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Economy MRunal PDF
Economy MRunal PDF
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.
Q. What is Backwash effect?
Ans. It is an economic development effect suggested by Swedish economist Gunnar Myrdal. It
basically means that
if one particular area in a country starts growing or developing, it causes people, human capital
as well as physical capital (infrastructure, finance, machines etc.) from other parts of the country
to gravitate towards this growing centre.
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, lets 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.
Spread Effect
Technical definition
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.
ou ga e e
s a d I ga e ou a pape sa i g I ll pa a k
=M u al s se u it pape
s.
there is another guy named Mitul who, same way borrowed 100 Rs. And
ga e ou a othe pape sa i g he ll pa ou
s afte
o ths. Mitul s
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.
You gi e e
s. A d I gi e ou pape sa i g if I do t pa a k, ou
a take a a
house
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
repacks them- makes another derivative product and sell it to 4 guy.
After few months, I refuse to pay money, and tell the 4 guy to take away
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
rd
th
th
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.
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
PIMAY arket. *
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 ECONDAY MAKET (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.)
As ou sa o a o e diag a
apital
a ket. o,
uppose I the Go t.
= I i defi it gap
I e follo i g optio s to o e that defi it
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.
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.
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.
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.
Ok now ,final part in this article-As we saw, there are 2 types of capital market :
Primary and secondary. but
I goi g to etu
o e to ou afte
ea s. o ou ha ds a e tied
ou a t e o e it f o
e until next 10 years, so what if you needed
o e i e e ge ? You e se o da
a ket so ou ll sell
se u it to
someone else and recover the money. Otherwise,
What is infrastructure?
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
hats the use of Infrastructure
uppose ou e u i g a
ercafe. So, the shop, the computers and
i te et o e tio is ou apital =so ethi g that ge e ates o e . But
what if there is no electricity in 3 days per week?/ slow internet connection? =
your business will be ruined.
So, When Govt. opens more powerhouses, lays more telephone cables,
sends more Satellites = your cybercafe will earn more money.
Thus,
Physical Infrastructure
Roads
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.
Funds have been made available to the NHAI for its capital base through
a tax on motor spirit and cess on diesel.
but yet
In old times (60s to 90s) when the land was cheap, Govt. didnot acquire
it,
so now it has to buy the land and pay very high prices per square meter
+ other compensation. (+ the pseudo-environmentalists)
Railways
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.
CROSS SUBSIDISATION
=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.)
so, freight charges* and upper class passengers ticket prices are set high,
to cover that cost.
Railway s earning
ut o ada s it s
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
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)
Thus,
REGULATION of sea-ports
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.
port of Sika ( Gujarat) accounts for the largest cargo handling among all
ports in the country. (its connected to Reliance Refinery @ Jamnagar.)
Airports
and Hyderabad.
Problems
Energy
estimated 80,000 villages yet to be electrified,
Factories have to pay higher bills per unit of electricity so that Govt. can
give free/cheaper electricity to farmers. (again cross subsidisation)
Electricty theft.
communication
its aim is to provide connectivity to all rural, hill villages & remote parts.
o e , ,
illages e e u o e ted (as of June 2002)
Ma
u al / hill a eas do t get ade uate telepho e/ o ile o e ti it
e ause the e high ost se i e a eas
= to serve the people where pvt players are not interested to work in.
anyways, back to the topic:-
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.
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
o e as loa to
u al
Social infrastructure
Health
Human Develpoement index has 3 components
Income
Knowledge
Health.
Some Facts-
But in 10th plan they talked about National Mental Health Programme
fo
e tall halla ged
B
e ll e the ou t with largest population on earth.
Education
I toda s speech, Obama said
is orld
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 the last part for this article
Govt. made a huge bridge on sea in Mumbai called Warli-Bandra sea link.
Now every car passing from it has to pay about 25-50 Rs.
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.
What is SEBI?
It regulates both the primary and secondary markets. (explained in my
previous article)
SEBI was established in 1988 but was given statutory powers in 1992, and
started working effectively since 1993.
I a t fi the p i es of
sha es, as I like, e ause i e to follo the ules
made by CCI.
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 lots of people will send application to buy it because its cheap (= over
subscription)
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.
The problems in secondary market before SEBI came
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.
BSE imposed a high entry barrier, so that competition among brokers was
absent.
means trading used to take place in trading ring where non-brokers were
not allowed in.
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).
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.
this used to recur at the rate of almost once every other year.
Even after you buy the shares and get the paper in your hands- you had
to send the shares to the registrar of the company to register the ownership
of that share in your name.
if the signature of the seller did not match with the one maintained with
the registrar, the shares were sent back.
Reasons for inaccurate signature
The seller of the shares, who probably purchased the shares years back,
might unwillingly sign in a different manner.
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.
NSE was a new exchange promoted and owned by public sector financial
institutions (like IDBI, UTI, LIC, GIC, IFCI, etc.) and banks.
Computerized trading
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.
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
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.
Result-BSE Is busted
BSE was working since 1875, with monopoly now it had to face
competition with N.S.E
Anonymity= no cartels
for
NSE throws open the business of stock broking to all and everyone
(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.
Investors from all over the country have got access to an exchange on
same terms and conditions as investors within Mumbai for the first time.
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.
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.
Demat account
To curb this problem, SEBI came up with the novel idea that is
De ate ializatio of sha e holdi g
he ou u sha es, ou do t get a pie e of pape . That sha e gets
automatically credited to your demat account.
But things are not that safe and sweet, thanks to IPO scam-Demat Queen
Roopal Panchal
In simple terms, if I borrow money from you for less than 1 year = the
place where we do this deal is Money market
Technical definition
money market is the place where lending and borrowing is done through
instruments having an original maturity of up to one year.
the opportunity for players to invest their short-term surplus funds and to
borrow short-term funds in case of deficit.
It is the market for borrowing and lending for short-term periods (usually
upto 14 days, but at times more than that)
It is a telephonic market, i.e., deals are struck over telephone and reported
to RBI. (thats why its call market)
When a bank is in shortage of funds, it telephones & borrows from
another bank which is in surplus.
Notice 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.
commercial banks and primary dealers can both borrow and lend,
LIC, UTI, GIC, IDBI, NABARD, ICICI & Mutual Fund managers can
lend money in this market (but theyre not allowed to borrow from this
market)
Repos/Reverse Repos
Suppose I write on a piece of paper anyone who gives me 100 Rs. Ill
give him 120 Rs. After 1 year
Now I give that paper to you and collect 100 Rs. And tell you that Ill buy
(repurchase) that paper after 6 months and give you 110 Rs.
hen you buy a security and sign contract that youll 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
First the easy exampleIm the RBI manager.
When I give you security (paper) & take money from you this is Repo.
When I buy the security (paper) from you and give you money- this is
reverse Repo.
Now the more correct example
Im the RBI manager.
When I give you security (paper) & take money from you & promise you
that Ill buy the same paper back from you after few months this is Repo.
When I buy the security (paper) from you and give you money & you
promise me that youll buy back that paper from me after few months- this is
reverse Repo.
RBI, Scheduled banks & Primary dealers can borrow and lend
absorption of short-term liquidity, RBI carries out overnight (one day)
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 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.
In order to inject liquidity into the system, RBI conducts fixed rate
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.
Keep in mind, the terms repo and reverse repo have been defined above, is
just opposite to the international practice.
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.
Money market topic doesnt stop here, there are other remaining items like
Commercial papers, Treasury bills, Certificate of Deposits etc which will be dealt in
some other article.
So here see the other side of the mirrorPDS= public distribution system (Raashan ki dukaan.)
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= cant go
to school
indoor pollution
For e.g.out of 2 Rs.s thick coin theyll make 10 blades and sell it
for 5 Rs. and cutting their production cost- theyll still make good profit.
that is one of the reason why Govt. changed our coins- now
Means theyre using firewood and dung for cooking even when we
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
In the absence of electricity, kerosene has, for long, been the only
source of lighting (apart from more expensive vegetable oil-based
lamps).
But, these alternatives pose the problem of safe disposal of usedup cells but its not really challenging task.
subsidy.
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.
which was 41% higher than that of the low income States.
Most of the households use only 3.5 litres per month. State-wise
smaller allocation say 2 litres per month may be made for electrified
BPL households.
PDS Kerosene prices have not been raised from around Rs.9 per
litre since March 2002.
If Petrol producer cant sell the petrol @ high price, he has no interest in expanding /
upgrading his factory. so
Artificially low prices can widen long term supply-demand imbalances by discouraging
refiners and marketers to expand capacity and, on the other hand, encouraging demand
growth.
In last 10 years, Petrol prices are almost constant, around Rs. 40-50 bracket.
while income of people has increased (+ the 6th Pay Commission)
so, lot people buying cars and bikes.
so, the demand for petroleum products such as petrol and diesel recorded double digit
growth -higher than the GDP growth.
Continuation of the present policies is not viable, particularly once oil prices rise again
Since Govt. pays money to keep petrol cheap, it puts money shortage for Govt.
(which is under lot money burden already thanks to pakis weve 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.
because poor people need cheap kerosene to cook food, else theyll chop down the trees.
= climate change they also use kerosene lamps, because they have no electricity.
suppose LPG & Kerosene were sold on high prices then?
Poor Girls will be forced to collect firewood all day= cant go to school
Deforestation = climate change + global warming.
Villagers using Cattle-dung but Cattle dung has better use a manure.
indoor pollution
respiratory disease, eye burns.
thus, Life-Expectancy of women + infants reduced.
truck owners will demand higher fees for transporting veggies + milk. = inflation !
But Parikh Committee reports it is not entirely true. (petro-diesel control will be in next
article)
suppose today World Oil Barrel price is say 10,000 Rs./ barrel.
Govt. lets the market forces decide the oil price
so here theyll sell Dieasel @ 100 Rs. / litre
inflation in milk/veggies price.
but even after few weeks when world price goes down to 5000 Rs/barrel
the middleman wont let the price of milk/veggies go down.(even if truckers reduce their
fees.)
thus,
complete pass-through of increase in world oil prices may cause inflation which may
persist even when oil price comes down.
Petro doesnt fall from sky, somebody has to pay for it.
in this case, Oil cos sell petro cheap and Govt. pay for it.
But, Govt. cant print more money just to give it to Oil cos. (thatll create inflation)
so where does the money come from?
general increase in taxes, or
by increasing fiscal deficit or
by cutting other government expenditure
so ultimately someone is suffering in some way.
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.
2. So
3. Because goods and veggies are transported via trucks which use
diesel.
One Example
recommends that petrol prices should be marketdetermined both at the refinery gate and retail
levels.
Diesel
Out of total Diesel consumption in India
see this pie-chart to know who uses how much of it-
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)
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.)
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.
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
LPG Cylinders
Subsidy situation
subsidized
LPG-consuming households in the top 3 decile in urban areas,
comprising some 22 million households, use nearly 40 per cent of LPG
and spend less than 5 per cent of their total expenditure.
These households get a large part of the subsidy even when they
have the capacity to pay the market price for LPG and
will use LPG even when the price is raised.
Best solution is just simply giving direct cash- and then every one
including poor men buy LPG @ market prices!
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.
However, since rolling out of the Smart Card mechanism on the
UID platform may take at least 2 yearan interim arrangement has to be
devised to contain the ballooning LPG subsidy. In
Accordingly, the fair price of domestic LPG cylinder from the base
price of Rs. 262/cylinder in
A long term viable system of pricing of domestic LPG and effective
targeting of subsidy can be ensured through a transparent distribution
system based on the UID/Smart Card framework. Under this
framework,
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.
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 doesnt go on tough loan recovery like those
moneylenders or banks do (because thatd cost votes in elections)
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 doesnt get depleted. Because RBI is not
importing, its the businessmen who import. And when theyve 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 ill send you 30 kilo Basmati rice).
RBI has 270 bn USD that doesnt mean whole India has only 270 bn USD, youve to see
the amount of money the Indian businessman have (which they can get converted into
dollars at forex market, whenever theyve to import something).RBI has 270 billion
dollar$ that doesnt mean whole India has only 270 bn USD or that whole Indias capacity
to import is only 270 bn USD, youve to see the amount of money (in Rs,$,Yen,Pound) the
Indian businessman have.Ofcourse RBI does print new currency regularly, but its not to meet
the trade-deficit, if RBI does so, thatll lead to huge inflation.
So NBFC cannot accept or give demand deposits, fixed deposit, demand drafts,
credit cards, ATM cards or cheques like a normal bank.
NBFC is mainly involved in giving loans.
Its more like a sophisticated moneylender for example Mannapuram gold
loans, it gives you loan when you deposit your gold with them.
Manapuram finance is an NBFC and not a bank.
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 doesnt flow from sky.
Ultimately, the Expenditure became way tooooo higher than Governments 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 Governments 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 countrys 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.
This is Greece Crisis.
It is originating from the fact that Government was spending way to more than its income
(=Deficit) until they came on the verge of bankruptcy.
Similarly Portugal, Spain, Ireland, Italy & UK also have huge deficits compared to their GDP.
Together it makes the Europe
Debt crisis.
There is a lottery ticket costing Rs.50, first price is 1 crore rupees. You dont have a
single penny to buy it, so you talk to your friend and he buys it for you on your behalf.
If you win, you dont have to pay that friend any share from the 1 crore you won.
You only have to give him Rs. 50 after winners are declared and in the meantime interest
on that 50 rupees as long as the result doesnt come.
Thats how Badlaa system rolls.
Suppose you purchase 10 shares of Reliance Power for Rs. 3000, and at the end of the
day, the stock closes at Rs.3300.
You speculate that this Reliance power share price will go even further up and you can
make a handsome profit out of this. But you dont have the money to pay to the broker
and take delivery of these shares!
To solve this problem, you enter into a badlaa transaction, so your broker will carry out
the money payment on your behalf. Youve to keep paying him the interest rate for it (as
long as you hold these shares and donot sell them to someone else).
Badla transactions are settled on Saturday session each week.
The interest rate on Badlaa transaction is determined by market forces of supply and
demand.
i.e. if lot people entering into Badlaa contract that means money is in high demand =
Interest rate on Badlaa increases. If broker believes that xyz share prices will go really
high then hell demand more interest for financing it because the customer will be
making big profit. And so on
In English this is called Carry forward transaction because youre carrying forward the
payment date for those shares youve purchased.
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 dont 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!
In Badlaa youve to regularly keep paying interest-rate to the broker as long as you hold
the shares. So your hands are tied
In options (or Vaada/Waayda) contract, there is only one time premium to be paid. So
your hands are not tied in interest payment.
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 theyve 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
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 Crosssubsidization and it increases the inflation indirectly.
calculated on their asset value, itll not be good for industrial growth. similarly if a company is
making losses, itll still have to pay MAT for its assets. Thatll be like an insult to the injury!
Taking note of this objection, Government revised the DTC and said the MAT will be calculated
on book-profits only.
So How to make a technical formula? Ask yourself, where is the money changing hands? There
are five components of that.
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
GDP(Expenditure)=C+I+G+(X-M)
#B: Income Method of counting gdp
Here you count everyones income. But some people may be running business in credit
(udhaari), sometimes payments are delayed. So may not give the full picture for the given year.
Farmer produced Wheat and sold 100 kg of it @ 2000 Rs. (Original value)
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)
what is total GDP here?
2000+2500+3500=8000 Rs? Hell no! Youve to see the value added.
So, total money value of this line is: 2000+500+1000=3500.
Not all of the wheat goes into Bakers oven. Some of it will go in making beer, some in a normal
household for making roti and so on. Youve to track the value added in each different line.
Example#1: Subsidy
1 kg. Urea fertilizers original-price is 500 Rs.
When it reaches the local supplier, Government is giving 10% subsidy. So farmer purchases it @
(500-50)=Rs. 450
1. GDP @ Factor cost= 500 [i.e. without Government's involvement]
2. GDP @ Market price= 450 [with Government's involvement]
Example#2: Tax
Box of 10 Blank DVDs =Rs.100 +10% VAT so final M.R.P.=Rs.110
1. GDP @ Factor cost=Rs.100 (Real value of those dvds)
2. GDP@ Market price=Rs.110
How will you calculate GDPMP if GDPFC is given, & vice versa?
GDP@Market price=GDP@ Factor price+Government involvement
Now, Government involvement=+Indirect taxes-subsidies
So finally,
GDP@Market price=GDP@Factor cost+Indirect tax-subsidies
Or doing the reverse,
GDP@Factor cost=GDP@market price-Indirect tax+subsidies
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
GDP Deflator
Image: Formula
In our onion case
Nominal GDP in 2010= 70 Rs/kg x 100 kg=Rs. 7000
Real GDP as we calculated=3000.
So, GDP deflator= [7000/3000]x100= 233
What does it mean?
Here, GDP deflator is >greater than 100. That means there is inflation. (very very heavy
inflation)
IF it was near to 100, thatd mean, there is no difference in real and nominal GDP hence there is
no inflation in India.
eve PI and CPI to measure inflation, but they dont include each and every product and
service available in India, while with GDP deflator, we can get an inflation-picture of them too.
btw, DONOT CONFUSE ABSOLUTE GDP NUMBER WITH PERCENTAGE RISE.
Newspaper: Montek Singh said weve got 8% GDP in 2010
That doesnt mean Indias GDP is 8%. It only means whatever was our GDP in 2009, weve
increased it by 8%.
IF India produced goods and services worth 100 billion $ in 2009, then in 2010 weve produced
goods n services worth 108 billion $. Thats why GDP rose by 8%.
Now back in our onion example,
2009 s real GDP=3000
2010 s real GDP=3000
So real-GDP has rose by 0% in two years.
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:
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 doesnt 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.
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 dont need it much, they just need a place to safely park their
money.
Its same like buying a no-sports channel DTH package, doesnt put you on disadvantage
because you never really wanted to see those channels in the first place!
Distinguish between Monetary and Fiscal Policy. To what extent is monetary policy independent
of fiscal policy in India
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 peoples income gets redistributed to poor -people.
World Bank
In short, They give soft loans to poor nations for Development purpose and various healtheducation,poverty removal programs.
Soft loan= minimal interest rates, the EMIs have longer time brackets in between, and they dont
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
Led to recession
This innovation led to complex Derivatives that led to *asset bubble and ultimately we got
recession.
#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.
#above-normal build up in government cash balances
If above money from spectrum auction, was deposited in Governments bank account, then itd
be again available for loans again, immediately. But it was deposited in the consolidated fund of
India.From this consolidated fund of India, Government gives salary to judges, its whole staff,
finances various projects like NREGA, JNNURM, and so on.
Hence, this 68k cr. is no longer available for loan.
=less liquidity compared to earlier.
#credit growth outpacing deposit growth
if credit growth has outpaced deposit growth (more ppl r takin loans rather than depositin them)
it means less money available for loans. So we say tight liquidity.
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.
Bank will pay you interest, when you deposit money in savings account, as Fixed Deposit
(FD),
Bank will borrow from RBI. (and will pay RBI interest)
Bank will give you loans for bike/car/home/business and charge higher interest rate on
that.
So in simple terms,
Banks profit = Interest charged on loans -(minus) Interest paid on deposits.
Now, CASA= Current and savings account
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 banks incoming money comes only from two types of deposits:
1) CASA deposits and 2) FD (Fixed Deposit)
Here whatever money you deposit, you can withdraw it any time. banks do not pay any
interest on current account,and interest paid on savings account it (pathetically) low as
4%.
And then bank will circulate your money in form of house loan to others, and will charge
9.5% interest rate on it! So, that is a decent profit margin.
Also known as Term Deposits, like double your money in 10 years or deposit 20,000
today and get 50,000 after 10 years etc.etc. Here bank will pay you interest rate of
around 7-9% per year.
But downside:you cannot withdraw your money before the term completes, else bank
will charge penalty and you wont get the total double your amount thing.
As you can see, If bank would circulate this FD money in loan, there is not a big profit
margin, as in case of CASA.
Not only banks but loan-taker people also benifit from higher CASA ratio. Because bank
with higher CASA, will keep its loan base rates low.
Confused? Let me rephrase: If Bank X has barely 10% of CASA, means lot of their
money comes from FD. And in FD theyve to pay higher interest rate on deposit, hence
theyll keep their loan-interest rates higher to maintain the profit margin.
ex. SBI= loan base rate is about 7%, but for Bank of Baroda its about 8%, because BoB
has got lower CASA than SBI.
In India, interest rates paid on current and savings account deposits is administered by
banking regulator the Reserve Bank of India.
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.
Thats 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
Ahmedabads 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 itll be a real panic-situation.
The FD money is safer in this way. because banks know, once you make an FD, youre not going
to withdraw it for next 5-10-20 years (in most cases) so they can safely circulate this money as
loans.
Question . Ive come across these terms numerous times, but couldnt make anything out.
hats all these about Base year prices and Current year prices while calculating economical
statistics?
Tell me what is inflation?
Its the increase in the price of a product.
How can you say there is inflation?
Because, earlier in the year 2001, we could buy a litre of petrol for Rs.50, but now its Rs.70/per litre. So there is price-rise and hence there is inflation.
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) well 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?
[(12-10)/10]*100=20% incrase in the price of a soap.
Price of a bike was 30,000 in 2004 and now its close to 55,000/-.
Price of one litre milk was 25 Rs. in 2004 and now it is almost 60/- (After Sharad Pawar advised
all the dairies to buy an alarm, which rings at paheli taarikh every month to remind them to
increase the price without fail)
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.
down on your expenses like the chauffeur for your limo or the number of workers in your oilwell.)
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 cant 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
Youre a big bank, youve given such loans or credit cards to lot of sub-prime dudes and you
know it well that theyre 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, Ill 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 guychain 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
take our houses, we dont have the money.
But you cant sell the house, real-estate has collapsed, noone is ready to pay even $5000 for that
house, on which you had given $10000 loan. Your asset bubble is burst, and what youve in your
hand: that piece of trash paper is a toxic asset or a non-performing asset (NPA).
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.
Little concept: debt to GDP :
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 AirIndia).
Ireland:96%
Their banks were running the same asset bubble game like the Americans. When it collapsed,
Government had to bailem 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%
Socialist Government, so lot subsidy and NREGA stuff.
What is Export Promotion Capital Goods Scheme?
etc.
Means Capital goods are the things you need to manufacture your products or give your services.
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.
Can you see how its all linked?
11 FYP> Exim Policy > EPCG tool.
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)
2. Customers cant 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 theyll 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 cybercafs.
4. Did local Udipi owner ran out of business because of McDonald / KFC? Ofcourse not.
Example small time cushions, toys, shoes, plastic wares maker. They dont see much business
because they dont have the avenues to sell their
products. Big mall with big floor space, provides them opportunity to market their products and
get customers attention.
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)
5. Regular monitoring of mall-inventories to see that India is not used as dumping ground for
Chinese products.
#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.
charged by the commission agent (usually 10 per cent of sale price) in the mandi
is taken into account.
Im 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-socorrect examples, just to give you a broad idea of what ails Indian economy) Ok here it goes..
Add the bribe he has to pay to local goons, policemen, and municipality corporators. If he raises
the selling price of each cup, there will be drastic reduction in customers. Again Hardly any
profit margin left.
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.
Currency Speculations @ Forex Market
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 realestate 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 oldman 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.
(upon knowing that at Forex market, Rupee is selling down at 1$= 52Rs)
RBI Chief: what in the gods 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, hell lock it in banks
fixed deposit or pension funds and hell wait and watch for the prices to go down before making
any big purchase. This trickle down theory isnt that linear and straight forward as youre
thinking. Back to the point, We need dollars to finance the crude oil import..
Finance Minister: No problem. Youve got more than 200 billion dollars Forex-reserve in your
custody. Release them in the market.
RBI Chief: Never. Im saving it for the rainy day. God forbid if situation gets even worse, wed
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-mans 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. Ive 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: Youre 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 itll 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.
FM: no no UP electionno more inflation.
RBI: Look I understand your constrains but I cant release dollars from my reserve. But How
about you arrange for dollars ..you know something like via FDI? How about 51% FDI in
retail, that ought to attract a lot foreign players with bags full of dollars, theyll get desperate to
convert it into rupees.
An electronics store owner, Jethalal Champaklal Ghada , requests 20 LCD TVs from
Sony wholesaler.
Wholesaler arranges for the truck, sends the LCDs.
Jethalal need not pay the entire cost-price of 20 LCDs at once.
Hed keep paying it either in installments or entire sum before next-Diwali or next month
or only when those LCDs are sold to a newly opening hotel. (i.e. deals made on credit)
Another example of traditional wholesale:sometimes you see a guy with a notebook, making rounds at your local kiranastore or dairy
parlor. Hed note down the order from that store owner and after some time, hed come back in
loading-rickshaw full of biscuit, softdrink and wafer packs. And the money is settled on monthly
basis.
Here Jethalal himself goes to that holesalers 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.
Basheer asked,
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 itd require total
investment of 100 crores.
Even if he has 5000 crores, he can only put 51 crores from his side and hell 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. theyve 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
49-51 sharing percentage is calculated on total investment, which can be anything.
Current account
First the meaning of Balance of Payment= keeping track of incoming and outgoing money
from a country.
In Balance of Payment, weve two components :
1. Current Account and
2. Capital Account.
Current Account= the sum of
1. Balance of trade (exports minus imports of goods and services)
2. Factor Income (interest and dividends from international loans and investments.)
3. Net transfer payments (such as foreign aid).
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: weve Trade Deficit.
It doesnt consider foreign aid and interest payments but only the trade part.
Do you see the hierarchy ??
Balance of Payment > > Current Account > > Balance of Trade > > Trade Deficit
By the way, how to calculate current account deficit, has been explained here: Click ME!
A credit rating agency is like the Box office review columns in Saturdays newspapers: 2
star out of 5, means waste of money. (Ra.One, Don 2 for example).
Similarly Credit rating agency (CRA) assigns credit ratings to issuers of bonds and
securities : companies, Governments etc.
From their rating, you can know issuers credit worthiness (i.e., its ability to pay back a
loan)
Example of CRA are :Standard & Poors (U.S.), CRISIL (India)
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.
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,
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?
Hell 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- its
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.
Lets 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, hed convert
his pounds to dollars and buy a ford from America and wont 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 gasstation while youll 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.
Thats 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
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 Rameshs 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
Suppose Price of a Lifebouy soap was Rs.10 in 2001.
And now it has increased to Rs.12 per bar.
We take 2001 as our base year.
We take Rs. 10 as our base price.
Then our index for 2001,
= Price of soap in 2001 divided by price of soap in 2001
=(10/10) x 100= 100%
Our index for 2011
=Price of soap in 2011 divided by price of soap in 2001
=(12/10) x 100=120%
The formula is essentially, new price divided by old price
Now for SENSEX
Base year : 1978-79 [to be specific, the price on 1st April 1979]
First the concept ofFree Float market Capitalization
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 Kingfishers 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)
So as we saw earlier, INDEX= new price divided by old price (% value)
Now SENSEX = Total Free float market cap (FFMC) of 30 companies today divided by Total
(FFMC) of 30 companies on 1st April 1979
=(15 crores / 10 lakh) x 100
=15000
This 15,000 my friends, is the todays SENSEX.
P.S. Actual formula not this linear.
Some points
The 30 companies, in that list keeps changing. So 30 companies in todays SENSEX not
necessarily included in 1979s list. But we take their values.
Actual SENSEX calculation involves minute technical-items such as free float factor
for each company but its 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 wont 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
NIFTY
In the first few years, youve to pay a very low interest rate on your home loan, but
afterwards, the interest rate will be normalized (and increased)
SBI started this in India, in 2009 with two products:
1) Happy Home Loan 2) Easy and Advantage Home Loan.
Both these loans hold the interest rates fixed and below the market rate in the initial
years. Thereafter, the rates turn floating.
Target customers:
1. Low-income home buyers.
2. Young people who just got job, married and want to buy a home.
RBI had observed that many banks at the time of loan appraisal did not check the
repaying capacity of the borrower at normal lending rates of future.
RBI fears, this may lead to a housing bubble and sub-prime like situation.
If the bank has given loans to people undeserving or unable to pay higher rates later on,
Customer may lose the property.
Mass scale defaults on home-loans= real estate market crashes, and you get a situation
like Americas sub-prime crisis of 2007.
We have chosen the borrowers wisely, it has been a great product especially for the
younger borrowers.
Young people have lower incomes earlier, and hence lower EMIs, as their income levels
increase with time, so will their EMIs.
It is an ideal product for the disciplined person who saves money prudently.
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.
Means that Japan will accept rupees and give dollars to RBI up to a stipulated limit, and
similarly RBI will take yen and send dollars to Japan if speculators seek to thrash down
the respective currencies.
Currency swap would take place between the Reserve Bank of India and its counterpart
in Tokyo, the Bank of Japan.
The two central banks would give each other dollars to stabilize their currencies, in case
of need.
A dollar swap arrangement can help emerging economies as it promises a supply of
dollars in an emergency.
The previous currency swap deal between the two nations, signed in 2008, has expired.
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
Answer
Government and RBI are two different entities.
Both are involved in managing the economy in their own capacity.
1. What Government does (taxation and budget) is called Fiscal policy
2. What RBI does (repo, reverse repo, CRR, SLR etc) is called Monetary policy.
It is the job of RBI to worry about Money supply in the market.
Theyve a system called M1,M2,M3,M4 to calculate it and they tweak their repo rates etc
accordingly.
FII players pull out their money from stock-market even for slightest good/bad rumors
and invest in in different country.
Thats why its 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 Its hard to
pull out FDI once invested.
budget is not about minute data and numbers like 15664 cr. alloted to some xyz scheme and
19.5% excise duty on footwares.
1.
2.
3.
4.
5.
+ 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, weve 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.
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 youre 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.
Indirect Tax
You pay it on the goods and services purchased.
1.
2.
3.
4.
5.
Sales Tax
VAT
Customs duty
Excise Duty
Service Tax etc
^ Goods and services Tax (GST) seeks to combine them all in one book.
Redistribution of wealth
Right now weve different Codes for different taxes for ex.
Under DTC, all the direct taxes will be brought under a single Code
So that even non-experts can interpretate the rules on their own, and no need to consult a
tax-lawyer or Chartered Accountant every now and then.
At present, the income tax slabs and rate are changed in every budget, thus keep keeping
people on their toes.
Therefore, People have to keep making rounds here and there to tax-consultants and
insurance agents to save themselves from higher-tax slabs, every year.
DTC will provide stable brackets and rates for a longer time, (ofcourse they can be
amended from time to time.)
It means the ratio of tax collection against the national gross domestic product (GDP).
Right Governments tax collection is not optimum, because people get so many taxexemptions.
Under DTC, Men and women are treated same. Women would cease to enjoy income-tax
exemptions
Only senior citizens will get extra relief with tax exemption
Tax exemption on LTA (leave travel allowance) is abolished.
DTC removes most of the categories of exempted income. Unit Linked Insurance Plans
(ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings
certificates), House Loan principal repayment etc.
Thus, Governments tax collection would increase, because there are less exemptions
available.
Plus, Government needs truckload of money for their inefficient schemes such as
MNREGA and Food security bill, otherwise problem of fiscal deficit. In that sense too,
DTC is very important for them.
Right now youve to pay additional tax if you own farmhouses, shopping malls,
jewellery, vehicles etc wealth above Rs.30 lakh.
Under DTC, youve to pay wealth tax only if you own assets worth to Rs 50 core or
above.
I already talked about that a year ago. Click me If you missed the MAT article
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
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.
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.
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!
SBI takes deposits from you and me, pays us 7% interest rate, and gives same money as
loan to car-home seekers, businessmen etc at 12% interest rate, thus earning 5% in profit.
SBI gave Rs.1500 as loan to Kingfisher.
SBI gave loan of Rs.4500 crores to Telecom players for 2G auction and now the licenses
are cancelled.
What if those telecom players run away without paying back the loan and Kingfisher
goes broke?
Adding insult to the injuries, someone starts a systematic campaign on facebook and
twitter to spread rumors that SBI itself is going to collapse.
Lakhs of middleclass account holders will run to the nearest SBI branch to take out their
deposited money (as it happened in ICICI, Ahmedabad in 2003 in real-life).
Overnight entire banking sector will collapse and You already know about the sub-prime
crisis etc: the aftershocks were felt everywhere in every sector.
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 and 2 capital is way too technical and detailed, to be asked in a routine
Government recruitment exam for Generalist posts, so not much point in getting to that
depth and numbers. But still for the sake of discussion:
Capital= Wealth in form of Money, Property, Bonds etc.
As we saw earlier, banks need to keep some money aside to deal with crisis. It meant the
word capital.
If bank keeps aside capital, in form of real-estate investment (say buying 5 farm houses)
then during the crisis, it wont be easy to sell away farm-houses and get money within a
day or two. So this Capital is not liquid.
Tier 2
Not easily Liquid, for example the building or land owned by the bank.
Criticism of BASEL
1. One shoe doesnt fit all.
2. Just because American Banks were so imprudent in their functioning and ran into trouble,
doesnt 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
RBIs CRR, SLR, Repo etc.) make it difficult to uniformly implement BASEL norms.
What is Greenex?
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
For the moment, just a brief idea: all the money earned by Union Government should go
in this fund, and all the expenses of Union Government will be made from this fund.
According to Constitution, The Union Government (Executive) cannot spend money out
of this Consolidated fund of India without parliaments permission.
Hence theyve to present budget every year: To get parliaments permission.
This ensures accountability of Executive to the legislature.
Ideally the disinvestment money should go in CFI, but UPA in its infinite wisdom has
decided to put disinvestment money in NIF.
Official reason: better Money Management, more profit, can be used to social schemes.
Unofficial reason: No more parliamentary control over how Government spends the
money out of this fund: for their (Bogus) pet-schemes and on the kinds of AIR-India.
ONGC and Cairn India had started oil drilling operation in Rajasthan under a Joint
Venture.
Cairn owned 70% and ONGC 30%.
So Cairn had sought an NOC (No objection certificate) from ONGC for this deal with
Vedanta.
When a company digs or drills somewhere, theyve to pay Mining Royalty to the
Government. Currently ONGC is paying the entire Royalty amount; they want Vedanta
(or any future owner) to share this cost in future.
On this issue, ONGC kept the NOC file pending.
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)
Thats 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.
ONGC secretly wished that Cairn sold the ownership to them but it was beyond ONGCs
Aukaat (????) to outrun Vedanta in the bidding process.
Itd have required almost 10 billion dollars. Hence theyre playing kabab mein huddi.
(?????) by delaying the NoC.
August 2010: Cairn announces its plan to sell Indian operations to Vedanta.
