India 27

was abolished, duty on non-coking coal was reduced from 15% to 5% and that
on pig iron was dropped from 10% to 5%. However, the government also
reduced the extent of duty rebate for exports of steel to countries with which
India has free-trade agreements or preferential trade agreements. The
government allocated Rs700m (US$16m) for subsidies to small steel producers,
which will receive Rs500 per tonne. Faced with a shortage of coking coal when
Chinese coal exporters reneged on their commitments, the Steel Authority of
India Limited (SAIL) began to mix sponge iron with pig iron in its steel
converters. India’s sponge iron output in fiscal year 2003/04 (April-March) was
8.1m tonnes, and is likely to rise to 10m tonnes in 2004/05. Sponge iron
producers are also facing shortages of iron ore and railway wagons.

The domestic economy

The economy grows by 10.4%
in the last quarter of 2003
Economic trends
@VS = Real GDP growth in October-December of 2003 was a strong 10.4% (at
factor cost) year on year, up from 2% in the same quarter of 2002. This was
largely owing to the fact that 2002 was a year of widespread drought!
agricultural output in the last quarter of 2002 had fallen by 9.8% year on year.
The autumn crop in 2003 recovered and improved upon the level reached in
2001; hence agricultural output grew in fiscal year 2003/04 (April-March) by
16.9% over the previous year. The growth of industrial and services output was
marginally lower in 2003 than in the previous year. Industrial growth
decelerated slightly, but this was on account of slower growth in mining output;
manufacturing growth accelerated to 7.4%. In February the Central Statistical
Organisation (CSO) released advance estimates of growth of 8.2% in 2003/04,
even before the fiscal year had ended. The CSO expects all major sectors!
agriculture, industry and services!to have grown faster in 2003/04 than in the
previous year. It has revised growth figures for 2002/03 downwards.@VE =

GDP and its components

(% change, year on year)
Oct-Dec Oct-Dec
2001/02 2002/03 2003/04 a 2002 2003
Agriculture 5.7 -5.2 9.4 -9.8 16.9
Industry 2.9 6.1 6.7 6.8 6.5
Mining 1.0 8.8 3.2 7.6 4.2
Manufacturing 3.4 6.2 7.0 6.9 7.4
Electricity 4.3 3.8 4.3 4.8 5.2
Construction 3.7 7.3 5.7 7.4 5.1
Services 6.2 7.1 7.8 6.8 9.0
Trade & hotels 8.7 7.0 11.5 6.5 13.1
Finance 4.5 8.8 7.3 8.6 7.7
Others 5.6 5.8 5.3 5.6 2.8
Real GDP growth 5.6 4.0 8.2 2.0 10.4
a Advance estimates.
Source: Central Statistical Office.

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28 India

Inflation remains in check
Consumer price inflation rose in the early months of 2004, but inflation fell
below 4% in March. The behaviour of cost-of-living indices appears to have
prompted the Reserve Bank of India (RBI, the central bank) to continue its
relaxed stance on interest rates in its spring credit policy (which this year was
announced in May because of the elections). However, the wholesale price
index shows much higher inflation because of the stronger weighting of
petroleum products in the index.

Inflation
2003 2004
Consumer price index May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
% change, year on year 4.7 4.4 4.2 3.1 2.9 3.3 3.1 3.8 4.4 4.1 3.5
Source: Labour Bureau.

Food production increases
dramatically on previous year
Agriculture
Early estimates place foodgrain production in 2003/04 at 21% above that in
2002/03 (when there was a severe drought) but at almost the same level as in
2001/02. Rice output in 2003/04 was 7% below last year, and wheat output was
6% above that in 2001/02. But the regional distribution of rainfall was such that
the output of oilseeds in 2003/04 rose by 28% compared with 2001/02; within
this total, groundnut output rose by 30% and that of soybeans by 37%. Cotton
output in 2003/04 was also 26% above the level in 2001/02. Sugarcane output,
on the other hand, is expected to have been 10% down in 2003/04 compared
with 2001/02. The world wheat price has risen from US$105-110 a tonne to
US$160-165 a tonne in a year. At this international price level and with a
domestic price of Rs6,300 (US$140) a tonne, exports can be profitable. The
wheat crop is expected to have totalled 76m tonnes during 2003/04, as against
65m tonnes the previous year. With the good autumn crop, oilcake exports in
2003/04 recovered to their level of two years earlier, although they are far from
the peak reached in 1997/98. Most oilcake exports consist of soybean cake, for
which there is strong demand in China and East Asia; cake from other major
oilseeds, such as groundnut and sesame, is consumed domestically as
animal feed.

