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The Reserve Bank of India was set up in 1935 (by the RBI Act, 1934) as a private bank with
two extra functions :-
After nationalisation in 1949, it emerged as the central banking body of India and
governments have been handing over different functions to the RBI as given below :-
1. It is the issuing agency of the currency and coins (Under section 22 of the RBI
Act,1934)
2. Distributing agent for currency and coins issued by the Government of India.
3. Government Banker, Adviser and agent to government,
4. Announces the credit and monetary policy for the economy.
5. Stabilising the rate of inflation.
6. Stabilising the exchange rate of rupee
7. keeper of the foreign exchange reserves
8. Agent of the Government of India in the IMF.
9. Performing a variety of developmental and promotional functions under which it did
set up institutions like IDBI, SIDBI, NABARD, NHB etc.
Definition - The policy by which the desired level of money flow and its demand is regulated
is known as the credit and monetary policy.
Monetary policy refers to the policy of the central bank with regard to the use of monetary
instruments under its control to achieve the goals specified in the RBI Act, 1934.
All over the world it is announced by the central banking body of the country - as the RBI
announces it in India.
The primary objective of monetary policy is to maintain price stability while keeping in mind
the objective of growth. Price stability is a necessary precondition to sustainable growth
There are many tools by which the RBI regulates the desired/required kind of the credit and
monetary policy are :-
1. CRR
2. SLR
3. Bank Rate
4. Repo Rate
5. Reverse Repo Rate
6. PLR
The cash reserve ratio is the ratio (fixed by the RBI) of the total deposits of a bank in
India which is kept with the RBI in the form of cash.
The average daily balance that a bank shall maintain with the Reserve Bank as a share
of such per cent of its NDTL(net demand and time liabilities deposits) that the
Reserve Bank may notify from time to time in the Gazette of India.
Another weapon available to RBI for credit control is the use of variable cash reserve
requirements. Under the RBI Act, 1934, every commercial bank has to keep certain
minimum cash reserves with RBI- initially, it was 5 per cent against demand deposits
and 2 per cent against time deposits - these are known as the statutory cash reserves.
The statutory liquidity ratio (SLR) is the ratio (fixed by the RBI) of the total deposits
of a bank which is to be maintained by the bank with itself in non-cash form
prescribed by the government.
The share of NDTL that banks shall maintain in safe and liquid assets, such as,
unencumbered government securities, cash and gold. Changes in SLR often influence
the availability of resources in the banking system for lending to the private sector.
Statutory - by law, Liquidity ratio - Which can be easily converted into cash.
The lesser the amount of SLR, the more banks have to lend outside.
Apart from cash reserve requirements which commercial banks have to keep with RBI
(under RBI Act, 1934), all commercial banks have to maintain (under section 24 of
the Banking regulation Act, 1949) liquid assets in the form of cash, gold and
unencumbered approved securities. This is known as statutory liquidity requirements.
Rate at which RBI lends money to commercial banks for longer period of time (365+)
It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange
or other commercial papers.
The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934.
This rate has been aligned to the MSF rate and, therefore, changes automatically as
and when the MSF rate changes alongside policy repo rate changes.
The clients who borrow through this route are the GoI, state governments banks,
financial institutions, co-operative banks, NBFCs, etc.
The (fixed) interest rate currently 50 bps below the repo rate at which the Reserve
Bank absorbs liquidity, on an overnight basis, from banks against the collateral of
eligible government securities under the LAF.
It is the rate of interest the RBI pays to its clients who offer short-term loan to it.
It is the reverse of the repo rate and this was started in November 1996 as part of
liquidity Adjustment Facility (LAF) by the RBI.
It is reverse of the repo rate and this was started in November 1996 as part of liquidity
Adjustment Facility (LAF) by the RBI.
In practice, financial institutions operating in India lend their surplus funds with the
RBI for short term period and earn money.
It has a direct bearing on the interest rates charged by the banks and the financial
institutions on their different forms of loans.
This tool was utilised by the RBI in the wake of over money supply with the Indian
banks and lower loan disbursal to serve twin purposes of cutting down banks losses
and the prevailing interest rate.
Last option given by RBI to commercial banks once they exhaust all borrowing
options including the liquidity adjustment facility by pledging through government
securities, which has lower rate(i.e., repo rate) of interest in comparison with the
MSF.
MSF - Penal rate. The MSF would be a penal rate for banks and the banks can borrow
funds by pledging government securities within the limits of the statutory liquidity
ratio.
A facility under which scheduled commercial banks can borrow additional amount of
overnight money from the Reserve Bank by dipping into their Statutory Liquidity
Ratio (SLR) portfolio up to a limit [currently two per cent of their net demand and
time liabilities deposits (NDTL)] at a penal rate of interest, currently 50 basis points
above the repo rate.
This provides a safety valve against unanticipated liquidity shocks to the banking
system.
This scheme has been introduced by RBI with the main aim of reducing volatility in
the overnight lending rates in the inter-bank market and to enable smooth monetary
transmission in the financial system.
The MSF rate and reverse repo rate determine the corridor for the daily movement in
the weighted average call money rate.
INFLATION - A persistent increase/rise in the general level of prices and decrease in value
of money. If the price of one good has gone up, it is not inflation, it is inflation only if the
prices of most goods have gone up. Inflation is defined as the rate (%) at which the
general price level of goods and services is rising, causing purchasing
power tofall.
INFLATION IN INDIA
Every economy calculates its inflation for efficient financial administration as the multi-
dimensional effects of inflation make it necessary. India calculates its inflation on two price
indices i.e., the wholesale price index (WPI) and the consumer price index (CPI). While the
WPI inflation is used at the macro level policy making, the CPI inflation is used for micro
level analysis. The inflation at the WPI is the inflation of the economy. Both the indices
follow the 'point to point' method and may be shown in points (i.e., digits) as well as in
percentage relative to a particular base year.
Inflation created and sustained by excess of aggregate demand for goods and services over
the aggregate supply . In other words , demand pull inflation takes place when increase in
production lags behind the increase in money supply. Demand-Pull Inflation is commonly
described as too much money chasing too few goods.
Demand pull inflation - The inflation resulting from an increase in aggregate demand is
called demand pull inflation. Such inflation may arise from any individual factor that
increases aggregate demand, but the main ones that generate ongoing increases in aggregate
demand are :
COST-PUSH INFLATION
Due to 'inflation tax' the price of goods and services in India have been rising as the
government took alternative recourse to increase its revenue receipts. We see it taking
place due to higher import duties on the raw materials also. The non-value added tax
structure of India in the past was also having cascading effect on the prices of
commodities in the country. The government needed higher revenues to finance its
planned development.
Inflation which is created and sustained by increase in cost of production which is
independent of the state of demand (e.g. Trade unions can bargain for higher wages
and hence contributes to inflation).
Cost Push inflation - Inflation can result from a decrease in aggregate supply.
The two main sources of decrease in aggregrate supply are :-
An increase in wage rates and An increase in the price of raw materials.
These sources of a decrease in aggregate supply operate by increasing costs, and the
resulting inflation is called cost push inflation.
Definition: Cost push inflation is inflation caused by an increase in prices of inputs
like labour, raw material, etc. The increased price of the factors of production leads to a
decreased supply of these goods. While the demand remains constant, the prices of
commodities increase causing a rise in the overall price level. This is in essence cost
push inflation.
Description: In this case, the overall price level increases due to higher costs of
production which reflects in terms of increased prices of goods and commodities which
majorly use these inputs. This is inflation triggered from supply side i.e. because of less
supply. The opposite effect of this is called demand pull inflation where higher demand
triggers inflation.
Apart from rise in prices of inputs, there could be other factors leading to supply side
inflation such as natural disasters or depletion of natural resources, monopoly,
government regulation or taxation, change in exchange rates, etc. Generally, cost push
inflation may occur in case of an inelastic demand curve where the demand cannot be
easily adjusted according to rising prices.
VARIANTS OF INFLATION
1. Philips Curve -
The Phillips curve is an economic concept developed by A. W. Phillips (in his
paper 'The relation between Unemployment and the rate of change of money
wage rates in the United Kingdom, 1861-1957')showing
that inflation and unemployment have a stable and inverse relationship. The
theory states that with economic growth comes inflation, which in turn should
lead to more jobs and less unemployment.
Philips curve is a graphic curve which advocates a relationship between
inflation and unemployment in an economy.
Inflation and unemployment has a inverse relationship. Lower the inflation,
higher the unemployment and higher the inflation, lower the unemployment.
2. Bottleneck Inflation -
This inflation takes place when the supply falls drastically and the demand
remains at the same level.
Such situation arise due to supply-side accidents, hazards or mismanagement
which is also known as 'structural inflation'.
This would be put in the 'demand-pull inflation' category
With few exceptional years, India has been facing the typical problem of
bottleneck inflation (i.e., structural inflation) which arises out of shortfalls in
the supply of goods, a general crisis of a developing economy, rising demand
but lack of investible capital to produce the required level of goods.
Whenever the government managed to go for higher growths by managing
higher investible capital it had inflationary pressures on the economy (seen
during 1970s and 1980s, especially) and growth was sacrificed at the altar of
lower inflation.
Thus, the supply-side mismatch remained a long drawn problem in India for
higher inflation
Bottle neck inflation is a variant of Demand pull inflation.
Bottleneck is the inefficiency, inability or hindrance which the supply side
faces to equal the demand.
3. Core Inflation
This nomenclature is based on the inclusion or exclusion of the goods and
services while calculating inflation.
Popular in western economies, core inflation shows price rise in all goods and
services excluding energy (Crude oil) and food articles.
In India, it was first time used in the financial year 2000-2001 when the
government expressed that it was under control- it means the prices of
manufactured goods were under control
Basically, in the western economies, food and energy are not the problems for
the masses, while in India these two segments play the most vital role for
them.
4. Inflation Premium
The benefit of debtor during inflation time is called Inflation Premium.
The bonus brought by inflation to the borrowers is known as the inflation
premium.
The interest banks charge on their lending is known as the nominal interest
rate which might not be the real cost of borrowing paid by the borrower to the
banks.
To calculate the real cost, a borrower is paying in its loan, the nominal rate of
interest is adjusted with the effect of inflation and thus the interest rate we get
is known as the real interest rate.
Real interest is always lower than the nominal interest if the inflation is taking
place - the difference is the inflation premium.
At times, to neutralise the effects of inflation premium, the lender takes the
recourse to increase the nominal rate of interest.
5. Inflation targeting
The announcement of an official target range for inflation is known as
inflation targeting.
It is done by the Central Bank in an economy as a part of their monetary
policy to realise the objective of a stable rate of inflation.
India, commenced inflation targeting in February 2015 when an agreement
between the GOI and the RBI was signed related to it - the Agreement on
Monetary Policy Framework. The agreement provides the aim of inflation
targeting in this way - "it is essential to have a modern monetary framework to
meet the challenge of an increasingly complex economy. Whereas the
objective of monetary policy is to primarily maintain price stability, while
keeping in mind the objective of growth".
In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to
provide a statutory basis for the implementation of the flexible inflation
targeting framework.
The amended RBI Act also provides for the inflation target to be set by the
Government of India, in consultation with the Reserve Bank, once in every
five years. Accordingly, the Central Government has notified in the Official
Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the
period from August 5, 2016 to March 31, 2021 with the upper tolerance limit
of 6 per cent and the lower tolerance limit of 2 per cent.
