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.

Jayalalithaa launches Rs 750-cr health insurance scheme

A new health insurance scheme for providing free medical and surgical treatment to 1.34 crore families in Tamil Nadu was January 11 launched by the Chief Minister, Ms J. Jayalalithaa, at an annual outlay of Rs 750 crore.

Under the “Chief Minister's Comprehensive Health Insurance Scheme”, replacing the previous DMK regime's insurance cover, a family would get a health insurance cover up to Rs 1 lakh a year for four years, an official release said.

In the case of certain diseases, the insurance cover could go up to Rs 1.50 lakh. The scheme, to be implemented by public sector United India Insurance Company, would be applicable to every member of a family whose annual family income is less than Rs 72,000.

Ms Jayalalithaa handed over ID cards for the scheme to seven beneficiaries and approval letters for treatment to seven others on the occasion.

After coming to power in May, Ms Jayalalithaa had scrapped the “Chief Minister Kalaingar's Insurance Scheme” named after the DMK President, Mr M. Karunanidhi, as part of reversing DMK regime's pet projects.

Observing that the DMK Government's scheme did not benefit everyone, the release said under the earlier initiative a family was given only Rs 1 lakh total cover for a block of four years.

Furthermore, the insurance amount of Rs 1 lakh in the earlier scheme was not sufficient for treatment of life-saving and major surgeries and no provision was made for post-operative treatment, forcing the poor to borrow money for their medical treatment, the release said.

India’s forest cover falling: Study

India's forest cover has declined by 367 sq km between 2007 and 2009. While the figure may not seem alarming, it runs counter to the impression that afforestation and conservation programmes are yielding results.

The largest dip in forest cover was in the northeast which lost 550 sq km. This loss was very partially made up elsewhere, even as there was an overall negative growth in green cover. There was better news from states like Punjab, Jharkhand, Tamil Nadu and Rajasthan where social forestry projects seem to have worked to some extent.

The 2011 report of the Dehradun-based Forest Survey of India accessed by TOI has been submitted to the ministry of environment and forests (MoEF) and is to be released soon.

The news for Delhiites is not encouraging. There has been no change in the forest cover although Delhi government has been repeatedly claiming that forest areas are increasing. With civic agencies pointing to unchecked encroachments in the Ridge, the FSI report is not a surprise.

Maximum reduction in forest cover has been reported from insurgency-hit Manipur, totaling 190 sq km. Nagaland comes next with at least 146 sq km forest being lost between 2006 and 2008. The trend is equally worrying in Mizoram, Arunachal Pradesh and Meghalaya.

The last FSI report in 2009 showed forest cover in the northeast had increased from 1,69,825 sq km in 2005 to 1,70,423 sq km in 2007 -- an annual increase of 299 sq km over two years.

Citing reasons behind the sharp fall in forest cover, a retired conservator of forests said some forest areas in the region were inhabited by tribals and locals practised Jhum cultivation by clearing out huge swathes of forest areas. There was also the threat of organized wood smugglers and mafia.

But there have been some positive indicators elsewhere. Forest cover has increased by 100 sq km during these two years in Punjab, sources in the FSI said. "This is primarily because the government is pushing agro forestry activities. If satellite imagery establishes at least 10% area in an hectare is under forest, we designate it as forest cover," said an official associated with preparation of FSI reports.

Sources said that while Haryana and Himachal Pradesh reported slight increase in forest cover - 14 and 11 sq km respectively. "We expect the forest cover will be more in Haryana in the next report which will be out in 2013 considering the positive impact of Supreme Court ban on mining in Aravallis," said an official posted at FSI.

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.

Indian Economy - Socio-economic Planning

(Planned economy is one in which the state owns (partly or wholly) and directs the economy. )While such a role is assumed by the State in almost every economy, in planned economies, it is pronounced: (for example in communist and socialist countries- former USSR and China till the 1970's.) In such a case a planned economy is referred to as command economy or centrally planned economy or command and control economy. (In command economies, state does the following

• Control all major sectors of the economy
• Legislate on their use and about the distribution of income
• State decides on what should be produced and how much; sold at what price
• Private property is not allowed)

(In a market economy, it is the opposite- state has a minimal role in the management of the economy- production, consumption and distribution decisions are predominantly left to the market.) State plays certain role in redistribution. State is called the laissez faire state here. (It is a French phrase literally meaning "Let do.")
(Indicative plan (see ahead) is one where there is a mixed economy with State and market playing significant roles to achieve targets for growth that they together set.) (It is operated under a planned economy but not command economy.)
The difference between planned economy and (command economy is that in the former there may be mixed economy and while in the latter Government owns and regulates economy to near monopolistic limit.)
(Command economies) were set up in China and USSR, mainly for rapid economic growth and social and economic justice but have been dismantled in the last two decades as (they do not create wealth sustainably and are not conducive for innovation and efficiency.) (Cuba and North Korea are still command economies.)

History of Economic Planning in India: The beginnings

India being devastated economically after more than 2 centuries of colonial exploitation resulting in chronic poverty, eradication of poverty was the driving force for the formulation of various models of growth before Independence.

(In 1944 leading businessmen and industrialists (including Sir Purshotamdas Thakurdas, JRD Tata, GD Birla and others) put forward "A Plan of Economic Development for India" -popularly known as the 'Bombay Plan".) It sawIndia's future progress based on further expansion of the textile and consumer industries already flourishing in cities like Bombay and Ahmedabad. It saw an important role the State in post-Independent India: to provide infrastructure, invest in basic industries like steel, and protect Indian industry from foreign competition.

(Visionary engineer Sir Mokshagundam Visvesvarayya. pointed to the success of Japan and insisted that 'industries and trade do not grow of themselves, but have to be willed, planned and systematically developed') - (in his book titled "Planned Economy for India"(1934)) Expert economists and businessmen were to do the planning. The goalwas poverty eradication through growth.

(The Indian National Congress established a National Planning Committee under the chairmanship of Jawaharlal Nehru.) It (1938) stated the objective of planning for development ("was to ensure an adequate standard of living for the masses, in other words, to get rid of the appalling poverty of the people"). It advocated heavy industries that were essential both to build other industries, and for Indian self- efence; heavy industries had to be in public ownership, for both redistributive and security purposes; redistribution of land away fromthe big landlords would eliminate rural poverty.

(During the 1940's, the Indian Federation of Labour published its People's Plan by MN Roy) that stressed  on employment and wage goods). (S.N. Agarwala, follower of Mahatma Gandhi published Gandhian Plan that emphasized on decentralization; agricultural development; employment; cottage industries etc.)

Planning Goals

After Independence in 1947, India launched the year plan for rapid growth. (Planning has the following long term goals).

