Indian Rupee getting hotter day by day

For the first time after nine years, the rupee breached the psychological mark of 40 to touch 39.85 against dollar on September 20, 2007. With US Federal Bank cutting the interest rate by 50 basis points, the rupee has breached the level of Rs. 40 much before than expected by the markets. The main reason being the sudden spurt in capital inflows. BNP Paribas' country treasurer Manoj rane said: "the rupee could touch 38.5 level against dollar by year-end. we can expect the rupee to rise further on the back of strong capital inflows".

Why the US FED rate cut influences our currency?

Typically, when US lowers interest rates, FIIs begin looking for greener pastures like India and China, where they can earn a higher return. When dollar inflows rise into these countries, local currencies in these markets begin to grow stronger. Hence, as a result of US FED rate cut by 50 basis points and also hardened interest rates in India combined with strong capital market, there will be a spurt in FII inflows in short term which will increase the demand for rupee and thereby, rupee will appreciate further. If the dollars coming into India are not compensated by the requirement of importers, the RBI has to intervene into the forex market by buying dollars so as to maintain the current level. But, it has side effect, the increase in money supply and thereby, inflation. Keeping in view the general elections in 2009, the Government cannot afford to neglect inflation management. As the role of RBI is limited in the present circumstances, the Rupee will appreciate further and I expect the rupee to appreciate to a level of Rs. 35 towards the end of current fiscal.

The appreciation of rupee during the current financial year already effected many sectors like IT, textiles, leather industry, pharmaceuticals. This new phenomenon has forced many mid sized software and other exporters to hedge against the foreign currency fluctuations.

With the appreciation of rupee and also acceptability of rupee increasing in the Gulf and South East Asian markets, trading in rupee futures is picking up. In Dubai exchange, rupee futures trading is already picking up.

Inflation is for soft landing - dips to 3.32% for the week ended September 08, 2007

The official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for the week ended 8th September 2007 rose by 0.1% to 214.7 from its previous week level of 214.4. The annual rate of inflation, calculated on point to point basis, stood at 3.32 percent for the week ended 08/09/2007 (over 09/09/2007 ) as compared to 3.52 percent for the previous week. The annual rate of inflation stood at 5.22 percent as on 09/09/2006 i.e. a year ago. The annual rate of inflation declined due to the larger base of last year.

The index for 'Food Articles' group rose by 0.2 percent due to higher prices of fruits & vegetables, condiments & spices, barley and wheat (1% each). However, the prices of bajra (3%), fish-marine (2%) and maize (1%) declined.

The index for 'Non-Food Articles' group rose by 0.1 percent due to higher prices of fodder (2%) and raw cotton, groundnut seed and cotton seed (1% each). However, the prices of niger seed (6%), soyabean (4%) and raw tobacco and sunflower (2% each) declined.

Central Statistical Organisation revises it inflation figures after two months of releasing the provisional figures. For the week ended 14/07/2007, the final wholesale price index for 'All Commodities’ (Base: 1993-94=100) stood at 213.6 as compared to 212.9 (Provisional) and annual rate of inflation based on final index, calculated on point to point basis, stood at 4.76 percent as compared to 4.41 percent (Provisional) reported earlier.

Related Articles:-

• Inflation rate tumbles, courtesy ‘base effect’ - Business Line - September 22, 2007
• Inflation nears 5-year low at 3.32% - The Times of India - September 22, 2007
• Inflation hits near 5-yr low of 3.32% - The Economic Times - September 22, 2007
• Inflation hits lowest since Dec 2002 - The Indiainfoline.com - September 21, 2007

Inflation further dips to 3.52 percent for the week ended 1st September, 2007

The official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for the week ended 25th August 2007 rose to 214.4 from its previous week level of 213.6. The annual rate of inflation, calculated on point to point basis, stood at 3.52 percent for the week ended 01/09/2007 (over 02/09/2007 ) as compared to 3.79 percent for the previous week. The annual rate of inflation stood at 5.27 percent as on 02/09/2006 i.e. a year ago. The annual rate of inflation declined due to the larger base of last year.

Central Statistical Organisation revises it inflation figures after two months of releasing the provisional figures. For the week ended 07/07/2007, the final wholesale price index for 'All Commodities’ (Base: 1993-94=100) stood at 213.3 as compared to 212.6 (Provisional) and annual rate of inflation based on final index, calculated on point to point basis, stood at 4.61 percent as compared to 4.27 percent (Provisional) reported earlier.

Related Articles:-

• Indian inflation hits two-year low but no early rate cut seen - afp.google.com - September 14, 2007
• Inflation in India drops to two-year low, but rising food prices remains a concern - The Associated Press - September 14, 2007
• Annual inflation at 3.52 pc on Sept 1 - The Economic Times - September 14, 2007
• Inflation falls to 17-month low of 3.52 per cent - Business Line - September 14, 2007
• India's Inflation Rate Slows to Two-Year Low of 3.52% (Update2) - Bloomberg - September 14, 2007
• Battle against inflation getting tougher, RBI vigilant: Reddy - The Economic Times - September 13, 2007

Industrial growth slows down to 7.1% in July, 2007

The Quick Estimates of Index of Industrial Production (IIP) for the month of July 2007 have been released by the Central Statistical Organisation of the Ministry of Statistics and Programme Implementation. The industry has grwon at 7.1% as compared to the level in the month of July 2006. This is the slowest IIP growth in the last eight months. A lower growth can be partly explained by a higher base effect. The cumulative growth for the period April-July 2007-08 stands at 9.6% over the corresponding period of the pervious year.

Alongwith the Quick Estimates of IIP for July 2007, the indices for June 2007 have undergone the first revision and those for April 2007 have undergone the second (final) revision in the light of the updated data received from the source agencies. Even, industrial growth figures for June ‘07 has been revised downwards to 9% this month as against the initial estimate of 9.8% growth.

The adverse effects of rising interest rates and tight monetary policy are evident. Higher rates affected sectors such as automobile and housing the most. As a result production of machinery and transport equipment and non-metallic products which has cement as a major item slowed down. Small sectors like jute and jute products, wood and wood products along with basic metals have recorded outstanding growth in the range of 16-22 %. Besides, power generation rose 7.% on top of a 8.9% growth in July 06.

In terms of industries, as many as thirteen (13) out of the seventeen (17) industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of July 2007 as compared to the corresponding month of the previous year. The industry group ‘Wood and Wood Products; Furniture and Fixtures’ have shown the highest growth of 21.1%, followed by 17.5% in ‘Basic Metal and Alloy Industries’ and 16.1% in ‘Jute and other Vegetable Fibre Textiles (except cotton)’. On the other hand, the industry group ‘Metal Products and Parts, except Machinery and Equipment’ have shown a negative growth of 5.1% followed by 4.6% in ‘Paper & Paper Products and printing, Publishing & Allied Industries’ and 4.1% in ‘Food products’.

As per used-based classification, the impact of interest rate is visible in many sectors. Decceleration in capital goods production in the initial months of FY08 has put a pause button on the five-years rally. Moreover, there is a sharp moderation in intermediate goods to 4.7% as against a growth of 10.7% a year ago. Slowdown in investment activity coupled with a lower intake of raw material reflects a moderation in industrial activity so far this year. Whether the latest figures are just an aberration or a beginning of a southward trend remains to be seen.

Going forward demand will influence the trend. A 3.2% fall in production of consumer durables this month deepened the existing trend in consumption slowdown. Things could look up a little with the festival season demand. But, this could be short-term . Later on, liquidity position, outlook on inflation and Reserve Bank’s measures to deal with the evolving situation will set the tone of consumption demand for the rest of the year.

