newsletter_december_2012_mmc by Money Matters Club IBS-HYD

Money Matters Club Presents

The Financial Bulletin

Issue 1,Volume 19 30th December,2012

From the Editors Desk: Dear Readers,

Advisor: Dr V Narendra Faculty Coordinator : Dr. S Vijaylakshmi Student Coordinator: Roshni Nair Editor : Vikas Singh

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 aheadâ&#x20AC;Ś.Happy reading!!!

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Content WINNER OF ARTICLE OF THE MONTH: NEERAJ GUPTA, XIME

Contributors:

CONGRATULATIONS!!! 

IFRS – Is India Ready This Time ?

Evolution of Indirect Taxes: Goods and Services tax (GST) Anti-money laundering amendments made by Reserve Bank Of India in 2012

The Resilient Currency - Indian Rupee

NEERAJ GUPTA,

XIME, BANGALORE 

NIKET KUMAR DIXIT

IIT MADRAS



EKTA SINGH

IBS HYDERABAD



IBS HYDERABAD 

ABHILEKH VERMA KOMAL JAIN

IBS HYDERABAD 

CHANDRA SHEKHAR

IITM GWALIOR

Will India favour Islamic Banking?



AMIT KUMAR SINGH

IITM GWALIOR

Subsidy slash and FDI flow: accelerators for Indian economy renaissance



RAJAT GARG,

BANKING, NMIMS

Quantative Easing 19

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Page 4

IFRS – Is India Ready This Time ? The looming question in the minds of many

companies not covered in Phase 1 and having

people these days is, whether India is ready to

net worth of more than Rs. 500 Crore had to

switch over to International Financial

implement IFRS. In Phase 3, all the

Reporting Standards (IFRS). There have

remaining companies were supposed to

already been many postponements in the

implement IFRS. The Phase 1, companies

implementation of IFRS. With the scheduled

were required to present financial statements

date of IFRS rollout being April 1, 2013

using Indian Accounting Standards (IAS)

another postponement seems inevitable.

converged with IFRS, from April 1, 2010.

It all started in January 2010, when the Ministry of Corporate Affairs issued the

Apparently, the reasons for postponement of

roadmap for IFRS implementation in India.

IFRS are taxation and some regulatory issues

Institute of Chartered Accountants of India

which include amendments to Companies

(ICAI) followed suit and announced that

Act. But since new Companies Bill is still

IFRS

waiting to be passed in parliament, the

will

mandatory

for

financial

statements in India from April 1, 2010. Since

implementation

then the date of implementation has been

Therefore,

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

phase

wise

implementation plan for IFRS

there

IFRS

government

confusion itself

delayed. in

the

regarding

“Apparently, the reasons for postponement of IFRS are taxation and some regulatory issues which include amendments to Companies Act.”

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

Neeraj Gupta XIME, Bangalore

implement IFRS in Phase 1. In Phase 2, those

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I S S U E 1 , VO L U M E 19

Page 5

whether to amend the old companies act or to

Implementation of IFRS in a phase wise

incorporate provisions regarding IFRS in the new

manner was a smart move by ICAI. But it is

Companies Bill. Another reason which is

very unfortunate that India has not been able

hindering IFRSâ&#x20AC;&#x2122; rollout is that under IFRS, many

to implement IFRS in the last three years.

elements of

There has been a mixed reaction in the

balance sheet are evaluated based

on market value as compared to current practice

corporate

of carrying it at book value, which is lower than

implementation of IFRS. Some companies are

the market value.

happy with the delay in implementation of

Also, there is one reason which is only specific to

IFRS because this means that they can defer the

Banking

the

cost to be incurred on appointing international

implementation of IFRS in banking sector is the

accounting firms, who are well acquainted with

Provision for Loans. Currently banks follow RBI

the IFRS standards. On the other hand, some

guidelines on provisions for loans. However IFRS

companies which want to attract foreign capital

requires a case by case assessment of facts and

are

circumstances surrounding the recoverability and

implementation of IFRS. After postponing the

timing of future cash flows relating to credit

IFRS rollout two times, itâ&#x20AC;&#x2122;s high time that the

exposure. All this will change the accounting

India Government wakes up and takes concrete

scenario in India.

steps towards IFRS rollout. But whether the

industry

and

impeding

India

disappointed

about

with

this

delay

IFRS will be implemented this year, that still remains to be seen.

