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[Economy 4 Newbies] Types of Economic Agreements by Don1234 All credit for this article is goes to Don1234, in below article,

if you dont understand what is tariff and non-tariff barriers then read the article on WTO. Trade agreements are broadly classified in to five types. Spectrum of Formal Regional Trading Arrangements (see the image below)

Preferential Trade Agreements (PTAs)

regional agreement in which members of the PTA impose a preferential tariff or lower customs duty on the products originating from the member countries.

Free Trade Agreements (FTAs)

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).

Customs Unions (CUs)

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.

Common Markets (CMs)

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.

Economic Unions (EUs)

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). 1

India is also involved in a number of RTAs andFTAs.India is currently involved in 19 free trade negotiations.

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[Economy 4 Newbies] Backwash and Spread Effect in Economic Development by Puneeth All credit to Puneetg of IOforum for this article. 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.

Counter to the Backwash Effect is the Spread Effect

also discussed by Myrdal. Here, development in one place, spreads to its suburbs and all the adjoining areas. Again taking the example of Delhi, we could argue that suburbs like Faridabad, Gurgaon, Ghaziabad etc. have benefited from Delhis growth due to the Spread Effect caused by Delhis growth.

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[Economy 4 Newbie] Securities, Derivatives, Financial Market As usual nothing 100% politically / technically correct. This article is about some very basic concepts. But Im writing this because youll need these concepts to understand the more complex topics like SEBI, Stock Exchange etc. Issues & Securities, 1. If I write on a piece of paper saying anyone who gives me 100 Rs., Ill give him 120 rupees after 6 months = this is public issue 2. If you give me 100 Rs. And take that paper- then that paper becomes the security Keep in mind that The 100 Rs you give to me or the 120 Rs. Ill give to you after 6 months- that is NOT Security. That Piece of paper is the security. Technical definition Security means a formal declaration that documents a fact of relevance to finance and investment gives the holder a right to receive interest or dividends. Security means A guarantee that an obligation will be met Shares, debentures. Theyre also securities 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 say that, Ill give you 15 Rs. Every year no matter I get any profit / not = this is debenture. Derivatives / Stock Market Derivatives you gave me 100 Rs and I gave you a paper saying Ill payback 120 Rs. (=Mrunals security paper) there is another guy named Mitul who, same way borrowed 100 Rs. And gave you another paper saying hell pay you 120 Rs after 6 months. (Mituls security paper.) Now you need money before 6 months, so you write on a new paper, anyone who gives me 220 Rs, Ill give him 240 Rs. Worth Security papers of Mrunal and Mitul. that new paper you crated is again a security but it doesnt have direct-money attached with it instead, it derives its value from the security papers for Mrunal and Mitul. So your new paper is called Derivatives lets now deviate from our articles topic for a while to learn a few things related to recession from above talk. Mortgage, Asset bubble & derivatives 3

You give me 100 Rs. And I give you paper saying if I dont pay back, you can take away my house this is mortgage. But again this is also one kind of security paper Now youre a big bank, so youve plenty of such mortgage papers because you give loans to lot of people. (even to those who cant afford to pay back the lo an) Then you repack those mortgage papers (security ) and make a new security paper anyone who gives me 500 Rs. Ill give him mortgage papers of 5 houses = this is derivative product. Suppose 3rd guy bought such derivative papers and after few months, he repacks them- makes another derivative product and sell it to 4th guy. Such papers are one sort of asset (because you can get money from someone using it.) but as you can see, you did not create any new asset youre just keep reselling same stuff over and over to different people. So youre blowing a bubble After few months, I refuse to pay money, and tell the 4th guy to take away my home. But the prices in reality sector are low so even if you sell my home you cant recover your 100 Rs. = this is toxic asset / NPA = non-performing asset and your asset bubble is burst

Financial Market

You gave me money I gave you a piece of paper (security) The place where we did this business is called financial market. If I had promised to pay back money in less than 1 year (=short term loan) , this will be called Money Market If I had promised to pay back money after long time like 10-20 years (=long term loan) , this will be called a CAPITAL MARKET. Players in Capital Market (diagram)

Subparts of capital market. As said above, when I take long term loan = its capital market. When initially I took money from you and give you piece of paper = this is PRIMARY market. * But after sometime, you need the money while Im going to pay back after 10 years. So you borrow 100 Rs from another guy and give that piece of paper (=security) to that guy. And tell him to recover the money from Mrunal = you traded my security. This is SECONDARY MARKET (Sharemarket / BSE/NSE etc) (*this primary market will be discussed in another article) our current article deals only with capital market.) Its the job of SEBI to control both Primary & Secondary Capital market in India. (detailed article about SEBI,BSE,&NSE is coming soon.) As you saw on above diagram that Govt. is also a player in capital market. So, Why does Government issue securities? Suppose Im the Govt. My expenses are more than my income = Im in deficit (gap) Ive following options to cover that deficit

1. Increase tax rates (income tax, VAT, import duties) But this will make people unhappy and theyll not vote for me in next election 2. Print more money But this will create inflation= again unhappy people= less votes. 3. Borrow from international institution (world bank / IMF) But if I borrow too much, Ill have to play by their tunes regarding Kashmir, Copenhagen, WTODoha. 4. Borrow from people within India This sounds safer! So Ill issue securities. (When you issue for the first time = youre in primary market.) keep in mind that Govt. does this for short term deficits. (its like I need money in October 2010 but youre going to pay income tax in March 2011 so Ill use this trick to cover my money needs.) Govt. generally plays only in the primary market. When you give me your money and receive that piece of paper (security) = you can be certain that Im going to pay back and wont run away like Ashok Jadeja. After all Im the Government. And I pay good profits. thats why Govt. securities are called Gilt-Edged securities How does this thing work? As I decided to issue security in primary market, but that doesnt mean Ill send my peon/clerk/Secretary to the primary market with bag full of papers (security) and sell it like vegetables. I give my piece of papers (security / treasury bills) to RBI- theyll give me the money and then RBIs men will sell it in the primary market. = RBI is Govt.s debt manager.* *Security Paper= Im going to pay money after some time. = Im in your debt. And RBI managers my security papers so theyre my debt manager. Separate debt Management office. Ok so now you know that RBI is Govt.s debt manager. But consider this RBIs main job = maintain liquidity (=money supply) in market via monetary policy (=CRR,Repo etc crap) But, When RBI sells Govt. securities in primary market, and give the money to Govt. = money supply flow is interrupted = liquidity is drying = harder to get loans = conflict of interest. Thats why many people are calling for separate Public debt Management office and relieve RBI from this duty. Ok now ,final part in this article-As we saw, there are 2 types of capital market : Primary and secondary. but

Why do we need Secondary market? 6

Gives Exit Route Im going to return money to you after 10 years. So your hands are tied you cant recover it from me until next 10 years, so what if you needed money in emergency? Youve secondary market so youll sell my security to someone else and recover the money. Otherwise, In the absence of a secondary market, many of the investors would probably not agree to supply capital (money) in the primary market because they would not have an exit route for their investment. Gives Price information By active trading by millions of investor, you get price information regarding the securities. This price information is used to judge 1. the corporate performance (share prices) 2. performance of the Government 3. economy (through interest rates on Government debt). 4. facilitating value-enhancing control activities (mergers & acquisitions) and 5. enabling implementation of incentive-based management contracts (employee stock options).

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[Economy 4 Newbie] SEBI & Stock Exchange (The Beginning) This is the first article regarding how and why SEBI came to existence and how things were running in Stock markets in old times. The more about how they calculate SENSEX etc. will be dealt in upcoming articles later on. As usual, my articles are politically and technically not 100% correct. What is SEBI? Securities and Exchange Board of India = SEBI It regulates both the primary and secondary markets. (explained in my previous article) It protects the interests of the investors in securities It promotes the development of the securities market. SEBI was established in 1988 but was given statutory powers in 1992, and started working effectively since 1993. Why did the government create SEBI? 7

As you know that in India, the Government wont do any major reform or action unless the things get messed up really bad. The same was the case why SEBI was given the power to control both primary and secondary market because they were in complete mess. So lets first see, what was the problems in primary and secondary markets before SEBI came in picture. The problems in Primary market before SEBI came primary market was extremely restrictive regulations on the issuers enforced by the Controller of Capital Issues (CCI) Now lets assume Im the big businessman. Primary market is where i issue my security for the first time. I cant fix the prices of my shares, as I like, because ive to follow the rules made by CCI. but that dude always underprice my issues. When I put my equity shares for the first time in Primary market = this is IPO (initial public offering) but now as you know that I cant fix high prices for my IPO due to CCI dude. so my IPO is very cheap. so lots of people will send application to buy it because its cheap (= over subscription) so ill have to give the IPO shares via lottery only to a few people. but those who get my cheap IPO via lottery will immediately go to secondary market and sell it at higher price. = I lost money (that I could have made if CCI dude allowed me to sell my IPO @ higer price.) and those lucky dudes who won the lottery made money without really doing anything. As you can see, all this is not good for industrial Development. 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. So lets see the

problems of Stock markets before SEBI came first organized stock exchange was established in 1875 in Bombay (now Mumbai) there were almost 20 regional stock exchanges in 1992, but trading was concentrated in Bombay Stock Exchange and it enjoyed a monopoly Users from outside Bombay found it extremely difficult to trade in BSE due to poor technology and high cost of telecommunications. (they didnt have internet or cellphones with free incoming calls in 1992!) BSE imposed a high entry barrier, so that competition among brokers was absent. Thats why services provided by the brokers were, thus, extremely inefficient and costly. (its same like Indian railways stinking toilets- you cant complain because railway dont have much competition.) Specific problems in Share market before 1992 open outcry system means trading used to take place in trading ring where non-brokers were not allowed in. 9


These traders will shout the prices like weve in vegetable markets. There wasnt any mechanism to verify the prices at which trading actually took

So, brokers used to charge prices to the investors (buyers and sellers of securities) that were usually different from the actual prices =brokers used to report higher than actual prices for buy orders and lower than actual prices for sell orders). If investors (buyers or sellers) demanded a more accurate price, orders often got cancelled (for example, the broker could simply claim that such a favourable price was not obtained in the market). The settlement system payment of money and delivery of securities after trade by the brokers to both parties (buyer and seller of shares) it favored the brokers and was to the disadvantage of the investors. the settlement was futures-style and was on a fortnightly basis. means that trading done during a fortnight would be settled at the end of the fortnight. system of badla =enabled the brokers to carry forward their liability (of money or securities) to next settlement. so, brokers could postpone settlement almost indefinitely, if the prices were not favorable to them. This led to a high degree of risks. Large-scale problems arising out of failure to make payment or deliver shares, would lead to closure of BSE for days together, this used to recur at the rate of almost once every other year. bad delivery of Shares 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. At this stage, the problem of bad delivery arose due to a number of problems if the signature of the seller did not match with the one maintained with the registrar, the shares were sent back. Reasons for inaccurate signature The seller of the shares, who probably purchased the shares years back, might unwillingly sign in a different manner. But in many cases, manipulations by unscrupulous operators were responsible. counterfeit shares (wherein any signature were put by the counterfeiter), Engineering bad deliveries by selling partys brokers or by the companies themselves to delay settlement in order to support price manipulation. The time lag between buying shares and getting it registered in the name of the buyer used to take anything between 1-3 months if everything was alright. The time lag normally went up to six months on an average in case of bad delivery. Anyways so above were the problems with primary + secondary market so Govt. made a law to give powers to SEBI to control them both. And so CCI was abolished.


NSE (National stock exchange) was established to end the monopoly of Bombay Stock Exchange. NSE (National stock exchange) NSE was a new exchange promoted and owned by public sector financial institutions (like IDBI, UTI, LIC, GIC, IFCI, etc.) and banks. NSE is professionally-managed (as opposed to the other exchanges that are managed by brokers or members still today) You saw the problems of BSE ago, and to curb them, NSE came with 4 innovations

Computerized trading First, physical, floor-based, brokers-dominated trading outside the eyes of the investors was replaced by anonymous, computerized order matching system where trading is done in front of the investors. The order-matching system is characterized by strict price-time priority, wherein an order is executed according to the price parameters set by the investors. The OTCEI, which was set up in 1992, was the first computerised exchange in India. NSE started operations in 1994 with electronic trading, while all other exchanges introduced electronic trading subsequently. By March 31, 1999, all the 23 stock exchanges in the country had computerised online screen based trading. Satellite communication to spread the reach of the exchange to all over the country was attempted successfully, for the first time, by NSE. This was in stark contrast to the other exchanges which till then had the reach limited to their cities of operation for over a century.


Professional managers the traditional exchanges were and still are managed by the member brokers. This gave rise to many malpractices, a conflict of interest being the most important one. Since the brokers themselves were in charge of enforcement of rules and regulations, they never took a decision in favour of the investors that went against their interest. This gave rise to a conflict of interest between the members as brokers and members as responsible for enforcement of rules and regulations. NSE avoided this problem right from beginning because it was set up as a limited liability company with brokers as franchisees. This led to a situation where brokers were not held responsible for enforcement of rules and regulations, and those who were entrusted with enforcement (professional managers) were not brokers. As a result, NSEs staff is free of pressures from brokers and is better able to perform regulatory and enforcement functions. Weekly settlement If you buy shares from me, youve to give me the money in 1 week and Ive to give you the shares in the same 1 week. the traditional practice of fortnightly settlement cycle + system of badla that allowed extension of even this fortnightly cycle was replaced by a strict weekly settlement cycle without badla. Result-BSE Is busted Equity trading at NSE commenced in November 1994. Within one year of operation, NSE surpassed the BSE in terms of turnover. BSE was working since 1875, with monopoly now it had to face competition with So in March 1995, BSE also adopted similar innovation to keep up in the race.


All this, lead to 5 good things Stock markets


Improved Transparency: Investors can see with their own eyes the prices that are currently being quoted in the market, and choose to trade or not. Anonymity= no cartels The electronic trading platform makes trading completely anonymous. Traditionally, lack of anonymity in trading in the floor-based system gave rise to cartels (of brokers) and made price manipulation easy. NSE was a break from this tradition as well and removed much of the scope for price manipulation. More brokers = competition =good for clients 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. This led to a drastic fall in transaction costs. (*the brokers Commission) No more bad delivery Automation of the trading system eliminated all the problems associated with manual trading (e.g., bad delivery/ signature etc.) Investors outside Mumbai can earn money 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. Earlier, Bombay stock exchange was the pre-dominant one in the country, but investors outside the city found it extremely difficult and costly to do business in the exchange. (no cellphones with free incoming!) Thus, true to its name, NSE turned out to be the first national stock exchange. 13

This benefited the investors from outside Mumbai more than perhaps the investors within the city.

National Securities Clearing Corporation Limited (NSCCL) 1995) Its a subsidiary of N.S.E, to prevent the counter party risk. (established in August

counter-party risk means the risk that one of the two parties in a transaction may fail to honour their commitment to pay cash [buyer] or stock [seller] on the scheduled settlement date For every trade (buy or sell) done on the NSE, NSCCL becomes the counter-party. means, the seller sells the securities to the NSCCL, and the buyer buys from the NSCCL. Even if a brokerage firm fails to make payment (or deliver securities), NSCCL makes the payment (or deliver securities). This has almost eliminated counter-party risk and contained the recurrence of payment crises that characterised Indian stock markets for almost a century. Demat account You read above, how the bad delivery of shares was engineering by the brokers.+ the menace of counterfeit shares. And the fear of theft of shares. To curb this problem, SEBI came up with the novel idea that is Dematerialization of share holding This means, youve to get a Demat account in the bank and when you buy shares, you dont get a piece of paper. That share gets automatically credited to your demat account. In November 1996, the National Securities Depository Ltd. (NSDL), the first depository in India, was established For this purpose. SEBI played an active role in gradual shifting from physical certificates to dematerialised holding by introducing a mandatory element in the process. Currently almost cent percent trading and settlement are done in a dematerialised environment. But things are not that safe and sweet, thanks to IPO scamDemat Queen Roopal Panchal

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[Economy 4 Newbie] Infrastructure Roads, Railways, Seaports etc Infrastructure is one of the most important topics for UPSC, because in mains-essay-interview it helps you frame better answer in almost all questions regarding Indias problems (ranging from Maoist to insurgency to poverty) this article is just to give basic highlights about infrastructure concepts, the minute fact-data you can find from any magazine. What is infrastructure? In simple terms, things like roads, dams, power-plants,schools, etc. help you in your life and business = this is infrastructure. infrastructure is defined in dictionary as the underlying foundation or basic framework 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

Whats the use of Infrastructure? Why infrastructure in important? How does it help in economic Development ? Infrastructure contributes to development both directly and indirectly.


When Govt. opens more polytechnique, IITs,IIMs youll get better trained people to work in factories and business.thus, Quality of labour is enhanced by human capital improvements via Social infrastructure Suppose youre running a cybercafe. So, the shop, the computers and internet connection is your capital (=something that generates money.) 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, productivity of physical capital is improved by power and transportation etc economic infrastructures.

If youre a truck driver. If the roads are bad then? Trucks tyres,engine will need more servicing. If the roads are good then? youll be able to drive your truck faster and make more trips. Thus, Infrastructure lowers the cost of producing a given level of output or, alternatively, can increase the amount of output produced by all other inputs for a given cost. Infrastructure enables markets to work better. Transactions are made less costly and this increases the benefits of trade. For example, advances in transport and communications have considerably lowered storage costs by permitting producers to respond rapidly to changing consumer demands even in international trade. (this is referred to as modern logistics management). If youre running a factory, and there is no electricity 3 days per week, then youll waste lot of your money buying & running diesel generators & then youll sell your products at higher cost, to recover that money you wasted in diesel. Thus, Unit costs tend to rise due to unreliable or inaccessible public infrastructure. Both small and big firms spend a significant portion of their expenditure on buying infrastructure services and suffer when these are not available. Now lets take a look @ some very important segments of infrastructure. Physical Infrastructure Roads Roads are divided into five categories for administrative purposes. 1. National highways, 2. State highways, 3. major district roads, 4. other district roads 5. village roads


but yet

Central Govt. is responsible for maintaining the National Highways, other 4 types of roads are maintained by State Govt. Before LPG in 1991, only Govt. could invest in making roads. but after LPG, National Highways Act was amended in 1995 to allow private sector participation. NHAI (National Highways Authority of India) was created to build and upgrade national highways. Funds have been made available to the NHAI for its capital base through a tax on motor spirit and cess on diesel.

NHAI isnt working @ its full potential because 1. Frequent change of officers ( 5 chairmans in last 3 years) 2. Environment ministry clearance (you want to chop down trees to make roads then you need permission from Forest Dept.) 3. Land Aquisition Sam Pitroda has pointed out the difficulty 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 Railways provide energy efficient form of transportation compared to roads. i.e. you want to send tonnes of wheat/coal from one state to another, itll consume more dieasel if you do it via trucks. railway services are intermediate inputs to production; any reduction in these input costs raises the profitability of production. CROSS SUBSIDISATION Traditionally, railways are seen as part of essential public service =railways should not be denied to even those who are unable to pay fully. (=poor people should also be allowed to enjoy railways= Garib Rath / Student concession pass etc.) But it doesnt fall from sky, if someone is enjoy something then somebody has to pay money for it, right ? so, freight charges* and upper class passengers ticket prices are set high, to cover that cost. this is called Cross subsidisation Railways earning 30 % from Passenge tickets 70 % from Freight traffic.* <*when you send physical items like wheat / coal = this is Freight>


Problem for Railways as you saw, 70% of Railways profit comes from Freight traffic but nowadays its facing high compitition from other sectors. like road sector the four-laning of the Golden quadrilateral and tnew expressway stretches. use of pipelines for the transportation of petroleum products coal and cement have started moving via coastal shipping. + Cheaper airplane tickets so those previously moving via 1st class AC Railways, switch to Airlines when prices are low. But above 4 are also infrastructure (roads, pipelines,shipping ports, airports!) so any Development of one infrastructure may degrade the Development of other infrastructure But, ultimately the common people benefit from it.+ Compitition lowers the prices To solve the problems, Railway had taken some steps Gauge conversion, doubling of existing single lanes, electrification projects, allowing Private companies to make wagons and passenger coaches running Duranto Expresses and many more.

Seaports India has coastline of 7,000+ kms and 12 major ports (managed by Central Govt.| account for over 75 % of total cargo) 185 minor ports (managed by State Govt. |25% Cargo transported via them) ports. After LPG, Private companies are allowed to participate in Development of these

If you want to export Wheat to S.Africa, then itll be expensive if you do it using aeroplanes. but cheaper via sea-routes. But first of all youve to transport the wheat grown in Punjab / UP/Haryana to Mumbais port via Railway/Trucks. Thus, Ports require good inland connectivity (via rails/roads) so Efficiency of one infrastructure depends on other infrastructures. Thats why, Government is investing in improving the road connectivity to major ports through the NHDP.


REGULATION of sea-ports as you know, there is TRAI (Telephone regulatory Authority of India) as judge for telephone related matters. (otherwise BSNL will act as monopoly and pvt players like Vodaphone, Airtel wont get level playing field in spectrum allocation etc.) same way, for level playing field in sea-port operations Tariff Authority for Major Ports (TAMP) has been set up. landlord ports when cargo handling is done by private players, such ports are called landlord ports. (just like airport Management given to pvt players.) but in India all major ports are run by Port Trust made by central Govt. the concept of Landlord ports is not yet implemented in Major Ports. but A wholly private owned port of Pipavav is setup in Gujarat = this is Landlord Port. port of Sika ( Gujarat) accounts for the largest cargo handling among all ports in the country. (its connected to Reliance Refinery @ Jamnagar.) Airports Airports are under the management of Airports Authority of India. Private investments are to be drafted for the upgradation of the four major airports (Delhi Mumbai Kolkata and Chennai). greenfield airports under private ownership are coming up at Bangalore and Hyderabad. new airport promoted by Kerala State Government has come up in Kochi with private investor participation. Problems Tax on Aviation fuel = air-tickets costly. Big burden on tax payers, known as Air-India. Energy estimated 80,000 villages yet to be electrified, Problems in Electricity supply Uneconomic tariffs charged from the priority sectors, Factories have to pay higher bills per unit of electricity so that Govt. can give free/cheaper electricity to farmers. (again cross subsidisation) High transmission and distribution losses (T&D losses) because of bad equipements. Electricty theft. Financial constraints to undertake systems improvement schemes = since youre supplying electrictity @


communication New Telecom Policy (NTP) was introduced in 1999. its aim is to provide connectivity to all rural, hill villages & remote parts. + level playing field for pvt players.(against BSnL) over 2,00,000 villages were unconnected (as of June 2002) Many rural / hill areas dont get adequate telephone/mobile connectivity because theyre high cost service areas =mobile companies dont earn enough revenues (income) to cover costs of operating in that area. Thus it falls on Govts shoulders to do that work. (thats why Govt. PSU BSNL exists.) > this is one of the arguments in favor of public sector undertakings = to serve the people where pvt players are not interested to work in. anyways, back to the topic:Universal Service Obligations: (USO) in short Govt. says itll try to give phone connectivity to rural areas. for this they created a fund called USO fund. so when pvt players do something in rural areas, theyll get money from it. Govt. is trying to increase the teledensity in rural areas via 3 strategies Niche Operators It is assessed by TRAI that despite the USO support, existing big service providers would not be interested to serve about 50 per cent of the villages. To address this issue, TRAI in its Unified Licensing recommendations envisaged that the Short Distance Charging Areas with teledensity less than 1 per cent be notified as telecom-wise-backward areas. In these areas, niche operators, defined as the telecom service providers whose services are restricted to these backward areas only will be inducted. These operators are entitled 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. Creating Mobile Telephone Infrastructure means if youre setting up mobile tower / need land in backward area then Govt. will give you subsidy. but after 1 year youll have to share that tower with other players by taking some fees from them.

Subsidising the Rural Household DELs in short it means if youre the Tata/ Airtel/Vodafone and if setup phone lines in rural areas then Govt. gives you subsidy for that work.


Banking Infrastructure What does the Bank do? it saves your money, give you interest on it and itll give that money as loan to someone else to buy home/start business.thus, Banks transfers the savings into productive investment. But its not just the banks- but share market as well that transfers savings into investment.

Inter-State Difference in infrastructure In Bihar only 10% of households have access to electricity, While in Andhra its 67% (2001 Census ) (well have to go to Development administration, polity ,centre state relations, history etc things to understand this inter-state difference in infrastrucutre.) so not writing much on that here. until now we talked of Physical infra. now lets see the Social infrastructure Health Human Develpoement index has 3 components Income Knowledge Health. Some Facts10th Plan talked about effectively using traditional Indian medicine system consisting of ayurveda, yoga, unani and siddha. These combined with homeopathy is named as AYUSH (was asked in mains 2009.) Generally Govt. funds are mostly spent on preventing the of communicable diseases.(AIDS, Cholera,Polio etc) + family planning schemes. But in 10th plan they talked about National Mental Health Programme (for mentally challanged) India has 1/6th of humans living in this world. By 2050 well be the country with largest population on earth. large population has its problem- drinking water, food etc. Total Sanitation Campaign = making toilets in the rural areas = sanitation = people dont fall ill in water-bourne disease = their productivity increases (since theyre not in bed and doing work (=earing money)+ their savings saved from being wasted in medicines.) 21

Education In todays speech, Obama said the best poverty removal program is world class education You can find the data regarding Sarva-Siksha Abhiyaan + Mid day meal from yearbook or similar books/magazines. So Im not writing much on it here. Now the last part for this article

Who should create infrastructure? 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. But Govt. spent crores of rupees making the bridge + theyve to maintain staff to collect those fees from cars , and pay that staff the salary. So itll take almost 100 Years to recover the money Govt. invested it. Second case We get water from Narmada dam, every morning for 2 hours. For that weve to pay about 450 Rs. A year. Again- as the same reason given above So itll take almost 100 Years to recover the money Govt. invested it making the dam. But we cannot deny the fact the bridges and dams are important. But private players wont be interested in making them because it takes long time to recover the money invested = long gestation time. Thats why the physical infrastructure like heavy industries, dams, roads, bridges etc. is considered to be responsibility of the Govt. Problem when Govt. starts doing something = red tape, inefficiency, corruption. + nowadays Govt. doesnt have lot money to make new project. Thats why they talk about keeping the private players So we get PPP = public pvt partnership project. Then weve BOT= build operate transfer type of project. Ill talk about this two (PPP/BOT) in detail in another article.

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[Economy 4 Newbie] Money market, Repo Rate & Call Money Mrunal update October-18-2012: This is Old and outdated article. dont pay much attention, Ill refine and rewrite it later. What is money market In simple terms, if I borrow money from you for less than 1 year = the place where we do this deal is Money market For long term loans = Capital market. See this diagram

Technical definition market refers to the market for short-term funds, i.e., up to one-year maturity. money market is the place where lending and borrowing is done through instruments having an original maturity of up to one year. Use of money market money market provides a mechanism to balance the demand for and supply of short-term funds. the opportunity for players to invest their short-term surplus funds and to borrow short-term funds in case of deficit. Its interlinked with Foreign Exchange market (read my article on currency devaluation for more on this) Call/ Notice/Term Money Market


It is the market for borrowing and lending for short-term periods (usually upto 14 days, but at times more than that) The deals mostly by commercial banks. It is a telephonic market, i.e., deals are struck over telephone and reported to RBI. (thats why its call market) Commercial banks often face temporary shortages of funds (e.g., to meet CRR and SLR requirements, or sudden outgo of funds) or temporary surpluses. When a bank is in shortage of funds, it telephones & borrows from another bank which is in surplus. 3 types of deals in Call Market

Call Money If borrowing (or lending) is made for one day (overnight), it is known as Call Money. This segment is also called overnight money market. Notice Money If the maturity of borrowing (or lending) is more than 1 day but up to 14 days, then it is known as Notice Money. Term Money Term Money refers to money borrowed (or lent) for more than 14 days but less than one year. In Indian money market, most of the transactions are of call money and notice money. Players in Call Market


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) RBI, as regulator, routinely participates in the market to inject liquidity (lend) or to mop up liquidity (borrow). Repos/Reverse Repos Example repo (also known as ready forward contract) transaction,

Suppose I write on a piece of paper anyone who gives me 100 Rs. Ill give him 120 Rs. After 1 year this piece of paper is security. Now I give that paper to you and collect 100 Rs. And tell you that Ill buy (repurchase) that paper after 6 months and give you 110 Rs. This is called repo-contract And this period (6 months) is repo period. Now remember the mirror in the mirror my left hand will show as my right hand. Same is for Reverse Repo Rate When 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) 25

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. The players in Repo / Reverse Repo Rate

RBI, Scheduled banks & Primary dealers can borrow and lend Non-Bank participants (Finacial institutions) + companies listed in stock market can only lend , they cant borrow. Lets rewind the liquidity tape 1. Liquidity = How much money in the market? = if money is plenty= easy to get loans @ cheaper interest rate = this is called cheap / easy money. 2. When there is less liquidity =hard to get loans and the interest rate will be higher = this is Dear money. 3. Where there is too much money= inflation 26

4. When there is too less money= bad to business as you cant get loans easily to run your works. 5. So RBIs work is to fine tune the liquidity (money supply.) = tuning the dear money / easy money policy based on the situation. See this diagram

RBI & Repo 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 means, RBI is ready to sell as much securities as is demanded by the participants at the fixed rate. This rate is fixed in the sense that it does not change on a daily basis depending upon the supply-demand condition of short-term liquidity Changes in the fixed repo rate are usually made in the Annual Monetary and Credit Policy or in the Mid-Term Review of the Monetary and Credit Policy. RBI & Reverse Repo 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. Definition difference from international market. Keep in mind, the terms repo and reverse repo have been defined above, is just opposite to the international practice. That is, what is repo in Indian terminology is reverse repo in international parlance, and what is reverse repo in India is internationally known as repo. In a fast globalising environment, this may create confusion.


Consequently, RBI has changed the definitions of repo and reverse repo to bring them in line with international practice with effect from 27th October 2004. However, in this article, we have throughout followed the older (Indian) definition. Money market topic 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.

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[Economy 4 Newbie] Kerosene Subsidy & Parikh Report Introduction As usual nothing 100% technically or politically correct. and As usual media is not playing its role right. Since yesterday theyre all crying in loud and angry tone that they all are covering Kirit Parikh Committees Report only highlighting LPG rates will be hiked by Rs 100 per cylinder and kerosene by Rs 6 per litre. And their tone is like Mr. Parikh is the enemy #1 of India by suggesting price rise in petro-products. But none of them is actually explaining why exactly Parikh is recommending for price rise? 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. Govt.s intention for selling cheap Kerosene If kerosene is expensive 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.

See this chart


If poor people use wood / dung for cooking then? indoor pollution respiratory disease, eye burns. thus, Life-Expectancy of women + infants reduced. These are Govt.s good intentions for selling cheap kerosene but lets look @ the ground realities. Kerosene Smuggling! price of PDS kerosene in India is very low in comparison with that in neighbouring countries -Bangladesh and Nepal. The price of kerosene in Bangladesh and Nepal is Rs. 29.28/litre and Rs. 36.29/litre respectively as in January 2010, more than 3 to 4 times the price in India. So people are doing cross-border smuggling this is referred as Fuel tourism Size zero coins Related to the fuel tourism, previously our currency coins were thick in size esp Rs. 2 & 5 but these people would smuggle it to Bangladesh and melt it and make shaving razor-blades from it. 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 youve thin-size zero coins for 1/2/5/10. Anyways, back to the topic-


Kerosene & Cooking NSSO survey says that In 2004-05, 62% of the rural households got kerosene only from PDS and consumed less than 3.5 litres per month But, less than 1% used it for cooking but 60% used it for lighting. 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 Kerosene & Light The primary objective of subsidizing kerosene is for lighting purpose. In the absence of electricity, kerosene has, for long, been the only source of lighting (apart from more expensive vegetable oil-based lamps). However, with the development of LED lights, LED lanterns using ordinary dry cells provide an alternative which, at comparable cost to what household spend on subsidized kerosene, provides better light and involves no subsidy. As manufacturers make these lanterns available across the country, the need for kerosene for lighting will reduce. But, these alternatives pose the problem of safe disposal of used-up cells but its not really challenging task. Solar lighting systems can also provide an alternative albeit at a much higher initial cost. Kerosene & Electricity :- Double subsidy! For BPL people, there is Rajiv Gandhi Gramin Vidyutikaran Yojna (RGGVY),for getting electricity supply but yet theyre using kerosene for lights. Since kerosene subsidy is going largely for lighting, the allocations should be reduced as more and more BPL households are connected to the electricity grid. Such connections under the RGGVY are subsidized and continuing kerosene supply to such households amounts to double subsidy. Kerosene used in Diesel vehicles! Large price difference between PDS kerosene and diesel is an incentive to divert kerosene to adulterate diesel. Estimates suggest 35% or more of PDS kerosene is diverted for unauthorized purposes including adulteration. A consequence of this diversion is that the more than Rs.20000 crore of investment in producing Euro III and Euro IV diesel would be negated to large extent if diesel continues to get adulterated by kerosene. Govt. adds some dye in kerosene so PDF kerosene becomes blue color, but that doesnt solve anything. (if you put sand +charcoal+ some chemical power then blue colored kerosene will become white again) Diagram


How to prevent Kerosene adulteration in Diesel vehicles? first important step in kerosene pricing should be to have one price in the market Kerosene price should be close to the price of diesel so as to eliminate any incentive to mix it with diesel! This can be achieved if PDS kerosene is provided to BPL households through a system of smart cards with biometric identification. The cards would indicate the households entitlement of subsidized kerosene. This will reduce PDS kerosene need by one third, as diversion would cease. Direct cash transfer instead of subsidy? When we say kerosenes price should be closer to diesels price so it becomes unprofitable to mix kero with diesel. But then you full proof distribution of subsidy kerosene and OR give direct cash to poors so they buy kerosene from market instead of PDS shop. But then suppose a poor man given 100 Rs. To buy monthly kerosene for his family , he may not buy it and instead buy liquor and beat up his wife to collect firewood from jungle for cooking. Thus, The argument for providing subsidy in kind rather than in cash rests on the problem of intra-household distribution of expenditure where a womans needs may get a lower priority. This intra-household distribution problem can be addressed to some extent by transferring cash to the account of woman of the household Smartcard & Kerosene- time delay the use of Smart Cards for targeting the subsidy on kerosene may take two years or more until the UID project becomes fully operational, so Parikh Committee recommended that allocation across states should be rationalized to bring down all-India allocation by at least 20% and price of PDS kerosene be increased to at least Rs.15/litre so as to keep subsidies under reasonable level this will keep diversion and adulteration under check. Thereafter, price of PDS kerosene be raised every year in step with the growth in per capital agricultural GDP at nominal price. 31

Developed States & PDS Kerosene Over the years, distribution of PDS kerosene has developed an inverse relationship with the income levels of states, which needs to be rationalized. For instance, the average per capita kerosene allocation in high income States in 2007-08 was 14.1 litre which was 41% higher than that of the low income States. economic development and improvement in power supply, the percentage of households using kerosene in different States has declined. (so where is all this Kerosene going ?) Most of the households use only 3.5 litres per month. State-wise allocation should be based on the number of BPL households without electricity in rural areas and urban households using kerosene for cooking. Since electricity supply may be erratic, a smaller allocation say 2 litres per month may be made for electrified BPL households. subsequent progress of rural electrification, LPG and piped gas availabilities is expected to reflect much larger reductions in Kero use in coming years. Poorest Rural BPL spends around 2 per cent of its monthly expenditure on kerosene. While they spend 13 %per cent of , what one might call, its discretionary expenditure on 1. entertainment, 2. personal effects, 3. toilet articles, 4. sundry articles, 5. consumer services 6. conveyance. There is therefore, some scope for increasing price for PDS kerosene. if we take the growth rate of per capita GDP in agriculture, that should give a good measure of the ability of the rural poor to pay. How to calculate new price for Kerosene? 2002. PDS Kerosene prices have not been raised from around Rs.9 per litre since March

During 2002-03 to 2008-09, the per capita agriculture GDP at current prices has increased by around 60% (at an annual compound growth rate of 6%). By 2009-10, the increase is likely to be 66%. A 66% increase in kerosene price would keep the share of expenditure on kerosene at the same level as in 2002-03. Thus, the price of PDS kerosene could be raised by 66% to reach a level of around Rs. 15/litre without putting undue burden on the poor.


Kerosene & Parikhs recommendations Parikh Committee recommends that issue price of PDS kerosene be raised by Rs.6/litre and should be revised every year in step with per capita agricultural GDP at nominal prices

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[Economy 4 Newbie] Govt. Price control on Petroleum Products- Why Background

80% of our oil is imported. 2008 saw an unprecedented rise in oil price on the world market. Crude Barrel price increased from US$ 36 / barrel in May 2004 to US$132.5 / barrel in July 2008, government did not permit Public Sector Oil Marketing Companies (OMCs) to pass the full cost of imports on to domestic consumers of major oil products, i.e., petrol, diesel, domestic LPG & Kerosene. Since it doesnt fall from sky,somebody has to pay for it. Govt. paid it- via issuing bonds to Oil making Cos. So what we are getting is subsidized product and this is how Govt. controls the prices of petroleum products

Bad Consequences of Governments Price control on petro-products

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. Since Petro is cheap, every Tom, Dick and Harry around is going to fill his bikes tank full and loiter around the city & colleges with out doing any productive work. People are going to use vehicles even for short distance travel which they could cover on foot/bicycle or public Bus/Railway So Fuel shortages are nearly universal when prices are kept low. Since petrol is cheap, people dont use extreme parsimony /care in its use. Subsidizing domestic consumers also doesnot incentivize them to economize on use of petroleum products.


Market malpractices like hoarding, black marketing, and adulteration thrive when prices are controlled arbitrarily. Especially for Kerosene, I see long lines of Rickshaw drivers in front of those Kerosene vendors every evening why do they come there? Major oil exporters that subsidize petroleum product prices can actually become product importers for lack of investment in the downstream sector. Iran, Iraq, Nigeria and Mexico are prime examples. Cross-border price difference trend to widen when prices are kept low; it encourages fuel tourism/ Smuggling especially for Kerosene.

Whats the consequence of Oil Subsidy?

They put stress on governments finances. Lot of Govt.s money goes into subsidizing these things which could have been used for other projects. Oil cos have to sell their product @ the price determined by Govt. thus, they dont have big cash surplus to invest in finding new oil wells in country or buying oil fields abroad. Govt. doesnt issue oil bonds to Oil cos on time, they created cash flow problems for OMCs who had to borrow from the market, which increased interest payments and reduced their surplus. only the OMCs were provided financial support, the private sector companies withdrew from oil marketing. This not only made infructuous the large investments they had made in setting up retail outlets, it also reduced competition in oil marketing. And low competition amongst manufacturers is bad for consumers.

People earn more, yet pay less for petro

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

Note: these are the observation of Parekh Committee!

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.

Why Should the government intervene at all in the market and set prices?

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. 34

Villagers using Cattle-dung but Cattle dung has better use a manure.

If you use wood / dung for cooking then?

indoor pollution respiratory disease, eye burns. thus, Life-Expectancy of women + infants reduced.

if Diesel was expensive then?

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)

Cycle of Inflation even if petro prices go down

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.

Ultimately even Cheap Petro is bad for everyone!

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. tax rise = rich & middle class MRP of products increase due to higher VAT on other things so on one hand you get cheap petro on the other you get costly soap/toothpaste. and even poor are affected because everyone buys matchsticks. Fiscal deficit= (its consequences are discussed in my old article on public debt.) Suppose they chop down Govt. Expenditure on girl education to release some subsidy money for cheap petro= society suffers in long term.

kills the innovation

Price control means setting prices price calculations involve rigid specifications of items to be considered and their costs. 35

today most people get gas via cylinders have to wait after booking the cylinders. but if they laid the pipelines in every town and city , gas connection to every homethatd make the life of a middle-class man very easier. but initial cost of setting the pipelines is high, and since Govt. doesnt let the LPG sold @ higher prices, Oil cos have no money for it and Govt. pays for petro-subsidy, instead of using that money to lay down gas-pipelines- to settle the problem atleast in major cities.

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.

What happens if Govt. stops regulating?

if international crude oil price rise from $60/barrel to $120/barrel then price of petrol in Delhi is required to be increased by Rs.20/litre, the price of diesel by less than Rs. 20/litre and LPG by around Rs. 200 per cylinder.


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.URL to article:

[Economy 4 Newbie] Petrol-Diesel-LPG Subsidy- The Parikh Solution Petrol 1. Petrol is largely an item of final consumption. 2. So Petrol price, therefore, has a very small impact on inflation 3. Because goods and veggies are transported via trucks which use diesel. One Example A two-wheeler consumes, on an average, 86 litres of petrol per year, for which the owner spends Rs. 320 per month (Rs. 510 in Delhi). The fuel expenditure of car owners is much larger at Rs. 2210 per month (Rs. 4140 in Delhi). Motorized vehicle owners are largely well-off persons belonging to the upper two/three deciles of the population. There is no reason to subsidize this class of consumers. Full price pass-through at US $ 80/bbl will increase the retail price of petrol by around Rs.7/litre. The additional expenditure of a two-wheeler owner would be only Rs. 50 per month (all-India average). If higher petrol prices lead to less driving, more fuel efficient vehicles and an efficiency increase by 20%, the additional cost would be that much less. Parikh Committee believes that the cost increases can be borne by motorized vehicle owners and recommends that petrol prices should be market-determined 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-


Diesel & Agriculture Farmers use diesel for following things tractors, thrashers, tillers, harvesters, pump -sets Diesel & Farmers if diesel price rise- theyll suffer BUT Government can compensate via fixing higher Minimum Support Price (MSP) for major crops. Therefore, any increase in the cost of diesel will be reflected in the price and will not adversely affect farmers Higher diesel price will induce them to use less diesel which may reduce over-use of ground water prevalent in many parts of the country (via pump-sets) Govt. instead of giving cheap diesel- uses that subsidy money to build more canals, then farmers wont have to use lot pump-sets anyways. higher diesel price = higher MSP will increase subsidy for PDS, (since food become expensive, Govt. has to give more money to supply same quantity of PDS wheat/rice.)


Diesel & Truckers Trucks and jeeps & SUVs consume around 40% of diesel. With industrial revival and higher economic growth, the truck owners generally raise their rentals in consonance with growth. Therefore, long distance charge for a round trip between Delhi and Mumbai for a 9-tonne truck is more than Rs. 40000 today whereas its diesel consumption works out to around Rs. 22000. Higher diesel price would encourage fuel use efficiency as well as greater use of railways for freight movement. Railways consume around 1/4th as much diesel per net tonne kilometer as trucks. means climate change help. Even assuming that the truckers, power generators, industrial users etc.(other than the passenger car owners) are able to pass on fully the additional cost of diesel, an increase of Rs. 4 per litre would mean an increase of around Rs. 20,000 crore in their cost of diesel which would be around 0.4 % of GDP in 2008-09. This should be compared with the inflationary impact of subsidies, which would be similar. Car owners who drive diesel vehicles, including Sports Utility Vehicles (SUVs), should be able to bear the additional cost. There is no economic or social reason to subsidize them so Parikh Committee recommends that the price of diesel should also be market determined both at the refinery gate and retail levels. And finally, LPG LPG Cylinders Subsidy situation LPG consumption is growing and global price is also expected to increase, the subsidy burden will keep growing. This is not a sustainable situation. Normally, a subsidized product ought to be given in limited amounts. However, domestic LPG is both heavily subsidized and available in unlimited quantity. The burden of subsidy can be reduced by either raising the price or reducing the quantity or both. How many cylinders used per year? 1. rural households use from 5.17 to 7.91 cylinders per year. 2. Urban people use 8-10 cylinders per year. 3. Poors use firewood/dung/kerosene 4. 57% of urban households but only 8.6% of rural households used LPG. 5. Rajiv Gandhi Gramin LPG Vitrak Yojana launched in 2009 aims to cover 75% of the population by 2015 which will substantially increase access of rural households to subsidized LPG. Wrong people getting cheap LPG?


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. Since providing universal subsidy through price below the cost misdirects the subsidy to the relatively affluent, a strong case can be made for subsidizing LPG as a clean cooking fuel for the poor. How to distribute LPG to poors? If the poor are to be subsidized, we need an effective mechanism to provide the subsidy. smart card system or transfer on entitlement based on the UID platform can be used which entitles a household a fixed quantity of LPG at subsidized price beyond which the market price would be charged. yet this can happenpoor getting cheap LPG cylinder- selling it to middle class family @ a little higher price and then burning firewood & dung to cook in his own home. So not just smart-cards you need a more full proof system like gas pipeline or something. Best solution is just simply giving direct cash- and then every one including poor men buy LPG @ market prices! Direct cash transfer instead of subsidy? Instead of subsidy, direct cash transfer to poors may be provided and everyone is charged the market price. But then suppose a poor man given 100 Rs. To buy LPG , he may not buy it and instead buy liquor and beat up his wife to collect firewood from jungle for cooking. Thus, The argument for providing subsidy in kind rather than in cash rests on the problem of intra-household distribution of expenditure where a womans needs may get a lower priority, and on the merit good nature of LPG use. The intra-household distribution problem can be addressed to some extent by transferring cash to the account of woman of the household The UID /Smart cardsystem, which is currently under progress, or the Smart Card system piloted by Petro ministry with biometric identification could provide a transparent, targeted subsidy delivery mechanism which can eliminate diversion of LPG cylinders for unintended uses. 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 this regard, we have only two options: either ration the quantity or raise the price. As we so ago- even with smart card- you give cheap LPG theyll go in wrong hands so youve to give direct cash transfer to poor not cheap LPG. Ration / Subsidy systems problem


Any scheme of rationing or limiting the number of cylinders at subsidized price without Smart Cards will involve a complex monitoring and inspection system more likely to promote Inspector Raj rather than effectively reduce subsidy. In the interim, therefore, there is no choice, but to raise the price of domestic LPG if the subsidy burden is to be reduced. As the NSSO survey data have shown, households have flexibility in absorbing certain additional costs on LPG by adjusting expenditure on discretionary items. Accordingly, LPG price can be increased at least to the extent their income has increased so that the proportion of income that they spend on LPG remains the same. How to calculate new price for LPG? The logic of adopting changes in GDP as a yardstick for increasing prices of PDS kerosene has already been explained in previous article. A similar dispensation can be devised for domestic LPG also. Since LPG is used largely in urban areas its price should be determined on the basis of growth of total GDP (in contrast to agricultural GDP considered for kerosene). The per capita urban GDP during 2004-05 to 2009-10 has increased by 84% (say 85%). Accordingly, the fair price of domestic LPG cylinder from the base price of Rs. 262/cylinder in 2003-04 is estimated to be Rs. 485/cylinder in 2009-10. Another way of assessing the level of price of LPG cylinder in 2009-10 is to maintain the percentage of LPG subsidy in the price of 2003-04. Parikh Committees recommendation on LPG pricing 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, a single price of LPG for all consumption purposes can prevail in the market, which will eliminate the scope for diversion to unintended uses. Subsidies to the targeted group such as the BPL rural households can be delivered as entitlements or through direct cash transfers to be given to the woman of the household. Since the above mechanism is yet to be made operational, an interim measure needs to be put in place. While companies would weed out multiple connections and create a scientific data base for effective monitoring, there is a strong case to increase the price of 14.2 kg LPG cylinder by at least Rs. 100 per cylinder. Thereafter, the price of domestic LPG should be periodically revised based on increase in paying capacity as reflected in the per capita income. The subsidy on domestic should be discontinued for all others except the BPL households once an effective targeting system is in place. As a clean cooking fuel, LPG is a merit good and subsidy to poor households may be needed and justified.

