Professional Documents
Culture Documents
Mrunal Notes
Mrunal Notes
regional agreement in which members of the PTA impose a preferential tariff or lower customs
duty on the products originating from the member countries.
FTA is a special case of PTA where all tariff and non-tariff barriers are abolished and free access
is allowed to the products of member countries. In both PTA and FTA, each member is free to
maintain different most-favoured-nation (MFN) barriers on non-members. Rules of Origin
between the members of FTA is agreed to ensure that genuine products of the FTA partners
alone are given duty-free access (World Bank 2005).
A Customs Union moves beyond a free trade area by establishing a common external tariff on all
trade between, members and non-members. Customs Unions typically contain mechanisms to
redistribute tariff revenue among members.
A Common Market deepens a customs union by providing free flow of factors of production
such as labour and capital in addition to the flow of outputs.
In an Economic and Monetary Union, members share a common currency and macro-economic
policies (Example European Union).
There is only a very shallow integration between PTAs, FTAs and Custom Union whereas a deep
integration exists between Common Markets and Economic Unions
Over a period of time there has been an explosive growth in regional and preferential trading
system in the form of Regional Trade Agreements and Preferential/ Free Trade Agreements
(PTA / FTA).
India is also involved in a number of RTAs andFTAs.India is currently involved in 19 free trade
negotiations.
This essentially leaves the other areas worse off than before because their best brains and capital
leave them to go to the growing centre. It means that growth in one area adversely affects the
growth in the other.
For instance, in India, let’s say
Delhi is the developing centre with all the companies being set up there.
Then people from all over Haryana, Punjab, UP, Bihar etc. have a tendency to move to
Delhi because all companies are located there and better employment opportunities exist.
So Delhi will grow but the remaining areas will be worse off. This is Backwash effect.
Counter to the Backwash Effect is the
“Spread Effect”
also discussed by Myrdal. Here,
development in one place, spreads to its suburbs and all the adjoining areas.
Again taking the example of Delhi, we could argue that suburbs like Faridabad, Gurgaon,
Ghaziabad etc. have benefited from Delhi’s growth due to the Spread Effect caused by
Delhi’s growth.
Technical definition
Security means a formal declaration that documents a fact of relevance
to finance and investment gives the holder a right to receive interest or
dividends.
Security means A guarantee that an obligation will be met
Shares, debentures.
The e also se u ities of one type. You must be knowing about them already so just
in brief–
1. If for your 100 rs, I give you a limited ownership in my company and
promise to give you the share from my profit = this is share
2. But if I sa that, I ll gi e ou ‘s. E ery year no matter I get any profit /
not = this is debenture.
security paper.)
Now you need money before 6 months, so you write on a new paper,
a o e ho gi es e ‘s, I ll gi e hi ‘s. Wo th “e u it papers of
M u al a d Mitul.
that e pape ou ated is agai a se u it ut it does t ha e di e t-
o e atta hed ith it –instead, it derives its value from the security papers
fo M u al a d Mitul. “o ou e pape is alled De i ati es
lets o de iate fro our arti le s topi for a hile to lear a fe thi gs related to
recession from above talk.
back the loan)
Then you repack those mortgage papers (security ) and make a new
se u it pape a o e ho gi es e ‘s. I ll gi e hi o tgage pape s of
houses = this is derivative product.
Suppose 3 guy bought such derivative papers and after few months, he
rd
repacks them- makes another derivative product and sell it to 4 guy. th
someone using it.)
ut as ou a see, ou did ot eate a e asset ou e just keep
eselli g sa e stuff o e a d o e to diffe e t people. “o ou e lo i g a
u le
After few months, I refuse to pay money, and tell the 4 guy to take away
th
my home. But the prices in reality sector are low so even if you sell my home
ou a t e o e ou ‘s. = this is to i asset / NPA = o -performing
asset and your asset bubble is u st
Financial Market
You gave me money I gave you a piece of paper (security)
The place where we did this business is called financial market.
If I had promised to pay back money in less than 1 year (=short term loan)
, this will be called Money Market
If I had promised to pay back money after long time like 10-20 years (=long term
loan) , this will be called a CAPITAL MARKET.
Subparts of capital market.
As said above, when I take long term loan = its capital market.
When initially I took money from you and give you piece of paper = this is
P‘IMA‘Y arket. *
But afte so eti e, ou eed the o e hile I goi g to pa a k
after 10 years.
So you borrow 100 Rs from another guy and give that piece of paper
(=security) to that guy. And tell him to recover the money from Mrunal = you
traded my security. This is “ECONDA‘Y MA‘KET (Sharemarket / BSE/NSE
etc)
(*this primary market will be discussed in another article) our current article deals
only with capital market.)
It s the jo of SEBI to control both Primary & Secondary Capital market in India.
(detailed article about SEBI,BSE,&NSE is coming soon.)
primary market.)
keep in mind that Govt. does this for short term deficits. (its like I need
o e i O to e ut ou e goi g to pa i o e ta i Ma h so
I ll use this t i k to o e o e eeds.
Govt. generally plays only in the primary market.
When you give me your money and receive that piece of paper
(security) = ou a e e tai that I goi g to pa a k a d o t u a a
like Ashok Jadeja. Afte all I the Government. And I pay good profits.
that s h Go t. se u ities a e alled Gilt-Edged se urities
How does this thing work?
As I de ided to issue se u it i p i a a ket, ut that does t ea I ll
send my peon/clerk/Secretary to the primary market with bag full of papers
(security) and sell it like vegetables.
I give my piece of papers (security / treasury bills) to RBI- the ll gi e e
the o e a d the ‘BI s e ill sell it i the p i a y market. = RBI is
Go t. s de t a age .*
*“e u it Pape = I goi g to pa o e afte so e ti e. = I i ou
de t. A d ‘BI a age s se u it pape s so the e de t a age .
monetary policy (=CRR,Repo etc crap)
But, When RBI sells Govt. securities in primary market, and give the
money to Govt. = money supply flow is interrupted = liquidity is drying =
harder to get loans
= conflict of interest.
That s h a people a e alli g fo sepa ate Pu li de t Ma age e t
office and relieve RBI from this duty.
Ok now ,final part in this article-As we saw, there are 2 types of capital market :
Primary and secondary. but
someone else and recover the money. Otherwise,
In the absence of a secondary market, many of the investors would
probably not agree to supply capital (money) in the primary market because
they would not have an exit route for their investment.
Gives Price information
By active trading by millions of investor, you get price information regarding the
securities.
This price information is used to judge
1. the corporate performance (share prices)
2. performance of the Government
3. economy (through interest rates on Government debt).
4. facilitating value-enhancing control activities (mergers & acquisitions) and
5. enabling implementation of incentive-based management contracts
(employee stock options).
What is infrastructure?
In simple terms, things like roads, dams, power-plants,schools, etc. help
you in your life and business = this is infrastructure.
i f ast u tu e is defi ed i di tio a as the u de l i g fou datio o
asi f a e o k
Broadly, infrastructure includes all public services from law and order
through education and public health to transportation, communications,
power and water supply, as well as irrigation and drainage systems.
Classification
→hat’s the use of Infrastructure
Why infrastructure in important?
How does it help in economic Development ?
Physical Infrastructure
Roads
Roads are divided into five categories for administrative purposes.
1. National highways,
2. State highways,
3. major district roads,
4. other district roads
5. village roads
other 4 types of roads are maintained by State Govt.
Before LPG in 1991, only Govt. could invest in making roads. but after
LPG, National Highways Act was amended in 1995 to allow private sector
participation.
NHAI (National Highways Authority of India) was created to build and
upgrade national highways.
Funds have been made available to the NHAI for its capital base through
a tax on motor spirit and cess on diesel.
but yet
it,
so now it has to buy the land and pay very high prices per square meter
+ other compensation. (+ the pseudo-environmentalists)
Railways
Railways provide energy efficient form of transportation compared to
roads.
i.e. you want to send tonnes of wheat/coal from one state to another,
it ll o su e o e dieasel if ou do it ia t u ks.
railway services are intermediate inputs to production; any reduction in
these input costs raises the profitability of production.
CROSS SUBSIDISATION
Traditionally, railways are seen as part of essential public service
=railways should not be denied to even those who are unable to pay
fully.
(=poor people should also be allowed to enjoy railways= Garib Rath /
Student concession pass etc.)
But it does t fall f o sk , if so eo e is e jo so ethi g the
somebody has to pay money for it, right ?
so, freight charges* and upper class passengers ticket prices are set high,
to cover that cost.
this is alled C oss su sidisatio
Railway s earning
30 % from Passenge tickets
70 % from Freight traffic.*
<* he ou se d ph si al ite s like heat / oal = this is F eight >
Gauge conversion,
doubling of existing single lanes,
electrification projects,
allowing Private companies to make wagons and passenger coaches
running Duranto Expresses
and many more.
Seaports
India has coastline of 7,000+ kms and
12 major ports (managed by Central Govt.| account for over 75 % of
total cargo)
185 minor ports (managed by State Govt. |25% Cargo transported via
them)
it using aeroplanes.
but cheaper via sea-routes.
But fi st of all ou e to t a spo t the wheat grown in Punjab /
UP/Ha a a to Mu ai s po t ia ‘ail a /T u ks.
(via rails/roads)
so Efficiency of one infrastructure depends on
other infrastructures.
That s h , Go e e t is i esti g i i p o ing the road connectivity to major
ports through the NHDP.
REGULATION of sea-ports
as you know, there is TRAI (Telephone regulatory Authority of India) as
judge fo telepho e elated atte s. othe ise B“NL ill a t as o opol
and pvt players like Vodapho e, Ai tel o t get le el pla i g field i spe t u
allocation etc.)
same way, for level playing field in sea-port operations Tariff Authority
for Major Ports (TAMP) has been set up.
landlord ports
when cargo handling is done by private players, such ports are called
landlord ports. (just like airport Management given to pvt players.)
but in India all major ports are run by Port Trust made by central Govt.
the concept of Landlord ports is not yet imple e ted i Majo Po ts .
but A wholly private owned port of Pipavav is setup in Gujarat = this is
Landlord Port.
port of Sika ( Gujarat) accounts for the largest cargo handling among all
ports in the country. (its connected to Reliance Refinery @ Jamnagar.)
Airports
Airports are under the management of Airports Authority of India.
Private investments are to be drafted for the upgradation of the four
major airports (Delhi – Mumbai – Kolkata and Chennai).
g ee field ai po ts u de p i ate o e ship a e o i g up at Ba galo e
and Hyderabad.
new airport promoted by Kerala State Government has come up in Kochi
with private investor participation.
Problems
Tax on Aviation fuel = air-tickets costly.
Big burden on tax payers, known as Air-India.
Energy
give free/cheaper electricity to farmers. (again cross subsidisation)
High transmission and distribution losses (T&D losses) because of bad
equipements.
Electricty theft.
Financial constraints to undertake systems improvement schemes
= si e ou e suppl i g ele t i tit @
communication
New Telecom Policy (NTP) was introduced in 1999.
its aim is to provide connectivity to all rural, hill villages & remote parts.
+ level playing field for pvt players.(against BSnL)
of operating in that area.
Thus it falls o Go t s shoulde s to do that o k. that s h Go t. P“U
BSNL exists.) –> this is one of the arguments in favor of public sector
undertakings
= to serve the people where pvt players are not interested to work in.
anyways, back to the topic:-
Universal Service Obligations: (USO)
i sho t Go t. sa s it ll t to gi e pho e o e ti it to u al a eas.
for this they created a fund called USO fund. so when pvt players do
so ethi g i u al a eas, the ll get o e f o it.
Govt. is trying to increase the teledensity in rural areas via 3 strategies
Niche Operators
It is assessed by TRAI that despite the USO support, existing big service
providers would not be interested to serve about 50 per cent of the villages. To
address this issue, TRAI in its Unified Licensing recommendations envisaged
that the Short Distance Charging Areas with teledensity less than 1 per cent be
notified as telecom-wise-backward areas. In these areas, niche operators,
defi ed as the tele o se i e p o ide s hose se i es a e est i ted to these
a k a d a eas o l ill e i du ted. These ope ato s a e e titled for
concessions of zero entry fees, lower license fees and funds. The scheme is aimed to
promote local entrepreneurs who have the technical competence to provide
communication solutions but cannot compete on equal footing with large operators.
Banking Infrastructure
Social infrastructure
Health
Human Develpoement index has 3 components
Income
Knowledge
Health.
Some Facts-
10th Plan talked about effectively using traditional Indian medicine
system consisting of ayurveda, yoga, unani and siddha.
These combined with homeopathy is named as AYUSH (was asked in
mains 2009.)
Generally Govt. funds are mostly spent on preventing the of
communicable diseases.(AIDS, Cholera,Polio etc) + family planning schemes.
But in 10th plan they talked about National Mental Health Programme
fo e tall halla ged
India has 1/6th of humans living in this world.
B e ll e the ou t with largest population on earth.
large population has its problem- drinking water, food etc.
Education
I toda s speech, Obama said
the est po erty re o al progra is orld
lass edu atio
You can find the data regarding Sarva-Siksha Abhiyaan + Mid day meal from
ea ook o si ila ooks/ agazi es. “o I ot iti g u h o it he e.
Now every car passing from it has to pay about 25-50 Rs.
But Go t. spe t o es of upees aki g the idge + the e to maintain
staff to collect those fees from cars , and pay that staff the salary.
“o it ll take al ost Yea s to e o e the o e Go t. i ested it.
Second case
We get water from Narmada dam, every morning for 2 hours. For that
we e to pa a out ‘s. A ea . Agai - as the same reason given above– So
it ll take al ost Yea s to e o e the o e Go t. i ested it aki g the
dam.
But we cannot deny the fact the bridges and dams are important.
But private pla e s o t e i te ested i aki g the e ause it takes
long time to recover the money invested = long gestation time.
That s h the ph si al i f ast u tu e like hea i dust ies, da s, oads,
bridges etc. is considered to be responsibility of the Govt.
What is SEBI?
Securities and Exchange Board of India = SEBI
It regulates both the primary and secondary markets. (explained in my
previous article)
It protects the interests of the investors in securities
It promotes the development of the securities market.
SEBI was established in 1988 but was given statutory powers in 1992, and
started working effectively since 1993.
made by CCI.
but that dude always underprice my issues.
When I put my equity shares for the first time in Primary market = this is
IPO (initial public offering)
ut o as ou k o that I a t fi high p i es fo IPO due to CCI
dude.
so my IPO is very cheap.
so lots of people will send application to buy it because its cheap (= over
subscription)
so i ll ha e to gi e the IPO sha es via lottery only to a few people.
but those who get my cheap IPO via lottery will immediately go to
secondary market and sell it at higher price.
= I lost money (that I could have made if CCI dude allowed me to sell my
IPO @ higer price.)
and those lucky dudes who won the lottery made money without really
doing anything.
As you can see, all this is not good for industrial Development.
Secondary market = where you trade the securities that you purchased from primary
market.
For general understanding- the stock markets = secondary market = where you
sell/buy shares.
So lets see the
Mumbai)
there were almost 20 regional stock exchanges in 1992,
but trading was concentrated in Bombay Stock Exchange and it enjoyed
a monopoly
Users from outside Bombay found it extremely difficult to trade in BSE
due to poor technology and high cost of telecommunications. (they did ’t
have internet or cellphones with free incoming calls in 1992!)
BSE imposed a high entry barrier, so that competition among brokers was
absent.
That s why services provided by the brokers were, thus, extremely
i effi ie t a d ostl . its sa e like I dia ail a s sti ki g toilets- ou a t
o plai e ause ail a do t ha e u h o petitio .
not allowed in.
These t ade s ill shout the p i es like e e i egeta le a kets.
The e as t a e ha is to e if the p i es at hi h t adi g a tuall
took place.
So, brokers used to charge prices to the investors (buyers and sellers of
securities) that were usually different from the actual prices
=brokers used to report higher than actual prices for buy orders and
lower than actual prices for sell orders).
If investors (buyers or sellers) demanded a more accurate price, orders
often got cancelled (for example, the broker could simply claim that such a
favourable price was not obtained in the market).
both parties (buyer and seller of shares)
it favored the brokers and was to the disadvantage of the investors.
the settle e t as futu es-st le a d as o a fortnightly basis.
means that trading done during a fortnight would be settled at the end of
the fortnight.
system of badla =enabled the brokers to carry forward their liability (of
money or securities) to next settlement.
so, brokers could postpone settlement almost indefinitely, if the prices
were not favorable to them.
This led to a high degree of risks. Large-scale problems arising out of
failure to make payment or deliver shares, would lead to closure of BSE for
days together,
this used to recur at the rate of almost once every other year.
of that share in your name.
At this stage, the problem of bad delivery arose due to a number of
problems
if the signature of the seller did not match with the one maintained with
the registrar, the shares were sent back.
might unwillingly sign in a different manner.
But in many cases, manipulations by unscrupulous operators were
responsible.
counterfeit shares (wherein any signature were put by the counterfeiter),
E gi ee i g ad deli e ies selli g pa t s oke s o the o pa ies
themselves to delay settlement in order to support price manipulation.
The time lag between buying shares and getting it registered in the name
of the buyer used to take anything between 1-3 months if everything was
alright.
The time lag normally went up to six months on an average in case of bad
delivery.
Anyways so above were the problems with primary + secondary market so Govt.
made a law to give powers to SEBI to control them both. And so CCI was abolished.
NSE (National stock exchange) was established to end the monopoly of Bombay
Stock Exchange.
institutions (like IDBI, UTI, LIC, GIC, IFCI, etc.) and banks.
NSE is professionally-managed (as opposed to the other exchanges that
are managed by brokers or members still today)
You saw the problems of BSE ago, and to curb them,
Computerized trading
First, physical, floor-based, brokers-dominated trading outside the eyes
of the investors was replaced by anonymous, computerized order matching
system
where trading is done in front of the investors.
The order-matching system is characterized by strict price-time priority,
wherein an order is executed according to the price parameters set by
the investors.
The OTCEI, which was set up in 1992, was the first computerised
exchange in India.
NSE started operations in 1994 with electronic trading, while all other
exchanges introduced electronic trading subsequently.
By March 31, 1999, all the 23 stock exchanges in the country had
computerised on-line screen based trading.
Satellite communication
to spread the reach of the exchange to all over the country was
attempted successfully, for the first time, by NSE.
This was in stark contrast to the other exchanges which till then had the
reach limited to their cities of operation for over a century.
Professional managers
the traditional exchanges were and still are managed by the member
brokers.
This gave rise to many malpractices, a conflict of interest being the most
important one. Since the brokers themselves were in charge of enforcement
of rules and regulations, they never took a decision in favour of the investors
that went against their interest.
This gave rise to a conflict of interest between the members as brokers
and members as responsible for enforcement of rules and regulations.
NSE avoided this problem right from beginning because it was set up as a
limited liability company with brokers as franchisees.
This led to a situation where brokers were not held responsible for
enforcement of rules and regulations, and
those who were entrusted with enforcement (professional managers)
were not brokers.
As a esult, N“E s staff is free of pressures from brokers and is better able
to perform regulatory and enforcement functions.
Weekly settlement
If ou u sha es f o e, ou e to gi e e the o e i 1 week and
I e to gi e ou the sha es i the sa e eek.
the traditional practice of fortnightly settlement cycle + system of badla
that allowed extension of even this fortnightly cycle was replaced by a strict
weekly settlement cycle without badla.
Result-BSE Is busted
Equity trading at NSE commenced in November 1994.
Within one year of operation, NSE surpassed the BSE in terms of
turnover.
BSE was working since 1875, with monopoly now it had to face
competition with N.S.E
So in March 1995, BSE also adopted similar innovation to keep up in the
race.
Improved Transparency:
Investors can see with their own eyes the prices that are currently being quoted
in the market, and choose to trade or not.
Anonymity= no cartels
The electronic trading platform makes trading completely anonymous.
Traditionally, lack of anonymity in trading in the floor-based system
gave rise to cartels (of brokers) and made price manipulation easy. NSE
was a break from this tradition as well and removed much of the scope
for
price manipulation.
(subject to fulfillment of certain criteria).
In contrast, BSE restricted new entry into the brokerage business until
NSE came into picture.
Now More than a thousand brokers entered the market with the NSE
leading to steep increase in competition and the consequent fall in the
brokerages* by a very substantial amount.
This led to a drastic fall in transaction costs. *the oke s Co issio
No more bad delivery
Automation of the trading system eliminated all the problems associated with
manual trading (e.g., bad delivery/ signature etc.)
same terms and conditions as investors within Mumbai for the first time.
Earlier, Bombay stock exchange was the pre-dominant one in the
country,
but investors outside the city found it extremely difficult and costly to do
business in the exchange. (no cellphones with free incoming!)
Thus, true to its name, NSE turned out to be the first national stock
exchange.
This benefited the investors from outside Mumbai more than perhaps
the investors within the city.
August 1995)
counter-party risk means the risk that one of the two parties in a
transaction may fail to honour their commitment to pay cash [buyer] or stock
[seller] on the scheduled settlement date
For every trade (buy or sell) done on the NSE, NSCCL becomes the
counter-party.
means, the seller sells the securities to the NSCCL, and the buyer buys
from the
NSCCL.
Even if a brokerage firm fails to make payment (or deliver securities),
NSCCL makes the payment (or deliver securities).
This has almost eliminated counter-party risk and contained the
recurrence of payment crises that characterised Indian stock markets for
almost a century.
Demat account
You ead a o e, ho the ad deli e of sha es as e gi ee i g the
brokers.+ the menace of counterfeit shares. And the fear of theft of shares.
To curb this problem, SEBI came up with the novel idea that is
De ate ializatio of sha e holdi g
This ea s, ou e to get a Demat account in the bank and
he ou u sha es, ou do t get a pie e of pape . That sha e gets
automatically credited to your demat account.
In November 1996, the National Securities Depository Ltd. (NSDL), the
first depository in India, was established For this purpose.
SEBI played an active role in gradual shifting from physical certificates to
dematerialised holding by introducing a mandatory element in the process.
Currently almost cent percent trading and settlement are done in a
dematerialised environment.
But things are not that safe and sweet, thanks to IPO scam-Demat Queen
Roopal Panchal
place where we do this deal is Money market
For long term loans = Capital market.
See this diagram
Technical definition
market refers to the market for short-term funds, i.e., up to one-year
maturity.
money market is the place where lending and borrowing is done through
instruments having an original maturity of up to one year.
supply of short-term funds.
the opportunity for players to invest their short-term surplus funds and to
borrow short-term funds in case of deficit.
Its interlinked with Foreign Exchange market (read my article on currency
devaluation for more on this)
upto 14 days, but at times more than that)
The deals mostly by commercial banks.
It is a telephonic market, i.e., deals are struck over telephone and reported
to RBI. (that’s why its ‘call’ market)
Commercial banks often face temporary shortages of funds (e.g., to meet
CRR and SLR requirements, or sudden outgo of funds) or temporary surpluses.
When a bank is in shortage of funds, it telephones & borrows from
another bank which is in surplus.
Notice Money
If the maturity of borrowing (or lending) is more than 1 day but up to 14
days, then it is known as “Notice Money”.
Term Money
“Term Money” refers to money borrowed (or lent) for more than 14 days
but less than one year. In
Indian money market, most of the transactions are of call money and notice money.
market)
RBI, as regulator, routinely participates in the market to inject liquidity
(lend) or to mop up liquidity (borrow).
Repos/Reverse Repos
repo (also known as ready forward contract) transaction,
Example
Suppose I write on a piece of paper “anyone who gives me 100 Rs. I’ll
give him 120 Rs. After 1 year”
this piece of paper is security.
Now I give that paper to you and collect 100 Rs. And tell you that I’ll buy
(repurchase) that paper after 6 months and give you 110 Rs.
This is called repo-contract
And this period (6 months) is repo period.
Now remember the ‘mirror’ – in the mirror my left hand will show as my right hand.
Same is for ‘Reverse Repo Rate’
→hen you buy a security and sign contract that you’ll sell it after 6 months
= this is reverse repo contract.
one party borrows funds for a specific period (known as repo period)
against the collateral of specific securities at pre-determined rate (known as
repo rate)
for buyer its reverse repo rate (RRR) and for seller its repo rate.(RR)
And whether the transection is RRR or RR is classified by who initiated the deal?
If the buyer initiated the deal– then its RRR
If the seller initiated the deal then its RR
To prevent the topic getting confusing and complicated. Lets take an example
repo auction at a fixed rate.
Currently, fixed-rate repo and reverse repo auctions are conducted by the
RBI on a daily basis (excluding Saturdays, Sundays and other public holidays)
for 1 day (overnight) tenor.
This means, RBI is ready to sell as much securities as is demanded by the
participants at the fixed rate.
This rate is fixed in the sense that it does not change on a daily basis
depending upon the supply-demand condition of short-term liquidity
Changes in the fixed repo rate are usually made in the Annual Monetary
and Credit Policy or in the Mid-Term Review of the Monetary and Credit
Policy.
auctions of reverse repo at a rate higher than the repo rate.
The reverse repo rate is linked to the repo rate in the sense that it is set at
specific percentage point above the repo rate.
just opposite to the international practice.
That is, what is repo in Indian terminology is reverse repo in international
parlance, and what is reverse repo in India is internationally known as repo.
In a fast globalising environment, this may create confusion.
Consequently, RBI has changed the definitions of repo and reverse repo to
bring them in line with international practice with effect from 27th October
2004.
However, in this article, we have throughout followed the older (Indian)
definition.
Money market topic doesn’t stop here, there are other remaining items like
Commercial papers, Treasury bills, Certificate of Deposits etc which will be dealt in
some other article.
PDS Kerosene price has remained at around Rs.9 per litre at Delhi since
2002.
· If kerosene is expensive then Poor Girls will be forced to collect firewood all day= can’t go
to school
respiratory disease, eye burns.
thus, Life-Expectancy of women + infants reduced.
These are Govt.’s good intentions for selling cheap kerosene but lets look @
the ground realities.
Kerosene Smuggling!
price of PDS kerosene in India is very low in comparison with that
in neighbouring countries -Bangladesh and Nepal.
The price of kerosene in Bangladesh and Nepal is Rs. 29.28/litre
and Rs.
36.29/litre respectively as in January 2010, more than 3 to 4 times
the price in India.
So people are doing cross-border smuggling this is referred as
‘Fuel tourism’
Bangladesh and melt it and make shaving razor-blades from it.
For e.g.out of 2 Rs.’s thick coin they’ll make 10 blades and sell it
for 5 Rs. and cutting their production cost- they’ll still make good profit.
that is one of the reason why Govt. changed our coins- now
you’ve ‘thin-size zero’ coins for 1/2/5/10.
Anyways, back to the topic-
NSSO survey says that
In 2004-05, 62% of the rural households got kerosene only from
PDS and
But, less than 1% used it for cooking but 60%
consumed less than 3.5 litres per month
give them cheap kerosene.
(so it kills the purpose of saving poor women from indoor pollution /
firewood gathering by giving cheap kerosene.)
Diagram- solutions & problems
purpose.
In the absence of electricity, kerosene has, for long, been the only
source of lighting (apart from more expensive vegetable oil-based
lamps).
However, with the development of LED lights, LED lanterns using
ordinary dry cells provide an alternative
which, at comparable cost to what household spend on subsidized
kerosene, provides better light and involves no subsidy.
As manufacturers make these lanterns available across the
country, the need for kerosene for lighting will reduce.
But, these alternatives pose the problem of safe disposal of used-
up cells but its not really challenging task.
Solar lighting systems can also provide an alternative albeit at a
much higher initial cost.
lights.
Since kerosene subsidy is going largely for lighting, the allocations
should be reduced as more and more BPL households are connected
to the electricity grid.
Such connections under the RGGVY are subsidized and continuing
kerosene supply to such households amounts to double subsidy.
incentive to divert
kerosene to adulterate diesel.
Estimates suggest 35% or more of PDS kerosene is diverted for
unauthorized purposes including adulteration.
A consequence of this diversion is that the more than Rs.20000
crore of investment in producing Euro III and Euro IV diesel would be
negated to large extent if diesel continues to get adulterated by
kerosene.
Govt. adds some dye in kerosene so PDF kerosene becomes blue
color, but that doesn’t solve anything. (if you put sand +charcoal+ some
chemical power then blue colored kerosene will become white again)
Diagram
in the market
Kerosene price should be close to the price of diesel so as to
eliminate any incentive to mix it with diesel!
This can be achieved if PDS kerosene is provided to BPL
households through a system of smart
cards with biometric identification.
The cards would indicate the household‟s entitlement of
subsidized kerosene.
This will reduce PDS kerosene need by one third, as diversion
would cease.
it becomes unprofitable to mix kero with diesel.
But then you full proof distribution of subsidy kerosene and OR give
direct cash to poors so they buy kerosene from market instead of PDS
shop.
But then suppose a poor man given 100 Rs. To buy monthly
kerosene for his family , he may not buy it and instead buy liquor and
beat up his wife to collect firewood from jungle for cooking.
Thus, The argument for providing subsidy in kind rather than in
cash rests on the problem of intra-household distribution of expenditure
where a woman‟s needs may get a lower priority.
This intra-household distribution problem can be addressed to
some extent by transferring cash to the account of woman of the
household
and
price of PDS kerosene be increased to at least Rs.15/litre so as
to keep subsidies under reasonable level
this will keep diversion and adulteration under check.
Thereafter, price of PDS kerosene be raised every year in step
with the growth in per capital agricultural GDP at nominal price.
inverse relationship
with the income levels of states, which needs to be rationalized.
For instance, the average per capita kerosene allocation in high
income States in 2007-08 was 14.1 litre
which was 41% higher than that of the low income States.
going ?)
Most of the households use only 3.5 litres per month. State-wise
allocation should be based on the number of BPL households
without electricity in rural areas
and urban households using kerosene for cooking. Since electricity
supply may be erratic, a
smaller allocation say 2 litres per month may be made for electrified
BPL households.
subsequent progress of rural electrification, LPG and piped gas
availabilities is expected to reflect much larger reductions in Kero
use in coming years.
Poorest Rural BPL spends around 2 per cent of its monthly expenditure on
kerosene.
While they spend 13 %per cent of , what one might call, its discretionary
expenditure on
1. entertainment,
2. personal effects,
3. toilet articles,
4. sundry articles,
5. consumer services
6. conveyance.
There is therefore, some scope for increasing price for PDS kerosene.
if we take the growth rate of per capita
GDP in agriculture, that should give a
good measure of the ability of the rural
poor to pay.
litre since March 2002.
During 2002-03 to 2008-09, the per capita agriculture GDP at
current prices has increased by around 60% (at an annual compound
growth rate of 6%).
By 2009-10, the increase is likely to be 66%.
A 66% increase in kerosene price would keep the share of
expenditure on kerosene at the same level as in 2002-03.
Thus, the price of PDS kerosene could be raised by 66% to reach
a level of around Rs. 15/litre without putting undue burden on the poor.
Market malpractices like hoarding, black marketing, and adulteration thrive when prices
are controlled arbitrarily. Especially for Kerosene, I see long lines of Rickshaw drivers in
front of those Kerosene vendors every evening – why do they come there?
Major oil exporters that subsidize petroleum product prices can actually become product
importers for lack of investment in the downstream sector. Iran, Iraq, Nigeria and
Mexico are prime examples.
Cross-border price difference trend to widen when prices are kept low; it
encourages “fuel tourism”/ Smuggling especially for Kerosene.
Since Govt. pays money to keep petrol cheap, it puts money shortage for Govt.
(which is under lot money burden already thanks to pakis – we’ve to maintain huge army,
make test new missles every week)+ naxals + insurgency in N.East = lot money going
into Revenue Expenditure instead of capital Expenditure.
Why Should the government intervene at all
in the market and set prices?
because poor people need cheap kerosene to cook food, else they’ll chop down the trees.
= climate change they also use kerosene lamps, because they have no electricity.
Other impacts
if diesel is cheap, it may encourage freight movement by trucks rather than by train.
When the price
difference between petrol and diesel is high, diesel driven vehicles may be preferred. If
there is a large difference between the prices of diesel and kerosene, kerosene may be
used to adulterate diesel.
In 2008, we have even seen diesel being used in place of furnace oil.
Thus, Price control, subsidies and taxes can introduce distortions which may not be
desirable.
Conclusion
In order to shield the Indian economy and consumers from the adverse impact of a
volatile international oil market, the government decided to fix the consumer prices of
four sensitive petroleum products, viz. petrol, diesel, domestic LPG, PDS kerosene.
As the prices of these products were below their cost, government devised a
compensation mechanism for the public sector oil marketing companies (OMCs).
This mechanism essentially involved financial support to OMCs from other public sector
upstream companies, viz. ONGC, OIL and GAIL by way of price discounts and from the
government through issue of bonds.
Parikh Committee suggests that at current levels of prices of petrol, diesel, PDS kerosene
and domestic LPG, the financial burdens on the companies as well as on the government
will be unsustainable.
Therefore, there is a need to change the existing policy which can strike a balance
between the capacity of the consumer to bear higher prices and fiscal stability of the
government.
Explicit formula-based pricing mechanism of petroleum products is not conducive to
establishing a long-term viable and globally competitive oil industry in the country.
As more than 3/4th of the current domestic crude oil requirements is met by imports and
is expected to go upto further in the future, the domestic consumer prices of petroleum
products should be increasingly aligned with movements in international oil markets.
Any ad hoc system of price fixation by the government may provide a semblance of
domestic price stability in the immediate-to-short term, but give rise to serious long-term
instabilities in the demand-supply conditions in the country, competitive functioning of
oil companies, and fiscal soundness of the government.
A viable and sustainable pricing system for petroleum products is a key requirement of
stable, long-term growth of the economy. Similarly, a financially strong and globally
competitive oil industry provides an enduring platform to strengthen energy security of
the country. It is therefore important that oil companies should have the freedom to set
prices based on competitive market conditions. The government needs to extend subsidy
to the targeted consumers in such a manner which does not impinge on the freedom of oil
companies to set prices in the market place.
One Example
A two-wheeler consumes, on an average, 86 litres of petrol per year,
The fuel expenditure of car owners is much larger at Rs. 2210 per
for which the owner spends Rs. 320 per month (Rs. 510 in Delhi).
upper two/three deciles of the population.
There is no reason to subsidize this class of consumers.
Full price pass-through at US $ 80/bbl will increase the retail price
of petrol by around
Rs.7/litre. The additional expenditure of a two-wheeler owner would
be only Rs. 50 per month (all-India average).
If higher petrol prices lead to less driving, more fuel efficient
vehicles and an efficiency
tractors,
thrashers,
tillers,
harvesters,
pump -sets
Diesel & Farmers
if diesel price rise- they’ll suffer BUT
Government can compensate via fixing higher Minimum Support
Price (MSP) for major crops.
Therefore, any increase in the cost of diesel will be reflected in the
price and will not adversely affect farmers
Higher diesel price will induce them to use less diesel which may
reduce over-use of ground water prevalent in many parts of the country
(via pump-sets)
Govt. instead of giving cheap diesel- uses that subsidy money to
build more canals, then farmers won’t have to use lot pump-sets
anyways.
higher diesel price = higher MSP will increase subsidy for PDS,
(since food become expensive, Govt. has to give more money to supply
same quantity of PDS wheat/rice.)
owners generally raise their rentals in consonance with growth.
Therefore, long distance charge for a round trip between Delhi and
Mumbai for a
9-tonne truck is more than Rs. 40000 today whereas its diesel
consumption works out to around Rs. 22000.
Higher diesel price would encourage fuel use efficiency as well as
greater use of railways for freight movement.
Railways consume around 1/4th as much diesel per net tonne
kilometer as trucks.
means climate change help.
Even assuming that the truckers, power generators, industrial users etc.(other
than the
passenger car owners) are able to pass on fully the additional cost of diesel,
an increase of Rs. 4 per litre would mean an increase of around Rs. 20,000
crore in their cost of diesel which would be around 0.4 % of GDP in 2008-09.
This should be compared with the inflationary impact of subsidies, which
would be similar.
Car owners who drive diesel vehicles, including Sports Utility Vehicles
(SUVs), should
be able to bear the additional cost. There is no economic or social reason to
subsidize them
so Parikh Committee recommends that the price of
diesel should also be market determined both at the
refinery gate and retail levels.
And finally, LPG
LPG Cylinders
Subsidy situation
LPG consumption is growing and global price is also expected to
increase, the subsidy burden will keep growing. This is not a
sustainable situation.
Normally, a subsidized product ought to be given in limited
amounts. However, domestic LPG is both heavily subsidized
These households get a large part of the subsidy even when they
and spend less than 5 per cent of their total expenditure.
have the capacity to pay the market price for LPG and
will use LPG even when the price is raised.
Since providing universal subsidy through price below the cost
misdirects the subsidy to the relatively affluent, a strong case can be
made for subsidizing LPG as a clean cooking fuel for the poor.
provide the subsidy.
smart card system or transfer on entitlement based on the UID
platform can be used which entitles a household a fixed quantity of LPG
at subsidized price beyond which the market price would be charged.
yet this can happen—poor getting cheap LPG cylinder- selling it to
middle class family @ a little higher price and then burning firewood &
dung to cook in his own home. So not just ‘smart-cards’ you need a
more full proof system like gas pipeline or something.
Best solution is just simply giving direct cash- and then every one
including poor men buy LPG @ market prices!
and everyone is charged the market price.
But then suppose a poor man given 100 Rs. To buy LPG , he may
not buy it and instead buy liquor and beat up his wife to collect firewood
from jungle for cooking.
Thus, The argument for providing subsidy in kind rather than in
cash rests on the problem of intra-household distribution of expenditure
where a woman‟s needs may get a lower priority, and on the merit good
nature of LPG use. The intra-household distribution problem can be
addressed to some extent by
transferring cash to the account of woman of the household
expenditure on discretionary items.
Accordingly, LPG price can be increased at least to the extent their
income has increased so that the proportion of income that they spend
on LPG remains the same.
prices of PDS
kerosene has already been explained in previous article. A similar
dispensation can be devised for domestic LPG also. Since LPG is used
largely in urban areas its price should be determined on the basis of
growth of total GDP (in contrast to agricultural GDP considered for
kerosene).
The per capita urban GDP during 2004-05 to 2009-10 has
increased by 84% (say 85%).
Accordingly, the fair price of domestic LPG cylinder from the base
price of Rs. 262/cylinder in
2003-04 is estimated to be Rs. 485/cylinder in 2009-10. Another
way of assessing the level of price of LPG cylinder in 2009-10 is to
maintain the percentage of LPG subsidy in the price of 2003-04.
unintended uses.
Subsidies to the targeted group such as the BPL rural households
can be delivered as entitlements or through direct cash transfers
to be given to the woman of the household.
Since the above mechanism is yet to be made operational, an
interim measure needs to be put in place.
While companies would weed out multiple connections
and create a scientific data base for effective monitoring, there is a
strong case to increase the price of 14.2 kg LPG cylinder
by at least Rs. 100 per cylinder.
Thereafter, the price of domestic LPG should be periodically
revised based on increase in paying capacity as reflected in the per
capita income.
The subsidy on domestic should be discontinued for all others
except the BPL households once an effective targeting system is in
place.
As a clean cooking fuel, LPG is a merit good and subsidy to poor
households may be needed and justified.
Answer: RBI prints new notes to replace the old torn-out notes and to meet the money demands
of a rising economy.
As you know, if people have x amount of money but there are not sufficient items in market to
purchase, then there will be inflation (price-rise).
So RBI’s job is to maintain the money supply (liquidity) in the market, to prevent inflation.
If there is shortage of money in the market, RBI generally alters its SLR,CRR,Repo,Reverse-
repo to increase the money supply.
Lets imagine,
We need to buy new F16 fighter-plane from America, they ask for 1 billion dollar$.
So Prime minister Manmohan Singh asks the RBI to print new notes of 50 billion rupees and
pack them in a big suitcase. Then he takes it to Forex market, gets the Rupee converted into
dollars and buys the fighter-jet. But the same broker at Forex market, will use those 50 billion
rupees to buy all the tea,Basmati rice, onion, potato and everything in India and then export it to
other countries!! So shortage of items for Indian consumers = price rise=inflation.
So RBI cannot print notes indiscriminately.
However an expanding economy like us, requires more money so people can take loans and start
business etc. Even after altering SLR,CRR,Repo,Reverse repo, there will be still demand for
money So RBI must be printing more money after looking at the indicators like IIP, GDP etc.
Besides printing money also costs money. So I think there will be some complex formula, but
I’m not aware about it.
2.)Sufficient gold or forex reserves is necessary to print notes by the rbi but please explain me
what happens to the forex or gold reserve as soon as the indian notes are printed. i.e., if the rbi
has 4000 u.s. dollars as forex reserve and a situation occur to print 100000 rupee notes (2000 us
dollars=100000)(so after printing the notes, will the forex reserve of india become as 2000 us
dollars or will it remain at 4000 us dollars itself.
Please explain…..
However, RBI uses special printing-machines, papers and inks imported from Switzerland etc. to
print the new currency notes. so obviously RBI has to pay in dollar$$ while buying the raw
material. So in that sense some of its forex re$erve will deplete.
RBI can never link the money-printing to gold or forex reserve because that’ll sevearly limit its
capacity to meet the money-demands of a rising economy.
Sidenote:
you can get brand-new fresh notes and coins from RBI branch, but before you have to wait in
long queue while the RBI staff sells it to the agents from the backdoor (Rs.10 Commission on
Coins worth Rs.500). And those agents sell it to merchents, but merchants never use it and insist
on you to buy toffees worth Rs.1,2,3 instead of returning the change. (as seen on sting-operation
by E-T↑) So, in that sense, artificially created shortage of ‘change’ also boosts economy!
Cons
1. As petrol becomes expensive, rickshaw fares increase. So you end up wasting lot of time
waiting for the bus or wasting more money on rickshaw.
2. Cost of everything that is transported by petro-vehicles, also increases.
3. Erratic public transport system (buses and railways) creates problem in reaching at office
/ school /college on time = negative-effect on nation's productivity.
4. Deregulation of petrol doesn't directly mean that Government will reduce taxes, they'll
simply start diverting that subsidy-money to something else like NREGA where again
their cronies loot it via ghost muster rolls and fake ration cards. So better you and me
misuse the subsidized petrol then let them enjoy the subsidy money!
5. If petrol becomes expensive People start preferring to buy diesel vehicles. So recession in
petro-vehicle sector and boom in diesel vehicle sector.
6. People start buying electricity-based cars and scooters but where does that electricity
come from?? if from coal based thermal power plant, then again it'll lead to more
pollution.
7. Petrolpump owners will start adulterating more kerosene in petrol, to increase their profit
margin, while vehicle-engine efficiency decreases.
8. The theoretical assumption that as petrol becomes expensive, businessmen will start
investing in clean energy: doesn't hold much water in India, as the required infrastructure
and Government support for research in clean energy technology is bare minimum,
compared to USA etc.
Poor people want to start some small business, but don’t have money and banks are not
interested in doing lengthy paper-work to lend them small amount of money.
So poor people end up going to moneylenders, who charge 36% interest rate and then poors
remain indebted forever.
But when you add corrupt politicians, indifferent-bureaucrates, crony NGOs and agents to this
Microfinance equation, everything changes.
Problems in Micro-finance
1. Compare potato chips business between some poor self-help group vs. giant companies
like Lays, Kurkure etc. SHG can never match in the supply-line, package quality,
advertizement and retail distribution agents like them. Same about soap giants like
Lifebouy or Nirma. So ultimately only a few SHG survive the competition and make
some money [Generally those with traditional-handicraft stuff exporting to America].
Rest of them get disbanded after initial enthusiasm and so cannot pay back the loans.
Although NABARD generally doesn’t go on tough loan recovery like those
moneylenders or banks do (because that’d cost votes in elections)
2. →hatever alleged ‘2 week-business-training‘ they’re given by Government is all those
namesake powerpoint dudes stuff. While you know that to compete your product
against some big company like Lays, Kurkure, Nirma or Lifebouy you need lot more
exhaustive and rigorous training, exposure and a mentor.
3. Sometimes before elections, big Loan-melas are held on the instance of local politicians,
so every villager ends up getting some loan of small amount, but most cannot payback.
4. There are some good for nothing crony NGOs, who create ghost SHGs, get the loans
sanctioned, give a share to the officers and everybody enjoys life.
5. Microfinance gives only a ‘small’ amount of loan, while for starting a business you need
a little big. For example, they give 20000/- for your one project, while you need 1 lakh
rupees, so either you put 4 new flimsy-projects under different categories to make up the
money or go to moneylender to get the rest amount on higher interest rate.
6. the lack of entrepreneurial culture at rural level means whatever little money they make is
wasted in wedding ceremony or repaying previous loans to money-lenders, instead of
investing it back in their business. So money made, doesn’t bring more money.
7. In Andhra pradesh there are more than 10,000 SHGs (highest in the country), it accounts
for about 40 per cent of MFI lending across the country of about Rs 30,000 crore, and is
currently facing a crisis due to bad loans and MFIs using coercion to recover loans, even
leading to suicides.
a)- Do we use our Forex Assets , a very stupid option as we have around 270 Billion
USD and that will get exhaust very soon.
b)- Does RBI print this much of amount every year.
Answer:
When we say “we are importing more and exporting less”… That is not same as “we are
spending more and earning less” So forex doesn’t get depleted. Because RBI is not
importing, it’s the businessmen who import. And when they’ve to import, they get their
rupee converted into Dollars in the forex market or go through a barter system (like
give me 1 iphone and i’ll send you 30 kilo Basmati rice).
RBI has 270 bn USD that doesn’t mean whole India has only 270 bn USD, you’ve to see
the amount of money the Indian businessman have (which they can get converted into
dollars at forex market, whenever they’ve to import something).RBI has 270 billion
dollar$ that doesn’t mean whole India has only 270 bn USD or that whole India’s capacity
to import is only 270 bn USD, you’ve to see the amount of money (in Rs,$,Yen,Pound) the
Indian businessman have.Ofcourse RBI does print new currency regularly, but it’s not to meet
the trade-deficit, if RBI does so, that’ll lead to huge inflation.
Ans.
Greece Government was giving pension benefits, social security and welfare schemes
(NREGA Mid-Day meal like stuff), mega PSUs to give jobs for wooing the voters,
without realizing that money doesn’t flow from sky.
Ultimately, the Expenditure became way tooooo higher than Government’s income.
(Deficit).
So Greece started borrowing from market, by issuing bonds.
Adding insult to the injury, 2008 s American recession had snowballing effect on Greece : fall in
exports, tourists stop coming and more. So Government’s tax collection falls down.
In this scenario, a seasoned player would not like to buy such Government bonds.
So Government of Greece was misreporting its official economic statistics as well as its
borrowing status to make the country’s economic foundation appear strong on paper.
But later that was found out, and lead to a speculation that Greece is on a verge of bankruptcy
and will default on all its loans and borrowed money. (=Sovereign default)
Such speculation makes share-market collapse, foreign players pulling out their money from
Greece.
But unlike the Bollywood movies, EU cannot simply print suitcase full of Euros and give it to
Greece to solve its debt problems. (recall my earlier example: PM asking RBI to print more
money to buy fight-jets, will lead to heavy-inflation when broker buys stuff from that extra-
printed money.)
So when EU gives financial relief to Greece, it actually goes from other team-members’ wallets.
(Germany, France.) So they’re not happy, especially Germany.
Effect of crisis on the nation itself
Monetary help from EU, IMF etc. comes with riders attached, like Greece would have to stop its
welfare schemes, reduce salary of Government employees, close down their inefficient PSUs etc.
that again leads to more strikes and anti-Government riots in Greece = further deterioration in
tourism and trade.
Looking at such a grim picture of Greece, foreign players prefer to invest their money in some
other nations and the vicious cycle continues.
PROBLEMS
As you can see, any no0b without sufficient money can enter in this speculating game as
long as he has some money to pay interest rates on Badlaa transactions. And if luck
favors him, he can walk away with a decent profit.
So lot of people doing speculative share-trading like this = speculation + volatility
but it may happen that share prices don’t work out as they had speculated and then they
refuse to pay money or go bankrupt or suicide = not good for economy.
After ‘92s Harsha Mehta scam, badla system was banned in the county for a while.
As such Baldaa is not bad because it allows you to arrange money. And it also allows the
brokers-financiers to lend you money and earn interest on it.
Pitfalls in Badlaa system are same as in overspending with credit card or buying way too
much stuff on loans to an extend where 70% of your monthly salary goes in EMI
payments!
Suppose Foreign Direct Investment (FDI) is allowed in multi-brand retail sector then Wall mart
can come to India and start a big mall in every city.
So lot of laborers, contractors, cement suppliers, masons, electricians etc get work for
mall-construction.
After mall starts running: people get jobs as salesmen, accountant, manager, security
guard and sweeper in it.
Since competition increases, consumers get more choices and attractive price offers by
competing malls & small vendors.
All these people who got job because of this mall, now they’ve money in their hands so
they go take home and bike loans, so it increases the demand and thus people in those
automobile-real estate sectors also get more orders.
new houses are built so more laborers get jobs and that goes on and on…
Answer. Operating ratio is the amount of rupees spent to earn 100 Rupees.
For railways, Operating ratio for passenger trains used to be about Rs.75 earlier but now it is
almost Rs.125. That means Railway is not making profit in passenger trains.
Because of this increase in Operating Ratio, Railway increases Freight charges (money charged
on transport of goods such as coal, cement etc), to cover up the losses. This is called Cross-
subsidization and it increases the inflation indirectly.
Ans. When coal becomes expensive, the electricity by thermal power stations becomes
expensive. And freight railway charges also increase.
That has snowballing effect on everything because
1. Now factory owners have to pay more electricity-bill while producing same amount of
stuff,
2. They’ve to pay more money to trains while getting same amount of items transported.
3. Steel, aluminum, cement, glass etc industries also require coal during manufacturing
process.
4. So, they’ve to increase their product-price to keep the profit margin same.
And coal price itself is counted in WPI, with about 1.7% weightage.
Thus Whole sale price (WPI) increases when coal becomes expensive.
Tax is self-explanatory, you’ve to pay a portion of money to the Government on the income
/profit you make or the products you purchase etc.
Generally Cess is temporary in nature. e.g. Education cess on income tax is taken, and after
Government get sufficient money to open new schools, then cess is removed.
Food for thought
The tax itself is taken in pretext of running the administration and doing the Development work
so If Cess (tax on tax) is demanded that means something is not right in the system.
e.g. in 2009 during the recession time, Government of India launched a scheme to give 50%
depreciation to commercial vehicles. (with assumption that it’ll boost the vehicle demand and
help the automobile industry to come out of the recession.)
Other tricks involve donating 5,000 rupees to some religious institution run by con-man and
getting donation-receipt of 5 lakh rupees. And claiming deduction! and so on..
These companies, making profit but having zero taxable income, are known as ‘Zero tax
companies’
Taking note of this objection, Government revised the DTC and said the MAT will be calculated
on book-profits only.
what are these income,production and expenditure methods in calulating GDP?how do terms like
NNP, NDP, GNP,GDP,NNPFC,NNPMP DIFFER FROM EACH OTHER. what is difference
between gdp at constant prices and current prices. its very confusing
I’ll deal with each question in one post. First, lets refresh the concepts again.
How GDP calculated and what is are these income, production and expenditure methods.
like you and me buying (overpriced) daal, vegetables and milk (courtesy: Sharad Pawar).
I buy your second-hand bike for 15,000 Rupees, should we including it in the consumer
Expenditure (C) ? Nope. Because the bike Is not ‘produced again.
Second hand products are not counted
When you had bought that bike for Rs.30000, 10 years ago, we had counted that money in that
year’s GDP. So second hand-product sale money cannot be counted in this year’s GDP.
Now, I buy your second-hand bike from an auto dealer, (who gets Rs.1000 Commission) should
we include it in the (C)? Hell Yes, because he sold his ‘service’ to me uniquely. Every time he
sells a second hand product, although no new ‘product’ is created but new service is delivered by
him.
WHAT IF SAME 1000 RUPEE NOTE IS CHANGING HANDS?
Each service or product has separate value even if same currency note is used to purchase it
I gave a note of Rs.1000 to that dealer as part of his brokerage (dalaali) and he gives the same
Rs.1000 note to the electricity company for his monthly bill.
Same Rs.1000 note is changing hands so is our GDP =Rs.1000? Nope. GDP is the money value
of everything produced within India. So brokerage service is Rs.1000 separately and the
electricity produced is also worth Rs.1000 separately. Therefore, Even as same 1000 rupee note
is given to both parties.
Total GDP=1000 brokeage+1000 electricity bill=Rs.2000
If electri.co gives that 1000 rupee note to its peon as salary, then again it has to be counted.
Because peon sold his unique service separately to the company. So in that case
Total GDP =Brokerge+Electric bill+peon^’ salary=Rs.3000
Like buying (overpriced) sports equipment from Kalmaadi’s associates during Common wealth
games. Government paying salary to staff, buying new tanks and missiles..everything.
GDP(Expenditure)=C+I+G+(X-M)
1. Farmer produced Wheat and sold 100 kg of it @ 2000 Rs. (Original value)
2. Flour mill, purchased it, grinded it and sold the flour to baker @ 2500 Rs. (+500 value
added to previous purchase)
3. Baker made breads, cookies and biscuits and sold the total production @3500 Rs to its
final customers. (+1000 value added to previous purchase)
Example#1: Subsidy
1 kg. Urea fertilizer’s original-price is 500 Rs.
When it reaches the local supplier, Government is giving 10% subsidy. So farmer purchases it @
(500-50)=Rs. 450
Example#2: Tax
Box of 10 Blank DVDs =Rs.100 +10% VAT so final M.R.P.=Rs.110
How will you calculate GDPMP if GDPFC is given, & vice versa?
So finally,
Still doubt (like I always had about everything in college)? Following table should clarify it.
GDP @ Factor Cost and Market Price for same Urea and Blank DVDs
As you can see, Factor cost= Original or real value of something.
So at marketprice, even when Government is giving subsidy, the manufacturer still receives the
original price. E.g. although farmer pays Rs.450, still manufacturer gets Rs.500 so we ‘add’
subsidy when converting MP to FC.
Similarly, even when customer pays MRP of DVD is 110, the DVD-manufacturer is still getting
100 Rs. So we ‘deduct’ the indirect tax(↑AT) while converting MP to FC.
Similarly
So, what is Net National product @ Factor cost, and @Market price.
And factor cost, market price, just as explained above..with and without Government
intervention.
So Formula: Real GDP= Price of xyz item in base year x Quantity produced in current year.
GDP Deflator
Image: Formula
Appropriation account:
When Union Government spends money in various schemes, it is noted in this account.
E.g. Parliament passed 500cr. rupees project for health care and only 400 cr. were spent at the
end of the year, 10 cr. worth projects were given to x company etc.
Ans:
Answer: Anil kapoor-Garry Kirsten example was for GNP. [GNP= domestic product+income
from abroad]
Stimulus:
A weak athlete takes some steroids and runs faster than his built-in ability, so Steroid is
stimulus.
Similarly when Government comes up with some plan to increase the performance of
(depressed) economy, it is fiscal stimulus.
During recession, the demand is depressed (i.e. noone is buying stuff) so Government has to
come up with something to increase the demand, to make the consumers buy something.
In 2009, Government of India gave tax benefits on purchase of commercial vehicle to increase
automobile demand.
It also chopped down excise duty by 4%, asked RBI to release more money to EXIM bank to
provide it as cheap-loans to exporters and so on…. this is a fiscal stimulation package which
costed Government about 4 billion $.
Similarly 2008, President Bush released 700 billion $ bailout package to buy the toxic loans and
to save American economy from the sub-prime crisis. That is also a fiscal stimulus.
Fiscal deficit
We also know that money doesn’t fall from sky, so If Government is giving ‘stimulus’
that means it is either borrowing from someone else to supply that money into the
depressed economy or it is cutting down its own tax-rates (income) to stimulate the
consumer-demand.
So, obviously when stimulus is given, the fiscal deficit increases.
In simple words it :If a company makes its service/product cheaper by removing the extra
features, that is no frill.
eg. Mobile phone postpaid package without unlimited ringtones or free night talk.
Dish TV package without 100 sports channels.
For example
As you can see above, it doesn’t have the extra-features like Cheque book and ATM etc. So it is
no-frill (because extra-features removed).
Advantages
Apart from the features mentioned above,
1. Rural women can put their hard earned money in it, less chances of theft or husband
spending it on Desi liquor.
2. Can get easy loans, saved from the clutches of moneylenders.
3. Some banks even offer free of charge DD (demand drafts) like 2 per month.
4. No frill account holder can convert his/her account to regular saving account later.
5. Financial inclusion, Empowerment, Development, ….(Kurukshetra, Yojana, Frontline
stuff)
6. Less chances of that good-for-nothing ***** bank forcefully sending you credit card
behind your back along with hidden insurance and service charges and then refusing to
take it back.
Disadvantages
None. Although it has limited withdrawals, no chequebook/ATM but think about the
targeted poor people. They don’t need it much, they just need a place to safely park their
money.
It’s same like buying a no-sports channel DTH package, doesn’t put you on disadvantage
because you never really wanted to see those channels in the first place!
Monetary Policy
Who makes it? Ans.RBI.
What is their intention?
Ans.To control the money supply in the banking system and thus control the inflation.
What tools do they use?
Repo,reverse repo, bank rate, SLR etc.
What happens?
Suppose there is too much inflation (price rise) in the market because people have more ca$h in
hand and only few products in market.
So RBI changes those numbers in a way that banks have less money to give as loans to people.
Obviously the banks will charge higher interest rates on their loans, this is called tightening of
the moneytary policy / Dear money policy.
Reverse of it, is Cheap money policy i.e. when RBI feels that people should get loans @cheap
rate so that there is boost in demand.
Fiscal Policy
Who makes it?=Government.
What tools do they use?
1. Taxation
2. Public Expenditure.
What is their intention?
Re-distribution of income,allround Development.
e.g. Government puts 30% corporate tax (taxation), then uses that money to fund NREGA [100
days wage to poors] (public Expenditure).
So part of rich people’s income gets redistributed to poor -people.
Many times, Government doesn’t have enough money to fund its projects*. So they release
bonds. RBI sells those bonds on Government’s behalf to the banks. Now banks may or may not
be interested in purchasing them. So, RBI has a tool called SLR* (Statutary liquidity ratio),
which means banks have to compulsory keep x amount of their money in form of Government
bonds even if they like it or not.
* See?
Government project= fiscal policy’s public Expenditure tool
SLR=Monetary policy’s tool (by RBI)
Thus, SLR (part of monetary policy) is not totally independent from fiscal policy.
There is conflict of interest: RBI’s role as money supply controller vs RBI’s role as
Government’s debt manager.
Same way, Government wants that farmers should get loans @cheaper rate.
