Current Economic Statistics and Review For the Week 
Ended February 17, 2007 (7^th Weekly Report of 2007)

Theme of the week:

Recent Trends in Professional Tax Revenue Across States *

During late 1980s, the fiscal situation of central as well as state government had witnessed a major deterioration. The steep rise in expenditures of the central and state governments in comparison with the revenue resulted in ballooning revenue deficit’s as well as fiscal deficit to GDP ratios, this had intensified the need for fiscal reforms. Restructuring the tax system had been the major focus of state as well as central governments in the process of fiscal reforms. State governments took various measures to streamline their taxation system comprising land revenue, vehicles tax, entertainment tax, sales tax, betting tax, electricity duty, tax on trades and luxury tax. From 2004-05 onwards there has been a substantial improvement in the fiscal health of the state governments. During the current fiscal year, the state government finances have shown better performances considering their efforts towards pursuing the process of fiscal consolidation through the enactment of Fiscal Responsibility Legislation (FRL).  In order to face the revenue constraints, recently some state governments have approach the central government to increase the professional tax ceiling. Enhancement of the ceiling would help the States in reducing their revenue deficits, however it may have an impact on the personal income tax collections, as professional taxes payments are income tax exempted. In this note, the attempt has been made to study the trends in the collections of a professional tax during last 7-8 years with respect to the state governments, which levy professional tax.

States own Tax Revenue

The Seventh Schedule of the Constitution of India demarcates the taxing powers of Union and State Governments and entries 46 through 63 in the State List specify the items on which States can levy taxes. Accordingly, the major taxes levied by the States are sales tax, state excise duties, stamp duties and registration fees, motor vehicles tax, land revenue, agriculture income tax, entertainment tax, profession tax, electricity duty, and other minor taxes.

Professional Tax

In the tax structure of India , the tax on professionals, trades, callings and employment is constitutionally allocated to the States. All individuals engaged in some profession or trade or with some form of gainful employment need to pay a profession tax. Every person, who carries on a trade either by himself or by an agent or representative, or who follows a profession or calling, or who is an employment, either wholly or in part within the State shall be liable to pay profession tax for each financial year.

Although it is not a part of income tax, the Constitution gives this right to the states so that they can have some share in this income generated in the state. Accordingly, it is calculated on the basis of income received by salaried people or those engaged in any profession. Traders are required to pay profession tax along with sales tax and the amount payable is estimated on the basis of their turnover. States can either levy profession tax itself by adopting in their legislature an appropriate Act within the Constitutionally imposed constraints, or can delegate the tax to an authority it deems fit. In India several states have not yet levied profession tax. Some states have imposed profession tax via an Act, while few states have delegated the power to levy this tax to local bodies, either fully (as in Kerala state the profession tax is levied by the local bodies) or partially as in Assam state.

Profession tax in usually levied only on those types of employment that are specified in the act, and residual categories are not taxable. Basically, there are two types of taxpayers:

1)      individuals employed in an organization and who are paid salaries or wages,

2)      self employed professionals, like small traders, doctors, architects, advocates, chartered accountants and consultants etc.

In the case of salaried employees, the employers deduct the profession tax at source whereas self-employed professionals pay the tax to authorities. Employers are required to register themselves with tax authorities along with details of persons employed and remuneration paid.

Most of the states calculate profession tax on a per-professional basis, usually a slabbed amount based on gross income. A deduction of sum paid by the taxpayer on account of professional tax is allowed as a deduction from the income of the individual, under section 37(1) of the Income-tax Act, 1961. However, the deduction is allowed in the year in which the tax is actually paid by the individual. Some states have provided exemption in payment of professional tax, by making suitable amendment in the Act.

In Kerala the local bodies levy profession tax. In some of the states this is a new tax. Rajasthan started levying profession tax from April 1, 2000 but it was abolished after about a year due to opposition by taxpayers.

Recent Trends in Profession Tax Revenue

The professional tax has been levied by most of the States in India . Table 1 displays the trends in the professional tax of the various states over the last nine years period. The time series data on the professional tax imposed by various states has displayed mixed trends.

