Current Economic Statistics and Review For the Week 
Ended April 23, 2005 (17^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

CORPORATE SECTOR

Sector performance
Twenty-six new business houses have entered Rs 1,000 crore and more market capitalization list in 2004-05. The Walchand group, Chhabria group, CK Birla, M P Birla, Videocon, Nagarjuna, Modi and H S Singhania groups have joined this elite club. The total aggregate wealth of these 26 business houses has more than doubled in the last one year, from Rs 17,352 crore on March 31, 2004 to Rs 35,410 crore on April 13, 2005. Of the 26 business groups, the market captialisation of 16 business houses appreciated more than 100 per cent during the period.

The corporate sector’s profit margins seem to be under pressure. This is evident from the financial results of the 55 companies that have so far reported their performance for the quarter ended March 31, 2005. 

New ventures
The Orissa government has signed two memoranda of understanding (MoUs) with Essar group and Tube Investments of India for setting up of two separate steel plants with combined investment of Rs 14,201 crore. Of these, the Essar group proposes to set up a four million tonne steel plant at Paradip investment of Rs 10,721 crore. The project will come under the banner of Hy Grade Pellets Ltd and it envisages setting up of a 1,000 mw captive power plant, which will be located close to the coal mines at Talcher. 

The Rs 350 crore pipeline being built by Essar group to carry iron ore slurry from Bailadila mines in Chatishgarh to the company’s pelletisation unit at Vishakhapatnam in Andhra Pradesh is now ready for commissioning. The pipeline will be commissioned in another three weeks. 

The Tata group has unveiled three major projects in Orissa in the field of technical education, information technology and tourism envisaging a combined investment of Rs 100 crore. Tata Consultancy Services is constructing global software development center at Bhubaneshwar. 

After setting up four multiplexes in Maharashtra, four new multiplexes are slated to come in Kolkata, Mangalore, Bangalore and Hyderabad in 2005. The company will add 22 screens this year, taking its total count to 40. It has plans to set up 30 multiplexes, amounting to 150 screens, across India over the next four to five years. It has also acquired a 67-year old single-screen Metro theatre in Mumbai, which will be converted into a multiplex in the near future. 

Matrix Laboratories has received US Food and Drug Administration approval for its active pharmaceutical ingredients manufacturing facility at Kazipally, near Hyderabad. 

Saint-Gobain Glass India plans to invest Rs 850 crore to start a second float glass line in its plant at Sriperumbudur.

Austrian firm Stork Handelsges mbH is in talks with the Andhra Pradesh government to set up a titanium-based project in the coastal district of Srikakulam. 

The US has placed an order to buy Pochampally silk.

Petroleum & Natural Gas
Private petroleum majors are gearing up for a foray into the domestic aviation turbine fuel market as the monopoly of state-owned companies, Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation, comes to an end this April. 

Hazira LNG Pvt Ltd, an arm of the Royal Dutch/Shell group, has commissioned the country’s second LNG terminal on April 21, 2005. 

Reliance and Niko Resources have struck gas in the Mahanadi basin. 

Power
Siemens has received Rs 148 crore order from PowerGrid Corporation of India for a turnkey transmission substation project at Seoni in Madhya Pradesh.

Landis + Gyr India, a wholly owned subsidiary of Landis + Gyr Holding GmbH, manufacturers of heat and electricity metres for optimized energy procurement and loss identification, is setting up a new plant in Himachal Pradesh.

New ventures abroad
KEC International has secured four new contracts worth $ 52.9 million i.e., approximately Rs 231 crore from the Ethiopian Electric Power Corporation. Three of the four contracts are for construction of power distribution networks. 

Policy Issues
The income tax department has imposed tax penalties of at least Rs 10,000 crore on companies and banks for concealment of incomes over the past seven to eight years. Among them are ICICI Bank, Industrial Development Bank of India, HDFC Bank, Gujarat Ambuja and Deepak Fertilisers. 

Mergers & Acquisitions
Acquisitions abroad 
Ahmedabad-based Dishman Pharmaceuticals & Chemicals Ltd has acquired the UK-based contract research company, Synprotec, through its wholly-owned subsidiary, Dishman Europe. The size of the deal is estimated to be less than pound 2 million. This is Dishman’s second overseas acquisition. The company had recently acquired the Holland-based Chem Conserve for manufacturing phosthanium quats. 

Cognizant Technology Solutions, the Nasdaq listed, Chennai-headquartered provider, of information technology services, has acquired US-based Fathom Solutions, a consulting company, for an initial consideration of $ 19 million in cash and stock. The deal also provides for a performance-based payment up to $ 16 million payable in cash two years from the closing of the acquisition deal. Fathom Solutions is a privately held consulting company founded in 1999 by former Accenture executives. 

Tata Autocomp Systems Ltd (Taco), the $ 500 million component manufacturing venture of the Tata group, is in an advanced stage of negotiations for acquiring a component manufacturer in Europe. The deal is likely to be signed in the next three months. 

Tata Iron and Steel company is in talks to take over the 3 million tonne Hormozgan steel plant in Iran. The steel plant is owned by National Iranian company. 

Three major biotech partnership deals were struck on the opening of day of annual biotechnology show-BangaloreBio 2005. Shanta Biotechnics is collaborating with PolyTheric of UK. Edutech a Bangalore-based knowledge solutions company is tying up with Zenosis, another UK-based technology company, Randox, a UK-based diagnostic kit maker, is setting up a manufacturing base outside Bangalore which will be first one outside of its home country. 

Ispat Industries, the PK Mittal and VK Mittal group-controlled steel company, is at an advanced stage of acquiring a 2.2 million tonne steel mill in Bulgaria. 


