Current Economic Statistics and Review For the Week 
Ended February 3, 2007 (5^th Weekly Report of 2007)

Theme of the week:

New Growth Profile based on Buoyant Savings and Investment Levels 

Brief Review: Overall GDP Performance

The year 2005-06 marks the third consecutive year of remarkable growth in the Indian economy; the country’s GDP has accelerated by 9 per cent for the year as per the quick estimates of national accounts statistics (NAS) released by the Central Statistical Organisation (CSO). This is much higher than the earlier revised estimate of 8.4 per cent and even higher than the 7.5 per cent growth registered in 2004-05 (Table 1). The current year seems positively poised to take this momentum even further with the advanced estimates for 2006-07 expecting a growth of 9.2 per cent for the current year.

In 2005-06, the industrial and services sectors have only about maintained their growth momentum achieved in the preceding year. Despite, being buoyed by robust accelerations in the manufacturing and construction sub-sectors, overall industrial sector growth has been restrained at 9.6 per cent, marginally lower than 9.8 per cent in 2004-05 due to poor progress in the electricity, gas and water supply as well as the mining and quarrying sub-sectors. The sluggishness in the latter has been a result of a fall in crude oil output during the year, following a destructive fire accident in July 2005 at the Mumbai High oilfields where the production has been gradually restored only after May 2006.. Concomitantly, the services sector has witnessed yet another year of upbeat growth, with the GDP originating in the sector touching Rs 1,409,357 crore, 9.8 per cent higher than the previous year. The key contributors to this growth have been: rapid expansion in communications segment, and remarkable performance of financial services (comprising banking, insurance and real estate services) given the progressive maturity of the Indian financial markets and substantive commercial bank credit flows to the housing, real estate and retail sectors.

Interestingly, and somewhat surprisingly, the impetus to the sharp escalation in overall GDP growth has emanated in agriculture sector which has spiralled upwards by a strong 6 per cent as compared to almost nil growth at the end of 2004-05 (Table 1).  This phenomenon has its basis, partly in the significant progress of the fishing category, and, more importantly, in the improved performance of the farm sector (a growth of 6.3 per cent in 2005-06 as compared to a fall of 0.2 per cent in 2004-05). The agricultural sector, receiving a major boost by a change in the rainfall pattern from an erratic to a near-normal distribution, has undergone a revival as reflected in the increased output figures, mainly that of commercial crops (each of them have posted double-digit growth) (Table 2). The production of foodgrains has risen by a substantial 5.2 per cent to 208.6 million tonnes in 2005-06 from 198.4 million tonnes of 2004-05 when it registered an absolute fall of 7 per cent; notably, rice output has surged by a good 10.4 per cent to 91.8 million tonnes during the same period. Among the non-food grain crops, sugarcane has posted the highest growth in output (18.6 per cent to 281 million tonnes), followed by cotton (12.6 per cent to 185 million bales) and oilseeds (14.9 per cent to around 28 million tonnes).

The Theme: Soaring Savings and Investment Levels

Much more than the estimated 9 per cent growth in real GDP during 2005-06 producing an average growth of 8.33 per cent for the past three years which is indeed commendable, it is the quantum leap in the country’s domestic saving and capital formation rates that are noteworthy in the CSO’s latest release of quick estimates of national accounts statistics (NAS) for the year. Almost for a decade up to 2001-02, saving and investment rates had slipped from the peak attained in the mid-1990’s and stagnated, as per the old series, at around 24 per cent and 26 per cent of GDP at market prices, respectively. Even after the national accounts series were revised which gave a statistical boost to the levels of savings and investment, the saving rate fell from 24.8 per cent in 1999-2000 to 23.5 per cent in 2001-02 and the investment rate dropped rather sharply from 25.9 per cent to 22.9 per cent during the period.

But, after 2001-02, there has occurred a sea-change in the saving and investment scenario. The domestic saving rate has jumped from 23.5 per cent in 2001-02 to 32.4 per cent in 2005-06 and likewise, the investment rate from 22.9 per cent to 33.8 per cent (Table 3). And now, probably based on advance information, the chairman of the Prime Minister’s Economic Advisory Council, Dr. C. Rangarajan, has projected a further sharp rise in the saving rate to 35 per cent during 2006-07 accompanied by a repeat 9 per cent national income growth. Considering that the current account deficit, the counterpart of net capital inflows, would in all probability rise from 1.4 per cent in 2005-06 to 2.0 per cent of GDP, the investment rate in the current year is very likely to be of the order of 37 per cent.

For any inquisitive observer of India ’s macroeconomy, the above are mind-boggling numbers. The domestic saving and investment rates have thus galloped by 12 to 13 percentage points each within a period of five years – an average of 2.5 percentage points every year, a remarkable record in India’s post-independence history. This radical upward push to the saving-investment scenario, going closer to the south-east Asian experiences, has been the result of two factors: statistical revisions in the data base as per the 1999-2000 revision of NAS; and genuine improvements in sectoral saving and investment rates. Interestingly, the effects of the two factors have tended to reinforce the rise in saving-investment rates, for revisions have been effected precisely in those areas where substantial increases have taken place in recent years.