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Evolution of Indirect Taxes: Goods and Services tax (GST) the State have the right to levy taxes. The

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

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.

potential growth.

Prior to VAT :

Among the numerous economic reforms, the

Prior to VAT in the country, a commodity was

implementation of Goods and Services Tax

taxed multiple times in the pre-existing Central

(GST) would definitely top the list. After

excise duty and State sales tax system. Before

missing several deadlines, it is now almost

any commodity was produced, inputs were

certain that it would be implemented by April

first taxed, and then after the commodity got

2013. According to Mr. Chidambaram the

produced with input tax load, output was taxed

implementation of GST would be a “watershed”

again. So this had a cascading effect on the

event that will economically unify the country.

final prices of the commodity. Further, in the sales tax structure, there was also a system of multi-point sales taxation at

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

“implementation of GST would be a “watershed” event that will economically unify the country”

subsequent

levels

Taxation policy in India Prior to VAT Introduction of VAT Goods and Services Tax

Taxation Policy in India

Niket kumar Dixit

India is federal country and both the Centre and

MBA, IIT Madras

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Page 7

distributive trade, then along with input tax load,

from tax burden not only for input tax paid

burden of sales tax paid on purchase at each

but also for tax paid on previous purchases.

level was also added, thus aggravating the

With VAT, the problem of â&#x20AC;&#x153;tax on taxâ&#x20AC;? and

cascading effect further. Higher taxes were a

related burden of cascading effect is thus

barrier for business and discourage business

removed. Furthermore, since the benefit of set

activity. High taxes also lead to lobbying

-off can be obtained only if tax is duly paid on

activities where producers of a certain sector

inputs (in the case of Central VAT), and on

asked the government to lower/waiver taxes for

both inputs and on previous purchases (in the

their sector. This lead to multiple taxation rates

case of State VAT), there is a built-in check in

for multiple products and further increased

the VAT structure on tax compliance in the

inefficiency in the system.

Centre as well as in the States, with expected

Introduction of VAT :

results

Introduction of the VAT in the country is

transparency and reduction in tax evasion.

terms

improvement

considered to be a major step forward in the area of indirect tax reforms in India. The VAT is a

In India, VAT was introduced at the Central

major improvement over the previous Central

level for a selected number of commodities in

Excise Duty at national level and the Sales tax

terms of MODVAT with effect from March 1,

system at the State level.

1986, and in a step-by-step manner for all commodities in terms of CENVAT in 2002-03.

The VAT is considered to be the way to negate

Later in 2004-05, the service taxes were also

the cascading effect in the previous state sales

added to CENVAT.

tax regime. The VAT system taxes goods at

Goods and Services Tax :

each stage and on the value addition done by the

Despite success with VAT, there are still

enterprise. In a VAT system the idea is also to

certain shortcomings in the structure of VAT

have a single rate of taxation for all the goods.

both at the Central and at the State level. Firstly, non-inclusion of several Central taxes

When VAT is introduced in place of Central

in the overall framework of CENVAT, such as

excise duty, a set-off is given, i.e., a deduction is

additional customs duty, surcharges, etc., and

made from the overall tax burden for input tax.

thus keeping the benefits of comprehensive

In the case of VAT system, a set-off is given

input tax and service tax set-off out of reach for

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manufacturer dealers. Secondly, no step has been

goods remains included in the value of goods

taken to capture the value-added chain in the

distribution trade below the manufacturing level

contributing to that extent a cascading effect

in the existing scheme of CENVAT.

on account of CENVAT element. Lastly, any

taxed

under

State

VAT,

and

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 The introduction of GST at the Central level will

established which reduces the burden of all

not only include more indirect Central taxes and

cascading effects.

integrate goods and service taxes for the purpose

Conclusion

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.

