Current Economic Statistics and Review For the Week Ended September 15

Policy History

Government policies have obviously influenced the growth of the cement industry in India at various stages. The first stage began from the time of the Second World War when cement was declared an essential commodity under the Defence of India Rules; the industry remained under a stifling regime of price and distribution controls in the subsequent years for over three decades. By the end of the 1970s, the industry had reached a situation of stagnation characterised by technologically obsolete, inefficient and undersized plants.

The second stage of partial decontrol of price and distribution regulation commenced in February 1982 when a system of levy cement quota was introduced for the cement producing units and the balance of output was allowed to be sold in the open market. This resulted in a rapid phase of development during which the industry witnessed commendable improvements in the technology of production and substantial augmentation in the scale of production in terms of fresh capacity creation and entry of new corporates into cement manufacturing. The policy of dual control boosted corporate profitability and thus imbued the industry with a momentum, the benefits of which have been quite long-lived.

In March 1989, the cement industry had been completely decontrolled followed by dispensing with the licensing requirements in July 1991. By 1992, the pace of overall economic liberalisation had peaked; ironically, however, the economy slipped into recession for a prolonged period of over a decade up to 2003-05, except for a brief interval of 1994-95 to 1996-97; in the recent years there has been an overall improvement in the economy’s growth performance. The cement industry too has broadly faced the same vicissitudes.

Table 1: Decadal Growth of Cement Industry
Year	Production	Installed Capacity	Decadal Growth Rate
	(million tonnes)		(per cent)
	(A)	(B)	(A)	(B)
1950-51	2.7	3.3
1960-61	8.0	9.3	11.5	11.0
1970-71	14.3	17.6	6.0	6.6
1980-81	18.6	27.9	2.7	4.7
1990-91	48.8	65.1	10.1	8.8
2000-01	99.5	119.3	7.4	6.2
Source: Economic Surveys, GoI Growth rates calculated by EPWRF

A glance at decadal growth (Table 1) of installed capacity and production in the cement industry clearly underlines the effect of the policy environment on the performance of the industry. Post-liberalisation, there has been a close correlation between growth in the cement sector and the country’s overall as well as sector specific-economic performance. Events in the world markets have also influenced the performance of the cement industry. For example, the stock market boom in 1994, coupled with demand projections for cement, power scarcity, etc, resulted in cement companies attracting huge valuations and led to enormous investments and capacity creation around that time. Or the positive impact of the post-war reconstruction in Iraq on cement manufactures, particularly those located on the west coast who were well-suited to meet at least a part of the huge requirements of cement arising in that region.

Industry Structure

Historically, the Indian cement sector has been highly fragmented. The industry has three broad components: large cement plants in the private sector; four government-owned cement companies; and mini cement plants. The industry is cyclical and capital-intensive in nature with a requirement of Rs 3,500 per tonne of capacity of large plants as compared with Rs 1,400-1,600 for mini plants. A new plant typically has a gestation period of 3-4 years. The mini-cement plants, set-up in dispersed location across the country, enjoy many benefits: reductions in transportation as well as capital costs and making use of smaller limestone deposits. They contribute to better regional development. The prime advantage of mini cement plants arises from capital cost requirements which are much lower than those for large cement plants, as indicated above. Apart from the reduced per tonne fixed cost, these plants save on transportation costs since they cater to local markets in their vicinity. A typical characteristic of the industry is that competitive advantage arises not from manufacturing costs alone; high transportation cost per unit of cement sold imparts great significance to location. Additionally, severe rigidities in the infrastructure for transportation greatly increase the importance of the locational factor.

Table 2: Select Parameters of the Cement Industry Classified by Industry Structure
As on 31^st March, 2005	Large Plants	Mini Plants
Cement Plants (numbers)	129	365
Installed Capacity (million tonnes)	153.6	11.1
Cement Production (million tonnes)	127.6*	6.0**
Large Plants have capacity more than 1.98 lakh tonnes/year.
Mini Plants have capacity less than 1.98 lakh tonnes/year.
: During 2004-05; *: Provisional figures for 2003-04
Source: Cement Manufacturer's Association (CMA)

Currently, the industry comprises 54 players that operate 129 plants with installed capacity of around 154 million tonnes (Table 2). A majority of the plants are small-sized and well-spread throughout the country. However, large cement plants account for 93 per cent of the total installed capacity and the concentration at the top has been increasing over the last decade. Additionally, there are more than 350 mini cement plants with an estimated capacity of 11 million tonnes per annum. The Cement Corporation of India , which is a central public sector undertaking, has 10 units and various state governments own another 10 large cement plants. The state sector produces 13 million tonnes or roughly 10 per cent of India ’s total production and mini cement plants contribute another 6 million tonnes. The state sector companies have incurred substantial losses and their future prospects are dependent on government policy. Of the mini cement plants, many have been closing and others have been incurring losses. It has been recognised that the sustenance of the mini cement plants sector is overtly a function of excise duty and other fiscal concessions that they have been entitled to.

The industry has been rapidly consolidating with Mergers & Acquisitions (M&A) activity. After Gujarat Ambuja acquired control of ACC and Grasim acquired control of L&T in the last decade, these two players dominate the industry and control nearly 50 per cent of the market share. Besides the above mentioned large players, other noteworthy companies include India Cement, Madras Cement, Chettinad Cement, Shree Cement, Birla Corp and JK group. With 100 per cent foreign direct investment (FDI) permitted for the sector, Lafarge, which entered the Indian cement industry in 1999, has acquired a capacity of 4.5 mtpa (million tonnes per annum) and Itali Cementi a capacity of 2.7 mtpa.

Installed Capacity and Production

As mentioned in preceding paragraphs, both installed capacity and production in the cement sector, dictated by government control before the eighties, had been meagre. All of that changed with partial de-control in 1982 and complete liberalisation in 1989. Post-liberalisation, the sector became vulnerable to market conditions of demand and supply as well as other events in the domestic economy, and to some extent the world economy (Charts A and B).

