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					        Macro-Overview                                                      I C R A B U L L E T I N

                                                                            Money
                                                                                   &
                                                                                    Finance
                                                                                  JAN.–JUNE.05




        The Economy
         The security environment in India remains stable, having
improved dramatically through 2004 and continuing in a positive
direction though the first half of 2005. Tensions with Pakistan have de-
escalated, and the Kashmir situation improved considerably. Develop-
ments in Nepal—a combination of the Royal coup, and the evident
                                                                           Ever since 2002-03,
strength of the Maoist guerrillas—continue however to be a matter of
concern.                                                                        on the back of a
         Economic Growth                                                              recovery in
         The Advance Estimates of the Central Statistical Organisation
(CSO) for 2004-05 released on February 7, 2005 estimated GDP growth               manufacturing
in the year at 6.9 per cent. The revised numbers are due to be released
on June 30, 2005 and it is expected that with slightly stronger than         activity, the rate of
expected agricultural output, the overall growth number may rise to
7.0 per cent. At Table 1.1, we present the overall growth numbers, as            growth of non-
well as their sectoral decomposition between 1993-94 and 2004-05. It
may be observed that ever since 2002-03, on the back of a recovery in
                                                                               agricultural GDP
manufacturing activity, the rate of growth of non-agricultural GDP has
                                                                              has strengthened
strengthened considerably from 5.5 per cent in 2000-01 to 6.9 per cent
in the following year and thereafter to 8.0 per cent in 2003-04 and 8.5      considerably from
per cent in 2004-05.
         The arithmetical reason underlying the weakness in growth for     5.5% in 2000-01 to
most years since 1997-98 has derived from a combination of weak
agricultural out-turn following on a wayward monsoon, and a sus-                      6.9% in the
tained slackness in manufacturing output growth between 1997-98 and
2001-02, with the exception of one year, that is, 2000-01. It may be        following year and
readily seen that the weakness in manufacturing was the principal
factor behind the prolonged slowdown in economic growth since 1997-        thereafter to 8.0% in
98, which was broken only in 2001-02. As we have consistently argued
                                                                            2003-04 and 8.5 %
in these columns, the year-to-year volatility of the agricultural sector
serves to mask the real changes in the economy. Thus, a recovery in the              in 2004-05.
farm sector in 1998-99 pushed overall growth to 6.6 per cent, despite
anaemic manufacturing growth of 1.5 per cent. Likewise in 2000-01,
notwithstanding a recovery in manufacturing, overall economic growth
was depressed to 4.4 per cent, in part because of negative growth in
agriculture and in part because of a change in the treatment of how                        125
 I C R A B U L L E T I N       value added is measured in the state owned mutual fund business (Unit
                               Trust of India). Again, despite strong performance in the industrial and
  Money                        services sectors in 2002-03, overall growth was a niggardly 4.0 per
         &                     cent entirely because of a negative growth of 5.2 per cent in the farm
          Finance              sector. Tracking the rate of growth of the non-agricultural sector thus,
                               as we have consistently argued, serves to provide a clear picture of
        JAN.–JUNE.05
                               what is happening to the economy.


                                                   TABLE 1.1
                              Sectoral annual growth rates in the decade post-reform

 Year ending March 31              1994    1995 1996 1997 1998 1999          2000 2001 2002 2003 2004 2005*

 GDP at factor cost                 5.9     7.3    7.4   7.8    4.8    6.6    6.0    4.4   5.8     4.0    8.2   7.0
 Agriculture & allied activities    4.1     5.0   –0.9   9.6   –2.4    7.1    0.5   –1.4   6.8    –5.2    9.1   1.8
 Non-agriculture                    6.7     8.5   10.9   7.1    7.6    6.4    8.1    6.3   5.5     6.9    8.0   8.5
 Of which:       Industry           5.2    10.2   11.7   7.0    4.3    3.4    5.3    6.5   3.3     6.4    6.7   7.6
                 Services           7.7     7.1   10.4   7.2    9.8    8.2    9.7    6.2   6.6     7.1    8.7   8.9
 Memo items
 Manufacturing—registered
 and unregistered                    8.5   12.0   14.9   9.7    1.5    2.5    4.4    7.1    3.7    6.2    7.3   8.9
 Trade, hotels, transport, &
 communication                       7.1   10.4   13.3   7.8    7.7    7.1    8.3    7.8   8.6     7.0   11.2 11.3
 Finance, insurance, real estate
 & business services               13.4     5.6    8.2   7.0   11.6    8.4    9.6    3.5    4.5    8.8    6.8   7.1
 Community, social &
 personal services                  3.5     3.2    7.9   6.3   11.7    9.9   12.1    6.1   5.3     5.8    6.0   6.1
 Note: * Expected revised estimates due for release at the end of June 2005, and based on Advance Estimates for
         2004-05 released in February 2005 and the subsequent known data.
 Source: Data for all years from Central Statistical Organisation (CSO), various press notes up to February 8, 2005.



As we have                              The rate of growth for the previous twelve quarters, at the
                               aggregate and sectoral levels, including an estimate for the fourth
consistently argued            quarter of 2004-05, is provided at Table 1.2.
                                        The South-west (SW) monsoon in the current year is making
in these columns,              slow progress and fears have been expressed that rainfall would be
                               short and the resultant effect on the farm sector would be adverse and
the year-to-year               therefore some agencies have rushed to the conclusion that overall
                               economic growth would stumble quite significantly.
volatility of the
                                        First, it is early days yet. Every year the SW monsoon departs
agricultural sector            slightly from its statistical average course. That does not necessarily
                               mean inadequate rainfall. Second, even if there is indeed some inad-
serves to mask the             equacy in precipitation, the effect on the kharif crop is uncertain, for
                               what matters as much as the total of precipitation is the distribution of
real changes in the            rain over the season. Third, unless the shortfall is dramatic (as for
                               instance in 2002), the negative impact if any, may not necessarily be
economy.                       significant, considering that over half the arable land (and more than
                               that in terms of production) is irrigated and the dynamics of the winter
126                            (rabi) crop, which is mostly irrigated, do not necessarily follow from
the SW monsoon. Finally, as we should have learnt from the experience                         I C R A B U L L E T I N

in 2002, even one of the worst monsoons in recent memory failed to
make a significant dent in the level of expansion of industrial and
                                                                                              Money
service sector output.                                                                               &
         The upshot is that in looking at the outlook for economic                                    Finance
growth, one must take explicit cognizance of the fast growing and more
                                                                                                     JAN.–JUNE.05
stable trajectory of growth of the non-agricultural sector, quite sepa-


                                                     TABLE 1.2
                                 Sectoral quarterly growth rates—year-on-year basis

                                              2002-03                     2003-04                    2004-05
                                        Q1    Q2     Q3     Q4     Q1    Q2     Q3     Q4      Q1     Q2    Q3 Q4*
 GDP at factor cost                     5.2    5.6    1.8    3.7   5.6    8.8 11.0      8.2    7.6    7.1 6.2     7.4
     Agriculture & allied activities   –1.2   –4.7   12.1   –6.3   0.1    7.2 18.2     10.5    3.3   –0.8 –1.1    2.3
 Non-agriculture                        7.2    8.2    7.4    6.7   7.2    9.2  8.6      7.7    8.8    8.7 8.8     8.5
     Of which:       Industry           5.5    7.5    7.1    6.4   6.0    6.3  6.3      7.9    7.4    9.1 8.9     7.2
                    Services            8.1    8.6    7.5    6.9   7.8   10.7  9.9      7.6    9.5    8.5 8.8     9.2
 Memo items
 Manufacturing—registered and
 unregistered                           4.3    7.0    7.1    7.3   6.1    6.9    7.0    7.6    8.9   10.8 10.4    9.2
 Trade, hotels, transport, &
 communication                          9.5   10.5    9.4    7.7   8.0   10.4   13.6   13.8   11.0   11.6 10.5 10.5
 Finance, insurance, real estate &
 business services                      9.4    9.6    8.5    7.5   6.4    7.2    7.5    8.5    7.0    7.0   8.1   8.3
 Community, social & personal
 services                               4.1    4.1    3.2    5.1   9.0   14.9     5.   –3.1    9.3    4.5   5.8   6.0

 Note: * Estimated. Previous quarters subject to revision.
 Source: CSO, Quarterly Estimate of Gross Domestic Product—Press Notes up to March 31, 2005.



rately and distinct from what happens to agriculture. Undoubtedly there
are linkages between what happens in the farm sector and in the rest of
the economy, but they are not that significant. Further, the dominant
factor defining what linkage truly exists, is likely to be influenced by
the fact that the geographical sub-set of agriculture that makes up a
disproportionately large share of the rural market for manufactures and
other modern services, namely the richer farm belts of north-western
India, and some of the fertile southern deltaic and commercial crop
growing regions, are relatively insulated from the vagaries of the
monsoon. Thus, the economic cost of a weak SW monsoon is most
likely to be significantly smaller than the human cost as farmers in arid
and semi-arid regions are hard-pressed by the paucity of rainfall.

         Outlook for 2005-06
         Growth in the farm sector in 2003-04 was exceptionally high
as there was a rebound from the precipitous decline in the previous
year. Belying expectations in 2004-05, farm sector output despite not
such a good monsoon, was expected to increase by 1.1 per cent in the                                         127
 I C R A B U L L E T I N   Advance Estimates, and since farm output numbers estimated at the end
                           of March appear to be stronger, this may be raised to as much as 1.8
  Money                    per cent. Even with a normal SW monsoon in 2005, given that farm
         &                 sector output has grown at an average pace of nearly 2.5 per cent over
          Finance          the past four years, it should not have been a surprise if growth in the
                           current fiscal was in the region of 1.5 per cent, since the trend rate of
       JAN.–JUNE.05
                           growth since the mid-1990s has been below 2 per cent. The injection of
                           much higher volumes of bank credit into the farm sector over the past
                           year is an off-setting factor through a combination of higher inputs and
                           a superior cropping pattern. It is however too early to assess the
                           benefits attendant on credit injection, but it makes the adoption of 1.5
If however the SW
                           per cent growth in the farm sector a more conservative estimate than
monsoon turns out          otherwise. If however the SW monsoon turns out to be much below
                           normal, it is likely that farm sector output growth would turn out to be
to be much below           close to flat, rather than being negative. Unless that is the monsoon
                           failure is of devastating proportions. In this context it may be recol-
normal, it is likely       lected that the Indian Meteorological Department (IMD) has predicted
                           a near normal SW monsoon and there has been no indications that they
that farm sector           are considering a revision in their assessment made as recently as May
                           2005. We therefore proceed with a base case scenario of 1.5 per cent
output growth              growth in the GDP arising in agriculture & allied activities.
                                     Our estimates for the different components of industry and
would turn out to be       services are based on a combination of the trends apparent over the
                           past several quarters. Industrial output expansion in April 2005, the
close to flat, rather
                           first month of the fiscal, was very strong with manufacturing output
than being negative.       growing by 10 per cent. The present phase of industrial output expan-
                           sion began in July 2002 and it has completed 34 months in April 2005.
Unless that is the         Following economic reforms, the phase of rapid manufacturing output
                           expansion began in July 1993 and lasted till August 1996—a period of
monsoon failure is         38 months [see Chart 1].
                                     The first phase of rapid expansion of manufacturing output
of devastating             between mid-1993 and mid-1996 petered out by way of a combination
                           of low international commodity prices arising from the disintegration
proportions.               of manufacturing enterprises in the former Soviet Union, unrestrained
                           capacity expansion by domestic businesses that failed to appreciate
                           how they would be impacted by domestic and international competition
                           and the Asian currency crisis that was to follow shortly thereafter
                           settling commodity prices to very low levels. External conditions today
                           are far more comfortable and world commodity prices are at unprec-
                           edented high levels. There exists no destabilising source of supply like
                           the collapsing state enterprises in the former Soviet Union and capacity
                           creation in the rest of the world has been very restrained, the result of
                           which we are seeing in the escalation of commodity prices today.
                           Indian businesses, having experienced the pitfalls of unrestrained
                           balance sheet expansion through high leverage, and assisted by gener-
                           ous lending from financial institutions and easy financing from capital
128                        markets, have exercised far greater caution in the current phase of
                                  CHART 1                                                          I C R A B U L L E T I N
              Expansion of Manufacturing Output and GDP Growth
                                                                                                   Money
 16%                                                      Manufacturing Output                            &
 14%                                                      GDP
                                                                                                           Finance
                                                          Non-Agricultural GDP                           JAN.–JUNE.05
 12%

 10%

  8%
                                                                                                   Indian businesses,
  6%
                                                                                                   having experienced
  4%
                                                                                                           the pitfalls of
  2%
                                                                                                           unrestrained
  0%
       1993