July 2011: Cabinet give approval to the deal.
December 2011: ONGC gave the NoC.
Notice the delays: Almost one and a half year!
Such lethargy on part of Indian Government discourages foreign players from
investing in India.
Related:
Currency Devaluation Alone will not Bring More FDI!
[ 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 ]
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)
What is Dumping?
China exports its products to India at a price lower than its normal price in domestic
Chinese market.
Meaning theyre dumping their products in India @lower price to capture the Indian
market and destroy competition from local Indian players.
Indian Government can impose anti-dumping duty on such items.
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 plasticfilm 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 theyre cheap anyways).
To sum up
Table of Contents
What is 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.
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
The polluter will have to pay this tax on per tonne of carbon dioxide emitted in the
atmosphere.
It is an example of ^Pigovian tax.
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 products 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.
European Union imposed a carbon tax on all airlines from January 2012: about 6 Euros
per ton of CO2 emitted.
China, Russia, India and United States, have opposed the EU move. (Because their
international flights will also help to pay this tax while flying over the skies of European
union.)
Australias 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.
Is India justified in its move of opposing carbon taxes imposed by Australia and EU?
(Interview)
National clean energy fund. 15 marks (Yearbook Q? for GS Mains)
National mission on Energy Efficiency.
Energy Efficient Certificate.
Fiscal policy and pollution. (Essay)
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.
The first file (how government wants to earn money by taxing us)
it is called Finance bill.
The second file (how government wants to spend the money)
it is called Appropriation bill
e call them Bills because they are only proposed by government and not yet passed
by the Parliament. (Just like Lokpal Bill)
When they passed by the Parliament, and President of India signs on these files, they
become Acts.
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.
SEBI to operate as an FII (foreign institutional investor) in Indian market. (After paying $5000
application fees). Mr.Cruise, you will have to register as sub-account under our FII firm. And
then you give your suitcase to us, well invest it in Indian stock market on your behalf.
Tom Cruise: Are you the only FII guy ?
Maxwell Manager: ell Im 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, Lets goto SEBI office and get it done. (*conditions apply)
cut to SEBI Office.
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.
SEBI Clerk: oh Really? Every desi dude here wants to be an IAS,
IIM,
IIT and every firangi dude wants to be an FII ever since the sub-prime crisis. But are you a
wealthy foreign individual or firm with a minimum net worth of $50 million (about Rs. 260
crore)? Only then we give the license, and not to any random swinging dude that walks into our
office!
Tom Cruise You dont know me? Im the Tom Cruise.
SEBI Clerk hos that?
Maxwell Manager He is a famous Hollywood hero, got billions of dollars.
SEBI Clerk hmm never heard of you. I only watch the movies of Indias 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 minutes 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!
Tom gets the sub account opened.
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, Ive been doing some market research myself, recently saw Abhishek
Bacchans 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.
Maxwell Manager Whaat an Idea sir-ji!
Cut to : Supreme Court cancels 2G licenses of all Telecom companies.
Tom Cruise Man this is hopeless. I think investing in Idea was a bad Idea. Company is gonna
make any decent money now, my return on investment will be ridiculous. Vedanta-Cairn deal is
also stuck in the Cabinet, means no quick and huge profit there either.
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?
Tom Cruise: I have no idea sir-ji, what do you suggest?
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 dont think it is worth it to play in Indian market any more. Besides youve one million dollars,
meaning If Indian market gives you 5% return on Investment and Singapores 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.
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).
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.
Under this policy, government auctioned potential oil and gas field areas to private players such
as Reliance, Cairn etc.
These companies would take all risk of discovering the oil/gas, drilling it out and sell to to make
profit.
if you are involved in Iron-ore mining, the Indian Bureau of Mines ( IBM) will determine
its present market value and you have to pay 10% royalty of that, to the Government.
For example you digged 1 kilo (!) iron ore, its present market-value is Rs.100, youve to
give Rs.10 as royalty
It does not matter how much profit you make out of this, youve to pay 10% right from
the day one of your mining activity.
But for the gas-exploration, the system of royality is different, it is called:
But here in case of gas, first youve to do Exploration. It may happen that you drill in a
potential area but still donot find any gas, and yet youve to purchase expensive drilling
instruments, vehicles, hire engineers and monthly salary to staff etc.
So there is a gestation period involved, before you actually discover the gas, start
selling it, recover your costs and then see the profits.
If there is a direct royalty sharing formulas like conventional iron-ore mining, then
private players will not be interested in taking the risk in this gas exploration activity.
Hence government came up with a concept called Production Sharing Contract (PSC)
Under this scheme, the company will have to share royalty, according to the profit made.
Initially company makes low profit, government gets extremely low share, later company
discovers more and more gas fields, its production increases and costs go down, then it
has to share more profit to the government.
This is not the standard royalty model as seen in mining systems, where revenue is shared
regardless of profitability. This PSC model allows the operator (RIL) to substantially
recover his costs before the sharing of revenue.
However, once these costs are recovered, the sharing with the government is often large.
But As you can understand Private contractors (RIL) have virtually no incentive to
minimise capital expenditure and a substantial incentive to increase capital expenditure
(theyll buy more and more vehicles, machines etc) to keep their operation-cost high,
which would result in low/lowest share of profit for the government of India
real loss etc. (but as the common sense suggests) he might have taken suitcases to turn
a blind eye to all this.
War of Words
CAG
Oil Ministry and its technical arm, the Directorate General of Hydrocarbons, did not pay
adequate attention to protecting the governments financial interest.
if your production is increasing, then your expenditure per unit must come down. But,
here, production cost almost quadrupled.
even if you take into account the trial and error method of digging here and there, even if
you take into account your wasted efforts of searching gas and exploring,
your development cost cannot triple or quadruple.
Reliance cant charge the country like this. Its a clear case of gold-plating the cost.
It would incur the government a big loss because only after recovering the cost of
production would the government start getting a return on the national asset.
inflated cost of Reliance has national ramifications. If the cost of gas exploration is too
high, then it will affect the prices.
Reliance, the company that had gold-plated the expenditure of exploration
Then Reliance hiked the price from $2.34 mmBtu to $4.2 mmBtu. So, fertilisers
companies, power plants and common consumers are paying more to Reliance. This
collective loss by the nation and to 1.2 billion people should be calculated.
Whatever the money Reliance has to make, they have made.
The government should have quantified the loss to the exchequer. The government
should have calculated when would Reliance recover its cost and when would the
government start sharing profits.
The same Reliance sold 30 per cent stake to British Petroleum for $7.2 billion. It was
approved by the government.
Director General of Hydrocarbons should be prosecuted. The production-sharing contract
should be re-written and price level should be revised.
It will make electricity cheaper, fertilisers cheaper and industries would benefit.
I dont blame Reliance. If I get the opportunity to steal, am I going to leave it? It is the
duty of the government to see that nobody takes people for a ride.
To build a factory.
Labor
Capital
Entrepreneurship
Cant rob a rob a bank because this too requires Labour (gangsters) and guns, masks,
vehicles and Entrepreneurship (to take the risk of going to jail).
Cant start my own IIT Bombay would again require those four factors of production
(Land, Labour, Capital, Entrepreneurship)+Permissions from UGC/AICTE.
Cant join politics because Only ministers can make huge money, MPs/MLAs dont. And
Unfortunately Im not a son or daughter of some big politician so I cant become minister
@ young age (Agatha Sangma, Sachin Pilot, Naveen Jindal et al) So even If I join
politics right now, Ill have to do bootlicking of Party high command until I get 60
years old, only then I can become minister and break the records set by A.Raja and
Madhu Koda.
Now, There are two ways to (legally) arrange money for starting a company or to expand a
company. First is Debt and Second Equity. See this chart
The word debt is self-explanatory. You borrow money from someone: It can be a bank, it
can be a friend, it can be a stranger.
I write on a piece of paper: To whoever pays me Rs.1000, Ill pay annual 10% interest
rate (Rs.100). And after 5 years, Ill also repay the principle amount Rs.1000. No ifs
and buts.
This is one type of security paper. e call it BOND .
IF you hold my bonds, Im liable to pay you money no matter what happens. hether my
ice-cream company actually makes profit or goes Kingfisher . I have to keep paying fixed
money to you, every year.
In above case I offered you 10% interest rate. But in real life, there are credit rating
companies like CRISIL, S&P, Moodys etc. Theyll give credit ratings to a bond. (i.e.
Am I capable enough to actually pay you?).
Based on that, they give ratings example AA,A, BBB, BB,C,D etc.
I had talked about them in my previous article. Go through the Archive on
www.mrunal.org/economy
Junk Bonds
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 Governments behalf.
But Governments generally have the aukaat to repay the principle and interest rates.
Hence Government bonds have higher credit ratings (AA). So, they dont need to seduce
you, theyll offer very low rate, say 4%.
Similarly, well known companies with high credit ratings (AA) also issue bonds but pay
low rates.
If you dont like to take risks, youll 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 dont have Holders Name on them.
These bearer bonds have coupons attached with them. So, if you dont 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 hell 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, whos
buying, whos 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 doesnt have space for Owners names and there are three coupons attached
at the bottom.
Question: hy would Government issue bearer bonds? Because when theyre 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 youve 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.
So far, we saw that first option is to borrow money and pay regular interest rate. (Debt >Bonds). Now continuing this not so technically correct article,
Second option is, I take money from you and in return I offer you partnership. This is
called Equity.
Assuming that I need 1 crore rupees to start my company and Ive 30 lakhs in my
savings. So, I write on a piece of paper: Ill give 0.0001% ownership of my company to
whoever gives me Rs.1000.
This is again a type of security-paper. But since Im sharing a part of ownership with
you, in crude terms, well call it Share.
Then I print 10,000 such papers. hats the value of these papers?
10,000 Papers multiplied with Rs.1000 each =1 crore. oila thats total money I need.
And since I already have Rs.30 lakhs, I can purchase 3000 shares. (because 3000 papers x
Rs. 1000 each = 30 lakhs)
So out of the Total 10,000 shares that I printed, I will own 3,000 shares, so percentage
wise I own 30% of this companys equity.
Since Im issuing the shares (Equities), under the Company law, Ive to
Constitute a board of directors and hold annual general meeting of the
shareholders.
For important policy decision, Ill have to take votes of the shareholders, the
Board of Directors will supervise over my activities. In short I cannot run the
company as I please, Ive to give answers to those people.
On the first year, I make profit of Rs.25 lakhs. The board of directors will meet
and decide
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 Ill 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 Companys 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 dont 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 Chokrobarthys 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 dont call him Newcomer , they call him flop hero.
Moral of the story: hen you act in your first film, youre called a newcomer. Then in
your subsequent movies, youre called a flop actor, although youre the same human
being from your daddys 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 Daddys point of view (Mine), its the same. If someone has one paper, he gets
0.0001% from the dividends.
Venture Capital is a company that gives you money, to start your company or to expand
your company but in return they demand part of ownership.
They deal with only big things, big projects, big investments. They wont help me to
open an ice-cream parlour in Gujarat University despite the fact that its monthly revenue
will be higher than SBI General Managers salary.
Copy pasting example of Ojasventure, India
We invest in technology based businesses in sectors such as Mobile technology,
Telecom, Software.
We make an initial investment of US $ 250,000 to US $ 1.5 million.
Ofcourse money doesnt fall from sky, these enture Capitalist companies themselves
borrow money from other companies like mutual funds, pension funds or they may be
issuing their own bonds to get money.
Theyve their own team of Management experts, corporate lawyers, chartered accountant,
and business consultants. They study your business plan, approve the money.
Theyll demand seats in your companys board of directors to Influence the Decision
Making in your company, according to their requirement and so on
These are rich gentlemen. They finance startup companies for getting partial ownership
and or assured returns on investment, after few years.They can give debt (i.e. just like
moneylenders and banks) or Equity (i.e. partial ownership). But mostly they play in the
equity field.
You can get money from Banks / Bonds (Debt) or IPO/Venture Capitalist (Equity), if
your business project is likely to bear success based on previous experiance.
Why is it so?
Because most of the company dont 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, hell 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.
I have Rs.30 in savings, I borrow Rs.20 (Debt) and thus start a company for Rs.50
After few years, I need another Rs.50 to expand business, so I launch an IPO: Total 50
share papers worth Rs. 1 each (Equity)
You buy 10 shares for 10 rupees. Means you own 10/50th =20% of my
shares/stocks/equity/ IPO whatever you want to call it.
But the total assets of my company are= From Rs. 50 I had already + Rs. 50 from IPO =
Total Rs.100
So, You dont own 20% assets of my company, because youve given me only Rs.10!
and my total assets are financed from both Debt + Equity.
Same way, if you purchase 10% shares of Jet Airways, doesnt mean you own 10% of
their airplanes and buildings.
Who is Underwriter?
Here is the problem: I cannot print those security papers on my own Home PCs cheapprinter.
First, A lengthy legal and accounting paper-work has to be done, itll 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 hell buy the IPO/Bonds if others
dont buy it.
Kotak Mahindra, ICICI offer such underwriting services.
In real life, companies dont rely on single source to finance their adventure. Theyll
arrange part of the cash from Debt (Borrowing) and part of the cash by issuing IPOs
(Equity).
Each has its own advantage and disadvantage. Lets check
Equity (IPO/Shares)
Equity (IPO/Shares)
So, itd be better if I finance a part from debt and a part from equity. That leads us to the
discussion about Debt to Equity Ratio.
It takes money from RBI, World Bank and other international funding institutes.
It loans this money to Regional Rural banks and to NBFC (Non-Banking Finance
Companies) working in Microfinance sector.
Recall that Muthoot Finance is also an NBFC, but It cannot get money from NABARD.
(although they may be giving gold-loans to villagers!)
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.
Govt. of India,
the concerned State Government and
Sponsor Banks
Ownership in the proportion of 50%, 15% and 35% respectively
RRBs are not functioning properly; they need new capital infusion of Rs 2,200 crore by
2011-12.
Performance of RRBs should be monitored by state level committees headed by finance
secretaries of state governments with officers from the NABARD, etc.
Step 1: Gang up a few heavy weight politically connected people, and Open a
cooperative bank.
Step 2: take deposits from common-men, borrow some money from RBI, but give loans
only to your friends and relatives and dont ask them to pay EMI.
Step 3: Keep doing this, until the bank collapses.
Step 4: Now pay bribe to police and run away to any foreign country.
Some big scams: Madhupura Bank-Ketan Parekh, Aadarsh Bank, etc.
Because Sugar data is used in the IIP index, under the Manufacturing >> Consumer
(Non-Durable) Goods.
But sugar has just 1.5 per cent weight in the IIP index, how can it lead to such huge
fluctuation? Obviously some other commodities production is also mis-reported apart
from Sugar.
policy accordingly.
If a number is misrepresented, RBI will make wrong policy. Then it affects everyone of us.
RBI is going to update its policy on 17th April. Suppose CSO did not admit the mistake, what
could happen?
RBI :
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 dont need to
do anything, time to watch #IPL Matches!
But now CSO has admitted mistake, what will happen?
RBI:
oh hell NO!! January IIP is just 1.1%; this is so hopeless just like Zardaris 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!
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?
This word is going to keep reappearing in next few articles, so better understand it in
advance.
You already saw that there are two ways to finance a company: Debt + Equity.
Paid up Capital means the amount of money contributed via Equity (shareholders)
Private company
Public company
Departmental undertakings
They are involved in some commercial activity such as engineering, manufacturing etc.
But
Theyre 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 Parliaments approval on how to use the profit, But it will
need approval of Board of directors on how to spend the profit.
Theyre 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 Parliaments 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.
When we use the word PSU: it means Public corporations + Government companies.
Departmental undertakings (Railway/Postal) are not PSUs.
CAG has two wings:
1. The Civil wing looks after the auditing of Ministries + Departmental undertakings.
2. The Commercial wing looks after the auditing of Government companies +Public
Corporations.
Suppose the company has issued 1000 shares, worth Rs.10 each
You purchased 50 shares of this company. So you have to pay 50 shares x 10 Rs. Each =
Rs.500
That means you own 50 Shares of this company and
You own stock of Rs.500 in this company.
In short, when we talk about shares we refer to the number of papers held by you.
When we talk about stocks, we refer to the money value of those papers held by you.
But ultimately, both shares and stocks suggest the same thing: Equity. You already
know what equity means, if not click me
Normal shares
It comes with voting rights. This is what you get from routine IPO>>Share thing
Preferential shares
Already discussed in the SBI capital infusion article
You launch IPO, get funds from the public, and start a company. (Equity)
After some years you want some more money to expand the company, so you want to
issue additional shares. But under the companies act, you can issue additional shares to
the existing shareholders only. This is called rights issue of shares
Here, you give notice to the existing shareholders, offer them to buy your new-shares,
you cannot offer any other outsider to purchase the shares.
If you do not want rights issue of shares, you have to hold a general meeting of
shareholders and pass a resolution that company does not need to offer new shares to the
existing shareholders, and these new shares are available for anybody to purchase
Well the direct utility of rights issue= obviously to gather more money to expand your
company.
But it is also used for other purpose
From the Debt VS Equity article: There are credit rating agencies S&P, CRISIL etc.
they give rating to your companys bonds. AAA,BBB etc.
Lower the rating = higher the interest rate youve to offer, to seduce the people into
buying your bonds. (Recall the Junk Bonds.)
But before giving rating to your bonds, the credit rating agency will look into your
companys performance, assets, liability everything. And one of the thing theyre
interested in, is Debt to Equity Ratio
The company with high debt to equity ratio = it has more debt = compulsory interest
payment = trouble = lower rating.
If such company issues more bonds to gather money, itll have trouble; its new bonds will
receive even lower credit rating. So, what can they do?
Another case: Youre kingfisher. Youre not doing good, nobody is helping you. So you
want some foreign investor to come and help you. But hell also look into debt:equity
ratio before finalizing the terms of deal. hat can you do to appear good in front of
him?
Obviously: reduce the Debt to Equity ratio. But how?
Simple: offer new equity (shares) to existing shareholders @ a discounted rate. (=Rights
issues of shares). Youve offer it at a discounted rate, else no one would buy it. Youre
doing this whole exercise, because youre in trouble in the first place.
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 youll have to pay money for buying new shares under rights issue
This is also a form of Employee Stock Option but here the company promises to deliver
shares to its employee in future date.
For example, Apples new CEO Tim Cook: hell get $900,000 of cash salary and a $377
million in RSU.
Apple will deliver him 500,000 shares of Apple stock in 2016, and 500,000 more shares
in 2021 as long as he stays employed at the company.
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?
RBIs monetary policy has been very tight last year. Loan interest rates are quite high,
big corproates are finding it hard to borrow at such high interest rate.
So when QFIs come up with their cash = more money supply in Indian market.
Supply more = price goes down.
More Supply of money = interest rate goes down.
And thus, Indian businessmen will be able to borrow @ a lower interest rate and then use
the money to manufacture more goods and services = better IIP = better GDP.
Recall the breaking news of S&P credit downgrade for India. After that news, FIIs
panicked and within days they took out almost 700+ crores of their investment from
Indian market.
In such scenario, Pranab is trying to stabilize and deepen the market by allowing QFIs
to come and invest in Bond market as well.
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
In the Debt + Equity article, you read about Junk Bonds that carry high risk vs Gilt-edged
securities that carry low risk.
Therefore Junk bonds offer you higher rate of return to seduce you into purchasing them.
But If you want to play in Junk bonds, you need to have lot of money in your pocket so
even if they default on your payments, you can still pay your grocery and telephone bill.
The FIIs have got huge cash in their pockets, so theyve the guts and aukaat to invest in
junk bonds. They dont mind taking the risk, if the returns are attractive.
But QFIs dont have that much money, so they like to play safe and generally prefer to
invest in bonds with AAA ratings (i.e. Gilt edged securities)
Here is the problem: Not even five per cent of the Indian Companies have the premier
AAA rating from S&P/ Moodys.
So even if QFIs are allowed in Bond market, doesnt mean immediately the problems of
low-IIP + low-GDP, will be solved.
Ok, This year we need to collect 8 lakh crores to finance our bogus schemes
and other Royal Expenditures such as luxury foreign vacation trips of
Pratibha + business-class Air-tickets for Sharad et al.. Ive told the custom and
excise Department to collect 3 lakh crores in indirect taxes, and you get me the
remaining 5 lakh crores from direct taxes. Else I wont promote you.
Understood?
IT
Commissioner
But sir your target is implausible just like reading entire Mishra-Puri and Dutt
Sundaram for economy!
Pranab
Well, the Diamond traders in Surat and Builders in Mumbai got plenty of black
money. You raid their offices every month, starting from tonight.
IT
Commissioner
We are already doing that. Yes, we recovered truckload of cash but still your
target is just way too high.
Pranab
Then catch those big fishes that use Cayman island and other tax havens for
making business deals!
IT
Commissioner
Pranab
Betaa I dont have to update the IT Act. Its your job to write the bill, give
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.
Alright. Im done writing the major provision about Income Tax in Direct Tax
Code. (click me if you havent read them already.)
Only one part remains: Our Department must have the power to take action
against these folks who use tax-havens for making business deals.
Retired IT
officer
Yes, We should make the necessary rules and call it GAAR: General AntiAvoidance Rules.
IT
Commissioner
Wow that name GAAR sounds really unique and awesome, as if the
*Singham* is roaring grrrrI wish I could get selected in IPS :-(
Retired IT
officer
IT
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, Ive 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 doesnt matter whether the business
deal was done in India or outside India or
It doesnt matter whether the deal is between any Indian citizens / NRIs / Foreigners.
It doesnt 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 Im 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 Ill table this bill in parliament.
Government should have introduced GAAR as a separate act. But Pranab has
mischievously packed this GAAR with Direct Tax code (DTC).
Target audience of DTC = corporates+ middle-class tax payers but target audience of
GAAR is mostly big corporates such as myself.
And the dimwit media of India doesnt really understand what is the issue and confuses
the junta as if we the corporates are against the entire DTC.
No, we are not against DTC; we are concerned about GAAR. But yet we are
unnecessarily getting vilified just like anyone who dares to speak against Team-Anna is
automatically labelled as Congi-agent.
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 dont 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 well have to treat him as maai-baap, give him gifts and bribes every HoliDiwali, 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 dont 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 youre not happy with IT Commissioners order!
Mr.Vodafone: But well 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 VodafoneHutch deal? This GAAR will only generate more income for the top 10-12 tax lawyers of India.
Tax
Avoidance
An arrangement of a tax payers affairs that is intended to reduce his liability and
that although the arrangement could be strictly legal.
The key distinction being that in tax avoidance the key facts and financial details
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 taxauthorities.
Tax
Planning
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.
Youve shown enthusiasm against Tax evasion but you dont 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, Ive to take state governments in confidence
before passing any legislation or framework, just like the FDI in retail or GST (Goods
and services tax.)
Youve 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?
Summery
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, Caymens 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 Im, can leave now. No need to read further.
Newchannel Anchor: How can you be so cruel and insensitive about the Arushi murder case? If
she wasnt murdered she could have become the next female President, Speaker or Prime
Minister of India.
Mr.Vodafone: oh yesright .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!
Mr.Vodafone: But I didnt mention Farmer suicides or Sunny Leone.
Foreign Currency Non-Resident (FCNR) scheme was launched by RBI in the early
1990s.
It allows NRIs to make fixed Deposits (FD) in Indian Banks, in Pound Sterling, US
Dollar, Japanese Yen, Euro etc.
They dont need to convert their foreign currency into rupees, just directly deposit foreign
currency in Indian Banks.
They dont need to pay income tax on the interest earned in such account.
RBI decides the upper ceiling on interest rate to be paid on such deposits.
Minimum maturity at 1 year, max is 5 years.
Example SBI FCNR. You can read its terms, conditions and features by clicking Me
RBI had to do something immediately to stop the further downfall of Rupee against
Dollar, so RBI chief increased the upper ceiling of FCNR interest rate. Now Indian banks
can offer even higher interest rate on FCNR deposits.
Currently Citibank USA offers only 0.05% interest rate on savings account! (does it
sound ridiculously low? Well, these rates are given on the official page of Citibank USA!
Compared to that, Bank of Barodas FCNR interest rate on dollar deposits is around 3 to
4%. Now theyll increase the interest rate even higher, after RBI increased the ceiling.
So, the NRIs will find it even more attractive to park their dollar-savings in Indian banks
rather than in American banks.
This Means, Supply of dollar increased for those Indian banks.
They can loan these dollars at to Indian importers. (more money supply =more liquidity =
loan-interest rates go down).
Thus Demand of Dollars decrease @Forex market, because now you can borrow
dollars from SBI @ a lower cost compared to what SBI used to charge earlier. So no need
to run to Forex agents.
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, isnt 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.
Demand of dollar decreases from open Forex market= rupee strengthens.
So instead of going down to $1=54 Rs, now rupee will trade @$1=52Rs or lower
Although its not that linear and immediate, takes some time for the laws of supply and
demand to show effects and then rupee will start strengthening again.
Current account
It is made up of three parts.
1. Balance of Trade
2. Earning from Investment
3.Cash Transfers
Export
+299284
Import
-381061
Total
-81777
e got a negative number, therefore India has a trade DEFICIT of 81777 million US$
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 weve 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 doesnt have PAN cards and Demat
accounts.
Note: For the sake of simplicity, Ive added + and in front of incoming and outgoing
money and did the total. But technically it is called net difference between exports
and imports.
Foreigners invest their money in India (both FDI and FII), similarly Indians invest their
money abroad.
On their investment, they earn income: interest rates / dividends etc.
The amount of money actually invested, is put under Capital Account
But the amount of income or interest earned on ^above investment, is put under Current
account
For example, An FII invests $100 on 8% Bond, therefore earns $8 in interest after one
year. The $100 are classified in Capital account and $8 are classified in Current Account.
Take the difference of incoming and outgoing Earning on Investment for 2010-11 it was
-17309 Million US$..call this figure (2)
Question: why was it negative? Because more Foreigners invest in India compared to
Indians investing abroad. (we do invest abroad but in Swiss bank accounts only :P).
Besides even if an Indian had invested in American or European market, hed not have
recieved much income from the investment because of the global financial crisis during
that period.
The money transferred without exchanging any goods or services. For example an Indian
worker sending money from Dubai to his family in Kerala(Remittances)
Some American nuclear powerplant company using a charity foundation to send
donations to Jholachhap NGOs of India, to help them finance the protests, dharnaa
pradarshan against Russian nuclear powerplants in India = that is also one type of
service offered by Indian NGOs but still Donations fall under Cash transfers and
not under the Goods and services
Again take difference of incoming and outgoing money: thankfully this number was
positive for 2010-11: it was +53140 Million US$.call this figure (3)
Why was it positive? Because so many Indian people work abroad and send money to
their families, that remittance is soooo high, that it skews to balance in positive direction
Besides there are very few foreigners working in Indian and remitting money back home.
One of them was that Italian tourist-agent in Orrisa but he was kidnapped by naxalites
and went back to Italy so that is one less foreigner remitting money from India to abroad
= next year the cash-transfer of India will look even more positive!
Worth US Million $
Balance of Trade
-81777
Earning on Investment
-17309
Cash Transfer
53140
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: youll get different number on different website and sources based on their data-sources.
But 2010-11s 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 dont 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.
As long as India continues to import to crude oil and gold, we cannot have Current
account Surplus
That means we are doomed to have current account deficit for the years to come. So
Think about following questions:
How does increase or decrease in CAD help us or harm us?
Is CAD always bad?
How can we reduce the Current Account Deficit?
Ofcourse one solution is: ask the Naxalites to kidnap more and more foreign workers to
decrease the outbound remittances! Thatd also reduce the foreign investment coming
into those naxal-affected regions = less outgoing money in Earning from Investment =
Current Account Deficit reduced! But is it good for the overall Indian economy? Think
about it!
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 dont have to make regular interest rate payment, nor
Ive 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)
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, theyll be
able to repay the interest and in most cases, the foreign investor will get the bond converted into
equity so we wont 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:
Ive following FCCB of Company xyz
$1000, 8%, 2025, 100 shares after 5 years.
Let us do some aptitude
In 5 years, I earn 8% x 1000 x 5 years =$400 in interest payment.
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, Im not in a mood to convert my FCCB bond into that Indian companys shares.
Because as long as Ive the FCCB in bond form, I continue to receive interest and claim the
principal.
Think it this way, from investors point of view
If the time is uncertain, where will you invest money: in Debt or in Equity?
Ofcourse in debt because you get assured return on investment.
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,
Youve to repay FCCB of 1000,8%,2025, but you dont 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.
Indirect tax
is paid by rich and poor alike, on the purchase of goods and services. Sale tax, excise duty,
custom duty, entertainment tax and examples of indirect tax.
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.
Capital is something that generates income for you. It can be a building, it can be a
rickshaw, it can be a truck, it can be printing press machinery.
When you sell these capital assets, and IF you make profit (gain), then you have to pay
tax. This tax is known as capital gains tax.
Short-term capital gains tax, if you owned that asset for less than 36 months, before
selling it.
Long-term capital gains tax, if you owned that asset for more than 36 months before
selling it.
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 doesnt actually pay it. It is for the Vodafone (buyer) to deduct that tax money from
his payment and give the tax to Indian Government. Thats why IT Department harasses
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, dont you know that Cayman Island is a Tax Haven. They dont
have Capital Gains Tax! Better we sell via Cayman route and well save a truckload of ca$h in
tax.
because the transfer of shares of an SPV outside India, is not taxable in India. And Cayman
Island itself has very negligible tax rates. It is a win win situation for them.
And This is not the first case, there have been truckload of merger and acquisitions like this, in
past and weve never sent any notice to any such company because this matter is outside my
Jurisdiction, sir.
Minister: Betaa, dont give me this GYAN (
), get me some CASH ! Ive to give
Rs.71,000 crores in debt-waiver scheme to farmers in 2008 to win the General elections.
Sept 2010
Bombay HC: Yes IT Department is right. Mr. odafone youve to pay the Capital Gains Tax.
Mr.Vodafone: Ill go to supreme court.
Leftist Media: Shame shame. Youre going to Supreme Court!! e are going to report this as in
such a tone as if youre 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 cant I? Saving tax is a legal activity. Ive done nothing wrong. Im the innocent
bystander here. You dont have the guts to cover blackmoney issue until Anna Hazare and Baba
Ramdev raised it, but just because Im 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 doesnt 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.
Judge: order, order.
Mr. Vodafone: Yes your honor, there is a difference between the sale of shares in a company
and the sale of assets of that company. It is an elementary principle of company law that
ownership of shares in a company does not mean ownership of the assets of the company. Thus,
an individual who owns 45 per cent share capital does not own 45 of that companys assets. The
assets belong to that company which is a separate legal entity. So I have not received any capital
asset from the Indian company. I cannot be taxed for capital gains!
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 Caymans island, between two
Non-Indian companies. They dont have any capital gains tax there. So how come you hold me
responsible for paying Capital Gains Tax in India? You dont have any jurisdiction over this
matter! And If this is your logic, why didnt 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 dont
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?
January 2012
Landmark Judgment of Supreme court
Saare sabuto aur gawaaho ko madde nazar rakhte hue, ye adalat iss natije par pahuchi hai ki
(
Assembly elections ahead, I need the ca$h! Gang up the best tax-lawyers, study the judgement
and File a review petition in Supreme Court again!
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
even if the deal is executed on a foreign soil!
ith this move, Im trying to get around the courts decision which said that
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
whore 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
governments 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.
No tax
2,00,001 to 5,00,000
10%
5,00,001 to 10,00,000
20%
Above 10,00,000
30%
Why?
Because income tax is not calculated like that.
2,00,000
Two
3,00,000
Three
5,00,000
Four
5,00,000
Total
15 lakhs
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.
Transport / Conveyance
Allowence
Child education allowence
Leave travel allowance (LTA)
Medical Allowance
Uniform / Dress allowance
Gift from relatives
Agricultural income
House Rent income
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.
These are extremely knowledgeable and experienced Chartered Accountants, MBA and
Tax Lawyers.
They make customized tax-saving plans according to your requirements.
Big players in Tax Consulting = Ernst & Young, KPMG, Price waterhouse Coopers
(PwC).
Recall that odafone Essar deal: Saving Capital Gains tax in Caymens Island. These Big
Players help in such huge tax-saving deals.
In above table, you can see that Agriculture income is exempted from income-tax.
Lot of film stars forge documents and show they own farm-lands and theyre farmers.
Game is simple. They take 5 crores from film producers or 50 lakhs to dance in Dubai.
But on paper they show only few lakhs as legit payment received and pay income tax
on that part only.
Remaining money is shown as income from that agricultural land and thus totally
exempted from income-tax.
So this is also one type of Tax-Planning, just illegal.
Black money = income on which tax is not paid.
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? Youve to compare two cases to find that out.
2,00,000
0%
Zero
Two
3,00,000
10%
30,000
Three
4,00,000
20%
80,000
Four
30%
Total
9 lakhs
1,10,000
200000
Two
300000
10
30000
Three
375000
20
75000
Four
30
Total
875000
105000
Homework:
(No, theyll 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 did Pranab come up with Rajiv Gandhi Equity saving scheme?
Why are only first-time investors allowed to save money in the scheme?
Why is Pranab not allowing people with annual income of Rs.10 lakh or above, to invest
in this scheme?
hy did Pranab say this move will improve the depth of domestic capital market?
What is No-Frills demat account and why is Pranab talking about it?
If you were in place of Pranab, How will you design the Tax Exemptions and Tax
Deductions for the Aam-Aadmi and how will you help the Indian Economy?
Its a place in New Hampshire State of USA, just like BASEL is a city in Switzerland.
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
1. IMF
They give short-term loans to help nations settle the balance of payment crisis.
Theyve a system called SDR :Special Drawing rights. (requires another article)
2. World Bank
o Officially known as IBRD :International bank for reconstruction and
Development, that time
o They give long term soft loans to rebuild the third world.
o Soft loans= interest rate is very low. Sometimes you dont have to pay back the
principle.
3. GATT (General Agreement on Trade and Tarrif) later becomes WTO
o To facilitate the international trade.
o This will later become WTO. Already written an article on this.
4. Fixed Exchange Rate system. (although Discarded in 1970s)
o Explained in this same article.
o
o
Absent from the meeting: Mohan, Montek, Pranab, Chindu and Subba (good grief else
theyd have messed up International Economy, just like they did to Indian Economy.)
India was represented by Sir C.D. Deshmukh, he was the first Indian Governor of RBI,
This gentleman had cracked IAS exam in British-raj ,known as ICS exam in those days.
