February 12. 2010

February 12, 2010

ü      Pakistan said on Thursday that it looked forward to a result-oriented engagement with India, and is likely to announce the decision to accept the Indian offer of Foreign Secretary-level talks in the next couple of days.

ü      The Centre on Thursday said it was ready to “welcome” Kashmiris who had gone to Pakistan-occupied Kashmir (PoK) if they were willing to return after giving up militancy.

·         A bit about the insurgency in Kashmir

o   Insurgency in Kashmir has existed in various forms, both on the Indian administrated side of the disputed territory of Jammu and Kashmir and Pakistan-administered Kashmir.

o   Thousands of lives have been lost since 1989 due to the intensified insurgency

o   A widespread armed insurgency started in Kashmir with the disputed rigged 1987 election ;since the 1987 rigged Sate elections some of the 'state’s legislative assembly' 'formed militant wings' and furthermore that had started a catalyst for the insurgency

o   According to official figures released in Jammu and Kashmir assembly(Indian controlled), there were 3,400 disappearance cases and the insurgency has left more than 47,000 people dead till July 2009.

o   India frequently asserts that most of the separatist militant groups are based in Pakistan and Pakistan-administered Kashmir (also known as Azad Kashmir). Some like the All Parties Hurriyat Conference and the Jammu and Kashmir Liberation Front demand an independent Kashmir. Other militant groups such as Lashkar-e-Toiba and Jaish-e-Mohammed favour a Pakistani-Kashmir.

o   Due to the presence of these numerous anti-India insurgent groups India has been compelled to deploy massive number of troops in the Indian administered Jammu and Kashmir for the task of counter insurgency.

ü      A day before the scheduled release of “My Name Is Khan” on Friday, multiplex owners across the city retracted their plan and expressed their unwillingness to go ahead with the release in the wake of ongoing threats and intimidation.

ü      India on Thursday signed a “declaration” on civilian nuclear cooperation with the U.K. which officials described as a “general umbrella agreement.”

·         has so far signed civilian nuclear pacts with Russia, France, the U.S., Kazakhstan, Mongolia, Argentina and Namibia.

·         What is a civilian nuclear agreement? It is a bilateral accord between two countries on civilian nuclear cooperation. It separates out military establishments and civilian nuclear establishments.

·         The deal would include sharing of technology and information that would prove useful for both the countries involved.

·         Such deals are critically important to India because

o   It recognizes India’s nuclear might and allows India not to sign the Nuclear Non-Prolifiteration Treaty

o   It is of extreme strategic importance to India

o   Economic considerations also play an important factor

o   The agreement makes India part of a select group of nations and increases India’s global standing

ü      Food inflation rose for the third straight week to touch 17.94 per cent by January-end, fuelled by costlier potatoes and pulses. An RBI official said it was expected to moderate toward the year-end. Read about our post on food inflation here.

ü      Defence Minister A.K. Antony on Thursday delinked the proposed Foreign Secretary-level talks from Islamabad’s efforts at dismantling terrorist camps and the increased levels of infiltration.

·         But why are the talks so important?

o   India and Pakistan are two important players in the region. The peace in the region will be determined by the relationship between the two players.

o   US has interests in this area as Afghanistan is near Pakistan and India

o   China also has interests as China does not want India to get leverage in the race towards global supremacy.

o   The resurgent Russia also has vested interests in the area.

o   India and Pakistan share a lot of common history.

o   Being two countries whose major religions are entirely different, a confrontation between the two countries could boil over to serious confrontations in other parts of the world because of a ripple effect.

o   Last but not least, the number of people involved is a very huge number. These include the civilians on both the sides as well as the military personnel.

o   The natural resources involved in this area provide a major concern.

o    The aesthetic value of the region is a major concern for the parties involved.

o   The major factor is the nuclear power of both the countries. A nuclear confrontation can have irreversible consequences.

ü      The budget is coming. A preview of the union budget of 2010-2011

·         Last year’s union budget focused on combating the financial crisis to combat which two stimulus packages were doled out.

·         The last union budget was a sort of stimulus as well, and faced with the parliament elections, the central government also listed a huge amount of sops to the poor.

·         Coupled with the fiscal packages by way of huge cuts in excise duty and service tax aimed at propping up consumer demand and keeping the wheels of industry moving so as to pre-empt job cuts, the Reserve Bank of India pumped in adequate liquidity by lowering its key policy rates.

