Economy Current Affairs 2020 (March, April, May) Set-10

Table of Contents

Q) In which of the following sectors FDI is prohibited in India?
1) Chit Funds
2) Manufacturing of cigarettes
3) Atomic Energy
Select the correct options

1 and 2
1 and 3
1, 2, and 3
2 and 3

WHY IN NEWS

Revised FDI Policy

Recently, India’s Department for Promotion of Industry and Internal Trade revised its FDI policy in order to curb the possibility of predatory foreign investment exploiting the financial distress of COVID-19-hit Indian companies.

FDI in Automatic vs. Government Route

Government Route: Under the government route, foreign investor has to take prior approval of respective ministry/department.
Automatic Route: Through automatic route, the investor just has to inform the RBI after the investment is made.
Also, Proposals involving FDI exceeding Rs 50 billion are placed before the Cabinet Committee on Economic Affairs irrespective of sector or country.

Sectors in which FDI is prohibited in India

Lottery businesses.
Trading in Transferable Development Rights (TDRs).
Manufacturing of cigars, cheroots, cigarillos and cigarettes
Gambling and betting.
Chit funds.
Nidhi Company.
Real estate business excluding construction and REITs
Sectors not open to private sector investment such as atomic energy, railway operations etc.

WHY IN NEWS

Negative Oil price

US oil markets created history on 22nd April 2020 when prices of West Texas Intermediate (WTI) crude fell to “minus” $40.32 a barrel in New York which is lowest crude oil price ever known
The fall in prices was triggered by the expiry of futures contracts for US West Texas Intermediate (WTI) crude.

How global prices are determined

Crude oil prices like any other commodity are determined by global supply and demand.
Growing economies are engines which generate demand for oil in general and especially for transporting goods and materials from producers to consumers.
On the other hand, supply of crude oil in majorly controlled by a selected countries or groupings such as OPEC (Organization of the Petroleum Exporting Countries).
Thus, the stability of oil prices and its seamless operations depends on-

1.Predictability of the global demand of oil.
2.The ability of the oil-producing countries to act in consort for maintenance of supplies.
Future Contracts

A futures contract is a standard contract to buy or sell a specific commodity of standardized quality at a certain date in the future.
For example, if oil producers want to sell oil in the future, they can lock in their desired price by selling a futures contract today.
Alternatively, if consumers need to buy crude oil in the future, they can guarantee the price they will pay at a future date by buying a futures contract.

India’s Crude Oil Profile

India is the world’s third-largest consumer of oil, fourth-largest oil refiner and net exporter of refined products.
Growth rate of India’s oil consumption is expected to surpass China in the mid-2020s and India’s energy demand is set to double by 2040.
India is heavily dependent on crude oil and LNG imports with greater than 80% import dependence for crude oil and 45.3% for natural gas/LNG.
The top 5 crude oil exporters to India (by import bill) are Iraq, Saudi Arabia, Iran, Nigeria and UAE in decreasing magnitude of exports.

Crude pricing mechanism in India

Over a period of time the APM (administered pricing mechanism) was established for crude pricing.
APM=The weighted average of international prices and the domestic cost of production
Starting from 2002, APM were officially dismantled.
With the dismantling of APM, the price of indigenous crude has been linked to international prices
After dismantling of APM, Petrol & Diesel prices were finally deregulated by Indian Government in 2010 and 2014 respectively.
But the international price does not directly reflect in the local prices
Retail Prices= International Price+ Central Government Taxes+ State Government Taxes + operating cost -Subsidies
These subsidies are provided to protect consumers from volatility in international prices.
Government then compensates companies for any loss from selling fuel products at lower rates.
These losses are called under recoveries.

Benefits for India

India Imports 80% of its oil needs.
$1 fall in crude price saves almost Rs. 10,000 crore a year.
Cheaper crude will help in Inflation reduction.
Savings on fuel may increase consumer spending.
Lower subsidies would help government budget.

Q) Which of the statement is correct regarding the Special Drawing Rights ?
1) SDRs can only be held by IMF member countries and not by individuals
2)India Rupee is also used to calculate the value of SDR
Which of the above statements is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2

WHY IN NEWS

SPECIAL DRAWING RIGHTS

Recently, a proposal for the International Monetary Fund (IMF) to issue additional 500 billion Special Drawing Rights (SDR) was blocked by India and USA.

About SDR

SDR is an international reserve asset, created by IMF in 1969 to supplement official reserves of member countries.
The value of the SDR is calculated from a weighted basket of 5 major currencies, including the S. dollar, the Euro, Japanese yen, Chinese Renminbi, and British pound.
SDR basket is reviewed every five years, or earlier if warranted, to ensure that the basket reflects the relative importance of currencies in the world’s trading and financial systems.
Technically, the SDR is neither a currency nor a claim on the IMF itself. Instead, it is a potential claim against the currencies of IMF members.
SDR augments international liquidity by supplementing the standard reserve currencies.
SDRs can only be held by IMF member countries and not by individuals, investment companies, or corporations.
India’s Foreign exchange reserves also incorporate SDR.

What is a general SDR allocation?

An SDR allocation is a low cost way of adding to members’ international reserves, allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
The IMF has the authority under its Articles of Agreement to create unconditional liquidity through “general allocations” of SDRs to participants in its SDR Department (currently, all members of the IMF) in proportion to their quotas in the IMF.
Quota (the amount contributed to the IMF) of a country is denominated (expressed) in SDRs.
Members’ voting power is related directly to their quotas.

Quota and Voting Share: IMF