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 State-level VAT structure also, certain

in the country. In the end, GST is just not

shortcomings are there. Firstly, there are several

simply

taxes which are in the nature of indirect tax on

improvement over the previous system of

goods and services, such as luxury tax,

VAT and disjointed service tax.

VAT

plus

service

tax

but

entertainment tax, etc., and yet not subsumed in the VAT. Secondly, CENVAT load on the

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Anti-money laundering amendments made by Reserve Bank Of India in 2012 The KYC guidelines were formulated to protect

sets of documents, one each for identity and

the financial system against threat of money

address proof.

laundering/terror financing and frauds. However,

To ease the burden on the prospective

it has been brought to the notice of Reserve Bank

customers

that some of the provisions made in this regard or

requirements for opening new accounts, it has

their implementation by banks have led to

now been decided that:

avoidable inconvenience to public and also

a) If the address on the document submitted for

hindered the efforts at financial inclusion. The

identity proof by the prospective customer is

Reserve Bank has received complaints pertaining

same as that declared by him/her in the account

to KYC norms relating to areas such as

opening form, the document may be accepted as

documentary proof of identity/address, need for

a valid proof of both identity and address.

introduction for opening of bank accounts, and

b) If the address indicated on the document

periodicity for review of KYC documents. In

submitted for identity proof differs from the

view of these developments, some of the

current address mentioned in the account

amendments brought about are:

opening form, a separate proof of address

(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

“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”

complying

with

KYC

should be obtained. For this purpose,

apart

from

the

indicative documents listed in

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

Ekta Singh MBA, IBS Hyderabad

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Annex II of the aforesaid circulars, a rent

provided by the account holder is the same as

agreement indicating the address of the customer

that on Aadhaar letter, it may be accepted as a

duly registered with State Government or similar

proof of both identity and address.

registration authority may also be accepted as a

(v) Accounts with Introduction – The

proof of address.

provisions for opening of bank accounts with

(ii) Introduction not Mandatory for opening

restrictions on total credits and outstanding

accounts - Before implementation of the system

balance, with introduction from an existing

of document-based verification of identity, as laid

account holder or other evidence of identity

down in PML Act/Rules, introduction from an

and address to the satisfaction of the bank, were

existing customer of the bank was considered

made to help persons who were not able to

necessary for opening of bank accounts. In many

provide ‘officially valid documents’ for opening

banks, obtaining of introduction for opening of

accounts. In view of provisions for 'Small

accounts is still a mandatory part of customer

Accounts' being included in the PML Rules, the

acceptance policy even though documents of

extant instructions for opening of 'Accounts

identity and address as required under our

with Introduction' stands withdrawn.

instructions are provided. This poses difficulties

It has been observed recently that banks are not

for prospective customers in opening accounts as

promoting opening of ‘Small Accounts’ for

they find it difficult to obtain introduction from

greater financial inclusion. Banks are, therefore,

an existing account holder.

advised to open ‘Small Accounts’ for all

Since introduction is not necessary for opening of

persons who so desire. It is reiterated that all

accounts under PML Act and Rules or Reserve

limitations applicable to ‘Small Accounts’

Bank’s extant KYC instructions, banks should not

should be strictly observed.

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

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Customer Identification Procedure Features to be verified and documents that may be obtained from customers Features

Documents

Accounts of individuals Legal name and any other names used

(i) Passport (ii) PAN card (iii) Voterâ&#x20AC;&#x2122;s Identity Card (iv) Driving license (v) Identity card (subject to the bankâ&#x20AC;&#x2122;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 address

(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 of the above documents wouldHyderabad suffice. These documents be in is onlytwofor internal use at IBS and not should for sale the name of the proprietary concern.

This newsletter

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THE RESILIENT CURRENCY- INDIAN RUPEE 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.

