Current Economic Statistics and Review For the Week 
Ended November 18, 2006 (46^th Weekly Report of 2006)

Theme of the week:

IT and ITeS-BPO Exports of India*

Services Exports of India

A significant feature of the structural transformation of the Indian economy in recent years has been the rising contribution of the services sector which includes substantial value-added and skill-intensive services, predominantly software development and production, information technology enabled services (ITeS), business process outsourcing (BPO) and knowledge-process outsourcing (KPO) – outsourcing by foreign countries in favour of India . Predominantly, the ITeS-BPO services sector has emerged as the fastest growing sector in terms of exports.

Services exports were initially led by rapid rise in business and professional services followed by travel and software services. The compositional shift in favour of software and business services became even more pronounced in 2005-06.

The rise from US$ 4.5 billion in 1990-91 to as much as US $ 60.6 billion in 2005-06 in India’s services exports (Table 1), has made the country emerge as the 18^th largest service exporter in the world in 2004 and its market share has expanded to 1.8 from 0.6 per cent in 1990 (Table 2). In 2000-01 the share of software exports in total service exports was around 39 per cent, the subsequent decline in this ratio to 37.4 per cent in 2004-05 by some increase in miscellaneous services rose to 47.6 per cent in 2003-04. The gains recorded by the exports of services have far exceeded those recorded by exports of goods.

Services and Software Exports of India

A significant development with far-reaching implications on international scenario has been that India has emerged as one of the world’s major IT powerhouses. Over the last decade, India has made a conscious effort to participate in the global software industry by providing software development services to client companies’ world over. Within a short span of 8-10 years the Indian software industry, which has grown at an amazing pace, is a successful player in the international market and enjoys the benefit of a good reputation. IT companies have propelled India on the world map as a provider of wide range of highly skilled software services.

In some ways this is a counter-point from many of the earlier predictions in the literature that suggested that the growth of the software industry in India was a temporary phenomenon which exploited an existing opportunity of shortage of software engineers in western countries and benefited from the consequent moves towards outsourcing. During the period 1998-2001 the Indian IT opportunity boom was built on the back of Y2K problem. Almost all the developed countries of the world, particularly western countries faced a shortage of skilled manpower to fix the Y2K bug. The US primarily required a huge number of software engineers to solve their problem. Indian IT professionals took advantage of this opportunity and rendered their expertise in solving the Y2K bug. This led Indian IT companies to a great strategic position of moving forward to the most dynamic business sector in the world. Eventually, the Indian software industry has sustained its competitive advantage and in future will have reasonable growth prospects. According to the National Association of Software and Service Companies (Nasscom) software development and services industry has emerged as one of the fastest growing sectors in the Indian economy.

India ’s software industry can be divided into the export sector and the domestic sector. Unlike manufacturing, where typically growth is driven, by and large, by the domestic market, in the case of software industry it is the buoyancy in exports that has been fuelling higher growth and for a longer period. Indian software exports have shown high growth rates for many years. Exports began in 1974 but made limited impact until the 1980s. From 1981 onwards, growth rates have been consistently high. A Nasscom survey, on the export performance of the Indian software industry during the year 1997, has revealed that revenue generated by software exports has touched Rs 5,860 crore against Rs 3,580 crore during calendar year 1996, registering a 64 per cent growth in rupee terms.

In the past decade from 1995-96 to 2004-05, India ’s total software and services exports have witnessed a robust growth registering a CAGR of 51.9 per cent. Total revenue of software and services exports rose to US $ 6.2 billion in 2000-01 from a mere US $ 754 million in 1995-96 (Table 3).

During 2001-03, for a short period of 2-3 years the year-on-year (y-o-y) growth of software and services exports have declined owing to slow growth of IT spending and jobless recovery in major markets world over. The y-o-y growth in software and services exports of India in 2000-01 was around 57 per cent declined to 23 per cent in 2001-02 and rose marginally to 24.8 per cent in 2002-03.

From 2001 onwards, Indian info-tech companies, apart from consolidating their presence in traditional verticals such as BFSI (banking, financial services and insurance), diversified into new verticals such as telecom, retail, utilities and health care and initiated offering new services like enterprise application integration (EAI), package implementation, engineering services, software testing and service oriented architecture and web services. Consequently, during the period 2003-06 the impressive growth rate of software and services exports of India continued despite global competition and appreciation of the rupee, with its revenue rising from US $ 9.5 billion in 2002-03 to a staggering US $ 23.6 billion in 2005-06 recording a growth of around 50 per cent and is estimated to touch around US $ 30 billion in 2006-07. Analysts and industry observers have predicted that by 2010, the total IT, ITeS-BPO exports of India would reach $ 60 billion. In the year 2005-06, India ’s IT sector’s share accounted for 12 per cent of the country’s total exports.

Globally, India ranks second to Ireland in exports of computer information services. Notwithstanding increasing competitive pressures, India remains an attractive source because of its low cost of operations, high quality of products and services and availability of skilled manpower. Favourable time zone difference also helps organisations run round the clock internal operations and render better customer services.

In order to withstand growing global competition, the Indian IT companies have started moving up the value chain by exploring untapped potential in IT consulting and system integration, hardware support and installation and processing services. India has now become a hub for multinational firms for software development, supply chain management and other services as security concerns have also been duly recognised to maintain customer confidence. In recent years, Indian IT companies are winning multi-year, multi-million dollar contract from global firms. During 2005-06, India ’s IT and ITES-BPO companies have bagged the country’s biggest ever outsourcing deal from multi-national companies. TCS and Infosys Technologies have together won outsourcing contract worth $ 400 million from Dutch bank ABN Amro.

