Date 18.11.2013Economy

One of the first promises that Raghuram Rajan made when he assumed office as Governor of the Reserve Bank of India (RBI) was to enhance transparency and communication by the central bank.

“…the public should have a clear framework as to where we are going, and understand how our policy actions fit into that framework. Key to all this is communication, and I want to underscore communication with this statement on my first day in office,” Dr. Rajan said the day he assumed office.

the RBI has always said that it is only concerned with volatility and not with setting a direction for the currency. So, was this a departure in policy?

A new deal for foreign banks

C. R. L. Narasimhan

Even while the issue of granting bank licences to a few private banks is gaining traction, the Reserve Bank of India (RBI) has released important guidelines for foreign banks to participate in the Indian financial sector in a bigger way than what has been possible so far.

The two developments have one common objective — they are meant to deepen the financial sector. If all goes well, a few new private sector banks will advent in early 2014. At the moment, there are 26 applicants, who have met the stiff eligibility criteria, and are being vetted by an independent committee of experts headed by former RBI Governor Bimal Jalan.

Awarding licences to corporates has been the most contentious issue in the new licensing policy, but once the decision was made, a few of the India’s biggest companies have put in their applications.

The major theme

The framework for foreign banks has one major theme — the formation of wholly-owned subsidiaries (WOS) for furthering their business in India. The RBI guidelines make it clear that the WOS model is what the regulator would prefer the foreign banks to have. Suitable incentives are being given to new as well as existing players operating

through their branches in India to adopt the subsidiary route and incorporate locally.

Origin of policy

Like the new private bank licensing policy, the framework for foreign banks has passed through several stages.

The origin of the new policy is to be traced to the year 2004 when the government relaxed the foreign direct investment (FDI) limits to 74 per cent in private sector banks. Simultaneously, foreign banks were permitted to set up a 100 per cent wholly-owned subsidiary in India subject to certain conditions. A detailed roadmap for operationalising the FDI guidelines, in two stages, was issued subsequently. Then, as now, the objective was to encourage foreign banks to take the WOS route. But in the absence of any incentives, no bank came forward to set up or convert their branches into WOS.

If the latest policy is to succeed and attract new foreign banks in the WOS route, the type of incentives naturally matter. Great significance is attached to the proviso that a locally incorporated WOS will be given near-national treatment, which, for all purposes, will place them on a par with Indian banks.

For instance, they can open branches anywhere in the country (except in sensitive areas where RBI prior approval will be required). It is expected that foreign banks already operating branches in India will also see in the national treatment a big advantage and convert themselves into WOS and participate in all financial sector activities. The WOS will have a minimum paid-up capital of Rs.500 crore, which is what has been stipulated for the new private banks.

Corporate guidelines for the WOS include a proviso that not less than 50 per cent of the directors should be Indian nationals/NRIs/PIOs.

Further, not less than two-thirds of the directors should be non-executive directors and a minimum of one-third of the directors should be independent of the subsidiary.

The fear of foreign banks taking over the Indian financial sector has been there ever since the FDI rules were liberalised.

To assuage such apprehensions, restrictions would be placed on further entry of new WOS of foreign banks/capital infusion, when the capital and reserves of foreign banks and their wholly-owned subsidiaries exceed 20 per cent of the capital and reserves of the banking system,

This stipulation is unlikely to satisfy either the foreign banks or those who want the RBI to spell out a more workable system of restraining them.

On the foreign banks taking over small private banks, the guidelines are circumspect. The RBI would wait and watch before allowing mergers and acquisitions.

Evidently, how foreign banks fare in the new dispensation will matter.

That, in fact, is something everyone would be interested in. Some of the foreign banks have had a long association with India.

Yet, in terms of volume of business and balance sheet expansion, even the world’s largest banks have been laggards. While in the past they could blame restrictive policies, they probably have a more conducive environment now.

However, it is too simplistic to assume that they would rush in and make a big impact anytime soon. If the new policy is to succeed, the type of incentives naturally matter

Date 27.11.2013Restore investor trust, EU tells India“The prospect of growth is better in India. The market and prospects will be much bigger ten years from now. Among investors from EU, there is positive sense on India’s medium-to-long term future,” Mr. Cravinho added. He was addressing select journalists here on Tuesday.He said the biggest concern among EU investors was the uncertainty under which they operated in India. “The uncertainty of the tax regime here is devastating. There is uncertainty with regard to licensing. These uncertainties really frighten the European investors. The time the courts take here to resolve disputes is a real deterrent for investment,” he added.

