Current Economic Statistics and Review For the Week 
Ended October 21, 2006 (42^nd Weekly Report of 2006)

Theme of the week:

The Sixth Pay Commission: Issues and Possible Ramifications*

I

Overview

A pay commission is an administrative system or a mechanism that the Government of India set up in 1956 to determine the salaries of government employees. This concept was adopted by the Indian administrative system since the British raj. During the British era also, the Attchison Commission (1886-87) and the Royal (Islington) Commission (1912-15) were constituted to determine the pay structure of civil servants. Since Independence , India has instituted five pay commissions and the sixth pay commission is now underway. Each of these pay commissions examined various issues such as pay and allowances, retirement benefits, conditions of service, promotion policies, etc and submitted recommendations thereon.  In order to examine the trends and patterns related to the pay scales, it would be useful to throw a light on overall structure of employment in India .

Broad Structure of Employment

India has a vast labour pool with almost 92 per cent of the workforce engaged in unorganised sector and only a small proportion of 7 to 8 per cent in organised sector.

Structure of Employment in Organised and Unorganised Sector (1999-2000)

   (In Million)

As per the latest data available, within the organised sector employment (28 million), there were 18.5 million government (central, states, quasi governments and local bodies) employees in 2003. (Economic Survey 2005-06). Although these data are not strictly compatible due to temporal differences, they give rough idea about the compositional pattern of employment. The state (7.4 million) and central government (3.1 million) employees together account for 10.5 million.

A broad structure of employment reveals that the salaries of the government employees who account for only approximately 37 per cent of the total organised sector employment are paid out of the taxes paid by the community at large. Apart from the normal increments, the government employees are entitled for pay scale revisions after every decade, which has been implemented through ‘Pay Commissions’.

Pay Commissions

The first pay commission was constituted in May 1946 and submitted its report in a year’s time. The commission innovated the principle of ‘living wage’ to government employees stating that the salary of the lowest paid employee should not be less than the minimum wage. The Second Pay Commission (1957-59) reiterated the first pay commission’s principle that the pay structure and the conditions of service of government employees should maintain efficiency in the recruitment of persons with required qualifications and abilities at all levels. It further insisted on the determination of minimum and maximum salaries on a combination of both, economic and social consideration. The financial impact of this commission was Rs 396 million. The Third Pay Commission (1972-73) stressed on rationality of pay structures beyond the minimum subsistence level. Accordingly, the salaries should be judged by the salary scales in alternative occupations. The proposals created by the commission costed the government Rs.1.44 billion.

The Fourth Pay Commission (1983-86) widened its scope for determining the pay structure by including a number of factors, such as social status of the public employment in society, the authority of the post, security of tenure and welfare measures to be adopted by the government for employee benefit. By implementation of the recommendations of this commission the financial burden to the government stood at Rs.12.82 billion.

The Fifth Central Pay Commission (1994-97) specified the principles that should govern the structure of emoluments and other conditions of service. It stressed the need for professionalism in government service and requirement based vacancies, which could necessitate a reduction in the number of employees. The Commission also promoted the principles like ‘equal pay for equal work’, and ‘fair compensation’. However, the financial strength and ability of government to pay its employees also received utmost priority by the Commission.

Among the five pay commissions, the impact of the fifth pay commission is worth mentioning which had the most severe impact on both, the centre as well as states fiscal health.

II

Impact of Fifth Pay Commission

“The Fifth Pay Commission (set up in 1994) recommendations resulted in a Rs 530 billion payout by the government. The next (sixth) pay commission would effectively wind up Indian sovereignty.”   --- (Arun Shourie, former Union minister for Divestment, Statistics and Programme Implementation)

The central government declared salary and allowances hikes for its approximately 3.1 million employees, and insisted the state governments to follow suit as per the Commission's recommendations. Before the Fifth Pay Commission recommendations came into effect, the central government's wage bill (including pension dues of Rs 50.94 billion) stood at Rs 218.85 billion in 1996-1997 which shot up by nearly 99 per cent to Rs 435.68 billion in 1999-2000.

As shown in the Table 1, the pay and allowances have continuously gone up except for the year 2000-01. On the other hand, there has been a little or negligible efforts to reduce the number of employees in the central government. As per the trend, the government’s strategy has remained unclear throughout the decade as far as the strength of the government is concerned.

Impact on Finances of State Governments

The states implemented the salary revisions with effect from 1st January 1996, or some other specified date around this period. In order to consider the impact of salary revisions, it is useful to compare the pre-revised salary, i.e., of 1995-96 with the average of per employee salary in the later years. It is evident that the maximum impact of salary revision in different states was felt in 1997-98 to 1999-00. The average of these is centered in 1998-99. Table 2 shows that as compared to 1995-96, the average per employee salary over 1997-98 to 2000-01, centered in 1998-99, shows a massive increase of 59 per cent. 

Similarly, as shown in the Table 3, the salary revisions undertaken by the state governments due to the implementation of the Fifth Central Pay Commission, resulted in substantial increases in the average salaries, especially during 1998-99 (22 per cent).

The impact of the Fifth Pay Commission was so severe that 13 states could not pay salaries in 2000. Therefore, some state governments like West Bengal, Bihar, Orissa , Assam , Manipur, Meghalaya and Mizoram sought a mechanism under which the Centre could not announce a pay revision without consulting the states. They also sought the centre's help in offsetting the impact of the Fifth Pay Commission and a national wage policy to replace pay commissions.

