Current Economic Statistics and Review For the Week Ended December 5

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Current Economic Statistics and Review For the Week
Ended July 25, 2009 (30^th Weekly Report of 2009)

The Central Budget: Need for a Medium Term Fiscal Strategy*

The recent central government budget for 2009-10 has received more than the usual interest amongst the media and academic circles, both before and after its presentation, essentially because of the extraordinary economic situation faced by the country in the face of the unprecedented global financial and economic turmoil. The unusual expectations generated in the minds of the public at large from the central budget have had a wider context, that is, the budget was sought to be providing answers to a wide variety of questions that have surfaced due to the confluence of a number of developments.

First, the high growth phase of four years 2004-05 to 2007-08 particularly of manufacturing, was brought to a precipitate halt in early 2008 following the sledge-hammer kind of monetary actions taken to fight inflation and there is the imperative of resuming a high growth path. Second, the slowdown in growth due to domestic reasons coincided with the rapid unfolding of the impact of the global crisis on the Indian economy in the form of reduced capital flows and the corporates finding it difficult to resort to external commercial borrowings, as also dampening of export demand. This situation calls for expanding domestic liquidity. Third, there occurred an acute deterioration in the fiscal health of the economy which was hidden in under-provision of expenditures in the original budget of 2008-09 (Govinda Rao 2009). These uncovered provisions related to pay and pension revisions as per the sixth pay commission recommendations, additional funds provided for food and fertilizer subsidies, funding of the loan waiver scheme, and additional allocations to various flagship programmes including the national rural employment guarantee (NREG). When the supplementary grants were sought and finally when revised estimates were presented, it became clear that the size of gross fiscal deficit had galloped from Rs. 133,287 crore (2.5% of GDP) in 2008-09 (BE) to Rs 326,515 crore (6.0% of GDP) and significantly, the bulk of this rise in the fiscal deficit - about Rs 105,613 crore out of Rs 193,228 crore - was on account of these uncovered expenditures, the stimulus packages representing a meagre amount of Rs 40,000 crore or thereabout. In fact, this uncovered expenditure size would gallop further, if extra-budgetary liabilities created in the form of special bonds for food, fertilizer and petroleum companies were taken into account (worth Rs 95,942 crore or 1.8% of GDP during 2008-09).

Table 1: Fiscal Indicators: Rolling Targets as Percentage of GDP
	As per the Budget 2008-09 (February 2008)
	2007-08	2008-09	Target for
	(RE)	(BE)	2009-10	2010-11
Revenue Deficit	1.4	1.0	0.0	0.0
Fiscal Deficit	3.1	2.5	3.0	3.0
Gross Tax Revenue	12.5	13.0	13.5	14.0
	As per the Budget 2009-10(interim) (February 2009)
	2008-09	2009-10	Target for
	(RE)	(BE)	2010-11	2011-12
Revenue Deficit	4.4	4.0	0.0	0.0
Fiscal Deficit	6.0	5.5	3.0	3.0
Gross Tax Revenue	11.6	11.1	14.4	15.0
	As per the Budget 2009-10 (Full) (July 2009)
	2008-09	2009-10	Target for
	(RE)	(BE)	2010-11	2011-12
Revenue Deficit	4.4	4.8	3.0	1.5
Fiscal Deficit	6.0	6.8	5.5	4.0
Gross Tax Revenue	11.6	10.9	11.9	12.4
Source: Budget Documents (2009-10)

Finally, all the above complex developments have occurred when the authorities have been compelled to seek a radical transformation of the development strategy in favour of inclusive growth because the benefits of development have not percolated enough to the poorer sections of society. The entire policy environment, including that enunciated in the eleventh five-year plan (2007-08 to 2011-12) and in the Presidential address to the new Parliament based on the electoral promises of the new government, has imposed an onerous burden on the Finance Minister to accommodate the programmes and policies geared towards inclusive growth even as he has faced tremendous pressures because of (a) vastly reduced revenue receipts, and (b) higher expenditure commitments as referred to above. The extent of the revenue losses may be gauged from the differing estimates given of tax buoyancy (gross tax revenue of the Centres as percentage of GDP) for the same budget year 2009-10 as well as for the subsequent period 2010-11 and 2011-12 (Table 1). The estimate of gross tax to GDP ratio for the year 2009-10 was 13.5% as projected in the relevant documents of the 2008-09 budget but it was reduced to 11.1% in the interim budget and now it is placed at 10.9% in the full-year budget for the same year. In these measurements based on the government’s medium-term projections, the underlying cause for the decline in tax buoyancy has been the anticipated slowdown in economic growth.

Excessive Focus on Conventional Budget Deficit

The intense debate on the budget has been essentially dominated by the concerns expressed on the unusually high government borrowings and the consequential increase in the gross fiscal deficit. But, the environment of reduced tax buoyancy, the imperatives of not only reverting to a higher growth path but also making the growth process much more inclusive and the constraints on liquidity arising from sharply reduced capital inflows from abroad, cannot but make the authorities accept the reality of a higher fiscal deficit. This does not mean that the objective of better fiscal prudence has to be given the go-by. It is just that higher fiscal deficit resorted to now would help us to achieve fiscal prudence in the medium-term provided calibrated attempts are made by the RBI to manage liquidity and minimise any additional average interest cost on the central and state budgets. It will also help us achieve better growth and thus enhance tax buoyancy.

Table 2: Key Fiscal Indicators
(Per cent to GDP)
Year	Primary Deficit	Revenue Deficit	Gross Fiscal Deficit	Outstanding Liabilities*
Centre
2007-08	-0.9	1.1	2.7	60.1
2008-09 RE	2.5	4.4	6.0	58.9
	(2.6)	(4.6)	(6.2)
2009-10 BE	3	4.8	6.8	59.7
States
2007-08 #	-0.6	-0.9	1.3	25.8
2008-09 RE #	0.7	-0.2	2.5	25.2
2009-10 BE #	0.9	0.4	2.7	25.3
Combined
2007-08	-1.3	0.2	4.0	73
2008-09 RE	3.4	4.4	8.6	72.6
2009-10 BE	4	5.2	9.5	74.4
RE : Revised Estimates. BE : Budget Estimates * : Includes external liabilities at historical exchange rates # : Data from 2007-08 onwards pertains to 22 State Governments, of which 14 are vote on account. Note: 1. Negative sign indicates surplus 2. Figures in parentheses relate to provisional accounts
Source: RBI, First Quarter Review 2009-10, July 27. p.13

