Thursday, August 30, 2007

Is using forex reserves for funding infrastructure too risky?

Yes, argues an ET editorial. Let’s take a look at it.

The government has directed RBI to invest $5 bn of forex reserves in the special purpose vehicle (IIFCL) floated for funding infrastructure needs of the country. The entity would fund equipment buys and investment by Indian companies abroad.

How far such a direction is tenable is questionable. RBI’s mandate of investments is drawn from Section 17 of the RBI Act. It allows investments only in gilt-edged securities with maturities less than 10 years, in bonds issued by other sovereign states and deposits with multilateral institutions. But government has argued that clause 13 of the same Section empowers the Central board to approve investments by RBI in foreign institutions.

Funding infrastructure needs out of our huge forex reserves is bad because, it is not lack of funds which is hindering infrastructure growth; it is lack of bankable projects. In such a scenario, funding the unbankable project through the use of the special purpose vehicle (IIFCL) will only result in the SPV not being able to service its bonds over a period of time and the all too familiar cycle of writing off of the bonds have to be lived with. This is nothing short of deficit financing.

On the other hand, if the projects are designed in a bankable way, then there is no need for them to use the SPV route at all. So this clearly brings out one thing – the accounting fudge being indulged in by the government; nothing more nothing less.

A better solution therefore is to moderate forex reserve growth through greater exchange rate flexibility; hiving of forex reserves management to a professional investment agency like China Investment Trust or Singapore’s Temasek, and simultaneously reduce policy waffle so that infrastructure projects get financed on their own strength.

So argues the ET editorial. But is the move really that bad? I don’t think so. Everybody knows that infrastructure needs of the country are very high. It is also a given that the country is on a growth path and is expected to stay the course in the medium to long term. This makes the prospect of securitizing the loans advanced by the SPV look attractive. Create an international market for such securitized assets; and I am sure it will whet the appetite of the international investors in the India growth story. Secondly, the proposed route is not much different from the method and manner in which the CIT and Temasek are investing for long. So, why should there be any objection? Lastly, is $5 bn such a huge amount when we are looking at $240 bn reserves? Why keep looking at only the downside all the time? Can’t we look at the upside? I think the fears are largely unfounded.

Tuesday, August 28, 2007

Hyderabad Bomb Blasts

A couple of you have written to me showing your concern for my safety in Hyderabad. But just as news broke about the bomb blasts, I was leaving the city on a two day trip to the interiors of Andhra Pradesh on a personal trip. I am pretty much safe and fine. But all through my trip, my thoughts rarely strayed away from the people who lost their lives. Many of us may be found wanting in expressing our regrets and grief. But not so experienced journos and other senior editorial personnel at the ET. Take a look at this excellent comment:

    • Indian politics today, is either about harassing Muslims for the sake of Hindutva, or pandering to retrograde impulses in the name of secularism. The abysmal record of our intelligence and investigation agencies, both in terms of preventing deadly terror strikes and correctly figuring out who the real culprits behind successful soft-target attacks are, is partly a function of such moribund politics.
      • If you were asked “Indian politics is the culprit behind the frequent terror strikes happening in India. Comment. (100 words)” You can’t have a better answer than the one above.

Similarly, if you were asked to suggest suitable remedial measures for tackling terrorism, I would rate the following paragraph as the best answer.

    • Community policing, which would ensure accurate intelligence gathering and water-tight and credible investigation, must immediately be institutionalised. But that would really work only when such dangerously sterile politics is replaced with a new politics that engages and transforms the Muslims into a modern social group, even as it cleanses the mainstream of all majoritarian and communal biases. Tough anti-terror laws are no substitute for effective and better-coordinated policing, which includes state and central authorities working together and sharing intelligence.

PS: I am sorry friends, if I am looking too businesslike in our approach to preparation. My heartfelt condolences to all those who have lost their near and dear in this mad act in Hyderabad.

Friday, August 24, 2007

Should Ronen Sen be recalled?

I am sure by now all of you are familiar with the ‘headless chicken’ statement that was made by the ambassador of India to the US while giving an interview to the press.