Exposed to the open market, the cement industry’s performance has been typically cyclical in nature, characterised by boom-and bust cycles. A huge potential market and rapid growth in the early stages led to a surge in interest and a flurry of investment (1970s); projected growth rates pointed to a lucrative market (1982); some freedom from controls, buoyant conditions and huge profits raked in by players tempted more players into the market (1982-1989); capacity increased in excess of demand and a glut in capacity emerged, resultantly competition increased, prices fell and margins came under pressure (mid-1990s), capacity additions got halted and weaker players quit the market or sold off to larger ones (late 1990s and early 2000). Demand eventually caught up and the cycle seems to be repeated all over again. Perhaps, of all the cyclical industries, the Indian cement industry has exhibited this boom-and-bust cycle most visibly.

Table 3: Capacity Utilisation by Large Cement Plants
(in per cent)
Year	1950-51	1960-61	1970-71	1980-81	1984-85
Capacity Utilisation	82.3	86.0	81.2	66.6	69.7
Year	1989-90	1991-92	1996-97	2000-01	2004-05
Capacity Utilisation	76.3	79.5	72.6	83.4	85.7
Source: Various Government and Media Sources

The installed capacity, which was 65 million tonnes per annum in 1991-92, has increased to nearly 156 million tonnes per annum in 2004-05. The all-India average capacity utilization of cement plants is at 85 per cent (Table 3) . The industry constantly endeavours to achieve full capacity utilization vis-à-vis demand because of a high incidence of fixed costs. The cement units continue to operate at rated capacities to cover their costs; they thus seek to attain capacities that cover their costs. Yet, there have been occasions when the industry has faced a fall in utilisation levels on account of severe shortages of key raw materials such as power, coal and rail wagons; in the 1990s, the lowest level of capacity utilisation was in 1996-97 when the economy got plunged into recession.

Technology

Along with the achievement of larger capacities and higher production, the industry has made tremendous strides in technological upgradation and assimilation of modern technology. At present about 94 percent of total capacity is based on the more modern, energy- efficient and environmentally friendly dry process technology, while just about 6 percent of capacity still uses the older wet and semi-dry processes. As a result, there have been substantial improvements in the quality of production, reduction in energy consumption, more efficient pollution control systems and a higher degree of automation. There still exists tremendous scope for waste heat recovery in cement plants and thereby reduction in emission levels. One project for co-generation of power utilising waste heat in an Indian cement plant is being implemented with Japanese assistance under Green Aid Plan.

Constraints and Indirect Controls

The primary constraints faced by the industry are mostly externally imposed. Though the industry has been liberalised, its dynamics are dictated to a large extent by government-controlled sectors of coal, power and the railways. Three important constraints are: deteriorating quality of coal along with steadily rising pit-head prices; inadequate wagon availability and rising haulage charges; and power cuts and rising power tariffs. Other related concerns are lack of private and public investment in infrastructure projects like sea and rail transport, ports and bulk terminals as well as the high incidence of state and central levies and duties.

In response to the power-related problems, most large cement plants now have installed captive power with diesel generating sets as well as small thermal power stations. Many plants, in the worst affected states like Karnataka, have installed adequate capacity to run the plant on full load on captive power alone. The small budget mini plants though continue to remain vulnerable to the problems arising from government-owned power supply. Similarly, as an answer to transport related problems, some companies like Gujarat Ambuja have embarked on innovative means of moving their cement, including the acquisition of ocean-going vessels and silo storage sites at distribution centres, though here again such an option is unavailable to the mini plants due to inhibiting costs.

Demand and Consumption

Cement consumption is driven by two different economic agents. Consumption in residential and even commercial spaces is largely influenced by demand from households and small business enterprises. At the second level, there exists consumption demand in infrastructural projects – dams, irrigation canals, bridges, ports, roadways – and in the setting up of industrial plants and utilities. The former is influenced largely by short-run changes and trends in income growth and tend to be localised in those areas experiencing income expansion. The latter being a function of large investment decisions and to the extent a large part of it being directed towards the generation of public goods, the availability of investible funds with the relevant public agencies become critical.

Table 4: Decadal Growth in PCC of Cement
Year	Per Capita Consumption (PCC)	Decadal Growth Rate
Year	(kgs per capita)	(per cent)
1951-52	9
1961-62	20	8.3
1971-72	27	3.0
1981-82	31	1.4
1991-92	62	7.2
2001-02	100	4.9
Source: Various Reports Growth rates calculated by EPWRF

Immediately after the country’s independence, cement consumption boomed largely on the back of strong demand in the public sector domain, given the importance to infrastructure development in the first two five year plans (1951-56 and 1957-61). The lull in growth during the seventies and the early eighties was pierced through this strong pick up in the decade of decontrol to reach 62 kgs per capita in 1991-92 from 31 kgs per capita in 1981-82, a growth of 7.2 per cent per annum during the decade (Table 4 and Chart C). In 2003-04, per capita consumption of cement has touched 110 kgs per capita. Yet, this is in fact the lowest per capita consumption of cement anywhere across the world with the world average being in the range of 250 kgs per capita.

The industry has been recording healthy growth primarily due to the ongoing infrastructure projects such as golden quadrilateral, the north-south & east-west corridor and construction activity in the wake of the unprecedented housing boom in recent times. The golden quadrilateral project (5,846 km plus 7,300 km of feeder roads), a number of other infrastructure projects related to seaports and various power plant projects will boost demand for cement. Besides, the industry has been witnessing rising cement demand on account of a boom in the housing sector.

Interest rate for housing finance plummeted from around 15-16 per cent per annum in 1997-98 to below 10 per cent per cent per annum around 2003-04 (though these rates have again begun to move upwards in 2006). Traditionally housing, infrastructure and industrial construction have accounted for 55 per cent, 25 per cent and 20 per cent, respectively of total cement demand in the country. In the recent past, housing sector is estimated to have accounted for 70 per cent of cement consumption.

