SYNOPSIS OF TND ON FOOD SECURITY BILL

Hi friends,

What follows is a brief dicussion on food security bill including the inputs given by Prof Reetika Khera in our Tuesday Night Discussion on 24 Jan.

Discussion started of with a presentation given by Nishi Dixit making the audience aware about what exactly food security bill was and then Reetika Khera ma'am was welcomed to present her views.

First of all,she told us about the present scenario of PDS in our country and then what was Food Security Bill and how it differed with PDS which has been a common doubt in our google group discussions.Then she ended up discussing about NREGA and various questions raised up by the students.Here is brief synopsis:

PDS in India has not worked very well .It was meant for assuring food security to poor but was not successful in providing food security to the poor.In fact as pointed out in the discussion that poor people didn't had BPL card while rich people had which clearly shows how it dwindled away from its path.Poor were left out of PDS mainly due to corrupt political practices.For instance in Bihar around 2004-05 90% of the food grains were not able to reach the poor people which means that out of the stock of food grains which is alloted for their food security they were only able to consume 10% of it .This clearly represents the failure of PDS in India.

Although lately things have improved a lot and in Jharkhand for instance this diversion of food grain has came down from 85% to 46%.Although 46% is still a bad figure as almost half of the food is being diverted and is not reaching the people it is meant for.Also Orissa has shown decline in diversion from 75% to 30%.What all this suggests is that there is a possibility to fix the system and hence a possibility for improved standards of nutrition for the poor people which we cannot deny ( presently) is in worst condition.

Difference Between PDS and Food Security Bill:

PDS is well known as Public Distribution System which helps to provide food grains at subsidised rate to the poor people .

On the other hand Food security bill is extension of PDS and basically adopts a lifecycle approach which consists of provisions not only for poor people but for children and mothers separately.There are many important things that food security bill provides whereas PDS is not able to provide them.For instance take the time when a child is born.When mothers are pregnant they have special nutrition requirements which cannot be only fulfilled by food grains distributed through PDS system and hence a major proportion of our children from poor families are born undernourished.So it is very important to take care of nutritional requirement of mothers so as to improve health status of our country.Also there should be programmes so that children are provided with better nutrition upto the age of 6 years as to ensure that children are not undernourished .There has also been a scheme called Integrated Child Development Programmealso known as "Aanganvadi".

So in short Food Security Bill is integration of mid-day meals for children ,PDS for poor people ,Maternity benefits for mothers and other programmes.So what it ensures is that it provides a legal entitlement and thus it will help the provisions which are granted to actually reach the poor people.

Ma'am said she also considered the fact that 1 lakh crores which was provided for Food Security Bill was a large amount but it was still 1.2% of our GDP (whereas other countries spend a much larger proportion of GDP on health schemes) so the money is not actually the problem.The only problem is that it should well spent and should not get entangled by corruption.

In the end we discussed on Cash versus Food debate and NREGA with Ma'am.In cash versus food debate there are certain provisions like pensions which are fine with cash provisions while others like food security is not at all fine.Ma'am read out various reactions of people about what they wanted cash or food.They wanted food more than cash due to many of the reasons.Main reasons were

1:inflation which may decrease their capacity to buy,

2:money as can be used to buy other things may be spent by these people on other items and

3:among the women folk there was a concern that it would make their husbands to spent this money not on food but other usless items like liquor etc.

Lastly,there was more or less an informal session where most people asked questions to Reetika Khera ma'am.

WHAT IS FDI ?

For all those of you who have missed out on FDI, here is clear understanding of FDI along with its impacts.

FDI (Foreign Direct Investment ) is defined as type of investment that involves injection of foreign funds into an enterprise that operates in a different country from that of the origin of investor. In quantitative terms it is the measure of ownership of productive assets such as factories ,mines and land. But, it is important to note here that FDI does not include foreign investments in stock markets. Instead, it specifically refers to investment of foreign assets into domestic goods and services. Depending on the direction of flow FDI can be classified into:

· INWARD FDI: This occurs when foreign capital is invested in local resources. Measures of increasing inward FDI include tax breaks, low interest rates and grants.

