Indian Economy: News and Discussion (June 8 2008)

Krishna_V · Post by **Krishna_V** » 29 Oct 2009 02:01

harbans · Post by **harbans** » 29 Oct 2009 03:23

India has become the third largest steel producer for the first 9 months of 2009.

And Mittal, Posco, TATAs are yet to kick in their mega investments in Orissa. Thats good news indeed, but wait about 5 years..

If India can use the very iron ore it ships to China from Orissa, once these mega plants come in i don't see why it makes sense for China to be a major steel producer anymore..

ramana · Post by **ramana** » 29 Oct 2009 04:22

How much ore does India export to China and how much of it can be converted to iron and steel?

anishns · Post by **anishns** » 29 Oct 2009 04:31

This is sad indeed but, maybe it belongs in the Governance thread!

Masaru wrote:On Mumbai's Streets, Cabbies Fight To Keep Passengers Uncomfortable

The taxi tensions are strongest at the city's domestic airport. The airport has a brand-new covered area for cabs where, initially, old and new cabs mingled. But passengers were waiting in line for the next modern cabs rather than choosing the old ones. After watching the choicest customers being whisked away, the Padmini drivers got mad.

After some of the old-taxi drivers started beating up Meru cab drivers and stoning windshields, the police asked the new cabs to wait for customers to call to phone at a spot three blocks from the airport exit. Meru drivers at the airport say their business has plunged, and now they can't even go to the nearby tea stall for a snack.
May be OT for this thread, but another instance of mobocracy masquerading as democracy. Instead of the rule of law it is more the rule of the loud, obnoxious and powerful vested interests. Reminds one of the instance in 1920-30 when a group of Mumbai textile mill workers similarly protested against modernizing and automating the manufacturing, leading to most of the business shifting to Japan and eventually bankrupting the whole industry. International financial center and next 'shanghai' dream on, when the govt. can't/won't do anything against a taxi driver mob. Compare the rickety taxis to the maglev; gives a true measure of the distance to be traveled.

csharma · Post by **csharma** » 29 Oct 2009 06:48

India's steel production last year was 55 million tonnes and this year it will be probably up by 5% or so. China produced close to 500 million tonnes of steel last year. So any comparison between India and China is meaningless as far as steel production is concerned.

We have been hearing about new steel plants by POSCO and Tata Steel for quite some time now and I am not sure when they will actually start producing steel. But I have read estimates of India producing 120 million tonnes of steel by 2012. That would be a huge jump and I am not sure if that is feasible.

Suraj · Post by **Suraj** » 03 Nov 2009 01:36

Auto industry reports strong October sales:
Auto sales up 30% in festive season
Tata Motors sales up 34%
Maruti/Suzuki sales up 32%
Ford India sales up 98%
M&M utility vehicle sales up 32%
Bajaj Auto records 52% growth
Hyundai sales up 11%

Interesting trade trends - export decline is slowing down, but import decline is rising, the result being a smaller merchandise trade deficit. As a result we'll probably run a current account surplus for the first half of the year, if not the whole year, since invisibles have remained generally stable in comparison:
Imports decline 31.3%, Exports by 13% in September

India's imports continued to fall at a sharp pace and contracted 31.3 per cent to $21.3 billion in September, an official said. The imports in September 2008 was $31.13 billion.

Exports dropped by 13.8 per cent in September, the lowest rate of fall this fiscal, to $13.6 billion. The dip was over 30 per cent in April and May.

vera_k · Post by **vera_k** » 03 Nov 2009 08:14

IMF sells 200 tonnes of gold to India

Chinmayanand · Post by **Chinmayanand** » 04 Nov 2009 01:59

Full circle: India buys 200 tons gold from IMF

More than 18 years after New Delhi pawned 67 tons of gold to tide over a balance of payments crisis, the Reserve Bank of India has bought thrice that amount of gold from the International Monetary Fund to diversify its assets.

svinayak · Post by **svinayak** » 04 Nov 2009 02:21

durgesh wrote:Full circle: India buys 200 tons gold from IMF

More than 18 years after New Delhi pawned 67 tons of gold to tide over a balance of payments crisis, the Reserve Bank of India has bought thrice that amount of gold from the International Monetary Fund to diversify its assets.

How much has the Indian rupee devalued from 1991 to 2009. Anyone?
Adjust for this and you get the difference

animesharma · Post by **animesharma** » 04 Nov 2009 03:13

How much has the Indian rupee devalued from 1991 to 2009. Anyone?

