Current Economic Statistics and Review For the Week 
Ended February 10, 2007 (6^th Weekly Report of 2007)

Theme of the week:

Trends and Patterns in Government Revenue *

In the area of Indian public finance, recently, much has been made of the achievement of the FRBM (Fiscal Responsibility and Budgetary Management) targets (as specified by the FRBM Rules, 2004 which require revenue and fiscal deficits as percentage of GDP to annually decline by half and one-fifth of a percentage point, respectively). In this context, fiscal prudence in the form of better expenditure management, including its pros and cons, has also been much highlighted. In this note we intend to focus attention on the revenue-side of government finances, which have displayed considerable buoyancy over the past few years and more so during the first nine months of the current fiscal year 2006-07.

The 1990s were a period of steep deterioration in the country’s of the tax-GDP ratio when tax revenues (combined tax revenues of the centre and states) as percentage of GDP dipped to as low as 13.4 per cent during 1998-99[1].  Such an alarming situation hurting the process of generating development finance could not be allowed to be entertained for long and the government initiated a series of measures to improve the tax-GDP ratio. The situation has begun to gradually improve in the current decade; the figure for 2005-06 has been placed at 16.8 per cent (revised estimates). The current year’s budget (2006-07) estimates the ratio at 17.4 per cent and given the data available on central tax collections during the first nine months (April-December 2006) coupled with optimistic news on state finances, the target does not seem out of reach. Here we take a closer look at the pattern of central government revenue flows, specifically revenue receipts, in terms of its growth, its composition and its buoyancy in relation to GDP against the backdrop of full year performances over the last five to seven years and make some observations regarding the root causes of certain developments in the area of government revenues.

Growth in Revenue Receipts

The revenue receipts of the central government have been inching ahead at robust rates since 2000-01, backed by high growth in the tax revenue stream while the behaviour of non-tax revenue collections remained rather erratic (Chart 1).

The higher tax revenues have been facilitated by substantial increases in direct tax collections given the overall economic buoyancy; specifically higher corporate profits have resulted in larger collections of corporate taxes (estimated at Rs 99,221 crore in the budget for 2006-07) as well as improving incomes of high-tax bracket individuals have led to higher income tax revenues (again, Rs 55,810 crore) (Table 1). In the current financial year, corporate taxes have registered an impressive rise of over 55 per cent while there has been a 27 per cent growth in personal income tax.

Increased Buoyancy in Tax Collections

As stated earlier, a low tax-GDP ratio characterised the fiscal scenario during the nineties when the gross tax revenue of the central government has reached as low as 8.2 per cent of GDP even as late as 2001-02, comprising 3 per cent of GDP in the form of direct taxes and 5.2 per cent in indirect tax collections (Table 2 and Chart 2). Since then gross tax revenues have recovered with the budget estimates for 2006-07 placing them at Rs 4,42,153 crore or the tax-GDP ratio at 10.8 per cent.

Notably, another aspect is the composition of tax collections wherein direct taxes which had constituted only about one fourth of total tax revenue in the mid-1990s, have begun to contribute a near-equal share with indirect taxes. This has resulted from the government’s concentrated attempts to reform the taxation system wherein direct taxation has been given a pivotal position; it has a significant distributional objective. On the other hand, reductions in dependence on indirect taxes have the implications of combating inflation and more significantly, on correcting the levels of protection, which in turn contributes to competitive efficiency.

Within direct taxes, it is the corporate tax collections that have risen more substantially as percentage to GDP (Chart 3).  During 2005-06, they have crossed the 2 per cent mark and are estimated at 2.2 per cent of GDP (revised estimates). Their budget estimates for the current year at Rs 99,221 crore or 2.4 per cent of GDP are sure to be met considering that the collections during April-December have been Rs 93,851 crore – a 55 per cent over that during the comparable period of 2005-06, given the expectations of an impressive performance of corporate profits for the year. The personal income taxes, too, have risen from being a mere 0.5 per cent of GDP in 1999-2000 to an estimated 1.4 per cent during 2006-07 (BE). A 27 per cent rise in the collection at nearly Rs 55,810 crore during April-December 2006 presages a further rise in the income-tax to GDP ratio during the year Backed by a vibrant capital market and the spiralling incomes of the executives class, this revenue head seems set to witness further buoyant growth.

