Wednesday, December 19, 2007
Sunday, December 16, 2007
Types of Life Insurance Policies
Some basics about the various types of insurance policies:
Life insurance policies can be broadly classified into two types, term life insurance and permanent life insurance. Term life insurance policies are basically meant for younger people who live with their families. These policies offer cover to a person's requirement on a short -term basis. If any unfortunate accident was to happen during the term of the policy then the policy holder can make an insurance claim with a term life insurance policy. You name any leading life insurance company and they will offer such term life insurance policies. The range of a term life policy will vary. With a permanent life insurance policy the entire life of a policy holder is covered. Whole life insurance policies are of this type and require you to pay for a small period of time. This is till the total amount is fully paid-up.
Here is a snapshot of the types of policies and what they offer.
Term Insurance
Term insurance covers for a term of one or more years. It pays a death benefit only if the policy holder dies during the period the insurance is in force. It is the cheapest form of life insurance. Most of the term insurance policies can be renewed for one or more terms even if the health condition of the insured person has changed. Though each time the policy is renewed for a new term, premiums may rise higher. This policy is particularly useful to cover any outstanding debt in the form of a mortgage, home loan, etc. For example if someone has taken a loan of Rs10 lakhs, he/she will have an option of taking an insurance to protect the loan in case of passing away before the debt is repaid.
Whole Life Insurance
Whole life insurance covers for as long as the insured person live if the premiums are paid. The premium payments remain stable and level throughout the life of the policy, and upon the death of the insured person, the beneficiaries receive the death benefit in whatever amount the policy was originally set up. It is different from term life in that it also builds "cash-value" as the years pass. However, that it takes many years for this to happen, so it can’t be looked at as a means to make money quickly. There are options in the market to have a return of premium option in a whole life policy. That means after a certain age of paying premiums, the life insurance company will pay back the premium to the life assured but the coverage will continue. Some whole life policies offer the premiums to be paid for a shorter period such as 15, 20 or 25 years. Premiums for these policies are higher.
Money Back Insurance
Apart from covering life, Money Back Insurance also assures the return of a certain per cent of the sum assured as cash payment at regular intervals. It is a savings plan with the added advantage of life cover and regular cash inflow. This plan is ideal for planning special moments like a wedding, child's education or purchase of an asset, etc. Money back plan have "participating" and "non participating" versions in the market.
Endowment Assurance
Endowment insurance is a level premium plan with a savings feature. At maturity, a lump sum is paid out equal to the sum assured (plus dividends in a par policy). If death occurs during the term of the policy then the total amount of insurance and any dividends (par policy) are paid out.
There are a number of products in the market that offer flexibility in choosing the term of the policy. The terms can be chosen from 5 to 30 years. There are products in the market that offer non participating (no profits) version, the premiums for which are cheaper.
Universal Life
This is a flexible life insurance policy and is also market sensitive. The investor decides here the several investment options on how the net premium is to be invested. While the money invested has the potential for significant growth, such funds are subject to market risks including the loss of the principal.
Unit Linked Product
Market-linked plans or unit-linked insurance plans (ULIP) are similar to traditional insurance policies with the exception that the premium amount is invested by the insurance company in the stock market.
Market-linked insurance plans (MLP) mimic mutual funds and invest in a basket of securities. It allows choosing between investment options predominantly in equity, debt or a mix of both (called balanced option).
The major advantage market-linked plans offer is that they leave the asset allocation decision in the hands of investors themselves. Investor is in control of how he/she wants to distribute the money among the broad class of instruments and when to do it or pull out. Any of the products mentioned above except term products could be unit-linked.
Riders
Riders are additional add-on benefits that one can opt to include in one’s policy over and above what the policy may provide. However, these additions come at an extra premium charge depending of the rider one opt for. These riders cannot be bought separately and independently. The extra premium, nature and characteristics of the riders are based on the base policy that is offered.
Some riders available in the market are :
1. Accident Death Benefit: Provides an additional amount in case death occurs as a result of an accident.
2. Term Rider: It allows the payment of an additional amount if death of the insured happens.
3. Waiver of Premium: In case of total and permanent disability of life insured due to accident or any other means this rider allows premiums on base policy or riders to be waived.
4. Critical Illness: It provides payment of an additional amount on the diagnosis of some critical illness.
Life insurance policies can be broadly classified into two types, term life insurance and permanent life insurance. Term life insurance policies are basically meant for younger people who live with their families. These policies offer cover to a person's requirement on a short -term basis. If any unfortunate accident was to happen during the term of the policy then the policy holder can make an insurance claim with a term life insurance policy. You name any leading life insurance company and they will offer such term life insurance policies. The range of a term life policy will vary. With a permanent life insurance policy the entire life of a policy holder is covered. Whole life insurance policies are of this type and require you to pay for a small period of time. This is till the total amount is fully paid-up.
Here is a snapshot of the types of policies and what they offer.
Term Insurance
Term insurance covers for a term of one or more years. It pays a death benefit only if the policy holder dies during the period the insurance is in force. It is the cheapest form of life insurance. Most of the term insurance policies can be renewed for one or more terms even if the health condition of the insured person has changed. Though each time the policy is renewed for a new term, premiums may rise higher. This policy is particularly useful to cover any outstanding debt in the form of a mortgage, home loan, etc. For example if someone has taken a loan of Rs10 lakhs, he/she will have an option of taking an insurance to protect the loan in case of passing away before the debt is repaid.
Whole Life Insurance
Whole life insurance covers for as long as the insured person live if the premiums are paid. The premium payments remain stable and level throughout the life of the policy, and upon the death of the insured person, the beneficiaries receive the death benefit in whatever amount the policy was originally set up. It is different from term life in that it also builds "cash-value" as the years pass. However, that it takes many years for this to happen, so it can’t be looked at as a means to make money quickly. There are options in the market to have a return of premium option in a whole life policy. That means after a certain age of paying premiums, the life insurance company will pay back the premium to the life assured but the coverage will continue. Some whole life policies offer the premiums to be paid for a shorter period such as 15, 20 or 25 years. Premiums for these policies are higher.
Money Back Insurance
Apart from covering life, Money Back Insurance also assures the return of a certain per cent of the sum assured as cash payment at regular intervals. It is a savings plan with the added advantage of life cover and regular cash inflow. This plan is ideal for planning special moments like a wedding, child's education or purchase of an asset, etc. Money back plan have "participating" and "non participating" versions in the market.
Endowment Assurance
Endowment insurance is a level premium plan with a savings feature. At maturity, a lump sum is paid out equal to the sum assured (plus dividends in a par policy). If death occurs during the term of the policy then the total amount of insurance and any dividends (par policy) are paid out.
There are a number of products in the market that offer flexibility in choosing the term of the policy. The terms can be chosen from 5 to 30 years. There are products in the market that offer non participating (no profits) version, the premiums for which are cheaper.
Universal Life
This is a flexible life insurance policy and is also market sensitive. The investor decides here the several investment options on how the net premium is to be invested. While the money invested has the potential for significant growth, such funds are subject to market risks including the loss of the principal.
Unit Linked Product
Market-linked plans or unit-linked insurance plans (ULIP) are similar to traditional insurance policies with the exception that the premium amount is invested by the insurance company in the stock market.
Market-linked insurance plans (MLP) mimic mutual funds and invest in a basket of securities. It allows choosing between investment options predominantly in equity, debt or a mix of both (called balanced option).
The major advantage market-linked plans offer is that they leave the asset allocation decision in the hands of investors themselves. Investor is in control of how he/she wants to distribute the money among the broad class of instruments and when to do it or pull out. Any of the products mentioned above except term products could be unit-linked.
Riders
Riders are additional add-on benefits that one can opt to include in one’s policy over and above what the policy may provide. However, these additions come at an extra premium charge depending of the rider one opt for. These riders cannot be bought separately and independently. The extra premium, nature and characteristics of the riders are based on the base policy that is offered.
Some riders available in the market are :
1. Accident Death Benefit: Provides an additional amount in case death occurs as a result of an accident.
2. Term Rider: It allows the payment of an additional amount if death of the insured happens.
3. Waiver of Premium: In case of total and permanent disability of life insured due to accident or any other means this rider allows premiums on base policy or riders to be waived.
4. Critical Illness: It provides payment of an additional amount on the diagnosis of some critical illness.
Wednesday, December 12, 2007
US credit squeeze and India
It is obvious that Indian policymakers can do little about containing the magnitude of the liquidity squeeze that has been the by-product of the sub-prime saga in the US. The RBI will have to factor in this reduced availability of external credit in its plans, if any, to tighten the credit delivery system.....a nice article from Business Line:
News from the US, the main engine of the global economy aided by funds from emerging countries such as China and Taiwan, has been engaging the attention of economists and commentators for the last few weeks. The rising current account deficit of the US, its falling currency and the latest sub-prime credit woes have all drawn excited and focussed attention. Can India remain decoupled from what happens in the US economy?
Notwithstanding assertions of Indian policymakers to the contrary, when America sneezes, India catches a cold, although India is mainly sustained by domestic consumption and investment. Exports in general, and software exports in particular, are linked to US market demand.
If demand in US markets contracts, Chinese goods displaced from the US will descend on the rest of the world, including India. Directly or indirectly, the US economy’s contraction, which can result from a credit squeeze, can impact India. The implications are even more deep-seated than appears to a superficial observer.
Contraction of credit
Recently, TV channels flashed the views of the Chief Economist of Goldman Sachs who predicted that the abstraction from US credit markets will run into a global credit reduction of $2 trillion — a large sum of money by any reckoning.
Such a sharp contraction of credit will mean, at a minimum, the reduction of external borrowing by Indian corporates through the credit markets abroad, or, at any rate, a tightening of interest rates for such borrowing. It will also mean reduction of capital flows into emerging markets, including the Indian markets, which have already been alleged to have too high a valuation.
While this last aspect may not be good news for the Indian market punters, it may be music to the ears of the central banker struggling with $250-plus billion reserves and dreading further inflows.
The rupee may perhaps depreciate a tad from the high levels it has seen in recent months. This may be good news for our exporters and capital goods producers fearing the onslaught of cheaper goods from abroad. Overall, the impact would turn on whether the liquidity drop falls on external commercial borrowing or on investment in Indian stocks.
The reduction of global liquidity may spell a sharp reduction of access to resources for the Indian corporate sector.
