Friday, September 28, 2007

Answers to shout-box queries-14

28 Sep 07, 10:34

Sadananda: sir, i have asked earlier hw the value of Rupee is decided u said Market, Which Market & hw. tell me by example

Market, means the foreign exchange market operating in India. You don't see it in a physical form like the Bombay Stock Exchange. It operates in a nebulous way. The market participants in it operate through telephones/fax/telex/internet to conduct their trades.

If more dollars are on offer (for sale), the rupee will rise and vice-versa. The foreign exchange earned by various companies will have to converted into rupees; isn't it? So, they sell those dollars through their banks or directly. Similarly importers will be need of dollars, to pay for the goods and services they import from elsewhere. That is how there will be demand for various foreign currencies and Indian rupees.

But because the dollar is the dominant currency in which many countries prefer to operate their import/export transactions, it effectively works as the reserve currency. There are at least three other currencies which also occupy such a position -- the Euro, the Japanese Yen and the UK Pound sterling.

27 Sep 07, 23:37

neha: sir, what is banda chelva pact all about???

It is the agreement between Sirimavo Bandaranaike, the Sri Lankan Prime Minister and Chelvanayagam, the leader of the Tamil Arasu Katchi in 1957. It was about four major issues:

1. Federal constitution for Sri Lanka.

2. Parity for Tamil and Sinhala languages.

3. Repeal of citizenship laws which discriminated against Tamils in Sri Lanka.

4. Immediate halt to colonization of the Tamil homeland in Sri Lanka.

The Sri Lankan Prime Minister repudiated the agreement in 1958 itself.

See for more of it here.

27 Sep 07, 22:23

rishi: sir what is the meant by Indian Economy's fundamentals

I answered this already know? It is about growth in GDP, substantial domestic savings and having a low inflation. Buoyant taxes, reduced/decreasing deficits etc. We can also add the absorptive capacity of the economy as one more fundamental. If the economy is able to absorb more of capital for productive purposes, it is a sign of strong fundamentals.

Thursday, September 27, 2007

The Darfur Crisis

I came across an excellent articulation of the origin of this crisis from Jan Pronk, a senior Dutch politician and statesman who worked as the head of the UN Mission in Sudan (UNMIS), in today’s Hindu. It is worth a repeat. Do read the full interview here.

The seeds of this conflict lie in the historic, tribal, economic, ethnic and ecological dimensions of the problem that had been slowly unfolding over the years in Darfur.

Historically speaking, the borders of Sudan were drawn in the Berlin conference of 1892 at the behest of the colonial powers, with nobody from Sudan being even present there. Subsequently, the north of the country was administered differently and the south in another manner. And before that, the slave trade, dominated by the Arab constituents within the tribal identities, had created their own imbalances.

The baggage and legacy of all this laid the foundations for mistrust and power struggles, leading to the conflicts of the present day. And then progressive desertification, resulting in resource scarcity and economic hardships had been leading to tensions between the nomadic Arab pastoral tribes and the settled agricultural black African communities in the region.

The disgruntled rebels, representing the farming villagers, after continued inaction by the government to act on their behalf, attacked the Al Fasher airport in April 2003. This was the spark that led to unspeakable violence.

The Janjaweed militia, with the tacit and covert support of the government, retaliated and unleashed terror that borders on ethnic cleansing and even genocide. Villagers had to flee their homes to refugee camps, running away from rape, murder, torture, poisoned wells and burnt farmlands. There are now roughly two million displaced people in the camps and another 2,00,000 refugees in neighbouring Chad. The people in the refugee camps now live off international donations, whose continued inflow is not guaranteed within any legal framework. Conditions are difficult in these camps, and there is the risk of a whole generation losing out.

It is imperative that these people are restored to their homes and lands if they are too see meaningful lives again. The world has a great crisis on its hands.

Saturday, September 22, 2007

Implications of becoming a signatory to NPT

Signing the NPT would force India to forswear its nuclear option. Acceding to NPT means accepting the three basic principles represented by it -- non-proliferation, disarmament, and the right only to peacefully use nuclear technology. Can a country, placed as India is, sign the NPT? More so when the very foundations of the treaty are being shaken thoroughly?

In trying to comprehend the implications, it is very important for us to look at these three following questions:

  1. What made India not sign the NPT in the first place?
  2. Has anything changed between then and now?
  3. Or whether these changes have highlighted the necessity of our accession to the treaty?