Changing Share of Account Heads in Revenue

Given the erratic growth in non-tax revenue, their share in revenue receipts which was nearly equal to that of tax revenues around 2001-02 has been continuously falling in the recent years (Chart 4). The budget for 2006-07 estimates gross tax revenues of Rs 442,153 crore to contribute over 78 per cent to total receipts of Rs 563,991 crore.

Further, the composition of tax revenue too has undergone a sea change with the share of direct taxes like income and corporation tax rising significantly with associated decreases in the share of indirect taxes like excise and custom duties (Chart 5).

The April-December period over the last 3 years shows a steep rise in the share of corporate taxes in total tax revenue (21 per cent during April-December 2004-05 to 32.5 per cent in the same period of 2006-07). The reasons for this are two-fold: while, on one hand, the higher share is a result of the government’s special policy focus on direct tax collections, the other arises out of the country’s economic scenario of high growth in corporate profits and steep income increases for the richer classes, particularly in areas where tax evasion is minimal.

Some Reflections

Briefly, Indian public finances have seen noteworthy progress in revenue collections over the last few years. The government popularly claims this success to have arisen out of actions on the reforms front in the form of simplification and rationalisation of taxes, improvements in tax administration, slashing of tax rates and the resultant reductions in tax evasion, curbs on tax exemptions, introduction of the system of VAT (value added taxation), etc. Irrefutably, while these have impacted revenue flows positively; it seems to be starkly evident also that the buoyancy has resulted from factors outside the government’s direct field of intervention. High GDP growth has gone a long way to augment the revenue streams of the government; especially high growth in GDP originating in the services sector has pushed service tax collections on a higher growth trajectory. For another, financial markets, specifically the capital markets have seen an unprecedented boom and, also, incomes of the corporate executive class have sharply risen, both of which being areas with high barriers to tax evasion, which have led to robust increases in tax revenue. In some, inequality in the distribution of incomes – and unintended fall-out of reforms - has contributed to better tax collections.

(*This note has been prepared by Snehal Nagori and Nilopa Shah.)

References: 

§                     Controller General of Accounts (www.cga.nic.in)

§                     RBI (2003), Annual Report 2002-03

§                     RBI (2006): Handbook of Statistics 2005-06

§                     Various Media Articles

Highlights of  Current Economic Scene

AGRICULTURE  

As per the second advanced estimates (II AD) released by ministry of agriculture, total foodgrain production has been pruned at 209.17 million tonnes during 2006-07, marginally higher than the 208.59 million tonnes of last year. In spite of attaining a record sowing level of 282 lakh hectares so far in the rabi sowing season 2006-07, the farm ministry has projected wheat output at a modest 72.5 million tonnes as against 69.35 million tonnes a year ago. Among other foodgrains, output of rice is set to decrease slightly by 1.7 million tonnes to 90.1 million tonnes in 2006-07 and that of coarse cereals is also expected to drop sharply by almost 12 per cent to 30 million tonnes. However, pulses production is likely to surge by 8.4 per cent to 14.5 million tonnes over 13.4 million tonnes of 2005-06, driven by rise in the production of gram.  As foe non-foodgrain crops, production oilseeds for 2006-07 is estimated to decline to 236.19 lakh tonnes, 15.6 per cent lower from 279.79 lakh tonnes of 2005-06; on account of fall in the output of major oilseeds like groundnut, sunflower and rapeseed-mustard. Production of other non-food grain crops like cotton and sugarcane is likely to increase by 13.3 per cent to 20.9.6 lakh bales and 12.2 per cent to 3155.3 lakh tonnes, respectively.

The central government is contemplating over creating an independent entity on the lines of China and Mauritius to purchase 50 lakh tonne from the market and create a buffer stock. The proposed entity comprising the industry, sugar federations and the government would hedge sugar in the future trading so as to reduce the inventory in the market and thereby curb the heavy slide in the sugar prices. The move is aimed at providing financial relief to sugar producers in the wake of falling the prices of sugar, molasses and bagasse in domestic as well as international market following the glut in sugar supply owing to record sugar production in addition to the carry forward stock of 35.12 lakh tonnes by the end of ongoing crushing season of 2006-07.

