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The Financial Bulletin

30th December,2012

Issue 1,Volume 19

Money Matters Club

Presents

Dear Readers, Year 2012 was full of challenges for Indian financial system. The growth rate expectation which was to be around 8 % at years beginning came down to around 5% by years end. The year gave a lot reasons for the economic reforms, some of which are expected in 2013-14. This volume covers issues like preparedness of INDIA for implementation of IFRS, acceptance of ISLAMIC Banking to encourage Muslim savings, about evolution of indirect taxes which are expected to be addressed in 2013. It also covers how subsidy slash and FDI which have been in news throughout year 2012, as accelerators of Indian economy. And in the end you can read the year 2012 at glance. Have great year ahead….Happy reading!!!

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

This newsletter is only for internal use at IBS Hyderabad and not for sale

From the Editors Desk:

IFRS – Is India Ready This Time ?

4

Evolution of Indirect Taxes: Goods and Services tax (GST)

6

Anti-money laundering amendments made by Reserve Bank Of India in 2012

9

The Resilient Currency - Indian Rupee

12

Will India favour Islamic Banking?

13

Subsidy slash and FDI flow: accelerators for Indian economy renaissance

15

Quantative Easing 19

WINNER OF ARTICLE OF THE MONTH:

NEERAJ GUPTA, XIME

CONGRATULATIONS!!!

Contributors: NEERAJ GUPTA,

XIME, BANGALORE

NIKET KUMAR DIXIT

IIT MADRAS

EKTA SINGH

IBS HYDERABAD

ABHILEKH VERMA

IBS HYDERABAD

KOMAL JAIN

IBS HYDERABAD

CHANDRA SHEKHAR

IITM GWALIOR

AMIT KUMAR SINGH

IITM GWALIOR

RAJAT GARG,

BANKING, NMIMS


Content

ISSUE 1 ,VOLUME 19

The looming question in the minds of many

people these days is, whether India is ready to

switch over to International Financial

Reporting Standards (IFRS). There have

already been many postponements in the

implementation of IFRS. With the scheduled

date of IFRS rollout being April 1, 2013

another postponement seems inevitable.

It all started in January 2010, when the

Ministry of Corporate Affairs issued the

roadmap for IFRS implementation in India.

Institute of Chartered Accountants of India

(ICAI) followed suit and announced that

IFRS will be mandatory for financial

statements in India from April 1, 2010. Since

then the date of implementation has been

postponed two times – April 1, 2011 and

April 1, 2012. RBI also delayed

the IFRS implementation for

Indian banks to April 1, 2013.

ICAI gave a phase wise

implementation plan for IFRS

roll out. In Phase 1, all the Nifty 50 and BSE

30 companies were supposed to adopt IFRS.

In addition to this, all the companies (whether

listed or not) having net worth of more than

Rs. 1000 Crores were also supposed to

implement IFRS in Phase 1. In Phase 2, those

companies not covered in Phase 1 and having

net worth of more than Rs. 500 Crore had to

implement IFRS. In Phase 3, all the

remaining companies were supposed to

implement IFRS. The Phase 1, companies

were required to present financial statements

using Indian Accounting Standards (IAS)

converged with IFRS, from April 1, 2010.

Apparently, the reasons for postponement of

IFRS are taxation and some regulatory issues

which include amendments to Companies

Act. But since new Companies Bill is still

waiting to be passed in parliament, the

implementation of IFRS is delayed.

Therefore, there is confusion in the

government itself regarding

IFRS – Is India Ready This Time ?

“Apparently, the reasons for postponement of

IFRS are taxation and some regulatory issues

which include amendments to

Companies Act.”

Neeraj Gupta XIME, Bangalore


ISSUE 1 ,VOLUME 19

whether to amend the old companies act or to

incorporate provisions regarding IFRS in the new

Companies Bill. Another reason which is

hindering IFRS’ rollout is that under IFRS, many

elements of balance sheet are evaluated based

on market value as compared to current practice

of carrying it at book value, which is lower than

the market value.

Also, there is one reason which is only specific to

Banking industry and is impeding the

implementation of IFRS in banking sector is the

Provision for Loans. Currently banks follow RBI

guidelines on provisions for loans. However IFRS

requires a case by case assessment of facts and

circumstances surrounding the recoverability and

timing of future cash flows relating to credit

exposure. All this will change the accounting

scenario in India.

Implementation of IFRS in a phase wise

manner was a smart move by ICAI. But it is

very unfortunate that India has not been able

to implement IFRS in the last three years.

