Indian Economy, 5th edition (126 page)

Japan is the
first
country which introduced 3G on a large commercial scale in 2005. 3G is now also in use in France, Germany, and Austria besides some other countries.

There is no single global 3G standard, but the principal technologies of 3G include:

(i)
WCDMA, which has been chosen for 3G mobile phone systems in Europe, Asia, and the US. It first converts raw data into a narrow band digital radio signal and then attaches a marker to each data packet to identify it as belonging to a particular communication.

(ii)
Customers who already use CDMA can upgrade to newer models. CDMA2000 IxEV-DO provides always–on packet data connection like landline-based broadband, for mobile internet use.

(iii)
EDGE is the technology that allows existing GSM networks to provide 3G services and allows GSM to transmit data at transmission speeds of up to 384Kpbs.

GSM operators offering EDGE-based services are already providing some 3G-like services including video on the move. 3G requires spectrum in specified bands and telecom regulator TRAI has identified 450 MHz, 800 MHZ, and 2.1 Ghz as 3G bands. 3G services will be launched in India only after the government announces its spectrum policy and allocates spectrum in the required bands. This is expected by the end of 2008. After that, it will take a minimum of three months for operators to rollout 3G services.

Hedge Funds

These are basically mutual funds (MFs) which invest in various securities in order to contain or hedge risks. They are investment vehicles that take big bets on a wide range of assets and specialise in sophisticated techniques of investment. They are meant to perform well in falling as well as rising markets!

Run by former bankers or traditional investment managers by setting up their own funds, they make a lot of money by charging high fees typically 2 per cent management fees besides 20 per cent of the profits out of the investment. As they are unregulated in most of the economies (for example the USA, India, specially) and risky, they accept investments from wealthy and sophisticated investors.

Hedge funds made news in recent times as some of them were caught out by betting the wrong way on the market movements. Some of them also made huge losses by buying the complex packages of debt that contain many of the US mortgage loans which turned sour. It is believed that 33 per cent of stocks traded on the London Stock Exchange and 20 per cent on the New York Stock Exchange are managed by numerous hedge funds. In the case of India
,
it is believed that foreign investment in the Indian stocks (which accounted for almost 75 per cent of the total stocks by November 2007) has a heavy share of such funds–the Participatory Notes (PNs) route investment (i.e., 52 per cent of the total foreign investment in shares) is considered as hedge fund investment.

In recent years, there have been several high-profile hedge fund collapses. The Long -Term
c
apital Management (LTCM) of the US failing in 1998 had threatened the very stability of the US financial system–looking at the level in impact the regulators managed a bail out for it to prevent an imminent financial collapse. In 2006, the world saw the collapse of another hedge fund in the US, the
Amaranth
which lost $6.5 billion in a month in the natural gas market (The fund in place of a bail out was closed down by the regulators with the investors losing heavily.)

Herfindahl index

This is a measure of the level of seller concentration in a market which takes into account the total number of firms and their relative share in the total market output. Also known as
Herfindahl-Hirschman Index.

Hidden price reduction

A quantitative or qualitative increase of a product by keeping the price unchanged. We see it taking place in the case of many goods in the market selling ‘20 per cent or 33 per cent extra’ at the same prices.

Hidden price rise

A quantitative or qualitative decrease in a product without changing the price.

Hidden tax

Addition of an indirect tax into the price of a good or service without fully informing the consumer as, for example, the magnitude of the excise duty in tobacco and alcoholic products is so high that the taxes are added to the products directly.

Historic cost

The original cost of purchasing an asset such as land, machine etc., which is shown in the balance sheet of a firm under this title with an adjustment for the replacement cost of the
asset.

Hoarding

An act of unproductive retention of
money
or
goods.

Hog cycles

The cycles of over and under production of goods. This takes place due to time lag in the production process–this happens in case of agricultural products specially.

Impossible trinity

This is a term to show the central bank’s dilemma in targeting for stable exchange rate, interest rate and inflation while announcing the credit and monetary policy for the economy. As this task is not only challenging but also not possible, it is called as the ‘impossible trinity’.

INDIA’S SOVEREIGN RATING

Presently, India is rated by six international credit rating agencies, namely Standard and Poor’s (S&P), Moody’s Investor Services, FITCH, Dominion Bond Rating Service (DBRS), the Japanese Credit Rating Agency(JCRA), and the Rating and Investment Information Inc., Tokyo(R&I). Information flow to these credit rating agencies has been streamlined.

Indifference curve

A curve on the graph showing the alternative combinations of two products, each giving the same utility/satisfaction.

Induced investment

The part of investment (increase or decrease) which takes place due to a change in the level of national income.

IIFCL

The India Infrastructure Finance
c
ompany Ltd (IIFCL), a Government of India company set up in 2006 to promote public sector investments and public-private partnerships (PPPs) in all areas of infrastructure
except
the telecommunication.

Inferior product

The good or service for which the income elasticity of demand is negative (i.e., as income rises, buyers go to purchase less of the product). For such products, a price cut results into lesser demands by the buyers.

Inflation

For all types of inflation see the chapter
with the same title.