· OUTWARD FDI: It is also known as “direct investment abroad”. So it is now local investors investing in foreign. Measures for increasing this kind of FDI can again be an initiative by government like it can be backed by government against all associated risk.

Another important thing to note here is that investors from abroad can also buy a local company and that too can be considered as an FDI. In fact, share ownership amounting to less than 10% of the ordinary shares is termed as portfolio investment instead of FDI. Also, investors are granted management and voting tights if the level of ownership is greater than the stated amount.

In case of FDI it has both advantages and disadvantages ,and depending on the type of economy it can be more advantageous for a country or may be disadvantageous for an economy. Let us look essentially what are the benefits of this and then we will go on describe why is it inappropriate in Indian context of study(according to my opinion).

FDI plays an extraordinary role and growing role in global business.It can provide a firm with new markets and marketing channels ,cheaper production facilities ,access to new technology, products and skills .For the host country it can provide a source of new technologies ,capital processes and as such can provide a strong impetus to the economic development of the economy .Increasing foreign investment can be used as a measure of growing economic globalization. Basically, it brings the economies more closer and allows the flow of goods and services to flow easily across countries.Also it would lead to the development of the world and will lead lead to maximum efficiency according to the theory division of labour which states that maximum efficiency is achieved when work is distributed. For example let us take example of car .It is manufactured at industry by several workers each specialising in its own domain.Suppose if instead of each working in its domain only ,each were to work to make cars individually then that would not have led to that much efficiency because now each will make car which will lead to more time, less quality and less efficiency. In division of labour each person knows exactly he has to do ,moreover as he has to do only small amount of work again and again it brings in more accuracy with speed. Now this division of labour can be thought of at the scale of world wherein each country can specialise in whatever they are good at or have good conditions for producing.So it is ultimately FDI which leads to globalisation and thus division of labour and thus maximum efficiency.

By now you might have believed that nothing is wrong with FDI and that it is for the progress of all and doesn’t cause any harm .But this is not at all the case.Let us first understand this by first understanding what is retail sector and that how FDI in retail sector will produce the worst impact on our society as a whole.

Retailing is the interface between the producer and the individual customer buying for personal consumption. This excludes the direct interface between the manufacturer and institutional buyers such as the government and other bulk customers.A retailer is the one who stocks the producer’s goods and is involved in the act of selling it to the individual customer at the margin of individual profit .

Retail industry in India has been one of the important sectors of the economy contributing to 14% of the GDP and employing 7% of the total workforce (second largest after agriculture).In India , retail industry mainly consists of two sectors namely organised sector and unorganised sector. Organised retailing refers to trading activities undertaken by licensed

retailers, that is, those who are registered for sales tax, income tax, etc.These include the corporate-backed hypermarkets and retail chains, and alsothe privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi

shops, convenience stores, hand cart and pavement vendors, etc

India predominantly consists of unorganised sector retailing, that is local kirana shops ,hardware stores ,convenience stores and bazaars. There many reasons why there is an explosion of retail sector in India very much. Given the over-crowded agriculture sector ,and stagnating manufacturing sector and hard nature of the low wages jobs people are forced into the services sector. Hence given the lack of opportunities it is almost a natural decision for an individual to set up a small shop or store depending on his pocket. So, we have large number of people who are involved in this sector and let us see what will be the effect on these people from FDI.Even the figures given by many consultancies demonstrate that it is retail sector today on which the employment of large chunk of people depends. It is also demonstrated that share of services sector in GDP is increasing very fast and that retail sector has the largest share in the services sector.Hence retail sector is one of the important sectors of our economy.

WHAT HAPPENS IF FDI IS ALLOWED IN THE RETAIL SECTOR IN INDIA?

Let us understand this with an example of considering a situation of what will happen if a company Wall Mart invest in the Indian market.

The largest retailer in the world ‘Wal-Mart’ has a turnover of $ 256 bn. And is growing annually at an average of 12-13%. In 2004 its net profit was $9,000 mn. It had 4806 stores employing 1.4 mn persons. Of these 1355 were outside the USA. The average size of a Wal-mart is 85,000 sq.ft and theaverage turnover of a store was about $ 51 mn. The turnover per employee averaged $ 175,000.

