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Summary of Economic News in India -- IMF New Delhi Office, June 2005

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					A Summary of Economic News in India, June 20051 IMF New Delhi Office Markets
Nominal Exchange Rate (Rs/US $)
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Rupee appreciated. The rupee/dollar rate appreciated by 24 paise during the month of June, mainly due to strong FII inflows. The six-month forward premium on the US dollar was 1.51 percent at month-end, 56 bps higher than at end-May 2005.

42.0 42.5 43.0 43.5 44.0 44.5

Net Weekly FII flows (mln US $) 800 600 400 200 0 -200 -400 -600

45.0

1-Jun
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8-Jun

15-Jun

22-Jun

29-Jun

Portfolio inflows increased. Portfolio inflows reversed last two month’s trend and increased sharply during June. Net inflows were US$ 1.3 billion in June 2005 compared to US$ -119 million in June 2004 and US$ -292 million in May 2005.

Reserves declined. Foreign reserves, measured in US dollars, decreased on account of currency revaluation. June 1-10 June 13-17 June 20-24 June 27-30 Reserves, which declined by US$ 1.0 billion and US$ 135 million in weeks ending June 3 and 10, respectively, increased by US$ 1.0 billion for week ending June 17. It declined by US$ 676 million in week ending June 24. Reserves were US$ 138.9 billion on June 24. HBL 12, 19, 27 & July 4.
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Stock market scaled new peak. Stock markets rose sharply during the month to scale historical peak on account of strong quarterly corporate results, robust FII inflows, strong industrial growth and revival of monsoon rains after some delay in its unset. On a month-end basis the BSE index was higher by 471 points, or 7.1 percent.
7.00 6.00
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7500 7300 7100 6900 6700

BSE Index

Call M oney Rate

6500 1-Jun 8-Jun 15-Jun 22-Jun 29-Jun

5.00 4.00 3.00
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Call money rate rose. The call rate, which stayed in the range of 5.00-5.10 percent during the first three weeks, rose above 5.50 percent level in the last week with some tightening of liquidity conditions.

The yield curve flattened. Yields [primary market] on 91-day Treasury bills increased by 12 bps to 5.31 1-Jun 8-Jun 15-Jun 22-Jun 29-Jun percent during June. Yields [primary market]on 364day Treasury bills also rose by 4 bps to 5.61 percent. Yield [secondary market] on the 10-year government bond, however, declined by 9 bps to 6.83 percent.

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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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Disinvestment developments. The Government has decided to divest 10 percent stake in Bharat Heavy Electricals Limited (BHEL), amidst strong opposition from left parties and is reportedly planning to sell 8 percent stake in Maruti. It has also cleared the transaction document, including the concessions agreement, which had delayed the privatization process of Delhi and Mumbai airports. H 20, IE 23 & T 23 Service tax. The Government is reportedly consulting all states to evolve a consensual mechanism to share the fast-growing service tax revenue, which would be part of the draft Central legislation on service tax. FE 3 Electricity Act 2003. The Power Ministry has notified a very stringent investment norms for private companies entering into the power distribution business, which would not only require them to commit 30 percent of their investment as equity but also to demonstrate adequate cash flow to the satisfaction of concerned state regulatory commission. IE 6 Power Sector Reforms. In line with the Electricity Act 2003, the state government of Andhra Pradesh has divided the power allocation among the four distribution companies equitably and transfer the subsidy to them as well. Similarly, the state government of Orissa has also bifurcated the transmission and distribution business of the government-owned utility Grid Corporation of Orissa (Gridco) by passing on the transmission business to a new company, Orissa Power Transmission Corporation (OPTCL). BS 13 & FE 8 Special purpose vehicle (SPV). The Government is reportedly planning to set up “India Infrastructure Finance Company (IIFC)”, a wholly-owned government company under the Companies Act, as the SPV to fund commercially viable infrastructure projects (including those eligible for viability gap funding under a government scheme) in the public sector, private sector or involving public-private partnership. The company would have an initial paid up capital of Rs 100 million and authorized capital of Rs 10 billion and its borrowings (pegged at Rs 100 billion for 2005/06) would be guaranteed by the Government. FE 24 & BS 27 Dabhol settlement. The stalemate in the issues relating to settlement of dues with General Electric (GE) was reported to have been resolved with the Maharashtra Power Development Corporation Ltd (MPDCL) agreeing to pay GE US$ 145 million (a down payment of US$ 110 million and the balance US$ 35 million to be paid from the sale proceeds of the Dabhol power project). The settlement agreement, to which the Indian Government and the domestic financial institutions were also parties, would allow public sector NTPC and GAIL to start work on reviving the power plant. The Government is also trying to reach a settlement agreement with Bechtel, the other foreign firm having a stake in the project. IE 30 FDI policy. The Government has permitted 20 percent FDI in FM radio and 26 percent FDI in Indian news publications and is reportedly considering various recommendations to allow 49 percent FDI in the Asset Reconstruction Companies (ARCs), 100 percent FDI in trading of electricity through the automatic approval route, 51 percent FDI in retail sector and 100 percent FDI in captive coal mining in steel, cement and sponge iron sectors. It is also reportedly planning to amend FDI norms to remove highly regulated sectors from the purview of the Foreign Investment Promotion Board (FIPB) and to do away with the post-entry divestment clause applicable to certain sectors. HBL 7, FE 16, ET 29, FE 29, BS 29 & HBL 30