• Growth
• Modernization
• Self-reliance and
• Social justice

(Economic growth) is the value of the goods and services produced by urban economy. It (is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP- real means adjusted to inflation.) (Growth measures quantitative increase in goods and services.)
Economic development refers to growth that includes redistributive aspects and social justice. GDP shows growth and welfare and human development aspects like education, access to basic amenities, environmental quality, freedom, or social justice. (Economic growth is necessary for development but not sufficient).
Growth is expected to [spread to all sections and regions; raise resources for the Government to spend on socio-economic priorities etc. (It takes a long time for growth to trickle down to all people and regions. Therefore, State plans for an expeditious process of inclusive growth.)
(Modernization is improvement in technology. It is driven by innovation and investment in R and D.) Education is the foundation of modernization. (The more modernized the economy, the greater the value created by it).
(Self-reliance means relying on the resources of the country and not depending on other countries and the MNCs for investment and growth.) India embarked on the goal partly due to the colonial experience and partly due to the goal of orienting growth to development and poverty eradication. (Nehru-Mahalanobis model of growth that closed Indian economy and relied on basic industries is the main plank for self-reliance.)
The term (self-reliance)  should not be confused with self-sufficiency - the former means depending on resources of the country) and avoid dependence on external flows); the latter means that the country has all the resources it needs. No country can be self-sufficient. Social justice means inclusive and equitable growth where inequalities are not steep and benefits of growth reach allrural- urban ,man-woman; caste divide and interregional divides are reduced.
While the above four are the long term goals of the planning process, each five year plan has specific objectives and priorities.

History of Planning

First Plan (1951-56)
The First Plan stressed more on agriculture, in view of large scale import of foodgrains and inflationary pressures on the economy. Other areas of emphasis were power and transport. The annual average growth rate during the First Plan was estimated as 3.61% as against a target of 2.1%. Renowned economist KN Raj, who died in 2010was one of the main architects of India's first five-year plan.
Second Plan (1956-61)
With agricultural targets of previous plan achieved, major stress was on the establishment of heavy industries. Rate of investment was targeted to increase from 7% to 11%. The Plan achieved amore than targeted growth rate of 4.32%. This Plan envisaged to give a big push to the economy so that it enters the take off stage. It was based on Nehru-Mahalanobismodel- self-reliance and basicindustry driven growth.
Third Plan (1961-66)
It tried to balance industry and agriculture. The aimof Third Plan was to establish a self sustaining economy. For the first time, India resorted to borrowing from IMF. Rupee was also devalued for the first time in 1996. India's conflict with Pakistan and repeated droughts also contributed in the failure of this Plan.
Annual Plan
As the Third Plan difficulties on the external front (war with China in 1962 and Pakistan in 1965); and the economic troubles mounted on the domestic front- inflation, floods, forex crisis- the Fourth Plan could not be started from 1966. There were three annual plans till 1969. This period is called plan holiday- that is when five year plans are not implemented. The Annual Plans were: 1966-67, 1967-68 and 1968-69.
Forth Plan (1969-74)
The main objective of this Plan was growth with stability. The Plan laid special emphasis on improving the condition of the under-privileged and weaker sections through provision of education and employment. Reducing the fluctuations in agricultural production was also a point of emphasis of this Plan. The Plan aimed at a target growth of 5.7% and the achievement against this was 3.21 %.
Fifth Plan (1974-79)
The main objective of the Plan was Growth for Social Justice. The targeted growth rate was 4.4% and we achieved 4.8%. It was cut short by the Janata Party that came to power in 1977.
Sixth Plan (1980-1985)
Removal of poverty was the foremost objective of Sixth Plan. Another area of emphasis was infrastructure, which was to be strengthened for development of both industry and agriculture. The achieved growth rate of 5.7% was more than the targeted one. Direct attack on poverty was the main stress of the Plan.
Seventh Plan (1985-90)
This Plan stressed on rapid growth in food-grains production and increase in employment opportunities. The growth rate of 5.81% achieved in this Plan was more than targeted one. The plan was more than the targeted. The plan saw the beginnings of liberalization of Indian economy. The 8th Plan could not start in 1990 due to economic crisis and political instability. There were two annual plans- plan holiday.
Eighth Plan (1992-1997)
This Plan was formulated keeping in view the process of economic reforms and restructuring of the economy. The main emphasis of this Plan were

• to stabilize the adverse balance of payment scenario sustainably.
• improvement in trade and current account deficit.
• human development asmain focus of planning.

It was indicative plan for the first time. The Plan was formulated in a way so as to manage the transition from a centrally planned economy to market led economy. The targeted annual average rate of growth of the economy during Eighth Plan was 5.6%. Against this, we achieved an average annual growth of 6.5%.
The Plan was based on Rao-Manmohan Singh model of liberalization.
Ninth Five Year Plan (1997-2002)
The salient features of the Ninth Five Year Plan are a target annual average growth rate of 6.5 per cent for the economy as a whole, and a growth rate of 3.9 per cent for agriculture sector, among others. The key strategies envisaged to realise this target rest on attaining a high investment rate of 28.2 per cent of GDP at market prices. The domestic saving rate, which determines the sustainable level of investment, is targeted at 26.1 per cent of the GDP. Care has been taken to ensure achievement of a sustainable growth path in terms of external indebtedness as well as fiscal stability, Rate of growth achieved was 5.4%
Tenth Plan (See ahead)
Growth Performance in the Five Year Plans (per cent per annum)

	Target	Actual
1. First Plan (1951-56)	2.1	3.61
2. Second Plan (1956-61)	4.5	4.32
3. Third Plan (1961-66)	5.6	3.21
4. Fourth Plan (1969-74)	5.7	4.80
5. Fifth Plan (1974-79)	4.4	5.69
6. Sixth Plan (1980-85)	5.2	5.81
7. Seventh Plan (1985-90)	5.0	6.7
8. Eighth Plan (1992-97)	5.6	5.35
9. Ninth Plan (1997-2002)	6.5	7.8%
10. Tenth Plan(2002-2007)	8%
11. Eleventh Plan( 2007-12)	8.1 (revised 2010)

The economy is expected to expand by 9% per cent in 2010-11- having achieved 8.9% real growth in the first half of 2010-2011. It may rise to 10 per cent in the terminal year of the 11th Plan. Government set an average annual growth target of 9 per cent for the 11th Plan - beginning with 8.5 per cent in the first year and closing with 10 per cent In 2011-12. The MTA document said the economy exceeded expectations in 2007-08, with a growth rate of 9 per cent, but the momentum was interrupted in 2008-09 because of the global financial crisis. Following the globalmeltdown, the growth rate slipped to 6.7 per cent in 2008-09 from over 9 per cent in the preceding three years. In the year 2009-10. the growth rate was 7.6%.

Planning Commission

(The Planning Commission was constituted in March, 1950 by a Resolution of the Government of India, and works under the overall guidance of the National Development Council). (The Planning Commission consults the Central Ministries and the State Governments while formulating Five Year Plans and Annual Plans and also oversees their implementation). (The Commission also functions as an advisory body at the apex level).
The 1950 resolution setting up the Planning Commission outlined its functions as to:

• Make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation's requirement;
• Formulate a Plan for the most effective and balanced utilisation of country's resources;
• On a determination of priorities, define the stages in which the Plan should be carried out and propose the allocation of resources for the due completion of each stage;
• Indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan;
• Determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of the Plan in all its aspects;
• Appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisal may show to be necessary; and
• Make such interim or ancillary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it, or on a consideration of prevailing economic conditions, current policies, measures and development programmes or on an examination of such specific problems as may be referred to it for advice by Central or State Governments.

(The Prime Minister is the ex officio Chairman of the Planning Commission). (Deputy Chairperson enjoys the rank of a cabinet minister). (A member of the Planning Commission enjoys the rank of a Minister of State in the Union Government). Cabinet Ministers with certain important portfolios act as part-time members.
(The Deputy Chairman and the full time Members of the Planning Commission function as a composite body in the matter of detailed plan formulation. (They provide advice and guidance to the subject Divisions of the Commission in the various exercises undertaken for the formulation of Approach to the Five Year Plans, and Annual Plans). Their expert guidance is also available to the subject Divisions formonitoring and evaluating the Plan programmes, projects and schemes.
The Planning Commission functions through several technical/subject Divisions. Each Division is headed by a Senior Officer designated as Pr. Adviser/Adviser/Addl. Adviser/Jt. Secretary/Jt. Adviser.
The various Divisions in the Commission fall under two broad categories:

• General Divisions which are concerned with aspects of the entire economy; and
• Subject Divisions which are concerned with specified fields of development.

