An Overview

The term ‘real estate’ is defined as land including the air above it and the ground below it, and any buildings or structures on it. It covers residential housing, commercial offices, trading spaces such as theatres, hotels and restaurants, retail outlets, industrial buildings such as factories and government buildings. It involves the activities like sale, purchase and development of land, residential and commercial buildings. By convention, any agricultural and forest land is not a part of real estate. The main players in the real estate market are landlords, developers, builders, construction companies, real estate agents, tenants and buyers.

Significance of Real Estate Sector in Indian Economy

With the liberalisation of the economy since 1991, the real estate sector in India has emerged as one of the fast growing service sectors, especially in the last six years. According to a World Bank study on ‘Sustaining India’s Services Revolution (2004)’, the decadal growth of ‘dwellings’ and ‘real estate’ were 8.3 per cent and 3.5 per cent per annum in the 1980s and 4.1 per cent and 4.9 per cent in the 1990s. Apparently, these were based on special tabulation of the CSO for the World Bank. As per the CSO’s latest data, the sub-sector ‘finance, insurance, real estate and business services’ has shown growth rates ranging from 4.1 per cent to 9.7 per cent during the years 2000-01 to 2005-06.

The importance of the real estate sector in Indian economy can be explained in terms of its size, contribution to GDP and it’s strong backward and forward linkages with various other sectors of the economy. According to a report by Ernst and Young (November 2005):

· The turnover of the Indian real estate industry is currently estimated at approximately US $ 12 billion (Confirming this, FICCI, have estimated that US $ 10 billion to residential and the rest to be commercial and retail, including shopping malls, hotels and hospitals.) at current exchange rate, this total works out to about Rs 55,000 crore or 1.56 per cent of GDP.

· The contribution of real estate services, housing and construction sector to GDP is at around 13 per cent (2003-04). [Further, according to the Confederation of Real Estate Developers’ Association of India (CREDAI), the real estate and construction sector has contributed more than 12 per cent of the GDP in 2005-06. By and large, this has been supported by the Tenth Five-Year Plan (2002-07), by ranking the industry little lower at a contribution of 9.3 per cent of GDP in 2003-04 (Table 1).

Table 1: Percentage Share in Gross Domestic Product from Housing, Real Estate Services and Construction (at 1993-94 prices)
Year	1993-94	1998-99	1999-2000	2000-01	2001-02	2002-03	2003-04
Housing	5.6	4.6	4.5	4.4	4.3	4.2	4.0
Real Estate Services	0.04	0.04	0.04	0.04	0.04	0.04	0.04
Construction	5.2	5	5.1	5.2	5.1	5.3	5.2
Total	10.8	9.7	9.6	9.7	9.4	9.6	9.3
Source : Tenth Five-Year Plan quoting CSO, National Accounts Statistics, 2005

It is significant to note that these shares not only include real estate industry, but also construction of wide variety of infrastructure projects like building of dams, bridges, canals etc.]

· During 1993-94 to 2003-04, real estate services, housing and construction grew by 14.6 per cent (CAGR).

· According to various market studies, the real estate sector has a potential to grow at an estimated 25-30 per cent per annum.

· Further, as per estimates, the sector would be worth between US $ 45-50 billion by 2010 with a potential to touch US $ 90 billion in 10 years thereafter.

Backward and Forward Linkages

Apart from these, the sector has solid forward and backward linkages with over 250 associated vital industries of the economy:

Backward Linkages

The diagram above shows that the real estate industry creates huge investment demand for core industries and other services sectors in India . Especially, the demand for construction material accounts for sizeable share of construction cost; these include cement, steel, bricks/tiles, sand/aggregates, fixtures/fittings, paint and chemicals, petroleum products, aluminum, glass, fibre glass and plastics. The break-up of the cost of constructing a building in percentage of the total cost is roughly as follows:

Forward Linkages

Apart from backward linkages, the real estate sector provides physical infrastructure to various industries such as housing, hospitality and commercial services for creating bases to make these sectors operational. Besides, due to these linkages, the sector is a major employment generator and it claims to be the second only to agriculture. According to ASSOCHAM, the housing component of real estate sector is expected to create 4 million new jobs by 2015. The Chamber has expected demand for 80 million houses coming from the middle and low-income groups, which would require a total investment of US $ 670 billion by 2015. The Chamber projects that India’s annual growth rate of the economy by 2015 would be at around 12 per cent, with housing and real estate growing at 14 per cent per annum to double it’s contribution to GDP from the current level of less than 1 to 1.5 per cent. Currently, the real estate sector has been growing remarkably along with a robust macro-economic scene reflected by the expansionary phase of the Indian economy.

Real Estate Growth Drivers in the Indian Economy

Recent developments in the real estate sector symbolise the changing face of India . A rapid growth in this sector is a reflection of the structural changes in the Indian economy brought about by high rates of GDP growth (8.4 per cent in 2005-06) and also by India 's integration into the global economy. Particularly, the strong growth rate exhibited by the services sector (10 per cent in 2005-06 at 1999-00 prices) has reflected buoyant performance of the real estate sector.

Following are the key-factors, which have been responsible for gaining momentum in the real estate market in the last couple of years:

(i) The structural changes in the economy characterised by rapid urbanisation and burgeoning middle class with higher purchasing power especially due to flourishing IT and ITES industries have fuelled demand for real estate. Developments in the real estate sector are being influenced by the developments in the retail, hospitality and entertainment (e.g. hotels, resorts, cinema theatres) industries, economic services (e.g. hospitals, schools) and information technology enabled services (ITES) like call centres etc. All this has changed the consumption basket and spending habits of people. Similarly, it has changed aspiration levels of Indian families who have started looking for better quality of living and modern lifestyle amenities. Not only these, but the spurt in earnings from stock market investments has also translated in the real estate investments.