Date 3.12.2013

CAD to remain within limit: Chidambaram

Expresses confidence that the economy will expand by 5 %

Encouraged by better-than-expected growth in the July-September quarter, Finance Minister P. Chidambaram, on Monday, expressed confidence that the economy would expand by 5 per cent, and the fiscal and current account deficits would remain within limits, notwithstanding the present stress.“We are going through a period of stress, but there is a ground for optimism... We hope things will become better in the second half of the current fiscal (2013-14). We hope to achieve a growth rate

of 5 per cent,” he told reporters.Mr. Chidambaram based his optimism on several factors such as improvement in the current account deficit (CAD), output of the services sector and recovery of exports.The Reserve Bank of India data showed on Monday that decline in gold imports and turnaround in exports helped narrow CAD sharply to $5.2 billion, or 1.2 per cent of GDP, in the July-September quarter of the current fiscal.“We are satisfied with 4.8 per cent growth in Q2 versus 4.4 per cent in Q1 (April-June). We are looking forward to better performance in Q3 and Q4,” Mr. Chidambaram said.The economic growth had slipped to decade’s low of 5 per cent in 2012-13, and during the first quarter of the current fiscal, it was 4.4 per cent.Several global institutions, including the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), as well as independent experts have projected growth rate of below 5 per cent for 2013-14.Mr. Chidambaram said that with the recent improvement in some important sectors such as manufacturing, better performance of exports as well as certain steps taken by the government, the economy could be expected to show further improvement.He also expressed confidence that government would be able to achieve the disinvestment target of Rs.40,000 crore and contain the fiscal deficit within 4.8 per cent of the GDP. “The fiscal deficit at the end of any month does not give a true picture as expenditure is front-loaded and revenues are usually back-loaded. We will contain fiscal deficit at 4.8 per cent,” he said.In the first seven months (April-October) of 2013-14, the fiscal deficit, which is the difference between earning and spending of the government, was already at 84.4 per cent of the full-year Budget Estimate (BE).Mr. Chidambaram said: “We are still on target. We are on course for disinvestment. We are still on track to achieve Rs.40,000 crore target.”He said Plan expenditure at the end of October was 48.3 per cent of BE, compared to last year’s 43.2 per cent. Net tax and non-tax revenues up to October were 43.2 per cent of BE, exactly the same as last year, he added.“There is some momentum in the beginning of the second half. We will push for tax collections to speed up, and once revenue collections speed up, we are confident that we will contain the fiscal deficit,” Mr. Chidambaram said.The government will garner little more from the sale of spectrum than the Budget target of Rs.40,000 crore, he added.On cut in Plan expenditure, Mr. Chidambaram said: “We don’t cut Plan expenditure. Ministries, departments are usually over-budgeted at the beginning of year, and in every year by the time we enter the month of December, we know that they cannot spend the entire budgeted amount.”Replying to queries on inflation, Mr. Chidambaram said the principal responsibility of taming food inflation and all instruments for that lies with State governments.

“For years, State governments have simply shrugged their responsibility and blamed the Central Government... They (State governments) must take action against hoarding and profiteering. They must take action on removing the barriers to trade... They must encourage people to improve supply change to bring produce to shelves,” he said.

The retail inflation swelled to 10.09 per cent in October, mainly on account of high food prices.

Date 7.12.2013

FinMin pushes for revenue-sharing norm for oil sectorThe Finance Ministry has asked the Petroleum and Natural Gas Ministry to formulate a proposal for inter-Ministerial consultations on the revenue sharing arrangement suggested by the Rangarajan Committee for the oil and gas sector.It may be recalled that Finance Minister P. Chidambaram had, in his 2013 Budget Speech, stated that oil and gas exploration contracts would be awarded on a revenue-sharing basis, shifting from the current profit-sharing one.The Comptroller and Auditor General (CAG), in its report in 2012, had strongly pitched for shifting to a revenue-sharing formula, stating that the current production-sharing contracts (PSCs) provided for explorers to first recover all of their capital and operating expenditure before sharing profits with the government under a specific formula. However, gas producers have strongly opposed to the new formula. But the Finance Ministry is keen that the new formula should be adopted for the oil and gas blocks offering under New Exploration Licensing Policy (NELP) Round X, expected early next year.The CAG had, in its report, criticised the Petroleum Ministry and the Directorate-General of Hydrocarbons for having failed to protect the government’s financial interests, and had called for structural changes in the present PSCs for the management of hydrocarbon exploration and production, involving the private sector.“The Petroleum Ministry is actively looking into the Rangarajan Committee recommendations on this issue, and is expecting to complete the exercise shortly,’’ a senior Petroleum Ministry official stated.Under the revenue-sharing model, there is no element of cost-recovery, and the government and the operator will share revenues according to a pre-determined formula.