Administrative Reforms Missing

Some of the Fifth Pay Commission's other recommendations included slashing the government workforce by 30 per cent, abolishing 350,000 vacant posts and reducing the number of pay scales from 51 to 34, none of which were implemented. There were few attempts to reduce the strength of the government, but as mentioned above, it was with a negligible impact in an inconsistent manner (Table 1). The Commission also suggested that the grant of salary hikes to employees be linked to issues of efficiency and administrative reforms, which was never a major concern for the government. Therefore, there was no improvement in the quality of the bureaucracy. As far as reducing the strength of the government, it shouldn’t have been difficult, especially with the advent of technology and e-governance, which could either replace or transfer employees wherever needed as per the developmental programmers of the government. Due to a partial implementation of the recommendations of the Fifth Pay Commission, the government has neither achieved better governance nor improved on social and physical infrastructure, which forms a significant part of developmental expenditure.   

III

The Sixth Pay Commission: Current Scenario

For the last two years, communist leaders and trade unions have been demanding the setting up of sixth pay commission. The committee set up by the government headed by Cabinet Secretary B K Chaturvedi, turned down the request for constituting the Sixth Pay Commission. The committee viewed that the Centre and states might not be able to bear the additional burden.

The Eleventh Finance Commission had recommended that states should attempt to limit their salary expenditures relative to revenue receipts or revenue expenditures. Decisions relating to salary levels and levels of government employment should be taken keeping in view the fiscal capacity of the state and the size of population that needs to be served by the government. If the number of employees is relatively large, average salaries should be relatively less. A state that has a large work force, a high level of per employee salary, and low fiscal capacity, will find a large part of its revenue receipts being claimed by the overall salary bill. The work force, even if large, would not prove to be productively employed unless the state is able to provide complementary expenditures, that is, non-salary revenue expenditure and capital expenditure. In addition to this, the Twelfth Finance Commission (set up un November 2002) also urged the need to stop the practice of increasing salaries by appointing pay commissions every 10 years. According to it, many states have reported to the Commission that salaries and allowances have tended to converge with those of the central government and that they find it difficult to implement a salary structure that is different from that of the centre.

In spite of clear indications of possible implications on fiscal health on both the centre and the states, the sixth Pay Commission to revise wages of 3.1 million central government employees has been cleared by the Cabinet, a decision that is widely expected to put an additional burden of at least Rs 20,000 crore on the exchequer annually. The Commission has been given 18 months to submit its recommendations. This decision has sparked of a flurry of debate amongst economists and policy makers.

Pay Commission and FRBM Targets

The crucial part of this controversy relates to the government’s contradictory decision-making process to contain its fiscal deficits. The finance ministry as per the FRBM (Fiscal Responsibility and Budgetary Management) Act 2003, has set a target of reducing the country’s fiscal deficit to 3 per cent by 2007-08 as a ratio of GDP. On one hand, to achieve these targets, the government has been taking stringent measures to curb expenditure and on the other hand the same government has approved the pay commission.  The salary hikes suggested by the sixth pay commission is expected to put a burden of Rs 20,000 crore on the central government. Once the impact on states and other quasi-government bodies is factored in, the Sixth Pay Commission would cost 1.5 per cent of GDP to the exchequer. (Bibek Debroy, PHDCCI). Moreover, the states, as has been historically the case, would have no option but to accept the commission and accordingly raise salaries of the respective state governments’ employees. The major part of this increased expenditure of the state governments would have to be borne by the central government since the states, already combating their current deficit burdens, would seek assistance from it. This, in turn, may have significant budgetary cuts on capital and social expenditure.

Summing up

There is a division of opinion on the merit of appointing yet another Sixth Pay commission. The group of intellectuals who principally strongly advocate for wage hikes for the government employees, consider a decadal gap as a high time to revise salaries. On the other hand, a group of staunch opponents principally disagree to any such hike irrespective of the government’s capacity to do so. Generally, there would be hardly any disagreement when it comes to good governance as a function of efficient systems.  Therefore, keeping the competence factor at the forefront and treating this as a precondition for setting up the Sixth Pay Commission, a system that would allow only performance-linked rewards seems to be justifiable. It should be noted that, the proposed additional pay hikes of the government employees as per the Sixth Pay Commission would be in addition to the normal annual increments. Therefore, any such additional allowances, which are expected to be substantial, should be explained by an equivalent improvement in the overall productivity of the employees and the administrative system. It is evident from the past experience that despite continued emphasis on administrative reforms in overall governance in successive pay commissions including the Fifth Pay Commission, mainly downsizing the government and reducing the number of holidays, nothing or very little has been achieved except implementing only the pay part of it. Such partial measures offering free monetary benefits have resulted in high opportunity costs of money that could have been spent on building sound physical and social infrastructures.

Apart from the questions of ethics, egalitarianism and administrative efficiency, the assessment should have a strong bearing on financial viability of the centre and the states in terms of their capacity to withstand such a heavy burden of pay hikes and should not be governed by political interests in the wake of general elections in 2009. Therefore, merely revising pay scales through constitution of a sixth pay commission without any significant administrative reforms is a regressive move that would further put enormous pressure on the government finances without any socio-economic development measures which, in fact, have been continuously on the government agenda.

References:

1.Government of India (2004), “Report of the Twelfth Finance Commission (2005-2010)”,

Ministry of finance

2. Government of India (1973), “Report of the Third Central Pay commission 1973”,

Ministry of finance

3. Government of India , ”Budget Documents”, Ministry of finance

4.Various Media Sources.

