Current Economic Statistics and Review For the Week 
Ended May 05, 2007 (18^th Weekly Report of 2007)

Theme of the week:

Central Government Budget 2007-08: 
Fiscal Corrections Revealed Over Years *

Plan Programmes

            The year 2007-08 is the first year of the Eleventh Five Year Plan (2007-08 to 2011-12) and hence the priorities set in the budget for the expenditure programmes will serve as a precursor to the next five-year plan programmes.  The budget speech claims that the plan will aim at a faster and more inclusive growth.  Towards this end, the budget for 2007-08 hopes to place the budgetary support at Rs 154,939 crore, an increase of 22.5 per cent over the revised estimates of Rs 126,510 crore for 2006-07 (RE).  The budget also hopes to have a 40.2 per cent rise in internal and extra-budgetary resources (IEBR) of public enterprises from Rs 117,719 crore to Rs.165,053 crore during the same period (Statement A).  Therefore, the total central plan outlay will increase by 31.0 per cent from Rs 244,229 crore to Rs 319,992 crore.

            The claim made by the budget that a number of additional programmes envisaged for the hitherto neglected agricultural sector would shift the balance of plan programmes in its favour, does not seem to have fructified.  Of the total central plan outlay of Rs 319,992 crore, during 2007-08, only Rs 8,558 crore or 2.7 per cent appears under ‘agriculture and allied activities’ against 3.0 per cent as per the revised estimates for 2006-07.  The largest increases under the central plan outlays have occurred in the case of energy, industry and minerals, communications, and social services (Statement B).  It is true that much the larger part of the public expenditure on agriculture takes place at the states level but at the same time, unless the centre releases larger plan outlays, the states are unable to expand their outlays at the margin.

Deficit Reductions

            The central (and state) budgets in recent years have been steadfastly pursuing the objectives of deficit reductions as embodied in the Fiscal Responsibility  and Budget Management (FRBM) Act, 2003 and the rules framed there under.  As shown in Statements C and D, the central government has achieved steady reductions in revenue and fiscal deficits.  A noteworthy aspect of the budget for 2007-08 has been the achievement of deficit reductions as between the budget estimates of 2006-07 and their revised estimates as a result of substantial buoyancy in tax receipts as explained in a subsequent paragraph.  And the budget seeks to make a sharp advance in this respect.  The declines of 0.5 percentage points in each of the revenue and fiscal deficits to 1.5 per cent and 3.2 per cent, respectively, during 2007-08 would be a noteworthy achievement.  More noteworthy would be the achievement in slashing the percentage of total liabilities of the centre to GDP1 from 63.4 per cent in 2005-06 to 58.4 per cent during 2007-08 (BE) (Appendix Table 2).

            It should be noted in parenthesis that if the external sector components of the total liabilities are measured at current exchange rates rather than at book values as done in the budget papers, the total liabilities to GDP ratio will rise by at least 2 to 3 percentage points (Government of India’s Economic Survey 2006-07, p.34).

            As per the FRBM targets, revenue deficit as percentage of GDP would be reduced to “nil” and fiscal deficit to 3.0 per cent by 2008-09 (Statement C).  The current trends suggest that it would be easily achieved.  There are two methods by which this achievement is made possible: one, by a steady increase tax resource mobilization which is reflected in an increase in tax to GDP ratio; and another, by relative reductions in expenditure.  The objective of this note is to present, with the support of a series of tables, the details of these methods by which the central government is achieving the FRBM goals.

Trends in Tax Revenues

            As shown in Statement D, the pace of decline in total expenditure of the central government has been faster than the pace of increase in the centre’s revenue receipts or that of the tax revenue receipts net to the centre (all as percentages of GDP).

            No doubt, the centre has expanded its tax base, which is reflected in a rise in gross tax to GDP ratio by about 3.50 percentage points from 8.20 per cent in 2001-02 to 11.67 per cent of GDP. As against this, the centre’s total expenditure, which had peaked at 17 per cent of GDP in 2003-04, has fallen to 14.5 per cent of GDP during 2007-08 (BE), that is a less of about 2.5 percentage points. But, partly as a result of the slower growth in other revenue receipts and partly as a result of higher transfers to the states through the Finance Commission recommendations, the centre’s revenue receipts as percentage of GDP have risen by 1.0-1.5 percentage points during the period under discussion (Appendix Tables 1 and 7).

            On the capital receipts side, following the FRBM regulations, borrowings of the central government as percentage of GDP have been drastically reduced from 6.2 per cent in 2001-02 to 3.2 per cent during 2007-08 (BE).  In fact, the budget for 2007-08 visualises an absolute reduction in borrowings from Rs 152,328 crore in 2006-07 (RE) to Rs 150,948 crore  (Appendix Table 1).  A developing country like India requires a steady expansion in capital expenditures, which in turn necessitate borrowings from the market.  A moderate increase in borrowings not only in absolute terms but also as percentage of GDP should be the preferred strategy because of the imperatives of development finance.  This is particularly so in the context of the need for substantial expansion in development expenditures in the areas of education, health and other social expenditures as well as many other rural infrastructures. 