Exports of oilcake
(m tonnes)
Soybean Rapeseed Other Total
1997/98 2.51 1.20 0.43 4.14
1998/99 2.73 0.43 0.15 3.31
1999/00 2.25 0.08 0.10 2.43
2000/01 2.18 0.06 0.10 2.34
2001/02 2.51 0.31 0.20 3.02
2002/03 1.33 0.46 0.11 1.90
2003/04 2.68 0.45 0.15 3.28
Source: Business Line.

Government intervention in Sugar prices are subject to strict government controls. Originally, the central
sugar is likely to continue government fixed a statutory minimum price (SMP) for cane, which was related
to the price at which the government compulsorily purchased sugar from mills

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India 29

for sale through the public distribution system; the aim was to distribute the
proceeds fairly between cane growers and sugar mills. However, in the 1960s
state governments began to fix higher state-advised prices (SAPs) for growers
within their states. Since neither the central government’s procurement price
nor the market price depended on SAPs, sugar mills often made losses in states
that pushed up their SAPs, and the mills therefore refused to buy all the cane
offered to them. The state governments then compelled them to buy the cane
offered. The mills crushed the cane, but often did not pay growers the full price,
and so accumulated debt to the growers.
In 1996 Allahabad High Court struck down the right of state governments to fix
SAPs. But that judgement was appealed against; in the verdict finally delivered
by the Supreme Court on May 5th this year, the right of state governments to
fix SAPs was upheld. In 2003/04, however, the drought in the south reduced
cane sowings. The market price of sugar rose from Rs1,060 to Rs1,400 per
100 kg, but the central government did not raise the SMP. The government also
gave the states money to clear cane arrears, in exchange for a promise from the
states not to raise their SAPs. As a result, sugar mills in Uttar Pradesh have
cleared their arrears on cane purchases. Finding themselves short of cane, the
mills have been offering free pesticide and 125 kg of urea fertiliser per hectare
to growers.

Cane and sugar production in principal states

(m tonnes)
Cane Sugar
2002/03 2003/04 2002/03 2003/04
Uttar Pradesh 59.3 50 5.7 4.8
Maharashtra 53.4 28 6.2 3.1
Tamil Nadu 16.6 11 1.6 1
Source: Business Line.

India enters the lucrative India has recently entered the world vanilla market. Global vanilla output in
vanilla market 2001 was 5,583 tonnes, obtained from 40,846 ha under cultivation. India now
has 3,700 ha planted to vanilla, of which 1,000 ha has started yielding vanilla.
A vanillin extraction plant with an output capacity of 500 tonnes per year is
being set up in Kerala at a cost of Rs70m; with a yield of 2.5-3%, the plant will
require 125,000 tonnes per year of green beans.

Reliance funds aloe vera Reliance, India’s largest company, agreed in April to fund a Rs8bn project to be
production implemented by the government-owned National Bank for Agriculture and
Rural Development. Reliance will supply 5,000 farmers, spread over 1,000 ha,
with saplings of aloe vera and patchouli, and will then buy their output to
process and sell.

Infrastructure
Telecoms players begin In February this year Bharti Televentures, one of India’s three biggest private
outsourcing telephone companies, outsourced the management, maintenance and quality
of service in ten existing and three proposed network zones to a Swedish
telecommunications company, Ericsson, for US$400m. Ericsson will take over