In respect of the public sector, for instance, apart from head office expenditures of government departments on machines, equipments, furnitures, etc. being treated as capital expenditures instead of consumption expenditures, some parts of the outlays on special government programmes like sarva shikshana abhiyan (SSA), district primary education programmes and mid-day meal schemes, are being treated as capital expenditures. Likewise, in respect of the private corporate sector investment, apart from the inclusion of expenditure on software, etc., investments made by new companies or companies under construction, which were not covered in the previous series, have now been covered. All of these are precisely the ones that seem to have experienced substantial increases in recent years.

Apart from data revisions, there have been genuine improvements in the contributions of public and private corporate sectors to the higher saving-investment scene. Public sector savings have arisen following significant reductions in the dissavings of the government administration as mirrored in reducing revenue deficits of the central and state governments. The central government’s revenue deficit has halved from 7 per cent of GDP in 2001-02 to 3.7 per cent in 2004-05 and there are indications that it would further fall to 3.1 per cent in 2005-06 and is budgeted at 2.1 per cent for 2006-07. Almost all state governments have reported reductions in their revenue deficit ratios; the combined revenue deficits of states (as compiled by the RBI) have declined from 1.2 per cent in 2004-05 to 0.5 per cent of GDP each in the two succeeding years.

The buoyancy shown in the profitability of the corporate sector is reflected in more than doubling of the corporate savings rate from 3.7 per cent during 2001-02 to 8.1 per cent during 2005-06 (Table 3). More significantly, the level of corporate investment, which had always remained below that of public sector investment, has considerably overshot the latter (Table 4). The private corporate sector investment has also more than doubled from 5.4 per cent in 2001-02 to 12.9 per cent of GDP in 2005-06, whereas the public sector investment has just edged up from 6.9 per cent to 7.4 per cent of GDP despite upward revisions indicated above; this suggests the extent to which the customary investment programmes of the government have taken a back seat despite so much of hype on infrastructure development.

A closer look at the pattern of capital formation across major sectors of the economy reveals a continuation of robust investment activity in the service sector industries with the gross capital formation in the sector during 2005-06 at Rs 429,798 crore or 12 per cent of GDP  (Table 5), in consonance with the sector’s increasing share in national income from below 50 per cent in 1999-2000 to nearly 55 per cent by the year 2005-06. Commendably, capital formation in the manufacturing sector, which had been trapped at levels below 5 per cent of GDP during the recessionary period, has been gradually inching up since 2002-03 and has crossed even the services sector share to touch 13.6 per cent of GDP in 2005-06, a full 2 percentage points higher than the ratio of 11.6 per cent a year ago. Further, the data reflect the insistent rhetoric of poor capital formation in the agricultural sector; the sector’s gross capital formation as a percentage of GDP has stagnated at below 3 per cent over the years; during 2005-06 it Rs 83,952 crore or 2.4 per cent of GDP.

The higher saving and investment rates have a number of implications, both from what could be called their sources and uses sides. On the sources of the rise in savings, household savings have gone up because of the substantial shift in incomes in favour of the middle and richer classes of society. Data on income-tax revenue statistics reveal the phenomenal increases in the number of assessees in income brackets drawing incomes of Rs 1 crore and above per year; growing inequality has become a blatant issue with the economic and social reality today. Incidentally, this is one of the reasons for tax revenue buoyancy seen in recent years. That apart; as for the corporate sector, it has derived significant benefits from reduced incidence of the burdens of corporate taxation and interest cost, which are obviously at the cost of the public exchequer. Despite this, the revenue deficits of the central and state governments are getting reduced due to restrained budgetary allocations for a number of social and infrastructure programmes so as to achieve the goals of Fiscal Responsibility and Budget Management (FRBM) Act 2003.

Some Caveats

The above does not mean that everything is hunky-dory with either the macroeconomic scene or with the data base on NAS. With substantially higher levels of investment each year, the implied incremental capital-output ratio (ICOR) would be much higher than what has been presumed so far. This has cut at the root of a tall claim made in the latest Approach Paper on the 11^th Five Year Plan (Planning Commission, June 2006), that India’s investment rates at much lower than those reported in China imply “that we are in a position to achieve comparable rates of growth with a lower ICOR” (p.10). As for the quality of NAS estimates, there are serious questions on series of improvements suggested by the National Statistical Commission (Chairman: C Rangarajan 2001) which largely remain to be implemented by various government departments. Corporate sector statistics as well as industrial output statistics, for instance, are known to be in a shambles.

(* This note has been prepared by Pallavi Oak and Nilopa Shah, drawing extensively from a forthcoming editorial in the Economic and Political Weekly by Dr. S.L. Shetty.)

Reference:

GoI (2006): Press Note: Quick Estimates of National Income, Consumption Expenditure,

Saving and Capital Formation, 2005-06, Central Statistical Organisation

Highlights of  Current Economic Scene

AGRICULTURE  

The central government has banned milk powder exports, which covers skimmed, whole and all other types of milk powder excluding casein, till September 30, 2007. The decision has been taken in the backdrop of high global prices, triggered by drought in Australia and lower-than-projected milk volumes in New Zealand, coupled with phased reduction of subsidies by the European Union, which have made exports attractive thereby creating short supply in the domestic market flowed by the price hike of the same. At the same time, imports have become expensive, which has forced the government to resort to banning the export of milk powder till end of September 2007.

