Highlights of  Current Economic Scene

AGRICULTURE  

According to data compiled by the Price Monitoring Cell in the Department of Consumer Affairs, the retail prices of essential items especially edible oils and rice have increased drastically in many parts of the country during 2007.  The spiral in domestic oil prices has mainly been a reflection of inflationary pressures prevailing at global level in vegetable oil segment, which has resulted from their diversion towards biofuel manufacture. In addition to it there is shortfall of oilseed production. While in contrary to the international trend, wheat has witnessed a downtrend in its price in the domestic market, pulses, except gram and arhar, have also shown some respite in inflationary pressures. Milk prices; too have shown a noticeable increase over the last couple of years.

According to Solvent Extractors Association of India, India ’s oilmeal exports have grown by 8 per cent in December 2007 to 676,452 tonnes compared with 626,675 tonnes during the corresponding period in 2006 mainly on higher soymeal and groundnut meal exports. The overall export of oilmeal for the period April - December 2007 is reported to be 2.97 million tonnes as compared with 3.18 million tonnes showing a downfall of 7 per cent from a year ago. While during the same period, exports of soymeal fell to 1.98 million tonnes from 2.16 million tonnes and rapeseed meal export dropped to 597,927 tonnes from 656,825 tonnes.

As per the estimates given by Cotton Advisory Board (CAB), India is likely to produce 31 million cotton bales (one bale = 170 kg) in 2007-08, up by 10.71 per cent from the previous year’s 28 million bales, due to increase in acreages under cotton to 9.53 million hectares this year from 9.14 million hectares last year. Gujarat, alone, is estimated to produce 11 million bales followed by Maharashtra and Andhra Pradesh with 6 million bales and 4.3 million bales, respectively. The country would export around 6.5 million bales as against that of 5.8 million bales last year. Imports are projected to go up to 0.65 million bales from 0.55 million bales last year.

According to forecast of International Cotton Advisory Committee (ICAC), world cotton area during 2008-09 would largely remain unchanged at 34 million hectares, but production is expected to rise by 5 per cent to 26.9 million tonnes on account of expected increase in yield. On the other hand, global cotton mill utilisation is likely to be around 27.5 million tonnes that is only 1 per cent higher than that of previous year. Overall consumption is expected to exceed production resulting into further decline in ending stocks to 10.7 million tonnes. India is, further, determined to consolidate its position as a major supplier of cotton to the world market due to sharp expansion in domestic production. Despite appreciating rupee, Indian cotton exports are seen performing well because of price parity.

The onion exports form the country is likely to fall in 2007-08 due to curbs on overseas sales during the festival season and congestion at ports. Untill December 2007, 6 lakh tonnes of onion have been exported and the final export figure for the financial year is likely to be around 8 lakh tonnes, showing a decline of around 31 per cent from the previous year’s 11.61 lakh tonnes. Onion exports have declined by 36 per cent to 5.97 lakh tonnes during the April-December 2007 as compared to that of 9.26 lakh tonnes a year-ago.

The Cabinet Committee on Economic Affairs (CCEA) has approved the increase in MSP of copra for the 2008 season. The central government has decided to increase the minimum support price (MSP) of copra by Rs 40 per quintal on both the milling and ball varieties in order to safeguard the interest of coconut growers in the country. Based on the recommendation of the Commission for Agricultural Cost and Prices (CACP), the government has fixed the MSP for fair average quality (FAQ) of milling copra at Rs 3,660 per quintal and for FAQ of ball copra at Rs 3,910 per quintal. The increase in the MSP of copra is expected to encourage the farmers to step up investment in coconut cultivation and also help in increasing production and productivity of coconut in the country.

According to International Coffee Organisation (ICO), world coffee exports have totalled over 7 million bags (1 bags equal to 60 kg), showing a downfall of 9.3 per cent in November 2007 as compared with the volume of 7.74 million bags recorded during the corresponding period. The sharp fall is witnessed due to low shipments from the countries such as Brazil , Vietnam and India . Indian coffee exports during November 2007 declined by 22 per cent at 1,68,374 bags as against that of 2,16,937 bags a year ago. However, coffee exports in the 12 months to November 2007 have been higher by 5.3 per cent to 9.578 crore bags as compared to that of 9.094 crore bags during the corresponding year.

