Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
The International Monetary Fund (IMF) is an international organization that was initiated in 1944 at the Bretton
Woods Conference and formally created in 1945 by 29 member countries. The IMF's stated goal was to stabilize exchange rates
and assist the reconstruction of the world’s international payment system post-World War II. Countries contribute money to a
pool through a quota system from which countries with payment imbalances can borrow funds temporarily. Through this
activity and others such as surveillance of its members' economies and policies, the IMF works to improve the economies of its
member countries.
The IMF describes itself as “an organization of 188 countries, working to foster global monetary cooperation, secure financial
stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around
the world.
The organization's stated objectives are to promote international economic cooperation, international trade, employment and
exchange rate stability, including by making financial resources available to member countries to meet balance of payments
needs. Its headquarters are in Washington, D.C., United States
UNDP is the United Nations Global Development Network
Operated in 177 countries. HQ is New York
UNICEF: United Nations Children’s Fund: United Nations Program HQ: New York
Humanitarian & Developmental assistance to children & mothers in developing countries. Started in December 1946
ADB- Asian Development Bank based in Manila, Philippines, started in August-1966 to facilitate economic development in
Asian Countries United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly known as the
United Nations Economic Commission for Asia and the Far East) and non-regional developed countries. ]From 31 members at
its establishment, ADB now has 67 members - of which 48 are from within Asia and the Pacific and 19 outside. ADB was
modelled closely on the World Bank, and has a similar weighted voting system.
An open market operation (also known as OMO) is an activity by a central bank to buy or sell government bonds on the open
market. A central bank uses them as the primary means of implementing monetary policy. The usual aim of open market
operations is to manipulate the short term interest rate and the supply of base money in an economy, and thus indirectly control
the total money supply. This involves meeting the demand of base money at the target interest rate by buying and selling
government securities, or other financial instruments. Monetary targets, such as inflation, interest rates, or exchange rates, are
used to guide this implementation. Credit Control is an important tool used by Reserve Bank of India, a major weapon of the
monetary policy used to control the demand and supply of money (liquidity) in the economy. Central Bank administers control
over the credit that the commercial banks grant. Such a method is used by RBI to bring “Economic Development with
Stability”. It means that banks will not only control inflationary trends in the economy but also boost economic growth which
would ultimately lead to increase in real national income with stability. In view of its functions such as issuing notes and
custodian of cash reserves, credit not being controlled by RBI would lead to Social and Economic instability in the country.
Credit Rating Agencies in India: CRISIL, ICRA, CARE, ONICRA, FITCH & SMERA
Corporate hedging is a mechanism to protect a firm's exposure to foreign exchange risk. The process is managed by corporate
treasury officials and they work toward maximising forex income and minimising costs. In the process, they try to minimise
losses from the volatility in the currency markets, by covering the exposure. The extent of the foreign currency risk for a firm
depends on the value of the foreign exchange rates, among other things.
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that
company accounts are understandable and comparable across international boundaries. They are a consequence of growing
international shareholding and trade and are particularly important for companies that have dealings in several countries. They
1
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
are progressively replacing the many different national accounting standards. The rules to be followed by accountants to
maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external.
IFRS began as an attempt to harmonise accounting across the European Union but the value of harmonisation quickly made the
concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards
(IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On
1 April 2001, the new International Accounting Standards Board took over from the IASC the responsibility for setting
International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations
Committee standards (SICs). The IASB has continued to develop standards calling the new standards International Financial
Reporting Standards (IFRS).
Real time gross settlement systems (RTGS) are funds transfer systems where transfer of money or securities takes place from
one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected
to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is
settled on one to one basis without bunching or netting with any other transaction. Once processed, payments are final and
irrevocable.
An efficient national payment system reduced the cost of exchanging goods and services, and indispensable to the functioning
of the interbank, money, and capital markets. A weak payment system may severely drag on the stability and developmental
capacity of a national economy; its failures can result in inefficient use of financial resources, inequitable risk-sharing among
agents, actual losses for participants, and loss of confidence in the financial system and in the very use of money Technical
efficiency of the payment system is important for development of an economy. Real time gross settlement systems (RTGS) are
funds transfer systems where transfer of money or securities takes place from one bank to another on a "real time" and on
"gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are
settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bunching or
netting with any other transaction. Once processed, payments are final and irrevocable.
Plan Holiday 1966 to 1969
By the Third Five Year Plan (1961-66), Indian policy makers were convinced that the Indian economy had entered the ‘take-off’
stage and that the earlier two Plans had created enough infrastructure to serve as the perfect launch pad. Thus the Third Plan
aimed at creating a self-reliant and self-generating economy. The Third Plan in accordance with the dominant mood, accorded
highest priority to agriculture along with emphasis on basic industries.
But the Indian Plans from 1951 to 1966 (from the commencement of the First Plan till the end of the Third Plan) proved to be
over-ambitious and were visited by a number of problems and failures. The plans fell short of fulfilling the aspiration of the
common masses. The Third Plan was mired by inflation, armed conflicts and droughts. The failure of this Plan led to an
imbalance in the economy. Despite big investments during the three Plans the living standards of the poor could not be raised
and poverty and inequity in distribution of state resources remained stark. Unemployment increased from 5.3 million in 1956 to
about 9.6 million in 1966.
Consequently, the period between 1966 and 1969 marked the shift from a ‘growth approach’ to a ‘distribution from growth
approach’. Looking at the failures and pitfalls the planners suspended the impending Fourth Plan, which was due in 1966, until
1969 for a revision of objectives and targets. This came to be called as the ‘Plan Holiday’ extending from 1 April 1966 to 31
March 1969.
The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax (such as sales tax, a specific tax,
value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the
person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and
forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax which
2
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
is collected directly by government from the persons (legal or natural) on which it is imposed. Some commentators have argued
that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be.
An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.
Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the
manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form of a higher
price. Thus, an indirect tax is such which can be shifted or passed on. The degree to which the burden of a tax is shifted
determines whether a tax is primarily direct or primarily indirect. This is a function of the relative elasticity of the supply and
demand of the goods or services being taxed. Under this definition, even income taxes may be indirect.
The term indirect tax has a different meaning for U.S. constitutional law purposes: see direct tax and excise tax in the United
States
Optional money is the non-legal tender money, but it is generally acceptable by the people in it's final payments. optional
money consists of credit instruments like bills of exchange , cheques ,promissory notes, Bonds etc. which does not enjoy any
statutory backing. The acceptance of optional money depends upon the choice of an individual person. However they are
generally accepted because people have confidence in the credit of the paper
A Special Economic Zone (SEZ) is a geographical region that has economic and other laws that are more free-market-oriented
than a country's typical or national laws. "Nationwide" laws may be suspended inside a special economic zone.
The category SEZ includes free trade zones (FTZ), export processing Zones (EPZ), free Zones (FZ), industrial parks or
industrial estates (IE), free ports, free economic zones, and urban enterprise zones.
Usually the goal of a structure is to increase foreign direct investment by foreign investors, typically an international business or
a multinational corporation (MNC), development of infrastructure and to increase the employment.
13th Finance Commission
The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution
by the President of India. It was formed to define the financial relations between the centre and the state. The Finance
Commission Act of 1951 states the terms of qualification, appointment and disqualification, the term, eligibility and powers of
the Finance Commission. As per the Constitution, the commission is appointed every five years and consists of a chairman and
four other members. Since the institution of the first finance commission, stark changes have occurred in the Indian economy
causing changes in the macroeconomic scenario. This has led to major changes in the Finance Commission's recommendations
over the years. Till date, Thirteen Finance Commissions have submitted their reports.
TRIPS
The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement administered by
the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation
as applied to nationals of other WTO Members. It was negotiated at the end of the Uruguay Round of the General Agreement on
Tariffs and Trade (GATT) in 1994.
The TRIPS agreement introduced intellectual property law into the international trading system for the first time and remains
the most comprehensive international agreement on intellectual property to date. In 2001, developing countries, concerned that
developed countries were insisting on an overly narrow reading of TRIPS, initiated a round of talks that resulted in the Doha
Declaration. The Doha declaration is a WTO statement that clarifies the scope of TRIPS, stating for example that TRIPS can
and should be interpreted in light of the goal "to promote access to medicines for all."
Specifically, TRIPS requires WTO members to provide copyright rights, covering content producers including performers,
producers of sound recordings and broadcasting organizations; geographical indications, including appellations of origin;
3
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
industrial designs; integrated circuit layout-designs; patents; new plant varieties; trademarks; trade dress; and undisclosed or
confidential information. TRIPS also specify enforcement procedures, remedies, and dispute resolution procedures. Protection
and enforcement of all intellectual property rights shall meet the objectives to contribute to the promotion of technological
innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological
knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.
