Russia becomes WTO 153rd member

On 16 December 2011, Russia cleared the final hurdle to become a WTO member. WTO Ministers adopted Russia’s WTO terms of entry at the 8th Ministerial Conference in Geneva. Russia will have to ratify the deal within the next 220 days and would become a fully-fledged WTO member 30 days after it notifies the ratification to the WTO.

The Russian membership deal was agreed by the Working Party of countries negotiating with the applicant on 10 November 2011, and ended 18 years of negotiation. Russia still has to ratify the agreement and will become a member 30 days after it notifies the WTO. Under the agreement, it should ratify within 220 days (about 22 July 2012).
Ministers welcomed the agreement and the forthcoming membership of the last large economy to remain outside the WTO. Several also paid tribute to Switzerland for broking an important deal between Russia and Georgia during the final stages of the negotiations.

Georgia and Russia have signed an historic trade deal which allows Russia to join the World Trade Organization (WTO). The deal, which follows 18 years of negotiations, was brokered by Switzerland. Georgia has repeatedly blocked Russia's WTO entry since the two countries fought a short war in 2008. The deal hinges on international monitoring of trade along the mutual borders of Abkhazia and South Ossetia. The two provinces have broken away from Georgia and are recognised as independent states by Russia.

Russia has finally joined the World Trade Organization (WTO) at a ceremony in Switzerland on Friday, after 18 years negotiating its membership. The Swiss brokered a deal between Russia and Georgia earlier this year that removed the last obstacle to Russia's accession.
Georgia had tried to block Russia's WTO entry since the two countries fought a short war in 2008. Russia was by far the biggest economy yet to join the global trade body. It is also the last member of the Group of 20 major economies to join, after China gained membership in 2001. "This result of long and complex talks is good both for Russia and for our future partners," President Dmitry Medvedev said in a message to a WTO ministerial meeting in Geneva that formally approved Russia's membership.

The White House said US President Barack Obama called Mr Medvedev to congratulate him on Russia's admission.
The 153-member WTO provides a forum for international trade liberalisation agreements, which it polices - deciding when rules have been breached and when retaliatory trade sanctions can be imposed. The removal of trade barriers is likely to stimulate greater and more diversified trade between Russia and the rest of the world. Some estimates suggest Russian membership will help to boost its economy by tens of billions of dollars each year. Russia is Europe's third largest export market, while Russia's own exports have been dominated by oil and gas.
One reason the agreement was finally reached was because of a change of heart in the Russian leadership, according to Mr Tchakarov. "Since the 2008-09 [global financial] crisis there has been a certain recognition at the very high level in Russia that... Russia will have to open up a little bit to foreign investment, because this is the only way for Russia to become a more competitive economy," he said. Ahead of the signing ceremony, Russian officials were talking up the benefit of the deal, which will still need to be ratified by the Russian parliament in the next six months. "This will create the right conditions for the further improvement of our business climate, for an influx of foreign investment and for boosting Russian exports while also retaining the possibility of giving support to our key branches of domestic economy," said Russian foreign ministry spokesman Alexander Lukashevich. "We are achieving a completely new level of integration into the global economic system."
The deal with Georgia that opened the way for Russia to join hinged on the international monitoring of trade along the mutual borders of Abkhazia and South Ossetia. The two provinces have broken away from Georgia and are recognised as independent states by Russia.
However, the agreement may still face a hurdle in the US, where existing legislation left over from the Cold War era blocks favourable trading relations with Russia. But Mr Tchakarov at Renaissance Capital said he believed Congress would agree to eliminate the laws, as past disputes with Russia over agriculture and intellectual property rights have now been fully resolved.

Russia and WTO timeline

• 1993 : Russia applies to join the General Agreements on Tariffs and Trade (Gatt)
• 1995 : The Gatt is institutionalised as the World Trade Organization (WTO)
• 1998 : Russia suffers a major financial crisis
• 2000 : US President Bill Clinton backs Russia's WTO bid in a speech to the Russian parliament
• Vladimir Putin succeeds Boris Yeltsin as Russian president
• 2001 : China joins the WTO after 16 years of talks
• Russian membership talks intensify
• 2002 : The US and EU recognise Russia as a market economy, removing a major hurdle to WTO membership
• 2004 : EU gives formal backing to Russia's application
• 2006 : US formally backs Russian membership
• Georgia threatens to veto after Russia imposes a trade blockade on it
• 2008 : Brief Russian military invasion of Georgia
• President Putin questions the benefits of joining the WTO
• 2010 : EU reaffirms support for Russian membership
• 2011 : Russia reaches an agreement with Georgia in November, opening the way for its accession in December
• 2011 : Russia reaches an agreement with Georgia in November, opening the way for its accession in December

