Understanding my blog

Dear Friends,

Please read my blog posts systematically to understand my research work in the complete sense. I am re-posting the links for the better understanding of my blog posts. I have done a small research on priority sector lending and results will be posted soon. I am planning my next research on bonded labour and child labour in firework industries of Sivakasi and Rajapalayam in Tamilnadu. Hope it materializes soon.

1. http://socialandeconomicresearch.blogspot.in/2011/03/introduction-lets-start.html

2. http://socialandeconomicresearch.blogspot.in/2011/07/research-design.html

3. http://socialandeconomicresearch.blogspot.in/2011/08/philosophy-of-human-being.html

4. http://socialandeconomicresearch.blogspot.in/2011/12/sample-1-kolathupalayam-and-kolanalli.html

5. http://socialandeconomicresearch.blogspot.in/2011/12/sample-1-chief-economic-activity.html

6. http://socialandeconomicresearch.blogspot.in/2011/12/sample-1-government-records-about.html

7. http://socialandeconomicresearch.blogspot.in/2011/12/sample-1-democracy-theory-and-practise.html

8. http://socialandeconomicresearch.blogspot.in/2011/12/sample-1-class-contradictions-and-nrega.html

9. http://socialandeconomicresearch.blogspot.in/2012/01/sample-1-shgs-making-waves-in-grass.html

10. http://socialandeconomicresearch.blogspot.in/2012/01/sample-1-untouchability-in-land-of.html

11. http://socialandeconomicresearch.blogspot.in/2012/01/sample-1-condition-of-dalits.html

  

Economic concepts: Money Markets

It is the market in which high liquidity instruments are traded for a short term(less than 1 year) period. It is a part of financial markets. It can be classified into three

overnight market – for one day

notice money market – 2 to 14 days

term money market – 15 days .

Reserve bank of India being the apex body uses various tools to control the money supply(liquidity) in the money market, for ensuring effective demand for money, bearable rate of inflation and steady economic growth.

The various tools that are used are as follows

Liquidity adjustment facility.

It is the options by which RBI adjusts the liquidity available in the system and there by influences the interest rate prevailing in the system. As of now, RBI uses three tools under the LAF. They are Repo , Reverse repo and MSF.

Repo:

These are basically short term lending tools. Repo means repurchase options. Generally, in India, 1 day Repo is only used. But RBI reserves the decision of using more day Repos and uses them occasionally.

Repo stands for repurchase option. In repo, the scheduled commercial banks (including RRB and LAB) and primary dealers(specialized dealers who acts as intermediaries in trading government securities) can sell their Government securities to the RBI, with a repurchase clause. The banks and the RBI have to repurchase the securities in the specific time period as mentioned in the clause. Generally it will be one day. Whenever the banks need money immediately at night for ending that day's transactions and when the call money interest rate are higher or there is very high liquidity deficit in the system, the banks and dealers will prefer this option to borrow money. The rate at which repo transactions are done is known as Repo rate.

Repo is used by the RBI to inject liquidity into the system and there by reduce the inter – bank interest rates. In India, repo auctions are conducted by RBI twice a day. The first time repo(in a day) is called as LAF-REPO and the second time repo (in a day) is known as SLAF – REPO.

Reverse repo:

It is the reverse of the previous thing. Whenever there is a liquidity surplus, the banks and the dealers lend the money to the RBI, by buying the government securities from the RBI with a clause of reselling them back after a specific time period. The rate at which the reverse repo transactions are done is known as Reverse repo rate.

Marginal Standing Facility:

All scheduled commercial banks can avail overnight up-to one percent of their net demand and time liabilities(NDTL) outstanding at the end of the second preceding fortnight.

The rate is always 100 basis points above the LAF- repo rate. The MSF rate dependent on LAF – REPO rate ans varies dependent on variations in repo rate.(from MAY 2011)

 

Liquidity Corridor or Interest Corridor:

The difference between the interest rates of Reverse Repo rate and the MSF rate is known as liquidity corridor.(Now after May 2011) RBI has fixed the corridor as 200 basis points(always) and Repo rate comes in the middle of the corridor. And the Repo rate is the only independent varying LAF policy rate of RBI as reverse repo rate is always set 100 basis points below repo rate and the MSF rate is fixed always 100 basis pts above the Repo rate.

