A Summary of Economic News in India October 2006

A Summary of Economic News in India, October 20061 IMF New Delhi Office Markets 44.5 • Nominal Exchange Rate (Rs/US $) Rupee appreciated. The rupee /dollar rate appreciated by 85 paise during October on account of strong FII inflows. The six-month forward premium on the dollar was 2.15 percent at month-end, 82 bps higher than at end-September 2006. 45.0 45.5 46.0 46.5 3-Oct 2500 2000 1500 1000 500 0 -500 -1000 -1500 -2000 -2500 10-Oct 17-Oct 24-Oct 31-Oct Net monthly FII flows (mln US $) • Portfolio inflows increased. FII inflows in October were $1.7 billion, more than double the average inflow of $ 800 million in 2005 (the pink line in the figure). During the calendar year so far (Jan-October) net inflows were $ 7.2 billion, about the same as last year, despite the large outflow in May. Reserves increased. Foreign reserves rose by $ 500 million in October, reflecting some revaluation and intervention by the RBI in the forex market. Reserves were $ 167.1 billion on October 27. • • Stock market boom continued. The BSE Sensex moved up 508 points (4.1percent) on strong FII investment and healthy Q2 corporate results. Index is up by 5,070 points (64.2 percent) over end-October 2005 and by 3,564 points (37.9 percent) over end-December 2005. BSE Index 13500 13000 12500 12000 Yield curve 8.0 7.5 • 11500 3-Oct 10-Oct 17-Oct 24-Oct 31-Oct 7.0 6.5 Sep-06 6.0 1-Day call 91-Day Tmoney bills 364- Day 10-Year Gilt T-bills Oct-06 The yield curve moved up. Yields [primary market] on 91-day Treasury bills rose by 4 bps to 6.63 percent during October, while yields [primary market] on 364-day Treasury bills increased by 9 bps to 6.97 percent. Yields [secondary market] on 10-year government bonds also rose by 6 bps to 7.62 percent. 1 This is a factual summary of news stories that appeared in the press during the month and does not represent the views of IMF staff. - 2 8.00 • Call M oney Rate Call money rate stable. The overnight call money rate moved up to around 7.0 percent –the top of the RBI’s corridor (shown in pink line)– in the second fortnight in October, reflecting some tightening of liquidity. 7.50 7.00 6.50 6.00 5.50 Policy Announcements • 3-Oct 10-Oct 17-Oct 24-Oct 31-Oct Credit policy. On October 31, in its busy season credit policy, the RBI raised the repo rate by 25 bps to 7.25 percent from 7.0 percent as a signal to banks to slow down credit growth, following some signs of overheating. It, however, kept the reverse repo rate (the rate previously used to give direction to the market) unchanged at 6 percent and maintained its inflation forecast at 5-5.5 percent for 2006/07. The Bank Rate and CRR were also kept unchanged at 6 percent and 5 percent, respectively. Some other key measures announced are : Banks with overseas presence to meet Basel-II norms by March 31, 2008 Other banks to migrate to Basel-II norms by March 31, 2009 ECB eligible borrowers can avail additional $ 250 million Prepayment of ECB up to $ 300 million without RBI approval FII investment in Government securities enhanced to $ 3.2 billion from $ 2 billion. Overseas investment ceiling on Mutual Fund increased to $ 3 billion Resident individuals free to remit up to $ 50,000 in a financial year, double the previous limit of $ 25,000. (RBI 31 & FE 31) • Sixth Pay Commission. The Government issued the notification for the setting up of the Sixth Pay Commission, which is expected to submit its recommendations in 18 months. The Commission was asked to link the salary structure to efficiency and productivity, while also keeping an eye on fiscal prudence. BS 6 PSU wage negotiation. The Government has reportedly asked the managements of central public sector units (PSUs) to negotiate a revised wage structure with unions on condition that the companies themselves would have to generate funds from their internal resources by improving productivity and profitability and no burden would be borne by the government. The wage revision, due from January 1, 2007 under the seventh round, would include 100 percent dearness allowance neutralization and be valid for 10 years. ET 16 Petroleum pricing. Following the softening of international crude prices to below $ 59 per barrel, the PSU oil marketing companies have reportedly started making profits of Rs 1.50 per liter on petrol and incurring marginal losses of 15 paise (Rs1 = 100 paise) per liter on diesel. The Finance Ministry has reportedly said that benefits from lower international oil prices would not be passed on to the consumers, because overall subsidies still remained large. Public sector oil marketing companies, however, reduced aviation turbine fuel (ATF) prices by 7.9 percent in line with fall in international oil prices. The Petroleum Ministry’s sub-group on marketing of petroleum products has reportedly proposed a complete overhaul of the current pricing policy for retailing petrol and diesel