(ii) The demographic transition with rising proportion of young Indians (what is called as ‘demographic dividend’) and increasing nuclear families have also contributed to fuel huge demand for all segments of the real estate market. Moreover, higher women work participation rates in both, rural and urban areas have also contributed to raise standard of living of the middle-class families. The work participation rate for women, which was 7.18 and 9.74 per cent in 1971 and 1991 respectively, in urban areas, went up to 11.55 in 2001. In rural areas, the rate has shown steady improvement, it has risen from 15.92 in 1971 to 27.20 in 1991 and to 30.98 in 2001. (Ministry of Labour and Employment)

(iii) The financial sector reforms and rising gross domestic savings rate (24.9 per cent in 1999-00 to 29.1 per cent in 2004-05) coupled with softening interest rates has brought about a surge in demand for consumer and retail credit. Similarly, availability of fiscal and tax benefits have added to the consumers’ advantage in opting for home loans. Several supporting policy measures like tax benefits and reductions in interest rates have increased the demand for housing loans. The banks have distinct advantage of low-cost retail funds coupled with high availability of short-term funds and this gave them an edge. Most banks found that they can operate with higher spreads even if they offer lower lending rates. Further, housing finance traditionally has been characterised by low non-performing assets (NPAs). In addition, banks also have a good reach through their network of branch offices spread all over the country. Thus, banks have been eyeing the housing sector as a lucrative option for higher profit margins and lower risks. During the period 1996-2005, outstanding housing loans by scheduled commercial banks grew at a trend rate of 23 per cent per annum. The share of housing loans in total credit of scheduled commercial banks has increased from 2.8 per cent in March 1996 to 11 per cent in March 2005. Commercial banks, despite being late entrants have overtaken the housing finance companies (HFCs) in the home loan market. The share of banks in total home loan disbursements has risen from 43.6 per cent in the year 2000-01 to 61.1 per cent in 2003-04. For most banks, both in the public sector and private sector, housing finance forms a huge chunk of their total retail loans.

(iv) Moreover, NRI’s renewed interest in Indian real estate market has set the growth on the fast track. It is not just the gulf-based NRIs, but even second generation Indians in the UK , US and Germany are enthusiastically investing in the land of their origin. It is estimated that over 25 per cent of all properties worth over Rs 1 crore are bought by NRIs.

(v) In addition to these, the market has taken speculative turn. Unlike olden days, where the property or house purchase was aimed at ones’ self-occupancy, the buyers now invest in property market in order to earn from the market movements. These factors have changed the whole orientation and the way at which the real estate market was looked at in the pre-reform period.

(vi) Policy Initiatives: The government of India has further liberalised foreign direct investment (FDI) in real estate in March 2005 and permitted it through the automatic route (FDI in sectors/activities under automatic route does not require any prior approval either by the government or RBI. Although the results of this initiative are not yet fully noticeable, it is expected to organize the real estate sector, bridge demand and supply gap, create more professionalism, bring superior technology, induce healthy competition and ensure availability of funds. A large number of companies are looking at an opportunity to invest in India . Some of the foreign players who have already tied up with Indian developers are Lee Kim Tah Holdings, CESMA International Pvt Ltd., Evan Lim, Keppel Land from Singapore, Salim Group from Indonesia, Edaw Ltd., from USA., Emaar Group from Dubai, IJM, Ho Hup Construction Company from Malaysia etc. Real estate has been estimated to capture about 18-20 per cent of the total FDI coming to India in 2005-2006 (FICCI, International Real Estate Summit , November 2005).

(vii) Number of real estate venture capital funds are earning high returns from real estate investments. While some private funds have applied for SEBI approval, few have received approvals and have invested in real estate. This has ensured more availability of funds to the developers and faster growth of real estate sector. Some examples are HDFC Real Estate Fund, ICICI-Tishman Speyer, Ascendas India IT Park Fund, Kotak Mahindra Realty Fund, IDFC, Edelweiss Captial etc.

The above factors essentially reveal that the real estate boom can be attributed mainly to the two factors: First, the changes in demographic and structural patterns of the economy and secondly, the ambitious policy reforms undertaken by the government of India . No doubt that for buyers as well as real estate service providers, this has created ample opportunities to invest in the thriving market. On the flip side, such developments have also resulted in escalating property prices in the last couple of years, especially in 2004 and 2005.

III

Unprecedented Growth in Real Estate Prices: Real or Unreal?

Although a consolidated picture of the price movements in the real estate sector is not available due to a highly fragmented market structure and variations depending upon the builder, location and specifications, sharp upward price trends in various metropolis and tier II cities have been indicative of increasing cost of properties during the last couple of years. According to the report of Knight Frank, there has been an appreciation in the wide range of 20-300 per cent in real estate across India in 2005.

Across all metropolis, the property prices in Mumbai have witnessed one of the sharpest increases in 2005. For e.g. residential property prices in central suburbs of Mumbai appreciated by 20 per cent, while prices in western suburbs and south Mumbai have posted growth of around 30-40 per cent in 2005 (Raheja Corporation).

Table 2: Average Prices Across Mumbai (Rs per sq ft across old and new buildings)
	March 2006	December 2005		December 2004
Worli	17000	15500	34.8	11500
Bandra (West)	13500	12500	47.1	8500
Santa Cruz (West)	8750	7750	40.9	5500
Andheri (West)	5250	4750	43.9	3300
Figures in italics represent percentage variation over the previous year.
Source: Trammell Crow Meghraj Property Consultants

This is well supported by the Trammell Crow Meghraj Property Consultants study on real estate prices. The appreciation in property rates in Mumbai at premier locations is shown in Table 2.

Table 3: Average Residential Prices Across Metros in India (Rs per sq ft)
City	2005	2001	CAGR*
Delhi & NCR Region	4000	2300	14.8
Kolkata	1700	1300	6.9
Chennai	2400	900	27.8
Bangalore	2300	900	26.4
Mumbai	2750	1800	11.2
Note: Mumbai (Thane), Delhi (Noida), Chennai (Valacheri),Kolkata (EM Bypass), Bangalore (JP Nagar) * Compound Annual Growth Rate Source: Trammell Crow Meghraj Property Consultants

According to Trammell Crow Meghraj, residential property prices in other metros have also gone up as shown in Table 3. The property prices in other metros especially, NCT of Delhi (15 per cent), Chennai (28 per cent), Bangalore (26 per cent) followed by Kolkata (7 per cent) have shown either sharp or considerable increases in the property prices over the last four years. The prices of property have risen piercingly in Chennai and Bangalore .

