VAT FACES SEVERE PROTEST FROM TRADERS; SOME STATES DRAGGING THEIR FEET
Traders have staged nationwide demonstrations against the Value-Added Tax, which is to be implemented by all states from April 1, 2005. Traders associations, led by the Confederation of All India Traders, staged demonstrations with an anti-VAT picture carrying message of the adverse impact of VAT, CAIT secretary general Praveen Khandelwal told PTI after initiating the demonstration at New Delhi's prime shopping centre Palika Bazaar. He said demonstrations against VAT were being held all over India.

The traders have also threatened to go on a hunger strike on March 17 if their demands of making VAT trader-friendly were not met, he said. The traders will also launch a "VAT-RATHYATRA" on March 1 all over the nation to protest against the "harsh" clauses in the VAT White Paper, he added.

VAT if fully implemented across all states in India, would be the biggest tax reform in the last 50 years. But now the April 1 deadline looks in peril as many states have begun to make noises that they would not be able to implement VAT from April 1 2005. It is believed that unless all the states introduce VAT together, those who switch over to VAT would suffer. UP has made it clear that it won't implement VAT from April 1. Similarly other states like MP, Gujarat, Rajasthan, Karnataka and Uttarnchal are under tremendous pressure from the strong traders' lobby which doesn't' want the change over.

INFLATION RATE SLIDES FURTHER
The dip in prices continues as the weekly wholesale price index (WPI) eased to 5.01% for the week ended February 5, down 0.24 percentage points from the previous week's level of 5.25%. This is the lowest inflation level achieved under the present government. The rate was 6.15% a year ago.

The consecutive fall in the inflation rate for the tenth week, has been helped by cheaper vegetable prices, fruits and edible oils, while prices of manufactured products have not changed. The onset of the harvest season has enhanced the flow of vegetables and food grains to the markets.

As per the weekly inflation data released by the government on Friday, the PI index is now at 188.6, just 0.01% over the past week's level. The index was at 179.6 points a year ago.

The sharp fall in the overall inflation rate for the economy is despite a rise in the index for fuel, power, light and lubricants' group by 0.3% to 288.9 points due to a 10% rise in the prices of aviation turbine fuel, furnace oil and naphtha. The index for manufactured products' group was unchanged at the previous week's level of 167.5. The index for the textiles group fell by 0.5% to 132 points as synthetic and cotton yarns became cheaper. There was a decline in the prices of other cotton yarn, and cotton yarn-cones. The index for chemicals and chemical products' group was up 0.1% at 184.1 points due to an increase in prices of caustic soda and methanol and NPK contents.

WTO CHIEF EMPHASIZES ON REAL TRADE TALKS
World Trade Organisation (WTO) states must get down to hard bargaining immediately if a 2006 target for a free trade pact is to be met, the organisation's chief said on Monday.

"Participants must get down to real negotiations in all areas, meaning real give and take, and they must do this now," WTO chief Supachai Panitchpakdi said in a meeting of the organisation's Trade Negotiating Committee (TNC).

A comprehensive plan in the key areas of farm and industrial goods trade is expected in the next December's WTO meeting.

But for the Hong Kong meeting to succeed, the negotiations on lowering global barriers to commerce would have to make significant progress in Geneva by the time the WTO closed for its summer break at the end of July.

"By July, we must be able to judge across the board whether we are on course for a significant outcome in Hong Kong," he said, which in turn meant some "first approximations" emerging from the various negotiating groups by the TNC, the umbrella group which oversees the various WTO negotiating bodies, was meeting to hammer out a programme of work for 2005.

The end of 2004 should have wrapped up the WTO's Doha Round, launched in the Qatari capital in late 2001 to give a boost to the world economy.

But deep differences between rich and poor, particularly over agriculture, hampered progress in the early years. However, diplomats say that 2006 appears a more realistic deadline.

Panitchpakdi said that in Hong Kong, members must agree on specific targets for slashing subsidies and opening up markets for agriculture and industrial goods.

Agreement on how these should then be applied to individual member states would take a further year, so without the numbers in Hong Kong, the late 2006 date could also slip.

On agriculture, officials told the TNC that progress had been made, although they said technical issues such as transforming monetary tariffs into percentages, something which had to be done before a formula for lowering import duties could be fixed, risked slowing talks.

But the chief mediator said talks on opening up services' markets, including energy and banking, were still lagging, with more than 40 countries still to offer any kind of liberalisation.

MORE PLAN EXPENDITURE EXPECTED FOR NCMP
The allocation for plan expenditure is expected to be about 18% more than Rs 1,45,600 crore provided for the current year. The forthcoming budget may fix it near Rs 1,72,000 crore, including Rs 40,000 crore for the priority programmes identified by the National Common Minimum Programme. However, this will be about 12% lower than the Rs 1,95,000-crore support sought by the Planning Commission to ensure a GDP growth of 7-8%.

