The Financial Bulletin 30th December,2012 Issue 1,Volume 19 Money Matters Club Presents
Mar 27, 2016
The Financial Bulletin
30th December,2012
Issue 1,Volume 19
Money Matters Club
Presents
Dear Readers, Year 2012 was full of challenges for Indian financial system. The growth rate expectation which was to be around 8 % at years beginning came down to around 5% by years end. The year gave a lot reasons for the economic reforms, some of which are expected in 2013-14. This volume covers issues like preparedness of INDIA for implementation of IFRS, acceptance of ISLAMIC Banking to encourage Muslim savings, about evolution of indirect taxes which are expected to be addressed in 2013. It also covers how subsidy slash and FDI which have been in news throughout year 2012, as accelerators of Indian economy. And in the end you can read the year 2012 at glance. Have great year ahead….Happy reading!!!
Advisor: Dr V Narendra Faculty Coordinator : Dr. S Vijaylakshmi Student Coordinator: Roshni Nair Editor : Vikas Singh
This newsletter is only for internal use at IBS Hyderabad and not for sale
From the Editors Desk:
IFRS – Is India Ready This Time ?
4
Evolution of Indirect Taxes: Goods and Services tax (GST)
6
Anti-money laundering amendments made by Reserve Bank Of India in 2012
9
The Resilient Currency - Indian Rupee
12
Will India favour Islamic Banking?
13
Subsidy slash and FDI flow: accelerators for Indian economy renaissance
15
Quantative Easing 19
WINNER OF ARTICLE OF THE MONTH:
NEERAJ GUPTA, XIME
CONGRATULATIONS!!!
Contributors: NEERAJ GUPTA,
XIME, BANGALORE
NIKET KUMAR DIXIT
IIT MADRAS
EKTA SINGH
IBS HYDERABAD
ABHILEKH VERMA
IBS HYDERABAD
KOMAL JAIN
IBS HYDERABAD
CHANDRA SHEKHAR
IITM GWALIOR
AMIT KUMAR SINGH
IITM GWALIOR
RAJAT GARG,
BANKING, NMIMS
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Content
ISSUE 1 ,VOLUME 19
The looming question in the minds of many
people these days is, whether India is ready to
switch over to International Financial
Reporting Standards (IFRS). There have
already been many postponements in the
implementation of IFRS. With the scheduled
date of IFRS rollout being April 1, 2013
another postponement seems inevitable.
It all started in January 2010, when the
Ministry of Corporate Affairs issued the
roadmap for IFRS implementation in India.
Institute of Chartered Accountants of India
(ICAI) followed suit and announced that
IFRS will be mandatory for financial
statements in India from April 1, 2010. Since
then the date of implementation has been
postponed two times – April 1, 2011 and
April 1, 2012. RBI also delayed
the IFRS implementation for
Indian banks to April 1, 2013.
ICAI gave a phase wise
implementation plan for IFRS
roll out. In Phase 1, all the Nifty 50 and BSE
30 companies were supposed to adopt IFRS.
In addition to this, all the companies (whether
listed or not) having net worth of more than
Rs. 1000 Crores were also supposed to
implement IFRS in Phase 1. In Phase 2, those
companies not covered in Phase 1 and having
net worth of more than Rs. 500 Crore had to
implement IFRS. In Phase 3, all the
remaining companies were supposed to
implement IFRS. The Phase 1, companies
were required to present financial statements
using Indian Accounting Standards (IAS)
converged with IFRS, from April 1, 2010.
Apparently, the reasons for postponement of
IFRS are taxation and some regulatory issues
which include amendments to Companies
Act. But since new Companies Bill is still
waiting to be passed in parliament, the
implementation of IFRS is delayed.
Therefore, there is confusion in the
government itself regarding
IFRS – Is India Ready This Time ?
“Apparently, the reasons for postponement of
IFRS are taxation and some regulatory issues
which include amendments to
Companies Act.”
Neeraj Gupta XIME, Bangalore
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ISSUE 1 ,VOLUME 19
whether to amend the old companies act or to
incorporate provisions regarding IFRS in the new
Companies Bill. Another reason which is
hindering IFRS’ rollout is that under IFRS, many
elements of balance sheet are evaluated based
on market value as compared to current practice
of carrying it at book value, which is lower than
the market value.
Also, there is one reason which is only specific to
Banking industry and is impeding the
implementation of IFRS in banking sector is the
Provision for Loans. Currently banks follow RBI
guidelines on provisions for loans. However IFRS
requires a case by case assessment of facts and
circumstances surrounding the recoverability and
timing of future cash flows relating to credit
exposure. All this will change the accounting
scenario in India.
Implementation of IFRS in a phase wise
manner was a smart move by ICAI. But it is
very unfortunate that India has not been able
to implement IFRS in the last three years.