And No, he is not the grandfather of Ritesh Deshmukh.
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), theyll introduce
their own national currencies without control of big superpowers (Britain) and theyll
enter in international trade in their own capacity.(Exchange rates, IMF)
Hence, Some order had to be created to facilitate smooth international trade. (GATT)
Under this system, if RBI says $1=30 rupees, and youve 30 rupees and want to convert
it in dollars but the Foreigners are willing to give 1 dollar to youdont worry.
RBI will accept your 30 rupees and give your one dollar out of its own reserve and vice
versa.
Cons are obvious : When India is not exporting enough and not attractive enough foreign
investment (in dollars) and still RBI keeps paying people in dollars, one day the bank
lockers will be empty, there will be no dollars to pay. System will collapse.
But it has Pros (advantages) in the times of uncertainty- hen youre writing on a clean
slate, after WW2, if every nation decides to have a fixed exchange rate system- it leads to
stability and predictability in Exchange rates = good for foreign trade.
President Roosevelt: Ive fixed the value of your currency to my dollars. And Im 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 youll get one ounce of gold in
return. Gold will remain precious forever. So, its not like were running the show in thin air.
Dollars are backed by GOLD.
Mohan: ya man but what if my RBI doesnt have enough dollars in its lockers? hat will we do
then?
President Roosevelt: dont worry, come to IMF. Theyll 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 Ive the aukaat to pay enough gold, so I say dollars will be the
international reserve currency. IF youve enough gold reserve in your RBI, come sit in the chair
and well 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 dont 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 noI was just kidding man. Im well aware of my aukaat (
(
) and hesiyat
).
President Roosevelt: Besides hen weve a stable and fixed exchange system like this, itll
ensure smooth and long term trade deals between merchants of various countries. When you
dont have fixed exchange rate system, it is bad for economy. For example, today your callcenter 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. Ill 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.
Theyre 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, theyre basically wasting
money.
Now, USA gets involved in a very lengthy and expensive Vietnam War from 1959 to
1975.
ith respect to, Eurozone crisis, lots of columnists write We need another Bretton
Woods.
They dont actually mean that we need to move back to the same old Fixed Rate
exchange system, in which every currency was pegged to Dollar and Dollar was pegged
to Gold. Because that fixed rate thing is impractical in real life scenario, as we saw in
above paragraph.
Just imagine, if tomorrow World starts running according to Bretton Woods system, what
will happen?
We know that China already has more than 1000 billion dollars in its Forex Reserves. So
Peoples Bank of China will send its Probationary officer with suitcases full of dollars
and take away all the gold from Fort Knox. They dont even need to fight a war, USA
will come down to its knees financially.
[Fort Knox is a place in Kentucky State, US Government keeps the gold reserves in this
place.]
In real life, not that China will actually do so, but the mere threat and possibility will
keep USA on its toes. Hence US will not agree to Fixed Exchange rate in the first place.
There is no chance any other country will agree to become the big brother and let their
currency become the reserved currency and peg it to gold.
Especially India, because if we peg our 10,000 Rupees to one ounce of Gold and declare
that we are the new international reserve currency, just like dollar before 1970s, What
will be the Result? Pegged currency means Government cant do extravagant spending in
MNREGA. Theyll have to stop subsidy on diesel, kerosene, LPG and fertilizers, because
they can doll out only as much rupees as the amount of gold held in RBIs locker.
As You can understand, no political party has the guts to do that, hence no nation will
want to become the big brother (or Bali kaa Bakraa) for another Bretton oods.
So, The sentence We need another Bretton Woods is just a metaphor, to say that all the
Presidents, Prime ministers and Economists of the world should meet up once again,
drink some Desi Daaru (
), watch some Item-song, brainstorm for new ideas and
start something from scratch, totally new, Just like the Gentlemen at Bretton Woods did,
in 1944.
It could be anything, untried and untested before likeChina could agree that well not dump our products in foreign market, we will not keep
our yuan devalued,
Russia and China could agree that ell stop supporting Assad and force him to give up,
thus integrating Syria into world economy.
US could agree that well bring back our troop from Afghanistan and cut down on our
Defense Expenditure and its inflationary effect on world economy. We will also stop
supporting Pakistan. Thus reducing defense Expenditure of India in the arms race.
Iran could agree that well stop our irrelevant obsession with nuke weapons and give up,
So that UN removes the sanctions and our trades can make more money, thus improving
the standard of living for Iranian aam-aadmis.
EU could agree that well kick out Greece, because its just way too messed up.
And India could agree that well bring all the black money from Switzerland and use it to
finance our bogus Government schemes and subsidies instead of looting aam-aadmi in
petrol tax, to finance those things.
And finally you and I could agree that every IPL cricket match is fixed, so a serious
UPSC/CAT/CMAT/IBPS/State PSC aspirant must not waste his time watching it and
concentrate on his studies instead.
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: cant
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
(
) to purchase gold worth 2 lakhs, then he shouldnt fear and get himself a PAN
cardJeweler: agreed but whats 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? Hell 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 itll 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 doesnt have PAN cards so if I announce TDS on
gold purchase of 2,000 rupees right now, itll be totally impractical and create uproar in
the country.
Thats why, well 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 Ill 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 payers money, isnt it?
Pranab: umm.
Jeweler: anyways Im still not getting the logic. If black money is the problem, why dont you
fix the root of the problem- corruption itself, rather than doing firefighting by this gold-buypan-card thing? What about the Lokpal, Whitepaper on blackmoney and Swiss money reports
and
Pranab: well ummmammmhmmmm
Dubai/South Africas dealer doesnt Export gold bars for rupees, he demands payment in
dollars.
Dont you get it? henever you purchase gold, our rupee weakens in the forex market!
hen rupees value declines, weve 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.
Because good people in rural and Naxal affected areas, dont have access to banks. So
where can they put with their savings? ofcourse we could improve the law and order
situation and public amnesties (water, electricity and roads) atleast upto Tehsil level so
atleast some of the doctors, bank officers and teachers go and serve in those backward
areas, but why bother.
Besides these lower middle-class and poor peolpe dont have PAN cards so they cannot
invest in mutual funds or sharemarket. And even if they were forcibly given PAN cards,
they dont know the technical knowledge required to invest in sharemarket. So where
can they invest money except buying gold or land?
Gold is a liquid asset, meaning it can be sold quite quickly and easily. Hence poor people
like it. Besides, given the rise of NBFC Gold Loan Companies like Muthoot Finance
(Akshay Kumar)- they give quick loans in lieu of gold and their target customer base is
poor and lower middle class people.
So those people definitely think it is wiser to save in gold to get loans in emergency.
Banks gives you about 7% interest rate on your savings account while inflation rate is
about 8%. What does it mean? Your bank account is not earning enough money to
counter the effect of inflation. In fact youre paying invisible 1% inflation tax by
depositing your money in banks.
Ofcourse SBI could pay your higher interest rate had they not been wasting their money
on ijay Mallya or 2G telecom players. But thats a different story altogather. The point
is: banks are not giving you enough cash to fight inflation.
So even urban people think it is better to save now in gold, and sell it later to earn some
profit, especially in the times of global financial crisis, when share market isnt giving
attractive return on investment.
hen people buy gold, theyre showing disrespect to my fiscal policy and RBIs
monetary policy.
When people buy gold- theyre suggesting that weve 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, lets now talk about you. hy are you bothered with this
taxation, we all know that the company or merchant doesnt 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. eve to hire so many film-actresses in advertisement.
Mohan: but thatd means Ill 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 youd see another Dawood Jr!
ISI: Whaat an Idea Sir-ji!
Epiloge
Mohans son is preparing for CSAT, IBPS, State PSC or Group discussion /Personal interview of
MBA admission
Mohans Son (loudly reading the same sentence repeatedly from a note)
India, the worlds largest consumer of gold, imported 967 tonnes of the precious metal in
2011.
India, the worlds largest consumer of gold, imported 967 tonnes of the precious metal in
2011.
India, the worlds largest consumer of gold, imported 967 tonnes of the precious metal in
2011.
India, the worlds largest consumer of gold, imported 967 tonnes of the precious metal in
2011.
What is FATF?
FATF (financial action task force) is an international body, monitoring money laundering
and terrorist financing.
The QFIs from Baherin, Oman, Kuwait, UAE, Saudi Arabia and Qatar, cannot invest in
India because their countries have not signed the FATF.
Therefore, now Indian government, is amending the FATF-rules to allow QFIs from
these Gulf nations. As long as these countries are part of IOSCO MMOU, their QFIs can
enter in Indian market.
So far, The response of QFIs from EU and USA, has been lukewarm due to the not so
positive economic conditions in their home countries and in India.
Combine it with Rupee depreciation, right now Rupee trades at about 1$ =Rs.55+
India needs foreign currency inflows, to prevent further downfall of rupee.
Therefore, in order to attract the investors from Gulf nations, government of India is
amending these QFI related rules.
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.
Policy reforms
Government could initiate policy reforms to boost foreign direct investment (FDI) in
India. Such as FDI in retail-marketing and aviation sector.
Recall my previous article on how to calculate current account deficit, we've seen that
we can never have surplus in balance of trade because we import crude oil and gold
worth billions of dollars, but our exports are not that much.
The crude oil is a necessary evil, without which our industries or life cannot function
properly. We export textiles and chemicals, but even for their production, crude oil is
necessary. No matter how climate friendly it sounds, there is a limit below which, we
cannot reduce our oil consumption.
However, gold is a luxury item, people will not die if they do not buy or purchase gold.
The government could increase the customs and excise duty on gold, that way MRP of
gold jewellery will increase and consequently, its demand will decrease. (except by those
Politicians, Bureaucrats and Real Estate mafias whove truckload of cash, and want to
invest it in gold.)
Recall the Gold Excise duty article, although Pranab did have noble intentions of
implementing above things, but then he fell back due to public pressure.
We know that RBI has forex reserve worth around 290 billion dollars. The RBI could
open a special window, allowing the oil companies to sell rupees and by dollars from the
RBI itself, rather than from other forex sellers. Thus, saving some money in the
commission payment and preventing excessive speculation in the forex market.
Recall my article on debt versus equity. In that, I discussed about junk bonds versus giltedged securities.
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)
hen you make an agreement with someone that youll 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, youve the right to buy that 1000 kg potato at the predetermined price Rs.150,000 in future, but not the obligation to buy it.
Means you can refuse to buy it later on, if youre 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 dont 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.
It means this is a call-options contract: Buy infy shares at 3000 Rs. on x date.
Right now you dont 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 youll 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.
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.
Now comparing two nations, GDP (PPP) wise,
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?
No, because financial activity is not limited to local market.
eve to import crude oil from Middle east and buy jet-planes, missiles from Russia,France and
Israel.
eve 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.
Theyll 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.
Answer:
Take a basket of commodities (like 1 kg sugar,wheat,veggies and cloths etc).
Now find out how much money do you need to buy everything from that basket?
For India suppose the bill is 1700 Rs.
Go to America and buy same items from their local market, the bill is 100$
So 100$=1700 Rs. => 1$=17 Rs.
So, PPP exchange rate is 17 Rs. per 1 $
To calculate GDP (PPP)
GDP (in Rupees) / PPP exchange rate for Rupees
=100/17
=5 $
Indias GDP (PPP)= 5$
To calculate nominal GDP in $.
Just convert the Rupee into dollar at official exchange rate.1$=50 Rs.
Indias GDP (in Rupees)/official exchange rate
=100/50
=2$
So Indias GDP (nominal) is 2$.
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.
Now comparing two nations, GDP (PPP) wise,
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?
No, because financial activity is not limited to local market.
eve to import crude oil from Middle east and buy jet-planes, missiles from Russia,France and
Israel.
eve 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.
Theyll 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.
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 worlds second largest economy at official exchange rates does mark an important transition.
Answer:
First the Purchasing Power Parity part:
Suppose youre earning 25,000 Rs. per month in India and Im earning 1000$ in USA. How can
we measure whos getting better salary? who is happy?
eve to see how much stuff can you buy from the given income?
Suppose, Price of one burger in USA is 10$, I can only buy 100 burgers a month.
While its Rs.25 in India, you can buy 1000 burgers a month!
In this way youre in better position than Im, because you can buy more food!
Same way weve to calculate not just burger but overall monthly food bill, house rent, electricity,
telephone, petrol etc. to measure who can buy more stuff in the given salary.
This is purchasing power parity.
Tech-definition
PPP is an economic technique used to determine the relative values of two currencies by
comparing costs of the identical products and services in different countries.
It is useful because often the amount of goods a currency can purchase within two nations varies
drastically.
If we only use official exchange rate of 1$=40 Rs.
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.
Thats 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)
This is GDP @ official exchange rate.
Earlier Japan was ahead of China in this race. But now Now China is ahead of Japan even in this
race, means it has got more $$ than Japan= China is exporting more and Chinese economy is
booming more than Japans.
Main reason:
China keeps its yuan undervalued, hence its exports are cheaper than Japan or Indias.
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
PS: sorry for the watermark, although my current id is not mrunalpatel.co.nr but mrunal.org.
Insiders (employees and board members) have advance knowledge of Companys accounts,
secrets, financial statements, future plans of merger & acquistions etc. They can benefit from
this Inside information to trade and make profit in the share-market.
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.
Insider trading is an offence punishable under the SEBI Act of 1992.
The penalty Insider trading is Rs 25 crore or three times the gain whichever is higher.
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 Petroleums 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.
Sebis 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 youre buying Crude Oil Barrels from Middle East, youve to Pay in Dollars!!
Suppose if 1 Oil Barrel s price was 1 Dollar, then now youll 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.
Thats why youve to maintain a fine balance between your Rupees 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, youre importing more than what youre 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!
Since 1950, India ran continued trade deficits because of the Quota-Licence-inspector raj.
(Already explained in LPG article, click me to read.)
Government of India had a budget deficit problem and could not borrow money from
abroad or from the private corporate sector.
As a result, the government issued bonds to the RBI, which increased the money supply,
leading to inflation.
In 1966, America stopped foreign aid to India (because Americans were friendly to Pakis)
and we were fighting Indo-Pak war of 1965. During this war, Govt.s 25% expenditure was spent
in fighting pakis.
All this lead to problems, youve high inflation, you dont have enough money to buy crude
oil. And you cant print more money to buy crude oil (click me to know why) ,
so what will you do? Youve to boost your exports to earn from $$. And for that youve to
reduce the value of your Rs.
Same thing had to be done in 1991, due to BOP crisis.
Who exactly determines the Exchange Rate?
1$= 50 Rs. =this is exchange rate, but who exactly determines this?
In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the
value of a basket of currencies of major trading partners. (= Central Govt. + RBI deciding 1$ =
will be equal to how many rupees?)
But then they had to liberalize and Nowadays, its the market forces of Supply and demand
who will decide the Exchange rate. = its the players @ Foreign Exchange market.
The foreign exchange market allows businesses to convert one currency to another.
For example, youve a factory in Noida to make bikes, you sell these bikes in India = you earn in
Rupees. But the engines of those bikes are imported from America, so youve to pay in Dollars
to that American supplier. So how will you get dollars? Simple, go to the Forex Market, give you
rupees and buy the dollars. Here the supply and demand rules will decide the value of 1$= How
many rupees.
Its almost same like vegetable market, today it can be 10 Rs. Per kg potato, tomorrow it might go
20 Rs. /kg, depending on demand and supply.
Consider this talk @ Forex Market
Rupeeguy: hey man! take this 50 Rs. And give me 1 dollar.
$ guy: dude, weve only few dollars, and I know youve plenty of Liquidity In India, your
economy is booming and you people are earning lot of money. so give me 100 Rs. Otherwise Ill
not sell. (=$ supply is low)
Rs.Guy: damn it, anyways I need to pay $$ do my American supplier so here take this 100 Rs.
And give me 1$. (=$ demand is high)
=Rs. Is devalued
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 youre a Rich American, and American banks are giving you only 18% interest rate for
your deposits. = youre 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 youve to buy
land, cement, labors and theyll accept payments in only Rupees. So youll go to Forex market,
to get your Dollars converted into Rupees.
Remittances of Indians abroad otherwise than through normal banking channels, i.e.
through compensatory payments. (eg Many Indian living abroad send money to their wives and
relatievs via Hawala)
Acquisition of foreign currency illegally by person in India. (for example, Ashwarya Rai
faced inquiry from the Customs department, which has stumbled upon a mysterious postal parcel
addressed to her containing 65,000 euros (Rs.3.7 million) in cash. In another case The ED found
evidence of alleged 50 Lakh hawala payments by a Dubai event manager to Ash, and others.
(refer CNN-IBN)
Under-invoicing of exports and over-invoicing of imports and any other type of invoice
manipulation.
In the period 20002007, the Rupee stopped declining and stabilized ranging between 1 $ =
4448 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 dont 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
So ultimately, youll have to import huge quantity of crude oil to run a war, and your
foreign exchange reserve (whatever dollars or gold youve in RBI) = will be reduced.
And you cant print more money to buy oil from middle east. (read my BoP article to know
why?) + if the United Nations intervenes, then theyll place trade and arms embargo on us (=
quantitative restrictions on your oil imports)
As you know weve only 270 Billion $, while China got 1400 Billion $ in their forex, so
ultimately our pockets will get empty before their pockets go empty,
And there will be no diesel in our tanks and fighter planes and theyll win the war.
Same is the reason why well win against Pakis in a traditional war.
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.
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 theyll have to declare a ceasefire.
Infact China doesnt 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.
smuggling of foreign items! Like Gold watches/ perfumes etc in the 80s.) *Desi=
domestic / indian
This protects domestic players. (= industrialists/ businessmen.) from competition from
foreign players.
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 itll 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 cant sell
their products here.
Here no tariff (=tax/money) is involved but still there is a barrier for foreign players.
Thats 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 wont have
much choice. for Example.. compareprices 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 wasnt free, now its
around 50 Paisa / minute + Free incoming/)
Today we have this fun, because of globalization + import of foreign products & Govt. doesnt
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. (ill 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 doesnt follow these agreements.
Every Agreement has an Annex- in that youll 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 wont play by the rules & try to cheat such agreements.
So second objective of TO is Dispute Resolution
thats like an international civil court.
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,
Apart from this, shipment inspection and anti-dumping are also included in GATT annex.
#3 : TRIPS
like I said ago, TRIPS doesnt have any annex!
But TRIPS is very imp agreement in todays world full of technologies-so lets see whats it about
t.
In short, under TRIPS agreement, every member-nation has to make laws and tough
punishments for anyone who breaks / copies other peoples copyright / patent etc.
otherwise, there will be wide spread piracy & then Inventors of 1st world wont invest /
come in 3rd world market.
there are certain items whose actual price cant be counted based on physical material
used in it (e.g. Books are not sold based on number of pages/ cost of paper but content &
fame of author.) so we cant apply GATT (which is for physical goods ) and Book is not
a service either (so cant apply GATS)
Research & Development.(R&D)
it takes years and billions of rupees to make a new drug.
but retail price of one tablet of that drug would be about 5 Rs.
here, if the patent / copyright wasnt protected, then inventors will not invest in R&D.&
then world will be deprived of better products.
the GI (Geographical indicator)
like Darjiling tea- only the tea made in Darjiling can be sold as Darjiling tea
otherwise, Britishers would also sell their tea claiming it to be Darjiling variety and
then our tea makers will face unfair compitition.
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)
Predictability
When there are legally binding agreements between member nations of WTO- it means,
even after change in Govt. (BJP / Congress / whatever) the Indian policy of
international trades wont alter very much.
This gives confidence of foreign investors because of
Promise of stability (=Ceilings on customs tariffs.)
policy environment is predictable.(= Transparency in trade rules)
Equal treatment to Local players & foreign players. (=open access to markets)
binding commitments (WTO keeps an eye on each nation so Govt. cant cheat. And if
you cheat- youll have to pay fines.)
And foreign investment helps the domestic economy as well.
Fair competition
WTO agreements prevent unfair dumping, subsidies, government procurement
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)
4. India won multilateral dispute settlement against such powerful economies as USA
5. because of TRIPS, India had to adopt international standards in Intellectual property
rights.=
flow of Foreign investment & technology.
6. (because Foreigners established research labs/ manufacturing units in India & started
selling their products here.)
7. Textiles boom (because MFA = Multilateral Fiber Agreement was scrapped under
TOs ATC=Agreement on Texttile clothings.) otherwise previously UK and other
nation had put quantitative limits on Indian Cottons Entry in their market.
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.
its a measure designed to protect poor farmers by allowing countries to impose a special
tariff on certain agricultural goods in the event of an import surge or price fall
For example, if USA sends so much cheap corn to India, that price of Corn become 50
paisa per kg. then India can put tariff barrier (= increase import duty on American Corn)
so that prices become high again.
otherwise, no one would by Indian Corn, and our farmers will starve.
United States arguing that the threshold had been set too low.
(e.g. if it was decided that if price fall to 5 Rs. / kg corn, then India could do this. but US
wants that India shouldnt be allowed to act, unless price of corn falls very low,
something like 50 paisa / kg.!)
India doesnt agree with US on this.
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 youve 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 Indias population depends on one
way or another with the agriculture sector. So if cheap foreign items are allowed, then itll 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,
youll face such topics in mains / essay.)
Criticism of WTO
Mostly comes from environment activities.
1. WTO promotes industries, MNC (Multi-national corporations)
a. But these MNCs sometimes are involved in bad things. Eg. They pay huge bribes
to Burmas military regime for operating the gas lines, nickel mines etc. and
employ forced laborers in it.
2. The infrastructure boom because of WTO (more foreign companies making factories in
India) leads to habitat / bio-diversity loss & pollution etc.
3. Its hard to put barriers on imported items, thus the domestic industries face tough
competition which sometimes ruins them. (e.g. its not possible for Indian Toy maker to
compete with Chinese toys in retail price.) and yet not much the Indian Govt. can do. If
they put some ban on it, then China will go to WTO, and WTO will impose heavy fines
on India.
4. 3rd world has to open its market for first world product without much benefit in the
reverse process. (=3rd worlds products lag in race in 1st worlds market.)
5. e.g. as you know in colonial era, when India was under British Rule, if we exported our
Indian Textiles to Britain, theyd put huge import tax on it. Thus our cloths would
become very expensive in their market. So Britishers would only buy locally made cloths
from Manchester. This sort of protectionism in old times (almost upto 1995) = their
companies made lot of profit during that era & had lot profit invested in Research and
technology, so currently their products will be technically and in quality far superior than
ours. So even if there is no barrier today, British people will buy their product and not
ours. This argument runs on the same line like of climate change. America allowed its
factories to pollute the atmosphere and thus became a developed nation but now, it wants
the developing nations to stop polluting the world & cut their emissions!
1947:
1986
2004
-
We grow plenty of rice and wheat. (Cereals). Their supply or price is not the main reason
for food-inflation.
But the problem is with supply of fruits, veggies, pulses (Daal) and milk. These are called
Non-cereals and theyre mainly responsible for food inflation.
In the major pulses-producing states (MP, Rajasthan, Maharashtra and UP), cultivation
has been pushed to marginal, non-irrigated land.
Farmers have also been reluctant to invest in fertilisers and other nutrients or experiment
with high-yielding but more expensive varieties of pulses. As a consequence, yields have
stagnated. From about 590 kg/hectare in the 1990s, the average yield for pulses (averaged
across major categories) has risen to barely 600 kg/hectare in the 2000s.
The average annual growth rate in the output of pulses is less than 1 per cent. This is
alarming since pulses are the major source of proteins for Indians and the population
growth is about 2 per cent.
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.
Absence of a cold chain and an inadequate food processing industry. Given these risks,
farmers are reluctant to follow price signals and commit more land to these items instead
of cereals.
Post-harvest waste of fruits and vegetables is as high as 50 per cent, and higher output
simply translates into higher levels of wastage and a collapse in farm-gate prices.
Solution
India is the largest milk producer in the world with an annual output of 9.6 million
tonnes.
The per capita consumption is higher than the minimum consumption norms prescribed
by the WHO.
However, these aggregates are shored up by the success of the cooperative movement in
Gujarat (NDDB or Amul), which began in the 1970s, and a handful of cooperatives in
other states.
A number of states are severely deficit in milk. The result again is sustained high prices
of milk and its impact on food inflation.
Solution : Milk
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.
Obviously by putting direct and indirect taxes on your and me. But even after taxing us,
there is not enough money to run any bogus Government schemes, then what can they
do? Thatll give the answer for
Sovereign debt is the money a government borrows from its own citizens or from
investors around the world.
hen Government doesnt have the aukaat to pay back the Sovereign Debt, it called
Sovereign Debt Crisis.
Once a bond has been issued and the government has the cash the investor can hold
the bond and collect the interest every year until it is repaid. But investors can also buy
and sell bonds that have already been issued on the financial markets just like buying
and selling shares on the stock market.
The price of the bond will rise and fall according to speculation and analysis by experts.
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 theyll pay you 4% of
the Rs.100 until 2014. And on 2014, theyll 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 cant buy even peppermint for Rs.4 and or
b. There is a rumor that Government will default and its payment and wont 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 doesnt 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 wont pay you Rs.100 but
only Rs.90 for your bond. Youre not in a position to negotiate, youre 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 wont 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 priestswhich 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 countrys 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 handouts significantly affects the ideological narratives that are popular in the country.
TimeLine of Events
January 2010
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
EU To Greece: Ok well give you the money to pay off your debts, and we call this money
Bailout money but youll have to shut down your Air Indias and MNREGAs and we call it
Austerity Measures.
PM of Greece: haat an idea sir-ji.
Greece Government introduces the austerity bill in parliament which included following
measures
1. 15,000 public-sector job cuts
2. liberalisation of labour laws (businessmen can easily hire and fire employees)
3. Lowering the minimum wage by 20% from 751 euros per month to 600 euros.
Junta of Greece: Not a good idea sir-ji
and they start rioting on the street. But since Government kept the promise of introducing
reforms, EU gives them billions of Euro as loan.
Ordinary Greeks may queue up to empty their bank accounts before they get frozen and
converted into drachmas that lose half or more of their value. Depositors in other
eurozone countries seen as being at risk of leaving the euro Spain, Italy may also
move their money to the safety of a German bank account, sparking a banking crisis in
southern Europe.
Unable to borrow from anyone (not even other European governments), the Greek
government simply runs out of euros. It has to pay social benefits and civil servants'
wages until the new drachma currency can be introduced.
The government stops all repayments on its debts, which include 240bn euros of bailout
loans it has already received from the IMF and EU.
The Greek banks who are big lenders to the government would go bust.
Meanwhile, the Greek central bank may be unable to repay the 100bn euros or more it
has borrowed from the European Central Bank to help prop up the Greek banks.
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.
If Greece leaves the eurozone, that will send negative impression among the investors all
over the world, that Eurozone countries are not trustworthy, hence theyll not lend to
other countries such as Spain or Italy and if they lend, theyll charge heavy interest rate.
This could leave the governments of Spain and Italy short of money and in need of a
bailout. These two huge countries together account for 28% of the eurozone's total
economy, but the EU's bailout fund currently doesn't have enough money to help them
out.
And as explained earlier, they (Spain and Italy) will have to offer more interest rate on
new bonds, because of the Bond Yield problem.
Nervous investors and lenders around the world may start selling off risky investments
(i.e. Bonds and Equities coming from Greece and similar nations) and move their money
into safe havens. Theyll instead prefer to park their money in the gilt-edged securities
(i.e. the Government treasury bonds of US, Japan, Germany etc.)
Thus on one hand, the Greece, Spain and Italy will have to pay high interest rate to
borrow from market, while US, Japan and Germany can borrow more cheaply.
Problem for India: Creding Rating agencies are not very happy with Indias performance,
theyre unlikely to increase our rating. Meaning, if Mr.X pulls out his money from
Greece or other EU nation, hell most likely put it in US, Japan and Germany but not in
India. Because India is getting negative rantings from Standard and Poors, Moodys etc.
As eurozone governments and the European Central Bank (ECB) face enormous losses
on the loans they gave to Greece, public opinion in Germany may turn against providing
the even larger bailouts probably now needed by big countries like Italy and Spain.
The ECB's role of quietly providing rescue loans to these countries in recent months
would be exposed and could become politically explosive, making it harder for the ECB
to continue to help these troubled nations.
However, the threat of a meltdown might push Europe's or the eurozone's governments to
agree a comprehensive solution either dissolution of the single currency, or more
integration, perhaps through a democratically-elected European presidency tasked with
overseeing a massive round of bank rescues, government guarantees and growth.
Recession in Europe
When investors take out their money from Greece, theyll most likely convert it into
Dollars and invest it US. Means less supply Dollar in the international forex market =
dollar becomes more expensive, youve to offer more rupees to buy same amount of
dollar. 1$ might become 57Rs. = crude oil expensive = everything becomes more
expensive.
Some of above investors may also invest in gold, (After loosing faith in bond market).
Again same supply-demand situation. Gold becomes more expensive.
Investors will become more and more cautious about credit-ratings, they wont dare to
invest in places with negative ratings. In a way, right now India is no better than Greece
when it comes to inefficient bureaucracy, PSU and policy paralysis. Thus Indian
Companies and PSUs will have to offer more interest rates under bond yield problem
(why? Because RBI is not cutting down the Repo rate) = so profit margins falls= less
production = fall in IIP Index = job cuts= demand falls = fall in GDP. Finally, when
GDP growth is negative for two consecutive quarters or more = the Recession.
Seeing the situation of Greece people (Pension and job cuts), the citizens of other
European nations will try to save more and more money for the possible bad times ahead
= less spending on luxery items = less demand for indian textiles, polished dimanonds
and automobiles.
Indian businessmen who exported goods and services to Greece earlier, will have trouble
collecting their money. Because Greek businessman might simply give up saying either
you accept my Drachma or file a court case on me. I dont care. I dont have money.
When Indian businessman cannot collect the payment = job cuts, reduced production=
low IIP. (Impact of low IIP already explained in an old article)
You might wonder- why is Greece against the austerity measures, when the whole world
wants them to do it?
Their logic: if we stop welfare programs and reduce salaries and pensions, then people
will have less money to spend = demand supressed = slowdown.
So instead of cutting the Government expenditure, we should do the reverse, just like
what Lord Keynes suggested, To combat recession, Government should start spending
on public works, thus creating jobs and demand in the market.
Make sure youve read my earlier article on Eurozone crisis, before proceeding further.
Eurozone
1.
2.
3.
4.
5.
6.
7.
8.
Austria
Belgium
Cyprus
Estonia
Finland
France
Germany
Greece
9. Ireland
10. Italy
11. Luxembourg
12. Malta
13. Netherlands
14. Portugal
15. Slovakia
16. Slovenia
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 theyre not members of European Union (EU),
they dont fall under the definition of Eurozone.
A pact between the EU member-nations that theyll not run Air Indias and MNREGAs.
To put this in a refined language:
Eurozone member-nations will pool their money in this fund and during any financial
crisis, the money will be used.
There will be 500 billion Euro in this fund. (Equals to about $620 billion USD)
PIGS countries (Portugal, Italy, Greece, Spain) each will have to give $100 billion in the
ESM fund, but its beyond their Aukaat at the moment.
So, the big players France and Germany will have to bear the burden and give most of the
money.
In fact Germany will give 27% of contributions to the ESM, paying out about 20bn euros
in cash and providing guarantees worth about 170bn euros.
The Left-wing Opposition parties of Germany are unhappy with this Development, they
feel why should we bear the burden for the problems caused by Greece?
German Chancellor Angela Merkel will need 2/3rd majority in Parliament, to first get this
EU treaty approved.
She has made deal with other opposition parties SP and BSP and promised to pause CBI
inquiry against their leaders so theyll vote in favor of the treaty, in Bundestag.
What is Bundestag?
CCI investigation found that the cement companies had intentionally not utilised the
available capacity so that there are reduced cement supplies in the market and they can
raise prices in times of higher demand.
The cement manufactures were instrumental in limiting and controlling supplies in the
markets and determining prices through an anti-competitive agreements.
The commission stressed that such anti-competitive agreements are detrimental not only
to consumers but also to the entire economy as cement is very crucial input in
construction and infrastructure industry, vital for economic development.
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.
Competition Commission of India (CCI) is looking into Public Sector Oil Companies, for
controlling the petrol prices even after prices in international markets fell.
PSU oil firms, which generally revise the petrol rates on 1st and 16th of every month
have skipped changing rates recently. The oil companies have not reduced the petrol
prices citing the excuse that imports are getting costlier due to the falling rupee.
Apart from this, CCI is also watching the Tyre-manufacturing sector.
has been pending for several years, seeks to open the pension sector to private sector and
foreign investment.
If it was passed by cabinet in June 2012, it could be tabled in parliament in the Monsoon
Session starting in July 2012.
But Trinamool Congress, a key ally of UPA opposed it and hence the bill has been put on
backburner yet again.
Trinamools official reason: this PFRDA bill is against the intersest of common man.
Unofficial reason (if one believes the IndianExpress frontpage 08 June 2012), is that
West Bengal Government wants debt relief of Rs.25,000 crores from the Union
Government and unless and until it is given, theyll continue to stall all the bills and
policy issues like FDI in Multi-brand retail, Pension Reform bill etc.
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
Which of the following statements are correct?
1.
2.
3.
4.
5.
6.
o
o
11. Individual Qualified institutional investors (QFI) are allowed to bring up to one billion
dollar in the Debt Market. (i.e. the Bonds market, for explaination read my Debt s
Equity, Bond vs Shares article.) Apart from that, rules have been relaxed to allow entry
of QFIs from gulf countries. More on that given in previous article (click me)
12. New sops for the exporters in foreign trade policy 2009-14.
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 well 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
Slow pace of highway projects, because of the land acquisition issues and environmental
clearance. Strong road-infrastrucutre is a prerequisite for boosting the economy.
Railways is messed up because
o Passenger fares are not hiked due to vote bank politics. And to cover up the
losses, they keep the freight costs high (i.e. the price youve to pay to get goods
delivered from one place to another.) this is called cross-subsidization.
o Higher freight charges = lower profit margin = higher MRP = Supply side
inflation
o Because of the Naxal blowing railway tracks, the Indian Railways doesnt run
many trains through the red-corridor during night hours and the pilots are
instrucuted to drive the train at 30-40 kmph speed only, while going through the
naxal regions = slow transport of men and material = bad for economy.