Significance of the liquidity corridor:

Consider today's rates (as of January 26, 2012) MSF rate is 9.5% and reverse repo is 7.5%

If there is surplus liquidity in the system, the call money rate (the rate at which the interbank overnight money transaction takes place) goes below 7.5% and hence for banks using reverse repo tool is profitable than lending to other banks. Similarly, if there is a liquidity deficit in the system, the call money rate goes above 8.5% and subsequently banks starts to use repo tool than call money option as repo tool becomes profitable now. But, when the money required is very high than that is auctioned through the LAF - REPO tool, then the banks use MSF tool to borrow money. Hence the call money is not preferred even in very difficult circumstances, which stops the call money interest rate to float above the MSF rate, that is 9.5%.

The major significance of the narrow corridor like 200 basis points is that it provides more stability (less variation of call money rates) in the system. Hence, LAF becomes a important a important monetary tool and not just a liquidity supplier or a absorber tool(like CRR).

The accepted 'system deficit' or 'liquidity deficit' in the system is +/- 1% of net deposit time liability(NDTL).

Note: repo can also be undertaken in corporate debt securities (all SCB)

CRR:

It is a statutory requirement for all scheduled banks to maintain a particular amount of cash reserves with the Reserve bank of India. It is a fixed percentage of their net demand and time liabilities as fixed by RBI. Reduction of CRR injects one time liquidity into the system. It is basically a liquidity tool rather a monetary tool.

Statutory Liquidity Ratio:

It is a minimum amount of liquid assets (cash, gold , government securities and SDL) that has to be maintained by scheduled banks among themselves. It is generally fixed as a percentage of NET DEMAND AND TIME LIABILITY of that particular bank by RBI. The present rate of SLR is 24%. but most banks maintain maintain it at 28% on a average.

Open Market Operation:

Government from time to time sells and buys government securities and bonds directly from the market. Banks, dealers, corporates, even FIIs can buys these government securities. In fact, it is mandatory for few government institutions to buy government securities

BANK RATE POLICY:

It is the rate at which RBI re-discounts government securities and bills of exchanges or commercial bills. The present rate is 9.5%.

MARKET STABILIZATION SCHEME:

When the rupee appreciates, RBI will normally buy the foreign exchanges and release money which increases the liquidity in the system. As we are aware, too much liquidity would actually induce inflation in the economy. Hence RBI simultaneously would simultameously do open market operations and absorb the excess liquidity. But during 2004 there came a situation where RBI went short of government securities to sell and absorb liquidity. It can also cant ask the govet to issue new securities as it would increase the fiscal defecit as well. Hence came the concept of Market stabilization scheme.

Here the govt securities which is issued by RBI on behalf of the govt would be sold in a separate scheme called MSS. Govt of India maintains money in an seperate account with RBI called MSS account which would will be equal to the sum of the value of all the secuities thus issued. The collected funds will be maintained in the same account and is rotated to buy and sell securities

 and by the way stabilize the market without increasing the fiscal defecit.

 The high liquidity instruments generally traded are government securities, certificates of deposits, commercial papers etc. Certain important terminologies associated with money markets are described below.

GOVERNMENT SECURITIES:

• Treasury bills
• cash management bills
• Dated government securities
  1. Fixed rate bonds
  2. Floating rate bond
  3. Zero coupon bonds
  4. Capital indexed bonds
  5. Bonds with call/put option
  6. Special securities

7. STRIPS(seperate trading of registered interest and principal of securities)

TREASURY BILLS:

• 91 days
• 182 days
• 364 days
• 14days intermediate treasury bills/

Treasury bills are zero coupon securities and they pay no interest. They are generally lesser than the face value of the bills and the difference in the amount gain of the buyers. For example, consider a treasury bill of Rs.100. It is auctioned at a lesser value of only Rs.90. And if the treasury bill is 91 days type, then after 91 days the person who bought the bill for Rs. 90 could get Rs.100.

Cash Management Bills:

Introduced on May 2010 , are same as treasury bills but with a 2 major difference

1. they are given for a period less than 91 days
2. they are not accepted as eligible securities for SLR purpose.

Dated Government securities:

They are long term securities and carry fixed or floating coupon(interest rate) which is paid on face value, payment at fixed time periods(usually half-yearly). The tenure of dated securities can be upto 30 years.

State Development Loans:

State governments also raise loans from the market. SDLs are dated securities issued through market similar to the way as usual by central government.