Exports

Indian cement accounts for not more than 0.2 per cent of total world cement exports. The sector is relatively insulated from international markets. Given the bulky nature of the commodity and the inadequacy of transport infrastructure in the country, international trade has been limited to neighbouring states in small quantities. Even that miniscule volume of exports took a beating after the south-east Asian crisis, though the situation has improved gradually and the export figures (including clinker) have touched 9 million tonnes in 2003-04 (Table 5).

Table 5: Exports of Cement (in million tonnes)
Year	Cement	Clinker	Total
2001-02	3.4	1.8	5.1
2002-03	3.5	3.5	6.9
2003-04	3.4	5.6	9.0
2004-05	3.3	4.8	8.1
2005-06	6.0	-	-
Source: Economic Survey 2005-06, GoI and CMA

Exports have been mostly restricted to those large companies that own jetties. Companies like Gujarat Ambuja and L&T have been major exporters, who export mainly to get incentives like duty-free import of high grade coal and oil. There exists tremendous export potential for the cement industry, especially to the rapidly expanding south-east Asian economies as well to west Asian economies due to the construction boom over there.

Prices

Table 6: Per cent Increases in Wholesale Price Index
	All Commodities	Manufactured Products	Cement Index
*Annual Increases*
1996-1997	(4.6)	(2.1)	(2.8)
1997-1998	(4.4)	(2.9)	(-3.4)
1998-1999	(5.9)	(4.4)	(1.6)
1999-2000	(3.3)	(2.7)	(-1.9)
2000-2001	(7.2)	(3.3)	(6.4)
2001-2002	(3.6)	(1.8)	(8.9)
2002-2003	(3.4)	(2.6)	(-2.3)
2003-2004	(5.5)	(5.7)	(1.2)
2004-2005	(6.5)	(6.3)	(3.9)
*Period Increases*
May 2005 over Nov 2004	(1.0)	(2.1)	(11.1)
May 2006 over Nov 2005	(1.2)	(1.6)	(17.0)
Source: Economic Advisor, GoI

The prices in the cement industry strongly follow cyclical as well as seasonal trends. During monsoons, cement consumption hits a seasonal low and it is inappropriate for a production cut or any price rise. This trend changes with the end of the season, more so with the setting in of the festive season in the country around the same time (October-November). The prime season for the cement industry when demand surges and prices peak naturally coincides with the boom period for construction activity – November to May. Likewise, periods of recession and buoyancy in the economic activities influence corresponding easiness and firmness in cement prices, respectively.

It is interesting to note that the rise in the wholesale price index (WPI) for cement, while it remains contained on a full financial year basis (April-March) relative to the rise in all commodities WPI as well as the manufactured products WPI, it shoots up much above the increases in these two indices in the peak season of November – May. In the current year (November 2005-May 2006), there has been an unprecedented rise in cement prices, wherein the WPI for cement has risen by 17 per cent as compared to 11 per cent in the same period a year ago. The general index of WPI has risen only by 3 per cent and 5 per cent, respectively, during these two periods (Table 6 and Chart D).

The retail prices, which include apart from ex-factory prices, government levies like excise duties, cesses as well as profit margins of sellers, have risen even further by over 50 per cent in this latest seven month span (Table 7). In fact, in response to the government’s criticism regarding irrationally high prices, the cement manufacturers have sought to rebut and have pointed towards unduly high taxation which accounts for 33 per cent of the cost and made out a case of tax cuts for the industry. Another reason cited by the industry has been rising input costs, though the rise in cement prices has been much higher than can be justified by rising raw material prices.

Table 7: Increase in Prices of Cement
	Cement Index in WPI	Wholesale Prices				Retail Prices
		Rs per 50 kg bag				Rs per 50 kg bag
		Mumbai	Delhi	Kolkata	Chennai	Mumbai	Delhi
May 2006	193.5	202	204	200	185	240	230
Nov 2005	165.4	161	165	179	169	150	140
Price Rise in May 2006 over Nov 2005 (per cent)	(17.0)	(25.5)	(23.6)	(11.7)	(9.5)	(60.0)	(64.3)
Source: Economic Advisor, GoI and Various Newspaper Articles

Currently, since two companies, Grasim and Gujarat Ambuja along with their associate companies, control almost 50 per cent of the country’s cement capacity and supply, it has significance on the profits in the cement industry which tend to move disproportionately with even small changes in cement prices. To illustrate, as per some estimates if these two companies decide to raise cement prices by Rs 20 per bag, they would annually add Rs 1200 crore each to their bottom lines (August 2003).

Regional Segmentation

Transporting cement, a bulk commodity, over long distances is uneconomical. This has introduced a better regional spread of the industry with the southern region enjoying a slight edge amongst the five main regions: north, south, west, east and central. The southern region thus accounts for the largest share in overall production (29 per cent) due to the vast availability of limestone. This is followed by the northern (21 per cent) and the western regions (19 per cent). Cement consumption varies across regions due to the differences in their demand which in turn is influenced by per capita income and the level of industrial development in each state. In 2003-04, northern India accounted for the highest proportion of cement consumption (32 per cent) followed by southern (28 per cent), western (25 per cent) and eastern regions (15 per cent). Over the years it has been observed that demand in the east has been driven by the housing sector, whereas infrastructure, investments in industrial projects and the housing sector (in varying proportions) have propelled demand in the western, northern and southern regions. The western and northern regions are the most lucrative markets due to their higher price realisations.

Table 8: Region wise Market Share of Top Four Cement Groups
(per cent)
	2003-04	2007-08 (P)
North	49.8	68.2
South	50.8	66.2
West	61.4	80.5
East	58.4	76.6
P: Provisional
Source: CRISIL

The principal market segmentation in the domestic industry is the regional segmentation of the national market. With the exception of the industry leader ACC, cement companies have been at best restricted to servicing a few regional markets and some have even more localised sales. This often creates a situation where arising out of movement rigidities, some markets offer enclaves of relative scarcity and premium prices. There exist significant differences in market prices of cement between major urban markets such as Delhi and Mumbai – cement offer prices are lower by Rs 8 to as much as Rs 15 in Delhi than in Mumbai for the same company.