As per the estimates of central organisation for oil industry and trade (COOIT), the rabi oilseeds production is likely to decline by 11.3 lakh tonnes to 91.4 lakh tonnes, mainly due to fall in coverage of the crop by over 10 lakh hectares. With kharif oilseed production also being lower, the total output this season is now projected nearly 20 lakh tonnes lower at 219.8 lakh tonnes. For the kharif season, the production has been estimated at 128.4 lakh tonnes against 137 lakh tonnes last year. Consequently, edible oilseeds and oil prices have witnessed sharp rise in the domestic market. In view of the lower production, imports are expected to surge by over 60 lakh tonnes for both edible and non-edible purpose from 52.8 lakh tonnes last season (November 2005-October 2006).

A task force on plantation industry has recommended a mix of subsidy-based insurance scheme at a cost of Rs 720 crore to the exchequer and a market-based scheme to co-exist over a period of five-years. It has enlarged the insurance cover scheme from tea, coffee and rubber to include chilli, ginger, turmeric, pepper and cardamom. The Rs 720-crore insurance cover to small growers would consist of the task force projection of Rs 679.55 crore over the Eleventh Plan as government's financial support for the scheme — split into Rs 64.18 crore, Rs 99.99 crore, Rs 128.51 crore, Rs 177.72 crore and Rs 226.93 crore over the different years. An annual interest accretion of Rs 40 crore would be made available under the PSFS.

The Spices Board has plans to set up a quality evaluation laboratory of international standard at Guntur in Andhra Pradesh to monitor the quality requirements for chillies in that state, which contributes 60 per cent of the country's total production. The laboratory would be manned by qualified scientists and equipped with modern scientific gadgets to take care of the quality parameters required for export of chillies to different international markets.

In order to increase the availability of urea, the cabinet committee on economic affairs (CCEA) has approved the New Pricing Scheme (NPS) phase-III to encourage urea production from the indigenous urea units beyond 100 per cent of their installed capacity by introducing a system of incentives for additional production subject to merit order procurement. Under the new system, the companies would not be required to seek permission for additional production and would also be permitted to retain part of the additional profit generated from additional output. A timeframe of three years has been provided for conversion of all non-gas based urea units to gas-based units. The new policy also encourages setting up of joint venture projects abroad where gas is readily available at reasonable prices. It has also been decided that the Department of Fertilisers would operate a buffer stock through the state institutional agencies and fertiliser companies in major consuming states up to a limit of 5 per cent of their seasonal requirement, to meet unexpected spurt in demands or local shortages.

The sugar mills in Maharashtra have cumulatively crushed 400 lakh tonnes of cane and produced 44 lakh tonnes of sugar at an average 11 per cent recovery as compared to crushed 285 lakh tonnes and produced 31.5 lakh tonnes at 11.05 per cent recovery a year ago. The recovery has been slightly lower as the crushing operations have been delayed due to extended monsoon and lack of sunshine during September 2007. However, with the peak recovery will continue till end-February 2007, the mills are likely to produce over 70 lakh tonnes of sugar during the sugar season (October-September) 2006-07.

Total exports of spices, registering a marginal rise in terms of volume and around 31 per cent increase in terms of value, as on December 31, 2006, have stood at 2,50,528 tonnes valued at Rs 2,335.24 crore against 2,50,431 tonnes worth Rs 1,781.81crore in the same period a year ago. Tight supply position in the world market of certain spices coupled with increase in unit value has pushed up the export earnings so far during the fiscal year 2006-07. Apart from the exports of value added products such as curry powder/paste, mint products and spice oils and oleoresins contributing over 43 per cent of the total foreign exchange earnings, export of pepper had also gone up to 20,000 tonnes valued at Rs 203.53 crore as against 12,091 tonnes worth Rs 101.98 crore in April-December 2005. The world tight supply position and the competitive price India could offer because of the availability of export subsidy from the government have been the important factors contributed to the increase in pepper exports.

The central government has cleared Rs 22,000 crore fertiliser subsidies of the companies and would pay the remaining amount of Rs 12,000 crore by March this year. Paswan said the Department of Fertiliser was pursuing release of Rs 6,000 crore fertiliser subsidy arrears from the Finance Ministry.

The world’s top three cashew producers India, Vietnam and Brazil, have come together to form a global alliance for promotion of cashew production, consumption, standardisation of cashew kernel grades, research and development, and validation of quality. The proposed body would put in efforts towards increasing the global raw cashew nut production from the present 1.7 million tonnes per annum to 3 million tonnes by 2020. An effort would also be made to increase per capita consumption in India , and other markets.

