The National Rural Employment Guarantee Act (NREGA) was notified by the central government on 7 September 2005. National Rural Employment Guarantee Scheme (NREGS), coming under the Act, aims at enhancing livelihood security in rural areas by providing at least 100 days of guaranteed wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work. The Act was notified in 200 districts in the first phase with effect from 2 February 2006 and later extended to additional 130 districts in the financial year 2007-2008 (113 districts notified with effect from 1 April 2007 and 17 districts in UP notified with effect from 15 May 2007). The remaining districts have been notified under the NREGA with effect from 1 April 2008. Thus NREGA covers the entire country with the exception of districts having 100% urban population. The NREGS differs from the other rural employment scheme, Sampoorna Grameen Rozgar Yojana (SGRY) in that, the release of funds under NREGS is based on state proposals rather than on predetermined allocations. The scheme marks a major paradigm shift from the earlier wage employment schemes as it creates a rights-based framework for wage employment making the government legally accountable for providing employment to those who ask for it. NREGS is a demand-based programme, and hence, the requirement of funds and employment generation will depend on demand for work. The scheme aims at creating jobs and enhancing rural capital formation and not just providing a dole or an unemployment allowance. Thus, the scheme fundamentally avoids any moral hazard problem. The scheme thus has the potential of reducing the disguised unemployment in rural areas, and also could increase the overall total labour productivity.

Salient Features

The salient features of the scheme as it operates including its scope and coverage are :

·         Convergence of the NREGA funds with funds from other sources for the creation of durable assets is permissible.  However, care is taken to ensure that NREGA funds do not substitute for resources from other sectors or schemes. Funds available with Panchayati Raj Institutions (PRIs) from other sources such as the National Finance Commission, State Finance Commission, state departments and other central or centrally-sponsored schemes can also be dovetailed with NREGA funds for the construction of durable community assets / works permissible under NREGA. Infact, as per the NREGA guidelines, it is mandated that social sector programmes such as literacy and health missions must be converged with the NREGS to extend the benefits of these programmes to NREGS workers and beneficiaries.

·         The number of households receiving employment increased from 2.05 crore in FY 2006-07 to 3.39 crore in FY 2007-08, a rise of 65%. Presently, the scheme covers 4.5 crore households.

·         In 2007-08, about 13 lakh works were taken up as against 8.26 lakh works 

      in the previous year. In 2008-09, 27.2 lakh works were undertaken.

·         Women contribute around 43% to total person days of work.

·         Highest priority is given to the water conservation work which accounts for 52% of the total works given under NREGS.

·         Provision of irrigation facilities to lands owned by SC/ST contributes 14% and rural connectivity 17% to total works undertaken under the scheme.

·         Rs 4676 was the annual average amount spent on each household under the   NREGS during 2007-08. This is 11% higher than Rs 4192 spent during 2006-07. For the financial year 2008-09, the annual average amount spent was Rs 6038. The NREGS helped in increasing the minimum wages in many states. The average rise reported was around 32%.

Progress

NREGA   covered   4.5 crore households in FY 2009 and offered 216.04 crore person days of employment. The Union Budget 2009-10 has considerably hiked the allocation under the NREGS to Rs 39,100 crore.  FY2009-10 has witnessed the highest outlay so far, which translates into a y-o-y rise of 144%. The Budget has also increased the wages under NREG from Rs 60 per day to Rs 100 per day.

The national overview of the programme shows that the total employment provided under NREGS was 2.10 crore (in 2006-07), 3.39 crore (in 2007-08) and 3.51 crore (in 2008-09 till Dec 2008). Women’s participation has increased from 41% in 2006-07 to 49% in 2008-09. The number of households provided with employment  was more for states in which more districts were covered (in phase 1 of NREGS). The graph below validates this finding

Source :  http://rural.nic.in/budget/Budgetframe.htm and http://nrega.nic.in

Goals & Guidelines

            The NREGS seeks to achieve the following goals based on predetermined

guidelines.

Goals

• Strong social safety net for the vulnerable groups by providing a fall-back employment source, when other employment alternatives are scarce or inadequate.
• Growth engine for sustainable development of an agricultural economy. Through the process of providing employment on works that address causes of chronic poverty such as drought, deforestation and soil erosion, the Act seeks to strengthen the natural resource base of rural livelihood and create durable assets in rural areas.
• Empowerment of rural poor through the processes of a rights-based Law
• New ways of doing business, as a model of governance reform anchored on the principles of transparency and grass-root level democracy

Guidelines

• Adult members of a rural household, willing to do unskilled manual work, may apply for registration in writing or orally to the local gram panchayat.

• A job card holder may submit a written application for employment to the gram

   panchayat,  stating the time and duration for which work is sought. The minimum

     days of employment have to be at least fourteen.

• The gram panchayat after due verification will issue a job card, within 15 days of application. The job card will bear the photograph of all adult members of the household willing to work under NREGA and is provided free of cost.

Employment will be given within 15 days of application for work, if it is not, then unemployment allowance as per the Act has to be paid. The liability of paying the allowance rests with the states. The unemployment allowance amounts to one fourth of the minimum wage for the first 30 days, and one half thereafter.

• Work should ordinarily be provided within 5 km radius of the village. In case       work is provided beyond 5 km, extra wages of 10% are payable to meet additional   transportation and living expenses.
• Wages are to be paid according to the Minimum Wages Act 1948 for agricultural labourers in the state, unless the centre notifies a wage rate which will not be less than Rs 60 per day. Equal wages will be provided to both men and women.
• Wages are to be paid according to piece rate or daily rate. Disbursement of wages has to be done on weekly basis and not beyond a fortnight in any case.
• At least one-third beneficiaries shall be women who have registered and requested work under the scheme.
• Work site facilities such as crèche, drinking water, shade have to be provided
• The shelf of projects for a village will be recommended by the gram sabha and approved by the zilla panchayat.
• At least 50% of works will be allotted to gram panchayats for execution
• A 60:40 wage and material ratio has to be maintained. No contractors and machinery is allowed.
• Social audit has to be done by the gram sabha.
• Grievance redressal mechanisms have to be put in place for ensuring a responsive implementation process.