Investment Climate

Table 9: Investment Scenario in the Cement Sector
	At the end of	Unit	Apr 2006	Jan 2006	Oct 2005	Jul 2005	Apr 2005	Jan 2005	Oct 2004	Jul 2004	Apr 2004	Jan 2004
1)	Total Investment*	Rs crore	16680	12773	11955	11246	11353	11453	10815	10720	9088	8252
			(46.9)	(11.5)	(10.5)	(4.9)	(24.9)	(38.8)	(15.7)	(11.0)	(-7.0)	(-13.8)
2)	Investment Under Implementation	Rs crore	2758	3654	3819	3669	3258	3633	3641	4615	3603	3145
			(-15.3)	(0.6)	(4.9)	(-20.5)	(-9.6)	(15.5)	(25.8)	(68.1)	(32.4)	(4.8)
3)	Rate of Implementation (2/1)	Per cent	16.53	28.61	31.94	32.62	28.70	31.72	33.67	43.05	39.65	38.11
4)	Completed	Rs crore	601	800	710	428	258	426	426	298
	Projects**	Nos.	5	7	6	9	10	5	5	3
* Total Investment includes Investments which have been either Announced, Proposed or are Under Implementation at the end of the specified quarter. ** Projects completed within past one year. Italicised figures in brackets represent year-on-year percentage change. Source: CMIE, Capex, Various Issues

Most of the leading corporates in the cement industry have significant expansion plans. Though it is important to note that the rate of implementation of projects (the number of projects actually implemented as a proportion of total projects announced or proposed of in the sector) has been low at below 50 per cent and has been in fact falling; the rate of implementation in the last quarter ending April 2006, for which data is available, has been a mere 16.5 per cent (Chart F).

The projects under implementation grew at healthy rates in 2004, though this momentum has decelerated in the current year. The large growth in projects under implementation in 2004 has reflected in a substantial number of projects being completed in the first half of 2005; 10 projects worth Rs 258 crore in quarter ending April 2005, 9 projects worth Rs 428 crore in the quarter ending July 2005, 6 projects worth Rs 710 crore in the quarter ending October 2005, 7 projects worth Rs 800 crore in the quarter ending January 2006. The large monetary values attached to a relatively smaller number of projects and vice versa would be due to completion of large plants in the latter periods while that of mini plants in the former (Table 9 and Chart E).

At the end of the quarter ending April 2006, of a total of 81 projects in the sector, nearly one-third of the projects have been in the four states of the southern region. Andhra Pradesh has accounted for the maximum number of projects (15 projects worth Rs 2,279 crore) followed by Rajasthan in the western region (13 projects, though worth more than the former at Rs 2,580 crore). These two states together account for over 30 per cent of the total invested amount.

In Conclusion

There exists tremendous growth potential for the sector catering to the needs of both within the domestic economy as well as in the international market. In the domestic market the lowest per capita consumption of cement in India by international standards coupled with robust growth trajectory that the Indian economy has entered indicates a potentially large domestic demand. At the specific industry level, a spurt in consumption demand for cement arising out of both its demand-driving sectors - the government’s focus on infrastructure development coupled with a booming construction industry – is likewise indicative of the huge domestic growth potential for the cement industry in the forthcoming years.

India also has an immense potential to tap cement markets of countries in the neighbourhood, the Middle East and the South East Asia , due to its manifold strengths: locational advantage, large-scale limestone and coal deposits, adequate cement capacity and world-class cement production with the latest technology. However, congestion at the Indian ports and lack of cement handling facilities may serve as a constraint in attempting to push cement exports.

It must also be recognised that the fortunes of the Indian cement industry demonstrate a singular vulnerability to fluctuations. Scope may well exist to reduce these fluctuations by first, widening the market by way of better inland/costal transportation, split location plants and overseas operations, and second, by deepening the market by entering into areas like ready-mix plants, on-site delivery and the like, where synergies with engineering, construction and material handling business can clearly be perceived to be sources of strength for the industry.

Cement: Some Basic Facts

Cement, the most commonly used construction material, is a mixture of limestone, clay, and gypsum. It is made by heating limestone (as source of calcium) with clay or sand (as source of silicon) in a kiln and pulverising the product (clinker), with a source of sulphate (most commonly gypsum). The resulting fine powder when mixed with water sets to a hard mass due to hydration of the constituent compounds.

Manufacturing Process of Cement

The manufacture of cement involves mixing, drying and grinding limestone, clay and silica into a composite mass. The mixture is then heated and burned in a pre-heater and kiln and subsequently cooled in an air cooling system to form clinker, which is the semi-finished form of cement. Clinker is cooled by air and ground with gypsum to form cement. Limestone, the key raw material, significantly affects the operating efficiency of the manufacturing units. Normally, 1.2-1.5 tonnes of limestone goes into the making of every tonne of cement, apart from 0.25 tonne of coal, 120 KWh of power and 0.05 ton of gypsum.

Types of Cement Manufacturing Processes

The wet, semi-dry or dry processes can be used to produce cement. In the wet/semi-dry process, the raw material is produced by mixing limestone and water (called slurry) and blended with soft clay. The dry process and semi-dry processes are more fuel-efficient. The vertical shaft technology employed by mini cement units, use the wet process where as the rotary kiln technology uses the modern dry process. The Indian cement industry has been progressively substituting the wet process with the dry process, which now accounts for 91 per cent of the total installed capacity.

Varieties of Cement

There are different varieties of cement based on different compositions (the basic difference lies in the percentage of clinker used) according to specific end uses. The ones listed are all produced in India .

Ordinary Portland Cement (OPC): OPC, popularly known as grey cement, has 95 per cent clinker and 5 per cent of gypsum and other materials. It accounts for 70 per cent of the total cement consumption.

Portland Pozolona Cement (PPC): PPC, containing 80 per cent clinker, 15 per cent pozolona and 5 per cent gypsum, accounts for 18 per cent of the total cement consumption. Pozolona has siliceous and aluminous materials that do not possess cementing properties but develop these properties in the presence of water. It is cheaply manufactured because it uses fly ash/burnt clay/coal waste as the main ingredient. It has a lower heat of hydration, which helps in preventing cracks where large volumes are being cast.