* This note is prepared by Ms Gauri Ranade and Ms Snehal Nagori

Highlights of  Current Economic Scene

AGRICULTURE  

Ministry of agriculture has announced an action plan worth Rs 841 crore to boost wheat production by expanding its cultivation to additional 1.4 million hectares and raising crop productivity in existing area covering selected 138 districts in 9 states (Bihar, Uttar Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, Gujarat, Punjab, Haryana and West Bengal ) to be implemented in 3 years. Measures proposed to step up wheat productivity include demonstration of improved package of practices of wheat, increasing the seed replacement rate to 33 per cent from the present 13 per cent, promotion of macronutrient and gypsum application, popularisation of machines, sprinklers, subsidising diesel used for irrigation, timely crop sowing; propagation of area-specific and high-temperature tolerant wheat varieties, replace of the existing PBW-343 wheat variety with a new improved variety PBW-502.supplying good quality seeds, promotion of new soil and energy conservation technologies such as zero-tillage technology. In the meanwhile ministry of agriculture has reiterated that the country may not need to import wheat in the fiscal year beginning April 01, 2007.

Of the 55-lakh tonne wheat contracted by State Trading Corporation (STC, about 17.2 lakh tonnes has arrived at various ports of the country. However, Food Corporation of India (FCI) has so far received only 14.75 lakh tonne of wheat and about 2.5 lakh tonnes has been expected to get stuck at various ports delaying the other shipments. FCI has started disposing wheat stocks under various government-sponsored public distribution schemes (PDS). For instance, around 7 lakh tonnes of wheat, so far, has been distributed to Maharashtra, Madhya Pradesh, Gujarat , along with the southern states.

As per the Solvent Extractors’ Association of India, the country has exported 1.63 million tonnes of oilmeal during April-September, 2006 registering an increase of 26.3 per cent over the last year on account of higher exports to China and Vietnam. Soymeal exports, the largest constituent of India ’s total oilmeal export basket, have risen to 975,975 tonnes during April-September from 721,900 tonnes a year ago. While China has imported 79,800 tonnes soymeal, 171,475 tonnes rapeseed meal and 43,200 tonnes groundnut meal, Vietnam has emerged as the largest soymeal importer, buying over 325,0000 tonne from Indian markets.

Farmers in the southern Maharashtra region have decided not to supply sugarcane if sugar barons fail to respond to their demand of Rs 1,800 per tonne as the first installment of the final price of sugarcane in the current season. Farmers in Kolhapur , Sangli, Satara and other areas, have expressed their dissatisfaction over the denial of fair price by owners of sugar cooperatives in the region. Most of the sugar factory managements have not paid the first instalment of Rs 1,500 per tonne due to farmers for the cane supplies last season.

The central government has plans to introduce new schemes for replanting rubber, pepper and cardamom. During the next 5 years rubber would be replanted in 50,000 hectares and pepper and cardamom in 60,000 and 40,000 hectares respectively. The Rubber Research Institute of India under the Rubber Board would be given the status of an International Research Organisation.

A new tractor-operated device to help in the cultivation of ratoon sugarcane crop has been developed by the Lucknow-based Indian Institute of Sugarcane Research (IISR).The two-row mounted Ratoon Management Device (RMD) can be used for stubble shaving, deep tilling, off-barring, placing manure, spraying fertilisers/bio agents, chemicals in liquid form and earthing up operations in one or subsequent passes for the ratooning of sugarcane.

The Indian Institute of Sugarcane Research (IISR), Lucknow , has developed a bio-pesticide that could control the spread of red rot disease in sugarcane by up to 53 per cent. The formation is named Trichoderma and would cost about Rs 20 a kg. This could help in preventing the destruction of sugarcane varieties due to red rot, which has been one of the oldest diseases of sugarcane and is also known as the ‘cancer’ of sugarcane. While the usual chemical formation used to control red rot leads to deterioration of soil and affects productivity, this formation is expected to prevent soil deterioration.

According to estimates of Mahyco Monsanto Biotech India Ltd (MMB), Bt cotton has been adopted to cover 8.6 million acres of the total 14 million acres under hybrid cotton cultivation across the country till September2006. This is nearly 275 per cent higher than 3.1 million acres covered a year ago.

The food and agriculture organisation (FAO) has estimated world cereal production to decline by 1.6 per cent 2,013 million tonnes in 2006 over a period of one year owing to downward revisions to the forecasts for wheat, and a slight reduction for rice, which has more than offset an increase for coarse grains. While the forecast for global paddy production in 2006 has been revised downwards by 2 million tonne to 635 million tonne (424 million tonne in milled terms), which would be just marginally up from 2005, the global wheat output in 2006 has been forecast to reduce by 4.6 per cent to stand at 19,596.3 million tonnes compared to previous year on account of wheat crop getting adversely affected due to hot and dry weather prevailing in major wheat producing countries. Conversely, global coarse grains production has been expected to increase slightly to 992.3 million tonnes, which would be almost similar to the level of last year.

Industry

Overall

The buoyant growth rates in consumer goods, consumer durables and non-durables and the capital goods sectors in August 2006 have offset the slowdown in power generation, mining and basic goods production and have raised the Index for Industrial Production (IIP) by 9.7 per cent, against 7.6 per cent in August 2005. In the same month, the manufacturing sector has registered 11.1 per cent growth (8.5 per cent), while mining has posted a decline of 0.1 per cent (2.5 per cent) and power generation has increased at a slower rate of 3.7 per cent (7.9 per cent). The overall growth rate for the April-August 2006 has been 10.6 per cent as compared to 8.7 per cent in the corresponding previous period. The cumulative growth during April-August 2006 in manufacturing has risen by 11.8 per cent (9.6 per cent) while growth in mining has stood at 3.1 per cent against 1.6 per cent in the first five months of the previous fiscal year and the electricity sector has posted a growth of 5.7 per cent against a 6 per cent growth in April-August 2005. The consumer durables sector has recorded the highest growth of 20.2 per cent in August 2006 as compared to 13 per cent last year and the capital goods sector has improved by 14.7 per cent, while consumer goods have grown by 14.6 per cent and consumer non-durables by 12.6 per cent.