Most of India's major ports are short on capacity and grossly insufficient in terms of
tonnes of cargo handled and turn-around time for vessels, when compared to Singapore
or Japan. (Example: If you come up with a cargo-ship containing 500MT of goods from
US to India, itll take 2 days to unload the ship in India while itll take merely a few
hours in Singapore, due to the unskilled manpower, lack of latest machinary and lots of
paperwork and bureaucratic procedures.)
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
Prepaid cards work on the theme very similar to prepaid mobile phone cards. All you
have to do is buy a card, load it with the desired amount and the card is ready to be used.
You do not require any bank account to use these cards.
Theyre convenient alternatives to cash and cheques
Theyre issued mainly by banks and Non-Banking Financial Companies (NBFCs) on
payment of specified amount and are used for purchasing goods and services from
limited outlets.
These pre-paid cards which are technically known as semi-closed pre-paid instrument
These instruments do not permit cash withdrawal or redemption by the holder. (i.e. you
buy a card, youve to use it.)
No interest is payable by the bank on such balances.
The maximum value of any prepaid payment instrument shall not exceed Rs 50,000/-.
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)
Now, Finance ministry will do away with the complex multi-level system of Tax
Deduction at Source (TDS) for the IT sector from July 1,2012.
Pranab said, No deduction of tax shall be made on payment by a person (transferee) for
acquisition of software from another person (transferor), being a resident (of India).
Government will amend Income Tax Act for this purpose.
The TDS exemption would be available only when the software is acquired in subsequent
transfer, without any modification.
This could mean that the benefit of TDS exemption will not be available for unbranded
software or customised software.
Rupee Downfall: RBI directive to Oil Cosbuy 50% dollars from SBIs
In the earlier articles, I had talked about the Steps taken by RBI to prevent Downfall of Rupee
(click me if you didnot read it)
Here is one more step taken by RBI : It ordered the Public Sector Oil marketing companies
(OMCs) to buy 50% of their dollar requirements from single public sector bank.
The Oil Companies would seek dollar quotes from multiple banks.Eg. they send email
asking for estimate to every Bank- I need $1 million, how much money will you take?
The banks respond with individual rates, (counting their profit margin) and then the Oil
company will make dollar purchase deal to the cheapest among them all.
Indian Oil Corp (IOC), Bharat Petroleum and Hindustan Petroleum are the biggest buyers
of dollars in the domestic market with nearly $7 billion of monthly purchase.
The oil company sends same I need $1 million email to every bank and that gives an
exaggerated impression of an OMCs demand, sending a wrong signal to the market that
there is a huge unmet need of dollars.
This usually ended up strengthening the dollar against the rupee.
February 2012 : 1$ = Rs. 48
June 2012: 1$=Rs.57
From now on, OMCs have to buy half their daily foreign exchange needs from a public
sector bank like SBI (without bidding)
and the rest half through competitive bids by a panel of banks public and private to
fund their import of crude oil and petroleum products.
This applies to State Run OMCs only.
Because Dollar purchase from a single bank would lead to dependence on a singe bank
for a large volume which might not be in their best interest. (+lack of transparency /
another scam incoming.)
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 companys 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 governments 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 borrowers 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.
adequacy ratio suggests that a bank has a limited ability to absorb losses, given the amount and
the riskiness of the loans it has made.
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 Japans 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 companys 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
A commitment by a government to maintain its currency at a fixed value in relation to another
currency. Sometimes pegs are used to keep a currency strong, in order to help reduce inflation. In
this case, a central bank may have to sell its reserves of foreign currency and buy up domestic
currency in order to defend the peg. If the central bank runs out of foreign currency reserves,
then the peg will collapse.
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 Peoples 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.
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
governments 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
An income payment by a company to its shareholders, usually linked to its profits.
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 UKs 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 borrowers 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 EBRDs 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 Unions development bank. It is owned by the
EUs member governments, and provides loans to support pan-European infrastructure,
economic development in the EUs 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
EFSFs 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.
Fiscal policy
The governments 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 securitys value in the long-term. A companys
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 UKs 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 borrowers 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 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 borrowers 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
A debt or other form of payment obligation, listed in a companys accounts.
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 investors 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 companys lenders and other claimants
are given an order of priority. Usually the tax authorities are the first to be paid, while the
companys 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 banks 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 banks vulnerability to the loss of confidence in a liquidity crisis. Deposits
are typically guaranteed by the banks 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.
Nationalisation
The act of bringing an industry or assetssuch as land and property under state control.
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 Moodys,
Standard & Poors 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 UKs 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 mortgagebacked 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 borrowers
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 markets 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 Greeces 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 troikas 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 ringfenceproposal, 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 companys ability to make payments falling due in the next 12 months. It is
calculated as the difference between the companys 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-tomarket) or due to an impairment charge.
Yield
The return to an investor from buying a bond implied by the bonds current market price. It also
indicates the current cost of borrowing in the market for the bond issuer. As a bonds 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 borrowers bonds will rise if markets think there is a greater risk that the borrower
will default.
Central Board of Direct Taxes (CBDT) has notified that all individuals and Hindu
undivided family will have to file income tax returns electronically for assessment year
2012-13 if their income exceeds Rs 10 lakh.
Currently, business houses with receipts of Rs 60 lakh and professionals with income of
Rs 15 lakh are mandatorily required to e-file their return with digital signature.
electronically filed returns are processed at Centralised Processing Centre (CPC),
Bangalore, and two new CPCs are coming up in Manesar and Pune.
The department also provides some value-added services like tracking of refunds,
viewing tax credit status, e-mail and SMS alerts regarding status of processing and
refunds to taxpayers who e-file their returns.
Central Board of Excise and Customs moniters the e-filling of income tax returns.
Manesar is a city in Punjab
Yogendar Garg Committee is formed to look in the royality issue of coal mining.
From 2012-13, only corporates houses will have to e-file their income tax return.
GST is an indirect tax, that will replace the service tax and excise duty.
They accept money from common people and invest it in shares and bond marks.
And whatever profit / interest they make, they give back to the customer after cutting
their profit Margin.
A mutual fund is a type of professionally-managed collective investment scheme that
pools money from many investors to purchase securities (Wikipedia)
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of
a mutual fund as a company that brings together a group of people and invests their
money in stocks, bonds, and other securities. (investopedia)
Mutual fund company pays Commission to the distributors (those agents / brokers etc),
to market and sell their schemes.
Earlier Mutual funds used to charge 2.25% entry load from customers.
Meaning, if you give Rs.100 to the agent, the mutual fund company will only invest
Rs.97.75 in various shares, bonds etc. while the Rs.2.25 was paid to the agent who
introduced you to the scheme and filled up your paperwork etc.
SEBI chairman believed that it is not good, these middlemen are not adding any value to
the investment. hence he banned Entry load thing from Aug09
Result: the agents started selling other products where Commissions are higher. Mutual
funds started losing clients. After all this mutual fund/ pension /insurance / childplans/
ULIP etc is a game of marketing (and fooling) people.
So in June 2012, the mutual fund-walla went to Finance minister and asked him to
resume the Entry load mechanism.
FM has asked SEBI to look into the matter. So the matter is still being looked into.
SEBI chairman still says that entry loads are not good. At most we can allow MF to
invest in Rajiv Gandhi equity saving scheme (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) doesnt 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).
National Investigation Agency / NIA estimates that over Rs.16,000 crore worth Fake
Indian Currency is in circulation.
Such notes, believed to have been routed from Pakistan, have been seized not only from
India but also from Nepal, Bangladesh, Afghanistan and Holland
Central Economic Intelligence Bureau (CEIB) says that The NIA, the CBI, the DRI and
police have detected only 28 to 30 per cent of fake currency actually circulating in the
market
The quantum of fake currency floating around in the country is enough to keep the
terrorist machinery well-oiled and running.
Price of a fake Rs 100 Indian note in Pakistan varies between Rs 26 and 30 .
During the probe into the 26/11 attacks, the NIA found David Headley too had been
provided with FICN by the ISI for his recce.
government has decided to classify offences involving high-value FICN as terror acts
with an amendment to the Unlawful Activities Prevention Act.
It can be concluded that the notes have been printed on highly sophisticated machines
which a common man cannot acquire, since such machines involve huge capital
investment
There were other similarities between the FICN and Pakistans currency the same pH
value for chemical nature, the same paper density in g/sq m, and clear signs of having
been printed on the same Simultan dry offset press. It proves that ISI and Pakistani state
players are involved in the fake currency game. (besides, Pakistan itself lives on the
charity of USA, how can it finance its war against India, except by printing fake Indian
currency?)
Social security scheme was first introduced in Germany in 1883. Under the scheme, each
member of a particular trade (blacksmiths, painters, weavers etc) was required to
contribute at regular intervals; such funds were originally used for hospital and funeral
expenses and for food and lodging for aged and disabled members.
In USA, Social Security Act came into existence in 1935. (years not important, this is
only fodder material for Essay.)
India has always had a Joint Family system that took care of the social security needs of
all the members provided it had access/ownership of material assets like land and gold.
However with increasing migration, urbanization and demographic changes there has
been a decrease in large family units.
This is where the formal system of social security gains importance.
Item No. 24
Welfare of Labour including conditions of work,
provident funds,
employers liability,
workmens compensation,
invalidity and old age pension and maternity benefits.
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.
includes primarily those establishments which are covered by the Factories Act, 1948, the
Shops and Commercial Establishments Acts of State Governments, the Industrial
Employment Standing Orders Act, 1946 etc.
This sector already has a structure through which social security benefits are extended to
workers covered under these legislations.
Examples: employees of union and state Government, army, navy, airforce, Multinational
companies, Infosys, TCS and so on.
Unorganized sector
Examples
Rural Areas
1. landless agricultural labourers
2. small and marginal farmers
3. share croppers
4. persons engaged in
a. animal husbandry
b. fishing
c. horticulture
d. bee-keeping
e. toddy tapping
5. forest workers
Urban Areas
1.
2.
3.
4.
5.
6.
7.
street vendors
hawkers
head load workers
cobblers
tin smiths
garment makers
Construction workers
6. rural artisans
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
covers factories and establishments with 10 or more employees and provides for
comprehensive medical care to the employees and their families as well as cash benefits
during sickness and maternity, and monthly payments in case of death or disablement
provides for 12 weeks wages during maternity as well as paid leave in certain other
related contingencies.
provides 15 days wages for each year of service to employees who have worked for five
years or more in establishments having a minimum of 10 workers.
today 1/8th of the worlds older people live in India. The overwhelming majority of these
depend on transfers from their children.
Addressing social security concerns with particular reference to retirement income for
worker
In India the coverage gap i.e. workers who do not have access to any formal scheme for
old-age income provisioning constitute about 92% of the estimated workforce of 400
million people.
Provident Fund
1.
2.
3.
4.
1. Just some more fodder for Essay and Group Discussion (GD) taken from IE (Indian
Express). Many ideas repeated
Among the major developing nations, Only Russia has higher inflation than us.
India has the second highest inflation with an average inflation of close to 7 per cent
estimated during the seven years from 2005-12.
What is inflation?
Inflation rate refers to a general rise in prices measured against a standard level of
purchasing power.
High inflation generally signifies that too much money is chasing too few goods,
essentially implying that the demand for goods and services is much higher than the
supply, resulting in an increase in the prices of goods and services. (More on supply-side
inflation, explained in older articles. See the archive on www.mrunal.org/economy
massive investments to ease the supply side problem [such as lack of 24/7 electricity and
water supply to factories, cold storage for agro-products, smooth road-connectivity
between villages and cities and so on]
Government should cut down the subsidies (because theyre mostly misused for example
cheap diesel for running generators that power unnecessary Airconditioners in shopping
malls)
Government should try to divert the public savings into infrastructure, agriculture,
human resource development and so on. [at present public savings go mostly in gold, real
estate, share market speculation]
Private investments from India and abroad will have to be poured in large amounts.
2. Rupee is weakning against Dollar because when there is uncertainty in global market,
investors look for safe havens (to invest) like the US treasury bonds, German bonds and
Gold. You find the entire worlds money is going to all three of these.
3. Indian industrialists should make use of the opportunity because
a. In china, labour wages are on rise, so their manufacturing cost will increase.
b. When rupee is weak (+ our labourers are cheaper than Chinese) then our exports
can become cheaper and attractive in international market.
4. Foreign direct investments must be allowed in retail sector for it would be "highly
beneficiary" for the farmers and be a major thrust to Indian exports.
5. And most importantly India needs governance reforms and corruption control.
Land acquisition is the process by which the government forcibly acquires private
property for public purpose without the consent of the land-owner.
It is thus different from a land purchase, in which the sale is made by a willing seller.
Land Acquisition is governed by the Land Acquisition Act, 1894. The government has to
follow a process of declaring the land to be acquired, notify the interested persons, and
acquire the land after paying due compensation.
Various state legislatures have also passed Acts that detail various aspects of the
acquisition process.
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.
Land Acquisition, Rehabilitation and Resettlement Bill, 2011 was introduced by the
Minister of Rural Development.
The Bill proposes a unified legislation for acquisition of land and adequate rehabilitation
mechanisms for all affected persons
replaces the Land Acquisition Act, 1894
Excluded
1.
2.
3.
4.
5.
provisions of this Bill shall not apply to 16 existing legislations that provide for land
acquisition. These include
The Atomic Energy Act, 1962,
The National Highways Act, 1956,
SEZ Act, 2005,
Land Acquisition (Mines) Act, 1885,
The Railways Act, 1989.
provisions of the Bill shall be applicable in cases when the appropriate government
acquires land,
private companies shall provide for rehabilitation and resettlement if they purchase or
acquire land, through private negotiations, equal to or more than 100 acres in rural areas
and 50 acres in urban areas.
Anti-argument
2.
3.
4.
5.
roads, railways, highways, and ports, built by government and public sector enterprises
project affected people,
planned development or improvement of villages.
residential purposes for the poor and landless.
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.
maximum of five per cent of irrigated multi-cropped land may be acquired in a district,
with certain conditions.
Every acquisition requires a Social Impact Assessment (SIA) by an independent body
followed by a preliminary notification and a final award by the District Collector.
In the case of urgency, the Bill proposes that the appropriate government shall acquire the
land after 30 days from the date of the issue of the notification (without SIA).
This clause may be used only for defence, national security, and conditions arising out of
a national calamity.
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
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).
3. The money is good for economy ONLY if it keeps circulating. For example, you buy
gold and just store it in your locker- it is of no use to economy. But if instead of buying
gold, if you give the same amount of money as loan to xyz businessman (or start your
own business), that helps the economy- creates employment and gets you extra income.
4. Besides, Gold purchase increases current account deficit. (we already saw this multiple
times hence not elaborating again.)
1.
2.
3.
4.
5.
6.
7.
bank accounts,
insurance,
retirement savings plans
stocks, bonds and mutual funds.
understanding basic financial concepts like compounded interest,
present and future value of money,
Investment return, risk, protection and diversification.
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
1. total Government funding or
2. by PPP/ Joint Ventures between the Government and private comany or
3. via Bonds.
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:
District officials, jholachhap NGOs, wife-beater Panchayat members and bootlegger
Municipal corporators (all in one voice): ya, now we just have to create ghost muster-roll and
eat up all the money meant for the beneficiaries, just like we do/did in IAY, PDS, TRYSEM,
MNREGA, SGSY and 50 dozen other schemes named after Nehru Gandhi family! Indeed
Whaat an Idea Sir-ji!
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.
Some folks in the Indian government think that we should simply renegotiate with those
nations and delete the investor-state dispute settlement clause from BIT so no company
can sue us!
But they forget that it is a two way street. Deleting the investor-state dispute settlement
provisions in BITs will negatively affect many Indian companies who have invested
majorly in Africa, Latin America and other countries like Nepal. Because our companies
wont be able to drag their Governments in tribunals if things go wrong.
Some people believe that Government of India (executive) did not cancel the 2G licences,
it was done by Supreme court. Hence, the matter is outside the jurisdiction of a BIT
tribunal.
But a decision of any organ of the state, including the judiciary, can be challenged under
a BIT.
In addition to the executive, sovereign actions of the judiciary and the legislature can also
violate international law contained in a BIT, for which India, as a country, will be liable
in the BIT tribunal.
Some people believe only foreign direct investment (FDI) falls under the ambit of BITs.
But the definition of investment in all Indian BITs covers investment, portfolio
investment, intellectual property rights, rights to money or to any performance under
contract having a financial value or business concessions conferred under law or contract.
Epilogue
eve already discussed some of these topics such as QFI, Rajiv Gandhi Equity Saving
Schemes, Financial Stability and Development Council etc.
Ill 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)
Even if we are not heavily dependent on US for our wheat or corn, the drought situation
in US will create inflation in India. How? Because If US is unable to supply the grains,
the other countries will look for alternatives, so xyz trader of India, who has stockpiled
truckload of corn / wheat, he will find it more lucrative to export it abroad than sell it in
the local market. So less supply in local market= food inflation.
It is for the same reason, every once in a while, Government has to make rules to ban the
export of sugar, onion, rice etc. to control their prices in local market. But then the traders
lobby hard, and give suitcase full of money to the ministers, to lift the ban.
So, here comes another question : should India totally ban export of all food items, to
control food inflation inside India? Think about it.
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.
Earlier SLR was 24%, but on last day of July, RBI changed it to 23%.
That means, if earlier SBI had total Rs.100 Deposited in all its 11,000+ branches, then
SBI would have to park Rs.24 in G-sec but with new RBI rule, SBI will have to park only
Rs.23.
Meaning SBI can take away Rs.1 from its G-sec investment and use it for giving as loan
to regular customers. So, SBI will sell G-sec worth Rs.1 from its suitcase and use that 1
Rupee for lending as House, Car, Business loans to the customers.
SBI has one more rupee to lend to the customers, it'll reduce the interest rate (to seduce
more customers). Thus Interest Rates go down when SLR is decreased.
In real life, 1% decrease in SLR, means SBI alone will have additional Rs.10,000 crores
for lending
And all the banks (SBI, ICICI, Bank of Baroda etc combined), will have more than
68,000 crores for lending.
Now the reverse: If SLR is increased, then banks have less money to lend = they'll charge
more interest rates on loans to keep the profit margin same.
Earlier I said, Banks prefer to park the SLR money into G-Sec, because it is safe and
convenient. But when something is safe the rate of return (profit) is not high.
In case of G-sec, the rate of return on G-sec is 7.5%, while if SBI lends the same money
to customers- it can earn more than 10% (because car and home loans have more than
10% interest rate, usually.)
Just because RBI decreased SLR, doesn't mean all banks will immediately reduce the
loan interest rates (Thank god they don't behave like Oil Companies- who have formed
up sort of cartel, and then rarely reduce oil prices even if crude oil price decreases in
global market.)
Anyways, whenever RBI decreases rates, usually SBI takes the initiative and decreases
interest rates to attract new customers. [Because SBI is a big player with deep pockets, it
can suffer temporary losses to get new customers- just like Wallmart etc. do by offering
huge discounts].
Other banks such as ICICI, will then have to reluctantly follow the suit, to keep up with
the competition of SBI.
For example, on 1st august 2012,
SBI reduced its Car loan interest rate from 11.25 to 10.75% and
Home loan interest rate from 10.50% to 10.25%.
So now if ICICI wants to keep in business, it'll have to reduce its rates. [can't just rely on
Bacchan's advertisement power.]
Usually, RBI would try to manipulate the money supply in the market (and thus control
inflation) by changing the repo rate, and SLR is kept unchanged, but this time, RBI kept
the Repo rate unchanged and instead decreased SLR, why? Again, Think about it.
Earlier, the same department had directed banks to open at least one bank account for
every family living in financial inclusion villages.
Why? = To directly transfer MNREGA wages, Widow Pension etc. into the bank
account.
Government wants to cut down leakage of subsidies and limit the total subsidy burden at
2 per cent of the GDP. (because if lot of crooks are eating away MNREGA / Pensions
etc. in half way, then subsidy bill will be high. So to prevent the crooks, money must be
directly sent to bank accounts of Poor People.)
Therefore in last few months, Finance ministry has undertaken pilot studies for direct
transfer of fertiliser, kerosene and LPG subsidies.
In the Union Budget 2012-13, Pranab had also announced that the Aadhar
platformwould be used to support the payments made under
o MGNREGA,
o old age, widow and disability pensions;
o scholarships directly to the beneficiary accounts in selected areas.
India has rice and wheat stocks exceeding 80 million tonnes. It is 125 per cent higher
than the buffer stock norms.
But the impact of the drought will be felt in pulses especially tur dal (pigeon pea),
coarse cereals, oilseeds and rainy season vegetables.
And the Increase in fodder prices will eventually lead to a rise in the prices of milk, meat
and poultry.
The average annual rainfall in India is 1,160 millimetre, although this is erratic in four
out of ten years.
It has an irrigation potential of 140 million hectares 76 mha from surface water and 64
mha from groundwater
but despite all the technology and Administrative machinary, every year 16 per cent of
the countrys total area and about 50 million people in the country are exposed to
drought like situation, due to poor management and low water utilisation efficiency.
Irrigation
Loans
Insurance
Cut down
Middlemen
hydro power contributes to only about 20 per cent of electricity generation in India, while
in China- the Three Gorges dam alone satisfies 10% of Chinas electricity consumption.
Only about one-fourth (25%) of the India hydro potential has been harnessed. Why?
Lack of vision,
social and environmental activism of Jholaachhap NGOs.
slow decision-making
Weak law-enforcement. (the whole naxal belt- Government cannot start any projects
there)
eve huge potential of hydro power generation in Arunanchal Pradesh but most of the
projects are stalled due to Border disputes with China. (lack of political will.)
The national electricity transmission network links up Indias five regional grids.
some states used more than their quota of power from this network.
Why? Because of the low monsoon, farmers were using more electricity to pump out
more ground water.
So this extra demand of electricity overburdened the system, causing a cascade of
failures.
To cut the burden, power plants were shut down, some automatically because of
computer softwares.
generating stations
load centres or distribution
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
power stations
transmission
lines
Transformers
produce electricity from fossil fuels (coal, gas) or non-combustible fuels (hydro,
nuclear, wind, solar);
carry electricity from power plants to demand centers
reduce the voltage so that distribution lines carry power for final delivery.
If a state draws more electricity than its quota, then it has to pay penalty known as
Unscheduled Interchange or UI rate.
Uttar Pradesh is the repeat offender of grid violation, it has UI penalty bills of several
hundred crores and delays the payments. The state has also taken advantage of a High
Court order under which it does not pay the full UI penal rate.
At present the northern, western, eastern and northeastern regions are integrally
connected through AC (alternating current) transmission links to form what is called the
NE grid.
Few years back, (when there was no recession in US and call centres were booming), the
private players thought that Indias middle class will grow exponentially, and everyone
will buy TVs, fridge, washing machine and computers. Thus demand of electricity will
increase and we could make heavy bucks. So many private players (like Anil Ambani),
entered the game and opened their thermal power stations.
electricity-generating companies in the private sector do not get enough coal from Coal
India, or get the Indian Railways to transport it in time.
And They cannot import lot of coal from abroad (Australia) because it is expensive and
Government controls the electricity prices, so they cannot pass on the cost of import to
the final consumers.
Thus industrialists have started reduced long-term investment in new plants. Some of
them had taken loans from Banks and now showing inability to repay the loan on time, so
banks are also feeling the heat. And adding insult to the injury, Less electricity =
expensive electricity = low IIP, low GDP, high WPI and CPI.
Coal India
it is the Government controlled mining company that has monopoly over digging up coal
through out India.
Environmental clearance : cant 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]
Most local distribution firms are state-owned and all but bankrupt, as local politicians
insist that tariffs stay low and that juntaa especially farmers, get free power- especially
during the election year. And given Indias polity, weve elections round the year- in this
state or that state. So there is no dry year, in which Government can take tough nonpopulist measures.
Lack of modernisation, poor operation and maintenance practices and pilferage (stealing
of electricity) ensure that 30-40 per cent of electricity generated is lost and do not
produce any revenue.
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,
Im republishing two old artices on inflation, because they went missing after I upgraded the
website.
Inflation is as we all know, is the general rise in the price of goods and services. But why does
inflation happen?
There are two major causes / theories behind Inflation
Deposit in his bank account? No, he cannot, because he'll get caught because income tax
department keeps an eye on this. He will be booked for disproportionate assets case just
like Mulayam, Mayawati and Jaya Lalitha.
Should he Invest in the share market? No, he can't do this either, because he has to give
his PAN card number for every purchase and sale of shares, and the income tax
department keeps a close eye on this activity.
So he will use the very time-tested method of hiding black money:
Either purchase gold, silver, platinum, diamonds or
Deposit in the Swiss bank account but he is feeling insecure about it, given the current
activism by media, civil society and judiciary.
or Purchase land, shopping-mall, farmhouse or other real estate: under Benami
Transection
In crude terms, when you purchase the land, property, car with your money but it is
purchased in the name of your relative, friend, daughter-in-law, driver, peon any even a
person that isnt born yet or died a long time ago.
So our beloved Minister purchases quite a few buildings, with the speculation that in
future the price of these buildings will increase. (After all, there is no end to greed, he
already made the cash, but still he would want to make more money out of his money.)
Now we know that the land, or gold or the number of buildings that can be constructed on
a land are in finite amount.
So when normal people like you or me go to purchase an apartment, the builder will
demand more money because there is same supply of apartments in the market but more
people waiting in the line to purchase a home. What happened? Supply same, but demand
increased = price rise.
Same way, the minister would also invest part of his black money in gold and silver, thus
increasing their prices also.
Moneylenders
Minister will also invest some of his money with the moneylenders who circulate it as
loan @36% interest rate to the needy people.
hore 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 Ambanis IPO and then have to
borrow immediately to settle payments. They cant 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 daughters 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) dont 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.
RBI Governor: behold my infinite wisdom and limitless awesomeness. Repo rate is the
interest rate at which we lend the money to banks. Im omnipotent and omniscient so I
say- decrease the repo-rate from 5% to 4%! Those Aam-Aadmis (common men) are
unable to purchase homes thanks to that minister. If I reduce the interest rates, itll bring
some relief to the common men.
SBI manager: good. Lets borrow as much money as we can, from SBI, and then we lend
it to juntaa.
ICICI manager: Im gonna do the same thing!
SBI manager: damn it ICICI manager competition with me, but Im gonna show whos
the real player here. (To his probationary officer) gang up as many annoying telemarking
callers as you can, dial every number in the phone directory, sell our loans and schemes,
If you dont meet the sales-target of 500 policies a month, Ill rip you apart and then
make negative remarks in your performance report.
ICICI manager follows the same suit.
SBI Probationary Officer (To his manager): Sir it is not working. People are not
interested in taking our loans or policies, ICICI is offering unlimited SMS, free callertunes, with each loan. Indian Juntaa loves mobile phones more than toilets. And they
have rallied up Big B to do the advertisements.
SBI Manager: damn it, I should have thought about it. Anyhow, Im going to talk with
MD.
SBI MD: Reduce our interest rates. Then we see whos the real-player here.
Juntaa shifts to SBI loans because of lower interest rate. ICICI also follows the suit and
decreases their interest rate.
No0b loser pathetic college kid to his restaurant owner daddy: I want a Pulsar bike to
impress my friends in college.
Daddy: but I already increased your pocket money last month for Axe-perfume,
Shahrukh Khans Fair and lovely skin whitening cream and John Abrahams sunscreen
lotion!!
Bike Salesman in his makeshift outlet just outside their home: come on sir, we get you
easy loan from SBI.
Daddy: alright damnit.
This way, people get easy loans in their hands and they go out to purchase homes, cars,
bikes.
Businessmen also take loans, purchase trucks, machinery, hire more people in their
company: these people also get more salary (compared to their earlier state of being
unemployed)
and hence people have more money, they demand more products = price rise = inflation.
What if RBI increased repo rate, thus increasing the home-loan interest rates?
People would delay their decision of purchasing a home/car/ etc.
They would instead deposit the money in savings account, or fixed deposit account or
mutual funds.
This will decrease the cash in the hands of people, thus decreasing the demand= inflation
reduced.
Now this is what RBI has been doing throughout last year, RBI Governor kept increasing
the repo rate thinking that this will work.
But it did not work, we did not see any decrease in inflation despite RBIs monetary measures,
hy this tightening of monetary policy wasnt effective? Because of two reasons,
1. The minister/bureaucrat with black money wont decrease his spending. He will not
put his money in banks, he will not delay his decision of buying a new SUV car, goldjewelry or farm-house. RBIs repo rates dont 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.)
They could introduce a national savings certificate or kisan vikas patra etc with scheme
deposit your money in this, get your money doubled in 15 years, and no income-tax will
be levied on it this will make Government employees deposit their extra disposable
income in savings. Thus reducing the moneysupply.
Income tax Department could increase the raids on builders and businessmen.
CBI could increase the investigation speed in NHRM and Mining scams involving
politicians.
Government could relax the Environmental go and No-go areas of coal mining= more
coal= cheaper electricity
Government could permit FDI in retail = middlemen removed = onions cheaper.
And so many other steps that could have been taken but werent taken.
This ends the first theory of inflation: demand pull. Second Theory : Cost Push Inflation in the
next article.
Maruti is producing 1000 cars per month, but the union workers of Maruti go on a strike
and demand higher salary.
Ultimately, Maruti agrees to the union demand, every worker will now get more salary.
But of course the company never pays out of its own pocket and wants to keep the profit
margin same so, the increased cost of car-production is always transferred to the
customers. So the car that used to sell for two lakh rupees, will now sell for 2.17.
Finance Minister reads the newspaper headline Indians have more mobile phones than
toilets. So he thinks, why not increase the excise duty on the mobile phones and use that
Revenue to give more funds under total sanitation campaign (TSC). Thatll help in
building more toilets on the villages.
But of course, the CEOs of Nokia, Samsung or Motorola are not going to pay the money
out of their pockets to finance the toilet building in Indian villages, they'll pass the
increased cost to the customers. MRP of Nokia Lumia is increased.
The cash in your hands is same as earlier, but the MRP has been increased by the
suppliers side.
In all four cases, because the supply of onions is reduced, the restaurant owner will
hat happened? Supply of onion reduced, so restaurant owners input cost increase and he had
to push the menu prices higher.
The Supply of rice is same, the disposable income in your wallet is same, but the
restaurant owner wants higher profit margin, so he decreases the size of every Idli , but
your hunger remains the same, so youll order more idlies and end up paying higher bill.=
Inflation.
The restaurant owner may not be the real-culprit here. Perhaps he is that daddy from the
demand pull pulsar bike case: He had to increase the pocketmoney of his kid for that
axe-perfume, SRKs skin whitening cream and John Abrahams sun-screen lotion.
Thats why he has to increase his profit margin to pay for those unnecessary products.
Or perhaps but real-estate market has gone up thanks to that Ministers in Demand pull
inflation case. And so, restaurant owner has to increase his profit margin to pay for the
house-loan.
As you can see in ^this case, there is never a totally demand pull inflation or totally
cost-push inflation. The final inflation that we feel in our real life, is resulted because
of both of them. (Minister increased demand pull hence Restaurant owner had to increase
the cost-push.) So this brings us to the third theory
Misc GK Stuff
Name
Creeping
inflation
Walking or
trotting
Galloping
inflation
Meaning
Mild inflation
Intermediate range 3 to 7% per year
Higher than walking
Hyperinflation
Stagflation
Final stage, inflation is totally out of control, when it is outside the aukaat
of RBI or Government to control this inflation.
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
A. Hyperinflation.
B. dis-inflation
C. Stagflation.
D. Reflation
E. Inflation
Suppose SBI and BoB (Bank of Baroda) are London based Banks.
If Bank of Baroda borrows money from State Bank of India, say 1 crore pounds for 1
month @12% interest rate.
Then 12% is the London Interbank Offered Rate (Libor).
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 cant be lending to each other at the same interest rate, right?
ell come to that problem very soon but first of all.
In every country, there is one RBI (Central Bank) and there are some SBIs,BoBs etc.
(Commercial banks). Usually, the SBIs take deposits from customers and some loans
When you want to take car- loan, you visit various bank branches, take their brochures, if
youre tech-savvy you might just visit the website of all famous banks and compare their
interest rates, loan terms etc. So, there is total transparency about interest rates,
But when one bank has to borrow from another bank, such transactions take place via
phone-conversations between their executives, there is lot of give and take, bartering etc.
for exampleif your bank promises not to setup any ATM booths around Gujarat university for next
five months and ill reduce the interest rate!
another case
I know your 20,000 crores rupees are stuck in the loan given to that Mallya. So youre in
no position to negotiate. Give me 18% interest else I wont 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.
Every day, 16 banks in London, will send SMS to the BBA Manager, giving the the
interest rate that they are charged to borrow money.
The BBA manager will delete the four highest rates and the four lowest rates. And then
hell take average [mean] of the remaining data.
Thus, The average of the eight remaining rates = Libor rate.
If a bank is weak and unlikely to repay money on time then the rival banks will demand
higher interest rate while lending money to that weak bank.
Means, A bank has to pay a higher interest rate to borrow funds if other lending banks
have less confidence in it.
So, The rate each bank has to pay is in part a reflection of their rivals perception of its
financial strength, effectively how much it is trusted.
This means that the Libor rate gives an indication of the health of the wider banking
sector.
Euribor=plays the same role for banks based in the eurozone.
SIBOR =for Singapore
HIBOR=for Hongkong
1.
2.
3.
4.
In UK, the Banks charge interest rate on home loans according to LIBOR. If LIBOR
increases then home loan interest rate also increases.
Even in USA, majority of the home loans were linked to LIBOR rate (in 2008).
Same case for business loans.
Same case for students (education) loans.
Many Futures and derivative contracts in forex, commodity and oil market are based on
LIBOR rates.
In short, The prices of trillions of dollars worth of financial transactions around the world
are set according to Libor.
Indirect implications are many (both positive and negative), for example, If a
businessman in US or UK has to pay more interest rate for getting loans,
He may increase the price of his products.
he may reduce the number of employees or
he may be outsource the work to India and Philippines to reduce the operational costs.
he may scale down his operation, thus reducing the amount of raw material / input
products imported from India. and so on
Recall the earlier statement: A bank has to pay a higher interest rate to borrow funds if
other lending banks have less confidence in it.
If youre Managing Director/CEO of a Bank, you wouldnt like to report the higher
interest rate of borrowing. Because that means other banks have less confidence in you.
Imagine what consequences it can bring?
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 companys 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?
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.
Barclays money was stuck in USA around 12 billion dollars worth of toxic assets. So
Barclays 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.]
Its not that Bob Diamond himself sends fake SMS from his Nokia 1100, theyd 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.
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.]
