Current Economic Statistics and Review For the Week Ended September 15

A government’s fiscal policy broadly encompasses its governing principles regarding the level of public expenditure and the ways and means of funding that expenditure. The fiscal policy stance of a government has wider ramifications not only for the process of growth of its economy but also for the entire macro-economic management involving demand pressures and inflation as well as the pursuit of redistributional goals. This fiscal policy stance has larger significance in developing economies like India characterised by low per capita incomes, gaping income and social inequities, widening urban-rural divide and physical infrastructure shortages.

The simplest and the single-most important parameter reflecting the government’s fiscal policy stance is the fiscal deficit, which is the counter part of borrowing requirements for the government’s budget and which adds to public debt. Conventionally, a healthy system of fiscal deficit is one in which the consequential borrowed funds supplement surpluses generated out of revenue account surpluses to finance capital expenditure. If any part of fiscal deficit goes to finance revenue expenditure on the ground of there being a situation of revenue deficit, it is an apparently unhealthy fiscal stance.

An appropriate yardstick of fiscal deficit is as percentage of GDP, i.e., the proportion of national income that is deployed for financing the government’s budget expenditure in the form of borrowed funds. In this note, we trace the trends in India ’s fiscal deficit, take a closer look into public expenditure components and, concomitantly, review the developments and debates with regards to the deficit targets set as per the Fiscal Responsibility and Budgetary Management (FRBM) Act, 2003.

The Indian government began to experience fiscal deterioration from 1979-80onwards; before that it had managed to maintain stability by balancing the overall budget with a revenue surplus situation. The government’s expansionary policy after 1979-80 led to an excess of expenditure over revenue resulting in revenue deficit. Subsequently, the state governments as a group began to face revenue deficit from 1987-88 onwards. Consequently there occurred sizeable increases in the country’s debt-GDP ratio. The revenue-expenditure gap continued to widen till 1990-91. In 1990-91, the combined fiscal deficit of the centre and the states stood at over 9 per cent of GDP (Chart 1) and the debt-GDP ratio bulged to nearly 62 per cent.

It is said that it was against this backdrop of this fiscal situation that the country was left with no option but to open up the economy, as per IMF’s guidance, so as to combat the 1991 crisis. The cautionary approach adopted after the crisis resulted in some corrections in fiscal deficit and brought down the combined fiscal and revenue deficits of the central and state governments. This pattern continued till 1996-97 when the combined fiscal deficit for the central and state governments as per cent of GDP was trimmed to 6.26 per cent and the combined revenue deficit as per cent to GDP receded to 3.6 per cent from the level of 4.2 per cent during 1990-91.

An uptrend in both deficit indicators recurred around the mid-nineties, this time on the back of an overall slowdown in economic activity. By convention, it is the role of the government in a planned economy to raise expenditure in the face of a recessionary period in the economy. This accompanied by sluggish GDP growth was reflected in a rising fiscal deficit. In the same period, the implementation of the Fifth Pay Commission accompanied by a decline in tax revenue as per cent to GDP added to the government’s deficit burden. The percentage of combined fiscal deficit of the central and state government’s to GDP during 2001-02 touched 9.6 per cent and the revenue deficit-GDP ratio shot up to 6.9 per cent, that is, both even higher than those in 1990-91.

Since 2001-02 the government aiming for fiscal consolidation has taken the appropriate measures, which resulted in a steady fall in both fiscal and revenue deficit as per cent to GDP. These ratios have stood at 7.64 per cent and 3.4 per cent, respectively as per the revised estimates of 2005-06. As per budget estimates for 2006-07 they are expected to further decline to 6.5 per cent and 2.2 per cent, respectively.

At a stand-alone level, of the union government, the fiscal and revenue deficits of the central government have shown a steady decline for the three consecutive years ending 1992-93 but it was followed by a huge rise to 8.1 per cent in 1993-94 from 6.8 per cent recorded during the previous year. From 1993-94 to 1996-97 it again displayed a falling trend and reached 4.1 per cent during 1996-97. The next five years saw a rising trend but reaching 6.2 per cent in 2001-02, it remained below the levels attained in 1990-91 (9.3 per cent) (Chart 2).

The trends in the fiscal and revenue deficits of the state governments have also shown a similar trend (Chart 3). During the period 1990-91 to 1993-94, both revenue and fiscal deficit ratios of the state governments have experienced a steady decline. The ratios began to rise gradually after this period; however from 1997-98 to 1999-00 both the deficits traversed sharply, almost doubling from 2.8 per cent in 1997-98 to 4.6 per cent in 1999-00. Again, this was mainly reflecting the impact of the implementation of the Fifth Pay Commission, which hampered state budgets severely. The deficits remained in the range of 4 per cent till 2003-04, after which the state governments have taken stringent measures to curtail their respective deficits. Since 2003-04, the state deficits have seen a steady decline. The decision of the states to introduce Value Added Tax (VAT) from April 1, 2005 has also helped them to narrow down the revenue-expenditure gap. The decline in the revenue deficit has been steeper as compared to the fiscal deficit in case of the states as shown in Chart 3.

In recent years, though the central and state governments have been successful in reducing their respective deficits, as discussed earlier, it is also important to take into consideration the trends in the individual components of the government’s expenditure to make any value judgements regarding fiscal prudence. The expenditure of the government is broadly classified as developmental and non-developmental expenditures. As it is clear from Annexures 1, 2 and 3, the non-developmental expenditures of both the tiers of the government have seen substantial increases over the period but in the developmental expenditures, which includes social expenditure, expenditure on agricultural activities and such others cannot be said to have been augmented satisfactorily.

Chart 4 displays the trends in the combined percentage of developmental and non-developmental expenditures to GDP of the central and state governments. During the period 1990-91 to 1996-97, the combined developmental expenditure of central and state governments has seen a significant decline from 13 per cent in 1990-91 to 10.5 per cent 1996-97. On the other hand, the non-developmental expenditure displays a mixed trend; after rising to 13.2 per cent during 1992-93 from 12.17 per cent in 1990-91 the non-developmental expenditure as per cent of GDP stayed put at the same level until the end of 1996-97. After 1996-97, it witnessed a gradual increase to touch 11.1 per cent during 2002-03. On the contrary, non-developmental expenditure rose sharply from 12.2 in 1996-97 to 15.0 per cent in 2002-03. As per the latest data available, the budgeted estimates for 2005-06 of combined developmental and non-developmental expenditure of central and state governments as per cent to GDP have stood at 12.0 per cent and 14.2 per cent, respectively.