Amongst all state, the tax collected by the government of Maharashtra has stood as the highest. This can be attributed to the higher economic activity and larger number of taxpayers in the state. In the year 1998-99, the professional tax at Rs 546 crore constituted 3.2 per cent of the total tax revenue of the state. It has increased to Rs 1028.6 crore in 2002-03, forming 4.1 per cent of the total tax revenue of the state. After 2002-03, although the absolute amount of the professional tax has shown a rising trend its percentage to total tax revenue has seen a gradual decline. For the current fiscal year the professional tax has been budgeted at Rs 1100 crore, which constitutes 2.3 per cent of the total tax revenue of the state. The states like Karnataka, Andhra Pradesh and West Bengal have also collected a significant amount as professional tax, however its percentage to total tax revenue has remained within a smaller range of 1 per cent to 2.5 per cent during the last three years. There has been a declining tendency as far as the ratio to the total tax revenue is concerned. The states like Sikkim , Nagaland that are less developed have greater percentage ratio as compared to the developed states mainly because of the lower tax-SDP ratio. Considering all states the revenue from professional tax has not constituted more than 2 per cent to the total tax revenue.

Recent state-wise trends in professional tax revenue of major states have been discussed in following paras.

Maharashtra

The government of Maharashtra levied profession tax from April 1, 1975. In fact the state government imposed a special tax – the profession tax on the salarised class – whose entire proceeds were to be used only for the Employment Guarantee Scheme (EGS), with the government required to provide an additional matching grant of an equal amount. The EGS was born after the devastating drought that stuck Maharashtra and the rest of the country in 1972-73.

However, the Maharashtra government has exempted professional tax by making an amendment in the Act, for instance, in accordance with the amendment to Section 27A of Maharashtra Act XVI of 1975 as appeared in “Maharashtra Shasan Rajpatra Asadharan” of March 26th, 1987 bona fide blind persons were exempted from payment of professional tax. As well, the government has exempted senior citizens from payment of profession tax. The profession tax is calculated on the basis of gross income. The latest slab rates for collecting profession tax is as follows:

      For an annual income of Rs 24,000 profession tax is nil, whereas for an annual income of Rs 24,000 – Rs 30,000 the profession tax is Rs 360 per annum.

Profession tax has been a steady source of revenue in state in the initial years. In 1999-00 the profession tax revenue of Maharashtra state increased by 48 per cent to Rs 808 crore from Rs 546 crore in 1998-99, as a result the ratio of profession tax revenue as percentage of total tax revenue rose to 4.1 per cent from 3.2 per cent in 1998-99.  In 2002-03, the profession tax revenue’s year-on-year (y-o-y) growth declined by 1 per cent to Rs 1,019 crore despite of 13.8 per cent y-o-y growth in total tax revenue. However, in 2004-05, the profession tax revenue again increased by 5.7 per cent to Rs 1,077 crore but its share in total tax revenue declined to 3.6 per cent from 4.1 per cent in 2002-03 (Table 3).

In 2004-05, the profession tax revenue again increased by 5.7 per cent to Rs 1,077 crore compared to Rs 1,019 crore in 2003-04, but however, its share in total tax revenue declined to 3.6 per cent from 4.1 per cent in 2002-03 (Table 3). In the year 2005-06, as per the revised estimates the profession tax revenue increased by 2.2 per cent to Rs 1,100 crore.

Gujarat

Gujarat State Profession, Trade, Commerce and Employment Act, 1976 has been implemented in the State since 1^st April 1976. The powers and responsibility to implement this law has been entrusted to sales tax department.

The profession tax revenue for Gujarat state shows a fluctuation with revenue realised increasing from 4.45 crore in 1977-78 to 44.81 crore in 1988-89, thereafter it dipped to 38.05 crore in the next year but rose again to 44.35 crore in 1993-94 and sipped again to 43.71 crore. But thereafter it rose continuously to 103.46 crore in 2000-01 but fell sharply to 92.12 crore in 2001-02 (Table 4).

Karnataka

In order to augment the revenues of the State, the Karnataka government in the year 1976 levied a tax on professionals, trade, callings and employment.  The latest slab rates for collecting profession tax is as follows:

Interestingly, Karnataka state’s profession tax revenue as percentage of total tax revenue for the last 8 years from 1998-99 to 2005-06 has been almost constant in the range of 1.3 to 1.4 per cent, except in 2003-04 when it reached to 1.6 per cent. However, the collection of profession tax has increased by almost 1.5 times during the last 8 years, from Rs 114 crore in 1998-99 to Rs 294 crore in 2005-06 (Table 6).

Karnataka government witnessed the highest y-o-y growth of profession tax revenue in the year 2003-04 to Rs 245 crore as against Rs 180 crore in the previous year registering a growth of 36 per cent. However the y-o-y growth declined to 13.3 per cent in 2004-05.

West Bengal

            During the period 1998-2003, West Bengal ’s profession tax revenue as percentage of total tax revenue’s ratio has been in the range of 1.9 to 2 per cent, except in 1999-00 it reached to 2.4 per cent. Further, the ratio declined to 1.6 per cent in 2003-04 and remained at 1.5 per cent during 2004-06.