You already know that BBA manager will receive 16 SMS every morning, hell remove
the top 4 and bottom 4 values and take average of the remaining values and publish that
number as LIBOR rate for that day.
If even a single SMS [value] is incorrect, then hell get a wrong average [LIBOR].
In our case, Barclay is reporting lower than usual, while some other banks are reporting
higher than usual, so overall the Average (LIBOR) increased.
So all these years, BBA manager was publishing wrong LIBOR, because he wasnt
getting the right data from Barclays and other banks.
And because of the Wrong LIBOR rate, the UK and US citizens had to pay higher
interest rates on home, student and business loans [because their banks set the
home/education/business loans interest rates according to LIBOR rate]. Similarly
investors in Forex, Commodity etc. market ended up paying more than necessary money
for the contracts, because their contracts were linked to LIBOR.
Timeline of Events
2008
The Wall Street Journal (WSJ) published an article on this activity of sending wrong
data.
20112012
Jun
2012
Barclays Bank was fined $160m by the United States Department of Justice, $200m
by the Commodity Futures Trading Commission, and 59.5m by the Financial
Services Authority for attempted manipulation of the Libor and Euribor rate.
July
2012
August
2012
Innocent aspirants of UPSC, Bank and MBA are forced to learn one more topic for the
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.
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.
Ever since its formation, it has failed to acquire any overseas coal assets either through
bids or through takeovers.
This non-performance by ICVL has spurred members to quit the ICVL.
So on one hand you cant dig enough coal from India, on the other hand, you are not
acquiring enough coal from abroad. What will happen?
a. WPI will increase
b. IIP will decrease
c. GDP will decrease.
d. All of above.
NTPC has already quit from this ICVL because of its non performance.
Of the remaining four members, three are under the administrative control of the steel
ministry and are consumers of metallurgical coal to be sourced through ICVL.
Whereas Coal India (CIL) itself is a coal seller.
So, the business interest of CIL would be seriously compromised if it remains in this
ICVL gang.
Therefore, Coal India is also thinking about quitting ICVL gang.
Mock Questions
Q1. Match the following
1. Rashtriya Ispat Nigam Ltd (RINL)
2. National Thermal Power Corporation
3. Coal India Limited (CIL)
4. Ministry of Steel
Scheduled banks are those banks which have been included in the second schedule of the
Reserve bank of India act of 1934.
The banks included in this schedule list should fulfill two conditions.
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 !? ]
Private Sector
Majority stakes are held by private players.
1. ICICI,
2. HDFC,
3. AXIS Bank
Rs.100
-15
-38
100-1538=Rs.47
Salary to Bank PO , Clerks, peons and security guards (With rusted guns)
Office rent
ATM machines electricity and maintenance.
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
Lets 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 relend 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 hes 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.
RBIs main job = control inflation by controlling money supply in the market.
Too much money in the market =easy to get loans= not good. Because Itll 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 itll
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 doesnt 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 RBIs 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.
65 lakh crores
65 lakh crores x 4.75%=around 3 Lakh crores
sitting idle in RBI lockers.
3 lakh crores x 0% = Rs.0
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 dont 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, USAs 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
theyre talking about USAs RBI changing their repo, SLR etc. rates
Interestingly, USAs RBI (Feds) pays interest on the CRR deposits, while Indias RBI
doesnt 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.
Timeline of Events
Early 90s
CRR used to be as high as 15% and SLR used to be as high as 38.5%, thus making
life of businessmen and aam juntaa difficult.
1992
1996
1999
2007
2010
2011
Throughout the year, RBI keeps increasing Repo Rate to combat inflation.
Repo rates gets as high as 8.50%.
August
2012
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 chiefs 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
to learn one more topic i.e. CRR controversy.
Bank Rate= 9%
Repo = 8% (reverse repo would be obviously 8-1= 7%)
CRR= 4.75%
SLR= 23%
Mock Questions
Q1. Which of the following statements are incorrect?
a.
b.
c.
d.
Repo rate is the interest rate paid by RBI to banks on short term deposits.
A decrease in repo rate will increase the home loan interest rates.
HDFC is a Non-scheduled Commercial bank.
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?
What is FCRA?
To check that foreigners are not affecting Indias electoral politics, public servants,
judges, journalists, NGOs etc. for wrong purposes.
If someone violates the FCRA act, he can be sent to jail for up to 5 years.
Earlier Mohan said that US based NGOs are financing the protests @KundanKullam
Nuke Power Plant.
So Home ministry got in action, bank accounts of some NGOs were frozen after it was
found that they were diverting money received from their donors abroad into funding
protests at the Koodankulam plant.
Now, Home ministry has cancelled some more registrations including top 8 national
educational institutions such as -Jawaharlal Nehru University, IIT-Kanpur and Jamia
Milia Islamia saying that these institutes are not maintaining proper FCRA accounts.
so, Unless their registrations are restored, these institutions cannot receive contributions
from abroad.
Controversy
The Home Ministry had earlier made a notification that if xyz organizations accounts are
audited by CAG then it doesnot need to maintain FCRA accounts.
Jamia Milia, JNU etc. = Central Universities = hence audited by CAG = They dont need
to maintain FCRA accounts in the first place.
Mock Questions
Q1. Which of the following statements are correct?
1. Finance Ministry is responsible for implementing Foreign Contribution Regulation Act
(FCRA)
2. Kundankullam Power plant is located in Andhra Pradesh.
3. A Lok Sabha election candidate can accept foreign donations for campaign after taking
necessary approval from Chief Election Commissioner.
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 Indias 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?
It will ensure the availability of external physical infrastructure linkages to the PCPIR
For example, Rail, Road (National Highways), Ports, Airports, and Telecom, in a
time bound manner.
This infrastructure will be created/upgraded through Public Private Partnerships to the
extent possible.
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.
Hence, if the final consumers (you and I) used energy efficient products then power
stations would have to produce less energy = less pollution, less input costs etc.
Itll be mandatory for all passenger car makers to display special star labelling
indicating fuel efficiency for their product cars, from April 1, 2013,
This star-rating (based on a five-star scale, with five being the most efficient and one the
least) will help compare the fuel efficiency of different car models within the same
weight class.
BEE defines cars in five-star category are those which roughly consume up to 7 litres of
fuel for 100 kms
For smooth functioning of business and industry, Quick decision of any commercial
dispute is necessary.
Internationally, it is accepted that normally commercial disputes should be solved
through arbitration and not through normal judicial system
An arbitrator is basically a private judge appointed with consent of both the parties.
Object of arbitration is settlement of dispute in an quick, convenient, inexpensive and
private manner so that they do not become the subject of future litigation between the
parties.
Arbitration Act
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 Itll create a more investor-friendly atmosphere for
foreign companies intending to set up shop in India.
Insurance is a subject listed in the Union list in the Seventh Schedule to the Constitution
of India.
That means only Union Government can make laws on insurance (a state Government
cannot make law on this subject)
IRDA
Insurance Ombudsman
Receive and consider complaints in respect of insurance from any person who has any
problem against an insurer.
pass an award within 3 months after receiving complaint.
Insurance companies are required to honour the awards passed by an Insurance
Ombudsman within three months.
If the policy holder [customer] is not satisfied with the award of the Ombudsman he can
approach other venues like Consumer Forums and Courts of law for redressal of his
grievances.
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. youve to make regular
payment to Dish T/Tata Sky etc., we call it subscription.
Similarly to get insurance protection, youve to make regular payment to the insurance
company, we call it premium.
General Insurance
Name
Personal Insurance
policies
Sub categories
medical insurance, accident, property and vehicle insurance
protection against natural and climatic disasters for agriculture and rural
businesses
Industrial Insurance
coverage for project, construction, contracts, fire, equipment loss, theft,
policies
etc.
Commercial Insurance protection against loss and damage of property during transportation,
policies
transactions, marine insurance etc.
Rural Insurance policies
Endowment
Term Plan
ULIP(Unit Linked
Insurance Policy)
You pay the premium till you retire or till the term of the policy.
Your family will get money ONLY after you die.
You MUST DIE to get back the money.
Insurance company collect premium form the insured for the
certain period of time like 15, 20, 25, 30 years.
If you die within that term, the company will pay huge money to
your family.
If you dont die within that term, company will return the
premium you paid + some interest or bonus on it.
So, you DONOT NEED TO 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 dont die within that period, you will not get a single
penny from the company.
So, you MUST DIE to get back the money.
Good part- Term Plans have cheaper premium than other plans.
You pay regular premium to the company.
Company invests it in Debt and Equity markets. [click Me to
know more about Debt and Equity Markets]
The profit generated by this investment, will be given to you no
matter you die or not.
Thus you get the benefit of risk cover as well as the investment
gains.
You DONOT NEED TO DIE to get back the money.
They pay higher return than Endowment.
up to 26% is allowed.Update: 49% allowed after Mamta Left the UPA alliance.
For example Bajaj Allianz Life Insurance Company Limited is a joint venture between
o The Indian Company Bajaj (that scooter maker, has 74% stakes in this company.)
o The Foreign Company Allianz AG (German Company, has 26% stakes in this
company)
Similar arrangement was present in Max New York Life Insurance Company But the
New York Life sold its stakes and left the game hence the new name of the company is
Max Life Insurance Company. [You might have seen the ads on TV about its name
change.]
If an Insurance company has been in business for 10 years, it can launch IPO.
Mobility / Portability in Health Insurance= if youre unhappy with your Health (Medical)
insurance company, you can change it.
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.
Mamatha: But Im opposed to FDI in Retail, Insurance and Aviation.
Mohan: Ok I drop the idea sir-ji.
LIC
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 crorethat 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 crches in factories where more than 25 women are employed
gives immunity to the trade unions against certain forms of civil and criminal action.
Provides for registration, internal democracy, a role for outsiders.
permission for raising a political fund subject to separate accounting requirements.
right to register a trade union however does not mean that the employer must recognise
the union there is in fact no law which provides for recognition of trade unions and
consequently no legal compulsion for employers, even in the organised sector, to enter
into collective bargaining.
This law governs the methods to fix minimum wages in scheduled industries (which may
vary from state to state).
Workers have the right to strike, even without giving notice to their boss, unless it
involves a public utility service.
Employers (bosses) have the right to lockout, subject to the same conditions as a strike.
To solve the strike/lockout, both parties can engage with negotiation/talks.
If that fails, they can go to government appointed conciliation officer whose intervention
may produce a settlement, which is then registered in the labour department and becomes
binding on all parties.
If that fails then parties can go for arbitration (private judge) or labour court.
A company with more than 100 workers must get Governments permission before mass
layoffs or closing down business.
Employer cannot change the existing service conditions / salary of a worker unilaterally
without giving a notice of 21 days to the workers and the union.
A permanent worker can be removed from service only for proven misconduct or for
habitual absence due to ill health, alcoholism and the like, or on attaining retirement
age.
In other words the doctrine of hire and fire is not approved within the existing legal
framework.
An employee can challenge the dismissal order in the labour court.
Industrial Disputes Act provides for setting up of Labour courts and Industrial tribunals.
Labour Courts
Industrial Tribunals
Industrial Tribunals deal with collective disputes such as
1.
2.
3.
4.
5.
wages,
hours of work,
leave, retrenchment,
closure of a company
+ 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.
covers all cases of accident arising out of and in the course of employment and the rate
of compensation
The injured person, or in case of death the dependent, can claim the compensation.
This law applies to the unorganised sectors and to those in the organised sectors who are
not covered by the Employees State Insurance Scheme
provides a scheme under which the employer and the employee must contribute a certain
percentage of the monthly wage to the Insurance Corporation and itll run hospitals for
them.
Retirement Benefits
There are two main types of retirement benefit generally available to workers.
Payment of Gratuity Act
Emigration Act
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
Established in 1919
HQ- Geneva, Switzerland
India is the founding member of ILO
International Labour Organization has a tripartite governing structure, (usually with a
ratio of 2:1:1)
1. representing governments,
2. employers
3. workers
Ministry of Labour
[^This list not exhaustive, Im 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.
Implementation of Employees State Insurance Act, 1948, which provides for medical
care and treatment to insured persons and their families.
Providing assistance in terms of benefits during sickness and maternity, compensation for
employment injury, pensions for dependants on the death of workers due to employment
injury, etc. to employees covered under the ESIC Act.
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.
This is very dangerous; you need do fiscal consolidation immediately!
reference books either, so Im unable to recall the concepts right now, just like a no0b
player of UPSC.
Kelkar
Well fiscal deficit (FD) = Budgetary Deficit + Market borrowing + other liabilities of
Government
Outgoing
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: see the table yourself for the examples.
Incoming money
Outgoing
Tax Revenue
Direct Tax
1.
2.
3.
4.
income tax
Corporate tax;
Wealth tax
Capital gain tax
Indirect Tax
1. custom
duty,
2. excise duty,
3. service tax.
Plan
Non
Plan
(Vodafone case)
4. VAT
Outgoing
Tax Revenue
Direct Tax
1. income
tax
2. Corporate
tax;
3. Wealth
tax
4. Capital
gain tax
(Vodafon
e case)
Indirect Tax
1. custom
duty,
2. excise
duty,
3. service
tax.
4. VAT
Non Tax
Revenue
1. Fees
Collecte
d
(Drivin
g
license,
RTI,
Passport
)
2. Fines
and
Penaltie
s
(Traffic
violatio
n etc)
3. Income
from
PSU
(e.g.
profit
from
Airindia
(lolz)
4. Gifts.
(discuss
ed in 2nd
ARC
article)
5. Grants
(Foreig
n Aid
Plan Expenditure
1. MNGREA
2. Janani
Suraksha
Yojana
3. JNNURM
4. Indira
Awas
Yojana
Non Plan
1. Salary of
judges,
bureaucrats
and armymen
2. Buying new
tanks and
missiles
3. Subsidies:
Petrol,
Kerosene etc.
4. Light bills of
Government
offices.
5. Luxury Trave
l bills of
Pratibha.
from
UN,
Japan
etc)
Types of Budget=Deficit,Surplus,Balanced
When
It is called a
In the 1980s, Sukhmoy Chrokroborthy Committee came up with the fiscal deficit formula
Fiscal deficit=
1. Budgetary deficit (=total Expenditure minus total income)
2. +
market borrowings (=through Government securities (G-Sec)/Bond)
3. +
other liabilities (e.g. pension and provident to be given in future)
Mohan: but why should we calculate this 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
within India (internal borrowing from RBI, Other banks etc)
Mohan then simply borrow money and fill up the pothole! What is the problem?
problem is Paisaa Ped pe toh nahi lagtaa (Money doesnt grow on trees). hen you
borrow money, youve to pay interest (
) to the party, every year.To pay this
Kelkar
interest in the future, youve 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 thats Easier said than done :(
Kelkar
Then Third option : Print more currency and use it to fill up the pothole. This is
called debt monetization.
Actually thats the stupidest of all three solutions. Let me explain with the usual
example.
So, there will be one customer offering Rs.400 per kilo of onion, then another guy would offer
Rs.500 per kilo of onion=inflation =not good.
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.
Thats why giving you 10 lakhs doesnt 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.
Hence printing money to solve problems= not good idea.
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 hasnt 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.)
If the money that the Government had borrowed was used to increase the amount of
wheat production, then the inflation could have been avoided. (for example borrowing
money to create new canal or irrigation project)
If Such irrigation project led to an increase in wheat production from 10,000 quintals to
11,000 quintals.
In that case, even with an increase of money to 1.1 crores, the cost of wheat would
remain steady at Rs. 1,000 per quintal.
Thus wed have economic growth and also avoid inflation
Clearly then, it was a good thing that the Government borrowed money to implement
this program.
It can mean that the Government is spending money on unproductive programmes which
do not increase economic productivity. (For example MNREGA, most of the money is
eaten midway by the Sarpanch and Local officers.) =Bad
Now these rich Sarpanch and Local officers buy more gold, land and cars= demand
increased but other normal people dont have that much money = inflation. (demand pull
type).
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.
This hypothesis says that as the fiscal deficit of the country goes up its trade deficit (i.e.
the difference between exports and imports) also goes up.
Hence, when a government of a country spends more than what it earns, the country also
ends up importing more than exporting.
In India, the trade deficit story is basically about oil and gold two commodities that the
country does not produce much but imports a hell of a lot.
When India imports more than it exports = leads to Current Account Deficit. (we already
discussed it earlier, click ME)
CAD is another pothole but it can be filled only with foreign currency (mostly dollars!)
This increases the demand of dollars in Forex Market = rupee weakens against dollar=
price of petrol will increase= again inflation= bad.
the government of India does not pass on a major part of the increase in the price of oil to
the end consumer and thus subsidises diesel, LPG and kerosene .
So oil companies sell at a loss, and the government compensates these companies for the
loss (by giving them bonds).
This increases government expenditure, which, in turn, increases the fiscal deficit.
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?
There are two ways to express Fiscal Deficit.
1. Absolute Value: Rs. 521,980 crores on March 31, 2012 .
2. Percentage: 5.9% of GDP.
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.
Kelkar
Fiscal consolidation means doing everything to fix the fiscal deficit problem in its root
and preventing heavy fiscal deficits situation from occurring in future.
+ 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 dont have to implement its recommendations). Let me check my phonebook for
retired judges.
Kelkar
Sir this is the matter of economy not railway accidents. It requires an expert on
economy.
but Media wont like his recommendations. (Everyone who earns more than Rs.20 is not
a BPL and he should pay 10% income tax.)
Mohan Then make a Committee headed by some columnist from The H*****!
Kelkar
But Madam-ji wouldnt like his recommendations. (hand over Finance Ministry to Fidel
Castro)
and now youre 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, Ill give you a miss call.
Kelkar PM and miss-call? Another joke?
Mohan
No, Im serious! Miss call= Government expenditure on phone bills reduced= fiscal
consolidation.
Mock Questions
Which of the following statements are correct?
1.
2.
3.
4.
5.
6.
7.
8.
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, well need to increase the incoming money and reduce
the outgoing money. Now, let us check some of the important recommendations of this Kelkar
Committee.
Recall that fiscal deficit = Governments incoming money is less than its outgoing
money.
Thefore Government should take some measures to increase tax collection.
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.
If Direct Taxes Code Bill, 2010 is implemented in its present form then there will be
considerable tax losses to the Income Tax department.
Hence it (DTC bill) should be comprehensively reviewed.
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.
Thats 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.
What is PAN, why is It used- all discussed in earlier articles. But still here is the brief
recap:
PAN is an all India, unique ten-digit alphanumeric number.
PAN card is issued by the Income Tax Department. It does not change with changes in
address or place.
This an example but dont be surprized, anyone can get PAN card. (=You dont 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 theyve the proof of residence).
Please check this chart uploaded on official UID site. Extremely important for MCQs.
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.
Income Tax dept should create a 360 degree orkut profile of all taxpayers.
This will help decreasing tax evasion and tax fraud.
Online verification of PAN could be made mandatory for all high value transactions, in
order to reduce black money transactions.
Thus, if Government takes above steps then direct tax collection would increase.
If a company or individual doesnt pay his taxes on time, then Government should charge
22-24% interest rate on his pending tax payments.
Kelkar says Mohan should reform Union Excise Duties (UED) and Service Tax (ST) so
that they can be smoothly intergrated into upcoming Goods and Services Tax.
At present, many activities are outside the service tax regime, for example Department of
Post, renting houses, Funeral services etc.etc.etc.
Negative list= It is a list prepared by Government. It contains the names of services,
which are exempted from Service tax. You can download the entire list by clicking me
Kelkar says, this Negative list should be pruned (=trimmed, cut-down, shortened,
condensed). That means, give exemption to very few activities.
For example:
Kelkar agrees that it is difficult to implement GST from from 1st April, 2013 (because
many states are opposed to it)
But Government should atleast try to pass the Constitutional Amendment relating to
introduction of GST, in the Winter Session of the Parliament.
This would send out very strong signal to trade and industry about Governments serious
intent to move forward on this issue.
Once the GST is implemented, it will automatically increase the industrial output, exports
and (thus) the tax revenues.
Anyways back to business. e were talking about Kelkars recommendations on Excise duties.
Government of India charges excise duties on various goods produced in India.
For example
Kelkar says review the list of goods under 6% excise duty. Only Merit Goods should have
Union Excise Duty of 6%. And for the other items, collect 8% excise duty.
Merit goods are products, such as education, library, museum, vaccination which
consumers may undervalue but which the government believes are good for consumers
as they exhibit positive externalities.
ok now what is Positive externalities? I think we discussed that in earlier articles, but
again
What is Externality?
Negative externality
I take admission in some pharmacy college. (ME and college are buyer and seller of
education). But the college is bogus and doesnt 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 Im not very skilled pharmacist! (this is an
example of Negative Externality)
Positive externality
IF all kids are given policy vaccine by Government, then then Indias 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.
He also suggested some more ways to increase incoming money.
money would be used to finance bogus Government schemes and to revise other PSUs, if
theyre 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.
You already know about shares and dividend. If not, then go through the same debt vs
equity article.
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 doesnt want complete elimination of subsidies. He says we
shouldnt 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.
Descriptive
150 words
1. What are the major recommendations of Kelkar Committee on fiscal consolidation?
2. Salient features of DTC Bill.
3. Salient features of proposed Goods and Services Tax.
Interview
1. What is fiscal consolidation?
1.
2.
3.
4.
5.
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 Itll 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
National Health Mission (NHM),
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA),
Pradhan Mantri Gramin Sadak Yojana (PMGSY)
Integrated Child Development Scheme (ICDS)
National Rural Livelihoods Mission (NRLM).
1.
2.
3.
4.
Nowadays much of the growth process is now driven by actors outside the direct control
of government.
These actors are : farmers, entrepreneurs, corporate houses and market forces.
This, however, does not mean that government has no role to play in the development
process.
Government has important role to play in Indias Growth.
There are four areas, where Governments role is essential:
providing a policy environment (FDI, environment clearnaces, land acquisition etc)
Developing infrastructure (roads, dams, powerhouses, ports, railways etc)
Supporting poor and vulnerable groups. (through various schemes)
Providing essential public services (police, fire, health education, drinking water,
sanitation etc)
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
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 Governments 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
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.
Indias position today is roughly comparable to Chinas 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.
Eleventh Plan had set a target of having 500 million individuals in the labour force with
some formal training by 2020.
There is National Skill Development Council under the chairmanship of the prime
minister.
But Government must Involve the private sector in skill development, because it
increases the likelihood that the skills imparted are marketable.
(we already discussed this in length, in the two kelkar articles) but still
Fiscal deficit can be reduced through two pronged strategy
most important initiative in this context is the Goods and Services Tax (GST)
Because implementation of the GST involves a constitutional amendment, a successful
outcome may take time
but once achieved, it will be a major achievement.
Cross subsidy in crude term means that Railways doesnt increase passange train ticket
price and makes losses. So to cover these losses, it increases the freight (goods, coal etc.)
transport prices. And thus indirectly increases the inflation.
Solution: freight tariffs should be lowered and passenger fares raised.
Use new practices such as land levelling, use of drip irrigation, zero till cultivation,
raised seedbed planting
in the case of rice, adoption of the System of Rice Intensification (SRI).
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
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. Apples 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 doesnt have enough extramoney/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.
At present, Governments policy/ attitude is that if give the farmers huge subsidies in
electricity, seeds, and loans, then agro-productivity will automatically increase.
But Government should focus more on changing in farming practices, introducing new
technology. So that farmers become less dependent on subsidies in the long run.
MSME
If Government wants to move people out of agriculture, then Micro, small and medium
enterprises (MSME), are generally more labour absorbing,
MSME are also potential seedbeds for innovation and entrepreneurship.
So Government must provide policy environment to encourage the growth of these
industries and this does not mean sops and subsidies. But instead, give them
first class infrastructure which includes both reliable electricity supply at reasonable cost.
Regional imbalance
1.
2.
3.
4.
5.
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
No naxalite problem
No kidnapping and extortions.
Sufficient electricity and water supply
Quick land acquisition and environment clearnaces.
Rationalise our labour laws to give employers more flexibility to shed labour when faced
with a downturn.
Infrastructure Development
the current processes are often not sufficiently transparent and predictable.
We need to move to a system with much greater transparency, predictability.
road map for new private sector banks and foreign investment in banks,
deregulation of the savings rate offered by banks
increasing FDI in pension, insurance etc.
passage of the Pension Fund Regulatory and Development Bill,
passage of the Company Laws Amendment which will modernise bankruptcy
proceedings.
creation of the Public Debt Management Office outside the RBI
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 nononventional resources.
but it must be recognised that the subsidy implicit in the present low prices of kerosene
and LPG is completely untargeted.
In the case of kerosene, it also leads to large-scale black marketing, adulteration and
criminalisation.
Solution: Implementation of a unique identification number.
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.)
expand domestic production of petroleum, natural gas and also coal to avoid excessive
import dependence
Coal production
We must also take steps to exploit the full potential of other energy sources notably
nuclear, solar and wind power.
Both nuclear and solar power are more expensive than coal / gas power plants and
While increased reliance on solar/nuke sources will contribute to energy security, reduce
climate change, but it does imply higher energy costs.
But Costs can be expected to come down as technology develops further. (e.g. compare
price of Desktop PC in 1998 vs 2012)
Nuke
Solar
Hydro
Can make huge dams in Arunchal Pradesh and generate thosands of MW electricy.
Problem: border disputes with China.
Indias available supply of fresh water is the same as it was 5,000 years ago, and the
population has grown.
excessive withdrawal of = water table gets low =land salinity increases = agriculture
output decreases.
If things are left to business as usual, the situation will worsen steadily.
Solutions:
1. building storage dams,
2. investing in watershed management to improve surface water retention a
3. groundwater recharge
4. forcing industry to treat waste water for reuse.
5. About 80 percent of Indias water use is for agriculture and it is technically
feasible with better agricultural practices, to reduce water use in agriculture by 40
percent to 50 percent
6. land levelling drip irrigation
Water price
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.
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
Government schemes
In following schemes, the Complaints of leakages, inefficiency and corruption are widespread
1.
2.
3.
4.
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
harvesting these crops and delivering it to the ethanol plant, producing the ethanol, and
distributing it the oil company = it doesnt remain environmentally neutral. i.e. more
CO2 is produced in making ethanol blend petrol, than the amount of CO2 emittion
reduced by using such blended petrol.
India is the second largest sugarcane and sugar producer in the world. (Brazil is 1st)
In Brazil, blending is mandatory up to 25 per cent of ethanol with petrol; and pure
ethanol can also be used by flexi-fuel cars.
Even Pakistan has 10% blending!
So, in 2007, Govt of India came up with the idea of making 5% ethanol blending in
petrol.
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 Itll make the ethanol blending rules/policy.
o or It may form another GoM to study the recommendations of this GoM!
Suppose a party from Delhi pays you via cheque of Citibank and you have account in
SBI, Ahmedabad. You deposit this cheque in your areas SBI branch.
Now the SBI branch manager would send his [overworked, underpaid] Bank PO to
Citibanks office in Abad. Hed show the cheque, collect the cash and return to deposit
the money in your account.
But SBI would be getting thosands of cheques everyday- some from ICICI, some from
Citibank, some from axis and so on. SBI cannot send its staff to every other bank to get
the cash, thatd be extremely time consuming.
Therefore To simplify this cheque transection process, each bank will send a
representative to a central place and exchange cheques drawn on each other.
This centralized place is called clearing house/processing house.
Reserve bank of India is act as clearing house.
In cities where RBIs office doesnot exist, usually SBI or other public sector bank acts as
the clearing house.
By seeing the PIN code, a postman can know the destination of an envelope. Same way
by using the MICR code, RBI (clearing house) can know the name of a bank, location of
its branch from where the cheque was issued= faster clearing of cheques.
MICR = Magnetic ink character recognition.
At the bottom of every cheque, youd see some black colored numbers with weird
looking fonts. That is the MICR code.
These numbers are printed with a special ink containing iron oxide, so that it can be
automatically read by a special machine.
Ofcourse this sounds similar to bar codes, but there is a difference: unlike barcode, you
can read the MICR code and decode it, without the use of special machines.
Under the old paper cheque based clearing, the SBI bank will send the paper cheque to
the clearing house and get the money and then transfer it to your account.
This is still time consuming. because SBI (or any bank) would need to physically move
the cheques to a clearing house.
So RBI came up with a new idea known as Cheque Truncation System (CTS).
In this Cheque Truncation System (CTS), SBI branch will not send the paper cheque to
the clearing house, but instead, itd merely scan the cheque, and electronically send the
image + MICR data, to the clearing house.
From the clearing house, the data would goto the paying bank (Citibank in our example),
they will inspect the MICR data, signature on the scanned image and release the money
to SBI.
This process is faster and more safer than the conventional paper-cheque clearing
method.
It Eliminates the time, money and manpower wasted during physical movement of
cheques (from banks to clearing house).
Thus, Cheque Truncation =faster clearing = better service to customers,
Cheque Truncation system reduces the scope for clearing-related frauds
There is no fear of losing cheque in transit.
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 RBIs CTS 2010 guidelines.
Hence recently RBI issued a warning to all banks:
RBI Governor:
Branch
manager of
Lena Bank:
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
1. IMF
They give short-term loans to help nations settle the balance of payment crisis.
Theyve a system called SDR :Special Drawing rights. (requires another article)
2. World Bank
o Officially known as IBRD :International bank for reconstruction and
Development, that time
o They give long term soft loans to rebuild the third world.
o Soft loans= interest rate is very low. Sometimes you dont have to pay back the
principle.
3. GATT (General Agreement on Trade and Tarrif) later becomes WTO
o To facilitate the international trade.
o This will later become WTO. Already written an article on this.
4. Fixed Exchange Rate system. (although Discarded in 1970s)
o Explained in this same article.
o
o
Absent from the meeting: Mohan, Montek, Pranab, and Chindu (good otherwise theyd
have messed up International Economy, just like they did to Indian Economy.)
India was represented by Sir C.D. Deshmukh, he was the first Indian Governor of RBI,
This gentleman had cracked IAS exam in British-raj ,known as ICS exam in those days.
And No, he is not the grandfather of Ritesh Deshmukh.
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), theyll introduce
their own national currencies without control of big superpowers (Britain, France etc) and
theyll 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)
Under this system, if RBI says $1=30 rupees, and youve 30 rupees and want to convert
it in dollars but the Foreigners are willing to give 1 dollar to youdont worry.
RBI will accept your 30 rupees and give your one dollar out of its own reserve and vice
versa.
Cons are obvious : When India is not exporting enough and not attractive enough foreign
investment (in dollars) and still RBI keeps paying people in dollars, one day the bank
lockers will be empty, there will be no dollars to pay. System will collapse.
But it has Pros (advantages) in the times of uncertainty- When youre writing on a clean
slate, after WW2, if every nation decides to have a fixed exchange rate system- it leads to
stability and predictability in Exchange rates = good for foreign trade.
President Roosevelt: dont worry, come to IMF. Theyll 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 Ive the aukaat to pay enough gold, so I say dollars will be the
international reserve currency. IF youve enough gold reserve in your RBI, come sit in the chair
and well 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 dont 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 noI was just kidding man. Im well aware that youre the superpower both
financially and militarywise.
President Roosevelt: Besides hen weve a stable and fixed exchange system like this, itll
ensure smooth and long term trade deals between merchants of various countries. When you
dont have fixed exchange rate system, it is bad for economy. For example, today your callcenter 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. Ill 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 RBI (US Treasury).
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.
Theyre 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, theyre basically wasting
money.
Now, USA gets involved in a very lengthy and expensive Vietnam War from 1959 to
1975.
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 RBIs 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 indias
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 Americas 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. Im 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 dont fix exchange rates
here. It is left to the Forex markets, private players and laws of supply and
demand.Government /RBI will only intervene if there is huge fluctuation in the exchange
rates.
With respect to the Eurozone crisis (click ME), many columnists write We need another
Bretton Woods .
They dont actually mean that we need to move back to the same old Fixed Rate
exchange system, in which every currency was pegged to Dollar and Dollar was pegged
to Gold. Because that fixed rate thing is impractical in real life scenario, as we saw in
above paragraphs.
Just imagine, if tomorrow World starts running according to Bretton Woods system, what
will happen?
We know that China already has more than 1000 billion dollars in its Forex Reserves. So
Peoples Bank of China will send its Probationary officer with suitcases full of dollars
and take away all the gold from Fort Knox*. They dont even need to fight a war, USA
will come down to its knees financially.
[*Fort Knox is a place in Kentucky State, US Government keeps the gold reserves in this
place.]
In real life, not that China will actually do so, but the mere threat and possibility will
keep USA on its toes. Hence US will not agree to Fixed Exchange rate in the first place.
There is no chance any other country will agree to become the big brother and let their
currency become the reserved currency and peg it to gold.
Especially India, because if we peg our 10,000 Rupees to one ounce of Gold and declare
that we are the new international reserve currency, just like dollar before 1970s, What
will be the Result? Pegged currency means Government cant do extravagant spending in
MNREGA. Theyll have to stop subsidy on diesel, kerosene, LPG and fertilizers, because
they can dole out only as much rupees as the amount of gold held in RBIs locker.
As You can understand, no political party has the guts to do that, hence no nation will
want to become the big brother or Sacrificial goat (Bali kaa Bakraa ) for another Bretton
oods.
So, The sentence We need another Bretton Woods is just a metaphor, to say that all the
Presidents, Prime ministers and Economists of the world should meet up once again and
hold conference in some gambling den, drink some Desi liquor (
), watch some
Item-song, brainstorm for new ideas and start something from scratch, totally new, Just
like the Gentlemen at Bretton Woods did, in 1944.
It could be anything, untried and untested before likeChina could agree that well not dump our products in foreign market, we will not keep
our yuan under-valued,
US could agree that well bring back our troop from Afghanistan and cut down on our
Defense Expenditure and its inflationary effect on world economy. We will also stop
supporting Pakistan. Thus reducing defense Expenditure of India in the arms race= that
will also reduce fiscal deficit of India= India could decrease taxes=boost for economy
and world trade.
Iran could agree that well stop our irrelevant obsession with nuke weapons and give up,
So that UN removes the sanctions and our traders can make more money, thus improving
the standard of living for Iranian aam-aadmis.
EU could agree that well kick out Greece, because its just way too messed up beyond
fixing.
And India could agree that well bring all the black money from Switzerland and use it to
finance our bogus Government schemes and subsidies instead of looting the aam-aadmi
via direct and indirect taxes, to finance those things.
And finally you and I could agree that facebook is a waste of time, so a serious Aspirant
should concentrate on his studies instead of uploading funny/motivational photos there.