Some Shortcomings

            However, of late, the NREGS is facing some criticism from certain quarters as regards its effectiveness. Economists, activists, analysts have come out with several areas of weakness in the operation of the scheme. Some of these aspects are covered in this section along with our own comments.

Considerable efforts still need to be taken so as to make the Act really effective. It has been found that, the NREGS appears to be deviating from its objective on two important counts. One, wages and the other, number of days for which employment was provided. In most states, the average employment in 2008-09 per household was only 47 days. While workers in Rajasthan were employed under the scheme for the longest duration at an average of 76 days, those in Kerala sought employment for an average of only 22 days. Out of the total 4.5 crore households that were provided jobs during 2008-09, about 14.5% of them could get 100-days of employment.  The statistics reveal that about 10.62 per cent of the total 3.4 crore registered rural households in 2007-08 were provided 100-days of employment. During 2006-07, from a total of 2 crore households which were provided jobs, about 10.29 per cent of them could get 100-days of employment. As per an assessment done by the ministry, the national average of the number of working days per household under NREGA was 48 in the last fiscal and it stood at 25 till May this year. Our comment is that this situation should be viewed positively. Since the offer of employment is based on the demand supported by the need, if the number of days of employment offered under the scheme is less, then it should be interpreted as relatively low demand under the scheme which indirectly means that employment otherwise is normally available outside the scheme.

            Data for the three years during which NREGA has been in operation, 2006-07, 2007-08 and 2008-09 shows that on an average, only 50% of the households which registered under the scheme were actually employed.  Further, the average number of days each household received employment was only 45 against the promised 100. The performance across states also varies a great deal. In terms of the percentage of registered households provided work, Maharashtra has averaged an abysmal 13% over the three years, while Rajasthan averaged 73%. In terms of the average number of person-days of employment per household too, the variation is stark. From 22 in West Bengal to 79 in Rajasthan. Our comment on this is the same as in the previous paragraph. The question that needs to be verified before passing any judgement on this issue is whether the employment was low because of less supply or lower demand in practice.

With the central government likely to do away with the idea of curtailing states’ liberty of raising wages under the scheme, this will have two repercussions. One, it will strain the exchequer considerably given the current fiscal situation and two, most likely will breed inequality across states. States revise their minimum wages periodically, and as many as eight states increased their minimum wages substantially in 2007-08. Some like Uttar Pradesh and Rajasthan almost doubled the wage rate to Rs 100 from Rs 58. However, as the states know their local economy and are better placed to fix wages, the central government prefers to stay out. The centre had issued a notification in January this year, which in effect has capped the minimum wages of individual states at levels prevailing as on 1 January 2009. The notification stated that, states wanting to hike their minimum wage are free to do so, but the programme would go by the wages as on 1 January 2009. The centre can revise the rate if it is convinced by the individual state’s justification for a hike. Now, Orissa is all set to increase the wage rate of unskilled workers to Rs 90 from the current Rs 70. Our view is that the wages fixed under the scheme should normally be pitched slightly lower than the market wages, otherwise, the scheme will be offering employment of the first resort and not as the last resort.

The average wage rate varies too. The average wage rate is a tad over Rs 85, but varies from around Rs 70 per person per day in states like Gujarat and Meghalaya to double that in Haryana. The scheme breeds inequality, partly due to some inherent shortcomings in the policy, but largely due to absence / inefficiency of the administrative machinery.  Wage rates cannot be uniform across the states since the cost of maintenance, labour market conditions, etc., having a bearing on level of wages would vary from state to state. The scheme technically cannot breed any added inequality—at best it can only reduce inequality, since people without wages or employment are offered some guaranteed employment under the scheme.

Of late, some harsh realities at the ground level of implementation are coming to the surface. In remote villages of Orissa, Haryana and some other villages, villagers are coming up with innovative ways to misuse their NREGA job cards, the detection of which is beyond the scope of scientific audits. In some parts of tribal Orissa, job cards are used to raise money from local money lenders. When villagers want to raise a loan, they pledge their cards with the money lender. The latter then collects the wages from the government using the card. In many cases job cards are used to substitute work done using machines. Despite registering under the scheme, the contractor dissuades the villagers from working and uses machines which are cheaper, to do the same. Those who willingly opt out are paid some money while the contractor pockets the wages. This violates norms of employing contractors and using machines.  

Job cards are used to fudge muster rolls and siphoning off wages. This is being slowly replaced by paying wages through banks and post offices. However, many point out that even in schemes where money is paid through banks and post offices it is a Herculean task to ensure that the beneficiaries are themselves withdrawing the cash and using it for their welfare.

Another scam has been unearthed in Balrampur, Uttar Pradesh (UP). The state Department of Rural Development has ordered a probe into the purchase made under the scheme at Balrampur in October 2008. Under it, goods worth Rs 5 crore had been purchased in violation of the guidelines of the Act or informing the department. According to the Act, every district can spend only four per cent of its NREGS budget to purchase items like information boards, registers, stationary and such material. But it does not allow any central procurement for entire districts and the purchases have to be done according to the task approved. According to official information, the Rs 5 crore procurements in Balrampur were made after the district had exhausted its limit. Tin sheets, metal almirahs, registers and other stationary items were bought with the approval from then district magistrate. However, the district officials could not explain why the items were bought or where they were utilised. The department has asked the district magistrate to conduct a probe into these purchases and take action against the guilty officials.

Also, instances of over-payment, anomaly in payment have surfaced in Sitapur and Chandrauli districts of UP.

In some villages of northern Kerala's Wayanad district, workers are employed at private farms, mostly owned by rich farmers, but paid by the government under the NREGA.