In order to improve the fiscal consolidation, most of the state governments have stressed on expanding the scope of revenue of the state, mainly in the form of raising the tax collections of the state through the measures like introduction of new taxes, improvement in tax administration etc. Enhancement of the ceiling of professional tax has been considered as one of the source to augment the state government revenue. Hence some of the states have approached the Centre for enhancement of the professional tax ceiling to capture more professions and enlarge the scope. Almost all the states have reached the ceiling of Rs 2,500 per person fixed under Article 276 of the Constitution. This ceiling was fixed in the 60th Amendment in 1988. Enhancement of the ceiling would help the States in reducing their revenue deficits and tax coverage. 

In addition, some of the states have also asked the Centre for allowing some flexibility to realise greater revenues from information technology and business process outsourcing (BPO), in view of their high tax paying abilities. This was especially in States such as Karnataka, Andhra Pradesh, Maharashtra, Tamil Nadu and the New Delhi where most of the IT/BPO entities were concentrated.

References:

Purohit M C (2006): ‘Tax Efforts and Taxable Capacity of Central and State Governments’ EPW XLI, No.8, February 25 – March 3, 2006, Mumbai.

Sarma J V M, ‘An Overview of Sate Tax System in India (Other than Sales Taxation).

RBI (2006): State Finances A Study of Budget of 2006-07, November 30 and earlier issues.

* This note is prepared by Bipin K Deokar and Snehal Nagori.

Highlights of  Current Economic Scene

AGRICULTURE  

As a part of the central government’s strategy to restrain the rising prices of agricultural products in the domestic market, it is considering setting up a price stabilisation fund along with a market intervention plan for all agriculture products. With the proposed plan, the government would be able to intervene if the price of a particular product rise beyond a threshold limit or fall below a floor price.

In the view of current wheat crop estimated at 72.5 million tonnes, lower than the expected 74 million tonnes, the government has banned wheat exports for the whole of 2007 in order to control the rising prices of wheat and to ensure the sufficient procurement of wheat by the Food Corporation of India (FCI) during the year.  Last year, FCI’s procurement fell sharply to 9.2 million tonnes from 14.8 million tonnes in the previous year, forcing the government to import 5.5 million tonnes. The ban has come into effect since February 9, 2007.

The central government has been considering several plans to procure higher quantity of wheat such as imposing country-level stock limits to keep private and MNC traders away from procurement, of paying a higher bonus to farmers above the minimum support price (MSP), if the need arises and asking private and MNC traders to procure their requirements from other wheat-producing states such as Madhya Pradesh, Gujarat and Rajasthan instead of from Punjab, Haryana and Uttar Pradesh. It has set a target of purchasing 15 million tonnes of during the marketing season 2007-08. The procurement activities would commence 5-days in advance of scheduled date, that is from March 15, 2007 in Madhya Pradesh, while in Punjab and Haryana from April 01, 2007 and by the second week of April in Uttar Pradesh.

The country has so far received 4.99 million tonnes imported wheat as against 5.5 million tonnes contracted by the central government. The balance 5.57 lakh tonnes imported wheat is expected to reach the ports by the end of February 2007. Of the total imported wheat that has reached Indian shores so far, about 4.91 million tonnes has already been discharged from ships, and 4.22 million tonnes has been moved to the Food Corp. warehouses.

National Agricultural Cooperative Marketing Federation of India Ltd (Nafed) is likely to procure about 20 lakh tonne of mustard in the current rabi season as the market price has slid below the minimum support price (MSP) of Rs 1,715 per quintal. The current market price of mustard is in the range of Rs 1,550-1,650 per quintal.

The retail egg prices in the domestic market have touched an all time high of Rs 3 per piece (against Rs 2 last year) owing to and. Factors like culling of large number of birds in 2006 after the outbreak of bird flu resulting in shortage in production, rising feed cost such as that of maize and higher demand for eggs from the northern parts owing to unseasonal rains have been considered responsible for this price-hike. The egg production for 2006-07 is estimated to fall by 20 per cent at about 30,000 million eggs from 37,500 million eggs produced in calendar year 2005-06.

