Current Economic Statistics and Review For the Week 
Ended August 20, 2005 (34^th Weekly Report of 2005)

Theme of the week:

India’s Inflation Experience*

Inflation, as widely known, is a sustained rise in the general price level representing an average rise in producer prices or an increase in the cost of living in terms of higher prices of goods and services. In other words, it represents the rate of fall in the purchasing power of money within an economy. Therefore, inflation is an important indicator of macro-economic stability. The objective of this note is to identify the major forces which have shaped the course of prices in India since the beginning of the first five-year plan and to track the contribution of these factors to the overall price movements. 

Inflation is one of the most researched and debated areas of economic analysis. It cannot be claimed that there is any agreement on the causes of inflation in general. The textbook explanations for inflation in the form of interactions between demand and supply for goods and services, are found to be too simplistic for a thorough explanation for many an inflationary situation. Inflation is rarely a monetary phenomenon, for there are complex structural causes such as the underdeveloped nature of the production system and inefficiencies of distribution machinery, which prevent appropriate supply responses. The periods of hyperinflation that got created due to excess money chasing fewer goods during the last world-war are a thing of the past. But sectoral price increases as in the case of petroleum price increases after the early 1970s or sharp increases in the prices of agricultural commodities due to droughts and reduced agricultural output as occurred in the late 1960s, 1970s and 1980s in India , are always possible. However, in this respect too, the modern economies are better placed now to put in place improved supply management systems. Also, the open economic situations with scope for augmenting supplies through imports, provides confidence for preventing inflation getting out of control.        

I

Measurement of Inflation

In India , there are essentially three measures of inflation. They are:  

1.      Wholesale price index (WPI),

2.      Consumer Price Index (CPI)

3.      National Income Deflator or GDP deflator       

The WPI is a weighted arithmetic mean of price relatives representing cost of basket of commodities in the wholesale market or at producers’ level. The retail price index or CPI, on the other hand, represents the average of prices that the final consumers bear for all goods and services consumed. The third, that is, the national income deflator, is a derived concept, resulting from a ratio of national income at current prices to national income at constant prices; it thus covers the prices at the producer’s level of all goods and services that enter the national income framework.  

Thus the choice of an appropriate measure from one of these three in any case would depend on the purpose in view. Each of these three measures of inflation has some merits but also some demerits. While the general indices of wholesale prices and national income deflator are said to reflect overall price level in an economy and hence have universal recognition, the CPI can not claim such general applicability between developed and developing economies. Unlike WPI, there can not be a single consumer price index depicting cost of living for all classes in a vastly differentiated economic and social structure. However, CPI has one advantage over WPI that it captures the prices at the retail level including the one of transport, cost of holding inventories and indirect levies, which the WPi does not. 

II

Difficulties in Measuring Inflation in India

Measurement of inflation is a complex task in India . The most tricky issue is one of working out weighting diagrams for WPI and CPI. The creation of weights does not arise in the case of national income deflator as it is implicitly derived by relating current price estimates to constant price estimates. In WPI and CPI, the choice of commodities to be included in the index becomes an important issue.

Among the above mentioned three measures, the most commonly used is the general index of wholesale price index (WPI). Various revisions have been effected in WPI series to capture the evolving structure of the economy and changing patterns of trade at the wholesale level. The succeeding series of WPI have expanded the scope and coverage of commodity items covered in them.

The consumer price index (CPI), as another measure, is also used to reflect price variations at consumers level. However, due to heterogeneity of the patterns of consumption among various economic and social groups, we have evolved four separate CPI  - for industrial workers, agricultural labourers, rural labourers and urban non-manual employees. However, these indices are not amenable to producing an average aggregate consumer price index to represent all consumers in the economy as they exclude vast segments of rural and farm households, other non-labour rural households and vast middle and richer classes amongst urban households. 

The index of wholesale prices and the national income deflators are times used as alternatives. However, there are vital compositional and computational differences between them. First, the WPI can not match national income data in terms of scope and coverage of commodities. Secondly, unlike WPI, national income deflator can not capture weekly fluctuations in prices. Third, the WPI covers only commodities and excludes services, whereas national income deflator captures all economic activities including services.

These compositional and computational differences with regard to these three indices pose a great problem in selecting an appropriate index representing overall picture of price situation in India . However, it has been generally agreed that the WPI represents the most appropriate picture due to its widening scope and coverage of commodities and the high-frequency of the availability of data. We have, therefore, chosen the WPI as the most suitable measure of inflation in India and the movement of wholesale price index is generally referred as the inflation rate.

III

Plan-wise key trends in price movements in the pre-liberalisation era

First two five-year plan period

It may be recalled that during the first plan period (1951-52 to 1955-56), the demand- supply management was in favour of a downward trend in prices with a fall of 17.3 per cent in the general price level. (Table 1) This decline was partly due to the readjustment to the spurt in prices experienced in the post-partition/post-war period and partly due to the sharp increase in agricultural production, especially foodgrains. Not only did the supply position improve, but also the aggregate national expenditure remained subdued. 

This was accompanied by higher investment-income and savings-income ratio, which stood at 7.5 per cent and 7 per cent, respectively, in 1955-56 from the period 1950-51. Therefore, only a small proportion of the investment was financed by inflow of foreign resources. Thus, the supply factors in terms of aggregate output were in excess of demand factors, which suppressed the general price level during the first five-year plan.

The dominant feature of the second plan was a shift in investment strategy in favour of large-scale industries (emphasised in Mahalanobis Model). During this period, investment-income ratio rose sharply from 7.4 per cent in 1953-54 to 14.7 per cent in 1960-61, savings-income ratio limped up from 7 per cent to 7.8 per cent and the gap of 3.7 per cent was met by inflow of foreign resources. An effective planning era began with the second-five-year plan. The supply availabilities were considerably disrupted during the period. This put considerable pressure on the general price level. On the supply side, the foodgrains production increased by about 15 million tonnes as they increased in the first plan period. However, the additions made to the per capita availability of foodgrains was not as much as that of in the first plan due to a rapid growth in population, resulting in economy’s inability to reap benefit of higher foodgrains output. It is evident that the rate at which agricultural output increased, had remained constant during the second plan period. (Table 1)

On industrial front, the basic and capital goods did achieve an outstanding growth rate of about 60 per cent, but partly due to a low base effect. In addition to this, a steady rise in demand during this period further laid pressures on supplies. At the same time, the expansion in consumer goods industries was too inadequate to meet the growing consumer demand. The demand-supply gap was also apparent from the imbalance between a real income growth of 22 per cent against the national expenditure growth of 44 per cent. All this was combined with foreign exchange difficulties arising from larger import needs produced a considerable strain on prices with the overall increase in prices of about 35 per cent.