But, that is not enough. In order to make the growth process much more egalitarian, it is necessary for the authorities to undertake a rethinking on the entire structure and character of fiscal prudence that the Fiscal Responsibility and Budget Management (FRBM) Act envisages – a worthwhile dynamic strategy which is missing in the thinking of the government, currently. For instance, if social deprivations of vast segments of the society have to be reduced, increased social expenditures have to be promoted at the state as well as central level and hence too rigid a target on revenue deficit at any level would be improper (Table 2). Secondly, and more importantly, lessons of the past decade or so have shown that just targeting deficit indicators without setting out appropriate goals for the composition of expenditure and nature of revenue collections, can distort the end results It is known how focusing on the end products, namely, gross fiscal deficit and revenue deficit, have resulted in the neglect of the most essential expenditures for social (Table 3) and physical infrastructure areas. Apart from ensuring that fiscal policy plays a stabilising role in the economy as it passes through business cycles with a counter-cyclical stance, it has to aim at strong developmental and social roles as a rolling strategy in the medium-term. Even as such strong thrust to a social orientation in public expenditures is adopted, it is necessary to impart a somewhat improved degree of egalitarianism in the taxation system of the country.

Table 3: Social services expenditure (Centre and State Governments combined)
Items	2003-04	2004-05	2005-06	2006-07	2007-08	2008-09
Items	Actual	Actual	Actual	Actual	RE	BE
Total Expendirute	796384	869757	959855	1109174	1355831	1485536
Expenditure on Social Services	153454	172812	2,02,672	239340	303490	357381
of which
i) Education	75607	84111	96365	114744	135679	160642
ii) Health	34066	37535	45428	52126	66423	75055
iii) Others	43781	51166	60879	72470	101388	121684
As percentage of GDP
Total Expendirute	28.91	27.62	26.76	26.86	28.7	27.91
Expenditure on Social Services	5.57	5.49	5.65	5.8	6.43	6.72
of which
i) Education	2.74	2.67	2.69	2.78	2.87	3.02
ii) Health	1.24	1.19	1.27	1.26	1.41	1.41
iii) Others	1.59	1.62	1.7	1.76	2.15	2.29
As percentage of total expenditure
Expenditure on Social Services	19.3	19.9	21.1	21.6	22.4	24.1
of which
i) Education	9.5	9.7	10	10.3	10	10.8
ii) Health	4.3	4.3	4.7	4.7	4.9	5.1
iii) Others	5.5	5.9	6.3	6.5	7.5	8.2
As percentage of social services expenditure
i) Education	49.3	48.7	47.5	47.9	44.7	44.9
ii) Health	22.2	21.7	22.4	21.8	21.9	21
iii) Others	28.5	29.6	30	30.3	33.4	34
Source: Budget Documents of the Union and State Governments, RBI (Economic Survey 2008-09, page 267)

An Agenda for Fiscal Strategy in the Current Context

Perceived in the above light, there are a number of solutions which come to the surface for the current situation of the highest ever level of revenue deficit, the highest primary deficit in India’s post-reform period, and the elevated levels of the combined gross fiscal deficit of the central and state governments (RBI 2009). The fresh agenda for the fiscal strategy would call for presentation of many details, but for the present we describe the end results of our exercise in this respect rather briefly below:

(i) Raising the marginal tax rate

The artefacts of India’s personal tax structure bring out certain glaring revelations. First, India has emerged as the lowest taxed nation insofar as the middle and higher income brackets are concerned. For instance, the average incidence of income tax on assesses having incomes of over Rs.10 lakh has dropped from 45.3% in 1990-91 to 21.4 % in 1999-2000; these data are available up to 1999-2000 only. In fact, tax rate changes effected thereafter do suggest that the incidence would have further come down in the last eight to nine years. The marginal tax rate of 30% has been contrary to the recommendation of the Chelliah Committee Report (GoI 1991-93) which had suggested a simple three-tier personal income tax structure with a top rate of 40% (Acharya 2005). It is not our intention to introduce the upward revision now when the income earners are facing erosion in incomes due to the current recession; it should nevertheless constitute a part of the medium-term fiscal strategy.

Secondly, the authorities have claimed that reductions in tax rates have resulted in better compliance and improved tax buoyancy – a claim which is not proven factually. Better buoyancy has come about because there has occurred a sharp rise in the number of persons earning high incomes, and also quite a large number of them in the financial sector and in executive categories, where tax avoidance or evasion becomes difficult. For instance, the number of people reporting above Rs 10 lakh of assessed income has shot up from 1,564 in 1990-91 to 78,109 in 1990-2000, or in respect of those earning Rs 3 lakh and above, the number has gone up from 16,634 to 527,901 during the same period; as percentage of total number of assesses, the latter number has gone up from 1.0 per cent to 7.3 per cent. The increases in exemption limits may have contributed to the rising share of high-income brackets, but a rapid rise in their share of assessed incomes proves that it is the shift of incomes in favour of richer classes that is responsible for the tax buoyancy. As shown in Table 4, in 1990-91, only 6.6 per cent of income tax revenue was from the assesses having taxable incomes of over Rs 3 lakh; this proportion had gone up to 20.8 per cent by 1999-2000. The contribution of these high-income assesses is brought out more sharply when we find that their share in personal tax amount assessed has shot up from 6.2 per cent in 1990-91 to 50.4 per cent in 1999-2000 (As explained above, these may be partly due to the raising of exemption limits).