Mergers & Acquisitions in India
Retail chain Shoppers’ Stop is planning to increase its stake in Crosswords bookstores from the present 51 per cent and also a controlling 51 per cent stake in food and grocery retail company Hypercity Retail (India). 

Berger Paints has sold off 75 per cent holding in its wholly-owned insurance subsidiary, Avani Insurance Services to the principal group, Punjab National Bank and Vijaya Bank. 

British music giant EMI group has pulled out of the RPG Enterprises-controlled Saregama India by offloading its entire 7.71 per cent stake in the open market, marking the end of the century-old relationship. 

International equity placement firm BSMA, an affiliate of Bear Stearns Asia, has invested $ 6 million i.e., approximately Rs 27 crore in the multiplex business of Adlabs Films Ltd. Adlabs Films has organized an EGM on May 12 to consider an increase in its authorized capital and preferential allotment of equity shares to BSMA at Rs 150 a share. The allotment will represent a dilution of up to 7.5 per cent of the owner’s stake in the Mumbai-based company. 

Joint ventures
The Singapore-based Ascendas has strengthened its existing alliance with Mahindra industrial park into a 74:26 joint venture, which will develop the million square foot IT park in Mahindra world city in Chennai. Many Singapore-based real estate developers have shown interest to enter into joint ventures with Indian developers. 

D-Link informed that along with its joint venture partner-the Taiwan based Gigabyte Technology, it will launch a complete range of computer hardware products. The products will be sold under the brand name of ‘Gigabyte’ and will include laptops and peripherals. 

The government approved the joint venture between Dubai-based Emaar Properties and Delhi’s MGF group for the development of integrated townships project. The venture, a $ 833 million project, is the largest foreign direct investment proposal in real estate in India so far. 

Company issues
MRF is likely to further hike its tyre prices after an around 8 per cent increase in July 2004. The company expects the continuous rising input costs to put a pressure on its profits. 

Great Eastern Shipping has signed a contract to sell its VLCC “Vasant J Sheth”. VLCC was acquired in November 2003. 

The official website of Indian Petrochemicals Corporation Ltd (IPCL) has omitted the name of Anil D Ambani from the list of members of its board of directors. 

German drugmaker, Atlanta has filed a lawsuit against Sun Pharmaceutical industries alleging patent infringement on Atlanta’s top drug, anti-ulcer treatment pantoprazole. 

In the first instance of the provisions of Press Note 1 coming into force, the Foreign Investment Promotion Board has said that proposal of Singapore Technologies Telemedia and TM International of Malaysia to acquire a 47.7 per cent stake in Idea Cellular will need no-objection certificate from Bharti-Tele-Ventures. 

Tata Motors wants to pursue the guarantees that bankrupt British carmaker MG Rover’s owners Phoenix Venture Holdings had given it for supplying Indica cars for the UK market. 

Company results
The Oil and Natural Gas Corporation (ONGC) has recorded a 47 per cent increase in its net profit to Rs 12,725 crore during 2004-05. Sales turnover increased by 43 per cent to Rs 47,025 crore during 2004-05 as compared to Rs 32,927 crore in 2003-04. 

Wirpo Ltd, India’s third largest software services’s profit after tax increased by 58 per cent to Rs 1,629 crore in 2004-05 while revenue rose by 39 per cent to Rs 8,170 crore. 

Nalco’s net profit during 2004-05 has increased by 66 per cent to Rs 1,222.43 crore as compared to Rs 737.37 crore during 2003-04. 

Jindal Vijaynagar steel’s net profit has increased to Rs 870.11 crore in 2004-05 as compared to Rs 528.68 crore in 2003-04. Total income has been recorded at Rs 6,698.34 crore for 2004-05. 

Satyam Computer Services has posted a 34.98 per cent rise in net profit at Rs 750.26 crore in 2004-05 with a revenue of Rs 3,546.78 crore. 

Jindal Stainless has recorded 52.34 per cent increase in net profit at Rs 250.14 crore during 2004-05 as compared to Rs 164.19 crore in 2003-04. 

Biocon has posted a 42 per cent increase in net profit to Rs 198 crore and 34 per cent rise in net sales to Rs 728 crore in 2004-05. The net profit was at Rs 139 crore and net sales at Rs 542 crore in 2003-04. 

Uttam Galva Steels has posted a 296.8 per cent rise in its net profit at Rs 94.72 crore in 2004-05 as compared to Rs 23.87 crore in 2003-04. Sales increased by 77 per cent at Rs 2156.11 crore as compared to Rs 1,220.55 crore in 2003-04.

BANKING HIGHLIGHTS

Banking
The State Bank of India (SBI) will have to invest over $85 million if it wants to maintain a major stake in its subsidiary in Nigeria, Indo-Nigerian Bank Ltd in order to comply with the new diktats announced by the central bank of Nigeria. The central bank has announced that all banks in the country must have an equity capital of $190 million by December 2005. As of now, Indo-Nigerian Bank has an equity capital of only $10 million. At present SBI is a major stakeholder in the bank with 52 per cent stake, while local banks hold the remaining 48 per cent. Therefore, SBI has decided to merge its Nigerian subsidiary with Nal Bank Plc., a private sector bank in Nigeria. The merged entity will be a universal bank with Nal Bank’s experience in corporate/investment banking and SBI’s competence in retail banking. 

Bank of India (BoI) has tied-up with TVS Motor Company Ltd. (TVS) for financing loans for two-wheelers manufactured by TVS. As per the agreement, BoI will finance two-wheeler loans to eligible customers at a low rate of interest and would offer other concessions like low processing charges, low/nil margin, while TVS will leverage its strong distribution network to promote financing of its two-wheelers through BoI. 