Automobiles

According to figures released by Society of Indian Automobile Manufacturers (SIAM), the automobiles sector has continued to grow at a healthy pace in September 2006. The domestic passenger car sales have maintained a healthy sales momentum at 22.4 per cent despite expectations of a sluggish growth for the month in North India due to some traditional beliefs of an inauspicious period. Nine of the eleven car-makers have seen increased sales in September, General Motors and Hindustan Motors being the only exceptions. Car sales in the first half of this fiscal year have grown 22.8 per cent at 5,03,249 units against 4,09,681 units in April-September 2005 period. In two-wheelers, Hero Honda and Bajaj Auto have led the momentum as bike sales in September have grown at 24.8 per cent from the same month last year. Bike sales in the April-September period have grown by 18.5 per cent at 32,05,497 units against 27,04,466 units in the same period in 2005. the overall two-wheeler sales, comprising bikes, scooters and mopeds, has grown 18.8 per cent at 7,78,865 units against 6,55,210 units in the same month last year. Commercial vehicles sales in September have increased by 33.5 per cent at 42,400 units, led by market leaders Tata Motors and Ashok Leyland. While sales of medium and heavy commercial vehicles (M&HCVs) has gone up by 34.2 per cent, higher sales of Tata's light truck `Ace' has resulted in a 32.5 per cent rise in the sales of the light commercial vehicles segment.

Tyres

The government has imposed provisional anti-dumping duty on the import of non-radial tyres, tubes and flaps for bus and trucks from China and Thailand with a view to protect the domestic industry. A notification by the finance ministry said the duty was imposed following an investigation which revealed that the items were being imported from both the countries below their normal value. According to sources, the duty would make imports of tyres from China costlier by Rs 800-1,000. However, the anti-dumping duties are unlikely to be of much help since as per sources, “A pair of tyres from China cost between Rs 14,000-20,000 depending on the brand and use while a pair of tyres from Indian manufacturers cost between Rs 21,000-24,000.

Infrastructure

Overall

India Infrastructure Finance Company Ltd (IIFCL), the special purpose vehicle (SPV) for infrastructure funding, has tied up Rs 1,800 crore, including Rs 500 crore raised from the market at 8.7 per cent for 10 years in bonds. The government-owned company has also raised Rs 200 crore loan from Allahabad Bank and Rs 100-crore loan from State Bank of India ; another Rs 1,000 crore is expected to be raised from Life Insurance Corporation. The company, entitled to fund up to 20 per cent of any single project, has sanctioned a total of Rs 5,086 crore for various infrastructure projects, which have total estimated cost of Rs 35,066 crore so far. These include five projects in the power sector with projected total investment of Rs 15,467 crore, of which IIFCL will lend a total of Rs 1,763 crore, Rs 1,957 crore for 22 road projects (estimated cost Rs 12,230 crore), Rs 216 crore for three sea ports (estimated cost Rs 1,542 crore), Rs 1,150 crore for an airport (estimated cost Rs 5,826 crore).

Power

Power generation has augmented by 11.3 per cent in September 2006 at 54.19 billion units as compared to 48.69 billion units recorded during the corresponding month a year ago. During April-September 2006, the actual generation of energy has been 325.18 billion units, registering a growth of 6.6 per cent over 304.93 billion units in the corresponding period of last year. The overall Plant Load Factor of thermal power stations during the period has been recorded at 73.3 per cent compared to 70.5 per cent last year. With gas supplies continuing to be a major constraint, a generation loss of about 15.04 billion units has been recorded during April-September 2006.

The power ministry’s sub-group has projected the capacity addition required to meet the 11th Plan requirement will be about 71,000 MW, whereas the 12th Plan requirement will be about 66,000 MW. The sub-group will further consider load pattern and seasonal availability in the north eastern region separately. The 71,000 MW capacity requirement for the 11th Plan will be categorised into load centre, pit head and coastal stations as well as the type of plant namely gas, coal, hydro and nuclear and additionally back up projects totalling about 14,313 MW have also been identified. According to the sub-group on demand projection and generation planning for the 11th Plan by and large gas-based projects have not been planned except those specific projects for which gas has already been tied up. The main reasons for delay in the project implementation are delays in obtaining environment clearance, water availability, acquisition of land and financial closure. The sub-group is of the view that the environmental clearance be granted in 90 days after submission of the EIA and other relevant documents after which deemed clearance should be assumed.

Despite the burgeoning aggregate technical and commercial losses (AT&C) and financial losses of state utilities, power generation during April-September has grown at 6.6 per cent with the actual generation at 325.182 billion units compared with 4.7 per cent growth and 304.925 billion units in the corresponding period last year. The thermal and hydro generation have registered a growth of about 5.5 per cent and 12.6 per cent, respectively, over the actual generation in corresponding period last year. The overall plant load factor (PLF) of thermal power stations during April-September 2006 has touched 73.3 compared with the actual PLF of 70.5 per cent during corresponding period last year. Nearly 5,000 MW of the total 12,000 MW generation capacity based on gas with an investment of over Rs 20,000 crore has been lying idle due to gas shortage; against the total requirement of 48 million cubic meters a day only 30 million cubic meters of gas a day is currently available.