On investment demand front, the existing situation is not very encouraging . Higher domestic interest rates, steep rise in overseas rates on account of liquidity crunch arising out of sub-prime crisis and a cap on foreign loans may play a spoilsport.

Estimates of GDP by Economic Activity for the First Quarter of Current Fiscal

Quarterly GDP at factor cost at constant (1999-2000) prices for Q1 of 2007-08 is estimated at Rs 7,23,132 crore, as against Rs. 6,61,335 crore in Q1 of 2006-07, showing a growth rate of 9.3 per cent over the corresponding quarter of previous year.

The economic activities which registered significant growth in Q1 of 2007-08 over Q1 of 2006-07 are, manufacturing, electricity, gas & water supply, construction, trade, hotels, transport and communication, financing, insurance, real estate and business services, and community, social and personal services.

According to the information furnished by the Department of Agriculture and Cooperation (DAC), which has been used in compiling the estimate of GDP from agriculture in Q1 of 2007-08, the crops rice, wheat, coarse cereals and pulses during the Rabi season (which ended in June, 2007) of 2006-07 recorded growth rates of (-) 6.4 per cent, 8.0 per cent, 17.1 per cent, and 11.4 per cent, respectively over the corresponding season in the previous agriculture year. Among the commercial crops, the production of oilseeds declined by 11.3 per cent during the rabi season of 2006-07, while the production of cotton and sugarcane recorded growth rates of 22.7 per cent and 22.8 per cent, respectively during the agriculture year 2006-07.

According to the latest estimates available on the Index of Industrial Production (IIP), the index of mining, manufacturing and electricity, registered growth rates of 3.2 per cent, 11.9 per cent and 8.3 per cent, respectively during Q1 of 2007-08, as compared to the growth rates of 3.6 per cent, 11.7 per cent and 5.3 per cent in these sectors during Q1 of 2006-07. The key indicators of construction sector, namely, cement and finished steel registered growth rates of 6.8 per cent and 7.7 per cent, respectively during Q1 of 2007-08, as against the growth rates of 10.2 per cent and 10.3 per cent, respectively in Q1 of 2006-07.

Among the services sectors, the key indicators of railways, namely, the net tonne kilometers and passenger kilometers have shown growth rates of 2.6 per cent and 5.1 per cent, respectively during Q1 of 2007-08. In the transport and communication sectors, the production of commercial vehicles, cargo handled at major ports, cargo handled by the civil aviation, passengers handled by the civil aviation and the total stock of telephone connections (including WLL and cellular) registered growth rates of 6.6 per cent, 14.3 per cent, 11.6 per cent, 21.8 per cent and 47.0 per cent, respectively during Q1 of 2007-08 over Q1 of 2006-07. The other key indicators, namely, aggregate bank deposits, and bank credits have shown growth rates of 26.1 per cent, and 25.9 per cent, respectively during Q1 of 2007-08 over Q1 of 2006-07.

Source: The Press Note of PIB dated 31-08-2007

Inflation rate comes down to 3.79% for the week ended 25th August

The official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for the week ended 25th August 2007 rose remained unchanged at its previous week level of 213.6 (Provisional).

The annual rate of inflation, calculated on point to point basis, stood at 3.79 percent for the week ended 25/08/2007 (over 26/08/2006 ) as compared to 3.94 percent (Provisional) for the previous week. The annual rate of inflation stood at 5.27 percent as on 26/08/2006 i.e. a year ago. The annual rate of inflation declined due to the larger base of last year.

The index for 'Food Articles' group declined by 0.2 percent to 223.3 (Provisional) from 223.7 (Provisional) for the previous week due to lower prices of maize, fish-marine, wheat and fruits & vegetables (1% each). However, the prices of moong, condiments & spices and eggs (1% each) moved up.

The index for 'Non-Food Articles' group rose by 0.1 percent to 209.9 (Provisional) from 209.7 (Provisional) for the previous week due to higher prices of sunflower (5%) and raw cotton (3%). However, the prices of raw rubber (11%), raw silk (4%), castor seed and soyabean (2% each) and rape & mustard seed, copra and raw jute (1% each) declined.

Central Statistical Organisation revises it inflation figures after two months of releasing the provisional figures. For the week ended 30/06/2007, the final wholesale price index for 'All Commodities’ (Base: 1993-94=100) stood at 212.8 as compared to 212.5 (Provisional) and annual rate of inflation based on final index, calculated on point to point basis, stood at 4.42 percent as compared to 4.27 percent (Provisional) reported earlier.

However, Union Finance Minsiter, Mr. Chidambaram told reporters that outlook on inflation is of caution, given that international crude oil prices have reached 74 dollars per barrel.

Related Articles:-

• Inflation drops to 16-mth low at 3.79% - The Indian Express - September 08, 2007
• Inflation hits 16-month low of 3.79% - The Economic Times - September 08, 2007
• Inflation down to 3.79 pc, FM expresses caution on crude - The Hindu - September 07, 2007
• FM presses caution button on oil prices - Hindustan Times - September 08, 2007
• Inflation falls to 3.79% - Rediff News - September 07, 2007
• Hike in petrol, diesel prices likely - Central Chronicle - September 08, 2007

Indian GDP grows at 9.3% during April-June of 2007

Continuing the upswing on the strength of the good showing by manufacturing sector, the economy grew by 9.3 per cent during the April-June quarter of the current financial year, when comapred to 9.6 per cent recorded during comparable period last year. India continues to be the second fastest growing economy after China which grew by 11.5% over the same period. India is now a $1 trillion economy after a growth spurt in the past four years second only to China's hot pace of expansion among major economies.

The highlights of the growth story are

• The manufacturing sector grew by 11.9 per cent which is lower than 12.3 per cent recorded during the first quarter of 2006-07.
• The services sector too maintained double digit growth, as demand, in particular, for telecommunications services, residential apartments and office space, air travel and financial services continued to rise. Trade, hotels, transport and communication registered a growth rate of 12 per cent. And, maintaining the trend seen in recent years, “trade, hotels, transport and communication” accounted for a fourth of the GDP (26.8%).
• Growth in agriculture, forestry and fishing was 3.8 per cent, compared to 2.8% in the same period last year. That notwithstanding, the share of agriculture in the total domestic output continues to decline. Indeed, the value of output of “agriculture, forestry & fishing” declined to 17.7% in the quarter under review, from 18.6% in the corresponding period of 2006-07.
• Mining and quarrying sector grew by 3.2 per cent.
• Finance, insurance, real estate and business services grew at 11 per cent during the quarter.
• The wholesale price index for food articles, fish, minerals, manufactured products, electricity and all commodities has risen by 8 per cent, 3.4 per cent, 13 per cent, 5.7 per cent, 2.4 per cent and 5.4 per cent respectively during the quarter.
• The consumer price index for industrial workers rose 6.3 per cent in the quarter.

The forecast for full year remains largely optimistic: finance minister P Chidambaram expects growth in the full year to be 9%, making it third successive year of about 9% growth. His argument being that growth has been driven by domestic consumption and investments. In the coming months, however, economists expect the growth rate to dip a little and close the year around the 9% mark. The Reserve Bank of India, in contrast, is relatively conservative, maintaining that the real GDP growth this fiscal would be 8.5%.