The Reserve Bank of India (RBI) has asked the Industrial Development Bank of India (IDBI) to achieve the priority-sector lending target over five years from now. The lending norms became applicable to IDBI following the conversion of the erstwhile development finance institution into a commercial bank from October 1, 2004. The norms require banks to lend 40 per cent of net credit every year to priority sectors including agriculture, weaker sections and housing. IDBI’s total advances as on March 31, 2005 would be over Rs.40,000 crore. IDBI will have to scale up its lending to the priority sector to ensure that its priority sector portfolio is 40 per cent of its total outstanding loans at the end of 5 years. 

ICICI Bank and Lloyds TSB have launched free money transfer service for its customers between UK and India. 

Vijaya Bank has posted a net profit of Rs.155.92 crore in the fourth quarter of the financial year 2004-05, up 25.35 per cent from Rs.124 crore in the corresponding quarter of the previous year and the total income was up by 4.77 per cent to Rs.632.92 crore from Rs.604 crore. 

Union Bank of India (UBI) has covered 2,247 small-scale industries (SSI) units under the Credit Guarantee Fund for Small Industries, which provides guarantee cover against default upto 75 per cent of the credit facilities granted. The total amount covered has increased by 90 per cent to Rs.50.37 crore as on March 31, 2005. During the financial year 2004-05 the bank’s advances to SSIs were at Rs.3,765.77 crore registering a growth of 20 per cent. UBI’s agricultural advances had also recorded an impressive growth of 35.15 per cent during the year 2004-05. Agricultural credit increased from Rs.4,559 crore to 6,161 crore. The share of agricultural advances in net bank credit increased from 15.38 per cent to 16.10 per cent. Under the Union Green Card Scheme the bank issued 1,68,808 new Kissan Credit Cards taking total number of cards to 7,24,012 with a credit limit of Rs.1,931.87 crore. UBI has joined the elite club of banks by achieving total business (deposits + credit) of over Rs.1 lakh crore with the customer base of 15 million customers. 

INSURANCE

Berger Paints has sold off 75 per cent holding in its wholly owned insurance subsidiary, Avani Insurance Services (AIS) to the Principal Group (PG), Punjab National Bank (PNB) and Vijaya Bank. PG has acquired 26 per cent, while PNB has bought another 30 per cent and Vijaya Bank on the other hand has acquired another 19 per cent in the company, which now has been rechristened as PNB Principal Insurance Advisory Company Ltd. 

Insurance Regulatory and Development Authority (Irda) has decided to allow tie-ups between life and non-life insurers to provide composite products to poor people. Irda had earlier barred joint selling of life and non-life insurance products, but has now decided to permit partnerships for providing affordable insurance cover for the poor. The new regulations are aimed at providing infrastructure over which micro insurance can be developed in a proper manner to provide available insurance to the poor at affordable premium. Irda has also decided to have a shorter training period for micro insurance agents, who would not be entitled to sell other insurance products. The minimum number of hours of training required for micro insurance agents will be reduced to 25 hours against 100 hours for normal insurance agents. 

The Life Insurance Corporation of India (LIC) has witnessed a 13 per cent fall in number of policies sold till February 2005 against the corresponding period previous year. Till February 2005, the state insurance behemoth sold 1.69 crore policies, while it had sold 1.93 crore policies till February 2004. The decline in number of policies sold by LIC was primarily due to a 17.7 per cent fall in individual non-single premium policies, which constitute a bulk of the insurance major’s income from sales. As a result, LIC’s market share in terms of number of policies has declined from 93.75 per cent to 90.32 per cent in the last one year. 

INFORMATION TECHNOLOGY

Wipro has posted a net profit of Rs.433 crore in the fourth quarter during the financial year 2004-05, an increase of 35 per cent from Rs.320.80 crore in the corresponding quarter last year. Wipro board has recommended 1:1 bonus share to all shareholders, including holders of American depository shares and the company has also recommended a cash dividend of Rs.5 per share. In the financial year 2004-05 Wipro’s profit surged by 58 per cent to Rs.1628.50 crore from Rs.1031.50 crore last year. 

Cognizant Technology Solutions, the Nasdaq listed, Chennai-headquartered, information technology service provider company, has acquired US-based Fathom Solutions, a consulting company, for an initial consideration of $19 million in cash and stock. Fathom Solutions, which was set up in 1999 by former Accenture executives, is a privately held consulting company. Its clients include major industry players in telecommunications and financial services. 

FINANCIAL MARKET DEVELOPMENTS

Capital Markets
Primary Market
Shopper’s stop, a retail-trading firm, is tapping the primary market with a public issue of 69,46,033 equity shares of Rs 10 through 100 per cent book building process. The price band has been set between Rs 210 and Rs 250 per share.

Shringar Cinemas has fixed the issue price at Rs 53 per equity share; the price band had been set between Rs 47 and Rs 53. 

Gokaldas Exports has fixed the issue price at Rs 425 per share. The issue was oversubscribed by 41.63 times as bids for 13 crore shares were received against 31.25 lakh share offered for sale. 

Secondary Market
Trading in equity markets has been volatile during the week. Following the weakness in the Asian and the US stock markets, the BSE sensex fell by 92 points on April 18. The disappointing results 

declared by the IT major, Tata Consultancy Services (TCS), pulled the BSE sensex still lower by 22 points on the next day. But, as the metrological department forecasted a normal monsoon, the BSE sensex jumped by 109 points on April 20. The rising trend continued on the last trading day. Over the week, the BSE sensex registered a gain of 98.23 points to close at 6346.57 and the NSE nifty moved up by 11.05 points to close at 1967.35. 