            On the expenditure side, there is a peculiar picture which is that the bulk of the rise in capital expenditure during 2007-08 (BE) has been due to non-plan capital expenditure and not plan capital expenditure; the former arises from a special development viz., the acquisition of SBI shares from the RBI (for which there is a corresponding receipt item in the form of other capital receipts).  Non-plan capital expenditure is budgeted to rise only by Rs 2,600 crore, whereas the capital expenditure under defence is expected to rise by Rs 7,464 crore. The bulk of the capital expenditure on non-plan account thus represents the transfer of SBI shares from the RBI to the government.

            In the rise in plan expenditure of Rs 32,370 crore, as much as Rs 29,770 or 92 per cent has been under revenue plan expenditure during 2007-08, the first year of the eleventh five-year plan.  This reflects the newer objective of the plan which focus on social infrastructures, the expenditures on which are generally of a revenue nature.

Composition of Tax Revenues

            An aspect of the fiscal performance in recent years has been the steady increase in the share of direct taxes in the tax structure of the central government as distinguished from indirect taxes.  The proportion of direct taxes has risen from 37 per cent during 2001-02 to 48.8 per cent during 2007-08 (BE), whereas the share of indirect taxes has fallen from 63.0 per cent to 51.2 per cent during the same period.  On the face of it, this is certainly a healthy development, but it has been achieved essentially as a result of the sharp reductions in the rates of indirect taxes, customs and excise duties in particular, as part of the reform agenda.  Also, increases in direct tax revenues have taken place because of the sizeable increases in the incomes of the middle and richer segments of society; there has been, in other words, a decisive shift in income distribution in favour of richer segments of society.  Also, much the larger part of the increases in higher incomes has occurred amongst the executive classes who cannot evade Taxes; therefore, the average collection has turned out to be better than in the past (Appendix Table 2).

Expenditure Pattern

            On the face of it, the steady decline in the share of non-development expenditure in aggregate expenditure from a peak of about 75-76 per cent in 2000-01 to about 70 per cent and the corresponding rise in the share of plan expenditure from 25 per cent to 30 per cent, appear as healthy developments.  But, a detailed analysis suggests that these developments are not as healthy as it is made out.  First, the relative shares of non-plan and plan expenditures are out of somewhat reduced tempo of growth in aggregate expenditure.  The aggregate expenditure as percentage of GDP has fallen from the peak of 17 per cent of GDP in 2002-03 to 14.5 per cent in 2007-08 (BE).  Within such a reduced tempo of aggregate expenditure, the plan expenditure to GDP ratio has stayed put at around 4.4 per cent throughout the past decade (Appendix Table 3).

            Non-plan expenditure as percentage of GDP, no doubt, has fallen from the peak of 12.6 per cent during 2003-04 to 10.1 per cent during 2007-08 (BE).  But, by far the largest decline has occurred under ‘interest payments’ because of a steep and general fall in the interest rate levels in the economy.  The share of ‘defence’ expenditure has gone up and that of ‘subsidies’ has fallen rather fractionally from a peak of 9.4 per cent of GDP to 8.0 per cent.  Interestingly, the share of administrative expenditure, christened in the budget as ‘general services’ which consists of police, pensions and general administration, has stayed stuck at around 7 per cent of GDP.

Simultaneously, the non-plan, expenditures earmarked for ‘social’ and ‘economic services’, puny as they are at around 1.4 to 2.5 per cent of GDP, have experienced declines during the past few years.

            No doubt, under the plan expenditure, the direct expenditures on ‘economic’ and ‘social services’ have shown significant increases as proportions of the total, that is, from 9 per cent to 12 per cent and from 5 per cent to 11 per cent, during the past few years (Appendix Table 3).  But, as direct social expenditures incurred by the centre constitute only about 20 per cent of the aggregate social expenditures of the government sector, state governments have to expand their expenditure base on ‘social’ services.  Unfortunately, this is not possible as the centre has simultaneously reduced its share of devolution to the states.   It is found that the central assistance to state plans as percentage of aggregate expenditure has slipped from 11.0 per cent in 2001-02 to 6.9 per cent in 2007-08 (BE).  After the transfer of small saving accumulations to a separate corpus called the “National Small Savings Fund” (NSSF) from which the states are fully allotted small saving allocations, central assistance on capital account has been meagre, while the bulk of the central assistance has been on revenue account.  The revenue account assistance has shown a rise from Rs 19,466 crore in 2001-02 to Rs 45,627 crore in 2007-08 (BE) (Appendix Table 3).

