Current Affairs: Economy - Minor Issues 10 to 18 August 2010

CAG Weekly
(Current Affairs & GK)
By Om Prakash (Goldy sir)

Economy (Minor Issues)

Commission to probe illegal mining

  • The Centre has set up a Commission of Inquiry to look into cases of illegal mining of coal, iron ore and manganese across the country.
  • The decision seems to be fallout of the cases involving the controversial Reddy brothers in Karnataka and some multinational companies.
  • The inquiry will cover the most affected States of Andhra Pradesh, Jharkhand, Karnataka, Chhattisgarh and Orissa.
  • The Commission has been asked to submit its report in 18 months. But it will also submit interim reports to the Cabinet.
  • The Commission will initially have the mandate for investigating cases of illegal mining of iron ore and manganese, and later its mandate could be extended for covering cases of illegal coal extraction too.
  • The sources said the Commission could be headed by a retired judge of the Supreme Court or High Court.

Plan to give tribals a share of mining profits

  • The Centre is planning to give a 26 per cent share in mining profits to tribal people and to set up a regulatory body to check illegal mining, Union Minister of Mines B.K. Handique informed the Rajya Sabha.
  • The draft of the Mines and Minerals (Development and Regulation) Bill — prepared on the basis of the policy directions set forth in the 2008 National Mineral Policy and the recommendations of the Hooda Committee, and now with a Group of Ministers — was aimed at doing justice to tribal people of areas where mining would be carried out, he said.

Credit cards seen losing out as debit gets preferred status

  • The Indian consumer is slowly warming up to spending through debit cards as more point of sale terminals (POS) at merchant establishments are becoming debit card compliant. Besides, debit card is also emerging as a preferred transaction tool for e-commerce payments.
  • There are 19 crore debit cards in the system. While there are only around 1.9 crore credit cards. The share of debit cards in total card spend has gone up sharply from just about 17% in FY08 to 30% in FY10. This fiscal too, consumer spend through debit card has grown, with its share in total card spend going up to 32% as of end June 2010, according to the Reserve Bank of India data.

Vedanta set to buy out Cairn India for $9.6 b

  • Vedanta Resources agreed to buy as much as 60% of oil & gas explorer Cairn India for $9.6 billion. Vedanta proposes to buy as much as 40% of the company from Cairn UK at 405 a share, including 50 a share as non-compete fees. Sesa Goa (another of Mr. Anil Aggarwal controlled firms) would offer to buy 20% of Cairn India’s minority shareholders at 355 apiece to meet regulations.
  • The deal may close by the first quarter of 2011, before which it has to convince many about the benefits, including the oil ministry, partner Oil & Natural Gas Corporation (ONGC) and Sesa shareholders. Also, there is the likely $1-billion tax bill.
  • Vedanta, which draws most of its revenues from India in mining and producing copper, zinc and aluminium, may be the second global metals firm to expand into oil & gas after BHP Billion to smoothen earnings fluctuations. This may be in line with Mr Agarwal’s desire to dominate the resources business in India, but may lead to conflict with minority holders in Sesa Goa.
  • Cairn India, the second-biggest private refiner in the nation, produces 125,000 barrels of oil a day from fields in Rajasthan. Vedanta believes it can more than double the output from those fields, which contain an estimated 6.5 billion barrels of oil and gas equivalent.

AI’s Star entry faces delay again

  • Air India's (AI) plans of joining the global airline network Star Alliance could get delayed again as the air carrier has not been able to get its employees appropriate training. The airline had fixed March 2011 as its outer deadline to join Alliance, which will open new routes and boost traffic for the carrier.
  • The delay comes despite the airline setting up a three-member committee to chart a course for the training so that Air India could join the alliance on time.
  • In November 2009, Air India signed an agreement with London-headquartered management consulting firm Mckinsey and Co to implement the training project at a fee of Rs. 12.86 crore.

Ethanol pricing -- Government gives an interim price

  • The cabinet committee on economic affairs approved an interim price of Rs. 27 per litre for ethanol, compared with Rs. 21.50 a litre earlier. The final price will be fixed after an expert group gives its recommendations for the mandatory blending with petrol up to a maximum of 10%.
  • A committee chaired by Planning Commission member Saumitra Chaudhuri is looking into ethanol pricing. The government made the sale of ethanol-added petrol mandatory in 2007 to rein in fuel cost, reduce dependence on imported hydrocarbons and reduce pollution levels. The plan did not take off due to a shortage of ethanol and opposition from the chemicals ministry.
  • The current production of ethanol is about 1.8 billion litres.