Industry

Automobiles  

The automobile sector is set to see an increase in turnover to $ 145 billion by 2016 from the present $ 35 billion as per the minister of heavy industries. The Automotive Mission Plan (AMP) 2006-2016 report on the sector states that to make India a significant player in the global market, the sector needs an investment of around $ 40 billion to help raise exports to a minimum of $ 35 billion from $ 4.1 billion at present. The report estimates that the contribution of the auto sector to the country's gross domestic product is expected to increase to more than 10 per cent by 2016, compared with 3-4 per cent at present. Also, the automotive sector should be able to provide an additional employment to 25 million people in the next nine years. The AMP has proposed a 25-point plan, including making India the manufacturing and export hub for small cars, multi-utility vehicles, two and three-wheelers, tractors and components. According to the Auto Policy the definition of a small car is 3,800 mm in length while the finance ministry in last year's Budget has granted excise benefits to "small cars" with a length 4,000 mm.

Textiles

The union minister of state for textiles while appreciating the strength of domestic textile sector and its growth pace has highlighted a need for scaling up capacity of textile machinery manufacturing sector, which is not in a position to meet the industry's machinery requirement, thereby causing huge backlogs in supplies. He has expressed hope that the scheme of integrated textile park (SITP) would be extended to the 11th Plan to enable creation of more textile parks over the next five-year period and so would the technology upgradation fund scheme (TUFS) for the textile sector so as to provide continued capacity building opportunity.

Consumer Electronics

The consumer electronics and appliances manufacturers association (CEAMA), a representative of the consumer durables industry of India, has asked the government to bring down the total level of taxes (inclusive of excise duty, octroi and VAT) to between 12-17 per cent, from the existing rate of more than 30 per cent, in order to make the industry globally competitive. The key industry demands are excise duty cut from 8 per cent to 4 per cent  and correction of inverted duty arising out of free trade agreements (FTAs) to ensure a level playing field for Indian durable manufacturers. For instance, there is nil customs duty on colour televisions imported from Thailand while inputs attract customs duty of 12.5 per cent. It also wants differential customs duty on raw materials to be scrapped; components should be 5 per cent, finished products at 10 per cent while excise duty on all consumer electronics products should be rationalised at 8 per cent from the existing 16 per cent. Moreover, the industry also wants the additional customs duty of 4 per cent for import of all zero duty items to continue till local and non-vatable taxes on value chain exist. However, central sales tax (CST) on electronic goods should be totally abolished rather than being phasing out from April by lowering it to 3 per cent.

Leather

The leather industry has presented a plan to the central government seeking its support for capacity expansion and infrastructure development for export growth, according to the Council for Leather Exports (CLE). The industry has asked the government to set up 15 small, integrated leather parks in various leather production centres, extend the `leather sector modernisation scheme' and develop two centres of excellence for design and development. Over the next three years, the industry has set itself a target of doubling exports to generate over a million jobs. The exports in 2006-07 are expected to cross $ 3 billion against $ 2.6 billion last year. As per teh CLE director, India had emerged as a `common ground' between the East and West. While cost increases have resulted in companies in Italy , Spain , Portugal and Germany looking elsewhere for investments, labour costs in the traditional investment destinations such as China and Vietnam are also increasing and, hence, India is the next main opportunity. An indication of India 's emergence in the global leather markets is the increased participation in the India International Leather Fair where there are over 64 overseas buyers, 325 participants showcasing leather products and a third of them are overseas participants from 22 countries.

Infrastructure

Power

A 500-MW Prototype Fast Breeder Reactor (PFBR), now under construction nearby Kalpakkam, promises power at Rs 3.20 a unit in 2010, when it will commence generation. The next set of (two) FBRs planned to be put up at the complex will deliver electricity at Rs 2.50 a unit. A FBR breeds its own fuel; therefore, fuel costs are practically zero. Also, since India is planning to build a family of FBRs, the industry will be able to supply equipment at a lower cost. The construction work on the first two of the future FBRs will begin in 2011 and will be completed in 2017.

Petroleum, Petroleum Products and Natural Gas

The domestic oil product sales at 10.5 million tonnes (mt) in December 2006 have registered a moderate increase of 3.9 per cent compared to 10.1 mt in December 2005. According to official sources, during the month there has been a high growth for both motor spirit and high-speed diesel. Since dealers maintained lower inventories in November due to an anticipated price cut, it had a positive impact on sales as they uplifted more to bring inventories to normal levels as per an official. During the month under consideration, while diesel sales have risen by 6.9 per cent to 3.93 mt, petrol sales have gone up by 9.6 per cent to 8,03,600 tonnes. Besides, petrol and diesel sales also saw an increase due to the Supreme Court ruling banning the overloading of trucks, forcing more vehicles on to the roads. For the nine-month period (April-December) of the current financial year, the product sales have risen by 5.2 per cent to 88.2 mt, mainly due to the increase in demand for oil products from the industrial and agricultural sectors. The growth of 5.2 per cent has been far higher than the government expectation of 2.5 per cent annual growth for the financial year. On the import front, oil product imports have accelerated by 66.5 per cent to 1.54 mt while their exports have fallen by 7.3 per cent to 2.12 mt in December. The country has imported 9.1 mt of crude oil as compared with 8.8 mt in the same month a year earlier. For the April-December period, 13.1 mt of oil products have been imported, up by 21.6 per cent from the same period last year.