Table 4: Income Tax Revenue Statistics: Size Distribution Part 1:Share of High Income Brackets
	Number of returns
Range of Income (Rs)	1999-2000		1994-95		1990-91
3,00,001-4,00,000	373129	(2.6)	18116	(0.3)	8465	(0.2)
4,00,001-10,00,000	76663	(0.5)	29310	(0.4)	4313	(0.1)
Over 1000000	78109	(0.5)	5543	(0.1)	3856	(0.1)
Total of high-income returns	527901	(3.7)	52969	(0.8)	16634	(0.5)
Aggregate (including others)	14242969	(100.0)	6717453	(100.0)	3525376	(100.0)
	Income of returns (Rs Lakh)
Range of Income (Rs)	1999-2000		1994-95		1990-91
3,00,001-4,00,000	969231	(7.7)	62356	(1.5)	29235	(1.9)
4,00,001-10,00,000	502415	(4.0)	207276	(4.9)	35018	(2.3)
Over 1000000	1142460	(9.1)	220156	(5.2)	37602	(2.4)
Total of high-income returns	2614106	(20.8)	489788	(11.5)	101855	(6.6)
Aggregate (including others)	12565976	(100.0)	4247190	(100.0)	1548968	(100.0)
	Tax payable (Rs Lakh)
Range of Income (Rs)	1999-2000		1994-95		1990-91
3,00,001-4,00,000	175187	(16.9)	18286	(2.3)	12481	(4.4)
4,00,001-10,00,000	103908	(10.0)	67559	(8.7)	16135	(5.7)
Over 1000000	244123	(23.5)	100222	(12.8)	17030	(6.0)
Total of high-income returns	523218	(50.4)	186067	(23.8)	45646	(16.2)
Aggregate (including others)	1037673	(100.0)	780922	(100.0)	281762	(100.0)
Part 2: Average Incidence of Income Tax (In Percentages)
	Tax Payable (Rs Lakh)
	(As percentage of income assessed within brackets)
Range of Income (Rs)	1999-2000		1994-95		1990-91
3,00,001-4,00,000	175187	[18.1]	18286	[29.3]	12481	[42.7]
4,00,001-10,00,000	103908	[20.7]	67559	[32.6]	16135	[46.1]
Over 1000000	244123	[21.4]	100222	[45.5]	17030	[45.3]
Total of high-income returns	523218	[20.0]	186067	[38.0]	45646	[44.8]
Aggregate Tax Payable (including others)	1037673		780922		281762
Note: Round brackets represent percentages to the total; some discrepancies in data have been observed at source. Source: GOI (2003): Indian Public Finance Statistics (2003-04).

(ii) Re-imposition of capital gains tax and dividend tax

A blatant aspect of inegalitariasm in the personal tax structure in the country relates to abolition of taxes on capital gains in equity and dividend earnings. These have been severally criticised by many public finance specialists such as Amaresh Bagchi (2002), Raja Chelliah (2002) and Shankar Acharya (2003). One statement by Acharya (2005) brings out the severity of criticism in this respect:

“The current exclusion of both dividends and long-term capital gains on security transactions from the base of personal income tax is hard to justify in a poor country, straining to increase tax revenues. The contrast between taxation of labour incomes and exemption of returns from equity capital is stark. Some reform is in order, but it has to be carefully calibrated to minimize market disruptions” (p.2069).

The recent introduction of new tax measures such as the fringe benefit tax (FBT), security transactions tax (STT) and the commodity transactions tax (CTT), have the same egalitarian objective by mopping up unearned incomes. Hence, the abolition of FBI and CTT in the latest budget appears to be highly unreasonable and inadvisable

(iii) Disinvestment of government equities in PSUs

With a careful calibration, there is scope for generating revenues through partial sales of government equities held in public sector undertakings (PSUs). But, as per past practice, the resources so mobilised should not be used for expanding budgetary resources. Instead, they should be deposited as part of a corpus for financing special social expenditure schemes beyond the budgeted programmes, for which there is ample scope. In this regard, the decision taken in 2000-01 to employ the receipts from disinvestment (and privatisation) for meeting expenditures on social sectors, restructuring of central public sector undertakings (CPSUs) and for retiring public debt, appears a valid one. However, the National Investment Fund scheme, instituted in November 2005, was somewhat restrictive, in that the corpus so created will be of a permanent nature and only the annual income earned on the corpus is to be used for social expenditures and capital investment in PSUs in the ratio of 3:1. Instead, the funds accumulated in the corpus may be released after a lapse of every five years for utilization in social and physical infrastructure programmes in the public sector, as also for long-term financing requirements of big-size investment projects in private or public sector or even those operating in the form of public-private partnerships. In fact, this source of funds may go to fill the vacuum created in the absence of development finance institutions (DFIs) in the country, the details of which may have to be worked out.

(iv) Need for monetisation of central government borrowings

As the RBI have portrayed, the net draft on the market resources through central and state government borrowings has been unprecedented. Such combined net market borrowings during 2008-09 were nearly two and a half times their net borrowings during 2007-08, and now, their budgets for 2009-10 have placed such borrowings higher by as much as 34% over those in 2008-09 (Table 5).

Table 5: Borrowings of the Central and State Governments: 2009-10
(Rs. crore)
Item	2009-10			2008-09 Actual	2007-08 Actual
Item	Interim Budget Estimates	Budget Estimates (BE)	% Increase in BE over 2008-09	2008-09 Actual	2007-08 Actual
Central Government
Gross Market Borrowings $	398552	491044	54.2	318550	188215
Net Market Borrowings	308647	397957	33.3	298536	108998
State Governments
Net Market Borrowings	126000*	140000*	34.9	103766	56224
Total Net Market Borrowings	434647	537957	33.7	402302	165222
$ Pertain to dated securities and 364-Day Treasury Bills.
* Estimated. The State Governments have been allowed to borrow an additional 0.5 per cent of Gross State Domestic Product (GSDP) as part of the fiscal stimulus package in 2008-09 and another 0.5 per cent of GSDP in the Union Budget 2009-10, raising their budgeted borrowings in 2009-10 to 4.0 per cent of GSDP.
Source: Reserve bank of India, First Quarter Review of Monetary Policy 2009-10

Insofar as the central government borrowings are concerned, the revised borrowing calendar envisages that net borrowings of Rs 265,911 crore, or two-thirds of the annual budget of Rs 397,957 crore, will be completed during the first half of 2009-10 (April-September). The RBI has agreed to purchase government securities under its open market operations (OMOs) for an indicative amount of Rs 80,000 crore during the first-half of the current fiscal year. Both the RBI and the government are wedded to the FRBM regulations and hence are extremely reluctant to use the term ‘monetisation’ in the context of the RBI’s special OMOs created essentially for facilitating the unprecedented levels of government borrowing programmes. As argued in a recent note, the situation would call for “considerable monetary easing if the increase in yield rates is to be contained within moderate limits” (EPWRF 2009).

