Wednesday, December 31, 2008

Should foreign law firms be allowed to operate in India?

In a very well reasoned article, Som Mandal, the Managing Partner of a leading law firm in India, FoxMandal Little gives us three solid reasons why we should allow foreign firms and also allays our fears on two counts.  Take a look:

One, as more and more Indian companies begin to do business outside India, foreign legal advice is increasingly needed.  Hence the presence of foreign law firm in India is going to be of help to India Inc's increasing appetite for investing in foreign shores.

Second, it gives greater opportunity, better pay to our young lawyers and also exposes them to international best practices.

Third, those service sectors that have fully liberalised have experienced much higher growth than those that are still closed.  Biotechnology, IT and telecom, for instance, have achieved growth rates of between 30% and 37% in 2005-6.  Legal, accounting and railways are all closed and achieved only single digit growth in the same period. 

Then coming to some fears:

On the fear that foreign law firms will take away the litigation work of Indian lawyers in Indian courts; it can at best be an unfounded fear.  They will find it that their learning curve in this respect is far steeper than imagined.  Besides, the rules can be easily amended to keep the foreign firms away from this work.

On the fear that the Indian firms will not be able to compete with the foreign firms because of their size, it should be remembered that in the presence of a level playing field in India for the legal services sector, there are glaring disparities among law firms in terms of size, revenue and quality.   So, mere presence of bigger firms does not necessarily mean no work for smaller firms.  Presence of bigger firms need not necessarily sound death knell for the smaller firms.  Experience proves this.

Saturday, December 06, 2008

Query on the offset policy answered

Ashish informed me that he could not get the meaning of "mandatory offsets would mean that its armed forces would get less from the nation’s defence expenditure" in the article on defence offset policy.

Here is my take on the subject:

To understand the full meaning of it, let us look at what is meant by offset; once again. An offset is a compensation that the buyer is seeking from the seller; isn't it? And what is the form in which this compensation is being expected? In the form of co-production, licensed production, technology transfer, outsourcing of components, etc., related to the defence item imported or investment, collaboration and similar compensatory arrangements in civilian areas.

Is the seller going to give it to the buyer for free? The obvious answer as we all can guess is a big NO. Then for every Rs. 100 that you spend on procuring defence equipment, how much worth of actual equipment are you getting? Isn't the answer clear that it is Rs. 70? (Because the offset policy mandates about 30%.) Had the offset policy not been there, what would have your Rs. 100 bought? Equipment worth Rs. 100; isn't it? There lies the answer for the query raised.

But then, why should we go for an offset in the first place? Again it is obvious. That's a conscious choice the government is making. It is not just the equipment that really matters. What equally matters is the ability to manufacture the equipment by way of technology transfer or by having a component of it manufactured in the country for improving our technological capability and for generating employment in our economy out of the money that we are spending.

Hope this answers the query raised.

Sunday, November 30, 2008

What should we do? Now that Mumbai carnage has ended.

I am writing this response to the lively discussion that is going on in our shoutbox about terrorism. My response to comments from cvrk and others...

What we see in most of the Middle East and North Africa, no doubt is terrorism, but of a civil war variety, barring what goes on in Palestine/Israel, which is pure civil war cum terrorism going hand in hand. The issue is not whether or not there is terrorism in those places. The issue on the table is: Is the rule of law prevailing there, to be dismissed as regressive?

When heinous crimes are committed, would it not be time to take a re-look at our humanitarian outlook of the rule of law? I think a time has come for the entire humanity to reconsider the definition of rule of law. Remember the fate meted out to William Wallace in the hands of the law of Longshanks? So heroically played out by Mel Gibson in Braveheart? Or remember Judge Dredd played by Sylvester Stallone? I wonder whether or not it is time we have such judges?

Tell the mother who has lost her son fighting terrorists that the present day rule of law forbids Longshanks laws. Plead with the wife who has lost her husband to let the captured terrorist serve a life term (which can effectively mean no more than 14 years) in jail and come out free; perhaps to commit more such attacks on release. Enjoin the mother of a Major Unnikrishnan or an Ameena Begum to be patient with the process of judicial system as the rule of law provides for a certain procedure to be followed before a terrorist can be sentenced. They do not know whether the rule of law sentences them at all and even if sentences, whether or not the sentences will be carried out ever! Remember Afzal Guru? Even after being convicted more than three years ago, he still is ensconsed safely in Tihar jail. Perhaps biding his time to come out one day and may be he will succeed the next time to bomb the very President of India who gave him clemency!!

It is this that I am riling against. Asking and getting the head of home minister, a chief minister or the government is not the solution. Not even bombing the country which supported such activities,as experience has shown that such bombing has only complicated the matter rather than finding a solution. An America could do it because it did so in addition to what it has done by way of strengthening the anti-terror infrastructure. It is time for the entire humanity to sit up and take notice that the kind of rule of law that we have in place is not simply delivering results. The political system that we have kept in place has miserably failed to protect the life of the common man. While the common man is felled by the terrorist bullets, why should there be VIPs, VVIPs and VVVIPs who are protected by NSG? Let such protection be there only for a few like the President, the PM, the Speaker and the Chief Justice of India. When the common man is vulnerable to the bullets of the terrorists, let the Home Minister of the country also be equally vulnerable to the same bullets. Is it not after all his duty to ensure that the country remains a safe place to dwell? As much as sons, daughters, wives and husbands appear replaceable / substitutable in the ethos of these VVIPs, let them also know that they are also equally replaceable. What if one home minister falls to a bullet? There will be somebody who will be ready and eager to occupy his gaddi.

Stages of economic development

This piece is written in response to a shout-box query on factor driven economy.

The earliest stage in economic development is recognized as a factor driven economy. In this the economic growth is recognized as primarily the result of mobilization of primary factors of production viz., land, primary commodities and unskilled labour. Contrast this with economies which are investment-driven. In the latter, economic growth is largely seen as the result of harnessing of global technologies to local production. This stage transforms itself into innovation-driven economy when there occurs an improvement in technologies that support economic growth. Largely this is how economic development / growth is explained.

Have more time or want more detail? Follow this piece. This is a ten page piece from the who's who of economics. Michael Porter, Jeffrey Sachs & John Mcarthur. Once in a while you should read such pieces. They will do you a lot of good and enhance the 'extensive' reading background that you get to possess over a long time.

Thursday, November 27, 2008

Infrastructure creation and job creation; a debate

I try to answer below questions from two of our readers in the shout-box. Their questions are excerpted below for ready reference:

27 Nov 08, 15:19
Ashish: Pardon me Sir, but how does public expenditure in infrastructure will generate demand, apart from creating some job opportunities. What r the other constituents of demand generation, apart from jobs.

Mayank: He was discussing about the negative side effects of job creation in government sector and preferred government's financing private sector infrastructure creation for job creation.

My response:

It is more about creating jobs at the lowest level. The casual labourer, the low wage earner and small time employee. If about Rs. 50,000 crore is being spent on creating infrastructure, a substantial portion of it will go towards creation of such jobs directly. Then there is the indirect job creation because of the material being used, the operation of the infrastructure etc. This will lead to further creation of jobs and assets. That is how a virtuous cycle of creating demand can be commenced. More jobs means more money in the hands of large number of people. That means their spending for consumption. That will in turn create more demand for goods and services and in turn lead to further creation of jobs. Hope you can get the concept. The question is much more about creation of jobs; it is less about creating it in public sector or private sector. What we meant by 'government spending' was in the context of reports that the government is thinking of boosting invetment infrastructure by encouraging private investment i.e., largely through giving loans from the government coffers to business houses in the context of tightening liquidity conditions. Instead of that if the government spends directly on infrastructure creation, that will have a direct impact on job creation across various levels.