Sub – Markets

Call money rate:-

Uncollateralized lending and borrowing of funds is predominantly overnight and is open for participants only to SCBs and primary dealers.

Bill Market:-

Bill market or the discount market is the most important part of money market where short term bills are bought and sold. They can be either commercial or treasury bills.

It is also known as bill of exchange. Consider a small manufacturer buys raw materials from a steel firm for Rs.1000. The manufacturer does not have money now. Hence gives a bill of exchange, stating to pay Rs. 1100 at a fixed future date. The steel firm holds the bill in exchange for actual cash. Now if the steel firm runs into liquidity deficit, it can deposit the bill of exchange in any commercial bank and get money at a discount rate i.e, Rs.1050. The Rs.50 difference(1100-1050) is the earning of the bank. Now if the commercial bank wants cash, they can do the same with the RBI. The RBI will re-discount this bill at Bank Rate and give the balance money.

This is a important tool used in western countries, less famous in India.

Treasury Billl Market:-

Same thing can be done with treasury bill too.

Certificate of Deposit:-

It is a negotiable money market instrument. Banks will issue CDs for maturities from 7 days to one year where as FIs can issue maturities one yr to two yr.

They are issued by banks in multiples of Rs.25 lakhs. Now, the minimum value is reduced to one lakh. They are issued at a discount to this face value and the difference is their rate of interest.

Commercial Papers:-

It is issued by corporates, FIs, primary dealers with a net worth of Rs. 5 crore. They are issued in the multiples of 25 lakhs subject to a minimum issue of 1 crore. They are issued to raise funds. They are issued at a discount to the face value and difference is the rate of interest.

Maturity period-- 7days to one year

Collateralized Borrowing and Lending Obligations:-

It is operated by CCIL- Clearing Corporation of India ltd. It lends money on collaterals(government and other securities).

Economic concepts: Fiscal Policy

It is the policy by which a government earns its revenue and spends it and, in the process influence the economic growth and human development in the country.

The main objectives of the fiscal policy are

• Full employment
• Economic stabilization
• Economic growth
• Social justice or equality in the distribution of income and wealth

The prime objective of the fiscal policy among the above said objectives is to ensure social justice in the distribution of income and wealth because, now most of the modern economies accept that(at least after the recession) it is impossible to secure social justice through market phenomena or corresponding monetary policy. The whole world reverted back to fiscal policy, especially counter cyclical fiscal policy after recession (2007-08) as believed by J.M. Keynes (during Great depression, 1930) after a long stint of Milton Friedman's Monetarist policy.

Lets see what are the major issues in economics and their importance of fiscal policy.

1. Economic Growth always goes with inflation. The increase in the total goods and services produced in the country(aggregate demand) will increase with the rapid economic growth which will in turn will push the price up. So full employment can be attained with the heavy economic growth but only with high inflation.

2. Higher rate of inflation may lead to stagflation, a condition where both inflation and unemployment rates are very high and economic growth is low.
3. Demand pull inflation will push the wage higher hence creating a cost push inflation hence the prospects of recovery becomes bleak
4. Failure in the economic cycle(see Image): Earlier economist believed that, 'the automatic stabilizers will stabilize the economy. These stabilizers are present in the market and in the fiscal policy tools of the government. But all this failed to improve during 1930s. Hence the importance of fiscal policy rose to prominence, thanks to the efforts of economist like J.M. Keynes

The main aim of establishing a government is to secure social justice and peacefully regulated employment. In the market phenomena three things are antithetical to each other, they are

Price stability

Employment

& Growth

That is all cannot achieved at the same time. Something has to be sacrificed for achieving the other.

Through the fiscal policy tools like taxation, public expenditure, government borrowings(public debt) this business cycle could be interrupted to produce full employment with relative price stability and a decent growth.

These objectives cannot be realized by only pursuing monetary policy(policy relating to money supply and interest rate). Even when we ride a camel into a oasis it will drink the water only when its thirsty .Similarly, even when we reduce the interest rates and increase the money supply the businessmen will do business only when he has confidence in the growth and performance of the economy in general. Only when he feels that there is demand for the market for the goods he produces, he will produce goods. When the economy is in recession the consumption will be less as most people will be without money or save money for future use. High inflation might also make the situation worse. Hence, the artificial demand for finished goods has to be created. To make this happen the fiscal policy comes into the picture. There are various types of fiscal tools used in various circumstances.