Portland Blast Furnace Slag Cement (PBFSC): PBFSC consists of 45 per cent clinker, 50 per cent blast furnace slag and 5 per cent gypsum and accounts for 10 per cent of the total cement consumption. It has a heat of hydration even lower than PPC and is generally used in construction of dams and similar massive constructions.

White Cement: White Cement is basically a variation of OPC clinker made using fuel oil (instead of coal) and a special cooling technique. It contains a very low proportion of iron oxide (below 0.4 per cent) that ensures whiteness and makes it much more expensive than grey cement and is used for decorative purposes to enhance aesthetic value in tiles, flooring, etc.

Specialised Cements: Oil Well Cement is made from clinker with special additives to prevent porosity; Rapid Hardening Portland Cement is similar to OPC, except that it is ground much finer so that on casting the compressible strength increases rapidly and Water Proof Cement is OPC with waterproofing properties.

[This note is based on facts gathered from various secondary sources, mainly Wikipedia.]

References:

Government of India , Economic Survey (Various Issues), Ministry of Finance

Cement Manufacturers’ Association (www.cmaindia.org)

Government of India , Office of the Economic Advisor, Ministry of Commerce and Industry

CRISIL, Various Reports

CMIE, CapEx (Various Issues)

ICRA, Various Cement Industry Reports

IBEF, Various Cement Industry Reports

Various Media Articles

(This note has been prepared by Nilopa Shah.)

The State Trading Corporation (STC) has finalised the wheat import contracts of 2.2 million tonnes. Initially, the STC had shortlisted 4 companies for this wheat tender namely, Glencore, Cargill, ADM (Archer Daniels Midland) and Concordia. However, now, in all 5 companies including Toefer (

Germany

) have been awarded the contracts for the respective amounts of 5.5 lakh tonnes, 4.05 lakh tonnes, 3 lakh tonnes 2.25 lakh tonnes and 7.2 lakh tonnes. Prices for the bids are in the range of $196 to $205 per tonne including cost and freight (C&F). Bulk of the shipments is expected to arrive in the country between September – January, 2006 – 07 at Mumbai, Kandla, Mundra and Visakhapatnam ports.

The central government has allowed white sugar imports at zero duty till September 30, 2006, though the quantum of imports has yet to be decided. White sugar imports used to attract a 60 per cent duty earlier. Experts from the sugar industry, however, are expecting the imported sugar to be costlier than domestically produced, due to factors like higher international prices, imposition of countervailing duty of Rs 850 per tonne, transportation costs and various taxes within the country. This in turn is likely to hike the retail prices to around Rs 26-28 per kg, from the current price range of Rs 19-21 per kg.

In the view of soaring wheat prices in the domestic market, the central government has slashed down the customs duty on wheat from 50 per cent to 5 per cent to increase the open market availability of wheat. The new rate has been applied from June 28, 2006 and would be valid till December 31, 2006. The quality standards applicable would be the same as notified for public sector imports. The government, however, had proposed to reduce the duty on wheat to zero. The 5-per cent duty on wheat import, as per the industry experts, would cause a difference of Rs 45 per quintal had the wheat imports been allowed duty free.

The Centre has decided to release 8 lakh tonnes of maize, exclusively, to poultry farmers to help them recover the heavy losses incurred on account of bird flu outbreak in the country. This maize would be made available at Rs 450-500 per quintal, which is considerably lower than the current market price of Rs 700. The government had earlier released 5.3 lakh tonnes of maize, in April 2006. In addition to maize, the government has plans, also, to allocate 60,000 tonnes of jowar and about 7,000 tonnes of bajra to poultry farmers.

The department of horticulture has planned to give a subsidy of Rs 70.5 lakh for crops like mango, cashew, banana, vegetables and floriculture in East Godavari district, Tamil Nadu. The department has decided give 50 per cent subsidy on plant material not exceeding Rs 900, Rs 1,200 and Rs 18,000 per hectare of mango, cashew and banana crops respectively. The subsidy would also be provided for rejuvenation/replanting of mango, cashew and citrus crops not exceeding Rs 5,000 each per hectare. Similarly, vegetable crops would also be entitled to 50 per cent subsidy not exceeding Rs 1,500 per hectare. The farmers in the district would get a subsidy of Rs 14.89 lakh on vegetable crops and Rs 22.52 lakh on mango, cashew, banana and citrus plants. The department has also allocated Rs 9.50 lakh for subsidy on shade nets, H T rose, chrysanthemum, crossandra and jasmine.

National Agricultural Co-operative Marketing Federation (Nafed) has finalised the import of 30,000 tonnes pulses comprising 25,000 tonnes of urad and 5,000 tonnes of moong at zero duty. Both the pulses would be imported from Myanmar and would be delivered at Mumbai, Kolkata and Chennai ports during the period of July and early August 2006. Nafed had floated a global tender to import 45,000 tonnes of pulses consisting of gram, arhar (tur), urad and moong on June 18, 2006. However, the import of arhar has been put on hold by the government and in case of gram the offers have not been finalised as they have been scheduled for late August and September shipments.

Southern peninsular as well as the northeastern region in the country have witnessed higher rainfall during the revived phase of southwest monsoon 2006. Conversely, the northwestern part of the country, which is yet to receive the monsoon showers, has been experiencing intermittent pre-monsoon rainfall. Despite the temporary slow down in kharif sowings during the weak monsoon phase between June 8 and 20 2006, area covered under the crops like paddy, sugarcane and pulses during the kharif season 2006 has increased compared to previous season. As against this the pace of sowing of cotton and oilseeds, particularly groundnut, has been relatively slow this season.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone up to 5.44 per cent for the week ended June 17, 2006 from 5.24 per cent during the previous week. The inflation rate was lower at 4.10 per cent in the corresponding week last year.

