Indian Economy, 5th edition (127 page)

An informal term denoting the financial securities issued by a company/bidder as a means of borrowing to finance a takeover bid. Such securities generally include high-risk, high-interst loans, that is why the term ‘junk’ is used. It is also known as
mezzanine debt.

Kerb dealings

All the transactions taking place outside the stock exchanges.

Kleptocracy

A government which is corrupt and thieving – the politicians and bureaucrats in charge using the powers of the state to earn personal benefits/profits. Russia after the disintegration is condsiered to be a clear-cut example when Mafia-friendly government allotted valuable shares of the government companies when they were privatised.

Kondratieff wave

A business cycle of 50 years, named after the Russian economist Nikolai
k
ondratieff (wrote so in his book
The Long Waves in Economic Life,
1925).

He argued that capitalism was a stable system (the business cycle of 50 years implied it), in contrast to the Marxist view that it was self-destructive and unstable–he died in one of the Stalin’s prisons.

LAF

The abbreviated form of the Liquidity Adjustment Facility, is part of a financial policy provided to the banks by the RBI in India. The facility commenced in June 2000 under which the banks operating in India are allowed to park their funds with the RBI for short-term periods (i.e., less than one year which is usually from one day to seven days, in practice), known as the
Reverse Reop.
On such deposits to the RBI, the banks get an interest rate of 6 per cent per annum at present.

Laffer curve

A curve devised by the economist Arthur Laffer in 1974 which links average tax rates to total tax revenue. It suggests that higher tax rates initially increase revenue but after a point further increases in tax rates cause revenue to fall (for instance by discouraging people from working). But it is tough to know whether an economy is on the Laffer curve, as higher taxation breeds evasion of taxes too.

Liar loans

A term associated with the financial world which created news after the US financial system was hit by the subprime crisis in mid-2007.

These are the loans wherein borrowers fraudulently mis-state their incomes often egged on by the lender or broker to the bank. Such frauds have been detected along the entire US mortgage financing chain by September 2007–websites freely advertised that for a nominal fee, they could produce sufficient proof of income by generating bank statements, pay slips, income tax returns, and provide references. Lenders in turn
lied
about the real terms and conditions of the loans to borrowers and lied about the quality of loans sold to investors. The whole gamut of these deeds make such mortgage loans the
‘liar loans’.

LIBOR

The
l
ondon Interbank
o
ffered Rate (LIBOR) is the interest rate on dollar and other foreign currency deposits at which larger banks are prepared to borrow and lend these currencies in the Eurocurrency market. The rate reflects market conditions for international funds and are widely used by the banks as a basis for determining the interest rates charged on the US dollar and foreign currency loans to the business customers.

Life-cycle hypothesis

An idea which states that current consumption is not dependent solely on current disposable income of the consumers but is related to their anticipated lifetime income. This hypothesis has its high applied value in the real life economic management.

Life Insurance: Some Important
Terms

Endowment Policy

Insurance policies where a lump sum is payable either at the end of the policy term or if the insured dies during the policy tenure, are termed as endowment policies.

Beneficiary

A person or organisation legally entitled to receive benefits.

Term Life Insurance

In most cases, term life insurance refers to a product that provides death benefit protection for a specified period of time, say for 30 years. Benefits are doled out under this scheme only if the insured dies during the term.

Whole Life Insurance

It is a policy that provides insurance coverage for the entire life of the individual for a fixed premium throughout his life insurance, coupled with an investment component. Investments could be made in stocks or bonds that lead to accumulation of cash values. The augmented cash reserves are returned once one decides to surrender the policy.

Universal life insurance was created to provide more flexibility than whole life insurance by allowing the policy owner to shift money between the insurance and saving components of the policy.

Variable Universal Life Insurance Policy

A form of whole life insurance policy, this is a policy for those who weigh high risk threshold. It offers cash values that fluctuate based on the performance of the underlying mutual funds in the investment account. It is this investment of premiums in the equity market that carries with it an element of uncertainty.

Premium

This is the amount that the policy holder pays to the insurance company for the benefits provided under an insurance policy. The frequency of premium payments is opted by the individual. Typical premium modes include monthly, quarterly, semi-annual, and annual.

Annuity

An agreement sold by a life insurance company that provides fixed or variable payments to the policy holder, either immediately or at a future date.

Group Life Insurance

A life insurance policy issued to a group of people, usually through an employer.

Lapse

Defaulting on premium payments leads to the termination of an insurance policy. A lapse notice is sent in writing to the policy holder when the policy has lapsed.

Lump Sum

It refers to the proceeds of the policy that is paid to the beneficiary all at once rather than in installments. Typically, most life insurance policies make lump sum payment settlements.

Liquidation

A process of ‘winding up’ a joint-stock company as a legal entity.

Liquid asset

The monetary asset that can be used directly as payment.

Liquidity

The extent to which an asset can be quickly and completely converted into currency and coins.

Liquidity preference

A term denoting a preference among the people for holding money instead of investing it.

Liquidity trap

A situation when the interest rate is so low that people prefer to hold money rather than invest it.

In such situations investors do not go to increase investment even if the interest rates on loans are decreased. J. M. Keynes suggested for increased government expenditure or reduction in taxes to fight such a situation.

L-M Schedule

Here ‘L-M’ stands for ‘liquidity-money’. This is a schedule showing the combinations of levels of national income and interest rates where the equilibrium condition for the monetary economy, L = M, holds.

Local area bank

Announced in the Union Budget 1996–97 to ensure a focussed savings and credit mobilisation by defining the clear boundary of operation, the
l
ocal Area Bank (LAB) operates to a narrow geographical area of three contiguous districts. The private sector is also allowed entry in the segment.