The central government has approved the release of Rs 1,909.66 crore to the national cooperative agricultural marketing federation of India (NAFED) for compensating its losses due to procurement of rapeseed-mustard and settling accounts with banks for the period till March 31, 2007. The cabinet committee on economic affairs has also approved additional funds of Rs 289.86 crore for the same purpose during the fiscal year 2007-08. The approval not only would enable NAFED to dispose of its remaining stocks and settle accounts with banks, but also the procurement of mustard-seed to ensure MSP to farmers in the coming harvesting season from March 2007.

The central government has plans to classify the entire food products industry into three clearly defined categories as against the current eight segments, for licensing as well as taxation purposes. The three categories are products processed from perishable commodities, products from natural produce with longer shelf life and grain-based products including composite foods, biscuits, ready-to-eat foods, etc. It is also considering the proposal of allowing a 100 per cent tax deduction for the first 10 years for all new food-processing units after they are set up and that of accessing zero-cost capital through venture funds.

Export of oilmeals during April-January 2006-07 has risen by 29.5 per cent to 38.2 lakh tonnes over the period of one year. Export figures for a stand-alone month of January 2007, for the entire group have stood at 6.46 lakh tonnes, while that for rapeseed and soyabean extractions, they have been placed at 91,650 tonnes and a little over 5 lakh tonnes, respectively. Vietnam (8.97 lakh tonnes), South Korea (7.63 lakh tonnes) and Indonesia (5.91 lakh tonnes) have been the major export destinations during this period.

Imports of natural rubber are likely to touch a record level of 82,000 tonnes during the fiscal year 2006-07, topping the 68,718 tonnes brought into the country during 2004-05. According to a status paper on natural rubber, the user industry has contracted 41,300 tonnes for import during January-March 2007, while 40,700 tonnes have been imported during April-December 2006-07. The surge in imports has been attributed to higher domestic prices of the commodity.

Infrastructure

Overall

Riding on the strong growth in crude petroleum production, the index of six core infrastructure industries has registered a growth of 8.3 per cent in December 2006 as against 7.5 per cent in December 2005. For the nine-month period of April-December 2006, the overall growth in the infrastructure sectors stands at 8.3 per cent as compared to the 5.5 per cent growth registered in the nine-month period of April-December 2005.

Coal

As part of the government and industry effort to tap new sources of natural reserves and sustain large projects in the country, Rashtriya Ispat Nigam Ltd (RINL), Steel Authority of India Ltd, National Thermal Power Corporation, National Mineral Development Corporation and Coal India Ltd have embarked on a plan to create a special purpose vehicle (SPV) for acquiring coal mines abroad. These mines would be in Indonesia , Australia , Russia and some of the coal surplus countries in the regions willing to invite foreign investments and partners. The proposal to create the SPV has been formalised and a note prepared for approval would be placed before the Cabinet shortly. The SPV would have an initial corpus of Rs 5,000 crore and would later be scaled up to about Rs 25,000 crore.

Cement

Cement prices, which have risen sharply in 2006, are expected to start declining from the second-half of 2007, driven by capacity additions which are expected to go on stream during next fiscal year and 2008-09, according to credit rating agency Fitch. Fitch estimates capacity expansion to be large during financial years 2008 and 2009, with most of the burden on operating rates being felt in financial year 2008-09; South India , with the maximum capacity addition planned, would bear the maximum brunt on operating rates.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) rose by 6.58 percent for the week ended January 27,2007 as compared to 6.11 per cent in the last week or at a lower rate of 4.04 per cent during the corresponding week last year.

During the week under review, the WPI rose to 208.8 from 208.5 in the previous weeks’ level (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), rose by 0.6 percent to 214.6 from its previous week’s level of 213.7 mainly due to higher prices of ‘food article like beef,  meat, chicken, ragi , arhar, milk, moong, jowar, fish,fruits and vegetables. However, prices of gram nd condiments and spices showed a decline. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) remained unchanged at the previous week’s level of 322.1. The index of ‘manufactured products’ group also remained unchanged at the previous weeks level mainly because of the fall in food products and groups.