Another notable factor in 2005 was that more and more property developers have moved to tier-II cities like Pune, Nagpur , Nasik , Hyderabad and Mangalore on account of strong demand for real estate. For example, Nagpur and Ahmedabad provide 25 to 30 per cent cost advantage over Kolkata and Delhi . Apart from the cost factor, lack of land availability in tier-I cities has also been a major reason for shifting or expanding bases of the estate developers in tier-II cities. Further, it is expected that the real estate sector would record an average price increase of 10-15 per cent in 2006 over the previous year.

Is the Asset Bubble Sustainable?

Historically, the real estate market has always seen cyclical phases in India , driven by market conditions in the respective periods. Interestingly, in mid 1990, there was a sudden spurt in property prices across all metros in India . However, it did not continue and the price appreciation in the later period was almost nil or negligible. During this period, the market corrected itself quite drastically after a speculative rally. Since then, the market has fluctuated in a narrow range. Now, the market has firmed up once again since last two years. However, there is a divide of opinion among industry experts whether such unreasonable price levels in the real estate market would be sustainable in future. This essentially necessitates an inquiry into the very nature of the current demand-supply mechanism in the real estate sector. Apparently, as the factors behind this boom are more permanent in nature as compared to a mere speculative real estate market in mid-1990, the boom is expected to continue. High demand for all the three categories, especially for residential and retail space appears to remain sustainable at least for some more years. Particularly, demand for residential property is genuine and being led by end-users who belong to emerging middle-class. The boom may subside only if affordability becomes a concern. According to Trammell Crow Meghraj, there may be a slight correction in the medium term, but long-term prospects seem to be robust. According to a property consulting firm Cushman and Wakefield , the present boom in real estate is more or less demand-driven and if volatility in stock markets that was experienced in June 2006 continues for long, the market sentiments in general would be affected. However, a minor or short-term correction in the stock market would certainly not affect bullish trend in real estate market. Moreover, hardening of home loan rates (currently at around 9.5 per cent from 7-7.5 per cent in the last year) is not expected buyers to shy away from property purchases, due to a genuine demand.

Apart from the long run demand-pull factors, the short-term factors like increase in the wholesale prices of cement (by 19 per cent and 4 per cent on y-o-y and over the current financial year basis, respectively, as on June 10, 2006) and steel (by more than 7 per cent in the current financial year as on June 10, 2006) has resulted in an increase in the overall construction cost by 15 to 20 per cent in the last couple of months. The overall increase in the construction cost is generally passed on to end-users with varying time frames.

Issues and Concerns

Following the recent real estate boom, there have arisen certain issues of concern that need to be addressed for the healthy development of the market:

(i) Foreign Direct Investment (FDI)

The decision to liberalise FDI norms in the construction sector is perhaps one of the most significant economic policy decisions taken by the union government in the recent period. Until now, only Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the housing and real estate sectors. Foreign investors other than NRIs were allowed to invest only in the development of integrated townships and settlements either through a wholly-owned subsidiary or through a joint venture company in India along with a local partner. However, the guidelines prescribed via Press Note 2 (2005) series issued by Ministry of Commerce & Industry, have further opened out FDI in townships, housing, built-up infrastructure and construction-development projects. Major corporations are taking initiative and are wooing international firms in order to line up investments for major projects. The Department of Industrial Policy and Promotion (DIPP) has now permitted FDI up to 100 per cent under automatic route in townships, housing, built-up infrastructure and construction development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure facilities, such as roads and bridges, transit systems etal), subject to certain guidelines in terms of minimum area to be developed under each project.

FDI is expected to alter the dynamics of the real estate business in India . It would bring in institutional funds with professional fund managers, who will have a certain time- frame in which to set up and invest and bring returns to shareholders. So they need to see the project being pushed through. Along with the professionalism, a proper project planning and scheduling would lead to improved quality and time-bound supply.

Table 4: FDI in Real Estate in India
	GDP (US $ billions)	FDI (US $ billions)	Share of FDI in GDP (per cent)	Share of Real Estate in FDI (per cent)
	2003
India	600.6	3.11	0.5	4.5
China	1,417	57	4.0	18.3
	2004
India	650	3.75	0.57	10.6
China	1,533	60.63	3.9	21.78
	2005 (estimated)
India	692.25	15	2.2	10-20
China	1,673	68.6	4.1	20.5
Source: Chesterton Meghraj Property Consultants Ltd.

Comparing India with China , it is evident that the share of real estate in FDI in China has always been higher since 2003 (Table 4). However, there are computational differences in both the countries; while India considers only cash inflows of equity when counting its FDI, China reflects cash, reinvested earnings¹ and round-tripping routing through Hong Kong in its FDI calculations (indiaproperties.com). This has widened the difference in the share of real estate FDI of both the countries. Secondly, given fundamental differences between these two countries in terms of political environment, i.e. government is the sole owner of land in China and has started to privatise recently as against private sector ownership of most of the land in India , the potential gains from real estate sector in India seem to be undeniably tremendous.

(ii) Private-Public Partnership (PPP)

The model of PPP has become popular recently in the development projects of housing commercial premises, resorts, educational institutions and recreational facilities. Ever since the government has allowed 100 per cent FDI in real estate through the automatic route in 2005, the West Bengal government has introduced private-public partnership (PPP) projects. This has also become a popular model of development in other states such as Andhra Pradesh and Punjab . The PPP evolved in West Bengal is essentially to deal with the restrictions to land ownership put under the Land Reforms Act and the Urban Land Ceiling (Regulation) Act, 1976. The Act puts ceiling on acquisition of land in excess of the limit set by the government and aims at preventing concentration of urban land in the hands of few. These difficulties have led to a model by which the state government acquires land and allots the same to the private developer on partnership basis. The developer arranges the finances required by the government to pay compensation and also deals with objections of land owners. Thereafter, the government and the private developer form a partnership in which they take 49.5 per cent equity each and one per cent to outsiders. Such joint ventures have resulted in affordable housing available to all segments of society. The PPP arrangement can greatly increase not only the number of affordable homes, but the quality of housing through fiscal, regulatory and other incentives for builders and partners alike. This would enable the primary role of the government as a facilitator of housing as a social good, with the private sector participation bringing in capital, technical and managerial expertise in delivering good quality mass housing and commercial projects. This would also improve operating efficiencies to prevent time and cost overruns to meet consumer needs. Although, PPP can serve as a useful tool for achieving goals that the local government cannot achieve by itself, certain aspects like complex process of forming joint ventures, formal feasibility study and conflicts resolution in terms of social and political goals, should also need to be addressed.