Eurozone crisis: On the brink of chain reaction

Eurozone refers to the Economic and Monetary Union of member states of the European Union. Members of the Eurozone have adopted the Euro as their common currency and sole lender. The monetary policy of the Eurozone is laid out by the European Central Bank (ECB). Fiscal Policy, however, is the domain of individual member countries. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The roots of the ongoing economic crisis in Europe began in early 2009, as a knock-on effect from the 2008 global financial crisis, which had already claimed Iceland as a victim. Iceland was not an institutional issue for the EU, but in 2009 Eastern members of the EU not using the euro began to have balance-of-payments problems. They suffered effective devaluations of their national currencies and sought help from Brussels to resolve their mounting budget deficits. In response, the EU doubled the funds in an existing facility to address balance-of-payments problems. Among the European countries that are affected mainly by the ongoing Eurozone crisis are Portugal, Ireland, Greece and Spain (PIGS countries). Iceland, the country which experienced the largest crisis in 2008 when its entire international banking system collapsed has emerged less affected this time as the government was unable to bail the banks out. In the EU, especially in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.

The debt crisis affecting Europe has come to a fore. Called the Sovereign debt crisis, the issue started around the beginning of 2009. By 2010 eurozone members Greece, Ireland and Portugal and some other EU countries outside the area were affected. In simplified terms Eurozone countries in question are faced with the risk of running out of money to pay back the loans that they have taken out in past. As a result the countries are being refused loans for the future. The crisis began from Greece, which amassed a huge pile of debt from years of statistical fraud in its public-accounts sector. In lay terms, debt crisis was triggered by over-borrowing. Countries borrowed beyond their means and then struggled to pay off these debts. This led to a dramatic rise in borrowing costs for these countries, worsening the problems further. What started off two years ago in Greece has now spread to Portugal, Ireland, Spain and Italy. Other European countries are also feeling vulnerable. Those lending money to these countries are charging higher interest rates since they are now seen as risky – and hence prone to default. So we have country after another country in eurozone being dubbed as not good risk, and are therefore charged more for loans via bond issues. This is very much the same as someone who has failed to pay back a past mortgage and would be refused, or charged more for a loan by a bank, in the future. European zone countries face a similar dilemma. The Euro as a common currency of countries with disparate political and fiscal policies has meant the crisis has spread across the Eurozone. If each of these countries would have had a separate currency and monetary policy, the crisis would have been localized instead of having spread across the Eurozone. With slowing GDP growth, large welfare budgets and popular opposition to measures towards curbing entitlements, the situation in Europe is extremely difficult. At present, Germany is the only large Eurozone country with a sound economy, and it cannot be expected to bail out all of Eurozone on its own.

On wrong track: When the EuroZone formed in the late 1990’s, Germany and France were the economic powers and every other country was clearly in an economically subservient position. When the poor countries of Europe wanted to build roads, fund schools, and do various other large-scale projects, they funded these activities by issuing debt in the form of government bonds. Countries that are economic powers are able to borrow this money for pretty cheap. However, countries that are not in excellent financial shape have to pay more to finance their debt by offering investors a higher yield. Economically-weak PIGS countries were paying quite a bit to be able to borrow money. By joining the EuroZone, they were magically allowed to borrow money at very close to German bond yields. So the grand idea when the EuroZone started was that these weak countries like Greece would be able to borrow money at cheap rates in order to economically develop their countries in a responsible manner. This would help them close the gap with stronger countries like Germany and France, and then all of Europe would grow more powerful. It is clearly evident now that this grand idea has failed drastically and the whole Eurozone is facing the worst economic crisis of this century. Well, of course Greece, Portugal, Spain, Italy, and Ireland borrowed money. It’s what they did with the money, and how much they borrowed that became a problem. Instead of using the money to develop strong economic infrastructure in their respective countries, they went on reckless spending sprees. These countries have spent so much money and developed such irresponsible fiscal agendas that they are now having trouble paying back all those loans. To make it worse, investors are now demanding more yields in order to hold the debt of these countries.

Euro was introduced in 1999 and the unified interest rates allowed its members to borrow heavily and recklessly. Bonds issued by southern European nations were taken to be as safe as German ones. The money created a huge boom into the real estate in PIGS countries. The US housing bubble busted in 2008 and this affected real estate business all over Europe. The big EU countries and IMF came to rescue but did not able to stop the spread to other EU countries. If Greece were to default on its 370-billion-euro debts then the European banks that lent to Greece at the height of the borrowing binge would certainly be hit especially the French banks. The budgetary deficit of Greece in the eight months to the end of August has widened to 22 per cent to 18.9 billion euros, more than the target of 18.1 billion euros for the period. Greece has pledged to reduce its general government deficit to about 7.5 per cent of gross domestic product this year from 10.5 per cent in 2010.