The Central Government notified the following as factors that constitute
failure to achieve the inflation target:(a) the average inflation is more than the
upper tolerance level of the inflation target for any three consecutive quarters;
or (b) the average inflation is less than the lower tolerance level for any three
consecutive quarters.
Prior to the amendment in the RBI Act in May 2016, the flexible inflation
targeting framework was governed by an Agreement on Monetary Policy
Framework between the Government and the Reserve Bank of India of
February 20, 2015.
6. Inflation Accounting
During lending, Inflation is taken into account, it is called Inflation
Accounting.
When a firm calculates its profits after adjusting the effects of current level of
inflation, this process is known as inflation accounting.
Such profits are the real profit of the firm which could be compared to a
historic rate of inflation (Inflation of the base year)
7. Inflation Taxation
Inflation is itself a tax.
Inflation erodes the value of money and the people who hold currency suffer
in this process.
As the governments have authority of printing currency and circulating it into
the economy (as they do in the case of deficit financing), this act functions as
an income to the governments.
This is a situation of sustaining government expenditure at the cost of people's
income.
This looks as if inflation is working as a tax. This inflation tax is also called
seignorage - It means, inflation is always the level to which the government
may go for deficit financing - level of deficit financing is directly related by
the rate of inflation.
It could also be used by the governments in the form of prices and income
policy under which the companies pay inflation tax on the salary increases
above the set level prescribed by the government.
It has 2 perspective - Hidden tax and slab fixing economic tool
13. Stagflation
14. Reflation
12) HEADLINEINFLATION:
A measurement of price inflation that takes into account all types of inflation that an
economy can experience.
It also counts changes in the price of food and energy. Because food and energy prices
can rapidly increase while other types of inflation can remain low, headline inflation
may not give an accurate picture of how an economy is behaving.
In India, headline inflation is measured through the WPI which consists of 676
commodities (services are not included in WPI in India).
It is measured on year-on-year basis i.e., rate of change in price level in a given month
vis a vis corresponding month of last year. This is also known as point to point
inflation.
13) COREINFLATION:
CAUSES OF INFLATION
1. Factors on Demand Sides
Increase in money supply
Increase in Export
Increase in disposable income
Deficit financing
Foreign exchange reserves
2. Factors on Supply Side
Rise in administered prices
Erratic agriculture growth
Agricultural price policy
Inadequate industrial growth
3. Black money (fake currency)
4. Increase in public expenditure
5. Decrease in the aggregate supply of goods and services
1. Monetary Measures
A. Quantitative Methods
Raising the Bank rate - To control inflation the central bank increases the bank
rate. With this cost of borrowing of commercial banks from central bank will increase
so the commercial banks will charge higher rate of interest on loans. This discourages
borrowings and thereby helps to reduce the money in circulation.
Open Market Operations - During inflation , the central bank sells the bills
and securities. These cash reserves of commercial banks will decrease as they
pay central bank for purchasing these securities. Thus the loan able funds with
commercial banks decrease which leads to credit contraction.
Variable Reserve Ratio - The commercial banks have to keep certain
percentage of their deposits with the central bank in the form of cash reserve.
During inflation, the central bank increases this cash reserve ratio this will
reduce the lending capacity of the banks.
B. Qualitative methods
Fixation of Margin requirements - Commercial banks have to maintain certain
fixes margins while granting loans. In inflation central bank raises the margin
to contract credits and reduces the price level.
Regulation of consumer credit - For purchase of durable consumer goods on
installment basis, rules regarding payments are fixed. During inflation initial
payment is increased and the number of installments is reduced. These result
in credit contraction and fall in prices.
Control through Directives - Certain directives are issued by central bank to
commercial banks and they are asked to follow them while lending. This keeps
in check the volume of money.
Rationing of credit - The central bank regulates the amount and purpose for
which credit is granted by commercial banks.
Moral Suasion - this refers to request made by the central bank to commercial
banks to follow its general monetary policy.
Direct action - Direct action is taken by central bank against commercial banks
if they do not follow the monetary policy laid by it
Publicity - The central bank undertakes publicity to educate commercial bank
and public about the trends in money market. By undertaking these measures
the central bank can control the money supply and help to curb inflation.
Credit Control
Issue of new currency
2. Fiscal Measures
Reduction in Unnecessary Expenditure
Increase in taxes
Increase in savings
Surplus Budgets
Public Debts
To increase in production
Rational wage policy
Price Control
Rationing
1) Recession:
2) DEPRESSION:
UNEMPLOYMENT
CONCEPT OF UNEMPLOYMENT
In India, a person working 8 hours a day for 273 days in a year is regarded as employed on a
standard person year basis. Thus, a person to be called an employed person, must get
meaningful work for a minimum of 2184 hours in a year. The person who does not get work
even for this duration, is known as unemployed person.
TYPES OF UNEMPLOYMENT
NATURE OF UNEMPLOYMENT
1. Inadequate Work - . One aspect of the problem is the non availability of work to the
extent needed for entire labour-force. For those in disguised unemployment, it means
that they are not getting work to engage themselves fully during their working hours.
If they seem to be working, they are infact sharing the existing work. Actually almost
each one is under-employed, so that none is working to one's full capacity.
Among them, there are some who are only seasonally employed. For rest of
the time, they are either without work or do some other odd jobs or share with others
on some other work. Disguised unemployment account for a major proportion of the
work-force, mostly in agriculture and activities allied to it.
Besides those in disguised unemployment, there are those in open
unemployment. These are the workers who just do not have any work to do. Such
unemployed persons are also found mostly in the rural areas. Their number, taking
both the rural and urban unemployed, though small as against those in disguised
unemployment, is on the increase.
2. Low-Productivity Work - Another aspect of the problem concerns income of those
employed. Most of them are very poor because their earnings are very small, which in
turn, are caused by low-productivity of their work. These poor people are working
because they can hardly afford to remain unemployed and wait for high-paid jobs.
They engage themselves in any work that comes their way and any income, they are
offered. With labour-force increasing and productivity remaining almost the same,
average income remains very small. The reality, however, is that most of such
employed are no better than those totally unemployed, as both the categories of
workers are living at subsistence level.
3. Chronic or Structural - Unemployment in our country is in nature, a chronic/
permanent one, and is rooted in the underdeveloped character of economy. It is the
incapacity of our low-level economy to offer adequate work opportunities to labour-
force that has given rise to this problem. It is, thus, the supply-side of employment-
situation which is at fault. Unless the economy develops and per head capital
increases, the deficient supply-side will continue.
Determination of MSP
In formulating the recommendations in respect of the level of minimum support prices and
other non-price measures, the Commission takes into account, apart from a comprehensive
view of the entire structure of the economy of a particular commodity or group of
commodities, the following factors:-
1. Cost of production
2. Changes in input prices
3. Input-output price parity
4. Trends in market prices
5. Demand and supply
6. Inter-crop price parity
7. Effect on industrial cost structure
8. Effect on cost of living
9. Effect on general price level
10. International price situation
11. Parity between prices paid and prices received by the farmers.
12. Effect on issue prices and implications for subsidy
The Commission makes use of both micro-level data and aggregates at the level of district,
state and the country. The information/data used by the Commission, inter-alia include the
following :-
1. Cost of cultivation per hectare and structure of costs in various regions of the country
and changes there in;
2. Cost of production per quintal in various regions of the country and changes therein;
3. Prices of various inputs and changes therein;
4. Market prices of products and changes therein;
5. Prices of commodities sold by the farmers and of those purchased by them and
changes therein;
6. Supply related information - area, yield and production, imports, exports and domestic
availability and stocks with the Government/public agencies or industry
7. Demand related information - total and per capita consumption, trends and capacity of
the processing industry;
8. Prices in the international market and changes therein, demand and supply situation in
the world market;
9. Prices of the derivatives of the farm products such as sugar, jaggery, jute goods,
edible/non-edible oils and cotton yarn and changes therein;
10. Cost of processing of agricultural products and changes therein;
11. Cost of marketing - storage, transportation, processing, marketing services, taxes/fees
and margins retained by market functionaries; and
12. Macro-economic variables such as general level of prices, consumer price indices and
those reflecting monetary and fiscal factors.
PROCUREMENT PRICES
1. The MSP is announced before sowing, while the procurement price was announced
before harvesting - the purpose is to encourage the farmers to sell a bit more and get
encouraged to produce more.
2. FCI, the nodal central agency of Government of India, along with other State
Agencies undertakes procurement of wheat and paddy under price support scheme .
Coarse grains are procured by State Government Agencies for Central Pool as per the
direction issued by Government of India on time to time. The procurement under
Price Support is taken up mainly to ensure remunerative prices to the farmers for their
produce which works as an incentive for achieving better production.
3. Before the harvest during each Rabi / Kharif Crop season, the Government of India
announces the minimum support prices (MSP) for procurement on the basis of the
recommendation of the Commission of Agricultural Costs and Prices (CACP) which
along with other factors, takes into consideration the cost of various agricultural
inputs and the reasonable margin for the farmers for their produce.
ISSUE PRICE
GREEN REVOLUTION
It is the introduction of new techniques of agriculture which became popular by the name of
Green Revolution in early 1960s at first for wheat and by the next decade for rice, too. It
revolutionised the very traditional idea of food production by giving a boost by more than
25o per cent to the productivity level. The Green revolution was centred around the use of the
high yielding variety (HYV) of seeds developed by the US agro-scientist Norman Borlaug.
The new wheat seeds which he developed in vivo claimed to increase its productivity by
more than 200 per cent.
In India, in 1960-61 a new technology was tried as a pilot project in seven districts
and was called Intensive Agricultural District Programme (IADP). Later, the High yielding
varieties programme was also added and the strategy was extended to cover the entire
country. This strategy has been called for various name : modern agricultural technology,
seed-fertiliser-water technology or simply green revolution.
The Green Revolution was based on the timely and adequate supply of many
inputs/components.
1. Socio-economic Impact
Food production increased in such a way that many countries became self-sufficient
and some even emerged as food exporting countries. But the discrepancy in farmers'
income, it brought with itself increased and inter-personal as well as inter-regional
disparities/inequalities in India. Rise in the incidence of malaria due to water-logging,
a swing in the balanced cropping patterns in favour of wheat and rice etc., were
negative impacts.
2. Ecological Impact
The most devastating negative impact of the Green Revolution was the ecological
one.
i. Critical Ecological Crisis - On the basis of on-field studies it was found that
critical ecological crisis in the Green Revolution region are showing up -
a) Soil fertility being degraded (due to the repetitive kind of cropping
pattern being followed by the farmers as well as the excessive
exploitation of the land; lack of a suitable crop combination and the
crop intensity etc.)
b) Water table falling down (as the new HYV seeds required
comparatively very high amount of water for irrigation - 5 tonnes of
water needed to produce 1 kg of rice.
c) Environment degradation - due to excessive and uncontrolled use of
chemical fertilizers, pesticides and herbicides have degraded the
environment by increasing pollution levels in land, water and air. In
India it is more due to deforestation and extension of cultivation in
ecologically fragile areas. At the same time, there is an excessive
pressure of animals on forests - mainly by goats and sheeps).
ii. Toxic Level in Food chain - Toxic level in the food chain of India increased
to such a high level that nothing produced in India is fit for human
consumption. Basically, unbridled use of chemical pesticides and weedicides
and their industrial production combined together had polluted the land, water
and air to such an alarmingly high level that the whole food chain had been a
prey of high toxicity.