Petroleum, Petroleum Products and Natural Gas

The ministry for petroleum and natural gas has projected a 26 per cent increase in domestic crude oil production and a 41 per cent increase in natural gas production in the XI Plan period. Crude oil and natural gas production in the country over the last four years of the current Five Year Plan has been almost stagnant as there had been very few major oil and gas discoveries by state-owned E&P companies. Some of the other reasons cited for the stagnant production include the natural decline in the ageing fields. It is proposed to target an increase of 26 per cent in domestic production of crude oil to 211.64 million metric tonnes (MMT) over the X Plan achievements, which is likely to be 167.74 MMT. Similarly, the production of natural gas is projected to increase by 41 per cent in XI Plan period to 224.56 billion cubic meters (BCM) over X Plan estimated production of 158.79 BCM. Besides, the first Coal Bed Methane (CBM) gas production is slated to begin in 2007-08, the first year of XI Plan. During the XI Plan period CBM production is projected at 3.78 BCM. The country is also likely to witness gas production from another alternative source - Underground Coal Specification (UCS) - towards the end of XI Plan. Additionally, overseas production of oil and gas during XI Plan is projected to increase to about 45 million metric tonnes of oil equivalent (MMTOE) comprising about 35 MMT of crude oil and about 10 BCM of gas. This would be more than double of X Plan period production of 22.24 MMTOE (16.83 MMT of crude oil and 5.41 BCM of gas). The Ministry also proposes to bring 65 per cent of India 's sedimentary basins under exploration by the end of XI Plan. The Parliamentary Consultative Committee has specified that steps should be taken so that the shortage of drilling rigs in the global market did not affect domestic exploration and production efforts. The Petroleum and Natural Gas Regulatory Board that is proposed to regulate downstream petroleum sector activities, including processing, storage, refining, transportation, distribution and marketing of petroleum products and natural gas is expected to be functional soon.

Crude oil and natural gas production in the country over the last four years of the current Five-Year Plan has been almost stagnant at around 33 million metric tonne and about 31-32 billion cubic meters (bcm), respectively. Some of the reasons for the stagnant oil and gas production include the natural decline in the ageing fields producing the fuels. Also, it will take about seven to eight years to develop the oil and gas discoveries announced by private and joint venture companies in the last two to three years. There had been few major oil and gas discoveries by state-owned exploration and production firms, ONGC and Oil India Ltd (OIL). On the status of major oil and gas development projects, Cairn Energy, which discovered huge oil and gas reserves in Rajasthan, would be producing 6 million metric tonne of crude oil per annum from 2007-08 onwards, through development efforts of oil discoveries in Rajasthan. An increase of 1.7 million standard cubic meters of gas production is likely to take place in the current year from the Tapti gas field of the joint venture consortium comprising ONGC, Reliance and British Gas. Another 2.5 mmscmd increase in gas production is slated in 2007-08. Besides the Tapti field, an additional 1.3 mmscmd of natural gas is expected to be produced from the PY-1 field of the Hindustan Oil Exploration Company (HOEC) from 2007-08 onwards, following completion of scheduled development plan. An additional 40 mmscmd of natural gas is likely to be produced from Reliance Industries Limited's (RIL’s) KG offshore field from 2008-09 onwards. The five discoveries announced by ONGC are, together, expected to yield about 15 mmscmd of gas in 2009-10, going up to 33 mmscmd in 2011-12. However, this increase in production will be offset by decline in gas production from the western offshore area. ONGC has taken up 15 fields for the purpose enhancing oil and gas discoveries from existing producing fields at an estimated investment of Rs 10,000 crore. The incremental crude oil anticipated on account of this investment is about 120 million tonne up to 2030, half of which would be from the Mumbai High fields.

Steel

The 15 public sector undertakings under the ministry of steel have notched up a combined profit of around Rs 6,600 crore during the first half of 2006-07, around 17 per cent higher compared to the combined profits of these 15 PSUs in the first half of 2005-06. One of the loss making units Bharat Refractories Ltd had been able to significantly scale down its losses in the first half of the current financial year as compared to the same period in the previous fiscal year, though there had been a substantial reduction in the profits of Kudremukh Iron Ore Company Ltd on account of the cessation of mining of iron ore from the Eastern Ghats pursuant to the Supreme Court's orders. The combined production of saleable steel by the Steel Authority of India Ltd and Rashtriya Ispat Nigam Ltd has increased by around 4 per cent in the first half of this financial year as compared to the same period last year to stand at around 7.57 million tonnes. At the same time, the production of ferro manganese by Manganese Ore India Ltd has recorded a more than 200 per cent increase from last year's level of 1,540 tonnes to 4,960 tonnes. The Ferro Scrap Nigam Ltd has also registered a significant rise in its slag production from around 14 lakh tonnes in the first half of 2005-06 to around 17 lakh tonnes during the current half of 2006-07.

Railways

Keeping up with expectations, the Indian Railways has registered 15.2 per cent rise in its earning during the first half of the current financial year (April-September 2006-07). Its earnings have amounted to Rs 29,360.31 crore compared with Rs 25,472.45 crore during the same period last year. This represents a marginal increase from the 13.8 per cent growth in earnings in the first half of last fiscal year. The railways ministry had set a target of Rs 59,978 crore as gross traffic revenue collection and internal revenue generation of Rs 20,000 crore for the current fiscal year. Nevertheless, the railways are sure to make a much higher profit than the Rs 14,293 crore it made in 2005-06. Total goods earnings have risen to Rs 19,701.71 crore compared with Rs 16,988.93 crore it made in the corresponding period last year. The total passenger revenue earnings have also increased to Rs 8,456.28 crore, an increase of 11.12 per cent from Rs 7,609.84 the railways earned a year ago. However, the most significant rise has been witnessed in revenue earnings from other coaching, which amounted to Rs 797 crore, a 40.27 per cent increase from Rs 568.27 crore earned in the corresponding period of 2005-06. The total sundry earnings have also increased by 32.68 per cent to Rs 405.22 crore in the first six months of the current year. There has been a marginal increase in earnings from the first quarter, when the railways’ earnings grew 14.2 per cent compared with the last year's first quarter.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone up to 5.16 per cent for the week ended September 30, 2006 from 4.77 per cent during the previous week. The inflation rate was lower at 4.61 per cent in the corresponding week last year.