Brokers hurt as FIIs go for direct punch

  • With an increasing number of institutional clients warming up to the direct market access (DMA) concept, broking commissions are shrinking.
  • In direct market access, a fund manager sitting abroad can place an order to buy or sell shares directly on the exchange’s trading system, using his broker’s trading infrastructure, but without any manual intervention. In the traditional method, the fund manager would have to call a dealer at the broking house in India, who would then punch the order into the trading system.
  • The direct market access route for order placement was approved by Sebi in 2008. But it was only in 2009, that fund managers abroad started availing of this facility.
  • Broking firms charge 20-25 basis points as commission on cash market trades placed through the conventional route i.e calling up a dealer in India, and placing the order with him. For trades done through DMA, the commission is 7-8 basis points, and is expected to shrink further as volumes rise.
  • Market experts belieive that the catalysts for the further growth of DMA in India will be the omnibus trading and smart order router facility receiving regulatory approvals. The latter facility allows a client to look at two exchanges at the same time and enables the trading engines to decide the best price for the trader.

Tata Group to form ‘elite task force’ for PE play

  • The Tata Group is putting in place an elite task force of senior executives, working and retired who will act as mentors and give operational guidance to the portfolio companies of Tata Capital’s private equity practice.
  • These senior executives will be drawn from various industries within the group from levels upward of middle management in the organisational hierarchy. They will include people who have recently retired and also those from the different inhouse training and developing centres that the group owns. The $71-billion conglomerate has presence in a variety of sectors ranging from salt to telecom to software.
  • Exposure to large private equity deals in India over the past seven to eight years has commoditised the space, with promoters now opting to partner with private equity firms that provide value, in addition to financial capital. This value could be in the form of operational expertise — technological guidance for a manufacturing or pharma company — or managerial expertise in overseeing operations.
  • The newly-founded Tata Capital, which is the financial services arm of the Tata group and is widely identified as the vehicle for the Tata group’s future banking plans, will raise $1 billion to invest across four themes, including the Growth Fund. Tata Capital is currently raising about $500 million for the Growth Fund, which will look at investing in small, unlisted and profitable Indian companies.

Weak security links may put e-comm at risk

  • Security experts are warning that websites that use encryption to communicate with users are more vulnerable to security threats. Those sites, which are typically identified by a closed lock displayed somewhere in the web browser, rely on a third-party organisation to issue a certificate that guarantees to a user’s web browser that the sites are authentic. But as the number of such third-party “certificate authorities” has proliferated into hundreds spread across the world, it has become increasingly difficult to trust that those who issue the certificates are not misusing them to eavesdrop on the activities of internet users, the security experts say.
  • The power to appoint certificate authorities has been delegated by browser makers like Microsoft, Mozilla, Google and Apple to various companies, including Verizon. Those entities, in turn, have certified others, creating a proliferation of trusted “certificate authorities,” according to internet security researchers. According to the Electronic Frontier Foundation, more than 650 organisations can issue certificates that will be accepted by Microsoft’s Internet Explorer and Mozilla’s Firefox. Some of these organisations are in countries like Russia and China, which are suspected of engaging in widespread surveillance of their citizens.

On cloud computing

  • It can be defined as ‘a standardised IT capability, such as software, app platform or infrastructure, delivered via Internet technologies in a pay-per-use and self-service way’.
  • If we were to break down the services that the cloud today provides, they can be classified into: one, software-as-a-service (SaaS), which comprises end-user applications delivered as a service rather than traditional on-premise software.
  • Two, platform-as-a-service (PaaS), which provides an independent platform as a service on which developers can build and deploy customer applications.
  • Three, infrastructure-as-a-service (IaaS), which primarily comprises the hardware and technology for computing power, storage, operating systems or other infrastructure delivered as an on-demand service rather than a dedicated onsite resource.
  • India has the potential to emerge as the global competency centre for cloud services. An international study estimated the global cloud computing market to be over $70 billion by 2015 and that India, with its powerful ecosystem of independent software vendors, developers and system integrators, is ideally poised to address this growing opportunity. An additional 3,00,000 jobs related to cloud services are estimated to be created in the country over the next five years.