As per the Solvent Extractors’ Association, the imports of edible oil have increased by a robust 36 per cent to 312,584 tonnes in the standalone month of January 2006 as against a year ago though it has been 15 per cent lower from that in December 2006. a similar trend has been observed in case of non-edible oil imports as well, which have surged by 52.8 per cent to 36,110 tonnes during January 2007 from 23,626 tonnes a year ago, however down from 72,890 tonnes in December. As per the industry experts, edible oil imports had risen sharply in December 2006 in the wake of lower kharif oilseed output estimates. During November-January 2006-07, the country’s edible oil imports have stood at 932,214 tonnes, 20 per cent higher compared with the same period a year ago and that of non-edible oil have surged by 7.8 per cent to 158,792 tonne, during the same period.

As per the latest data from Tea Board, tea exports from the country have touched a record level of 203.86 million kg in 2006. A monthly shipment of 20 million kg from October 2006 onwards has helped the industry to record total exports last year. The gaining market share of Indian tea in the Pakistani market, which consumes 140 million kg annually and slump in the Kenyan production in the first half due to a drought are the major factors that have contributed to higher tea exports from India during 2006.

India ’s coffee exports are expected to fall by at least 15 per cent in the calendar year 2007 on account of lower crop and opening stocks and growers holding back arabica variety in the hope of better prices. The opening stocks have dwindled below 10,000 tonnes in 2007 as against the average level of around 30,000 tonnes.

The US shrimp exports from the country to US has hampered badly, by nearly 50 per cent due to imposition of anti-dumping duty to the extent of 10.17 per cent, which has been coupled with a matching customs bond during the calendar year 2006. The shrimp exports have dipped to $252 million during 2006 from exports worth $485 million in 2005.

Board for Reconstruction of Public Sector Enterprises (BRPSE) has given approval to revive closed fertiliser units of Fertiliser Corporation of India (FCI) and Hindustan Fertiliser Corporation (HFC). Under the current proposal, brown-field plants would be set at the existing sites on the basis of their physical condition. Iinitially four plants - at Durgapur , Brauni, Sindri and Gorakhpur - would be made operationalised, with an investment of about Rs 1,000 crore. Once revived, these units will add about 50 lakh additional urea capacity from the domestic sector, saving about $ 1.25 billion on costly imports annually. This would also bring down the subsidy burden substantially.

To take advantage of lifting clamps on import of mangoes from India by the Japanese and US Government, the central government has plans to open two pack houses one at Tirupati (Chittoor district) and other at Nuziveedu (Krishna district) that include vapour heat treatment (VHT) systems. The AGROS (AP State Agro Industries Development Corporation) has would work as a nodal agency for setting up the two pack houses, which would also have facilities for grading, sorting, packaging and cold storage facilities.

HDFC Bank has entered into an agreement with Godrej Aadhaar, the agri services and retail initiative of Godrej Agrovet Ltd, to offer agri-credit facility in the rural areas. The farmers, associated with Godrej Aadhaar, would be able to avail themselves of cash credit and term loans post-assessment of their land holdings and cropping patterns at a preferential interest rate. These farmers could also get loan facility for their farm mechanisation needs such as tractors, combine harvesters and other agri-related implements.

Industry

Growth in IIP

Riding on strong growth in the production of capital goods, the Index of Industrial Production (IIP) has grown by 11.1 per cent during December 2006 as against 5.7 per cent in December 2005. The growth in production of capital goods has stood at 20.2 per cent compared with 12.9 per cent while the output of intermediate goods has improved by 11.2 per cent (0.9 per cent). Production in the basic goods sector has improved by 11.7 per cent and consumer non-durables output has increased by 8.7 per cent compared with 5.7 per cent and 6 per cent, respectively. Production of consumer durables, however, has decelerated to 3.3 per cent in December 2006 as against a buoyant growth of 12 per cent in December 2005. For the nine-month period of April-December 2006, basic goods output has increased by 9.7 per cent, capital goods production by 17.5 per cent and intermediate goods output by 11.1 per cent. Simultaneously, consumer goods output has gone up by 9.5 per cent. While consumer durables production during the nine months has increased by 11.4 per cent, that of consumer non-durables has recorded an increase of 8.9 per cent. The overall increase in the IIP during the April-December period has stood at 10.8 per cent as against 8 per cent during April-December 2005.

