Indian Economy, 5th edition (115 page)

(v)
Monetary Measures

(a)
The RBI had also taken suitable steps to contain inflation with 13 consecutive increases by 375 basis points (bps) in policy rates from March 2010 to October 2011.

Q. 29 Write a short note on the sub-prime crisis and point out the lessons for India.

Ans.
The sub-prime crisis is related to the US mortgage market which first surfaced in July 2007. Simply said, this is a financial crisis generating from the default of the borrowers. It means that it is like the non-performing assets (NPAs) crisis of banks in India. But the analyses of the situation and the mode of financing involved make it highly complex. Let us have a look on the whole matter in the following steps:

Step 1:
Borrowers with poor or less than standard (that is why
‘sub-prime’)
credit records were encouraged (to borrow by some of the world’s leading banks and financial institutions!).

Step 2:
These ‘sub-prime loans’ were then sold to other investment banks by the original lending banks and institutions.

Step 3:
The investment banks (who purchased the sub-prime loans from the original lenders) in turn converted them (the loan papers) into marketable, complex financial instruments to spread risks and manage liquidity (i.e., fund).

Step 4:
w
hen the sub-prime borrowers defaulted in their repayment of mortgaged loans, the financial crisis originated–today known as the ‘sub-prime crisis’ around the world.

As the banks and financial institutions of the world are today more inter-connected due to financial globalisation, the crisis has spread to other non-US economies. The seriousness of the matter is best illustrated by the fact that no one knows who owns the bad debts. Worse, banks do not seem to know the extent of risks in some of the instruments they have created or for that matter when and where to expect them. The credit rating agencies involved with the debt instruments are themselves badly confused. The US government proposed a radical financial reform programme in late March, 2008.

Basically, in the name of financial innovation and cut-throat competition in the financial world, there is always a risk that banks start adopting/promoting highly risky, complex and questionable financial practices. Two long-term measures will help to prevent such crises to occur again:

(i)
The financial instruments should be made transparent enough and easily communicated to the buyers, and

(ii)
The buyers should have at least basic knowledge of how these instruments work and the risk involved.

India must take lessons from the crisis and every liberal financial move should be guarded with utmost transparency.

Q. 30 Write a descriptive note on the emerging challenge of inflation targeting in India.

Ans.
A stable rate of inflation is among the most important things for the growth of an economy–both from domestic and external point of view. It was in mid-1970s that the RBI was given the function to stabilise inflation–and ‘inflation targeting’ commenced in India. A new term was born–‘threshold rate of inflation’ (considered 5 per cent)–in late 1990s to connote the level beyond which prices hurt all sectors of the economy. Now, once the economy has started globalisation vigorously, the challenge of stabilising as well as targeting inflation has become more complex. The current challenge of inflation targeting in India may be seen in two perspectives:

(i)
As Indian economy is more open now, it has become necessary to keep its inflation in tandem with global trends to ward off crises with exchange rate, banking, insurance, investment, etc. As most of the developed economies have inflation below 3 per cent, we have an immediate obligation to target this level (as we are competing with these economies in the globalised era).

(ii)
At another level, the comfortable range of inflation for India is considered 4–5 per cent (almost 2 per cent higher to the obligation of globalisation). But an economy like India which has great growth potential but wretched human development, a lower level of inflation will hinder its growth (there is trade off between inflation and growth). As inflation crossed the 7 per cent level by the first week of April 2009, the government has taken many measures to cool it down. But in the long-run every attempt to cut it to 3 per cent level will hamper investment and growth.

Indian economy is today faced with the above-given twin and paradoxical challenges regarding inflation targeting.

Q. 31 Write a brief note on the role played by the Micro Management of Agriculture (MMA).

Ans.
The MMA is a Centrally sponsored programme launched in 2000-01 aimed at complementing/supplementing the States’ efforts towards enhancement of argicultural production and productivity. The Revised (2008-09) MMA has the following salient features:

(i)
Funds are allocated on gross cropped area basis (unlike on historical basis of past).