Further, critical areas falling under the developmental expenditure account of the government, such as social expenditure or expenditure on agriculture an allied activities, forms a miniscule component of the GDP. Moreover, the share of these expenditure heads has not seen any significant rise for over the last two decades. The combined social expenditure of the central and state governments as percentage to GDP during 1990-91 which stood at 5.45 per cent has inched up to a mere 5.6 per cent in the budgeted estimates for 2005-06. Even worse, the expenditure on agricultural and allied activities as percentage of GDP has declined from 2.06 per cent in 1990-91 to 1.77 per cent in 2005-06.

In the milieu of high deficits in the period between 1996-97 and 2002-03 the Fiscal Responsibility and Budgetary Management (FRBM) Act, 2003 became operational in year 2004 after the rules there under were notified; the FRBM Bill had been introduced in the December 2000 to the parliamentary standing committee, on finance. Taking into account the recommendation of the committee the revised Bill was introduced in the Lok Sabha in April 2003 and after receiving the President’s consent in August 2003, the new law came into existence.

The Act provides an institutional framework for binding the government to pursue a prudent fiscal policy. The original FRBM Bill had proposed that the revenue deficit should be eliminated by 2005-06, which was modified by the parliament to be 2007-08. On 8 July 2004, the Act was further amended to postpone the deadline to 2008-09. According to the targets set by this Act, the government is mandated to eliminate the revenue deficit by 2008-09 and to reduce the fiscal deficit to below 3 per cent of GDP by the same year. A minimum annual reduction of 0.5 per cent of GDP in the revenue deficit and 0.3 per cent of GDP in the fiscal deficit is required as per the FRBM Rules.

With the background of the high growth rate of the Indian economy and despite the growing deficits, the government has assured that the target of reducing the fiscal deficit to 3.8 per cent at the end of the current fiscal year 2006-07 would be met. It intends to achieve this target by effecting a curb on the government’s expenditure.

Concomitantly, the Planning Commission of India has, in its Approach paper to the 11^th Five-year Plan in June 2006, recommended a postponement in the achievement deficit targets by two years. The Planning Commission is of the opinion that to sustain the 8 - 9 per cent level of growth, there is need of larger development and infrastructure activities, which demand higher expenditure. Education, health and other social services constitute a large component of revenue expenditure and have a limited share in the capital expenditure. Thus the Planning Commission has proposed a view that reducing the revenue deficit within the available revenue would mean curtailing the revenue expenditure, which would hamper the outlays on these crucial developmental services. This opinion has been strongly opposed by the finance ministry, keen to achieve the targets within the limit decided by the Act. The Reserve Bank of India has supported the finance ministry reasoning that postponing the target would have adverse macroeconomic and budgetary implications, besides tainting the government’s credibility. The Bank has also pointed out that the current fiscal deficit has been underestimated since not only have the oil bond prices have not been reflected in it but also because the expected oil price increases in the future may lead to even higher deficits.

The Planning Commission and finance ministry have both projected an 8-9 per cent rate of growth but their strategies and approach towards achieving this target are divergent. The Commission has stressed on the development of the economy, promoting higher social sector and infrastructure spending whereas the finance ministry is keen to reduce the deficit, which, it expects, would bestow more credibility on India in the global market leading to larger foreign investment inflows into the country which could be used for development purposes.

The government, keen to meet the FRBM targets as per the set deadlines, has been adopting stringent measures to curb its deficits. Given the limited scope for growth in government revenue as well as the politically sensitive and legislatively knotty issues related to reining in on administrative expenditures, social sector heads like health and education as also capital expenditures, in the name of fiscal prudence, become easy targets for budgetary squeezes. This has resulted in a pattern of fiscal behaviour characterised by improved deficit indicators resulting from stagnant or, even worse, reduced outlays on crucial areas of public interest. This has been telling on the living conditions of the citizens and, most importantly, affecting the poorest and most needy strata of society.

In the backdrop of the overall vibrant performance of the Indian economy, some crucial sectors are vying for attention. The development of agriculture and allied activities has been laboriously slow. Rural poverty and farmer indebtedness have only been intensifying over the years with the incidence of farmer suicides alarmingly on the rise. Similarly, growth in the infrastructure sector, despite some recovery in the current year, has been laggard. The development of transport infrastructure in the form of projects like the NHDP for roads or port development projects has been unable to meet deadlines or to keep pace with the needs of the growing economy. Simultaneously, income disparities have accentuated; the delivery of basic services like education and health to vast segments of the population still remains a distant dream. In each of these sectors, there is, among other measures, a strong case for budgetary support. The government concomitantly with fiscal prudence needs to use its powers and resources to establish a more egalitarian pattern of growth.

Though the goal of achieving fiscal prudence, as reflected in the deficit indicators, is of critical importance to the economy, sustainability of the current growth acceleration as well as equity considerations cannot take a backseat. It is the government’s prerogative to strike the right balance between these two conflicting, though equally important motives. Against this background, fiscal correction has to be perceived not only purely in terms of quantitative indicators of fiscal deficit but also in terms of the healthy quantitative change brought about in the composition of government expenditures.