(iii) Civic Infrastructure

Another issue that needs to be seriously addressed is the provision of infrastructure facilities like adequate power, water supply and good roads and connectivity in the existing complexes or buildings. What makes the scenario move from ‘unfair’ to ‘grotesque’ is the exceptionally high real estate prices with poor civic infrastructure (HDFC Newsletter). The mass construction projects that take place, especially in the outskirts of cities lack such basic amenities. For instance, connectivity and accessibility issues in the country's IT hub Bangalore , owing to poor infrastructure, apart from oversupply of commercial space, have shown either decline or only a marginal increase in the prices of real estate. Therefore, creation of basic infrastructure is the need of the hour. Of course, at times, private establishments also stimulate creation of social overhead capital. As pointed out by Hirschman in development theories, economic growth is possible by investing either in social overhead capital (SOC) such as power, irrigation, transport, communications, energy or in directly productive activities (DPA). However, investment in SOC is advocated as a prerequisite to permit and in fact invite DPA to come in. This essentially underlines the significance of provision of infrastructure facilities before private construction can take place. We need to devise a bankable model to fund infrastructure projects like rapid mass transport and communication systems, which would lessen undue significance of locations. Such moves, over time, will shift the property demand to other, lesser known destinations.

(iv) Real Estate Regulator

The unprecedented boom in real estate market has unfortunately resulted in unregulated growth and at times, manipulative and fraudulent building sector taking real estate prices to unreasonable heights. Moreover, uncontrolled builders’ lobbying has also resulted in cartels and thereby price fixation below which no builder sells his/her properties to buyers. Such manipulations have brought down middle class affordability levels. Unfortunately, currently, any household having a decent income level of around Rs 20 to 25 thousand has to shell out a large part of income as equated monthly installment (EMI) in buying a house usually for a tenure of 15 to 20 years. Thus, high property prices have regressive impact on current and future livings of a broad cross-section of the society. Further, these may widen if prices continue to escalate. Therefore, recently, the government has prepared a legislation, which will set up an independent regulatory authority to oversee builders and developers. For this purpose, the Ministry of Urban Development has proposed the Real Estate Management (Regulation and Control of Activities) Bill, which would be introduced in the parliament soon. Under the Bill, certain requisite qualifications have been prescribed for builders for granting a certificate of registration. Similarly, promoters will be required to furnish a bank guarantee as a percentage of the estimated cost of the development works certified by the authority. The percentage for the bank guarantee would be left to the respective states. Additionally, the builders and real estate agents would be required to get registered under the authority and the authority would hold the rights to cancel their licences if found breaching laws. Apart from this, the authority would verify the safety of construction. Since land, housing, registration of chartered engineers and matters related to building bylaws fall under the jurisdiction of states, the Ministry has decided to frame a legislation for Delhi and other territories which would be a model law for other states to keep check on builders and ensure transparency.

(v) Real Estate Price Index: A Proposal

Housing and real estate sectors constitute not only a major proportion of national wealth but also an important rapidly expanding service sector in the economy.²Because both lenders and borrowers may have large real estate/housing exposures (direct as well indirect), financial balance sheets may be affected by any wide volatility of prices in this sector. Thus, it is desirable to monitor housing and real estate prices — an important segment of asset prices for formulation of appropriate monetary and fiscal measures.

The National Housing Bank (NHB) has set up a Technical Advisory Group (TAG) to explore the possibility of constructing a real estate price index. After reviewing international best practices in terms of the methodology, sampling techniques and collection of price data for construction of real estate price indices in some developed countries, the TAG has suggested a methodology for India . It has decided to take 2001 as the base year for the construction of Housing Price Index (HPI) on a half-yearly basis. The choice of base year for HPI is consistent with the base period of other indices, that is, 2001 for the revised CPI-IW series, 2000-01 for the revised WPI and 1999-2000 for the revised GDP series.

(vi) Online Realty Auction

Online real estate trading is fast catching up. With real estate consultants recommending this medium for its ease and reach, more and more websites are considering entering the fray. For instance, internet auction site receives on an average 250 real estate listings per month under categories like auctions, classifieds and ‘buy it now’ or fixed price. Both, residential (sale and rental) and commercial properties, are listed on the site, the largest listings being in the commercial category. These online transactions are a result of growth of e-commerce in India where sellers and buyers are unconstrained by geographies. In addition to these, sites like www.99acres.com and www.2let-service.com, so far working purely as online real estate classifieds, are now planning to diversify into real estate e-auctions. According to Knight Frank India Pvt Ltd., online real estate trading is expected to bring in more transparency and efficiency in conducting auctions by obviating malpractices such as underhand payments.

Summary

Real estate market in India is on a roll. The emergence of a strong middle class and the growth of IT and other professional segments on a vast scale has provided this impetus. Apart from other reasons, land prices are spiraling mainly because demand is outstripping supply. What is required is to cater to the needs of genuine demand and to discourage speculative activities in the real estate market. Similarly, it is essential to bring in mechanism to balance equations of demand and supply which would stabilise prices in future. Discouraging speculative demand for real estate, on the one hand and augmenting supply of the same by way of encouraging real estate investments in regions other than mega cities, could be the keys to bring to bear some respite to high property prices in the long run. A co-ordinated approach between the center, state and other authorities in easing the supply through policy reforms in real estate would make property purchase, especially housing, affordable. Indeed, the fact that the authorities have thought it fit to set up the institution of a real estate regulator argues well for the market, it would help to rein in property speculative activities.

For the healthy growth of the real estate market, the public policy interventions have to be calibrated and not overarching and bureaucratic. Such healthy interventions would facilitate the fulfillment of housing aspirations of the vast middle and professional classes to possess houses as a necessity rather than as a luxury. Eventually, this would emerge as a major contribution to the social upward mobility of most sections of the society.