Third Plan Period

Interestingly, upto 1961, the falling and rising trend in prices broadly coincided with the plan periods. The third five-year plan (1961-1966), however, showed a mixed trend. The first two years of the plan (1961-62 and 1962-63) exhibited considerable price stability. The wholesale price index (1952-53=100) increased only by 0.2 per cent and 2.2 per cent in 1961-62 and 1962-63, respectively. A notable point is that the inflation rate based on the revised index number with a base 1961-62=100 was at 3.8 per cent in 1962-63. It is generally accepted that in a developing country like India a rise of 2 to 3 per cent in general price level is not only inevitable, but also desirable. The inflation rate of around 4 to 5 per cent in developing countries can be regarded as in the tolerable limits. Therefore, during the first twelve years of planning the general price increases had remained within fair limits.

Emergence of inflationary pressures

(1963-64 to 1967-68)

The most distinct feature of the last three years of the third plan (1963-64 to 1965-66) including the first two years (1966-67 and 1967-68) of three-year annual plans (Fourth plan could not be finalised by 1966 due to economic setback caused by various domestic and international factors) was the serious attempt by the government in pushing the ongoing developmental pace, despite sharp increases in defence and other non-developmental expenditure, following the Indo-China war in 1962.

The aggregate demand-supply factors causing the inflationary situation during this period are presented in Table 2.   

During this period, the real income growth by 8.5 per cent with practically no increase in per capita terms reflected weaknesses in supply side. This was accompanied by as high as 61 per cent increase in net national expenditure at market prices on demand side and thereby, created an imbalance in demand-supply conditions. On supply side, the agricultural output, especially foodgrains remained stagnant. In addition to this, a severe decline in farm output in 1965-66 and 1966-67 resulted in adverse effect on industrial output during 1966 and 1967. The main reason behind this decelerating performance of agriculture and subsequently industry was the disastrous droughts in 1965 and 1966 combined with war with Pakistan in 1965. Double-digit rates of inflation were witnessed during the years 1966-67 (13.9 per cent) and 1967-68 (11.6 per cent).

Fourth Plan Period

During the fourth plan (1969-74), i.e. since 1968-69, the prices had risen only moderately. The index number of wholesale prices  (1961-62=100), which had risen by an annual average of over 10 per cent during the preceding five years, experienced a fall of 1.1 per cent during 1968-69. The reason behind this fall was a sufficient supply of essential commodities, particularly foodgrains.  However, despite such food adequacy, the general price level did increase moderately, partly due to relatively high procurement prices of foodgrains and partly because of the failure to utilise the available food stocks. Apart from this, the price rise during this period was also due to the demand side factors like sharp increases in money supply; it increased from 8 per cent in 1968-69 to 13.6 per cent in 1971-72.

A sudden spurt in the rate of inflation was noticed in 1972-73 (10 per cent) and in 1973-74 (20.2 per cent). This was due to a poor harvest and a resultant fall of 8.1 per cent in agricultural output in 1972-73. There was a fall in the availability in foodgrains in 1973 coupled with rapid growth in M3 (M3 = currency with public + demand deposits and time deposits with commercial banks) in 1971-72 and 1972-73. In such a difficult scenario, the OPEC (Organisation of Petroleum Exporting Countries) raised oil prices in November 1973 by almost four times, which resulted in price hike of minerals by 81 per cent in 1973-74 and 87.9 per cent in 1974-75. The terminal year of the fourth plan (1973-74), thus witnessed a price rise of 20.2 per cent due to various cost-push factors like international oil price hike and the emergence of inflationary psychology with cumulative impact of excess money creation, which resulted in hoarding and black-marketing.

Fifth to Seventh plan Periods

The above inflationary psychology was carried forward to the initial year of the fifth plan. The first year (1974-75) of the fifth five-year plan (1974-75 to 1979-80) thus recorded the sharpest average rate of increase in prices in the post-war years at 25.2 per cent (Appendix A). This was mainly due to a drag of inflationary pressures from the preceding years. This induced the government to take strong measures to control aggregate demand by curbing public expenditure, reducing money supply growth and curtailing disposable income so as to control inflation. During 1974-75, the ‘fuel’ group prices shot up by 51.8 per cent as compared to 18.6 per cent rise in 1973-74. The prices of minerals also rose by as high as 87.9 per cent in 1974-75. Both these groups contributed 23 per cent to the general price rise despite their low weight of 6.44 in WPI.

After such a huge spurt in the prices in the year 1974-75, the subsequent three years of the plan experienced negative or moderate inflation. But, in the last year of the plan, 1979-80, there was yet another spurt of petroleum price increases. Again it combined with a sharp setback to agricultural output continuously for the next four years. Be that as it may, the fifth plan ended with a 17.1 per cent rise in WPI in its terminal year 1979-80. 

As stated above, the first three years of the sixth five-year-plan, 1980-81 to 1982-83, faced severe setback to farm output. For instance, total foodgrains output, which fell drastically from 131.90 million tonnes in 1978-79 to 109.70 million tonnes, remained at a low level in the range of 129 million tones to 133 million tones thereafter until 1982-83.  Therefore, the inflation rate ruled at 18.2 per cent and 9.3 per cent during the first two years of the plan 1980-81 and 1981-82.  A strict money supply control measures coupled with efficient management of foodgrains production kept inflationary measures under check in 1982-83 and thereafter WPI increases were 4.9 per cent, 7.5 per cent and 6.5 per cent, respectively, in the last three years of the sixth plan.