There has been a mixed reaction in the

corporate India about this delay in

implementation of IFRS. Some companies are

happy with the delay in implementation of

IFRS because this means that they can defer the

cost to be incurred on appointing international

accounting firms, who are well acquainted with

the IFRS standards. On the other hand, some

companies which want to attract foreign capital

are disappointed with this delay in

implementation of IFRS. After postponing the

IFRS rollout two times, it’s high time that the

India Government wakes up and takes concrete

steps towards IFRS rollout. But whether the

IFRS will be implemented this year, that still

remains to be seen.


ISSUE 1 ,VOLUME 19

Introduction : After the morale-boosting victory in the

parliament last week on the issue of Foreign

Direct Investment in multi-brand retail, the

United Progressive Alliance (UPA) government

will now try to usher number of reforms to pull

the Indian economy back on track of higher

potential growth.

Among the numerous economic reforms, the

implementation of Goods and Services Tax

(GST) would definitely top the list. After

missing several deadlines, it is now almost

certain that it would be implemented by April

2013. According to Mr. Chidambaram the

implementation of GST would be a “watershed”

event that will economically unify the country.

The objective of this article is to

provide readers fundamental

knowledge about evolution of indirect

taxes in India. The flow of the article

is as follows

Taxation policy in India

Prior to VAT

Introduction of VAT

Goods and Services Tax

Taxation Policy in India India is federal country and both the Centre and

the State have the right to levy taxes. The

constitution of India empowers the Centre and

the State to levy the taxes. The Centre collects

the direct taxes (Income tax, Fringe Benefit

Tax etc.) and the State collects indirect taxes

like VAT and local taxes. The VAT is a

replacement over the traditional Sales tax.

Prior to VAT : Prior to VAT in the country, a commodity was

taxed multiple times in the pre-existing Central

excise duty and State sales tax system. Before

any commodity was produced, inputs were

first taxed, and then after the commodity got

produced with input tax load, output was taxed

again. So this had a cascading effect on the

final prices of the commodity. Further, in the

sales tax structure, there was also a system of

multi-point sales taxation at

subsequent levels of


“implementation of GST would be a

“watershed” event that will economically

unify the country”

Niket kumar Dixit MBA, IIT Madras

Evolution of Indirect Taxes: Goods and Services tax (GST)

ISSUE 1 ,VOLUME 19

distributive trade, then along with input tax load,

burden of sales tax paid on purchase at each

level was also added, thus aggravating the

cascading effect further. Higher taxes were a

barrier for business and discourage business

activity. High taxes also lead to lobbying

activities where producers of a certain sector

asked the government to lower/waiver taxes for

their sector. This lead to multiple taxation rates

for multiple products and further increased

inefficiency in the system.

Introduction of VAT : Introduction of the VAT in the country is

considered to be a major step forward in the area

of indirect tax reforms in India. The VAT is a

major improvement over the previous Central

Excise Duty at national level and the Sales tax

system at the State level.

The VAT is considered to be the way to negate

the cascading effect in the previous state sales

tax regime. The VAT system taxes goods at

each stage and on the value addition done by the

enterprise. In a VAT system the idea is also to

have a single rate of taxation for all the goods.

When VAT is introduced in place of Central

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

made from the overall tax burden for input tax.

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

from tax burden not only for input tax paid

but also for tax paid on previous purchases.

With VAT, the problem of “tax on tax” and

related burden of cascading effect is thus

removed. Furthermore, since the benefit of set

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

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

both inputs and on previous purchases (in the

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

the VAT structure on tax compliance in the

Centre as well as in the States, with expected

results in terms of improvement in

transparency and reduction in tax evasion.

In India, VAT was introduced at the Central

level for a selected number of commodities in

terms of MODVAT with effect from March 1,

1986, and in a step-by-step manner for all

commodities in terms of CENVAT in 2002-03.

Later in 2004-05, the service taxes were also

added to CENVAT.

Goods and Services Tax : Despite success with VAT, there are still

certain shortcomings in the structure of VAT

both at the Central and at the State level.

Firstly, non-inclusion of several Central taxes

in the overall framework of CENVAT, such as

additional customs duty, surcharges, etc., and

thus keeping the benefits of comprehensive

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


ISSUE 1 ,VOLUME 19

manufacturer dealers. Secondly, no step has been

taken to capture the value-added chain in the

distribution trade below the manufacturing level

in the existing scheme of CENVAT.

The introduction of GST at the Central level will

not only include more indirect Central taxes and

integrate goods and service taxes for the purpose

of set-off relief, but may also lead to revenue

gain for the Centre through widening of the

dealer base by capturing value addition in the

distributive trade and increased compliance.

