Economics – Oct 2013

1. Economics Nobel Prize : Shared by Eugene Fama, Robert Shiller and Lars Peter Hansen. Their work ranges from the foundations of modern finance (Fama) to defects in the mainstream models (Fama and Shiller) and improvements in statistical methodology (Fama and Hansen).
   

   Economics Nobel Prize 2013

EPCG Scheme

History

• The Export Promotion Capital Goods (EPCG) scheme was one of the several export-promotion initiatives launched by the government in the early ’90s. The basic purpose of the scheme was to allow exporters to import machinery and equipment at affordable prices so that they can produce quality products for the export market.
• The import duty on capital goods — like all other items — was high during that period, inflating the cost of capital goods nearly 50%, so the government allowed exporters to import capital goods at only 25% import duty. For waiver of the remaining portion of import duty, exporters were supposed to undertake an ‘export obligation’ (a promise to export) which was worked out on the basis of the duty concession obtained.
• Exporters were given eight years to carry out their commitment to export. Once the ‘export obligation’ was fulfilled, the owner of the capital goods concerned could sell them or transfer them to another facility. Till the promised export materialised, the owners of the machinery or equipment were barred from even moving the goods concerned out of their manufacturing unit.

Did liberalisation of imports have an impact on EPCG?

• Gradual reduction in import duties, particularly in the case of capital goods, has been rendering EPCG scheme less attractive. However, till last year, EPCG was preferred by many since the exemption also included 4% special additional duty of customs (SAD) which has been abolished now.

Two windows

• The first change was the introduction of two windows — the first one attracting 15% duty while the second one attracted 25%. Those who preferred to pay higher duty under the second window had a lower export obligation. In ’95, the government offered duty-free imports under the first window while the duty under the second was 15%. This was the first time duty-free imports were made available under EPCG.
• Since the purpose of the scheme was to allow exporters compete internationally, it was decided to allow them to buy machinery at internationally-competitive rates. The pent-up demand for imported machinery had peaked at this point and the domestic industry’s initial trouble with competing imports had come to an end. Thereafter, the government even reduced the import duty on capital goods under the second window to 10% while the first remained duty-free. Subsequently, the policy was changed in ’00 to merge the two windows into one — import capital goods by paying 5% and undertake uniform export commitment.

Economics – Sep 2013

Swapping foreign currency

• The Reserve Bank of India allowed banks to swap funds mobilised through foreign currency deposits to attract overseas funds.
• It has been decided accordingly to offer such a window to the banks to swap the fresh foreign currency non-resident (banks) FCNR(B) dollar funds, mobilised for a minimum tenor of three years and over at a fixed rate of 3.5 per cent per annum for the tenor of the deposit.
• The RBI has decided that the current overseas borrowing limit of 50 per cent of the unimpaired Tier I capital will be raised to 100 per cent and that the borrowings mobilized under this provision can be swapped with RBI at the option of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market. These schemes will be open up to November 30, 2013, which coincides with when the relaxations on NRI deposits expire.

Swap Funds

• In finance, a swap is a derivative in which counterparties exchange cash flows of one party’s financial instrument for those of the other party’s financial instrument.
• Swaps were first introduced to the public in 1981 when IBM and the World Bank entered into a swap agreement

Types of Swaps 

Interest Rate Swap

• The most common type of swap is a “plain Vanilla” interest rate swap. It is the exchange of a fixed rate loan to a floating rate loan. The life of the swap can range from 2 years to over 15 years. The reason for this exchange is to take benefit from comparative advantage.
• Some companies may have comparative advantage in fixed rate markets, while other companies have a comparative advantage in floating rate markets.
• A swap has the effect of transforming a fixed rate loan into a floating rate loan or vice versa.
• In this only INTEREST on predetermined principal at predetermined rate (variable or fixed) is exchanged / swap.
• For example, party B makes periodic interest payments to party A based on a variable interest rate of LIBOR +70 basis points. Party A in return makes periodic interest payments based on a fixed rate of 8.65%.

Currency Swaps

• A currency swap involves exchanging principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal loan in another currency.
• Just like interest rate swaps, the currency swaps are also motivated by comparative advantage.
• Currency swaps entail swapping both principal and interest between the parties, with the cashflows in one direction being in a different currency than those in the opposite direction.

Credit Default Swaps

• A credit default swap (CDS) is a contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if an instrument, typically a bond or loan, goes into default (fails to pay).
• Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded.
• CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occur. Unlike an actual insurance contract the buyer is allowed to profit from the contract and may also cover an asset to which the buyer has no direct exposure.

MSME Sector

Classification of MSME 

MSME sector are classified into 2 classes with the following criteria:

1. Manufacturing or production enterprises

Enterprises	Investment in plant & machinery
Micro Enterprises	< Rs.25 lacs
Small Enterprises	> Rs.25 lacs and < Rs.5 crores
Medium Enterprises	> Rs.5 crores and < Rs.10 crores

2. Service enterprises

Enterprises	Investment in equipments
Micro Enterprises	< Rs.10 lacs
Small Enterprises	> Rs.10 lacs and < Rs.2 Crores
Medium Enterprises	> Rs.2 Crores and < Rs.5 Crores

Contribution of MSME sector to Indian Economy

• Around 40% of total exports.
• Over 8% to gross domestic product (GDP).
• Contributes around 45% of India’s manufacturing output.
• Provides employment to about 60 million persons through 26 million enterprises.

Inter-Ministerial committee to boost MSME exports in May 2013 

WHY ?  

• Revival of exports which were affected by global economic slowdown ( exports decline to USD 300 billion as against projected USD 360 billion)
• Overcoming the widening trade deficit gap as it resulted into increase in current account deficit (CAD crossed 6.7% of GDP in Q3 of fiscal year 2012-13).
• Suggest Long and short-term measures to enhance exports.

Committee Members : 

• Chairman: R S Gujral (Finance Secretary).

Economics June 2013

1. India’s trade deficit widened to a seven month high of $20.1 billion in May as gold imports continue to surge while exports declined by over a percent.

   

2. Reserve Bank on Monday kept the key interest rates unchanged citing elevated food inflation, rupee depreciation and uncertainty over foreign fund inflows. Key short term lending rate (repo rate) kept unchanged at 7.25 per cent;Cash reserve ratio unchanged at 4 pc;
   

   rbi policy

   

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3. A slew of stimulating reforms are in the offing. Over the next three weeks, the Centre is likely to set up a railway tariff authority, a coal and road regulator, unveil a new policy of auctioning coal blocks and remove the FDI cap in various sectors. The moves come as an attempt to kick-start a sluggish economy, remove the investment gloom and improve investor confidence.
4. Search engine giant Google on Monday launched a new ad format ‘Product Listing Ads’ in India to provide users information like images, price and brands of products, which will help people shop better both online and offline.