Some of the other operational hurdles brought out in the working of the scheme are as follows. Also, we have mentioned comments and probable remedies for the same.

·         Irregularity of payment. Workers are not paid immediately after work. This should be addressed.

·         Not all find the NREGS lucrative. The prime reason is the wage differential existing in the villages or its neighbouring / surrounding areas. Workers are paid handsomely under various other works being undertaken. Also, during the peak farming season, agricultural wages during the cleaning and harvesting period are much higher than NREGP wages. This is what is expected to be. One cannot be critical about this point. The opportunity cost of not benefiting from the scheme, if higher, then demand need not be created by the NRGES by offering more lucrative wages. The objective is not higher wages, but provision of employment at reasonable wages when employment opportunities do not exist.

·         After assessment, some workers were paid as low as Rs 30, depending on the quantity of work done. This cannot be considered a bad practice. The scheme provides for payment of piece wages. Again to remind, the scheme does not offer unemployment allowance.

·         There may not be any work at all under the scheme. This cannot be the case. There are always opportunities to improve further rural infrastructure. This is the responsibility of development administration.

·         Of the 52.20 lakh people who have been issued job cards from the time the NREGS was launched, only 11,92,896 households were provided employment during 2008-09. There is something wrong about the comparison, the former talks about ‘people’ registered, and the latter about the ‘households’.

·         Some state governments (like Orissa) allow villagers to work on a piece-wage basis where wages depend on volume of work done. This gives them a chance to earn more than just the minimum wage. Piece-wage is different for various categories of works and is decided by the state government from time to time. This is absolutely a fair practice, and under piece wages, the amount earned could also be lower.

·         To some extent, NREGS has rendered agriculture more expensive for farmers and more rewarding for workers. NREGS has displaced farm labourers, in that labourers are shifting to works offered under NREGS. This is evident from the increase in agricultural wages since 2005-06 in some states. This observation has some meaning. But, this has to be carefully evaluated. Since the objective of the scheme is to fill the gap in supply of employment, this should not create an environment of wage competition and offer opportunities for ‘rent’ by creating an artificial shortage of labour for normal employment. This could have serious implications for food security and agricultural production and productivity in general.

·         Absence of grievance redressal system. State governments bear the primary responsibility for putting in place grievance redressal systems. Under Section 19, they are bound to formulate Grievance Redressal Rules for dealing with any complaint by any worker. Interesting ideas have been floated, such as the appointment of Ombudsman at the district level, but they are yet to see the light of day.

·         It fails on accountability, whereby applications may be rejected or issuing of receipts be refused. Without a receipt showing that work was demanded, workers cannot apply for the unemployment allowance. 

·         Lack of professionals is an important issue. The Comptroller & Auditor General (CAG) Report has found that 19 states have not appointed full-time programme officer (PO) in 70% of the blocks it surveyed. The existing Block Development Officers (BDO) have been given the additional charge of NREGS. An Employee Guarantee Assistant (EGA) was meant to be appointed in each gram panchayat. The shortage of staff leads to delay in the payment of wages as paucity of engineers lead to long gaps between execution and valuation of work. The block officials ask for margin money to sanction the projects even as they are not responsible for it.

·         Lack of effective planning of the works to be done. The works are not effectively designed taking into account the requirements of a particular village. Very little has been done to mobilise the people to take active part in plan formulation.

·         Problems are faced in distribution of job cards as large number of needy households are in the queue ;  selection, design and execution of projects, resulting in huge leakages.

·         The requirement of maintaining a minimum balance of Rs 500 is unaffordable to many.

·         The effort is more towards spending large amount of money rather than ensuring quality in work execution.

·         Social audit of the NREGS has not been done satisfactorily. It is alleged that audit reports are not available, however this is not completely true. The NREGA portal provides data for some states only.

Many of the points above relate to weaknesses in administrative machinery. These should be addressed as part of monitoring and evaluation and taking corrective steps.

 Monitoring

The Comptroller and Auditor General  (CAG) conducted a performance audit of implementation of NREGA covering the first phase of the 200 districts. An audit is normally done when a scheme is more or less over. But for NREGA, the government took a very proactive step in asking the CAG to audit an ongoing scheme. The CAG chief is preparing his staff to ensure that starting next year, a thorough audit is done. It is hoped that by then, the government has put in place the right infrastructure. It was found that, the implementation in the beginning was slightly slow. There were leakages of a sub-optimal delivery because the system had not been tested but no mala fide was found.

Vinod Rai, Comptroller and Auditor General of India (CAG), is of the opinion that, an oversighting mechanism of totally independent, apolitical and experienced people is a must for the scheme’s success when such vast sums of money is involved. He suggests, including MPs (Members of Parliament), professors, retired bureaucrats, social workers.  Also, surprise checks can be conducted.

Scope

            It goes without saying that the NREGS has a long way to go in living up to its mandate. It’s a delicate situation, wherein on the one hand, the scales tip in favour of NREGS, while on the other, the scheme faces brickbats. Amongst many other recommendations, is the proposal to link the minimum wage rate with inflation, so as to make the scheme more tenable, should be seriously considered. This may require amending the NREGA in order to be made reconcilable with the Minimum Wages Act.

While there could be review of minimum wages from time to time, inflation linked wages may fuel wage inflation, which may not otherwise be present in rural areas where the supply shortage of labour may not exist. As observed earlier, already the minimum wages have been hiked in many states and also by the central government. 

Another powerful tool in the hands of the central government to make NREGS more accountable is Section 25, whereby anyone who fails to perform his or her duty under the Act is liable to a fine of up to Rs 1000. Recent experience shows that even relatively small fines can be of great help in keeping government officials on their toes. When a fine of Rs 1000 was levied on the Block Development Officer (BDO) of Karon Block in Jharkhand last year, he spared no effort to find an escape route. Thus, wider use of Section 25 could make a big difference. Unfortunately, no state government other than Jharkhand has used it so far. We agree that a good incentive structure be in place to ensure accountability.