Annexure 1: Trends in Major Heads of Combined Central and State Government Expenditure (Rs crore)
Years	Developmental Expenditure					Non Developmental Expenditure
Years	Total	Social & Comm. Ser.	Agri. & Allied Ser.	Power, Irr. & Flood Cntrl	Transport & Comm.	Total	Int. Payments	Fiscal Services	Admin. Ser.	Pension & Rt. Benefits
1990-91	74000.28	30971.99	11714.34	10106.61	4556.84	69195.35	25006	3448.22	9375.81	5183.63
	(13.01)	(5.45)	(2.06)	(1.78)	(0.80)	(12.17)	(4.40)	(0.61)	(1.65)	(0.91)
1991-92	83995.89	34732.54	12596.84	15343.79	5498.3	81027.86	30994.4	5216.76	10673.59	6138.66
	(12.86)	(5.32)	(1.93)	(2.35)	(0.84)	(12.41)	(4.75)	(0.80)	(1.63)	(0.94)
1992-93	90031.35	38257.45	15303.1	12562.88	6113.99	97063.44	35863.98	10998.32	12881.53	7395.58
	(12.03)	(5.11)	(2.04)	(1.68)	(0.82)	(12.97)	(4.79)	(1.47)	(1.72)	(0.99)
1993-94	98954.12	43706.21	17099.24	15238.07	7325.45	113602.15	42553.18	10218.39	13893.89	8553.46
	(11.52)	(5.09)	(1.99)	(1.77)	(0.85)	(13.22)	(4.95)	(1.19)	(1.62)	(1.00)
1994-95	115609.55	50503.9	20083.76	20036.95	8488.57	128717.86	51932.73	4810.16	16365.87	12241.29
	(11.42)	(4.99)	(1.98)	(1.98)	(0.84)	(12.71)	(5.13)	(0.47)	(1.62)	(1.21)
1995-96	126518.42	58664.19	21635.85	20928	8611.2	153144.67	58944.49	9921.37	18437.15	12169.62
	(10.65)	(4.94)	(1.82)	(1.76)	(0.72)	(12.89)	(4.96)	(0.84)	(1.55)	(1.02)
1996-97	143833.92	68680.96	22870.75	23192.54	10549.39	167219.38	69930.96	5917.25	20700.87	14936.06
	(10.51)	(5.02)	(1.67)	(1.70)	(0.77)	(12.22)	(5.11)	(0.43)	(1.51)	(1.09)
1997-98	163909.86	78587.33	26278.87	25407.85	12306.27	193466.91	78551.39	6380.21	23936.26	18544.59
	(10.77)	(5.16)	(1.73)	(1.67)	(0.81)	(12.71)	(5.16)	(0.42)	(1.57)	(1.22)
1998-99	190897.08	95629.84	33080.76	25570.37	14481.69	236854.54	92591.97	13397.46	28187.6	26261.54
	(10.96)	(5.49)	(1.90)	(1.47)	(0.83)	(13.60)	(5.32)	(0.77)	(1.62)	(1.51)
1999-00	218603.21	109268.94	36319.96	27462.12	19171.05	277014.08	110050.69	9885.37	33155.95	37017.63
	(11.16)	(5.58)	(1.85)	(1.40)	(0.98)	(14.14)	(5.62)	(0.50)	(1.69)	(1.89)
2000-01	236096.04	114005.22	35140.39	33799.18	24492.15	298848.31	122791.75	9014.9	34897.41	38818.67
	(11.20)	(5.41)	(1.67)	(1.60)	(1.16)	(14.18)	(5.83)	(0.43)	(1.66)	(1.84)
2001-02	253578.03	117382.14	39379.07	38799.83	27326.61	336873.24	140889.88	9400.83	38118.76	40321.2
	(11.12)	(5.15)	(1.73)	(1.70)	(1.20)	(14.77)	(6.18)	(0.41)	(1.67)	(1.77)
2002-03	271957.79	127531.26	40174.58	39519.61	29883.62	368211.25	154398.54	10209.16	39761.73	43037.56
	(11.10)	(5.21)	(1.64)	(1.61)	(1.22)	(15.03)	(6.30)	(0.42)	(1.62)	(1.76)
2003-04	328666.09	141630.09	45741.15	66182.33	31337.45	401176.55	176372.66	11349.45	43551.16	45226.76
	(11.91)	(5.13)	(1.66)	(2.40)	(1.14)	(14.53)	(6.39)	(0.41)	(1.58)	(1.64)
2004-05	384704.4	174933.12	54709.09	63556.85	35341.02	458559.28	188643.41	11855.32	51127.7	55105.22
(RE)	(12.32)	(5.60)	(1.75)	(2.04)	(1.13)	(14.69)	(6.04)	(0.38)	(1.64)	(1.77)
2005-06	424847.62	197634.77	62603.02	57614.83	45716.82	502174.88	208379.32	13012.02	58741.63	59752.15
(BE)	(12.03)	(5.60)	(1.77)	(1.63)	(1.29)	(14.22)	(5.90)	(0.37)	(1.66)	(1.69)
Figures in the brackets are percentage to GDP
Source: Indian public finance statistics, ministry of finance