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 Strong dollar is also one of the good reasons for Payment situation in several Asian countries it the depreciation of our rupee value. Since, the also puts stress on the currencies. As discussed demand for foreign exchange has earlier Reserve Bank of India tried become relatively inelastic in India “One can think about the its level best to make things come for a variety of reasons and does not under its control. It even tried to ways to attract the respond adequately to the shift in the bring slight corrections in Forex global capital but it is global trade and capital flows, the trade but it was not useful in the equally important to keep quality and urgency to increase foreign inflows long run. stability of the foreign to push up supply is only rising. The One can think about the ways to money.” increased demand for the importers 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.

further has significantly added currency.

pressure on our

Another important aspect is that the foreign

ABHILEKH VERMA MBA , IBS Hyderabad

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Page 13

Will India favour Islamic Banking? Islamic Banking, also called, Non-Interest based

In crux, Islamic banking, a practice consistent

financing, in the modern day per se is a concept,

with Shariah laws, prohibits the collection or

which is as old as the religion, Islam, and

payment of taxes. According to the religion

however it has been brought in the limelight by

Islam, interest leads to inflation and its

the Governor of RBI, Dr. D Shubba Rao and has

accumulation leads to increasing the gap

become one of the most debatable topic in the

between the rich and poor. In case a mortgage

recent days.

transaction takes place in the Islamic way, the

Emerging economies like India follow

banking practice

which

involves interest payments on borrowings and lending of funds which practisers

Islamic

banking

bank, “Islamic banking, a practice consistent with Shariah laws, prohibits the collection or payment of taxes”

the

instead of giving loan to buyer,

the

item

themselves and then sells it to the buyer at a profit,

giving him the

option of repaying the amount in installments.

ignore. The concept of Interest

buys

Hence,

the

bank

payment is ingrained into the present banking

doesn’t charge any interests, but earns its

regulations of India and it’s difficult to imagine a

revenues in the form of profits.

system in its absence. Interests aids in the

Islamic banking basically doesn’t support the

liquidity function which RBI provides to the

concept of receiving and paying interests,

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

their

economy.

Komal Jain MBA, IBS Hyderabad

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Page 14

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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Subsidy slash and FDI flow: accelerators for Indian economy renaissance A decade after being the 2nd fastest growing

year. Failing to tackle fiscal deficit means that

economy in the world, Indian economy has

the country could potentially face a worse

slumped down with a GDP growth rate forecasted

situation than that of balance-of-payment crisis

at 5.5 % for the current year 2012 as compared to

in 1991, when the country was bailed out by

previous year’s 6.86%. The foreign investments

International Monetary Fund (IMF), says a

and exports have been drastically reduced due to

report released by Kelkar committee. The

global slowdown and Eurozone crisis. In its

subsidy slash would prevent flight of foreign

report, ‘‘Will India be the first BRICS fallen

capital and a potential downgrade.

angel’’, S&P said, “Slowing GDP growth and

Subsidies slash to tame inflation

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

investors. Desperate times calls for desperate measures, so in attempt to lure investors and put the economy

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

lowest notch of ‘investment’ grade which could further woo away the

Finance Minister P. Chidambaram wants to take

“FDI is considered as the safest type of international capital flows out of all the available sources of external finance”

that it is not keen on meeting Indian Inc’s demand for cutting interest rates. Instead it wants

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

Chandra shekhar

Amit Kumar Singh

MBA, IITM Gwalior

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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- abroadin 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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Table: 1 FDI FLOWS IN INDIA (From 1948-2012)

Amount of FDI

Mid 1948

March 1964

March 1974

March 1980

March 1990

March 2000

March 2010

In Crore

256

565.5

916

933.2

2705

18486

1,23,378

March 2011-12

173,947

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 pension 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 â&#x20AC;&#x153;recent innovationâ&#x20AC;? 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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Table: 2 MAJOR SOURCE OF FDI FLOW IN INDIA Cumulative country-wise FDI equity flows (from April, 2000 to March, 2012)

Mauritius

38%

U.S.A

Singapore

U.K

Netherland

Japan

Germany

Cyprus

France

U. A. E

10%

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 peopleâ&#x20AC;&#x2122;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.