FOREX RESERVES
The total foreign currencies of different countries an possess at a point of time is its 'roeign
currency assets/reserves'. The forex reserves of an economy is its 'foreign currency assets'
added with its gold reserves, SDRs (Special Drawing rights) and Reserve Trenche in the IMF.
CATEGORIES.
WORLD BANK
The World Bank (WB) Group today consists of five closely associated institutions
propitiating the role of development in the member nations in different areas. The World
Bank is like a cooperative, made up of 189 member countries. These member countries, or
shareholders, are represented by a Board of Governors, who are the ultimate policymakers at
the World Bank. The term World Bank generally refers to the IBRD and IDA, whereas the
World Bank Group is used to refer to the institutions collectively.
1. IBRD
The mission statement of the IBRD states that it "aims to reduce
poverty in middle-income and creditworthy poorer countries by
promoting sustainable development, through loans, guarantees, and
non-lending-including analytical and advisory-services."
The International Bank for Reconstruction and Development is the
oldest of the WB institutions which started functioning (1945) in the
area of reconstruction of the war-ravaged regions (world war II) and
later for the development of the middle income and credit worthy
poorer economies of the world.
Human development was the main focus of the developmental lending
with a very low interest rate (1.55 per cent per annum) - the areas of
focus being agriculture, irrigation, urban development, health care,
family welfare, dairy development etc. It commenced lending for India
in 1949.
4. MIGA
5. ICSID
IMF
1. IMF and World Bank are popularly called the Bretton Woods' twins.
2. The International Monetary Fund (IMF) came up in 1944 whose Article came into
force on the December 27, 1945 with the main functions as
exchange rate regulation,
purchasing short term foreign currency liabilities of the member nations from
around the world,
allotting special drawing rights (SDRs) to the member nations and
the most important one as the bailor to the member economies in the function
of any BoP crisis.
3. The Main functions of the IMF are as given below :
to facilitate international monetary cooperation
to promote exchange rate stability and orderly exchange arrangements
to assist in the establishment of a multilateral system of payments and the
elimination of foreign exchange restrictions; and
to assist member countries by temporarily providing financial resources to
correct mal-adjustment in their balance of payments. (BoPs).
4. The Board of Governors of the IMF consists of one governor and one alternate
Governor from each member country. For India, Finance Minister is the ex-officio
governor while the RBI governor is the alternate governor on the board.
Other than the WPI, India also calculates inflation at the consumer level, similar to all the
economies of the world. Depending upon the socio-economic differentiations among
consumers, India has four differing sets of CPI with some differentials in the basket of
commodities allotted to them.
At the national level, there are four Consumer Price Index (CPI) numbers. These are:
CPI for Industrial Workers (IW), CPI for Agricultural Labourers (AL), CPI for Rural
Labourers (RL) and CPI for Urban Non-Manual Employees (UNME). The base years of the
current series of CPI(IW), CPI(AL) and CPI(RL), and CPI(UNME) are 1982, 1986-87 and
1984-85, respectively. While the first three are compiled and released by the Labour Bureau
in the Ministry of Labour, the fourth one is released by the Central Statistical Organisation in
the Ministry of Statistics and Programme Implementation.
CPI-IW - The Consumer Price Index Numbers for Industrial Workers on base 1960=100 (old
series) was compiled for Industrial Workers relating to factories, mines and plantations. But
for the subsequent series of Index Numbers on base 1982=100 and 2001=100 the coverage of
the Industrial Workers were increased to seven sectors viz. (a) factories, b) mines, c)
plantations, d) railways, e) public motor transport undertakings, f) electricity generation and
distribution establishments, and g) ports and docks. A Working Class Family is defined as
one where one of the members worked as manual worker in one of the 7 sectors as listed
above and which derived one half or more of its income through manual work.
The current series of Consumer Price Index on base 2001=100 is compiled for 78 selected
centres in the country. The All-India Consumer Price Index for Industrial Workers is the
weighted average of these 78 centre indices. These centres have been selected on the basis of
industrial importance in the country in the first instance and then distributed among different
states in proportion to the industrial employment in the state subject to maximum allotment of
5 centres in a state to a sector.
Uses of CPI-IW:
I. The CPI (IW) indices are mainly used for regulation of Dearness allowance and
Wages of millions of Workers and Employees belonging to Central Government,
State Governments, Public and Private sector Establishments in the country.
II. CPI-IW serves as an indicator of retail price situation in the country. The rate of
inflation based on retail prices is measured through these indices.
III. These are also used for real wage calculation i.e. as deflators of money wages.
IV. These indices are used for determining the poverty line in the country.
V. These indices are also used for price adjustments in Business, Individual and Public
Works contracts.
VI. The interest rates charged by Banks and other financial institutions undergo changes
on the basis of inflation rates depicted by these indices
VII. These indices help in the formulation of General Economic Policy of the Government
particularly with reference to wages, prices and taxation.
All India General Index Numbers for Agricultural and Rural Labourers on base 1986-87
(General Index)
Wholesale Price Index (WPI) is based on the price prevailing in the wholesale markets or
the price at which bulk transactions are made.
Consumer Price Index (CPI) is based on the final prices of goods at the retail level. Both
these indices are the weighted averages of prices of a specified set of goods and services.
1. Data on Wholesale Price Index (WPI) is available every week, while data on
Consumer Price Index (CPI) is only available every month, so there is a time lag in
CPI data availability compared to WPI data availability, which can impact decision
making both for RBI and the Government of India, as the previous answer states.
2. In India, we do not have one CPI calculated per se. Earlier, there were 4 CPIs
calculated for 4 different sets of workers, and now we have three such CPIs, out of
which the most famous is CPI for Industrial Workers (CPI-IW). The others used
currently are CPI for agricultural laborers and CPI for rural laborers.
The argument used therefore is that there is no one CPI value which can be used for decision
making by either RBI or the Government of India.
1. According to our policy makers/decision makers at RBI and elsewhere, or so it seems,
WPI has a broader coverage compared to all the CPIs, in terms of the commodities
covered, quotations, larger number of non-agricultural products and tradeable items,
which are missing in the CPIs.
Also, interest rates which the RBI controls may not have much of a correlation with high
food prices and therefore decision makers may feel that since they cant target inflation
across major sections constituting the CPI, they would rather focus on WPI constituted of
goods on whose demand interest rates may have a more significant impact.
1. WPI is calculated on an all India basis, while CPI is calculated for specific centres in
India and then this is aggregated to an all India index.
Why CPI is better than WPI?
Conceptually, retail inflationprice rise driven by potential consumer demand and
available supplyis a better indicator of inflation for guiding monetary policy
decisions than WPI inflation.
WPI excludes prices of services such as education, healthcare, and rents. However,
services now account for nearly 60 per cent of GDP and a vast majority of these
services are not traded with other countries. Conversely, the new CPI measure assigns
nearly 36% weightage on services and includes price changes in housing, education,
healthcare, transport and communication, personal care and entertainment
WPI assigns nearly 15% and 10.7% weightage for the fuel group and metal and metal
products group, respectively.Any sharp movements in international prices of fuels and
metals, therefore, lead to sharp changes in WPI.CPI shows the consumer trends of the
common man
The consumer price index for the industrial workers (CPI-IW) has 260 items in its
basket with 2001 as the base year (the first base year was 1958-59). The data is collected
at 76 centres with one month's frequency and the index has a time lag of one month.
Basically, this index specifies the government employees (other than banks and
embassies personnel). The wages/salaries of the central governement employees are
revised on the basis of the changes occuring in this index, the dearness allowance (DA)
is announced twice a year. When the Pay Commission recommends pay revisions, the
base is the CPI -IW.
CPI-UNME
1. The consumer for index for the urban Non-manual employees has 1984-85 as the base
year and 146-365 commodities in the basket for which data is collected at 59 centres
in the country - data collection frequency is monthly with two weeks' time lag.
2. This price index has limited use and is basically used for determining dearness
allowances of employees of some foreign companies operating in India (i.e., airlines,
communications, banking, insurance, embassies and other financial services).
3. It is also uses under the Income Tax Act to determine capital gains and by the CSO
for deflating selected service sector's contribution to the GDP at factor cost and
current prices to calculate the corresponding figure at constant prices.
4. Presently, on the advice of its governing council, the NSSO is conducting a Family
Living Survey (FLS) to obtain the present consumption pattern of urban non-manual
employees for shifting the present base of CPI-UNME. The CSO is also examining
the possibility of constructing a consumer price index for the urban employees.
5. An urban non-manual employee is defined as one who derives 50 per cent or more of
his or her income from gainful employment on non-manual work in the urban non-
agricultural sector. The current CPI(UNME) series with base 1984-85, introduced in
November 1987, derives the weighting pattern from the family living survey
conducted during 1982-83 in 59 selected urban centres.
CPI-AL
1. The consumer price index for Agricultural labourers has 1986-87 as its base year with
260 commodities in its basket. The data is collected in 600 villages with a monthly
frequency and has three weeks time lag.
2. This index is used for revising minimum wages for agricultural labourers in different
states. As the consumption pattern of agricultural labourers has changed since 1986-
87( its base year), the Labour Bureau proposes to revise the existing base year of this
index. For the revision, the consumer expenditure data collected by the NSSO durinf
its 61st NSS Round 2004-2005 us proposed to be used.
CPI-RL
1. CPI-RL takes 1983 as the base year, data is collected at 600 villages on monthlt
frequency with three weeks time lag, its basket contains 260 commodities.
2. The agricultural and rural labourers in India create an overlap, i.e., the same labourers
work as the rural labourers once the farm sector has either low or no employment
scope. Probably, due to this reason this index was dropped by the government in
2001-02 but was revised again after the new government.
CPI AL/RL
The list below is historical. It contains the 128 GATT signatories as at the end of 1994,
together with the dates they signed the agreement.
India is a founder member of both GATT and WTO. The WTO provides a rule based,
transparent and predictable multilateral trading system. The WTO rules envisage non-
discrimination in the form of National Treatment and Most Favoured Nation (MFN)
treatment to India's exports in the markets of other WTO members. National Treatment
ensures that India's products once imported into the territory of other WTO members would
not be discriminated vis-a-vis the domestic products in those countries. MFN treatment
principle ensures that members do not discriminate among various WTO members. If a
member country believes that the due benefits are not accruing to it because of trade meaures
by another WTO member, which are violative of WTO rules and discipline, it may file a
dispute under the Dispute Settlement Mechanism (DSM) of the WTO. There are also
contingency provisions built into WTO rules, enabling member countries to take care of
exigencies like balance of payment problems and situations like a surge in imports. In case of
unfair trade practices causing injury to the domestic producers, there are provisions to impose
Anti-Dumping or Countervailing duties as provided for in the Anti-Dumping Agreement and
the Subsidies and Countervailing Measures Agreement.
The highest decision making body of the WTO is the Ministerial conference, which has to
meet at least once every two years. The ministerial conference can take decisions on all
matters under any of the multilateral trade agreements.