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[Economy Q] RBI prints more money when and its implication on gold and forex reserves Tanvir Khan asked What are the situations at which rbi print notes? Answer: RBI prints new notes to replace the old torn-out notes and to meet the money demands of a rising economy. As you know, if people have x amount of money but there are not sufficient items in market to purchase, then there will be inflation (price-rise). So RBIs job is to maintain the money supply (liquidity) in the market, to prevent inflation. If there is shortage of money in the market, RBI generally alters its SLR,CRR,Repo,Reverse-repo to increase the money supply. Lets imagine, We need to buy new F16 fighter-plane from America, they ask for 1 billion dollar$. So Prime minister Manmohan Singh asks the RBI to print new notes of 50 billion rupees and pack them in a big suitcase. Then he takes it to Forex market, gets the Rupee converted into dollars and buys the fighter-jet. But the same broker at Forex market, will use those 50 billion rupees to buy all the tea,Basmati rice, onion, potato and everything in India and then export it to other countries!! So shortage of items for Indian consumers = price rise=inflation. So RBI cannot print notes indiscriminately. However an expanding economy like us, requires more money so people can take loans and start business etc. Even after altering SLR,CRR,Repo,Reverse repo, there will be still demand for money So RBI must be printing more money after looking at the indicators like IIP, GDP etc. Besides printing money also costs money. So I think there will be some complex formula, but Im not aware about it. 2.)Sufficient gold or forex reserves is necessary to print notes by the rbi but please explain me what happens to the forex or gold reserve as soon as the indian notes are printed. i.e., if the rbi has 4000 u.s. dollars as forex reserve and a situation occur to print 100000 rupee notes (2000 us dollars=100000)(so after printing the notes, will the forex reserve of india become as 2000 us dollars or will it remain at 4000 us dollars itself. Please explain.. Nothing happens to forex or gold reserve. It remains as it is. Prior to World war-II era, nations used to print only as much currency as the gold-reserve they had. Nowadays currencies are not linked with gold. However, RBI uses special printing-machines, papers and inks imported from Switzerland etc. to print the new currency notes. so obviously RBI has to pay in dollar$$ while buying the raw material. So in that sense some of its forex re$erve will deplete. 42

RBI can never link the money-printing to gold or forex reserve because thatll sevearly limit its capacity to meet the money-demands of a rising economy. Sidenote: you can get brand-new fresh notes and coins from RBI branch, but before you have to wait in long queue while the RBI staff sells it to the agents from the backdoor (Rs.10 Commission on Coins worth Rs.500). And those agents sell it to merchents, but merchants never use it and insist on you to buy toffees worth Rs.1,2,3 instead of returning the change. (as seen on stingoperation by E-TV) So, in that sense, artificially created shortage of change also boosts economy!

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[Economy Q] Deregulation of Petrol prices : Pros, Cons, consequences Pros 1. As petrol becomes expensive, the college kids waste less of it, loitering around on their bikes. 2. Middle-class people start using public transport systems instead of their private vehicles = less air & noise pollution and traffic congestion during peak hours. 3. Less subsidy burden on tax-payers, who are not using petro-vehicles otherwise.(theoretically) 4. People switch to CNG based vehicles = less pollution. 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. 43

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. You can post more in the comments! URL to article:

[Economy Q] Micro finance and its problems The Sketchy details about micro-finance are as following. Poor people want to start some small business, but dont have money and banks are not interested in doing lengthy paper-work to lend them small amount of money. So poor people end up going to moneylenders, who charge 36% interest rate and then poors remain indebted forever. To fix the problem, Government came up with a microfinance solution. Basically Government gives money to NABARD (National Bank for Agriculture and Rural Development). NABARD supplies it to local cooperative banks etc. Poor ladies from village gather up and make self-help groups.(SHG) They pool some money lets say 5000/- And NABARD gives them 20000/- on very low interest rate, so they can start some small business like wafer-chips, embroidary, greeting cards, soaps, detergent etc. As they start earning profit, they slowly start repaying the debt in small amounts like 100-200 Rs. Since theyve formed a group, theyre less vulnerable and more likely to repay the money back. All sounds good on paper. Mohd.Yunus even got a Noble for this, with his Gramin bank in Bangladesh. And you can read all rosy-feel-good stories about it in The Frontline, Yojana and Kurukshetra. But when you add corrupt politicians, indifferent-bureaucrates, crony NGOs and agents to this Microfinance equation, everything changes. Problems in Micro-finance 1. Compare potato chips business between some poor self-help group vs. giant companies like Lays, Kurkure etc. SHG can never match in the supply-line, package quality, advertizement and retail distribution agents like them. Same about soap giants like Lifebouy or Nirma. So ultimately only a few SHG survive the competition and make 44


3. 4. 5.

6. 7.

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) Whatever alleged 2 week-business-training theyre given by Government is all those namesake powerpoint dudes stuff. While you know that to compete your product against some big company like Lays, Kurkure, Nirma or Lifebouy you need lot more exhaustive and rigorous training, exposure and a mentor. Sometimes before elections, big Loan-melas are held on the instance of local politicians, so every villager ends up getting some loan of small amount, but most cannot payback. There are some good for nothing crony NGOs, who create ghost SHGs, get the loans sanctioned, give a share to the officers and everybody enjoys life. Microfinance gives only a small amount of loan, while for starting a business you need a little big. For example, they give 20000/- for your one project, while you need 1 lakh rupees, so either you put 4 new flimsy-projects under different categories to make up the money or go to moneylender to get the rest amount on higher interest rate. the lack of entrepreneurial culture at rural level means whatever little money they make is wasted in wedding ceremony or repaying previous loans to money-lenders, instead of investing it back in their business. So money made, doesnt bring more money. In Andhra pradesh there are more than 10,000 SHGs (highest in the country), it accounts for about 40 per cent of MFI lending across the country of about Rs 30,000 crore, and is currently facing a crisis due to bad loans and MFIs using coercion to recover loans, even leading to suicides.

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[Economy Q] If weve Trade deficit why RBI has so much Forex? Question via email: Every year we do some import and some export and usually we have some deficit every year so how do we overcome that deficit, for exp- we import 300Billion USD and we export 200 Billion USD so we have deficit of 100 Billion USD almost every year so how do we balance this margin

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). 45

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. URL to article:

. [Economy Q] Non-Banking Financial Company (NBFC) Mukesh asked, Please help me to understand NBFC Answer

Non-Banking Financial Company (NBFC) is a type of company and not a bank. 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.

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[Economy Q] Greece crisis and Sovereign Default Ankit Agarwal asked, I want to know about Europe crisis in 2010 and its effect??



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, 2008s 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 crisis of 2010 also known as Sovereign Debt crisis. European Unions response to Greece EU had two options: 1. kick Greece out of their team. or 2. Give it the money to recover. Since #1 was not easily workable so EU had to do #2. But unlike the Bollywood movies, EU cannot simply print suitcase full of Euros and give it to Greece to solve its debt problems. (recall my earlier example: PM asking RBI to print more money to buy fight-jets, will lead to heavy-inflation when broker buys stuff from that extraprinted money.) So when EU gives financial relief to Greece, it actually goes from other team-members wallets. (Germany, France.) So theyre not happy, especially Germany. Effect of crisis on the nation itself Monetary help from EU, IMF etc. comes with riders attached, like Greece would have to stop its welfare schemes, reduce salary of Government employees, close down their inefficient PSUs etc. that again leads to more strikes and anti-Government riots in Greece = further deterioration in tourism and trade. Looking at such a grim picture of Greece, foreign players prefer to invest their money in some other nations and the vicious cycle continues. 47

Effect of crisis on the world (From Indian Point of view) 1. Big players start pulling out their money from these troubled nations, and look for opportunities to invest that money somewhere else with better returns. Since American market is also still recovering, they narrow down their investment-choice to emerging economies such as India. 2. European Union Is Indias largest trading partner, accounting for 20% of India trade. So Downturn in EU means Indian exporters dealing in chemicals, textiles etc. get low orders from those EU nations [Portugal,Spain,Greece etc.] + Non-EU nations of Europe (UK). Means European crisis isnot good for Indian export industry.

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[Economy Q] Greece crisis and Sovereign Default Ankit Agarwal asked, I want to know about Europe crisis in 2010 and its effect?? Ans.

Greece Government was giving pension benefits, social security and welfare schemes (NREGA Mid-Day meal like stuff), mega PSUs to give jobs for wooing the voters, without realizing that money 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, 2008s 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 crisis of 2010 also known as Sovereign Debt crisis. 48

European Unions response to Greece EU had two options: 1. kick Greece out of their team. or 2. Give it the money to recover. Since #1 was not easily workable so EU had to do #2. But unlike the Bollywood movies, EU cannot simply print suitcase full of Euros and give it to Greece to solve its debt problems. (recall my earlier example: PM asking RBI to print more money to buy fight-jets, will lead to heavy-inflation when broker buys stuff from that extraprinted money.) So when EU gives financial relief to Greece, it actually goes from other team-members wallets. (Germany, France.) So theyre not happy, especially Germany. Effect of crisis on the nation itself Monetary help from EU, IMF etc. comes with riders attached, like Greece would have to stop its welfare schemes, reduce salary of Government employees, close down their inefficient PSUs etc. that again leads to more strikes and anti-Government riots in Greece = further deterioration in tourism and trade. Looking at such a grim picture of Greece, foreign players prefer to invest their money in some other nations and the vicious cycle continues. Effect of crisis on the world (From Indian Point of view) 1. Big players start pulling out their money from these troubled nations, and look for opportunities to invest that money somewhere else with better returns. Since American market is also still recovering, they narrow down their investment-choice to emerging economies such as India. 2. European Union Is Indias largest trading partner, accounting for 20% of India trade. So Downturn in EU means Indian exporters dealing in chemicals, textiles etc. get low orders from those EU nations [Portugal,Spain,Greece etc.] + Non-EU nations of Europe (UK). Means European crisis isnot good for Indian export industry.

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[Economy Q] Badlaa system or Carry forward transaction Archana asked, What is Badla system? Badlaa = In Hindi movies it means revenge but for Stock market it means on your behalf BASIC CONCEPT OF BADLAA

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.


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.

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[Economy Q] How Foreign Direct Investment (FDI) would influence the Economy Question: Tell me how FDI would influence the Economy in a simple language as I am new to Economics Please. Suppose Foreign Direct Investment (FDI) is allowed in multi-brand retail sector then Wall mart can come to India and start a big mall in every city.

So lot of laborers, contractors, cement suppliers, masons, electricians etc get work for mall-construction. After mall starts running: people get jobs as salesmen, accountant, manager, security guard and sweeper in it. Since competition increases, consumers get more choices and attractive price offers by competing malls & small vendors. All these people who got job because of this mall, now 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

Thus it helps economy.

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[Economy Q] Operating ratio in Railway budget Question: What exactly is meant by the operating ratio with respect to the Railways budget? Answer. Operating ratio is the amount of rupees spent to earn 100 Rupees.

If its less than 100 = youre making profit. If more than 100 =youre making losses.

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.

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[Economy Q] Effect of Coal prices on WPI (Whole sale price index) Q. How does increase in price of coal by Coal India affected the WPI? Ans. When coal becomes expensive, the electricity by thermal power stations becomes expensive. And freight railway charges also increase. That has snowballing effect on everything because 1. Now factory owners have to pay more electricity-bill while producing same amount of stuff, 2. Theyve to pay more money to trains while getting same amount of items transported. 3. Steel, aluminum, cement, glass etc industries also require coal during manufacturing process. 4. So, theyve to increase their product-price to keep the profit margin same.


And coal price itself is counted in WPI, with about 1.7% weightage. Thus Whole sale price (WPI) increases when coal becomes expensive.

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[Economy Q] Difference between Tax and Cess Q. explain the difference between Tax & Cess Tax is self-explanatory, youve to pay a portion of money to the Government on the income /profit you make or the products you purchase etc. Cess means Tax on that tax. For example if there is 10% income Tax and 3% Educational-Cess on it. Your income is 1 lakh Rupees, so you have to pay 10% income tax on it =Rs. 10000. And Cess = tax on the tax. So 3% cess on Rs.10000 income Tax = Rs.300 Generally Cess is temporary in nature. e.g. Education cess on income tax is taken, and after Government get sufficient money to open new schools, then cess is removed. Food for thought The tax itself is taken in pretext of running the administration and doing the Development work so If Cess (tax on tax) is demanded that means something is not right in the system.

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. [Economy Q] Minimum Alternative Tax (MAT) its provisions in DTC Question from via email: Explain Minimum Alternate Tax (MAT) and its provisions under the new Direct tax code (DTC) Ans First we need to understand why Government takes MAT? Zero Tax companies Example, A companys book-profit is 10 lakh Rupees. Then they use some creative accounting methods like depreciation, donations etc. to claim deductions and finally their taxable income is reduced to almost zero. e.g. in 2009 during the recession time, Government of India launched a scheme to give 50% depreciation to commercial vehicles. (with assumption that itll boost the vehicle demand and help the automobile industry to come out of the recession.) So the company buys a truck, for 20 lakh rupees on loan. Their deduction on first year= 50% of 20 lakh rupees= 10 lakh rupees. Their taxable income = book profit minus deductions =10 minus 10=0. So they dont have to pay any tax on their profit at all! Other tricks involve donating 5,000 rupees to some religious institution run by con-man and getting donation-receipt of 5 lakh rupees. And claiming deduction! and so on.. These companies, making profit but having zero taxable income, are known as Zero tax companies Minimum Alternative Tax (MAT) Around 1997, Indian Government realized above large-scale problem of creative accounting and tax-deduction. So it came up with MAT (Minimum alternative tax). So if companys taxable income is less than 30% of its book profit, then itll have to pay MAT, which is around 15% of the book profit. Therefore, now even if above zero-tax company escapes the regular taxes, it still has to pay 1.5 lakh rupees in MAT. MAT under new Direct Tax Code (DTC) The new Direct Tax Code (DTC) initially proposed that MAT should be calculated on assets rather than book profit. i.e. 2% MAT on assets. But the industry oppsed it saying, some companies have long gestation period (like real-estate, steel,cement etc) before they start seeing big profits, but these companies have to buy high-value assets since the beginning (land,machinery) to start and run their operations. so if MAT is 54

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.

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[Economy] 3 Methods of calculating GDP Got this question from mail, what are these income,production and expenditure methods in calulating GDP?how do terms like NNP, NDP, GNP,GDP,NNPFC,NNPMP DIFFER FROM EACH OTHER. what is difference between gdp at constant prices and current prices. its very confusing Ill deal with each question in one post. First, lets refresh the concepts again. GDP (Gross Domestic Product) means, Money value of everything you produce within your country. (Domestic=within country). Everything means products and services. GNP (Gross National Product) means, The Money value of everything you produce within your country PLUS your income from abroad. Anil Kapoor goes to America, get 5 million dollar$ to play baddie in Mission Impossible 4, but sends that money to India = counted in Indias GNP. But with same logic, Cricket Coach Gary Kirsten gets 50 lakh rupees from BCCI, and sends it to his family in S.Africa, youve to deduct it from Indias GNP. (South Africans will count it in their GNP) Similarly, Americans will subtract the dollar value of Anil Kapoors remittance to India while counting their GNP. So, whatll be the (stupid) formula? Gross National production=Money value of everything produced within India+Incoming money from outside-Outgoing money to abroad. 55

Or you can simply say GNP = GDP + incoming money from abroad Outgoing money to abroad. How GDP calculated and what is are these income, production and expenditure methods.

GDP is calculated by three methods. Theoretically all three of them should give same final number, but in reality there will be slight difference between each of them. #A: EXPENDITURE METHOD OF COUNTING GDP Here you count the money spent by everyone. So How to make a technical formula? Ask yourself, where is the money changing hands? There are five components of that.

#1: CONSUMPTION BY PRIVATE CITIZENS [C] like you and me buying (overpriced) daal, vegetables and milk (courtesy: Sharad Pawar). I buy your second-hand bike for 15,000 Rupees, should we including it in the consumer Expenditure (C) ? Nope. Because the bike Is not produced again.


Second hand products are not counted When you had bought that bike for Rs.30000, 10 years ago, we had counted that money in that years GDP. So second hand-product sale money cannot be counted in this years GDP. Now, I buy your second-hand bike from an auto dealer, (who gets Rs.1000 Commission) should we include it in the (C)? Hell Yes, because he sold his service to me uniquely. Every time he sells a second hand product, although no new product is created but new service is delivered by him. WHAT IF SAME 1000 RUPEE NOTE IS CHANGING HANDS?


Each service or product has separate value even if same currency note is used to purchase it I gave a note of Rs.1000 to that dealer as part of his brokerage (dalaali) and he gives the same Rs.1000 note to the electricity company for his monthly bill. Same Rs.1000 note is changing hands so is our GDP =Rs.1000? Nope. GDP is the money value of everything produced within India. So brokerage service is Rs.1000 separately and the electricity produced is also worth Rs.1000 separately. Therefore, Even as same 1000 rupee note is given to both parties. Total GDP=1000 brokeage+1000 electricity bill=Rs.2000 If 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 #2: Investment [I] People investing in sharemarket, putting money in banks etc. #3: Government spending [G] Like buying (overpriced) sports equipment from Kalmaadis associates during Common wealth games. Government paying salary to staff, buying new tanks and missiles..everything. #4, 5 :Export & Import [X & M] Money we get from export is added. You remember that GDP means Money value of everything we produce within India. So if we import something, it has to be subtracted, because it is not produced within India. So formula (for ease In remembering) GDP = Consumer+Investor+Governer + (eXporter iMporter) Technically correct formula: 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. #C: Production method of counting gdp Total money value of everything produced (value added at each stage) 1. 2. 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) 58


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. To be continued GDP at nominal price, Market price, Factor Cost, etc.etc.etc.

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. [Economy Q] GDP at Factor cost and Market price (GDPFC & GDPMP), NNPFC,NNPMP Continuing the previous article, GDP at Factor cost means, money value of everything produced in India, without counting Governments role in it. i.e. indirect tax and subsidies. 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 59

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 As you can see, Factor cost= Original or real value of something. So at marketprice, even when Government is giving subsidy, the manufacturer still receives the original price. E.g. although farmer pays Rs.450, still manufacturer gets Rs.500 so we add subsidy when converting MP to FC. Similarly, even when customer pays MRP of DVD is 110, the DVD-manufacturer is still getting 100 Rs. So we deduct the indirect tax(VAT) while converting MP to FC. Similarly NNPFC and NNPMP GNP = everything produced inside India + Anil Kapoors income from Hollywood Gary Kirstens remittance to S.Africa (more here) So, what is Net National product @ Factor cost, and @Market price. Net = Gross minus depreciation. So NNP=GNP minus depreciation. And factor cost, market price, just as explained above..with and without Government intervention. 60

To be continued.. GDP @ Current Price and Constant Price, GDP deflator

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[Economy Q] GDP DEFLATOR, REAL AND NOMINAL GDP GDP mean money value of everything* produced inside India. (*Everything means goods and services.) 100 kg. of onion produced in 2009, market price = 20 Rs/kg. 100 kg of onion produced in 2010, market price =70 Rs/kg (courtesy: Sharad Pawar) So, Indias GDP has increased at the rate of 250% in a year! But the World bank and leading economists say we can hardly reach 9% GDP increase rate per year. So what is this 250%?? Its nothing but inflation. Just because onion prices rose thanks to Governments faulty food policy or black marketers, doesnt mean that real-GDP has increased and that our contry has prospered. So how do we find real GDP for 2010, when prices of everything have increased due to inflation? We need to compare 2010s production to some base year. Lets pick 2003-04 as base year. So whatever price Onion had in that year, will be our base price. IN 2003-04, average price of 1 kg onion was 30 Rs. A kilo. 2010s GDP= 1 kg onion price of base year (2003-04) *multiply* total onions produced in 2010 =30 x 100 =Rs. 3,000 is our real-GDP for 2010. So Formula: Real GDP= Price of xyz item in base year x Quantity produced in current year. 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 61

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. Weve WPI 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, 2009s real GDP=3000 2010s real GDP=3000 So real-GDP has rose by 0% in two years. URL to article:

. [Economy Q] 3 audit reports of CAG V.Ahlawat asked, what is audit report on appropriation account, audit report on public under takings and audit report on finance accounts? 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. Audit report on public under takings self explanatory: audit report of ONGC, SAIL, DRDA etc PSU companies. Their income and expenses.


Audit report on finance accounts: When Government receives money (tax etc.) and distributes it among various departments, it is noted in this account. Constitution has empowered CAG to audit all these accounts.

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[Economy Q] Who is the regulator of capital market in India? Q. from mail: Who is the regulator of capital market in india? A. B. C. D. Ans:

RBI (it issues Govt-securities) SEBI (it securities exchange market) MoF (it decides how much G-sec to be issued) or all three of them

Capital market = Primary market + Secondary market SEBI controls both primary and secondary market. Means SEBI controls the entire capital market. RBI is controller only for Banking and not for securities. MoF (Ministry of Finance) decides how much Government security is to be issued, but it for filling the Governments money requirement. It doesnt regulate the capital market, it merely participates in it to get money.

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. [Economy Q] Contradiction in GDP (Expenditure) formula? Followup question on my previous article Three methods for calculating GDP in the start of definition of gdp..u r nt counting income of anil kapoor or garry kirsten..but in the topic.expenditure method of calculating gdp.u have used this nt contradictory..kindly plz.xplain? Answer: Anil kapoor-Garry Kirsten example was for GNP. [GNP= domestic product+income from abroad] For GDP (expenditure), weve to calculate consumption (C), Governments expenditure (G), investment(I) and eXport (X). But what if government imports 5000 special mobile devices to print biometric UID smartcards? That is also counted in Governments expenditure accounts (G). So, weve to deduct all the iMports (M) to prevent them from being counted into nations GDP. Thats why GDP (Expenditure)= C+I+G+(X-M) Now, GNP (national product)= Domestic product + Income from abroad. But since foreigners will be sending remittances to their families back home. So if every nation adds(+) foreigners income (who is residing in their country) into their GNP, then itll lead to double counting. So weve to deduct(-) the remittances. Hence GNP= GDP + Income from abroad income earned by foreigners.

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[Economy Q] Fiscal stimulus package : meaning and example Myra asked, what is a fiscal stimulus package ?



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. How is fiscal stimulus different from fiscal policy 1. Fiscal stimulus is given in extraordinary circumstances, it is temporary in nature because When Government feels that the economy is back on track, itll remove/stop giving the stimulus. 2. Fiscal policy (taxation and spending of Government) is rather a regular-routine process. 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 consumerdemand. So, obviously when stimulus is given, the fiscal deficit increases.

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[Economy Q] No Frills account: Meaning advantages Q. What is no frill account?


In simple words it :If a company makes its service/product cheaper by removing the extra features, that is no frill. eg. Mobile phone postpaid package without unlimited ringtones or free night talk. Dish TV package without 100 sports channels. For our discussion purpose : No frill account is a type of bank account, with low / Zero balance requirement with extrafeatures removed. RBI came up with this No-frill concept, because poor people cannot open regular bank accounting having requirements like Rs.5000/- minimum balance etc. So there are no frill accounts for them. So that poor people can open bank accounts and take loans, thatll save them from the 36% interest rate charged by the evil money lenders. For example Allahabad banks no frill account 1. - Account can be opened with a minimum initial deposits of Rs.5/- and maintained at the minimum balance of Rs 5, no penalty charges will be deducted in case the minimum balance reaches zero. 2. - The Account holders will not be eligible for Cheque Book and ATM card facilities 3. - Maximum numbers of withdrawals are restricted to 30 every 6 months. 4. - Duplicate passbook may be issued to the account holder with a charge of Rs.10/As you can see above, it doesnt have the extra-features like Cheque book and ATM etc. So it is no-frill (because extra-features removed). Advantages Apart from the features mentioned above, 1. Rural women can put their hard earned money in it, less chances of theft or husband spending it on Desi liquor. 2. Can get easy loans, saved from the clutches of moneylenders. 3. Some banks even offer free of charge DD (demand drafts) like 2 per month. 4. No frill account holder can convert his/her account to regular saving account later. 5. Financial inclusion, Empowerment, Development, .(Kurukshetra, Yojana, Frontline stuff) 6. Less chances of that good-for-nothing ***** bank forcefully sending you credit card behind your back along with hidden insurance and service charges and then refusing to take it back. Disadvantages

None. Although it has limited withdrawals, no chequebook/ATM but think about the targeted poor people. They dont need it much, they just need a place to safely park their money. 66

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!

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[Economy Q] Monetary and Fiscal Policy Difference and dependence 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.


To what extent is monetary policy independent of fiscal policy in India As we saw Monetary= RBI, fiscal =Government. Many times, Government doesnt have enough money to fund its projects*. So they release bonds. RBI sells those bonds on Governments behalf to the banks. Now banks may or may not be interested in purchasing them. So, RBI has a tool called SLR* (Statutary liquidity ratio), which means banks have to compulsory keep x amount of their money in form of Government bonds even if they like it or not. * See? Government project= fiscal policys public Expenditure tool SLR=Monetary policys tool (by RBI) Thus, SLR (part of monetary policy) is not totally independent from fiscal policy. There is conflict of interest: RBIs role as money supply controller vs RBIs role as Governments debt manager. Same way, Government wants that farmers should get loans @cheaper rate. So, RBI makes special consessions to regional rural banks in CRR/Repo etc.

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[Economy Q] IMF Vs World Bank Difference in functions Function of IMF and World Bank in the context of the world economy. International monetary Fund IMF gives short-term loans to its members, and helps in recovering from BoP crisis (balance of payment crisis) In simplest terms, BoP crisis means you dont have enough money/ foreign currency to pay for your imports. So in that case you run to IMF. When IMF gives loans, theyll ask you to change your policies accordingly. eg. theyll ask you to 1. let the MNCs enter your market, 2. reduce the jobs or shutting down the loss making Public sector units etc. 3. stop giving subsidies to particular section (petrol/fertilizer etc.) and so on IMF gives loans, it expects you to pay full amount back + interest rate. 68

In IMF there is a thing called Quota i.e. Every member has to give some money to IMF, (IMF will give it to loan as other members). The rich nations with bigger Quota has more voting rights (USA). So rich nations can effectively decide how IMF should function. World Bank In short, They give soft loans to poor nations for Development purpose and various 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) Their loan-terms are not as stringent as IMF. Rest you can google and wiki.

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. [Economy Q] Financial innovation : Meaning advantages and criticism What is Financial innovation ? financial innovation=when you come up with complex financial instruments (bonds, securities etc). e.g in 1980s there was simple thing :just one LIC life insurance policy. you pay installments, you die your family gets money. Now there are complex ULIPs (Unit linked insurance planning), child education plans, pension fund, travel insurance, health insurance this and that. =financial innovation. Other examples of financial innovations (wiki)

interest rate swaps , credit default swaps, Collateral debt obligation. credit and debit cards and online payment systems like PayPal.


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 Two main Criticisms fools paradise There is no neutral evidence that financial innovation has led to economic growth. example The money gone into bonds and policy should lead to real asset/physical product creation (like you buy insurance policy from me, and I lend that money to a businessman who makes a factory or launches a new physical product like cola or breads or a service like Hospital/ Hotel chain and so on ) Then we can say yes this financial innovation is leading to economic growth. But instead Some of the money goes into two directions #1: further speculation business like mutual funds, commodity market or share market (click me to first understand the Derivatives) Like you buy some insurance policy/mutual fund/complex security bond from me, I invest that money in speculation, whether xyz share/commoditys price will go up or not. (via options and futures contract) So Ive a virtual portfolio : today 5 lakh, tomorrow 1 lakh third day not even worth 10,000, fourth day jumping to 10 lakh rupees. Im betting and speculating, like those kids playing and trading WWF wrestlers cards. No real asset creation or economic growth. In the meantime, you claim your policy, If my portfolio is 10 lakh, I would pay away otherwise I would borrow from third party to pay you and give that third party a futures bonds, he sells it to forth guy as a derivative who again invests it into some speculation game. This game goes on, without any real economic growth. Just more papers and bonds. #2: The Complex financial products=Chor bank robbing you in daylight Similarly you open a bank account in that Chor party bank (Chor=thief, you know which bank Im talking about), they trick you into getting a credit card and deduct insurance premium behind your back saying that credit card comes with a free health-insurance policy. And adding insult to the injury, when you get heart-attack, they dont pay you, saying sorry heart attack is not covered, this health insurance covers minor injuries in road-accidents only* (*provided that you were wearing helmet/seatbelt, driver had licence and was driving under speed limit)! And whatever money the Chor party bank earns from this unethical game, they reinvest it into putting more feel-good advertizements on TV to trick more people like you, while the already fooled customers get redirected like footballs from this call centre to that call centre. = No economic growth. So, end product of this kind of financial innovation is a new even complex financial product not a physical product or service that you can see/touch/feel or consume.


Led to recession This innovation led to complex Derivatives that led to *asset bubble and ultimately we got recession. *Explanation of Asset-bubble click me

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[Economy Q] Investment banking Meaning and functions sanchit asked: investment banking samjha do plz Ans. Suppose you want to start a new factory, dont have enough money. Banks are not giving you loans or their loan-conditions are very tough. So you want to Issue an IPO/security in the primary market to get the required funds. *security =a piece of paper. When someone buys that piece of paper from you, they give you money like 100. And youre supposed to pay them back after a period or share your profits with them (Shares).

But what if nobody buys your IPO? And how to go and launch your IPO in the first place? You dont know the technical nitty gritty or paper-work involved in it, or have the competent staff to do that? Easy, just walk in to an investment bank, theyll launch the IPO on your behalf. Theyll 71

sell you on your behalf and if no-one buys it, the investment banker will buy it and pay you the money. This is called underwriting. Investment bankss primary job =offering underwriting. For example, on following link see the big underwritings made by Kotak Investment bank and the list of their big clients Kotak Investment Banking: Leaders in the Equity Capital Markets Other functions of an investment banker 1. If youre a big corporate co., currently under heavy-debts, theyll help you re-structure your debts. e.g. longer EMIs, selling or renting your non-core assets to squeeze some money and so on. 2. help you make deals,big investments, joint ventures, Mergers and acquisitions with other companies. They provide you with Research data like how much risk is there, whatll be your return on investment, is there any technical or legal hurdle, if yes then how to bypass it. 3. Settle your family disputes. (like big corporate dad died and now people fighting for property, they help you come at an amicable compromise, without getting involved in lengthy court process. 4. They also help you convert your money from one currency to another. So investment banker is not just a banker but combo of many things: lawyer, financial adviser, money-lender, insurer, Real estate agent and so on. But Investment banks dont do anything on small scale. Like you cant walk in to get bike/car/house loan or get your 100$ converted into rupees. Their customer base= big MNCs and corporates. Their scale of operation= in millions and billions of Rs./dollars.

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[Economy Q] Liquidity and monetary policy Question from a Reader: Here is a paragraph one which went over my head. Read this excerpt from monetary policy:


After remaining in surplus for 18 months, liquidity conditions transited to a deficit mode towards end-May 2010. This was the consequence of a large build-up in government cash balances as a result of higher than expected proceeds from spectrum auctions. Beginning October 2010, liquidity conditions became even tighter. Both frictional factors such as the above-normal build up in government cash balances and structural factors such as high currency demand growth and credit growth outpacing deposit growth contributed to tight liquidity conditions. My question is if credit growth has outpaced deposit growth (more ppl r takin loans rather than depositin them) then how can that contribute to tight liquidity !!! There will be more money wid ppl due to loans taken. Pls xplain AnsHere liquidity is a relative term. If the banking-system has more money to offer as loan today, compared to last month, well say liquidity has increased. If banks have less money to offer as loans today, compared to last week/last month/last year, then well say liquidity is tight. Now there are 3 factors. #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.


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. [Economy Q] Zero Interest Rates in Japan and America Question from a reader: RBI increases interest rates slowly and higher interest rates encourage more FDI inflows. I got the reason wich u mentioned that y RBI duznt increase the rates suddenly. Question wich arises here is wrt Japan. Japan has been keeping near zero interest rates for a while now. Why so? Higher interest rates as usual wud mean more FDI in Japan wich will bolster its growth. So wat r the reasons for keepin low interest rates? Ans. Youre right, if Japan or any nation increases the interest rates, then more FDI will come. But Japans concern at the moment is not FDI but consumer-demand. FDI matters for third world and newly emerging economies because you need big money for infrastructure,factories,machinary, R&D for launching new product etc. but Japan,America are already far ahead in those things hence some-what saturated for FDI. So their main-priority = consumer demand @Home and Abroad. Interest rates in Japan are kept low, to encourage people to 1. take loans and spend it (=boost in auto-real estate demands home) 2. take loans and do some production (if loan-interest is low, the final product will be cheaper and can compete with Chinese export-items abroad) Same is the case, why America too has near zero-interest rates. Theyve so much money available as loan but people are not interested in taking it for spending or production =>so decrease the rates even further.* India is reverse: so much inflation, so you need to swallow some money out of the sytem. =>so increase the rates higher. *While Japs and American authorities believe that zero-interest rates will help boosting the demand, there are thinkers with opposite view. Copy pasting from TIME American consumers, too, are trying to reduce household debt, so borrowing more money for a new car or to remodel the kitchen is not a high priority. And without greater consumer spending, most companies have little need for new loans to expand operations. Interest rate cuts dont matter in this environment, says Kirby Daley, senior strategist at financial-services firm Newedge Group in Hong Kong. It doesnt get at the heart of the issue.


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. [Economy Q] CASA (Current and Savings Account) Ratio: meaning, implications, danger Siddhant asked: WHAT IS THE CASA ? Ans: CASA =Current and Savings Account. Lets refresh a few concepts before diving into CASA. In a bank, there is incoming money and outgoing money. Incoming Money in the bank

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)

Outgoing Money from the bank

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) #1: CASA (Current and savings account) deposits

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. 75

#2: In FD (Fixed Deposit)

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.

Implication of High CASA Ratio For SBI, CASA ratio is around 47%. (That is 47% of their total incoming money in form of deposits, comes from CASA). So SBI can earn lot of profit by circulating this money as loan. If Bank X has CASA ratio =barely 10%, obviously, not so good position like SBI. Higher CASA is good only for banks?

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.

Danger with high Casa ratio?

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. Curious case of SBI 1. As we saw SBI has highest CASA Ratio in India = high profit 2. but then again SBI has highest N.P.A. (Non-performing assets / bad loans/toxic assets) amongst all the banks in India! Now read the previous para on CASA danger again. :)

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[Economy Q] If people dont take loan what will banks do? Question. Weve learnt that the main source of income for banks is loans which they give out to borrowers, where the interest rate for the loans is set at a higher rate than the savings bank rate which they provide us with. Let us suppose a situation where, we have our savings deposits intact in our banks, and no people needs to take loans from the bank. How will the bank function at that time? Ans. A Banks life depends on circulating the money from one hand to another and pocketing the difference of the interest rates between them. If people stop taking loans then Bank will invest in sharemarket, fund real estate projects, mutual funds, oil bonds etc. or start giving loans to people of other nation or finance projects abroad. If bank doesnt see much profit even in that scenario then they will have to close down the operation.

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[Economy Q] Base year and Current year price? How to calculate WPI and CPI? Question . Ive come across these terms numerous times, but couldnt make anything out. Whats 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,WPI) 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. What did we do, in above formula? We took 2001 is the base year and 2011 is the current year. Then we divided the change in price, with the price of base year and multiplied it with 100 to get the percentage. If price of a soap was Rs.1 in 1950s (dont get excited because in those days, monthly income of most middle-class people was around 100-300 Rs, so one rupee was a big amount.) So with 1950 as base year, whatll be the % price increase? [(12-1)/1]*100=1100% increase in the price of a soap! But does it make any sense to calculate inflation with such an old base year? Ofcourse not, because lot things have changed after 1950, including the salaries of the middle class people. So you wont get the real picture.


Inflation is a hurt-meter. You cannot fathom how much it hurts now, if you didnot feel less pain earlier. Those who lived in 1950s are all either dead or retired. And the current-working population never actually bought a soap for 1 rupee. So how much is the soap price hurting the current-population, to know that answer, you need to set the hurt-meter to compare the prices of recent memory: oh yeah back in 2004 it was only 10 rupees and now its 12 so yes I can feel it hurting me. Morale of the story: We need to have the base-year at some near-past level like 2004-05 to get the real picture of inflation. (Earlier this base year was about 1993-94) Now lets get a lil technically correct, above post was written to clear the basic concept of base year and current year only, the CPI and WPI are not calculated so straight-forward. How to calculate the WPI or CPI? 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. The weightage given in WPI It is something like this 1. Primary Articles (food,fruits etc):22% 2. Fuel, Power, Light & Lubricants :14% 3. Manufactured Products (biscuit,toothpaste):63% Now survey the prices of all items in the base year and in the current year. Then you plug them in the Lesperes Formula for weighted arithmetic mean. (Formula is not important, but what is important for you to know is, that it is not a simple average but a weighted average) And you get a number, we call it the WPI index number for the given year or given week or given month. Suppose after calculation you get a number 110 on 1st August 2011. For base year we assume that WPI is 100. So there is 10% inflation. i.e. [110-100/100]*100 Now on 1st September 2011, you calculate again with new price data and the number is 112. What does that mean? The inflation has increased by 12% compared to compared to base year AND inflation has increased by 1.8% compared to last month. i.e. (112-110)/110*100


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[Economy Q] If dollar weakens, oil price appreciates How? Relation between dollar and oil prices Question. Plz explain The Relationship Between Oil Prices & Dollar If dollar weakens , the oil price appreciates How?? Answer. Lets say today 1$=50 Rs and price of one barrel of oil is 100$. Means, if you sell 1 barrel of oil, you get 100$ (or 5000 Rs.) so by selling 1 barrel, you can buy stuff worth 5000 Rs. from Indian market. But next week, dollar weakens and it stands at 1$=40Rs. If you still sell your one barrel @100$ then you can buy stuff worth Rs.4000 only. So what should you do to keep your profit margin same?Obviously increase the price of 1 barrel of oil to 125$. (because $125*40=5000 Rs.) In short, dollar has weakened, means its purchasing power has declined in the international market. Now you can buy less stuff from Chinese, European or Indian market using that 1 dollar compared to earlier times, when Dollar was stronger. Since youre selling your barrel in the dollar currency, you must increase the price of your oilbarrel to maintain your profit margin and standard of living the same. (else youll have to cut down on your expenses like the chauffeur for your limo or the number of workers in your oilwell.)

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[Economy Q] Difference between Subprime Crisis and Eurozone Crisis Question via email Difference between Eurozone crisis and Subprime Crisis? 80

Ans. Im writing for explanation purpose only. Technical details, intentionally skipped. Subprime Crisis First you need to understand Mortgage, derivatives and Asset bubble. Mortage You give me $10,000 loan and I sign on a paper that if I 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. More on the Eurozone crisis is given on following page


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. Economy Q] Export Promotion Capital Goods Scheme Question via email What is Export Promotion Capital Goods Scheme? First, what are capital goods? Examples: Textile machines, big agro-harvesting vehicles, expensive lab instruments for medicines, printing press for magz/newspaper, sophisticated computer-server for your call centre etc. Means Capital goods are the things you need to manufacture your products or give your services. What is Export Promotion Capital Goods Scheme? (EPCG) Under EPCG scheme, you can import these instruments (capital goods) at only 5% customs duty. But condition is that, within 8 years, youve export manufactured products worth 8 times the duty you saved. This EPCG is part of Indias EXIM policy (Export-import) 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.

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[Economy Q] Duty Entitlement Pass Book (DEPB) Another question via email What is Duty Entitlement Pass Book (DEPB) Youre an exporters, you get this passbook from Government.When you export something : gems, chemicals anything; they will write it down in your passbook. Mr. XYZ has exported 1 kilo paperclips and U-pins worth 4000 rupees. So he is entitle to Rs.4 credit. (Theyve specific rates for each export product, Im only giving a fictional example) You can use this Rs. 4 credit in two ways. 1. When you import something, youve to pay customs Duty. Now you can just show your passbook, and ask them to deduct the credit from it. 2. Or if youre not planning to import anything, you can ask them to pay that Rs.4 in cash. This DEPB is a tool under Indias EXIM/ Foreign trade policy. EXIMExport Import,

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[Economy] The FDI in Retail business pro-cons Single brand vs Multibrand Retail In the fond memories of Dev Anand, Whats the difference between Single brand vs Multibrand retail? Single Brand retail


Nike Company opens outlets in Abad, Banglore, Delhi and Mumbai selling nothing but Nike Shoes, Nike wrist-watches and Nike t-shirts only. This is single brand retail. FDI in Single-Brand Retailing was permitted in 2006, to the extent of 51%. These were mostly outlets for sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags, life-style products. But neither the Political parties nor Local Kiranawala raised any voice against this,why? Because these are high-end luxury items for brand conscious upper middle class and rich class people. It doesnt hurt population at large. It was not like people would stop purchasing from local garment store to get Nike or Adidas. Multi-brand retail Big Bazaar opens mall in above cities: selling t-shirts of multiple-brands such as Reebok, Nike, Adidas, Allen Solley, Van Huesen, Peter England etc. +and+ they also sell unbranded t-shirts (you know those buy one get three t-shirts free from unknown companies.) So this is multi-brand retail: when an outlet sells a product (tshirt, tie, shoes anything) of more than one brand.

Retail means when product is sold to the ultimate consumer (common man)


Argument against FDI Anti #1: will lead to mass-unemployment 1. Retail sector in India is the second largest employer after agriculture. Almost 33 million people involved here. 2. Now the problem part: Disguised unemployment. Father and two Sons running a farm, producing 200 kgs of wheat. You take out any two members, the production still remains 200 kgs. Same problem goes with family owned-operated retail stores, the intermediaries and middle agents. 3. What should be done? Obviously one of the two sons ought to get himself in other sector (service, construction, manufacturing, industry, etc) But there is lack of opportunities, the manufacturing sector is not growing at the pace. So the argument=: Displaced retail-operators will not be absorbed in other sectors. This FDI will lead to unemployment. Although this unemployment argument is flawed because 1. Walmart cannot open malls in every nook and corner of India. Their electricity, staff and security costs will surpass their profit margins. 2. Customers cant goto Walmart on daily basis for attractive discounts because the petrol cost (and time wasted in traffic) will negate the discount 86

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. Anti #2: Predatory pricing Walmart or any other MNC retail mall, for the first 3-4 years theyll give heavy discounts and seductive offers, even if they make loss in the deal. Result : all the customers in a particular city are hooked to walmart only. The smalltime retail players cannot run business giving such heavy discounts, they close down. Once all competition is eliminated with this predatory pricing Walmart will slowly stop giving discounts and recover their losses by increasing the MRP. Since these big MNCs have deep pockets, they can affort this sort of loss. But in the long term, they recover everything. Same way Once the small time retailers are out of business, Wal-Mart will start exploiting farmers, paying them extremely low money for their produce, because now Wal-Mart is the sole retailer in the city. counter arguments: Predatory pricing 1. Customer thinks of Traffic, time and petrol cost involved before visiting Walmart everynow and then. Not like someone would go 10 kilometers, just because the mall is giving Rs.3 discount on apple juice. 2. There is a Competition Commission of India to look into this matter. (earlier MRTP, Monopoly and restrictive trade practices act) (sidenote) Another example of Predatory pricing is our airline industry. One of the prime reasons why theyre making losses. Anti#3: India will become dumping ground for Chinese products Dumping means, suppose a ballpen is sold for Rs.10 in China but they intentionally export it to India at the price of Rs.5, in order to ruin the business of local Indian pen-producers and to capture the Indian stationary market. China is notorious for this dumping tactic, earlier we had to impose Anti-dumping duty on their rubber products and tires. Some believe that entry of Foreign retailers will facilitate the Chinese scheme of dumping our market with their cheap products.


Arguments in favor of FDI in retail Pro#1: No more wastage of agro-produce India is the second largest producer of fruits and vegetables, If we are the 2nd biggest producers of fruits and vegetables, why are we not a big name / exporter in world market? And more importantly, if we are second largest producer, then why is so much inflation in food items? Because Post-harvest more than Rs. 1 trillion worth farm produce, especially of fruits, vegetables and other perishables, is wasted due of lack of storage and transport facilities. More than 50% of this can be saved, if weve proper cold-storage facilities. Government is not doing much about this (duh they are unable to save even the wheat in PDS, let alone cold-storage) and the private Indian players donot have much money to invest in this cold-storage chain or those expensive big transporttrucks of America that we see in Discovery channel. So if FDI in retail is allowed, the MNCs would invest in cold-storage chains and those big transport trucks. Means lower wasted of produce. More supply of fruits and vegetables. According to supply-demand rule the prices will go down. Right now, 100% FDI Is allowed in Cold-storage chain, but foreign players are not coming there because theyre not allowed to sell it in retail malls. There is not much profit margin in operating a cold-storage alone. Itd take years to recover the investment. Only if MNCs are allowed to sell the produce as well in their retail malls, theyll feel interested in investing in this cold-storage game. Similarly FDI in Wholesale trading was allowed upto 100% since 1997. Pro#2: Farmer gets more money for his produce Indian Farmer doesnt have cold-storage or transport facility, if he grew 200 kilos of carrots, he has no option but to sell it as soon as possible before it get spoiled. The middle agent buy this produce for as low as 2-4 rupees per kilo, but by the time it reaches market, the price jumps to 25-30 rupees per kilo. WHY? Indian Truck Transport: Overloading and Bribes There is no organized truck- transport service, the truck operators are running in extremely competitive environment so theyve to overload their trucks. Once this overloaded truck goes through checkpoint, policeman will demand bribe for flouting the road permit provisions.