The seventh five-year plan (1985-86 to 1989-90) witnessed comparatively moderate inflation rates at an average of 6.6 per cent per annum. The first year of the plan witnessed the lowest annual price rise at 4.4 per cent, mainly due to effective supply management and tight control on M3 growth. The following two years, i.e. 1986-87 and 1987-88 registered moderate price increases of 5.8 per cent and 8.1 per cent, respectively. Further in 1988-89, despite a bumper kharif harvest, the rate of inflation was 7.5 per cent. The following year 1989-90 also showed the same rate of inflation of 7.5 per cent, despite good agricultural and industrial production and absence of any external shocks. This was due to the general buoyancy in investment activity and sharp increases in liquidity in the system.

Overall, on an average, inflation based on WPI remained below the 7 per cent level through the 1950s and 1960s, but it accelerated during the first half of the 1970s as also through the 1980s. (Table 3)

IV

Inflation in the Post-liberalisation Period: A Decelerating Trend

The subsequent 15-year period (1990-91 to 2004-05), described in official parlance as the post-liberalisation period, is also a period in which the planning processes have been sidelined and importance has been assigned to the market forces in economic management.

 Reforms took the form of mainstream structural adjustment and stabalisation measures. The trigger for these radical measures was found in the crisis situation in the macro economy. When the reforms began in the 1990-91 and the subsequent two years, the economy faced double-digit inflation, which was mainly attributed to the following factors:

(i)                  The economy had to face the Gulf Crisis of 1990s and the consequent uncertainties about oil prices;

(ii)                Adverse balance of payments situation, coupled with the external payments problems, the economy suffered from serious inflationary pressures; and

(iii)                Scarcities of essential commodities and deterioration of fiscal discipline.

By June 1991, the annual inflation rate was running at about 16 percent and the economy was on the verge of a major crisis. It was in response to such an emerging crisis, the Government initiated a set of stabilisation and structural adjustment measures starting in July 1991. The key objective of the stabilisation policy included reduction in the fiscal deficit, upward adjustment in the interest rate structure in the economy, containment of the growth in money supply and an exchange rate adjustment. This was expected to bring the growth of aggregate demand more or less in line with the long-term growth path of the economy, thereby reducing the domestic inflation rate and improving the balance of payments situation. In conjunction with these stabilisation measures, the structural adjustment measures included decontrol of several administered prices, which aimed at improving the supply side of the economy.

The outcome of structural reforms exercised during the post-reform period was reflected in a considerable decline in the average inflation rate, but only since 1996-97. For six years, 1990-91 to 1995-96, the annual inflation rate ruled high-ranging from 8.1 per cent to 13.7 per cent. Apart from the slowdown in foodgrains output and cost-push factors arising from a sharp depreciation of a rupee and increases in the petroleum prices, the growth of money supply was fairly rapid during the period.  As shown in the Table 3 and 4, there was a reversal of price trend since 1996-97. The average inflation rate as per WPI came down significantly to 5.1 per cent during 1996-97 to 2000-01 as compared to 10.6 per cent during 1991-92 to 1995-96. Table 5 presents annual inflation rates in the late 1990s and the subsequent years:

Factors responsible for declining trend in prices during the late 1990s

     In recent years, supply side factors have been more instrumental in determining the direction and magnitude of price rise, while the impact of demand side factors have remained comparatively weak. Overall, the factors like agricultural production, monsoon conditions, global crude oil prices and increases in the prices of some of the imported commodities like steel, edible oil have played a crucial role in price determination in the last decade. 

           Appendix B shows that the WPI has risen by about 4.9 per cent from 1995-96 to 2004-05. It is evident that among the three major commodity groups, ‘fuel, power, light and lubricants’ has been the most significant factor contributing to the inflationary pressures in the last decade. The price index of this group has increased on an average by 10.4 per cent during the last decade, where the prices of the sub-group ‘mineral oil’ with the highest weightage in this group has increased by 12.9 per cent. The average rate of rise in the index for the sub-group ‘mineral oil’ has reached its peak at 41.5 per cent in the year 2000-01. This was, of course, mainly due to a jump in the international crude oil prices and therefore, prices in general rose due to a sharp increase in the administered prices of energy products. After remaining at a single digit rate of increase for the next three years, the index for the group for once again resumed a double-digit rate of inflation (15 per cent) in the year 2004-05.

The other two major groups, i.e. ‘primary articles’ and ‘manufactured products’ have shown relatively lesser price increases of 4.6 per cent and 3.5 per cent, respectively, as compared to the fuel group over the last decade. Under the ‘primary articles’ group, the prices of food articles had been the most prominent (4.8 per cent) during 1995-96 to 2004-05. Similarly, under ‘manufactured products’ group, the prices of food products, chemical and chemical products, basic metals, alloys and metal products were the most significant sources of price pressure during the same period.

After reviewing the inflation scene since 1950s, it is apparent that the prices have certainly softened after the late 1990s as compared to those in the previous decades, especially in late 1960s and early 1970s. Domestic deregulation and tariff rationalisation have resulted in greater competition, greater cost-efficiency and moderation of upward pressure on prices. Lower annual average inflation rates for primary products reflect better supply side management. In addition to this, the decline in inflation in fuel sector is noteworthy, especially in view of the dismantling of the administered price mechanism in the hydrocarbon sector in April 2002. Such dismantling brought fears of petroleum prices to have abnormal swings. However, a thoughtful public ownership of marketing companies kept low inflation in the fuel sector. Above all, is the openness of the economy, which has compelled the manufactures to keep the domestic prices at the competitive level. Better supplies of scarce commodities like pulses and edible oils have become easier.   

