Current Economic Statistics and Review For the Week 
Ended December 23, 2006 (52^nd Weekly Report of 2006)

Theme of the week:

All-India Debt and Investment Surveys – A Pragmatic Look*

This study is divided into three parts. Part I gives a brief overview of the RBI efforts in the area of rural credit and a brief analysis of the characteristics of rural and urban households, their asset holdings and the outstanding debt owed. Part II deals mainly with many facets of incidence of debt.  A final section deals with a brief state-wise analysis.

Aim

The aim of this note is to find out, whether, the off-quoted maxim that “our ryat is born is debt, lives in debt and pass on the debt to their progeny on death” is still valid after six decades of independence by scanning through the results of all-India debt and investment survey conducted by National Sample Survey Organisation (NSSO) decennially.

I

Background

Section 54 of the Reserve Bank of India Act, 1934 as amended says that the Bank may maintain expert staff to study various aspects of rural credit and development, and in particular, it may,

(a)    tender expert guidance and assistance to the National Bank;

(b)   conduct special studies in such areas as it may consider necessary to do so for promoting integrated rural development.

By incorporating this section in the RBI Act of 1934 itself when RBI was founded as the central bank of the country, the policy makers put an obligation on RBI to develop the rural credit delivery structure and thus expand the supply of credit to agriculture for its development.

As per this statutory requirement, RBI set up a department called Agriculture Credit Department within its fold.

After independence in August 1947, by seeing the ineffectiveness of co-operatives in the rural credit scene and the increasing role of  money lenders and with the avowed intention of removing the poor agriculture farmers from the clutches of these money lenders and above all to understand the basic credit needs of these poor farmers, RBI undertook an epoch making event in the history of rural credit, by conducting a survey known as the All-India Rural Credit Survey (AIRCS) in 1951-52.

The important findings of this survey were:

1)      Money lenders played a dominant role in financing rural credit;

2)      High interest rates were charged by the money lenders;

3)      Official agriculture credit fell short of the requirements and it was not of the right type, it did not serve the right purpose, and often failed to go to the right people;

4)      It found that the performance of co-operatives was deficient and recommended strengthening of the co-operative credit structure;

5)      The integrated scheme of rural credit (with active participation of the state by contributing to the share capital of co-operative institutions) was one of the important recommendations made by AIRCS;

6)      It also recommended conversion of Imperial Bank of India into State Bank of India with a wide network of branches to cater to the credit needs of rural households;

7)      RBI by amending the RBI Act set up two funds, viz., National Agricultural (LTO) Fund and National Agricultural Credit (Stabilisation) Fund in 1955.

8)      In July 1, 1963 RBI set up Agricultural Finance Corporation of India (ARDC) for providing long-term institutional finance for agriculture.

The All-India Rural Credit Review Committee (ARCRC) was set up in July 1966 by the RBI to review the agricultural credit system so that the bottlenecks may be identified and remedial measures undertaken.

            Some of the important recommendations of the ARCRC were:

1)      The Committee envisaged a dynamic role for the ARDC and recommended adoption of various measures to ensure timely and adequate flow of credit for agriculture through co-operatives;

2)      The Committee felt the necessity to induct commercial banks to supplement efforts of the co-operative to meet the increased demand for agricultural credit emanating from the use of modern techniques of cultivation viz., improved seeds and fertilisers, etc.; 

3)      It recommended setting up of Regional Rural Banks (RRBs) to supplement the efforts of commercial banks, with the active participation of commercial banks, central and concerned state government. In 1975, RRBs were set up in different states.

4)      Committee also recommended establishment of Rural Electrification Corporation for financing rural electrification schemes through state electricity boards and Rural Electric Co-operatives and Small Farmers Development Agencies (SFDA) and Marginal Farmers and Agricultural Labourers (MFAL) designed to identify the problems of respective small and marginal farmers. But in 1978-79 with the establishment of Integrated Rural Development Programme (IRDP) these two agencies were merged with it.

This multi-agency approach, while it resulted in increased flow of rural credit was also besotted with many problems. Thus, in 1978 RBI set up a committee known as Committee to Review Arrangements for Institutional Credit for Agriculture (CRAFICARD). A pathbreaking recommendation of this committee was the establishment of National Bank for Agriculture and Rural Development (NABARD) by merging ARDC and most of the functions of ACD of the RBI; thus, NABARD came into existence in July 1982.

In 1986, at the instance of the Government, the RBI constituted Senior Expert Group with a view to reviewing the agricultural credit system in general , the role and effectiveness of lending institutions, the role and functions of the apex level agricultural credit system, etc. They recommended greater role for NABARD in manpower training and setting up of National Co-operative Bank of India . They also recommended that the RRBs may be merged with sponsor banks as they felt that strong viable structure can only extend the much needed service to the weaker sections.

II

Decennial Surveys on Debt and Investment of All Households – An Overview

As observed above, the RBI has been entrusted with the crucial and leading role to provide finances to agricultural sector and in data collection required for policy formulation purposes.