Now let us consider the present Indian situation: By contrast the average Indian retailer had a turnover of Rs. 186,075. Only 4% of the 12 million retail outlets were larger than 500 sq.ft in size. The total turnover of the unorganized retail sector was Rs. 735,000 crores employing 39.5 mn persons.

Not only the retailers in unorganised sector but also the those in organised sector will not be able to compete head on when it comes to competing with world class firms like walmart. As

Walmart is so rich it will be able sustain the losses uptil its competition is ultimately wiped off and then eventually recovering losses from the competiton free environment.

It is important to realise how much impact it would have on our society.Today promoting FDI to promote modern retailing can only be done at the cost of the jobs of the people in the traditional retail sector.Moreover these people cannot even get jobs in these modern retailing firms as these too want affluent ,English speaking employees.So,another option which is of creating jobs in manufacturing sector for which we are not in postion as of now.Although for future it could be used for creating jobs.

On the ending note it is important to realise that whether FDI is advantageous or not depends from country to country.

European Union Council Meetin Dec 8/9

The objective of the recent European Union Head of States meeting was to help overcome the Sovereign Debt Crises facing the PIIGS (Portugal, Italy, Ireland, Greece, Spain) which has threatened to destabilize other European Union countries as well.

Currently the European Financial Stability Facility (EFSF) and European Financial Stability Mechanism(EFSM) are temporary emergency purpose vehicles meant for helping out the defaulting economies by giving loans. EFSF had a cash pool of € 440 Billion, while EFSM has the authority to raise upto € 60 Billion from the capital market. The guarantee capacity of EFSF of € 440 Billion was increased to € 780 Billion in the EU meeting on July 21 this year, so that the lending capacity is now € 440 Billion. From what I understand the logic is that the EFSF will be raising money from the capital market by issuing bonds, and because the bonds are guaranteed by this guarantee amount of € 780 Billion from AAA rated countries, the borrowing would be easy and at low interest rate. The lending capacity is the maximum amount that the EFSF can raise. The difference between EFSM and EFSF is that collateral for EFSM is the budget of the European Union, while that for EFSF is the guarantee capacity pooled from Eurozone member states(Germany contributes 27% and France 20% to this fund, so that in the event of  sovereign default their economies will be hit very hard).

EU Council President Herman Van Rompuy has in his statement said that “our first approach to Private Sector Involvement, which had a very negative impact on the debt markets, is now officially over”. This I think means that the EU will no longer force the Banks to reduce their debt amount payable by Greece.

One of the agenda of the meeting was to speed up the creation of European Stability Mechanism, a  permanent rescue funding programme to replace the temporary EFSF/EFSM. ESM will also have a lending capacity of € 500 Billion.

Also, EU member countries will make bilateral agreements with IMF such that the 27 bilateral agreements will provide a total loan of€ 200 Billion from the national central banks, that can be channeled to the crises-ridden economies. This route is being taken because European Central Bank(ECB) cannot directly bail out EU economies by providing them money, and even the route currently taken to channel money through IMF is likely to face opposition from ECB president Mario Draghi.

To ensure that this bailout mechanism, which requires a considerable cash guarantee from EU member states, succeeds, EU countries will have to submit to stronger budget deficit regulations. This common set of Budget deficit regulations is set to bring the EU economies in a closer fiscal union than before. Some of the regulations are:

• In the event of an economic recession, budget deficit should not exceed 3.0% of GDP. Nations failing     this will be subject to sanctions
•  Public Debt is not to exceed 60% of nominal GDP
•  Budgets must be balanced in structural terms over the economic cycle( which means that the governments must AIM to have balanced budgets over the period of the economic cycle)
•  Automatic Adjustment mechanism to ensure correction in case of deviation must be defined by member states
•  Bringing revised Qualified Voting Majority in the Council to decide on Commission proposals at the very beginning of the Excess Deficit Procedure so that this will apply throughout the procedure – this means that an 85% majority in EU is sufficient for decision making even if the ECB does not agree.
•  Member States under an Excessive Deficit Procedure will have to submit their draft budgetary plans before adoption to the Commission.