              1994

                     1995

                            1996

                                   1997

                                          1998

                                                 1999

                                                        2000

                                                               2001

                                                                      2002

                                                                             2003

                                                                                    2004

                                                                                           2005
                                                                                                          balance sheet
                                   Year ending March 31
                                                                                                   expansion through

expansion. Banks and the capital market have also exercised greater                                 high leverage, and
circumspection in financing capital plans. In consequence, the struc-
                                                                                                             assisted by
tural weaknesses that accompanied the first phase of expansion of
manufacturing output in the post-reform period are absent today.                                     generous lending
         While export demand continues to be fairly strong, given the
slowing in evidence in advanced economies, it would not be surprising                                     from financial
that in 2005-06 the pace of export growth may turn out to be weaker
than in the previous year. Domestic demand growth however continues                               institutions and easy
to be strong, as evidenced by the rapid expansion of non-oil import
demand (over 50 per cent in April 2005). On the whole, constraints are                                   financing from
unlikely to rise from the demand side to the extent that it would end the
on-going phase of manufacturing output expansion. However, supply                                      capital markets,
side constraints—from infrastructure in general, and electricity in
particular, as well as the availability of mineral resources (and its
                                                                                                    have exercised far
price)—can act as a dampener. With company profitability still rising,
                                                                                                     greater caution in
balance sheets healthy and excess manufacturing capacity reduced to
the bare minimum (in most sectors), investment activity is likely to add                          the current phase of
to the demand facing the domestic economy.
         Thus, while we do not expect manufacturing activity expansion                                       expansion.
to collapse as it did after August 1996, or for that matter after the short
(12-month) period of expansion between May 1999 and April 2000, it
would not be unreasonable to expect a moderation in the pace of
expansion. Accordingly, we have factored in manufacturing growth of
7 per cent in the base case, with an upside potential of averaging 8 per
cent, provided investment kicks in on a fairly broad basis, particularly                                          129
 I C R A B U L L E T I N   in infrastructure. While construction activities ought to receive a fillip
                           during this fiscal from the rolling out of known investment projects,
  Money                    mining and power are unlikely to exceed the growth of last year. The
         &                 service sector is expected to grow at a pace slightly slower than that of
          Finance          last year, as the telecommunication sector expands on a much enlarged
                           base.
       JAN.–JUNE.05
                                    This gives us a projected growth of 6.7 per cent in the base
                           case, with an upside of 7.2 per cent. The latter is contingent on a faster
                           rollout of investment projects and a slightly improved performance in
                           agriculture. If the SW monsoon turns out to be much weaker than has
                           been expected and agricultural GDP remains more or less flat, the base
This gives us a
                           case situation would drop to about 6.4 per cent and the upside would
projected growth of        be correspondingly reduced to 6.7 per cent.
                                    However, we do not see enough evidence to warrant such a
6.7% in the base           conclusion and place 2005-06 expected GDP growth at between 6.7 and
                           7.2 per cent.
case, with an upside
                                    Official forecast
of 7.2%. The latter                 The Reserve Bank of India (RBI) in its Annual Policy Statement
                           of April 28, 2005, has placed growth in the current fiscal at “around
is contingent on a         7 per cent”, on the basis of expectations of a normal monsoon and
                           agricultural growth of “around 3 per cent”.1
faster rollout of

investment projects                 World Crude Oil Prices
                                      Benchmark crude prices have hovered around $50–55 per
and a slightly             barrel (/bbl), and on the odd day dropping below the $50-mark, but not
                           by much. Both the OPEC seven-crude basket and the Dubai-Oman
improved                   heavy sour have ruled a few dollars lower, on the rare occasion drop-
                           ping just below $45/bbl, but for the most part hovering around the $50
performance in             mark.
                                      High crude prices reflect the strength of demand across the
agriculture.               world, but particularly in the emerging economies of Asia, especially
                           China and India. On the supply side, there is little spare capacity
                           available and potentially the largest addition, namely Iraqi crude, is
                           still to flow in any sizeable quantity. Crude oil prices, beginning March
                           2002 for spot Nymex (New York Mercantile Exchange) are plotted at
                           Chart 2.1.
                                      Oil market dynamics are complicated by crude oil futures
                           being an attractive object of investment. Market expectations are
                           reflected in the contango nature of the market, with forward prices
                           consistently ruling well over spot prices. This is known in the parlance
                           as a contango market. Generally, future prices are lower than spot,
                           especially when prices are at relatively high levels. That is, the market


                                    1 Para 51, Annual Policy Statement for the Year 2005-06 by Dr. Y.

130                        Venugopal Reddy, Governor, Reserve Bank of India, April 28, 2005.
                                      CHART 2.1                                                                                          I C R A B U L L E T I N
                          Crude Prices—Nymex US$ per barrel
       Daily prices for one-month deliveries (spot) from March 2002 to June 2005                                                         Money
                US$ / bbl                                                                                                     58.47
                                                                                                                                                &
  60                                                                                                                                             Finance
                                                                                                                                               JAN.–JUNE.05


  50




  40                                                                                                                                        Generally, future

                                                                                                                                             prices are lower
  30
                                                                                                                                        than spot, especially

                                                                                                                                          when prices are at
  20
                                                                                                                                               relatively high
                                                                                          Jun-04

                                                                                                   Sep-04




                                                                                                                               Jun-05
                  Jun-02

                           Sep-02




                                                      Jun-03

                                                               Sep-03




                                                                                                                     Mar-05
       Mar-02




                                    Dec-02

                                             Mar-03




                                                                        Dec-03

                                                                                 Mar-04




                                                                                                            Dec-04                          levels. However,
Note:            A barrel is a measure of volume, and therefore the density of the crude
                 governs the volume to weight relationship. Little over 7 barrels make a                                                        ever since the
                 metric tonne.
Source:          Department of Energy, US government.
                                                                                                                                        second half of 2004,
expects supply to respond to elevated prices (or demand to weaken),                                                                            it has been the
thereby bringing about a reduction in market clearing prices. However,
ever since the second half of 2004, it has been the opposite with future                                                                opposite with future
prices persistently staying above spot prices, despite the relatively very
high level of spot prices, reflecting the market’s perception that demand                                                                 prices persistently
is strong (even at these prices) and the supply side is very tight indeed,
pre-conditions that make the OPEC cartel work most smoothly and                                                                          staying above spot
high prices to rule in consequence. At Chart 2.2, the difference between
the spot and 4-month forward price for Nymex crude has been plotted.
                                                                                                                                        prices, reflecting the
The area above the X-axis, that is where there is a premium in future
                                                                                                                                        market’s perception
prices, reflects the contango market. The area below the X-axis where
future prices are at a discount over spot is the “normal” market.                                                                             that demand is
         Normally future prices have approached or exceeded the spot
prices at times when the spot price was at very low levels. Thus                                                                               strong and the
between July 1997 and February 1998 when international crude oil
prices fell to below $15/bbl, future prices were higher, as markets                                                                         supply side very
expected an end to the Asian currency (and other) crisis and a return to
normalcy. In the months that followed the September 11, 2001 terror                                                                              tight indeed.
attacks on the USA, crude oil prices plummeted and future prices went
above spot, again as markets expected a return to normalcy. As crude
oil prices rose through 2003 and most of 2004, the spot-future price
structure remained normal with future prices at a discount, reflecting                                                                                  131
 I C R A B U L L E T I N                                          CHART 2.2
                                      Difference between Spot and 4-month Future Contract Price for Nymex
  Money
         &                   6                   US$ / bbl
                                                                                                                                            Future prices exceed spot
          Finance
                             4
       JAN.–JUNE.05


                             2


                             0
On June 14, 2005 at
                            -2
the OPEC meeting

two significant             -4
                                                                                                                                                Future prices at discount to spot
statements were             -6
                                 Jan-00

                                               May-00

                                                         Sep-00

                                                                      Jan-01

                                                                                  May-01

                                                                                            Sep-01

                                                                                                     Jan-02

                                                                                                              May-02

                                                                                                                       Sep-02

                                                                                                                                Jan-03

                                                                                                                                          May-03

                                                                                                                                                     Sep-03

                                                                                                                                                                 Jan-04

                                                                                                                                                                              May-04

                                                                                                                                                                                           Sep-04

                                                                                                                                                                                                     Jan-05

                                                                                                                                                                                                                  May-05
made. First that

OPEC had moved its         Source:               Department of Energy, US government.

“target” price for                                             CHART 2.3
                                 Spot and Future Premium/Discount for Nymex—from January 1997 onwards
crude oil to $50/bbl                                      Unit: US$ per barrel

and second that
                                                         Future discount /
                                                                discount/
                              70                         premium to spot RHS
                                                                   to spot RHS                                                                                                                                         5
meeting fourth
                                                                                                                                                                                                                       4
                              60
quarter 2005 world                                                                                                                                                                                                     3

                              50                                                                                                                                                                                       2
demand would
                                                                                                                                                                                                                       1
                              40
strain both crude                                                                                                                                                                                                      0

                              30                                                                                                                                                                                       -1
production capacity
                                                                                                                                                                                                                       -2
                              20
in OPEC and                                                                                                                                                                                                            -3
                                                                                                                                                                                                                       -4
                              10
refining capacity                                                                                                                                                                                                      -5
                                                  Spot price LHS
                                                  Spot price LHS
                                  0                                                                                                                                                                                    -6
world wide.
                                      Jan-97



                                                                  Mar-98

                                                                               Oct-98




                                                                                                                       Mar-01
                                                                                           May-99

                                                                                                     Dec-99




                                                                                                                                 Oct-01

                                                                                                                                            May-02

                                                                                                                                                        Dec-02



                                                                                                                                                                                  Mar-04

                                                                                                                                                                                                Oct-04

                                                                                                                                                                                                              May-05
                                                    Aug-97




                                                                                                              Aug-00




                                                                                                                                                                     Aug-03




                           Source:               Department of Energy, US government.


132
expectations of a correction, that is, a softening in spot prices. How-     I C R A B U L L E T I N

ever, by November 2004, future prices began to stay ahead of spot (as
spot weakened for some time) and continued ahead, even as spot started
                                                                            Money
rising. The only interpretation that informed market players are                   &
confident of is that basic demand and supply situation will ensure the              Finance
maintenance of high prices for some time to come. At Chart 2.3, we
                                                                                  JAN.–JUNE.05
have plotted the discount/premium between spot and future prices since
the beginning of 1997, with the spot price on the left-hand scale (LHS)
and the premium/discount on the right hand scale (RHS). As is evident,
in periods when spot prices fell to historical lows there was a forward
premium and vice versa. Except for the past six months, when despite
                                                                            The warning about
very high spot prices, the future prices remained at a premium.
                                                                                   fourth quarter
         Recent Developments
         On June 14, 2005 at the OPEC meeting two significant state-       tightness has helped
ments were made. First that OPEC had moved its “target” price for
crude oil to $50/bbl and second that meeting fourth quarter 2005 world           crude prices to
demand would strain both crude production capacity in OPEC and
refining capacity world wide. It may be recalled that OPEC has for            surge ahead with
quite some time maintained silence about what its “target” price was.
There was a time that this price was acknowledged to be around $25/            the week closing
bbl, and later raised to under $30/bbl. There have been some doubts
expressed about to what extent world demand would be affected by
                                                                                  with Nymex at
high crude oil prices in the $40 plus range.
                                                                            $58.47/bbl and UK
         However, the way that the demand for refined petroleum
products has held up in the face of average crude oil prices in the $45–   Brent at $57.76/bbl.
55/bbl range has certainly formed the foundation of the new target
price of $50/bbl. The warning about fourth quarter tightness has helped          It would not be
crude prices to surge ahead following on the announcement with the
week closing with Nymex at $58.47/bbl and UK Brent at $57.76/bbl. It            unreasonable to
would not be unreasonable to expect that these benchmark crudes
would now move within a range of $55–60/bbl, instead of the $50–55/            expect that these
bbl over the past several months. Nymex spot closed on June 17, 2005
at a record level of $58.47/bbl and the 4-month forward (October 2005)       benchmark crudes
delivery price crossed the $60-mark to close at $60.04/bbl. The price
                                                                              would now move
for December 2005 delivery was $60.43/bbl.
                                                                               within a range of
        Balance of Payments Position
         Surging merchandise imports, both oil and non-oil, have                     $55–60/bbl.
brought about a reversal in the current account from a positive balance
to a deficit. Since 2000-01 the current account has been in positive
territory and it had increased to $10 billion (0.8 per cent of GDP) in
2003-04. In fiscal 2004-05, even as exports did quite well, a rapid
increase in imports has brought the reappearance of a sizeable current
account deficit from the second quarter of 2004-05, which was repeated
in the third quarter. While the balance of payments (BoP) data for the
fourth quarter is not yet available, for the year as a whole the current                   133
 I C R A B U L L E T I N   account is likely to be in deficit to the extent of $10 to 12 billion, that
                           is, 1.4 to 1.7 per cent of GDP.
  Money                              The data released by the Director General of Commercial
          &                Intelligence & Statistics (DGCI&S) show that in 2004-05, both imports
          Finance          and export grew faster than they had in the previous year. Imports rose
                           by 38 per cent, compared to 27 per cent in the previous year. Exports
       JAN.–JUNE.05
                           rose by 27 per cent in 2004-05, compared to 22 per cent in 2003-04.
                           The merchandise trade deficit nearly doubled to $27 billion.
                                     However, BoP imports have been reported to be significantly
                           higher than that reported by the DGCI&S. In the normal course BoP
                           imports are higher than that reported by the DGCI&S by about $1 to
While the balance of
                           2 billion, mostly on account of government (defence and other depart-
payments data for          mental) purchases that do not pass through customs and hence are not
                           captured by the DGCI&S. However, in the second and third quarters of
the fourth quarter is      2004-05, the gap widened to $4.5 and 5.5 billion, respectively. This has
                           resulted in considerable divergence between the trade deficit as reported
not yet available, for     by the DGCI&S and in the BoP. For the first nine-month period (April
                           to December 2004), the merchandise trade deficit as per DGCI&S stood
the year as a whole        at about $20 billion, while the BoP showed a deficit of $28 billion.
                           Assuming that the divergence will persist into the fourth quarter of
the current account        2004-05, as against the DGCI&S reported trade deficit of $27 billion,
                           we expect one of $40 billion. In the event that the difference is not
is likely to be in         expressed in the fourth quarter, the BoP trade deficit would be lower at
                           $35 billion. In consequence the current account deficit would be
deficit to the extent
                           proportionately smaller at under 1 per cent of GDP.
of $10 to 12 billion,                At Table 2, is a summary of the BoP for calendar years 2003
                           and 2004. Notable are:
that is, 1.4 to 1.7%           (a) A very sharp expansion in merchandise imports (42 per cent)
                                   that outstripped the strong increase in exports (31 per cent),
of GDP.
                                   leading to a near-doubling (79% increase) of the trade deficit;
                               (b) 125 per cent increase in the net balance on miscellaneous
                                   general services;
                               (c) 48 per cent reduction in the net negative balance in investment
                                   income;
                               (d) Stable private remittances at about $22 billion annually.
                                    Even as the positive balance of net invisibles increased by $5
                           billion or by 21 per cent, the $13 billion increase in the merchandise
                           trade deficit converted the surplus of $6.9 billion in the current account
                           to a deficit of $1.5 billion.