The General Divisions functioning in the Planning Commission are:

• Development Policy Division,
• Financial Resources Division, .
• International Economics Division,
• Labour, Employment andManpower Division;
• Perspective Planning Division,
• Plan Coordination Division,
• Project Appraisal and Management Division,
• Socio-Economic Research Unit,
• State Plan Division, including Multi Level Planning, Border Area Development Programme, Hill Area Development and North Eastern Region (NER), and Statistics and Surveys Division,
• Monitoring Cell.

The Subject Divisions are:

• Agriculture Division,
• Backward Classes Division,
• Communication & Information Division,
• Education Division,
• Environment and Forests Division,
• Health & Family Welfare Division,
• Housing, Urban Development & Water Supply Division,
• Industry & Minerals Division,
• Irrigation & Command Area Development Division,
• Power & Energy Division (including Rural Energy, Non-Conventional Energy Sources and Energy Policy Cell)
• Rural Development Division,
• Science & Technology Division,
• Social Welfare & Nutrition Division,
• Transport Division,
• Village & Small Industries Division, and
• Western Ghats Secretariat.

The Programme Evaluation Organisation undertakes evaluation studies to assess the impact of selected Plan Programmes / Schemes in order to provide useful feedback to planners and implementing agencies.
The Commission is a corner-stone of our federal structure, a think-tank ; helps to balance the priorities and expenditures of the Ministries of the Union Government ; throws up ideas on policies for structural and perspective changes ; and is a reservoir of research."

Relevance of Planning

There has been a national debate about the relevance of planning in the era of liberalization where the state controls and regulations are dismantled to a great extent andmarket forces are given larger role. (The investment of the government for the five year plans is also on decline). (The trend began in the 7th plan and strengthens into the Eleventh Plan).
It is true that the quantitative aspects of planning in terms of control over economy are being selectively phased out and the nature of planning process is undergoing a qualitative change. Planning is important for the following reasons in the era of liberalization

• (In a federal democracy like ours, the principal task of planning is to evolve a shared vision among not only the federal units but also among other economic agents so that the efforts of all the actors become convergent towards the national priorities, the role of planning is to develop a common policy stance for center and states. Also, (the task of federal policy coordination is central to Indian Planning). For example, the need to invite foreign investment in infrastructure areas like power need center - state coordination as the necessary legislation and administrative changes involve both.
• While the growth process can be made the responsibility of the corporate sector to a greater degree, its direction and distribution are to be steered by planned public intervention so that regional imbalances are reduced and socio economic inequities are set right. For example, `directing the growth of the large industry into the backward areas and technology intensive areas to realize national goals.
• The nature of instruments available to planners in the implementation has changed. Quantitative controls have yielded place to qualitative ones .The planning process has to focus on the need for planning for policy.
• Planning at the grass roots level that is participatory is very crucial for improving the delivery systems and proper use of the resources. The role of the government is thus to facilitate participatory planning.
• Environmental priorities are a major concern of planning is necessary for the sectors like energy, communication, transport and so on as private sector needs to be guided into the national plan.
• In the era of globalization where corporates are not expected to plan beyond the growth of a particular unit, the (role of safeguarding national interest is that of planning by the State). For example, being subjected to various discriminative trade practices by EU, USA and so on, (the Indian farmers,manufacturers and exporters have to fight sophisticated battles in the WTO for which the legal services and information and building up bargaining power are best provided by the State).

Thus, planning continues to be relevant and ever more so for the following reasons

• Federal cooperation and coordination
• Equitable growth
• Environment friendly development
• Defending national interest in the age of globalization
• Inter-sectoral balance in growth

Changing Role of Planning Commission

(From a highly centralized planning system, the Indian economy is gradually moving onwards indicative planning where hard planning is no longer undertaken). The role of the (Planning Commission) accordingly changes. The Commission concerns itself with the building of a long term strategic vision of the future and decide on priorities of nation. (It works out sectoral targets and provides promotional stimulus to the economy to grow in the desired direction).

Planning Commission plays an integrative role in evolving a national plan in critical areas of human and economic development. (In the social sector, Planning Commission helps in schemes which require coordination and synergy like rural health, drinking water, rural energy needs, literacy and environment protection).

When planning in a vast federal country like India involves multiplicity of agencies, a high powered body like the PC can help in evolution of an integrated approach for better results atmuch lower costs.

In our transitional economy, (Planning Commission attempts to play a systems change role and provide consultancy within the Government for developing better systems). It has to ensure smooth management of the change and help in creating a culture of high productivity and efficiency in the Government.

In order to spread the gains of experience more widely, Planning Commission also plays an information dissemination role.

With the emergence of severe constraints on available budgetary resources, the resource allocation system between the States and Ministries of the Central Government is under strain. This requires the Planning Commission to play a mediatory and facilitating role, keeping in view the best interest of all concerned.

From Planning Commission to Systems Reforms Commission

There has been a significant change in the role of the PC since its inception in 1950. In the beginning, Planning Commission was all powerful and had the final say and the veto over every aspect - related to growth and socio-economic development- of the functioning of the Union Ministries and the State Governments: The manner of raising and utilising resources; specific allocations to particular schemes and programmes; location of enterprises; expansion and reduction of capacities; application of technologies; sources of supplies; modalities of implementation; priorities, phasing, pricing, targets and timeframes; nature of the instrumentalities; qualifications and strength of personnel of organisations; staff emoluments etc.
(Since 1991, India adopted the indicative planning model, away fromthe kind of centralised planning on the Soviet model envisaged by Jawaharlal Nehru). Now Ministries and Departments, as well as the corporate entities in the private sector, enjoy a lot of functional, financial and operational autonomy.
In the era of liberalisation, the economic players should properly be left to decide for themselves what they consider to be the appropriate courses of action on the various issues coming up before them, whether they relate to policies, schemes or investments.

RBI releases Mid Quarter Monetary Policy Review

Monetary Measures

On the basis of the current macroeconomic assessment, it has been decided to:

• keep the cash reserve ratio (CRR) unchanged at 6 per cent; and
• keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.5 per cent.

Consequently, the reverse repo rate under the LAF will remain unchanged at 7.5 per cent and the marginal standing facility (MSF) rate at 9.5 per cent.

Introduction

Since the Reserve Bank’s Second Quarter Review (SQR) of October 25, 2011, the global economic outlook has worsened significantly. The recent European Union (EU) summit agreement did not assuage negative market sentiments, thereby increasing the likelihood of persistent financial turbulence as well as a recession in Europe. Both factors pose threats to emerging market economies (EMEs), including India. Significantly, despite these developments, crude oil prices remain elevated.

On the domestic front, growth is clearly decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties.

Both inflation and inflation expectations are currently above the comfort level of the Reserve Bank. However, reassuringly, inflationary pressures are expected to abate in the coming months despite high crude oil prices and rupee depreciation. The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation.

