A Summary of Economic News in India, February 20061 IMF New Delhi Office Markets
Nominal Exchange Rate (Rs/US $)
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Rupee stable. The rupee/dollar rate mostly remained stable during the month despite strong FII inflows. The six-month forward premium on the US dollar was 2.39 percent at month-end, only 9 bps lower than at end-January 2006.
43.0 43.5 44.0 44.5 45.0 45.5 46.0 46.5 47.0
Net Weekly FII flows (mln US $) 800 400 0 -400 -800 Feb 1-10 Feb 13-17 Feb 20-24 Feb 27-28
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1-Feb
7-Feb
13-Feb
19-Feb
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Portfolio inflows rebound. Portfolio investment rose sharply during February 2006, after a slowdown in the previous month. Net inflows were US$ 1.7 billion (with equity inflows of US$ 1.7 billion and debt outflows of US$ 34 million) compared to net inflows of US$ 2.0 billion in February 2005 and US$ 536 million in January 2006.
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Reserves increased. Foreign reserves, measured in US dollars, increased by US$ 240 million, US$ 500 million, US$ 350 million and US$ 810 million for weeks ending January 27 and February 3, 10 & 17, respectively. Reserves were US$ 141.2 billion on February 17. YF 24 Stock market rose. The stock market rose further to reach new peaks during the month in anticipation of a growth supporting Budget 2006/07 and robust FII investment. The BSE index was up 450 points, or 4.3 percent, on a month-end basis.
BSE Index
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11000 10600 10200 9800
The yield curve flattened. Yields [primary market] on 91-day Treasury bills increased by 50 bps to 6.67 percent during February, while yields [primary market] on 364-day Treasury bills rose by 51 bps to 6.79 percent. Yields [secondary market] on the 10-year government bonds, however, went up by only 2 bps to 7.39 percent.
1-Feb 7-Feb 13-Feb 19-Feb 25-Feb
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8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00
Call M oney Rate
9400 9000 1-Feb
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7-Feb
13-Feb
19-Feb
25-Feb
Call money rate high. The overnight call money rates remained high amid tight liquidity conditions, despite the infusion of liquidity by the RBI through repo auctions.
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This is a factual summary of news stories that appeared in the press during the month and does not represent the views of IMF staff.
Policy Announcements
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Budget 2006/07. After a years’ pause on fiscal consolidation, Budget 2006/07 returned to the fiscal correction path as enunciated in the FRBM Act 2003. Accordingly the budget projections aimed at reducing Central Government’s revenue deficit by 0.5 percentage points to 2.1 percent of GDP and gross fiscal deficit by 0.3 percentage points to 3.8 percent of GDP. Some of the key measures announced are : Peak customs duty brought down to 12.5 percent (from 15.0 percent) on all non-agricultural imports Services tax raised to 12.0 percent from 10.0 percent More services will be brought under the tax net The Securities Transaction Tax (STT) raised by 25.0 percent to 0.019 percent (from 0.015 percent) Rules governing the Fringe Benefit Tax (FBT) made easier Corporate tax on MAT companies raised to 10.0 percent from 7.5 percent To introduce nationwide goods and services sales tax beginning April 1, 2010 Allocated Rs 143 billion on rural jobs guarantee scheme in 2006/07 (from Rs 117 billion in 2005/06) Allocated Rs 187 billion for rural infrastructure projects in 2006/07 Education spending to increase by 31.5 percent, and health 22.0 percent Banks to raise farm credit to Rs 1.75 trillion 06/07 (from Rs 1.42 trillion in 2005/06) Farmers to get short-term credit at 7.0 percent Defense spending increased to Rs 890 billion rupees in 06/07 (from Rs 830 billion in 2005/06) 187 items removed from SSI reservation list
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Infrastructure. A Government Committee on infrastructure has reportedly approved the proposal to set up a special purpose vehicle (SPV) to finance the rail freight corridor, to be completed in five years. The Committee also approved the Rs 150 billion phase VI of the National Highway Development Programme (NHDP). The Government has reportedly asked the Planning Commission to draft an expression of interest for the modernization of the Chennai and Kolkata airports. It is also trying to bring in a system for speedy customs clearances for consignments by large importers and exporters. FE 17 & BS 17 Power sector. The Maharashtra Electricity Regulatory Commission (MERC) is reportedly planning to propose to the State Government to allocate certain distribution circles to private operators in order to prevent leakages and improve efficiency. ET 16 Small savings. The Government has withdrawn a 10 percent bonus, payable on maturity, on the six-year post office monthly income scheme, which was offering an effective return of 9.5 percent (interest rate of 8.0 percent plus 10 percent bonus). The report on debt market reforms (Chairman R H Patil) and the RBI study on state finances have separately recommended that the interest rate on small savings instruments be aligned with the market rates. IE 10 & 11 Debt management. The RBI is reportedly considering a proposal to transfer its responsibility for primary auction of gilts to the Clearing Corporation of India (CCIL), in line with the provisions in the FRBM Act, which requires it to give up its role as