The objective of the Agriculture Agreement is to reform trade in the sector and to
make policies more market-oriented. This would improve predictability and security
for importing and exporting countries alike.
AA's goal was to provide a framework for the leading members of the WTO to make
changes in their domestic farm policies to facilitate more open trade.
The Agreement on Agriculture forms a part of the Final Act of the Uruguay Round of
Multilateral Trade Negotiations, which was signed by the member countries in April
1994 at Marrakesh, Morocco and came into force on 1st January, 1995. The WTO
Agreement on Agriculture together with individual countrys commitments to reduce
export subsidies, domestic support and import duties on agricultural products are
significant steps towards reforming agricultural trade between countries.
The core objective of AoA is to establish a fair and market oriented agricultural
trading system. Its implementation period was six years for developed countries and
nine for developing countries, starting with the date the agreement on Agriculture
came into effect January 1, 1995. The least developed countries are not required to
make any reductions.
THREE PILLARS
The Agreement is made up of three pillars: market access, export competition and domestic
support. All WTO members, except least developed countries (LDCs), were required to make
commitments in all these areas in order to liberalise agricultural trade. As can be seen in the
box below, developing countries were given a limited element of special and differential
treatment (S&DT).
The agreement does allow governments to support their rural economies, but preferably
through policies that cause less distortion to trade. It also allows some flexibility in the way
commitments are implemented. Developing countries do not have to cut their subsidies or
lower their tariffs as much as developed countries, and they are given extra time to complete
their obligations. Least-developed countries dont have to do this at all. Special provisions
deal with the interests of countries that rely on imports for their food supplies, and the
concerns of least-developed economies.
Components of AoA
Least developed countries do not have to make commitments to reduce tariffs or subsidies.
1. Tariffication,
2. Tariff reduction
3. Access opportunities.
AoA prohibited the use of non-tariff-barriers (NTBs) like quotas and import restrictions for
agricultural products and introduced Tariffication. Tariffication required that all NTBs on
the import of an agricultural product would have to be replaced by a single bound tariff rate
so that the resulting protection would be equivalent to the nominal protection in the base
period. No country was allowed to increase tariff rates beyond the bound rate. Tariffication
led to the concern that it could result in high bound tariffs which, if applied, could be
prohibitive for any trade to take place. This gave rise to the concept of 'minimum market
access', whereby access WTO members were required to maintain current import access
opportunities at a certain minimum level. This was achieved through the tariff rate quota
(TRQ), which is a two-level tariff with the rate, charged depending on the volume of imports.
A lower tariff is charged on imports to ensure minimum market access or the quota volume; a
higher tariff is charged on imports in excess of the quota volume. By 2002, almost all
quantitative restrictions on agricultural imports had been abolished. Under normal
circumstances, an imported product is expected to have free entry into the importing country.
However, a member is allowed to impose a tariff i.e., customs duty on the imported product
at the time when it enters the importing country. Tariffs usually serve the purpose of getting
revenue for the government and in the case of developing counties it forms an important
source of income. Tariffs are used for the protection of the local industry by making domestic
products cheaper for a developing country, protecting its domestic produce and farmers. In
agriculture, 100 percent of products now have bound tariffs.
Developed and developing countries to convert all non-tariff barriers into simple tariffs (a
process known as tariffication).
Developed countries to reduce import tariffs by 36% (across the board) over a six year
period with a minimum 15% tariff reduction for any one product.
Developing countries to reduce import tariffs by 24% (across the board) over a ten year
period with a minimum 10% tariff reduction for any one product.
EXPORT COMPETITION (articles 8,9,10 and 11).
The export subsidy discipline requires that export subsidies be subjected to reduction and
limiting both in value and quantity. It establishes ceiling on the value as well as volume of
subsidized exports. Limits are determined on the basis of the support extended during 1986-
88 annual average The commitments are:
For developed countries, the value and volume of export subsidies to be reduced by 36%
and 24% respectively from the base period 1986- 1990 over a six year period.
For developing countries, the value and volume of export subsidies to be reduced by 24%
and 10% respectively from the base period 1986- 1990 over a ten year period.
All forms of domestic support are subject to rules. The WTO classifies domestic subsidies
into three categories known as the Amber, Blue and Green Boxes (see Box 2). Only the
Amber Box is subject to reduction commitments as follows:
For developed countries, a 20% reduction in Total AMS (Amber Box) over six years
commencing 1995 from a base period 1986-1988.
For developing countries, a 13% reduction in Total AMS (Amber Box) over ten years
commencing 1995 from a base period 1986-1988
The agricultural subsidies, in the WTO terminology have in general been identified by 'boxes'
which have been given the colours of the traffic lights -
The WTO provisions on agriculture has nothing like red box subsidies, although subsidies
exceeding the reduction commitment levels is prohibited in the 'amber box' . The 'blue box'
subsidies are tied to programmes that limit the level of production. There is also a provision
of some exemption for the developing countries sometimes called the 'S&D box'.1
1
article 6.2, AoA, WTO, 1994 - In accordance with the Mid-Term Review Agreement that government measures
of assistance, whether direct or indirect, to encourage agricultural and rural development are an integral part of
the development programmes of developing countries, investment subsidies which are generally available to
agriculture in developing country Members and agricultural input subsidies generally available to low-income or
resource-poor producers in developing country Members shall be exempt from domestic support reduction
commitments that would otherwise be applicable to such measures, as shall domestic support to producers in
developing country Members to encourage diversification from growing illicit narcotic crops. Domestic support
meeting the criteria of this paragraph shall not be required to be included in a Members calculation of its
Current Total AMS.
AMBER BOX
All subsidies which are supposed to distort production and trade fall into the amber box, ie.,
all the agricultural subsidies except those which fall into the blue and green boxes.2 These
include government policies of minimum support prices (as MSP in India) for agricultural
products or any help directly related to production quantities ( a power, fertilisers, pesticides,
irrigation, etc).
Under the WTO provisions, these subsidies are subject to reduction commitment to
their minimum level - to 5 percent and 10 percent for the developed and the developing
countries, respectively, of their total value of agricultural outputs, per annum accordingly. It
means, the subsidies directly related to production promotion above the allowed level
(which fall in either the blue box or green box) must be reduced by the countries to the
prescribed levels.
Amber Box: all domestic subsidies such as market price support - that are considered to
distort production and trade. Subsidies in this category are expressed in terms of a Total
Aggregate Measurement of Support (Total AMS) which includes all supports in one single
figure. Amber Box subsidies are subject to WTO reduction commitments.
DE-MINIMIS PROVISION
Under this provision developed countries are allowed to maintain trade distorting subsidies or
Amber box subsidies to level of 5% of total value of agricultural output. For developing
countries this figure was 10%. So far Indias subsidies are below this limit, but it is growing
consistently. This is because MSP are always revised upward whereas Market Prices have
fluctuating trends. In recent times when crash in international market prices of many crops is
seen, government doesnt have much option to reduce MSP drastically. By this analogy
Indias amber box subsidies are likely to cross 10% level allowed by de Minimis provision.
de minimis - Minimal amounts of domestic support that are allowed even though they
distort trade up to 5% of the value of production for developed countries, 10% for
developing.
BLUE BOX
This is the amber box with conditions. The conditions are designed to reduce distortions. Any
subsidy that would normally be in the amber box, is placed in the blue box if it requires
farmers to go for a certain production level.3 These subsidies are nothing but certain direct
payments (i.e, direct set aside payments) made to farmers by the government in the form of
assistance programmes to encourage agriculture, rural development etc.
certain direct payments to farmers where the farmers are required to limit production
(sometimes called blue box measures), certain government assistance programmes to
encourage agricultural and rural development in developing countries, and other support on a
2
Article 6 , AOA, WTO
3
Article 6, Para 5
small scale (de minimis) when compared with the total value of the product or products
supported (5% or less in the case of developed countries and 10% or less for developing
countries).
Blue Box: subsidy payments that are directly linked to acreage or animal numbers, but under
schemes which also limit production by imposing production quotas or requiring farmers to
set-aside part of their land. These are deemed by WTO rules to be partially decoupled from
production and are not subject to WTO reduction commitments. In the EU, they are
commonly known as direct payments.
GREEN BOX
The agricultural subsidies which cause minimal or no distortions to trade are put under the
green box.4 They must not involve price support.
This box basically includes all forms of government expenses, which are not targeted
at a particular product, and all direct income support programmes to farmers, which are not
related to current levels of production or prices. This is a very wide box and includes all
government subsidies like public storage for food security, pest and disease control, research
and extension and some direct payments to farmers that do not stimulate prodution like
restructuring of agriculture, environmental protection, regional development, crop and
income insurance, etc.
The green box subisidies are allowed without limits provided that comply with the
policy specific criteria. It means, this box is exempt from the calculation under subsidies
under the WTO provisions because the subsidies under it are not meant to promote
production thus do not distort trade, That is why this box is called 'production neutral box'.
Measures with minimal impact on trade can be used freely they are in a green box
(green as in traffic lights). They include government services such as research, disease
control, infrastructure and food security. They also include payments made directly to
farmers that do not stimulate production, such as certain forms of direct income support,
assistance to help farmers restructure agriculture, and direct payments under environmental
and regional assistance programmes.
Green Box: subsidies that are deemed not to distort trade, or at most cause minimal distortion
and are not subject to WTO reduction commitments.2 For the EU and US one of the most
important allowable subsidies in this category is decoupled support paid directly to
4
Annexure 2, AOA , Para 1 - 1. Domestic support measures for which exemption from the reduction
commitments is claimed shall meet the fundamental requirement that they have no, or at most minimal, trade-
distorting effects or effects on production. Accordingly, all measures for which exemption is claimed shall
conform to the following basic criteria:
(a) the support in question shall be provided through a publicly-funded government programme (including
government revenue foregone) not involving transfers from consumers; and,
(b) the support in question shall not have the effect of providing price support to producers; plus policy-
specific criteria and conditions as set out below.
producers. Such support should not relate to current production levels or prices. It can also be
given on condition that no production shall be required in order to receive such payments
S & D Box
The WTO provisions have defined another box i.e., the Social and Development Box which
allows the developing countries for some subsidies to the agriculture sector under certain
conditions, These conditions revolve around human development issues such as poverty,
minimum social welfare, health support, etc., specially for the segment of population living
below the poverty line, Developing countries can forward such subsidies to the extent of less
than 5 percent of their total agricultural output
The Agreement on Agriculture contains provisions in 3 broad areas of trade and agriculture
policies:
Market access for agricultural products is to be governed by a 'tariffs only' regime. That is to
say, the agreement states that there can be no restrictions on farm trade except through tariffs.
This means that non tariff barriers such as quantitative restrictions on imports (i.e., quotas,
import restrictions through permits, import licensing etc.) as were in existence before the
Agreement came into being, were to be replaced by tariffs on imports to provide the same
level of protection and then were to be followed by progressive reduction of tariff levels.
Tariffs resulting from this "tariffication process" as well as other tariffs are to be reduced by a
simple average of 36 per cent over 6 years in the case of developed countries and 24 per cent
over 10 years in the case of developing countries. However, developing countries like India
who had not converted their quantitative restrictions into tariffs, were allowed to have ceiling
bindings which were not subjected to these reduction commitments.