Global Economy

The global economic situation continues to be fragile with no credible solution as yet to the immediate  euro area sovereign debt problem. At the EU summit on December 8-9, the European leaders agreed on a new fiscal compact, involving stronger coordination of economic policies to strengthen fiscal discipline. While the agreement is necessary for medium and long-term sustainability of the euro area, its ability to resolve short-term funding pressures was questioned by markets.  Q3 euro area growth, at 0.8 per cent, was anaemic and 2012 growth is now expected to be weaker than earlier projected.  Reflecting these projections, the European Central Bank (ECB) cut its policy rate twice in the last two months, and also implemented some non-standard measures. By contrast, growth in the US in Q3 of 2011 was better than in Q2, although still substantially below trend.

Growth in EMEs is also moderating on account of sluggish growth in advanced economies and the impact of monetary tightening to contain inflation. In view of the slowing down of their economies, Brazil, Indonesia, Israel and Thailand cut their policy rates, while China cut its reserve requirements. EME currencies have also come under varying degrees of downward pressure as a result of global risk aversion and financial stress emanating from the euro area.

Domestic economy

Growth

GDP growth moderated to 6.9 per cent in Q2 of 2011-12 from 7.7 per cent in Q1 and 8.8 per cent in the corresponding quarter a year ago. The deceleration in economic activity in Q2 was mainly on account of a sharp moderation in industrial growth. On the expenditure side, investment showed a significant  slowdown. Overall, during the first half (April-September) of 2011-12, GDP growth slowed down to 7.3 per cent from 8.6 per cent last year.

Industrial performance has further deteriorated as reflected in the decline of the index of industrial production (IIP) by 5.1 per cent, y-o-y, in October 2011. This was mainly due to contraction in manufacturing and mining activities. The contraction was particularly sharp in capital goods with a y-o-y decline of 25.5 per cent, reinforcing the investment decline story emerging from the GDP numbers.

Other indicators also suggest a similar tendency, though by no means as dramatic as the IIP. The HSBC purchasing managers' index (PMI) for manufacturing suggested further moderation in growth in November 2011. However, PMI-services index recovered in November from contractionary levels in the preceding two months. Corporate margins in Q2 of 2011-12 moderated significantly as compared with their levels in Q1. The decline in margins was largely on account of higher input and interest costs. Pricing power is evidently declining.

On the food front, the progress of sowing under major rabi crops so far has been satisfactory, with area sown under foodgrains and pulses so far being broadly comparable with that of last year.

Inflation

On a y-o-y basis, headline WPI inflation moderated to 9.1 per cent in November from 9.7 per cent in October, driven largely by decline in  primary food articles inflation. Fuel group inflation went up marginally. Notably, non-food manufactured products inflation remains elevated, actually increasing to 7.9 per cent in November from 7.6 per cent in October, reflecting rising input costs. The new combined (rural and urban) consumer price index (base: 2010=100) rose further to 114.2 in October from 113.1 in September. Inflation in terms of other consumer price indices was in the range of 9.4 to 9.7 per cent in October 2011. Reassuringly, headline momentum indicators, such as the seasonally adjusted month-on-month and 3-month moving average rolling quarterly inflation rate, show continuing signs of moderation.

External sector

Merchandise exports growth decelerated sharply to an average of 13.6 per cent y-o-y in October-November from an average of 40.6 per cent in the first half of 2011-12.  However, as imports moderated less than exports, the trade deficit widened, putting pressure on the current account. This, combined with rebalancing of global portfolios by foreign institutional investors and the tendency of exporters to defer repatriating their export earnings, has led to significant pressure on the rupee.

As on December 15, 2011, the rupee had depreciated by about 17 per cent against the US dollar over its level on August 5, 2011, the day on which the US debt downgrade happened. In the face of this, several measures were taken to attract inflows. Limits on investment in government and corporate debt instruments by foreign investors were increased. The ceilings on interest rates payable on non‐resident deposits were raised. The all‐in‐cost ceiling for external commercial borrowings was increased. Further, a series of administrative measures that discourage speculative behaviour were also initiated. The Reserve Bank is closely monitoring the developments in the external sector and it will respond to the evolving situation as appropriate.

Fiscal  Situation

The central government’s key deficit indicators worsened during 2011-12 (April-October), primarily on account of a decline in revenue receipts and increase in expenditure, particularly subsidies. The fiscal deficit at 74.4 per cent of the budgeted estimate in the first seven months of 2011-12 was significantly higher than 42.6 per cent in the corresponding period last year (about 61.2 per cent if adjusted for more than budgeted spectrum proceeds received last year). The likely slippage in this year’s fiscal deficit has inflationary implications. 

Money, Credit and Liquidity Conditions

The y-o-y money supply (M3) growth moderated from 17.2 per cent at the beginning of the financial year to 16.3 per cent on December 2, 2011, although still higher than the projected trajectory of 15.5 per cent for the year. Y-o-y non-food credit growth at 17.5 per cent on December 02, 2011, however, was below the indicative projection of 18 per cent.

Consistent with the stance of monetary policy, liquidity conditions have remained in deficit during this fiscal year. However, the deficit increased significantly beginning the second week of November 2011. The average borrowings under the daily LAF increased to around ` 89,000 crore during November-December (up to December 15, 2011) from around  `49,000 crore during April-October 2011.  The Reserve Bank conducted open market operations (OMOs) on three occasions in November-December 2011 for an amount aggregating about ` 24,000 crore to ease liquidity conditions.

There are currently no significant signs of stress in the money market. The overnight call money rate is stable around the policy repo rate and liquidity facilities such as marginal standing facility (MSF) remain unutilised.  However, in view of the fact  that borrowings from the LAF are persistently above the Reserve Bank's comfort zone, further OMOs will be conducted as and when seen to be appropriate. 

Outlook

Global growth for 2011 and 2012 is now expected to be lower than earlier anticipated. Increased strains in financial markets on the back of growing concerns over euro area sovereign debt, limited monetary and fiscal policy manoeuvrability, high unemployment rates, weak housing markets and elevated oil prices are all contributory factors. These factors have also contributed to moderating growth in the EMEs. As a consequence of all-round slower growth, inflation has also started declining, both in advanced countries and EMEs. 

On the domestic front, agricultural prospects look promising on the back of expected record kharif output and satisfactory progress on rabi sowing. However, industrial activity is moderating, driven by deceleration in investment, which is a matter of serious concern. Overall, the growth momentum in the economy is clearly moderating. Further, considering the global and domestic macroeconomic situation, the downside risks to the Reserve Bank’s growth projection, as set out in the SQR, have increased significantly. 

Between the First Quarter Review (FQR) and the SQR, while non-oil commodity prices had declined significantly, the rupee too had depreciated sharply. Consequently, the headline inflation projection at 7 per cent for March 2012, as set out in the FQR, was retained in the SQR. With moderation in food inflation in November 2011 and expected moderation in aggregate demand and hence in non-food manufactured products inflation, the inflation projection for March 2012 is retained at 7 per cent.

The Reserve Bank will make a formal numerical assessment of its growth and inflation projections for 2011-12 in the third quarter review of January 2012.

Guidance

While inflation remains on its projected trajectory, downside risks to growth have clearly increased. The guidance given in the SQR was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.

However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead.