The politicians, especially the BJP and the Left were baying for his blood since then, citing breach of parliamentary privileges. His comments are seen as an affront to the elected members of parliament.

I am a bit surprised as to the venom that is on display even in the Press. While the Hindu has called for recall, today’s ET appears to have taken a more reasoned approach.
It argues for a thorough codification of what can be called the parliamentary privileges. Concepts like contempt of court and parliamentary privileges do impinge on the freedom of expression. Therefore, while their existence should be welcomed, there has to be clear cut guidelines as to when a person is deemed to have breached the privilege. Should omnibus comments like the one made by our ambassador be deemed as an insult? I don’t think so. Some comments made in today’s ET deserve an excerpt. Take a look:

Criticism of legislative functioning, especially when comes from quarters outside the legislature, serves to enrich democracy. The parliamentary system is no more than the best possible form that enables such deepening and broad-basing of democracy. To privilege this form over content would brush the original democratic project against its grain. Legislative privileges must be so defined that nothing save the most egregious actions – such as deliberately misleading the legislature – are deemed breach of privilege.

Thursday, August 23, 2007

Can the sub-prime crisis rock the international financial system? What role can central banks play in this?

We have been following the US sub-prime crisis for quite some time. I always wondered as to why Prof. TT Ram Mohan has not written on the subject for a long time. Here it comes today. And he seems to be grudgingly accepting (vindicating my stand) that the problem can be serious and perhaps pose some systemic risks. Though he did not say it in these words, this concern seems to be there somewhere back in his mind.

His article poses and answers two very good questions. Take a look at it here. In the process of knowing the answers, we can get our fundas right.

How could the sup-prime crisis rock the international financial system?

  • Banks are exposed to the sub-prime crisis not directly, but through derivative instruments known as CDOs. Hedge funds hold the riskier part of the CDO (Collateralized Debt Obligations) tranches. Their holdings of CDOs form a high proportion of their portfolios. As a result, hedge funds are extremely vulnerable to a problem in sub-prime mortgages. Because hedge funds are highly leveraged (meaning, they are able to obtain loans in the ratio of 20:1. That is for every dollar of rupee they bring in, they are able to obtain a loan of 20 dollars) a small drop in value of assets suffices to create bankruptcy.
  • The perception that a hedge fund is on the verge of bankruptcy triggers redemption calls from investors. Lenders too want their money back. This forces the hedge fund to liquidate assets. When this happens at several hedge funds, there is a wave of selling. Panic grips the markets quickly. Risky assets begin to get dumped as investors seek refuge in government securities. All of a sudden, assets become highly correlated. The risk management models that financial institutions use, compel them to reduce market exposures. This leads to more selling, more bankruptcies.

But is there any clarity as to the role that has to be played by the Central banks? He opines that there is a certain clarity.

o First, as long as commercial banks are not threatened, they must provide liquidity but they must not bail out insolvent institutions.

o Secondly, central banks must provide liquidity at an appropriate price. Anything less amounts to a bailout.

o Thirdly, central banks must not cut interest rates unless there is a clear indication that the problem is spilling over into the real economy. This is because, cuts in interest rates amount to a bailout of impudent investors and creates a moral hazard.

Is this all looking like Greek? Don’t worry, understand as much as you can and move on. If you have Economy and Finance as optionals, it is quite likely that a person like TT Ram Mohan may grill you in the interview.

Tuesday, August 21, 2007

On fertilizer subsidy policy

You can’t get a better dekko at well informed opinion on this subject than today’s debate in Perspectives column of the ET.

Take a look at “How can India reform its fertilizer policy?

After reading it, you may find that the following excerpts will perhaps work as reminder points to you when you want to review/reformulate your opinion on the matter:

Some facts about the subsidy amount

  • The subsidy bill for 2006-07 which was budgeted to be Rs. 17,253 cores has actually turned out to be Rs. 22,452 crores. Business sources say, it might actually be Rs. 30,000 crores.
  • For 2007-08, this is expected to touch an amount of Rs. 50,000 crores.