In the State-level VAT structure also, certain

shortcomings are there. Firstly, there are several

taxes which are in the nature of indirect tax on

goods and services, such as luxury tax,

entertainment tax, etc., and yet not subsumed in

the VAT. Secondly, CENVAT load on the

goods remains included in the value of goods

to be taxed under State VAT, and

contributing to that extent a cascading effect

on account of CENVAT element. Lastly, any

commodity, is produced on the basis of

physical inputs as well as services, and there

should be integration of VAT on goods with

tax on services at the State level as well, and at

the same time there should also be removal of

cascading effect of service tax.

In the GST, both the cascading effects of

CENVAT and service tax are removed with set

-off, and a continuous chain of set-off from the

original producer’s point and service

provider’s point up to the retailer’s level is

established which reduces the burden of all

cascading effects. Conclusion If the VAT was an improvement over the

Central excise duty at the national level and

the sales tax system at the State level, then the

GST will indeed be the next logical step

towards a comprehensive indirect tax reforms

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

simply VAT plus service tax but an

improvement over the previous system of

VAT and disjointed service tax.


ISSUE 1 ,VOLUME 19

The KYC guidelines were formulated to protect

the financial system against threat of money

laundering/terror financing and frauds. However,

it has been brought to the notice of Reserve Bank

that some of the provisions made in this regard or

their implementation by banks have led to

avoidable inconvenience to public and also

hindered the efforts at financial inclusion. The

Reserve Bank has received complaints pertaining

to KYC norms relating to areas such as

documentary proof of identity/address, need for

introduction for opening of bank accounts, and

periodicity for review of KYC documents. In

view of these developments, some of the

amendments brought about are:

(i) Opening of new accounts – Proof

of identity and address - An

indicative list of the nature and type of

documents/ information that may be

relied upon for customer identification

is given in the list below.

Consequently, banks have been calling for

separate documents for verification of identity

and address even though the documents for

identity proof (Passport, Drivers’ License etc.)

also carry the address of the individual

concerned. In view of this, customers frequently

complain about the requirement of producing two

sets of documents, one each for identity and

address proof.

To ease the burden on the prospective

customers in complying with KYC

requirements for opening new accounts, it has

now been decided that:

a) If the address on the document submitted for

identity proof by the prospective customer is

same as that declared by him/her in the account

opening form, the document may be accepted as

a valid proof of both identity and address.

b) If the address indicated on the document

submitted for identity proof differs from the

current address mentioned in the account

opening form, a separate proof of address

should be obtained. For this

purpose, apart from the

indicative documents listed in

Ekta Singh MBA, IBS Hyderabad


Anti-money laundering amendments made by Reserve Bank Of India in 2012

“Unique Identification Authority of India has

advised Reserve Bank that banks are accepting

Aadhaar letter issued by it as a proof of identity but

not of address”

ISSUE 1 ,VOLUME 19

Annex II of the aforesaid circulars, a rent

agreement indicating the address of the customer

duly registered with State Government or similar

registration authority may also be accepted as a

proof of address.

(ii) Introduction not Mandatory for opening

accounts - Before implementation of the system

of document-based verification of identity, as laid

down in PML Act/Rules, introduction from an

existing customer of the bank was considered

necessary for opening of bank accounts. In many

banks, obtaining of introduction for opening of

accounts is still a mandatory part of customer

acceptance policy even though documents of

identity and address as required under our

instructions are provided. This poses difficulties

for prospective customers in opening accounts as

they find it difficult to obtain introduction from

an existing account holder.

Since introduction is not necessary for opening of

accounts under PML Act and Rules or Reserve

Bank’s extant KYC instructions, banks should not

insist on introduction for opening bank accounts

of customers.

(iii) Acceptance of Aadhaar letter for KYC

purposes - Unique Identification Authority of

India (UIDAI) has advised Reserve Bank that

banks are accepting Aadhaar letter issued by it as

a proof of identity but not of address, for opening

accounts. As indicate above, if the address

provided by the account holder is the same as

that on Aadhaar letter, it may be accepted as a

proof of both identity and address.

(v) Accounts with Introduction – The

provisions for opening of bank accounts with

restrictions on total credits and outstanding

balance, with introduction from an existing

account holder or other evidence of identity

and address to the satisfaction of the bank, were

made to help persons who were not able to

provide ‘officially valid documents’ for opening

accounts. In view of provisions for 'Small

Accounts' being included in the PML Rules, the

extant instructions for opening of 'Accounts

with Introduction' stands withdrawn.