Performance of the Indian BPO industry

India is a leading destination for outsourcing of ITES and BPO activities. India ’s comparative advantage in the outsourcing business is on account of availability of advanced technological infrastructure, well developed telecommunication network and skilled yet low cost labour force, widespread use of English language, and India ’s location in a different time zone from the US enabling a 24-hour service. The ITES-BPO activities have benefited India by generating substantial job opportunities in the country and augmenting export earnings.

The ITES-BPO industry has witnessed phenomenal growth since 1999. The ITES-BPO exports of the Indian BPO market was $565 million in 1999-00, which surged to $ 1.5 billion in 2001-02. Furthermore, it increased by 42 per cent from $ 2.5 billion in 2002-03 to $ 3.6 billion in 2003-04. The exports growth is being driven by a steady increase in scale and depth of existing service lines. In recent years there has also been addition of newer vertical specific services and emerging business services, consequently the ITES-BPO exports have grown to US $ 6.3 billion in 2005-06, recording a growth of 37 per cent over the previous year and are expected to grow to US $ 8 – 8.5 billion in 2006-07 (Table 6).

According to the annual Nasscom survey on IT industry performance, Genpact, WNS and Wipro BPO are the top three third-party ITES-BPO companies in India . The rankings are based on revenues for 2005-06. The following sections highlight some of the new areas of opportunity (vertical markets and services) being addressed by Indian ITES-BPO companies:

1)      BFSI is amongst the most mature verticals in terms of offshore ITES-BPO adoption. This segment is estimated to account for approximately 35-45 per cent of offshore ITES-BPO, and has the greatest service line depth.

2)      Pharmaceuticals and life sciences sector is a relatively new sector with rapidly growing IT-ITES spends and significantly under-penetrated offshore potential.

3)      Legal services segment is a relatively newer segment that has witnessed recent interest and is believed to hold significant market potential to grow to $6 billion

The new strategy of offshore outsourcing to India is quality solutions. When processes are offshored to India , companies not only get the advantage of low cost but also experience improvement in productivity and quality. Shri Kiran Karnik, president of Nasscom, who has been chosen by Forbes magazine as the ‘face of the year’ (in December 2003) said, ''Offshore outsourcing was triggered by the intention to cut costs, but now it's not just driven by cost factors''. Nasscom is now helping (US companies) to tap Indian talent that is scarce in the United States .

Favouring large-scale outsourcing of software services and R&D works to countries such as India , Steve Ballmer, chief executive officer (CEO) of Microsoft said the US stands to benefit out of this. "We will have to increasingly bank on India for scaling up our operations to rise on the next wave of innovation. So, outsourcing is here to stay. I have always stated that the so-called outsourcing is good for the US economy," he said while delivering the Fifth Madhav Rao Scindia Memorial lecture.

Tata Consultancy Services (TCS)

TCS, a true Indian MNC, is one of the most successful IT companies, having branches in 32 countries with over 4,000 foreign nationals (accounting 6.5 per cent of total employees) working for it and serving more than 1,000 global clients round the world, including companies like, General Electric, Citigroup, Chevron Texaco, AIG and Verizon Communications. At any time about 10,000 engineers are abroad and some of them are working at global delivery centres in Australia, Canada, Japan, UK, US, Hungary and China. Started in 1968 the company has grown into a giant of 62,832 employees as on March 31, 2006, adding 3,000 – 4,000 people every year. 

TCS has grown more than 14 times in revenue in 8 years, from Rs 500 crore in 1996, to Rs 11,282 crore in 2005-06. The company crossed a billion dollars in revenues in 2002-03. TCS is a rare services company to have a decent-sized R&D expenditure, spending about 2 per cent of its sales on R&D or 0.28 per cent of its total income. Apart from revenues earned through the sale of software licences, the tools and products developed as part of TCS Corporate R&D have been used extensively within the company for developing software solutions. The table below shows the number of new licences provided for internal use in the company and the estimated savings in cost by avoiding purchase of products and other sources.

Pursuing global growth through selected, strategic Mergers & Acquisitions (M&As) has been an articulated approach of TCS as to emerge as an integrated full-service player. In 2005-06, it completed three M&As, of which one was in India and other in Chile and Australia .

Recently, TCS has acquired 75 per cent stake in its Swiss partner, TKS-Technosoft for around $ 80 million in a move aimed at giving it direct access to continental Europe and which also aids the consolidation of its banking products.

Infosys

Infosys’s financial record in the last 10 years has been mind-boggling. The sales, net profit and software exports have been rising at the rate of around 60 per cent in the last decade. Its exports during the last 10 years rose from Rs 25 crore to Rs 4,695 crore, a CAGR of 61 per cent (Table 8). In 2003-04, Infosys became the first listed IT company in India to gross a billion dollars in revenue. In 2005-06, the exports of Infosys stood at Rs 8,649 crore as against Rs 6,103 crore in 2004-05, registering a growth of 41.7 per cent. Infosys has been able to maintain their exports growth, through large client wins, cross-border mergers and acquisitions and by providing a stable-pricing model.

In the year 2005-06, the company recruited approximately 12,500 new employees, net of attrition. The total number of employees in Infosys as on March 31, 2006 stood at 44,658.

Table indicates that there is a heavy reliance on the US market, which accounts for almost 60 per cent export revenue of the two major companies, namely, Infosys and TCS. Recessions, turbulence, backlash in these few countries can thus have disproportionate effects on income of the firms. For survival and sustained growth, geographical diversification into Europe and Asia has been a key strategy adopted by these two companies. Infosys, to expand its footprint, has recently established two subsidiaries, one in China and other one in Australia, namely, Infosys China and Infosys Australia. As far as TCS is concerned, the US segment continues to be the most significant contributor to revenues followed by Europe . There has not been any significant change in the geography mix of revenue in 2006.