The FTSE 100 Index, also called FTSE 100, FTSE, is a share index of the 100 companies listed on the London Stock Exchange
with the highest market capitalization. It is one of the most widely used stock indices and is seen as a gauge of business
prosperity for business regulated by UK company law. The index is maintained by the FTSE Group, a subsidiary of the London
Stock Exchange Group.
The index began on 3 January 1984 at the base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999.
After falling during the financial crisis of 2007-2010 to below 3500 in March 2009, the index recovered to a peak of 6091.33 on
8 February 2011, fell under the 5000 mark on the morning of 23 September 2011, but reached 6503.63 (its highest since
December 2007) on 11 March 2013
The Hang Sang Index (abbreviated: HSI, Chinese :) is a free float-adjusted market capitalization-weighted stock market index
in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the
main indicator of the overall market performance in Hong Kong. These 48 constituent companies represent about 60% of
capitalisation of the Hong Kong Stock Exchange.
Since 7 March 2011, the HKEX extended their trading hours. In the first stage, (opening value will be at 09:20) 09.30-12.00 and
13.30-16.00. In the second stage, from 5 March 2012, the afternoon trade will change to 13.00-16.00, that's mark with the
mainland trading hours.
HSI was started on November 24, 1969, and is currently compiled and maintained by Hang Seng Index’s Company Limited,
which is a wholly owned subsidiary of Hang Seng Bank, one of the largest banks registered and listed in Hong Kong in terms of
market capitalisation. It is responsible for compiling, publishing and managing the Hang Seng Index and a range of other stock
indexes, such as Hang Seng China Enterprises Index, Hang Seng China AH Index Series, Hang Seng China H-Financials Index,
Hang Seng Composite Index Series, Hang Seng China An Industry Top Index, Hang Seng Corporate Sustainability Index Series
and Hang Seng Total Return Index Series. Hang Seng in turn, despite being a public company, is held in majority by British
financial firm HSBC.
The Nikkei 225, more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average is a stock market index for
the Tokyo Stock Exchange (TSE). It has been calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper since 1950. It
is a price-weighted index (the unit is yen), and the components are reviewed once a year. Currently, the Nikkei is the most
widely quoted average of Japanese equities, similar to the Dow Jones Industrial Average. In fact, it was known as the "Nikkei
Dow Jones Stock Average" from 1975 to 1985.
The Nikkei 225 began to be calculated on September 7, 1950, retroactively calculated back to May 16, 1949. Since January
2010 the index is updated every 15 seconds during trading sessions.
The Nikkei 225 Futures, introduced at Singapore Exchange (SGX) in 1986, the Osaka Securities Exchange (OSE) in 1988,
Chicago Mercantile Exchange (CME) in 1990, is now an internationally recognized futures index.
The Nikkei average has deviated sharply from the textbook model of stock averages which grow at a steady exponential rate.
The average hit its all-time high on December 29, 1989, during the peak of the Japanese asset price bubble, when it reached an
intra-day high of 38,957.44 before closing at 38,915.87, having grown six fold during the decade. Subsequently, it lost nearly all
these gains, closing at 7,054.98 on March 10, 2009—81.9% below its peak twenty years earlier.
Another major index for the Tokyo Stock Exchange is the Topix.
4
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
On March 15, 2011, the second working day after the massive earthquake in the northeast part of Japan, the index dropped over
10% to finish at 8605.15, a loss of 1,015 points. This put it at its lowest close since March 10, 2009.
Bombay Stock Exchange, commonly referred to as the BSE, (Bombay Śhare Bāzaār) is a stock exchange located on Dalal
Street, Mumbai, Maharashtra, India. It is the 10th largest stock exchange in the world by market capitalization. Established in
1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia’s first Stock Exchange and one of India’s leading
exchange groups. Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing it an
efficient capital-raising platform. Popularly known as BSE, the bourse was established as "The Native Share & Stock Brokers'
Association" in 1875.
The National Stock Exchange (NSE) (Hindi: राष्ट्रीय शेयर बाजार Rashtriya Śhare Bāzaār) is stock exchange located at Mumbai,
India. It is the 11th largest stock exchange in the world by market capitalization and largest in India by daily turnover and
number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1 trillion and over
1,652 listings as of July 2012. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two
most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. The
NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major
stocks weighted by market capitalisation.
NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries
in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euronext
and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than
1500 cities across India. In 2011, NSE was the third largest stock exchange in the world in terms of the number of contracts
(1221 million) traded in equity derivatives. It is the second fastest growing stock exchange in the world with a recorded growth
of 16.6%.
Direct Taxes Code Bill, 2010 (DTC 2010)
The Finance Minister tabled the Direct Taxes Code Bill, 2010 (DTC 2010) in the Parliament on 30 August 2010 which is
proposed to come into force on 1 April 2012. Some of the salient features are outlined below:
General
•
The Code proposes that every person shall be liable to pay income-tax in respect of the total income for the financial
year. The concepts of “previous year” and “assessment year” are proposed to be done away with.
•
Rates of tax as applicable to the persons are proposed under a schedule; for companies, individuals etc the maximum
rate of tax is proposed at 30%. Additionally a domestic company would be required to pay a dividend distribution tax (DDT) of
15% on dividends declared, distributed or paid. Minimum Alternate tax (MAT) of 20% would be applicable on a company in
case the tax based on the book profits is higher than the tax based on the profits as per the normal tax computation. A foreign
company is required to pay an additional branch profits tax of 15% in respect of the branch profits.
•
Levy of surcharge and education cess is proposed to be done away with.
Residence
•
In the case of a company, it is proposed that the company shall be resident in India if it is an Indian company or if the
place of effective management (POEM) is in India. POEM has been defined to mean the place where the board of directors or
executive directors make their decisions or the place where such executive directors or officers of the company perform their
5
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
functions and the board of directors routinely approves the commercial and strategic decisions taken by such executive directors
or officers.
•
In all cases, other than an individual, the persons would be a resident in India, if the place of control and management of
the affairs, at any time of the year is situated wholly, or partly, in India.
Source rules
•
Additional source rules for income arising to a non- resident are proposed to be introduced as income deemed to accrue
in India; for e.g. insurance premium including reinsurance covering any risk in India, from the transfer of any share or interest in
a foreign company, where the fair market value of the assets in India
owned by the company represent at least 50% of the fair market value of all the assets owned by the company etc.
Computation of total income
Income has been proposed to be classified as income from ordinary sources and income from special sources; Income from
ordinary sources would comprise of income from employment, house property, business, capital gains and residuary sources.
Income from special sources would refer to specified income of non –residents, winning from racehorses, lottery etc. However
where the income of a non resident is attributable to a PE, then the same would not be considered as income from special
sources.
Personal taxes
•
Changes in income slabs which will result in incremental savings in tax.
o
The concept of „Not ordinarily resident? is removed. The condition of 729 days has been retained to determine the
taxability of overseas income of an individual
o
A person not entitled to HRA is allowed a deduction of rent paid upto 10% of GTI or INR 2000 per month & other
conditions as may be prescribed
o
Exemption for medical expenses has been increased to INR 50,000.
o
Contribution to approved funds is deductible to the extent of INR 1 lacs.
o
Deduction for insurance premium (not exceed five percent. of the capital sum assured), Health Insurance covered &
Tuition fees to the extent of INR 50,000.
o
Wealth tax to be levied at 1% for wealth in excess of INR 10 million
Capital gains
•
Income from all investment assets to be computed under the head „Capital gains?. Investment asset to include any
capital asset which is not a business capital asset, any security held by a Foreign Institutional Investor and any undertaking or
division of a business.
•
Distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of
the asset to be eliminated.
•
No tax on gains on transfer of shares of a company or unit of equity oriented fund that are held for more than one year
and such transfer is chargeable to Securities Transaction Tax (“STT”). STT would be chargeable on transfer of equity shares of
a company or a unit of an equity oriented fund.
6
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
•
Fifty percent of the capital gains are allowed as deduction on transfer of shares of a company or unit of equity oriented
fund that are held for a period of one year or less and such transfer is chargeable to STT.
•
The base date for determining the cost of acquisition to be shifted from 1 April 1981 to 1 April 2000. Consequently, all
unrealized capital gains on assets between 1 April 1981 and 31 March 2000 not to be liable to tax.
•
Cost of acquisition to be Nil, if cannot be determined or ascertained for any reason.
•
Capital loss to be allowed to set off only against capital gains. The capital loss can be carried forward for indefinite
period.
MAT
•
Computation of book profits broadly similar to existing law
o
Credit for tax paid under DTC 2010, would be available. The credit would be allowed to be carried forward for 15
years.
o
MAT now applicable to SEZ developers and units in an SEZ
Tax incentives
The DTC 2010 provides for expenditure based incentives wherein capital expenditure incurred by the specified business would
be allowed as a deduction. Specified businesses, amongst others would include generation,
transmission or distribution of power, developing or operating and maintaining any infrastructure facility, operating a
maintaining a hospital in a specified area, SEZ developers and units established in an SEZ, exploration and production of
mineral oil or natural gas, setting up and operating a cold chain facility, developing and building a housing project under a
scheme of slum redevelopment etc.