Annexure 3: Trends in Major Heads of State Governments Expenditure (Rs crore)
Years	Developmental Expenditure					Non Developmental Expenditure
Years	Total	Social & Comm. Ser.	Agri. & Allied Ser.	Power, Irr. & Flood Cntrl	Transport & Comm.	Total	Int. Payments	Fiscal Services	Admin. Ser.	Pension & Rt. Benefits
1990-91	49546.09	25947.94	9204.74	6986.75	2682.28	26435.36	8681.39	1561.71	6559.17	3045.52
	(8.71)	(4.56)	(1.62)	(1.23)	(0.47)	(4.65)	(1.53)	(0.27)	(1.15)	(0.54)
1991-92	60595.88	29279.84	10009.5	12858.48	3876.64	31835.55	10963.83	1763.18	7553.96	3722.58
	(9.28)	(4.48)	(1.53)	(1.97)	(0.59)	(4.87)	(1.68)	(0.27)	(1.16)	(0.57)
1992-93	64452.29	32193.17	12478.64	10613.36	4292.22	36508	12631.42	1957.26	8713.94	4390.76
	(8.61)	(4.30)	(1.67)	(1.42)	(0.57)	(4.88)	(1.69)	(0.26)	(1.16)	(0.59)
1993-94	73902.15	36805.13	13813.45	13007.62	5062.58	42485.31	15370.56	2213.86	9760.75	5215.05
	(8.60)	(4.28)	(1.61)	(1.51)	(0.59)	(4.94)	(1.79)	(0.26)	(1.14)	(0.61)
1994-95	85049.58	42816.94	13572.65	17175.06	5867.61	54431.57	19056.08	2593.07	1222.03	8587.55
	(8.40)	(4.23)	(1.34)	(1.70)	(0.58)	(5.37)	(1.88)	(0.26)	(0.12)	(0.85)
1995-96	94440.72	49482.67	13846.99	18233.27	6198.82	64458.32	21901.13	4355.33	12633.04	7881.67
	(7.95)	(4.17)	(1.17)	(1.53)	(0.52)	(5.43)	(1.84)	(0.37)	(1.06)	(0.66)
1996-97	108384.88	57041.52	15146.91	21343.03	6613.89	69690.24	25615.64	3001.71	13931.01	9841.86
	(7.92)	(4.17)	(1.11)	(1.56)	(0.48)	(5.09)	(1.87)	(0.22)	(1.02)	(0.72)
1997-98	120254.61	64298.39	17027.85	22444.54	7298.3	81369.2	30387.29	3485.53	16022.24	11663.39
	(7.90)	(4.22)	(1.12)	(1.47)	(0.48)	(5.34)	(2.00)	(0.23)	(1.05)	(0.77)
1998-99	140011.58	77806.97	22099.5	21951.27	8811.14	95296.45	35951.78	4354.86	18750.9	16204.76
	(8.04)	(4.47)	(1.27)	(1.26)	(0.51)	(5.47)	(2.07)	(0.25)	(1.08)	(0.93)
1999-00	158728.35	90923.55	24320.12	23617.38	9581.4	118716.26	45246.24	4928.73	22286.3	22731.71
	(8.10)	(4.64)	(1.24)	(1.21)	(0.49)	(6.06)	(2.31)	(0.25)	(1.14)	(1.16)
2000-01	168401.42	93568.28	23761.65	29806.03	9865.2	129263.46	50347.5	4868.53	22601.16	24598.79
	(7.99)	(4.44)	(1.13)	(1.41)	(0.47)	(6.13)	(2.39)	(0.23)	(1.07)	(1.17)
2001-02	179710.11	99687.98	25462.26	32802.38	9911.87	151361.45	61682.4	5743.94	25185.6	28766.12
	(7.88)	(4.37)	(1.12)	(1.44)	(0.43)	(6.63)	(2.70)	(0.25)	(1.10)	(1.26)
2002-03	184286.26	103990.47	21738.44	34414.54	12643.61	160489.21	66194.31	5682.16	25715.76	30841.46
	(7.52)	(4.24)	(0.89)	(1.40)	(0.52)	(6.55)	(2.70)	(0.23)	(1.05)	(1.26)
2003-04	229124.41	115350.5	26246.04	61121.38	13071.17	182101.45	80926.12	6318.54	28659.53	31621.54
	(8.30)	(4.18)	(0.95)	(2.21)	(0.47)	(6.60)	(2.93)	(0.23)	(1.04)	(1.15)
2004-05	272305.51	140999.76	36325.93	59448.78	16406.89	210873.04	88051.56	7395.06	33894.21	36766.81
(RE)	(8.72)	(4.52)	(1.16)	(1.90)	(0.53)	(6.76)	(2.82)	(0.24)	(1.09)	(1.18)
2005-06	288887.67	155843.29	39062.86	53319.05	21108.74	231447.31	93457.47	7660.49	39587.14	40209.75
(BE)	(8.18)	(4.41)	(1.11)	(1.51)	(0.60)	(6.55)	(2.65)	(0.22)	(1.12)	(1.14)
Figures in the brackets are percentage to GDP
Source: Indian public finance statistics, ministry of finance

GoI (2004): Report of Task Force on Implementation of the FRBM Act, 2003, Ministry of Finance

GoI (2006): Indian Public Finance Statistics 2005-06, Ministry of Finance (Various Volumes)

GoI (2006): Towards Faster and More Inclusive Growth: An Approach to the 11^th Five Year Plan, Planning Commission, June 14

EPW Research Foundation (2006): ‘Budget Making a la Chidambaram’, Economic and Political Weekly, April 8

The International Grains Council has revised its global wheat harvest forecast upward to 587 million tonnes for the year ending June 2007, registering a 0.3 per cent increase from 585 million tonnes predicted last month, due to greater-than-expected yields in countries including Russia . However, the output would be 5 per cent lower than last season.

As per information reiterated by Seafood Exporters Association of India (Seai), the WTO disputes settlement board (DSB) has accepted India ’s request for setting up a panel to study the US directive on continuous bonds as part of the anti-dumping duty on shrimps, which had not been consistent with WTO rules. The US customs had imposed the continuous bond requirement on importers of certain frozen warm water shrimp from India subject to anti-dumping duties.

Bringing the commodity sector under the scope of their bilateral economic relations, India and China have signed a memorandum of understanding (MoU) for promoting synergies between their commodity market regulators for increasing efficiency. The tie-up aimed at promoting mutual assistance and exchange of information on investor disclosure norms, enforcement laws, operation of brokers, monitoring, clearing, settlement of disputes and also regarding market manipulation, and other deceptive and fraudulent practices concerning trading of commodity futures contract.

The Centre has de-canalised duty-free imports of vanaspati from Sri Lanka , while simultaneously fixing a quantitative limit of 2.5 lakh tonnes for such imports.The total quantum of import of vanaspati including bakery shortening and margarine under Indo-Sri Lanka Free Trade Agreement would be restricted to 2.5 lakh tonnes per annum. It has also cancelled the appointment of National Agricultural Co-operative Marketing Federation of India (Nafed) as the canalising agency for undertaking these imports. Hence, importers are required to only make an application to the Director General of Foreign Trade (DGFT)'s Exim Facilitation Committee along with a pre-purchase agreement from any eligible vanaspati exporter from Sri Lanka .