Sovereign states and large debts: First, investors start worrying that the debt may not be sustainable, concerns rise over the ability of the state to pay back capital and interests by generating budget surpluses in the future (that is, fiscal revenues in excess of expenditures). In this case, investors require higher interest rates to subscribe new public debt as a compensation for the risk of insolvency. This in turn increases the risk of insolvency as it worsens public sector balance sheets. At some point, there may no longer be an interest rate able to compensate investors for the risk of insolvency; then they just stop subscribing the public debt. This is a situation of fiscal crisis and has only two possible outcomes:

• (a) Government default followed by a renegotiation of the debt.
• (b) Monetization of the debt, which is effectively bought by the central bank. This represents an injection of money in the economy and thus generates inflation and exchange-rate depreciation.

Euro depreciating: In the last few days we have witnessed the sudden depreciation of the Euro. A possible answer is that as the financial crisis spreads to other large Eurozone countries, the risk of monetization of the public debt becomes more concrete. Even if Greece has been bailed out by other countries in the Eurozone, this would not be feasible for the much larger public debts of other debt ridden European nations. In the scenario of a widespread crisis, the possibility that the ECB will monetize the debt of weak Eurozone countries exists, and fear of the implied inflation can explain the depreciation of the euro. However, a massive monetization is an unlikely scenario, as it would eventually undermine price stability in the Eurozone and imply a substantial transfer of resources from strong to weak Eurozone countries.

Measures to curb crisis:

• (a) The 27 member states of the European Union have created the EFSF (European Financial Stabilization Mechanism), a legal instrument to preserve financial stability in Europe by providing financial assistance to Eurozone states in difficulty. The facility is jointly and severally guaranteed by the Eurozone countries’ governments.
• (b) The steps taken by ECB to reduce volatility in the financial market and improving liquidity include: (i) it began open market operations buying government and private debt securities. (ii) It announced two 3-months and one 6-month full allotment of Long Term Refinancing Operations (LTRO’s). (iii) It reactivated the dollar swap lines with Federal Reserve support.
• (c) The Euro Plus Pact: The Euro Plus Pact was adopted in March 2011 under which the countries of the EU make concrete commitments to a list of political reforms intended to improve the fiscal strength and competitiveness of each country. The Euro-Plus Pact has four broad strategic goals along with more specific strategies for addressing these goals. The four goals are: (i) Fostering competitiveness. (ii) Fostering employment. (iii) Contributing to the sustainability of public finances. (iv) Reinforcing financial stability.
• (d) Eurozone leaders agreed to extend the maturity of current bailout loans to Greece to 7.5 years, doubling the repayment deadline. They also agreed to lower the interest on their bilateral loans to Greece by 100 bps.
• (e) Euro zone leaders have agreed that the EFSF will be able to buy troubled countries’ bonds on the primary market — that is, when they are auctioned by the sovereign. The purchases will be possible only for countries which have agreed on an emergency aid programme with the euro zone, such as Greece or Ireland. Greece's parliament has passed a law to expand the powers of the European Financial Stability Facility (EFSF), which renders the euro zone's bailout fund more flexible. The EFSF increases the rescue fund's effective lending capacity to 440 billion euros ($603 billion) and allows it to lend euro zone governments money to recapitalise their banks. The fund is also empowered to provide precautionary loans to countries under attack in the markets and to buy sovereign bonds. Further, German Chancellor Angela Merkel has suggested that parts of a planned new 109-billion-euro ($148.6 billion) rescue for the debt-laden country could be reopened, depending on the outcome of the troika's audit.
• (f) Greek Prime Minister George Papandreou's Socialist Pasok party has won the parliamentary backing by 155 to 142 for a property tax to meet deficit-reduction targets required to avoid default. But the implementation of the measures is the biggest challenge for the government as the trade unions and parts of the civil service will protest against this decision. The property levy, to be collected via electricity bills, will provide an annual yield of 1.1 per cent of GDP. It will generate as much as 1.8 billion euros.
  The Government has announced an additional 20 per cent wage cut, on top of 15 per cent for the civil service and 25 per cent in the wider public sector. Pensions are being reduced 4 per cent on average, in addition to previous cuts of 10 per cent. A lowering of the tax-free threshold to 5,000 euros will mean higher taxes for all Greeks.