Since the truck is overloaded, engine efficiency is reduced. He has to get his truck repaired frequently. The road quality and traffic Management is bad, more diesel is consumed. Trucker will add all these costs (bribe, repair, extra diesel) in his service charge. Truck reaches the city, your local vegetable-vendor pays to offload the carrots but he gotta maintain his own profit-margin as well, (+ the bribe he has to pay to local policeman, municipality inspector etc) so the carrots that were lifted for 2 rupees, ultimately get sold for 25 rupees a kilo after cutting everyones Commission. When an organized MNC retailer gets in picture, he has his own extremely efficient and streamlined transport service. So there is no overloading of trucks, there is very systematic packing of goods. His truck maintenance cost is thus very low and there is low wastage during transport. Second, He doesnt have to pay so many bribes at every level, because 1. There is no overloading of trucks, papers are in order. Less chances for policemen etc to blackmail him into paying bribe. 2. He got deep pockets, he gives big annual donations for election funds to the ruling party and Diwali gifts to the concerned district officers. Thats why small time petty officials such as police, municipality, food n sanitation inspector cant dare to bother him every now and then, as they do to small time retailers. So MNC retailers cost price is quite low compared to small-time retailers. Hence he can afford to give attractive discounts to customers as well. Same reason why many political parties dislike MNCs in Retail, you can extract more electionfunds from 1000 small time players compared to from one big player. Big player is less susceptible to arm-twisting compared to a small player. No more intermediaries / Middle men in the chain= Lesser levels of Commissions Right now Intermediaries [middle agents] dominate the value chain. They often their pricing lacks transparency. They often run secret cartels, so even in open auctions, farmers dont get good price for their produce. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. These elected cooperative marketing societies and Mandis are more or less same BJP vs Congress fight for domination in university elections, there is hardly anything positive reform done for the students. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by 89

farmers in nations with a higher share of organized retail. A study commissioned by the World Bank : Why India doesnt earn much money from exporting its Fruits and vegetable (even though were second largest producer) = Same reason, Non-competitiveness. Bad supply lines. A price that the farmer receives for a typical horticulture product is only 1215 per cent of the price the consumer pays at a retail outlet. Small and Medium scale industries 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. Assured quality, no adulteration Tune into Aaj Tak newschannel during afternoon, it is always somewhere in Uttar Pradesh, they caught adulterated Milk, Milk products or soft drinks produced using banned chemicals. More than 40% of the medicines sold in rural and semi-urban areas of India are of fake brands. For an MNC retailer you can atleast feel confident that it wont be the case. More competition = Better prices and products Remember once upon a time, Mobile calls used to cost 7 Rupees per minute and incoming wasnt free. Why? Because there was low level of competition. Barely 2-3 players in the market. FDI can be a powerful catalyst to spur competition. Trickle down Theory To open a big mall, walmart has to purchase land and construct a big building= lot of laborers, masons, plumbers, electricians employed. Same way farmers are getting more money so all these people have more money in their hands and they use it to purchase bikes, mobiles etc. so more demand and more employment. This is trickle down theory. Marxist and Vinod Dua (NDTV) disputes this theory. Fear exaggerated Fears of large adverse effects on existing retailers are grossly exaggerated especially since modern domestic retailing has begun in any case via desi retailers such as Big Bazzar and Reliance. (10th plan document) 90

Suggestions for safeguards 1. Entry of foreign players must be gradual with social safeguards so that the effects of labour dislocation can be analysed and policy fine tuned. 2. Foreign players should initially be allowed only in metros cities only. 3. Gradual opening of the retail sector over a period of 3-5 years to give domestic industry enough time to adjust to the changes. 4. More stringent Compulsory corporate social responsibility requirement (e.g. Ask them to open 1 school and 1 clinic in every city where theyre operating etc.) 5. Regular monitoring of mall-inventories to see that India is not used as dumping ground for Chinese products. Some reports for mythbusting ***Ok now this is copy paste job*** ICRIER STUDIES ON: (i) FOREIGN DIRECT INVESTMENT IN RETAIL SECTOR-INDIA (2005) and (ii) IMPACT OF ORGANIZED RETAILING ON THE UNORGANIZED SECTOR2008 Based on their study #1 : Not as much job loss as feared 1. Unorganized retailers in the vicinity of organized retailers experienced a decline in their volume of business and profit in the initial years after the entry of large organized retailers. 2. The adverse impact on sales and profit, however, weakens over time. There was no evidence of a decline in overall employment in the unorganized sector as a result of the entry of organized retailers. 3. The rate of closure of unorganized retail shops in gross terms was found to be 4.2 per cent per annum, which is much lower than the international rate of closure of small businesses. The rate of closure on account of competition from organized retail was found to still lower, at 1.7 per cent per annum. 4. There was competitive response from traditional retailers through improved business practices and technology upgradation. #2 good for consumers


While customers from all income groups saved through organized retail purchases, the lower income consumers saved more. Thus, organized retail is relatively more beneficial to the less well-off consumers. #3 Intermediate players There was no evidence of an adverse impact by organized retail on intermediaries. There is, however, some adverse impact on turnover and profit of intermediaries dealing in products such as, fruit, vegetables, and apparel. Over two-thirds of the intermediaries planned to expand their businesses, in response to increased business opportunities opened by the expansion of retail. #4 More money to farmers Farmers were found to benefit significantly from the option of direct sales to organized retailers. The average price realization for cauliflower farmers selling directly to organized retail was about 25 per cent higher than their proceeds from sale to regulated government mandis. The profit realization for farmers selling directly to organized retailers was about 60 per cent higher than that received from selling in the mandis. The difference was even larger when the amount charged by the commission agent (usually 10 per cent of sale price) in the mandi is taken into account. Scenario in other third world countries FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand without limits on equity participation (that is 100% FDI allowed) Thailand: Since 1997, 100% FDI. Positive result: Thailand has now become an important shopping and tourist destination. *-*-*-*-*-*-*-*URL to article:

. [Economy] A story of Forex, currency conversion, rupee depreciation, inflation, subsidies etc. Again in the fond memories of Dev Anand.


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.. Investor: Faith won and lost Enter an American Mr.James. Thanks to American recession, he decides to invest outside USA, and comes to India with a bag full of green dollars, after he was assured by RBI and Commerce Secretary that environment in India is very conductive for business. Please come, give us your dollars, we convert it into rupees. He (full of confidence) converts his dollars, at the rate of 1$=Rs.40 Now James searches for land to open office or factory somewhere near a big city in India. But price of land is so high thanks to the black money, it doesnt make any sense buying a property. He says ok, let me just rent some readymade building and Ill starting a small-scale i-phone production company. But the electricity shuts down at random, for hours and days. James: ok, Ill buy a diesel generator like every other industrialist in this area. Again price of Diesel also increasing, Profit margin shrinking. Adding insult to the injury, his workers have gone on strike. Workers are demanding pay-rise because of the ever increasing prices of milk and petrol and James unable to settle the dispute so a lengthy (and expensive) legal battle is drawn. Meanwhile the factory remains closed for weeks and months together. James: let me start a coffee house to pay lawyers fees.

But the price of raw material (milk,sugar,gas) also increasing. 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 real-estate in those countries, he could get a handsome return of 40-50% a year. Allen recalls a Bollywood movie he saw on youtube with English subtitles, the handicapped 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. Crude Oil Bill Curiously, Chairman of IOC (Indian oil corp.) is also waiting there @Forex market, with a suitcase full of rupees. He is in desperate need of dollar$ for King of Saudi doesnt accept payment in Rupees for the crude oil sold. IOC Chairman: dude got any dollars? Come on man. I need them, please. Allen: How much? IOC Chairman: You know the routine rate. 1$ for 40 rupees. Allen: Hell NO!!! I aint selling. My best friend told me not to. IOC Chairman: ok ok how about 45 rupees for a dollar. Allen: Nope IOC Chairman: 50 Allen:Nope IOC Chairman: 52 Allen: ok, You got a deal. The Solutions Back in India (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. 95

RBI: Look I understand your constrains but I cant release dollars from my reserve. But How about you arrange for dollars 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. Finance Minister: hmminteresting.

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. [Economy] Cash and Carry wholesale trade meaning The term Cash and Carry wholesale trade has been appearing a lot in newspaper columns nowadays, because of that FDI in retail issue. Traditional wholesale trade

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. Cash and Carry wholesale trade It is different from the traditional wholesale deals in following manner:

Here Jethalal himself goes to that Wholesalers 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)


Cash n Carry wholesale in India (here goes copy paste job from Financialexpress)

In many big cities there are Best Price Modern Wholesale stores by Walmart 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.

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. [Economy] On What basis 49-51% are calculated in FDI? 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.

Total investment 204 crore(100%)=Anils 100 cr.(49%)+Toms 104 cr.(51%) Total 1020 (100%)=500 (49%)+520 (51%)

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[Economy Q] difference between current account deficit and trade deficit Tanvir asked: Whats the difference between current account deficit and trade deficit? 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. 98

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. For more on Current account and Capital account Click me Trade deficit First, the meaning of Balance of Trade = difference between value of import and export. When 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!

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[Economy] Link between Credit Rating & Interest Rates Another Question from email: DOWNGRADED rating could lead to hiked interest rates and borrowing costs: What does this mean? first of all, What is a credit rating agency?

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)

Standard & Poors (S&P) credit rating


It has stars from AAA to D. AAA means the guy is most likely to pay back. D means the guy is most-bogus. Now consider this: But if I get lower ratings such a BB, or CCC. in that case most people wouldnt want to purchase my bonds because theyre afraid that I may default on payments. So how do I motivate them to invest money in my bonds? Obviously by offering higher returns. example Anyone who gives me 100 Rs., Ill give him 170 rupees after 6 months, instead of 120 that I promised earlier!

From your side (Lender) what do you see?= hike in interest rate. From my side (Borrower) what do I see?=increased cost of borrowing, because I have to offer higher interest rate.

S&P downgraded U.S. long-term credit rating from AAA to AA+ So, Borrowing costs will rise for U.S. government (via treasury bonds), companies etc in longterm because now theyll have to offer higher interest rates. This was the credit rating for governments, companies, but what about Credit Rating for individuals

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, What is Angel fund? A wealthy individual who provides financing to a start-up compny. Start up company means a company in its earliest stage of development, usually before its IPO. Feeling bored and confused? Well refresh the concept of security, derivatives, primary and secondary market by going through old articles

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. [Economy Q] Story of Forex Part II Continuing the Technically-not-so-correct story of Forex and currency conversion Kashyap asked, First Question Why king of Saudi does not accept payment in rupees?

If he accepts rupees, his hands are tied, meaning he can only use that cash to buy stuff from India. But even If he wishes to import Indian mangoes or oranges, the Indian exporters would gladly accept American dollars, so why bother with rupees? Secondly, What if he wants to buy I-phone or Ferrari from America? 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. We 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 101

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 3. why did Allen exchanged dollars with rupees?

Because India would have appeared a good investment-destination 3-4 years ago when Allen came, and America was struggling with recession. But then thanks to Jairam 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.

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[Economy Q] 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 100 103

=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 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.


BSEs dollar version of SENSEX. [SENSEX is calculated on rupee values]


SENSEX is calculated on 30 chosen companies. (Started in 1986) NIFTY is calculated on 50 chosen companies. (Started in 1995), otherwise method is same. Similarly BSE 100= calculated on 100 companies, since 1989. PS: years and dates are not that important.

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.[Economy] Teaser Home Loans: Meaning, Implications Question from Manish Kumar: 104

I want you to throw some light on TEASER LOANS.. I have searched on the net and tried to understand the thing but not satisfied. Meaning of Teaser Home loans.

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. Why RBI is against Teaser loans?

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.

SBIs argument in favour of Teaser loans

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. Some more GK on SBI 1. SBI has launched Bank on Wheels project in Nagaland to deliver banking services at the doorstep of rural people even where there was no branch. 2. SBI countrys biggest lender, will name and shame wilful defaulters and put their pictures in newspapers to get them to pay up 3. SBIs chairman is Prateep Chaudhari. 105

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. [Economy] Currency Swap deal between India and Japan Ankit asked via email WHAT IS CURRENCY SWAP DEAL BETWEEN INDIA & JAPAN? HOW WILL INDIA BE BENEFITED? It is a deal made between the central banks of India and Japan, to prevent the fall of Rupee and Yen, due to speculative trading @Forex Markets. Currency swap agreement

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.

How is India benefited?

Government of India, issues bonds to oil marketing companies to compensate them for losses on sales of petroleum products below cost. Oil Companies sell these bonds to LIC, Banks etc to recover the money. To prevent the downfall of Rupee, RBI can open a Forex-window, where Oil cos line up and exchange their oil-bonds in lieu of dollars from RBI. For this activity: RBI can exchange its rupees to Japanese bank and get dollars and then RBI gives that dollars to Oil cos. in lieu of Government bonds.

Chiang Mai Initiative 106

(2 marker for GS-Mains)

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

1$= about 76 Yen = about 48 Rupees. 1 Yen= about 0.6 Rupees 1$= 6 Yuan 1 Yuan= 7 Rupees


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[Economy] How does RBI know about money supply in the market? Question from Kritika How govt assume more money with public which causes inflation? If am right,persistent rice in price level is inflation which is assumed to happen whenthere is more money with public, as a result demand increases , which causes price rise. So to curb the flow of money with public ,RBI taking measures to increase repo rates. But what my doubt is , how can govt come to conclusion that there is more money with the public? Answer Government and RBI are two different entities. Both are involved in managing the economy in their own capacity. 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. For more on M1 to M4, Click Me

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[Economy Q] FDI and FII difference & which one is better? Question by a reader: What is foreign institutional investment and how it is different from fdi? In crude terms:

FII= when foreign-players invest in shares and stockmarket. FDI= when foreign companies invest in India for manufacturing, production, sales etc. by themselves (100%) or by partnering with some Indian firms.

Whats the difference? Which one is better?

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.

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[Economy] Budget related current affairs making you nervous? Question via email : When I am trying to think the budget as a Current Affairs activity, my head shakes. I have to depend on Chronicle or news papers for the highlights of the budget. I am not able to read and analyze the budget presented every year. So will it be possible for you to suggest how to read the budget? What all things are there in Budget? What area we should focus on or not focus on? budget is not about minute data and numbers like 15664 cr. alloted to some xyz scheme and 19.5% excise duty on footwares. 1. 2. 3. 4. 5. all you need to understand from budget is tax slabs new policies meant for promoting FDI / business etc. broad objectives of Government welfare schemes. how will the Government handle deficit?

+ The burning issues: GST, DTC, what did the FM said in this budget speech about them?

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[Economy] meaning of Socialism,Communism and Capitalism in simple words Shivam asked, Please explain the meaning of Socialism,Communism and Capitalism in simple words,it is not completely clear to me. Read Class 11 NCERT: Indian Economic Development Economics It is lucidly explained in it. you can download for free I cannot simplify it any further.


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[Economy] IIP: Index of Industrial Production: Meaning, implication, impact on Rupeestrength 1. 2. 3. 4. Introduction Who calculates this IIP? What are other Indexes? What is the impact of poor Industrial Production? 1. As a job seeker 2. As a stock investor 3. As a shopper 4. As a borrower 5. As a producer/exporter: 5. IIP for October11 : Rupee weakens 6. IIP for December 2011 7. FII Introduction When we say economy is booming or industry is facing a slump: how do we know? Mere by perception? But Government or Banks or investors cannot make their policies and decisions on perception, they need some quantifiable data to work on. Hence they need IIP (index of Industrial production). It is a number, that gives you idea on how industries are performing. <without getting technically so correct or in minute details> 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. 110


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.

Who calculates this IIP? Central Statistical Organisation (CSO) under the Ministry of statistics and program Implementation. When do they calculate this IIP? Every month. Why do they calculate it every month? Because if they calculate every year, itll be too late for the Government or RBI to make necessary amendments in the policy ! Theyve to keep a constant eye on this number.For example 1. Automobile sector is facing very negative growth, Government may give them taxholidays or allow them to import foreign machinery without paying import tax. [Fiscal Policy] 2. Negative IIP may mean People dont have money in their hands, so theyre not purchasing products (less demand) hence industry had to reduce the production or Businessman are having hard time borrowing because of high interest rates. = Change the repo, reverse repo CRR etc to increase money supply in peoples hands. [Monetary Policy] What are other Indexes? 1. Wholesale price index (WPI) 2. Consumer price index (CPI): four subparts a. Industrial Workers (CPI-IW) b. for Agricultural Labourers (CPI-AL); c. for Rural Labourers (CPI -RL) d. for Urban Non-Manual Employees (CPI-UNME). What is the impact of poor Industrial Production? Here goes mere rephrasing of another article from 111

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. IIP for October11 : Rupee weakens

had negative growth (-5 .1 percent). (This data was released in Dec11) It sent panic among investors and SENSEX fell by 343 points. FIIs started pulling out money from our stock-market, theyd sell their stock-get rupees, get them converted into dollars and invest it elsewhere in different country.


You get the picture: Demand of dollar$ increase and demand of rupee decrease hence the rupee made a new lifetime low of 52.** against the dollar

IIP for December 2011

Very low +1.8 growth (In Dec10 it was 8.1%!) This data was released in Feb12.


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. More on FII vs FDI Click Me

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[Economy] Direct Tax Code (DTC): Meaning, Explanation, Basics Mansoor asked I have read about DTC in other articles but finding it difficult to comprehend it. please explain. First the Basics Direct Tax vs Indirect Tax Direct Tax You pay it on your income and property. 1. Income Tax 2. Corporate Tax 3. Wealth Tax ^ Direct Tax Code (DTC) seeks to consolidate them all in one book. Indirect Tax 113

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

Direct Tax follows the principle of redistribution of wealth in short it means: Tax the rich and use the money for the welfare of poors. You tax middle-class and rich-class, use that money to provide subsidized wheat for poor people = wealth is redistributed.

Why do we need Direct Tax Code? (just covering the brief highlights without getting into details) All In ONE code

Right now weve different Codes for different taxes for ex. Under DTC, all the direct taxes will be brought under a single Code

Simplify the language for aam-aadmi

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.

Provide stability in direct tax rates

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.)

Increase Tax to GDP ratio.

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 114

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.

Rates under DTC:

10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh

Other provisions of DTC [Not covering everything in detail]

Tax exemption on Education loan is continuing. Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010, such a concept has been abolished.

Wealthtax cutoff increased

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.

Corporate tax rate 30% (no surcharge or cess)

[Earlier they had to pay educational cess.] means now theyve to pay less because there is no cess! Confused about what is Cess Then click me! Combine this with Stability point explained above, and Foreign players would feel attracted to invest in India.

MAT (Minimum Alternative Tax)

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.


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. [Economy] Direct Tax Code (DTC): Meaning, Explanation, Basics Mansoor asked I have read about DTC in other articles but finding it difficult to comprehend it. please explain. First the Basics Direct Tax vs Indirect Tax Direct Tax You pay it on your income and property. 1. Income Tax 2. Corporate Tax 3. Wealth Tax ^ Direct Tax Code (DTC) seeks to consolidate them all in one book. Indirect Tax You pay it on the goods and services purchased. 1. 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

Direct Tax follows the principle of redistribution of wealth in short it means: Tax the rich and use the money for the welfare of poors. You tax middle-class and rich-class, use that money to provide subsidized wheat for poor people = wealth is redistributed. 116

Why do we need Direct Tax Code? (just covering the brief highlights without getting into details) All In ONE code

Right now weve different Codes for different taxes for ex. Under DTC, all the direct taxes will be brought under a single Code

Simplify the language for aam-aadmi

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.

Provide stability in direct tax rates

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.)

Increase Tax to GDP ratio.

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.

Rates under DTC:

10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh


Other provisions of DTC [Not covering everything in detail]

Tax exemption on Education loan is continuing. Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010, such a concept has been abolished.

Wealthtax cutoff increased

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.

Corporate tax rate 30% (no surcharge or cess)

[Earlier they had to pay educational cess.] means now theyve to pay less because there is no cess! Confused about what is Cess Then click me! Combine this with Stability point explained above, and Foreign players would feel attracted to invest in India.

MAT (Minimum Alternative Tax)

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.

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. [Economy Q] Basel III Norms: Tier 1 and Tier 2 Capital meaning use

Keep in mind friends, for a regular Government job recruitment exam [UPSC, State PSC] or MBA admission GDPI, you need to have only a basic idea about BASEL. No need to dwell into extreme details such as exact numbers of Tier 1 and Tier 2, credit valuation adjustment or Net Stable Funding Ratio. 118

What is BASEL? It is a city in Switzerland. Why Do we Need BASEL norms? Consider these cases ICICI bank collapse hoax Back in 2003, Someone started a rumor in Ahmedabad that ICICI bank is going to collapse. Suddenly thousands of panicked account holders lined up at the nearest ICICI branch to take out their money and hence there was such a money-shortage in ICICIs Ahmedabad branches, they had to actually call up trucks loaded with cash from their Mumbai branches.

Things settled out after a while and it was confined only to a few cities of Gujarat, but if it was an entire-countrywide hoax, just imagine the fallout!

SBI: Imaginary case

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.

Here comes BASEL in picture

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.

What is Tier 1 and Tier 2 Capital?


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 1 and 2 is way of classifying the capital of a bank. Tier 1 Easily liquid. For example

currency notes and coins in the bank value Stocks held by Bank, can be easily sold off in share-market.

Tier 2

Not easily Liquid, for example the building or land owned by the bank.

For BASEL norm will be something like this [technically totally incorrect, just for the purpose of basic understanding] 1. If a Bank loans 1 crore rupee to a company with B Credit Rating, it must keep capital worth 20 lakhs aside for crisis. 2. And out of that 20 lakhs, Rs. 15 lakhs must in form of Tier 1 Capital and 5 lakhs can be in form of Tier 2. 3. If the Company has credit rating of AAA then Capital worth and so on.. Governor of RBI signs on this BASEL agreement, comes back home and forces all the Indian banks to follow these norms. Same thing will be done by French, Chinese, Americans etc. and thus banks in every country will function prudently thus preventing another Global financial crisis. Latest is BASEL III accord, came in 2010. It has stringent provisions keeping in mind the subprime crisis. 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 WE 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.


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. [Economy] Greenex : New BSE Stock index for Energy efficient companies Before moving further, I suggest you read How do they calculate SENSEX (click Me) What is Greenex?

it is a stock index similar to SENSE, launched in 2012. It measures the share-trading activity of 20 top energy efficient companies of India in Bombay Stock Exchange.

What type of companies listed in 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


Baseyear: 1st October, 2008 (incase of SENSEX it is 1979) Basevalue: 1000 Started in Feb. 2012, opened at 1488 Numbers are not important, but you must understand the meaning: If the value of all stocks traded in BSE, was Rs.1000 in 2008 then right now it is Rs.1488. In case of SENSEX: the basevalue is 100, meaning if value of all stocks traded in BSE in 1979 was Rs.100 right now it is 15000 (or whatever it is).

ok, but why create Greenex, where there is already SENSEX?

You and me purchase shares Company makes profit and gives us dividend on those shares. If company gets higher profit, we get higher dividend. (assumption) In long term, energy efficient companies will get better profits than other companies. So if there is a separate index to measure performance of Energy efficient companies in stock-market, the investors can make a better and informed decision about where should they put their money. Thats why separate Greenex despite having a SENSEX. 121

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. [Economy] National Investment Fund (NIF): Meaning Use and Demo CSAT question What is National Investment Fund (NIF)? 1. Government has shareholding in PSUs (Public sector undertakings: ONGC, SAIL, LIC etc). 2. Government sells part of its shares in the market, and get ca$h. (it is called Disinvestment) 3. Government puts that cash in this NIF, instead of the consolidated fund of India. 4. SBI, UTI etc will act as fund managers, use this money to invest in sharemarket etc, and generate profit. (just like Mutual funds) 5. 75% of profit, will be used for MNREGA, Indira Awas Yojana and other schemes of Union Government. 6. 25% of the profit will be invested in profitable PSUs. (lolz e.g. Air India) 7. NIF was given approval in 2005 but in reality it started working in 2007. What is Consolidated fund of India? (CFI)

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.

Demo Question for CSAT 2012 Which of the following statements is/are correct about National Investment Fund? 1. It falls under the jurisdiction of Ministry of Commerce and Trade. 122

2. National Investment fund is created to increase investment in backward states. 3. NIF money is spent on advertizements to attract foreign investment in India, and to create investor friendly infrastructure such a rail, road, and electricity. 4. Government requires Parliamentary approval to spend money out of NIF. Answer a) Only 1, 2 and 3 b) Only 1 and 4 c) All of them d) None of them

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[Economy] Cairn Vedanta Deal: Whats the problem? First whore the players? Cairn Energy Oil and Gas exploration company of UK. Its Indian arm Cairn India owns big oil-drilling blocks in Rajasthan etc. Vedanta Resources ltd

London based Mining company owned by Anil Agarwal. Vedanta acquired majority ownership in the Cairns Indian arm for about 8 billion dollars. The deal was done in 2010 but got stuck due to ONGC and Government of India.

So whats the problem? #1: ONGC delying No Objection Certificate (NoC)

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.

#2: Approval File pending in Union Cabinet

The deal also needed approval from Indian Government because

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.

Cabinet Committee on Economic Affairs (CCEA) Another (unofficial) angle of this story:

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.

Climax and The End

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! 124

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. [Economy] Ad-Valorem Tax, Unit Tax, Dumping Duty 1. 2. 3. 4. 5. 6. Introduction Two Types of Taxes on Petrol Ad Valorem Tax Unit Tax and Dumping Duty Examples of Dumping Duty To Sum up

Introduction Before moving into Ad-Valorem, Consider The taxes levied on per litre of Petrol : (Data may be outdated but just for concept clarity)

Union takes excise tax: Rs 14 per litre, State takes Sales tax : 20%

[ 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 ] Two types of Taxes on petrol Notice the Difference between Union and State taxes. Union charges absolute value: Rs.14 per litre. Meaning whether original price of Petrol from the Oil refinery is 20 rupees or 100 rupees, Union Government will get only per Rs. 14 per litre. So Union is charging tax according to Quantity of Petrol. While state charges (percentages) % of petrol prices. So if petrol comes for Rs. 20, state gets Rs.4 in Sales Tax. if petrol comes for Rs.100, State gets Rs.20. Meaning State is charging tax according to Value of Petrol. Latin word for according to value = Ad Velorem. 125

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)

Now the second type of tax: Unit Tax / Specific Tax 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.

Examples of Anti-dumping Duty Copy pasting from newspaper articles

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

Ad Valorem tax is levied on the Value of a product or property. Unit Tax/ Specific Duty is levied on per Quantity of a product. (kg-weight, meter, litres, unit etc.)

Related to this List of 80+ Economy Articles written by me.


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[Economy] Carbon Tax: Meaning, implications Carbon tax is important topic under the Environment and Biodiversity portion of CSAT GS Paper-I, also forinterviews because it is in recent news. Table of Contents 1. 2. 3. 4. 5. 6. What is Negative externality? What is Pigovian tax? What is Carbon tax Implications of Carbon tax Why is Carbon Tax in News? Mock Questions from this Topic

What is negative externality?

A Thermal powerplant uses coal to produce electricity, sells it to the citizens. But the residents living near this Power-plant have to breath very polluted air- get various lung disease have to bear the medical expenses. The soot from the plants chimney settles down on their homes, compounds, clothes, cars and theyve to dust and clean it every day. This is a case of negative externality.

Externality means : Two parties enter in a deal, and benefit from the deal. but a third party who is not involved in this deal also gets affected involuntary. (Without consent). Externality can be positive also. e.g I run a perfume-shop and local-residents get to enjoy the lovely fragrances for free. What is Pigovian tax?

Suppose Government puts tax on the coal purchased by this Power-plant and uses this tax-money to provide cheap medical care to the residents of that area for respiratory diseases and gives them subsidy for buying special type of windows that filter the incoming polluted air in the house. Such tax is called the Pigovian tax, because a British economist Arthur Pigou argued about negative externalities and imposing taxes on companies involved in creating negative externalities. Now to the main topic of this article 127

What is Carbon tax

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.

Implications of carbon tax? We know that companies pay the tax, but ultimately the consumer has to bear the burden. Consider this chain: There are two companies A and B.

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.

Why is it the news? EU -Airlines

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!

Mock Questions for Mains and Interview CSAT Prelims 128

Which of the following statements are correct?

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.

Mains, Essay and Interview

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)

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[Economy] Why do we need budget? The Two problems Ask yourself a question : How does government earn the money? Obviously, by collecting taxes from us : income tax , sales tax , customs duty and so on but here is the first problem: Constitution of India says: The government cannot put any tax on us without the passing a Law in Parliament..(Problem #1)

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.


But here is the second problem: Constitution of India says, The government cannot take out even a single penny from this fund without authorization from the Parliament..(Problem #2) So, What do we conclude from Problem #1 & #2? Government will need the permission of Parliament for to earn money and to spend money. Hence each year, the Finance Minister prepares two files: they have the details of

1. How government wants to earn money from citizens 2. How government wants to spend the money. He puts these files in a leather suitcase. French word for this bag /Purse: bougette. Thats how we got the word Budget. You must have seen the Finance Minister holding a brown colored leather bag and getting photographs outside the Parliament on the day of budget.

The Two files

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 We 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.

Million Dollar Question Still remains: why do we need budget? Why did Constitution of India impose these problems on the government?

To ensure the financial accountability of executive (Government) towards the legislature (parliament) and by extension towards the people of India.

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[Economy] Currency Devaluation alone will not bring more FDI Question: as 1$ = 7 yuan and 1$ = 48 rupees it implies that our currency is devaluated thus should attract more FDI . I have read that china keeps its currency devaluated to gain more FDI but above data seems to be paradox to me. Please clear my confusion Ans:

If your currency is devalued, your exports will increase because American dude can purchase (import) more mangoes for the given $ 1 note. But When youre talking about FDI: the Foreign investor will also look at many factors apart from just currency devaluation e.g. Return on investment. Safety of his invested money (Telenors 2G license cancelled by SC) Government policy on labor, civil laws, Foreign Exchange laws (Capital account convertibility). And Most importantly: Political stability and scenario. For example, today Foreign investor Mr.X comes to India and Environment Minister demands five suitcases to clear his files, and it seems that current Government might collapse after a few months, and new Governments new minister would ask for another five suitcases Mr.X is unlikely to invest in such volatile situation. In this context, Political stability in China is rock solid, judicial intervention in Administrative decision= minimal, unlike India. So they get more FDI. Chinese President Hu Jintao was ranked #1 in Forbes worlds most powerful person list. The Magazine said Unlike Western counterparts, Hu can divert rivers, build cities, jail dissidents and censor Internet without meddling from pesky bureaucrats, or courts. You dont hear about Niyamgiri, Jaitapur, POSCO or Kundankulam in China. Their Administrative machinary takes action quickly. Either Yes or NO. In India Decision Making is slow. Mohan wont say yes and he wont say no either. Files remain pending under consideration in GoM (Group of Ministers) for months. As it happened in Cairn Vedanta Deal You dont invest your money somewhere only because that countrys currency is devalued. You look at all such factors. Thats Currency Devaluation alone doesnt bring more FDI.

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[Economy] Economic Survey-2012 (Hindi/English) Download Links

Not that youve to mug up the data from it ! Whatever Important highlight, recommendation, numbers / graphs it has, will be published in major newspapers, magazines soon. But these PDFs have enough fodder material for framing Mains GS/Pub.Ad, Essays and Interview Answers. Example Chapter #12 on Climate Change and Sustainable Development. So if anyone wants to go through it, here are the download links for Both Hindi and English version.

Foxit PDF Reader (Free and MUST Have While reading a PDF File, you can use this software for pen-highlighter / select and copy text / create bookmarks / add your own notes or commentbox on a pdf file etc. The Adobe PDF reader has very limited functionality in this regard. Foxit is better, smaller and portable (and free). Download Installation Version Download Portable Version Economic Survey 2012 in English All in One download Link (10MB) :Economic Survey (All Chapters) 10 MB Chaperwise download links (English) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. State of the Economy and Prospects Micro Foundations of Macro Economic Policy Fiscal Developments and Public Finance Prices and Monetary Mangement Financial Intermediation and Markets Balance of Payments International Trade Agriculture and Food Industry Services Sector Energy, Infrastructure and Communications Sustainable Development and Climate Change Human Development India and the Global Economy Statistical Appendix


Economic Survey 2012 in Hindi All in One download: All Chapters in One Link (Hindi). Size 14MB Chapterwise download links (Hindi) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. ,

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[Economy] QFI (Qualified Foreign Investor) vs FII, Need, Implication, Currency Depreciation, Demat Account and more (Story of Forex continues) The Technically incorrect Story of Forex continues with new topics : FII, QFI (Qualified Foreign Investors), Demat, PAN card and more What is FII, Why did Rupee weaken against Dollar. Why did QFI come? 133

1. Story of Foreign Institutional Investor (FII) 2. Serious Note on FII 3. QFI: Qualified Foreign Investor o Demat account? o What is Depository? o What is Depository Participants (DP)? o Trading account for QFI o PAN card 4. QFI from Newspapers 5. MOCK Economy Question for CSAT Foreign Institutional Investor (FII)

Tom Cruise: What is FII? Anil Kapoor: It means foreign player can invest money in Indian stock market. Tom Cruise: Cool. Tell you what, Im not getting much interest-rate in my savings account in American bank, I got $1 million in the suitcase, lets go to Bombay Stock Exchange and buy some shares! Anil Kapoor: Aint that easy! An individual foreigner cant simply walk in the Dalal street and do shopping. Go to Maxwell Assets Manager . He will explain everything to you. Sub-Account under FII Maxwell Manager: Im an established financial asset Management firm. Ive got a licence from 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: Well 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 Whos 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. Serious Note on FII (copied from Newspapers)

At present, a foreign individual seeking to invest in Indian stocks has to be registered as a sub-account of an FII, which in turn has to apply to Sebi on the behalf of the subaccount holder. India allows only wealthy foreign individuals or high networth individuals (HNIs) who have a minimum net worth of $50 million (about R260 crore) and registered as a subaccount of a foreign institutional investor (FII) to invest directly in local equities FIIs pulled out money on account of growth falling below 7% and widely-publicised difficulties in obtaining regulatory clearances. Net outflows exceeded $450 million last year For many FIIs, economic woes in their home markets, especially due to the European debt crisis and a perceived policy paralysis in India following a string of scams, exacerbated their pull-out. Euro zone crisis has led to investors pulling money out of Indian equities. For India, the problem has been compounded by a slump in investor confidence because of policy inaction leading to a sharp fall in new projects. Reserve Bank of India (RBI) estimate says that a 10 percent fluctuation in FII investment results in a 35 percent variation in stock prices. FIIs pulled out money on account of GDP falling below 7% and widely-publicised difficulties in obtaining regulatory clearances. Net FII outflows exceeded $450 million last year.

QFI: Qualified Foreign Investor

Finance Ministers office


Secretary: Sir, the FIIs are pulling out their money like there is no tomorrow. They have lost confidence in Indias growth story (thanks to you). Since theyre pulling out money, Demand of Dollar is increased and demand of rupee is decreased. Currently $1 goes for 54 Rupees in Forex market. We have to do something before all hell breaks loose! Finance Minister: damn, let us start a new scheme Qualified Foreign Investor (QFI) as New year gift from 1st January 2012 to increase the confidence of investors in Indian Market. Secretary: What does is do? Another (bogus) scheme like your MNREGA? Finance Minister It means a foreign individual, group or foreign firm can directly invest in Indian stock-market like any normal Indian citizen, without requiring the sub-account with FII. This should bring in some more investors, whore interested in investing in India but feel turned off because of this sub-account and strict High Net-worth rules. Tell RBI manager to do verification of the applicants though, make sure these individual, group or associations are resident in a foreign country that adheres to anti-money laundering and anti-terrorist financing guidelines as defined by the financial action task force (FATF). Secretary: Good idea but I suggest we name this scheme IGQFI or RGQFI Finance Minister: ?? Secretary: Indira Gandhi or Rajiv Gandhi QFI :P Finance Minister: Why not both of them simultaneously? IGRGQFI Secretary: Whaat an Idea Sir-ji!! Brad Pitt: haha my turn now, Im gonna purchase some shares from Indian Market! HDFC Manager: hey Wait, you cant just walk in like that. First youve to open a Demat account and a Trade account with a DP (Depositary Participant) like us! Brad Pitt: wait wait wait, so many words in a sentence, Im getting confused, lets talk this one at a time: What is this Demat account? When you purchase shares, you dont get paper certificates, but those shares get electronically transferred to your demat account in the Depositary. Meaning your shares are not in physical paper (material) form but electronic format. De-materializied= De-mat. No fear of theft, misplacement, delay in transfer etc. Something like having a caller-tune in your mobile. You own the tune but dont actually have to have it in your phones memory card. What is Depository? A Depository is like a bank locker where securities (shares) are held in electronic 137

(dematerialised) form. In India, there are only two Depositories -National Securities Depositories Limited (NSDL) and Central Depository Services Limited (CDSL). What is Depository Participants (DP)? DPs are like bank branches where shares in physical (paper) form need are deposited for converting them in electronic (demat) form and email it to the Depositary. Examples of Depository Participants (DP) :ICICI, SBI, HDFC etc. Youve to open a Demat Account with any one DP.

And what about this Trade account The same DP bank also act as stock-brokers. You open a trade account with us, This enables you to trade in shares without going through the hassles of manually converting your dollars in rupees or chasing your broker for cheques or Transfer Instructions etc. Everything will be done after you login to our online portal. Brad Pitt: ok so If I get it correctly: First I purchase shares using my trade account, then transfer them in my demat account. I can do this all without needing a third party agent (FII or Share-Broker), just like how an Indian citizen can play in share-market and Government took this step to increase money inflow and reduce volatility in the market, which was created by FIIs. This is the crux of QFI. Sounds good. Im desperate to become a QFI, Open my Trading account right NOW! HDFC Manager:But for that you need a Demat account. Brad Pitt:Ok open my demat account. 138

HDFC Manager:but you need a PAN card for that. Brad Pitt:Ok open my PAN card account. HDFC Manager:Youve to get PAN card from Income Tax department. Brad Pitt:Man this is hopeless. No wonder why India ranks low in Doing Business Index.Now What is this PAN card?HDFC Manager:Permanent Account Number (PAN) refers to a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department in India. It is now compulsory to quote PAN in share-trading and financial transactions. Although Dividends from companies and mutual funds are not taxable in India, PAN card is required to fulfill the KYC (know your customer) norms for us a critical requirement in the age of laundering and transferring terrorist money! Brad Pitt:But Im a Foreigner! Do I need PAN card too? HDFC Manager:Yes you do mister. and youll have to get it from IT office. Cut to- Income Tax Office. Peon (To Brad Pitt) Saaheb is gone for a tea-break. Wait for 145 x 109 minutes. Brad Pitt (Facebook-twitter status update): #missionimpossible6On a serious note, QFI from Newspapers

2011: QFI were allowed to invest in pension and mutual funds only and not in the Indian Sharemarket as such. Until now Foreign Institutional Investors/sub-accounts and Non-Resident Indians are allowed to directly invest in the Indian equity (Share) market. 2012: Now QFI can also invest in sharemarket. QFI is an individual, group or association resident in a foreign country that adheres to anti-money laundering and anti-terrorist financing guidelines as defined by the financial action task force (FATF), a multi-lateral body. The QFIs do not include FII/sub-accounts. QFIs can own up to 5% of Indian companies while their cumulative investments are capped at 10%. These limits are over and above the FII and NRI investment ceilings prescribed under the portfolio investment route for foreign investment in India The QFIs shall be allowed to invest through the SEBI-registered Qualified Depository Participant (DP), with the QFI required to open only one demat account and a trading account with any of the qualified DP and make purchase and sale of equities (shares) through that DP only.

Mock Questions for CSAT (Economy) Which of the following statements are correct?


At present there are four Depositories to hold shares in Dematerilized form PAN card is issued by SEBI Only Indian Nationals can get PAN card. PAN card has 16 digits. Aadhar (UID) card has 10 digits.

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. [Economy] Reliance KG Basin Issue : Reason, Controversy, Crux of Matter Before dwelling into Reliance KG Basin Issue, get some foundations clear 1. 2. 3. 4. 5. 6. New Exploration Licensing Policy (NELP) Conventional Mining and Royalty Production Sharing Contract (PSC) The crux of Reliance KG Basin controversy Dateline of Reliance KG Basin Controversy War of Words

New Exploration Licensing Policy (NELP) 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. Conventional Mining and Royalty

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:

Production Sharing Contract (PSC)


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

The crux of Reliance KG Basin controversy

It is alleged that Reliance used false accounting-methods to show huge-costs and operating expenses to keep the profit low so that they have to pay less money to the Government. CAG found this out after auditing, media started reporting, right now matter in PAC (Public accounts committee) of parliament. Also, RIL had to take permission of government before raising the sale price of Gas. So citing the heavy cost and low-profit, Reliance also increased the sale price of gas with Governments permission. And then this (expensive) gas was sold ot fertiliser companies, power plants and thus snow-balling effect: price of fertilisers, electricity also increased =inflation. Director-general of hydrocarbons (DGH) was responsible for looking after this exploration-activity, how much gas is generated, what is the operating cost, is there any real loss etc. (but as the common sense suggests) he might have taken suitcases to turn a blind eye to all this.

Dateline of Reliance KG Basin Controversy

1999 Vajpayee Government introduced NELP (NEw exploration licensing policy) 2000 Reliance got the licence to explore gas in Krishna Godavari Basin 2002 Reliance Industries discovered huge reserves of natural gas and some small reserves of crude oil in a block called D6. 2007 CAG starts auditing 2011 CAG submits audit report and media starts reporting this controversy.

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. Reliance Industrys response CAG has not found any false inflation of the cost or any dishonesty in developing the nations largest gas fields. Corporate rivalry motivated a few people with vested interests to indulge in a vicious smear campaign against us CAG neither had any expertise in hydrocarbon exploration Ashok Chawla Committee on Pricing of Natural Resources Production Sharing Contracts like the one Reliance Industries signed for the gas-rich KG-D6 are designed to benefit private players at the governments expense. Tapan Sen, a Rajya Sabha MP

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.


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[Economy] Bonds vs Shares, Debt vs Equity, IPO, Underwriter, Venture Capital, Angel Investor, Junk Bonds, Bearer Bonds, Gilt Edged securities: Meaning, Explained 1. 2. 3. 4. 5. 6. 7. 8. 9. How To get the cash to start my company? Problems in above options Financing my company: Debt OR Equity #1: Debt: Bonds o Junk Bonds vs Gilt Edged Security o Bearer Bonds #2: Equity Shares o Shareholders and Board of Directors o What is IPO? Venture Capitalist and Angel Investors o What is Venture Capital? o Who is Angel Investor? Who is Underwriter? Debt vs Equity : good and Bad things Upcoming articles

I want to start an Ice cream company, what will I need? Land Labor To build a factory. Workers to run the machines. Money to buy Freezers, mixers and packing machines to make icecream. To take the risk and do above three things.



These are called the four factors of production. I already have the entrepreneurship in my heart and mind. But it requires truckload of cash to arrange for the other three items: Land, Labour and Capital.


How To get the cash to start my company?

I can rob a bank Or I can just start my own IIT Bombay, sell its application forms for 5,000 rupees and then declare cut off 99.99% and thus earning truckload of cash without actually wasting a single rupee in arranging the admission interviews. Or I can join politics.

Problems in above options

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

Financing my company: Debt OR Equity

#1: Debt- bond 144

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. We call it BOND. IF you hold my bonds, Im liable to pay you money no matter what happens. Whether my ice-cream company actually makes profit or goes Kingfisher. I have to keep paying fixed money to you, every year.

Junk Bonds vs Gilt Edged Security

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

Junk Bonds

If my Bond gets C or D rating, it means Im not creditworthy, I may default on this loan, I may run away. So my bond is as junk as Ra.One movie. A wise man will not invest in it. So, how can I seduce you into purchasing my bonds? How can I convenience you to take the higher risk, in buying my junk bond? How about Free caller Tunes or a scratch-card that offers you a chance to dine with Sachin or Katrina? Or How about Higher Interest rates: If you give me Rs.1000, Ill give you 25% interest rate per year! This is also known as High Yield Bond, because youre getting higher profit.

Gilt Edged Securities

Like an ice cream company, Government also needs finance- at times when tax collection is low and they need some temporary funds. They issues treasury bonds. RBI sells these treasury bonds on 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.


Bearer Bonds (and Bad Guys)

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: Why 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.

#2: Equity: IPOs and Shares

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. 146

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. Whats the value of these papers? 10,000 Papers multiplied with Rs.1000 each =1 crore. Voila 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.

Related to this: How do they Calculated SENSEX? Click Me to Read it Shareholders and Board of Directors

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: When 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.

Primary vs Secondary Market

Primary market = this is the Place where IPOs are sold, Secondary Market= this is the place where IPOs are re-sold as shares. Physically both things are done in the same place e.g. BSE (Bombay Stock Exchange) but this virtual classification helps in keeping track of things, making statistical analysis etc.

Venture Capitalist and Angel Investors Now Two more sub-types of Equity financers What is Venture Capital?

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.

How do they get money?

Ofcourse money doesnt fall from sky, these Venture Capitalist companies themselves borrow money from other companies like mutual funds, pension funds or they may be issuing their own bonds to get money.


How do they operate?

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

Who is Angel Investor?

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.

What is the need of Angel Investors?

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. For example: Pharmaceuticals, Dairy, Engineering instruments, Mining, Telecom, Textiles, Oil Refinery etc. But they may not get interested in you, if you talk about untried and untested business plans / product or fields. Imagine Steve Jobs requesting SBI Bank Manager to give him business loan in 1970s to start Apple Computers, or Same Steve Jobs launching IPO of Apple in NewYork Stock exchange during that time! But there was an angel investor Mike Markkula, who actually believed in his plan and gave him some money and got 1/3rd ownership in the company in 1977. Angel investor doesnt mind taking huge risk by helping even small timers with totally unique and untested idea, if he think that itll grow up huge success in future. Similarly, Amazon online shopping website and Starbucks coffee chain also started with Angel Investors.

Capital Gain Tax Revisited Recall the argument given by Mr.Vodafone in Capital Gains tax? An individual who owns 45 per cent share capital does not own 45 of that companys assets. There is a difference between the sale of shares in a company and the sale of assets of that company.

Why is it so? Because most of the company 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. 149

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.

Take a really crude example

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?

So far weve seen that To arrange money I can either borrow (debt, Bond) or I can give shares (equity, IPOs/shares). Here is the problem: I cannot print those security papers on my own Home PCs cheap printer. 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.

Debt vs Equity : good and Bad things

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

Good things: bonds vs shares Debt (Bond) Equity (IPO/Shares)


I have complete ownership and control over the company. Im accountable to nobody just like UPA-II. I dont have to share my profit with anyone. I get to eat the whole cake. I can claim income tax deduction for paying the loan. It require less paperwork and time to borrow from bank / friend than via sharemarket (SEBI permission, board of directors etc)

If the company makes loss, I dont have to share any money with the shareholder, just like Kingfisher. So there is no regular interest payment, as we do in the loan. Meaning Ive less tension compared to bank loan/ bonds.