Marine Products Export Development Authority (MPEDA) would be releasing its action plan for the development of tuna fisheries in the country. On implementation of which, tuna exports are slated to increase by 12 per cent of the country’s US $ 4 billion marine exports by 2013. The major foray into tuna exports would also reduce the dependence on shrimp, which constitutes around 53 per cent of marine exports by value. The locations where the action plan would focus are Vizag, Lakshwadeep Andaman and Nicobar and Tuticorin.

The National Bank for Agriculture and Rural Development (Nabard) has sanctioned Rs 23.68 crore to Kerala for implementing various rural development projects in the state. A total of 91 projects would come under the Nabard assistance, of which 72 are minor irrigation projects involving a loan of Rs 17.42 crore and to be implemented in Wayanad, Kasargod, Palakkad, Malappuram and Ernakulam districts. These projects would bring about 3,710.68 hectares under irrigation thereby enhancing the productivity of various crops. The assistance also includes 19 rural road projects involving a loan of Rs 6.26 crore, which would be implemented by local self-government departments in Kollam, Malappuram, Palakkad and Kasargod districts. These projects are designed to provide improved connectivity to 33 villages and 44 marketing centres. All the projects together are expected to generate employment of around 5.76 lakh man-days.

The Marine Products Export Development Agency (MPEDA) would set up the country’s first special economic zone (SEZ) for marine products in Andhra Pradesh., which is likely to be set up at Kara Agraharam near Machilipatnam, the 260-acre SEZ would house 30-40 units from the private sector, specialising in the processing of various marine products. The assistance would be provided from the National Fisheries Development Board (NFDB), the central government is going to set up a specific pathogen-free seed multiplication centre (costing Rs 30-crore), as a joint venture with the US-based Moana Technologies, located near Sompeta in Srikakulam district.

Industry

The slow down in the growth of all the three sector pushed down the index of industrial production to 5.3 per cent in November 2007, a 13 month low as compared to 9.2 per cent last year.. Mining sector and electricity sector grew by 3.5 per cent and 5.8 per cent during the month. Slow down in the growth of manufacturing sector is almost one third recorded in November 2006. Out of the 17 industries, four industries declined and four industries registered double digit growth.. As per use-based classification, the sect oral growth rates in November 2007 over November 2006 are 4.8 per cent in basic goods industries, 24.5 per cent in capital goods and 7.3 per cent in intermediate goods. Consumer goods decline by 2.6 per cent due to substantial fall in the production of consumer durables and consumer non-durables.

Infrastructure

The index of six core infrastructure industries having a combined weight of 26.7 per cent in the index of industrial production registered a slower growth of 5.3 per cent as compared to 9.6 per cent in November 2007. The dismal performance of crude petroleum rose only by 0.3 per cent as against a growth of 9.8 per cent last year, and comparatively lower growth performance of refinery products, electricity, cement, steel all contributed for the lower rate of growth. However, coal production for the third month in succession registered a faster growth with its production rate registering a growth of 7.7 per cent in November 2007 as against a low growth of 4.9 per cent in November 2006

Inflation

The annual rate of inflation calculated on a point to point basis, remained stationary at 3.50 per cent for the week ended December 29, 2007 as compared 5.89 per cent as on December 30, 2006.

Primary Articles group declined marginally to 222.1 from 222.4 for the previous week. Food articles group decline due to lower price of moong  urad, fruits and vegetables, and fish marine..

Index of Fuel, power, light and lubricants remained unchanged at its previous week’s level of 330.2.

The index of manufactured products rose by 0.2 per cent due to higher prices of rape and mustard oil, oil cakes, butter, imported edible oil, rice bran oil, gingelly oil and cottonseed oil.

The final WPI for all commodities had been revised upward from 215.6 to 216.1 for the week ended November 03, 2007. As a result the rate of inflation calculated on a point to pint basis stood at 3.35 per cent as compared to 3.11 per cent provisional.

Banking

Punjab National Bank has received the approval of RBI for upgrading its Shanghai representative office to a branch in China .

Banks have urged the government to ask the RBI to outline flexible norms for recognizing defaults on lending to infrastructure projects, given the delays in project implementation, owing to factors beyond the promoter’s control. Current regulations require banks to classify a loan for financing an infrastructure project as a non-performing asset (NPA) if the project has not begun operation one year after the date on which the project was originally expected to be completed.

The Kerala-based South Indian Bank (SIB) has posted a growth of 64 per cent in net profit for the third quarter of fiscal 2007-08. SIB is the first bank to announce the third quarter results in the current financial year.

Axis Bank’s net profit rose by 66 per cent to Rs 307 crore in the quarter ended December 31, 2007 as against Rs 184 crore in the corresponding quarter last fiscal. The growth in profit was largely driven by 80 per cent increase in fee income at Rs 348 crore and 91 per cent growth in net interest income at Rs 747 crore.