The RBI will have to factor in this reduced availability of external credit in its plans, if any, to tighten the Indian credit delivery system. Already, the industrial production index has shown a sharp decline, as the latest reports show. It is important that the RBI does not pursue its inflation fighting credo to the exclusion of growth objective. It is, however, possible that the RBI’s inflation targeting hawks may gain an upper hand in view of the factor of crude oil prices touching the $100-mark.
Avoiding a repeat
The RBI has to take a holistic view of the combination of tightness of global credit availability and Indian investment needs in its next monetary policy stance. One hopes that there will not be a repeat of the mid-nineties experience when a burgeoning pace of economic growth had to be curtailed mainly because of the RBI’s tightening of monetary policy. In the light of this experience, at this time, one has to be doubly careful. This is possible since inflation is already down and global resources as a whole are under pressure.
It is quite possible that the US central bankers may themselves respond positively to the liquidity squeeze by pumping in more resources to avert a US recession. It this happens, the situation may not be as grim as Goldman Sachs predicts. But with Bernanke’s stance being primarily focused on inflation targeting, one may doubt whether he would counter the liquidity drain forecast.
At the same time, one has to bear in mind that world liquidity will be under strain, given the heavy drafts on resources by the $100-plus crude oil and its consequences on both developed and developing economies. How OPEC handles its surpluses will be critical to the issue. If it invests again in US securities, the damage will be mitigated. There is no alternative avenue for OPEC investment.
Difficult task ahead
The implications for Indian policymakers as a result of the global credit squeeze resulting from the US sub-prime mess are varied. First, the reduction in industrial growth might impact adversely, although not immediately, corporates’ profits and hence lower a bit of the good news on the corporate tax front. On the other hand, the recessionary impact of the reduction in credit to Indian corporates must not be worsened by financial tightening by the RBI.
While fiscal deficit reduction is a declared goal of the Government of India, its impact on growth of demand has also to be kept in mind. The Finance Minister may feel that he has a difficult task. On the one hand, he has to stimulate the economy fiscally. On the other, he has to keep fiscal deficit within the Fiscal Responsibility and Budgetary Management targets in order to keep inflation under control. Who said the FM’s crown has no thorns?
While the recent emphasis of Indian policymakers has been on containing the impact of capital flows, it has to be modulated now that the global scenario is changing. It is important that we remind ourselves continuously that we are in and part of a globalised economy. There is no point in insulating ourselves, whatever the other risks may be.
But, the RBI and Ministry of Finance have to work together to ensure that the liquidity in the system, continued effect of external capital flows and internal deposit resources remain optimal. While inflation has, of course, to be contained, food grain prices are showing a slight softening trend, aided by prospects of imports.
Balancing act
The prospects of a recessionary trend in the US have to be kept in mind in framing India’s tax proposals, especially its impact on the export sector. The impact of a rising rupee, plus a falling US market, can be a double-whammy for India’s service sector as well as manufacturing, particularly textiles, auto and electronics. It is the task of the budget-makers to keep these conflicting demands in mind to formulate a growth-friendly budget. Growth is vital if jobs are to grow. Jobs have to grow, if poverty is to be contained.
The debate about the US sub-prime mess and its consequences seems to be necessarily an extensive one because of the growing interconnections of the world economy. What happens in the remotest parts of the world seems to have an impact on us. Globalisation and its discontents are, indeed, many. There is little we can do about it.
For instance, it is obvious that our policymakers can do little about containing the magnitude of the liquidity squeeze that has been the by-product of the sub-prime saga in the US. But we have to do what is our remit — to contain its damage on India’s growth — both in the corporate sector and others.
Inflation management is, of course, critical, but the lack of adequate growth can be a disaster. Let it not be said that India’s growth became hostage to the sub-prime mismanagement of the US housing financial markets.
The answer lies in the hands of our undoubtedly competent central bankers, the mandarins of the Finance Ministry and the magnates of the corporate sector.
News from the US, the main engine of the global economy aided by funds from emerging countries such as China and Taiwan, has been engaging the attention of economists and commentators for the last few weeks. The rising current account deficit of the US, its falling currency and the latest sub-prime credit woes have all drawn excited and focussed attention. Can India remain decoupled from what happens in the US economy?
Notwithstanding assertions of Indian policymakers to the contrary, when America sneezes, India catches a cold, although India is mainly sustained by domestic consumption and investment. Exports in general, and software exports in particular, are linked to US market demand.
If demand in US markets contracts, Chinese goods displaced from the US will descend on the rest of the world, including India. Directly or indirectly, the US economy’s contraction, which can result from a credit squeeze, can impact India. The implications are even more deep-seated than appears to a superficial observer.
Contraction of credit
Recently, TV channels flashed the views of the Chief Economist of Goldman Sachs who predicted that the abstraction from US credit markets will run into a global credit reduction of $2 trillion — a large sum of money by any reckoning.
Such a sharp contraction of credit will mean, at a minimum, the reduction of external borrowing by Indian corporates through the credit markets abroad, or, at any rate, a tightening of interest rates for such borrowing. It will also mean reduction of capital flows into emerging markets, including the Indian markets, which have already been alleged to have too high a valuation.
While this last aspect may not be good news for the Indian market punters, it may be music to the ears of the central banker struggling with $250-plus billion reserves and dreading further inflows.
The rupee may perhaps depreciate a tad from the high levels it has seen in recent months. This may be good news for our exporters and capital goods producers fearing the onslaught of cheaper goods from abroad. Overall, the impact would turn on whether the liquidity drop falls on external commercial borrowing or on investment in Indian stocks.
The reduction of global liquidity may spell a sharp reduction of access to resources for the Indian corporate sector.
The RBI will have to factor in this reduced availability of external credit in its plans, if any, to tighten the Indian credit delivery system. Already, the industrial production index has shown a sharp decline, as the latest reports show. It is important that the RBI does not pursue its inflation fighting credo to the exclusion of growth objective. It is, however, possible that the RBI’s inflation targeting hawks may gain an upper hand in view of the factor of crude oil prices touching the $100-mark.
Avoiding a repeat
The RBI has to take a holistic view of the combination of tightness of global credit availability and Indian investment needs in its next monetary policy stance. One hopes that there will not be a repeat of the mid-nineties experience when a burgeoning pace of economic growth had to be curtailed mainly because of the RBI’s tightening of monetary policy. In the light of this experience, at this time, one has to be doubly careful. This is possible since inflation is already down and global resources as a whole are under pressure.
It is quite possible that the US central bankers may themselves respond positively to the liquidity squeeze by pumping in more resources to avert a US recession. It this happens, the situation may not be as grim as Goldman Sachs predicts. But with Bernanke’s stance being primarily focused on inflation targeting, one may doubt whether he would counter the liquidity drain forecast.
At the same time, one has to bear in mind that world liquidity will be under strain, given the heavy drafts on resources by the $100-plus crude oil and its consequences on both developed and developing economies. How OPEC handles its surpluses will be critical to the issue. If it invests again in US securities, the damage will be mitigated. There is no alternative avenue for OPEC investment.
Difficult task ahead
The implications for Indian policymakers as a result of the global credit squeeze resulting from the US sub-prime mess are varied. First, the reduction in industrial growth might impact adversely, although not immediately, corporates’ profits and hence lower a bit of the good news on the corporate tax front. On the other hand, the recessionary impact of the reduction in credit to Indian corporates must not be worsened by financial tightening by the RBI.
While fiscal deficit reduction is a declared goal of the Government of India, its impact on growth of demand has also to be kept in mind. The Finance Minister may feel that he has a difficult task. On the one hand, he has to stimulate the economy fiscally. On the other, he has to keep fiscal deficit within the Fiscal Responsibility and Budgetary Management targets in order to keep inflation under control. Who said the FM’s crown has no thorns?
While the recent emphasis of Indian policymakers has been on containing the impact of capital flows, it has to be modulated now that the global scenario is changing. It is important that we remind ourselves continuously that we are in and part of a globalised economy. There is no point in insulating ourselves, whatever the other risks may be.
But, the RBI and Ministry of Finance have to work together to ensure that the liquidity in the system, continued effect of external capital flows and internal deposit resources remain optimal. While inflation has, of course, to be contained, food grain prices are showing a slight softening trend, aided by prospects of imports.
Balancing act
The prospects of a recessionary trend in the US have to be kept in mind in framing India’s tax proposals, especially its impact on the export sector. The impact of a rising rupee, plus a falling US market, can be a double-whammy for India’s service sector as well as manufacturing, particularly textiles, auto and electronics. It is the task of the budget-makers to keep these conflicting demands in mind to formulate a growth-friendly budget. Growth is vital if jobs are to grow. Jobs have to grow, if poverty is to be contained.
The debate about the US sub-prime mess and its consequences seems to be necessarily an extensive one because of the growing interconnections of the world economy. What happens in the remotest parts of the world seems to have an impact on us. Globalisation and its discontents are, indeed, many. There is little we can do about it.
For instance, it is obvious that our policymakers can do little about containing the magnitude of the liquidity squeeze that has been the by-product of the sub-prime saga in the US. But we have to do what is our remit — to contain its damage on India’s growth — both in the corporate sector and others.
Inflation management is, of course, critical, but the lack of adequate growth can be a disaster. Let it not be said that India’s growth became hostage to the sub-prime mismanagement of the US housing financial markets.
The answer lies in the hands of our undoubtedly competent central bankers, the mandarins of the Finance Ministry and the magnates of the corporate sector.
ULIPs vs. Mutual Funds
The opening of the insurance sector has seen a deluge of innovative products, which have provided excellent flexibility, returns and insurance benefits. Coupled with this the equity market has given tremendous returns.
Today there is a debate revolving around choosing between ULIPs and Mutual Funds. Each of these avenues of investment have their positives and negatives.
ULIPs – Advantages
• Flexibility- you can choose your term, insurance cover.
• Transparency – you know the amount you are paying for various benefits.
• Tax free returns – 100% tax free since they are received from insurance.
• One can switch between various options and tax benefits when investing under Sec 80C.
ULIPs – Disadvantages
• Flexibility can act as a disadvantage since the person may use the withdrawal clause too early.
• Heavy initial cost – you pay around 15-20% for the first year and then around 5% for the next two years.
• No control on costs.
• One may try to time the market and may make errors.
Mutual Funds – Advantages
• Lower cost of entry- you can start with as low as Rs. 500.
• Choice of various sectors – one can choose a fund as per requirement.