The WPI in the week under review has gone up by 0.6 per cent to 207.8 from the previous weeks’ level of 206.6 (Base: 1993-94=100). The index of ‘primary articles’ group (weight 22.02 per cent) has risen marginally to 212.4 from its previous week’s level of 212.3, mainly due to an increase in the price index of ‘food articles’ by 0.3 per cent which has gone up to 215.7 from 215.1, mainly due to the higher prices of eggs, gram, fruits and vegetables, urad and arhar. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has gone up considerably by 1.2 per cent to 328.9 from its previous weeks’ level of 324.9. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has also gone up by 0.5 per cent to 179.2 from it’s previous week’s level of 178.3, mainly due to the higher prices of food products, textiles, chemicals, ‘non-metallic mineral products’ and base metals and machinery.

The latest final index of WPI for the week ended August 5, 2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 204.8 and 5.08 per cent as against their provisional levels of 204.3 and 4.82 per cent, respectively.

Public Finance

According to latest data, the overall direct tax collections for the April-September 2006-07 have stood at Rs 79,208 crore, as against Rs 56,278 crore collected during the same period last year witnessing a robust growth of almost 41 per cent. The total direct tax collections during the month of September 2006 have stood at Rs 36,228 crore, as against Rs 27,659 crore in September 2005, an increase of 31 per cent. This has raised the expectations of the revenue department to collect Rs 15,000 to Rs 20,000 crore more than the estimates of Rs 327,205 crore for the financial year 2006-07. For the first half of the current financial year, corporation tax collections have stood at Rs 49,813 crore, which has seen a growth of around 48 per cent more than the Rs 33,685 crore collected during April-September 2005-06. Income tax collections, inclusive of fringe benefit tax, securities transaction tax and banking cash transaction tax, of Rs 29,310 crore for the period under review, have displayed an increase of almost 31 per cent over Rs 22,450 crore collected during the corresponding period last year. STT collections have gone up by over 100 per cent to Rs 2,099 crore till September as compared with Rs 1,029 crore for the same period last year. FBT mop-up has increased by 37 per cent to Rs 1,089 crore against Rs 795 crore during April-September last year, while BCTT collection increased by around 150 per cent to Rs 232 crore compared with Rs 93 crore in the first six months of the previous financial year. In September 2006 alone, corporation tax collections have stood at Rs 27,226 crore against Rs 20,427 crore in September 2005, up by 33 per cent and income tax collections have stood at Rs 8,910 crore, compared with Rs 7,154 crore during the same month previous year, an increase of over 24 per cent. The higher collections have been on account of buoyancy in non-oil imports.

During the first six months of the current fiscal year 2006-07 the customs and excise collection has stood at Rs 93,069 crore, with an increase of 17.4 per cent over the corresponding period of the previous year (Rs 79,289 crore). This indicates that a trivial growth of 5.4 per cent has been required to achieve the combined budget target for excise and customs for the rest of the fiscal year. Customs collection during April-September 2006-07 has traversed by 34 per cent over the corresponding period of the previous year amounting to Rs 41,735 crore. In September alone, the collection has stood at Rs 7,604 crore, compared with Rs 5,750 crore a year ago. Excise revenue, during the period under consideration, has stood at Rs 51,334 crore, with a rise of 6.7 per cent over Rs 48,093 crore in the corresponding period last fiscal year. In September 2006, the revenue department has collected excise revenue of Rs 9,498 crore; compared with Rs 8,713 crore in the corresponding month last fiscal. Service tax revenue during April-August 2006-07 has displayed an increase of 65 per cent over the year totalling to Rs 12,412 crore.

The finance ministry has informed states that any revenue loss on account of deviation from the 4 per cent Value Added Tax rate on food grain and 12.5 per cent on tea will have to be borne by them and cannot be included in compensation claims made to the Centre for this fiscal year. States like Karnataka, Maharashtra and Tripura, which have already filed compensation claims totalling over Rs 475 crore for the current fiscal, have been asked to indicate the loss, if any, on account of deviation on the two items and deduct the sum from their claims. The finance ministry’s decision follows an earlier move by the empowered committee to exempt states from mandatorily imposing a 4 per cent VAT on food grain and 12.5 per cent VAT on tea only in the first year of VAT in 2005-06. The empowered committee of state finance ministers on VAT later decided to extend the exemption by another year in case of food grain. The ministry had earlier indicated that any revenue loss on account of reduction in rates for LPG would not be included in the compensation claims. The government, in the budget this year, had announced that LPG would be a declared good and attract only 4 per cent VAT.

Banking

The Department of Post (DoP) has joined hands with Corporation Bank for the disbursement of loans across Maharashtra . The DoP is also in talks with other financial institutions and banks for this purpose. Banks that do not have branches in rural villages will benefit from the widespread network and reach of the DoP for the disbursal of loans to those living in remotest areas. Maharashtra has over 12,000 post offices in rural areas.