Investment & holding cos under RBI net

  • Holding companies and investment firms of large Indian business houses will for the first time come under the regulator’s glare. All such entities with assets above 100 crore will have to register with the Reserve Bank of India, maintain a minimum level of capital and will be restricted from borrowing beyond a point.
  • Huge fund-raising by corporate investment companies with shallow capital base has been a gowing concern for the central bank which finalised a new a regulatory framework for these ‘core investment companies’ (CICs).
  • A core investment company, as per RBI’s definition, means a nonbanking finance company that holds not less than 90% of its total assets in the form of investment in equity shares, preference shares, debt or loans in group companies.
  • In recent times, Indian corporates have borrowed aggressively through investment arms and holding firms to fund growth. Often holding companies pledge shares of a group company to borrow from a bank or a finance firm and, then, invest the money to fund another group entity.
  • In the second stage, the shares of the newly-capitalised entity are pledged for fresh borrowings to fund yet another company. The holding company can do this as long as it pays interest on the loans and maintains margins with the lenders.
  • While some of the biggest corporate houses were lobbying against the new rules, the central bank felt that such over-leveraging was a risk to the system.

Public banks may not get to shop for RRB loans to meet priority targets

  • In a push to financial inclusion drive, the government may not allow state banks to buy priority sector loans of rural banks sponsored by them.
  • There are 82 regional rural banks with a network of 15,475 branches, 17 of which are sponsored by the country’s largest lender, State Bank of India.
  • The Reserve Bank of India guidelines say commercial banks have to earmark 40% of their bank credit towards priority sector, which include agriculture, small scale industries, education and advances towards weaker sections. Within this limit, banks have to carve out 18% for agriculture and set aside 10% for weaker sections.
  • Instead of trying to meet these targets on their own, banks take the easier way of lending to these sectors indirectly.
  • The other option is to make up for the shortfall in priority sector lending through participation in rural infrastructure development by a contribution towards Rural Infrastructure Development Fund (RIDF).
  • Banks prefer to buy out farm loans of RRB’s, offering a 7-8% return to them, instead of contributing towards the RIDF which pays an interest of 6%, barely more than the cost of funds.
  • A bird's eye view of the performance of the RRBs:
      • 79 RRBs out of toal 82 are profitable
      • The profits of these increased to 1970 crore in 2009-10 from 1371 crore in 2008-09
      • The losses of other three dropped to 6 crore from 36 crore
      • Accumulated losses down to 1808 crore end March 2010 from 2300 crore a year ago
      • Average net NPAs of RRBs down to 1.62% in 2009-10 from 1.81% in previous year
      • 53 RRBs had a capital adequacy ratio of more than 9% .

Germany’s best show in 23 yrs

  • European economic growth accelerated sharply in the second quarter of 2010 as Germany’s best performance (a growth of 2.2% in its GDP quarter on quarter)
  • Since reunification more than made up for the struggles of Spain, Ireland and recession-ravaged Greece.
  • The euro zone has seen an aggregate GDP growth rate of 1% from the previous quarter. This is the fastest growth rate for the currency bloc in more than three years compared with a rise of just 0.2% in the first quarter, and was higher than a comparable US secondquarter increase of about 0.6%.

RBI bats for single-point authority

  • RBI has told the government to empower a committee under the proposed Financial Stability and Development Council, or FSDC, to handle all inter-regulatory issues and financial stability, to replace the High-Level Coordination Committee on Capital and Financial Markets, or HLCCFM, a forum for discussing and co-ordinating policy moves among regulators.
  • The RBI was responding to the concept paper on FSDC circulated to all financial sector regulators by the finance ministry.
  • In the concept paper on the formation of the FSDC, first announced by finance minister Pranab Mukherjee in this year’s budget, the government had proposed two separate committees—one to address inter-regulatory issues to be headed by the RBI governor and a second group headed by the finance secretary to look at issues relating to financial stability.
  • RBI has been of the view that it is better placed to deal with financial stability, although the government believes that it should take the final call since in the event of any crisis, it is the taxpayers’ money that is at stake, thus making it more directly accountable. Like many other central banks, RBI too has signalled that it would pay greater attention to financial stability and improve skills in that area, having already formed a financial stability unit within the bank.
  • The HLCCFM, which was formed a little after the securities scam of 1992, has come under fire for its failure to resolve the turf war between Sebi and insurance watchdog Irda on unit-linked insurance plans (Ulips). The HLCCFM, which is headed by the RBI governor, does not have any executive powers and the FSDC concept paper does mention some of its failures on inter-regulatory co-ordination and also on development of the financial markets. Earlier, a committee on financial sector reforms headed by Raghuram Rajan too had pitched for a financial sector oversight agency to replace the HLCCFM.