It has been observed recently that banks are not

promoting opening of ‘Small Accounts’ for

greater financial inclusion. Banks are, therefore,

advised to open ‘Small Accounts’ for all

persons who so desire. It is reiterated that all

limitations applicable to ‘Small Accounts’

should be strictly observed.


ISSUE 1 ,VOLUME 19

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


Features Documents

Accounts of individuals Legal name and any other names used

(i) Passport (ii) PAN card (iii) Voter’s Identity Card (iv) Driving license (v) Identity card (subject to the bank’s satisfaction) (vi) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction of bank

Correct permanent ad-dress

(i) Telephone bill (ii) Bank account statement (iii) Letter from any recognized public authority (iv) Electricity bill (v) Ration card (vi) Letter from employer (subject to satisfaction of the bank) (any one document which provides customer information to the satisfaction of the bank will suffice)

Accounts of companies -Name of the company - Principal place of business - Mailing address of the company -Telephone/Fax Number

(i) Certificate of incorporation and Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf (iv) Copy of PAN allotment letter (v) Copy of the telephone bill

Accounts of partnership firms - Legal name - Address - Names of all partners and their addresses - Telephone numbers of the firm and partners

(i) Registration certificate, if registered (ii) Partnership deed (iii) Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf (iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses (v) Telephone bill in the name of firm/partners

Accounts of Proprietary Concerns -Name, Address and Activity of the Proprietary Concern.

i) Proof of the name, address and activity of the concern, like registration certificate (in the case of a registered concern), certificate/license issued by the Municipal authorities under Shop & Establishment Act, sales and income tax returns, CST / VAT certificate, certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities, License issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, etc. ii) Any registration / licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority / Department. NBFCs/RNBCs may also accept IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT as an identity document for opening of account. iii) The complete Income Tax return (not just the acknowledgement) in the name of the sole proprietor where the firm's income is reflected, duly authenticated/ acknowledged by the Income Tax Authorities. iv) Utility bills such as electricity, water, and landline telephone bills in the name of the proprietary concern. v) Any two of the above documents would suffice. These documents should be in the name of the proprietary concern.

ISSUE 1 ,VOLUME 19

I still remember, there was a time when rupee used to remain fixed for a good span of time, which had always ensured steady growth to us in the past. But, the current situations which has prevailed has ensured the rupee to fall as low as 54.49(as on 16th Dec), making the dollar value strong due to the trade deficit despite of Reserve Bank Of India’s suspected interventions. Strong dollar is also one of the good reasons for the depreciation of our rupee value. Since, the demand for foreign exchange has become relatively inelastic in India for a variety of reasons and does not respond adequately to the shift in the global trade and capital flows, the urgency to increase foreign inflows to push up supply is only rising. The increased demand for the importers

further has significantly added pressure on our currency. Another important aspect is that the foreign

investors do not have clarity over taxation which is a root cause for their worry and if this situation continues then the government won’t be able to clarify these confusions and thus the rupee value will be deteriorated. In several countries the Balance of Payment is under stress which leads to currency depreciation. By deteriorating Balance of Payment situation in several Asian countries it also puts stress on the currencies. As discussed

earlier Reserve Bank of India tried its level best to make things come under its control. It even tried to bring slight corrections in Forex trade but it was not useful in the long run. One can think about the ways to attract the global capital but it is equally important to keep quality

and stability of the foreign money. It is also important that currency issues, which have their in short comings in domestic policymaking are addressed in a better way, rather than just by adopting short-term measures that can backfire.

ABHILEKH VERMA MBA , IBS Hyderabad


THE RESILIENT CURRENCY- INDIAN RUPEE

“One can think about the ways to attract the

global capital but it is equally important to

keep quality and stability of the foreign

money.”

ISSUE 1 ,VOLUME 19

Islamic Banking, also called, Non-Interest based

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

which is as old as the religion, Islam, and

however it has been brought in the limelight by

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

become one of the most debatable topic in the

recent days.

Emerging economies like India

follow banking practice which

involves interest payments on bor-

rowings and lending of funds which

practisers of Islamic banking

ignore. The concept of Interest

payment is ingrained into the present banking

regulations of India and it’s difficult to imagine a

system in its absence. Interests aids in the

liquidity function which RBI provides to the

commercial banks. However, it can be argued that

countries like London, New York, Hong Kong,

UAE, etc. have introduced Islamic Banking into

their system and are running both the systems

simultaneously and successfully in their

economy.