(ii)
Subsidy structure rationalised and made similar to the other schemes sponsored by the Centre.

(iii)
Two new components have been added, namely – (a) Pulses and Oilseeds Crop Programmes (POCPs) for the areas not covered under the Integrated Scheme of Oilseeds, Pulses, Oil Palm and Maize (ISOPOM) and (b) Reclamation of Acidic Soil (RAS) launched along with the existing component of Reclamation of Alkali Soil (RAS).

(iv)
Ceiling for new initiatives increased to 20 per cent (from 10 per cent).

(v)
33 per cent of the funds earmarked for small, marginal and women farmers.

(vi)
Active participation of the PRIs in review, monitoring and evaluation.

Funding pattern is in the ratio of 90:10 between Centre and states except the north-eastern states for whom the 100 per cent Central funding is extended as Grant.

Q. 32 What are the causes of recent rupee slide.

Ans.
Rupee has been showing a serious tendency of depreciation since mid-September 2011 and presently it is at Rs 56, per dollar. The US dollar is at its eight months high today against its major rivals. The reasons for rupee slide and dollar high are driven by the following reasons:

(i)
the rupee is sliding on account of strong demand from importers (oil is India’s biggestimport and domestic oil firms are the largest purchasers of the dollar in the local currencymarket).

(ii)
banks in India are also creating high demands for dollars.

(iii)
the greenback is being seen as a
safe haven
, especially at a time when risk aversion issweeping through global financial markets. The weakening Euro is the chief concern for the world investors – making them search for a safe heaven.

(iv)
though the downgrading of the US dollar is another concern – as the international investors are still showing hope in the dollar (due to weakening euro) it has not beentranslated into stronger rupee (as banks and importers are demanding more dollars).

(v)
world stocks stumbled from the 1-1/2 month high on October 18, 2011 and government bonds rose as slower-than-expected Chinese growth and a warning on France’s AAA sovereign credit rating prompted investors to cut risks.

The depreciating rupee has emerged as a major concern for policymakers/ RBI in India – which puts a threat of spiralling into further price rises. In the given situation, if the central bank intervenes to support the rupee, it will increase its supply into the economy again fueling inflation which has already been the biggest challenge for the government for the past one and half years.

Nevertheless, the decline in the rupee exchange rate has given merchandise and software exporters cause for
cheer
, as they will enjoy better profits from the more competitive export prices. Recently concluded quarter has seen a very high export growth rate in India.

The normalcy in the demand of dollar and cooling down of the rupee is intertwined with the financial health of the crisis-ridden European economies. A strong intervention by the major European economies has every chance of rejuvenating the economy and arresting the slide of the rupee.

Q. 33 Write a contemporary note on the importance and the role played by the WIPO.

Ans.
The World Intellectual Property Organisation (WIPO) is a specialised agency of the United Nations. It is dedicated to developing a balanced and accessible international intellectual property (IP) system, which rewards creativity, stimulates innovation and contributes to economic development while safeguarding the public interest. WIPO was established by the WIPO Convention in 1967 with a mandate from its Member States (today it is 184) to promote the protection of IP throughout the world through cooperation among states and in collaboration with other international organisations. Its headquarters are in Geneva, Switzerland and its present Director General is Francis Gurry.

Strategic Goals

WIPO’s revised and expanded strategic goals are part of a comprehensive process of strategic realignment taking place within the Organisation. These new goals will enable WIPO to fulfill its mandate more effectively in response to a rapidly evolving external environment, and to the urgent challenges for intellectual property in the 21st Century. The nine Strategic Goals were adopted by Member States in 2008-09 which are:

(i)
Balanced Evolution of the International Normative Framework for IP.

(ii)
Provision of Premier Global IP Services.

(iii)
Facilitating the Use of IP for Development.

(iv)
Coordination and Development of Global IP Infrastructure.

(v)
World Reference Source for IP Information and Analysis.

(vi)
International Cooperation on Building Respect for IP.

(vii)
Addressing IP in Relation to Global Policy Issues.