FICCI Recommendations

To take the share of the manufacturing sector in the GDP to 22 per cent from the present 15 per cent by 2015, the FICCI has asked the government to reform the labour laws and incentivise innovation and technology. The chamber has also sought the bridging of the skill gap in the sector, speedy development of infrastructure and reducing transaction cost for the purpose. The FICCI has pointed out that a serious gap between the availability of skilled manpower and the requirement of industry. In the next few years, around five million people will be required mainly at the basic skill level in the sector out of which four million are required for the garment sector only. This will require massive expansion and modernisation of training institutes across the country that can be done with public private partnership scheme. On infrastructure requirements, the chamber has noted that the effective cost of power for manufacturers, adding the cost of erratic and supplemented power to the base cost, is very high vis-à-vis their counterparts in China, Thailand, and Indonesia. Also, the chamber highlighting the latest World Bank Indices of Doing Business 2007 has pointed that cost associated with all the procedures required to export in India is $864 per container vis-à-vis $335 per container in China. Similarly, cost associated with all the procedures required to import in India is $1,244 per container vis-à-vis $375 in China . Restrictive labour laws impact the competitiveness and growth of the manufacturing sector; there are 154 laws related directly or indirectly to labour which are to be complied with by the manufacturers, according to the chamber. Besides addressing these macro-policy issues, the government also need to address sector specific issues relating to leather, textiles, metal products and parts, electronics, food processing.

Policy Initiative

The commerce ministry has proposed a more liberal import and fiscal regime to ease supply pressures, as a part of the steps to rein in the rising prices. Supply side constrains driven mainly by the unprecedented economic growth have been cited as the main reasons for the rising prices. The commerce ministry has proposed a review of duties on imports, especially cement, metals and paper. Stating that while some amount of price rise is accepted in a rapidly growing economy, it has gone beyond acceptable levels, the ministry has asked manufacturers to keep the prices of their products under control.

Infrastructure

Infrastructure Funding

Srei Infrastructure Finance has launched a new business model that involves rate of interest-based bidding. Under the scheme infrastructure project developers can bid for equipment to cut down costs which would prove viable for project developers who depend on equipment that are leased out since the machineries are returned once the project is completed. While the assets are given away by the bidding companies at an open auction, participants bid for lower rates of interest for these assets. The concept, known as Paison ki Nilami, therefore makes available the bank of equipment from the manufacturers to project developers with Srei performing the hand-holding role. The model is particularly useful for those developers for whom buying the equipment could prove to be prohibitive; equipment typically make up over 30 per cent of the cost of projects, especially in sectors like roads or other civil construction works.

Petroleum, Petroleum Products and Natural Gas

The union minister for petroleum and natural gas has informed the parliamentary consultative committee (PCC) attached to his ministry that with exploration and development efforts made under NELP, natural gas production in the country is likely to be doubled from about 95 million cubic metre per day to over 190 million cubic metre per day by March 2009. In addition, Coal Bed Methane (CBM) is expected to be produced in India in 2007-08, thus, the country will join the select club of countries that commercially produce CBM. CBM gas production is envisaged as 3.78 billion cubic metres or about 10 million cubic metres per day. The government has signed contracts for 26 blocks covering an area of 13,600 sq. km. The total committed investment in these blocks is of the order of Rs 675 crore. As on April 1, 2006, the operating companies in CBM blocks have already invested Rs 170 crore. In five rounds of bidding under NELP, production sharing contracts (PSCs) for 110 exploration blocks have been signed in addition to 28 exploration blocks signed prior to NELP.

India ’s demand for oil products has risen by 4 per cent in December 2006 to 10.5 million tonne (mt) as against 10.1 mt a year ago, on the back of increase in diesel consumption. The sale of diesel in the country has increased by 7 per cent to 3.939 mt as compared to 3.684 mt in December 2005 as per data released by the petroleum ministry. In the same time, petrol demand has jumped 9.6 per cent to 8,03,600 tonne while fuel oil sales have been down by 3.8 per cent to 1.07 mt. Aviation turbine fuel (ATF) or jet fuel sales have soared 19 per cent to 3,71,000 tonne in December as compared to 3,13,100 tonne in the same month of the previous year. Naphtha demand has increased by 13.4 per cent to 1.22 mt as against 1.07 mt last year while LPG consumption has risen by 3.1 per cent to 9,60,200 tonne but kerosene demand has remained almost flat in December 2006.

Power

The budget for 2006-07 may prove favourable for many standalone companies and corporate groups who are contemplating setting up captive power plants to meet their requirements instead of depending on uncertain supplies from the state electricity boards or through the national grid. This is because, in order to encourage industrial units to achieve self-sufficiency with respect of their power requirements, the government is examining the option of reducing customs tariff for captive power plants and their spare parts from the existing 12.5 per cent to 5 per cent. However, the plan does not include similar exemption for non-captive units even though they might qualify to be small and medium sized units. As of now, not only did the import of all capital goods required for setting up small and medium power project attract a 12.5 per cent duty, taking into account a 16.32 per cent countervailing duty and an additional 4 per cent special countervailing duty, the net effect adds up to 36.73 per cent.