Expenditure on Social Development and Poverty Alleviation Programmes

            One of the important claims made by the central government in recent years has been that it has conferred special focus on social sector expenditures and expenditures on rural development programmes including rural employment programmes.  While there have been increases under all heads in absolute terms, in terms of percentages to GDP almost all social expenditure heads, except education, have experienced a fall in the 2007-08 budget.  Expenditure on education as percentage of GDP has risen from 0.4 per cent in 2001-02 to 0.6 per cent in 2006-07 and further to 0.7 per cent in 2007-08 (BE).  Under all other heads, this proportion has either stagnated or fallen.  For health, for instance, the proportion has remained stuck at 0.3 per cent now for about a decade.  For rural development, the proportion had risen from 0.6 per cent in 2001-02 to 0.9 per cent in 2006-07, but it is estimated to decline to 0.7 per cent in 2007-08 despite the rhetorics of implementing the national rural guarantee scheme.

            Overall, expenditures on all social and poverty alleviation programmes together have remained stuck at around 2.6 per cent of GDP during the past few years (Appendix Table 4).

Reduced Outlays for Agriculture

            Appendix Table 5 is intended to provide a synoptic view of the Government of India’s expenditure allocations amongst different sectors as represented by allocations for different ministries.  The Finance Minister’s budget Speech had claimed that the budget had “a number of proposals to improve the economic viability of farming and ensure that farmers earn a minimum net income”.  Amongst the programmes emphasized in the budget speech are: (i) accelerated irrigated benefit programmes; (ii) rain-fed area development programme; (iii) restoration of water bodies; and (iv) ground water recharge.

            Curiously vast importance assigned to irrigation and other agricultural programmes, the expenditure increases proposed for their ministries are just meagre.  The expenditure proposed for the Ministry of Agriculture at Rs 9,362 crore for 2007-08 shows a rise of 10.5 per cent over that of Rs 8,472 crore during 2006-07 (RE).  Likewise, the budgeted expenditure for the Ministry of Water Resources at Rs 872 crore shows a rise of only 7.4 per cent over that of Rs 812 crore during 2006-07 (RE).  It is not as though that there have been any substantial increases in the recent past.  The agrarian crisis and the agricultural development crisis are to a great extent attributable to the narrow emphasis given in public expenditure programmes to agriculture.  Thus, the annual average growth in expenditure for the Agriculture Ministry between 2000-01 and 2007-08 has been only 2.5 per cent as against the annual average increase of 21.5 per cent during the preceding five-year period 1995-96 to 2000-01.  Similarly, the corresponding increases for the Water Resources Ministry have been 5.2 per cent and 9.3 per cent (Appendix Table 5).

            This is truly disappointing because the budget proposals pertain to the first year of the Eleventh Five Year Plan which is poised to shift the development strategy in favour of agriculture.

Moderation in the Growth of Staff Strength

            Appendix Table 6 presents ministry-wise staff strength and remunerations of staff over the past 5 to 6 years.  There is no gainsaying that the growth in the staff strength of central ministries has been contained, though some of the ministries/departments like the Department of Atomic Energy and the Ministry of Home Affairs (paramilitary forces in particular) have had to increase their staff strength.  The total staff strength of all ministries/departments together were at 33.19 lakh as at the end of March 2003 and it would remain at 33.30 lakh at the end of March 2008.  During the same period of five years, however, there has occurred a 42 per cent rise in the remunerations of staff from Rs 32,615 crore to Rs 46,379 crore

Highlights of  Current Economic Scene

AGRICULTURE  

State Trading Corporation of India (STC) has floated a tender for importing 10 lakh tonnes of wheat for the public distribution system (PDS) to make up for the shortage resulting from lower-than-expected procurement by the central government agencies. As per the official records, the government agencies have procured only 78.6 lakh tonnes of wheat in the on going rabi marketing season 2007-08, against the 87.9 lakh tonnes during the corresponding period of 2006-07. Out of total 10 lakh tonnes of wheat to be imported, 5.4 lakh tonnes are required to be delivered during May-June 2007 and the remaining quantity of 4.6 lakh tonnes in July 2007.  During 2006-07, wheat imports by the STC have stood at 55 lakh tonnes, as the procurement has been dismal at 92.3 lakh tonnes. The central government has decided to keep the import price below US $ 230-US $ 235 per tonne C&F (cost and freight). The tender has received only 2 responses – one from Mumbai and another from Delhi . Meanwhile, wheat growers in Punjab have decided to protest this import and would demand the central government to hike the minimum support price (MSP) to Rs 1,140 per quintal to farmers from current Rs. 850 per tonne.

The minimum export price (MEP) of onions has been revised downwards by US $ 30 per tonne to US $ 225 with effect from May 01, 2007 to provide support to domestic prices. This has been the second consecutive downward revision of onion MEP as it was lowered by US $ 80 per tonne to US $ 255 in April 2007. Onion exports from the country have jumped by about 44 per cent in 2006-07 to 11.3 lakh tonnes against 7.8 lakh tonnes in 2005-06. The 2006-07 exports were valued at Rs 1,070 crore.  In the current financial year 2007-08, so far, about 70,000 tonnes have been exported on a good demand from Dubai , Malaysia , Sri Lanka and Bangladesh .

