Summary of Economic News in India, June 2006

A Summary of Economic News in India, June 20061 IMF New Delhi Office Markets Nominal Exchange Rate (Rs/US $) • Rupee appreciated. The rupee/dollar rate appreciated by 29 paise during the month on account of positive FII inflows and the weakening of US dollar against major international currencies. The six-month forward premium on the US dollar was 1.13 percent at monthend, 50 bps higher than at end-May 2006. Net Weekly FII flows (mln US $) 43.0 44.0 45.0 46.0 47.0 800 600 400 200 0 -200 -400 -600 -800 48.0 1-Jun • 8-Jun 15-Jun 22-Jun 29-Jun Portfolio inflows turned positive. Portfolio investment turned positive in June. Net inflows were US$ 402 million compared to net inflows of US$ 1.3 billion in June 2005 and net outflows of US$ 1.7 billion in May 2006. • Reserves declined. Foreign reserves, measured in US dollars, declined marginally reflecting some revaluation effect and intervention by the RBI in the forex market. Reserves, which increased by US$ 1.9 billion for week ending June 2, declined by US$ 1.7 billion for week ending June 9. They rose again by US$ 157 million for week ending June 16, but declined the following week by US$ 1.1 billion. Reserves were US$ 162.0 billion on June 23. YF 9, 16, HBL 24 & YF 30 June 1-9 June 12-16 June 19-24 June 26-30 11000 • BSE Index Stock market recovered. The stock market recovered in the second half of the month, after a sharp decline in the first half, in anticipation of a healthy Q1 corporate results and revival of FII inflows. The BSE index rose by 210 points, or 2.0 percent, on a month-end basis. Yield curve 10500 10000 9500 9000 8500 8000 1-Jun 8-Jun 15-Jun 22-Jun 29-Jun 9.0 8.0 7.0 6.0 5.0 4.0 1-Day call 91-Day Tmoney bills • • May-2006 June-2006 Call money rate stable. The overnight call money rate, which went up to 5.85 percent following the hike in the reverse repo rate by 25 bps to 5.75 percent, w.e.f., June 9, 2006, remained mostly stable with easy liquidity conditions. 364- Day 10-Year Gilt Tbills The yield curve moved up. Yields [primary market] on 91-day Treasury bills rose by 62 bps to 6.30 percent during June, while yields [primary market] on 364-day Treasury bills also increased by 61 bps to 7.03 percent. Yields [secondary market] on the 10-year government bonds, however, went up by only 49 bps to 8.15 percent. 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 Interest rates. In response to rising domestic inflation and hardening interest rates in advance economies, the RBI hiked reverse repo and repo rates by 25 bps to 5.75 percent and 6.75 percent, respectively, w.e.f., June 9, 2006. While HDFC Bank raised its prime lending rate (PLR) by 50 bps to 11.50 percent and ICICI Bank by 50 bps to 13.25 percent, most PSU banks have maintained the status co. FE 9, YF 9 & BS 19 Fuel price. The Government has announced the introduction of a new trade parity pricing regime and raised the prices of petrol and diesel by Rs 4 and Rs 2 per liter, respectively, while prices for kerosene and LPG remained unchanged (the previous change was effected in September 2005). [The hike in prices were, however, lower than the estimated trade parity price differential of Rs 8.75 a liter for petrol and Rs 10.0 a liter for diesel.] It has also brought down customs duties on petrol and diesel to 7.5 percent from 10 percent and would issue oil bonds of Rs 283 billion to the PSU oil marketing companies to meet their under recoveries, estimated at Rs 735 billion in 2006/07. It has also allowed oil PSUs to revise petroleum prices every month, subject to the approval of the Petroleum Ministry. Amidst demand for roll back in fuel price hike by political parties, some of the UPA ruled state governments have reduced the state VAT to give some relief to consumers. ET 6, IE 8, IE 23, O 13, FE 13, ET 13, BS 13 & HBL 27 Divestment developments. The Government has decided to divest10 percent equity each in the National Aluminium Company Ltd (NAlCO) and Neyveli Lignite Corporation (NLC). FE 23 & ET 26 Pay Commission. The Government is planning to set up sixth Pay Commission for Central Government employees in