Related Articles:-

• Good so far... - The Economic Times - 04-09-2007
• Flying Economy: GDP grows 9.3% - The Times of India - 01-09-2007
• India's GDP grows 9.3% in Q1 - Rediff News - 31-08-2007
• India shines: April-June GDP grows 9.3 per cent - The Economic Times - 31-08-2007

Inflation Trends During the Current Fiscal

Based on the statistics provided by the official website of Central Statistical Organisation, I have prepared the following graph indicating the Annual Rate of Inflation based on point-to-point basis or year-on-year basis. For Example, the inflation rate for the week ended 16/06/2007 is calculated by considering the Wholesale Price Index (WPI) for all commodities as on 16/06/2007 (211.90) and corresponding figure a year back i.e. on 17/06/2006 (203.50), by calculating the percentage increase of the WPI over the year at 4.13 percent [(211.90-203.50)/203.50*100] and by rounding off (and not truncating) the result into two decimal points.

If you see the trend in inflation, the rate of inflation has been declining from the beginning of the current fiscal till 16/06/2007, before being range bound between 4 to 4.50 percent, thanks to various credit squeezing measures taken by RBI. The major contributor to inflation is the rise prices of food articles, which hits every common man. Hence, it is all the more important to contain the inflation. With the second real estate boom on the corner, with agriculture becoming unviable due to high prices of land combined with the shoratge of agricultural labour force, with the reducing return on agriculture invetsment and with the rising cost of living, the acreage under vegaetables and fruits is declining in Telgana region of Andhra Pradesh. Similar may be the scenario in all other states. If this continues, there is no surprise that the prices for vegetables, fruits, diary products and other essential agriculture prducts will rise.

The RBI wants to keep the inflation rate below 5 percent during the current fiscal. Its medium term objective is to reduce the inflation to 4-4.50 percent on sustained basis, as per the economic outlook report of the RBI rleased on August 31, 2007. The RBI has raised the Prime Lending Rate (the benchmark lending rate), Cash Reserve Ratio and Reverse Repo Rate (the rate at which the banks lend from RBI for shortage of short term funds) during the current financial year to suck the excess liquidity out of the system as well as to reduce the money supply in the market. It has also cautioned the banks to go slow on their lending spree for high risk areas like real estate and reatil sectors. The press release of RBI's Annual Report 2006-07 says "On the sources side, growth of bank credit remained high, although there was some moderation. Demand for bank credit was largely broad-based with agriculture, industry and personal loans absorbing 14 per cent, 36 per cent and 24 per cent, respectively, of incremental expansion in overall non-food credit during 2006-07. Growth of credit to sectors such as real estate remained high, albeit with some moderation. In order to maintain asset quality, the Reserve Bank further tightened the provisioning requirements in respect of sectors witnessing high growth in credit".

The Government also took various fiscal and supply-side measures to contain inflation during the latter part of 2006-07. These measures taken by the Government and RBI contained inflation to a certain extent. With the Indian economy integrating with world economy, with Indian economy's robust growth attracting foreign inflows, it becomes difficult to contain inflation with the monetary measures alone. We have to effectively manage startegies for supply side managment of inflation by increasing the productivity of our industry, encouraging imports and also transforming to full capital account covertibilty gradually so that our foreign inflows and foreign exchange reserves are utilised properly to control inflation and rupee appreciation.

Inflation declines to 3.94% for the week ended 18th August, 2007

The official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for the week ended 18th August 2007 rose by 0.1 percent to 213.6 (Provisional) from 213.4 (Provisional) for the previous week.

The annual rate of inflation, calculated on point to point basis, stood at 3.94 percent for the week ended 18/08/2007 (over 19/08/2006 ) as compared to 4.10 percent for the previous week. The annual rate of inflation stood at 5.12 percent as on 19/08/2006 i.e. a year ago. The annual rate of inflation declined due to the larger base of last year. In fact, the index for 'food articles' has increased by 0.9% due to higher prices of fish-inland (5%), masur (2%) and milk, fruits & vegetables, bajra and gram (1% each). The index for manufactured items has declined by 0.1% during the week.

Central Statistical Organisation revises it inflation figures after two months of releasing the provisional figures. For the week ended 23/06/2007, the final wholesale price index for 'All Commodities’ (Base: 1993-94=100) stood at 212.4 as compared to 212.0 (Provisional) and annual rate of inflation based on final index, calculated on point to point basis, stood at 4.32 percent as compared to 4.13 percent (Provisional) reported earlier.

RBI releases Annual Report for 2006-07 & outlook for 2007-08

The RBI has released its Annual Report for the year 2006-07 on 30-08-2007. The highlights of the press release are as under:-

Overall Performance

• During 2006-07, the Indian economy exhibited acceleration in growth, led by manufacturing and services sector activities, supported by increase in domestic savings and investment. However this growth was accompanied by inflationary pressures on account of rising capacity utilisation, strong growth in monetary and credit aggregates, demand-supply gaps in domestic production of foodgrains and oilseeds, and firm global commodity prices.
• Strong growth in general and of the industrial sector in particular enabled the corporate sector to maintain high profitability. This, in turn, resulted in buoyant tax collections and played a major role in improving public finances.
• The growth process was facilitated by financial market conditions, which remained orderly, barring a few episodes of volatility. However, interest rates in various segments of the financial market hardened to some extent.
• Strong growth led to a widening of the trade deficit. Nonetheless, the current account deficit, as per cent of GDP, remained unchanged from the previous year since the widening of the merchandise trade deficit was offset to a large extent by the continuing buoyancy in net invisibles surplus.
• Large capital flows led by external commercial borrowings and net foreign direct investment (FDI) inflows resulted in large accretion to foreign exchange reserves.
• Real GDP growth accelerated from 9.0 per cent during 2005-06 to 9.4 per cent during 2006-07. The growth, thus, averaged 8.6 per cent per annum during the four-year period ended 2006-07. Real GDP growth during the Tenth Five Year Plan period averaged 7.6 per cent per annum, the highest in any Plan period. Acceleration in the growth rate during 2006-07 was attributable to buoyancy in the industrial and services sectors, which exhibited double-digit growth (11.0 per cent each). Higher growth in the industry and services sectors more than offset the deceleration in the agricultural sector. Growth in the agricultural sector decelerated from 6.0 per cent in 2005-06 to 2.7 per cent in 2006-07, partly on account of uneven rainfall during the South-West monsoon and partly due to the base effect.