• Tax free returns – under long capital gains for equity funds and tax benefits under Sec 80C for selected funds.
Mutual Funds – Disadvantages
• No control of costs.
• Recurring costs are higher.
• The capital gains rule can change the taxation part and only equity funds qualify for tax benefits.
Today there is a debate revolving around choosing between ULIPs and Mutual Funds. Each of these avenues of investment have their positives and negatives.
ULIPs – Advantages
• Flexibility- you can choose your term, insurance cover.
• Transparency – you know the amount you are paying for various benefits.
• Tax free returns – 100% tax free since they are received from insurance.
• One can switch between various options and tax benefits when investing under Sec 80C.
ULIPs – Disadvantages
• Flexibility can act as a disadvantage since the person may use the withdrawal clause too early.
• Heavy initial cost – you pay around 15-20% for the first year and then around 5% for the next two years.
• No control on costs.
• One may try to time the market and may make errors.
Mutual Funds – Advantages
• Lower cost of entry- you can start with as low as Rs. 500.
• Choice of various sectors – one can choose a fund as per requirement.
• Tax free returns – under long capital gains for equity funds and tax benefits under Sec 80C for selected funds.
Mutual Funds – Disadvantages
• No control of costs.
• Recurring costs are higher.
• The capital gains rule can change the taxation part and only equity funds qualify for tax benefits.
Tuesday, December 11, 2007
Carbon Trading
Kyoto Protocol- The Kyoto Protocol is a protocol to the international Framework Convention on Climate Change with the objective of reducing Greenhouse gases that cause climate change. It was agreed on 11 December 1997 at the 3rd Conference of the Parties to the treaty when they met in Kyoto, and entered into force on 16 February 2005.
As stated in the treaty itself, The objective of the Kyoto Protocol is to achieve "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system."
As of November 2007, 174 parties have ratified the protocol. Of these, 36 countries (plus the EU as a party in its own right) are required to reduce greenhouse gas emissions to the levels specified for each of them in the treaty (representing over 61.6% of emissions from Annex I countries), with three more countries intending to participate. A notable exception is the United States. One hundred and thirty-seven (137) countries have ratified the protocol, but have no obligation beyond monitoring and reporting emissions.
Among various experts, scientists and critics there is some debate about the usefulness of the protocol, and there have been cost-benefit studies performed on its usefulness.
India & Kyoto Protocol – India signed and ratified the Protocol in August, 2002. Since India is exempted from the framework of the treaty, it is expected to gain from the protocol in terms of transfer of technology and related foreign investments. At the G-8 meeting in June 2005, Indian Prime Minister Manmohan Singh pointed out that the per-capita emission rates of the developing countries are a tiny fraction of those in the developed world. Following the principle of common but differentiated responsibility, India maintains that the major responsibility of curbing emission rests with the developed countries, which have accumulated emissions over a long period of time. However, the U.S. and other Western nations assert that India, along with China, will account for most of the emissions in the coming decades, owing to their rapid industrialization and economic growth.
What is Carbon Trading? Let’s rewind to the Kyoto Protocol of 1997.
According to it all countries are required to reduce their greenhouse gas emissions by 5% --from 1990 levels-- in the next ten years, i.e. 2012—or pay a price to those that do. The idea was to make developed countries pay for their wild ways with emissions while at the same time monetarily rewarding countries with good behavior in this regard. Since developing countries can start with clean technologies, they will be rewarded by those stuck with ‘dirty’ ones. Say a company in India can prove it has prevented the emission of x-tonnes of carbon, it can sell this good carbon-karma to a company in say, the US which has a bad karma. An environment-fundamentalist may say it’s all a bit like an indulgent epicure paying someone else to diet for him, but then that’s another story. Right now, there is a market opportunity for India—but only till 2012. Closer to that clean-up date prices of carbon credits will rise and in the years leading up to it there will be a scramble to buy credits cheap. The World Bank has built itself a role in this market as a referee, broker and macro-manager of international fund flows. The scheme has been entitled Clean Development Mechanism [CDM] in 2000. Or more commonly, Carbon Trading.
India – Carbon Trading
India’s dominance in carbon trading under the clean development mechanism (CDM) of the UN Convention on Climate Change (UNFCCC) is beginning to influence business dynamics in the country.
India isn’t obliged to cut emissions, as its energy consumption is low. While this may change 10 years from now, companies are jumping on the CER bandwagon. Enterprises are adopting cleaner, sustainable technologies. Insome cases the revenues from waste exceed those from the main business.
The result: India Inc pocketed Rs 1,500 crore in 2005 just by selling carbon credits to developed-country clients. This is a fraction of the RS 18,000 crore experts estimate will be India’s share in global carbon trading by 2012.
In the pipeline are projects that would create upto 306 million tradable CERs. Analysts claim if more companies absorb clean technologies, total CERs with India could touch 500 million.
Though small compared to the Chinese total, the lead has been heartening for industry, government and experts alike.
The ethics of carbon trading ( ET - 11,Dec,2007) - There is a belief that carbon trading offers a golden opportunity for developing countries like India to get foreign funds. However, is it ethical for richer countries to continue to contribute more than their share of global carbon emissions by buying ‘cheaper’ emission reduction opportunities in poorer countries?
The problem of climate change caused by the increasing concentration of greenhouse gases in the atmosphere needs concerted action by all countries of the world. The impact of one tonne of carbon dioxide emissions is the same irrespective of whether the emission occurs in New York, Beijing, Mumbai or Latur. This implies that in order to reduce the total annual global carbon dioxide emissions to a fixed target, it is necessary to decide a basis for national or regional emissions.
The global community led by the Intergovernmental Panel on Climate Change agreed upon the Kyoto Protocol in 1997 (ratified in 2005) where Annex I countries (38 industrialised/developed countries) agreed to reduce their GHG emissions by 2008-2012 to an average of about 5% below their 1990 levels.
The Kyoto targets range from +10% (Iceland) to -8% (EU). The developing countries were exempt from targets at Kyoto. This indicates differentiated responsibility. However, the basis for targets seems to be emissions in a predefined base year. This implies that countries that have higher emissions due to higher per capita energy use would be entitled to higher targets.
A logical basis for deciding emission quotas (rights?) could be on a per capita basis. However, this basis is not agreed upon by the global community. Even the country averages hide significant intra-country variations.
A recent study by Greenpeace India computed the carbon dioxide emissions of different income classes in India and showed that the high income households (> Rs 360,000/ year income) have average emissions around the world average while low income households(< Rs 36,000/ year income) have emissions of about 20% of this value.
The Kyoto protocol permits meeting the national targets partially by trading emission allowances and carbon project credits through the emission trading system, joint implementation, and the clean development mechanism (CDM). This has resulted in the emergence of a carbon trading market.
The logic is that there are projects available in developing countries to mitigate carbon dioxide emissions — e.g., afforestation, energy efficiency and renewables — that can supply cheaper emission reduction credits. This implies that developed countries can continue to have higher emissions (than their emission quotas or rights) as long as they can buy these rights by funding equivalent emission reduction projects in developing countries.
Hence the problem can be ‘neatly’ (“efficiently”?) solved by the market without undue difficulty — no structural adjustments or lifestyle changes required in the developed countries. This would also benefit the developing countries as there would be significant fund transfers for the carbon credits.
What is the problem with this ‘win-win’ market solution? We are looking at the carbon reduction market as a great opportunity. Is this ensuring a fair price? Is it ethical? Are nations avoiding their responsibility to reduce carbon emissions to sustainable levels by using their ability to buy out emission rights?
At present, the volumes of certified emission reductions of carbon dioxide (CERs) recorded annually by the UNFCCC (UN agency regulating the emission reduction) are 174 million tonnes. The price for CERs is kept quite low (less than $20 per CER).
Suppose there were no global carbon market and each country had to balance its own carbon budget. Simulations done by European researchers indicate that if the countries had to meet their Kyoto targets, the economic cost incurred by the US would be $32 billion, by the EU would be $14 billion and for Japan it would be about $6 billion. This would indicate costs of reduction ranging from $41 to $55 per tonne of CO2. This is more than double the existing price of the CERs.
The targets set at Kyoto are a start but unlikely to help achieve the stabilisation scenario of carbon dioxide. Reductions of 40% or more would be required by the Annex 1 countries. Hence even the supply/demand equilibrium for carbon reductions in the global market is skewed since a much lower demand is initially mandated resulting in the developed countries benefiting from a carbon price that is lower than its fair value. The questions of ethics and equity are difficult issues to address.
The climate change negotiation is now about getting the two largest ‘future’ emitters India and China on board. India, a country hosting 17% of the world population has contributed only 2.4% to the total accumulated emissions since 1750.
The annual per capita energy consumption in the country is very low (0.53 tonnes of oil equivalent per person), whereas the average per capita electricity consumption in India is about 450 kWh per year — less than 1/5th of the world average and 1/30th of the US average. The economy is growing at the rate of 8%-10% in the past few years and the energy demand is on the rise.
To meet the developmental needs and to satisfy the aspirations of the people to achieve better living conditions, the energy consumption is expected to rise throughout the next decade or two. A significant part of the growth in the energy sector will be met through the coal reserves in the country. So, the carbon emission from India is likely to show a sharper rise than the historical trend, unless zero-emission coal plants become a reality in the near future.
At present, India is actively participating in CDM activity (~ 300 projects with 28 million CERs registered per year). Most of these projects allow the industrialised countries to pick up the low hanging fruits at the cheapest price. How can we ensure that substantial part of the Kyoto reduction targets are met through mitigation measures within Annex I countries themselves?
Unless that happens, stabilisation to any undisruptive GHG concentration level seems to be impossible. We should get fair compensation for the carbon credits to help in our development goals, especially when we are compromising our future emission rights by selling the carbon credits. It is high time industrialised countries looked beyond purchase of cheap emission credits through CDM.
Providing access to cleaner technologies (unconditional technology transfer) and ensuring a fair carbon price may help address the equity issues.
As stated in the treaty itself, The objective of the Kyoto Protocol is to achieve "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system."
As of November 2007, 174 parties have ratified the protocol. Of these, 36 countries (plus the EU as a party in its own right) are required to reduce greenhouse gas emissions to the levels specified for each of them in the treaty (representing over 61.6% of emissions from Annex I countries), with three more countries intending to participate. A notable exception is the United States. One hundred and thirty-seven (137) countries have ratified the protocol, but have no obligation beyond monitoring and reporting emissions.