As per the industry sources, sugar output in India , is likely to increase by 37 per cent to touch 265 lakh tonnes in sugar season (October to September) 2006-07. The country had produced 193 lakh tonnes in 2005-06.  The ministry of agriculture has estimated the sugar production in 2006-07 provisionally to be over 250 lakh tonnes. In addition to this, there had been a carry over surplus from last season of 44 lakh tonnes, while the estimated consumption has stood at 190 lakh tonnes.

The central government had decided to create a 2 million tonnes sugar buffer till April 2008 following surplus availability and falling prices. The creation of the buffer would cost the government Rs. 378 crore and an additional Rs. 420 crore credit would be provided to the mills by the banks. 

India has formed a global alliance on cashew nut with two other major exporters, Brazil and Vietnam , to promote the global cashew trade and help each other in increasing production and consumption. The major objectives of the global alliance include promotion and marketing of cashew kernels across the world, exchange reliable market information, crop size, government policies in each of the nations and conduct joint research on enhancing the yield per acre. They have planned to set up a committee to formulate uniform worldwide grades and specifications to avoid ambiguity and difficulties in international trade and implement these standards amongst the industry in respective countries.  

The inferior quality of Indian natural rubber has resulted in drastic decline in its exports, reflecting 25 per cent drop during the last financial year 2006-07.  According to exporters, China has not placed orders in the past six months due to the quality issue. China is the largest importer of Indian natural rubber, accounting for almost 35 per cent of the total annual exports. The total export in 2006-07 had been 55,309 tonnes, while it was 73,830 tonnes in 2005-06. During the peak season (December-January), India had been able to export only 1,547 tonnes.

Industry

SME

The government has proposed to increase the financial assistance to existing clusters of micro, small and medium enterprises (MSMEs) up to 80 per cent of their financial requirements. This has been provided for under the eleventh plan. According to the ministry of small-scale industries, this assistance will be provided towards aspects such as technology upgradation and meeting the financial gaps. The government will also be proposing to build a pool of consultants under its national manufacturing competitiveness programme. These consultants would be deployed with a cluster of 8-10 companies for a period of 12-18 months. The cost of these consultants will be borne by the Government.

Tyre industry

The rupee appreciation by six to seven per cent in the last eight weeks against the dollar is expected to bring down the price of imported radial tyres by Rs 600 to 800. The reduction in the price by about four to five per cent has come soon after the reduction in the peak import duty announced in the current budget. According to all India tyre dealers federation (AITDF), the rupee appreciation and peak-duty reduction have helped in not only bringing down the price but would also bring radial tyres usage within the reach of owners with a smaller fleet of five to six trucks. Now, a pair of truck/bus tyres will cost Rs 20,700 in comparison to its price of Rs 21,500 in February 2007. The freight truck operators had been reeling under volatility in the diesel price and frequent increase in the price of tyres in the last two years. The two key inputs, which together account for more than 80 per cent of the operating cost, had adversely affected the freight operators business. However, with stability in the diesel price in the last one year, strengthening of the rupee and import duty reduction, the trade is expected to improve its business in the long run.

Infrastructure

Power

Restarting of Dabhol power plant on natural gas has hit another roadblock with the construction of gas pipeline being further delayed. The Gujarat government has asked GAIL India ltd to suspend work on the 12-km section of the pipeline, which passes through the Surat district, due to protests by the local people. If the Dahej (Gujarat)-Uran (Maharashtra) section of the pipeline is further delayed, then Maharashtra will lose 700 MW of power by June from Dabhol plant and could be forced, from July onwards, to spend Rs 400 crore per month on naphtha for running the plant. Maharashtra state electricity distribution company ltd will also be forced to buy more power from other states. Currently Maharashtra is reeling under an extreme power shortage of 4,500 MW and it is heavily banking upon the restating of the Dabhol plant. If the plant runs smoothly on natural gas and pumps out 2,100 MW by December 2007, then Maharashtra would be able reduce its peak power shortage by 40 per cent in 2008 summer.

The government has, in its eleventh plan, planned to set up nine 4,000-MW each ultra mega power projects. But the prospect of even a single project getting operational during the current plan period now appears bleak. Contrary to the government's contention that some units of these projects would get operational by the end of the plan, the power ministry has stated that it would not be possible to complete any of the proposed ultra mega projects during the plan period and these would spill over to the twelfth plan (2012-2017). The government had issued letters of intent (LOI) to the promoters of the first two projects — Tata power company for the proposed Mundra ultra mega project in Gujarat and the Lanco-Globeleq combine for Sasan project in Madhya Pradesh — on December 28 last year. However, while the award of the Mundra project to Tata has been delayed by four months, the fate of the Sasan project is still hanging fire in the wake of controversies in the project's bidding process. These delays have raised question marks over the government’s capacity addition target of 68,000 MW this plan period.