the debt manager of the Government, w.e.f., April 1, 2006, in order to avoid any potential conflict with its responsibility for monetary policy management. BS 24 Rural employment. The Government has reportedly hired the services of a private software firm, the TATA Consultancy Services Ltd, to automate the implementation of the pilot phase of the National Rural Employment Guarantee Scheme, with an objective of plugging leakages and raising efficiency. HBL 3 SEZ rules. The new rules notified by the Government under the SEZ Act aim at simplifying procedures for development, operation and maintenance of SEZs through single window clearances, minimum documentation (with stress on self-certification) and lower transactions cost. So far the Government has approved 117 proposals to set up SEZs, (nearly 44 of these are from IT and IT-enabled services sector). BS 14 National Manufacturing Competitiveness Council (NMCC). The NMCC, in its report submitted to the Government, has suggested that import duty reductions should be done in phases to allow Indian industry to readjust to the trend of low import duties and advocated a 12.5 percent VAT on all imports as an alternative to 4.0 percent additional countervailing duty (CVD) to compensate for the state-level taxes. BL 11 Capital account. The Government is reportedly considering a proposal to allow overseas companies to raise funds in domestic capital markets. It is also reportedly considering a proposal to raise the overseas borrowing limit for local firms to US$ 15 billion a year (from US$ 12 billion currently), beginning April 1, 2006. YF March 1
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Voting rights to NRIs. The Government has reportedly agreed to introduce a bill in the current Budget session of Parliament to amend the Representation of People's Act to allow voting rights for non-resident Indians (NRIs). The amendments would broaden the definition of 'ordinarily resident' of the country to include Indian nationals residing in foreign countries, who have been absent from the place of their ordinary residence in India owing to their employment, education or otherwise, to get their names in the electoral rolls and thus exercise their voting rights. TOI 16
Real Sector
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GDP estimates for Q3. According the estimates by the Central Statistical Organization (CSO), GDP for Q3 (October-December 2005) would grow by 7.6 percent compared to 7.0 percent in the corresponding quarter in the previous year and 8.0 percent in Q2 of this year. YF 28 Crop prospects. According to the Ministry of Agriculture, total foodgrain production has been projected at 209.3 million tons in 2005/06, up 4.7 million tons over last year (204.6 million tons), comprising of kharif (winter) output at 108.2 million tons (103.3 million tons) and rabi (summer) output at 101.2 million tons (101.3 million tons). HBL 23 Industrial production. The Growth of the Index of Industrial Production (IIP) decelerated y-o-y to 5.0 percent in December 2005 (6.9 percent in November 2005), with manufacturing growing by 5.9 percent, mining by -1.8 percent, and electricity by 2.9 percent. The cumulative increase during April-December 2005 y-o-y was 7.8 percent compared with 8.6 percent last year. Six core infrastructure industries grew by 3.3 percent y-o-y in January 2006 (4.2 percent in January 2005). The cumulative increase during April-January 2006 y-o-y was 4.3 percent (6.2 percent in corresponding period last year). YF 10 & GOI 10 Inflation declines. WPI inflation declined on account of cheaper food and edible oil prices. Weekly inflation rates were 4.5 percent, 4.3 percent, 4.1 percent and 4.0 percent for the weeks ending January 21 & 28 and February 4 & 11, respectively. The CPI for industrial workers declined to 4.4 percent in January 2006 from 5.6 percent in December 2005. FE 24, GOI 28 & YF 28
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Fiscal Sector
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Fiscal update 2005/06. According to the Revised Estimates (RE) for Budget 2005/06, the Center’s net tax collection is estimated at Rs 2,741.4 billion (2,734.7 Budget Estimate), and non-tax revenue at Rs 743.4 billion (777.3 Budget Estimate). The total expenditure is projected at Rs 5,087.1 billion (5,143.4 Budget Estimate). The revenue deficit is projected at Rs 918.2 billion (953.1 Budget Estimate), and the fiscal deficit at Rs 1,461.8 billion (1,511.4 Budget Estimate). GOI 28 Petroleum prices. The report on the pricing and taxation of the petroleum products (Chairman C. Rangarajan), submitted to the Government, has favored giving public sector oil marketing companies the freedom to fix the prices of petrol and diesel, through the trade parity pricing mechanism in stead of the existing import parity pricing mechanism. It has also suggested reduction in Customs duties on petrol and diesel from 10.0 percent to 7.5 percent and shifting excise duty from an ad valorem levy to a specific levy. The report, while suggesting to limit subsidies on kerosene to below poverty line families only, asked for a phased withdrawal of subsidies on LPG. HBL 18
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External Sector