Grandfathering provisions for SEZ developers and SEZ Units
Grandfathering of profit linked incentives under the Income-tax act, 1961 to continue for SEZ developers notified on or before
31 March 2012. In case of SEZ units, the deduction would be permissible for units commencing operations on or before 31
March 2014
Anti- abuse provisions General anti-avoidance rules
The characteristics of the originally proposed rules have been retained. Additionally it is proposed that an arrangement would be
presumed for obtaining a tax benefit would include reduction in tax base including increase in losses. The provisions would be
applicable as per the guidelines to be framed by the Central Government. Further the definition of lacking commercial substance
has been amended to clarify that obtaining tax benefit cannot be the only criteria for applicability of GAAR.
Controlled foreign company (CFC) rules:
As indicated in the revised discussion draft, CFC rules have been incorporated to provide for the taxation of income attributable
to a CFC to be taxed in the hands of the resident. A foreign company would be considered as a CFC which
•
for the purposes of tax is a resident of a country or territory with a lower rate of tax
•
the shares of the company are not traded on any stock exchange
•
one or more persons individually or collectively exercise control over the company
7
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
•
it is not engaged in any active trade or business
•
the specified income exceed INR 2.5 million.
Rules pertaining to the computation of the income attributable to the CFC which would be required to be added to the income of
the resident have been provided.
Tax treaty provisions
It has been proposed to revert to the provisions under the existing law, wherein the provisions of the Code shall apply in relation
to an assessee to whom the agreement applies, to the extent they are more beneficial. However, the provisions relating to
GAAR, CFC and Branch profit tax would continue to apply irrespective of the beneficial provisions of the tax treaty provisions.
It has also been proposed that a person shall be entitled to claim relief under the provisions of the agreement on production of a
certificate in the prescribed form, from the tax authorities of the country that such person is a resident of the country.
A resident in India would be entitled to claim credit of taxes paid or deducted at source in the country in accordance with the
provisions of the tax treaty against the income tax payable in respect of the income for the financial year. Where tax has been
paid or deducted in a country with which there exists no agreement credit can be claimed only at the lower of the rate of tax
under the DTC 2010 and the tax rate levied in the other country. However, the credit cannot exceed the tax payable under the
DTC 2010.
Source: Direct Taxes Code Bill 2010 tabled on 30 August 2010 in the Lok Sabha.
Bharat Dynamics Limited (BDL) is one of India's manufacturer of munitions and missile systems. It was founded in 1970 in
Hyderabad, Andhra Pradesh.
BDL specializes in the manufacture of ammunitions, rifles and panels.[disambiguation needed]
Products and services
Indigenous Missiles
BDL is the nodal agency for the production of ammunitions developed by India.
The first such missile that entered production of dynamics with BDL was the Prithvi missile.[2]
In 1998, BDL produced Agni IRBM were inducted into the Indian Armed Forces. BDL also manufactures other missiles and
systems for the Indian Armed Forces. These include the Konkurs anti-tank missiles.[3]
NHB Residex - About Residex
Keeping in view the prominence of housing and real estate as a major area for creation of both physical and financial assets and
its contribution in overall National wealth, a need was felt for setting up of a mechanism, which could track the movement of
prices in the residential housing segment. Regular monitoring of the house prices can be useful inputs for the different interest
groups. Accordingly, National Housing Bank, at the behest of the Ministry of Finance, undertook a pilot study to examine the
feasibility of preparing such an index at the National level. The pilot study covered 5 cities viz. Bangalore, Bhopal, Delhi,
Kolkata and Mumbai. Besides, a Technical Advisory Group (TAG), with Adviser, Ministryof Finance, as its Chairman and
comprising of experts members form RBI, NSSO, CSO, Labour Bureau, NHB and other market players, was constituted to deal
with all the issues relating to methodology, collection of data and also to guide the process of construction of an appropriate
index . Based on the results of the study and recommendations of the TAG, NHB launched RESIDEX for tracking prices of
residential properties in India, in July 2007 by Shri P. Chidambram (then Hon’ble Finance Minister). Till now it has been
updated up to quarter ended December, 2012.
8
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
Small Industries Development Bank of India (SIDBI) is an independent financial institution aimed to aid the growth and
development of micro, small and medium-scale enterprises (MSME) in India. Set up on April 2, 1990 through an act of
parliament, it was incorporated initially as a wholly owned subsidiary of Industrial Development Bank of India. Current
shareholding is widely spread among various state-owned banks, insurance companies and financial institutions.[citation
needed] Beginning as a refinancing agency to banks and state level financial institutions for their credit to small industries, it has
expanded its activities, including direct credit to the SME through 100 branches in all major industrial clusters in India.[citation
needed] Besides, it has been playing the development role in several ways such as support to micro-finance institutions for
capacity building and onlending. Recently it has opened seven branches christened as Micro Finance branches, aimed especially
at dispensing loans up to 5 lakh.
It is the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium
Enterprise (MSME) sector and for Co-ordination of the functions of the institutions engaged in similar activities.
SIDBI has also floated several other entities for related activities. Credit Guarantee Fund Trust for Micro and Small Enterprises
provides guarantees to banks for collateral-free loans extended to SME. SIDBI Venture Capital Ltd. is a venture capital
company focussed at SME. SME Rating Agency of India Ltd. (SMERA - provides composite ratings to SME. Another entity
founded by SIDBI is ISARC - India SME Asset Reconstruction Company in 2009, as specialized entities for NPA resolution for
SME.
Mr. Sushil Muhnot is the chairman of SIDBI since April 4, 2012.
The National Housing Bank (NHB) is a state owned bank and regulation authority in India, created on July 8, 1988 under
section 6 of the National Housing Bank Act (1987). The headquarters is in New Delhi and i's total staff June 30, 2008 was 80.
The institution, owned by the Reserve Bank of India, was established to promote private real estate acquisition. The NHB is
regulating and re-financing social housing programs and other activities like research and IT-initiatives, too.
VISION Promoting inclusive expansion with stability in housing finance market.
State Bank of India (SBI) is a multinational banking and financial services company based in India. It is a state-owned
corporation with its headquarters in Mumbai, Maharashtra. As at December 2012, it had assets of US$501 billion and 15,003
branches, including 157 foreign offices making it the largest banking and financial services company in India by assets.
The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of
Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of Madras merged into the other two
presidency banks—Bank of Calcutta and Bank of Bombay—to form the Imperial Bank of India, which in turn became the State
Bank of India. The Government of India nationalised the Imperial Bank of India in 1955, with the Reserve Bank of India taking
a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of
India. SBI has been ranked 285th in the Fortune Global 500 rankings of the world's biggest corporations for the year 2012.
SBI provides a range of banking products through its network of branches in India and overseas, including products aimed at
non-resident Indians (NRIs). SBI has 14 regional hubs and 57 Zonal Offices that are located at important cities throughout the
country.
SBI is a regional banking behemoth and has 20% market share in deposits and loans among Indian commercial banks.
9
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
The State Bank of India was named the 29th most reputed company in the world according to Forbes 2009 rankings and was the
only bank featured in the "top 10 brands of India" list in an annual survey conducted by Brand Finance and The Economic
Times in 2010
DFHI
The Working Group of Money Market, in its Report submitted in 1987, recommended, among other things, that a Finance
House should be set up to deal in short-term money market instruments.
As a follow-up on the recommendations of the Working Group, the Reserve Bank in India, in collaboration with the public
sector banks and financial institutions, set up the Discount and Finance House of India Limited (DFHI) in.
April 1988. DFHI is the apex body in the Indian money market and its establishment is a major step towards developing a
secondary market for money instruments. DFHI, which commenced its operations from April 25, 1988, deals in short-term
money market instruments.
As a matter of policy, the aim of the DFHI is to increase the volume of turnover rather than to become the repository of money
market instruments. The initial paid up capital of DFHI is Rs. 150 crores.
Apart from this, it has lines of refinance from RBI and a line of credit from the consortium of public sector banks.
As the apex agency in the Indian money market, the DFHI has been playing an important role ever since its inception. It has
been promoting the active participation of the scheduled commercial banks and their subsidiaries, state and urban cooperative
banks and all-Indian financial institutions in the money market.
The objective is to ensure that short-term surplus and deficits of these institutions are equilibrated at market-related rates
through inter-bank transactions and various money market instruments.
In 1990-91 the DFHI opened its branches at Delhi, Calcutta, Madras, Ahmedabad and Bangalore in order to decentralise its
operations and provide money market facilities at the major money market centres in the country.
First Domestic Emission Trading Scheme
Tamil Nadu and Gujarat will soon have India’s first domestic emissions trading scheme (ETS), which will be tied to air
pollution. It will be implemented under a cap on air pollutants set by the respective state pollution control boards as a pilot for
the rest of the country for six months.
