Impact of Global Economy

http://globaleconomy7.blogspot.in/2014/02/impact-of-global-economy-is-inevitable.html

Mutual fund

Mutual fund

Ø  Mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities.

Ø  The SEBI (Mutual Fund) Regulations, 1996 defines mutual fund as a “ a fund established in the form of a trust to raise money through the sale of units to the public.

Ø  MF serves as a link between the investor and the securities market by mobilizing savings from the investors and investing them in the securities market to generate returns.

Ø  The basic objective of mutual fund is to provide continuous liquidity and higher yields

Benefits of Mutual Fund

Ø  Professional Management

Ø  Portfolio Diversification

Ø  Reduction in transaction cost

Ø  Liquidity

Ø  Convenience

Ø  Flexibility

Ø  Tax benefits

Ø  Transparency

Ø  Equity Research

Types of Mutual Fund Schemes

•       Open-ended Fund / Scheme

Ø  An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis.

Ø  These schemes do not have a fixed maturity period. The number of units outstanding goes up or down every time, the fund issues new units or repurchasing existing units. This means, the unit capital of an open-ended mutul fund is not fixed but its variable.

Ø  Not listed in the stock exchange

Ø  Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

•       Close-ended Fund / Scheme

Ø  A close-ended fund or scheme has a stipulated maturity period.

Ø  Realization is possible at the end of maturity

Ø  In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices.

Ø   SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Ø  And unit capital of a close-ended fund is fixed, because it makes a one time sale of a fixed number of units.

•       Growth / Equity Oriented Schemes

Ø  The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities.

Ø  Such funds have comparatively high risks.

Ø  These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.

Ø  The mutual funds also allow the investors to change the options at a later date.

Ø  Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

•       Income/ Debt Oriented Schemes

Ø  The aim of income funds is to provide regular and steady income to investors.

Ø  Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments.

Ø  Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds.

Ø  The NAVs of such funds are affected because of change in the domestic interest rates. However, long term investors may not bother about these fluctuations.

EXPLAIN THE CONCEPT OF EXCESS CAPACITY & WASTE IN MONOPOLISTIC COMPETITION

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EXPLAIN THE CONCEPT OF EXCESS CAPACITY & WASTE IN MONOPOLISTIC COMPETITION

§  DEFINATION OF WASTE.

§  EXAMPLE OF WASTE.

§  ACCORDING TO DIFFERENT PROFFSSORS.

§  CAUSES.

§  REASONS.

§  DIAGRAMS.

§  ANALYSIS.

DEFINATION OF WASTE

                                    “Waste means whatever extra quantity which is left over and unutilized by producer.”

EXAMPLE OF WASTE

                           Molasses left over after sugarcane is used.

                           Food left over after marriage function is over.

ACCORDING TO DIFFERENT PROFESSORS

1)      PROFESSOR MEADE

                                    “The term ‘waste’ refers to waste of monopolistic & not prefect competition. Because in perfect competition hardly any waste takes place”.

2)      PROFESSOR ROTHSCHILD

There are 7 kinds of waste in Monopolistic market

                                                                               I.      Expense on competitive advertisement.

                                                                            II.      Expense on cross transport.

                                                                         III.      Failure in specialization.

                                                                         IV.      Excess capacity.

                                                                            V.      Existence of inefficient forms.

                                                                         VI.      Higher price & less output.

                                                                      VII.      Unemployment.

CAUSES

1)       As demand curve is perfectly inelastic and average cost is decreasing, there is less use of resources.

2)      Present Firms who is get maximum short run profit, has to divide its profit with new entrance of firms. Thus, in long run, each firm will have to make less production, which leaders to excess capacity of production

EXM: T.V, clothes, etc…

REASONS FOR EXCESS CAPICITY

1)      In the perfect competition: under this competition, MC&AC are equal at equilibrium in long run. So, AC is at minimum. Therefore, resources are used at optimum manner.

2)      In Monopolistic Competition: there is AC more than AC at equilibrium in long-run. This means firm earns minimum Ac after equilibrium takes place. As a result, excess capacity takes place.

ANALYSIS

Ø  X-axis indicates output in units

Y-axis indicates revenue & cost.

Ø  In monopolistic competition, equilibrium takes place between OM and at equilibrium point.

Ø  MC cuts AR at B & cuts MR at E.

Ø  If a vertical line in drawn at E, then at firm earns MC equal to MR.

Ø  Hear, AR is equal to price curve but AC is higher than MC.

Ø  Here, AC of firm is Minimum at B point. Because at here AC interests MC& AC is minimum.

Ø  In perfect competition, AR & MR are equal, so no wastage is possible. But in monopolistic, firm get equilibrium at normal Profit, but MN capacity is still remain unutilized.

Ø  As factors production remains fully unutilized, at equilibrium point, full employment or max output cannot be achieved. Here, capacities of production remains excess & so products can be made at higher cost & there prices are kept quite high. Thus, wastage is created.

Ø  Prof. Hicks & Robertson believe that it is not a social waste because different classes of peoples get variety of products due to this. If there is excess capacity of production, in times of accidental rise in demand, supply of production can be increased without increasing proportion of fixed factors.

Ø  Here; at point A, cost is higher and profit is higher. But maximum utilization is not possible. So, it is not proper place for production for firm to produce goods at minimum cost & to earn maximum profit.

Ø  And at point B, Profit is not maximum and AC is at minimum, while resources are used at maximum. But if firm doesn’t get profit, how can a firm continue business or bear loss? So, its not proper point of production.