Expansionary Fiscal Policy: During the contraction phase of business cycle(recession & depression), the government will generally

Do a tax cut

Increase transfer to the poor to increase their purchase power.

Develop infrastructure to Stimulate aggregate demand.

These policies are expansionary in nature as these policies would increase the expenditure of the government and decrease the revenue hence higher fiscal deficit(total expenditure of the government- non debt creating revenues). But still government uses this tool to fight recession. These are also known as stimulus package or fiscal expansion measures. At this outset let us also see what is expansionary monetary policy?

Expansionary Monetary policy: during the time of recession government through the central banks will increase the money supply in the system and there by will try to reduce the interest rates. Low interest rate means less cost for starting business and low yield on deposit. Hence the tools generally used by RBI to increase the money supply are

• Decrease CRR and SLR
• Decrease Repo rate and Bank rate
• Buy back government bonds (open market operation)
• Decrease Reverse repo

Contractionary fiscal policy: During growth with high inflation government will generally uses the following policy tools.

• Increase the tax rate
• Decrease the transfer
• Decrease other government expenditures

These fiscal policy options are contractionary in nature as it decreases the fiscal deficit of the government.

Corresponding contractionary monetary policy is a policy by which the RBI curtails the money supply in our economy. The policy options used by the RBI in this context are

• Increase CRR and SLR
• Increase Repo and Bank rate
• Increase Reverse repo rate

NOTE: Fiscal Consolidation: It is long term plan to reduce deficit and accumulation of debts by making suitable fiscal policy options whenever needed. Generally governments tries to decrease transfers and implement other austerity measures for a longer period to achieve it.

COUNTER CYCLICAL FISCAL POLICY

These are policy options adopted by the government to counter the cyclical tendencies in an economy(business cycle). As suggested by Keynes, government has to use its fiscal tools to cool down the economy when growing rapidly to prevent it from going into depression and achieve price stability and full employment much before it is normally achieved in normal cycle.

The generally policy measures suggested by Keynes were

• Deficit Budgeting: budget in such a way where expenditure is more than income.
• Progressive taxation
• Government spending towards public welfare programs and providing social security measures.
• Cheap money policy should always accompany fiscal measures.
• Discretionary taxation policy to counter cyclical effects.

How it works:

Let us consider the concept of progressive taxation. When the economy grows a person goes to the higher income bracket, more amount of money is taxed which effectively reduces his capacity to buy goods and avail services. If more and more people fall in that bracket, automatically the aggregate demand is checked by the process. Similarly, when the economy is in recession more and more people will come under BPL, which has the potential to dry out the aggregate demand of the country. If the country has social security schemes, these BPL people will come under those schemes which in turn will increase the purchasing power of the people which would not let the aggregate demand to dry out . Thus, a stable demand is maintained in the economy.

The above example is the example of 'automatic stabilizer' used in the counter cyclical fiscal policy. The reduction of indirect taxes when needed, giving subsidies in the first quarter of the economy and waiting for output in the subsequent quarters are the discretionary measures adapted by the governments.

Sample – 1: Condition of Dalits

In the gram panchayat of Kolathupalayam, small villages like Devampalayam and Arampalayam has lots of Dalit settlements. The region consists of parayars (Adidravidar) and chakliyars in large numbers. Almost all of them are land labourers. At least 50 % of the total people live in houses with palm or coconut leaves as ceilings and 40 % of the people live in Asbestos sheeted houses and Only 10 % of the people live in concrete houses. During the MGR period in 1980’s, few houses and plots were donated and during Kalainger period of 1996-2001, many others got houses. But still, we can see that literally all the people are without basic amenities. In fact, one full settlement of chakliyars in Devampalayam, consisting of 52 houses is without 

sanitation facilities. We Indians should be ashamed, for having entered into the 65^th year of democracy, we still have failed to ensure our own brothers and sisters, a dignified life. Myself and my friend couldn’t control our tears when a 40 year old lady was describing the problems she and her teenage girl children use to face when they defecate daily in the open. Truly, i felt ashamed to be called an Indian.

Regarding education, the scenario was slightly better as most of the children go to school. At least some 20 to 30 % of people between the age group of 20 to 30 years are degree holders. But we have to say the education has not changed their fate. I met 5 people (including women) who are degree holders (2 of them hold 

master degree), but still rely on manual labour for their livelihood. When we enquired the reason, they said they did not have sufficient contacts to get them a dignified job in towns or cities (Which they felt was important) when they went to cities in the search of jobs. Even if they got some jobs, the cost of living in the towns and cities and the problems they faced there out weighed the money they got. People, who defend education as the best form of mobility should visit this village, to understand the dynamics of social structure and stratification and how it negates the so called benefits of education.