As per the Marine Products Export Development Authority (MPEDA), marine exports from the country have posted a 10 per cent growth in terms of value to Rs 3,704.87 crore (2,10,494 tonnes in terms of quantity) during the first six months of this fiscal year 2006-07 compared to 1,98,026 tonnes worth Rs 3,373.2 crore during the same period last year. However, the unit value realisation though remaining static around the $4 per kg level, was marginally down to $3.85 from $3.92. Shrimp, accounting for over 60 per cent of the value earned, has recorded a decline in quantity from 73,155 tonnes to 68,869 tonnes, which has been alleged to imposition of the anti-dumping duty by the US . The European Union has continued to be the main market with a share of 31 per cent in quantity and 33.4 per cent in value followed by the US with a quantity share of 11 per cent and value share of 20.7 per cent.

As per the industry estimates, coffee (Arabica) production is expected to face a set back of 10-15 per cent in the 2006-07 coffee crop season to touch 85 thousand tonnes due to white stem borer infestation and unseasonal rain in Arabica growing regions. However, Coffee Board in its post-blossom estimate has pegged the total Arabica crop size for 2006-07 at 1.04 lakh tonnes. The Coffee Board has expected the total coffee production to be 3 lakh tonnes, which includes Arabica 1.04 lakh tonnes and Robusta 1.96 lakh tonnes.

The exports of tobacco and tobacco products have stood at 96,001 tonnes worth Rs 885.83 crore registering a 19 per cent during the first half of fiscal year 2006-07 over 80,824 tonne worth Rs 646.83 crore in the previous year. The exports have comprised of 83,774 of leaf tobacco worth Rs 679.16 crore and 12,227 tonnes of tobacco products valued at Rs 206.67 crore during the same period. The exports of tobacco products have included 2,886 tonnes of cigarettes (Rs 63.13 crore), 217 tonnes of beedis (Rs 16.17 crore), 5,238 tonnes of hookah tobacco paste (Rs. 21.07 crore), 2,376 tonnes of chewing (zarada) tobacco (Rs. 87.84 crores), 1,473 tonnes of cut tobacco (Rs 17.75 crore), 33 tonnes of snuff (Rs 60.42 lakh) and 4 tonnes of cigars (Rs 10.6 lakh). West Europe has continued to be the biggest buyers of Indian tobacco with as many as 13 western European countries importing 26,094 tonnes of tobacco leaf worth Rs 245.95 crore.

The decision regarding lifting the ban on sugar exports has been postponed till December 2007. However, in the midst of expectations of a record sugar production in the current season (230 lakh tonnes as against 191 lakh tonnes in the last season) sugar prices have been falling by an average of Rs 30 to Rs 50 a quintal over the previous week to Rs 1,700-1,750 a quintal. In the futures market too, sugar witnessed a depressing week. At the National Commodity & Derivatives Exchange (Ncdex), the price of M-sugar for December delivery fell from Rs 1,779 a quintal on November 20, 2006 to Rs 1,761 on November 24, 2006.

Industry

The country's manufacturing sector has grown by 12.1 per cent in the first six months (April-September) of the current fiscal year (2006-07) as against 9.5 per cent in the same period last year. September 2006 has seen the manufacturing sector grow by 12 per cent as compared to 8.9 per cent in the same month last year. The production of machinery and equipment has grown by 14.8 per cent, metal and alloy industries by 19.2 per cent, chemicals at 10.8 per cent and textiles at 15.4 per cent. The national manufacturing initiative proposed by the national manufacturing competitiveness council has envisaged stepping up of the manufacturing sector growth from 9-10 per cent to 12-14 per cent in the 11^th Plan Period.

For the first time in the last ten years, the industrial growth has exceeded 10 per cent. Also, for the first time ever, the manufacturing rate of growth has exceeded 12 per cent in six months (April-September 2006). During the period April-September 2006, the manufacturing sector has grown by 12.1 per cent compared with 9.5 per cent during the same period of 2005. Industrial growth during the first six months (April 2006 to September 2006) of the current financial year is up by 10.9 per cent as compared to 8.5 per cent registered in the same period last year. S compared with April-September 2005, the mining and electricity sectors have grown by 3.1 per cent and 6.6 per cent, respectively, during April-September 2006.

Truck and bus tyre production has continued to see consistent growth in September 2006, as per data released by the Automotive Tyre Manufacturers' Association (ATMA); the production in this category has been registered at 10.22 lakh units as against 9.6 lakh units in September 2005, witnessing a growth of 6 per cent. However, the data has also shown exports to have dipped by 12 per cent to 1.96 lakh units (2.2 lakh units). The passenger car tyre production by ATMA member companies has also witnessed a rise at 12.3 lakh tyres as against 11.69 lakh units while the production of light commercial vehicle tyres has stood at 3.9 lakh tyres (3.77 lakh tyres).

Infrastructure

Having faltered on its power capacity addition target for the current (Tenth) Plan by a wide margin, the central government plans to set realistic generation capacity addition targets for the Eleventh Plan (2007-12). However, the government's `Power for All' target, aimed at augmenting the country's power generation capacity by an additional 1 lakh MW cumulatively during the Tenth and Eleventh Plan periods, now appears to be a long shot even under the most optimistic scenario. According to latest government estimates, the requirement of installed capacity to meet the projected demand works out to about 2,06,000 MW, resulting in a capacity addition requirement of about 72,000 MW in the Eleventh Plan period, taking into account the current Plan's revised capacity addition of 30,641 MW. Even if the revised capacity addition target for the current Plan is to be achieved, around 12,900 MW of under construction projects need to materialise during the remaining five months till March 2007, as against a total of only 17,700 MW that has been commissioned so far during the last four and a half years of the current Plan period.

Diesel would be cheaper by about Rs 3 per litre in Maharashtra from 1^st December 2006; in Mumbai, Navi Mumbai and Thane the price would be Rs 36.67 per litre and in the rest of the state it would be Rs 35.88. The reduction in prices follows the Maharashtra government's decision to reduce sales tax by 5 percentage points and scrapping the Rs 1 surcharge on diesel. Currently, the sales tax is 33 per cent plus Re 1 surcharge per litre of diesel in Mumbai, Navi Mumbai and Thane, which would be reduced to 28 per cent. In the rest of Maharashtra it is 30 per cent plus Re 1 surcharge, which would become 25 per cent. After the 5 per cent cut in sales tax and considering the consequential rise in diesel sales, the state exchequer will still lose about Rs 400 to 450 crore in the next one year as sales tax revenue. In the current fiscal year - next four months - the revenue loss would about be Rs 150 crore. In 1998 the sales tax on diesel was 21-23 per cent, which climbed to 36 per cent in 2002 and further increased to 39 per cent in the same year. Due to increase in tax and fluctuations in prices, the diesel sales volume has fallen to 2,945 million litres in 2005-06 from 3,611 million litres in 1998-99.