Research has shown:

  • That almost half of the fertilizer subsidy goes to the fertilizer industry rather than to farmers.
  • The marginal returns of government spending, are lower than for other sectors like agriculture R&D, rural roads, rural education or irrigation. What this means is that for every additional rupee spent on fertilizer subsidy, the returns are very low – at only 0.53. Such returns from other sectors are: agriculture R&D (6.9), rural roads (3.2), rural education (1.5) and irrigation (1.4).

One argument about the nomenclature

  • It is a misnomer to call it a subsidy. The difference between the sale price and the production costs is being funded to the fertilizer industry. It is wrong to term it a subsidy.

If we want to continue with the existing system of subsidy, to retain it at present level, the MRP (Maximum Retail Price) needs to be raised by 42%.

Today, farmers are applying only those fertilisers that are being subsidised by the government; the industry is producing only such fertilisers as are covered under the “subsidy” without giving a serious thought that our soil needs micro nutrients and secondary nutrients along with nitrogen, phosphate and potash to achieve better results.

Overnight Index Swap

One of you asked me through the shout-box to explain about this. Here I go.

Before we go on to learning a bit about this concept, let us first take a look at what a swap is in the first place. Traditionally, it is the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rate swaps. If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates. That is they exchange their interest rates with one another.

There are a number of swap contracts that can be entered into by two parties. Basis Rate Swap, Bond Swap, Commodity Swap, Credit Default Swap, Currency Swap, Interest Rate Swap, Non Deliverable Swap - NDS, Swap Spread, Total Return Swap, Variance Swap, Volatility Swap etc. You can get to know about each of them from the Financial Dictionary.

So in a swap, you exchange (swap) what you have with another one that is possessed by the counterparty to the contract. Now, let’s look at Overnight Index Swap. It is an interest rate swap involving a fixed rate being exchanged for a published index of an overnight reference rate. Usually there will be an independent third party which calculates the index of the reference rate. The OIS provides a flexible hedging tool for banks and corporate treasurers.

Sunday, August 19, 2007

Should reservation for SMEs to be done away with?

Backward march on SMEs, says today’ ET editorial. Is it?

The paper took strong objection to the proposal of the government, which seeks to give a legal backing to the existing price and purchase preference available to micro and small enterprises.

At present the government has reserved 358 items for exclusive purchase from registered small scale units. They also have a 15% price preference in case of items manufactured by both SSI and large-scale units.

It says that this step is retrograde for the following reasons:

  • It discourages scale economies and in the long run compromises their competitiveness.
  • The idea runs counter to the intended progressive de-reservation of small-scale sector.
  • As the list of items reserved for manufacture by the SSI sector has been pruned from 900 in the late 1990’s to about 114 now, it implies that a large number of the 358 items reserved for exclusive purchase from the SSI sector are competing with the large private companies.
  • The 15% purchase preference enjoyed by the SSI sector is unlikely to make them competitive vis-à-vis the larger players who enjoy scale economies.
  • In globalizing world, it has become increasingly difficult for shielding the SME sector from imports in the domestic market.
  • The idea that SME sector needs to be enabled to compete with large players is flawed in the first place.
  • When market principles have delivered a vibrant SME sector in advanced countries, there is no reason why that should not happen in India.

What is needed is that SME sector is not disadvantaged in anyway in terms of access to market, technology, credit and research.

While very cogent and persuasive, the above line of argument is flawed.

Even advanced countries like the US have some sort of reservation for the SME sector. Thinking that pure market dynamics have delivered a vibrant SME sector there, is not correct. True, there are factors other than reservation that enabled them to be vibrant. Of the two prongs of the approach that are required for delivering a vibrant SME sector, reservations is the easiest. When this easier approach itself has not delivered the results for this long, expecting the other alternative – that of ensuring market access, technology, credit and research etc., to deliver is nothing but wishful thinking. Do we have an alternative mechanism that grants access to markets, technology, credit and research to SME segment? Without such a tool or mechanism, why should the existing one be given up?