Key Issues in IT software exports

Indian software exports have been dominated by export of software services, in the form of custom software work, rather than export of software products, in the form of packages. The top IT firms in India should now focus on software products. Unfortunately, the big players in Indian software do not seem to be so interested. Their theme is: Services is services and product is product, the twin shall never meet. They must remain focused and develop expertise in specific domains and gradually exit the manpower-supply business. Indian firms must learn to take risk and look forward. They cannot go on endlessly supplying programmers and network engineers. If they continue to do so, not only will margins be at stake, they will continue to sell their capabilities short.

However, product development also requires Indian companies to take greater risks and make larger investments on research and development. It also needs companies to have much greater understanding about the emerging IT platforms and technologies. For that they require more number of software architects, as they help the developers to understand the system and allow enterprises to design efficient better systems, and increase the reuse of frameworks and components and also reduce the cost. Indian software firms can also learn from I-flex Solutions, which has done wonders in the product arena. It has become the top banking software product company in the world. The company’s strength and competitive advantage lies in specializing and concentrating on a specific vertical to achieve success. Creating a specialized product for a specific vertical has a much greater chance of success than trying to create a product that address a horizontal market.

Despite a robust growth in export earnings, the Indian IT companies rank low on revenues earned per employee. For instance, 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.

Challenges ahead in ITeS and BPO segment

Presently Indian BPO industry is shifting both ways – a vertical movement (offering more critical services in the same domain) and a horizontal movement (expanding service portfolio by moving into sophisticated areas like analytics and complex transactions); these will continue to be so. Even as the Indian BPO industry is poised for growth, a major inhibiting factor is the high staff attrition rate in the Indian BPO companies. In addition to high attrition rate, Indian BPO companies have to overcome the possible challenges of the potential BPO backlash, and more importantly, competition from other countries.

As per Gartner, an international research firm, India will lose its current market share in the BPO business from 80 per cent to 55 per cent by 2007 owing to lack of clear strategy and competition from countries like China . Various countries like Ghana , Fiji , South Africa , Mauritius , Malaysia , Philippines , Australia , New Zealand and China have now understood BPO’s potential to create new jobs and have put together integrated strategies to develop BPO business. In addition, India might face competition from small, highly developed economies like Singapore , New Zealand and Ireland , which offer excellent infrastructure, education systems, and business-friendly low-risk environments that make them attractive offshoring locations. India BPOs may possibly lose business to some of these countries, as its long-term plan for improving infrastructure and increasing the supply of quality employees, leaves much to be desired. Additionally, poor infrastructure adds to the cost of doing business in India .

Furthermore, in just four to five years of BPO business in India , there is already a huge staff attrition problem. Therefore, at present, high attrition rate is the major issue of concern in the Indian BPO industry. Presently, BPO companies in India are offering hefty salaries and other benefits and privileges to their employees, like subsidized food and transportation, company-leased accommodation, recreation and cafeteria facilities, performance-based incentives, flexi-time and employee referral scheme. Inspite of all these benefits, the attrition rate in BPO industry is vastly high. Some of the reasons attributable to high attrition rates are:

1)      lack of opportunity for growth

2)      no personal life (owing to working in night-shifts)

3)      desire for pursuing higher education and

4)      involves intense physical strains.

* This note is prepared by Bipin K. Deokar.

Highlights of  Current Economic Scene

AGRICULTURE  

The government has revised downward, after two upward revisions, the kharif oilseed output estimate for the crop year (July-June) 2006-07 to 13.93 million tonne from 14.55 million tonnes projected a week earlier. Groundnut output estimate has been cut marginally to 4 million tonnes from 4.55 million tonnes, while soybean output has been revised downward to 8.09 million tones from 8.13 million tonnes estimated earlier. Meanwhile, the Central Organisation for Oil Industry and Trade (COOIT) has estimated the oilseed production for the `kharif' 2006-07 at 128.4 lakh tonnes, which is about 9 lakh tonnes lower than that of 137 lakh tonnes recorded during the last kharif season.

According to Solvent Extractors’ Association, the edible oil imports during the oil-year (November-October) 2005-06 has fallen by 15 per cent to 4.3 million tonne over the previous year, driven mainly by drop in the domestic demand, good availability of mustard seed and high prices in overseas markets. On the contrary, non-edible oil imports, during the same period, have posted a whopping increase of 65 per cent to 675 thousand tonnes over the previous year. While Vanaspati imports have also been higher at 3 lakh tonnes compared to 2 lakh tonnes of the earlier oil-year, total vegetable oil imports have been lower at 5.27 million tonnes compared with 5.65 million tonnes.

On the export front, the total oilmeals export has jumped by 31 per cent during April-October at 1.97 lakh tonnes as compared with 1.5 lakh tonnes during the comparable period last year.  The soybean meal export jumped from 8.8 lakh tonne to 11.9 lakh tonnes, while rapeseed meal export increased from 3.7 lakh tonnes to 5.3 lakh tonnes, due to the availability of rapeseed during the off-season from Nafed, which not only boosted the crushing and oil availability, but also increased availability of rapeseed extractions, leading to a boost in the export of rapeseed meal. 