Bad things: bonds vs shares Debt (Bond)

Equity (IPO/Shares)

Even if I dont make profit, Ive to pay interest rate, because basically this is a loan just like home loan or car loan. Whether you earn or not, youve to pay the EMI. I may have to mortgage something (machinery, building) to get the loan. So in case I default on the loan, the bank/financer can take it away from me.

I dont get complete ownership and control over the company. Ive to constitute a board of directors, hold general meetings of shareholders, Im accountable to them. The board of directors can throw me out of CEO job, if I donot deliver results, unlike Mohan. It requires heavy paperwork and time to initiate IPO, sharemarket thing (SEBI permission, underwriting etc)

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. (to be continued)

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. [Economy] Regional Rural Banks vs Cooperative Banks 1. What is NABARD? o How does it give money to villagers? o Where is the office? 2. Regional Rural Banks o Where do they operate? o What do they do? o How were they born? o What is ordinance? o Who owns RRB? o Give some examples of RRB? o Whats their problem? o K. C. Chakrabarty Committee on RRB, 2009 3. What is Co-operative bank? o Loans and Co-operative Banks o How to scam using Cooperative bank? 4. Upcoming article: What is NABARD?

National Bank for Agriculture and Rural Development (NABARD) It is the top development bank. It was established in 82 by a special act of parliament: to provide cheap loan to villagers. Government of India holds 99% stake.

How does it give money to villagers?

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!)

Where is the office?

NABARDs Headquarter = in Mumbai RBI Headquarter = in same Mumbai. (and NOT in Delhi)

Now two more types of Banks: Regional Rural Banks (RRB) and Cooperative Banks. 152

Regional Rural Banks Where do they operate? As the name suggests, they are located in rural / semi-urban areas. What do they do? They give loans, mostly to small and marginal farmers, agricultural laborers and rural artisans. How were they born?

They were established under Government ordinance in mid-1970s.

What is ordinance? When parliament is not in session, President can make an act on advice of the cabinet. Such law is called ordinance. Who owns RRB? RRBs are jointly owned by

Govt. of India, the concerned State Government and Sponsor Banks Ownership in the proportion of 50%, 15% and 35% respectively

Give some examples of RRB?

Dena Gujarat Gramin Bank Andhra Pradesh Grameena Vikas Bank Vidharbha Kshetriya Gramin Bank Paschim Banga Gramin Bank

Whats their problem?

Same as Air-India and Kingfisher: Loss making. Out of political compulsions, they hold Loan-melas to give mass-loans to farmers (during Election-years) but later cannot recover the money. Sometimes loans given to undeserving people, due to political pressure. Makes sense huh? Government owns 99% in NABARD >> NABARD Gives money to RRBs, I hope you get the picture.

K. C. Chakrabarty Committee on RRB, 2009


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. (Better his report prepare it thoroughly for General Studies Mains.)

Coming to the second type of banks:

What is Co-operative bank?

Copy pasting from Theyre small-sized units organized in the co-operative sector (mostly Rich-businessmen and relatives of politicians gather-up and open such banks in a city/ small town) These banks, until 1996, could only lend for non-agricultural purposes. Cooperative Banks in India are registered under the Co-operative Societies Act. These banks provide most services such as savings and current accounts, safe deposit lockers, loan or mortgages to private and business customers. Co-operative banks function on the basis of no-profit no-loss. Co-operative banks, as a principle, do not pursue the goal of profit maximization. Therefore, these banks do not focus on offering more than the basic banking services.

Loans and Co-operative Banks

Co-operative banks give cheaper auto loans compared to private banks. The criteria for getting a loan from a UCB are less stringent than for a loan from a commercial bank. For instance, when taking an education loan, it does not matter whether the course you are going for is recognized or not! End of copypasting

How to scam using Cooperative bank?

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. 154

Upcoming article: NEFT and RTGS online money-transfer systems. Madhavpura Bank, Ketan Parekh and Circular trading scam.

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[Economy] IIP Index calculation mistake for January 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Why revision in IIP? Why sugar data impacts IIP? But why sugar data-entry was incorrect? But why should we care? IIP Data misuse and crony capitalism? Pranab Anand Mahindra Rahul Khullar, commerce secretary Expressbuzz Economic Times

You already know about the meaning and implications of IIP (If not, click me) But what you and I didnot know so far: IIP index for January 2012, as bogus as Ra.One movie. Consider this: Initially CSO said January IIP is 6.8% Now theyve revised the number and Chief Statistician of CSO, is saying Sorry, Galti se mistake ho gaya!! January IIP is only 1.1% Why revision in IIP? Because actual sugar production was 58 lakh tonnes but they entered 134 lakh tones in the Excel datasheet. (MS Office Version 1997, Windows 95 Operating system) Why sugar data impacts IIP?


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.

But why was sugar data incorrect?

Because Directorate of Sugar in the Ministry of Consumer Affairs-Food & Public Distribution, had given wrong sugar data to CSO. (May be he was in hurry to watch cricket matches with you-know-who runs the agroministry.)

But why should we care? When weve extremely important news-reports on Nupur Talwar and Nirmal Baba, why should we bother with IIPs bogus-data? Why should we care? Because RBI studies these numbers: WPI, CPI, IIP, M1, M2, M3 etc. and decide the monetary 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. We 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. IIP Data misuse and crony capitalism?

Indianexpress says Crony capitalist benefit from IIP miscalculation. How? Because Government also uses IIP index to make policies. For example a low IIP because of low steel production= Government may ban the iron-ore export, to make more raw material available to local steel producers. So mining mafias dont like low IIP. Similarly, low IIP because of low sugar production= Government may temporary ban sugar export, to prevent shortage in local market. 156

But sugar-industrialists enjoy exporting sugar, as it fetches them higher price compared to local market. So they may not want low IIP index.


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 We 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! Rahul Khullar, commerce secretary This is not the first time! We had $9.4 billion correction in the exports data for April-October 2011 due to a computer crash and data entry errors. Expressbuzz

Government is not only incapable of estimating figures for the future but also of capturing past data accurately to make sound decisions. Is the country being fed wrong information through government agencies because they are backed by corporate interests and foreign institutional investors? Is the rise of crony capitalism driving data collection agencies to feed wrong information to benefit vested interests? The government must realise that sanctity of underlying data lies at the core of sound policy formulation. No doubt, gathering socio-economic data in a country as complex as India, which is not monetised and computerised, cannot be expected to be 100 per cent accurate. But it should not be so skewed as to twist our perspective. It is time the government took data collection and collation more seriously and got it scrutinised by some independent agencies before releasing it.

Economic Times

Industrial growth in February 2012, we are now told, was 4.1%. But do we know for sure? Or will we have to wait till next month? Or the month after?


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[Economy] Different Types of Companies: Pvt.Ltd, Public Ltd., Public Corporation, Departmental Undertaking, PSUs 1. 2. 3. 4. 5. 6. 7. 8. Paid up Capital Private company Public company Holding company and subsidiary company Departmental undertakings Government Company Public corporation PSU (Public Sector undertakings)

Paid up Capital

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

It has a minimum paid-up capital of Rs.1 lakh It needs minimum two members and maximum 50 members (i.e. The persons who hold its equity) This company is to use the word Private Limited at the end of its name. It cannot have more than 50 members It cannot borrow for general public. For example Balaji Telefilms private ltd= Ektaa Kapoors company, involved in making those boring Saas Bahu serials. Another example: Neela telefilms private ltd. = Asit Modis company, they produce the comedy serial Tarak Mehta Kaa oolta Chashmaa. : the online shopping website is also a private company, started by Sachin and Binni Bansal.

Public company

It has minimum paid-up capital of Rs.5 lakh. Requires minimum seven members to start a public company. It has to hold annual general meeting of shareholders. It can borrow from general public via IPOs and Bonds. 158

For example, Infosys started as a private ltd company in 1981, but in 1992, it reregistered itself as a Public Ltd company and launched the IPO in 1993.

Holding company and subsidiary company

If company A holds more than 50% Shares of company B then, Company A is a holding company Company B is a subsidiary company Example: Coal India is a holding company. Bharat Coking ltd, Mahanadi CoalFields ltd are its subsidiary companies. Similarly, Konkan Railway is a subsidiary company of Indian Railways. Although Indian Railways is not a Holding Company, it is a Departmental undertaking.

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. 159

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.

PSU (Public Sector undertakings)

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.

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. [Economy] Shares vs Stocks, Rights Issue of Shares, Bonus Shares, RSU 1. 2. 3. 4. 5. 6. 7. 8. Share versus stock Different types of shares Rights issue of shares So, whats the point in doing rights issue? To reduce the debt: equity ratio Bonus shares Employee stock option scheme Restricted stock unit (RSU)

Share versus stock

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

Different types of shares

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

Still There are some topics related to shares Rights issue of shares

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 161

So, whats the point in doing rights issue?

Well the direct utility of rights issue= obviously to gather more money to expand your company. But it is also used for other purpose

To reduce the debt: equity ratio

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. What 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.

For example: Here is my offer of Rights issue:

1:1, Face value Rs.100, @ Discount of Rs.50 Meaning, if you already have 10 shares of my company, you can buy 10 more shares from me (1:1), Each of these shares will have Worth Rs.100 printed on it but Ill give it to you for Rs.50 only. What good does it do to me? Well in the legal record, for the calculation of Debt Vs Equity =theyll calculate using Rs.100 face value. Thus my Debt:Equity ratio will go down, and Ill look good when credit rating agency / FDI investor starts evaluating me.

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. 162

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 Well, as a shareholder, you get shares for free under bonus shares. But youll have to pay money for buying new shares under rights issue

Employee stock option scheme

Here the company issues shares its employee at a discount price. This is done to make the employees committed to the success of company because if the company makes more profit, they can walk away with higher dividends. Such shares have minimum lock in period: for example if your boss gives it today, you cannot sell it for one or two years.

Restricted stock unit (RSU)

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.

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[Economy] QFIs to enter in Bond Market: Reasons and Implications 1. 2. 3. 4. Pranab+SEBI+RBI High interest rate=Bad IIP S&P Downgrade=FII exit No AAA Rating=No QFI investment

From my previous articles, you know

What is the difference between QFI and FII (if not click Me) What is the difference between Bonds and Equity (if not Click Me) 163

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?

Reasons are following

High interest rate=Bad IIP

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.

S&P Downgrade=FII exit

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 No AAA Rating=No QFI investment

In the Debt + Equity article, you read about Junk Bonds that carry high risk vs Giltedged 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.

Click me for Previous 100+ Economy Articles by Mrunal

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. [Economy] General Anti-Avodiance Rules (GAAR): Meaning, Pros, Cons, Implications, Explained Before reading further, make sure you have read the previous article on Vodafone-Hutch Capital Gains tax case. 1. 2. 3. 4. 5. 6. 7. Ministry of Finance, Delhi (2008) Drafting of the DTC Bill Rules of GAAR Burden of Proof Parliament of India (August 2009) Review by Standing Committee Pro and Anti GAAR viewpoints o Should be a separate Act o Assumption of Guilt o Conflict of Interest o Misplaced priorities: Tax Evasion vs Tax Avoidance o Piecemeal vs Holistic Approach o No respect for bilateral Tax treaties=Uncertainty 8. Summery 9. Epilogue #1: Mr.Vodafone 10. Epilogue #2: Pranab Ministry of Finance, Delhi (2008)



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? But sir your target is implausible just like reading entire Mishra-Puri and Dutt Sundaram for economy! Well, the Diamond traders in Surat and Builders in Mumbai got plenty of black money. You raid their offices every month, starting from tonight. We are already doing that. Yes, we recovered truckload of cash but still your target is just way too high. Then catch those big fishes that use Cayman island and other tax havens for making business deals! Matter is outside my jurisdiction. And even if I try to do something about it, theyll go to court and win the case. So, First, youve to update the Income tax act of 1961. 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


IT Commissioner


IT Commissioner


IT Commissioner calls up other senior and experienced officers from his department and starts updating the Income Tax Act. Drafting of the DTC Bill 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. Yes, We should make the necessary rules and call it GAAR: General AntiAvoidance Rules.

IT Commissioner

Retired IT officer


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 :-( Betaa there is nothing really unique or awesome in GAAR. Australia has GAAR since 1981. Then Canada, New Zealand, Germany, France and South Africa also adopted GAAR. Hell even China got GAAR in 2008! Im surprised to see Indian authorities were sleeping all these years and suddenly realized in 2009 that we too need a GAAR!

Retired IT officer

IT Commissioner

Well, Better late than never!

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: Very good. Just the way I wanted it. Now Ill table this bill in parliament. Parliament of India (August 2009) Pranab tables the Direct Tax Code-2010 bill in parliament. As usual Opposition MPs start shouting slogans against him. Lok Sabha TV-viewer: Yaar, ek toh Pranabs Bengali English accent is so hard to decipher in the first place and all this shouting is making it impossible to understand what he is saying!

Review by Standing Committee The bill is sent to the Standing Committee on Finance, headed by BJP Leader Yashwant Sinha, for review. The Committee issues an advertisement in the major newspapers : Weve uploaded the draft DTC code on our website so if anyone got problem or suggestion, send it by ordinary post or meet us in person because our fax machine is not working and our Secretary forgot the Gmail password. One such stakeholder is our good old Mr.Vodafone, he appears before the standing Committee to present his case. Pro and Anti GAAR viewpoints Mr.Vodafone: This GAAR is totally rubbish. I strongly oppose it because Should be a separate Act

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. 168

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. What 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. Why 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. Misplaced priorities: Tax Evasion vs Tax Avoidance Means illegal arrangements where liability to tax is hidden or ignored i.e. The tax payer pays less tax than he is legally obligated to pay by hiding income or information from tax authorities. Black money falls here.

Tax Evasion


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. Arrangement of a persons business and /or private affairs in order to minimize tax liability.

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.

Piecemeal vs Holistic Approach Pranab: But my friend, something is better than nothing. As youre well aware, I dont enjoy majority in Rajya-Sabha. It is very tough for me to pass any bill be it womens reservation bill or pension and insurance reforms.

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?

No respect for bilateral Tax treaties=Uncertainty Mr.Vodafone: The GAAR even says that its provisions shall override the provisions of any Double Taxation Avoidance Agreement (Tax Treaty) that India may have entered into with other nations. This means total disrespect for bilateral tax treaties! Vienna Convention on the Law of Treaties that that a treaty should be interpreted and must be performed by parties to it in good faith. 170

Pranab (intervenes): haha dude we have neither signed nor ratified that Vienna Convention! Mr.Vodafone: But then how am I supposed to do business? There is no certainty whether youre going to respect the International tax treaties or not. It will all depend on the whims and fancies of your IT Commissioner. How am I going to make business deals with other companies abroad? Economy cannot prosper in places having any type of uncertainty. Take the case of Naxal affected regions. Besides Supreme Court has said in my case Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Pranab: ya ya I know it very well what Supreme Court said in your case. And the main reason for doing GAAR is to make sure that you cant win in Supreme court next time. Mr.Vodafone: Then Ill make sure you that get a downgrade in Standard and Poor (S&P)s rating. Just one stroke and the FIIs will pull out crores from your market in a week=Rupee weakens =crude oil becomes expensive= inflation. Fir GAAR ki poongi bajaate rahenaa. Summery

GAAR is a set of rules to check on tax-avoidance.

Pro GAAR-Lobby Pranab, His party, Jholaachhap NGOs and Leftwing columnists of The Hindu et al

Big companies sell their products in Indian and make huge cash. Yet they do business deals in Mauratius, 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

GAAR is a draconian Act, in its present form. IT Commissioners are vested with so much discretionary powers, and theyll abuse it to meet the Revenue collection targets. Burden of proof rests with suspect and not with the prosecution. GAAR puts the onus on the taxpayer to prove that his business-deal is not for tax-avoidance. This will create a lot of uncertainty and could potentially lead to a dangerous trend of the IT Commissioner questioning almost every transaction that results in tax saving. GAAR doesnt respect bilateral tax-treaties= uncertainty=not good for making business decisions.

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. 171

Epilogue #1: Mr.Vodafone Some newspaper columnist: GAAR is blah blah blah blah GAAR is blah blah blah.. Mr.Vodafone: what is this yaar? GAAR should have been a news issue since August 2009 when Pranab introduced the DTC bill in parliament. But Only in 2012, after Vodafone judgment and Budget 2012, you fellas start writing about GAAR and that too only for namesake. And nobody is gonna read your newspaper columns except those UPSC and MBA aspirants. This GAAR issue requires proper public-debate because it has direct implications on Foreign investment, IIP, GDP, employment, inflation everything. Why no news channel is taking up this GAAR-matter? Newchannel Anchor: sorry man but my news schedule is totally jampacked with Sachins Rajya-sabha nomination and Nupur Talwars bail case. Ive to cover these two breaking news tirelessly for next 15 days 24/7. Mr.Vodafone: Thousands of girls get raped and killed across India on daily basis. What about them? Theyre not important? Dont they too deserve to get justice and media activism? Posh victims of Delhi-Noida region deserve quicker justice than some poor victims in Chhattisgarh or Rajasthan? Zee News, Aaj Tak, NDTV, Star News, TimesNow and CNN_IBN, no matter which channel I switch to, there is only Nupur Talwaar, Nupur Talwaar and Nupur Talwaar. Youre giving minute by minute live coverage of her: Nupur wore her own clothes to jail, she borrowed a jail library book, she was given a blanket, a mug,and she dined on brinjal-potatoes, dal and rotis. Hell, even Nathuram Godse, Lee Harvey Oswald and Nalini Sriharan didnot get this much attention! Newchannel Anchor: How can you be so cruel and insensitive about the Arushi murder case? If she 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.

Epilogue #2: Pranab Pranab Damn it!! This GAAR thing is still stuck in the parliamentary Committee. How am I supposed to get more Revenue in the mean time? How will


Rahulbaba say in Gujarat assembly election rallies ki hum Delhi se paisa bhejte hai lekin Haathi Modi paisa khaa jaataa hai! .

IT Commissioner

Boss, Tell him not to repeat the speeches of UP rallies in Gujarat, else UP result fiasco will also get repeated in Gujarat. Anyways, Ive got an idea about increasing Revenue collection. Then by all means share it with me. How about 80% tax on skin-whitening creams and also on the brandambassadors of those skin-whitening creams: SRK, John Abraham et al. But heavy direct-taxation leads to more tax evasion and heavy indirect-taxation leads to smuggling as it happened in Once Upon A Time In Mumbaai because India Junta has obsessed with white skin. Ok another idea Sir-ji. You become brand ambassador of Sandhi Sudha Tel (oil). In front of camera, you just have to say :

Pranab IT Commissioner


IT Commissioner

I did not need a knee replacement surgery thanks to Sandhi Sudha Tel. Iss tel ke istemaal se Mujhe Jodo ke dard mein bahot raahat mili hai. .

That company pays damn good money for brand-promotion: ask Govinda, Jackie Shroff and Alok Nath, if you dont believe me. Pranab Govinda (intervenes) Finally, Whaat an Idea Sir-ji! Not a good idea Sir-ji. Why taking away my bread n butter? I have to send my son to Kota for AIEEE coaching!

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[Economy] FCNR Rate Hike to Prevent Rupee Downfall: Meaning, Implications, Explained 1. 2. 3. 4. 5. What is FCNR? Example SBI FCNR What does SBI do with foreign currency? Why is FCNR in News? Implication of FCNR interest Rate hike

What is FCNR?

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

What does SBI do with foreign currency deposits?

NRI deposits his hard earned dollars$ into SBI account. SBI gives these dollars as loans to Indian Importers, who have to make payments in dollars for the importing raw material, machinery and goods from foreign countries. SBI also gives these dollars as loan as pre-shipment credit to Indian Exporters. Because theyve too may need to import some raw material from third country, also for paying the transport cost to ships etc. In short, SBI (or any Indian Bank), takes dollars from NRIs in FCNR account and gives it as loans to Indian businessmen for import/export. Same thing for Yen, Pound, Euro etc. (Because NRI can deposit those currencies as well and those Indian businessmen may also need Euro/Yen for making special purchases from particular country.)

Why is FCNR in News?

As usual, Rupee is weakening against dollar. On 4th May 2012, the exchange rate was $1=53.** Rupees. 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.

Implication of FCNR interest Rate hike


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.

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. [Economy] Current Account Deficit: How to Calculate it? 1. Balance of Payment 2. Current account: Three Parts o Part #1: Balance of trade o Part #2: Earning on Investment o Part #3: Cash Transfer 3. Current Account Deficit (CAD) 4. The Invisible Method of calculation 5. Implications of Current Account Deficit Balance of Payment Is made up of two components 1. Current account and 2. Capital Account. This article, deals with Current Account only. Current account It is made up of three parts.

1. Balance of Trade 2. Earning from Investment 3.Cash Transfers

Part #1: Balance of trade Since we are talking about Indias Current account, whatever money is incoming we take it as positive (+) and whatever money is outgoing, we take it as Negative (-). For 2010-11 Goods and Services Export Import Total Worth (Million Dollars) +299284 -381061 -81777


We 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 wholebalance. 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.

Part #2: Earning on Investment

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 $8 are classified in Current Account. Take the difference of incoming and outgoing Earning on Investment for 2010-11 it was -17309 Million US$ 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.

Part #3: Cash Transfer

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!

Current Account Deficit 177

Simply do the addition of figure (1), (2) and (3) 2010-11 Balance of Trade Earning on Investment Cash Transfer Total Worth US Million $ -81777 -17309 53140 -45946

Since we got a negative number, we call this Current Account Deficit (CAD): worth 45946 million US dollars. 1 billion = 100 million 178

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. Implications of Current Account Deficit

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!

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[Economy] FCCB: Foreign Currency Convertible Bonds and FCCB Refinancing 1. 2. 3. 4. 5. 6. What is a Foreign Currency Bond? What is Convertible Bond? Foreign Currency + Convertible Bond FCCB Refinancing Why in News? FCCB Problem of Suzlon

Foreign Currency Convertible Bond (FCCB) From the previous Debt + Equity article, you know there are two ways to finance a company 1. Debt ( Bonds) 2. Equity (Shares / IPOs ) What is a Foreign Currency Bond? Example of a Bond: Rs.1000, 8%, 2023. It means, You give me Rs.1000, I give you that Bond-paper Until 2023, each year I shall pay you Rs.80 as interest and on maturity (2023), Ill pay you the principal (Rs.1000). This is a bond in Indian currency, with both principal and interest is paid in Rupees. But what if any Indian company wants to sell bonds to Americans? $100, 8%, 2023. Here both principal and interest will be paid in American currency. This is an example of Foreign Currency Bond. It is a bond issued by an Indian company expressed in foreign currency, the principal and interest of which is payable in foreign currency. What is Convertible Bond? Again two ways to finance a company : Debt + Equity. Consider this bond Rs.1000, 8%, 2023. Convertible to 100 shares after 5 years. 180

It means, for the first five years, you continue to receive interest payment of Rs.80, each year. But on the fifth year or after that, you can give this bond back to the company and receive 100 shares (equity) in lieu of your bond. Think of the pros and cons From Investors point of view:

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.

From Companys point of view

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)

Foreign Currency + Convertible Bond Combine above two features in one bond.

Issue the bond in foreign currency; promise to pay the interest and principal in foreign currency. Promise the investor to convert the bond into equity after a fixed date.

When you issue a bond having both of above features, it is called FCCB (Foreign currency convertible Bond). FCCB started in 1993. FCCB Refinancing In crude terms, it means you take a new loan, to repay previous loan! During the IT-boom period, Many Indian companies took funds from Foreigners using FCCB bonds. At that time the picture was rosy good and the Indian businessmen had thought, 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. 181

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. FCCB Problem of Suzlon Suzlon is a famous wind turbine maker company promoted by Mr.Tulsi Tanti. Few years back, Suzlon had raised $600 million or Rs 3,000 crore through Foreign Currency Convertible Bonds (FCCB). The Maturity date is in July 2012. i.e. Suzlon has to repay the principal of Rs.3000 to those FCCB bond holders. But according to market sources, The company is not in a good financial position, thanks to the global financial crisis. Reason1. Wind-turbine orders from Europe and American clients have declined and 182

2. one of the biggest clinet Edison Mission, is not paying the dues in previous orders.) So, currently, it is outside Suzlons aukaat to pay back more than Rs.2250 crores. Therefore 3000-2250=Rs.750 crore have to be arranged. Weakening of Rupee currency only adds insult to the injury. Because in FCCB, both principal and interest have to be paid in foreign currency. So if 1$=50 Rs., that was well and good but right now 1$= around 54 Rs. Means company has to get even more Rupees to repay these FCCB bonds. So, Suzlon is in talks with bondholders e.g. 1. (offering to Bondholder) : Bhaiyaa instead of 100 shares, I offer you 200 shares. But please convert your FCCB into equity. If the bondholder agrees, it is well and good but problem: Tulsi Tantis shareholding will decline from 53% to 50%. As you can understand, shareholding less than 50%= Not a good idea Sir-ji. Just like running a coalition Government with Mamatha Benerjee. 2. Suzlon is also thinking of selling a subsidiary company called SE Forge Again problem: SE forge will not sell for more than 300 Crores, While Suzlon needs Rs.750 crores. 3. Issue a new FCCB bond, to repay the previous FCCB Bond.

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[Economy] Exchange Earners Foreign Currency (EEFC) Account 1. 2. 3. 4. 5. 6. 7. What is EEFC? Where can I open EEFC? Difference between FCNR vs EEFC Why is EEFC called current Account? EEFC= No interest paid by Bank! Why EEFC in News? RBIs new guidelines Rule #1: use your own forex damnit! 183

8. Rule 2: Sell 50% Forex from your account. What is EEFC? Indian People who earn in foreign currency (Exporters, big companies etc), can open the Exchange Earner's Foreign Currency (EEFC) Account in a Bank and deposit their foreign currency in it. Where can I open EEFC? ICICI, Bank of Baroda and other banks. Difference between FCNR vs EEFC Recall the FCNR = NRIs can deposit foreign currency in Indian bank. EEFC= Indian Exporters can deposit foreign currency in Indian bank. Why is EEFC called current Account? EEFC = Current Bank account in Foreign Currency. Just like a normal Current Account, Banks donot give interest on EEFC deposits. EEFC= No interest paid by Bank! Yep, The million dollar question is: If Bank doesnt give any interest on your EEFC deposit, then whats the purpose of opening such account? You import steel from china, assemble bicycle in India and export it to France. From France you receive Euro and to China, youve to pay in Yuan. Suppse youve only a normal bank account, you can only deposit money in Rupees. So first youve to convert those Euros into Rupees, (Forex agent will charge Commission), deposit Rupee money in your savings account. But just after 10 days, youve to pay to Chinese exporters in Yuan. So again take out Rupee money, convert it in Yuan (Forex agent again charges Commission.) + so much paper-work. The only guy benefitting here is the Forex dealer because youre not earning enough interest and paying more to him in Commission. The EEFC account comes handy. You can deposit whatever amount of Euros you received from France (100% amount) into this EEFC account. And later as and when you need, you take out the Euros and convert them into desired currency. Q. In EEFC Account, can somebody hold multiple currency like Dollar, Pound, sterling, Yuan or he is allowed only for a single foreign currency. (by Pradeep) Ans: One is required to have multiple EEFC accts for multiple currencies. So, if some exporter has transaction in EUROs and Yuans, he has to have two EEFC accts i.e EEFC (EURO) and EEFC (Yuan) (By Nitesh Macwan) 184

Why EEFC in News? RBIs new guidelines Same reason why FCNR was in news! =The declining value of Rupee. This week, 1$= 53.82 Rs. RBI wanted to stop the downfall of rupee any further so, Governor issued notification. It made two new rules.

Rule #1: use your own forex damnit! Exporters are permitted to buy foreign exchange only when they have completely utilized the foreign currency in their EEFC accounts. But why? Ans. To reduce currency speculation. For example, my finance expert tells me that I should hold on to my dollars in my EEFC for a month, because afterwards, dollar is likely to strengthen. (example 1$=50 to 1$=55) Therefore, at the moment Im not interested in using any dollars from my EEFC account, I just kept the stash aside. And I buy new dollars from forex market using rupee currency, to make payments for my business (instead of utilizing my own dollars already stored in my own EEFC.) This unnecessarily decreases the supply of dollars. (because people dont use their dollars, they just keep buying new from others) = demand of dollars even increase = rupee weakens even more. Therefore New RBI rule: Exporters are permitted to buy foreign exchange only when they have completely utilized the foreign currency in their EEFC accounts. Rule 2: Sell 50% Forex from your account.


Another rule made by RBI: whatever foreign currency Ive in my EEFC account, 50% of it, will be automatically sold and converted into rupee and saved back in my EEFC account. Ive to compulsorily surrender 50 per cent my foreign currency from my EEFC, for conversion to rupee balances. Result: Since Im forced to sell my foreign currency from my EEFC account= the supply of dollar / pound and other foreign currencies will increase in the market. Their price go down (example from 1$=55 Rs. To 1$=50 rs.) = Rupee strengthens. Click me for Previous 100+ Economy Articles by Mrunal

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. [Economy] Vodafone Essar Case: Capital Gains Tax Meaning, Reasons, Timeline, Implications, explained Before venturing into Vodafone Essar Court Case, Lets start with the basics Some information may be technically incorrect / outdated. This article is for illustration and understanding purpose only and not for writing the actual answers in your exam. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Two type of taxes. What is capital gains tax? Who pays the Capital Gains Tax? Players in the Vodafone Case Timeline of Events December 2006, Hong Kong February 2007, London March 2007, Mumbai Sept 2010: Vodafone losses in Bombay HC Aug-Oct 2011: SC hearing January 2012: Landmark Judgment of Supreme court March 2012: Review Petition by Government Budget 2012: Retrospective Amendment in Income Tax Act Epilogue

Two type of taxes.


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. What is capital gains tax? First, What is capital?

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.

There are two types of 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.

Do Shares of a company also come under Capital Gains tax? Yes Shares of a company also come under Capital Gains Tax. And there is different time-frame for them.

Short-term capital gains tax, if you owned those shares for less than 12 months, before selling it. Long-term capital gains tax, if you owned those shares for more than 12 months before selling it.

Who pays the Capital Gains Tax? Who is to pay CGT? The seller or the buyer?

Suppose I own a shopping mall building worth Rs.1 crore and I sell it to you for Rs.2 crores, and thus I made the profit (Gains) of Rs. 1 crore and I have to pay Rs.10 lakh to the government as capital gains tax. Now the convention is that I (the seller) dont actually pay Rs.10 lakh by myself Instead of that, you just give me only Rs.1 crore 90 lakhs. And keep aside 10 lakh rupees. 187

Then, you (the buyer) will pay the 10 lakh rupee to the Government on my behalf. (Thus you purchased the mall for Rs.2 crore). This is the concept of Tax Deduction @Source (TDS)

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 Vodafone and not the Hutch. Now coming to the Vodafone Essar case Players in the Vodafone Case

Vodafone Hutch Hutchison Essar Ltd. (HEL) CGP Investments Holdings Ltd Income Tax dept. Innocent Bystanders

UK based Telecom company. Hong-Kong based company. India based company Cayman Island based company, has 67% stakes in Hutch-Essar India. CGP itself is owned by Hutch, Hong Kong. India based *insert whatever word you want* You and I, because weve to prepare such topics for competitive exams.

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. February 2007, London


Vodafone (UK) Boss: (To his Netherland subsidiary manager) Take these suitcase full of 11 billion US Dollars, go to Cayman Island, buy that CGP holdings Ltd. From HTIL (Hong Kong) and give me miss call when the deal is finished. March 2007, Mumbai Income Tax Commissioners Office. Minister (on Phone): Mast bakraa haath mein aayaa hai ( !). Send a notice to Vodaphone, ask them to pay Rs. 12000 crores under capital gains tax because they purchased an Indian Company HEL (Hutch Essar Ltd) for 11 billion dollars! IT Commissioner: Sir, may I humbly point it out that It is a common practice among multinational companies (MNCs) to establish such SPV (Special purpose vehicles/ flimsy companies) in Tax havens of Mauritius / Cayman Island. And then those flimsy companies (SPV) such as CEG Ltd., buy shares of an Indian company (HEL). When the MNC wishes to sell or acquire an Indian company, they dont directly come and buy in India, they simply purchase or sell the shares of these flimsy companies in Caymans Island 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.

We are already giving billions of rupees in subsidies on diesel, LPG, Kerosene, Fertilizers. Weve to pay crores of rupees to Government employees under 6th Pay Commission. Were running Development schemes like MNREGA (Rs.40,000 crores a year), and in future we are thinking of starting Food security Act (2 lakh crores a year). Where is the money to pay for all this? Ive to give crores to that loss-making Air India. Ive to pay Rs.28000 crores Common Wealth games arrangement. All these things requires huge huge huge cash, man. Money doesnt fall from sky. We cannot tax the aam-aadmi beyond a level and We couldnt get decent money from sale of 2G spectrum, or coal mines auction Reliance isnt paying much from KG Basin gas exploration. Dont you understand? Weve to find new sources of income. Vodafone is a good bakraa. Lets rip him apart. Then we use it to create bogus Developmental schemes, siphon off the money and use it to fight election. This shall help us get absolute majority in Bihar and Uttar Pradesh because Public of UP and Bihar is so Gullible they will vote for anyone who tells them ki hum aap ke liye Delhi se paisa bhejte hai!( !)

IT Commissioner: as you wish. Ive sent the notice to HEL (India). Minister: Mogembo khush hua. ( ) HEL(India) Boss: (To IT Commissioner) Why the hell are you sending notice to me? I am not a party to any of this! Dont you see Im getting sold here. Ask the buyer Vodafone of UK or the seller Hutch of Hongkong about your Capital gains tax! 189

In the mean time Vodafone International boss: (To HEL Boss): Ive purchased majority shares of your company. You shall take my name like an obedient wife. From this day on, you shall be known as VEL (Vodafone Essar Limited) and not HEL (Hutchison Essar limited). HEL boss: as you wish my lord. Mr. HEL transforms into Mr.VEL. IT Commissioner: caught you now! Mr.VEL, youre the Indian agent of Vodafone, now you pay the capital gains tax or Ill start your ragging worst than that in B.J.Medical College, Ahmedabad. Vodafone files appeals in Bombay highcourt and supreme-court, stay orders here and there, sometimes victory sometimes defeat Fast-forward to Sept 2010 Bombay HC: Yes IT Department is right. Mr. Vodafone youve to pay the Capital Gains Tax. Mr.Vodafone: Ill go to supreme court. Leftist Media: Shame shame. Youre going to Supreme Court!! We 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? Judge: order, order. IT Commissioner: ummwell.ahhh oh yes, you and Hutchison International, have intentionally conspired to make this deal in Caymans Island. Because it is a tax haven. Because Cayman island doesnt have capital gains tax. You guys are very smart, you intentionally create such flimsy companies in Tax havens, and then make merger and acquisitions to avoid as much tax as possible. Youre not the only culprit; plenty of Indian companies are doing the same thing. [But since youre a big bakraa worth Rs.12000 crores weve special interest in you] Mr. Vodafone: of course. Why not? It is a completely legal activity to save tax through legal means. Whats wrong in that? Blame it to your outdated laws and tax-treaties. If a drunk rich brat kills 15 people in drunk driving, he still gets out of jail on bail, thanks to your outdated laws So who is to blame? The drunkard or the Government? Yes we save taxes by running the show through tax havens in Mauritius and Caymand island, but you cannot ignore the enormous employment generated because of me. See how many people got jobs in Vodafone outlets and the substantial increase in excise duty, sales tax and other duties. Not to mention all those people who got jobs, they also pay income tax, they go out purchase homes, automobiles, perfumes and skin whitening creams and what about that indirect employment generated in those industries? You cry about the puny 12000 crores in capital gains, what about the million dollar happiness in the lives of all those people benefitted directly or indirectly because of my entrepreneurship?.


January 2012 Landmark Judgment of Supreme court Saare sabuto aur gawaaho ko madde nazar rakhte hue, ye adalat iss natije par pahuchi hai ki ( , )

Indian authorities do not have jurisdiction on an overseas transaction. Certainly and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner This offshore transaction evidences participative investment in India and not a sham. The demand of nearly 12,000 crore by way of capital gains tax, in my view, would amount to imposing capital punishment for capital investment since it lacks authority of law and therefore stands squashed.

Location: Finance ministers Office, Delhi There is pindrop silence in the office. Babus are not even playing that Solitaire/Hearts cardgame in their Windows 98 computers. Some of them are busy in toilet, actually leaking information about possible future-moves of their minister to their journalist friends in TimesNow, via SMS from their Antique Nokia-1100 mobile phones. Minister (entering the Office) : Itnaa Sannaataa kyo hai bhai? ( ?) IT Commissioner: Because We have suffered a humiliating defeat in Supreme court, in that Vodafone case. Minister: You mean as humiliating as Team Indias defeat in Austrialian test-matches? IT Commissioner: Well, not *that* humiliating, but still very humiliating. Minister: I cannot let this matter go. Rs. 12000 crores is not a small amount! Ive Gujarat 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! With 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) What 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 We have to examine. We obviouslyneed 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. Demo Question for CSAT Which of the following statements are true?

Capital Gains tax is a type of Indirect tax There are three types of Capital Gains tax in India: Short term, Medium term and Long term. Central Excise Department looks after collection of Capital Gains Tax Direct Tax Code 2010, has no provisions about Capital Gains Tax.


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. [Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme 1. 2. 3. 4. What are the Income tax slabs in Budget 2012? How to Calculate income tax? 3% educational cess What is the difference between Tax exemption and tax deduction? o #1: Tax exemption o #2: tax deduction 5. Union budget 2012: provisions of Tax Deduction and Tax Exemption o What is Tax Planning? o Who is Tax-Consultant? o Black Money and Agro-Income 6. How does RGESS save Rs.5000 In Tax? o Case #1: dont invest in RGESS o Case #2: investment maximum in RGESS 7. The important questions : Food for Thought You may have read this statement in newspaper, tv-channels. Rajiv Gandhi Equity Saving Scheme (RGESS) will give maximum benefit of Rs. 5,000 in taxsaving. What does it mean? Before we can talk about that, lets see the basics of Income Tax calculation, Exemption and Tax Deduction. What are the Income tax slabs in Budget 2012? You know about this already: Income tax slab (in Rs.) Tax 0 to 2,00,000 No tax


2,00,001 to 5,00,000 5,00,001 to 10,00,000 Above 10,00,000

10% 20% 30%

(We are skipping senior citizen provisions) Time for a very simple question: if your income is Rs.15 lakhs, how much income tax do you have to pay? 15 lakhs is above Rs.10 lakhs, so you fall in 30% income tax slab. 30% of 15 lakhs equals to 4.5 lakhs income tax. Sorry 4.5 lakhs is Incorrect Answer. Infact youre income tax will be quite less than Rs.4.5 lakhs. Why? Because income tax is not calculated like that. Then how to calculate income tax? Suitcase approach Imagine there are four suitcases labeled one, two, three, four. You have to fill up each suitcase with your cash. But there are some conditions

you have to fill these suitcases in serial order: 1,2,3 then 4 First suitcase can contain maximum two lakh rupees only. Once it is fully packed, you move to the next suitcase. Second suitcase can hold maximum three lakh rupees Third suitcase can contain maximum five lakh rupees Fourth suitcase can contain any amount of money. No maximum limit.

Step #1: Distribute money in suitcases Now start distributing your 15 lakh rupees into these four suitcases suitcase number Money packed One 2,00,000


Two Three Four Total

3,00,000 5,00,000 5,00,000 15 lakhs

Step #2: Make a new column and apply those four tax slabs suitcase number Money packed Tax slab One Two Three Four Total 2,00,000 3,00,000 5,00,000 5,00,000 15 lakhs 0% 10% 20% 30%

Step #3: Calculate the income tax to be paid for each suitcase suitcase number Money packed Tax slab Tax to be paid One Two Three Four Total 2,00,000 3,00,000 5,00,000 5,00,000 15 lakhs 0% 10% 20% 30% Zero 30,000 1,00,000 1,50,000 2,80,000


The total sum of income tax on all four suitcases =2,80,000 lakhs So, if your income is 15 lakhs, you have to pay 2.8 lakhs as income tax. But we forgot some important things: educational cess, tax exemption, tax deduction.

3% educational cess Cess means tax on the tax. Union budget 2012, has provision of 3% educational cess. Meaning 3% of 2.8 lakhs, equal to Rs.8400 Hence the total income-tax that you to pay = 2.8 lakhs +8400= Rs.2,88,400 Now time for two most important parts in the income tax calculation. What is the difference between Tax exemption and tax deduction? #1: Tax exemption Income tax= the tax on your income, but you dont have to pay income tax on certain type of income. For example Policemen and Army jawans get uniform maintenance allowance: Suppose Rs.1000 to wash and iron their uniforms and to polish their boots every month. Rs.1000 every month multiplied with 12 months equals to Rs.12,000 every year, apart from the regular salary. But Budget-2012 says this Uniform Allowance income is exempted from taxation. So, If an army jawan earns Rs. 2,12,000, then his taxable income is 2 lakhs minus Rs. 12000 exempted= Rs. 2,00,000. Now calculate his income tax on Rs. 200,000 based on our suitcase approach. (ans. Zero tax, because Cash finished at first suitcase.) Crux: Tax exemption is given on INCOME. #2: tax deduction If you spend your income on certain activities, you wont have to pay income tax on that much amount of your income. E.g.50% deduction, if you invest in Rajiv Gandhi Equity Savings Scheme. (RGESS) Suppose you earn nine lakh rupees a year and invest Rs.20,000 in RGESS, Thus , your taxable income = nine lakh rupees minus 50% of Rs.20,000 (invested in RGESS) = 9 lakhs-10,000


= Rs. 8,90,000 Now calculate the income tax on Rs.8,90,000 using our suitcase approach. Crux: Tax Deduction is given on SPENDING Union budget 2012: provisions of Tax Deduction and Tax Exemption Here are a few examples. Note: Im not filling up the minute details and you dont have to mug this list. Tax Exemption (on INCOME / Salary) Tax Deduction (on SPENDING)

Transport / Conveyance Allowence Child education allowence Leave travel allowance (LTA) Medical Allowance Uniform / Dress allowance Gift from relatives Agricultural income House Rent income

Rajiv Gandhi Equity Saving scheme. Tax saving mutual funds (ELSS) Five year tax-saver bank Fixed deposits Public provident fund (PPF) National Savings Certificate (NSC) or National Service Scheme (NSS) Employer contribution into New Pension Scheme (NPS) Life insurance/Unit Linked Insurance Plan (ULIP) premium Employees contribution towards Employee provident fund (EPF) Home loan principal amount payment. Post office tax saving deposit or tax saving bonds Pension scheme/Retirement plans (Secion 80CCC) Tuition fees paid for children education Medical Treatment of family (upto Rs.40k)

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. Who is Tax-Adviser / Tax-Consultant?

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 Vodafone Essar deal: Saving Capital Gains tax in Caymens Island. These Big Players help in such huge tax-saving deals. 198

Black Money and Agro-Income

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.

Coming back to the opening sentence of this article: How does RGESS save Rs.5000 In Tax?

You already know the main provisions of Rajiv Gandhi Equity saving scheme

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. Case #1: dont invest in RGESS Your income is Rs.9 lakhs, and you dont invest in RGESS and dont get any other tax deduction or tax exemptions. The total taxable income is Rs. 9 lakhs. suitcase number Money packed Tax slab Tax to be paid One Two Three Four Total 2,00,000 3,00,000 4,00,000 0 9 lakhs 0% 10% 20% 30% Zero 30,000 80,000 0 1,10,000

Thus, in case#1: youre paying Rs. 1.1 lakh as income tax 199

Case #2: investment maximum in RGESS Your income is Rs.9 lakhs, and you invest to the maximum limit (Rs.50,000/-). Thus, the taxable income is = Rs. 9 lakhs minus 50% of Rs.50,000 ;because RGESS gives 50% Deduction. =9 lakhs 25,000 =Rs. 8,75,000 Now calculate income tax for Rs.8,75,000 using same suitcase approach suitcase number Money packed Tax slab Tax to be paid One Two Three Four Total 200000 300000 375000 0 875000 0 10 20 30 0 30000 75000 0 105000

Thus, in case#2, you pay 1,05,000 as income tax. Difference between Case #1 minus Case #2 =1,10,000 minus 1,05,000 = Rs. 5,000 Therefore all the newspapers, magazines and TV channels shout all the time that youll save Rs.5,000 by investing in RGESS. But here is a fine-print. This Rs.5000-magic works only if you fall under the 20% tax slab. If your income is rupees two lakhs and you invest Rs.50,000 in RGESS, you will not save any tax. Why? Because you fall in zero% tax slab. Your annual are not taxable in the first place! Similarly, if you are in the 10% tax slab, you will get different answers. 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. 200

Anyways, whether you can save 5000 or 7000 that is not the important question for UPSC, IBPS (Bank PO) or MBA admission interviews. The important questions are following

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? Why 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?

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[Economy] Bretton Woods: Fixed Exchange Rate system: Meaning Implications Explained 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. What is Bretton Woods? Why is important? Result of Bretton Woods Main Players in this Conference Impact of World War II on Economy Agenda of conference Fixed Exchange Rate system. Roosevelt Vs Mohan: Fast forward to 1970s Inflation and Gold Prices Do we need Bretton Woods?

While reading newspaper columns about global economy or Eurozone crisis etc. you may have come across a sentence, multiple times : we need another Bretton woods. What is Bretton Woods? 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

Result of Bretton Woods

1. IMF
o o

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.

Main Players in this meeting

Total 44 nations participated, but Main players were: US President Franklin D Roosevelt o US Treasurys Harry Dexter White UK Prime Minister Winston Churchill o Lord John Maynard Keynes, Famous economist, UK treasury advisor

India @Bretton Woods

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.

Back to the topic, Impact of World War II on Economy

Second world war started in 1939, ended in 1945 There is large scale bombing and destruction in the world. Production has declined, there is huge inflation. Agriculture, Dairy, Manufacturing, Export- everything is brought to standstill. 202

Agenda of conference

Help rebuilt the World Economy. Provide money, loan, finance to needy nations. (World Bank) After WW2, 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)

Fixed Exchange Rate system. What is Fixed Exchange Rate System?

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.