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Real Sector
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Growth prospects. According to the revised estimates by the CSO the overall GDP grew by 6.9 percent (advance estimate at 6.9 percent) in 2004/05, compared to 8.5 percent in 2003/04. While the slowdown in growth is attributed to a lower growth of 1.1 percent in agriculture sector, the industrial and services sectors witnessed robust growth of 8.3 percent and 8.6 percent, respectively. The current southwest monsoon, which was late by a week, has covered the entire country 15 days ahead of schedule time and has brightened growth prospects for 2005/06, forecasted to be around 7.0 percent by the Government, RBI, NCAER and CII, with exception of CMIE, a private think tank, at 6.0 percent. FE 6, 13, YF 21, HBL 30 & July 1 Mid-term appraisal of 10th Plan. The Government reportedly told the National Development Council Meeting, which deliberated the Mid-term Appraisal Report prepared by the Planning Commission for the Tenth Five Year Plan (2002-07), that the economy would fail to achieve the GDP growth target of 8.1 percent as it has averaged only 6.5 percent growth in the first three years. It also informed that it aimed at achieving 78 percent growth in the remaining two years and urged the participating state governments to chalk out ambitious plans to double farm production. FE 27 Industrial production. The Index of Industrial Production (IIP) grew y-o-y by 8.8 percent in April 2005 : manufacturing growing by 10.0 percent, mining by 3.1 percent, and electricity by 3.0 percent. Six core

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infrastructure industries grew by 5.6 per cent y-o-y in May 2005 (6.7 percent May 2004). The cumulative increase during April-May 2005 was 4.9 percent (8.2 percent April-May 2004). YF 10 & HBL 28
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SSI sector. According to the third All India Census of Small-Scale Industrial Units the number of registered SSI units went up from 1.38 million units in 2001/02 to 1.47 million units in 2002/03 and that of unregistered units from 9.15 million to 9.54 million units. While production, at constant prices, went up from Rs 1,956 billion to Rs 2,106 billion (7.7 percent), exports were up from Rs 712 billion to Rs 860 billion (20.7 percent). Employment also went up from 24.9 million in 2001/02 to above 26.1 million in 2002/03. HBL 14 Inflation declined. WPI inflation declined sharply mainly due to last year's high base and a fall in fruit, vegetable and textile prices. Weekly inflation rates were 5.4 percent, 5.2 percent, 4.2 percent, 4.3 percent and 4.1 percent for the weeks ending May 21 & 28 and June 4, 11 & 18, respectively. The CPI for industrial workers declined to 3.7 percent in May 2005 from 5.0 percent in April 2005. The Government has allowed the oil PSUs to raise prices for petrol by Rs 2.50 per liter and diesel by Rs 2.00 per liter, effective June 20, 2005 (kerosene and LPG prices were kept unchanged). It also hiked prices for compressed natural gas (CNG) by Rs 1.12 per kg. HBL 20, FE July 1 & YF July 1 Unemployment. According to the latest report of the National Sample Survey Organization (NSSO), the unemployment rate (measured as the number of persons unemployed per thousand persons in the labor force) among the male rural workers has increased from 12 in 1997 (53rd round) to 15 in 2003 (59th round), while that of male urban workers from 39 to 40 during the same period. The unemployment rate among the female workers, however, has declined somewhat both in rural and urban areas during the same period. ET 27 Gas discovery. The state-owned Gujarat State Petroleum Corporation (GSPC) is reported to have struck a huge gas reserves, estimated at 20 trillion cubic feet (tcf) and valued at almost US$ 50 billion, in the coast of the Bay of Bengal. It has the potential to pump out 40-50m cubic meters of gas per day (India currently produces 80m cubic meters of gas per day). ET 27

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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 86.6 billion (3.2 percent of Budget Estimate), and non-tax revenue totaled Rs 32.9 billion (4.5 percent of Budget Estimate) through the end of May, 2005. The total expenditure was at Rs 597.4 billion (11.6 percent of Budget Estimate). The revenue deficit totaled Rs 441.5 billion (46.3 percent of Budget Estimate), and the fiscal deficit totaled Rs 476.0 billion (31.5 percent of Budget Estimate) during April–May, 2005. FE July 1 Outcome budget. The Government is reportedly planning to come out with an outcome budget, which would help assess the effectiveness of the money spent under various heads of different ministries and monitor the achievement of physical targets. This would also help discipline various ministries in their spending pattern by ensuring that they do not stagger it towards the last quarter of fiscal as they have to spend 66 percent the budgeted expenditure in the first three quarters and balance 33 percent in the last quarter. FE July 1 State default. The Finance Ministry is reportedly working out a scheme to put information on default in repayment of outstanding loans by states to the Centre in public domain. ET 9 Tax arrears. With tax arrears (both direct and indirect) at Rs 1,250 billion, the Government has reportedly decided to drop demands that are difficult to recover and focus on cases those are recoverable. ET 13