All EU nations, including Britain, agreed to these requirements. However it was the implementation, which required a stronger economic and monetary union, which was not acceptable to Britain. Britain’s financial services industry contributes to about 10% of its GDP – if the European Central Bank has the power to override the authority of the England Central Bank the protective regulatory environment could damage the industry. It is for this reason that David Cameron refused to join the new fiscal compact. The countries joining in the fiscal compact are the 17 Eurozone countries, and 6 other countries, while Sweden, Hungary and Czech Republic will confirm after some time. A Fiscal Compact Treaty will be signed, sometime in March 2012 to make the fiscal compact binding.

Some interesting links for further reading:

europa.eu/press_room/index_en.htm

http://online.wsj.com/article/SB10001424052970203501304577086030233783036.html

http://www.marketoracle.co.uk/Article32038.html

http://blogs.wsj.com/marketbeat/2011/12/09/eu-summit-results-analysts-react/

http://www.keeptalkinggreece.com/2011/12/09/the-eu-summit-conclusions-in-short/

Image credits: monstersandcritics,com, reuters.com

Dodd-Frank Wall Street Reform and Consumer Protection Act

With two major economic crises in quick succession-the subprime mortgage crises in 2008 and the debt crises in 2011 scaring many people from the markets and causing people to lose faith in the economy---8 million jobs lost, drop in housing prices and wiping out of personal savings, the US government needed to take bold actions to change things at the regulatory level, which is precisely what it is doing with the Dodd-Frank Wall Street Reform and Consumer Protection Act. Some highlights of the legislation are as follows:

Consumer Protection with Authority and Independence: Creates a new independent watchdog, housed at the Federal reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practice.

Ends Too Big to Fail Bailouts: Ends the possibility that tax-payers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed's authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Advance Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.

Transparency and accountability for exotic instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated---including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and golden parachutes.

Protects Investors: Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.

Enforces regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefits special interests at the expense of American families and businesses.

These different aims are to be achieved by different measures, which shall be covered in further posts.

NSE visit PART II, IIT DELHI

This is a synopsis of workshop on stock markets in IITD.It is also follow up article on the previous discussion on workshop.
Ms. Renu Bhandari started with a note of How investment plays a vital role in managing our credits and therefore our lives.Ma'am highlighted that most of the people (as hightlighted in our previous discussions)do not have the required knowledge and know how of how to invest well in markets and therefore incur losses.She emphasised the fact that it was important to spend time before investing our money.

Also ,she highlighted the success of NSE in bringing a revolutionary change in the stock markets.Also, we got to know that trade has grown from 2 crores per day in 1990s to 2lakh crores per day today.This sudden change in 20 years has been due to three main reasons:
1.Technology
2.Good Practices(Transparency)
3.Liquidity
As desribed in the workshop there was an OPEN OUTCRY SYSTEM in earlier times under which there were brokers who met clients and placed orders.She explained that such a system was not at all transparent as brokers could take undue advantage of the less information which was there in the market with their customers.Also earlier there were 22-23 stock exchanges based on regional stock exchange.

Due to transparent practices of NSE,now low spread i.e. less difference between the price quoted by the buyer and seller is ensured.Also, it is now much easier to enter and exit out of the markets as compared to earlier times.

On,the basis of ranking,NEWYORK STOCK EXCHANGE and NASDAQ are at first and second positions respectively and NSE is at third.Ms.Bhandari said that NSE was third because it had less volume of trade but in terms of technology it is far ahead of them.Demat(dematerialised) settlement has been ensured by NSE.Moreover there are 1500+ brokers registered with NSE.

COST-BENEFIT ANALYSIS OF DIFFERENT INVESTMENTS (by Ms. Bhandhari):

First of all let us consider the safest investment.If we keep money in banks we will end up with 3-4% per annum.But if we invest in fixed deposits then we will end up getting 8-10% per annum.Now government also taxes on this income earned through interest rates.So from FDs we get 6-7% net income.But on the other hand, considering inflation scenario which is as high as 10.2 % we are at as our basket or purchasing power is becoming small.

