Assocham Economic Research Bureau

THE ASSOCIATED CHAMBERS OF COMMERCE AND INDUSTRY OF INDIA

ASSOCHAM Economic Weekly 25th May, 2014

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Contents

1. Macroeconomy

1.1 Working Committee Recommendations for fulfilling the objectives of Price-

discovery and Risk Management of Commodity Derivatives Market

1.2 Export of Goods - Long Term Export Advances

1.3 Consumer Price Index Numbers for Agricultural and Rural Labourers, April

2014

2. Corporate Sector

2.1 Mineral Production during March 2014

3. Market Trends

4. Global Developments

4.1 UK Index of Services, March 2014

5. Data Appendix

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1. Macroeconomy

1.1 Working Committee Recommendations for fulfilling the objectives of Price-discovery

and Risk Management of Commodity Derivatives Market

1. Transactions costs on the futures market are an impediment to arbitrage. FMC should pur-

sue a program of market development, including promoting a diverse array of firms as

members in order to improve market liquidity.

2. One way to reduce the cost of capital for the commodities trader is, to make banks and

other financial institutions an integral part of trading in commodity derivatives. A number

of policies and regulatory restrictions restrict banks and other financial institutions from

participating in futures markets. Restrictions on banks under the Banking Regulation Act

and other RBI regulated entities need to be removed so as to deepen and widen the partici-

pation in these markets.

3. Foreign financial firms (both intermediaries and end-users) should be permitted to partici-

pate in commodity futures trading. The existing system of limits on open interest and risk

management provides adequate safeguards against the risk of allowing foreign participa-

tion in Indian markets.

4. High warehousing and assaying cost adds to the transaction cost of hedgers. While use of

scientific storage and grading etc. should be encouraged, one way to do so is to provide

these services at low price.

5. Modernisation and professionalisation of warehousing is a critical policy priority that will

reduce the frictions faced in arbitrage. The Ministry of Finance should engage with the

WDRA and the Department of Food to pursue a work program to assist the emergence of

high quality warehouses, negotiability of warehouse receipts, and spot market trading in

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warehouse receipts. A robust and liquid market in warehouse receipts would facilitate and

encourage credit market participation in commodities derivatives in the form of loans

against warehouse receipts.

6. Government should exempt arbitrageurs from the restrictions on holding inventory under

the ECA, 1955.

7. In order to assist the development of organisational capability of firms operating in the

commodity futures ecosystem, the government should stop the suspension of trading in an

abrupt and unreasoned manner.

8. FMC should voluntarily adopt the regulatory governance of the draft Indian Financial

Code, so as to reduce legal and regulatory risk in the eyes of financial firms, and thus as-

sist the development of organisational capability in financial firms.

9. FMC should focus on addressing market failures through the objectives of consumer pro-

tection, micro-prudential regulation and enforcing against market abuse. It should ensure

that the owners and managers of exchanges have incentives that are aligned tightly with

these objectives, and set up regular monitoring and reporting systems to ensure these.

Apart from these functions, it should gradually step away from micro-managing contract

design and market design. A review of contract designs should be undertaken periodically

to ensure that these reflect the spot market realities and provide effective hedging oppor-

tunities to its participants.

10. FMC should establish an annual process of computing measures of futures market liquidi-

ty, price discovery and hedging effectiveness. This report should be released into the pub-

lic domain and its implications discussed at the meeting of the FMC.

11. FMC and exchanges should undertake a work program, with data producers, to improve

the precision of polled price series (a narrower set of grades and locations), a larger num-

ber of time-series captured, and improvements in the veracity of the polled rates.

12. FMC should create an explicit plan on how to develop organizational capacity to execute

on the above goals over the coming two years. The Government should provide it adequate

freedom to manage its human resources. Exchanges should explore new ideas in contract

design, to more tightly define the product with a narrower set of grades and locations, so as

to reduce the frictions of arbitrage and thereby improve hedging effectiveness wherever

the movement of prices of the commodities across grades and locations are not aligned.