to provide a level-playing field between public and private sector oil marketing firms. HBL 4, FE 5 & FE 17 Railway sector. The Railway Ministry is reportedly considering a proposal from the Finance Ministry and the Planning Commission to allow private players to ply passenger trains and also to construct and own locomotives, coaches and tracks to open up competition in the sector. FE 16 Road sector. The slow progress of road development under the National Highway Development Program (NHDP) is being reportedly attributed to lack of coordination between the National Highway Authority of India (NHAI), the official agency responsible for its implementation, Public Private Partnership Appraisal • • • • - 3 Committee (PPP-AC) in the Finance Ministry and the Planning Commission. NHAI, which has not awarded even a single project in the current fiscal year (against a target of about 3,000 km under NHDP phases II and III), has reportedly pointed out that the new model concession agreement (MCA) for road, drafted by the Planning Commission, failed to address the concerns of the private sector. The Commission, on the other hand, has criticized NHAI for inefficiency and suggested that PPP-AC should modify the model concession agreement to attract private and foreign participation. FE 6, BS 30 & Nov 1 • Power. The Ministry of Power has reportedly made the first move in its ambitious ultra mega power projects proposal, by signing power purchase agreements (PPAs) for two proposed projects, each with a capacity of 4,000 MW and an investment requirement of nearly Rs 200 billion. In another initiative to seek private sector participation in power transmission, Power Grid Corporation of India, a public sector company, invited bids from private companies to set up the country’s first independent private power transmission lines in Gujarat and Maharashtra. HBL 10, T 10 & FE 20 Shipping sector. The Government is reportedly planning to build two international standard shipyards with capability to build vessels in excess of 0.3 million dead weight ton. TOI 11 FDI. The Government has reportedly decided to cap foreign investment (including both FDI and FII) at 49 percent in stock exchanges (excluding commodity exchanges), contrary to the reported suggestion by the RBI for a 24 percent cap. It was also reported that the RBI and Finance Ministry have asked the Ministry of Industry, the nodal Ministry on foreign investment policy, to remove ambiguities in the definition of FDI and FII. The Government has set up a committee to look into the issues relating to FDI in education sector. ET 5, FE 9, BS 26 & ET 31 Services sector. The Government is reportedly considering a proposal to set up a high level group in the Planning Commission to suggest policy measures to sustain the competitiveness of the service sector. The Commerce Ministry has reportedly floated a consultation paper and constituted a panel of lawyers under the UK-India Joint Economic and Trade Committee (JETCO) to address issues in opening up the legal services sector. ET 5 & HBL 9 Bilateral trade. The Government is reportedly considering adding 264 items in the tariff liberalization program under its bilateral Comprehensive Economic Cooperation Agreement (CECA) with Singapore to bring it to par with the proposed ASEAN list, while negotiating a taxation relaxing treaty to encourage investment flows from Singapore. It was also reported that India was in favor of putting an initial cap of $ 5 billion on the non-portfolio investments to help monitor inflows and check possible round-tripping. Indian Government has reportedly decided to restore cargo shipping services with Pakistan after a gap of 35 years. India is reportedly planning to extend duty-free and quota-free market access to 50 least developed countries (LDCs) from Africa and Asia. BS 4, ET 10, TOI 27 & BS 31 SEZ. The number of proposals to set up SEZ rose sharply to 236 with the Government approving 44 fresh applications. The SEZs, which are being created to set up world-class infrastructure, suffered a setback when the RBI asked banks to treat loans to SEZ developers and units in the zones on par with real estate projects, which carry a risk weight of 150 percent as against 100 percent for infrastructure projects. The Commerce Ministry has reportedly asked the RBI to reconsider its decision. The Central Board of Excise and Customs (CBEC) has clarified that banking services offered to units set up in SEZs have been exempted from paying service tax. FE 5, BS 10, 23, ET 11 & IE 30 Foreign bank. The Government has reportedly decided to restrict expansion plans for banks from the USA, in a retaliatory move against the US delay in granting licenses to open more branches by three Indian banks — the SBI, ICICI Bank and Bank of Baroda. TOI 11 Wheat procurement. The Government has reportedly raised the procurement price for wheat by Rs 50 to Rs 750 per quintal, contrary