Major increase is expected in the allocation for about seven programmes of the NCMP - such as elementary education, primary health, and rural employment. Allocation for Sarva Shiksha Abhiyan, mid-day meal and agriculture - including irrigation and watershed development - are expected to go up. The current figure for these categories (Rs 25,000 crore) - could be raised to Rs 40,000 crore

The areas that might get lower allocation include the National Urban Renewal Mission and the Railways. Even, budgetary support for states is expected to be less than 40%, given that the Centre has decided to allow them to finance part of their plan expenditure with market borrowings as recommended by the Twelfth Finance Commission (TFC). The TFC had recommended that states should be allowed to borrow directly from the market instead of depending on the Centre to borrow.

Also, Centre's funding for the infrastructure sector may appear less in the Budget, as some of it will be carried out through special purpose vehicles (SPVs).

REFORMS WILL BOOST FURTHER FII
Now when FII in India has surpassed FII inflows of Korea and Taiwan since January '05, these investors' eyes are now on the Budget on February 28.

There are several reforms which the FIIs expect from the government in the forthcoming budget; the major being rationalization of revenue collection, cut in customs duties and expenditure on infrastructure. Many believe that the government needs to do more in the Budget to ensure that taxpayers' money is used for asset creation and not merely expenditure.

Further, it is believed that the government must bring some improvements in the capital expenditure. "Capital expenditure constitutes a very small fraction of revenue expenditure and for the past three years, hovered around 25%," the brokerage said in a pre-budget note.

According to the head of equities at a foreign brokerage, international investors should not have qualms over India's fiscal deficit as India is showing a strong growth rate and the government is putting stress on improving tax-GDP ratio.

CHINA'S NEW FARM POLICY MAY HELP INDIA
Agriculture growth is imperative for attaining a higher GDP growth. India can benefit by adopting some of the measures which china has introduced in its new farm policy, to give its agriculture sector a boost and a helping hand. China has now introduced direct subsidies to farmers, begun to phase out its centuries old agricultural tax, subsidise seed and machinery purchases, and increase spending on rural infrastructure.

Beijing has announced grain subsidies worth $1.4 billion in the form of direct payments of around $7/acre to every acre planted with grain.

Agricultural taxes will be eliminated over the next five years, which would mean a saving of $5-7 billion for farmers. It will also end tax on all speciality crops like fruits, vegetables and cotton, except tobacco.

Beijing will give $193 million as subsidy on high-quality grain and Soya seeds at the rate of $7-10/acre planted. A $5 million subsidy will be given to buy machinery. The bumper boost is expected to come from a $18 billion spending on rural infrastructure such as irrigation, rural roads, power, and labs.

The new policies come not a moment too soon because Beijing's policy makers face tough choices. Though agriculture accounts for just 15% of China's GDP, and less than 5% of tax revenue, it still employs roughly half of the labour force and rural incomes are just 30% of the urban average.

This widening gap between rural and urban living standards is thus a powder keg of political instability waiting to explode in the countryside.

More importantly, China is realising the futility of MSP. Over the past several years, it has been abolishing procurement of grain at "protection prices" (support prices at which government-sponsored marketing bureaus procure a set quota of grain from farmers), a policy introduced during the late 1990s when market prices for grain were falling from historical highs reached in 1996.

Now the government has minimum "protection prices" for only rice and corn. Grain prices are now mostly set in open markets, and government procurement prices appear to be following market prices. In addition to agricultural subsidies and tax reduction, China is privatising the domestic grain marketing system, making large public in-vestments in agricultural infrastructure, stepping up efforts to prevent loss of agricultural land to urban uses, and encouraging rural financial institutions to loan more money to farmers.

China last year resumed futures trading of corn (suspended in the late 1990s), introduced a new futures contract also for imported soybeans and began cotton futures.

For China-watchers, the moot point is will these measures deliver results. Analysts believe they have symbolic value but only marginal effects on rural incomes or grain production.

The subsidies and tax reductions provide 2-4% of the value of agricultural production as benefit. Instead, the increase in grain production during 2004 was due to a 30% increase in grain prices. In addition, given fiscal constraints and reliance of local governments on agricultural tax revenue, the fiscal sustainability of these policies is unclear.

Rural per capita income rose 6.8% during 2004, the fastest increase since 1997, but subsidies and tax reduction accounted for only a small portion of the growth in income. "About half of the increase in income was due to increased sales of agricultural commodities, 29% to in-creased non-farm wage and salaries, and 14% to non-farm business in-come The subsidies are not large enough to make planting grain as profitable as planting alternative crops, such as cotton, vegetables, or fruit," say analysts.

The subsidies also do not provide strong incentive to increase yields because they are based on the area planted in grain. Seed subsidies are focused on "high-quality" seeds, which are not necessarily high yielding. The reduced agricultural tax lowers production costs slightly, put-ting more cash in the farmer's pocket. But it does not appear, however, to provide an incentive to plant more grain since farmers pay less agricultural tax whether they produce grain or not.

DEPOSITS RATES MAY GO UP
Given thee current scenario in lending, there is possibility that banks may raise the deposits rates soon. Since October '04, fresh loans given by banks have exceeded fresh deposits mobilised by them. For eight consecutive fortnights, the incremental credit-deposit (CD) ratio has been over 100% even after adjusting for IDBI's conversion into a bank.