The first comprehensive survey on rural credit was the All-India Rural Credit Survey, 1951-52, whose main aim is to collect data suitable for policy formulation by RBI. The Committee of Direction, in regard to AIRCS, 1951-52, had suggested the need for a constant review of all main features of the credit situation in the rural sector through annual investigations in the nature of sample enquiries of moderate scope and large-scale surveys could be undertaken at larger intervals of time. In pursuance of this recommendation, the Bank carried out six follow-up surveys in the form of case studies between 1957 and 1962 and 1962-66.

RBI carried out the second decennial survey known as All-India Rural Debt and Investment   Survey (AIRDIS), 1961-62, with the objective of arriving at statistically valid estimates of various economic characteristics of rural households.

These two surveys conducted by the RBI though mainly confined to rural households forms the basis of further decennial surveys. However, because of various administrative and other attending problems encountered in the above surveys, the field work of the next survey was entrusted to NSSO in 1971-72. Scope of this survey was extended to cover urban households also. NSSO conducted the next four surveys as part of their 26^th round (1971-72), 37^th round (1981-82) , 48^th round (1991-92) and 59^th round (2003).

In addition to these decennial surveys, there are two more surveys on indebtedness. First the National Sample Survey Organisation (NSSO) has covered the subject of indebtedness under a special ‘Situation Assessment Survey of Farmers’ (SAS) conducted during January-December 2003 and published its report entitled Indebtedness of Farmer Households (NSSO Report No.498). Secondly, a study undertaken by world bank and the National Council of Applied Economic Research (NCAER) conducted a survey in 2003 known as ‘Rural Finance Access Survey (RFAS).

NSSO surveys are nation-wide surveys with a major central sample supplemented by a few state/ut samples, while RFAS 2003 has covered only two Indian states, namely Andhra Pradesh and Uttar Pradesh.

III  

Households

A group of persons normally living together and taking food from a common kitchen constituted household. They comprise cultivator households and non-cultivator households in rural areas and self-employed and others in urban households.

Distribution of Households

The survey covered  households in both rural and urban areas. The rural households are broadly categorised as cultivators and non-cultivators.

Cultivator households are rural households operating at least 0.002 hectare of land during the last 365 days preceding the date of survey. Table 1: gives the distribution of households by occupational categories. It can be seen from there that the cultivator households has declined from 72.4 per cent in 1991 to 59.7 per cent in 2002.

Non-cultivator households, consisting of agricultural labourers, artisans etc., defined as households operating no land or land less than 0.002 hectares, has gone up from 27.6 percent to 40.3 per cent of all rural households. Among the non-cultivator households, while the agricultural labourers share was stagnant between 1971 and 2002 survey at about 14 per cent, the share of artisans grew from 2.4 per cent to 5.2 per cent during the period.

Similar to that for rural areas, the distribution of households by occupational categories is given in Table 2 for self employed and others.

In urban areas, each household was first categorised in one of the four groups viz. self employed, regular wage/salaried employee, casual labour and others as per the definition given below.

Self-employed: Persons engaged in farm or non-farm enterprises of their household are called self-employed workers. In urban areas, a household was considered self-employed, if the major source of its income during the 365 days preceding the date of survey was self-employment of its members. 

More than one-third of the urban household in India are self-employed in 2002 as per NSSO 59^th round survey. There is an increasing tendency to become self-employed since 1981 (see Table 2). Preferred areas of profession in the urban areas are 1. Administrative work whose proportion raised from 2.4 in 1981 to 8.0 per cent in 2002. and second important profession is Sales work whose proportion reached 11.5 per cent in 2002 from a low of 10.2 per cent in 1981. This two occupational categories of the urban household constituted about 20 per cent of the total urban households in 2002 as against 13.0 per cent in 1981. 

IV

Asset Holdings of the Households

Household assets represent all that were owned by the household and had some money value. Assets of the households comprise physical assets and financial assets. Physical assets comprise land, buildings, livestock, agricultural implements and machinery, non-farm business equipments, all transport equipment and household durables. Financial assets comprise share and deposits; dues receivable on loans advanced in cash or in kind, deposits in companies, banks, post office etc. and cash in hand. The average value of assets per households for rural areas is estimated at Rs.2,65,606 crore in 2002 as against Rs. 1,07,007 crore in 1991. In urban areas it is Rs.4,17,158 crore in 2002 as against Rs.1,44,330 crore. A rural cultivator household on an average, owned assets of Rs.3.73 lakh  about three and half times than those owned by non-cultivator household of Rs. 1.07 lakh. The difference in the urban areas in this respect were narrower: AVA of self-employed household at Rs.5.6 lakhs was 1.6 times or 64 per cent higher than AVA of other urban households at Rs. 3.4 lakhs.

It can  be seen from  Table 3 that the average value of asset of rural house hold had gone up by about 24 times Cultivator household also registered the same kind of increase between 1971 and 2002.. However the average value of asset of urban household had raised by only 10 times between 1981 and 2002.  