India had bound its tariffs at 100% for primary products, 150% for processed products
and 300% for edible oils, except for certain items (comprising about 119 tariff lines), which
were historically bound at a lower level in the earlier negotiations. Out of these low bound
tariff lines, bindings on 15 tariff lines which included skimmed milk powder, spelt wheat,
corn, paddy, rice, maize, millet, sorghum, rape, colza and mustard oil, fresh grapes etc. were
successfully negotiated under GATT Article XXVIII in December 1999 and the binding
levels were suitably revised upward to provide adequate protection to the domestic producers.
India has also not taken any commitment to provide minimum market access
opportunities which other countries who had tariffied their QRs had to undertake to the extent
of 3% of its domestic consumption going upto 5%, at the end of the implementation period.
Though India is not entitled to use the Special Safeguard Mechanism of the Agreement,
which can be used only by countries which had tariffied, yet it can take safeguard action
under the WTO Agreement on Safeguards if there is a surge in imports causing serious injury
or if there is a threat of serious injury to the domestic producers.
Domestic Support measures, according to the Agreement, are meant to identify acceptable
measures of support to farmers and curtailing unacceptable trade distorting support to
farmers. These measures are targetted largely at developed countries where the levels of
domestic agricultural support had risen to extremely high levels.
(a) support with no, or minimal, distortive effect on trade (often referred to as "Green Box"
and "Blue Box" measures) and
The trade distorting domestic support is measured in terms of what is called the "Total
Aggregate Measurement of Support" (Total AMS), which is expressed as a percentage of the
total value of agricultural output and includes both product specific and non product specific
support. The Agreement on Agriculture stipulates a reduction commitment of total AMS by
20 per cent for developed countries in 6 years (1995-2000) and by 131/ 3 per cent by
developing countries in 10 years (1995-2004), taking 1986-88 as the base period. However,
domestic support given to the agricultural sector upto 10% of the total value of agricultural
produce in developing countries and 5% in developed countries is allowed. In other words,
AMS within this limit is not subject to any reduction commitment.
In India the product specific support is negative, while the non product specific support i.e.,
subsidies on agricultural inputs, such as, power, irrigation, fertilisers etc., is well below the
permissible level of 10% of the value of agricultural output. Therefore, India is under no
obligation to reduce domestic support currently extended to the agricultural sector.
Disciplines in the area of Export Subsidies required developed countries to reduce, over a
period of 6 years, the base period (1986-90) volume of subsidised exports by 21 per cent and
the corresponding budgetary outlays for export subsidies by 36 per cent. For developing
countries these reductions are 14 per cent in volume terms and 24 per cent in budgetary
outlays over a period of 10 years.
Export subsidies of the kind listed in the Agreement on Agriculture, which attract reduction
commitments, are not extended in India. Also, developing countries are free to provide
certain subsidies, such as subsiding of export marketing costs, internal and international
transport and freight charges etc. India is making use of these subsidies in certain schemes of
Agricultural & Processed Food Products Export Development Authority (APEDA),
especially for facilitating export of horticulture products.
During the ongoing negotiations, some developing countries, including India, have sought a
special safeguard mechanism (SSM) to be used by developing countries for addressing
situations of import surges or swings in international prices of agricultural products. Apart
from additional duties, these countries have sought the flexibility to impose quantitative
restrictions under the special safeguard mechanism.
Under AoA, developing countries enjoy S&D in three main areas: market access, domestic
support and export subsidies. In all three areas, developing countries are allowed a ten-year
(1995-2004) implementation period as compared to five years (1995-2000) for developed
countries. The reduction commitments of developing countries in these areas have been about
two-thirds that of developed countries.
Trade facilitation was put on the agenda in the Bali Ministerial conference during 3 to 7
December 2013 mainly by the developed countries.
The WTOs intellectual property agreement amounts to rules for trade and investment in
ideas and creativity. The rules state how copyrights, patents, trademarks, geographical names
used to identify products, industrial designs, integrated circuit layout-designs and undisclosed
information such as trade secrets intellectual property should be protected when trade
is involved.
The areas of intellectual property that it covers are: copyright and related rights (i.e. the rights
of performers, producers of sound recordings and broadcasting
organizations); trademarks including service marks; geographical indications including
appellations of origin; industrial designs; patents including the protection of new varieties of
plants; the layout-designs of integrated circuits; and undisclosed information including trade
secrets and test data.
Enforcement. The second main set of provisions deals with domestic procedures
and remedies for the enforcement of intellectual property rights. The Agreement
lays down certain general principles applicable to all IPR enforcement procedures.
In addition, it contains provisions on civil and administrative procedures and
remedies, provisional measures, special requirements related to border measures
and criminal procedures, which specify, in a certain amount of detail, the
procedures and remedies that must be available so that right holders can
effectively enforce their rights.
Ideas and knowledge are an increasingly important part of trade. Most of the value of new
medicines and other high technology products lies in the amount of invention, innovation,
research, design and testing involved. Films, music recordings, books, computer software and
on-line services are bought and sold because of the information and creativity they contain,
not usually because of the plastic, metal or paper used to make them. Many products that
used to be traded as low-technology goods or commodities now contain a higher proportion
of invention and design in their value for example brandnamed clothing or new varieties
of plants.
Creators can be given the right to prevent others from using their inventions, designs or other
creations and to use that right to negotiate payment in return for others using them. These
are intellectual property rights. They take a number of forms. For example books, paintings
and films come under copyright; inventions can be patented; brandnames and product logos
can be registered as trademarks; and so on. Governments and parliaments have given creators
these rights as an incentive to produce ideas that will benefit society as a whole.
The extent of protection and enforcement of these rights varied widely around the world; and
as intellectual property became more important in trade, these differences became a source of
tension in international economic relations. New internationally-agreed trade rules for
intellectual property rights were seen as a way to introduce more order and predictability, and
for disputes to be settled more systematically.
The Uruguay Round achieved that. The WTOs TRIPS Agreement is an attempt to narrow
the gaps in the way these rights are protected around the world, and to bring them under
common international rules. It establishes minimum levels of protection that each
government has to give to the intellectual property of fellow WTO members. In doing so, it
strikes a balance between the long term benefits and possible short term costs to society.
Society benefits in the long term when intellectual property protection encourages creation
and invention, especially when the period of protection expires and the creations and
inventions enter the public domain. Governments are allowed to reduce any short term costs
through various exceptions, for example to tackle public health problems. And, when there
are trade disputes over intellectual property rights, the WTOs dispute settlement system is
now available.
Copyright
The TRIPS agreement ensures that computer programs will be protected as literary works
under the Berne Convention and outlines how databases should be protected.
It also expands international copyright rules to cover rental rights. Authors of computer
programs and producers of sound recordings must have the right to prohibit the commercial
rental of their works to the public. A similar exclusive right applies to films where
commercial rental has led to widespread copying, affecting copyright-owners potential
earnings from their films.
The agreement says performers must also have the right to prevent unauthorized recording,
reproduction and broadcast of live performances (bootlegging) for no less than 50 years.
Producers of sound recordings must have the right to prevent the unauthorized reproduction
of recordings for a period of 50 years
Trademarks
The agreement defines what types of signs must be eligible for protection as trademarks, and
what the minimum rights conferred on their owners must be. It says that service marks must
be protected in the same way as trademarks used for goods. Marks that have become well-
known in a particular country enjoy additional protection.
Geographical indications
A place name is sometimes used to identify a product. This geographical indication does
not only say where the product was made. More importantly, it identifies the products
special characteristics, which are the result of the products origins.
Using the place name when the product was made elsewhere or when it does not have the
usual characteristics can mislead consumers, and it can lead to unfair competition. The
TRIPS Agreement says countries have to prevent this misuse of place names.
For wines and spirits, the agreement provides higher levels of protection, i.e. even where
there is no danger of the public being misled.
Some exceptions are allowed, for example if the name is already protected as a trademark or
if it has become a generic term. For example, cheddar now refers to a particular type of
cheese not necessarily made in Cheddar, in the UK. But any country wanting to make an
exception for these reasons must be willing to negotiate with the country which wants to
protect the geographical indication in question.
The agreement provides for further negotiations in the WTO to establish a multilateral system
of notification and registration of geographical indications for wines. These are now part of
the Doha Development Agenda and they include spirits. Also debated in the WTO is whether
to negotiate extending this higher level of protection beyond wines and spirits.
Industrial designs
Under the TRIPS Agreement, industrial designs must be protected for at least 10 years.
Owners of protected designs must be able to prevent the manufacture, sale or importation of
articles bearing or embodying a design which is a copy of the protected design.
Patents
The agreement says patent protection must be available for inventions for at least 20 years.
Patent protection must be available for both products and processes, in almost all fields of
technology. Governments can refuse to issue a patent for an invention if its commercial
exploitation is prohibited for reasons of public order or morality. They can also exclude
diagnostic, therapeutic and surgical methods, plants and animals (other than
microorganisms), and biological processes for the production of plants or animals (other than
microbiological processes).
Plant varieties, however, must be protectable by patents or by a special system (such as the
breeders rights provided in the conventions of UPOV the International Union for the
Protection of New Varieties of Plants).
The agreement describes the minimum rights that a patent owner must enjoy. But it also
allows certain exceptions. A patent owner could abuse his rights, for example by failing to
supply the product on the market. To deal with that possibility, the agreement says
governments can issue compulsory licences, allowing a competitor to produce the product
or use the process under licence. But this can only be done under certain conditions aimed at
safeguarding the legitimate interests of the patent-holder.
If a patent is issued for a production process, then the rights must extend to the product
directly obtained from the process. Under certain conditions alleged infringers may be
ordered by a court to prove that they have not used the patented process.
An issue that has arisen recently is how to ensure patent protection for pharmaceutical
products does not prevent people in poor countries from having access to medicines while
at the same time maintaining the patent systems role in providing incentives for research and
development into new medicines. Flexibilities such as compulsory licensing are written into
the TRIPS Agreement, but some governments were unsure of how these would be
interpreted, and how far their right to use them would be respected.
A large part of this was settled when WTO ministers issued a special declaration at the Doha
Ministerial Conference in November 2001. They agreed that the TRIPS Agreement does not
and should not prevent members from taking measures to protect public health. They
underscored countries ability to use the flexibilities that are built into the TRIPS Agreement.
And they agreed to extend exemptions on pharmaceutical patent protection for least-
developed countries until 2016. On one remaining question, they assigned further work to the
TRIPS Council to sort out how to provide extra flexibility, so that countries unable to
produce pharmaceuticals domestically can import patented drugs made under compulsory
licensing. A waiver providing this flexibility was agreed on 30 August 2003.
The basis for protecting integrated circuit designs (topographies) in the TRIPS agreement is
the Washington Treaty on Intellectual Property in Respect of Integrated Circuits, which
comes under the World Intellectual Property Organization. This was adopted in 1989 but has
not yet entered into force. The TRIPS agreement adds a number of provisions: for example,
protection must be available for at least 10 years.
Trade secrets and other types of undisclosed information which have commercial value
must be protected against breach of confidence and other acts contrary to honest commercial
practices. But reasonable steps must have been taken to keep the information secret. Test data
submitted to governments in order to obtain marketing approval for new pharmaceutical or
agricultural chemicals must also be protected against unfair commercial use.