In crux, Islamic banking, a practice consistent

with Shariah laws, prohibits the collection or

payment of taxes. According to the religion

Islam, interest leads to inflation and its

accumulation leads to increasing the gap

between the rich and poor. In case a mortgage

transaction takes place in the Islamic way, the

bank, instead of giving loan to

the buyer, buys the item

themselves and then sells it to the

buyer at a profit, giving him the

option of repaying the amount in

installments. Hence, the bank

doesn’t charge any interests, but earns its

revenues in the form of profits.

Islamic banking basically doesn’t support the

concept of receiving and paying interests,

Komal Jain MBA, IBS Hyderabad


Will India favour Islamic Banking?

“Islamic banking, a practice consistent with Shariah laws,

prohibits the collection or payment

of taxes”

ISSUE 1 ,VOLUME 19

however, the same can be called profits while a

transaction is taking place.

Analyzing its viability in India, the Banking

Regulation Act,1949 demands modification in lot

of suitable avenues so that this practice makes a

successful entry. India being the third largest

Muslim dominated country in the world shows

huge potential for Islamic form of banking. The

long raised topic of financial Inclusion can also

be brought up and solved up to some extent

through this practice. Since Muslims are adamant

to take loans on interests as their religion

prohibits them to, if this practice is introduced, it

would act as an encouragement to them, and will

also aid immensely to generate foreign direct

investments from Muslim dominated countries, it

is also said, that this practice may in future help

in combating terrorism to an extent by attracting

equity finance from gulf countries.

Moreover, on the other side, the policy makers

also need to keep in mind that the population of

India is hugely dominated by Non-Muslims, so if

in future, Islamic Banking is introduced in India,

it would have to be customized and marketed in a

manner which would make it equally attractive

from the perception of non Muslims too.


ISSUE 1 ,VOLUME 19

A decade after being the 2nd fastest growing

economy in the world, Indian economy has

slumped down with a GDP growth rate forecasted

at 5.5 % for the current year 2012 as compared to

previous year’s 6.86%. The foreign investments

and exports have been drastically reduced due to

global slowdown and Eurozone crisis. In its

report, ‘‘Will India be the first BRICS fallen

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

political roadblocks to economic policy-making

can put India at a risk of losing its investment

grade rating.” Having scaled down India’s rating

outlook to ‘negative’ from ‘stable’ in April this

year it has threatened to downgrade India’s

sovereign credit rating to ‘speculative’ from the

lowest notch of ‘investment’ grade

which could further woo away the

investors. Desperate times calls for

desperate measures, so in attempt to

lure investors and put the economy

back on track government has taken

up some reforms, i.e. subsidy slash and FDI flow.

Subsidies slash to curb fiscal deficit

The economy is on the edge of a “fiscal

precipice” and government has slash subsidies to

curb the fiscal deficit to 5.1% which could have

otherwise touch 6.1% of GDP in the current fiscal

year. Failing to tackle fiscal deficit means that

the country could potentially face a worse

situation than that of balance-of-payment crisis

in 1991, when the country was bailed out by

International Monetary Fund (IMF), says a

report released by Kelkar committee. The

subsidy slash would prevent flight of foreign

capital and a potential downgrade.

Subsidies slash to tame inflation

Finance Minister P. Chidambaram wants to take

a “calibrated” risk on inflation and lower

interest rates to give a fill up to the slowing

economy, but Reserve Bank of India (RBI) in

its report said that fighting inflation remains a

top priority for its monetary policy indicating

that it is not keen on meeting

Indian Inc’s demand for cutting

interest rates. Instead it wants

Amit Kumar Singh MBA, IITM Gwalior


Subsidy slash and FDI flow: accelerators for Indian economy renaissance

“FDI is considered as the safest type of

international capital flows out of all the

available sources of external finance”

Chandra shekhar MBA, IITM Gwalior

ISSUE 1 ,VOLUME 19

the government to slash subsidies and reduce the fiscal deficit. Such an action would also provide

some room for monetary policy, but lower interest rates alone are unlikely to jump-start the

investment cycle. Inflation still remains stubbornly above the RBI’s comfort level of five to six

percent and is expected to move up as farm output has been impacted due to scanty rains and

international crude oil prices continue to skyrocket making it imperative to slash government

subsidies and revive capital spending.

