Politics & the Nation
- The country is seeing tumultuous changes in the political sphere on the eve of the general elections.
- Some excellent commentary on how regional parties are playing decisive roles is penned by PR Ramesh. Worth a read.
- Some snippets of info about NREGS budgeting
- You all know about this pet scheme of the UPA government. It guarantees 100 days of employment in a year to an adult person in every rural household. Look at this info that appeared in papers today:
- To assess the precise requirement for the next fiscal, the ministry of rural development has started preparing a labour budget with inputs from over two lakh gram panchayats in the country. The ministry is getting details of the infrastructure projects that gram panchayats want to undertake next year. It will assess the requirement of workers assuming that a part of the project cost, say 60%, would go to labour. The ministry expects to complete the labour budget in the first week of April.
- The problem before the government in scaling up infrastructure development work in rural areas is the limited availability of projects that would lead to productive assets in small gram panchayats where 8,000 people dwell on an average.
Finance & Economics
- How did the global financial crisis come about? What are the reasons behind it? What systemic issues were involved in its coming about?
- If you are asked to answer such a question, this excerpt from today's excellent piece by Subhasish Roy will get you decent marks:
- One of the latest international surveys reveals that the top three reasons for this financial crisis are inadequate risk management practices at banks, increased complexity of financial instruments and speculation of financial market.
- However, in my opinion there are four systemic issues involved behind this crisis. (i) The entire financial risk analysis was mainly based on an unrealistic assumption that property prices will not fall drastically, rather it would continue to rise. (ii) Too much greed and unrealistic expectations of higher return from mortgagebased loan. This encouraged many banks to increase their risk exposure disproportionately in single line of business ignoring the underlying risk involved. (iii) The underestimation of underlying risk by the various intermediaries involved in the process of development of complex financial instruments. Considering the subprime borrower profile with lack of stable income, many of these mortgages were already at high risk. Yet these mortgages were packaged with some credit enhancement mechanism by some banks and financial institutions in such a way that these obtained high rating. However, in reality, the original risky loan remained risky even with this credit enhancement as the underlying cash flows from the borrower remained uncertain. (iv) Over-reliance on quantitative analysis on risk modelling without giving much importance to underlying assumptions. Risk models (such as estimation of value at risk) that were based on a short history of abnormal loss data and unrealistic assumptions, one of being continuous liquidity, did not prepare them for crisis conditions. Reliance on these models led to a myopic focus within institutions that ignored the risk of a significant disruption to the financial system if everyone reacted to a large shock in the same way.
- Thus the current crisis is not only the fallout of a faulty risk management strategy, but also factors like failure of business strategy; asymmetric information system of the intermediaries involved in the complex financial product; and rating agencies that had assigned rating based on mainly secondary source of information about the borrowers and bank’s profile and probable impact of market dynamics of such products under adverse business conditions. All these led to systemic failure in the banking and financial sector.
- What ails power trading in India?
- Many of you might be aware that with the passage of the Electricity Act 2003, India embarked on a path of reforms in Electricity sector.
- One of the notable aspects of this reform process is allowing electricity trading through the creation of power trading exchanges. At present there is only one power trading exchange operated by Power Trading Corporation (PTC). Despite having an exchange for trading power, power trading has not taken off on substantial scale. Actually, power trading accounts for a tiny part of total generation, just about 2%. There are now as many as 42 power-trading licensees, but only a few find it worth their while to be active in the market. One of the reasons attributed for this is the tough stand taken by CERC, the central electricity regulator on ceiling margin for eletricty trading. It has prescribed a ceiling of 4 paise/unit as this ceiling.
- PTC contends that if this ceiling is raised, more power trading will happen in the country.
- What is EGI?
- It stands for Economic Governance Index. EGI is a measure of the environment provided by local bodies for private enterprises and households. It is a comparative measure of how private enterprises operate in conditions provided by the state.
- A group of researchers at the Institute for Financial Management and Research (IFMR) are trying to come up with this unique index. It will be initially formulated for Tamil Nadu and later extended to other states.
International
- News on Bernie Madoff
- I am sure you all remember him as the big daddy of Ponzi schemes. He was arrested three months ago.
- The government's investigations are still on. US government estimates now say that he could have made about $170.8 bn through all of his schemes. It did not say how it arrived at the figure.
- The government prosecutors have come up with 11 counts of charges against him that include: securities fraud, mail fraud, wire fraud, three counts of money laundering, making false statements and perjury among other charges, according to the court documents.
- He faces up to 150 years imprisonment, according to sentencing guidelines.
- He is currently under house arrest.
- Mr. Madoff is expected to plead guilty to all the 11 counts today in the US.
- eminence grise: Noun
- (French) a person who exercises power or influence in certain areas without holding an official position
- eg: The President's wife is an éminence grise in matters of education.
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