Andhra Bank has raised Rs 700 crore through the issue of F-series subordinated debt bonds for 124 months at a coupon rate of 9.15 per cent a year. The issue was fully subscribed on the same day.

A consumer redressal court has fined the State Bank of India for its causal service, which had forced a customer to pay penalty. While disposing the case, the court imposed a penalty of Rs 23,950 on SBI.

Public Finance

During April-December 2007, the net direct tax collection of center at Rs. 2,06,029 crore was about 43 per cent more than that collected in the same period last year. As a per cent of budgeted tax collection it is about 77 per cent. Corporate  tax collection with a share of 62 per cent in the total collection rose by 39 per cent to 1,28,194 crore during the period. Personal income tax ( FBT, STT, and BCTT) grew by a stupendous 50.36 per cent to Rs. 77,535 crore.  Securities transaction tax (83 per cent), fringe benefit tax ( 69 per cent) and banking transaction tax (15 per cent) all grew . In direct tax collection, Mumbai lead the way in the mobilization of taxes followed by Pune. In corporate tax collection the growth was highest in Guwahati followed by Lucknow , them Mumbai and Kochi .

Financial Market

Capital Markets

Primary Market

The primary market is expected to witness record fund-raising this year, thanks to a line-up of initial public offers (IPOs) and follow-on public offers (FPOs). According to Prithvi Haldea, the chief of Prime Database, The IPO’ s and FPO’s together would mop up Rs 75,000 crore during this calendar year while Rs 60,000 crore will be collected through IPOs, the remaining Rs 15,000 crore is expected to be raised through FPOs. This will be the highest-ever amount in a year, the previous highest being Rs 45,176 crore in 2007.  According to him, there is a huge appetite for Indian paper as almost all issues over the past three years have received huge over subscriptions, reflecting the strength of the market. Public issues hitting the market have a good track record of established companies and promoters. 

The New Delhi-based Cords Cable Industries Ltd, manufacturer of cables for a variety of industries, is to enter the capital market with an IPO of 30.85 lakh equity shares of Rs 10 each for cash at a price to be decided through a 100 per cent book-building process. The issue opens for subscription on January 21 and closes on January 24and the price-band has been fixed between Rs 125 and Rs 135 per equity share. The issue would constitute 27 per cent of the fully diluted post-issue paid-up capital of the company.

On January 11,2008, the Supreme Court passed a blanket interim order allowing Reliance Power Ltd to launch its Rs 10,000-crore initial public offering (IPO) as scheduled on January 15 notwithstanding any order passed by any other court in the country against the IPO.

Ramky Infrastructure Ltd, the flagship company of the Hyderbad-based Ramky group, is coming up with a Rs 450-crore IPO and has filed Draft Red Herring Prospectus with Sebi. The prospectus delineates its new business plans. The company is planning to enter manufacturing of prefabricated concrete structures business.

IPO for the Railway Ministry subsidiary RITES is likely to hit the market by April with Union Cabinet on January 10, 2008, giving its nod for reducing Government holding in the company to 72 per cent. RITES Ltd, a wholly state owned consultancy firm, would raise funds by issuing fresh equity and sale of existing shares. The lead managers for the IPO are Kotak, Enam and ICICI Securities. RITES would raise funds through issue of one crore fresh equity shares (with a face value of Rs 10) and offloading 40-lakh Government shares.

Delhi-based alcohol beverage company Globus Spirits Ltd has received Sebi’s nod for entering the capital market with its IPO aggregating to Rs 68 crore through the book-building route. Globus Spirits proposes to modernise and expand its production facilities at Behror, Rajasthan and Samalkha, Haryana; develop and acquire IMFL brands; and revamp its storage and bottling capacity. The book running lead manager to the proposed issue is SREI Capital Markets Ltd.