Possible solutions to the crisis:

• (a) Creation of Common European bond: If a common Euro bond is created it will allow the weaker countries to share Germany’s credit rating and hence they will be able to borrow at lower rates. However, for this, Germany would have to guarantee other countries’ debt which is highly unlikely.
• (b) ECB buys bonds of weak countries: One of the solutions to cope up with the meltdown is that ECB buys bonds of the heavily indebted Eurozone members. The ECB has earlier bought Greek, Irish and Portuguese bonds and is now buying Italian and Spanish bonds. But this is not a bottomless pit and purchases would have to stop at some point.
• (c) IMF should come to rescue Eurozone: International Monetary Fund should organize a global rescue package worth trillions of euros. Europe’s debtor nations could borrow at low rates with long maturities. Once a debt pressure is relieved, Europe could follow more pro-growth economic policies.
• (d) Developed nations can write off the debts: A solution to the ongoing eruozone crisis can be achieved if the developed nations negotiate and write down on their debts or defaults on them. Superficially, this seems a solution. But it would create other problems. Defaults would inflict huge losses on banks, insurance companies and will lead to collapse of many European banks and finally the global economy will fall into Great Recession II.
  Thus we can analyze the fact that there are no easy solutions to the crisis confronting Eurozone. However, the urgency for solid steps to confront the issue is also increasing day by day.

European crisis and the American economy: Both, the USA and the Eurozone are witnessing the economic crisis almost at the same time. The 2008 global financial crisis was triggered due to failure of the American economic system and in 2011 the world is witnessing the failure of European economic policies. The fear about the failed Eurozone economy has raised concerns about rising government deficits and debts across the globe. This has worsened the situation and has created alarms in world financial markets and expectations of recession in developed countries including the United States. Let us analyze briefly the impact of European crisis on American economy:

• (a) Impacts on US Banks: The U.S.’ gross direct exposure to European banks through loans and bonds amounts to $678 billion. This does not include less direct exposure through financial derivatives, loan guarantees and other financial connections such as credit default swaps. While a collapse of a European bank as major as Societe Generale or BNP Paribas will not have much impact on the U.S. economy, a financial contagion in Europe will, however, have a palpable impact on the U.S. and the global financial system through the loss of confidence in banks.
• (b) Euro devaluation: The European sovereign debt crisis will trigger a devaluation of the euro against the U.S. dollar, which would impact U.S. exports. Europe is the largest export market for the United States. Depreciation in the euro will make American exports to Europe more expensive, which would significantly weaken the only remaining engine of growth for U.S. economic recovery after the U.S. government ended its stimulus package.
• (c) Threat to Euro viability: The weakening of the euro versus other global currencies and spread of contagion from small European countries, such as Greece and Portugal, to the larger countries, such as Germany and France, may threaten the viability of the euro, potentially paralyzing global credit markets in a way similar to what happened after the collapse of Lehman Brothers in the United States.
• (d) Loss of wealth: The European crisis has affected U.S. capital markets other than the banking sector. It has unraveled stocks and increased fears of a new crash in the stock market. The crisis has also jolted hopes of a strong recovery in the United States. There could be a global loss of wealth, one way or the other, and the loss could be huge. Thus we can say that if the US economy is again hit by recession, this time it will definitely come from Europe and whenever it happens it may be called Great Recession II.

Implications of Eurozone crisis for Indian Economy: Any deceleration in software exports due to the Euro zone debt crisis and the poor economic conditions in the US will affect India's GDP growth. In 2009-10, the US alone accounted for 61 per cent of India's total software exports. European countries (including the UK) followed with as much as 26.5 per cent. If these two regions are the first to be hit by the recession, it is unlikely that software export revenue would remain unscathed. Moreover, over the period 2004-05 to 2009-10, services accounted for 66 per cent of the increment in India's GDP. Revenues from software services amounted to 9.4 per cent of this (excluding public administration and defence). According to balance of payment data, gross revenue from exports of software services amounted to as much as 24 per cent of the gross revenue from merchandise exports. But by and large, India is not going to be affected directly due to PIGS crisis as in 2010, Portugal and Greece had a share of about 1.3 per cent each in India's exports to the EU and Ireland had about 0.7 per cent. Italy and Spain had 11.5 per cent and 6.8 per cent respectively.

Let us now examine some potential scenarios:(a) Impact on foreign trade: First of all, the EU (excluding UK) accounts for roughly 30 per cent of the country’s merchandise foreign trade (export and import). A slowdown in Europe would naturally have a negative impact on our foreign trade and lead to loss of revenue as well as jobs in export-oriented industries. The impact of a slowdown would be much more severe in the service sector (particularly BPO and software) where trade is in India’s favour.(b) Impact on domestic economy: If the European meltdown spreads and leads to a global slowdown, this will definitely worsen India’s trade with other countries and thus hit our domestic economy directly as well as indirectly. The income of exporters will reduce drastically, unemployment will rise, etc. thus our domestic demands will fall drastically and our growth rate will have to comprise. (c) Bearish stock market: More importantly the impact of the crisis would be felt in the financial market. The first signs of this may already be visible, with the Indian markets declining by nearly 4 per cent in last week September, 2011. (d) Fall in commodity prices: In addition to decline in security markets, one can expect to see a rise in gold prices and fall in commodity prices (due to lower demand), and depreciation in currency (due to flight of capital). (e) Currency depreciation: If the Eurozone crisis hangs on for a longer time it will result in deprecation of Indian Rupees due to fligh to capital from the market. (f) Foreign remittances will suffer: Slowdown could impact the flow of remittances and NRI deposits in India. In the wake of a crisis, remittances from abroad could slow down and a significant number of expatriates might even lose jobs and move back to India, thus straining the local economy.