Rs. 7,500-cr. interest-free loan for sugar mills

To clear arrears payable to cane farmers; loan can be repaid

in 5 years with a moratorium of 2 years

In a major initiative to end the face-off between the sugar industry and farmers, an informal Group of Ministers (GoM) headed by Agriculture Minister Sharad Pawar on Friday recommended a financial package to millers, which includes an interest-free loan of Rs. 7,500 crore to pay off

arrears. The loan can be repaid in five years with a moratorium of two years.According to sources in the industry, the arrears stood at Rs. 5,064 crore in 2012-13.After a two-hour meeting with invited Chief Ministers of major sugar-growing States, the GoM agreed on interest subvention of 12 per cent on the Rs. 7,500-crore loan. Of this, 5 per cent will be borne by the Centre and 7 per cent will come from the Sugar Development Fund under the Ministry of Food. Each mill can avail itself of a loan under this arrangement equivalent to the average excise duty paid by it.Other measures include incentives for production of 4 million tonnes of raw sugar, restructuring of loans as per the Reserve Bank of India guidelines and doubling of ethanol blending in petrol to 10 per cent. An inter-departmental panel will be set up to coordinate with oil marketing companies and sugar mills for ethanol blending.For now, there will be no increase in duty on sugar imports.On the millers’ demand for the creation of a buffer stock on government account, the Finance Ministry would come up on the financial burden this would create on the exchequer. The States have been asked to examine different modalities for sugarcane pricing, including the revenue-sharing model (suggested by the C. Rangarajan panel), Mr. Pawar told journalists after the meeting.“Our effort is to help both, the farmers and the industry,” he said adding that the crushing of sugarcane had begun in all parts of the country.The recommendations will be placed before the Union Cabinet for approval.Finance Minister P. Chidambaram, Petroleum Minister M. Veerappa Moily, Civil Aviation Minister Ajit Singh and Food Minister K.V. Thomas were present. The Chief Ministers of Karnataka (Siddaramaiah), Maharashtra (Prithviraj Chavan) and Uttar Pradesh (Akhilesh Yadav) participated in the meeting, while Tamil Nadu was represented by Chief Secretary Sheela Balakrishnan.Coming out of the meeting, Mr. Yadav and Mr. Siddaramaiah said: “Some measures are being worked out,” and Mr. Chavan pointed out that “it is a process.”The industry, represented by the Indian Sugar Mills Association (ISMA), welcomed the initiatives, saying it will help in clearing the cane arrears. “The proposed measures will also help the industry venture into production of new product ‘raw sugar’ and grab opportunities whenever they are available,” ISMA Director-General Abhinash Verma said.In the last few weeks, millers had declined to crush cane in the ongoing season, saying it was financially unviable for them to do so. They cited higher production of sugar and decline in sugar price as the reasons for their agony. Farmers, on the other hand, sought higher cane price over last year as input costs had gone up, leading to the formation of the GoM by the Prime Minister to resolve the matter.

Date 9.12.2013Larger messages from economic data

The Central Statistics Office recently released GDP data for the second quarter (July-September) of the current fiscal. The economy grew by 4.8 per cent, up from the 4.4 per cent clocked in the first quarter (April-June), but below the 5 per cent, the rate for the whole of 2012-13.Last year’s growth rate was the lowest in a decade, and the growth for the first quarter in the current year was at a four year low. The economy, which had comfortably cruised at 8 per cent and above for a number of years, has hit a trough more recently. Extricating the economy from its low levels is the biggest challenge for policymakers.The economy fared better in the second quarter than in the first quarter. Despite this, the average growth rate for the first-half of the year is only 4.6. For the economy to grow by at least 5 per cent for the whole of current fiscal, the rate of growth, on an average, should be at least 5.5 per cent during the remaining two quarters of this fiscal. This, is anyway the expectation of the government. Will it be met? To get an answer, one has to analyse the performance of various sectors that form the GDP.Agriculture does wellAgriculture grew by 4.6 per cent in the second quarter as against 2.7 in the first quarter. This sharp upturn in the farm sector is primarily responsible for the higher growth rate of 4.8 per cent. Given the good monsoons, it is hoped that the farm sector would do even better during the remaining period of the year also, and be in the forefront of the long expected recovery.However, agriculture has a relatively small share in the GDP, and it is the other two — industry and services — that one should look to.There was a mild upturn in industry, increasing by 2.4 per cent in the second quarter, up from a mere 0.2 per cent in the first quarter. There was an improvement in core sectors, mining, utilities