The IPO of Kishore Biyani promoted Future Capital Holdings was subscribed by four times on the first day of the issue according to NSE data.  Future Capital Holdings (FCH), the financial services arm of Kishore Biyani’s Future Group, is likely to get into asset management and retail broking. FCH is currently into investment advisory, retail financial services and research. According to Sameer Sain CEO and Managing Director, they want to become a leading financial services provider in the country and look at all the opportunities to achieve that aim

Stockbrokers are providing incentives to the retail investors to subscribe to Reliance Power's (RPL) initial public offer (IPO) on their behalf. For every application where shares are allotted, brokers will pay Rs 7,000 to the retail investor. The amount would be paid over and above the cost of shares allotted.  The deal, sources say, is that the retail investor, subscribing on broker’s behalf, would have to make an application for 225 shares, the entire cost of which – considering the discount of Rs 20 a share that RPL has offered – would come to Rs 96,750. Since the investor is entitled to make only 25 per cent payment while subscribing to the RPL issue, under the part-payment scheme, he would have to invest only Rs 24,187.50 for subscribing to 225 shares. Therefore, the retail investor would stand to gain nearly 29 per cent returns on his investment of Rs 24,187.50 even if he is allotted the minimum number of shares, which is a lot of 15 shares. 

The average size of the IPOs in the Indian primary market is on the rise and has risen to Rs 403 crore in 2007-08 (FY08, till date), and the smaller issues (raising funds less than Rs 5 crore) have become the matter of the past. This also strongly underlines the need for a separate exchange for the smaller and medium enterprises (SMEs), who wish to tap the market and get listed on the bourses. In FY06, when there were 6 Companies who raised less than Rs 5 crore via the IPO route, the number declined to 3 in FY07, further from April 2007 till date there has been no company who raised less than Rs 5 crore from the public. It was the same count for companies raising money in the range of Rs 5 to Rs 10 crore with no company raising money from April 2007 till date. In all, 104 Companies raised money in the range of Rs 10 crore to Rs 500 crore in FY07, while in FY08 till date, only 52 Companies have raised money in that range.

Secondary Market

The BSE sensex gained 140.56 points or 0.67 per cent to 20,828 in the week ended Friday, 11 January 2008. However, the S&P CNX Nifty declined 74.20 points or 1.18 per cent to 6,200 in the week. The Nifty hit a record 6,350 points intraday and bottomed at 6,112 before closing at 6,200 for a week-on-week loss of 1.18 per cent. The narrower the sensex was down to 20,505 points before recovering to close at 20,827 and it actually gained 0.7 per cent.

Indian stocks have sharply outperformed major global markets since October, with the BSE sensex being one of the few indices globally to scale a new high in 2008. The sensex has been soaring merrily over the last three months even as other global markets have been weighed down by innumerable worries. The other major global indices are trading between 10 per cent and 20 per cent below the highest levels recorded in 2007. Even last year’s high fliers, Shanghai Composite Index and Hang Seng, are more than 12 per cent below their 2007 peak. Most global indices peaked in the second week of October with the re-surfacing of the sub-prime crisis.

Life insurance companies are rapidly catching up with the money power of foreign institutional investors (FIIs). In this financial year so far, insurance companies have invested around Rs 36,000 crore in the stock markets against around Rs 60,000 crore invested by the FIIs.  But the gap is expected to narrow in the last quarter (January to March 2008), with the insurance companies estimated to pump in an additional Rs 24,000 crore.

Sebi had proposed wider investor participation for delisting. However, Sebi’s proposal for a change in delisting norms has not found favour with the government which wants a status quo. Sebi, in its presentation to the finance ministry, had given two options: promoters should acquire either at least half of the public shareholding in their respective companies, or buy shares which will take their shareholding to a little over 90 per cent, whichever ensures a larger number of shares. The existing rules do not specify a minimum level of public participation for delisting. Sebi had further suggested that if half of the shareholders are not willing to participate in the buyback programme, the company should remain listed. The government, however, is not in favour of this suggestion on the ground that delisting should not be withheld if the promoter has already acquired over 90 per cent of the shares. It will block the exit route for those investors who have sold their shares to the promoter and are not happy with the management. Sebi had also given a deadline of May 2008 to the companies where the outstanding shares with the public are just on the verge of being 10 per cent or 25 per cent.

The government is planning a new regulatory regime for foreign sovereign wealth funds operating in India .  The finance ministry has convened an inter-ministerial meeting next month to discuss the new framework and asked the Sebi to submit its views since most of these funds operate as registered foreign institutional investors under the market regulator's jurisdiction. The move follows concerns raised by the Reserve Bank of India . According to sources, the central bank is concerned that most sovereign wealth funds operate in a non-transparent manner.

Sebi continues to issue draft proposals and circulars, one after another, in 2008. After a detailed proposal on primary issuance process for corporate bond, the regulator has now issued a circular for the introduction of index options with longer tenure on Friday, January 11,2008. Sebi said in a statement that it has decided to launch long-term options on BSE Sensex and NSENifty with tenures of up to three years. The option cycle of three serial months contracts will continue to exist. The move is aimed at helping investors to hedge their positions in the market for three years compared to the existing three-month duration. The product will be available with immediate effect, according to a Sebi circular.

