A Summary of Economic News in India, May 20061 IMF New Delhi Office Markets
Nominal Exchange Rate (Rs/US $)
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Rupee depreciated. The rupee/dollar rate depreciated by 134 paise during the month on account of net FII outflows. The six-month forward premium on the US dollar was 0.63 percent at month-end, 65 bps lower than at end-April 2006.
Net Weekly FII flows (mln US $)
43.0 44.0 45.0 46.0 47.0 48.0
1500 1000 500 0 -500 -1000 -1500
2-May
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9-May
16-May
23-May
30-May
Portfolio inflows turned negative. Portfolio investment turned negative in the second half of May. Net outflows were US$ 1.7 billion compared to net outflows of US$ 292 million in May 2005 and net inflows of US$ 177 million in April 2006.
May 2-5
May 8-12 May 15-19 May 22-26 May 29-31
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Reserves up. Foreign reserves, measured in US dollars, increased sharply reflecting some revaluation effect and intervention by the RBI in the forex market. Reserves, which were up by US$ 3.415 billion, US$ 1.736 billion and US$ 1.342 billion for weeks ending April 28 and May 5 & 12, respectively, declined by US$ 793 million and US$ 370 million for weeks ending May 19 & 26, respectively. Reserves were US$ 162.6 billion on May 26. HBL 8, 14, YF 19, 26 & May 2 Stock market crashed. The stock market declined sharply following heavy net selling by FIIs (US$ 1.7 billion), as part of a global trend to withdraw from emerging market economies. Their decision was also attributed to some speculation in the press that the Government would tax the FIIs at a higher rate by a change in the definition of trading income vis-à-vis investment income (prompting the Government to issue a clarification). The BSE index was down 1,644 points, or 13.7 percent, on a month-end basis. BS 17, BS 23 & FE 29
Yield curve
BSE Index 12500 12000 11500 11000 10500 10000 2-M ay 9-M ay 16-M ay 23-M ay 30-M ay
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8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5
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Call money rate stable. The overnight call money rate remained stable with easy liquidity conditions. The yield curve flattened. Yields [primary market] on 91-day Treasury bills rose by 29 bps to 5.68 percent during May, while yields [primary market] on 364-day Treasury bills also increased by 53 bps to 6.42 percent. Yields [secondary market] on the 10-year government bonds, also, went up by 27 bps to 7.66 percent.
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April-2006
May-2006
91-Day T-bills 364- Day Tbills
I0-Year Gilt
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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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Fiscal consolidation. The draft approach paper for the Eleventh Five-Year Plan (2007-12) has reportedly proposed a 5-year road map to end the regime of fiscal concessions, exemptions and subsidies, remove tax distortions, eliminate ‘negative’ duty protection and align domestic tax regime with the global tax system. The Finance Ministry has placed a list of various direct and indirect tax exemptions on its website for review and has invited comments from the public. A Parliamentary Standing Committee on Finance has reportedly asked the Government to study the usefulness of continuing with various income-tax exemptions as it shrinks the tax base. BS 23 & ET 31 FRBM norms. The Planning Commission has reportedly suggested that the Government should consider changing the definition of capital and revenue account to meet the Revenue Deficit target under the FRBM Act, or run the risk of cutting down some expenses (to the extent of Rs 100 billion in the next two years) under programs, e.g., Bharat Nirman, Jawaharlal Nehru National Urban Renewal Mission, Employment Guarantee Scheme, Backward Regions Grant Fund and the viability gap finance. These expenses are currently being categorized as plan revenue expenditure, since they are recorded as grants to states or private sector partners. Alternatively, it has suggested that these schemes should be administered directly by the Central Government departments to be categorized as capital expenditure. BS 17 VAT implementation. The Empowered Committee of state VAT has reportedly proposed to integrate VAT on imports into the state VAT, instead of the CENVAT, and the proceeds be credited to the destination state, which would require amendment to the constitution. It has also asked for a 50.0 percent share in the Centre’s service tax receipts, along with the right to tax a number of services of local nature to compensate for revenue losses on phasing out central sales tax (CST). The newly elected Government in Tamil Nadu and Pondicherry have expressed their intention to introduce VAT very soon. HBL 21, FE 26 & Bs 26 Legislative initiative. The Parliament has passed the RBI (amendment) Bill 2005, which removed existing ceilings or floors on cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) to provide more operational flexibility to the RBI. It has also passed the Companies Amendment Bill, 2006, to pave the way for implementation of a comprehensive e-governance system. The Bill to amend the Banking Regulation Act to remove the 10 percent cap on voting rights for foreign stakeholders, however, failed to get the support of the Left parties. H 16, HBL 18, ET 18 & FE 29 Social security. The Report on social security for nearly 300 million workers in the unorganized sector by the National Commission for Enterprises in the Unorganized Sector (NCEUS), submitted to