Whatever increases general consumption from the people is what leads to demand generation. This can include keeping more money in the hands of the people or lowering the prices of goods and services. Keeping more money in the hands of people can be achieved by, apart from employment generation, lowering taxes -- both direct and indirect and also by strengthening currency so that the same amount of currency can buy more goods and services. Lowering of prices can be achieved by deflation, lowering inflation, lowering indirect taxes and by strengthening currency.

Hope it clarified something for you.

Monday, November 24, 2008

Why is the India story intact?

Some fresh thoughts and points to ponder from Samir Arora, the CEO of Helios Capital Management, Singapore.

Till the other day we were listening to expert opinion which said the farm loan waiver was bad and the non-opening up of our banking and insurance sector to FDI was wanting and is not in consonance with the way the developments in the developed world are progressing. And then suddenly we find that our huge forex reserves are depleting at a rate which is worrisome. How should we read all this? It is an interesting and must read.

Some excerpts worth our attention:

A few months ago the government of India wrote off $16 billion of loans, made over the past decade or so, to more than 40 million farmers (at the rate of $400 per head) and was criticised by the whole world that economics was being sacrificed for the sake of politics. Now everyone (in most cases the employers of these "bearish on India" analysts) is asking for similar (and larger) and much more morally indefensible bailouts throughout the world.

Until a few weeks ago, investors were hoping that in pursuit of its reforms policy, the Indian government would accelerate the opening of its banking sector and insurance sector to foreign and private sector; and today all potential foreign partners are themselves seeking equity investments from their governments.

Last year India had less than $200 billion of foreign exchange (FX) reserves and I do not recall reading any reports that we had inadequate reserves which needed to be built up urgently. Now that FX reserves have fallen from $320 billion to $250 billion, economists are highlighting how we have had a record decline in FX reserves. It is a separate matter that more than half this fall can be explained by the strength of the US dollar which has reduced the dollar value of our reserves held in other currencies.

Indians (households) are the largest owners of gold in the world with their holdings estimated at more than 15,000 metric tonnes, currently valued at $400 billion plus. All the bearish doom and gloom analysts in the world have their price target for gold at $2,500 or higher. At $2,500 /ounce of gold, Indian households stand to make a paper profit of nearly $1 trillion (which is the same size as India's GDP). Contrast that with the total market capitalisation of the Indian market of $600 billion with Indian retail ownership of the market of around 20% and you can imagine why the average Indian may actually feel relatively much richer by the time the dooms day scenario comes along for the rest of the world.

Saturday, November 15, 2008

Why is America to be blamed for the present financial crisis?

Some excerpts from a recently written piece by Nobel laureate, Joseph Stiglitz

We all know that the current global financial crisis has had its roots in the American mortgage market. That was just the beginning. There were quite a few other reasons / contributory factors that led to the present sorry state of affairs -- all because of America. If you are asked to list them out, can you do a better job than this one from Joseph Stiglitz?

America exported its toxic mortgages around the world, in the form of asset-backed securities. America exported its deregulatory free market philosophy, which even its high priest, Alan Greenspan, now admits was a mistake. America exported its culture of corporate irresponsibility – non-transparent stock options, which encourage the bad accounting that has played a role in this debacle, just as it did in the Enron and Worldcom scandals a few years ago. And, finally, America has exported its economic downturn.

In spite of all this the world still loves America! Why? Why does pumping money into America make sense? Even for the third world countries?

Remarkable as it may seem, America, for all its problems, is still seen as the safest place to put one’s money. No surprise, I suppose, because, despite everything, a US government guarantee has more credibility than a guarantee from a third-world country.

What's been wrong with the IMF policies?

Traditionally its recipes included fiscal and monetary contraction, which would only increase global inequities. While developed countries engage in stabilizing countercyclical policies, developing countries would be forced into destabilizing policies, driving away capital when they need it most.

Saturday, November 01, 2008

Interest rates and reserve requirements

I was asked the following question yesterday in the Indian Current Affairs shout-box.

"When Federal bank of USA reduces interest rates, what rate exactly is that with context to RBI's? Is it in relation to CRR?"

The simple answer to the question is NO. The complicated answer is:

US Fed announces two different rates: the discount rate and the federal funds rate. The discount rate is the interest rate charged by the US Fed on the loans it gives to commercial banks. The federal funds rate is the interest rate at which banks lend to each other overnight. The US Fed only prescribes a target federal funds rate.

In contrast, the RBI announces only the bank rate. This is the same as the US Fed discount rate. There is no equivalent for the federal funds rate from the RBI. Instead, it announces its repo and reverse repo rates. Market rates (i.e., lendings and borrowings among the market participants) are determined based on these repo and reverse repo rates. Repo rate is the rate the RBI charges for the money lent by it to the banks. Reverse repo rate is the rate which it gives to the banks for lodging money with it. Both these types of transactions are backed by securities. In a repo transaction what happens is the banks lodge securities with the RBI in return for money. So, in effect what a repo transaction (a repo for the banks) does is infuse liquidity in the market. A reverse repo (for the banks) drains liquidity from the market.

Comparing rates with CRR is not correct. CRR and SLR are reserve requirements. That is, banks are mandated by the RBI to hold certain amount of money in the form of cash or invest a certain amount in prescribed securities. The US Fed has similar reserve requirements for banks operating there.

The US Fed has a single reserve requirement. It is at present 10% of the deposit liabilities of the banks. I am sure all of you know that RBI mandates two different reserve requirements: the CRR and the SLR. The former is the amount of funds that the banks have to keep with the RBI. The latter is the amount of money that the banks to keep invested in RBI approved securities to meet their liquidity requirements. We have covered about them in detail in this Disover-It post. However a repeat would be in order here:

Statutory Liquidity Ratio -- SLR, is the percentage of net demand and time liabilities of a bank that has to be maintained by a bank with the RBI. This can be in the form of cash, gold or approved securities. This percentage currently is at 25%. The Banking Regulation Act, 1949 actually prescribes a floor and ceiling for this percentage. The floor is at 25% and the ceiling is at 40%. That is, the RBI can't impound more than 40% of the net demand and time liabilities of banks nor can it prescribe a percentage which is below 25% for this purpose. It has to operate within this band. But recently the BR Act, 1949 was amended doing away with the floor. This gives RBI flexibility to prescribe a percentage of SLR which is lower than 25%. On the SLR funds, the RBI has to pay interest to the banks. It is currently at 6.5%.

Contrast this with CRR -- Cash Reserve Ratio, wherein the Bank has to maintain a certain percentage of its net time and demand liabilities in the form of cash with the RBI. CRR at present is 6. On the CRR funds, RBI will not pay any interest to the banks.
You can take the ‘net demand and time liabilities’ broadly to mean the deposits of the bank. Why this term is used is that many a time there will be situations in which the deposits figure will not be reflecting the actual deposits. It is the ‘net’ figure that is to be taken and not the ‘gross’ figure. Demand liabilities are those that have to be paid by the bank on ‘demand.’ And ‘time liabilities’ are those that have a time within which the bank has to pay these liabilities. Time deposits like bank FDs (Fixed Deposits) come under this ‘time liabilities’ category.

Note: This is one important link that gives a good explanation of repo and reverse repo rates.

Education as fundamental right

I am prompted to write this post because of a question in the shout-box on Indian Current Affairs. The question was to the following effect:

"When the Constitution of India already has the 86th amendment, guaranteeing right to education as a fundamental right, where is the necessity for the government to introduce yet another bill in the Parliament?"

It is a good question. To understand the answer, take a look at the 86th amendment first. What does Article 21A now read as? It says that the State shall provide free and compulsory education to all children in the age group of 6 to 14 years, in such manner as the State may, by law, determine. This highlighted portion is the key.