Members from both ruling and Opposition parties in the parliamentary standing committee on finance on Thursday raised the issue of possible flow of funds from terrorist outfits into the Indian capital market. They sought the real picture on this front from the market regulator Sebi. Panel members, present at a presentation by Sebi on the issue, were of the view that the latter should give the present status, especially after the finance minister P Chidambaram himself talked about suspected terrorist funding in stock market on December 4 last year.

On Friday January 11,2008 BSE signed an agreement with OMX, a Sweden-based exchange technology provider, for trading and clearing systems to strengthen its derivatives and securities trading capabilities. Under the agreement, the BSE will implement the systems from OMX, which will serve as its new trading and clearing platform for derivatives trading and cash securities.  The first phase of the system will be rolled out before mid-2008. The launch of BSE’s new trading platform is part of its strategy to enhance the volume, speed up transactions and bring more liquidity, said Rajnikant Patel, managing director & CEO of BSE.  The new technology is also expected to offer a more robust derivatives platform for the Indian market from the BSE.

On January11, 2008 Sebi had said short selling will begin from February 01,2008. Last month Sebi said that it would allow short selling by domestic and foreign institutional investors, to sell stocks that they do not own at the time of trade.

Temasek Holdings and the Government of Singapore Investment Corporation (GIC) have requested the government to consider them as separate entities for all future investments in Indian entities.  The request has led RBI to postpone its approval for a proposal by Temasek and GIC to pick up 10 per cent each in ICICI Bank. The central bank had agreed to consider the request only as an exception. These investments came into India following the comprehensive economic co-operation agreement singed between India and Singapore .  Some sections within the government feel that it is possible to treat them as separate entities as is done in case of World Bank and its private investment arm - the International Finance Corporation. However, RBI is of the view that there cannot be a one-off approval and Temasek and GIC cannot be considered as separate entities as they belong to the same government - the government of Singapore .

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In an effort to accumulate cash for the two big upcoming IPOs - Future Capital Holdings (FCH) and Reliance Power - next week, investors sold small and mid-cap stocks heavily to trigger a sharp slide in the Bombay Stock Exchange’s (BSE) respective indices on Tuesday January 08, 2008.  BSE’s small-cap index fell 3.28 per cent, the biggest among all the indices, while the mid-cap index shed 2.82 per cent in an otherwise flat market. Sensex, the 30-share benchmark index, was up 0.29 per cent after piercing the psychological 21,000-mark in early trades.  According to dealers, investors, who sold the stocks on Tuesday, would get the money in their accounts by Friday.

Advance tax outflows along with IPO listings, new fund offers (NFOs) and inflows into debt instruments failed to dampen fund flows into the mutual fund industry in the recent past, according to a Crisil report.

Derivatives

The cash Nifty closed at 6,200 while the January, February and March futures settled at 6,203.6, 6,202.35 and 6,191.35 respectively.   The Junior closed at 12,466.2 with the January future settled at 12,558.25. The Bank Nifty (which was the only gainer) closed at 10,561.55 and the January future was settled at 10,583.35. The CNX IT was down to 4,404.35 in cash and settled at 4,417. In terms of liquidity only the Nifty had OI in the mid-term and far-term contracts.

Despite the up and down behaviour of the Nifty, it isn't registering exceptional daily volatility, in fact, last week's average daily ranges were on the low side of normal. This conceals the fact that there were two wide-ranging sessions and three exceptionally low ones.   The differentials between the three Nifty contracts are obviously nominal in fact, one could take a calendar spread of long Jan, short Feb on the logic that this pair normally has a wider difference. 

Government Securities Market

Primary Market

The six state governments auctioned 10-year paper maturing in 2018 through an yield based auction using multiple price auction method on January 07, 2008 for an aggregate amount of Rs. 5,833 crore. The cut-off yields were ranging from 8.03-8.12 with the lowest for Himachal Pradesh and the highest for Kerala.

On January 09, 2008, RBI auctioned 91-day and 186-day T-bills for the notified amounts of Rs.3,500 crore (out of which Rs.3,000 crore under MSS) and Rs.1,500 crore (out of which Rs.1,000 crore under MSS), respectively. The cut-off yields for 91-day and 186-day T-bills were 7.02 per cent and 7.23 per cent respectively.       

