Finance

FDI : Important pointers

In 2010, larger format convenience stores and supermarkets accounted for about 4 percent of
the industry, and these were present only in large urban centers.
India's retail and logistics industry employs about 40 million Indians (3.3% of Indian population).
Retailing is one of the pillars of the Indian economy. The Indian retail market is estimated to be
worth US$ 450 billion and is one of the top five retail markets in the world by economic value.
India is one of the fastest growing retail markets in the world, with a 1.2 billion people market.
As of 2013, India's retailing industry was essentially owner-manned small shops.
Arguments for FDI
o It will cut intermediaries between farmers and the retailers, thereby helping farmers get
more money for their produce.
o It will help in bringing down prices at retail level and calm inflation.
o Big retail chains will invest in supply chains which will reduce wastage, estimated at 40
percent in the case of fruits and vegetables.
o Small and medium enterprises will have a bigger market, along with better technology
and branding.
o It will bring much-needed foreign investment into the country, along with technology
and global best-practices.
o It will actually create employment rather than displace people engaged in small stores.
o It will induce better competition in the market, thus benefiting both producers and
consumers.
Arguments against FDI
o It will lead to closure of tens of thousands of mom-and-pop shops across the country
and endanger the livelihood of 40 million people.
o It may bring down prices initially, but will fuel inflation once multinational companies
get a stronghold in the retail market.
o Farmers may be given remunerative prices initially, but eventually, they will be at the
mercy of big retailers.
o Small and medium enterprises will become victims of predatory pricing policies of
multinational retailers.
o It will disintegrate established supply chains by encouraging monopolies of global
retailers.

GAAR

The General Anti Avoidance Rule (GAAR) is an anti-tax avoidance rule, drafted by the Union
Government of India, which prevents tax evaders from routing investments through tax havens
like Mauritius, Luxemburg, Switzerland, etc.
Government appointed Mr. Parthsarthy Shome to formulate rules that would allow the IT
department to assess investments flowing in and going out of the country.
As per the GAAR guidelines, FIIs not opting for treaty benefits and ready to pay taxes will not
come under GAAR, but those who do opt for dual taxation avoidance agreements will come
under its purview.
Tax havens are countries that have low tax regimes which provide individuals and businesses
opportunities of tax avoidance or tax evasion.
There are roughly 45 tax havens in the world today.
In the Indian context, Mauritius is considered to be the most significant tax haven or tax-evading
route.
In more precise words, the Mauritius route can be described as a channel used by individuals
and Multi National Companies to evade paying taxes in India.

Rupee Depreciation

Reasons for decline of rupee vis--vis dollar:Dollar strength: The dollar index is up nearly 5 per cent this year on signs of growing economic
momentum and talk of an early end to the Fed's stimulus effort. Most global currencies have
weakened against the dollar including India's rupee
Weakness in domestic equities: The BSE Sensex has fallen nearly 4 per cent over the last week.
This is a hedging move as FIIs expect stocks (cash segment) to fall in the near term, traders say.
Demand from oil importers: India has to import crude oil to meet its domestic requirement. Oil
and gold imports account for 35 per cent and 11 per cent of India's trade bill respectively. Since
India imports more goods (in value terms) than it exports, it results in a huge imbalance in trade,
i.e. a trade deficit.
Gold imports: Gold is the second most expensive import for the country after crude oil.
Although India has become an attractive destination which can woo foreign capital as well as
money from non-resident citizens, it is not enough to make up for the trade deficit.
The country's current account deficit - a broader measure of the trade deficit - has also
ballooned due to the above reasons.
Capital Outflow- RBI reduced the limit for outbound investment and remittances from India.
Encouraging Capital Inflows- RBI has removed administrative restrictions on investment
schemes offered by banks to non-resident Indians, and removed ceiling on interest rates on

deposit accounts held by NRIs. The government liberalized the FDI limits for 12 sectors,
including oil and gas.
RBI increased the current overseas borrowing limit for banks from 50% to 100%, and allowed it
to be converted into rupees and hedged with the RBI at concessional rates.
RBI also allowed banks to swap fresh NRI dollar deposits with a minimum duration of 3 years
with the RBI.
Limiting Imports and encouraging exports- The Finance Ministry increased the customs duty on
importing precious metals including gold and platinum. 20% of every lot of import of gold must
be exclusively made available for the purpose of export.
RBI decided to provide dollar liquidity to three public sector oil marketing companies (IOC, HPCL
and BPCL) to help them meet their entire daily dollar requirements.
RBI allowed exporters and importers more flexibility in management of their forward currency
contracts.
Curbing Speculation in currency- RBI increased the short-term emergency borrowing rates for
banks.
International Cooperation- Government increased its currency swap limit with Japan from USD
15 billion to USD 50 billion.
The BRICS nations also agreed on a USD 100 billion foreign currency reserve pool as part of their
plan to create a BRICS New Development Bank. India will contribute $18 billion to this fund from
its reserves.