The Constitution amendment has just given an enabling provision. It is for the State to come out with an appropriate law that prescribes the method and manner in which this fundamental right is to be secured for the citizens.

Friday, October 31, 2008

On subprime loans and securitization

This post follows the request from two of our readers in the shout-box on Indian Current Affairs.

Though we have covered it quite a few times in our blogs, I take this opportunity again for the benefit of newcomers to our blogs.

The term 'subprime loan' refers to loans advanced to subprime borrowers.  Subprime refers to the borrower's classification.  A borrower is classified as subprime when her creditworthiness is less than perfect.  That is her ability to repay the loans given her is fraught with high risk.  Therefore, the rate of interest on loans given to her attract higher rates and usually prepayment penalties.

Securitization of these subprime loans means pooling and repackaging these loans into securities that are sold to investors who are willing to buy them.  Because the lender has already invested his money in giving loans to subprime borrowers, by securitizing them, what he does is raise more money on the strength of the asset (subprime loans given by him) from willing investors.

Why would investors be interested in purchasing these securities which represent subprime loans?  Because they have the risk appetite.  They think that they will earn more return for their investment.  They think that the bank which has securitized the assets is so reputable that it will never palm off a bad security to them for investment etc.

Securitization has reportedly allowed banks and the original investors to raise about $10.50 trillion in the US alone.  In Europe it has reportedly enabled raising of $2.25 trillion in finance.  These figures pertain to the period up to second quarter of 2008.

Has it become a bad word now?  How did it lead to the present liquidity crisis?
Securitization per se is not bad.  What has made things worse for the globe is the fact that the banks which sold these asset backed securities (subprime loan backed securities) have indulged in all possible dirty tricks while packaging these securities.  They have mixed these poor quality assets with good quality assets (i.e., loans to prime borrowers) and have inflated the possible returns to investors and backed their claims with excellent ratings (AAA ratings and the like) from credit rating agencies.  A AAA rating from a reputable credit rating agency means that the asset is very good and the payment default -- of either the interest or the principal -- is NIL.  Such ratings have lulled the investors into making huge investments into these worthless securities. 

Okay.  So where was the problem? 
The problem arose when the subprime borrowers were not able to pay their loan instalments properly and well in time.  Because it is only then that the lenders will be able to make money.  Because the lender, in the meantime had securitized these loans, it is the ultimate purchaser or investor in these securities that suffered, the credit ratings notwithstanding.  So, the investors started demanding their money back by surrendering these securities to the banks.  That is how the banks ended up receiving a double whammy.  There was tremendous pressure for money.  Their securities investors started demanding money and the borrowers are failing to pay their loan instalments.  The bank was not able to raise more money because the other banks sensed that it is in trouble and refused to lend it money.  This resulted in the liquidity crisis -- i.e., banks refused to lend to each other because they are afraid that they will not be repaid their monies.

Hope this answers the questions posed in the shout-box.

What is Market Stabilization Scheme?

To understand this we need to take a look at the year 2004 when FIIs (Foreign Institutional Investors) started bringing in dollars to buy Indian stocks. This has resulted in an oversupply of US dollars in the Indian market. RBI bought dollars, thus creating an equivalent amount of rupees. This dollar buying raised forex reserves from $100 bn in January 2004 to about $300 bn by 2007-08. Thus there was a liquidity overhang that was caused by the inflow of dollars. This has forced the government to mop up the rupees by creating the MSS bonds.

MSS was introduced by way of an agreement between the government and the Reserve Bank of
India (RBI) in early 2004. Under the scheme, RBI issues bonds on behalf of the government and the money raised under bonds is impounded in a separate account with RBI. The money does not go into the government account. As on October 22, 2008 the balance under MSS stood at Rs 1,71,317 crore.

Monday, October 20, 2008

Global financial crisis. Why did it hit India? What should it do?

Why did the current global financial crisis affect India? What could India do?

India did not lend in a great way to subprime borrowers within its borders. Nor did its banks and financial institutions invest in the subprime related assets (barring the ICICI Bank to a small extant; but which by no means can really pull it down) in the US. In spite of this, how come we are witnessing a downturn in our financial fortunes? Why are our markets collapsing? What could be the possible reasons? How can this be explained?

In a very well written article Arthur Okun, Professor of Yale University reels out the reasons and the possible course of action that India should take. Worth a read. Do so here. Some excerpts which I found are worth our filing in our library:

Actually, the similarity of market behaviour across countries is evidence that something else, deeper than the causes that are usually given for the subprime crisis in the US, is at work.

The most fundamental problem is found in the swings of overconfidence that was seen in many countries since the 1990s, overconfidence shared by millions, billions, of people. And this confidence has been very strong until recently.

In the US, consumer confidence rose to near-record levels at the time of the peak in the stock market around 2000. This high level of confidence, shared in many other countries as well, was related to the booming markets and booming economy of that time. The booming markets and economy were in turn substantially buoyed by the high confidence, in a feedback loop.

Recently, confidence has been fading. In the US, confidence has fallen sharply since 2006, now below the lowest levels reached in the 2001 recession. This decline in confidence is seen in other countries as well.

But economic confidence, the true state of mind that affects asset markets and the economy, is difficult to measure by any survey. The seizing up of credit markets, amidst the reports of a financial spectacle that is going on in the US that is reminiscent of the Great Depression, certainly changes people’s thinking all over the world.

When people expect good performance from their investment assets, they tend to bid up their prices. That is what was happening in many places around the world in the years leading up to the current crisis, until markets collapsed.

The subprime crisis in the US is only a symptom of this fundamental problem. The deterioration in mortgage lending standards in the US since the 1990s is not an exogenous cause of the crisis. It is, in substantial measure, a consequence of the overconfidence that is the real cause. Mortgage lending standards deteriorated because people thought that home prices can only go up, and so they thought there is little risk in writing mortgages with few protections.

Even the loose Fed monetary policy in the US is, in a way, derived from the overconfidence. The Fed was willing to have such loose monetary policy because, under Alan Greenspan, it was so unaware of the bubble in home prices, thought it was just another sign of spectacular economic growth, and so felt no concern about it.

India is part of world culture and is not invulnerable to changing patterns of thinking about investment. Much of what happens in speculative markets in India is just the same as in other countries. But India must rank as among the most vulnerable in the world to speculative turbulence, since she appears to be undergoing such a dramatic economic revolution, a revolution that, along with China’s, is the talk of the world, and that allows imaginations to run wild and confuses traditional and sober thinking.

So, India appears not at all invulnerable to the current crisis. She urgently needs to take many of the same actions that are called for in other countries. Some serious work needs to be done to improve the quality of the financial markets, both expanding regulation and consumer protection, but also expanding the scope integrity of the markets and their retail products. Work needs to be done now to democratise finance, to make enlightened risk management available to everyone, by subsidising financial advice and education.

PS: While discussing about the current financial crisis and its impact on India, it is very important that we keep ourselves abreast of the reflections of some great minds like KV Kamath and Vinod Dham. Kamath feels that we are affected by sentiments rather than fundamentals and that the current crisis will test the economy’s resilience and provide it with insights to build an even more robust framework for reforms. Vinod Dham feels that the current crisis offers a boon for the country.

Thursday, July 31, 2008

Reform of the defence offset policy

I am one of those die hard fans of companies like PWC (Price Waterhouse Coopers). Though I do criticise them at times; by and large I am a great fan of many an international consultant. They really bring lot of value add to the discussions on the table.

Look at today’s article by Dhiraj Mathur on India’s defence offset policy – a subject which we are interested in and have covered earlier also in our blogs.