Notes:

¹ For Balance of Payments (BOP) accounting, India too has joined in this IMF practice.

² There is a view that ‘construction’ should constitute a part of the secondary sector and not the tertiary sector. For this, however, it is taken as a part of the services sector.

References:

1. Planning Commission (2002): Tenth Five-Year Plan 2002-07 (Volume II)

2. Media Sources

3. Federation of Indian Chambers of Commerce and Industry (FICCI), various reports

* This note is prepared by Ms Gauri Ranade

In order to curtail inflationary pressures, the central government has allowed duty-free import of wheat by private players like flour millers, biscuit manufacturers and bread makers and has halted all exports of pulses, effective from June 22, 2006. It has also given permission for importing sugar at zero per cent duty to restrain the price escalation of this essential commodity. Earlier, though import of wheat and sugar by private players was allowed, it was uneconomical as it used to attract import duty of 50 per cent and 60 per cent, respectively.

In response to the 2.2 million tonnes - wheat tender floated by the State Trading Corporation (STC) on June 12, 2006, 8 companies have submitted their bids with the price quotes ranging between $190 to $237 per tonne, cost and freight (C&F). The Australian Wheat Board (AWB), which has got the orders to supply 10 lakh tonnes in the earlier tenders, has not bid this time. Out of these 8 bids STC has short-listed 4 bids - from ADM, Cargill, Glencore and Concordia, which would provide only around 1.5 million tonnes. Glencore had offered to sell 550,000 tonnes of wheat, Cargill 480,000 tonnes, Concordia about 220,000 tonnes and ADM 240,000 tonnes. The other four bids have been rejected on technical grounds.

After a break of more than 12 days, the southwest monsoon has revived and is expected to advance from south peninsula towards the northern region of the country. Half of the of the total 36 meteorological sub-divisions in the country have, so far, remained rain deficient and are expected to receive their first monsoon shower at least a week to 10 days behind schedule. This would delay the planting of rain-fed crops, mainly of oilseeds, pulses and coarse cereals. In fact, farmers, in areas that have received scanty rains, have been advised to defer sowing of kharif crops until the next spell of showers by National Centre for Medium Range Weather Forecasting (NCRWF) as the monsoon is not likely to revive during the next seven days in central and western parts of the country. However, farmers in the northeastern and southern regions have been advised to continue with sowing operations.

The central government is set to announce an all-time-high Rs 60 per quintal increase in the procurement price for paddy during the forthcoming 2006-07 kharif marketing season (October-September). The effective procurement price for common paddy would be Rs 630 per quintal and that for `Grade A' paddy Rs 660 per quintal. The minimum support price (MSP) is likely to be increased by Rs 10 per quintal and in addition to this farmers are expected to receive a bonus of Rs 50 per quintal to post a hike of Rs 60 per quintal., would be by way of a higher, while farmers are to additionally The move to hike procurement price substantially comes even as total rice procurement in the ongoing 2005-06 season has crossed a record 26 million tonnes.

Industry

Overall

The government has been mulling some reform measures, including labour law flexibility and single-window clearances, for facilitating investments into the proposed big-ticket petro hubs called petroleum, chemicals and petrochemicals investment regions (PCPIRs). The centre is also considering a customs duty waiver on crude oil imports specifically for these zones. The PCPIRs, spread over an area of 100-250 square kms, are expected to be set up through private-public partnerships and each zone is likely to include a refinery and petrochemical plant with downstream chemical units. States such as Karnataka, West Bengal, Orissa, Gujarat , Kerala and Andhra Pradesh, which are expected to develop the first round of these hubs, have been chosen on the basis of the presence of certain key basic infrastructure facilities that can be expanded further. They have been asked to enact separate legislations on the same lines as the Uttar Pradesh Government's Noida law for land acquisition and fast track development of the zones.

After the petroleum, chemicals and petrochemicals investment regions, the government is considering investment regions for the manufacturing sector. After discussions between National Association of Manufacturers (NAM), USA and an Indian delegation led by the minister of state for industry accompanied by chief secretaries of four states — West Bengal, Gujarat, Andhra Pradesh and Karnataka. The government is considering setting up five such regions spread across 100 square kms under a model for public-private partnership (PPP). Within the investment regions, special economic zones (SEZs) could be included and the project could be combined with e-governance. The states had not been identified as yet and the process would depend on incentives being offered by them. It is ikely that the manufacturing investment regions would follow the same policy as the PCPIRs, where the central government had decided in principle to set up chemical hubs in regions which already had large chemical and petrochemical units.

Textiles

With private investments picking up in the textile sector, investments under the government’s technology upgrade fund scheme (Tufs) are providing the industry with the much-needed impetus to touch the targeted investment level of Rs 1,40,000 crore by 2010. With the amount sanctioned under the Tufs doubling each year since 2002-03 to 2005-06, the industry is optimistic of meeting the targeted investment requirement of Rs 70,000 crore by 2010. The total investments required from 2002-2010 have been estimated at Rs 1,40,000 crore. Since the scheme, which provides an interest subsidy on loans taken by industry for modernisation, covers about 50 per cent of total investments, as per the current trend, investments enabled by the Tufs could easily reach the targeted Rs 70,000 crore well before 2010.

Leather

Most large footwear exporters are on an expansion spree with capacities expected to grow by 50 per cent during 2006-07. The expansion is to cater to existing markets - Indian exporters have traditionally focussed on men's shoes and the European market - as well as to tap new markets, including the US, and new segments such as women's shoes and children's shoes. According to the Council for Leather Exports, India has established itself as a viable alternative to China and Vietnam as a manufacturing base, more so because the antidumping duty levies on China and Vietnam mean that they are costlier by more than 15 per cent. Leading brands are looking at spreading their supplier base and Indian exporters are benefiting.