Today, India has four times as many people as the US, but only a third as much land.
It means Land in India, is very scarce.
Therefore, Indias politicians and businessmen end up buying land wherever they can,
however they can and then bribe get the government to convert its use from agricultural
to commercial.
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?
If GDP of a country is growing at an average of 8% per year then some sectors are likely
to grow at 15-18 per cent. (service sector, telecom, mining, industries for example)
Rapid GDP growth makes overnight millionaires, even overnight billionaires, possible in
those sectors.
So, if government regulations and permissions are required in such sectors, then a
government-business nexus is very likely to emerge. (as it did, in 2G and coal mining)
Thus, high growth creates enormous opportunities for corruption.
Does it means High GDP growth itself is responsible for corruption? No, not the GDP but the
incentive structure.
Therefore job of the Government is to create laws and policies in such manner that good
people have incentives to do good things and bad people have incentives not to do bad
things.
If Raja and Kalmadi can walk out jail and walk into parliament again- Then something is
wrong with this incentive structure.
At the same time, Society too has a role to play in it. If we keep attending and admiring
the lavish wedding reception parties held by corrupt people -our neighbor and relatives,
then we too are creating incentives for them to accept bribes to finance their expensive
wedding.
Mr. ijay Kharadi (IAS, Gujarat cadre), recently got married. Ofcourse, wed expect this ought
to be an expensive wedding ceremony.
But it wasnt. 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.
Ofcourse the cynics can brush off both Vijay Kharadi
and Anandakumar that you cannot change the
mindsets of thousands by doing such acts of
symbolism. But for them Andrew Jackson had said,
One man with courage makes a majority.
the Use of technology like Aadhaar-UID will reduce lower-level corruption, @district,
tehsil, PDS ration shops, but what about the upper-level, high level, white collar
corruption?
Anyways upto this point, the argument was corruption follows High GDP .
Now how about the reverse Argument? High GDP follows corruption!
The bribe money in India either goes to tax heavens abroad (Switzerland etc) or gets
invested in gold and real-estate (buildings, farm houses, properties)
So, if bribe money does not go into tax heavens abroad, it creates employment in India
and improves our GDP!
Around 2 crore people are employed directly or indirectly in real estate & construction
sector = employment = more demand (because theyre employed so theyll buy more
stuff)= more production =higher GDP!
If the corrupt person hosts a lavish wedding reception party = more employment for
cooks and catering wallas.
if he decides to spend vacation in any tourist resort of India = again GDP boosted.
Is/Can/should GDP alone be the criteria to measure the Aukaat of a Country? And Can endgoal 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?
The company pools money from various investors and uses the money for a specific
purpose. (for example buying gold or real-estate property or raising pigs/ goats / trees).
To run Collective Investment scheme, you have to get permission from SEBI.
Why is it in news?
This is one type of Collective Investment scheme scheme. But this firm (Beetal livestock)
has not registered with SEBI, so it could be a Typical pyramid/Multi-level marketing
(MLM)/Ponzi scheme.
There are estimated to be more than 500 companies in the country that have undertaken
CIS activities without complying with SEBI.
Generally, the operators of such schemes offer impressive returns in their initial days to
lure unsuspecting investors and then suddenly disappear after some time, leaving their
investors in a lurch.
Then they restart similar business under a new name and scam some more investors,
before they come under the SEBI scanner.
As per SEBI data, more than one lakh investor complaints are currently pending with it in
connection with such schemes.
Most common CIS frauds are related to investments for real estate properties, plantation
and agriculture industry (e.g. goat scheme), art funds, time-sharing schemes and multilevel marketing (MLM) schemes, among others.
There is lack of clarity about roles of different agencies like MCA, SEBI, RBI, State
Governments, Registered co-operative societies etc. These fraudsters take advantage of it.
Therefore, SEBI has recently asked the government to come out with a separate set of
norms and an independent regulator for collective investment schemes(CIS).
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 Abad to Mumbai (or vice
versa)?
Obviously via highway.
Spectrum is that highway.
So, e first send the truck from Abad 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).
Youre a businessman, you want to launch your own mobile service (like odafone,
Airtel etc). Therefore youre interested in using this 2G highway, to transport your trucks
(data). You can also use 3G or 4G, which provide faster data transfer, but theyre more
expensive.
New Problem: to access this 2G highway, you need two things
Problem (businessmans side)
1. Drivers License (to operate the truck)
Solution
Apply to Department of Telecom.
You already know how cinema tickets are sold. The person who is first in the line, gets
the ticket. If You come late, you dont get the ticket.
This also leads to ticket black-marketeering, for example, I come early, buy all the
tickets. You come late, all the tickets are sold, I offer my tickets to you @higher price
and make huge profit.
This is not good for economy because Im making money without producing any new
goods/services=inflation.
But according to a theory propounded by Mr.Sibbal, this is zero loss. Because Cinema
hall did receive money for ticket sale. So its not like Cinema-hall making losses!
As the name suggest, Auction the tickets. If person A offers Rs.200 for a seat and Person
B offers Rs. 500 for the same seat, then sell the ticket to Person B.
From theatre owner (Govt)s point of view: this method may look good, because now we
can earn more money per ticket sold and use that money to finance whatever
Development scheme weve in our mind.
Here is the problem: if Person B was a doctor, and he had to shell out Rs.500 for one
movie ticket. Then he may charge more fees from patients @his clinic to keep the profit
margin same.
Behold my awesomeness.
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 @2001s market
rates.
Initially the last date to apply for licenses = 1st October 2007. But then Raja changed
policy well 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 SAN)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 wifes
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
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 blackmarketeers, 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.
Swami
Supreme court said auction cannot be the only method of allocating natural resources, it
should be considered on a case-by-case basis.
Earning maximum revenue is secondary to serving the public good in allocating
natural resources.
But if allocation of a particular resource is going to get sudden huge profit to a company,
then such resource should be allotted through auction only. (for example 2G spectrum).
In anycase, all decisions and actions of the government are open to being questioned by
the court.
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.
Since the license are scrapped, and new auction will be held = input cost of mobile
companies will increase.
So, Theyll increase the call-rates to keep the profit margin same.
Therefore final consumer (common men) become the innocent victim in this game.
Foreign Investors
Norways Talenor and UAEs Etisalat Company had paid heavy price to invest in the
telecom sector of India.
But since the licenses are cancelled, in future, the foreign investors will be extremely
cautious before investing in India, particularly in the sectors related with allocation of
spectrum, coal mines etc.
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.
Theyve to prepare one more stupid topic for exams/group discussion /interview.
Anyways, nothing new for them either, theyre used to this irony of life.
Just like Telenor (Norway) and Etilsat (UAE), Sistema (Russia) is also a foreign telecom
company.
Sistema had bought stakes in an India company (Shyam Telecom), but then Supreme
court cancelled their license.
Now Sistema has appealed the Supreme court to restore its license, current matter is
pending in court.
In the light of this event, Russian Government has warned India that
3. We will not let Sistemas USD 3.1 billion investment in its Indian telecom venture go
waste due to internal problems here.
Spectrum Refarming
Infrastructure= railways, roads, ports, thermal plants etc. that are essential for other
economic activities.
Infrastructure projects worth over Rs 7 lakh crore are pending because environment
ministry is not clearing the files.
Every time a coal miner wants to increase production, he has to get fresh clearance from
environment ministry. It is time-consuming. This has led to low coal-output= thermal
power plants cannot produce much electricity =grid failure, as we discussed in earlier
article CLICK ME
Another example: If you want to open a thermal power plant, you need to get a file
cleared from the Coal Ministry. But to get that file cleared, you need to get environment
and forest clearance from Environment Ministry. Even if environment clearance is given,
forest clearance may take longer or even ultimately be denied. Thus, some power projects
are not executed for several years, even after winning an auction.
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 longterm 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?
1. Itll be headed by the Finance Minister.
2. Itll deal with granting/refusing the FDI in retail, aviation and power-sector.
Answer choices:
a.
b.
c.
d.
Only 1
Only 2
Both 1 and 2
None
Banks decide Loan interest rate based on a persons creditworthiness. So in my case you
can demand higher interest rate=good for you.
Youre also speculating that in future the real-estate prices will increase, so even if I cant
repay the loan, you can attach my house and sell it off to recover your loan.
Thus, its a win-win situation for you whether I pay back the loan or not, youre going to make
good profit.
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=
theyd not hire maids or babysitters anymore, theyll buy less clothes and toys for their
kids, theyll 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.
You already know when outgoing money is higher than incoming money = fiscal deficit.
Fiscal deficit is a big pothole in the road to countrys prosperity. This pothole can be filled with
cash only. If this pothole keeps increasing in size then itll 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 childrens college education plans, or businesshouses invested in research and
Development etc. All that will expire from 1st January 2013, thus theyll 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. Thatll
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).
Ok sounds well and good, but
American economy was going through bad phase due to sub-prime crisis.
So President Obama had to give stimulus to boost this economy (tax-cuts to companies,
buying toxic assets from banks= examples of fiscal-stimulus.)
Fiscal-Stimulus are similar to Steroids. If an athlete takes steroids, it will temporary
improve his performance and take him towards the peak performance.
But once you stop giving him steroids, his performance will suddenly decline. It will feel
like falling off a cliff. Observe this graph:
Technically speaking
When people have to pay more taxes= less money in their hands = less money to spend
on cinema and Christmas vacations= less demand of products= not good for economy.
When Government reduces research in space, military programs = many people affected
directly or indirectly. E.g. less funds for space research = less demand for electronic
instruments, metals, pen-pencil-rubber required in those programs.
Again, If parents were working in some Government-research program/ private company,
lost jobs or their salary was reduced, theyd not hire maids or babysitters anymore, theyll
buy less clothes and toys for their kids, theyll not goto some holiday resort during
vacations. So indirectly many sectors get affected.
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. Itll lead to a decline
in GDP.
Observe this graph
GDP=Money value of all goods and services produced in a country within a year.
If there is shortage of electricity, factory owners cannot produce lot of mobilesets, TVs,
refrigerators. = Production of goods decreases.
If there is shortage of electricity, hospitals cannot carryout X-ray, CAT-scan etc. =
Production of services decreases.
Therefore, good quality Infrastructure is essential for achieving high GDP growth (9%).
Government estimates that one trillion dollars will be required in next 5 years to finance
all the important infrastructure projects.
But Government cannot finance all those projects by itself. Because theyre already
spending lot of money on Food-Fertilizer subsidies, MNREGA, Air-India etc.
Government cannot merely print more suitcases full of money to finance these
infrastructure projects, else itll create inflation. click me to know why
If Government borrows money from public, to finance these infrastructure projects, itll
severe the problem of fiscal deficit.
So, Government wants 50% of that required money to come from private sector (banks,
domestic and foreign investors.)
Such infrastructure projects require long-term funding for 20-25 years, but banks are
already exposed to too much risk (loans given to 2G players, Vijay Mallya etc.) In the
present situation, banks are unable to finance infrastructure projects for more than 5-7
years time-frame.
Hence, there is need to channel money from the hands of investors into infrastructure
projects. (+ also need to reduce investment in Gold, because it increases current-accountdeficit.)
To achieve this, Government has come up with new idea = Infrastructure Debt Funds.
Suppose a non-resident (foreigner), lends money to an Indian company and earns Rs.100
interest per year.
Earlier he was supposed to pay Rs.20 to the Government, but from now onwards only
Rs.5
It is called withholding tax, because he (foreigner) doesnt need to pay the tax himself,
but the company who borrowed money, is required to withhold it and give money to
Government.
Example you (foreigner) loaned me (Indian company) some money. On 1st December,
Im supposed to pay you Rs.100 as interest, but Ill give you only Rs.95, and put aside
Rs.5 and send it to Government as withholding tax.
Since Government reduced withholding tax from 20% to 5%, that mean you (foreign
investor) can earn more money, so this way Government has tried to seduce the foreign
investors, into investing in Infra-Debt Fund in India.
The first IDF-fund of India, was setup by a consortium (gang) of ICICI, BoB, Citi bank
and LIC.
This entity will work as a Non-Banking Finance Company (IDF-NBFC), and hence
theyll come under the jurisdiction of RBI.
They could have set it up as a mutual fund company, but then theyd have come under the
jurisdiction of SEBI.
Employees Provident Fund Organization (EPFO) takes money from people, invests it
shares and bonds, earns money and pays it to the EPFO subscribers. (After cutting its
commission).
Central Board of Trustees= the decision making body of EPFO. It is headed by Labour
minister.
Theyve made rule : EPFO must invest in Government-securities (G-sec) and companies
AAA credit rating only.
Problem: Most companies dont have AAA-rating, so EPFO is forced to park majority of
its money in Government-securities (G-sec).
Recall the concept of Gilt-edged securities (click me). Government/ treasury bonds are
more reliable, hence, they pay less interest. (because they dont need to seduce investors
by offering higher interest rate, unlike some junk bond company with C or D credit
rating.)
So, ultimately problem for EPFO managers= G-sec doesnt pay much interest. (Around
8% only).
While New Pension Scheme (NPS) managers, invests in many other places, including
risky bonds, and make around 12% profit.
If things go on as usual, then in long term, people might switch from EPFO to NPS and
other various pension-provident-retirement policies offered by private firms like Max
Life insurance, Bajaj Alliance, Kotak Mahindra etc. to get better deals.
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.
Which of above is/are correct?
a.
b.
c.
d.
Only 1
Only 2
Both
None
Only 1
Only 2
Both
None
Q3. Which of the following fund receives the proceeds from disinvestment?
1. Infrastructure Debt Fund
2. Consolidated fund of India
3. National Investment Fund
a. Only 1
b. Only 2 and 3
c. Only 1 and 2
d. Only 3
What is GAGAN?
They also help in efficient Air traffic Management= less fuel burned by aircrafts= less
pollution.
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
World Bank is made up of five organizations:
Arm of world bank
Role
5. International Finance
Corporation (IFC)
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 itd 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).
They got the right to run Male Airport for 25 years.
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.
Fast forward to Feb-2012, There was a coup in Maldives, Nasheed had to resign and
Waheed became the new President. (We already discussed this in previous article, click
me)
During all this time, there was political debate over privatization of Male Airport.
Some politicians and experts projected that Government itself can run the airport (via that
company MACL) and make 4 billion dollars till 2035.
But now weve handed over the operation to private company GMR, theyll barely give
1.5 billion dollars to Government, during this period.
Second, after getting the contract to run Male Airport, GMR decided to charge each
passenger: $25 as Airport Development Charge (ADC) + $2 as insurance = total from
each
But the local court of Maldives ruled that it is one sort of tax and tax cannot be levied
on passengers without approval of parliament. Therefore, GMR cannot collect such
charges from Passengers.
However, GMR says This was all written in our contract agreement with previous
Government.
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 well take
over the airport Management. Our Government company MACL will run this airport. He also
ordered criminal investigation against the company.
Initially Government made aggressive statements like this will affect foreign investment
in Maldives, we are committed to protect the interst of Indians abroad etc.etc.etc.
But after Singapore judgement did not come in favour of GMR, Salman Khurshid says
this is all legal matter, we respect the judgement.
From earlier article, you also know that India gives truckload of financial and technical
aid to Maldives (and also to other poor countries of the region such as Bhutan,
Bangladesh, Myanmaar).
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 nations 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.
Traditionally US and Chinese Governments are very assertive almost aggressive when
it comes to protecting their national and commercial interests.
But it doesnt mean theyve 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 Chinas strong support
to Myanmar during its long years of international isolation and Western sanctions.
Chinas 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 Indias 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 theyre 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, itll 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
doesnt want this.
China has recently opened an embassy in Male= proves theyre interested in the
Maldives.
China has been consistently expanding its own influence in island nations on Indias
periphery the Maldives, Sri Lanka, Seychelles and Mauritius by giving several millions
of dollars in aid and infrastructure projects.
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 wasnt 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, hed 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.
So far GMR had invested about 500 million dollars in Male Airport.
But all of that money didnot come from its own pocket.
GMR had taken loans from Axis Bank and Indian Overseas Bank (IOB) worth approx
160 million dollars.
Some experts believe that GMR will now refuse to pay interest rate on loan until matter is
settled! (SBI must be feeling happy for not being the only bank loosing money on airline
related loans.)
In India, Government had allowed the airport operators to charge airport development fee
from passenger. So, the airport operators charge anything between 100 to 1300 rupees per
passanger.
CAG says, when DIAL (GMR and AAI owned company) got contract to run Delhi
airport, this ADC charge was not mentioned in the agreement.
Yet theyre collecting money from passengers. So far theyve made undue benefit of
over Rs. 3,400 crore in the name of Airport development fee! (meaning they gave
suitcase full of bribe to previous minister to order the airport development fee approval.)
Now the new Aviation Minister ordered ban on ADC on Delhi and Mumbai airport from
January 2013.
But GMR is non-committal about it (They are planning to go to Airports Economic
Regulatory Authority (AERA) and court against this move, in India also!)
So, neither Indian nor Maldivian Government likes the private company making money
through Airport Development fee, yet Indian Government is against Maldivian
Governments move to scrap GMR contract the whole crisis has stemmed from ADC.
Indian Government (and media) say, GMR crisis will affect Foreign investment in
Maldives.
Curiously, the same thing was said by Norway and Russia after their 2G licenses were
cancelled.
Mock Questions
Q1 which of the following, is not a function of Airports Authority of India (AAI)?
1. Air traffic management over Indian air space.
2. Arbitration of Labour disputes involving airline staffers.
a.
b.
c.
d.
Only 1
Only 2
Both
None
Only 1 and 2
Only 2 and 3
Only 1 and 3
All of them
a.
b.
c.
d.
Only 1
Only 2
Both
None
Interview
1. How do you rate Indias 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?
Capital goods are the tools and machinaries used for producing consumer products.
Theyre (usually) expensive, and theyre purchased for long-term use.
Raw materials are also needed for producing consumer goods (Biscuits, bread etc) but
they are not capital goods.
Capital goods are also known as producer goods.
Heavy equipment (such as excavators, forklifts, generators, metal-forming or metalworking machines, vehicles).
In short, factory equipment are capital goods because theyre 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 owners cabin=not capitals goods.
If Capital goods are expensive, then companies cannot buy them=low production= low
GDP.
If they buy expensive capital goods, theyll keep final products MRP high to keep the
profit margin same.
Hence, Government gives tax reliefs on purchase/import of Capital goods by
businessmen.
hen you want to import Capital goods from a foreign country (e.g. USA ), youll need
pay them in their own currency (dollars)?
So where to arrange for the dollars? Recall the FCNR account article Click ME
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
1. Capital Gains tax, Custom duty are examples of Direct tax
2. Agricultural land is exempted from Capital Gains tax.
a.
b.
c.
d.
Only 1
Only 2
Both
none
Only 2
Only 1 and 2
Only 1 and 3
Only 2 and 3
It is governs all public sector banks (SBI, PNB etc.) and private sector banks.(ICICI,
HDFC etc.) in India.
Yaar many new players want to open banks in India. But they cant, because youre
not giving new licenses, So what is your problem?
ell, Im given powers to regulate public and private sector banks, under Banking
Regulation Act 1949.But those powers are not enough.
So, Im not going to give new bank-licenses to anybody, unless and until you get me
more powers, by updating that Banking Regulation Act.
Ok, Ill move a Banking laws (Amendment) bill, to amend the necessary things.But
first tell me what new powers do you need?
RBI
Agreed.
Chindu youll get the power to inspect those other business arms of a bank.
Anything else?
RBI Yes, money from unclaimed bank accounts.
If Mr.X has not used his bank account for more than 10 years, it is called unclaimed
bank account.
There are crores of rupees in such unclaimed bank accounts, it increases the
Administrative burden on bank employees (=need to maintain files etc)
Plus there is also an opportunity to commit a fraud. for example some bank employee
knows that Mr.Xs bank account is never checked, then hell forge checkbooks signature
or some other trick to withdraw money from Mr.Xs account.
so we must take some measure to tackle this issue.
RBI
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
And Ill 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.
RBI
1. If any person wants to buy more than 5% shares of any bank, hell 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, Ill
take away your deposit.
2. If primary cooperative societies want to continue their banking business, theyll
have to get a license from me.
3. I can conduct special audits of cooperative banks because theyre 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.
SBI
There is need for consolidation in the banking sector so India can have two to
three large public banks that can compete globally.
For this, I need you to simplify Banking Companies Acquisition and Transfer of
Undertakings Act.
And to exclude bank mergers from the scrutiny of Competition Commission of
India (CCI).
Bank mergers should need only approval of RBI.
Chindu Agreed.
Citibank
Right now, the Banks can trade in shares, bonds and currencies speculation but
the Banking Regulation Act forbids them from trading in commodities.
But we (foreign banks) see huge profit making opportunity in that sector.
So we need you to amend Banking regulation Act, to allow the banks to invest
in Commodities market.
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)
Chindu
No, no, no. if bill goes back to standing Committee, itll take lot of time.Ok I back off, I
remove this provision, so there is no need to send this bill back to standing Committee.
Anti-Bill arguments
In December, employees of public banks went on strike. (although SBI employees did not join
the strike.)
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 wont 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.)
Critiques also argue that
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)
1.
2.
3.
4.
5.
Prior to 90s, banks had very hard time recovering bad loans.
Because often, borrowers (loan takers) would file frivolous cases in civil courts, then
taarikh pe taarikh, taarikh pe taarikh.. proceeding would go on for years.
So 1993, Government established Debt Recovery Tribunals to deal with NPA matters.
Now borrower cannot approach civil court, theyve to goto special Debt Recovery
Tribunal (DRT).
This led to some relief, but then DRTs clogged down by truckload of cases. (Even now,
more than 60,000 cases pending with DRTs)
In 2002, Government came up with new Act, named SARFAESI Act.
Securitisation
and Reconstruction
of Financial Assets
and Enforcement of Security Interest Act, 2002,
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)
Holder
Rupees in Cr.
Paraajay and his family 20
Equity (IPO->Shares)
Juntaa (public)
30
Debt (loans, Bonds) Business loan from SBI 40
Bonds
10
Total
100
Once a loan is declared as non-performing asset, SBI can take actions under SARFAESI
act, to recover the loan money.
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, hell have to deposit 50% of his pending loan
money.
But if plot/factory/house is in some remote area= useless for SBIs personal business.
Under the Banking regulation Act, a bank cannot keep such immovable property beyond
7 years, (max 12 years with RBIs permission).
So ultimately SBI will have to auction it to someone. hat if they dont get better price?
Critiques of the bill say, this is not clarified in the bill.
What is ARC?
Examples:
1. ARCIL (Indias first and largest asset reconstruction company (ARC))
2. Reliance Asset Reconstruction Company Limited by Anil Ambani
In above example, ARC needs Rs.35 crores to buy a Non performing asset from SBI.
So ARC will issue security reciepts (SR) worth Rs.35 crores.
Only Qualified Institutional buyers (QIB) can buy these security reciepts (SR).
SR are not bonds, they donot carry fixed interest rate.
ARC will promise to pay money on SR, when it gets money the bad loan.
Although, ARC usually promise 9% profit on security reciepts (SR).
So, three possible situations:
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.
Before reading further, Make sure you know the pros and cons of Debt Vs. Equity (already
discussed in an old article click me)
The new Amendment in SARFAESI, empowers ARC to convert debt into equity.(fully or
partially).
Rupees Cr.
Approx.
%
22%
33%
44%
100%
*that is the paper value of original debt (NPA loan of SBI to Mr.Parajaay), Otherwise ARC
purchased it @Rs.35 crores.
Anyways, This leads to two situations:
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 companys shares go up in the sharemarket, ARC can sell those shares to third
party and make decent profit.
Banks loss
ARCs profit
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 Parajaays company will start making huge profits (otherwise it
wouldnt be in bad loan problem in the first place!)
2. It is very unlikely that share-price of Parajaays 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 peons name @Rs.37 crores.
And ARC would agree, because 37-35=Rs.2 crores profit!
Side question
How would Mr.Parajaay arrange those Rs.37 crores?
Ans. If Mr.Parajaay is totally awesome then he wouldnt give 37 crores from his own pocket.
Hed 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 Debtequity 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.
2. Borrower
3. Asset reconstruction companies (ARC) can convert their debt into equity (fully or
partially)
4. Government
can prohibit or modify SARFAESIs
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.
2.
3.
4.
ICICI
LIC
EPFO
FII registered with SEBI
A.
B.
C.
D.
Only 2 and 3
Only 1 and 4
Only 2 and 4
All of them.
Only 1 and 2
Only 2 and 3
Only 2
Only 1 and 3
A.
B.
C.
D.
Only 1
Only 2
Both
None
Boring details
1. Recovery of Debts Due to Banks and Financial
Institutions Act of 1993 (RDBF)
Committees
SARFAESI was based on recommendation of these two Committees
1. Committee on Banking Sector Reforms (Narasimham Committee II), 1998
2. Restructuring of weak Public Sector Banks -Verma Committee
The latest amendment (Debt to Equity), is based on recommendations of Alok Nigam Panel on
ARCs, made by Finance Ministry.
What is CSR?
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.)
Who is
covered?
Provision?
Punishment?
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 shouldnt 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, CSRreporting 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 doesnt
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 yellowNGOism. Thus, CSR doesnt cleanse the sins of a company. often it merely allow
companies to continue bad behavior in the shadows. (child labour, environmental
degradation etc.)
Example
1. Bank loans
2. Borrowing from friends,
Borrow money from someone. Offer him interest
relatives, moneylenders
Debt rate and guarantee to repay the principal after xyz
3. Bonds
date.
4. Debentures
Equity
1. IPO-> Share.
2. Venture Capitalist
3. Angel Investor
In this case, you need 100 crores, meaning print 1 crore papers (debentures) each worth
Rs.100.
Whoever holds such paper units is called Debenture holder.
The cash thus collected is a loan for the company. (=debt)
1.Bond
2.Debenture
Issued by
1. Union Government
2. State Government
3. PSUs
Issued by companies.
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
They can be converted into shares of the company on the
When debenture is converted into shares, it means debt holder becomes an equity holder.
Both debt vs equity have their own advantages and disadvantages. eve discussed it in
the earlier article (click ME)
But by and large, from the investors point of view, Debt is safer than Equity.
These debentures can be converted into shares, when debt holder (investor) wishes (after
expiry of xyz pre-decided date).
But the rate, will be decided by the company e.g. 20 debentures =>1 share.
From investors 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. Companys 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 lets move to the SEBI-SAHARA case.
SEBI
To SAHARA
To SEBI
Governments
response
MCQ
Find incorrect Match:
1. SEBI: SAT
2. CCI: COMPAT
a.
b.
c.
d.
Only 1
Only 2
Both
None
There is a lot of control by the government both state and centre over the sugar industry.
To look at this one must look into the production lineup of sugar.
Let us understand the sugar producing process first.
This simple diagram will explain the process
Now the government control on the major aspects can be visualized easily. So the control by
government at every stage is:
Before going into the recommendations of the committee let us look at the difference between
FRP and SAP.
The FRP and SAP are prices set by the different governments at which the mill owners
will reimburse the farmers.
This is the minimum price that they pay to the farmers for the sugarcane.
FRP
SAP
Generally lower.
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
Control
Recommendation
Remarks
Sugar crop Do away with reserved area. Give farmer option Empowering the farmer to do
to trade with any mill.
better business.
area
Mill
distance
Pricing of
Sugar
1. Give the farmers FRP price at the 1st stage and Double stage strategy to have
do away with SAP.2. Share 70% of the sold value better cash flow to
of sugar+molasses+bagasse+press mud at the 2nd mills.Putting proper system
stage.
for remuneration.
Market
This is similar to many other committees formed by the government to recommend the
sugar industry decontrol. Committees under Mahajan (1998), Tuteja (2004), Thorat
(2009) and Nandakumar (2010) had similar recommendations.
So most probably these recommendations will also bite the dust like others.
Give every poor man a bank account. And help him get a loan from banks.
1969
2005
2006
No frills account.
Poor people can open bank accounts with very low balance e.g. Rs.5 only.
eve already discussed that in earlier articles: Click me and click ME
If Financial inclusion means open bank accounts for poor people. Then whats the big
deal, just open a damn account!
Not so easy. India has around 6 lakh villages. Most of them dont have bank branches.
Ok so hy cant banks open branches in every village?
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 itll lead to heavy losses.
Reluctant staff
Therefore banks dont like to open branches below district HQ or Tehsil level. Now
comes the problem
Ultimately
1. Banks
2. poor people
8. farmers clubs
9. Community based organisations
10. Cooperatives societies
11. Village Knowledge Centres,
4.
5.
6.
7.
Post Offices
Insurance agents
Panchayats
Civil Society Organisations (CSOs)
Swabhimaan
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
beneficiarys 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
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, Indias 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
1. A villager earns some cash under
MNREGA.
2. Government gives cash to bank.
3. Bank gives it to B.C.
4. B.C. deposits it into MNREGA
workers account.
New system
1. All accounts will be maintained by core
banking system.
2. So, cash directly goes from Government > Bank
>MNREGA workers bank account.
3. Villagers will have the freedom to make their
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 cant 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.
Theyll provide banking services in remote areas.
In November 2012, Mohan announced Direct Cash transfer scheme. (will be covered in
detail, later)
Anyways, under Direct Cash transfer scheme, Government will directly deposit
payments, subsidies, scholarships, pensions etc into the beneficiarys bank account.
Sounds well and good? Well, here is the big problem
And despite all these financial inclusion initiatives (of FINMIN+RBI), still only ~75,000
villages have a bank branch or business correspondent agents (BCA). So for the poor
people in remaining ~525000 villages still face the problems we saw` in MNREGA
payment withdrawl.
So Direct Cash Transfer will be #EPICFAIL unless each and every village is covered
under banking services.
Therefore, recently Chindu asked the banks to have at least one bank branch or business
correspondent agents (BCA) for every village or group of villages with 1,000 to 1,500
households.
In the villages without BCA, Department of Electronics and Information Technology will
install Common Service Centre (CSC).
This CSCs will serve as the BCA.
Right now, CSC will used only for opening new accounts of beneficiaries under the
scheme for direct cash transfer.
Only after banks install the software and complete other technical requirements for cash
transactions, the CSC will allow villagers to withdraw cash from their accounts.
Mock questions
MCQs
Q1. Financial inclusion involves
1.
2.
3.
4.
5.
Ans.choices
a.
b.
c.
d.
Only 1, 3 and 5
Only 1,2 and 5
Only 3 and 4.
All of them
Only 3
Only 1 and 2
Only 2 and 3
Only 1 and 3
Q3. Who among the following, is/are eligible to become Business correspondents for banks?
1.
2.
3.
4.
Post office
Panchayats
NGO and Insurance Agents
Self Help Groups (SHG)
Ans
a.
b.
c.
d.
Only 1 and 2
Only 2 and 4
Only 2 and 3
All of them.
Descriptive Questions
1.
2.
3.
4.
5.
Swabhimaan (5m)
Swavalamban (5m)
Common Services Centers scheme (5m)
Write a note on National E-governance Plan (NeGP) (10m)
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?
Start
Via
For high GDP growth, we need lot of electricity =lot of coal need to be transported from
mines to thermal power station.
For infrastructure (bridges, roads, buildings)= need fast transport of cement, steel,
machinery.
Because of growing international trade via sea lanes= need to quickly transport products
from factories to ports.
This has led to birth of Dedicated Freight Corridors along the Eastern and Western
Routes in 2005.
Eastern Corridor
Ludhiana in Punjab
1. Haryana,
2. Uttar Pradesh
3. Bihar
Western Corridor
Dadri in Uttar Pradesh
1. Haryana
2. Rajasthan
3. Gujarat
4. Maharashtra
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.
Under the High Speed Railway corridors (HSR) plan, the Railways intend to run trains at
the speed of 160 km to 200 km per hour.
Ministry of Railways has selected following six corridors
1.
2.
3.
4.
5.
6.
Delhi-Chandigarh-Amritsar
Pune-Mumbai-Ahmedabad
Hyderabad-Dornakal-Vijaywada-Chennai
Chennai-Bangalore-Coimbatore-Ernakulam
Howrah-Haldia
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
Ministry of Railways has decided to set up a National High Speed Rail Authority
(NHSRA)
Itll be an autonomous body through a bill in Parliament .
NHSRA will be responsible for planning, implementation and monitoring of High Speed
Rail Corridor projects.
NHSRA is being proposed to be set up on the lines of the National Highway Authority
and it would be under the Railways Ministry.
selection of chairman and members of the NHSRA would be done by the Public
Enterprise Selection Board (PESB) with the approval of Appointment Committee of
Cabinet.
Railways Act, 1989, Ministry of Railways enjoys full powers to fix tariffs.
But Finance Ministry recommends that a separate body should be established to regulate
tariff in Railways.
Currently, Telecome sector has TRAI to regulate the tarrifs.
Because Railways is a monopoly. therefore an independent regulatory mechanism
=necessary.
This authority will help Railways to improve performance and tighten productivity loss.
And To ensure that the Railways meet the transport requirement at the minimum cost to
economy.
Road transport segment is entirely in the private sector and it doesnt have any regulatory
body to fix transport prices.
In Aviation sector, there are both private and public operators (Airindia!) and yet there is
no regulatory authorities to control transport prices in Aviation either.
And both road transport and aviation =competitors of Railways.
So, if they dont have a price regulator then why should Railways?
Besides, Ministry of Railways doubts such authority will not help fulfilling the socialobjectives.(such as concessional passes for students, cheap tickets for poor people)
On these arguments, the Working Group of planning Commission has said, maintain
status-quo. No need to setup Railway Tariff regulatory authority.
China
1. They use heavier, longer and faster
freight trains to transport coal, cement,
iron-ore etc.
2. Theyve outsourced the minor tasks
(such as cleaning the railway coaches,
providing blankets to passengers etc.)
to private companies =cheaper input
India
Not done.
Not done
Passenger trains
Goods transport
Following the Chinese success story, our strategy should be HEAIER, 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. Theyre more track-friendly and capable of carrying
enhanced loads.
No subsidy on magazines
Perishable cargo
Under Kisan vision project.
Safety
There are almost 15000 unmanned level crossings. = Theyre 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
This would minimize human dependence in train operations and enhance the level of
safety
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 cant be done.
Outsourcing
Minor works
cleaning of coaches,provision of
Examples
blankets and food in trains
Outsource this work private
Suggestion of
companies=less cost than permanent
planning commission:
staff.
Major works
manufacturing locomotives,
coaches, wagons.
Partial disinvestment. Run it on
corporate lines.=more efficiency.