to the recommendation of the Commission for Agricultural Costs & Prices (CACP) to retain the price at last year’s level of Rs 700 per quintal. YF 30 & FE 31 • • • • • • • - 4 • Trade union. The reported formation of the first IT employees’ trade union in West Bengal by CITU, the trade union wing of the Left Parties, against the state Chief Minister’s promise to insulate the state’s IT/ ITeS sector from unionization, have raised concerns in the IT industry across the country. ET 23 Real Sector • GDP forecast. The RBI, in its busy season credit policy, raised its growth forecast for 2006/07 to 8.0 percent from a range of 7.5-8.0 percent earlier. Meanwhile domestic rating agency CRISIL increased India's GDP growth forecast to 8.3 percent from 7.3 percent. TOI 17, RBI 31 & FE 31 11th Five-Year Plan. The Government reportedly accepted the Planning Commission’s GDP growth projection of an annual average of 9 percent for the next five years (2007/08 to 2011/12), with a growth of 10 percent set for the last year, 2011/12. It, however, did not agree to the Commission’s proposal to relax fiscal deficit targets during the first two years to accommodate large government expenditure, stressing that growth could not come at the cost of fiscal prudence. FE 18, 19, BS 18 & BS 24 Industrial production. The Index of Industrial Production (IIP) rose y/y by 9.7 percent in August, with manufacturing growing by 11.1 percent, mining by -0.1 percent, and electricity by 3.7 percent. On cumulative basis the IIP grew by 10.6 percent y/y in April-August. The core infrastructure sector output rose by 5.5 percent y/y in August, and by 6.7 percent y/y in April-August. FE 5, GOI 12, BS 12 Corporate results. According to an analysis of 363 companies with a market capitalization of more than Rs 1 billion, the first half results (April-September 2006) indicated a robust 31 percent growth in both sales and net profit. BS 20, FE 26, BS 26 & IE 30 Business confidence. The business confidence index (BCI), compiled by NCAER, for July-September rose 7.6 percent to 152.5 from 141.7 in the previous quarter. In another survey by Dun and Bradstreet, the Business Optimism Index (BOI) for Q3 (October- December) recorded an increase of 14% to 177.1 from 155.3 in Q2 (July-September), with all the six optimism indices—volume of sales, net profits, selling prices, new orders, inventory levels and the recruitment of employees— showing an improvement over Q2 level. The RBI survey, however, indicated a little dip in business confidence in Q3. ET 21, YF 27 & ET 31 Inflation. The point-to-point WPI inflation generally rose. Weekly inflation rates were 5.16 percent, 5.26 percent, 5.41 percent and 5.09 for the four weeks through October 28. The CPI for urban non-manual employees (CPI-UNME) increased by 6.6 percent, for agricultural workers (CPI-AW) by 7.3 percent and rural laborers (CPI-RL) by 7.0 percent in September 2006. BS 26, YF 27 & FE Nov 1 Inflation index. The RBI was reportedly in favor of compiling a harmonized index of consumer prices (HICP) that would help track retail prices across the country and be useful for policy formulation. A discussion paper put up on its website expressed the view that the compilation of four different types of CPIs (two each for rural and urban sectors), as being done currently, was designed to measure changes in prices of goods and services consumed by specific segments of the population and did not provide information on changes in prices for the entire rural and urban population. BS 13 Poverty estimates. According to a National Sample Survey Organization’s (NSSO) findings, the poverty ratio declined to 22 percent in 2004/05, compared to 26 percent in 1999/00. The survey also indicated that the sharpest decline was in the poorer states. ET 19 • • • • • • • - 5 Fiscal Sector • Fiscal update. During April-September the central government’s total revenue was at Rs 1,610 billion (40.0 % of Budget estimate) and expenditure was at Rs 2,519 billion (44.7 % of Budget estimate). 7000 6000 5000 (in Rs. billion) 4000 3000 2000 1000 0 7000 Revenue (in Rs. billion) 2005/06 2006/07 6000 5000 4000 3000 2000 1000 0 Expenditure 2005/06 2006/07 50 • Using three months moving average, the y/y revenue growth was 28.5 percent, while expenditure rose by 2.6 percent. The revenue deficit totaled Rs 693 billion (81.8 % of Budget estimate), and the fiscal deficit totaled Rs 865 billion (58.2 % of Budget estimate). TOI 11, FE 11, 12, ET 18, GOI 31, YF 31, BS Nov 1 & IE Nov 2 40 30 (in percent) 20 10 0 -10 -20 Revenue grow th (3mma, y/y) Expenditure grow th (3mma, y/y) • Expenditure saving. The Finance Ministry has reportedly asked all ministries to cut their non-plan spending by 5 percent, which would save nearly Rs 75 billion in the current fiscal year. FE 23 Oil and FCI bond. On October 16 the Government issued the first tranche of oil bonds worth Rs 50 billion to the state-owned