Coal

The capacity addition of 70,000 mw during the 11th Plan, entailing an investment of $ 50 billion, may face major hurdles mainly due to shortage of coal, demand for which is likely to go up 6-7 per cent annually. The coal ministry has made it clear that the gap between indigenous production and demand would be 51 million tonne and has added that the achievement of this target will only be possible if the capacity of captive blocks allotted to various allocatees is utilised to the optimum level and coal companies achieve their estimated target. This needs to be monitored by coal controller and ministry. The ministry has allotted captive coal blocks to the state-run NTPC, state utilities like MahaGenco and Gujarat Electricity Board (GEB), and independent power producers like Essar Power. While coal companies, led by Coal India Ltd (CIL), have been making efforts to increase production, there should also be concerted efforts on part of captive mine owners to develop mines fast. NTPC has projected that the coal production from its captive mine in Jharkhand would be possible by mid-2008 or early 2009. Similarly, MahaGenco and GEB, which have been allotted captive coal blocks in the Mahanadi region, Orissa, have indicated the production would begin only after 2009. CIL has planned an investment of Rs 15,600 crore in the 11th Plan to raise the output to 520 million tonne from 363 million tonne. Mahanadi Coalfields Limited is expected to achieve production of 152 million tonne. Interestingly, a Cirsil research also revealed that the deficit scenario in the next five years was expected to peak in 2009-10 before reducing on account of captive mines becoming operational. The deficit in coal (43.3 million tonne of coking coal and 42 million tonne of non-coking coal in 2011-12) will be met through imports. Hence, the research has suggested augmentation of the coal-handling capacity of major ports. Another option available to meet the shortage is infusion of funds by private players into coal mining.

Inflation

A result of inflation fighting measures taken up by the government in terms of increased imports of agricultural products like edible oil and foodgrains, the imports of sensitive commodities have gone up by 11.7 per cent in April-December 2006 at Rs 12,959 crore as compared with Rs 14,472 crore in the same period of 2005. The imports of edible oil have increased to Rs 7,558 crore in April-December 2006 as compared with Rs 6,753 crore in the corresponding period of 2005, mainly due to an increase in import of crude palm oil and its fractions in the first nine months (April-December) of 2006-07 by 44 per cent from the same period of the last fiscal year. Other sensitive items that have witnessed increased imports include products of small scale industries, rubber and marble and granite, alcoholic beverages and milk products.

Banking

The Union Cabinet has given its approval for the transfer of the Reserve Bank of India stake in the State Bank of India (SBI) to the government in June. The government will acquire 59.73% stake of RBI, which is estimated at Rs 40,000 crore based on the market price of Rs 1,300 share price. However, the Parliament needs to pass the SBI Amendment Bill in order to carry out the exercise.

Financial Markets

Capital Markets

Primary Market

Power Finance Corporation Ltd, tapped the market between January 31 and February 6 through issue of shares of Rs 10 each in a price band of Rs 73-85 per share.

Secondary Market

The RBI’s third quarter review of the Annual Monetary Policy was the highlight of the week. Anticipation of an interest rate hike and other credit policy measures influenced trading during the week on the stock exchanges. The market corrected on the first two trading days of the week, and then bounced back remarkably on the following two. Both the BSE sensex and the NSE nifty closed at their all-time high levels on Friday, 2 February 2007. The sensex gained 121.05 points (0.84 per cent), from the closing last week, to 14,403.77. The nifty closed Friday at 4,183.50, up 35.8 points (0.86 per cent) over the previous week’s closing. On Monday, 29 January 2007, the Sensex lost 70.76 points on account of selling in banking counters. Interest rate sensitive banking shares weakened in the latter part of trading due to concerns of a rate hike. IT shares were subdued-to-weak throughout the day. Index heavyweight Reliance Industries did offer some support to the Sensex by holding strong. The bourses enjoyed a holiday on Tuesday, 30 January 2007, on account of Moharrum. The market began Wednesday, 31 January 2007, in the correction mode. The fall was more severe on the day with a loss of 121.04 points on the Sensex. The hawkish stance taken by the Reserve Bank of India (RBI) at its monetary policy review meeting that day cast a shadow on trading. Tata Steel was a major loser on the day, crashing 10.65 per cent after clinching the Corus deal, at a valuation deemed expensive by the market. Metal stocks across the board lost the same day. The break through for the bulls came on Thursday, when the market soared on the back of RBI’s upgradation of 2006-07 GDP growth forecast to 8.5 - 9.0 per cent from 8 per cent on the previous day, and the US Federal Reserve’s stance of not raising interest rates in the absence of any serious pressure on the US economy.The Sensex closed Thursday with a gain of 176.26 points. Market experts consider that the gains in the derivatives segment were more so from short-covering than from a build-up of fresh long positions. There was no respite to the bull-run on Friday with the telecom and IT stocks putting on good gains, and the overall market joining in the party. In the opinion of some market men, the pre-budget rally has now triggered off. The Sensex gained 136.59 points over the previous day. Both the Sensex and the Nifty closed at their all-time high levels.