the Government, has reportedly recommended an ambitious social welfare scheme to provide health benefits, life insurance coverage and provident fund (or old-age pension). According to the Report, the estimated cost of Rs 254 billion over the next five years would be met by contributions from identifiable employers, Centre and state governments and workers at the rate of Re 1 per day. IE 16 Infrastructure. The National Highways Authority of India (NHAI) has reportedly failed to implement the much publicized model concession agreement (MCA) on highways, drafted by the Planning Commission and approved by the Government, citing cumbersome land acquisition norms and absence of a toll policy. FE 25 Power sector reform. In a setback to power sector privatization, the Standing Committee on energy of Orissa State Assembly has recommended to the state government to explore all legal avenues to stop the Reliance Energy, the private company responsible for supplying electricity to consumers, from carrying out its power distribution business in the state. BS 10 Small scale industry (SSI). The Government has notified the removal of 180 item from the SSI reservation list (36 item in auto parts/components, 21 item in the chemicals, 47 in the "other chemicals and chemical products" and 76 mechanical engineering item.) H 31 Postal reform. The Government is reportedly planning to convert some of its high net worth post offices into banks, as a part of a broader plan to generate more revenue for the Department of Post. FE June 1 Trade policy. The ASEAN countries were reported to have unilaterally called off their next round of negotiations, scheduled for May 29 in Singapore, for finalizing a free-trade agreement with India on account of differences over issues related to pruning the negative list of 991 items, including some of the sensitive agricultural products. It was also reported that UPA Chairperson Sonia Gandhi had voiced her concern regarding the impact of FTA on farmers, while the Finance Ministry had highlighted the possible revenue losses; though the Prime Minister had reportedly upheld the case for a Pan-Asian FTA, working closely with ASEAN, Japan, China and South Korea. FE 8, ET 9, BS 23 & 26
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Exports cess. The Government has abolished the export cess on agri-products, plantation items and marine products, which would save exporters nearly Rs 1.1 billion. ET 22 Textile parks. The Government is reportedly planning to set up 25 integrated textile parks across the country in the next 18 months to improve the competitiveness of the domestic industry. BS 22
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Real Sector
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Growth estimates. According the revised estimates by the CSO, India’s GDP grew by 9.3 percent in Q4 (January-March 2006). GDP growth for 2005/06 was revised upward to 8.4 percent from 8.1 percent (provisional estimates), mainly on account of higher growth in agriculture, reflecting the impact of the scaling down of foodgrain production estimates for 2004/05 (by 6 million tons). BS 10 & FE 31 Industrial production. The Growth of the Index of Industrial Production (IIP) accelerated y-o-y to 7.7 percent in March 2006 (8.8 percent in February 2006), with manufacturing growing by 8.9 percent, mining by 0.5 percent, and electricity by 3.2 percent. The cumulative increase during April-March 2006 y-o-y was 8.0 percent (8.4 percent last year). Six core infrastructure industries grew by 6.7 percent y-o-y in April 2006 (6.0 percent in April 2005). BS 12 & FE 31 Power sector capacity. The Government is reportedly planning for installing additional capacity for 67,000 mw during the 11th Plan (2007-12) and 60,000 mw in 12th Plan (20012-17). It is also reportedly scaling up its target for nuclear power generation from 20,000 mw to 40,000 mw by 2020 and is considering amendments to the Atomic Energy Act to enable private participation in the sector. BS 23, BS 30 & FE 30 Inflation rose. WPI inflation went up mainly due to increase in the prices of food, non-food, minerals and some manufactured items. Weekly inflation rates were 3.5 percent, 3.6 percent, 4.0 percent, 4.3 percent and 4.7 percent for the weeks ending April 22, 29 and May 6, 13 & 20, respectively. YF 5, 19, FE 26 & May 2 WPI revision. The new series of wholesale price index (WPI) with 2000-01 as the base year is expected to be introduced by December, 2006. The series would reportedly take into account 1,200 items and 6,000 price quotations as compared with 435 items and 1,918 price quotations being used in the current 1993-94 base year series. HBL 16 & ET 25 Cement prices. In an unusual development, the Minister for Commerce and Industries had asked the cement manufacturers to work out modalities for price reduction following price increases in the range of 30-50 percent in recent months. The manufactures have reportedly assured the Government to maximize production to increase availability and extend a 5.0 percent discount to the Government purchases. HBL 16
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Fiscal Sector
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Fiscal update. According to the data released by the Controller General of Accounts, the Center’s net tax collections totaled Rs 2699.9 billion (Rs 2741.4 Revised Estimate), and non-tax revenue totaled Rs 738.9 billion (Rs 743.4 Revised Estimate) during April-March, 2006. The total expenditure was at Rs 5039.1billion (Rs 5087.1 Revised Estimate). The revenue deficit was Rs 946.4 billion (Rs 918.2 Revised Estimate), and the fiscal deficit was Rs 1463.5 billion (Rs 1461.8 Revised Estimate) during April-March, 2006. GOI 31& BS June 1 VAT. The Finance Ministry is reportedly expected to increase the Budget provision by Rs 30 billion to compensate states for losses incurred under VAT in 2005/06 (due to delayed reporting by some of the states), in addition to Rs 30 billion provision made for the current year 2006/07. BS 17 & 25 Oil Bond. The PSU oil refiners have reportedly asked the Government to provide Rs 700 billion in oil bonds to cover subsidies in 2006/07. FE 29