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I S S U E 1 , VO L U M E 19

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QUANTITATIVE EASING Quantitative easing (QE) is a part of monetary

central bank may perform ‘Quantitative

policy used by central banks to boost the

Easing’ by purchasing limited amount of

national economy when the policy of

bonds and other assets from the financial

modifying

institutions.

the

interest

rates

becomes

ineffective. The Central bank buys financial

What are QE1, QE2, and QE3

assets from the financial institutions and

In 2010, "QE2" became a "ubiquitous

banks in order to inject a fixed amount of

byname" referring to second round of

money into the economy. This results in an

Quantitative Easing by central banks in the

increase in the bank’s reserves and since

United States. Retrospectively, the round of

demand for assets increases their prices

Quantitative Easing preceding QE2 is referred

increase which lowers their yield.

as "QE1" and similarly third round of

‘Quantitative Easing’ can be used to achieve a

Quantitative Easing following QE2 is referred

target level of inflation. The policy aims to

as "QE3".

ensure that inflation does not fall below that

On November 25, 2008, QE1 was announced

level. The risks involved in the

and concluded in March of

implementation of QE policy are:

Policy being more effective than intended in acting against deflation, leading to higher

2010. In this the Fed cut “Quantitative Easing’ can be used to achieve a target level of inflation.”

key interest rates to near zero and

purchased $175

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

Rajat Garg,

in a liquidity trap. In such a situation, the

MBA-Banking, NMIMS

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I S S U E 1 , VO L U M E 19

Page 20

billion of agency debt securities and $1.25

According to Federal Reserve’s Chairman,

trillion of mortgage-backed securities in

Ben Bernanke, the intent of QE3 is to

addition to

purchases of Treasuries. This

stimulate the economy, which has been

resulted in mortgage rate dropping to as low

languishing and is now slowing further under

as 5.23% from 6.33%.

current economic policies.

On Nov 3, 2010, QE2 was announced. In this

Two key arguments in supporting QE3 are –

Federal Reserve announced to spend a total of



It will induce an increase in asset

$600 billion until the end of the second

prices that will induce an increase in

quarter of 2011, at a pace of $75 billion per

personal consumption by increasing

month. The initial reaction was fall of the

personal wealth.

dollar, but this was reversed quickly. The



It will put downward pressure on

broad market rose much less, and “the

long-term interest rates especially

Information

mortgage rates .

Technology

sector

did

the

worst”.

But a careful examination shows both the

On September 13, 2012 QE3 was announced.

arguments to be weak and the second

In this, the Federal Reserve of US has decided

argument to ironically echo an unfortunate

to launch a new $40 billion a month i.e. to

past experiment in monetary policy.

print US dollars worth $40 billion every

The premise is that QE3 will artificially

month and using them for bond purchasing

increase the wealth. ‘Artificial’ because

program

mortgage-backed

productive assets will not become productive

securities and this they will continue until at

by increase of money supply in economy. The

least mid-2015. According to NASDAQ, this

discussion does not even hinge on an increase

is effectively a stimulus program which

in inflation that might depress real wages,

allows the Federal Reserve to print $40 billion

which would improve business profits and

dollars a month for an unlimited amount of

thus justify an increase in asset prices.

time. Egan-Jones, Ratings firm, said it

Another argument for QE3 is that pushing

believes the Fed’s decision “will hurt the U.S.

down long-term interest rates (especially

economy and, by extension, credit quality.”

mortgage rates) will help the housing market

As a result the firm slashed the U.S. bond

to recover and hence strengthening the

rating to AA-.

economic recovery. But problem with this

agency

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I S S U E 1 , VO L U M E 19

Page 21

argument is that mortgage rates are already

inflation, pension investors may face the real

very

value of their savings declining rather than

low

and

housing

sector

also

recovering. Also doubt is, how much more

racketing up over the next few years.

can the Federal Reserve push interest rates down, and how much difference will it make

On India

to housing market when so many homeown-

India, like EU, is unlikely to benefit too much

ers are underwater and cannot sell and

from the Federal Reserve's new asset purchase

unemployment, already above 8%, threatens

programme. QE3 is likely to boost global

to rise?

commodity prices, including crude, which

Effects of Quantitative Easing

would be a "negative" for import bill for oil

Quantitative

Easing

fundamentally

importing countries like India, while exports

a regressive redistribution program that has

are "unlikely to be boosted

been boosting wealth for those already

the overall economic impact may be limited.

engaged in the financial sector or who already

Higher oil prices will keep India's current

own homes, but passing little along to the rest

account deficit "elevated".

of the economy.