VI

 Current Scenario of Inflation and Issues Involved 

The inflation scene for the year 2005-06 has begun with a relatively satisfactory note than that of the previous year. The annual point-to-point rate of inflation based on WPI stood at 5.7 per cent at the beginning of this financial year and it has shown a decelerating trend from June onwards. It has touched 3.3 per cent in the first week of August this year as compared to a much higher rate of 8.3 per cent in the corresponding period last year. The current scenario of declining inflation rate is attributed partly to the high base effect and partly due to the satisfactory performance of macro economy as a whole. Nevertheless, the major factor that is causing uncertainties with regard to the inflation scene is persistent by high international oil prices and their inevitable impact on the domestic economy. The government has already hiked the prices of petrol and diesel recently, which may affect other factors like transport costs. What is more, there is another price increase due.

Maintaining reasonable price stability is one of the major objectives of economic policy of the government and monetary authorities. Issues such as whether inflation is inevitable in the course of economic development and whether it helps or hinders rapid growth are often discussed. However, by and large, it has been agreed that a moderate level of inflation acts as an incentive to producers in a developing economy, which in turn, generates greater demand for economic activity. Therefore, a developing country like India can afford to have an inflation rate within a range of 4 to 5 per cent.

VII

Overall Assessment

Inflation in India had been generally regarded as a product of excess demand arising out of the attempts of authorities to bridge the gap between planned or desired investment and savings, by means of deficit financing. Secondly, rising agricultural prices played a key role as one of the major price determinants over a period of time. Third, global oil price shocks –three major ones and the current creeping one have strongly influenced domestic inflation rate from time to time. Apparently, there is no foolproof solution to avoid inflation and a zero per cent inflation is neither possible nor desirable in a developing country like India . Therefore, what is essential is to maintain reasonable price stability and to contain inflationary expectations. To achieve this, the monetary authority had been focusing on liquidity management with a switch from a provision of ‘adequate liquidity’ to ‘appropriate liquidity’. The Reserve Bank of India has, therefore, kept a close watch on the overall price situation in the country and is committed to maintaining price stability to the extent monetary factors play a role in inflation, but as indicated at the outset, inflation is a much more complex phenomenon and the use of monetary instruments to control inflation to the neglect of their influence on growth and employment will not be possible.             

* This note is prepared  by Ms. Gauri Ranade

I

Highlights of  Current Economic Scene

AGRICULTURE

o       The government has scrapped Rs. 100 crore worth of cess levied on various agri-products including spices, coffee and tobacco to increase the international competitiveness of agricultural products. The cess paid on export of basmati rice – which goes to Basmati Development Fund-, has been reduced while the cess on marine products has been scraped.

o       The loss on account of scrapping of the APEDA (Agriculture and Processed Foods Export Development Authority) cess would be Rs. 50 crore and that of the MPEDA (Marine Products Export Development Authority) cess is estimated to cost exporters Rs 20 crore per annum. The burden on coffee, tobacco and spices is estimated to be respectively Rs 12 crore, Rs 3 crore and Rs 7 crore.

o       The delay in onset and advancement of the south-west monsoon has lead to short fall in kharif acreage in the current monsoon season. However, as per the latest data released by Agricultural Ministry, area covered under crops like Cotton, Sugarcane, Pulses and Jute is showing improvement to some extent while Coarse Cereals, Rice, oil seeds have lagged behind in their sowings this year compared to last year.

o       Rice acreage is lower because of the shortfall in sowing reported in Uttar Pradesh, Gujarat, Karnataka, Maharashtra, Orissa and that in case of oil seeds it is lower due to lower coverage in Andhra Pradesh, Gujarat, Maharashtra and Tamil Nadu.

INFRASTRUCTURE

 Petroleum and Petroleum Products

• International Energy Agency (IEA) predicts an 8 per cent slash in world economic growth if this year’s average oil price hits $ 50 per barrel.

• To cover under recoveries, Indian oil marketing companies have demanded a Rs 5.29 per litre and Rs 4.54 per litre price hike for petrol and diesel respectively, while the petroleum ministry has said that oil prices should be raised by Rs 3.25 a litre and diesel pries by Rs 4 a litre. Also, Indian Oil Corporation has indicated a required increase of Rs 11.45 per litre in kerosene prices and of Rs 91.95 a cylinder LPG prices.

• Organisation of Petroleum Exporting Countries (OPEC) expects world oil demand to grow by 1.57 billion barrels per day (bpd) in 2006 (an upward revision of 3000 bpd), with United States leading demand growth within Organisation for Economic Cooperation and Development (OECD) countries and China constituting one fourth of the world oil demand growth.

Power

o       Central Electricity Regulatory Commission (CERC) is amending regulations to allow for, in-principle, clearance of project costs before construction of power generation plants, thus making it easier for power project developers to tie up finances.

o       Maharashtra government plans to release a special policy to promote power generation through non-conventional sources, in response to an increasing energy shortage. So far Maharashtra has tapped a paltry 748.741 megawatts from wind, minor irrigation, biogas, solid waste and agri waste from its total potential marked at 6731 megawatts. A proposed tidal power generation project with a generation capacity of 600 kilowatts, envisages an investment of Rs 5.50 crore, of which Rs 3 crore would be a grant from the ministry of non-conventional energy and the balance to be mobilised through the state government’s Green cess.

Steel

• An expert committee set up by the steel ministry has proposed that foreign investors will be allowed to mine ore in India, with plants requiring to have a minimum capacity of at least 10 million tonnes a year each, only if they have a proper track record and access to global finance.

Shipping

o       Ministry of Shipping, Road Transport and Highways plans to put National Maritime Development Programme (NMDP) on fast track, with projects pertaining to shipping and inland water terminals in one phase and another phase of 228 projects of port development.

Aviation

o       Civil aviation industry has achieved the biggest ever growth in aircraft movement and passenger traffic in the last financial year of 2004-05, with passenger traffic in domestic airports rising by 22.3 per cent to 59.54 million and aircraft movement increasing by 14.2 per cent to 7.3 lakh.

INDUSTRY

Pharmaceuticals

o       Government is keen to enact a law providing for a fine of Rs 10 lakh or life imprisonment for peddling of fake medicines, in order to eliminate the menace of spurious drugs, which is on the rise.

