Indian Economy, 5th edition (125 page)

Fractional banking

A system of banking in which banks maintain a minimum reserve asset ratio in order to maintain adequate liquidity to meet the customer’s cash demands in its everyday business (
the SLR in India is such a provision,
).

Free goods

The goods which are in abundance (
as air and water
) and are not considered as scarce economic goods. As such goods have
zero supply price
and
they will be used in large volumes resulting into rising environmental pollution (point should be noted that today air and water may not be considered as the typical free goods, at least the ‘pure air’ and ‘pure water’).

Free trade

The international trade among an agreed-upon group of countries without any barriers (such as tariffs, quotas, forex controls, etc.), promoted with the objective of securing international specialisation and an edge in their foreign trade.

Free port

A port that is designated as such is the one where imports are allowed without any duty, provided they are re-exported (i.e.,
entrepot
). If the same is correct in the case of an area, it is known as the
free trade zone.

Fringe Benefit Tax

The fringe benefit tax is an additional tax imposed by the Union government in order to bring under the tax net fringe benefits received by the employees from his employer.

The various categories of employers are defined under the new provision. This includes an individual or a Hindu Undivided Family engaged in a business or profession, a company, a firm, an association of persons, a body of individuals, a local authority and every artificial juridical person. The key point is that even individuals running small businesses are covered and thus would include someone who even employs a single person.

It is very important to note the exact definition of fringe benefits because only those items that get covered here would be included for the purpose of taxation. It means any privilege, service, facility or amenity, directly or indirectly provided by an employer to his employees. It also includes such facilities provided to former employees. Any reimbursement made either directly or indirectly to the employer will also be considered as a fringe benefit. Travelling ticket provided by the employer to the employees and his family members would be a fringe benefit. Even an amount, which is a contribution by the employer to an approved superannuating fund would be called a fringe benefit.

This is not the end of the matter for there is a category called
deemed
fringe benefits which will suffer the same tax effect. These are benefits that are deemed to have been provided if the employer has in the course of business or profession incurred any expenses on or made any payment for a whole host of fringe benefits. These include entertainment, festival celebration, gifts, use of club facilities, provision of hospitality facilities, maintenance of any accommodation in the nature of a guest house, conference, employee welfare, use of health club, sports and similar facilities, sales promotion including publicity; conveyance tour and travel including foreign travel, hotel, boarding and lodging, repair, running and maintenance of motorcars, repair running and maintenance of aircrafts, consumption of fuel other than imnndustrial fuel, use of telephone, scholarship to the children of the employees.

Tax calculation has to follow a specific procedure. First one has to check whether the benefit falls under the head of fringe benefits. Once this is determined a certain percentage of the expense is then taken as the value on which the tax is to be levied. These percentage has been listed in the budget. For example, the amount to be considered is 50 per cent of the expenses for entertainment and 20 per cent for conveyance, tour and travel. On this a rate of 30 per cent (i.e., 30 per cent of 50 per cent in case of entertainment) is applied as a tax.

Gallup poll

A method of survey in which a representative sampling of public opinion or public awareness concerning a certain subject/issue is done and on this basis a conclusion is drawn.

The credit of developing this research methodology goes to
George H. Gallup
(1901–84), a US journalist and statistian who in 1935 did set up the
American Institute of Public Opinion.
Through his efforts the method developed between the period 1935–40. In the coming times, the poll technique was immensely used by business houses for their market research and the psephologists for election forecasting, around the world.

Game theory

The analysis of situations involving two or more interacting decision makers (that may be individuals, competing firms, countries, etc.) who have conflicting objectives. It is a technique which uses logical deduction to explore the consequences of various strategies that might be adopted by game players having competing interests.

Game theory is a branch of
Applied Mathematics
that studies strategic interactions between agents–where the agents try maximising their pay off. It gives
formal modeling approach
to social situations in which decision makers interact with other agents. The theory generalises maximisation approaches developed to analyse markets such as supply and demand model.

The field dates back from the 1944 classic
Theory of Games and Economic Behaviour
by John von Neumann
and Oskar Morgentern (Princeton University Press, N. Jersy, 1944 & 2004; 60
th
Anniversary Ed.). Neumann was a mathematician and Morgenstern an economist and this book was based on the former’s prior research published in 1928 on the
Theory of Parlour Games
(in German).

The theory has found significant applications in many areas outside economics as usually construed, including formulations of nuclear strategies, ethics, political science, and evolutionary theory.

GDRs

While ADRs are denominated in dollars and traded on US National Stock Exchanges, GDRs can be denominated either in dollars or Euros and are commonly listed on European Stock Exchanges. Investors can cash in on the difference in price between local and foreign markets. Some time back ADRs and GDRs were
fungible
one way i.e. foreign investors could convert their ADRs/GDRs into underlying shares and sell them in the local market. However, they were not permitted to reconvert shares bought on the local exchange into ADRs/GDRs. In 2002,
two-way fungibility
was permitted. Under these rule reissuance of depositary receipts is permitted to the extent to which they have been redeemed into underlying shares and sold in the domestic market.

Giffen good

The good for which the demand increases as its price increases, rather than falls (opposite to the
general theory of demand
)–named after Robert Giffen (1837–1910). It applies to the large proportion of the goods belonging to the household budget (as flour, rice, pulses, salt, onion, potato, etc. in India)–an increase in their prices produces a large
negative income effect
completely overcoming the normal substitution effect with, people buying more of the goods.