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30
Satellite users complain about
restrictions
Stakeholders in the Dabhol
Power Corporation negotiate
The railways suffer from a
shortage of wagons
Country Report June 2004
India
250 Bharti employees engaged in the work. Bharti has 4m customers in 1,650
towns. In March Bharti signed another agreement, with a US company, IBM, to
outsource US$700m-750m of hardware, software and information technology
(IT) services over ten years, involving the transfer of 200 Bharti employees to
IBM. Bharti has also taken a US$40m share in the US$500m submarine cable
between South-east Asia and western Europe, along with 15 other companies.
The VSAT (very small aperture terminal) Services Association of India (VSAI,
representing a host of Indian satellite users)!which includes stock exchanges,
banks and companies among its members!complained in February about the
high prices charged by the Indian Space Research Organisation (ISRO).
Currently, VSAI’s members are allowed to rent satellite services only through
ISRO. Foreign VSAT operators give bulk discounts, deferred payments, and also
more powerful connections, which cut down on hardware costs. VSAI found it
particularly unfair that broadcasters and Internet service providers in India
could use any satellite provider, whereas VSAI members are forced to use ISRO.
Data Access, an ISP, has used this freedom to grow fast enough to replace
Videsh Sanchar Nigam Limited (VSNL), the official overseas telecoms service
that was sold to the Tata Group three years ago, as the largest Indian carrier of
overseas telecoms.
@VS = Before it went bankrupt, a US power company, Enron, had valued its 65%
stake in Dabhol Power Corporation (DPC) at US$1.2bn. In a settlement
supervised by a US court, General Electric (GE) and Bechtel, both of the US,
bought 49% of Enron’s equity stake for US$20m. In April stakeholders in DPC
met in Singapore. Indian financial institutions offered to take over the foreign
debt component of DPC from the Overseas Private Investment Corporation
(OPIC, a US government agency), which assumed it during the US proceedings
at a discount of 40% on Phase I loans and 30% on Phase II loans. OPIC is
considering the offer. It was decided at the meeting that GE and Bechtel would
prepare a report on the condition of DPC’s plant. The total debt of US$1.9bn is
likely to be written down to US$600m, the total cost from US$3bn to US$1.5bn
and the 85% stake held by GE and Bechtel to US$385m. At the written-down
price, the potential buyers are Tata Power and Reliance Energy of India, British
Gas and Royal Dutch/Shell of the UK/Netherlands. Tata Power has formed a
consortium with a UK oil company, BP, and Gas Authority of India Limited
(GAIL) to make a bid: BP would supply liquefied natural gas (LNG), Tata Power
would run the power station and GAIL would sell excess LNG.@VE =
The state-owned national railway company, Indian Railways, carried 518m
tonnes of goods in 2002/03, and estimates that it carried 550m tonnes in
2003/04. Indian Railways is suffering from a serious shortage of wagons. The
company regards transport of coal, steel, cement, fertiliser, foodgrains and
defence supplies as core elements of its business; the shortage of rolling stock is
most severe for coal, steel and non-core goods. The railways placed orders for
20,000 wagons in May 2003, but by December they had received only 8,000.
www.eiu.com © The Economist Intelligence Unit Limited 2004
India 31

Manufacturing
Car and two-wheeler Sales of passenger vehicles exceeded 1m in 2003/04, while 5m two-wheelers
sales soar were sold. Sales of motorcycles and scooters rose by 13%, and sales of cars and
utility vehicles increased by 32%. Sales of more expensive cars grew faster that
those of cheaper models, and a small market is emerging for luxury cars. Sales
of trucks and buses, by contrast, were sluggish, rising from 191,000 in 2002/03
to 200,000 in 2003/04.

Passenger vehicle sales

(‘000; fiscal years, Apr-Mar)
Domestic sales Exports Total sales Growth
2002/03 2003/04 2002/03 2003/04 2002/03 2003/04 (%)
Cars 541 696 70 125 612 821 34
Mini 143 168 7 10 150 178 19
Compact 299 370 34 84 333 454 36
Mid-size 92 139 30 31 122 170 39
Executive 2 14 0 0 2 14 553
Premium 4 5 0 0 4 5 30
Utility vehicles 114 145 1 0 115 145 27
Multi-purpose vehicles 52 60 1 1 53 60 15
Source: Society of Indian Automotive Manufacturers.