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13. Exchanges should explore the idea of extending trading hours that overlap with Asian and

Australian markets to improve their international competitiveness. Currently, trading hours

in India overlap with the European markets, but has little or no overlap with Australia and

Asia, which is a large trading base that has been hitherto untapped

1.2 Export of Goods - Long Term Export Advances

RBI circular for Authorised Dealer Category - I (AD Category I) banks is invited to the sub-

regulation (2) of Regulation 16 of the Foreign Exchange Management (Export of Goods and Ser-

vices) Regulations, 2000, notified vide Notification No.FEMA.23/RB- 2000, dated 3rd May 2000,

as amended from time to time, in terms of which prior approval of the Reserve Bank is required to

be obtained by an exporter for receipt of advance where the export agreement provides for ship-

ment of goods extending beyond the period of one year from the date of receipt of advance pay-

ment. Further, in terms of A.P. (DIR Series) Circular No.81 dated February 21, 2012 AD Catego-

ry- I banks have been permitted to allow exporters to receive advance payment for export of goods

which would take more than one year to manufacture and ship and where the 'export agreement'

provides for the same.

In view of requests received from exporters, it has been decided to permit AD Category- I banks

to allow exporters having a minimum of three years’ satisfactory track record to receive long term

export advance up to a maximum tenor of 10 years to be utilized for execution of long term supply

contracts for export of goods subject to the conditions as under:

a) Firm irrevocable supply orders should be in place. The contract with the overseas party /buyer

should be vetted and clearly specify the nature, amount and delivery timelines of products over the

years and penalty in case of nonperformance or contract cancellation. Product pricing should be in

consonance with prevailing international prices.

b) Company should have capacity, systems and processes in place to ensure that the orders over

the duration of the said tenure can actually be executed.

c) The facility is to be provided only to those entities, who have not come under the adverse notice

of Enforcement Directorate or any such regulatory agency or have not been caution listed.

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d) Such advances should be adjusted through future exports.

e) The rate of interest payable, if any, should not exceed LlBOR plus 200 basis points.

f) The documents should be routed through one Authorized Dealer bank only.

g) Authorised Dealer bank should ensure compliance with AML / KYC guidelines and also under-

take due diligence for the overseas buyer so as to ensure it has good standing / sound track record.

h) Such export advances shall not be permitted to be used to liquidate Rupee loans, which are

classified as NPA as per the Reserve Bank of India asset classification norms.

i) Double financing for working capital for execution of export orders should be avoided.

j) Receipt of such advance of USD 100 million or more should be immediately reported to the

Trade Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai.

In case Authorized Dealer banks are required to issue bank guarantee (BG) / Stand by Letter of

Credit (SBLC) for export performance, the following guidelines may also be adhered to:

a) Issuance of BG / SBLC, being a non-funded exposure, should be rigorously evaluated as any

other credit proposal keeping in view, among others, prudential requirements based on board ap-

proved policy. Such facility will be extended only for guaranteeing export performance.

b) BG / SBLC may be issued for a term not exceeding two years at a time and further rollover of

not more than two years at a time may be allowed subject to satisfaction with relative export per-

formance as per the contract.

c) BG / SBLC should cover only the advance on reducing balance basis.

d) BG / SBLC issued from India in favour of overseas buyer should not be discounted by the

overseas branch / subsidiary of bank in India.

e) Authorised Dealer bank should duly evaluate and monitor the progress made by the exporter on

utilisation of the advance and submit an Annual Progress Report to the Trade Division, Foreign

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Exchange Department, Reserve Bank of India, Central Office, Mumbai within a month from the

close of each financial year.

1.3 Consumer Price Index Numbers for Agricultural and Rural Labourers, April 2014

The All-India Consumer Price Index Numbers for Agricultural Labourers and Rural Labourers

(Base: 1986-87=100) for April, 2014 increased by 8 points each to stand at 771 ( Seven hundred

and seventy one) points and 773 (Seven hundred and seventy three) points respectively.