There is also a provision, under Schedule II Section 30, for compensating workers for delays in payments. If wages are not paid within 15 days, workers are entitled to compensation under the Payment of Wages Act. Yet again, Jharkhand holds the distinction of invoking the Act. Meanwhile, delays in payments appear to be getting worse, causing immense hardship to NREGA workers. This is a serious administrative lacuna and should be addressed.

At the national level, the Central Employment Guarantee Council was set up to act as an active, independent watchdog for NREGA. It is endowed with a broad mandate and wide powers under the Act. Unfortunately, the Council is not doing its job, nor has it been enabled to do it. Further, the government seems to consider the Council as a purely advisory body, and to treat it like most advisory bodies, taking on board whatever advice turns out to be convenient and ignoring the rest. A telling example of disregard for the Council's advice was the ‘freezing’ of NREGA wages in January 2009, against the unanimous advice of Council members.  This notification was recently suspended by the high court of Andhra Pradesh.

In its place, the Ministry of Rural Development has recently notified a new-look Employment Guarantee Council, statutorily meant to monitor the NREGP’s working. Of the 15 non-official members, only two have been retained, Aruna Roy and Jean Dreze. Four of the 15 official members are from the Congress party. The NREGA states that the Council establish a central evaluation and monitoring system, advise the central government on all matters concerning implementation of the Act, review the monitoring and redressal mechanism from time to time and recommend improvements and prepare annual reports to be tabled in Parliament. It would also have powers to undertake evaluation of the various schemes made under the NREGA . 

These are some examples of the ‘dormant’ provisions and institutional mechanisms that could be activated to restore accountability in NREGA.   However, there is some respite on the anvil. The central government is expected to expand the National Rural Employment Guarantee Scheme (NREGS); in that it plans to increase the number of days of guaranteed employment under the scheme from the present 100 days a year to 120 days. The Ministry of Rural Development is working towards the same and it has set up a task force to study the feasibility and financial impact of increasing the number of workdays under the scheme. This hike in number of work days may not have much of a financial impact on the exchequer as very few households seek employment under the scheme even for the entire mandated 100 days.

            The central government is also expected to do away with the idea of curtailing states’ wage rates under the scheme (NREGS). The government is likely to go ahead despite the strain on the exchequer, due to substantial hikes in minimum wages by states during the last two years and concerns that higher wage rates led to ineffective targeting.

Only recently, the scope of the scheme has been further enhanced by allowing work done on private land belonging to small and marginal farmers to create assets.  According to a notification by the Rural Development Ministry, NREGS work will include, provision of irrigation facility, horticulture plantation and land-development facilities on land owned by small and marginal farmers. This means that these farmers can get assets built, like irrigation facilities, on their private fields with the help of labour paid for by the central government under the NREGS. However, the farmers have to get their ‘desired works’ approved by the gram panchayat for inclusion under projects available for wage employment under NREGS. The Finance Minister also emphasised  on convergence of various other schemes relating to agriculture, forests, water resources and rural development. He also stated that, particularly, importance should be given to water conservation projects to be taken up under the scheme. Restoration of water bodies would be of utmost importance considering the drought situation the country is in today.

The most significant impact that the NREGS can make is, by addressing the drought situation in the country.  Scanty rainfall and drought in major parts of the country has got the central government to mull the repackaging of the scheme. A host of other activities ranging from cooking of mid-day meals, to running a cr`eche are likely to be included to provide an alternative source of rural employment and livelihood in the current situation. It may also include construction of kitchen-cum-store for running the mid-day meal schemes. The government also plans to bring the conservation and preservation of ancient monuments as a part of NREGS activities. In the coastal sector, proposals include construction of fish landing centre, drying yards and boat jetties as new jobs. Earth excavation for heritage monuments & its conservation and manufacturing of mud bricks for use in construction of Aanganwadi centres may also be included in the list of NREGA jobs.

The government also plans a convergence between different works of NREGS and its Bharat  Nirman  programme. Among the proposals lying before the ministry includes, setting up of Bharat Nirman Sewa Kendra, a mini secretariat under the NREGS, and the Backward Regions Grant Fund. This would accommodate multiple development project needs in one place and encourage convergence at the gram panchayat level. States can be advised to take this as the ‘core’ activity this financial year. This activity would need convergence of NREGS labour with funds for BRGF, stated an official. ‘Lok Sewaks’ are also likely to be appointed to monitor the scheme.

Recommendations

Various suggestions have been offered to ameliorate the shortcomings in the NREGS. Some of them are as follows :

• Deployment of full-time professionals dedicated to NREGA at all levels, most importantly at block levels. For this, a Diploma course in NREGA should be conducted by various government and private training institutions across the country.
• The system of continuous monitoring and evaluation at every stage of the programme has to be built in order to ensure quality.
• Greater use of IT should be mandated for all states, in order to bring more transparency, accountability and speed at all stages. 
• Once the Unique Identification Card (UID) is issued, government services will be effectively delivered through more accurate identification of the intended beneficiaries, or paying the equivalent value in cash hand-outs. Given the vast budgets for the programmes that would benefit, and the scale of leakages that is widely believed to exist, the UID project would (or should) help the government to save crores of rupees. Once enough UID have been issued to attain critical mass, the government would (or could) transfer funds to these smart-cards, using technology that already exists.

 Initiative

The government plans to lay a 12-lakh km, countrywide optic-fibre network at an overall investment of Rs 40,000 crore over the next five years sourcing labour from NREGA. Since a major chunk of this would be the wage cost, the government proposes to tap the NREGA programme. Those provided work under the scheme will be asked to dig trenches and perform associated construction work for the network, thereby saving Rs 20,000 crore of the cost of the project, as they would be paid from NREGA funds with the Ministry of Rural Development. The remaining would be tapped from the universal service obligation (USO) fund, in which around Rs 14,000 crore is currently lying unutilised. The USO fund, is meant for rural telecom and broadband projects. However, since NREGA cannot be utilised for this project in its current form, certain changes would have to be made to it.