Gini coefficient

An inequality indicator in an economy. The coefficient varies from ‘zero’ to ‘one’. A ‘zero’ Gini coefficient indicates a situation of perfect equality (i.e., every household earning the same level of income) while a ‘one’ signifies a situation of absolute inequality (i.e., a single household earning the entire income in an economy).

Golden handshake

A payment (usually generous) made by a company to its employees for quitting the job prior to their service.

Golden handcuff

A royalty/bonus payment by a company to its staff (usually top ranking) to keep them with the company or to save them from poaching by the other companies.

Golden hello

A large sum paid by a company to attract a new staff to its fold.

Golden rule

A fiscal policy stance which suggests that over the economic cycle, government should borrow only to ‘invest’ and not to finance the ‘current expenditure’. The attempts towards ‘balanced budgeting’, ‘zero-based budgeting’ developed under influence of this rule.

Goodhart’s law

The idea of
g
oodhart which suggests that attempts by a central bank (as RBI in India) to regulate the level of lending by banks imposing certain controls can be circumvented by the banks searching the alternatives out of the regulatory preview.

Go-Go fund

The highly speculative mutual funds operating in the USA with the objective of earning high profits out of capital appreciation–adopt risky strategies for the purpose (investing in volatile unproven and small shares, etc.)–also called the
performance funds.

Greater fool theory

A theory evolved by the technical analysts of stocks/shares according to which some even buy overvalued stocks with the conviction that they will find a
greater fool
who will buy them at higher prices. This is also popular as
castle-in-the-air theory.

Greenfield investment

An investment by a firm in a new manufacturing plant, workshop, office, etc.

Greenfield location

An area consisting of unused or agricultural land (
i.e., ‘greenfield’
) developed to set up new industrial plants.

Green revolution &
Institutions

The support of institutions and the governments of the world did play a very vital role in the success of the Green Revolution all over the world.

The International Maize and
w
heat Improvement Centre (CIMMYT), Mexico and the International Rice Research Institute (IRRI), Manila were the two institutions in strong partnership with national programmes which developed the miracle varieties of rice and wheat that fuelled the
g
reen Revolution around the world.

The Consultative Group on International Agricultural Research (CGIAR), set up in 1971 (in Washington DC under the aegis of the World Bank) played a central role in Green Revolution, supporting the works of the CIMMYT and IRRI. Today, the 16 CGIAR support centres around the world generate new knowledge and farming technology for the agriculture sector. Its research products are “global public goods”, freely available to all.

Greenshoe option

A term associated with the security/share market. This is a clause in the underwriting agreement of an initial public offer (IPO) by a company which allows to sell additional shares (usually 15 per cent) to the public if the demand for shares exceeds the expectation and the share trades above its offering price. It gets its name from the
Green Shoe
company which was the first company to be allowed such an option (in the USA, early 20
th
century). This is also known as
‘over-allotment provision’.

The company availing this option uses the proceeds (i.e. from the greenshoe option) to prevent any decline in market price of shares below the issue price in the post-listing period (in such cases the aforesaid company uses the money to purchase its own shares from the market–as demand increases, the market price of its shares picks up).

Gresham’s law

The economic idea that ‘bad’ money forces ‘good’ money out of circulation–named after Sir Thomas Gresham,
an adviser to Queen Elizabeth I of England. This law does not apply to the economies where paper currencies are in circulation. The economies which circulate metallic coins (gold, silver, copper, etc.) of proportional intrinsic values face such situations when people start hoarding such coins.

Greenspan put

A financial market terminology named after the former chairman, of the US central bank, Federal Reserve, to mean the helpful way he responded to big declines in the stock market by delivering a cut in interest rates.

Grey market

The ‘unofficial’ market of the newly issued shares before their formal listing and trading on the stock exchange.

GROWTH RECESSION

An expression coined by economists to describe an economy that is growing at such a slow pace that more jobs are being lost than are being added. The lack of job creation makes it ‘feel’ as if the economy is in a recession, even though the economy is still advancing. Many economists believe that between 2002 and 2003, the United States’ economy was in a growth recession.

In fact, at several points over the past 25 years the US economy is said to have experienced a growth recession. That is, in spite of gains in real GDP, job growth was either non-existent or was being destroyed at a faster rate than new jobs were being added.

3G technology

3G refers to the third generation of developments in wireless technology. It is a collective term for the new communication procedures, standards, and devices that will improve the speed and quality of services on mobiles. 3G-compatible handsets combine the functionality of a mobile phone with that of a PC and a personal organiser/PDA.

3G divides each call or transmission into little packets of data, marking each one with an individual code to show which connection it belongs to. This is a more efficient way of transmitting data, allowing 3G networks to deliver larger files, like pictures and video, at much faster speeds.

3G devices have greater transmission abilities, both in terms of speed and capacity, than 2G or 2.5G. The International Telecommunications Union (ITU)
defines
3G as any device that can transmit and receive data at 144Kbps or more. In practice, 3G devices can transfer data at up to 384Kbps.

Besides phone calls, 3G allows fax transmissions, e-mails, including large attachments, while on the move. High-speed internet access allows web browsing and fast downloading of data files, software, image or music files. 3G can be used for video conferencing and some 3G handsets can also function as personal organisers, with electronic diaries, contact lists, and automatic reminders. Most 3G networks offer global roaming.