BTT

With several voices, including those of some BJP leaders, yoga guru Ramdev and even some
economists, pitching for abolition of all taxes and replacing them with a single banking
transaction tax, here is a look at the pros and cons of the proposed regime:
BTT is a tax levied on debit or credit entries on banking transactions made by any account
holder. Essentially, this would mean that each time an account holder withdraws from or
deposits money in his account, it will be taxed.
Ramdev and some BJP leaders want the abolition of all categories of taxes, except for customs
duty, and their replacement with BTT, which they claim will simplify the tax regime
Any tax should be on income or production in an economy. BTT is on neither and simply taxes
movement of cash by the same recipient. So it penalizes movement of money and consequently,
may impact the efficiency of the economy.
In the Indian economy, the total volume of bank deposits is about Rs 70,60,182 crores as per the
latest RBI figures.

To generate the current tax of Rs 24,71,740 crores (Center and states combined) from that sum
would mean a tax rate of close to 35 per cent across the board on everyone with a bank
account.
Even after taxing credit, it would need a 20 per cent flat rate of tax. It would be highly
regressive, subsidizing the rich at the expense of the poor. Schemes such as direct cash transfer,
where the amount of subsidy is directly transferred into bank accounts of beneficiaries, will be
the first casualty of this plan as the poor will pay a disproportionately high tax
Positive: The only advantage tax experts see is the speedy and transparent collection of taxes.
Negative: BTT envisages a ban on any cash transaction above Rs 2,000. This is not feasible as it
would require an army of inspectors even in a market the size of one decent mall. Since the tax
department will have no data to assess tax paid beyond examining bank accounts, there is no
way to track the parallel economy. For instance, if someone keeps bundles of cash somewhere,
he cannot be prosecuted in the new dispensation; this will encourage people to keep out of the
banking net.
Having such a tax would mean undoing what has been done so far towards financial inclusion.
Even now, only over 3 per cent of the population pay income tax and given the fact that the
penetration of banks in India is very low, having BTT will ensure that many taxpayers go out of
the tax net
The move will also lead to taxation of the agriculture income, hitherto out of the tax net.
Further, while the need of the hour is a stable and moderate tax regime, bringing in such a
regime would scare investors away.

Bitcoins

It is a type of alternative currency known as a cryptocurrency, which uses cryptography for

security, making it difficult to counterfeit.
Bitcoin issuance and transactions are carried out collectively by the network, with no central
authority.
The total number of Bitcoins that will be issued is capped at 21 million to ensure they are not
devalued by limitless supply.
Users store their Bitcoins in a digital wallet, while transactions are verified by a digital signature
known as a public-encryption key
The first Bitcoin specification and proof-of-concept was published in 2009 by an individual or
individuals under the pseudonym Satoshi
Nakamoto Satoshi left the project toward the end of 2010, leaving the motivation behind setting
up Bitcoin an enduring mystery.
Bitcoins are created through a mining process that involves complex number crunching by the
computers in this network; this process currently creates 25 Bitcoins every 10 minutes. The limit
of 21 million is expected to be reached in the year 2140, after which the total number of
Bitcoins will remain unchanged.

Disadvantages
o It is a complex product that is difficult to understand, making its widespread acceptance
doubtful.
o Since it is a virtual currency, it cannot be stored in physical form. As a result, if you have
not stored a backup copy of your Bitcoin holdings, your digital hoard can be wiped out
by something as mundane as a computer crash.
o Its anonymity has also made it a favored currency for illegal activities such as tax
evasion, smuggling and weapons procurement.
o Bitcoin prices are very volatile thanks to rampant speculation.

Fiscal Cliff

It is a US phenomena
It refers to simultaneous expiry of tax breaks and the introduction of tax increases and spending
cuts.
Tax breaks were a part of the quantitative easing and expansionary policies followed by USA
after the recession of 2008.
It was Keynes who first suggested that during GDP contraction, public spending will act as a
stimulus to economic development.
But, uncontrolled quantitative easing will inevitably lead to general price rise or currency
depreciation or both.
Therefore, financial cliff refers to the time when tax breaks will be rolled back. As the time for
financial cliff is coming closer, it has led to a panic situation in emerging economies but, the
timely retrieval of a proposal regarding the fiscal cliff saved the world economy from another
recessionary cycle.

Monetary and Fiscal Policy

Monetary policy is created by RBI whereas Fiscal is devised by Government

The purpose of Monetary is to regulated inflation on the other hand fiscal policy looks at the
growth chart for the nation
Certain tools that are used by Monetary policy are:o CRR: Cash Reserve Ratio
It is the amount of cash that has to be deposited by commercial banks with RBI
as reserves
o SLR: Statutory Ratio
It is a mandatory amount of liquidity that needs to be maintained with the
banks

o
o

RR: Repo Rate

It is the ratio at which commercial banks take loan from RBI
Here government securities are exchanged
RRR: Reverse Repo Rate
It is the ratio at which RBI takes loan from commercial banks
BR: Bank Rate
It is the ration at which commercial banks take loans from RBI
Here no government security is exchanged
Base Rate
It is the minimum rate with which commercial banks give loans to public