Information Technology

• TPI index[1] registered an 11 per cent increase in global contract award values in the first quarter of 2005 (Jan-Mar) as compared to first quarter of 2004. However, it reported a drop in performance in terms of number of contracts and total value as compared to the same quarter a year ago. The total value of contracts (112 in number) for the first half of 2005 was almost at $ 28.5 billion, representing a 13 per cent decrease in value from the same half-year period in 2004.

Automobiles

• Central Government has selected to sponsor Aurangabad Industrial Estate under its Industrial Cluster Development Scheme (ICDS). An Auto Cluster Facility Centre, worth Rs 67 crore, will come into existence in Aurangabad , with 75 per cent contribution from the centre while local industry corporation, state government and its allied bodies are required to collect the remaining 25 per cent.

Electrical Equipments

o       Power equipment industry, comprising companies in the business of equipment for power generation, transmission and distribution, registered a 13.3 per cent growth in volume terms for the first quarter of 2005-06, led by a growth in exports. Sales were up by Rs 1000 crore during this period from Rs 4000 crore in the corresponding period last year. According to Indian Electrical and Electronics Manufacturers’ Association (IEEMA) reports, within power equipments, the transmission industry posted a growth of 43.6 per cent, switchgear, 20 per cent, high-tension motors 70 per cent, small motors 15 per cent, transformers 10 per cent capacitators 6 per cent, cable industry 30 per cent and energy meters 20 per cent.

Textiles and Apparels

• Government is considering a proposal to abolish cess on textiles and textile machinery by deleting Section 5A to 5F of the Textile Committee Act, 1963.

• Global textile industry, currently estimated to be around $360 billion, post quota dismantling is expected to be around $650 billion by the end of 2010.

• India, presently accounting for a mere 3 per cent of world textile exports with an estimated potential of at least five times more than the current level, envisages a $ 100 billion textile industry by 2010, half of it from exports in the post quota regime.

CORPORATE SECTOR

o       In a move to cover increased input prices such as steel and to correct a cut in dealer margins affected in June, Hyundai Motor India has announced a price rise of Rs 6,000-11,000 for its best selling model Santro.

o       Global steel holdings, a special purpose vehicle controlled by Ispat group, has raised nearly $150 million to partly finance its acquisition of 71 per cent share in Bulgaria’s largest steel maker, Kremikovtzi.

o       Balrampur Chini Mills Limited is gearing up to tap the overseas market with a combination of global depository receipt and foreign currency convertible bonds to finance its expansion plans.

o       Bharti Tele-Ventures has decided to invest Rs 120 crore in the current financial year, in its mobile, telephone broadband and other services in Goa and Maharashtra region.

o       TVS Motors company has planned to launch two 150 cc-motorcycles in December 2005 and March 2006. In total four motorcycle launches are scheduled for the current financial year.

o       Kolkata based Eastern Silk industries limited, one of the leading exporters of silk in the country, is planning to raise Rs 70 crore through foreign currency convertible bonds and private placement of equity, for future expansion.

o       Tata Motors has announced that its US-based wholly owned subsidiary Tata Technologies limited would buy British engineering and design services company Incat International Plc for Rs 411 crore.

o       The Cabinet committee of Economic affairs has approved, in principle Kochi refinery limited merger with Bharat Petroleum Corporation limited.

o       Infotech and BPO major Hinduja TMT has acquired Immaculate Interactions Limited, a Banglore-based outbound call centre, specialising in telemarketing.

o       Wheels India limited, part of the TVS group, is planning to join hands with US-based Caterpillar to set up an auto component joint venture in Chennai. The proposed joint venture would manufacture idlers and components.

o       Larsen & Toubro limited (L&T) has got Rs 450 crore project for the construction of a residential property in Dubai . L&T’s construction division will execute the project.

o       Hindustan Construction limited had received orders worth Rs 5050 crore from the Highway Authority of India for projects in the northern part of Uttar Pradesh.

o       Rolta India limited has posted a net profit of Rs 24.74 crore for first quarter of 2005-06 compared to Rs 16.81 crore in the same quarter of 2004-05, posting a growth of 47.2 per cent. The company’s total income has registered a 11.4 per cent growth during April-June 2005.

o       HCL Infosystem’s consolidated quarterly net profit for April-June 2005 grew by 29 per cent to Rs 59 crore against Rs 45.9 crore in the same quarter last year. Consolidated revenues has increased by 66 per cent to Rs 2197.5 crore during quarter ended June 2005 from Rs 1321.2 crore in quarter ended June 2004.

o       Hindustan Motors, which has extended its accounting period till June 2005, has announced a profit after tax of Rs 61.2 crore in the 15 month period compared with a loss of Rs 80.8 crore in the previous year of 12 month. Net sales have increased to Rs 1048.6 crore in June 2005 from Rs 729.2 crore in 2004, indicating an annualised return of 15 per cent.

BANKING HIGHLIGHTS

• National Bank for Agriculture and Rural Development (Nabard) has increased the rates of interest on its capital bonds issue from 5.20 per cent to 5.50 per cent for bonds with three years tenure effective from August 22, 2005. The bank has also increased interest rates for bonds with five years tenure to 5.60 per cent.

• Scheduled commercial banks prefer to park their funds with the Reserve Bank of India (RBI) in the current fiscal, while significantly reducing their investments in government securities. Banks have invested only Rs.5,368 crore in government securities during April-July 2005 as against Rs.47,646 crore in the corresponding period in the previous year. Meanwhile balances with RBI have shot up to Rs.24,979 crore in the same period as compared to Rs.8,402 crore in the same period last fiscal.

• Nabard has sanctioned a grant support of Rs.13.43 crore for tribal development projects in the states of Jharkhand, Chhatisgarh, Orissa and union territory of Dadra and Nagar Haveli. The projects would directly benefit 1,000 tribal families in each state.

• In a move to re-align its organisational structure to enhance efficiency, the IDBI bank has embarked Rs.200 crore for technology upgradation programme. The bank has also planned to augment its ATM network by 200, as this would take the number to 500 by the end of March 2006.

• Mumbai-based Shamrao Vittal Co-operative Bank has embarked on an acquisition spree of smaller co-operative banking entities and is all set to acquire Samartha Nagar Co-operative bank. The country’s oldest co-operative bank is also eyeing at least another four similar entities in Maharashtra and Karnataka.