Roosevelt Vs Mohan: Pegging the Currencies (Fictional, technically incorrect, imaginary) President Roosevelt: ok I say we put fixed exchange rate system. Lets fix the rates that 40 Rupees will equal to 1 dollar. 15 Yens will equal to 1 dollar. 12 Pounds will equal to 1 dollar and so on. In short, Im pegging your currencies to US Dollar. Thus Dollar will be the international reserve currency. AND Your countrys RBI (central bank) will make sure these exchange rates dont fluctuate more than 1% from these values.Mohan: ya man, but what if the exchange rate fluctuates? for example, What If I start running my country in a totally pathetic and irresponsible manner and hence nobody wants to invest in India so supply of dollar is low but demand of dollar is high- because Indians want to buy gold and weve to import crude oil and pay in dollars. In short, this will fluctuate the exchange rates between Dollar vs Rupee.President Roosevelt: Let me ask you a question. Suppose Onions are selling 100 rupees a kilo because of low supply but suddenly farmers produce fresh new 50 million tonnes of onions and supply it to market, what will happen?Mohan: Easy! Onion Price will drop down to 40 rupees a kilo because the supply has increased. President Roosevelt: yes dude, the same way, whenever exchange rate fluctuates from our standard rate, youll tell your RBI to supply dollars from its own forex reserves in to the market to calm down the demand and bring the rate back to normal level. If the reverse happens: (Onions are selling @ 2 rupees a kilo) then you tell your RBI to buy all Onions dollars using its own rupees, until the supply is reduced and price is back to normal.


Mohan: What nonsense is this? If 40 rupees equals 1 dollar but then what does 1 dollar equal to? What is the value of your own dollar? Why should we accept your dollar as international reserve currency? President Roosevelt: 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? What 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 World War, 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 When 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 call-center boss may give you free lunch and coffee because $1=60 rupees but next day when value of rupee declines and it is $1=50 rupees, same boss will even stop running the water-cooler in your office. Third day when $1=40 rupees, He will just kick you out because outsourcing generate that much profit for him. Such uncertainty, is not good for economy. Besides, since Gold is in limited supply, Dollar will be spent carefully, and so your currency will be in spent carefully. i.e. Since currencies are pegged, you will not indulge in extravagant spending in subsidies, welfare schemes, tax-reliefs or debt-waivers to farmers. This ensures fiscal discipline => That ensures less Fiscal deficit = less inflation. Mohan: Mr. President Sir, I think I got the point now. 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. 204

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.

Inflation and Gold Prices

Fact: War leads to inflation Fact: Inflation decreases the value of your money. Fact: Gold becomes more expensive because of Inflation. US still kept fixed value of 35 dollars = 1 ounce of gold. But thanks to this inflation, Gold is trading at higher price in open market 40 dollars per ounce. So there is an opportunity to make quick money, just tell the RBI manager to take suitcase full of dollars from 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 Vietnam 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. What 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. Just like in the Story of Forex. Government /RBI will only intervene if there is huge fluctuation in the exchange rates.

Do we need Bretton Woods?

With 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 Woods. 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.

Then what to do?

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 Well 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.

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. [Economy] Excise Duty on Gold in Budget 2012: Reasons and Implications, Why Jewelers are protesting? In the union budget 2012, government increased the tax on gold jewelry, and the Jewelers all over India have gone on strike. Theyre agitating and protesting and demanding for the withdrawal of these taxes. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Budget provision TDS@Source Rupee weakens due to Gold obsession Why Indians consume Gold? #1: Financial Inclusion #2: Safe and Liquid Asset Better return on investment Profit Margin Gold Smuggling Epilogue

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.)


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? Why 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 operatorwhile 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 Rupee weakens due to Gold obsession Mohan (intervenes): Indian juntaa is the largest consumer of Gold in the world. In 2011 we imported almost 1000 tonnes of gold worth almost 50 billion dollars.

Dubai/South Africas dealer doesnt Export gold bars for rupees, he demands payment in dollars. Dont you get it? Whenever you purchase gold, our rupee weakens in the forex market! When 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. Weve to reduce the gold consumption in India.

Why Indians consume Gold? Jeweler: but why is Indian juntaa consuming so much gold in the first place? More people are 208

getting married or what? Mohan: Because bad people prefer to convert their blackmoney into gold bars. Other reasons for gold-consumption are following #1: Financial Inclusion

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?

#2: Safe and Liquid Asset

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.

#3:Better return on investment

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 Vijay 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.

Jeweler: wow man how do you know all this? Mohan: Because Im a good economist. Jeweler: Then why dont you do something to fix it? Mohan: Because Im not a good prime-minister.

Fiscal policy= what Government does to control economy. Monetary policy= what RBI does to control the economy. When people buy gold, theyre showing disrespect to my fiscal policy and RBIs monetary policy. 209

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. Why 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. Weve to hire so many film-actresses in advertisement.

Price difference of 10 gm gold pre-budget and post-budget is already Rs.1,500. Im afraid if I pass the taxes to final consumer, by increasing MRP of gold, itll further reduce the demand of gold-jeweler. Hence, for a while Ill have to bear a part of this taxation burden, by reducing my profit margin and keeping the MRP almost the same as usual, else Ill lose customers, and thats why Im agitating and demanding the withdrawal of this tax.

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 Who 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.

Mohan (to his son): What are you doing Betaa? Betaa: Daddy Im trying to verbatimly mugup the sentence written in this ready made coaching class notes/book. Mohan: But WHY? Betaa: Because Im yet to hit the puberty, so Im still under the impression that theyll ask absolute fact/data/number/date based question and one can really score well in the exam by copy pasting the lines in a verbatim fashion just like in the board exams! Afterall economy is not about evaluating the implications of a policy or decision, but it is about just mechnical memorization of Tax rates in Budget, GDP, GNP, weekly Repo, CPI,WPI and Food inflation rates!! URL to article:

. [Economy] QFIs from GCC to prevent Rupee downfall, IOSCO MMOU and Mock Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. What Is QFI What is FATF? Why QFIs of Gulf nations cannot participate in Indian Market? What is IOSCO MMOU? Why India changing the rule? Mock Questions for GS Mains Interview Question CSAT-2013 My Previous Economy articles on QFIs

What Is QFI

QFI (qualified foreign investor) is an individual, group or association, residing in a foreign country. This does not include the FII/subaccounts (For explanation click me) in January 2012, the government had allowed the QFIs to invest in the Indian market but with condition that their home countries must be part of FATF*.

What is FATF?

FATF (financial action task force) is an international body, monitoring money laundering and terrorist financing.


Why QFIs of Gulf nations cannot participate in Indian Market?

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.


International organization of Security commissions (IOSCO)- multilateral memorandum of understanding (MMOU). It is a global information sharing arrangement, among the security regulators (i.e. SEBI of each country). It sets the international benchmark for cross-border cooperation for combating the violations of securities and derivatives laws.

Why India changing the rule?

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.

Mock Questions for GS Mains 1. Write a note on India and GCC (Gulf Cooperation council) 2. Discuss Indias relations with **** (whatever countries Pratibha and Mohan visited during last one year using tax payers money. I suggest better keep a note, containing the major outcomes / treaties because of such visits.) 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. My Previous Economy articles on QFIs 1. QFI vs FII: explained. 2. QFIs to enter in Bond market: Meaning, Implications

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. [Economy] Rupee Downfall What can RBI and Government do to prevent further downfall of Rupee against Dollar? What steps should RBI and Government take, to prevent further Downfall of Rupee? 1. 2. 3. 4. 5. Important Steps taken so far Future course of action for RBI and Government Sovereign backed NRI bonds India Sovereign backed Bonds Allow banks to borrow from abroad

Important Steps taken so far In May 2012, reserve bank of India took following steps to stop the downfall of rupee against dollar. Reducing the speculative trading 1. RBI changed the rules related to EEFC Bank Account. (For Explanation click me) Reforms in FCNR Accounts 2. RBI relaxed the interest-rate ceiling FCNR Bank-Accounts and allowed the Banks to use FCNR deposits to provide loans to local residents. (For explanation click me)


Selling part of Forex Reseve 3. in past couple of weeks, RBI itself sold about $200 million from its foreign exchange reserves, to increase the supply of dollars in the market. Future course of action for RBI and Government Main reasons why Rupee falls down against dollar? 1. Because people have to pay in dollars, while they import crude oil and gold. 2. Because FIIs are exiting Indian Market due to policy paralysis and rumors related to GAAR. (For explanation click me) 3. Current account deficit is merely the outcome of about two problems. (for Explanation click me) 4. When people say, rupee is falling because of large current account deficit , it means that supply of dollars is low (from FII/FDI/Exporter etc.) side compared to the demand of dollars (from Gold and Oil sellers abroad/FII exiting from India etc.). So what can government and RBI do, to tackle this downfall of rupee? Policy reforms

Government could initiate policy reforms to boost foreign direct investment (FDI) in India. Such as FDI in retail-marketing and aviation sector.

Reduce Gold import

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.

Dollar window for oil firms

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. 214

Sovereign backed NRI bonds

Recall my article on debt versus equity. In that, I discussed about junk bonds versus giltedged securities.

India Sovereign backed Bonds So far, government of India has issued such bonds only three times (with help of SBI) 1. in 1991, Indian government had issued India development bonds, to borrow $1.6 million from abroad. 2. In 1998, Indian government had issued resurgent India Bonds, to borrow $4.2 billion from abroad. 3. In 2000, India millennium deposits, to borrow $5.6 billion from abroad.

Generally, these sovereign backed Bonds have maturity period of five years (i.e. you get principal back after 5 yeas) . They are issued in dollar or pound form The interest and principal are paid in the foreign currency itself, therefore, the investor does not need to worry about fluctuating currency exchange rates The Indian government could issue such Gilt-Edged bonds via SBI one more time, offering attractive interest rates to the NRIs. Implication: NRIs give their dollars to purchase these bonds, and the dollars, thus collected can be used for lending to Indian oil companies and or Indian Importers/Exporters*.

*ya exporters also need foreign currency! Because sometimes they have to import raw material/services from a third country for producing their own goods and services. Example: import electronic chips from Taiwan, steel from Russia, plastic from China, and assemble laptops in India and export it to South Africa. * why NRIs? (Because other FIIs/ foreign investors may not be so interested in investing in India at the moment given the policy paralysis and GAAR etc issues) Allow banks to borrow from abroad RBI could take a policy initiative, allowing the Indian banks and nonbanking financial companies (NBFC) borrow dollars from abroad and lend it in the local Indian market (i.e. Indian oil companies and Indian businessmen.) finally Allow QFIs from Non FATF Nations to invest in India For Explanation Click Me

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. [Economy] Wayda Bazaar or Futures market Meaning Question: what is wayda bazaar? Answer waydaa / Wadaa = promise to buy something in future. Waydaa bazaar= future (and options) market. When 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.

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. [Economy] Oil Hedging meaning and its impact on Government Subsidies Rahul asked, what Oil Hedging means and how is it related to the subsidies given by the govt. on oil products?? Answer

hedge= a fence or compound wall built to protect your property. 216

hedging = a method of preventing risk.

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.

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. [Economy Q] Infy at 3000 premium 100 what does that mean? Rudranil Ghose asked, what exactly does it mean when we say that in the stock market, a company is at (say) 3000, premium (say 100) ..For eg: Infy at 3000 premium 100 Answer Infy at 3000 premium 100.

It means this is a call-options contract: Buy infy shares at 3000 Rs. on x date. Right now you dont have to pay Rs.3000, but only that premium Rs.100 to that broker. 217

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.

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[Economy Q] How to calculate GDP (PPP) and GDP nominal? Abhi asked, How is PPP measured? Suppose Indias GDP is Rs 100. Convert this to dollars as GDP(nominal) and GDP(PPP) 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$. 218

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[Economy Q] Why use GDP (nominal) instead of GDP (PPP) when comparing two nations? After the previous question regarding GDP (at purchasing power parity) between Japan and China, Tarun asked, i have a query why GDP (ppp) is not used often to measure worth of countries as it give real picture than using GDP (Nominal terms) Answer For example: In India majority of people are poor, and receive subsidized grains (like 1 kilo rice for 3 Rs, kerosene etc. from PDS shops. In America poor people are supported by Government by food stamps and social security cheques. 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. Weve to import crude oil from Middle east and buy jet-planes, missiles from Russia,France and Israel. Weve 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.

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[Economy Q] Purchasing power parity: The case of China and Japan GDP nforninad asked, I Came across this article from the HINDU. I could not understand some of the economic terms in them. Can anyone please help out? For many years before that China had been ahead of Japan only when GDP was measured in purchasing power parity terms. PPP is an indicator that takes into account relative prices and therefore the command over goods that a dollar of income provides. Since with lower wages and prices, a dollar in China when converted to RMB delivers more purchasing power, Chinese GDP measured in PPP dollars is significantly higher than at official exchange rates. Hence, becoming the 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?


Weve 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. 221

Main reason: China keeps its yuan undervalued, hence its exports are cheaper than Japan or Indias.

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. [Economy] ADR and GDR Meaning and Use Question from a reader: What is ADR and GDR? Answer: American Depositary Receipt (ADR) ADR is method of trading non-U.S. stocks on U.S. exchanges Suppose, Indian Co. wants to raise money from America, by issuing shares in American stock exchange. But then Indian co. will have to maintain accounts according to American standards. To prevent this problem, Indian company gives its shares to American bank. American bank gives that Indian company receipts (called ADR) in return of those shares. Then Indian Co. can trade those ADR receipts in American share market, to raise money. Global Depository Receipts (GDR) Serve as same function like GDR, but on Global scale, it helps the countries from third world, to raise money from the stock exchanges in developed countries. Several international banks issue GDRs, such as JPMorgan, Citigroup, Deutsche Bank, Bank of New York. Normally 1 GDR = 10 Shares, but not always.

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[Economy] CDS : Credit Default Swaps Meaning Explained CDS = Credit default Swaps. In simplest form Its buying insurance against a default. For example: Im a banker, gave car-loans to dude, but Im afraid he might not pay back the full money. So Ill goto some other Bank X who sells Credit default Swaps (CDS). Ive to pay regular premium Bank X, but if someday that dudes default on his car-payment, Bank X will pay me the money. In a CDS transaction, the protection buyer does not suffer a loss when reference entity defaults. These CDS bonds, once issues, can be sold and bought like any other bond or security. i.e. Bank X sells my CDS to Bank Y. So now Bank Y gets my premium but in case of default by that Dude, Bank Y is supposed to pay me. In Jan 2013, RBI updated the CDS guidelines. As per the revised guidelines-now, CDS will be permitted also on 1. securities with original maturity up to one year like Commercial Papers, Certificates of Deposit and non-convertible debentures 2. listed corporate bonds 3. unlisted but rated corporate bonds Why CDS important for economy? 1. CDS, as a risk management product, offers the participants the opportunity to hive off credit risk. 2. such products would increase investors confidence in corporate bonds (because they can transfer risk) 3. thus it would be beneficial to the development of the corporate bond market. (CDS also means combined defense services exam, conducted by UPSC)

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. [Economy] Yield Spread : Meaning and use Explained 223

What is Yield Spread?

Yield spread is a way of comparing any two financial products. Yield spread is the difference between profit you can make in two different types of investment.

Why do we need to calculate Yield spread? Before coming to the purpose of calculating yield spread, lets go in a different direction. When you buy a Government bond, you can be certain that youll be paid in full, after the maturity and theyll not run away. So in this case risk is very low, hence they sell like hot-cakes. Thats why theyre called Gilt edged securities When risk is low, it doesnt carry much profit. But some junk company is issuing bonds, no one has ever heard of them. So their bonds carry high-risk of default, hence people wont be interested in buying it as such.So,The company will offer extra-high return (profit) on their bonds, to attract people. In short : Higher return is offered when Risk is HIGH. Scene 1: Year 2010 For every 100 rs. Invested in Government bond, you get Rs.5 return after 1 year. For every 100 Rs. Invested in the junk bond, youre offered Rs.13 return after 1 year. So yield spread = (13% minus 5%) = 8% Scene 2: Year 2011 Government bonds return remains the same but now that junk bond company is offering you 20% return. So Yield spread = (20% minus 5%)=15% In one year, the yield spread has widened from 8% to 15%. As we saw above, Higher the risk, higher return is offered. So, market is forecasting a greater risk of default which implies a slowing economy. A narrowing of spreads (between bonds of different risk ratings) implies that the market is factoring in less risk (due to an expanding economy). URL to article:

[Economy] M1,M2,M3,M4 : Money Stock Measure Meaning What is all this M1,M2,M3,M4? 224

It shows the money supply in the market. More money = more liquidity = easy to get loans = inflation Less money = less liquidity = hard to get loans = problem As we saw earlier, RBI controls the money supply by changing its CRR, Repo etc rates. (thus controls inflation) thats called Monetary Policy But for that, RBI needs to measure how much money is there in the market (=liquidity) ? they know it via these M1-M4. Side note Govt. controls economy via changing Tax rates- thats called Fiscal Policy

Thank you Satishtj for following information M1= Currency with public + Current deposits with banking system + demand liabilites portion of saving deposits with the banking system . Governor of RBI + ministers + MP can have account with RBI Now see this chart


PS: sorry for the watermark, although my current id is not but Who calculates M1-M4? RBI since 1970-71 What are the other names of this? 1. Money Stock measure 2. Measures of monetary Aggregates Was there any reform in it? Yes there was YB Reddy Group 1997-98 and on their recommendations- following steps were taken. Financial Sector Survey every 3 Months 4 New measures :M0-M3 3 Types Liquidity What is all Hot money, soft money, hard currency etc? Thats Types of Currencies -See this chart

What is Dear Money and Cheap Money? See this chart 226

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. [Economy] Credit Crunch : Meaning, Examples and Implications What is Credit Crunch? In simple words, when you cant get loans easily, its credit crunch. Definition: reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. Examples of credit crunch 1. In America, banks were giving housing loans to any swinging dude, without checking his credit-worthiness (like can he really pay back the loan or not?). This lead to mass-defaults after few years. Now bank managers are very cautious and before processing your loan application, theyll check it 17 times! this is also a sort of credit crunch because you cant get loans that easily, like you used to get, before the recession. 2. In 3G auction spectrum, telecom companies took 70,000 cr. from Indian Banks to bid in the auction. = lot of money flew out of the system. So for a time being, banks have less money to give as loans to other customers = Credit crunch. (although that didnot happen) but suppose Mukesh Ambani had called up a bank asking for 50000 cr. loan for acquiring a foreign company next morning, Bank manager might have said Sir, sorry we dont have no money! Implications of Credit Crunch Credit crunch is not good for economy, because 227

1. A businessman wants to start new factory, but cannot get loans easily = slowdown in economy. 2. A couple wants to buy home, but cant get home-loan easily = slowdown in real-estate sector. 3. A college kids wants a new bike, but his dad cant get loan easily = slowdown in automobile sector, but also good from climate-change angle. as people will be forced to use public transport system ;-) If such credit crunch continues for a long time, itll lead to job-losses, factories shutting down and finally recession. But sometimes credit crunch is a necessary evil, when there is too much liquidity (money) in the market. Too much liquidity = too much money = easy to get loans = people have more money in their hands compared to the items available for purchase = hyper-inflation. From the previous post about CRR & SLR, we can also say that an (Excessive) increase in CRR and SLR will lead to Credit crunch.

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[Economy] What is Insider Trading? Question: Recently got a news Reliance is accused of insider trading!! Can U tell me what is insider trading?? Answer: 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. 228

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.

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. [Economy] Currency Devaluation, Dollar to Rupee Exchange Rate Meaning Implications Explained Introduction First read the Balance of Payment (BoP) article, to understand this concept better. Consider this example. 1$ = 50 Rs. Price of one diamond = 50 Rs.= you can buy only 1 diamond in 1$ Now Suppose, RBI and Govt. of India declares that from now on 1$ will be equal to 100 Rs. Then ?? 1$= 100 Rs= 50+50 = you can buy 2 diamonds in 1$! So as an American youll import lot more, if the Rupee is devalued. Devaluation means The reduction of somethings value or worth An official lowering of a nations currency; a decrease in the value of a countrys currency relative to that of foreign countries Timeline of Rupee Devaluation Before 1966: 1$ = 4.76 Rs. In 1966: 1$= 7.50 Rs. (Rupee was devalued for the first time) This is fixed rate system means Govt. says 1$= 7.50 Rs. = its permanent; It doesnt keep changing every now and then. This fixed rate system is also known asBretton Woods system or pegged currency. (click me to understand it better) This system was abandoned by most countries in 1973. 229

India also abandoned this Fixed Rate system in 1975, and moved to the floating rate system. In the Floting rate system , the market forces of supply and demand decide the value of Dollar and rupee. 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 When 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 Value 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! Why India had to go Devaluation? 1966 Economic crisis 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 230

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 $$. And for that youve to reduce the value of your Rs. Same thing had to be done in 1991, due to BOP crisis. Who exactly determines the Exchange Rate? 1$= 50 Rs. =this is exchange rate, but who exactly determines this? In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. (= Central Govt. + RBI deciding 1$ = will be equal to how many rupees?) But then they had to liberalize and Nowadays, its the market forces of Supply and demand who will decide the Exchange rate. = its the players @ Foreign Exchange market. What is foreign exchange market (forex, FX, or currency market) Its a worldwide financial market for the trading of currencies. (just like youve sharemarket to sell and buy shares) The foreign exchange market allows businesses to convert one currency to another. For example, youve a factory in Noida to make bikes, you sell these bikes in India = you earn in Rupees. But the engines of those bikes are imported from America, so youve to pay in Dollars to that American supplier. So how will you get dollars? Simple, go to the Forex Market, give you rupees and buy the dollars. Here the supply and demand rules will decide the value of 1$= How many rupees. Its almost same like vegetable market, today it can be 10 Rs. Per kg potato, tomorrow it might go 20 Rs. /kg, depending on demand and supply. Consider this talk @ Forex Market Rupeeguy: hey man! take this 50 Rs. And give me 1 dollar. $ guy: dude, weve only few dollars, and I know youve plenty of Liquidity In India, your economy is booming and you people are earning lot of money. so give me 100 Rs. Otherwise Ill not sell. (=$ supply is low) Rs.Guy: damn it, anyways I need to pay $$ do my American supplier so here take this 100 Rs. And give me 1$. (=$ demand is high) =Rs. Is devalued Let see another deal. Suppose American banks pay 18% interest rate on your deposit. And Indian Banks are giving only 7% interest per year on your deposit. Then? If youre a big player, you want to put your money in American banks. but theyll accept only dollars. So what will you do? You go to the Forex Market to get your Rupees converted into Dollars. But After a few days, there will be huge rush to buy Dollars. So value of Rs. Will decrease. Rs.guy = hey man take this 50 Rs. Give me 1 $ $ Guy= I know you want to put that dollar in American bank to earn high interest! Ive plenty of people offering me more than 100 Rs. To get 1 Dollar, so you better give me 100 Rs. Or get lost from here. Rs. Guy= Ok I agree. (= rupee 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. $ Guy= take this 1$ and gimme 100 Rs. Rs.Guy= I know youre going to invest it in India and get 100% profit, plenty of Americans like you are offering me Dollars. So give me 2$ and Ill give you 100 Rs. Otherwise get lost from here. $ Guy= well that still better than parking my $$ in American banks and earn only 18% interest. so ok, I accept, here are 2$, give me 100 Rs. [1$=50 Rs.] (=Rs. Is revalued) However things are not this straightforward in real life deals. Many factors including rumors, Govt. policies, Tax rates, speculative purchase etc. will shift the trends in currency trading, just like your sharemarket. RBI and Central Govt. will not intervene in minor fluctuations. Theyll let the market forces of supply and demand decide the exchange rates and play their games. But if there is major problem, then RBI & Central Govt. will intervene to stop the heavy fluctuations. Weapons of RBI to control Exchange Rate Monetary policy For example, IF there is plenty of liquidity in Indian market. (= lot of Rs. In circulation) thus, within India youll not get good interest rates from bank and not high profit from your investment so you want to park your Rs. Abroad. = supply is more= Value of Rs. Will go down. Hence 1$ =100 Rs. So RBI will step in and change the CRR,Repo,Reverse Repo, Bank rates etc. to suck up the extra liquidity in market. And value of Rs. Will go up. Thus 1$ becomes 50 Rs. FERA & FEMA If there is too much dollars in Indian Market or if there is too less Rupees in Indian market, then Exchange Rates will change. (based on supply-Demand principles). If there are fluctuations like today 1$= 49 Rs. And after 15 days, 1$=47 Rs. This is normal healthy fluctuation but if there is sudden drastic change like in 15 days, 1$=100 Rs. that means bad guys are not playing by the rules. So to prevent such things, weve certain Laws. Foreign Exchange Regulation Act of 1973 (FERA) (repealed in 2000.) Foreign Exchange Management Act (FEMA),1999 By these acts, RBI is empowered to oversee and control the forex markets within india. And the Enforcement Directorate (ED) get the power to investigate and prevent leakage of foreign exchange which generally occurs through the following malpractices : 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 232

ED found evidence of alleged 50 Lakh hawala payments by a Dubai event manager to Ash, and others. (refer CNN-IBN) Non-repatriation of the proceeds of the exported goods. Unauthorised maintenance of accounts in foreign countries. Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation. Siphoning off of foreign exchange against fictitious and bogus imports. Illegal acquisition of foreign exchange through Hawala. Secreting of commission abroad. Third trick is current and capital account convertibility (will write about it in another article.) RBIs own Forex Reserve Another trick- when 1$= 100 Rs. This means, the dollar supply is low in the market compared to Rupee supply. So RBI will release the dollars from its Forex reserve, or sell its gold in foreign market and buy some dollars and release them in Indian Market. Revaluation 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 2007 (Oct)= 38.48 2008 (June)= 42.51 2008 (October)= 48.88 2009 (October)= 46.37 Now a sidenote- currency devaluation and building Forex Reserve. Advantages of Huge Forex reserves Now you might wonder what exactly is the use of building a huge Forex Reserve by keeping the currency devalued / weak, like China has done? And why do they keep the value of Yuan very low compared to Dollars? Well Huge Forex has its own uses lets see Indo-China War Suppose China and India goto war against each other. (and assuming that no one will intervene to stop the war and they will not use nuke missiles.) Now what items do you need the most during a war? 1. Missiles, guns, bullets, bombs. 233

2. Medical supplies 3. Diesel, Petrol 4. Fighter jet planes Diesel, Petrol is most important in war because 1. You need to transport your soldiers to the borders using aero plane , trucks, trains, 2. You need to setup base camps in remote jungles, but you need electricity to maintain communication with your Head Quarters= you need wireless sets, and to run them, youll need diesel generators. 3. If you want to use Jet-Fighters planes like MiG, to attack on enemys positions, then again you need very expensive type of petrol to run those Jet Fighter planes. 4. Battle Tanks like Arjun dont give an average like Bajajs Bike (1 Litre goes 100 km) so again you need lot diesel to run these tanks. 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. But China has 1400 Billion Dollars in their Forex reseve. Suppose it sends all those dollars in American market, then? Suppose China buys plenty of cars, food, etc from American market using the same American Dollars? Too much liquidity in America= everyone has more $$ in pocket than the physical products available in the market. = heavy inflation =1 potato will sell in 1000 $ So American economy will collapse. And ultimately 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. Role of Forex Reserve in Foreign Policy When youve plenty of Forex, you can give loans or Donations to poor nations in Africa, and then theyll support your every resolution and policy in United Nations General Assembly! Theyll even support your permanent seat in security council (UNSC) China is buying lot agriculture land in poor African nations & in that land, theyre growing Maize and other crops to produce bio-dieasel. = again China doesnt have to worry about Crude 234

oil like India. (=getting powerful for war) You can buy latest fighter jets, missiles, bombs, machine guns from France and America. (=again getting powerful for war) And finally, you can use that Forex reserve to import pulses, sugar, wheat etc. to control food prices with in your domestic market. For latest on this issue, click me to see the archive of all economy articles written by me so far URL to article:

. [Economy] WTO Doha Made Easy for UPSC and MBA Group Discussion Interviews 1. Tariff barriers 2. Non-Tariff barriers 3. what was happening before WTO? 4. Why agreements? 5. Annex 6. #1 Annex : GATT 7. #2 : Annex of GATS (services) 8. #3 : TRIPS 9. TRIPS =Trade related intellectual property rights 10. What is TRIPS all about? 11. Why TRIPS is imp? 12. Indias Problem with GI 13. Time limit 14. What is the Use of these agreements? / What are the trading principles in WTO? 15. What was before WTO? 16. so WTO is better than GATT? 17. India & WTO 18. What did India Gain from WTO? 19. DOHA 20. what is DOHA? 21. items for new negotiations in Doha 22. What was Indias Problem in Doha? 23. Criticism of WTO 24. Timeline Evolution of WTO Tariff barriers

Tariff = A government tax on imports or exports


When Indian Govt. puts heavy import duty / custom duty on Foreign Products either that import item becomes very costly so people will buy desi* items. (and there will be 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.

what was happening before WTO?

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 WTO, 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 WTO is Dispute Resolution thats like an international civil court. Now see the 3 most imp agreements of WTO. See this chart

Now lets see their annex 1 by 1 via charts. Annex #1 Annex : GATT


Now another mimp annex of GATT is, SCM = subsidies & counter veiling measures (=the Red, Green & Amber list) see this chart-

Apart from this, shipment inspection and anti-dumping are also included in GATT annex. #2 : Annex of GATS (services)


#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. TRIPS =Trade related intellectual property rights Its one of the agreement between WTO member nations. TRIPS doesnt have any annexes. What is TRIPS all about?

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.

Why TRIPS is imp?

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) 239

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.

Indias Problem with GI

Pakis also claim GI for their Basmati Rice. TRIPS doesnt talk about trans-border GIs.

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)

What is the Use of these agreements? / What are the trading principles in WTO? Without Discrimination a. MFN = Most favored nation b. In WTO, every nation is MFN c. So, if India grants a special favor to one nation India will have to give that special favor to all member-nations of WTO. d. India will have to treat locals & foreign players equally. (e.g. you cant have a system like Local businessmans file will be cleared first or local man will be given preference in contract / tenders/ 3G frequency allocation.) Exception to this principle 240

1. Group of nations can form FTA = Free trade agreements 2. Country can give special favors to 3rd world / poor nations. 3. A nation can impose high import duty/ prevent entry of goods from a nation thats doing unfair trade practices (like dumping* / Products dangerous to health**) 4. But there are strict conditions in WTO, before you can do above things. a. *Dumping =China intentionally sends extremely cheap toys in india, so Indian toy makers collapse and toy market in India is captured by China. b. ** Products dangerous to health like Chinas milk powder which had melamine. Freer Trade (bringing down barriers in international trade)

WTO agreements try to abolish following thingscustom duties Quota subsidies non-tariff barriers* (explained later.) red tape Artificially propped up exchange rates o like China intentionally keeps the value of Yuan low, so Americans will find it cheap to buy from China compared to other nations.)


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) What was before WTO?

Before WTO, there was GATT. GATT was criticized for being Rich mens club Everything in GATT used to work in a manner thatd suit the rich nations. 241

so WTO is better than GATT?

Yes, because of following reasons. WTO dispute resolution is quicker than GATT (disputes have to be solved within 18 months) in GATT, the bad-nation was free to determine its own penalty. but in WTO, bad nation has to pay high penalties for not following the rules. GATT talked only about goods (physical products) . WTO talks about services (phone lines, BPO) & Intellectual property rights, along with those goods. The working of WTO is more transparent. In WTO, every nation has one vote only. Unlike IMF where rich nations have more voting powers.

India & WTO first lets see what positive things happened then we talk of Doha Rounds and finally about Whats Indias problem in Doha rounds. What did India Gain from WTO? 1. 2. 3. 4. 5. India got boom in exports because WTO gradually lowered Barriers internationally. our export was only $33.22 billion in 1998-99. right now Indias exports are worth more than $100 billion India won multilateral dispute settlement against such powerful economies as USA 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 WTOs 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. What were they talking in Doha? Developing nations were complaining that theyre facing difficulties in implementing WTO agreements. 242

so concessions were given to them. 1. SPS annex added under GATT (hope you saw the previous diagram of GATT annex) i. a. SPS: Sanitary+ Phytosanitary Measures Agreement (on farm products) ii. b. Each nation can make its own Quality control rules iii. c. but theyve to be scientific. 2. Earlier TRIPS (intellectual property rights) was strict. a. now it was relaxed- and agreement changed saying that Laws should be made which supports existing medicines and public health interest at large. items for new negotiations in Doha 1. Multilateral environmental agreements 2. Trade barriers on environmental goods & services 3. Fisheries subsidies =they harm environment, by encouraging too many fishermen to chase insufficient fish the Doha conference failed because it ended with out any consensus.

Members were divided on competition policy & transparency in Govt. procurements. First world blames India to be the main villain for failure of Doha talks.

What was Indias Problem in Doha? SSM=special safeguard mechanism

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. 243

However the problem of food-price inflation should also be taken into account. (= read editorials, youll face such topics in mains / essay.) More trouble for India NAMA= Non-agricultural market access negotiations European Union has threatened to approach the World Trade Organisation (WTO) again if India does not remove the inter-state tariff disparities. We want India to get rid of its taxes on wines and spirits in different states to allow easier access to European wines, failing which we will approach the WTO again, 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! Timeline Evolution of WTO 1944 Bretton Woods conference, they wanted to make ITO (International Trade Org.) but it didnt happen.


1947: GATT (General Agreement on Trade & Tariffs) established It was criticized as being RICH MENS CLUB

1986 Uruguay Round of Talks Service & Intellectual Property rights related topics included in the debate 1993, everyone agreed on it

1994 (Marrakesh, Morocco) 2004 148 nations are members of WTO, covering 94% of international trade All nations signed on agreement & WTO was established

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[Economy] Food Inflation : Meaning, Reasons, Solutions 1. 2. 3. 4. 5. 6. 7. 8. What is food inflation? Non-cereals = Main Culprits Reasons for Low Non-cereal output Pulses Cultivation Fruits and vegetables Milk and Dairy items Conclusion Mock Questions for GS Mains

What is food inflation?

A consistent rise in the price level of all agricultural food items.


See this chart

Non-cereals = Main Culprits

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.

Now the million dollar question: If the fruits, veggies, pulses (=non-cereals) are expensive than rice or wheat (cererals), then why arent the farmers growing more of these fruits, veggies and pulses to earn more money? Reasons for Low Non-cereal output Pulses Cultivation 1. Pulses are fundamentally different from cereals since they need nutrients and energy for synthesising both proteins and carbohydrates unlike cereals that need to synthesise only carbohydrates. 2. This makes them more vulnerable to the vagaries of weather than either rice or wheat and thus riskier to cultivate. This risk would have been mitigated if farmers had better marketing and price support. But unlike cereals where there is a procurement price 246

system run by the government that offers a minimum support price and private trade that has developed alongside, this is not true of pulses. 3. Although Government is running lots of schemes to enhance the pulses and oilseed production, but its not showing enough result. 4. Though the government declares a minimum support price for most pulses, procurement operations are far less effective than those for cereals. Thus farmers could see a complete collapse in prices if the crop is good. The lack of a robust marketing network also implies that in periods of deficit, when retail prices actually pick up, farm gate prices remain subdued. Present Situation: Pulses

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.

Fruits and vegetables

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. 247

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.


A thriving food-processing industry could have provided producers an assured market and relative price stability. But that, alas, is not the case since food processing is confined to only about 2-3 per cent of fruit and vegetable output. Thailand, in comparison, processes 30 per cent and Brazil 70 per cent. we need huge investments both in food processing and in supply chain for perishables itesm (i.e. the food items that cannot be stored forever, unlike gold). Whether this investment could come through higher foreign investment or greater domestic resources is for our policymakers to figure out. For fruits, vegetables and milk we need large corporate participation in the post-harvest supply chain. This would break the current monopoly of private traders, reduce the tiers of intermediation and ultimately ensure a better farm gate price for the cultivator.

Milk and Dairy items

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

We need an Amul in every state, providing procurement and marketing support to millions of milk-producers who are now outside any safety net.

Conclusion We need to de-risk the cultivation of critical items that are in short supply. This would ensure that the farmers are willing and able to use better inputs. The problem of food inflation will vanish by itself. Mock Questions for UPSC GS (Mains) 1. Discuss the reasons behind Food inflation in India and suggest remedies 2. List the steps taken by Government, to promote the cultivation of Pulses and Oilseeds. 3. Functions of Agriculture Price Commission 248

Food for thought Government has foodgrain stocks about 80 million tonnes, large part of this is rotting because of the lack of storage facilities. We are literally sitting on a mountain of grain that we can export and then use it to fund imports of deficit items (example crude oil) Ref 1. Original article by Aditya Puri, MD of HDFC Bank 2. Rephrasing and elaboration by you know who.

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[Economy] What If Greece Exits from Eurozone? Implications on Indian and World Economy Past few weeks, media is talking about Greeces possible exit from Eurozone and its impact on India. Before going into Greeces possible Exit from EU, lets once again start from the beginning. 1. How does Government finance its operations? o What is Sovereign Debt? o Then what is Sovereign Debt Crisis? o What is a government bond? o What is a bond market? o Why do bond markets matter? o Borrowing beyond the Aukaat 2. Why is Greece such a messed up Economy? 3. TimeLine of Events o January 2010 o February 2012: The Auserity Bill o May 2012: Elections in Greece 4. Whats the EU Exit Rumor? 5. Whatre the consequences IF Greece Exits Eurozone? o Lines at the Banks o Loan Default by Greece o Meltdown o Businesshouses go Bankrupt o Sovereign Debt Crisis for Weak Eurozone Nations o Good for US and Japan o Political Turmoil in Europe 249

o Recession in Europe 6. Why Greece Exit =Trouble for India? 7. Food for thought

How does a Government finance its operations?

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

What is Sovereign Debt?

Sovereign debt is the money a government borrows from its own citizens or from investors around the world.

Then what is Sovereign Debt Crisis?

When Government doesnt have the aukaat to pay back the Sovereign Debt, it called Sovereign Debt Crisis.

What is a government bond?

Governments borrow money by selling bonds to investors. In return for the investor's cash, the government promises to pay a fixed rate of interest over a specific period say 4% every year for 10 years. At the end of the period, the investor is repaid the cash they originally paid, cancelling that particular bit of government debt. Government bonds have traditionally been seen as ultra-safe long-term investments (aka Gilt Edged Securities) and are held by insurance companies and banks, as well as private investors. They are a vital way for countries to raise funds.

What is a bond market?

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 Why do bond markets matter? 1. Because they determine what it costs a government to borrow. 2. When a government wants to raise new money, it issues new bonds, and has to pay an interest rate on those bonds that is acceptable to the market. 3. The yield (profit) at which the market is buying and selling a government's existing bonds gives a good indication of how much interest the government would have to pay if it wanted to issue new bonds. 4. So, for example, Spanish 10-year bond yields have risen above 6% in recent years. That means that if the Spanish government wants to borrow new money from the bond market for 10 years, it would have to pay an interest rate on the new bond of more than 6% to seduce the buyers. Borrowing beyond the Aukaat Governments can just go on print Bonds on their HP printers and sell it to junta, because money doesnt fall from sky. Someone someday will have to pay for it. If they dont, then the Bond Yield will increase and a point will come when you (Government) have to offer 36% interest rate on fresh bonds to seduce new investors. Therefore, Governments, put limit on their own borrowing. In India weve a thing called FRBM (Fiscal responsibility and budget Management). For Europen Union, back in 1997 when they were forming the gang, they had decided that each 251

gang-member (country) will not borrow beyond 3% of its GDP per year. But Government of Greece manipulated** its account-books to appear as if they were staying within the 3% limit, but actually they had been borrowing much above their Aukaat almost 13% of their GDP. **(might have taken coaching from Ramalinga Raju!) Why is Greece such a messed up Economy? Ill copy paste the answer from Amol Agrawals article.

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 hand-outs significantly affects the ideological narratives that are popular in the country.

end of copy paste 252

In short, Greece is not a country but Air India running MNREGA. And adding insult to the injury, due to the recession in USA, the tourism and export industry of Greece had took a huge setback. TimeLine of Events January 2010

An EU report starts talking about the irregularities in Greek accounting procedures. Concern starts to build about all the heavily indebted countries in Europe Portugal, Ireland, Greece and Spain (PIGS).

A.Raja could give the loans to save these countries but stupid Indian media gets him arrested, while Mohan continues to loop his repeated tape on every 15th August speech that Naxalites are the biggest thread to India, while Pranab continues to loop his tape that everything bad with Indian economy is because ofGlobal Situation.Anyways Fast forward to February 2012: The Austerity Bill 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: Whaat 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. May 2012: Elections in Greece

But no party gets clear majority and no coalition Government is formed. So they plan to hold election again on June 2012, and a judge has been appointed to head an interim government in the mean time.

Whats the EU Exit Rumor? There are two major parties in Greece. 1. The right wing party: they say we continue in Eurozone, agree to their demand, cut more jobs and public spending for receiving more bailout money. 2. The Left Wing Party: they want to renegotiate the loan-terms with EU and IMF and donot want to implement any austerity measures. Theyd take a hostile stand against EU, 253

although in media they say We want to continue in Eurozone but their agenda and gesture speaks otherwise. See this same like Paki PM comes to India and speaks in one tone but when hes back in an election rally in Lahore hed be speaking an a totally different tone about Kashmir. And there hell say India is not cooperating with us and India is the bad guy. Experts feared that public of Greece will elect anti-bailout parties that reject the spending cuts (austerity measures) suggested by EU and IMF. So this newly elected party will try to renegotiate the bailout terms with EU / IMF to such a ridiculous level, that negotiations will break off and then Greece will exit from EU. Thankfully for the time being, crisis has been averted as the right wing pro-EU / bailout party has gained the majority. Whatre the consequences IF Greece Exits Eurozone? Starting Copy paste of BBC Article


Lines at the Banks

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.

Loan Default by Greece

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.


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.

Sovereign Debt Crisis for Weak Eurozone Nations


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.

Good for US and Japan

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.

Political Turmoil in Europe

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

Businesses, afraid for the euro's future, may cut investment. Faced bad news in the press, ordinary people may cut back their own spending. = less demand= could push the eurozone into a deep recession. The euro would lose value in the currency markets, providing some relief for the eurozone by making its exports more competitive in international trade. But the flipside is that the rest of the world will become less competitive especially the US, UK and Japan undermining their own weak economies. Even China, whose economy is already slowing sharply, could be pushed into a recession. (Because people in Europe will cut down their spending = less demand for Chinese goods)


-End of BBC copy paste Why Greece Exit =Trouble for India?

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)

Food for thought

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.

Who do you think is right? Greece or the EU?

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[Economy] EU Fiscal Treaty and European Stability Mechanism (ESM): Meaning Issues Explained 1. 2. 3. 4. 5. 6. 7. What is the difference between Eurozone and EU? What is EU Fiscal Treaty? What is European Stability Mechanism (ESM)? What is European Financial Stability Facility (EFSF)? What is the problem? What is Bundestag? Archive : 100+ articles on Economy

Make sure youve read my earlier article on Eurozone crisis, before proceeding further. What is the difference between Eurozone and EU?

EU = European Union. Made up of 27 Nations. Eurozone= Those EU countries, which use Euro as their official currency. There are 17 such nations. Therefore EU (27)= Eurozone (17) nations. + Other EU (10) nations.

Eurozone 9. 10. 11. 12. 13. 14. 15. 16. 17. Ireland Italy Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain

1. 2. 3. 4. 5. 6. 7. 8.

Austria Belgium Cyprus Estonia Finland France Germany Greece

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. What is EU Fiscal Treaty?

A pact between the EU member-nations that theyll not run Air Indias and MNREGAs. To put this in a refined language:


The salient features of EU fiscal treaty are following 1. Member-nations will try to get a balanced or surplus budget. i.e. Government will not spend more money than its income. a. But still, if they end up with a deficit budget (when Government spends more than it earns) and thus to fill up that deficit, if the Government has to sell bonds, then itll have to notify the Committee. 2. European Court of Justice will check whether nations implement budget rule properly it will fine them up to 0.1% of national output (GDP) if they fail to do so. For example, next time Greece fudges its account books to borrow more than the limit, then itll be in deep trouble. 3. Eurozone has 17 nations, and this treaty will come into effect, if and only if at least 12 Eurozone nations ratify it (in their parliament or via referendum.) Once this is done, the treaty will come into effect from from 1 January next year (2013). 4. Even after these measures, if there is another Sovereign debt crisis, then they will use money from European Stability Mechanism (ESM) fund to fix it. 5. If a Eurozone Member-state doesnot pass EU treaty and later on, runs into trouble like Greece, then it will not get money from ESM fund. What is European Stability Mechanism (ESM)?

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)

What is European Financial Stability Facility (EFSF)? It was the original Eurozone bailout fund, set up in May 2010. Now it will be replaced by the ESM. What is the problem?

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?

It is the Loksabha of Germany. 259

Japans parliament known as Diet Afghanistan = Jirga Israels parliament =Knesset USAs parliament = Congress. USAS Rajyasabha= Senate, but with truckload of powers compared to ours. You can dig more and post in comments.

Archive : 100+ articles on Economy Goto to access the entire Archive. URL to article:

. [Economy] Competition Commission of India order against Cement Companies 1. 2. 3. 4. 5. 6. 7. 8. 9. What is Competition Commission of India (CCI )? Case of Cement Companies Case of Oil Companies Hindi ?????? ???????????? ???? (??????) ???? ??? ?????? ???????? ?? ????? ???? ???? ??? ???????? ?? ?????

What is Competition Commission of India (CCI )?

It is a statutory body that monitors anti-competitive agreements, abuse of dominant position by enterprises and regulates combinations (acquisition, acquiring of control and M&A), which causes or likely to cause an adverse effect on competition within India. Commission comprises a Chairperson and six members. Ashok Chawla is the current Chairperson of the CCI

Case of Cement Companies

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. 260

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.


ACC, Ambuja Cements, UltraTech Cement and JK Cement, Lafarge India, India Cements, Madras Cements, Century Cements, Binani Cement and Jaiprakash Associates.


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.

Case of Oil Companies

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.

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. [Economy] Pension Fund Regulatory and Development Authority (PFRDA) Bill Features, Issues 1. 2. 3. 4. 5. Pension Fund Regulatory and Development Authority Bill, 2011 History Salient Features of PFRDA Bill 2011 What is NPS? Mock Question

Pension Fund Regulatory and Development Authority Bill, 2011 261

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.


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.

Salient Features of PFRDA Bill 2011

Establishment of a statutory authority to undertake promotional, developmental and regulatory functions in respect to pension funds. It proivdes for 26% Foreign Direct Investment (FDI) in the pension sector, just like it is in the insurance industry. Bill will provide greater flexibility to subscribers to withdraw funds from their accounts, and Assured returns to pension fund subscribers. It also alters the name of the New Pension System to National Pension System (NPS).

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 262


Mock Question Which of the following statements are correct? 1. 2. 3. 4. 5. 6. PFRDA is a statutory body. PFRDA is a Constitutional body IRDA is a statutory body SEBI is a statutory body FDI cap in Insurance Sector is 26% Monsoon session of parliament begins in November.