1970 7.576
1975 8.409
1980 7.887
1985 12.369
1990 17.504
1995 32.427
2000 45.000
2006 48.336
2007 (Oct) 38.48
2008 (June) 42.51
2008 (October) 48.88
2009 (October) 46.37
http://en.wikipedia.org/wiki/History_of_the_rupee

ramana · Post by **ramana** » 04 Nov 2009 05:01

Also what was the price of gold in 1991 and now? I think it was ~ $320 in 1991 and now ~ $1080. About three times.

svinayak · Post by **svinayak** » 04 Nov 2009 05:17

Virupaksha · Post by **Virupaksha** » 04 Nov 2009 05:28

http://www.eenadu.net/panelhtml.asp?qry ... panel2.htm

The link is in telugu and will go tomorrow. It says that though we have "freed" the gold we pawned in 1991, the physical possesion is still with London and Swiss.
Is this true and can I have more info on this.

TIA
Ravi

SaiK · Post by **SaiK** » 04 Nov 2009 07:29

http://beta.thehindu.com/business/artic ... epage=true
interesting move!

Hari Seldon · Post by **Hari Seldon** » 04 Nov 2009 11:07

Read somewhere that the last reliably known gold reserves in US vaults would have to be valued at $8000 per oz to cover treasury liabilities at the end of 2008 (some kind of proxy for a return to the gold standard). There's been wanton speculation that often central bankers have had to manipulate Au prices down to maintain a convenient status quo that suited all.

wig · Post by **wig** » 04 Nov 2009 12:32

the gold rate (standard - 24 carats) per ten grams in Indian Rupees:
01.04.1981 1670
01.04.1991 3466
01.04.2001 4380
01.04.2009 15105

US which abandoned the gold standard in 1973. it is very unlikely that the US or the world will return to it.
the world economy is much much larger than before. all the gold would surely fail to anchor the volume of currency swilling around - white, black and grey -orginal and counterfeit

shyamd · Post by **shyamd** » 04 Nov 2009 22:10

Subscription so posting in full.
India Buys Gold from the IMF: On the Path of Gradual Reserve Diversification?

Print

Overview: India's central bank, the Reserve bank of India (RBI), has built large foreign exchange reserves due to a capital account surplus, mainly debt-creating hot inflows, since it runs a deficit on the current account. This is unlike other Asian countries who have built reserves based on current account surpluses. The reserves satisfy the reserve adequacy requirements. Given the volatile nature of these hot inflows, the central bank is reluctant to use these reserves to set up a sovereign wealth fund. In 2008, a small fraction of the reserves were used to set up an offshore fund to finance infrastructure development. Despite some diversification in the recent years, the central bank has been risk averse and has mostly invested in U.S. dollar assets, and in securities and deposits with central banks, BIS and the IMF.

