18.02.2008

• India considering a sovereign wealth fund
• The government is considering the establishment of a sovereign wealth fund (SWF) with a corpus of $5 bn to acquire companies abroad. The investment fund may also be used to bolster the country’s energy security by acquiring overseas coal mines and oil and gas blocks.
• The PM himself seems to be pushing this idea and announcement to this effect is expected in the forthcoming budget.
• In trying to establish an SWF, India is following the footsteps of China, Singapore et al. China floated a $200 bn SWF – China Investment Corporation last September. Kuwait has its Kuwait Investment Authority while Singapore has Temasek Holdings.
• Singapore earns over 20% annually through its investments abroad. In contrast India earns less than 5% by investing its foreign exchange reserves in US treasury bills.
• Something about government business for banks
• Recently the RBI has threatened that it would auction government business if lead banks don’t take their responsibilities seriously and don’t play the development role in districts allotted to them across the country.
• What exactly is this government business? What is its size? How much do banks earn out of this? What is the lead bank scheme? When was this introduced? Let’s see the answers for these questions.
• Government business involves salary, pension payments and expenditure payments of various ministries. Banks earn fee income besides benefiting from the free float. (Float here means the government funds that get deposited in the bank before they are disbursed. On this banks don’t need to pay any interest and these amounts usually run into crores of rupees.)
• The lead bank scheme was introduced by RBI in 1969 with a view to ensure cooperation and coordination among various financial institutions and government departments in development efforts. RBI has divided over 600 districts among the 28 PSU banks and they are required to play an active role in financing and developing these districts. The unhappiness of RBI emerges out of the fact that banks are only working for implementing government sponsored schemes rather than undertaking the developmental role.
• Auctioning the government business would mean these PSU banks losing out on the lucrative government business and the free float. If the RBI does so, the biggest loser will be SBI which has a total government business of Rs. 5,91,350 crores upto the end of September 2007. It earned Rs. 490 crores commission from government transactions, which is about 15% of its other income.
• Mayawati promises ST status for Gurjars of Rajasthan
• As neither the BJP nor the Congress have been able to take a clear stand on the issue, Mayawati has stepped in with a clear demand.
• You might remember that the BJP for its part has simply forwarded the Justice Jasraj Chopra committee’s report to the Centre without any recommendation. The committee noted that the Gurjars did not qualify for ST status. The report has further asked the Centre to ‘abrogate’ certain criteria for the purpose of qualification as they had become outdated.
• The Congress remained non-committal on the issue.
• Government finally gives the nod for issuing FCEBs – Foreign Currency Exchangeable Bonds
• Remember our noting about EBs – Exchangeable Bonds?
• THE government now allowed firms to issue foreign currency exchangeable bonds (FCEBs) to unlock the value of their holding in group companies. The norms governing tax treatment and eligibility for FCEBs are on the same lines as foreign currency convertible bonds (FCCBs).
• In the case of FCCBs, bonds can be converted to equity of the issuing firm. In the case of FCEB, bonds can be converted into equity of a group company. As a result, payment of interest on FCEBs would be subject to payment of withholding tax. Funds raised through FCEBs cannot be invested in the capital market, but can be used for overseas expansion.
• How do FCEBs help Indian companies? To know this, look at the borrowing costs through the ECB route. For borrowings with average maturity of 3-5 years, the overall cost ceiling is 150 basis points over 6 month LIBOR, RBI guidelines say. For borrowings over 5 years, the cost ceiling is 250 basis points over 6 month LIBOR.
• Farm power GDP growth is best for poverty reduction
• This is not from some politician based in West Bengal or Kerala. The World Development Report for 2008 by the World Bank has affirmed this. Such a view should give lot of support for our home based economists and other local and regional politicians who have been crying hoarse that it is development in agriculture that would lay the strong foundations of an egalitarian society.
• By the way did you ever read a WDR? Take a look at it. I uploaded the overview on rapidshare for easy download by anyone of you interested in reading it.
• Why is there a case for bringing the indirect taxes down?
• Because lower tax rates boost consumption. According to a study by McKinsey, a price drop of 25 percentage points increases consumption three to five fold.
• In our country the indirect taxes (read excise duties) are at about 25 to 30%. In China they are in the region of 15%.
• Can you give a few examples of our political class’s scant respect for economic reform when things get politically inconvenient for them?
• Tamilnadu CM has threatened to nationalize cement units in his state unless they cut prices.
• In Goa, the CM has decided unilaterally to abolish all SEZs, including those officially notified.
• The Union Minister Mr. Ram Vilas Paswan has displayed the command-and-control attitude in relation to price control in drugs. Now he is doing the same in pricing of steel.
• The lackadaisical attitude of the Indian household sector towards the stock market
• The household sector’s investment in shares and debentures is only 1.2% of the GDP. The share of their savings in financial assets is also very low at 6.3%.
• The share of bank deposits in household financial savings has steadily increased over time. From 36.5% in 2004-05 it reached 55.6% in 2006-07.
• What is Balck Swan? Who coined it?
• It is a term used to describe the stock market collapse. It was coined by Nassim Nicholas Taleb in his book “The Black Swan” to describe a large-impact, hard-to-predict and rare event beyond the realm of normal expectations.
• Now that the subprime crisis has mauled every big bank and there are calls for more nuanced regulation of banks and the credit rating agencies, the question that is gaining importance is this – can the gains of credit revolution be sustained through the envisaged strict regulatory oversight and reform? Will it not price credit derivatives out of the market?
• Alok Sheel is a senior Civil Servant and is a very good commentator on economic and finance issues. Those of you who have a heart for knowing this high-funda subject, take a look at his article in today’s ET here for the answer.
• It is a good read. Possibly for economics and finance guys, it can be a very good essay.
• Buget Glossary
• Time and again many of you have asked me about some basic concepts in economics and finance. More so those that are related to the Budget. Today’s ET has a very good glossary. A must read for everyone.
• Do so here. (Sorry friends, I am not able to get the ET link for it.) Uploaded it on rapidshare. Download it from here.
• Blue Ray vs. HD DVD battle
• Looks like HD DVD championed by Toshiba has lost out. We get this impression because of the following developments:
• Recently the US retailing giant Wal-Mart has announced that it would abandon the HD DVD format and only stock its shelves with Blu-ray movies.
• Time Warner’s Warner Bros Studio said it would only release HD DVDs in Blu-ray format.
• These developments have put paid to the Toshiba promoted HD DVD format. Looks like this round is won by Sony which championed the Blu-ray format.