The BSE Mid-Cap index gained a relatively lower 29.22 points than the Sensex’s gains. The BSE Mid-Cap index ended the week at 6,088.98. The BSE Small-Cap index, however, ended in the red for the week. It ended at 7,576.13 on Friday, down marginally 15.41 points (0.20 per cent).

Tata Steel finally managed to clinch the Corus deal this week, albeit at valuations which appear pretty much on the higher side of analyst estimations. The deal at 608 pence per share values the company at seven times its forecasted EBITDA earnings. The market reacted to the development by hammering the stock. Tata Steel's Q3 FY-2007 numbers, in line with market expectations, did not provide any buffer to the fall in the share price. It posted a 41.1 per cent growth in net profit in the December 2006 quarter to Rs 1063.75 crore, on 21.4 per cent growth in net sales to Rs 4469.98 crore. The stock fell for the week by 9.09 per cent, to end at Rs 462.95 on Friday.

Benchmark Asset Management Company launched India 's first gold exchange traded fund, `Gold BeES.' The primary investment objective of Gold Benchmark Exchange Traded Scheme (Gold BeES) will be to provide returns that, before expenses, closely corresponding to the market price of gold. Gold BeES is an open-ended, Exchange listed scheme tracking domestic prices of gold through investments in physical gold. The new fund offer (NFO) starts on February 15 and closes on February 23. Each unit of Gold BeES will be approximately equal to the price of one gram of gold. During the NFO there will be an entry load ranging from 1.5 per cent to 0 per cent, while no load would be charged on an ongoing basis. However, the investor will have to pay the brokerage charges applicable on the trade.

International rating agency, Standard & Poor’s Ratings Services, today raised its ratings on six Indian banks and six government-owned entities to investment grade, following a similar revision in India ’s sovereign credit rating. The agency said that that it had raised its corporate credit ratings on Indian Oil Corporation (IOC), NTPC and National Hydroelectric Power Corporation (NHPC) to BBB- from BB+ with a stable outlook. Among domestic lenders, State Bank of India, ICICI Bank, Industrial Development Bank of India , Bank of India, Indian Overseas Bank and UTI Bank saw their ratings being upgraded to BBB- with a stable outlook. The rating agency also raised its long-term foreign and local currency issuer credit ratings on Export-Import Bank of India , Power Finance Corporation, and Indian Railway Finance Corporation to ‘BBB-’ from ‘BB+’. The outlook for all three ratings is stable. “The rating upgrade on IOC is driven largely by expectation of continued government support to the entity, given the prevailing policy on pricing of refined products and IOC’s prominent position and role in the energy sector in India ,” said Standard & Poor’s credit analyst Anshukant Taneja.

Mid-cap firms have done well in the December quarter in terms of net profit growth compared with the Sensex and the small-cap firms. The 164 firms, which are part of the BSE Mid-Cap Index, have posted an aggregate net growth of 92 per cent compared with 42.7 per cent rise reported by the Sensex firms and 81 per cent by small-cap firms. However, mid-cap firms underperformed the Sensex and the small-cap firms in terms of sales growth. Total sales income of mid-cap companies rose 23 per cent, while that of the Sensex and the small-cap firms rose 35 .5 per cent and 45 per cent, respectively.

Derivatives                                  

The introduction of 26 stock futures during December-end may have boosted volumes in some of their respective underlying (cash market) stocks in January, but has hardly contributed to the overall turnover of derivatives segment.

This has led to analysts questioning the logic about the introduction of several of these stocks in the F&O segment, especially the ones with thin liquidity in the cash segment. “Ever since their introduction, they have formed only about 2.5-3 per cent of the total turnover in the derivatives segment, which is dismal considering they form nearly 17-18 per cent of the stock futures (roughly 155),” said a derivatives analyst with a brokerage.

Out of the 26 stock futures introduced, 11 have seen an appreciation in stock prices. The top five gainers include Praj Industries (70 per cent), Sesa Goa (38 per cent), Tata Teleservices, Kotak Mahindra Bank and Aban Offshore-(18-19 per cent each). The other six have returned up to 8 per cent. Of these 26 stocks, average monthly trading volumes in the cash segment for 17 of them has jumped sharply in January. Volume in shares of Praj Industries has risen 660 per cent, Sesa Goa (271 per cent), Tata Teleservices, Kotak Mahindra Bank, Aban Offshore and GTL (140-190 per cent).

Analyst are unfazed about the surge in trading volumes. They point out the improvement in liquidity has been mainly restricted to those stocks where trading volumes were robust even before these were added to the F&O list. Though there is no denying that introduction of these stocks has widened the scope for investors, the feeling is that inclusion of some would not have made any difference, due to lack of liquidity. “It is difficult for a common investor to track the trend in all the stock futures,” said Alex Mathews, head of derivatives research, Geojit Financial Services.

The Nifty closed at 4183 in the spot market. The February future was held at 4174. The March Nifty was settled at 4176. The February CNX IT was settled at 5643.85 while the spot traded at 5655. The Bank Nifty was settled at 6111.45 while the spot Bank Nifty was held at 6075.