In the sixth round of the New Exploration Licensing Policy (NELP VI), the state-owned exploration and production major seems to be emerging as a winner for 24 blocks while Reliance Industries Ltd is likely to get seven blocks. Of the 24 blocks likely to be awarded to ONGC, 12 are deepwater blocks, 10 are on-land blocks, while two blocks are in shallow water. All blocks awarded to RIL are deepwater. While ONGC had bid for 45 blocks, Reliance had bid for 21 under the sixth round of NELP (20 solo and one with Oil India ). Among the foreign companies, Ukraine 's Naftogaz is likely to get 3 onshore blocks, while Australia 's Santos may emerge a winner for 2 blocks, both deepwater. Under NELP VI, 55 blocks were put on offer and bids were received for 52, of which 39 attracted multiple bids and 13 single bids. Going with the DGH recommendation, the ECOS is understood to have rejected 14 bids, including those of Essar, Tap Oil (Australia), Finder (Australia), M3Nergy (Malaysia) and Niko Resources (Canada), as they did not meet the eligibility criteria.

Despite the central government's claims of having launched ethanol-blended petrol on a nation-wide scale, the programme has actually taken off in just three states - Uttar Pradesh, Tamil Nadu and Goa . In these three states, the public sector oil marketing companies have not only contracted ethanol at an ex-distillery price of Rs 21.50 per litre, but have also finalised the logistics of procurement, blending and distribution. This is not the case elsewhere, where contracts are yet to be concluded. In Maharashtra, for instance, the process is stuck over pricing, with XL Telecom Ltd quoting a rate of Rs 19.49 a litre as against the Rs 24.30 per litre tendered by the other 40 bidders in Maharashtra who have alleged predatory pricing by the company. According to them, XL Telecom has only a stand-alone distillery at Nanded that procures rectified spirit and dehydrates it further to ethanol. In the last tender, XL Telecom had quoted for 420 lakh litres against which it had supplied only 18.18 lakh litres till October. The Ethanol Manufacturers' Association of India has told the petroleum ministry that prices cannot be fixed based on a quote by a stand-alone distillery that is not attached to any sugar mill. The ministry and oil companies are hopeful that the Rs 21.50 per litre rate would eventually become the negotiated rate across the country and the programme will be fully in place by the end of November as against the previous two deadlines of November 1 and November 15.

To revive the Indian maritime sector, there is a need to simplify the taxation regime in the shipping industry, as per a recent KPMG report commissioned by Confederation of Indian Industry (CII). The taxation regime for shipping comprises multiple taxes (12 in all), including service tax and the fringe benefit taxes. These levies make Indian shipping businesses uncompetitive in comparison to international players, the study says. The study also calls for focus on the ship-building and ship-repair segment, global maritime security, ports, hinterland connectivity and human resource development. Even though Indian shipyards enjoy a price advantage over many international shipbuilding yards, they lack the capability to build large and modern ships. At present the Kochi shipyard is the only one with the capability to repair and build large ocean-going ships. The Indian ship-building industry needs to focus on benchmarking efficiencies to international standards to improve delivery times, price and quality which, in turn, will enhance its competitiveness. Measures such as performance incentives and public private partnership (PPP) models could be introduced to improve efficiency.

Railways should considerably lower revenue-sharing norms for undertaking jatropha plantation on a public private partnership (PPP) basis to "as less as a 20 per cent range" so as to get the private sector interested in jatropha plantation projects on Railway-owned land, as per Grow Diesel Ventures, a consultant engaged by the Railway Ministry engaged to develop a `market-friendly' agreement framework for joint ventures in commercial plantation of jatropha. According to the present norms, the party undertaking commercial jatropha plantation on land owned by Railways is required to part with 50 per cent of its revenues to the Indian Railways; the policy envisages Railways providing land on lease for 15 years, while the private player invests in jatropha saplings and maintains the plantation. However, with these conditions, the private sector was not forthcoming to undertake jatropha plantation. The Railways has a target to plant 72 lakh jatropha saplings on its land in the current fiscal year as against 61 lakh saplings in 2005-06. The Southern and Northern Railways have already run trains on bio-diesel blended fuel. The Railways plans to use the arid and semi-arid surplus land belonging to the organisation outside the station areas for planting jatropha trees for generating bio-diesel for captive consumption. The Railways had initiated jatropha plantation at four sites based on joint venture - three under the North Eastern Railways and one under Southern Railway. Apart from commercial plantation through joint ventures, the Railways also plants jatropha through departmental plantations by usually paying contractors to plant jatropha saplings and maintain them for two-three years.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) rose by 5.29 percent for the week ended November 11,2006 as compared to 5.30 per cent in the last week or at a lower rate of 4.09 per cent during the corresponding week last year.

During the week under review, the WPI rose to 208.9 from 208.8 in the previous weeks’ level (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), increased by 0.1 percent to 214.5 from its previous week’s level of 214.2, mainly due to increases in prices of ‘food article like eggs, maize, jowar, barley, bajra, wheat and fruits and vegetables. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) declined marginally from 329.5 to 329.4. The index of ‘manufactured products’ group also increased by 0.1 per cent to 180.1 from 180.0 during the week under review. Food Products like bran, skimmed milk powder and oil cake, bran all kinds, rice bran oil, coconut oil, sunflower oil, and gingelly oil, chemicals and chemical products prices rose.

The latest final index of WPI for the week ended September 16,2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 207.7 and 5.27 per cent as against their provisional levels of 206.3 and 4.56 per cent, respectively.