Cement

Admitting that the dual excise duty structure proposed in budget 2007-08 has failed to elicit the desired response from cement players, the finance minister Mr P. Chidambaram has announced an ad valorem duty of 12 per cent for cement selling above Rs 190 for a 50-kg bag, instead of the increased specific duty of Rs 600 per tonne proposed in the budget. However, cement selling at a price below Rs 190 would continue to enjoy the reduced duty of Rs 350 per tonne announced as part of the budget proposals. The minister is expecting an effective reduction of Rs 7 per bag on the excise duty liability.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) stood at 5.77 percent for the week ended April 21,2007 as compared to 6.09 per cent for the previous week or at a lower rate of 3.85 per cent during the corresponding week last year.

During the week under review, the WPI remained unchanged at 210.9  (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), rose by 0.1 percent to 219.2 from its previous week’s level of 219.1 mainly due to rise in prices of chicken, masur and gram. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) rose marginally from 320.4 to 320.5. The price index of ‘manufactured products’ group decreased by 0.1 pr cent to 183.5 from 183.6 for the previous week due to rise in food products like coconut and gingelly oil etc.

The latest final index of WPI for the week ended February 24,2007 has been revised upward from 208.8 to 209.0. Annual WPI inflation gone up to 6.20 per cent as compared to 6.10 per cent (provisional).

Banking

The department of economic affairs announced that beginning May 1, all foreign investment coming in as non-convertible, optionally convertible or partially convertible preference shares would be considered debt and come under the overall ambit of external commercial borrowing (ECB) guidelines and caps. This is the first time that the ECB cap, which hitherto applied only to debt, will cover a class of shares. The ECB cap for 2007-08 is $22 billion. In April-December 2006-07, Indian companies raised over $9 billion in ECBs, against $4.3 billion (excluding Indian Millennium Deposit redemptions) in the same period of 05-06.  In addition, any foreign investment coming in as fully convertible preference shares would be treated as part of share capital. It would also be included for calculating foreign equity for sectoral caps.  The finance ministry has also said that any foreign preference shares as on and up to April 30, 2007, would be outside the sectoral cap till their maturity. Issue of preference shares of any type would continue to conform to existing statutory requirements. The latest policy statement supersedes a Press Note of July 31, 1997, which prescribed the guidelines for Indian companies mobilising foreign investment through preference share issues.

Financial Markets

Capital Markets

Primary Market

Insecticides (India) Limited has tapped the market between May 07 and 11 by issuing 32.1 lakh shares of Rs 10 each in a price band of Rs 97-115 per share.

Binani Cement Limited has tapped the market between May 07 and 10 by issuing 205 lakh shares of Rs 10 each in a price band of Rs 75-85 per share.

MIC Electronics Limited has tapped the market between April 30 and 08 by issuing 51 lakh shares of Rs 10 each in a price band of Rs 129-150 per share.

Secondary Market

The market edged higher in a truncated trading week. Select side-counters were in demand, either due to their strong Q4 results or on expectations of good earnings.

The 30-share BSE Sensex rose 25.69 points to 13934.27 in the week ended 4 May. The S&P CNX Nifty advanced 33.85 points to 4117.35 in the week.

Small-cap and mid-cap stocks extended their recent gains. BSE Mid-Cap Index rose 129.63 points to 5863.16 in the week. BSE Small-Cap Index rose 90.09 points to 7031.57 in the week.

The two key indices Sensex and S&P CNX Nifty witnessed a divergent trend on Monday (30 April). While the Sensex shed 36.21 points to end on 13,872.37, Nifty rose 4.40 points and settled at 4,087.90. However, the highlight of the trading session was a tremendous intra-day rebound by both. The Sensex reverted from the lower level after having plunged as many as 214.99 points in mid-morning trade.

The market remained closed on Tuesday (1 May) and Wednesday (2 May) on account of public holidays.

Renewed buying in Reliance Industries (RIL) took Sensex up 206 points on Thursday (3 May). Rallying US markets and firm Asian markets aided rally on domestic bourses.

A fall in RIL, caused by an unfavorable interim order of the Bombay High Court, pulled the barometer BSE Sensex below the psychologically important 14,000 mark on Friday (4 May). IT pivotals also edged lower, hit by the rupee’s surge. The domestic bourses bucked a firm trend in Asian stocks. Sensex lost 143.94 points to finish at 13,934.27.

FIIs pressed sales to the tune of Rs 304.60 crore on Monday (30 April) but they resumed buying on Thursday (3 May) with an inflow of Rs 56.20 crore. Mutual funds were net buyers to the tune of Rs 71.30 crore on Monday and Rs 298 crore on Thursday.