and construction. Electricity grew by 7.7 per cent, its fastest pace on eight quarters. Welcome as these figures are, it will be hasty to conclude that they will maintain at least this tempo during the remaining months of the year.Two other points merit attention. Mining, whose growth is still in the negative territory, remains bogged down by environmental and legal issues. This has had some deleterious consequences (for instance, the need to import coal when there are abundant domestic stocks waiting to be exploited).Manufacturing, a critical component of the Index of Industrial Production, staged a recovery of sorts — growing by 1.1 per cent from an almost similar decline in the first quarter. Strong export performance has helped. However, highly susceptible to interest rate changes, manufacturing cannot possibly look to the RBI for an easier stance at least for the next few quarters. This is because inflation remains high. The second point is that the data relating to industry — the IIP numbers especially have often been faulted for their inconsistency.The services sector, normally the star performer, was down in the second quarter, growing by just 5.9 per cent. An important sub-sector — community, social and personal services — slowed significantly to 4.2 per cent from 9.4 per cent in the previous quarter. Considered to be a proxy for government spending, this sub-sector of services will remain in sharp focus for the rest of the year. This is because the fiscal deficit has already reached more than 80 per cent of the budgeted figure, and the government faces an acute dilemma of having to rein in the deficit to 4.8 per cent of the GDP and simultaneously maintain a reasonable level of public spending to support growth.From the foregoing, it may be difficult to say with certainty that a recovery is well and truly under way. Other important data such as balance of payments (BOP), released well ahead of its schedule on December 1, do brighten the picture. It shows a sharp decrease in the current account deficit during the second quarter.

IIPFor administrators, planners and policy makers in the Government, it is important to understand how the economy works at the macro level and what the status of the national economy at any given time is. Official measures of economic aggregates form the foundation for sound management of governmental functions and decision-making relating to the national economy, with information being the key factor deciding the quality of decisions.Index Numbers Lets consider the industrial sector. There are several products and each product is measured in a definite unit. e.g. while production of clothes is expressed in meters(thousand meters or lakh meters), the production of coal is expressed in tonnes(Million tonnes, billion tonnes, etc.), the production of natural gas is expressed in cubic meters and the production of oil in litres(gallons, barrels, etc.). Individual indicators of production are expressed in different units and tell about that particular product of the economy. For an overall assessment of all the activities of the industrial sector or the entire

economy, it is essential to combine the various individual indicators into a summary or composite measure, which is free of the units of measurement. An Index Number, is such a composite variable which measures the short-term changes in a variable or a group of variables during a particular period with reference to a chosen base period.IIP is one such index. Other indexes are CPI, WPI etcIndex of Industrial Production - IIP The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a representative basket of industrial products during a given period with respect to that in a chosen base period. IIP is a statistical device which enables us to arrive at a single representative figure to measure the general level of industrial activity in the economy.

IIP is compiled and published monthly by the Central Statistics Office (CSO)with the time lag of six weeks from the reference month.

For IIP preparation we take data from following industriesMiningManufacturingElectricity

Data for IIP comes from following source

[Note: If you remember IIP figures for Jan 2012. It was in news because the initial figure of 6.8% was later revised/correct to 1.1%. This revision was severely criticized by RBI, Finance Ministry etc. Later it was found that the culprit was (2) Directorate of Sugar, which had reported wrong sugar production volume.]

IIP characteristicsFor IIP we take a ratio of the volume of commodities produced within a specified group of industries in a given time period to the volume produced in the same group of industries in a specified base period (2004-05).IIP numbers do not include Agriculture & Allied services and Services sector data. Industrial production in IIP refers to the outputs of all industrial activities within the boundary of the country.