·         As a consequence, by the time Mr. Mukherjee presented the UPA government’s first regular budget for 2009-10 in its second term on July 6, the economy had already started putting out green shoots of recovery in key sectors such as steel, cement, auto and consumer goods.

·         What appears to have essentially paid off was the high priority given to infrastructure development as the increased investment led to rapid growth and employment generation in urban and rural areas.

·         Through the four packages announced during the fiscal year ever since the global meltdown, the government had provided an overall stimulus of nearly Rs. 2,18,000 crore to the economy. The bulk of this was directed at investment in urban and rural infrastructure, as well as aam aadmi-centric programmes.

·         While the farm debt waiver scheme was extended to ameliorate the hardship of farmers on account of the late arrival of monsoon, the excise cuts on various FMCG (fast moving consumer goods) products and autos resulted in higher demand for such goods even in rural areas.

·         That the stimulus packages worked, although with a lag effect, is clear from the growth data, both for industrial production and GDP (gross domestic product) figures.

·         In particular, the second quarter data surprised one and all with a 7.9 per cent GDP growth and as the third and fourth quarter numbers are expected to be better — despite the negative growth in the farm sector — the overall growth for the entire fiscal is officially estimated at 7.2 per cent.

·         Even at 7.2 per cent, it would be the second fastest recovery and growth among all economies at a time when the developed economies are still witnessing a tepid and fragile recovery.

·         And that brings the Minister to the biggest challenge while presenting the budget on February 26 for the new fiscal. To adhere to his own budgetary target of bringing down the fiscal deficit to 5.5 per cent in 2010-11 from the “unsustainable” 6.8 per cent of the GDP in the current fiscal, Mr. Mukherjee will have to raise adequate revenue to fund the inflation-adjusted higher expenditure allocations.

·         For this, the stimulus measures — excise and service tax cuts — will have to be withdrawn. He has gone on record saying the stimulus measures would not be withdrawn until there are clear signs of a firm global recovery and the growth pick-up in the domestic economy is sustained.

·         Influenced by the growing food inflation, The RBI, while sucking out “excess” liquidity to the extent of Rs. 36,000 crore by raising the CRR (cash reserve ratio), has given enough indications that a phased exit of stimulus is essential.

·         Mr. Mukherjee’s dilemma, however, is whether the exit would affect the growth process. For, no one is sure whether the faster pace of economic recovery is due to the stimulus packages or it can be sustained without the sops.

ü      A total of 419 leaders and cadres of the Karbi Longri N.C. Hills Liberation Front (KLNLF) formally handed over 158 weapons to Chief Minister Tarun Gogoi on Thursday at an arms decommissioning ceremony in Diphu of central Assam’s Karbi Anglong hill district.

·         KLNLF wants self-rule for the Karbi Longri and North Cachar Hills

ü      Army Chief General Deepak Kapoor, who was directed by Defence Minister A.K. Antony to court-martial a top general in the Sukna land scam, on Thursday defended his earlier decision of a lighter administrative action against him. To know more about Sukhna Scam, please visit this link.

ü      The defence lawyer of 26/11 accused Fahim Ansari was shot dead on Thursday evening at Taximan’s colony in suburban Kurla.

ü      With France and Germany, the EU’s two largest economies promising “determined and coordinated action” during a mini EU summit held in Brussels on Thursday, Greece averted a humiliating recourse to the International Monetary Fund to stave off financial ruin.

·         However, few details were made available how exactly that support would be given and the question of immediate and direct financial aid was completely sidestepped.

·         Greece, which represents 2.7 per cent of the bloc’s $13-trillion economy, is the sickest member of the EU’s ailing economies and posted a budget deficit of 12.7 per cent of gross domestic product in 2009, the highest in the euro’s 11-year history and more than four times the EU’s 3 per cent limit.

·         The country has fudged its account and systematically lied about the exact nature of its finances for over a decade.

·         Earlier this week, fears of a sovereign default by Greece sent shock waves throughout the EU with markets and the Euro falling sharply.

·         The shaky economies of two other Euro zone members, Spain and Portugal, also came in for scrutiny amid speculation that this could mean very bad news for the EU’s currency, which many economists deem to be artificially strong.

·         Greece had promised to adopt “additional measures” to cut public spending and that the situation would be closely monitored.

·         These developments are likely to lead to further social unrest in Greece which has witnessed massive street demonstrations after the government decided to freeze public sector salaries and reduce the number of state employees.