The rise in index varied from State to State. In case of Agricultural Labourers, it recorded an in-

crease between 4 to 14 points in all the 20 States. Haryana with 852 points topped the index table

whereas Himachal Pradesh with the index level of 637 points stood at the bottom.

In case of Rural Labourers, it recorded an increase between 4 to 15 points in all the 20 States.

Haryana with 845 points topped the index table whereas Himachal Pradesh with the index level of

673 points stood at the bottom.

The Consumer Price Index Numbers for Agricultural and Rural Labourers in respect of West

Bengal State registered the maximum increase of 14 points and 15 points respectively mainly due

to increase in the prices of rice, pulses, mustard oil, fish fresh, chillies green, vegetables & fruits

and fire wood.

Point to point rate of inflation based on the CPI-AL and CPI-RL increased from 8.38% and 8.51%

in March, 2014 to 8.44% and 8.72% in April, 2014. Inflation based on food index of CPI-AL and

CPI-RL are 8.06% and 8.03% respectively during April, 2014.

Please refer Tables 1 & 2

Table 1

All-India Consumer Price Index Number (General & Group-wise)

Group

Agricultural Labourers Rural Labourers

Mar., 2014 April, 2014 Mar., 2014 April, 2014

General Index 763 771 765 773

Food 741 751 743 753

Pan, Supari, etc. 1061 1069 1068 1077

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Fuel & Light 868 873 866 870

Clothing, Bedding & Footwear 763 768 774 778

Miscellaneous 728 732 726 729

Source: Ministry of Labour & Employment, Govt. of India

Table 2

Consumer Price Index Numbers for Agricultural and Rural Labourers (Base: 1986-87=100)

Agricultural labourers Rural labourers

General Food General Food

S.No. State March.,

2014

April.,

2014

March.,

2014

April,

2014

March.,

2014

April

14

March

14

April.,

2014

1 Andhra Pradesh 815 822 815 822 813 820 814 821

2 Assam 746 758 735 749 753 765 746 760

3 Bihar 700 707 655 662 704 710 653 661

4 Gujarat 772 777 778 783 772 776 782 786

5 Haryana 847 852 874 880 840 845 878 885

6 Himachal Pradesh 629 637 650 661 663 673 677 691

7 Jammu & Kashmir 734 742 749 759 729 736 740 748

8 Karnataka 816 824 818 827 811 818 808 816

9 Kerala 780 785 783 788 779 784 778 784

10 Madhya Pradesh 710 716 674 680 730 735 675 681

11 Maharashtra 797 810 810 828 793 806 801 819

12 Manipur 725 730 631 638 728 733 631 638

13 Meghalaya 757 765 747 756 753 762 744 753

14 Orissa 707 716 662 672 707 716 663 673

15 Punjab 821 829 857 868 814 822 855 867

18 Rajasthan 834 838 798 803 820 825 789 795

19 Tamil Nadu 765 774 690 699 760 769 698 707

20 Tripura 683 690 684 690 675 680 672 677

21 Uttar Pradesh 740 745 755 761 739 744 757 763

22 West Bengal 728 742 677 694 738 753 679 696

All India 763 771 741 751 765 773 743 753

Source: Ministry of Labour & Employment, Govt. of India

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2. Corporate Sector

2.1 Mineral Production during March 2014

The index of mineral production of mining and quarrying sector for the month of March (new Se-

ries 2004-05=100) 2014 at 145.8, was 0.4% lower as compared to March 2013. The cumulative

growth for the period April- March 2013-14 over the corresponding period of the previous year

stands at (-) 0.8%.

The total value of mineral production (excluding atomic & minor minerals) in the country during

March 2014 was Rs. 21232 crore. The contribution of coal was the highest at Rs. 8325 crore

(39%). Next in the order of importance were: petroleum (crude) Rs. 5795 crore, iron ore Rs. 3024

crore, natural gas (utilized) Rs. 1789 crore, lignite Rs. 624 crore and limestone Rs. 427 crore.