      The cabinet secretariat has already given the project its go-ahead and a group has been constituted to draft its details, which will shortly be put before a group of ministers. The communications & IT ministry would act as the nodal agency. New legislation would also be enacted bringing uniformity to charges paid to state governments and local municipal agencies to dig routes for laying the optic fibre. The project would be synchronised with the Pradhan Mantri Gram Sadak Yojana, wherein ducts are laid during the construction of roads so that separate digging can be kept to a minimum.

Summing Up 

The scheme, in its current form has the potential of providing safety net to rural labourers who are not able to secure employment on a regular basis and may suffer deprivation, is however wrought with some shortcomings particularly the way in which the scheme is implemented. The responsibility of implementing the Act lies with the states and the ministry provides financial assistance to them as per provisions. The ministry also monitors the implementation of the Act and issues necessary advisories to states to make it more effective. Though NREGA is one of the most powerful state initiatives with a potential to bring radical change in the rural development, it is essential to focus on raising labour productivity in the backward regions of the country, to meet the objective fully. For this, the necessary infrastructure has to be in place. Also, the state government’s have to exercise immense political will to make the scheme a huge success. Effectively implemented, NREGA has the potential to transform the geography of rural poverty.

·         This note has been prepared by Deepa Vaidya

Growth

Global Economy

The International Monetary Fund’s chief economist said that the global economic recovery has begun but sustaining it, will require refocusing the United States toward exports and Asia toward imports. The potential economic output may be lower than it was before the financial crisis occurred. The crisis has left deep mark, which will affect both supply and demand for many years to come. US consumption, which accounts for about 70% of the US economy and a large chunk of global demand, would not quickly return to pre-crisis strength as households cope with trillions of dollars in losses from the falling housing and stock markets.

 From the point of view of the United States, a decrease in China’s current account surplus would help to increase demand and sustain the US recovery, which would result in more US imports which will help in sustaining world recovery. Asia is outpacing the United States and Europe in the return from the global economic slump, because of multi-billion dollar stimulus packages and robust demand from China.

 Second-quarter of the current fiscal year indicators showed the region’s recession-hit economies such as Singapore and Hong Kong have returned to the growth path despite sluggish demand from the US and European markets. Countries with bigger domestic populations, including China, India, Indonesia, South Korea, the Philippines and Vietnam, have been growing during the global downturn although the pace has slowed.

Japan, the world’s second-largest economy, lumbered out of recession in the second quarter of the present fiscal year for which was given to the stimulus package announced by the government.   

 US-based credit ratings firm Standard and Poor’s said that five of the 14 Asia-Pacific economies it covers will post positive growth this financial year, with nine expected to report contractions.

Domestic Economy 

Global Sachs raised its growth forecast for India to 7.8% in FY11, from its earlier estimate of 6.6%. 

Planning Commission Deputy Chairman Montek Singh Ahluwalia expressed that the slow monsoon will not have any significant impact on gross domestic product (GDP), as agriculture production constitutes less than 20.0% of the economy. But, added that the deficient monsoon across the country will adversely impact farm production. The existence of drought by itself can lead to some cutting down of the growth projections. According to him it will be too early to make an assessment about the growth for the entire country.

Rajya Sabha member and former Reserve Bank of India, governor, C Rangarajan told that it was not just enough to spend more to stimulate the economy, but the state should also ensure the extra spending was on sectors capable of replacing the declining global demand for Indian goods, the priority is to stimulate sectors such as textiles and auto components that would improve local demand.   He added that government should attempt to reduce the swelling fiscal deficit in line with the economic cycle. “During a recession, fiscal deficit can be high to stimulate the economy, but it should be brought down when the economy recovers from the growth slowdown.” He also forecast a 6.5-6.7% economic growth this fiscal, which would go up to 7.0-8.0% next fiscal. But returning to the 9.0% growth would require a recovery of the global economy. “Until then, by stimulating domestic demand, economy can grow at 7-8%.”

Financial major Citigroup slashed its viewpoint for India’s gross domestic product to 5.8% from its earlier projection of 6.8% on concern about the drought situation in the country, which factors negative agricultural growth whereas industry and services are left unchanged.   Furthermore, the financial services firm said that the relief measures could widen the projected fiscal deficit of 6.8% for the current fiscal to 7.0%.

Agriculture

Sugar industry is expecting a decline of 30% in sugar output to around 6 million tonnes in the ongoing 2008-09 season mainly due to low sugarcane production. Maharashtra has registered a 50% decline in production during October-April 2009 to 4.6 million tonnes. An overall demand and supply mismatch is anticipated to increase the prices of sugar in the domestic market. Sugar industry has requested the government to allow duty-free imports. According to sources, the sugar producers in Maharashtra are not able to take advantage of schemes provided by the government. Thereby they have approached the government to seek extension of the advance licencing on a tonne-to-tonne basis for raw sugar imports.

India Meteorological Department (IMD) has ruled out an early withdrawal of southwest monsoon for this year. Monsoon normally starts withdrawing from extreme north-western part of the country (northwest Rajasthan) by 1^st September and completely withdraws from the country by 15^th October. Annual rain cycle has entered its critical phase threatening oilseeds and sugarcane harvests.

The acreage under paddy (de-husked) rice as on 6 August is reported to be around 228.19 lakh hectares, almost 57.75 lakh hectares less than last year, with Jharkhand and Bihar suffering the maximum damage to their paddy acreage because of low monsoon. Sowing of rice has registered a downfall of 48% in Bihar, while it is around 64% less in Jharkhand, 43% in Uttar Pradesh and 32% in West Bengal. However, overall, sowings of coarse grains and pulses during the same period have shown improvements as more farmers scampered to plant these low moisture-requiring crops. The sown acreages under oilseeds have so far dipped in most parts of the country mainly because of fall in area under groundnut. Cotton acreage has gone up marginally while that under sugarcane has declined drastically.