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. [Economy] Rupee & GDP Downfall : Steps taken by Government, What is Policy Paralysis? Meaning Implications In an earlier article, we saw about the steps taken by the reserve bank of India to prevent the downfall of the downfall of rupee. In this article, we see the steps taken by government of India, to prevent the downfall of rupee, to boost the GDP, confidence of Investors and Credit rating agencies (S&P, Moodys etc). 1. Steps already taken by Government 2. Policy paralysis: What are the problem areas? o FDI issues o Oil Price o Gold Import o Aviation Fuel o Roads, Railways and ports o Telecom


See this diagram

Steps already taken by Government 1. Infrastructure review meeting by the Prime Minister, he says we need investment of Rs.1 lakh crore in the infrastrcture. (hahaha, in another meeting or seminar he had said we need Rs.2 lakh crore investment, As if money falls from the sky!) 2. Investment tracking system to monitor the status of project of Rs.1000 crore and above. 3. Manufacturing industry promotion board (MIPB) headed by the commerce and industry Minister, has been set up. 4. Aviation Ministry has cleared and India's new operation plan. 5. Cabinet has cleared the National Telecom policy 2012, and a move to introduce unified licensing regime. 6. Empowered group of Ministry on spectrum pricing, has endorsed Telecom commission suggestion that a 10 MHz spectrum per circle be put up for auctions. 264

7. A nine-member ministerial panel has been formed to hasten the draft coal regulator bill. 8. Finance Ministry set up a meeting with pharmaceutical industry, to work out a mechanism for fast clearance of FDI proposals 9. Finance Ministry has issued austerity guideline to ministers and bureaucrats a. Restrictions on foreign travel. b. Restrictions on purchase of new vehicle c. Ban on meetings in the five star hotels. d. Although Planning Commission has been kept out of these auterity measures, and allowed to build toilet worth Rs.35 lakhs. 10. Government agreed to amend the pension bill and incorporate the suggestions of the standing committee of Finance, including a 26% FDI and a mechanism for minimum assured returns. (update this was put on backburner after Mamatha blocked it.) 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 Vs 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. Policy paralysis: What are the problem areas? FDI issues Proposal for the foreign direct investment in the key sectors such as multibrand retail, aviation, banking and insurance are either stuck at various level or simply put in cold storage because of coalition politics 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. 265

Aviation Fuel

high cost of aviation turbine fuel (ATF) State taxes upto 33% tax on ATF, thus airlines are not generating decent profit. Some are exiting, some are cutting down the staff. Proposal for allowing FDI in domestic airlines = stuck Air India = loss making, financed by tax payers money.

Roads, Railways and ports

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 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.


IndianExpresss business section dated 7th June 2012 Restrcturing, elaboration by You know who.

For more articles on Economy by Mrunal Patel, click


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. [Economy] Prepaid Payment Card What is Prepaid Payment card?

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.)

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[Economy] Multi-level TDS on Softwares Removed: Yet another Reform to boost GDP Present Tax-structure on sale of softwares

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)

TDS Reform for Softwares

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.

Condition on TDS relief

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.

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. [Economy] Rupee Downfall: RBI directive to Oil Cos- buy 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.


1. 2. 3. 4.

How do Oil Companies buy the Dollars for Crude Oil import? What is the problem? RBIs directive to OMCs Why are Oil Companies unhappy with RBIs Directive?

How do Oil Companies buy the Dollars for Crude Oil import?

Until Now following Method: 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.

What is the problem?

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

RBIs directive to OMCs

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.

Why are Oil Companies unhappy with RBIs Directive?

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.)

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[Economy] Definition of 100+ (A-Z) Terms of Economics from BBC This is compiled from BBC articles. Click on the Word to know its Meaning. A. AAA-rating AGM Assets Austerity B. Bailout Bankruptcy Base rate Basel accords Basis point BBA Bear market Bill BIS Bond BRIC Bull market C. Capital Capital adequacy ratio Capitulation Carry trade Chapter 11 Collateralised debt obligations (CDOs) Commercial paper Commodities Core inflation Correction (market) CPI Credit crunch Credit default swap (CDS) Credit rating Currency peg D. Dead cat bounce Debt restructuring Default Deficit Deflation Deleveraging Derivative Dividends Dodd-Frank Double-dip recession E. EBA Ebitda EBRD ECB EIB ESM EFSF EFSM Equity Eurobond Eurozone F. Federal Reserve Financial Policy Committee Financial transaction tax Fiscal policy Freddie Mac, Fannie Mae FTSE 100 Fundamentals Futures G. G7 G8 G20 GDP Glass-Steagall H. Haircut Hedge fund Hedging I. IIF IMF Impairment charge Independent Commission on Banking Inflation Insolvency Investment bank J. Junk bond K. Keynesian economics L. Lehman Brothers Leverage Liability Libor Limited liability Liquidation Liquidity Liquidity crisis Liquidity trap Loans-to-deposit ratio M. Mark-to-market (MTM) Monetary policy Money markets Monoline insurance Mortgage-backed securities (MBS) MPC N. Naked short selling Nationalisation Negative equity O. OECD Options P. Ponzi scheme Preference shares Prime rate Private equity fund PPI Profit warning Q. Quantitative easing R. Rating Rating agency Recapitalisation Recession Repo Reserve currency Reserves Retained earnings Rights issue Ring-fence S. Securities lending Securitisation Security Shadow banking Short selling Spread (yield) SPV Stability pact Stagflation Sticky prices Stimulus Sub-prime mortgages Swap T. TARP Tier 1 capital Tobin tax Toxic debts Troika U. Underwriters Unwind V. Vickers Report Volcker Rule W. Warrants Working capital World Bank Write-down X. Yield AAA-rating The best credit rating that can be given to a borrowers debts, indicating that the risk of a borrower defaulting is minuscule. 270

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:

providing loans to a borrower that markets will no longer lend to guaranteeing a borrowers debts guaranteeing the value of a borrowers risky assets providing help to absorb potential losses, such as in a bank recapitalisation

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. Where 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. Capital adequacy ratio A measure of a banks ability to absorb losses. It is defined as the value of its capital divided by the value of risk-weighted assets (ie taking into account how risky they are). A low capital 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. Collateralised debt obligations (CDOs) A financial structure that groups individual loans, bonds or other assets in a portfolio, which can then be traded. In theory, CDOs attract a stronger credit rating than individual assets due to the risk being more diversified. But as the performance of many assets fell during the financial crisis, the value of many CDOs was also reduced. 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 default swap (CDS) A financial contract that provides insurance-like protection against the risk of a third-party borrower defaulting on its debts. For example, a bank that has made a loan to Greece may choose to hedge the loan by buying CDS protection on Greece. The bank makes periodic payments to the CDS seller. If Greece defaultson its debts, the CDS seller must buy the loans from the bank at their full face value. CDSs are not just used for hedging they are used by investors to speculate on whether a borrower such as Greece will default. 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 275

accumulated trillions of dollars in US government bonds, because of its policy of selling yuan and buying dollars a policy that has the effect of keeping the yuan weak. Dead cat bounce A phrase long used on trading floors to describe the small rebound in market prices typically seen following a sharp fall. Debt restructuring A situation in which a borrower renegotiates the terms of its debts, usually in order to reduce short-term debt repayments and to increase the amount of time it has to repay them. If lenders do not agree to the change in repayment terms, or if the restructuring results in an obvious loss to lenders, then it is generally considered a default by the borrower. However, restructurings can also occur through a debt swap a voluntary agreement by lenders to switch existing debts for new debts with easier easier repayment terms in which case it can be very hard to determine whether the restructuring counts as a default. Default Strictly speaking, a default occurs when a borrower has broken the terms of a loan or other debt, for example if a borrower misses a payment. The term is also loosely used to mean any situation that makes clear that a borrower can no longer repay its debts in full, such as bankruptcy or a debt restructuring. A default can have a number of important implications. If a borrower is in default on any one debt, then all of its lenders may be able to demand that the borrower immediately repay them. Lenders may also be required to write off their losses on the loans they have made. Deficit The amount by which spending exceeds income over the course of a year. In the case of trade, it refers to exports minus imports. In the case of the government budget, it equals the amount the government needs to borrow during the year to fund its spending. The 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:

restrictions on banks riskier activities (the Volcker rule) a new agency responsible for protecting consumers against predatory lending and other unfair practices regulation of the enormous derivatives market a leading role for the central bank, the Federal Reserve, in overseeing regulation higher bank capital requirements new powers for regulators to seize and wind up large banks that get into trouble

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 278

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. Financial Policy Committee A new committee at the Bank of England set up in 2010-11 in response to the financial crisis. It has overall responsibility for ensuring major risks do not build up within the UK financial system. Financial transaction tax See Tobin tax.


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. Freddie Mac, Fannie Mae Nicknames for the Federal Home Loans Mortgage Corporation and the Federal National Mortgage Association respectively. They dont lend mortgages directly to homebuyers, but they are responsible for obtaining a large part of the money that gets lent out as mortgages in the US from the international financial markets. Although privately-owned, the two operate as agents of the US federal government. After almost going bust in the financial crisis, the government put them into conservatorship guaranteeing to provide them with any new capital needed to ensure they do not go bust. 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. Independent Commission on Banking A commission chaired by economist Sir John Vickers set up in 2010 by the UK government in order to make recommendations on how to reform the banking system. The commission reported back in September 2011, and called for:

a ring-fence, to separate and safeguard the activities of banks that were deemed essential to the UK economy measures to increase the transparency of bank accounts and competition among banks, including the creation of a new major High Street bank much higher capital requirements for the big banks so that they can better absorb future losses

Inflation The upward price movement of goods and services. Insolvency A situation in which the value of a 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 283

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. 284

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. Mortgage-backed securities (MBS) Banks repackage debts from a number of mortgages into MBS, which can be bought and traded by investors. By selling off their mortgages in the form of MBS, it frees the banks up to lend to more homeowners. 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. Naked short selling A version of short selling, illegal or restricted in some jurisdictions, where the trader does not first establish that he is able to borrow the relevant asset before selling it on. The aim with short selling is to buy back the asset at a lower price than you sold it for, pocketing the difference. 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. Private equity fund An investment fund that specialises in buying up troubled or undervalued companies, reorganising them, and then selling them off at a profit. 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 homebuyers 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 291

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. URL to article:

[Economy] Current affairs: E-filling income tax return + Yogendra Garg Committee 1. Compulsory E-Filling if income more than 10 lakhs 2. Yogendra Garg Committee 3. Mock Questions for CSAT / IBPS GK Compulsory E-Filling if income more than 10 lakhs

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. 293

Yogendra Garg Committee

Itll draft the model GST legislation. the Committee will be monitered by Central board of Excise and Customs.

Mock Questions for CSAT / IBPS GK which of the following statements are correct? 1. 2. 3. 4. 5. 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.

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[Economy] Mutual Funds and Entry Load 1. What is Mutual fund? 2. What the Entry Load? 3. Sidenote: RGESS Not really an article but a quick response to some readers questions What is Mutual fund?

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)

What the Entry Load?

Mutual fund company pays Commission to the distributors (those agents / brokers etc), to market and sell their schemes. 294

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.

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. [Economy] Shilabhadra Committee on Fake Currency : Recommendations for GS Mains 1. What is Shilabhadra Banerjee Committee? 2. What are the recommendation of Shilabhardra Committee? 3. Background : Fake Indian Currency Notes (FICN) What is Shilabhadra Banerjee Committee? This Committee was formed to suggest the measures


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).

What are the recommendation of Shilabhardra Committee? 1. Create a Directorate of Currency under Finance Ministry to coordinate & oversee acquisition and R&D efforts of security features for currency notes and other security products. 2. Under this Directorate of Currency, set up a National level research and Development unit for raw material, security features and currency printing machinery. 3. Government should try indigenisation of manufacture of bank note paper, security inks, security features, related equipments and coin plating. 4. Set up a Single national level coordinating agency for intelligence, law enforcement and investigation to tackle the menace of Fake Indian Currency Notes (FICN). 5. RBI should launch a big multimedia campaign for educating the public to distinguish genuine bank note from the fake notes. Background : Fake Indian Currency Notes (FICN)

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?)

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. [Economy] Social Security: Meaning and Laws in India for APFC exam Important topic particularity for Asst.Provident Fund Commissioner (APFC) Exam 1. 2. 3. 4. 5. 6. 7. 8. What is Social Security? History of Social security Social Security in India Social Security: Constitutional Provisions Concurrent List Part IV Directive Principles of State Policy Difference between Organized and Unorganized Sectors SOCIAL SECURITY LAWS in India o Employees State Insurance Act, 1948 (ESI Act) o Employees Provident Funds Act, 1952 o Workmens Compensation Act, 1923 (WC Act) o Maternity Benefit Act, 1961 (M.B. Act) o Payment of Gratuity Act, 1972 (P.G. Act) 9. Social Security In India : Different From Developed Nations 10. Provident Fund 11. Mock Questions for APFC 2012 Exam What is Social Security?

any of the measures established by legislation to maintain individual or family income or to provide income when some or all sources of income are disrupted or terminated or when exceptionally heavy expenditures have to be incurred (e.g., in bringing up children or paying for health care) social security may provide cash benefits to persons faced with sickness and disability, unemployment, crop failure, loss of the marital partner, maternity, responsibility for the care of young children, or retirement from work Social security benefits may be provided in cash or kind for medical need, rehabilitation, domestic help during illness at home, legal aid, or funeral expenses It acts as a facilitator it helps people to plan their own future through insurance and assistance.

History of Social security

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.)

Social Security in India

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.

Social Security: Constitutional Provisions

Concurrent List


Social Security and labour welfare falls under Concurrent list, it means both union and state Government can make laws regarding these topics.

(List III in the Seventh Schedule of the Constitution of India) Item No. 23 o Social Security and insurance, o employment and unemployment. Item No. 24 Welfare of Labour including conditions of work, provident funds, employers liability, workmens compensation, invalidity and old age pension and maternity benefits.

Part IV Directive Principles of State Policy Article 41

Right to work, to education and to public assistance in certain cases State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.

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.

Difference between Organized and Unorganized Sectors Organized sector

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 299

Rural Areas 1. 2. 3. 4. landless agricultural labourers small and marginal farmers share croppers persons engaged in a. animal husbandry b. fishing c. horticulture d. bee-keeping e. toddy tapping 5. forest workers 6. rural artisans

Urban Areas

1. 2. 3. 4. 5. 6. 7.

street vendors hawkers head load workers cobblers tin smiths garment makers Construction workers

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


Employees State Insurance Act, 1948 (ESI Act)

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

Employees Provident Funds Act, 1952

applies to specific scheduled factories and establishments employing 20 or more employees and ensures terminal benefits to provident fund, superannuation pension, and family pension in case of death during service.

Workmens Compensation Act, 1923 (WC Act)


Requires payment of compensation to the workman or his family in cases of employment related injuries resulting in death or disability.

Maternity Benefit Act, 1961 (M.B. Act)

provides for 12 weeks wages during maternity as well as paid leave in certain other related contingencies.

Payment of Gratuity Act, 1972 (P.G. Act)

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.

Social Security In India : Different From Developed Nations

We do not have an existing universal social security system 92% of the workforce is in the informal sector which is largely unrecorded 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

Here the employers to contribute to a provident scheme providing a lump-sum payment in the event of death or disability or on retirement.

Three disadvantages of Provident Fund 1. Money is inadequate for risks occurring early in working life. 2. Provident funds are generally invested in government stock with a rate of interest fixed in money terms that may be below market rates. 3. Real value of the accumulated savings may thus be substantially eroded by inflation by the time of retirement. But From the point of view of government, Provident Fund is attractive because it generates forced savings that can be used to finance national development plans. Mock Questions for APFC 2012 Exam


Q1 Which of the following statements are correct?

1. 2. 3. 4.

Social security falls under the purview of Union Government only. Social security is a fundamental right enshrined in the Constitution of India. Employees State insurance Act applies to any establishment with 5 or more workers. Workmans Compensation Act requires payment of compensation to the worker or his family in cases of employment related death only.

Q2 Match the following Name of Act Payment of Gratuity Maternity Benefit Year 1961 1972

Workmens compensation 1952 Employees Provident Fund 1923

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. [Economy] Inflation, Policy Paralysis some more fodder material Just some more fodder for Essay and Group Discussion (GD) taken from IE (Indian Express). Many ideas repeated. 1. 2. 3. 4. 5. 6. 7. What is the problem? What is inflation? Why do we have inflation? What is the solution? What are the problems faced by Indian Businessmen? Chief Economic Adviser Kaushik Basu gives some wisdom Chinas official news agency Xinhua gives even more profound wisdom 302

What is the problem?

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.

Why do we have inflation?

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

What is the solution?

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.

What are the problems faced by Indian Businessmen? 1. 2. 3. 4. High inflation = raw material is expensive : steel, cement, petrol everything. Sluggish policy making environment, High interest rates and Uncertainty in global economy, particularly Europe.

Chief Economic Adviser Kaushik Basu gives some wisdom 1. Common man will have to live with high prices for another two-three months as inflation is expected to come down only by September. 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. Chinas official news agency Xinhua gives even more profound wisdom From a Column Indian Economy: The myth is shattered 1. weakness of the Indian government cannot be changed for a long timeThis means that after the 2014 elections, India could still have a weak coalition government, which is definitely bad news for reformIndian political weakness will lead to a weak economy for many years. 2. In these two years, most politicians have to fight for votes and therefore, reforms will be set aside. 3. Rahul still does not have a dazzling performance 4. Sonia has been sick recently 5. Mohan has become conservative and is facing criticism for his complacency. 6. opposition BJP too has its own internal contradictions. 7. It has used phrases like a. farewell to incredible India, b. miracle has become a mirage, c. from bullet train, the economic growth has become express train d. reforms: an empty slogan 8. once illustrious Indian economy is suddenly faced with numerous questions and has become a loose brick among BRICS countries 9. Incidentally, India played host to the BRICS summit in Delhi in March, which was attended by Chinese President Hu Jintao. 10. Giving the example of the stalled reform over allowing FDI in the retail sector, Xinhua says that Indias economy has not only lost direction but even its growth has lost impetus. And finally, the most profound wisdom on Indian Education and Career system I would like to coach the Indian Cricket team but I dont have the level 1, 2, 3 certificates that people want sometimes. -Rahul Dravid

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[Economy] Land Acquisition bill 2011 : Salient Features, Pro Con analysis Land acquisition topic is very important for almost all competitive exams of India starting from UPSC, State PSC, CPF, APFC, Bank and MBA Group Discussion / Interviews. 1. 2. 3. 4. 5. 6. 7. What is Land Acquisition? How is this process governed? Land is a state subject then how can the parliament pass a law? What is the problem with land acquisition act of 1894? Why was new law required? What are the major changes being proposed? Land acquisition Bill, 2011: Salient Features o Introduction o Excluded o Then where is it applicable? o Applicable even to private companies o Government can acquire land for Public Purposes o Consent o Limits on land acquisition o Compensation o Dispute resolution o What if the acquired land is not used? 8. Download Pro Con analysis and summery What is Land Acquisition?

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.

How is this process governed?

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.


Land is a state subject then how can the parliament pass a law? Though land is a state subject, acquisition and requisitioning of property is in the concurrent list. Both Parliament and state legislatures can make laws on this subject. What is the problem with land acquisition act of 1894?

very old, ineffective, weak draconian delayed and no compensation no livelihood provisions afterwards

Why was new law required?

Heightened public concern: Singur, Yamuna Express etc. absence of proper rehabilitation law anticorruption movement public unrest at many places Law and order problems: police and farmer clashes in UP

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. What are the major changes being proposed? In 2011, the (bogus UPA) Government made changes in 2007 Bill with regard to

the purpose for which land may be acquired; the amount of compensation to be paid; the process of acquisition; use of the land acquired; and dispute settlement mechanisms.

Land acquisition Bill, 2011 Introduction

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



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.

1. 2. 3. 4. 5.

Then where is it applicable?

provisions of the Bill shall be applicable in cases when the appropriate government acquires land,

a. for its own use and control, b. to transfer it for the use of private companies for public purpose, and c. on the request of private companies for immediate use for public purpose Applicable even to private companies

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.


It is not clear whether Parliament has jurisdiction to impose rehabilitation and resettlement requirements on private purchase of agricultural land. While private companies are included, but PSUs are excluded from the responsibility of rehabilitation.

Government can acquire land for these Public Purposes

1. 2. 3. 4. 5.

strategic defense purposes and national security, 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.


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.

Limits on land acquisition

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.


The value of the assets (trees, plants, buildings etc) attached to the land being acquired will be added to this amount. mandated the job for one person in each affected family or Rs. Two lakhs separate allowance for SC,ST provision for housing, if the land is acquired for housing projects

Anti-Argument 1. The market value is based on recent reported transactions. This value is doubled in rural areas to arrive at the compensation amount. This method may not lead to an accurate adjustment because people sell land to each other at underreported price to save stamp duty. 2. The government can temporarily acquire land for a maximum period of three years. There is no provision for rehabilitation and resettlement in such cases. Dispute resolution

Bill proposes the following authorities;

1. Administrator; 2. Commissioner for Rehabilitation and Resettlement; 3. Rehabilitation and Resettlement Committee (for acquisition of 100 acres or more of land); 308

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). What if the acquired land is not used?

If an acquired land which is transferred to a person for a consideration, is left unutilised for a period of 10 years from the date it was acquired, it shall be returned to the Land Bank or the appropriate government. in cases where the ownership of an acquired land is sold to any person, without any development made, 20 per cent of the profit made shall be shared among all the persons from whom the land was acquired.

Download Summery and Pro Con analysis The pro con analysis is quite important for interview and Group discussion (MBA).These PDFs are created by PRS Institute, New Delhi Land Acqusition Bill summery by PRS (click me to download) Land Acqusition Bill Pro Cons by PRS (click me to download) Reference

1. Inputs from Om Kasera (AIR 17 / CSE 2011). 2. Rediff news report. 3. PRS Legislative Research (PRS), New Delhi

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. [Economy] Why would Mohan want Indian juntaa to be financially educated? 1. 2. 3. 4. What is Capital market, Primary market and Secondary market? Whats the problem with Capital market? Why do Indians not invest in sharemarket? What is financial Education? 309

5. 6. 7. 8. 9.

National Strategy for Financial Education $1 trillion investment in Infrastructure projects Technical stuff: What is Financial Stability and Development Council (FSDC)? What is financial inclusion?

What is Capital market, Primary market and Secondary market?

Primary when you buy fresh car (Bonds,IPO), secondary when you sell it to third party. 1. Every businessman requires money to start or expand his business. There are only two legit ways to arrange money: Debt and Equity (already saw in older articles). The place where (big) businessmen arrange money for long term investment, via Debt (Bonds) or Equity (IPOs) is called Capital Market. Government also arranges for money by selling bonds here. 2. It has two subparts: Primary and secondary market. 3. The first time (fresh) sale of Bonds or IPOs are done in a place called Primary market 4. Suppose I buy that bond / IPO and then sell it to you, its called Secondary market. (used car sales). Anyways, These are only theoretical classifications so the experts can evaluate how market or economy is performing. Otherwise all the buy and sell is done via online. Whats the problem with Capital market? 1. More than 50% of the money invested in Capital Market belongs to FIIs. They tend to take away their money as and when they find better investment opportunity in other countries. This makes the market quite volatile AND, weakens the rupee. The businessmen find it very hard to arrange for the money. 2. Most of the Indians donot invest in Capital market. They just put their money in gold, real estate pension plans, post office savings or Fixed Deposit. 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.) Why do Indians not invest in sharemarket? 1. Because most of them do not have Financial Education (or enough money). What is financial Education? It is the knowledge and understanding of key financial products you need throughout your adult life.

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.

National Strategy for Financial Education Because Government is contemplating about a National Strategy for Financial Education The aim Is to educate the people about these things, so they start investing in capital market. Hitting two birds with one stone 1. People gets more return on investment 2. Businessman can arrange money easily. $1 trillion investment in Infrastructure projects Mohan and Montek earlier wanted an investment of 1 trillion dollars in infrastructure (haha really!), Now Montek says not possible because 1. Foreigners are not investing thanks to bogus reputation of Government. 2. We had made the 1 trillion figure when 1$=44 rupees! Right now the situation is totally different! Mohan: koi baat nahi, if the outsiders are not coming then apno ko hi bottle mein utaar lete hai, by educating them about financial education! Montek: but how does it relate with each other??


Answer Infrastructure means highways, powerhouses, irrigation, damns, nuke plants etc. To build such things, Government / private player will need truckload of money. Most of the big foreign players are not interested in this, after seeing what happened to telecom companies and POSCO. Mega Infrastructure projects are usually financed either by 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). What is Financial Stability and Development Council (FSDC)? A gang headed by Finance minister of India. The chiefs are RBI, SEBI, IRDA etc are the gangsters. But RBI, SEBI and IRDA now says first take a survey that how much financial education and inclusion do the Indians have, so that we can arrange for resources, booklets, advertizements, syllabus and MCQs accordingly! Financial education already explained above. What is financial inclusion? It roughly means getting all the poor people in the banking and insurance net. Because if they dont have a DEMAT account in the first place, how the hell are you going to make them invest in capital market? Anyways this is just another scam coming Mohan: ya according to our scheme, well give money to State Governments and theyll give money to district officials and Jholaachhap NGOs, to educate the schoolchildren, College kids (if theyve time in between Indian Idol and sending more than 200 SMS per day), and common men. For each person participating in such seminar and opening a bank / DEMAT account, well give Rs.200 to the concerned NGO, District office for the Administrative expenses. 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! ,

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[Economy] Bilateral Investment Treaty (BIT): Meaning, use, controversy, explained 1. 2. 3. 4. 5. 6. What is BIT? Why is it in news? Indian Governments response? #1: Judiciary is part of the state #2: More than just FDI treaty #3: BIT deals with taxation

What is BIT?

Bilateral Investment treaty It is signed between two nations. It provides for the terms and conditions for private investment by nationals and companies of one state in another state. It gives the foreign investors the right to prosecute their claims against the host countrys actions, in a BIT investment tribunal. i.e. If Vodafone (a Netherland based company), is unhappy with Indian Governments action, it can drag India to a separate tribunal under BIT to settle the dispute. Thus, BIT provides real protection to foreign investment.

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.

Indian Governments response?


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.

#1: Judiciary is part of the state

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.

#2: More than just FDI treaty

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.

#3: BIT deals with taxation

The Inter-ministerial group formed in response to Vodafones notice to the Indian government under the India-Netherlands BIT reportedly feels that taxation matters are outside the ambit of BITs. But the fact is Taxation issues are also a part of the host states sovereign regulatory functions and hence fall within the ambit of BITs, unless explicitly excluded.


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. [Economy] Steps taken by Indian Government to enhance the Capital Market? Before talking about the steps taken by Government to strengthen / improve the Capital Market, million dollar question is, what is Capital market? Ans- already explained in my earlier articles. Now here is the list of reforms initiated for Capital Market. Anyways, to put this in crude words, Capital market is a place where companies and Governments borrow money from others via Debt (Bonds) or Equity (IPO, Shares) for long term projects. So why would Government want to strengthen this market or facilitate investment here? you can guess the answer! Now whatre the reforms initiated in Capital Market of India? First, the QFIs, are allowed to access Indian Equity Markets, corporate bonds and mutual fund debt schemes. (weve discussed this more than once). Secondly, External Commercial Borrowings (ECB) mechanism has been liberalized to finance Rupee debt of existing power projects. 3. Financial Stability and Development Council (FSDC) has been setup. (already talked about this in the Why Mohan wants Indian Juntaa to be financially educated?) 4. Financial Action Task Force (FATF) has been setup. 5. Permitting two-way fungibility in Indian Depository Receipts 6. Dedicated trading platforms for small and medium scale enterprises 7. Reducing transaction cost in Securities markets. 8. Reduction in the rate of long-term capital gains tax in the case of other non-resident investors, including Private Equity from 20% to 10% on the same lines as applicable to FIIs 9. Providing the levy of Securities Transaction Tax (STT) at the rate of 0.2 per cent on sale of unlisted securities in the course of IPO . 10. Tax exemption to Angel investors investing in in start-up companies 11. Extending the lower rate of withholding tax to funds raised through long term infrastructure bonds in addition to borrowing under a loan agreement 12. Removal of Restriction on Venture Capital Funds to invest only in nine specified sectors 13. Financial Sector Legislative Reforms Commission (FSLRC) 14. Rajiv Gandhi Equity Saving Scheme (already talked about this). 15. Mandatory offer of electronic voting facility (for shareholders) 16. Income tax exemption to the Beneficial Owners Protection Fund (BOPF) set up by the Depositories.


Epilogue Weve already discussed some of these topics such as QFI, Rajiv Gandhi Equity Saving Schemes, Financial Stability and Development Council etc.

For rest you can google. Ill try to add articles on them, in future but cannot make a commitment like Wanted Salman Khan.

Ref Factbook on Indian Economy released by Ministry of Finance sent to me by a good friend Syed Waseem Pasha. The PDF version can be downloaded by this link Clicking Me Note: it has 11MB size, and most of the diagrams/ data given in it, are not useful from Exam point of view. But some gemstones scattered in between.

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[Economy] RBI doesnt want Ramalinga Raju in Banking sector + How Drought in USA brings Food inflation to world? Not really an article, just tidbits on information. 1. RBI doesnt want NBFC and Corporates to come in Banking Sector. 2. Drought in US, Australia = Food inflation all over the world 3. How does drought in US bring Food inflation in India? RBI doesnt want NBFC and Corporates to come in Banking Sector. You already know what is NBFC, if not, go through the Archives:

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)

Drought in US, Australia = Food inflation all over the world

United States and Australia are worlds top grain exporters. Drought-like condition prevailing in both these countries and it has started to push up the price of soybean, corn, wheat and crude palm oil in the global commodities market. as much as 61 per cent of the United States agricultural land is facing deficient rains, and it is Referred as the worst drought in 25 years. US exports more than half of all world corn shipments and also the top exporter of wheat and soy. US drought is expected to hit global oilseed supplies as well. India is the biggest consumer of palm oil, accounting for around 17 per cent of total world consumption. India, the second biggest producer of rice, wheat and sugar, will review its export rules shortly as monsoon rains have been deficient by 22 per cent. But Sharad said, country wont ban exports of rice and wheat as food grains stocks with the government are in excess of 80 million tonne, which is far above the strategic reserve and buffer stocks norms.

Now the question: How does drought in US bring Food inflation in India?

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.

Ref 1. 2.

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[Economy] Statutory Liquidity Ratio (SLR): Meaning and implications 1. 2. 3. 4. 5. 6. 7.

What is SLR? What happens if SLR is decreased? But why would SBI sell G-sec? SBI takes initiative Why is it called "Statutory" Liquidity Ratio? How does SLR reduction impact Bond Yield? SLR decrease unusual To put this without getting "technically correct"

What the hell is SLR? SLR Means Self Loading Rifle. The INSAS Rifle used by our Jawans, is one example of SLR. But for our purpose, SLR means

Statutory Liquidity Ratio. It is a tool used by RBI to control inflation and to boost growth. Anyways since last one year, RBI's primary aim is to control inflation. If RBI sets SLR to 25%, that a Bank must keep 25% of its Total deposits, into non-cash forms prescribed by RBI: that is.

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.

What happens if SLR is decreased?

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 318

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.

But why would SBI sell G-sec?

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.)

SBI takes initiative

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.]

Why is it called "Statutory" Liquidity Ratio?

It is called Statutory because it is provided by the Law/Statute(The Reserve Bank of India Act). This Act says SLR cannot be more than 40% and less than 25%. [hahaha, if SLR was 40% then who would open a bank in the first place?!] But in 2007, Government amended the act and removed the lower limit of 25%, so thus RBI went to 24 and 23% SLR.

How does SLR reduction impact Bond Yield? You already know what is Bond yield. If not, then go through the Eurozone Article. (Click Me) The Newpapers are reporting that Bond Yields increased after RBI cut down the SLR. So why or how did that happen? Think about it! SLR decrease unusual


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.

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[Economy] Urban Financial Inclusion : New Directive of the Government to cut Subsidy leakage Not an article, just some fodder. 1. Urban financial inclusion 2. Rural Financial Inclusion 3. Why does Government want Bank accounts for Poors? Urban financial inclusion

Government has launched the campaign for Urban Financial Inclusion Union finance ministry >> The department of financial services. This department, has directed all banks to do following 1. open at least one bank account for every family in urban areas living below poverty line in urban areas. 2. capture biometric information for all such account holders. The responsibility of enrolling families would lie on the bank branch in every ward or circle of a municipal corporation. In case there is no bank branch in a particular ward or circle, the responsibility would be given to the neighbouring bank branch.

Rural Financial Inclusion

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.

Why does Government want Bank accounts for Poors?

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.) 320

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.

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. [Economy] Drought Situation in India: Suggest solutions 1. Food inflation is upcoming: 2. Drought situation in India 3. What are the solutions? Not an article, just some fodder for Essay and GDs. Food inflation is upcoming:

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.

Drought situation in India

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.

What are the solutions? 321


India cannot afford to neglect investment in irrigation structures of all types Drip and sprinkler irrigation systems in scarcity areas will also help save water, upto 85%. Using such systems instead of normal surface irrigation could boost yield by 10-50 per cent. Farmers have problems due to cumbersome loan procedures and consequent delay in loan disbursement. Therefore loan availability needs to be made simpler, especially in drought hit areas. Need to introduce more rainfall insurance products among farmers. These products cover for low or high rainfall, cloudbursts, sudden changes in temperature and hailstorms. Steps should be taken to link farmers to the remunerative markets directly through farm-to-fork approach. Strong farm-fork linkages will induce farmers to adopt new farming technologies, trigger investment in logistics, save resources and protect farmers from the vagaries of the weather.



Cut down Middlemen

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. [Economy] Electricity generation in India: Grid failure, privatization, problems, reasons, solutions and more 1. 2. 3. 4. 5. 6. 7. 8. Electricity Scenario: India Problem with hydro power Coal Based Electricity Generation What was the reason behind grid failure? What is an electrical grid? Components of a grid When does a grid collapse? Penalty for Grid violation 322

9. What is the network in India like? 10. Players in the game o Private players o Coal India o Local Electricity companies o Farmers 11. Suggest the reforms to fix Electricity problems in India Because of the Grid failure, last month about half of India or roughly 10 per cent of the worlds population, suddenly found they had no electricity. Electricity is the life line for Manufacturing and Service sector. If India wishes to grow at 8 or 9% a year, then smooth and uninterrupted supply of electricity =essential. Electricity Scenario: India

Indias present installed electricity capacity is 205 gigawatts (1GW is 1,000MW). Per capita electricity consumption in China is about 3.5 times that of India. [ If a countrys electricity, cement or steel consumption is higher than India, it means means theyre more advanced and Developed than we are]. Hydro and coal account for nearly 77 per cent of electricity generation in India.

Problem with hydro power

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) Weve 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.)

Coal Based Electricity Generation

Coal accounts for more than half of Indias electricity generation. country has the worlds fifth largest reserve of coal but its quality is poor because of very high ash content. Coal India has not been increasing production fast enough. Compared to Chinas exponentially increasing output, Indian production has remained almost stationary during the past two years. Existing mines have strict limits as to how much coal they can extract. New mines are difficult to open because of the trouble in obtaining environmental and land clearances.


What was the reason behind grid failure?

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.

Here goes some technical details What is an electrical grid?

grid is an interconnected network of transmission lines : on one hand it has Generating station and on the other hand it has load centres.

generating stations load centres or distribution companies

They put together, supply the electricity demand through the transmission lines; draw the power from the lines and send it to consumers.

For an electricity grid to function smoothly, it is essential that load and generation must be balanced at all times to prevent a failure. The flow of electricity through the lines should ideally not exceed the rated capacity, otherwise the lines could trip due to an overload.

Components of a grid

A grid consists of three main components: produce electricity from fossil fuels (coal, gas) or non-combustible fuels (hydro, nuclear, wind, solar); carry electricity from power plants to demand centers reduce the voltage so that distribution lines carry power for final delivery.

power stations transmission lines Transformers

When does a grid collapse?

There can be two main reasons. First reason: equipment failure due to reasons such as fog and pollution 324

Second reason: when one or more constituents violate the grid code and overdraw in a big way from the grid, causing it to fail due to the imbalance in the power injection Northern states are repeat violators of the grid frequency norms, especially Uttar Pradesh, Haryana, Punjab, Jammu and Kashmir.

Penalty for Grid violation

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.

What is the network in India like?

At present the northern, western, eastern and northeastern regions are integrally connected through AC (alternating current) transmission links to form what is called the NEW grid.

Players in the game Private players

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.

Problems faced by private players in power market

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). 325

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]

Local Electricity companies

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 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.

Suggest the reforms to fix Electricity problems in India

Privatize Coal India. install new electricity regulator with teeth. (just like SEBI is for capital markets.) Install nuke power stations, disregarding the protests by jholaachhap NGOs and their foreign masters. Sort out border disputes with China, so that Arunanchal Pradeshs hydro potential can be fully utilized. Your suggestions also welcome.

Ref 1. 2. 3. 326

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. [Economy] No frills renamed to basic savings account to prevent stigma You already know about No Frills Account, (if not, click me) With respect to that topic, Muhammed yunus has shared this update: 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, SERVICES PROVIDED UNDER BASIC SAVINGS a/c. 1. 2. 3. 4. 5. No limit on the number of deposits that can be made in a month Maximum 4 withdrawals in a month , including through ATM's No minimum balance requirement [important fact for MCQ] No charge will be levied on non operation of account [important fact for MCQ] Recipe of money through electronic payment channels or by cheques issued by government agencies 6. This would help those covered under the welfare schemes like MGNREA in receiving payments. [important fact for MCQ] Ref- the Hindu Aug 11, 2012.

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[Economy] Inflation: Demand Pull Theory- Meaning, Causes Republishing an old article, after it got deleted in a technical glitch. 1. What is Demand pull inflation? 2. What is black money? 3. Increased inDisposable income: 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

1. Demand Pull / demand side 2. Cost push / Supply side

What is Demand pull inflation?


Also known as demand-side inflation, monetary theory of inflation. Crux: When people have truckload of cash in their hand. But there are not truckloads of goods in the market. Consider this scenario: Government of India initiates a (bogus) scheme called MNREGA, total 40,000 crore rupees are sent from Delhi every year and we all know that most of the money is eaten by the Ministers and government officials before it reaches to the poor people. Now this minister has truckload of blackmoney in his hands and worried about how to invest it somewhere?

What is black money?

Black money is any money on which tax is not paid. Black money is not necessarily related with Corruption only. Only politicians and bureaucrats have black Money = Wrong statement. I run a medical store very honestly, earning 10 lakhs a year but on paper show only 2 lakhs of profit, to save myself higher income tax payment. So this 10 minus 2 = 8 lakh rupees on which income tax is not paid = black money. You purchase a home for 10 lakhs from a builder, but to save the stamp-duty payment, you give 2 lakhs as cheque, rest payment in cash without any bills. That 10 minus 2= 8 lakh rupees on which stamp-duty is not paid =black money.

Back to the topic; What should the minister do with his black money?

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

what is 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. 329

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.


Minister will also invest some of his money with the moneylenders who circulate it as loan @36% interest rate to the needy people. Whore 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 IPOand 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!)

Back to the topic: another factor responsible for Demand-pull inflation. Increased inDisposable income: What is disposable income? Every month you get salary,

part of that salary goes in the EMI of car/bike/house loan payments, Part of that goes in the compulsory payment of electricity, telephone, Internet, newspaper, milk and vegetables. Part of the salary deposit in the savings account of your bank and then Whatever is money left in your hand for cinema, restaurant, spa, caller-tunes, branded clothes etc. non-essential, discretionary spending is called disposable income. Example. The sixth pay commission increased the salary of government employees, almost everybody suddenly got say Rs.50,000 per month, compared to 20,000 earlier. So even after the regular payments of EMI, Telephone bill etc. they will have more disposable income in their hands compared to earlier, what will they do? They will start visiting restaurants or cinema every Sunday instead of visiting them every month. Many of them may even plan holiday trip. What is the implication? 1000 families chasing total 500 seats of restaurant / multiplexes in their city Or 100 families chasing 50 hotel rooms in Goa.


We know that supply of seats or hotel room is same as earlier, but demand has increased, the hotel owners would start charging more = inflation.

Dearness Allowence paid by Government

Quoting a Line from Times of India

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.

RBIs monetary policy

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.

So what is the problem here? RBI worsened the problem by relaxing its monetary policy. It is impossible to get zero percent inflation. RBI should only try to maintain the tolerable level. Should RBI have tighetend the monetary policy?

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, Why 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.)

What could Government do?

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 332

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. URL to article:

[Economy] Inflation: Cost Push Meaning, Reasons, Solutions and CSAT Mock Questions Republishing two old articles on Inflation, after they got deleted due to a technical upgrade of the website. In the previous article, we saw about demand-pull theory of Inflation. Now time for the second one. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Theory #2: cost push inflation What are the factors responsible? Increased wages Increase in the tax Reduced availability of raw material To get Higher profit margin Theory 3: Mixed Demand Pull Cost Push inflation Misc GK Stuff Mock Questions Question number one Question number two question number three Question number four Question number five question number six Question number seven Previous years questions Question from passage

Theory #2: cost push inflation

Also known as supply side inflation. it means the cost of production has increased hence the price of products have increased.


What are the factors responsible? Increased wages

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.

Increase in the tax

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.

Reduced availability of raw material Consider the case of onion

Bad weather= less production of onion or the blackmarketeers are intentionally stocking up or hoarding onions for better prices in future. Government declared attractive MSP (minimum support price) for Pulses (daal, Moong) so, farmers have shifted to producing those pulses instead of onions. UAE businessman is paying higher prices for Indian onions, because of bad weather conditions there. So our middlemen, find it lucrative to export onions to UAE rather than to local vegetable market in city.

In all four cases, because the supply of onions is reduced, the restaurant owner will

A. Increase the per plate price of pau-bhaaji or B. Keep the per plate price same as usual but reduce the quantity of onion given, so that youve to pay extra for the extra supply of onion salad.

What happened? Supply of onion reduced, so restaurant owners input cost increase and he had to push the menu prices higher. To get Higher profit margin


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

Theory 3: Mixed Demand Pull Cost Push inflation Self-explanatory. Misc GK Stuff Name Creeping inflation Walking or trotting Galloping inflation Hyperinflation Stagflation Mock Questions Time for some Mock Demo CSAT questions for General Studies paper 1. Question number one Inflation in theory occurs

Meaning Mild inflation

Intermediate range 3 to 7% per year

Higher than walking 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

A. When the price of essential commodities outstrip the income 335

B. When money supply grows at a higher rate than GDP in real terms. C. When the exchange rate of currency falls D. When fiscal deficit exceeds the balance of payments deficit

Question number two Which of the following is not a reason for cost push inflation

A. The payment of dearness allowance to employees. B. The existence of large parallel economy (black money) C. Fluctuations in the agricultural and industrial output D. Excessive indirect taxation

question number three Among the supply-side measures to contain inflation is.

A. Postponing the public expenditure. B. Mopping up excessive liquidity through taxation C. Credit control measures of RBI D. Maintaining price levels through an effective public distribution system.

Question number four Temporary control of inflation can be affected by

Reducing prices. Increasing prices. Increasing the taxation rate. Restricting the growth of money supply.

Question number five Out of the items given below, which can cause demand pull inflation?

Increasing interest rates. Increasing investment. Increasing money supply. Increased cost of materials

question number six inflation results from an excessive demand over the availability of supply, is known as

A.cost push inflation. B.Demand pull inflation. C.Either a or B. D.None of these. 336

Question number seven inflation is the result of increasing the cost of production. This kind of inflation is known as

A.cost push inflation. B.Demand pull inflation. C.Either a or B. D.None of these.

Previous years questions A rise in general level of prices may be caused by

1. Increasing money supply 2. Decreasing aggregate level of output 3. Increasing effective demand

which of these given statements are correct.

Only one only one and two only two and three all of them

match the list A with list B

1. Continuous increase in the general price level. 2. Raising prices deliberately to relieve the depression 3. Fall in the price without decline in existing level of employment, output and income. 4. Recession accompanied by inflation

A. Hyperinflation. B. dis-inflation C. Stagflation. D. Reflation E. Inflation

Question from passage Consider the following passage. Price is not the same thing as value. Suppose that on a day, the price of everything: coal, bread, postage stamp, labour, rent of house, et cetera where to double- price, then, would certainly rise, but the values of all things except one would not. The writer wants to see that if price of all things were doubled

A.the value of all things would remain constant B.the values of thing sold would be doubled C.the values of things bought would be halved D.the value of money only would be halved.

Stagflation refers to a situation which is characterized by


deflation and rising unemployment. Inflation and rising employment inflation and rising unemployment. Stagnant employment and deflation.

Stagflation refers to.

high inflation in periods of high unemployment. Deflation in the periods of stagnant employment. Deflation in the periods of high unemployment. High inflation in the periods of full employment.

What does the term benign inflation imply?

mild the rate of inflation. An unexpected rate of inflation. The markup inflation. A spiraling inflation

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[Economy] LIBOR Scam : Meaning, Reasons, Consequences, Timeline, explained Continuing the series of not so technically correct economy articles: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. What is Libor? Ya but why do banks lend each other? How do banks borrow in London? Who calculates LIBOR? How does BBA calculate LIBOR? Why does BBA calculate LIBOR? Whatre the Implications of LIBOR Why LIBOR scam? What is Barclays? Wrong Data= Wrong Average Timeline of Events

What the hell is Libor?

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. 338

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? Well come to that problem very soon but first of all. Why the hell do banks lend each other?

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 from RBI and lend this money as home/car/bike/business/personal loan to other customers. So why do these banks need to borrow from each other? Well, there are days when more customers have made withdrawals than deposits. (e.g. before Diwali / Christmas or IPL cricket betting) so a Bank has to borrow from its rival banks to cover the shortage of cash. It is not necessary that a bank is running into losses and hence borrowing from the other banks. Because a bank would have loaned the money to other customers for 5-10-20 years period so it cant immediately recover all the cash in one day. On the other side, banks with a cash surplus can make extra profits by lending its cash to a rival bank. Thus, Banks lend to each other on a short-term basis to either to cover the shortage of cash or to make a profit.

How do banks borrow each other in London?

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.

Who calculates LIBOR?

It is calculated daily by British Bankers Association. (BBA)

How does BBA calculate LIBOR?

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.

Why does BBA calculate LIBOR?

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

Whatre the Implications of LIBOR

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 340

1. 2. 3. 4.

Why LIBOR scam?

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?