RBI is to re-issue11.30 per cent 2010 for 4,000 crore, on January 17, 2008 through price based auctions using multiple price method under the Market Stabilisation Scheme (MSS).  

RBI re-issued 7.99 per cent 2017 and 8.33 per cent 2036 for Rs.6,000 crore and 4,000 crore on January 11, 2008 at the cut-off yields of 7.56 per cent and 7.89 per cent, respectively.  

Secondary Market

Call rates stuck to a narrow range just above 6 per cent amidst comfortable liquidity conditions. The high non-debt inflows were evident from that there was 20 bidders for the reverse repurchase window of the RBI that resulted in mopping up Rs 19,925 crore.

Bullish sentiments in gilts market eased the yield curve across the maturity spectrum. Ample liquidity and benign interest rate scenario were the key drivers for the momentum in the gilts market. The trade volumes were bullish this week. This was evident from the high daily trade volumes. Average daily volumes during the week were in excess of Rs 15,000 crore, largely on account of purchases by banks and insurers. As a result, dated G-secs comprised about 90 per cent of trade volumes. However, yield spreads narrowed, as more banks moved into the long-dated securities. Of particular interest was the 8.33 per cent 2036 and 7.40 per cent 2035 per cent, both of which saw large trade volumes during the week, largely on account of purchases by LIC and other life insurers.

The Reserve Bank of India is examining the government securities portfolio of both primary dealers and banks, triggered by concern of overleveraging and stocking of huge portfolios.  The government securities market has been rallying in the past few days after the finance minister hinted at rate cut by banks and the RBI. The volumes in the government securities market had reached a high of 18,000 crore on Thursday and the yield on the 10-year benchmark security reached a low of 7.56 per cent. Till a few days ago, the yield on the 10-year benchmark paper was ruling in a range of 7.87-90 per cent.  Bankers said the examination of the bank books by the central bank has been triggered by the concern that banks may be maintaining bonds of higher duration or maturity anticipating appreciation in the gilts portfolio once the RBI opts for rate cut in the forthcoming monetary policy review by the month-end.    If the rates are not cut, then banks would run into losses leading to a rush for borrowings in the money market to make provision for the market losses. Most of the banks are seen stocking up long-term of bonds of 30-year maturity and above since the extent of appreciation in the portfolio is always higher for longer maturity papers. Primary dealers, on the other hand, are leveraging their capital base and maintaining huge positions in the government securities. These could also run in market losses if the interest rate position runs haywire.  The RBI also fears off-market deals in the government securities where the banks may have sold government securities to non-savvy investors such as pension funds, trusts who are aflush with funds after the government paid the interest on the special deposit scheme maintained by such trusts and funds.   According to dealers, the banks have been bullish since there are no auctions slated to be held in the rest of the financial year. The government has already stretched itself by borrowing in excess in June 2007 for buying the shareholding of State Bank of India from RBI.  Therefore, the RBI may slash the quantum of the borrowing programme if not completely cancel it, which is scheduled to be held next month. The liquidity, which has been a concern, has improved markedly with the RBI intervening in the market to buy dollars and releasing rupees. Since the RBI has cancelled market stabilisation scheme, there has been not supply in comparison to the maturing T-bills.

 A policy advocacy body today said that ever since the central government enacted the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, its development expenditure as a proportion of GDP declined from 7.49 per cent in 2002-03 to 6.42 per cent in 2005-06.  In a report on FRBM, the Centre for Budget and Governance Accountability (CBGA) called for scrapping the FRBM Act.  The body said the central government’s total expenditure, as a proportion of GDP, had also declined from around 17 per cent in 2003 to around 14 per cent in 2006-07.  In its analysis of development expenditure by states, the CBGA found that in almost all sectors of development, there has been a decline during the FRBM era.    In case of education, it declined from around 2.5 per cent of GDP in 2002-03 to less than 2.2 per cent of GDP in 2005-06.  In health sector, the decline has been from 0.6 per cent to 0.49 per cent and in agriculture from 0.67 per cent to 5.8 per cent. In overall social sectors, it declined from 4.5 per cent of GDP to 4.1 per cent of GDP during the period.  The CBGA hold that the argument that higher deficits lead to higher inflation has also been proved wrong. Though the central government has been able to reduce deficits, “rate of inflation for almost all sections of population has increased during the FRBM era,” the report maintained.

Bond Market

During the week under review, ICICI Bank tapped the market by issuing upper tier-II bonds and perpetual bonds by offering 9.70 per cent and 10.15 respectively for call at the end of 10 years for an amount of Rs 500 crore each both for 15 years. Both the issues had been rated AAA by crisil and care.