Among the eleven sectoral indices of BSE during the week only three of them have registered negative gains while the rest have closed in the positive territory. Amongst them, the highest gain has been registered by BSE consumer durables followed by BSE capital goods. The BSE 500 has surged by 0.97 per cent as compared to the 1.57 per cent rise in BSE sensex. However, the new indices - BSE mid-cap and BSE small-cap- registered gains of 2.33 per cent and 2.81 per cent, respectively. 

The FIIs have been net sellers in equities during the period between April 1 and April 22 to the extent of Rs 436.40 crore, with sales at Rs 12,414.40 crore and purchases of Rs 11,978 crore. However, the mutual funds have been net buyers of equities to the extent of Rs 1,107.26 crore, with purchases of Rs 3,204.24 crore and sales of Rs 2,096.98 crore. 

The monthly income plan (MIP) scheme launched by various mutual funds had attracted a lot of interest in past few months, but as interest rates have begun firming up, the redemptions under the scheme have increased substantially; in March Rs 316 crore has been redeemed and in February Rs 644 crore. The total corpus under MIP has fallen Rs 6,003 crore in February to Rs 5,695 crore in March. 

On April 15, the Maharashtra government clarified that the imposition of stamp duty will be only on delivery based transactions. This will help improve the turnover on the stock exchanges, which has been affected severely by the hike in stamp duty on all transactions executed on stock exchanges as announced in the state budget. 

Derivatives 
The F&O segment of NSE witnessed lackluster trading except for Tuesday, April 19. During the week, the daily volume of the segment ranged between Rs 7066.9 crore and Rs 12734.1 crore. The number of securities available for trading has increased by 34, thereby totaling to 87 securities available for trading. This is expected to boost the trading on this segment. 

Nifty futures have been trading at heavy discount to the Nifty index for most part of the week, though the discount declined on Wednesday, April 20, it increased later as investors have been taking short positions in Nifty futures. 

Government Securities Market
Primary Market
For the 10-year Kerala state development loan auctioned on April 20 for notified amount of Rs 300 crore, 60 bids worth Rs 810.97 crore were received. Of which, only 2 bids worth Rs 300 crore had been accepted at a cut-off yield of 7.45 per cent. 

On April 19, the government re-issued 8.07 per cent 2017 and 7.50 per cent 2034 for notified amounts of Rs 5,000 crore and Rs 2,000 crore, respectively. Both the stocks were over-subscribed. The cut-off prices for the 12-year paper and the 29-year stock have been set at Rs 104.50 (YTM of 7.48 per cent) and Rs 95.00 (YTM 7.94 per cent), respectively. 

The cut-off yields for the 91-day and 182-day treasury bills has been set lower from 5.16 per cent and 5.44 per cent, respectively, in their previous actions to 5.12 per cent and 5.29 per cent, respectively, in the auction held on April 20. 

Secondary Market
Liquidity remained comfortable during the week despite the state loan and the central loan floatations. The call rates ruled in a range of 4.60 per cent to 4.80 per cent and the bids tendered under the RBI’s reverse repo facility has been around Rs 30,000 crore. The market sentiments turned buoyant, as the cut-off prices had been set higher than market expectations in the central loans auction. However, as the inflation rate surged for the second consecutive week, the market sentiments turned subdued. As a result, the weighted average YTM on 7.38 per cent 2015 increased from 6.99 per cent on April 15 to 7.06 per cent on April 21. 

Bond Market
In a unique development, Mahindra and Mahindra Finanical Services (MMFS) and Rabo India Finance (RIF) have tapped the market by offering coupon of 12.32 per cent minus NSE Mibor and 11.22 per cent minus NSE Mibor, respectively. This type of coupon helps the corporates to control the interest burden in view of the rising interest rates. 

Foreign Exchange Market
The rupee-dollar exchange rate appreciated from Rs 43.83 on April 15 to Rs 43.75 on April 21 as the dollar continued to remain weak against the major currencies such as the euro and the yen. 

In a holiday-shortened week, the six-month forward premia eased amidst lackluster trading from 1.86 per cent on April 15 to 1.74 per cent on April 21. 

Commodities Futures derivatives
As per the data for the first fortnight of April put out by Forward Markets Commission (FMC), the highest volume of trades on Multi Commodity Exchange (MCX) has been in silver, gold and refined soya oil amounting to Rs 6680.92 crore, Rs 2258.26 crore and Rs 1919.58 crore, respectively. 

Following the FMC’s order asking the commodity exchanges to have uniform transactions changers across commodities, NCDEX has applied unified transaction charges for all the commodities traded on it. Earlier NCDEX had different transaction charges for three sets of commodities: gold and silver; mustard seeds, soya oil, cotton and rice; and the rest of commodities. 

In an interesting development, Tirmalai Tirupati Devasthanam considered to be India’s largest pilgrimage center, has set up a commodity futures terminal in its premises. As they are one of the largest purchases of commodities like sugar, cashew and turmeric in the country, it is possible to monitor directly the prices fluctuations in these commodities through the terminals. 

Multi Commodity Exchange has introduced futures trading in cotton short staple, steel long (Govindgarh) and steel long (Bhavnagar) contracts. Each of the contracts is to be of five months duration and expiring on 15th of every contract month.

PUBLIC FINANCE

According to data collected by the ministry of finance, the target set for indirect tax collection has been met by the government for the fiscal year 2004-05. Customs collections are estimated to be around Rs 57,644 crore, against a revised estimate of Rs 56,250 crore. Service tax collections have almost reached the revised estimate target. The service tax collection for the fiscal year 2004-05 is estimated to be at Rs 14,134 crore as against, a revised estimate of Rs 14,150 crore. Excise collection was a little lower than the revised estimate at Rs 98,632 core. The lower collection of excise duty has been mainly due to duty cuts in petroleum products and steel.