• Backed by robust growth in total income, Infrastructure Development Finance Corporation (IDFC) has registered a 113 per cent rise in its net profit to Rs.108.2 crore for the quarter ended June 2005 as against Rs.50.80 crore in the corresponding quarter the previous year.

TELECOM

• GSM service provider Bharti Tele-Ventures Ltd is to install an additional 10,000 base trans-receiver stations (BTS), a transmission and reception link for a mobile communication systems. Of the total 10,000 cell sites, around 30 per cent would be installed in the western region, comprising Rajasthan, Madhya Pradesh, Chattisgarh, Gujarat and Maharashtra .

• Reliance Infocomm has launched its international roaming facility in 5 countries, making it the first Indian CDMA operator to roll out the mobile telephony continuity services across seas. The company is also planning to extend the services to 11 countries across three continents.

• As per the data received from the operators and their associations, at the end of July 2005 the gross subscribers base consisting of fixed and mobile phones, has touched 53.76 million (50.2 per cent) whereas that of PSU operators has reached 53.24 million (49.8 per cent).

FINANCIAL MARKETS

Capital Markets

·        Primary Market

o       The IPO of Sasken Communications Technologies, which opened on August 11, was ovsersubscribed by 12.27 times on the first day itself.

o       Amar Remedies Limited is tapping the market with the IPO of 1.5 crore equity shares of Rs 10 each through 100 per cent book-building process in a price band of Rs 24 to Rs 28.  The offer would constitute 57.33 per cent of the fully diluted post issue paid up capital of the company. The issue is to open on August 25 and close on August 31.

·        Secondary Market

o       The BSE sensex reached yet another historic high during the week when it crossed 7900 mark and 2400 mark for NSE nifty. As the market ventured into new highs, the profit booking activity gained momentum, as a result, the indices fell. However, the calling off of center government’s plan of selling stake in 13 public sector companies to strategic investors has not affected the market sentiments.  Following the RBI notification allowing FII investment in print media, the stocks from media segment surged ahead, particular sharp rise was seen in case of Seccan Chronicle Holdings. 

o       Over the week, the BSE sensex registered a gain of 0.17 per cent to close at 7780.76 points before touching an all-time high of 7921.39. Similarly, NSE nifty rose by 0.93 per cent to close at 2383.45 before peaking at 2426.25 points. Among the sectoral indices of BSE, indices for health care products, fast moving consumer goods, banking and auto have registered losses, while all other have recorded gains.  While BSE sensex gained 0.17 per cent but BSE small-cap recorded a gain of 4.6 per cent. BSE small-cap scaled all time high on August 19 to 5653.69 points.

o       The FIIs were net buyers of equities between August 1 and 19 to the extent of Rs 4477.70 crore with purchases of Rs 20,607.70 crore and sales of Rs 16129.90 crore. Mutual funds also remained net buyers of equities but turned seller on the last trading day of the holiday-shortened week. 

o       Due to the surging stock prices and upbeat investors sentiments, Indian stock markets has, as on July 28, become the 15^th largest market in the world in terms of market capitalization and fourth largest among emerging markets.

o       It is expected that the Sebi might ban the practice of mutual funds amortising issue expense over a longer period of time for open-ended schemes following the complaints that they were running huge issue expenses and were amortizing these expenses over a long period usually 5 years, thereby putting long-term investors at a disadvantage.

o       The 130-year old, the Stock Exchange, Mumbai, (BSE) has been formally turned into a corporate entity with a proposed 51 per cent public holding from August 19, 2005. At the function organized by BSE to commemorate the occasion, Madhukar, the whole time member of Sebi , said that the BSE sensex could cross 16,000 mark  point during the current year itself. He explained this bullishness due to the good economic fundamentals and improved adherence to corporate governance principles by companies and dissemination of knowledge to all section of investors, could take the market to unprecedented levels.    

Derivatives                                  

o       The F&O segment began trading during the week on a subdued note but as the rollover of contracts from August expiry to September rose and also as the hedging activities increased due to the new peak touched by the stock indices, the market turned buoyant. 

Government Securities Market

·        Primary Market

o       The RBI re-issued 7.37 per cent 2014 and 7.50 per cent 2034 for notified amounts of Rs 5,000 crore and Rs 3,000 crore, respectively, for cut-off yields of 7.03 per cent and 7.54 per cent, respectively. 

o       The yield set on the 91-day treasury bills has been set lower at 5.20 per cent as compared to the previous weeks yield of 5.24 per cent.

·        Secondary Market

o       The government securities market remained concerned about the surging crude oil prices touching yet another highs. Even the 25 basis points fall in the inflation rate failed to enthuse the market sentiments. The momentary pause in FII inflows also affected the market sentiments.

o       The daily average subscriptions to the reverse repo under the LAF continued to rule above Rs 34,000 crore indicating improved liquidity scenario. The short-term rate (call market and CBLO) ruled in a range of 3 per cent to 6.25 per cent. However, due to the above-mentioned uncertainties, the weighted average YTM rose from 7.02 per cent on August 12 to 7.06 per cent on August 19.

o       The trading during the week remained focused around 5 securities accounting for 84 per cent of the total trading; of them, 10.25 per cent 2021 saw the highest trading with a share of 30 per cent in the total trading. 

Bond Market

o       During the week, three issuers tapped the market to moblise Rs 1,145 crore. They are NABARD, HDFC and Kokan Railway Corporation Ltd.   

Foreign Exchange Market

o       The rupee –dollar exchange rate has appreciated from Rs 43.60 on August 12 to Rs 43.54 on August 17 but fell to Rs 43.58 on August 19. The six-month forward premia fell from 0.92 per cent on August 12 to 0.81 per cent on August 19.

o       Following the revaluation of Chinese currency on July 21, the inflows of foreign currency assets have increased by almost US $7 billion. 