Among various experts, scientists and critics there is some debate about the usefulness of the protocol, and there have been cost-benefit studies performed on its usefulness.
India & Kyoto Protocol – India signed and ratified the Protocol in August, 2002. Since India is exempted from the framework of the treaty, it is expected to gain from the protocol in terms of transfer of technology and related foreign investments. At the G-8 meeting in June 2005, Indian Prime Minister Manmohan Singh pointed out that the per-capita emission rates of the developing countries are a tiny fraction of those in the developed world. Following the principle of common but differentiated responsibility, India maintains that the major responsibility of curbing emission rests with the developed countries, which have accumulated emissions over a long period of time. However, the U.S. and other Western nations assert that India, along with China, will account for most of the emissions in the coming decades, owing to their rapid industrialization and economic growth.
What is Carbon Trading? Let’s rewind to the Kyoto Protocol of 1997.
According to it all countries are required to reduce their greenhouse gas emissions by 5% --from 1990 levels-- in the next ten years, i.e. 2012—or pay a price to those that do. The idea was to make developed countries pay for their wild ways with emissions while at the same time monetarily rewarding countries with good behavior in this regard. Since developing countries can start with clean technologies, they will be rewarded by those stuck with ‘dirty’ ones. Say a company in India can prove it has prevented the emission of x-tonnes of carbon, it can sell this good carbon-karma to a company in say, the US which has a bad karma. An environment-fundamentalist may say it’s all a bit like an indulgent epicure paying someone else to diet for him, but then that’s another story. Right now, there is a market opportunity for India—but only till 2012. Closer to that clean-up date prices of carbon credits will rise and in the years leading up to it there will be a scramble to buy credits cheap. The World Bank has built itself a role in this market as a referee, broker and macro-manager of international fund flows. The scheme has been entitled Clean Development Mechanism [CDM] in 2000. Or more commonly, Carbon Trading.
India – Carbon Trading
India’s dominance in carbon trading under the clean development mechanism (CDM) of the UN Convention on Climate Change (UNFCCC) is beginning to influence business dynamics in the country.
India isn’t obliged to cut emissions, as its energy consumption is low. While this may change 10 years from now, companies are jumping on the CER bandwagon. Enterprises are adopting cleaner, sustainable technologies. Insome cases the revenues from waste exceed those from the main business.
The result: India Inc pocketed Rs 1,500 crore in 2005 just by selling carbon credits to developed-country clients. This is a fraction of the RS 18,000 crore experts estimate will be India’s share in global carbon trading by 2012.
In the pipeline are projects that would create upto 306 million tradable CERs. Analysts claim if more companies absorb clean technologies, total CERs with India could touch 500 million.
Though small compared to the Chinese total, the lead has been heartening for industry, government and experts alike.
The ethics of carbon trading ( ET - 11,Dec,2007) - There is a belief that carbon trading offers a golden opportunity for developing countries like India to get foreign funds. However, is it ethical for richer countries to continue to contribute more than their share of global carbon emissions by buying ‘cheaper’ emission reduction opportunities in poorer countries?
The problem of climate change caused by the increasing concentration of greenhouse gases in the atmosphere needs concerted action by all countries of the world. The impact of one tonne of carbon dioxide emissions is the same irrespective of whether the emission occurs in New York, Beijing, Mumbai or Latur. This implies that in order to reduce the total annual global carbon dioxide emissions to a fixed target, it is necessary to decide a basis for national or regional emissions.
The global community led by the Intergovernmental Panel on Climate Change agreed upon the Kyoto Protocol in 1997 (ratified in 2005) where Annex I countries (38 industrialised/developed countries) agreed to reduce their GHG emissions by 2008-2012 to an average of about 5% below their 1990 levels.
The Kyoto targets range from +10% (Iceland) to -8% (EU). The developing countries were exempt from targets at Kyoto. This indicates differentiated responsibility. However, the basis for targets seems to be emissions in a predefined base year. This implies that countries that have higher emissions due to higher per capita energy use would be entitled to higher targets.
A logical basis for deciding emission quotas (rights?) could be on a per capita basis. However, this basis is not agreed upon by the global community. Even the country averages hide significant intra-country variations.
A recent study by Greenpeace India computed the carbon dioxide emissions of different income classes in India and showed that the high income households (> Rs 360,000/ year income) have average emissions around the world average while low income households(< Rs 36,000/ year income) have emissions of about 20% of this value.
The Kyoto protocol permits meeting the national targets partially by trading emission allowances and carbon project credits through the emission trading system, joint implementation, and the clean development mechanism (CDM). This has resulted in the emergence of a carbon trading market.
The logic is that there are projects available in developing countries to mitigate carbon dioxide emissions — e.g., afforestation, energy efficiency and renewables — that can supply cheaper emission reduction credits. This implies that developed countries can continue to have higher emissions (than their emission quotas or rights) as long as they can buy these rights by funding equivalent emission reduction projects in developing countries.
Hence the problem can be ‘neatly’ (“efficiently”?) solved by the market without undue difficulty — no structural adjustments or lifestyle changes required in the developed countries. This would also benefit the developing countries as there would be significant fund transfers for the carbon credits.
What is the problem with this ‘win-win’ market solution? We are looking at the carbon reduction market as a great opportunity. Is this ensuring a fair price? Is it ethical? Are nations avoiding their responsibility to reduce carbon emissions to sustainable levels by using their ability to buy out emission rights?
At present, the volumes of certified emission reductions of carbon dioxide (CERs) recorded annually by the UNFCCC (UN agency regulating the emission reduction) are 174 million tonnes. The price for CERs is kept quite low (less than $20 per CER).
Suppose there were no global carbon market and each country had to balance its own carbon budget. Simulations done by European researchers indicate that if the countries had to meet their Kyoto targets, the economic cost incurred by the US would be $32 billion, by the EU would be $14 billion and for Japan it would be about $6 billion. This would indicate costs of reduction ranging from $41 to $55 per tonne of CO2. This is more than double the existing price of the CERs.
The targets set at Kyoto are a start but unlikely to help achieve the stabilisation scenario of carbon dioxide. Reductions of 40% or more would be required by the Annex 1 countries. Hence even the supply/demand equilibrium for carbon reductions in the global market is skewed since a much lower demand is initially mandated resulting in the developed countries benefiting from a carbon price that is lower than its fair value. The questions of ethics and equity are difficult issues to address.
The climate change negotiation is now about getting the two largest ‘future’ emitters India and China on board. India, a country hosting 17% of the world population has contributed only 2.4% to the total accumulated emissions since 1750.
The annual per capita energy consumption in the country is very low (0.53 tonnes of oil equivalent per person), whereas the average per capita electricity consumption in India is about 450 kWh per year — less than 1/5th of the world average and 1/30th of the US average. The economy is growing at the rate of 8%-10% in the past few years and the energy demand is on the rise.
To meet the developmental needs and to satisfy the aspirations of the people to achieve better living conditions, the energy consumption is expected to rise throughout the next decade or two. A significant part of the growth in the energy sector will be met through the coal reserves in the country. So, the carbon emission from India is likely to show a sharper rise than the historical trend, unless zero-emission coal plants become a reality in the near future.
At present, India is actively participating in CDM activity (~ 300 projects with 28 million CERs registered per year). Most of these projects allow the industrialised countries to pick up the low hanging fruits at the cheapest price. How can we ensure that substantial part of the Kyoto reduction targets are met through mitigation measures within Annex I countries themselves?
Unless that happens, stabilisation to any undisruptive GHG concentration level seems to be impossible. We should get fair compensation for the carbon credits to help in our development goals, especially when we are compromising our future emission rights by selling the carbon credits. It is high time industrialised countries looked beyond purchase of cheap emission credits through CDM.
Providing access to cleaner technologies (unconditional technology transfer) and ensuring a fair carbon price may help address the equity issues.
Monday, December 10, 2007
India-Foreign Relationship
India’s external relation policies have been characterized by the basic tenets of Panchsheel. Peace, disarmament, self-reliance, non-alignment and development are the bedrocks of India's relations with other nations, and determine its reactions to external developments. Another pillar of Indian foreign policy is the element of consensus on vital foreign policy issues, transcending party affiliations, and including political parties, diplomats, academics and opinion-makers alike.
Some of the predicaments facing India are the challenges to the concept of the nation-state from linguistic, ethnic and religious groups, on-going changes in the external equations and in the nature of global developmental and economic policies, trade and financial regimes, and the scourges of terrorism, often exported from other countries, as well as the menace of drugs and arms-trafficking and their links with terrorist and criminal outfits. Environmental conservation, protection and promotion of human rights, and disarmament have rightly assumed great importance in the world.
Following are the few points revealing India’s relation with the rest of the world:
•India was one of the founding members of the United Nations and the Non-Aligned Movement and is an active member of several international organizations, most notably the WTO, ADB, SAARC, G8+5, East Asia Summit and G20.
•India has always taken first step to develope a friendly relation with the neighbours, The Simla Agreement provided the basis for constructive dialogue between India and Pakistan.
•Among the most encouraging recent developments in India China Economy and India-China ties is the rapid increase in bilateral trade. A few years ago, India Inc had a fear of being swamped by Chinese imports. Today, India enjoys a positive balance of trade with China.In 2004, India's total trade to China crossed US $13.6 billion, with Indian exports to China touching $ 7677.43 million and imports from china at US $ 5926.67 million.
•India's relations with the Central Asian peoples are venture old, with considerable social, cultural, intellectual and commercial interaction.
•Indo-US relations: US companies account for over one third (38%) of the total foreign investment commitments in India. From the year 1991 to 2007, the stock of FDI inflow has increased from $11.3 million to $4.9 billion.
•India's relations with the Russian Federation are characterized by friendship and cooperation, based on trust and confidence.
•The growing political and economic integration of Europe has also been adequately addressed. India has concluded a third generation agreement with the European Union and looks forward to continued development of commercial and economic relations with it. Bilateral relations with European countries also demonstrate a positive increase in both quality and range.