Subsidies slash to bolster falling rupee

A series of regulatory measures from RBI have failed to stop the decline of rupee, as global

economic condition worsens. To turn around the rupee’s fortune the government has focused more

on deeper structural problem undermining the currency-India’s gaping current account deficit. To

fix that, the government has taken more proactive steps to slash spending, particularly on fuel

subsidies. Unlike most emerging markets, India imports far exceed its exports, especially as it

brings in more than three-fourths of the crude oil it needs. A weakening rupee makes those

imports more expensive. The government also subsidizes “common man’s” fuel products such as

diesel, cooking gas and kerosene. The subsidy to state–run oil companies widen the fiscal deficit,

which rose to 5.8% of GDP last fiscal year, from 4.9% a year earlier. India has traditionally relied

on foreign investment in Indian stocks and bonds to supply the additional foreign exchange to pay

for imports.

FDI flow

India’s progress and prosperity is reflected by the pace of its sustained economic growth and

development. In particular, FDI is considered as the safest type of international capital flows out

of all the available sources of external finance. As it does not only add fuel to domestic savings,

foreign reserves but promotes growth through spillovers of technology, skills, increased

innovative capacity, and domestic competition. By these, India can improve its economic fortunes

by adopting liberal policies vis-à-vis by creating conditions conducive to investment considered as

an instrument of international economic integration as it brings a package of assets including

capital, entrepreneurship, technological know-how, skills and practices, access to markets- abroad-

in their economic development, technology, managerial skills and capacity and access to foreign

markets. As a result it has a wide range of impact on the country’s economic policy and

improvements in human capital and sole visible panacea for all their scarcities.


ISSUE 1 ,VOLUME 19

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

Source: Various issues of SIA Publication, Ministry of commerce, GOI

The government's recent reforms include allowing FDI in multi-brand retail, aviation and

broadcasting, hiking diesel price, capping the number of subsidized LPG cylinders, opening up pen-

sion sector to foreign investment and raising the FDI cap in insurance to 49 percent. Foreign carriers

have also been allowed to invest up to 49 percent in domestic airlines by these the Indian businesses

have been impressed by its vibrancy, its commercial sector, technology and ways to reinvent. It

will certainly help in reducing government's fiscal deficit and putting the economy back on high

growth path and the policy will not only generate more job opportunities but also protect the interest

of small and medium traders thereby having a salutary effect on the economy.

And it will also meet to raise the government fiscal deficit target to 5.1 percent of GDP this financial

year 2012-13. The states “recent innovation” of land pooling scheme would further ensure that the

farmers and land-owners get not only maximum benefit but also a fair share in development projects

and build up rural infrastructure in the state through cold chains and food processing centers and

warehouses.


Amount of FDI

Mid 1948

March

1964

March

1974

March

1980

March

1990

March

2000

March

2010

March 2011-12

In

Crore

256

565.5

916

933.2

2705

18486

1,23,378

173,947

ISSUE 1 ,VOLUME 19

Table: 2 MAJOR SOURCE OF FDI FLOW IN INDIA

Cumulative country-wise FDI equity flows (from April, 2000 to March, 2012)

Source: Planning Commission, fact sheet on FDI from April 2000 to March 2012

Conclusion

These two reforms would act as a fillip to staggering Indian economy which faces a possibility of

stagflation if current economic conditions persist for some time. More jobs would be created and

people’s purchasing power would increase which could boost the otherwise slowing economy. And

the government should raise resources by selling unutilized and under-utilized land of public sector

undertakings, port trusts, Railways, etc., to fund infrastructure sector.

Mauritius

U.S.A

Singa-pore

U.K

Netherland

Japan

Germany

Cyprus

France

U.A.E

38%

6%

10%

9%

4%

7%

3%

4%

2%

1%


ISSUE 1 ,VOLUME 19

Quantitative easing (QE) is a part of monetary

policy used by central banks to boost the

national economy when the policy of

modifying the interest rates becomes

ineffective. The Central bank buys financial

assets from the financial institutions and

banks in order to inject a fixed amount of

money into the economy. This results in an

increase in the bank’s reserves and since

demand for assets increases their prices

increase which lowers their yield.

‘Quantitative Easing’ can be used to achieve a

target level of inflation. The policy aims to

ensure that inflation does not fall below that

level. The risks involved in the

implementation of QE policy are:-

Policy being more effective

than intended in acting against

deflation, leading to higher

inflation.

Policy not being effective enough if

banks do not lend the additional

reserves.

Consider a situation where the nominal

interest rate is close to zero. The central bank

cannot lower the rates further as it may result

in a liquidity trap. In such a situation, the


central bank may perform ‘Quantitative

Easing’ by purchasing limited amount of

bonds and other assets from the financial

institutions.

What are QE1, QE2, and QE3

In 2010, "QE2" became a "ubiquitous

byname" referring to second round of

Quantitative Easing by central banks in the

United States. Retrospectively, the round of

Quantitative Easing preceding QE2 is referred

as "QE1" and similarly third round of

Quantitative Easing following QE2 is referred

as "QE3".