Banking

In a bid to ease the capital raising process for the urban cooperative banks (UCB), a working group report by the Reserve Bank of India (RBI) has suggested access of certain innovative instruments. According to the report, some of the avenues for raising capital would be unsecured subordinated non-convertible redeemable debentures, special shares, which are non-voting in nature. The recommendations also include access for raising redeemable cumulative preference shares and long term subordinated deposits with maturity in excess of 15 years. These deposits of over 15-year maturity can be considered as Tier II capital subject to their meeting certain conditions. Further the group has recommended that funds raised through the special shares, which are non-voting in nature, may be reckoned for Tier-I capital and the rest for Tier-II capital. The RBI also said that none of the new instruments would have a put option but could have a call option exercisable by the bank with the prior permission of the regulator. However, exercising of call option/redemption would be subject to a lock-in clause of the bank meeting the prescribed capital to risk weighted assets ratio.

The RBI has found fault with the way the domestic banking industry is undertaking microfinance projects. In a joint study with banks on microfinance RBI pointed out many faulty ways in which the banks are managing microfinance business and has asked all banks to take necessary corrective action wherever required considering the findings. One of the key findings is some of the microfinance institutions (MFIs) financed by banks or acting as their intermediaries/partners appear to be focussing on relatively better banked areas, including areas covered by the self help group - bank linkage programme. As the competing MFIs were operating in the same area, and trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households. The regulator has also found that many MFIs supported by banks are not engaging themselves in capacity building and empowerment of the groups to the desired extent. It has been observed that the MFIs were disbursing loans to the newly formed groups within 10-15 days of their formation, in contrast to the practice obtaining in the SHG - Bank linkage programme that takes about 6-7 months for group formation. As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs. Further RBI even said that banks, who are the principal financiers of MFIs, do not appear to be engaging them with regard to their systems, practices and lending policies with a view to ensuring better transparency and adherence to best practices. In many cases, no review of MFI operations was undertaken after sanctioning the credit facility.

Recently, the RBI has issued new guidelines, which will be implemented, from January 1, 2007. The new guidelines will restrict a bank’s total exposure to the capital markets to 40 per cent of its networth. At present, the bank’s exposure to capital markets is restricted to 5 per cent of its total advances. Applying the new guidelines, a study by FE Research Bureau reveals that the private sector banks’ exposure to the capital market to networth ratio shows a marginal increase over the past two years, whereas public sector banks’ (PSBs) ratio also shows an increasing trend, albeit significantly during 2005-06. And the exposure to the capital market to networth ratio of private banks is higher than that of the PSBs. A study of around 42 banks, both private and public sector, conducted by FE Research Bureau, shows that the exposure to the capital market to net worth ratio of 24 PSBs increased significantly from 8.4 per cent in 2004-05 to 11.5 per cent in 2005-06. On the other hand, the above ratio of the aggressive 18 private sector banks marginally increased from 14.9 per cent to 15.4 per cent during the same period. The significant increase in the ratio was in the case of HDFC Bank, where it increased from 21.8 per cent to 30.1 per cent.

Financial Markets

The stock of Info Edge ( India ) Ltd made its debut on BSE at Rs 480, at a premium of 50 per cent to its issue price of Rs 320. The company is a provider of online recruitment, matrimonial classifieds and related services in India . The stock reached an intra-day high of Rs 623.80 and settled at Rs 593.20 on BSE. The stock opened at Rs 451.05 on NSE, at a premium of 41 per cent. The stock touched an intra-day high of Rs 623.80 and closed at Rs 592.55 on NSE. The company had offered 53.24 lakh equity shares of Rs 10 each through a 100 per cent book building process.

Market continued to head higher, on consistent buying support from FIIs. For the week ended 24 November, the BSE Sensex gained 273.85 points or 2.04 per cent to settle at 13,703.33. The S&P CNX Nifty rose 98.05 points or 2.54 per cent to 3,950.85. On 20 November, the sensex recoded an intra-day reversal, from its lows of 13,200.36, to settle 1.23 points higher, at 13,430.71. The Reserve Bank of India 's draft circular prescribing tighter guidelines for banks’ capital market exposure had resulted in sensex tumbling over 200 points in intra-day trade on that day. Renewed buying in blue-chips helped the sensex surge 186.06 points to 13,616.77 on 21 November. The sensex rose 89.76 points on 22 November to settle at 13,706.53, an all-time closing high, backed by firm Asian markets. The sensex ended 25.70 points lower at 13,680.83 amid a mixed trend in various constituents of the barometer index on 23 November after surging to a life high of 13,790.82 in early trade. The index finished with a modest 22.50-point gain on 24 November at 13,703.33 as buying support continued.

On 21 November, Sebi directed 2 depositories and 8 depository participant to pay Rs 116 crore as compensation to retail investors who suffered opportunity loss in the IPO scam that came to light last year.

Derivatives

National Stock Exchange of India Limited has been awarded ‘Derivatives Exchange of the Year’ by Asia Risk Magazine. The award recognizes best practice, quality service and innovation in derivatives and risk management in the Asia-Pacific region. The winning institutions are those that, over the past year, have responded best in the needs of their clients, both on the asset and liability side, along with the end-users that have demonstrated outstanding trading and risk management strategies

Government Securities Market

Under the weekly T-Bill auctions, the RBI mopped up Rs.4750 crore and Rs.2000 crore through 91-day T-Bill and 364-day T-Bill. From this, the RBI raised Rs.1500 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 6.9824 per cent respectively.

RBI conducted the sale (re-issue) of 8.07 per cent 2017 for a notified amount of Rs.5,000 crore. The cut-off price and cut-off yield for the security was Rs.104.47 and 7.4323 per cent respectively.

The Government of India have announced the issue of ‘7.75 per cent Oil Marketing Companies Government of India Special Bonds, 2021’ for Rs. 5,000 crore (nominal). The Special Bonds are being issued to three Oil Marketing Companies as compensation for under-recoveries in their domestic LPG and Kerosene (PDS) operations during the current financial year. The second tranche of the Special Bonds is being issued at par to Indian Oil Corporation Ltd. (IOCL) including IBP for Rs. 2,838 crore, Bharat Petroleum Corporation Limited (BPCL) for Rs. 1,135 crore and Hindusthan Petroleum Corporation Limited (HPCL) for Rs. 1,027 crore on November 28, 2006 (Tuesday).