Commodities Futures derivatives

o       Punjab Markfed has signed a MOU with the NCDEX to extend the benefits of futures trading to primary producers covered by the former. The alliance seeks to work together on innumerable opportunities provided by the agri-business, particularly regarding commodity futures. It also aims to achieve synergies in trading between local mandies and national commodity exchanges for the benefit of primary producers.

o       Multi Commodity Exchange (MCX) launched plastic futures for the first time in Asia Pacific on August 18. The contracts initially are introduced for expiry in September and October in polypropylene (PP) and high density polyethylene (HDPE). 

o       It is expected that by early 2006, it will be possible to trade in commodity options contracts. This decision is part of the recommendations on the Forward Contracts Regulation Act (FCRA) which is to be tabled in the parliament in the winter session.

INFLATION

• The annual point-to-point inflation rate based on wholesale price index has declined to 3.35 per cent during the week ended August 6, 2005 from 3.84 per cent registered during the previous week. This rate of inflation is two and a half-year low. The inflation rate was at 8.30 per cent in the corresponding week last year.

o       The WPI has gone down to 194.1 during the week under review from the last weeks’ level of 194.5 (Base: 1993-94=100). The index of primary articles’ group has declined considerably by 0.8 per cent to 191 from the previous week’s level of 192.5, due to decline in the price indices of both, food articles and non-food articles. The price indices of food articles declined to 191.2 from 193.2 in the previous week, mainly due to decline in the prices of fish-marine and fruits and vegetables. Similarly, the price indices of non-food articles have registered a decline by 0.2 per cent to 182.6 from 182.9 for the previous week.  The index of fuel, power, light and lubricants group has also declined by 0.2 per cent to 303.9 from 304.4, the previous week’s level. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has remained unaltered to stand at previous week’s level of 170.6. 

o       The latest final index of WPI for the week ended June 11, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 192.9 and 4.50 per cent instead of the provisional levels of 192.6 and 4.33 per cent, respectively.

o       The contained rate of inflation during last two months, i.e. June and July is attributed mainly to the high base effect. The same trend is expected to prevail upto the end-August, provided the government does not hike oil prices significantly.

LABOUR

o       Despite criticism that getting an estimated Rs. 150,000 crore may be difficult for expanding the scope of National Rural Employment Guarantee Scheme (NREGS), the government has cleared the NREGS Bill, 2004, one of the major components of the rulling alliance’s common minimum programme. After 14 months of being much talked about, the same has been finally introduced in Lok Sabha. The Bill incorporates the amendments suggested by the parliamentary committee. The scheme aims to provide employment to one person of every rural household for at least 100 days a year. The amendments are as follows:

o       To guarantee employment to any one who offered to work for the prescribed wage, instead of confining the same to below poverty line (BPL) job-seekers. 

o       The guarantee once applicable must not be open to withdrawal at the government’s discretion.

o       The major financial burden could be borne by the Centre, with the states meeting the 10 per cent of the total expenditure and the expenses on unemployment allowance. Panchayats should play a central role in selection of works as well as in implementation and monitoring of the scheme. Initially as per the scheme, the Centre was suppose to bear the wage cost and 75 per cent of the material cost involved in implementing the NREGS across the country and the states were required to bear the balance of 25 per cent and pay the unemployment allowance to those who register under the programme, but are not given the jobs.

o       The Bill also stated that there would be a legal employment guarantee to rural poor instead of just an executive guarantee mentioned earlier.

o       The Minimum wage to be paid under the scheme would be Rs. 60 and women would be given priority. 

o       Referring to the financial implications, the ruling government also mentioned that the economy growing at 7 per cent must find resources for such crucial intervention. The Bill has a provision for a corpus fund for the employment scheme where money would be provided in advance to the state governments to initiate the work. 

o       The government is unlikely to accept the recommendation of the standing committee on finance to allow premature withdrawals under the New Pension Scheme (NPS). According to the government, allowing premature withdrawals would defeat the purpose of the scheme to generate reasonable pension. It added that the employees already have an optional tier II withdrawable account that can be used to invest money that can be withdrawn any time.      

PUBLIC FINANCE

o       Finance Ministry, in its background note for the Consultative Committee on Finance, is considering extending the scope of the outcome budget by covering non-plan expenditure wherever possible. The outcome budget is a pre-expenditure instrument to measure outputs/outcomes, wherein the outcomes are to be specifically defined in measurable and monetarable grounds. Further, Finance Ministry has also mooted the involvement of communities, target groups and Panchayati Raj with easy access and feedback systems as a feature of the outcome budget, which may have to be finalised within three months of the Union budget. The note also states that the Expenditure Finance Committee guidelines have been modified to insist on clear definition of outcomes at programme or project formulation stage and to co-ordinate with this initiative, a new division called the programme outcome and response monitoring division has been created within the Planning Commission.

o       The Finance Minister may present the first outcome budget in Parliament on August 25.The budget would comprise scheme/project-wise outlays for all central ministries, departments and organisations during 2005-06 listed against corresponding outcomes to be achieved during the year 

o       As per the revised estimates gathered by Financial Express (FE), the combined gross fiscal deficit (GFD) of all the states have declined from Rs. 1,41,010 crore (5.1 per cent of gross domestic product) at the end of 2003-04 to Rs. 1,21,629 crore in 2004-05. Significantly, the reduction in the deficit has been substantially sharper than the Rs. 1,693 crore projected by the Twelfth Finance Commission for 2004-05. States have also witnessed a major decline in their outstanding liabilities from Rs. 1,84,268 crore to Rs. 1,28,795 crore during 2004-05 on account of central loans.

o       According to Assocham eco plus study, the government can raise a huge amount of Rs. 31,000 crore by divesting only 10 per cent of its stake in each of the top 14 public sector undertakings, taking advantage of the good run of stocks at the bourses. The combined market capitalisation of the government holdings in these firms as on August 11 was Rs. 3,16,981 crore on the National Stock Exchange and the Bombay Stock Exchange.

o       The excise collections during April-June 2005 went up by 7.34 per cent to Rs. 8,590 crore, compared to Rs. 8,002 crore during the corresponding period last year.

