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2012 January Economic Issues

The Reserve Bank of India (RBI) on 24 January 2012 cut the cash reserve ratio (CRR) by 50 basis points from 6 per cent to 5.5 percent with effect from 28 January 2012. RBI thus released Rs 32000 crore to banks. 

The RBI kept the repo rate unchanged at 8.50 per cent for the second consecutive time after raising it 13 times between March 2010 and October 2011. It also kept Reverse Repo Rate unchanged.

The Department of Industrial Policy and Promotion (DIPP) notified the rules allowing 100% foreign direct investment (FDI) in single-brand retail. 

Currently 51% FDI is permitted in this segment of retailing which was opened to foreign players almost six years ago.

Andhra Pradesh Power Generation Corporation Ltd (APGENCO) announced the commissioning of a 1-MW photovoltaic-cell-based solar power plant at Priyadharsini Jurala Hydro-Electric Project. This is AP Genco's maiden entry into solar power generation. 

The Indian Renewable Energy Development Agency (IREDA), a public limited company under the control of the Ministry of New and Renewable Energy, allocated this power project to AP Genco under phase-1 of the Jawaharlal Nehru National Solar Mission (JNNSM).

The Supreme Court observed that the allocation of 2G spectrum under former telecom minister A. Raja was wholly arbitrary and contrary to public interest apart from being violative of the doctrine of equality favour some companies at the cost of the public exchequer. 

The Supreme Court cancelled all the 122 2G licenses. According to the verdict, telecom regulator TRAI is to make fresh recommendations on the grant of licenses.

The Union government on 31 January 2012 revised the economic growth rate for 2010-2011 financial year to 8.4 percent in comparison to the previous estimate of 8.5 percent. 

The Indian economy, Asia’s third-largest slowed in recent quarters due to the impact of the global slowdown, high inflation and high interest rates.

Ministry of Railways prepared draft policy which seeks increased private participation and opens the doors for foreign direct investors for expanding its network.

The Ministry proposed six PPP models for project execution that includes creating railway connectivity on private land. The policy also sought to attract the state government in developing rail projects. foreign direct investors will also be allowed to participate in asset creation pending clearances by Foreign Investment Promotion Board.

According to data released by the Reserve Bank on 6 January 2012, foreign exchange reserves fell by over $4.18 billion to $296.69 billion, slipping below the long-held $300-billion mark in te week ended 30 December 2011. The drop in the reserves was attributed to the fall in the core foreign currency assets (FCAs) and gold reserves. The overall reserves slipped by $1.23 billion to $300.86 billion in the previous reporting week.

FCAs, a major component of the forex kitty, fell by $2.72 billion to $262.93 billion for the week ended 30 December. Gold reserves were down by $1.42 billion to $26.62 billion.

Faced with massive volatility in the rupee the value of which eroded by 20 per cent since August 2011, the apex bank resorted selling dollar reserves to limit or arrest the depreciation.

The Union government in January 2012 cleared an external loan to finance part of the programme launched by the Ministry of Rural Development in left wing extremism-affected villages. The clearance is for a loan of $500 million from the Asian Development Bank (ADB) to speed up construction of rural roads.

Union Ministry of Rural Development (MoRD) issued directions for negotiating and early signing of the loan, which his Ministry to gather resources to give thrust to the Pradhan Mantri Gram Sadak Yojana (PMGSY).

The ADB, which has already extended a loan of $800 million was petitioned with a fresh proposal for rural connectivity investment programme to construct or upgrade 7000 km of roads connecting eligible habitations in Maoist-affected States of Bihar, Chhattisgarh, Madhya Pradesh, Odisha, West Bengal, besides Assam where too the PMGSY has progressed with little to cheer.

Data released by the commerce and industry ministry on 5 January 2012 showed food inflation, as measured by the wholesale price index, fell by (-)3.36% sharply lower than the 0.42% registered in the week ended16/17 december 2012. Food Inflation had stood at 20.84% in the same year-ago period.

Food prices stood at negative 3.36 per cent in the week to 24 December 2012 marking the first fall in nearly six years, as the costs of vegetables continued to fall from their high levels in the previous winter.

Food-price inflation had not turned negative since 2004-05 prices were adopted as the statistical base for the series.

Insurance regulator IRDA on 4 January 2012 introduced uniform asset-liability management norms for market players to ensure their solvency. Insurance Regulatory and Development Authority (IRDA) announced a broadly-defined uniform framework for reporting asset liability management activities adopted by life and non-life insurance companies.

The regulator also asked firms to undertake stress tests to ascertain their ability to meet financial obligations in the event of a crisis. IRDA has issued these guidelines to bring about uniformity in the ALM norms being followed by both life and non-life insurance companies.