 The latest final index of WPI for the week ended December 2,2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 208.2 and 5.36 per cent as against their provisional levels of 207.8 and 5.16

 per cent, respectively.

Banking

The net non-performing assets (NNPAs) of 24 public sector banks increased by 5.3 per cent to Rs 12,797 crore in the third quarter of 2006 from Rs 12,151 crore in the corresponding period of 2005. But the gross NPAs of the same PSBs have decreased by 7.8 per cent to Rs 36,865 crore in the reporting period. Most of the PSBs are trying to recover the NNPAs as per the RBI schemes as well through their own recovery schemes.

ICICI Bank has launched a card-based remittance product for receiving remittances and was looking to partner with more banks in the US for expanding its remittance services. The new remittance product is a rupee-denominated card, which can be used at all VISA affiliated ATMs and merchant establishments in India and has a withdrawal limit of Rs 50,000 per day.

The country’s second largest bank, ICICI Bank, has hiked its benchmark lending rates by 100 basis points following the repo rate hike and increase in the provisioning requirements in certain retail segments by the RBI last week. The bank has hiked its floating reference rate (FRR) to 11.75 per cent as against 10.75 per cent earlier. Simultaneously, the benchmark reference rate, which is applicable for the corporate loan accounts, has been increased to 14.75 per cent as against 13.75 per cent at present. The hike in the rates would be effective from February 9, 2007.

Financial Markets

Capital Markets

Primary Market

Power Finance Corporation (PFC) public issue got over-subscribed by over 73 times within it the QIB portion was subscribed 137 times. This is the largest over-subscription an issue got in recent times. In an issue targeted at mobilizing Rs 1000 crore, the PFC mobilised close to Rs 75,000 crore.

During the week under review, C&C Construction Ltd, Indian Bank, and SMS Pharmaceuticals Ltd tapped the market.

Secondary Market

The week saw high volatility prevailing in the stock markets with the BSE sensex and the NSE nifty touching newer all time high levels on three trading days of the week while the end of the week saw a correction of 113.19 points. With the government forecasting a strong 9.2 per cent GDP growth for the current fiscal, and on the back of FIIs stepping up purchases, the sensex closed on Friday, 9th February 2007, at 14,538.90, gaining 135.13 points (0.94 per cent) over the previous week’s closing (Friday, 2 February 2007). The Nifty closed marginally in the green with a gain of 3.9 points (0.09 per cent) over the previous week’s close.

On Monday (5 February’07) both the Sensex and the Nifty closed at their all time high levels. The Sensex gained 112.13 points (0.78 per cent), to settle at a lifetime closing high of 14,515.90. It also struck a lifetime high of 14,526.51, surpassing its earlier all-time high of 14,462.77 from Friday (2 February 2007). The Nifty gained 31.85 points (0.76 per cent), to settle at a lifetime closing high of 4215.35. The Nifty hit an all-time high of 4,219 in intra day trading.

The joint meeting between the Securities and Exchange Board of India-appointed Primary Market Advisory Committee (PMAC) and Secondary Market Advisory Committee (SMAC) ended with the decision of forming another sub-committee to look into the aspects of commercial interests versus regulatory issues on the matter of cross listing by bourses. The cross listing issue gains significance in the wake of the fact that stock exchanges (SEs) across the country have kicked-off demutualisation process and the Bombay Stock Exchange is the font runner in the process. The interesting issue here is whether a bourse can be allowed to list its own shares on the stock exchange? This situation may raise the issue of conflict of interest as the listed company (the bourse) and the exchange have the same set of management. An in such cases, there are possibility of exchange administration extending some kind of favour to the listed entity - the bourse in this case. In another situation where, the demutualised bourse is listed on the rival stock exchange, there can arise a situation where the listed entity may be victimised as a part of business rivalry, in the normal process.

The government is planning a slew of amendments to the Securities and Exchange Board of India Act in the forthcoming budget session. According to official sources, the amendments will be made to enable the market regulator to introduce plea bargain, disgorgement, among other things. The ministry has called a meeting of the Sebi officials to discuss and finalise these amendments before placing it for the amendment. The Act will also incorporate the clause of compounding of cases in the capital market. This power will be accorded to the court and not to the Sebi. Compounding relates to settling of offences in the market through monetary penalty and to cut litigation.