According to the estimates of the Rubber Board, exports of natural rubber have registered a 49.6 per cent growth to 49,097 tonnes during the April-October 2006 from 32,810 tonnes a year ago, facilitated by a rise in production and lower domestic prices compared to those in the global markets. The Board has projected a growth of 10.1 per cent in total rubber production to 464,660 tonnes in the first seven months of fiscal year 2006-07, from 422,090 tonnes registered during the same period last year on account of favourable climate and active tapping in most of the rubber-producing areas of Kerala and Tamil Nadu. Rubber consumption, however, is set to increase moderately by 2.2 per cent to 473,900 tonnes during the same period and is expected to fail short of its target of 841,000 tonnes owing to increased use of synthetic rubber, lower rubber offtake, especially from the non-tyre sector and shut-down of several number of small and medium industries.

The All-India Starch Manufacturers' Association has demanded a reduction in import duty on maize and ban on its exports considering the possibility of lower domestic production in 2006-07 compared to previous year.  As per the estimates of the association, maize production is likely to be 12.8 million tonnes, less than the projected demand of 13.86 million tonnes. The association has sought for an urgent review of the existing import and export policy with regard to maize as the short supply of the same in the domestic market would put forth increasing pressure on maize prices, which in turn would have a spiralling effect, causing increase in prices of all the products of maize consuming industries.

As per the industry estimates the poultry exports are set to drop by 40 per cent in the financial year 2006-07 as compared to poultry products worth Rs 326 crore exported in 2005-06.  As per Indian Poultry Federation, 5 months of the current fiscal year (from April to August) 2006-07 have passed without any export, which would cause a radical decline in poultry exports in 2006-07. The department of animal husbandry is trying to get Japan to import poultry products from India . Currently, India only exports egg powder to Japan . Agricultural and Processed Food Products Export Development Authority (Apeda) has been trying to explore new markets, particularly in South-East Asia , for the Indian poultry products so that the export does not decline drastically.

The National Bank for Agriculture and Rural Development (Nabard) has sanctioned loans to the tune of Rs 437 crore to Andhra Pradesh for taking up a variety of rural infrastructure projects. The project sanctioning committee has approved loan proposals for 461 roads, 11 bridges, 18 lift irrigation schemes and 140 bio-diesel projects. The new loan included Rs 39.8 crore for bio-diesel plantations in over 16,600 hectares of forestlands. The lift irrigation schemes, covering `distress districts', would get Rs 39 crore.

Industry

Overall

The strong growth momentum in manufacturing, electricity generation and mining has propelled the Index of Industrial Production (IIP) by 11.4 per cent in September 2006 compared to 7.2 per cent in September 2005. The cumulative growth rate for the first six months of the fiscal year has touched 10.9 per cent. According to use-based classification, the basic goods sector have grown by 11.3 per cent in September 2006 while the capital goods sector has improved by 2.2 per cent. The intermediate goods sector has recorded a 14.7 per cent growth. In terms of industry groups, the `beverages, tobacco and related products' group and the `basic metal and alloy industries' group have shown the highest growth of 19.8 per cent, followed by 19.6 per cent in 'wood and wood products, furniture and fixtures' while 'non-metallic mineral products' have grown by 16.7 per cent. On the other hand, the `other manufacturing industries' group has seen a decline of 10.9 per cent; growth in 'jute and other vegetable fibre textiles (except cotton)' has also dropped, by 0.1 per cent.

Pharmaceuticals

The Tamil Nadu Chemists and Druggists Association (TCDA) has announced that the MRP (maximum retail price) on drugs manufactured after October 2, 2006 will be inclusive of taxes in line with the union government's order dated June 26, 2006. Meanwhile, medicines manufactured on a prior date would continue to quote MRP without including local taxes, which could create confusion among customer, as these stocks are likely to be on the shelves for three to six months. Recently, 11 top manufacturers have cut prices on 886 branded drugs but this will substantially impact the buyers since these account for just 1-2 per cent of the all-India pharmaceutical sales, which is estimated around Rs 50,000 crore per month.

Automobiles

Helped by the festive season purchases, passenger cars and motorcycles sales have seen double-digit growth during October 2006 at 16.34 per cent to 92,383 units and 13.16 per cent to 47,994 units, respectively. Motorcycles sales during the month have stood at 7,05,467 units (6,23,432 units), up by 13.16 per cent while scooter sales have continued to be on the decline at 9.75 per cent to stand at 84,680 units (93,830 units). Meanwhile, commercial vehicle sales during October have been 38,554 units (31,663), up by 21.76 per cent. The growth in the commercial vehicle sales has been driven by medium and heavy commercial vehicles, which have clocked a healthy 27.68 per cent growth at 22,183 units (17,373 units).

Infrastructure

Overall

A hike in crude oil production coupled with high refinery and power generation growth has propelled the overall infrastructure growth to 9.9 per cent in September 2006 compared with 6.3 per cent during the same month of the previous year. Cumulatively, the six core industries have registered a growth of 7.3 per cent in April-September this year as against 6.1 per cent in the corresponding period last year.

Petroleum, Petroleum Products and Natural Gas

The government is expecting about $ 1 billion of investments in exploration of gas trapped below coal seams in the areas offered recently to developers under the third round of coal bed methane (CBM-III) bidding. Contracts for 9 of 10 blocks offered under CBM-III have been signed by the government with three consortia, namely, the one led by the Anil Ambani group’s RNRL-REL-Geopetrol , Australia ’s Arrow Energy and Coalgas Mart-Deep Industries. While RNRL-led consortium has signed production sharing contracts (PSCs) for four blocks, Arrow energy-led group has inked the pact for three blocks and the Coalgas Mart-Deep industries joint venture has signed the PSC for two blocks. The Anil Ambani group has assured an investment of Rs 100 crore for exploring its four blocks. The Arrow Energy-led group has committed $ 500-600 million worth investment in 20 years in exploring CBM in its three blocks.