Increasing Shares of SDR and Gold in India's Foreign Exchange Reserves
* According to the IMF and RBI press releases, during October 19-30, 2009, India bought 200 metric tonnes of gold from the IMF. India is the first to purchase gold under IMF's gold sales program, which aims to raise resources to increase lending to low-income countries. India bought half of the 403 metric tonnes of gold offered for sale by the IMF to central banks. The purchase was made at the prevailing market price amounting to US$6.7 billion or SDR4.2 billion.
* The gold purchase comes after India purchased SDR from the IMF in August 2009 and is a clear sign that India is in the camp of emerging markets holding large share of foreign exchange reserves in U.S. dollars and wanting to gradually diversify their reserves.
* Data from the RBI shows that until 2001, India reduced its gold holdings to a low of US$ 2.7 billion (6.4% of reserves) from over 20% in 1994. Even as its FX reserves surged during 2004-07, RBI reduced the share of gold in total reserves. As of October 23, 2009, of the total US$285.5 billion in FX reserves, India held US$10.3 billion in gold or only 3.6% of reserves. According Lex of FT, after the gold purchase from the IMF, the share of gold in India's reserves will rise to over 6.0%.
* On August 28, 2009, the IMF allocated US$4.82 billion or SDR 3.08 billion to India under the general allocation of Special Drawing Rights (SDRs) by the IMF. As of October 23, 2009, India held US$5.3 billion in SDR of the total US$285.5 billion in FX reserves.
* India has committed to buy up to US$10 billion in SDR denominated IMF notes. This is a part of the commitment made by the G20 countries in April 2009 to bolster IMF's resources and lending capacity to countries in times of crisis. (IMF, September 5, 2009)
* Under the agreement, India can purchase the notes directly from the IMF under the Note Purchase Agreement (NPA). The notes will be issued at the time when the IMF provides a loan to a country in crisis. The NPA will have a maturity of up to a maximum of five years with three-month interim maturities that can be extended for additional three-month periods. The interest on the notes will be paid quarterly based on the average SDR interest rate for the preceding quarter. These notes can be transferred to other IMF members. The IMF will be able to repay the note holders if needed. (IMF, July 2009)
* India recently joined other BRIC nations in global calls for diversifying foreign exchange reserves away from the U.S. dollar.
* Economic Adviser to India's Prime Minister Suresh Tendulkar said he is urging the government to diversify its over US$260 billion foreign exchange reserves and hold fewer dollars. “The major part of Indian reserves is in U.S. dollars which is a 'prisoner’s dilemma' in terms of managing the holdings." (via Bloomberg, July 3, 2009)
* India's Foreign Secretary Shivshankar Menon: "India is willing to discuss proposals to replace the US. dollar as the global reserve currency." (via Reuters, July 6, 2009)
* U.S. dollar is the India's largest reserve currency, followed by euro, sterling pound. India also holds some yen, Canadian dollars and Australian dollars in its reserves. In the recent years, India diversified its reserves slightly from U.S. dollar to the euro and other foreign currencies given its growing goods trade with Europe and other countries. However, after the global crisis began in August 2007, India increased its U.S. dollar holdings. India's exports, imports, capital inflows and external debt are largely denominated in U.S. dollars though euro's share has somewhat increased in recent years.
* RBI: The Foreign Currency Assets are maintained in major currencies like U.S. Dollar, Euro, Pound, Australian Dollar, Yen and others. The foreign currency assets are invested in multi-currency, multi-asset portfolios as per the existing norms which are similar to the best international practices. As of March 2009, out of the total foreign currency assets of US$ 241.4 billion, US$ 134.8 billion was invested in securities, US $ 101.9 billion was deposited with other central banks, BIS and the IMF. US$ 4.7 billion was in the form of deposits with foreign commercial banks / funds placed with the External Asset Managers. The rate of earnings on foreign currency assets and gold, after accounting for depreciation, increased from 4.6% in July 2006-June 2007 to 4.8% in July 2007-June 2008. (RBI report on reserves, July 2009)
* Brad W. Setser, Fellow for Geoeconomics and Arpana Pandey, Research Associate, Council on Foreign Relations: "India’s reserves are held mostly as deposits at the Bank for International Settlements. It holds relatively few U.S. securities. India has been buying U.S. treasuries even though its reserves are not growing." (May 2009)
* Jagannadham Thunuguntla, equity head, SMC Capitals : India's has the least exposure to U.S. Treasury bonds among BRIC countries as a share of total reserves (14%) and GDP (4%) and most of the investment is in short-term securities. However, in the last one year, exposure to U.S. treasury bonds has increased as these bonds are considered a safe-haven. (via Economic Times, August 9, 2009)
* Rupee appreciation and USD weakness have led to valuation losses on foreign exchange reserves in recent years. Government pays higher interest rate on sterilization bonds than interest earned on foreign assets (fiscal cost of holding reserves). Higher domestic lending rates (due to foreign exchange intervention and high credit growth) have led private sector to borrow from abroad (social/opportunity cost of holding reserves).

Trends in India's Foreign Exchange Reserve Position
* Foreign exchange reserves rose sharply during 2007-2008 led by large capital inflows (FII, external commercial borrowings by domestic firms, foreign direct investment (FDI) and remittances) peaking at US$315 billion in May 2008.
* India's foreign exchange reserves fell sharply in Q3 and Q4 2008. The global financial turmoil and FII outflows led the central bank to sell dollar to defend the downward pressure on the currency. Spike in oil prices also widened the current account deficit. This caused reserves to decline to US$245 billion in November 2008 from a peak of US$315 billion in May 2008.
* Revival of foreign institutional investment (FII) inflows since March 2009 has led the central bank to buy dollars to defend the appreciation pressure on rupee, especially as it wants a depreciation bias to support exports and build reserves. Foreign exchange reserves have risen steadily since mid-March 2009. Reserves might continue to rise if capital inflows remain buoyant even if the extent of central bank intervention slows ahead. The central bank also bought IMF's SDR bonds in August-end 2009. As a result, foreign exchange reserves stood at US$276 billion at the end of August 2009 with US$260.5 billion in foreign currency assets, US$4.8 billion in SDR bonds, US$9.6 billion in gold and US$1 billion in Reserve Tranche Position with the IMF.
* According to the RBI data in June/July 2009, India's foreign exchange reserves declined US$57 billion in FY2009 after rising US$110 billion in FY2008. The decline was mainly accounted by decline in foreign institutional investment (FII), external bank borrowing, short-term trade credit and also valuation changes (US$37 billion).