Tata Motors buys Daewoo In March, Tata Motors (formerly known as Tata Engineering and Locomotive
Commercial Vehicle Company Company) bought Daewoo Commercial Vehicle Company for US$250m. Tata
Motors manufactures medium-duty vehicles, whereas Daewoo manufactures
mainly heavy vehicles. Ratan Tata, the chairman of Tata Motors, said that he
wanted Daewoo to improve the technological base of Tata Motors as well as to
provide it with a share of the heavy-vehicle market. Tata Motors had gained a
foothold in developing-country markets in the 1970s and 1980s, but lost market
share to competitors. Now Mr Tata hopes that Daewoo’s know-how will
facilitate a return to world markets for Tata Motors. The company also began
shipping its Indica model to the UK’s Rover in the last quarter of 2003: Rover
will market the Indica in the UK. However, exports led to a shortage of Tata
vehicles in India, especially given a rise in demand that resulted from a cut in
excise duty, and customer waiting-times went up from 15 to 30 days. Tata
Motors is therefore planning to increase output from 450 to 750 cars a day, and
to set up an assembly line dedicated to Rover, which has agreed to market
100,000 cars a year. Tata expects to increase its sales from Rs108.4bn in 2003/04
to Rs150bn in 2004/05.

The Tata Group improves its Under the chairmanship of Mr Tata, the Tata Group has undergone
performance considerable restructuring. Between 1992 and 2004 its workforce fell from
310,000 to 220,000, and the share of “knowledge workers” went up from 10%
to 33% (Tata Consultancy Services is India’s largest IT company, and is fully
owned by the Tata Group). The share of branded products in the group’s sales
went up from 19% to 42%. The Tata Group has spent Rs270bn on buying shares
in its companies, and now owns at least 26% of the equity in every company it
manages. The group has moved out of soaps and toiletries, cosmetics,
pharmaceuticals, computer manufacturing, telecommunications equipment,