He discusses with cogent reasons as to why the FDI cap in defence production (currently at 26%) makes no sense. While I recommend reading the full article at least once (do so here), let us look at some excerpts:

The government is scheduled to announce a new (and delayed) defence procurement policy (DPP 2008) in the next couple of days. From Indian industry’s perspective, the defence offset policy is a key element of the DPP. The existing version (DPP 2006) stipulates that 30% (or more) of the value of a defence purchase from a foreign vendor for a contract exceeding Rs 300 crore has to be ploughed back into the country via a defence offset obligation. Broadly, this obligation can be fulfilled by one of several methods — purchase from or exports on behalf of Indian defence industries of good or services produced or supplied by them, foreign direct investment (FDI) into Indian defence industries, investments in defence R&D etc.

The Indian government has launched a $100 billion capital investment plan over the 2007-12 period. The annual budget for the year 2008-09 is set at $26.4 billion.

The existing FDI policy restricts foreign equity in the manufacture of defence equipment to 26%. If one were to assume that approximately $10 billion of the offset obligation would be discharged through investment in manufacturing, the existing policy would require a domestic equity contribution of almost about $30 billion (Rs 1,20,000 crore). Since the offset policy requires that the obligation be discharged during the tenure of the defence equipment supply agreement, this quantum of domestic equity would need to be raised over a 2-5 year period in the defence sector alone, a target that seems quite impossible to achieve. Second and equally important, original equipment manufacturers (OEMs) aggressively guard their intellectual property and would be loathe providing cutting edge technology to a joint venture in which they own only 26% equity.

There is no economic or strategic rationale for this cap on foreign equity. For those who say that defence is a strategic sector in which we cannot have 100% foreign equity, I have only this to say — for the last 50 years, we have been buying equipment from companies that have no assets or even operations in India and over which we have no control. What great security threat would a company pose that would be incorporated in India, be subject to Indian laws and regulations with physical assets in India? The cap of 26% on the FDI thus works against fully exploiting the potential benefits of the offset policy.

Saturday, July 19, 2008

Concerns about WTO draft agreement on services

The release of the draft text had taken many countries by surprise as the delegations were reportedly not informed nor were all members consulted, and some even accuse the Chair of lack of transparency. Some member countries such as Bolivia, Cuba and Venezuela, which have been opposing a services text on the ground that it is inappropriate and unnecessary since the 2005 Hong Kong ministerial had already concluded the modalities, have expressed surprise. But the new draft had been agreed on July 15 to by ambassadors of the Enchilada Group (India, China, Pakistan, Philippines, Japan, the EU, the US, Canada, Brazil, South Africa, Indonesia, Malaysia, Thailand, and some others).

Paragraph 4 of the draft text has become the most contentious. Developed countries demand a comparable level of ambition in services as in agriculture and Nama. This means that developing countries should agree to bind their current actual level of liberalisation as well as offer more market access and national treatment commitments.

It may be worthwhile for you at this juncture to have a glimpse of what are the various ‘modes’ in services. The WTO’s site explains it very well. Take a look here. Look at the offending paragraph in the same page for reference.

India is pushing for a services text and therefore is unlikely to oppose the said paragraph.”

Friday, July 18, 2008

Press Note 1 (PN 1) on the way out?

THE government is planning to scrap Press Note 1, allowing foreign companies to invest in sectors where they already have a joint venture without obtaining a no objection certificate (NOC) from their current partner. The government appears to have veered round to the view that PN 1 is making MNCs bypass India to invest in China.

PN1 shields local firms by mandating that foreign allies must get their nod before investing in the same sector. It thus enables local companies to get the technology and financial resources to expand operations.

Scrapping PN-1 would allow foreign firms to invest without getting NOC from their JV partners. Getting NOC is a dampener for MNCs; their plans are often jettisoned on frivolous grounds.

Press Note 1 was formulated in 2005 to dilute an earlier government provision called Press Note 18, which stipulated that the foreign company had to furnish a NOC from an Indian partner if it planned to set up a wholly-owned subsidiary in an allied field. Press Note 1 has restricted the need for an NOC to the same activity only. In addition, joint ventures formed after January 2005 are not subject to Press Note 1.

Thursday, July 17, 2008

Fannie Mae and Freddie Mac

Why should the world be concerned about these US housing mortgage companies’ health?

It was on 13th July that we noted first about them. Look at it here. Their full names are Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). One can’t help but feel a sense of déjà vu when reading about them again and again. The figures being reported about their liabilities keep going up.

The two institutions are now reported to have bought or guaranteed almost half the $12 trillion housing mortgages. As government-sponsored entities, their debt had been regarded as almost as good as gilts and hence is held by many central banks worldwide. Amazingly, it now transpires that their direct and guaranteed liabilities were almost 65 times their regulatory capital at the end of the first quarter.

The US government is trying to rescue the mortgage giants whose shares came under acute selling pressure last week on fears that they are not adequately capitalised. Under the plan, the US treasury will be authorised to increase its existing $2.25 billion lines of credit to Fannie and Freddie. No wonder the treasury plan, which is set to add some or all of their $5,000 billion in liabilities to the government’s balance sheet, more than half the US national debt of about $9,000 billion, has shaken already fragile world confidence in the US economy.

In the light of this, can the dollar remain strong? If the world’s central banks start withdrawing or redeploying their funds from them, that is enough to send the dollar down.

Tuesday, July 15, 2008

Why is the RBI concerned about the frenetic activity in the OIS market now?

OIS stands for Overnight Index Swap. To get a grip over the concept read this noting we made sometime back.

India's OIS market is unregulated. These deals, which do not cause any flow of funds into or outside the country, are not reported, unlike foreign institutional trading activity in stock or bond markets.

Offshore hedge funds operating through multinational banks in India have stepped up action in India’s OIS market in recent months. These players are convinced that rates will rise, even as the economy is showing signs of slowing down.

Concerned that this surge in hedge fund activity in OIS is boosting volatility in interest rates, the RBI is making inquiries with multinational banks about exposures of such funds in this market.

Monday, July 14, 2008

The country’s education market potential

With double digit economic growth demanding a sustained supply of knowledge workers, India has emerged as one of the world’s largest consumer of education services with a target population of more than 445 million (between age group of 5-24 years), which is expected to increase to approximately 486 million by 2025, far exceeding the combined target population in China (354 million) and the US (91 million) in the same year. With public and private spending on education services in India aggregating approximately $100 billion per annum, and private spending on education having grown at a CAGR of 10.38% since 1994 at constant prices (double the 5.11% CAGR for total private consumption spending during the same period at constant prices), the Indian education sector is on its way to become the next “flavour” of the season for private equity (PE) investors.

While government spending on education remains comparable to other developing nations (approximately 4% of GDP), structural inefficiencies and lack of focus on primary education have resulted in a low adult literacy rate of approximately 67% and a low retention rate in schools of approximately 73%. While India is rated amongst the highest in terms of GDP per capita spending per pupil on tertiary education (beating developed economies like United Kingdom, United States and Japan), it is ranked in the lower spectrum for GDP per capita spending per pupil on primary education, as per UNESCO statistics for 2006.

ECB vs. FII limits

Which is better? Raising the ECB limits for Indian corporates? Or raising the limits for FIIs to invest in Indian bonds?

The finance ministry and RBI jointly fix an annual limit for debt raising by Indian corporates abroad. Progressively, the cap has been raised and during the last fiscal, local firms are reckoned to have raised over $20 billion.

Over a month ago, the combined ceiling for investment by foreign portfolio investors in local corporate bonds and government securities was enhanced to $8 billion from $2.5 billion. Of this, the allocation for investment in corporate bonds stands at $3 billion.