The impact of Eurozone meltdown will be felt seriously by emerging economies like India. In addition to the possibilities outlined above, the Indian economy could be affected in numerous other ways, as it is practically impossible to identify all the interlink-ages between India and the global economy in this day and age of increasing integration. But there is another side of the story which can also become possible. The slowdown in Europe and the USA could benefit the emerging economies due to fall in commodity prices and flow of capital from those countries to countries such as India. In order to reap fruits from the crisis the developing nations need to fasten their economic growth and change the overall climate of crisis of governance.

DTAAs : to curb black money

Basically DTAAs are those pacts that seek to eliminate double taxation of income or gains arising in one country and paid to residents or companies of another. In other words, the treaty is devised to ensure that the same income is not taxed twice. In a bid to curb the growing menace of black money, the Government of India has written, under revised tax treaties, some countries to freeze the assets of Indians that have not been declared in India and repatriate the money. It is important to note that India has renegotiated Double Taxation Avoidance Agreements (DTAAs) with 29 out of the 79 countries with which it has such agreements, including the US, Mozambique, Tanzania, Ethiopia, Colombia and Norway. Further, India has also involved into the process of revising DTAAs with Switzerland and Mauritius as well.

The government was amending DTAAs by inserting a clause on information regarding banking sector and also entering into tax information exchange agreements (TIEAs) with several countries, including tax havens. DTAAs have been amended (clause on banking sector has been inserted) with 40 nations and TIEA has been sealed with tax havens like Isle of Man, Bermuda and Bahamas. In absence of a clause on banking sector in DTAAs, the contracting countries were not sharing information in this regard.

The revised pacts include an article on 'Assistance in Collection of Taxes' which allows the two sides to help each other collect taxes due under their respective domestic laws. In some DTAAs, India is including "conservancy" measures, too. The measures include seizure or freezing of assets before the final judgment to ensure they are available whenever the dues are to be collected.

Abuse of DTAAs and round-tripping:

1. DTAAs are misused when many of the countries with whom we have avoidance agreements do not tax their residents in the manner we do. For example, Mauritius has exempted taxation on capital gains but India imposes. It is important to note that through Mauritius 41.9 per cent of all FDI since 1991 and bulk of the FIIs flows into India. India loses more than $600 million every year in revenues on account of the DTAA with Mauritius, as per some available estimates. India and Mauritius entered into the DTAA way back in 1982 as part of a strategic relationship in response to the US setting up military base in Diego Garcia in the Indian Ocean.
2. The money going out of India, however, is coming back to India for investments, in what is known as "round-tripping". It has been suspected that round-tripping or routing of Indians' illicit money back into the country through the Mauritius route. But in India still we don't have sound estimates regarding round-tripping exist and for this the network of DTAAs and TIEAs to be strengthened to check such practices. And in this regard, the Government has concluded discussions for 11 TIEAs and 13 new DTAAs along with revision of provisions of 10 existing DTAAs during 2010-11. He said foreign tax division of CBDT had been strengthened and a dedicated cell for exchange of information was being set up to work on this agenda.
3. It has been suspected that a significant surge in venture capital funds coming from Mauritius in sectors like telecom and real estate, which have been subject matter of close scrutiny for money laundering cases. A total of 154 foreign venture capital investors are registered with SEBI and are permitted to invest in Indian companies and as many as 149 of these entities are based out of Mauritius, three from Singapore and two in Cyprus.
4. It has been believed that due to growing popular demand to make public of those having money in bank accounts in locations like Switzerland has also led to a large number of entities shifting their illicit wealth to Mauritius with an aim to ultimately route the funds to India.

Proposed measures:

1. The Direct Taxes Code (DTC) Bill introduced in Parliament and likely to be implemented from April 1, 2012, has proposed to override provisions of DTAAs with regard to certain overseas transactions. Basically, DTC has overriding powers in three areas: General anti-avoidance rules (GAAR), controlled financial operations and branch profit tax. At present, there is no provision in the Income-Tax Act to tax overseas or cross border transactions.
2. The newly-approved Directorate of Criminal Investigation (DCI) would collect information about persons and transactions connected with criminal activities and initiate prosecution proceedings against them. The DCI will perform functions in respect to criminal matters having any financial implication punishable as an offense under any direct tax law.
3. India has also entered into information exchange agreement with countries such as Switzerland and tax havens such as Bahamas and British Virgin Islands to allow it to receive relevant data on tax evasion in specific cases and to enable the agencies to take the required action.