There has been a mixed reaction in the
corporate India about this delay in
implementation of IFRS. Some companies are
happy with the delay in implementation of
IFRS because this means that they can defer the
cost to be incurred on appointing international
accounting firms, who are well acquainted with
the IFRS standards. On the other hand, some
companies which want to attract foreign capital
are disappointed with this delay in
implementation of IFRS. After postponing the
IFRS rollout two times, it’s high time that the
India Government wakes up and takes concrete
steps towards IFRS rollout. But whether the
IFRS will be implemented this year, that still
remains to be seen.
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ISSUE 1 ,VOLUME 19
Introduction : After the morale-boosting victory in the
parliament last week on the issue of Foreign
Direct Investment in multi-brand retail, the
United Progressive Alliance (UPA) government
will now try to usher number of reforms to pull
the Indian economy back on track of higher
potential growth.
Among the numerous economic reforms, the
implementation of Goods and Services Tax
(GST) would definitely top the list. After
missing several deadlines, it is now almost
certain that it would be implemented by April
2013. According to Mr. Chidambaram the
implementation of GST would be a “watershed”
event that will economically unify the country.
The objective of this article is to
provide readers fundamental
knowledge about evolution of indirect
taxes in India. The flow of the article
is as follows
Taxation policy in India
Prior to VAT
Introduction of VAT
Goods and Services Tax
Taxation Policy in India India is federal country and both the Centre and
the State have the right to levy taxes. The
constitution of India empowers the Centre and
the State to levy the taxes. The Centre collects
the direct taxes (Income tax, Fringe Benefit
Tax etc.) and the State collects indirect taxes
like VAT and local taxes. The VAT is a
replacement over the traditional Sales tax.
Prior to VAT : Prior to VAT in the country, a commodity was
taxed multiple times in the pre-existing Central
excise duty and State sales tax system. Before
any commodity was produced, inputs were
first taxed, and then after the commodity got
produced with input tax load, output was taxed
again. So this had a cascading effect on the
final prices of the commodity. Further, in the
sales tax structure, there was also a system of
multi-point sales taxation at
subsequent levels of
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“implementation of GST would be a
“watershed” event that will economically
unify the country”
Niket kumar Dixit MBA, IIT Madras
Evolution of Indirect Taxes: Goods and Services tax (GST)
ISSUE 1 ,VOLUME 19
distributive trade, then along with input tax load,
burden of sales tax paid on purchase at each
level was also added, thus aggravating the
cascading effect further. Higher taxes were a
barrier for business and discourage business
activity. High taxes also lead to lobbying
activities where producers of a certain sector
asked the government to lower/waiver taxes for
their sector. This lead to multiple taxation rates
for multiple products and further increased
inefficiency in the system.
Introduction of VAT : Introduction of the VAT in the country is
considered to be a major step forward in the area
of indirect tax reforms in India. The VAT is a
major improvement over the previous Central
Excise Duty at national level and the Sales tax
system at the State level.
The VAT is considered to be the way to negate
the cascading effect in the previous state sales
tax regime. The VAT system taxes goods at
each stage and on the value addition done by the
enterprise. In a VAT system the idea is also to
have a single rate of taxation for all the goods.
When VAT is introduced in place of Central
excise duty, a set-off is given, i.e., a deduction is
made from the overall tax burden for input tax.
In the case of VAT system, a set-off is given
from tax burden not only for input tax paid
but also for tax paid on previous purchases.
With VAT, the problem of “tax on tax” and
related burden of cascading effect is thus
removed. Furthermore, since the benefit of set
-off can be obtained only if tax is duly paid on
inputs (in the case of Central VAT), and on
both inputs and on previous purchases (in the
case of State VAT), there is a built-in check in
the VAT structure on tax compliance in the
Centre as well as in the States, with expected
results in terms of improvement in
transparency and reduction in tax evasion.
In India, VAT was introduced at the Central
level for a selected number of commodities in
terms of MODVAT with effect from March 1,
1986, and in a step-by-step manner for all
commodities in terms of CENVAT in 2002-03.
Later in 2004-05, the service taxes were also
added to CENVAT.
Goods and Services Tax : Despite success with VAT, there are still
certain shortcomings in the structure of VAT
both at the Central and at the State level.
Firstly, non-inclusion of several Central taxes
in the overall framework of CENVAT, such as
additional customs duty, surcharges, etc., and
thus keeping the benefits of comprehensive
input tax and service tax set-off out of reach for
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ISSUE 1 ,VOLUME 19
manufacturer dealers. Secondly, no step has been
taken to capture the value-added chain in the
distribution trade below the manufacturing level
in the existing scheme of CENVAT.