Table 4 reveals that the average value of assets (AVA) as on 30^th June 2002 for household of different land ownership. It can be seen from their in all occupational categories the AVA increases with the size class of land owned.

 Distribution of households classified by the value of total assets holding classes in rural areas is given in Table 5. This distribution reveals the relative importance of different assets holding groups. In the rural area it is seen that 7.6 per cent of households owned assets as low as Rs 15000 or even less , valued at 2002 prices. Another 8.3 per cent households belonged to the asset group of Rs. 15,000 – 30,000 . Thus in 2002, less than one-sixth of the rural households owned assets worth Rs. 30,000 or less. On the other hand , about 23 per cent of rural households owned assets amounting to rupees three lakh and more. More than 60 percent were found to be distributed in the middle five assets group ranging from Rs. 30,000 to Rs. 3 lakh.

Among the different categories of households, cultivators (60 percent) are found to be more prosperous than non-cultivators.

An analysis of the composition of household assets holding in the rural area reveals some interesting points (Table 6).

1. Predominant component of assets especially for cultivator households is land and building, which together forms about 87 per cent of the total rural assets. 

2. Share of other items is meagre at 13.2 per cent.

3. However, the shares of household durables and deposits are seen to be higher among the non-cultivator households together forms about 15 per cent of the total assets as compared to a lower share of 5.7 per cent in the case of cultivator households.

Households in urban areas also possess 76 percent of assets in the form of land and building Table 7. However, their holding household durable and assets in the form of financial assets are much more than their counterpart in rural areas.

It would be of interest to know the relative importance of different items of assets over the three decades ending 2002.

Land and Building remained the most components of the assets owned in rural and urban areas and the relative position of land or building or any other item of assets did not change considerable during the period 1971 and 2002. The share of livestock and poultry have reduced considerably over the years in rural areas. Share of land and building in urban areas revealed an increasing trend during the two decades, while the share of household durables showed declining trend (Table 8).

V

Amount of Outstanding Debt

The aggregate amount of debt (cash loans) outstanding as 30^th June, 2002, as reported by households, was estimated at Rs. 1,76,795 crore, which is 19.2 times from a base of Rs. 9,216 crores in 1981. Table 9, also, reveals that the households residing in rural areas with 72.7 per cent share of the estimated households in the country, held about 63.0 per cent of the total outstanding debt. Opposed to this, the urban households, in 2002, accounted for 37.0 per cent of the total debt, which was relatively higher than the share of 27 per cent of the all the households in the country.

Table 10 presents the amount of outstanding debt as on 30^th June in the years 1971,1981,1991, and 2002 for the rural households .In 1971 round the total household debt includes debt in kind which forms a very small part of less than 3 per cent of the total debt. To that extent, any exercise in comparison over different rounds of AIDIS suffers, since the figures reported on incidence and level of incidence in earlier AIDIS rounds are strictly not comparable with those of 1991 and 2002. 

A review of the table 10 reveals that the cultivator household, which accounts for about 60 per cent of the rural households accounted for about 73 per cent of the total debt. But, like the number of households the share of debt of the cultivator households are on the decline over the period 1971 to 2002. This resulted in an equal amount of percentage gain for non-cultivator households. The share in the value of debt for cultivator households peaked to 93 per cent in 1981 from 88 per cent in 1971, and then dropped to 80 per cent in 1991 and by 2002 it fell to 73 per cent. 

Chart 1 clearly shows the trends in percentage of cultivator households to total households and the percentage share of cultivator households to total debt of all rural households.

VI

Debt Asset Ratio

            At any point of time, the outstanding debt of a household is potentially a charge upon the assets – whether or not these are mortgaged or hypothecated to a person or agency. Hence for a given group of households a question naturally arises – how was their debt outstanding related to their assets on any given date ? A study of debt-asset ratio  in all probability will give an answer to this query.

            Debt-asset Ratio is defined as the average amount of debt for a group of households expressed as percentage of the average value of assets owned by them on the given date. Thus this ratio reflects the burden of debt on any particular group of households on a given date.

It can be seen from Table 11 that the debt-asset ratio at the all-India level is found to be 2.82 per cent for the urban areas and 2.84 per cent for the rural areas as on 30.6.2002.  The said ratio is 4.65 per cent for the   non-cultivator and 2.49 per cent for the cultivator households. However, in urban areas the difference is much narrower as between self-employed and others.

It can be seen from Table 12  that the debt-asset ratio decreased almost monotonically with the increase in asset. It is the highest at 20 per cent and 27 per cent for people with asset worth less than Rs.15,000 for rural and urban areas respectively. At the other end it is about 2 per cent for both rural and urban areas.

Table 13 depicts changes in the debt-asset ratio during 1971,1981,1991, and 2002.

\It can be seen that there is though there is a decline from 1971 to 1981 thereafter there is a steady increase in debt-asset ratio in case of rural households. This trend is true for both occupational categories of households in rural areas.