A monetary juggle

The Reserve Bank of India (RBI) is clearly in no mood to loosen its current tight monetary policy stance. An indication of it came from the Deputy Governor, Dr Subir Gokarn, who, on Saturday, made a distinction between the central bank's ‘monetary stance' (a view on the cost of money) and its ‘liquidity stance' (a view on availability of money for genuine productive use). The RBI, it would seem, is prepared to be accommodative of the latter, given tightening domestic liquidity conditions. Leaving aside for the moment the broader question of whether the RBI can, if at all, isolate the effects of its injection of liquidity into the system from the impact on the cost of funds, its latest observation has a practical dimension. The RBI's forthcoming mid-quarter policy review on December 16 is unlikely to see any reduction in its repo (lending) rate or even the cash reserve ratio (CRR) requirements for banks. The central bank's daily purchases of securities in ‘repo' auctions, besides outright open market operation (OMO) purchases since mid-November, have been somewhat successful in addressing the liquidity problem. Yields on benchmark 10-year government paper have fallen from 8.9 to below 8.7 per cent in the last 10 days.

Dr Gokarn's observations would, nevertheless, come as a disappointment to the markets that were seeing the RBI's resort to OMOs, after nearly a year, as a precursor to an easing of its monetary policy. A one per cent cut in CRR — the proportion of banks' deposits compulsorily kept with the RBI — seemed a logical next step, as it would have freed up about Rs 80,000 crore of lendable funds even without involving a lowering of the central bank's own policy rates. A CRR reduction looked all the more likely in the light of the People's Bank of China's recent move in this direction. But all these hopes have now been dashed, with Dr Gokarn saying that any action on CRR would “straddle the divide between liquidity and monetary management, which, at the current juncture, we are intent on maintaining”. This was as opposed to OMOs that do not entail a “change in any policy stance, real or perceived”.

That raises the question of how effective this conservative monetary stance would be, going forward. If the past is any guide, the outlook doesn't seem promising. Since March 2010, the RBI has hiked its repo rate 13 times by a cumulative 350 basis points. Yet, the wholesale inflation rate has remained at over 9 per cent since December 2010 and above 8 per cent from January 2010. The interest rate increases have, however, hit investment — as confirmed by the Government's own GDP data for July-September — by eating into the profits of firms and disincentivising them from augmenting productive capacity. In the process, they may have undermined the RBI's own battle with inflation.

Private Sector Lender HDFC Bank launched Premium Credit cards Exclusively for Women

Private sector lender HDFC Bank launched premium credit cards exclusively for women on 30 November 2011. HDFC expects to add 4 million credit card customers in the next two years. The bank has about six million credit card customers. Of this, 1.5 million customers are women.

The card Solitaire introduced exclusively for women has a credit limit of up to 2 lakh. The bank also launched a special card, Solitaire Premium, with a credit limit of Rs 5 lakh for women. Solitaire will provide unmatched lifestyle offers, its wellness aspects will help women take holistic care of themselves in the midst of a busy career.

Solitaire is expected to fulfil a long-standing need of women who are pursuing a successful career, travelling the world and are at the forefront of the global consumption story.

The bank, which is the biggest issuer of credit cards in the country decided to come out with new credit card products including co-branded card every quarter.

SEBI issued Regulations for Uniform Know Your Client KYC Registration Agency (KRA)

Securities and Exchange Board of India (SEBI) put forth the regulations for uniform Know Your Client KYC Registration Agency (KRA) on 2 December 2011. The move is expected to benefit investors as it would save them the trouble of repeating the KYC process while investing in various financial products.

The regulator allowed stock exchanges, depositories or any other Self Regulatory Organisation (SRO) to form wholly-owned subsidiaries that could be registered as a KRA. SEBI will consider applications to grant certificates of initial registration to a wholly owned subsidiary of a recognised stock exchange that have a nation-wide network of trading terminals, a wholly owned subsidiary of a depository or any other intermediary registered with the Board.
The certificates of initial registration of KRA granted under sub-regulation would be valid for a period of five years from the date of its issue to the applicant.

What is KRA?

A KRA will make life simpler for investors who have to go through the entire KYC procedures each time they want to register with a new broker or a fund house. The role of a KRA will involve completion of the KYC procedures for a client and make it available to all capital market intermediaries that avail of its services. If there is more than one KRA, inter-operability will have to be put in place to avoid duplicacy. The KRA will be required to maintain a net worth of at least R25 crore on a continuous basis.

SEBI mentioned that the KRA will be responsible for storing, safeguarding and retrieving the KYC documents and it will also have to retain the original KYC documents of the client, in both physical and electronic form.

KRAs have the responsibility to appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines and instructions issued by the board or the central government and for redressal of client’s grievances. The compliance officer will immediately and independently report to the Sebi board any non-compliance observed by him.

RBI approved Creation of Separate Category of Non-banking Financial Companies for MFI Sector

The Reserve Bank of India (RBI) on 2 December 2011 approved the creation of a separate category of non-banking financial companies for the microfinance institution (MFI) sector. The central bank also specified that such institutions need to have a minimum net owned fund of Rs 5 crore.

An RBI-appointed panel headed by YH Malegam had earlier recommended setting up of a special category of NBFCs operating in the micro finance sector. The panel had suggested a minimum net worth of 15 crore for an entity to qualify as an NBFC-MFI.

The RBI highlighted that the NBFC-MFIs should have a minimum net worth of Rs 5 crore. However, for those operating in the North-Eastern states, the slab was kept at Rs 2 crore.

The RBI had in its second quarter policy review in October 2011 approved of setting up of this category of specialised financial companies which would cater to low-income groups.

IRDA launched Two Online Initiatives to Safeguard the Interest of Insurance-seekers

The Insurance Regulatory and Development Authority (IRDA) announced two online initiatives to safeguard the interest of insurance-seekers. The first of the two online initiatives is the extensive guidelines pertainining to web aggregators and the second one relates to the launch of a mobile application to compare unitlinked insurance policies (ULIPS) from various companies and their premium rates.

Guidelines to web aggregators

Web aggregators are sites like policybazaar.com, i-save.com, medimanage.com and click2insure.in that provide information on insurance products from various companies. The information so collated can help insurance-seekers compare premium rates for life, health, travel and motor insurance. Most portals just generate leads and not all offer the option to purchase a product online.

However, some do facilitate an online buying process to the extent possible, usually by directing the insurance-seekers to the companies’ website. However, aggregators often sell visitors’ personal information to several insurers, resulting in customers being bombarded with sales calls from the companies or their agents. IRDA therefore directed the aggregators not to pass visitor’s information on to companies on the site’s home page.
To ensure that aggregators do no indulge in promoting products, the insurance regulator has decreed that they cannot display ratings, rankings, endorsements or bestsellers of insurance products on their websites. Similarly, they have been barred from commenting on insurers or their products.

In addition, aggregators will from here on be required to highlight links to the product comparison charts and tables for each category of products covered by them. Items to be displayed include premiums quoted by each insurer as per age and other personal details, policy and premium term, sum assured, default underwriting requirements such as medical examination, diagnostics, etc, and key features of the product chosen. The diktat also puts the onus of safeguarding and securing the entire process on the aggregators.

Launch of the mobile application

The launch of the mobile application, is intended to help insurance-seekers compare ULIPs launched after 1 September 2010. The tool, which works on Android, iPhone, Nokia and Blackberry platforms, has been termed a mobile application and can be accessed even via a personal computer.

Users can search products for comparison through three options – By company, Policy type and Keywords. Up to three products can be selected at a time for comparison, with the criteria listed being benefits offered, premium-paying term, tenure, charges and so on.