                                   Capital Account
                                   As may be observed from Table 2, foreign direct investment
                           (FDI) inflows in 2004 were at the same level as in 2003, while portfolio
                           flows continued to remain strong and about 11 per cent higher in 2004.
                           Inflows on account of loans (including multilateral and bilateral loans)
134                        and issue of bonds turned from a large net negative number in 2003 to
                                                                                             I C R A B U L L E T I N
                                       TABLE 2
                          Major Balance of Payments Aggregates
                             Calendar years 2003 and 2004
                                                                                              Money
                                                                        Unit: US $ million
                                                                                                    &
                                    January–December 2003      January–December 2004                 Finance
                                   Credit    Debit      Net    Credit     Debit       Net
                                                                                                   JAN.–JUNE.05
 Merchandise Trade                59,339    75,710 –16,371    77,814 107,640 –29,826
 Total Invisibles                 50,009    26,786   23,223   67,306    39,078 28,228
 of which:
     Travel & Transportation       6,949     6,117     832     8,719     9,182      –463
    Misc. General Services        15,734    11,475    4,259   29,929    20,305     9,624
                                                                                                 The total capital
           Of which: software     11,282      465    10,817   15,247       659 14,588
    Private remittances           22,311      345    21,966   21,601       457 21,144
                                                                                              account surplus in
    Investment income*             3,647     7,640   –3,993    4,866     6,935    –2,069
 Current Account Balance         109,348 102,496      6,852 145,120 146,718       –1,598
                                                                                                   2004 at $24.7
 Foreign Investment               24,774    13,298   11,476   43,247    31,301 11,946
 O/w     Direct Investment**       4,773     1,513    3,260    5,422     2,309     3,113
                                                                                                   billion was $7
          Portfolio Investment    21,788    13,921    7,867   37,825    28,992     8,833
 Loans (incl. Bonds)              17,776    22,903   -5,127   28,703    21,080     7,623
                                                                                              billion higher than
 Banking Capital                  21,189     9,910   11,279   13,951    11,833     2,118
 “Other” capital                   5,595     1,756    3,839    6,959     3,615     3,344
                                                                                             in the previous year,
 Total Capital Account            69,634    51,003   18,631   92,860    68,198 24,662
 Overall Balance of Payments 179,471 153,807         25,664 238,635 215,080 23,555
                                                                                                   resulting in an
 Note:   * After adjustments made for re-invested earnings of foreign owned
         companies operating in India and net of direct investments of Indian                overall BoP surplus
         owned companies overseas.
         ** Including re-invested earnings as above.
 Source: Statement 40, India’s Balance of Payments in Dollars, Monthly Bulletin,                 of $23.6 billion,
         Reserve Bank of India, previous issues up to May 2005.
                                                                                                     which was a
a sizeable positive figure in 2004. The total capital account surplus in                     decrease by over $2
2004 at $24.7 billion was $7 billion higher than in the previous year,
resulting in an overall BoP surplus of $23.6 billion, which was a                             billion from that of
decrease by over $2 billion from that of the previous year, flowing from
the conversion of the surplus to a deficit in the current account.                             the previous year,

         Invisibles
                                                                                                flowing from the
         At Table 3.1, the pattern of expansion of key elements in the
                                                                                                conversion of the
category “Invisibles” which include both the export of services, as well
as the flow of factor income, is presented. At Table 3.2, key elements of                     surplus to a deficit
the BoP for the previous nine quarters are reported. Earnings from
export of software services show consistent year-on-year growth in                                  in the current
excess of 30 per cent in previous years and over 40 per cent in 2004-05,
while the export of services other than software (miscellaneous general                                    account.
services less software) shows erratic, but strong growth nevertheless.
Remittances have shown negative growth in the second and third
quarters.
                                                                                                            135
I C R A B U L L E T I N
                                                      TABLE 3.1
 Money                      Changes in Key Items of Invisible Earnings on a Quarterly Basis'
                                               Total Value and Change¦
        &                         2000-01, 2001-02, 2002-03, 2003-04 and 2004-05
                                                                                                Unit: US dollar millions
            Finance
                             Fiscal Year Q-1 (Apr-Jun)   Q2 (July-Sep)    Q3 (Oct-Dec)     Q4 (Jan-Mar)
        JAN.–JUNE.05           ending
                             March 31 $ million Change $ million Change $ million Change $ million Change
                               2001        2,039              2,306              2,486                2,973
                               2002        3,273     61%      2,448       6%     2,574       4%       2,741      –8%
                   Credit




                               2003        3,712     13%      3,274      34%     3,494      36%       3,773      38%
Miscellaneous                  2004        3,611     –3%      4,052      24%     4,298      23%       4,904      30%
General                        2005        8,397    133%      7,315      81%     9,313     117%
Services,
including                      2001        1,217              1,467              2,254                2,734
Software &                     2002        1,405     15%      1,824      24%     1,514     –33%       2,029     –26%
                   Debit




Expenses of                    2003        2,762     97%      1,954       7%     1,628       8%       3,585      77%
overseas                       2004        2,693     –2%      3,575      83%     1,622       0%       4,051      13%
branches of
                               2005        4,822     79%      4,937      38%     6,495     300%
Indian
companies                      2001          822                839                232                  239
                               2002        1,868    127%        624    –26%      1,060     357%         712     198%
                   Net




                               2003          950    –49%      1,320    112%      1,866      76%         188     –74%
                               2004          918     –3%        477    –64%      2,676      43%         853     354%
                               2005        3,575    289%      2,378    399%      2,818       5%
                               2001        1,198              1,611              1,421                1,520
Of which                       2002        1,700     42%      1,683       4%     1,770         25%    1,731      14%
Software
                   Net




                               2003        1,963     15%      2,054      22%     2,415         36%    2,431      40%
Services                       2004        2,544     30%      2,750      34%     3,092         28%    3,364      38%
                               2005        3,866     52%      4,021      46%     4,336         40%
                               2001        3,141              2,608              4,088                3,017
Remittances                    2002        5,130     63%      3,047     17%      3,215     –21%       4,006      33%
                   Net




of overseas                    2003        3,551    –31%      3,957     30%      4,073      27%       4,806      20%
Indians                        2004        4,798     35%      6,472     64%      5,890      45%       5,673      18%
                               2005        6,084     27%      4,605    –29%      4,782     –19%
                               2001      –1,721                –941             –1,013            –989
                               2002      –1,040     –40%       –731    –22%     –1,049       4% –1,024            4%
Investment
                   Net




Income                         2003      –1,025      –1%       –626    –14%     –1,218      16%   –675          –34%
                               2004        –783     –24%       –515    –18%     –2,020      66%     27            nm
                               2005        –636     –19%       –808     57%       –632     –69%
                               2001          930              2,331              4,033                2,500
                               2002        5,094    448%      2,356      1%      3,495     –13%       4,029      61%
Total of all
                   Net




Invisibles                     2003        3,196    –37%      4,271     81%      5,135      47%       4,433      10%
                               2004        4,929     54%      6,621     55%      7,240      41%       7,225      63%
                               2005        8,902     81%      5,770    –13%      6,331     –13%

Note:   ' Revised numbers, except Oct-Dec 2004, which is provisional. The numbers in the table also incorporate
        the large scale revision of BoP data released in September 2004 going back to Apr-Jun 2000.
        ¦ The change is the variation with respect to the same quarter in the previous year.

Source: As in Table-2 above.


136
                                                                                         I C R A B U L L E T I N
                                                   TABLE 3.2
                              Net position—Major Balance of Payments Aggregates '
                                       Previous Nine Consecutive Quarters
                                                                                          Money
                                                                                                 &
                                                                                                Unit: US $ million

                                     2002-03                     2003-04                          Finance
                                                                                                2004-05
                                   Q3       Q4        Q1       Q2       Q3       Q4      Q1       Q2
                                                                                                JAN.–JUNE.05
                                                                                                            Q3

 Merchandise Trade               –3,781   –2,386    –5,565 –3,795 –4,625 –1,470 –6,711 –9,844 –11,801
 Total Invisibles                 5,135    4,433     4,929  6,621  7,240  7,225  8,902 5,770    6,331
 Of which:
    Travel & transportation         199     –111        76      218    649    597          –81   –412       –567
    Misc. General Services        1,866      188       918      477  2,676    853        3,575 2,378       2,818
             O/w Software         2,415    2,431     2,544    2,750  3,092  3,364        3,376 3,512       4,336
    Private remittances           4,073    4,806     4,798    6,472  5,890  5,673        6,084 4,605       4,782
    Investment income            –1,218     –675      –783     –515 –2,202     27         –656   –808       –632
 Current Account Balance          1,354    2,047      –636    2,826  2,615  5,755        2,191 –4,014     –5,470
 Foreign Investment               1,421    1,362     2,097    3,025  4,992  4,662          801 1,409       5,074
 O/w Direct Investment              676      769       721      889    881    929          720    979        485
    Portfolio Investment            745      593     1,376    1,787  4,111  3,733           81    430      4,589
 Loans (incl. Bonds)*               248   –2,269       960    1,036 –4,854     10        3,232 1,449       2,932
 Banking Capital                  3,009    3,012     1,931    2,716  3,620    380        1,094 –1,002      1,646
 Other capital                      262       90     1,334    1,185  1,230   –990          300 1,438       2,596
 Capital Account Balance          4,940    2,079     6,021    5,544  4,987  3,990        5,150 3,292      12,230
 Overall BoP Balance              6,082    4,314     5,464    8,592  7,294 10,071        7,524   –634      6,594
 Note:   ' Revised numbers, except Oct-Dec (Q3) 2004-05, which is provisional. The numbers in the table also
         incorporate the large scale revision of BoP data released in September 2004 going back to Apr-Jun 2000.
         * This category includes external assistance.
 Source: As in Table-2 above.


        Oil Import Bill—position in 2004-05
        The oil import bill in 2004-05 stood at $29.1 billion, which
was $9 billion or 41 per cent higher than that of the previous year.
Indian refineries however export surplus refined petroleum products and
on net basis, the oil import bill was about $25 billion in 2004-05,
nearly 49 per cent higher than in the previous year.

         Current Account Outlook for 2005-06
         In the first two months of the year, imports rose by 41 per cent,
while exports increased by 20 per cent. In consequence the trade deficit
doubled to $7.2 billion, from $3.6 billion in the corresponding period
of the previous year. In 2004-05, in the first half DGCI&S exports had
risen by 32 per cent, while exports had risen by 38 per cent. In the
second half of the year export growth had dropped to 17 per cent, but
imports had continued to increase at the brisk pace of 33 per cent. The
same pattern was in the evidence in the first two months of 2005-06. As
has been noted earlier, the increase in non-oil imports has been as
strong as that of total imports.

                                                                                                          137
 I C R A B U L L E T I N           This basically implies that domestic demand for exports will
                           continue to rise strongly on the back of favourable underlying eco-
  Money                    nomic conditions. Export growth on the other hand will be the outcome
         &                 of a mix of factors:
          Finance              (a) Demand in overseas markets;
       JAN.–JUNE.05            (b) Cost competitiveness vis-à-vis our competitors;
                               (c) Further intensification of the process of manufacturing
                                   outsourcing and our place in it.
                               (d) Degree of success in navigating choppiness in trade relations
                                   and in currency markets, as also easing infrastructural short-
With safeguard                     ages at home that constrain the movement of goods.

textile quotas in                   Most OECD member nations that account for a significant
                           share of our exports [see Tables 8.3 & 8.4] are not in the best of
place in the US with       economic health, especially those in the Euro area and in Japan.
                           Flagging domestic demand in these economies cannot but be bound to
respect to Chinese         adversely impact import demand. However, that could increase the
                           pressure to compress supply prices and hence drive imports from low
exports, and similar       cost producing centres. This process will be facilitated by the demise of
                           textile quotas arising from the MFA (Multi-Fibre Arrangement). But
restrictions in the        how much of this opportunity Indian exporters can seize will depend on
                           their relative costs and other measure of competitiveness, such as
EU, Indian exporters       quality and delivery time standards. With safeguard textile quotas in
                           place in the US with respect to Chinese exports, and similar restrictions
need to be sensitive
                           in the EU, Indian exporters need to be sensitive to the pitfalls that
to the pitfalls that       abound in the post-MFA regime. China’s currency regime and purported
                           tax subsidies on exports have and are going to come under increasing
abound in the post-        scrutiny. It will serve us well if we learn constructively from this
                           experience and cease to look at fiscal breaks in order to service exports.
MFA regime.                         Higher imports are also to an extent driven by the rate of
                           export expansion, to the extent that many items of export have a very
                           large import component. Keeping these in mind, we have examined
                           various scenarios for 2005-06 with export growth ranging between 10
                           and 20 per cent and import growth ranging between 20 and 40 per
                           cent. The most likely merchandise trade deficit that emerges from this
                           exercise is $45 billion. This estimate would correspond to the DGCI&S
                           trade data. The extent of deviation of the DGCI&S import data and
                           that in the BoP in 2004-05 probably derives from government purchases
                           and the dimension of this category is not possible to anticipate in 2005-
                           06, especially since these involve advance payments in many cases. We
                           have assumed, for want of anything better, that BoP merchandise trade
                           deficit would be higher by $5–10 billion in 2005-06, which means an
                           expected merchandise trade deficit in the BoP of $50–55 billion. This
                           translates to 6.3–6.9 per cent of expected GDP in 2005-06.
                                    We have assessed likely growth in miscellaneous general
                           exports (which includes software) to be in excess of 30 per cent, that in
138                        private remittances to be in excess of 20 per cent and net investment
income outflows to rise by 50 per cent (on the back of higher loans/                       I C R A B U L L E T I N

bonds incurred in the previous years and little further accretion to
official foreign currency assets). That gives us a range for net invisibles
                                                                                           Money
from $34 to 38 billion. The resultant current account deficit (CAD) for                           &
2005-06 is thus assessed to be likely to be around $17 billion, that is,                           Finance
2.1 per cent of expected GDP. With capital account surpluses around
                                                                                                 JAN.–JUNE.05
$20 billion in the past couple of years, financing this magnitude of
CAD should not be difficult.
          More pertinently, with a CAD relatively close to the size of the
capital account surplus, two consequences are likely to emerge:
     (a) The real absorption by the domestic economy of the foreign                       Further liberalisation
         savings availability that the capital account represents;
     (b) Favourable conditions for a market clearing exchange rate                         of the FDI regime in
         with reduced intervention of the central bank.
                                                                                          a host of areas from
          Foreign Investment
                                                                                               infrastructure to
          Fresh net foreign direct investment (FDI) inflows, in 2004-05 up
to February 2005, stood at $3 billion, which is a significant increase of                 retail to the financial
47 per cent from the $2.0 billion in the corresponding period of last
year [see Table 3.3]. Further liberalisation of the FDI regime in a host                        sector to realty,
of areas from infrastructure to retail to the financial sector to realty,
and a general improvement in the domestic regulatory climate can                                  and a general
result in significantly higher levels of FDI, with attendant benefits on
technology absorption, efficiency and greater market access.                               improvement in the
          Overseas issuance in the form of Global Depository Receipts
(GDR) and American Depository Receipts (ADR) in the first eleven                          domestic regulatory
months of 2004-05, has been at about the same level as in the corre-
sponding period of the previous year (little under $0.5 billion). Invest-
                                                                                          climate can result in
ment made in Indian securities by Foreign Institutional Investors (FIIs)
                                                                                           significantly higher
in the first eleven months of 2004-05 stood at $6.9 billion, which was a
reduction of 24 per cent from that in the corresponding period of the                       levels of FDI, with
previous year ($9.1 billion).
          FII net purchases of Indian securities in the January-March                        attendant benefits
quarter of 2004-05 stood at $3.8 billion, which was 34 per cent higher
than in the corresponding period of the previous year. However, in the                           on technology
first quarter of 2004-05 net purchases by FII were a colossal $7.8
billion—concentrated in April and early-May, prior to the general                                    absorption,
elections. In 2005-06, the first quarter has seen FIIs book profits with
net purchases at –$0.46 billion (till June 17, 2005).2 The rally in stock                         efficiency and
prices from the end of April, through May and till mid-June in 2005,
                                                                                                 greater market