However, there is also a merit in the argument that the RBI may preserve the monetary weapons in its armoury for use when growth picks up and the commercial credit expansion entails further monetary easing. For the extraordinary government borrowing programme, it is necessary to deploy the facility of an exceptional character available in the FRBM regulations, that is, in the form of direct monetisation of government borrowings by the RBI for such exigencies. If three-fold rise in net market borrowings within a period of two years by the central and state governments – from Rs 165,222 crore in 2007-08 to Rs 537,957 crore in 2009-10 - is not an extraordinary situation, what else it is! Also, the reliance on OMOs alone for injecting liquidity has a serious flaw in that it would provide the unnecessary leeway for the market for pushing up yield rates on government securities and thus expanding total interest burden for the budget. The experience of conducting OMOs in July 2009 when the RBI has had to reject OMO bids shows the difficulties ahead in using OMOs as a weapon to smoothen the market for intensified government borrowings. As against a planned OMO borrowing of Rs 13,500 crore in July 2009, the RBI could achieve only Rs 5,251 crore because of excessive yield demands by the market. It is significant that despite there being massive amount of excessive liquidity in the system, the central as well as state government borrowings have been conducted at substantially higher yield rates than in the previous year.

Finally, the reported enthusiasm on the part of the Union Finance Ministry to establish a Debt Management Office (DMO) in the government so as to achieve separation of monetary and debt management functions, is somewhat misplaced, particularly in the current context of the RBI having to support the government borrowing programme to an unusual extent which may persist for the next two to three years. As it is, the RBI has been exercising its operational independence within the given socio-economic constraints. The notion of the above functional separation between monetary and fiscal policies itself arises from the conventional monetarist stance of inflation control by monetary policy. In India, inflation is primarily determined by supply factors and also by many social influences of income distribution, etc. Even the generation of money balances is influenced by real growth factors except during the past few years when external capital flows have generated explosive growth of domestic liquidity for which again, close coordination was possible between the government and the RBI to achieve an innovative sterilisation arrangement within the current dispensation, or what Dr.Y.V. Reddy (2009) called “………in the nature of creative tensions, with a notable beneficial impact on the economy”(emphasis added).

* This note has been contributed by Dr. S. L. Shetty

References

Acharya, Shankar (2003): India’s Economy: Some Issues and Answers, Academic Foundation,

New Delhi.

- (2005): ‘Thirty Years of Tax Reform in India’, Economic and Political Weekly, May 14.

Bagchi, Amaresh (2002): ‘Vision of the Kelkar Papers: A Critique’, Economic and Political

Weekly, December 21.

GoI (1991-93): Reports of the Reports of the Tax Reform Committee (Chairman: Raja Chelliah)

Rao, M Govinda (2003): ‘Reform in the Central Sales Tax in the Context of VAT’, Economic

and Political Weekly, February 15.

-(2009): ‘The Fiscal Situation and a Reform Agenda for the New Government’, Economic and

Political Weekly, June 20.

RBI (2009): Macroeconomic and Monetary Developments First Quarter Review 2009-10,

July 27.

Highlights of Current Economic Scene

Agriculture

The fourth advance estimates released by the Ministry of Agriculture displayed that country's food grains production during 2008-09 would rise to a record level of 233.88 million tonnes as against 230.8 million tonnes a year earlier. Rice production rose to an all-time high of 99.15 million tonnes during 2008-09, compared to 96.69 million tonnes in 2007-08. While wheat production reached a record of 80.58 million tonnes from 78.57 million tonnes achieved during the previous year. Pulses production has been revised slightly upward to 14.66 million tonnes as against 14.18 million tonnes in the third advance estimates of 2008-09. The production of coarse cereals has been revised upward to 39.48 million tonnes compared to 38.67 million tonnes in the previous estimates. Among oilseeds, the production of soyabean has been revised downward, while mustard and groundnut output is reported to be higher than their last estimates. It has been estimated that sugarcane production would be around 271.25 million tonnes, while cotton production would be 23.16 million tonnes.

As per the India Meteorological Department (IMD), the cumulative rainfall for the entire 2009 season, from June 1 to July 22, is estimated to be 19% deficient as against 27% recorded during a week earlier. Of the 36 meteorological sub-divisions in the country, 17 have received excess to normal rains, while 19 have received scanty or deficient rain. However, states such as Punjab, Haryana, western Uttar Pradesh, Himachal Pradesh has still not managed to get around half of their average quota of rains.

Agricultural ministry has started giving advice to farmers regarding which crops should be to sown in which states. As the country’s north-western region has been worst hit with poor rains the national rain-fed authority (NRRA) under the ministry has asked farmers to sow basmati paddy crop in central Punjab and short duration paddy variety along with green and black gram, peg ion pea in eastern Uttar Pradesh, respectively, during the period July 15 to July 31.

Agricultural ministry stated that delayed arrival of southwest monsoon over most parts of central and north-western India is expected to create a serious problem for crops like rice, maize and sugarcane. Sowing of rice has fallen significantly but planting of oilseeds, lentils and coarse grains has increased. As per the government data till 17 July, paddy (de-husked rice) has been sown in around 114.63 lakh hectares almost 31 lakh hectares less than sowed last year.

Kerafed, the nodal agency for procurement operations in Kerala on behalf of National Agricultural Cooperative Marketing Federation Ltd (Nafed) has virtually stopped procurement of copra or dry coconut from the farmers because of moisture content of 8% in the copra instead of stipulated Agmark norm, which limits the moisture content of 6%. Nafed has already procured 13,000 tonnes of copra including ball and milling till date in coconut growing states including Kerala, Karnataka, Tamil Nadu and Andhra Pradesh.

Exports of coir increased by 1.8% in volume and 6.29% in value during the first quarter of the current fiscal (2009-10) as against 1.2% in volume and value by 5.2% during the corresponding period last fiscal. This surge in exports is attributed to rise in exports of input materials like fibre and curled coir to China. However, in the month of June the performance was disappointing, as exports volume fell by 5% and value dipped by 13.72% compared to the same period in the last fiscal. The US is the single largest market, accounting for more than 37% of the total export. European countries together accounted for more than 41%, while remaining 22% shared by number of countries. Even though the domestic market is bigger in revenue share, the market is less evolved, traditional and brings lesser per unit realisation

As per the projections by International Rubber Study Group (IRSG), the global output of natural rubber (NR) may decline by 2.3% to 9.65 million tonnes as against 9.88 million tonnes during the corresponding period a year earlier. Global consumption of natural rubber is estimated to be down by 5.1% to 9.2 million tonnes. The slowdown in production and consumption is attributed mainly to the current global economic turmoil that also engulfed rubber-based industries such as tyre producers. The global average price of RSS-3, the benchmark grade, increased to Rs 103.79 a kg last year while the domestic average price was Rs 101.1 a kg.