The WPI in the week under review has increased by 0.2 per cent to 203.4 from 203 in the previous week (Base: 1993-94=100). The index of ‘primary articles’ group (weight 22.02 per cent) has risen considerably by 1.2 per cent to 205.2 from the previous week’s level of 202.7, mainly due to an increase in the price index of ‘food articles’, ‘non-food articles’ and ‘minerals’ by 0.8 per cent, 1.1 per cent and 9.6 per cent respectively, as compared to the previous week. The index of ‘food articles’ has gone up to 208.7 from 207 in the previous week, mainly due to the higher prices of urad, fish-marine, eggs, fruits and vegetables, barley, gram, ragi and milk. The index of non-food articles has gone up to 181.5 from 179.6 for the previous week, mainly due to the higher prices of fodder, raw silk, raw cotton,

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seed, gingelly seed and groundnut seed. The index of minerals has gone up to 392.2 from 357.7 for the previous week, mainly due to the higher prices of fire clay, iron ore and magnesite. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has gone up considerably by 0.1 per cent to 326.4 from its previous weeks’ level of 326, mainly due to the higher prices of naphtha and bitumen. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has declined a tad by 0.1 to 175.4 from the previous weeks’ level of 175.6, mainly due to reduced prices of textiles and base metals.

The latest final index of WPI for the week ended April 22, 2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 199.4 and 3.85 per cent as against their provisional levels of 198.8 and 3.54 per cent, respectively.

Banking

The RBI has asked the commercial and co-operative banks to submit status reports on implementation of core banking solutions (CBS) in order to plan a nationwide roll out of electronic clearing service (ECS). The central bank is designing an ECS system which will have much broader coverage than the existing one. At present, the ECS system is operational at 43 centres. The RBI is providing these services at 15 locations and other banks are operating this clearing at the remaining centres. A nationwide ECS, for which there is a strong demand from mutual funds and capital intermediaries, will have a centralised data submission facility to ensure safety and efficiency.

Yes Bank has announced a special scheme offering 8 per cent interest on deposits of 10 months and 1 day, ahead of the launch of its retail business. The interest offered on deposits of up to one year by most bank ranges from 6.25 per cent to 6.50 per cent.

Commercial banks disbursed Rs 1,16,370 crore to the agriculture sector in 2005-06, up 33 per cent compared with the target set by the government for the year. Of this, the public sector banks (PSBs) disbursed Rs 91,234 crore, while the private sector banks provided Rs 25,136 crore. The government had set a target of Rs 87,200 crore for the year as part of its efforts to double credit to the farm sector in three years beginning 2005-06. The target, including other financial intermediaries such as co-operative and regional rural banks for the year was Rs 1,41,500 crore. The target was fixed during a meeting of chief executives of PSBs with finance minister P Chindambaram in June 2005. During 2005-06, PSBs alone financed 43 lakh new farmers, issued 38 lakh kisan credit cards and financed setting up of 860 agri-clinics. The government-owned banks also provided Rs 12,175 crore for financing 8,95,288 new investment projects in the agricultural sector.

Financial Markets

Shirdi Industries Limited tapped the primary market with its public offer of 65 lakh equity shares with a price band of Rs 69 to Rs 78 and a face value of Rs 10 per equity share on June 28, the issue closes on July 05,2006.

The market commenced the week on a bearish note, with the sensex plunging by around 371 points on June 26 amidst fears of further US Fed interest rate hike in the upcoming FOMC meeting, derivative expiry and concerns over the paucity of rains in June 2005. Thereafter, volatility continued to prevail in the market as sensex recovered partially on the very next day as it closed 109 points higher. However, on June 30, the sensex gained a whopping 447 points, as the market had already factored in the Fed rate hike by a quarter percentage points to 5.25 per cent on June 29, also with the Fed toning down its warning and thereby signaling possible stop on further increases in the key lending rates also boosted the market sentiments. Further, the firm global market trends also positively affected the market sentiments. On a weekly basis, the sensex gained around 207.95 points or 2 per cent to settle at 10609.25 and nifty gained 85.50 points or 2.81 per cent to settle at 3128.2. Meanwhile, both the BSE Small-Cap and BSE Mid-Cap registered a decline of 3.19 per cent and 0.91 per cent, respectively on a weekly basis. Among the sectoral indices, except BSE PSU, BANKEX, BSE CD, and BSE HC, which have registered a decline of 1.04 per cent, 2.22 per cent, 0.68 per cent anda 1.49 per cent, respectively, all the other sectoral indices registered gains over the week. The fast moving consumer goods index registered the highest gain of 4.43 per cent, followed by information technology index at 3.22 per cent.

The FIIs remained net sellers in the equity markets during the week ending June 30,2006 to the tune of Rs 450 crore with purchases worth Rs 7750 crore and sales of Rs 8201 crore. However, for the entire month of June, they have been net buyers in the equity market to the extent of Rs 479.5 crore with purchases worth Rs 39783.1 crore and sales of Rs 39303.5 crore. Meanwhile, the mutual funds turned net buyers for the week ending June 30,2006 to the extent of Rs 276.99 crore with purchases worth Rs 2072.73 crore and sales of Rs 1795.74 crore. But, for the entire month of June, they have turned net sellers in the equity market to the tune of Rs 1976.94 crore with purchases of Rs 7843.52 crore and sales of Rs 9820.46 crore.

The total turnover of the NSE’s F & O segment rose on a weekly basis to Rs 152364 crore as compared to Rs 117610 crore in the previous week; correspondingly, the average daily turnover also rose to Rs 25394 crore from Rs 19601.67 crore. Meanwhile, product-wise, as usual stock futures continued to constitute the bulk of the trading at Rs 71141 crore and stock futures stood at 61337 crore.

Meanwhile, the RBI has come out with recommendations on derivative and hedge accounting norms by way of a discussion paper. RBI has asked banks to give suggestion on the paper within the next six weeks. This move would help the regulator to frame uniform principles and enable banks to recognize, classify, and measure the inherent risks in their book of accounts and financial statements. According to this discussion paper, the banks will have to make full disclosure in their balance sheet on their derivative transactions. Besides profit and loss arising out of derivative transactions the disclosure should include the nature of financial instruments used in such transactions.