The introduction of GST at the Central level will
not only include more indirect Central taxes and
integrate goods and service taxes for the purpose
of set-off relief, but may also lead to revenue
gain for the Centre through widening of the
dealer base by capturing value addition in the
distributive trade and increased compliance.
In the State-level VAT structure also, certain
shortcomings are there. Firstly, there are several
taxes which are in the nature of indirect tax on
goods and services, such as luxury tax,
entertainment tax, etc., and yet not subsumed in
the VAT. Secondly, CENVAT load on the
goods remains included in the value of goods
to be taxed under State VAT, and
contributing to that extent a cascading effect
on account of CENVAT element. Lastly, any
commodity, is produced on the basis of
physical inputs as well as services, and there
should be integration of VAT on goods with
tax on services at the State level as well, and at
the same time there should also be removal of
cascading effect of service tax.
In the GST, both the cascading effects of
CENVAT and service tax are removed with set
-off, and a continuous chain of set-off from the
original producer’s point and service
provider’s point up to the retailer’s level is
established which reduces the burden of all
cascading effects. Conclusion If the VAT was an improvement over the
Central excise duty at the national level and
the sales tax system at the State level, then the
GST will indeed be the next logical step
towards a comprehensive indirect tax reforms
in the country. In the end, GST is just not
simply VAT plus service tax but an
improvement over the previous system of
VAT and disjointed service tax.
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ISSUE 1 ,VOLUME 19
The KYC guidelines were formulated to protect
the financial system against threat of money
laundering/terror financing and frauds. However,
it has been brought to the notice of Reserve Bank
that some of the provisions made in this regard or
their implementation by banks have led to
avoidable inconvenience to public and also
hindered the efforts at financial inclusion. The
Reserve Bank has received complaints pertaining
to KYC norms relating to areas such as
documentary proof of identity/address, need for
introduction for opening of bank accounts, and
periodicity for review of KYC documents. In
view of these developments, some of the
amendments brought about are:
(i) Opening of new accounts – Proof
of identity and address - An
indicative list of the nature and type of
documents/ information that may be
relied upon for customer identification
is given in the list below.
Consequently, banks have been calling for
separate documents for verification of identity
and address even though the documents for
identity proof (Passport, Drivers’ License etc.)
also carry the address of the individual
concerned. In view of this, customers frequently
complain about the requirement of producing two
sets of documents, one each for identity and
address proof.
To ease the burden on the prospective
customers in complying with KYC
requirements for opening new accounts, it has
now been decided that:
a) If the address on the document submitted for
identity proof by the prospective customer is
same as that declared by him/her in the account
opening form, the document may be accepted as
a valid proof of both identity and address.
b) If the address indicated on the document
submitted for identity proof differs from the
current address mentioned in the account
opening form, a separate proof of address
should be obtained. For this
purpose, apart from the
indicative documents listed in
Ekta Singh MBA, IBS Hyderabad
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Anti-money laundering amendments made by Reserve Bank Of India in 2012
“Unique Identification Authority of India has
advised Reserve Bank that banks are accepting
Aadhaar letter issued by it as a proof of identity but
not of address”
ISSUE 1 ,VOLUME 19
Annex II of the aforesaid circulars, a rent
agreement indicating the address of the customer
duly registered with State Government or similar
registration authority may also be accepted as a
proof of address.
(ii) Introduction not Mandatory for opening
accounts - Before implementation of the system
of document-based verification of identity, as laid
down in PML Act/Rules, introduction from an
existing customer of the bank was considered
necessary for opening of bank accounts. In many
banks, obtaining of introduction for opening of
accounts is still a mandatory part of customer
acceptance policy even though documents of
identity and address as required under our
instructions are provided. This poses difficulties
for prospective customers in opening accounts as
they find it difficult to obtain introduction from
an existing account holder.
Since introduction is not necessary for opening of
accounts under PML Act and Rules or Reserve
Bank’s extant KYC instructions, banks should not
insist on introduction for opening bank accounts
of customers.
(iii) Acceptance of Aadhaar letter for KYC
purposes - Unique Identification Authority of
India (UIDAI) has advised Reserve Bank that
banks are accepting Aadhaar letter issued by it as
a proof of identity but not of address, for opening
accounts. As indicate above, if the address
provided by the account holder is the same as
that on Aadhaar letter, it may be accepted as a
proof of both identity and address.
(v) Accounts with Introduction – The
provisions for opening of bank accounts with
restrictions on total credits and outstanding
balance, with introduction from an existing
account holder or other evidence of identity
and address to the satisfaction of the bank, were
made to help persons who were not able to
provide ‘officially valid documents’ for opening
accounts. In view of provisions for 'Small
Accounts' being included in the PML Rules, the
extant instructions for opening of 'Accounts
with Introduction' stands withdrawn.