So, RBI makes special consessions to regional rural banks in CRR/Repo etc.
and so on…
IMF gives loans, it expects you to pay full amount back + interest rate.
In IMF there is a thing called Quota i.e.
Every member has to give some money to IMF, (IMF will give it to loan as other members). The
rich nations with bigger Quota has more voting rights (USA).
So rich nations can effectively decide how IMF should function.
World Bank
In short, They give soft loans to poor nations for Development purpose and various health-
education,poverty removal programs.
Soft loan= minimal interest rates, the EMIs have longer time brackets in between, and they don’t
expect your to pay back the principle.
They facilitate private players to setup business in poor nations. (via insurance and loans)
Advantage
1. Makes life easy, e.g. Paypal, credit card, travel insurance etc.
2. Helps you hedge the risk. Hedge= a fence or compound wall built to protect your
property. Hedging = a method of preventing risk. Example, Oil Hedging
Similarly you open a bank account in that Chor party bank (Chor=thief, you know which bank
I’m talking about), they trick you into getting a credit card and deduct insurance premium behind
your back saying that credit card comes with a ‘free’ health-insurance policy. And adding insult
to the injury, when you get heart-attack, they don’t pay you, saying sorry heart attack is not
covered, this health insurance covers minor injuries in road-accidents only* (*provided that you
were wearing helmet/seatbelt, driver had licence and was driving under speed limit)! And
whatever money the Chor party bank earns from this unethical game, they reinvest it into putting
more ‘feel-good’ advertizements on TV to trick more people like you, while the already fooled
customers get redirected like footballs from this call centre to that call centre. = No economic
growth.
So, end product of this kind of financial innovation is a new even complex financial product –
not a physical product or service that you can see/touch/feel or consume.
Led to recession
This innovation led to complex Derivatives that led to *asset bubble and ultimately we got
recession.
Ans. Suppose you want to start a new factory, don’t have enough money. Banks are not giving
you loans or their loan-conditions are very tough. So you want to Issue an IPO/security in the
primary market to get the required funds.
*security =a piece of paper. When someone buys that piece of paper from you, they give you
money like 100. And you’re supposed to pay them back after a period or share your profits with
them (Shares).
But what if nobody buys your IPO? And how to go and launch your IPO in the first place? You
don’t know the technical nitty gritty or paper-work involved in it, or have the competent staff to
do that? Easy, just walk in to an investment bank, they’ll launch the IPO on your behalf. They’ll
sell you on your behalf and if no-one buys it, the investment banker will buy it and pay you the
money. This is called underwriting.
For example, on following link see the big underwritings made by Kotak Investment bank and
the list of their big clients
So investment banker is not just a banker but combo of many things: lawyer, financial adviser,
money-lender, insurer, Real estate agent and so on.
But Investment banks don’t do anything on small scale. Like you can’t walk in to get
bike/car/house loan or get your 100$ converted into rupees.
“After remaining in surplus for 18 months, liquidity conditions transited to a deficit mode
towards end-May 2010. This was the consequence of a large build-up in government cash
balances as a result of higher than expected proceeds from spectrum auctions. Beginning October
2010, liquidity conditions became even tighter. Both frictional factors such as the above-normal
build up in government cash balances and structural factors such as high currency demand
growth and credit growth outpacing deposit growth contributed to tight liquidity conditions.”
My question is if credit growth has outpaced deposit growth (more ppl r takin loans rather than
depositin them) then how can that contribute to tight liquidity !!! There will be more money wid
ppl due to loans taken. Pls xplain
Ans-
Here liquidity is a relative term. If the banking-system has more money to offer as loan today,
compared to last month, we’ll say liquidity has increased. If banks have less money to offer as
loans today, compared to last week/last month/last year, then we’ll say liquidity is tight.
#Spectrum auction
In the spectrum auction, the big telecom companies withdrew their deposited money from the
banks and also took loans.The telecom companies had to pay around Rs 68,000 crore within 10
days of the auction. So as you can see, that much money went from banking system to the
Government and hence was unavailable for loans.
Implications of liquidity
When liquidity is tight (or low), that means less money available for loans hence interest rates on
loans increases.
1. Too high liquidity =easy loans=less interest rates= people have more ca$h than products
in market= inflation.
2. Too low liquidity=hard loans=high interest rates=businessman find it hard to finance new
projects, demands for automobie/cars etc. decrease and so on.
Zero Interest Rates in Japan and America
Question from a reader: RBI increases interest rates slowly and higher interest rates encourage
more FDI inflows. I got the reason wich u mentioned that y RBI duznt increase the rates
suddenly.
Question wich arises here is wrt Japan. Japan has been keeping near zero interest rates for a
while now. Why so? Higher interest rates as usual wud mean more FDI in Japan wich will
bolster its growth. So wat r the reasons for keepin low interest rates?
Ans. You’re right, if Japan or any nation increases the interest rates, then more FDI will come.
But Japan’s concern at the moment is not FDI but consumer-demand. FDI matters for third world
and newly emerging economies because you need big money for
infrastructure,factories,machinary, R&D for launching new product etc. but Japan,America are
already far ahead in those things hence some-what saturated for FDI. So their main-priority =
consumer demand @Home and Abroad.
Same is the case, why America too has near zero-interest rates.
They’ve so much money available as loan but people are not interested in taking it for spending
or production =>so decrease the rates even further.*
India is reverse: so much inflation, so you need to swallow some money out of the sytem. =>so
increase the rates higher.
*While Japs and American authorities believe that zero-interest rates will help boosting the
demand, there are thinkers with opposite view.
Copy pasting from TIME
American consumers, too, are trying to reduce household debt, so borrowing more money for a
new car or to remodel the kitchen is not a high priority. And without greater consumer spending,
most companies have little need for new loans to expand operations. “Interest rate cuts don’t
matter in this environment,” says Kirby Daley, senior strategist at financial-services firm
Newedge Group in Hong Kong. “It doesn’t get at the heart of the issue.”
So in simple terms,
Bank’s profit = Interest charged on loans -(minus) Interest paid on deposits.
Casa ratio =is the share of current and savings account deposits to the total deposits of the bank.
To keep it simple, lets just say bank’s incoming money comes only from two types of deposits:
1) CASA deposits and 2) FD (Fixed Deposit)
From CASA account, you can withdraw your money any time. So, while bank is
circulating this money as loan, then have to be careful.
They do a statistical analysis, like 10000 people deposited total 1 crore rupees in CASA
accounts. And on any day, not more than 10 lakh rupees are withdrawn in terms of
cheques, demand draft etc.
That’s 10% outgoing money from CASA? So lets keep 15% of CASA money in terms of
‘cash’ in the bank and give away remaining CASA money as loans
BUT, what if suddenly account holders withdraw a lot of money? Example, back in 2008
during sub-prime crisis, some one spread a rumour in Ahmedabad that ICICI has gone
bankrupt! So people panicked and lined up in front of ICICI branches and ATMs to
withdraw all their account money. On daily basis more than Rs. 5 crores were withdrawn
Ahmedabad’s branches and they had to order truck load of cash from other cities and
even run the branches on holidays to meet the situation.
Take a reverse case, what if thousands of people take home loans and then show inability to pay
back [=bad loans / toxic assets / N.P.A. as it happened in America]? And at the same time CASA
depositers come and demand to withdraw lo lot of their money? So with this kind of situation,
the statistical calculations may go wrong. and if Bank has given lot of its CASA money to long
term loans (house loans for example) then it’ll be a real panic-situation.
The FD money is safer in this way. because banks know, once you make an FD, you’re not going
to withdraw it for next 5-10-20 years (in most cases) so they can safely circulate this money as
loans.
Ans. A Bank’s life depends on circulating the money from one hand to another and pocketing the
difference of the interest rates between them.
If people stop taking loans then Bank will invest in sharemarket, fund real estate projects, mutual
funds, oil bonds etc. or start giving loans to people of other nation or finance projects abroad. If
bank doesn’t see much profit even in that scenario then they will have to close down the
operation.
→hat’s all these about Base year prices and Current year prices while calculating economical
statistics?
Means you need to compare the current price, with some old price to say that the price has
increased (or decreased), right ?
Hence, to calculate the inflation (CPI,→PI) we’ll need to compare the price of some item for two
different years.
Suppose Price of a lifebouy soap was Rs.10 in 2001. And now it has increased to Rs.12 per bar.
So what is the % increase?
If price of a soap was Rs.1 in 1950s (don’t get excited because in those days, monthly income of
most middle-class people was around 100-300 Rs, so one rupee was a big amount.)
But does it make any sense to calculate inflation with such an old base year? Ofcourse not,
because lot things have changed after 1950, including the salaries of the middle class people. So
you won’t get the real picture.
Inflation is a ‘hurt-meter’. You cannot fathom how much it hurts now, if you didnot feel less
pain earlier. Those who lived in 1950s are all either dead or retired. And the current-working
population never actually bought a soap for 1 rupee. So how much is the soap price hurting the
current-population, to know that answer, you need to set the hurt-meter to compare the prices of
recent memory: oh yeah back in 2004 it was only 10 rupees and now it’s 12 so yes I can feel it
hurting me.
Morale of the story: We need to have the base-year at some near-past level like 2004-05 to get
the real picture of inflation. (Earlier this base year was about 1993-94)
Now lets get a lil technically correct, above post was written to clear the basic concept of base
year and current year only, the CPI and WPI are not calculated so straight-forward.
So, What hurts to you more, or what hurts the people at large: bike price or milk price? ofcourse
the milk price inflation because you need to buy it every day.
So when calculating the inflation, you need to ‘weight’ the products according to their usage.
Now survey the prices of all items in the base year and in the current year. Then you plug them
in the Lesperes Formula for weighted arithmetic mean. (Formula is not important, but what is
important for you to know is, that it is not a simple average but a weighted average)
And you get a number, we call it the WPI index number for the given year or given week or
given month.
Suppose after calculation you get a number 110 on 1st August 2011.
For base year we assume that WPI is 100.
So there is 10% inflation.
i.e. [110-100/100]*100
Now on 1st September 2011, you calculate again with new price data and the number is 112.
What does that mean? The inflation has increased by 12% compared to compared to base year
AND inflation has increased by 1.8% compared to last month. i.e. (112-110)/110*100
Answer. Lets say today 1$=50 Rs and price of one barrel of oil is 100$.
Means, if you sell 1 barrel of oil, you get 100$ (or 5000 Rs.)
so by selling 1 barrel, you can buy stuff worth 5000 Rs. from Indian market.
In short, dollar has weakened, means its purchasing power has declined in the international
market. Now you can buy less stuff from Chinese, European or Indian market using that 1 dollar
compared to earlier times, when Dollar was stronger.
Since you’re selling your barrel in the dollar currency, you must increase the price of your oil-
barrel to maintain your profit margin and standard of living the same. (else you’ll have to cut
down on your expenses like the chauffeur for your limo or the number of workers in your oil-
well.)
Ans. I’m writing for explanation purpose only. Technical details, intentionally skipped.
Subprime Crisis
First you need to understand Mortgage, derivatives and Asset bubble.
Mortage
You give me $10,000 loan and I sign on a paper that if I can’t pay back the amount before 2045,
you can take over my house. So my house is ‘mortgaged’.
Subprime dude
He is the borrower who is less likely to repay a loan. Because his income is low or irregular.
Why would bank want to give loans to sub-prime dudes in the first place?
Because bank can demand more interest rates from such people because of their bad credit
history.
Subprime is also in the car-loans, credit card etc. Besides when the general manager gives
‘impossible targets’ to his probationary officer, So what can a man do? Just give loan to every
swinging dude around.
Derivative
You’re a big bank, you’ve given such loans or credit cards to lot of sub-prime dudes and you
know it well that they’re less likely to pay. So after a while, you decide to cash in your
investment before these dudes start defaulting, so you repack those mortgage papers (security)
and make a new security paper “anyone who gives me $50,000, I’ll give him mortgage papers of
5 houses” = this is derivative product, because this security paper derives its value from those
mortgage papers.
Asset bubble
So now you sold such a derivate product to second guy, he then re-packs it with other things and
makes a new derivative product sells it to third guy…chain continues. Here, no new asset
(property or something that can generate $$) is created, basically you all are playing games with
the same five houses mortgaged, blowing the ballon with new derivates. Thus the asset bubble is
created.
A point comes when people who took loans or did big shoppings with credit cards : they refuse
to pay back and say
This is sub-prime crisis. And technically it contained, after American treasury bought all such
NPAs worth $1 trillion (somewhere in 2009), but the aftershocks are still felt: American
economy is not back on track yet, because that $1 trillion bailout money didnot fall from sky, nor
does the dollars spend on military expenditure in Iraq or Afghanistan fall from sky.
Eurozone Crisis
Also known as Sovereign debt crisis.
What happened here is the Governments of PIGS (Portugal, Ireland, Greece, Spain) were
spending way too much money on subsidies, NREGA stuff and bank bailouts etc. They used to
finance their spending by borrowing from the market. These nations earn most of their money
from export to America and tourism income from American travelers. But the sub-prime crisis
and the recession in 2008-09 meant Americans stopped going on vacations. So the
airlines,tourism and export business declined, while the expenditure remained the same. Hence
in a way, Eurozone crisis is an aftershock of the Sub-prime earthquake.
Suppose Debt to GDP is 96% (meaning if the country produced goods and services worth $100
in a year, they already had outstanding loan-repayment worth $96)
High Debt to GDP means investors loose confidence in your country.
These PIGS had high Debt to GDP than other nations, hence they are in the crisis.
But why only PIGS: why they ran out of money? (along with Debt to GDP %)
Portugal:93%
Over-spending by Government, inefficient PSUs with too much manpower (just like our Air-
India).
Ireland:96%
Their banks were running the same asset bubble game like the Americans. When it collapsed,
Government had to bail’em out.
Greece:143%
Overspending on Social schemes, overinflated staff in PSUs. Misreported its official economic
statistics, to fool the investors in buying the Government bonds. Caught.
Spain:60%
Boost to agri-business
If you import some Agriculture related machinery like Big harvesting machines they show on
discovery channel, this EPCG period is 12 years instead of 8 years.
Again minute details like 12 years and 13 years are not important, what is important :
Government is giving extra benefit to agro-machines under EPCG to make Agro-GDP grow by
4% a year for their 11th Five year plan target.
Mr. XYZ has exported 1 kilo paperclips and U-pins worth 4000 rupees. So he is entitle to Rs.4
credit. (They’ve specific rates for each export product, I’m only giving a fictional example)
1. →hen you import something, you’ve to pay customs Duty. Now you can just show your
passbook, and ask them to deduct the credit from it.
2. Or if you’re not planning to import anything, you can ask them to pay that Rs.4 in cash.
· These were mostly outlets for sportswear, luxury goods, apparel, fashion clothing, jewellery,
hand bags, life-style products.
· But neither the Political parties nor Local Kiranawala raised any voice against this,why?
Because these are ‘high-end’ luxury items for brand
conscious upper middle class and rich class people. It doesn’t hurt population at large. It was not
like people would stop purchasing from local
garment store to get Nike or Adidas.
Multi-brand retail
· Big Bazaar opens mall in above cities: selling t-shirts of multiple-brands such as Reebok, Nike,
Adidas, Allen Solley, Van Huesen, Peter England etc.
+and+ they also sell unbranded t-shirts (you know those buy one get three t-shirts free from
unknown companies.)
· So this is multi-brand retail: when an outlet sells a product (tshirt, tie, shoes anything) of more
than one brand.
Retail means when product is sold to the ultimate consumer (common man)
Argument against FDI
Anti #1: will lead to mass-unemployment
1. Retail sector in India is the second largest employer after agriculture. Almost 33 million
people involved here.
2. Now the problem part: “Disguised unemployment”. Father and two Sons running a farm,
producing 200 kgs of wheat. You take out any two members,
the production still remains 200 kgs. Same problem goes with family owned-operated retail
stores, the intermediaries and middle agents.
3. What should be done? Obviously one of the two sons ought to get himself in other sector
(service, construction, manufacturing, industry, etc) But
there is lack of opportunities, the manufacturing sector is not growing at the pace. So the
argument=: Displaced retail-operators will not be absorbed
in other sectors. This FDI will lead to unemployment.
1. Walmart cannot open malls in every nook and corner of India. Their electricity, staff and
security costs will surpass their profit margins.
2. Customers can’t goto →almart on daily basis for ‘attractive discounts’ because the petrol cost
(and time wasted in traffic) will negate the discount
on small purchase. So they’ll be using local small-retailer for daily requirements of bread, milk,
newspaper etc.
3. Did STD booth-operators become unemployed after advent of mobile phones with zero
roaming charges and free incoming? Nope, they diversified and
started running Xerox and cybercafés.
4. Did local Udipi owner ran out of business because of McDonald / KFC? Ofcourse not.
· The smalltime retail players cannot run business giving such heavy discounts, they close down.
Once all competition is eliminated with this
‘predatory pricing’ →almart will slowly stop giving discounts and recover their losses by
increasing the MRP.
· Since these big MNCs have deep pockets, they can affort this sort of loss. But in the long term,
they recover everything.
· Same way Once the small time retailers are out of business, Wal-Mart will start exploiting
farmers, paying them extremely low money for their produce, because
now Wal-Mart is the sole retailer in the city.
2. There is a Competition Commission of India to look into this matter. (earlier MRTP,
Monopoly and restrictive trade practices act)
· (sidenote) Another example of Predatory pricing is our airline industry. One of the prime
reasons why they’re making losses.
· China is notorious for this dumping tactic, earlier we had to impose Anti-dumping duty on their
rubber products and tires.
· Some believe that entry of Foreign retailers will facilitate the Chinese scheme of dumping our
market with their cheap products.
· If we are the 2nd biggest producers of fruits and vegetables, why are we not a ‘big name /
exporter’ in world market? And more
importantly, if we are second largest producer, then why is so much inflation in food items?
· Because Post-harvest more than Rs. 1 trillion worth farm produce, especially of fruits,
vegetables and other perishables, is wasted due of lack of
storage and transport facilities.
· More than 50% of this can be saved, if we’ve proper cold-storage facilities.
· Government is not doing much about this (duh they are unable to save even the wheat in PDS,
let alone cold-storage) and the private Indian players
donot have much money to invest in this cold-storage chain or those expensive big transport-
trucks of America that we see in Discovery channel.
· So if FDI in retail is allowed, the MNCs would invest in cold-storage chains and those big
transport trucks. Means lower wasted of produce. More
supply of fruits and vegetables. According to supply-demand rule the prices will go down.
· Right now, 100% FDI Is allowed in Cold-storage chain, but foreign players are not coming
there because they’re not allowed to sell it in retail
malls. There is not much profit margin in operating a cold-storage alone. It’d take years to
recover the investment. Only if MNCs are allowed to sell
the produce as well in their retail malls, they’ll feel interested in investing in this cold-storage
game.
· Similarly FDI in Wholesale trading was allowed upto 100% since 1997.
· Since the truck is overloaded, engine efficiency is reduced. He has to get his truck repaired
frequently.
· The road quality and traffic Management is bad, more diesel is consumed.
· Trucker will add all these costs (bribe, repair, extra diesel) in his service charge.
· Truck reaches the city, your local vegetable-vendor pays to offload the carrots but he gotta
maintain his own profit-margin as well, (+ the bribe he
has to pay to local policeman, municipality inspector etc) so the carrots that were lifted for 2
rupees, ultimately get sold for 25 rupees a kilo after
cutting everyone’s Commission.
When an organized MNC retailer gets in picture, he has his own extremely efficient and
streamlined transport service. So there is no overloading of
trucks, there is very systematic packing of goods. His truck maintenance cost is thus very low
and there is low wastage during transport.
1. There is no overloading of trucks, papers are in order. Less chances for policemen etc to
blackmail him into paying bribe.
2. He got deep pockets, he gives big annual donations for ‘election funds’ to the ruling party and
Diwali gifts to the concerned district officers.
That’s why small time petty officials such as police, municipality, food n sanitation inspector
can’t dare to bother him every now and then, as they do
to small time retailers.
So MNC retailer’s cost price is quite low compared to small-time retailers. Hence he can afford
to give attractive discounts to customers as well.
Same reason why many political parties dislike MNCs in Retail, you can extract more election-
funds from 1000 small time players compared to from one
big player. Big player is less susceptible to arm-twisting compared to a small player.
· Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic
and non-transparent character.
· These elected cooperative marketing societies and Mandis are more or less same BJP vs
Congress fight for domination in university elections, there is
hardly anything positive reform done for the students.
· According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final
consumer, as against 2/3rd by
farmers in nations with a higher share of organized retail.
· A study commissioned by the →orld Bank : →hy India doesn’t earn much money from
exporting its Fruits and vegetable (even though we’re second largest
producer) = Same reason, Non-competitiveness. Bad supply lines.
· A price that the farmer receives for a typical horticulture product is only 12–15 per cent of the
price the consumer pays at a retail outlet.
· More than 40% of the medicines sold in rural and semi-urban areas of India are of fake brands.
· For an MNC retailer you can atleast feel confident that it won’t be the case.
· Same way farmers are getting more money so all these people have more money in their hands
and they use it to purchase bikes, mobiles etc. so more
demand and more employment.
· This is trickle down theory. Marxist and Vinod Dua (NDTV) disputes this theory.
Fear exaggerated
· Fears of large adverse effects on existing retailers are grossly exaggerated especially since
modern domestic retailing has begun in any case via
desi retailers such as Big Bazzar and Reliance. (10th plan document)
3. Gradual opening of the retail sector over a period of 3-5 years to give domestic industry
enough time to adjust to the changes.
4. More stringent Compulsory corporate social responsibility requirement (e.g. Ask them to open
1 school and 1 clinic in every city where they’re
operating etc.)
5. Regular monitoring of mall-inventories to see that India is not used as dumping ground for
Chinese products.
2. The adverse impact on sales and profit, however, weakens over time. There was no evidence
of a decline in overall employment in the unorganized
sector as a result of the entry of organized retailers.
3. The rate of closure of unorganized retail shops in gross terms was found to be 4.2 per cent per
annum, which is much lower than the international
rate of closure of small businesses. The rate of closure on account of competition from organized
retail was found to still lower, at 1.7 per cent per
annum.
4. There was competitive response from traditional retailers through improved business practices
and technology upgradation.
While customers from all income groups saved through organized retail purchases, the lower
income consumers saved more. Thus, organized retail is
relatively more beneficial to the less well-off consumers.
#3 Intermediate players
There was no evidence of an adverse impact by organized retail on intermediaries. There is,
however, some adverse impact on turnover and profit of
intermediaries dealing in products such as, fruit, vegetables, and apparel. Over two-thirds of the
intermediaries planned to expand their businesses,
in response to increased business opportunities opened by the expansion of retail.
Farmers were found to benefit significantly from the option of direct sales to organized retailers.
The average price realization for cauliflower
farmers selling directly to organized retail was about 25 per cent higher than their proceeds from
sale to regulated government mandis. The
profit realization for farmers selling directly to organized retailers was about 60 per cent higher
than that received from selling in the mandis. The difference was even larger when the amount
charged by the commission agent (usually 10 per cent of sale price) in the mandi
is taken into account.
· Thailand: Since 1997, 100% FDI. Positive result: Thailand has now become an important
shopping and tourist destination.
I’m writing this story so that the newcomers can get some idea about Forex, currency
conversion, rupee depreciation, inflation, subsidies etc. (caution : full of technically not-so-
correct examples, just to give you a broad idea of what ails Indian economy) Ok here it goes…..
Now James searches for land to open office or factory somewhere near a big city in India. But
price of land is so high thanks to the black money, it doesn’t make any sense buying a property.
He says ok, let me just ‘rent’ some readymade building and I’ll starting a small-scale i-phone
production company.
But the electricity shuts down at random, for hours and days.
James: ok, I’ll buy a diesel generator like every other industrialist in this area.
Adding insult to the injury, his workers have gone on strike. Workers are demanding pay-rise
because of the ever increasing prices of milk and petrol and James unable to settle the dispute so
a lengthy (and expensive) legal battle is drawn. Meanwhile the factory remains closed for weeks
and months together.
Moreover frequently one political outfit or another, calls for a ‘strike/bandh’ for creation of
separate state or to protest against inflation or corruption or lokpal or just because someone
slapped their political leader.
James dares to open his shop on such ‘Bandh day’ and he is beaten up severely by the political
goons, his coffeeshop is ransacked while police watches silently.
His calls his buddy Allen in America, cautions him not to invest in India.
At the local beer-bar in California, Allen overhears some conversation between drunkards that
soon IMF and world bank will give big financial aid to the ailing Greek and Portugal, and their
economies will be back on right track. If one invests money at this point, in stock market or real-
estate in those countries, he could get a handsome return of 40-50% a year.
Allen recalls a Bollywood movie he saw on youtube with English subtitles, the handicapped old-
man in that movie had given a profound and universally applicable Management advice: “Lohaa
garam hai maar do hathoda”
Allen immediately runs to Forex market, with his bag full of dollars to get them converted into
Euro.
IOC Chairman: dude got any dollars? Come on man. I need them, please.
Allen: Hell NO!!! I ain’t selling. My best friend told me not to.
Allen: Nope
IOC Chairman: 50
Allen:Nope
IOC Chairman: 52
The Solutions
Back in India
(upon knowing that at Forex market, Rupee is selling down at 1$= 52Rs)
RBI Chief: what in the god’s name is happening? 52 rupees for a dollar? How are we supposed
to import crude-oil at this expensive rate?
Finance Minister (FM): hey look at the bright side, although our imports become costlier but
now our exports will earn more money. It is Good for call-centres and textile exporters. And then
they use that money for buying items in Indian market = it will create more demand= more
jobs=boost in economy!!! Trickle down theory!!!
RBI: Wait a minute! Nobody is going to buy nothing under this high-inflation. So Whatever
extra-profit the call centre owner makes thanks to this rupee devaluation, he’ll lock it in bank’s
fixed deposit or pension funds and he’ll wait and watch for the prices to go down before making
any big purchase. This trickle down theory isn’t that linear and straight forward as you’re
thinking. Back to the point, We need dollars to finance the crude oil import..
Finance Minister: No problem. You’ve got more than 200 billion dollars Forex-reserve in your
custody. Release them in the market.
RBI Chief: Never. I’m saving it for the rainy day. God forbid if situation gets even worse, we’d
have our pockets totally empty. What if a war breaks out with Pakistan or China, how will we
purchase extra-oil for our fighter-jets and combat-tanks during that crisis, if our Forex reserve is
wasted like this?
Finance Minister: Damn it, if prices of petrol and diesel are increased because of this rupee
depreciation, the truck-transportation cost will increase and so will the prices of milk,eggs,fruits
and vegetables. Spider-man’s Uncle Ben before his untimely death, had said “With great power
comes great responsibilities and for great Pawar comes great slappings” Please man, do
something, we need green dollars to finance the oil bills. I’ve UP election to win.
RBI Chief: how about you stop MNREGA? That will stop a lot of corruption, black money
generation and the resultant inflation and price rise.
FM: You’re kidding, right? How am I supposed to win UP elections without MNREGA?
Centrally sponsored welfare scheme is the only Brand-USP of our party!
RBI: Ok how about disinvestment? Sell a part of your shares from SAIL, Coal India and other
public sector undertakings.
FM: Yes we can do that but wait Madam-ji and NAC (National advisory council) said the
disinvestment money is to go in National Investment fund from which it’ll be spent for more
schemes like MNREGA.
RBI: ok lets recover the 2G and CWG corruption money from Raja and Kalmadi then use it to
finance the oil-bill.
FM: lolz, come on man, be serious. Hey wait…. how about you print 10 suitcases of rupees in
your printing press. Then I goto Forex market and get them converted into dollars.
RBI: Yes that could work. Only problem is that the guy how buys these suitcases from you in
exchange of dollars…. He might come back, buy all the onions and potatos from our market
using same printed rupees and takes them to his home-country. That would lead to even further
inflation for there will be lesser produce left in our market.
Here Jethalal himself goes to that →holesaler’s warehouse (or sends his henchmen Nattu
kaka or Bagheshwar ).
He pays entire cost of all 20 LCDs, at once. (Cash/Cheque/DD etc.)
He arranges for the truck-transport by himself and takes it back to his shop. (Carry)
In many big cities there are “Best Price Modern →holesale stores” by →almart Bharti
venture, as 100% FDI is already allowed in wholesale.
They stock about 6,000 items, including a wide range of fresh, frozen and chilled foods,
fruits and vegetables, dry groceries, personal and home care, hotel and restaurant
supplies, clothing, office supplies and other general merchandise items.
These items are available at competitive wholesale prices, allowing retailers and business
owners to lower their cost of operations.
Over 90% of these goods and services are sourced locally, thereby helping keep costs to a
minimum, adding to the growth of the local economy and creating job opportunities.
what is this 51% and 100%…on what basis those percentages are allowed for fdi….i mean if
51% in multibrand is allowed thn how can they maintain tht 51 %.
Situation #1
Anil Kapoor is running a mall in Mumbai (or a big retail-mall chain, having presence in
all big cities) and his total investment is 49 crores.
Then Tom Cruise cannot invest more than 51 crores in this mall.
Situation #2
Tom Cruise dreams to open a retail mall chain in India, he calculates it’d require total
investment of 100 crores.
Even if he has 5000 crores, he can only put 51 crores from his side and he’ll have to find
one or more Indian players to invest the remaining 49 crores, else his dream will become
a ‘Mission impossible‘ (Ghost protocol)
Situation #3
Anil Kapoor has a public listed company doing the retail business (i.e. they’ve shares in
sharemarket)
In this case Anil might issue extra shares on preferential basis to Mr.Cruise upto the limit
of 51% in total investment
On these shares, the dividend cannot be more than the limits given by Finance ministry.
Percentage Calculation
When we say Current account deficit, means incoming money is less than outgoing money.
Trade deficit
First, the meaning of “Balance of Trade“ = difference between value of import and export.
→hen we are importing more than our exports: we’ve Trade Deficit.
It doesn’t consider foreign aid and interest payments but only the ‘trade’ part.
first of all,
“Anyone who gives me 100 Rs., I’ll give him 170 rupees after 6 months, instead of 120 that I
promised earlier!”
From your side (Lender) what do you see?= hike in interest rate.
From my side (Borrower) what do I see?=increased cost of borrowing, because I have to
offer higher interest rate.
This was the credit rating for governments, companies, but what about
Credit Information Bureau of India (CIBIL) is a central agency that prepares a report
of all loan borrowers who have defaulted on their payment to their banks.
In short, CIBIL knows if you are a good borrower or a bad one. Banks seek these reports,
called as credit reports, from CIBIL before they sanction you a loan amount.
If your credit history is not good, your loan request may be rejected, or you may be
required to pay higher interest rate.
Non-related question,
Kashyap asked,
First Question
Why king of Saudi does not accept payment in rupees?
If he accepts rupees, his hands are ‘tied’, meaning he can only use that cash to buy stuff
from India.
But even If he wishes to import Indian mangoes or oranges, the Indian exporters would
gladly accept American dollars, so why bother with rupees?
Secondly, What if he wants to buy I-phone or Ferrari from America?
He’ll have to get those rupees converted into Dollars.
But everytime he converts one currency to another, there will be taxes and Commission
charges applied @ the forex market. So why waste money in it? Just get the dollars- it’s
universally accepted-Can buy anything from anywhere.
You buy something from my medical store and pay but instead of returning change (
), I give you plastic coin or coupon with “2-rupees” written on it. It can be used to
purchase items from my store only. So, will you accept that plastic coin currency or will
you demand an actual Indian currency coin? Which one has more benefits?
Second Question
At the beginning only 1$=Rs.40?why not 1$=Re.1?
First, Why do we want to convert one currency to another? Because we want to buy
something from that country, or to invest in that country.
Let’s just presume for a moment,there is no share-market or speculation or FDI/FII, just plain
buy n sell of goods between nations.
In the initial years after independence, we didnot have the excellent manufacturing
technology,
There were droughts so food shortage. We were dependent on the west for food supplies.
There was heavy inflation because of wars with China and Pakistan.
→e emphasized on ‘Swadeshi’, we were using “Import substitution strategy”. We
prevented the entry of foreign companies, hence our Swadeshi automobiles, cameras, etc
were not of ‘export-quality‘. If the third guy (British) wanted to buy a car, he’d convert
his pounds to dollars and buy a ford from America and won’t come to India to buy the
khataraa Ambassador.
In those years, America was quickly advancing, they had color TV, missiles, tanks,
weapons, sports cars for sale and export in their show-room.
Compared to them, We didnot have much expensive stuff to export.
As we saw a paragraph ago: why we exchange currency? so that we can buy something
from their local market. So how do you motivate an American to exchange his one
dollar to your rupees?
1$=1Rupee? ofcourse not. Why should he give you his one dollar for just one rupee?
What is so precious in your Indian show-room that he feels tempted to exchange his
dollars for your rupees?
1 gallon is approx 4 litres. He can buy 4 litres of petrol, in about 16$ on American gas-
station while you’ll need Rs. 280 to buy 4 liters in Indian petrol pump.
He can buy a computer mouse in 7 dollars in America, while here it costs no less than
Rs.150 in India. ( I mean to say, if he exchanges 1 dollar for 1 Rupee and imports things
from India, he is at loss.)
Besides, we are have desperate need of dollars to purchase his weapons, his machinery,
or to pay $$ for crude oil.
So you would need to motivate him by offering more rupees for each dollar so that he can
purchase more from India.
That’s why 1 Dollar did-not equal to 1 Rupee. You had to offer him more than 1 Rupee.
PS issues of officially Fixed exchange rate, devaluation etc intentionally skipped to keep the
explanation plain and simple. You can read more about that by clicking me
Third Question
3. why did Allen exchanged dollars with rupees?
Because India would have appeared a good investment-destination 3-4 years ago when
Allen came, and America was struggling with recession.
But then thanks to Jairam Ramesh’s Environmental activism, Niyamgiri-POSCO
agitations, Cairn-Vedanta deal obstacles, mining scams and energy crisis etc. the scenario
right now, may not appear attractive to new investors.
SENSEX calculation
Before venturing into SENSEX calculation, lets refresh basic concepts of Index calculation, that
we saw in WPI calculation
Base year : 1978-79 [to be specific, the price on 1st April 1979]
First the concept of-
1. Kingfisher: suppose has total 1 lakh shares: 30,000 held by Malya and rest 70 thousand held
by general public.
2. Value of each share in Bombay Stock Exchange (BSE) on 11 January 2012 is Rs. 150.
Now we first calculate a thing called “Free float Market capitalization” for Kingfisher, which
is nothing but
= Number of shares held by general public multiplied with Value of Each share on the given date
in Bombay Stock Exchange (BSE)
= 70 thousand x 150
= 105 lakh rupees
So Kingfisher’s Free float Market cap (FFMC) for 11 January 2012= 105 lakh rupees.
Like this kingfisher, you pick up total 30 companies, calculate their FFMCs, add them
together.This number becomes our “Price of lifebuoy”, say it is 15 crore rupees. (NEW
PRICE)
And total Free floating market cap of 30 companies, on that 1st april 1979 was say 10 lakh
rupees. (OLD PRICE)
Some points
The 30 companies, in that list keeps changing. So 30 companies in today’s SENSEX not
necessarily included in 1979’s list. But we take their values.
Actual SENSEX calculation involves minute technical-items such as “free float factor
for each company” but it’s beyond the scope of routine competitive exams. However
curious souls can access it by clicking following
http://www.ehow.com/how_5184590_calculate-sensex.html
Different companies have different ‘weights‘ in the Index. So calculation won’t be
directly new price by old price but weighted average, similar to how in WPI we assigned
weights to different commodities.
Total market capitalization =total number of shares of a company (i.e. Malya+General
public) multiplied with price of each share on given date.
SENSEX from 1986 to 2003, was calculated on this Total market capitalization. In 2003,
they switched to Free Float Market Cap.
The word SENSEX is made by combining two words: Sensitive + Index.
Dollex
BSE’s dollar version of SENSEX. [SENSEX is calculated on rupee values]
NIFTY
SENSEX is calculated on 30 chosen companies. (Started in 1986)
NIFTY is calculated on 50 chosen companies. (Started in 1995), otherwise method is
same.
Similarly BSE 100= calculated on 100 companies, since 1989.
I want you to throw some light on “TEASER LOANS”.. I have searched on the net and tried to
understand the thing but not satisfied.
Climax
In an attempt to discourage teaser loans, RBI had asked banks to make provision of 2% of
outstanding portfolio for such loans with immediate effect.
Result: SBI withdrew teaser home loan plan with effect from 1 May 2010.
WHAT IS CURRENCY SWAP DEAL BETWEEN INDIA & JAPAN? HOW WILL INDIA BE
BENEFITED?
It is a deal made between the central banks of India and Japan, to prevent the fall of Rupee and
Yen, due to speculative trading @Forex Markets.
1997: East Asian countries had a big financial crisis due to speculative forex investors.
Under Chiang Mai Initiative in 2010, ASEAN countries + Japan + China + S.Korea have
a currency swap agreements.
Chiang Mai is a city in Thailand.
Some GK
How govt assume more money with public which causes inflation?
If am right,persistent rice in price level is inflation which is assumed to happen whenthere is
more money with public, as a result demand increases , which causes price rise.
So to curb the flow of money with public ,RBI taking measures to increase repo rates.
But what my doubt is , how can govt come to conclusion that there is more money with the
public?
Answer
Government and RBI are two different entities.
Both are involved in managing the economy in their own capacity.
FII players pull out their money from stock-market even for slightest good/bad rumors
and invest in in different country.
That’s why it’s called ‘Hot money‘ -was responsible for 1997 Asian financial crisis {2
marker in GS Mains Paper-I, 2007}
In 2007, the 2 marker appeared because that year SEBI made some regulation in FII
investment via participatory notes to control the hot-money.
Also, there were allegations that Pakistan might use it for ‘financial-terrorism’ using FII
via Participatory notes.
Although there are tools such as Tobin Tax, to control the flight of hot-money. But still,
For development, Governments want and prefer FDI and not FII. Because It’s hard to
pull out FDI once invested.
When I am trying to think the budget as a Current Affairs activity, my head shakes. I have to
depend on Chronicle or news papers for the highlights of the budget. I am not able to read and
analyze the budget presented every year. So will it be possible for you to suggest – how to read
the budget? What all things are there in Budget? What area we should focus on or not focus on?
budget is not about minute data and numbers like 15664 cr. alloted to some xyz scheme and
19.5% excise duty on footwares.
+ The burning issues: GST, DTC, what did the FM said in this budget speech about them?
Suppose industrial output of India, in the year 2004-05 was 100 crore rupees.
In 2010-11 it is 105 crore rupees.
So simple percentage calculation: 5% increase in the industrial output over the base year.
Newspaper headline: IIP shows growth of 5%.
For this ‘industrial output’ value, we’ve to measure the output in three sectors (MEM)
1. Mining
2. Electricity
3. Manufacturing
Then we take out the weighted arithmetic mean and that is our ‘industrial output’ value. Then do
all the index calculation of current year and baseyear.
Meaning
It is a single representative figure to measure the general level of industrial activity in the
economy.
It measures the absolute level and percentage growth of industrial production.
Because if they calculate every year, it’ll be too late for the Government or RBI to make
necessary amendments in the policy ! They’ve to keep a constant eye on this number.For
example
1. Automobile sector is facing very negative growth, Government may give them tax-
holidays or allow them to import foreign machinery without paying import tax. [Fiscal
Policy]
2. Negative IIP may mean People don’t have money in their hands, so they’re not
purchasing products (less demand) hence industry had to reduce the production or
Businessman are having hard time borrowing because of high interest rates. = Change the
repo, reverse repo CRR etc to increase money supply in people’s hands. [Monetary
Policy]
As a job seeker
1. Lower demand will force businesses to invest less and scale back expansion plans. That
means lower hiring.
2. So, if you’re looking for a job in the manufacturing/industrial sector, expect the going to
get a little bit tougher.
As a stock investor
3. Lower industrial output means lower revenues and profits (which are also getting hit by
higher borrowing costs). That lowers earnings per share for investors
4. continuation of the poor IIP trend could lead to more earnings downgrades and lower
stock valuations. Means FIIs start pulling their money out of India and invest it in
different country = leads to weakening of rupee.(more below)
As a shopper
5. manufacturers to offers discounts and freebies, to attract shoppers to stores. (haha like the
Flipkart ads shown below!)
6. Of course, shoppers will only be inclined to spend if they still have jobs or enough
disposable income.
As a borrower
7. RBI may lower the rates, to increase the money supply in the market and make borrowing
easier.
As a producer/exporter:
8. businesses using locally-priced inputs, there might be a silver lining in terms of costs,
which could come down.
9. if the prices of those inputs are based on international prices, they might not be so lucky
because a falling rupee will increase prices in local terms.
10. Now some real life examples: End of rephrasing, now writing further on my own.
FII
in crude terms, it is the foreign investors who invest money in Indian stock-market.
They pull out their money immediatly if they see problem.
Direct Tax Code (DTC): Meaning,
Explanation, Basics
Mansoor asked
I have read about DTC in other articles but finding it difficult to comprehend it. please explain.
1. Income Tax
2. Corporate Tax
3. Wealth Tax
^ Direct Tax Code (DTC) seeks to consolidate them all in one book.
Indirect Tax
You pay it on the goods and services purchased.
1. Sales Tax
2. VAT
3. Customs duty
4. Excise Duty
5. Service Tax etc
^ Goods and services Tax (GST) seeks to combine them all in one book.
Redistribution of wealth
Direct Tax follows the principle of redistribution of wealth
in short it means:
Tax the rich and use the money for the welfare of poors.
You tax middle-class and rich-class, use that money to provide subsidized wheat for poor
people = wealth is ‘redistributed’.
If approved, the DTC shall come into force on the April 1, 2012, and shall be applicable for
income earned during the financial year 2012-13.
Core inflation
it is Headline inflation minus food and fuel prices.
The food and fuel prices keep changing based on season and external factors. Hence,
headline inflation gives a very volatile number.
The policymakers (RBI and Fin.Min.), cannot use this number to make future predictions
or long-term policies, so they also keep a separate watch on Core-Inflation number.
The same org. also responsible for compiling Index of industrial production (IIP)
Related to this
Phillips curve
If the unemployment rate is LOW, Inflation rate will be HIGH.
Stagflation
Both unemployment and inflation rates are high and growth rate is low.
Basel III Norms: Tier 1 and Tier 2 Capital
meaning use
Keep in mind friends, for a regular Government job recruitment exam [UPSC, State PSC]
or MBA admission GDPI, you need to have only a basic idea about BASEL. No need to
dwell into extreme details such as exact numbers of Tier 1 and Tier 2, credit valuation
adjustment or Net Stable Funding Ratio.
What is BASEL?
It is a city in Switzerland.
Back in 2003, Someone started a rumor in Ahmedabad that ICICI bank is going to collapse.
Suddenly thousands of panicked account holders lined up at the nearest ICICI branch to take out
their money and hence there was such a money-shortage in ICICI’s Ahmedabad branches, they
had to actually call up trucks loaded with cash from their Mumbai branches.
Things settled out after a while and it was confined only to a few cities of Gujarat, but if
it was an entire-countrywide hoax, just imagine the fallout!
The BASEL Norm is kinda safeguards / backup plan for Banking sector.
It provides internationally accepted detailed guidelines about how much money should a
bank keep aside, to deal with such financial crisis.
Even if loan-takers run away without paying, Bank should have money to give back to
deposit holders.
More risk the bank takes, more money it has to keep aside in reserve to counter the risk.
Tier 1
Tier 2
Not easily Liquid, for example the building or land owned by the bank.
1. If a Bank loans 1 crore rupee to a company with “B” Credit Rating, it must keep capital
worth 20 lakhs aside for crisis.
2. And out of that 20 lakhs, Rs. 15 lakhs must in form of Tier 1 Capital and 5 lakhs can be
in form of Tier 2.
3. If the Company has credit rating of “AAA” then Capital worth Rs.xyz and so on…..
Governor of RBI signs on this BASEL agreement, comes back home and forces all the Indian
banks to follow these norms. Same thing will be done by French, Chinese, Americans etc. and
thus banks in every country will function prudently thus preventing another Global financial
crisis.
Latest is BASEL III accord, came in 2010. It has stringent provisions keeping in mind the sub-
prime crisis.
Criticism of BASEL
1. One shoe doesn’t fit all.
2. Just because American Banks were so imprudent in their functioning and ran into trouble,
doesn’t mean →E the Indian banks need be so overcautious and keep so much of money
aside for ‘safety’, it could be used for giving loans to needy people.
3. Already existing complex Monetary policies of Central Banks in each country (example
RBI’s CRR, SLR, Repo etc.) make it difficult to uniformly implement BASEL norms.
Just like SENSEX this is a ‘weighted’ index, but comprising of energy efficient
companies or ‘green’ companies.
biggest weightage in this index :Tata Steel.
Included : ICICI Bank, State Bank of India, HDFC, Sun Pharma and BHEL.
Not included: Infosys, wipro, ONGC, reliance etc big companies
Timeline
Answer
a) Only 1, 2 and 3
b) Only 1 and 4
c) All of them
d) None of them
Government launched New Exploration Licensing Policy (NELP), and auctioned various
oil-blocks to private players for oil drilling operations.
(example: Reliance in Krishan Godhavari Basin)
That’s how Cairn Energy (UK) came to India.
FDI in Oil exploration is permitted upto 100% but with Government approvals.
Now Cairn is selling its Indian operations to third company, Government had to
deliberate on the matter because ..
Cairn was given tax-benefits under NELP.
Rajasthan oil block is THE LARGEST onshore (i.e. on land) oil block of India so Home
Ministry had to give security clearance, when a foreign company was acquiring majority
stakes in it.
Plus, Govt. of India itself owns about 75% in ONGC.
Related:
Currency Devaluation Alone will not Bring More FDI!
Ad-Valorem Tax, Unit Tax, Dumping Duty
Introduction
Before moving into Ad-Valorem, Consider The taxes levied on per litre of Petrol :
(Data may be outdated but just for concept clarity)
[ Important: 'Central Government' is a wrong word to use. The official and correct word is
'Union Government' so be very careful your choice of words, in Mains/ Essay and Interview.
Some examiners (and interview panelists) get really irritated on such minute mistakes. Now back
to the topic ]
Meaning
State is charging tax according to ‘Value‘ of Petrol.
Latin word for “according to value” = Ad ↑elorem.
Ad Valorem Tax
is a type of tax, levied on the value of a product, service or property.
Following are the examples of Ad Valorem tax
Sales Tax
VAT and GST
Property Tax (According to the value of building etc)
India has imposed an anti-dumping duty of Rs 1,50,000 per 1 lakh unit on import of
sewing machine needles to protect domestic players from cheap Chinese shipments.
India has imposed anti-dumping duty of up to $0.538 per “kg” on imports of a plastic-
film used by the advertisement industry to protect domestic players from cheap Chinese
shipments.
India imposed dumping duty of up to $99.05 per “set” of bus and truck radial tires
(including tubeless) from China and Thailand,
Notice the words: per 1 lakh units, per kg, per set…
This is example of per unit tax. Indian Government is putting tax on ‘quantity’ of Chinese
products, not the ‘value’ of those product (because they’re cheap anyways).
To sum up
Ad Valorem tax is levied on the Value of a product or property.
Unit Tax/ Specific Duty is levied on per Quantity of a product. (kg-weight, meter, litres,
unit etc.)
Table of Contents
What is negative externality?
A Thermal powerplant uses coal to produce electricity, sells it to the citizens.
But the residents living near this Power-plant have to breath very polluted air- get various
lung disease – have to bear the medical expenses.
The soot from the plant’s chimney settles down on their homes, compounds, clothes, cars
and they’ve to dust and clean it every day.
This is a case of negative externality.
Externality means : Two parties enter in a deal, and benefit from the deal.
but a third party who is not involved in this deal also gets affected involuntary. (Without
consent).
Externality can be positive also. e.g I run a perfume-shop and local-residents get to enjoy the
lovely fragrances for free.
What is Pigovian tax?
Suppose Government puts tax on the coal purchased by this Power-plant and uses this
tax-money to provide cheap medical care to the residents of that area for respiratory
diseases and gives them subsidy for buying special type of windows that filter the
incoming polluted air in the house.
Such tax is called the Pigovian tax, because a British economist Arthur Pigou argued
about negative externalities and imposing taxes on companies involved in creating
negative externalities.
Now to the main topic of this article…
In the beginning, both are emitting same amount of carbon and hence have to pay same
amount of carbon tax.
So, They will include this Carbon tax costs in their product’s MRP. (Maximum retail
price).
But later company A invests in new production technology so that their carbon emission
is reduced, now they have to pay less carbon tax and thus their MRP will decrease = good
for consumers and bad for second company B, because their product will remain
expensive = less selling.
So either company B will run out of business (like Kingfisher), or they will also invest in
clean technology to reduce the production-cost.
Ultimately good for environment and good for citizens.
and Government can use the money collected using carbon tax for various schemes of
environment protection.
Australia’s move
Australian government also planning to implement carbon tax: about $23 per ton of
carbon dioxide emitted by a company.
Indian businessmen are concerned with this news because our steel companies import lot
of coal from Australia.
(a tit for tat case) Indian government had proposed Mines and Minerals (Development
and Regulation) bill that a mining company should share 26% of its profits with local
tribals. So Austrialian businessmen are also concerned!
1. India introduced the carbon tax (a.k.a. Clean energy cess ) in the Union budget 2010.
2. This Carbon tax rate is Rs.50 per tonne of Coal.
3. Companies have to pay this tax on Locally mined coal but not on the coal imported
from other nations.
4. The money collected via this tax, is deposited in the National Clean Energy Fund.
Anyways, All this tax money goes in the “Consolidated fund of India .”
When government wants to pay salaries to bureaucrats, create new (bogus) schemes like
MNREGA etc., wants to purchase new missiles and fighter planes, it will take out money
from this Consolidated fund of India.
Choice of Words
The Finance Minister does not lay down a budget in the Parliament.
He lays down the “Annual financial statement”. (There is no word “Budget” in the whole
Constitution of India: Article 112)
Same way, Parliament does not pass the budget. It passes the Appropriation bill and the
Finance Bill.
What is FII, Why did Rupee weaken against Dollar. Why did QFI come?
Anil Kapoor: It means foreign player can invest money in Indian stock market.
Tom Cruise: Cool. Tell you what, I’m not getting much interest-rate in my savings account in
American bank, I got $1 million in the suitcase, let’s go to Bombay Stock Exchange and buy
some shares!
Anil Kapoor: Ain’t that easy! An individual foreigner can’t simply walk in the Dalal street and
do shopping. Go to Maxwell Assets Manager . He will explain everything to you.
Maxwell Manager: →ell I’m not the only FII, there are many others like BNP PARIBAS,
MORGAN STANLEY and other 1,700 FIIs and more than 5,500 sub-accounts registered with
SEBI. But we are the best, we charge the least Commission and give free caller tunes and
Unlimited talk time*. So, Let’s goto SEBI office and get it done. (*conditions apply)
Peon: Our Saaheb is gone for tea-break so wait for 145 minutes.
(after 145 minutes)
Tom Cruise: (to the SEBI clerk) ya I wanna open a FII sub-account.
Tom Cruise You don’t know me? I’m the Tom Cruise.
SEBI Clerk hmm never heard of you. I only watch the movies of India’s Finest Actor, Fighter,
Dancer and Bollywood Superstar Mimoh Chakraborty. Anyways here is the application form for
$1000. Fill it up, Attach photocopies of your id and address proof, 10th,12th, Graduation
marksheets, Work-Ex and Extra curricular activity certificates: Everything in triplicate, and
attested by a Gazetted Officer and your three passport sized photographs with white background,
no smile, and sign on your photo with black pen only.
Tom Cruise: Man this is so hopeless, it sounds like a perfect plot for Mission Impossible #5.
Anil Kapoor can get the 2 minute’s role of Gazetted Officer, while I fool the Indian audience for
the second time spreading rumors that he is given a big role just like in MI-4!
Maxwell Manager: congrats. Now we can invest your money in Indian Stock market on your
behalf, so which company do you want to put your money in?
Tom Cruise: hmm, I’ve been doing some market research myself, recently saw Abhishek
Bacchan’s Idea 3G ad in Divya-Bhaskar (Gujarati Edition), I think that company and its 3G
service is going to be huge hit. Buy some Idea-shares for me so I can earn huge dividends later
on. Also buy a few of Vedanta cause they acquired some oilfields from Cairn India, they will
also make huge profits and pay good dividends to their shareholders.
Tom Cruise (phonecall to Maxwell Manager) hi, sell all my shares of Idea and Vedanta.
Maxwell Manager Sure. But Where should I invest the money then?
Maxwell Manager I have been looking at the IIP (index of industrial production), the numbers
are going in negative range. RBI is also hellbent on tightening the monetary policy, thus
increasing the loan-rates and decreasing the demand of products to contain inflation. Indian
industries are facing a slump, there is electricity problem, there is problem of getting
environment clearances. Even blue chip software, chemical or automobile companies are not
doing good thanks to slowdown in America and Europe. No hope in Airline companies either..
I don’t think it is worth it to play in Indian market any more. Besides you’ve one million dollars,
meaning If Indian market gives you 5% return on Investment and Singapore’s gives you just 6%,
still you should run away because 1% of one million dollar= easy $10,000, huge cash! So, I
suggest we pull out your money completely from India and get it invested somewhere else,
Singapore, Australia, perhaps?
Tom Cruise: Just Do It. Anything is better than the stalemate and “Policy paralysis” in India.
Secretary: Sir, the FIIs are pulling out their money like there is no tomorrow. They have lost
confidence in India’s growth story (thanks to you). Since they’re pulling out money, Demand of
Dollar is increased and demand of rupee is decreased. Currently $1 goes for 54 Rupees in Forex
market. We have to do something before all hell breaks loose!
Finance Minister: damn, let us start a new scheme “Qualified Foreign Investor” (QFI) as New
year gift from 1st January 2012 to increase the ‘confidence’ of investors in Indian Market.
Secretary: What does is do? Another (bogus) scheme like your MNREGA?
Finance Minister It means a foreign individual, group or foreign firm can directly invest in
Indian stock-market like any normal Indian citizen, without requiring the sub-account with FII.
This should bring in some more investors, who’re interested in investing in India but feel turned
off because of this sub-account and strict High Net-worth rules.
Tell RBI manager to do verification of the applicants though, make sure these individual, group
or associations are resident in a foreign country that adheres to anti-money laundering and anti-
terrorist financing guidelines as defined by the financial action task force (FATF).
Secretary: Good idea but I suggest we name this scheme “IGQFI” or “RGQFI”
Finance Minister: ??
Brad Pitt: haha my turn now, I’m gonna purchase some shares from Indian Market!
HDFC Manager: hey →ait, you can’t just walk in like that. First you’ve to open a Demat
account and a Trade account with a DP (Depositary Participant) like us!
Brad Pitt: wait wait wait, so many words in a sentence, I’m getting confused, let’s talk this one
at a time:
What is Depository?
A Depository is like a bank locker where securities (shares) are held in electronic
(dematerialised) form.
In India, there are only two Depositories -National Securities Depositories Limited (NSDL) and
Central Depository Services Limited (CDSL).
Brad Pitt: ok so If I get it correctly: First I purchase shares using my trade account, then transfer
them in my demat account. I can do this all without needing a third party agent (FII or Share-
Broker), just like how an Indian citizen can play in share-market and Government took this step
to increase money inflow and reduce volatility in the market, which was created by FIIs. This is
the crux of QFI. Sounds good. I’m desperate to become a QFI, Open my Trading account right
NOW!
HDFC Manager:But for that you need a Demat account.
Brad Pitt:Man this is hopeless. No wonder why India ranks low in “Doing Business”
Index.Now What is this PAN card?HDFC Manager:Permanent Account Number (PAN) refers
to a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax
Department in India.
It is now compulsory to quote PAN in share-trading and financial transactions. Although
Dividends from companies and mutual funds are not taxable in India, PAN card is required to
fulfill the KYC (know your customer) norms for us— a critical requirement in the age of
laundering and transferring terrorist money!
HDFC Manager:Yes you do mister. and you’ll have to get it from IT office.
Peon (To Brad Pitt) Saaheb is gone for a tea-break. Wait for 145 x 109 minutes.
Brad Pitt (Facebook-twitter status update): #missionimpossible6On a serious note, QFI from
Newspapers
2011: QFI were allowed to invest in pension and mutual funds only and not in the Indian
Sharemarket as such.
Until now Foreign Institutional Investors/sub-accounts and Non-Resident Indians are
allowed to directly invest in the Indian equity (Share) market.
2012: Now QFI can also invest in sharemarket.
QFI is an individual, group or association resident in a foreign country that adheres to
anti-money laundering and anti-terrorist financing guidelines as defined by the financial
action task force (FATF), a multi-lateral body.
The QFIs do not include FII/sub-accounts.
QFIs can own up to 5% of Indian companies while their cumulative investments are
capped at 10%. These limits are over and above the FII and NRI investment ceilings
prescribed under the portfolio investment route for foreign investment in India
The QFIs shall be allowed to invest through the SEBI-registered Qualified Depository
Participant (DP), with the QFI required to open only one demat account and a trading
account with any of the qualified DP and make purchase and sale of equities (shares)
through that DP only.
War of Words
CAG
Oil Ministry and its technical arm, the Directorate General of Hydrocarbons, “did not pay
adequate attention to protecting the government’s financial interest.
Production Sharing Contracts like the one Reliance Industries signed for the gas-rich KG-D6 are
designed to benefit private players at the government’s expense.
Capital Money to buy Freezers, mixers and packing machines to make ice-cream.
Junk Bonds
If my Bond gets “C” or “D” rating, it means I’m not creditworthy, I may default on this
loan, I may run away. So my bond is as junk as Ra.One movie. A wise man will not
invest in it.
So, how can I seduce you into purchasing my bonds? How can I convenience you to take
the higher risk, in buying my junk bond?
How about Free caller Tunes or a scratch-card that offers you a chance to dine with
Sachin or Katrina?
Or How about Higher Interest rates: “If you give me Rs.1000, I’ll give you 25% interest
rate per year !”
This is also known as “High Yield Bond”, because you’re getting higher profit.
Gilt Edged Securities
Like an ice cream company, Government also needs finance- at times when tax collection
is low and they need some temporary funds.
They issues treasury bonds. RBI sells these treasury bonds on Government’s behalf.
But Governments generally have the “aukaat” to repay the principle and interest rates.
Hence Government bonds have higher credit ratings (AA). So, they don’t need to seduce
you, they’ll offer very low rate, say 4%.
Similarly, well known companies with high credit ratings (AA) also issue bonds but pay
low rates.
If you don’t like to take risks, you’ll invest in such bonds. These are called ‘gilt-edged
securities’.