The Finace Ministry on 4 January 2012 clarified that the rates applicable on small savings instruments schemes would be announced on April 1 each year and the rate would remain valid till the maturity of the scheme. The Ministry stated that barring the Public Provident Fund (PPF), the rates of interest on all small savings schemes will remain fixed throughout the tenure of investment.

The report of the Department of Telecommunications, prepared by the working group on Telecom for the 12th Five Year Plan (2012-17), emphasised on the the urgent need for creating a secure infrastructure for government communication.

The security of governemnt communication need to be ensured by an alternative mechanism because neither is it advisable to wait for such a mandating and capacity building nor is it appropriate to rely on the level of security provided by such a scheme given that communication will continue to remain in the open domain of Internet.

The report highlighted the capacity constraint of the current Indian system that allows traffic to flow outside the country. As per the report an investment of Rs.450 crore is needed to develop and deploy a pan-India secure network and network-based services such as email, VoIP mobile communication through a survivable and available network architecture for secured communication for government use.

The Reserve Bank of India on 3 January 2011 decided to conduct an open market operation (OMO) to inject more liquidity into the system. The RBI will buy up to Rs 12000 crore of government bonds via open market operations on 6 January 2012, including the 10-year paper which till recently was the benchmark paper.

The central bank has decided to ease liquidity by buying back gilts for an amount of R10,000 crore in the backdrop of banks accessing the Reserve Bank of India (RBI)’s borrowing window for more than R1 lakh crore each day.

RBI announced an auction for R10,000 crore worth of bonds, otherwise known as open market operation (OMO). The OMO announcement came after the market trading hours. the Reserve Bank of India decided to conduct open market operations consistent with the stance of the monetary policy and based on the current assessment of prevailing and evolving liquidity conditions.

The capital market regulator SEBI on 3 January 2012 allowed auctioning of securities through stock exchanges and introduced a new method for institutional placement of stocks. The move was directed to kick-start government's divesment programme as well as help promoters of companies to sell a part of their holdings.

As per the auctioning route, a special window can be used by promoter stakeholders to sell at least 1% of the paid-up capital of a company. It is similar to the block-deal mechanism for secondary stock market transactions, but with lesser restrictions. The auction method can be only used by promoters of top 100 companies based on average market capitalisation for sale of their stakes.

The Parliamentary Standing Committee submitted its report on a bill to amend the Forward Contracts Regulation Act 1952. Parliamentary Standing Committee on consumer affairs, food and public distribution, chaired by Congress MP Vilas Baburao Muttemwar, submitted its report on the FCRA (Amendment) Bill 2010 to Parliament on 22 December 2011.

The current department-related standing committee (DRSC), set up in 2009, was asked by the Lok Sabha speaker in December 2010 to prepare a report on the bill and submit it to the Lok Sabha Secretariat.

The committee in its report recommended a doubling of the maximum penalty for trading rule violations to Rs 50 lakh.

The standing committee report suggested raising the upper limit on penalties for offences like insider trading to Rs 50 lakh from Rs 25 lakh stipulated in the Forward Contracts Regulation Act (FCRA) Amendment Bill 2010. Insider trading involves using unpublished price sensitive information for personal gain.

The implementation of levy on railway freight service was put off once again in the backdrop of high inflation. The levy is now likely to come into force from 1 April instead of 1 January as announced earlier.

The levy on transport of goods by rail was deferred for the sixth time. Finance Minister Pranab Mukherjee in the 2010-11 Union Budget had brought transport of goods by railway under the service tax net from 1 April 2010. However, the proposal was vehemently opposed by Railway Ministry fearing adverse impact on goods movement, forcing the government to defer it repeatedly.

The Union government on 3 January 2012 approved Reliance Industries' (RIL) $1.529 billion investment plan for developing four satellite fields in the flagging KG-D6 block. RIL’s investment plan will boost falling output in the Krishna-Godavari Basin KG-D6 block.

The investment proposal was signed by the three partners in the block- RIL, UK's BP Plc and Niko Resources of Canada and the representative of DGH.

The KG-D6 block oversight committee, which includes officials from the Oil Ministry and its technical arm, the Directorate General of Hydrocarbons (DGH), met for the third time in three months on 3 January to finally approve the proposal.

The MC approval, which is the final approval an operator needs before beginning work, put a cap on the cost of developing the four fields that surround the currently producing Dhirubhai-1 and 3 (D-1 & D-3) fields in the KG-D6 block.

The Union government raised the ad valorem duty (export duty) on iron ore exports to 30 per cent from 20 per cent. The decision is expected to step up finances of cash-strapped government by around Rs 8500-9000 crore. The Federation of Indian Mineral Industries, the apex body of miners however complained that Indian ore would no longer be competitive internationally.