PSUs out of 25% public float norm

  • The finance ministry has exempted state-owned firms from the recent rule that requires listed companies to achieve at least 25% public holding within three years after some of them said they will not participate in disinvestment if the rule was forced on them.
  • Public sector firms will now have to maintain a minimum public float of only 10%, the finance ministry said in a notification .
  • The modified rules also gave a breather to the private sector companies. They will have to comply with the minimum 25% public float within three years but they will now have flexibility in how the limit is reached, without the annual 5% increase mandated in the current rules.
  • Listed state-owned companies that have less than 10% public stake will have to reach that threshold over a period of three years, but those listing through a public offer will comply with the 10% norms at the time of listing in one go.
  • The finance ministry had amended the rules to the Securities Contracts (Regulation) Act on June 4, asking companies to lower their promoter holdings in order to increase opportunities for common investors and also increase free float to discourage manipulation.
  • But many public sector firms like CIL and Nalco as well as the department of disinvestment had sought a review of the norms saying that it would impact the valuation and keep them away from the stake sale programme. Many PSUs had agreed to get listed because the government wanted to divest stake in them and not because they needed to raise funds, they had argued.

Fruits of reform have failed to reach the poor

  • The top 20% of India’s population has a more than 50% share of the national income in 2009-10, up from 36.7% in 1993-94, says a study by the National Council for Applied Economic Research, or NCAER. This would seem to confirm the charge that income disparities have increased in the reform years, 1991 onwards, and the rich have got richer as a freer economy has created more opportunities.
  • What should worry the policymakers is not the high income inequality per se, but that it continues to widen even today, after two decades of reforms. In the initial years of reforms an increase in income inequality was understandable as those with access to resources or equipped with skills would be in a position to make use of the opportunities better or command a better price. However, over time, a larger share of population should have been able to benefit from the near double-digit growth of the Indian economy.
  • The problem is not that the rich have got richer but that those at the bottom have not been provided the wherewithal to improve their earning capability. And that continues to be the case even now. Access to meaningful and affordable education, for one, continues to be an issue, and lack of physical infrastructure makes it difficult for the hinterland to be integrated with the market economy.

FMC to retain its independent identity

  • The convergence debate involving the merger of Forward Markets Commission (FMC) with Sebi has been closed, with the government taking a decision that FMC will continue to regulate the commodity futures market and report to the consumer affairs ministry, which lays down policy for the market.
  • Consequentially, FMC chairman BC Khatua along with consumer affairs secretary Rajiv Agarwal will be made part of the high-level cooordination committee (HLCC) on financial markets, currently comprising four regulators and the finance secretary.
  • HLCC is an inter-regulatory coordination committee which comprises the finance secretary and heads belonging to RBI, Sebi, Irda and PFRDA.

India is worried about the problem of plenty

  • The problem of plenty refers to the inward financial flows.
  • Therefore it is reportedly going to propose global financial safety nets at the Seoul summit of the G-20 in November to protect fastgrowing emerging economies from destabilising foreign capital flows.
  • Large inflows pose a challenge to developing and emerging economies and there should be a mechanism to deal with it at the global and regional levels, feels India.
  • Loose monetary policy practised by the US and the EU has brought down the cost of funds to near-zero levels. Fund managers seeking high returns invest such funds in emerging market economies like India,exposing them to risky fund flows.
  • A sudden large capital inflows can fuel asset price bubbles and put upward pressure on local currencies, rendering exports uncompetitive and making monetary management difficult. India has already attracted $11 billion of portfolio inflows in the current calendar year.
  • When the economy faces high inflation, as is the case now, large inflows will have to be sterilised, which impose costs on the exchequer.
  • The financial safety net proposal involves currency swap arrangements to rescue countries faced with large-scale capital outflows.
  • The new concept is seen as an alternative to International Monetary Fund’s financial rescue mechanism that came under intense criticism during the Asian financial crisis of 90s so much so that countries’ are still shy of seeking help from the agency for such support.