GOVERNMENT BORROWING COST SET

TO DROP

ISHAN JINDAL

Increase in Government savings by 1100 – 1400 crore

Government able to sell bond at a higher Price than before

Increase in price of Bonds

Opportunity cost of holding bonds increases

Drop in government bonds yields from 9.10% to 8.14%

Speculation of rate cuts by RBI

Overview

Speculative demand for Money = Msp = f(y+ , i-)

Impact of Speculation

i= CP_

I = Bond yield, c = fixed coupon , P = price of bond

Impact of Speculation

iC = constant

P Government has to pay less

Impact of Speculation

i

Speculative demand for money

8.93%

8.26%

8%

69008000 8430

Conclusion

Bond yield for 10 year bonds , will come down to 8%

Borrowing cost will decrease further

Higher revenue

High growth leading to lower subsidies

Low oil prices

Decrease in fiscal deficit from 4.1% to 3.6%

Centre wants private Investments in smart cities

Allen Thomas Kannattu

Private Investments in smart cities Building 100 “Smart cities” – An integral part of

Modi’s acche din vision

Built for the neo middle class – those who have emerged above poverty line and are striving to ensure they remain there

Smart cities are nothing but an urban space that is ecologically friendly, technologically integrated and meticulously planned, with a particular reliance on the use of information technology to improve efficiency.

Private Investments in smart cities What is smart about them – Maximizing the

efficiency of the city by integrating and compiling into a smart grid; electricity, gas, water, traffic and other government analytics and feeding them into computers.

Why do we need them- By 2030, nearly 600 million Indians will be living in the cities according to census in 2001

Palavar city project , Gujarat’s tech city, Amritsar-Kolkata Industrial Master Plan etc are few of the projects.

Government Spending – 7060 crs.

I=S

I2 I1

I + GI(i)

IS2

S

Y

i

IIS1

S(Y)

S1

Y1 Y2

S2G=70cr

Change in the General Equilibrium

IS1

IS2

LM

Y1

i2i1

Y

i

Y2

Note: The government Spending is not enough. There have to be a huge private sector investments

Attracting the private sector investments

Increasing the money supply and cutting down interest rates

Developing special economic zones

Easing stringent norms and regulations

Increasing the Money supply to attract private sector investments

LM2

Lt

Y

i

Lsp

LM1

Lt=kY

S1

Y1 Y2

S2

MS1-Lsp(i)

Lsp(i)

MS2-Lsp(i)

Conclusion

IS1

IS2

LM1

Y1

i2i1

Y

i

Y2 Y

3

LM2

Conclusion

Economics in each city is has reached a new general equilibrium

The interest rates have been stabilized The income levels in each smart city has increased

from Y1-Y3 There is also crowding out effect which has taken

place

Outcome: The standard of living in each city has increased

RBI holds interest rates

Akriti Jain

Current Scenario

The repo is the rate at which banks borrow funds from the central bank . The Reserve Bank of India (RBI) on Tuesday kept the

short-term indicative policy rate (repo rate) unchanged at 8 per cent

CRR is the portion of total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. The central bank also kept the Cash Reserve Ratio

(CRR) unchanged at 4 per cent 

Why Unchanged ?

To make sure that inflation coming down is for real.

Fiscal outlook should brighten because of the fall in crude prices,  RBI said that weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets

AD/AS diagram showing effect of a cut in interest rates

Aggregate Demand (AD) = C + I + G + X – M

Impact on Current Account

• On the one hand, lower interest rates encourage consumer spending; therefore there will be a rise in spending on imports. This will cause a deterioration in the current account.

• However, lower interest rates should cause a depreciation in the exchange rate. This makes exports more competitive, and if demand is relatively elastic, the impact of a lower exchange rate should cause an improvement in the current account.

Impact on Different Groups in Society

Lower interest rates are good news for borrowers, homeowners (mortgage holders). This group may spend more.

Lower interest rates is bad news for savers. For example, retired people may live on their savings. If interest rates fall, they have lower disposable income and so will probably spend less.

Lowering Interest rate always lead to economic growth ??

If the Central Bank cut the base rate, banks may not pass this base rate cut onto consumers. 

It depends on other factors in the economy (Global Recession)

Consumer Confidence. 