o       The government has collected Rs. 583 crore through Fringe Benefit Tax and another Rs. 20 crore through the Banking Cash Transaction Tax, during the first quarter of the current fiscal year.

o       Following the recommendations of the sub-committee headed by Chief Commissioner of Customs, the government has decided to do away with a number of declarations that exporters have to file under various promotion schemes, including drawback and duty entitlement pass book.  The revenue department has also decided not to ask for duty-free replenishment certificate scheme. The department would issue a suitable draft notice and standing orders for guiding industry and stuff.

o       Central Board of Excise and Customs (CBEC) is introducing a new set of criteria to monitor compliance, in wake of a marginal 5.69 per cent rise in excise collection during April-June 2005-06. Excise collections stood at Rs. 30,095 compared with Rs. 28,475 crore in the corresponding period last year. As per the proposed criteria, excise returns would now be subject to verification every six months and a decrease of 15 per cent or more in the amount debited from the personal ledger account of the assessee towards payment of the duty could invite scrutiny. Moreover, instead of superintendents in charge of the range, senior officers namely deputy/assistant commissioners and joint/additional commissioners would scrutinise the returns, with the former verifying returns with assessable value between Rs. 1 crore and the latter those exceeding Rs. 5 crore.

o       In a memorandum submitted to the empowered committee of state finance ministers, Assocham has proposed to create a single authority to tax all aspects of any transaction so as to prevent unnecessary harassment of taxpayers who face varying taxes assessments by Union as well as state governments.

o       The central government has in-principle agreed to reimburse Rs. 193 crore to Andhra Pradesh government against the losses incurred by the state during the first three months of VAT implementation. While filing its first claim of Rs. 193 crore, the state government had requested the central government to reimburse the losses on a monthly basis so as to enable the state to continue with its welfare activities without any financial hitches.

o       The centre government has turned down Rajasthan government’s exemption plea to pay the cash transaction tax. States government and local authority have begun to feel the burn of cash transaction tax, since, states usually keeps funds allocated to them under various centrally sponsored schemes in current accounts with scheduled banks. Thus, withdrawals from such accounts, more often than not, breach the threshold of Rs. one lakh in a day and are subjected to the tax levied at 0.1 per cent on the transaction value.

CREDIT RATING

o       Crisil has reaffirmed the outstanding ‘Grade 1’ rating assigned to the three-year Bachelor of Maritime Science course and one-year Graduate Engineering course offered by Marine Engineering and Research Institute  (MERI) located in Mumbai. The grading denotes that MERI's quality of education is outstanding and the course is in line with the objectives of the Director General of Shipping (DGS). The grading underpins MERI's professional and committed management, highly qualified and experienced faculty, good infrastructure, and excellent placement track record.

o       In an another exercise, Crisil has also reaffirmed the ‘P1’ rating assigned to Mid Day Multimedia Ltd.’s Rs. 100 million commercial paper programme. The rating reflects Mid-Day Multimedia Limited's established presence in the Mumbai newspaper market through its daily, Midday. The rating also draws comfort from the management's commitment that its growth plans will be contingent upon the infusion of equity funds by a strategic partner.

o       Crisil has reaffirmed the  ‘D’ rating on the Cable Corp of India Ltd.’s Rs. 292.6 million non-convertible debentures issue, following the company’s report showing a profit after tax of Rs. 28.9 million on a turnover of Rs. 1607.1 million, for the financial year ended March 31, 2005. The amount outstanding on the above debentures is around Rs. 155 million as on March 31, 2005.

o       Crisil has reaffirmed the ‘AAA (SO)’ rating assigned to the National Small Industries Corporation Limited’s (NSICL) Rs. 500 million bond issue.  The rating continues to draw strength from the unconditional and irrevocable guarantee provided by the Government of India as well as from the payment structure which is designed to ensure full and timely payment to investors, and a set of warranties furnished by NSICL.

o       Crisil has reaffirmed the ‘P1+’ rating assigned to Federal Bank’s Rs. 20 billion certificate of deposit programme (enhanced from the earlier Rs. 10 billion). The rating continues to reflect the bank’s good liquidity position, which comes from a large proportion of retail deposits, comfortable deposit renewal rates and access to the inter-bank money market.

o       Crisil has reaffirmed the ‘P1+’ rating assigned to Dewan Housing Finance Corporation Ltd.’s  (DHFL) Rs. 2 billion short-term debt programme (enhanced from the earlier amount of Rs. 1 billion). The rating continues to reflect DHFL’s comfortable capital adequacy and good asset quality 

EXTERNAL SECTOR

o       India ’s exports during April-July 2005 valued at $28.1 billion are 21.3 per cent higher than the exports during April-July 2004 valued at $23.1 billion. During the same period imports are valued at $42.1 billion representing an increase of 36.3 per cent over imports of $30.8 billion during April-July 2004. The trade deficit for the first four months of 2004-05 thus works out to be at $13.9 billion, much higher than the deficit of  $ 7.6 billion during the same period previous year.

o       For the month of July, exports have registered a record growth of 26.8 per cent increasing to $7.2 billion from $5.7 billion in June 2004. Imports have gone up from $7.4 billion to $9.9 billion registering a rise of 33.21 per cent.

o       India has pegged FDI in telecom at 49 per cent in its revised service offer at the WTO, in wake of certain concerns expressed by the communications ministry over a higher binding rate.

o       According to A T Kearney’s latest FDI Confidence Index rankings, India has displaced the US to become the second most attractive destination for foreign direct investment among manufacturing investors.

o       The WTO regime has opened up export opportunities for the dairy sector in India , with the exports of milk and milk products likely to more than double in the next three years to Rs 500 crore. This excludes earnings through casein, another milk product used primarily in the pharma industry, which are pegged at Rs 250 crore.

o       Foreign firms have asked the government to keep its promise of raising the foreign investment cap for the insurance sector to 49 per cent in order to encourage more capital infusion.

o       Pithampur based Vindas Chemical Industries Pvt Ltd will make a fresh investment of Rs 5 crore in the Indore special economic zone (SEZ) to set up a 100 per cent export-oriented unit. The company already has its two units in Pithampur.

*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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