•India also faces the demanding agenda before the developing world. A high level ministerial delegation was therefore sent by the prime minister to the Organization of African Unity (OAU) Summit held in July 1986, in Yaounde, Cameroon. India is also engaged in building up of relations of partnership and cooperation with other African regional organizations like the South African Development Community; the Economic Community of West African States; COMESA; UNECA and the African Development Bank
•The development of relations between India and Latin America and the Caribbean countries and their regional organizations is a matter of considerable priority. A special envoy of the Indian Prime Minister participated at the Caribbean Community (CARICOM) Summit in Barbados. India has institutional arrangements with the Rio Group and the MERCOSUR. India also plans to reinvigorate and revitalize its links with the Organisation of American States
•India having close and cooperative relations with the countries of the Association of Southeast Asian Nations (ASEAN), Central Asia and the Asia-Pacific region. India has moved progressively closer to ASEAN with the commencement of Sectoral Dialogue Partnership in 1992 to Full Dialogue Partnership with them and participation in the ASEAN Regional Forum.
Some of the predicaments facing India are the challenges to the concept of the nation-state from linguistic, ethnic and religious groups, on-going changes in the external equations and in the nature of global developmental and economic policies, trade and financial regimes, and the scourges of terrorism, often exported from other countries, as well as the menace of drugs and arms-trafficking and their links with terrorist and criminal outfits. Environmental conservation, protection and promotion of human rights, and disarmament have rightly assumed great importance in the world.
Following are the few points revealing India’s relation with the rest of the world:
•India was one of the founding members of the United Nations and the Non-Aligned Movement and is an active member of several international organizations, most notably the WTO, ADB, SAARC, G8+5, East Asia Summit and G20.
•India has always taken first step to develope a friendly relation with the neighbours, The Simla Agreement provided the basis for constructive dialogue between India and Pakistan.
•Among the most encouraging recent developments in India China Economy and India-China ties is the rapid increase in bilateral trade. A few years ago, India Inc had a fear of being swamped by Chinese imports. Today, India enjoys a positive balance of trade with China.In 2004, India's total trade to China crossed US $13.6 billion, with Indian exports to China touching $ 7677.43 million and imports from china at US $ 5926.67 million.
•India's relations with the Central Asian peoples are venture old, with considerable social, cultural, intellectual and commercial interaction.
•Indo-US relations: US companies account for over one third (38%) of the total foreign investment commitments in India. From the year 1991 to 2007, the stock of FDI inflow has increased from $11.3 million to $4.9 billion.
•India's relations with the Russian Federation are characterized by friendship and cooperation, based on trust and confidence.
•The growing political and economic integration of Europe has also been adequately addressed. India has concluded a third generation agreement with the European Union and looks forward to continued development of commercial and economic relations with it. Bilateral relations with European countries also demonstrate a positive increase in both quality and range.
•India also faces the demanding agenda before the developing world. A high level ministerial delegation was therefore sent by the prime minister to the Organization of African Unity (OAU) Summit held in July 1986, in Yaounde, Cameroon. India is also engaged in building up of relations of partnership and cooperation with other African regional organizations like the South African Development Community; the Economic Community of West African States; COMESA; UNECA and the African Development Bank
•The development of relations between India and Latin America and the Caribbean countries and their regional organizations is a matter of considerable priority. A special envoy of the Indian Prime Minister participated at the Caribbean Community (CARICOM) Summit in Barbados. India has institutional arrangements with the Rio Group and the MERCOSUR. India also plans to reinvigorate and revitalize its links with the Organisation of American States
•India having close and cooperative relations with the countries of the Association of Southeast Asian Nations (ASEAN), Central Asia and the Asia-Pacific region. India has moved progressively closer to ASEAN with the commencement of Sectoral Dialogue Partnership in 1992 to Full Dialogue Partnership with them and participation in the ASEAN Regional Forum.
Sunday, December 9, 2007
Interest Rates – Future Outlook
In fast emerging economies like India, monetary policy management has become even more demanding. A future outlook on interest rates therefore depends on a number of factors, both global as well as domestic.
Global factors influencing interest rates-
1. US Fed rate – A Fed rate cut will trigger a rate cut by the RBI to lower the interest rate differential between the two countries. At present there is a strong perception that the US will follow an easy money policy and cut Fed fund rates. The main reasons for this are-
• There is an urgent need to infuse sufficient cash into financial institutions hit by sub prime crisis.
• The grim employment crisis adds to above need.
2. Benchmark rates of other leading banks.
3. Global growth forecast- global economy is expected to grow at 5.2% for 2008, mainly lead by emerging market economies such as Brazil and India. The crisis in the US housing market as well as increasing crude oil prices are the factors which may lead to a slowdown in the growth rate. The growth is projected to slowdown in euro area, Japan and the UK. With downside risk to global economic growth in force, the indication is towards a decline in interest rates to support world economic growth.
Domestic factors influencing interest rates-
1. Growth in bank credit and deposits- the slowdown in credit growth will reduce money supply to a certain extent and suppress monetary inflation. The low money supply will percolate down to the real sectors and suppress price levels, leading to declining inflationary levels. This will reduce the need for regulatory intervention by the RBI in the form of frequent interest rate changes using monetary policy tools at its disposal.
2. Crude oil price movements- it is estimates that a hike in price of crude oil by $1/bbl will shave off 0.5% from the GDP of an emerging economy like India. If crude oil price is an indicator, if higher OPEC supplies are not forthcoming, there is an upward bias to interest rates.
3. Inflation trends- at present it is very unlikely that inflation will go above 5% even when the affect of rise of crude oil prices shows on the WPI index. Therefore no major interest rate movement is expected due to inflation.
4. Money supply – money supply at 21% is above the desired level of 17% set by RBI. However a rate hike will be prompted only if money supply is high enough to take the inflation beyond the tolerance band ( 4- 4.5 %).
Global factors influencing interest rates-
1. US Fed rate – A Fed rate cut will trigger a rate cut by the RBI to lower the interest rate differential between the two countries. At present there is a strong perception that the US will follow an easy money policy and cut Fed fund rates. The main reasons for this are-
• There is an urgent need to infuse sufficient cash into financial institutions hit by sub prime crisis.
• The grim employment crisis adds to above need.
2. Benchmark rates of other leading banks.
3. Global growth forecast- global economy is expected to grow at 5.2% for 2008, mainly lead by emerging market economies such as Brazil and India. The crisis in the US housing market as well as increasing crude oil prices are the factors which may lead to a slowdown in the growth rate. The growth is projected to slowdown in euro area, Japan and the UK. With downside risk to global economic growth in force, the indication is towards a decline in interest rates to support world economic growth.
Domestic factors influencing interest rates-
1. Growth in bank credit and deposits- the slowdown in credit growth will reduce money supply to a certain extent and suppress monetary inflation. The low money supply will percolate down to the real sectors and suppress price levels, leading to declining inflationary levels. This will reduce the need for regulatory intervention by the RBI in the form of frequent interest rate changes using monetary policy tools at its disposal.
2. Crude oil price movements- it is estimates that a hike in price of crude oil by $1/bbl will shave off 0.5% from the GDP of an emerging economy like India. If crude oil price is an indicator, if higher OPEC supplies are not forthcoming, there is an upward bias to interest rates.
3. Inflation trends- at present it is very unlikely that inflation will go above 5% even when the affect of rise of crude oil prices shows on the WPI index. Therefore no major interest rate movement is expected due to inflation.
4. Money supply – money supply at 21% is above the desired level of 17% set by RBI. However a rate hike will be prompted only if money supply is high enough to take the inflation beyond the tolerance band ( 4- 4.5 %).
Kidnap and Ransom Insurance
A kidnap and ransom policy (K&R) basically provides coverage in the event of a kidnapping. These are one of the most hush-hush and discreetly sold policies in extreme privacy by the insurer to the corporates. A typical K&R policy includes the following:
• Kidnap and ransom coverage: Pays ransom and most policies insure ransom money while it's in transit ("delivery coverage"). Also includes payment of security company fees.
• Extortion coverage: Protection for threats against company property, contamination of products, and computer systems.
• Expense reimbursement: Includes travel expenses for security consultants, family members, and the kidnapped employee. Also covers the abductee's lost salary, and legal services.
Kidnapping and ransom insurance is really important to purchase for companies who have frequent business travels to the following countries and also for the companies in these countries. The top 10 countries in total kidnappings:
1. Brazil
2. China
3. Colombia
4. El Salvador
5. India
6. Malaysia
7. Mexico
8. Philippines
9. Russian Federation
10. Venezuela
Indian perspective
K&R policies are gaining much ground these days and enquiries of such policies are said to be going up by 15-20 per cent. Once supposedly opted by companies for kidnap-prone areas like northeastern India, and, more recently, for Naxalite- and Maoist-prone areas, Indian corporates are opting this cover for their executives travelling or working internationally in countries like Latin Amercia, Gulf countries or Africa. Insurers and corporates are extremely tight-lipped when it comes to disclosing the names of companies taking this cover. Coporate houses are also secretive about these policies- that seems obvious as disclosing any information would put them in the public domain. Companies like Tata AIG, ICICI Lombard, National Insurance and Bajaj Allianz have devised these policies.
The growth of these policies have gone up in recent times - be it for the alleged kidnapping of a corporate in Gurgaon or the high-profile kidnappings in Noida or a Food Corporation of India official in Assam. Data reveal that just in the year 2005 as many as 23133 such cases were reported out of which 1000 were for ransom.
Being very sensitive, a K&R policy is issued in strict confidence with only the top-level officials in insurance companies and corporate houses knowing about it. About 100 policies were sold in India last year.
The premium depends on a number of risk features and broadly this could vary between 2-5 per cent of the limit of the liability. While there are no upper or lower limits, the policy cover may vary between $1 million and $5 million (about Rs 4-22 crore).
These policies in general are very complex and phenomenally expensive. There are no general advertisements for these policies and these are generally sold to corporates who have a relationship with the insurance companies.
Tips for traveling executives to avoid kidnapping
• Don't think you're immune because you're not rich. The most frequent kidnapping targets are middle-class execs and their families.
• Maintain a low profile when traveling abroad. Leave flashy jewelry, clothes, and cars at home.
• Vary your routines. Don't travel the same road or jog the same path every day.
• Use official taxi stands.
• Steer clear of isolated or rural areas.
(Source: Assurex, a risk-management and commercial insurance brokerage)
• Kidnap and ransom coverage: Pays ransom and most policies insure ransom money while it's in transit ("delivery coverage"). Also includes payment of security company fees.
• Extortion coverage: Protection for threats against company property, contamination of products, and computer systems.
• Expense reimbursement: Includes travel expenses for security consultants, family members, and the kidnapped employee. Also covers the abductee's lost salary, and legal services.