Infrastructure

Power

Well over five years into the power sector reforms process, a majority of state electricity boards continue to flout the mandatory fiscal prudence norm of making annual tariff revision filings before their respective regulators. Despite the financial mess, only 4 states - Andhra Pradesh, West Bengal , Kerala, and Orissa - out of 29 state utilities have filed their Annual Revenue Requirement (ARR) petitions within the stipulated timeframe to get regulatory nod for new tariff orders in 2005-06. Worse, major states such as Maharashtra, Tamil Nadu, Gujarat, Haryana, Uttar Pradesh, and Bihar, have not filed ARR petitions at all, while Karnataka, Rajasthan, Punjab , and Madhya Pradesh, have filed their ARR petitions subsequent to the March 31 deadline.

Petroleum and Petroleum Products

Crude oil production in May 2006 has risen by 1 per cent, post the recovery of output at Oil and Natural Gas Corporation (ONGC) from an area destroyed by fire in July 2005. The exploration and production companies have produced 2.86 million tonnes of crude oil in May compared with 2.83 mt produced during same period last year. The natural gas output has risen by 1.4 per cent to 2.78 billion cubic meters in the same period. Following rising demand for diesel and gasoline, the state refiners have processed 11.58 million tonnes of crude oil in May 2006 - a 12 per cent increase from the 10.35 million tonnes processed in the same month a year ago.

Coal

The government has allotted 19 coal blocks with estimated reserves of 7.396 billion tonnes to 18 state government undertakings in 12 states and 1 to the central public sector MMTC Ltd., in an attempt to speed up industrialisation in these states. The 19 blocks are spread over West Bengal, Chhattisgarh, Jharkhand, Madhya Pradesh, Maharashtra and Orissa. West Bengal has received the maximum allotment amounting to 1.4billion tonnes followed by Chhattisgarh with 1.2 billion tonnes.

Shipping

With the global and Indian offshore rig market facing a surge in demand in the wake of increased offshore oil exploration activities, shipping companies have been diverting investments from ships to rigs. The companies have also been investing to acquire other offshore assets, such as drill ships and supply vessels. The demand-supply imbalance in the rig market is primarily due to under-investment for years at a global level. In India , the demand for rigs and other offshore assets is set to soar following the surge in exploration activities. With offshore fields accounting for almost 55 per cent of the Indian sedimentary basin, exploration and production activity offshore is promising. All major E&P operators have together made an investment of about $2 billion in the Indian exploration market, while each of these has a committed capex of about $300 million annually, all of which is bound to increase the demand for rigs and other offshore assets. The offshore rig fleet in India at present consists of 27 jack-up rigs, 5 drill ships and 1 semi-sub, all of which are working to their full capacities. Reports indicate that the demand for jack-up rigs in the Indian offshore market is likely to increase to 36 by mid-2006 and that the exploration companies could face a deficit of at least 4 rigs towards the end of the calendar year. It is estimated that a jack-up rig, costing around $180 million, can earn high day-rate charges of up to $1,30,000 with the market expected to further firm up.

Aviation

Air India Express, the low cost airline from Air India, is expected to see a drop in its fuel bill during the current fiscal year since the Finance Ministry has specified that the aviation turbine fuel (ATF) for its international flights would be considered as "deemed exports" and hence the airline would not be required to pay any sales tax to the states. The move would help boost operating profit of the low cost airline, resulting in an annual savings of between Rs 20 and Rs 25 crore, on the estimated annual sales tax outgo of the airline on fuel.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone up to 5.24 per cent for the week ended June 10, 2006 from 4.72 per cent during the previous week. The inflation rate was lower at 4.50 per cent in the corresponding week last year.

The WPI in the week under review has increased by 0.5 per cent to 203 from 201.9 in the previous week (Base: 1993-94=100). The index of ‘primary articles’ group (weight 22.02 per cent) has risen by 0.2 per cent to 202.7 from the previous week’s level of 202.2, mainly due to an increase in the price index of ‘food articles’ and ‘non-food articles’ by 0.1 per cent and 0.4 per cent, respectively, as compared to the previous week. The index of ‘food articles’ has gone up to 207 from 206.7 in the previous week, mainly due to the higher prices of jowar, eggs, arhar, condiments and spices, gram, wheat, moong and fish-inland. The index of non-food articles has gone up to 179.6 from 178.8 for the previous week, mainly due to the higher prices of raw rubber, niger seed, sunflower, cotton seed, copra and linseed. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has gone up considerably by 1.7 per cent to 326 from its previous weeks’ level of 320.4, mainly due to higher prices of petrol by 9 per cent, high speed diesel oil and light diesel oil by 7 per cent each and bitumen by 3 per cent. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has increased by 0.2 to 175.6 from the previous weeks’ level of 175.3, mainly due to increase in the prices of food products, textiles, ‘rubber and plastic products’, ‘chemical and chemical products’ and ‘non-metallic mineral products’, base metals and ‘machinery and machine tools’.

The latest final index of WPI for the week ended April 15, 2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 198.8 and 3.70 per cent as against their provisional levels of 198.5 and 3.55 per cent, respectively.

Banking

In dividend payout, private sector banks continue to outperform state-run banks. A comparison between 11 private sector and 23 government-owned banks shows that the former performed better in terms of dividend to net profit ratio during the financial year 2005-06. RBI has raised the cap on banks’ dividend-payout ratio from 33.33 to 40 per cent. In the case of private sector banks, dividend to net profit ratio at the aggregate level showed a marginal decrease during 2005-06 as compared to that of 2004-05. In case of public sector banks, dividend to net profit ratio increased marginally. But the ratio was higher in private sector banks compared to their public sector counterpart during both the time period. The aggregate total net profit of 11 private sector banks has increased by 21.7 per cent from Rs 3,581 crore in 2004-05 to Rs 4,359 crore in 2005-06. Their total equity dividend has increased by 18.2 per cent during the study period, leading to a drop in the equity dividend to net profit ratio from 32.39 per cent in 2004-05 to 31.46 per cent in 2005-06. On the other hand, the total dividend payment on 23 PSBs increased by 23.1 per cent to Rs 3,212 crore during 2005-06 from the level of Rs 2,609 crore in 2004-05. The aggregate total net profit of 23 PSBs has increased by 5.3 per cent from Rs 14,758 crore in 2004-05 to Rs 15,539 crore in 2005-06. And the equity dividend to net profit ratio increased from 17.68 per cent to 20.67 per dent during the study period. Among the 23 PSBs, one bank, State Bank of Patiala exceeded the RBI norm of ratio by paying a dividend of 46.55 per cent.