The Mutual Fund Identification Number (MIN), mandatory for investments above Rs 50,000 in mutual funds, is likely to stay, even though the month-old confusion over it continues. The Association of Mutual Funds in India (Amfi) has issued nearly one lakh MINs till date. The industry body, along with fund houses, is also exploring the ministry of finance’s proposal to use the permanent account number (PAN) of investors as his/ her MIN.  “There is no proposal to scrap MIN. The number has been introduced to comply with the know your customer norms. The Amfi standing committee is discussing the government’s suggestion of using PAN. A decision would be taken soon,” Amfi chief A P Kurian said. The finance ministry’s suggestion, if implemented, would see MIN of the investor to be followed by his PAN, which means same set of digits as PAN would be used as the Mutual Fund Identification Number. However, the one lakh-odd MINs alloted till date have been issued without PAN.

Assets managed by diversified equity funds — not including tax-planning, index and sector funds — have for the first time crossed the Rs 1 lakh crore mark. The trend, considering end-January numbers, is being seen as a continuation of what has been evident since the early days of the current bullish phase: an almost linear increase in the assets managed by diversified funds.

Derivatives                                  

The National Stock Exchange has revised the contract size for 64 securities in the derivative segment. Of these, the market lot of 52 securities has been revised downwards and that of 12 securities has been revised upwards. This revision will take effect from February 23 for companies (see table). The lot size has been revised to meet SEBI guidelines, which prescribe a minimum value of Rs 2 lakh for a contract.

Government Securities Market

Primary Market

Under the weekly T-Bill auctions, the RBI mopped up Rs.2,000 crore and Rs.1,500 crore through 91-day T-Bill and 182-day T-Bill. From this, the RBI raised Rs.1500 crore and Rs.1000 crore under the Market Stabilisation Scheme (MSS) through 91-day T-Bill and 182-day T-Bill auction respectively. The cut-off yields for the 91-day and 182-day T-Bill were 7.5186 per cent and 7.6190 per cent respectively.

RBI conducted the auction of 7.37 per cent 2014 and 8.33 per cent 2036 for a notified amount of Rs.6,000 crore and Rs.3,000 crore at cut-off yields of 7.8759 per cent and 8.1898 per cent, respectively.

Secondary Market

During the week, the weighted average call rates during the period ranged between 6.63 per cent and 7.87 per cent, while weighted average repo rates ranged between 6.34 per cent and 7.56 per cent and the weighted average CBLO rates ranged between 6.13 per cent and 7.45 per cent. The average volumes of Call, Repo and CBLO segments were Rs.13,210.35 crore, Rs.8,066.15 crore and Rs.19,918.38 crore respectively. The daily average outstanding amounts in the LAF (reverse repo) and LAF (repo) operations conducted during the period were Rs.1,163 crore and Rs.4,460 crore respectively.

The weighted average YTM of G.S 2017 8.07 per cent bond was 7.7659 per cent on February 09, 2007 as compared to 7.7718 per cent on February 02, 2007. The 1-10 year YTM spreads decreased by 6 bps to 22bps.

Bond Market

Industrial Development Bank of India will raise up to Rs 1,500 crore through lower tier II bonds in the next 12 months to support credit growth and basel II norms and supplement for capital bonds that will be redeemed over next few months.

Foreign Exchange Market

The Reserve Bank of India on Thursday relaxed the norms for FIIs to rebook cancelled forward contracts. Banks will now allow FIIs to cancel and rebook forward contracts up to 2 per cent of the market value of their investments in equity and-or debt in India.

The rupee closed at Rs.44.06/USD on February 09, 2007 as compared with Rs. 44.11/USD as on February 02, 2007. The six-month forward premia closed at 3.21 per cent (annualized) on February 09, 2007 vis-à-vis 3.42 per cent on February 02, 2007.