Putting Foreign Exchange Reserves into Use

* India's large foreign exchange reserves are accounted by debt creating and hot inflows (FIIs and external bank borrowing) as it runs a current account and trade account deficit. As a result, the reserves are highly volatile to global capital flows and economic outlook. This has constrained India from using its reserves for setting a Sovereign Fund or for fiscal spending.
* But India has used a small fraction of reserves to set up a Special Purpose Vehicle (SPV) for infrastructure development. The government-owned firm India Infrastructure Finance Company (IIFC) has set up a subsidiary in London (with regulatory approval from UK). The company will be borrowing US$250 million of foreign exchange reserves (up to total of US$5 billion) from RBI by issuing the RBI 10-year government-guaranteed bonds at LIBOR (London Inter-Bank Offer Rate).
* The firm will lend to Indian infrastructure companies to import capital goods or co-finance capital expenditure to be undertaken abroad (to avoid liquidity, inflationary, currency appreciation impact)
* IIFC also has an India-based US$5 billion fund in alliance with Citigroup, Blackstone. IIFC plans raising credit abroad, from the Indian government and India's National Small Savings Fund
* Back in 2008, the government was planning to set up similar firm that would borrow foreign exchange reserves from RBI to provide credit guarantees to Indian firms borrowing from foreign capital markets.
* RBI: Investment in high-yielding assets is constrained by RBI's mandates of safety and liquidity. It is difficult to determine the reserve adequacy given composition and liquidity risks associated with capital flows. India has fiscal and current account deficits, is dependent on non-resource exports,has a negative international investment position and low absorptive capacity . These factors constrain the useof foreign exchange reserves to setup a sovereign wealth fund.

Suraj · Post by **Suraj** » 04 Nov 2009 23:32

In effect, RBI is voting against 'wampum' in favour of more tangible assets. More central bank moves on these lines will send up the USD price of gold.

Kakkaji · Post by **Kakkaji** » 04 Nov 2009 23:42

Cross-posting from China economy thread. Some relevance to Indian economy:

U.S. dumps China for Mexico

An index developed by the global business advisory firm AlixPartners states that by the end of 2008, Mexico was the least expensive country for the U.S. to manufacture.

"The index showed that China, once the lowest cost supplier ... has now dropped to number three in LCC (low-cost countries) rankings, behind India and the new number one, Mexico," according to the AlixPartners 2009 Manufacturing-Outsourcing Cost Index.

Manufacturing in Mexico costs around 68%; in India around 73%; in China, near 86% and in Brazil close to 91%, compared to costs in the United States.

SwamyG · Post by **SwamyG** » 05 Nov 2009 00:11

'wampum' ka etymology kya hain? If I understand correctly it means 'dollar'. I think Vina was the first to use (coin) that term.

SwamyG · Post by **SwamyG** » 05 Nov 2009 00:24

The gold buying process was put in motion sometime back in April of 2009: http://www.mydigitalfc.com/news/india-a ... b-gold-897

A blog that discussed this in April of 2009: http://emsnews.wordpress.com/2009/04/17 ... gold-sold/

kumarn · Post by **kumarn** » 05 Nov 2009 00:57

SwamyG wrote:'wampum' ka etymology kya hain? If I understand correctly it means 'dollar'. I think Vina was the first to use (coin) that term.

As per dictionary.com it is informal for money.

Katare · Post by **Katare** » 05 Nov 2009 01:14

India for sure needs more gold in central reserve but I think timing may be wrong. But again when would you get an opportunity to buy 200tons of metal without upsetting market prices.

Muppalla · Post by **Muppalla** » 05 Nov 2009 01:54

Gold may cross $1500
http://money.cnn.com/2009/11/04/markets ... 2009110413

Muppalla · Post by **Muppalla** » 05 Nov 2009 05:43

I don't know if this article will be archived or not and hence posting in full.

http://www.wikigold.com/commentary/?p=6452

By Jeff Nielson
November 3, 2009

Given that this was such a simple news story – with nothing especially surprising about it – my first inclination was that it did not merit a commentary on the subject. However, seeing the reaction to this news convinced me that my first inclination was wrong.

Reading several reports on this news item, the “analysis” is remarkably the same: India’s purchase is a “surprise” because everyone expected China to grab the first share of this gold, but this “removes some anxiety” from the gold market which the IMF’s long-promised sale supposedly caused.

Addressing these two themes in order, certainly most knowledgeable commentators in the precious metals sector fully expected China and India to buy all of the 403 tons which the IMF has been authorized to sell. Those with reasonable memories will recall that China and India jointly called for the IMF to sell all of its thousands of tons of gold only a few months earlier. Obviously, with the IMF selling only a small fraction of their gold, China and India would be expected to be jointly standing at the front of the line-up to buy the IMF’s gold.