July under the terms to give due consideration to affordability by the Government, while ensuring reasonable compensation in their pay revision. It was also reported that the "rightsizing" efforts, as recommended by the fifth Pay Commission, has enabled the Central Government to cut staff strength to 32,74,145 in 2005/06 from 37,82,177 in 1996/97. ET 14 Drought relief. Amidst reports of large number of farmers committing suicide, the Prime Minister has announced a Rs 37.5 billion relief package that included interest waiver and debt rescheduling, to help the farmers in the six drought affected districts in Maharashtra. HBL July 1 Infrastructure. The Finance Ministry has reportedly refused to release the guarantee to mobilize Rs 100 billion, the annual borrowing limit for India Infrastructure Finance Company Limited (IIFCL), the government-owned SPV for infrastructure funding, in one go and suggested to released them in tranches and on a case-to-case basis, as and when IIFCL vets project proposals. FE 8 FDI. The Government is reportedly planning to relax conditions issued in Press Note 1, 2005 to allow more FDI by existing joint venture partners and liberalize norms for real estate sector. FE 27. Trade policy. The FTA negotiations between India and ASEAN has reportedly entered into a deadlocked, with the ASEAN asking India to prune its ‘no tariff cuts’ list to just 60 items and rejecting India’s offer for a Tariff Rate Quota on palm oil, tea and pepper. India is also negotiating an economic partnership agreement with Japan, to be signed in 2007. FE 7, HT 15 & BS 20 Agriculture marketing. In a politically significant move the state Government of West Bengal- ruled by the left parties- has reportedly decided to amend the Agriculture Produce Marketing Committee (APMC) Act to formally allow private corporates to purchase farm produce directly from the farmers. FE 23 Procurement price. The Government is reportedly planning to raise in the procurement price for paddy in the 2006-07 kharif marketing season (October-September) by Rs 60 per quintal - an all-time-high. HBL 21 • • • • • • • • • SEZ related issues • Tax exemption. The Finance Ministry has clarified that exemption from service tax for service exports would be restricted to actual export of services from the SEZ and all import of services to a SEZ would be liable to the tax unless the services are used as an input or for value-adding to a product which is exported. Further, transfer of any old machinery from the domestic tariff area to a SEZ would not be eligible for tax breaks and splitting of companies and moving one of them into a SEZ would also not allow tax breaks. The Ministry has also clarified that the countervailing duty of 4 percent would not be levied on imports. BS 12 & IE 21 Revenue loss. Following the concerns expressed by the Finance Minister that the revenue losses from SEZs would result in the Central Government missing the FRBM targets along side adverse demonstration effect on the fiscal management at the state Governments, the Government has reportedly decided to limit the final • - 3 approval to 150 SEZs only, out of the 164 SEZs that have been given in-principle approval so far (nearly 300 proposals still pending) and asked the board of approvals to check relocation of existing businesses to SEZs. ET 6, FE 8 & ET 19 • Labor and land laws. The state Government of Maharashtra, in a notification on SEZ (dated May 2, 2006), has allowed industries and export oriented units (EOUs) to employ certain categories of services on a perpetual contract basis. [The law currently prohibits industries from retaining employees under the “temporary” category beyond 240 days.]The Finance Ministry has reportedly expressed its reservation against relaxing employment criteria in SEZs, as it would defeat the idea of granting huge fiscal incentives. The Government, however, overruled the Ministry’s objection to the minimum land requirement criteria, set at 10 hectares for infotech, gems and jewellery and biotech firms. ET 20 & FE 7 Real Sector • Growth estimates. The draft approach paper to the Eleventh Five-Year Plan (2007-12) has set a target for an average annual GDP growth rate of 8.5 percent, with 12.0 percent growth rate in manufacturing and 4.0 percent in agriculture. BS 15 & FE 26 Industrial production. The Growth of the Index of Industrial Production (IIP) accelerated y-o-y to 9.5 percent in April 2006 (8.2 percent in March 2006), with manufacturing growing by 10.4 percent, mining by 4.3 percent, and electricity by 5.6 percent. YF 12 & GOI 12 Inflation up. WPI inflation went up mainly due to increase in the prices of pulses, fruits, vegetables and petroleum products. Weekly inflation rates were 4.68 percent, 4.72 percent, 5.20 percent and 5.44 percent for the weeks ending May 27 and June 3, 10 & 17, respectively. According to an estimate made by the Prime Minister’s economic advisory council, the hike in fuel prices would have 1.0 percent impact on the WPI (0.4 percent direct impact and 0.6 percent indirect impact). YF 9, FE 9, 23 & BS 30 Food prices. The Government has permitted the private sector to import wheat and a limited amount of sugar and banned the export of pulses as part of its efforts to curb the prices of food items. It has also reduced the customs duty on wheat to 5.0 percent from 50.0 percent and placed it under the open general license (OGL) till December 2006 and allowed private firms to import pulses at zero duty. ET 9, YF 22 & BS 29 Population. A Report of the technical group of the National Commission on Population has projected India’s population to be around 1,384 million by the year 2026, excluding a projected death of nearly 11-16 million people from HIV/AIDS in the next 20 years (a recent UNAIDS Report on the Global AIDS Epidemic estimated AIDS deaths in India at over 0.4 million in 2005- the highest in the world). HBL 14 & IE 14 Poverty. According the preliminary estimates of the 2004/05 NSS thick sample survey, the percentage of people living below the poverty line (BPL) has reduced from 26.0 percent in 1999/2000 to 22.0 percent in 2004/05 (it was 36.0 percent in 1993/94). However, in terms of absolute number, the BPL population was estimated at around 220-230 million in 2004/05, same as that in 1999/2000. FE 15 Economic census. Highlighting many positive features of the current phase of economic growth in India, the findings of the Fifth Economic Census have indicated that the rural sector had a much higher share of 61.3 percent in the new industrial and service sector units that have come up between 1998 and 2005 (annual growth of 5.5 percent) as against a 38.7 percent share in urban areas (annual growth of 3.7 percent). Further, jobs in enterprises, other than those engaged in crop production and plantations, rose by 2.5 percent a year between 1998 and 2005 (it was 1.7 percent per annum between 1990 and 1998), as against an annual growth of 2.0 percent in the total workforce. The sector wise employment, however, indicated that crop production and the plantation sector continued to employ much higher share of 73 percent (nearly 275 million) of workers out of the total labour force of 375 million. Out of the balance 100 million workers being employed in non-agricultural sector, 51 percent are in rural areas and 49 percent in urban areas. ET 13, FE 13 &14 • • • • • • Fiscal Sector • Fiscal update. According to the data released by the Controller General of Accounts, the Center’s net tax collections totaled Rs 150.9 billion (4.6 percent of Budget Estimate), and non-tax revenue totaled Rs 42.4 billion (5.6 percent of Budget Estimate) through the end of May, 2006. The total expenditure was at Rs 919.2 billion (16.3 percent of Budget Estimate). The revenue deficit totaled Rs 686.2 billion (81.0 percent of Budget Estimate), and the fiscal deficit totaled Rs 720.9 billion (48.5 percent of Budget Estimate) during April–May, 2006. The revenue department has reportedly fixed an arrear collection target of Rs 117 billion for direct taxes in 2006/07 (Rs 80 billion in 2005/06). BS 21 & FE July 1 • 4 VAT. Tax revenues of 30 States and Union Territories States, that have implemented VAT, increased by 23.5 percent in April-May 2006. BS 14, 20 & HBL 28 Employment guarantee. The