Government Securities Market

During the week, RBI mopped up Rs 1075 crore and Rs 1100 crore through 91-day and 182-day treasury bills under the regular auction; the cut-off yields for 91-day and 182-day treasury bills were 6.3563 per cent and 6.7797 per cent, respectively. Also, RBI has fixed the rate of interest on the Floating Rate Bonds, 2015 applicable for the next half-year (July 2,2006 to January 01,2007) at 6.83 per cent per annum; while the rate interest on the Floating Rate Bonds, 2017 applicable for half-year (July 2,2006 to January 1,2007) has been fixed at 6.69 per cent per annum.

During the week, the secondary market for gilt-edged securities remained subdued on account of domestic interest rates worries. Moreover, the finance minister’s comment that the government had advanced part of its July 3-11 borrowing when it raised the size of the last auction resulted into a marginal dip in the yields the gilt-edged securities. Also, the expectations of the government reducing the size of borrowing by Rs 4,000 crore in its forthcoming auction propped up the gilt prices. Towards the end of week with the Fed rising its key lending rate to 5.25 per cent and signaled a possible pause in its tightening policy aided the market sentiments. But, RBI governor’s comments on the rising domestic inflation rate weighed down the market sentiments and rendered the market subdued. The weighted average YTM on the 7.59 per cent 2016 paper closed higher at 8.1214 per cent on June 30, 2006 as compared to 7.9608 per cent on June 23, 2006.

Meanwhile, it being the first week of the reporting cycle, the demand of funds by banks remained high, so as to meet the fortnightly targets. However, aided by robust money market liquidity, the funds requirements were smoothly provided for and the call rates traded around the reverse repo rate throughout the week to close at 5.75-5.85 per cent The daily average outstanding amounts in the LAF (reverse repo) operations conducted during the week stood at Rs 41686 crore as against Rs 39246 crore in the previous week. The RBI announced the calendar of auction for Liquidity Adjustment Facility and Second Liquidity Adjustment Facility for the quarter July-September 2006.

Bond Market

During the week, the hike in the US Fed rates by a quarter percentage points to 5.25 per cent renewed the fears of a hike in the domestic interest rates by RBI and also the market continued to be weighed down by the oil prices concerns. The triple-A 5-year benchmark yield rose to 8.55 per cent from its previous weekly close of 8.46 per cent, while its spread over underlying gilt widened to 75 basis points from 65 basis points in the previous week.

Foreign Exchange Market

In the foreign exchange market, the rupee recovered early losses against dollar to end at Rs 46.05 per dollar from Rs 46.13 per dollar in the previous week. During the week, it did fell to 22-month low due to weak domestic stock exchange and non- deliverable forward arbitrage, but recovered as the stock market rallied and US Fed hinted at an end to the tightening policy. Moreover, poor FIIs inflows and month end dollar demand by corporates also weighed down the rupee movement and pushed it to a low of Rs 46.39 per dollar. In the forward premia market, the six month annualised forward premia closed at 1.09 per cent on June 30,2006 as compared to 1.26 per cent on June 23,2006.

Commodities Futures Derivatives

Following the media reports, of late, about rumours in the market that the government has been considering banning futures trading in essential commodities, FMC, on June 27, issued a warning that no person or organisation should indulge in rumours-mongering, which affects trading in futures. The regulator said that any person found guilty of spreading rumours would be punished with imprisonment of upto two years, or a fine of not less than Rs 1000 or both.

Goldman Sachs, one of the world’s top investment banking, securities, and investment management firms, is set to pick up about 7-8 per cent stake in NCDEX. Goldman will buy out nearly 50 per cent of NCDEX’s original promoter ICICI Bank’s 15 per cent stake at a premium.

NCDEX has, on June 27, halved position limits of all wheat contracts on a directive from the

FMC and the reduced limit has been made applicable from June 30.the position limits for members have been reduced to 40,000 tonne and for clients to 10,000 tonne. The near month position limits for members and clients have also been reduced to 8,000 tonne and 2,000 tonne, respectively.

CRISIL has assigned ‘A+’ rating to the Rs 500 million long-term borrowing programme of Godavari Fertilisers and Chemicals Limited (GFCL). The assigned rating reflects GFCL’s leadership position in complex fertilizers market in Andhra Pradesh, its strong support from Murugappa group, and high operating efficiencies.

CRISIL has assigned provisional rating of ‘AAA (SO)’ to the pass through certificates issued under Kotak Mahindra Bank Limited's (erstwhile Kotak Mahindra Finance Ltd) Construction Equipment backed securitisation transaction. The provisional ratings are based on the strength of the credit quality of the pool cash flows, Kotak Mahindra Bank Ltd's origination and servicing capabilities, the credit enhancement, the liquidity support, the payment mechanism for the transaction and the soundness of the legal structure.

CRISIL has assigned ‘AAA/Stable’ rating to the CitiFinancial Consumer Finance India Limited's Rs 3 billion non convertible debenture issue. The assigned rating reflects the company’s 100 per cent ownership by Citigroup and the strategic importance of CitiFinancial to the Citigroup India’s business plans. The rating also takes into account the company's good credit appraisal and risk management mechanisms, healthy capital position, high profitability (inspite of high operating expense levels), and comfortable resource profile.

CARE has assigned ‘AA’ and ‘PR1+’ ratings to the long-term bond programme of HUDCO for Rs 1,000 crore and short-term debt programme aggregating to Rs 1000 crore, respectively. The above mentioned ratings take into consideration the 100 per cent government of India ownership of HUDCO, strategic of HUDCO in financing housing and urban development projects in the country, demonstrated government support in form of regular equity infusions, and satisfactory capital adequacy ratio.

ICRA has reaffirmed the ‘A1+’ rating assigned to the commercial paper programme of Transport Corporation of India Limited (TCI) for an enhanced amount of Rs 600 million (from Rs 450 million). The agency has also assigned ‘ MA+ ’ rating outstanding for TCI’s Fixed Deposit (FD) programme. The reaffirmation of the rating takes into account TCI’s strong position in the organised segment of the road transportation industry, the outsourcing model that allows TCI to limit its fleet investments and enables the company to pass on cost pressures during economic downturns. The rating also takes into account the proposed restructuring in the company that includes merger of TCI Seaways (a group company) and hiving off of its the petrol pump division.