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Trade data. Growth in exports accelerated to 21.5 percent y-o-y in January 2006 (16.2 percent in December 2005), while they rose at 18.9 percent y-o-y in April-January 2006. Growth in imports also rose to 10.7 percent y-o-y in January 2006 (8.4 percent in December 2005), while they increased by 26.7 percent y-o-y in April-January 2006. The trade deficit widened to US$ 33.8 billion in April-January 2006 compared to US$ 22.8 billion during the same period a year ago. GOI 14 & PIB 14 BOP outlook. According to a report on India’s Balance of Payments position, prepared by the Prime Minister’s Economic Advisory Council, the current account deficit for 2005/06 projected at 2.9 percent of GDP, is in the comfort zone. While invisibles are projected to increase to 4.8 percent of GDP (4.5 percent in 2004/05), capital flows would to decline to 4.1 percent of GDP (4.5 percent in 2004/05). The lower capital flows, however, would not only be sufficient to finance the current account gap but also leave a net accretion of US$ 10.7 billion to the foreign exchange reserves. The report also has expressed concern at the growing divergence between the trade data reported separately by the DGCI&S and the RBI for the year 2005/06 (while trade deficit is projected at 5.2 percent of GDP based on the DGCI&S data, the same is projected at 7.7 percent of GDP based on BOP data provided by the RBI). PIB 22
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Software exports. According to estimates by NASSCOM, software exports are expected to grow by 32.0 percent to reach US$ 23.4 billion in 2005/06, of which the emerging ITES-BPO exports are estimated to grow to US$ 6.3 billion in 2005/06, up 40.0 percent (US$ 4.6 billion in 2004/05). HBL 10 & 16 Textile exports. According to official data released by the US, Indian textile exports to the US grew by 27.0 percent y-o-y (January-December 2005) to US$ 4.6 billion. BS 13 FDI in hardware. In a major boost to FDI in hardware, SemIndia, along with its technology partner AMD (Advanced Micro Devices) has finalized its plan to invest US$ 3 billion in a chip making project in the city of Hyderabad. HBL 10 Wheat imports. Following the decline of stocks with the Food Corporation of India (FCI) and the rising domestic prices, the Government has reportedly asked the State Trading Corporation (STC) to import 0.5 million tons of wheat, after a gap of six years, to bolster domestic supply. It has also decided to waive the high import duty of 60 percent. HBL 3
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Financial Sector
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Interest rates. ICICI Bank, the biggest domestic private sector bank, has raised its benchmark prime lending rate (PLR) by 50 bps points to 11.75 percent and home loan rates by 50 bps to 9.5 percent fixed rate and 7.758.50 percent floating rate. The State Bank of India (SBI) has also hiked interest rates on fixed and floating rate home loans by 25 to 75 basis points. FE 12, HBL 14 & YF 21 NRI deposit. In an effort to bring down arbitrage opportunities, the RBI has reportedly tightened norms for fixing the floor rate on NRI deposits by banks. To ensure uniformity and transparency it has asked the Foreign Exchange Dealers Association of India (FEDAI) to quote/display the LIBOR/SWAP rates for five maturities in the six currencies which are used by banks to arrive at their interest rates on NRI deposits. YF 10 Export credit. The RBI has reportedly asked commercial banks to give priority to foreign currency export credit requirements of small and medium exporters, preferably at rates lesser than the ceiling rates prescribed by it. It has also advised Indian Banks’ Association (IBA) to devise a simplified model loan application form in consultation with the Federation of Indian Export Organizations (FIEO) and other export promotion agencies to simplify loan application process. BS 8 Bank takeover. The board of the Indian Overseas Bank (IOB), a public sector bank, has reportedly approved a proposal to acquire 70 percent stake in Bharat Overseas Bank (BOB), a domestic private sector bank. IOB already had 30 percent equity in BOB. FE 15 Foreign banks. Following the guidelines issued by the RBI in February 2005 on restricting foreign banks’ holdings in domestic private sector banks to five percent, HSBC bank reportedly sold 7.19 percent equity in UTI bank to bring its stake to 4.99 percent. HBL 25 UTI Securities. Securities Trading Corporation of India (STCI) has reportedly acquired broking and investment firm UTI Securities Ltd, for Rs 2.7 billion. HBL 2 Money laundering. Following the directives by the Government under the Prevention of Money Laundering Act, 2002, the RBI has reportedly asked all commercial banks to introduce a system for recording high-value cash transactions and suspicious transactions, and to submit a monthly cash transaction report (CTR) and suspicious transaction report (STR) to the Director, Financial Intelligence Unit. BS 17 Bank supervision. The RBI has imposed penalties on three more banks (HDFC bank, IDBI bank and ING Vysya bank) for violating guidelines on initial public offerings and the holding of inaccurate client data in addition to penalties imposed on seven banks last month. It has also referred these banks to the Government for further investigations by the Serious Fraud Investigations Office. BS 10 & YF 28 Debt market. The RBI has reportedly allowed intra-day short selling in Government bonds to add depth to the gilt market. YF March 1
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____________________________________________________________________________ Sources Key: RBI-Reserve Bank of India Press Release/Notification; BS-Business Standard; CM-Capital Markets.com; YF/R-Yahoo Finance.com/Reuters; DJ-Dow Jones, TOI-Times of India; OL-Outlook; ETEconomic Times; HBL-Hindu Business Line; H- The Hindu; FE-Financial Express; IE-Indian Express; TTelegraph; TR-Tribune; PIB-Press Information Bureau; GOI- Government of India