While banks are finding new ways to raise funds, like selling bonds and borrowing overseas, deposits make up a big part of the fund base. It could well be a matter of time before banks start raising the return on deposits to attract more savings the credit-deposit ratio was over 100% till end-January, according to Reserve Bank of India (RBI) data.

It would be sensible for banks to release resources by liquidating investments, as the opportunity lies in lending. Banks had, over the past three years, piled up investments as bond yields moved southwards. With the interest rate scenario changing, the opportunity matrix for banks has also changed.

Inflation rate falls to 5.25% for the week ended Jan 29
The inflation rate has dropped to 5.25% for the week ended January 29 and could be less than 6% for the year as a whole. The inflation rate was at 5.91 percent during the corresponding week of the previous year. The prime minister's economic advisory panel expects inflation in the fiscal year ending March 2005 to be around 5.5 percent.

The central bank expects the wholesale inflation rate will decline further in the coming weeks and economists say the gradual easing of price pressures should persuade it to leave interest rates unchanged for the next few months.

It is believed that, lower inflation rate will give the finance ministry the room to call in a variable interest rate regime for small investors, that is more in tune with the market expectations of the movement in interest rates.

Slight cut in interest rate likely in the budget
Interest rates on small savings will see a marginal dip, if the Centre acts on the expert advice it has received on the subject. However, the Centre will take care to offer small savers a rate of return higher than the rate of inflation. A committee under Sebi chairman, GN Bajpai, has advised the Centre to link the rate of interest for small investors to the rate of inflation. This will give the finance ministry the elbowroom to ring in a variable interest rate regime for small investors, that is more in tune with the market expectations of the movement in interest rates.

The expert committee has endorsed the method suggested by the Reddy committee on small savings, to keep the rates on small savings instruments to within 50 basis points of the yield on comparable government securities. But it has not specified the exact rates of interest. This will ensure that there is minimal pressure on the government to meet the burden of rising interest rates, which have been sticky downward.

The Bajpai committee has also suggested that there should be a deposit scheme for senior citizens, which offers a return above the current rate of inflation. The government hopes that the proposed scheme, along with the senior citizens bond scheme, which offers a flat rate of interest of 9%, will provide a safe haven for the elderly and especially the fixed income group. The committee has also made some suggestions to get small investors to invest in the corporate debt. The recommendations of the committee are expected to encourage more small investors to invest in financial instruments instead of in physical assets like land and gold.

Over the past few years, the government has faced severe criticism whenever it has pared interest rates for small savings. This is because most small investors have preferred PPF and post office time deposits. As per the budget estimates for '04-05, the total investment in savings certificates and PPF are expected to touch Rs 78,720 crore. This is Rs 7,340 crore more than the revised estimate of Rs 71,380 crore, for 2003-04.

GOVT TO ENHANCE BILATERAL AIRTRAFFIC RIGHTS TO IMPROVE CONNECTIVITY
The government will soon hold talks with France, Germany, Hong Kong and China to enhance the bilateral air traffic rights.

"Along with the limited 'open sky' policy, we will be liberalising our bilaterals like we have done with the US and the UK... We will be holding talks with France, Germany, Hong Kong and mainland China in this regard soon," Civil Aviation Minister Praful Patel said at an international conference.

Such arrangements would also be worked out with ASEAN nations, with whom agreements to open up the skies have already been signed, he added.

In the past few months, India has signed liberal bilaterals with US and UK.

While there is an unlimited open sky agreement with the former, the bilaterals have been doubled to 40 flights a week with the latter with India allowing private carriers to operate to London and Gatwick.

M DAMODARAN TO BE NEW SEBI CHIEF
IDBI chief M Damodaran will be the new chairman of the Securities and Exchange Board of India. . He will replace G N Bajpai, who is retiring on February 28.

Joint secretary, capital markets in the ministry of finance, UK Sinha, will now take over as the new chief of UTIAMC. The appointments have been cleared by the Prime Minister's Office and might be announced on Friday.

Mr Damodaran's appointment has ended weeks of speculation over who would succeed Mr Bajpai as the market regulator.

A 1971 batch IAS officer, Mr Damodaran was earlier additional secretary, banking, in the finance ministry, before he took over as chief of UTI AMC as well as the administrator of the Specified Undertaking of UTI, the two entities which were formed following the collapse of UTI after the '01 stock scam.

PUBLIC SECTOR COMPANIES TO GET ALLOTMENT FOR REGENERATION
In the Union Budget 2005-06, the government is most likely to come up with a separate fund for reviving public sector companies. The fund size will be kept small initially but more funds will be provided for as and when the need arises, sources said.

The fund will be part of the budget of Ministry of Heavy Industry and money will be released for revitalisation of a specific public sector company when the Board clears its case for Reconstruction of Public Enterprises (BRPSE).

"The money from the fund will be provided on merit of each case. Resources will be provided only when a firm case is made that a particular PSU can be revived. No money will flow for testing whether a particular company can be revived," the sources added. For revival of sick PSUs under its control, the Ministry alone has drawn up a plan of Rs 3,000 crore. While Rs 1,500 crore will be required for writing off liabilities of the sick government-owned companies, the same amount would be used for their renewal and modernisation.