However, in case of urban households the fluctuation in debt-asset ratio is not large between decades.

VII

Summing up

Rural households forms about 73 per cent of the households in India as per 59^th survey. As against this urban household is 36 per cent.

Almost all the households owned some of assets as on 30.6.2002. Average value of assets in rural areas at Rs.2.66 lakhs is much less than Rs.4.17 lakh  worth asset holding of urban people.

In rural areas, cultivator household is more prosperous than non-cultivator as cultivator household holds more than three and half time of asset owned by non-cultivator.

In urban areas, self-employed household asset holdings are Rs.5.55 lakh as against the other category of household owned assets of Rs.3.39 lakh.

In both rural and urban areas land and building is the preferred asset. However, there is a marked deterioration in the holding of livestock and poultry during the last three decade ending 2002.

In 2002, in rural areas about 8 per cent of the households owned very low assets worth Rs.15000 or even less and at the other end about 23 per cent of the households owned assets amounting to Rs. 3 lakhs and more. In urban areas, corresponding percentages of households were 17 and 34 respectively.

About 27 per cent of rural and 18 per cent of urban households reported debt ie cash loans outstanding as 30.6.2002. Average amount of debt was Rs.7539 for rural households and Rs. 11771 for urban households.

*  This note is prepared by R  Krishnaswamy

Highlights of  Current Economic Scene

AGRICULTURE  

According to the National Federation of Cooperative Sugar Factories and the Indian Sugar Mills Association, the country has witnessed a record sugar production, 26.95 lakh tonnes, as on November 30, 2006 for the sugar year 2006-07 (October-September), registering significant increase of about 22 per cent over 21.95 lakh tonnes produced last year. While co-operative sugar factories have contributed 55.4 per cent (14.93 lakh tonnes) to the total production, the private sugar mills have produced the 12.02 lakh tonnes. Among all the sates, Maharashtra has been the top-most producer, so far, with production touching 10.47 lakh tonnes, followed by Uttar Pradesh (7.23 lakh tonnes) and Karnataka (3.18 lakh tonnes).

The central government has lifted the ban on sugar export partially, allowing companies with export obligation under the advance licence ( AL ) scheme to undertake exports. Under AL scheme companies have to re-export 1 tonne of white sugar against every 1.05 tonne of raw sugar imported within a period of two years.  So far, 2.3 million tonnes of raw sugar has been imported against which 1.1 million tonnes refined sugar has been exported till July 4, 2006, when the ban on sugar exports was imposed by the government. The government might lift the ban on sugar import totally depending on the production and stock levels during the sugar season 2006-07.

Private players have imported 7.49 lakh tonnes wheat, against permitted quantity of 3 million tonnes, under the open general licence (OGL) so far in the current financial year 2006-07. Actual imports have been very low due to high international prices. Industry experts have denied the possibility of more wheat imports on private account in spite of government extending the last date for wheat imports at nil duty to February 28, 2007, from December 31, 2006 on account of lower offtake of wheat caused by low demand.

As per the estimates of cotton advisory board (CAB), cotton production would stand at 270 lakh bales (1 bale = 170 kgs) in the October-September 2006-07 season, 10.65 per cent higher than 244 lakh bales of last year owing to farmers shifting to cotton from other farm products, mainly in the major producing states such as Gujarat and Punjab. The carryover stock is estimated at 45 lakh bales for 2006-07, 11 lakh bales lower against 56 lakh bales for 2005-06.

 Rubber exports from the country have fallen drastically by 93.6 per cent to 797 tonnes in November 2006 from 12,440 tonnes exported during November 2005 on account of higher domestic price and devaluation of Thailand ’s currency (bath). However, as per the industry sources, rubber import would post a huge rise crossing 60,000 tonnes by the end of March 2007 and are expected to be cheaper benefiting rubber-based industries especially the tyre industry. 

Infrastructure

Overall

Propelled by the strong performance of petroleum refinery products, the six core infrastructure industries have grown by a robust 9 per cent in October 2006 compared with 7.4 per cent in the corresponding period in the previous fiscal year. This has been contrary to the Index for Industrial Production (IIP) for October which has indicated a slowdown in the growth rate for the month (6.2 per cent), the lowest in this fiscal year.  According to official data, key infrastructure industries, including crude petroleum, coal, power, cement and finished steel, have improved their performances in October 2006 over the comparable period last year. On a cumulative basis, in April-October 2006 the infrastructure industries have registered a growth of 7.5 per cent against 5.2 per cent in the comparable period in 2005-06. The petroleum refinery products sector have topped the list, growing at 18 per cent in October, reversing the deceleration of 2.4 per cent in the corresponding month of the last fiscal year. Electricity has performed the second-best performer in October with a growth of 9.7 per cent against 7.7 per cent, followed by crude petroleum that has improved output by 9.3 per cent against a slowdown of 7 per cent. Cement output has grown by 9.1 per cent against 8.6 per cent, while coal output has also improved by 6.1 per cent compared with 2.1 per cent in the previous year. Though, there has been a deceleration in the performance of finished steel to 7.6 per cent from 16.1 per cent in October 2005. The index of core infrastructure industries has a combined weighting of 26.7 per cent in the IIP, which has registered a slowdown in October 2006 due to a poor performance by the manufacturing sector.