Non-Conventional Energy

With the government encouraging banks to offer loans for solar energy systems counting this as priority lending in an effort to popularise renewable energy products, the demand for loans for solar energy products has increased considerably. The demand for Canara Bank's loan scheme called `Can Solar' for solar water heaters has picked up well in the last two years; it has provided loans to the tune of Rs 42 crore for about 18,300 units so far. Can Solar was introduced in Karnataka about 11 years ago, and was extended to the rest of the country about two years ago. Canara Bank was one of the pioneering banks to participate in the Solar Water Heating Programme of the Ministry of New and Renewable Energy. Now, about ten public-sector banks, four non-banking financial corporations, two private banks and 10 scheduled co-operative banks participate in this programme.

Ports

The union shipping minister, Mr T.R. Baalu, has stressed the need for a highly efficient logistic support in the shape of modern port infrastructure considering the GDP growth rate in the country. The ministry has conceived a very ambitious National Maritime Development Programme (NMDP) to build modern port infrastructure recognising the critical importance of development and expansion of port infrastructure. He has pointed out that the Indian exports have grown at 35 per cent and imports 33 per cent in the first half of the current fiscal year and in order to sustain the level of growth,  there is a need to set up better infrastructure facilities in the port sector. Further, citing that 95 per cent of India 's export-import trade takes place through ports, the minister emphasised that well developed and modern rail and road connectivity is essential for the efficient functioning of ports, especially for fast clearance and evacuation of cargo and better use of port storage area.

Railways

Indian railways is planning a major overhaul of its infrastructure during the Eleventh Plan period in order to meet the requirements of its increasing business; while its freight business is expected to increase to 1,100 million tonne (mt) by 2011-12, it is likely to ferry 8,400 million passengers by the said period. The railways plans to give top priority to upgrade its technology, especially those used in tracks, locomotives, coaches, wagons, signaling and its information technology services while another focus area would be an upgrade of its rolling stock. It also targets to bring in 62,000 more wagons, 1,800 diesel and electric locos, each, as well as 17,500 coaches and to double its rail transport capacity to 1,500 mt for freight traffic and ferry 10,000 million passengers. Doubling of tracks, upgrade of lines for heavy axle load movement as well as laying of new lines would help in this. The dedicated freight corridor would also help in capacity augmentation. The railways also plans to bring down further its unit cost of transportation.as well as an increase in the speed of trains so as to compete with the road and air transport sectors.

The railways ministry has projected an increased annual plan size of about Rs 34,000 crore for the coming fiscal year, mainly to expand capacity; the annual plan size for the current year is at Rs 23,475 crore. While the ministry is looking for a budgetary allocation of about Rs 7,500 crore, it hopes to generate at least Rs 20,000 crore internally and going by its estimated surplus of Rs 20,000 crore for this year, the target seems quite achievable. In 2006-07, the railways received Rs 6,800 crore as budgetary support.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) rose by 6.73 percent for the week ended February 03,2007 as compared to 6.58 per cent in the last week or at a lower rate of 3.98 per cent during the corresponding week last year.

During the week under review, the WPI rose to 209.2 from 208.8 in the previous weeks’ level (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), rose by 0.5 percent to 216.1from its previous week’s level of 215.0 mainly due to higher prices of ‘food article like pork, eggs, mutton, urad, masur, moong, condiments, spices, fruits, vegetables and bajra.. However, prices of barley and wheat showed a decline. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) declined by 0.4 per cent to 320.8 from 322.1 due to lower prices of aviation turbine fuel and naptha , furnace oil and electricity. The rise of 0.3 per cent in the index of ‘manufactured products’ group can be attributed to the spurt in prices of food products some edible oils, butter, and bran. However the fall in the prices of imported edible oils, gur, rawa, maida and atta had a sobering effect in the rise in the index of manufactured products.

 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 208.3 and 5.63 per cent as against their provisional levels of 207.7 and 5.32 per cent, respectively.

Banking

The Reserve Bank of India (RBI) has increased the cash reserve ratio (CRR) by 50 basis points to 6 per cent in two stages. The first hike of 25 basis points will be effective from February 17 and the second from March 3, 2007. The RBI’s move is aimed at checking liquidity from fanning the flames of inflation and comes less than a fortnight after the central bank raised its overnight lending (repo) rate on January 31, 2007.

ICICI Bank has raised $500 million from a bond sale for its UK unit. The bank priced the five-year floating-rate notes to pay interest of 0.62 percentage point above the three-month LIBOR.