oil marketing companies, carrying a coupon rate of 8.13 percent with 15-year maturity and FCI Special Bonds worth Rs 50 billion (coupon rate of 8.15 percent with 16-year maturity). HBL 17 Tax return. The Government has launched a web-based portal that would enable companies and other categories of income tax assessees to file their returns online using the internet (anytime-anywhere filing). The corporate sector is required to furnish returns electronically beginning assessment year 2006-07, while for individuals, non-corporates and trusts e-filing would remain optional. HT 11 & HBL 14 • • External Sector • Trade data. Exports accelerated to 41.1 percent y/y in September, compared to 37.3 percent y/y in AprilSeptember. Imports also quickened, growing by 49.1 percent y/y in September, compared to 32.1 percent y/y in April-September. The trade deficit widened to $ 24.6 billion in April-September compared to $ 20.3 billion during the same period a year ago. GOI 24 & HBL 24 FDI. Inward FDI to India nearly doubled during April-July 2006 to $ 2.9 billion, from $ 1.5 billion the year before. With reports of Tata Steel’s proposed takeover of the Corus Steel (the Anglo-Dutch steel manufacturing company) at a cost of $ 8-10 billion, outward FDI from India was set to go up sharply in 2006/07. FE 6, ET 21, FE 24 & BS 31 • - 6 • Overseas borrowing. India corporates have raised nearly $13.3 billion (January-August 2006) from overseas debt securities, with a major chunk coming through foreign convertible currency bonds (FCCBs), estimated at $ 5 billion. HBL 16 Outsourcing. According to a NASSCON-Booz Allen Hamilton study, the engineering services outsourcing (ESO) business in India has the potential of generating $40 billion by 2020, out of an estimated $ 150-225 billion global outsourcing demand, which could be twice the size of the entire Indian ITeS and BPO industry put together. IE 26 Multilateral lending. The World Bank has reportedly agreed to extend a $ 5 billion loan to Maharashtra for urban infrastructural development program [the state government requires an estimated capital investment of $50 billion over the next 15 years]. The Bank is also considering loan assistance of $1 billion to Andhra Pradesh for irrigation projects. ET 24 & FE 26 • • Financial Sector 4 0 .0 • Credit off-take. Non-food credit (excludes credit extended to government agencies for food procurement) by commercial banks, which has been growing above 32 percent y/y for last several months, witnessed a marginal slowdown to 30 percent in October 2006. RBI weekly data Bank Credit Growth (Y/Y) 3 7.0 In percent 3 4 .0 3 1.0 2 8 .0 Non-food credit Total bank credit 2 5.0 • Real estate exposure. The RBI has reportedly directed banks to lend only for productive construction activity and to check diversion of funds into speculation. Banks’ boards have also been asked to draw up extensive prudential norms that would encompass ceilings on the total amount of loans, single/group exposure limits, margins, security, repayment schedules and availability of supplementary finance for the sector. It has also prohibited banks from funding land acquisition and raised the risk weights to 150 percent on exposure to commercial real estate and home loans above Rs 2 million. BS 17 Non-bank finance companies (NBFCs). Alarmed at the very high level of asset base of some of the nondeposit taking (NBFC-NDs) the RBI is reportedly carrying out a census of NBFCs with a view to work out a comprehensive regulation for the sector. As an immediate measure it has reportedly asked independent directors to be “morally accountable” for the decisions of the boards of such NBFCs as per the corporate governance guidelines of the Securities and Exchange Board of India (SEBI). BS 11 Co-operative banks. The Government is reportedly planning to avail a $ 2.4 billion loan from the World Bank and Asian Development Bank (ADB) to restructure cooperative banks (ADB to provide $1.4 billion and the World Bank $1 billion). FE 10 Bank performance. The Q2 (July-September) result of 31 listed banks (13 private sector and 18 public sector banks) indicates a robust 25 percent increase in net profit. While net profit of 13 private banks rose 37 percent to Rs 17 billion, those of 18 public sector banks grew 20 percent to Rs 44.4 billion. The relatively slow growth in the net profit of public sector banks is attributed to a 2 percent decline in net profit of SBI, the largest public sector bank. BS 31 • • • ____________________________________________________________________________ Sources Key: RBI-Reserve Bank of India Press Release/Notification; BS-Business Standard; CM-Capital Markets.com; YF/R-Yahoo Finance.com/Reuters; DJ-Dow Jones, TOI-Times of India; OL-Outlook; ETEconomic Times; HBL-Hindu Business Line; H- The Hindu; FE-Financial Express; IE-Indian Express; TTelegraph; TR-Tribune; PIB-Press Information Bureau; GOI- Government of India