A Parliamentary committee has termed the tax collection target set out in the Budget 2005-06 as “too ambitious” and expressed apprehension about achieving it. The standing committee on finance also said that it was ‘not inclined to accept the plea given that, targeted reductions in the deficits (as per the Fiscal Responsibility and Budget Management Act) could not be adhered to because of the implementation of the recommendations put forth by the Twelfth Finance Commission.’ The committee has also advised the government to restrain from giving tax breaks too often as the tendency of the government to alter the rate of tax or duty intermittently causes unexpected downfalls in revenue collections

The finance ministry is considering to introduce a new legal provision to make sure assessees clear excise and Customs duty arrears. The government is expected to introduce a Bill during the ongoing budget session of the parliament to strengthen direct and indirect tax provisions and penalties besides simplifying the tax system. The Customs and excise arrears are estimated to be around Rs 15,000 crore. During 2004-05, the Central Board for Excise and Customs managed to recover arrears of around Rs 1,800 crore against a target set for Rs 3,000 crore. The amendments are likely to be particularly useful to collect arrears from fly-by-night operators who transfer assets from one company to another to avoid payment of arrears.

In a bid to check excise duty evasion, the revenue department may soon ask companies paying excise duty of over Rs 1 crore a year to submit weekly details of their production and excise paid on it to the revenue department. This move will impact around 6,000 companies. The revenue department has sought the views of industry on the submission of production data. The information will be in addition to the normal returns or statements that companies are required to submit. The measure is aimed at ensuring that the excise duty target of Rs 1,21,533 crore, for fiscal year 2005-06 is met. Government sources are of the opinion that the information would not be used for scrutiny or investigation of a case but to establish assessee- friendly contacts and ascertain shortfall in revenue, if any. The finance ministry is also considering introducing new legal provisions to induce assesees to clear outstanding excise and customs duty arrears by allowing attachment of immovable property. The department also wants to have standard quantity denominator for each commodity under the Central Excise Tariff.

A parliamentary committee has raised concerns regarding the over pendency of legal cases that has locked up close to Rs 75,000 crore in revenue. The committee has asked the finance ministry to take up the matter with the law ministry, so as to avoid inordinate delays in the disposal of cases. About Rs 55,138 crore is locked up at various levels under direct taxes, while Rs 19,473 crore is locked up under indirect taxes. The main reason for delay in disposal of cases by the Income Tax Tribunal is that tribunal gives stays beyond the mandatory 180 days.

A standing committee on petroleum and natural gas has recommended that the government rationalise the duty structure on petroleum products so that there was no cascading effect of the increase in international prices on customers. The committee has also asked the government to set up a price stabilisation fund to bring in stability in the prices of petroleum products. The fund could be created using the money collected from cess on indigenous crude. It has further added that the changes in the duty structure are not revenue neutral as stated by the government and would actually add another Rs 3,000 crore to the central government coffers.

The government has said that exporters of services would be exempted from payment of service tax and avail of rebate on service tax and excise duty paid on inputs if the earnings were in convertible foreign exchange. According to a ministry notification, the facility can be availed if services are exported to countries other than Nepal and Bhutan. Also, the service tax and cess rebate should not be less than Rs 500. The government can levy a penal interest in case the service tax in case the service tax and education cess rebate that has been claimed has not been paid or the taxable service has not been exported.

The income tax department has imposed tax penalties of atleast Rs 10,000 crore on companies and banks for concealment of incomes. According to income tax department sources, the tax penalties have been imposed for concealing income details over the past seven to eight years. ICICI bank, Industrial Development Bank of India (IDBI), HDFC bank, Gujarat Ambuja and Deepak Fertilizers are some of the companies to whom notices have been sent. 

The Federation of Indian Chambers of Commerce and Industry (Ficci) has warned that the new taxes, like fringe benefit tax on the corporate sector would severely hit savings and investments. Citing double-digit growth rates in revenue collections in the last three years, the federation has said that corporate taxes have been the most buoyant registering growth rates of 26.1 per cent, 37.7 per cent and 30.6 per cent in 2002-03, 2004-03 and 2004-05, respectively. It further stated that any more taxes would hurt investment sentiments.

Within three weeks of implementation of VAT, state of Delhi has lost out about 30 per cent to 60 per cent of its business to neighbouring states. Delhi has lost 50-60 per cent of commercial vehicle tyre business, 70-80 per cent of bullion trade, 60-70 per cent of weights and measurements and half of the plywood trade to states like Haryana, Uttar Pradesh and Rajasthan. Taking advantage of the varying tax rates, traders with multiple sales tax numbers in the neighbouring states are booking orders wherever the tax is lower.

INFLATION

The annual inflation rate based on wholesale price index has risen to 5.5 per cent during the week ended April 9, 2005 from 5.3 per cent registered during the previous week. The annual inflation rate was at 4.6 per cent in the corresponding week last year.

The WPI has risen to 190.7 from the last weeks’ level of 190.2 (Base:1993-94=100) during the week in review. The index of primary articles’ group has risen to 187 from the previous week’s level of 186.5, mainly due to a considerable rise in the prices of non-food articles. The index of fuel, power, light and lubricants group has also gone up considerably to 292.5 from the previous week’s level of 289.9. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight remained constant at the previous weeks’ level of 169.2, indicating little variations in the indices of sub-groups with a net nullifying effect. 