India’s objection is that the NPT creates a club of "nuclear haves" and a larger group of "nuclear have-nots" by restricting the legal possession of nuclear weapons to those states that tested them before 1967. But the treaty never explains on what ethical grounds such a distinction is valid. Secondly, while China is recognized as a nuclear ‘have’, India cannot remain a nuclear ‘have not’.

These two objections are still valid even after 40 years of the existence of the treaty. Having been an ‘unofficial’ nuclear power since 1974, India had to bear the brunt of sanctions imposed on it by the US government and had to live with the non-cooperation of the developed world for a better part of the last 40 years on science and technology front. This, in spite of our stated policy of ‘no first use’ of a nuclear weapon against any country and an impeccable non-proliferation record.

If at all there is anything that has changed in between, it is that some of the official ‘haves’ and others have indulged in proliferation. US connivance cannot be brushed aside in Israel’s nuclear program. Nor can Russia’s with Iran and China’s with Pakistan. Israel (a non-signatory country) has actively assisted South Africa in the 1970’s. The latter is believed to have tested a nuclear weapon in 1979. But it has subsequently destroyed its entire nuclear arsenal and joined the NPT in 1991.

Now Iran has publicly breached the treaty saying that it is only conducting its nuclear program with a view to produce nuclear energy. The suggestion becomes laughable in the light of the fact that Iran has one of the largest reserves of oil (third largest) and natural gas (fourth largest) in the world. Moreover, enriched uranium can only be used in light water reactors. Iran doesn’t possess light water reactor technology. North Korea has publicly withdrawn from the treaty in 2003 and gone ahead and tested nuclear weapons in 2006. The US and four others are trying their best to resolve the impasse with North Korea still.

None of these events necessitate or usher India into signing the NPT. So why should it sign? Having endured the sanctions regime, India had done commendably well in developing its own nuclear and space program strengths. Acceding to NPT is not a solution. Signing the nuclear deal with the US is. It will hasten the process of our development. It will make the world albeit grudgingly admit India into the club of nuclear ‘haves’. It still retains with it the benefits of a non-signatory country and is not obliged by the treaty conditions. Though being a non-signatory country, we have demonstrated a much better non-proliferation record than the ‘haves’ and other signatories.

Will signing the NPT now bring any extra benefit to India? I doubt it. We are fairly developed. Our progress on the nuclear and space fronts has made the world realize that India perhaps can be slowed down, but not stopped from developing its strengths. The deal with US will hasten the process and integrate us into the top tier countries. Singing NPT may bring these benefits with the added conditionality of forswearing the nuclear option. So, why should it oblige?

Wednesday, September 19, 2007

US Federal reserve and its terminology

“Federal Reserve cuts key rate by 50 basis points”

Amidst fears that the subprime crisis is going to have a negative impact of the other sectors of the US economy and thereby speed up a much feared recession in the US, the Fed has cut the interest rate by 0.5% (100 basis points = 1%) from 5.25% to 4.75%. This reduction is expected to boost consumer spending and economic activity, thus ensuring that the US economy doesn’t go into a recession.

A paper headline like the one mentioned above, has three unknown terms for a novice. “Federal reserve”, “key rate” and “basis points”. Let me explain these terms for you today.

Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States.

The Federal Reserve System is a quasi-governmental/quasi-private banking system composed of (1) the presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils.

The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. A reference to “key rate” in the news headline above, is to this federal funds rate.

The Federal Reserve System also directly sets the "discount rate", which is the interest rate that banks pay the Fed to borrow directly from it. However, banks usually prefer borrowing fed funds from other banks, even at a higher interest rate, rather than directly from the Fed, because that might suggest problems with the bank's credit-worthiness or solvency.

Both of these rates influence the prime rate which is usually about 3 percentage points higher than the federal funds rate. The prime rate is the rate at which most banks price their loans for their best customers.

Interest rates are usually mentioned by bankers in terms of basis points. 100 basis points equals 1%. Therefore, 50 basis points refers to 0.5%.

Thursday, September 13, 2007

More about subprime crisis and consequences

"Developing a new risk paradigm” is an excellent article written in today’s ET by TK Arun. A must read for those who want to understand the play of subprime crisis on developing countries’ economies.

It gives an excellent explanation of how the crisis started.

· The subprime crisis started with lenders in the US pushing home loans to people who just didn’t have the capacity to service them.