Ethanol

The supply of ethanol-blended petrol is set to start across the state of Tamil Nadu with the distilleries and oil companies agreeing on ethanol pricing. According to sources, they have agreed on a base price Rs 21.50 a litre of ethanol for a three-year period and the distilleries have been asked to supply ethanol with immediate effect; previously, they were paid Rs 18.75. Over the next three years, the distilleries will supply 5.8 crore litres of ethanol a year. Initially, distilleries connected to five sugar mills — Thiru Arooran Sugars, Dharani Sugars, Rajshree Sugars, Kothari Sugars and Sakthi Sugars — will supply the ethanol. In March 2007, E.I.D. Parry is also expected to commence supply and from July 2007, two cooperative sugar mills in Tamil Nadu are expected to have ethanol production facilities, when they will also start supplying. Together they will meet the ethanol requirement in Tamil Nadu for the gasohol programme. The programme was earlier taken up in fits and starts because of problems in ethanol availability and pricing and also because of limitations in the quantity of ethanol available the programme being restricted to a few districts in south Tamil Nadu. This time the contract is for a three-year long period with oil companies having a long-term plan and, hence, the ethanol suppliers having an assured market and a stable price. SIt is expected that sufficient quantity of ethanol will be available to cover the entire state under the ethanol-blended petrol, gasohol programme.

Railways

Even though the railway ministry has decided to fund the dedicated freight corridor project on its own, it is grappling with the problem of financing about 268 projects which are estimated to cost around Rs 54,000 crore. The projects, which consist mainly of laying down new railway lines and gauge conversion, are found to be too unprofitable for the ministry to complete on its own. The reluctance of the ministry to do so is evident from the fact that some of them are lying unfinished for over 20 years. The ministry is of the view that it can only take up projects that have a high rate of return. In a last ditch attempt, the ministry has now approached state governments to prioritise these projects and to partly fund them on their own. However, official sources admitted that the response of state governments to the proposal has not been very encouraging. So far, only six states — Jharkhand, Karnataka, Tamil Nadu, Haryana, Uttaranchal and Maharashtra — have come forward to finance some of these projects. The ministry is also hoping that the recently revived capital fund will help finance some of the projects. However, the capital fund, too, has only about Rs 5,500 crore, and all of it cannot be used to complete these projects. The onus for finding investors for such projects has been shifted to the Rail Vikas Nigam, a special project vehicle set up to implement projects to strengthen the golden quadrilateral and port connectivity.

Aviation

The civil aviation ministry has expressed reservations about joining the open skies agreement of the Asean by 2010, mainly on the grounds that it could act against the interest of domestic public and private airlines. The Ministry has said that if at all India were to get into such an arrangement with the Asean, it should be considered only for flights to and from each of the countries of the regional bloc, and that too only after 2015. Most of the Asean countries plan to follow an open skies regime from 2010 and have invited India to be part of the planned liberalisation. An open skies agreement allows the designated airline of a particular country to operate unrestricted flights to another country. The 10-member regional bloc includes Malaysia , Singapore , Thailand , Indonesia and the Philippines . Industry observers are of the opinion that if India joins the regime now it would benefit only the big airlines of the South-East Asian region. They add that the agreement would be detrimental to the proposed business plans of Indian public and private sector airlines. Besides, industry has expressed fears that an open skies agreement with one regional bloc could see pressure being mounted on India to reach similar agreements with other blocs, including the Gulf region. A clear picture on India 's stand on the issue is expected in December 2006 at the Indo-Asean summit.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) rose by 5.09 percent for the week ended October 28,2006 as compared to 5.41 per cent in the last week or at a lower rate of 4.75 per cent during the corresponding week last year.

During the week under review, the WPI remained unchanged at 208.4 the same as in the previous weeks’ level (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), increased by 0.2 percent to 213.3 from its previous week’s level of 212.9, mainly due to increases in prices of ‘food article like condiments and spices; mutton, fish marine, eggs, barley and ragi. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) remained unchanged at the last week level of 329.5. The index of ‘manufactured products’ group declined by 0.1 per cent to 179.7 from 179.8 during the week under review thereby registering a growth rate of 0.1 per cent. Food Products, Textiles, Basic metals and alloys and Machinery and machine tools prices rose, the decline in chemicals and chemical products and non-metallic mineral products offset it to some extent.

 The latest final index of WPI for the week ended September 02,2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 207.1 and 5.34 per cent as against their provisional levels of 206.0 and 4.78 per cent, respectively.

Banking

The RBI, in a recent draft circular has said that banks must not hold more than 10 per cent stake in a deposit-taking, non-banking financial company, however, housing finance companies have been exempted. The draft circular, which aims to plug loopholes in existing norms, will affect the operations of NBFCs owned by Citibank, GE Capital, DBS and Societe Generale.

In its revised draft guidelines on the priority sector lending, the RBI has given broad classification of the sectors, which would be included under the purview of priority sector lending. The priority sector now will broadly comprise of agriculture, small-scale industries, small business/service enterprises, micro-credit, education loans and housing loans. As against the earlier requirement of classifying all housing loans up to Rs 15 lakh under priority sector lending, the draft guidelines said the loans up to Rs 15 lakh for the construction of houses by individuals would be considered. Meanwhile, the regulator has also introduced a new segment of micro credit, which would include provision of credit and other financial services of small amounts not exceeding Rs 50,000 per borrower to the rural, semi-urban, urban areas and which would enable in improving the standard of living of poor. Further, the release said that the priority sector lending target and sub-targets for all banks would now be linked to adjusted net bank credit or credit equivalent of off-balance sheet exposures, whichever is higher, as on March 31 of the previous year. Adjusted net bank credit would be calculated as net bank credit plus investments made by banks in non-SLR bonds held in HTM category. In a bid to augment this, the outstanding FCNR (B) and NRNR deposits balances will no longer be deducted for computation of Net Bank Credit for priority sector lending purposes. These guidelines also take into account the revised definition of small and micro enterprises as per the Micro, Small and Medium Enterprises Development Act, 2006.