The latest final index of WPI for the week ended February 12, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 189 and 5.12 per cent instead of the provisional levels of 188.8 and 5.01 per cent, respectively. 

The rate of inflation has remained consistently moderate during the last couple of weeks. Maintaining the current moderate level of inflation in coming weeks is a major challenge in front of the government. Easing international crude oil prices, which stand currently at around $ 53 per barrel as compared to $ 58 in the first week of April, is one of the relieving factors for the government. However, inflation is expected to have ripple effects, if oil PSUs decide to hike prices of petrol and diesel. 

LABOUR

According to the information received by Labour Bureau from the state labour departments and regional labour commissioners, mandays lost in the year 2004, were mainly due to lockouts than strikes. Of the roughly, 14.4 million mandays lost during the year on account of 469 industrial disputes, an overwhelming 10.4 million mandays were lost due to private sector lockouts arising from 368 disputes. Among states, West Bengal reported the highest number (206) of industrial disputes involving 4.38 lakh workers, causing a loss of more than 9.9 million mandays. It was followed by Tamil Nadu (61), Gujarat (37), Uttar Pradesh (26), Andhra Pradesh (23), Rajasthan (19), Karnataka (16) and Kerala (9). 

The Statistics on various programmes for rural development, compiled for 2004-05, by the Ministry of Rural Development, revealed that the states like Maharashtra and West Bengal have lagged behind in utilising funds allocated under various heads. On the other hand, states like Andhra Pradesh, Rajasthan, Madhya Pradesh and Uttar Pradesh seemed to focus on rural development as top priority. They not only utilised the funds under (i)Swarnajayanti Gram Swarojgar Yojana (SGSY) aimed at bringing the assisted poor families above poverty line, (ii) Sampoorna Grameen Rozgar Yojana (SGRY) which seeks to provide additional wage employment and food security to the rural poor and (iii) Indira Awas Yojana (IAY) which aimed to provide rural housing scheme, but also in most cases, sought additional funds. 

EXTERNAL SECTOR

India’s crude oil import rose 5 per cent to 95.315 million tonnes during 2004-05 from 90 million tonnes in 2003-04, despite the fact that domestic crude oil production increased 2 per cent. Total domestic production of crude oil during 2004-05 was 34.05 million tonnes as compared to 33.37 million tonnes in 2003-04.

In a major boost to textile exports, a high level committee has recommended a sharp increase in the duty drawback provided to textile exports. In the case of garments, the recommended rates are almost double than existing rates and significantly higher for fabrics, yarn and carpets. Once the committee report is accepted, duty drawback will be available to almost all manufactured products. The coverage will increase to 4000 items, compared to just 1100 items at present.

According to Gems and Jewellery Export Promotion Council, gems and jewellery exports grew by 29.3 per cent to $15.7 billion during 2004-05 as compared to $12.1 billion in the previous fiscal. The exports have crossed the $13.3 billion target set by the commerce ministry. Keeping this attainment in view, the target for 2005-06 and 2006-07 has been revised upward to $18 billion and $20 billion respectively.

According to the data released by the RBI, India Inc raised $957 million through external commercial borrowings (ECB) in March 2005. Out of the total borrowings $763 million was raised through automated route and the rest ($194 million) through approval route.

The government is planning to allow foreign direct investment in retail sector, with a limit of 49 per cent. Initially, in internal discussions, it was thought to begin with a limit of 26 per cent and then gradually liberalise it further. However, the officials have argued that there is hardly any material difference between a 26 per cent and a 49 per cent ceiling. Besides, India is also under pressure to make foreign investment as attractive as it is in China. Only last year China moved from a 49 per cent FDI limit in retail to a 100 per cent opening up of the sector.

Retail consultancy KSA Technopak, in its study has looked at cost competitiveness structure of 75 emerging markets with high appeal exports potential and has ranked India at tenth spot. This ranking puts India below China, Pakistan, Bangladesh, Vietnam, Cambodia and even Uzbekistan. According to the report the cost of sourcing textiles from India continues to be nearly 33 per cent more than it is in China and 15 per cent more than in other emerging markets

The government is considering introducing a new legislation to cover exports and imports norms for dual-use technology items. These items will be taken out of the purview of the Foreign Trade Development and Regulation Act. The export of dual-use technology items, at present, is restricted to items mentioned in the special chemicals, organisms, materials, equipment and technologies list. It is likely that the external affairs ministry or the home ministry would formulate the legislation.

CREDIT RATINGS

It is expected that post Basel-II implementation, the domestic rating agencies will witnesses a gradual boom. The new guidelines under Basel-II norms put much greater reliance on credit ratings given by external agencies as against the present system governing the capital adequacy norms under Basel-I. The crux of the Basel-II norms lies in the notion that the amount of capital held by banks must be linked more closely to the riskiness of their asset portfolios; thus higher the risk, more the capital is required. The standarised approach under Basel-II prescribed by RBI envisages empanelment of credit rating agencies by the central bank. With only two rating agencies in the country and lakhs of loan accounts, the implementation of Basel-II norms thus opens up huge opportunities both in terms of quality of services as well as categories of products. 

Crisil has assigned a AA+/stable rating to Rs. 100 crore NCD programme of Bajaj Auto Finance limited (BAFL). It has also reaffirmed the P1+ rating to the Rs. 200 crore CP and FAAA/stable rating to the FD programme. The ratings take into account the company’s comfortable capital adequacy, adequate earning profile and its ability to maintain its asset quality in the growing consumer durable portfolio. 

In an another exercise, Crisil has assigned P1+ rating to the Rs. 100 crore CP programme of the Alembic Limited. The rating reflects the company’s strong brand franchise in its key cough and cold and antibiotic therapeutic segments of the domestic pharmaceutical market and its increasing focus on research and development.