Monetary Developments

• Money supply (M3) increased by 21.3 per cent (Rs. 5,80,733 crore) during 2006-07 as compared with 17.0 per cent (Rs. 3,96,878 crore) during 2005-06. Amongst the major components, time deposits exhibited a growth of 23.2 per cent (Rs. 4,41,913 crore) during 2006-07 as compared with 15.3 per cent (Rs. 2,53,056 crore) during 2005-06. Higher growth in time deposits could be attributed to factors such as higher interest rates on bank deposits and availability of tax benefits under Section 80C for bank deposits.
• On the sources side, growth of bank credit remained high, although there was some moderation. Demand for bank credit was largely broad-based with agriculture, industry and personal loans absorbing 14 per cent, 36 per cent and 24 per cent, respectively, of incremental expansion in overall non-food credit during 2006-07. Growth of credit to sectors such as real estate remained high, albeit with some moderation. In order to maintain asset quality, the Reserve Bank further tightened the provisioning requirements in respect of sectors witnessing high growth in credit.
• Banks’ SLR investments, as a proportion of their net demand and time liabilities (NDTL), declined further to 28.0 per cent by end-March 2007 (close to the prescribed ratio of 25 per cent) as the expansion in investments did not keep pace with the expansion in the NDTL.
• Net foreign assets remained the key driver of reserve money and the Reserve Bank continued to modulate market liquidity through operations under the liquidity adjustment facility (LAF), issuance of securities under the market stabilisation scheme (MSS) and use of the cash reserve ratio (CRR).
• Headline inflation firmed up from 4.0 per cent, y-o-y, on April 1, 2006 to 5.9 per cent on March 31, 2007 with an intra-year high of 6.7 per cent on January 27, 2007 and a low of 3.7 per cent on April 15, 2006. Both demand and supply side factors added to inflationary pressures during 2006-07. Demand pressures emanated from both high investment and consumption demand, strong growth in credit and monetary aggregates, and elevated asset prices. Supply side pressures emerged from demand-supply gaps in domestic production of major foodgrains and oilseeds amidst rising global prices. Although there was some improvement in domestic agricultural production during 2006-07, the production of major foodgrains has exhibited stagnation over the past few years. For instance, the production of rice, wheat and pulses during 2006-07 was still lower than the previous peaks touched during 2001-02, 1999-2000 and 1998-99, respectively. Consumer price inflation rose from 4.9-5.3 per cent in March 2006 to 6.7-9.5 per cent in March 2007, mainly reflecting the impact of higher food prices. In order to contain inflation and to stabilise inflationary expectations, the Reserve Bank persevered with the policy of pre-emptive actions and gradual withdrawal of monetary accommodation, using various instruments at its disposal flexibly. Between the second half of 2004 and July 31, 2007, the repo and the reverse repo rates were increased by 175 basis points and 150 basis points, respectively. In addition, the cash reserve ratio was raised by 250 basis points (including the increase of 50 basis points effective August 4, 2007). The Government also took various fiscal and supply-side measures to contain inflation during the latter part of 2006-07.

Balance of Payments

• India’s balance of payments in 2006-07 reflected a number of positive features. Merchandise trade continued to exhibit robust growth during 2006-07, although there was some loss of pace from the strong growth of 2005-06.
• Net capital inflows to India remained buoyant (4.9 per cent of GDP), far exceeding the current account deficit. Higher capital flows could be attributed to the strengthening of macroeconomic fundamentals, greater investor confidence and ample global liquidity.
• Net FDI inflows from abroad of US $ 19.4 billion exceeded FII inflows (net) during 2006-07 aggregating US $ 3.2 billion.
• The debt flows (net) at US $ 25.0 billion were led by external commercial borrowings reflecting strong investment demand. Net capital flows, after financing the current account deficit, led to accretion of US $ 36.6 billion, excluding valuation changes, to foreign exchange reserves during 2006-07.

Financial Markets

• Financial markets remained orderly during 2006-07, barring some episodes of volatility, especially during the second half of March 2007. Capital inflows and movements in Government cash balances continued to be the key drivers of liquidity conditions and overnight interest rates.
• Interest rates in the various market segments hardened during the year, broadly in tandem with the pre-emptive monetary tightening measures taken by the Reserve Bank.
• By and large, the exchange rate of the Indian rupee exhibited two-way movement with respect to the main reserve currencies during 2006-07.
• The stock market remained buoyant with the benchmark indices reaching record highs during 2006-07 amidst intermittent corrections. The primary segment of the capital market exhibited buoyant conditions.

Outlook for 2007-08

• Available information so far indicates continuation of the growth momentum during 2007-08 at a strong pace with the impulses of growth getting more broad-based. Steady increases in the rate of gross domestic saving and investment, consumption demand, addition of new capacity as well as more intensive and efficient utilisation/capitalisation of existing capacity are expected to provide support to growth during 2007-08. For monetary policy purposes, the Reserve Bank, in its Annual Policy Statement (April 2007), placed the real GDP growth for 2007-08 at around 8.5 per cent, assuming no further escalation in international crude prices and barring domestic or external shocks. The Reserve Bank in its First Quarter Review of the Annual Statement of Monetary Policy in July 2007 retained its projection of real GDP growth at around 8.5 per cent, barring domestic and external shocks
• In view of the lagged and cumulative effects of monetary policy on aggregate demand and assuming that supply management would be conducive, capital flows would be managed actively and in the absence of shocks emanating in the domestic or global economy, the Reserve Bank in its Annual Policy Statement noted that the policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08. . Assuming that aggregate supply management will continue to receive public policy attention and that a more active management of the capital account will be demonstrated, the outlook for inflation in 2007-08 in the First Quarter Review remained unchanged. Accordingly, it was indicated in the Review that holding headline inflation within 5.0 per cent in 2007-08 assumed priority in the policy hierarchy; while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4.0-4.5 per cent on a sustained basis.

Monetary Management

• Expansion of money supply (y-o-y) as on August 3, 2007 was higher (21.7 per cent) than a year ago (19.3 per cent) and also higher than the indicative projection of 17.0-17.5 per cent set out in the Annual Policy Statement. Growth in aggregate deposits accelerated, led by time deposits. Bank credit witnessed some moderation from the strong pace of the preceding three years. Growth of non-food credit of scheduled commercial banks was 23.6 per cent, y-o-y, as on August 3, 2007 as compared with 32.5 per cent a year ago. Commercial banks’ investments in SLR securities, as per cent of their net demand and time liabilities, at 28.6 per cent were marginally higher than those at end-March 2007, but below those of 31.1 per cent a year ago. Growth of reserve money as on August 10, 2007 at 26.9 per cent (19.6 per cent adjusted for the first round impact of the increase in the CRR) was higher than a year ago (17.2 per cent), mainly on account of accretion to the Reserve Bank’s net foreign assets.
• Headline inflation, based on movements in the wholesale price index (WPI), moderated to 4.1 per cent, y-o-y, on August 11, 2007 from 5.9 per cent at end-March 2007 and 5.1 per cent a year ago. Inflation for all the three sub-groups of the WPI eased from their end-March levels. However, consumer price inflation continued to exceed wholesale price inflation mainly on account of higher food prices. Although inflation has eased since end-March 2007, inflationary pressures could potentially persist for several reasons. There are concerns regarding further hardening of international commodity prices, in particular, oil prices. Moreover, the possibility of inflationary pressures from domestic factors such as strong growth in monetary aggregates, elevated asset prices and large capital flows with implications for domestic liquidity conditions need to be recognised. Accordingly, a continuous vigil supported by appropriate policy actions by all concerned would be needed to maintain price stability so as to anchor inflationary expectations on a sustained basis.
• The likely evolution of macroeconomic and financial conditions indicates an environment supportive of sustaining the current growth momentum in India. The domestic outlook continues to be favourable and would dominate the dynamic setting of monetary policy in the period ahead.
• Increases in global food prices reflected a shortfall in global production and the rising demand for non-food uses such as bio-fuels. Reflecting the sustained uptrend in major food prices, the food price index (compiled by the IMF) reached a 26-year high in June 2007 - the highest since early 1981.