Exports of black pepper have suffered a serious setback in the first quarter of the current financial year. It has registered a drop of 46% to 4,084 tonnes during April-June as against 7,550 tonnes during the same period last year. This sharp decline is due to the current price tags in the country, which are highest across all leading global markets. The board has set a target of 25,000 tonnes for 2009-10 as against 35,000 tonnes set for the previous year.

Northern-states of the country, driving up procurement cost of companies such as Mother Dairy and Amul by 10%-15%. Consequently, prices of dairy products such as ghee have jumped by about 20% to Rs 240 a kg, while SMP prices have moved up marginally from Rs 130-135 a kg to Rs 135-140 a kg.

According to the latest estimates by the United Nations Food and Agriculture Organisation (FAO), paddy output from India this year is likely to decline marginally by 2.55% to 145.2 million tonnes after hitting a record of 149 million tonnes in the previous year. This decline would be due to delayed monsoon and uncertainty over follow-up rain in the agriculturally crucial month of July. However, the final outcome would depend greatly on the development of the monsoon in July and August. Total cereal output would be around 260.6 million tonnes this year as against 265.4 million tonnes produced last year. Harvesting of the wheat crop for 2009 is almost over with primary estimates up to 77.6 million tonnes, below the previous record set last year at 78.4 million tonnes.

In a bid to tide over the present financial crisis, mainly due to huge losses incurred by failed 'tie-up business' initiated few years ago, the National Agricultural Cooperative Marketing Federation of India (Nafed) has decided to tie up with Krishak Bharati Cooperative Ltd (Kribhco) and Indian Farmers Fertilisers Cooperatives Ltd (Iffco) for joint operation of fertiliser, seeds and pesticides businesses.

Industry

The Index of Industrial Production (IIP) stands at 281.9, which is 2.7% higher as compared to the level in the month of May 2008.

The annual growth in the Indices of Mining, Manufacturing and Electricity sectors for the month of May 2009 has been 3.7%, 2.5% and 3.3% as compared to 5.5%,4.5%, and 2.0% in May 2008.

In terms of industries, as many as 9 out of the 17 industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of May 2009 as compared to the corresponding month of the previous year. The industry group ‘Other manufacturing industries’ (27.3%), Rubber, plastic, petroleum and coal products’ (16.4%) and ‘ wood and wood products (15.3%) have registered double digit growth during May 2009. On the other hand, the industry group ‘Food Products’ (-14.7%), Jute Textile ((-20%),have shown double digit negative growth.

As per Use-based classification, the Sect oral growth rates in May 2009 over 2008 are 3.8% in Basic goods, (-)3.6% in Capital goods and 6.1% in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of 12.4% and (-) 2.3% respectively, with the overall growth in Consumer goods being 1.2%.

Infrastructure

The Index of Six core industries having a combined weight of 26.7 per cent in the Index of Industrial Production (IIP) with base 1993-94 stood at 251.6 in June 2009 and registered a growth of 6.5% compared to a growth of 5.1% in June 2008. During April-June 2009-10, six core industries registered a growth of 4.8%as against 3.5% during the corresponding period of the previous year.

Crude Oil (weight of 4.17%) registered a growth of 4.0% in June 2009 contrast a dip of 4.7% in June 2008. The Crude Oil production registered a growth of (-) 1.3during April-June 2009-10 compared to (-) 0.1% during the same period of 2008-09.

Petroleum refinery production (weight of 2.00%) registered a fall of 3.7% in June 2009 compared to growth of 5.6% in June 2008. The Petroleum refinery production registered a decline 4.1% during April-June 2009-10 compared to 3.3% during the same period of 2008-09.

Coal production (weight of 3.2% in the IIP) decrease by 14.7% in June 2009 compared to growth rate of 6.1% in June 2008. Coal production grew by 12.7% during April-June 2009-10 compared to an increase of 8.4% during the same period of 2008-09.

Electricity generation (weight of 10.17% in the IIP) registered a growth of 7.0% in June 2009 compared to a growth rate of 2.6% in June 2008. Electricity generation grew by 5.8% during April-June 2009-10 compared to 2.0% during the same period of 2008-09

Cement production (weight of 1.99% in the IIP) escalated to a growth of 12.8% in June 2009 compared to 6.6% in June 2008. Cement Production grew by 12.1% during April-June 2009-10 compared to an increase of 5.8% during the same period of 2008-09.

Finished (carbon) Steel production (weight of 5.13% in the IIP) registered a growth of 5.3% in June 2009 compared to 10.4% in June 2008. Finished (carbon) Steel production grew by 3.2% during April-June 2009-10 compared to an increase of 4.3% during the same period of 2008-09.

Inflation

Price rose by 0.1% for the week ended 11 July 2009 over the week. As a result annual inflation rate stood at (-)1.2% as compared to 12.1% last year.

Over the week price rise of 0.7% brought about by the movements in prices of fish marine, fruits and vegetables, condiments and spices, rice, maize, raw silk, soybean, raw cotton and linseed.

The increase in the prices of aviation fuel by 7% during the week pushed up the price index of fuel, power, light and lubricants by 0.1%.

Fall in the price index of manufactured products by 0.1% can be attributed to the decline in the price index of edible oils.

The usual revision of WPI after 8 weeks time i.e., for the week 16 May 2009 pushed the index from 232.2 to 234.6 and thus the rate of inflation flared up by 1% to register 1.6% from 0.6%.

Financial Market Developments

Capital Markets

Primary Market

Adani Power is entering the capital market through an initial public offering (IPO) to raise Rs 2,200 crore, by offering 30.16 crore equity shares of Rs 10 each for cash at a price to be decided through a 100% book-building process. The issue would constitute 13.84% of the post-issue paid-up capital of the company. The IPO opens from 28 July 2009. The price band has been fixed between Rs 90 to Rs 100 per equity share. The Adani Power IPO will be the biggest issue to hit the primary market since the Reliance Power issue in February 2008.