DTAA
India signed with Tanzania and Ethiopia

With the intention of making a further leap in its relations with Africa, India recently signed double taxation avoidance agreement with Tanzania and Ethiopia. Double tax avoidance agreement is the deal between two countries by which the tax payer need to pay income tax to one country of which it dues, and by showing the certificates of income tax paid, the second country cannot ask to repay the income tax. Some transactions are like this in which one works part time to different country or work in home country to the foreign country. In such cases the Double taxation avoidance agreement works. Major terms of reference of both the Agreements: The agreement for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income, signed by India with two of Africa’s major economies consists of following major references. The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in the source state. Profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 270 days (183 days with Ethiopia). Profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed a two-tier 5% or 10% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the scale of shares will be taxable in the country of source. The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries. The Agreement will provide tax stability to the residents of all the nations and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and its African partners. With the latest agreement with Ethiopia and Tanzania, India has now formed DTAAs with 43 countries.

India and Singapore
Signed protocol to amend DTAA
Indian Government has signed a protocol, amending Double Taxation Avoidance Agreement (DTAA) with the Government of Singapore for effective exchange of information in tax matters. It has to be mentioned that both India and Singapore have adopted internationally agreed standard for exchange of information in tax matters and it is likely to ensure greater transparency and governance. The agreed standard for exchange of information in tax matters includes the principles incorporated in the new paragraphs 4 and 5 of OECD Model Article on 'Exchange of Information' and requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.

European crisis more dangerous than 2008 financial crisis: George Soros

Europe's debt crisis is more dangerous than the 2008 global financial crisis, billionaire investor George Soros said.

"We now have a crisis, which in my opinion is even more serious than the crash of 2008," Soros said on Monday at a business event in the southern Indian city of Bangalore .

"You had the institutions that were necessary to control the situation (in 2008), a functioning central bank, the Federal Reserve system, and a functioning

T reasury," he said. "In the case of the e uro, you have a European Central Bank but you don't have an European treasury. That institution is missing , " he said.

Soros, who made investment history by earning $1 billion with a bet against the British pound two decades ago, said last week that a collapse of the euro and break-up of the European Union would have catastrophic consequences for the global financial system.

He was speaking as French President Nicolas Sarkozy and German Chancellor Angela Merkel prepared to meet to discuss ways to boost growth and improve fiscal coordination in the euro zone.

India elected to serve on UN ECOSOC

India is among 21 countries which were October 25 elected to serve on the Economic and Social Council (ECOSOC), one of the six principal organs of the UN and the main body tasked with furthering economic and social cooperation and development worldwide.

UN member states elected 18 countries to serve three-year terms starting next year and three other nations through by-elections held as some countries were stepping down from the 54-member Council before the formal end of their terms.

Burkina Faso, Ethiopia, Lesotho, Nigeria and Libya were elected to the five African vacancies, while Indonesia, India and Japan won the three seats allotted to Asia-Pacific States. Belarus claimed the only Eastern European vacancy.

In Latin America and the Caribbean, the Dominican Republic, El Salvador, Brazil and Cuba were victorious, while Spain, France, Germany, Ireland and Turkey were successful in the Western European and other States category.

In the three by-elections, Switzerland replaced the outgoing Norway, the Netherlands succeeded Belgium, and Bulgaria took over from Hungary.

International Bank for Reconstruction and Development (IBRD)

 

 

IBRD and its associate institutions a group are known as the World Bank. The Second World War damaged economies of the most of the countries particularly of those who were directly involved in the war. The global war had completely dislocated the multilateral trade and dislocated multilateral trade and had caused massive destruction of life and property. In 1945, it was realised to concentrate on reconstructing these war affected economies in a planned way. IBRD was established in December 1945 with the IMF on the basis of recommendation of Bretton Wood Conference. This is the reason why IMF and IBRD are called 'Bretton Wood Twins'. IBRD started functioning in June 1946. World Bank and IMF are complementary institutions.

India is a member of four constituents of the World Bank Group i.e. IBRD, IDA, IFC, and MIGA (Multilateral Investment Guarantee Agency) but not of its fifth institute ICSID (International Centre for the Settlement of Investment Disputes).

Objective of World Bank

According to the Clause I of the agreement made at he time of establishment of World Bank, it was assigned the following objectives:

1. To Provide long-run capital to member countries for economic reconstruction and development. World Bank provides capital mainly for following purposes -
   (i) To rehabilitate war ruined economies (this objective is fully achieved)
   (ii) To finance productive efforts according to peace time requirement.
   (iii) To develop resources and production facilities in underdeveloped countries.
2. To induce long-run capital investment for assuring BOP equilibrium and balanced development of international trade. (This objective was adopted to increase increase the productivity of member countries and to improve economic condition and standard of living among them).
3. To promote capital investment in member countries in following ways:
   (i) To provide guarantee on private loans and capital investment.
   (ii) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities in considered conditions.
4. To provide guarantee for loans granted to small and large units and other projects of member countries.
5. To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace economy.