The increase in export tax could lower the profit margin of Sesa Goa Ltd., India's largest iron-ore exporter by volume.

Coal India (CIL) announced on 2 January 2012 that its board approved in a meeting held on 30 December 2011 the switching over to internationally-accepted Gross Caloric Value-based pricing mechanism. The new system is based on the recommendations of the Integrated Energy Policy Committee and the Expert Committee on Road Map for coal sector reforms.

The board approved switching over of non-coking coal pricing from Useful Heat Value based grading system to Gross Caloric Value (GCV) based classification with effect from 1 January 2012. GCV measures the amount of heat released by carbon and hydrogen in coal when it is heated and is an internationally accepted pricing mechanism. the UHV mechanism was followed in India Howeverbecause of the high-ash content in Indian coal. The UHV took into account the heat trapped in ash. In Indian coal, GCV is 25% higher than UHV.

Reserve Bank of India (RBI) raised red flags over the high dependability of non-banking finance companies (NBFCs) on the banking system because the apex bank feels that the higher dependence would mean systemic vulnerability in the context that NBFCs are involved in higher risk activities vis-à-vis the banking system.

The higher borrowings of NBFCs from the banking system tend to raise concerns about their liquidity position. More so, if such reliance happens to increase further.

The banking system’s exposure to NBFCs-D (deposit taking) was observed to have considerably increased over the years. The concerns to be further accentuated in case the banks’ own liquidity position becomes tight at the time of crisis or even at crisis like situation.

As per the to Commerce Ministry data released on 2 January 2012, India’s exports recorded their slowest pace of growth in two years at 3.8 per cent in November 2011 as a result of the global slowdown. Moderation in demand in developed markets also impacted export. The growth rate was the lowest since October 2009, when exported had contracted by 6.6 per cent.

The commerce ministry had overestimated exports by over $9 billion due to software upgrade and punching errors that prompted a revision of data revision for the previous eight months. The data on engineering exports was inflated by around $15 billion, while export of gems and jewellery and petroleum products was underestimated by $12 billion.

The HSBC Purchasing Managers' Index ( PMI) - a headline index designed to measure the overall performance of the manufacturing sector - registered 54.2 in December, up from 51.0 in November. The PMI was released by the banking major HSBC on 2 January 2012. The index indicated the strongest improvement in business conditions since June 2011. New orders from overseas clients also grew at a faster pace than November 2011, the second consecutive expansion after shrinking for four months.

India’s manufacturing activity was at a a six-month high in December 2011 on account of an increase in factory output and new orders from domestic and international firms. The HSBC Markit India Manufacturing PMI jumped to 54.2 from 51.0 in November, its biggest monthly rise since April, 2009.

The index stayed above the 50 mark that separates growth from contraction for 33 months now. The PMI or Purchasing Managers’ Index dipped to 50.4 in September 2011.

Small Industries Development Bank of India (SIDBI) entered into a memorandum of understanding with Indian Overseas Bank (IOB) on 6 January 2012 to extend assistance to micro, small and medium enterprises (MSME) customers of IOB. The MoU was signed by S. Muhnot, Chairman and Managing Director of SIDBI, and M. Narendra, Chairman and Managing Director of IOB.

Indian Overseas Bank (IOB) received Rs 100 crore from Small Industries Development Bank of India (Sidbi), as part of refinancing agreement. SIDBI lined up Rs 2000 crore equity investment in the country's micro, small and medium enterprises (MSME).

The board of Oil and Natural Gas Corporation (ONGC) declared on 4 January 2012 that it approved Rs.352.50-crore investment for producing oil from a marginal field off the Mumbai coast. The board also approved a Rs.115-crore investment in the Heera and South Heera fields, situated 70 km South-West of Mumbai city.

The board also approved an interim dividend of Rs.6.25 per share of Rs.5 each for 2011-12. The total payout on this account was estimated to be Rs.5347.20 crore, out of which the government is to get Rs.3964.36 crore.

Mukesh Ambani’s Reliance Industries Ltd (RIL) entered the media and entertainment sector by making a major investment in the Raghav Bahl-controlled Network18 Group, one of India’s largest broadcast companies. Network18 owns several news channels and has significant interests in the film and general entertainment broadcast businesses.

Reliance Industries Ltd. conglomerate on 3 january 2012 unveiled a complex agreement to raise funds to help big media company Network18 pay down debt as well as provide content to Reliance’s new fourth-generation telecommunications network. RIL will help Network18 fund the purchase of a leading regional language rival, Eenadu and at the same time also ensuring a stake for itself in Network18's expanded business



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