Summary of Economic News in India, March 2006

A Summary of Economic News in India, March 20061 IMF New Delhi Office Markets Nominal Exchange Rate (Rs/US $) • Rupee little changed. The rupee/dollar rate depreciated by 29 paise during the month despite strong FII inflows. The six-month forward premium on the US dollar was 2.08 percent at month-end, 31bps lower than at end-February 2006. Net Weekly FII flows (mln US $) 43.0 43.5 44.0 44.5 45.0 45.5 46.0 500 300 100 -100 -300 -500 1-Mar • 7-Mar 13-Mar 19-Mar 25-Mar 31-Mar Portfolio inflows robust. Portfolio investment remained robust during March 2006, following strong inflows in the previous month. Net inflows were US$ 1.4 billion compared to net inflows of US$ 1.8 billion in March 2005 and US$ 1.7 billion in February 2006. March 1- March 63 10 • March 13-17 March 20-24 March 27-31 Reserves up. Foreign reserves, measured in US dollars, increased sharply reflecting some revaluation effects and intervention by the RBI in the forex market. Reserves were up by US$ 350 million, US$ 1.6 billion, US$ 773 million, US$ 2.2 billion and US$ 2.5 billion for weeks ending February 24 and March 3, 10, 17 & 24, respectively. Reserves were US$ 148.7 billion on March 24. HBL 18, YF 24 Stock market buoyant. The stock market rose further to reach new peaks during the month in anticipation of healthy Q4 corporate results and robust FII investment. The BSE index was up 910 points, or 8.8 percent, on a month-end basis. 11500 11100 10700 10300 9900 9500 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 • BSE Index Call M oney Rate • 1-M ar 7-M ar 13-M ar 19-M ar 25-M ar 31-M ar Call money rate fluctuates. The overnight call money rate remained volatile amid signs of some easing in liquidity conditions. The yield curve steepened. Yields [primary market] on 91-day Treasury bills declined by 58 bps to 6.09 percent during March, while yields [primary market] on 364-day Treasury bills also fell by 38 bps to 6.41 percent. Yields [secondary market] on the 10-year government bonds, however, went up by 16 bps to 7.55 percent. • 1-Mar 7-Mar 13-Mar 19-Mar 25-Mar 31-Mar 1 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 • 2 Capital account. Following a public announcement by the Prime Minister to revisit the issue of capital account convertibility, especially within special economic zones (SEZs), the RBI has appointed a six-member committee with former RBI Deputy Governor Tarapore as its chairman to present a new roadmap for fuller convertibility by July 31, 2006. An earlier official Committee on the capital account convertibility, 1997, which was also headed Mr. Tarapore, set as part of a road map, the containment of the gross fiscal deficit within 3.5 percent of GDP and inflation at a range of 3-5 percent, reduction in gross non-performing assets to below 5 percent of total advances of banks and lowering of the CRR to 3.0 percent of total deposits. HBL 19, ET 20, FE 21 & ET 23 Global finance centre. The RBI is reportedly planning to formulate guidelines for the proposed International Financial Services Centre (IFSC) in Mumbai and the overseas banking units to be located in special economic zones (SEZs) within the next two months period. The guidelines would seek to spell out the applicability of the stock exchange, insurance and banking norms in the IFSC. BS 31 ECB. The Government has reportedly raised the ceiling on private corporate borrowing through the ECB route in 2006/07 to US$ 18 billion from US$ 15 billion, which would include FII investment in corporate debt (with a ceiling of US$ 1.5 billion). HBL 20 & BS 30 NRI deposits. The RBI has raised the interest rate ceiling on FCNR(B) deposits by 25 bps to help banks to mobilize deposits. The new ceiling would allow banks to set interest rates equal to or lower than the LIBOR/SWAP rate effective March 28, 2006 (previous ceiling was 25 bps below LIBOR/SWAP rate). FE 29 Overseas investment. The RBI has further liberalized rules governing overseas corporate investment by allowing corporates the freedom to offer all forms of guarantees (within the prudential limit of 200 percent of their net worth) and the ability to disinvest without prior approval from the RBI. FE 28 FII. The Securities and Exchange Board of India (SEBI) has reportedly decided to keep investment by subaccounts of an FII outside the 10 percent cap mandated for a single FII investment in any listed company’s equity as against the recommendation by the Lahiri committee on FII policy to bring all such investment under the 10 percent cap (sub-accounts are investment funds from abroad, which route their money through an FII into the Indian stock markets) and has directed that all such sub-accounts be “financially regulated entities”, under the purview of the financial regulator in the country of origin. ET 6 FDI in bank. The Parliamentary Standing Committee on Finance has reportedly approved the necessary amendment to the Banking Regulation Act that would allow 74 percent FDI in weak private banks and raise the limit on voting rights proportionate to the equity holding (currently capped at 10 percent). [Note : RBI approval of such investment is still required, however.] BS 16 VAT implementation. After a years’ delay five BJP ruled states, Madhya Pradesh, Rajasthan, Gujarat, Chhattisgarh and Jharkhand, have reportedly decided to implement the state VAT beginning