Nobody can understand our culture, ethos and capabilities better than ourselves. So, why should we keep importing solutions to our problems? Those solutions may or may not work. Why should we keep forgetting solutions architected by our own economists, leaders and people? Even after six decades of independence, what Gandhiji said remains relevant – that India lives in its villages. A natural corollary to that is the better deliverance capacity of dispersed manufacturing/wealth generating capacities over large scale manufacturing behemoths. Encouraging them would ensure a more rapid percolation of economic growth benefits than large scale industry.

Giving a legal backing to the reservation of certain items from SSI sector should not be seen as a retrograde step.

Wednesday, August 15, 2007

India @60

Today’s ET has so much to read and write from on our Independence Day. One should at least take a glance at some of the excellent content that is posted on India Empowered – Young at 60.

I found that some thoughts expressed by beloved our PM need excerpting in our blog. So, here we go:

  • The idea of India, of unity in diversity, of openness and inclusiveness has withstood the test of time and history and is our great contribution to humankind these past 60 years.
  • In the first three decades of Independence, we grew at 3.5% per annum. In the second three decades, our annual growth rate went up to nearly 6%. In the past few years, the growth rate has been close to 9% per annum. This has been made possible by a rising rate of investment, now at around 35% of national income, and rising productivity of labour and capital. If we can sustain these rates, and step up the productivity of land labour, we should be able to attain double-digit rates of growth in the near future. India is on the move.
  • In the past 60 years, people moved to where work was available; in the next 60 years, work must move where people live.
  • While our democracy is our great strength and a unifying force, we must not allow it to become an excuse for not working together in the larger national interest.
  • Indians have proved that individually they can excel and compete with the best in the world. We must be able to do so collectively too.
  • To overcome the many challenges we face – developmental as well as social, domestic and external – we require at least a minimal consensus on a national agenda.

Monday, August 13, 2007

Attack on Taslima

The attack on Taslima Nusreen, the exiled Bangladeshi writer living in India, on her recent visit to Hyderabad to release a Telugu translation of her book exemplifies an attack on liberal values and the growing insensitivity towards discussion and debate. This is substance of an excellent article written in today’s Hindu. Take a look at the full article here. I give below excerpts/notes from the article for our record.

The article outlines three instances of such intolerance for discussion and debate. The first of them is the vandalism perpetrated by VHP activists of a painting exhibition in Vadodara. The second is the intolerance displayed against the remarks made by a Political Science lecturer in Hyderabad, during a class while discussing Salman Rushdie. The third is the attack on Taslima Nusreen, again at Hyderabad.

All these attacks make us ponder about the following three trends that are emerging.

The first is that the governments’ muted reactions to the instances of intolerance convey a message that political vote-mongering is more important than any respect for individual freedoms.

The second is that the idea of ‘hurt’ religious sentiments are playing a larger part in imposing restrictions against the freedom of speech, much beyond those that are sanctioned by the Constitution.

Finally, the scant respect for the processes of the Constitution seems to be getting silently accepted. In spite of professing allegiance to the Constitution, the MLAs involved in the Taslima Nusreen attack were shown in the media as considering their religion to be above the Constitution of India.

Friday, August 10, 2007

Replies to Shout-box discussions

Here are my replies to some of the shout-box queries that I couldn't answer because of my tight schedule during the last couple of days.

9 Aug 07, 21:33
never0: what is combustible ice mean??

It is colloquial name given to Methane hydrate. It is natural gas frozen inside a crystal lattice of water. It is reported that about 164 cubic meters of natural gas can be released from one cubic meter of methane hydrate.

9 Aug 07, 16:53
Rishi: Where does the sultan of brunei stand among the richest men

As per the latest info available in Wikipedia, he tops the list of Heads of State by networth with about $30 bn.

9 Aug 07, 15:59
Rishi: What is the differnce between insurgent , militant , terrorist ? Its slightly out of the line of the discussion , but I felt like asking..