As per the report by US Department of Agriculture (USDA), world's rice production is estimated to fall by 15 million tonnes to 433.46 million tonnes as against earlier estimation of 448.98 million tonnes. This decline in output is due to fall in production of rice from India. It was earlier estimated that India’s rice output would be around 99.5 million tonnes and now it has been down to 84 million tonnes for 2009-10 season. Indonesia is expected to produce less rice than last year, while Vietnam, China and Thailand are expected to see a marginal increase in their output.

According to Solvent Extractors’ Association of India (SEA) imports of edible oil during the third quarter (May-July 2009) of the oil year 2008-09 rose by 39% at 21.27 lakh tonnes over 15.26 lakh tonnes in the same period last year. Overall, import of edible oils during November 2008 to July 2009 jumped by 55% to 64.19 lakh tonnes from 41.38 lakh tonnes during the same period last year. The erratic monsoon and lower kharif oilseeds’ crop would further push the import in September-October months and total imports are likely to be around 80 lakh tonnes for the current oil year ending October 2009 over 63 lakh tonnes imported during last year. Imports of vegetable oil in the month of July rose by 4.3% to 5.9 lakh tonnes, while edible oil rose by 4.7% to 5.5 lakh tonnes form 5.2 lakh tonnes during the same month last year.

Provisional figures collated by the Marine Products Exports Development Authority (MPEDA) reveals that exports of seafood during April-June 2009-10 stood at 105,812 tonnes valued at Rs 1644.48 crore (US $ 335.83 million) as against 111,368 tonnes valued at Rs 1649.39 crore (US $ 405.41 million), displaying a decline of 5% in volume terms, while value is lower by only 0.2%. Exports of frozen shrimps dipped by 7.5% in volume and 4% in value, while the unit realisation of a kilogram of shrimp exported dropped by 7.5% during 2008-09. Exports of squid and ribbon -fish have fallen marginally during April-June 2009 due to trawling ban. Exports of seafood products stood at 602,000 tonnes valued at Rs 8607.94 crore during 2008-09, showing an increase of 11.29 % in volume and 12.95 % in rupee earnings.

Tea production from the country has fallen by 11.7 million kg during the first six months due to erratic weather witnessed in most parts of the country. The shortfall in production has led to lesser exports and more imports. India imported 8.12 million kg in January-May this year as against 6.56 million kg during the corresponding period last year. Exports are likely to remain weak and subdued in the current year due to high domestic price and shortfall in production Importers of Indian tea are reducing there offtake and scouting for other origins due to the higher cost of importing from India. Unit cost of importing Indian tea has gone up by more than 59% during the first half of 2009.

Industry 

The Index of Industrial Production (IIP) stands at 281.9, which is  7.8% higher as compared to the level in the month of  June 2008.

The annual growth in the Indices of Mining, Manufacturing and Electricity sectors for the month of June 2009 has been 15.4%,7.3% and 8.0% as compared to 7.3%,3.2%, and 6.0% in June2008.

In terms of industries, as many as 12 out of the 17 industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of June 2009 as compared to the corresponding month of the previous year. The industry group ‘Other manufacturing industries’ (32.4%),  ‘ wood and wood products (26.3%)and 13.2% in ‘paper and paper products’ have registered double digit growth during June 2009. On the other hand, the industry group ‘Jute textiles’ (-31.1%), m’metal products and parts(8.5%) and Beverages and tobacco products (4.1%)have shown   negative growth.

As per Use-based classification, the Sect oral growth rates in June 2009 over 2008 are 10.1% in Basic goods, 11.8% in Capital goods and 7.9%  in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of 15.5%   and 0..3% respectively, with the overall growth in Consumer goods being 4.0%.

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 1 August 2009 over the week. As a result annual inflation rate stood at (-) 1.7% as compared to 12.9% last year.

Over the week price rise of 0.1% in primary articles is the result of the increase in the price indices of barley, jowar, gram, condiments & spices, arhar ,fruits & vegetables, raw silk, fodder and gingelly seed.

Rise in aviation fuel by 2% pushed up the price index of major groups  fuel, power, light and lubricants by 0.03% over the week.

Price index of manufactured products increased by 0.1% due to rise in prices of imported edible oils, unrefined oil, khandasari and gur, beer, woollen cloth, polystrer fibre yearn, PTA,, benzene, electrodes,etc.

The usual revision of WPI after 8 weeks time i.e., for the week 6 June 2009 pushed the index from 232.7 to 234.1 resulting in the negative influence of inflation rate dwindling to 1.01 as compared to earlier -1.6%.

Financial Market Developments

Capital Markets

Primary Market

JSW Energy, an arm of JSW Group filed the draft prospectus for its initial public offering (IPO) with market regulator SEBI on 14 august to raise Rs 3,000 crore from the capital market.

The IPO of edible oil firm Raj Oil Mills was fully subscribed on 11 August the final day of the offer. The IPO received bids for over 98.16 lakh equity shares against the offer size of 95 lakh shares, according to the data on NSE. The price band for the issue was fixed between Rs 100 and Rs 120 per equity share of face value of Rs 10. The IPO, which opened on July 20, got a positive response from non-institutional investors, including corporate and individuals (other than retail institutional investors), as they fully subscribed (1.48 times) to the shares reserved for them.

Public sector utility major NHPC’s $1.25-billion IPO, which closed on 12 August, was subscribed more than 23 times, fuelling hopes that this overwhelming response may motivate the government to fast-track divestment in other firms. NHPC is the first IPO by a government-owned company in 18 months and given the response, industry experts expect the deal to be priced at the top end of its indicated range of Rs 30-36 per share.