IIP is a composite/summary indicator which does not have any units.Base period of IIP is revised on a regular basis.Current base period is 2004-05Base period revision is necessary in order to capture the changes in the structure and composition of the industry over time due to technological changes, economic reforms and consumption pattern.

IIP Vs PMI (Purchasing Managers Index) IIP continues to be a very volatile measure making it difficult to draw any meaningful analysis from it. RBI Governor himself remarked that IIP data continues to be “analytically bewildering”.IIP Data has not been very reliable

The PMI gained importance in India after the RBI began taking cognizance of it. Globally too, PMI is considered an important macroeconomic indicator.

-----------------With above understanding of IIP, lets now understand the IIP data as released by CSO. The notification can be accessed here.

So it says the indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of September 2012 stand at 114.8, 174.7 and 149.7 respectively, with the corresponding growth rates of 5.5%, (-)1.5% and 3.9% as compared to September 2011.[Note: Observe there are no units to these indices. Also it is comparing with 1 year old data and hence its called year-on-year(y-o-y)Also, the General Index for the month of September 2012 stands at 163.6, which is 0.4% lower as compared to the level in the month of September 2011(when it was 164.6).----------------

Other indexes produced by Govt. of India

Consumer Price Indices (CPI) measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption.

Uses: CPI numbers are widely used as a macroeconomic indicator of inflation Tool by governments and central banks for inflation targeting and for monitoring price stability Deflators in the national accounts (used in GDP/GNP calculations to distinguish b/w changes brought by price to that by physical output) Indexing dearness allowance to employees for increase in prices

CPI Indices: CPI(IW), CPI(AL), CPI(RL) – Compiled by Labour Bureau in the Ministry of Labour and Employment CPI(UNME -Urban Non-Manual Employees) is complied by CSO (Min of Statistics & Prog. Implementation) CPI is published monthly.

Wholesale Price Index (WPI) is published weekly by Office of the Economic Adviser (OAE) in the Ministry of Commerce & Industry.

Date 10.12.2013Gas allocation: EGoM to review priority ranking

Bali burdenThe Indian ExpressPosted online: Tue Dec 10 2013, 03:07 hrsKeeping the WTO process alive is important. But the same can’t be said for the distorting farm subsidiesGiven that India has stakes in the success of multilateralism, the lack of an agreement at the Bali summit would have been a disaster. It has to be said, then, that India’s hardball tactics worked. Bali did not fail while India largely got what it was fighting for — the right to hike its food subsidies till such time that various distortions in the global subsidy agreement aren’t fixed. For instance, subsidy calculations are based on 1986-88 prices while global wheat prices have more than doubled since. While developed countries were willing to offer a ceasefire for four years,

India managed to extend this till the time an agreement is reached. During this period, no country can take India to the WTO’s dispute settlement board (DSB) arguing that its food subsidies are excessive.But caveats need to be added, and a larger examination must be made to ascertain whether Indian agriculture will benefit from this in the long run. First, the caveat. No country can take India to the DSB as long as its food subsidies, under the Food Security Act, for instance, do not distort global trade. But in a situation where the Food Corporation of India has excessive foodgrain stocks and these are liquidated at prices lower than what it costs the FCI, this can be construed as trade-distorting and can invite action by the WTO.The larger issue relates to India’s gains. Right now, India wants to be free to offer farmers whatever minimum support prices (MSPs) it wants to buy their crops. But given that too much of wheat and rice is being grown relative to other crops, and that too in states where it should not be grown — India would save a lot of water if cultivation of these crops shifted to states like Bihar and West Bengal — farmers need to be incentivised differently. The Bali win means MSPs can simply be hiked for other crops, but how do you incentivise farmers in Bihar and West Bengal to move to wheat and rice if the FCI does little procurement there? This is where the UIDAI comes in. India now has a system in place that can deliver income support directly — in keeping with farm acreage, for instance — which will make farming more efficient and, under the WTO system, is not considered trade-distortive. The win at Bali means India is free to expand its inefficient system of subsidies till a fiscal breakdown. A pyrrhic victory, at best.

Date 13.12.2013

A lot of hard work lies ahead for the WTO, and Mr. Azevedo has acknowledged this. Trade negotiators need to carry forward the positive momentum built up at Bali as they seek to push through the Doha Round agenda. This will not be easy though, as negotiators will have to contend with regional groupings such as the Trans-Pacific Partnership, which involves the U.S., Japan and ten other Pacific Rim countries, and the powerful trans-Atlantic alliance between the U.S. and the European Union, negotiations for which are now on

Date 12.12.2013

SEBI panel prescribes stricter norms on insider trading

Regulations tobring greater clarity on ‘unpublished price

sensitive information’

The Securities and Exchange Board of India(SEBI) panel, headed by former chief justice of India N. K. Sodhi, has suggested that trades by promoters, employees, directors and their immediate relatives would need to be disclosed internally to the company.