Mock Questions
Q1. Correct statement about Dedicated Freight Corridors?
1.
2.
3.
4.
a.
b.
c.
d.
Only 1 and 4
Only 1 and 3
Only 2 and 3
Only 2 and 4
Only 1
Only 2
Both
None
Q3. Which of the following states are common for both Eastern and Western Dedicated Freight
Corridor projects?
a.
b.
c.
d.
Descriptive
1.
2.
3.
4.
Essay
1. Railways: The artery of India.
Interview
1. (in context of the issue that Planning Commission says run high speed train on DelhiAgra 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. Youre made the Railways minister. hat will be your first five initiatives?
Earlier RBI used to appoint reputed persons from banking, finance, management, legal
etc. sectors as Banking Ombudsmen (BO).
But now RBI has reserved this BO post for its own Chief General Managers and General
Managers.
Tenure: 3 years at a time.
Reappointment: yes possible.
Jurisdiction
Banking Ombudsman (BO) Scheme applies to whole of India (including Jammu and
Kashmir).
All commercial banks (scheduled and non scheduled, public and private)
Regional rural banks
scheduled primary co-operative banks
NBFCs (BOs 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 doesnt follow RBI guidelines regarding loan-recovery agents (e.g. bank hires some
criminals to bully and harass you.)
5. Bank doesnt follow RBI guidelines regarding loan interest rates.
Youre unhappy with the bank for xyz reason. But you cannot directly approach BO.
First youve to give written complaint to the concerned bank that Ive so and so
problem.
and IF the bank doesnt deal with your complaint within one month, then you can
approach BO.
On the other hand, you cannot approach BO if the matter is older than 1 year.
You dont need lawyer to approach BO.
You dont need to pay any fees/ stamp papers for approaching BO.
Upon receiving your complaint, first BO will try to solve the matter via settlement
/arbitration (=try to achieve a compromise, conciliation or amicable solution between
bank and its customer.)
This has to be done within one month after receiving complaint.
But if either party (customer/bank) is not accept this (compromise/negotiation/settlement)
then after 1 month, BO will have to pass order.
Now, hell ask both parties to present their case/documents etc. And hell pass the order
accordingly.
Two things can happen
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.
If either party (Bank / Customer) is unhappy with Ombudsmans order, then they can
approach the Appellate authority (=Deputy Governor of RBI.)
originally
After reforms
According to RBIs scheme, Ombudsman can also look into internet banking related
matters.
But Ombudsmen across the country often wash away their hands and ask the victim to
wait for police investigation to finish.
And on the other hand, Banks donot take responsibility saying net banking frauds as
most of them happen due to customers negligence and cyber-crime.
So ultimately customer has to depend on the police to get justice.
A Committee formed by RBI has recommended that instead of having only 15 Banking
ombudsman across country, have one BO appointed for every bank.
The upper limit (of Rs.10 lakh) should be increased.
Location of Offices
1. Abad
2. Banglore
3. Bhopal
4. Bhuvneshwar
5. Chandigarh
6. Chennai
7. Guwahati
8. Hyd.
9. Jaipur
10. Kanpur
11. Kolkata
12. Mumbai
13. Delhi
14. Patna
15. Thiruvanthapuram
Mock questions
Q1. Which of the following falls under the jurisdiction of Banking Ombudsman
1. Regional Rural Banks
2. Scheduled commercial banks
3. Non Scheduled primary co-operative banks
Answer choice
a.
b.
c.
d.
Only 1 and 3
Only 2 and 3
Only 1 and 2
All of them.
Only 1
Only 2
Both
None
If the promises made by a sales agent, are not kept by the bank, you cannot approach BO.
If the matter involves loss of more than Rs.10 lakhs, you cannot approach BO.
The appellate authority for BO is High court of the concerned State.
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.
Q4. Which of the following are included in the purview of BO?
1.
2.
3.
4.
Net banking
Credit cards
ATM cards
Harassment by Loan recovery agents
Answer choices
a.
b.
c.
d.
Only 2 and 3
Only 1, 2 and 3
Only 2,3 and 4
All of them.
GI Vs. trademark?
GI
Product comes from a particular place/region.
Right is enjoyed by a community / association of
producers.=community right.
Trademark
Product comes from a particular
enterprise/company.
Right enjoyed by only one
person/company=individual right.
Mechanism: Internationally
WTO> Trade related Intellectual property rights (TRIPS)
1. Member nations have to respect geographical indications.
2. Theyve 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.
For example, Darjeeling tea is given GI tag in India, under India law.
So if someone inside /from India is selling fake Darjeeling tea, he can be jailed/fined in
India.
But If a Sri Lankan guy exporting fake Darjeeling tea to France, you cannot do anything
in India.
Youve to manually file petition in Frances court to protect your GI. (or India
Government need pursue the matter via WTO).
So, to prevent such problem, youve to again apply for GI status in European Unions
office for Protected Geographical Indication (PGI).
=this is Gaddha Majoori (donkey labour) just like for getting MBA admission, youve to
apply for so many entrance tests such as CAT, XAT, SNAP, CMAT etc. and each of
them costs around 1000 rupees.
Customs authorities have the power to seize imported goods at the border, if there is
prima facie evidence that xyz product is in infringing on the geographical indication of
the rights holder
+ Customs authorities dont even need a court order to carry out such raid or seizure.
India has huge social, cultural, ethnic, food diversities= thousands of products that would
qualify for a geographical indication.
But Most of the people engaged in the production of such products are small households
or small units, although in the same area.
So it is often difficult to organize them into associations and apply for the GI registration.
Pakistani Basmati
Meerut scissors
Meerut scissors are made of carbon steel blades sourced from scrap metal found in cars,
buses, trucks and railways.
Madurai Malli
Some others
This list is not exhaustive, just some prominent names that popped up in Hindu in recent years.
Item
Shankarpura
mallige
Navalgund
Dhurries
Karimnagar
Silver Filigree
Palakkad
madhalam
Place
Darjeeling Tea
W.Bengal
What is it?
Kerala
hand-held drums
Mysore Silk
Tirukanur Papier
Pondicherry dolls and idols made up of glue and paper.
Mache
can be moulded in virtually any thickness, and so it can produce
Villianur
Pondicherry idols up to 30 feet in height. This is not possible with most other
Terracotta
forms of terracotta
Matti Gulla
Karnataka Type of brinjal, rich in iron.
Kerala
Characteristic
grows in the saline waters of the coastal areas with diseaseresistant quality. No fertilizer/pesticide used.
Bangalore Blue
Grapes
Around
Banglore
Dindigul locks
TN
Entire list?
Download this PDF file (click me). It contains name of goods given GI status (till July
2012). You dont 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.
b.
c.
d.
Only 1 and 2
Only 2 and 3
Only 1 and 3
All of them
Only 1 and 3
Only 2 and 3
Only 2
All of them.
Earlier EPFO had decided that Aadhaar numbers must be compulsory for subscribers
from 1st March 2013.
This could help EPFO easily cross verify subscribers.
But after EPFO officials held meeting with UIDAI officials, they came to know that
1. UIDAI agency is organizing enrollment camps in only 18 states.
2. In the remaining states, the Registrar General of India (RGI) is collecting data for the
National Population Register (NPR). And then data is sent to UIDAI then UIDAI issues
Aadhar card = time consuming.
Ok so whats the difference?
Aadhar card
HDFC
IDFC
IL&FS (Infrastructure Leasing & Financial Services Limited)
LIC Housing Finance
HDFC Bank
ICICI Bank
Axis Bank
Recently,
I need to borrow cash from market, just to repay some previous bank loans. So, In
way Im totally awesome Pawnfisher airlines!
Then you should be left to collapse just like Pawnfisher.
Oh come on!! Im 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
market economy hahaha!
Please tell us how much cash do you need?
Rs.7400 crores.Ill issue bonds.
Maturity @19 years. (meaning youll recover principle after 19 years.)
In the mean time, Ill pay 9+% interest rate (but Ill pay installments bi-annually.)
Ok agreed. ell buy all of your bonds.
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 Indias bond was given AAA rating. (Despite
the fact that Air Indias 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
1. UIDAI comes under planning commission.
2. Registrar General of India functions under Ministry of Statistics and program
implementation.
a.
b.
c.
d.
Only 1
Only 2
Both
None
Only 1
Only 2
Both
None
LIC, PFRDA and EPFO should invest only in G-sec (Government securities).
LIC, PFRDA and EPFO should invest AA or AAA rated Indian corporate bonds.
LIC, PFRDA and EPFO should invest in foreign bonds with D rating.
None of above.
Interview
1.
2.
3.
4.
5.
This contract made between the government and a contractor (oil/gas exploration
company).
Contracts bids for specific oil block.
If he wins the bid, hell start oil exploration in that block.
Oil exploration =lot of investment and risk taking involved. This is borne by contractor.
(lets say 150 million dollars were invested).
Once the oil is discovered, contractor will start commercial production and sells it.
Lets 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 doesnt need to share profit with Government. (because 1
million x 150 = 150 million.)
Once contractor has recovered his the cost of exploration, then hell 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 contractors 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 dont run my plant on full capacity. Ill just wait till the oil prices in
international market to sky rocket, and only during those days/ months, Ill run plant on
full capacity to make lot of profit.
For more on this, recall Reliance KG Basic article click me
To solve ^these problems, Rangarajan made some recommendations. He proposed a
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.
1. Policy Issues
2.Management
Issues
3. Contractual
Issues
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 doesnt 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 doesnt 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
(APM)
2. Non-APM
This is applied to:
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.
Value #1
Value #2
Then, take average of values #1 + #2. Thatll be the final pricing for gas in the country.
1. There are two types of gases: Wet gas vs. dry gas. The wet gas contains crude oil too. So
obviously wet gas is more useful. But Committee has not considered it in in the pricing
mechanism.
2. Countries that export LNG, donot openly declare the price. Because it depends on
many variables. (e.g. Iran may sell us gas cheap, if we support their nuclear program.) So
it is hard to determine value #1 objectively.
3. While calculating Value #2 (weighted avg in global market), Rangarajan has included
Japan in the list, but Japan doesnt have its own gas production/suppliers. (counter:
Japan is a big buyer so whatever gas prices go in Japan, they reflect benchmark for
Asia-Pacific region.)
4. Rangarajan says take average of alue #1 + #2. This Average logic is unheard of in
International markets. No country is doing this!
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 cant let the gas prices to be
determined by free market.
So, use ^above pricing mechanism be used until such provision can be made.
Rangas implication?
If Rangas 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, itll reduce the subsidy burden on Government = fiscal consolidation.
Summary points
Feature
1. PSC
2. Issues
3. Audit
4. Pricing for
domestically
produced Gas
Recommendation of Rangarajan
Move to a royalty-tax regime after
which the balance revenue is shared by
govt and contractor.
1. Create an Inter-Ministerial Committee
to solve policy related issues.
2. Give more powers Secretaries(ECS)
3. tax holiday, more time to explore
1. CAG has the right to perform audit
over oil/gas blocks and publish report.
2. CAG to directly audit big blocks.
3. CAG to outsource auditing for small
blocks.
Average of (imported LNG + wt.avg of
prices in US, UK and Japan)
The declining share of the agriculture and allied sector in the countrys GDP= this is
characteristic of any fast growing economy
but that doesnt 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.
Indian agricultural sector is the domination of small farmers with small sized
landholdings. = they cannot afford sophisticated tractors, thrashers, irrigation system etc.
Therefore, per hectare Agricultural yields or productivity= very low
Government should carry out land reforms, land consolidation, promote cooperative
farming etc. to reduced these small sized farms.
Food security =everybody should get food. But doesnt mean nutritional security.
For example, you can feed a poor-child with cheap quality wheat / rice. But for healthy
growth of body and mind, you also need various vitamins, fruits, vegetables, milk,
protein, oil, etc. nutritional items. Malnutrition is a big problem in India.
So we dont just need food security, we also need nutritional security.
For ensuring nutritional security, Government has to arrange the right amounts of food
items in the food basket of the common man.
So, Government must give a thrust on horticulture products and protein-rich items, apart
from the regular wheat, maize, rice and foodgrains.
+ invest more money in agricultural research.
Lot of agro-produce gets wasted due to infra problem (bad roads, no cold storage,
electricity etc.)
Government needs to link wholesale processing, logistics, and retailing with farmproduction activitie.
Recently the government allowed FDI in multi-retail, = Itll bring for investment in new
technology, storage, processing and marketing of agro produce.= less spoilage, better
prices for farmers.
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
As the name suggest: It is the Ratio of tax collection against the national gross domestic
product.
From Governments point of view, higher tax to GDP ratio= incoming money is more.
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)
HUMAN DEVELOPMENT
In 12th FYP>> social sector Expenditure, Government aims to spend lot of money on
education + health.
Nevertheless, Indias 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
Year
Approx. population living BPL
2004 37%
2009-10 29%
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
Right to information Act
Mahatma Gandhi National Rural Employment Guarantee Act
(MGNREGA)
Forest rights act
Right to education act
Beneficiary?
Everybody.
Rural households.
Tribals
Children (mostly
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).
In the first world countries (US, UK etc.) the impact of recession is still present. So their
consumers have less money to spend (compared to previous years.) therefore, demand of
indian products in internation market = decreased.
This is second reason for lower private investment. (if businessman is not getting exportdemand, then he has no rason to invest more money in expanding his operation, buying
new warehouse, factories, machinaries etc.)
The orld Economic Outlook (EO) Update released by the IMF, says Indias trading
partners (US/EU etc.) are growing at low rate, hence Indian exports also declined
DOMESTIC SAVINGS
Domestic savings, come from three sources
1. Households
2. private corporate sector
3. public sector.
Savings Rate
Era
Domestic Savings rate %
80 and 90s
18-23%
Since 2004 onwards >30%
Household (aam-aadmi)s savings can be subdivided into
1.Financial savings
1.
2.
3.
4.
2.Physical assets
Building, Farmhouse etc.
Usually, most of the household savings go into bank deposits. And Pension provides
funds dont 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 theyre 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%
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
Anyways, whats 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, hell 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.
One solution = increase duty on gold import. But problem= people will start smuggling.
Then Government will not get any import duty at all.
Therefore, Economy survey suggests following things
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 dont 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?
a.
b.
c.
d.
Q2. Which of the following is/are responsible for excessive gold consumption in India?
1.
2.
3.
4.
Inflation.
Lack of access or awareness about financial markets.
High Volatility in share market.
High rate of returns on investment in share market.
Choice
a.
b.
c.
d.
Only 1 and 2
Only 1, 2 and 3
Only 1, 2 and 4
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.
b.
c.
d.
Finally economic survey is released. (free download English click me for Hindi click me)
For UPSC, economic survey is important, because just like yearbook, this one also
provides you with truckload of facts for MCQs, and fodder for
descriptive/essay/interview.
Even for SBI PO, this is important, because lot of MCQs come from current based
economy + fodder necessary for GDPI stage.
On HBO, Star movies, they show movie for 15-20 minutes and advertisement for 5
minutes.
But on Zee Cinema, 9x etc. channels, they show advertisements for 20 minutes and
movie for 5 minutes.= movie is shown in between advertizements. (advertisements are
not shown in between movies.)
Thats the first reason why economic survey is boring, because it gives facts/fodder in
between useless numbers and data.
Second reason why economic survey is boring, because the authors assume that youre
already aware of the basic economic terms, concepts and the connections in between.
Therefore, to enjoy the first chapter, make sure you already know following terms and
concepts, if not click on the given links
Now lets start with the gist of first chapter from Economic Survey. (Ive further subdivided it
into three articles, else itll lead to information overload= boredom + frustration.)
Timeframe
2007
200810
201011
201112
Feb
2013
GDP at factor cost (FC)= GDP at market prices MINUS indirect taxes PLUS subsidies.
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.
Few years back, America faced the sub-prime crisis and recession. But now it seems to
be slowly getting back on track.
But if we look @India, it seems as if inflation and slowdown is going to continue forever!
hy cant India bounce back quickly? Reasons are following
First, International investors and their risk taking. Compared to American Economy, the
Indian economy is more exposed this shifts of foreign investors. (the whole GAAR,
Vodafone controversy, retrospective taxation, policy paralysis, environmental clearances
ruined the mood of foreign investors.)
If they pump in money, Indian economy quickly improves, when they pull out money
suddenly, our rupee weakens against dollar = crude oil becomes costly.
Second, Indias import bill is strongly tied to the price of oil.
Third, because of ongoing inflation, people prefer to invest in gold. Gold import= CAD =
rupee weakens = crude oil import becomes expensive =even more problems.
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 theyve to pay more money to import same quantity of
goods. And for Exporters, call centers= good. Because they get more rupee.(even if theyre 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 isnt really doing great. On the other hand, imports are getting more and more
expensive, especially crude oil => petrol diesel become expensive= inflation.
Forex Reserve
Indias foreign exchange reserve, is made up of following components
1. Foreign currency assets
2. Gold
3. SDR and RTP in IMF.
As per Economic Survey, Forex reserve is:
March 2012 $294.4
January 2013 $295.5
As you can see, there is hardly any increase in Forex reserve during this time. Why?
Mock questions
Q1. Which of the following is correct formula?
a.
b.
c.
d.
Only 1
Only 2
Both
None
Q3. Which of the following is/are not a component of Foreign Exchange reserve of India?
1.
2.
3.
4.
Gold
Foreign currency assets
Special drawing rights in IMF
Diamonds
Choice
a.
b.
c.
d.
Only 1 and 3
Only 2 and 2
Only 3 and 4
Only 4
1.
2.
3.
4.
It means, India will have more number of people in the productive age groups= more
incomes=more demand of products= more growth=high GDP.
Seems plausible in theory. But hard to do in practice.
A larger workforce translates into more GDP only if there are productive jobs for it.
If people are given work of digging up wells and ponds (MNREGA), theyre employed
but that doesnt lead to significant rise in GDP (compared to if same number of people
were given some skill training and job in manufacturing or service sector).
So If you really want to tap the demographic dividend, then labour force must go through
following transitions:
From agriculture to non-agriculture (manufacturing / service sector).
from rural to urban
from the unorganized sector to the organized.
from subsistence self-employment to wage employment.
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 lifecyclebirth,
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 dont need to pay service tax.
Similarly, less than 1.5 crore annual turnover= you dont 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 dont 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 Banks 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).
Theyve to separately visits to various Government offices and applications are not
approved without bribes.
Suppose you finished cooking/catering course and you wish to start a restaurant/cafeteria.
For that, you need initial investment of lets say 30 lakh rupees.
But you dont have a single penny in your pocket. So you decide, Ill not borrow even a
single rupee from anyone. first Ill work in some other persons hotel/restaurant. Save
money and once Ive 30 lakh, Ill open my own restaurant.
Problem?= well, depending on your salary (+family expenses), Itll 5-6-15 years to save
that much money and by then inflation would have increased (property rents, electricity,
milk, vegetables, tea, coffee etc.) so at that time, 30 lakh wont be sufficient to start a
restaurant, youll need 50 or 70 lakhs!
Thus, most of the time you cant start business by ^above approach. Youve arrange
finance from someone else. And we already know there are two ways arrange
cash/finance to start a business: first is debt and second is equity. Click me
For small scale firms, arranging finance by either way (debt or equity) = headache.
Because
Solutions?
So banks will get that much less loan takers from upper end of the pyramid= banks will
have more spare cash lying around. Then theyll be tempted to loan that money to small
and medium sized firm to earn some profit (interest).
Labour laws
Indias 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.
Lets understand this with an example:
Suppose youre 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 companys products is decreased, and there is no way you can increase
demand because Americans dont have money, so no matter how much you spend on
advertisement, they wont 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 youll
start making losses.
One way to reduce input cost is downsizing=lay off a few workers, so youve 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.
Since you cannot lay off workers easily (case#1), you decide to shift the business and use
those workers.
Instead of diamond jewelry, you decide to make gold jewelry, stop the export oriented
business, and concentrate on domestic Indian consumers.
But according to the same Industrial disputes Act, if the employer (boss) wants to change
the terms and conditions /salary/ job description of workers or if he wants to move
workers from one plant to another, then he must get (written) consent of workers.
This again increases rigidity. The trade union type leaders will blackmail the employer,
Give xyz amount of money else we will not sign the consent papers.
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 doesnt want to lose any vote bank. Thats 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 theyre fired without cause
3. Compensation for severance and unemployment benefits.
Apprentices
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
Education
Government measures its success in education sector mainly by two numbers:
1. School enrollment.
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 childeducation.
On the other hand, since money is low, it doesnt 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
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.
Recent economic history is replete with examples of economies that were supposed to
have great potential but ultimately did not achieve rapid economic growth and
improvements in standards of living. India could become the next example of it.
In India reforms are typically implemented only after there is really big crisis (for
example 26/11, or Delhi rape). And that too after long debate and after some sort of
political consensus is reached on them.
3. ^because of that, more people stay in agriculture= Pressure on land will increase + Per
capita income will decrease.
4. Small agricultural plots do not provide enough income, nor can they be leased out.
5. When things go really worse (a point is reached where monsoon is bad, farmplots are
become extremely small, heavy inflation)villagers will start large-scale migration to
overburdened cities. (=problems of slums=unhygienic living conditions=outbreak of
some contagious disease, increase in crime etc.)
6. Then Government will come up with some scheme to prevent this large scale migration
e.g. Rajiv Gandhi Village mein raho yojana under this scheme, whoever goes back to
live in village, will be given monthly Rs.500 and 5 kilos of wheat. Thus strain on
government finances increases. (=fiscal deficit=even more problems.)
7. The Income inequality between good service jobs in cities and marginal agricultural jobs
in rural areas increases tremendously= rich and poor divide grows even further=social
unrest, breeding ground for Naxal elements.
Mock questions
Q1. Which of the following are correct about ASER Survey-2012?
1. It is related to status of University education in India.
2. It is an official survey conducted by Ministry of Human resources and Development.
a.
b.
c.
d.
Only 1
Only 2
Both
None
Q2. Governments classification for Micro, Small or medium enterprise (MSME) is based on:
a.
b.
c.
d.
Mains
GS1
GS2
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 youre 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?
1.
2.
3.
4.
For the sake of simplicity, lets assume there are only four people in India: 1) common
men and 2) businessmen 3) Commercial banks (like SBI) 4) Central Bank (RBI.)
Now the Question: How do commercial banks make money?
Common men save their money in bank. Bank gives them say 7% interest rate on
savings.
Then Bank gives that money as loan to businessmen and charges 12% interest rate. So
12-7=5% is the profit of Bank. Although thats technically incorrect, because weve not
counted banks input cost=staff salary, telephone-internet-electricity bill, office rent,
xerox machine etc. So actual profit will be less than 5%.
But anyways, first lets construct a technically incorrect model.
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
On Tuesday, SBI Branch manager gives away entire 1 crore to a businessman as loan for
12% interest rate for 5 years.
From SBIs point of view, sounds very good right? 12-7=5% profit!
But weve 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 SBIs office doesnt 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 wholl 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, Im ready to pay
Mr.Parajay, the 36% interest rate on it! And trust me, Im going to make lot of money in my
new business project. And Im ready to mortgage all of my factories, cars,
businessman
farmhouses. So if I cant repay loan, you can auction them and recover your
money.
SBI manager Good! Ill give you all of my 90 lakhs as loan!
After six months, Mr. Parajays 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 itll 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.Parajays properties, but itll take lot of time in
paperwork, legal issues etc.)
Ok so, bank should invest part of common-mens 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, weve already seen SLR in detail.
click me
Lets 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.
Suppose a rival bank of SBI, hires some people to spread rumors against SBI.
The rumor is something like this= SBI invested lot of money in sharemarket but
sharemarket is crashed so now SBI doesnt have any money left. Theyre going to shut
down the office and run away.
^this is totally ridiculous rumor because according to RBI rules, banks cannot invest
depositors money in the sharemarket in the first place!
Anyways, out of the 100 SBI account holders (common men), 30 common men believe
in this rumor and run to the SBI office.
They demand SBI to return their entire savings deposit. Such panic movement of bank
customers is known as bank run.
Thankfully, SBI has total 10 lakh (CRR), so they can directly give it back. SBI also has
set aside Rs.25 lakhs under (SLR), so SBI can sell away those Government securities,
gold worth 25 lakhs and give that money back to account holders.
Thus, SLR+CRR protects a bank against Bank runs.
However in case of a totally awesome bankrun, nothing can protect a bank. (i.e. when
all of the account holders simultaneously demand all of their money on the same day!)
anyways back to the topic:
Out of that 65 lakhs, lets 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
50 farmers
25 Small
businessman
2 Students
1 Big
Give us loans of 1 lakhs each for buying seeds and fertilizers. However, given
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
saloon etc. We offer 11% interest rate. we cannot offer a penny more because
our profit margin isnot good.
Sir please give us loan of Rs.25 lakhs each, for paying self-financed medical
college. We can pay atmost 9% interest rate.
Give me those 50 lakhs. In a few months, Diwali is coming and I want to setup
businessman
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.
2.
3.
4.
5.
6.
from depositors,
from loan takers whore re-paying EMI,
(fraudulent) hidden charges imposed on credit cards
Commission charged on giving demand draft
Commission charged on online money transfer
Commission charged on foreign currency conversion etc.etc.etc.
So how does bank exactly count CRR, SLR requirements? = Net Demand and Time
Liabilities (NDTL)
Time
liabilities
Demand
liabilities
Im not going into minute nitty-gritty involved in computing NDTL because thats
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.
1.
2.
3.
4.
The book definition of Reverse repo rate = it is interest rate paid by RBI to its clients for
short term loans. Ok but who are the clients of RBI?
Central Government
State Government
Banks (commercial, regional rural banks, cooperative banks)
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.
Youre aware of Government securities: when Government wants to borrow money from
market, Government security / Government bond is issued.
Basically its 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, lets construct a simplified technically
incorrect model:
1.
2.
3.
4.
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, lets construct a simplified technically
incorrect model:
RBI has cash of Rs.100 lakhs.
SBI has Government securities worth Rs.100 lakhs.
SBI enters into Repo agreement with RBI.
The agreement reads I (SBI) am selling my Government securities worth Rs.100 lakh to
RBI and I (SBI) promise to buy back(repurchase) those securities from RBI after 6
months @Rs.107 lakhs.
Read it carefully:
1.
2.
3.
4.
Question:
Why all this gadhaa majoori (donkey labour), involving Government security? Why
cant 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 doesnt
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.
What is LAF?
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 villains
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 dont need to bring suitcases loaded with cash.
What is RGTS?
RTGS, NEFT=These are online facilities for transferring money within the country.
MSF
NDTL.
MSF lending rate is always (r+1)%
Summary
From SBI managers point of view
CRR
SLR
Repo rate
I must keep this much money aside. I cannot give it as loan to anyone. I will not
earn any interest rate on it.
Ive to invest this much money in gold, Government securities (G-sec) and RBI
approved corporate bonds.
If I borrow money from RBI for short term, Ill have to pay them this much
interest rate.
Reverse repo
If I park my money in RBI, theyll pay me this much interest rate.
rate
If I borrow money from RBI for long term, Ill have to pay this much interest
Bank rate
rate.
Mock Questions
Q1. If RBI purchases Government securities via open market operations, then liquidity _______.
a.
b.
c.
d.
increases
decreases
Stays the same.
None of above.
Repo rate is always 100 basis points higher than MSF lending rate.
Reverse repo rate is always 100 lower than MSF lending rate.
Repo rate is always 100 basis point higher than reverse repo rate.
None of above.
Only 1
Only 1 and 2
Only 2 and 3
All of them
Q4. In which of the following, Bank will not be making any money?
1. Meeting CRR requirement.
2. Meeting SLR requirement.
3. Parking money in RBI under Reverse repo.
Choice
a.
b.
c.
d.
Only 1 and 3
Only 2 and 3
Only 1
All of them
a.
b.
c.
d.
demand drafts
cheques
fixed deposits
credit cards
fixed deposits
cash certificates
current account
Staff security deposits.
We know that when Government spends more money than it earns= leads to fiscal deficit
and high level of fiscal deficit = bad for economy. For more details, read the earlier Vijay
Kelkar article click me
Chapter 3 of economic survey, deals with these issues of public finances and deficits.
1.
2.
3.
4.
How can Government overshoot the (fiscal deficit) target? Well, fiscal deficit will happen
when Governments outgoing money is more than its incoming money.
Recall that in 2007, subprime crisis happened in USA and its shocks were felt on every
country, including India: export declined, business activity declined.So, Government
had to take some initiative to protect Indian economy from further damage.
Therefore Government decreased excise duty, decreased the service tax + offered many
tax incentives to businessmen, to boost demand of Indian products and services within
India and abroad. (=incoming money of Government reduced).
Thus, Government missed the Revenue collection target (first proof of poor fiscal
marksmanship.)
On the other hand outgoing money was high because
1. MNREGA and other welfare schemes. (+ the lot of that money didnot go to actual poor
people. so such schemes didnot show the desired positive result on the economy.)
2. Subsidies on petrol, diesel, LPG, Urea etc.
3. Since 2009s general election was coming, so Government wanted to woo the farmers. So
it gave debt waiver to farmers = again outgoing money increased. Government increased
minimum support prices (MSP) to farmers for sugar, wheat etc. In other words,
Government overshot (missed) the expenditure target (second proof of poor fiscal
marksmanship.)
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 markets 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 courts
order), private players werent 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 transferthese are all
measures to decrease the fiscal deficit (=achieving fiscal consolidation).
anyways back to the story:
Usual approach is: Government would say the service tax on xyz item is xyz%.
But in 2012-13: Government introduced a new approach negative list. Here,
Government would say xyz items are exempted from service tax payment(e.g. doctor,
lawyer)= It means service tax applies on all the remaining services that are mentioned in
the Negative list.
Service tax=12%* on all services that are not included in the negative list. (rate is same
for both 2012 and 2013s budget)
Government also implemented service tax on railways (first class or an air conditioned
coach) from 1st October 2012.
*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.
Service tax
12.00%
2% educational cess. Meaning tax on tax = 2% of 12% +0.24
1% Senior & Higher Education Cess= 1% of 12%
+0.12
Effective service tax
=12.36%
#5: IT in IT
A tax is buoyant when revenues increase by more than 1 per cent for a 1 per cent increase
in GDP.
After the FRBM act, both direct and indirect taxes remained buoyant except in the crisis
years (2008-9 and 2009-10).
But in 2011-12, the tax buoyancy declined sharply in corporate tax sector. Because high
level of inflation decreased the actual profits of corporate sector.
Last year, Government couldnt 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
1 chairman + 4 members.
1 Chairman = experience of public affairs
4 members need to have following qualifications
1.
2.
3.
4.
Serving or retired judges of High Court, or someone who is qualified to become one
knowledge of Government finances or accounts, or
experience in administration and finance.
Special knowledge of economics.
Terms of reference
The 14th finance Commission will look into following matters
1. Distribution of certain taxes between union and state.
2. What principles should Union follow while paying grants-in-aid to states? (from the
consolidated fund of India)
3. What measures should be taken to augment the Consolidated Fund of a states so they can
help the panchayats and municipalities.
4. Review the state of finances, deficit, and debt levels of the union and states
5. Give suggestion to maintain a good fiscal environment and equitable growth.
6. Give suggestions to amend the FRBM Act.
7. How much money should be spent for the maintenance of capital assets
8. How to monitoring ^such expenditure?
9. Should Government insulate the pricing of public utility services like drinking water,
irrigation, power ,and public transport via through laws?
10. How to make public-sector enterprises competitive and market oriented;
11. Matters related to Disinvestment
12. Should Government giveup non-priority enterprises?
13. Climate change, sustainable economic development
14. What will be the impact of the proposed goods and services tax (GST) on Centre and
State?
15. Will GST implementation lead to Revenue loss to States? If yes, then how to compensate
that loss?
16. How to arrange money for disaster Management related activities?
Way ahead?
Prolonged fiscal deficit leads to
1. higher real and nominal interest rates,
2. slower growth in capital formation
3. potentially lower the rate of output growth.
Therefore Government must stick to the fiscal targets. Although, Government cannot rapidly
reduce its outgoing money (expenditure) because
Mock questions
Q1. What is the correct equation of effective revenue deficit?
a.
b.
c.
d.
The service tax rate was 12% for 2012-13 and increased to 12.36% for 2013-14.
Railways is exempted from service tax.
Service tax is levied on the items listed in the negative list.
All of above.
Only 1
Only 2
Both
None
2. GDP deflator
3. CRR, SLR, Repo, reverse repo, LAF and MSF
WPI
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
Subtypes
1.
2.
3.
4.
Prepared
by
After
Now only three subtypes of CPI
1. Entire urban population
2. Entire rural population
3. Urban + Rural (consolidate
from above two)
1. Agri labour=1986
2. rural labour=1986
3. Industrial workers=2001
4. Urban non-manual=1984
CPI (reformed in
2012)
CSO
Statistics ministry
Yes
2010
200
Yes
no
WPI
Compiled by
Ministry
Includes services?
Baseyear
Items included
Known as Headline
inflation?
Importance
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 doesnt use it much for policy making because GDP deflator data comes
quarterly (and not weekly/monthly basis).
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.
8. Increased excise duty on gold.
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)
12. direct cash transfer.
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.
From above points, it seems Government did lot of things to reduce inflation. Then why
are we not seeing any good results?
Because, to fight food inflation, govt. started imposing ban on exporting some food
commodities, increased and decreased the duties on import/export as necessary.
While this may look a good solution for the short term but in long term, this creates
uncertainty for businessmen, farmers.
It reduces their incentive to produce more, because theyre not certain whether govt. will
allow them to export or not? (for example Sugarcane->sugar, onion etc.)
So indirectly, this affects employment and income of people => leads to more inflation.
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.
All Government schemes = leakage, corruption. And corruption =black money. And
black money is mostly invested in gold and real estate.
So demand of gold forever high= high current account deficit = rupee weakens against
dollar= crude oil price increases = petrol/diesel price increases = even more inflation.
Government did try to hike excise duty, make PAN cards mandatory for high value gold
purchase and even thought of putting bans on gold import. But these moves have been
heavily opposed by the jeweler lobby, hence Government has shied away from doing
anything radical to stop the gold consumption.
Besides a small hike of 2-3% in gold excise duty doesnt prevent those bad guys with
black money from buying gold! And Government hasnt done much to stop the Black
money / corruption either.
You have read and heard this ten thousand times that FDI in multibrand retail = no
middlemen = less inflation in food. And similarly cold storage, and food processing
infrastructure= less wastage.