Secondary Market

Buoyant industrial production data, a new Direct Taxes Code providing a simple tax structure for better compliance, and optimistic comments from the US Federal Reserve on the US economy lifted the key benchmark indices in the week ended 14 August 2009. The rise was despite the key indices sliding in 3 out of 5 trading sessions in the week. Small and mid-cap shares outperformed the Sensex. The BSE Sensex rose 251.39 points or 1.66% to 15,412 in the week ended 14 August 2009. The NSE Nifty gained 98.65 points or 2.20% to 4580 in the week. The BSE Mid-Cap index jumped 170.56 points or 3.14% to 5,604 and the BSE Small-Cap index rose 218.80 points or 3.53% to 6,413 points.

Derivatives

The Nifty futures managed to close the week with gains, in spite of heightened volatility. The Nifty August futures closed the week with a gain of 2.1% at 4,575 against the previous week’s close of 4,481. It swung between premium and discount over the spot throughout the week but ended in discount. The Nifty August futures also shed open interest suggests that traders may have lacked confidence in the current rally. Open interest declined to 2.19 crore shares against the previous weekend’s 2.32 crore shares. Several stock futures, including that Reliance Industries also shed open interest. Steel major Tata Steel however continued to see accumulation.

The volatility index continued to climb during the week and closed at 44.24 over the previous week’s close of 40.85. During the week, it crossed the 50-point mark quite consistently, indicating that traders may be getting nervous whenever the market moves up.

The cumulative FII positions as a percentage of the total gross market position on the derivative segment as on August 13 declined to 33.81% (35.37%). They were mainly sellers throughout the week. Their index futures holding increased to Rs 10,520.05 crore (Rs 9,938.48 crore) and stock futures holding to Rs 19,296.07 crore (Rs 17,745.96 crore); their index options holdings also surged to Rs 22,395.64 crore (Rs 20,057.89 crore).

Government Securities Market

Primary Market

91-day and 364-day Treasury Bills (TBs) were auctioned on 12 August 2009 with the notified amount of Rs 5,000 crore and Rs 1,000 crore, respectively. Yield to maturity (YTM) was set at 3.36% and 4.17%, respectively for 91-day and 364-day TBs. For 91 day TBs 81 bids were received out of which 55 bids were accepted with bid to cover ratio of 1.47 while for 364 day TBs 33 competitive bids were accepted out of 73 competitive bids received with bid to cover ratio of 2.21.

RBI re-issued 6.35% 2020 and 7.35% 2024 securities on 14 August 2009 with the notified amount of Rs 4,000 crore and Rs 2,000 crore with the YTM of 7.45% and 7.77%, respectively. For both the government securities competitive as well as non-competitive bids were accepted. 

New government security 2016 maturing in 7-year was introduced on 14 August 2009, with the notified amount of Rs 6,000 crore. The YTM was set at 7.02%. 202 competitive bids were received from which 96 bids were accepted for an amount of Rs 5,705 crore and one non-competitive bid was received and accepted for Rs 9.45 crore.

Secondary Market

Inter-bank call rates were moved in the range of 3.15%-3.30% during the week. On first day of the week it was ranged between 3.20-3.30%, on second day it has slightly increased to 3.25-3.30%, on the third day of the week it has drop down to 3.20-3.30%. On fourth day it has further declined and stayed between 3.15-3.20% and on the last day of the week it has gained and ranged in the corridor of 3.25-3.30%.

Bond yields remained high due to surging crude oil prices, concerns over below average monsoon and selling of government debt papers by FII’s of $56.1 million during the week. Buyers have shown less interest in government securities, as the average bid to cover ratio of re-issued securities (6.35% 2020 and 7.35% 2024) stood at 1.9%, which should be 2% or more than 2%. The firm yields and low bid to cover ratio were despite the high recourse to the reverse repurchase window at the weekend that amounted to a whopping Rs 1,46,473 crore showing preference for short term securities. Government securities have been losing lure can be witnessed by surged cut-off yield for 91-day TBs at 3.36% up by 8 basis points from its previous auction when cut of yield was 3.28%.

Trade volumes for G-Secs improved marginally during the week as the average daily trade volume stood at Rs 8,500 crore against Rs 6,600 crore recorded in the previous week. Some banks sold or switched their G-sec holdings to private sector insurers and provident funds for reducing risk, which pulled down the spread of 1 to 10-year government securities yields to 260 basis points during the week, from 288 basis points recorded in the previous week.

Under LAF auctions, banks have parked Rs 62,37,05 crore at reverse repo window, through 302 bid received and accepted during the week.

Bond Market

During the week under review, 1bank, 3 NBFC’s, I central undertaking and 1 corporate have tapped the bond market to mobilize Rs 2,770 crore with a greenshoe option of 275 crore.

Foreign Exchange Market

The rupee depreciated to Rs 48.30 per dollar against the previous week’s close of Rs 47.86 per dollar due to huge demand for the dollar. Forward premia for one, three, six and 12 months ended the week at 3.05% (2.92%), 3% (2.80%), 2.92% (2.58%) and 2.57% (2.32%) respectively. But the short premia, cash to spot, ended last week at 2.24% (2.35%) in view of high demand for dollar liquidity as foreign banks were net dollar buyers.

Commodities Futures derivatives

The forward Market Commission (FMC) has withdrawn recognition from Jaipur based Bullion Association Ltd for the purpose of forward trading from 1 August as they didn’t work toward starting forward trade in the past five years and neither they requested for an extension beyond 30 June.

The National Commodity and Derivatives Exchange (NCDEX), has set to start a commodity spot exchange in Gujarat. It has kicked off spot trading in four states Madhya Pradesh, Rajasthan, Maharashtra and Kerala.

FMC may approve Shree Renuka sugars to buy 5% stake in NCDEX from Goldman Sachs and Inter-Continental Exchange, as none of the present stakeholders Nabard, Crisil, IFFCO, Canara Bank and Punjab National Bank evinced interest in raising their stake.

FMC Chairman B C Khatua reiterated that MCX would be allowed to launch a freight rate futures contract if the country’s legal framework permits trade in the intangible commodity.