Country Report June 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004
32
Petronet receives its first
LNG vessel
GAIL continues an
expansionary drive
Several pipelines are being
developed
ONGC increases its refining
capacity
Country Report June 2004
India
paints, cement, textiles and consumer electronics, and has begun to concentrate
on passenger cars, automotive components, retailing, IT services, telephones
and insurance.
Oil and gas
Petronet, a gas pipeline operator, received the first LNG ship at Dahej on the
western coast on January 30th 2004. Petronet has one ship running between
Dahej and Qatar, where it buys 2.5m tonnes of LNG a year from a Qatari
company, Ras Gas. Petronet has ordered another ship, which will be delivered
in early 2005 and will double its import capacity to 5m tonnes per year. It is
also negotiating with Ras Gas for a larger long-term gas purchase agreement,
but has so far failed to strike a deal. As a contingency, Petronet will buy
additional gas in the spot market. However, its first shipment was loss-making!
there is a take-or-pay clause between Ras Gas and Petronet, and Petronet set a
price of US$4.87/m British thermal units (Btu) for consumers in Gujarat and
US$4.93/m Btu throughout the rest of the country. It found no buyers at those
prices, and eventually sold the LNG, via state-owned oil companies, to urea
manufacturers at US$2.60-3/m Btu.
India’s first major pipeline company, GAIL, was set up in the 1980s to transport
gas from the Bombay High oil- and gasfields to fertiliser factories and power
stations further north. Apart from its industrial clients, GAIL distributes gas to
households in Mumbai and Delhi as well as to petrol and gas pumps for public
vehicles in Delhi. GAIL continues to enjoy strong cash flows, and is therefore
looking to invest elsewhere. In 2003 it purchased a 19% stake in an Egyptian
distribution project, Fayum Gas, and a 22% share of Shell CNG in Egypt. GAIL is
also looking at investment possibilities in Iran and the Philippines, and is
planning to enter retail distribution in 22 Indian cities.
Hindustan Petroleum Corporation Limited (HPCL) is planning to lay a product
pipeline with a capacity of 5.8m tonnes per year from Mundra on the Gujarat
coast to Delhi, at a cost of Rs13.7bn. Reliance plans to lay two pipelines from its
33m-tonnes/year refinery in Jamnagar to Patiala and Kanpur, at a cost of
Rs16.4bn and Rs17.8bn respectively. The government is setting up a crude oil
buffer stock of 5m tonnes at Vishakapatam and Bangalore; the oil will cost
Rs50bn, while storing it will cost Rs16.5bn a year. GAIL and Total of France are
digging a cavern in Vizag for the storage of 60,000 tonnes of liquefied
petroleum gas (LPG). GAIL will import LPG in the summer, when prices go
down, for sale during the winter. It is also laying a LPG pipeline from Vizag to
Secunderabad. The number of consumers of LPG increased from 35m in 1999 to
73m in 2004; the fuel is mainly used for domestic cooking.
The Oil and Natural Gas Corporation (ONGC) bought an oil refinery in
Mangalore from the Aditya Birla group two years ago at a highly competitive
price. The refinery has increased its capacity from 4.5m tonnes/year to 10.5m
tonnes/year, and made a profit for the first time in 2003/04. ONGC is also in
the middle of a programme to stimulate its Bombay High offshore oilfields by
means of water and gas injection; it has spent Rs25bn of a planned total for the
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India
A glut of refining capacity
stimulates marketing
British Gas invests in
exploration
IT firm are recruiting staff
Country Report June 2004
33
programme of Rs83.6bn. In addition, ONGC will tender an international
turnkey contract to drill 56 wells for coal-bed methane in the West Bokaro-
Jharkhand coalfields.
Bharat Petroleum Limited (BPL) and Chennai Petroleum Corporation have each
added 3m tonnes/year to their existing refining capacity. As a consequence,
anticipating a glut in refining capacity and intense competition, these public-
sector refineries have accelerated the opening of new petrol pumps. The
number of pumps they own went up from 608 in 2001/02 to 960 in 2002/03
and 1,934 in the nine months to end-December 2003. Public-sector refineries,
which marketed 11.3m tonnes of the output from Reliance Energy’s Jamnagar
refinery last year, plan to take less this year, preferring to sell their own refined
products. Reliance is therefore also planning to open 500 petrol pumps, which
should sell 3m tonnes per year. Reliance could export the rest, but export prices
are Rs1,200-1,500 per tonne below local prices. In March Reliance reached an
agreement with the government refinery companies; Reliance will market
3.7m tonnes of diesel, 300,0o0 tonnes of kerosene and 300,000 tonnes of LPG
at a 37% discount on the excess of retail price over export price, and 5m tonnes
of diesel oil, 800,000 tonnes of kerosene and 300,000 tonnes of LPG at a 50%
discount. Later in March, HPCL agreed to take another 500,000 tonnes from
Reliance at a discount of 40%. In 2003/04 Reliance’s sales increased by 13% to
Rs520bn, and its profits rose by 26% to Rs52.7bn!95% of which was derived
from energy. Reliance’s cash flow is now Rs100bn a year; the company aims to
raise this to Rs500bn in the next five years.
British Gas is to set up two new wellhead platforms worth US$140m in the
Mukta-Panna oilfield, it will drill six horizontal wells from one of the platforms,
and five from the other. The wells will come on stream in the third quarter of
2005, and are expected to yield 18m barrels of oil and 74bn cu ft of gas during
their lifetime.
Other services
The collapse of the IT boom in the US in 2000 had an impact on the Indian
industry. The US industry, which used to employ 50,000-100,000 Indian
software engineers every year, began to shed workers. Indian firms also began
to face stronger competition in world markets, and consequently many small
Indian firms closed down. Campus recruitment ceased, and the firms that were
recruiting began to hire engineers who had lost their jobs. The pattern has
changed this year, however. Exports are booming, and leading Indian IT firms
are facing staff shortages. They have therefore made plans to recruit large
numbers of new staff. In addition, foreign firms find India a favourable location
with its relatively inexpensive engineers, and are expanding operations in India.
As the labour market tightens, campus recruitment has been revived: almost
one-half of staff taken on this year will be recent graduates.
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34 India

Planned IT staff increases, 2004/05

(Apr-Mar)
Company New staff (no.)
Wipro 9,000
IBM 5,000
Accenture 5,000
Satyam 4,000
Cognisant 4,000
Huawei 3,000
Agilent 1,600
Kanbay 1,500
Logica CMG 1,200
iGate 1,200
iSoft 650
Usha Commvision 600
Trilogy 300
Silicomp 300
Sireea Atlantic 300
Vincity 250
Concerto 200
Headstrong 150
AMD 120
Source: Business Line.