Jairam Ramesh, minister of state for environment and forests, described the plan as “a big innovation...in market-friendly
systems of implementing environmental laws”.
The scheme works thus: A ceiling on emissions of a certain pollutant is set, based on its desired concentration in the
atmosphere. The government then issues or auctions free permits to industrial units in accordance with the amount of pollutant
they are allowed to emit. If the plant exceeds the level, it has to buy these permits from others and vice-versa.
“I have said before the problem is not in regulations but in regulators. That’s where the harassment comes,” Ramesh said in an
interview on Wednesday. “So I have got Esther Duflo, who is called the most brilliant economist in the world today. She and
her team from MIT (the Massachusetts Institute of Technology) prepared a report for us on creating an emissions trading system
and we will start with this in Tamil Nadu and Gujarat and later extend it to the rest of the country,” Ramesh said.
The report that Ramesh referred to was written by Duflo, Michael Greenstone and Nicholas Ryan of MIT and Rohini Pande,
Harvard Kennedy School, Harvard University.
10
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
The limits on the industrial pollutants will be set by the states themselves in consultation with the Central Pollution Control
Board. Akin to the carbon market, the cap will help in lowering pollution levels at lower overall costs of compliance.
This will allow the regulator to set a cap on the aggregate level of pollution permitted, and then allow a self-regulating system to
ensure that pollution does not exceed this cap. A system of credits that can be traded is most commonly used for industrial units
falling above or below pollution limits.
A programme covering oxides of sulphur and nitrogen in the US did work but “this kind of ETS presupposes lots of things”,
said Anumita Roychowdhury, associate director at activist group Centre for Science and Environment.
“It will need a very transparent mechanism, robust monitoring and will have to be quantifiable, for which a lot of institutional
preparedness will be required,” she added. “Also, it will apply more to the organized sector. If these emissions are in the
unorganized sector, it will be very hard to monitor. So it is limited. Plus, it might also need third-party checks.”
Some legal amendments may be required, said an environment lawyer, who did not want to be identified.
“For instance, for the energy efficiency market, the ECA (Energy Conservation Act) had to be (changed), which was done by
Parliament,” he added.
This won’t be the first market-based regulatory instrument in the environmental sector in India. Under the national mission on
energy efficiency, India will soon have the “Perform, Achieve and Trade” mechanism for energy efficiency, which will cover
facilities that account for more than 50% of the fossil fuel used in India, and help reduce carbon dioxide emissions by 25 million
tonnes per year by 2014-15.
Varad Pande, officer on special duty to the minister, said that Tamil Nadu was chosen because it has been progressive in its
monitoring of air pollution. The state at present has real-time online monitoring of pollution loads at the industrial unit level,
which will be scaled up and rolled out across the state.
“Gujarat was chosen because they also have shown interest in innovations in controlling pollution,” he said. “Right now, they
are studying the impact of third-party monitors on pollution loads.”
There will be a meeting of the pollution control boards and the ministry on 19 January in Delhi to discuss the next steps for the
implementation of the ETS, what the states will require and how the Centre can help. The framework will be set up in the first
half of 2011 and implemented in the second, Pande said
Polymer Notes
Polymer banknotes are banknotes made from a polymer such as biaxially oriented polypropylene (BOPP). Such notes
incorporate many security features not available to paper banknotes, including the use of metameric inks; they also last 2.5 times
longer than paper notes, resulting in a decrease in environmental impact and a reduction of production and replacement costs.
Modern polymer banknotes were first developed by the Reserve Bank of Australia (RBA), CSIRO and The University of
Melbourne, They were first issued as currency in Australia in 1988 (coinciding with that country's Bicentenary year). Countries
that have since switched completely to polymer banknotes include Bermuda, Brunei, Canada, New Zealand, Papua New Guinea,
Romania and Vietnam.
National Innovation Council
National Innovation Council is the think-tank council of India to discuss, analyse and help implement strategies for innovation
in India and suggest a Roadmap for Innovation 2010-2020.[1] It is headed by Sam Pitroda. It has approved Vadodara Innovation
Council as its first city-based innovation council in India.
11
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased
by households. The CPI in the United States is defined by the Bureau of Labour Statistics as "a measure of the average change
over time in the prices paid by urban consumers for a market basket of consumer goods and services."
The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected
periodically. Sub-indexes and sub-sub-indexes are computed for different categories and sub-categories of goods and services,
being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures
covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage
change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real
value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.
In most countries, the CPI is, along with the population census and the USA National Income and Product Accounts, one of the
most closely watched national economic statistics
The Central Statistical Organisation (CSO) was set up in the cabinet secretariat on 2 May 1951. CSO is responsible for
coordination of statistical activities in India, and evolving and maintaining statistical standards. It has a well-equipped Graphical
Unit. The CSO is located in Delhi. Some portion of Industrial Statistics work pertaining to Annual Survey of industries is
carried out in Calcutta.
Activities include:
•
National
The Central Statistics Office is responsible for coordination of statistical activities in the country, and evolving and maintaining
statistical standards. Its activities include National Income Accounting; conduct of Annual Survey of Industries, Economic
Censuses and its follow up surveys, compilation of Index of Industrial Production, as well as Consumer Price Indices for Urban
Non-Manual Employees, Human Development Statistics, Gender Statistics, imparting training in Official Statistics, Five Year
Plan work relating to Development of Statistics in the States and Union Territories; dissemination of statistical information,
work relating to trade, energy, construction, and environment statistics, revision of National Industrial Classification, etc. It has
a well-equipped Graphical Unit. The CSO is headed by the Director-General who is assisted by 2 Additional Director-Generals
and 4 Deputy Director-Generals, Directors & Joint Directors and other supporting staff. The CSO is located in Delhi. Some
portion of Industrial Statistics work pertaining to Annual Survey of industries is carried out in Calcutta. it is an international
organisation.
Organization
The CSO is headed by the Director-General who is assisted by two additional Director-Generals and four Deputy DirectorGenerals, six Joint Directors, seven special task officers, thirty deputy directors, 48 assistant directors and other supporting staff.
The CSO is located in Delhi.
Fiscal drag happens when the government's net fiscal position (spending minus taxation) fails to cover the net savings desires
of the private economy, also called the private economy's spending gap (earnings minus spending and private investment). The
resulting lack of aggregate demand leads to deflationary pressure, or drag, on the economy, essentially due to lack of state
spending or to excess taxation.
One cause of fiscal drag may be bracket creep, where progressive taxation increases automatically as taxpayers move into
higher tax brackets due to inflation. This tends to moderate inflation, and can be characterized as an automatic stabilizer to the
economy. Fiscal drag can also be a result of a hawkish stance towards government finances.
The Goods and Services Tax (GST) is a value added tax to be implemented in India, the decision on which is pending. It will
replace all indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being
comprehensive for most goods and services.
12
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
India is a federal republic, and the GST will thus be implemented concurrently by the central and state governments as the
Central GST and the State GST respectively. Exports will be zero-rated and imports will be levied the same taxes as domestic
goods and services adhering to the destination principle.
A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price.
From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by
this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two
amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.
The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and
other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in
that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer.
With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the
supply chain purchases products.
Cenvat, or the Central Value Added Tax, is a component of the tax structure employed by many countries in the western
section of Europe. The inspiration for Cenvat is derived from a tax system that is generally referred to as VAT, or a Value
Added Tax. Both Cenvat and VAT are designed with the express purpose of minimizing a cascading effect when it comes to
taxes on income, goods and services, and other forms of tax revenue. The aim of Cenvat is to aid in maintaining a tax structure
that is considered equitable for both the citizens incurring the tax and the government that is collecting the tax revenue.
One notable example of Cenvat can be found in India. Originally designated as a modified value added tax, this approach placed
some limits on the type of taxation that could occur on goods used in the manufacturing process of finished consumer products.
Modvat was later designated as Cenvat, and continued to function as a means of promoting industry within the country while
still receiving some form of tax revenue from the effort.
Cenvat, or the Central Value Added Tax, is a component of the tax structure employed by many countries in the western section
of Europe. The inspiration for Cenvat is derived from a tax system that is generally referred to as VAT, or a Value Added Tax.
Both Cenvat and VAT are designed with the express purpose of minimizing a cascading effect when it comes to taxes on
income, goods and services, and other forms of tax revenue. The aim of Cenvat is to aid in maintaining a tax structure that is
considered equitable for both the citizens incurring the tax and the government that is collecting the tax revenue.
Central Sales Tax is a type of tax charged by a registered dealer at the time of selling the goods outside state in which he is
registered. Presently the CST is charged @ 2 % with FORM-C on the value of the goods dispatched. However, this may differ
in some cases. No VAT is chargeable in that case and the purchaser cannot take the input credit for the CST paid or payable to
the supplier on the value of goods purchased by him. This amount will be added to the value of goods and became a part of
COGS.
Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money through repurchase
agreements.
Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money through repurchase
agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo
operations. Repo or repurchase option is a collaterised lending i.e. banks borrow money from Reserve bank of India to meet
short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date. The rate
charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity into the system. Reverse
repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI is in this case is
called the reverse repo rate. Reverse repo operation therefore absorbs the liquidity in the system. The collateral used for repo
and reverse repo operations comprise of Government of India securities. Oil bonds have been also suggested to be included as
collateral for Liquidity adjustment facility. Liquidity adjustment facility has emerged as the principal operating instrument for
13
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
modulating short term liquidity in the economy. Repo rate has become the key policy rate which signals the monetary policy
stance of the economy.
The origin of repo rates, one of the component of liquidity adjustment facility, can be traced to as early as 1917 in U.S financial
market when war time taxes made other sources of lending unattractive . The introduction of Liquidity adjustment facility in
India was on the basis of the recommendations of Narsimham committee on banking sector reforms. In April 1999, an interim
LAF was introduced to provide a ceiling and the fixed rate repos were continued to provide a floor for money market rates. As
per the policy measures announced in 2000, the Liquidity Adjustment Facility was introduced with the first stage starting from
June 2000 onwards. Subsequent revisions were made in 2001 and 2004. When the scheme was introduced, repo auctions were
described for operations which absorbed liquidity from the system and reverse repo actions for operations which injected
liquidity into the system. However in international nomenclature, repo and reverse repo implied the reverse. Hence in October
2004 when revised scheme of LAF was announced, the decision to follow the international usage of terms was adopted.
Repo and reverse repo rates were announced separately till the monetary policy statement in 3.5.2011. In this monetary policy
statement, it has been decided that the reverse repo rate would not be announced separately but will be linked to repo rate. The
reverse repo rate will be 100 basis points below repo rate. The liquidity adjustment facility corridor, that is the excess of repo
rate over reverse repo, has varied between 100 to 300 basis points. The period between April 2001 to March 2004 and June
2008 to early November 2008 saw a broader corridor ranging from 150-250 and 200-300 basis points respectively. During
March 2004 to June 2008 the corridor was narrow with the rates ranging from 100-175 basis points. A narrow LAF corridor is
reflected from November 2008 onwards. At present the width of the corridor is 100 basis points. This corridor is used to contain
any volatility in short term interest rates.
REPO RATE
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an
agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale
price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities
effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured
cash loan at a fixed rate of interest.
A repo is equivalent to a spot sale combined with a forward contract. The spot sale results in transfer of money to the borrower
in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender
and return of the collateral of the borrower. The difference between the forward price and the spot price is effectively the
interest on the loan, while the settlement date of the forward contract is the maturity date of the loan.
Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to
lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the
banks to transfer more funds to RBI due to these attractive interest rates. It can cause the money to be drawn out of the banking
system.
Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their
lending or investment rates for common man.
CRR Rate in India
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the per cent
of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the
excessive money from the banks.
14
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
Relation between Inflation and Bank interest Rates
Now a days, you might have heard lot of these terms and usage on inflation and the bank interest rates. We are trying to make it
simple for you to understand the relation between inflation and bank interest rates in India.
Bank interest rate depends on many other factors, out of that the major one is inflation. Whenever you see an increase on
inflation, there will be an increase of interest rate also.
What is Inflation?
Inflation is defined as an increase in the price of bunch of Goods and services that projects the Indian economy. An increase in
inflation figures occurs when there is an increase in the average level of prices in Goods and services. Inflation happens when
there are less Goods and more buyers, this will result in increase in the price of Goods, since there is more demand and less
supply of the goods.
Credit Control is an important tool used by Reserve Bank of India, a major weapon of the monetary policy used to control the
demand and supply of money (liquidity) in the economy. Central Bank administers control over the credit that the commercial
banks grant. Such a method is used by RBI to bring “Economic Development with Stability”. It means that banks will not only
control inflationary trends in the economy but also boost economic growth which would ultimately lead to increase in real
national income with stability. In view of its functions such as issuing notes and custodian of cash reserves, credit not being
controlled by RBI would lead to Social and Economic instability in the country.
Selective credit control — Useful tool to curb commodity speculation
In India, selective credit control means control over advances against the security of "sensitive commodities'' such as food
grains, oilseeds and sugar. There has been considerable misunderstanding about the purpose of SCC, whose objective is not to
fight inflation. The RBI should not hesitate to wield the instrument, unconstrained by wrong notions that direct control is
inherently bad.
Some attribute the current inflation trend to cost-push factors, mainly a result of the rise in oil prices. There is the implied
suggestion that monetary policy cannot do much about the problem. One has to reckon with all factors before devising a
strategy.
The country has been swimming in liquidity for quite some time as indicated by the large amounts of the central bank's repo
transactions. This is despite the massive open market operations employed by the Reserve Bank of India (RBI) to sterilise forex
inflows.
Studies show that, in India, money supply makes an impact on prices after 15-18 months. The current situation is further
aggravated by the revival of demand for bank credit by the manufacturing sector. It has resulted in a fall in the amount of repo
transactions and also a part of government borrowing devolving on the central bank.
In the recent years, the central bank has shifted its emphasis to the interest rate instrument from money supply.
It has largely left the exchange rate to the market forces except for occasional forays to check volatility. It has also realised that
it is conceptually impossible to try to determine interest rate, money supply and exchange rate at the same time.
Only one of them could be manipulated at one time, the remaining two being its corollaries. Trying to administratively fix two
or three variables will make the system over-determined and, hence, the result will be indeterminate. It is like trying to stand on
three stools.
15
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
A rise in interest rates is quite appropriate under the circumstances. Besides, its usefulness in curbing excess demand, especially
under inflationary conditions marked by a rise in commodity prices, it would also provide the much-needed relief to fixedincome savers who have been hit severely hard in the last two years.
Another weapon is selective credit control (SCC) on advances by banks against the hypothecation or mortgage of sensitive
commodities such as rice, wheat, oilseeds, etc. It is out of fashion now. But it is really not dead if one uses the term in the
internationally-accepted sense.
Throughout the world it is understood to mean the central bank trying to promote credit flow through desired channels or
prevent its flow in undesirable channels. In the US, it is mainly used to control stock advances to curb speculation in the market.
In the correct sense, we still have SCC in India in the form of stipulation on priority advances and numerous other directives
bearing on the directions through which credit is either encouraged or discouraged to flow.
But, historically, SCC has come to mean in India, control on advances against the security of what are identified as "sensitive
commodities'' such as foodgrains, oilseeds, sugar, etc. They are sensitive because of their substantial weights in the index of
wholesale or consumer prices.
The SCC directives are issued under the powers vested in the RBI in the Banking Regulation Act unlike other monetary
instruments mentioned in the Reserve Bank of India Act. There has been considerable misunderstanding about the purpose of
SCC.
The objective is not to fight inflation. Unfortunately, the latest edition of the Functions and Working of the Reserve Bank of
India, published by the central bank, contains a factual error perpetuating this myth.
The correct position is stated in the Bank's Handbook on Selective Credit Control published in the late 1970s. (Incidentally, it
was a sell-out. Forty thousand copies were sold in two editions mainly to banks — a record for any RBI publication.
Earlier, the record was held by the Tandon Committee Report selling 10,000 copies. There are direct and indirect instruments
other than SCC in the armoury of the central bank for dealing with inflation.
SCC is limited to the aim of curbing the use of bank credit for the speculative holding of commodities. Before the advent of
social control and the subsequent nationalisation of banks, advances to traders against the security of commodities constituted
the bulk of bank credit.
In fact, the concepts of busy and slack seasons in banking transactions had their origin at a time when the ebb and flow of
agricultural seasons determined those of bank credit and deposits.
It was easy for the bank manager to issue credit to traders as it did not call for any sophisticated approach such as project
appraisal, cash flow statements, etc., as in the case of agricultural and manufacturing production credit.
Thanks to the social reorientation of commercial banking policies and substantial training facilities, bankers have come to
realise the importance of the new concepts and the credit flow to traders has come down as a percentage of the total, even as
agricultural, manufacturing and other advances has gone up.
However, in the recent period, the banking system has had a problem of inadequate demand for credit either because of nonperforming assets or the direct approach of the manufacturers to the market with a consequent disintermediation.
In such a situation, the banker can deploy his funds in government securities as he has done.
The bank investments in government securities are far above the stipulated minimum of 25 per cent of net demand and time
liabilities. The other option is to utilise the funds in financing trade, a familiar field. There is nothing wrong in this practice.
16
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
Trade — wholesale or retail — also needs credit to facilitate the smooth functioning of the economy and the oiling of the
transactions, adding value in terms of time and space. In fact, retail trade is part of the priority sectors.
However, any large-scale access to bank credit by wholesale traders or processors of agricultural commodities (rice mills, oil
mills, etc.) out of sync with earlier trends should raise a cautionary signal for the central bank.
