Indian Economy, 5th edition (120 page)

Accrual basis

An accounting method which considers revenues and expenses as they accrue, even though cash would not have been received or paid during the period of accrual.

Activity rate

t
he labour force of a country is known as the activity rate or
participation rate
. It is in per cent and always a proportion of the total population of the country–the economically active population. This rate varies from one country to another depending upon several factors such as school leaving age, retirement age, popularity of higher education, social customs, opportunities, etc.

ADR
s

ADR stands for American Depository Receipt, which enables investors based in the USA to invest in stocks of non-US companies trading on a non the US stock exchange. ADRs are denominated in dollars. Simply put, US brokers purchase shares of a foreign company, say Infosys (on behalf of their clients). ADRs are subsequently listed on US stock exchanges.

ADRs can be sponsored or unsponsored. Sponsored ADRs are those in which the company actively participates in the process. Sponsored ADRs can be Level I, Level II or Level III. There are also what are called Rule 144A. The ADRs were first offered in the US in the 1920s. A number of Indian companies have issued ADRs. Infosys Technologies was the
first
Indian company to use the ADR route.

The terms
ADR
and
ADS
are often used interchangeably. The individual shares representeted by an ADR are called American Depositary Shares (ADS).

To the company issuing ADRs, it provides access to the American market. A company can, therefore, raise additional resources. To an American investor, it provides the opportunity to invest in stock of companies not listed in the US. Huge operational, custodial, and currency conversion issues can come into play if the ADR route is not used.

ADS Conversion Offer

Conversion of local shares into American Depository Shares (ADS) of a company is called an ADS conversion offer. It is managed by investment bankers, mainly large investment banks familiar with Indian and global markets The offer allows local investors to convert their shares into ADS and then sell it in US markets. The proceeds of the sale in the US markets is distributed to Indian investors in rupees after deduction of expenses incurred in the process. The company does not issue any new shares. Existing shares are converted into ADS. The scheme obviously can only be offered by companies listed on the Indian and US markets which is the case for many large Indian corporates.

American Depository Shares are usually traded at a premium to the underlying (Indian) share price.

If the share conversion offer takes place through the stock market in India, investors pay no long-term capital gains tax. A 10 per cent short-term capital gains tax is applicable. Investors, however, have to pay the securities transaction tax in the process. However, if the offer is not through the stock market system, then investors have to pay 30 per cent short-term capital gains tax with surcharge or 10 per cent long-term capital gains tax as applicable. Investors do not have to pay any securities transaction tax.

Companies do not issue new shares. Thus, the offer does not lead to any dilution of equity and earnings per share. They are making this offer to satisfy the demand for ADS traded in US markets. This allows companies to have new investors and creates visibility on the US stock exchanges. They also satisfy the local investor by offering an opportunity to sell their shares at a higher price than available locally on the Indian bourses.

Adverse Selection

One among the two kinds of the market failure often associated with insurance business which means doing business with the people one would have better avoided.

Adverse selection can be a problem when there is an asymmetry in information between the seller and the buyer of an insurance policy–as insurance will not be profitable when buyers have better information about their risk of claiming than does the seller of the insurance policy. In the ideal case, insurance premiums are set in accordance to the risk of a randomly selected person in the insured bracket (such as 40-year-old male smokers) of the population.

The other kind of market failure is
moral hazards
associated with the insurance sector.

Agricultural Extension

Agricultural extension is a proper approach to motivate people to help themselves by applying agricultural research and development in their daily lives in farming, home making, and community living. It plays a vital role in community development. It is a two-way channel that brings scientific information to rural people and takes their problems to scientific institutes (for further research and development) for their solution.

In India, like many other developing countries, the role of agricultural extension is more than educational and it needs to deal with the human resource development of the agrarian population too, making it a comparatively tougher task than in the developed countries. The spread of information technology will serve a great purpose in this area.

AGRICULTURAL LABOURER

A person who works on another person’s land for
wages
in money or kind or share is regarded as an agricultural labourer. He or she has no risk in the cultivation, but merely works on another person’s land for wages. An agricultural labourer has no right of lease or contract on land on which he/she works.

Agricultural Markets

Agricultural Markets are regulated and managed under the Agricultural Produce Market Act (APMC Act) enacted by the respective state governments. The Central government provides guidance and assistance in regulation and development of agricultural-produce markets. 7,521 markets have been brought under regulation upto March this year. To handle increasing quantity, more and more markets have been brought under regulation over the years. There were only 286 regulated markets in 1950 on an average.
a
regulated market serves 459 sq. km. but the National Commission on Agriculture recommended that a regulated market should serve farmers within a 5 km. radius and a command area of 80 sq. km.

Alpine convertible bond

An ACB (Alpine Convertible Bond) is a Foreign Currency Convertible Bond (FCCB) issued by an Indian company exclusively to the Swiss investors.

Ammortisation

Payment of a loan in installments by the borrower. It is usually done in an agreed period and every installment includes a part of the total loan plus the interest.

Andean Pact

A regional pact to establish a common market link, started originally in 1969. At present it has
p
eru, Equador, Columbia, Bolivia, and Venezuela. The pact had almost collapsed by the mid-1980s due to regional, economic, and political instabilities and was re-launched in 1990 (the original member Chile was dropped and the new member
v
enezuela was added to it).

Animal spirit

‘Confidence’, considered as one of the essential ingredients of economic prosperity was called by J. M. Keynes as animal spirit. For
k
eynes, this is a ‘naive optimism’ by which an entrepreneur puts aside the fact of loss as a healthy man puts aside the expectation of death.