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External Sector
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Trade data. Growth in exports accelerated to 27.1 percent y-o-y in April 2006 (20.6 percent in March 2006), while growth in imports accelerated to 20.5 percent y-o-y in April 2006 (18.7 percent in March 2006). The trade deficit was at US$ 4.2 billion in April 2006 compared to US$ 3.9 billion in April 2005. GOI 26 & H 27 Rating outlook. The rating agency Moody’s, while maintaining Ba2 rating on India’s local currency debt (two levels below investment grade), have revised the outlook to stable from negative, citing robust nominal GDP growth and improved Government finances. It has also revised India’s long-term foreign currency country ceiling upwards to Baa2 from Baa3 with a stable outlook, following its adoption of a new methodology. FE 5 & 26
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IT exports. According to an estimate by the National Association of Software and Service Companies (NASSCOM) software services exports rose by 33.0 percent to US$ 23.6 billion in 2005/06. The growth is, however, projected to slowdown to a range 25-28 percent in 2006/07. FE June 1 FDI inflow. According to updated information the Government expects FDI inflow at US$ 12.0 billion in 2006/07 (US$ 8.4 billion in 2005/06). BS 29 Multilateral loan. The ADB is reportedly planning to double its lending to India from US$ 1.3 billion in 2005/06 to over US$ 2.5 billion 2007/08, especially in the areas of water, transport, energy and urban infrastructure. ET 4
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Financial Sector
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Credit growth. Leading public sector banks, which had experienced high credit growth of over 30.0 percent in 2005-06, have been reportedly lowered their credit growth target to 20-25 percent, faced with a liquidity crunch and higher borrowing costs. FE 4 Agriculture credit. Commercial banks have reportedly disbursed Rs 1,079 billion credit to agriculture sector in 2005/06, much higher than the Rs 872 billion target set by the Government. The target for 2006/07 has been set at Rs 1,750 billion. Banks have also reportedly accepted Government’s suggestion to charge simple interest on such loans in stead of compounded basis. The Government reportedly expressed its intention to bring down the interest rate to 5.0 percent in the next two years form 7.0 percent. FE 29, BS 29 & 30 Bank ownership. The Government has reportedly cleared a proposals to acquire 59.73 percent share in the State Bank of India (SBI), currently held by the RBI. The bank is expected to complete the acquisition of Giro Commercial Bank of Kenya and PT Bank Indo Monex of Indonesia in the next two months. ET 25 & FE 31 Co-operative bank. The RBI has reportedly cancelled the license of Baroda Mercantile Co-operative Bank Ltd and asked the Registrar of Co-operative Societies, Gujarat to issue an order for winding up the bank and appoint a liquidator. T 18 Bank transparency. According to the new RBI guidelines commercial banks would have to put all their charges and penalties levied on customer in the public domain by May 31, 2006. It has also asked banks to levy reasonable and cost-based charges.. The customers would find it easier to compare charges across banks for various services, as the RBI would place the rate list of various banks on its own website. In another directive the RBI has asked banks to disclose their provisions by asset categories, which would enable quick comprehension of the financial statements apart from making available at one place information on all provisions and contingencies. ET 17, BS 24, YF 30 & T 31 NBFCs. In its draft guidelines the RBI has asked the boards of directors of non-banking finance companies (NBFCs) to lay down an appropriate grievance redressal mechanism to resolve disputes and provide for periodical review of the compliance of the Fair Practices Code. H 27 Stock market. In its response to a discussion paper circulated by the Securities and Exchange Board of India (SEBI), the RBI has reportedly suggested that the stock market regulator should put on hold its proposal to permit FIIs to short sell equities in the overheated secondary market. The RBI also felt that it would be difficult to monitor the individual cap on foreign investment in companies and therefore, when permitted, it should be restricted to sectors where 100 percent foreign ownership is allowed. BS 2 Mutual funds. In an effort to regulate the intermediaries in the mutual fund business and ensuring compliance with corporate governance guidelines in content and spirit, SEBI has reportedly asked the distribution industry to come up with suggestions, as nearly 40,000 mutual funds distributors have so far remained outside its regulatory ambit. In another development the Supreme Court has empowered SEBI to take immediate action against mutual funds who in connivance with their associate brokers engage in excess trading leading to cartelization. FE 10 & TOI 24
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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