In Bollywood movies, Kidnapper demands ransom of Rs.10 lakhs but he wants the
money in the denomination of Rs.5/10/50 Rupee notes. Why? Because it is easy to
circulate these notes and harder for police or banks to keep track of this money.
Same way, in Hollywood Spy-thriller movies, the Villain will ask you to pay 10 million
dollars in Bearer bonds.
Bearer bonds are same as regular bonds, but they don’t have “Holder’s Name” on them.
These bearer bonds have coupons attached with them. So, if you don’t want to withdraw
the whole money, you can cut a few coupons and sell them to a broker to withdraw
partial amount.
E.g. Rs.100 interest is to be paid on 1st April 2012, But even on December-2011 you can
sell the coupon to a Broker. Although he’ll not give you Rs.100 but something like Rs.95
or 90. (Why so? Think about it!)
Anyways, the point is, Noone can keep a track of who withdrew the money, who’s
buying, who’s selling Because there are no “names”, addresses or records. Bad guys like
it, because this ensures anonymity.
See the following example photograph of a Bearer bond of Government of Palestine.
Notice that it doesn’t have space for Owner’s names and there are three coupons attached
at the bottom.
Question: →hy would Government issue bearer bonds? Because when they’re in dire
need of money, there is emergency, there is war going on, they cannot waste time in
checking the lengthy registration forms. So, Better just sell the bonds to any swinging
dude that comes, without asking his name, address, mobile number or email id.
Although, in real life, it is hard to find Bearer bonds. Because most of the bonds now,
exist in Electronic (DEMAT) format and you’ve to give your pan card number (or other
similar personal information in foreign countries) to buy or sell bonds/shares or any
similar security papers. So, now bad guys want payment in gold, diamond or other
precious metals instead of bearer bonds.
distribute Rs. 10 lakhs as Dividend among the shareholders. Now about the remaining 15 lakhs,
invest them back in the company to expand our production-capacity , buy bigger machines and
install new factories in Pakistan and Somalia.
Here is the cool part, I can become CEO of my own company and say I’ll take salary of
Rs.1 only! And still, I will earn Rs.3 lakhs.
How? Because I own 30% of shares in this company, so when that Rs.10 lakh Dividend
is shared among the shareholders, I get 30% of it = 3 lakhs, apart from my Rs.1 salary as
an ‘employee’ of this company.
Here is a demo photograph, of Creek Mining Company’s shares.
The owner Mr. George own 200 shares of this company. And in the small fonts, it is mentioned
that total 30,00,000 shares of $1 each. Meaning Mr. George owns (200/30 lakh) x100 =0.0067 %
stocks of this Creek Mining Company.
But in real life, nowadays, when you purchase shares , you don’t get such cool looking colorful
paper certificates. You get the shares in electronic dematerialized format. They get transferred in
your demat account. (already discussed in QFI vs FII article.)
What is IPO?
Mithun Chokrobarthy’s Son Mimoh Chakrabarthy was launched in the first film
“Jimmy”. That year he got Best “Newcomer ” award. Movie was flop, then Mimoh
decided that changing his name, would bring him some luck.
So he became Mahaakshay Chkarbarty and yet gave a few more flop films.
Now people don’t call him Newcomer , they call him flop hero.
Moral of the story: →hen you act in your first film, you’re called a ‘newcomer’. Then in
your subsequent movies, you’re called a flop actor, although you’re the same human
being from your daddy’s eyes.
Same way, When I sell my share papers for the first time, to the public, it is called IPO
(initial public offer)
Then you (the buyers of these IPOs), sell these papers to each other, the same paper is
called “Share” or “Equities”.
From Daddy’s point of view (Mine), it’s the same. If someone has one paper, he gets
0.0001% from the dividends.
An individual who owns 45 per cent share capital does not own 45 of that company’s assets.
There is a difference between the sale of shares in a company and the sale of assets of that
company.
Why is it so?
Because most of the company don’t directly start with IPO / Shares. First the
entrepreneur starts a small company using money from his own savings, borrowing from
friends, relatives and banks or from an Angel Investor.
Once the business starts booming, he’ll launch an IPO to get extra funds from public, to
expand his business.
So, He already has some building, machinery, vehicles etc assets in his small company
before launching his IPO.
Who is Underwriter?
So far we’ve seen that
To arrange money I can either borrow (debt, Bond) or I can give shares (equity,
IPOs/shares).
Here is the problem: I cannot print those security papers on my own Home PC’s cheap-
printer.
First, A lengthy legal and accounting paper-work has to be done, it’ll require chartered
accountants, Corporate Lawyers experts in these matters.
So, I goto an underwriter, he charges Commission but he promises to cover all the
technically things, paperwork, SEBI regulations, selling, accepting money for IPO/Bonds
sale etc.etc.etc.
Same underwriter also offers a kinda insurance, that he’ll buy the IPO/Bonds if others
don’t buy it.
Kotak Mahindra, ICICI offer such underwriting services.
Now two more types of Banks: Regional Rural Banks (RRB) and Cooperative Banks.
What is ordinance?
When parliament is not in session, President can make an act on advice of the cabinet.
Such law is called ordinance.
Who owns RRB?
RRBs are jointly owned by
Govt. of India,
the concerned State Government and
Sponsor Banks
Ownership in the proportion of 50%, 15% and 35% respectively
Now they’ve revised the number and Chief Statistician of CSO, is saying
Oh yes January IIP is rosy good 6.9%! this means plenty of liquidity in market. Junta and
businessman are getting loans easily and have sufficient money in their hands. →e don’t need to
do anything, time to watch #IPL Matches!
RBI:
oh hell NO!! January IIP is just 1.1%; this is so hopeless just like Zardari’s political future. We
gotta ease up the monetary policy, change the Repo, SLR, CRR etc so that interest rates go down
and businessmen can get funds easily.
Pranab
I can understand if there is an error in calculating 0.1% of 0.2 %, but a revision from
6.8% to 1.1% is totally baffling
→e shall have to ensure that government data integrity should not be challenged…
I have asked concerned authorities to look into it that why it has taken place and they
should be much more careful in the future (lolz man why always lock the stables after
horses run away?)
Anand Mahindra
We used to claim our economic data was more reliable than China's. Looks like we're catching
up with them at least in one area!
Expressbuzz
Government is not only incapable of estimating figures for the future but also of
capturing past data accurately to make sound decisions.
Is the country being fed wrong information through government agencies because they
are backed by corporate interests and foreign institutional investors?
Is the rise of crony capitalism driving data collection agencies to feed wrong information
to benefit vested interests?
The government must realise that sanctity of underlying data lies at the core of sound
policy formulation.
No doubt, gathering socio-economic data in a country as complex as India, which is not
monetised and computerised, cannot be expected to be 100 per cent accurate. But it
should not be so skewed as to twist our perspective.
It is time the government took data collection and collation more seriously and got it
scrutinised by some independent agencies before releasing it.
Economic Times
Industrial growth in February 2012, we are now told, was 4.1%. But do we know for sure? Or
will we have to wait till next month? Or the month after?
Private company
It has a minimum paid-up capital of Rs.1 lakh
It needs minimum two members and maximum 50 members (i.e. The persons who hold
its ‘equity’)
This company is to use the word “Private Limited” at the end of its name.
It cannot have more than 50 members
It cannot borrow for general public.
For example Balaji Telefilms private ltd= Ektaa Kapoor’s company, involved in making
those boring Saas Bahu serials.
Another example: Neela telefilms private ltd. = Asit Modi’s company, they produce the
comedy serial Tarak Mehta Kaa oolta Chashmaa.
Flipkart.com : the online shopping website is also a private company, started by Sachin
and Binni Bansal.
Public company
It has minimum paid-up capital of Rs.5 lakh.
Requires minimum seven members to start a public company.
It has to hold annual general meeting of shareholders.
It can borrow from general public via IPOs and Bonds.
For example, Infosys started as a private ltd company in 1981, but in 1992, it re-
registered itself as a Public Ltd company and launched the IPO in 1993.
Departmental undertakings
They are involved in some commercial activity such as engineering, manufacturing etc.
But
They’re directly controlled by the government, just like any other department
For example: Indian Railways, postal Department.
They are not registered as companies under the companies act
They are wholly financed by the government (and not through Debt+Equity like a
normal company)
They cannot use their profit to meet their expenditure, or to expand their business
activities without the permission of Government (by extension parliament. I.e. Railway
budget for Railways and General Union budget in case of postal Department)
Their employees are government servants.
Directly audited by CAG.
RTI applies to Departmental undertakings.
Government Company
It is a company in which government holds not less than 51% of paid-up share capital.
For example, ONGC, SAIL
Here, The “Government” means the union government or the State government(s) on
both.
For example, in Company A, 30% shares are held by union government, 10% by Gujarat
government, 11% by Madhya Pradesh government, still Company A is a Government
company (30+10+11=51%)
The government company is managed by the board of directors.
Board of Directors are appointed by the shareholders. But since government owns
majority of the shares, majority of directors are chosen by the government.
They can borrow extra money from public via IPOs and bonds.
This company does not need Parliament’s approval on how to use the profit, But it will
need approval of Board of directors on how to spend the profit.
They’re not directly audited by CAG, but CAG appoints the private firms (Chartered
accountants) as auditors.
RTI applies to Government companies.
Public corporation
They are established by a special act of Parliament or state legislature (Vidhan Sabha)
The act defines how this organization will run. For example: LIC, Air India, IDBI, UTI
They are wholly financed by the government, but still they can also borrow from general
public via Bonds and shares.
Government appoints board of directors.
They can use their profit as per their requirements without Parliament’s approval
Employees of public corporation are not government servants.
Directly audited by CAG, although in some cases CAG outsources the work to private
firms.
RTI applies to Public Corporations.
Bonus shares
In the debt versus equity article, you saw that a company can collect money from people
by issuing shares (IPO/Equity/Stock whatever you want to call it), but every year,
company reports the profit to the board of directors. The board of directors will decide
how much profit is to be re-invested in the company and how much profit is to be shared
with the shareholders.
The profit, thus shared with the shareholders is called “dividend”. Generally dividend is
sent to the shareholders via cheques.
But sometimes,company also gives you extra shares.
It means company paid the money to purchase shares on your behalf and gives it to you.
So you got free shares and next year when company distributes the dividends (cash), you
will get more dividend, because now you are holding more shares. Alternatively, you can
sell away these bonus shares to someone else and take out the money.
These are called “bonus shares”
What is the difference between Bonus shares and “rights issues”
→ell, as a shareholder, you get shares for free under “bonus shares”.
But you’ll have to pay money for buying new shares under “rights issue”
What is the difference between QFI and FII (if not click Me)
What is the difference between Bonds and Equity (if not Click Me)
Continuing further
Pranab+SEBI+RBI
On Jan 1, 2012, Pranab had allowed QFIs to invest in equity (share) market.
But right now (May 2012) Pranab is discussing with SEBI and RBI chief about allowing
QFIs to invest in Bonds (debt) market as well.
Currently, FII can invest maximum $15 billion in government bonds and $20 billion in
corporate bonds.
Rumors suggest that max limit for QFI in bond market will be $5 Billion.
But why did Pranab suddenly came up with this idea of allowing QFIs in Bond market?
Ok so, Just allow QFIs to invest in Bond market and every problem is solved. Does it mean “ke
bhaiyaa all is well”? Nope. Because …
IT But sir your target is implausible just like reading entire Mishra-Puri and Dutt
Commissioner Sundaram for economy!
Well, the Diamond traders in Surat and Builders in Mumbai got plenty of black
Pranab
money. You raid their offices every month, starting from tonight.
IT We are already doing that. Yes, we recovered truckload of cash but still your
Commissioner target is just way too high.
Then catch those big fishes that use Cayman island and other tax havens for
Pranab
making business deals!
Betaa “I” don’t have to update the IT Act. It’s your job to write the bill, give
Pranab paper to me; I present it in parliament, and if parliament approves and President
signs, the bill becomes the Act and I take all the credit.
IT Commissioner calls up other senior and experienced officers from his department and starts
updating the Income Tax Act.
IT Wow that name GAAR sounds really unique and awesome, as if the
Commissioner *Singham* is roaring grrrr…I wish I could get selected in IPS :-(
IT
Well, Better late than never!
Commissioner
Both gentlemen watch Tarak Mehta kaa Ooltaa Chashma on SAB-TV and write the GAAR
rules for India in between the advertisement breaks.
IT Commissioner (To Pranab):Sir, I’ve finished drafting the DTC and included GAAR In it.
Let me tell you the specific rules under this GAAR, which are as following
Rules of GAAR
Under these rules, I can take action against those people involved in tax avoidance.
I, the Income Tax Commissioner, will have full power to decide whether a business deal
is genuine or some sham to avoid tax payment. It doesn’t matter whether the business
deal was done in India or outside India or
It doesn’t matter whether the deal is between any Indian citizens / NRIs / Foreigners.
It doesn’t matter whether the deal is protected by some bi-lateral tax treaty between India
and the given country.
GAAR provisions shall override the terms of any Double Taxation Avoidance Agreement
(Tax Treaty) that India may have entered into.
No ifs and not buts; I'll have full jurisdiction to question any business deal.
I can send notice to the concerned parties and demand explanation.
After hearing their side, if I’m not satisfied, I shall order my Assessing offer (AO) within
12 months, to take necessary action against them and recover the taxes.
If the party is unhappy with my order, it can appeal in Dispute resolution Panel (DRP),
which will consist of three IT Commissioners like me.
DRP will have to give the verdict in nine months.
If the party is still unhappy with DRP verdict, it can file appear before the Income Tax
Appellate Tribunal (ITAT)
If party is unhappy even after ITAT verdict, it can approach High court and Supreme
Court.
Burden of Proof
In the regular criminal cases, suspect is presumed innocent until proven guilty. The
burden of proof rested on the prosecution, i.e. Sarkaari Vakil (and Police) has to
convenience the court that Raja is guilty.
However, in case of GAAR, the burden of proof rests with the party, Raja has to prove
that he is innocent.
This is similar to TADA and POTA: Burden of Proof rested on the suspect. The Suspect
was presumed guilty, and he had to prove that he had no criminal intent.
Pranab: ↑ery good. Just the way I wanted it. Now I’ll table this bill in parliament.
Lok Sabha TV-viewer: Yaar, ek toh Pranab’s Bengali English accent is so hard to decipher in
the first place and all this shouting is making it impossible to understand what he is saying!
“We’ve uploaded the draft DTC code on our website so if anyone got problem or suggestion,
send it by ordinary post or meet us in person because our fax machine is not working and our
Secretary forgot the Gmail password.
One such stakeholder is our good old Mr.Vodafone, he appears before the standing Committee to
present his case.
Assumption of Guilt
Mr.Vodafone: Adding insult to the injury, the GAAR rule says, “It shall be presumed that
tax-avoidance is the main purpose of a business deal, unless otherwise proved by the
taxpayer.” →hat the hell man?? This is same like POTA and TADA were it was presumed that a
person is guilty, and the burden of proof rested on the suspect.
→hy treating us as terrorists, especially when you don’t have the guts to say,
“Maoists=terrorists” in UN assembly?
Kalmadi can walk out on bail despite stealing crores from Indian-taxpayers and we are not even
allowed to do proper tax planning.
Even Supreme Court said in the Vodafone case that.
All tax plannings cannot be said to be illegal / illegitimate or impermissible. Genuine strategic
tax planning is permissible.
Conflict of Interest
Mr.Vodafone: In the GAAR, IT Commissioner alone will decide whether a business deal is
genuine or a tax avoidance sham? But Why give him this discriminatory power?
We all know that IT Commissioners are given revenue collection targets from ‘above’.
So when an IT Commissioner is under pressure to meet the target, he may issue a notice
to us even where there is no case of tax avoidance, and the deal is totally legit.
Ultimately we’ll have to treat him as ‘maai-baap’, give him gifts and bribes every Holi-
Diwali, thus GAAR will bring back the Inspector Raj.
And IT Commissioner is given so much power. He'll be Police, Judge, Jury and the
Executioner. On one hand, you are against the Jan-Lokpal giving same argument and yet
allow it in GAAR.
In most of the countries, IT Commissioners don’t have so much discretionary powers, the
GAAR matter is generally handled by a panel/Committee system and not by individual
Commissioners.
Pranab: but there are safeguards. You can appeal to the DRT, ITAT, High court and Supreme
court, if you’re not happy with IT Commissioner’s order!
Mr.Vodafone: But we’ll have to waste so much of our money in hiring tax-lawyers! Do you
have any idea how much time and money did it cost me to prove my innocence in Vodafone-
Hutch deal? This GAAR will only generate more income for the top 10-12 tax lawyers of India.
An arrangement of a tax payer’s affairs that is intended to reduce his liability and
that although the arrangement could be strictly legal.
Tax The key distinction being that in tax avoidance the key facts and financial details
Avoidance are not hidden by the tax payer but are on audit-record.
So there is no ‘black-money’ because all the money is reported to the tax-
authorities.
Tax Arrangement of a person’s business and /or private affairs in order to minimize
Planning tax liability.
GAAR is not an antidote for ‘tax evasion’; it can only solve ‘tax avoidance’.
The GAAR cannot deal with tax evasion since it cannot deal with what is not reported.
You’ve shown enthusiasm against Tax evasion but you don’t flex your muscles in same
manner when it comes to Hasan Ali and other tax evaders!
So instead of clubbing GAAR with DTC, make a separate law for that incorporates not
only GAAR (tax evasion) but also provisions for black money.
GAAR is only a piecemeal approach. The situation requires a holistic approach to handle
both Tax Avoidance + Tax evasion.
According to the Constitution, Income tax legislation falls under the domain of Union
Government. Therefore I can proceed easily with DTC without consulting State
Governments. Besides DTC target audience=middle class+corporates= The ‘vote-bank’
is large enough so no party dares to oppose DTC beyond a level. I can easily pass DTC
(+ GAAR) in Rajya Sabha too.
But when we talk about “Holistic” approach of dealing with “Black Money”, that
involves both direct and indirect taxes. So, I’ve to take state governments in confidence
before passing any legislation or framework, just like the FDI in retail or GST (Goods
and services tax.)
You’ve already seen► all Non-Congressi chief ministers opposing NCTC. Even if I want
to do something good, How am I supposed to proceed with a “holistic” approach /
legislation to deal with both Tax Avoidance + Tax evasion?
Pranab (intervenes): haha dude we have neither signed nor ratified that Vienna Convention!
Mr.Vodafone: But then how am I supposed to do business? There is no certainty whether you’re
going to respect the International tax treaties or not. It will all depend on the whims and fancies
of your IT Commissioner.
How am I going to make business deals with other companies abroad? Economy cannot prosper
in places having any type of uncertainty. Take the case of Naxal affected regions.
Besides Supreme Court has said in my case
Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational
economic choices in the most efficient manner.
Pranab: ya ya I know it very well what Supreme Court said in your case. And the main reason
for doing GAAR is to make sure that you can’t win in Supreme court next time.
Mr.Vodafone: Then I’ll make sure you that get a downgrade in Standard and Poor (S&P)’s
rating. Just one stroke and the FIIs will pull out crores from your market in a week=Rupee
weakens =crude oil becomes expensive= inflation. Fir GAAR ki poongi bajaate rahenaa.
Summery
GAAR is a set of rules to check on tax-avoidance.
Pro GAAR-Lobby
Pranab, His party, Jholaachhap NGOs and Leftwing columnists of The Hindu et al
Big companies sell their products in Indian and make huge cash. Yet they do business
deals in Mauratius, Caymen’s island etc to avoid paying taxes to Indian Government.
With GAAR, we can recover taxes from them and use it for poverty-removal (!)
Anti GAAR-lobby
Big Corporates, Sharebrokers, Rightwing Columnists of Indian Express, Times of India et al
End of article. Die hard fans of Sachin, Nupur Talwaar and anyone else not as bored and fed up
as I’m, can leave now. No need to read further.
Mr.Vodafone: what is this yaar? GAAR should have been a news issue since August 2009 when
Pranab introduced the DTC bill in parliament.
But Only in 2012, after Vodafone judgment and Budget 2012, you fellas start writing about
GAAR and that too only for namesake. And nobody is gonna read your newspaper columns
except those UPSC and MBA aspirants. This GAAR issue requires proper public-debate because
it has direct implications on Foreign investment, IIP, GDP, employment, inflation everything.
Why no news channel is taking up this GAAR-matter?
Newchannel Anchor: sorry man but my news schedule is totally jampacked with Sachin’s
Rajya-sabha nomination and Nupur Talwar’s bail case. I’ve to cover these two breaking news
tirelessly for next 15 days 24/7.
Mr.Vodafone: Thousands of girls get raped and killed across India on daily basis. What about
them? They’re not important? Don’t they too deserve to get justice and media activism? Posh
victims of Delhi-Noida region deserve quicker justice than some poor victims in Chhattisgarh or
Rajasthan?
Zee News, Aaj Tak, NDTV, Star News, TimesNow and CNN_IBN, no matter which channel I
switch to, there is only Nupur Talwaar, Nupur Talwaar and Nupur Talwaar. You’re giving
minute by minute live coverage of her: Nupur wore her own clothes to jail, she borrowed a jail
library book, she was given a blanket, a mug, and she dined on brinjal-potatoes, dal and rotis.
Hell, even Nathuram Godse, Lee Harvey Oswald and Nalini Sriharan didnot get this much
attention!
Newchannel Anchor: How can you be so cruel and insensitive about the Arushi murder case? If
she wasn’t murdered she could have become the next female President, Speaker or Prime
Minister of India.
Mr.Vodafone: oh yes…right ….now I get it. And since Sachin is becoming a Rajya Sabha
MP…. Rivers of milk and honey will flow, Naxalites will stop kidnapping good Collectors,
Drunkards will stop beating their wives, Lokpaal bill will be passed…., Black money will be
brought from Switzerland, Kashmir issue will be solved, Bhopal Gas victims will get proper
compensation and all the MBA colleges of India will stop looting aspirants in fee refunds, by
declaring their results simultaneously on same date, right?
Newchannel Anchor: Haahaahaa really man, please stop talking like Justice Katju!
Imaginary example:
Year 2001
interest given to NRI on savings deposit: 3%
loan interest charged from businessmen: 6%
Year 2002
interest given to NRI on savings deposit: 4%
loan interest charged from businessmen: 5.5%
It seems the profit margin declined in second case, isn’t it? But the “volume” of incoming money
has increase and so will the volume of business.
Besides, it takes only one troubled bank to reduced its loan interest rate, and the other banks will
be forced to reduce their loan-interest rate as well, to stay competitive.
Then why didnot the said troubled bank reduce its loan interest rate earlier? because earlier its
incoming NRI-deposits were low due to FCNR limit so they didnot have enough “raw-material”
to reduce the sales price and yet run operation smooth.
So instead of going down to $1=54 Rs, now rupee will trade @$1=52Rs or lower
Although it’s not that linear and immediate, takes some time for the laws of supply and
demand to show effects and then rupee will start strengthening again.
Current account
It is made up of three parts.
1. Balance of Trade
2. Earning from Investment
3.Cash Transfers
Export +299284
Import -381061
Total -81777
→e got a negative number, therefore India has a trade “DEFICIT” of 81777 million US$
for year 2010-11. Call this figure (1)
If we had got a positive number, we could say India had trade “SURPLUS”
Unfortunately, we can never have “Surplus” because every-year we’ve to import crude
oil and gold worth billions of dollar and that disturbs the whole balance.
Rajiv Gandhi Equity saving scheme was an initiative of Pranab, to make Indians reduce
gold-purchase and use that money to invest in capital market. But so far it seems to be
heading for #EPICFAIL. Reason: Target audience doesn’t have PAN cards and Demat
accounts.
Note: For the sake of simplicity, I’ve added + and – in front of incoming and outgoing
money and did the “total”. But technically it is called “net difference” between exports
and imports.
Total -45946
Since we got a negative number, we call this Current Account Deficit (CAD): worth
45946 million US dollars.
1 billion = 100 million
10 lakh = 1 million
1 billion = 100 crores = 100 x 100 lakhs = 1000 x 10 lakh = 1000 million
1 billion = 1000 million
Hence, 1 Million = 1/1000 Billion
45946 million
= 45946 x (1/1000) billion
=45.9 billion $
Note: you’ll get different number on different website and sources based on their data-sources.
But 2010-11’s CAD was somewhere between 45-55 billion $.
Although absolute number by itself is not important for exams. Economy is not about absolute
numbers but context of those numbers.
The Invisibles
Theoretically, the CAD is calculated using above three figures: BoT + EI + CT
But in real life, many countries, including India uses a slightly modified method of CAD
calculation.
Under the Current Account subheads, they classify money according to visibility of products.
Visible = import and exports of Goods (gems, petroleum, textiles etc)
Invisible involves
Import and export of services (softwares, call centre, tourism, softwares, insurance etc.)
Earning on investment (dividends, profits, interest etc.)
Cash transfer (remittances, donations etc.)
^These three are classified under “invisible” because you don’t see any physical goods/products
moving around during the transaction.
So, take the balance (net difference) of visible
and take the balance (net difference) of invisibles.
Add them up and you get CAD.
1. Debt ( Bonds)
2. Equity (Shares / IPOs )
This is a bond in Indian currency, with both principal and interest is paid in Rupees.
But what if any Indian company wants to sell bonds to Americans?
It means, for the first five years, you continue to receive interest payment of Rs.80, each year.
But on the fifth year or after that, you can give this bond back to the company and receive 100
shares (equity) in lieu of your bond.
If the shares are selling @higher price. I can exchange my bond for those shares and sell
them in market. In that situation, I should get my bond converted into shares.
If the bond is converted into share, I don’t have to make regular interest rate payment, nor
I’ve to give back the Principal Rs.1000.
Less bonds = less debt. This is good for reducing Debt : Equity Ratio. (more explained in
previous “Rights issue of Shares” article)
Foreign Currency + Convertible Bond
Combine above two features in one bond.
Issue the bond in foreign currency; promise to pay the interest and principal in foreign
currency.
Promise the investor to convert the bond into equity after a fixed date.
When you issue a bond having both of above features, it is called FCCB (Foreign currency
convertible Bond). FCCB started in 1993.
FCCB Refinancing
In crude terms, it means you take a new loan, to repay previous loan!
During the IT-boom period, Many Indian companies took funds from Foreigners using FCCB
bonds. At that time the picture was rosy good and the Indian businessmen had thought, they’ll be
able to repay the interest and in most cases, the foreign investor will get the bond converted into
equity so we won’t have to pay back the principal!
Problem: Foreign investors did not convert their bonds into equity, may be because of the dismal
economy-scenario both in India and abroad.
For example:
Now this Indian company offers to convert the bonds into equity of 100 shares.
But the shares of this company are trading @ Rs.150 per share. That is roughly $3.
Means I get $3 per sharex 100 shares = $300 worth of shares.
Even if I sell it in market, I can recover only $300.
How much I make ?
$400 already earned in interest + $300 via shares = $700.
But my initial investment is $1000.
Besides, this stupid company pays very low dividends and my financial advisors tell me that in
future also, its share price of dividend is not going to increase much.
In this scenario, I’m not in a mood to convert my FCCB bond into that Indian company’s shares.
Because as long as I’ve the FCCB in bond form, I continue to receive interest and claim the
principal.
Why in News?
The current RBI-norms mandate if a company wants to pre-pay FCCBs via fresh foreign loans or
bonds, the new paper must be of longer maturity and carry a lower interest rate than the existing.
For example,
You’ve to repay FCCB of 1000,8%,2025, but you don’t have enough money so you want to
issue another bond to get money and payback this loan.
But You can issue new bond of lower interest rate and longer maturity only, for example
Rs.1000,7%,2030 only.
But unless a higher interest rate is offered, the new investors may not be willing to put in
money. (Recall the junk bond example.)
Therefore Indian corporates are asking RBI to reduce limits on pricing and maturity.
Consider following crisis of Suzlon.
Few years back, Suzlon had raised $600 million or Rs 3,000 crore through Foreign Currency
Convertible Bonds (FCCB). The Maturity date is in July 2012. i.e. Suzlon has to repay the
principal of Rs.3000 to those FCCB bond holders.
But according to market sources, The company is not in a good financial position, thanks to the
global financial crisis. Reason-
1. Wind-turbine orders from Europe and American clients have declined and
2. one of the biggest clinet Edison Mission, is not paying the dues in previous orders.)
So, currently, it is outside Suzlon’s aukaat to pay back more than Rs.2250 crores.
Therefore 3000-2250=Rs.750 crore have to be arranged.
1. (offering to Bondholder) : Bhaiyaa instead of 100 shares, I offer you 200 shares. But
please convert your FCCB into equity.
If the bondholder agrees, it is well and good but problem: Tulsi Tanti’s shareholding will decline
from 53% to 50%. As you can understand, shareholding less than 50%= Not a good idea Sir-ji.
Just like running a coalition Government with Mamatha Benerjee.
Again problem: SE forge will not sell for more than 300 Crores, While Suzlon needs Rs.750
crores.
You import steel from china, assemble bicycle in India and export it to France.
From France you receive Euro and to China, you’ve to pay in Yuan.
Suppse you’ve only a normal bank account, you can only deposit money in Rupees. So first
you’ve to convert those Euros into Rupees, (Forex agent will charge Commission), deposit
Rupee money in your savings account. But just after 10 days, you’ve to pay to Chinese exporters
in Yuan. So again take out Rupee money, convert it in Yuan (Forex agent again charges
Commission.) + so much paper-work.
The only guy benefitting here is the Forex dealer because you’re not earning enough interest and
paying more to him in Commission.
The EEFC account comes handy. You can deposit whatever amount of Euros you received from
France (100% amount) into this EEFC account. And later as and when you need, you take out
the Euros and convert them into desired currency.
Q. In EEFC Account, can somebody hold multiple currency like Dollar, Pound, sterling, Yuan or
he is allowed only for a single foreign currency. (by Pradeep)
Ans: One is required to have multiple EEFC accts for multiple currencies. So, if some exporter
has transaction in EUROs and Yuans, he has to have two EEFC accts i.e EEFC (EURO) and
EEFC (Yuan) (By Nitesh Macwan)
Why EEFC in News? RBI’s new guidelines
Same reason why FCNR was in news! =The declining value of Rupee.
This week, 1$= 53.82 Rs.
RBI wanted to stop the downfall of rupee any further so, Governor issued notification.
It made two new rules.
Exporters are permitted to buy foreign exchange only when they have completely utilized the
foreign currency in their EEFC accounts.
But why?
Ans. To reduce currency speculation.
For example, my finance expert tells me that I should hold on to my dollars in my EEFC for a
month, because afterwards, dollar is likely to strengthen. (example 1$=50 to 1$=55)
Therefore, at the moment I’m not interested in using any dollars from my EEFC account, I just
kept the “stash” aside. And I buy new dollars from forex market using rupee currency, to make
payments for my business (instead of utilizing my own dollars already stored in my own EEFC.)
This unnecessarily decreases the supply of dollars. (because people don’t use their dollars, they
just keep buying new from others) = demand of dollars even increase = rupee weakens even
more.
Therefore New RBI rule: Exporters are permitted to buy foreign exchange only when they have
completely utilized the foreign currency in their EEFC accounts.
I’ve to compulsorily surrender 50 per cent my foreign currency from my EEFC, for conversion
to rupee balances.
Result: Since I’m forced to sell my foreign currency from my EEFC account= the supply of
dollar / pound and other foreign currencies will increase in the market.
Their price go down (example from 1$=55 Rs. To 1$=50 rs.) = Rupee strengthens.
Direct tax
Is paid by middle class and rich men on their income and property. Income tax, corporate tax,
Wealth tax, capital gains tax, are examples of direct tax.
Direct taxes collected by the income tax department.
Yes Shares of a company also come under Capital Gains Tax. And there is different ‘time-frame’
for them.
Short-term capital gains tax, if you owned those shares for less than 12 months, before
selling it.
Long-term capital gains tax, if you owned those shares for more than 12 months before
selling it.
So in the case of Vodafone: indeed Hutchison was the seller so he has to pay the Capital gains
tax but he doesn’t ‘actually’ pay it. It is for the Vodafone (buyer) to deduct that tax money from
his payment and give the tax to Indian Government. That’s why IT Department harasses
Vodafone and not the Hutch.
Now coming to the Vodafone Essar case
Timeline of Events
December 2006: Hong Kong
Hutchison Telecommunication International Ltd (HTIL) Boss: My Indian arm “Hutchison
Essar Limited (HEL)” is not making good money. I want to quit from India.
(To his Secretary ) as you know, I own CGP Investments Holdings Ltd, located in Cayman. And
CGP holds 67% in HEL (India). So, just make an announcement that I want to sell CGP and start
talking with prospective buyers.
Secretary: but why all this complex procedure?
HTIL boss: oh come on man, don’t you know that Cayman Island is a Tax Haven. They don’t
have Capital Gains Tax! Better we sell via Cayman route and we’ll save a truckload of ca$h in
tax.
Sept 2010
Bombay HC: Yes IT Department is right. Mr. ↑odafone you’ve to pay the Capital Gains Tax.
Mr.Vodafone: I’ll go to supreme court.
Leftist Media: Shame shame. You’re going to Supreme Court!! →e are going to report this as in
such a tone as if you’re the main culprit here and doing something immoral.
Mr.Vodafone: When the kinds of Shibu Soren, Sanjay Dutt and Vikas Yadav can goto Supreme
court, why can’t I? Saving tax is a legal activity. I’ve done nothing wrong. I’m the innocent
bystander here. You don’t have the guts to cover blackmoney issue until Anna Hazare and Baba
Ramdev raised it, but just because I’m a rich MNC company I must be the bad guy, right? All
you mediawalla want, is money to keep your mouth shut.
Aug-Oct 2011
Location: Supreme Court, Delhi
IT Commissioner: Your Honor, this Mr.Vodafone here, has purchased ownership of an Indian
mobile company called HEL (Hutch Essar Limited) for USD 11 billion and now he is not giving
me Rs.12,000 crores as Capital Gains tax.
Mr.Vodafone: Get your facts right Commissioner Gordon. Please see this diagram again.
Long thing cut short, I purchased a Cayman Island company from Hutch Hongkong. Now this
Cayman Island company happens to have 67% shares of Hutch Essar ltd (HEL, India), and thus I
only have “Shares” of HEL. I did not purchase any assets like trucks, buildings or mobile towers
from the HEL (India) itself. So where is the capital and where are the gains?
IT commissioner: No that is incorrect. Capital Gains tax applies!! Because You gained Assets
of an Indian company.
Gurmeet (from court viewers): This is utter nonsense. If today you buy 10% of the shares of a
particular company, let us say Jet Airways, does this mean that you automatically own 10% of all
of Jet Airways’ assets? Does this mean that 10% of the entire fleet of aircraft now belongs to
you? By buying out a company that holds 67% of HEL, it doesn’t mean that Vodafone now owns
67% of the assets of HEL. Those assets continue to belong to HEL, which is a separate legal
entity based in India. Read the Company law, Damnit. Because there has been no transfer of
assets, there has been no capital gain.
IT commissioner: ya But still, you purchased the shares of a company. According to Indian
law, capital gains tax applies to sell of shares!
Mr.Vodafone: Agreed that a person has to pay Capital gains tax on the sell of shares according
to Indian Income tax act. But This share-purchase took place in Cayman’s island, between two
Non-Indian companies. They don’t have any capital gains tax there. So how come you hold me
responsible for paying Capital Gains Tax in India? You don’t have any jurisdiction over this
matter! And If this is your logic, why didn’t you arrest Sunny Leone when she came to
participate in Big Boss season #5? She is a porn actress, and watching porn is illegal in India
(except for Karnataka MLAs). But you cannot arrest Sunny Leone in India, because you don’t
have jurisdiction over her activities in America. It is completely legal to shoot porn in California
State of USA. So why this Kolaveri Di with me?
T.V. SIVAKUMARAN (from Court audience): Let me give another simpler illustration. ICICI
Bank shares are listed in the US Stock exchange. As a US citizen, I own some shares. If I sell
them and make a profit, should I be made liable to pay Capital Gains Tax in India, U.K. and
other countries, where ICICI Bank holds Assets?
Judge: order, order.
IT Commissioner: umm…well….ahhh… oh yes, you and Hutchison International, have
intentionally conspired to make this deal in Cayman’s Island. Because it is a tax haven. Because
Cayman island doesn’t have capital gains tax. You guys are very smart, you intentionally create
such flimsy companies in Tax havens, and then make merger and acquisitions to avoid as much
tax as possible. You’re not the only culprit; plenty of Indian companies are doing the same thing.
[But since you’re a big ‘bakraa’ worth Rs.12000 crores we’ve special interest in you]
Mr. Vodafone: of course. Why not? It is a completely legal activity to save tax through legal
means. →hat’s wrong in that? Blame it to your outdated laws and tax-treaties. If a drunk rich brat
kills 15 people in drunk driving, he still gets out of jail on bail, thanks to your outdated laws So
who is to blame? The drunkard or the Government?
Yes we save taxes by running the show through tax havens in Mauritius and Caymand island, but
you cannot ignore the enormous employment generated because of me. See how many people
got jobs in Vodafone outlets and the substantial increase in excise duty, sales tax and other
duties. Not to mention all those people who got jobs, they also pay income tax, they go out
purchase homes, automobiles, perfumes and skin whitening creams and what about that indirect
employment generated in those industries?
You cry about the puny 12000 crores in capital gains, what about the million dollar happiness in
the lives of all those people benefitted directly or indirectly because of my entrepreneurship?.
January 2012
Landmark Judgment of Supreme court
Saare sabuto aur gawaaho ko madde nazar rakhte hue, ye adalat iss natije par pahuchi hai ki
( औ , इ )
March 2012
Supreme court rejects the review petition.
Those Best Tax-lawyers demand lakhs of rupees as consultation fees from Government of India.
IT Commissioner (to self): Khaayaa piyaa kucchh nahi, glass fodaa…. ( ,
..)
Budget 2012
Minister (announcing in Parliament): I propose an amendments in the Income Tax Act with
retrospective effect from 1962 so that all persons, whether residents or non-residents, having
business connection in India, will have to deduct tax at source and pay it to the government
the government cannot tax a deal between two foreign entities, even if the transaction includes an
Indian asset.
Our party has ‘history’ of trying to outsmart judiciary, whether it was Shah Bano case or 42nd
Constitutional amendment or….
Random MP: (putting his i-pad aside) →hat does this “retrospective effect” mean?
Peon: Retrospective effect means if Government passes such law in 2012, still the past deals
between companies made in 2007 can be taxed. Only Civil laws can be made with retrospective
effect. But criminal laws cannot be made with retrospective effect.
Random MP: Elaborate
Peon: Criminal law cannot be made with retrospective effect, meaning if in 2012, Government
passes a law that mobile phone thieves will get life time imprisonment, then only those thieves
who’re caught in 2012, after the commencement of that law, will be jailed for lifetime.
But, If a thief stole the mobile phone in 2007, he cannot be given lifetime imprisonment, he has
to be tried under the punishment provision that were in effect during that time. On same logic,
people are still languishing in jail under TADA and POTA cases, even though those acts are
scrapped now.
Random MP:That means I must hurry and do as much corruption as I can, before that Lokpal
thing comes in effect, Whaat an idea Sir-ji.
Outside Parliament
Salman to Media: Right now we only know that it is a unanimous judgement that has gone
against the revenue authorities… →e have to examine. →e obviously need revenue for the
government’s important programmes.
Epigue
Anand: Just like the Govt insists on tax revenue, even when the supreme court dismissed their
case,
we citizens need to insist that the revenue is spent wisely by the Govt on the welfare of its
citizens.
The extra tax revenue that the govt would have got from Vodafone would not benefit any citizen.
Instead 90% of the money would find their way into the pockets of our politicians,
while the rest is frittered away as salaries for a burgeoning bureaucracy.
Rajiv Gandhi Equity Saving Scheme (RGESS) will give maximum benefit of Rs. 5,000 in tax-
saving.
→hat does it mean? Before we can talk about that, let’s see the basics of Income Tax calculation,
Exemption and Tax Deduction.
if your income is Rs.15 lakhs, how much income tax do you have to pay?
15 lakhs is above Rs.10 lakhs, so you fall in 30% income tax slab.
30% of 15 lakhs equals to 4.5 lakhs income tax.
Sorry 4.5 lakhs is Incorrect Answer. Infact you’re income tax will be quite less than Rs.4.5
lakhs.
Why?
Because income tax is not calculated like that.
Step #2: Make a new column and apply those four tax slabs
suitcase number Money packed Tax slab
One 2,00,000 0%
Two 3,00,000 10%
Three 5,00,000 20%
Four 5,00,000 30%
Total 15 lakhs –
Step #3: Calculate the income tax to be paid for each suitcase
suitcase number Money packed Tax slab Tax to be paid
One 2,00,000 0% Zero
Two 3,00,000 10% 30,000
Three 5,00,000 20% 1,00,000
Four 5,00,000 30% 1,50,000
Total 15 lakhs – 2,80,000
The total sum of income tax on all four suitcases =2,80,000 lakhs
So, if your income is 15 lakhs, you have to pay 2.8 lakhs as income tax.
But we forgot some important things: educational cess, tax exemption, tax deduction.
3% educational cess
Cess means tax on the tax.
Union budget 2012, has provision of 3% educational cess.
Meaning 3% of 2.8 lakhs, equal to Rs.8400
Hence the total income-tax that you to pay = 2.8 lakhs +8400= Rs.2,88,400
Now time for two most important parts in the income tax calculation.
What is Tax-Planning?
It means use of Tax-Exemption and Tax-Deduction provisions in such a way that you can save
maximum amount of tax.
Only first-time investors, with annual income less than Rs.10 lakh can invest in the
scheme.
One person can invest maximum Rs.50,000 only
Ya but still how is Rs.5000/- saved? You’ve to compare two cases to find that out.
Homework:
(No, they’ll not ask this in your exam, this is only for brain exercise)
Calculate the maximum possible tax saving with RGESS, if your annual income is Rs.4 lakhs.
Shortcut tip:
You can get max deduction of 25,000 (that is 50% Deduction of Rs.50000 invested in RGESS)
And your given income 4 lakhs fall under 10%.
So, 10% of 25,000=Rs.2500 saved in tax.
Why does this shortcut method work? Think about it.
Anyways, whether you can save 5000 or 7000 that is not the important question for UPSC, IBPS
(Bank PO) or MBA admission interviews.
Why is important?
In 1944, President Roosevelt hosted a conference here, to rebuild the world economy,
after Second World War.
Delegates of 44 allied nations ( ) had came to participate in this conference.
Officially it is known as United Nations Monetary and Financial Conference,
commonly known as Bretton Woods because of the place where it was held.
This conference resulted into creation of four extremely important things
Agenda of conference
Help rebuilt the World Economy. Provide money, loan, finance to needy nations. (World
Bank)
After →→2, lot of colonies will get independence (India, Sri Lanka…), they’ll introduce
their own national currencies without control of big superpowers (Britain) and they’ll
enter in international trade in their own capacity.(Exchange rates, IMF)
Hence, Some order had to be created to facilitate smooth international trade. (GATT)
President Roosevelt: ok I say we put fixed exchange rate system. Let’s fix the rates that 40
Rupees will equal to 1 dollar. 15 Yens will equal to 1 dollar. 12 Pounds will equal to 1 dollar and
so on. In short, I’m pegging your currencies to US Dollar. Thus Dollar will be the international
reserve currency. AND Your country’s RBI (central bank) will make sure these exchange rates
don’t fluctuate more than 1% from these values.Mohan: ya man, but what if the exchange rate
fluctuates? for example, What If I start running my country in a totally pathetic and
irresponsible manner and hence nobody wants to invest in India so supply of dollar is low but
demand of dollar is high- because Indians want to buy gold and we’ve to import crude oil and
pay in dollars. In short, this will fluctuate the exchange rates between Dollar vs Rupee.President
Roosevelt: Let me ask you a question. Suppose Onions are selling 100 rupees a kilo because of
low supply but suddenly farmers produce fresh new 50 million tonnes of onions and supply it to
market, what will happen?Mohan: Easy! Onion Price will drop down to 40 rupees a kilo because
the supply has increased.
President Roosevelt: yes dude, the same way, whenever exchange rate fluctuates from our
standard rate, you’ll tell your RBI to supply dollars from its own forex reserves in to the market
to calm down the demand and bring the rate back to normal level.
If the reverse happens: (Onions are selling @ 2 rupees a kilo) then you tell your RBI to buy all
Onions dollars using its own rupees, until the supply is reduced and price is back to normal.
Mohan: What nonsense is this? If 40 rupees equals 1 dollar but then what does 1 dollar equal to?
What is the value of your own dollar? Why should we accept your dollar as international reserve
currency?
President Roosevelt: I’ve fixed the value of your currency to my dollars. And I’m fixing the
value of my own dollars to Gold. 1 ounce of Gold shall equal to 35 dollars. Meaning you walk in
with 35 dollars in my RBI (Federal Reserve Bank of USA), and you’ll get one ounce of gold in
return. Gold will remain precious forever. So, it’s not like we’re running the show in thin air.
Dollars are backed by GOLD.
Mohan: ya man but what if my RBI doesn’t have enough dollars in its lockers? →hat will we do
then?
President Roosevelt: don’t worry, come to IMF. They’ll arrange short term loans for you, in
dollars.
Mohan: but still, why should we fix price of our currency to dollars? Why should we accept
dollar as the reserve currency and not Yuan, Yen or Pound? Why should we accept you as our
big boss?
President Roosevelt: Because I’ve the aukaat to pay enough gold, so I say dollars will be the
international reserve currency. IF you’ve enough gold reserve in your RBI, come sit in the chair
and we’ll see whether rupee is strong enough to become the international reserve currency or not.
Even Britain is so financially bankrupt after Second →orld →ar, they don’t have the guts to tell
me set this exchange rate according to their Pounds. Btw, I also got some nuke missiles in my
limousine.
Mohan: no no…I was just kidding man. I’m well aware of my aukaat (औ ) and hesiyat
( ).
President Roosevelt: Besides →hen we’ve a stable and fixed exchange system like this, it’ll
ensure smooth and long term trade deals between merchants of various countries. When you
don’t have fixed exchange rate system, it is bad for economy. For example, today your call-
center boss may give you free lunch and coffee because $1=60 rupees but next day when value
of rupee declines and it is $1=50 rupees, same boss will even stop running the water-cooler in
your office. Third day when $1=40 rupees, He will just kick you out because outsourcing
generate that much profit for him. Such uncertainty, is not good for economy.
Besides, since Gold is in limited supply, Dollar will be spent carefully, and so your currency will
be in spent carefully. i.e. Since currencies are ‘pegged’, you will not indulge in extravagant
spending in subsidies, welfare schemes, tax-reliefs or debt-waivers to farmers. This ensures
fiscal discipline => That ensures less Fiscal deficit = less inflation.
Mohan: Mr. President Sir, I think I got the point now. I’ll tell my RBI Governor here to sign the
Bretton Woods agreement papers, because fixed exchange rate system sounds safe and good.
As you can see, the fixed exchange rate system, is good for stable international trade
environment, atleast on paper.
But this system can run smoothly only as long as USA has the aukaat to pay gold to
every swinging dude that walks with dollars into their office.
Problem started with Cold War. Both USA and USSR (not Russia), are busy in an arms
race, building new tanks, missiles and submarines every week.
They’re also giving huge donations and help to poor nations, in order to win their support
and dominate the region. This is a non-productive activity, they’re basically wasting
money.
Now, USA gets involved in a very lengthy and expensive Vietnam War from 1959 to
1975.
Inflation and Gold Prices
Fact: War leads to inflation
Fact: Inflation decreases the value of your money.
Fact: Gold becomes more expensive because of Inflation.
US still kept fixed value of 35 dollars = 1 ounce of gold. But thanks to this inflation,
Gold is trading at higher price in open market – 40 dollars per ounce.
So there is an opportunity to make quick money, just tell the RBI manager to take
suitcase full of dollars from RBI’s locker to US Federal Reserve, take their gold in return,
and sell it to the local jeweler at higher market price and use this profit to fix india’s
problems- poverty, education etc. (may be by starting another welfare scheme named
after Nehru-Gandhi family.)
For a while, US Presidents had enough clout over international politics so that they could
force other nations’ RBI managers not to indulge in such cheap profiteering. But
↑ietnam war is fast deteriorating America’s clout and now RBIs of various countries
have started lining up with their suitcases full of dollars and they want gold in return.
1971, President Nixon decides that if we continue giving gold for dollars, we will go
bankrupt. There will be no gold left in our lockers. So I give up. I’m not going to let
anyone exchange their dollars for my gold.
And thus Bretton Wood system breaks down.
1973, World moves to floating exchange rate system.
→hat is Floating Exchange rate? Governments / Central Banks don’t fix exchange rates
here. It is left to the Forex markets, private players and laws of supply and demand. Just
like in the Story of Forex. Government /RBI will only intervene if there is huge
fluctuation in the exchange rates.
Budget provision
Pranab: (announcing budget in parliament)
Jewelers will have to pay 4% import duty on gold, earlier they had to pay only 2%.
Aam-Aadmi will have to pay 1 percent excise duty on non-branded gold jewelry
If Aam-Aadmi purchases jewelry worth more than 2 lakh rupees, the Jeweler will have to
collect 1% tax from him in TDS (tax deduction @Source=Just like in Vodafone case.)
TDS@Source
Jeweler: but TDS form requires PAN card number. In a population of 120 crores, barely 12
crore people got PAN cards! How am I supposed to proceed with the paperwork?Pranab: can’t
you see? it is a move to make people get PAN cards. If everyone has PAN cards then it is easy
to track the tax evasion and black money. So If a person is genuine and has the ‘aukaat’
(औ ) to purchase gold worth 2 lakhs, then he shouldn’t fear and get himself a PAN
cardJeweler: agreed but what’s so magical about the lower limit of 2 lakh? →hy not 1 lakh why
not 1.5 lakh but 2 lakhs only?
Pranab: because Most of the black money is routed through gold bars. A normal bar weighs
100 gram or more, and costs more than 2.5 lakhs. So, if customer has to pay tax and quote his
PAN card number, the badman with blackmoney will think twice before making a purchase.
Hawalaa operator: but which fool is going to buy gold worth 2 lakh rupees in one go from one
shop? He’ll just buy the smaller gold bars of 1 lakh rupees each, from 2 different jewelry shops.
Yes, Necessity is the mother of all inventions!
Too bad you Stephenian and JNU-walla ministers and bureaucrats always underestimate the
wisdom, might and finesse of a highschool dropout Hawalaa operator while making your
economic policies.
Pranab: Ya agree but it’ll create some inconvenience and reduce the gold purchase by a small
percentage.
And Our end goal is to have compulsory PAN card and TDS for gold purchase of any
price: whether it is 2 thousand rupees or 2 lakh rupees. Only then black money can be
stopped from going into gold purchase.
But as you know, majority of junta doesn’t have PAN cards so if I announce TDS on
gold purchase of 2,000 rupees right now, it’ll be totally impractical and create uproar in
the country.
That’s why, we’ll do it in a phased manner: 2 lakh this year, 1 lakh next year, 50
thousands in third year and so on.
By that time majority of people will get PAN card as I’ll order the Income tax dept. to
launch major drive to register everyone for PAN cards.
Jeweler: Do one thing at a time yaar. Either you ask everyone to get a UID card or PAN card.
Why this overlapping and double labour, it is wastage of tax payer’s money, isn’t it?
Pranab: umm….
Jeweler: anyways I’m still not getting the logic. If black money is the problem, why don’t you
fix the root of the problem- corruption itself, rather than doing firefighting by this gold-buy-
pan-card thing? What about the Lokpal, Whitepaper on blackmoney and Swiss money reports
and…
Dubai/South Africa’s dealer doesn’t Export gold bars for rupees, he demands payment in
dollars.
Don’t you get it? →henever you purchase gold, our rupee weakens in the forex market!
→hen rupee’s value declines, we’ve to pay more money to import crude oil=
petrol/dieasel expensive= milk and vegetables delivered via trucks and rickshaws also
become expensive! Your gold obsession is increasing the inflation.
→e’ve to reduce the gold consumption in India.
When people buy gold- they’re suggesting that we’ve failed in curbing the inflation. So
gold is my enemy #1.
I must stop the consumption of gold, instead of stopping the cause behind the
consumption of gold i.e. inflation and blackmoney.
Profit Margin
Mohan: btw, enough talking about me, let’s now talk about you. →hy are you bothered with this
taxation, we all know that the company or merchant doesn’t pay out of his pocket. The taxes are
ultimately Bourne by the final consumer!Jeweler: ya but the gold prices have increased so high,
demand is already decreased. →e’ve to hire so many film-actresses in advertisement.
Mohan: but that’d means I’ll succeed in my goal of reducing the gold demand in India!
Gold Smuggling
Hawala operator: Not so fast mister! Consider this:
For every kg of gold imported, the jeweler will have to Rs 1.10 lakh as duties as per the
current prices.
but if he smuggles the gold from Dubai, and even if the return ticket costs Rs.20,000, he
will easily save 90,000 in tax! (90k+20k=1.10lakh)
In the same way, on purchasing 5 kg gold, people will save upto Rs 5 lakh.
In short, your stupid tax policy on gold, will only increase smuggling.
Dawood: Hey I started my career doing the same thing! Smuggling of silver bars and gold
watches in the 80s :P →ho knows History may repeat itself and you’d see another Dawood Jr!
ISI: Whaat an Idea Sir-ji!
Epiloge
Mohan’s son is preparing for CSAT, IBPS, State PSC or Group discussion /Personal interview of
MBA admission
Mohan’s Son (loudly reading the same sentence repeatedly from a note)
India, the world’s largest consumer of gold, imported 967 tonnes of the precious metal in
2011.
India, the world’s largest consumer of gold, imported 967 tonnes of the precious metal in
2011.
India, the world’s largest consumer of gold, imported 967 tonnes of the precious metal in
2011.
India, the world’s largest consumer of gold, imported 967 tonnes of the precious metal in
2011.
Mohan (to his son): What are you doing Betaa?
Betaa: Daddy I’m trying to verbatimly mugup the sentence written in this ready made coaching
class notes/book.
Mohan: But WHY?
Betaa: Because I’m yet to hit the puberty, so I’m still under the impression that they’ll ask
absolute fact/data/number/date based question and one can really score well in the exam by copy
pasting the lines in a verbatim fashion just like in the board exams! Afterall economy is not
about evaluating the implications of a policy or decision, but it is about just mechnical
memorization of Tax rates in Budget, GDP, GNP, weekly Repo, CPI,WPI and Food inflation
rates!!
What is FATF?
FATF (financial action task force) is an international body, monitoring money laundering
and terrorist financing.
2 or 5 markers
3. financial action task force
4. What is IOSCO
Interview Question
1. Do you think it is a good idea to allow QFIs from Non-FATF participant countries to
enter in India? Should the issue of national security / blackmoney be compromised for
merely stabilize the downfall of rupee?
CSAT-2013
1. Locate the members of GCC in your atlas.
In May 2012, reserve bank of India took following steps to stop the downfall of rupee against
dollar.
1. RBI changed the rules related to EEFC Bank Account. (For Explanation click me)
Reforms in FCNR Accounts
2. RBI relaxed the interest-rate ceiling FCNR Bank-Accounts and allowed the Banks to use
FCNR deposits to provide loans to local residents. (For explanation click me)
3. in past couple of weeks, RBI itself sold about $200 million from its foreign exchange
reserves, to increase the supply of dollars in the market.
1. Because people have to pay in dollars, while they import crude oil and gold.
2. Because FIIs are exiting Indian Market due to policy paralysis and rumors related to
GAAR. (For explanation click me)
3. Current account deficit is merely the outcome of about two problems. (for Explanation
click me)
4. →hen people say, “rupee is falling because of large current account deficit ”, it means
that supply of dollars is low (from FII/FDI/Exporter etc.) side compared to the demand of
dollars (from Gold and Oil sellers abroad/FII exiting from India etc.).
So what can government and RBI do, to tackle this downfall of rupee?
Policy reforms
Government could initiate policy reforms to boost foreign direct investment (FDI) in
India. Such as FDI in retail-marketing and aviation sector.
1. in 1991, Indian government had issued India development bonds, to borrow $1.6 million
from abroad.
2. In 1998, Indian government had issued resurgent India Bonds, to borrow $4.2 billion
from abroad.
3. In 2000, India millennium deposits, to borrow $5.6 billion from abroad.
Generally, these sovereign backed Bonds have maturity period of five years (i.e. you get
principal back after 5 yeas) . They are issued in dollar or pound form
The interest and principal are paid in the foreign currency itself, therefore, the investor
does not need to worry about fluctuating currency exchange rates
The Indian government could issue such “Gilt-Edged” bonds via SBI one more time,
offering attractive interest rates to the NRIs.
Implication: NRIs give their dollars to purchase these bonds, and the dollars, thus
collected can be used for lending to Indian oil companies and or Indian
Importers/Exporters*.
*ya exporters also need foreign currency! Because sometimes they have to import raw
material/services from a third country for producing their own goods and services. Example:
import electronic –chips from Taiwan, steel from Russia, plastic from China, and assemble
laptops in India and export it to South Africa.
* why NRIs? (Because other FIIs/ foreign investors may not be so interested in investing in India
at the moment given the ‘policy paralysis’ and GAAR etc issues)
Answer
waydaa / Wadaa = promise to buy something in future.
Waydaa bazaar= future (and options) market.
→hen you make an agreement with someone that you’ll buy gold/potato or anything in x
quantity at y price on z date in future. This is future contract.
Waydaa Bazaar is the place where brokers hang out to make and trade such future and options*
contracts.
*Options means, with such agreement, you’ve the right to buy that 1000 kg potato at the pre-
determined price Rs.150,000 in future, but not the obligation to buy it.
Means you can refuse to buy it later on, if you’re not in mood or find someone who is selling the
same thing at lower prices! But in that case you loose the premium money paid on that options
contract.
Oil prices go up and down very rapidly due to unpredictable and unforeseeable events, such as
political unrest in Egypt and Libya.
So buyers enter in futures and options contracts with the producers to prevent themselves from
such unpredictable price rises.
For example,
Indian Oil Co. makes an options contract with Libyan supplier in October 2010, that on Feb 2011
Libyan supplier will send 5000 barrels @ 70$ each.
Now due to unrest in Libya in February, the oil prices have escalated to 90$/barrel but still that
Libyan supplier is bound by contract to sell 5000 barrels @ 70$ each to the Indian company.
So Indian company prevented the risk of having to pay higher prices.
This is oil hedging.
But suppose there was no riots in Libya and in fact they had discovered a new big oil well, and
thanks to the extra oil supply, Barrel prices went down to 20$ per barrel! In that case Indian oil
company would cancel to options contract and would loose the premium money paid on the
contract.
how is Oil Hedging related to the subsidies given by the govt. on oil products?