It has been observed recently that banks are not
promoting opening of ‘Small Accounts’ for
greater financial inclusion. Banks are, therefore,
advised to open ‘Small Accounts’ for all
persons who so desire. It is reiterated that all
limitations applicable to ‘Small Accounts’
should be strictly observed.
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ISSUE 1 ,VOLUME 19
Customer Identification Procedure Features to be verified and documents that may be obtained from customers
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Features Documents
Accounts of individuals Legal name and any other names used
(i) Passport (ii) PAN card (iii) Voter’s Identity Card (iv) Driving license (v) Identity card (subject to the bank’s satisfaction) (vi) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction of bank
Correct permanent ad-dress
(i) Telephone bill (ii) Bank account statement (iii) Letter from any recognized public authority (iv) Electricity bill (v) Ration card (vi) Letter from employer (subject to satisfaction of the bank) (any one document which provides customer information to the satisfaction of the bank will suffice)
Accounts of companies -Name of the company - Principal place of business - Mailing address of the company -Telephone/Fax Number
(i) Certificate of incorporation and Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf (iv) Copy of PAN allotment letter (v) Copy of the telephone bill
Accounts of partnership firms - Legal name - Address - Names of all partners and their addresses - Telephone numbers of the firm and partners
(i) Registration certificate, if registered (ii) Partnership deed (iii) Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf (iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses (v) Telephone bill in the name of firm/partners
Accounts of Proprietary Concerns -Name, Address and Activity of the Proprietary Concern.
i) Proof of the name, address and activity of the concern, like registration certificate (in the case of a registered concern), certificate/license issued by the Municipal authorities under Shop & Establishment Act, sales and income tax returns, CST / VAT certificate, certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities, License issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, etc. ii) Any registration / licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority / Department. NBFCs/RNBCs may also accept IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT as an identity document for opening of account. iii) The complete Income Tax return (not just the acknowledgement) in the name of the sole proprietor where the firm's income is reflected, duly authenticated/ acknowledged by the Income Tax Authorities. iv) Utility bills such as electricity, water, and landline telephone bills in the name of the proprietary concern. v) Any two of the above documents would suffice. These documents should be in the name of the proprietary concern.
ISSUE 1 ,VOLUME 19
I still remember, there was a time when rupee used to remain fixed for a good span of time, which had always ensured steady growth to us in the past. But, the current situations which has prevailed has ensured the rupee to fall as low as 54.49(as on 16th Dec), making the dollar value strong due to the trade deficit despite of Reserve Bank Of India’s suspected interventions. Strong dollar is also one of the good reasons for the depreciation of our rupee value. Since, the demand for foreign exchange has become relatively inelastic in India for a variety of reasons and does not respond adequately to the shift in the global trade and capital flows, the urgency to increase foreign inflows to push up supply is only rising. The increased demand for the importers
further has significantly added pressure on our currency. Another important aspect is that the foreign
investors do not have clarity over taxation which is a root cause for their worry and if this situation continues then the government won’t be able to clarify these confusions and thus the rupee value will be deteriorated. In several countries the Balance of Payment is under stress which leads to currency depreciation. By deteriorating Balance of Payment situation in several Asian countries it also puts stress on the currencies. As discussed
earlier Reserve Bank of India tried its level best to make things come under its control. It even tried to bring slight corrections in Forex trade but it was not useful in the long run. One can think about the ways to attract the global capital but it is equally important to keep quality
and stability of the foreign money. It is also important that currency issues, which have their in short comings in domestic policymaking are addressed in a better way, rather than just by adopting short-term measures that can backfire.
ABHILEKH VERMA MBA , IBS Hyderabad
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THE RESILIENT CURRENCY- INDIAN RUPEE
“One can think about the ways to attract the
global capital but it is equally important to
keep quality and stability of the foreign
money.”
ISSUE 1 ,VOLUME 19
Islamic Banking, also called, Non-Interest based
financing, in the modern day per se is a concept,
which is as old as the religion, Islam, and
however it has been brought in the limelight by
the Governor of RBI, Dr. D Shubba Rao and has
become one of the most debatable topic in the
recent days.
Emerging economies like India
follow banking practice which
involves interest payments on bor-
rowings and lending of funds which
practisers of Islamic banking
ignore. The concept of Interest
payment is ingrained into the present banking
regulations of India and it’s difficult to imagine a
system in its absence. Interests aids in the
liquidity function which RBI provides to the
commercial banks. However, it can be argued that
countries like London, New York, Hong Kong,
UAE, etc. have introduced Islamic Banking into
their system and are running both the systems
simultaneously and successfully in their
economy.