          2 Participation by FIIs in ADS (sponsored American Depository Receipts                          access.
in ICICI and Infosys) may have been a factor behind the negative net purchases,
which do not therefore reflect a decline in buying interest, given the significant
premium that still obtains in overseas and domestic prices of most Indian scrips.
However, the fact is that large scale fresh buying was in evidence in the first quarter
of 2005-06.                                                                                               139
I C R A B U L L E T I N         seems to have been driven by domestic investors and in the absence of
                                large net buying interest by FIIs, though there has been fresh purchases
Money                           since the middle of June. For the record net purchase by FIIs was –$0.3
         &                      billion in both April and May 2005 and +$0.2 billion in June till the
         Finance                17th of the month.
                                         Non-Resident Indian (NRI) deposits with the banking system
       JAN.–JUNE.05
                                fell by $3.1 billion through 2004-05 till the end of February 2005.
                                There was a decline of about $600 million in FCNR deposits (foreign
                                currency denominated) and about $2.5 billion in NRE (rupee denomi-
                                nated) deposits. This most certainly was a consequence of stricter


                                                    TABLE 3.3
                                   Inward foreign investment—stock and changes
                                                                                           Unit: US dollars millions

                              For the year/month                                   Cumulative
As on                           Portfolio flows         Total                    Portfolio flows            Total
31 Mar         FDI        Overseas    FII      Sub-    foreign    FDI     Overseas     FII      Sub-       foreign
                          Issuance             total     inv.             Issuance              total        inv.

1993            315          240        1       244       559       541      240         1         244       785
1994            586        1,520    1,665     3,567     4,153     1,127    1,760     1,666       3,811     4,938
1995          1,314        2,082    1,503     3,824     5,138     2,441    3,842     3,169       7,635    10,076
1996          2,144          683    2,009     2,748     4,892     4,585    4,525     5,178      10,383    14,968
1997          2,821        1,366    1,926     3,312     6,133     7,406    5,891     7,104      13,695    21,101
1998          3,557          645      979     1,828     5,385    10,963    6,536     8,083      15,523    26,486
1999          2,462          270     –390       –61     2,401    13,425    6,806     7,693      15,462    28,887
2000          2,155          768    2,135     3,026     5,181    15,580    7,574     9,828      18,488    34,068
2001         4,029*          831    1,847     2,760     6,789    19,609    8,405    11,675      21,248    40,857
2002         6,130*          477    1,505     2,021     8,151    25,739    8,882    13,180      23,269    49,008
2003         5,035*          600      377       979     6,014    30,774    9,482    13,557      24,248    55,022
2004         4,673*          459   10,918    11,377    16,050    35,447    9,941    24,475      35,625    71,072
2005
2004-05: monthly data
Apr             217           35      846       881     1098       217        35       846         881      1,098
May             217          135     –457      –322     –105       434       170       389         559        993
June            380                  –477      –477      –97       814       170       –88          82        896
July            173                   –432     –432      –259       987      170      –520        –350       637
Aug             601                    448      448      1049     1,588      170       –72          98     1,686
Sept            282                    411      411       693     1,870      170       339         509     2,379
Oct             214                    807      807     1,021     2,084      170     1,146       1,316     3,400
Nov             186          224     2,808    3,032     3,218     2,270      394     3,954       4,348     6,618
Dec             316                    746      746     1,062     2,586      394     4,700       5,094     7,680
Jan             152           48     –231     –183        –31     2,738      442     4,469       4,911     7,649
Feb             238                  2,390    2,390     2,628     2,976      442     6,859       7,301    10,277
Mar
Note: * Adjusted as per new method relating to estimation of foreign direct investment.
Source: Monthly Bulletin, Reserve Bank of India, Statement No 46, S-815, June 2005.


140
market-linked interest rates on such deposits and an evaporation of                         I C R A B U L L E T I N

expectations of a rapid increase in the external value of the Indian
currency.
                                                                                            Money
                                                                                                   &
                                    TABLE 3.4
                                                                                                    Finance
                           NRI Deposits—stock and changes
                                                                                                  JAN.–JUNE.05
                                                                         Unit: $ million

                  As at the end of Month               Flows for the year/month
 As on    FCNR           NR(E) NR(NR) Total         FCNR NR(E) NR(NR) Total
 March 31  (B)            RA     RD                  (B)  RA     RD
 Previous fiscal years                                                                       NRI deposits with
 1995*      10,114        4,556   2,486   17,156     –294    1,033      732     1,471
 1996*       9,975        3,918   3,542   17,435     –139     –638    1,056       279      the banking system
 1997*       9,802        4,983   5,604   20,389     –173    1,065    2,062     2,954
 1998        8,468        5,637   6,262   20,367   –1,334      654      658       –22        fell by $3.1 billion
 1999        7,836        6,045   6,618   20,499     –632      408      356       132
 2000        8,172        6,758   6,754   21,684      336      713      136     1,185      through 2004-05 till
 2001        9,076        7,147   6,849   23,072      904      389       95     1,388
 2002        9,673        8,449   7,052   25,174      597    1,302      203     2,102       the end of February
 2003       10,199       14,923   3,407   28,529      526    6,474   –3,645     3,355
 2004       10,961       20,559   1,746   33,266      762    5,636   –1,661     4,737          2005. This most
 2005
 2004–05: Monthly Data                                                                           certainly was a
 Apr        10,889       21,251   1,630   33,770      –72     301      –150        79
 May        11,020       20,272   1,500   32,792      131    –512       –95      –476
                                                                                                consequence of
 June       11,054       19,731   1,379   32,164       34    –318      –105      –389
 July       11,162       19,459   1,275   31,896      129    –145       –67       –83
                                                                                                 stricter market-
 Aug        11,067       19,375   1,155   31,597     –119    –105       –89      –313
 Sept       11,087       19,472   1,047   31,606     –119    –105       –89      –313
                                                                                           linked interest rates
 Oct        11,100       19,616     965   31,681     –119    –105       –89      –313
 Nov        11,196       19,940     895   32,031     –119    –105       –89      –313
                                                                                              on such deposits
 Dec        11,437       20,475     801   32,713     –119    –105       –89      –313
 Jan        11,292       20,094     701   32,087     –119    –105       –89      –313
                                                                                            and an evaporation
 Feb        11,415       20,407     475   32,297     –119    –105       –89      –313
 Mar
                                                                                           of expectations of a
 Note:   * For these years FCNR (A) has been included. All figures are inclusive of        rapid increase in the
         accrued interest.
 Source: Statement No. 45: “NRI Deposits–outstanding”, RBI Bulletin, S-814,
         June 2005.                                                                        external value of the

                                                                                                Indian currency.
        Foreign Currency Assets of the Reserve Bank of India
        In the past several issues of this journal we have been reporting
our estimate of the accretion to the RBI’s foreign currency assets due to
revaluation gains arising from the movement in cross rates of the major
currencies.3 Over the past year, the RBI has also shared the composi-

          3 Since the forex assets are held in different major currencies, and the

aggregate is expressed in one currency (US dollars), the nominal increase in the                           141
I C R A B U L L E T I N         tion of the sources of accretion to the foreign currency assets with the
                                general public. At Table 3.5, we have provided our past estimates and
Money                           the actual position as revealed in the eventual BoP statement. It may be
         &                      observed that our previous estimates have been reasonably close to the
          Finance               mark, given the crudeness of the approach adopted. The estimate for
                                the last quarter of 2004-05 and that for the first quarter up to June 3,
         JAN.–JUNE.05
                                2005, are also provided. As the dollar recovers strength vis-à-vis the
                                Euro, the revaluation gains are being gradually wound down.


                                                       TABLE 3.5
                          Increase in the foreign currency assets of the Reserve Bank of India
                                            Revaluation and real components
                                                                                                          Unit: US$ million

                                           2003-04¦                             2004-05¦                       2005-06
                                Q1       Q2       Q3       Q4        Q1       Q2       Q3         Q4*         Q1 up to
                                                                                                            June 3, 2005
Nominal increase              6,656     8,667   10,138    10,097    6,703     –68    11,081      10,098         –2,532
Overall BoP Surplus           5,464     8,592    7,294    10,071    7,524    –634     6,594
= Real increment              5,170     8,360    7,294    10,071    7,524    –634     6,594
Implicit impact of
revaluation                   1,486       307     2,844       26     –821     702     4,487
Our Estimates
Real increment                5,193     7,867     7,638   10,194    7,514    –442     6,621      12,316            –98
Revaluation impact            1,463       800     2,500      –96     –811     374     4,460      –2,218         –2,434
Notes:   ¦ Figures reported in previous issues of this journal for periods up to Q1 of 2004-05—from Table 3.5,

         Money & Finance July–December 2004, and earlier issues.
         * For Q4, the foreign currency assets and rates taken as on April 1, 2005.
Sources: Exchange rates for the four currencies are from the daily noon rates of the Federal Reserve Bank of
         New York, Aggregate foreign currency assets of the RBI from the respective Weekly Statistical
         Supplements up to June 18, 2005. The foreign exchange currency assets on the last day of each quarter
         are from the RBI’s Report on Foreign Exchange Reserves, March 31, 2005 and similar releases by the
         RBI earlier.



                                          Sectors
                                         Monsoon
                                         South-west (SW) monsoon in 2005 (June to September) is
                                making slow and delayed progress over peninsular India as we go to
                                press. Last year the SW monsoon was deficient to the extent of 13 per
                                cent of the long period average, with as many as 43 per cent of districts
                                receiving deficient rainfall. The Indian Meteorological Department
                                (IMD), as stated earlier, had forecast “normal” rainfall. In a release
                                dated April 20, 2005 it stated that:



                                dollar value of foreign currency assets is always due to a combination of valuation
                                changes and real accretion. However, the impact is significant when there is
                                considerable change in the cross rates of major currencies, as had happened in 2002,
142                             2003, 2004 and is continuing in 2005.
        “IMD’s operational Long Range Forecast for the 2005 South-west          I C R A B U L L E T I N

        Monsoon season (June-September) is that the rainfall for the country
        as a whole is likely to be 98% of the Long Period Average (LPA) with
                                                                                Money
        a model error of ± 5 %.... The model suggests a very high (75%)                &
        probability for the 2005 south-west monsoon season rainfall over                Finance
        the country as a whole to be near normal and above.”
                                                                                      JAN.–JUNE.05
Of course predictive models do go wrong. Explaining why in 2004
there was a deficiency of 13 per cent in rainfall when the IMD had
predicted 100 per cent normal precipitation, the department said:
        “Forecasts for the 2003 south-west monsoon season were accurate.
                                                                                If the SW monsoon
        However, in 2004, the realized seasonal rainfall was 87% of the Long
                                                                               in 2005 does indeed
        Period Average (LPA) as against the forecast of 100% of LPA. The
        deficient seasonal rainfall in 2004 was due to suppressed rainfall           play truant and
        activity in July 2004, which was caused by the unexpected develop-
        ment of warming in the equatorial central Pacific. No Long-range        rainfall turns out to
        prediction group in India or abroad could correctly predict the
        suppressed monsoon activity in July 2004.”                               be deficient, and it
          SW monsoon 2005 arrived over Kerala on June 5, 2005, four                         is the rain
days behind time and within only 0.57 times the standard deviation of
seven days. However, since then monsoon activity has been weak and              dependent areas in
as we write (June 19, 2005), the monsoon’s normal approach over the
sub-continent is clearly delayed by between 10 and 13 days—nearly              central and western
2 times the standard deviation of the monsoon’s onset. However, since
June 18, there has been renewal of monsoon activity in both the Indian          India that are hit, it
Ocean and Bay of Bengal, after many days of relative inactivity. Much
of the actual precipitation in the season is in late June and July, so there       will still not be a
is time for things to recover. The SW monsoon is a phenomenon often
marked by a lull in monsoon activities, followed by rapid advance and
                                                                                          second bad
then again a lull.
                                                                               monsoon—where it
          In 2004, a large part of the shortfall in precipitation was in the
Indo-Gangetic belt that is otherwise well-watered and irrigated. Then                  matters most.
again there were good late rains in October which improved conditions
for the rabi (winter) harvest. Thus if the SW monsoon in 2005 does
indeed play truant and rainfall turns out to be deficient, and it is the
rain dependent areas in central and western India that are hit, it will
still not be a second bad monsoon—where it matters most. However,
deficient rainfall in semi-arid rain dependant areas will bring consider-
able hardship to the farming community, besides widespread shortage
of water for drinking and hydro-power. Poor rainfall prevents
groundwater levels to be recharged and will then exact a second order
burden on communities that are dependant for drinking water and
irrigation on bore wells.
          However, it is still too early to raise an alarm—as a few have
done. There is as of yet no reason to believe that the delay in the
progress of the SW monsoon which is still in the upper end of the range
                                                                                               143
 I C R A B U L L E T I N   of normal statistical variability will not indeed end up in yet another
                           normal or near-normal seasonal precipitation.
  Money
          &                         Agriculture
          Finance                   The estimates for foodgrain output for 2004-05 were about 206
                           million tonnes (mt) in January 2005, the last time the Department of
        JAN.–JUNE.05
                           Agriculture released any numbers. It is however believed that output
                           was indeed higher aggregating about 210 mt. Among non-foodgrain the
                           biggest output increase was registered by cotton.