Power

The union minister for power has assured that it is making efforts to ensure that it meets its target for achieving electrification of all households across the country by 2012. The government expects the rural electrification programme to be completed by 2009 and every household in the country to have access to power by 2012. 27 states participating in the implementation of Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), except Delhi and Goa, have formulated and submitted 575 draft detailed project reports (DPRs) involving an outlay of Rs 28,772.31 crore covering 546 districts. Sanction has been accorded to 317 DPRs involving an outlay of Rs 11,514.23 crore covering electrification of 69,534 un-electrified or de-electrified villages and intensive electrification of 1,65,124 villages in these 27 states. It is reported that the implementing states so far have availed Rs 2,480.41 crore under sanctioned RGGVY projects.

The central government has allocated a coal block for the proposed Sasan power project in Madhya Pradesh and the process for importing coal has been initiated for the Mundra project in Gujarat – the first couple of 4,000 MW - each thermal stations being set up under the ultra mega power projects The union power minister has admitted to a delay in the announcement of the winning bidders for the two projects. The Sasan project had received 10 bids and 6 parties are in the fray for the Mundra mega power project. The PFC has been delayed in opening the price bids for Sasan and Mundra projects due to the absence of the chairman of the apex committees evaluating the bids.

Petroleum, Petroleum Products and Natural Gas

India’s oil refining capacity would rise by 60 per cent to about 240 million tonne by the end of the 11th Plan period (2012); as per the petroleum ministry, given the projects under implementation and those at various stages of approval, the refinery capacity in India is expected to go up to about 240 million tonne per annum during the 11th Plan, which implies an additional capacity of 91 mmtpa during the Plan period from the current oil refining capacity of 148.97mmtpa. Reliance Petroleum’s 29 million tonne refinery at Jamnagar along with Indian Oil Corp’s 15 million tonne Paradip refinery in Orissa, Hindustan Petroleum’s 9 million tonne Bhatinda refinery in Punjab and Bharat Petroleum’s 6 million tonne Bina refinery in Punjab are likely to be commissioned in the 11th Plan. Essar also plans to raise its Vadinar refinery capacity to 16 mmtpa. Besides, IOC plans to raise its Panipat refinery capacity to 15 mmtpa from current 12 and expand the Haldia refinery by 1.5 million tonne to 7.5 million tonne. HPCL is expanding the Mumbai and Vizag refineries to 7.9 and 8.33 million tonne from current 5.5 and 7.5 million tonne, respectively and BPCL expanding its Kochi refinery by 2 million tonne to 9.5 million tonne. The petroleum minister adds that with the surplus gradually increasing with the projected refinery expansions, it the need for exporting the surplus for higher foreign exchange earnings.

Railways

The estimated cost of constructing the railways’ dedicated freight corridor has jumped by a dramatic 60 per cent from the original projection; as per an interim draft report by RITES, an Indian Railways undertaking, the construction cost of the east and west corridors has gone up a whopping Rs 13,000 crore to Rs 35,000 crore, from the earlier estimate of Rs 22,000 crore. The report estimated the eastern corridor to cost around Rs 15,200 crore and the western corridor Rs 19,500 crore. As per sources, the main reasons for the escalation include larger land requirements and new technology; about 500 km of the corridors will be built on a completely new alignment, for which the railways would have to acquire land. According to the draft report, the eastern corridor would cover 1,280 km, of which 280 km would be on a new alignment and, similarly, the western corridor will cover 1,483 km, of which 276 km will be diverted.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) rose by 5.32 percent for the week ended December 09,2006 as compared to 5.16 per cent in the last week or at a lower rate of 4.39 per cent during the corresponding week last year.

During the week under review, the WPI declined to 207.7 from 207.8 in the previous weeks’ level (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), rose by 0.1 percent to 212.1 from its previous week’s level of 211.9, mainly due to rise  in prices of ‘food article like fruits and vegetables , Jowar but the effect of this increase is some what moderated by the fall in prices of gram,urad, moong, arhar.   The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) remained unchanged at 322.6. The index of ‘manufactured products’ group declined by 0.2 per cent to 180.5 from 180.8 during the week under review. The fall  in prices of food products like rice bran oil, oil cakes, gingerly oil, and ghee brought down the prices of manufactured products in spite of the rise in prices sunflower oil, gur, coconut oil and ground nut oil, .rectified spirit vitamins and phenols.

The latest final index of WPI for the week ended October 14,2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 208.6 and 5.46 per cent as against their provisional levels of 208.2 and 5.26 per cent, respectively.