April 1, 2006. The Central Government and the state VAT panel have reportedly decided to set up a working group to define the modalities of compensation for an appropriate phasing out of CST in a four-year period beginning April 1, 2006. The Government is reportedly working on a roadmap for implementing the General Sales and Service tax (GST) on a countrywide basis by April 1, 2010. FE 21, HBL 23, FE 23, BS 30, FE 31 & HBL Apr 1 Petroleum subsidy. The Petroleum Ministry has reportedly requested the Prime Minister to provide full subsidy to the oil sector through a transparent mechanism in line with the provision for food and fertilizer subsidy in the Budget. In an adverse development, international oil major BP has decided to withdraw from a joint venture with public sector oil company HPCL to build a US$ 3.0 billion refinery, citing lack of transparency in the pricing mechanism. FE 14 & YF 27 Education. According to the Outcome Budget 2006/07 presented to the Parliament, the Government is planning to enroll 10 million children in age group of 6-14 years in schools in 2006/07 under the Sarva Shiksha Abhiyan (education for all) program. It is also planning to create 0.5 million additional classrooms and recruit 0.15 million additional teachers. FE 22 Poverty line. The Government has reportedly notified 13 new parameters for defining Below Poverty Line (BPL) category of people in the country based on landholding, type of dwelling, clothing, food security, hygiene, capacity for buying commodities, literacy, minimum wages earned by the household, means of livelihood, education of children, debt, migration and priority for assistance. It has done away with the earlier definition based on food calories intake or annual earnings. H 22 • • • • • • • • • • • 3 Labor law. In a land mark ruling the Supreme Court has said that employers can shed surplus staff on grounds of financial burden (the Court ruled that the State Government of Rajasthan had no obligation to reemploy engineers who were laid off after state-owned Avas Vikas Sansthan made losses). TIO 29 Power sector. Under a special initiative to boost power generation, the Government is planning to set up 5-7 ultra mega-power projects of 4,000 Mw each in the next couple of years. ET 16 Trade with Pakistan. It was reported that Pakistan has agreed to enlarge the list of import items from India, to revise the shipping services protocol of 1975 to allow ferrying of third country cargo and third country flagships between the two nations, and to expeditiously process applications for opening branches of scheduled banks in each other’s country. YF 29 & FE 30 Other Bilateral trade. India is reportedly working with the Gulf Cooperation Council (GCC) countries on a comprehensive economic cooperation agreement, including a FTA, to be ready by early 2007. It was also reported that India was working on a bilateral FTA with Japan and had set an ambitious trade target of US$ 50 billion with China by 2010 from US$ 18 billion in 2005. ET 14, IE 17, ET 20 & FE 27 Trade promotion. The Government has reportedly decided to extend the duty entitlement pass book (DEPB) scheme for another year till March 31, 2007 to buy time to prepare a suitable scheme to replace it. The scheme, which reimburses exporters for the customs duty paid on imported inputs, is viewed incompatible with norms of the WTO because of its non-transparent nature. FE 24 • • • • Real Sector • Monsoon. According Indian weather officials monsoon rains during June-September 2006 are forecast to be normal due to favorable wet weather patterns generated by the La Nina system. FE 10 Industrial production. The Growth of the Index of Industrial Production (IIP) accelerated y-o-y to 8.3 percent in January 2006 (5.3 percent in December 2005), with manufacturing growing by 9.2 percent, mining by 0.2 percent, and electricity by 5.8 percent. The cumulative increase during April-January 2006 y-o-y was 8.0 percent compared with 8.4 percent last year. Six core infrastructure industries grew by 5.6 percent y-o-y in February 2006 (4.2 percent in February 2005). The cumulative increase during April-February 2006 y-o-y was 4.5 percent (5.8 percent in April-February 2005). GOI 10, YF 10 & YF 29 Investment climate. According a survey of investment plans conducted in January 2006 by the Centre for Monitoring Indian Economy (CMIE), a private think tank, fresh investments announced by Indian companies during Q4 2005/06 aggregated to about Rs 2,900 billion. This was much higher than the whole financial year of any of the preceding 8 years, which ranged between Rs 1,500 to Rs 2,000 billion. HBL 20 Household Indebtedness. According to the latest decade-wise NSSO survey the debt levels of the household sector have gone up. While rural household borrowings were higher by Rs 302.4 billion over their repayments, the urban household borrowings were up by Rs 157.3 billion over their repayments. Inflation stable. WPI inflation mostly remained stable on account of cheaper food items. Weekly inflation rates were 4.3 percent, 4.0 percent, 4.3 percent and 4.1 percent for the weeks ending February 25 and March 4 & 11, 18, respectively. The CPI for industrial workers rose to 4.9 percent in February 2006 from 4.4 percent in January 2006 [the Labor Bureau has updated the base year to 2001=100 (from 1982=100)]. H 10, BS 17, YF 24 & HBL Apr 1 • • • • Fiscal Sector • Fiscal update. According to the data released by the Controller General of Accounts, the Center’s net tax collections totaled Rs 2078.5 (75.8 percent of Revised Estimate), and non-tax revenue totaled Rs 612.9 billion (82.5 percent of Revised Estimate) through the end of February 2006. The total expenditure was at Rs 4119.2 billion (81.0 percent of Revised Estimate). The revenue deficit totaled Rs 986.5 billion (107.4 percent of Revised Estimate), and the fiscal deficit totaled Rs 1322.2 billion (90.5 percent of Revised Estimate) through the end of February 2006. GOI 31& ET Apr 1 Crop subsidy. The Government has reportedly approved the release of Rs 17 billion to cover interest burden of public sector banks toward the 2.0 percent subsidy on crop loans to farmers 2005/06. BS 31 Oil bond. The Government has issued oil bonds to three PSU oil marketing companies to compensate them for their under-recoveries in the sale of domestic LPG and kerosene (sold through PDS) during 2005/06. The special bonds were issued in two tranches of Rs 57.5 billion each. HBL 24 • • • 4 VAT revenue. The total tax revenue of VAT implementing states was up by 15.5 percent during AprilJanuary 2006 to Rs 610.3 billion (Rs 528.3 billion in April-January 2005). The Central Government has incurred an expenditure of Rs 15.1 billion towards compensation to eight States for revenue losses arising from VAT implementation till February 28, 2006. HBL 7 & 18 State cash surplus. According to reports, various State Governments have accumulated a cash surplus of Rs 424.6 billion in current fiscal, reflecting changes in Government’s policy on small savings schemes and the large transfers from the centre as per the recommendation of the 12th Finance Commission. BS 10 Multilateral loan. The World Bank has reportedly suspended (temporarily) financial support to the roads and resettlement components of the US$ 940 million Mumbai Urban Transport Project (MUTP) expressing concerns over issues related to resettlement of some households affected by the works. BS 3 • • External Sector • Balance of Payments (BoP) data. The current account deficit in India's BoP for Q3 (October-December 2005) declined to US$ 3.9 billion from US$ 5.1 billion in Q2 (July-September 2005), mainly because of a lower trade deficit of US$ 12.0 billion (US$ 14.6 billion in Q2). The capital account for Q3, 2005 also witnessed a deficit of US$ 0.9 billion, mainly due to repayment of IMDs (US$ 5.5 billion), from a surplus of US$ 10.3 billion in Q2, 2005. The overall balance was in deficit of US$ 4.7 billion in Q3, 2005 (a surplus of US$ 5.3 billion in Q2, 2005). The overall balance for April-December 2005 witnessed a surplus of a mere US$ 1.8 billion as against US$ 13.5 billion in previous year. RBI 31 & YF 31 External debt. India's external debt declined by US$ 5.0 billion to US$ 119.2 billion as on end-December 2005 from end-September, 2005, mainly reflecting the redemption of IMDs. HBL 31 Trade data. While growth in exports decelerated to 12.3 percent y-o-y in February 2006 (21.5 percent in January 2006), cumulative exports y-o-y April-February 2006 were up by 26.3 percent, on account of substantial upward revisions to previous months data. Growth in imports accelerated to 21.4 percent y-o-y in February 2006 (10.7 percent in January 2006), while they increased by 33.0 percent y-o-y in April-February 2006. The trade deficit widened to US$ 37.6 billion in April-February 2006 compared to US$ 24.7 billion in April-February 2005. Initial reports suggested that total exports in April-March 2006 crossed US$ 100 billion mark for the first time with a y-o-y on growth of around 25.0 percent. GOI & ET Apr 1 Textile exports. According to the revised trade data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S), textile exports during April-December 2005 were US$ 12.3 billion, indicating a healthy y-o-y growth of 24.9 percent. IE 24 • • • Financial Sector • Interest rates. ICICI Bank has raised its corporate prime lending rate and rates on automobile loans by 100 bps. The UTI Bank and HSBC bank have also hiked their home loan rates by 50 bps. YF 6, ET 14 & BS 27 Rural credit. The Government has indicated that credit flow to farm sector should exceed Rs 2,000 billion by 2006/07, far above the target set at Rs 1,750 billion. ET 14 Money laundering. The RBI has reportedly asked all commercial banks to submit their plan of action with regard to the deployment of anti-money laundering (AML) systems by end-June 2006, and to submit the final report on solutions and infrastructure installed by end-December 2006. BS 24 Banking sector reform. The RBI has reportedly allowed more freedom to banks in deciding the location of their bank branches, extension counters and ATMs. The Government has reportedly approved a plan to restructure Indian Bank and United Bank of India by allowing them to write-off their accumulated losses of Rs 38.0 billion and Rs 2.7 billion, respectively. The Parliamentary Standing Committee on Finance has approved a proposal to reduce RBI’s stake in SBI to 51 percent (currently at 59.73 percent) and grant power to the RBI to supersede the board of co-operative banks incase of financial irregularities. T 14 & BS 16 ____________________________________________________________________________ • • • 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