Centre for Monitoring Indian Economy (CMIE) scaled down India’s GDP forecast to 7.8% for 2011-12

Leading research firm, Centre for Monitoring Indian Economy (CMIE) in November 2011 scaled down India’s GDP forecast to 7.8% for 2011-12 from the earlier forecast of 7.9%.

Downward revision in the forecast for the mining index from 4.4% to 3.2%, manufacturing sector from 7.5% to 6.9% and electricity from 9 to 8.7% led to a further decline in GDP forecast for this fiscal. the Reserve Bank had also reduced its forecast for real GDP growth sharply from 8 to 7.6%. The rating agency Crisil had revised its growth estimate from 7.7-8% to 7.6%.

The index of industrial production growth slowed down to 2-4% and the wholesale price index-based inflation growth remained riveted to 9.5% despite sustained efforts by the RBI to rein in inflation by raising interest rates.
The lack of availability of coal in 2011-12 pulled down the mining index and led to delay of thermal projects. As a result the electricity generation forecast was revised.

Analysis

The research firm warned that the economy is headed towards stagflation due to persistent fall in the IIP (Index of Industrial Production) and the high inflation.

The growth in sales of companies, which grew by a handsome 25% in the first half of 2011 was however robust.
Sales of manufacturing companies adjusted for inflation indicated that the IIP under-estimates growth in the manufacturing sector by about 33%. CMIE also noted thatr in the first half, the real sales of manufacturing companies grew by about 9%, indicating robust demand for industrial goods.

Though profit margins of the corporates later declined because of an increase in raw material cost and interest rates, it is still robust and way above the low margins seen in the years 1999 to 2002. The net profit margin of the listed non-finance companies fell to 6.4% in June 2011, but between March 1999 and December 2002 they never touched 6%.

Growth in corporate sales indicates that consumption demand continues to grow well. Kharif sowing this year was higher than last season.

Agricultural production was estimated to grow by 2.9% after a robust 6.6% growth in 2010. Estimation of growth in agricultural production indicated robust domestic consumption demand in in 2011-12.

CHOGM 2011

The 2011 Commonwealth Heads of Government Meeting (CHOGM) was held at Perth, Australia. India was represented by Vice-President Hamid Ansari.

world population to reach from 6 to 7-billion mark

It has taken just 12 years for the world population to reach from 6 to 7-billion mark. World population did not reach 1 billion mark until 1804. It took 123 years to reach the 2-billion mark in 1927, 33 years to reach 3 billion in 1960, 14 years to reach 4 billion in 1974, 13 years to reach 5 billion in 1987 and 12 years to reach 6 billion in 1999. World population is projected to nearly stabilise at just above 10 billion after 2200.  China (19%) and India (17%) together make up 36% of the world population.

India Human Development Report, 2011

On October 21, 2011, the Planning Commission released the second India Human Development Report (HDR) 2011, which records controversial claims and a few surprises on income, education, health, literacy and sanitation. The last India-specific report had come out in 2000.

The report claims that poverty, unemployment and child labour are declining, inter-State disparities are getting narrower and that the improved Human Development Index has been driven by strides made in education. It does concede, however, that the absolute number of the poor (27 per cent according to the report) stood at 302 million, compared to 320 million in 1973. Sixty per cent of the poor are still concentrated in Bihar, it holds.

Prepared by the Institute of Applied Manpower Research of the Commission, the report claims that between 2000 and 2007, the Human Development Index rose by 21 per cent, higher than 17 per cent recorded by China during the same period and the 18 per cent estimated by the Global Human Development Report, 2010.

The top five slots, states the report, were occupied by Kerala, Delhi, Himachal Pradesh, Goa and Punjab (same as in the last India HDR 2000). Haryana slipped two places from 7 to 9 while Jammu and Kashmir and Uttarakhand improved a notch to finish 9th and 14th, respectively.

For the six lowest HDI states—Bihar, Andhra Pradesh, Chhattisgarh, Madhya Pradesh, Orissa and Assam—HDI improvement has been considerably above the national average.

Education (mainly primary level enrolment of 96 pc) is the big gain for India. There has been an improvement of 28.5 per cent in Education Index between 1999 and 2008. Health Index rose by just 13 pc over the period of study.

Gujarat fares poorly on hunger index, ranked 13th out of 17. The eight poor States (Bihar, UP, MP, Orissa, Rajasthan, Jharkhand, Uttrakhand, Chhattisgarh) which are home to 48 percent of all SCs, 52 pc of all STs and 44 pc of all Muslims, have posted HDI improvements across groups and States doing well are doing so across board.

Muslims posted the sharpest decline in total fertility rate among all social groups and the highest increase in contraception prevalence rate. Muslims fare better than SCs and STs on other human development indicators. A higher percentage of the minority group has access to toilets too.

National Manufacturing Policy cleared

On October 25, 2011, the UPA government cleared its ambitious national manufacturing policy (NMP) that seeks to create a massive 100 million additional jobs in the manufacturing sector by 2025, as well as create large sized industrial zones with easier compliance and labour laws.

The new policy seeks to boost the stagnating manufacturing sector to contribute at least 25 per cent of the national GDP by 2025.

The share of manufacturing in India’s GDP has stagnated at 15 to 16 per cent since 1980 while the share in comparable economies in Asia, like China, South Korea, Indonesia and Malaysia, is much higher at 25 to 34 per cent. Also, the manufacturing sector has a multiplier effect in creation of two to three additional jobs in the allied sectors.

The policy also seeks to empower rural youth by imparting necessary skill sets to make them employable. Sustainable development and technological value addition in manufacturing have received special focus.

The policy will be a partnership between the Central and State governments. The former will create the policy framework, provide incentives for infrastructure development on a public private partnership basis through appropriate financing instruments, while State governments will identify the suitable land and be equity holders in the national investment and manufacturing zones (NIMZs).

A defining feature of the policy has been the endeavour to improve the business regulatory environment by providing single window clearances. In order to protect the interests of labour in the eventuality of a closure of a unit, a suitable mechanism has been devised using innovative job loss policy and sinking fund to insure workers against such loss.

Green manufacturing has received a special attention. Also, small and medium enterprises will be given access to the patent pool, up to a maximum of Rs 20 lakh, for acquiring patented technologies.

Saving Bank Interest rate decontrol

Reserve Bank of India (RBI) has freed interest rates on savings deposits. As per a rough estimate, about Rs 13 lakh crore of funds are parked in savings bank. The interest on these accounts had been fixed at 4% even as inflation was two-and-a-half times that level. Now savings rate deregulation gives people an opportunity to shift to banks that come up with better deals.

Although savings deposits can be withdrawn without notice and interest rates are calculated on daily basis, a part of these deposits are perpetual, partly because amounts withdrawn are replenished by monthly earnings and partly because banks mandate a minimum balance ranging between Rs 5,000 to Rs 10,000 in savings accounts.

Banks that are short of retail deposits, like Yes Bank and IDBI Bank, are in a better position to offer higher rates as their overall cost will not rise to that extent. Larger banks, such as SBI and HDFC Bank, may resist initially, preventing their overall cost of funds from rising. But if their customers respond to higher rates offered by rivals, they may be forced to follow suit. Given that the deregulation has come at a time when the interest rate cycle is close to its peak and banks are paying 8.5% for overnight money, it is likely that return on savings deposit will rise. But if there is a slowdown in the economy and demand for credit slips, banks may even lower deposit rates from current levels.