Financial Markets

Capital Markets

Primary Market

The book Running Lead Manager to the issue of Vijayeswari Textiles Limited, has informed the Exchange that the issue will close on February 19, 2007 instead of the earlier closing day of February 13, 2007. Further price band has been revised from Rs.115/- to Rs.130/- per share to Rs.100/- to Rs.115/- per share

During the week, Evinix Accessories Ltd, Idea Cellular Ltd and Raj Television Network Ltd. Have tapped the market.

Secondary Market

A host of factors like fears of a further rise in domestic interest rates, a large number of IPOs lined up for the next few weeks, rising inflation, heavy unwinding of leveraged derivative positions and a surprise CRR hike were behind the havoc. The BSE sensex shed 183.35 for the week ended 15 February 2007, to settle at 14,355.55, while the NSE nifty lost 41.20 points, to end at 4,146.20. On 12 February 2007 (Monday), the BSE Sensex plunged 348.20 points, to settle at 14,190.70. It stayed in the red for the entire session as plenty of stop losses were triggered due to highly leveraged positions in the derivatives market. Weak global markets also played spoilsport. The sensex lost 99.72 points on Tuesday (13 February 2007), to settle at 14,090.98, in highly volatile trading. The benchmark index shed 81.08 points, to end at 14,009.90 on Wednesday (14 February 2007). It had plunged to a low of 13,805.36, but recovered on short-covering in the later half of the day’s trading session. The initial fall was because of the Reserve Bank of India (RBI) announcing a surprise hike in the cash reserve ratio (CRR) to 6 per cent from 5.5 per cent in two stages, the first on 17 February 2007 and the second on 3 March 2007, to curb inflation and credit growth. The sensex rebounded, after falling for the past four trading sessions, taking cue from firm Asian markets and short covering in derivatives ahead of the expiry of February 2007 derivative contracts on Thursday (15 February 2007). It jumped 345.65 points, to settle at 14,355.55 that day. The market was closed on 16 February 2007 for Mahashivratri.

On Wednesday (14 February 2007), the Bombay Stock Exchange (BSE) sold 5 per cent stake to Germany's Deutsche Börse for Rs 189 crore, at Rs 5,200 per share. The transaction values the BSE at Rs 3,777 crore ($854 million).

Derivatives                                  

The Nifty closed at 4146 in the spot market after swinging between 3950-4160 in last week. It was settled at 4160 in the February series. The March Nifty was settled at 4158

Government Securities Market

Primary Market

The Government of India have announced the issue of "8.20 per cent Government Stock 2022" for an aggregate amount of Rs.1,632.33 crore (nominal), "8.24 per cent Government Stock 2027" for an aggregate amount of Rs.4,388.55 crore (nominal) and "8.28 per cent Government Stock 2032" for an aggregate amount of Rs. 2,687.11 crore (nominal) to 19 nationalized banks. These Stocks are issued in lieu of outstanding amount of "10 per cent Nationalised Banks' Recapitalisation Bonds, 2006" aggregating to Rs.4818.78 crore (nominal) and "10 per cent Nationalised Banks' (non-transferable) Special Security, 2006" aggregating to Rs.3889.21 crore (nominal) held by these nationalized banks. These Stocks will be reckoned as an eligible investment for the purpose of Statutory Liquidity Ratio (SLR). These Stocks will be transferable and eligible for ready forward transactions (Repo).

Seven State Governments have announced the sale of 10-year State Development Loans for an aggregate amount of Rs.3,399.57 crore through a yield based auction using multiple price auction method on February 22, 2007.

The Government of India issued '8.23 per cent Government of India FCI Special Bonds, 2027' for Rs.6,200 crore (nominal) to Food Corporation of India (FCI) as part of settlement of the outstanding dues of FCI. The investment in the Special Bonds by the banks will not be reckoned as an eligible investment in Government securities by banks and insurance companies for their statutory requirements.

The Government of India issued '8.20 per cent Oil Marketing Companies Government of India Special Bonds, 2024' for Rs.5,000 crore (nominal) to three Oil Marketing Companies as compensation The investment in the Special Bonds by the banks will not be reckoned as an eligible investment in Government securities by banks and insurance companies for their statutory requirements.

RBI has announced that the two State Governments viz., Orissa and Rajasthan will buy back certain specified State Development Loans (SDLs) issued by them. The buyback of securities will take place through a multi security auction using multiple price auction method. The auction will be conducted on February 22, 2007 and settlement will be on February 26, 2007. The buyback auction will be conducted on the existing NDS Primary Auction module.

Secondary Market

As an initiative to curb the inflationary pressures, the Petroleum Minister has cut the petrol and diesel prices by Rs.2 per litre and Re.1 per litre respectively effective February 16, 2007.