· These unviable loans do not stay on the books of the lenders for long. They are securitised and sold off to other investors in various esoteric combinations. How risky these instruments were, the investors didn’t have a clue — they chose to swallow the triple A rating the credit rating agencies gave them and bought them up by the tonne anyway.

Some other questions that are answered in straight-forward manner by this article include the following.

What adverse affects were played out by the subprime crisis?

· When interest rates went up, as the Fed raised rates to combat inflation, default on these loans began. Worse, fears of large-scale default began to mount. And defaults on loans lead to mortgage foreclosures, bringing houses on to the market.

· House prices have not just stopped soaring in the US, but also started declining, as more and more houses come up for sale. The drop in house prices makes the outstanding loans riskier still — the loan-to-house-value ratio goes up. If the loan against a house is larger than the market price of the house, even foreclosure will not prevent loss. So, the closer the value of the loan approaches the value of the house, the riskier the loan.

What is a ‘flight to safety’ manoeuvre undertaken by FIIs and how does it hurt countries like India?

· When this perception of risk goes up, lending freezes up, throwing sand into the economy’s machinery. Further, funds undertake a manoeuvre called flight to safety. This is where developing economies like India get hurt. India, and such economies classified as emerging markets, are still seen by developed country fund managers as risky propositions. So the flight to safety will see some funds pull out of countries like India. This could lead to a stock markets slide in these economies, loss of confidence and slowdown of the real economy. This is one source of disruption.

· The other source of disruption is construction-led slowdown in the US. This could hit developing economies that export a lot to the US. Around 40% of Chinese exports, for example, go to the US. About 22%of Indian goods exports go to the US and a significantly larger share of India’s service exports.

You may also be interested in looking at what we noted on the subject earlier on:

10th August

11th August

17th August

3rd September

Monday, September 10, 2007

Oaths of Office

Why are oaths of office and secrecy different for various functionaries in the Constitution of India?

The President and the Vice President are above the three pillars of the Constitution of India viz., the Legislature, the Judiciary and the Executive. Perhaps, this explains their oath being mentioned in the main Constitution (Arts. 60 and 69) itself; not in any Schedule thereof. They affirm that they will discharge their duties faithfully. The President undertakes to preserve, protect and defend the Constitution and the law of India. The Vice President undertakes to faithfully discharge his duties and owes his faith and allegiance to the Constitution of India.

All the functionaries have to express their allegiance to the Constitution of India and upholding the sovereignty and integrity of the country. The obligation relating to their oaths of office and/or secrecy is laid down in Articles 75(4), 99, 124(6), 148(2), 164(3), 188 and 219 of the Constitution. The actual text of their oaths and affirmation are mentioned in the III Schedule the Constitution. The Legislatures will have to affirm only this. The Executive functionaries have to express in addition, that they will discharge their duties without any fear or favour. The Judicial functionaries have to affirm that they will perform their duties without fear or favour and also uphold the Constitution and the laws of the land.

As the Legislatures are basically involved with law making; which happens through lot of open debate, there is no oath of secrecy for them. The Executive and Judiciary on the other hand will have to express that they will perform their duties without any fear or favour. While the Judiciary has to uphold the Constitution and the law of the land, the Executive will have to undertake to maintain oath of secrecy.

Sunday, September 09, 2007

Answers to Shoutbox queries-13

8 Sep 07, 23:03

vikram sahasrabudhe: hello, I am appearing for the IAS mains this Oct, I wanted to know the source from which you have prepared these notes ? Is it a mix of Hindu , TOI and ET ? or only Economic Times, Please let me know. These notes come in very handy at the last moment , I have experienced it in the PT . . though I was preparing the notes that time but now as I am short of time . . its not possible as a result, I would be skipping some part of the newspapers . . so please let me know so that i can sort out my own notes too . . n rely on some part of ur notes as well as mine . .

Ans: It is a mix of ET and Hindu for the most part. I note something from TOI usually on Sundays. My recommendation is – be selective in what you note. Be on your own when you see something complicated and/or not the run-of-the-mill stuff. Because such preparation gives you all the background needed for articulating a point. But for others, you can safely depend on this. My blogs are basically meant for:

1.Those who are short of time to go through the daily newspapers and make notes from.

2. Those who read, but are not able to make any notes from there.

3. Those that need some backgrounders and/or help in understanding the basics behind some current developments.

7 Sep 07, 16:52

Vikash: Dear Sir Glad to join your forum . A simple question , I am not able to devote time in the studies taking into consideration that I am working and often i am on tour . How much time i shud devote.

