21.10.2008

  • Repo rate cut by 1% to 8%
    • With a view to give a fillip to the economy, the RBI has cut the repo rate - the rate at which banks borrow from RBI — by one percentage point to 8%. This marks the beginning of a dovish monetary policy, with inflation becoming less of a concern. RBI had last cut interest rate in 2004.
    • How will the rate cut positively impact the economy? Why will it lower the home loan rates? To know answers to questions like these, take a look at today's ET in the class-room column. It explains very well.
    • I welcome this move by the RBI. I have long been a votary of low cost economy. It is only with lower interest rates that we get a low cost economy.
  • China slows down, even as the US measures another stimulus package
    • Reports are that the US is considering another economic stimulus package, considering that its economy will stay in a recession mode for the next few quarters. China's growth also has taken a beating; though it still is an enviable figure of 9%. Look at this graphic .
  • India-Pakistan to open a trade route after 60 years!
    • The Srinagar - Muzaffarabad road route will be opened today between the two countries after 60 years. Muzaffarabad is actually Indian territory but it is in PoK - Pakistan occupied Kashmir.
  • A very good article on exchange rate management by Ashima Goyal. Some excerpts for us:
    • THE exchange rate has three effects.
      • First, on the real sector: trade, demand and therefore on output. So the real exchange should not deviate from competitive levels.
      • Second, on inflation — appreciation alleviates temporary commodity price shocks coming from food, oil and other intermediate inputs, for which passthrough of border prices is high. Such an appreciation is in line with the monetary policy stance of raising interest rates under high inflation, but it lowers the required rise in interest rates.
      • Third, a flexible exchange rate contributes to stability in the external sector, by decreasing the likelihood of a currency crisis.
  • It was just yesterday that we noted something about CAG lamenting about not having enough teeth and wanting more. We note some more of his views on an important topic of interest.
    • The CAG is reportedly contemplating a move to accrual based accounting from cash based system for the country.
    • Do you know the difference between the two systems?
      • Cash-basis accounting is a method of bookkeeping that records financial events based on cash flows and cash position. Revenue is recognized when cash is received and expense is recognized when cash is paid.
      • Accrual-basis accounting records financial events based on economic activity rather than financial activity. Under accrual accounting, revenue is recorded when it is earned and realized, regardless of when actual payment is received. Similarly, expenses are “matched” regardless of when they are actually paid.
    • Wikipedia gives an excellent brief on these two systems. Hardly takes 3 minutes for a read and recap. Do so here.
    • The CAG feels that the move will lead to better transparency. It will bring out the assets and liabilities of the government clearly. With 21 states having already accepted the move, he expects the process to be complete in about 2-3 years.
  • Some buzzwords (or should I say phrases?) that we need to recap in the context of the PM's stress on the need to evaluate the impact of government schemes to judge the real improvements brought about by them.
    • With this, perhaps it will be a matter of time before we start hearing the CAG emphasizing 'impact audit' or 'social impact audit' or something similar.
    • Performance Budgeting
      • Performance budgeting consists of classifying government transactions into functions and programmes in relation to the government’s policy goals and objectives; establishing performance indicators for each programme or activity; and measuring the costs of these activities and the outputs delivered. The terms “performance budgeting” and “programme budgeting” are often used interchangeably, but programme budgeting can also be defined as a form of performance budgeting giving greater emphasis to the classification of programmes according to the government’s policy objectives and the needs of efficient resource allocation. A full system of performance budgeting is difficult to realise, in large part because of the high information requirements and complex management systems that are needed.
    • Zero-based budgeting
      • Zero-based budgeting is a technique of planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure. By contrast, in zero-based budgeting, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases. Zero-based budgeting requires the budget request be justified in complete detail by each division manager starting from the zero-base. The zero-base is indifferent to whether the total budget is increasing or decreasing.
        The term "zero-based budgeting" is sometimes used in personal finance to describe the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward. It would be more technically correct to refer to this practice as "active-balanced budgeting".
    • Outcome budgeting
      • Presenting the 2005-06 budget, the finance minister Chidambaram introduced the phrase 'outcome budgeting' into the financial lexicon. It is supposed to be a progress card on what various ministries and departments have done with the outlay announced in the annual budget.
        It is a performance measurement tool that helps in better service delivery; decision-making; evaluating programme performance and results; communicating programme goals; and improving programme effectiveness.
        The Outcome Budget is likely to comprise scheme- or project-wise outlays for all central ministries, departments and organisations listed against corresponding outcomes (measurable physical targets) to be achieved during the year.
        It measures the development outcomes of all government programmes. Which means that if you want to find out whether some money allocated for, say, the building of a school or a health centre has actually been given, you might be able to. It will also tell you if the money has been spent for the purpose it was sanctioned and the outcome of the fund-usage.
        The Outcome Budget, however, will not necessarily include information of targets already achieved.
        This method of monitoring flow of funds, implementation of schemes and the actual results of the usage of the money is followed by many countries.
    • The CAG describes the move from performance based budgeting to zero based budgeting and then on to outcome budgeting as natural progression. Social impact budgeting or impact auditing would be more progress in the same line.

3 comments:

Yusuf said...

I don't complete agree with your views on Low cost/interest economy. If you examine all the asset bubbles created in the last hundred years then low interest rate will always figure in the equation. Low interest rate regimes generally leads to excessive leverages and thus excesses in terms of asset prices.

Pilani Pictures said...

Quite useful! thanks!

ramkyc said...

When the interest rates are high, companies will find that they have to earn that much profit which will cover their costs. Interest costs should not become one more additional factor (among the plethora of factors that are already there) for companies to seek earning higher gross margins. That's why high cost economies / interest rates are bad in general. Low cost does not mean interest rates should be zero or negative. That would be equally bad.