The economic situation of the dalits was also relatively worst. 95 % of the people don’t have a savings bank account although few of them had availed bank loans once. Only few own pieces of land (Self earned) or a house and their numbers are negligible.

Almost 80 % of the people eat ration rice only and almost all have got credit from the pawn – brokers in heavy rate of interest (Kandu Vatti) at least once in their life and among these at least 75 % of people get such credits frequently. And only few own vehicles (like TVS 50 etc).

The overall condition of dalits was pathetic. Many govt. have come and gone, but nothing has changed. They cast 6 votes in total, also has representation among themselves in the Panchayat, but could do nothing. Instead of democracy, political dynamics, caste dynamics and above all money dynamics, rule their lives. Only thing that we could do at this pt. of time is feel for their patheticalness. But remember, the time will change. We will change it. 

Sample – 1: Untouchability in the land of Socrates of Southeast Asia.

Erode, as we all know is the land of the greatest philosopher the Tamil land has ever seen. Eulogized as the ‘Socrates of south east Asia’ by UNESCO, ‘Thanthai Periyar’ stands tall in the minds of every Tamil for his stupendous efforts to reform the society. He spent all his life to create ‘self respect’ in the minds of every human being and taught the people that it is not superstitions, but reason and rationality should guide their action. Being a staunch enemy against the practice of Untouchability, Periyar has staged numerous meeting to propagate his ideas. It was shocking for us to see Untouchability still being practised in the land of such a great man. I was stunned, went speechless when I heared a person say he is not allowed inside the houses of upper caste people. Infact 2/3^rd of the total people we spoke with has experienced the sin at least once in their life in some form. Few people recollected the extreme form of Untouchability being practised some 40-50 years back and said it has been reduced remarkably in last few decades. But still many people say in few teashops, till date 2 tumbler system is followed. They say, dalits would be given tea in striped glass and others would be served in the plane glasses. But one good thing here is among the dalits there is no hierarchy. The Adidravidars and the chakaliyars neither fight among themselves nor place themselves in a hierarchy and derive pride out of it. 

Sample – 1: SHGs – Making waves in the grass roots

The only good thing which is hailed by nearly all the people in the kodumudi union including the Govt. officials, bank managers is the concept of SHGs → Self – help – groups. In the kodumudi union, it functions very well. The program is implemented through Block development office along with the bank participation. First a group of 12 – 20 people (between age 18 – 60) is formed through the officer in charge in Block development office. Mostly female SHGs are formed, there are also other functioning SHGs as well. Once it is formed, the persons in the group will save 10 rupees, 20 rupees whatever they can and will form a fund. If any person needs money in their group for any genuine reason they give loan to the person from the saved fund. They help each other like how a bank does (Receive deposits; give loans) among themselves but without profit motive as in the case of banks. Each group will have a head and 2 representatives. The whole group will regularly meet during public holidays in a public place to make decisions democratically (It is the only instance we really saw democracy in its true spirit). The best performing self help groups are eligible for huge amount loans to start a big business (Rs 50000). Loan have the repayment period of 6 months, availed through a bank, out of which Rs.10,000 is subsidy. The rate of interest will be minimum. The group can do small business or divide the money among themselves into equal parts and each should repay the proportional amount or everyone should repay the whole amount (which ever is applicable) with in six months. Simply we can say all the members of the group are jointly liable for the loan incurred(Joint liability groups, JLGS). Initially the job of selecting the best performing SHGs was done by NGOs. But as there was a lot of corruption in NGOs, the practise was discontinued and PLF (Panchayat level federation) was instituted. PLF has a elected chairperson (among the group heads), Secretary, Joint secretary, Treasurer etc. Now they will decide to whom the loan should go democratically in rotation policy.

This concept without doubt is making waves in Kolathupalam and kolanalli (kodumudi union) because

1. It empowers women.
2. It makes the women and other landless labourers participate in the decision making process which aids in their human development.
3. Extends Credit – facilities to the fringe group, hence financial inclusion.
4. It increases the social cohesion. we met people belong to these SHGs and found that they were really happy with its progress. It was nice to see the poor people happy and after all we do research to perpetuate the same.