The finance ministry has made out a case for a major revision in the policy on foreign borrowings to allow an investment of over $15 billion by foreign portfolio investors (FIIs) in rupee-denominated bonds issued by Indian corporates. The ministry’s argument is that allowing higher investment by foreign portfolio investors in local corporate bonds would make better economic sense rather than consistently raising the limit for Indian firms to borrow from the overseas loan and capital markets (ECBs).

Increasing the allocation for investment in local corporate bonds and cutting down on the entitlements for Indian firms to borrow abroad would mean shifting the currency risk on to foreign investors. Besides, the ministry believes that the move to allocate a large share for corporate bonds could add to the liquidity of firms here.

However, the RBI reportedly has not exactly warmed up to the idea. It appears to be concerned about monitoring the end use of funds raised by issuing corporate bonds.

Latest jargon on the global stock markets

Heard of things like 'dark pools' 'smart routers' and 'algorithmic trading'?

Dark pools, to put it simply, are essentially trading platforms and exchanges that match block institutional orders, bypassing the main exchanges completely in off-market deals, and don’t publish stock quotes. The geeky jargon in the circuit is primarily because it’s been made possible by increasingly sophisticated technology like algorithmic trading tools. They guarantee absolute anonymity and secrecy to buy-side traders worried about revealing their strategies, accesses available liquidity outside the exchanges, and is only reported to the light side post-trade. It is, of course, all intensely regulated and painstakingly legal — dark pools have taken off in Europe only after the introduction of MiFID, which discourages internalisation of trades, and regulation NMS in the US. A consortium of major banks, including Citigroup, Goldman Sachs, Deutsche Bank, Merrill Lynch, UBS, Morgan Stanley and Credit Suisse, are due to launch Turqoise, a pan-European dark pool trading platform come September.

In electronic financial markets, algorithmic trading, also known as algo, automated, black-box, or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on certain aspects of the order such as the timing, price, or even the final quantity of the order. It is widely used by hedge funds, pension funds, mutual funds, and other institutional traders to divide up a large trade into several smaller trades in order to manage market impact, opportunity cost, and risk. It is also used by hedge funds and similar traders to make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information. Algorithmic trading, says one study, will account for more than 50% of all shares that change hands in the US by 2010.

Smart order routers, which most traders now use as a given, do exactly what the name suggests, scan multiple options and sources of liquidity and routes your order through to the best price.

Dark algorithms allow disguised orders to be matched electronically without going through the Big Board, or letting any-one else know what you’re up to.

Sunday, July 13, 2008

Gist of the developments related to the Indo-US nuclear deal


Nuclear Deal: A nuclear deal, announced in July, 2005 and finalised in March, 2006, would allow the United States to sell nuclear material to India and it may end India’s nuclear isolation. India is self-sufficient in thorium but possesses a meagre 1% of the global uranium reserves. The deal will help India obtaining a steady supply of uranium required for running the present nuclear programme.

123 agreement: Section 123 of the United States Atomic Energy Act of 1954, titled “Cooperation With Other Nations”, establishes an agreement for cooperation as a prerequisite for nuclear deals between the US and any other nation. Such an agreement is called a 123 Agreement.

Hyde Act: Henry J Hyde United States-India Peaceful Atomic Energy Cooperation Act of 2006 is the legal framework for a bilateral pact between the United States and India under which the US will provide access to civil nuclear technology and access to nuclear fuel in exchange for International Atomic Energy Agency-safeguards on civilian Indian reactors.

NPT Signatories: Signatories to the Nuclear Non-Proliferation Treaty (NPT) are granted access to civilian nuclear technology from each other as well as nuclear fuel via the Nuclear Suppliers Groups in exchange for International Atomic Energy Agency-verified compliance of the NPT tenets. India, Israel, and Pakistan, however, have not signed the NPT.


  • It will help India meet its rising energy demands by reversing US sanctions, imposed after nuclear tests were carried out by India in 1974 and 1998.
  • India will get access to US civilian nuclear technology.
  • The deal guarantees India fuel supplies for its civilian programme, and allows it to reprocess spent fuel.
  • It could spur India’s economic growth as India’s objective is to increase the production of nuclear power generation from its present capacity of 4,000 MW to 20,000 MW in the next decade.
  • It could usher in a new era of nuclear power in India, freeing the country from heavy dependence on fossil fuels.


The deal ties India’s future foreign and energy policy closely to the US. India will now classify 14 of its 22 nuclear facilities as being for civilian use, and thus open to inspection.


July 2005

Prime Minister Singh and US President George W Bush agree to a civilian nuclear co-operation deal.

March 2006

Two countries agree on India’s plan to separate its civilian and military nuclear reactors.

Dec 2006

US Congress approves the deal. Approvals from Nuclear Suppliers Group, International Atomic Energy Agency and a second time by the Congress are still needed.

Dec 2006

Bush signs the law approved by Congress, which makes changes to the US Atomic Energy Act.

July 2007

The two countries announce finalisation of the deal.

Aug 2007

Text of the bilateral pact, called the 123 agreement, is unveiled.

Aug 2007

Left parties slam the pact and ask the government to suspend it saying it compromises India’s sovereignty and imposes US influence.

July 4, 2008

Samajwadi Party with 39 MPs agree to support the UPA on the deal.

July 8, 2008

Left withdraws support to the UPA; Govt approaches IAEA.

Saturday, June 14, 2008

Shoutbox queries answered

13 Jun 08, 19:11
kranthi: sir, I don't understand whats the meaning of "revised growth" ---in 1st point, today blog ! can you explain me please?
can we compare earlier growth with revised growth....I mean do they have same base?

CSO (Central Statistical Organization) gets revised figures frequently. Not all the figures needed for compiling the inflation or economic growth figures are available by the time it releases the figures the first time. Even when it does have, the department supplying the figures keep revising them as and when they get latest data. Therefore, as and when the new figures keep coming in, it revises the compiled figures to reflect this reality. That is how/why there occurs a revision in these figures.

13 Jun 08, 16:19
zephyr: and all this while I thought Capital Account Deficit needs to be reduced... please exaplain sir...

Capital account deficit means more capital is flowing into the country. That's is usually a good thing. But then a country should be concerned when it is getting more of 'hot money' i.e., for eg., money coming in for arbitrage opportunities and not for genuine investment purposes. You can say countries will not be usually happy only with FII and Hedge fund inflows. If this is accompanied by other capital inflows for genuine industrial or manufacture build-up, it will be viewed with less suspicion.

It is current account deficit that is more worrisome for any country. That means we are consuming/importing more than what we are producing/exporting.

Monday, June 09, 2008

What broad lessons can India draw from the subprime crisis?

o In a very well written piece, the Chairman of the CFSR (Committee on Financial Sector Reforms) of the Planning Commission, Dr. Raghuram Rajan writes about the lessons that our country can learn from the subprime debacle and also offers solutions.

o Perhaps the most important lesson is that a narrow focus on rules can lead regulators to miss the bigger picture, and can encourage regulatory arbitrage, to the detriment of the system. Regulators were overly fixated on seeing that rules on capital norms were being met, without seeing the larger picture – that many banks were going to the riskiest structures consistent with the rules. To achieve this, a statutory body, the Financial Sector Oversight Agency (FSOA) composed of key regulators, which will replace the current informal High-Level Coordination Committee (HLCC) is recommended to be set up. The FSOA will conduct a principles-based supervisory dialogue with top management of key financial conglomerates, look out for an overall build up of risks in the system, and undertake coordinated action to mitigate those risks. The senior-most regulator – typically the RBI governor – would be the head of the FSOA. In many ways, the FSOA would have the powers in India that the US Treasury’s reform plan seeks to give the Fed.

o Second, some regulators resort to boxchecking when they simply do not understand what they are dealing with. We need to constantly upgrade regulatory skills. Investments in better regulatory pay and conditions, as well as in training, can offer tremendous national return.

o Third, there are fewer limits on regulatory action when regulators can go beyond the letter of regulations. To balance this power, the CFSR recommends regulatory actions should be subject to appeal to a Financial Sector Appellate Tribunal. More freedom for regulators will therefore be combined with checks to ensure the freedom is not misused.