But from where does this animal spirit come has been a mystery–can it be created artificially from outside or whether it is an innate thing some are born with, etc.

Antitrust

A category of the government policy which deals with monopoly. Such laws intend to stop abuses of ‘market power’ by big companies and at times to prevent corporate mergers and acquisitions that would strengthen monopoly. The US has such laws and recently it was in news when Microsoft was its target.

Appreciation

It shows increase in value and is used in economics in the following two senses:

(i)
It is an increase in the price of an asset over time–such as price rises in land, factory building, houses, offices, etc. It is also known as
capital appreciation.

(ii)
It is an increase in the value of currency against any foreign currency or currencies. It is market-based if the economy follows the floating-currency exchange-rate
system.

Arbitrage

Earning profits out of the price differences of the same product in different markets at the same time. For example, buying and selling any product, financial securities (as bonds) or foreign currencies in different markets/economies. As globalisation is promoting liberalised cross-border movement of goods and services around the world, arbitrage is prevalent today. To avoid arbitrage the WTO member countries (i.e.,, the official countries in the process of globalisation) are under compulsion to chalk out homogenous economic policies–and a level-playing field at the international level is emerging.

ARCs

Assets Reconstruction Companies (ARCs) acquire non-performing assets (NPAs) from banks or financial institutions along with the underlying securities mortgaged and/or hypothecated by the borrowers to the lenders. The ARCs then try and manage or resolve these NPAs acquired from banks. It can even infuse more funds in order to reconstruct the asset. If reconstruction is not possible and the borrower is unwilling to repay the loan, the ARCs
even sell
the secured assets.

While the basic principle of ARCs is the same everywhere–to acquire bad loans to resolve them, the essential difference is in the ownership of ARCs, public or private. After the Asian Crisis, countries like Indonesia, Korea, Malaysia, and Thailand have adopted government-owned and funded ARCs. The Philippines, on the other hand, has opted for private ARCs. India, too, has adopted the private sector model of asset resolution. Here, ARCs are set up as non-governmental vehicles mostly with support from the banking sector and other investors. Also, India has opted for multiple ARCs, which helps in better pricing of bad loans, as opposed to the single ARC model followed in many countries. The RBI has already allowed licenses to three ARCs and some banks are also planning to float ARCs.

ARCs acquire NPAs by way of ‘true sale’, i.e., once an NPA has been sold, the seller has no further interest in that asset.

ARCs are a product of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (
SARFAESI Act
). And they derive their asset resolution powers from this Act. The act provides full right to the lenders acting in majority (75 per cent of the total debt by value) to enforce the security in tersest (terms of the loan) without judicial intervention. Through buying out major lenders in a loan gone bad (to the extent of 75 per cent of value), through the mechanism mentioned earlier, an ARC is able to have recourse to SARFAESI Act and, thereby, acquire legal muscle to force settlement.

It is true that if a bank itself has 75 per cent of the total value of debt in an NPA or is able to buy out other and accumulate the same, then it also gets recourse to SARFAESI. In that sense, banks are at par with ARCs. That is why we now find that some banks are getting interest and acquiring bad assets, just like an ARC does. However, a bank’s business is not to deal bad assets or try and reconstruct them. An ARC, on the other hand, is in the business of reconstructing bad assets, and has acquired skill and experience in asset resolution. It is able to do the same job better. Moreover, selling an NPA helps a bank to clean its balance sheet, too.

Asset

Anything which has a ‘money value’ owned by an individual or a firm is an asset. It is of
three
types:

(i)
Tangible Asset:
All physical assets such as land, machinery, building, consumer durables (refrigerator, car, TV, Radio, etc.), etc. (
the assets which are in the material form
).

(ii)
Intangible Assets:
All non-physical/immaterial assets such as brand names, good-will, credit-worthiness, knowledge, know-how, etc.

(iii)
Financial Assets:
All financially valid valuables other than tangibles and intangibles such as currencies, bank deposits, bonds, securities, shares, etc.

ASSIGNED REVENUE

The term is used to refer to various tax/duty/cess/surcharge/levy etc., proceeds of which are (traditionally) collected by state government (on behalf of) local bodies (the PRIs), and subsequently adjusted with / assigned to the PRIs. Collection of such revenue is governed by relevant Acts of the local bodies.

Some examples of assigned revenue in India, include – entertainment tax, surcharge on stamp duty, local cess/surcharge on land revenue, lease amount of mines and minerals, sale proceeds of social forestry plantations etc. State Finance Commissions recommend
devolution
of assigned revenue to local bodies on objective criteria, which may be specified by them in specific context.

Autarky

The idea of self-sufficiency and ‘no’ international trade by a country. None of the countries of the world has been able to produce all the goods and services required by its population at competitive prices, however, some tried to live it up at the cost of inefficiency and comparative poverty.

Backwardation

A term of future trading which means a commodity is valued higher today (i.e., spots market) than in the futures (i.e., future market). When the situation is opposite, it is known as
contango.

back-to-back loan

a
term of international banking, is an arrangement under which two firms (i.e. companies) in different economies (i.e. countries) borrow each other’s currency and agree to repay (such loans) at a specified future date. Each company gets full amount of the loan on the repayment date in their domestic currency without any risk of losses due to exchange rate fluctuations. It has developed as a popular tool of minimising the exchange-rate exposure risk among the multi-national companies. This is also known as the
parallel loan.