Raj Oil Mills IPO got subscribed 1.24 times on 23 July. The company received bids for 1.17 crore shares as compared with 95 lakh shares on offer. The IPO had opened on 20 July 2009 with the price band of Rs 100 to Rs 120 per equity share and closed on 23 July 2009. The IPO experienced dull response from the investors for first three days. The qualified institutional buyers (QIBs) category was subscribed 0.75 times, non-institutional investors’ category was subscribed 3.97 times and retail individual investors category was subscribed 0.76 times.

Secondary Market

Key benchmark indices surged extending strong gains in the preceding week as encouraging Q1 June 2009 results, sings of pick up in the economy, revival of monsoon and firm global markets lifted the sentiment. The market hit highest level in more than a month. The market rose in three out of five trading sessions in the week. The BSE Sensex rose 634.04 points or 4.3% to 15,378.96 in the week ended Friday, 24 July 2009. The BSE Mid-Cap index jumped 276.22 points or 5.41% to 5,381.81 in the week. The BSE Small-Cap index rose 369.30 points or 6.5% to 6,050.20. The NSE Nifty zoomed 193.60 points to close at 4568.55 thus continuing the previous week's strong upward momentum.

All the sectoral indices of BSE, recorded positive returns over the week, with realty sector being the highest gainer with 13% followed by Auto (9.38%), Metal (8.85%) and Consumer Durables (8%). Reality stocks zoomed on lower interest rate expectations while Auto stocks were up after the better than expected results from Maruti. A pick-up in economic activity and firmer LME prices pushed up metal stocks.

The Securities and Exchange Board of India’s (SEBI’s) guideline that liquid funds can no longer invest in papers of more than 91 days’ tenure has led to a sharp fall in the assets under management (AUM) of fund managers. This, coupled with a fall in returns of short-term (three months) securities and bonds, has added to the woes of fund managers.

The share of foreign institutional investors (FIIs) in free-float market capitalisation of the NSE Nifty index of 50 companies has gone up to 42.87% as on 30 June from 40.73% on 31 March 2009. Their share was around 50% in March 2007. The rise is on account of an increase in FIIs’ stake in 40 of these 50 companies in the quarter ended June 2009.

Derivatives

Strong global cues coupled with relentless buying by FIIs helped the Nifty future maintain its bullish momentum throughout the week. The Nifty July future closed at 4,575.45 points, gaining 4.5% over its previous week’s close. It also maintained its premium over the Nifty spot close, which ended the week at 4,568.55 points. However, the gains were not accompanied by a rise in open interest. As against 2.14 crore shares in open interest the week before, it fell to 2.04 crore shares last week. Also Nifty futures saw a rollover of about 26%, which is slightly on the lower side.

In the futures & option (F&O) segment, the Nifty future closed at a premium of 9.45 points to the underlying and the average volumes in the F&O improved to Rs 74,915 crore.

The Nifty future remained at a premium to the underlying during the week. Overall the market wide-open interest (OI) increased in the F&O segment as compared to the end of the previous week. The Nifty near month future shed 10 lakh shares in the OI during the full week ended 24th July 2009. On 24 July itself the Nifty shed 3.4 lakh shares in OI and the total OI of Nifty stood at 2.04 crore shares. During the full week there was significant OI unwinding in some of the front-line Nifty index components.

In the Nifty option segment the most active strikes were 4300 to 4700 for calls and the 4400 and 4500 strike puts. The 4600 and 4700 strike calls added 1.84 lakh shares and 2.08 lakh shares in OI on Friday thus taking the total OI of both these strikes to 35.35 lakh shares and 38.13 lakh shares, respectively. However the trend indicates that fresh calls being wrote at 4600, 4700 and 4800 strikes. Thus these levels would act as a major resistant point. Simultaneously the 4400 and 4500 strike puts added 4.6 lakh shares and 5 lakh shares respectively in OI on Friday.

The index put call ratio (PCR) was 0.91 on 24 July 2009 as compared to 1.03 during the previous trading session, whereas the stock PCR increased to 0.33. Thus the market wide PCR was 0.87 as compared to 0.99 on 23 July 2009.

The FIIs continued to reduce their exposure to a pattern that has been consistent for the past month when FII exposure dropped from around 38% of all OI to around 32%. The cumulative FII positions as a percentage of the total gross market position on the derivative segment as on July 23 remained flat at 31.88% (31.87%). They indulged in alternate bout of buying and selling during the week. FIIs increased their index futures holding to Rs 11,075.76 crore (Rs 8,490.59 crore) and stock futures to Rs 21,996.8 crore. Their index options holding also surged to Rs 27,845.26 crore (Rs 25,237.23 crore).

Volatility index maintained a flat trend and closed the week at 36.47 against the previous week’s close of 35.89.

Government Securities Market

Primary Market

RBI auctioned 91-day Treasury Bills (TBs) and 182-day TBs on 22 July 2009, for the notified amount of Rs 8,000 crore and Rs 1,500 crore, with the cut of yield of 3.28% and 3.47%, respectively.

Five state governments, Andhra Pradesh, Gujarat, Maharashtra, Uttar Pradesh and Uttarakhand have auctioned 10-year state development loans maturing in 2019 for the notified amount ranging from Rs 300 crore to Rs 3,000 crore with the cut of yield between 7.80% to7.85%.

Under open market operations, RBI has purchased 7.56% 2014, 6.35% 2020, and 8.33% 2036, securities for an aggregate amount of Rs 6,000 crore. Cut of yields for 5-year maturity, 11-year maturity and 27-year maturity were set at 6.62%, 7.05% and 7.77%, respectively.

RBI has re-issued government securities of 6.49% 2015 and 6.90% 2019 on 24 July for the notified amount of Rs 6,000 crore each with the cut of yield at 6.73% and 6.92%, respectively.

Secondary Market

Call rate has remained easy tracking surplus liquidity in the banking system during the beginning of the week and ended between 3.20-3.30%. On the second day, the call rates gone up slightly to 3.25-3.30% but came down to marginally to 3.20-3.30% on the third day. On forth day it ranged between 3.25-3.30% and once again came down to 3.20-3.30% on the last day of the week. Overall, the call rates for the week remained unchanged in the range of 3.20-3.30% compare to the previous week’s close of 3.25-3.30%.

Bond yields remained high ahead of the RBI’s Credit Policy review, despite continued liquidity overhang. Bond yields were firm on account of front ending of government borrowings of Rs 4.51 lakh crore in this financial year.