From this writer's experience with the SCC policy desk, he can cite the example, inter alia, of the vegetable oil mills in Gujarat
closing rather early in the season, despite the availability of stocks for crushing, if there is a failure of monsoon in Saurastra,
which accounts for one-third of groundnut production in the country.
The idea is clear. It is to hoard the nuts for a more propitious time to crush when edible oil prices would rise. Bank credit being
less expensive, especially in a regime of low interest rates, than private sources for borrowing, the average trader would turn to
it first. SCC could deal with such a situation.
It is not as if the trader does not have other sources of finance, either his own or of moneylenders. But the easy route was closed
when the minimum margin was kept as high as 75 per cent at the height of edible oil crisis in the mid-1970s. To that extent,
there was some curb on speculative tendencies as the traders had to expect prices to rise even more in the absence of bank credit
for making a tidy profit.
The RBI will do well to look at the most recent data collected on commodity advances in Basic Statistical Return 3 and look for
any signs of accelerated lending. Thanks to the media, traders are well acquainted with the economics of demand and supply,
geographical distribution of rainfall and its impact on different commodities, the level of food grain reserves, etc., to make their
own calculations on speculative gains.
The RBI should not hesitate to wield SCC unconstrained by wrong notions popularised by Western economists that direct
control is inherently bad. No one hears in the US of any trader hoarding agricultural commodities with the help of bank credit.
But we do.
Market Stabilization Scheme (MSS)
This scheme came into existence following a MoU between the Reserve Bank of India (RBI) and the Government of India (GoI)
with the primary aim of aiding the sterilization operations of the RBI.
Historically, the RBI had been sterilizing the effects of significant capital inflows on domestic liquidity by offloading parts of
the stock of Government Securities held by it. It is pertinent to recall, in this context, that the assets side of the RBI’s Balance
Sheet (July 1 to June 30) includes Foreign Exchange Reserves and Government Securities while liabilities are primarily in the
form of High Powered Money (consisting of Currency with the public and Reserves held in the RBI by the Banking System).
Thus, any rise in Foreign Exchange Reserves resulting from the intervention of the RBI in the Foreign Exchange Markets (with
the intention, say, to maintain the exchange rate on the face of huge capital inflows) entails a corresponding rise in High
Powered Money. The Money Supply in the economy is linked to High Powered Money via the money multiplier. Therefore, on
the face of large capital inflows, to keep the liabilities side constant so as to not raise the Supply of Money, corresponding
reduction in the stock of Government Securities by the RBI is necessary.
The MSS was devised since continuous resort to sterilization by the RBI depleted its limited stock of Government Securities and
impaired the scope for similar interventions in the future. Under this scheme, the GoI borrows from the RBI (such borrowing
being additional to its normal borrowing requirements) and issues Treasury-Bills/Dated Securities that are utilized for absorbing
excess liquidity from the market. Therefore, the MSS constitutes an arrangement aiding in liquidity absorption, in keeping with
the overall monetary policy stance of the RBI, alongside tools like the Liquidity Adjustment Facility (LAF) and Open Market
Operations (OMO).
17
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
The securities issued under MSS, termed as Market Stabilization Scheme (MSS) Securities/Bonds, are issued by way of
auctions conducted by the RBI and are done according to a specified ceiling mutually agreed upon by the GoI and the RBI.
They possess all the attributes of existing Treasury-Bills/Dated Securities and are included as a part of the country’s ‘internal
Central Government debt’.
The amount raised under the MSS does not get credited to the Government Account but is maintained in a separate cash account
with the RBI and are used only for the purpose of redemption/buy back of Treasury-Bills/Dated Securities issued under the
scheme.
However, following the global financial crisis of 2008, that necessitated fiscal stimulus measures, an amendment to the original
MoU between the RBI and the GoI in February 2009 allowed the Government to convert a portion of the MSS funds into
normal government borrowing for financing its stimulus expenditure requirements.
Treasury-Bills/Securities issued under MSS are matched by equivalent cash balances that are held by the Government with the
RBI. Such payments are not made from the MSS account just as receipts due to premium or accrued interest on these Securities
are not credited to it.
As and when MSS securities are issued by the RBI as well as the annual ceiling, when decided, is notified through a press
release. For the fiscal year 2010-11 the annual ceiling for such securities outstanding stand at Rs. 50,000 crore, with a review
due when the outstanding reaches the threshold of Rs. 35,000 crore.
Statutory Liquidity Ratio
Statutory Liquidity Ratio refers to the amount that the commercial banks require to maintain in the form of gold or govt.
approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different
companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the
expansion of bank credit. It is determined as percentage of total demand and time liabilities. Time Liabilities refer to the
liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and
demand liabilities are such deposits of the customers which are payable on demand. example of time liability is a fixed deposits
for 6 months, which is not payable on demand but after six months. Example of demand liability is deposit maintained in saving
account or current account, which are payable on demand through a withdrawal form of a cheque .it is ratio. SLR is used by
bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved
securities. Thus, we can say that it is ratio of cash and some other approved liabilities (deposits). It regulates the credit growth in
India
The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered
as time liabilities. The maximum limit of SLR is 40% and minimum limit of SLR is 23% In India, Reserve Bank of India always
determines the percentage of Statutory Liquidity Ratio. There are some statutory requirements for temporarily placing the
money in Government Bonds. Following this requirement, Reserve Bank of India fixes the level of Statutory Liquidity Ratio. At
present, the minimum limit of Statutory Liquidity Ratio that can be set by the Reserve Bank is 23% AS ON AUGUST 2012
Objectives of SLR: The main objectives for maintaining the Statutory Liquidity Ratio are the following: •Statutory Liquidity
Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio,
Reserve bank of India can increase or decrease bank credit expansion. •Statutory Liquidity Ratio in a way ensures the solvency
of commercial banks. •By determining Statutory Liquidity Ratio, Reserve Bank of India, in a way, compels the commercial
banks to invest in government securities like government bonds.
If any Indian Bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to
Reserve Bank of India. The defaulter bank pays penal interest at the rate of 3% per annum above the Bank Rate, on the shortfall
amount for that particular day. But, according to the Circular, released by the Department of Banking Operations and
Development, Reserve Bank of India; if the defaulter bank continues to default on the next working day, then the rate of penal
18
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
interest can be increased to 5% per annum above the Bank Rate. This restriction is imposed by RBI on banks to make funds
available to customers on demand as soon as possible. Gold and Government Securities (or Gilts) are included along with cash
because they are highly liquid and safe assets.
The RBI can increase the Statutory Liquidity Ratio to contain inflation, suck liquidity in the market, to tighten the measure to
safeguard the customer’s money. In a growing economy banks would like to invest in stock market, not in Government
Securities or Gold as the latter would yield less returns. One more reason is long term Government Securities (or any bond) are
sensitive to interest rate changes. But in an emerging economy interest rate change is a common activity.
Financial Action Task Force on Money Laundering (FATF)
The Financial Action Task Force (on Money Laundering) (FATF), is an intergovernmental organization founded in 1989 on the
initiative of the G7.
The purpose of the FATF is to develop policies to combat money laundering and terrorism financing. The FATF Secretariat is
housed at the headquarters of the OECD in Paris.
History of the FATF
In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering (FATF) was
established by the G-7 Summit that was held in Paris in 1989. Recognising the threat posed to the banking system and to
financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task
Force from the G-7 member States, the European Commission and eight other countries.
The Task Force was given the responsibility of examining money laundering techniques and trends, reviewing the action which
had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat
money laundering. In April 1990, less than one year after its creation, the FATF issued a report containing a set of Forty
Recommendations, which provide a comprehensive plan of action needed to fight against money laundering.
In 2001, the development of standards in the fight against terrorism financing was added to the mission of the FATF. In October
2001 the FATF issued the Eight Special Recommendations to deal with the issue of terrorism financing. The continued
evolution of money laundering techniques led the FATF to revise the FATF standards comprehensively in June 2003. In
October 2004 the FATF published a Ninth Special Recommendations, further strengthening the agreed international standards
for combating money laundering and terrorism financing - the 40+9 Recommendations. During 1991 and 1992, the FATF
expanded its membership from the original 16 to 28 members. In 2000 the FATF expanded to 31 members, in 2003 to 33
members; in 2007 it expanded to 34 members, in 2009 to 35 members, and in 2010 to its current 36 members.
Reverse Mortgage Loan
Western culture has influenced our nation in a big way. As more and more nuclear families are coming up, senior citizens are
left with no choice but to make their own financial arrangements in their old age. It is surprising to know that 1/8ths of the
world’s elderly population is in India. That accounts to 80 million people! The number of elderly people is growing at an
alarming rate. If the overall population is growing at 1.8%, the population of elderly people is growing at 3.8%. Youths also are
going to join the senior citizen club in 20 more years.