These six minerals together contributed about 94% of the total value of mineral production in

March 2014.

Production level of important minerals in March 2014 were: coal 654 lakh tonnes, lignite 49 lakh

tonnes, natural gas (utilized) 2795 million cu. m., petroleum (crude) 32 lakh tonnes, bauxite 1707

thousand tonnes, chromite 461 thousand tonnes, copper conc. 11 thousand tonnes, gold 246 kg.,

iron ore 146 lakh tonnes, lead conc. 18 thousand tonnes, manganese ore 259 thousand tonnes, zinc

conc. 122 thousand tonnes, apatite & phosphorite 173 thousand tonnes, dolomite 642 thousand

tonnes, limestone 255 lakh tonnes, magnesite 17 thousand tonnes and diamond 5118 carat.

The production of important minerals showing positive growth during March 2014 over March

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2013 include ‘gold’ (82.2%), ‘iron ore’(23.0%), ‘chromite’ (18.5%), ‘apatite & phosphorite’

(16.8%), ‘diamond’ (16.1%), ‘lead conc.’ (0.6%) and ‘coal’ (0.5%). The production of other im-

portant minerals showing negative growth are: ‘dolomite’ [(-) 0.1%], ‘manganese ore’ [(-) 1.4%],

‘petroleum (crude)’ [(-) 1.6%], ‘limestone’ [(-) 3.2], ‘bauxite’ [(-) 7.8%], ‘natural gas (utilized)’

[(-) 10.2%], ‘lignite’ [(-) 10.3], ‘copper conc.’ [(-) 12.9%], ‘magnesite’ [(-) 16.6%] and ‘zinc

conc.’ [(-) 24.2%].

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3. Market Trends

BSE: The BSE Sensex increased by 1.45 per cent and closed at 24693.35

NSE: Nifty increased by 1.24 per cent during the week and closed at 7367.1

Dollar: The value of Rupee depreciated by Rs. 0.057 against the US dollar during the

week and closed at Rs 58.48 per dollar.

Euro: The value of Rupee appreciated by Rs. 0.311 against the Euro and closed at

Rs. 79.80 per euro.

Gold: Prices of gold decreased by Rs. 902.26 per 10 grams during the week and

closed at Rs. 28203.66 per 10 grams.

Silver: Prices of silver increased by Rs. 276.46 during the week and closed at Rs.

41918.26 Per kg.

Crude Oil: The prices of crude oil increased by USD 0.9 per barrel and closed at

USD 108.0 per barrel.

Forex Reserves: India’s Foreign Exchange reserves increased by USD 1.09 billion to

USD 314.93 billion during the week-ended May 16, 2014.

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4. Global Developments

4.1 UK Index of Services, March 2014

The Index of Services increased by 3.1% in March 2014 compared with March 2013. All of the

four main components of the services industries increased in the most recent month compared

with the same month a year ago.

The largest contributions came from: business services & finance, which contributed 1.6 percen-

tage points to total growth; and distribution, hotels & restaurants, which contributed 0.9 percen-

tage points to total growth.

The latest Index of Services estimates show that output increased by 0.4% between February 2014

and March 2014, following an increase of 0.2% between January 2014 and February 2014.

The Index of Services increased by 0.9% in Q1 2014 compared with Q4 2013.