Decling Growth in Agricultural Sector

• Against the backdrop of the hardening trends in global food prices, there is an urgent need to take measures to accelerate the growth in Indian agriculture, especially food crops. Although the share of agriculture in overall GDP declined over the years from around 40 per cent in 1980-81 to below a fifth in 2006-07, it continues to play an important role in the Indian economy. Since the mid-1990s, however, the growth of the agricultural sector decelerated from an annual average of 4.7 per cent per annum during the 1980s to 3.1 per cent during the 1990s and further to 2.2 per cent during the Tenth Plan period.
• The reduction in agricultural growth since the mid-1990s could be attributed to stagnant/declining yields, which, in turn, reflect a variety of factors such as declining investment, lack of proper irrigation facilities, inadequate other infrastructural facilities, inadequate attention to R&D for developing high yielding varieties of seeds, absence of major technological breakthroughs, improper use of fertilisers/nutrients and institutional weaknesses. In view of stagnation in the production of major foodgrains, there may be a need to refocus production efforts in alternative potential areas with suitable agro-climatic conditions, rather than the traditional areas, particularly in the case of rice and wheat.
• As Indian agriculture continues to be heavily dependent on the monsoon, the need for enhancing the irrigation potential to meet the growing water requirements of farmers and to impart stability to agricultural production and yield assumes greater emphasis. More focus needs to be placed on agricultural research in the coming years as the success so far has been restricted to select crops. A growing disparity between the actual and the potential yields points to a crucial gap between research and extension. There is an urgent need to revive the extension system so that it is able to respond to the emerging demands of renewed agricultural growth.
• In order to bring marketing reforms, there is a need to take forward the process of implementing Agricultural Produce Marketing Committee (APMC) Act in all the States. There is also a need to have an appropriate legislative framework that is conducive to participatory organisations. In view of significant weather and price risks, appropriate risk mitigation policies would need to be put in place to provide relief to distressed farmers as well as enhance efficiency of production.
• While agricultural growth is envisaged at four per cent per annum during the Eleventh Plan, the Planning Commission’s projections suggest that the production of foodgrains needs to increase by 2-2.5 per cent per annum. The production of non-foodgrains will, thus, have to expand at a much higher rate to achieve the overall target of four per cent which will necessitate substantial development of activities such as horticulture, dairy, poultry, and fishery. This would require a revolution on the lines of the green revolution of the 1970s.
• Inclusive growth calls for greater financial inclusion with, inter alia, enhanced and easy access to institutional credit. The programme for financial inclusion initiated by the Reserve Bank in collaboration with banks and several State Governments by adopting modern technology needs to be intensified and expanded urgently. In view of small and fragmented farm holdings, the population dependent upon agricultural activity and incomes will have to increasingly rely on non-farm sources of income in future. Thus, diversification towards activities such as poultry, food processing and other rural industries will be critical for the betterment of living standards in rural areas.
• While there has been rapid integration of the Indian economy with the global economy since the early 1990s, the pace of progress on intra-regional integration within the country needs to be quickened to enable the rural areas to reap the benefits of higher growth.

Industry and Infrastructure

• The rebound in industrial production that started during 2002-03 continued during 2006-07 resulting from increased domestic and external demand. Modernisation of the capital stock, reduction/rationalisation of import tariffs and other taxes, increased openness of the economy, higher foreign direct investment inflows, greater competitive pressures, increased investment in information and communication technology and greater financial deepening are contributing to productivity gains in industry.
• The manufacturing sector has recorded robust growth, despite several infrastructure deficiencies. It is imperative to augment the existing infrastructure facilities, particularly roads, ports and power, to provide the enabling environment for industry to prosper.
• There has been mixed progress in the infrastructure sector so far. The telecom sector has witnessed high growth as reflected in the accelerated spread of mobile telephony in the country. Railways and ports have also witnessed some improvement. However, progress remains less than adequate in other sectors such as power, coal, water, roads, urban infrastructure and rural infrastructure.
• Urban infrastructure is a vital element in the growth process. Studies show that increase in the size of urban agglomerations is associated with large productivity gains. These gains emanate from the proximity to the product as well as labour markets, which provide savings in trade and transport costs on the one hand and the availability of skilled labour on the other. Efficient functioning of cities of all sizes is essential for improving the overall efficiency. Improvements in the provision of water, transport, sanitation, health and education facilities in urban areas are also essential for the welfare of the poor.
• The High Level Committee on Infrastructure headed by the Prime Minister has estimated that an investment of Rs.14,50,000 crore during the Eleventh Plan would be required to develop world class infrastructure. This would require a substantial increase in spending on infrastructure by both the public and privates sectors from the current levels of 4.6 per cent of GDP to almost 8 per cent of GDP every year.

Services

• The sustained strength of manufacturing activity, strong growth in tourism, improvements in the telecommunications, buoyancy in IT and BPO sectors, robust growth of the construction sector, acceleration in deposit and credit growth and opening up of the insurance sector have buoyed the services sector in recent years.
• The impressive performance of the services sector was attributable largely to the availability of skilled and cheap labour. However, the sustained acceleration in the services and the manufacturing activities is leading to incipient pressures on the supply of good quality skilled labour. While its demographic profile places the country favourably in terms of manpower availability, there are reports of emerging talent supply shortages. In order to reap the benefits of the demographic dividend, substantial expansion and reforms in the education sector would be needed on an urgent basis.

Fiscal Policy

• The process of fiscal consolidation in Central Government finances under the rule-based framework of the FRBM has been characterised by front-loaded reduction in deficit indicators in 2004-05, pause in 2005-06 and resumption of the process in 2006-07.
• The fiscal correction process is budgeted to continue during 2007-08. With the gross fiscal deficit budgeted at 3.3 per cent of GDP in 2007-08, the FRBM target of 3.0 per cent by 2008-09 appears feasible. The revenue deficit is budgeted at 1.5 per cent of GDP for 2007-08; the FRBM path envisages elimination of revenue deficit in 2008-09.
• Adherence to the FRBM target would require a reduction of 1.5 per cent in the revenue deficit/GDP ratio during 2008-09.
• Maintaining the current buoyancy in tax revenues over a higher base needs to be continued with sustained effort in the light of high income growth. The scope for deepening fiscal empowerment further through improved tax revenues lies in maintaining a moderate structure of tax rates and broadening the base without affecting the growth momentum of the economy.
• The Government’s policy of reprioritising expenditure has led to higher outlays for the social sector. The shares of public expenditure on education and health in India are, however, still low by international standards. Reprioritisation of expenditures towards social sectors along with higher capital outlays would promote fiscal discipline without restricting operational efficiency of the Government. Higher public spending on social services would improve the social infrastructure and provide productivity gains.