Nothing but semantics. During our independence struggle, two streams of people fighting for the same cause was discernible. Those that believed in armed struggle and those that believed in peaceful struggle. There is no such distinction between militants, insurgents and terrorists. All are the same. It all depends on how we portray them. Nevertheless, I will risk an explanation as below:

The thing that goes on in our North East is usually termed insurgency. Our own people, convinced as they are that they are getting a raw deal from the government revolted against the government. This is insurgency.

A militant is on the other hand one who holds militant views. For instance, all sorts of leaders now agitating in J&K can be called militants though some of them may be insurgents and terrorists. Those that believe in the political process, but yet hold extreme views can be called militants. I am sure many would disagree with such a view. One other word that can be used to describe such people would be 'extremists'.

The terrorist is one that is just trigger happy to achieve his short term gain. I am sure you get pictures of Taliban or the people indulging in reckless killing of innocents in J&K, Assam etc.

Arguments can be there about it. But as I told you, this is my version of the explanation.

9 Aug 07, 10:03
kushagra: The Sasan power project has been awarded at Rs 20,000 Cr of course.But that 'll include sufficient profits to be raised by RDAG.Rs 20k Cr , therefore is project cost to Govt and not investment of RDAG
10 Aug 07, 10:02
kushagra: I am sorry for the hasty comment made on Sasan Power SPV! The news was rightly presented.

Very well taken Kushagra. I would like to add one more thing; let not 'profit' be a dirty word. Nobody does or can't do anything out of charity all the time. An element of profit -- whether in monetary terms or in some other form will kick in sometime down the line. Even if we assume for a moment that the Communist logic of equity through distribution is to be accepted, there has to be something to distribute in the first place. For that something to be in place, wealth should have been created. Nobody can be expected to create wealth without being allowed to atleast owning a part of it. So, nothing wrong if Anil Ambani makes his billions by investing. It is for the government and the society at large to ensure that he doesn't shortchange them in the process.

9 Aug 07, 05:36
chenna: why bill gates is not a richest person. what is the reason behind it?

Because Carlos Slim has overtaken him in wealth creation. As agasint Bill Gates' fortune of $58 bn, Carols Slim has amassed a wealth of $59 bn according to Fortune magazine. This magazine's ratings incidentally are widely treated as realistic estimates.

Thursday, August 09, 2007

What do we need to know about the Novartis case decided by the Madras High Court?

The media has reported just a few days back about the Madras High Court striking down a case filed by the pharma major Novartis about India’s patent regime not being compliant with TRIPS regime of the WTO. Novartis being a Swiss pharma major and that too when a Swiss dignitary was visiting India, there was all round expectation that the Swiss authorities would pressure the Indian government on behalf of Novartis. But no such thing happened and the very next day the Union Minister of Commerce and Trade Mr. Kamal Nath was clarifying that no other country has a grouse against India’s Intellectual Property Regime. The visiting Swiss federal councilor Doris Leuthard was also quoted as saying “We have to accept the settlement and the Swiss government never engages itself or questions any judicial announcements.”

What exactly was at stake in the case?

Novartis manufactures a drug called Glivec, which is used for treatment of cancer. It was granted patent for this by India in 1998. At that time India did not have product patent regime. It was having only a process patent regime. The product patent regime came as a result of our acceding to the IPR of the WTO. At present also India’s patent laws do not prohibit a company from getting patents for incremental innovations, if the drugs enhance efficacy. The patent granted to Novartis in 1998 will be valid till 2018 i.e., for a good 20 years. If it keeps making enhancements to the drug decade after decade, there is a possibility that its patent can keep on getting extended – a process derisively called ‘evergreening.’

The government of India is trying to publish clear guidelines as to what constitutes ‘enhanced efficacy’ of drugs. This is expected to help the patent examiners distinguish between what constitutes genuine incremental innovation and ‘evergreening.’

By going to court what Novartis was trying to do was force the making of laws by India which would recognize incremental innovations per se. The Madras High Court has rightly ruled that a court is not the forum to decide such issues and that the company has to approach the appellate tribunal for patents and plead its case.

UPDATE: As this is an important issue from every point of view, you should also be looking at experts' opinion. Take a look at it here. This debate is about granting patents for incremental innovation.

