Tuesday, November 20, 2007

Answers to shout-box queries-17

18 Nov 07, 19:50
manpreet: sir could you please explain th term "depreciation" used in economics in simple language..thanks.

If you buy an eatable say for Rs. 100 and consume it equally over two days, how much worth of the eatable remains at the end of the first day? Since the consumption is done equally over two days, we can say that your asset (eatable) has depreciated by Rs. 50 over one day. On the second day (beginning of the day that is) its worth is Rs. 50 only. I have taken this example for the sake of simplicity.

Apply the same analogy to any real asset like scooters, cars, motors, aircraft etc. Their life time extends over several years. So if you would like to know what is their value at the beginning of say the second or third or nth year, what would its value be? The depreciated value over that period. Let us assume you buy a scooter for Rs. 30,000. If the envisaged life of the scooter is say 15 years; then its depreciated value at the end of two years would be Rs. 26,000. As you have used it for two years, you apportion about Rs. 4,000 towards the cost of your consumption/use of the asset.

I took a very simple example. But there are various complicated ways in which this deprecitation is calculated. Straight-line, Declining-balance/Reducing balance, Activity depreciation, Sum of years digits, Units of Production, and Units of time depreciation are some of the methods.

18 Nov 07, 19:18
sonali: sir please explain the concept of PFDF in detail. about the issuance of these bonds and what purpose they are used for etc ?

Under JNNURM the Central Government has announced its policy that it will fund cities coming to it for urban renewal. Huge funds are envisaged to be spent for urban renewal in the country. To the tune of about Rs. 100,000 crores. The way this huge funding is envisaged to be mobilized was on 50:50 basis. That is, the cities will have to mobilize about Rs. 50,000 crores and the Centre will give a matching funding. How will the cities mobilize this much money? State governments are almost broke to finance such kind of money for urban renewal. Hence the idea to enable the various cities (Municipalities and Corporations) to mobilize funds by issuing bonds. Who will buy these bonds from them? What is their capacity to service the interest burden on the bonds? Can they be trusted to repay the principal invested in the bonds? Hence the issue of credit rating comes in. A higher credit rating gives the investors the comfort to make investments in the bonds. Investors having a greater risk appetite will go for less rated cities also provided the interest rates they offer are attractive. So the government asked all the four major credit rating agencies in India to rate various cities. If their credit rating is good, then they will be able to mobilize resources easily. Then these cities can approach the Centre for a matching funding of their requirements.

18 Nov 07, 18:59
sonali: i.e., govt has to provide power and dole out funds for it what has individuals and credit have to do with it ?
18 Nov 07, 18:58
sonali: sir in priority sector lending credit is given to private individuals like farmers etc...so how can power projects/ sector be given such status when its all depends upon government ...

Giving priority sector status or infrastructure status means that the loans extended by banks will come at a cheaper rate for the investors. That is one way of attracting interest of the investors in putting up generation plants. This will also encourage banks to earmark funds for power sector project finance as that would enable them to meet their crucial priority sector targets. As these are still only at proposal stage, we will know the full details only when they are finalized and their details announced.