Kidnapping and ransom insurance is really important to purchase for companies who have frequent business travels to the following countries and also for the companies in these countries. The top 10 countries in total kidnappings:
1. Brazil
2. China
3. Colombia
4. El Salvador
5. India
6. Malaysia
7. Mexico
8. Philippines
9. Russian Federation
10. Venezuela
Indian perspective
K&R policies are gaining much ground these days and enquiries of such policies are said to be going up by 15-20 per cent. Once supposedly opted by companies for kidnap-prone areas like northeastern India, and, more recently, for Naxalite- and Maoist-prone areas, Indian corporates are opting this cover for their executives travelling or working internationally in countries like Latin Amercia, Gulf countries or Africa. Insurers and corporates are extremely tight-lipped when it comes to disclosing the names of companies taking this cover. Coporate houses are also secretive about these policies- that seems obvious as disclosing any information would put them in the public domain. Companies like Tata AIG, ICICI Lombard, National Insurance and Bajaj Allianz have devised these policies.
The growth of these policies have gone up in recent times - be it for the alleged kidnapping of a corporate in Gurgaon or the high-profile kidnappings in Noida or a Food Corporation of India official in Assam. Data reveal that just in the year 2005 as many as 23133 such cases were reported out of which 1000 were for ransom.
Being very sensitive, a K&R policy is issued in strict confidence with only the top-level officials in insurance companies and corporate houses knowing about it. About 100 policies were sold in India last year.
The premium depends on a number of risk features and broadly this could vary between 2-5 per cent of the limit of the liability. While there are no upper or lower limits, the policy cover may vary between $1 million and $5 million (about Rs 4-22 crore).
These policies in general are very complex and phenomenally expensive. There are no general advertisements for these policies and these are generally sold to corporates who have a relationship with the insurance companies.
Tips for traveling executives to avoid kidnapping
• Don't think you're immune because you're not rich. The most frequent kidnapping targets are middle-class execs and their families.
• Maintain a low profile when traveling abroad. Leave flashy jewelry, clothes, and cars at home.
• Vary your routines. Don't travel the same road or jog the same path every day.
• Use official taxi stands.
• Steer clear of isolated or rural areas.
(Source: Assurex, a risk-management and commercial insurance brokerage)
Duty Entitlement Passbook Scheme
DEPB scheme – Duty Entitlement Passbook Scheme, is the most popular duty reimbursement scheme for the exporters in India. According to the officials of the commerce department this scheme which lapses on March 31, 2008 is likely to be extended if no decision is taken on reimbursing state taxes like octroi, electricity tax mandi, tax sales tax on petroleum products and municipality cess. This is the most popular scheme and there are many other advantages of this scheme.
DEPB Scheme –Most Popular Scheme Why?
DEPB Scheme has been a time proven instrument to help Indian export grow to present level
It is easy & simple to understand, operate & implement
The cost of other Duty Exemption & Remission Schemes is high.
Raw materials sourced from local industry
•Local industry is encouraged & strengthened
•Strong local industry –A must for development of exports & the country’s strength
DEPB Scheme does not insist on import content requirement.
Only scheme that is used by SSI/SMEs.
Reasons for continuation of DEPB scheme
DEPB is the most popular scheme amongst the exporters & therefore should not be replaced by another scheme but should be further strengthened to support exporters, until there is sufficient reform in the domestic tax structure which can create the path for a more efficient replacement of the DEPB.
Indian Rupee is becoming stronger & stronger day by day. Exporters will loose heavily on account of strengthening of the Indian Rupee.
DEPB scheme has delivered results over the period of time.
DEPB scheme provides a “LEVEL PLAYING FIELD”to the Indian Exporters & compensates for the infrastructural inadequacies.
DEPB is a Drawback substitution system & therefore Drawback is not at loggerheads with DEPB.
DEPB is the only incentive left with DTA exporters to fight against the might of SEZ/EOU exporters because DTA exporters do not get Income Tax benefit in respect of exports but SEZ exporters get it.
Taking away DEPB benefits will be a severe blow to DTA exporters.
Even SEZ exporters depend upon DEPB to a large extent for their competitiveness since SEZs also eligible for DEPB benefits.
The outgo in terms of DEPB will now start declining because of shift of exports to SEZ units & DEPB rate being lowered on account of reduction in Customs duties. In effect the scheme is now stabilizing in terms of outgo to the Government.
DEPB can be made WTO compliant with adding of one more parameter of control (i.e. CIF value of imports), which will ensure balancing & dilution of WTO criticism.
With the effective rate of Customs duties going down, the DEPB rates are decreasing therefore it would be much more difficult for the WTO members to establish cases of subsidization or dumping than earlier.
DPB is well suited to the needs of small exporters since it is not feasible for them to effect imports on their own account as economic volumes are not generated.
DGFT / MOF has appropriate database to run the scheme in a more meaningful manner & effect changes as & when required.
Survey will suggest that number of cases brought against the DEPB & decided against the Government will be evidence enough to continue with the DEPB Scheme.
There is no reason to fear the WTO & DEPB can be traded with reduction of subsidies on Agri. Products by the developed world.
Exports take place on a long term planning basis. Most commitments that are already been given by the exporters will fall apart since the export costing has been arrived at taking DEPB in to account.
Free Trade Agreements with ASEAN and other countries duties will be reduced hence DEPB benefits will also reduce accordingly.
No other Duty Exemption & Remission Schemes covers infrastructural inadequacies.
It is imperative that a transition period of one year at least must be granted to the exporting community before discontinuation. Testing of the alternative scheme to be introduced must be done before doing away with the DEPB scheme.
WTO Compatibility –At what cost?
According to WTO and EU, DPEB is regarded as being not transparent. But there are many points which need to be considered before India decides to go for full WTO compatibility.
It appears that striving for full WTO compatibility as interpreted by the EU and US, though arguably desirable, cannot be an impediment to the growth of Indian exports.
India’s federal structure has a myriad of indirect taxes levied numerous authorities.
The Indian exporters comprise of truly global industrial units at one end, and small enterprise at the other.
Indian exporters need full & efficient re-imbursement of indirect taxes incurred in the course of exports.
This requires a series of options for the exporter to choose from, which ideally suits their specific needs.
India is an Annex VII Country and is not required to phase out export subsidies.
There is no express prohibition on the approximation/averaging of taxes which forms the basis for re-imbursement of taxes.
The number of countervailing cases are few and levied by a few countries.
Need of the Hour?
Continuation with the DEPB Scheme till alternative scheme is tested at least for a year.
Ensure that alternative scheme must include not only Customs Duties but also all types of taxes & duties including infrastructural inadequacies & transactional costs suffered in the course of manufacture & exports
The Offices of DGFT must be permitted to continue to monitor & administer the scheme.
Administration & monitoring of all Export promotion scheme should be left to the Offices of DGFT only in view of their better understanding of exporters’ problems.
DEPB Scheme –Most Popular Scheme Why?
DEPB Scheme has been a time proven instrument to help Indian export grow to present level
It is easy & simple to understand, operate & implement
The cost of other Duty Exemption & Remission Schemes is high.
Raw materials sourced from local industry
•Local industry is encouraged & strengthened
•Strong local industry –A must for development of exports & the country’s strength
DEPB Scheme does not insist on import content requirement.
Only scheme that is used by SSI/SMEs.
Reasons for continuation of DEPB scheme
DEPB is the most popular scheme amongst the exporters & therefore should not be replaced by another scheme but should be further strengthened to support exporters, until there is sufficient reform in the domestic tax structure which can create the path for a more efficient replacement of the DEPB.
Indian Rupee is becoming stronger & stronger day by day. Exporters will loose heavily on account of strengthening of the Indian Rupee.
DEPB scheme has delivered results over the period of time.
DEPB scheme provides a “LEVEL PLAYING FIELD”to the Indian Exporters & compensates for the infrastructural inadequacies.
DEPB is a Drawback substitution system & therefore Drawback is not at loggerheads with DEPB.
DEPB is the only incentive left with DTA exporters to fight against the might of SEZ/EOU exporters because DTA exporters do not get Income Tax benefit in respect of exports but SEZ exporters get it.
Taking away DEPB benefits will be a severe blow to DTA exporters.
Even SEZ exporters depend upon DEPB to a large extent for their competitiveness since SEZs also eligible for DEPB benefits.
The outgo in terms of DEPB will now start declining because of shift of exports to SEZ units & DEPB rate being lowered on account of reduction in Customs duties. In effect the scheme is now stabilizing in terms of outgo to the Government.
DEPB can be made WTO compliant with adding of one more parameter of control (i.e. CIF value of imports), which will ensure balancing & dilution of WTO criticism.
With the effective rate of Customs duties going down, the DEPB rates are decreasing therefore it would be much more difficult for the WTO members to establish cases of subsidization or dumping than earlier.
DPB is well suited to the needs of small exporters since it is not feasible for them to effect imports on their own account as economic volumes are not generated.
DGFT / MOF has appropriate database to run the scheme in a more meaningful manner & effect changes as & when required.
Survey will suggest that number of cases brought against the DEPB & decided against the Government will be evidence enough to continue with the DEPB Scheme.
There is no reason to fear the WTO & DEPB can be traded with reduction of subsidies on Agri. Products by the developed world.
Exports take place on a long term planning basis. Most commitments that are already been given by the exporters will fall apart since the export costing has been arrived at taking DEPB in to account.
Free Trade Agreements with ASEAN and other countries duties will be reduced hence DEPB benefits will also reduce accordingly.
No other Duty Exemption & Remission Schemes covers infrastructural inadequacies.
It is imperative that a transition period of one year at least must be granted to the exporting community before discontinuation. Testing of the alternative scheme to be introduced must be done before doing away with the DEPB scheme.
WTO Compatibility –At what cost?
According to WTO and EU, DPEB is regarded as being not transparent. But there are many points which need to be considered before India decides to go for full WTO compatibility.
It appears that striving for full WTO compatibility as interpreted by the EU and US, though arguably desirable, cannot be an impediment to the growth of Indian exports.
India’s federal structure has a myriad of indirect taxes levied numerous authorities.
The Indian exporters comprise of truly global industrial units at one end, and small enterprise at the other.
Indian exporters need full & efficient re-imbursement of indirect taxes incurred in the course of exports.
This requires a series of options for the exporter to choose from, which ideally suits their specific needs.
India is an Annex VII Country and is not required to phase out export subsidies.
There is no express prohibition on the approximation/averaging of taxes which forms the basis for re-imbursement of taxes.