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External Sector
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Trade data. Export growth accelerated to 22.3 percent y-o-y in May 2005 (17.2 percent in April 2005), while it grew at 19.8 percent y-o-y in April-May 2005. Imports also witnessed strong growth of 35.5 percent y-o-y in May 2005, while they grew by 40.9 percent y-o-y in April-May 2005.Trade deficit widened to US$ 7.2 billion in April-May 2005 compared to US$ 3.4 billion during the same period a year ago. BS 15 Balance of Payments data. The current account in India's Balance of Payments (BoP) for Q4 (JanuaryMarch 2005) turned into a surplus of US$ 159 million, after witnessing deficit for the previous two quarters, mainly due to a surge in net invisible receipts. The current account for the financial year 2004/05, however, was in a deficit of US$ 6.4 billion, as against a surplus of US$ 10.6 billion in the previous year. The capital account for Q4, 2005 witnessed a surplus of US$ 12.5 billion (US$ 4.3 billion in the same period last year), while for the financial year 2004/05 it was in a surplus of US$ 32.6 billion (US$ 20.9 billion in 2003/04). The

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overall balance was in a surplus of US$12.6 billion in Q4, 2005, while for 2004/05 it was a surplus of US$ 26.2 billion (US$ 31.4 billion in 2003/04). FE July 1
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External debt. India’s external debt rose by US$ 11.6 billion to US$ 123.3 billion by end-March 2005 (US$ 111.7 billion by end-March 2004), mainly due to surge in commercial borrowings. RBI 30 Foreign exchange market. An RBI appointed panel Report has recommended to further relax capital controls and push forward more reforms in the foreign currency market. The Report has suggested to allow residents to cancel and rebook foreign currency swaps and companies to deal in covered call and put options in order to give more flexibility in hedging. It has also suggested that Indian banks be allowed to accept deposits from non-resident Indians in more foreign currencies, including the Canadian, Australian and New Zealand dollar. Following these recommendations the RBI has permitted importers to cancel and rebook all forward contracts to hedge current account transactions (earlier, only up to one year forward contracts, which were booked to cover import exposures, could be rebooked after cancellations), which is expected to impart more volatility and greater depth to the forward currency markets. BS 24 & YF 27 Bilateral trade pact. India and Singapore have signed a Comprehensive Economic Cooperation Agreement (CECA), which included an integrated package for free trade in goods and services, an agreement on investments, a cooperation pact in customs, science and technology, education, e-commerce, intellectual property and media, to be effective from August 1, 2005. HBL 30 Software exports. According to NASSCOM software and services exports at US$ 17.2 billion, grew 34 percent in 2004/05 and is projected to grow by 30.8 percent (US$ 22.5 billion) in 2005/06. HBL 3 FDI. POSCO, the world's fifth-largest steel maker from South Korea, had signed an investment deal for a US$12 billion Indian steel project, the biggest FDI in India. YF 22

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Financial Sector
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Interest rates up. The HDFC, ICICI Bank and Standard Chartered Bank have hiked housing loan rates by 50 bps across all maturities. Some of the banks and NBFCs have also raised the interest rate on car loans by 25 bps. An RBI working group has recommended that the interest rate for foreign currency denominated export credit be raised by 0.25 percent. ET 13, FE 17 & July 1 Banks’gilt exposure. Public sector banks (PSBs) are reported to have reduced their excess holdings in gilts as robust credit growth promises higher yields. The Union Bank of India, Corporation Bank and Dena Bank have taken the lead by paring their exposure to government securities to the bare minimum level of 25 percent, the mandatory minimum level prescribed statutory liquidity ratio (SLR). PSBs were earlier invested 35- 40 percent of their total deposits in government securities. BS 30 Cooperative bank reforms. The state Government of Gujarat and Andhra Pradesh have signed separate memorandum of understandings (MoUs) with the RBI to strengthen the regulation and supervision of urban co-operative banks (UCBs). According to the MoUs, the RBI and the respective State governments would constitute State-level Task Force for Urban Cooperative Banks (TAFCUB) for reviewing their performance at periodical intervals and suggest measures for strengthening them, with the RBI having a far greater say in the management of UCBs. The RBI expects to enter into similar MoUs with other State governments, in the due course of time. HBL 28 & BS 30 Micro finance. An RBI internal group on rural credit and micro finance has suggested that the government should consider reducing the FDI limit for NBFC Micro Finance Institutions (MFIS) from US$ 5,00,000 to US$ 1,00,000 or alternatively, restrict external sources of finance to NRIs only. It has also recommended the appoint of business facilitators by banks to provide support services for effective delivery of financial services and make regulated MFIS eligible for direct finance from NABARD. ET 3 Banking merger. The Centurion Bank and the Bank of Punjab, both private sector banks have agreed in principle to merge. HBL 21

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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; PIB-Press Information Bureau; BE-Budget Estimates; RE- Revised Estimates.