External Sector

• India’s linkages with the global economy are getting stronger, underpinned by the growing openness of the economy and the two way movement in financial flows. The ratio of merchandise exports to GDP has been rising since the early 1990s reflecting growing international competitiveness. At the same time, import intensity has been rising steadily as domestic entities have expanded access to internationally available raw material and intermediate goods as well as quality inputs for providing the cutting edge to domestic production and export capabilities.
• Structural shifts in services exports, led by software and other business services, and remittances have imparted stability and strength to India’s balance of payments. The net invisible surplus has offset a significant part of the expanding trade deficit and helped to contain the current account deficit to an average of one per cent of GDP since the early 1990s.
• Capital flows (net) have remained substantially above the current account deficit and have implications for the conduct of monetary policy and macroeconomic and financial stability. Like India, several other countries are facing a similar situation of excess foreign exchange inflows which is affecting monetary management in these countries as well. However, monetary management at the current juncture in India is more complex than in other EMEs for several reasons. First, domestic interest rates are higher than the return on foreign exchange reserves, which leads to quasi-fiscal costs. Second, although the fiscal deficit and public debt have declined in recent years in India, by international standards, they still remain high. This restricts the flexibility available to fiscal policy to keep inflation relatively low. Third, in India, the real sector has been liberalised over the years which constrains the ability to take administrative measures with regard to supply management. At the same time, several policy rigidities persist, inhibiting the rapid and flexible adjustments that are needed by the demands of a well-functioning market economy.
• Further, in India, the banking system has been gradually deregulated and the conduct of monetary policy is largely through the use of market-based instruments. This restricts the ability to use administrative instruments such as prescribing deposit and lending rates, which some other countries may be able to use. Moreover, some countries are managing capital account more actively than before.
• Finally, it is also necessary to recognise that India is one of the few emerging market economies (EMEs) to record current account deficits, along with a significantly high trade deficit.There has been a significant liberalisation of the policy framework with regard to capital outflows over the past few years. The policy regime for capital outflows is designed keeping the specific country context in view, especially characteristics of the real sector, and not merely the contextual level of inflows and extant absorptive capacity of the economy.
• First, the current regime of outflows in India is characterised by liberal but not incentivised framework for corporates to invest in the real economy outside India, including through the acquisition route. The regime has served the country well since Indian corporates are increasingly able to establish synergies with overseas units; to make up for lack of scale that has been a legacy problem in India, and to quickly acquire domain knowledge through acquisition.
• Second, significant liberalisation of outflows by individual households has been implemented following recommendation of the Committee on Fuller Capital Account Convertibility (Chairman: Shri S. S. Tarapore, 2006). However, the international experience shows that resident individuals often precede overseas investors in initiating outflows when the perceptions in regard to domestic economy’s performance or stability appear to turn adverse. Further, more favourable tax treatment, if any, on investments from foreign destinations relative to domestic investments provides a compelling incentive for round tripping.
• Third, as regards the regime for outflows through financial intermediaries, the approach is characterised by caution and quantitative stipulations whereby both prudential considerations and compulsions of management of capital account are relevant.

Financial Sector

• During 2006-07, the Reserve Bank continued to fine tune the regulatory and supervisory initiatives. In order to ensure asset quality, prudential measures were further tightened through increases in the provisioning requirements and risk weights in respect of specific sectors.
• The focus of the various prudential and supervisory measures was on anchoring financial stability while providing flexibility to the financial system. In order to further strengthen the domestic banking sector and to conform the banking sector with international best practices, commercial banks will migrate to Basel II norms in a phased manner from the year ending March 2008. Although implementation of Basel II poses a significant challenge to both banks and the regulators, it also offers two major opportunities to banks, viz., refinement of risk management systems and improvement in capital efficiency.

Monetary Policy

• In view of the incipient inflationary pressures, the stance of monetary policy progressively shifted from an equal emphasis on price stability along with growth (October 2004/April 2005) to one of reinforcing price stability with immediate monetary measures and to take recourse to all possible measures promptly in response to evolving circumstances (January 2007). Concomitantly, the Reserve Bank has taken pre-emptive monetary measures beginning mid-2004 to contain inflation and inflationary expectations.
• The major policy challenge for monetary policy during the recent period has been to manage the transition to a higher growth path while containing inflationary pressures so that potential output and productivity are firmly entrenched to sustain growth. Monetary measures, supported by supply side and fiscal measures, have helped in containing inflation and anchoring inflation expectations while supporting the growth momentum.
• The Reserve Bank’s self-imposed medium-term ceiling on inflation at 5.0 per cent has had a salutary effect on inflation expectations and the socially tolerable rate of inflation has come down. In recognition of India’s evolving integration with the global economy and societal preferences in this regard, the resolve, going forward, would be to condition policy and expectations for inflation in the range of 4.0–4.5 per cent. This would help in maintaining self-accelerating growth over the medium-term, keeping in view the desirability of inflation at around 3 per cent to ensure India’s smooth global integration.
• The conduct of monetary policy has turned out to be more complex in recent years for a variety of reasons. Globalisation has brought in its train considerable fuzziness in reading underlying macroeconomic and financial developments, obscuring signals from financial prices and clouding the monetary authority’s gauge of the performance of the real economy. There is considerable difficulty faced by monetary authorities across the world in detecting and measuring inflation, especially inflation expectations. The operation of monetary policy in India is also constrained by some uncertainties in the transmission of policy signals to the economy.
• Monetary policy in India has also to contend with the burden of challenges emanating from other sectors. First, fiscal imbalances remain large by international standards and have to be managed in a non-disruptive manner. Second, the enduring strength of foreign exchange inflows complicates the conduct of monetary policy. Third, in India, levels of livelihood of a large section of the population are inadequate to withstand sharp financial fluctuations which impact real activity. Accordingly, monetary policy has also to take into account the effect on these segments of the economy of volatility in financial markets, often related to sudden shifts in capital flows. Fourth, limitations on the elasticity of aggregate supply domestically impose an additional burden on monetary policy, particularly in the short term. While open trade has expanded the supply potential of several economies, it does not seem to have had any significant short-term salutary effect on supply elasticities.
• Persisting supply shocks to prices of commodities and services to which headline inflation is sensitive can exert a lasting impact on inflation expectations. Faced with longer term structural bottlenecks also in supply, with less than adequate assurance of timely, convincing and demonstrated resolution, monetary policy has to respond appropriately. The burden and the dilemmas, in fact, are greater in the event of a structural supply problem on account of its persistent effects on inflation. Managing structural change, while keeping inflation low and stable, without dampening the growth momentum is the quintessential challenge to monetary policy in the period ahead.

Related Reports:-

• Press Release - Annual Report 2006-07 - August 30, 2007
• Annual Report 2006-07 - Summary - August 30, 2007
• Complete Annual Report 2006-07 - August 30, 2007

Related Articles:-

• Subprime woes not over yet: RBI - Business Standard - August 31, 2007
• RBI wary of subprime, upbeat on growth - The Economic Times - August 31, 2007
• To fund credit growth, banks must widen base - The Economic Times - August 31, 2007
• RBI remains bullish on economy - Indian Express - August 31, 2007
• Big forex inflows giving jitters - Business Standard - August 31, 2007
• Growth momentum to continue in FY07-08: RBI - The Economic Times - August 30, 2007
• Growth on track but prices may hurt again: RBI - Hindustan Times - August 30, 2007
• Further defaults in US credit market threat to India: RBI - The Hindu - August 30, 2007
• RBI says inflationary concerns persist - Reuters - August 30, 2007

In India every one in five owns a phone

The total number of telephone subscribers has reached 232.87 million at the end of July 2007 as compared to 225.01 million in June 2007. The overall tele-density has increased to 20.52 in July 2007 as compared to 19.86 in June 2007.

In the wireless segment, 8.06 million subscribers have been added in July 2007 while 7.34 million subscribers were added in June 2007. The total wireless subscribers (GSM, CDMA & WLL (F)) base is 192.98 million now. The wireline segment subscriber base stood at 39.89 million with a decline of 0.20 million in July 2007.

Total broadband connections in the country have reached 2.47 million by the end of July, with an addition of 50 thousand links. In July, the GSM subscriber base grew from 135.9 million in June to 141.74 million. This translates into an overall growth of 4.23% over the previous month when the addition was was 5.3 million. The country's top mobile operator, Bharti Airtel, captured 31.58% share of the market. It added 2 million new users and its subscriber base touched 44.76 million.Vodafone Essar added 1.68 million new users to take its user base to 32.43 million to retain the second slot, while state-run BSNL, which is struggling with capacity expansion, added just 0.55 million new users to remain at the third slot with a user base of 28.97 million.

Complete Report:- TRAI's Press Release Dated 24-08-2007

Inflation rises to 4.10% for the week ended 11th August, 2007

The official Wholesale Price Index for 'All Commodities' for the week ended 11th August 2007 rose by 0.1 percent to 213.4 from 213.1 for the previous week.