It is after all not a                                         TABLE 4.1
                                             Output of Principal Agricultural Commodities
                                                                    Unit: Million Tonnes except for cotton & index
state secret that
                                                       1998- 1999- 2000- 2001- 2002-            2003-     2004-
foodgrain stocks are                                    99    00    01    02    03               04        05¦
                            Rice                        86.1 89.7 85.0 93.3 72.7                87.0   87–88
at historical lows          Wheat                       71.3 76.4 69.7 72.8 65.1                72.1   73–74
                            Coarse cereals              31.3 30.3 31.1 33.4 25.3                36.8   32–34
and much as many            Pulses                      14.9 13.4 11.1 13.4 11.1                15.2   14–15
                               Kharif foodgrain        102.9 105.5 102.1 112.1 87.8            112.0 103–104
are quixotically               Rabi foodgrain          100.7 104.3 94.7 100.8 86.4             100.0 103–106
                            Total of Foodgrain         203.6 209.8 196.8 212.9 174.2           212.1 206–210
disinclined to accept       Groundnut                    9.0   5.3   6.4   7.0   4.4             8.3      6.5
                            Rape and mustard             5.7   5.8   4.2   5.1   3.9             5.8      7.6
that price matters—         Soybean                      7.1   7.1   5.3   6.0   4.6             7.9      7.8
                            Total of nine oilseeds      24.8 20.7 18.4 20.7 15.1                25.1     24.8
farmers and                 Cotton (million
                            170 kg bales)               12.3 11.5    9.5 10.0    8.7            13.8         17.1
merchants are               Sugarcane                  288.7 299.3 296.0 297.2 281.6           236.2        234.2
                            Index of Agricultural
rational economic           Production (1981-82=100)   177.9 176.9 165.7 178.3 150.7 179.75
                            Note:   ¦  Foodgrain output estimates for 2004-05 are within a range defined by
entities quite open                  the January 2005 estimate released by the Department of Agriculture &
                                     Co-operation and media reports on the same at the end of March 2005
to the dynamics of                   for foodgrain. For non-foodgrain crops as per the January 2005 estimate
                                     of the Department.
                            Sources: Department of Agriculture & Co-operation for output data up to 2004-
demand, supply and                   05. Index of Agriculture Production (1981-82=100) from Economic
                                     Survey, Government of India 2004-05.
prices.
                                    Rice output estimated at between 87 and 88 mt, about the same
                           as last year, has seen an increase of 5 per cent in procurement. How-
                           ever, wheat output currently estimated at between 73 and 74 mt is also
                           a tad above last year’s production, but procurement up to May 27,
                           2005 is running nearly 12 per cent below that of last year. It is possible
                           as some are concluding that output may have been much lower than
                           estimated. It is however more likely that farmers are holding on to their
                           stock in expectations of better market prices and private traders are
144                        making more purchases.
         It is after all not a state secret that foodgrain stocks are at                                                         I C R A B U L L E T I N

historical lows and much as many are quixotically disinclined to accept
that price matters—farmers and merchants are rational economic
                                                                                                                                 Money
entities quite open to the dynamics of demand, supply and prices. The                                                                   &
relatively easy availability of credit to the farm sector may also have                                                                  Finance
contributed to the holding power of wheat farmers who are concen-
                                                                                                                                       JAN.–JUNE.05
trated in the richer belts of north-western India. To the extent that
farmers and market intermediaries reclaim their legitimate markets
from the official agencies, so much the better.
         At this stage with the SW monsoon delayed any estimation of
farm sector output in 2005-06 would be bound to be associated with
                                                                                                                                  The electricity and
considerable uncertainty. However, if the SW monsoon does turn out to
be close to normal, albeit slightly deficient, and the deficiency is not                                                        mining sectors have
severe in the rain-fed regions of central and western India, farm sector
output is yet unlikely to be but slightly higher than that of the previous                                                       failed to expand as
year. As stated above we do not expect farm sector output to grow by
more than 1.5 per cent in the base case, and by little over 2 per cent if                                                                   fast as has
natural conditions—like the intra-seasonal rain distribution and soil
moisture conditions—are favourable. If however, the SW monsoon turns                                                             manufacturing and
out to be a poor one, and that too this deficiency is particularly ex-
pressed in rain-fed regions a flat to small negative growth is indeed                                                                the likelihood of
possible, characterising the downside risk.
                                                                                                                                these sectors posing
                Industry                                                                                                           as a constraint to
        As stated earlier the present phase of expansion of manufactur-
ing output began in July 2002 and by the end of April 2005 had                                                                      manufacturing is
completed 34 months. This is almost as long as that of the longest
                                                                                                                                          self-evident.
                                          CHART 3
                Growth in Industrial Output with respect to that 12 months ago
                                      Up to April 2005


 20%                                                                    General                      Manufacturing
                      37 months


 15%                                                                                                   34 months

                                                                 11 mths
 10%



  5%



  0%
       Apr-93

                  Apr-94

                           Apr-95

                                    Apr-96

                                             Apr-97

                                                      Apr-98

                                                               Apr-99

                                                                          Apr-00

                                                                                   Apr-01

                                                                                            Apr-02

                                                                                                     Apr-03

                                                                                                              Apr-04

                                                                                                                       Apr-05




 -5%
                                                                                                                                                145
 I C R A B U L L E T I N   previous expansion lasting 37 months between July 1993 and August
                           1996. The electricity and mining sectors have failed to expand as fast
  Money                    as has manufacturing and the likelihood of these sectors posing as a
         &                 constraint to manufacturing is self-evident. While some items like coal
          Finance          are indeed tradeables and higher imports can alleviate domestic
                           capacity problems, electricity is not a tradable commodity.
       JAN.–JUNE.05


                                                                 TABLE 5.1
                                    Index of Industrial Production: Growth rates (annualised) by sectors
                                                                                                   Unit: per cent


It is noteworthy that       Year            Period       General      Manufacturing      Mining     Electricity
                            1995–96                       13.0             14.1            9.7             8.1
consumer goods—             1996–97                        6.1              7.3           –1.9             4.0
                            1997–98                        6.7              6.7            6.9             6.6
both durables and           1998–99          Full Year     4.1              4.4           –0.8             6.5
                            1999–00                        6.7              7.1            1.0             7.3
non-durables—have           2000–01                        5.0              5.3            2.8             4.0
                            2001–02                        2.7              2.9            1.2             3.1
been consistent             2002–03                        5.8              6.0            5.8             3.2
                            2003–04                        7.0              7.3            5.2             5.1
growth drivers in           2004–05                        8.2              9.0            5.2             4.4
                            2001–02         Q–1            2.2              2.6           –1.6             2.2
aggregate                                   Q–2            2.4              2.5           –0.2             4.0
                                            Q–3            2.7              2.9            1.7             2.1
manufacturing                               Q–4            3.3              3.3            1.6             4.1
                            2002–03         Q–1            4.3              4.1            6.8             3.7
output expansion.                           Q–2            6.5              6.9            6.2             3.3
                                            Q–3            5.8              6.1            4.7             4.5
                                            Q–4            6.2              6.9            5.7             1.5
                            2003–04         Q–1            5.7              6.0            5.6             4.2
                                            Q–2            6.6              7.6            2.9             1.9
                                            Q–3            7.3              7.9            4.4             4.3
                                            Q–4            8.1              7.9            8.1             9.8
                            2004–05         Q–1            7.7              8.1            5.7             5.9
                                            Q–2            9.0              9.3            4.6             9.6
                                            Q–3            8.7             10.1            4.9             3.8
                                            Q–4            7.2              8.3            2.6             1.7
                            2005–06         April          8.8             10.0            3.1             3.0

                            Note:   Quarterly growth rates are with respect to the corresponding quarter in
                                    the previous year.
                            Source: Central Statistical Organisation, Press Note on Index of Industrial
                                    Production, issues up to June 10, 2005.



                                   It is noteworthy that consumer goods—both durables and non-
                           durables—have been consistent growth drivers in aggregate manufac-
                           turing output expansion [Table 5.2].

146
                                                                                          I C R A B U L L E T I N
                                    TABLE 5.2
             Index of Industrial Production: Growth rates (annualised)
                            by Use-based Classification
                                                                                          Money
                                                                         Unit: per cent
                                                                                                 &
 Year         Period      Basic    Capital    Inter-  Total    Consumer      Goods                Finance
                          Goods    Goods     mediates          Durables       Non-
                                                                            durables            JAN.–JUNE.05

 Weight out of 1,000      355.65    92.57    265.14   286.64     53.65       232.99
 1995-96                   10.7      5.4      19.3     12.8      25.8          9.8
 1996-97                    3.0     11.4       8.1      6.2       4.6          6.6
 1997-98                    6.5      5.8       8.0      5.5       7.8          4.9
 1998-99                    1.5     11.5       5.9      1.9       4.6          1.2        In the present round
              Full Year




 1999-00                    6.3      8.0       9.0      6.0      15.3          3.2
 2000-01                    4.3      1.7       4.7      8.0      14.6          5.8           of expansion the
 2001-02                    2.4     –3.4       1.6      6.0      11.5          4.1
 2002-03                    4.8     10.5       3.9      7.1      –6.3         12.0        dispersion of output
 2003–04                    5.5     13.6       6.4      7.0      11.6          5.8
 2004–05                    5.5     13.3       5.8     11.5      14.3         10.6           expansion at the
 2001–02     Q–1            1.4     –6.0       3.3      4.8       7.4          3.9
             Q–2            2.4     –7.4       2.5      6.0      17.3          1.6            2-digit level has
             Q–3            2.2     –0.9       0.2      6.9      11.6          5.3
             Q–4            3.7      0.6       0.4      6.2       9.6          5.1        been widely spread
 2002–03     Q–1            5.5      5.2       0.2      6.6      –1.7          9.9
             Q–2            4.5     13.4       3.5      9.8     –10.4         18.8         with many sectors
             Q–3            4.5     13.3       4.5      6.3      –4.3         10.2
             Q–4            4.9     10.0       7.3      5.8      –8.2         10.4             recording quite
 2003–04     Q–1            4.4      8.4       2.8      8.6       4.0         11.1
             Q–2            4.2     11.6       7.1      7.3       9.3          6.7               rapid growth.
             Q–3            5.2     10.2       9.4      6.7      13.8          4.5
             Q–4            8.0     23.0       6.1      5.6      19.0          2.0
 2004–05     Q–1            4.6     13.4      10.9      7.3      12.2          4.6
             Q–2            6.4     14.1       5.1     13.0      20.3         11.8
             Q–3            6.9     13.6       4.9     13.5      13.5         13.5
             Q–4            4.3     12.3       2.9     11.9      11.3         12.1
 2005–06     Apr            5.9     24.5       2.5     13.1      18.6         11.4
 Note: As in Table 5.1 above.
 Source: As in Table 5.1 above.


        In the present round of expansion the dispersion of output
expansion at the 2-digit level has been widely spread with many sectors
recording quite rapid growth [Table 5.3].

        2-digit level analysis
        There has been significant variation at the 2-digit level in the
growth record.
        • The fastest growing sectors that have averaged 10 per cent and
          higher growth in the last three years include #22 beverages,
                                                                                                         147
I C R A B U L L E T I N
                                                  TABLE 5.3
Money                     Annualised Growth Rates for Manufacturing at the 2–digit level
                                                                                                   Unit: per cent

        &
Group Description of sector             Weight   Average Average     1999– 2000– 2001– 2002– 2003– 2004–
          Finance                       in1000    1995–   2003–       00    01    02    03    04    05
                                                  1998*   2005¦
        JAN.–JUNE.05
(1)     (2)                               (3)       (4)       (5)      (6)    (7)    (8)   (9)    (10)    (11)
The fastest growing industry groups: 10 per cent and higher
22      Beverage, tobacco etc.           23.82      15.4      15.8     7.6    4.3   12.2   27.9    8.6    10.8
35–36   Machinery (excl. transport)      95.65       9.8      12.3    17.7    7.3    1.3    1.6   15.6    19.6
37      Transport equipment & parts      39.84      10.8      11.8     5.7   –2.0    6.8   14.6   17.0     3.9
28      Paper & paper products           26.52      10.5      10.7     6.3   –9.1    3.1    6.8   15.6     9.7
26      Textile products incl RMG        25.37      17.9      10.1     2.0    4.0    2.4   14.4   –3.2    19.2
Industry groups with strong growth: Above 8 and below 10 per cent
30      Basic chemicals & chemical
        products                        140.02      10.1       8.9    10.0    7.3    4.8    3.7    8.7    14.4
38      Others industries                25.59      25.3       8.3   –16.0   11.7    8.9    0.1    7.2    17.3
32      Non–metallic mineral
        products                         43.97      15.0       8.0    24.4   –1.2    1.2    5.1    3.6     1.5
33      Basic metal & alloys             74.53       8.4       8.0     5.0    1.8    4.3    9.2    9.2     5.5
Industry groups with slow growth: 3 to 5 per cent
34    Metal products & parts
      (excl. Machinery)                  28.10       8.8       5.3    –1.2   15.0 –10.0     6.4    2.6     5.8
24    Man–made fibres, wool &
      silk yarn                          22.58      14.6       4.5    11.9    5.8    4.4    3.0    6.8     3.6
31    Rubber, plastic, coal &
      refined petroleum products         57.28       5.0       4.1    –1.1   11.8   11.1    5.5    4.5     2.4
20–21 Food Products                      90.83       5.1       3.2     4.2   10.1   –1.6   11.0   –0.5    –0.9
25    Jute & mesta                        5.90      12.3       2.6    –0.9    0.8   –5.9    8.3   –4.2     3.7
Industry groups with negative growth: Flat and up to –7 per cent
23      Cotton textiles                  55.18       8.3       0.5     6.7    2.9   –2.2   –2.7   –3.1     7.4
29      Leather, leather & fur
        products                         11.39       8.4      –0.1    13.8   10.7   5.3 –3.3      –3.9     6.9
27      Wood, products & furniture       27.01      15.6      –6.6   –16.2    2.9 –11.0 –17.6      6.8    –9.1
2–3     Overall Manufacturing           793.58       9.4       8.3     7.1    5.3   2.9   6.0      7.3     9.0
Distribution of Rates of Growth
        Median Value                                 9.1       5.3     5.7    4.3    3.1    5.5    6.8     5.8
        25 percentile value                          5.0       3.2    –0.9    1.8   –1.6    1.6   –0.5     3.6
        75 percentile value                         10.5      10.1    10.0   10.1    5.3    9.2    8.7    10.9
        Nos. of industry groups
        > mean                                      11         8       6      8      9      8      6       6
        Nos. industry groups
        < 1/3 rd of mean                             0         3       6      4      5      5      5       4
Note:   * Averages for 3 years—1995–96, 1996–97 and 1997–98.
        ¦ Average growth rate for the 3-year period—2002-03 to 2004-05, and ranked in descending order of

        3–year average growth, that is, column (5).
Source: As in Table 5.1 above.



