Indian Economy, 5th edition (133 page)

Exchanging one debt of a particular interest rate for another at lower interest rate.

Product Swap

Exchanging one product for the other as wheat for milk (similar to barter).

SWFs

Sovereign wealth funds (SWFs) are the foreign currency funds held by the governments of the world, specially in Asia and West Asia. After the process of globalisation, freer capital movements to the developing economies had brought enough foreign currencies to some economies. Earlier, such funds used to originate in Singapore and Norway but now we see
c
hina, Russia, and the Middle East emerging as the new SWFs economies.

Such funds, estimated to be sitting on a total of $25 trillion, are eagerly looking to diversify into higher yielding riskier assets. Any fast growing economy with open and liberal attitudes to foreign investments with opportunities for investment may face up the inflow of such funds. India is one fit candidate today.

Such funds need to be studied and alllowed entry cautiously as they bring in non-market and extraneous factors with them too, having potential diplomatic, strategic and sovereign dangers to the host economies. In November 2007, the National Security Advisor of India voiced apprehension about such funds.

Swiss formula

Tariff cut formulae are either linear or non-linear. A Swiss formula is a non-linear formula. In a linear formula, tariffs are reduced by the same percentage irrespective of how high the initial tariff is. As opposed to a linear formula, in a non-linear formula, tariff cuts are directly or inversely proportional to the initial tariff rate.

In the Swiss formula, tariff cuts are proportionally higher for tariffs which are initially higher. For instance, a country which has an initial tariff of 30 per cent on a product will have to undertake proportionally higher cuts than a country which has an initial tariff of 20 per cent on the same product.

In the on-going multilateral trade negotiations at the World Trade Organisation (WTO), it has been decided by all participating countries to use the Swiss formula for reducing import tariffs on industrial goods. After a long-standing debate on the number of reduction coefficients to be used in the formula, a unanimous decision was recently taken that there would be two sets of coefficients–one for the developed countries and another for developing countries. A decision on the value of the coefficient is yet to be taken.

India’s average tariffs are much higher than those existing in the developed countries. If a linear formula for tariff reduction was used, then its reduction burden would have been proportional to that of developed countries. However, using a Swiss formula could lead India to taking on a greater reduction commitment than its developed counterparts with lower initial tariffs.

India agreed to a Swiss formula because it was decided that developing countries would be allowed to have a higher reduction coefficient than developed countries which could lower their tariff reduction obligations.

A reduction coefficient is part of the Swiss formula. It has a very important role to play in deciding the final reduction commitment. If all other variables in the Swiss formula remain unchanged, then a higher reduction coefficient could lead to lower reduction commitment and vice versa.

India wants that the reduction coefficient for developing countries should be much higher than the coefficient for developed countries. The difference should be enough to negate the effect of the original Swiss formula which weighs in favour of developed countries with lower initial tariffs. It has proposed that a difference between the coefficients should be at least 25 points to ensure that the reduction burden on developing countries is not higher than that on developed countries.

Systemic risk

The risk of damage to the health of the whole financial system. In modern financial world, the collapse of one bank could bring down the whole financial system.

Takeover

The process of one firm acquiring the other, also known as
acquisition.
As opposed to the merger which is an outcome of ‘mutual agreement’, takeovers are ‘hostile’ moves.

Takeovers may be classified into three broad categories:

(i)
Horizontal takeovers
involve firms which are direct competitors in the same market;

(ii)
Vertical takeovers
involve the firms having supplier-customer relationship; and

(iii)
Conglomerate takeovers
involve the firms operating in unrelated markets but intend diversification.

Takeover bid

An attempt of acquiring the majority share in a firm by another firm. There are various
terms
to show the
‘tactics’
applied in such bids either by the bidder or the bidded firms:

Black Knight

The launch of an unwelcome takeover bid (as the Mittal’s for the Arcelor in recent past).

Golden Parachute

A generous severance term written into the employment contracts of the directors (of a firm) which makes it expensive to sack them if the firm is taken over.

Green Mail

A situation of takeover bid when the bought-up shares by a potential bidder is actually being bought by the directors of the firm itself.

Leveraged Bid

A takeover bid being financed primarily by the loan.

Pac-man Defence

A situation when the firm being bidded for takeover, bids for the bidder firm itself–also known as
reverse takeover bid.

Poison Pill

A tactic used by the firm being bidded of merging with some other firm in order to make itself less attractive (financially or structurally) to the potential bidder.

Porcupine

Any agreements between the firm being bidded and its suppliers, creditors, etc. which are so complex that after the takeover the bidder firm feels diffculties integrating it.

Shark Repellants

The measures specially designed to discourage takeover bidders (e.g., altering the firm’s articles of association to increase the proportion of shareholder votes needed to approve the bid above the usual 50 per cent level, etc.).

White Knight

The intervention of a third firm in a takeover bid which either merges or takes over the victim firm to rescue it from the unwelcome bidder.

Technological unemployment

Unemployment which results from the automation of the production activities (
i.e., machines replacing men
).

Third-party insurance

Motor third-party insurance or third-party insurance is a statutory requirement under the Motor
v
ehicle Act in India–also known as
‘act only’
cover. A person purchasing a motor vehicle has to go for this compulsory insurance which benefits the third person (i.e. neither the vehicle owner nor the insurance company)–the person who becomes victim of an accident by the vehicle.

Till December 31, 2005, the premium for the insurance was fixed by the Tariff Advisory Committee (an arm of the IRDA) but since then it has been done away with. However, IRDA still continues to fix the premium for the mandatory third-party insurance, though the insurance companies have the freedom to decide on prices for comprehensive cover.