The annual rate of inflation, calculated on point to point basis, stood at 4.10 percent for the week ended 11/08/2007 (over 12/08/2006 ) as compared to 4.05 percent for the previous week. The annual rate of inflation stood at 5.07 percent for the corresponding period of last year.

The increased inflation is due to higher prices of fruits & vegetables (4%), bajra (3%), masur (2%) and gram (1%). However, the prices of moong (5%), mutton (4%), eggs (2%) and urad (1%) declined.

Inflation eases to 4.05% for the week ended 4th August, 2007

India's inflation slowed faster than expected in the first week of August as the prices of fruits, vegetables and other foods eased. The annual rate of inflation stood at 4.05 percent for the week ended Aug. 4, the lowest since the week ended June 16, compared with 4.45 percent the previous week. Analysts had estimated inflation at 4.3 percent. On year-to-year basis, wholesale prices-based inflation dropped by over one percent as it had stood at 5.08 percent during the corresponding period of the previous fiscal.

Food prices declined as flood waters receded in the north, east and northeast. These areas were swamped in annual monsoon flooding that caused an unexpected spiral in food prices in the last week of July. The Reserve Bank of India may keep borrowing costs unchanged as inflation was below its 5 percent target for the ninth week.

The index of food articles declined 0.7 percent, led by a 6.5 percent fall in the index of vegetables and a 4.8 percent drop for the benchmark for fruits and vegetables, according to the report. Poultry and meat prices fell 0.5 percent in the week.

The revised estimates by CSO say that the inflation rate for the week ended June 9 was unchanged at 4.28 percent. The government revises the inflation rate after a delay of two months on additional price data.

Inflation was hovering between 4.0 percent and 4.50 percent for the past two months, with the lowest figure at 4.03 percent during the week ended June 16. The wholesale price index, on which inflation is based, declined by 0.1 percent to 213.1 points during the week under review from 213.4 percent in the previous week, the data showed. The Reserve Bank of India (RBI), has already increased the cash reserve ratio (CRR) for the commercial banks from 6.50 per cent to 7.0 percent aiming to curb inflationary pressures on economy through withdrawing excess liquidity from the banking system.

Strong rupee may shave off USD 30 bn in Indian exports

By now, it's well known that India's software industry has been hit by the rising rupee and the problem will only rise if the currency maintains its upward climb against the dollar. But what was probably not known is that IT would be the biggest loser while other sectors, which have been crying foul due to cheaper greenbacks, might see a smaller dent, thanks to lower dependence on imported raw material and clients.

A study commissioned by commerce ministry has revealed that even if exports grow 20 percent this year, the appreciation of the currency from Rs 44 to a dollar to Rs 40.50 is expected to result in a Rs 53,000 crore or USD 13 billion loss. After IT, the rupee appreciation will have the biggest impact on the profitability of meat, spices and textiles exporters followed by leather and gems and jewellery. Pharma, plantations and construction sector are expected to have a moderate impact, while engineering goods and chemicals may not be affected much.

The study said rupee appreciation has rendered 11,000 people employed in textiles and garment firms jobless during March-June this year, while another 1,900 were unemployed in the leather sector. But overall, exports are going to result in net addition of jobs, though there would be sectors with lower exports which see lower employment numbers. And, if the currency continues to rise against the dollar - which accounts for 70 percent of the export invoices - the unemployment problem will accentuate. What's more, surveys conducted for the study have revealed that there has been considerable loss of business across sectors with those that depend more on imports for their raw material needs, hit the most. So, it's the gems exporters in Mumbai and Surat, who import nearly 75 percent of their raw materials, who are expected to be hurt most, followed by silk (over 70 percent dependence on imported raw material) and machine tools and electronics (around 45 percent each). With costs rising, it's only natural that profitability would be hit. While the biggest dent has been to the IT sector - as is evident from the first quarter results of Infosys, Wipro and Satyam - the report has predicted that profitability could fall by as much as 250 percent while textile companies would be hit by up to 150 percent, leather (75-80 percent) and gems and jewellery (60-70 percent).

Sources said the impact would have been lowered a little thanks to a package of measures including higher duty remission, cheaper export insurance and subsidised loans that was announced by the government earlier this month.

Source: The Economic Times

Direct tax collections buoyant on continued economic growth

Direct tax collections during fiscal 2007-08 have recorded a growth of 44.39% up to 15th August, 2007. Tax collections stood at Rs.59,210 crore, up from Rs.41,006 crore during the same period last fiscal.

Corporate tax recorded a growth of 52.25% at Rs.33,164 crore, up from Rs.21,783 crore during last fiscal, while personal income tax (including FBT, STT and BCTT) grew by 35.57% at Rs.25,989 crore, up from Rs.19,170 crore last fiscal. Securities Transaction Tax (STT) grew by 36.30% at Rs.2,495 crore and Banking Cash Transaction Tax (BCTT) grew by 29.71% at Rs.207 crore.

The continued buoyancy in direct tax collections is a reflection of the robust growth in the economy, better tax compliance and improved tax administration.

Source: Press Release at incometaxindia.gov.in

Industrial production grows by 11% in the first quarter of current fiscal

The Index of Industrial Production (IIP) numbers for June 2007 indicate a persistence of the somewhat unbalanced pattern of growth that was evident in the numbers for the first two months of this fiscal year. The overall index grew by 9.8 per cent over the corresponding month of last year, somewhat slower than during April and May, both of which showed double-digit growth; but growth during the quarter clocked in at 11 per cent, which is still quite respectable.

As in April and May, it is the significant variation in growth across industries that is a primary feature of the numbers and raises questions about momentum and sustainability. In both April and May, by far the fastest growing industry was wood and wood products, not at all significant in the overall basket but contributing disproportionately to the growth during the quarter. June was a third spectacular month for this industry - it grew by over 103 per cent over June 2006 and by over 104 per cent during the quarter. One could imagine that all the real estate that has been developed in recent months, be it residential or commercial, needs to be decorated and furnished, leading to a surge in demand for the products of this industry, but, even then the numbers are staggering. The other industry which performed exceedingly well is food products. Though it moderated considerably during June, growing at only 1.3 per cent, it notched a growth rate of over 27 per cent during the quarter. This was on the back of 55 per cent growth during April. If it hadn't been for these two industries accelerating so sharply, overall growth would have been far less buoyant.

By contrast, several major industries were relatively sluggish during the quarter. Metal products, for example, declined by almost 8 per cent during June; as a result, this sub-sector grew by barely 1 per cent over the quarter. Transport equipment, which has not been having a particularly good time, grew by 0.8 per cent during June and less than 2 per cent during the quarter. Paper, chemicals and non-metallic minerals were some of the other relatively slow-growing segments during the quarter. The one major industry which has sustained its momentum and also points to enduring optimism about the medium term, is machinery and equipment, which grew at over 18 per cent during June and over 19 per cent during the quarter. However, as the economic advisory council to the Prime Minister has pointed out, rapid growth driven more by an investment boom can be halted more quickly than if led by a consumption boom. In that sense, it is the capital goods sub-sector that needs to be watched closely for any change of tempo.

Over the past three months, it seems quite clear that the broad-based momentum that had been visible over the last couple of years has now subsided. Certain industries are doing very well, presumably driven by micro-economic factors, while some important ones which are more closely associated with macro-economic cycles are showing distinct signs of flagging. The latter appears consistent with the overall impression that the first-quarter corporate results created; the first signs of a plateau after several quarters of escalation. None of this should be surprising. After several interest rate hikes and liquidity control measures as well as the sharp appreciation in the rupee, a slowdown of some magnitude was inevitable. The only question is one of degree.