Finance Minister P Chidambaram on Thursday announced changes in the Finance Bill 2007-08, following a discussion in Parliament. Chidambaram said the government will charge an ad valorem duty of 12% on cement priced above Rs 190 per 50 kg bag as against the budget proposal of Rs 600 per tonne. After this 12% duty, the effective reduction in tax burden on cement sold above Rs 190 per bag would be up to Rs 7, Chidambaram said during the debate on Finance Bill 2007-08 in the Lok Sabha.

The import duty on jems & jewellery has been completely abolished and duty on cut diamonds abolished. The export duty on low-grade iron ore export was slashed to Rs 50 per tonne from Rs 300 per tonne.

The Finance Minister also recast the tax on Employee Stock Options (ESOPs). Fringe Benefit Tax will now be applicable on date of vesting. Guidelines will be issued in due course on how to arrive at the value of ESOPs. The Lok Sabha on Thursday passed the Union Budget 2007-08 by a voice vote

Derivatives         

The Nifty May 2007 futures settled at 4,120, a slight premium of 2.65 points as compared to the spot closing of 4,117.35.                        

Government Securities Market

Primary Market

Under the weekly T-Bill auctions, the RBI mopped up Rs.2000.00 crores (MSS worth Rs.1500.00 crores) and Rs.1626.33 crores (MSS worth Rs.1000.00 crores) through 91-day T-Bill and 182-day T-Bill. The cut-off yields for the 91-day and 182-day T-Bill were 7.6851% and 7.7271% respectively.

 RBI has announced the sale (re-issue) of "7.55% Government Stock 2010" for Rs.2000 crores under the Market Stabilisation Scheme (MSS) on May 9, 2007.

 RBI has announced the sale (re-issue) of "7.49 per cent Government Stock 2017" and "8.33 per cent Government Stock 2036" for Rs.6000 crores and Rs.4000 crores respectively on May 11, 2007.

 RBI has revised the ceiling for the outstanding under the Market Stabilisation Scheme (MSS) for the year 2007-08 to Rs.1, 10,000 crores with a threshold of Rs.95,000 crore.

 RBI announced that the rate of interest on the Floating Rate Bonds, 2016 (FRB, 2016) applicable for the year (May 7, 2007 to May 6, 2008) shall be 7.83% per annum.

Secondary Market

During the week, the weighted average call rates during the period ranged between 7.90% and 9.12%, while weighted average repo rates ranged between 7.13% and 7.85% and the weighted average CBLO rates ranged between 6.69% and 7.65%. The average volumes of Call, Repo and CBLO segments were Rs.11479.18 crores, Rs.6510.78 crores and Rs.13248.39 crores respectively. The daily average outstanding amounts in the LAF (reverse repo) and LAF (repo) operations conducted during the period were Rs.393.33 crores and Rs.8508.33 crores respectively. The weighted average YTM of G.S 2017 8.07% bond was 8.1499% on May 04, 2007 as compared to 8.0328% on April 27, 2007. The 1-10 year YTM spreads increased by 7 bps to 37 bps.

Foreign Exchange Market

The rupee-dollar exchange rate appreciated from Rs 41.29 on April 30 to Rs 41.18 on May 03 and again rose to 40.90 on May 04.

The six-month forward premia closed at 5.61% (annualized) on May 04, 2007 vis-à-vis 6.8% on April 27, 2007.

Commodities Futures derivatives

The chief executive officer and managing director of the National Commodity and Derivatives Exchange (Ncdex), P H Ravikumar said, blaming futures trading in commodities for rising prices was misplaced as the non-exchange traded goods had contributed more to inflation than those traded in the exchanges. Exchange has made a detailed presentation on futures trading and its impact on prices to the expert panel headed by Abhijit Sen. In a study undertaken by the exchange, it was observed that the prices of wheat and pulses were rising due to supply constraints. Earlier this year, the government had banned futures trading in urad, tur, wheat, and rice to keep a check on the prices. Inflation contribution of commodities traded on the exchange was 0.3% while commodities not traded contributed 0.835 to the WPI. Ravikumar said the weightage of commodities not traded on the exchange in Wholesale Price Index was also higher at 2.63% than those traded at 2.06%.

The expert panel, set up by the Centre to study the impact of futures trade on prices of farm commodities, is scheduled to submit its recommendations by the May-end. Ravikumar’s statement assumes significance as the standing committee on food, consumer affairs, and public distribution on Friday reiterated that futures trading in all essential commodities be banned. The committee observed that the objective of futures forward trading is to help farmers in price discovery and price risk management, but small farmers were not able to reap the benefits.

Ravikumar said Farmers have largely benefited from futures trading, while he quoted case studies prepared by Haryana Marketing Federation, National Institute of Agricultural Marketing, Jaipur, and Institute of Agri-Business Management , Bikaner .