India’s position on bio-piracy and TRIPS in WTO talks

  • INDIA has insisted that the issue of amending the trade-related intellectual property rights agreement (TRIPS) to check bio-piracy should be made part of the upcoming “horizontal process” in which senior officials and trade ministers from key countries would meet to agree on the modality texts for liberalising trade in agriculture, industrial goods and other issues.
  • But wait a minute. What is this ‘horizontal process’?
    • 'Horizontal process' is the term given to a process of prior negotiations at Senior Official level in the WTO talks. Prior talks on trade issues at the senior official level, even before the Ministerial level talks commence, is believed to help the Ministerial meets to quickly close the gaps that exist in their positions and give commitments for the trade agreements. This was done at the behest of the Director General Pascal Lamy in April 2008 in the context of agriculture and NAMA (Non Agricultural Market Access) talks.
    • Horizontal process provides a means of giving sufficient reassurance that all the other negotiating issues are advancing as they should.
  • While reading this article I came across the term ‘non-paper.’ A group of about 100 countries have reportedly submitted a “non-paper” to the trade negotiations committee of the WTO proposing that three intellectual property issues, including amendment of TRIPS agreement related to biodiversity, extension of the higher level of protection for geographical indications currently only required for wines and spirits, and the issue of creating a multilateral register for geographical indications of wines and spirits, should be part of the horizontal process. What is a non-paper in the context of WTO talks?
    • It is a proposed agreement or negotiating text circulated informally among delegations for discussion without committing the originating delegation's country to the contents.
  • If you want to know more about such trade related terms look at this glossary.

Saturday, June 07, 2008

On the spectacular growth of the insurance sector in India

If you are asked to say something about the benefits of opening up of the insurance sector in India, what could your answer be?

  • Insurance penetration has increased from a niggardly 2.32 % at the time the sector was opened up to private sector participation in 2000 to more than 5% in 2007.
  • The first year premium collections in life insurance, a measure of new business secured, has gone up from Rs 9,700 crore in 2000-01 to Rs 75,600 crore in 2006-07.
  • Industrial houses which have forayed into this sunrise sector have seen spectacular growth and have overtaken the valuations of their parent companies. For example Bajaj Auto’s seven-year-old insurance business has overtaken its 60-year-old parent company in market value. Bajaj Auto is not an exception. Multinational companies that were smart enough to see the potential in the sunrise sector, despite the low 26% ceiling for foreign direct investment, have been amply rewarded.
  • It is not only insurance companies and individuals who have benefited in the process. The close link of the insurance sector with infrastructure is widely acknowledged — insurance companies typically look for avenues for long-term investment while infrastructure companies need long-term funds — so a rapidly growing insurance sector is good news for all concerned.

Tuesday, June 03, 2008

A look at how IPL makes money

  • A lowdown on the IPL business model
    • The business model is relatively straightforward. The revenues for the IPL and the franchisees come from three streams: media rights, sponsorships under the central or local pool, and gate receipts. The central pool includes sponsorships for the entire league, to be distributed between the IPL and the franchisees. The local pool comprises sponsorships each team manages to attract, of which the franchisee/team keeps the entire amount. The franchisees’ expenses include team franchising instalments, player and personnel, marketing, stadium expenses, and promotion, event management and administration.
    • The auction of the eight teams generated $724 million. Franchisees own the teams in perpetuity, but make the payments in instalments over the next 10 years. In addition, each team spends $4-6 million per year on players and team personnel. Players signed three-year contracts with the franchisee, and icon players excepted, can be traded after the first season. Stadiums could cost up to Rs 30 lakh per match, and each team is also expected to spend approximately $3-4 million per year on marketing, promotion, and event management costs.
    • A consortium including Sony Entertainment Television (SET) and World Sports Group bought the broadcasting rights for a total of $1.026 billion for ten years. SET will spend $108 million on marketing, and the remaining $918 million goes into the central pool. The proceeds are divided between the IPL and the franchisees, where IPL’s share is 20% until 2013, and increases to 40% from the sixth year onwards. The franchisees receive 80% up to 2013, and 60% from 2013-2018, less a fixed percentage that goes towards prize money.
    • The central sponsorship deals are for five years and for the next ten years, IPL and the franchisees will divide the revenues in the proportion 40%:60%, with the latter amount to be divided equally among the franchisees. Sponsors include DLF as title sponsor, and associate/partner sponsors include Kingfisher, Hero Honda, Pepsi, Citi, Vodafone, and ITC. Each franchisee could earn almost Rs 30 crore annually for the next five years. Additionally, the franchisees keep all the revenue generated from the local pools, which include team title sponsorship, partner sponsors, licensing, merchandising (87.5%), in-stadium signage, as well as other forms of sponsorship at the team level. Franchisees have appearance rights over the players during the IPL tournament, which can amount to approximately 10 days, of eight hours each. Gate receipts are a significant revenue source, and the IPL’s share is 20% of the total receipts from each franchisee, while the franchisees retain 80%.

Monday, April 07, 2008

Answers to shoutbox discussions - Apr 2008

I found some of the discussions requiring quite lengthy responses. Hence I am reproducing below the discussions and my responses to them:

6 Apr 08, 23:04
neha: sir could u plz explain underwriting ..i m new to ur blogs. and also what is mandatory IPO unerwriting. i looked in wikipedia but could'nt get it. thanks.

ramkyc: I would say keep reading the blogs and do keep following the links given therein. Almost everyday I am giving links to some external sites which give us a deeper understanding of some important concept or the other. However...

Whenever any company comes out with an IPO (Initial Public Offering) of its shares, it may choose to have an underwriter. This person/entity is one which gaurantees the company that its public offer would be fully subscribed and that in the event that it remains unsubscribed, the latter would subscribe for the entire portion remaining unsubscribed by the public. This is a kind of insurance that the underwriter gives to the company. For this insurance, the company will have to pay a price to the underwriter called the underwriting fee. Normally any sensible person/entity is supposed to underwrite an IPO only when it has carried out a due diligence of the issue and is of the opinion that the issue is worth subscribing to. An underwritten IPO gives comfort to the subscribing public that the issue is vetted by experts (underwriters) and that it is worth subscribing to.

What SEBI has done now is propose this underwriting to be mandatory for every IPO. The debate is about whether or not this mandatory underwriting is good.

Hope it is clear now. ET has given its solid reasoning as to why it is not good. But we can also have our own arguments about it being investor friendly etc. Got it? Dig deeper, think and discuss. All the best.