Sorry I don’t have exact idea, but i think if Oil headgeing prevents Indian Oil Companies from
big price rise, then Government has to pay less subsidy on oil products.
what exactly does it mean when we say that in the stock market, a company is at (say) 3000,
premium (say 100) ..For eg: Infy at 3000 premium 100
Answer
Infy at 3000 premium 100.
It means this is a call-options contract: Buy infy shares at 3000 Rs. on x date.
Right now you don’t have to pay Rs.3000, but only that premium Rs.100 to that broker.
Suppose on that x date, price of infy share has gone down to 2000 Rs. you can cancel the
contract, and loose only Rs.100/- (and may purchase those shares from another broker at
2000 Rs.)
But suppose on x date, the price of infy shares went upto 4000 Rs. then you’ll exercise your
option to buy it from that broker at 3000 Rs. and sell back to someone else at 4000 Rs. thus
earning a profit of [4000-3000-100]=900 Rs.
i have a query why GDP (ppp) is not used often to measure worth of countries as it give real
picture than using GDP (Nominal terms)
Answer
For example:
In India majority of people are poor, and receive subsidized grains (like 1 kilo rice for 3 Rs,
kerosene etc. from PDS shops.
In America poor people are supported by Government by food stamps and social security
cheques.
Obviously majority of Indians are poor, and majority of them get cheap- subsidized stuff, the
purchasing power parity of India may look better than Americans.
But does it really mean India is financially more powerful than America just because Indians can
buy more stuff in local market compared to Americans?
→e’ve to import crude oil from Middle east and buy jet-planes, missiles from Russia,France and
Israel.
→e’ve buy pulses and onions from Africa and Pakistan(!), Those people are not going to sell us
stuff with subsidy in Rupees, like we get in our local market.
They’ll ask hard dollars (or gold or diamonds) as payment. So there, in international market,
America can purchase more crude oil, fighter-jets, missiles and onions compared to India, even
though its GDP-PPP wise it may not be powerful as India.
Even China can buy more stuff internationally than we can, because our forex reserve is only
270 billion, while Chinese got 1400 billion $!
GDP at PPP gives us only picture of how much stuff we can buy within our country.
GDP at nominal rate ($) gives us bigger-picture of how much stuff we can buy internationally.
Using GDP (nominal), it becomes easier to compare two nations’ financial strength, by
comparing their ability to purchase in international market in same currency (dollars). The one
who has more $$, can purchase more stuff internationally.
So bigger the GDP (Nominal), powerful a country is financially. While in case of GDP(PPP) we
cannot say with confidence that bigger the GDP (PPP) is, powerful a country is financially,
because they may be heavily-subsidizing it.
How is PPP measured? Suppose India’s GDP is Rs 100. Convert this to dollars as
GDP(nominal) and GDP(PPP)
Answer:
i have a query why GDP (ppp) is not used often to measure worth of countries as it give real
picture than using GDP (Nominal terms)
Answer
For example:
In India majority of people are poor, and receive subsidized grains (like 1 kilo rice for 3 Rs,
kerosene etc. from PDS shops.
In America poor people are supported by Government by food stamps and social security
cheques.
Obviously majority of Indians are poor, and majority of them get cheap- subsidized stuff, the
purchasing power parity of India may look better than Americans.
But does it really mean India is financially more powerful than America just because Indians can
buy more stuff in local market compared to Americans?
→e’ve to import crude oil from Middle east and buy jet-planes, missiles from Russia,France and
Israel.
→e’ve buy pulses and onions from Africa and Pakistan(!), Those people are not going to sell us
stuff with subsidy in Rupees, like we get in our local market.
They’ll ask hard dollars (or gold or diamonds) as payment. So there, in international market,
America can purchase more crude oil, fighter-jets, missiles and onions compared to India, even
though its GDP-PPP wise it may not be powerful as India.
Even China can buy more stuff internationally than we can, because our forex reserve is only
270 billion, while Chinese got 1400 billion $!
GDP at PPP gives us only picture of how much stuff we can buy within our country.
GDP at nominal rate ($) gives us bigger-picture of how much stuff we can buy internationally.
Using GDP (nominal), it becomes easier to compare two nations’ financial strength, by
comparing their ability to purchase in international market in same currency (dollars). The one
who has more $$, can purchase more stuff internationally.
So bigger the GDP (Nominal), powerful a country is financially. While in case of GDP(PPP) we
cannot say with confidence that bigger the GDP (PPP) is, powerful a country is financially,
because they may be heavily-subsidizing it.
For many years before that China had been ahead of Japan only when GDP was measured in
purchasing power parity terms. PPP is an indicator that takes into account relative prices and
therefore the command over goods that a dollar of income provides. Since with lower wages and
prices, a dollar in China when converted to RMB delivers more purchasing power, Chinese GDP
measured in PPP dollars is significantly higher than at official exchange rates. Hence, becoming
the world’s second largest economy at official exchange rates does mark an important transition.
Answer:
First the Purchasing Power Parity part:
Suppose you’re earning 25,000 Rs. per month in India and I’m earning 1000$ in USA. How can
we measure who’s getting better salary? who is happy?
→e’ve to see how much stuff can you buy from the given income?
Suppose, Price of one burger in USA is 10$, I can only buy 100 burgers a month.
While its Rs.25 in India, you can buy 1000 burgers a month!
In this way you’re in better position than I’m, because you can buy more food!
Same way we’ve to calculate not just burger but overall monthly food bill, house rent, electricity,
telephone, petrol etc. to measure who can buy more stuff in the given salary.
Tech-definition
PPP is an economic technique used to determine the relative values of two currencies by
comparing costs of the identical products and services in different countries.
It is useful because often the amount of goods a currency can purchase within two nations varies
drastically.
then my salary in USA is Rs. 40,000, while yours in India is only 25,000.
In that way my position is better than you according to official exchange rate.
In case of China and Japan, as you know China is a communist Government, so food-petrol etc.
prices will be strictly controlled by the Government along with lots of subsidies and benefits.
While Japan is a liberal democratic country so market forces of supply and demand decide the
prices of everything from food, petrol to fertilizers and movie tickets.
So obviously food, petrol and stuff will be cheaper in China compared to Japan.
So for the given salary a Chinese man can buy more stuff in China, compared to the stuff a
Japanese can buy with his salary, just like the same way you can buy more burgers in India than I
can in America.
That’s why China had been ahead of Japan only when GDP was measured in purchasing power
parity terms.
When GDP is measured in absolute official exchange rate (in simple terms how much money the
country has irrespective of the amount of stuff it can buy using all that money)
Main reason:
China keeps its yuan undervalued, hence its exports are cheaper than Japan or India’s.
I’m a banker, gave car-loans to dude, but I’m afraid he might not pay back the full money.
So I’ll goto some other Bank X who sells Credit default Swaps (CDS).
I’ve to pay regular premium Bank X,
but if someday that dudes default on his car-payment, Bank X will pay me the money.
In a CDS transaction, the protection buyer does not suffer a loss when reference entity defaults.
These CDS bonds, once issues, can be sold and bought like any other bond or security.
i.e. Bank X sells my CDS to Bank Y. So now Bank Y gets my premium but in case of default by
that Dude, Bank Y is supposed to pay me.
In Jan 2013, RBI updated the CDS guidelines. As per the revised guidelines-now, CDS will be
permitted also on
1. securities with original maturity up to one year like Commercial Papers, Certificates of
Deposit and non-convertible debentures
2. listed corporate bonds
3. unlisted but rated corporate bonds
But some junk company is issuing bonds, no one has ever heard of them.
So their bonds carry high-risk of default, hence people won’t be interested in buying it as
such.So,The company will offer extra-high return (profit) on their bonds, to attract people.
In short : Higher return is offered when Risk is HIGH.
M1= Currency with public + Current deposits with banking system + demand liabilites portion
of saving deposits with the banking system .
Governor of RBI + ministers + MP can have account with RBI
PS: sorry for the watermark, although my current id is not mrunalpatel.co.nr but mrunal.org.
2. In 3G auction spectrum, telecom companies took 70,000 cr. from Indian Banks to bid in the
auction. = lot of money flew out of the system. So for a time being, banks have less money to
give as loans to other customers = Credit crunch. (although that didnot happen) but suppose
Mukesh Ambani had called up a bank asking for 50000 cr. loan for acquiring a foreign company
next morning, Bank manager might have said ‘Sir, sorry we don’t have no money!”
1. A businessman wants to start new factory, but cannot get loans easily = slowdown in
economy.
2. A couple wants to buy home, but can’t get home-loan easily = slowdown in real-estate
sector.
3. A college kids wants a new bike, but his dad can’t get loan easily = slowdown in
automobile sector, but also good from climate-change angle. as people will be forced to
use public transport system ;-)
If such credit crunch continues for a long time, it’ll lead to job-losses, factories shutting down
and finally recession.
But sometimes credit crunch is a necessary evil, when there is too much liquidity (money) in the
market.
Too much liquidity = too much money = easy to get loans = people have more money in their
hands compared to the items available for purchase = hyper-inflation.
From the previous post about CRR & SLR, we can also say that an (Excessive) increase in CRR
and SLR will lead to Credit crunch.
if the CEO of Company A learned (prior to a public announcement) that Company A will be
taken over, and bought shares in Company A knowing that the share price would likely rise. In
this case he made profit, only because he knew the inside information.
Reliance Petroleum (RPL) was set up to build a refinery in Jamnagar, no longer exists and has
been merged with RIL.
In Nov.2007, RIL sold about 4% of Reliance Petroleum’s equity for Rs 4,023 crore.
According to SEBI findings, the sellers had same registered address and phone numbers as RIL
in Mumbai and Jamnagar; had opened their accounts with the brokers on the same day; share a
common email address; and had received margin financing from two other companies promoted
by Ambani Navi Mumbai SEZ Pvt. Ltd and Mumbai SEZ Pvt. Ltd.
Sebi’s alleges that the company — which controlled the agents dealing on its behalf — knew that
it intended to sell shares in the cash segment when it transacted in the futures segment so This
amounted to insider trading.
RIL made 500 cr. Rupees profit from these transection. So the possible penalty (if proven) will
be 500 x 3 = 1500 cr.
Why Devaluation ?
Like I showed ago, if Rupee is devalued, Americans can buy more diamond in 1 dollar = Export
increases.
China uses this strategy. They intentionally keep their Yuan weak compared to Dollar. So in 1
Dollar, the Americans can import more ‘quantity’ of products from China, compared to India.
This way, China is major exporter of most electronic and consumer items, because its cheap!
Thus, China made a huge Foreign Exchange reserve by exporting.
Currently China has more than 1400 Billion Dollars in their reserve! While India has only about
270 Billion Dollars in its reserve.
Then lets do Rupee Devaluation?
Now if you think we should also keep our Rupee very weak (like 1$= 5000 Rs.) to boost our
exports and get lot of Forex like Chinese… you are forgetting something.
When you declare that 1$= 5000 Rs. Then obviously, Americans will import a LOT from India.
But
→hen you’re buying Crude Oil Barrels from Middle East, you’ve to Pay in Dollars!!
Suppose if 1 Oil Barrel ‘s price was 1 Dollar, then now you’ll have to pay 5000 Rs. To buy just
one Barrel! (earlier you were paying only 50 Rs. To buy one barrel.)
Thus diesel & petrol becomes very costly, = road transport cost increased = milk, veggies and
everything transported by trucks become very costly.=inflation. So whatever money you gained
in export, you lose here.
That’s why you’ve to maintain a fine balance between your Rupee’s ↑alue against Dollar vs.
How much import items you need to run your Country + the well being of your citizens.
In short
1. Devaluation increase exports and decreases imports
2. Devaluation gives a price advantage to the exporting contry.
How does Currency Devaluation help in Solving BoP Deficit
- In BoP Deficit, you’re importing more than what you’re exporting.
- When your currency is devalued, your export increases (1$ buys 2 diamonds)
- And you decrease your import (people will stop using cars, when 1 Liter petrol is sold for
5000 Rs.)
- Thus Export is increased and import is decrease = Deficit solved!
3rd deal
There is economic boom in India. If you start a mobile phone factory in Noida, then you can
make a mobile only for 500 Rs and sell it for 1000 Rs. = 100% profit.
Now you’re a Rich American, and American banks are giving you only 18% interest rate for
your deposits. = you’re earning only 18% profit, so You want to invest your money in setting up
Mobile phone factory in India. (= Foreign direct investment/FDI) but for that you’ve to buy
land, cement, labors and they’ll accept payments in only Rupees. So you’ll go to Forex market,
to get your Dollars converted into Rupees.
$ Guy= take this 1$ and gimme 100 Rs.
Rs.Guy= I know you’re going to invest it in India and get 100% profit, plenty of Americans like
you are offering me Dollars. So give me 2$ and I’ll give you 100 Rs. Otherwise get lost from
here.
$ Guy= well that still better than parking my $$ in American banks and earn only 18% interest.
so ok, I accept, here are 2$, give me 100 Rs. [1$=50 Rs.]
(=Rs. Is revalued)
However things are not this straightforward in real life deals.
Many factors including rumors, Govt. policies, Tax rates, speculative purchase etc. will shift the
trends in currency trading, just like your sharemarket.
RBI and Central Govt. will not intervene in minor fluctuations. They’ll let the market forces of
supply and demand decide the exchange rates and play their games. But if there is major
problem, then RBI & Central Govt. will intervene to stop the heavy fluctuations.
Revaluation
· In the period 2000–2007, the Rupee stopped declining and stabilized ranging between 1 $ =
44–48 Rs..
· In 2007, it was 1$ = 39 Rs. , on sustained foreign investment flows into the country .
· This posed problems for major exporters and BPO firms located in the country.
· The trend has reversed lately with the 2008 financial crisis.
Table: Value of 1 Dollar to Rs.
(just to reference, you don’t have to remember every value in it.)
· 1970= 7.576
· 1975= 8.409
· 1980= 7.887
· 1985= 12.369
· 1990= 17.504
· 1995= 32.427
· 2000= 45.000
· 2006= 48.336
· 2007 (Oct)= 38.48
· 2008 (June)= 42.51
· 2008 (October)= 48.88
· 2009 (October)= 46.37
Now a sidenote- currency devaluation and building Forex Reserve.
China-America War
· Lets assume China and America go to war against each other. (again assuming nobody
intervenes, and nobody uses nuke missles.)
· Both have got plenty of money so buying Oil is not a problem for them.
· But China has 1400 Billion Dollars in their Forex reseve.
· Suppose it sends all those dollars in American market, then?
· Suppose China buys plenty of cars, food, etc from American market using the same
American Dollars?
· Too much liquidity in America= everyone has more $$ in pocket than the physical products
available in the market. = heavy inflation =1 potato will sell in 1000 $
· So American economy will collapse. And ultimately they’ll have to declare a ceasefire.
Infact China doesn’t even have to go on a ‘traditional war’, all they need to do is just flood
American market with Dollars without firing a bullet and let the economy of America collapse.
Americans will automatically accept their defeat. Same case, for China vs. France / Russia /
Britain/ Canada or any other 1st world nation.
Thus, having a big Foreign Exchange reserve – makes China a nation, feared and respected by
the Western World compared to India.
Low Forex Reserves, is one of the many reasons why India is not getting a permanent seat in UN
Security council.
For latest on this issue, click me to see the archive of all economy articles written by me so far
Non-Tariff barriers
When Desi players are given subsidies / preference over the foreign players by Govt. of
India.
For example,
o when Govt. is buying some phones/ Xerox Machines, in the tender it’ll mention
that only Domestic companies can fill the tender.
o making polices in such a way that its hard for foreign player to start factory /
introduce his product in India
o Intentionally setting the Quality standards so high that certain players can’t sell
their products here.
Here no tariff (=tax/money) is involved but still there is a barrier for foreign players.
That’s why its called Non-Tariff barrier.
Nations would put heavy custom duties on foriegn items. (to protect the domestic /
Swadeshi industries)- this is called ‘protectionism / Tarrif Barriers’
this all sounds good from patriotic point but
When there is less competition – products will be expansive & customer won’t have
much choice. for Example….. compare-
prices of Mobiles in 1999, with current prices!
features of current mobiles with 1999 (was there any MP3, radio,Camera, Color Screen
etc features, if yes- how expensive was it!)
talk-time plans (in 1999 it was about 7 Rs./minute + incoming wasn’t free, now its
around 50 Paisa / minute + Free incoming/)
Today we have this fun, because of globalization + import of foreign products & Govt. doesn’t
put high custom / import tax on it. (no high tarrif barriers)
So, The Primary objective of WTO is to remove the tarrif barriers / Custom duties. =
integrate all nations in international economy.
For this, WTO will consult with all member-nations, and will make legally binding agreements.
Why agreements?
there are total 19 Agreements in →TO, but most imp. are 3. (i’ll explain it later in this
article.)
these agreements talk about what is compulsory & what is non-compulsory for each
nation.
And what will be the penalties if a nation doesn’t follow these agreements.
Every Agreement has an ‘Annex’- in that you’ll find the detailed provisions & items
included in the agreements.
The Secretariat of WTO keeps an eye on every nation – seeing whether agreements are
followed or not.
But there will be some bad-nations who won’t play by the rules & try to cheat such agreements.
So second objective of →TO is ‘Dispute Resolution’
Now see the 3 most imp agreements of WTO. See this chart
Annex
#1 Annex : GATT
Now another mimp annex of GATT is, SCM = subsidies & counter veiling measures (=the Red,
Green & Amber list) – see this chart-
Apart from this, shipment inspection and anti-dumping are also included in GATT annex.
#3 : TRIPS
like I said ago, TRIPS doesn’t have any annex!
But TRIPS is very imp agreement in today’s world full of technologies-so lets see what’s it about
t.
Time limit
it came in force from 1st January 1995. and according to its provision
Developed nations have to make such laws within 1 year.
developing nations (like India) have to make such laws within 5 years.
Least Developing countries (like Zimbabway/ Somalia) were given time limit upto 11
years (=2006) , but now the time is extended upto 2016 for pharmaceutical patent laws.
Apart from above 3 agreements (GATT, GATS, TRIPS) other 3 imp agreements are-(see this
diagram)
Fair competition
Economic Reforms
to implement WTO Agreements, the 3rd world nations have to change their policies. = reform
(remember the pre-LPG Era – quota,licence,inspctor raj)
WTO dispute resolution is quicker than GATT (disputes have to be solved within 18
months)
in GATT, the bad-nation was free to determine its own penalty.
but in WTO, bad nation has to pay high penalties for not following the rules.
GATT talked only about goods (physical products) . WTO talks about services (phone
lines, BPO) & Intellectual property rights, along with those goods.
The working of WTO is more transparent.
In WTO, every nation has one vote only. Unlike IMF where rich nations have more
voting powers.
DOHA
what is DOHA?
Doha is capital city of a small nation called Qatar.
4th Ministerial conference of WTO was held in that city in Nov.2001.
and they (member nations) started talking about some new agreements & issues- and the talks
continued.. so this entire package is called ‘Doha round of talks.‘ aka “DDA = Doha
Development agenda.”
Fifth Ministerial Conference was held in Cancun, Mexico in September 2003.
the Doha conference failed because it ended with out any consensus.
Apart from this, India has insisted on a large number of special products that would not be
exposed to wider market opening
Like I said ago, more mobile companies are good. Because it increases employment. (you can be
a representative of some mobile co. or if you’ve retail store, you can sell pre-paid cards etc. or
you can start your own mobile repair shop and so on…)
But same is not true about agriculture sector, since 70% of India’s population depends on one
way or another with the agriculture sector. So if cheap foreign items are allowed, then it’ll create
huge problem for their employment. Its easy for each American farmer to produce tonnes of
grain (and sell his produce cheap), because every farmer has huge farms, latest machinery,
fertilizers & great seeds+ continuous water supply + subsidy. But same is not true in India.
However the problem of food-price inflation should also be taken into account. (= read editorials,
you’ll face such topics in mains / essay.)
Criticism of WTO
Mostly comes from environment activities.
1947:
· GATT (General Agreement on Trade & Tariffs) established
· It was criticized as being ‘RICH MEN’S CLUB’
1986
· Uruguay Round of Talks
· Service & Intellectual Property rights related topics included in the debate
· 1993, everyone agreed on it
2004
- 148 nations are members of WTO, covering 94% of international trade
Solution: Pulses
Marketing apparatus for items such as pulses and vegetables has to be revamped so that
producers are assured both of a minimum return on production and a share in higher
revenues when prices move up.
We need to work on developing varieties with shorter cropping cycles so that they can
be grown on the same land as wheat or rice without affecting their cropping cycles. This
kind of multi-cropping could reduce farmers’ risks substantially, while simultaneously
boosting the output of pulses. There has been limited success with this in the case of
chana and mung.
Agricultural Price Commission Chairman Ashok Gulati has suggested the possibility of
entering into long-term production contracts for pulses with countries like Tanzania,
which have fallow land and weather and soil conditions conducive to cultivating pulses.
This will enable us to bridge the domestic supply gap but with some certainty about
import prices.
Solution
A thriving food-processing industry could have provided producers an assured market
and relative price stability. But that, alas, is not the case since food processing is confined
to only about 2-3 per cent of fruit and vegetable output.
Thailand, in comparison, processes 30 per cent and Brazil 70 per cent.
we need huge investments both in food processing and in supply chain for perishables
itesm (i.e. the food items that cannot be stored forever, unlike gold).
Whether this investment could come through higher foreign investment or greater
domestic resources is for our policymakers to figure out.
For fruits, vegetables and milk we need large corporate participation in the post-harvest
supply chain. This would break the current monopoly of private traders, reduce the tiers
of intermediation and ultimately ensure a better farm gate price for the cultivator.
Solution : Milk
→e need an “Amul” in every state, providing procurement and marketing support to
millions of milk-producers who are now outside any safety net.
Conclusion
We need to de-risk the cultivation of critical items that are in short supply. This would ensure
that the farmers are willing and able to use better inputs. The problem of food inflation will
vanish by itself.
For example, you bought a Government of India bond. It says Rs.100 / 4% / 2014.
That is, you paid the “MRP” Rs.100 to Indian Government, and every year they’ll pay you 4% of
the Rs.100 until 2014. And on 2014, they’ll also repay you the entire Principal of Rs.100
Suppose things go nice and smooth until 2012. But Then
a. There is heavy inflation, you can’t buy even peppermint for Rs.4 and or
b. There is a rumor that Government will default and its payment and won’t repay you any
money.
In either case, you want to “Exit” from game before its too late. You want to sell the bond to
another person and recover whatever money possible and reinvest that money in something even
safer and more profitable, for example starting your own Saas-bahu serial. It doesn’t require lot
of brain or money (*if you ask the actresses to bring their own makeup, expensive sarees and
jewellary), and still you get to earn plenty of ad-revenue from anti-aging and skin whitening
creams.
So, you come to sell this bond to me. But I also read the newspapers (except The Hindu), so I
know things are not good with Indian Government or economy, so I won’t pay you Rs.100 but
only Rs.90 for your bond. You’re not in a position to negotiate, you’re panicked, you just want to
exit from this game and you fear that if you continue to hold this bond, 15 days from now,
people won’t even pay you Rs.50 for it.
Thus I buy the Bond worth Oringally “MRP” of Rs.100, for Rs.90 from you.
Question.
why would I do that? Why would I buy a “not so good-looking” bond from you?
Two reasons
1. My profit is more than yours! How? Because, You invested Rs.100 and get Rs.4 every
year, so your profit (technically known as Bond-yield) is (4/100) x 100 = 4%.
1. While I invested Rs.90 and get Rs.4 every year, so my profit (Yield) is (4/90) x
100 =4.44…% which is better than your 4% yield.
2. I may be speculating that after a month or two, the situation with Indian economy /
Inflation / Government will improve and then I would be able to buy a peppermint for
Rs.4
around 1,2 million people are employed by the Greece Government —this includes
clerks, teachers, doctors, and priests—which amounts to almost 27 percent of the total
working population of the country (France24 2010). Thus one out of four working Greeks
is employed wholly or partly in the public sector. More than 80 percent of public
expenditure goes to the wages, salaries and pensions of the civil servants.
Getting a civil service job in Greece is widely perceived as being granted a sinecure and
not as a contractual obligation to work. The resulting inefficiency of the civil service
reinforced a system of promotions based on seniority and not on merit or talent. One can
only move up the ladder more quickly if one has good connections with politicians and
trade unionists.
This huge bureaucracy just keeps making laws. From 1974 onwards, 100,000 laws were
passed around 2857 per year!
Then there are rules limiting competition. You pay a fees to lawyers for everything. You
need a degree licence for doing anything in Greece
In Greece one can find a whole set of laws mandating opening and closing hours of
various enterprises, or defining the geographical proximity where two similar
establishments can operate, setting minimal prices for various professional services,
issuing licenses and preventing or limiting competition.
Similar restrictions apply to the operation of drugstores. You are only allowed to own
and operate a drugstore in Greece if you hold a degree in pharmacology. The same
applies to opticians. You can only own a shop selling spectacles if you hold a degree in
optics!
If you have a business and you want to advertise your brand or product you have to pay
an amount equal to 20 percent of the advertising expenses to the pension funds of the
journalists.
Each time you buy a ticket on a boat, 10 percent goes to the pension fund of the harbor
workers. A part of the ticket price that covers the insurance of passengers goes to the
sailors’ social security fund.
If you sell supplies to the Army, you will have to pay 4 percent of the money to the
pension funds of the military officers. When you buy a ticket at a soccer game, 25 percent
of the amount goes to the pension funds of the police.
It is estimated that there are more than 1,000 such levies whose total cost amounts,
according to some calculations, to over 30 percent of the country’s GDP
Greece is a society dominated by rent seeking rather than wealth producing activities.
The fact that two thirds of the electorate is living partly or wholly on government hand-
outs significantly affects the ideological narratives that are popular in the country.
In short, Greece is not a country but Air India running MNREGA. And adding insult to the
injury, due to the recession in USA, the tourism and export industry of Greece had took a huge
setback.
TimeLine of Events
January 2010
An EU report starts talking about the irregularities in Greek accounting procedures.
Concern starts to build about all the heavily indebted countries in Europe – Portugal,
Ireland, Greece and Spain (PIGS).
A.Raja could give the loans to save these countries but stupid Indian media gets him arrested,
while Mohan continues to loop his repeated tape on every 15th August speech that Naxalites are
the biggest thread to India, while Pranab continues to loop his tape that everything bad with
Indian economy is because of “Global Situation”.Anyways Fast forward to
1. The right wing party: they say we continue in Eurozone, agree to their demand, cut more
jobs and public spending for receiving more bailout money.
2. The Left Wing Party: they want to renegotiate the loan-terms with EU and IMF and
donot want to implement any austerity measures. They’d take a hostile stand against EU,
although in media they say “→e want to continue in Eurozone” but their agenda and
gesture speaks otherwise.
See this same like Paki PM comes to India and speaks in one tone but when he’s back in an
election rally in Lahore he’d be speaking an a totally different tone about Kashmir. And there
he’ll say India is not cooperating with us and India is the bad guy.
Experts feared that public of Greece will elect anti-bailout parties that reject the spending cuts
(austerity measures) suggested by EU and IMF. So this newly elected party will try to
renegotiate the bailout terms with EU / IMF to such a ridiculous level, that negotiations will
break off and then Greece will exit from EU.
Thankfully for the time being, crisis has been averted as the right wing pro-EU / bailout party has
gained the majority.
Meltdown
Greece's banks would be facing collapse. People's savings would be frozen. Many
businesses would go bankrupt. The cost of imports – which in Greece includes a lot of its
food and medicine – could double, triple or even quadruple as the new drachma currency
is introduced.
With their banks bust, Greeks would find it impossible to borrow, making it impossible
for a while to finance the import of some goods at all.
One of Greece's biggest industries, tourism, could be disrupted by political and social
turmoil (and rioting).
In the longer run, Greece's economy should benefit from having a much more
competitive exchange rate. But its underlying problems, including the government's
chronic overspending, may not go away.
Businesshouses go Bankrupt
Greek companies who still owe big debts in euros to foreign lenders, but whose main
sources of income are converted to devalued drachmas, will be unable to repay their
debts. Many businesses will be left insolvent – their debts worth more than the value of
everything they own – and will be facing bankruptcy. Foreign lenders and business
partners of Greek companies will be looking at big losses.
Some contracts governed by Greek law are converted into drachmas (=old currency of
Greece before Euro), while other foreign law contracts remain in euros. Many contracts
could end up in litigation over whether they should be converted or not.
Recession in Europe
Businesses, afraid for the euro's future, may cut investment.
Faced bad news in the press, ordinary people may cut back their own spending. = less
demand= could push the eurozone into a deep recession.
The euro would lose value in the currency markets, providing some relief for the
eurozone by making its exports more competitive in international trade. But the flipside is
that the rest of the world will become less competitive – especially the US, UK and Japan
– undermining their own weak economies.
Even China, whose economy is already slowing sharply, could be pushed into a
recession. (Because people in Europe will cut down their spending = less demand for
Chinese goods)
Make sure you’ve read my earlier article on Eurozone crisis, before proceeding further.
Eurozone
9. Ireland
1. Austria
10. Italy
2. Belgium
11. Luxembourg
3. Cyprus
12. Malta
4. Estonia
13. Netherlands
5. Finland
14. Portugal
6. France
15. Slovakia
7. Germany
16. Slovenia
8. Greece
17. Spain
Note: There are some non-EU countries also using Euro as their official currency, for example
San Marino, Kosovo and Montenegro. But since they’re not members of European Union (EU),
they don’t fall under the definition of Eurozone.
Guilty
ACC, Ambuja Cements, UltraTech Cement and JK Cement, Lafarge India, India
Cements, Madras Cements, Century Cements, Binani Cement and Jaiprakash Associates.
Punishment
Competition Commission of India (CCI) has slapped a penalty of over Rs 6,300 crore on
10 cement companies
The companies have been asked to deposit the penalty within 90 days.
History
PFRDA, set up as a regulatory body for pension sector, is yet to get statutory powers as
the Bill pertaining to that effect lapsed in Parliament with the expiry of last Lok Sabha in
2009.
Interim PFRDA is functioning since 2003 through an executive order.
It was introduced in the Lok Sabha on March 24, 2011 was referred to the Standing
Committee headed by senior BJP leader and former Finance Minister Yashwant Sinha for
scrutiny.
Committee wanted the government to specify the FDI cap in the legislation itself, besides
providing for minimum guaranteed return to pension subscribers.
What is NPS?
NPS is a ‘defined contribution’ scheme for all central government employees who joined
after January 2004. It is implemented through a combination of retailers, pension fund
managers, and a record keeper.
Under the NPS, every subscriber will have an individual pension account, which will be
portable across job changes. The subscribers will choose fund managers and schemes to
manage their pension wealth. They will also have the option of switching schemes and
fund managers.
The NPS was extended to all general citizens through central government notification in
2009.
Mock Question
coal
1. There is a huge gap in demand and supply of the coal, and it is negatively affecting the
IIP and WPI Index, and electricity supply.
a. How does coal price affect WPI? Click me to understand.
b. What is IIP? Click me to understand.
2. Gas output has declined, directly affecting the CNG and Fertilizer prices.
Oil Price
Higher petrol / diesel price has snowballing effect on entire economy. It increases the
cost of production and transport of various goods (milk, vegetables ) = Supply side
inflation. What is Supply side inflation? Click me to understand.
On one hand Oil companies say we are making losses so we’ll hike the prices, one the
other hand Government (At union and state level) keep high taxes on fuels to finance
their bogus Development schemes. So you and I are crushed from both the sides paying
Rs. 80 per litre of petrol.
Gold Import
Already explained in the previous article, how Gold import increases our Current Account
Deficit, thus increasing the demand of dollar = rupee downfall. Hence there should be a heavy
excise duty on gold, to prevent its consumption.
Aviation Fuel
high cost of aviation turbine fuel (ATF)
State taxes upto 33% tax on ATF, thus airlines are not generating decent profit. Some are
exiting, some are cutting down the staff.
Proposal for allowing FDI in domestic airlines = stuck
Air India = loss making, financed by tax payer’s money.
Telecom
Telecom and internet are essential to generate more business and employment.
But the foreign investors are exiting because of the flawed implementation and court
orders.
Because of the policy uncertainty in the telecom sector, there is very low investment
thefore prices of mobile connection and broadband internet are extremely high compared
to Japan or USA. It directly affects the profit margin of cybercafe / call centre and other
similar businesses.
Credit
IndianExpress’s business section dated 7th June 2012
Restrcturing, elaboration by You know who.
Why is it in news?
With passing of Payment and Settlement systems, Act 2007, all non-bank entities
(NBFCs) currently issuing prepaid payment instruments and those proposing to issue
such payment instruments would have to approach Reserve Bank for authorization.
In 2009, RBI had allowed Pre-Paid card holders to purchase travel tickets, insurance and
pay water, electricity and telephone bills.
Now in June 2012, Reserve Bank has allowed holders of pre-paid payment cards, to
deposits school and college fees and pay taxes in addition to buying rail and air tickets
within the prescribed limit of Rs 10,000. (Banks and Companies are allowed to issue
such pre-paid cards without fullfilling the KYC : Know your customer requirement.)
Under the current structure, TDS of 10 per cent is levied at every level of software
distribution chain from master distributor to retailer and to the final consumer.
Problems= Lot of paper work + Low profit margins for the software makers.
(TDS already explained in Vodafone case article)
AGM
An annual general meeting, which companies hold each year for shareholders to vote on
important issues such as dividend payments and appointments to the company’s board of
directors. If an emergency decision is needed – for example in the case of a takeover – a
company may also call an exceptional general meeting of shareholders or EGM.
Assets
Things that provide income or some other value to their owner.
Fixed assets (also known as long-term assets) are things that have a useful life of more
than one year, for example buildings and machinery; there are also intangible fixed
assets, like the good reputation of a company or brand.
Current assets are the things that can easily be turned into cash and are expected to be
sold or used up in the near future.
Austerity
Economic policy aimed at reducing a government’s deficit (or borrowing). Austerity can be
achieved through increases in government revenues – primarily via tax rises – and/or a reduction
in government spending or future spending commitments.
Bailout
The financial rescue of a struggling borrower. A bailout can be achieved in various ways:
Bankruptcy
A legal process in which the assets of a borrower who cannot repay its debts – which can be an
individual, a company or a bank – are valued, and possibly sold off (liquidated), in order to repay
debts.
→here the borrower’s assets are insufficient to repay its debts, the debts have to be written off.
This means the lenders must accept that some of their loans will never be repaid, and the
borrower is freed of its debts. Bankruptcy varies greatly from one country to another, some
countries have laws that are very friendly to borrowers, while others are much more friendly to
lenders.
Base rate
The key interest rate set by the Bank of England. It is the overnight interest rate that it charges to
banks for lending to them. The base rate – and expectations about how the base rate will change
in the future – directly affect the interest rates at which banks are willing to lend money in
sterling.
Basel accords
The Basel Accords refer to a set of agreements by the Basel Committee on Bank Supervision
(BCBS), which provide recommendations on banking regulations. The purpose of the accords is
to ensure that financial institutions have enough capital to meet obligations and absorb
unexpected losses.
Basis point
One hundred basis points make up a percentage point, so an interest rate cut of 25 basis points
might take the rate, for example, from 3% to 2.75%.
BBA
The British Bankers’ Association is an organisation representing the major banks in the UK –
including foreign banks with a major presence in London. It is responsible for the daily
Liborinterest rate which determines the rate at which banks lend to each other.
Bear market
In a bear market, prices are falling and investors, fearing losses, tend to sell. This can create a
self-sustaining downward spiral.
Bill
A debt security- or more simply an IOU. It is very similar to a bond, but has a maturity of less
than one year when first issued.
BIS
The Bank for International Settlements is an international association of central banks based in
Basel, Switzerland. Crucially, it agrees international standards for the capital adequacyof banks –
that is, the minimum buffer banks must have to withstand any losses. In response to the financial
crisis, the BIS has agreed a much stricter set of rules. As these are the third such set of
regulations, they are known as “Basel III”.
Bond
A debt security, or more simply, an IOU. The bond states when a loan must be repaid and what
interest the borrower (issuer) must pay to the holder. They can be issued by companies, banks or
governments to raise money. Banks and investors buy and trade bonds.
BRIC
An acronym used to describe the fast-growing economies of Brazil, Russia, India and China.
Bull market
A bull market is one in which prices are generally rising and investor confidence is high.
Capital
For investors, it refers to their stock of wealth, which can be put to work in order to earn income.
For companies, it typically refers to sources of financing such as newly issued shares.
For banks, it refers to their ability to absorb losses in their accounts. Banks normally obtain
capital either by issuing new shares, or by keeping hold of profits instead of paying them out as
dividends. If a bank writes off a loss on one of its assets – for example, if it makes a loan that is
not repaid – then the bank must also write off a corresponding amount of its capital. If a bank
runs out of capital, then it is insolvent, meaning it does not have enough assets to repay its debts.
A banking regulator – typically the central bank – sets a minimum capital adequacy ratio for the
banks in each country, and an international minimum standard is set by the BIS. A bank that fails
to meet this minimum standard must be recapitalised, for example by issuing new shares.
Capitulation
(market)
. The point when a flurry of panic selling induces a final collapse – and ultimately a bottoming
out – of prices.
Carry trade
Typically, the borrowing of currency with a low interest rate, converting it into currency with a
high interest rate and then lending it. The most common carry trade currency used to be the yen,
with traders seeking to benefit from Japan’s low interest rates. Now the dollar, euro and pound
can also serve the same purpose. The element of risk is in the fluctuations in the currency
market.
Chapter 11
The term for bankruptcy protection in the US. It postpones a company’s obligations to its
creditors, giving it time to reorganise its debts or sell parts of the business, for example.
Commercial paper
Unsecured, short-term loans taken out by companies. The funds are typically used for working
capital, rather than fixed assets such as a new building. The loans take the form of IOUs that can
be bought and traded by banks and investors, similar to bonds.
Commodities
Commodities are products that, in their basic form, are all the same so it makes little difference
from whom you buy them. That means that they can have a common market price. You would be
unlikely to pay more for iron ore just because it came from a particular mine, for example.
Contracts to buy and sell commodities usually specify minimum common standards, such as the
form and purity of the product, and where and when it must be delivered.
The commodities markets range from soft commodities such as sugar, cotton and pork bellies to
industrial metals such as iron and zinc.
Core inflation
A measure of CPI inflation that strips out more volatile items (typically food and energy prices).
The core inflation rate is watched closely by central bankers, as it tends to give a clearer
indication of long-term inflation trends.
Correction (market)
A short-term drop in stock market prices. The term comes from the notion that, when this
happens, overpriced or underpriced stocks are returning to their “correct” values.
CPI
The Consumer Prices Index is a measure of the price of a bundle of goods and services from
across the economy. It is the most common measure used to identify inflation in a country. CPI
is used as the target measure of inflation by the Bank of England and the ECB.
Credit crunch
A situation where banks and other lenders all cut back their lending at the same time, because of
widespread fears about the ability of borrowers to repay.
If heavily-indebted borrowers are cut off from new lending, they may find it impossible to repay
existing debts. Reduced lending also slows down economic growth, which also makes it harder
for all businesses to repay their debts.
Credit rating
The assessment given to debts and borrowers by a ratings agency according to their safety from
an investment standpoint – based on their creditworthiness, or the ability of the company or
government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a
company that has already defaulted. Ratings of BBB- or higher are considered “investment
grade”. Below that level, they are considered “speculative grade” or more colloquially as junk.
Currency peg
Pegs can also be used to help keep a currency weak in order to gain a competitive advantage in
trade and boost exports. China has been accused of doing this. The People’s Bank of China has
accumulated trillions of dollars in US government bonds, because of its policy of selling yuan
and buying dollars – a policy that has the effect of keeping the yuan weak.
Dead cat bounce
A phrase long used on trading floors to describe the small rebound in market prices typically
seen following a sharp fall.
Debt restructuring
A situation in which a borrower renegotiates the terms of its debts, usually in order to reduce
short-term debt repayments and to increase the amount of time it has to repay them. If lenders do
not agree to the change in repayment terms, or if the restructuring results in an obvious loss to
lenders, then it is generally considered a default by the borrower. However, restructurings can
also occur through a debt swap – a voluntary agreement by lenders to switch existing debts for
new debts with easier easier repayment terms – in which case it can be very hard to determine
whether the restructuring counts as a default.
Default
Strictly speaking, a default occurs when a borrower has broken the terms of a loan or other debt,
for example if a borrower misses a payment. The term is also loosely used to mean any situation
that makes clear that a borrower can no longer repay its debts in full, such as bankruptcy or a
debt restructuring.
A default can have a number of important implications. If a borrower is in default on any one
debt, then all of its lenders may be able to demand that the borrower immediately repay them.
Lenders may also be required to write off their losses on the loans they have made.
Deficit
The amount by which spending exceeds income over the course of a year.
In the case of trade, it refers to exports minus imports. In the case of the government budget, it
equals the amount the government needs to borrow during the year to fund its spending. The
government’s “primary” deficit means the amount it needs to borrow to cover general
government expenditure, excluding interest payments on debts. The primary deficit therefore
indicates whether a government will run out of cash if it is no longer able to borrow and decides
to stop repaying its debts.
Deflation
Negative inflation – that is, when the prices of goods and services across the whole economy are
falling on average.
Deleveraging
A process whereby borrowers reduce their debtloads. Primarily this occurs by repaying debts. It
can also occur by bankruptcies and debt defaults, or by the borrowers increasing their incomes,
meaning that their existing debtloads become more manageable. Western economies are
experiencing widespread deleveraging, a process associated with weak economic growth that is
expected to last years. Households are deleveraging by repaying mortgage and credit card debts.
Banks are deleveraging by cutting back on lending. Governments are also beginning to
deleverage via austerity programmes – cutting spending and increasing taxation.
Derivative
A financial contract which provides a way of investing in a particular product without having to
own it directly. For example, a stock market futures contract allows investors to make bets on the
value of a stock market index such as the FTSE 100 without having to buy or sell any shares.
The value of a derivative can depend on anything from the price of coffee to interest rates or
what the weather is like. Credit derivatives such as credit default swaps depend on the ability of a
borrower to repay its debts. Derivatives allow investors and banks to hedge their risks, or to
speculate on markets. Futures, forwards, swaps and options are all types of derivatives.
Dividends
Dodd-Frank
Legislation enacted by the US in 2011 to regulate the banks and other financial services. It
includes:
Double-dip recession
A recession that experiences a limited recovery then dips back into recession. The exact
definition is unclear, as the definition of what counts as a recession varies between countries. A
widely-accepted definition is one where the initial recovery fails to take total economic output
back up to the peak seen before the recession began.
EBA
The European Banking Authority is a pan-European regulator responsible created in 2010 to
oversee all banks within the European Union. Its powers are limited, and it depends on national
bank regulators such as the UK’s Financial Services Authority to implement its
recommendations. It has already been active in laying down new rules on bank bonuses and
arranging the European bank stress tests.
Ebitda
Earnings (or profit) before interest payments, tax, depreciation and amortisation. It is a measure
of the cashflow at a company available to repay its debts, and is much more important indicator
for lenders than the borrower’s profits.
EBRD
The European Bank for Reconstruction and Development is a similar institution to the World
Bank, set up by the US and European countries after the fall of the Berlin Wall to assist in
economic transition in Eastern Europe. Recently the EBRD’s remit has been extended to help the
Arab countries that emerged from dictatorship in 2011.
ECB
The European Central Bank is the central bank responsible for monetary policy in the eurozone.
It is headquartered in Frankfurt and has a mandate to ensure price stability – which is interpreted
as an inflation rate of no more than 2% per year.
EIB
The European Investment Bank is the European Union’s development bank. It is owned by the
EU’s member governments, and provides loans to support pan-European infrastructure,
economic development in the EU’s poorer regions and environmental objectives, among other
things.
ESM
The European Stability Mechanism is a 500bn-euro rescue fund that will replace the EFSF and
the EFSM from June 2013. Unlike the EFSF, the ESM is a permanent bail-out arrangement for
the eurozone. Unlike the EFSM, the ESM will only be backed by members of the eurozone, and
not by other European Union members such as the UK.
EFSF
The European Financial Stability Facility is currently a temporary fund worth up to 440bn euros
set up by the eurozone in May 2010. Following a previous bail-out of Greece, the EFSF was
originally intended to help other struggling eurozone governments, and has since provided rescue
loans to the Irish Republic and Portugal. More recently, the eurozone agreed to broaden the
EFSF’s mandate, for example by allowing it to support banks.
EFSM
The European Financial Stability Mechanism is 60bn euros of money pledged by the member
governments of the European Union, including 7.5bn euros pledged by the UK. The EFSM has
been used to loan money to the Irish Republic and Portugal. It will be replaced by the ESM from
2013.
Equity
The value of a business or investment after subtracting any debts owed by it. The equity in a
company is the value of all its shares. In a house, your equity is the amount your house is worth
minus the amount of mortgage debt that is outstanding on it.
Eurobond
A term increasingly used for the idea of a common, jointly-guaranteed bond of the eurozone
governments. It has been mooted as a solution to the eurozone debt crisis, as it would prevent
markets from differentiating between the creditworthiness of different government borrowers.
Confusingly and quite seperately, “Eurobond” also refers to a bond issued in any currency in the
international markets.
Eurozone
The 17 countries that share the euro.
Federal Reserve
The US central bank.
A new committee at the Bank of England set up in 2010-11 in response to the financial crisis. It
has overall responsibility for ensuring major risks do not build up within the UK financial
system.
Fiscal policy
The government’s borrowing, spending and taxation decisions. If a government is worried that it
is borrowing too much, it can engage in austerity; raising taxes and/or cutting spending.
Alternatively, if a government is afraid that the economy is going into recession it can engage in
fiscal stimulus, which can include cutting taxes, raising spending and/or raising borrowing.
FTSE 100
An index of the 100 companies listed on the London Stock Exchange with the biggest market
value. The index is revised every three months.
Fundamentals
Fundamentals determine a company, currency or security’s value in the long-term. A company’s
fundamentals include its assets, debt, revenue, earnings and growth.
Futures
A futures contract is an agreement to buy or sell a commodity at a predetermined date and price.
It could be used to hedge or to speculate on the price of the commodity. Futures contracts are a
type of derivative, and are traded on an exchange.
G7
The group of seven major industrialised economies, comprising the US, UK, France, Germany,
Italy, Canada and Japan.
G8
The G7 plus Russia.
G20
The G8 plus developing countries that play an important role in the global economy, such as
China, India, Brazil and Saudi Arabia. It gained in significance after leaders agreed how to tackle
the 2008-09 financial crisis and recession at G20 gatherings.
GDP
Gross domestic product. A measure of economic activity in a country, namely of all the services
and goods produced in a year. There are three main ways of calculating GDP - through output,
through income and through expenditure.
Glass-Steagall
A US law dating from the 1930s Great Depression that separated ordinary commercial banking
from investment banking. Like the UK’s planned ring-fence, the law was intended to protect
banks which lend to consumers and businesses – deemed vital to the US economy – from the
risky speculation of investment banks. The law was repealed in 1999, largely to enable the
creation of the banking giant Citigroup – a move that many commentators say was a contributing
factor to the 2008 financial crisis.
Haircut
A reduction in the value of a troubled borrower’s debts, imposed on, or agreed with, its lenders
as part of a debt restructuring.
Hedge fund
A private investment fund which uses a range of sophisticated strategies to maximise returns
including hedging, leveraging and derivatives trading. Authorities around the world are working
on ways to regulate them.
Hedging
Making an investment to reduce the risk of price fluctuations to the value of an asset. Airlines
often hedge against rising oil prices by agreeing in advance to to buy their fuel at a set price. In
this case, a rise in price would not harm them – but nor would they benefit from any falls.
IIF
The Institute of International Finance is a global trade association of the major banks.
IMF
The International Monetary Fund is an organisation set up after World War II to provide
financial assistance to governments. Since the 1980s, the IMF has been most active in providing
rescue loans to the governments of developing countries that run into debt problems. Since the
financial crisis, the IMF has also provided rescue loans, alongside the European Union
governments and the ECB, to Greece, the Irish Republic and Portugal. The IMF is traditionally –
and of late controversially – headed by a European.
Impairment charge
The amount written off by a company when it realises that it has valued an asset more highly
than it is actually worth.
A commission chaired by economist Sir John Vickers set up in 2010 by the UK government in
order to make recommendations on how to reform the banking system. The commission reported
back in September 2011, and called for:
a ring-fence, to separate and safeguard the activities of banks that were deemed essential
to the UK economy
measures to increase the transparency of bank accounts and competition among banks,
including the creation of a new major High Street bank
much higher capital requirements for the big banks so that they can better absorb future
losses
Inflation
The upward price movement of goods and services.
Insolvency
A situation in which the value of a borrower’s assets is not enough to repay all of its debts. If a
borrower can be shown to be insolvent, it normally means they can be declared bankrupt by a
court.
Investment bank
Investment banks provide financial services for governments, companies or extremely rich
individuals. They differ from commercial banks where you have your savings or your mortgage.
Traditionally investment banks provided underwriting, and financial advice on mergers and
acquisitions, and how to raise money in the financial markets. The term is also commonly used
to describe the more risky activities typically undertaken by such firms, including trading
directly in financial markets for their own account.
Junk bond
A bondwith a credit rating of BB+ or lower. These debts are considered very risky by the ratings
agencies. Typically the bonds are traded in markets at a price that offers a very high yield(return
to investors) as compensation for the higher risk of default.
Keynesian economics
The economic theories of John Maynard Keynes. In modern political parlance, the belief that the
state can directly stimulate demand in a stagnating economy, for instance, by borrowing money
to spend on public works projects such as roads, schools and hospitals.
Lehman Brothers
A US investment bank, whose collapse in September 2008 sparked the most intense phase of the
financial crisis.
Leverage
Leverage, or gearing, means using debt to supplement investment. The more you borrow on top
of the funds (or equity) you already have, the more highly leveraged you are. Leverage can
increase both gains and losses. Deleveraging means reducing the amount you are borrowing.
Liability
Libor
London Inter Bank Offered Rate. The rate at which banks in London lend money to each other
for the short-term in a particular currency. A new Libor rate is calculated every morning by
financial data firm Thomson Reuters based on interest rates provided by members of the British
Bankers Association.
Limited liability
Confines an investor’s loss in a business to the amount of capital they invested. If a person
invests £100,000 in a company and it goes under, they will lose only their investment and not
more.
Liquidation
A process in which assets are sold off for cash. Liquidation is often the outcome for a company
deemed irretrievably loss-making. In that case, its assets are sold off individually, and the cash
proceeds are used to repay its lenders. In liquidation, a company’s lenders and other claimants
are given an order of priority. Usually the tax authorities are the first to be paid, while the
company’s shareholders are the last, typically receiving nothing.
Liquidity
How easy something is to convert into cash. Your current account, for example, is more liquid
than your house. If you needed to sell your house quickly to pay bills you would have to drop the
price substantially to get a sale.
Liquidity crisis
A situation in which it suddenly becomes much more difficult for banks to obtain cash due to a
general loss of confidence in the financial system. Investors (and, in the case of a bank run, even
ordinary depositors) may withdraw their cash from banks, while banks may stop lending to each
other, if they fear that some banks could go bust. Because most of a bank’s money is tied up in
loans, even a healthy bank can run out of cash and collapse in a liquidity crisis. Central banks
usually respond to a liquidity crisis by acting as “lender of last resort” and providing emergency
cash loans to the banks.
Liquidity trap
A situation described by economist John Maynard Keynesin which nervousness about the
economy leads everybody to cut back on their spending and to hold cash, even if the cash earns
no interest. The widespread fall in spending undermines the economy, which in turn makes
households, banks and companies even more nervous about spending and investing their money.
The problem becomes particularly intractable when – as in Japan over the last 20 years – the
weak spending leads to falling prices, which creates a stronger incentive for people to hold onto
their cash, and also makes debts more difficult to repay. In a liquidity trap, monetary policy can
become useless, and Keynes said that the onus is on governments to increase their spending.
Loans-to-deposit ratio
For financial institutions, the sum of their loans divided by the sum of their deposits. It is used as
a way of measuring a bank’s vulnerability to the loss of confidence in a liquidity crisis. Deposits
are typically guaranteed by the bank’s government and are therefore considered a safer source of
funding for the bank. Before the 2008 financial crisis, many banks became reliant on other
sources of funding – meaning they had very high loan-to-deposit ratios. When these other
sources of funding suddenly evaporated, the banks were left critically short of cash.
Mark-to-market (MTM)
Recording the value of an asseton a daily basis according to current market prices. So for a
Greek governmentbond, the MTM is how much it could be sold for today. Banks are not
required to mark to market investments that they intend to hold indefinitely (in what is called the
“banking book” in accounting jargon). Instead, these investments are valued at the price at which
they were originally purchased, minus any impairment charges – which might arise following a
defaultby the borrower.
Monetary policy
The policies of the central bank. A central bank has an unlimited ability to create new money.
This allows it to control the short-term interest rate, as well as to engage in unorthodox policies
such as quantitative easing – printing money to buy up government debts and other assets.
Monetary policy can be used to control inflation and to support economic growth.
Money markets
Global markets dealing in borrowing and lending on a short-term basis.
Monoline insurance
Monolines were set up in the 1970s to insure against the risk that a bondwill default. Companies
and public institutions issue bonds to raise money. If they pay a fee to a monoline to insure their
debt, the guarantee helps to raise the credit rating of the bond, which in turn means the borrower
can raise the money more cheaply.
MPC
The Monetary Policy Committee of the Bank of England is responsible for setting short-term
interest rates and other monetary policy in the UK, such as quantitative easing.
Negative equity
Refers to a situation in which the value of your house is less than the amount of the mortgage
that still has to be paid off.
OECD
The Organisation for Economic Co-operation and Development is an association of
industrialised economies, originally set up to administer the Marshall Plan after World War II.
The OECD provides economic research and statistics, as well as policy recommendations, for its
members.
Options
A type of derivativethat gives an investor the right to buy (or to sell) something – anything from
a share to a barrel of oil – at an agreed price and at an agreed time in the future. Options become
much more valuable when markets are volatile, as they can be an insurance against price swings.
Ponzi scheme
Similar to a pyramid scheme, an enterprise where funds from new investors – instead of genuine
profits – are used to pay high returns to current investors. Named after the Italian fraudster
Charles Ponzi, such schemes are destined to collapse as soon as new investment tails off or
significant numbers of investors simultaneously wish to withdraw funds.
Preference shares
A class of shares that usually do not offer voting rights, but do offer a superior type of dividend,
paid ahead of dividends to ordinary shareholders. Preference shareholders often also have
somewhat better protection when a company is liquidated.
Prime rate
A term used primarily in North America to describe the standard lending rate of banks to most
customers. The prime rate is usually the same across all banks, and higher rates are often
described as “x percentage points above prime”.
PPI
The Producer Prices Index, a measure of the wholesale prices at which factories and other
producers are able to sell goods in an economy.
Profit warning
When a company issues a statement indicating that its profits will not be as high as it had
expected. Also profits warning.
Quantitative easing
Central banks increase the supply of money by “printing” more. In practice, this may mean
purchasing government bonds or other categories of assets, using the new money. Rather than
physically printing more notes, the new money is typically issued in the form of a deposit at the
central bank. The idea is to add more money into the system, which depresses the value of the
currency, and to push up the value of the assets being bought and to lower longer-term interest
rates, which encourages more borrowing and investment. Some economists fear that quantitative
easing can lead to very high inflation in the long term.
Rating
The assessment given to debts and borrowers by a ratings agency according to their safety from
an investment standpoint – based on their creditworthiness, or the ability of the company or
government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a
company that has already defaulted. Ratings of BBB- or higher are considered “investment
grade”. Below that level, they are considered “speculative grade” or more colloquially as junk.
Rating agency
A company responsible for issuing credit ratings. The major three rating agencies are Moody’s,
Standard & Poor’s and Fitch.
Recapitalisation
To inject fresh equityinto a firm or a bank, which can be used to absorb future losses and reduce
the risk of insolvency. Typically this will happen via the firm issuing new shares. The cash raised
can also be used to repay debts. In the case of a government recapitalising a bank, it results in the
government owning a stake in the bank. In an extreme case, such as Royal Bank of Scotland, it
can lead to nationalisation, where the government owns a majority of the bank.
Recession
A period of negative economic growth. In most parts of the world a recession is technically
defined as two consecutive quarters of negative growth – when economic output falls. In the
United States, a larger number of factors are taken into account, such as job creation and
manufacturing activity. However, this means that a US recession can usually only be defined
when it is already over.
Repo
A repurchase agreement – a financial transaction in which someone sells something (for example
a bond or a share) and at the same time agrees to buy it back again at an agreed price at a later
day. The seller is in effect receiving a loan. Repos were heavily used by investment banks such
as Lehman Brothers to borrow money prior to the financial crisis.
Repos are also used by speculators for short selling. The speculator can buy a share through a
repo and then immediately sell it again. At a later date the speculator hopes to buy the share back
from the market at a cheaper price, before selling it back again at the pre-agreed price via the
repo.
Reserve currency
A currency that is widely held by foreign central banks around the world in their reserves. The
US dollar is the pre-eminent reserve currency, but the euro, pound, yen and Swiss franc are also
popular.
Reserves
Assets accumulated by a central bank, which typically comprise gold and foreign currency.
Reserves are usually accumulated in order to help the central bank defend the value of the
currency, particularly when its value is pegged to another foreign currency or to gold.
Retained earnings
Profits not paid out by a company as dividends and held back to be reinvested.
Rights issue
When a public company issues new shares to raise cash. The company might do this for a
number or reasons – because it is running short of cash, because it wants to make an expensive
investment or because it needs to be recapitalised. By putting more shares on the market, a
company dilutes the value of its existing shares. It is called a “rights” issue, because existing
shareholders have the first right to buy the new shares, thereby avoiding dilution of their existing
shares.
Ring-fence
A recommendation of the UK’s Independent Commission on Banking. Services provided by the
banks that are deemed essential to the UK economy – such as customer accounts, payment
transfers, lending to small and medium businesses – should be separated out from the banks
other, riskier activities. They would be placed in a separate subsidiary company in the bank, and
provided with its own separate capital to absorb any losses. The ring-fenced business would also
be banned from lending to or in other ways exposing itself to the risks of the rest of the bank – in
particular its investment banking activities.
Securities lending
When one broker or dealer lends a security (such as a bond or a share) to another for a fee. This
is the process that allows short selling.
Securitisation
Turning something into a security. For example, taking the debt from a number of mortgages and
combining them to make a financial product, which can then be traded (see mortgage backed
securities). Investors who buy these securities receive income when the original home-buyers
make their mortgage payments.