Intellectual property rights are customarily divided into two main areas:
The rights of authors of literary and artistic works (such as books and other writings, musical
compositions, paintings, sculpture, computer programs and films) are protected by copyright,
for a minimum period of 50 years after the death of the author.
The protection of such distinctive signs aims to stimulate and ensure fair
competition and to protect consumers, by enabling them to make informed choices
between various goods and services. The protection may last indefinitely,
provided the sign in question continues to be distinctive.
The social purpose is to provide protection for the results of investment in the
development of new technology, thus giving the incentive and means to finance
research and development activities.
The protection is usually given for a finite term (typically 20 years in the case of
patents).
While the basic social objectives of intellectual property protection are as outlined above, it
should also be noted that the exclusive rights given are generally subject to a number of
limitations and exceptions, aimed at fine-tuning the balance that has to be found between the
legitimate interests of right holders and of users.
DISPUTE SETTLEMENT
The WTOs procedure for resolving trade quarrels under the Dispute Settlement
Understanding is vital for enforcing the rules and therefore for ensuring that trade flows
smoothly. Countries bring disputes to the WTO if they think their rights under the agreements
are being infringed. Judgements by specially-appointed independent experts are based on
interpretations of the agreements and individual countries commitments.
The system encourages countries to settle their differences through consultation. Failing that,
they can follow a carefully mapped out, stage-by-stage procedure that includes the possibility
of a ruling by a panel of experts, and the chance to appeal the ruling on legal grounds.
Confidence in the system is borne out by the number of cases brought to the WTO around
300 cases in eight years compared to the 300 disputes dealt with during the entire life of
GATT (194794).
The Trade-Related Investment Measures (TRIMs) Agreement applies only to measures that
affect trade in goods. It recognizes that certain measures can restrict and distort trade, and
states that no member shall apply any measure that discriminates against foreigners or foreign
products (i.e. violates national treatment principles in GATT). It also outlaws investment
measures that lead to restrictions in quantities (violating another principle in GATT). An
illustrative list of TRIMs agreed to be inconsistent with these GATT articles is appended to
the agreement. The list includes measures which require particular levels of local
procurement by an enterprise (local content requirements). It also discourages measures
which limit a companys imports or set targets for the company to export (trade balancing
requirements).
Under the agreement, countries must inform fellow-members through the WTO of all
investment measures that do not conform with the agreement. Developed countries had to
eliminate these in two years (by the end of 1996); developing countries had five years (to the
end of 1999); and least-developed countries seven. In July 2001, the Goods Council agreed to
extend this transition period for a number of requesting developing countries.
This Agreement, negotiated during the Uruguay Round, applies only to measures that affect
trade in goods. Recognizing that certain investment measures can have trade-restrictive and
distorting effects, it states that no Member shall apply a measure that is prohibited by the
provisions of GATT Article III (national treatment) or Article XI (quantitative restrictions).
- Most-favoured-nation (MFN): treating other people equally Under the WTO agreements,
countries cannot normally discriminate between their trading partners. Grant someone a
special favour (such as a lower customs duty rate for one of their products) and you have to
do the same for all other WTO members.
Some exceptions are allowed. For example, countries can set up a free trade agreement that
applies only to goods traded within the group discriminating against goods from outside.
Or they can give developing countries special access to their markets. Or a country can raise
barriers against products that are considered to be traded unfairly from specific countries.
And in services, countries are allowed, in limited circumstances, to discriminate. But the
agreements only permit these exceptions under strict conditions. In general, MFN means that
every time a country lowers a trade barrier or opens up a market, it has to do so for the same
goods or services from all its trading partners whether rich or poor, weak or strong.
2. National treatment: Treating foreigners and locals equally Imported and locally-
produced goods should be treated equally at least after the foreign goods have entered the
market. The same should apply to foreign and domestic services, and to foreign and local
trademarks, copyrights and patents. This principle of national treatment (giving others the
same treatment as ones own nationals) is also found in all the three main WTO agreements
(Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), although once again the
principle is handled slightly differently in each of these.
National treatment only applies once a product, service or item of intellectual property has
entered the market. Therefore, charging customs duty on an import is not a violation of
national treatment even if locally-produced products are not charged an equivalent tax.
Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers
concerned include customs duties (or tariffs) and measures such as import bans or quotas that
restrict quantities selectively. From time to time other issues such as red tape and exchange
rate policies have also been discussed.
Sometimes, promising not to raise a trade barrier can be as important as lowering one,
because the promise gives businesses a clearer view of their future opportunities. With
stability and predictability, investment is encouraged, jobs are created and consumers can
fully enjoy the benefits of competition choice and lower prices. The multilateral trading
system is an attempt by governments to make the business environment stable and
predictable.
The WTO is sometimes described as a free trade institution, but that is not entirely
accurate. The system does allow tariffs and, in limited circumstances, other forms of
protection. More accurately, it is a system of rules dedicated to open, fair and undistorted
competition.
The rules on non-discrimination MFN and national treatment are designed to secure
fair conditions of trade. So too are those on dumping (exporting at below cost to gain market
share) and subsidies. The issues are complex, and the rules try to establish what is fair or
unfair, and how governments can respond, in particular by charging additional import duties
calculated to compensate for damage caused by unfair trade.
Many of the other WTO agreements aim to support fair competition: in agriculture,
intellectual property, services, for example. The agreement on government procurement (a
plurilateral agreement because it is signed by only a few WTO members) extends
competition rules to purchases by thousands of government entities in many countries. And
so on.
The principles
Tariff Quotas - lower tariff rates for specified quantities, higher (sometimes much higher)
rates for quantities that exceed the quota. The newly committed tariffs and tariff quotas,
covering all agricultural products, took effect in 1995. Uruguay Round participants agreed
that developed countries would cut the tariffs (the higher out-of-quota rates in the case of
tariff-quotas) by an average of 36%, in equal steps over six years. Developing countries
would make 24% cuts over 10 years.
A tariff-quota
Imports entering under the tariff-quota (up to 1,000 tons) are generally charged 10%. Imports
entering outside the tariff-quota are charged 80%. Under the Uruguay Round agreement, the
1,000 tons would be based on actual imports in the base period or an agreed minimum
access formula.
The agreement still allows countries to use different standards and different methods of
inspecting products. So how can an exporting country be sure the practices it applies to its
products are acceptable in an importing country? If an exporting country can demonstrate that
the measures it applies to its exports achieve the same level of health protection as in the
importing country, then the importing country is expected to accept the exporting countrys
standards and methods.
The SPS Agreement encourages WTO members to base their regulations on the health and
safety standards developed by the three relevant international expert bodies, namely
WTO members who want to impose more stringent requirements must be able to justify these
measures based on a scientific assessment of health risks. The SPS Agreement aims to
achieve a balance between the right of WTO members to implement legitimate health
protection policies and the goal of allowing the smooth flow of goods across international
borders without unnecessary restrictions. The SPS Committee provides a forum for the
exchange of information and gives WTO members the opportunity to resolve specific trade
concerns. Nearly half of the concerns raised in the Committee have subsequently been
completely or partially resolved among the members concerned.
For the purposes of the SPS Agreement, sanitary and phytosanitary measures are defined as
any measures applied:
Government procurement accounts for 10-15 per cent of the GDP of an economy on average.
It constitutes a significant market and an important aspect of international trade. The WTO's
work on government procurement aims to promote transparency, integrity and competition in
this market.
These four issues have collectively come to be known as the Singapore issues in the context
of the WTO, because it was at the first ministerial conference of the WTO in Singapore in
1996 that they were first brought up as possible areas on which the multilateral body could
initiate negotiations. As it can be inferred from these four areas, only trade facilitation is
directly related to trade, while other three are only indirectly related (if not unrelated) to
trade. Developed countries wanted to include all these areas in negotiations. In contrast,
developed countries wanted implementation of outcomes of Uruguay round. Hence, from
very beginning of WTO deliberations, contradictions of interests of both developed and
developing world came to surface, which continues till date. Further, The USA and Norway
were behind the push for bringing in labour standards in the WTO, but developing countries
were able to get the meeting to agree that the International Labour Organisation is the
competent body to do such work.
On issues like investment and competition policy, India feels that having a multilateral
agreement would be a serious impingement on the sovereign rights of countries. To an extent,
of course, this is inherent in any multilateral treaty, but Investment is seen as an area in which
ceding sovereign rights would leave governments, particularly developing country
governments, with too little room for maneuver in directing investments into areas of national
priority. These are concerns that many other developing countries also share. In addition, on
the specific issue of competition policy as applicable to hardcore cartels,
India has pointed out that there is no clarity on whether these would include export cartels.
The Organisation of Petroleum Exporting Countries (OPEC) is perhaps the best known
example of an export cartel that rigs prices by fixing production ceilings. On the issue of
transparency in government procurement, the Indian position is that while the principle is
entirely acceptable, there cannot be a universal determination of what constitutes transparent
procedures. On trade facilitation, India has argued that once again while the idea is
unexceptionable, developing countries may not have the resources by way of technology,
or otherwise to bring their procedures in line with those in the developed world over the
short to medium term.
1. There was a commitment to completely eliminate subsidies for farm exports Under the
decision, developed members have committed to remove export subsidies immediately,
except for a handful of agriculture products, and developing countries will do so by 2018.
Developing members will keep the flexibility to cover marketing and transport costs for
agriculture exports until the end of 2023, and the poorest and food importing countries would
enjoy additional time to cut export subsidies.
2. Ministers also adopted a Ministerial Decision on Public Stockholding for Food Security
Purposes. The decision commits members to engage constructively in finding a permanent
solution to this issue. Under the Bali Ministerial Decision of 2013, developing countries are
allowed to continue food stockpile programmes, which are otherwise in risk of breaching the
WTOs domestic subsidy cap, until a permanent solution is found by the 11th Ministerial
Conference in 2017.
4. There were other decisions of particular interests of least developing Countries. One of
them is Preferential Rules of Origin. It entails that Made in LDC products will get
unrestricted access to markets of non LDCs.
5. There was affirmation that Regional Trade Agreements (RTAs) remain complementary to,
not a substitute for, the multilateral trading system (WTO).
6. Ministers acknowledged that members have different views on how to address the future
of the Doha Round negotiations but noted the strong commitment of all Members to
advance negotiations on the remaining Doha issues.
BALANCE OF PAYMENTS
The balance of payments (henceforth BOP) is a consolidated account of the receipts and
pay-ments from and to other countries arising out of all economic transactions during the
course of a year.
X is exports,
M is imports,
CI is capital inflows,
CO is capital outflows,
CURRENCY CONVERTIBILITY
Currency convertibility means currency of a country can be freely converted into foreign
exchange at market determined rate of exchange ,i.e the rate determined by demand and
supply of currency of different countries. In India there are some dealers whose job is
facilitating the services of exchanging the currency of one country into another. Mostly these
are commercial banks who act as dealers of exchange. Convertibility of currency allows you
to go there and convert your Indian rupees into whatever currency you wanted. Capital
account convertibility (CAC) refers to the freedom of converting local financial assets into
foreign financial assetsand vice versa at market determined rates of exchange. It refers to the
elimination of restraints on international flows on a country s capital account, facilitating full
currency convertibility and opening of the financial system.
CURRENT ACCOUNT
It has two meanings - one is related to the banking sector and the other to the external sector.