4 Apr 08, 23:02
cvrk: @ramkyC; you have dealt this matter in detail in your discover it blog in june 07.
4 Apr 08, 23:01
cvrk: Different stock exchanges define market capitilisation. As per BSE, the market capitalisation is defined as the Price multiped by free float
4 Apr 08, 22:54
cvrk: This is in respect of market capitalisation.
4 Apr 08, 22:54

ramkyc: Yes, I know. How many of our readers are keeping track of this?


cvrk: the trade deficit resulted in devaluation of dollors. The domiance of dollars, The over expansion has created the situations and not overspending. Any comments?
4 Apr 08, 22:52
cvrk: us slowing down, the produce imported did not find takers , allowing the trade deficit to enlarge.
4 Apr 08, 22:51
cvrk: dominance in the international market. But as it happens with all traders, the expansion was so fast, the other countries such as china started dumping the goods to us. With the domestic growth in
4 Apr 08, 22:49
cvrk: will purchase the goods created out of its assistance, thus the carrot. Like a horse, the developing nations jumped into the fray, and started exporting to us, indirectly thus benefitting dollor
4 Apr 08, 22:48
cvrk: @ramkyc: It is the instinct of the market maker US was trying. It assisted other countries, to gain dominance. To keep it simple, it helped the weaker economy with a carrot, that as an importer it wil

ramkyc: The presumption that imported goods into the US did not find takers and hence its trade deficit enlarged, is incorrect. US was importing more than what it produced. It gobbled up whatever the world could offer. That's why its trade deficit grew. It thought that the deficit is sustainable. But it was a false sense of comfort that it was drawing on the back of the US dollar's strength. That strength itself is not the currecy's inherent strength growing out of trade balances. But it was one that accrued to it out of its situation; of being used as the exchange currency of the world. Sooner or later the consequences of this overspending have to be faced. It is very tough (I think that includes Nobel winning economists) to predict in what form or the time frame in which such consequences would occur. Perhaps it is equally difficult to gauze when or what would trigger the dawn of that realization. At the present moment, it is the subprime -> liquidity -> financial crisis that has made the US realize that it is time for it to pay for its past consumption. I doubt whether it is still acknowledging that it has to pay. Let us wait for a few more months. Its understanding will be clearer. But so far, its responses have been very traditionalistic and typically Keynesian. Keep more money in the hands of the people and boost consumption. I am skeptical about its solutions. Let's wait and watch like good students.

Monday, March 03, 2008

On farm loan waiver package

We all have seen the details of the farm loan waiver package announced by the Finance Minister in his budget speech on 29th February.

Some more details are:

There are four crore small and marginal farmers who are unable to repay their crop loans to the banks.

It will be financed out of the fisc through a combination of cash and bonds. The fisc is expected find the resources from its overflowing tax receipts and disinvestment proceeds.

The last major write-off was in 1990.

Why is a waiver bad or why it misses the point?

A complete waiver vitiates the lending climate and does damage to farm and loan discipline. It penalizes borrowers who have honoured their loan commitments and creates a moral hazard since farmer-borrowers are likely to assume future dues will also be written off.

Small farmers face two main challenges: meeting their input needs and dealing with the weather risks to their crops. Addressing these challenges is not on the radar of the government.

Another basic problem farmers face is getting a fair price for their produce. Nothing is uttered about this also in this budget.

The announcement by the finance minister seems to have got its definition of small farmer all wrong. Marginal farmers (less than 1 hectare) and small farmers (1 to 2 hectares) is an incorrect classification. It should have taken the irrigated and un-irrigated areas and arid and semi-arid areas into account while classifying farmers. Without this, a large measure of the farmers in distress will remain untouched by the waiver.

The scheme misses the point that majority of the farmers are in the clutches of village money lenders. The scheme doesn’t touch them at all.

What suggestions could you give?

The long term solution is to make farming profitable. The way ahead in this direction is – investment in irrigation and roads, allowing farmers to sell outside mandis and provision of information on seeds and agricultural practices.

Redefine small and marginal farmers duly taking into account the nature or type of their farm.

Rein in the village money lender by fixing a cap on the amount of interest that he can charge on the loans given by him.

Related links:

A very good debate that appeared in today’s ET on the issue can be found here.

Any debate about alleviating farm distress cannot be complete without inputs from the doyen of Indian agriculture – M.S. Swaminathan. Read his excellent article that appeared in today’s Hindu here.

Sunday, March 02, 2008

Budget Related Questions answered

Hi friends,

I received an email asking me to clarify certain things about the recent budget statement and figures. I am doing my best to answer the queries. The para having an * before it is the query and the para that follows it without an * is my answer. Here I go:

This is with reference to blog post (dt. 01.03.2008). Here you have posted a table depicting various aggregates of Budget 2008.
I had the following queries -

* Point 3 talks about non - tax revenue to the central govt. Could you provide me with an indicative break up of this figure.

If you are looking for actual figures, I recommend that you look at Annual Financial Statement on Receipts. It is just a four page document.

But to give an idea what comprises non-tax revenue, it includes thinks like fiscal services (coinage and mint services), interest and dividend income or profits made by government.

* Similarly, Point 6 is about other capital receipts, so it refers to 'grants' which the central govt. receives or it is pointing at some other source.

Capital receipts includes Public Debt (Internal and External), Recoveries of loans and advances and others. The internal debt comprises of Treasury Bill auctions, Ways and Means advances, Receipts from Market Stabilization Scheme auctions etc. The 'grants' that you are referring to perhaps fall under the 'others' category.

* Point 9 is an aggregate of non-plan expenditure, here I am surprised to see such exorbitant amounts placed under Interest payments, if they are of this magnitude and are foreseeable - then why not classify them under plan expenditure. Further, does Point 14 include any interest payout?

Though your query makes sense to me, I think the reason for it lies in the simple fact that Plan is for a five year period. Whereas Government keeps mobilizing money at times much more than what is budgeted by way of loans depending on circumstances. This makes it hard for it to really plan the interest outgo in advance, over a five year period. That's why it can't plan for such interest outgo. In any case what you plan for interest outgo during a five year plan is separate and will find a mention under the Plan Expenditure head.

* Point 17 (total revenue expenditure) - why doesn't it include Point 11 as interest payment is also of revenue nature only.
Row 10 already includes in it row 11 figures. Read the "of which" in row 10? That means that row 11 is already included.

Friday, February 15, 2008


It is the body of literature describing the lives and veneration of the Christian saints. The literature of hagiography embraces acts of the martyrs (i.e., accounts of their trials and deaths); biographies of saintly monks, bishops, princes, or virgins; and accounts of miracles connected with saints' tombs, relics, icons, or statues.

Hagiographies have been written from the 2nd century AD to instruct and edify readers and glorify the saints. In the Middle Ages it was customary to read aloud at divine office and in the monastic refectory (dining hall) biographies of the principal saints on their feast days. Besides biographies of single saints, other works of hagiography told the stories of a class of saints, such as Eusebius of Caesarea's account of the martyrs of Palestine (4th century AD) and Pope Gregory I the Great's Dialogues, a collection of stories about Saint Benedict and other 6th-century Latin monks. Perhaps the most important hagiographic collection is the Legenda aurea (Golden Legend) of Jacobus de Voragine in the 13th century. Modern critical hagiography began in 17th-century Flanders with the Jesuit ecclesiastic Jean Bolland and his successors, who became known as Bollandists.

The importance of hagiography derives from the vital role that the veneration of the saints played throughout medieval civilization in both eastern and western Christendom. Second, this literature preserves much valuable information not only about religious beliefs and customs but also about daily life, institutions, and events in historical periods for which other evidence is either imprecise or nonexistent.

The hagiographer has a threefold task: to collect all the material relevant to each particular saint, to edit the documents according to the best methods of textual criticism, and to interpret the evidence by using literary, historical, and any other pertinent criteria.

Source: Encyclopaedia Britannica.

Thursday, February 07, 2008

Replies to shoutbox discussions

@Suresh: Agree with your assessment. But a real national leader is one who could muster his faculties to articulate a cause that is felt strongly about by the larger masses and mobilize them to it. Had you and I lived in pre-independence era, could we have mobilized people the way a Gandhi or Nehru mobilized? That's the stuff leaders are made of. At present, yes we are woefully short of them. Instead what we are witnessing is regional and sectarian leaders articulating narrow and petty considerations for the perceived wants of a few, often to the chagrin and detriment of the needs of the majority.