Banking

With the RBI rationalizing its guidelines, resident individuals now have the freedom to invest in any listed foreign company. Individuals no longer face the restriction of investing only in a listed foreign company that has at least a 10 per cent stake in a listed Indian company. The requirement of 10 per cent reciprocal shareholding in listed Indian companies by overseas companies has been dispended  as per the recent circular by the RBI to banks, accepting the recommendation of the S S Tarapore Committee on fuller capital account convertibility. The individual investments will form a part of the overall remittance limit of $50,000 per financial year for both current and capital account transactions, being raised from $25,000 per calendar year. Remittances by resident individuals towards gifts and donations have now been included in $50,000 limit. Individuals will have to make a declaration for all remittances made and also be required to disclose the source of funds. Foreign financial products, including mutual funds, can now be marketed in India by Indian as well as foreign banks, including those not having an operational presence in India, with the prior approval of the RBI.

The RBI has announced a package of relief measures for the debt-stressed farmers of 25 districts in Kerala, Karnataka and Andhra Pradesh. According to a press release issued by the Spices Board, the districts covered under the package are Wynad, Palakkad and Kasargode, which are mainly pepper, vanilla and cardamom growing areas in Kerala, Belgaum, Hasan, Chikmaglur, Kodagu, Shimoga and Chitradurga districts in Karnataka and Guntur, Nellore, Prakasam, Kurnool, Chittoor, Kadapa, Anantapur, Adilabad, Karimnagar, Khammam, Mahaboobnagar, Medak, Nalgonda, Nizamabad, Rangareddy and Warangal districts in Andhra Pradesh.  Board chairman has advised the farmers in these districts to contact scheduled commercial banks for mitigating their debt problems.  The package offers waiver of interest on overdue loans as on July 21, 2006, and re-scheduling of outstanding loans for a period of 3-5 years with one year moratorium.

Public Finance

The government has expressed confidence in achieving its targets of fiscal and revenue deficit for the current fiscal year. It has also set the FRBM target for next fiscal year for fiscal deficit at 3.4% of the gross domestic product (GDP), while the fiscal deficit target for 2006-07 stands at 3.8% of the GDP. The revenue deficit target has been set at 2.1% of the GDP. Finance minister has admitted that the gap between the FRBM goals and achievement had widened in the first half this fiscal year. According to the midterm review submitted by the government, this was mainly due to acceleration in non-plan expenditure during the second quarter. Finance minister stressed that the government is confident that this mismatch will even out in the second half of the year, proceeding more or less on budgetary lines. The review maintained that budgetary targets for fiscal deficit could be achieved through careful expenditure management and achievement of the budgeted tax collection targets. The report has suggested that the government should phase out old and irrelevant schemes and rework the system of subsidies to limit expenditure. On the revenue side, the report also suggested that, the government should try to reduce tax exemptions and concessions.

Financial Markets

  Capital Markets

Primary Market

L.T. Overseas settled at a slight discount, at Rs 55, compared to its IPO price of Rs 56 per share on 18 December 2006. The stock listed on BSE at 7.14 per cent premium, at Rs 60, and hit an intra-day high of Rs 62.90. The intra-day low was Rs 51.

On 20 December 2006, Sobha Developers settled at premium at Rs 968.75 on BSE, compared to its IPO price of Rs 640 per share. The scrip debuted at Rs 1,111.25 on BSE and hit a high of Rs 1,179. Its low was Rs 918.10. Sobha Developers’ IPO was subscribed over 100 times.

Ruchira Papers finished at a discount, at Rs 20.95 on BSE, compared to the IPO price of Rs 23 per share on 20 December. The stock listed on BSE at 5.86 per cent premium, at Rs 24.35 per share, which was also its intra-day high. The stock dipped to a low of Rs 20.65.

Secondary Market

The market continued its journey downward, posting losses for the third straight week. The barometer index lost 142.78 points (1.05 per cent) for the week ended Friday (22 December) at 13,471.74. The S&P CNX Nifty slipped 17.50 points (0.5 per cent), to 3,871.15. The 30-shares BSE Sensex gained 116.57 points, to 13,731.09, on 18 December, on strong buying in index pivotals, especially for index heavyweight Reliance Industries (RIL). The BSE Sensex plunged 349.08-point on 19 December 2006, to 13,382.01, amid high volatility following a sell-off across Asian emerging markets, sparked by a 10 per cent penalty imposed on foreign funds moving out Thailand within a year, by its central bank. The Sensex lost 41.80 points to 13,340.21 on 20 December following a mixed trend in index pivotals. The BSE Sensex settled with a gain of 44.65 points, at 13,384.86, as buying resumed. On 22 December 2006, the BSE index gained 86.88 points, to 13,471.74, as buying picked up in the fag end of the trading session.

Thailand ’s SET index witnessed a decline of 7.6 per cent – its biggest weekly slide since September 2001 as the country’s central bank had imposed a 10 per cent short-term withholding tax. As a result, most of the Asian markets fell. However, Morgan Stanley Asia Pacific index moved up by 0.4 per cent to 138.39 and Japan ’s Nikkei gained 1.1 per cent. 