Security
A contract that can be assigned a value and traded. It could be a share, a bond or a mortgage-
backed security.
Separately, the term “security” is also used to mean something that is pledged by a borrower
when taking out a loan. For example, mortgages in the UK are usually secured on the borrower’s
home. This means that if the borrower cannot repay, the lender can seize the security – the home
– and sell it in order to help repay the outstanding debt.
Shadow banking
A global financial system – including investment banks, securitisation, SPVs, CDOs and
monoline insurers – that provides a similar borrowing-and-lending function to banks, but is not
regulated like banks. Prior to the financial crisis, the shadow banking system had grown to play
as big a role as the banks in providing loans. However, much of shadow banking system
collapsed during the credit crunch that began in 2007, and in the 2008 financial crisis.
Short selling
A technique used by investors who think the price of an asset, such as shares or oil contracts, will
fall. They borrow the asset from another investor and then sell it in the relevant market. The aim
is to buy back the asset at a lower price and return it to its owner, pocketing the difference. Also
known as shorting.
Spread (yield)
The difference in the yield of two different bondsof approximately the same maturity, usually in
the same currency. The spread is used as a measure of the market’s perception of the difference
in creditworthiness of two borrowers.
SPV
A Special Purpose Vehicle (also Special Purpose Entity or Company) is a company created by a
bank or investment bank solely for the purpose of owning a particular set of loans or other
investments, and distributing the risk to investors. Before the financial crisis, SPVs were
regularly used by banks to offload loans that they owned, freeing the banks up to lend more.
SPVs were a major part of the shadow banking system, and were used in securitisation and
CDOs.
Stability pact
A set of rules demanded by Germany at the creation of the euro in the 1990s that were intended
among other things to limit the borrowing of governments inside the euro to 3% of their GDP,
with fines to be imposed on miscreants. The original stability pact was abandoned after Germany
itself broke the rules with impunity in 2002-05. More recently, the German government has
called for an even stricter system of rules and fines to be introduced in response to the eurozone
debt crisis.
Stagflation
The dreaded combination of inflation and stagnation – an economy that is not growing while
prices continue to rise. Most major western economies experienced stagflation during the 1970s.
Sticky prices
A phenomenon observed by Depression-era economist John Maynard Keynes. Workers typically
strongly resist falling wages, even if other prices – and therefore the cost of living – is falling.
This can mean that, particularly during deflation, wages can become uncompetitive, leading to
higher unemployment. The implication is that periods of deflation usually go hand-in-hand with
very high unemployment. Many economists warn that this may be the fate of Greece and other
struggling economies within the eurozone.
Stimulus
Monetary policy or fiscal policy aimed at encouraging higher growth and/or inflation. This can
include interest rate cuts, quantitative easing, tax cuts and spending increases.
Sub-prime mortgages
These carry a higher risk to the lender (and therefore tend to be at higher interest rates) because
they are offered to people who have had financial problems or who have low or unpredictable
incomes.
Swap
A derivativethat involves an exchange of cashflows between two parties. For example, a bank
may swap out of a fixed long-term interest rate into a variable short-term interest rate, or a
company may swap a flow of income out of a foreign currency into their own currency.
TARP
The Troubled Asset Relief Program – a $700bn rescue fund set up by the US government in
response to the 2008 financial crisis. Originally the TARP was intended to buy up or guarantee
toxic debts owned by the US banks – hence its name. But shortly after its creation, the US
Treasury took advantage of a loophole in the law to use it instead for a recapitalisation of the
entire US banking system. Most of the TARP money has now been repaid by the banks that
received it.
Tier 1 capital
A calculation of the strength of a bank in terms of its capital, defined by the Basel Accords,
typically comprising ordinary shares, disclosed reserves, retained earnings and some preference
shares.
Tobin tax
A tax on financial transactions, originally proposed by economist James Tobin as a levy on
currency conversions. The tax is intended to discourage market speculators by making their
activities uneconomic, and in this way, to increase stability in financial markets. The idea was
originally pushed by former UK Prime Minister Gordon Brown in response to the financial
crisis. More recently it has been formally proposed by the European Commission, with some
suggesting the revenue could be used to tackle the financial crissi. It is now opposed by the
current UK government, which argues that to be effective, the tax would need to be applied
globally – not just in the EU – as most financial activities could quite easily be relocated to
another country in order to avoid the tax.
Toxic debts
Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some
customers cannot repay; toxic debt describes a whole package of loans that are unlikely to be
repaid. During the financial crisis, toxic debts were very hard to value or to sell, as the markets
for them ceased to function. This greatly increased uncertainty about the financial health of the
banks that owned much of these debts.
Troika
The term used to refer to the European Union, the European Central Bank and the International
Monetary Fund – the three organisations charged with monitoring Greece’s progress in carrying
out austerity measures as a condition of bailout loans provided to it by the IMF and by other
European governments. The bailout loans are being released in a number of tranches of cash,
each of which must be approved by the troika’s inspectors.
Underwriters
The financial institution pledging to purchase a certain number of newly-issued securitiesif they
are not all bought by investors. The underwriter is typically aninvestment bank who arranges the
new issue. The need for an underwriter can arise when a company makes a rights issue or a
bondissue.
Unwind
To unwind a deal is to reverse it – to sell something that you have previously bought, or vice
versa, or to cancel a derivative contract for an agreed payment. When administratorsare called in
to a bank, they must do the unwinding before creditors can get any money back.
Vickers Report
See Independent Commission on Banking
Volcker Rule
A proposal by former US Federal Reserve chairman Paul Volcker that US commercial banks be
banned or severely limited from engaging in risky activities, such as proprietary trading (taking
speculative risks on the markets with their own, rather than clients’ money) or investing in hedge
funds. The Volcker Rule follows similar logic to the Glass-Steagall Act and the UK ring-
fenceproposal, and a modified version of the rule was included in the Dodd-Frankfinancial
regulation law passed in the wake of the financial crisis.
Warrants
A document entitling the bearer to receive shares, usually at a stated price.
Working capital
A measure of a company’s ability to make payments falling due in the next 12 months. It is
calculated as the difference between the company’s current assets (unsold inventories plus any
cash expected to be received over the coming year) minus its current liabilities (what the
company owes over the same period). A healthy company should have a positive working
capital. A company with negative working capital can experience cashflow problems.
World Bank
Set up after World War II along with the IMF, the World Bank is mainly involved in financing
development projects aimed at reducing world poverty. The World Bank is traditionally headed
by an American, while the IMF is headed by a European. Like the IMF and OECD, the World
Bank produces economic data and research, and comments on global economic policy.
Write-down
Reducing the book value of an asset, either to reflect a fall in its market value (see mark-to-
market) or due to an impairment charge.
Yield
The return to an investor from buying a bond implied by the bond’s current market price. It also
indicates the current cost of borrowing in the market for the bond issuer. As a bond’s market
price falls, its yield goes up, and vice versa. Yields can increase for a number of reasons. Yields
for all bonds in a particular currency will rise if markets think that the central bank in that
currency will raise short-term interest rates due to stronger growth or higher inflation. Yields for
a particular borrower’s bonds will rise if markets think there is a greater risk that the borrower
will default.
1. Central Board of Excise and Customs moniters the e-filling of income tax returns.
2. Manesar is a city in Punjab
3. Yogendar Garg Committee is formed to look in the royality issue of coal mining.
4. From 2012-13, only corporates houses will have to e-file their income tax return.
5. GST is an indirect tax, that will replace the service tax and excise duty.
Mutual Funds and Entry Load
1. What is Mutual fund?
2. What the Entry Load?
3. Sidenote: RGESS
Sidenote: RGESS
recall that RGESS was launched to cut the middle men and lure middle-class investors
into the capital market, otherwise they only invest money in gold, real estate = problem
of inflation, black money and current account deficit.
But after launching the RGESS, Pranab realized the mistake that most of his target
audience (middle class junta) doesn’t have PAN cards and DEMAT account, which are
prerequisite to play in shares and bonds investment. Then Government started talking
about “no frills DEMAT” Account.
To Increase the security features for currency notes (i.e. make it harder for Pakistanis to
print fake Indian Currency)
To Prepare a roadmap for progressive indigenization of various inputs. (i.e. start printing
currency using “desi” equipment and technology instead of relying on foreign countries
such as Switzerland etc. for the printing press, paper and ink).
Concurrent List
Social Security and labour welfare falls under Concurrent list, it means both union and state
Government can make laws regarding these topics.
Article 42
Provision for just and humane conditions of work and maternity relief
State shall make provision for securing just and humane conditions of work and for
maternity relief.
Unorganized sector
Examples
Unorganized sector is characterized by the lack of labour law coverage, seasonal and
temporary nature of occupations, high labour mobility, dispersed functioning of
operations, casualization of labour, lack of organizational support, low bargaining power,
etc
Provident Fund
Here the employers to contribute to a provident scheme providing a lump-sum payment
in the event of death or disability or on retirement.
But From the point of view of government, Provident Fund is attractive because it generates
forced savings that can be used to finance national development plans.
What is inflation?
Inflation rate refers to a general rise in prices measured against a standard level of
purchasing power.
1. weakness of the Indian government cannot be changed for a long time…This means that
after the 2014 elections, India could still have a weak coalition government, which is
definitely bad news for reform…Indian political weakness will lead to a weak economy
for many years.
2. In these two years, most politicians have to fight for votes and therefore, reforms will be
set aside”.
3. Rahul still “does not have a dazzling performance”
4. Sonia has been “sick recently”
5. Mohan has become “conservative” and is facing criticism for his “complacency”.
6. opposition BJP too has its own “internal contradictions”.
7. It has used phrases like
a. “farewell to incredible India”,
b. “miracle has become a mirage”,
c. “from bullet train, the economic growth has become express train”
d. “reforms: an empty slogan”
8. once illustrious Indian economy is suddenly faced with numerous questions and has
become a loose brick among BRICS countries
9. Incidentally, India played host to the BRICS summit in Delhi in March, which was
attended by Chinese President Hu Jintao.
10. Giving the example of the stalled reform over allowing FDI in the retail sector, Xinhua
says that India’s economy has not only lost direction but even its growth has lost impetus.
And finally, the most profound wisdom on Indian Education and Career system
I would like to coach the Indian Cricket team but I don’t have the level 1, 2, 3 certificates that
people want sometimes.
-Rahul Dravid
The government had introduced a Bill to amend this Act in 2007. That Bill lapsed in 2009 at the
time of the general elections. The government enacted a new bill in 2011.
Excluded
provisions of this Bill shall not apply to 16 existing legislations that provide for land
acquisition. These include
Anti-argument
It is not clear whether Parliament has jurisdiction to impose rehabilitation and
resettlement requirements on private purchase of agricultural land.
While private companies are included, but PSUs are excluded from the responsibility of
rehabilitation.
Public purpose includes other government projects which benefit the public as well as provision
of public goods and services by private companies or public-private partnerships.
Consent
Land acquisition will require the consent of 80 per cent of project affected people
Affected families include those whose livelihood may be affected due to the acquisition,
and includes landless labourers and artisans.
Anti-argument
Projects involving land acquisition and undertaken by private companies or public private
partnerships require the consent of 80 per cent of the people affected. However, no such
consent is required in case of PSUs.
Compensation
The value of the assets (trees, plants, buildings etc) attached to the land being acquired
will be added to this amount.
mandated the job for one person in each affected family or Rs. Two lakhs
separate allowance for SC,ST
provision for housing, if the land is acquired for housing projects
Anti-Argument
1. The market value is based on recent reported transactions. This value is doubled in rural
areas to arrive at the compensation amount. This method may not lead to an accurate
adjustment because people sell land to each other at underreported price to save stamp
duty.
2. The government can temporarily acquire land for a maximum period of three years.
There is no provision for rehabilitation and resettlement in such cases.
Dispute resolution
Bill proposes the following authorities;
1. Administrator;
2. Commissioner for Rehabilitation and Resettlement;
3. Rehabilitation and Resettlement Committee (for acquisition of 100 acres or more of
land);
4. National Monitoring Committee for Rehabilitation and Resettlement; and Land
Acquisition, Rehabilitation and Resettlement Authority (which shall adjudicate all
disputes, with appeal to the High Court).
Primary when you buy fresh car (Bonds,IPO), secondary when you sell it to third party.
1. Every businessman requires money to start or expand his business. There are only two
legit ways to arrange money: Debt and Equity (already saw in older articles). The place
where (big) businessmen arrange money for long term investment, via Debt (Bonds) or
Equity (IPOs) is called “Capital Market”. Government also arranges for money by
selling bonds here.
2. It has two subparts: Primary and secondary market.
3. The first time (fresh) sale of Bonds or IPOs are done in a place called “Primary market”
4. Suppose I buy that bond / IPO and then sell it to you, it’s called “Secondary market”.
(used car sales). Anyways, These are only theoretical classifications so the experts can
evaluate how market or economy is performing. Otherwise all the buy and sell is done via
online.
1. bank accounts,
2. insurance,
3. retirement savings plans
4. stocks, bonds and mutual funds.
5. understanding basic financial concepts like compounded interest,
6. present and future value of money,
7. Investment return, risk, protection and diversification.
Mohan: “koi baat nahi, if the outsiders are not coming then apno ko hi bottle mein utaar lete hai,
by educating them about financial education !”
Montek: but how does it relate with each other??
Answer
Infrastructure means highways, powerhouses, irrigation, damns, nuke plants etc.
To build such things, Government / private player will need truckload of money. Most of the big
foreign players are not interested in this, after seeing what happened to telecom companies and
POSCO.
Mega Infrastructure projects are usually financed either by
Now you get the connection. Why would Mohan / Montek want indian junta to be educated
about financial education? And why did not they think about it 8 years ago?
Technical stuff:
National Strategy for Financial Education is being drafted by a sub-Committee of Financial
Stability and Development Council (FSDC).
Epilogue:
Why is it in news?
When Supreme Court of India cancelled the 2G telecom licences- Sistema, a Russian
corporation was also affected. It plans to sue Indian Government in under the BIT, in an
investment treaty tribunal.
Telenor and Vodafone are also planning to do the same.
3. Financial Stability and Development Council (FSDC) has been setup. (already talked
about this in the “→hy Mohan wants Indian Juntaa to be financially educated?”)
4. Financial Action Task Force (FATF) has been setup.
5. Permitting two-way fungibility in Indian Depository Receipts
6. Dedicated trading platforms for small and medium scale enterprises
7. Reducing transaction cost in Securities markets.
8. Reduction in the rate of long-term capital gains tax in the case of other non-resident
investors, including Private Equity from 20% to 10% on the same lines as applicable to
FIIs
9. Providing the levy of Securities Transaction Tax (STT) at the rate of 0.2 per cent on sale
of unlisted securities in the course of IPO .
10. Tax exemption to “Angel” investors investing in in start-up companies
11. Extending the lower rate of withholding tax to funds raised through long term
infrastructure bonds in addition to borrowing under a loan agreement
12. Removal of Restriction on Venture Capital Funds to invest only in nine specified sectors
13. Financial Sector Legislative Reforms Commission (FSLRC)
14. Rajiv Gandhi Equity Saving Scheme (already talked about this).
15. Mandatory offer of electronic voting facility (for shareholders)
16. Income tax exemption to the Beneficial Owners Protection Fund (BOPF) set up by the
Depositories.
Epilogue
→e’ve already discussed some of these topics such as QFI, Rajiv Gandhi Equity Saving
Schemes, Financial Stability and Development Council etc.
I’ll try to add articles on them, in future but cannot make a commitment like “→anted” Salman
from Anil Ambani group, the Mahindras, L&T to Religare — everyone wants to open a
bank.
But the dreams of big industrial houses and non-banking finance companies (NBFCs) to
set up commercial banks are unlikely to materialise because RBI is against giving
banking licence to any of them for the time being.
RBI will consider new licences only after Parliament approves the amendment to the
Banking Regulation Act.
RBI had earlier said that promoters and promoter groups with diversified ownership,
sound credentials and integrity that have a successful track record for at least 10 years in
running their businesses should be eligible to promote banks. (sorry Mr.Mallya)
1. In Gold
2. In Corporate Bonds / Shares approved by RBI
3. G-Sec (Government Securities/ Treasury Bonds)
But most bank prefer to put all the money in Government securities (G-Sec), because
they're more safe and convinient than the other two.
Hydro and coal account for nearly 77 per cent of electricity generation in India.
load centres or distribution draw the power from the lines and send it to consumers.
companies
For an electricity grid to function smoothly, it is essential that load and generation must
be balanced at all times to prevent a failure.
The flow of electricity through the lines should ideally not exceed the rated capacity,
otherwise the lines could trip due to an overload.
Components of a grid
A grid consists of three main components:
produce electricity from fossil fuels (coal, gas) or non-combustible fuels (hydro,
power stations
nuclear, wind, solar);
transmission
carry electricity from power plants to demand centers
lines
Transformers reduce the voltage so that distribution lines carry power for final delivery.
Coal India
it is the Government controlled mining company that has monopoly over digging up coal
through out India.
Environmental clearance : can’t dig enough coals from jungles.
Coal India has $11 billion of unused cash, but reinvests only about 20 per cent of its gross
cash flow into research and Development (R&D).
So its coal processing capacity, machinery etc. are not up to the mark according to
international standards.
Technology and management practices in mining and transportation are outdated.
Management is weak because of strong trade unions [just like Air India] and the system
is rife with corruption. [just like MNREGA]
Farmers
Farmers get free power to pump groundwater for irrigation, but some of this free power is
illegally diverted to factories.
Since electricity is free, farmers run their pumps whether or not crops require water. As a
result, groundwater levels in many states are declining by over 1 metre every year.
This means each year, farmers have to use more electricity to pump water from
increasing depths,
Secondly, when ground water table decreases, the soil becomes more saline. And saline
soil produces less crop. Combine this with Deforestation and soil erosion= farmers are
forced to use more and more fertilizers to produce same amount of crop.
So, in the end this becomes a vicious cycle of excessive electricity and fertilizer use.
Introduction
RBI had introduced "no frills" account in 2005 to provide basic banking facilities to poor
and promote financial inclusion.
But now, The RBI asked the banks to drop the no frills tag from the “basic savings a/c”
as the this “no frills” had become a stigma.
Anyways,
Moneylenders
Minister will also invest some of his money with the moneylenders – who circulate it as
loan @36% interest rate to the needy people.
→ho’re these needy people?
#1: the urban middle-class men who suddenly loose lot of money in cricket betting thanks
to Sachin or sharemarket speculation thanks to Anil Ambani’s IPO and then have to
borrow immediately to settle payments. They can’t goto banks because banks take weeks
and months to process personal loans.
#2: the farmers in rural areas. They need money for two reasons:
1. settle payment of seeds, fertilizers, electricity, water, laborers or
2. Dowry for daughter’s marriage and other expenses related to social ceremonies
associated with child-birth, marriage, death etc.
Irrespective of their India-Bharat divide, the fate of these two categories of needy people
is same: they remain in-debt forever or commit suicide, while minister continues to enjoy
hefty 36% interest rate on his money from them. (Banks only pay about 7% on your
savings account, consider the difference!)
Giving relief to its employees and pensioners from inflation, the central government on Friday
announced a seven percentage point increase in dearness allowance (DA) which will cost the
exchequer an additional Rs 7,500 crore. The new DA rate of 65 per cent of basic pay against 58
per cent earlier will be applicable retrospectively from January 1, 2012.
What does it mean? Government keeps an eye on the inflation, and gives more salary to
compensate the employee for the increased prices and cost of living.
So, Government employee need not worry much about increased price of milk or
vegetables.
BUT private companies are not so generous about D.A. so people working in private
companies (Atleast at the lower level) don’t have that much disposable income.
Again money supply increased (Rs.7500 crores)= demand by Government employees
increased= inflation is felt by the people working in private companies.
But it did not work, we did not see any decrease in inflation despite RBI’s monetary measures,
→hy this “tightening of monetary policy” wasn’t effective? Because of two reasons,
1. The minister/bureaucrat with black money won’t decrease his spending. He will not
put his money in banks, he will not delay his decision of buying a new SUV car, gold-
jewelry or farm-house. RBI’s repo rates don’t have much direct effect on him.
2. Supply-side problems.
o Onions are expensive
their supply is low because of bad-weather
Many middle-men involved and each getting Commission
Diesel is expensive = transport expensive.
o Milk is expensive because
Electricity is expensive. (For running the plant, coolers, machinery.)
Crude oil is expensive (Plastic pouches, printing inks, lubricants for
machinery: All derived directly or indirecty from crude oil.)
This ends the first theory of inflation: demand pull. Second Theory : “Cost Push Inflation” in the
next article.
In all four cases, because the supply of onions is reduced, the restaurant owner will
→hat happened? Supply of onion reduced, so restaurant owner’s input cost increase and he had
to push the menu prices higher.
Misc GK Stuff
Name Meaning
Creeping
Mild inflation
inflation
Walking or
Intermediate range 3 to 7% per year
trotting
Galloping
Higher than walking
inflation
Final stage, inflation is totally out of control, when it is outside the “aukaat”
Hyperinflation
of RBI or Government to control this inflation.
Stagflation Both price and unemployment rates increase
Mock Questions
Time for some Mock Demo CSAT questions for General Studies paper 1.
Reducing prices.
Increasing prices.
Increasing the taxation rate.
Restricting the growth of money supply.
Only one
only one and two
only two and three
all of them
In short, LIBOR= the interest rate at which banks borrow and lend from each other in London.
(i.e. SBI is “lending” @12% and BoB is “borrowing” @12% interest rate, but either way the
interest rate is 12%.)
But this is a technically not so correct definition. Because there ought to be more than two banks
in whole London and all of them can’t be lending to each other at the same interest rate, right?
→e’ll come to that problem very soon but first of all.
if your bank promises not to setup any ATM booths around Gujarat university for next
five months and i’ll reduce the interest rate!
another case
I know your 20,000 crores rupees are stuck in the loan given to that Mallya. So you’re in
no position to negotiate. Give me 18% interest else I won’t offer any loan.
In short, there are many variables and behind the curtain deals.
We can know the buying and selling price for shares of Infosys by glancing at the Nation
Stock Exchange website/ screen/ CNBC or similar business news channels.
However, there is no comparable screen where we can learn the LIBOR.
For the last 26 years, the British Bankers’ Association (BBA) has computed Libor by
asking dealers what they saw as prevailing market conditions, deleting the high and low
values of the reports, and taking the average of rest data.
1. The aam-juntaa would still keep coming to your bank as long as you hire celebrities to do
the advertisements.
2. But, The big corporate houses, have wise Chartered Accountants, who understand the
meaning of such numbers and its long term consequences. So, CA may advice his CEO
to close the company’s bank accounts and deposit money in other banks.
3. Some big Companies may even stop taking loans from you.
4. The price of your shares, go down in the sharemarket, because investors lose faith in your
bank.
And with all this mess, the Board of Directors may remove you from your CEO job and hire a
new CEO to fix the bank.
What is Barclays?
Barclays is the name of a British Bank.
It is the fourth-largest of any bank worldwide (First three banks are: BNP Paribas,
Deutsche Bank and HSBC)
On a side note, if we make list of Top 50 banks of the world according to the cash
they’ve, then there is no bank from India.
Recall the sub-prime crisis, Barclays, along with many other banks had given loans to
plenty of unworthy customers in US, who didnot have the aukaat to repay the loan.
Barclay’s money was stuck in USA – around 12 billion dollars worth of toxic assets. So
Barclay’s situation was bad, the other rival banks of London, knew it and they didnot
have much confidence in this bank.
But even during this period, Barclay [and other 15 banks in London] had to send daily
SMS to BBA Manager so that he could calculate the LIBOR.
So, Barclays’ CEO Mr.Bob Diamond sent artificially low figures to BBA manager, in
order to hide the fact that his bank was in a mess.
[recall the concept : if bank X has to pay more interest for borrowing from another banks
compared to bank Y, that means Bank X is weaker than Bank Y.]
It’s not that Bob Diamond himself sends fake SMS from his Nokia 1100, they’d have
pretty sophisticted email or software system and dedicated staff for doing all this, but the
Barclay staff will not dare to send wrong data to BBA, without the secret consent and
approval of Main boss.
Some of the Other 15 banks of London also misreported their borrowing rates, why?
Because, During the global financial crisis (2007 and afterwards) the RBIs (Central
Banks) in developed countries (like UK, France and US) had started giving loans to their
nations’ banks at very nominal or close to 0% interest rate in order to boost the economy.
So the various banks in London, also got cheap loans from RBI of UK (known as Bank of
England).
Now their CEOs had incentive to to quote higher than usual rates of borrowing because if
LIBOR went up, then their banks could earn more interest on Libor-linked loans.
If LIBOR rate was manipulated even by 0.01%, then these banks could make a about a
couple of million dollars more in the interest rate charged on home / business loan
customers.
So, Barclays is not the only villain this scam, just like A.Raja is not the only guy in 2G
scam.
Side-Question: if the banks in London are getting cheap loans from their RBI, then
Barclays should also have recieved some loans from their RBI @0%, right? yep, but
Barclays was in bigger trouble (12 billion dollars) than the amount of money their RBI
could lend to fix the mess.
It is also alleged that Barclay staff also coordinated with staff from other banks to jointly
report the false data to BBA. [Because these people had invested in various
futures/derivative contracts whose payment depended on LIBOR rate.]
Timeline of Events
The Wall Street Journal (WSJ) published an article on this activity of sending wrong
2008
data.
2011-
U.S. Department of Justice conducts a criminal investigation into Libor abuse.
2012
Barclays Bank was fined $160m by the United States Department of Justice, $200m
Jun
by the Commodity Futures Trading Commission, and £59.5m by the Financial
2012
Services Authority for attempted manipulation of the Libor and Euribor rate.
July
CEO of Barclays, Mr.Bob Diamond, resigned.
2012
August Innocent aspirants of UPSC, Bank and MBA are forced to learn one more topic for the
2012 exam.
Administrative control
Steel Authority of India Ltd (SAIL) Ministry of Steel
Rashtriya Ispat Nigam Ltd (RINL) Ministry of Steel
National Mineral Development Corporation (NMDC) Ministry of Steel
National Thermal Power Corporation Ministry of Power
Coal India Limited (CIL) Ministry of Coal
It has a capital base of about Rs 10,000 crore and enjoys the powers of a navaratna
company.
Why was ICVL formed?
To secure metallurgical coal and thermal coal mines abroad, preferably in Australia/
New Zealand, Indonesia, Canada/ USA, South Africa/ Mozambique.
By the way India has sufficient coal in its own land, but it is either located in Naxal
region or cannot be mined due to environmental clearances/ Supereme Court order, hence
the need to acquire more coal from abroad.
Type Use
Metallurgical coal to make coke for the iron and steel industry.
Thermal coal electricity generation in thermal power plants.
Mock Questions
Q1. Match the following
1. The paid capital and collected funds of bank should not be less than Rs. 5 lakhs.
2. Any activity of the bank will not adversely affect the interests of depositors [hahaha,
does it mean Non-scheduled banks are allowed to adversely affect the interests of
depositors !? ]
In either case, as long as you’re running a bank, you’ll have some input costs such as
1. Salary to Bank PO , Clerks, peons and security guards (With rusted guns)
2. Office rent
3. ATM machine’s electricity and maintenance.
4. Newspaper advertizements.
To pay above salary and bills, SBI would need to maintain certain amount of profit margin, no
matter what RBI does with CRR,SLR or Repo Rate.
In Case#1, when SBI has only Rs.47 in the hands, what can it do to keep the profit margin same?
Obviously SBI will have to increase the interest rates on car,home,bike,business loans given to
customers.
In case#2, when SBI has Rs.72, what can it do? Here the situation is not that bad.
So, SBI chief would decrease the interest rates on car,home,bike,business loans to seduce more
customers. We already discussed this- SBI has more money so it can cut down interest rates and
suffer temporary reduction in profit, in order to seduce more customers (compared to ICICI) So
once SBI has reduced the interest rates, other banks will need to reduce their interest rates, to
stay in the competition.
Repo Rate
Let’s continue assuming the Case#2, that SBI has only Rs.72.25 left in its locker.
SBI chief comes to know that recently Samsung Company has launched Galaxy S3
mobile so plenty of youngsters may want to buy it because of the advertisements that
appear on TV channels 24/7
Thus there will be demand for more personal loans (EMI) or credit card based shopping.
But SBI got only Rs.72.25.
So SBI chief would borrow some more money from RBI @8% interest rate and then re-
lend this money to customers as personal loan @16% (and thus making a killing profit of
16-8=8%)
or he can supply money to customers for Credit Card shopping, and in that case he can
earn interest rate anything between 16-37% or even more (depending on hidden terms
and conditions of credit card.)
This 8% : the rate @which RBI lends short term loans to clients, is called Repo Rate.
Side Question
Why would SBI chief put his money in RBI?
Because on your normal savings account in SBI, the chief pays you around 4% interest rate,
while RBI is giving him 7% Reverse repo rate, so he’s making a profit of 3%.
Bank Rate
Bank rate is the interest rate which RBI charges from its clients* for their LONG-term
loans.
Recall that Repo Rate = RBI charge that much interest from its clients on SHORT term
loans.
please note:
1. Bank Rate, Repo Rate and Reverse Repo Rate applies to all Clients of RBI.
2. The CRR,SLR applies to Commercial Banks. (including Urban Cooperative banks but
excluding Regional Rural Banks)
What is the need of all these CRR,SLR,Repo
rates?
RBI’s main job = control inflation by controlling money supply in the market.
Too much money in the market =easy to get loans= not good. Because It’ll create
inflation. [Demand Pull]
Too less money in the market= again not good, because businessmen find it hard to get
loans, thus input cost of production increases= not good for economy either and it’ll
create inflation. [Cost push]
Therefore, RBI will increase/decrease these CRR, SLR and Repo Rates according to the
situation in order to adjust the money supply in market and thus control
inflation. [Monetary policy]
Nowadays RBI doesn’t touch Bank rate much and mostly relies on Repo rate to control
the money supply.
CRR and SLR are also not changed as frequently as Repo rate.
And Reverse repo rate is automatically kept 1% less than Repo rate, so that makes Repo
rate the “most frequently used tool” in RBI’s monetary policy, in last two years.
Apart from that, CRR,SLR and Repo Rate also help those competitive magazine wallas
to fill up pages with ridiculously unimportant data tables to make your life more
miserable.
If SBI/ICICI etc. could lend these 3 lakh crores (CRR deposits) to customers @10%, they
could easily earn Rs.30,000 crores in interest payment.
Thus, CRR makes a huge difference in the profit of banks.
UK, Canada, Sweden, Australia and New Zealand donot have CRR system in any form.
In USA, there is graded system i.e. small banks don’t need to maintain any CRR with
their central bank. →hile “big” banks would need to maintain CRR Deposit according to
their size.
Side Question: How “big“? Answer: no need to do Ph.D on that question trail.
By the way, USA’s RBI (Central Bank) is known as Federal Reserve system and
commonly known as “F eds”. So sometimes while randomly surfing through BBC/CNN
you might come across lines like “Market boomed /crashed after Feds cut down the rates”
they’re talking about USA’s RBI changing their repo, SLR etc. rates
Interestingly, USA’s RBI (Feds) pays interest on the CRR deposits, while India’s RBI
doesn’t pay any interest on CRR deposits.
CRR does not help anyone and it is unfair to apply it only on banks.
Even if CRR is required why should it be on banks alone? There are a number of
institutions that raise funds from the public – insurance companies, mutual funds and
NBFCs so CRR should be applicable to all.
Because of CRR, every year we lose Rs. 3,500 crore.
In India, Businessmen get loan @11 per cent while that for a Chinese equipment
manufacturer gets loan in his country for only 4 per cent. So CRR= less money in
market= higher interest rate= increases the input cost of Indian products.
if the SBI Chairman is not able to do business as per our regulatory environment, he has to find
some other place.
(doesn’t matter what anyone says) I wanted to start a debate on CRR in the public domain, so let
that debate happen.
Timeline of Events
CRR used to be as high as 15% and SLR used to be as high as 38.5%, thus making
Early 90s
life of businessmen and aam juntaa difficult.
1992 RBI introduces system of Repo rate.
1996 RBI introduces the system of Reverse Repo Rate
1999 RBI starts paying interest rates to banks, on CRR deposits.
2007 Sub Prime Crisis in USA
RBI stops paying interest rates to banks on CRR deposits.
Throughout the year, RBI keeps increasing Repo Rate to combat inflation.
2011 Repo rates gets as high as 8.50%.
SBI chief Pratip Chaudhari demands removal of CRR. [He has been doing it
since a long time, even in 2011 seminars]
So, This CRR removal news topic would have faded away just like it did in
2011, had the RBI deputy governor not replied on SBI chief’s statement.
But RBI Deputy governor did, so the media blows the news out of proportion
that “RBI snubs SBI chairman.”
And thus the Innocent aspirants of UPSC, bank and MBA exams, are forced
August to learn one more topic i.e. CRR controversy.
2012
By the way, during this time,
1. Bank Rate= 9%
2. Repo = 8% (reverse repo would be obviously 8-1= 7%)
3. CRR= 4.75%
4. SLR= 23%
Mock Questions
a. Repo rate is the interest rate paid by RBI to banks on short term deposits.
b. A decrease in repo rate will increase the home loan interest rates.
c. HDFC is a Non-scheduled Commercial bank.
d. SLR is always 20% higher than CRR.
Q3. What were the steps taken by RBI in its monetary policy during 2011 to control inflation in
India. Do you think RBI achieved its objective? Give reasons to justify your stand. (Mains)
Q4. If you were the RBI Governor, what steps would to take regarding the CRR issue?
Controversy
The Home Ministry had earlier made a notification that if xyz organization’s accounts are
audited by CAG then it doesnot need to maintain FCRA accounts.
Jamia Milia, JNU etc. = Central Universities = hence audited by CAG = They don’t need
to maintain FCRA accounts in the first place.
Mock Questions
Q2. Write a note on the Salient Features of Foreign Contribution Regulation Act (FCRA). 12
marks.
Introduction
Petroleum, Chemicals and Petrochemical industry is very important for India’s economic
growth.
Hence, to promote more investment in this sector and make the country an important hub
for both domestic and international markets, the government came up with the idea of
Petrochemical Investment Regions (PCPIRs).
What is PCPIR?
Petroleum, Chemical and Petrochemical Investment Region (PCPIR) would be a
specifically delineated investment region with an area of around 250 square kilometers.
for the establishing manufacturing facilities for petroleum, chemicals & petrochemicals,
alongwith the associated services and infrastructure.
PCPIR would be a combination of production units, public utilities, logistics,
environmental protection mechanisms, residential areas and administrative services.
PCPIR may include one or more Special Economic Zones, Industrial Parks, Free
Trade & Warehousing Zones, Export Oriented Units.
All the benefits available under the relevant legislation or policy will continue to remain
available to the said SEZ or Parks, that form part of the PCPIR.
Organizational setup
1. State Government will locate a site and send application to union Government.
2. High Powered Committee constituted by the Government of India will scrutinize
applications for setting up the PCPIR.
3. Department of Chemicals and Petrochemicals (DoC&PC) will be the nodal department of
the Government of India for the PCPIRs.
4. Once passed, the State Government will make necessary law to notify xyz site as PCPIR
region.
5. Then a Management Board will be constituted by the concerned state government for
each PCPIR, under the relevant legislation
6. This Management board will be responsible for the development and management of the
given PCPIR.
Why in News?
10-years ago, Supreme Court had given a ruling that Indian companies can approach
Indian courts against unfavorable awards by foreign arbitration panels.
But in Sept.2012, Supreme Court said in a judgement that if an Indian investor chooses
to go for arbitration with a foreign company abroad, Indian courts would have no
jurisdiction to interfere with the arbitration award unless provided under law.
Implication of SC Judgment
Foreign companies have so far found it extremely difficult to get foreign arbitration
awards against their Indian partners enforced through Indian courts because courts would
stay the award saying they have the jurisdiction to do so.
But now Supreme court has said that Indian courts have no business to interfere with
such foreign judgments, hence It’ll create a more investor-friendly atmosphere for
foreign companies intending to set up shop in India.
IRDA
Insurance Regulatory and Development Authority (IRDA)
Created on the recommendations of the Malhotra Committee report
Started in 2000, it is a statutory body (i.e. made through an Act of parliament).
Insurance Ombudsman
was created by a Government of India in 1998
Selection of Ombudsman
Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services.
A committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a
representative of the Central Government select the Insurance Ombudsman.
There are twelve Ombudsman across the country allotting them different geographical
areas as their areas of jurisdiction.
An insurance Ombudsman is appointed for a term of three years or till the incumbent
attains the age of sixty five years, whichever is earlier.
Re-appointment is not permitted.
What is premium?
To enjoy SAB TV, Zee TV, Star Movies, AXN, HBO etc. you’ve to make regular
payment to Dish T↑/Tata Sky etc., we call it “subscription”.
Similarly to get insurance protection, you’ve to make regular payment to the insurance
company, we call it “premium”.
General Insurance
General Insurance = Every Insurance plan EXCEPT life insurance plan
You pay the premium till you retire or till the term of the policy.
Your family will get money ONLY after you die.
Whole life plan
You MUST DIE to get back the money.
You keep paying premium for given period (5,10,20 etc. years)
If you die within that period, your family gets huge money.
But if you don’t die within that period, you will not get a single
Term Plan penny from the company.
So, you MUST DIE to get back the money.
Good part- Term Plans have cheaper premium than other plans.
Pending Reform
Mohan: I want to increase the FDI limit from 26% to 49%. Then more foreign companies would
come up = more products = lower premiums.
LIC
Life Insurance Corporation of India
100% owned by Government.
Started in 1956
HQ: Mumbai
Motto: “Yogakshemam ↑ahamyaham” (taken from Gita, meaning “I carry what you
require”.)
Provides Life Insurance, Health Insurance
GIC- Reinsurer
Suppose LIC sells 1000 life insurance policies, each with a 1 crore policy limit (e.g. I, the
customer pay Rs.10,000 premium every year and If I die my family should get 1 crore-
that type of Policy).
Theoretically, the LIC could lose 1000 crores in a day, if every customer dies on the same
day!
So to prevent itself from such a loss, LIC itself should take some insurance from a third
insurance company (GIC).
for example “I, the LIC Manager shall continue to pay the GIC 1 lakh every month, and
in return GIC insures that if my company LIC has to pay more than 100 crores in policy
claims within 1 week, then GIC will cover the cost.
So, This third party, General Insurance Corporation of India (GIC) = Reinsurer.
GIC is the ONLY Reinsurer in India.
Vishaka Case
SC gave the guidelines regarding protection of women @work places against sexual harassment.
Factories Act
Employer must provide crèches in factories where more than 25 women are employed
Industrial Disputes Act provides for setting up of Labour courts and Industrial tribunals.
Labour Courts
Labour Courts deal with matters pertaining to
Industrial Tribunals
Industrial Tribunals deal with collective disputes such as
1. wages,
2. hours of work,
3. leave, retrenchment,
4. closure of a company
5. + all matters which come under the jurisdiction of Labour Courts.
A settlement arrived at in the course of labour court/ industrial tribunals is binding on all parties
to an industrial dispute.
Retirement Benefits
There are two main types of retirement benefit generally available to workers.
make an equal contribution into a national
a worker who has put in not less
fund. The current rate of contribution is 12
than five years of work is entitled to
percent of the wage including a small
a lump sum payment equal to 15
percentage towards family pension.
This contribution also attracts an interest,
days’ wages for every completed
year of service.
currently 9.5 percent per annum, and the
Every month the employer is
accumulated amount is paid on retirement to
expected to contribute the required
the employee along with the interest that has
money into a separate fund to
accrued.
The employee is allowed to draw many types
enable this payment on retirement
or termination of employment.
of loan from the fund such as for house
construction, marriage of children, and
education etc. As a result very little is
available at the time of retirement.
Emigration Act
regulates the emigration of Indian workers for jobs abroad.
no agency can undertake the recruitment of Indian workers with foreign employers
without possessing a registration certificate issued by the Protector General of Emigrants.
UNORGANISED LABOUR
those who have not been able to organise themselves in pursuit of common objectives on
account of constraints like casual nature of employment, ignorance and illiteracy.
They donot enjoy sick leaves, maternity benefit, provident fund etc. facilities enjoyed by
organized labourers.
But Government is making various schemes to help them out for example Aam Admi
Bima Yojana, New Pension Scheme (N.P.S) etc.
91% of the working population is in the unorganised sector
Ministry of Labour
Important OFFICES/institutes with Labour
Ministry
1. Chief Labour Commissioner
2. Directorate General, Mines Safety
3. Welfare Commissioners
4. Board of Arbitration
5. Employees’ State Insurance Corporation (ESIC)
6. Employees’ Provident Fund Organisation (EPFO)
7. V.V. Giri National Labour Institute, NOIDA [He was the 4th President of India and wrote
books on labour related matters.]
[^This list not exhaustive, I’m only listing the important ones for MCQ]
Labour Bureau
Compilation and publication of the Consumer Price Index Numbers for industrial and
agricultural workers
Welfare Commissioners
Providing welfare facilities to the workers employed in the mica, limestone, dolomite,
iron ore, manganese and chrome ore mines and in the beedi and cinema industries.
Board of Arbitration
Compulsory arbitration of disputes between the Government employees and the Government
on pay and allowances, weekly hours of work and leave.
Sir, the expert reports suggest that fiscal deficit will be around 6 percent for 2012-13.
Kelkar
This is very dangerous; you need do fiscal consolidation immediately!
Mohan Ya but what is fiscal deficit and why is it dangerous?
Kelkar →hat? you’re an economist and yet you don’t know what is fiscal deficit?
Mohan Well I was an economist. But I didn’t maintain notes and I did not revise the standard
reference books either, so I’m unable to recall the concepts right now, just like a no0b
player of UPSC.
Well fiscal deficit (FD) = Budgetary Deficit + Market borrowing + other liabilities of
Kelkar
Government
Mohan Please Explain in English, from the very beginning.
Ok then let us start from the
beginning.Every year, the Government puts out a plan for its income
Kelkar
and expenditure for the coming year. This is, called annual Union Budget and you
need to get it approved by the parliament.
Mohan Side question: why do I need to get it approved by the parliament?
Kelkar For the answer Click ME
Mohan Ok back to the topic
Incoming money is divided into two parts. Tax and Non Tax
And outgoing money is divided into Plan and Non plan Expenditure.
Incoming Outgoing
Tax Non Tax Plan Non Plan
Kelkar: We can further refine this classification into Revenue/capital receipts and Expenditure.
But let us not complicate the matter for the time being.
Mohan: Now What is this incoming money from tax and non tax sources?
Kelkar: Outgoing money = the area where Government spends the money (Expenditure).
Plan-Expenditure means spending money on the activities related to the national five year plan.
(FYP)
Non-plan Expenditure, obviously means spending money on activities that are not related with
national five year plan. Check the table for examples.
Incoming Outgoing
Tax Revenue Non Tax
Plan Expenditure Non Plan
Direct Tax Indirect Tax Revenue
1. Fees
Collecte
d
(Drivin
g
license,
RTI,
Passport
1. Salary of
)
judges,
2. Fines
bureaucrats
and
1. income and armymen
Penaltie
tax 1. MNGREA 2. Buying new
1. custom s
2. Corporate 2. Janani tanks and
duty, (Traffic
tax; Suraksha missiles
2. excise violatio
3. Wealth Yojana 3. Subsidies:
duty, n etc)
tax 3. JNNURM Petrol,
3. service 3. Income
4. Capital 4. Indira Kerosene etc.
tax. from
gain tax Awas 4. Light bills of
4. VAT PSU
(Vodafon Yojana Government
(e.g.
e case) offices.
profit
5. Luxury Trave
from
l bills of
Airindia
Pratibha.
(lolz)
4. Gifts.
(discuss
ed in 2nd
ARC
article)
5. Grants
(Foreig
n Aid
from
UN,
Japan
etc)
Kelkar: Now we classify the budget according to the balance between incoming and outgoing
money.
Types of Budget=Deficit,Surplus,Balanced
When It is called a
outgoing money > incoming money deficit budget.
outgoing money < incoming money surplus budget.
outgoing money = incoming money balanced budget.
as long as there is Pakistan and China in the neighborhood, we’ll have to maintain a huge army,
keep buying new tanks and missiles.
As long as there are poor people, we’ll have to keep running various Government schemes.
When Government spends beyond its aukaat, it creates a big pothole in the highway.
This pothole can be called a Revenue deficit, budget deficit, fiscal deficit or primary deficit –
according to the formula you use to measure the depth of this pothole.
This pothole cannot be filled with cement, asphalt or dirt. It can only be filled with cash.
In the 1980s, Sukhmoy Chrokroborthy Committee came up with the fiscal deficit formula
Fiscal deficit=
Kelkar: This fiscal deficit number tells you the depth of the hole and gives you the idea how
much money do you need to borrow from the sources
Mohan then simply borrow money and fill up the pothole! What is the problem?
problem is “Paisaa Ped pe toh nahi lagtaa ” (Money doesn’t grow on trees). →hen you
borrow money, you’ve to pay interest ( ) to the party, every year.To pay this
Kelkar
interest in the future, you’ve three options.first option =Increase the current taxes or
create new taxes.
Mohan Not a good idea sir-ji.
alright, Second option =Create policies to help stimulate economic growth so that tax
Kelkar collection automatically increases with it, like FDI in aviation, power sector, retail,
insurance and so on.
Mohan But that’s Easier said than done :(
Then Third option : Print more currency and use it to fill up the pothole. This is
Kelkar
called debt monetization.
Mohan Now this third option sounds great :D
Actually that’s the stupidest of all three solutions. Let me explain with the usual
Kelkar
example.
On the other hand, Suppose your boss pays you 10 lakh per year, but that means he definitely
extracts work worth more than 10 lakhs from you and sells some goods/services to a third client.
That’s why giving you 10 lakhs doesn’t increase inflation. (because some other client is buying
the services you had produced).
but giving 10 lakh to a poor without making him economically productive = increases inflation.
Here is another example: Suppose that there is only one commodity that everyone
needs to buy in order to live a good life say wheat.
Also, assume that our country produces 10,000 quintals of wheat every year.
There are a total of 25,000 people in the country who spend Rs. 400 each per year to
buy wheat.
Since this Rs. 1 crore is spent to purchase ten thousand quintals of wheat, the cost of
wheat is Rs. 1,000 per quintal.
Now suppose that to repay some of its debt, the Government decides to print some new
currency notes. Say the Government prints new notes worth Rs. 10 lacs.
This means the amount of money available to spend increases from Rs. 1 crore to Rs.
1.1 crores.
Since the amount of wheat produced hasn’t increased, each tonne of wheat now costs
Rs. 1,100, a 10% increase! (1.1 crores paid for ten thousand quintals = Rs. 1,100
per quintal).
So we have just seen that the effect of debt monetization is “inflation.”
Inflation acts like an invisible tax on all the people of a country. (recall the first option –
increasing tax was not a good option.)
Black Money
Fiscal deficit= crudely speaking when incoming money is less and outgoing money is
more. So, incoming money is less = tax collection machinery is not effective = perhaps
lot of people are evading the taxes = black money =inflation (demand pull type) = Very
bad.
In extreme conditions, inflation can give way to hyperinflation that can completely
destroy a country. =very bad.
When Government keeps borrowing and borrowing to fill up the fiscal deficit pothole, then bond
yield will increase = not good because more and more of taxpayers’ money (i.e. Government ‘s
incoming money) will go in repaying that bond interest rate rather than going into education or
healthcare.
So, that much money (Credit/loan) is not available for other needy businessman.
thus fiscal deficit “Crowds out”investment from private sector. Now that needy businessman will
have to borrow money at higher interest from another party (this is how fiscal deficit increases
‘interest rates’)= input cost of product increased = he will increase the MRP of his product or
service to maintain the same profit margin = inflation. (cost-push type)
Interest Payment
In this financial year alone (2012-13), the government will pay more than 4 lakh crore just as
interest payment on debt taken earlier! = more imbalance between incoming and outgoing
money.
Now in the opening lines, Kelkar said Fiscal deficit would be around 6%. What does that mean?
In newspapers and economic discussions, the Fiscal is usually expressed in second form
(percentage).
Therefore, we must not only pay attention to the fiscal deficit, we must also try and
understand the different areas of Government spending.
Is the Government borrowing money to spend on programmes that lead to increased
economic productivity or is it spending on unproductive programs?
Remember, even directly giving money (or amenities) to BPL, without making them
more economically productive = dangerous because of the various reasons seen above.
+ Policy reforms such as FDI (to create environment conductive for economy = that will
automatically increase productivity and tax collection. Recall the second option.)
hmm that itself sounds like a problem. I think I should make another Committee (so that
Mohan I don’t have to implement its recommendations). Let me check my phonebook for
retired judges.
Sir this is the matter of economy not railway accidents. It requires an expert on
Kelkar
economy.
Mohan Then make a Committee headed by Montek Singh
but Media won’t like his recommendations. (Everyone who earns more than Rs.20 is not
Kelkar
a BPL and he should pay 10% income tax.)
Mohan Then make a Committee headed by some columnist from The H*****!
But Madam-ji wouldn’t like his recommendations. (hand over Finance Ministry to Fidel
Kelkar
Castro)
Mohan Then whom should I appoint?
Kelkar The expert is sitting in front of you.
Alright, tomorrow morning you goto the finance Minister along with your class
Mohan 10,12,college marksheets, extra-curricular activity certificates and job experience
certificates (if any) and get the appointment letter from him.
What???
Kelkar
I served as the finance Secretary of India (despite not being an IAS).
I served as an executive director in IMF.
Hell I even served as the chairman of 13th Finance Commission of India!
and now you’re asking the Vijay Kelkar to submit his class 10-12 marksheets and extra
curricular activity certificates?
Mohan Chillx. I was joking. You may go now. If I need any more help, I’ll give you a miss call.
Kelkar PM and miss-call? Another joke?
No, I’m serious! Miss call= Government expenditure on phone bills reduced= fiscal
Mohan
consolidation.
Kelkar Whaat an idea sir-ji.
Then ↑ijay Kelkar set out for a journey to prepare a ‘roadmap’ for fiscal consolidation.
→e’ll see the recommendations of Kelkar Committee in future article. (To Be continued.)
Mock Questions
Which of the following statements are correct?
Observations of Kelkar
1. High fiscal deficits tend to
1. heighten inflation.
2. reduce room for monetary policy stimulus (=steps taken by RBI to direct
economy)
3. dampen private investment, growth and employment.
4. millions of young, both skilled and unskilled, enter the labour force each year,
hence inflation and unemployment can be politically destabilizing for the
Government.
If Government takes no step, then with a “do-nothing” approach, the fiscal deficit will be
more than 6 per cent of GDP in the current year 2012-13, and such situation could lead
the country to a 1991-like crisis.
Therefore, Fiscal consolidation is necessary.
So obviously, for “fiscal consolidation”, we’ll need to increase the incoming money and reduce
the outgoing money. Now, let us check some of the important recommendations of this Kelkar
Committee.
There are two types of taxes: Direct and Indirect. Kelkar has given recommendations to increase
the collection of both Direct and indirect taxes, in following manner.
Data Mining
Since 2004, the Income Tax Department has been electronically obtaining a large volume
of information from third-parties through the Tax Information Network (TIN).
This is done to check tax evasion and black money.
(but) there is a growing perception that the Income Tax Department is unable to harness
this large volume of information, because it lacks data mining skills.
(Therefore) Taxpayers have found new methods and avenues for parking their
undisclosed income to escape detection by Income Tax dept.
That’s why Income tax department should provide training in data-mining for all directly
recruited inspectors and Assistant Commissioners, with the help of Big IT companies.
This an example but don’t be surprized, anyone can get PAN card. (=You don’t have to be
Indian Citizen)
UID (Aadhar) is also similar- a unique 12 digit number, issued by Unique Identification
Authority of India (UIDAI) to all the residents of India. Please note: there is difference
between “resident” and “citizen”. Some people oppose Aadhar on this ground. (That
illegal Bangladesis might also get it, if they’ve the proof of residence).
Please check this chart uploaded on official UID site. Extremely important for MCQs.
An Example of Aadhar Card.
It also doesnot change with address or place. So if you got your PAN/UID while you
were in college of Delhi but then shifted to Banglore, your PAN/UID numbers wouldnot
change. This helps in tracking down tax evaders.
Kelkar says amend the laws so that Irrespective of amount of money transected, PAN /
UID number must be quoted in bank accounts, fixed deposits with banks, all salary
payments and sale of immoveable property.
This will also help detecting tax frauds and reduce black money.
Thus, if Government takes above steps then direct tax collection would increase.
If a company or individual doesn’t pay his taxes on time, then Government should charge
22-24% interest rate on his pending tax payments.
For example:
Anyways back to business. →e were talking about Kelkar’s recommendations on Excise duties.
For example
What is Externality?
Externality = →hen two party do some business, “externality“ is experienced by the
unrelated third parties that are not involved in that business.
Negative externality
I take admission in some pharmacy college. (ME and college are buyer and seller of
education). But the college is bogus and doesn’t teach anything meaningful. Then third
party (Pharma industry) also suffers negatively, because the drug-company that gives me
job in future will run less efficiently because I’m not very skilled pharmacist! (this is an
example of Negative Externality)
Positive externality
IF all kids are given policy vaccine by Government, then then India’s future workforce
will be healthier and fitter =third party (Industries) will also benefit.
E-Governance in CBEC
Kelkar observed that under the Kerala VAT regime, the dealer must electronically
provide invoice-wise details of all sales to, and purchases from, registered dealers.
Central Board of Excise and Customs (CBEC) should also develop a similar
computerized system for comprehensive cross-verifications.
This will help in detecting the tax-evaders.
These are (not all but) main recommendations of Kelkar on how to increase collection of direct
and indirect taxes = incoming money will increase.
You already know about Debt vs Equity, Shares vs Bonds If not click me
Disinvestment (in crude terms) = when Government sells its shares from a PSU.
The Budget 2012 wants Government to collect Rs.30,000 crores via Disinvestment. (This
money would go in National Investment Fund under Ministry of Finace. And later on this
money would be used to finance bogus Government schemes and to revise other PSUs, if
they’re capable of making profits)
Kelkar says, Government should sell minority stakes in entities such as SUUTI ,
Hindustan Zinc and Balco etc. This way, it can easily get the required 30k crores.
But Kelkar has different views about what to do with this money! He says, The money
thus collected, through the disinvestment process should be deployed in infrastructure=
growth and employment.
Using this money, Government could move into the sectors where private players would
be hesitant to play a role. These include areas such as garbage clearing, public health,
cleaning of rivers, recharging of groundwater, urban mobility and so on.
Reduce Subsidies
Kelkar says increase the prices of diesel, petrol, keroscene, LPG and Urea etc. (Actually
he says Government should reduce the subsidies on each of them, in phased manner =
price will increase automatically!)
Kelkar also clarifies that he doesn’t want complete elimination of subsidies. He says we
shouldn’t eliminate subsidies. Food subsidy is defensible. For undernourished children or
lactating mothers food subsidy is not only defensible, it is ethically right and morally
correct
Subsidy must be continued for kerosene as long as it is affordable (for the government)
But the subsidies should be reduced as and where possible.
For example, LPG subsidies do not go to our people who fall in the low income bracket,
therefore LPG subsidies should be removed.
With a drastic cut in subsidies, a bigger part of the resultant savings should be
channelized towards programmes that lead to creating new job opportunities.
Kelkar agrees that Yes, reduction in (petrol, diesel, kerosene, urea) subsidies could lead
to some short-term pain (=inflation ) but the government should spend more on
employment generation, which would lead to higher growth and benefit everyone.
If Kelkar report is implemented then Diesel price will increase by around Rs.6/lit and
LPG price by Rs 87 per cylinder.
Change focus of Government schemes
Kelkar suggess that all Government schemes/Programmes for the poor should be centred around
employment generation.(rather than populist schemes aimed at free electricity, TV Fridge etc.)
These are the major recommendations of Kelkar Committee. This is what “Kelkar said”
Chindu: I’m going to hold consolations with various stockholders and then decide the future
course of action (about whether should we implement his report or throw it in dustbin). And In a
developing country where a significant proportion of the population is poor, a certain level of
subsidies is necessary.
1. Government should sell unused land owned by various ministries, if it is not generating
any Revenue.
2. Government should increase the subsidies on Urea.
3. Government should increase the excise duty on merit goods.
4. Government should exempt railways and non-profit organizations from service tax.
5. Government should not implement Direct Tax Code in its present form.
6. Government should not implement GST in its present form.
Descriptive
150 words
Interview
1. What is fiscal consolidation?
2. Why is it necessary to have low fiscal deficit?
3. The presidential debate between Obama and Mitt Romney revolved around healthcare
cuts, tax cuts and fiscal deficits. How are they related with each other?
Every year GDP should grow the 9%. (this was the original target but in Oct 2012,
Government concluded that it is beyond our aukaat to grow at 9%, so the new target is
8.2% per year).
Every year Agriculture sector should grow at 4%, because
o Higher agricultural growth would provide income benefits to the rural population
and
o It’ll also reduce food inflation.
Every year, manufacturing sector should grow at 10%
At present, 30 per cent of the population is below poverty line. 12th FYP wants to bring
down the poverty ratio by 10 per cent.
major flagship programmes in the Eleventh Plan, would continue in the Twelfth Plan.
most notably the
Time Factor
Development requires time and patience. For example, if Government takes step to
improve education for the poor kids.
but the impact will only be reflected in actual income earning much later (When they
grow up and start earning).
So, even when policies are moving in the right direction, the results may only be evident
much later.
Inflation
A moderate level of inflation, is unavoidable for a growing economy.
but when inflation beyond this tolerable level – usually put at 5 percent to 6 percent, then
it’ll start damaging the overall growth and inclusiveness (of poor people.)
Inflation has been well above this level in the past two years and while India is not the
only emerging market country experiencing this problem.
But inflation in India has been higher than in most other countries
High rates of inflation in food prices, especially vegetables, fruits, milk, eggs, reflected in
double digit rates of inflation as measured by the Consumer Price Index (CPI) in the past
two years
Main reasons for inflation in India
Fixing inflation
Monetary policy is the traditional instrument for dealing with overall inflation,
Last two years, RBI gradually tightened the monetary policy, but it can be effective only
if it is supported by appropriate fiscal policy.(i.e. steps by Government)
Exports
India has become a more open economy in the post-LPG Era. But It is still less dependent
on export demand than other emerging market countries
Problem: How India can actually expect to grow faster in an environment in which export
demand will be weaker. (because of slowdown in US and EU).
Answer: even if export demand from industrialised countries is weaker, many emerging
market countries are projected to grow more rapidly. (Brazil, South East Asia etc.)
So, if we target these fast growing markets our export performance could be improved.