An increase in Saving Bank account rates will put pressure on bank margins. Even if rates go up by only one percentage point, the cost of funds will go up by 0.25% for a bank that has 25% of its resources coming from savings deposits.

SOCIO ECONOMIC DEVELOPMENTS MCQs

1. A major Financial Newspaper while writing about the present status of economy in India wrote “the outlook in the agricultural sector gives room for optimism”. What does it really mean ?
[Pick up most appropriate statement(s)]
1. Agricultural Sector which was not playing any significant role in Indian economy is now growing very fast and significantly.
2. Agricultural sector is not going to play any major role in economy as its progress is still very slow.
3. Govt. will not require to provide any boost up package to agricultural sector as it is likely to be satisfactory this year.
(A) Only 1
(B) Only 2
(C) Only 3
(D) Either 1 or 3
(E) None of these

2. While addressing a conference of Bankers and top Industrialists, the Prime Minister made a statement that “Domestic Credit Flow for Productive Needs had to be maintained at a reasonable Cost”. What does it really mean ?
(Pick up the most appropriate statements).
1. Banks should further raise their deposit base and provide very low cost credit to Industry which is badly in need of the same.
2. Banks should neither reduce their lending rates further nor increase the rates on deposits as this may create a critical imbalance in the financial/money market of the country.
3. Banks should see that ample credit is provided to the industries at an affordable cost without diluting the credit norms.
(A) Only 1
(B) Only 2
(C) Only 3
(D) Both 1 and 2 only
(E) None of these

3. Which of the following taxes is not levied by the Union Govt. ?
(A) Customs
(B) Corporate Tax
(C) Land Revenue
(D) Income Tax
(E) Surcharge on Income Tax

4. Service Tax was introduced in India for the first time in the year ……….
(A) 1990-91
(B) 1991-92
(C) 1994-95
(D) 1980-81
(E) 2000-01

5. The Govt. of India allowed the Income Tax Department to set up its centralized IT processing centre in ……….
(A) Bangalore
(B) Chennai
(C) Mumbai
(D) Kolkata
(E) Hyderabad

6. As per news reports MTNL launched it “3G Services” and became the first telecom operator to launch the same in India. What is the full form of ‘G’ in 3G ?
(A) Global
(B) Generation
(C) Growth
(D) Gravity
(E) None of these

7. We very frequently read about the activities of the Foreign Exchange Market in newspapers/magazines. Which of the following is/are the major functions of the same ?
1. Transfer of purchasing power from domestic to foreign market.
2. Providing credit for financing foreign trade.
3. Power to purchase gold from foreign countries as most of the nations still work on Gold Standards.
(A) Only 1
(B) Only 2
(C) Only 3
(D) Both 1 and 2 only
(E) Both 2 and 3 only

8. Which of the following is/are the components of the Fiscal Deficit ?
1. Budgetary Deficit
2. Market Borrowings
3. Expenditure made from Pradhan Mantri Rahat Kosh
(A) Only 1
(B) Only 2
(C) Only 3
(D) All 1, 2 and 3
(E) None of these

9. Which of the following is not a Welfare scheme launched by the Govt. of India ?
(A) Village Grain Bank Scheme
(B) Sampoorna Gramin Rozgar Yojana
(C) Annapurna Scheme
(D) Midday Meal Scheme
(E) Bharat Nirman Yojana

10. Which of the following are the instruments of Credit Control in the hands of the RBI ?
1. Lowering or raising the discount and interest rates.
2. Raising the minimum support price of the major agro products.
3. Lowering or raising the minimum cash reserves maintained by the commercial banks.
(A) Only 1
(B) Only 2
(C) Only 3
(D) Both 1 and 3 only
(E) Both 2 and 3 only

11. Which of the following programmes was launched to further improve the facilities of irrigation in rural India ?
(A) National Social Assistance programme
(B) Construction of Kiosks for poor
(C) Sampoorna Grameen Rozgar Yojana
(D) Annapurna Scheme
(E) National Watershed Development Programme

12. Which of the following bodies is responsible for the distribution of revenues between the Centre and the States?
a) Planning Commission
b) Finance
c) Inter-State Council
d) National Development Council

13. How far does the Exclusive Economic Zone of a country extend from its coast?
a) 120 km
b) 220 km.
c) 320 km.
d) 420 km.

14. Which of the following agencies recently laid down guidelines for foreign companies who wish to raise money from the Indian Capital Markets?
(1) RBI
(2) IRDA
(3) Registrar of Companies
(4) SEBI
(5) None of these

15. More and more banks in India these days are setting up their ATMs and discourage people to visit their branches for transaction.
Which of the following is/are the limitation(s) of the ATMs which force people to go to branch for transactions?
(A) Lack of human interface
(B) Communication gap
(C) Limited cash dispensing ability
(1) Only (A) (2) Only (B)
(3) Only (C) (4) (A) and (B)
(5) (A), (B) and (C)

16. Which of the following is NOT one of the core areas identified under the Bharat Nirman Programme?
(1) Irrigation
(2) Rural electrification
(3) Drinking water supply
(4) Computer Education in schools
(5) None of these

17. The Basel II Accord for Banking Industry is based on three pillars. Which of the following is/are NOT included in the same?
(A) Minimum Capital Requirement
(B) Supervisory Review
(C) Market Discipline
(D) Credit Risk
(1) Only (A)
(2) Both (A) and (C)
(3) Only (D)
(4) (A), (B) and (C)
(5) None of these

18. ‘Sheqel’ is the currency of:
(1) Israel
(2) Kenya
(3) Iraq
(4) Iran
(5) None of these

19. Which of the following countries has largest stock of foreign exchange reserves in the world?
(1) USA
(2) China
(3) Japan
(4) India
(5) None of these

20. As per the reports published in the newspapers which of the following countries is first in production of Gold Jewellery?
(1) China
(2) India
(3) Turkey
(4) Italy
(5) None of these

21. Golden revolution refers to the development of—
(1) Oilseeds
(2) Pulses
(3) Horticulture
(4) Cereals
(5) Fodder

22. Commission for Agricultural Costs and Prices (CACP) recommends—
(1) Comfort Price
(2) State Advised Price
(3) Minimum Support Price
(4) Minimum Export Price
(5) Statutory Minimum Price

23. National Agricultural Cooperative Marketing Federation is known as—
(1) NIAM
(2) NAFED
(3) MARKFED
(4) NACMF
(5) NACOM

24. Which insect is known as farmers' enemy No.1?
(1) Bollworm
(2) Desert locust
(3) Aphids
(4) Stem borer
(5) Fruit fly

25. Which of the following statements are true about the Foreign Trade Policy 2009-14?
A. The new Foreign Trade Policy, coming in the backdrop of a 30 per cent contraction in exports in the last 10 months, seeks to identify 26 new markets for trade that would be eligible for sops. These include 16 in Latin America and 10 in Asia and Oceania.
B. At present, India's $ 168-b exports are highly concentrated in Europe (36 per cent), the US (18 per cent and Japan (16 per cent), and these are the worst hit by the biggest financial crisis since the 1930s.
C The new policy has sought to give special focus to help the gems and jewellery sector, one of the worst hit, by allowing duty drawback on exports. The handloom and handicrafts sector would be helped under the Market Development Scheme, while the government also announced the continuation of the DEPB scheme till December 2010.
D. These export-oriented units would be encouraged to look for new markets and they could be given incentives and tax sops to create a new basket of exports. In the short-term, the relief measures Include providing dollar credit to exporters that will be overseen by a high-level committee, comprising
Finance Secretary, Commerce Secretary, and the Indian Banks Association, to insulate the small-and medium-scale exporters
l) OnlyA,B&C
2)OnlyB,C&D
3)OnlyC&D
4) Only A, C & D
5) All the above

26. Which of the following is decided by commercial banks? .
1) Bank rate
2)CRR
3) SLR
4)BPLR
5) None of these

27. The Reserve Bank of India, which made third-party ATM transactions free from April, 2010 said not more than Rs 10,000 can be withdrawn each time they are used and limited the number of such transactions to _ _ a month.
1)2
2)5
3)10
4)15
5) None of these .