The panel on insider trading also recommended that trades within a calendar quarter of a value beyond Rs. 10 lakh (or such other amount as the capital market regulator may specify) would be required to be disclosed to the stock exchanges.Code of fair disclosure“Every entity that has issued securities which are listed on a stock exchange or which are intended to be listed would be required to formulate and publish a code of fair disclosure governing disclosure of events and circumstances that would impact price discovery of its securities,” said SEBI in a press release on Wednesday.The Justice Sodhi Committee on Insider Trading Regulations has made a range of recommendations to the legal framework for prohibition of insider trading in India and has focused on making this area of regulation more predictable, precise and clear by suggesting a combination of principles-based regulations and rules that are backed by principles.The Committee has also suggested that each regulatory provision may be backed by a note on legislative intent.While enlarging the definition of “insider”, the term “connected person” has been defined more clearly and immediate relatives are presumed to be connected persons, with a right to rebut the presumption. The term “immediate relative” would cover close relatives who are either financially dependent or consult an insider in connection with trading in securities.Clarity on UPSIFurther the regulations would bring greater clarity on what constitutes “unpublished price sensitive information” (UPSI) by defining what constitutes “generally available information”, essentially, information to which non-discriminatory public access would be available. A list of types of information that may ordinarily be regarded as price sensitive information has also been provided.Insiders would be prohibited from communicating, providing or allowing access to UPSI unless required for discharge of duties or for compliance with law.Trading in listed securities when in possession of UPSI would be prohibited except in certain situations provided in the regulations.Insiders, who are liable to possess UPSI all round the year, would have the option to formulate pre-scheduled trading plans. In such cases, the new UPSI that may come into their possession without having been with them when formulating the plan would not impede their ability to trade.“Trading plans would, however, be required to be disclosed to the stock exchanges and have to be strictly adhered to.”Conducting due diligence on listed companies would be permissible for purposes of transactions entailing an obligation to make an open offer under the Takeover Regulations, it said.Due diligenceIn all other cases, due diligence would be permissible subject to making the diligence findings that constitute UPSI generally available prior to the proposed trading. In all cases, the board of directors would need to opine that permitting the conduct of due diligence is in the best interests of the company, and would also have to ensure execution of non-disclosure and non-dealing agreements.Code of conductThe Committee suggested that every listed company and market intermediary is required to formulate a Code of Conduct to regulate, monitor and report trading in securities by its employees

and other connected persons. All other persons such as auditors, law firms, accountancy firms, analysts and consultants who handle UPSI in the course of business operations may formulate a code of conduct and the existence of such a code would evidence the seriousness with which the organization treats compliance requirements.Companies would be entitled to require third-party connected persons who are not employees to disclose their trading and holdings in securities of the company.SEBI has also invited public comments on this report, which should reach SEBI office by December 31. 2013.

Insiders would be prohibited from communicating, providing or allowing access to UPSIEach regulatory provision may be backed by a note on legislative intent

Date 15.12.2013

People must shun gold, says FM

Rising volume of trade in rupee a major concern

P. ChidambaramUnion Finance Minister P. Chidambaram, on Saturday, called for high level of probity among financial institutions to build a robust capital market.“It is important that all our institutions maintain the highest ethics and highest standards of probity. An ethics deficit can bring down the entire financial system, as we have seen in the past,” said Mr. Chidambaram while delivering his commemorative address at the 20th anniversary function of the National Stock Exchange (NSE) here.The Finance Minister further said the domestic capital markets were facing many concerns, including low level of investor participation, lack of financial literacy and financial inclusion.He observed that even though the household savings ratio is between 30 and 38 per cent of the GDP, very little of it gets channelised into financial investments. He said Indians still preferred to invest in gold and real estate, and there was an urgent need to address this issue.“Investors, at 21 million, account for just 2 per cent of the population. The degree of risk aversion is extremely high. We need to make people shy away from gold and induce them to invest in financial products,” he added.The Finance Minister also said that the rising volume of trade in rupee in the offshore non-deliverable forward (NDF) market was a major concern.The rising volume of trade in Indian currency would affect the value of the rupee adversely in the domestic market he added.Mr. Chidambaram said financial inclusion had been a high priority area for the government, and, therefore, the Centre had initiated several measures to expand the financial sector.It had also launched an extensive investor education programme through various market regulators