The week started with increase in yield, due to speculation regarding some investors was selling part of their holdings before a debt auction. The yield on the 6.90% July 2019 was up by six basis points to 6.92% at the close. The yield on the 6.90% July 2019 has surged as government has announced increase in its borrowing target for the first half of the fiscal year to 2.99 trillion. On the second day, a mixed trend has been experienced due to uneven demand and supply transactions. The 10-year benchmark paper, 6.90% maturing 2019 has closed at Rs 99.90 with yield of 6.91%. Bonds prices have seen northward movement on the third day of the week after the central bank offered to buy existing debt through an auction on Thursday; releasing concern about record borrowing and resulting higher yield. The yield on the most traded 6.90% July 2019 fell 5 bps and closed at 6.86%. Bond yields closed flat on the fourth day ahead of Friday’s Rs 12,000 crore bond sale, despite RBI did not buy the full amount of bonds of Rs 6,000 crore in OMO. The yield on the most traded 6.07% 2014 bond ended at 6.53%, but the 6.90% 2019 yield remained constant at 6.86%. There were no deals in the benchmark 10-year bond 6.05%, 2019 bond. Bonds yields were high during the weekend ahead of a policy review where traders expect signs of improving economic activity on the hope that the central bank keeps its key interest rates unchanged. The yield on the most traded 6.90%, 2019 bond ended at 6.92%, above its previous closure of 6.86%. The yield on the 7.94% 2021 bond ended at 7.27%, above Thursday’s closing of 7.24%.

Trade volumes have dropped to Rs 11,000 crore reflecting the traders’ caution ahead of the RBI Monetary Policy review. On the LAF window, RBI absorbed Rs 6,40,465 crore during the week.

Bond Market

During the week under review, three non-banking financial institutions, one central undertaking and one corporate tapped the bond market to mobilize Rs 3,725 crore through issuance of bonds and NCDs.

Profile of Major Commercial Bond Issues for the Week Ending 24 July 2009
Sr No.	Issuing Company / Rating	Nature of Instrument	Coupon in % per annum and tenor	Amount in Rs crore
	NBFCs
1	Mahindra & Mahindra Financial Services Ltd AA&AA- by Fitch, Crisil	NCD	8.50% for 3 years	25
2	LIC Housing Finance Co Ltd AAA by Crisil	Bonds	7.45% for 3 years	1100
3	IFCI Ltd	Bonds	9.50% & 9.75% for 5 years &10 years, respectively.	100
	Central Undertakings
1	Rural Electrification Corp Ltd AAA by Crisil, Icra	Bonds	7.15% & 8% for 3 years & 5 years, respectively	2000
	Corporates
1	Jaiprakash Associates Ltd A+ by Care	NCD	11.75% for 5 years	500
	Total			3725
Source: Various Media Sources.

Foreign Exchange Market

The rupee appreciated marginally to 31 paise to close at 48.38 per dollar on 24 July 2009 as compared to the previous week’s close of Rs 48.69 per dollar. The six month forward premia closed at 2.30% on 24 July against 2.21% on 17 July.

Commodities Futures derivatives

Indian Commodity Exchange (ICEX), India's fourth national commodity bourse, may start functioning by September 2009 will start its operations in bullion, metals, energy, and agricultural commodities. The mock trading will be introduced in August.

National Multi Commodity Exchange (NMCE) will launch 8 gm and 10 gm gold futures’ contracts in August a move to increase the share of bullion trade in the bourse's annual turnover. The new monthly contracts are specially designed to meet the requirements of the untapped retail market. The bourse is in negotiations with a logistics company to open delivery centres across the country for these bullion contracts.

In a bid to expand the agri futures market, the National Commodities and Derivatives Exchange (NCDEX) plans to bring a system where the farmers would be in a position to alter their cropping pattern based on the futures prices disseminated by the exchange, rather than the practice of sowing a particular crop based on current prices.

National Securities Depository and Central Depository Services (India) have decided to bar off-market deals, which enabled inter-client transfer of expired commodity stocks at exchange warehouses. In a circular issued on 21 June 2009, NCDEX stated that members must transfer the holdings from his pool account to the beneficiary or client’s account only. The new norms would come into effect after 31 July, when, the client will have to take physical delivery of the goods after the final expiry date of the stock.

For the first time, platinum has attracted investors on the domestic platform with the daily average volume in the white metal on the Multi Commodity Exchange (MCX) rising five times in July. The volume has risen to 200-300 lots (250 gm) from 50-60 lots in the beginning of July. Open interest has gone up four-fold to 127 lots.

A delayed and deviant monsoon has led to higher trade volumes in domestic agri-commodities futures as dealers try and hedge their positions to ride out uncertainties on output and prices. There has been a lot of volatility in prices among commodities which contributed to exchanges business volumes.

Insurance

Insurance Regulatory and Development Authority (Irda), in its new decision, has asked insurance companies to collect copy of Permanent Account Number (PAN) from those policyholders whose annual premium exceeds Rs 100,000.

Banking

Barclays Bank has become the first foreign bank to open a branch in Ahmednagar city, (Maharashtra state). At present, the bank has five branches in the country.

Bank of Baroda is planning to raise Rs 3,500 crore in the current fiscal year 2009-10 through various financial instruments. The bank would raise funds by issuing innovative perpetual debt instruments (IPDI) and perpetual non-cumulative preference shares (PNCPS).

Orient Bank of Commerce will be recruiting 1,500 employees in the financial year 2009-10. The bank has applied for 117 branch licences to be opened in the fiscal which will increase its network to 1,500 branches. Of this, 70 licenses have been approved and another 47 branches are expected shortly

Andhra Bank is also planning to expand its network by opening 500 new branches in the coming four years. The bank has decided to open 121 branches outside Andhra Pradesh state.

The government has asked all public sector banks to open at least one branch in each of the 25 minority concentrated blocks, apart from stepping up lending to people belonging to the minority communities. Finance Minister has also asked to increase disbursement to minority communities to 15% of their priority sector lending by the end 2009-10.

HDFC Bank has slashed its benchmark-lending rate by 25 basis points to 15.75%, effective from 20 July 2009. Earlier, in December 2008, the bank has reduced B-PLR by 50 bps to 16% and now it has slashed down by 25 bps to 15.75%.