Centre Government has reportedly released Rs 63.4 billion since February 2006 for its ambitious rural job guarantee scheme (NREGA) in 200 districts under the first phase. Under the scheme the Government has so far received 2,660 million applications for registration, issued more than 1,780 million job cards and provided 6.5 million jobs from 8.1 million persons who have asked for employment. FE 8 & ET 15 Tax administration. The Central Board of Excise and Customs (CBEC) is working on a pilot project to introduce automation of both excise and service tax, which, in addition to encouraging e-filing, would also create a database and profiles of excise and service tax payers by October 2006. BS 14 • • External Sector • Trade data. According to data released by Director General of Foreign Trade (DGFT), exports growth accelerated to 29.6 percent y-o-y in May 2006 (27.1 percent in April 2006), while they grew at 28.4 percent y-o-y in April-May 2006. Imports, which grew by 21.7 percent y-o-y in May 2006, increased by 22.8 percent y-o-y in April-May 2006.Trade deficit widened to US$ 8.0 billion in April-May 2006 compared to US$ 7.2 billion during the same period a year ago. According to press reports, the Government data has overstated the growth numbers for both exports and imports by wrongly comparing the provisional May 2006 data over provisional May 2005 data (instead of the available final data for May 2005).YF 19 & ET 20 Balance of Payments data. The current account in India's Balance of Payments (BoP) for Q4 (JanuaryMarch 2006) turned into a surplus of US$ 1.8 billion, after witnessing deficit for the previous three quarters, mainly due to a surge in net invisible receipts. The current account for the financial year 2005/06, however, was in a deficit of US$ 10.6 billion, compared to a deficit of US$ 5.4 billion in the previous year. The capital account for Q4, witnessed a surplus of US$ 11.4 billion (US$ 12.1 billion in the same period last year), while for the financial year 2005/06 it was in a surplus of US$ 25.7 billion (US$ 31.6 billion in 2004/05). The overall balance was in a surplus of US$11.4 billion in Q4, while for 2005/06 it was a surplus of US$ 15.1 billion (US$ 26.2 billion in 2004/05). RBI 30 & YF 30 External debt. India’s external debt rose by US$ 2.0 billion to US$ 125.2 billion by end-March 2006 (US$ 123.2 billion by end-March 2005), mainly due to surge in commercial borrowings. RBI 30 Black gold. Following the sustained rise in international prices for petroleum products, there have been reports indicating that smuggling of diesel, kerosene and other petro-products is on the rise. ET 14 FDI. According to some private estimate, the out bound FDI from India, mainly through overseas acquisitions, was over US$ 6 billion involving over 50 deals in 2006 compared to US$ 4.3 billion for 136 deals in 2005. Global Software giant IBM announced its plan to triple its investments in India over the next three years to US$ 6 billion from US$ 2 billion. ET 6 & BS 8 Multilateral loan. The World Bank has resumed financing the Mumbai Urban Transport Project (MUTP), lifting the suspension imposed in March 2006, following satisfactory negotiation with the state Government of Maharashtra on issues relating to the rehabilitation of the affected people. FE 29 • • • • • Financial Sector • Cash reserve ratio (CRR). Following the amendment to the RBI Act, the RBI has done away with the concept of minimum cash balance to be maintained with the central bank and withdrew interest payment on the such balances. It is estimated that banks would lose nearly Rs 15 billion on this account. YF 23 & HBL 25 Regional rural banks (RRBs). The RBI has liberalized branch licensing policy for RRBs by empowering the empowered committees at regional offices of RBI to clear their applications to open new branches and conducting foreign exchange business. Earlier, RRBs had to approach the RBI through NABARD, after due approval from their respective sponsor banks. BS 14 • ____________________________________________________________________________ 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