UTI Bank has posted a 30 per cent jump in net profit to Rs 142 crore for the second quarter ended September 30, 2006, as against Rs 109 crore in the corresponding quarter of the previous fiscal. Simultaneously, net profit for the half-year ended September 30, 2006, rose by 30 per cent to Rs 262 crore from Rs 202 crore in the last year.

Financial Markets

Capital Markets

Primary Market

Info Edge Ltd is tapping the market between October 30 and November 2 through the issue of 53 lakh shares of face value of Rs 10 in a price band of Rs 290-320 per share.

Secondary Market

The market has closed at a lifetime high last week on the back of robust numbers from IT bellwether Infosys and falling global crude oil prices. The market sentiments have been positive as traders expect corporate majors to beat street expectations and post better results. The BSE Sensex has jumped 363.42 points (2.9 per cent), to close at an all-time high of 12,736.42. The benchmark index overtook its previous all-time high of 12,671.11, of 11 May 2006. The S&P CNX Nifty rose 106.35 points, to close at 3,676.05.

Among the sectoral indices of BSE, IT sector has been the biggest gainer on account of the robust performance reported by an IT company which instilled expectations of similar performance by other IT companies. 

Global indices have ended the week on a positive note amid Korea ’s nuclear tests, Japan ’s lower than expected lending growth and rising consumer spending in the US . Also, the receding crude oil prices have provided further support these positive sentiments.

Capital market regulator SEBI plans to create a separate outfit with independent professionals for stock market surveillance and investigation, to make these two key activities more effective. According to a SEBI official, the idea is to rope in independent professionals such as practicing chartered accountants, lawyers and financial experts to do this job. Two separate departments of SEBI now handle market surveillance and investigation. However, they are short of specialized hands to police the bourses and undertake sophisticated inquiries, leading to delays in investigation and corrective action. This is crucial to safeguard investors' interest as price rigging — jacking up or bringing down prices deliberately by a group of traders — is a common phenomenon in stock trading. Equally important is investigation into market irregularities, which include price rigging, market manipulations and violation of takeover regulations.

Overruling the suggestion of the Reserve Bank of India (RBI) for allowing foreign investment of only 24 per cent in stock exchanges, the finance ministry intends to shortly finalize a cap of 49 per cent.  Finance ministry officials said the policy being worked out for stock exchanges was unlikely to disturb the present regime, where foreign institutional investors (FIIs) can hold up to 24 per cent, according to the Foreign Exchange Management Act (FEMA) norms. 

The Securities Appellate Tribunal (SAT) has recently passed a landmark order having far-reaching consequences for appellate oversight in the capital markets. The order is about the sweep of appellate scrutiny over decisions and actions of the Securities and Exchange Board of India (Sebi). Disposing of an appeal by the National Securities Depository Ltd challenging a Sebi circular, SAT has ruled that its appellate jurisdiction covers all Sebi decisions. 

Derivatives

With the stock indices touching new highs, there has been a large expansion in volumes of future and options stocks. The spot nifty has closed at 3676 while the October futures contract have settled at 3678 and the November contract at 3679. Though there has been ample liquidity in both futures series, there has been a sharp drop in the open interest in the October contract. The Bank Nifty futures settled at 5314, which is a mild premium to the cash index that closed at 5302. CNXIT, which galloped during the week by 8.6 per cent to 4904, yet, the futures index settled at 4898.

Government Securities Market

Primary Market

 RBI has conducted the sale (re-issue) of 7.59 per cent 2016 and 8.33 per cent 2036 for a notified amount of Rs.6,000 crore and Rs.3,000 crore respectively. The cut-off yields for the 7.59 per cent 2016 and 8.33 per cent 2036 have been 7.63 per cent and 8.11 per cent, respectively.

Two State Governments, Arunachal Pradesh and Kerala, have announced the sale of 10-year State Development Loans (SDLs) for an aggregate amount of Rs.201.33 crore through a yield based auction using multiple price auction method on October 17, 2006.

Secondary Market

Following a rebound in the liquidity conditions, inter-bank call rates are likely to ease from their current levels of tightness.  The government expenditure has started in addition to the rollback of additional funds set aside by banks for reserve requirements and provisioning in anticipation of liquidity demand during the seasonal holiday period. 

With the inflation ruling above 5 per cent at 5.16 per cent, the market sentiments turned cautious and also the yield set at the auction being above the market expectations, the yields firmed up.  The weighted average YTM of 7.59 per cent 2016 bond has been 7.62 per cent on October 13, as compared to 7.58 per cent on October 6.

The Reserve Bank of India (RBI) has asked select foreign banks active in the derivatives market to provide information on derivative structures sold by them. Following the complaints complaint lodged by the Food Corporation of India (FCI) with the RBI; after the company suffered losses in an interest rate swap deal struck with Barclays Bank. FCI informed the RBI that it was not given a “fair” quote by Barclays Bank while structuring the deal. FCI had bought the interest rate swap for its underlying fixed rate interest liability on a Rs 700-crore bond issue in October 2005.

In the domestic market, there is greater demand by banks to buy government securities, as most of them have trimmed their portfolio to the minimum requirement of maintaining a mandatory statutory liquidity (SLR).  On the other hand, with growing base of deposits and advances, banks are required to maintain SLR much more than what they are maintaining.  Therefore, the supply of government securities has become a positive trigger for the market rather than being a dampener

Bond Market

The Prime Minister and finance minister have drawn attention to the need for a proper bond market. In a mature market economy, liquidity and market efficiency are found in four markets: equities, currencies, commodities and debt. India has an uncomfortable situation where the only piece of finance that works, as it should is the equity market. It has liquidity; and is a source of trustworthy information about future expectations. India needs a bond market to stand alongside this, to have better information for making informed decisions, and to support the fund-raising requirements of government, infrastructure projects and the private sector. Indeed, an efficient bond market is far more important, as a source of finance, than an equity market. 