Whether the IMF announced a sale of gold to China and then India, or India and then China, or both together, there are no “surprises” here. Indeed, the real “surprise” is the claim by the writers of these various news items that the proposed IMF sale has caused “anxiety” in the gold market. What anxiety?

When two of the world’s new, economic powerhouses make it clear that they covet the thousands of tons of gold being held by the IMF, there was never a possibility (as claimed by one writer after another) that this gold would be sold “in the open market”. Indeed, the “voice of reason” through this long, drawn-out farce has been gold-sector icon, Jim Sinclair.

If Sinclair was not the first to scoff at the potential impact of an IMF sale of gold, he was certainly the loudest. He pointed out that in the past, such official sales of gold have tended to be gold-bullish – because when such gold was rapidly absorbed by the market, and where that same market demonstrated that its appetite for gold had not even begun to be sated, that this reinforces the bullish sentiment in this sector.

Indeed, the only people who expected (or at least hoped) that the paltry sale of 400 tons of gold would “depress” the gold market, or at least cause genuine “anxiety” are the anti-gold cabal. With respect to this group of hardly-unbiased observers, we can observe their own sentiments by reading the words of their “mouthpiece”: Kitco’s Jon Nadler.

It utterly mystifies me why anyone interested in the precious metals sector would listen to a word of the disinformation on the gold market from this sleazy snake. Consider this: Nadler has worked for a precious metals web-site, during a decade in which the price of gold has nearly quadrupled - and yet Nadler, himself, virtually never thinks that “now” is a good time to buy gold.

True to form, Nadler desperately tried to twist the sale of IMF gold to India in a manner which was designed to try to generate some “anxiety” in the gold sector about this non-event. Nadler referred to the sale of gold to India as “removing one cloud” which supposedly hung over the gold market. In fact, as someone who writes about this sector on a full-time basis (and thus is regularly exposed to the daily news in the market), Nadler’s remarks demonstrate his complete lack of sincerity.

In the real world, the anti-gold cabal has been trying to depress the gold market for a year with the proposed sale of gold by the IMF. Long before the IMF even had approval to sell this gold, the anti-gold Manipulators were “announcing” and “re-announcing” this sale roughly every six weeks to two months. With the exception of last autumn, when the Wall Street-engineered “crash” of global markets took everything down, this proposed sale of gold by the IMF has had no relevance at all to the gold market.

As I wrote back in July, in “Two Short-Term Scenarios for the Gold Market“, during gold’s traditional “seasonal weakness” from May through the summer, the gold market completely shrugged-off the IMF non-event – despite the increase to weekly sound-bites about this sale, which the anti-gold cabal continuously fed into the market during this period to try to depress sentiment.

The Manipulators were totally unable to push the price of gold lower during this period, despite the fact that India (typically the world’s largest importer of gold) had virtually stopped its gold-buying for most of the year. Indeed, the one thing which was totally obvious in this sector, after countless “announcements” of this IMF-sale is that selling this gold would have no impact on the gold market (at least, no negative impact).

Most likely, most of the people writing these “news” pieces today were simply fishing for some “angle” to fill up space – and turn this trivial announcement into a “news story”. Obviously, such an excuse does not apply to Kitco’s Nadler. As someone who writes a daily column, he has years of practice in simply “filling space” in his writing.

Nadler has been the loudest voice in broadcasting the message of the Manipulators. Yet, despite a year of evidence that this propaganda-campaign has been utterly ineffectual, today he is still spouting the same drivel. With many commentators providing useful and honest advice and commentary on the precious metals sector, investors could use their time much more productively than by reading the tired, repetition of the same anti-gold message from people such as Nadler. The only possible value of Nadler’s pseudo-insights into this market would be as a contrarian indicator for this sector: if Nadler says gold is going down, then now is the time to buy!

With the IMF’s remaining 203 tons of gold clearly set aside for sale to China, hopefully we will not be subjected to more “news” stories depicting that upcoming event as a “surprise”, as well. If there is any real “news” regarding these 403 tons of IMF gold, it’s that it comprises 20% of all the gold which will be sold under the “gold agreement” of Western, central banks over the next five years. The latest of these five-year agreements began as of October 1, 2009.

The IMF gold-sale was desperately patched-into this sales agreement – despite the fact that the IMF is not a Western, central bank. The reason for this is that the anti-gold cabal has run out of gold which it can persuade these bankers to dump onto the market. During the last year of the previous five-year agreement, which called for a target/quota of 500 tons per year, Western central banks were only willing to sell less than 200 tons.