State Bank of India (SBI) has announced reduction in its deposit rates across most of the maturities by 25 – 50 bps effective from July 27, 2009. As per the revised rates the interest rate for deposits, having a maturity of one year to less than two years, would be 6.5% against 7% earlier.

Some of the major banks have announced their Q1:2009-10 financial results. ICICI Bank has reported a 20.6% rise in net profit to Rs 878 crore in the first quarter of the financial year 2009-10 from trading in government bonds and currencies even as its outstanding loans have dipped.

Canara Bank has posted five-fold jump in its net profit to Rs 555 crore during the first quarter of the fiscal year 2009-10 from Rs 123 crore in corresponding quarter of the fiscal year 2008-09. The bank has recorded five-fold increase in the net profit as the bank has managed to reduce its provisions and contingencies by 10% to Rs 486 crore coupled with substantial rise in credit to the corporate sector, higher growth in other income and containment of interest expenses.

Net Profit of Major Banks
Name of the Bank	Q1: 2009-10 (Rs crore)	Q1: 2008-09 (Rs crore)	Growth (%)
Canara Bank	555	123	352.7
Oriental Bank of Commerce	257	221	16.7
ING Vysya Bank	60	41	48.5
Union Bank of India	442	228	93.9
Indian Bank	332	218	52.4
ICICI Bank	878	728	20.6
Source: Financial Express.

Corporate

Steel giant, SAIL will be borrowing about Rs 5,000 crore in the current fiscal year to part finance its expansion plans.

In a bid to tide over its financial crisis, Maytas Infrastructure has decided to sell part of its shareholding in Cyberabad Expressway Pvt Ltd to Terra Projects Ltd, a company owned by the Kolkata-based Neco group. Maytas which owns 50% in each of these two companies that will operate on a build, operate, transfer (BOT) basis, is initially selling 36% to Terra Projects. It is required to retain at least 14% in these companies during the construction period, according to terms of the concession agreement with the AP government.

The government is understood to have finalized divesting 10% stake in hydropower PSU Satluj Jal Vidyut Nigam in the current fiscal and is hoping to raise over Rs 1,200 crore. the public offering to offload government 10% shareholding may happen by the end of this fiscal. The state government HP has already given NO objection certificate for the disinvestment

As the government prepares to consider Air India’s pleas for infusion of additional equity and a soft loan, a high-level committee would meet for the first time this week to vet a turnaround plan prepared by the national carrier. A committee of Secretaries, headed by Cabinet Secretary K M Chandrasekhar, would be studying the airline’s proposals and plans to cut costs and enhance savings.

Sun Pharmaceuticals Industries’ US subsidiary Caraco Pharmaceutical is facing more trouble in the US. A law firm, Izard Nobel LLP, has initiated a lawsuit seeking class action status against the company in the United States District Court for the Eastern District of Michigan on behalf of the investors.

Tata Power Company has raised $335 million (about Rs 1,619 crore) through issue of securities in international markets.

External Sector

Exports during May, 2009 were valued at US $ 11010 million (Rs. 53435 crore) which was 29.2 per cent lower in dollar terms (18.4 per cent in Rupee terms) than the level of US$ 15550 million (Rs.65506 crore) during May,2008. Cumulative value of exports for the period April- May, 2009 was US$ 21753 million (Rs. 107214 crore) as against US $ 31626 million (Rs. 129846 crore) registering a negative growth of 31.2 per cent in Dollar terms and 17.4 per cent in Rupee terms over the same period last year.

Imports during May, 2009 were valued at US $ 16212 million (Rs.78682 crore) representing a decrease of 39.2 per cent in dollar terms (30.0 per cent in Rupee terms) over the level of imports valued at US $ 26684 million ( Rs. 112405 crore) in May,2008. Cumulative value of imports for the period April- May 2009 was US$ 31959 million (Rs. 157514 crore) as against US$ 51507 million (Rs. 211752 crore) registering a negative growth of 38.0 per cent in Dollar terms and 25.6 per cent in Rupee terms over the same period last year.

Oil imports during May, 2009 were valued at US $ 4135 million which was 60.6 per cent lower than oil imports valued at US $ 10495 million in the corresponding period last year. Oil imports during April- May, 2009 were valued at US$ 7768 million which was 59.6 per cent lower than the oil imports of US $ 19244 million in the corresponding period last year

Non-oil imports during May, 2009 were estimated at US $ 12078 million which was 25.4 per cent lower than non-oil imports of US $ 16189 million in May, 2008. Non-oil imports during April- May, 2009 were valued at US$ 24191 million which was 25.0 per cent lower than the level of such imports valued at US$ 32262 million in April- May, 2008.

The trade deficit for April- May, 2009 was estimated at US $ 10206 million which was lower than the deficit of US $ 19880 million during April-May, 2008.

Telecom

Integrated telecom major Reliance Communications (RCom) has bagged an Rs 10,000 crore ($2.2 billion) telecom infrastructure outsourcing deal from new entrant Etisalat DB Telecom (formerly Swan Telecom). The deal, which includes both towers and transmission, is spread over a 10-year period. Earlier, DB will outsource both its passive (towers) and active (electronics and equipment) infrastructure across 15 circles to Reliance Infratel. Allianz Infratech, a wholly-owned subsidiary of Etisalat DB, will outsource its telecom infrastructure requirement to RCom. The company intends to share a total of over 30,000 towers under the contract. In India a number of telecom companies have separated their towers (infrastructure) business to a different company, which enables them to concentrate on roll-out plans. In 2007, Bharti Airtel had hived off its towers into a separate subsidiary, while Bharti Airtel, Vodafone Essar and Idea Cellular jointly hived off a total of 70,000 towers into a separate company, Indus Towers.

The Telecom Commission had last year decided that in order to arrest the decline in fixed line network, expansion in rural India is vital and thus it was essential that fixed line operators get a waiver in the licence fee. However, due to a bitter battle between the finance ministry and the DoT over their jurisdiction might force the latter to withdraw its decision to waive licence fees for fixed-line service operators in rural areas. DoT has amended the terms of the basic services and universal access service licence to accommodate this waiver in September 2008 to address issues of viability in rolling out rural networks.

Information Technology

Infosys’s product division, which markets Finacle banking solutions, has launched a direct banking software product and has bagged two major clients, including one in Europe and other in North America.

LIST OF WEEKLY THEMES

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