Canara Bank tapped the market by issuing lower tier II bonds to mobilise Rs 700 crore by offering 9.00 per cent for 10 years. The bond has been rated AAA by crisil and icra.

Andhra Bank tapped the market by issuing lower tier II bonds to mobilise Rs 700 crore by offering 9.70 per cent for 15 years. The bond has been rated AA+ fitch and care

Power Finance Corporation tapped the market by issuing bonds to mobilise Rs 200 crore through book building, for 3 and 5 years with a step up off 0.05 bps each. The bond has been rated AAA by crisil and icra. (Thru book building 8.75 - 8.80 per cent & 8.89 - 8.94 per cent respectively, 3 yrs & 5 yrs)

Bank of Maharashtra tapped the market by issuing lower tier II bonds to mobilise Rs 200 crore by offering 9.20 per cent for 10 years. The bond has been rated AA by care and crisil.

ICICI Bank is tapping the market by issuing lower tier II bonds to mobilise Rs 250 crore by offering 9.15 per cent & 9.25 per cent for 3 and 5 years respectively. The bond has been rated AAA by Crisil and Icra.

Foreign Exchange Market

The rupee closed at Rs.39.29/USD on January 11, 2008 as compared with Rs.39.32/USD as on January 04, 2008. The rupee moved between Rs.39.27 and Rs.39.29, with a standard deviation of 1 paisa during the week. The rupee attempted testing 10-year highs in the initial couple of sessions in the past week, but faced resistance and consistently closed flat in the week. Over the week, the unit managed to gain 5 paise. The six-month forward premia closed at 1.9 per cent (annualized) on January 11, 2008. The unit rallied to a two-month peak at 39.22/$ on the first day of the week supported by expectations of hefty foreign inflows that could arise out of upcoming IPOs.

The net inflows alone were about $625 million, which pushed up the rupee further to Rs 39.29 at the end of the week. According to traders the rise would have been far higher but RBI intervened in the form of buy-sell swaps. The forward premia for one-month declined to 0.92 per cent, down from 1.6 per cent in the previous week as importers cancelled their forward covers for up to three months.

Commodities Futures derivatives

Speculative activities continued to push up the pepper futures market on January 08,2008. Investors were active in selling futures and buying fresh spot exchange delivered material even at one rupee above the January price. Processors were buying expired material for reprocessing and selling. Arrivals at the terminal market of new crop continued to remain with 5 to 7 tonnes. The availability, as a result, is tight and that in turn has pushed up the spot prices by Rs 200 on Tuesday January 08,2008. Besides, the rupee continues to be strong against the dollar. Indian parity has gone up to $3,900-3,950 a tonne (c&f). Prices of other origins were reportedly firm and moving up.

Domestic gold prices zoomed to Rs 11,125 per 10 gm, lead by rates in the global markets rising to record high of $875 an ounce. The surge in the yellow metal’s price is owing to strong buying by the funds and surging crude oil prices, according to analysts. High prices have resulted in halt of import activity of gold and offtake from the bank’s bullion counter.

Concerned over the falling volume in agri-commodities, the National Commodity and Derivatives Exchange is looking at increasing its market share in gold futures trading by five times to 25 per cent.  With a recent spurt in the prices, gold as an investment option in the portfolio of investors has regained prominence.  NCDEX has recently launched new gold 100 grams trading lot futures contract in a bid to attract retail participation in futures trading in the precious commodity. This contract was in addition to the existing gold (1 kg) contracts that are traded on the exchange.

The Sugar futures dropped on January 10,2008 as traders unwound positions after prices climbed as much as 1.5 per cent a day earlier but the spot market firmed on concerns about a short fall in supplies. However, the sugar production in Maharashtra has declined by 15 per cent with mills crushing 20-22 per cent less cane this season (October 2007 -September 2008).

Considering the volatility in the steel sector, construction and engineering Companies including L&T, HCC, DLF, and Gammon India Ltd plan to approach the National Commodity and Derivatives Exchange Ltd (Ncdex) to restrict their spending on steel. Since steel accounts for about 20 per cent of the total construction cost of these Companies, the plan is seen as critical to hold their costs. The plan also has an advantage in that Companies would need to spend just 5 per cent of the amount upfront. According to Ramesh Iyer assistant vice-president Ncdex a volatile steel price coupled with the risk associated in stocking steel products is driving construction Companies to book the stock. The platform provides six months window period to block ingot and billet that have about 90 per cent correlation with finished steel products. Ingot and billet could be cast into a shape suitable for further processing such as TMT bars.