Ravikumar said wheat farmers have got better prices on account of futures trading, at least Rs 20 higher than the minimum support price (MSP). He said futures trading can even help the government in its procurement operation by timely import decision can be made by monitoring wheat futures closely, MSP can be fixed based on the harvest month futures price and Food Corporation of India can buy wheat on commodity exchanges if there is a deficit in procurement.

Rebutting criticism that futures markets are causing escalation of prices in certain commodities, Mr Anjani Sinha, Director of Multi Commodity Exchange, has said the markets would have no impact on prices. Giving an example, he said that prices of sugar, which were ruling at Rs 2,200-Rs 2,300 a quintal last year, had come down significantly this year. On the other hand, prices of wheat (trading of which was banned by the Government early this year) and some pulses had gone up. While this was the case with the agricultural commodities that were in the trading list, those, which were not covered in the list, like onions and moong dal too showed a sharp increase. Prices of commodities are influenced by demand and supply

With the organised retailing witnessing a big boom, major players such as Reliance, Pantaloon and ITC have begun futures in potatoes, Mr Sinha said. This enabled the retail players assured quantities, quality products and shield against price hikes.

He said the exchange was going to have tie-ups with all leading global exchanges. They have already entered into agreements with London Metal Exchange and Chicago Climate Exchange

He said biggest challenges for the growth of commodity markets in the country were lack of knowledge and rural infrastructure. The Multi Commodity Exchange (MCX) is likely to start futures trading in barley and coriander soon.

National Spot Exchange Ltd (NSEL), which is hopeful of commencing electronic trade of agricultural commodities by the year-end, will enroll traders in two months. NSEL is an arm of Multi Commodity Exchange. They have initiated a nationwide campaign to educate farmers and traders on the NSEL activities and its advantages. Farmers would get better price realisation if they join the trading. The exchange would first focus on Gujarat , Rajasthan, Kerala, and Andhra Pradesh. NSEL will set up computer-networked offices in major arrival markets (like Nizamabad and Guntur ) and warehouses to manage the commodities procured from farmers. To begin with, it would start operations in one or two places in each State. Mr D.S. Kolamkar, Economic Adviser to the Forwards Markets Commission, said a Bill was likely to be introduced in the next session of Parliament to make the commission an autonomous regulatory body on the lines of the SEBI

In a significant move, the Multi-Commodity Exchange (MCX) has joined hands with Federation of Farmers’ Association (FFA) to dispel myths among the farmers about futures trading resulting in increase in foodgrain prices. In fact, this form of trading would help in averting crisis arising out of crop shortages and crop failures. Addressing an awareness programme on futures trading for farmers here on Monday, Anjani Sinha, CEO, National Spot Exchange Ltd said that futures exchanges provided price signals for the future, and when monitored closely, it can avert major crisis during shortages. Through spot exchanges or electronic virtual markets, exchange wants to empower farmers with real-time information and on that basis; better price can be achieved while selling. The MCX-FFA initiative aims at achieving widespread participation of actual producers and bringing farmers under one platform and helps them with national trends of the production and arrives at a best price for the crop. This in turn, can be hedged to secure a long-term interest and capital. Further, MCX is looking at adding more products in the pipeline. Currently it offers futures trading in 68 commodities National Spot Exchange have sought a state level licence from the Andhra Pradesh government. According to Rule 53A, it specifies Rs 10 crore as investment requirement for setting up private market yard which is linked to investment in physical infrastructure.

Corporate Sector

With aviation turbine fuel prices likely to go up by around 4 per cent for the month of May 2007, airline companies are planning to increase the fuel surcharge. The fuel surcharge, introduced in May 2006, currently stands at Rs 750. It was last revised in September when ATF prices stood at Rs 43,989 per kilolitre. Since then fuel prices have seen a continuous increase over the previous quarter, with the result that the fuel surcharge is likely to go up again by Rs 100.

Sakthi Auto Component Ltd, the Rs 250-crore subsidiary of Sakthi Sugars, has acquired Intermet Europe, an auto component company owned by Intermet International Inc of the US , for a consideration of $130 million (Rs 535 crore). Intermet Europe is a $165 million profit-making company with two plants in Germany and one in Portugal and is engaged in the manufacture of precision castings in ductile iron for the automotive industry with a total annual production capacity of 1,65,000 tonne. The combined entity called Sakthi Automotive Group will be headquartered in Germany .

Ashok Leyland is in the process of buying out a Detroit-based testing services firm. The commercial vehicle major has signed a share purchase agreement to acquire 100 percent of the paid-up capital of Defiance Testing and Engineering Services, Inc (DTE). The purchase price of the transaction is $17 million, which is approximately Rs 70 crore. DTE, which is currently owned by GenTek Inc, USA , is a profitable organisation engaged in providing independent testing services for leading auto original equipment manufacturers (OEM) and their Tier-1 and Tier-2 suppliers.