Insurance

LIC has increased its stake in Bank of India by 2% to make it 7.15% from earlier 5.15%, after buying fresh shares worth Rs 371 crore through an open market transaction.

The Insurance Regulatory and Development Authority (IRDA) have cautioned the public against engaging in any transactions with Winner Insurance Benefits Ltd, Mumbai. The company is issuing certificates of protection for a health hospitalisation mutual scheme and collecting money from applicants. IRDA has clarified that the company has not been issued any licence/registered by the IRDA for carrying on the said business.

By March 2010, SBI is foraying in the general insurance business and has tied up with Australian insurance company, Insurance Australia Group (IAG). SBI will have a majority stake in the joint venture (JV) with 74% stake while 26% stake will be held by IAG. SBI in a JV with BNP Paribus has already entered into the life insurance business.

Banking

The RBI has set up a Financial Stability Unit (FSU) to conduct macro-prudential surveillance of the financial system on an ongoing basis. The unit has become operational from July 17, 2009. In its Annual Policy Statement for 2009-10, RBI had proposed to set up a FSU, drawing upon inter-disciplinary expertise from supervisory, regulatory, statistics, economics and financial markets departments for carrying out periodic stress test and for preparing financial stability reports. The FSU will prepare financial stability reports and develop a database of key variables, which would impact financial stability, in co-ordination with the supervisory wings of RBI. The unit will also develop a time series of a core set of financial indicators models for assessing financial stability. In addition, it would conduct systemic stress test to assess resilience.

A group set up by the RBI has come out with several recommendations to check circulation of fake notes. It has issued directions to banks to set up note sorting machines at all branches in a phased manner. The high-level group on systems and procedures for currency distribution has suggested that banks switch over to the “cassette swap system” to feed automated teller machines (ATMs).

HDFC has reduced rates by 50 basis points for loans between Rs 30 lakh to Rs 50 lakh, retaining old rates for the other categories of loans, the new rates are effective from August 13, 2009. 

The banks are petitioning the RBI to put curbs on cash withdrawals at third-party ATMs. Since April 1, 2009 customers have been allowed to withdraw cash and check account balance without having to bear the interchange fee. After witnessing a surge in number of transactions but a fall in the ticket value of each transaction, banks have sought modifications in the free ATM rule. Chief among their suggestions is the imposition of a limit of Rs 10,000 per withdrawal when customers use a third-party ATM and a cap on the number of free third-party transactions at five a month. Recently, representatives from the Indian Banks Association (IBA) met central bank officials to make a case.

Corporate

Japanese ink manufacturer Sakata Inx’s is setting up a plant at Panoli in Gujarat with an investment of Rs 100 crore. The first phase of the plant will reach full annual capacity utilization of 18,000 tonnes by November 2010.

Ford India has for the first time started exporting cars in a large number from Chennai. Recently, the company has exported 158 units through Chennai port to Durban in South Africa and is planning to export more models, especially its proposed small car.

India’s Essar group has joined the race to buy the UK’s second-largest oil refinery, Shell’s Stanlow complex. Shell is hoping to earn £1.5 billion from the sale. Shell’s Stanlow complex produces a sixth of UK’s petrol and oil giant’s only refinery in Britain, which is being sold along with two German refineries, at Heide and Harburg.

Hospital chain Fortis Healthcare has announced that it will raise Rs 1000 crore through a rights issue.

Drug firm Suven Life Sciences is looking to raise $20 million through debt and private equity placement for conducting Phase II trial of its molecule indicated for the treatment of Alzheimer.

External Sector

Exports in June 2009 at US $ 12815 million was 27.7% lower than that in June 2008 valued at US $ 17732 million . During the first quarter of current fiscal ecport dropped from US $ 51545 to US $ 35432 million and the negative growth works out to be 31.3%.

Imports during May, 2009 were valued at US $ 18977 million (Rs.90657 crore) representing a decrease of 29.3 % in dollar terms (21.2 % in Rupee terms)  over the level of imports valued at US $ 26855 million ( Rs. 114995 crore) inJune,2008. Cumulative value of imports for the period April- May 2009 was US$ 50936 million (Rs. 248171 crore) as against US$ 80187 million (Rs.334191 crore) registering a negative growth of 36.5 per cent in Dollar terms and 25.7 per cent in Rupee terms over the same period last year.

Oil imports during June, 2009 at US$ 4999 million were 50.6% lower than that of US$ 10119 million in June 2008. Cumulative oil imports during the current fiscal valued at US $ 12767 million was lower than that of US $ 29542 million oil imports in the previous year.

Non-oil imports during June, 2009 were estimated at US $ 13978 million lower by 16.5%  to that in June 2008 and the imports during the current fiscal was also lower by 24.6%.

The trade deficit for April- June, 2009 was estimated at US $ 15504 million which was lower than the deficit of US $ 28642 million in the comparable period of 2008.

Information Technology

IT and BPO services company, MphasiS is planning to acquire AIG Systems Solutions (AIGSS), the IT arm of the US-based insurance giant AIG, for an undisclosed sum. The acquisition which comes with guaranteed business from AIG is expected to strengthen MphasiS’ domain-based solutions in its key banking, financial services and insurance (BFSI) industry vertical. 

Telecom 

Direct to Home (DTH) operators could be asked to provide inter-operable set-top boxes to their customers with the Competition Commission of India (CCI) seeing prima facie merit in a complaint filed by a consumer organisation that it is in violation of competition laws. There are over 15 million DTH subscribers currently among five private DTH operators – Dist TV, Tata Sky, Reliance Big TV, Sun Direct and Airtel Digital TV.

Etisalat DB Telecom India, in which the UAE-based Etisalat holds a 45% stake, is close to signing an Rs 1,500 crore outsourcing deal with Wipro Technologies. If the deal goes through, this would be the second largest deal for Wipro in the telecom domain. Earlier, in April, the company has bagged a Rs 2,500 crore contract from another new operator, Unitech Wireless.