Deflation. If we had deflation then even if interest rates are very low, then people may still prefer to save because the effective real interest rate is still quite high.

Declining Crude Oil Prices

Prerit K

Declining Crude Oil Prices

Crude Oil: Current Scenario

More than Three Fourths of the crude oil is Imported

Net imports of crude oil amounts to Billion Barrels per year

Average cost of $106 per Barrel in first 6 months of 2014

Cost of Crude Oil consistently decreasing due to oversupply(Non OPEC countries)

Has direct impact on Energy firms ,Tyre Makers and consumer companies

Has Impact on LPG and Kerosene cost

Has Dependence on Marco economic indicators such as CAD , fiscal deficit etc.

Crude Oil Import , CAD and Under-recoveries

Benefits of Reduction in Oil Prices to India

Decrease in Import Bill

•If Oil Prices decrease from $106 to $100 /Barrel, then India’s Import bill will fall by $10 Billion (around 61,000 crores)

Decrease in CAD and Fiscal

Deficit

•India’s CAD will reduce to 1.3% of GDP as compared to 1.7% of GDP •Will bring down Fuel Under recoveries and hence, narrow fiscal deficit.

Benefit to Various

companies

•Consumer Companies-Lower packaging costs -> Increase in margins•Tyre Companies-Improvement in Margins since 25-35% of their raw material depends on crude oil

•Energy firms would be benefitted too•Reduce working capital requirement of HPCL,IOCL and subsidy pay out from government

FUNDS CRUNCHGovernment just does not have the money ,say officials;

Interest subvention scheme may not be revived

There has been a 5% decline in exports from INDIA this October

The FIEO concerned by this called for the restoration of the interest subvention scheme

The government had removed the scheme just this year due to too much money being spent on it.

But the government is offering better non fiscal measures like reducing paperwork and transaction time

CURRENT SCENARIO

Yes to Exporters No to exportersThis year’s target fiscal deficit is 4.1 when last year it landed at 4.5, sacrifices need to be made.

Already 1700 crores spent this year on interest subvention as compared to 1475 crores last fiscal

May lead to the future reduction in fiscal deficits

Improvement from the dismal export numbers

GOVERNMENTS TARGETS

Effect on the IS Curve

Effect on the BP line

There can be a interest subvention scheme implemented with a lower level of subsidy on offer.

The subsidy scheme should be permitted only upto a limit (amount) per trader / exporter.

Suggestions

THANK YOU

NEW ERA OF INDIAN RAILWAYS-

100% FDI

INDIAN RAILWAYS: OVERVIEW

It is the 4th largest rail freight carrier, on its way to become largest in the world.

World’s largest passenger carrier. World’s third largest rail network. It has a workforce of about 1.3 million people. In recent times, it is facing a severe cash crunch to

the tune of Rs 26,000 crore every year. Further growth will depend upon the investments

made in this sector.

SOME GOVERNMENT INITIATIVES Opening railways for 100% FDI (earlier it was

banned). The government plans to spend  Rs 65,450 crore

on railways in 2014/2015.

INVESTMENT OPPRTUNITIES Manufacture of components Infrastructure Projects

UNION CABINET APPROVES 100% FDI IN RAILWAYS.

-Aug 6th , 2014

GOVERNMENT OUTLINES AREAS OPEN FOR FDI IN RAILWAYS.

-Nov 13th , 2014

KEY POINTS AND AREAS Some areas were identified for 100% FDI.

[construction, operation and maintenance/ high speed train projects/ dedicated freight lines/railway

electrification/signalling systems/mass rapid transport systems etc]

MAJOR INVESTORS• EMD (USA)• GE (USA)• Siemens (Germany)• Alstom (France)

IMPLICATIONS Railways contributes to around in

2.3% India’s GDP. So increasing investments in railways will lead to improvement of GDP.

This investment increase will come through PPP and FDI.

Infrastructure, signalling/communication, manufacturing and power generation sectors also get a boost (being closely related to railways).

There will be introduction of new technology in country.

There will be more job opportunities and thus increase in employment.

All this and the interdependence of various sectors will lead to increase in individual income.

More Investments - Income Increase – Investment in alternate assets (except government securities) Demand – Demand decreases – Price Decreases- Interest rate rises