28. Which of the following is not a Navaratna (PSU) company?
a) Air India
b) BHEL
c) GAIL
d) IOC
e) Power Finance Corporation Ltd.

29. What is the expansion of BEE?
a) Bureau of Energy Efficiency
b) Bureau of Efficient Engineers
c) Bureau of Employess Efficiency
d) Bureau of Employers’ Efficiency
e) None of these.

30. A per the news published in the major financial newspapers/journals/magazines, India’s exports and imports both have come down in the last few years. Which of the following is/are the probable reason(s) for the same?
A) As per the new policy of the WTO, India can import only those commodities, which are not grown/produced in the country in adequate quantity/volume to meet its total demand. Commodities, which India needs to import, are very few. Hence import has gone down.
B) Since all the countries are required to pay for their imports partly by exporting some goods in exchange to other countries, exports from India have gone down.
C) This slowdown in imports/exports is only because there is a global economic crisis. This is why India’s exports and imports both have come down.
a) Only A
b) Only C
c) Only B
d) All A, B & C
e) None of these

31. The Economic and Social Commission for Asia and Pacific in one of its recently published reports has said some positive things about India’s economic resilience. What are these points? (The report was published in various newspapers/journals).
A) India has played the role of a sheet anchor behind the economic stability of the South Asian region.
B) India is helping other economies or the region to fight the global financial crisis better than some other more open economies of Asia Pacific Region.
C) India is likely to become the second largest economy of the world in the next five years, as it has been the most favourite destination for Foreign Direct Investment for almost 90% of the countries of the World.
a) Only A
b) Only B
c) Both A & B
d) All A, B & C
e) None of these

32. Which of the following schemes was launched to give a boost and incentives to increase public investment to achieve 4% growth in the area of agriculture and allied sectors during the 11th plan period?
a) National Technological Mission
b) National Bamboo Mission
c) Rashtriya Krishi Bima Yojana
d) National Rural Employment Guarantee Scheme
e) Rashtriya Krishi Vikas Yojana

33. Which of the following statements is/are correct about the Sampoorna Grameen Rozgar Yojana?
A) The scheme was launched in 2001 by merging some of the schemes running that time.
B) In this scheme preference is given to Below Poverty Line families for the jobs.
C) The wages under the scheme are paid partly in cash and partly by giving foodgrains.
a) Only A
b) Only B
c) Only C
d) All A, B & C
e) None of these

34. Which of the following Acts help(s) Union Govt control its fiscal deficit?
a) Finance Act
b) Fiscal Responsibility and Budget Management Act
c) Banking Companies Act
d) Both (1) and (2)
e) None of these

35. Which of the following housing schemes was/were launched by HUDCO to give special emphasis on the development of rural areas of the country?
A) Indira Awas Yojana
B) Adarsh Gram/Adarsh Basti Yojana
C) Pradhan Mantri Gram Sadak Yojana
a) Only A
b) Only B
c) Only C
d) All A, B & C
e) None of these

36. Many a time we read in financial newspapers about Public Debt. Which of the following is / are the components of Public Debt?
A) Market loans
B) External loans
C) Outstanding against saving schemes/provident funds.
a) Only A
b) Only B
c) Both A & B
d) Only C
e) All A, B & C

37. As agriculture is the mainstay of the Indian Economy, what is the contribution of agriculture and allied sectors in the total Gross Domestic Product of India? About.
a) 10%
b) 15%
c) 22%
d) 36%
e) 48%

38. As we know, the National Rural Employment Guarantee Act was implemented by Govt. of India. Now Govt has made certain changes in the Act so that it can boost up its policy of Financial Inclusion of the beneficiaries. Which of the following changes is/are done for this purpose?
A) NREGA functionaries are being trained to conduct social audits and public disclosure of the works undertaken by State Govts and Panchayats.
B) Workers who are engaged for various jobs under the scheme are paid their wages through post office and/or bank accounts.
C) Wages paid to the beneficiaries are revised and it is strengthening their livelihood resources.
a) Only A
b) Only B
c) Only C
d) All A, B & C
e) None of these

39. Which of the following is/are the major roles of the Union Ministry of Environment and Forests?
A) Prevention and control of pollution B) Ensuring the welfare of animals
C) Afforestation and regeneration of degraded area
a) Only A
b) Only B
c) Only C
d) All A, B&C
e) None of these

40. Which of the following schemes is NOT a part of National Social Assistance programme?
A) National Old Age Pension Scheme B) National Family Benefit Scheme
C) Services for the Poor programme
a) Only A b) Only B
c) Both A & B
d) Both B & C
e) None of these

41. How many banks were nationalized in 1969?
(1) 16
(2) 14
(3) 15
(4) 20
(5) None of these.

42. The Reserve Bank of India was established in :
(1) 1820
(2) 1920
(3) 1935
(4) 1940
(5) None of these.

43. The first Indian Bank was :
(1) Traders Bank
(2) Imperial Bank
(3) Presidency Bank of Calcutta
(4) Indian Bank
(5) None of these.

44. The rupee coin was first minted in India in :
(1) 1542
(2) 1601
(3) 1809
(4) 1677
(5) None of these.

45. The Export-Import (EXIM) Bank was set up in :
(1) 1980
(2) 1982
(3) 1981
(4) 1989
(5) None of these.

46. Planning Commission is :
(1) Advisory body
(2) Executive body
(3) Government body
(4) Autonomous body
(5) None of these.

47. The Community Development Programme was launched in :
(1) 1950
(2) 1952
(3) 1956
(4) 1960
(5) None of these.

48. The highest body which approves the Five-Year Plan is the :
(1) Finance Ministry
(2) Lok Sabha
(3) Rajya Sabha
(4) National Development Council
(5) None of these.

49. Which of the following commodities earn maximum foreign exchange for India?
(1) Jute
(2) Iron and Steel
(3) Tea
(4) Sugar
(5) None of these

50. The one rupee note bears the signature of :
(1) Secretary, Ministry of Finance
(2) Governor, Reserve Bank of India
(3) Finance Minister
(4) Prime Minister
(5) None of these.


ANSWERS:
1. (C) 2. (C) 3. (C) 4. (C) 5. (A) 6. (B) 7. (D) 8. (A) 9. (E) 10. (C)

11. (E) 12. (B) 13. (D) 14. (1) 15. (3) 16. (4) 17. (4) 18. (1) 19. (2) 20. (2)

21. (3) 22. (3) 23. (2) 24. (3) 25. (5) 26. (4) 27. (2) 28. (A) 29. (C) 30. (B)

31. (A) 32. (E) 33. (D) 34. (B) 35. (A) 36. (C) 37. (B) 38. (D) 39. (D) 40. (E)

41. (2) 42. (3) 43. (3) 44. (1) 45. (2) 46. (1) 47. (2) 48. (4) 49. (3) 50. (1)