1. In the banking industry, a business firms bank account is known as current account.
The account is in the name of a firm run by authorised person or persons in which no
interest is paid by the bank on the deposits. Every withdrawal from the account taks
place by cheques with limitations on the number of deposits and withdrawals in a
single day. The overdraft facility or the cash-cum-credit (c/c account) facility to
business firms is offered by the banks on this account only.
2. In the external sector, it refers to the account maintained by every government of the
world in which every kind of current transactions is shown - basically this account is
maintained by the central banking body of the economy on behalf of the government.
Current transactions of an economy in foreign currency all over the world are -
exports, import, interest payments, private remittances and transfers.
All transactions are shown as either, inflow or outflow (Credit or debit). At the end of
the year, the current account might be positive or negative. The positive one is known
as a surplus current account, and the negative one is known as a deficit current
account. India had surplus current accounts for three consecutive years (2000 to
2003)- the only such period in Indian economic history.
CAPITAL ACCOUNT
Every government of the world maintains a capital account, which shows the capital kind of
transactions of the economy with outside economies. Every transaction in foreign currency
(inflow or outflow) considered as capital is shown in this account -
external lending and borrowing
foreign currency deposits of bank
external bonds issued by the govt of india
FDI
PIS and
Security market investment of the QFIs (Qualified Foreign investors) (Rupee is fully
convertible in this case).
An economy might allow its currency full or partial convertibility in the current account and
capital accounts. If domestic currency is allowed to convert into foreign currency for all
current account purposes, it is a case of full current account convertibility. Similarly, in cases
of capital outflow, if the domestic currency is allowed to convert into foreign currency, it is a
case of full capital account convertibility. If the situation is of partial convertibility, then the
portion allowed by the government can be converted into foreign currency for current and
capital purposes. It should always be kept in mind that the issue of currency convertibility is
concerned with foreign currency outflow only.
CONVERTIBILITY IN INDIA
LERMS - India announced the Liberalised Exchange Rate Mechanism System (LERMS) in
the Union Budget 1992-93 and in March 1993 it was operationalised. India delinked its
currency from the fixed currency system and moved into the era of floating exchange rate
system under it. Indian form of exchange rate is known as the 'dual exchange rate', one
exchange rate of rupee is official and the other is market-driven. The market driven exchange
rate shows the actual tendencies of the foreign currency demand and supply in the economy
vis-a-vis the domestic currency. It is the market driven exchange rate which affects the
official rate and not the other way around.
NEER - The Nominal Effective Exchange Rate (NEER) of the rupee is a weighted average
of exchange rates before the currencies of India's major trading partners.
REER - When the weight of inflation is adjusted with the NEER, we get the Real Effective
Exchange Rate(REER) of the Rupee. Since inflation has been on the higher side REER of the
rupee is more than NEER.
EFF - The extended fund facility(EFF) is a service provided by the IMF to its member
countries which authorises them to raise any amount of foreign exchange from it to fulfil
their BoP crisis, but on the conditions of structural reforms in the economy put by the body. It
is the first agreement of its kind. India had signed this agreement with the IMF in the
financial year 1981-82.
IMF CONDITIONS ON INDIA
The BoP crisis of the early 1990s made India borrow from the IMF which came on some
conditions. The medium term loan to India was given for the restructuring of the economy on
the following conditions:
1. Devaluation of rupee by 22 %
2. Drastic custom cut to a peak duty of 30 percent from the erstwhile level of 130
percent for all goods.
3. Excise duty to be increases by 20 percent to neutralise the loss of revenue due to
custom cut.
4. Government expenditure to be cut by 10% per annum (the burden of salaries,
pensions, subsidies, etc.).
A concept of public finance which means an increase in the government expenditure which
has an effect of reducing the private sector expenditure.
Capital Account Convertibility means that rupee can now be freely convertible into any
foreign currencies for the acquisition of assets like shares, properties and assets abroad.
Further, the banks can accept deposits in any currency.
Currency convertibility means the freedom to convert one currency into other internationally
accepted currencies, wherein the exporters and importers were allowed a free conversion of a
rupee.But still, none was allowed to purchase any assets abroad.
So if a foreigner buys a building in India, and after 5 yrs its selling price rises so sells it at
five times the cost he collected, now he has rupees in hand, can he easily convert these rupees
into yen easily?
Considering that exchange rate is better in terms of INR-JPY, the foreigner would want to
convert the currency into yen..and this can be done if complete capital a/c convertibility takes
place.
Remittance to foreign countries from India is restricted by RBI. for import of machines you
are remitting abroad means it is capital account convertibility. if you remit money to your son
or relative living abroad means current account convertibility.
It means the freedom to convert local financial assets into foreign financial assets and vice
versa at market determined rates of exchange. It refers to the removal of restraints on
international flows on a countrys capital account, enabling full currency convertibility and
the opening of the financial system. Capital account convertibility is considered to be one of
the major features of a developed economy. It helps attract foreign investment.At the same
time, capital account convertibility makes it easier for domestic companies to tap foreign
markets. It is sometimes referred to as Capital Asset Liberation.
Capital account convertibility (CAC) refers to the freedom of converting local financial assets
into foreign financial assets and vice versa at market determined rates of exchange. It refers
to the elimination of restraints on international flows on a country s capital account,
facilitating full currency convertibility and opening of the financial system.
BENEFITS
1. The most obvious argument is that all developed countries are capital account
convertible; hence this is an inevitable destiny of the developing countries in their
path to development.
2. Free global capital flows bring about better and more efficient allocation of the global
pool of savings to the more productive uses. From the developing countrys
viewpoint, free access to global capital markets increases available investible
resources which augments domestic savings, reduces marginal cost of capital,
accelerates investment and growth.
3. According to Stanley Fischer, ....open capital accounts support the multilateral
trading systems by broadening the channels through which countries can finance trade
and investment.
4. Open capital accounts facilitate portfolio diversification by investors in developed as
well as developing countries.
5. Because the feasibility of capital account convertibility rests on sound
macroeconomic policy, it creates a sort of commitment for the country concerned to
ensure better macroeconomic management, lest it is punished by the investors. As
Rudiger Dornbusch puts it, The capital market fulfils an important supervisory
function over economic policy
6. The first and foremost advantage of capital account convertibility is that it helps the
currency of the country because due to capital convertibility being implemented
foreign investors feel free to invest in the country resulting in glut of foreign currency
flowing into the country and due to foreign currency inflows the currency of the
country appreciate against the foreign currencies. Hence as far currency is concerned
capital account convertibility initially is a boon and indirectly helps the imports of the
country getting cheaper because appreciation in currency results in imports of the
country getting cheaper.
DIS-ADVANTAGES
1. It is recognised that capital flows are sensitive to macroeconomic conditions. Any
deterioration in fiscal conditions, inflation management, balance of payments, or any
other macroeconomic shock may cause a cessation or reversal of capital flows
2. Capital flows, inasmuch as they result essentially from trade in financial assets, are
prone to volatilities derived from information asymmetries, herd behaviour, panics
etc., which may be far divested from the fundamental macroeconomic strengths. I
resist the temptation to tangentially sail into a discussion on the vagaries of the
financial markets. Suffice to quote Keyness famous words: when capital
development of a country becomes a by-product of the activities of a casino, the job is
likely to be ill done.
3. As a consequence of impossible trinity, an open capital account demands a complete
let go of the exchange rate management and volatile capital flows and can therefore
lead to extreme volatility in the exchange rate and large departures from its
equilibrium value.
Current account convertibility allows free inflows and outflows for all purposes other than for
capital purposes such as investments and loans. In other words, it allows residents to make
and receive trade-related payments receive dollars (or any other foreign currency) for
export of goods and services and pay dollars for import of goods and services, make sundry
remittances, access foreign currency for travel, studies abroad, medical treatment and gifts,
etc.
Current account convertibility allows you to receive and convert the earnings sent by your
family members working in abroad without going under a complex procedure as earlier.
Current account convertibility leads to smoother exchange of foreign exchange into domestic
currency and vice versa. This helps in integrating the trade activities among different
countries of the world. It enhances the international trade relations between the countries by
removing the exchange barriers.
(3) Imports and exports can be done at fair rates determined by the market :
Earlier when there was no free current account convertibility one needs to surrender either
some portion of their foreign exchange receipt or should convert it in to Indian rupees at the
rates determined by RBI. Usually the rate determined used to be less than the rate determined
by the market. Hence current account convertibility allows you to convert your foreign
exchange at the rates determined by the market which is more fair than pre determined rates.
India has become one of the largest recipients of foreign direct investment on account of
reform measures taken by the government, the Economic Survey for 2016-17
The government has liberalised and simplified the foreign direct investment (FDI) policy in
sectors like defence, railway infrastructure, construction and pharmaceuticals.
It said many new initiatives have been taken up to facilitate investment and ease of doing
business in the country such as Make-in-India, Invest India, Start Up India and e-biz Mission
Mode Project.
Foreign direct investments can be made in a variety of ways, including the opening of a
subsidiary or associate company in a foreign country, acquiring a controlling interest in an
existing foreign company, or by means of a merger or joint venture with a foreign company.
The threshold for a foreign direct investment that establishes a controlling interest, per
guidelines established by the Organization of Economic Cooperation and Development
(OECD), is a minimum 10% ownership stake in a foreign-based company, typically
represented for the investor acquiring 10% or more of the ordinary shares or voting shares of
a foreign company. However, that definition is flexible, as there are instances where effective
controlling interest in a firm can be established with less than 10% of the company's voting
shares.
Foreign portfolio investment (FPI) consists of securities and other financial assets passively
held by foreign investors. It does not provide the investor with direct ownership of financial
assets and is relatively liquid depending on the volatility of the market. Foreign portfolio
investment differs from foreign direct investment (FDI), in which a domestic company runs a
foreign firm, because although FDI allows a company to maintain better control over the firm
held abroad, it may face more difficulty selling the firm at a premium price in the future.
FPI is part of a countrys capital account and shown on its balance of payments (BOP). The
BOP measures the amount of money flowing from one country to other countries over one
monetary year. It includes the countrys capital investments, monetary transfers, and the
number of exports and imports of goods and services.
SEBI has recently stipulated the criteria for Foreign Portfolio Investment. According to this,
any equity investment by non-residents which is less than or equal to 10% of capital in a
company is portfolio investment. While above this the investment will be counted as Foreign
Direct Investment (FDI).
Investment by a foreign portfolio investor cannot exceed 10 per cent of the paid up
capital of the Indian company. All FPI taken together cannot acquire more than 24 per cent of
the paid up capital of an Indian Company. As per SEBI regulations, FPIs are not allowed to
invest in unlisted shares and investment in unlisted entities will be treated as FDI.
After the new SEBI guidelines, the RBI stipulated that Foreign Portfolio Investors
include Asset Management Companies, Banks, Pension Funds, Mutual Funds, and
Investment Trusts as Nominee Companies, Incorporated / Institutional Portfolio Managers or
their Power of Attorney holders, University Funds, Endowment Foundations, Charitable
Trusts and Charitable Societies etc. Sovereign Wealth Funds are also regulated as FIIs.
FII is an institution like a mutual fund, insurance company, pension fund etc.