MAIN STEPS BEFORE INVESTING:

1.Identify surplus funds:
First of all it is necessary for all investors to look at how much he needs to save and how much to invest from the savings obtained after all expenditures on health,parties or any other leisure or necessary activities.
2.Identifying products:
Identification of products mainly depends on our age and our risk appetite.Risk appetite is your capacity to take risk.Our risk appetite depends on our lifestyle and our income.identification of a product is a very important job as there are different products available in the markets.For e.g. equity markets which allow for higher risks with high return.Then there are purely safe fixed deposits and there are mutual funds with moderate risks.
3.Choosing Intermediary:
It is required of each customer to check whether their chosen intermediary is registered with exchange and SEBI or not.Also, it is important to complete all registration formalities.Moreover,ma'm also advised beware of intermediaries promising very high returns.
4.Track markets:
Lastly it is important for us to identify depending on time what and how much should we buy or sell.Moreover from the time we have bought stocks we should keep track of the markets and respond immediately according to our targets of stoploss and bookprofits.


Also,two types of markets primary markets and secondary markets were also discussed.

IPOs:
IPOs (Initial Public Offer ) is used by companies for collecting funds for expanding and diversifying their business.Price of an IPO is decided by two ways as highlighted in workshop.First, it could be a fixed price which was decided on by the company and other groups of traders and merchants.Secondly,its price could be decided by book bidding in which based on demand and supply company along with merchants decide the price.IPOs come under primary markets.

Also one question which was asked by Ms.Bhandari by a student was that,how can investors track their companies ,meaning thereby what are the indicators for investors?
In response she said,there were many methods by which we could check.For e.g. we could look at the liabilities and debts of the company and see whether they are increasing or decreasing.Also we can look at company's balance sheet and balance reports for tracking them.

MFs(Mutual Funds):
Investment in Mutual Funds consists of moderate return with moderate risk. In mutual funds we can have a good investment by investing for considerable period of time i.e. 3-5 years.Also,concept of SIPs was highlighted in the workshop.SIP which is systematic investment plan consists of investing monthly(like Rs. 5000 every month).So,because in mutual funds there are intelligent choices ,about buying and selling of stocks,made by investors in mutual fund companies therefore there less risk of incurring losses(moreover informed choices are themselves ensured and it is not necessary for people to track different companies).Investors in Mutual Funds ,from the money they raise ,they buy different stocks according to the analysis of different companies and thus book profit or losses.So,there is relatively lesser risk.

There are two options for suscribing mutual funds.First is buying mutual funds through agents .Second is filling up form with cheque in favour of AMC(Asset Management Company).Also if we want to redeem funds we could do so and we would get the payment based on the NAV at the end of day of mutual fund market i.e. 3 pm. MFs are also advantageous because we direct our investments directly from MFs to stock markets without redeeming our purchase and just by directly asking the mutual fund company to give our shares of stocks in the basket of stocks that we have purchased.

At the end ,ETFs (Exchange Traded Funds) were dicussed.These are an investment funds traded on stock exchanges much like stocks.These are most popular type of exchange traded products .Exchange traded products are derivatively priced security which trades intra-day on NSE.
Also Ms. bhandhari explained us what is meant by 1 ETF.1 ETF of gold means price of 1 gram of gold.In general 1ETF means 1/10th of the price of the stock.Also she told us about Nifty50 which includes best 50 stocks.Thus investing in NIFTY50 reduces the risk because if some stocks fall then some rise too.

Although, time was less, everything was clearly explained by ma'am.Altogether event provided us with greater insight to the markets and was an overall a good experience .

National Stock Exchange Investor Awareness Lecture

Ms. Renu Bhandari, Manager, National Stock Exchange delivered a lecture here at IIT Delhi on Wednesday, 28 September. The lecture, presented in the V-Lecture Theatre-1, was attended by 100+ enthusiastic students, both from IIT and from nearby colleges. The lecture was basically an introduction to the stock exchange market, with Ms. Bhandari explaining the origins of the stock exchange and how NSE has grown in the post-reforms period---how a volume of Rs.2 Crore trade per day in 1994 has grown to Rs.2 lakh crore per day in 2011.