Traditionally, we have viewed current account deficits of around 2 percent of GDP as
comfortable.
current account deficit in 2010-11 was already around 2.5 percent of GDP
Policy environment
India has only recently begun to attract global capital and given the size of the economy,
and its perceived high growth potential,
If Indian Government’s policy towards FDI is seen to be supportive, then India will
remain an attractive investment destination for coming years.
But there is also a situation when but investment does not take place even after allowing
FDI, relaxing environment laws etc. simply because entrepreneurs do not find investment
opportunities attractive, i e, “animal spirits” are missing.
Therefore, Government needs to create an overall policy environment conductive for
investment (not just FDI but also infrastructure, labor laws etc.)
Labour
In the coming years, working age population in India will increase.
At the same in the industrialised countries, and also in China, it will be going down.
This situation can work as a “demographic dividend” only if
1. sufficient investment is taking place to generate the GDP growth (and thus employment)
to absorb this youth.
2. right education and vocation skills are given to the youth.
Right now, over 90 percent of our labour force has received no formal training prior to
employment and skills are typically acquired only on the job.
This is simply not consistent with target of 9 percent growth.
India’s position today is roughly comparable to China’s in the 1985, and starting from
that position, China achieved an average growth of GDP over 10 percent per annum for
30 years. There is no reason why India cannot do the same.
Cold storage
Most of the growth in agriculture in future will come not from foodgrains
but from sectors such as horticulture, dairying and fisheries, where the produce is
perishable (Food that will decay rapidly if not refrigerated)
So Government must pay greater attention transporting produce from the farm to the
consumer, with minimum spoilage.
This requires active involvement of the private sector, cold storages, better quality roads
etc.
Supply lines
The present Agricultural Produce Marketing Committee (APMC) Acts prevent the
private sector buyers from dealing directly with producers.
State Governments must amend these acts.
Land Leasing
state governments is the reform of laws relating to leasing of land.
When rural population increase, the farm holdings are subdivided and become
uneconomic.
The very small and marginal farmers should lease out their tiny land to more viable
farmers, and move into other sectors for better employment.
But small farmers will do it only if they felt that they could lease out their land and get it
back when they want.
Yet, leasing is not legal in some states. Where it is allowed, the law is biased towards the
tenant (Someone who pays rent to use land).
So state Governments should also amend the laws accordingly.
Non-farm Employment
In manufacturing sector, the corporates make huge profit even after giving salaries to the
employees. And much of this profit is reinvested for research and Development of new
products. (e.g. Apple’s iphone 5) and in expansion (e.g. Tata making new automobile
plant in some state)
Therefore, manufacture and service sector continues to grow, because new products are
created, new demand is generated, new employment is generated.
But Productivity in agriculture is low and too many people are employed in it. So after
paying for seeds, farm-labourers, even a big farmer doesn’t have enough ‘extra-
money/profit’ left, which he can use to drastically change his farming practice (like
buying big farming equipments from US, importing best hybrid quality seeds from top
company etc.)
Therefore Government should focus on two things:
1. land consolidation : small farmers should lease their land to big farmers/ cooperative
farming.
2. move people out of the agro-sector.
Regional imbalance
Northern states are industrially backward at present, but have high labour supply.
Hence there is lot of inter-state migration.
So the respective Governments must improve the employment opportunites right within
their states.
How? By attracting both national and international companies in their states.
But those companies will come only if there is right atmosphere and environment in the
state. That means
1. No naxalite problem
2. No kidnapping and extortions.
3. Sufficient electricity and water supply
4. Quick land acquisition and environment clearnaces.
5. Rationalise our labour laws to give employers more flexibility to shed labour when faced
with a downturn.
Infrastructure Development
infrastructure sectors = power, roads, ports, airports, and railways
some sectors, e g, telecommunications, achieving higher levels of investment than
projected, while others achieved significantly less.
For 9% growth, we need total investment of $1 trillion over the Twelfth Plan period.
But how to finance infrastructure projects? Two problems
LIC, EPFO, etc, are very conservative at present when it comes to investment. Whatever
money they get from clients, they prefer to invest it in G-sec instead of higher yielding
corporate bonds.
Reason: if the private company defaults or goes bankrupt then it is very hard and time-
consuming to recover the bond-money.
While banks, can easily recover loan money via SARFAESI, bond holders can only have
recourse to liquidation and bankruptcy procedures which are hopelessly time consuming.
Therefore Government must amend the Company laws etc. to fix this problem.
Energy Economy
global supply of crude oil = will remain tighter in the years ahead, and therefore crude oil
price will also remain high
Therefore we must increase domestic supply of energy from both conventional and non-
onventional resources.
Electricity
Electricity prices are set by supposedly independent state regulators, but there is strong
political pressure on regulators in many states and it prevents them from increasing
electricity price.
The system must be allowed to function properly so that electricity prices are not
artificially depressed, especially as coal prices are expected to rise. (otherwise subsidy
burden= more fiscal deficit= inflation.)
Coal production
Coal industry is nationalised, although private investment is allowed in captive coal
mines (i e, coal mines linked to power plants or steel and cement plants).
the policy for the coal industry should be liberalised – allowing private investment.
Nuke
Expansion of nuclear power is an important element of India’s long-term energy strategy
and this has been facilitated by the recent agreement with the Nuclear Suppliers Group
which gives India access to imported uranium, and also opens windows for other
cooperation in this area.
Problem: Bogus NGOs and semi-naxalite intellectuals protesting against Nuke plants
after receiving bribes from abroad.
Solar
India has target to install 20,000 MW of solar power by 2020.
India has the potential to be a significant supplier of solar-equipment to other countries.
Hydro
Can make huge dams in Arunchal Pradesh and generate thosands of MW electricy.
Problem: border disputes with China.
Water price
Government keeps the price of irrigational water very low.
This leads to poor maintenance of the canal system due to low funds.
Tubewells
The present laws only provide for banning new tubewells in areas where the water table
has fallen too far.
This only confers a monopoly on existing tubewell owners to pump as much water as
they wish and sell it to other farmers.
Free electricity for agriculture provides a wholly unjustified incentive for such activity
(of selling tubewell water).
So, state governments should consider imposing a cess (tax on tax), on electricity for
agricultural use in all areas where the water level has sunk too low.
Right now only 30% of the sewage generated in urban areas, is treated before getting
discarged into rivers. Government should increase this to 100%.
Urbanization
The urban percentage of the population is currently around 30 percent, and is expected to
reach 40 percent by 2030.
Most of the revenue generated from economic activity in the country occurs in urban
areas.
But most of this tax Revenue goes to Union and State Government and not to the city
municipalities.
So, municipalities in India also have limited money to improve the water, sewerage and
urban transport system.
Jawaharlal Nehru National Urban Renewal Mission (JNNURM) introduced in the
Eleventh Plan fixing this problem. But much needs to be done yet.
Environment Protection
We want high growth (9%) without inflicting much damage to the environment.
But these two objectives (9% growth vs protect environment) cannot be achieved
simultaneously in many situations for example,
9% growth = need lots of power/electricity =need coal and hydropower= forest clearance.
9% growth = require industrialisation = leads to water +air pollution.
Therfore some compromise is necessary.
But there are certain areas where we must not make any compromise, for example tiger
reserves and very select biospheres.
Corruption
Corruption in land-acquisition and land allotment
Corruption in Spectrum and minerals allocation.
These things indirectly increase the ‘input cost’ for the entrepreneurs and hence inflation
also increases.
As a general rule, competitive bidding among qualified bidders provides the most
transparent way of allocating scarce resources such as mining rights or spectrum.
Many countries have a public procurement law whereas in India government
procurement is governed by rules.
Government schemes
In following schemes, the Complaints of leakages, inefficiency and corruption are widespread
Why problem?
central government only finances these programmes, and actual implementation is carried
out by state government agencies
Many schemes involve cooperation between different departments of government, e g, of
agriculture, irrigation and rural development or the departments of health, education and
women and child development.
Unfortunately, Government departments typically work in silos = interdepartmental
cooperation very difficult = lot of leakage and wastage.
Secondly many schemes have separate id-cards and registers = cross verification difficult
= corruption. So need to fully implement UID as soon as possible.
The panchayati raj institutions (PRIs) donot have enough funds to carry out the
Development activities.
Conclusion
No power on earth can stop an idea whose time has come.
We live in a world of rising and faltering economies. So, The future is what we make of
it. Nothing is ordained or pre-determined. India can rise, if the right steps at taken at right
time.
Much of what needs to be done to accelerate GDP growth to 9% (or 8.2%) will be done
by the private sector, but the governments too have a crucial role to play in providing a
policy environment that is seen as investor friendly and is supportive of inclusive growth.
Solution
In October 2012, Mohan setup a GoM (Group of Minister) to examine all matters relating
to pricing of bioethanol, its blending with petrol.
This GoM will be headed by Sharad.
Mohan has asked the concerned ministers (agri, finance, chemical, petroleum etc) to
resolve their differences in the GoM and bring it back with a recommendation to the
Cabinet Committee on Economic Affairs (CCEA.)
The CCEA will then
o Either It’ll make the ethanol blending rules/policy.
o or It may form another GoM to study the recommendations of this GoM!
CTS-2010
In the year 2010, RBI came up with the guidelines for Cheque Truncation system. (CTS
2010)
The banks would need to upgrade a few things to comply with CTS 2010 standards of
RBI.
For example, in their branch offices, they would need to buy scanners and install special
software provided by RBI, to securely transfer and receive the scanned image and data.
They may need to change the color-scheme of chequebooks so that signature and
handwriting is visible in the scanned image. And so on…
Problem: some jholachhaap banks, are yet to comply with RBI’s CTS 2010 guidelines.
Hence recently RBI issued a warning to all banks:
Branch
manager of indeed, whaat an idea sir-ji
Lena Bank:
Bretton Woods and Fixed Exchange Rate
system : Meaning Explained
I had posted this article somewhere in April 2012 but because of a technical glitch this article
(and many other articles on economy) got wiped out of the server. So here I’m re-posting the
same article. If you had already read it, no need to read again because Content has not been
changed.
While reading newspaper columns about global economy or Eurozone crisis etc. you may have
come across a sentence, multiple times : “we need another Bretton woods.” so,
Why is important?
In 1944, President Roosevelt hosted a conference here, to rebuild the world economy,
after Second World War.
Delegates of 44 allied nations ( ) had came to participate in this conference.
Officially it is known as United Nations Monetary and Financial Conference,
commonly known as Bretton Woods because of the place where it was held.
This conference resulted into creation of four extremely important things
Agenda of conference
Help rebuilt the World Economy. Provide money, loan, finance to needy nations. (World
Bank)
After →→2, lot of colonies will get independence (India, Sri Lanka…), they’ll introduce
their own national currencies without control of big superpowers (Britain, France etc) and
they’ll enter in international trade in their own capacity.(Exchange rates, IMF)
Hence, Some rules/order had to be created to facilitate smooth international trade.
(GATT)
President Roosevelt: ok I say we put fixed exchange rate system. Let’s fix the rates that 40
Rupees will equal to 1 dollar. 15 Yens will equal to 1 dollar. 12 Pounds will equal to 1 dollar and
so on. In short, I’m pegging your currencies to US Dollar. Thus Dollar will be the international
reserve currency. AND Your country’s RBI (central bank) will make sure these exchange rates
don’t fluctuate more than 1% from these values.
Mohan: ya man, but what if the exchange rate fluctuates? for example, What If I start running
my country in a totally pathetic and irresponsible manner and hence nobody wants to invest in
India so supply of dollar is low but demand of dollar is high- because Indians love gold and
we’ve to import crude oil and pay in dollars. In short, this will fluctuate the exchange rates
between Dollar vs Rupee.
President Roosevelt: Let me ask you a question. Suppose Onions are selling 100 rupees a kilo
because of low supply but suddenly farmers produce fresh new 50 million tonnes of onions and
supply it to market, what will happen?
Mohan: Easy! Onion Price will drop down to 40 rupees a kilo because the supply has increased.
President Roosevelt: yes dude, the same way, whenever exchange rate fluctuates from our
standard rate, you’ll tell your RBI to supply dollars from its own forex reserves in to the market
to calm down the demand and bring the rate back to normal level.
If the reverse happens: (Onions are selling @ 2 rupees a kilo) then you tell your RBI to buy all
Onions dollars using its own rupees, until the supply is reduced and price is back to normal.
Mohan: What nonsense is this? If 40 rupees equals 1 dollar but then what does 1 dollar equal to?
What is the value of your own dollar? Why should we accept your dollar as international reserve
currency?
President Roosevelt: I’ve fixed the value of your currency to my dollars. And I’m fixing the
value of my own dollars to Gold. 1 ounce of Gold shall equal to 35 dollars. Meaning you walk in
with 35 dollars in my RBI (Federal Reserve Bank of USA), and you’ll get one ounce of gold in
return. Gold will remain precious forever. So, it’s not like we’re running the show in thin air.
Dollars are backed by GOLD.
Mohan: ya man but what if my RBI doesn’t have enough dollars in its lockers? →hat will we do
then?
President Roosevelt: don’t worry, come to IMF. They’ll arrange short term loans for you, in
dollars.
Mohan: but still, why should we fix price of our currency to dollars? Why should we accept
dollar as the reserve currency and not Yuan, Yen or Pound? Why should we accept you as our
big boss?
President Roosevelt: Because I’ve the aukaat to pay enough gold, so I say dollars will be the
international reserve currency. IF you’ve enough gold reserve in your RBI, come sit in the chair
and we’ll see whether rupee is strong enough to become the international reserve currency or not.
Even Britain is so financially bankrupt after Second →orld →ar, they don’t have the guts to tell
me set this exchange rate according to their Pounds. Btw, I also got some nuke missiles in my
limousine.
Mohan: no no…I was just kidding man. I’m well aware that you’re the superpower both
financially and militarywise.
President Roosevelt: Besides →hen we’ve a stable and fixed exchange system like this, it’ll
ensure smooth and long term trade deals between merchants of various countries. When you
don’t have fixed exchange rate system, it is bad for economy. For example, today your call-
center boss may give you free lunch and coffee because $1=60 rupees but next day when value
of rupee declines and it is $1=50 rupees, same boss will even stop running the water-cooler in
your office. Third day when $1=40 rupees, He will just kick you out because outsourcing
generate that much profit for him. Such uncertainty, is not good for economy.
And since Gold is in limited supply, Dollar will be spent carefully, and so your currency will be
in spent carefully. i.e. Since currencies are ‘pegged’, you will not indulge in extravagant
spending in subsidies, welfare schemes, tax-reliefs or debt-waivers to farmers. This ensures
fiscal discipline => That ensures less Fiscal deficit = less inflation.
Mohan: Mr. President Sir, I think I got the point now. I’ll tell my RBI Governor here to sign the
Bretton Woods agreement papers, because fixed exchange rate system sounds safe and good.
1. During that time, majority of American population was involved in agriculture and allied
activities (just like Indian population right now)
2. During that time, USA’s GDP growth rate was 7% per year (similar case in India right
now.)
3. And during that time, USA too had high-level of political corruption and scandals. (Just
like India)
4. By the end of this Gilded Age, USA became an urban majority society And went on to
become the superpower, supercop, judge, jury, executioner, leader, financer and top
innovator of the world.
So one can be optimistic that the situation in India today, is just normal and expected-sign of
good things to come, just like the labor pain before a child delivery.
In short, the corruption problem is universal and not related with Indian morality or lack of
it. Rather, high economic growth brings with it a set of virtues and vices. But How?
Does it means High GDP growth itself is responsible for corruption? No, not the GDP but the
incentive structure.
a. Now the teacher has incentive to personally look after every student and see that he/she is
learning every lesson.
b. Now the teacher has incentive to setup very easy question paper so that every student
passes in the exam.
c. Now the teacher has incentive to evaluate the answersheets in very liberal manner so that
every student passes in the exam.
d. Hell, now the teacher has incentive to leak the damn question paper one week before the
actual exam or simply dictate answers in the examhall!
Yes, there will be some good teachers, opting for option (a) and there will be some good students
who will study seriously, irrespective of the cheap tricks used by their teacher to up the passing
rate. But by and large, most teachers would opt for the option b, c or d.
Then Government makes excuse “Our policy is good but implementation is bad”, “we send
money from Delhi but State Governments are not doing enough!”
But can a policy be good if it has not taken precautions to prevent bad things @implementation
level, in States and Districts?
Mr. ↑ijay Kharadi (IAS, Gujarat cadre), recently got married. Ofcourse, we’d expect this ought
to be an expensive wedding ceremony.
But it wasn’t. He married in a simple mass-wedding ceremony.
His words, “Spending on extravagant weddings is a complete waste. I am a tribal, and I know my
community lives on the fringes. We need to spend on health and education, not weddings. I wa nt
to set an example by getting married in the simplest way.”
In 2011, Erode (TN) District Collector Mr.R. Anandakumar admitted his daughter in
Government primary school. His decision has surprised many parents in the district,
which has a number of well-known private schools.
Now The Collector will be making sure that Government schools are working nicely,
they has sufficient funds, teachers and infrastructure. It will encourage more parents to
admit their children in government schools and feel safe about their future.
Anyways upto this point, the argument was “corruption follows High GDP” .
Now how about the reverse Argument? High GDP follows corruption!
Is/Can/should GDP alone be the criteria to measure the Aukaat of a Country? And Can “end-
goal” justify the “means” used to achieve it?
If yes, then
How about cut down all trees, make furniture and export it to USA?
How about kill all tigers, sell their hides and bones to China and Thailand?
How about legalizing gambling and cricket betting?
Why is it in news?
Beetal Livestock & Farm (P) Ltd
This company claimed to have large goat-rearing farms in North India and offered
following type of investment opportunity.
What is Spectrum?
→henever you watch T↑, receive phone call, send SMS, surf internet….data is being
transferred from one place to another, say Ahmedabad to Mumbai.
So, If data was a “truck”, how would you transport it from A’bad to Mumbai (or vice
versa)?
Obviously via highway.
Spectrum is that highway.
Cable TV 145-860MHz
2G 800-1900MHz
3G 2100MHz
4G, broadband internet 2300MHz
(^numbers for illustration only. Different websites will give different numbers.)
So, →e first send the truck from A’bad to a Satellite hovering in the sky, and from there,
send the truck to Mumbai.
Problem: satellite=expensive. Private Player(Businessman) cannot afford it.
Solution: Government launches the satellite using ISRO. Thus the highway (spectrum), is
created. Then Government will charge money to whoever(cellphone company) uses this
highway (spectrum).
You’re a businessman, you want to launch your own mobile service (like ↑odafone,
Airtel etc). Therefore you’re interested in using this 2G highway, to transport your trucks
(data). You can also use 3G or 4G, which provide faster data transfer, but they’re more
expensive.
Highways have fixed capacity. So Government cannot give license to 500000 truck-drivers else,
it’ll create traffic jam. So, From Government’s side what should be the “ideal” solution?
1. Check the application of driver: does he have previous experience of running telecom
business? and more importantly his class 10,12 and college marksheets and school
leaving certificate.
2. After verifying his record, Sell the access to this highway (Spectrum).
Another problem: how should Government sell access to this Highway (Spectrum)?
1. Driver’s license
2. Access to Spectrum (via paying the money to Government)
And then, what happened next, is a classic case of cinema ticket black-marketeering.
Ignored the advice of PM, Finance Ministry, Law ministry, TRAI etc.
TRAI had advice Raja to sell the spectrum via ‘auctioning’.
But Raja used “first come first serve basis.”
Licenses were sold in 2008 but the price (entry fees) were kept very low @2001’s market
rates.
Initially the last date to apply for licenses = 1st October 2007. But then Raja changed
policy “we’ll give license to only those companies who applied before 25th Sept.” This
way later-comers could not get license (and had to buy it from ‘black market’).
He allowed ineligible companies to apply and get license (e.g. Unitech)
The companies who got license but did not start business (UNITECH and S→AN)…Raja
did not take action against them. He should have cancelled their licenses or imposed
heavy fines on them.
Companies paid him the bribes, he transferred money to bank accounts under his wife’s
name in Mauritius and Seychelles.
Arrested in 2011, got bail in 2012, came back in parliament, thus proving that he is
totally (and that means totally) awesome.
Kanimozhi
Kanimozhi
Neera Radia
There are some phone-tapes, in which this lady is
talking with Barkha Dutt (NDTV fame).
To put this bluntly, Radia allegedly paid money to
Congress party, to get Raja appointed as telecom
minister. Then Raja could use the office to benefit
particular companies in 2G auction (who had
financed his ‘posting’).
This phone scandal is known as “Radia Gate”.
Only questioned, not arrested, and it is said that she
wore a Kashmiri shawl worth Rs.1 lakh during
questioning by Enforcement Directorate, so she too
is totally awesome.
Now that shawl has become so recognisable that
Kashmiri shawl sellers have started referring to it as
the Radia shawl and sales of it have shot up= good
for economy, GDP increased.
There are some other players too- RK Chandolia, Siddharth Behura et al, but you get the idea-
they too are totally awesome.
The 122 2G licenses were given by Raja for over Rs 9,000 crore.
While 3G auctions for a smaller number of licenses had fetched the government a sum of
Rs 69,000 crore.
Therefore Government has lost money (Besides, whatever money made by ticket black-
marketeers, is loss to the cinema hall owner)
The question remains, how much money was lost?
CAG says Government lost Rs.1.76 lakh crores, it has come to this figure, using
extrapolations from
Parliament -JPC
In Feb-2011, Parliament Constituted a Joint parliamentary Committee to probe the 2G scam. No
“real” progress so far.
Apart from that, a committee on allocation of natural resources, headed by Ashok Chawla, also
recommended the adoption of a transparent and competitive process for the allocation of natural
resources.
Government
Banks
SBI, PNB and other banks had landed to some of those telecom companies and now
licenses are cancelled, so loan-money is stuck.
Anyways, nothing new for SBI- their loan-money is stuck with Vijay Mallya (Kingfisher)
also.
1. “If the issue of cancellation of 2G license to Sistema is not resolved in Indian courts, we
will go for international arbitration.” (because Russian Government too holds about 17%
in this Sistema-Shyam telecom company.)
2. Row over Sistema will have “great repercussion” not only on Indo-Russian bilateral
cooperation but also for foreign investments in India.
3. We will not let Sistema’s USD 3.1 billion investment in its Indian telecom venture go
waste due to “internal problems” here.
Spectrum Refarming
This is a separate issue, not directly associated with 2G Scam of A.Raja.
In 2001, some companies got License + free spectrum (900 Mhz). (recall that Spectrum
was linked with the license.)
They’ve to renew their license in 2014.
But now Government has changed policy. According to new policy, Spectrum is de-
linked from License. So you’ve to apply for license separately and you have to purchase
spectrum separately (through auction).
Telecom Regulatory Authority of India (Trai) has suggested that existing mobile
operators will have to surrender the spectrum in the 900 Mhz band at the time of license
renewal in 2014.
And then, this 900 Mhz spectrum will be auctioned again.
Under this so called “Spectrum-refarming” process, if the companies manage to win in
the auctions, they will be able to retain the spectrum or, in lieu, they would be given the
1,800 MHz spectrum via another auction.
Telecom companies are against this decision.
Their argument, “we’ve already invested more than one lakh crore rupees in machinery,
mobile tower, other infrastructure for 900Mhz spectrum. If you take this away and give
us new type of spectrum, we’ll have to buy new machines=we’ll increase call rate price
to cover the losses”.
The matter will now be decided by Empowered group of ministers (EGoM).
1. There is huge infrastructure deficit (=not enough rails, roads, power stations, electricity
output required to get 9% GDP growth).
2. Delay in project= input cost increases= indirectly this leads to inflation (price rise)
3. Because files are not cleared= production/construction doesn’t start= Less employment
opportunities, directly (in the coal mine itself) and indirectly (in some xyz factory that
will use that electricity).
4. Government is unable to achieve the Five year plan targets. Check this table: Source:
Department of Economic Affairs.
Anti-argument/Objections
1. The main objective of NIB seems to shortcircuit or overtake Environment Ministry for
granting project approvals. But NIB might end up approving projects that are not good
from long-term environmental view.
2. Creation of such an entity might lead to lax environmental standards and social
safeguards (i.e. problems of displaced families because of a project).
3. Government should worry about not just growth but green growth.
4. NIB has no constitutional authority and its creation will decimate (wipeout) the role of
the Environment ministry
5. NIB will turn individual ministries and departments into rubber-stamps.
6. Setting up NIB suggests that existing institutions are not functioning properly. But
Creating more institutions to fix existing institutions, is like firefighting. The real long-
term solution = re-write the office-manuals/ standard-operating-procedures for each
ministry to prevent file-delays and the tendency to evade responsibilities.
7. Many projects in the railways, coal, telecom, petroleum and power sectors are delayed
due to “law and order problem” (=naxalites). NIB is no panacea for this.
8. Speedy project clearances and implementation would require solutions at the district
administration and state Government levels, where the NIB would not be of help as it will
comprise representatives only from central ministries.
MCQ
Which of the following statements are correct, regarding the Proposed National Investment
Board?
Answer choices:
a. Only 1
b. Only 2
c. Both 1 and 2
d. None
1. You’re running a bank/Non-Banking Financial company that gives loans, and I’m
basically a loser who doesn’t have the aukaat (capacity) to repay any loans.
2. Yet, You (American Bank) give me loan of $20,000, And I give you paper saying “if I
don’t pay back, you can take away my house.” This is mortgage.
3. →ait a minute, if I don’t have the capacity to repay the loan, then why the hell are you
giving me a loan in the first place? Well, Two reasons
i. Banks decide Loan interest rate based on a person’s creditworthiness. So in my case you
can demand higher interest rate=good for you.
ii. You’re also speculating that in future the real-estate prices will increase, so even if I can’t
repay the loan, you can attach my house and sell it off to recover your loan.
Thus, it’s a win-win situation for you whether I pay back the loan or not, you’re going to make
good profit.
Now, Back to the topic
4. Like this, you gave $20,000 loans each to 5 unworthy people= your investment is 1 lakh
dollars.
5. Now repack those mortgage papers (security) in a new file and make a new security
paper “anyone who gives me $1,50,000, I’ll give him mortgage papers of 5 houses” = this
is derivative product. (Because it derives its value from some other thing)
5. See? You are making profit of $50,000 and you don’t even have to bother about EMI
payments, interest rates anymore.
6. Suppose 3rd guy bought such derivative papers and after few months, he repacks them-
makes another derivative product and sell it to 4th guy.
7. Such papers are one sort of ‘asset’ (because you can get money by selling it to someone.)
8. but as you can see, in above cases, people are not creating any ‘new asset’, they just keep
repacking and reselling same stuff over and over to different people. So you’re blowing
an ‘asset-bubble’.
9. After few months, I, the bottom guy in food chain, refuse to pay loan-installments
(EMIs), and I tell the 4th guy to take away my house (mortgage).
10. Fourth guy takes away my home, but since banks gave loan to so many unworthy people,
there is over-saturation or over-availability of houses for sale in the real estate sector. So
no one is ready to pay you even $5000 for that house. = This is ‘toxic asset’ your asset
bubble is ‘burst’.
11. The banks, pension and insurance fund managers of Europe had also invested in this
game. They also lost. So in that way, Subprime crisis played a role in future Eurozone
crisis. Click ME
12. A bank of London named Barclay also lost money in this game, that led to LIBOR crisis.
Click ME
^This is just a crude explanation of what happened in sub-prime crisis. Otherwise the actual
crisis was result of many layers of refined and sophisticated loan and investment products
interlinked with each other.
Anyways, the Sub Prime crisis had negative effect on every sector.
Stock market crashed, Companies started dismissing local staff (especially those banks
and mortgage companies).
If parents were working in some private company, lost jobs or their salary was reduced=
they’d not hire maids or babysitters anymore, they’ll buy less clothes and toys for their
kids, they’ll not goto some holiday resort during vacations. So indirectly many sectors get
affected.
More unemployment= less product demanded by those unemployed families=even more
factories close down=even more unemployment. Cycle goes on.
^President Obama took these steps to increase money in the hands of American people, so they
can go out for shopping = demand of more products and services= more employment could be
created.
1. Giving tax-cuts to workers and companies= incoming money reduced for the
Government.
2. Giving unemployment allowance to jobless people= outgoing money increased.
3. +daily huge expenses for keeping army in Iraq and Afghanistan= outgoing money
already high.
You already know when outgoing money is higher than incoming money = fiscal deficit.
Fiscal deficit is a big pothole in the road to country’s prosperity. This pothole can be filled with
cash only. If this pothole keeps increasing in size then it’ll lead to very bad effects on economy.
So, President Obama had planned some things in advance to increase incoming money and
decrease outgoing money for the Government. These plans are:
Most of the tax-cuts, tax-benefits given to people will be removed from 1st January 2013.
For example, earlier the people were given tax-cuts if they adopted a child, invested
money in children’s college education plans, or businesshouses invested in research and
Development etc. All that will expire from 1st January 2013, thus they’ll have to pay
higher taxes.
Many of Government sponsored programs in space research, military research, lengthy
unemployment allowances etc. will be either paused, reduced or shut down from 2013.
(More than 900 billion dollars saved at the end of 2013)
If things go in ^this way, US Government will earn 4 trillion dollars in next 10 years. That’ll
cover up most of its huge fiscal deficits and past mistakes. (i.e. buying toxic assets, money
wasted on Iraq-Afghanistan and most importantly Pakistan).
1. Middle class families of USA, will have to pay average $2000 more in taxes every year.
And $2000 is a big amount given that many people in USA don’t earn more than $40,000
a year. So imagine the reduction in their purchasing power.
2. Overall, American public will have to pay $500 billion more in taxes.
3. More than 10 lakh people will become jobless.
^These numbers vary from site to site, if it’s a pro-Republican party newspaper or expert- they’d
say 20 lakh American will become jobless, but some other Pro-democratic party newspaper or
analyst would say only 7 lakh will be jobless.
Anyways, The point is, American Households and businessmen are accustomed (used) to
a certain way of spending and saving habits in past four years and Obama plan will break
that status quo = not good for economy, at least for the short term. It’ll lead to a decline
in GDP.
Observe this graph
What will be the Effect of Fiscal Cliff on
India?
1. If American consumers have less money = they buy less= not good for Indian exporters
(especially polished diamonds).
2. Many American companies outsource their research and development work to India,
particularly pharmaceuticals (clinical trials of drugs), software, engineering. If Obama
removes the tax-benefits given to them (+consumer demand already down)= they’ll either
delay payments, cancel or renegotiate the contracts given to the Indian companies.
3. If American Corporate have to pay huge taxes @home, and consumer demand is already
low, they’ll try to concentrate more on India and other emerging economies to get new
customers (Retail, Aviation, Pension-insurance) = More FDI may come to India.
4. Americans already burned their hands in share-market and real-estate, if this fiscal cliff
leads to recession, they’ll park their money in GOLD = demand of gold increased= gold
becomes even more expensive = bigger Current Account deficit for India (because we too
love gold) = Rupee weakens against dollar, because when we import gold, we’ve to pay
in dollars= we’ve to pay more rupees to buy same amount of crude oil = petrol price
increase = inflation.
For the entire Archive of all my articles on [Economy], visit this page: Mrunal.org/economy
Member %
ICICI 31
Bank of Baroda 30
Citi Bank 29
LIC 10
Total 100%
Solution
Therefore, EPFO wants to invest money in Infrastructure Debt Funds (IDF) to earn more
profit to give better ‘return-on-investment’ to its subscriber. It is looking forward to
invest about 5 lakh crores in IDF funds.
But newly formed Infrastructure Debt Funds (IDF) companies will not get AAA credit
rating immediately. So EPFO needs approval from Central Board of trustees to modify
the investment rules. And since Central Board of Trustees, is headed by labour minister
so essentially EPFO needs approval of Labour Ministry.
Mock Questions
Q1. Regarding Infrastructure Debt Funds (IDF) in India
1. The first IDF fund was setup by State Bank of India (SBI)
2. IDF is exempted from Withholding tax.
a. Only 1
b. Only 2
c. Both
d. None
1. The apex decision making authority for EPFO rests with the Finance Minister of India.
2. Withholding tax is an example of Indirect Tax
a. Only 1
b. Only 2
c. Both
d. None
Q3. Which of the following fund receives the proceeds from disinvestment?
a. Only 1
b. Only 2 and 3
c. Only 1 and 2
d. Only 3
What is GAGAN?
Male=capital of Maldives.
Maldives is a tourism economy. Their annual GDP=$2 billion annual GDP.
About 1/5th (=20%), of that GDP comes from this Male Airport.
So far this Male Airport was managed by Maldives Airports Company Limited (MACL).
Maldives Airports Company Limited (MACL)= 100% Government owned company.
In 2009, Government decided to to handover Management and control this airport to a
private company.
But Why?
Well, for the same reason why experts recommend that Air India should be privatized.
Because Government owned companies are mired with inefficiency and loss-making.
Besides Maldives Government itself did not have enough money to develop or modernize
the airport, they were looking for some foreign private investment.
Therefore Government of Maldives (under President Nasheed) decided to invite
“Biddings/tenders” for privatization of Male Airport: →hichever foreign company agreed
to share maximum profit with the Government, will get the contract to run the airport.
But the bureaucrats of Maldives= had no prior experience of how to evaluate the
financial, legal and technical worthiness of foreign bidders.
So, Government asked International Financial Corporation (IFC) to oversee the bidding
process.
1. IMF
2. GATT->WTO
3. World Bank
2. International Development
Give loans @ZERO interest rate to poor countries.
Association (IDA)
+knowledge sharing, health education etc.
3. Multilateral Investment
Loans and insurance to private companies, when they
Guarantee Agency (MIGA)
invest in Developing countries.
4. International Centre for
Settlement of Investment To settle investment disputes between foreign investors
Disputes (ICSID) and their host developing countries.
Anyways IFC was tasked to manage the bidding process for privatization of the Male
airport to ensure fairness.
Big players such as GMR, Reliance and other companies from Switzerland etc. were in
the competition.
The whole bidding process, checking applications etc. went on for 10 months (which is
roughly the same time it’d take UPSC to declare official answer key for any exam under
R.T.I.)
Finally GMR of India, won the contract in 2010 (when Nasheed was the President of Maldives).
And the contract had provision: If there is any dispute in future, either party (Government or
GMR) can approach the High Courts of London or Singapore for settlement.
President →aheed took the opportunity and started saying “GMR contract is not in best interest
of our country. They had got the contract by bribing previous President Nasheed. So we’ll take
over the airport Management. Our Government company MACL will run this airport.” He also
ordered criminal investigation against the company.
Rich nation gives aid to poor nation, for three main reasons
1. Whenever there is voting in UN general assembly or other forum, the poor nation will
vote in favor of rich nation. (e.g. Kashmir or Arunanchal pradesh border dispute, or
WTO, Climate-change agreements).
2. Poor nation will allow the rich nation to construct military, naval bases, radars, missile
defense system etc. in its territory.
3. Poor nation will allow rich nation’s companies to get mines, mineral and other contracts.
Indian Government was planning to cancel financial aids to Maldivian Government, to force
them into settling issue in favor of GMR. Experts are against this move because
1. If India stops giving money to Maldivian Government, then China (or US) will step in,
start playing big-brother and giving cash to Maldives.
2. Loss of good will among Maldivian citizens.
3. Apart from GMR, Indian companies like Tata, Taj etc. invested in Maldives. So if Indian
Government stops financial aid, then Waheed could start harassing them also.
1. I’ll stop or reduce financial and technical aids given to your country.
2. I’ll also start bullying and harassing your companies working in India via Income Tax
dept./CBI.
3. I’ll start giving money, weapons and shelter to opposition parties, rebels of your country.
4. I’ll increase taxes on goods imported from your country.
5. I’ll hatch some conspiracy to get you out of office. (sting operation, buying coalition
partners of Government.)
6. I’ll order my state media, psuedo-civil society organization etc to bad mouth you in India
and abroad about Human rights violation, corruption etc.
Traditionally US and Chinese Governments are very ‘assertive’ almost ‘aggressive’ when
it comes to protecting their national and commercial interests.
But it doesn’t mean they’ve always succeeded.
For example, In 2011, Myanmar Government suspended $4 billion Chinese project to
build a large dam on the Irrawaddy River. This happened despite China’s strong support
to Myanmar during its long years of international isolation and Western sanctions.
China’s relationship with Myanmar is much stronger than that between Delhi and Male.
Yet China had to display patience and hold its tongue.
Therefore, it is not the “assertiveness” but “preparedness” that is necessary to tackle such
issues. (We saw earlier, how India was caught unguarded during the coup).
>40 per cent of India’s GDP is linked to imports and exports.
Indian corporate is investing tens of billions of dollars abroad every year.
The real lesson is that India should be more prepared to protect the interests of its
companies operating abroad.
Problem with Maldives Economy= heavy dependence of tourism. Hence their GDP is
low, purchasing power is low and they’re suseptibe to instability. (both economic and
political).
India should see to it that they ‘diversify’ (marine food processing etc.) and have strong
import-export relationships with India. Once established, economic tries are harder to
breakoff than diplomatic ties.
Other necessary things for stable Maldives: Independent media, judiciary, penetration of
internet, cable-TV, powerful civil society.
Conspiracy Theories:
The Chinese angle
Behind the curtains, China had played role in it. First getting Nasheed replaced and then
Getting →aheed to cancel the GMR deal. And (perhaps) later, it’ll get the contract to
manage the airport.
Maldives is of strategic interest for both China and India, because of its location in the
Indian Ocean alongside major oil and shipping lanes.
More than 80% of international trade to and from Asia passes through Maldivian
territory.
Even USA has plans of building a military base in one of the islands of Maldives. China
doesn’t want this.
China has recently opened an embassy in Male= proves they’re interested in the
Maldives.
China has been consistently expanding its own influence in island nations on India’s
periphery – the Maldives, Sri Lanka, Seychelles and Mauritius by giving several millions
of dollars in aid and infrastructure projects.
The Crony Capitalism Angle
GMR is a shoddy company. It was “unknown” before 2000s. Suddenly it started making
billions after getting Delhi-Hyderbad airport contracts and other plump highway, building
and coal projects.
There is nexus between Indian ministers and this company.
GMR is charging Airport development fees in Indian airports also. (according to CAG
report, this wasn’t part of original contract.) Now even IT department has started raiding
its offices.
Nasheed was already in debt of India Government (recall we purchased 100 million
worth treasury bonds.)
So behind the curtains he was “ diplomatically” coerced into giving final approval to this
company.
This was either done because Indian Government wants to increase presence in Male or
simply because GMR paid gave them a few suitcases for lobbying.
In his exam-oriented blockbuster movie “Shivaji, The Boss”, the Rajnikanth plays role of
an NRI businessman. He wants to open free Medical college in Tamilnadu. But he has to
pay crores of rupees as bribe to bureaucrats and politicians for land allotment.
But then elections are held. New minister again demands bribes from the Rajnikanth.
Similarly, after →aheed took charge, he’d have asked GMR to pay another suitcase full
of money, but GMR refused (or decided to delay bribe because, elections are just
upcoming in 2013 who knows if Nasheed again became President!)
So, Waheed cancelled the contract to teach a lesson to GMR (and other Indian companies
in Maldives) ki suitcase delivery mein delay nahi hona chaahiye.
Mock Questions
Q1 which of the following, is not a function of Airports Authority of India (AAI)?
a. Only 1
b. Only 2
c. Both
d. None
1. Weather forecasting
2. Aiding pilots to navigate and land in difficult weather and terrain.
3. Aiding Air-traffic Management.
a. Only 1 and 2
b. Only 2 and 3
c. Only 1 and 3
d. All of them
a. Only 1
b. Only 2
c. Both
d. None
Interview
1. How do you rate India’s handling of GMR crisis?
2. Apart from GMR, are you aware of any recent disputes involving Indian Businessmen vs
Foreign Governments?
3. Are you in favor of Privatization of Airports? Yes/No and why?
4. What do you understand by Crony Capitalism?
5. Can you think of any solutions to tackle Crony Capitalism?
In short, factory equipment are capital goods because they’re used to produce customer
goods.
But the equipment used in an office= not capital goods for example stapler, paper
shredder, pen-holder, water-cooler table, chair etc.
Similarly, specialized air-conditioners installed in drug/ ice-cream factories to maintain
uniform temperature during production= capital goods.
But air-conditioners installed in that factory owner’s cabin=not capitals goods.
Capital gains tax are of two types: short term and long term. (depending on how long you
kept the asset before selling it.)
Capital gains tax is a direct tax. (because direct tax=charged on your income and
property).
For more on Capital Gains tax, check Vodafone Case article click me).
Mock Qs
Q1. Which of the following is correct
a. Only 1
b. Only 2
c. Both
d. none
a. Only 2
b. Only 1 and 2
c. Only 1 and 3
d. Only 2 and 3
Yaar many new players want to open banks in India. But they can’t, because you’re
Chindu
not giving new licenses, So what is your problem?
→ell, I’m given powers to regulate public and private sector banks, under Banking
RBI Regulation Act 1949.But those powers are not enough.
governor So, I’m not going to give new bank-licenses to anybody, unless and until you get me
more powers, by updating that Banking Regulation Act.
Ok, I’ll move a Banking laws (Amendment) bill, to amend the necessary things.But
Chindu
first tell me what new powers do you need?
So, I must be given powers to check the records and account-books of those mutual
RBI
funds, insurance and other companies associated with a bank.
Agreed.
Chindu you’ll get the power to inspect those other business arms of a bank.
Anything else?
RBI Yes, money from unclaimed bank accounts.
If a bank account is not operated for more than 10 years, bank will have to
transfer its money in the “Depositor Education and Awareness Fund”
RBI
And I’ll appoint a Committee to use money from this fund to create awareness.
Although if Mr.X returns, he can claim his money and that bank will have to pay
him interest also.
1. If any person wants to buy more than 5% shares of any bank, he’ll have to take
permission from me. And before giving him approval, I can put conditions on
him, For example give me deposit worth Rs.xyz, so if you play some mischief, I’ll
take away your deposit.
RBI 2. If primary cooperative societies want to continue their banking business, they’ll
have to get a license from me.
3. I can conduct special audits of cooperative banks because they’re more liable to
collapse and frauds.
4. If a bank fails to maintain the prescribed minimum amount of Cash Reserve Ratio
(CRR) on any day, I can demand penalty interest from that bank.
Chindu Agreed.
Chindu Agreed.
Set: parliament
In the parliament, Opposition members are shouting slogans. (as usual)
Meera Kumar says “beth jayiye, beth jayiye, kripyaa shaant ho jayiye.”(as usual)
No, no, no. if bill goes back to standing Committee, it’ll take lot of time.Ok I back off, I
Chindu
remove this provision, so there is no need to send this bill back to standing Committee.
Now this bill file will goto President. Once he signs it, this bill will become a “Law”.
Anti-Bill arguments
In December, employees of public banks went on strike. (although SBI employees did not join
the strike.)
The Bank unions give following Anti-Bill arguments:
Government claims “more banks = more branches = more poor people get banking
facilities = financial inclusion”. But it is mere lip service. Because new corporate
banks/foreign banks won’t have any interest in serving poor people.
If mergers are allowed then rural branches will close down and/or rural banking
operations will be outsourced via contractual business route.
This type of ‘privatization’ will negatively affect our job security and interests of those
poor people.
Statistics indicate that only 50 percent of people in India have bank accounts.
The Centre should focus on educating rural people and cultivating banking habit among
them instead of taking steps to merge banks or diluting voting rights.
Merger of banks will de-stablise public sector banks, then corporate firms will start their
own banks and gobble up public savings. And that money will be misused for the benefit
of few corporate honchos and not for the general public.
Although Chindu counters them saying “these banking reforms= new banks will be opened=
more employment. (he expects 6,000 new bank branches and recruitment of 84,000 people next
year.)
It seems the whole exercise is not a comprehensive banking reform but just firefighting
because 1) Foreign banks and domestic players put pressure on FM to help them get
bank licenses. 2) RBI blackmails FM to get more powers. 3) FM comes with banking
regulation bill. Prime objective of this bill seems to help private players get new banking
licenses.
Government should further relax the voting rights otherwise, Government will keep
abusing its majority shareholding to further its own political goals and election agendas.
e.g. in 2008, public sector banks were asked to forgo farmers’ loans (Debt →aiver
scheme). Although Government promised to refund the loan-money to banks on behalf of
farmers but it is not a good business practice.
Summary
The Banking regulation bill, 2011 was passed in the Winter session of parliament in Dec.2012.
The salient features of the Banking regulation bill are (list not exhaustive)
Suppose, Mr.Paraajay has opened factory with Rs.100 crores. He financed this, via mixture of
Debt + equity in following way. (make sure you understand debt vs Equity, if not click me)
By the way SARFAESI applies only to those assets “mortgaged/secured” to get the loan.
E.g. if Mr.Paraajay had taken business-loan, SBI would have asked him to sign away his
factory/machinary/vehicles/land etc. specific items as mortgage.
Hence SBI can attach only ^those assets.
But SBI cannot take away Paraajay’s personal home-furniture, expensive wrist-watch or
his son’s bicycle in the name of SARFAESI.
Similarly, Agricultural land is exempted from SARFAESI attachment.
Appeal structure
The borrower (loan taker) has following options:
Get a stay order from Debt Recoverty tribunal (DRT) against the auction/sale of his
properties. (He cannot file case in Civil courts.)
Fight the case in DRT.
If unhappy with DRT verdict, he can appeal to Debt Recovery Appellate Tribunal
(DRAT).
But before filing appeal with DRAT, he’ll have to deposit 50% of his pending loan
money.
What is ARC?
Asset reconstruction company (ARC).
They buy NPA (Bad loans) from Banks and try to extract maximum money out of
it=profit.
They’ve to register with Reserve Bank of India.
Examples:
A. Qualified institutional buyers (QIB) buy those security reciepts (SR). So Rs.35 cr cash
goes from QIB -> ARC -> SBI.
B. SBI itself recieves SR worth Rs.35 crores for free. (that means ARC will gradually pay
the money to SBI).
C. combination of both: QIBs buy SR worth 30 crores + SBI recieves free SR worth 5
crores.
1. SBI had NPA. First solution: auction the property. Did not work out.
2. Second solution: sell it to ARC.
So, ARC purchased the NPA worth Rs.40 crores (at Rs.35 crores).
ARC’s aim= extract maximum money out of this investment. But how?
1. Auction the assets fully or partially. (sell the machinary now, rent the building and wait
for land prices to go up for two years and then sell it.)
2. Sell the property in combination with other NPA properties of other defaulters. (similar to
“buy one large pizza and get 20% discount on any medium sized pizzas”).
3. Restructure the EMIs of Mr.Paraajay. E.g. instead of 1 lakh per month, give us 75,000
per month.
4. Change the Management of that asset, appoint its own directors/officers.
5. Order Mr.Paraajay to outsource or lease his business to a another company.
^SARFAESI act empowers ARC to do such things. The amendment Bill adds a new power to the
ARC.
The new Amendment in SARFAESI, empowers ARC to convert debt into equity.(fully or
partially).
*that is the paper value of original debt (NPA loan of SBI to Mr.Parajaay), Otherwise ARC
purchased it @Rs.35 crores.
1. If company starts making more profit in future, ARC will receive more share from that
profit. (because more profit=more dividend to shareholders.)
2. If price of company’s shares go up in the sharemarket, ARC can sell those shares to third
party and make decent profit.
Bank’s loss
SBI gave Rs.40 crores loan to Mr.Parajaay
He refuses to pay loan=bad loan/NPA.
Then SBI sells this bad loan file to an ARC company @Rs.35 crores.
Hence, SBI’s loss is 40-35=5 crores. (actually more than 5 crores, if we count the
possible interest rate that he would have paid, if he had not defaulted. And loss figure will
be different if he had paid a few installments earlier. Anyways, let’s keep the loss at 5
crore for the moment.)
ARC’s profit
Now ARC owns the NPA assets. (their investment Rs 35 crores)
Paraajay offers Rs.37 crores and ask ARC to sell the assets to his relative, friend or
proxy.
Hence, ARC’s profit is 37-35=Rs.2 crores.
And yet Mr.Parajaay successfully saved Rs.3 crores (because originally he had to pay
Rs.40 crores to SBI, but he walked away by paying just Rs.37 crores!)
Few years back, CVC had held a meeting with Bank chairmans and CBI officers. They
alleged ^this type of mischief going on, in many loan default cases.
Now under the new provision: if ARC converts its debt into equity (shares), then what will
happen?
1. It is very unlikely that Parajaay’s company will start making huge profits (otherwise it
wouldn’t be in bad loan problem in the first place!)
2. It is very unlikely that share-price of Parajaay’s company will go up in sharemarket.
(because it has negative publicity due to NPA).
Hence it is very unlikely that ARC will make huge profit out of this “Equity”.
Then Mr.Parajaay can simply offer them a way out : “sell those shares to me, in my
friend,relative,driver or peon’s name @Rs.37 crores.”
Side question
How would Mr.Parajaay arrange those Rs.37 crores?
Ans. If Mr.Parajaay is “totally awesome” then he wouldn’t give 37 crores from his own pocket.
He’d just open another company, get new loan from second bank, issue IPOs to get money from
juntaa. Then Iski topi uske sar pe.
^This is (one of the many) reasons why Mr.Ratan Tata said following thing:
Bank Employee unions are also against the “Debt to Equity” clause of SARFAESI amendment.
(When they had gone on strike to oppose Banking Amendment bill, they also cited this Debt-
equity reason as well.)
Central Registry
Previously, borrowers used to forged property documents and get loans from multiple
banks by giving them duplicate property documents as security.
So when borrower refuses to pay up loan, many banks would make claim for the same
property!
To fix this problem, Reserve Bank of India (RBI) setup Central Registry in 2011, under
SARFAESI.
This central registry has details of all properties against which loans have been taken.
Any person or bank can inspect records of this registry to make sure the mortgaged
property is genuine.
Official name: Central Registry of Securitisation Asset Reconstruction and Security
Interest of India (CERSAI)
Misc.Amendments
1. In public interest, Union Government can issue notification that xyz provision of
SARFAESI act may not apply or may apply with modifications to a class or classes of
banks or financial institutions. Suppose many textile exporters have taken loans from
banks but due to global recession they are not receiving payments and hence unable to
repay loans. In that case, Government can order notification that “SARFAESI will apply
to all loans except those given for textile-export business.”
2. Earlier a borrower could approach Debt Recovery tribunal (DRT) to get stay order
against bank/ARC. New amendment says DRT cannot grant any stay order unless both
parties (Borrower vs. lender bank) are heard. This will ensure the process of law is not
misused by unscrupulous borrowers to get stay orders just to delay money-recovery.
3. Bill proposes to enable banks and financial institutions to enter into settlement or
compromise with the borrower. It also seeks to empower the Debts Recovery Tribunal to
pass an order acknowledging any such settlement or compromise.
Summary
SARFAESI empowers banks and other financial institutions to attach secured assets of a
loan defaulter and sale, auction or manage them without requiring court intervention.
Parliament passed the amendment to SARFAESI Act and the debt recovery tribunal, in
Winter session 2012.
3. Asset reconstruction companies (ARC) can convert their debt into equity (fully or
partially)
4. Government can prohibit or modify SARFAESI’s
applicability in public interest.
Apart from this amendment, Government has also increased foreign investment limit in ARCs
from 49 to 74%.
Mock Questions
Q1. Which of the following are Qualified Institutional buyers (QIB)?
1. ICICI
2. LIC
3. EPFO
4. FII registered with SEBI
A. Only 2 and 3
B. Only 1 and 4
C. Only 2 and 4
D. All of them.
Q2. Which of the following is not correct about SARFAESI act?
1. It mandates the Rural regional banks to lend atleast 15% of their total loans to rural
cottage industries.
2. It empowers banks to reduce their NPAs.
3. It empowers RBI to impose penalties on Bank responsible for NPAs.
A. Only 1 and 2
B. Only 2 and 3
C. Only 2
D. Only 1 and 3
A. Only 1
B. Only 2
C. Both
D. None
Boring details
1. Recovery of Debts Due to Banks and Financial
Established Debt Recoverty tribunal
Institutions Act of 1993 (RDBF)
(DRT) and
2. Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act of Helps banks recover money from
2002 (SARFAESI) bad loans.
3. Enforcement of Security Interest and Recovery of Passed in Lok Sabha in Dec 2012,
Debts Laws (Amendment) Bill, 2011 to amend above two laws (RDBF +
SARFAESI)
Committees
SARFAESI was based on recommendation of these two Committees
The latest amendment (Debt to Equity), is based on recommendations of Alok Nigam Panel on
ARCs, made by Finance Ministry.
Examples of CSR?
1. IndianOil gives special allotment of petrol/diesel station dealerships and LPG
distributorships to beneficiaries from among SC/ST/PH/Ex-servicemen, war widows, etc.
2. Installation of hand pumps/bore well/tube wells/submersible pumps
3. Rainwater harvesting projects,
4. Aquaguard water purifiers/water coolers to schools/community center etc.
5. Organising Medical/Health Camps on Family Planning,
6. Immunization, AIDS awareness
Big companies like Tata, Wipro, Birla, Essar have done many such projects.
Why CSR?
The term “Corporate social responsibility” was coined in late 50s, but it remained just an
academic concept for many years.
The issue was raised in Rio Earth Summit (1992). But MNC-giants were non-committal
and lobbied heavily against such moves. (recall how American corporate giants did not
allow UN to get control over DNS registry in the recent WCIT Dubai conference. Click
me)
In the 90s, big NGOs such as Greenpeace started exposing the environmental and human
rights abuse done by American oil and mining companies abroad. (particularly Shale
company in Africa.)
This led to huge negative publicity for those companies particularly among the
consumers in first world.
Hence the MNC giants started taking up CSR initiatives in third world (Asia, Africa) as a
PR-image improvement exercise.
Methods of CSR?
Via
Company will just donate money to Red Cross, UNICEF etc.
Charity
Via Company will hire an NGO/another special agency to carry out a project and pay
Contract them money.
Company will create separate Administrative machinary and staff of its own, to do the
By itself
social welfare work. (E.g.in big companies like Microsoft, IBM, Dabur etc.)
Companies Bill 2012
It’ll replace the Companies Act 1956
In Budget 2013, Chindu is likely to allow some tax-deduction /benefits to companies who
spend money for CSR, thus making it attractive for the companies to spend money for
CSR.
An estimated 2,500 companies fall into this “mandatory” CSR-reporting category.
CSR activities in the first year would be between Rs 9,000 crore and Rs 10,000 crore
spent in social welfare. This could significantly benefit the society at large.
CSR: Pro-Arguments
1. Big Companies in India are already making a killing, particularly in mining, real-estate
and IT sector, so spending a few crores on CSR shouldn’t be an issue. Besides, CSR
spending has been kept very low: only 2%.
2. Government could increase the tax-rates to collect additional 2% and then spend the
money on its own for various social welfare schemes. But instead Government has given
flexibility to the companies to do take up projects on their own= there would be
corruption and leakages. So, If the companies themselves spend the money on CSR, more
likely to show some result.
3. Media is unnecessarily creating panic- CSR “spending” is not compulsory, CSR-
“reporting” is compulsory.
4. This provision will lead to about 30% increase in CSR-linked jobs. (those special project
officers, MSW degree etc). For example, Dabur is reviewing its existing CSR
programmes in the wake of the latest developments. It will hire more professionals if it
feels the need to extend the existing CSR-programmes.
CSR: Anti-Arguments
Companies already paying so much in taxes + global economic crisis= decline in profit.
It is the job of Government to do all the social welfare stuff. Companies are only
responsible to their shareholders and not to society as a whole.
If company has to spend 2% of profit in CSR= means less profit will be shared among the
shareholders.
Might lead to ‘creative accounting’ (only showing work on paper) or doing work that
actually benefits the company rather than society. Corporate Affairs ministry doesn’t
have the manpower to manually inspect the CSR-projects done. Thus making the whole
exercise useless to society.
NGOs often feed journalists stories of supposed corporate malpracticies, tribal
exploitation etc, which the reporters are happy to print without much background check.
Hence companies just throw off donation money to such NGOs in the name of CSR and
to media houses in the name of “advertizemenst”, just to keep them both in “good
humor”. So in many cases, CSR is done because of yellow-journalism and “yellow-
NGOism.” Thus, CSR doesn’t cleanse the sins of a company. often it merely allow
companies to continue bad behavior in the shadows. (child labour, environmental
degradation etc.)
1. IPO-> Share.
Take money from someone and offer him part 2. Venture Capitalist
Equity
ownership of the company. 3. Angel Investor
1.Bond 2.Debenture
Issued by
1. Union Government
Issued by companies.
2. State Government
3. PSUs
Second difference: the different rates of Stamp Duty applied on each of them.
Third difference: The interest rate offered by Debenture is (usually) higher than
Government Bonds. Because Government more likely to repay = no need to seduce
customers with higher interest rate.
Types of Debentures
Based on ‘convertibility’ the Debentures are of two types
When debenture is converted into shares, it means debt holder becomes an equity holder.
Both debt vs equity have their own advantages and disadvantages. →e’ve discussed it in
the earlier article (click ME)
But by and large, from the investor’s point of view, Debt is safer than Equity.
From investor’s view, this “option” to convert Debenture into Shares is good ONLY IF
1. Company is likely to make huge profit (so you, the shareholder can earn more dividend.)
OR
2. Company’s share-price is likely to rise in the share market (then you can sell shares to
third-party and make profit).
BUT if the Company is going bankrupt, then it is better to avoid converting the Debenture into
shares. Because when a company is liquidated (i.e. its assets sold off), the Debenture holders
get the money before the shareholders.
It means OFCD is a bit tricky game. Investors should have some knowledge and understanding
of share prices, company performance etc. else they could lose money. (or end up not getting
maximum profit out of their investment). Now let’s move to the SEBI-SAHARA case.
~23 million people, mostly from villages and small towns subscribed to this scheme. They
invested ~24,000 crores rupees in these OFCDs of SAHARA.
To SAHARA To SEBI
We are unconvinced with your logic that
OFCD schemes don’t come under the
If those two companies of SAHARA
scope of SEBI.
donot refund money, you’re free to
Mostly rural people have Invested money
attach their properties and freeze their
in your schemes and they’re not aware of
bank accounts.
OFCD.
Also conduct a probe against those two
At the end of day, they would come and
Sahara companies to find out their
say that they were cheated. You know
actual subscriber base. (to make sure
Harshad Mehta’s case, same modus
some funny game or money laundering
operandi was there. Investors were not
isnot going on.)
aware of the scheme.
Check the genuineness of the investors
It seems you have no intention of
and if the investors are not traceable,
returning the investors’ money. Your
the amount will go to the government.
intentions are shady.
We order you to refund the money.