(viii)
A Responsive Communications Interface between WIPO, its Member States and All Stakeholders.

(ix)
An Efficient Administrative and Financial Support Structure to Enable WIPO to Deliver its Programs.

The Strategic Goals will provide the framework for WIPO’s six year Medium Term Strategic Plan (2010-2015).

Q. 34 ‘India’s foreign investment regime has become more liberalized in recent times’. Comment.

Ans.
To promote the flow of foreign funds into the economy, the RBI on
January 24, 2013
, further liberalised the provisions of investment in India’s security market –

•
FIIs
and
long-term investors
2
investment limit in Government Securities (G-Secs) enhanced by US $5 billion (to US $ 25 b).

•
Investment limit in corporate bonds by the above-given entities enhanced by $5 billion (to $50 billion).

•
The RBI also relaxed some investment rules by removing the maturity restrictions for first time foreign investors, on dated G-Secs. But such investments will not be allowed in short-term paper like Treasury Bills.

•
Foreign investors restricted from investing in the ‘money market’ instruments – certificates of deposits (CDs) and commercial paper (CPs).

•
In the total corporate debt limit of $50 billion, a sub-limit of $25 billion each for infrastructure and other than infrastructure sector bonds has been fixed.

•
Rules requiring FIIs to hold infrastructure debt for at least one year has been abolished.

•
The qualified foreign investors (QFIs) would continue to be eligible to invest in
corporate debt securities
(without any lock-in or residual maturity clause) and
mutual fund debt schemes
, subject to a total overall ceiling of $1 billion (this limit of $1 billion shall continue to be over and above the revised limit of $50 billion for investment in corporate debt).

•
As a measure of further relaxation, it has been decided to dispense with the condition of one year lock-in period for the limit of $22 billion (comprising the limits of infrastructure bonds of $12 billion and $10 billion for non-resident investment in IDFs) within the overall limit of $25 billion for foreign investment in infrastructure corporate bond.

•
The residual maturity period (at the time of first purchase) requirement for the entire limit of $22 billion for foreign investment in the infrastructure sector has been uniformly kept at 15 months. The five-year residual maturity requirement for investments by QFIs within the $3 billion limit has been modified to three years original maturity.

Q. 35 What is Double Taxation? Write a current note on the situation of the Double Taxation policy followed by India.

Ans.
Due to phenomenal growth in international trade and commerce and increasing interactivity among the nations, residents of one country extend their sphere of business operations to other countries. Cross-country flow of capital, services and technology is the order of the day particularly after our country embarked on the path of globalisation of economy. Presence of double or multiple taxation acts as a major determining factor in decisions relating to location of investment, technology etc. as it affects the bottom-line of a business enterprise. The effort is, therefore, to ensure that heavy tax burden is not cast as a result of double or multiple taxation. The object is achieved by the government entering into agreements with other countries whereby the respective jurisdiction is so identified that a particular income is taxed in one country only or, in case it is taxed in both the countries, suitable relief is provided in one country to mitigate the hardship caused by taxation in another jurisdiction.

The situation of double taxation occurs when an individual is required to pay
two
or
more
taxes for the
same income
,
asset,
or
financial transaction
in different countries - mainly due to overlapping tax laws and regulations of the countries where an individual operates his business. When an Indian businessman makes a profit or some other type of taxable gain in another country, he may be in a situation where he will be required to pay a tax on that income in India, as well as in the country in which the income was generated. To protect Indian tax payers from this unfair practice, the Indian government has entered into tax treaties, known as
Double Taxation Avoidance Agreement
(DTAA) with 65 countries, including U.S.A, Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E, and Switzerland. DTAA ensures that India’s trade and services with other countries, as well as the movement of capital are not adversely affected. Such agreements are known as “Double Tax Avoidance Agreements” (DTAA) also termed as
“Tax Treaties”
(TTs). The statutory authority to enter into such agreements is vested in the Central Government by the provisions contained in
Section 90
of the Income Tax Act.