IMF Vs. World Bank

IMF and World Bank are Bretton Wood Twins. Both the institutions were established to promote international economic cooperation but a basic difference is found in the nature of economic assistance given by these two institutions. World Bank provides long term loans for balanced economic development, while IMF provides short-term loans to member countries for eliminating BOP disequilibrium. Both these institutions are complementary to each other. The eminent world economist George Schultz had suggested in American Economic Association Conference in January 1995, for the merger of IMF and World Bank.

Membership of the World Bank and Voting Right

Generally every member country of the IMF automatically becomes member of World Bank. Similarly, any country which quit IMF automatically expelled from the World Bank's membership. But under a certain provision a country leaving the membership of IMF can continue its membership with World Bank. If 75% member of the bank gives their vote in its favour.

Any member country can be debarred from the membership of World Bank on following grounds:

1. Any member country can quit the bank simply by written notice to bank, but such country has to repay the granted loans on terms and conditions decided at the time of sanctioning the loan.
2. Any country working against the guidelines of bank can be debarred from membership by the board of governors.

Like IMF, World Bank has also two types of members: 'founder members' and 'general members' the world bank has 30 founder members who attained membership by December 31, 1945. India is also among these founder members. The countries joining the World Bank after December 13, 1945 come under the category of general members. At present total membership of the World Bank is 182. The voting right of member country is determined on the basis of member country's share in the total capital of the bank. Each member has 240 votes plus one additional vote for each 1,00,000 shares of the capital stock held.

Capital Resources of World Bank

The initial authorized capital of World Bank was $ 10,000 million, which was divided in 1 lakh share of $ 1 lakh each. The authorized capital of the bank has been increased from time to time with the approval of member countries. On June 30, 1996 the authorized capital of the bank was $ 188 billion out of which $ 180.6  billion (96% of total authorized capital) was issued to member country in the form of shares. Member countries repay the share amount to the world bank in following ways:

1. Two percent of allotted shares are repaid in Gold, USD or SDR. 
2. Every member country is free to repay 18% of its capital share in its own currency.
3. The remaining 80% share is deposited by member country only on demand by the World Bank.

Bank is managed by an elected President. On July 1, 2007, Robert B. Zoellick became the 11th President of the World Bank. The headquarter of World Bank is at Washington DC.

IDA (established on Spetemeber 24, 1960) and IFC (established in July, 1956) are the tow main associate institutions of IBRD. These institutions work under the supervision of World Bank. MIGA is also an associate institution in the World Bank group.

Banks Lending Operations

IBRD gives loan to members in anyone or more of the following ways:

1. By granting or participating in direct loans but its own funds.
2. By granting loans out of the fund raised in the market of a member or otherwise borrowed by the bans and 
3. By guaranteeing the whole or part loans made by private investors through the investment channels.

Before a lone is made or guaranteed the bank ensure that the -

1. Project fro which the loan is asked has been carefully examined by the competenet committee as regards the merits of the proposal.
2. Borrower has reasonable prospect for the repayment of loans.
3. The loan is meant for productive purposes and 
4. Tthe loan is meant for reconstruction and development.

Functions of the World Bank

Presently, The World Bank is playing the main role of providing loans for development works to member countries, specially to under-developed countries. The World Bank provides long-term loans for various development projects of 5 to 20 years duration. The loaning system of the bank can be explained with the help of following points:

1. Bank can grant loans to a member country upto 20% of its share in paid up capital.
2. Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors have to seek prior permission from those countries where the amount will be collected. For such loans the consent of that country is also required whose currency is given in loans. For granting such guarantee, the Bank charges 1% to 2% as service charge.
3. The quantum of loans, interest rate and term and conditions are determined by the Bank itself.
4. Generally, Bank grants loan for a particular project duly submitted by the member country.
5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.

Besides, granting loans for reconstruction and development, World Bank also provides various technical services to the member countries. For this purpose, the Bank has established 'The Economic Development Institute' and a Staff College in Washington.

Appraisal of the World Bank Activities

Bank has sanctioned 75% of its total loans to developing countries of Africa, Asia and Latin America while only 25% was given to developed nations of Europe. IFC, IDA and MIGA were established as the associate institutions of the World Bank in extending financial assistance to member countries. Besides, the Bank also tried its best to coordinate the functioning of nations granting loans to underdeveloped countries. In 1958, the Bank played an important role in establishing 'India Aid Club' for providing specific economic assistance to India. It has now been renamed as 'India Development Forum'. Such types of clubs and forums has also been established for other developing countries. The Bank has also established its mission in various developing countries for providing technical assistance for development project in these countries. The Bank also takes the guidance of experts of various international institutions like FAO, WHO, UNIDO, UNESCO for providing assistance for various projects related to agriculture, education and water supply.