On 21 December, Great Offshore settled at Rs 727.05. Great Offshore came into existence following a restructuring of GE Shipping, whereby the shipping firms’ offshore services business was transferred to a separate company.

Jindal Drilling & Industries settled at Rs 580 on BSE, on 22 December. Jindal Drilling’s restructuring scheme involved the amalgamation of two group companies Newsco Newtech and Discovery Hydrocarbons with the company. It also involved demerger of Jindal Drilling’s Casinvest division into Haryana Engineering.

RBI has decided, in consultation with Government of India, to allow foreign investment in Infrastructure Companies in Securities Markets, namely stock exchanges, depositories and clearing corporations, in compliance with SEBI Regulations and subject to the following conditions :

Foreign investment upto 49 per cent will be allowed in these companies with a separate Foreign Direct Investment (FDI) cap of 26 per cent and Foreign Institutional Investment (FII) cap of 23 per cent;

FDI will be allowed with specific prior approval of FIPB; and

FII will be allowed only through purchases in the secondary market.

Derivatives 

Nifty futures were traded at discounts to spot throughout the week. There was huge built-up of short positions in nifty futures , as open interest surged by 42.3 lakh shares, with the total open interest touching 3.57 crore shares.

FIIs chose to sell the index futures with net sales of 11304 index futures valued at Rs 434 crore. However, they covered their short positions in index futures with net buys of 5028 index options worth Rs 200 crore. They were net buyers of 7,234 stock futures contracts. 

Government Securities Market

Primary Market

Under the weekly T-Bill auctions, the RBI mopped up Rs.1256.61 crore and Rs.2250 crore through 91-day T-Bill and 364-day T-Bill. From this, the RBI raised Rs.256.61 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 7.1027 per cent and 7.2354 per cent respectively. The cut-off yield in 91-day T-Bill auction remained steady at 7.1027 per cent. The cut-off yield in 364-day T-Bill auction moved higher to 7.2354 per cent as against the previous cut-off yield of 6.9366 per cent.

Secondary Market

Call rates during the period ranged between 7.94 per cent and 8.61 per cent, while repo rates ranged between 6.10 per cent and 7.65 per cent and the CBLO rates ranged between 7.94 per cent and 8.13 per cent. The daily average outstanding amounts in the LAF (reverse repo) operations conducted during the period were Rs.664 crore vis-à-vis Rs.16,374 crore and Rs.13,931 crore for CBLO and Call market respectively. During the week, the RBI received daily average subscription of Rs.12,515 crore for LAF (repo) operations.

The overnight call money rate rose to a six-year high as banks struggled to cover cash requirements ahead of the first phase of increase in the cash reserve ratio, prompting the Reserve Bank of India (RBI) to mull opening a temporary refinance window for banks.  Call rate, the rate at which banks borrow money for a day, closed at 9.25 per cent, the highest since January 2001.  The RBI had last week announced a 50-basis-point increase in the cash reserve ratio (CRR) to 5.5 per cent, in equal phases of 25 basis points effective December 23 and January 6. 

The Mid-Year Review 2006-07 presented by the Finance Minister in the Parliament said that the high economic growth coupled with creeping inflation in manufactured products during the year has generated concerns about overheating of the economy. “The issue of overheating relates to the fundamental question of whether the country is growing beyond its growth potential thereby straining its labour force and capital stock and hence engendering inflationary instabilities”, the report stated. The review highlighted that though it seems unlikely that the current deficit was a cause of alarm, there was need for continuous caution in maintaining macro-economic stability to support the pick up in investment and growth on an enduring basis.

The weighted average YTM of G.S 2016 7.59 per cent bond was 7.5960 per cent on December 22, 2006 as compared to 7.6826 per cent on December 15, 2006. The 1-10 year YTM spreads decreased by 2 bps to 39bps.

The Reserve Bank of India (RBI) Deputy Governor Rakesh Mohan today said the cash tightness in the banking system was temporary. “Because of December tax outflows and impact of the increased cash reserve ratio (CRR), there is temporary tightness in liquidity,” he said. 

Bond Market

Indusind Bank tapped the market to mobilise Rs 165 crore (Rs 65 crore as greenshoe option).

Foreign Exchange Market

With a view to simplifying the procedures and providing greater flexibility in foreign exchange transactions, the RBI has enhanced the limit of USD25,000 per calendar year to USD50,000 per financial year (April-March) for any current or capital account transactions or a combination of both. For remittances towards gift and donation by a resident individual, the limit has been raised to USD50,000. Investment by resident individual in overseas companies would be subsumed under the Liberalised Remittance Scheme of USD50,000. The requirement of 10 per cent reciprocal shareholding in the listed Indian companies by such overseas companies has been dispensed with.

