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).

News : 3 July 2013

1. Ed Husic became Australia’s first ever Muslim Minister in Australia, he was flooded with online racial abuse for taking oath of office on the Koran.
2. The Egyptian army has invited opposition leader Mohammed ElBaradei, the top Sunni sheikh and the Coptic pope for “consultations” on a future roadmap to end the crisis
3.  Several Southeast Asian countries have begun scaling down the subsidies they are providing to key sectors of their economies.Last month, the Thai government confirmed that it will soon decrease the rice price subsidy it gives to farmers. In Indonesia, the parliament approved a revised budget that lowered the fuel subsidy. Meanwhile, in the Philippines’ Transportation and Communications chief advised Metro Manila train commuters to prepare for a fare hike since the government will reduce the subsidy for the mass transit service.
4. India has ranked 66th in the Global Innovation Index (GII) 2013, an index that is published by Cornell University, INSEAD, World Intellectual Property Organization (WIPO) and the Confederation of Indian Industry (CII) as a knowledge partner.The study ranked 142 economies across the world on their innovation capacity and efficiency.India ranked 1st in the Central and South Asia region followed by Kazakhstan and Sri Lanka, and 11th overall in innovation efficiency ratio. (Innovation efficiency reflects the innovation output per unit of innovation input in the economy).India ranked poor in areas such as political stability (rank 123), ease of starting business (rank 128) knowledge absorption (rank 122) among others.
5. India’s ONGC has lost the giant Kashagan oilfield to the Chinese after Kazakhstan blocked its USD 5 billion deal to buy US energy major ConocoPhillips’ stake in the Caspian Sea oilfield.ONGC Videsh, the overseas investment arm of state-owned Oil and Natural Gas Corp (ONGC), had in November last year struck a deal to buy ConocoPhillips’ 8.4 per cent stake in Kazakhstan’s biggest oilfield, Kashagan for USD 5 billion.“Based on the communication received through ConocoPhillips, the Government of Kazakhstan has announced that in accordance with the Republic of Kazakhstan Law (ROK) on Subsurface and Subsurface Use, ROK has exercised its priority right and pre-empted the bid by OVL to acquire the 8.4 per cent stake of ConocoPhillips,” OVL said in a statement.

News : 2 July 2013

1. India says ‘no’ to Snowden’s plea.
2. In case of issuance of cheque from joint accounts, only the person who signs the cheque can be prosecuted in a cheque bouncing case under Section 138 of the Negotiable Instruments Act, the Supreme Court held.
3. Suresh kalmadi lost his bid for the fourth consecutive term as president of the Asian Atheletics Association to Dahlan Jumaan Al-Hamad of Qatar by 2 votes.

News : 1 July 2013

1. The U.S. National Security Agency snooped on the Indian embassy and considered it a “target” along with 37 other embassies and missions here, according to the latest revelations by The Guardian.The Guardian exposé on the spying methods used against embassies said a key method was code-named ‘Dropmire,’ which, according to a 2007 document, is “implanted on the Cryptofax.”It is unclear whether the Indian embassy uses such a device.
2. Delhi Metro on Monday took over operations of Airport Express Line even as Reliance Infra, which ran the line, blamed DMRC’s “persistent” failure to cure defects in the civil structure for termination of the concession agreement and claimed termination payment from it.
3. Indian Space Research Organisation (ISRO) will launch the first of seven satellites that will provide the country with an independent navigation satellite capability.

News : 17 June 2013

1. Britain spied on foreign politicians and officials participating in two G20 meetings in London in 2009 by using “ground-breaking” intelligence capabilities to get an edge during the high-stakes financial talks , according to documents uncovered by U.S. whistleblower Edward Snowden and obtained by the Guardian.
2. 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 per cent
3. 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.
4. The Union government should withdraw the Insurance Bill that envisaged enhancement of foreign direct investment in the insurance sector from 26 per cent to 49 per cent, the All India Insurance Corporation Employees Association (AIIEA) has demanded.
5. The Foreign Investment Promotion Board (FIPB) on Friday deferred a decision on the Rs. 2,000-crore Jet-Etihad deal and sought clarity on control and ownership.
6. The Great Indian Bustard, one of the critically endangered flying bird species in the world, will soon be tracked by satellite by the Wildlife Institute of India (WII) to understand the movement of this rare bird and its preferred habitat,primarily in Gujarat and Rajasthan.
7. China’s Tianhe 2 – worlds fastest computer.Speed : 33.86 petaflops (1000 trillion calculations) per second on a benchmarking test.Second being in US : TITAN having speed of 17.59 petaflops per second.
8.  The Foreign Ministers of Egypt and Ethiopia met in Addis Ababa on Monday in the hope of defusing tensions over a huge dam Ethiopia is building on the Blue Nile River.Egypt and Ethiopia began a sharp exchange of words after Ethiopia last month started to divert Nile waters as part of the construction of its massive $4.2 billion hydro-electric project dubbed the Grand Ethiopian Renaissance Dam.
9. Iranian president-elect Hassan Rouhani will take office in Aug 2013.
10. The single-seater Solar Impulse plane, attempting a record-breaking trip across the U.S., made a smooth landing in Washington.The Swiss-made 63-meter-wide aircraft set down at Dulles International Airport.

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.