Related Reports:-

• Quick estimates of index of industrial production for June, 2007 - domain-b.com - August 10, 2007
• IIP growth almost flat at 9.8% - The Economic Times - August 11, 2007
• India's June IIP Growth Slows Down On Tighter Monetary Policy - rttnews.com - August 10, 2007

Indian companies are poor in legal compliance

Indian companies lag behind their Asia-Pacific counterparts in regulatory compliance, as per the 2007 Asia Pacific CIO Survey, conducted by MarketShare for software firm Serena Software. The survey interviewed nearly 350 CIOs from medium and large companies across the Asia Pacific Region, including 50 from India. The highlights of the survey are

• Only 18% of Indian companies have implemented regulatory compliance programmes, much lower tahn the Asia Pacific average of 42%.


• 68% of Indian chief information officers (CIOs) agreed that there are business benefits in regulatory compliance initiatives


• 45% of Indian CIOs are planning to implement compliance initiatives by 2008 end.


• In APAC, Japan (56%) is the leader in implementing compliance initiatives, followed by Sungapore (52%) and South korea (38%).


• 88% of Indian CIOs realise the importance of IT in ensuring regulatory compliance


• Only 44% of Indian CIOs said the upper management supported the role of IT for compliance


• Only 40% of Indian CIOs are ready to take the accountability for legal compliance whereas the APAC average is 67%


• Only 20% said they currently spend more than 15% of their total IT budget on compliance-related activities while 26% planned to spend over 15% of their total IT budget onn comapliance related activities over the next two years


• While 52% of Indian CIOs said compliance is important 'to do business/trade with foreign companies', 32% said it was required 'to increase the company potential of partnering with foreign companies'


• For Asia Pacific, the companies that have implemented compliance programmes has doubled to 42% in 2007 from only 21% in the preceding year.

Indian telecom companies added a whopping 7.34 mn users in June, 2007

The temporary slowdown in India’s celebrated telecom growth over the last couple of months due to government’s enforced verification drive is now history. The telecom sector is buzzing again—operators have added a record 7.34 million subscribers in June, the highest subscriber growth in a month so far, the country’s telecom regulator. More importantly, industry players also said that June’s growth in subscriber numbers was a global record. Going forward, the industry is also confident of maintaining the growth rate of 7 million plus new users per month.

GSM players accounted for over 71% of June’s record growth and contributed 5.2 million users to this fold while the CDMA operators added the rest. This has also resulted in the Indian cellular base crossing the 185-million mark.

However, despite record growth over the last 12 months, the fact is that less than 20% of the country’s 1.1 billion population own a telephone! “If the government extends its support in the form of good policy decisions, then the sector can increase the 7 million monthly figure to about 9 million,” said the spokesperson with a leading cellular operator.

Commenting on the record growth, the Association of Unified Service Providers of India’s general secretary S C Khana said, “The growth was driven by CDMA players who cut handset prices to less than Rs 1,000, forcing the GSM sector to follow suit. The competition that followed over the handset price wars resulted in record additions. With more cheap handsets set to come in, and as the network coverage increases especially in the C category circles, the growth rate will increase.”

A closer look at June’s figures tell an interesting story. At a time when all players are riding the cellular boom, public sector BSNL has registered negative growth in five of the 21 telecom circles where it offers services. The PSU added just 0.43 million new subscribers in June compared to 1.96 million additions by Bharti Airtel, 1.54 million by Vodafone-Essar and 1.2 million by Reliance Communications. At the same time, India’s largest cellular operator Bharti Airtel continues to outperform the industry—the company added 1.9 million users last month taking its total subscriber base to over 42 million.

While cellular growth is back on track, the broadband sector has failed to match the trend. Total broadband users totalled 2.52 million in June-end, with the addition of a mere 0.06 million new connections last month. Despite 2007 being declared as the Year of Broadband, the country has added just 0.47 million high speed internet users during the first six months of the year.

India had added a record 6.73 million subscribers in January this year, but the preceding months witnessed a slow down with growth remaining below the peak of 6 million per month for the next couple of months as the impact of stringent verification rules and capacity constraints began to show. This resulted in the subscriber additions falling to 5.96 million in February, 3.53 million in March and 5.38 in April, before picking up to touch 6.57 million in May.

Source:

• Telcos add 7.34 m subscribers in June - The Economic Times - July 26, 2007

Related Article:-

• Highest-ever wireless users of 7.34 lakh in June - Business Line - July 25, 2007

Inflation rate rises to 4.41 percent for the week ended July 14, 2007

Higher food prices pushed up the inflation rate to 4.41 per cent, but analysts expect the Reserve Bank not to raise key rates when it reviews the monetary policy on July 31. The inflation rate based on wholesale prices index, the key measure of cost of living, is still within the central bank’s medium-term target of 4-4.5 per cent and annual target of 5 per cent for this fiscal.

Vegetables costlier

Among the primary articles, prices of vegetables rose sharply by 7 per cent during the week, while those of cereals rose by 0.9 per cent.Though inflation figures will have a bearing on the measures to be announced by the RBI to regulate money supply, analysts said inflation is within control and there was little chance of the banking regulator going for a rate hike. Finance Minister P Chidambaram had indicated last week that high crude oil and food prices did not necessarily mean that monetary policy would be tightened further. However, the ever rising cost of vegetables may be a cause of concern for the government. Vegetable prices soared seven per cent for the week ended July 14 registering the highest increase among all items. Last week too prices of vegetables had gone up by 4.4 per cent. WPI, on which inflation data is based, rose by 0.1 per cent to 212.9 per cent during the week compared to 212.6 per cent in the previous week.Prices of some food items, however, came down marginally. Fish-marine became cheaper by two per cent while urad prices declined by one per cent pulling down the overall price of pulses by 0.3 per cent during the week. In the non-food articles category, prices of fibre rose by 2.2 per cent.

Manufactured products

Among manufactured products, rates of rice and bran oil rose by three per cent each, while imported edible oil, groundnut oil, cottonseed oil and oil cakes became costlier by one percentage point each. However, the prices of sugar, jaggery and gingelly oil declined by one per cent. Prices of fruits fell by 0.9 per cent. Egg, meat and fish also became cheaper by 0.5 per cent each. Index of paper and paper products group rose by 0.1 per cent to 192.8 points from 192.7 points last week due to marginal rise in the prices of printing paper white.Inflation numbers for the week ended May 19 was revised to 5.30 per cent compared to the provisional figure of 5.06 per cent. This was done as WPI for the week stood at 212.4 points against the provisional figure of 211.9.

Related Article:-

• RBI’s Review of Annual Policy Statement - merinews.com - July 30, 2007

Inflation remains unchanged at 4.27 percent

Inflation remained unchanged at the previous week's level of 4.27 per cent for the week ended July 7, despite a fall in prices of fruit and vegetables, poultry chicken, moong and masur, and some manufactured items.

The wholesale prices-base index stood at 4.83 per cent in the corresponding week a year ago. During the week, prices of fruits declined by over 16 per cent, while vegetables witnessed an increase of 4.4 per cent. However, fish marine, condiments and spices got dearer along with pulses like gram and arhar. Among the manufactured items, prices of imported edible oil, sugar, groundnut oil and few metal products like lead ingot, aluminium material increased.

Related Article:-

• Inflation remains unchanged at 4.27% - The Economic Times - July 20, 2007