In crux, Islamic banking, a practice consistent
with Shariah laws, prohibits the collection or
payment of taxes. According to the religion
Islam, interest leads to inflation and its
accumulation leads to increasing the gap
between the rich and poor. In case a mortgage
transaction takes place in the Islamic way, the
bank, instead of giving loan to
the buyer, buys the item
themselves and then sells it to the
buyer at a profit, giving him the
option of repaying the amount in
installments. Hence, the bank
doesn’t charge any interests, but earns its
revenues in the form of profits.
Islamic banking basically doesn’t support the
concept of receiving and paying interests,
Komal Jain MBA, IBS Hyderabad
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Will India favour Islamic Banking?
“Islamic banking, a practice consistent with Shariah laws,
prohibits the collection or payment
of taxes”
ISSUE 1 ,VOLUME 19
however, the same can be called profits while a
transaction is taking place.
Analyzing its viability in India, the Banking
Regulation Act,1949 demands modification in lot
of suitable avenues so that this practice makes a
successful entry. India being the third largest
Muslim dominated country in the world shows
huge potential for Islamic form of banking. The
long raised topic of financial Inclusion can also
be brought up and solved up to some extent
through this practice. Since Muslims are adamant
to take loans on interests as their religion
prohibits them to, if this practice is introduced, it
would act as an encouragement to them, and will
also aid immensely to generate foreign direct
investments from Muslim dominated countries, it
is also said, that this practice may in future help
in combating terrorism to an extent by attracting
equity finance from gulf countries.
Moreover, on the other side, the policy makers
also need to keep in mind that the population of
India is hugely dominated by Non-Muslims, so if
in future, Islamic Banking is introduced in India,
it would have to be customized and marketed in a
manner which would make it equally attractive
from the perception of non Muslims too.
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ISSUE 1 ,VOLUME 19
A decade after being the 2nd fastest growing
economy in the world, Indian economy has
slumped down with a GDP growth rate forecasted
at 5.5 % for the current year 2012 as compared to
previous year’s 6.86%. The foreign investments
and exports have been drastically reduced due to
global slowdown and Eurozone crisis. In its
report, ‘‘Will India be the first BRICS fallen
angel’’, S&P said, “Slowing GDP growth and
political roadblocks to economic policy-making
can put India at a risk of losing its investment
grade rating.” Having scaled down India’s rating
outlook to ‘negative’ from ‘stable’ in April this
year it has threatened to downgrade India’s
sovereign credit rating to ‘speculative’ from the
lowest notch of ‘investment’ grade
which could further woo away the
investors. Desperate times calls for
desperate measures, so in attempt to
lure investors and put the economy
back on track government has taken
up some reforms, i.e. subsidy slash and FDI flow.
Subsidies slash to curb fiscal deficit
The economy is on the edge of a “fiscal
precipice” and government has slash subsidies to
curb the fiscal deficit to 5.1% which could have
otherwise touch 6.1% of GDP in the current fiscal
year. Failing to tackle fiscal deficit means that
the country could potentially face a worse
situation than that of balance-of-payment crisis
in 1991, when the country was bailed out by
International Monetary Fund (IMF), says a
report released by Kelkar committee. The
subsidy slash would prevent flight of foreign
capital and a potential downgrade.
Subsidies slash to tame inflation
Finance Minister P. Chidambaram wants to take
a “calibrated” risk on inflation and lower
interest rates to give a fill up to the slowing
economy, but Reserve Bank of India (RBI) in
its report said that fighting inflation remains a
top priority for its monetary policy indicating
that it is not keen on meeting
Indian Inc’s demand for cutting
interest rates. Instead it wants
Amit Kumar Singh MBA, IITM Gwalior
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Subsidy slash and FDI flow: accelerators for Indian economy renaissance
“FDI is considered as the safest type of
international capital flows out of all the
available sources of external finance”
Chandra shekhar MBA, IITM Gwalior
ISSUE 1 ,VOLUME 19
the government to slash subsidies and reduce the fiscal deficit. Such an action would also provide
some room for monetary policy, but lower interest rates alone are unlikely to jump-start the
investment cycle. Inflation still remains stubbornly above the RBI’s comfort level of five to six
percent and is expected to move up as farm output has been impacted due to scanty rains and
international crude oil prices continue to skyrocket making it imperative to slash government
subsidies and revive capital spending.