148
       tobacco etc., #35-36 machinery, #37 transport equipment and           I C R A B U L L E T I N

       #26 textile products including apparel.
     • Categories with growth between 8 and 10 per cent include #30
                                                                             Money
       chemicals, #38 other manufactures, #32 non-metallic mineral                  &
       products (cement and ceramics) and #33 basic metal & alloys.                  Finance
     • Categories with 3 to 5 per cent growth include metal products,
                                                                                   JAN.–JUNE.05
       manmade fibres & yarn, rubber, plastic & refined petroleum
       products, food products (sugar, edible oil etc) and jute.
     • Cotton textiles (mill sector), leather and wood come in last
       with flat to negative growth.
         It is interesting to note the wide divergence in manufacturing,             Inflation had
between those that are growing at 8 per cent and over (eight categories)
and those that are trudging along with 5 per cent and less growth           become a hot button
(seven groups). The fast growing first group accounts for 62 per cent of
the base weight in the manufacturing index, while the second slow
                                                                              policy issue in the
moving group accounts for the balance of 38 per cent. It is also of
                                                                            second half of 2004.
interest to note that some of the slow moving group—manmade fibres
& yarn, cotton textiles, metal products and leather—had registered                     However, a
fairly rapid growth in the first prolonged phase of expansion between
1994-95 and 1997-98.                                                              combination of

        Prices & Inflation                                                   policy initiatives at
          Wholesale or Producer Prices (WPI)
          Inflation had become a hot button policy issue in the second              the fiscal and
half of 2004. However, a combination of policy initiatives at the fiscal
and monetary levels appears to have altered the direction of inflation-          monetary levels
ary expectations and despite rapid economic growth the rate of infla-
                                                                                 appears to have
tion was brought down to acceptable levels. From peak levels of over
8 per cent in August, and close to 8 per cent through September and         altered the direction
October 2004, to under 6 per cent by the beginning of 2005. At the end
of March 2005 the WPI rate of inflation was down to 5.1 per cent, well              of inflationary
within the Reserve Bank of India’s projection of “6.5 per cent with a
downward bias” (made towards the end of 2004). As discussed below,                  expectations.
were the increase in petroleum refined products that is warranted by the
increase in world crude oil prices passed on to the customer, the actual
rate of inflation at the end of March 2005 would have been just shy of
the RBI estimate.
          For the first few months of 2005-06, the rate of WPI inflation
has been in the region of 5.1–5.6 per cent, with recent weeks exhibiting
a weakening trend, culminating in WPI inflation of 4.2 per cent for the
week ended June 4, 2005. This was expected as the year progressed and
the reported inflation rate was measured against the elevated base of
the summer of 2004. However, it ought not to be forgotten that retail
prices of refined petroleum products have not been revised upward to
reflect the increase in international crude oil prices and the additional
cost burden to the refiners and marketing companies. A 10 per cent
                                                                                            149
 I C R A B U L L E T I N
                                                            TABLE 6.1
  Money                                         Components of Wholesale Price Inflation
                                                        Base 1993–94=100
         &                                                                                        Unit: per cent

          Finance           Calendar          All    Foodgrain   Other          Com-       Manu-      Core(x)¦
                            Year             Com-     (cereals  Primary        mercial    factured
       JAN.–JUNE.05                         modities & pulses) Food items      Energy      Goods
                            Weight          100%         5.01%      10.39%     14.23%     63.75%       70.37%
                            Average of weeks for the completed calendar year up to 2004
                            1998               5.8       4.9        14.8        6.0         3.9           4.4
                            1999               3.5      18.4        –2.0        5.5         3.4           2.9
It is worth taking          2000               6.3       0.9         5.7       25.6         2.7           2.4
                            2001               5.2      –1.5         4.6       14.7         2.9           3.2
note of the fact that       2002               2.5       0.2         3.9        4.5         1.7           1.8
                            2003               5.3       2.1         1.1        6.7         5.0           5.9
the inflation rate for      2004               6.5      –3.8        –0.7        9.0         6.6           2.6
                            From the last week of March 2005 onwards—year–on–year basis
manufactured goods
                            26–Mar–05          5.1       2.2         3.3       10.5         4.6           4.1
has been inching up         2–Apr–05           5.7       2.6         2.3       11.1         5.5           4.7
                            9–Apr–05           5.9       3.6         4.2       11.1         5.4           4.6
in recent weeks—            16–Apr–05*         5.6       4.2         3.0       11.2         5.1           4.4
                            23–Apr–05*         5.9       4.0         3.6       11.4         5.4           1.7
from 4.5% at the            30–Apr–05*         5.7       3.8         2.2       10.9         5.4           4.7
                            7–May–05*          5.6       3.6         2.2       10.9         5.4           4.6
end of March 2004           14–May–05*         5.6       3.3         2.9       11.1         5.2           4.4
                            21–May–05*         5.4       3.1         2.2       10.9         5.2           4.3
to 5.4% in the last         28–May–06*         5.2       3.5         2.7       10.9         5.4           3.9
                            4–Jun–05*          4.2       3.5         0.8       11.4         3.8           2.6
week of May—even            Notes: * Figures for weeks marked with asterisk are on the basis of provisional
                                    estimates. All previous periods are based on revised estimates.
                                    ¦ Core (by exclusion) rates of inflation, which excludes primary food
as the overall rate of
                                    items and energy from the index—the standard procedure.
                            Source: Office of the Economic Adviser, Ministry of Commerce & Industry,
inflation has been                  Government of India, up to press release of June 17, 2005.

coming down.
                           across-the-board increase in the price of refined petroleum products
                           would probably just about recompense the oil marketing and refining
                           companies for their higher costs, but leave little by way of profit. If
                           such an increase were to be given effect to, it would raise the WPI
                           inflation rate by 1.3 percentage points, from the current level of 4.2 per
                           cent to 5.5 per cent.
                                    From Table 6.1, it is worth taking note of the fact that the
                           inflation rate for manufactured goods has been inching up in recent
                           weeks—from 4.5 per cent at the end of March 2004 to 5.4 per cent in
                           the last week of May—even as the overall rate of inflation has been
                           coming down. However, on the 53rd week of the last large price
                           increase in steel products, manufactured goods inflation dropped off to
150                        3.8 per cent. The base year effect of iron & steel alone accounted for
                                                                                          I C R A B U L L E T I N
                                  TABLE 6.2
                   Sources of Wholesale Price Inflation in 2004
                                                                        Unit: per cent
                                                                                          Money
                            Weight 27 Mar 26 Jun 2 Oct 25 Dec 26 Mar 4 Jun
                                                                                                 &
                                    2004   2004 2004    2004   2005 2005*                         Finance
Overall WPI inflation       100.00    4.6     6.1     7.1      6.6      5.1      4.2            JAN.–JUNE.05
Foodgrain                     5.01   –0.5    –2.0     1.5      2.2      2.2      2.9
Other primary food           10.39    1.2    –1.2     1.0      3.6      3.3     –0.2
Raw cotton                    1.36   12.3     3.8    –5.4    –21.5    –23.8    –23.1
Oilseeds                      2.67   –0.5    –1.6     8.8     –1.2     –6.5     –5.7
Commercial Energy            14.23    2.5    11.8    10.8     11.5     10.5     11.4
Petroleum products            6.99    0.2    15.8    16.9     18.3     16.0     14.0
                                                                                         Not only has the rate
Manufactured Goods           63.75    6.7     6.6     7.0      6.0      4.6      3.8
Dairy products                0.69   11.6     9.1     2.9      3.1     –3.0      0.2
                                                                                                 of inflation in
Grain mill products           1.03   11.8     2.1    –2.6     –1.5     –1.3      1.3
Sugar, khandsari & gur        3.93   14.5    18.8    20.0     19.7     17.5     10.8
                                                                                         manufactured goods
Edible oil                    2.76    7.1    –0.3    –4.5     –3.3     –8.4     –7.2
Tea & coffee processing       2.76   20.3    –0.4     0.9      2.1      2.9      1.5
                                                                                          been moving up in
Cotton textiles               4.22   15.3    10.9     6.8     –8.1    –12.7     –9.2
Manmade Textiles              4.72   –0.3     6.4     5.6      3.3      0.8     –0.9
                                                                                            recent weeks, but
Rubber & plastic products     2.39    2.2     0.1    –0.6     –0.9     –1.3      0.5
Chemical materials &
                                                                                           the direction from
products                     11.93    0.1     2.0     3.2      3.9      3.9      4.5
Non–metallic minerals         2.52    3.0     6.2     7.9      4.9     11.4      8.0       where it is coming
Iron and steel                3.64   34.2    43.8    26.5     25.9     21.3      9.6
Non–ferrous metals            1.47    4.2     4.1     6.2      6.7      7.8      8.5       has also changed.
Machinery & machine
tools                         8.36    3.0     2.6     6.3      7.8      7.1      7.7      Manufactured food
All other manufactured
goods                        15.14    5.2     2.4     7.1      6.7      4.9      4.0        products account
Contribution to overall WPI inflation—in percentage points
Primary Food articles    15.40        0.11   –0.23    0.27     0.48     0.46    0.11     less for increases in
Oilseeds & Edible Oil     5.42        0.18   –0.05    0.11    –0.12    –0.40   –0.35
Cotton & Cotton Textiles 5.57         0.81    0.51    0.22    –0.64    –0.86   –0.70        inflation, than do
Dairy products, grain
mill, sugar and tea &                                                                               machinery,
coffee items              6.62        0.97    0.82    0.79     0.80     0.68    0.45
Chemicals, manmade                                                                              chemicals and
textiles, rubber &
plastics products        19.04        0.05    0.54    0.63     0.60     0.48    0.51
                                                                                                        cement.
Non–metallic minerals     2.52        0.08    0.16    0.20     0.12     0.29    0.20
Iron & steel              3.64        1.24    1.59    0.96     0.94     0.78    0.35
Non–ferrous metals        1.47        0.06    0.06    0.09     0.10     0.11    0.12
Machinery & machine
tools                     8.36        0.25    0.22    0.53     0.66     0.59    0.64
All other manufactured
goods                    15.14        0.79    0.36    1.08     1.04     0.75    0.60
Notes: * Provisional estimates. All previous periods are based on revised estimates.
Source: as in Table 6.1.

                                                                                                         151
 I C R A B U L L E T I N   0.7 percentage points in the overall inflation rate and over 1 percentage
                           point in inflation in manufactured goods. However, if the base year
  Money                    effect of iron & steel and other ferrous items were set aside, a percepti-
         &                 ble upward movement in the prices of manufactured goods is still
          Finance          visible.
       JAN.–JUNE.05
                                    Composition of Inflation
                                    Much of inflation is contributed to by a relatively small set of
                           products and this is shown at Table 6.2. Not only has the rate of
                           inflation in manufactured goods been moving up in recent weeks, but
                           the direction from where it is coming has also changed. Manufactured
The recent softness
                           food products (e.g. sugar) account less for increases in inflation, than
in international steel     do machinery, chemicals and cement (non-metallic minerals). Iron &
                           steel since June 4, 2005 has yielded pride of place to chemicals and
prices, which has          machinery items. The recent softness in international steel prices, which
                           has been transmitted to domestic markets via price reduction in domes-
been transmitted to        tic markets, may see further paring down of the contribution of steel to
                           inflation.
domestic markets
                                    Consumer Price Inflation
via price reduction,                Consumer price inflation measured both by the CPI-UNME
                           (urban non-manual employee) and CPI-IW (industrial worker) had
may see further            stabilised at around 4 per cent in the first quarter of calendar 2005. In
                           April however while the CPI-UNME stayed at 4.2 per cent, the CPI-IW
paring down of the
                                                                              CHART 4
contribution of steel                                           Consumer and Wholesale Rates of Inflation
                                                                Monthly Basis—January 2001 to May 2005
to inflation.
                            10%                                            CPI-UNME                                         CPI-IW                               WPI

                                                                                                                                                                         Spike and
                                                                                                                                                                           easing
                             8%              WPI Inflation                                                    Falling inflation
                                             falls sharply


                             6%



                             4%



                                                                                              First                                                             Second
                             2%
                                                                                             rising                                                             rising
                                                                                             phase                                                              phase

                             0%
                                                             Oct-01




                                                                                                 Oct-02




                                                                                                                                     Oct-03




                                                                                                                                                                         Oct-04
                                  Jan-01
                                           Apr-01
                                                    Jul-01


                                                                      Jan-02
                                                                               Apr-02
                                                                                        Jul-02


                                                                                                          Jan-03
                                                                                                                   Apr-03
                                                                                                                            Jul-03


                                                                                                                                              Jan-04
                                                                                                                                                       Apr-04
                                                                                                                                                                Jul-04


                                                                                                                                                                                  Jan-05
                                                                                                                                                                                           Apr-05
                                                                                                                                                                                                    Jul-05




152
recorded an increase in inflation to 5.0 per cent. The rates of inflation             I C R A B U L L E T I N

in consumer prices and WPI are now converging at around the 5 per
cent level. If retail petroleum fuel prices are revised upward, WPI
                                                                                       Money
inflation rate would once again move ahead, since the weight of                              &
petroleum products in the consumer price indices is much smaller than                         Finance
that in the WPI.
                                                                                             JAN.–JUNE.05

         Credit & Investment
         Credit flow from the banking system to the commercial sector
increased rapidly and at a growing rate through 2002-03 and 2003-04.                   In 2004-05, for the
Non-food credit rose by over Rs. 125,000 crore in 2003-04 on top of
the increase of over Rs. 100,000 crore in the previous year. In 2004-05,               third year running,
for the third year running, non-food credit expanded at a rising rate,
and the increase during the course of the year amounted to nearly Rs.                      non-food credit
214,00 crore.
         In the first two months of 2005-06 up to May 27, 2005, non-
                                                                                      expanded at a rising
food credit has gone up by a whopping Rs. 47,000 crore [Table 7.1].
                                                                                                rate, and the
The accelerating trends can readily be seen from the year-on-year rates
of increase. In the first quarter of 2005-06 (up to May 28) the increase              increase during the
in non-food credit has been nearly 30 per cent, compared to 21 per cent
in the previous year and 16 per cent in the year prior to that [Table                   course of the year
7.2]. Growth in investments (commercial paper, bonds, debentures and
shares) has however been negative over the past three years and as a                  amounted to nearly
result the expansion of total accommodation to the commercial sector
has been at a rate somewhat smaller than that of non-food credit.                       Rs. 214,00 crore.