So, as per this, we can say:

                        “Excess capacity & wastage is seen in monopolistic competition.

Functions of World Bank

What are the Functions of World Bank?

World Bank performs the following functions:

(i) Granting reconstruction loans to war devastated countries.
(ii) Granting developmental loans to underdeveloped countries.
(iii) Providing loans to governments for agriculture, irrigation, power, transport, water supply, educations, health, etc
(iv) Providing loans to private concerns for specified projects.
(v) Promoting foreign investment by guaranteeing loans provided by other organisations.
(vi)Providing technical, economic and monetary advice to member countries for specific projects
(vii) Encouraging industrial development of underdeveloped countries by promoting eco­nomic reforms.

Important of SEZ

How SEZ’s should be modelled to Benefit India:

Size Does Matter: I was reading an article and found out the following fact, China’s SEZs are huge. Shenzhen, the most important SEZ, covers 32,000 hectares. In India, there are just two or three privately developed SEZ, exceeding 1,000 hectares. Most of the others approved are less than 100 hectares.  But it is heartening to realize that the government has decided to up the ante and have made guidelines to have a minimum of 1000 hectares of area for approving an SEZ. It hardly needs reiteration that only a large sized zone can generate economic activity on some reasonable scale. In a small zone, the requisite infrastructure and services cannot be provided nor can multiple economic activities be promoted.

TAX Benefits:  The incentive package in India is quite liberal and may even be a shade better than that for Chinese SEZs. In fact, it is more or less on a par with the package for the existing EPZs. Duty free import of capital goods and raw materials, reimbursements of Central Sales Tax, tax holiday for specified period, 100 per cent repatriation of profits for subcontracting facilities are allowed. The Government has done well by extending incentives for the infrastructure sector to zone developers and the units as well. This can attract foreign direct investment for providing internationally competitive infrastructure.

Labor Laws:  We can learn from china where initially labor laws where relaxed so that the companies could adopt Hire and Fire policy, once the Private and foreign players gained confidence in the Chinese workers’ productivity, this was replaced by the Contract system. India should take cue from this and understand that the import-export business is highly dependent on uncertain international market conditions, rejection of consignments etc. hence a flexible labor policy is the need of hour in the SEZ’s.

Domestic Tariff Areas: We got to understand that the reason for the Foreign investors to invest in Industrial, Manufacturing sector in India is not only to cut down on their costs because of cheaper and competitive products but they also see the vast Indian consumer markets, which has seen great income rise and standard of living. So apart from exports itself, the domestic market itself provides immense opportunity for sale of products. The companies in SEZ being levied a full import duty on sale in domestic areas does not seem a bright idea. In this case SEZ’s will only promote export driven industries which are highly dependent on import of raw materials. To further make use of full potential of SEZ’s Industries which are capable of indigenous generation of raw materials should be provided with tax holidays in terms of benefits to facilitate competitive pricing in the domestic tariff areas.

Thinking about the Future and Possible Fallacies: As evidence over the years has shown, this single-minded pursuit of growth has lowered the efficiency and effectiveness of economic policies, besides incurring huge resource and environmental costs. The Chinese experience offers a valuable lesson for India. Neither the international nor the Indian experience with SEZs has been particularly happy. Globally, only a handful of SEZs, of the hundreds that exist, have generated substantial exports, along with significant domestic spin-offs in demand or technology upgradation. For each successful Shannon (Ireland) or Shenzhen (China), there are 10 failures – in the Philippines, Malaysia, Brazil, Mexico, Colombia, Sri Lanka, Bangladesh, why, even India. A 1998 report by the Comptroller and Auditor General (CAG) on export processing zones (EPZs) says: “Customs duty amounting to Rs. 7,500 crores was forgone for achieving net foreign exchange earnings of Rs.4,700 crores.

The Reserve Bank of India says that large tax incentives can be justified only if SEZ units establish strong “backward and forward linkages with the domestic economy” which is a doubtful proposition. Even the International Monetary Fund’s (IMF) Chief Economist Raghuram Rajan has warned: “Not only will [the SEZs] make the government forgo revenue it can ill afford to lose, they also offer firms an incentive to shift existing production to the new zones at substantial cost to society.”

As much as 75 per cent of the SEZ area can be used for non-core activities, including development of residential or commercial properties, shopping malls and hospitals. Developers will surely use this to make money via the real estate route rather through export promotion. This represents a potentially humongous urban property racket of incalculable dimensions. India will see a multiplication of “Gurgaon-style” development, under the aegis of big builders such as DLF, Marathon, Rahejas, Unitech, City Parks and Dewan.

Conclusion: The SEZ’s could drastically improve the economic activity in the country, make the country’s export competitive and globally noticeable, be net foreign exchange earner and provide immense employment opportunity. But this should not be done at the cost of bringing down the agricultural activities, Land grabbing and real estate mafia should be properly regulated so that the common man is not the net sufferer to get the net foreign exchange earner up and running. As compared to china where majority of the SEZ’s were setup by the government, similar should be adopted in India, if not fully it should be a public-private partnership and regulatory bodies should be properly managed to weed out fallacies. To be economically viable SEZ’s should be approved over a particular land area (greater than 1000 acres) for rapid economic growth in the area and for it to be profitable and self sustainable. Relaxed Tax norms, Labor laws and DTA regulations will surely attract foreign investment and major industries to setup industries in the SEZ’s making it profitable and meeting its desired results!