Icra has upgraded the rating assigned to the Rs. 100 crore non-convertible debentures of Bharati Tele-Ventures (BTVL) to LAA+, taking into account significant increase in BTVL’s operating profits because of healthy growth in its subscriber base and improvement in operating margins, resulting in further strengthening of debt protection indicators.

In an another exercise, Icra has downgraded the AAA rating assigned to National Insurance Company Limited to AA+. The rating downgrade reflects the sharp decline in the company’s profitability and Icra’s concern on the qualifications made by the auditors of the company with regard to the valuation of the company’s liabilities towards its policyholders.

Theme of the week:

Invisibles: Their Growing Importance

There has been a major transformation in India’s external account, essentially on account of net invisible earnings emerging as principle foreign exchange earners for the country. Rising surpluses on account of invisible transactions have financed a significant portion of merchandise trade deficit that has traditionally characterised India’s balance of payments. In fact, buoyant earnings on invisible account have been the key factor that has contained the current account deficit at 1.0 per cent of GDP over the period 1993-2001. The ratio of net invisibles to trade balance, a measure of BOP support from invisibles, has maintained a rising trend and reached a peak of 168.3 per cent in 2003-04 from 48 per cent in 1995-96 (Table 1). What is more, during the past three years, 2001-02 to 2003-04, considerable invisibles earnings have been able to offset merchandise trade deficit and thus helped to convert a traditional current account deficit situation to one of current account surplus. While many of the export-oriented Asian economies, including South Korea, Malaysia, Philippines and Thailand, have improved their current account through strong growth in merchandise exports relative to their imports, India has done it through improved invisible performance. Gross Invisible receipts to GDP ratio increased from 2.4 per cent in 1990-91 to 8.8 per cent in 2003-04.

Key Components of Invisibles
In balance of payments accounting, transactions relating to goods, services, income and current transfers constitute the current account. This current account is again classified into two broad categories: merchandise and invisibles. As distinguished from the ‘visibles’ (merchandise) transactions, the invisible account comprises cost of services, income and transfer payments. Major heads of services in the India’s BOP account, comprise travel, transportation, insurance, government not included elsewhere and miscellaneous services. Travel represents all expenditure by foreign tourists in India on the receipts side and all expenditures by Indian tourists and visitors abroad. Transportation records receipts and payments on account of the carriage of goods, persons as well as other distributive services performed on merchandise trade. Insurance receipts consist of insurance on exports, premium on life and non-life policies and reinsurance premium from foreign insurance companies. ‘Government not included elsewhere’ represents remittances towards maintenances of foreign embassies, diplomatic missions and international/regional institutions. Miscellaneous services encompass communication services, financial services, software services, construction services, news agency services, royalties, copyrights and license fees, management services and others. Since 2000-01, software services are shown as a separate sub-item under miscellaneous services. Transfers, official as well as private, represent receipts and payments without any repayment obligations such as grants, gifts, remittances for family maintenance, repatriation of savings and migrant transfer. ‘Official transfer’ includes grants and donations from/to non-residents to/from government. Private transfers are basically remittances for family maintenance. Investment income transactions are in the form of interest, dividend, profit and others for servicing of capital transactions; these include RBI’s earnings on the country’s foreign exchange assets. Prior to 1997-98, income consisted only of investment income. However, since 1997-98, one more sub-category ‘compensation of employees’ has been included under this head.

Recent Trends: A Story of Phenomenal Transformation
In 1990-91, the year marked with external sector crisis, there was a net outflow of $200 million in invisibles account. By 1995-96, net invisible earnings had increased to $5.4 billion, growing to $9.8 billion in 2000-01 and further to $17 billion in 2002-03. In 2003-04, the net inflows were a massive $26 billion (Table 3). This transformation in India’s external transactions, where the rising importance of invisibles in country’s balance of payments is very much ‘visible’, has been on account of a couple of factors. Apart from other factors, India has witnessed a structural shift in favour of services wherein the services sector has emerged as a key driving force behind growth. This shift is also reflected in the external sector where services have increasingly gained importance over a period, which is reflected in the fact that currently India is ranked 18th among the world’s leading exporters of services, improving its ranking from 27 in 1990. Its share in total world export of services stood at 1.3 per cent from a meagre 0.6 per cent in 1990. The growth in export of services can be attributed to, apart from other reasons, trade liberalisation and multilateral trade negotiations, which covered services apart from goods. The process was aided by technological innovations. In recent years, a sectoral shift within the spectrum of service exports has also taken place. The buoyant growth of professional, technical and business services have provided a cushion against the slowdown in traditional services like travel and transportation. The relative share of travel and transportation in India’s service exports have declined over the years (Table 4).
Table 2: India's Current Account

Tourism Receipts: Gentle Growth
Travel receipts are principally determined by the number of tourists visiting India during the period in question, although factors like social and political environment in India and abroad, cost conditions, etc, also have a role to play. Even though gross receipts from travel have shown a steady rise (except for the year when tourism industry was hit by terrorist attack in the US, 2001-02) (Table 5), there has been a deceleration in the rate of net receipts. This is because of a rise in payments under this account. This could be attributed to the fact that more and more of Indians are taking up foreign travel. Currently as many as 4.5 million Indians travel abroad annually (RBI Monthly Bulletin, March 2005). In 2001-02, there was a fall in number of tourists visiting India and also a fall in gross and net earnings on this account. This was because of terrorist attack in the US, which resulted in an unfavorable climate for international tourism. However, travel and tourism industry has started looking up again and India is fast emerging as one of the top ten tourism destinations. According to the World Travel and Tourism Council, India became the fastest growing tourism economy in the world.