Subsidies slash to bolster falling rupee
A series of regulatory measures from RBI have failed to stop the decline of rupee, as global
economic condition worsens. To turn around the rupee’s fortune the government has focused more
on deeper structural problem undermining the currency-India’s gaping current account deficit. To
fix that, the government has taken more proactive steps to slash spending, particularly on fuel
subsidies. Unlike most emerging markets, India imports far exceed its exports, especially as it
brings in more than three-fourths of the crude oil it needs. A weakening rupee makes those
imports more expensive. The government also subsidizes “common man’s” fuel products such as
diesel, cooking gas and kerosene. The subsidy to state–run oil companies widen the fiscal deficit,
which rose to 5.8% of GDP last fiscal year, from 4.9% a year earlier. India has traditionally relied
on foreign investment in Indian stocks and bonds to supply the additional foreign exchange to pay
for imports.
FDI flow
India’s progress and prosperity is reflected by the pace of its sustained economic growth and
development. In particular, FDI is considered as the safest type of international capital flows out
of all the available sources of external finance. As it does not only add fuel to domestic savings,
foreign reserves but promotes growth through spillovers of technology, skills, increased
innovative capacity, and domestic competition. By these, India can improve its economic fortunes
by adopting liberal policies vis-à-vis by creating conditions conducive to investment considered as
an instrument of international economic integration as it brings a package of assets including
capital, entrepreneurship, technological know-how, skills and practices, access to markets- abroad-
in their economic development, technology, managerial skills and capacity and access to foreign
markets. As a result it has a wide range of impact on the country’s economic policy and
improvements in human capital and sole visible panacea for all their scarcities.
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ISSUE 1 ,VOLUME 19
Table: 1 FDI FLOWS IN INDIA (From 1948-2012)
Source: Various issues of SIA Publication, Ministry of commerce, GOI
The government's recent reforms include allowing FDI in multi-brand retail, aviation and
broadcasting, hiking diesel price, capping the number of subsidized LPG cylinders, opening up pen-
sion sector to foreign investment and raising the FDI cap in insurance to 49 percent. Foreign carriers
have also been allowed to invest up to 49 percent in domestic airlines by these the Indian businesses
have been impressed by its vibrancy, its commercial sector, technology and ways to reinvent. It
will certainly help in reducing government's fiscal deficit and putting the economy back on high
growth path and the policy will not only generate more job opportunities but also protect the interest
of small and medium traders thereby having a salutary effect on the economy.
And it will also meet to raise the government fiscal deficit target to 5.1 percent of GDP this financial
year 2012-13. The states “recent innovation” of land pooling scheme would further ensure that the
farmers and land-owners get not only maximum benefit but also a fair share in development projects
and build up rural infrastructure in the state through cold chains and food processing centers and
warehouses.
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Amount of FDI
Mid 1948
March
1964
March
1974
March
1980
March
1990
March
2000
March
2010
March 2011-12
In
Crore
256
565.5
916
933.2
2705
18486
1,23,378
173,947
ISSUE 1 ,VOLUME 19
Table: 2 MAJOR SOURCE OF FDI FLOW IN INDIA
Cumulative country-wise FDI equity flows (from April, 2000 to March, 2012)
Source: Planning Commission, fact sheet on FDI from April 2000 to March 2012
Conclusion
These two reforms would act as a fillip to staggering Indian economy which faces a possibility of
stagflation if current economic conditions persist for some time. More jobs would be created and
people’s purchasing power would increase which could boost the otherwise slowing economy. And
the government should raise resources by selling unutilized and under-utilized land of public sector
undertakings, port trusts, Railways, etc., to fund infrastructure sector.
Mauritius
U.S.A
Singa-pore
U.K
Netherland
Japan
Germany
Cyprus
France
U.A.E
38%
6%
10%
9%
4%
7%
3%
4%
2%
1%
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ISSUE 1 ,VOLUME 19
Quantitative easing (QE) is a part of monetary
policy used by central banks to boost the
national economy when the policy of
modifying the interest rates becomes
ineffective. The Central bank buys financial
assets from the financial institutions and
banks in order to inject a fixed amount of
money into the economy. This results in an
increase in the bank’s reserves and since
demand for assets increases their prices
increase which lowers their yield.
‘Quantitative Easing’ can be used to achieve a
target level of inflation. The policy aims to
ensure that inflation does not fall below that
level. The risks involved in the
implementation of QE policy are:-
Policy being more effective
than intended in acting against
deflation, leading to higher
inflation.
Policy not being effective enough if
banks do not lend the additional
reserves.
Consider a situation where the nominal
interest rate is close to zero. The central bank
cannot lower the rates further as it may result
in a liquidity trap. In such a situation, the
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central bank may perform ‘Quantitative
Easing’ by purchasing limited amount of
bonds and other assets from the financial
institutions.
What are QE1, QE2, and QE3
In 2010, "QE2" became a "ubiquitous
byname" referring to second round of
Quantitative Easing by central banks in the
United States. Retrospectively, the round of
Quantitative Easing preceding QE2 is referred
as "QE1" and similarly third round of
Quantitative Easing following QE2 is referred
as "QE3".