A string of corporate bond issues from banks and public sector undertakings are likely to continue this week as well. Banks — Dena Bank, Vijaya Bank, Punjab National Bank, Bank of Maharashtra, Union Bank and Uco Bank — are in the fray with series of instruments ranging from tier-II vanilla bonds to perpetual tier-I bonds. Primary issues from Power Grid Corporation and Power Finance Corporation are also likely.

Foreign Exchange Market

The rupee has appreciated against dollar during the week due to the robust domestic growth outlook as well as expectations of good corporate results.

Commodities Futures derivatives

The decision to introduce stock limits on wheat and pulses is contrary to India ’s plan to move towards a common agricultural market, said P H Ravikumar, managing director and chief executive officer of National Commodity and Derivatives Exchange (NCDEX). “There were (government) statements that by 2010 India would be a common agricultural market. But, state governments are imposing stock limits. This is a completely opposite strategy,” Ravikumar opined. Worried by an upturn in prices of essential commodities, the central government restored powers of state governments to set stock limits and restrict movement of these commodities to check prices.

The combined business volumes of commodity futures trading at the three national exchanges — NCDEX, MCX, NMCE — have touched Rs 11 lakh crore this year, showing a 200 per cent rise over last year, according to L Mansingh, secretary, ministry of consumer affairs. He said the regional commodity exchanges (there are 21 of them in the country) will not be wound up. The ministry will lay down guidelines to make their trading more transparent. They will be allowed to trade in more commodities since most of them still stick to a particular commodity. He said the issue of amendment to the FMC Act to grant autonomy to the Forward Markets Commission to transform it to a body like Sebi has been referred to Parliament.

Corporate Sector

For the second quarter (Q2) ended September 2006, Infosys Technologies Limited has registered a growth of 51 per cent in consolidated sales revenue at Rs 3,451 crore as against Rs 2,294 crore in Q2 2005 and its net profit has galloped by 52 per cent at Rs 930 crore compared to Rs 612 crore in Q2 2005. During the second quarter of the current fiscal year, 45 new clients have been added to the company and its subsidiaries.

Mastek has posted a growth of 42 per cent in its net profit at Rs 18 crore for Q2 2006 as compared to Rs 12.6 crore over the same period previous year. Its total income too increased by 42 per cent to Rs 124.13 crore compared to Rs 87.12 crore during Q2 2005.

Apollo Tyres has reported a 21 per cent increase in net sales at Rs s 767.3 crore during Q2 2006 from Rs 632.7 crore over the same period a year ago. The company’s net profit has risen by 3.8 per cent at Rs 19.37 crore during the quarter ended September 2006 as compared to Rs 18.66 crore.

During Q2 2006, Sintex Industries Ltd, a leading player in the plastic and textile segments, has registered a 49 per cent increase in its consolidated net sales amounted to Rs 266.7 crore over the corresponding quarter of the preceding financial year and Its net profit has grown by 93 per cent to Rs 31.5 crore.

Castrol India has reported a 26 per cent increase in net sales at Rs 419 crore for Q2 2006 against Rs 334 crore during Q2 2005. Its net profit has risen marginally by one per cent at Rs 34 crore.

Man Industries India Limited, manufacturers of pipes for the oil and gas industry, has secured several orders worth Rs 700 crore from overseas and domestic companies. Orders worth Rs 600 crore have placed from companies operating in the US , Nigeria and West Asia , while Indian companies have given orders worth Rs 100 crore. The pipes would be used for building high-pressure cross-country gas transmission pipelines.

External Sector

Overruling the suggestion of the Reserve Bank of India for allowing foreign investment of only 24 per cent in stock exchanges, the finance ministry intends to shortly finalise a cap of 49 per cent.

The broad-based trade and investment agreement between India and the European Union, which was proposed to be announced at the India-EU summit in Helsinki later this week has run into trouble. India is working for a trade and investment agreement where as EU wants this agreement to include political and social issues such as labour, environment, as well.

The board of Approval has approved 26 SEZ proposals and has given clearance in principal to eight more proposals.

Gems and Jewellery exports are unlikely to grow at a pace of 10 to 15 years as witnessed in past few years due to high volatility in gold prices and consumer’s increased inclination towards luxury items such as perfumes and watches.

The commerce ministry is working on a plan to increase the country’s footwear exports in order to take advantage of a recent decision by the European Union to impose anti-dumping duty on footwear from China and Vietnam .

Labour

The Ministry of Rural Development has sanctioned Rs 697.97 crore as an additional central assistance under the ‘National Social Assistance Programme’ to 28 states, mainly Bihar , Assam , AP, MP, UP, Maharashtra , Orissa and Jharkhand. The corpus is primarily meant to meet increased pension outgo from August to October 2006 under the national old age pension scheme. The amount of pension was increased to Rs 200 from Rs 75 this year in the budget 2006-07. Now the centre has urged the states to make an equal contribution in order to increase total quantum of pension to Rs 400 per month per person.

Information Technology

Despite stellar results quarter on quarter, Indian IT companies rank low on revenues earned per employee. While Infosys and TCS earn $48,333 and $37,719 per employee, per year, the revenue earned by IBM and Google stand at $2.6 lakh and $10.8 lakh, respectively.

*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.

LIST OF WEEKLY THEMES

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com