Ans: For people like you, my advice is follow the time management principles suggested by Dale Carnegie. They are very effective.

But a lot depends on your background/battle-readiness. If you had already seen one Mains attempt, that implies that Prelims should not be a problem area for you. But if you had not cleared Prelims, it calls for lot of preparation effort from you. My recommendation for average students (the 60% to 90% people) is that they should devote a full year for the preparation. Those who are above 90% category, even while working can test their mettle and see. The chinks in their armour, if any, will come out in the first attempt. Take a call then. If the chinks are too many, devote a year and you should be safely through to Mains. See your performance in Mains. That should give you a clear idea of how much effort you should put in for your next attempt. Generally people from CBSE/ICSE schooling backgrounds find it easy to attempt the exam.

7 Sep 07, 13:31

smita: sir plz tel m what strategies i should follow and how i should devote my time 4 optionals

Ans: Had you gone through these three posts?

Please go through them first. The suggestions that you are seeking may have been there already. If not, ask me again. I would reply you in your mail.

7 Sep 07, 13:30

smita: hello sir, ur blog is very gr8 & helpful 4m sir I need ur help as m preparing 4 IAS as 1st opt is pub add & 2nd is Agri. but having confusion whether i m on right track or not

Ans: It depends on your background. Are you from Agriculture Science background? If so, that shouldn’t be a bad idea. But why Pub Ad? Why not Botany/Zoology? They could keep you in good stead even for the IFS exam, which is an equally good service. But there are many who are choosing such combinations. But you should be prepared for some grilling in the interview stage.

7 Sep 07, 12:28

Namita: sir presently i am in research at IIT Delhi on GIS.i want to appear for IAS exam but i have lack of idea and i have computer science bankground ,plz help me regarding this.

Ans: Ooh boy err… girl, you will have helluva time convincing the interview board with your background. They are sure to grill you like mad. This is not to deter you. But are you sure that you want to go for this exam? You may be making tons of money with your background in private sector. Many IAS officers are quitting the service midway and joining the private sector. If you still want to have a go at it, here is my advice:

Look at one engineering subject. Civil/Electrical/Mech. I mean glance through the syllabus. It is available everywhere. UPSC site, Civil Service India site etc. Finding it tough? Look at Maths. One of these could be an option. Then look at your mother tongue. Do you get the confidence that you can manage the preparation? Then it could be the other option.

If you have to learn these from the scratch, dump both of them. Go for safer bets like History/Pol Science/Psychology/Sociology/Anthropology etc. Though you may find them also totally new, with an year and a half’s preparation you should be in the reckoning.

But I am still skeptical; are you sure you want to do this?

7 Sep 07, 10:00

yasaswi: sir one thing that i wat to know that i take optionals in general as history and public administration and wat are the books to be read for civils

Ans: Again, my advice is look up the Civil Service India site, for which we have given a link from our Resources page. The recommendations that are found on that site are good enough. My recommendations can’t vary from theirs.

7 Sep 07, 09:57

yasaswi: sir iwat to know when the civilservices exam notification will begiven

Ans: Just keep track of the UPSC site. We have given links from our blog’s “Resources for Preparation” page to a number of sites which keep track of such things like notification dates, and also host forums on speculating about the cut-off marks etc.

Usually a few months before the Prelims and Mains, you can expect the notifications. As you might be knowing Prelims are usually held in June and Mains in October/November.

7 Sep 07, 09:37

chakra: thanku sir, iwant to know about international news so plz send some information regarding this

Ans: International news is more useful for Political Science students only and as a majority of my readers are here for General Studies, I desist from giving it a wider coverage.

6 Sep 07, 10:43

abhijeet: sir, what is the difference betn NREGA and NREG scheme.

Ans: One is the Act and the other is the implementation of the same. That’s all there is to it. To my knowledge the difference, if any, is nothing but semantics.

3 Sep 07, 22:30

jagan: sir, what are derivatives?

Ans: A simple definition is: A derivative is a financial instrument that derives its value from the value of other financial instruments or an underlying asset such as a future, forward, commodity, futures contract, stock, bond, currency, index or interest rate.

If the value of the underlying security undergoes a change it gets reflected in the derivative. At times the converse also is true. The value of the derivative may undergo a change which may trigger a change in the value of the underlying security. That is how the market's perception of an underlying security gets reflected through its derivatives. For eg., remember what we noted about CDS? A change in the value of the CDS (which is a derivative) impacts the value of the underlying debenture of the company.