The formation of an alliance among country’s two large size bank and IDFC has suddenly boosted the domestic syndication for infrastructure market. The alliance among Bank of India, Union Bank of India and IDFC is targeting to fund 16 projects worth Rs 11,500 crore in the next five months and around 60 proposals of Rs 45,000 crore in the next 12 months.

Financial Markets

Capital Markets

Primary Market

The initial public offerings (IPOs) of two new real estate companies -- Parsavnath Developers Ltd (PDL) and Lanco-Infratech Ltd (LIL) -- whose offer closed on Friday, have been oversubscribed. PDL has received bids for more than 201 crore shares as against 3.32 equity shares on offer. This, analyst says is primarily driven by robust demand from overseas and other institutional investors and LIL has received bids for over 52 crore shares against the offer of 14.44 crore equity shares.

Secondary Market

The BSE Sensex rose 164.57 points (1.25per cent), for the week had settled at a lifetime high of 13,295.36, while the S&P CNX Nifty rose 36.30 points (0.95per cent), also to settled at a lifetime high of 3,841.65. On 10 November, the Sensex struck an all-time high of 13,303.85, while the S&P CNX Nifty touched a high of 3,842.40, in intra-day trade.

The Sensex rose 56.10 points, to 13186.89 on 6 November following buying demand for index pivotals. Profit-taking struck and the benchmark Sensex declined 30 points to 13,156.66 on 7 November. Sensex lost 84.15 points on 8 November and ended at 13,072.51, on selling pressure in index pivotals. Concerns over Indo-US relations following Democrats wresting control of the House of Representatives from President George W Bush's Republican Party in Congressional elections, hit the Indian market that day. Sensex resumed its winning streak, gaining 64.98 points on 9 November, to 13,137.49 as buying resumed. The Sensex surged 145.42 points, to 13,295.36, on 10 November, on strong buying demand in banking and oil & gas stocks. Strong industrial output data and benign inflation figures boosted the market that day.Market breadth has been intermittently negative despite key indices making new highs nearly every session since last one week

Derivatives                                  

The spot Nifty closed at 3834 on Friday’s high-volume action in the cash markets. Derivatives volumes spiked as did open interest.  The November Nifty future was held at 3842, December at 3884.5 and January at 3847. There are high levels of OI in all three contracts and it’s extremely unusual to have positive carry across the series. 

Stock futures far outrun stock options in volumes and open interest. This means unfortunately that our ability to create hedged stock-derivatives positions is low. You have to take a view on the basis of technical factors and gamble on that.

Government Securities Market

Primary Market

Under the weekly T-Bill auctions, the RBI mopped up Rs.1188.74 crore and Rs.2000 crore through 91-day T-Bill and 364-day T-Bill. From this, the RBI raised Rs.488.74 crore and Rs.1000 crore under the Market Stabilisation Scheme (MSS) through 91-day T-Bill and 364-day T-Bill respectively. The cut-off yields for the 91-day and 364-day T-Bill were 6.6462 per cent and 6.9939 per cent respectively.

Eleven state governments have announced the sale of 10-year State Development Loans (SDLs) for an aggregate amount of Rs.2,431.23 crore through a yield based auction using multiple price auction method on November 16, 2006.

RBI has fixed rate of interest on the FRB 2012 applicable for the year (November 10, 2006 to November 9, 2007) at 7.04 per cent per annum.

Secondary Market

With easing of inflation rate, the weighted average YTM of  7.59 per cent 2016 bond has been 7.5979 per cent  on Nov 10, 2006 as compared to 7.5995 per cent on Nov 03, 2006. The 1-10 year YTM spreads decreased by 1 bps to 61bps.

Finance minister P Chidambaram said there is no need for an immediate hike in interest rates by public sector banks. “On interest outlook, liquidity is quite comfortable and because of rebalancing of portfolio I don’t see an immediate rise in interest rates,” the minister said at the Economic Editors’ Conference on Tuesday. He reiterated that some sectors like real estate, personal loans, credit card have seen rapid credit growth. “Rebalancing does not mean that interest rates would need to be increased,” he said, adding that banks need to clip credit flow into some sectors and redirect them into some others, especially like industry, services, agriculture and small and medium enterprises. Chidambaram pointed out that credit growth has to be moderate, while deposit growth has to increase. It may be noted that several banks have indicated that rebalancing could push up interest rates in the next few months. He added that most banks would achieve their credit target of 40per cent to the priority sector.

The Central Board of Trustees failed to decide on the rate of interest for the Employees Provident Fund (EPF) as they did not have enough details about the incomes and available surplus fund.

Despite fall in the international oil prices in recent times, Rakesh Mohan, deputy governor, Reserve Bank of India (RBI), has maintained that the incomplete pass-through of rising oil prices, particularly LPG and kerosene, has kept inflation under check. The other factors, namely declining intensity of oil usage, higher competition and stable inflation expectations, have also controlled inflation.

At the address on ‘State of Economy ’, Dr. Rakesh Mohan, Deputy Governor, RBI said, “Recent developments, in particular, the combination of high growth and consumer inflation coupled with escalating asset prices and tightening infrastructural bottlenecks underscore the need to reckon with dangers of potential overheating and the implications for the timing and direction of monetary policy setting. While there is no conclusive evidence of potential overheating in the Indian economy at the current juncture, the criticality of monitoring all available indications that point to excess aggregate demand is perhaps more relevant now than ever before.”