Insider trading

A stock market terminology which means transactions of shares by the persons having access to confidential informations which are not yet public–such persons stand to gain financially out of this knowledge (the person might be an employee, director, etc. of the share issuing company or the merchant bank or the book runner to the issue, etc.). Such kind of trading in stocks is illegal all over the world.

Insolvency

The situation when the liabilities of an individual or a firm to creditors exceeds its assets–inability to pay the liabilities from the assets. Also known as
bankruptcy.

Inventory

The stocks of finished goods, goods under the production process and raw materials held by a firm.

Invisible hand

A term coined by Adam Smith (in his magnum opus
The
w
ealth of Nations, 1776
) to denote the way in which the market mechanism (i.e. the price system) coordinates the decisions of buyers and sellers without any outside conscious involvement. For him this maximises individual welfare.

IPO

An IPO or initial public offering refers to the issue of shares to the public by the promoters of a company for the first time. The shares may be made available to the investors at face value of the share or with a premium as per the perceived market value of the share by the promoters. The IPO can be in the form of a fixed price portion or book building portion. Some companies offer only demat form of shares, others offer both demat and physical shares.

The performance of an IPO depends on many factors such as the promoter’s track record, experience in running the business, risk factors listed in the offer document, nature of industry, government policies associated with the industry performance of that sector in the previous years, and also any available forecasts for the industry for the near future.

I-S schedule

Here ‘I-S’ stands for ‘investment saving’. This graphic schedule displays the combinations of levels of national income and interest rate where the equilibirium condition for the real economy (investment = savings) holds.

Islamic banking

It is banking practiced as per the Islamic principle as prescribed in the
s
hariah
known as
Fiqh al-Muamalat
(Islamic rules on transaction). The Islamic law prohibits interest on both loans and deposits. Interest is also called
riba
in Islamic discourse. The argument against interest is that money is not a good and profit should be earned on goods and services only not on control of money itself. But Islam does not deny that capital, as a factor of production deserves to be rewarded. It, however, allows the owners of capital a share in a surplus which is
uncertain
.

It operates on the principle of sharing both profits and risks by the borrower as well as the lender. As such the depositor cannot earn a fixed return in the form of interest as happens in conventional banking.

But the banks are permitted to offer incentives such as variable prizes or bonuses in cash or kind on these deposits.

The depositor, who in the conventional banking system is averse to risk is a provider of capital here and equally shares the risks of the bank which lends his funds.

Investment finance
is offered by these banks through
Musharka
where a bank participates as a joint venture partner in a project and shares the profits and losses. Investment finance is also offered through
Mudabha
where the banks contribute the finance and the client provides expertise, management, and labour, and the profits are shared in a prearranged proportion while the loss is borne by the bank.

Trade finance
is also offered through a number of ways. One way is through
mare up,
where the bank buys an item for a client and the client agrees to repay the bank the amount along with an agreed profit later on. Banks also finance on lines similar to
leasing,
hire purchase,
and
sell and buyback
.
Consumer lending
is without any interest, but the bank covers expenses by levying a service charge. Besides, these banks offer a host of fee-based products like money transfer, bill collections, and foreign exchange trading where the bank’s won money is not involved.

Islamic banks have come into being since the early 1970s. There are nearly 30 Islamic banks all over the world from Africa to Europe to Asia and Australia and are regulated even within the conventional banking system. The whole banking system in Iran has moved over to the Islamic system since the early 1980s and even Pakistan is
i
slamising its banking system.

Many of the European and American Banks are now offering Islamic banking products not only in muslim countries, but also in developed markets such as the United Kingdom. The concept is also catching up in countries like Malaysia and Dubai.

As per the Islamic experts, with growing indebtedness of many governments and with bulk of the borrowing going to servicing of the past debt and payment of huge interests, it could be an alternative to conventional banking as practiced in the rest of the world. Wherever it is practiced,
studies
have shown that the rate of return is often comparable and sometimes even higher than the interest rate offered by conventional banks to depositors.

Though there is no full-fledged Islamic bank, there are many NBF intermediaries in Mumbai and Bangalore operating on Islamic principles. Besides, their presence in the form of co-operatives in various parts of the country has been there even before independence.

The Reserve Bank of India, which regulates the banking sector in India has recently appointed a committee headed by the Chief General Manager to look into the prospects of introducing certain Islamic products and banks in India. What is unique is that the products are structured according to norms prescribed in the
s
hariah
.

In many countries, these banks do not have the power of issuing cheques. Besides, many banks which operate on a very small-scale, do not have adequate internal control system because of which their accounting is not very transparent and also inadequate information is provided to the regulator. Besides, wherever they co-exist with conventional banking, central bank control of bank interest rates is liable to be circumvented by shifts of funds to the Islamic banks.

Isocost line

A line on the two-axis graph which shows the combination of factor inputs that can be purchased for the same money.

Isocost curve

A curve on the graph showing the varying combinations of factors of production (i.e., labour, capital etc.) that can be used to produce a given quantity of a product with a given technology.

J-curve effect

The tendency for a country’s balance of payments deficit to initially deteriorate following a devaluation of its currency before moving into surplus.

Jobber

An individual active on the floors of the stock exchanges who buys or sells stocks on his own account. A jobber’s profit is known as
jobber’s spread.
They are also known as
Taravniwalla
on the Bombay Stock Exchange (BSE).

Junk bond