On November 25, 2008, QE1 was announced

and concluded in March of

2010. In this the Fed cut

key interest rates to near

zero and purchased $175

QUANTITATIVE EASING

“Quantitative Easing’ can be used to achieve

a target level of inflation.”

Rajat Garg,

MBA-Banking, NMIMS

ISSUE 1 ,VOLUME 19

billion of agency debt securities and $1.25

trillion of mortgage-backed securities in

addition to purchases of Treasuries. This

resulted in mortgage rate dropping to as low

as 5.23% from 6.33%.

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

Federal Reserve announced to spend a total of

$600 billion until the end of the second

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

month. The initial reaction was fall of the

dollar, but this was reversed quickly. The

broad market rose much less, and “the

Information Technology sector did the

worst”.

On September 13, 2012 QE3 was announced.

In this, the Federal Reserve of US has decided

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

print US dollars worth $40 billion every

month and using them for bond purchasing

program of agency mortgage-backed

securities and this they will continue until at

least mid-2015. According to NASDAQ, this

is effectively a stimulus program which

allows the Federal Reserve to print $40 billion

dollars a month for an unlimited amount of

time. Egan-Jones, Ratings firm, said it

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

economy and, by extension, credit quality.”

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

rating to AA-.


According to Federal Reserve’s Chairman,

Ben Bernanke, the intent of QE3 is to

stimulate the economy, which has been

languishing and is now slowing further under

current economic policies.

Two key arguments in supporting QE3 are –

It will induce an increase in asset

prices that will induce an increase in

personal consumption by increasing

personal wealth.

It will put downward pressure on

long-term interest rates especially

mortgage rates .

But a careful examination shows both the

arguments to be weak and the second

argument to ironically echo an unfortunate

past experiment in monetary policy.

The premise is that QE3 will artificially

increase the wealth. ‘Artificial’ because

productive assets will not become productive

by increase of money supply in economy. The

discussion does not even hinge on an increase

in inflation that might depress real wages,

which would improve business profits and

thus justify an increase in asset prices.

Another argument for QE3 is that pushing

down long-term interest rates (especially

mortgage rates) will help the housing market

to recover and hence strengthening the

economic recovery. But problem with this

ISSUE 1 ,VOLUME 19

argument is that mortgage rates are already

very low and housing sector is also

recovering. Also doubt is, how much more

can the Federal Reserve push interest rates

down, and how much difference will it make

to housing market when so many homeown-

ers are underwater and cannot sell and

unemployment, already above 8%, threatens

to rise?

Effects of Quantitative Easing

Quantitative Easing is fundamentally

a regressive redistribution program that has

been boosting wealth for those already

engaged in the financial sector or who already

own homes, but passing little along to the rest

of the economy.

Also lowering of interest rates may actually

have negative impact on the economy as

people dependent on the interest income may

spend less in response to their reduced

income. However, the Federal Reserve has

assumed that the advantages of the low

interest rates outweigh this effect.

On European Union

In the European Union, World Pensions

Council’s financial economists have argued

that QE3-induced artificially low interest rates

will have an adverse impact on pension funds

in EU. As under-funding condition of pension

funds, as without returns that outstrip


inflation, pension investors may face the real

value of their savings declining rather than

racketing up over the next few years.

On India

India, like EU, is unlikely to benefit too much

from the Federal Reserve's new asset purchase

programme. QE3 is likely to boost global

commodity prices, including crude, which

would be a "negative" for import bill for oil

importing countries like India, while exports

are "unlikely to be boosted significantly" as

the overall economic impact may be limited.

Higher oil prices will keep India's current

account deficit "elevated".

To put it simply: More Quantitative Easing is

not going to move the dial much on the

growth meter.

ISSUE 1 ,VOLUME 19

Raising cap on LPG cylinders

under study: Moily The Centre is considering requests from

various quarters to increase the cap on

subsidized LPG cylinders for domestic use

from the present six cylinders a year,

Petroleum and Natural Gas Minister M.

Veerappa Moily said on Friday.

Narendra Modi fit to become

Prime Minister, says Sushma In the first clear signal that the Opposition

Bharatiya Janata Party may not be averse to

projecting Gujarat Chief Minister Narendra

Modi as its prime ministerial candidate, senior

leader Sushma Swaraj said on Saturday that

“there is no doubt” that he was fit to hold the

country’s top job.