The RBI has received BS 7799 certification for two of its important work areas of internal debt management and external investments and operations handled by its Internal Debt Management Department and Department of External Investments and Operations respectively.

Financial Sector

Capital Markets

During the week, a unique development took place in the primary issuance market as Vigneshwara Exports and Bluplast Industries, on June 21, decided to scrap their respective IPO after stock market downfall soured investor’s demand. Vigneshwara Exports 4.76 million share offering was just about fully subscribed after the company cut the price band earlier this month to Rs 110-124 a share from Rs 121-140 has decided not to go ahead with the listing. Meanwhile, Bluplast has also abandoned its 11 million share offering at Rs 28-32 because of poor demand and has decided to seek funding from private equity investors

During the week, the market continued its northward journey amidst positive sentiments and value buying at lower levels, however, on June 20 sensex lost 175 points due to weak Asian and US markets. For the week ended, the sensex gained 528.42 points or 5.35 per cent to settle at 10412.93 and nifty advanced 159.95 points or 5.53 per cent to close at 3050.3. Meanwhile, both BSE Small-Cap and BSE Mid-Cap indices registered gain above that recorded by sensex at 14.77 per cent and 9.27 per cent, respectively. Among the sectoral indices, metal index recorded the highest weekly gain at 13.09 per cent as it closed at 8482.55, followed by oil and gas index at 8.68 per cent as it closed at 5142.57. Likewise, the dollar series index, viz., Dollex 30, Dollex 100, and Dollex 200 recorded weekly gains of 4.84 per cent, 5.01 per cent and 5.28 per cent, as they settled at 1853.64, 1188.32 and 453.55, respectively.

FIIs continued to remain net buyers in the equity market to the extent of Rs 303.3 crore with purchases worth Rs 8863 crore and sales of Rs 8559.6 crore. Meanwhile, the mutual funds continued to offload in the equity market as they sold Rs 125.89 crore for the week ended June 24, 2006.

Derivatives

During the week, the total turnover at the NSE’s F & O segment registered a marginal increase to Rs 117610 crore as compared to Rs 113346 crore for the week ended June 16, however, the daily average total turnover declined to Rs 19601.67 crore as against Rs 22669 crore in the previous week. As usual, stock futures continued to contribute bulk of the trading at Rs 55413 crore and index futures turnover stood at Rs 46286 crore.

Primary Market

The RBI, under the regular auction, mopped up Rs 1681.86 crore and Rs 2915.83 crore through 91-day treasury bills and 364-day treasury bills; the cut-off yields for 91-day treasury bills and 364-day treasury bills were 6.3149 per cent and 7.0513 per cent, respectively.

Meanwhile, RBI also conducted the sale (re-issue) of 7.37 per cent 2014 government dated security and 7.94 per cent 2021 government dated security for a notified amount of Rs 5,000 crore and Rs 4,000 crore respectively. The cut-off yields for 8-year paper and 15-year paper was set 7.9171 per cent and 8.4573 per cent, respectively.

The secondary market for government securities remained subdued throughout the week. The RBI auction announcement, wherein as against the market expectations of reduction in the maturity tenure of the scheduled dated securities, RBI increased the notified amount of auction to Rs 5,000 crore through 7.37 per cent 2014 paper and Rs 4,000 crore through 7.94 per cent 2021 paper on June 22 adversely affected the market sentiments. Further, the rise in the inflation figures to 5.24 per cent for week ended June 10 as compared to 4.72 per cent for the week ended June 3 also sparked speculations over another rate hike by the RBI. The weighted YTM of 7.59 per cent 2016 paper rose to 7.9608 per cent on June 23 as compared to 7.8021 per cent on June 16. Meanwhile, the 1-11 year YTM spread has decreased by 13 basis points to 93 basis points.

During the week, owing to the surplus liquidity in the market the call rates traded around the reverse repo rate to close flat at 5.75-5.89 per cent. Further, on account of available liquidity in the market, borrowing requirements by the banks to meet the gilts auction outflows as well as to provide mandatory reserve targets remained low. The daily average outstanding amount in the LAF (reverse repo) operations conducted by RBI stood at Rs 39246 crore. Meanwhile, according to the RBI (Amendment) Bill 2006, which has been amended and came into force, the CRR will remain unchanged at 5 per cent and RBI will no longer be paying interest on CRR balances of scheduled commercial banks with effect from June 24.

During the week, the sharp increase in the domestic inflation rate and the RBI’s announcement of increasing the auction amount to Rs 9000 crore adversely affected the corporate bond yields as it inched up by 10-15 basis points. The triple –A 5-year benchmark yield rose to 8.46 per cent from its previous closing of 8.33 per cent.

Foreign Exchange Market

In the forex market, the spot rupee lost around 23 paise to close the week at Rs 46.12/13 per dollar after opening at Rs 45.90 per dollar. The weakness in the domestic currency can be mainly attributed to dollar outflows, huge dollar demand by oil companies and dollar’s rise against other major foreign currencies. Initially, during the week, the rupee edged up against dollar drawing support from yen’s rally, following speculations that Bank of Japan would hike interest rates as early as July. However, the dollar’s rebound against other major currencies coupled with sustained dollar demands from importers pulled down the rupee below Rs 46 per dollar level. But, the domestic currency recovered on rallying stock market towards the end of week. In the forward premia market, the premia edged up sharply with the six-month annualised forward premia closing at 1.26 per cent on June 23 as compared 0.96 per cent on June 16.

Commodities Futures Derivatives

NCDEX has withdrawn Sugar S (Vashi) contracts with immediate effect owing to poor trading interest, Sugar S (Kolkatta) will, however, continue for the next three months. In a circular the exchange said that there has been no trades for Sugar S (Vashi) since the beginning of April this year and, hence, after seeking permission from the FMC, which it has granted to the exchange on June 14, NCDEX has withdrawn the contract on June 20.