Please refer Tables 3 & 4

Table 3

Index of Services

(Percentage change, latest month on same month a year ago)

Total ser-

vice indus-

tries

Distribution

hotels and res-

taurants

Transport, sto-

rage and com-

munication

Business ser-

vices and

finance

Government

and other

services

2013

Jan 0.6 0.6 -0.6 1.3 0.3

Feb 2.0 4.4 1.5 2.0 0.8

Mar 1.1 1.3 -0.5 1.7 0.8

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Apr 1.9 3.2 1.1 2.0 1.1

May 1.2 3.4 0.2 1.1 0.6

Jun 2.6 5.0 3.1 3.0 0.2

Jul 1.7 3.7 2.4 2.1 -0.5

Aug 1.3 3.2 1.1 2.1 -0.8

Sep 1.9 3.1 1.7 2.5 0.6

Oct 1.9 3.6 0.2 2.2 1.4

Nov 2.6 4.3 2.4 2.7 1.3

Dec 3.1 5.7 2.7 3.2 1.5

2014

Jan 3.1 5.9 1.9 3.2 1.7

Feb 2.6 4.2 0.5 3.5 1.4

Mar 3.1 5.3 1.4 4.1 1.2

Source: Office for National Statistics, UK

Table 4

United Kingdom - Growth rates and contributions to the Index of Services, March 2014 (Percentage change)

Description % of

Services

Month on a

year earlier

Volume (SA)

(%)

Contribution

to services (%

points)

Month on

month

growth Vo-

lume (SA)

(%)

Contribution

to services

(% points)

Total services industries 100 3.1 3.1 0.4 0.4

Distribution, hotels & restau-

rants 18 5.3 0.9 0.8 0.1

Transport, storage & commu-

nication 14 1.4 0.2 0.3 0.0

Business services & finance 39 4.1 1.6 0.6 0.2

Government & other services 29 1.2 0.3 0.0 0.0

Source: Office for National Statistics, UK

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5. Data Appendix

Table 5

Latest Available Financial Information

Item

May 09,

2014

May 16,

2014

Percentage

Change

Deposits of Scheduled Commercial

Banks with RBI (Rs. Billion) 3,232.95 3,237.77 0.15

Foreign Currency Assets of RBI

(Rs. Billion)

17,328.80 17,058.94 -1.56

Advances of RBI to the Central

Government (Rs. Billion) -------- --------- ---------

Advances of RBI to the Scheduled

Commercial Banks (Rs. Billion) 341.49 391.96 14.78

Source: RBI, Govt. of India

Table 6

BSE Sensex and NSE Nifty Index

Index May 19, 2014 May 23, 2014 Percentage Change

BSE SENSEX 24340.32 24693.35 1.45

S & P CNX NIFTY 7276.85 7367.1 1.24

Source: BSE India and NSE India

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THE KNOWLEDGE CHAMBER

Evolution of Value Creator ASSOCHAM initiated its endeavor of value creation for Indian in-

dustry in 1920. It has witnessed upswings as well as upheaval of Indian Economy and contri-

buted significantly by playing a catalytic role in shaping up the Trade, Commerce and Industrial

environment of the country.

ASSOCHAM derives its strength from the following Promoter Chambers: Bombay Chamber of

Commerce and Industry, Mumbai; Cochin Chamber of Commerce and Industry, Cochin; Indian

Merchant's Chamber, Mumbai; The Madras Chamber of Commerce and Industry, Chennai; PHD

Chamber of Commerce and Industry, New Delhi.

VISION

Empower Indian enterprise by inculcating knowledge that will be the catalyst of growth in the

barrier less technology driven global market and help them upscale, align and emerge as formid-

able player in respective business segment

MISSION

As representative organ of Corporate India, ASSOCHAM articulates the genuine, legitimate

needs and interests of its members. Its mission is to impact the policy and legislative environ-

ment so as to foster balanced economic industrial and social development. We believe edu-

cation, health, agriculture and environment to be the critical success factors.

GOALS

To ensure that the voice and concerns of ASSOCHAM are taken note of by policy makers and

legislators. To be proactive on policy initiatives those are in consonance with our mission. To

strengthen the network of relationships of national and international levels/forums. To develop

learning organization, sensitive to the development needs and concerns of its members. To

broad-base membership. Knowledge sets the pace for growth by exceeding the expectation, and

blends the wisdom of the old with the needs of the present.