The number of countervailing cases are few and levied by a few countries.
Need of the Hour?
Continuation with the DEPB Scheme till alternative scheme is tested at least for a year.
Ensure that alternative scheme must include not only Customs Duties but also all types of taxes & duties including infrastructural inadequacies & transactional costs suffered in the course of manufacture & exports
The Offices of DGFT must be permitted to continue to monitor & administer the scheme.
Administration & monitoring of all Export promotion scheme should be left to the Offices of DGFT only in view of their better understanding of exporters’ problems.
Saturday, December 8, 2007
Foreign Investment promotion Board
The Economic Times,9th July 2007
The Foreign Investment Promotion Board’s (FIPB’s) plans to impose restrictions on foreign brands entering the Indian market through the franchisee route will affect businesses banking on such arrangements as well as exports, these departments feel.
Finance ministry officials are of the view that the move will lead to discrimination since many foreign brands such as Chanel, Marks & Spencer and Tommy Hilfiger are already present here, and restrictions will deny a level playing field to those who are waiting to enter the Indian market.
The food processing ministry is worried that infusion of technology brought in by brands like Pizza Hut and McDonalds’ which operate here through franchisee arrangements’ will be hampered. Similar is the concern of the textile ministry since a number of global brands operate here through franchisees and their arrival here has led to introduction of modern technologies. Even the hotel sector will be affected since many properties operate with foreign brands through franchisee pacts.
Premium foreign brands do not compete with local brands, experts feel. They also create economic activity as they choose strong franchisee partners so that adequate investments go into marketing and branding, they argue.
In the global arena, companies from different regions opt for strategies specific to their business needs. Some prefer joint ventures while others go for franchisee arrangements. Industry’s view, therefore, is to leave the options open to companies rather than imposing restrictions.
Major brands such as Tommy Hilfiger and FCUK, for example, have provided business worth billions to India through sourcing without establishing their presence through the FDI route. It is felt that multinationals will not change their strategies due to government pressure.
The Economic Times, 6th Dec 2007:
Government is planning to obviate companies from seeking FIPB clearance while changing their equity structure, unless it is a fresh FDI proposal. Though, a company has to report to RBI every time it changes its equity structure. Foreign shareholders also would not require any govt clearance if they intend to diversify or expand their portfolio in their Indian Joint Ventures. However for a start up it will need FIPB approval. This proposal is likely to take shape in next year. According to analysts, this proposal will make life easier for companies that have to seek clearance from FIPB every time they make even minor equity changes.
But in the sensitive sectors like Real Estate, Telecom, the policies related to Foreign fund flows are getting stricter by government
Heard much about Foreign fund policies and FIPB, let’s get a basic idea about the board and its work…
The Foreign Investment Promotion Board is a special agency in India dealing with the matters relating to Foreign Direct Investment. Its objective is to promote FDI into India by undertaking investment promotion activities in India and abroad by facilitating investment in the country through international companies, non-resident Indians and other foreign investors.
Clearance of Proposals
Early clearance of proposals submitted to it through purposeful negotiation and discussion with potential investors. Reviewing policy and put in place appropriate institutional arrangements and transparent rules and procedures and guidelines for investment promotion and approvals.
On 18 February 2003, the board was transferred to the Department of Economic Affairs (DEA) Ministry of Finance.
Important functions of the Board are as follows:
•Formulating proposals for the promotion of investment.
•Steps to implement the proposals.
•Setting friendly guidelines for facilitating more investors.
•Inviting more companies to make investment.
•To recommend the Government to have necessary actions for attracting more investment.
•To ensure expeditious clearance of the proposals for foreign investment;
•To review periodically the implementation of the proposals cleared by the Board;
•To review, on a continuous basis, the general and sectoral policy regimes relating to FDI and in consultation with the Administrative Ministries and other concerned agencies, evolve a set of transparent guidelines for facilitating foreign investment in various sectors;
•To undertake investment promotion activities including establishment of contact with and inviting selected international companies to invest in India in the appropriate projects;
•To interact with the Industry Association/Bodies and other concerned government and non-government agencies on relevant issues in order to facilitate increased inflow of FDI;
•To identify sectors into which investment may be sought keeping in view the national priorities and also the specific regions of the world from which investment may be invited through special efforts;
•To interact with the Foreign Investment Promotion Council (FIPC) being constituted separately in the Ministry of Industry;
•To undertake all other activities for promoting and facilitating foreign direct investment, as considered necessary from time to time. The Board will submit its recommendations to the Government for suitable action.
With regards to the structure of the Foreign Investment Promotion Board, the board comprises the following group of secretaries to the Government:
•Secretary to Government Department of Economic Affairs, Ministry of Finance- Chairman.
•Secretary to Government Department of Industrial Policy and Promotion, Ministry of commerce and Industry.
•Secretary to Government, Department of Commerce, Ministry of Commerce and Industry.
•Secretary to Government, Economic Relations, Ministry of External Affairs.
•Secretary to Government, Ministry of Overseas Indian Affairs.
The Foreign Investment Promotion Board’s (FIPB’s) plans to impose restrictions on foreign brands entering the Indian market through the franchisee route will affect businesses banking on such arrangements as well as exports, these departments feel.
Finance ministry officials are of the view that the move will lead to discrimination since many foreign brands such as Chanel, Marks & Spencer and Tommy Hilfiger are already present here, and restrictions will deny a level playing field to those who are waiting to enter the Indian market.
The food processing ministry is worried that infusion of technology brought in by brands like Pizza Hut and McDonalds’ which operate here through franchisee arrangements’ will be hampered. Similar is the concern of the textile ministry since a number of global brands operate here through franchisees and their arrival here has led to introduction of modern technologies. Even the hotel sector will be affected since many properties operate with foreign brands through franchisee pacts.
Premium foreign brands do not compete with local brands, experts feel. They also create economic activity as they choose strong franchisee partners so that adequate investments go into marketing and branding, they argue.
In the global arena, companies from different regions opt for strategies specific to their business needs. Some prefer joint ventures while others go for franchisee arrangements. Industry’s view, therefore, is to leave the options open to companies rather than imposing restrictions.
Major brands such as Tommy Hilfiger and FCUK, for example, have provided business worth billions to India through sourcing without establishing their presence through the FDI route. It is felt that multinationals will not change their strategies due to government pressure.
The Economic Times, 6th Dec 2007:
Government is planning to obviate companies from seeking FIPB clearance while changing their equity structure, unless it is a fresh FDI proposal. Though, a company has to report to RBI every time it changes its equity structure. Foreign shareholders also would not require any govt clearance if they intend to diversify or expand their portfolio in their Indian Joint Ventures. However for a start up it will need FIPB approval. This proposal is likely to take shape in next year. According to analysts, this proposal will make life easier for companies that have to seek clearance from FIPB every time they make even minor equity changes.
But in the sensitive sectors like Real Estate, Telecom, the policies related to Foreign fund flows are getting stricter by government
Heard much about Foreign fund policies and FIPB, let’s get a basic idea about the board and its work…
The Foreign Investment Promotion Board is a special agency in India dealing with the matters relating to Foreign Direct Investment. Its objective is to promote FDI into India by undertaking investment promotion activities in India and abroad by facilitating investment in the country through international companies, non-resident Indians and other foreign investors.
Clearance of Proposals
Early clearance of proposals submitted to it through purposeful negotiation and discussion with potential investors. Reviewing policy and put in place appropriate institutional arrangements and transparent rules and procedures and guidelines for investment promotion and approvals.
On 18 February 2003, the board was transferred to the Department of Economic Affairs (DEA) Ministry of Finance.
Important functions of the Board are as follows:
•Formulating proposals for the promotion of investment.
•Steps to implement the proposals.
•Setting friendly guidelines for facilitating more investors.
•Inviting more companies to make investment.
•To recommend the Government to have necessary actions for attracting more investment.
•To ensure expeditious clearance of the proposals for foreign investment;
•To review periodically the implementation of the proposals cleared by the Board;
•To review, on a continuous basis, the general and sectoral policy regimes relating to FDI and in consultation with the Administrative Ministries and other concerned agencies, evolve a set of transparent guidelines for facilitating foreign investment in various sectors;
•To undertake investment promotion activities including establishment of contact with and inviting selected international companies to invest in India in the appropriate projects;
•To interact with the Industry Association/Bodies and other concerned government and non-government agencies on relevant issues in order to facilitate increased inflow of FDI;
•To identify sectors into which investment may be sought keeping in view the national priorities and also the specific regions of the world from which investment may be invited through special efforts;
•To interact with the Foreign Investment Promotion Council (FIPC) being constituted separately in the Ministry of Industry;
•To undertake all other activities for promoting and facilitating foreign direct investment, as considered necessary from time to time. The Board will submit its recommendations to the Government for suitable action.
With regards to the structure of the Foreign Investment Promotion Board, the board comprises the following group of secretaries to the Government:
•Secretary to Government Department of Economic Affairs, Ministry of Finance- Chairman.
•Secretary to Government Department of Industrial Policy and Promotion, Ministry of commerce and Industry.
•Secretary to Government, Department of Commerce, Ministry of Commerce and Industry.
•Secretary to Government, Economic Relations, Ministry of External Affairs.
•Secretary to Government, Ministry of Overseas Indian Affairs.
India - Capital Inflow Challenges
Benefits of capital inflow for a country are-
1. External capital can supplement domestic savings and stimulate economic growth. International borrowing and lending enable countries to neutralize fluctuations in income and attain smooth consumption stream.
2. This improves welfare. However, as to the developing countries, capital inflows have been markedly pro-cyclical so that the gap between boom-time and bust-time consumption was actually widened and not narrowed.
3. The lenders gain from higher return and better international portfolio diversification.
Problems of Foreign Capital (Global Perspective)
1. Appreciation of real exchange - In most Latin American countries inflow has been accompanied by marked real appreciation. This has not occurred for the Asian economies, with the exception of the Philippines.
2. Accumulation of FER - How much FER should a country hold at any point in time to counter speculative attack on its currency? There is no unique answer. However, from a macroeconomic viewpoint, government policies in a demand-deficient situation should try to ensure that the economy’s expenditure on capital accumulation is met through domestic, not foreign finance. FDI can be beneficial if it leads to additional investment which cannot otherwise be undertaken or if it acts as a vehicle of better technology or other positive supply-side factors.