The amount of compensation is largely decided by the earning capacity of the accident victim.

Third way

An economic philosophy (better say rhetoric) which propagates it is neither capitalism nor socialism but a third (pragmatic) way.

The idea was popularised in the late 20
th
century by some political leaders having leftist leanings, including
b
ill
c
linton and Tony Blair
.
Though it has been hard to pin down it was earlier used to describe the economic model of Sweden.

Tight money

w
hen money has become difficult to mobilise–the term is used to show the ‘dear money’ when the rates of interest run comparatively on the higher side.

Till money

The notes and coins the commercial banks keep to meet everyday cash requirements of their customers (this is counted as part of their CRR).

Tobin tax

A prosposal of imposing small tax on all foreign exchange transactions with the obejctive to discourage destabilising speculation and volatility in the foreign exchange markets.

Proposed by the Nobel prize-winning economist James Tobin (1918–2002), the tax has never been implemented anywhere in the world so far.

Total product

The main/core product supported by many peripheral products/services, as for example a car, coming with loan facility, warranties, insurance, and after sale service, etc.

Trade creation

The increase in international trade that results from the elimination or reduction of trade barriers (such as quota, customs, etc.).

Tragedy of the Commons

Refers to the dangers of over-exploitation of resources due to lack of property rights over them (‘commons’ are the resources neither owned privately nor by the state but are open for free use by all). A rationing or imposing of levy on such resources as a check.

The concept was proposed by a 19
th
-century amateur mathematician
w
illiam Forster Lloyd.

Transfer payments

The expenditure by the government for which it receives no goods or services. For example, the expenditures on tax collection, social sector, unemployment allowance, etc.

As such expenditures are not done against any products they are not counted in the national income of the economy.

Transfer earnings

The return that an asset must earn to prevent its transfer to the next best alternative use. Any earning above the transfer earnings is known as its
‘economic rent’.

Transfer price

A term of international economics via which an MNC charges lesser prices for its exportables to its arm in another economy where tax rates are high, for increasing income. The East India Company did it heavily in pre-independent India.

ULIPs & MFs

Unit linked insurance policies (ULIPs) offer insurance plus investment objective to those who want a higher amount of insurance cover at a marginally higher cost. However, unlike mutual funds, which may be a short-term investment play, ULIPs meet long-term investment objectives. Essentially, ULIPs must be treated as long-term (15-plus years) investment vehicles.

Returns are varied across the risk class. One can categorise risks into three classes for both MF and ULIP schemes–high, medium, and low risks. High-risk policies have a higher exposure to equities and low-risk policies might have low or no exposure to equities. For MFs, high-risk comparable products are diversified equity funds, medium-risks are balanced funds, and low risks are debt instruments.

Underwriting

The process of acceptance by a financial institution of the financial risks of a transaction for a fee. For example, merchant banks underwrite new share issues, guaranteeing to buy up the shares not sold in a public offer (i.e., in the situations of under-subscription).

Usury

Charging an exorbitant rate of interest or even charging interest. Decried by many ancient philosophers and many religions, today most modern economies have some law regulating the upper limit of the interest rates and they consider interest as a reward to the lender for the lending risk.

Veblen effect

Named after the American economist Thorstein Bunde Veblen (1857–1929), this is a theory of consumption which suggests that consumers may have an ‘upward-sloping demand curve’ as opposed to a ‘downward-sloping demand curve’ because they practice conspicuous consumption (
a downward - sloping demand curve means that the quantity demanded varies inversely to the price i.e. demand falls with price rise
). The concept suggests that quantity demanded of a particular good varies directly with a change in price (
i.e., as price increases, demand increases
).

Velocity of circulation

A measure of the average number of times each unit of money is used, to purchase the final goods and services produced in an economy in a year.

Venture capital

Generally, a private equity capital which lends capital to the entrepreneurs who are innovative and cannot get the required fund from the conventional set-up of the lending mechanism.

In India, it was the Government of India which did set up the first such fund in 1998–the IVCF.

Vulture Funds

Vulture funds are privately owned financial firms which buy up sovereign debt issued by poor countries at a fraction of its value, then file lawsuits (sue) against the countries in courts, usually in London, New York, or
p
aris, for their full face value plus interest.

A paper prepared for IMF/WB (October 18, 2007) showed that there are now $1.8b lawsuits against poor countries where people typically live below $1 a day; 24 countries that have received debt cancellation under Heavily Indebted Poor Countries (HIPCs)initiative, 11 have been targeted by such creditors (i.e., the VFs) and they has been awarded just under $1b.–money which have gone for schools and hospitals; they are neutralising the good deeds of WB/IMF. As per the IMF, the litigating creditors were concentrated in the US, UK as well as the British Virgin Islands (BVI)–the UK protectorate tax haven. Bush is being pressed by a motion signed by 110 MPs to change the law which allows them to file cases in US courts–VFs contradict US foreign policy.

VOSTRO ACCOUNT

Vostro is an account that one party holds for another.
With a view to give more operational leeway, the RBI decided to dispense with the requirement of prior approval of the RBI for opening and maintaining each rupee
vostro
account
in India of non-resident exchange houses in connection with the rupee drawing arrangements (RDAs) that banks enter into with them. The approved dealer banks could now take its permission the first time they entered into such an arrangement with non-resident exchange houses from the Gulf countries, Hong Kong, Singapore and Malaysia. Subsequently, they may enter into RDAs, and inform the RBI immediately.