India Canada agree on FIPA and SSA

Anand Sharma, the Union Minister for Commerce, Industry and Textiles, and Mr. Edward Fast, Minister of International Trade and Minister for the Asia Pacific Gateway of Government agreed that residual issues with regard to Foreign Investment Protection Agreement (FIPA) and Bilateral Social Security Agreement (SSA) between the two countries have been resolved and both agreements could now be signed at an opportune time. Minister Fast also confirmed that the Canadian side has delinked the SSA from FIPA. The Canadian Minister flew down to New York to meet with, on 23 September.

Minister Sharma raised the issue of constrained supply of Potash from Canada to the Indian buyers. He said that the Government of Canada should view this matter from a strategic perspective and urge the Canadian businesses to enter into long term agreements with the Indian buyers on commercial terms.

The two Ministers took stock of the current status of trade and commercial linkages between India and Canada. They also discussed steps to be taken by both sides to intensify the interaction between the government and the private sector stakeholder on both sides.

Minister Sharma underscored the need to convene the meeting of the India-Canada CEO Forum at an early date so that the agenda for positive engagement between the businesses of the two countries could be furthered.

Minister Sharma strongly raised the problems being faced by professionals of the Indian IT industry in obtaining appropriate visas for Canada. He said that this was limiting services trade between the two countries. In this regard, he asked Minister Fast to sensitize the relevant Canadian authorities to remove impediments to the movement of IT professionals from India to Canada. Minister Fast said that the Canadian government had recently changed its policy and under the revised guidelines Canada was giving appropriate multiple entry visas if the passports were of 10 year validity.

GDP growth taking a hit if Euro zone

An internal government assessment is worried that any deceleration in software exports due to the Euro zone debt crisis and the poor economic conditions in the US will affect GDP growth. The economy growth is estimated to grow at 8-8.5 per cent during current financial year.

 “In 2009-10, the US alone accounted for 61 per cent of India's total software exports. European countries (including the UK) followed with as much as 26.5 per cent. If these two regions are the first to be hit by the recession, it is unlikely that software export revenue would remain unscathed.”

Over the period 2004-05 to 2009-10, services accounted for 66 per cent of the increment in India's GDP. Revenues from software services amounted to 9.4 per cent of this (excluding public administration and defence), the assessment adds.

According to balance of payment data, gross revenue from exports of software services amounted to as much as 24 per cent of the gross revenue from merchandise exports.

Talking about the merchandise exports, the note says that markets accounting for about a third  of India's export are already stagnating or in recession. Only two regions counter this trend: Parts of Asia (excluding China) and the OPEC countries.

Although worst affected EU economies such as Portugal, Greece and Ireland have very little impact on Indian exports, the problem will be more significant if the crisis spreads to Italy and Spain, the assessment notes.

In 2010, Portugal and Greece had a share of about 1.3 per cent each in India's exports to the EU and Ireland had about 0.7 per cent. Italy and Spain had 11.5 per cent and 6.8 per cent respectively.

Further downgrades may lie ahead

A day after Standard & Poor's took the unprecedented step of downgrading the creditworthiness of the U.S. government to AA(PLUS) from AAA, the ratings agency offered a full-throated defence of its decision, calling the bitter standoff between President Barack Obama and Congress over raising the debt ceiling a “debacle” and warning that further downgrades may lie ahead.

In an unusual August 06 conference call with reporters, senior S&P officials insisted the ratings firm hadn't overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating.

“The debacle over the debt ceiling continued until almost the midnight hour,” said John B. Chambers, chairman of S&P's sovereign ratings committee. Another S&P official, David Beers, added that “fiscal policy, like other government policy, is fundamentally a political process.”

Administration officials at the White House and Treasury angrily criticised S&P's action as based on faulty budget accounting that discounted the just-enacted deal for increasing the debt limit.

The agreement set spending caps in the fiscal year that begins October 1 and calls for a bipartisan congressional “super committee” to propose more deficit reduction for up to $2.5 trillion in combined savings over a decade.

“The bipartisan compromise on deficit reduction was an important step in the right direction,” said White House press secretary Jay Carney in a statement on Saturday. “Yet, the path to getting there took too long and was at times too divisive. We must do better to make clear our nation's will, capacity and commitment to work together to tackle our major fiscal and economic challenges.”

In August 06 conference call, Mr. Chambers said the $2 trillion difference, in one scenario for 2021, equals only about 2 per cent of gross domestic product and doesn't alter the fundamental reality that the debt burden would continue to rise.

Speculative

Randy Neugebauer, Republican, who heads the House Financial Services' subcommittee on oversight and investigations, said while it was appropriate for S&P to consider the political situation in its analysis, it was speculative of it to use predictions of what Congress will likely do in the future as a rationale for a downgrade.