                                                TABLE 7.1
                  Changes in Major Items of Bank Accommodation to the Commercial Sector§
                                                                                                 Unit: Rs crore

                                   Non–food Credit                             Food Credit
 FY                02–03          03–04      04–05      05–06    02–03       03–04      04–05      05–06
 Q–1 (June)        19,308          3,091     34,926    47,354*     7,030       586       7,100      4,806*
 Q–2 (Sept)¦      46,834       41,034        92,443                 –752    –12,107      2,677
 Q–3 (Dec)        64,765       64,484       145,723               –2,031    –13,127      7,818
 Q–4 (Mar)       104,204      125,088       213,464               –4,499    –13,518      5,159

                                    Investments   (                        Total Accommodation
 FY                02–03          03–04      04–05      05–06    02–03       03–04      04–05      05–06
 Q–1 (June)        –5,724         –4,705      –2,440   –1,397*     6,111    –1,385      32,551    45,957*
 Q–2 (Sept)¦       –5,675         –1,838      –3,920              40,825    39,484      88,218
 Q–3 (Dec)         –2,719         –3,445      –4,531              61,472    61,363     140,887
 Q–4 (Mar)         –1,802         –3,687      –8,537             101,791   121,725     208,534

 Note: As in Table 7.2 below.
 Source: As in Table 7.2 below.




                                                                                                      153
I C R A B U L L E T I N
                                                   TABLE 7.2
 Money            Year–on–year changes in Major Items of Credit Flow to the Commercial Sector§
                                                                                                        Unit: per cent

         &                        Non–food Credit                                     Food Credit
FY
          Finance
                02–03             03–04      04–05     05–06           02–03        03–04      04–05      05–06
      JA                 05
Q–1 (Jun) N . – J U N E .16.8      16.2       22.2      29.9*            21.2       –17.1      –14.8         5.1
Q–2 (Sept)¦             17.5       15.8       24.5                        6.0       –29.8        3.4
Q–3 (Dec)               18.4       16.7       27.2                       –0.6       –30.0       20.4
Q–4 (Mar)               19.5       18.4       26.5                       –8.3       –27.3       14.3

                                   Investments   (                               Total Accommodation
FY                     02–03      03–04      04–05      05–06          02–03        03–04      04–05     05–06
Q–1   (Jun)             –2.0        0.5       –1.7        5.4*           14.3        14.1       19.4      26.7*
Q–2   (Sept)¦           –4.4        3.8       –6.5                       14.3        14.3       21.0
Q–3   (Dec)             –0.7       –1.6       –5.3                       15.5        14.4       23.7
Q–4   (Mar)             –0.6       –4.0       –6.1                       16.7        15.8       23.3

Note:   § Data for last reporting Friday of the week of alternate fortnights and the data used for estimating

        changes in the quarter is the last Friday of the month.
        * Up to the reporting Friday for the fortnight ended May 28, 005.
        ¦ For previous years since in the second quarter, the fortnight straddles the end of September and the first

        week of October. Hence the aggregates as at the end of the first week of October has been used, that is
        1st, 3rd, 4th, 5th, and 6th October of 2004, 2003, 2002, 2001and 2000 respectively.
        ( Figures are with one fortnight lag in comparison with the other aggregates.

Source: Reserve Bank of India, Weekly Statistical Supplement various issues up to June 18, 2005.



                                          Deposit and Credit Growth
                                          Deposits and non-food credit have grown more or less at the
                                same trend rate of 17 per cent over the past decade. However, since the
                                starting magnitude of deposits was obviously larger than that of non-
                                food credit, the increase in deposits exceeded the increase in non-food
                                credit. This can be expressed as the incremental non-food credit to
                                deposit ratio, that is, the increase in non-food credit in a given time
                                period as a ratio of the increase in deposit over the same time period.
                                          At Chart 5, we have presented the closing stock of deposits,
                                non-food credit at the end of the financial year for the past 13 years,
                                expressed as a proportion of GDP (at current market prices) on the left
                                hand scale (LHS) and the incremental non-food credit to deposit ratio
                                on the right hand scale (RHS). It might be observed that for all of these
                                years, with the exception of 2004-05 and 2000-01, the incremental non-
                                food credit to deposit ratio has been significantly lower than unity (that
                                is, 100 per cent). In fact the average value of this ratio was 62 per cent
                                for these 13 years. This has of course meant that government (Centre
                                and States) could find ready sources of bank finance for their fiscal
                                deficits. The year 2000-01 was preceded by a succession of poor years
                                as far as non-food credit was concerned and the spike in the incremen-
                                tal ratio did not cause much ripples, and interest rates were at that time
                                very much higher than they have been subsequently.
154                                       The year 2004-05 has however been preceded by higher levels
                                                                           CHART 5                                                                                                                                          I C R A B U L L E T I N
                                              Movement of Deposits, Non-Food Credit and Incremental Credit to Deposit
                                                                                                                                                                                                                            Money
                                              60%
                                                                                        Incremental Credit to
                                                                                                                                                                           140%
                                                                                                                                                                                                                                   &
                                                                                         Deposit Ratio (RHS)                                                                                                                        Finance
 Deposits & Non-Food Credit to GDP—per cent




                                                                                                                                                                           120%




                                                                                                                                                                                  Incremental Credit to Deposit—per cent
                                              50%                                                                                                                                                                                 JAN.–JUNE.05
                                                                                                                                                                           100%
                                                                                        Deposits (LHS)
                                              40%
                                                                                                                                                                           80%


                                                                                                                                                                           60%                                                The year 2004-05
                                              30%

                                                                                                                                                                           40%                                               has however been
                                              20%
                                                                                            Non Food Credit (LHS)                                                          20%                                              preceded by higher
                                              10%                                                                                                                          0%                                              levels of credit flow,
                                                    Mar-93

                                                             Mar-94

                                                                      Mar-95

                                                                               Mar-96

                                                                                          Mar-97

                                                                                                   Mar-98

                                                                                                            Mar-99

                                                                                                                     Mar-00

                                                                                                                              Mar-01

                                                                                                                                       Mar-02

                                                                                                                                                Mar-03

                                                                                                                                                         Mar-04

                                                                                                                                                                  Mar-05
                                                                                                                                                                                                                               tighter monetary

                                                                                                                                                                                                                            conditions at home
of credit flow, tighter monetary conditions at home and abroad and
what appears to be a slight easing in the pace of deposit growth,                                                                                                                                                               and abroad and
relative to both economic expansion and non-food credit growth. In
                                                                                                                                                                                                                           what appears to be a
2004-05, nominal economic growth was 12.6 per cent, deposit growth
13.6 per cent and non-food credit growth much higher at 26.5 per cent.                                                                                                                                                      slight easing in the
In 2003-04, nominal economic growth was 12.0 per cent, deposit
growth 17.4 per cent and non-food credit growth was again higher at                                                                                                                                                              pace of deposit
18.4 per cent. In 2002-03, nominal economic growth was 7.9 per cent;
deposits grew by 10.8 per cent, while non-food credit growth was                                                                                                                                                             growth, relative to
higher at 19.5 per cent.
          The trend continues in the current fiscal. In 2005-06 till date                                                                                                                                                        both economic
(with respect to end-March 2005), deposits have grown by Rs. 58,411
crore or 3.4 per cent, while non-food credit has expanded by Rs 47,354                                                                                                                                                     expansion and non-
crore or by 4.7 per cent, and total bank credit has risen by Rs. 51,960
crore or by 4.8 per cent. In the comparable period in the previous fiscal
                                                                                                                                                                                                                            food credit growth.
the increase in deposits (with respect to end March) was Rs. 44,971
crore (3.1 per cent), while that of bank credit had been Rs. 23,212 crore
(2.8 per cent) and non-food credit had been Rs. 15,661 crore (1.9 per
cent).
          On year-to-date basis for calendar year 2005 up to 27 May
2005, aggregate deposits in the banking system increased by
Rs. 112,901 crore (6.8 per cent), while bank credit expanded by
Rs. 117,043 crore (7.0 per cent) and non-food credit by Rs. 115,095
crore (6.9 per cent).
          In calendar year 2004, on year-to-date basis up to 28 May
2004, aggregate deposits had risen by Rs. 128,594 crore (9.1 per cent),                                                                                                                                                                    155
 I C R A B U L L E T I N   while bank credit rose by Rs. 80,639 crore (6.0 per cent) and non-food
                           credit by Rs. 73,479 (5.5 per cent).
  Money                             Inflows into the Liquidity Adjustment Facility (LAF) have
          &                fallen from the level of about Rs. 20,000 crore till the end of the first
          Finance          week of June 2005 to Rs 9,000 crore on June 17, 2005. The RBI still
                           holds about Rs. 70,000 crore in the Market Stabilisation Scheme and
       JAN.–JUNE.05
                           has the option of not re-issuing the underlying short-term securities on
                           maturity and some re-adjustment of liquidity positions are possible
                           fairly readily. Banks have selectively raised their lending rates for
                           home loans and some other consumer loans and price pressures have
                           necessarily to follow the tightness in the funds market—deriving
Banks have
                           essentially from the strong volumes in the loan market, where both
selectively raised         marginal and cumulative growth have outpaced the growth of bank
                           deposits.
their lending rates
                                   External Merchandise Trade
for home loans and                This section has four tables that provide information on (a) the
                           composition and (b) the direction of India’s external merchandise trade.
some other
                                    Imports
consumer loans and                  In 2003-04, while total imports (in rupee terms) had risen by 21
                           per cent, gold imports had soared by 60 per cent. The value of crude
price pressures have       petroleum imports rose by only 11 per cent and non-oil, non-bullion
                           imports were up by 22 per cent. Import of capital goods and several
necessarily to follow
                           manufacturing intermediates rose strongly—from chemicals to metals
the tightness in the       [see Table 8.1].
                                    In 2004-05, overall imports rose much faster by 34 per cent.
funds market—              Imports of crude petroleum increased by 42 per cent, that of gold by
                           54 per cent and all other commodities by 28 per cent. Of the total
deriving essentially       increase in the value of imports of Rs. 122,000 crore, crude petroleum
                           accounted for 32 per cent and gold another 13 per cent; the two thus
from the strong            aggregated 45 per cent of the total increase in imports. Imports of
                           machinery increased by a more modest 14 per cent, while that of
volumes in the loan        manufactured intermediate and consumer goods grew by 32 per cent
                           and accounted for 30 per cent of the increase in the value of imports.
market.
                                    It may be interesting to note that the value of gold imports,
                           which for the most part is purchased by householders as an outlet for
                           their savings, in 2005-06 amounted to as much as 1.5 per cent of GDP,
                           up from little over 1 per cent of GDP in the previous year.

                                    Exports
                                    In 2003-04, aggregate exports in rupee terms increased by 15
                           per cent and that of manufactured goods rose by 16 per cent. Amongst
                           manufactures the fastest expansion were in transport equipment,
                           plastics & linoleum products, dyes & intermediates, iron & steel,
                           manufactures of metals and pharmaceuticals. Export of electronic
156                        goods rose by 37 per cent and that of petroleum refined products by
                                                                                          I C R A B U L L E T I N
                                                   TABLE 8.1
                           Summary of Changes in the rupee value of Merchandise Imports
                               Financial years of 2002–03, 2003–04 and 2004–05
                                                                                          Money
                                                                                                 &  Unit: Rs. crore

                                          2002–03               2003–04                           Finance
                                                                                             2004–05
                                                     Amount       Change from       Amount      Change J from . 0 5
                                                                                                JAN.– UNE
                                                                   2002–03                       2003–04
                                                                  Amount    %                   Amount      %
 Food Products                            14,279       17,027      2,748    19       17,111          84      1
                 of which: Edible oil      8,780       11,683      2,904    33       10,756        –928     –8
 Other agricultural products               3,202        3,625        425    13        3,192         433    –12
 Ores & minerals                          11,924       13,424      1,497    13       24,366      10,942     82
 Manufactured intermed-iates &
 consumer goods                           90,992     114,462      23,269    26      150,980 36,728          32
                    Electronic goods      27,099      34,492       7,392    27       43,759   9,267         27
                         Iron & steel      4,267       6,492       2,225    52       10,914   4,422         68
                  Organic chemicals        9,125      12,689       3,563    39       16,986   4,297         34
        Fertilisers (manu-factured)        1,731       2,301         571    33        4,052   1,751         76
  Artificial resins, plastic material      3,784       4,972       1,118    31        6,272   1,300         26
                 Non ferrous metals        3,226       4,360       1,134    35        5,630   1,270         29
                Inorganic chemicals        5,516       5,838         322     6        6,985   1,147         20
   Chemical material & products            2,187       2,902         715    33        3,541     639         22
           Wood & wood products            1,946       3,269       1,323    68        3,803     534         16
    Manmade filament/spun yarn             1,922       1,912         –10    –1        2,116     204         11
              “Other” commodities         11,268      11,944         676     6       19,562   7,618         64
 Capital goods                            41,358      51,987      10,629    26       60,335   8,348         16
           All kinds of machinery*        24,291      29,739       5,448    22       39,844 10,110          14
           Professional instruments        5,494       5,653        1,59     3        6,681   1,028         18
               Transport equipment         9,183      14,833       5,650    62       10,886 –3,947         –27
 Gold                                     18,608      29,946      11,338    61       46,097 16,151          54
 Diamonds & gem stones                    29,341      32,757       3,416    12       42,341   9,584         29
 Crude petroleum and products             85,367      94,520       9,153    11      134,094 39,574          42
 Total                                   297,206     359,108      61,902    21      481,064 121,956         34
 Memo
 Non–oil, non–bullion imports            191,086     359,108      61,902    21      481,064 121,956          34
 Non–oil, non–bullion, non–
 diamond imports                         161,745      233,082     41,996    22      298,335      65,253      28
 Note: * Including all project goods.
 Source: Monthly Foreign Trade Statistics of India (principal commodities & countries), Imports and Exports &
         Re–exports, Directorate General of Commercial Intelligence & Statistics, Government of India, March
         2005.