The new agreement has reduced the new target/quota to 400 tons per year. Yet, even with the inclusion of the IMF sale of gold into this deal (for no real reason of any kind), there is no chance of the Manipulators being able to persuade its central banker allies from selling anywhere close to 400 tons per year.

What this really means to the gold market is that this gold-sale (and any/every future, official sale of gold) has absolutely no significance or news-value as a “cloud” or source of “anxiety” for the gold market. Instead, the only significance of such announcements is that it provides an opportunity for the many, national governments who are eager (if not desperate) to add to their gold reserves – without immediately driving the price of gold higher.

The semi-knowledgeable journalists (and disingenuous serpents, like Nadler) who provide their own “explanations” of such events should simply be ignored. During the years when central banks were large, net sellers of gold, there was some bona fide news value in announcements of official gold sales.

Having entered a new era in the gold market, where central banks are now net-buyers of gold, the significance of such gold-sales dwindles considerably. Instead of being important market-movers, such future sales should be covered in much the same manner as Gordon Brown’s foolish decision to dump half of the United Kingdom’s gold – at only a tiny fraction of its value. In other words, such sales are not “threats” to the gold market, but rather examples of misguided politicians and bureaucrats squandering an invaluable asset.

ldev · Post by **ldev** » 05 Nov 2009 16:03

pandyan wrote:buying gold in bulk at $1000 an ounce? what is the logic behind it?

It means that notwithstanding the fact that USTs pay a coupon and gold does not - that the RBI expects the decline in the purchasing power of the USD (due to various reasons including wanton printing of the currency) to more than offset the coupon USTs pay i.e. gold will provide better principal protection value for India's foreign exchange reserves. Or at the very least this purchase provides a better balance in the various components of India's fx reserves in the opinion of the RBI.

I am personally very happy with this. Sometime ago I had put forward the idea of the rupee being backed by a "representative gold standard" using household gold saved in India. In meeting that ultimate objective it does not hurt if GOI officially also bolsters its gold reserves.

Nihat · Post by **Nihat** » 05 Nov 2009 17:48

Posting in full

Govt revs up reforms, announces listing for all PSUs

New Delhi: In a major push to the economic liberalisation process, the government has decided to ensure at least 10 percent public holding in all profitable state-run firms that will see a host of public offerings by such companies over the next few years.

The government on Thursday decided that proceeds from the divestment of equity in state-run firms can be directly used for capital expenditure on social sector programmes, rather than routing it through the National Investment Fund.

"All profitable central public sector undertakings should meet the mandatory listing of 10 percent public ownership," Home Minister P Chidambaram told reporters in New Delhi, after a meeting of the Cabinet Committee on Economic Affairs.

The meeting, presided over by Prime Minister Manmohan Singh, also decided that all the unlisted, but profitable state-run enterprises, must be quoted and traded on the stock exchanges.

These decisions had an immediate impact on the stock markets, when the sensitive index (Sensex) of the Bombay Stock Exchange (BSE) shot up by over 300 points within seconds, to more than make up for the losses incurred in the morning.

Out of 419 public sector firms under the central government, 51 are listed.

Chidambaram said to qualify for divestment and listing, a state-run company should have a positive net worth, no accumulated losses and have made net profits for the past three consecutive years.

On the decision to use proceeds from divestment directly, the home minister said this was on a special dispensation for the next three years and restricted to programmes identified by the Planning Commission and accepted by the government.

Thus far, proceeds from divestment went to the National Investment Fund that has a corpus of over Rs 2,000 crore.

Asked as to when the qualifying unlisted companies will hit the market, Chidambaram said: "At an appropriate time, when market is favourable." He said there were a large number of central undertakings identified by the Department of Disinvestment for sale of equity.

http://ibnlive.in.com/news/govt-revs-up ... ml?from=tn

This is something which I was expecting to be a part of the budget, I guess they waited for the economy to show concrete signs of recovery.

wig · Post by **wig** » 05 Nov 2009 18:48

what i would like to know is the reason behind the Home Minister making the statment that disinvestment of profitable PSU through listing should proceed.
the Finance Minister or if there is one, the Disinvestment Minister should speak about such matters to maintain the discipline of the Cabinet.
or do the powers that be want another change and everything is not as calm as it appears to be?

nelson · Post by **nelson** » 05 Nov 2009 23:04

^^it was the routine thursday cabinet meet. one of the members of the cabinet briefs the media after the meet. this day, it happens to be chiddu. nothing amiss..?!