Bank of England raised the official bank rate paid on commercial bank reserves by 25 basis points to 5 per cent.

Bond Market

HUDCO has tapped the market to mobilise Rs 200 crore through issue of bonds by offering a coupon of 9.05 per cent for 10 year with call option at the end of 3^rd and 5^th years.

Foreign Exchange Market

The rupee-dollar exchange rate has appreciated from Rs 44.84 on November 3 to Rs 44.45 on November 10. The six-month forward premia closed at 1.77 per cent (annualized) on 10 November, 2006 vis-à-vis 1.98 per cent  on 03 November, 2006.

Commodities Futures derivatives

Forward Markets Commission, the commodity market regulator, has allowed National Commodities and Derivatives Exchange (Ncdex) to relax quality norms for urad futures to ensure better delivery of the contracts.  The relaxation on urad contract was meant to align the running futures contracts with the available quality in physical markets, Ncdex sources said.  “There has been no change in basic quality for the urad future contracts. However, some parameters have been relaxed to allow smooth delivery of available quality in the physical market,” they added.  FMC’s approval was given to Ncdex after the exchange had sought permission to allow delivery of a slightly inferior quality of urad variety available in the physical market.  In fact, the urad crop that has started arriving in the market had got affected due to unprecedented rains in the major producing state of Maharashtra .  “We have approved the Ncdex proposal to allow inferior quality of urad at a discounted price,” an FMC source said.  The market regulator cannot ignore the reality of physical market where the best quality urad variety are not available in abundance at present, he said.  This proposal of Ncdex, where the highest trading of the pulse variety takes place, has been approved to ensure benefit of price discovery at a commodity exchange reaches to farmers down the line,” he said

After the relaxation of delivery specification for urad futures on National Commodity and Derivatives Exchange (Ncdex) by the Forward Markets Commission (FMC), the focus now is on the chilli November contracts, which will mature on November 20.  Traders fear that chilli stocks at the Ncdex-accredited warehouses are of inferior quality. A fortnight ago, when the trading at Ncdex had come to a halt, owing to technical glitches, chilli, along with pepper, was in the news. 

Chilli futures prices had dropped by more than 20 per cent compared with those of the spot market. The news of inferior quality of chillies had triggered the decline in prices. It is the responsibility of the exchange concerned, Ncdex in this case, to ensure that the quality of the commodities as specified in the contracts is available for delivery, said a trader. Recently, when an Ncdex team had visited Guntur to ascertain the matter of inferior quality of chillies, the local traders were very agitated, the trader added. The FMC should ensure that Ncdex delivers on the promises and makes sure that sellers deliver the right quality of chillies, even if they have to purchase them from the open market. If warehouse owners have accepted inferior quality, they will have to bear the costs and make good the losses that buyers may have to incur, added another trader. Source at the Ncdex said that they will act as arbitrators and ensure that warehouse owners compensate the buyers if the chilli stocks are not as per the specification of the contracts. “They should not end up passing the buck,” the sources added.  Analysts said that the case of chilli is different from that of urad. The chilli stock was available and its quality was known when the contract was framed. In case of urad, specifications were changed owing to unavoidable circumstances.  Last week, the FMC had taken an unprecedented decision by allowing Ncdex to relax quality norms for urad futures to ensure that smooth delivery takes place. This had created quite a stir in the market.  “Once a contract is introduced, its terms cannot be changed. But the FMC’s decision is akin to allowing copper to be delivered against the gold futures,” reacted a trader.  Traders buying from the futures markets, with an intention to take delivery, expect the quality of commodities as specified in the contract. It is immoral to change the specification before the contract matures, the trader added. It was not an easy decision for the FMC. 

“We took this decision after long deliberation and this will be an exceptional case,” said S Sundaresan , chairman, FMC.  The erratic rains in major urad-producing areas, such as parts of Maharashtra , Rajasthan and Madhya Pradesh, had damaged the crop and with the urad contracts maturing, it was necessary for the regulator to take into account the realities of the physical market, he added.  Lack of good quality urad at Ncdex warehouses had led the FMC to allow the sale of low-quality urad at a discount to ensure that speculators did not misuse the situation

Prices of urad, chana and tur futures have fallen about 5 per cent, 12 per cent and 20 per cent, respectively, since Diwali. The commodities’ spot prices, too, have seen a declining trend, primarily owing to lack of demand.  Chana prices have declined mainly on lack of demand and expected increase in rabi production. In the spot market, chana prices have dipped to Rs 2,900 a quintal level from Rs 3,300 a quintal during Diwali.  The rabi acreage is estimated to go up from 11 lakh hectare last year to 16 lakh hectare, and there is a likelihood of good crop size. Rabi crop of chana is expected to arrive from January. 

Post-Diwali, urad prices too have declined about 4-5 per cent – both in the futures and spot markets – owing to low demand from traders after the festive season as well as increased arrivals in Maharashtra ’s mandis. 

Considering the improved supply position of pulses, Maharashtra has decided to increase stock holding limits for pulses for wholesalers from 50 tonne to 200 tonne and, in the case of retailers, the stock limit has been increased from 2 tonne to 5 tonne, said a senior state government official from the civil supplies ministry.  He said the increase of 200 tonne is for wholesalers in big cities such as Mumbai, Pune and Nagpur and in smaller cities limit has been increased to 150 tonne. The state government has also proposed to increase the holding limits for food grains to the central government and after we receive a consent from the central government, we will do so, he added. 