But, suppose Government allows wallmart on Monday, that doesnt mean from Tuesday
Wallmart will start running and from Wednesday inflation will be gone. All these things
take months and years to get file permission, construction, hiring and training employees,
setting up supply lines etc.
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.
Ive to keep this much cash aside. I cannot loan it to people. I donot earn any
interest on this.
Ive to invest this much cash in govt. securities, gold and reliable corporate bonds.
Ive to pay this much interest rate, IF I take short term loans from RBI.
I earn this much interest rate, IF I deposit my money in RBI for short term.
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 doesnt 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.
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 hasnt changed SLR much in last three years.
ere facing inflation because there is mismatch between supply and demand.
Supply (of food, gold, houses, everything) is low
While demand of those items (particularly food) is high (because population is high, the
income levels of public has increased).
Now think about this: What can RBI do? It can only increase the interest rates.
While increased interest rates may decrease the demand of houses, cars, bikes but it
cannot directly decrease the demand of food, milk and other essential commodities.
In other words, Interest rates cannot change the dietary habits of people, not at least in the
short term.
Besides, high interest rates make it difficult for businessmen to borrow = less new
projects = less new employment, less GDP.
Therefore primary solution to fight Indias inflation =Increase the supply of food items.
But this will requie thorough revision of the way govt. treats agriculture, allied activities,
food processing and infrastructure. Small farms, disguised unemployment, heavy reliance
on monsoon : all these issues must be addressed in comprehensive manner.
Way ahead
For RBI
orld Banks 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 theyre not providing any growth stimulus to the economy. (for example, if
situation in Europe and America was good, theyd have been importing a lot more goods
and services from India= Indias GDP could increase.)
So in that context, even if RBI drastically reduces repo or CRR, that wont do much good
to economy.
For Government
On a side note:
RESIDEX
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
On one side weve common men (households), these folks spend money and save money.
So these are the people who have surplus money.
On the opposite side, weve businessmen (industries) who provide goods n services. They
need money to start new business, to expand existing business, sometimes Government
also needs money. So These are the people that want money.
Financial intermediaries are the middlemen between these two types of people.
Banks, insurance companies, pension funds, mutual funds etc. are the examples of
financial intermediaries.
They take money from the savers (or lenders) and loan it directly or indirectly to the
borrowers (Government / businessmen)
Borrower (Government / Businessman) pays the interest rate on this loan.
The intermediary (bank/insurance co./pension or mutual fund ), will get Commission
And the Common men will earn some profit / interest / dividend/ return on his
investment.
Thus in financial intermediation, everyone goes home happy. (except the person who is
writing this article for some stupid exam and the person who is reading his article for
some stupid exam.)
Definition
1. The institutions that channel funds from savers to users are called financial
intermediaries.
2. Institutions that channel funds between surplus and deficit agents are called financial
intermediaries.
3. Financial intermediaries serve as a middleman between saver and borrower.
Commercial banks
Regional rural banks (RRB)
Cooperative banks/ societies
Development banks and All India finance institutions (IDBI, NABARD, SIDBI, NHB
etc.)
Pension/provident funds (NPS, EPFO etc.)
Mutual funds (UTI and private sector mutual funds)
Insurance companies (LIC, GIC etc.)
Non banking financial companies (NBFC, eg. Mannapuram gold loans, Muthoot finance
etc. Jab ghar mein pada hai sona to fir kaahe ko rona? )
If we look at the middlemen from common mans point of view, theyre usually
considered undesirable/ bad.
For example real-estate agents, they take commission and hence increase the price of
building or land.
And Youd have heard this argument hundred times : the middlemen buy carrots from
farmers for just Rs.2 rupees a kilo and charges Rs.20 per kilo to the final consumer in the
city without doing any value addition. The FDI in multibrand retail will cut down these
middlemen and hence reduce the prices of fruits and vegetables.
So based on that logic, can we say financial intermediaries are also bad because theyre
also middlemen? Answer is no. Because of following reasons:
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 itd be better if you let the financial
intermediaries do all that work.
Hell invest part of your money in Government securities, or high rated corporate bonds,
where profit is less but theyre more secure.
In addition, He has lot of clients and many new clients keep incoming, so even if he
makes losses in first place, he can make do by making profit in second place.
Often you hear newstories where someone committed suicide after losing money in
sharemarket. But You never see a news story where a mutual fund manager committed
suicide after losing money in share market.
Banks
Same goes for bank. You deposit your money in savings account then youre certainly
going to earn interest (profit).
It is banks 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
cant take out money from your savings account or fixed deposit because weve 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 doesnt 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.
Lot of people takes insurance and pay premium. But not everyone dies at the same
time.
Similarly, lot of people invest money in pension / provident funds, but not everyone
retires at the same time.
Hence there is lot of idle money that insurance /pension /provident company can invest in
Government securities, corporate shares, bonds etc.
And They also take help of experts and invest some money in risky areas, some money in
safe areas.
Thats 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 cant 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%.
Again the example of Mutual funds. A mutual fund manager is an expert in financial
matters, he has lot of experience on share market fluctuations, how individual companies
are performing, which companies shares are likely to go up in near future etc.etc.etc.
So he can make better investment decision compared to a new player in the sharemarket.
Similarly bank has battery of full time officers for processing loans application and
recovering the loans. They look at the credit history / record of a Borrower before
granting loans.
Insurance company also has experts to look into fraudulent insurance claims, and make
prudent investment decisions.
Thus, there exists an asymmetry of information. (Those intermediaries have experts so
they can make better decisions compared to an individual investor).
For the moment lets assume you love challenges and despite all the odds presented to
you so far, you still decide to play this game on your own.
But at most youll have a few lakh rupees to invest but on the other side there is a big
businessmen who needs loan worth cores of rupees for a long term project (e.g. 25 years).
You may not have the time / mood to wait for 25 years to recover your entire investment.
(even if he took partial loan from you).
But on the other hand a financial intermediary receives lot of money (e.g. SBI has lakhs
of savings accounts and fixed deposits ), so they can offer large amount of loans and wait
for years to recover the entire investment.
And if you had saved money in SBI, you would still be earning regular interest and can
take out your money any time you want.
^These are the advantages from investor / lenders side. Now lets look at the advantages from
borrowers side.
a. Individual can use that saved money in bad times / emergency and earn profit in
between.
b. A needy businessman will easily get loans.
3. hen businessmen can get loans easily at a reasonable cost, theyll start new business,
expand existing business, hire more employees, increase production of goods / services =
Indias GDP increases, IIP increases. hen people are making more money, they spend
more money. A family goes to restaurant, poor waiter makes money. Family hires maid,
gardener, driver. Family buys new car, mobile or bike- it breaks down, the repairman
makes money. Thats how money trickles down from rich people to poor people.
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. (well see them in a
separate article later.)
Mock Questions
Q1. What do you understand by the term financial intermediaries?
i.
ii.
iii.
iv.
Choice
a.
b.
c.
d.
Choices
a. Only I and iii
b. Only ii
c. Only iii and iv
d. Only iv
Q3. Financial intermediaries are
a.
b.
c.
d.
economies of scale
asymmetry of information
investments in diversified portfolios
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 weve NPS in India, In USA, theyve a pension scheme for all citizens called 401 (K).
Two accounts
In New Pension scheme, there are two types of account
Tier-I
Compulsory for every subscriber
You cannot Premature withdraw money
before retirement age.
Tier II
Optional.You can open Tier II, only if youve
opened a Tier I account first.
Can
NPS: Eligibility
Who can join?
Any citizen of India (age 18-60)
What is PRAN?
hen you subscribe to New pension scheme, youre 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:
PRAN
Cant.
Compulsory for new recruits in
Government service (minus armed
forces).
Voluntary
ICICI, UTI, SBI, Kotak etc are the fund managers for NPS.You can decide which
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).
NPS doesnt provide uniform or guaranteed return on your investment. hy?
1. It varies according to how much of your money is invested in Debt or Equity.
2. You can only tell the fund manager how much % to invest in debt / equity but it is upto
the fund manager whether he invests in company X or Company Y. Each fund manager
has different preference for companies.
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. Lets 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?
(main) NPS
NPS-lite
Swavalamban Scheme
Started in
Target
audience
Condition?
What is the
benefit?
In 2010.
This scheme will run till 2016-17.
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 doesnt 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.
PFRDA
chairman
@PFRDA chairman, I want you to subscribe more and more poor people in the
Swabhiman pension scheme because elections are incoming.
Forgive me Sir but youre confusing Swabhiman with Swavalamban.
1. Swabhiman = provide banking facilities in remote rural areas
2. Swavalamban= provide subsidy on NPS accounts for unorganized sector.
Chindu
PFRDA
chairman
Chindu
PFRDA
chairman
Then hold meetings Jholachhap NGOs and bogus microfinance companies and tell
them to use their network of grassroot workers to form more self help groups (SHG)
and get more and more subscribers.
It is Easier said than done because
1. I dont have sufficient staff to organize meetings / coordinate with those
people.
2. I dont have any coercive powers like RBI or SEBI to make others dance on
my tunes. Hell Im not even a statutory organization yet!
3. I cannot offer heavy commission to middlemen unlike those private sector
pension and insurance firms.
4. We could ask the state Governments to use their district and taluk level staff
Chindu
PFRDA
Youre 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 partys election
campaign.
Jokes apart, when it comes to MCQs, DONOT make silly mistakes the schemes starting with S
Swadhar
destitute widows,
women prisoners released from jail and without family support,
women survivors of natural disasters;
rescued from brothels
rape victims
Started in 2011.
Helps firms in organized sector, to move their employees to the New pension scheme.
Mock Questions
1. Correct Statement about NPS?
a. Initially it was meant for employees in central service and armed forces.
2.
3.
4.
5.
6.
Q7. Who among following, will definitely lose his job/position if he is declared insolvent?
1. Central Vigilance Commissioner
2. Chairman/ member of NHRC
3. Judge of supreme court
Choices
a.
b.
c.
d.
Only 1 and 2
Only 2 and 3
Only 1 and 3
None of above
Only 1
Only 2
Both
None
1.
2.
3.
4.
Sabla: Widows
Swabhiman: Physically Challenged
Swavalamban: Unorganized Sector
Swadhar: Women In Difficult Circumstances
Choices
a.
b.
c.
d.
Only 2 and 3
Only 1 and 2
Only 3 and 4
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 cant NPS?
3. Government shouldnot increase FDI in pension sector because itll hurt NPS.
Agree/disagree?
Pension sector
Already discussed in NPS article click me
Insurance sector
Discussed in the present article. (part 1 of 3)
Capital market: QFI, FII, SEBI reforms, ECB etc. Will be published soon. (in part 2 of 3)
Banking sector: NPA, NBFC, RRB
Will be published soon (in part 3 of 3)
lets 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 budgetspeech 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
Life
Example
LIC, ICICI prudential,
ICICI Lombard, Oriental, New India, United India. Among
them, three are standalone Health insurance companies
Re-insurer
Specialized
1. Star health
2. Apollo Munich
3. Max BUPA
GIC
1. Export credit guarantee corp.
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
Issue?
In past, (before LPG reforms of 90s), Indias 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, Indias 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 GICs 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
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 Chindus 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.
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
dont. 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 doesnt need to visit
so ultimately youve 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
e need to increase insurance penetration in India. Ive a number of proposals that have
been finalized in consultation with the regulator, IRDA.
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
We need a comprehensive and integrated social security package for the unorganised
sector
The package should include life-cum-disability cover, health cover, maternity assistance
and pension benefits.
At present schemes like AABY, JSBY, RSBY, JSY and IGMSY are run by different
ministries and departments.
I propose a convergence among these schemes so we can evolve a comprehensive social
security package. Itll benefit the poorest and most vulnerable sections of society.
Started in 2003
Healthcare for BPL
Medical expenses upto Rs.25k
Maternity benefit given
Pre-existing diseases also covered.
Janshree Bima
Yojana (JBY)
Universal Health
Insurance Scheme
(UHIS)
Rashtriya Swasthya
Bima Yojana (RSBY)
Pravasi Bharatiya
Bima Yojana
Agro Insurance
Mock Questions
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,
auto-rickshaw and taxi drivers, sanitation workers, rag
pickers and mine workers.
For medical expenses upto Rs.30k per year.
Premium sharing: centre vs State=75:25, incase of North
east, 90:10
For emigrant workers
Minimum Rs.10 lakh insurance cover
Applicable during employment contract period abroad.
For sickness, accidental death, disability while being
abroad.
Also cover expenses for transporting dead
Also for legal expenses related to employment contract
dispute abroad.
body/sick/disabled person back home.
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.
2) Weather based crop insurance scheme
Both are run by Agricultural insurance company (AIC)
Provides health insurance to handicraft artisans family.
(man, wife and two children only).
a.
b.
c.
d.
Mains
1.
2.
3.
4.
5.
6.
7.
Interview
1. Are you in favor of increasing the FDI in insurance sector?
2. Suggests the measures required to increase insurance penetration in India.
Outside India
ADR, GDR, External commercial borrowing (ECB), foreign
currency convertible bonds (FCCB) etc.
Financial market
Two subtypes
Money market
Capital market
Secondary Market
In common parlance this is known as Share-market.
Primary market helps businessmen (and Government) arrange money for their projects.
It also helps investors earn profit on it via interest / dividend.
Financial intermediaries come into picture here: they act as middlemen and help investor
lend money to borrower (and earn Commission in between).
If lot of money in invested in primary market (especially for corporate sector), that means
economy is booming.
But as per the Economic Survey, Compared to 2011, companies raised less money from
primary market via debt and equity in 2012.
It means companies are not doing as many new projects / business expansion like they
did in 2011. Why? 1) policy paralyses, 2) inflation =less demand of products within India
3) Slowdown in US, EU = less demand of products abroad
Within India
IDR fungibility
FII, FDI, QFI
Financial literacy, REGSS
Misc.
Reform: ECB
What is ECB?
Hotel, infra, IT, hospital sector. (But company must have registered itself under
Companies Act 1956, in India).
Micro Finance Institutions (MFI) can borrow via ECB
NGOs, NBFCs, Companies can borrow via ECB, if theyre involved in Microfinance
activity.
SEZ units
Anti
Today, American and European
economy is not performing
well, their banks and lenders
are not finding local borrowers
even at dirt cheap interest rate.
So in this scenario, If an Indian
company can borrow money
from abroad, at a lower interest
Reforms in ECB?
Infrastructure
companies
SIDBI
National
housing bank
This list of ECB reform is not exhaustive but for exam oriented preparation- youve to draw a
line somewhere hahaha.
What is ADR?
What is IDR?
ADR= American depository receipt = from Americas point of view, it allows a foreign
company (e.g. Indian) to raise money from American financial market.
Similarly, IDR= Indian depository receipt= from Indias point of view, it allows a foreign
company (e.g. American, British) to raise money from Indian financial market.
FIIs invest in Indian securities markets based on their perception how much money will I
mae?
Their perception is influenced by
o prevailing macroeconomic environment of India
o The growth potential of the Indian economy
o Performance of corporate sector in competing countries (such as Brazil, South
Africa.)
In 2012, FII inflows were around 30 billion dollar. Much of these FII inflows went into
equity segment.
The increase in FII inflow indicates their confidence in the performance of the Indian
economy and Indian market.
Compared to previous years, the turnover in share market has increased and volatility has
decreased.
The economic and political developments in the Euro zone area and United States had
their impact on markets around the world including India.
fiscal cliff in the US had been resolved, and had a positive impact on the market
worldwide including in India.
Further, the reform measures recently initiated by the government have been well
received by the markets.
FII reform?
In 2012, FII limit for investment in G-Secs (government securities) and corporate bonds =was
increased.
FII limit (US Billion dollars)
G-Sec
25
Corporate bonds 51
FDI reform?
Cabinet has approved increase in FDI for Multibrand retail, pension, insurance, aviation,
power and broadcasting.
QFI
To put this in crude terms:
2011
2012
Initially this QFI guy was allowed to invest in Indian mutual funds, IF he met the
Know your customers norm (KYC).
QFI was allowed to directly invest in Indian equity market. (provided theyre from
member countries of Financial Action Task Force (FATF).)
QFIs from Gulf Cooperation Council (GCC) and European Commission were also
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
SEBI and Government might give them incentives or concessions.
Government wants to make people buy less gold. Because when Indians buy a lot of
gold, it increases our current account deficit> our rupee weakens against dollar >weve
to pay more for importing crude oil =petro-diesel price increase= inflation (+bad election
publicity for Government).
Therefore, Government wants to increase financial literacy among (particularly) middle
class and lower middle class folks, make them invest in share market, mutual funds etc.
and move away from gold-purchase.
So Government needs to generate awareness that investment in capital market is safe and
gives you good returns. => Financial literacy / awareness needed. For this, CBSE already
included financial literacy related courses in the syllabus.
Financial Stability and Development Council (FSDC) also working on forming national
policy for financial literacy.
But just by making people aware, wont make them invest in capital market.
Government needs to offer some carrot to lure them.
Thats why Government introduced Rajiv Gandhi Equity Savings scheme- it provides tax
benefits and assured returns to FIRST TIME INVESTORS in the equities.
Conditions
Your annual income must be below 12 lakh. (original figure was Rs.10 lakh,
but Chindu raised it in budget 2013).
This must be your first investment in securities market. E.g. if youve been
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.
You dont have to pay tax on dividends paid by the company.
Benefit?
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 dont
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
Promote financial literacy (their sub Committee has made draft National Strategy on
Financial Education).
Promote financial inclusion (get people in banking, pension, insurance net)
Increase financial stability
Increase inter-regulatory coordination (between RBI, SEBI, IRDA etc)
Promoting financial-sector development
Misc. Reforms
MCX-SX
CDS
IRDA-repo
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
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 SEBIs 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
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 Indias in External Commercial Borrowings Policy.
Prologue
Banks
What do banks do? They collect deposits from savers and lend it as loan to the borrowers,
and earn Commission in between. Hence theyre 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 wont give much profit.
So why are the bank investing more money in Government securities, even above the
SLR requirement?
Interest rate
Interest paid by
bank
Current
Account
Savings
account
0%
4-6*%
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.
Governments 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
Swabhiman scheme
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)
Then came RRB and NABARD.
Why RRB?
RRB provides loan and savings facilities to villagers. These villagers include
1.
2.
3.
4.
5.
6.
Commercial Bank
Huge.
RRB
Small.
Source of
finance
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.
Financial Inclusion
Financial inclusion = getting all poor people in the banking, insurance, pension net. So
they dont become victims of evil money lenders who charge 36% compound interest
rates (or even more).
Swabhimaan scheme
eve 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.
Ultra small branches (USBs) are being set up in all villages covered through Banking
Correspondence Agents. (eve already discussed Banking business correspondents in
earlier article. Click me)
These Ultra small branches (USBs) will have a small area of 100-200 sq. feet.
A bank officer will be available here with a laptop on pre-determined days.
The Banking Correspondence agents will offer cash service to villagers (e.g. depositing
or taking out money),
This bank officer (in Ultra small branch) will offer other services, undertake field
verification (for loan applications), and follow up banking transactions.
A total of over 40,000 Ultra small branches (USBs) have so far been set up in the
country.
Development Banks/AIFI
They can be further classified based on their target audience
Agro
Industry
1. SIDBI
2. IDBI
3. ICICI
NABARD National Housing Bank
4. IFCI
5. IIBI
Housing
Import-export
EXIM bank
Out of ^them, names highlighted in bold (NABARD, NHB, SIDBI, EXIM) = All Indian
financial institutions (AIFI). Rest are development banks.
First question: How is industrial development bank different from regular (commercial) banks
such as SBI, PNB etc.?
Industrial development
bank
Commercial Bank
Public Sector
1.
2.
3.
4.
5.
Examples
ICICI*
IDBI
SIDBI (AIFI)
IFCI
IIBI
1. SBI
2. PNB
3. BoB
Pvt.Sector
1. ICICI*
2. HDFC
Accept
deposit from No
public?
Yes
Provide medium/long
term finance to ONLY
industries.
Job?
*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.
how do Industrial development banks provide finance to industries?
1. By directly giving loans to a company.
2. By buying shares and bonds of a company.
3. By underwriting new IPOs.
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 Committees 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.
1.ICICI
2.SIDBI
3.IDBI
4.IFCI
5.IIBI
6.NABARD
7.NHB
NPA = Non performing asset, in crude term, bank gave loan to someone but he is not
repaying it back on time.
Reasons for rising NPAs
1.
2.
3.
4.
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 didnt 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
These banks operate at international level. They are formed by group of countries.
Examples of MDB= Word Bank, Asian Development Bank (ADB), African development
bank.
Chindu wants to get loan from both World Bank and the Asian Development Bank to
build roads connecting North East India with Myanmar. This will help in our look east
policy and improve the economic prosperity of north eastern States of India.
1.
2.
3.
4.
for this,
MBN Rao committee = theyll prepare the blueprint for the countrys first womens 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.
There is already Rural Housing Fund set up through the National Housing Bank.
In this system, govt. gives cash to NHB. And NHB lends it to other banks operating in
rural areas >> finally those bank lend it to villagers to construct houses.
Chindu has proposed to start similar fund for Urban housing under National housing
bank.
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 well 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.
Core banking solution= Bank integrates all of its branches in a single IT network.
Whenever you take out money or deposit money from your account, the database is
updated in the central server directly.
Any branch of the bank, can access this date from the central server.
Thus Core banking solution helps customers to operate their accounts, and avail banking
services from any branch of the Bank on CBS network, regardless of which branch he
had opened the account.
The customer is no more the customer of a Branch. He becomes the Banks Customer.
Thus CBS = Anywhere and Anytime Banking.
You can deposit money in any branch-office, you can give cheque, you can take out
money, you can get your account statement, etc...as long as that branch is part of the
core banking solution.
CBS branch is like a Sales & Service Delivery Center. Internet banking, mobile banking,
ATM are all interconnected in Core banking solution.
All scheduled commercial banks and all RRBs are on core banking solution (CBS) and
on the electronic payment systems (NEFT and RTGS).
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.
All the state-owned commercial banks have implemented CBS system already.
But other Urban cooperative banks at district level are unable do it due Lack of funds
(takes lot of money to setup server, buy licensed softwares, intenet bill etc).
Although RBI maintains that in long term, use of Information technology and CBS will
reduce the cost of operation so its a win-win situation if UCBs implemented the CBS.
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.
Infrastructure Development funds will financing the long term infrastructure projects
@cheaper cost.
However, for the IDF to become effective, Government needs to take policy initiatives.
(allowing public sector insurance and pension funds to invest in them).
Financial literacy
Banks
Pension
Pension reforms in India
1. Will facilitate the flow of long-term savings for development
2. Will help establish a credible and sustainable social security system in the country
But challenge: NPS is not popular due to low commission, bill pending in parliament. More
explained earlier, click me
Insurance
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)
If you want to see a companys incoming and outgoing cash, youve to check its account
book.
Similarly Balance of Payment (BoP) is the summary / account sheet that shows the cash
flow between India and rest of the world.
BoP is made up of two parts: Current account and capital account. (As per IMF
definition, three parts: Current Account + Capital account+ financial account).
Without getting into technical details, just a brief over view:
Balance of Payment
Current Account
1. Import, Export (always negative, because we
export less and import more oil n gold, hence
weve trade deficit.)
2. Income from abroad (interest, dividends paid
on Indian investors FDI, FII in USA etc.)
3. Transfer (gift, remittances from NRI to their
families etc. always positive for India because
of large Diaspora abroad.)
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?
Assume there are only two countries India (rupees) and USA (dollars). And there are no
forex agents or middlemen, taxation, regulation, cricketers, politicians, saah-bahu serials
nothing
Now Indian importer buys Apple6 phones worth 10 billion US$ from American exporter.
Since there is no forex agent, the Indian importer will pay 500 billion Indian rupees to
that American exporter. (assuming 1$=50 Rs.) Means that much Rupee currency is
gone from Indian system via current account.
But that American exporter has no use of Indian rupees! He lives in USA, he cannot even
buy a burger from local McDonalds shop using Indian rupees. So what can he do?
1. He can import something else from India (e.g. raw material, steel and plastic for
further production of Apple6) = our rupee currency comes back to India via
current account.
2. He can invest that Indian currency to setup some factory or joint venture in
India (=our rupee currency comes back to India via capital account)
3. He can buy some shares or bonds in India. Again our rupee currency comes back.
4. He can find a 2nd American who wants to import something from India / wants to
invest in India. Apple6 guy can sell his rupee currency to that third American
fellow @Rs.50=1$ or Rs.49=1$ or Rs.99=1$ (depending on the desperation of
that 2nd American fellow).
In short, if rupee goes out, it has to come back. (same for dollar, from American point of
view).
Therefore, current account + capital account = ZERO (balance of Payment), atleast in
theory.
But in reality, RBI or tax authorities never have complete details of all financial
transactions and currency exchange rates keep fluctuating. Hence there will be statistical
discrepancies, errors and omissions and. So, BoP is expressed as:
Current Account + Capital account + Net errors and omissions = 0 (Balance of Payment).
In IMF definition, we can express this as
Current Account + Capital account + Financial account + balancing item = 0
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 timeframe.
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 importers 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 exporters 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 RBIs 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 thatd require another
article. Lets get back to the topic, we are seeing the 6th chapter of Economic Survey:
Balance of Payment, exchange rates etc.
How does Fixed Exchange Rate system work? and how does market based exchange rate
system work? = explained in the Bretton woods article. Click me
Anyways, lets construct a bogus technically incorrect model to understand the market
based exchange rate system, once again:
Assume following things
o There are only two countries in the world India and America.
o India has rupee currency. Indian farmers dont grow Onions.
o America doesnt have any currency, they trade using onions. The rate being 1kg
onion=Rs.50
First situation: American investor thinks that Indian economy is rising. If we invest in
India (FDI/FII), well make good profit. So theyre more eager to convert their onions to
Indian rupee currency. So theyd even agree to sell 1kg onions =Rs.45. (and then buy
Indian shares/bonds worth Rs.45)
Result =Rupee strengthened against onion (dollar).
During this time, RBI governor also buys 300 billion kilo onions from the forex and
stores these onions in his refrigerator. (Why? Because onions are selling cheap! And why
onions are selling cheap? Because there is surge in capital investment in India by
American investors.)
Ok everything is going nice and smooth. Now add third country to our bogus model:
UAE.
Second situation: UAE has increased crude oil prices, and they dont accept rupee
currency. They also want payment in onions.
1 barrel of crude oil costs 132kg of Onions.
India is eager/desperate for oil, because if we dont have crude oil, we cant get petrol,
diesel= whole economy will collapse.
So India would agree to buy 1kg onion even for Rs.55 (from American or forex agent or
whoever is willing to sell his onions). Then India can give that onions to some Sheikh of
UAE and import crude oil.
Third situation: The Sheikh of UAE gets even greedier, he demands 200kg onions for 1
barrel of crude oil. Now 1kg onion sells for Rs.59, Because those with onion surplus
(vendors) know that India likes it or not, itll have to buy onions to pay for the crude oil!
Thus, Rupee has weakened against onion (Dollar.)
If such situation continues, then there will be huge inflation in India (because crude oil
expensive=petrol/diesel expensive = transport expensive= milk/vegetables and everything
else transported using petrol/diesel becomes expensive.)
Now RBI governor decides to become the hero and save the fall of rupee against onion.
So, He loads a few tonnes of onions in his truck and drive it to the forex market.
Result: onion supply has increased, price should go down.
Now onions get little cheaper: 1kg onion =53 Rs.
Thus RBIs intervention in the forex market has led to recovery of rupee.
Prior to 1991, India followed License-quota-inspector (and suitcase) raj and import
substitution strategy. (Beautifully explained class 11 NCERT textbook.)
During that era, foreign companies couldnt invest in India.
Imported products such as radio / camera/ wristwatches attracted heavy custom duty.
(And that led to rise of smugglers and mafias, and the Bollywood movies that
romanticized their criminal lives.)
On the other hand, thanks to the license-quota-inspector (and suitcase) raj, the private
Indian companies werent big or efficient enough to compete in international market so
export was also low.
Result: during that time incoming money (via export, investment) was very low. Hence
RBI couldnt build up huge forex reserve. (when onion supply is low, its prices will be
high)
Ultimately in 1991, the Forex reverses of India were about to exhaust.
Finally India had to pledge its gold to IMF and get loans.
Then India had to open up its economy for private and foreign sector investment.
Remove the license-quota-inspector raj etc. to boost the incoming flow of dollars and
other foreign currencies..all those LPG reforms. (Although suitcase raj still continues,
because the Mohans in the system are blinded by totally awesome people like A.Raja.)
fast-forward: now weve a trillion dollar economy, our software and automobile
companies are globally recognized blah blah blah.
But the lesson learnt: RBI should have good foreign exchange reserve.
Hence post LPG reforms, RBI has been buying dollars, pound yen etc. from the currency
market, whenever FII/FDI inflow is high. Because during such situation, the foreign
investors are more eager to get their dollars converted to rupee currency hence rupee is
trading at higher rate e.g. 1$=Rs.49
But after global financial crisis, RBI has stopped building forex reserves actively.
Nowadays RBI intervenes in the forex market, only to stop the excess volatility
(fluctuation) in rupee exchange rate.
However, there was a sharp decline in rupee in 2011-12. Then RBI had to sell foreign
exchange worth 20 billion dollars. (so demand of foreign currency would decrease and
rupee would stop).
Similarly in 2012 also RBI had to sell its foreign exchange reserve worth 3 billion dollars
to prevent the fall of rupee. (in June 2012, Rupee had became very weak: 1$=around 57
Rupees. Thanks to RBI and Governments interventions, it came back to the normal 5354 level at the end of 2012.)
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 Indias forex reserve declines when
US dollar appreciates against major international currencies and vice versa.
RBI gains Foreign exchange reserves by
Country wide- China has the largest forex reserve (3300+ billion USD). India is 8th
position (close to 300 Billion USD).
China
Japan
Russia
Switzerland
Brazil
South Korea
Hong Kong
India
#1: import-export
Demand for Indian goods and services has declined due to Euro-zone crisis + America
hasnt 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 Indias market is
not giving good returns and or some other xyz countrys 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.
For past few years, Indian Government was lazy regarding environmental project
clearances, land acquisition, FDI in retail, pension, insurance etc. that has led to foreign
investors losing faith in Indian economy= slowdown in FII inflows. (besides Government
did not allow more FDI in pension / insurance / retail etc. so FDI inflow did not increase
either).
From the earlier article on debt vs equity, Government bonds = safer than equities
(shares). But when an investment is safe= it doesnt offer good returns.
hen foreign investors feel confident, they display risk on behavior =they invest more
in equities, particularly in developing countries. (which are risky but offer more profit).
But when foreign investors are not feeling confident, they display risk off behavior, =
they usually fall back to investing in US treasury bonds or gold.
In India, majority of foreign investment comes from FII (and not FDI)
and FII investors are more prone to displaying this risk-on/risk-off behavior.
They plug in their money quickly, they pull out their money quickly. Thus, Indian
rupees exchange rate becomes volatile against Dollar.
Therefore, Indian Government needs to inspire and sustain the confidence of foreign
investors, to prevent the fall of rupee. RBI intervention in forex market, cannot help
beyond a level.
RBI
Govt.
During 2012, RBI sold around 3 billion dollars from
its forex reserves.
Oct-12, Rupee recovers, 1$=around 51 rupees.
RBI allowed Indian banks to give more interest on
Foreign Currency Non-Resident (FCNR) bank
accounts. (thus attracting more NRIs to save their
dollars in Indian banks).
In 2012, Rupee wasnot the only currency that weakened against dollar.
The currencies of other emerging economies, such as Brazilian real, Argentina peso,
Russian rouble, and South Africas rand also depreciated against the US dollar.
It means dollars demand has increased. In the wake of sovereign debt crisis in the euro
zone and due to uncertain global economic environment, more and more investors are
preferring to buy US treasury bonds and other securities in USA.
We keep reading bad headlines that rupee weakened against dollarrupee all time low
against dollarand so on.
Does it mean, Indian rupee is a really bogus weak and fragile currency? Nope.
Because we dont trade only with USA.
e dont trade only in terms of Rupee to Dollar exchange.
We also trade with many other countries in many other forms of currency.
Therefore, if we want to objectively measure Rupees volatility, weve to compare its
price fluctuations with multiple currencies (Euro, Yen, Pound etc.) and not just against
single Dollar currency.
Secondly: 1$=Rs.50 or 1$=Rs.40 that alone doesnt decide the demand of goods and
services between India and America. This demand also depends on the inflation (both in
India and in USA.)
NEER and REER index (calculated by RBI), help us here get a clear picture here.
First youve to calculate NEER. Then using NEERs, you calculate REER.
NEER
REER
Nominal Effective Exchange Rate
Real Effective Exchange Rate (REER)
The weighted average of bilateral nominal
weighted average of nominal
exchange rates of the home currency in terms
exchange rates, adjusted for
of foreign currencies.
inflation.
REER captures inflation differentials between India and its major trading partners.
REER reflects the degree of external competitiveness of Indian products
REER captures movements in cross-currency exchange rates.
4. Pound sterling
5. Japanese Yen
6. Chinese Renminbi
External Debt
Higher NRI deposits (since NRIs are not getting much return on their dollar savings in
American banks, they prefer to invest it in India).
External Commercial borrowings (by Indian corporates)
Corporate borrowers in India and other emerging economies are keen to borrow in
foreign currency (dollar and Euro). Because in US/EU right now the market is down, not
many loan domestic taker businessmen, hence their banks/ investors dont mind giving
loans to foreigners (that is Indian / other Asian businessmen) at very low interest rate and
longer EMIs.
But such borrowings however, are not always helpful, especially in times of high
currency volatility. For example, if Indian businessman had borrowed loans from USA
when 1$=49 rupees but after some years, if 1$=57 rupee, then hell have to repay more.
This will badly affect not just him but to Indias BoP as well.
Prepared by OECD.
while capital inflows in India, were sufficient to finance the CAD safely.
But majority of the capital flows are via FII (hence volatile)= this has led to financial
fragility and is reflected in rupee exchange rate volatility.
We cannot significantly increase our exports in the short run because they are dependent
upon the recovery and growth of partner countries (US, EU). And this may take time.
Therefore our main focus has to be on curbing imports, mainly by making oil prices more
market determined (=expensive), and curbing imports of gold.
We should put greater emphasis on FDI including opening up sectors further.
Finally, external commercial borrowing needs to be monitored carefully.
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. Indias official forex reserve doesnt 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