Government Securities Market

Primary Market  

The cut-off yields for the 91-day and 364-day T-Bill auctioned during the week were set at  7.5602 per cent and 7.6985 per cent respectively.

RBI conducted the auction of State Development Loans (SDLs), 2017 for Jammu & Kashmir for an aggregate amount of Rs.200 crore. The cut-off yield of security was 7.9500 per cent.

The Government of India have announced the sale (re-issue) of "7.37 per cent Government Stock 2014" and "8.33 per cent Government Stock 2036" for a notified amount of Rs.6000 crore and Rs.3,000 crore respectively through a price based auction using multiple price method on February 9, 2007.

Secondary Market

During the week, the weighted average call rates during the period ranged between 7.74 per cent and 7.87 per cent, while weighted average repo rates ranged between 6.88 per cent and 7.60 per cent and the weighted average CBLO rates ranged between 6.98 per cent and 7.48 per cent. The average volumes of Call, Repo and CBLO segments were Rs.12,266.75 crore, Rs.6,920.31 crore and Rs.15,050.34 crore respectively.

The daily average outstanding amounts in the LAF (reverse repo) and LAF (repo) operations conducted during the period were Rs.1408.33 crore and Rs.9993.33 crore respectively.

In order to guard the spiralling credit growth and inflation, the RBI has only hiked the repo rate and has left the reverse repo which is perceived to be the main indicator for interest rates unchanged. This has triggered a rally in the market. The market participants feel the rally will continue this week too, albeit in the second half. The government securities auction will be held on February 9 as per the schedule. This has dampened the market sentiment to a certain extent. However, market players feel that once the auction is over, the market will be ready for a rally since most of the uncertainties till the next monetary policy review are over. The market also has to start building up the gilts portfolio for the year-end valuation purpose.

RBI has permitted Scheduled Commercial Banks and Primary Dealers (PDs) to undertake short sale of Central Government dated securities, subject to the short position being covered within a maximum period of five trading days, including the day of trade. In respect of short sales, banks and PDs shall ensure adherence to the conditions such as: the sale leg as well as the cover leg of the transaction should be executed only on the Negotiated Dealing System-Order Matching platform; the sale leg as well as the cover leg of the transaction should be accounted in the HFT category; under no circumstances, should participants fail to deliver, on settlement date, the securities sold short; at no point of time should a bank/PD accumulate a short position (face value) in any security in the HFT category in excess of the following limits: 0.25 per cent of the total outstanding stock issued of each security in case of securities other than liquid securities and; 0.50 per cent of the total outstanding stock issued of each security in case of liquid securities; banks and PDs which undertake short sale transactions shall mark-to-market their entire HFT portfolio, including the short positions, on a daily basis and account for the resultant mark-to-market gains / losses as per the relevant guidelines for marking-to-market of the HFT portfolio; gilt Accounts Holders (GAHs), under CSGL facility, are not permitted to undertake short sales. Entities maintaining CSGL Accounts are required to ensure that no short-sale is undertaken by the GAHs.

The Finance Minister, Mr P. Chidambaram, has said that the Reserve Bank of India 's move to hike repo rate as well as its other measures in the Credit Policy review would not affect the Indian growth story. He further said, that the main purpose behind the repo rate hike is to send signal to the banking sector that they must moderate credit growth.

Bond Market

Some of the issuers who tap the market include the State Bank of India and Power Grid Corporation. According to market information, while SBI is likely to raise around Rs 2,000 crore, PowerGrid is yet to finalise the borrowing plan. Infrastructure Development and Finance Corporation (IDFC) is in the process of raising Rs 500 crore through a bilateral deal with the Life Insurance Corporation

Foreign Exchange Market

 In an attempt to curb the robust growth in the advances granted against non-resident (external) rupee account [NR(E)RA] and foreign currency non-resident (banks) [FCNR(B)] deposits the Reserve Bank of India (RBI) has decided to reduce the interest rate ceilings on these deposits. In the third quarter review of annual policy for the year 2007-07, RBI has announced a reduction in the interest rate ceilings on NR(E)RA and FCNR(B) deposits by 50 basis points and 25 basis points, respectively.

The spot rupee has appreciated from 44.31/32 to a high of 44.06/07 in the week under review. However, in a bid to stem the strengthening, the RBI has been continuously intervening to suck out dollars from and infuse the equivalent amount of rupees into the market.

After long 16 years, global rating agency Standard and Poor’s has raised India ’s sovereign credit rating to investment grade. This is likely to spur an inflow of foreign exchange from portfolio investors since the upgrade has added to the bullish sentiment in the domestic markets.