Commodities Futures derivatives

Encouraged by the success of online trading in commodities in Kerala in the last four years, the National Multi Commodity Exchange of India Ltd (NMCE) is planning to replicate the `Kerala model' in rest of the country. The Kerala model is unique in the sense that it is a heady mix of growers, traders, brokers, investors, processors and exporter-importer comprising both small and big players hailing from urban centres as well as from remote rural areas, Mr Kailash Gupta, Managing Director of NMCE. The Kerala model had been appreciated even by the regulator, Forward Marketing Commission. Though NMCE had rolled out the first transparent trading platform for commodities with a nation-wide reach in 2002, he said the members of NMCE in Kerala had seized the opportunity to get the maximum advantage.

Nearly a month after acquiring five per cent in the National Stock Exchange, Goldman Sachs has proposed to buy a stake in the Multi Commodity Exchange (MCX), India ’s largest commodity bourse. Goldman Sachs, which holds seven per cent in the National Commodity and Derivatives Exchange Ltd (NCDEX), the other leading commodity bourse, holds that the MCX buy would be considered an investment and not a strategic acquisition.

National Multi-Commodity Exchange (NMCE) is planning to expand its futures basket and is looking at launching trade in dried ginger and cashew, according to exchange managing director Kailash Gupta. He said research was being done and was hopeful of launching futures trade in these commodities soon. Another commodity that had potential was vanilla and he did not rule out the possibility of the exchange launching trade in that commodity too despite low trade volumes.

Commodity derivatives turnover rose 72 per cent on year to over Rs 30 trillion during the first 10 months of 2006-07 (April-March), according to the data released by the Forward Markets Commission. The turnover for January 16-31 was Rs 1.45 trillion, up 11.6 per cent from Rs 1.30 trillion for the same period a year ago. However, it was down 2 per cent from January 1-15 figure of over Rs 1.47 trillion, the data said. MCX, the country’s largest exchange in terms of turnover, has registered slightly higher turnover at Rs 1.06 trillion, compared with Rs 1.05 trillion a fortnight ago. Gold remained the top traded contract on MCX followed by silver and copper. However, January 1-15 turnover of the second largest exchange, National Commodity and Derivatives Exchange, fell to Rs 332 billion from Rs 363 billion in earlier fortnight, FMC said. Guar seed has been the top traded contract followed by pepper and refined soybean oil, the data said. NCDEX turnover was down owing to the delisting of tur and urad futures from January 24. The third national exchange National Multi-Commodity Exchange registered a turnover of Rs 12 billion, down 20 per cent from Rs 15 billion a fortnight ago.

Insurance

Private sector life insurance firm, HDFC Standard Life plans to triple its sales force in the country in the next one year in anticipation of continued growth in sale of its insurance policies.

Corporate Sector

Aditya Birla Retail (ABR), AV Birla group’s retail venture, would make its maiden entry into retail with 15 supermarkets at Nashik, Pune and other tier II cities in western India in June this year.

Suzlon Energy Ltd., India’s biggest builder of wind turbines, will lead 1.02 billion-euro ($1.33 billion) bid for German competitor Repower Systems AG, topping on offer from French nuclear reactor maker Areva SA. Suzlon bid 126 euros a share for Repower, the Ahemdabad-based companies.

At a time when the government has allowed private participation in research, production and maintenance in the defence sector, UD-based the Boeing Company has signed a memorandum of understanding (MoU) wit L&T for jointly exploring business opportunities in India ’s defence sector.

Suzuki Motar Corporation and its Indian subsidiary Maruti Udyog Ltd inaugurated their fourth car assembly unit, a diesel engine, transmission plant and two-wheeler manufacturing facility at Maneswar in Haryana. The new plant, which has an initial capacity to manufacture 1 lakh units further expandable to 3 lakh units, would take company’s total car manufacturing capacity beyond 7 lakh units.

IPCL Ltd, a company belonging to Mukesh Ambani group, has informed the stock exchanges that its management has declared a lock-out at its Allahabad unit situated in Uttar Pradesh. Due to an illegal strike at the Allahabad unit of the company, resulting into behaviour causing aprehension amongst management staff and their families, the management has declared lock-out from February 4, 2007.

Telecom

Idea Cellular Ltd, an Aditya Birla Group company, which is entering the capital market with an initial public offering (IPO) aggregating Rs 2,125 crore of equity shares of Rs 10 has fixed the price band for the issue between Rs 65 and Rs 75 per equity share. The issue opens on February 12 and closes on February 15, 2007.

*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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