On November 25, 2008, QE1 was announced
and concluded in March of
2010. In this the Fed cut
key interest rates to near
zero and purchased $175
QUANTITATIVE EASING
“Quantitative Easing’ can be used to achieve
a target level of inflation.”
Rajat Garg,
MBA-Banking, NMIMS
ISSUE 1 ,VOLUME 19
billion of agency debt securities and $1.25
trillion of mortgage-backed securities in
addition to purchases of Treasuries. This
resulted in mortgage rate dropping to as low
as 5.23% from 6.33%.
On Nov 3, 2010, QE2 was announced. In this
Federal Reserve announced to spend a total of
$600 billion until the end of the second
quarter of 2011, at a pace of $75 billion per
month. The initial reaction was fall of the
dollar, but this was reversed quickly. The
broad market rose much less, and “the
Information Technology sector did the
worst”.
On September 13, 2012 QE3 was announced.
In this, the Federal Reserve of US has decided
to launch a new $40 billion a month i.e. to
print US dollars worth $40 billion every
month and using them for bond purchasing
program of agency mortgage-backed
securities and this they will continue until at
least mid-2015. According to NASDAQ, this
is effectively a stimulus program which
allows the Federal Reserve to print $40 billion
dollars a month for an unlimited amount of
time. Egan-Jones, Ratings firm, said it
believes the Fed’s decision “will hurt the U.S.
economy and, by extension, credit quality.”
As a result the firm slashed the U.S. bond
rating to AA-.
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According to Federal Reserve’s Chairman,
Ben Bernanke, the intent of QE3 is to
stimulate the economy, which has been
languishing and is now slowing further under
current economic policies.
Two key arguments in supporting QE3 are –
It will induce an increase in asset
prices that will induce an increase in
personal consumption by increasing
personal wealth.
It will put downward pressure on
long-term interest rates especially
mortgage rates .
But a careful examination shows both the
arguments to be weak and the second
argument to ironically echo an unfortunate
past experiment in monetary policy.
The premise is that QE3 will artificially
increase the wealth. ‘Artificial’ because
productive assets will not become productive
by increase of money supply in economy. The
discussion does not even hinge on an increase
in inflation that might depress real wages,
which would improve business profits and
thus justify an increase in asset prices.
Another argument for QE3 is that pushing
down long-term interest rates (especially
mortgage rates) will help the housing market
to recover and hence strengthening the
economic recovery. But problem with this
ISSUE 1 ,VOLUME 19
argument is that mortgage rates are already
very low and housing sector is also
recovering. Also doubt is, how much more
can the Federal Reserve push interest rates
down, and how much difference will it make
to housing market when so many homeown-
ers are underwater and cannot sell and
unemployment, already above 8%, threatens
to rise?
Effects of Quantitative Easing
Quantitative Easing is fundamentally
a regressive redistribution program that has
been boosting wealth for those already
engaged in the financial sector or who already
own homes, but passing little along to the rest
of the economy.
Also lowering of interest rates may actually
have negative impact on the economy as
people dependent on the interest income may
spend less in response to their reduced
income. However, the Federal Reserve has
assumed that the advantages of the low
interest rates outweigh this effect.
On European Union
In the European Union, World Pensions
Council’s financial economists have argued
that QE3-induced artificially low interest rates
will have an adverse impact on pension funds
in EU. As under-funding condition of pension
funds, as without returns that outstrip
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inflation, pension investors may face the real
value of their savings declining rather than
racketing up over the next few years.
On India
India, like EU, is unlikely to benefit too much
from the Federal Reserve's new asset purchase
programme. QE3 is likely to boost global
commodity prices, including crude, which
would be a "negative" for import bill for oil
importing countries like India, while exports
are "unlikely to be boosted significantly" as
the overall economic impact may be limited.
Higher oil prices will keep India's current
account deficit "elevated".
To put it simply: More Quantitative Easing is
not going to move the dial much on the
growth meter.
ISSUE 1 ,VOLUME 19
Raising cap on LPG cylinders
under study: Moily The Centre is considering requests from
various quarters to increase the cap on
subsidized LPG cylinders for domestic use
from the present six cylinders a year,
Petroleum and Natural Gas Minister M.
Veerappa Moily said on Friday.
Narendra Modi fit to become
Prime Minister, says Sushma In the first clear signal that the Opposition
Bharatiya Janata Party may not be averse to
projecting Gujarat Chief Minister Narendra
Modi as its prime ministerial candidate, senior
leader Sushma Swaraj said on Saturday that
“there is no doubt” that he was fit to hold the
country’s top job.