ICRA has assigned ‘A1’ rating to an enhanced amount of Rs. 2750 million short-term non convertible debenture programme of Religare Finvest Limited (Formerly Fortis Finvest limited). The assigned rating draws support from the parentage of the promoters of Ranbaxy Laboratories Limited and the continuous managerial and financial support demonstrated by them.

ICRA has assigned an ‘A1+’ to the Rs. 50 billion (enhanced from Rs. 20 billion) certificates of deposit programme of Industrial Development Bank of India Limited (IDBI). The assigned ratings draw comfort from the majority government of India ownership of IDBI and the implicit sovereign support that IDBI enjoys emanating from the continued and demonstrated government support to IDBI. Also, the ratings takes into account the low cost of operations given the wholesale nature of business for the erstwhile development financial institution, comfortable regulatory capital adequacy.

ICRA has assigned a ‘LAAA’ rating to the proposed Rs 20 billion subordinated bonds programme of ICICI Bank Limited (IBL). The rating take into consideration IBL’s strong position in the Indian financial system as the second largest commercial bank, its improving profitability, and its extensive corporate relationships, besides the bank’s increasing retail franchise as well as its improved capitalisation levels following its successful public offerings in the last two years.

ICRA has downgraded the rating for the Rs. 250 million long-term non-convertible debenture programme of Samtel Color Limited (SCL) to ‘LBB’ from ‘LBBB-‘ assigned earlier. The downgrade of rating follows SCL’s delay in meeting its repayment obligations against term loans from banks and financial institutions because of the liquidity pressures brought about by a sharp decline in the company’s income and profits. With demand for the competing flat display panels (FDPs) growing in the domestic market, realisations from sales of colour picture tubes (CPTs)—SCL’s mainstay—were affected significantly in 2005-06. This, in turn, led to the company posting a steep decline in its turnover and profits for 2005-06 over the previous fiscal.

ICRA has assigned ‘A1+’ rating to the Rs. 5 billion short-term debt programme (enhanced from Rs. 4 billion) of IDBI Homefinance Limited (IHFL). The outstanding ratings take into consideration IHFL’s strong parentage (Industrial Development of Bank of India Limited), it’s substantially improved funding profile, favourable asset quality, improving profitability and its comfortable capital adequacy.

ICRA has downgraded the rating assigned to the Rs. 1,250 million preference share capital programme of LML Limited (LML) to ‘LC’ from ‘LBB’, following prolonged disruption of manufacturing operations subsequent to lockout at its Kanpur factory, which the management had declared in March 2006 following labour unrest over compensation.

Corporate Sector

The world’s largest steel company, Mittal Steel, has agreed to merge with the second largest steel company, Arcelor SA, to form the world’s largest entity Arcelor-Mittal Steel which will account for nearly 10 per cent of global production and will be over three times the size of the second largest rival Nippon Steel.

Tata Coffee Limited has acquired Eight O’ Clock Coffee Company, owner of the third largest coffee brand in the US , from the San Francisco based private company Gryphon Investors for Rs 1,015 crore.

KEC International Limited has secured order worth Rs 198 crore from Power Grid Corporation of India Limited. The order comprises two projects worth Rs 114 crore and Rs 84 crore respectively to supply and construct transmission lines in Uttar Pradesh and West Bengal .

Bharat Heavy Electricals Limited has received an Rs 55 crore contract for setting up a sub-station in Bangladesh . The Power Grid Company of

Bangladesh

has awarded the contract for supply and installation of a 230 kv substation at Baghabari power plant and extension of Ishurdi substation.

Oil and Natural Gas Corporation (ONGC) has reported a 3 per cent increase in net sales to Rs 47,922 crore during 2005-06 and net profit has risen by 11 per cent to Rs 14,431 crore, despite paying out a higher subsidy. ONGC’s subsidy burden amounted to Rs 11,956 crore in FY06 compared with Rs 4,104 crore a year earlier.

Engineering and construction major Punj Lloyd’s total income has dipped by about 10 per cent to Rs 1,716 crore in 2005-06. The company has witnessed a sharp 45 per cent decline in net profit at Rs 55.46 crore during the same period. The company has raised Rs 584.86 crore through an initial public offering and $ 125 million through foreign currency convertible bonds.

Aurobindo Pharma has posted a 27 per cent increase in total income at Rs 1,505 crore during 2005-06 as against Rs 1,175 crore over a year ago. The company’s net profit has surged by 97 per cent to Rs 69.4 crore against Rs 35.1 crore a year ago.

Birla Corporation has posted a 6.7 per cent rise in net sales to Rs 1,215 crore during 2005-06 as compared to Rs 1,138 crore over a year ago. Its net profit has reported a substantial 45 per cent growth at Rs 125.76 crore against Rs 86.87 crore.

Despite an 11.8 per cent rise in total income at Rs 3,305 crore, TVS Motor has reported a 15 per cent drop in net profit at Rs 117 crore during 2005-06. The company has sold 1.34 million units of total two wheelers during 2005-06 as against 1.17 million units, a rise of 14 per cent.

Labour

There is a conflict between the Ministry of Labour and the Department of Posts with regard to much awaited social security bill for unorganised sector workers. The Bill envisages health benefits, life insurance and provident fund or old age pension for India ’s 30 crore unorganised sector workers. It has been decided that the cost would be shared by the centre and states in 75-25 ratio. However, the dispute is over the administration issue. According to the report of the National Commission for Enterprises in the Unorganised Sector (NCEUS) chaired by Arjun Sengupta, a network of 1,40,000 post offices could be retooled to administer the scheme. However, the Ministry of Labour has laid proprietary claim to the scheme by asserting that it would appoint labour officers to administer the scheme. It has emphasised that it would retain the right to administer the scheme as it would address the complaints about the implementation of the scheme.

*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.