3. Widening of current account deficit (CAD) - Although Williamson’s rule of thumb suggests a safety limit of 40% for the debt-gross domestic product (GDP) ratio, Mexico’s crisis started when it was only 8%. Prudent fiscal policy is by itself not enough to avert crisis, as demonstrated by the experience of East Asia. However, with public deficit under control, the financial system can handle inflows better.
4. Monetization - The heavy capital inflows of the 1990s have been accompanied by slightly higher levels of inflation in Asia, while inflation has fallen in Latin America due to sharp real appreciation of currencies.
5. Financial crisis - Increased openness to international capital flows has been associated with an increasing frequency of financial crises. One-third of these crises are twin banking and currency crises. Pure currency crises have declined as countries have moved towards more flexible exchange rate systems but banking crises have loomed larger with the dismantling of capital controls and regulations. The average cost of an emerging market currency crisis is estimated at 8% of forgone GDP, rising to as high as 18% when a banking crisis occurs simultaneously. For Indonesia in 1997 the cost was more than 30%. According to one estimate each percentage point fall in growth raises the poverty rate by 2 percentage points. For preventing financial instability, regulations that limit the exposure of banks to the volatility of equity and real estate markets, as well as ensuring risk-based capital adequacy are in order; but the flip side is that these policies may promote disintermediation, which refers to new institutions that develop to bypass these restrictions. Moreover, greater control on banks may amount to a reversal of the trend of financial liberalization currently in progress in developing countries.
For India the Govt. and RBI have been unsuccessful in managing capital inflow.
Two basic mistakes made by the Govt. which has lead to this situation are-
1. The Govt. misread the evolving economic trends toward acceleration in economic growth and related risks to inflation that would warrant tighter monetary policy. The Govt. forgot that a boost to economic activity - even if it were designed to expand capacity eventually - would worsen demand-driven inflation pressures in the near term.
2. The government favored an accelerated pace of capital account liberalization at a time when the RBI was already having difficulty in dealing with the existing magnitude of capital inflows. There was an unprecedented global liquidity seeking a favorable place to be parked and India became the most favored destination. This further complicated the monetary management task.
Other factors that played a role in this mismanagement are –
1. Single door entry to foreign investment is a root cause of high pressure building up in the equity market.
2. The lack of policy coordination between various policymakers. This helped the financial market in thriving by taking advantage of the policy inconsistency.
3. There were very few economic reforms when compared to the encouragement given to the capital inflow.
4. The govt was short of tools to deal with surged capital inflow.
5. The signals of accelerated pace of capital account convertibility only fuelled expectations of further rupee appreciation, already in place owing to a combination of the attractiveness of India's economic rise, weaker US dollar and surging global liquidity.
In the future we can expect more problems from the rising rupee. So far we have seen how it has affected the exporter’s margins and lead to job cuts. In the future we may witness impacts on domestic producers due to cheap imports.
The way out -
1. The govt should come up with policies to check rupee appreciation. Hedging against currency movements can be an affective way.
2. Increasing the absorptive capacity of the economy. This can be achieved by better education and infrastructure.
3. Extending the entry of foreign investors through different options, including the commodity market, to diffuse excess funds. (All funds seek solace in the equity market as interest rates and forex hedging can be done through the process of trading in equities.)
4. Provision of export sops.
1. External capital can supplement domestic savings and stimulate economic growth. International borrowing and lending enable countries to neutralize fluctuations in income and attain smooth consumption stream.
2. This improves welfare. However, as to the developing countries, capital inflows have been markedly pro-cyclical so that the gap between boom-time and bust-time consumption was actually widened and not narrowed.
3. The lenders gain from higher return and better international portfolio diversification.
Problems of Foreign Capital (Global Perspective)
1. Appreciation of real exchange - In most Latin American countries inflow has been accompanied by marked real appreciation. This has not occurred for the Asian economies, with the exception of the Philippines.
2. Accumulation of FER - How much FER should a country hold at any point in time to counter speculative attack on its currency? There is no unique answer. However, from a macroeconomic viewpoint, government policies in a demand-deficient situation should try to ensure that the economy’s expenditure on capital accumulation is met through domestic, not foreign finance. FDI can be beneficial if it leads to additional investment which cannot otherwise be undertaken or if it acts as a vehicle of better technology or other positive supply-side factors.
3. Widening of current account deficit (CAD) - Although Williamson’s rule of thumb suggests a safety limit of 40% for the debt-gross domestic product (GDP) ratio, Mexico’s crisis started when it was only 8%. Prudent fiscal policy is by itself not enough to avert crisis, as demonstrated by the experience of East Asia. However, with public deficit under control, the financial system can handle inflows better.
4. Monetization - The heavy capital inflows of the 1990s have been accompanied by slightly higher levels of inflation in Asia, while inflation has fallen in Latin America due to sharp real appreciation of currencies.
5. Financial crisis - Increased openness to international capital flows has been associated with an increasing frequency of financial crises. One-third of these crises are twin banking and currency crises. Pure currency crises have declined as countries have moved towards more flexible exchange rate systems but banking crises have loomed larger with the dismantling of capital controls and regulations. The average cost of an emerging market currency crisis is estimated at 8% of forgone GDP, rising to as high as 18% when a banking crisis occurs simultaneously. For Indonesia in 1997 the cost was more than 30%. According to one estimate each percentage point fall in growth raises the poverty rate by 2 percentage points. For preventing financial instability, regulations that limit the exposure of banks to the volatility of equity and real estate markets, as well as ensuring risk-based capital adequacy are in order; but the flip side is that these policies may promote disintermediation, which refers to new institutions that develop to bypass these restrictions. Moreover, greater control on banks may amount to a reversal of the trend of financial liberalization currently in progress in developing countries.
For India the Govt. and RBI have been unsuccessful in managing capital inflow.
Two basic mistakes made by the Govt. which has lead to this situation are-
1. The Govt. misread the evolving economic trends toward acceleration in economic growth and related risks to inflation that would warrant tighter monetary policy. The Govt. forgot that a boost to economic activity - even if it were designed to expand capacity eventually - would worsen demand-driven inflation pressures in the near term.
2. The government favored an accelerated pace of capital account liberalization at a time when the RBI was already having difficulty in dealing with the existing magnitude of capital inflows. There was an unprecedented global liquidity seeking a favorable place to be parked and India became the most favored destination. This further complicated the monetary management task.
Other factors that played a role in this mismanagement are –
1. Single door entry to foreign investment is a root cause of high pressure building up in the equity market.
2. The lack of policy coordination between various policymakers. This helped the financial market in thriving by taking advantage of the policy inconsistency.
3. There were very few economic reforms when compared to the encouragement given to the capital inflow.
4. The govt was short of tools to deal with surged capital inflow.
5. The signals of accelerated pace of capital account convertibility only fuelled expectations of further rupee appreciation, already in place owing to a combination of the attractiveness of India's economic rise, weaker US dollar and surging global liquidity.
In the future we can expect more problems from the rising rupee. So far we have seen how it has affected the exporter’s margins and lead to job cuts. In the future we may witness impacts on domestic producers due to cheap imports.
The way out -
1. The govt should come up with policies to check rupee appreciation. Hedging against currency movements can be an affective way.
2. Increasing the absorptive capacity of the economy. This can be achieved by better education and infrastructure.
3. Extending the entry of foreign investors through different options, including the commodity market, to diffuse excess funds. (All funds seek solace in the equity market as interest rates and forex hedging can be done through the process of trading in equities.)
4. Provision of export sops.
Thursday, December 6, 2007
BUSINESS CONFIDENCE AT 5- Yr. LOW
The latest business confidence survey of the Indian industry, released by FICCI on 5th December, 2007 shows that, the Overall Business Confidence Index, which measures the comfort level of the industry declined by seven points than the previous survey in August this year and stood at a five year low value of 61.2.
The main reasons given for this are-
1. The annual 15% appreciation of the Rupee.
2. Subsequent decline in export growth.
3. High interest rates.
4. Companies supplying raw material and intermediate goods to export driven sectors are also facing the brunt of the appreciating rupee and high interest rates.
5. Rise of oil prices.
6. Uncertainties over the fall out of US sub-prime crisis.
7. RBI maintaining its tight monetary stance.
8. India's GDP growth rate dipped to 8.9 per cent during the second quarter of current financial year from 10.2 per cent in the comparable period last year.
The recent survey thus highlights the degree of apprehension that Indian businessmen have over the future state of Indian economy. Overall it shows the expectations of a slowdown in the economy. The business confidence index survey helps the businesses, banks and the government with their policy formation. Therefore their findings are very vital for the economy. The key finding of the recent survey are -
1. Not only the export oriented units but firms even distantly connected with exports are getting hit because of the rising Rupee.
2. Consumer goods, intermediate goods and capital goods sectors are the most affected.
3. It is not only the slowdown in exports but the moderation in other sectors also that is slowing down the overall economic growth momentum.
4. Due to rising Rupee a number of exporters have shifted their focus to Indian markets. This is resulting in excessive supplies.
Policy suggestions to counter this situation are –
1. The RBI must review its credit policy.
2. Steps should be taken to prevent further Rupee rise.
The main reasons given for this are-
1. The annual 15% appreciation of the Rupee.
2. Subsequent decline in export growth.
3. High interest rates.
4. Companies supplying raw material and intermediate goods to export driven sectors are also facing the brunt of the appreciating rupee and high interest rates.
5. Rise of oil prices.
6. Uncertainties over the fall out of US sub-prime crisis.
7. RBI maintaining its tight monetary stance.
8. India's GDP growth rate dipped to 8.9 per cent during the second quarter of current financial year from 10.2 per cent in the comparable period last year.
The recent survey thus highlights the degree of apprehension that Indian businessmen have over the future state of Indian economy. Overall it shows the expectations of a slowdown in the economy. The business confidence index survey helps the businesses, banks and the government with their policy formation. Therefore their findings are very vital for the economy. The key finding of the recent survey are -
1. Not only the export oriented units but firms even distantly connected with exports are getting hit because of the rising Rupee.
2. Consumer goods, intermediate goods and capital goods sectors are the most affected.
3. It is not only the slowdown in exports but the moderation in other sectors also that is slowing down the overall economic growth momentum.
4. Due to rising Rupee a number of exporters have shifted their focus to Indian markets. This is resulting in excessive supplies.
Policy suggestions to counter this situation are –
1. The RBI must review its credit policy.
2. Steps should be taken to prevent further Rupee rise.
Subscribe to:
Posts (Atom)