Barclays is the name of a British Bank. It is the fourth-largest of any bank worldwide (First three banks are: BNP Paribas, Deutsche Bank and HSBC) On a side note, if we make list of Top 50 banks of the world according to the cash theyve, then there is no bank from India.

Anyways, coming back to this Barclays Bank.

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.


Bob Diamond says whaat an idea sir-ji

[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.

It doesnt mean that Barclays is the only villain in this episode. Some of the Other 15 banks of London also misreported their borrowing rates, why?

Because, During the global financial crisis (2007 and afterwards) the RBIs (Central Banks) in developed countries (like UK, France and US) had started giving loans to their nations banks at very nominal or close to 0% interest rate in order to boost the economy. So the various banks in London, also got cheap loans from RBI of UK (known as Bank of England). Now their CEOs had incentive to to quote higher than usual rates of borrowing because if LIBOR went up, then their banks could earn more interest on Libor-linked loans. If LIBOR rate was manipulated even by 0.01%, then these banks could make a about a couple of million dollars more in the interest rate charged on home / business loan customers. So, Barclays is not the only villain this scam, just like A.Raja is not the only guy in 2G scam. Side-Question: if the banks in London are getting cheap loans from their RBI, then Barclays should also have recieved some loans from their RBI @0%, right? yep, but Barclays was in bigger trouble (12 billion dollars) than the amount of money their RBI could lend to fix the mess. It is also alleged that Barclay staff also coordinated with staff from other banks to jointly report the false data to BBA. [Because these people had invested in various futures/derivative contracts whose payment depended on LIBOR rate.]

Wrong Data= Wrong Average


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 20112012 Jun 2012 July 2012 August 2012 The Wall Street Journal (WSJ) published an article on this activity of sending wrong data. U.S. Department of Justice conducts a criminal investigation into Libor abuse. 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. CEO of Barclays, Mr.Bob Diamond, resigned. Innocent aspirants of UPSC, Bank and MBA are forced to learn one more topic for the exam.

Ref 1. Ila Patnaik, Indian Express : 2. BBC: a. b. 3. New York Times:


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. [Economy] Coal acquisition from Abroad: ICVL and its problem 1. 2. 3. 4. 5. 6. What is ICVL? Why was ICVL formed? Whats ICVLs problem? Why no acquisition of coal mines abroad? Coal Indias problem Mock Questions

What is ICVL?

International Coal Ventures Limited (ICVL) It is a joint venture company formed in 2009 jointly by following entities: Administrative control

Steel Authority of India Ltd (SAIL) Rashtriya Ispat Nigam Ltd (RINL)

Ministry of Steel Ministry of Steel

National Mineral Development Corporation (NMDC) Ministry of Steel National Thermal Power Corporation Coal India Limited (CIL)

Ministry of Power Ministry of Coal

It has a capital base of about Rs 10,000 crore and enjoys the powers of a navaratna company.

Why was ICVL formed?

To secure metallurgical coal and thermal coal mines abroad, preferably in Australia/ New Zealand, Indonesia, Canada/ USA, South Africa/ Mozambique.


By the way India has sufficient coal in its own land, but it is either located in Naxal region or cannot be mined due to environmental clearances/ Supereme Court order, hence the need to acquire more coal from abroad. Use


Metallurgical coal to make coke for the iron and steel industry. Thermal coal electricity generation in thermal power plants.

Whats ICVLs problem?

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.

Why no acquisition of coal mines abroad?

Its members have been doing overseas acquisitions on their own. Mineral giant NMDC went ahead and secured mines in Australia and CIL secured two coal blocks in Mozambique. These individual pursuits by the members are diluting the collective efforts made by them under ICVL.

Coal Indias problem

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 345 1. Ministry of Mines and Mineral 2. Ministry of Coal 3. Ministry of Power

3. Coal India Limited (CIL)

4. Ministry of Steel

Q2. Write an Essay on following Energy security and Environmental Protection cannot be achieved simultaneously.

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[Economy] Cash Reserve Ratio (CRR) Controversy between SBI & RBI: meaning, implication on Economy Explained 1. What is CRR? 2. What is Scheduled Commercial Bank? 3. Examples of Scheduled Commercial Banks 1. Case #1: High CRR and SLR 2. Case #2: Low CRR and SLR 4. Repo Rate 5. Reverse Repo Rate 6. Bank Rate 7. What is the need of all these CRR,SLR,Repo rates? 8. What is the problem with CRR? 9. How much CRR deposit does RBI have? 10. What does SBI want? 11. Deputy Governor of RBI 12. Timeline of Events 13. Mock Questions Before proceeding further, do read the earlier articles on 1. Statutory Liquidity Ratio (SLR) 2. Cost Push Inflation 3. Demand Pull Inflation What is CRR?

CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their total deposits with RBI in cash form. 346

Right now, CRR is about 4.75% that means if people deposit total Rs.100 in SBI, then SBI would have to deposit Rs.4.75 in RBI. This is CRR or Cash Reserve Ratio. CRR rule doesnot apply to Regional Rural Banks, Non Banking Financial Companies (NBFC), Mutual funds or insurance companies.

What is Scheduled Commercial Bank?

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 !?] Examples of Scheduled Commercial Banks Public Sector Majority of stake is held by the government. 1. State Bank of India (SBI) 2. Punjab National bank (PNB) Private Sector Majority stakes are held by private players. 1. ICICI, 2. HDFC, 3. AXIS Bank

Case #1: High CRR and SLR Suppose total deposit deposited in (by you and me) State Bank of India =Rs.100 Total Deposit Rs.100

CRR: 15%SBI has to park this much amount of total deposit in RBI, without getting -15 any interest. SLR: 38%SBI has to park this much amount of total deposit, in Government securities / treasury bonds. SBI earns around 7.5% interest rate on this me for more on SLR Money left with SBI



Case #2: Low CRR and SLR


Total Deposit


CRR: 4.75%SBI has to park this much amount of total deposit in RBI, without -4.75 getting any interest. SLR: 23%SBI has to park this much amount of total deposit, in Government securities / treasury bonds. SBI earns around 7.5% interest rate on this investment. Money left with SBI



In either case, as long as youre running a bank, youll have some input costs such as 1. 2. 3. 4. 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 re-lend this money to customers as personal loan @16% (and thus making a killing profit of 16-8=8%) 348

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.

Reverse Repo Rate

As the name suggests, Reverse repo rate is reverse of Repo rate. So, if SBI chief feels there is not enough demand for loans and most of those 72.25 Rupees are sitting idle, hell deposit some of that cash, in RBI. RBI will pay SBI chief 7% interest rate on such deposit. Thus, Reverse repo rate is the interest rate which RBI pays its clients* for their shortterm deposits. Note: Reverse Repo Rate is automatically kept 1% less than Repo rate according to new RBI rules. [Since Nov.2010, Reverse Repo rate is constantly 1% less than Repo].

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 LONGterm loans. Recall that Repo Rate = RBI charge that much interest from its clients on SHORT term loans.

*Whore the clients of RBI? 1. Union Government 2. State Government 3. NABARD (through that money goes to Microfinance companies and Regional Rural Banks) 4. Commercial Banks (SBI, ICICI etc) 5. Non Banking Financial Companies (NBFC) like Muthoot Finance and Mannapuram Gold Loans. (^list is not exhaustive.) please note:


1. Bank Rate, Repo Rate and Reverse Repo Rate applies to all Clients of RBI. 2. The CRR,SLR applies to Commercial Banks. (including Urban Cooperative banks but excluding Regional Rural Banks) What is the need of all these CRR,SLR,Repo rates?

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.

What is the problem with CRR?

CRR serves two purposes o Control money supply in the market o Acts like the library deposit, so if your bank goes broke / doesnt play by the rules then RBI can use its CRR deposit to temporarily fix things. Earlier, RBI had to pay interest rates on CRR deposits. But in 2007, Government amended the RBI act so now RBI doesnt have to pay any interest on the CRR deposits. Obviously the SBI, ICICI etc wouldnt like it because their money is sitting idle in the lockers of RBI without earning any interest. They want CRR provision to be deleted.

How much CRR deposit does RBI have? In July 2012 [all approximate numbers] Total Deposits in all Scheduled Commerical banks (SBI,ICICI etc) CRR: 4.75%Banks have to keep this much amount of total deposits in RBI. 65 lakh crores 65 lakh crores x 4.75%=around 3 Lakh crores sitting idle in RBI lockers.


Interest earned by SBI/ICICI etc on CRR deposits made in RBI

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. While 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 Feds. 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.

What does SBI want?

Pratip Chaudhari = Chairman of SBI Recently SBI Chairman Pratip Chaudhari said that

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.

Deputy Governor of RBI


On SBI chief Pratip Chaudharis demand for removal of CRR, the Deputy Governor of RBI K C Chakrabarty, replied that if the SBI Chairman is not able to do business as per our regulatory environment, he has to find some other place. On this [rude] comment of Chakrabarthy, SBI chief Pratip Chaudhari replied, (doesnt matter what anyone says) I wanted to start a debate on CRR in the public domain, so let that debate happen.

Timeline of Events Early 90s 1992 1996 1999 2007 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. RBI introduces system of Repo rate. RBI introduces the system of Reverse Repo Rate RBI starts paying interest rates to banks, on CRR deposits.

Sub Prime Crisis in USA RBI stops paying interest rates to banks on CRR deposits. Eurozone Crisis. For more on that topic, Click ME High inflation, RBI starts increasing Repo rate to fix it. Throughout the year, RBI keeps increasing Repo Rate to combat inflation. Repo rates gets as high as 8.50%. SBI chief Pratip Chaudhari demands removal of CRR. [He has been doing it since a long time, even in 2011 seminars] So, This CRR removal news topic would have faded away just like it did in 2011, had the RBI deputy governor not replied on SBI 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.



August 2012

By the way, during this time, 1. Bank Rate=9% 352

2. Repo =8% (reverse repo would be obviously 8-1=7%) 3. CRR=4.75% 4. SLR=23%

Mock Questions

Q1. Which of the following statements are incorrect? a. b. c. d. The NBFCs are required to maintain CRR deposits with RBI. RBI pays interest rates on CRR deposits. An Increase in CRR would decrease the liquidity from the market. At present, Bank Rate > Repo Rate > Reverse Repo Rate.

Q2. Which of the following statements are correct? 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?(interview) Ref: 1. Indian Economy by Ramesh Singh (Tata McGraw hill Publication) 2. 3. 4.

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[Economy] Foreign Contribution Regulation Act (FCRA): Meaning, Features, Controversies 1. 2. 3. 4. 5. 6. 7. What is FCRA? What is the need of FCRA Act? Who can accept Foreign Contribution? Who cannot accept Foreign Contribution? Why is FCRN Act in news? Controversy Mock Questions

What is FCRA?

Foreign Contribution Regulation Act (FCRA) It regulates the foreign contribution (money donation) and foreign hospitality (e.g. free airplane tickets and hotel lodging during videsh-yaatra) given to various NGOs, institutes, judges, journalists, public servants etc.

What is the need of FCRA Act?

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.

Who can accept Foreign Contribution?

Organizations working for definite cultural, social, economic, educational or religious programs. But first, theyve get permission from the Ministry of Home Affairs AND Second, they have to maintain separate account book listing the donation received from foreigners and get it audited by a Chartered Accountant and submit it to Home Ministry every year.

Who cannot accept Foreign Contribution? 1. Election candidate. 2. MP and MLAs. 3. Newspaper-walla: Correspondent, columnist, cartoonist, editor, owner, printer or publishers of a registered Newspaper. 4. Public Servents: Judge, government servant or employee of any Corporation or any other body controlled on owned by the Government. Why is FCRN Act in news?

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. 354

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.


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.

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. [Economy] Petroleum, Chemical and Petrochemical Investment Region (PCPIR): Meaning, features For UPSC GS (Mains) exam under [yearbook] or [economy] section. 1. 2. 3. 4. 5. Introduction What is PCPIR? Role of Union Government Role of STATE GOVERNMENT Organizational setup 355

6. Example of PCPIR regions 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?

Petroleum, Chemical and Petrochemical Investment Region (PCPIR) would be a specifically delineated investment region with an area of around 250 square kilometers. for the establishing manufacturing facilities for petroleum, chemicals & petrochemicals, alongwith the associated services and infrastructure. PCPIR would be a combination of production units, public utilities, logistics, environmental protection mechanisms, residential areas and administrative services. PCPIR may include one or more Special Economic Zones, Industrial Parks, Free Trade & Warehousing Zones, Export Oriented Units. All the benefits available under the relevant legislation or policy will continue to remain available to the said SEZ or Parks, that form part of the PCPIR.

Role of Union Government

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.


would play the lead role in setting up of the PCPIR would identify a suitable site, prepare the proposal and seek approval It will notify the PCPIR area under the relevant Act Acquire/ assist in acquiring the land necessary for setting up of the infrastructure, processing and non-processing areas. Providing for rehabilitation to the affected families. As far as possible acquisition of agricultural land will be avoided. Apart from this, State Government will be responsible for 1. Power connectivity and availability of reliable and good quality power. 2. bulk requirements of water; 3. Road connectivity (State roads); 4. Sewerage and effluent treatment linkages, from edge of PCPIR, to the final disposal sites; 5. Appropriate infrastructure to address the health, safety and environmental concerns 356

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. Example of PCPIR regions Gujarat PCPIR in Bharuch District of South Gujarat. Similar projects in Tamilnadu and Andhra Pradesh.

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. [Economy] BEE Labeling in India: 1. 2. 3. 4. 5. What is BEE? Why was it setup? Functions taken by BEE? What is BEE Labelling? BEE labeling for cars

What is BEE?

Bureau of Energy Efficiency (BEE) statutory body under Ministry of Power It was set up under the provisions of the Energy Conservation Act, 2001.

Why was it setup?

To reduce energy intensity of the Indian economy.


Research shows that to provide the final consumer 1 watt of energy, the power station has to produce 4 watts of electricity (4-1=3 watts are lost in transmission and distribution). 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.

Functions taken by BEE?

Create Energy Conservation Building Codes minimum energy performance standards and labelling design for equipment and appliances Certify Energy Managers and Energy Auditors Create awareness and disseminate information on energy efficiency and conservation. For example BEE has launched a mobile application AC Power Saver that will help consumers calculate their expected annual bills and the potential saving with a five-star AC as against those with the lower stars. Strengthen consultancy services in the field of energy conservation Promote research and development in energy conservation.

What is BEE Labelling?

BEE labeling is mandatory for air-conditioners, frost-free refrigerators, distribution transformers and tubular fluorescent lights etc. (more products are added in the list every now and then) BEE labeling has 1 to 5 stars. If Product A has 5 stars and B has 3 stars that means, product A consumes less energy than product B yet delivers same (or better) output. Hence Product A is more energy efficient. (and consumers are more likely to buy Product A, thus indirectly helping in energy conservation)

BEE labeling for cars

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

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[Economy] Arbitration Act: Foreign Investment disputes 1. 2. 3. 4. What is Arbitration? Arbitration Act Why in News? Implication of SC Judgment

What is Arbitration?

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

Indian Parliament made Arbitration Act in 1996. It deals with Arbitration process. Suppose American company and Indian company made some business deal and then had some dispute. Both of them went for Arbitration in America and the American arbitrator gave an order Indian company is guilty and it should transfer its Ahmedabads factory to that American company. This order is called Foreign Award. Now to implement or enforce this award, The American company has to send a copy of this judgement to the concerned Indian court in Ahmedabad and that Indian court will pass an order that Indian Company shall transfer the ownership of Ahmedabads factory to that America Company before xyz date. One advantage of foreign award, according to foreign parties, is that Indian courts come into picture only at the time of implementation of award. And the Indian courts can refuse to implement the award only on limited grounds.

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. 359

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.

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. [Economy] Insurance Types, IRDA, Reforms, FDI in Insurance for AFPC, LIC AAO etc exams 1. Who can make laws on Insurance? 2. IRDA 1. What are the functions of IRDA? 2. Organizational setup of IRDA 3. Insurance Ombudsman 1. Functions of Insurance Ombudsman 2. Selection of Ombudsman 4. Insurance Policies: Types 1. General Insurance 2. Life Insurance 5. Nationalization of Insurance business 6. Foreign Direct Investment in Insurance 7. Reform in Insurance sector 1. Already Done by IRDA 2. Pending Reform 8. LIC 9. GIC- Reinsurer 10. Mock Questions Who can make laws on Insurance?

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) 360


Insurance Regulatory and Development Authority (IRDA) Created on the recommendations of the Malhotra Committee report Started in 2000, it is a statutory body (i.e. made through an Act of parliament).

What are the functions of IRDA?

To run insurance businesss, a company has to register itself with IRDA. IRDA regulates the insurance industry and protects the customers. IRDA has the power to frame regulations regarding Insurance market (just like SEBI for Capital market) promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums. (for example IRDA allowed Health Insurance Portability)

Organizational setup of IRDA

IRDA has a ten member team consisting of o 1 Chairman o 5 whole-time members o 4 part-time members

All of them, appointed by the Government of India. Insurance Ombudsman

was created by a Government of India in 1998

Functions of 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. 361

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 TV/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.

Insurance Policies: Types Two main types: General and Life General Insurance

General Insurance = Every Insurance plan EXCEPT life insurance plan Sub categories medical insurance, accident, property and vehicle insurance protection against natural and climatic disasters for agriculture and rural businesses coverage for project, construction, contracts, fire, equipment loss, theft, etc.

Name Personal Insurance policies Rural Insurance policies Industrial Insurance policies

Commercial Insurance protection against loss and damage of property during transportation, policies transactions, marine insurance etc. Life Insurance Types list is not exhastive.

Whole life plan

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 362


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.

Term Plan

ULIP(Unit Linked Insurance Policy)

Nationalization of Insurance business

In 1972, Government of India passed of the General Insurance Business (Nationalisation) Act, With this Act, Government took control of all the private insurance companies of India and created 4 companies General Insurance.HQ: Kolkata General InsuranceHQ: Mumbai General InsuranceHQ: New Delhi

National Insurance Company Ltd New India Assurance Company Ltd Oriental Insurance Company Ltd

United India Insurance Company Ltd. General InsuranceHQ: Chennai Foreign Direct Investment in Insurance

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.] 363

Reform in Insurance sector Already Done by IRDA

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

Life Insurance Corporation of India 100% owned by Government. Started in 1956 HQ: Mumbai Motto: Yogakshemam Vahamyaham (taken from Gita, meaning I carry what you require.) Provides Life Insurance, Health Insurance

GIC- Reinsurer

Suppose LIC sells 1000 life insurance policies, each with a 1 crore policy limit (e.g. I, the customer pay Rs.10,000 premium every year and If I die my family should get 1 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.

Mock Questions for APFC, LIC AAO Which of the following statements are correct? 1. IRDA is a statutory body. 2. IRDA is made up of 1 chairman and 3 members. 364

3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

IRDA members are selected by RBI governor. Oriental Insurance LTD is the only Reinsurer in India. Government owns only 51% in LIC. LICs motto is Nabha Sparsha Diptam Health insurance is a type of Life insurance. In ULIP policy, customers money in invested in Government securities only. The premium of a Term plan is cheaper than Endowment plan. Every Insurance Company has to appoint an Insurance Ombudsman in its head office. Currently, a foreign company can invest upto 49% in an Indian Insurance company. IRDA has allowed portability in life insurance products from 2011.

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[Economy] Labour Laws and Industrial Relations in India for APFC / EPFO exam This article keeping the upcoming APFC exam in mind: 1. Labour Laws and Industrial relations 2. Constitution of India: workers provisions 3. Laws for Female workers 1. Maternity Benefit Act 2. Vishaka Case 3. Factories Act 4. Equal Remuneration Act 4. Labor Laws in India 1. Trade Union Act 2. Minimum Wages Act 3. Strikes and lockouts 4. Industrial Disputes Act (IDA) 5. Labour Courts 6. Industrial Tribunals 7. Workmans Compensation Act 8. Employees State Insurance Act 9. Retirement Benefits 10. Emigration Act 5. UNORGANISED LABOUR 6. International Labour Organisation (ILO) 7. Ministry of Labour in India 365

1. Important OFFICES/institutes with Labour Ministry 2. Work done by offices with labour ministry 3. Chief Labour Commissioner 4. Labour Bureau 5. Welfare Commissioners 6. Employees State Insurance Corporation (ESIC) 7. Employees Provident Fund Organisation (EPFO) 8. Board of Arbitration 8. MCQs for APFC/UPSC Exam Labour Laws and Industrial relations

Industrial relation = interactions between employers (businessmen/bosses), employees (workers) and the government (which makes the laws for them). Labour laws=made by Government, they deal with a workers well being in the office: for example working hours, hiring and firing, maternity leave, pension, union formation etc.

Constitution of India: workers provisions Article Provision/how is it related? 15 16 discrimination on religion, race,caste, sex and place of birth. Equal opportunity in Government jobs. The right to form union.But it does not carry with it the right to achieve every object. Thus the trade unions have no fundamental to right strike. (it is only a legal right under the industrial dispute Act) right to live is not merely confined to physical existence but it includes within its ambit the right to live with human dignity. prohibits bonded / forced labour Child labour Those working in armed forces etc cannot enjoy all the fundamental rights. Free legal aid, health of workers Social security during unemployment. humane conditions of work + Maternity Relief.


21 23 24 33 39 41 42

Laws for Female workers Maternity Benefit Act


women in the labour force who have been employed for 160 days in a year to provide leave with pay and medical benefit. Vishaka Case SC gave the guidelines regarding protection of women @work places against sexual harassment.

sexual harassment of working women amounts to violation of rights of gender equality judgment also laid down the definition of sexual harassment, the preventive steps, the complaint mechanism, and the need for creating awareness of the rights of women workers.

Factories Act Employer must provide crches in factories where more than 25 women are employed Equal Remuneration Act for the payment of equal remuneration to men and women workers for same or similar nature of work Labor Laws in India Here is the list of all Labor laws in India, Click On this image.

Trade Union Act

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.

Minimum Wages Act


This law governs the methods to fix minimum wages in scheduled industries (which may vary from state to state).

Strikes and lockouts

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.

Industrial Disputes Act (IDA)

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 Labour Courts deal with matters pertaining to 1. discharge and dismissal of workmen 2. legality of strikes of lock outs etc. 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. 368

Workmans Compensation Act

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

Employees State Insurance Act

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 Provident Fund Act

a worker who has put in not less than five years of work is entitled to a lump sum payment equal to 15 days wages for every completed year of service. Every month the employer is expected to contribute the required money into a separate fund to enable this payment on retirement or termination of employment.

scheme both the employee and the employer make an equal contribution into a national fund. The current rate of contribution is 12 percent of the wage including a small percentage towards family pension. This contribution also attracts an interest, currently 9.5 percent per annum, and the accumulated amount is paid on retirement to the employee along with the interest that has accrued. The employee is allowed to draw many types of loan from the fund such as for house construction, marriage of children, and education etc. As a result very little is available at the time of retirement.

Emigration Act

regulates the emigration of Indian workers for jobs abroad. no agency can undertake the recruitment of Indian workers with foreign employers without possessing a registration certificate issued by the Protector General of Emigrants.


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. 369

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

Example of unorganized labourers: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. small and marginal farmers landless agricultural labourers fishermen building construction workers leather workers handloom workers weavers rural craftsmen salt workers workers in brick kilns and stone quarries midwives domestic workers barbers newspaper,vegetable and fruit vendors

International Labour Organisation (ILO)

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 Important OFFICES/institutes with Labour Ministry 1. 2. 3. 4. 5. 6. 7. Chief Labour Commissioner Directorate General, Mines Safety Welfare Commissioners Board of Arbitration Employees State Insurance Corporation (ESIC) Employees Provident Fund Organisation (EPFO) V.V. Giri National Labour Institute, NOIDA [He was the 4th President of India and wrote books on labour related matters.]

[^This list not exhaustive, Im only listing the important ones for MCQ]


Work done by offices with labour ministry [again list not exhaustive, just providing the facts important for MCQ] Chief Labour Commissioner

Prevention, investigation and settlement of industrial disputes in the Central sphere. Enforcement of awards and settlements. Implementation of labour laws in industries Verification of membership of Unions affiliated to the Central Organisations of Workers Fixation and revision of minimum wages by notifications under the Minimum Wages Act, 1948

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.

Employees State Insurance Corporation (ESIC)

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.

Employees Provident Fund Organisation (EPFO)

Administration of Employees Provident Funds Administration of Employees Pension Scheme

Board of Arbitration Compulsory arbitration of disputes between the Government employees and the Government on pay and allowances, weekly hours of work and leave. MCQs for APFC/UPSC Exam Which of the following statements are correct? 1. Supreme court laid down the guidelines against Ragging in Vishaka Case. 371

2. Humane conditions of work and Maternity Relief are fundamental rights enshrined in Indian Constitution. 3. Workers have the legal right to strike, even without giving notice to their boss in any industry. 4. Consumer Price Index Numbers for industrial and agricultural workers are published by NSSO 5. Only Sovereign nations can become members of Governing council of ILO. 6. In Gratuity fund, both Employer and Employee have to contribute. 7. In Provident Fund Act, only Employer (boss) has to contribute. 8. In Employees State Insurance, only Employer has to contribute. 9. The office of Directorate General of Mines Safety falls under the Administrative jurisdiction of Coal Ministry. 10. EPFO and ESIC are autonomous institutions under Finance Ministry.

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[Economy] Fiscal Consolidation, Fiscal Deficit : Meaning, Implications, Explained Why Vijay Kelkar Committee was formed? 1. 2. 3. 4. 5. Parts of Budget= Revenue + Expenditure Types of Budget= Deficit/Surplus/Balanced Why printing more money=Bad idea? When fiscal deficit NOT BAD? When & Why is fiscal deficit BAD? 1. Creates inflation 2. Black Money 3. Bond Yield increased 4. Crowding out investment 5. Twin deficit hypothesis 6. Current Account Deficit 7. Subsidy Burden = fiscal deficit increased 8. Interest Payment 9. Vicious circle: Trade to Fiscal deficit 6. Fiscal Consolidation: What is it? 7. Mock Questions Continuing episodes of technical incorrect economy.


Set Location: Prime Ministers Office (PMO), New Delhi. Mohan is busy uploading (un)funny photos in his facebook album and tagging random friends in them to get more likes. Vijay Kelkar makes an entry in his office. Kelkar 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!

Mohan Ya but what is fiscal deficit and why is it dangerous? Kelkar What? youre an economist and yet you dont know what is fiscal deficit? Well I was an economist. But I didnt maintain notes and I did not revise the standard Mohan 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

Mohan Please Explain in English, from the very beginning. Ok then let us start from the beginning.Every year, the Government puts out a plan for its income Kelkar and expenditure for the coming year. This is, called annual Union Budget and you need to get it approved by the parliament. Mohan Side question: why do I need to get it approved by the parliament? Kelkar For the answer Click ME Mohan Ok back to the topic

Parts of Budget: Revenue and Expenditure Kelkar: In every budget, there is incoming money (Revenue) and out going money (Expenditure). Incoming money Outgoing Money


Incoming money is divided into two parts. Tax and Non Tax And outgoing money is divided into Plan and Non plan Expenditure. Incoming Outgoing

Tax Non Tax Plan Non Plan

Kelkar: We can further refine this classification into Revenue/capital receipts and Expenditure. But let us not complicate the matter for the time being. Mohan: Now What is this incoming money from tax and non tax sources? Kelkar: see the table yourself for the examples. Incoming money Tax Revenue Non Tax Revenue Direct Tax Indirect Tax 1. Fees Collected (Driving license, RTI, Passport) 2. Fines and Penalties (Traffic violation etc) 3. Income from PSU (e.g. profit from Airindia (lolz) 4. Gifts. (discussed in 2nd ARC article) 5. Grants (Foreign Aid from UN, Japan etc) Plan Outgoing

Non Plan

1. 2. 3. 4.

income tax Corporate tax; Wealth tax Capital gain tax (Vodafone case)

1. custom duty, 2. excise duty, 3. service tax. 4. VAT

Mohan: and what is this outgoing money? Plan and non-plan? Kelkar: Outgoing money = the area where Government spends the money (Expenditure). Plan-Expenditure means spending money on the activities related to the national five year plan. (FYP) Non-plan Expenditure, obviously means spending money on activities that are not related with national five year plan. Check the table for examples. 374

Incoming Tax Revenue Direct Tax Indirect Tax


Non Tax Revenue

Plan Expenditure

Non Plan

1. income tax 2. Corporate tax; 3. Wealth tax 4. Capital gain tax (Vodafone case)

1. custom duty, 2. excise duty, 3. service tax. 4. VAT

1. Fees Collecte d (Driving license, RTI, Passpor t) 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 from UN, Japan etc)

1. MNGREA 2. Janani Suraksha Yojana 3. JNNURM 4. Indira Awas Yojana

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 Travel bills of Pratibha.

Mohan: ok so now what? Kelkar: Now we classify the budget according to the balance between incoming and outgoing money.


Types of Budget=Deficit,Surplus,Balanced When It is called a

outgoing money > incoming money deficit budget. outgoing money < incoming money surplus budget. outgoing money = incoming money balanced budget.

In reality, Government always has deficit budget. Because as long as there is Pakistan and China in the neighborhood, well have to maintain a huge army, keep buying new tanks and missiles. As long as there are poor people, well have to keep running various Government schemes. Mohan: come to the point. Kelkar: The point is, When Government spends beyond its aukaat, it creates a big pothole in the highway. This pothole can be called a Revenue deficit, budget deficit, fiscal deficit or primary deficit according to the formula you use to measure the depth of this pothole. This pothole cannot be filled with cement, asphalt or dirt. It can only be filled with cash.


In the 1980s, Sukhmoy Chrokroborthy Committee came up with the fiscal deficit formula Fiscal deficit= 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) and from abroad (external borrowing- World Bank, IMF etc.) Bigger the pothole, more cash you need to fill it up. Here is some food for thought. Incoming Outgoing Breakup for USA budget 2011. Click on Image to Enlarge.

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). When you Kelkar borrow money, youve to pay interest ( ) to the party, every year.To pay this interest in the future, youve three options.first option =Increase the current taxes or create new taxes.

Mohan Not a good idea sir-ji. Kelkar alright, Second option =Create policies to help stimulate economic growth so that tax 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.

Mohan Now this third option sounds great :D Kelkar Actually thats the stupidest of all three solutions. Let me explain with the usual example.

Why Printing more money= Not good idea? Suppose, Government orders RBI to print lots of cash to solve poverty. Then Government launches Rajiv Gandhi Suitcase yojana (RGSY) under which every BPL family is given a suitcase containing Rs.10 lakh. What will happen then? Theyll all go and buy lots of onion,milk,mobile, cars, houses everything. =Demand of product will increase, but the supply will remain almost the same as earlier. 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.)

Mohan : Does that mean fiscal deficit =bad? Kelkar: not always bad. It depends on the situation. When fiscal deficit = NOT BAD?

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.

Thus, fiscal deficit is not necessarily a bad thing, always. When and why is fiscal deficit= BAD? Creates inflation

A large and persistent fiscal deficit =something is wrong in the economy. 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). 379

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.

Bond Yield increased From Eurozone Greece Exit article, You already know what is bond yield. If not click me When Government keeps borrowing and borrowing to fill up the fiscal deficit pothole, then bond yield will increase = not good because more and more of taxpayers money (i.e. Government s incoming money) will go in repaying that bond interest rate rather than going into education or healthcare. Crowding out investment We already saw that, Fiscal deficit pothole can only be filled with cash. This cash has to be borrowed from RBI, other banks, FII etc. who buy the Government bonds. So, that much money (Credit/loan) is not available for other needy businessman. thus fiscal deficit Crowds outinvestment from private sector. Now that needy businessman will have to borrow money at higher interest from another party (this is how fiscal deficit increases interest rates)= input cost of product increased = he will increase the MRP of his product or service to maintain the same profit margin = inflation. (cost-push type)

Twin deficit hypothesis

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. 380

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.

Current Account Deficit (CAD)

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.

Subsidy Burden = fiscal deficit increased

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. The vicious circle: Trade to Fiscal deficit Thus, in Indias case, a greater trade deficit also leads to a greater fiscal deficit. So the causality in Indias case is both ways.

A high fiscal deficit leads to higher trade deficit. And high trade deficit leads to higher fiscal deficit. And this, in turn, also leads to a weaker rupee, which, in turn, pushes up the cost of oil in rupee terms leading to a higher fiscal deficit.

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).

You might think 5 or 6% is such a trivial amount, why Kelkar is so worried? Well, to understand the gravity of the situation, youve to compare the percentage with other percentages. 381

1. Around 3.8% of Indias GDP goes in Education. (2012) 2. Around 6% of Indias GDP goes in Fiscal Deficit. (2012) 3. Greeces Fiscal deficit was more than 10% of its GDP and look how much trouble it is facing. (recall Eurozone Article)

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.

Fiscal Consolidation: What is it? ok so far I understood Mohan 1. What is fiscal deficit. 2. Why and when fiscal deficit is bad. But what is this fiscal consolidation? 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.

Mohan But How can we do that? Kelkar Just try to reduce the outgoing money and increase the incoming money. (Look at that plan-non plan table again.)That means 1. 2. 3. 4. 5. 6. Cut down subsidies. Stop leakages in subsidies. Reform the tax structure (implement GST). Improve the performance of PSUs. Recover blackmoney stop ministers from using Business class airtickets and other wasteful Government expenditures. (= take austerity measures)

+ 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 Mohan that 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.


Mohan Then make a Committee headed by Montek Singh Kelkar 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)

Mohan Then whom should I appoint? Kelkar The expert is sitting in front of you. Alright, tomorrow morning you goto the finance Minister along with your class Mohan 10,12,college marksheets, extra-curricular activity certificates and job experience certificates (if any) and get the appointment letter from him. What???


I served as the finance Secretary of India (despite not being an IAS). I served as an executive director in IMF. Hell I even served as the chairman of 13th Finance Commission of India!

and now 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.

Kelkar Whaat an idea sir-ji.

Then Vijay Kelkar set out for a journey to prepare a roadmap for fiscal consolidation. In September 2012, He submitted his report to the Government. Well see the recommendations of Kelkar Committee in future article. (To Be continued.)


Mock Questions Which of the following statements are correct? 1. 2. 3. 4. 5. 6. 7. 8. Salaries paid to Constitutional bodies is an example of Planned Expenditure Fiscal deficit is always higher than budgetary deficit. Fiscal deficit cannot be financed through external borrowing. Kelkar Committee was created to suggest the roadmap for implementation of Direct Tax Code. High and persistent Fiscal Deficit is a sign of healthy and growing economy. To achieve Fiscal consolidation, Government should increase the non-plan expenditure. Fiscal consolidation means the steps taken by Government to increase its shareholding in PSUs. Vijay Kelkar is the chairman of 14th Finance Commission.

Descriptive 15 marks (150 words) 1. What is fiscal deficit. Whatre the salient features of FRBM Act? 2. Major recommendations of Kelkar Committee on Fiscal consolidation. All of my articles on Economy are Archived on this link: Ref 1. Wheat example from Parijat Gargs article on 2. Kelkars Character is portrayed according to his bio on 3. US budget from 4. Twin deficit etc from 5. Education GDP URL to article:

[Economy] Recommendations of Vijay Kelkar Committee on Fiscal Consolidation Roadmap 1. Observations of Kelkar 2. How to increase incoming money? 3. How to increase collection of Direct Taxes? Review DTC bill Data Mining 384


5. 6. 7. 8.

PAN/UID Card Mandatory Create fake Orkut profiles Charge interest rate on tax defaulters How to increase collection of Indirect Taxes? Increase the coverage of service tax Implement Goods and Services Tax (GST) 6% Excise duty on Merit goods only Whats the difference between Custom and Excise duty? What is Externality? Negative externality Positive externality E-Governance in CBEC Disinvest from PSUs Dividend from PSUs How to Decrease Outgoing Money? o Reduce Subsidies o Change focus of Government schemes Mock questions for CSE, RBI Grade B etc.

Let us recap what we saw in previous episode starring Vijay Kelkar: 1. Fiscal deficit =When outgoing money is more than incoming money, a pothole is created. This pothole is known as Fiscal deficit and it is not good for the economy. 2. Fiscal consolidation = steps to be taken for preventing (or reducing) fiscal deficit pothole. Now the moving on: 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.


How to increase incoming money? Increase Tax Collection

In 2007-08, the tax to GDP ratio was almost 12% (but) in 2012-13 this ratio is estimated around 10%. It means tax collection has fallen down. 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. How to increase collection of Direct Taxes? Review DTC bill

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. 386

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.

PAN/UID Card Mandatory

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.


An Example of Aadhar Card.

It also doesnot change with address or place. So if you got your PAN/UID while you were in college of Delhi but then shifted to Banglore, your PAN/UID numbers wouldnot change. This helps in tracking down tax evaders. Kelkar says amend the laws so that Irrespective of amount of money transected, PAN / UID number must be quoted in bank accounts, fixed deposits with banks, all salary payments and sale of immoveable property. This will also help detecting tax frauds and reduce black money.

Create fake Orkut profiles

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. 388

Charge interest rate on tax defaulters

Hasan Ali is Indias largest tax defaulter with dues allegedly over Rs 50,000 crore (Rs 500 billion)

If a company or individual doesnt pay his taxes on time, then Government should charge 22-24% interest rate on his pending tax payments.

Now second part: How to increase collection of Indirect Taxes?

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.

Increase the coverage of service 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:

Non-profit organizations should pay Service Tax. Government had given exemption to the Railways from service tax payment for transportation of goods and passengers (of higher class) upto 30.09.2012 Kelkar says, the Railways should no longer be exempted from service tax after that date.

Implement Goods and Services Tax (GST)

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.

6% Excise duty on Merit goods only

Excise duty = a type of indirect tax. Excise duty is collected by Union Government, on the goods manufactured or produced in India.

Whats the difference between Custom and Excise duty?

Excise duty = charged on goods produced (or manufactured) in india Customs duty= charged on goods imported into India as well as on goods exported from India. Please note: Excise on alcoholic liquors, opium and narcotics falls under the domain of State Government. Why? Because Seventh Schedule of the Constitution says so.

Anyways back to business. We were talking about Kelkars recommendations on Excise duties. Government of India charges excise duties on various goods produced in India. For example

12% small cars 6% on Iodine and LED Lamps.


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. What are merit goods?

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?

Externality = When two party do some business, externality is experienced by the unrelated third parties that are not involved in that business.

Negative externality

I take admission in some pharmacy college. (ME and college are buyer and seller of education). But the college is bogus and 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. Disinvest from PSUs

First of all, what is PSU? Answer Click ME You already know about Debt vs Equity, Shares vs Bonds If not click me 391

Disinvestment (in crude terms) = when Government sells its shares from a PSU. The Budget 2012 wants Government to collect Rs.30,000 crores via Disinvestment. (This money would go in National Investment Fund under Ministry of Finace. And later on this money would be used to finance bogus Government schemes and to revise other PSUs, if 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.

Dividend from PSUs

You already know about shares and dividend. If not, then go through the same debt vs equity article.

Ok let us review what we learned so far 1. Fiscal deficit = outgoing money > incoming money. 2. Fiscal consolidation = steps aimed at reducing fiscal deficit. 3. To reduce fiscal deficit, we need to increase incoming money and decrease outgoing money. 4. We saw how to increase the incoming money (direct+indirect tax, PSU dividend and sell land) Now let us move to the second part: How to Decrease the Outgoing Money? Kelkar has plain and simple solution for this. 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. 392

Kelkar agrees that Yes, reduction in (petrol, diesel, kerosene, urea) subsidies could lead to some short-term pain (=inflation ) but the government should spend more on employment generation, which would lead to higher growth and benefit everyone. If Kelkar report is implemented then Diesel price will increase by around Rs.6/lit and LPG price by Rs 87 per cylinder.

Change focus of Government schemes Kelkar suggess that all Government schemes/Programmes for the poor should be centred around employment generation.(rather than populist schemes aimed at free electricity, TV Fridge etc.) These are the major recommendations of Kelkar Committee. This is what Kelkar said Now let us check what Government said on his report? Chindu: Im going to hold consolations with various stockholders and then decide the future course of action (about whether should we implement his report or throw it in dustbin). And In a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary. Mock questions for CSE, RBI etc. MCQs Which of the following, is/are not recommend by Kelkar Committee on fiscal consolidation 1. Government should sell unused land owned by various ministries, if it is not generating any Revenue. 2. Government should increase the subsidies on Urea. 3. Government should increase the excise duty on merit goods. 4. Government should exempt railways and non-profit organizations from service tax. 5. Government should not implement Direct Tax Code in its present form. 6. Government should not implement GST in its present form. Which of the following statements are correct? 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Fiscal deficit stimulates the private investment, growth and employment. All Excise duties fall under the domain of Union Government. Customs duty is charged on imported items only. Funeral services are exempted from service tax. Property tax is an example of Direct tax. Service Tax is collected by Income Tax Department. PAN is a 12 digit alphanumeric code. Only a person above 18 years, can get PAN card. Only an Indian Citizen can get PAN card. Aadhar is issued by Ministry of Home Affairs. A person below the age of 18 years, is not eligible for Aadhar. Only a Citizen of India can get Aadhar Card. 393

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? 2. Why is it necessary to have low fiscal deficit? 3. The presidential debate between Obama and Mitt Romney revolved around healthcare cuts, tax cuts and fiscal deficits. How are they related with each other?

URL to article:

. [Economy] 9% GDP and 4% Agriculture growth: Fodder material for Essay and Interviews 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. What is the theme of 12th Five Year plan? What are the main targets of 12th FYP? Governments role in Development Time Factor Inflation Exports Policy environment Labour Reducing the fiscal deficit 1. Strategy #1: Increase revenues 2. Strategy#2: Reduce non-Plan expenditure. Railways: Cross subsidization How to get 4% growth in Agriculture? 1. Cold storage 2. Supply lines 3. Land Leasing 4. Non-farm Employment 5. Change the focus MSME Regional imbalance 394

12. 13.

14. Infrastructure Development 1. Where is the money? 2. Quick Project implementation 3. Reforms in the Financial Sector 15. Crowding out corporate borrowing 16. Energy Economy 1. Reducing Energy Intensity 2. Electricity 3. Increasing Domestic Energy Supply 4. Coal production 5. Solar and Nuke Energy 6. Nuke 7. Solar 8. Hydro 17. Managing Water Resources 1. Water price 2. Tubewells 3. Urbanization 18. Environment Protection 19. Corruption 20. Government schemes 21. Conclusion This is not really an article, just compilation of some important fodder material for GS, essay, group discussion and interview. Often we hear the newspaper columnists and TV-debatewallas talking if India wants 9% growth then it should xyz if India wants 4% growth in agriculture then it should do xyz So, let us make a list on what should be done. What is the theme of 12th Five Year plan?

Theme=Faster, sustainable and more inclusive growth. Lets deconstruct the theme. Faster growth= GDP should grow at 9% per year. Sustainble growth = you know what that means. If not, go through Kyoto and RIO+20 article More inclusive growth= Women, SC,ST,BPL, Physically challenged and minorities should also benefit from 9% GDP growth. + The fruits of Growth should be spread all over India and should not get concentrated in a few big states only.

What are the main targets of 12th FYP? (list is not exhaustive)


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). Focus Areas: Health, education, infrastructure and skill development Allocation in the health sector is all set to double.

1. 2. 3. 4. 5.

Governments role in Development

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)

1. 2. 3. 4.

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.



A moderate level of inflation, is unavoidable for a growing economy. but when inflation beyond this tolerable level usually put at 5 percent to 6 percent, then itll start damaging the overall growth and inclusiveness (of poor people.) Inflation has been well above this level in the past two years and while India is not the only emerging market country experiencing this problem. But inflation in India has been higher than in most other countries High rates of inflation in food prices, especially vegetables, fruits, milk, eggs, reflected in double digit rates of inflation as measured by the Consumer Price Index (CPI) in the past two years Main reasons for inflation in India

1. Rise in global prices of crude oil, foodgrains and metals. 2. domestic supply constraints in the food economy other than foodgrains. 3. High Fiscal deficit 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)


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.)


In the coming years, working age population in India will increase. 397

At the same in the industrialised countries, and also in China, it will be going down. This situation can work as a demographic dividend only if

1. sufficient investment is taking place to generate the GDP growth (and thus employment) to absorb this youth. 2. right education and vocation skills are given to the youth.

Right now, over 90 percent of our labour force has received no formal training prior to employment and skills are typically acquired only on the job. This is simply not consistent with target of 9 percent growth. 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.

How to upgrade skills of labour force?

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.

Reducing the fiscal deficit

(we already discussed this in length, in the two kelkar articles) but still Fiscal deficit can be reduced through two pronged strategy

Strategy #1: Increase revenues

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.

Strategy#2: Reduce non-Plan expenditure.

Some reduction in non-Plan expenditure will happen automatically because 1. Government employment is not expected to increase significantly. 2. Government is not going to form any No new pay commission for some years. Government provides lots of subsidies on food, fertilisers and on petroleum products, which together account for around 2 percent of GDP. Food subsidies, alone amount to about 0.7 percent of GDP. But Food subsidies cannot be reduced much, because of upcoming National Food Security Act.

Railways: Cross subsidization


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.

How to get 4% growth in Agriculture?

Need to increase R&D in seeds Development. improve soil health: increase micro-nutrients and carbon content in the soil. Provide soil health cards issued to farmers, with periodic soil testing. Then the farmer will be given tailormade advice on how type of crops, seeds, fertilizer, irrigation method is suitable for his farm, according to his soil-health card. Carbon content can be increased by shifting from the traditional practice of burning crop residue to leaving it in the field.

Reduce water consumption in agriculture

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

state governments is the reform of laws relating to leasing of land. When rural population increase, the farm holdings are subdivided and become uneconomic. The very small and marginal farmers should lease out their tiny land to more viable farmers, and move into other sectors for better employment. But small farmers will do it only if they felt that they could lease out their land and get it back when they want. Yet, leasing is not legal in some states. Where it is allowed, the law is biased towards the tenant (Someone who pays rent to use land). 399

So state Governments should also amend the laws accordingly.

Non-farm Employment

In manufacturing sector, the corporates make huge profit even after giving salaries to the employees. And much of this profit is reinvested for research and Development of new products. (e.g. 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.

This is actually necessary to reduce the present underemployment/ disguised unemployment in agriculture and increase real wages in this sector. Agricultural development will itself give rise to new demands for non-agricultural services and generate employment in agriculture-related sectors such as modernised marketing and agro-processing activity.

Change the focus

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.


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

Northern states are industrially backward at present, but have high labour supply. Hence there is lot of inter-state migration. 400

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.

1. 2. 3. 4. 5.

Infrastructure Development

infrastructure sectors = power, roads, ports, airports, and railways some sectors, e g, telecommunications, achieving higher levels of investment than projected, while others achieved significantly less. For 9% growth, we need total investment of $1 trillion over the Twelfth Plan period. But how to finance infrastructure projects? Two problems

Where is the money?