Software Exports: India’s New Forte
An important development of the 1990s was the emergence of software service sector as a dynamic area of export activity, resulting from IT revolution. Software services (with an average share of around 50 per cent in net invisible earnings for the past 4 years, Table 3), have surfaced as an important source of services earnings, contributing substantially to gross invisible receipts (Table 6). Gross as well as net earnings from software exports have been rising steadily, with as much as 45 per cent of total net invisible earnings emanating from net export of software services (Table 6). Within this sector, India is making its mark in IT-enabled services (ITES) and the business process outsourcing (BPO) segment. In terms of outsourcing of IT services, India has an edge over its competitors like China and Mexico due to its proficiency in English. In the BPO segment, India has maintained its lead as the best outsourcing destination, particularly for the US and European companies. Also, India has remained a dominant exporter of software and IT-enabled services due to low cost, high quality of product and services and adequate supply of skilled labour.

Large Outgo on “Miscellaneous” Account
Despite huge net earnings form software exports, the contribution of net miscellaneous services in total net invisible earnings is very miniscule (Table 3). Miscellaneous receipts have risen as a consequence of higher earnings from software services. The share of software receipts in total miscellaneous receipts has risen from 42.3 per cent in 1997-98 to 72.3 per cent in 2003-04 (Table 7). It implies that a little less than three-fourth of miscellaneous services receipts are on account of software exports. However, at the same time, payments for communication services, construction services, financial services, royalties, copyrights and license fee and other services have also risen. There is a significant outflow on account of other services. A large and rising negative net receipts under other services along with net outflows under financial services and royalties, copyright and license fee services has led to a smaller contribution of net miscellaneous services in total net invisible earnings.

“Private Transfers”: A Dominant Source
Apart from software services, growing volume of private transfers, driven essentially by workers remittance, has been one of the reasons behind the rise in invisibles. Private transfer receipts have been, traditionally, a major source of invisible receipts, providing cushion to balance of payments. These receipts constitute remittances by non-residents for family maintenance, repatriation of savings by Indian residents abroad and personal gifts and donations to religious and charitable institutions in India. In addition, other components such as import of gold and silver brought in as baggage by returning Indians and local withdrawals/redemptions of non-resident deposits held in India are also included (since 1992-93 and 1996-97 respectively). Over the years, “private transfers” have remained as one of the dominant sources of earning under invisibles account, even though their share in gross invisible receipts has fallen from a peak of 57.75 per cent in 1996-97; at present, for 2003-04 it stands at 43.75 per cent. Among the various components of private transfer receipts, inward remittances from Indians working abroad is the leading source of receipts (Table 8). Inward remittances from Indians have surged in response to the structural reforms carried out after the external sector crisis. A gradual shift has occurred in the sources of remittance, from oil producing countries to Europe and America. In 2003-04, India was the world’s leading recipient of remittances, accounting for about 20 per cent of global flows (RBI Bulletin, March 2005).

Investment Income 
The income account under invisibles has traditionally been in deficit on account of interest payments on external debt, profit/dividend and other payments related to foreign investment in India. The largest component of investment income receipts is the earnings on RBI investment, which are the earnings on deployment of foreign currency assets of the RBI (Table 9). A steady rise in these receipts reflect continuous building up of foreign exchange reserves. One thing needs to be mentioned that the pace at which the earnings have risen is slower than the pace of foreign exchange accretion. This could be the result of low interest rates that prevailed in the international market. India’s investment income receipts have been increasing steadily on account of huge earnings on RBI investment. However, investment payments have also risen and have been able to more than offset the increase in receipts leading to a deficit on income account. Investment income payments move in tandem with India’s external liabilities. The spurt in investment income payments from 2000-01 onwards was due to the inclusion of reinvested earnings as payments following adoption of the revised definition of FDI. A fall in investment income payments in 2002-03 seems to be a result of the decline in interest payments on non-residents deposits. This could be the result of downward revision in interest rate offered on NR(E)RA savings deposits and also discontinuation of NR(NR)R deposits with effect from April 1, 2002.

Services Export – A Renewed Focus
The rising importance of trade in invisibles has also been reflected in the country’s trade policy. The services sector has been identified as a thrust sector for trade policy. The EXIM policy and the Union Budget for 2003-04 have sought to promote export of services through access to service providers to duty-free imports, advance licences, venture capital funds and by formulation of specific action plans for the services sector. The Foreign Trade Policy 2004-09 has announced the setting up of a Services Export Promotion Council to snap opportunities for services in important markets and to develop strategic market access programmes. India should also try to diversify into a variety of other areas like consultancy, Research and Development services, healthcare, entertainment services, ship repair services, satellite mapping services, educational services, accounting services and hospitality services and also beyond the major markets of EU, US and Japan.

References

EPW Research Foundation, (2005): “ India ’s Balance of Payments: Concepts, Compilation and Recent Scenario-1950-51 to 2003-04”, February.

Government of India , (2005): “Economic Survey”, Ministry of Finance.

Reserve Bank of India , (1999): “Invisibles in India ’s Balance of Payments: 1989-90 to 1996-97”, Bulletin, April.

Reserve Bank of India , (2001): “Invisibles in India ’s Balance of Payments: 1997-98 to 1999-2000”, Bulletin January.

Reserve Bank of India , (2003): “Invisibles in India ’s Balance of Payments: 2000-01 and 2001-02”, Bulletin, May

Reserve Bank of India , (2004): Annual Report, August

Reserve Bank of India , (2005): “ India ’s Invisibles”, Bulletin, March.

Various Newspapers

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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