Wednesday, August 08, 2007

Is de-population a threat or an opportunity?

India and China have been at the forefront on containing population growth. The latter was more successful than the former. But of late a different kind of thinking has permeated the collective consciousness at the higher levels in academia and bureaucracy which argues that population growth should not be seen as a negative sign but that the demographic dividend has to be harnessed properly.

Alok Sheel is a rare bureaucrat who keeps writing excellent and well researched articles on diverse subjects in ET. He argues that the long-term threat to the human species may well be from de-population rather than overpopulation. Read the full article here if you have patience. The impatient can have a look at a couple of excerpts from it below.

He says that the population scare in developing countries was actually generated by the Club of Rome (a global think tank that deals with a variety of international political issues) and scholars like Paul Ehrlich. It was preceded centuries ago by something similar in Europe. As Europe entered the first stage of demographic transition, characterized by a sharp fall in death rates consequent on rapid improvement in public health, Thomas Malthus argued that human population growth would soon outstrip food supply, leading to catastrophic adjustment through war, famine and pestilence. But this did not happen as productivity growth exceeded population growth. Scholars like Ester Boserup argued that population growth provided the creative impulse that boosted agricultural productivity.

The second stage of demographic transition is marked by a sharp decline in poverty, rising living standards and female literacy. It is likely that most developing countries would gray at a far lower per capita incomes compared to the OECD countries. This would constrain the former’s capacity to transfer incomes to cope with ageing related crises in welfare.

Food supply continues to outstrip population growth. Unsustainable growth has less to do with population growth than with the consumption benchmarks set by the rich countries. As the ageing and welfare crises in the developed world unravel, migration can be expected to increase sharply, equalizing the global demographic structure over the long-term.

In the end, ageing and depopulation can have two possible consequences:

  1. On account of the strong correlation between affluence and ageing, poorer countries will age later, and could become nodes of growth as more affluent societies slow down.
  2. As globalization has increased inequalities by increasing the rewards to capital relative to labour, ageing could reverse this equation. With asset prices falling, a growing number of retirees will sell assets to a shrinking base of workers.

Monday, August 06, 2007

Australian Group Chemicals

The Indo-US nuclear deal is paving way for greater access to dual-use materials and technology by the Indian industry. So the government is burning midnight oil to introduce stricter export-control regime to prevent proliferation of such materials from India.

In this context it would be interesting to know something about the Australian Group Chemicals. I excerpt below for you, from an excellent article that appeared in today’s ET:

This refers to the 63 chemicals that are identified by the Australia Group as chemical weapons precursors. Hence they need stricter licensing according to the signatories of this grouping. US is a participant in this group. India is not. The group members are signatories to the Chemical Weapons Convention, a treaty that binds nations to be transparent about the nature of chemicals produced by them. India has legislated a chemical weapons statute in line with this treaty.

The Australia Group does not impose any legally binding obligations on its members and believes that the effectiveness of its work depends solely on a shared commitment to the non-proliferation of chemical and biological weapons. It advocates easy-to-implement export-licensing measures that are effective in checking production of chemical and biological weapons without harming legitimate trade.

Friday, August 03, 2007

Relationship between CDS and sub-prime mortgage market woes

Take a look at what I was asked in the shout-box:

2 Aug 07, 16:37

deepak: sir , can you state the relationship between cds (credit default swap) rates and subprime mkt (mortgage backed security) which are hiking now a days in europe and U.S due to subprime loan breakout.

I am very happy to see a question like this being asked on our blog. It gives me great satisfaction that my readers are coming of age and are asking me questions which normally are expected of experts in the relevant field. Usually I come across such questions in specialized fora or symposiums held by specialists of the relevant area. Let’s be happy that we are all evolving into specialists in our own way. Here we go.

But before I explore the actual link between the two, let’s take a quick recap (for the benefit of the still uninitiated) of the terms – CDS and subprime mortage loans.