Indian investors missed the global bull-run in commodities as the domestic futures underperformed global peers by significant margins on frequent government interventions, ban on some futures and on an appreciating rupee. Four prominent commodity indexes on the National Commodity and Derivatives Exchange (NCDEX) and Multi-Commodity Exchange of India (MCX) averaged total returns of only 2 per cent in 2007.

The Multi Commodity Exchange of India (MCX) will launch coal and electricity futures contracts this year, MCX has received regulatory approval for the same. MCX, India's top commodity exchange by trade turnover, has also received government approval for electricity futures, which it plans to launch this year, after spot electricity contracts on the Indian Energy Exchange (IEX) become functional. Both IEX and MCX are promoted by Financial Technologies ( India ) Ltd.

Insurance

For the first time ever, Reliance Anil Dhirubhai Ambani Group (R-ADAG) and ICICI Bank, are planning to set up syndicates in London ’s Llyod’s market, one of the largest reinsurance markets in the world. Underwriting members of Llyod’s, referred to collectively as Llyod’s market – write business through syndicates and together form one of the world’s largest specialist commercial insurers and reinsurers, reporting gross written premiums (including brokerage) of £16.4 billion in 2006. Both R-ADAG and ICICI Bank already have two insurance companies each in – life and general insurance. By and large Indian insurers depend upon the London market primarily for their reinsurance needs.

Corporate Sector

Making its entry into India ’s automobile industry through a tie-up with International Cars & Motors Ltd, Italian automotive and design and styling house Pininfarina plans to set up a global designing hub in India in two to five years.

Ashok Leyland has sold 5,488 vehicles in the domestic market during December 2007, a 2 per cent increase over December 2006. The exports during the month rose up by 79 per cent to 852 units as against 477 units in December 2007.

Pantaloon Retail India Ltd., the flagship company of the Future Group is planning to expand Future Money outlets from the existing 95 to 400 in about 50 cities across India by 2010. In June 2007, Future Capital Holdings, a financial arm of the Kishore Biyani-led Future Group, launched its retail financial services offering, ‘Future Money’ – with the objective of becoming the leading retailers of financial products and services in India.

Chenni-based LifeCell India, the first private cord blood stem cell banking service provider in the country, is all set to acquire a stem cell therapy company in the US for $10 million. The buyout will be funded from the Rs 70 crore that is to be raised through an initial public offering (IPO) planned by Asia Cryo Cell, the parent company of LifeCell, in a couple of months.

L&T has bagged two major contracts from Cairn India worth over Rs 1,300 crore. These include construction of civil works and the consolidated construction works for the Northern Area Development Project located near Barmer in Rajasthan as Cairn India and its joint venture partners ONGC are beginning its first oil production in 2009. The order was secured by L&T against both domestic and international competition, and the project is scheduled to be completed in 18 months.

External Sector

According to Union Commerce  and Industry Minister, Mr. Kamal Nath, that there is a substantial trade between China and India and it is sustainable only if there is no large deficit. India ’s trade deficit with cChina ballooned from $ 4.12 billion in 2006 to $ 10 billion. However, Indian industry is strongly opposed to Regional Trade Agreement with China as they are feared that such agreement will swamp Indian market with cheap Chinese goods.

The Goan iron ore exporting industry says that the export duty on iron ore exports in the last union budget pushed down the exports during the first nine months of fiscal 2007-08.  The export decline by about 11 per cent during the period.

Telecom

Amid tight security and an altercation with Himachal Futuristic Communications Ltd chief Mahendra Nahata at Sanchar Bhawan, headquarters of the Department of Telecom (DoT), nine companies among 45 applicants were offered letters of intent (LoIs) for unified access service licences (UASL). Within hours, a number of these companies paid the required fees and were allotted licences, but not the spectrum, the radio frequencies that enable wireless communications. Around eight of these companies paid the required licencse fees and bank guarantees. Telecom business analysts have estimated that the government received around Rs 6,500 crore from non-refundable license fees.

Information Technology

Electronics hardware and software companies may soon be cleared to invest in special economic zones (SEZs) and integrated townships. Mega-city plans have been drawn by the Department of Information Technology and identified as an IT investment region. The idea of developing jointly hardware and software sectors was mooted by the Prime Minister’s Office after recommendations from industry bodies, including the Manufacturers’ Association for Information Technology (MAIT) and Nasscom.

*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.