Atri · Post by **Atri** » 06 Nov 2009 03:16

X-posted from leadership dhaaga for feedback from RM ji,

Chiron wrote:Transaction tax is an old and very good idea... Coupled with removal of all currency notes with denomination higher than Rs. 50; this would be an awesome method to curb black economy..

1. remove all the notes above Rs 50 (that is, Rs 100, Rs 500, Rs 1000)
2. Any transaction in cash above Rs. 5000 should be made illegal. Anything above 5000, you should do it through banks.
3. Abolish all taxes, and introduce 2% transaction tax on every transaction above Rs. 5000

Suraj · Post by **Suraj** » 06 Nov 2009 03:43

None of those ideas sound particularly palatable. In fact, they sound quite draconian. But that would be getting ahead of the issue. Let's start with the premise itself - what is the urgency regarding 'curbing' the informal 'black' economy about, that necessitates such massively intrusive 'solutions' ? As an economy matures, the gamut of economic activities progressively becomes more and more formalized.

Atri · Post by **Atri** » 06 Nov 2009 04:46

Suraj wrote:None of those ideas sound particularly palatable. In fact, they sound quite draconian. But that would be getting ahead of the issue. Let's start with the premise itself - what is the urgency regarding 'curbing' the informal 'black' economy about, that necessitates such massively intrusive 'solutions' ? As an economy matures, the gamut of economic activities progressively becomes more and more formalized.

Suraj ji,

I did not understand the comment.. Why should black economy not be curbed? I am not a student of economics but from what I understand, black economy hurts the overall economic performance of country.

More money is out of law's coverage, hence less money is there with banks and government (in form of taxes). This leads to higher interest rates of the loans. IF all the transactions start happening via legal route (that is through banks recognized by RBI), then there will be more money with the banks, thus loans will be cheaper. This means easier credit, easier way of raising money for small and mid-cap businessman. Thus more capital will be available in market, along with FDI will accelerate the growth of nation. India's growth won't have to wait for foreign capital. All the problems (Social-economical-political) which arise owing to dependence on foreign money will decrease.

Also, more taxes, hence more money at the disposal of government for its developmental work.

Cash transactions is one of the most common way of evading the taxes and scrutiny. Also the corruption is easier due to the currency notes of higher denomination. when large number of people earn less than 200 rupees a day, why do we need notes of 100, 500 and 1000? Won't the currency notes of Rs 50 enough for all the daily wage earners who are poor?

Those who play with higher notes can do so via internet banking and/or cheques. Net-banking is more preferable. Furthermore, withdrawal of currency notes of higher denomination will starkly reduce the problem of fake-currency. It takes Rs 40 to print one note, be it of Rs 50 or Rs 1000. If everything above 50 rupee note is invalidated, it will be exponentially expensive and difficult for pakis and other forces to print fake Indian currency and introduce them into circulation.

Withdrawal of all taxes and levying of some transaction tax at source will make things cheaper, it will be difficult to evade taxes, and money distribution will be efficient. It will be bank's duty to distribute the money between central govt, state govt, local govt and its own profits.

Urgency is required for curbing black economy. IF there is some higher truth for not doing so, apart from vested interests of politicians, I don't know them as yet. Please enlighten.

Suraj · Post by **Suraj** » 06 Nov 2009 05:44

Chiron: I don't mean to suggest that there's nothing wrong with the informal economy. I'm asking why is it so urgent to curb it that demands such draconian, and IMHO, patently impractical, solutions. As I asked previously, what makes the informal economy so dangerous that necessitates such direct action, in such a manner ? I disagree that 'urgency is required to curb black economy' is any sort of self-evident truth, and can think of several others things that are far more critical, e.g. removing all distortionary inter-state tariff barriers like octroi, or clarifying eminent domain and land acquisition laws.

From my perspective, the premise is too weak, and the solution presented disproportionately invasive, not particularly well thought out (e.g. how does one make a large transaction when there's no access to the internet/phone ? Needing 10+ Rs.50 currency notes just to pay a cab fare from Bangalore airport-city ?) and practically unimplementable. Any attempt to implement these would lead overnight to a massive parallel economy dedicated to maintaining the existing informal economy, and where implemented, a massive reduction in the velocity of monetary transactions, because a disproportionately large part of the employed base is unorganized or small-scale, who primarily deal in cash.

The economic history in India has shown time and again that the stick approach rarely yields the desired results, thanks to unintended consequences. I would always prefer a disincentive over an overarching ban or some such action. Any form of enforcement is prone to inefficiency, or the potential for corruption and/or misuse.