Commodities Futures derivatives

The Forward Markets Commission (FMC) has asked the Multi Commodity Exchange (MCX) to re-align its trading-software vendor empanelment policies. This is to ensure fair competition among the growing list of manufacturers eyeing the straight-through processing (STP) or computer-to-computer link (CTCL) software market created due to fast growth of on-line commodity as well as stock exchanges. Responding to FMC's order issued earlier this month, MCX has withdrawn clauses like payment of Rs 1 crore bank guarantee by aspiring vendors. MCX was previously insisting on bank guarantee in addition to the industry norm of securing Rs 10 lakh empanelment fee and annual fees ranging between Rs 2 lakh and 5 lakh. According to sources, the FMC order came in the wake of a complaint from Omnesys Technologies, a Mumbai-based software manufacturer. The latter had accused MCX of creating barriers for empanelment of new vendors.

The National Multi-Commodity Exchange of India (NMCE) is scouting for various options to activate illiquid commodities on its platform by setting up marketing and knowledge management bases in the heart of crop-growing areas. Out of the 61 listed commodities traded at the exchange, 51 are reportedly illiquid. Recently, the Forward Markets Commission (FMC) instructed all commodity exchanges to prune the list of illiquid commodities or activate them.

Forward Markets Commission (FMC) may soon take a final decision on illiquid commodities trade on comexes was asserted by Kewal Ram, member, FMC. The commodities market regulator used to permit such trades for a year, which was brought down to six months, with contracts running from January to June and July to December.

The regulator had observed in the past that contract designs and feasibility study by the exchanges needed to be looked at differently. Exchanges kept on launching some commodities or the other, irrespective of their availability or interest of traders and consumers, compelling the FMC to rethink on norms, experts said. Often, after a few days of the launch, these commodities either fail to attract traders completely or are traded in very small quantities, leaving the burden of price updates on the exchanges without generating any substantial returns. Also, the prices of these commodities move in tandem with their liquid partners or the movement in the spot market. Usually, if there is no trading on a daily basis, the prices of illiquid commodities take a direction depending upon the general market sentiment.

Corporate Sector

In what is widely rated as a landmark in India 's corporate history, Tatas finally won the crucial battle for Corus. The Tata group was seen assiduously competing with the Brazilian steel group Cia Siderurgica Nacional SA (CSN) for acquisition of the Anglo-Dutch steel maker Corus. Tata Steel has outbid CSN to acquire Anglo-Dutch steelmaker Corus Group Plc for $12.1 billion (Rs 54,450 crore) in the largest acquisition ever by an Indian company. The deal would make the new entity the world's fifth largest steelmaker.

The winner emerged after a nerve-wrecking marathon auction, in which Tatas increased their bid by 33.6 per cent, to winning bid of 608 pence a share, up from its initial offer of 455 pence made in October, to pip CSN's offer of 603 pence.

L&T, India ’s biggest engineering company’s third quarter profit rose by 33 per cent to Rs 344 crore after it has won more orders for infrastructure and energy projects.

Suzlon Energy has reported 28.8 per cent increase in its profit after tax at Rs 173 crore for the quarter ended December 31, 2006 as compared to Rs 134 crore for the corresponding quarter in the previous year. Recently the company has secured the first order from an international energy major in India , with global petroleum company British Petroleum (BP) investing in 32 number of Suzlon’s S70-1.25 MW turbines totaling 40 MW capacity. The project would be executed at the company’s Dhule windfarm in 2007. Other major orders have come from HP and Tata Power for 25 MW and 50 MW and two new orders from Portugal .

BPCL has posted a net profit of Rs 303 crore in the quarter ended December 31, 2006 as against a net loss of Rs 1131 crore in the corresponding quarter in the previous year.

Confectionary giant Britannia Industries net profit declined by Rs 19 crore (54 per cent) to Rs 16.4 crore in the third quarter of the current fiscal as compared to Rs 35.7 crore in the corresponding period of the last fiscal.

Mahindra and Mahindra (M&M) through its subsidiary Mahindra Forgings Global Ltd based in Mauritius has acquired around 90 per cent stake in German forgings company Schoneweiss & Co. GmbH, for an undisclosed amount. Schoneweiss is a family-owned German company with over 140 years of experience in the forging sector, and is one of the top five axle beam manufacturers in the world. The company specializes in suspension, power train and engine parts and has a forging capacity of 50,000 tpa and turnover of Euro 90 million in the calendar year 2005. Its top customers include the DaimlerChrysler Group, MAN, Scania and Volkswagen. The company has three manufacturing plants in Hagen and Gevelsberg with a total manpower of 550 people. This acquisition creates M&M a strong European base as it is fully harmonious with out existing presence in Germany through Jeco AG.

Riding on the performance of both the parent and group company, M&M Group’s net profit doubled to Rs 503 crore for the third quarter this year against Rs 262 crore in the same period last year.

Riding on demand boom and escalating cement prices, the net profit for ACC soared to 106 per cent to Rs 358 crore for the quarter ended December 31, 2006 as against Rs 174 crore for the corresponding quarter last year.

Information Technology

TCS has won a “multi-million-dollar” contract from Singapore healthcare group Parkway Holdings Ltd. As per the deal TCS will build a healthcare management system for Parkway, which runs three hospitals in Singapore .

Telecom

State-owned telecom major MTNL has reported about two fold increase in its net profit at Rs 224 crore for the quarter ended December 31, 2006 against Rs 118 crore in the same quarter last year.

*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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