and other institutions to create awareness about different financial products and their benefits.Mr. Chidambaram hoped that with the Pension Fund Regulatory and Development Authority (PFRDA) becoming a statutory body, there would be a spurt in the pension fund market.He said “innovation should be the watch word of what we do in the capital market.”Cosy ties betweenbanks and corporatesExpressing concern over the under-developed corporate bond market, Mr. Chidambaram said “banks and corporates have entered into a cosy relationship. The day, banks refuse funds, corporates will be forced to tap the market sources to raise money.”Referring to the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), Mr. Chidambaram said passing legislation on the recommendations made in the report would take time, and, hence, the government had decided to implement non-legislative recommendations in the interim. “Making laws in India has become complex. Many of you would not understand the trauma we go through in getting a bill passed in Parliament,” said the Finance Minister while participating in a panel discussion on ‘Two decades of financial reforms’.He said “while the government is committed to financial reforms, the executive has been constrained by multiple causes, including the paralysis of Parliament and increased judicial activism.”Earlier speaking at the anniversary event, Securities and Exchange Board of India (SEBI) Chairman U. K. Sinha said the NSE, which was conceptualised by the government and implemented by the public sector financial institutions, had greatly expanded the equity culture in the country by breaking the geographic barriers.

Pitching for limiting Reserve Bank of India functionsStating that Financial Sector Legislative Reforms Commission (FSLRC), headed by Justice B. N. Srikrishna, has made similar recommendations, Mr. Chidambaram drew on the global experience and said the RBI did much more work than other central banks.

the RBI’s charter includes responsibilities such as issuing currency, being banker to the government, controller of credit and custodian of forex reserves, among others.

Date 16.12.2013

A mission to secure currency for bitcoin

It’s stored in electronic wallets, can be traded on online

exchanges and converted into cash

With India’s first bitcoin exchange gearing up to start operations hopefully by next March, hundreds of investors, enthusiasts and banking officials gathered here on Sunday, on a mission to convince the government that the virtual currency is enduring and serious.Started in 2008, bitcoin is the most prominent amongst a group of digital currencies — money that exists in the form of computer code —that do not have a central issuing authority. These virtual currencies are stored in electronic wallets and can be traded on online exchanges and converted into cash.At India’s first bitcoin conference — organised by digital currency awareness organisation CoinMonk— the top issue was how to convince the government and regulators that the bitcoin ecosystem would be a valuable economic innovation and not the currency of choice for money laundering and illegal drug purchases.Several Indian companies, whether they are online exchanges, trading platforms or bitcoin ‘mining start-ups,’ have already started hiring lawyers and lobbyists to make their case to various government agencies and to demonstrate to potential banking partners that they take regulators seriously.‘Remittance tool’“In India, bitcoin can help solve the problems of the unbanked rural population. It is also a potential remittance tool. We are working with lawyers to draft possible policies that we could present to the RBI and other government agencies by next month,” said Sunny Ray, Director of Business Development at Buttercoin, a free bitcoin exchange that is backed by investors including Google Ventures.Buttercoin hopes to tentatively start its India operations by next March, which would make it the first domestic exchange.The Reserve Bank of India, which has so far maintained silence apart from issuing a statement that it is adopting a ‘wait and watch’ stance on bitcoin, had a few observers at the conference. They, however, refused to speak to the media.For the team that is developing India’s very own digital currency, dubbed ‘laxmicoin,’ the RBI has been unresponsive.“We need a local digital currency to help local businesses. That’s how laxmicoin started. We sent them [RBI] queries and proposals awhile ago and are waiting to hear from them in order to start the launch of laxmicoin,” said Deepak Mantwal, a founding member of the Jaipur-based Laxmicoin team.For many others, the Bangalore conference was a step forward in the eventual creation of a bitcoin trade group or association that could protect the rights of users and entrepreneurs.“We don’t want banks or the government to shut down exchanges and other companies that thrive on the bitcoin system just because it’s scary. Close to Rs. 1.20 crore worth of bitcoin transactions are done from India every month. We need to figure out a way we can all exist,” said Karthik Jeyraj, a bitcoin enthusiast and researcher.RBI adopting wait and watch stance; observers present at Bitcoin