While I agree that the general premise towards discouraging the informal economy is right, I disagree that it is something that needs such urgent action, and do not think the proposed measures are either sensible or feasible. There will always be a cash economy at the small scale level, even in mature economies. Greater economic development leads to lesser utility for large cash transactions. If at all I were to consider proactive actions, I would prefer guidelines to the effect that economic transactions like car and house purchases require formal banking involvement.

wig · Post by **wig** » 06 Nov 2009 10:50

Black money is a pseudonym for unaccounted wealth. But it is instructive to speculate its origins.
The principal reasons for the generation of Black money is the legal framework we have designed for ourselves. Both Direct and Indirect tax legislations whether at the center or state level are worded in a lax manner. the drafting lends itself to differing interpretations.
next the laws themselves have pegged taxes at very high levels. taxation rates are ludicrous. Taxation levels in the direct taxes field are the same as the Developed, highly industrialised economies. In the field on indirect taxes we are adopting VAT and soon GST (Goods & Service tax) it is expected that this tax will ensure a trail from manufacturer, service provider to end consumer. the result are generally mixed. tax inflows rise but they do not do so(IMVHO) because of greater compliance but due to general growth of the economy.
an unitended conseqence is that tax related disputes clog the supreme and high courts and tax tribunals.
historically the slashing of tax rates has lead to much better compliance.
as a thought if everybody were to pay all taxes due the Govt would squander it. Developmental activities are always welcome but from what i hear the costs of roads, canals, public utility infrastructre is barely 40 to 50% of the moneys expended by the public exchequer.
Black Money is used by business to fund its growth in a very major way. In 1991 when the Govt relaxed lauched a scheme to bring in foreign currency most of it was indian owned money. and it was used by big business for investment.
to conclude black money is a mixed bag and it will go away as and when the economy becomes more transparent, education levels rise and the govt accounts for its own expenses properly.

AnimeshP · Post by **AnimeshP** » 06 Nov 2009 20:35

Chiron wrote:X-posted from leadership dhaaga for feedback from RM ji,

Chiron wrote:Transaction tax is an old and very good idea... Coupled with removal of all currency notes with denomination higher than Rs. 50; this would be an awesome method to curb black economy..

1. remove all the notes above Rs 50 (that is, Rs 100, Rs 500, Rs 1000)
2. Any transaction in cash above Rs. 5000 should be made illegal. Anything above 5000, you should do it through banks.
3. Abolish all taxes, and introduce 2% transaction tax on every transaction above Rs. 5000

Adding to the points made by posters above, I don't think removal of notes with denomination higher than Rs. 50 will solve the problem of underground economy. Case in point:
My relatives were selling their house to a gentleman serving in IPS. The total price to be paid by the buyer was around Rs.50 Lacs of which about Rs. 30 Lacs was "white" money and the rest Rs. 20 Lacs was "black" (in cash). Now when the buyer came to pay the cash component, he came with a couple of constables carrying 2 huge sacks of money which contained notes of Rs. 50, Rs. 10 & even Rs. 5 denominations

(basically the "toll" collected from all police nakas etc)!!! It took all the parties involved about about 3 hours to count the whole sum ....

Jarita · Post by **Jarita** » 06 Nov 2009 20:51

Government is planning to sell off 10% more of the PSU's. Bad decision.

SwamyG · Post by **SwamyG** » 06 Nov 2009 21:14

Jarita wrote:Government is planning to sell off 10% more of the PSU's. Bad decision.

Indiscriminate selling without thinking about the consequences is bad. I heard the axe does not stop even with PSUs that are making money. Security and Stability of the country ranks among the top responsibilities of any form of government. Sometimes security and stability come at a price - inefficiency etc. These need to be offset by other balancing forces - improved efficiency in other sectors.

Jarita · Post by **Jarita** » 06 Nov 2009 21:16

SwamyG wrote:
Jarita wrote:Government is planning to sell off 10% more of the PSU's. Bad decision.
Indiscriminate selling without thinking about the consequences is bad. I heard the axe does not stop even with PSUs that are making money. Security and Stability of the country ranks among the top responsibilities of any form of government. Sometimes security and stability come at a price - inefficiency etc. These need to be offset by other balancing forces - improved efficiency in other sectors.

PSU's constitute strategic assets. Somebody is getting some mega bribes. We've already sold off our Mines, Media...

Jarita · Post by **Jarita** » 06 Nov 2009 21:19

This is where the trade unions need to come in. SOmewhere we have to stop this

SwamyG · Post by **SwamyG** » 06 Nov 2009 21:22

Sadly nobody is there to stop them. Lessons learned from history are just in books sitting on the shelves.