Maruti sold 50,352 units in April, up 17 percent from 43,127 units a year earlier. GM India reported a 22.2 percent growth in April and sales 4,474 units against 3,662 units in April 2006. Among two-wheelers, motorcycle market leader Hero Honda reported a modest 4.9 per cent growth while Bajaj’s motorcycle sales in April fell by 13 per cent as it sold 1,64,304 units against 1,88,518 units in April 2006.

For the first time, big retailers like Reliance Retail, Pantaloon, PepsiCo and ITC have taken position on the Multi-Commodity Exchange (MCX) for futures trading of non-perishable products. They have teamed up with MCX for potato futures trading. Approximately, these companies source about 1,000 tonne of potato on weekly basis for distribution across the country through their outlets. Companies have started working on contract farming for commodities. NSE is poised to offer better price realisation for farmers through improving marketing efficiency, reduce the cost of intermediaries and offer an alternative spot trading platform.

The Bombay High Court has restrained Mukesh Ambani-led Reliance Industries Ltd (RIL) from entering into any contract for the use or supply of gas from the K-G Basin that was earmarked for Anil Ambani’s Reliance Natural Resources Ltd (RNRL) to any third party. RNRL, was entitled to buy 28 mmscmd of gas, however, the arrangement ran into legal complications. Under the demerger pact between the brothers, signed on the basis of a settlement arrived at in 2006, RIL was to supply 28 mmscmd to RNRL. In November last year, RNRL filed an application in the High Court, praying for implementation of the demerger agreement.

Finance minister P Chidambaram has moderated his Budget proposal to levy 3 per cent import duty, additional custom duty as well as countervailing duty on import of aircraft, including helicopter, by removing flying schools and smaller regional operators from its purview. The provisions would, however, continue to apply to non-scheduled operators (all other operators other than regional), corporate jets and for private use.

Providing partial relief to iron ore exporters, finance minister proposed to reduce the export duty on iron ore, fines with Fe content of 62 percent and below, to Rs 50 per tonne. On iron ore fines having Fe content above 62 percent and on iron ore lumps, the duty will, however, remain at Rs 300 per tonne as proposed in the Budget 2007.

Tata Steel has firmed up plans to refinance the bridge loans it had availed to fund its $12.9 billion acquisition of Anglo-Dutch steel maker Corus Group plc. The Indian steel maker had received Rs 28,960 crore bridge facility from Credit Suisse, ABN Amro and Deutsche bank.

Mumbai based Wockhardt has announced their fifth buyout in Europe by acquiring French pharmaceutical company Negma Laboratories for $265 million. The transaction is valued at 1.8 times the sales and 9.7 times the EBITDA of Negma Laboratories. With the buyout, Wockhardt will be the largest Indian pharmaceuticals company in Europe with more than 1,500 employees.

Information Technology

The Indian information technology and related services (IT/ITeS) industry is predicted to become a $100 billion plus industry by 2011, growing at a compound annual rate of (CAGR) of 18 per cent, as per the IDC India report. Moreover, the domestic IT/ITeS, with revenues growing at 19.7 per cent CAGR, is projected to touch Rs 1,68,370 crore in 2011 This also means that domestic IT/ITeS revenues will grow faster than the export revenues over the next 5 years. The Indian IT/ITeS industry clocked Rs 1,98,477 crore of revenue in 2006, up by an impressive 31 per cent over 2005. On the domestic front, IT/ITeS spend has been estimated at Rs 68,411 crore in 2006, a gain of 26 per cent over 2005.

The personal computer market is set to grow by 22 per cent in this financial year and may record sales of 6.5 million units. According to the Manufacturers’ Association for Information and Technology (MAIT), strong macroeconomic conditions and buoyant buying sentiments in the market led by demand from various industry verticals will spur the growth. MAIT also announced that the total PC sales between October and December 2006, including desktop computers and notebooks, were 1.39 million units, registering a growth of 28 per cent over the same period last financial year.

Telecom

A fall in hardware and component prices and fierce competition has resulted in handset prices dropping 10-15 per cent across brands over the last 12 months. Prices of components such as LCDs, batteries, VGA camera, memory chips and add-on features like radio and music players have declined owing to technological developments and competition. Overall hardware costs have fallen 10 – 20 per cent and in some cases and are expected to fall further. Entry level handsets, which have seen prices drop from an average of Rs 2,500 in the year 2006 to Rs 1,500 in 2007 and are expected to drop as market majors Nokia, Motorola and Sony Ericsson leverage their scale and product range to compete on price and differentiation. Analysts say that with the mobile subscribers base in India projected to surpass 300 million by 2010 from 166 million now, handset prices will decline further as manufacturers try to reach to rural and semi-urban markets.

Reliance Communications is planning to invest Rs 10,000 crore in capital expenditure for the financial year 2007-08 across all segments of its business.

*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

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com