Menon arrives in Beijing for

border talks National Security Adviser Shiv shankar

Menon arrived here on Sunday for talks with

the Chinese leadership on the boundary

question and strategic issues of common


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

first major engagement with the

newly-selected fifth generation of the

Communist Party of China's (CPC)

leadership.

Congress in a fix as BSP, SP lock

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

to support it during the FDI-in-retail vote, the

UPA now has the job of getting the bitter

rivals on the same page on the quota bill. BSP

leader Mayawati on Monday warned of a

tough posture after the SP succeeded in not

letting the government table the bill that

provides for quotas for the SCs/STs in

promotions. “We will see for two-three days

more, we will see the government’s stand on

the issue, what they do and what the

Chairman of the Rajya Sabha says. Then, we

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

LPG cylinder cap may be raised

to 9 a year The Manmohan Singh government indicated

on Tuesday that the cap on the subsidized

2012 at a Glance

ISSUE 1 ,VOLUME 19

LPG cylinders would go up from six to nine a

household a year.

A large number of Congress MPs had written

to Prime Minister Manmohan Singh,

demanding that the cap be raised to 12

cylinders. On September 13, the government

decided to limit the cylinder supply to six,

while allowing the consumers to buy

additional cylinders at the market price of Rs.

931 a 14.2-kg bottle. Subsidized LPG costs

Rs. 410.50 a cylinder in New Delhi. Mr.

Moily said he had held two rounds of

consultations with Finance Minister

P. Chidambaram on the impact of a decision

to raise the cap. “I think a decision could

happen as early as possible,” he said. The

concession would entail Rs. 9,000 crore in

additional subsidy a year on the government.

“We are working on ways of mitigating the

additional subsidy requirement. We are

working on certain formula to neutralize it.”

FDI in multi-brand retail:

Trouble at the ‘source’ Parliament has approved foreign direct

investment (FDI) in retail. However, the

stringent riders seem to have wiped the smile

off the face of multinational retail players.

After a long-drawn discussion, the


Government opened doors to FDI in

multi-brand retail trading, but the conditions

regulating foreign inflow have left foreign

players undecided yet.

Fair price pharmacy outlets

trigger threats for doctors An initiative of the West Bengal government

to set up fair price pharmacy outlets in

State-run hospitals appears to have raised the

hackles of vested interests as some doctors

have claimed that they are being intimidated

not to prescribe drugs from the outlets.

Quota Bill passed by huge

majority in RS Barring Samajwadi Party, an overwhelming

majority in the Rajya Sabha passed the Bill

that provides for quotas for SCs and STs in

government job promotions. The Constitution

amendment Bill was approved by 194

members in the 245-strong House. Nine from

Samajwadi Party and an independent voted

against the Bill.

The Bill is now likely to be introduced and

moved for consideration and passing in Lok

Sabha on Wednesday. The proposed legisla-

tion was the reason for the Lok Sabha being

ISSUE 1 ,VOLUME 19

unable to transact any business during the

day.

Applications under RTE from

Jan 10 The State government will begin receiving

applications for admissions under the Right to

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

Umashankar, Commissioner, Department of

Public Instruction (DPI), has said.

Not wanting to repeat the mistakes it made

during the ongoing academic year’s

admissions, which started at the last minute,

the government will begin checking the

availability of seats on January 5 with the aim

of making RTE implementation reach 100 per

cent from the present 50 per cent.

10 lakh new jobs expected to

come up in 2013: survey Job seekers can look forward to a prosperous

new year with more than 10 lakh new jobs

expected across various sectors including

FMCG and retail, says a survey.

Coming against the backdrop of uncertain

economic conditions, the projected number of

new jobs in 2013 is way higher than the

estimated 7 lakh employment opportunities

created this year, according to the My


HiringClub.com survey conducted on over

4,450 firms across 12 industry sectors.

Protesters battle police at India

Gate, several injured Lutyens’ Delhi turned into a war-zone on

Sunday with disparate groups agitating

against the gang-rape of a young

physiotherapy student. Despite pleas by

peaceful protesters, hooligans and political

elements, including members of the Bhagat

Singh Kranti Sena that had assaulted Aam

Aadmi leader Prashant Bhushan, battled

policemen, damaged vehicles and set ablaze

wooden lawn seats.

Hat-trick for Narendra Modi,

sticky wicket for BJP Narendra Modi swept back to power in

Gujarat for the third time in a row but the 115

seats he won in the State — two less than the

Bharatiya Janata Party’s tally in the current

182-member Assembly — has put the

sanghparivar at the national level in a

dilemma.

Consolidated by- Kanchan Kumar Roy

ISSUE 1 ,VOLUME 19


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