The inflation rate, as measured by the wholesale price index (WPI), increased to 6.73 per cent for the week ended February 3, 2007 as compared 6.58 per cent for the week ended January 27, 2007. The inflation rate for the comparable week one year back (February 4, 2006) was 3.98 per cent.

During the week, the weighted average call rates during the period ranged between 6.51 per cent and 8.12 per cent, while weighted average repo rates ranged between 5.20 per cent and 7.51 per cent and the weighted average CBLO rates ranged between 5.97 per cent and 7.17 per cent. The average volumes of Call, Repo and CBLO segments were Rs.13,253 crore, Rs.7504 crore and Rs.18,608 crore respectively. The daily average outstanding amounts in the LAF (reverse repo) and LAF (repo) operations conducted during the period were Rs.3285 crore and Rs.2981 crore respectively.

RBI has increased the Cash Reserve Ratio (CRR) from 5.5 per cent to 6 per cent (in two phases) to absorb around Rs.14,000 crore of banks' resources. In the first phase, CRR has been increased from 5.50 per cent to 5.75 per cent, effective February 17, 2007 and in second phase, it has been increased to 6 per cent, effective March 3, 2007.

In the address on "Current Challenges to Monetary Policy Making in India", Dr Rakesh Mohan, Deputy Governor, RBI said that the RBI would respond "swiftly' and use all monetary tools to contain runaway inflation, which could dampen the growth momentum. "In crafting appropriate monetary policy, it is important to undertake a careful assessment of the manner in which inflation is evolving. Primary articles have contributed significantly to WPI during 2006-07."

The weighted average YTM of G.S 2017 8.07 per cent bond was 8.0821 per cent on February 15, 2007 due to upsurge in inflation rate as compared to 7.7659 per cent on February 09, 2007. The 1-10 year YTM spreads increased by 4 bps to 26bps.

Bond Market

Syndicate Bank is to tap the market to mobilise Rs 240 crore through issue of upper tier-II bonds offering coupon of 9.30 per cent for 15-year paper.

Foreign Exchange Market

The six-month forward premia closed at 3.71 per cent (annualized) on February 15, 2007 vis-à-vis 3.21 per cent on February 09, 2007.

Commodities Futures derivatives

Potato hit the upper circuit across all contracts on the Multi Commodity Exchange(MCX) on Monday as rains have disrupted harvesting in north-eastern states. In the spot market, prices jumped approximately by 25 per cent to Rs 5-6 per kg from Rs 4-5 on Saturday. 

Potato for March, April, May deliveries jumped by 6 per cent to close the day at Rs 572 a quintal, Rs 560 a quintal and Rs 539.80 a quintal compared with Rs 539.60, Rs 528.40 and Rs 539.80 on Saturday. 

Corporate Sector

Kumar Mangalam controlled Hindalco Industries, the company’s largest aluminum producer, has announced the acquisition of Atlanta-based Novelis for an enterprise value of nearly $6 billion in cash, which will help it gain large customers like Coca-Cola, Ford and General Motors. The deal envisages a payment of $44.93 per share, which is 16.5 per cent more than its last closing prices, to Novelis shareholders, amounting to a total of $3.5 billion. In addition, Hindalco will take on its books Novelis’s debt of $2.4 billion. The acquisition, which requires approval of 66 per cent of Novelis’ shareholders, is expected to be completed by the second quarter of 2007.

British telecom giant Vodafone emerged victorious in the battle for Hutchison Essar Ltd, India ’s third largest private mobile services operator, with an offer that gives the company an enterprise value of about $19.3 billion. Ending the two-month long drama, the Hutchison Telecommunications International Board met in London and chose Vodafone over the Anil Ambani controlled Reliance Communications, the Ruias of Essar and the Hindujas for sale of 67 per cent stake in Hutchison Essar. Vodafone has paid a price of around $794 per subscriber to clinch the deal. The valuation is in line with the $33 billioin market capitalization of Bharati Airtel, the country’s largest private mobile services operator, and the $22 bilion market capitalization of Reliance Communication, the second largest operator. The acquisition will give Vodafone, which has over 200 million subscribers globally, a strong presence in the fastest growing market for mobile services – Hutchison Essar has close to 24 million customers. Vodafone, which has a 9.9 per cent stake in Bharti Airtel, is now expected to sell it soon.

Pricewaterhouse Coopers (PwC), India ’s second largest professional services firm, is set to acquire RSM, the fifth largest player. The deal, expected to be announced in next week, will make PwC the leasing player in the sector.

*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.

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