According to SEBI, an FII is an institution established or incorporated outside India which
proposes to make investments in India in securities. FII is an institution who is registered
under the Securities and Exchange Board of India (Foreign Institutional Investors)
Regulations, 1995. FIIs comprised of a pension fund, a mutual fund, investment trust,
insurance company or a reinsurance company.
In order to harmonize the various available routes for foreign portfolio investment in India,
the Indian securities market regulator i.e. Securities Exchange Board of India (SEBI) has
introduced a new class of foreign investors in India known as the Foreign Portfolio Investors
(FPIs). This class has been formed by merging the existing classes of investors through
which portfolio investments were previously made in India namely, the Foreign Institutional
Investors.(FIIs), Qualified Foreign Investors (QFIs) and sub-accounts of the FIIs.
Previously portfolio investment was governed under different laws i.e. the SEBI (Foreign
Institutional Investors) Regulations, 1995 (FII Regulations) for FIIs and their subaccounts
and SEBI circulars dated August 09, 2011 and January 13, 2012 governing QFIs, which are
now repealed under the SEBI (Foreign Portfolio Investors) Regulations (FPI Regulations)
that govern FPIs. SEBI has, thus, intended to simplify the overall operation of making foreign
portfolio investments in India.
With the new FPI regime, which has commenced from 1 June 2014, it has now been decided
to dispense with the mandatory requirement of direct registration with SEBI and a risk based
verification approach has been adopted to smoothen the entry of foreign investors into the
Indian securities market.
FPIs have been made equivalent to FIIs from the tax perspective, vide central government
notification dated 22nd January 2014.
Given this backdrop, in the Union Budget 2013-14, announced on 28 February 2013, vide
para 95, Honourable FM announced his intention to go by the internationally accepted
definition for FIIs and FDIs, as stated below:
"In order to remove the ambiguity that prevails on what is Foreign Direct Investment (FDI)
and what is Foreign Institutional Investment (FII), it is proposed to follow the international
practice and lay down a broad principle that, where an investor has a stake of 10 percent or
less in a company, it will be treated as FII and, where an investor has a stake of more than 10
percent, it will be treated as FDI. A committee will be constituted to examine the application
of the principle and to work out the details expeditiously."
Meanwhile, to rationalize/harmonize various foreign portfolio investment windows and to
simplify procedures, SEBI had formed a Committee on Rationalization of Investment
Routes and Monitoring of Foreign Portfolio Investments under the chairmanship of Shri K.
M. Chandrasekhar, former Cabinet Secretary. The Committee submitted its report on June 12,
2013.
In accordance with the budget announcement, a committee has been constituted under the
chairmanship of Secy (DEA), to examine and work out the details of the application of the
principle followed internationally for defining FDI and FII. The committee submitted its
report in June 2014. Based on the Committee recommendations and subsequent to the issue
of SEBI (FPI) Regulations, 2014, any investment beyond 10% in a company is termed as
FDI. Further, any investment in an unlisted entity, even if it is only one or two percentage of
the paid up capital will also be treated as FDI. An FPI is not allowed to invest in the equity of
unlisted companies, while they can invest in the listed companies or to-be listed companies
(i.e., at the time of IPO) through the stock exchange.
In India, FDI and FII are defined in Schedule 1 and 2 respectively of the Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations
2000.
1. Pension Funds
2. Mutual Funds
3. Investment Trusts
4. Banks
5. Insurance Companies / Reinsurance Company
6. Foreign Central Banks
7. Foreign Governmental Agencies
8. Sovereign Wealth Funds
9. International/ Multilateral organization/ agency
10. University Funds (Serving public interests)
11. Endowments (Serving public interests)
12. Foundations (Serving public interests)
13. Charitable Trusts / Charitable Societies (Serving public interests)
FDI VS FII
Here are the some contrasts between FDI and FII.
Meaning:
When any organization in one nation makes an investment in any organization in abroad, it is
mostly called as foreign direct investment or FDI.
When any organization in abroad make investment in the market related to stock of a nation
then this investor is called foreign institutional investor or FII.
Brings:
Foreign direct investment brings long term capital in the company where investment is made
by other company.
Foreign institutional investor brings short or long term capital in the nation.
Access or leave:
Foreign direct investment does not give an easy access or exit to the stock market. FII gives
an easier access to stock market and also allow an investor to leave the stock market.
Transfer:
In foreign direct investment, transfer of technologies, funds, strategies or resources is done.
In FII, only funds are transferred through this institution.
Economic growth:
Foreign direct investment helps to increase the job opportunities in the country which leads to
increase in living standard of people, also develops the infrastructure of the investee country
and all of this helps in the economic growth so FDI plays its role in economic growth of the
country. Foreign institutional investor does not play any part in the economic growth of
country.
Making money:
Foreign direct investment does not give an easy way in making money quickly as it includes
complex procedures.
FII allows the investor to make money quickly from the stock market.
Results:
By having foreign direct investment, there is the increase in productivity, job opportunities
and eventually it helps to increase the economic growth of the country.
The main consequence of FII is that there is an increase in capital of country.
Target:
Foreign direct investment targets any specific company for investment.
FII never targets any specific company.
Control:
Through FDI, there is the administration control in company.
FII does not help to get such kind of control in company.
The significant differences between FDI and FII are explained below:
2. FII is a way to to make quick money, the entry and exit to the stock market are very
easy. On the other hand, the entry and exit are not easy in FDI.
3. FDI brings long-term capital in the investee company whereas FII may bring long or
short term capital in the country.
4. In the case of FDI, there is the transfer of funds, resources, technology, strategies,
know-how. Conversely, FII involves the transfer of funds only.
6. FDI results in the increase in the countrys productivity. As opposed to FII that results
in the increase in the countrys capital.
7. FDI targets a particular company, but FII does not target a particular company.
8. FDI obtains management control in the company. However, FII does not enable such
control.
BASIS FOR
FDI FII
COMPARISON
CAPITAL FLIGHT
Capital flight is the movement of capital from one country to another, or sometimes from one
investment sector to another, to capitalize on returns or mitigate risk.
Capital flight denotes large scale outflow of capital (investment etc.) from an economy. Such
a mass movement or exodus of money mainly invested in a countrys financial markets occur
either due to some undesirable development in the domestic economy or due to some positive
development in other economies.
Usually capital flight occurs in developing countries who accepts huge amount of foreign
capital to promote domestic investment.
Both domestic (push) and external (pull) factors may create capital flight. The term flight is
obviously used from the angle of the host developing economy like India which holds such
capital (in the form of foreign investment mostly).
An example for (push) is the increase in interest rate by the US Fed may make high returns
for US financial assets. Increase in US interest rate implies more interest rate in US banks.
Here the US investors who have invested in India may find that US is also attractive now
because of the rate of interest hike there.
Another reason (pull) is the trouble in the domestic economy. an example here is the East
Asian crisis of 1997 where failure of many East Asian banks triggered mass withdrawal of
foreign deposits.
On the impact side, because of capital flight, foreign currencies may become scarce in
domestic foreign exchange market. Such a situation will cause depreciation of the domestic
currency. it will reduce money available for domestic investment. If the capital flight is big
macroeconomic crisis may appear.
A situation when increased interest rates lead to a reduction in private investment spending
such that it dampens the initial increase of total investment spending is called crowding out
effect.
Sometimes, government adopts an expansionary fiscal policy stance and increases its
spending to boost the economic activity. This leads to an increase in interest rates. Increased
interest rates affect private investment decisions. A high magnitude of the crowding out effect
may even lead to lesser income in the economy.
With higher interest rates, the cost for funds to be invested increases and affects their
accessibility to debt financing mechanisms. This leads to lesser investment ultimately and
crowds out the impact of the initial rise in the total investment spending. Usually the initial
increase in government spending is funded using higher taxes or borrowing on part of the
government.
BUDGET
An annual financial statement of income and expenditure is generally used for a govenrment,
but it could be a firm , company, corporation etc. This word had his origin from french word
'Bugeut' in mid 18th century meaning a leather bag out of which the financial statement was
brought out and presented in the parliament. The constitution of India has a provision
(Art.112) for such a document called Annual Financial statement to be presented in the
parliament before the commencement of every new fiscal year - popular as the union budget.
REVENUE BUDGET
The part of the Budget which deals with the income and expenditure of revenue by the
government. This presents the annual financial statement of the total revenue receipts and the
total revenue expenditure - if the balance emerges to be positive it is a revenue surplus
budget, and if it comes out to be negative, it is a revenue deficit budget.
CAPITAL BUDGET
The part of the Budget which deals with the receipts and expenditures of the capital by the
government. This shows the means by which the capital is managed and the areas where
capital is spent.
REVENUE
Every form of money generation in the nature of income, earnings are revenue for a firm or a
government which do not increase financial liabilities of the government i.e., the tax incomes,
non-tax incomes along with foreign grants.
NON-REVENUE
Every form of money generation which is not income or earnings for a firm or a government
(i.e., money raised via borrowings) is considered a non-revenue source if they increase
financial liabilities.
RECEIPTS
Every receiving or accrual of money to a government by revenue and non revenue sources is
a receipt. Their sum is called total receipts. It includes all incomes as well as non-income
accruals of a government.
REVENUE RECEIPTS
Revenue receipts of a government are of two kinds - Tax Revenue Receipts and Non-tax
Revenue Receipts - consisting of the following income receipts in India :
This includes all money earned by the government via the different taxes the government
collects i.e., all direct and indirect tax collections
2. NON-TAX REVENUE RECEIPTS
This includes all money earned by the government from sources other than taxes. In India
they are
1. Profits and dividends which the government gets from its public sector undertakings
(PSU).
2. Interests received by the government out of all loans forwarded by it, be it inside the
country (i.e., internal lending) or outside the country (i.e., external lending). It means
this income might be in both domestic and foreign currencies.
3. Fiscal services also generate incomes for the government i.e., currency printing,
stamp printing , coinage and medals minting etc.,
4. General services also earn money for the government as the power distribution,
irrigation, banking, insurance, community services etc.
5. Fees, Penalties and Fines received by the government.
6. Grants which the governments receives - it is always external in the case of the
central government and internal in the case of state governments.
CAPITAL RECEIPTS
All non -revenue receipts of a government are known as capital receipts. Such receipts are for
investment purposes and supposed to be spent on plan-development by a government. But the
receipts might need their diversion to meet other needs to take care of the rising revenue
expenditure of a government as the case had been with India. The capital receipts in India
include the following capital kind of accruals to the government :
1. Loan Recovery - This is one source of capital receipts. The money the government
had lent out in the past in India and abroad their capital comes back to the government
when the borrowers repay them as capital receipts. The interest which come to the
government on such loans are part of the revenue receipts.
2. Borrowings by the government - This includes all long term loans raised by the
government inside the country ,internal borrowings and outside the country, external
borrowings. Internal borrowings might include the borrowings from the RBI, Indian
banks, financial institutions etc. Similarly external borrowings might include the loans
from the World Bank, the IMF, foreign banks, foreign governments, foreign financial
institutions etc.
3. Other receipts by the Governments - This include many long term capital accruals to
the government through the Provident Fund (PF), Postal Deposits, various small
saving scheme and the government bonds sold to the public (Kisan Vikas Patra, Indira
Vikas Patra, Market stabilisation Bond etc.) Such receipts are nothing but a kind of
loan on which the government needs to pay interests on their maturities. But they play
a role in capital raising process by the government.