To put it simply: More Quantitative Easing is

Also lowering of interest rates may actually

not going to move the dial much on the

have negative impact on the economy as

growth meter.

significantly" 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 Councilâ&#x20AC;&#x2122;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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I S S U E 1 , VO L U M E 19

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2012 at a Glance Raising cap on LPG cylinders under study: Moily The Centre is considering requests from various quarters to increase the cap on

interest. His two-day visit will mark India's first

major

newly-selected Communist

engagement fifth Party

with

generation of

China's

the

(CPC)

leadership.

subsidized LPG cylinders for domestic use from the present six cylinders a year, Petroleum and Natural Gas Minister M.

Congress in a fix as BSP, SP lock

Veerappa Moily said on Friday.

horns over reservation bill A week after convincing the SP and the BSP

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.

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

Menon arrives in Beijing for

will decide and take a tough stand,” she said.

border talks National Security Adviser Shiv shankar

LPG cylinder cap may be raised

Menon arrived here on Sunday for talks with

to 9 a year

the Chinese leadership on the boundary question and strategic issues of common

The Manmohan Singh government indicated on Tuesday that the cap on the subsidized

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I S S U E 1 , VO L U M E 19

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LPG cylinders would go up from six to nine a

Government

household a year.

multi-brand retail trading, but the conditions

A large number of Congress MPs had written

regulating foreign inflow have left foreign

players undecided yet.

Prime

Minister

Manmohan

Singh,

opened

doors

FDI

demanding that the cap be raised to 12 cylinders. On September 13, the government

Fair price pharmacy outlets

decided to limit the cylinder supply to six,

trigger threats for doctors

while

allowing

the

consumers

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

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.

to raise the cap. “I think a decision could happen as early as possible,” he said. The

Quota Bill passed by huge

concession would entail Rs. 9,000 crore in

majority in RS

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.”

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

FDI

multi-brand

retail:

Samajwadi Party and an independent voted

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

long-drawn

discussion,

members in the 245-strong House. Nine from

the

against the Bill. The Bill is now likely to be introduced and moved for consideration and passing in

Lok

Sabha on Wednesday. The proposed legislation was the reason for the Lok Sabha being

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I S S U E 1 , VO L U M E 19

Page 24

unable to transact any business during the

HiringClub.com survey conducted on over

day.

4,450 firms across 12 industry sectors.

Applications under RTE from

Protesters battle police at India

Jan 10

Gate, several injured

The State government will begin receiving

Lutyens’ Delhi turned into a war-zone on

applications for admissions under the Right to

Sunday

with

disparate

groups

Education (RTE) Act from January 10, S.R.

against

the

gang-rape

Umashankar, Commissioner, Department of

physiotherapy student. Despite pleas by

Public Instruction (DPI), has said.

peaceful protesters, hooligans and political

Not wanting to repeat the mistakes it made

elements, including members of the Bhagat

during

year’s

Singh Kranti Sena that had assaulted Aam

admissions, which started at the last minute,

Aadmi leader Prashant Bhushan, battled

the government will begin checking the

policemen, damaged vehicles and set ablaze

availability of seats on January 5 with the aim

wooden lawn seats.

of making RTE implementation reach 100 per

Hat-trick for Narendra Modi,

the

ongoing

academic

cent from the present 50 per cent.

10 lakh new jobs expected to

agitating a

young

sticky wicket for BJP Narendra Modi swept back to power in Gujarat for the third time in a row but the 115

come up in 2013: survey

seats he won in the State — two less than the

Job seekers can look forward to a prosperous

Bharatiya Janata Party’s tally in the current

new year with more than 10 lakh new jobs

182-member Assembly — has put the

expected across various sectors including

sanghparivar at the national level in a

FMCG and retail, says a survey.

dilemma.

Coming against the backdrop of uncertain economic conditions, the projected number of new jobs in 2013 is way higher than the

Consolidated byKanchan Kumar Roy

estimated 7 lakh employment opportunities created this year, according to the My

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I S S U E 1 , VO L U M E 19

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