Menon arrives in Beijing for
border talks National Security Adviser Shiv shankar
Menon arrived here on Sunday for talks with
the Chinese leadership on the boundary
question and strategic issues of common
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interest. His two-day visit will mark India's
first major engagement with the
newly-selected fifth generation of the
Communist Party of China's (CPC)
leadership.
Congress in a fix as BSP, SP lock
horns over reservation bill A week after convincing the SP and the BSP
to support it during the FDI-in-retail vote, the
UPA now has the job of getting the bitter
rivals on the same page on the quota bill. BSP
leader Mayawati on Monday warned of a
tough posture after the SP succeeded in not
letting the government table the bill that
provides for quotas for the SCs/STs in
promotions. “We will see for two-three days
more, we will see the government’s stand on
the issue, what they do and what the
Chairman of the Rajya Sabha says. Then, we
will decide and take a tough stand,” she said.
LPG cylinder cap may be raised
to 9 a year The Manmohan Singh government indicated
on Tuesday that the cap on the subsidized
2012 at a Glance
ISSUE 1 ,VOLUME 19
LPG cylinders would go up from six to nine a
household a year.
A large number of Congress MPs had written
to Prime Minister Manmohan Singh,
demanding that the cap be raised to 12
cylinders. On September 13, the government
decided to limit the cylinder supply to six,
while allowing the consumers to buy
additional cylinders at the market price of Rs.
931 a 14.2-kg bottle. Subsidized LPG costs
Rs. 410.50 a cylinder in New Delhi. Mr.
Moily said he had held two rounds of
consultations with Finance Minister
P. Chidambaram on the impact of a decision
to raise the cap. “I think a decision could
happen as early as possible,” he said. The
concession would entail Rs. 9,000 crore in
additional subsidy a year on the government.
“We are working on ways of mitigating the
additional subsidy requirement. We are
working on certain formula to neutralize it.”
FDI in multi-brand retail:
Trouble at the ‘source’ Parliament has approved foreign direct
investment (FDI) in retail. However, the
stringent riders seem to have wiped the smile
off the face of multinational retail players.
After a long-drawn discussion, the
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Government opened doors to FDI in
multi-brand retail trading, but the conditions
regulating foreign inflow have left foreign
players undecided yet.
Fair price pharmacy outlets
trigger threats for doctors An initiative of the West Bengal government
to set up fair price pharmacy outlets in
State-run hospitals appears to have raised the
hackles of vested interests as some doctors
have claimed that they are being intimidated
not to prescribe drugs from the outlets.
Quota Bill passed by huge
majority in RS Barring Samajwadi Party, an overwhelming
majority in the Rajya Sabha passed the Bill
that provides for quotas for SCs and STs in
government job promotions. The Constitution
amendment Bill was approved by 194
members in the 245-strong House. Nine from
Samajwadi Party and an independent voted
against the Bill.
The Bill is now likely to be introduced and
moved for consideration and passing in Lok
Sabha on Wednesday. The proposed legisla-
tion was the reason for the Lok Sabha being
ISSUE 1 ,VOLUME 19
unable to transact any business during the
day.
Applications under RTE from
Jan 10 The State government will begin receiving
applications for admissions under the Right to
Education (RTE) Act from January 10, S.R.
Umashankar, Commissioner, Department of
Public Instruction (DPI), has said.
Not wanting to repeat the mistakes it made
during the ongoing academic year’s
admissions, which started at the last minute,
the government will begin checking the
availability of seats on January 5 with the aim
of making RTE implementation reach 100 per
cent from the present 50 per cent.
10 lakh new jobs expected to
come up in 2013: survey Job seekers can look forward to a prosperous
new year with more than 10 lakh new jobs
expected across various sectors including
FMCG and retail, says a survey.
Coming against the backdrop of uncertain
economic conditions, the projected number of
new jobs in 2013 is way higher than the
estimated 7 lakh employment opportunities
created this year, according to the My
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HiringClub.com survey conducted on over
4,450 firms across 12 industry sectors.
Protesters battle police at India
Gate, several injured Lutyens’ Delhi turned into a war-zone on
Sunday with disparate groups agitating
against the gang-rape of a young
physiotherapy student. Despite pleas by
peaceful protesters, hooligans and political
elements, including members of the Bhagat
Singh Kranti Sena that had assaulted Aam
Aadmi leader Prashant Bhushan, battled
policemen, damaged vehicles and set ablaze
wooden lawn seats.
Hat-trick for Narendra Modi,
sticky wicket for BJP Narendra Modi swept back to power in
Gujarat for the third time in a row but the 115
seats he won in the State — two less than the
Bharatiya Janata Party’s tally in the current
182-member Assembly — has put the
sanghparivar at the national level in a
dilemma.
Consolidated by- Kanchan Kumar Roy
ISSUE 1 ,VOLUME 19
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