Indian ports begin to become
more competitive
The Sri Lankan capital, Colombo, is an important entrepôt for south Indian
ports. Of its annual container traffic of about 2m TEUs, 40% is destined for
India. In comparison, the Indian government-owned ports handled a total of
3.9m TEUs in 2003/04. Concerned about this situation, the shipping ministry
asked Tuticorin, Chennai (Madras) and Cochin ports to match Colombo’s
charges; currently Chennai charges almost twice as much as Colombo.
Jawaharlal Nehru Port Terminal (JNPT) in Chennai (Madras) handles 2m TEUs a
year. Maersk Concor of Denmark won the bid for a new Rs10bn container port
at JNPT in March; it estimated a revenue share of 35.5% of the Indian market
and guaranteed a minimum throughput of 140,000 TEUs in the first year, rising
to 1.3m TEUs in the seventh year, and was given a 30-year build-operate-
transfer licence. P&O won the container terminal in Madras two years ago with
a revenue share of 37.1%. P&O has the only container terminal in Madras;
Maersk will have to compete with both the government and the P&O berths in
JNPT. It will also have to build the terminal from scratch!unlike P&O, which
took over a considerable amount of existing infrastructure in Madras. APM
Terminals, a subsidiary of A P Moller of the Maersk Group, increased its share
in the equity of Gujarat Pipavav Port (GPP) in April from 12.5% to 26% by buying
shares from Sea King, which used to own 37% of GPP. Singapore’s PSA
Corporation holds 22.5%; the other shareholders are financial investors. In April
Dubai Ports International (DPI), a subsidiary of the Dubai government-owned
Ports, Customs and Free Zone Corporation, made the highest bid, at 33.3% of
revenue, for the Rs20bn container transhipment terminal for Cochin. DPI has
the option of taking a local minority partner, and is currently looking for one. It
also has a 26% stake in the special-purpose vehicle for the Vizag container

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India 35

terminal. DPI’s international interests include management of Jeddah Islamic

Port, Djibouti port and the Constantza South container terminal in Romania.

Financial and other services

Moody’s upgrades Indian On February 6th a credit-rating agency, Moody’s Investor Services, upgraded the
banks’ foreign deposits rating of foreign-currency deposits of a number of Indian banks from Ba2
negative to stable. The banks affected are Bank of Baroda, Bank of India, Canara
Bank, Central Bank, ICICI Bank, Oriental Bank of Commerce, Punjab National
Bank, State Bank of India and Union Bank of India. The improvement in
international credit ratings has lowered the interest rates at which these Indian
companies are able to borrow abroad. In addition, the Ministry of Finance has
raised the limit of maximum external commercial borrowings from US$50m to
US$500m a month (although tenure must be at least five years). Companies
can raise five-year loans at rates starting from 4.5%. However, whereas
companies are interested in refinancing their loans, the central bank allows
borrowing only for “real” transactions such as equipment imports.

A credit information bureau is
being established
In 2002 parliament passed the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interests Act to enable banks to take over
the assets of defaulting borrowers. In April this year the Supreme Court upheld
the act but struck down the provision that aggrieved borrowers had to deposit
75% of the amount owed before they could appeal against the seizure of their
assets. One reason for the high level of bad debts was that banks did not share
information on borrowers’ credit ratings. In 1995 the RBI collected the names of
bad debtors and circulated them to banks. It intended that the names should
not be made available to the public, but they were leaked to the press. In May,
however, the Housing Development Finance Corporation and State Bank of
India launched the Credit Information Bureau of India Limited, a database
containing information provided by banks. It has 87 members, covers 80% of
bank assets and contains 5.5m records; only banks that provide information to
the database will be able to access it.

Inter-bank clearing system
moves to real-time settlement
The central bank has moved to a system of real-time settlement. Under the old
system, inter-bank dues were collected every day and settled together at the
end of each day by means of charges to the accounts that the banks held with
the central bank. On April 17th the central bank changed over to real-time gross
settlement!that is, instantaneous charging of accounts!thereby terminating the
end-of-day adjustment.

Foreign trade and payments

The US and India have At a joint press conference with India’s former commerce minister, Arun Jaitley,
differences on outsourcing on February 16th in the capital, New Delhi, Robert Zoellick, the US trade
representative, stated that bans on business process outsourcing to India of US
government operations had been imposed by only a few US states and affected
just a small share of the US market. He argued that the US had a trade deficit of
US$8bn with India and so could hardly be accused of closing its markets. In

Country Report June 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004