It is not an exaggeration that most of these senior citizens either have little savings or no savings at all. They are dependent on
their children even for their basic needs. Their mortality rate has come down due to advancement in healthcare sector. Senior
citizens are not able to fulfil their basic necessities only on their pension as the inflation has skyrocketed. As most of them keep
their savings in Fixed Deposits , the returns are not able to meet their expenses. Like in western countries Indians have no social
security benefits. Financial illiteracy has played a nasty role.
What is Reverse Mortgage Loan?
19
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
Reverse mortgage Loan is a scheme for senior citizens. This is a Home Loan Product . This scheme helps them get additional
income in their old age. Senior citizens can convert their house property into regular income as long as they are alive. Many
banks and financial institutions are offering this scheme. The borrowers don’t have to repay the loan in their life time and they
get to stay in their house.
Features of Reverse Mortgage Loan
This scheme should be considered as a last resort only.
•Any senior citizen above the age of 60 and having own house can apply for reverse mortgage loan.
•Married Couples also can apply for this. In that case at least one of the married couples should be above the age of 60.
•Rules differ depending upon the bank or financial institution.
•The borrower should be staying at his own house with proof of residence.
•The loan amount will be given either by instalment (monthly, quarterly, half yearly, yearly ) or lump sum.
•The loan amount will be calculated depending on the value of the property and the age of the borrower.
•The loan amount can't be used for any business purpose or trading.
•It can be used for personal expenses, house maintenance and repairs.
•Borrower has the option of repaying the loan amount along with the interest accumulated if he/she chooses to do so at any time
during the tenor without any prepayment penalty.
•The payments from reverse mortgage loan are exempt from Income Tax.
RURAL INFRASTRUCTURE DEVELOPMENT FUND (RIDF)
The RIDF was set up by the Government in 1995-96 for financing on going rural Infrastructure projects. The Fund is maintained
by the National Bank for Agriculture and Rural Development (NABARD). Domestic commercial banks contribute to the Fund
to the extent of their shortfall in stipulated priority sector lending to agriculture. The main objective of the Fund is to provide
loans to State Governments and State-owned corporations to enable them to complete on-going rural infrastructure projects. The
shortfall in disbursements of RIDF funds as compared to sanctions continues to remain a matter of concern in the
implementation of RIDF. The Government has taken a number of steps to address this problem. The scope of RIDF has been
widened to include activities such as rural drinking water schemes, soil conservation, rural market yards, rural health centres and
primary schools, mini hydel plants, shishu shiksha kendras, anganwadis, and system improvement in the power sector. From
RIDF V onwards, the ambit was extended to projects undertaken by Panchayat Raj institutions and projects in the social sector
covering primary education, health and drinking water.
The activities to be financed under RIDF X include minor irrigation projects/micro irrigation, flood protection, watershed
development/reclamation of waterlogged areas, drainage, forest development, market yard/godown, apna mandi, rural haats and
other marketing infrastructure, cold storage, seed/agriculture/horticulture farms, plantation and horticulture, grading and
certifying mechanisms such as testing and certifying laboratories, etc. community irrigation wells for irrigation purposes for the
village as a whole, fishing harbour/jetties, riverine fisheries, animal husbandry and modern abattoir.
Traditional Knowledge Digital Library is an Indian digital knowledge repository of the traditional knowledge, especially
about medicinal plants and formulations used in Indian systems of medicine. Set up in 2001, as a collaboration between the
Council of Scientific and Industrial Research (CSIR) and Department of Ayurveda, Yoga and Naturopathy, Unani, Siddha and
Homoeopathy (Dept. of AYUSH), Ministry of Health & Family Welfare, Government of India, the objective of the library is to
20
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
protect the ancient and traditional knowledge of the country from exploitation through bio-piracy and unethical patents, by
documenting it electronically and classifying it as per international patent classification systems. Apart from that, the non-patent
database also serves to foster modern research based on traditional knowledge, as its simplifies access to this vast knowledge, be
it of traditional remedies, or practices.
As of 2010, it had transcribed 148 books on Ayurveda, Unani, Siddha and Yoga in public domain, into 34 million pages of
information, translated into five languages — English, German, French, Spanish and Japanese. Data on 80,000 formulations in
Ayurveda, 1,000,000 in Unani and 12,000 in Siddha had already been put in the TKDL. Plus it has also signed agreements with
leading international patent offices such as European Patent Office (EPO), United Kingdom Trademark & Patent Office
(UKPTO) and the United States Patent and Trademark Office to protect traditional knowledge from bio piracy, by giving patent
examiners at International Patent Offices access to the TKDL database for patent search and examinations purposes.
A tax haven is a state, country or territory where certain taxes are levied at a low rate or not at all. Individuals and/or corporate
entities can find it attractive to establish shell subsidiaries or move themselves to areas with reduced or nil taxation levels
relative to typical international taxation. This creates a situation of tax competition among governments. Different jurisdictions
tend to be havens for different types of taxes, and for different categories of people and/or companies. States that are sovereign
or self-governing under international law have theoretically unlimited powers to enact tax laws affecting their territories, unless
limited by previous international treaties. There are several definitions of tax havens. The Economist has tentatively adopted the
description by Geoffrey Colin Powell (former economic adviser to Jersey): "What ... identifies an area as a tax haven is the
existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for
opportunities to engage in tax avoidance." The Economist points out that this definition would still exclude a number of
jurisdictions traditionally thought of as tax havens. Similarly, others have suggested that any country which modifies its tax laws
to attract foreign capital could be considered a tax haven.
According to other definitions, the central feature of a haven is that its laws and other measures can be used to evade or avoid
the tax laws or regulations of other jurisdictions. In its December 2008 report on the use of tax havens by American
corporations, the U.S. Government Accountability Office was unable to find a satisfactory definition of a tax haven but regarded
the following characteristics as indicative of it: nil or nominal taxes; lack of effective exchange of tax information with foreign
tax authorities; lack of transparency in the operation of legislative, legal or administrative provisions; no requirement for a
substantive local presence; and self-promotion as an offshore financial centre.
A 2012 report from the Tax Justice Network estimated that between USD $21 trillion and $32 trillion is sheltered from taxes in
unreported tax havens worldwide. If such wealth earns 3% annually and such capital gains were taxed at 30%, it would generate
between $190 billion and $280 billion in tax revenues, more than any other tax shelters. If such hidden offshore assets are
considered, many countries with governments nominally in debt are shown to be net creditor nations. However, the tax policy
director of the Chartered Institute of Taxation expressed skepticism over the accuracy of the figures. Daniel J. Mitchell of the
US Cato Institute says that the report also assumes, when considering notional lost tax revenue, that 100% money deposited
offshore is evading payment of tax. A study of 60 large US companies found that they deposited $166 billion in offshore
accounts during 2012, sheltering over 40% of their profits from U.S. taxes.
A golden handshake is a clause in an executive employment contract that provides the executive with a significant severance
package in the case that the executive loses his or her job through firing, restructuring, or even scheduled retirement. This can be
in the form of cash, equity, and other benefits, and is often accompanied by an accelerated vesting of stock options. Golden
handshake is similar to, but more generous than a golden parachute because it not only provides monetary compensation and/or
stock options at the termination of employment, it includes the same severance packages executives would get at retirement.
The term originated in Britain in the mid-1960s. It was first coined by the city editor of the Daily Express, Frederick Ellis. It
later gained currency in New Zealand in the late 1990s over the controversial departures of various state sector executives.
21
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
Typically, "golden handshakes" are offered only to high-ranking executives by major corporations and may entail a value
measured in millions of dollars. Golden handshakes are given to offset the risk inherent in taking the new job, since highranking executives have a high likelihood of being fired and since a company requiring an outsider to come in at such a high
level may be in a precarious financial position. Their use has caused some investors concern since they do not specify that the
executive had to perform well. In some high-profile instances, executives cashed in their stock options, while under their
stewardship their companies lost millions of dollars and thousands of workers were laid off.
The Southern African Customs Union (SACU) is a customs union among five countries of Southern Africa: Botswana,
Lesotho, Namibia, South Africa and Swaziland.
SACU is the oldest still existing customs union in the world. It was established in 1910, as a Customs Union Agreement
between the then Union of South Africa and the High Commission Territories of Bechuanaland, Basutoland and Swaziland.
With the advent of independence for these territories, the agreement was updated and on 11 December 1969 it was re-launched
as the SACU with the signing of an agreement between the Republic of South Africa, Botswana, Lesotho and Swaziland. The
updated union officially entered into force on 1 March 1970. After Namibia's independence from South Africa in 1990, it joined
SACU as its fifth member.