The six-month forward premia closed at 3.69 per cent (annualized) on Dec 22, 2006 vis-à-vis 2.94 per cent on Dec 15, 2006.

Commodities Futures derivatives

With the excessive speculation on guar seeds on the online exchange continuing unabated, the guar gum industry in Gujarat was on the verge of closure, said the Gujarat Guar Gum Manufacturers’ Association. Of the total 22 guar gum manufacturing mills in the state, 19 had already closed down, it said.  The association said if the kind of intense speculation on guar seeds seen currently – which was driving up the prices to soaring levels – continued and was not brought under scanner, the owners of the surviving mills would be left with only one option: to wind up their operations.  Commodity future exchanges provide exporters with an opportunity for hedging, but that should not result in excessive speculation. Although the Forward Markets Commission (FMC) has already put many restrictions on guar seed trade, exporters are perturbed by the continuing inordinate speculation.  The manufacturers’ body on Sunday demanded further regulatory control on guar seed speculation, on the silver jubilee celebration of Ahmedabad Commodity Exchange. It urged the FMC to reduce circuit filter for guar seed futures to 1 per cent and put more restriction on open interest position. Mahendra Bhanushali, president of the association, in his speech, accused the National Commodity and Derivatives Exchange (Ncdex) of allowing intense speculation on its floor. He said, “The guar gum industry is about to close down.”  The association stressed the high-scale speculation made real hedging difficult, and pushed up the prices beyond reach. While talking to mediapersons, Bhanushali said, “Only two countries produce guar gum – India and Pakistan . Around 90-95 per cent of the total produce is exported. The rate has been fixed at $1 a kg, but the raw material cost is so high that we can’t afford to sell at that price. Also, prices get doubled with the production expenses such as workforce, power and others.”  This, he said, was resulting in Pakistan , which could afford to export guar gum at $1 a kg, getting a major share of exports. And if the majority of earnings went into buying the raw material, “how can the industry survive?” Bhanushali said.  He further said, “The total size of guar seeds in the country is very small, which can be easily bought by hedgers of commodity exchanges. They earn around 12 per cent interest on that and we are left with nothing. At this rate, the time is not far before we sell off the surviving mills. We have realised that the real money is in hedging and not in manufacturing.” In his speech on the occasion, FMC Chairman S Sunderashan said, “I accept that over a year there was a substantial rise of 20 per cent in the guar seed prices. But we are closely monitoring them and also the trading on guar seeds. The prices have remained stable for the last two-and-a-half months,” he said. 

Insurance

The Insurance Regulatory and Development Authority (Irda) wants to ensure general insurers don’t engage in a free-for-all when controls on premiums on insurance covers for motor, fire and engineering are lifted from January 1, 2007. To prevent general insurance from engaging in cut-throat competition, Irda has asked general insurers not to lower insurance premium by more than 10 per cent on motor own damage covers and upto 20 per cent on fire and engineering. General insurers would be free to price their covers within these floors till they get approvals for their revised products filed with the Irda.

Life Insurance Corporation of India (LIC) has announced a bonus of Rs 11,784.58 crore to its policyholders for the year 2005-06. The bonus payable to its policyholders is pursuant to the actuarial valuation as on March 31, 2006. A surplus of Rs 12,404.82 crore has emerged as a result of valuation out of which 95 per cent, that is Rs 11,784.58 crore is distributed as bonus to the policy holders of with profit policies, which were in force as on March 31, 2006. Five per cent of the surplus, i.e. Rs 620.24 crore, is the share of the Union government.

Corporate Sector

The value of merger and acquisition (M&A) activity in India rose to $9.5 billion this year from $5.37 billion in 2005, nearly doubling its share in the global M&A deals to 1.30 per cent from 0.72 per cent. Globally, 2,932 M&A deals worth $732.32 billion were struck in 2006, compared with 3,000 deals worth $736 billion last year. Of the 113 deals involving India , Indian companies accounted for 53 overseas buyouts valued at $3.91 billion, while overseas companies struck 60 deals worth $5.69 billion. Data sourced from Bloomberg show that nearly 50 per cent of cross-border deals valued at $710 billion have not yet been completed.  Deals worth $731.32 billion have been completed, of which 247, valued at $136.20 billion, were for listed entities, and the remaining 2,685 deals, valued at $595.12 billion, were struck by undisclosed and unlisted sellers.  As many as 1,458 deals valued at 273.43 billion were struck with mutual understanding, while only 11, valued at $94.46 billion, were hostile takeovers. Great Britain was the most preferred destination for bidders, with deals valued at $110.6 billion materialising there. The other preferred destinations were the United States ($94.81 billion), Canada (49.68 billion), Luxembourg ($39.20 billion), and France ($23.51 billion). India was the 18th most preferred destination. Among buyers, the United States topped the list with deals worth $104.49 billion, followed by Great Britain ($65.28 billion), France ($57.68 billion), New Zealand ($47.22 billion) and Japan ($41.18 billion). India was 26th on this list.

*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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