Regulators tune in to Bitcoin buzz for policies on virtual money

Johnson TAPosted online: Mon Dec 16 2013, 02:56 hrsEconomists call it an asset bubble. Some think its anonymity makes it useful only as money for criminal transactions or money laundering. There is vast amounts of gray area still surrounding the utility and nature of the Internet crypto currency Bitcoin even among its most ardent early adopters from the information technology and financial communities. Financial regulators around the world are playing it by ear on policies regarding Bitcoin and whether the anonymous peer-to-peer transaction enabler, akin to a barter system, is a financial instrument with pitfalls attached to it or a plain technological innovation that can redefine one of the pillars of human society — the monetary system.Much of the churning and uncertainty in the Bitcoin world that has caught global attention in the past few weeks after the virtual currency of one Bitcoin was valued at over $1,000 was evident at a Global Bitcoin Conference, the first ever in India, that was held in Bangalore on Sunday.Financial start ups playing with Bitcoin in the speculative markets, IT start ups trying to create powerful computer mining tools for Bitcoin, people just trying to understand what the fuss is all about – all carved from the strong tech community in Bangalore, were part of the event.“For over 4,000 years, money and religion have been among the pillars of society that have been centrally controlled. I am curious to know if a decentralised system like Bitcoin is going to shake up the system,’’ said Bhaktha Keshavachar, co-founder and CTO of Ezetap a tech start-up in Bangalore which is offering mobile solutions for regular monetary transactions.Like the printing press and the Internet, Bitcoin is a technology of trust that could return human society to a natural order that is outside of the centralised control of the state and the church, Johann Gevers, the co founder and CEO of the US start-up Monetas said. Bitcoin is a return to a “people-based system that allows for a decentralised society on a large scale”, he said.“Bitcoin is a technology. It is a like a knife — it can be a murder weapon or a life saver in a surgeon’s hands. You can use it for many things. It is fundamentally a decentralised consensus instrument,’’ Gevers said. The Bitcoin system is a work-in-progress and requires large amounts of infrastructure including energy and computing power and there are of a lot of issues surrounding security, forgery, trust, speed of transactions, he said.According to Josh Zerlan, operations manager for Butterfly Labs, one of the key makers of computing tools to derive Bitcoins, the Internet currency system is deflationary in nature compared to the Fiat currency systems around the world. It would enable transactions in low denominations of currency as well which is not possible in inflationary systems, he said.The maximum amount of Bitcoins that will be available is only 21 million and 12 million of this has been created since the currency appeared on the Internet in 2009. Only 40 per cent of the 21 million which will be created by the year 2142 will be in circulation, Zerlan said. The market cap for the 12 million Bitcoins in existence was estimated to be $7.2 billion in November this year.According to estimates there are over 11 million global Bitcoin users with around 50,000 in India. Nearly 50 per cent of Bitcoin currency is reportedly vested with around 1000 individuals.While Bitcoin mining has until now been an “art for advanced software technologists’’ with the hardcore techies jumping onboard first, efforts are now on to make it accessible for even ordinary Internet users to mine for Bitcoins, said Gangesh Ganesan founder and CEO of the San Francisco based Bitcoin start-up High Bit Coin.In India, Bitcoin is used primarily for speculation by comparing it with the dollar, for investment and hedging with financial instruments, says Mahin Gupta, a former software engineer and

founder of buysellbitco.in, the first company in India to trade using Bitcoin.“No one wants to understand the intrinsic value of Bitcoin in India. It is undervalued. You talk to anyone and they will compare the value of Bitcoin to the dollar,’’ Gupta said. According to Gupta one of the key concerns of people dealing with Bitcoin as a financial instrument is that there is no clearly defined regulatory process in India over Bitcoin transactions by the RBI or any other agency.“If there was some kind of advisory from regulatory authorities on Bitcoin transactions there would be more clarity. Regulatory authorities are also still trying to learn. There are a lot of entrepreneurs who want to get in but they are kept back by the lack of policy,’’ Gupta said.“It would be a mistake for regulators to classify it. They should not box it. There are millions of things you can do with it. Regulators should not make new laws they should apply existing laws otherwise they will limit innovation. In Switzerland it is treated as foreign currency, in Germany it is a unit of account,’’ Gevers said.

DATE 20.12.2013

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