In the address on ‘Monetary and Financial Policy Responses to Global Imbalances’, Dr Rakesh Mohan, Deputy Governor, RBI said that global imbalances could indirectly impact India in form of a rise in domestic interest rates and thereby increase in the cost of borrowings for the government, due to rise in international rates.

With the fall domestic inflation, the weighted average YTM of 7.59 per cent 2016 bond was 7.44 per cent on November 24, 2006 as compared to 7.54 per cent on Nov 17, 2006. The 1-10 year YTM spreads decreased by 8 bps to 48bps.

Bond Market

Oriental Bank of Commerce tapped the market to mobilise Rs 125 crore (plus Rs 125 crore as greenshoe option) through issue of perpetual bonds by offering 9.40 per cent.

Foreign Exchange Market

The rupee-dollar exchange rate appreciated from Rs 45.10 on November 17 to Rs 44.87 on November 24. The six-month forward premia closed at 1.96 per cent (annualized) on November 24 vis-à-vis 2.01 per cent on November 17.

Commodities Futures derivatives

Urad (black matpe) price have softened a bit during the last two weeks after touching a record Rs 4,350 a quintal for the superior quality. The prices have declined on expectations of a bumper crop in the rain-fed areas and relaxation of quality norms in the commodity exchanges. According to trade sources, spot prices are higher since physical stocks are very low. The other reason for future prices to rule below spot is that the margin for pulses such as urad is higher, resulting in lower participation by market forces.

The National Commodity & Derivatives Exchange (NCDEX) on Tuesday launched new gold contract for 100 gm and silver contract for 5 kg. The contracts are designed to attract retail investors. The exchange currently trades in gold contract for 1 kg and silver contract for 30 kg which has a margin requirement of approximately Rs 45,710 (5 %) in gold and Rs. 40,000 (7%) in silver at current market prices. In the case of the new contracts, retail investors can trade with margin requirements of Rs 4,571 in the case of gold and of Rs. 6,700 in the case of silver. The gold will be received and delivered only from NCDEX accredited vaults. The new contracts will meet the much-required need of quality assurance, according to Mr P.H. Ravikumar, MD and CEO, NCDEX. The advantages for investors in the new bullion futures contracts on NCDEX include the ability to hold gold in the demat form at a low cost, assurance of quality, and ability to buy and sell easily.

Corporate Sector

Bharat Electronics Limited (BEL), a defence PSU, has received an order for supply of 2 lakh units of set-top boxes (STBs) from Wire and Wireless India Limited (WWIL), a Zee Group company. The boxes will be supplied with embedded conditional access software that enables the subscriber to select and choose the pay channels that he wants to view.

Sambhav Engineering has secured three projects of Rs 216.34 crore from Andhra Pradesh government for irrigation developments.

Siemens India, has won order worth Rs 4,000 crore from Qatar General Electricity and Water for the development of power transmission network in that country. Under the contract, Siemens will supply 25 new fully automated unmanned substations of varying voltages as well as extend 14 substations and renovate 10 older substations.

Tata Steel Limited has signed a joint venture agreement with Tata Power Company to set up captive power plants in Chattisgarh, Orissa and Jharkhand. Tata Steel will hold 26 per cent equity in the venture with TPC holding 74 per cent equity. The joint venture aims to meet the power and steam requirements to support the expansion plans of the company in the above states.

Mahindra and Mahindra ahs entered into an agreement to acquire 66 per cent equity stake in DGP Hinoday Industries Limited (Hinoday) for an undisclosed amount.

Export Sector

The next budget is likely to see significant changes in the duty structure for the gems and jewellery sector. An expert group set by the finance ministry may recommend imposition of direct tax on the basis of turnover.

Bilateral trade between India and Singapore has grown by almost 32 per cent to $8.5 billion during the fiscal year 2005-06 as compared to $6.65 billion during the previous fiscal year. On the other hand, the trade between India and China could touch $20 billion by end 2006, with the first half of the year already recording a growth of 22.9 per cent at $11.4 billion.

The government has approved 25 integrated textiles parks, which are expected to come up by March 2008, at a total investment of Rs 13000 crore for providing infrastructure in textile cluster.

FDI share in the domestic real estate market will shoot up by at least 10 per cent by March 2007 and will touch the 26 per cent level from 16 per cent during 2005-06. FDI inflows in September 2006 registered a record 225 per cent growth touching $916 million as compared to $282 million received in September 2005. Between April and September 2006, the equity component of FDI inflows was $4.4 billion; double the $2.2 billion received in the first half of last fiscal. The largest inflows were for the New Delhi region ( Delhi , a part of Uttar Pradesh, and Haryana) at $936.5 million in April-September 2006, a 25.1 per cent growth over the same period last year. But the Chennai region (Tamil Nadu and Pondicherry ) showed the most growth of 226.8 per cent with $437.3 million during the same period. The Mumbai region ( Maharashtra , Dadra & Nagar Haveli, and Daman & Diu) received $867.5 million (a 190.6 per cent increase). Country-wise, Singapore moved ahead of the US and the UK with $481.7 million worth of inbound FDI (a massive 305.1 per cent growth over the previous year) to move from seventh to second position. Mauritius continued to lead the chart with $2.54 billion (185.4 per cent growth). The US finished 3rd with $406.3 million (25.8 per cent growth), followed by the UK with $113.3 million (down 41.3 per cent). The services sector topped the sectoral growth in FDI inflows with $1.5 billion (350.1 per cent growth). This was followed by the electrical equipment sector with $777.9 million (246.2 per cent growth) and telecommunications $405.2 million (950.3 per cent growth).

The central government has agreed to the leather industry’s suggestion for setting up integrated leather parks in leather hubs across the country. The move is expected to help the sector achieve an exports target of $7 billion by 2010-11. The current export earnings from the leather sector, as per data, are about $2.7 billion with a growth of 8 per cent.

*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.