·         This crisis was very much talked during the Dubai Crisis.

·         The crisis began after last year's elections, when the new government discovered Greece was breaking euro zone rules that say a member country's debt must not exceed 3 percent of its gross domestic product. Greece's debt was a whopping 12.7 percent of GDP, and the new Greek government ministers claimed their predecessors had been lying about it.

·         The value of the euro has dropped against the dollar as the Greek crisis unfolded, from an average of $1.49 to the euro last November to around $1.38 on Wednesday. It has stabilized somewhat as currency markets saw signs that euro zone governments, led by Germany and France, were putting together an aid package that would help the Greek government avoid default

·         The problems in the euro zone could impact the U.S., too, Stiglitz says, especially if they dampen sales of U.S. exports to Europe.

·         Unemployment figures also have soared and Greece's debt and bank stocks were pounded further.

·         Impact on India :

o   Corporate bond spread rates have risen by 50 basis points

o   Indian banks have put nearly $2 billion in hold which had been supposed for investment in these markets. Bank of Baroda and Axis Bank have put on hold nearly $500 million on hold

o   The crisis is expected to subside soon.

ü      In a significant move aimed at expediting flow of foreign investment into the country, the Union Cabinet on Thursday liberalised the foreign direct investment (FDI) policy further by allowing the Foreign Investment Promotion Board (FIPB) to clear proposals from overseas entities worth up to Rs. 1,200 crore, against the existing limit of Rs. 600 crore.

·         With Thursday’s approval, only proposals involving total foreign equity inflow of more than Rs. 1,200 crore would be placed for consideration of the Cabinet Committee on Economic Affairs (CCEA). The recommendations of FIPB on proposals with total foreign equity inflow of and below Rs. 1,200 crore will be considered by the Finance Minister for approval.

·         The decision was taken at a meeting of the Cabinet Committee of Economic Affairs (CCEA) chaired by Prime Minister Manmohan Singh.

·         Under the new dispensation, only foreign investment will be considered while deciding whether the project will be put up before CCEA against the earlier practice of taking into account the total project cost.

·         This is the first time since 1991, when FDI policy was introduced, that an amendment has been made in the policy at this scale. Foreign investors need not seek fresh approvals from the government or FIPB in sectors that have been transferred to the automatic route or where FDI caps have been removed

·         Despite the global slowdown, India had recorded 13.2 per cent increase in December at $1.54 billion against $1.36 billion in December 2008, as per the RBI. The FDI equity inflows during April-December this fiscal was $21.5 billion, marginally up from $21.15 billion in the previous fiscal.

·         What is FDi? Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and "know-how".

·         With the development of economic globalization, foreign direct investment (FDI) is increasingly being recognized as an important factor in the economic development of countries.

·         Although FDI began centuries ago, the biggest growth has occurred in recent years. This growth resulted from several factors, particularly the more receptive attitude of governments to investment inflows, the process of privatization, and the growing interdependence of the world economy

·         Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country.

·         FDI takes on two main forms; the first is a green-field investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country.

·         On the other hand, FDI is divided into two kinds; horizontal FDI (market-expansion investments) which is investment in the same industry abroad as a firm operates in at home; And vertical FDI (resource-seeking investments), which comprises two forms further; the first is backward vertical FDI investing an industry abroad that provides inputs for a firm's domestic production process. The second is forward vertical FDI in which an industry abroad sells the foods of a firm's domestic production processes.

·         The advantages of FDI

o   Low transportation cost

o   Avoidance of trade restriction

o   Advantage of tax incentives

o   Avoidance of an uncertain cost structure created by foreign exchange.

o   Avoidance of consumer-imposed restrictions.

o   Use of local raw materials and market testing.

o   Protection to firms' know- how/Avoiding licensing

o   The obvious one: Creation of jobs

·         The disadvantages of FDI

o   FDI is more expensive than exporting and licensing

o   FDI is more risky than exporting and licensing.

o   Nationalist tendencies

o   Fear of losing indigenous products/methods

o   Depends a lot on political atmosphere

·         Here is a detailed study on the various aspects of FDI.

ü      Commercial banks will be made to extend loans at base rates from next fiscal year, which is expected to benefit consumers and borrowers.

·         According to Reserve Bank of India Deputy Governor Subir Gokarn, the apex bank is keen on ensuring that banks provide loans on a base rate from April onwards and not on the basis of current benchmark prime lending rate (BPLR) as the latter was not considered a transparent system.