Suresh: out

7 Feb 08, 19:15

Suresh: looking at issues that are important for the country, unlike previous generation(Nehruian era), where all the leaders had faced Imperialism since its a national issue they gained popularity through

7 Feb 08, 19:13

Suresh: I wonder who is going to have a national leader appeal in the next elections, present day no one commands such respect from every state, its big vaccume. The reason for this trend is nobody is

7 Feb 08, 03:21

indian: We can see it very distinctly where it is heading and we are doing nothing, whatsoever, to counter it.

7 Feb 08, 03:21

indian: Yes we can ! and Yes we are !

@cvrk: Yes I agree with you. Looks like regionalism is gaining momentum at the moment. What with the louder (and shriller?) calls for Telangana, Vidarbha Incidents in Mumbai etc.

6 Feb 08, 22:18

cvrk: mumbai for mumbaikars, changing the new year,etc. Are we not seeing a trend of regionalism gaining over nationalism?

6 Feb 08, 22:17

cvrk: attention, particlularly in the light of recent developments such as

6 Feb 08, 22:17

cvrk: naming issues: Hello RamkyC, even though it started with names, can you see there is one more area that was trying to pin pointed. The absence of national leader. do nt you feel that it deserves more

6 Feb 08, 18:02

raj: can anyone comment on the future of Loksatta Party in Andhra Pradesh as it just kickstarted its campaigning?

6 Feb 08, 17:09

@Mayank: Thanks for answering Sreenadh. Look at the second part as Left's (mostly; but there in other parties too) strong belief that our natural resources should not be sold. For eg., you might remember the huge debate about iron ore exports. Should we or should we not export our iron ore fines. This question attracted lot of debate, with strong reasons both for and against. People cutting across all parties have strong and informed stand about the issue. Very tough to side with one to the exclusion of the other.

Mayank: i.e the NATION seize control of their reserves of some RESOURCES. This is Resource Nationalism.Sir, plz corect me if I am wrong.The 2nd part of your question, no clues, I leave it totally on Sir :)

6 Feb 08, 17:08

Mayank: What I know, 'Resource Nationalism' is - a nation declares that I am not going to 'share' (read 'sell') resources which are produced within my nation.

6 Feb 08, 13:09

Sreenadh: Hi, can u throw some light on what is resource nationalism? and also statement "strong undercurrent of this in India’s political economy"

5 Feb 08, 22:59

adi: Our coountry will be divided in more ways than we can imagine?

5 Feb 08, 21:25

abhi: remya do u still give that public admin gudance.i needed your notes ..please help

Friday, February 01, 2008

Basics about primary and secondary stock markets

Quite a few of you have asked me at one time or the other to define or explain about stock markets. More specifically primary and secondary markets. You can’t get a better explanation than the one that appeared in today’s article ‘Not so primary a market’ in the ET.

For the impatient amongst you, the following excerpt would be just enough:

For sustained economic growth, it is essential to have a stock market that mobilises and allocates capital efficiently. To place the capital market in perspective, it would be useful to distinguish between the “new issues market” and “stock exchange”. The “new issues market” allocates long-term funds to corporates in an economy without constraining the investment horizon of the investors. The “stock exchange” facilitates buyers and sellers to transact in securities issued in the “new issues market”. Hence, the economic significance of the stock market stems from its role as an allocator of resources. As a result, the “new issues market” which is of primary importance to the economy is called the primary market and the “stock exchange” which provides liquidity and facilitates price discovery is called the secondary market.

A vibrant secondary market must ensure an efficient primary market. However, in the case of India, though the economy is home to the third and the fifth largest exchanges in the world in terms of the number of transactions, the amount of capital mobilised in the primary market is negligible. To substantiate this claim, it may be noted that between 1996 and 2006 debt instruments accounted for more than 80% of the funds raised from the primary market. Dependence on debt per se is not bad, however, what makes the situation grim is the fact that more than 80% of the debt was issued in the form of private placement.

In terms of mobilising funds from the capital surplus economic units, the primary market attracts less than 4% of the total savings of the household sector.

Thursday, January 31, 2008

Are regional trade agreements the right strategy?

This is one question you can expect to be asked either in Mains or in an interview. You can’t get a better answer for this question than from today’s op-ed by Prashant Goyal. Take a look at it here. But Some excerpts worth our noting follow.

Today 50% of world trade is under 200 RTAs and for countries like Mexico and Singapore almost 85% and 63% respectively of their global trade is under RTAs. In contrast, only around 30% of India’s global trade is under RTAs.

Today when our exports are around 14% of GDP and the trade-GDP ratio is almost 33%, our economy cannot afford this trade diversion. The effects of such diversion would be traumatic if India’s competitors were to conclude RTAs with India’s major trading partners.

The WTO negotiations are meandering. Even if the Doha round gets concluded, trade liberalisation is unlikely to be as ambitious as under RTAs owing to the divergent views and positions of 151 nations. RTA negotiations, in contrast, are faster, afford opportunity to seek tariff reduction in specific products of interest and also allow country-specific shielding of sensitive sectors.

Static benefits from RTAs include:

  • Trade creation through reduction in tariffs
  • Replacement of some domestic production from cheaper imports
  • Increased specialisation and division of labour in areas of comparative cost advantage
  • Increased consumer welfare because of reduction in prices

Dynamic benefits include:

  • Increased competition
  • Economies of scale
  • Stimulus to investment
  • Better utilisation of economic resources
  • Development and use of new technology
  • Increase in GDP because of efficient allocation of resources

Downside with RTAs:

The benefits, however, would be reduced to some extent due to trade diversion, lower-cost imports from efficient third country suppliers would be replaced by higher-cost goods from RTA members due to tariff preference for the latter. This reduces welfare by shifting production away from areas of comparative cost advantage.

A wider sweep of RTAs would help minimise this trade diversion impact. But, the Rules of Origin can never be perfect and the consequent trade deflection from non-members would to some extent neutralise the negative impact of this trade diversion.

Wednesday, January 30, 2008

RBI’s quarterly review of the monetary policy

The RBI Governor has kept the key rates unchanged in the recent review of the monetary policy. The key rates here include: Bank rate, CRR, Repo rate and Reverse repo rate. (Refer to the glossary or search our blogs for the definitions of these rates.)

Bank rate: 6%

Repo rate: 7.75%

Reverse repo rate: 6%

CRR: 7.5%

This has not gone down well with the expectations of the market, because everybody was expecting that RBI would reduce the rates in response to the US Federal reserve’s steep cut of the funds rate (the rate at which banks borrow/lend to each other). The Fed rate cut is seen as having sharpened the interest rate differentials between India and the US, leading to splendid arbitrate opportunity. This is expected to accentuate funds inflows into the country, leading to further rupee appreciation, subsequent sterilisation and the attendant fiscal costs.

But the RBI has stood its ground and the logic appears to be that there is no need for India to respond to US Fed’s actions at the moment. It felt there is no need for easing of our monetary policy in view of two factors:

  • There is adequate liquidity in our economy. The average reverse repo inflows are hovering around Rs. 13000 to 14,000 crores per day.
  • Global inflationary pressures have re-emerged.

For the moment, the RBI has found support from the FM also in its stand. But with the Fed rate cut bound to push more dollars into our economy, it is only a matter of time before it takes a hard look at our rates and possibly allow the appreciation of the rupee against the dollar.

Governor YV Reddy is known as a man of surprises. When the market expects him to act in a particular way, he never obliges it by acting in tune with its expectations.

So, my guess is that he will tinker with the rates sometime down the line but before the Annual Policy statement is presented in April. If he doesn’t do it, we can expect the rupee to strengthen against the dollar.

Am I venturing too far into the monetary expert’s domain? Yeah, I too have those doubts. But we lose nothing by being close watchers of the Governor’s moves.