During the week, the mentha oil futures on MCX in the early trades crossed the upper circuit of 4 per cent on an up trend in the spot market and strong overseas demand. The July contract perked up to Rs 468 per kg, while the August contract surged to Rs 477 kg- finally closing at Rs 465.6 and Rs 475.8 respectively, each contract gained about 3 per cent. A similar gain was witnessed in the physical market where mentha oil jumped more than 4 per cent intra-day and about 7 per cent since June 19,MCX may consider levy special margin if the trend continues. Meanwhile, the price rise is mainly attributed to no leftover from the last year’s stock, rising local demand and high speculative buying on futures exchanges

Insurance

SBI Life Insurance Company Ltd has announced a total of 9 per cent return on Lifelong Pension scheme, a simple annual bonus of 5 per cent in addition to the guaranteed return of 4 per cent per annum for all policies in force as on March 31, 2006. All bonuses declared here are a percentage of the effective Sum Assured and not linked to the premium component.

Credit Ratings

CARE has assigned ‘PR1’ rating to the proposed commercial paper programme of H & R Johnson India Limited (HRJ) for an amount of Rs 50 crore. The rating factors in experienced and professional management, market leadership position in ceramic tile industry, presence in all segments of tiles and sanitary wares, robust growth and positive outlook for ceramic tiles industry.

CARE has assigned ‘PR1’ rating to the proposed short-term debt (including commercial paper) programme upto Rs 25 crore of South Asian Petrochem Limited (SAPL). The assigned rating draws comfort from the satisfactory track record and long experience of promoters, strong technology back up, high capacity utilisation, production of high quality PET resins having international accreditation.

ICRA has assigned an ‘IrA’ issuer rating to the Bangalore Electric Supply Company Limited (BESCOM). The rating reflects the company’s track record of profitable operations, limited debt repayment obligation in the medium term, hitherto limited dependence on subsidy support from the government of Karnataka, its superior demographic profile and reasonable success in its ability to meet the regulatory targets set by the Karnataka Electricity Regulatory Commission (KERC).

ICRA has retained the ‘A1+’ rating assigned to the Rs. 25 Crore commercial paper programme of Narmada Chematur Petrochemicals Limited (NCPL). The rating reflects NCPL’s strong position in the domestic market, favourable demand potential for its products, lowered financial risk profile arising from improved capital structure and support from its parent company GNFC.

Corporate Sector

According to Society of Indian Automobile Manufacturers, car exports during April-May 2006 has augmented by 30 per cent to 31,360 units as against 23,964 units in the previous year. On the two-wheeler side motorbikes continued their strong growth momentum in the overseas market with exports growing at 43 per cent at 84,005 units as against 58,584 units. However, exports of scooter and scooerettees have declined by 33 per cent at 9,405 units against 14,196 units. Export of commercial vehicles, during April-May 2006; have risen by 27 per cent to 6,218 units against 4,896 units. Strong demand for vehicles of Tata Motors and Ashok Leyland has fuelled the demand for Indian commercial vehicles in the foreign market.

Era Constructions India Limited has secured order or Rs 17.7 crore from National Aluminium Company Limited for the construction work at its alumina refinery in Orissa.

Hyderabad based IVRCL Infrastructures and Projects Limited has secured an order worth Rs 55.8 crore from the irrigation and command area development department of the Andhra Pradesh government.

ABG Shipyard has secured an order of Rs 48 crore from Lamnalco Limited, Cyprus . The Lamnalco order is for its eleventh vessel by the Cyprus based company. ABG has already delivered five vessels and the remaining are under construction. Within the six months of 2006, the company has received orders worth Rs 1017 crore.

Reliance Infocomm’s international network transport and communication service providing company, Flag Telecom, has secured Deutsche Telekom’s bandwidth contract worth $ 80-100 million. The order is to buy bandwidth under the sea between Europe and the US for Deutsch Telekom’s retail broadband business all over Europe .

Radico Khaitan, India’s second largest liquor company, has formed a 50:50 joint venture through its wholly-owned overseas subsidiary Radico Global with UK based distillery SPS.

Labour

The government is likely to set up the Sixth Pay Commission to revise wages of its employees in July 2006. However, the detailed terms of reference has not been yet worked out. The government has ensured that unlike the adverse impact on state finances after the introduction of the Fifth Pay Commission, the centre and states would have minimum financial burden after the introduction of Sixth Pay Commission.

Information Technology

EDS has completed the acquisition of majority stake in Mphasis BFL Ltd. EDS acquired 83 million shares, amounting close to 52 per cent equity stake in the applications and BPO services, company for approximately $380 million in cash. Mphasis will operate as an independent EDS company and the latter planned to ramp up the total India work force to over 20,000 people by year-end.

TCS has signed a deal with two new customers in the Latin American market with a total deal value of over $30 million. The first deal is a five-year contract with a leading banking and financial group and the second deal is for managing the BPO and IT operations for Transantiago, the modernized integrated public transportation system planned for the Chile’s capital city, Santiago.

Telecom

Communications equipment major Nokia will shift the hub of its global telecom network management services business from its home base in Finland to India by the end of July 2006. The move marks Nokia’s intention to take on global leader Ericsson in the Indian market. One of the biggest advantages of moving the global hub to India is that Nokio will now be able to abide by the government’s proposed FDI norms for telecom. The norms do not allow remote access for security reasons. This could be Nokio’s biggest weapon against Ericsson, which manages crucial network issues from outside India . Making India the global hub could be a precursor to more network management contracts in the domestic market. Nokia is already believed to be negotiating a massive network management deal with India ’s second largest mobile company, Reliance Communications, which is believed to be the key to Reliance’s migration from the CDMA technology to GSM. Nokia’s move also indicates the growing significance of the Indian market in the global telecom arena. India has already emerged as the fifth-largest telecom market in terms of subscriber base. At the current rate of growth, it is projected to be the number two, only behind China , by 2010, with around 500 million subscribers. At present in the telecom sector in India outsourcing network management (ONM) has become popular as ONM eliminates the need for upfront investment in capex by a telecom company, leaving it focused on customer care and services. Equipment companies like Nokia manage and invest in base stations (antennae, switches, routers, transmitters and receivers), deploy new stations as subscriber numbers grow and roll out new networks and applications. Under the model, a telecom company only needs to pay a part of revenue-the higher the subscriber base, the lower the revenue share with an equipment vendor.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.