Ms. Bhandari discussed mutual funds and the emergence of the Gold ETFs---Exchange traded funds backed by gold. ETFs are based on real time movement of the underlying---gold or equities. The key difference between mutual fund and ETFs is that whereas mutual funds can be subscribed or redeemed only at the start or at the end of day-trade, ETFs can be traded in real-time.

NSE has made efforts to eliminate unauthorized intermediaries. Earlier large volume buyers were given preference and were given lower buying prices and higher selling prices than the ordinary buyer. With the elimination of unauthorized intermediaries, there are now equal prices for both the large and low volume buyers---effectively the democratization of the stock market. She explained that investors should deal only with intermediaries registered with SEBI. This is because in the case of complaints against the intermediary, NSE can only help the investor when the concerned Mutual Fund is registered with them.

She explained the main steps that an investor has to take before investing:

• Identifying surplus funds
• Identifying products
• Choosing intermediary
• Completing registration formalities
• Deciding on what, when and how much
• Monitoring the market movements
• Decision on Stop Loss or Book Profit

Other aspects are identifying your own risk appetite---that is, understanding the maximum loss that one is ready to accept. She explained a rough percentage of investment in equities as (100-age of investor)% of the surplus funds.

Ms. Bhandari also gave an introduction to the primary market comprising IPOs, and the secondary market comprising equities that are traded daily. Oversubscription of IPOs means that the IPO is booked more than the number of shares to be alloted. For instance if the IPO is oversubscribed 4 times, it means that for every 1 share there are four investors who have applied. In such a case each investor is allotted one-fourth the number of shares that they applied for. Whereas the price of an IPO depends on speculation, the long-term investment in that share depends on the business plan overall strategy of the company. She explained that short-term investments are speculations---they rely on profit/loss solely on by-the-minute news of the company, and not on the long-term plans and growth of a company.

She cautioned that even big name companies are not completely reliable to bring profits. Whether a stock performs well or not depends on many aspects, which include the kind of orders that it receives, the competition in the market that it has entered, and many other factors which depend not completely on the big name of the concerned company.

Inflation and Interest Rates

This is a follow-up to the article Use of Interest Rates as an Economic Tool, and is a synopsis of an earlier discussion on the Economics Club Google Group.

Basically, to curb inflation, policy makers try to tighten the monetary policy so as to reduce purchasing capacity of the people. This results in reduced demand which therefore reduces price levels(downward shift in demand-price graph). For this they absorb a portion of the money supply, which they do by increasing interest rates. As explained in the previous article, increasing the interest rates would result in less spending and more saving, and therefore lesser money flowing in the economy.

However, the RBI is reluctant currently to increase interest rates. This is because of the large negative impact that has on businesses, and therefore on the GDP. Although one argument for interest rate hike is that real GDP is equal to nominal GDP(GDP measured in monetary terms in the year) divided by GDP deflator(equivalent to inflation), so that the nominal GDP rise is cancelled by the high inflation.

However if we look at the effect of rise in interest rate on the market, we see that interest rate hike reduces money flowing in the market, so that investment in projects will go down. Loans to entrepreneurs are also unfavorable which in the long term is negative for the economy  For countries like India and China, which are focused on rapid economic expansion, an expansionary monetary policy with low interest rate is necessary, at the expense of high inflation. China for example has a high interest rate. This means that purchase levels have fallen, which means imports are costlier. But on the other hand a high interest regime actually encourages export, as exports bring money into the economy which can be invested with good returns. In the case of China, combining a high interest rate and rapidly increasing exports is possible because of the abundance of land and manpower. Also high interest rates attract foreign investment, which therefore creates a demand for the currency, so that the currency gains in value. But such a scenario is unstable because of the high foreign investment, which when withdrawn, could result in a considerable depreciation of currency. The risks can be seen in the example of the Latin American Debt Crises.