32 per cent. Important agro-products, namely marine items, rice and
tea/coffee all showed negative growth [Table 8.2].
         In 2004-05, overall exports rose by 21 per cent and that of
manufactured goods by 22 per cent. The fastest growing manufactured
items (in terms of value) were iron & steel, plastic & linoleum prod-
ucts, transport equipment and chemicals. The value of refined petro-
leum products rose by 86 per cent and that of gems & jewellery                                            157
I C R A B U L L E T I N
                                                   TABLE 8.2
Money                      Summary of Changes in the rupee value of Merchandise Exports
                               Financial years of 2002–03, 2003–04 and 2004–05
        &                                                                                        Unit: Rs. Crore

         Finance
Categories                           2002–03                  2003–04                     2004–05

      JAN.–JUNE.05
                                                    Amount          Change         Amount         Change
                                                                 Amount      %                Amount       %
Agricultural Products                 31,413         34,619        3,206     10     35,963      1,.344      4
Ores & minerals                        9,660         10,885        1,225     13     18,848       7,963     73
Leather & manufactures                 8,946          9,939          993     11     10,286         346      4
Textiles and products                 56,220         58,779        2,559      5     56,677     –2,102      –4
Chemicals and products                33,942         40,777        6,835     20     50,482       9,706     24
Metals and products                   20,309         25,726        5,417     27     42,255     16,530      64
Engineering goods                     17,141         22,985        5,844     34     29,670       6,684     29
Other manufactured goods*             76,244         89,660       13,416     18    118,055     28,394      32
Total                                255,137        293,367       38,230     15    356,069     62,702      21
Agricultural & mineral produce
Oil meals                               1,487         3,348        1,861     125     3,101        –248     –7
Marine products                         6,928         6,106         –822     –12     5,695        –410     –7
Meat & meat preparations                1,337         1,714          337      24     1,734          20      1
Rice—basmati & non–basmati              5,831         4,168       –1,663     –29     6,642       2,474     59
Sugar                                   1,770         1,217         –553     –31       144      –1,073    –88
Tea and coffee                          1,856         1,840          –16      –1     2,792          69      3
Wheat                                   1,760         2,391          631      36     1,448        –943    –39
Iron ore                                4,200         5,173          973      23    11,815       6,642    128
Manufactured Goods
Apparel—cotton                         21,510        22,009          499      2     20,521     –1,488      –7
Drugs & pharmaceuticals                12,826        15,213        2,387     22     16,681      1,468      10
Cotton yarn, fabrics & made ups        16,218        15,600         –618     –4     14,309     –1,211      –8
Iron and Steel                          8,982        11,386        2,404     27     22,476     11,091      97
Machinery and instruments               9,720        12,757        3,037     31     15,695      2,937      23
Manufacture of metals                   8,942        11,150        2,208     25     14,734      3,584      32
Plastic & linoleum products             5,912         8,054        2,142     36     13,243      5,189      64
Transport equipment                     6,455         8,988        2,533     39     12,714      3,726      42
Manmade fibres–yarn & apparel           6,639         8,093        1,454     22      8,353        260       3
Inorganic/organic/agro–chemicals        4,930         5,293          363      7      6,765      1,471      28
Dyes & intermediates                    3,440         4,710        1,270     37      5,101        390       8
Total of Manufactured Goods           214,064       247,863       33,799     16    301,258     53,395      22
Select items categorised under “other manufactured goods” at the top of this table and marked with *
Gems & jewellery                       43,701        48,586        4,885      11    61,581     12,995      27
“Other” commodities                     5,770         8,640        2,870      50     9,388        748       9
Petroleum refinery products            12,469        16,397        3,928      32    30,518     14,121      86
Electronic goods                        6,063         8,294        2,231      37     8,106       –188      –2
Handicrafts                             3,801         2,296       –1,505     –40     1,543       –753     –33
Source: As in Table 8.1.




158
by 27 per cent. The export value of ores & minerals shot up by 73 per                  I C R A B U L L E T I N

cent, propelled by 128 per cent increase in the export value of iron ore.
In agro-products, while rice exports made a recovery with 50 per cent
                                                                                       Money
increase in the value of exports, that of marine products and tea/coffee                      &
failed to show recovery.                                                                       Finance
         The export value of cotton textiles and products—yarn, made-
                                                                                             JAN.–JUNE.05
ups and apparel—showed contraction in 2004-05, after registering flat
growth in 2003-04. It is however possible that volume growth may
have been there, but values may have stagnated deriving from a decline
in unit value realisation attendant on a keener combination of lower
cotton prices and tougher international competition.
                                                                                       In 2004-05, overall
                                  TABLE 8.3                                                 exports rose by
                 Export, Import and Merchandise Trade Balances
                            By Geographic Regions
                                                                    Unit: Rs. Crore
                                                                                           21% and that of

                              Exports           Imports         Trade Balance         manufactured goods
                        2003-04 2004-05 2003-04 2004-05 2003-04 2004-05
                                                                                      by 22%. The fastest
 China                   13,579    20,607   18,625    30,414 –5,046 –9,807
 Hong Kong               14,989    16,406    6,859     7,686   8,130   8,720
                                                                                                     growing
 Sub-total China + HK    28,568    37,013   25,484    38,100   3,084 –1,087
 South Korea              3,515     4,326   13,001    14,352 –9,486 –10,026
                                                                                      manufactured items
 Japan                    7,854     8,886   12,258    13,506 –4,404   -4,620
 Taiwan                   2,447     2,641    3,533     4,745 –1,086 –2,104
                                                                                        (in terms of value)
 East Asia               43,136    53,428   54,290    70,704 –11,154 –17,276
 USA                     52,799    59,604   23,136    28,269 29,663 31,335
                                                                                        were iron & steel,
 Canada                   3,507     3,667    3,336     3,318     171     349
 Sub-total North
 America                 57,521    64,854   26,812    31,943    30,710    32,911
                                                                                        plastic & linoleum
 Euro-zone               47,812    56,766   47,371    56,926       442      –160
 Sub-total Western
                                                                                       products, transport
 Europe                  69,034    80,249   83,099 104,649 –14,065 –24,400
 South Asia              19,535    19,839    3,258   4,264 16,277 15,575                    equipment and
 South East Asia         26,725    35,915   34,156 39,568 –7,432 –3,654
 West Asia               45,974    60,092   20,850 39,530 25,123 20,562                           chemicals.
 South & Central
 America                  3,375     6,993    4,804     7,919    –1,430    –926
 Africa                  16,088    20,865   13,834    15,590     2,254   5,275
 Oceania                  3,080     3,485   12,537    16,482    –9,457 –12,997
 Eastern Europe & FSU     6,065     6,159    6,985     9,790      –920 –3,631
 Note:   The trade data does not include crude petroleum and refined products for
         the most part.
 Source: As in Table 8.1




                                                                                                      159
 I C R A B U L L E T I N
                                                               TABLE 8.4
  Money                                   Export, Import and Merchandise Trade Balances
                                Top 40 Countries by total bi-lateral trade (exports + imports) in 2004-05
         &                                                                                      Unit: Rs. Crore

          Finance                                          Exports           Imports        Trade Balance

       JAN.–JUNE.05
                                                       2003-04 2004-05 2003-04 2004-05 2003-04 2004-05

                            1   U.S.A.                  52,799 59,604 23,136       28,269    29,663 31,335
                            2   United Arab Emirates    23,553 31,893  9,465       20,587    14,088 11,306
                            3   China, PR               13,579 20,607 18,625       30,414    –5,046 –9,807
                            4   Belgium                  8,298 10,973 18,270       20,517    –9,972 –9,544
                            5   U.K.                    13,892 15,927 14,862       15,418      –970     509
India has had a
                            6   Germany                 11,693 11,880 13,411       17,381    –1,718 –5,501
                            7   Singapore                9,737 17,054  9,583       11,603       154   5,452
large and increasing
                            8   Switzerland              2,067  2,345 15,223       26,141   –13,155 –23,796
                            9   Hong Kong SAR           14,989 16,406  6,859        7,686     8,130   8,720
trade deficit with
                           10   Japan                    7,854  8,886 12,258       13,506    –4,404 –4,620
                           11   Australia                2,685  3,087 12,174       16,001    –9,489 –12,914
Western Europe,
                           12   South Korea              3,515  4,326 13,001       14,352    –9,486 –10,026
                           13   Indonesia                5,180  5,799  9,751       11,272    –4,571 –5,473
and a very large
                           14   Italy                    7,947  9,709  4,922        5,943     3,025   3,766
                           15   Malaysia                 4,102  4,477  9,404        9,979    –5,302 –5,502
positive trade
                           16   South Africa             2,478  4,307  8,727        9,648    –6,249 –5,341
                           17   France                   5,886  7,230  5,010        6,204       876   1,026
balance with North
                           18   Saudi Arabia             5,162  6,155  3,390        5,665     1,772     489
                           19   Israel                   3,327  4,448  3,078        4,370       249      78
America and the US
                           20   Russia                   3,280  2,684  4,410        5,686    –1,130 –3,001
                           21   Netherlands              5,924  6,821  1,314        1,528     4,609   5,293
in particular, as also
                           22   Sri Lanka                6,062  6,083    895        1,637     5,167   4,446
                           23   Thailand                 3,822  3,846  2,799        3,745     1,023     101
with West Asia.
                           24   Spain                    4,607  5,905  1,189        1,674     3,418   4,231
                           25   Taiwan                   2,447  2,641  3,533        4,745    –1,086 –2,104
                           26   Bangladesh               7,999  7,127    357          247     7,642   6,880
                           27   Iran                     4,219  5,448  1,226        1,793     2,993   3,656
                           28   Canada                   3,507  3,667  3,336        3,318       171     349
                           29   Brazil                   1,267  2,948  1,441        3,424      –174    –476
                           30   Sweden                   1,010  1,025  3,211        4,121    –2,201 –3,096
                           31   Nepal                    3,076  3,273  1,314        1,528     1,761   1,745
                           32   Turkey                   2,589  3,092    337          578     2,252   2,514
                           33   Norway                   2,599  2,753  1,392          874     1,206   1,879
                           34   Qatar                      590    616    860        2,871      –270 –2,254
                           35   Kuwait                   1,466  1,816    655        1,319       812     497
                           36   Argentina                  401    803  2,408        2,316    –2,006 –1,513
                           37   Ukraine                    507    908  1,081        2,208      –574 –1,301
                           38   Nigeria                  2,599  2,753    348          216     2,251   2,537
                           39   Vietnam                  1,886  2,365    176          364     1,710   2,001
                           40   Pakistan                 1,319  2,271    265          428     1,054   1,843
                           Source: As in Table 8.1.


160
        Direction of Trade                                                   I C R A B U L L E T I N

        In Table 8.3 we have presented Indian’s exports to, imports
from and trade balances (in rupee terms) with principal countries/
                                                                             Money
economic regions and followed this up at Table 8.4 with a listing of the            &
top 40 countries by total (exports + imports) value of trade in 2004-05.             Finance
Import volumes exclude crude petroleum products.
                                                                                   JAN.–JUNE.05

          Bilateral Trade Volumes
          The largest regional source of non-oil imports in both 2003-04
and 2004-05 into India is Western Europe, followed by East Asia and
South-East and West Asia [see Table 8.3]. The biggest destination for
                                                                              The massive trade
Indian exports was again Western Europe, followed by North America,
East Asia, West Asia and South-East Asia. Merchandise trade with                    deficit and its
China and Hong Kong combined has been mostly balanced—compris-
ing a deficit with China and a surplus with Hong Kong. India has had a              increase with
large and increasing trade deficit with Western Europe, and a very
large positive trade balance with North America and the US in particu-         Switzerland stem
lar, as also with West Asia.
          The largest trade partner country continues to be the US,         from the fact that the
followed by the UAE, China, Belgium and the United Kingdom [Table
8.4]. The massive trade deficit and its increase with Switzerland stem       bulk of the increase
from the fact that the bulk of the increase in gold imports both in 2003-
04 and 2004-05 was routed through that country. The biggest year-on-
                                                                            in gold imports both
year increase in exports in 2004-05 (on a reasonably large base) were
                                                                                  in 2003-04 and
with Brazil (133 per cent), Oman (91 per cent), Kenya (77 per cent),
South Africa (74 per cent), Pakistan (72 per cent), Israel (67 per cent),   2004-05 was routed
China (52 per cent), Iran (29 per cent), Belgium (22 per cent), France
(23 per cent), South Korea (23 per cent) and Italy (22 per cent).                     through that

                                                                                           country.

        *******
        [Section closed on June 19, 2005]




                                                                                            161

				
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