US sub-prime mortgage market

During the housing boom of the last five years, people with bad credit histories, many of who lied about their income and nature of employment, got mortgage loans they weren’t qualified for to buy homes they couldn’t afford. The problem can be gauged from the fact that a woman who was living on social security benefit of $1800 per month was given a loan of $9 million!!

The home prices have now stopped rising. So the house can’t be refinanced or sold at a profit. As long as the home prices rose, there is no problem in repayment. Rents rule usually high or you can always resell or transfer the burden of mortgage payments to an interested buyer. At least it helped in postponing a problem, than offering any fundamental strength to the mortgage transaction.

This leads to repayment default. With this, the US mortgage market will take a severe hit. So, any bank or investment fund having exposure to this sub-prime mortgage market is bound to lose money.

Credit Default Swap

A CDS is an agreement between a protection buyer (the bank that has given the credit) and a protection seller (a bigger bank that bets that payment will be received by the protection buyer) whereby the buyer pays a periodic fee in return for a contingent payment by the seller upon a credit event (such as a certain default) happening in the reference entity (this is from where money is to be received by the protection buyer). A CDS is often used like an insurance policy, or hedge for the holder of a corporate bond.

The relationship

Now, by the very nature of the CDS, its rates will go up when the likelihood of default increases. So all the investment banks that are likely to take a hit because of their exposure to the sub-prime mortgage market of the US, will see their credit default swaps impacted negatively. That is, when they want to insure their exposure to the sub-prime mortgage market with other bigger banks, the latter will surely charge a higher premium than what they have been hitherto charging. In other words, the cost of insuring against defaults will go up for the banks which have exposure to the sub-prime mortgage market.

So when you see a news item like “Sub-prime mortgage exposure pulls up Bear Sterns CDS” or something similar, what it means is that the credit default swaps that Bear Sterns would like to have with any other bank will become costly. Bear Sterns have to pay a hefty premium to the other bank to swap the credit default.

Wednesday, August 01, 2007

Answers to shout-box queries – 12

I lost track somewhere and stashed away these questions for answering later. I am coming out with my replies today.

21 Jul 07, 08:35

unni: what is NRF and RLGP in economics? pls help sir

I don’t know any RLGP. Perhaps you are referring to RLEGP.

National Renewal Fund and RLEGP (Rural Landless Employment Guarantee Program) are government schemes for different purposes. The NRF was meant for retraining or re-skilling the employees who have taken voluntary retirement from the government or public sector undertakings. It was introduced sometime in 1992.

The RLEGP scheme was in operation from 1998 budget or so. The name of the scheme says it all. It wants to guarantee employment to rural landless labourers. The intent is to ensure that they at least get gainful employment for about 100 days in a year.

20 Jul 07, 14:38

rehana: how do CII and FICCI fundamentally differ ( in aims ... objectives .. functions .. importance etc.)?

Both are associations of the corporate sector. There is no difference whatsoever that is visible to the general public. I would say that it is a question of politics. You forgot one more association that operates in the Indian space. It is the ASSOCHAM. We can also add the PHDCCI. This one is an association of corporates from the northern states.

All these are industry bodies. Membership can be obtained by corporates directly or indirectly through their own associations – which can be regional or sectoral. All they do is lobby with the government on policy matters. Of late, they have also been engaging top consultants to present their case before the government on policy formulation.

20 Jul 07, 14:35

rehana: what are problems of boundary management in public enterprises ?

Departmental functioning in PSUs is generally like functioning in silos or water tight compartments. Though the top mangements do try to implement some of the new and innovative management techniques they come across, in a government like setup, that often results in failure. In a PSU, usually while there is no agency problem (self serving interests of the management), there is a problem of ‘disinterestedness’ that permeates every level. People are sure that they would get their salary, whatever might be their performance either collectively or individually. This becomes the root cause of boundary management problem. Every department feels it is ‘supreme’ in its sphere of functioning and does not stay open for a ‘systems approach’ to functioning. This leads to weak team work and it does have a telling affect on the whole organization.

It does not mean that the organization will come to stand-still. It does function. But the functioning will be sub-optimal.