Government’s
response
As you’ve seen in ^this case,
SAHARA’s main argument is
“SEBI doesn’t have jurisdiction
over our OFCD investment
scheme, because this money was
meant for our “unlisted”
companies.”
Government has decided to fix
this ambiguity in the new
Companies Act.
According to Companies Bill 2012
(passed in Lok Sabha): SEBI will
have undisputed jurisdiction over
any investment scheme involving
more than 50 investors-It doesn’t
matter whether you’re a listed
company or an unlisted company.
MCQ
Find incorrect Match:
1. SEBI: SAT
2. CCI: COMPAT
a. Only 1
b. Only 2
c. Both
d. None
Before going into the recommendations of the committee let us look at the difference between
FRP and SAP.
When the state government issues its SAP then the mills in the state are bound to pay by that
amount only. This was held valid in a Supreme Court judgment in 2009.
Rangarajan Committee:Recommendations
Remembering the earlier diagram of the sugar process and the government control, the
Rangarajan committee report recommendations can be easily mapped.
Government
Recommendation Remarks
Control
Sugar crop Do away with reserved area. Give farmer option Empowering the farmer to do
to trade with any mill. better business.
area
Packaging Do away with the jute packaging Can save about 1000 crores.
Do away with the 10% sale to the central
Can ease central subsidy
Levy of government. Instead, pass on the subsidy to state
tension. The levy savings is
government, which can buy the sugar from the
Sugar about 2000 crores.
market and give it subsidized.
The move is to help
India(17% of world
Ease the market control of government on export production) to enable its
Market and import. exports(only 4% of world
export), but leaving it all to
the market is risky.
1. Give formal banking services to poor people in urban & rural areas.
2. Promote habit of money-savings, insurance, pension-investment among poor-people.
3. Help them get loans at reasonable rates from normal banks. So they don’t become victims
in the hands of local moneylender cum thugs.
No frills account.
Poor people can open bank accounts with very low balance e.g. Rs.5 only.
2005
→e’ve already discussed that in earlier articles: Click me and click ME
No profit
Because Administrative costs will be high= Building rent, telephone, electricity, staff
salary, security guards.
On the other hand volume of business is very “low” in village areas=amount of money
deposited, loans taken.
Means there is No profit. Actually it’ll lead to heavy losses.
Reluctant staff
In many villages, there is no electricity, no good schools/drinking water, naxalite
problem= Bank staff doesn’t want to serve there.
Therefore banks don’t like to open branches below district HQ or Tehsil level. Now
comes the problem
Ultimately
1. Banks
→e can’t open branches @every village, because it’s not profitable.
2. poor people →e can’t make trip to nearest town to access banking facilities, because it
is inconvenient.
How about a “middleman / agent” between banks and the poor people?
Swabhimaan
Initiative by the Finance Ministry + Indian Banks’ Association
launched in 2011
To bridge economic gap between rural and urban India.
Objectives
Make banking facilities available to every habitat with a population >2000 (by March
2012.)
Banks will provide basic services like deposits, withdrawal, Kisan Credit Card (KCCs)
etc via Business Correspondents (BCs) also known as Bank Saathi.
Banks will also working together with the Unique Identification Authority of India
(UIDAI) for opening new bank accounts.
Government will send subsidies and social security benefits (pension etc.) directly to
beneficiary’s account.
Beneficiary can withdraw the money from the Business Correspondents (BCs) in their
village itself.
Government has provided 500 million rupees to banks for taking these ^initiatives.(e.g.
paying Commissions to Bank Saathi, their training cost, doing paperwork with UID.)
Reforms in BC model
Common BC
Last year Finance ministry came up with this proposal:
India be divided into 20 clusters.
A common BC be appointed for all public sector banks operating in that geography.
Such a move would improve the economics of the BC model. (otherwise so many BCs,
fragmentation=nobody earning decent Commission=nobody improving the service
delivery.)
Reserve Bank of India (RBI) has permitted all business correspondents (BCs) working
for one particular bank, to conduct business for other banks as well.
FINO, India’s largest Business Correspondents company
FINO=Financial Inclusion Network and Operations (FINO).
It is promoted by various Public and Private sector banks and insurance companies like
LIC.
Last year, FINO become the common Business Correspondents company for all public
sector banks operating in Jharkhand.
NREGA payment
Old system New system
1. A villager earns some cash under 1. All accounts will be maintained by core
MNREGA. banking system.
2. Government gives cash to bank. 2. So, cash directly goes from Government > Bank
3. Bank gives it to B.C. >MNREGA worker’s bank account.
4. B.C. deposits it into MNREGA 3. Villagers will have the freedom to make their
worker’s account. withdrawals from any BC they choose.
Kiosk Banking
The D.I.Y. (Do it yourself) banking services e.g. ATM, internet kiosks = still expensive.
There is also lack of education + awareness in rural areas about such things.
So even if Government /bank installs such automatic ATM, internet kiosks=> most of the
time they just gather dust.
Therefore, technology-based ‘self-service’ model (e.g ATM, internet kiosks) is not useful
at this stage.
And hence we need Personnel (these Business Correspondents=middlemen). Because
often villagers are illiterate, so they can’t even fill up the forms for opening bank
accounts or loan-application or filling the deposit slips etc. Business Correspondents are
essential at this stage.
But again problem: The cost per transaction remains high. (Because Bank has to pay
commission to B.C.agent.)
Therefore, Chindu has suggested following solution for long term:
Migrate from banking correspondent model to Kiosk banking = mobile vans fitted with
ATM machines+ biometric devices.
They’ll provide banking services in remote areas.
Mock questions
MCQs
Q1. Financial inclusion involves
Ans.choices
a. Only 1, 3 and 5
b. Only 1,2 and 5
c. Only 3 and 4.
d. All of them
Ans
a. Only 3
b. Only 1 and 2
c. Only 2 and 3
d. Only 1 and 3
Q3. Who among the following, is/are eligible to become Business correspondents for banks?
1. Post office
2. Panchayats
3. NGO and Insurance Agents
4. Self Help Groups (SHG)
Ans
a. Only 1 and 2
b. Only 2 and 4
c. Only 2 and 3
d. All of them.
Descriptive Questions
1. Swabhimaan (5m)
2. Swavalamban (5m)
3. Common Services Centers scheme (5m)
4. Write a note on National E-governance Plan (NeGP) (10m)
5. Define Financial inclusion. Discuss the initiatives taken to achieve financial inclusion.
(15m)
Interview
1. Apart from what is already being done, what new initiatives should be taken to achieve
100% financial inclusion?
End Dankuni in West Bengal Jawaharlal Nehru Port Trust near Mumbai
When to complete? 2017 2016.
Length approx. 1800 1500
Total length 3000+Kms. Japan is providing financial and technical help for this project.
1. Delhi-Chandigarh-Amritsar
2. Pune-Mumbai-Ahmedabad
3. Hyderabad-Dornakal-Vijaywada-Chennai
4. Chennai-Bangalore-Coimbatore-Ernakulam
5. Howrah-Haldia
6. Delhi -Agra-Lucknow -Varanasi – Patna
Benefits
1. A high-speed rail moving at speeds of 300 km/hr would take just about 2 hours to reach
from New Delhi to Lucknow. Currently, it takes six hours for the fastest train on the route
to cover the same distance.
2. The benefits of high-speed rail are immense vis-a-vis road and airlines. These rail
systems have 30% less land requirement in comparison to expressways for same carrying
capacity.
3. High-speed railways would directly compete with economy class tickets of an airline.
4. These trains are highly fuel-efficient as their energy consumption is one third less than
private cars and 5 times less than airplanes.
problem
Railways is more interested in constructing the Ahmedabad-Mumbai project first.
But Planning Commission recommends that Delhi-Agra corridor should be constructed
first. Because it is shorter and cheaper than A’bad-Mumbai project.
China India
1. They use heavier, longer and faster
→e don’t have the money to buy such
freight trains to transport coal, cement,
trains.
iron-ore etc.
Passenger trains
Restructure the tariff to maximize Revenue. (=increase ticket prices)
At present, speed of trains of Passenger Mail/Express trains is below 55 kmph.
These are low as per international standards.
On popular routes, 24/26 coaches trains should be run to generate additional capacity.
Replace conventional trains by EMUs/MEMUs/DMUs.
Railways should develop alternative terminal at sub-urban areas of major cities.
Railways should hasten the implementation of Dedicated Freight Corridor. This way
passenger and freight traffic will become separate from eachother= faster passenger
services, quicker freight movement.
Goods transport
Following the Chinese success story, our strategy should be “HEA↑IER, LONGER,
FASTER” trains for freight (goods) transport.
Upgrade to heavier (higher axle load), speedier (100 kmph) and longer freight
trains=maximum utilization of existing track capacity.
→e should Import bogies from USA. They’re more track-friendly and capable of carrying
enhanced loads.
No subsidy on magazines
Indian Railways carry ‘Magazines’ parcel at highly subsidized rates.
But nowadays the cost of magazines is very high and it is a profitable business!
Besides, Magazines are not read by poor people.
Therefore, Railways should stop giving concessional rates for transporting ‘Magazines’.
However, Railways should continue giving concessional rates for transporting
Newspapers.
Perishable cargo
Under Kisan vision project.
Safety
There are almost 15000 unmanned level crossings. = They’re responsible for 40%
accidents (2011 data.)
Accordingly, Indian Railways Vision – 2020 and Railway Budget Speech, these
unmanned crossing have to be fixed in the next five years.
For Signaling & Telecommunication in Railways, switch over to systems and equipment
of higher reliability and safety levels.
Setup On-Board Fire detection and Fire Fighting equipment in trains.
Use of GPS technology and RFID technology for tracking railway trains.
Biometric VCD
Driver’s ↑igilance Telemetry Control System).
It is a small wrist-watch like device. It constantly moniters driver’s posture, pulse etc.
So if the driver has consumed desi-liquor and fell half-asleep in the cabin, the station
manager would get alarmed and can automatically stop the train.
Russia has been using such telemetry system for Locopilots (=train drivers) since a long
time.
problem
Railway would need more than 16000 crores to do all these things. And Government of
India is tight on cash already (MNREGA, food security etc..you get the picture)
So Railways will need to arrange the cash by itself = need to raise the tariffs, otherwise
safety reforms can’t be done.
Outsourcing
Minor works Major works
cleaning of coaches,provision of manufacturing locomotives,
Examples
blankets and food in trains coaches, wagons.
Outsource this work private
Suggestion of Partial disinvestment. Run it on
companies=less cost than permanent
planning commission: corporate lines.=more efficiency.
staff.
Mock Questions
Q1. Correct statement about Dedicated Freight Corridors?
a. Only 1 and 4
b. Only 1 and 3
c. Only 2 and 3
d. Only 2 and 4
a. Only 1
b. Only 2
c. Both
d. None
Q3. Which of the following states are common for both Eastern and Western Dedicated Freight
Corridor projects?
Descriptive
1. National High Speed Rail Authority (5m)
2. Train Collision Avoidance systems (TCAS) (5m)
3. Examine the case for setting up a nation railway tariff authority (10m)
4. Write a note on Dedicated Freight Corridors (12m)
Essay
1. Railways: The artery of India.
Interview
1. (in context of the issue that Planning Commission says run high speed train on Delhi-
Agra while Railways wants Ahmedabad-Mumbai)…which project should be taken up
first and why?
2. Should Government establish a separate regulatory authority to regulate transport price
in highway and aviation sector? Yes/No why?
3. You’re made the Railways minister. →hat will be your first five initiatives?
Jurisdiction
Banking Ombudsman (BO) Scheme applies to whole of India (including Jammu and
Kashmir).
1. All commercial banks (scheduled and non scheduled, public and private)
2. Regional rural banks
3. scheduled primary co-operative banks
4. NBFCs (BO’s Jurisdiction limited to “loan” part.)
Regular banking
1. Demand draft, cheques, pay orders etc. not issued on time. (or not paid on time)
2. Credit card related complaints (e.g. bank putting hidden charges. Your credit card was
stolen but bank did not disable it even after you called them.)
3. You asked the bank to close your account / credit card but they are not doing it.
4. Bank refuses to open your account without giving valid reasons.
5. Bank closes down your account without valid reasons.
6. Government / your company deposited salary / pension in your account but the bank is
not releasing it on time.
7. Bank is taking out money from your account in pretext of some flimsy charges.
8. Branch office notice board says “10.30 to 5” but staff refuses to provide you service after
3.30PM.
9. NRIs having bank account in India and facing problems about remittances etc. (e.g. he
deposited money from America, but his parents are not given money on time.)
Loans
1. Your loan application is not processed in time.
2. Your loan application is rejected without valid reasons.
3. You loan application is accepted but money is not released in time. (and still bank is
charging interest on it!)
4. Bank doesn’t follow RBI guidelines regarding loan-recovery agents (e.g. bank hires some
criminals to bully and harass you.)
5. Bank doesn’t follow RBI guidelines regarding loan interest rates.
Punishment
BO can order the Bank to compensate the actual money loss OR Rs.10 lakh (whichever is
lower).
In case of Credit card related cases, BO can order the bank to pay additional fines (upto
Rs.1 lakh) for the mental harassment caused to the customer.
Location of Offices
Banking Ombudsman has total 15 offices throughout India
Those who’re preparing for IBPS/SBI PO should prepare this table for MCQs, others
need not worry much.
1. A’bad
Gujarat + UT of Diu, Daman, Haveli
2. Banglore
Karnataka.
3. Bhopal
MP+Chattisgarh
4. Bhuvneshwar
Odisha
5. Chandigarh
HP+Punjab+part of Haryana
6. Chennai
TN+Andaman, Nico
7. Guwahati
All north Eastern states minus Sikkim
8. Hyd.
AP
9. Jaipur
Raj
10. Kanpur
UP (some areas excluded though)
11. Kolkata
WB+Sikkim
12. Mumbai
Mah+Goa
13. Delhi
Delhi+J&K+part of UP+Part of Haryana
14. Patna
Bihar+Jharkhand
15. Thiruvanthapuram
Kerala+Lakshdweep+Puducherry
Mock questions
Q1. Which of the following falls under the jurisdiction of Banking Ombudsman
Answer choice
a. Only 1 and 3
b. Only 2 and 3
c. Only 1 and 2
d. All of them.
a. Only 1
b. Only 2
c. Both
d. None
1. If the promises made by a sales agent, are not kept by the bank, you cannot approach BO.
2. If the matter involves loss of more than Rs.10 lakhs, you cannot approach BO.
3. The appellate authority for BO is High court of the concerned State.
4. There is one separate BO for Union Territories of India.
Answer choices
a. Only 2
b. 2 and 4
c. 1,3 and 4
d. All of them.
1. Net banking
2. Credit cards
3. ATM cards
4. Harassment by Loan recovery agents
Answer choices
a. Only 2 and 3
b. Only 1, 2 and 3
c. Only 2,3 and 4
d. All of them.
GI Vs. trademark?
GI Trademark
Product comes from a particular
Product comes from a particular place/region.
enterprise/company.
Right is enjoyed by a community / association of Right enjoyed by only one
producers.=community right. person/company=individual right.
Can be goods (mobile, PC etc) or service
Given for “Goods” (physical stuff.)
(e.g.music, spa etc.).
Mechanism: Internationally
WTO–> Trade related Intellectual property rights (TRIPS)
1. Member nations have to respect geographical indications.
2. They’ve to take measures to prevent violation of GI rights. (e.g. order custom authorities
seize bogus products.)
3. If a product enjoys GI status in member nation “A” then, Member nation “B” shouldnot
grant trademark for the same.
But this “Multilateral register” system has not been established yet.
Pakistani Basmati
Basmati is a variety of rice originally grown in Punjab and Himalayan foothills.
Post 1947, Punjab was divided between India and Pakistan, so now both nations claim GI
tag for Basmati rice.
After much negotiations, India and Pakistan decided to get a Joint GI for Basmati
globally.
But the talks came to a halt soon after 26/11 attack in Mumbai.
Now Bangladesh also wants to be part of this joint GI for Basmati.
In the meantime, Philippines etc. are selling their rice as “Basmati” in EU and USA
(despite the fact that Basmati is native to Indian subcontinent).
Meerut scissors
Madurai Malli
Some others
This list is not exhaustive, just some prominent names that popped up in Hindu in recent years.
Place Characteristic
grows in the saline waters of the coastal areas with disease-
Pokkali rice Kerala
resistant quality. No fertilizer/pesticide used.
Bangalore Blue Around originally an American variety, introduced here 150 years ago.
Grapes Banglore Acid-sugar blend of the fruit is perfect for wine making.
Dindigul locks are mango shaped iron and brass locks. They
Dindigul locks TN
are handmade and each one is unique in design and system.
Malwi potatoes are significant because they contain negligible
Nimari’ chillies and
MP quantities of starch, which is highly suitable for manufacturing
the ‘Malwi’ potatoes
chips and wafers
Entire list?
Download this PDF file (click me). It contains name of goods given GI status (till July
2012). You don’t have to mugup all of them but only those originating from your state
for “Profile based interview questions”.
+any other names that sound important from “Culture” point of view (in GS Mains paper
1)
Mock Questions
Q1. Which of the following are eligible to apply for GI-tag in India?
1. Agriculture produce
2. Handicrafts
3. Manufactured goods.
Answer choices
a. Only 1 and 2
b. Only 2 and 3
c. Only 1 and 3
d. All of them
1. Provides for GI registration for any Goods or services associated with a particular region
in India.
2. GI status is given for a period of 10 years at a time.
3. Recently Madurai Scissors and Meerut Malli were given GI-protection under this act.
Answer choice
a. Only 1 and 3
b. Only 2 and 3
c. Only 2
d. All of them.
But after EPFO officials held meeting with UIDAI officials, they came to know that
Hence EPFO has decide to delay this “compulsory Aadhar number” rule. (because it is very
unlikely that entire India will be covered under Aadhar numbers by March 2013).
By the way, why this Double labour (by UIDAI and RGI)?
Because there is a “turf-war” going on between UIDAI and Home Ministry. Home ministry has
two problems with data Collected by UIDAI:
1. it is not secure
2. Data / family is not verified by a government servant.
1. HDFC
2. IDFC
3. IL&FS (Infrastructure Leasing & Financial Services Limited)
4. LIC Housing Finance
5. HDFC Bank
6. ICICI Bank
7. Axis Bank
Recently,
EPFO @CRISIL Yaar please give some investment advice.
CRISIL I suggest you invest some money in Corporate bonds with “AAA” rating.
EPFO Why?
Because “AAA” rating= means company is reputed. It’ll not default on the
payments (unlike Pawnfisher).
And they offer good rate of return. For example RELIANCE Industries, Tata etc.
They offer good interest rate too and quicker installments (compared to Air
CRISIL
India).
You’ve total fund of Rs.3.5 lakh crores, it’d be a good idea if you invest 10% of
it (=Rs.35000 crores) into Corporate Bonds.
Sounds like a good idea, but I’ll have to get this proposal approved by Central Board of
EPFO
Trustees (CBT). (in Feb-end 2013)
CRISIL Why?
EPFO Because CBT is the main Decision Making body of EPFO.
1. EPFO can earn more money on its investment= it can offer higher returns to its
subscribers.
2. Those corporates companies get more investment money (from EPFO)= they can new
plants/ machinery / employees and expand their production capacity =better IIP, better
GDP.
I need to borrow cash from market, just to repay some previous bank loans. So, In
Air India
way I’m totally awesome Pawnfisher airlines!
LIC and
Then you should be left to collapse just like Pawnfisher.
EPFO
Air India Oh come on!! I’m the “National” Airline of India. You must not let me collapse!
Oh the patriotism angle. In that case, we must not apply the basic principles of free
LIC and
market economy hahaha!
EPFO
Please tell us how much cash do you need?
Rs.7400 crores.I’ll issue bonds.
Air India Maturity @19 years. (meaning you’ll recover principle after 19 years.)
In the mean time, I’ll pay 9+% interest rate (but I’ll pay installments bi-annually.)
LIC and
Ok agreed. →e’ll buy all of your bonds.
EPFO
By the way, in case you wondered: If Air India=#EPICFAIL, then why did LIC+EPFO take risk?
Ans. Because Government of India (GoI) gave unconditional guarantee, “if Air India fails to
make the payment on these bonds, we will pay money (to bond holders).”
And due to this assurance (by GoI), Air India’s bond was given “AAA” rating. (Despite
the fact that Air India’s financial situation is not very sound).
Anyways, If Air India collapses, the bond payment will be done by Government of India
(=from the pockets of Indian Tax payers.)
Mock Questions
Q1. Correct Statement
a. Only 1
b. Only 2
c. Both
d. None
a. Only 1
b. Only 2
c. Both
d. None
a. LIC, PFRDA and EPFO should invest only in G-sec (Government securities).
b. LIC, PFRDA and EPFO should invest “AA” or “AAA” rated Indian corporate bonds.
c. LIC, PFRDA and EPFO should invest in foreign bonds with “D” rating.
d. None of above.
Interview
1. UIDAI is a flawed idea. Agree/Disagree, why?
2. NPR is a flawed idea. Agree/Disagree, why?
3. Government should save Air India. Agree/Disagree, why?
4. Government should save Kingfisher. Agree/Disagree, why?
5. The trend of LIC/EPFO investing money in PSUs (or financing Government’s
disinvestment targets) breeds inefficiency. Agree/Disagree, why?
6. LIC, EPFO, PFRDA should look @ larger national interest and not just maximum profit
to their subscribers. Agree/disagree. Why?
Rangarajan submitted report in December, 2012. It mainly revolves around following issues
This contract made between the government and a contractor (oil/gas exploration
company).
Contracts bids for specific oil block.
If he wins the bid, he’ll start oil exploration in that block.
Oil exploration =lot of investment and risk taking involved. This is borne by contractor.
(let’s say 150 million dollars were invested).
Once the oil is discovered, contractor will start commercial production and sells it.
Let’s say he makes profit of 1 million dollar per month. According to contract, he has the
right to first “recover” the investment.
So for the first 150 months, he doesn’t need to share profit with Government. (because 1
million x 150 = 150 million.)
Once contractor has recovered his the cost of exploration, then he’ll have to share part of
his profit with the Government (as per the terms and conditions in production sharing
contract.)
Sounds well and good, right? But CAG and Rangarajan Committee found some flows in ^this
“Production sharing contract. (PSC)”
1. This system encourages Contractor to inflate costs. (I would rather show cost of
exploration as 2 billion dollars, even if it took me only 1 billion dollar.)
2. Difficult for Government to check the accuracy of contractor’s account and get the
correct share. (I may be making 1.5 million per month but I would doctor my accounts to
show profit of only 1 million.)
3. I intentionally don’t run my plant on full capacity. I’ll just wait till the oil prices in
international market to sky rocket, and only during those days/ months, I’ll run plant on
full capacity to make lot of profit.
Royalty-tax regime
Under this system:
1. From the total profit from selling the oil, a fixed royalty is to be paid to the govt.
2. After royalty is paid, the rest of revenue is shared by the govt and contractor.
3. Government should allocate block to a company that offers maximum share from profit.
Advantages of the system are:
1. Encourages the contractor to reduce costs.
2. In case of price rise, the contractor doesn’t get windfall gains.
3. Government gets more money = more money for MNREGA, food security.
Ranga recommends:
For Policy Related Issues – Make an Inter-Ministerial Committee to iron out the issues.
To solve other issues, there is already an Empowered Committee of Secretaries(ECS).
Give them more powers to resolve these issues.
For companies exploring oil / gas in difficult terrains, should be given following
extensions:
#3:CAG-Audit
Another controversial issue is : CAG auditing. Oil/ Gas exploration companies like Reliance,
want following things:
1. CAG should only check our financial accounts, he should not do performance auditing.
(because Production sharing contract doesn’t mention performance auditing).
2. CAG should not reveal details of audit to public( not even in Parliament) because that
leads to bad publicity for our company.
3. Audit should be within 2 years. If later, then under permission of the contractor.
Ranga on CAG
The CAG is bound by the constitution to share all its audit with the Parliament. Just
because some private company doesn’t want it, we cant change that!
CAG is fully empowered to carry out audits. (including performance audits)
If a block has high value, then CAG himself should audit it.
If the block has low value, then CAG should outsource this auditing work to others.
(reputed private audit firms selected by CAG)
1. Administered
Pricing Mechanism 2. Non-APM
(APM)
This is applied to:
Government fixes this price for National Imported LNG. (because Imported gas
Oil Companies . comes at a price agreed upon by the 2
This is the price at which gas is provided countries in agreement.)
to fertilizer, power companies, etc. (so if Gas obtained from National Exploration
National company makes losses, then and Licensing Policy (NELP) era and
Government pay money = subsidy). pre-NELP era gas fields. (because Pre-
This system is already regulated under NELP era licenses sell gas according to
Gas Utilization Policy(GUP). the Production Sharing Contracts
signed.)
Not yet regulated.
Since there are ^two mechanisms, the price of gas is neither constant nor predictable in Indian
market.
Ranga on GAS
Rangarajan says, first you gather two values.
Then, take average of values #1 + #2. That’ll be the final pricing for gas in the country.
Ranga Defends
In free market, price of a commodity is determined by Supply demand, but Indian market is not
yet ready to introduce direct market based gas pricing. Because
1. there is huge gap in supply-demand of gas. And our sea-ports donot have sufficient
capacity to handle lot of imported gas.
2. Gas is essential for fertilizer, power industries and these sectors are essential for overall
performance of economy and controlling inflation. So we can’t let the gas prices to be
determined by free market.
So, use ^above pricing mechanism be used until such provision can be made.
Ranga’s implication?
If Ranga’s pricing mechanism is implemented, we (public) will have to pay higher price
for gas, just like we do for petrol right now.
On the other hand, it’ll reduce the subsidy burden on Government = fiscal consolidation.
Summary points
Feature What was there earlier Recommendation of Rangarajan
Cost Recovery by contractor first, Move to a royalty-tax regime after
1. PSC then profits shared between govt which the balance revenue is shared by
and contractor. govt and contractor.
1. Create an Inter-Ministerial Committee
North east, naxal area, company to solve policy related issues.
2. Issues
mergers, # of wells etc. 2. Give more powers Secretaries(ECS)
3. tax holiday, more time to explore
1. CAG has the right to perform audit
Lot of issues between the over oil/gas blocks and publish report.
3. Audit contractor and CAG over what 2. CAG to directly audit big blocks.
type of audit can be performed. 3. CAG to outsource auditing for small
blocks.
4. Pricing for
Average of (imported LNG + wt.avg of
domestically Two models: APM, Non-APM
prices in US, UK and Japan)
produced Gas
Agriculture challanges, tax to GDP, steps by
Government (part 3 of 3)
AGRO and Food Management
Agro + allied industries Approx. number
Share in India’s GDP 14% (2011-12)
Share in total employment 58% (2001)
The declining share of the agriculture and allied sector in the country’s GDP= this is
characteristic of any fast growing economy
but that doesn’t mean we should ignore agro and pay more attention to manufacturing /
service sector.
Because fast agricultural growth = vital for jobs, incomes, food security, + curbing food
inflation.
11th Five year plan has led to improvement in agricultural performance. Even states that
were traditionally not procuring sufficient foodgrains, e.g. Bihar, Madhya Pradesh, Bihar,
Chhattisgarh, and West Bengal have showed significant increase.
Other problems:
soil erosion,
soil salinity,
waterlogging,
excessive use of fertilizers and pesticides
overexploitation of groundwater for irrigation.
Still dependent on the vagaries of monsoon.
Kelkar
The government appointed a committee headed by Dr Vijay Kelkar to chalk out a
roadmap for fiscal consolidation. We already discussed his recommendations in detail.
click me
Target: Reduce fiscal deficit to 3.0 per cent of GDP in 2016-17. But how?
Government will have to control the Expenditure on subsidies.
Government will need to increase the domestic prices of petrol, diesel, LPG as per the
prevailing in international markets.
Government has capped the number of subsidized gas cylinders to nine.
But that alone, cannot solve the fiscal deficit problem. Government also needs to increase the
“incoming” money.
Therefore, if Government wants to achieve fiscal consolidation, it must raise the tax-GDP
ratio to above the 11 per cent level. But how?
Of course, one way is increase the tax rate like 75% income tax for rich people, 25%
income tax for middle class. But then people will feel more compelled to evade tax and /
or relocate to some other country where tax rates are low.
So, instead of raising the taxes very much, better try to broaden the base and improve the
tax collection mechanism. There are two ways to do it 1)GST (for indirect taxes) 2)
Direct tax code (direct tax)
Steps Taken by Government
(list not exhaustive)
HUMAN DEVELOPMENT
In 12th FYP>> social sector Expenditure, Government aims to spend lot of money on
education + health.
Nevertheless, India’s expenditure on health as a per cent of GDP is lower than in many
other emerging and developed countries.
Poverty removal
As per Tendulkar Committee, the percentage of people living below the poverty line in
the country has declined
In the last few years public expenditure on social programmes increased dramatically.
In the Eleventh Plan period nearly 7 lakh crore has been spent on the 15 major flagship
programmes.
To secure the rights of people, Government made many laws in recent years
Act Beneficiary?
Right to information Act Everybody.
Mahatma Gandhi National Rural Employment Guarantee Act
Rural households.
(MGNREGA)
Forest rights act Tribals
Children (mostly
Right to education act
poor).
But the main problem is: Government money isnot reaching the targeted beneficiaries.
There is lot of corruption.
Government has come up with solution: Direct benefit transfer (DBT) with the help of
the Unique Identification (UID).
Investment, Savings, Gold Rush, Inflation
Indexed Bonds (Part 2 of 3)
INVESTMENT
The private sector is the major source of investment in the country.
Within the private sector there are two categories of investors
From both type of investors, less investment is coming. (according to Economic Survey). Why?
There are four reasons:
DOMESTIC SAVINGS
Domestic savings, come from three sources
1. Households
2. private corporate sector
3. public sector.
Savings Rate
Savings rate = Gross domestic savings divided by GDP @Market price.
If we look at the savings rate,
Usually, most of the household savings go into bank deposits. And Pension –provides
funds don’t get much. However, there has been some upward movement in the share of
pension and provident funds during 2008-9 and 2009-10. Why?
Because 6th Pay Commission implementation = disposable income of government
servants increased. And they’re the significant contributors to these pension / provident
funds
Decline in share-debentures
If you look at the data, you can see a trend: Household savings going into sharemarket
Era (approx.)
80s 8%
90s 13%
2000s 5%
Thus a combination of lower returns + higher volatility= less savings going into
sharemarket.
Implication?
When you combine above phenomenon with inflation = it is not very attractive to invest
in share market.
+ bank deposits not giving enough returns.
So people fall back to the “safe” investment = gold.
Gold Rush
Demand for gold has been rising worldwide
gold prices in international market are calculated in US$. And these gold prices have
doubled since 2008.
India has traditionally been a major absorber of world gold.
Gold has been a combination of investment tool and status symbol in India
Gold imports are positively correlated with inflation. (meaning, if inflation increases then
gold imports will definitely increase.)
Thus, rising demand for gold is only a “symptom” of more fundamental problems in the
economy (inflation, lack of financial awareness etc.)
Anyways, what’s the big deal? let the people invest in gold, after all its their money!
The big deal is, if people had invested money in banking / finance sector, then that money
could be given to some needy businessmen, he’ll open / expand his factory = more
employment + more production =good for economy.
But if people just purchase gold/ silver = that money stops moving. It just sits in their
locker = bad for economy.
1. Underlying motive for gold rush = high inflation. So first, Government should curb the
inflation.
2. Second problem is lack of financial instruments available to the average citizen,
especially in the rural areas. (they don’t have PAN card, DEMAT account or knowledge
of how to invest in sharemarket/ mutual funds etc.). So Government should take
initiatives to increase the financial awareness, financial inclusion.
3. Government should introduce inflation indexed bonds. (then it is more attractive to invest
in bonds, otherwise 9% return is not good, if there is 11% inflation!)
Mock Questions
Q1. Correct statement about Indian economy?
Q2. Which of the following is/are responsible for excessive gold consumption in India?
1. Inflation.
2. Lack of access or awareness about financial markets.
3. High Volatility in share market.
4. High rate of returns on investment in share market.
Choice
a. Only 1 and 2
b. Only 1, 2 and 3
c. Only 1, 2 and 4
d. All of above.
Q3. The Economic Survey suggested that Inflation indexed bonds should be introduced in India.
What will be the primary benefit of such bonds?
a. It comes from three sources: households, private corporate sector and public sector.
b. Savings rate has been above 30% in recent years.
c. bank deposits, life insurance funds, pension and provident funds, shares and debentures
are examples of physical savings.
d. None of above.
Now let’s start with the gist of first chapter from Economic Survey. (I’ve further subdivided it
into three articles, else it’ll lead to information overload= boredom + frustration.)
Timeframe
Sub prime crisis in USA. Impact felt across the globe.
2007
Government of India injects fiscal stimulus.
2008-
Leads to boost in consumption.
10
Government of India partially withdraws the fiscal stimulus. Because
2010- Government wanted to start “fiscal consolidation”.
11 + rise in global crude prices etc. leads to inflation.
RBI increases rates = Interest on EMI / Loans increased = demand for consumer
goods decreased. Businessmen find it hard to get loans.
2011- + global prices of crude high as usual.
12 Thanks to inflation, People start investing in gold. = less money for business
investment + crude price high = CAD = rupee’s value declines.
Feb
Economic survey is released.
2013
When there was global financial crisis, Government of India and RBI gave monetary and
fiscal stimulus (e.g. giving tax-soaps to industries, higher depreciation on commercial
vehicles, lowered interest on loans etc.)
This lead to increase in consumption. => later inflation.
Now to curb the inflation, RBI sharply raised the borrowing rates = again problem, it
slowed down the demand.
in years of sharply higher growth, GDP growth @MP >> GDP at FC.
Why? Because when there is slowdown, indirect taxes falldown and subsidy burden on
Government increases.
Rupee weakening?
Suppose on Jan 2012: $1= Rs.50 And on Feb 2012: $1=Rs.60
That means rupee has weakened and dollar has strengthened. But is it good or
bad? Theoretically, for Importers = bad. Because now they’ve to pay more money to import same quantity of
goods. And for Exporters, call centers= good. Because they get more rupee.(even if they’re paid same amount of
dollars.)
Ok so Rupee weakens = good for exporters. But here is the problem: US, EU still not fully
recovered from slowdown, so the demand of Indian goods and services, is not as high as it was
few years back.
So export sector isn’t really doing great. On the other hand, imports are getting more and more
expensive, especially crude oil => petrol diesel become expensive= inflation.
1. The demand of petroleum has increased globally. In a way this is good, because it shows
the economy of USA/EU etc slowly getting better. (otherwise they wouldnot be
importing so much). So in a few months, the demand of indian exports should increase. =
this is a good Development.
2. The crude oil price has increased due to geopolitical reasons (Iran blockade, Libya crisis
etc.) If this is the main reason for rise in crude oil price= this is a bad Development.
Bottomline is that India cannot take the external environment (recovery of US/EU economies,
crude oil politics of middle east) for granted.
Forex Reserve
India’s foreign exchange reserve, is made up of following components
As you can see, there is hardly any increase in Forex reserve during this time. Why?
One reason is current account deficit (esp. gold+petroleum)
second is that foreign investors are not pumping enough money due to ‘policy
bottlenecks’.
Mock questions
Q1. Which of the following is correct formula?
1. In the period of high growth, GDP (Market Price) is greater than GDP (Factor Cost)
2. During economic slowdown, GDP (Market Price) is less than GDP (Factor Cost)
Choice
a. Only 1
b. Only 2
c. Both
d. None
Q3. Which of the following is/are not a component of Foreign Exchange reserve of India?
1. Gold
2. Foreign currency assets
3. Special drawing rights in IMF
4. Diamonds
Choice
a. Only 1 and 3
b. Only 2 and 2
c. Only 3 and 4
d. Only 4
MSME sector employ 80+ million people in 30+ million units across the country.
But in the MSME group, most of the firms are “small”, there are hardly any “medium”
enterprises. Why?
Because The regulatory environment plays an important role in the lifecycle–birth,
growth, and death of MSMEs
Small scale firms more receive tax benefits from various Government schemes. For
example
If your firm has less than annual 10 lakh Revenue= you don’t need to pay service tax.
Similarly, less than 1.5 crore annual turnover= you don’t have to pay Central excise duty.
While medium scale firms have to pay more taxes, have to obey more regulations on
pollution, social security of employees etc.
For more, check this Table:
That means, if your firm grows from ‘small’ to ‘medium’ size = Government benefits
reduced but Government regulation increased.
So most of the small scale firms don’t buy expensive machinery for production.
In the short run: owner makes decent profit because there is less investment (in machines)
+ contract laborers are cheap.
In the long run: their productivity remains very low (compared to Chinese or American
firms of same size.)
Low productivity gives them little incentive to grow, completing the vicious circle.
According to the →orld Bank’s Doing Business 2013 data, India ranks 132 out of 185
countries in ease of doing business.
Entrepreneurs have to obtain a number of clearances when applying for
building/occupancy permits and utility connections (gas, electricity, water, pollution
control).
They’ve to separately visits to various Government offices and applications are not
approved without bribes.
Loan application procedures are “bureaucratic” in nature: they’d ask you lot of documentary
proofs (like income tax returns, account books, property papers and so on). But most small scale
firms run business informally without maintain lot of paper records.
Solutions?
A vibrant corporate bond market could help.
Even though the MSMEs will typically not be able to issue bonds
But large firms and infrastructure projects will be able to access (typically cheaper) bond
financing for their long-term projects.
So banks will get that much less loan takers from “upper end of the pyramid”= banks will
have more spare cash lying around. Then they’ll be tempted to loan that money to small
and medium sized firm to earn some profit (interest).
Labour laws
India’s labour regulations have been criticized on many grounds including sheer size and
scope.
There are 45 different national- and state-level labour legislation in India.
Labor laws in India = very rigid.
As the size of a factory grows, it increasingly becomes subject to more and more outdated
laws.
This has hindered the growth of large-scale manufacturing industry.
Let’s understand this with an example:
Suppose you’re running a firm with 500 employees, exporting diamond jewelry to USA. But due
to recession in USA, the demand of your diamond jewelry has decreased.
Case#1: downsizing
Demand of your company’s products is decreased, and there is no way you can increase
demand because Americans don’t have money, so no matter how much you spend on
advertisement, they won’t buy more diamond jewelry.
On the other hand, Indian consumers prefer gold jewelry instead of diamond.
So you cannot increase the demand, then you have to reduce your input costs, else you’ll
start making losses.
One way to reduce input cost is “downsizing”=lay off a few workers, so you’ve to spent
less money on wages.
But according to Industrial Disputes Act (IDA), if a firm with more than 100 workers,
wants lay off workers, it must get permission of state governments (via Labour
Commissioner).
While the Industrial dispute act does not prohibit laying off workers but State
Governments are often unwilling to grant permission because opposition parties will
make an issue out of it saying “This Government is anti-worker, anti-poor.”
Pro-Worker or Pro-employer?
From above examples, it is clear the Government needs to make labour laws flexible. But
when Government tries to reform labour laws, opposition parties and trade unions create
lot of hue and cry.
Besides, there is always some state Government election after every few months so the
ruling party in union Government doesn’t want to lose any vote bank. That’s why labour
reforms are always put on backburner.
Anyways, if and when Government decides to reform labour laws, what should be its
“form”? should it be pro-worker or should it be pro-employer?
In most countries, there is a “middle path” in labour laws= not too “pro-worker” and not
too “pro-employer” either. Such laws provide for
1. Employer can terminate a worker in case of business distress or for poor worker
performance.
2. At the same workers are provided a redressal mechanisms if they’re fired without cause
3. Compensation for severance and unemployment benefits.
Apprentices
Apprentice = Someone who works for an expert in order to learn a trade.
For example hawala operator, cricket bookie, running your own liquor and gambling dens
etc.
Such trades cannot be learned by reading theory from books. You’ve to work under a
master for many months and years to learn the actual skills. That is called
Apprenticeship.
The syllabus taught in Indian schools, colleges and polytechnics =outdated.
The present Indian education system doesn’t produce “→ork-ready” labour force. That
gap is filled by the system of Apprenticeship.
Apprenticeships are an effective way of ensuring that entry-level workers have the skills
required to join the formal workforce by ‘learning on the job’ and even ‘earning while
learning’.
Several countries have benefited greatly from focused programmes Apprenticeship. For
example Japan, US, UK, and Germany.
Germany, in particular, has a well-known dual education system that combines
classroom/online courses at a vocational school with workplace experience at a company.
More than 75 per cent of Germans below the age of 22 have attended an apprenticeship
programme.
Problem#2: coverage
Apprentices are only allowed in specified trades: for example Pharmacist, Engineers etc.
But majority of graduates are not currently covered under formal Apprenticeships.
Some recommendations
Simpler regulation: A single window mechanism is needed to clear company applications
for pan-India apprenticeship programmes.
Wider reach: Add more graduation fields in Apprentice Act.
company-led apprenticeship programmes, that place employers at the heart of education,
can play a powerful role in imparting job-relevant skills and also repairing, preparing,
and upgrading the labour force.
For example, the duration of apprenticeship training can be allowed to vary across trades
and companies.
Short-duration programmes (less than 12 months) can be freed from much of the
oversight provided they pay minimum wages.
Relaxing the rigid requirements on the ratio of apprentices to workers could also
accelerate capacity creation
Dual system of training: Partnerships between companies and educational institutions
should be encouraged
Active exchanges: There should be active exchanges and portals, matching prospective
apprentices to employers.
Education
Government measures its success in education sector mainly by two numbers:
1. School enrollment.
2. Money spent in mid-day meal scheme
If we just look at those two numbers, then everything looks hunky-dory. But does it mean all
Indian children are getting quality education? But does it mean all Indian children are getting
quality education?
Interestingly, Mohan has declared the year 2012 as the ‘National Year Of Mathematics’ to
mark the birth anniversary of Indian mathematical genius Srinivasa Ramanujan.
Anyways, point is Indian children are bad at maths, English and comprehension
(especially in Government school).
But “There are no bad students, only bad teachers”. (says Jackie Chan in Karate Kid)
There is no positive relationship between teachers possessing formal teacher training
credentials (B.Ed, M.Ed) vs. their teaching caliber.
Besides, State Governments treat teachers as contract laborers, paying extremely low
salaries to those “teaching assistants / vidhya sahayak”.
Hence there is no incentive for teachers to pour their hearts and minds into child-
education.
On the other hand, since money is low, it doesn’t attract brilliant minds into teaching
profession in Government schools.
Pedagogy
The default Indian pedagogy (method of teaching) = complete the syllabus of textbook.
But it does not reflect the learning levels of children in the classroom, who are
considerably further behind where the textbook expects them to be.
School Governance
In Government run schools, there is high rate of teacher absence .
The fiscal cost of teacher absence was estimated at around Rs 7,500 crore per year.
There is evidence that even modest improvements in governance can yield significant
returns.
Education: recommendations
1. If Government improves the monitoring and supervision of its schools, then teacher
absence will reduce significantly.
2. Government should make learning outcomes an explicit goal of primary education policy
(rather than “finishing textbook syllabus).
3. Government should invest in regular and independent high-quality measurement of
learning outcomes.
4. Government should motivate teachers by rewarding good performance.
5. Government should Launch a national campaign of supplemental instruction targeted to
the current level of learning of children (as opposed to teaching to the textbook) delivered
by locally hired teacher assistants, with a goal of reaching minimum absolute standards of
learning for all children: There is urgent need for a mission-like focus on delivering
universal functional literacy and numeracy that allow children to ‘read to learn’.
6. Government should pay urgent attention to issues of teacher attendance, teacher
performance measurement, better monitoring and supervision.
1. The manufacturing sector becomes a training ground for workers, absorbing more
students with a middle or high school education.
2. India moves into niches vacated by China such as semi-skilled manufacturing, even while
enhancing its advantage in skilled manufacturing and services
3. India experiences faster and more equitable growth.
4. Social frictions are minimized as both agriculture and manufacturing create better
livelihoods.
Mock questions
Q1. Which of the following are correct about ASER Survey-2012?
a. Only 1
b. Only 2
c. Both
d. None
Q2. Government’s classification for Micro, Small or medium enterprise (MSME) is based on:
Mains
GS1 Discuss the contribution of workers and trade unions in freedom struggle.
1. Write a note on National Child Labour Policy.
GS2 2. Write a note on National Policy on Skill Development
Interview
1. ASER survey has highlighted the pathetic status of Indian primary school education. As a
district collector, what will you do to improve the situation?
2. Suppose you’re the PM of a country whose demographic dividend phase has passed
(number of people in working age are very low compared to aged). So what new policies,
laws will you launch to keep your economy booming?
3. What do you understand by the term Industrial unrest. Can you cite any recent examples
of Industrial unrest?
4. Last year a Maruti General manager died following a labour unrest at the factory. Some
company decided to leave operations due to labour unrest in Kolkata Port Trust. should
trade unions be banned to prevent recurrence of such episodes?
Liquidity Adjustment facility (LAF),
Marginal Standing facility (MSF), Repo,
reverse repo, SLR, CRR, NEFT, RTGS,
NDTL: meaning explained
Liquidity?
Liquidity is a relative term.
For assets: Rs.1 crore worth gold is more liquid than Rs.1 crore worth farmhouse.
Because you can quickly sell the gold in a few days, but for selling farmhouse you’ll
have to deal with so many prospective customers, real-estate agents, paper work, stamp
duty etc., this would take more than 15 days= not so liquid.
For banking: if yesterday SBI had Rs.100 to give as loan
today SBI has Rs.200 to give as loan, then we say liquidity has increased. (And vice
versa).
In winter, supply of green vegetables increases (compared to summer) so selling price of
green vegetables decreases in winter (compared to summer).
Similarly when liquidity (money supply) increases, the cost of borrowing (=interest rates)
goes down.
Very high liquidity can create demand pull inflation=bad. for more, click me
Very less liquidity=cost of borrowing is extremely high for businessman = bad because
he cannot easily start or expand his business=less people get employment.
So one of the job of RBI= control this “liquidity” in banking system.
RBI mainly uses following tools to control this liquidity / money supply in the banking
system.
1. SBI has only one branch in a small town. It was opened on Monday.
2. On the very same day, Total 100 common men deposited 1 lakh each in their savings
accounts here (=total deposit is 1 crore)
3. and SBI offered them 7% interest rate per year on their savings
WHY CRR: Cash reserve ratio?
On Tuesday, SBI Branch manager gives away entire 1 crore to a businessman as loan for
12% interest rate for 5 years.
From SBI’s point of view, sounds very good right? 12-7=5% profit!
But we’ve not considered the fact that on →ednesday, some of those common men
(account holders) will need to take out some money from their banks savings account- to
pay for gas, electricity, mobile bills, college fees, writing cheques and demand drafts etc.
But SBI’s office doesn’t have a single paisa left! = problem, protest, rioting, suicides.
So condition #1: Banks must not give away all of the deposit money to businessmen for
loans. Banks must keep some money with aside.
Ok but who’ll decide how much minimum cash should a bank keep aside? Ans. RBI via
CRR.(Cash reserve ratio).
But banks donot like high CRR. We already saw that in the CRR controversy article:
click me
I desperately need loan for my business. but no other bank is giving me loan.
Tell you what, give me all of those 90 lakh rupees as loans, I’m ready to pay
Mr.Parajay, the 36% interest rate on it! And trust me, I’m going to make lot of money in my
businessman new business project. And I’m ready to mortgage all of my factories, cars,
farmhouses. So if I can’t repay loan, you can auction them and recover your
money.
SBI manager Good! I’ll give you all of my 90 lakhs as loan!
After six months, Mr. Parajay’s new business project = also #EPICFAIL.
He cannot pay back the EMIs.
Although SBI can attach his assets and auction them to recover the money. But it’ll take
lot of time.
In the mean time, common-men also read this story in local newspapers and they panic
that SBI will collapse and bank manager will shut down the office and run away.
So all the common men line up in front of bank and demand back their money. Recall
that SBI still has 10 lakh left in CRR. But people want total 1 crore back!
Again money of account holders (common men) is stuck =problem, protest, rioting,
suicides.
So, Condition #2: Bank must not give away all its loans to risky loan takers. Banks must
invest part of its money in “safe and liquid” investment. So during emergency, bank can
sell those “liquid” investments and take out the money.
For example, Government securities, gold, corporate bonds of reputed companies like
Infosys, reliance, TCS. These are “safe” investments.
These are also “liquid”, because you can sell them quickly whenever you want. (recall
that SBI could also auction Mr.Parajay’s properties, but it’ll take lot of time in
paperwork, legal issues etc.)
Ok so, bank should invest part of common-men’s money in “safe” investments like
Government securities, gold and corporate bonds of highly reputed companies.
BUT who will decide how much money should be invested in this sector? Ans. RBI
via SLR (Statutory liquidity ratio). In earlier article, we’ve already seen SLR in detail.
click me
Let’s assume RBI ordered SBI to keep Rs.25 lakhs under SLR.
Thus, out of original Rs.1 crore that SBI had, 10 lakhs (CRR) + 25 lakhs (SLR) are gone.
Now SBI manager start making calculation, how much money is left with him?
Out of that 65 lakhs, let’s assume SBI manager has to keep aside 15 lakh for
Administrative costs, salaries of employees, electricity bill, internet bill, Xerox machine
etc. So he has only 50 lakh left for providing “loan” to needy people.
Now loan-takers line up in front of SBI office
Give us loans of 1 lakhs each for buying seeds and fertilizers. However, given
50 farmers the vagaries of monsoon and low profit margin in agriculture, we cannot pay
more than 5% interest rate.
Give us loans of 2 lakhs each to setup small retail shops / car mechanic / hair
25 Small
saloon etc. We offer 11% interest rate. we cannot offer a penny more because
businessman
our profit margin isnot good.
Sir please give us loan of Rs.25 lakhs each, for paying self-financed medical
2 Students
college. We can pay atmost 9% interest rate.
1 Big Give me those 50 lakhs. In a few months, Diwali is coming and I want to setup
businessman a new firecracker factory. I offer you 15% interest rate.
if SBI is run from purely profit point of view, then farmers, small businessmen, students
and weaker sections of the society will never get any loan.
Because SBI manager would want to give loan to a person that offers him highest interest
rate.
Then who is going to protect those weak people? Who is going to help them get loans at
reasonable rates? Ans. RBI.
Suppose RBI tells the SBI manager, “40% of the money you lend, must go to priorities
sectors viz. agriculture, small scale business, housing and education.” (=40% of 50
lakh=20lakh).
^This is the basic funda of priority sector lending. More details are given on page 15.12
of Ramesh Singh.
What is NDTL?
So far, We know that Banks have to comply with the CRR, SLR and priority sector
lending rules of RBI.
CRR, SLR is counted on amount of money a bank receives. But bank receives lot of
money,
1. from depositors,
2. from loan takers who’re re-paying EMI,
3. (fraudulent) hidden charges imposed on credit cards
4. Commission charged on giving demand draft
5. Commission charged on online money transfer
6. Commission charged on foreign currency conversion etc.etc.etc.
So how does bank exactly count CRR, SLR requirements? = Net Demand and Time
Liabilities (NDTL)
I’m not going into minute nitty-gritty involved in computing NDTL because that’s
irrelevant from exam point of view. So long story cut short, CRR and SLR are calculated
on this NDTL number with some caveats.
And banks have to send reports to RBI on fortnight basis that “our NDTL is xyz and we
are maintaining xyz SLR and CRR on it as per your direction.”
Now here comes the problem: In our example, SBI followed SLR, CRR and 50 lakh
rupees left for loaning.
However in the given period, priority sector loan takers (farmers, students etc.) and
regular loan taker (businessmen, car/bike loans)….all of them together take total loans
worth only Rs.30 lakhs.
so SBI is left with 50-30=surplus of 20 lakh rupees.
These 20 lakhs are just gathering dust in the office. Nobody is coming to take new loans!
What should SBI do? because SBI has to give 7% interest even on these 20 lakh rupees,
so SBI cannot afford to let this money gather dust!
Now comes the Liquidity adjustment facilities, Repo Rate and reverse repo rate.
Let’s start with reverse repo rate.
1. Central Government
2. State Government
3. Banks (commercial, regional rural banks, cooperative banks)
4. Non-banking financial institutions etc.etc.etc.
anyways, Reverse repo rate in crude words= when SBI parks its surplus money in RBI
for short term, SBI makes ^this much profit.
But actually reverse repo rate works in a bit complicated manner= via selling and
repurchase of Government securities.
You’re aware of Government securities: when Government wants to borrow money from
market, Government security / Government bond is issued.
Basically it’s a piece of paper. It has agreement something like: “whoever gives me
Rs.100 will get 8% interest rate for 10 years and then principle will be repaid”.
For the purpose of understanding Reverse repo, let’s construct a simplified technically
incorrect model:
Read it carefully:
1. reverse repo rate would not be announced separately but will be linked to repo rate.
2. The reverse repo rate will be 100 basis points below repo rate.(=minus 1%)
So if RBI declares “Repo rate=8%” then reverse repo-rate is automatically 8-1=7%.But now
comes the question:
What is repo rate?
Common sense says, it has to be reverse of “reverse repo rate” right? Yes that is right.
Textbook definition says
Repo rate is the rate RBI charges on its clients for short term loans.
To put this crudely, when SBI wants to borrow money from RBI for short term, SBI will
have to pay ^this much interest rate.
(again) For the purpose of understanding repo rate, let’s construct a simplified technically
incorrect model:
Read it carefully:
Question:
Why all this gadhaa majoori (donkey labour), involving Government security? Why
can’t RBI and SBI give money to eachother without involving Government securities
just like the normal people borrow and lend to each other?
Answer= Because Government security acts as “collateral”. So if first party doesn’t
honor the agreement (of repurchase), then second party can sell away the Government
security to a third party and recover its money.
Just like pawning your jewelry in Muthoot finance or Mannapuram gold loans.
Bank rate RBI lends money to its clients for long term loans @this interest rate.
What is LAF?
liquidity adjustment facilities (LAF).
Recall that one of the main task of RBI is to control money supply in the economy.
RBI controls money supply via monetary policy. For this RBI uses various “tools” e.g.
SLR and CRR.
Liquidity adjustment facilities (LAF) is also a tool used by RBI to control short-term
money supply.
LAF timeline
1998 Narsminam Committee on banking rector reforms, recommends LAF
1999 RBI introduces interim LAF
2000 RBI introduces full-fledged LAF.
In the old Bollywood movies, international smugglers often come to main villain’s
hideout with suitcases loaded with cash. Then main villain will auction some ancient
Indian statues to them. Something similar happens under LAF.
LAF helps banks to quickly borrow money incase of any emergency or for adjusting in
their SLR/CRR requirements.
Under LAF, RBI auctions Government securities, starting at the repo and reverse repo
rate. Minimum bidding amount is Rs.5 crore.
So LAF is a tool used by RBI to control short-term liquidity / money supply in the
market.
In LAF, money transaction is done via RTGS. (RTGS is an online money transfer
method). So in this auction, players don’t need to bring suitcases loaded with cash.
What is RGTS?
RTGS, NEFT=These are online facilities for transferring money within the country.
Real Time Gross Settlement (RTGS) National Electronic Fund Transfer (NEFT)
Fast (immediate money transfer) Slow (done on hourly basis)
Can be used only if money transfer amount is Can be used for any amount. There is no
minimum 2 lakh rupees or more. minimum or maximum limit.
Summary
From SBI manager’s point of view
I must keep this much money aside. I cannot give it as loan to anyone. I will not
CRR
earn any interest rate on it.
I’ve to invest this much money in gold, Government securities (G-sec) and RBI
SLR
approved corporate bonds.
If I borrow money from RBI for short term, I’ll have to pay them this much
Repo rate
interest rate.
Reverse repo
If I park my money in RBI, they’ll pay me this much interest rate.
rate
If I borrow money from RBI for long term, I’ll have to pay this much interest
Bank rate
rate.
Mock Questions
Q1. If RBI purchases Government securities via open market operations, then liquidity _______.
a. increases
b. decreases
c. Stays the same.
d. None of above.
a. Repo rate is always 100 basis points higher than MSF lending rate.
b. Reverse repo rate is always 100 lower than MSF lending rate.
c. Repo rate is always 100 basis point higher than reverse repo rate.
d. None of above.
1. RTGS and NEFT are two online money transfer methods within India.
2. NEFT is faster than RTGS.
3. NEFT can be used only for transections above Rs.2 lakh.
Choice
a. Only 1
b. Only 1 and 2
c. Only 2 and 3
d. All of them
Q4. In which of the following, Bank will not be making any money?
Choice
a. Only 1 and 3
b. Only 2 and 3
c. Only 1
d. All of them
a. fixed deposits
b. cash certificates
c. current account
d. Staff security deposits.
And since Government already missed the first two targets (Revenue collection and
Expenditure) so obviously third target (fiscal deficit) was going to be missed.
Thus in 2008-09 Government could not show its sharp / precise / accurate “fiscal
marksmanship”.
To put this concept in refined words= Government overshot the deficit targets in 2008-09
to obviate the adverse impact of the global financial crisis and to give largesse on the eve
of the 2009 general elections.
Anyways ^that was the story of 2008-09, but even in 2011-12, Government was showing
signs of poor fiscal marksmanship because
1. Policy paralysis in last two years. Combine this with slowdown in Europe=our (export)
sector is not performing good, GDP is going down, low IIP=> low tax collection.
2. Disinvestment targets could not be met because market’s response was lukewarm.
(Meaning Government wanted to sell its shares of some PSU but private players were not
interested in buying them @high price).
3. Inflation continued to be above 7 per cent=again higher subsidy payments, lower tax
collection.
4. high inflation = people opting for gold-purchase as “safe-investment” + high crude oil
price= CAD increased = rupee weakened against dollar= even more inflation= profit of
businessmen declined = less tax collection.
5. In earlier years, Government could make truckload of money through proper auctioning
of spectrum and coal mine licenses, but both were ridden with scams and corruption. So
when Government tried to auction 2G again in the late 2012 (after supreme court’s
order), private players weren’t much interested.
6. Controversies surrounding Vodafone case and GAAR implementation = foreign players
felt less confident investing in India.
Lately Government has woken up and started firefighting: the increasing of petrol-diesel prices,
decreasing number of subsidized LPG cylinders, increasing FDI limits in multibrand retail,
insurance, aviation, increasing the railway ticket prices, direct cash transfer……these are all
measures to decrease the fiscal deficit (=achieving fiscal consolidation).
anyways back to the story:
*By the way service tax is 12% but some books/material/websites might say service tax is
12.36%. WHY?
Because they include cess on the service tax.
#5: IT in IT
To increase the tax collection, Government is making extensive use of information
technology is continuing, viz. along with e-filing of income tax returns, various forms,
audit reports, and statements of tax deduction at source have been made compatible with
electronic filing and computerized centralized processing. This helps checking tax
evasion and black money.