Government doesnt have enough money. And Government the first priority must be to spend money in education and health. Because those two sectors are crucial for inclusiveness and are currently underfunded. Both the central and state governments must therefore follow an infrastructure strategy which consists of a combination of public investment and public-private partnership (PPP). Public investment would have to be directed to areas where the private sector is unlikely to come. (e.g. backward regions, rural areas).

Quick Project implementation

This is second major challenge in infrastructure. Infrastructure projects are often delayed due to difficulties in land acquisition and environmental clearance. the current processes are often not sufficiently transparent and predictable. We need to move to a system with much greater transparency, predictability.

Reforms in the Financial Sector

This sector involves: banks, non-bank finance companies, microfinance institutions, capital markets, mutual funds, insurance companies, pension funds and venture capital fund etc.


reform are already in the pipeline

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

Crowding out corporate borrowing

In the earlier articles, we already saw that 1. there are two ways to finance a company: Debt / Equity. 2. very high fiscal deficit, crowds out corporate borrowing. (recall first Kelkar article) LIC, EPFO, etc, are very conservative at present when it comes to investment. Whatever money they get from clients, they prefer to invest it in G-sec instead of higher yielding corporate bonds. Reason: if the private company defaults or goes bankrupt then it is very hard and timeconsuming to recover the bond-money. While banks, can easily recover loan money via SARFAESI, bond holders can only have recourse to liquidation and bankruptcy procedures which are hopelessly time consuming. Therefore Government must amend the Company laws etc. to fix this problem.

Energy Economy

global supply of crude oil = will remain tighter in the years ahead, and therefore crude oil price will also remain high Therefore we must increase domestic supply of energy from both conventional and nononventional resources.

Reducing Energy Intensity LPG and Kerosene

Petrol price is deregulated. LPG and kerosene prices remain under administrative control and are currently set well below global levels Government doesnt want to raise kerosene and LPG prices because of the impact on vulnerable groups, 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. 402


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.)

Increasing Domestic Energy Supply

expand domestic production of petroleum, natural gas and also coal to avoid excessive import dependence

Coal production

Coal industry is nationalised, although private investment is allowed in captive coal mines (i e, coal mines linked to power plants or steel and cement plants). the policy for the coal industry should be liberalised allowing private investment.

Solar and Nuke Energy

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)


Expansion of nuclear power is an important element of Indias long-term energy strategy and this has been facilitated by the recent agreement with the Nuclear Suppliers Group which gives India access to imported uranium, and also opens windows for other cooperation in this area. Problem: Bogus NGOs and semi-naxalite intellectuals protesting against Nuke plants after receiving bribes from abroad.


India has target to install 20,000 MW of solar power by 2020. India has the potential to be a significant supplier of solar-equipment to other countries.


Can make huge dams in Arunchal Pradesh and generate thosands of MW electricy. 403

Problem: border disputes with China.

Managing Water Resources

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

Government keeps the price of irrigational water very low. This leads to poor maintenance of the canal system due to low funds.


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%.


The urban percentage of the population is currently around 30 percent, and is expected to reach 40 percent by 2030. Most of the revenue generated from economic activity in the country occurs in urban areas. But most of this tax Revenue goes to Union and State Government and not to the city municipalities. So, municipalities in India also have limited money to improve the water, sewerage and urban transport system.


Jawaharlal Nehru National Urban Renewal Mission (JNNURM) introduced in the Eleventh Plan fixing this problem. But much needs to be done yet.

Environment Protection

We want high growth (9%) without inflicting much damage to the environment. But these two objectives (9% growth vs protect environment) cannot be achieved simultaneously in many situations for example, 9% growth = need lots of power/electricity =need coal and hydropower= forest clearance. 9% growth = require industrialisation = leads to water +air pollution. Therfore some compromise is necessary. But there are certain areas where we must not make any compromise, for example tiger reserves and very select biospheres.


Corruption in land-acquisition and land allotment Corruption in Spectrum and minerals allocation. These things indirectly increase the input cost for the entrepreneurs and hence inflation also increases. As a general rule, competitive bidding among qualified bidders provides the most transparent way of allocating scarce resources such as mining rights or spectrum. Many countries have a public procurement law whereas in India government procurement is governed by rules.

Government schemes In following schemes, the Complaints of leakages, inefficiency and corruption are widespread 1. 2. 3. 4. subsidised foodgrains through the PDS National Social Assistance Programme (NSAP) which provides an old age pension MNREGA National Rural Drinking Water Programme: at covering villages which do not have an assured supply of potable water 5. Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) : electricity to all uncovered villages and provides free connection to all BPL families 6. Indira Awas Yojana (IAY) which provides assistance to the rural poor to build pucca homes 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. 405

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.


No power on earth can stop an idea whose time has come. We live in a world of rising and faltering economies. So, The future is what we make of it. Nothing is ordained or pre-determined. India can rise, if the right steps at taken at right time. Much of what needs to be done to accelerate GDP growth to 9% (or 8.2%) will be done by the private sector, but the governments too have a crucial role to play in providing a policy environment that is seen as investor friendly and is supportive of inclusive growth.

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[Economy] Ethanol Blending in Petrol: Pros and Cons, + Mohan sets up GoM 1. 2. 3. 4. 5. 6. What is Ethanol fuel / Gasohol? Pro-argument Anti-argument Gasohol system in India and abroad Whats the problem? Solution

What is Ethanol fuel / Gasohol? 1. When Ethanol is mixed with petrol, such fuel is known as Ethanol Fuel / Gasohol (=Gasoline + Ethanol). 2. It can be used with no modification to the vehicles engine. (if concentration of ethanol is upto 10%) 3. Almost all vehicles of US and Brazil, use such ethanol fuel. Pro-arguments for Ethanol Blending 1. decreases a nation dependence on foreign oil. 2. Reduces the carbon monoxide emissions by up to 30 percent. 3. Cleaner air means healthier people, especially those that suffer from respiratory diseases. Mortality rates will decrease, health care visits will decrease in number and severity, 406

4. 5. 6. 7.

health care costs will decrease, and productivity will improve as absenteeism and performance is improved. Gasohol is typically cheaper than petrol as it is cheaper to manufacture. (just like adulterated milk minus negative effects on health!) India is the fourth largest producer of ethanol in the world. By blending petrol with 10 per cent ethanol, 80 million litres of petrol could be saved annually in India. Ethanol production = Higher sugarcane price = Rural prosperity. Ethanol blended petrol cleans the car engine over time, by dissolving the harmful deposits and dirt from pipes and chambers.

Anti-arguments against Ethanol Blending 1. Ethanol is derived from Sugarcane, corn, sorghum. Ethanol blending in petrol, increases the demand and ultimately the price of these crops. + indirectly increase fertilizer, pesticide prices= Food security problem in India. (however not really a problem because Indian Government has proposed only 5% blending, unlike Brazil where it is 25%. Besides, In India, ethanol is mainly derived by sugarcane molasses, which is a byproduct in the conversion of sugarcane to sugar. Therefore, ethanol does not compromise on the food security front.) 2. It is not really Eco-friendly! While growing corn, sugar or shorgum, those plants absorbs CO2 from the atmosphere and then release it when consumed as ethanol (in petrol). So, you might think that ethanol is environmentally neutral. But a life-cycle analysis claim that when you calculate the the CO2 emissions in plowing, planting, applying fertilizer, 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. Gasohol system in India and abroad

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.

Whats the problem?

Ethanol is produced from molasses. Molasses is a by-product in sugar mills. At present, the government has made provision that Oil companies should buy ethanol @ the price not more than 27 per litre, and mix this ethanol with petrol. But, Sugar mills prefer to sell molasses to alcohol manufacturers because it gives them more profit. =less raw material available for ethanol manufacturing. So, if Government wants to implement compulsory 5% blending, then Oil cos would need to import atleast 200 crores of ethanol from abroad, every year. This would disturb the delicate balance of retail petrol pricing (if they cant import ethanol at reasonable price). 407


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!

Ref 1. 2. 3.

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[Economy] Cheque Truncation System (CTS-2010): Meaning, Advantages explained 1. 2. 3. 4. 5. What is cheque clearing house? What is MICR code? What is Cheque Truncation System (CTS)? What are the benefits of Cheque Truncation? CTS-2010

What is cheque clearing house?

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.

What is MICR code?

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.

What is Cheque Truncation System (CTS)?

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. 409

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.

What are the benefits of Cheque Truncation?

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.


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:

upgrade your banking infrastructure according to CTS 2010 guidelines, before the end of Sept. 2012 so that UPSC may ask a question on this topic. Whenever we do something, our prime objective is not to improve the economy but to harass the UPSC aspirants.

Branch manager of Lena Bank:

indeed, whaat an idea sir-ji

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[Economy] Bretton Woods and Fixed Exchange Rate system : Meaning Explained I had posted this article somewhere in April 2012 but because of a technical glitch this article (and many other articles on economy) got wiped out of the server. So here Im re-posting the same article. If you had already read it, no need to read again because Content has not been changed. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. What is Bretton Woods? Why is important? Result of Bretton Woods Main Players in this Conference Impact of World War II on Economy Agenda of conference Fixed Exchange Rate system. Roosevelt Vs Mohan: Fast forward to 1970s Inflation and Gold Prices Do we need Bretton Woods?

While reading newspaper columns about global economy or Eurozone crisis etc. you may have come across a sentence, multiple times : we need another Bretton woods. so, What is Bretton Woods? 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

Result of Bretton Woods

1. IMF
o o

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.


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.

Main Players in this meeting

Total 44 nations participated, but Main players were: US President Franklin D Roosevelt UK Prime Minister Winston Churchill Lord John Maynard Keynes, Famous economist, UK treasury advisor.

India @Bretton Woods

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.

Back to the topic, Impact of World War II on Economy

Second world war started in 1939, ended in 1945 There is large scale bombing and destruction in the world. Production has declined. Agriculture, Dairy, Manufacturing, Export- everything is brought to standstill=huge inflation

Agenda of conference

Help rebuilt the World Economy. Provide money, loan, finance to needy nations. (World Bank) After WW2, 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)

Fixed Exchange Rate system. What is Fixed Exchange Rate System?

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. 412

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.

Roosevelt Vs Mohan: Pegging the Currencies (Fictional, technically incorrect, imaginary) President Roosevelt: ok I say we put fixed exchange rate system. Lets fix the rates that 40 Rupees will equal to 1 dollar. 15 Yens will equal to 1 dollar. 12 Pounds will equal to 1 dollar and so on. In short, Im pegging your currencies to US Dollar. Thus Dollar will be the international reserve currency. AND Your countrys RBI (central bank) will make sure these exchange rates dont fluctuate more than 1% from these values. Mohan: ya man, but what if the exchange rate fluctuates? for example, What If I start running my country in a totally pathetic and irresponsible manner and hence nobody wants to invest in India so supply of dollar is low but demand of dollar is high- because Indians love gold and weve to import crude oil and pay in dollars. In short, this will fluctuate the exchange rates between Dollar vs Rupee. President Roosevelt: Let me ask you a question. Suppose Onions are selling 100 rupees a kilo because of low supply but suddenly farmers produce fresh new 50 million tonnes of onions and supply it to market, what will happen? Mohan: Easy! Onion Price will drop down to 40 rupees a kilo because the supply has increased. President Roosevelt: yes dude, the same way, whenever exchange rate fluctuates from our standard rate, youll tell your RBI to supply dollars from its own forex reserves in to the market to calm down the demand and bring the rate back to normal level. If the reverse happens: (Onions are selling @ 2 rupees a kilo) then you tell your RBI to buy all Onions dollars using its own rupees, until the supply is reduced and price is back to normal. Mohan: What nonsense is this? If 40 rupees equals 1 dollar but then what does 1 dollar equal to? What is the value of your own dollar? Why should we accept your dollar as international reserve currency? President Roosevelt: 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? What will we do then? 413

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 World War, 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 When 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 call-center boss may give you free lunch and coffee because $1=60 rupees but next day when value of rupee declines and it is $1=50 rupees, same boss will even stop running the water-cooler in your office. Third day when $1=40 rupees, He will just kick you out because outsourcing generate that much profit for him. Such uncertainty, is not good for economy. And since Gold is in limited supply, Dollar will be spent carefully, and so your currency will be in spent carefully. i.e. Since currencies are pegged, you will not indulge in extravagant spending in subsidies, welfare schemes, tax-reliefs or debt-waivers to farmers. This ensures fiscal discipline => That ensures less Fiscal deficit = less inflation. Mohan: Mr. President Sir, I think I got the point now. Ill tell my RBI Governor here to sign the Bretton Woods agreement papers, because fixed exchange rate system sounds safe and good. Fast forward to 1970s

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.

Inflation and Gold Prices 414

Fact: War leads to inflation Fact: Inflation decreases the value of your money. Fact: Gold becomes more expensive because of Inflation. US still kept fixed value of 35 dollars = 1 ounce of gold. But thanks to this inflation, Gold is trading at higher price in open market 40 dollars per ounce. So there is an opportunity to make quick money, just tell the RBI manager to take suitcase full of dollars from 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 Vietnam 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. What 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.

Do we need Bretton Woods?

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. 415

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 Woods. 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.

Then what to do?

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.

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[Economy] 2G scam, Spectrum refarming, Sistema controversy, Allocation of Natural Resources explained 1. 2. 3. 4. 5. What is Spectrum? Method #1: First come First Serve basis Method#2: Auctioning method What happened in 2G scam? Swan Telecom(Shahid Balwa) 416

6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Unitech (Sanjay Chandra) A.Raja (Telecom Ministry) Kanimozhi Neera Radia CAG: 1.7 lakh crore loss Supreme Court verdict Presidential reference on SC verdict Supreme court on Presidential Reference Impact of License Cancellation by Supreme Court Sistema Russia issue Spectrum Refarming

Continuing the series of technically not-so-correct articles on economy. What is Spectrum?

Whenever you watch TV, receive phone call, send SMS, surf 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.

Based on the width of the highways, we classify them into following Cable TV 2G 3G 145-860MHz 800-1900MHz 2100MHz

4G, broadband internet 2300MHz (^numbers for illustration only. Different websites will give different numbers.)

So, We first send the truck from Abad to a Satellite hovering in the sky, and from there, send the truck to Mumbai. 417

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 Vodafone, 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) 2. Pay rent/toll for using this highway (spectrum). Just like you pay for using Bandra-Worli sea-link or Yamuna Expressway. Solution Apply to Department of Telecom. Get loan from SBI.Pay the money to Government. Or even better, bribe minister so they give free spectrum.

Highways have fixed capacity. So Government cannot give license to 500000 truck-drivers else, itll create traffic jam. So, From Governments side what should be the ideal solution? 1. Check the application of driver: does he have previous experience of running telecom business? and more importantly his class 10,12 and college marksheets and school leaving certificate. 2. After verifying his record, Sell the access to this highway (Spectrum). Another problem: how should Government sell access to this Highway (Spectrum)? Ans. Two methods, 1) first come first serve 2) Auction. Both have their advantages and problems. Method #1: First come First Serve basis

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!

anyways, for common men:


1. Buying ticket=not crime. 2. Buying ticket but not watching movie AND selling that ticket to third person @higher price=crime. Method#2: Auctioning method

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. So overall effect on economy= may not be good.

What happened in 2G scam? Recall that you needed two things to run telecom business 1. Drivers license 2. Access to Spectrum (via paying the money to Government) Government decided that 1. We will give license by First come first serve basis. 2. To get this license, youll have to apply before 1st October 2007 and pay money (Entry Fees) for license. 3. And whoever gets the license, he will automatically get spectrum for free. So no need to pay separate money for accessing highway(spectrum). This is known as Spectrum linked with License. 4. If we give you the licence (+spectrum), then youll have to cover 10 per cent district headquarters within the first year of the allotment (i.e. you start serving customers in that area). This is known as Roll out Obligation. And then, what happened next, is a classic case of cinema ticket black-marketeering. Swan Telecom(Shahid Balwa)

A new company, it had no experience of running telecom business. Yet it applied for license and got it. (officially) SWAN telecom paid about Rs.1,500 crores to Government, as 2G Spectrum License fees. But this company did not open a single outlet/mobile tower. So it didnot meet the Roll out Obligation. It simply sold 45% stakes to UAEs Etisalat for around 6000 crore rupees. Calculate the profit%. Shahid Balwa was arrested in 2011, released on bail, thus proving that he is totally awesome. 419

His argument in the court, Since Mr Sibal and the PM have both said that there was no loss to the government from the allcoation of licenses in 2008, so Im being wrongly accused of corruption and conspiracy.

Unitech (Sanjay Chandra)

This company didnot have any prior experiance of telecom business. Yet, Applied for license, paid $365 million as licence fee to Government. Did not open any outlet/mobile tower. Then sold 60% stakes to Norways Talenor for $1.36 billion= huge profit without doing anything. Thus name of company changes: Unitech+Talenor=Uninor. Recall: bought the ticket, did not watch the movie and sold the ticket to third party @higher price.

A.Raja (Telecom Ministry)

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 SWAN)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.



DMK MP, Daughter of Karunanidhi. Shahid Balwa (SWAN) got benefit because of Raja. So he had to pay the bribe. He transferred Rs.200 crores to Kalaignar TV channel, which is owned by Kanimozhi and her step mom Dayalu Amma and other family members. Arrested in 2011, got bail in 2012, came back in parliament, thus proving that she too, is totally awesome.

Kanimozhi Neera Radia

Her Shawl is worth Rs.1 Lakh

There are some phone-tapes, in which this lady is talking with Barkha Dutt (NDTV fame). To put this bluntly, Radia allegedly paid money to Congress party, to get Raja appointed as telecom minister. Then Raja could use the office to benefit particular companies in 2G auction (who had financed his posting). This phone scandal is known as Radia Gate. Only questioned, not arrested, and it is said that she wore a Kashmiri shawl worth Rs.1 lakh during questioning by Enforcement Directorate, so she too is totally awesome. Now that shawl has become so recognisable that Kashmiri shawl sellers have started referring to it as the Radia shawl and sales of it have shot up= good for economy, GDP increased.

There are some other players too- RK Chandolia, Siddharth Behura et al, but you get the ideathey too are totally awesome. CAG: 1.7 lakh crore loss

CAG Vinod Rai

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? 421

CAG says Government lost Rs.1.76 lakh crores, it has come to this figure, using extrapolations from

1. licenses were sold in 2008, @the MRP of 2001 2. The money received from 3G auction vs the money recieved from 2G license. 3. 2G Spectrum was allotted for free. (recall Government only asked for entry-fees for licenses. Spectrum was linked with License). 2G-Spectrum should have been auctioned. 4. Profit made by Swan and Unitech etc. through black-marketeering. Parliament -JPC In Feb-2011, Parliament Constituted a Joint parliamentary Committee to probe the 2G scam. No real progress so far. Supreme Court verdict


Subramanian Swami, filled a petition in Supreme court, regarding the irregularities in 2G Auction. The case went on, finally in Feb 2012, The Supreme Court cancelled 122 licenses issued in 2008, by A Raja when he was Telecom Minister. Supreme Court said, these licenses were granted in an arbitrary and unconstitutional manner. SC asked the Telecom Regulatory Authority of India (TRAI) to recommend a new process of allocation of licenses, along with guidelines for an auction of spectrum. Supreme Court has also ordered Government to finish the auctioning before Jan-2013.

Presidential reference on SC verdict

After above verdict of Supreme court, Government decided to get clarification, on whether should every natural resources (coal, gas, petroleum, water etc) be allotted through auction only. (although technically Spectrum is not a natural resource, it is generated because of man made satellites.) But, Mohan cannot just call any SC judge and seek clarification. A procedure has to be followed. Through Article 143 of the Indian constitution, the president can refer matters of public interest to the Supreme Court and seek their opinion. This is known as Presidential Reference. Here, first the Cabinet headed by Mohan approves a resolution that WE need to send presidential reference in this xyz matter. Letter goes to President of India, then he/she sends a new letter to Supreme court asking what should be done in this XYZ matter?

Supreme court on Presidential Reference


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. Impact of License Cancellation by Supreme Court Customers

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.


The reputation of Government =already down. So in terms of reputation theyve got nothing to lose. They make excuse that 1) 2G =Zero loss. 2) Since licenses were not auctioned = companies got them cheap = call rates were cheaper = public benefited from this. Congi Government also maintains that we merely followed the policy of NDA (BJP), i.e. spectrum was linked with license and first-come-first serve basis. So, if our seniors did brutal ragging on us in the hostel, then we too will continue the glorious tradition by brutally ragging our juniors. Anyway nobody is a saint when it comes to allotment of land, coal reserves, spectrum etc be it congress, BJP, state Government, union Government. because everybody needs truckload of cash to finance election campaigns. Now Government will auction some 2G spectrum in Nov 2012 and expects to earn around Rs.40,000 crores. And this money could be used to solve the fiscal deficit problem (click me) or to finance any new Government schemes for poor people.



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.

Innocent aspirants of competitive exams

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.

Sistema Russia issue

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

1. If the issue of cancellation of 2G license to Sistema is not resolved in Indian courts, we will go for international arbitration. (because Russian Government too holds about 17% in this Sistema-Shyam telecom company.) 2. Row over Sistema will have great repercussion not only on Indo-Russian bilateral cooperation but also for foreign investments in India. 3. We will not let Sistemas USD 3.1 billion investment in its Indian telecom venture go waste due to internal problems here. Spectrum Refarming

This is a separate issue, not directly associated with 2G Scam of A.Raja. In 2001, some companies got License + free spectrum (900 Mhz). (recall that Spectrum was linked with the license.) Theyve to renew their license in 2014. But now Government has changed policy. According to new policy, Spectrum is delinked from License. So youve to apply for license separately and you have to purchase spectrum separately (through auction). Telecom Regulatory Authority of India (Trai) has suggested that existing mobile operators will have to surrender the spectrum in the 900 Mhz band at the time of license renewal in 2014. And then, this 900 Mhz spectrum will be auctioned again. Under this so called Spectrum-refarming process, if the companies manage to win in the auctions, they will be able to retain the spectrum or, in lieu, they would be given the 1,800 MHz spectrum via another auction. Telecom companies are against this decision. Their argument, weve already invested more than one lakh crore rupees in machinery, mobile tower, other infrastructure for 900Mhz spectrum. If you take this away and give 424

us new type of spectrum, well have to buy new machines=well increase call rate price to cover the losses. The matter will now be decided by Empowered group of ministers (EGoM).

For more articles on Economy, visit the Archive-page

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[Economy] National Investment Board (NIB): Meaning, Functions, Anti-Arguments 1. 2. 3. 4. Infrastructure Bottlenecks? What is National Investment Board (NIB)? Functions of National Investment Board (NIB)? Anti-argument/Objections against NIB?

Infrastructure Bottlenecks?

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.


To extract bribes, the corrupt bureaucrats intentionally delay the files. But sometimes even honest officials delay the files because of media-sensationalization, NGO-lobbies, CAG-activism, judicial activism, R.T.I activismthey fear if some scam comes out and if their signature is on the approval file, then theyll get victimized or made scapegoats. So they too avoid taking decisions.

Because of ^these issues, 1. There is huge infrastructure deficit (=not enough rails, roads, power stations, electricity output required to get 9% GDP growth). 2. Delay in project= input cost increases= indirectly this leads to inflation (price rise) 3. Because files are not cleared= production/construction doesnt start= Less employment opportunities, directly (in the coal mine itself) and indirectly (in some xyz factory that will use that electricity). 4. Government is unable to achieve the Five year plan targets. Check this table: Source: Department of Economic Affairs.


What is National Investment Board (NIB)? Chindu has proposed to setup this National Investment Board.

At present, the final decision/decisions are to be taken by one or more ministries. This is the reason why a truly final decision does not emerge for many years, proposal files keep making merry go round from one ministry to another ministry. Therefore, the power to take the final decision should be vested in separate board. This would be called National Investment Board Basically its a cabinet sub-Committee, chaired by the Prime Minister + FM, Law Minister as its members. For granting/refusing FDI- approvals, there is already a Foreign Investment Promotion Board (FIPB). And it has lead to fast clearing of files and boosted investment. NIB will provide the same benefits, especially in the infrastructure sector. 427

Prime minister has talked about a new phase of reforms unleashing animal spirits. Hunting is a prime example of the latter and its high time we created a body that went out and energetically sought investment for India amidst an exciting global jungle.

Functions of National Investment Board? 1. At first, NIB will focus on clearing investments project of Rs. 1,000 crore/more in roads, mining (especially coal), power, petroleum and natural gas, ports and railway projects. 2. A dedicated secretariat (staff) will support NIB to identify and monitor key projects and sectors. 3. In the long run, NIB will serve as an arbitrator i.e. If a company feels that its applications for infrastructure projects has been delayed or even rejected by some Ministry or Department without sound reasons, then it can approach NIB for clearance. 4. NIB will be to take over the process of granting licences, permissions and approvals whenever the respective ministries fail to act in time. 5. Once the final decision is taken by the National Investment Board (NIB), no other Ministry or Department or Authority will be able to interfere with that decision or delay its implementation. 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

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. [Economy] Fiscal Cliff: Meaning, Reasons, Implications on US and Indian Economy explained 1. What was Subprime crisis? 429

2. 3. 4. 5.

What was US-Governments response to Sub-prime crisis? What is Fiscal cliff? Why is Fiscal cliff bad for US Economy? What will be the Effect of Fiscal Cliff on India?

Fiscal Cliff= new kid in the town. Before getting his introduction, lets meet his mom and dad. Youve already met his dad, Fiscal Deficit. If not click me. Now meet his mom, Subprime Crisis. What was Subprime crisis? Subprime crisis is also mother of all problems: LIBOR, Eurozone etc. (atleast partially). 1. Youre running a bank/Non-Banking Financial company that gives loans, and Im basically a loser who doesnt have the aukaat (capacity) to repay any loans. 2. Yet, You (American Bank) give me loan of $20,000, And I give you paper saying if I dont pay back, you can take away my house. This is mortgage. 3. Wait a minute, if I dont have the capacity to repay the loan, then why the hell are you giving me a loan in the first place? Well, Two reasons i. ii. 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.

Now, Back to the topic


4. Like this, you gave $20,000 loans each to 5 unworthy people= your investment is 1 lakh dollars. 5. Now repack those mortgage papers (security) in a new file and make a new security paper anyone who gives me $1,50,000, Ill give him mortgage papers of 5 houses = this is derivative product. (Because it derives its value from some other thing) 5. See? You are making profit of $50,000 and you dont even have to bother about EMI payments, interest rates anymore. 6. Suppose 3rd guy bought such derivative papers and after few months, he repacks themmakes another derivative product and sell it to 4th guy. 7. Such papers are one sort of asset (because you can get money by selling it to someone.) 8. but as you can see, in above cases, people are not creating any new asset, they just keep repacking and reselling same stuff over and over to different people. So youre blowing an asset-bubble. 9. After few months, I, the bottom guy in food chain, refuse to pay loan-installments (EMIs), and I tell the 4th guy to take away my house (mortgage). 10. Fourth guy takes away my home, but since banks gave loan to so many unworthy people, there is over-saturation or over-availability of houses for sale in the real estate sector. So no one is ready to pay you even $5000 for that house. = This is toxic asset your asset bubble is burst. 11. The banks, pension and insurance fund managers of Europe had also invested in this game. They also lost. So in that way, Subprime crisis played a role in future Eurozone crisis. Click ME 12. A bank of London named Barclay also lost money in this game, that led to LIBOR crisis. Click ME ^This is just a crude explanation of what happened in sub-prime crisis. Otherwise the actual crisis was result of many layers of refined and sophisticated loan and investment products interlinked with each other.

Anyways, the Sub Prime crisis had negative effect on every sector. Stock market crashed, Companies started dismissing local staff (especially those banks and mortgage companies). If parents were working in some private company, lost jobs or their salary was reduced= 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.


But why is it called Sub-prime crisis? If a person has full capacity to repay loan, we call him prime. Therefore Im subprime because I did not have full capacity to repay the loan, my credit rating was bad. Yet you gave me loan and ran into trouble= sub-prime crisis. What was US-Governments response to Sub-prime crisis? 1. US Government has things like Social Security, unemployment allowance, food stamps etc. to take care of those jobless families. 2. President Obama started some federal construction projects (roads, bridges etc.) to create employment. 3. Government also bought those toxic assets to rescue the banks. 4. The Feds (RBI of USA), decreased its lending rates so other banks could borrow at almost 0% interest rate from the Central Bank and then give cheap loans to needy people and businessmen. 5. Gave income tax cuts to workers. So they can save at least $1000 from their salary or profit. 6. Same way tax-benefits to private companies, If they invest money in researchdevelopment etc. ^President Obama took these steps to increase money in the hands of American people, so they can go out for shopping = demand of more products and services= more employment could be created. But of course, money doesnt fall from sky. 1. Giving tax-cuts to workers and companies= incoming money reduced for the Government. 2. Giving unemployment allowance to jobless people= outgoing money increased. 3. +daily huge expenses for keeping army in Iraq and Afghanistan= outgoing money already high.

You already know when outgoing money is higher than incoming money = fiscal deficit.


Fiscal deficit is a big pothole in the road to 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 What is fiscal Cliff?

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 433

What is Fiscal Deficit? 1. Fiscal cliff term refers to more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after 1st January 2013. 2. Many economists say these new taxes and spending cuts would be too much deficit reduction, too suddenly, for a weak economy. Itll lead to an economic recession. Why is Fiscal cliff bad for US Economy?

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.

If President Obamas plan is carried out, then 1. Middle class families of USA, will have to pay average $2000 more in taxes every year. And $2000 is a big amount given that many people in USA dont earn more than $40,000 a year. So imagine the reduction in their purchasing power. 2. Overall, American public will have to pay $500 billion more in taxes. 3. More than 10 lakh people will become jobless. ^These numbers vary from site to site, if its a pro-Republican party newspaper or expert- theyd say 20 lakh American will become jobless, but some other Pro-democratic party newspaper or analyst would say only 7 lakh will be jobless.

Anyways, The point is, American Households and businessmen are accustomed (used) to a certain way of spending and saving habits in past four years and Obama plan will break that status quo = not good for economy, at least for the short term. Itll lead to a decline in GDP. Observe this graph


What will be the Effect of Fiscal Cliff on India? 1. If American consumers have less money = they buy less= not good for Indian exporters (especially polished diamonds). 2. Many American companies outsource their research and development work to India, particularly pharmaceuticals (clinical trials of drugs), software, engineering. If Obama removes the tax-benefits given to them (+consumer demand already down)= theyll either delay payments, cancel or renegotiate the contracts given to the Indian companies. 3. If American Corporate have to pay huge taxes @home, and consumer demand is already low, theyll try to concentrate more on India and other emerging economies to get new customers (Retail, Aviation, Pension-insurance) = More FDI may come to India. 4. Americans already burned their hands in share-market and real-estate, if this fiscal cliff leads to recession, theyll park their money in GOLD = demand of gold increased= gold becomes even more expensive = bigger Current Account deficit for India (because we too love gold) = Rupee weakens against dollar, because when we import gold, weve to pay in dollars= weve to pay more rupees to buy same amount of crude oil = petrol price increase = inflation. For the entire Archive of all my articles on [Economy], visit this page: Ref

Googling here and there but especially thankful to Mr. Ken Wilson for his fiscal cliff graphs.


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. [Economy] Infrastructure Debt Funds (IDF), Withholding Tax, EPFO Angle: Meaning, Concept, Explained 1. 2. 3. 4. 5. 6. 7. 8. 9. What is Infrastructure? Why is Infrastructure important? What is the problem with Infrastructure? What is problem with Banks? Mechanism of Infrastructure Debt Fund Attracting investors What is withholding Tax? First IDF Why EPFO interested in Infra-Debt Funds?

What is Infrastructure? Things that are essential for functioning of economy: roads, sea-ports, airports, railways, metro rail, electricity-generation etc. Why is Infrastructure important?

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%).

What is the problem with Infrastructure?

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.) 436

What is problem with Banks?

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 currentaccount-deficit.) To achieve this, Government has come up with new idea = Infrastructure Debt Funds.

Mechanism of Infrastructure Debt Fund You already know about Debt Vs Equity, Shares vs Bonds, if not click ME In technically-not-so-correct term, Infrastructure Debt Fund (IDF) essentially means that 1. 2. 3. 4. You invest money in an IDF company. IDF company lends your money in some Infrastructure project company (as Debt). That infrastructure project company pays interest rate to IDF Company. IDF company gives that interest money to you. (after cutting its commission). Thus you make profit on your investment.

Tax Policy to Attracting investors By merely allowing creation Infra Debt Funds, Government cannot bring in the investment in infrastructure projects. Government also needed to give some benefit (carrots) to lure the investors. Finance Minister has given two carrots 1. Withholding Tax reduced from 20% to 5% (for foreign investors) 2. Money earned from IDF is exempt from income tax. (for desi investors) What is withholding Tax?

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.


First Infra-Debt Fund of 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.

Anyways, shareholding pattern is Member ICICI % 31

Bank of Baroda 30 Citi Bank LIC Total 29 10 100%

^there is no need to mugup, this is just for information. We can speculate that near future, SBI will also come up with something like this, to counter ICICI. Why EPFO interested in Infra-Debt Funds? Problem with EPFO

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. 438

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.


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

Q2. Find Incorrect Statement 1. The apex decision making authority for EPFO rests with the Finance Minister of India. 2. Withholding tax is an example of Indirect Tax a. b. c. d. 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. b. c. d. Only 1 Only 2 and 3 Only 1 and 2 Only 3


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[Economy] GMR-Maldives Airport Controversy, IFC, AAI: Meaning, Reason, Implications, Explained 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. What is GMR? Delhi Airport Management What is Airports Authority of India (AAI)? What is GAGAN? Male International Airport, 2009 What is International Financial Corporation (IFC)? Coup, Feb 2012 Singapore Court, Dec.2012 Indian Governments response Should India stop giving ca$h to Maldives? Should India be Assertive? Conspiracy Parts The Chinese angle The Crony Capitalism Angle The Rajnikanth angle The Funny Parts Mock Questions

What is GMR?

An Indian company dealing with infrastructure related business: airport Management, coal mining, highways etc. It operates the airports in Delhi, Hyderabad and Turkey. Grandhi Mallikarjuna Rao founded this company, hence the name GMR.

Delhi Airport Management

Delhi airport is managed by Delhi International Airport Ltd or DIAL. But that company created by partnership between GMR + Airports Authority of India (AAI) etc.

What is Airports Authority of India (AAI)?

Public Sector Undertaking (PSU) 440

It operates more than 100 airports in India AAI also works as traffic police of Indian airspace. (Air Traffic Management). AAI has undertaken GAGAN project with Indian Space and Research Organization (ISRO). So aircrafts are fitted with GPS, and AAIs command centre will monitor them via satellites for efficient traffic Management.

What is GAGAN?

GPS Aided Geo Augmented Navigation (Gagan). GAGAN GPS devices help pilot to fly in difficult weather, fog, tough terrains. They also help in efficient Air traffic Management= less fuel burned by aircrafts= less pollution.

Anyways enough sidetalk, back to the issue. First question: Why the hell would GMR want to run airport in Maldives? Well, for the same reason Ekta Kapoor makes Saas-Bahu serials= to make truckload of ca$h. When you own an airport, you can make money via 1. 2. 3. 4. Car Parking fees. Renting rooms to Jet-Airways, Kingfisher to run their ticket booths. Open or rent food-stalls, duty-free liquor stores etc. Charing money on airlines to use the air-strip, fuel refilling,.

Male International Airport, 2009


Second Question: why would Government of Maldives want to give away the airport Management to a private company?

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: Whichever 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.

What is International Financial Corporation (IFC)?

For that, weve to go back to Bretton Woods (CLICK ME). Bretton Woods conference led to creation of three organizations:

1. IMF 2. GATT->WTO 3. World Bank World Bank is made up of five organizations: Arm of world bank 1. International Bank for Reconstruction and Development (IBRD) 2. International Development Association (IDA) 3. Multilateral Investment Guarantee Agency (MIGA) 4. International Centre for Role Give loans @market rates to middle class and poor countries. Give loans @ZERO interest rate to poor countries. +knowledge sharing, health education etc. Loans and insurance to private companies, when they invest in Developing countries. To settle investment disputes between foreign investors 442

Settlement of Investment Disputes (ICSID)

and their host developing countries.

5. International Finance Corporation (IFC)

When foreign investor, wants to start business in developing country, IFC provides financing and technical advice and assistance, works as a catalyst. So, Aim of IFC= boost private investment in developing countries.

Anyways IFC was tasked to manage the bidding process for privatization of the Male airport to ensure fairness. Big players such as GMR, Reliance and other companies from Switzerland etc. were in the competition. The whole bidding process, checking applications etc. went on for 10 months (which is roughly the same time 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. Coup, Feb 2012

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 Waheed 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. 443

Singapore Court, Dec.2012

GMR took the issue to Singapores Arbitration Court. In December Supreme Court of Singapore ruled in favor of Waheed, that Government of Maldives has full right to terminate contract. Now GMR has hired best lawyers and theyre studying the judgement. They plan to sue Government of Maldives for $800 million dollars for the losses caused.

Indian Governments response

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.

Should India stop giving ca$h to Maldives?

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. Should India be Assertive? Some other experts say India has not been Assertive in its diplomacy, and that led to GMR fiasco. Now what is this assertiveness? Dictionary meaning: Aggressive self-assurance. Practical meaning: Mohan should call up Waheed and threaten him that


1. Ill stop or reduce financial and technical aids given to your country. 2. Ill also start bullying and harassing your companies working in India via Income Tax dept./CBI. 3. Ill start giving money, weapons and shelter to opposition parties, rebels of your country. 4. Ill increase taxes on goods imported from your country. 5. Ill hatch some conspiracy to get you out of office. (sting operation, buying coalition partners of Government.) 6. Ill order my state media, psuedo-civil society organization etc to bad mouth you in India and abroad about Human rights violation, corruption etc.

Traditionally US and Chinese Governments are very assertive almost aggressive when it comes to protecting their national and commercial interests. But it 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 Waheed 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.

The Crony Capitalism Angle

GMR is a shoddy company. It was unknown before 2000s. Suddenly it started making billions after getting Delhi-Hyderbad airport contracts and other plump highway, building and coal projects. There is nexus between Indian ministers and this company. GMR is charging Airport development fees in Indian airports also. (according to CAG report, this 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.

The Rajnikanth angle

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 Waheed 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.

The Funny Parts Indian banks money stuck (AGAIN)

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.)


ADC charge in India

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.

Tit for Tat/ Karma-Cycle

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

Q2. Which of the following, is a function of GAGAN? 1. Weather forecasting 2. Aiding pilots to navigate and land in difficult weather and terrain. 3. Aiding Air-traffic Management. a. b. c. d. Only 1 and 2 Only 2 and 3 Only 1 and 3 All of them

Q3. Which of the following is correctly matched? 447

1. International Bank for Reconstruction and Development (IBRD) 2. International Development Association (IDA)

Give loans @ZERO interest rate to poor countries. Give loans @market rates to middle class and poor countries.

a. b. c. d.

Only 1 Only 2 Both None

General Studies Mains Explain following terms (5 marks, 50 words each) 1. 2. 3. 4. 5. 6. International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) Multilateral Investment Guarantee Agency (MIGA) International Centre for Settlement of Investment Disputes (ICSID) International Finance Corporation (IFC) Applications of GAGAN

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?

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. [Economy] Capital Goods and Capital Gains: Meaning, Difference Explained 1. 2. 3. 4. What is Capital Goods? Examples of Capital goods? Why is Capital Goods important? What is capital gains?

Question from a reader: What is the difference between Capital Goods and Capital Gains? What is Capital Goods?

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.

Examples of Capital goods?

Heavy equipment (such as excavators, forklifts, generators, metal-forming or metalworking machines, vehicles). Chemical factory Ice-cream factory

boilers, storage tanks, evaporators Mixer, grinders, refidgerators

Dumpsters, bulldozers etc big vehicles Construction, mining industry.

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.

Why is Capital Goods important?


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. When 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

What is capital gains?

Capital gains= profit made by selling your capital assets. When you make profit by selling your capital assets, youve to pay tax to the Go vernment on that profit. That is known as Capital Gains Tax. (CGT) Examples of Capital Assets are

1. Land (but not the agricultural land) 2. Building Factory Plant and machinery. (except raw-material, or finished products) So when you sell capital goods discussed above, and make profit, then youll have to pay capital gains tax (CGT). 3. Shares, debentures, mutual funds etc. 4. jewelry, paintings, sculptures and other Archaeological collections. (from 2008 onward)

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

Q2. Which of the following are not Capital goods? 1. Wheat stored in a granary 2. Boiler in a chemical factory 3. Air-conditioner in a corporate executives office a. Only 2 450

b. Only 1 and 2 c. Only 1 and 3 d. Only 2 and 3

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[Economy] Banking Amendment Bill: Issues, Features, Problems, Reforms meaning explained 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. What is Banking Regulation Act? RBI Power #1: Can remove entire Board of a Bank RBI Power #2: Connected Lending Prevention RBI Power #3: Unclaimed Accounts Public Banks Issue#1: Need consolidation Public Banks Issue#2: Need more investment Banks issue #3: More voting rights for investors Foreign Banks Issue #1: Stampduty Foreign Banks Issue #2: Want to invest in Commodity Standing Committee problem Set: parliament 1. Parliament fight #1: Commodity speculation 2. Parliament Fight #2: Competition Monitoring: RBI vs CCI 12. Anti-Bill arguments Boring technical details intentionally skipped. I dont do Ph.D on current affairs, neither should you. What is Banking Regulation Act?

It is governs all public sector banks (SBI, PNB etc.) and private sector banks.(ICICI, HDFC etc.) in India.


Set : Finance Ministers Office Finance minister and RBI governor are holding a meeting. Chindu Yaar many new players want to open banks in India. But they cant, because youre not giving new licenses, So what is your problem? Well, 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 governor


RBI Power #1: Can remove entire Board of a Bank At present, if a Bank doesnt play by my rules, I can remove its CEO or one or two directors. But that is not enough. What if the whole board of directors is involved in some mischief. So, I want powers to remove the entire board of directors. I also want you to increase the rates of existing monetary penalties that I can impose on a bank if it disobeys my rules, directives or gives me false information. Ok agreed.Ill get you the powers to supersede boards of the banks if any irregularities.And Ill increase the penalty rates as well.Anything else? Second problem. Connected lending.


Chindu RBI

Chindu What is that? RBI Power #2: Connected Lending Prevention

Suppose Mr.Paraajay gets license to open a new bank. He opens Pawn-Fisher bank, people deposit their hard earned cash in it. Ideally, bank should lend this money to the home, car, education and business-loan seekers, who then pay interest and thus bank makes profit. Bank must make good profit, so It can pay 1) good interest rate to its bank account holders. 2) good dividends to its share holders. But Mr.Paraajay also owns another company, Pawn-Fisher airlines. And this airlines company is making losses. Mr.Paraajay gives loans from Pawn-Fisher bank to Pawn-Fisher airlines @very low interest rate, to fix the mess. And or, this Pawn-Fisher airlines gets the bank loan @market rates from the PawnFisher Bank but it doesnt pay EMIs regularly, yet the bank doesnt take any action. Similarly, Mr.Paraajay also opens Pawn-Fisher Mutual funds, but it also makes losses, and money is transferred from bank deposits to mutual funds, to cover up those losses. 452

These type of activities = Not good, because in long term, bank will collapse and depositors money will be stuck. So, I must be given powers to check the records and account-books of those mutual funds, insurance and other companies associated with a bank.


Agreed. Chindu youll get the power to inspect those other business arms of a bank. Anything else? RBI Yes, money from unclaimed bank accounts.

RBI Power #3: Unclaimed 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.


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.

Chindu Agreed. Anything else Yes one tea, two samosas and four more powers 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, 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.


Chindu All agreed. Anything else.


RBI Chindu

Thats enough for now. Ok then please leave my cabin and send the SBI chairman in. He too had an appointment with me.

Public Banks Issue#1: Need consolidation SBI chief Good morning Mr. Finance Minister. As youre aware, SBI is the largest public sector bank in India, weve more than 11,000 branches. Yet if you make a list of top 5 biggest banks of the world, our name doesnt figure.

Chindu Why is it so? This is because too many small public banks exist in India. So, the incoming-money (from people to bank accounts) gets fragmented in so many bank branches. Finally, we dont have enough cash, to expand in a big way.


Chindu Ok so what do you want from me?


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. PSU Banks Issue#2: Need more investment SBI Right now the Public Sector banks cannot issue shares worth more than Rs.3000 crores. I want you to relax this, because We need lot of investment.

Ok agreed. You can issue more shares, including bonus shares and rights issue etc. Chindu (already explained click me)But youll have to take permission from Central Government + RBI if you want to do it. SBI Agreed.

Banks issue #3: More voting rights for investors SBI Before moving on, I must thank you for allowing us to issue bonus shares etc. But that alone will not bring investment in public or private sector banks.


Chindu Why?


Because in shareholders meetings, voting is done on many issues (for example election of board of directors, changing name of company etc.). A shareholder should have voting rights proportional to the number of shares held by him. But in case of public banks, the shareholders have only 1% voting right irrespective of number of shares held. So they cannot heavily influence any Decision. I need you relax these voting rights. Only then foreign investors will be attracted to invest in Indian banks.

Chindu Agreed. Well revise the voting rights. Revised voting rights Voting rights (%) Bank Example Before After 26 10

Private sector HDFC, ICICI 10 Public sector SBI , PNB Chindu Anything else. SBI Chindu No this is all for now. 1

Then you may leave. But please send the chairman of Citibank in, he too had taken appointment and is waiting outside.

Foreign Banks Issue #1: Stampduty Chindu Ok what can I do for you? Citibank When I transfer my branches from the main company to the subsidiary company, I dont want to pay stamp duty. This should help me expand my business in India.

Chindu Agreed. Anything else. Citibank Yes there is one more matter Foreign Banks Issue #2: Want to invest in Commodity Citibank

Right now, the Banks can trade in shares, bonds and currencies speculation but the Banking Regulation Act forbids them from trading in commodities. 455

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. Standing Committee problem

After a bill is introduced in parliament, it goes to the Standing Committee of Parliament for particular subject. for example Banking Regulation bill to Standing Committee on finance. They inspect the bill clause by clause, put forward their recommendations. And then voting is done. In case of Banking regulation bill, after the parliamentary Standing Committee on Finance put its report, Chindu added some new provisions in it. so opposition parties got angry this wasnt part of the original bill, if you want to add new provisions, then this bill must be sent back to the Standing Committee for reconsideration.

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) Parliament fight #1: Commodity speculation Chindu What is the problem? Oppn. The share-market and mutual f