Multi Commodity Exchange of India (MCX) is all set to launch spot trading before December 14. “The spot exchange, under the title of the National Spot Exchange for Agriculture Produce (NSEAP) and headed by Anjani Sinha, will commence official trading this year, to begin with, in three states – Rajasthan, West Bengal and Kerala,” MD and CEO Jignesh Shah said. “However, if the December 14 deadline cannot be met, the trading will start only after January 14, 2007, as this period (December 14, 2006 to January 14, 2007) is considered inauspicious to start any work or service,” he added.  The NSEAP was proposed to be set up at an investment of Rs 50 crore to effect a co-relation between spot and futures trades with a view to bringing all 7,500 mandis on to a single platform.  While MCX holds around 5 per cent stake in the NSEAP, the National Agricultural Co-operative Marketing Federation has invested Rs 50 lakh in the spot exchange. Financial Technologies holds the remaining stake.  The new initiative of MCX comes at a time when the world has started recognising the country’s technology and commodity power.  Meanwhile, Shah has been nominated for US-India Businessman of the Year for 2005-06.   The award will be conferred on him by the Senator Hillary Clinton on November 15 in Washington , DC . The award recognises the MCX head’s role in attracting global attention to rural India .  MCX has a daily turnover of about Rs 10,000 crore in futures, and has facilitates trading in 73 commodities ranging from metal to energy to agri-products, Shah said.  

Corporate Sector

The corporate sector has posted robust growth during the first half (April-September) 2006. A study carried out by The Financial Express of 762 companies shows the aggregate sales have risen by 30.1 per cent to Rs 5,64,295 crore from Rs 4,33,848 crore. Other income of these companies also has increased by 23.1 per cent to Rs 24,784 crore. On the profit front, net profit has grown by 31.2 per cent to Rs 76,000 crore from Rs 57,909 crore. Profit after tax (PAT) to sales ratio has risen from 13.35 per cent during April-September 2005 to 13.47 per cent. Companies like Hindalco Industries, Bharti Airtel, Mahindra & Mahindra, Hindustan Zinc, National Aluminium Company Limited have reported healthy financial performance.

According to Society of Indian Automobile Manufactures (SIAM), the total domestic sales of passenger vehicles, commercial vehicles, two and three-wheelers have increased by 16 per cent to 58.7 lakh units during April-October 2006 from 50.7 lakh units over the same period a year ago. Exports have grown by 27.8 per cent to 6 lakh vehicles.

Festival season, coupled with discounts and various auto-finance schemes have helped the passenger car market to register a double-digit growth of 21.8 per cent in April-October 2006 at 5.9 lakh units from 4.9 lakh units over the same period a year ago. Among the various categories, commercial vehicle segment has recorded the highest growth rate of 34.3 per cent during the April-October 2006, by registering total sales of 2.44 lakh units against 1.82 lakh units.

Table 2 show volume growth of several companies for the month of October. All the companies have registered a healthy increase in total sales. In the two-wheeler segment, Hero Honda being the leader has registered satisfactory sales performance in domestic and exports front.

Tata Motors has reported a total sale of 43,540 vehicles (including exports) for October 2006, a growth of 5.6 per cent over 41,219 vehicles sold in October 2005. The company’s sales of commercial vehicles in October ‘06 in the domestic market have stood at 23,354 units, an increase of 18.6 per cent over 19,700 vehicles. Hero Honda Motors, the world’s largest two-wheeler manufacturer, has reiterated its undisputed leadership of the Indian two-wheeler industry with total sales of 3.6 lakh units (including exports), a rise of 20 per cent in October 2006. During the month of October 2006, the company has launched two new models Passion Plus and the New Glamour with alloy wheels. Bajaj Auto has witnessed a significant growth of 76 per cent in exports to 40,148 units in October 2006.

GLG Partners, a UK based asset management company, has bought 8 per cent stake in the Aditya Birla group controlled Idea Celluar for around Rs 960 crore. This acquisition of shares has brought down the Aditya Birla group’s holding in the Cellular company to 65 per cent from 73 per cent.

Tata Consultancy Services (TCS) and Satyam Computers, India ’s largest and fourth largest software exporters respectively, have secured a Rs 645 crore seven year contract from Australian airline Qantas. TCS’s share in the contract is vlued at Rs 402 crore and Satyam’s at Rs 243 crore.

Export Sector

The commerce ministry is considering a two-stage screening of proposals for setting up of special economic zones (SEZs). The idea is to limit the number of cases that are sent to the inter-ministerial Board of Approval for clearance.

India will seek clarifications regarding the proposed sensitive list of trade items submitted by Asean at the next round of negotiations to be held in Jakarta from November 16 to 18. The trade block intends to undertake phased liberalisation of the items on this list by 2015-16. India is still awaiting a formal response to its revised sensitive list of around 560 items. The earlier list had 864 items.

An analysis by the commerce ministry of the top 10 items of trade under the Free Trade Agreement with Thailand shows that imports from Thailand have not increased substantially. The FTA with Thailand came into effect on September 1, 2004. In the first year, India offered 50 per cent tariff reduction on 82 items such as fruit, chemicals and machine parts under the early harvest scheme. The duty was cut by 75 per cent from March 1, 2005, and brought down to zero last March. The analysis examined the trend of import and export of the top 10 items between September 1, 2003 and March 30, 2004 (pre-FTA period) and in the-post FTA period from September 1, 2004, to March 30, 2005, and September 2005 to March 2006.

The center has approved 32 FDI proposals worth $55.7 million across a range of sectors and involving firms like Volvo, Walt Disney Co. and Honda Motor Co.

Telecom

Kolkata, the first city in India to get mobile telephony services way back in 1995, will now host the country’s first research centre for 4^th generation (4C) network technology.

*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

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