Locomotive priniciple

The idea that in a situation of worldwide
recession
(see the chapter
Business Cycle
), increase in the total demand in one economy stimulates economic activities in the other economies via foreign trade.

Lorenz curve

A graph showing the degree of inequality in income and wealth in a given population or an economy. It is a rigorous way to measure income inequality. In this method (for example), personal incomes in an economy are arranged in increasing order; the cumulative share of total income is then plotted against the cumulative share of the population. The curve’s slope is thus proportional to per capita income at each point of the population distribution. In the case of complete equality of income, the
l
orenz curve will be a straight line and with greater curvature the inequality rises proportionally–the
Gini Coefficient
measures this inequality.

Lump of labour fallacy

The fallacy in economics that there is a ‘fixed amount of work’ to be done i.e. a lump of labour –this may be shared in different ways to create fewer or more jobs in an economy. An economist, D.F. Schloss in 1891 called it the lump of labour fallacy because in reality, the amount of work to be done is not fixed.

Macro & Micro economics

In economics, two different ways of looking at the economy have been developed by economists i.e., macroeconomics and microeconomics.

Macroeconomics
(‘macro’ in Greek language means ‘large’) looks at the behaviour of the economy
as a whole
such as the issues like inflation, rate of unemployment, economic growth, balance of trade, etc. It is the branch of economics which studies the economy in its
total
or
average
term.

Microeconomics
(in Greek language ‘micro’ means ‘small’) looks on the behaviour of the
units
i.e. the individual, the households, the firms, a
specific
industry–which together make up the economy.

MARGINAL STANDING FACILITY
(MSF)

Operationalised on the lines of the existing Liquidity Adjustment Facility (LAF – Repo) in May 2011 under which all Scheduled Commercial Banks can avail overnight funds, up to one per cent of their Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight. The facility is availed at an interest which is 100 basis points above the LAF repo rate, or as decided by the Reserve Bank from time to time. At present it is 9 per cent.

Marginal utility

The increase in satisfaction/utility a consumer derives from the use/consumption of one
additional
unit of a product in a particular time period–it goes on decreasing, i.e., the
diminishing marginal utility.

Market capitalisation

A term of security market which shows the market value of a company’s share–calculated by multiplying the current price of its share to the total number of shares issued by the company.

Market maker

An intermediary (may be an individual or a firm) in the secondary market who buys and sells securities/shares simultaneously quoting two-way rates. For example, on the
o
ver the
c
ounter Stock Exchange of India (OTCEI) only ‘market markers’ are allowed to operate. The Discount and Finance House of India (DFHI) is the chief market maker in the ‘money market’ of India.

A market maker plays a very vital role by providing sustainability to liquidity in the secondary market.

Masc
s

The Multi-Application Smart Cards (MASCs) system to facilitate simplification of procedures and enhancing the efficiency of Government schemes has been suggested by a Planning Commission Working Group in the context of the Eleventh Five-Year Plan. The
Smart Card
(i.e., MASCs) has been recognised to be useful in implementation of various Central government schemes like, PDS, Indira Awas Yojana and National Rural Employment Guarantee Scheme (NREGS).

Based on a web-enabled information system the Smart Cards will be based on unique ID, sharing ID, multi-application and access control. The whole system will consist of front, middle, and back end. The electronic card will be the ‘front’ end of the system which will be the point of delivery where the smart cards will be read and used. The office at ‘middle’ will be responsible for changing and updating the card periodically (i.e. monthly, quarterly, annually) depending on the type of information and requirement and transfer information from the front end to the back end and vice versa. The office at ‘back’ end will contain the computerised records, guidelines, accounts and management information systems. The complete digitisation of records will be required by this system.

Marshall Plan

A programme of international aid named after General George Marshall (a US Secretary of State) under which North America contributed around 1 per cent of its GDP in total (between 1948–52) to western Europe to rebuild the economies ravaged in Second World War.

Menu cost

The cost a firm bears in changing the prices of its product–it includes retraining the sales staff, reprinting of the new price list, labelling of goods, and informing the customers about the price change. Higher menu costs discourage the firms going for frequent price changes.

Mid-Cap funds

Mutual funds launch sector-specific funds to attract investments. Similarly, they mobilise resources from investors with an objective of investing in mid-cap shares. The Fund Manager chooses the mid-cap shares that can become a part of the portfolio. His job is to outperform the benchmark like the CNX Midcap 200 indexes in terms of the returns. There are thousands of funds world over that focus on investing in medium or small-cap companies.

MFBS

In August 2007, the Reserve Bank of India released a Manual on Financial and Banking Statistics (MFBS), first of its kind, which works as a reference guide and provides a methodological framework for compilation of statistical indicators encompassing various sectors of the economy.

Mid-Cap shares

There is no classical definition of mid-cap shares. The name ‘mid-cap’ originates from the term,
medium capitalised.
It is based on the market capitalisation of the stock. Market capitalisation is calculated by multiplying the current stock price with the number of shares outstanding or issued by the company. The definition of mid-cap shares can vary across markets and countries. In case of India, the National Stock Exchange defines the mid-cap universe as stocks whose average six months market capitalisation is between Rs. 75 crore and Rs. 750 crore. In the US, mid-cap shares are those stocks that have a market
capitalisation
of Rs. 9,000 crore to Rs. 45,000 crore. In India, these shares will be classified as
large cap shares.
Thus, classification of shares into large-caps, mid-cap and small-cap is made on the basis of the relative size of market in a country. The total market capitalisation of US markets is $15 trillion. In India, the market capitalisation of listed companies is around $600 billion.