1. petroleum, oil, and lubricants (POL) are expensive in terms of value but Government is
levying lower levels of duties on them.
2. Tax exemptions are given on various imported items.
Issue: Non-Tax Revenue
Last year, Government couldn’t get sufficient “incoming” money from non-tax Revenue
sources because
Market gave lukewarm response to disinvestment.
Government was expecting to auctions of telecom spectrum and phase III FM Radio for
around 15,000 cr. But it did not work out.
As the 2G telecom spectrum auction elicited lukewarm response on account of the high
reserve price.
Issue: SUBSIDIES
The Budget for 2011-12 had estimated total expenditure to be contained at 14.0 per cent
of GDP but Government also overshot this target due to high global oil prices and
subsequent increase of subsidy bill (for oil and fertilizers) = another example of poor
fiscal marksmanship.
Government should give priority to food subsidy due to extent of malnutrition in the
country.
The government aims to do this via National Food Security Act.
But there is also need to reduce leakages involved in subsidy delivery= Government aims
to do this via Direct benefit transfer (DBT) / direct cash transfer.
Public debt
It is further classified into internal (domestic) and external debt
Internal debt makes up around 91 per cent of public debt.
State governments are not allowed to directly borrow externally hence their entire debt is
domestic.
1. Serving or retired judges of High Court, or someone who is qualified to become one
2. knowledge of Government finances or accounts, or
3. experience in administration and finance.
4. Special knowledge of economics.
Terms of reference
The 14th finance Commission will look into following matters
Way ahead?
Prolonged fiscal deficit leads to
Therefore Government must stick to the fiscal targets. Although, Government cannot rapidly
reduce its outgoing money (expenditure) because
1. Government has to pay interest on earlier borrowings
2. Continued payments on defense, civil service pay and pensions, etc.
Mock questions
Q1. What is the correct equation of effective revenue deficit?
a. The service tax rate was 12% for 2012-13 and increased to 12.36% for 2013-14.
b. Railways is exempted from service tax.
c. Service tax is levied on the items listed in the negative list.
d. All of above.
Choice
a. Only 1
b. Only 2
c. Both
d. None
1. WPI calculation
2. GDP deflator
3. CRR, SLR, Repo, reverse repo, LAF and MSF
1. WPI
2. CPI
3. GDP deflator
WPI
Wholesale price index
Compiled by Office of Economic Adviser ->Ministry of Commerce and Industry.
Base year 2004
Doesn’t cover services.
it’s calculated using Laspeyres formula.
Items are classified into three categories
1. Primary articles
2. Fuel, power, light, lubricants
3. Manufactured products.
Earlier Government used to give weekly primary and food inflation data based on the Wholesale
Price Index. But this practice has been discontinued since 2012.
CPI
Consumer price index
In 2012, the CPI system was reformed
GDP deflator
How and why GDP deflator is calculated? Already explained in earlier article, click me
So not going into details in the current article.
GDP deflator is calculated by Central Statistical Organisation (CSO)-> Ministry of
Statistics and program implementation.
GDP deflator =GDP @current price divided by GDP @constant price
GDP deflator is the most comprehensive number to measure inflation, but RBI
/Government doesn’t use it much for policy making because GDP deflator data comes
quarterly (and not weekly/monthly basis).
5. Govt. suspended futures trading in rice, urad, tur, guar gum and guar seed.
6. Govt. banned exports of edible oils (except coconut oil and forest-based oil) and edible
oils.
7. Govt. imposed stock limits on certain essential commodities such as pulses, edible oil,
and edible oilseeds and rice.
Via schemes
9. Govt. has been giving rice and wheat to poor families at very cheap rate under the
Antodyaya Anna Yojana.
10. Govt. allocated huge amount of foodgrain under the targeted PDS (TPDS).
11. government has allocated rice and wheat under the Open Market Sales Scheme (OMSS)
13. Introduced Rajiv Gandhi Equity Saving scheme (with tax benefits) to make people invest
money in it, rather than in gold.
Via Policy/Act
14. Recently the government permitted FDI in multi-brand retail trading. This will improve
logistical facilities connecting farmers with the final consumers and cut down the
middlemen.
15. The States of Madhya Pradesh and West Bengal have recently waived the market fee on
fruits and vegetables. Such waivers are expected to promote investment private sector in
the infrastructure necessary for transports and processing of fruits and vegetables.
16. Budgetary provisions for improving storage and warehousing facilities, creating
infrastructure for aquaculture etc.
When Government puts ban on export of xyz item, that means India receives that much
less foreign exchange (dollars). So this increases the Current Account deficit (CAD).
When CAD increases = rupee weakens against dollar = crude oil become expensive for
us = inflation in everything.
Therefore, export bans are like firefighting / short term quickfix solutions. They donot solve the
fundamental problems of Indian economy, infact they worsen it in long run.
Environmental clearances
Many coal and mining projects are not cleared due to environmental issues.
This has affected the electricity and raw material supply = input cost increased in
manufacturing sector=inflation.
Fiscal consolidation
Government is on the path of “fiscal consolidation” so it increased the prices of petrol, diesel and
reduced the number of subsidized LPG cylinders. These moves have increased the inflation.
I’ve to keep this much cash aside. I cannot loan it to people. I donot earn any
CRR
interest on this.
SLR I’ve to invest this much cash in govt. securities, gold and reliable corporate bonds.
Repo I’ve to pay this much interest rate, IF I take short term loans from RBI.
Reverse
I earn this much interest rate, IF I deposit my money in RBI for short term.
Repo
So what will be the impact on liquidity when RBI changes these rates?
Rate When rate is increased When rate is decreased
CRR Liquidity decreases Liquidity increases
SLR Liquidity decreases Liquidity increases
Repo Rate Liquidity decreases Liquidity increases
Note: RBI doesn’t need to change reverse repo rate, because they automatically keep it
1% less than repo rate. (1%= 100 basis points).
In winter, the supply of green vegetables is high so their price goes down. But in summer,
their supply is low, so price goes high. Same is the link between liquidity and interest
rates.
When liquidity increases = loan interest rate decreases.
When liquidity decreases = loan interest rate increases = harder to get loans for home,
car, bike, business.
1. Control inflation.
2. Facilitate growth.
But It has been very difficult to do both these things at the same time. Because if RBI
wants to control inflation, then it needed to reduce the liquidity= RBI had to increase repo
rate, CRR. But this type of tight” monetary policy badly affects both producers
(businessmen) and consumers. Why?
But when repo rate is increased= liquidity decreased= difficult to get loans for home, car,
bike etc.= demand down + difficult for businessmen to get loans = this hurts the
businessman and whatever hurts the businessmen – also hurt the GDP and employment.
To put this in refined words: the tight monetary policy of RBI decreased the flow of
credit (loan) to productive sectors of Economy and hence negatively affected the growth.
But due to inflationary pressures, RBI followed tight monetary policy during 2010-11.
During this period, RBI raised policy rate (repo rate) by 3.75%= repo rate was increased
from 4.75 per cent to 8.5 per cent. Check the following chart.
But this move has backfired: global economy was progressing slow (due to problems in
EU, and USA not yet fully recovered) => so, this tight monetary policy actually
contributed to a sharper slowdown of Indian economy than anticipated.
GDP growth rate fell down from good 9+% to around 5-6%.
CRR rates
Check the chart
As you can see, between 2010-11, here too, RBI kept increasing CRR rates to curb inflation. But
from 2012 onwards, RBI has started decreasing the CRR.
SLR rates
As you can see, RBI hasn’t changed SLR much in last three years.
Way ahead
For RBI
→orld Bank’s report (January 2013) says prices of most of the global commodity prices
are expected decrease in 2013 and 14 (except for metals.)
However, as per the assessment of RBI, global economic and financial conditions are still
fragile. So they’re not providing any growth stimulus to the economy. (for example, if
situation in Europe and America was good, they’d have been importing a lot more goods
and services from India= India’s GDP could increase.)
So in that context, even if RBI drastically reduces repo or CRR, that won’t do much good
to economy.
For Government
tackling the “supply side bottlenecks” take months and years.
So in the mean time poor people must be protected from the inflation.
That’s why govt. needs to continue giving welfare schemes and subsidies.
But such support must be “targeted” to the right beneficiaries: that’s where UID/Aadhar,
Direct cash transfer comes into picture.
Other than that, Government needs to continue pushing for fiscal consolidation,
deregulation of sugar pricing (as per Rangarajan’s recommendations), and other policy
initiatives.
On a side note:
RESIDEX
Rural to urban migration is an inevitable part of economic growth.
But when people migrate from rural areas to urban areas, it creates pressure on civic
amenities and housing (slums).
Until recently, we did not have an index to capture the prices of residential buildings in
urban areas.
Hence “Residex” index was launched in 2007.
This index records the changes in the prices of residential buildings.
According to the RESIDEX, the housing prices have declined in Hyderabad, Banglore
and Jaipur (from 2007 to 2012) but they have increased by more than 100% in Pune,
Bhopal and Chennai.
Mock questions
1. Correct statements about WPI?
a. It is released by finance ministry
b. It classifies items into three categories 1) primary 2) fuel and fodder 3)
Manufactured products and services.
c. It is calculated using Laspeyres’ formula.
d. None of above
2. Incorrect statements about CPI
a. The base year is 2004-05
b. It is calculated by Labour Bureau with the help of NSSO
c. Both A and B
d. Neither A or B.
3. Correct statements
a. CPI measures price change in both goods and services.
b. WPI measures price change in only in goods but not in services.
c. Both A and B
d. Neither A or B.
4. What is the formula for GDP deflator?
a. GDP at constant price divided by current price
b. GDP at current price divided by annual WPI
c. WPI divided by CPI
d. GDP at current price divided by constant price
5. What is RESIDEX?
a. It is a drug to combat swine flu.
b. It is a new vaccine for rabies.
c. It is an index to capture the prices of residential buildings in urban areas.
d. It is an index to capture the prices of residential buildings in both rural and urban
areas.
6. Between March 2011 to March 2013, what was the highest Repo rate?
a. 9.00
b. 7.25
c. 8.50
d. None of Above
7. Which of the following can be used to measure inflation directly?
a. Current Account deficit
b. GDP deflator
c. Fiscal deficit
d. Purchasing power parity
Economies of scale
Financial intermediaries are big in size, spend lot of money in advertisements, have
branches in many places, so for them finding prospective loan taker=very easy.
When loans are given, lot of paperwork, background check has to be done. Financial
intermediaries have thousand of employees to do it. They buy stationary, printer inks etc.
on wholesale so their operation costs are low.
On the other hand, if you (aam aadmi) directly try to find someone who needs
loan/finance then amount of rickshaw fare for searching clients, making telephone calls,
seeking help of CAs and accountants, no. of hours spent in paperwork- all that will
reduce your profit margin to a very low level. So it’d be better if you let the financial
intermediaries do all that work.
Banks
Same goes for bank. You deposit your money in savings account then you’re certainly
going to earn interest (profit).
It is bank’s headache to find a loan taker, collect EMIs and recover loans. Besides banks
have to maintain CRR, SLR, – it also ensures safety of your investment.
Often we see in newspaper that “SBI has non-performing assets (NPAs) worth thousands
of crores.” It means SBI gave loans to some people but unable to recover the money.
Yet you never hear a newstory where SBI branch manager told a customer ,“ sorry, you
can’t take out money from your savings account or fixed deposit because we’ve unable to
recover loans from third party.”
Why? Because SBI has lot of new incoming customers, and if it makes losses in one
place, it makes profit in several other places
besides SBI is doing business for years, so it has deep pockets full of cash. It can afford
to bleed, it can afford to make temporary losses and yet maintain a smile on its face.
But If a common man directly gives loan to someone, and the loan-taker doesn’t repay on
time = troublesome situation. Because then common man will have to either hire goons
or goto police/court: first solution is quick but very risky, second solution is expensive
and time consuming.
That’s the second advantage of financial intermediaries: they ensure safety of your investment.
To put this in refined words: “financial intermediaries invest in diversified portfolios and
hence suffer less risk compared to an individual investor.”
Besides, financial intermediaries are supervised by regulators (RBI, SEBI, IRDA etc.) so
they can’t fleece small investor and run away.
And financial intermediaries offer you a reasonable return on investment, their profit
margin is also reasonable. It is not like they give your 2% return on your investment and
loan it to businessman for 48%.
^These are the advantages from investor / lender’s side. Now let’s look at the advantages from
borrower’s side.
1. Easy availability: because you can easily find their office, take the application form.
2. Reasonable cost of borrowing:
a. Debt: if you borrow from a money lender, he’ll charge very high interest rate,
compared to a bank.
b. Equity: if mutual fund has invested in your shares, all you have to do is pay
reasonable amount of dividend on the shares (if your company makes profit).
3. You Can take long term loans worth crores of rupees.
Big picture is: if India wants a better GDP growth rate then
1. Financial intermediaries should be able to do their business easily. e.g. banks should have
better facilities to recover bad loans….there comes SARFAESI Act amendment.
2. Regulators (RBI, SEBI) should have more powers to supervise the Financial
intermediaries….there comes the amendments in their respective acts/ rules.
3. Businessman should be able to raise money not from Indian financial intermediaries but
also from abroad, wherever they can get finance at a cheaper rate….there comes ADR,
GDR.
4. People (particularly in rural areas) should be made aware of the benefits of these financial
intermediaries….there comes the topic of financial literacy.
5. People should be able to get help from financial intermediaries easily….There comes the
topics of financial inclusion, banking correspondence agents, ultra small branches, New
pension schemes etc.
^These are some of the topics discussed in fifth chapter of Economic survey. (we’ll see them in a
separate article later.)
Mock Questions
Q1. What do you understand by the term financial intermediaries?
Choice
Choices
a. economies of scale
b. asymmetry of information
c. investments in diversified portfolios
d. All of above.
Timeline:
2003 PFRDA established
(compulsory) New Pension System (NPS), for the new recruits in Government of India
2004
(except the armed forces).
New Pension System (NPS) is opened up for any citizens in India who wanted to subscribe,
2009
even if they are not in Government service.
Just like we’ve NPS in India, In USA, they’ve a pension scheme for all citizens called “401 (K)”.
Two accounts
In New Pension scheme, there are two types of account
Tier-I Tier II
Optional.You can open Tier II, only if you’ve
Compulsory for every subscriber
opened a Tier I account first.
You cannot Premature withdraw money
Can
before retirement age.
NPS: Eligibility
Who can join? Who cannot join?
Any citizen of India (age 18-60) Below 18 and above 60
1. A person declared insolvent.
NRI can also join, if he has account in Indian bank. 2. Person of unsound mind.
What is PRAN?
→hen you subscribe to New pension scheme, you’re given a unique account number.
Known as “Permanent Retirement Account Number (PRAN)”
Recall that UID/Aadhar also gives you a unique number. But there are differences:
Fund ICICI, UTI, SBI, Kotak etc are the fund managers for NPS.You can decide which
manager fund manager you want to pick up.
When you contribute money to NPS, it goes to these fund managers. They invest
your money in following*
1. Equities
2. Debts (Corporate bonds+Government securities)
*You can decide how much you want to invest in each of them. (with some
caveats).
Thus different NPS account holders will end up earning different % on their investment. On the
other hand, the EPFO (Employees’ provident Fund) offers uniform 8.5% interest rate to all
account holders.
NPS-lite
So far you know that NPS was originally meant for Government employees. Later it was
extend to all residents citizens of India. Let’s call that “NPS main”.
Government of India + PFRDA, also initiated another scheme called “NPS-lite”.
“NPS-lite” is meant for weaker and economically disadvantaged sections of society.
How is it different from the “main” NPS?
Swavalamban Scheme
In 2010.
Started in This scheme will run till 2016-17.
Target
People working in unorganized sector.
audience
They must contribute minimum Rs.1000 to maximum Rs.12000 per year
Condition? into their NPS or NPS-lite account.
What is the Government will contribute 1000 rupees in their NPS account each year.
benefit? They can exit early. (@age of 50 years or after being in the scheme for 20
years). while a “normal” NPS subscriber cannot exit before age of 60.
Ok, everything sounds well and good with NPS but then
Because NPS offers very low Commission to Fund managers (ICICI, SBI, UTI etc.)
So those players (ICICI, SBI) rather prefer to market their own pension, insurance,
retirement plans rather than promoting NPS among their (regular) bank customers.
Same goes for financial advisor, insurance agents etc. They get more Commission by
promoting pension/insurance/retirement plans of private companies to their clients
compared to NPS.
Other reasons
In NPS, there are multiple actors: PFRDA, CRA and fund managers. NPS doesn’t offer
uniform rate of return. Common people find this setup difficult and unsecure, unlike tried
and trusted LIC or PPF.
Income Tax benefits under NPS are not significantly higher than the existing investment
options.
NPS is not spending lot of money on ads with film stars / cricketers.
Man Are you suggesting that I should stop MNREGA and Direct cash transfer so
Chindu
people can put more money in NPS????????
PFRDA
You’re putting words in my mouth. But yes, sounds like a good idea.
Chairman
Well it is definitely not a good idea sir-ji. Because MNREGA, Direct benefit transfer
Chindu and food security act are the three main selling points of our party’s election
campaign.
Jokes apart, when it comes to MCQs, DONOT make silly mistakes the schemes starting with “S”
1. destitute widows,
Swadhar 2. women prisoners released from jail and without family support,
3. women survivors of natural disasters;
4. rescued from brothels
5. rape victims
Mock Questions
1. Correct Statement about NPS?
a. Initially it was meant for employees in central service and armed forces.
b. PFRDA, a statutory body, is responsible for implementation of NPS.
c. Only nationalized banks can work as fund managers of NPS.
d. None of above
2. PRAN is the account number of _______ subscriber.
a. EPFO
b. ESIC
c. NPS
d. LIC
3. Correct Chronology (older to newer)
a. Swabhiman, NPS, Swavalamban
b. NPS, Swavalamban, Swabhiman
c. Swabhiman, Swavalamaban, NPS
d. None of above
4. An NRI is eligible for
a. Aadhar card
b. New pension scheme
c. Voting from his respective constituency in India
d. All of above
e. None of above
5. What is the purpose of Swavalamban scheme?
a. Provide scholarships to poor girls pursing higher education
b. Provide financial assistance to self help groups in rural areas.
c. Increase subscription of NPS
d. Improve banking penetration in rural areas
6. What is the purpose of Swabhiman scheme?
a. Provide scholarships to poor girls pursing higher education
b. Provide financial assistance to self help groups in rural areas.
c. Increase subscription of NPS
d. Improve banking penetration in rural areas
Q7. Who among following, will definitely lose his job/position if he is declared insolvent?
Choices
a. Only 1 and 2
b. Only 2 and 3
c. Only 1 and 3
d. None of above
Choices:
a. Only 1
b. Only 2
c. Both
d. None
Choices
a. Only 2 and 3
b. Only 1 and 2
c. Only 3 and 4
d. All of them
Mains
1. Swavalamban (5m)
2. Write a note on New Pension Scheme and its salient features (12m)
3. Discuss various pension schemes launched by Government of India for the weaker
sections of society. (15m)
Interview
1. What are the flaws in NPS? If you were the chairman of PFRDA, how would you correct
them?
2. If LIC can be successful, why can’t NPS?
3. Government shouldnot increase FDI in pension sector because it’ll hurt NPS.
Agree/disagree?
let’s start with Economic Survey >> Chapter 5> Financial intermediaries> insurance sector. The
chapter itself, barely contains 4-5 paragraphs on Insurance, but this article also covers budget-
speech and various insurance schemes given in India Yearbook.
Insurance: intro
Insurance funds = important financial intermediaries for India. They help move peoples
savings into Government and corporate securities.
Insurance industry in India, can be classified into following
Insurer Example
Life LIC, ICICI prudential,
ICICI Lombard, Oriental, New India, United India. Among
them, three are standalone Health insurance companies
Non-life/General insurance (e.g.
health, travel, business, marine, 1. Star health
fire) 2. Apollo Munich
3. Max BUPA
Re-insurer GIC
1. Export credit guarantee corp.
Specialized 2. Agriculture insurance Company of India ltd. (AICIL)
The basics of IRDA, Insurance ombudsman functions, various types of policies etc.
already explained in earlier article click me
Insurance Penetration
It is the ratio of premium underwritten in a given year vs. gross domestic product (GDP).
It helps measuring growth in the insurance sector in a country.
Insurance density
ratio of premium underwritten in a given year to total population (measured in US dollars
for convenience of comparison).
Issue?
In past, (before LPG reforms of 90s), India’s Insurance penetration and density were very
low because insurance sector was monopolized by public sector companies.
But Post liberalization, and with the entry of private sector companies, both insurance
penetration and density have increased.
However, India’s insurance penetration and density are still low as compared to other
developing countries of the world.
FDI in insurance
Before 1999, Insurance sector in India was monopolized by public sector companies: LIC
+ GIC (and GIC’s subsidiaries).
1999 was the reform year insurance sector
o Insurance Regulatory and Development Authority (IRDA) Bill passed
o Private sector companies can enter insurance business (they started doing so from
2000)
o 26% FDI allowed in Insurance sector.
2012:
o As of 2012, there are 52 insurers in India.
o Chindu gave 12 point revival package for insurance sector
o Cabinet approved 49% FDI in insurance sector.
But insurance amendment bill is not yet passed in the parliament yet.
o
FDI in insurance = will increase competition, = more efficiency, innovation, cheaper
premiums for policy holders; Thus FDI ultimately benefit the customers, and help
improving India’s insurance penetration and density.
But some political parties oppose it saying, FDI in insurance = bad idea. Those
unscrupulous private insurance companies will invest policy holders’ money into bad
corporates and it will lead to something bad like sub-prime crisis.
→hat they don’t see is: Even China allows 50% FDI in Insurance, Malaysia 70%, and
Mexico has 100% FDI in insurance sector.
And all these countries are doing fine. Hence, the fears regarding foreign investment in
insurance= misplaced.
What is Bancassurance?
Bancassurance = Arrangement through which banks sells insurance products. (and earns
Commission)
“Bancassurance” system appeared in France in the 80s.
According to Insurance law: one bank can work as Bankassurance agent for only one
insurance company. (one for life insurance and one for non-life insurance)
Meaning one bank cannot sell policies of multiple insurance companies (unlike a
stationary shop owner- who can sell pens from multiple brands such as Raynolds, Parker,
Luxor, Cello etc.)
But this “one bank one insurance co.” system was changed after Chindu’s revival
package.
Example of Bankcassurance
Type of insurance Insurance co +bank
Life ICICI prudential ICICI Bank
SBI-life SBI
Non-life ICICI Lombard ICICI bank
TATA-AIG HSBC, IDBI etc.
Bancassurance: pros and cons
Pros Cons/Anti arguments
LIC has a big network of agents and Banks have huge database of customer
offices but private Insurance companies telephone numbers. They annoy
don’t. Hence Bancassurance system helps customers with stupid telemarketing
the private insurance companies to utilize calls for selling insurance policies.
the big network and manpower of a bank Bank employees donot have in-depth
without much investment. knowledge of insurance products.
It helps the reach of insurance products to They only care about meeting the
the masses. “sales-targets”. They sometimes
Bancassurance increases Insurance density misinform the customers about future
and insurance penetration. benefits / returns to sell a particular
Increases the competition between public insurance policy.
and private sector insurance companies = (^although same criticism applies for
better prices, products and services for insurance agents also, they push for
customers. products that give more Commission.)
Account holder doesn’t need to visit so ultimately you’ve to do bit of a
multiple offices – one for banking and one research and comparison of various
for insurance. Now bank is a “big mall” insurance policies before investing
where he can do “shopping” for both. into one.
New products
An insurance company has to seek approval from IRDA, before launching a new product.
According to this plan, IRDA must give that clearance within 30 days.
Life insurance companies can introduce a product even without getting formal approval
from the IRDA. (in some specific conditions).
Bank brokers
Banks can work as brokers of Insurance products. (earlier they could work only as
“agents”: meaning as an “agent”, one bank could tie up with only one insurance co.)
But now as a “broker” One Bank can sell insurance products of multiple insurance
companies.
Banking Correspondence agents can sell micro-insurance products.
KYC
IRDA will accept Know Your Customer (KYC) check done by banks.
Taxation
Service tax to be cut on single premium policies and 1st year premium
Government is thinking about offering some more income tax exemption, for investing in
insurance products.
Investment
Investment norms for Insurance companies=relaxed.
Life insurers can invest in infrastructure SPV (special purpose vehicles) of any firm
(earlier they could only invest in public sector undertaking’s SP↑ only).
New branches
Insurance companies will be empowered to open branches in Tier II cities and below
without prior approval of IRDA.
All towns of India with a population of 10,000 or more will have an office of LIC and an
office of at least one public sector general insurance company. I propose to achieve this
goal by 31.3.2014.
Claims
There are about 10,00,000 motor third party claims that are pending before
Tribunals/Courts.
Public sector general insurance companies will organise adalats to settle the claims and
give relief to the affected persons/families.
RSBY extended
The Rashtriya Swasthiya Bima Yojana already covers BPL families.
Now, It’ll cover rickshaw, auto-rickshaw and taxi drivers, sanitation workers, rag pickers
and mine workers as well.
Started in 2003
Healthcare for BPL
Universal Health Medical expenses upto Rs.25k
Insurance Scheme Maternity benefit given
(UHIS) Pre-existing diseases also covered.
Started in 2007
Smart card based cashless health insurance.
BPL family (upto 5 members) in unorganized sector.
In Budget 2013, Chindu extended this scheme to rickshaw,
Rashtriya Swasthya auto-rickshaw and taxi drivers, sanitation workers, rag
pickers and mine workers.
Bima Yojana (RSBY)
For medical expenses upto Rs.30k per year.
Premium sharing: centre vs State=75:25, incase of North
east, 90:10
Two schemes:
1) NAIS (National agriculture insurance scheme):
available to all farmers, irrespective of their farm size.
Protects them against crop losses due to natural calamity.
Agro Insurance
2) Weather based crop insurance scheme
Both are run by Agricultural insurance company (AIC)
Mock Questions
1. For the given year, Insurance penetration is measured as:
a. Ratio of Premium underwritten to No. of People in the 18-60 age group
b. Ratio of Premium underwritten to GDP
c. Ratio of Premium underwritten to Total population
d. None of above
2. For the given year, Insurance Density is measured as
a. Ratio of Premium underwritten to No. of People in the 18-60 age group
b. Ratio of Premium underwritten to GDP
c. Ratio of Premium underwritten to Total population
d. None of above
3. Bancassurance means
a. Arrangement in which Insurance company provides banking services
b. A bank giving security for Indian corporate to raise capital from abroad.
c. A Non banking Finance company providing assured returns on its deposits.
d. Arrangement in which Bank sells insurance products.
4. Bancassurance leads to
a. Increase in Bank’s NPA
b. Decrease in Bank’s NPA
c. Increase in insurance penetration
d. Decrease in insurance penetration
5. Bancassurance involves ________ and ________.
a. Bank, NBFC
b. Bank, MNC
c. Bank, insurance company
d. None of above
6. The Insurance amendment bill aims to increase FDI limit in Insurance sector to
a. 26%
b. 49%
c. 51%
d. None of above
7. Correct Chronology (older to newer)
a. IRDA, SEBI, PFRDA
b. PFRDA, IRDA, SEBI
c. SEBI, IRDA, PFRDA
d. None of Above
8. An urban BPL family is not eligible for
a. Janshree Bima Yojana
b. Rashtriya Swasthya Bima Yojana
c. Aam Admi Bima Yojana
d. None of Above
9. Incorrect Statement about Rashtriya Swasthya Bima Yojana
a. It is a smart card based cashless health insurance scheme for rural households.
b. Premium sharing between Centre :State is 50:50.
c. Both A and B
d. Neither A or B
10. Incorrect match
a. Aam Admi Bima Yojana: urban and rural BPL
b. Janshree Bima Yojana: Rural landless
c. Both A and B
d. Neither A or B
11. What are the similarities between Aam Admi Bima Yojana and Janashree Bima Yojana?
a. Both provide life insurance
b. Both are implemented via LIC
c. Both A and B
d. Neither A or B
12. Who among the following, is/are eligible for Rashtriya Swasthya Bima Yojana (RSBY)?
a. Rickshaw and taxi drivers
b. Rag pickers
c. Mine workers
d. All of Above
Mains
1. Pravasi Bharatiya Bima Yojana (5m)
2. Rashtriya Swasthya Bima Yojana (RSBY) (5m)
3. Janashree Bima Yojana? (5m)
4. Meaning and advantages of Bancassurance (5m)
5. Write a note on the salient features of Insurance (Amendment) bill. (10m)
6. Examine the need for a comprehensive social security scheme in India. (12m)
7. →rite a note on Finance Minister’s 12-point plan for revival of Insurance sector. (12m)
Interview
1. Are you in favor of increasing the FDI in insurance sector?
2. Suggests the measures required to increase insurance penetration in India.
Financial market
Two subtypes
Apart from that, financial market also includes: forex market, commodity market, derivative
market, insurance market. But let’s pay attention to only capital market for the moment.
Reform: ECB
What is ECB?
External commercial borrowing
As the name suggest: ECB= when Indian company borrows money from external (non-
Indian / foreign) sources.
Money is borrowed from non-resident lenders.
Via bank loans, fixed rate bonds, non-convertible shares, optionally convertible or
partially convertible preference shares etc.
For minimum average 3 years.
Pro Anti
Today, American and European
In ECB, the borrower has to repay in foreign
economy is not performing
currency (usually dollar).
well, their banks and lenders
So If Rupee sharply weakens dollar (e.g. from
are not finding local borrowers
1$=Rs.50 to 1$=Rs.60), then Indian borrower
even at dirt cheap interest rate.
will have to more amount of rupees to repay the
So in this scenario, If an Indian
same amount of loan he previously took. (because
company can borrow money
first he’ll need to convert his Indian rupee
from abroad, at a lower interest
rate than in India, then what’s income/profit into dollar then repay the loan).
the harm? Let them do it.
Reforms in ECB?
Government has liberalization in External Commercial Borrowings Policy during 2012-
13
Main Beneficiaries of this liberalization = infra companies, SIDBI and NHB.
This list of ECB reform is not exhaustive but for exam oriented preparation- you’ve to draw a
line somewhere hahaha.
What is ADR?
American Depository receipt.
Already explained, just copy pasting from my old article
Suppose, Indian Co. wants to raise money from America, by issuing shares in American
stock exchange.
But then Indian co. will have to maintain accounts according to American standards.
To prevent this problem, Indian company gives its shares to American bank.
American bank gives that Indian company receipts (called ADR) in return of those
shares. Then Indian Co. can trade those ADR receipts in American share market, to raise
money.
Sound good? Yes, but then Indian company will have to pay dividends to those investors
in Dollar currency.
Similarly GDR= Global depository receipt
What is IDR?
ADR= American depository receipt = from America’s point of view, it allows a foreign
company (e.g. Indian) to raise money from American financial market.
Similarly, IDR= Indian depository receipt= from India’s point of view, it allows a foreign
company (e.g. American, British) to raise money from Indian financial market.
FDI reform?
Cabinet has approved increase in FDI for Multibrand retail, pension, insurance, aviation,
power and broadcasting.
QFI
To put this in crude terms:
QFI was allowed to directly invest in Indian equity market. (provided they’re from
member countries of Financial Action Task Force (FATF).)
QFIs from Gulf Cooperation Council (GCC) and European Commission were also
2012 allowed to Invest.
QFIs have been permitted to invest in debt market, with a total overall ceiling of
US$ 1 billion.
3 types of AIF
SEBI has notified new regulations covering alternate investment funds (AIFs) under three
broad categories
Category Note
These funds have positive spillover effects on the economy. E.g. venture capital
funds, small and medium enterprises (SME) funds, social venture funds, and
infrastructure funds
1
SEBI and Government might give them incentives or concessions.
Your annual income must be below 12 lakh. (original figure was Rs.10 lakh,
Conditions but Chindu raised it in budget 2013).
This must be your first investment in securities market. E.g. if you’ve been
already investing purchased some IPOs, shares or invested in mutual funds,
then you don’t get tax benefit in this scheme.
Lock in period of three years. (meaning you cannot take out your money
before that).
You must purchase approved shares/mutual funds only.
For investment upto Rs.50000, you get 50% deduction in income tax.
You can invest money in installments. No need to invest Rs.50000 in on go.
Benefit?
You don’t have to pay tax on dividends paid by the company.
issue/problem in RGESS?
To invest in any type of securities (debt or equity), you first need two
things 1) PAN card and 2) DEMAT account. Most of the Indians don’t
have either PAN card or DEMAT account.
FSDC
Government has set up Financial Stability and Development Council (FSDC) in 2010.
Org of FSCD
FM = chairman
Heads of financial-sector regulatory authorities (RBI, SEBI etc),
Finance Secretary and a few other departments
Chief Economic Adviser
Misc. Reforms
MCX-SX
SEBI permitted MCX-SX to operate as a full-fledged stock exchange (just like
BSE/NSE).
Now MCX-SX will directly compete with BSE and NSE, and it’ll lead to better services,
lesser costs for the investors.
CDS
Credit default swap (more explained earlier click me)
Mutual funds and Insurance companies can now participate in CDS as users.
This will increase liquidity in the corporate bond markets.
IRDA-repo
Insurance Regulatory and Development Authority (IRDA) has permitted insurance
companies to participate in the repo market.
Electronic voting
A public limited company has shareholders. And the company needs to take votes of the
shareholders before merger-acquisition, election of new board of directors etc.
Earlier this was done through postal ballot.
But in 2012, SEBI made rule: voting must be done through electronic means. (this
reduces any mischief or foul play and brings more transparency).
At the moment, SEBI has made electronic voting is made Compulsory for the top 500
listed companies and more companies will be included soon.
SCOREs
SEBI complaints redress system
It is a web portal, where you can file online-complaints to SEBI.
Mock Questions
1. Capital market is madeup of
a. Primary and Money market
b. Primary and secondary market
c. Money, primary and secondary market
d. None of above.
2. New securities are first issued in
a. Primary market
b. secondary market
c. Either A or B depending on SEBI’s approval.
d. None of above
3. Correct Statements about ECB?
a. Infrastructure companies can borrow money only in dollar currency.
b. SIDBI and NHB are allowed to borrow money via ECB route.
c. Both A and B
d. Neither A or B
4. What is the purpose of ADR?
a. Help an American company raise money from within USA
b. Help an American company raise money from outside of USA
c. Help foreign company raise money from American financial market.
d. None of Above
5. What is the function of IDR?
a. Help an Indian company raise money from within Indian financial market
b. Help a Foreign company raise money from within Indian financial market
c. Help an Indian company raise money from abroad.
d. None of Above
6. Which of the following Depository receipt has two-way fungibility
a. ADR
b. IDR
c. Neither A or B
d. Both A and B
7. Arvind Mayaram panel is associated with
a. Current Account Deficit
b. Double taxation avoidance
c. FDI, FII definitions
d. PPP project finance
8. Correct statement about QFI
a. It is a sub-account under FII
b. They’re not required to have PAN
c. An Investors from Gulf cooperation council cannot register themselves as QFI
d. None of above
9. Correct statement about Alternative Investment Fund (AIF)
a. It is regulated under SEBI’s mutual fund regulations.
b. SEBI classifies AIF into four categories.
c. Every AIF is required to get itself registered with RBI
d. None of Above
10. Correct Statement about Rajiv Gandhi Equity savings scheme?
a. It offers tax deduction to any investor whose income is below Rs.12 lakh
b. Dividend income under RGESS is taxable.
c. For investment upto Rs.50,000, it provides 100% income tax deduction.
d. None of Above
11. Which of the following is a function of Financial Stability and Development Council
(FSDC)?
a. Controls FDI approvals.
b. An organization that aims to increase inter-regulatory coordination and financial
literacy.
c. Controls external commercial borrowing and current account deficit.
d. None of above.
12. SCORES an online portal to register complaints with
a. IRDA
b. PFRDA
c. SEBI
d. None of Above
Mains
1. 2 markers
a. SCORES
b. AIF
c. ECB
d. IDR
2. 5 markers
a. RGESS
b. FSDC
3. 12 markers
a. Write a note on the recent reforms in the Indian capital market
b. What do you understand by External Commercial Borrowing? Briefly discuss the
recent liberalization in India’s in External Commercial Borrowings Policy.
Banks
What do banks do? They collect deposits from savers and lend it as loan to the borrowers,
and earn Commission in between. Hence they’re one type of financial intermediaries.
We already know that banks have to invest some of their deposit money in govt.
securities (and high rated corporate bonds) under the statutory liquidity ratio (SLR).
For past few years, this SLR rate has remained steady 23-24%. Yet banks have invested
more than 30% of their deposits in Government securities.
Recall that Government securities are “safe investments” and if an investment is “safe”
then it won’t give much profit.
So why are the bank investing more money in Government securities, even above the
SLR requirement?
Interest rate
There are mainly three type of bank account:
Current Savings
Term deposits/Fixed Deposit
Account account
Interest paid by Depends on how long you keep the money. 6-
0% 4-6*%
bank 8*%
These rates change from bank to bank, ^these are just approximate numbers for
illustration.
For banks Current account and savings account (CASA) are most important. Why?
Because on these deposits, bank has to pay very low interest. So if bank gets lot money
from CASA source, and lends it as car/bike/home/business/personal loans @12-18%
=there is big profit margin.
Result:
Villagers did not get facility of banking / insurance, and they had to rely on the (evil)
money lender who charged whatever interest rate he wanted to.
Sometimes they paid more money in interest, than the actual principle they had
borrowed.
And thus villagers remained in debt and poverty forever.
Government’s action
Over the years, Government certain things to achieve following objectives:
1. To help the villagers get easy loans for buying cows, buffalos, diesel pump sets, seeds,
fertilizers, digging wells and bores in their farms etc.
2. increase the penetration of banking services in rural areas
3. To achieve financial inclusion in rural areas
After independence
The structure looked like this (for rural banking)
1. RBI
2. State cooperative banks
3. Central cooperative banks (@District level.) || Urban cooperative banks (in cities and
small towns)
4. Primary Agriculture Credit societies (PCAS) (@village level)
Why RRB?
1975: Government appointed MM Narsimhan Committee to look into rural banking.
Narsimhan observed that Commercial banks (such as SBI, BoB) have high cost structure
(building, staff etc.) so they prefer to open branches in cities rather than villages- Because
city branches make more profit.
The staff of commercial banks= expert in banking and financial matters but not aware of
the problems of rural people.
On the other hand, the Primary agriculture Cooperative societies have members from the
villagers themselves, so they are more aware of the needs and problems of the villagers.
Therefore, we need to create a hybrid institution that has positive characters of both
RRB provides loan and savings facilities to villagers. These villagers include
Apart from RRBs, villagers also get services from cooperative credit societies,
Microfinance institutions;
Even commercial banks such as SBI also serve the villagers via BCA (Banking
correspondence agents).
And the urban-rural geographical breakup has changed a lot since the birth of RRBs.
(Many places that were villages in 70s have now become small towns).
In this context, it was necessary to consolidate/merge various RRBs- to reduce their
overhead expenses and make them more competitive
Therefore in 2005: Government of India started amalgamation of RRB. So now the
number of RRBs have decreased.
Till 1 January 2013, 22 RRBs had already been amalgamated into 9 RRBs.
Banks who do not meet their Priority sector lending requirements, provide money to this rural
infrastructure development fund.
Financial Inclusion
Financial inclusion = getting all poor people in the banking, insurance, pension net. So
they don’t become victims of evil money lenders who charge 36% compound interest
rates (or even more).
Swabhimaan scheme
→e’ve already discussed this scheme and Banking business correspondents (BCs) in
earlier article. Click me
Budget 2012, Chindu Pranab had announced that Swabhimaan would be extended to
habitations with population more than 1,000 in the north-eastern and hilly states and
population more than 1,600 in the plains areas as per Census 2001.
Under this programs, self-help group open savings account in the bank. They get loans for their
projects, deposit money from members (and NGOs earn commission in between).
It is being implemented by
1. commercial banks,
2. regional rural banks (RRBs)
3. Cooperative banks.
Development Banks/AIFI
They can be further classified based on their target audience
Out of ^them, names highlighted in bold (NABARD, NHB, SIDBI, EXIM) = All Indian
financial institutions (AIFI). Rest are development banks.
Industrial development
Commercial Bank
bank
Public Sector
1. ICICI* 1. SBI
2. IDBI 2. PNB
3. SIDBI (AIFI) 3. BoB
Examples 4. IFCI
5. IIBI Pvt.Sector
1. ICICI*
2. HDFC
Accept
deposit from No Yes
public?
Provide medium/long Provide short/medium/long term finance to both
Job? term finance to ONLY common men (car/bike/home/education/personal
industries. loans) + to industries.
*The ICICI started in 1955 to provide finance to industries. In 1994 they also started ICICI
Bank. And in 2002, the original parent (ICICI) was merged with ICICI Bank Ltd.
In the beginning, these organizations started as “All India financial institutions”, their job was
to provide medium / long term finance to companies.
But after the LPG reforms in the 90s, capital market become popular. Now businessmen
had more options to arrange for finance (via IPOs, bonds). So these All India financial
institutions (AIFI) lost their original glamour and government converted them into
Development banks (as per Narsimhan Committee’s recommendation).
Now only four AIFI left: NABARD, SIDBI, EXIM and NHB. They are regulated by
RBI.
In the (part 2 of 3), we had seen that now SIDBI and NHB are allowed to borrow via
external commercial borrowing (ECB) route.
In public sector banks, government of India (GoI) has regularly infused capital to keep
the CAR high. But over the years, GoI too is running low on cash (thanks to fiscal
deficit), so government had formed a committee, and committee recommended that
Government should create a new financial holding company. This company will raise
money from domestic and international sources and then infuse it as equity in public
sector banks.
1. sanction of fresh loans/ad-hoc loans from 1st Jan 2013 will be made on the basis of
sharing of information among banks;
2. banks will conduct sector- /activity-wise analysis of NPAs;
3. banks will put in place a robust mechanism for early detection of sign of distress,
amendments in recovery laws, and strengthening of loan appraisal and post credit
monitoring.
In case you wonder “→HY”? →hy is govt. giving 3% interest subversion to farmer who repay
the loans on time? Earlier the interest subvention was 1% (2009), It was increased to 2% (2010)
and 3%(2011).
Because, in 2009, govt. had launched debt waiver scheme. (Meaning farmers didn’t have
to repay the loans they had taken earlier.) Govt. say they are doing it to prevent ‘farmers’
suicides’, but experts believe it was more of an election gimmick.
It hurt the economy in two ways
Thus, banks, particularly regional rural banks (RRBs) are facing really hard time recovering the
loan money. That’s why Chindu is doing two things
1. On one hand, he offers additional interest subersion to farmers who repay loans on time.
2. On the other hand, he is also working for amalgation of RRBs.
for this,
MBN Rao committee = they’ll prepare the blueprint for the country’s first women’s bank.
Govt. shall provide Rs 1,000 crore as initial capital to start this bank.
Chindu hopes RBI will give banking license to this by October, 2013.
Banking
1. Govt. will provide capital infusion to public sector banks and make sure they meet
BASEL III norms.
2. All scheduled commercial banks and all RRBs are on core banking solution (CBS) and
on the electronic payment systems (NEFT and RTGS).
3. Public sector banks have assured Chindu that we’ll set up ATM in all our branches by the
end of March 2014
4. We are working with RBI and NABARD to bring all other banks, including some
cooperative banks, on CBS and e-payment systems by the end of December 2013.
Conclusion
Indian Government started reforming the financial markets under LPG reforms in 90s.
The results of these reforms have been encouraging.
Today, India has one of the most vibrant and transparent capital markets in the world.
But still there are certain challenges before Indian capital market becomes an important
avenue for investors – both foreign and domestic.
1) Our corporate sector requires long term funds (@low cost), and
2) we need lot of money for infrastructure project.
So, Government needs to take policy initiatives for developing a robust corporate bond market.
These policy initiatives include:
1. Need to strengthen the legal, regulatory framework for corporate debt market.
2. Legal regulatory framework for financial products which is new or still in nascent stage
e.g. municipal bonds, credit default swaps.
3. At present our public sector organizations related to pension-insurance sector (LIC,
EPFO) cannot invest lot money in corporate debts. Government needs to relax their
investment guidelines.
Financial literacy
Investment will not come just by relaxing the legal/regulatory framework.
You need to encourage people to invest in capital market. (and to prevent them from
investing all their money in gold- because gold purchase increases current account deficit
and creates more problems for Indian economy).
Govt also tried to give the “carrot” of RGESS. But challenge : much of the target
audience doesn’t have PAN card and DEMAT account.
Banks
Banking Laws (Amendment) Act 2012 already discussed click me
o This will give more regulatory and supervisory to RBI and
o help banks in raising funds from the capital market for expanding their banking
business.
SARFAESI act amendment help banks reduce their NPAs.
Other issues related to RRBs, NABARD etc given in this article itself.
Pension
But challenge: NPS is not popular due to low commission, bill pending in parliament. More
explained earlier, click me
Insurance
Chindu gave revival package.
Challenge: Less insurance penetration, FDI Bill pending in parliament
Mock Questions
1. Correct Chronological order (older to newer)
a. NABARD, RRB, SHG-Bank linking program
b. SHG-Bank linking program, RRB, NABARD
c. RRB, NABARD, SHG-Bank linking program
d. None of Above
2. RRBs are sponsored by
a. NABARD
b. RBI
c. Commercial banks
d. None of Above
3. Correct statement about Priority sector lending (PSL)
a. RBI has mandated that banks should lend maximum 40% of their advances to
PSL.
b. As per RBI rules, the Priority sector lending target for foreign banks is higher
than Indian banks.
c. Both A and B
d. None
4. Who benefits from Priority Sector Lending?
a. Small scale industrialist
b. exporter
c. education loan seeker
d. All of above
5. Priority sector lending targets _____
a. Are Uniform for all foreign banks in India
b. Depend on number of branches a foreign bank has.
c. Donot apply to any foreign banks.
d. None of above.
6. Priority sector lending (PSL) target for foreign banks, is decided by
a. Department of Economic affairs
b. NABARD
c. RBI
d. None of above
7. Ultra Small (bank) branches are meant for
a. Army cantonments
b. Near SEZ units
c. Village covered through Banking Correspondence Agents
d. Major and Minor sea Ports
8. The main purpose of Ultra Small (Bank) branches is
a. Provide easy loans to exporters
b. Provide easy loans to importers
c. Achieve financial inclusion
d. None of above
9. Swabhiman scheme is associated with _____ sector.
a. Healthcare
b. Pension
c. Education
d. Banking
10. Swavalamban scheme is associated with _____ sector.
a. Healthcare
b. Pension
c. Education
d. Banking
11. Rural Infrastructure Development Fund is operated by
a. Ministry of Rural affairs
b. Planning commission
c. NABARD
d. None of above
12. Who among the following implements SHG-Bank linkage program?
a. Commercial banks
b. Regional rural banks (RRBs)
c. Cooperative banks.
d. All of above
13. RBI regulates the interest rates on
a. Interest rates on loans given to exporters
b. FCNR
c. Savings deposits
d. None of above
14. Arrange these bank accounts in the ascending order of interest offered to customer
(smaller to bigger)
a. Current, Savings, Term deposit
b. Term deposit, savings, current
c. current, term deposit, savings
d. none of above.
15. What is the similarity between industrial development bank and a commercial bank?
a. Both accept deposits from public
b. both provide short term finance to industries.
c. Both A and B
d. None
16. Which of the following is All India Financial institution
a. SIDBI
b. NABARD
c. NHB
d. All of above
17. first industrial financial institution in India was
a. IFCI
b. ICICI
c. SIDBI
d. UTI
18. National housing bank has launched Reverse mortgage product for benefits
a. Senior citizens
b. students
c. industrialists setting up new colonies
d. None of above
19. Which of the following has not fully implemented core banking solution yet?
a. Scheduled commercial banks
b. Regional rural banks
c. Urban cooperative banks
d. None of above
20. Core banking solution means
a. Bank doesn’t sell mutual funds, insurance policies but concentrates on its core
banking operation.
b. Information related to a customer’s account is stored in a centralized server.
c. Indian bank offering outsourcing services to foreign banks.
d. None of above.
21. For a bank customer, Core banking solution
a. Prevents him from getting services from branches other than his local branch.
b. helps him avail banking services from any branch of his bank.
c. Helps him buy mutual fund and insurance policies via local branch.
d. None of above.
22. Which of the following is an example of NBFC?
a. Infrastructure Finance Companies,
b. Infrastructure Debt Fund
c. Both A and B
d. None
23. correct statement about NBFC-factoring companies
a. They’re infrastructure companies that help entrepreneur in setting up new factory.
b. They’ve to register themselves with RBI.
c. Both A and B
d. None
24. A gold loan company
a. is an example of NBFC
b. Has to follow the Loan to Value ratio stipulated by SEBI
c. Both A and B
d. None
25. for a bank, low Capital adequacy ratio (CAR) means
a. It has low capacity to absorb losses.
b. It has high capacity to absorb losses.
c. Bank will be exempted from SLR requirement
d. None of above
26. If you have to deposit your savings, which of the following bank is most reliable?
a. Bank with low CAR and low NPA
b. Bank with low CAR and high NPA
c. Bank with high CAR and high NPA
d. Bank with high CAR and low NPA
27. If you have to deposit your savings, which of the following bank is least reliable?
a. Bank with low CAR and low NPA
b. Bank with low CAR and high NPA
c. Bank with high CAR and high NPA
d. Bank with high CAR and low NPA
28. Correct statement
a. A Bank customer doesn’t earn interest on current account
b. A Bank doesn’t earn interest on CRR
c. Both A and B
d. None
29. Who among the following, will help a bank reduce its NPA?
a. Asset reconstruction company
b. NBFC-factor company
c. Both A and B
d. None
30. Interest subvention scheme
a. was started in 2006 and stopped in 2012
b. is applicable to long term agriculture loans
c. both
d. None
31. Example of Multilateral development bank?
a. SIDBI
b. IDBI
c. ADB
d. None of above
32. Who among the following, is outside the regulatory control of RBI?
a. Urban cooperative banks
b. SIDBI, NHB and EXIM bank
c. Multilateral development banks
d. None of above
33. MBN Rao is to prepare the blueprint for _____
a. GAAR
b. Food security
c. India’s first women’s bank
d. India’s first multilateral bank
Balance of Payment
Note: current account can be calculated using “Visible and invisibles”, that was explained
in old article on current account deficit click me.
Since we want to track the flow of cash, so, whenever American invest in India (via FDI,
FII, ADR etc) we add it as (+), and
when Indians invest in USA (via FDI, FII, IDR etc.) we add it as (-) and then get the final
figure for Foreign investment.
Same goes for everything in balance of payment (remittances, External commercial
borrowing whatever.)
In short, BoP= we are tracking the incoming and outgoing money.
For India, current account has been in deficit (negative number) and capital account has
been in surplus (positive number).
The BoP accounting system is similar to double entry book-keeping.
Therefore theoretically, balance in current account and balance in capital account should
be same (ignoring the +/- signs).
In other words, if there is deficit in current account, there has to be equal surplus in
capital account. Why?
Current Account + Capital account + Net errors and omissions = 0 (Balance of Payment).
Ok then does it mean a country can never have surplus (or deficit) in Balance of
payment?
→ell, a country can have “TEMPORARY” surplus or deficit in BoP. Because, BoP is
calculated on quarterly and yearly basis. There is a good chance, that American Apple6
exporter may not invest back all those 500 billion Indian rupees in India within that time-
frame.
Secondly, Indian Government may put some FDI/FII restrictions so Apple6 exporter (or
that third American guy) cannot re-invest in India even if he wants to.
But in the long run, system will balance itself. for example
o Apple exporter will find some fourth American importer and convince him to pay
Indian exporter in rupee currency and thus apple guy will get rid of his 500 billion
Rupees by exchanging it with that American importer’s dollar
o Or the apple exporter will find some NRI living in USA. This NRI wants to send
money (dollar earned by working in USA) to his family back in India, (preferably
in Indian currency ) so this NRI will be willing to exchange his dollar savings
with that Apple exporter’s rupees.
o There are many other possibilities and combinations – but the point is, in BoP,
whatever currency goes out of the country, will come back to the country.
Convertibility
Suppose you want to import a dell computer from USA. And American exporter accepts
only payments dollars.
If you can easily convert your rupee into dollars, that means Rupee is fully convertible.
And rupee is fully convertible as far as Current account transactions are concerned (e.g.
import, export, interest, dividends).
But rupee is partially convertible for capital account transection. (In crude terms it means,
if an Indian wants to buy assets abroad or invest via FDI/FII OR borrow via External
commericial borrowing (ECB) he cannot do it beyond the limits prescribed by RBI. (And
vice versa e.g. American wants to convert his dollars to rupees to invest in India, then
also RBI’s limits have to be followed).
RBI gets power to do ^this, via FERA and FEMA Acts.
1973: Foreign Exchange Regulations Act, 1973 (FERA).
1997: Tarapore Committee (of RBI), had recommended that India should have full
capital account convertibility. (Meaning anyone should be allowed to freely move from
local currency into foreign currency and back, without any restrictions by Government or
RBI.)
2002: Government replaced FERA with Foreign Exchange Management Act (FEMA).
Although full capital account convertibility is yet not given.
Full capital account convertibility has both pros and cons. But that’d require another
article. Let’s get back to the topic, we are seeing the 6th chapter of Economic Survey:
Balance of Payment, exchange rates etc.
1. Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar,
Australian dollar and Japanese yen etc.)
2. gold,
3. special drawing rights (SDRs) of IMF
4. Reserve tranche position (RTP) in the International Monetary Fund (IMF)
The level of forex reserve is expressed in US dollars. Hence India’s forex reserve declines when
US dollar appreciates against major international currencies and vice versa.
1. China
2. Japan
3. Russia
4. Switzerland
5. Brazil
6. South Korea
7. Hong Kong
8. India
#1: import-export
Demand for Indian goods and services has declined due to Euro-zone crisis + America
hasn’t fully recovered.
On the other hand, cost of import= very high due to oil and heavy gold import (due to
high inflation).
Similarly high inflation = raw material / services become costly for the export. If he
raises the prices, then his export product becomes less competitive than Cheap China
made stuff.
#2: FII
In the total foreign investment in India, majority comes from FII (and not from FDI).
FII money is “hot”, it leaves quickly whenever FII investors feels that India’s market is
not giving good returns and or some other xyz country’s market is giving better returns.
There are week-to-week variation in such FII inflows and outflows. Hence it leads to
changes in rupee-dollar exchange rate.
US treasury bonds are consider the safest investment. During the peak of Eurozone,
Greece crisis, the big investors started pulling out money from Europe and investing it in
US treasury bonds. = demand of dollar increased. So other currencies would
automatically weaken against dollar.
RBI Govt.
During 2012, RBI sold around 3 billion dollars from Govt. allowed FIIs to invest
its forex reserves. more money in govt.and
Oct-12, Rupee recovers, 1$=around 51 rupees. corporate bonds.
RBI allowed Indian banks to give more interest on Govt. eased the FDI policy
Foreign Currency Non-Resident (FCNR) bank for pension, insurance,
accounts. (thus attracting more NRIs to save their aviation, multi-brand retail
dollars in Indian banks). etc.
Govt. offered subsidies and
tax benefits to exporters.
NEER REER
Nominal Effective Exchange Rate Real Effective Exchange Rate (REER)
The weighted average of bilateral nominal weighted average of nominal
exchange rates of the home currency in terms exchange rates, adjusted for
of foreign currencies. inflation.
REER-6 REER-36
Here Indian rupee is measured against 6 big currencies viz.
External Debt
World Bank has released ‘International Debt Statistics, 2013‘
It contains the debt numbers for the year 2011.
According to those statistics, in 2011 India was in fourth position in terms of absolute
external debt stock after China, the Russian Federation and Brazil.
At the end of March 2012, India’s external debt stock = 345 billion (near to 17 lakh crore
rupees.)
Higher NRI deposits (since NRIs are not getting much return on their dollar savings in
American banks, they prefer to invest it in India).
External Commercial borrowings (by Indian corporates)
Corporate borrowers in India and other emerging economies are keen to borrow in
foreign currency (dollar and Euro). Because in US/EU right now the market is down, not
many loan domestic taker businessmen, hence their banks/ investors don’t mind giving
loans to foreigners (that is Indian / other Asian businessmen) at very low interest rate and
longer EMIs.
But such borrowings however, are not always helpful, especially in times of high
currency volatility. For example, if Indian businessman had borrowed loans from USA
when 1$=49 rupees but after some years, if 1$=57 rupee, then he’ll have to repay more.
This will badly affect not just him but to India’s BoP as well.
Misc. facts
Three top countries from where FDI comes to India: Mauritius, Singapore and UK
Global Economic Prospects= this report is published by world bank.
Mock Question
1. Which of the following, is not a part of Capital account
a. FDI
b. FII
c. Remittances
d. External commercial borrowing
2. Which of the following is not a part of Current account?
a. Import
b. Export
c. External commercial borrowing
d. Interest, dividends paid on FII
3. India has deficit in
a. Current account
b. Capital account
c. Both
d. None
4. India has surplus in
a. Current account
b. Capital account
c. Both
d. None
5. India’s official forex reserve doesn’t include
a. Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar,
Australian dollar and Japanese yen etc.)
b. Gold
c. Silver
d. Special drawing rights (SDRs)
6. How can RBI build its foreign exchange reserve?
a. By Buying foreign currency
b. via funding from World Bank, ADB etc.
c. Both
d. None
7. Which of the following country has second largest forex reserves in the world?
a. India
b. France
c. Japan
d. USA
8. Among the countries with largest forex reserves, India ranks
a. second
b. third
c. fifth
d. eighth
9. Rupee will strengthen against dollar when
a. Government eases FDI policy
b. Government raises the ceiling on FII investment
c. Both
d. None
10. Correct statement
a. NEER is calculated by RBI
b. REER is calculated by Finance ministry
c. both
d. none
11. REER captures
a. difference in inflation between India and its trading partners
b. external competitiveness of Indian products
c. Both
d. none
12. Which of the following currency is not part of REER-6 calculation?
a. Hong Kong Dollar
b. Japanese Yen
c. Pound Sterling
d. Canadian Dollar
13. Incorrect Match
a. S.Korea: won
b. Mexico: Peso
c. Argentina: Peso
d. S.Africa: Baht
14. Which of the following is not released by World Bank?
a. International Debt Statistics, 2013
b. FDI Restrictiveness Index
c. Global Economic Prospects
d. All of Above
15. FDI Restrictiveness Index is released by
a. IMF
b. ADB
c. OECD
d. World Bank
16. Majority of FDI to India, comes from
a. Mauritius
b. Germany
c. USA
d. None of above