CURRENCY DEVALUATION AND ITS IMPACT ON THE ECONOMY
Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analysts are of the view
that weakening the value of currency could actually be good for the economy – since a weaker currency will boost exports,
which in turn will lift employment and all this will set in motion economic growth and keep the economy going
Devaluation means decreasing the value of nation's currency relative to gold or the currencies of other nations. Devaluation
occurs in terms of all other currencies, but it is best illustrated in the case of only one other currency. Devaluation and
Depreciation are sometimes used interchangeably, but they always refer to values in terms of other currencies and the value of
currency is determined by the interplay of money supply and money demand. In common modern usage, it specifically implies
an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority
formally sets a new fixed rate with respect to a foreign currency. In contrast, (currency) depreciation is most often used for the
unofficial decrease in the exchange rate in a floating exchange rate system.
Historically, early currencies were typically coins stamped from gold or silver by an issuing authority which certified the weight
and purity of the precious metal. A government in need of money and short on precious metal might abruptly lower the weight
or purity of the coins without announcing this, or else decree that the new coins had equal value to the old, thus devaluing the
currency.
Present day currencies are usually fiat currencies with insignificant inherent value. As some countries hold floating exchange
rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are
usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency
reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead
countries to lower or abandon their fixed rate policy, resulting in devaluation (as persistent surpluses and capital inflows may
lead them towards revaluation).
Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analyst are of the view
that weakening the value of currency could actually be good for the economy—since a weaker currency will boost
manufacturing production, which in turn will lift employment and all this will set in motion economic growth and keep the
economy going. But the dangers of a falling rupee too quickly, would be that the foreigners will stop investing in the country,
which would make it impossible to finance the current account (trade) deficit. It will then be forced to push interest rates up to
defend the rupee (crashing rupee stock and bond markets is supposed to make the rupee more valuable), and that could create
recession.
22
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
In an open market, the perception that a devaluation is imminent, may lead speculators to sell the currency in exchange for the
country's foreign reserves, increasing pressure on the issuing country to make an actual devaluation. When speculators buy out
all of the foreign reserves, a balance of payments crisis occurs. Economists Paul Krugman and Maurice Obstfeld state that the
balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between
countries) is equal to the nominal exchange rate (the stated rate). In practice, the onset of crisis has typically occurred after the
real exchange rate has depreciated below the nominal rate. The reason for this is that speculators do not have perfect
information; they sometimes find out that a country foreign reserve are at lower level after the real exchange rate has fallen. In
these circumstances, the currency value will fall rapidly. This is what occurred during the 1994 economic crisis in Mexico.
Devaluation of a currency was a matter of prestige in the past. However with the lapse of time it has been learnt that such an
operation is sometime necessary to save the country from economic hardships. Devaluation is not an enduring way to improve
the economy, unless the Government revises its method of economic planning and execution of plans, no amount of devaluation
will stabilise the external value of our currency. We must give highest priority to the consolidation of our economy vis-a-vis
expansion. A strong discipline should be exercised over all the unproductive expenditure whether it is in public or private sector.
Possible impact of the devaluation on the economy
Possible impacts of the devaluation on the economy could be the stimulation of merchandise exports, discouraging merchandise
imports and thus improving terms of trade, increase revenue collection and savings in repatriation of profits and royalties by
existing foreign investors, bringing illegal foreign exchange leakages into official channels and putting an end to gold
smuggling. Inflow of foreign capital can be improved by devaluation only if prices do not rise. It is supposed to provide an
escape from vexation import controls that prevent utilisation of full industrial capacity, stifle export drive, bestow monopoly
profits on a few, inefficient market regulation and pressure on budget and domestic prices will sky rocket. The obvious
consequence of devaluation in the short run would be to worsen the balance of payment position and raise the burden of
Pakistan’s foreign debt and debt service liability and foreign loans repayment would break the back of the budget, which would
in turn increases the trade gap. It will upset all the cost-price relationships in the economy, lead to galloping inflation, and will
stall many on-going projects due to rising costs.
Persistent adverse trade balance and disequilibrium in balance of payment are the main causes, which compels a country to
devalue its currency. Major components of trade balance are exports and imports of a country. Adverse trade balance is
generally the result of slackness in exports in comparison to imports. It might affect exports prices and thus wipe out all the edge
that might be hoping to gain in the export markets through devaluation. The markets for Pakistan’s traditional export are
inelastic, therefore devaluation may thus in fact give no big boost to their exports, because there is a small quantum of value
added exports and major requirement is based on export of raw material. Further the quality of export not competitive in the
foreign market. If an export -boom in agro-based industries does come about, the consequential diversion of land from food
crops will raise food prices and cause a rise in wages unaccompanied by any gains in productivity. Moreover, most of the bigger
enterprises will face increasing difficulties in loan repayments and the cost of new industrial investments will shoot up sharply.
In Pakistan, industries are heavily dependent on imported raw materials for industrial goods and capital goods and components,
and their access too many advanced countries are blocked by quotas and tariffs. , any rising of the prices of such inputs through
devaluation, would raise industrial costs and reduce the intensity of capacity utilisation. Therefore, it should be avoided as a
resort to deficit financing. Devaluation with its implications will cause a contraction in economic activity and consequential
slide down in income tax receipts will raise the burden of Pakistan’s defence equipment, and foreign debt overnight. It cannot
stop smuggling as long as black- market transactions in foreign exchange continue. Devaluing the Pak. Rupee means devaluing
the price of Pak labour and talent in the international market who send foreign exchange through home remittance. Devaluation
will make Pakistan lose heavily both as seller and as a buyer and will make no good substitute for remedial changes in economic
policies and developmental planning. Devaluation of Pakistan Rupee will mean devaluation of Pakistan labour and talent in the
international market evaluation will serve as a drug rather as a stimulant and cause an unprecedented inflation.
23
Chaitanya Institute for Competitive Exams – Test 1 Reading Materials
Bold steps must be taken to enliven capital market and more foreign aid procured. Strong discipline should be exercised over all
unproductive expenditure, whether it be public sector or private sector. Lavish spending of aid was bad enough, but it would be
even worse to raise the cost of debt repayment through devaluation, whose benefits in terms of larger foreign investment are
quite illusory.
Central exercise as well as sales tax receipts and custom duties should go down due to lower volume and high prices of
imported inputs resulting in cut-backs in industrial production.
Devaluation in Pakistan in different periods
Pakistan had experienced an increased in wholesale price, after its first devaluation in 1955, due to inelastic production
structure, which had generated uncontrollable inflationary pressure. Again on 11th May 1972, Pakistani Rupee was devalued by
56.7% in terms of gold to a new, unified Official Rate of PRs11.00 per U.S. Dollar and 4.5% fluctuation range for the currency
was also introduced. At the same time, the entire Export Bonus Voucher scheme with its complex accessory rates was
abolished. On 8th January 1982, the Rupee was devalued when the currency was unhitched from its link to the U.S. Dollar and
the fixed Official Rate abolished. A controlled, floating Effective Rate for the Rupee, initially at the Rupee dollar exchange rate
was Rs9.9 per U.S. Dollar was established in relation to a trade-weighted basket of currencies, Pakistan has been on a system of
managed float since January, 8, 1982, under this system the country has experienced massive downward slide in its exchange
rate. In 1997, retail prices rose significantly to 20 to 24 rupees/kg (US 55.4 to 66.5 cents/kg), indicating short domestic supplies,
the devaluation of the rupee against the dollar was highest in 1996, which contributed to the rise in price since sugar had been
traded internationally in US dollars. As imports had increased in the 2 years period, the rising price of imported sugar (in
rupees) was also reflected in the rising domestic price. An import tariff of 10 per cent was removed in mid-1997, so as not to
contribute to increasing sugar prices. It rose to very high amounting to Rs64.1 in July 2001. The economic indicators showed
some visible improvement since the year 2001-02 and it continued to be so, which helped the authorities to turn around the
creeping devaluation and the rupee has stabilised in the range of (Rs) 59-60 per dollar till 2006 and May 2007 (Rs60), but after
that the currency has started devaluing since 2007 to date i.e., April 2008 it stands to now Rs63.40 against a dollar. It is
concluded that devaluation may temporarily boost exports only if the demand of exported goods in the foreign country is price
elastic, but this is not necessary for those goods for which the demand is not price elastic. We therefore, should first try to
analyse the price elasticity of demand of goods exported from Pakistan, because experienced has taught that devaluation did not
lead to increase in exports. Further to this, it has been observed that successive devaluation in the past have failed to evoke a
favourable long term response in terms of improved exports. Apart from encouraging speculation it also shatters the confidence
of the foreign investor in the domestic economy. It takes the economy on the path of devaluation aided cost push inflation and is
a never ending vicious circle. A long term plan is required to put the economy on the right track. This should provide a
framework for exporting value added branded products, improving the quality and image of existing products, finding new
export markets and better marketing strategy.
We should try to effectively utilise the human resources, which is abundant in Pakistan and is under- utilised. Moreover, cut in
government expenditure, improvement in budget and trade deficit, multiple and persistent exchange rate would also be of great
help. But devaluation is not the solution of the current economic crisis and should not be resorted to in future.
24