IB08
Economics for International Managers
(For CNM Cases)
Assignment - II
Assignment Code: 2016IB08A2 Last Date of Submission: 30th April 2016
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and
carry equal marks.
Section-A
1.
What are the advantages and
disadvantages of export promotion and import substitution Industrialization?
2.
Write short notes on :
a. European
Monetary System
b. Fixed
and Free Float Exchange rate
3. What
are the major reasons of international trade among countries. What are the
basic documents necessary to
conduct a typical foreign trade?
4. “Regional
Economic Integration is a blessing or burden”.
Explain
Section-B
Case Study: Household Investments in Gold are irrational
Gold is fantastic. Gold is a problem. Depending on who you
are, you will choose one of these statements. For Indian households gold has
emerged as the investment destination of choice. After declining over the first
half of calendar year 2012, third quarter data shows an uptick in demand
despite high prices and a higher customs duty. Not only is gold demand up, but
that for coins and bars is growing faster than that for jewellery. Coins and
bars demand grew 12% over the third quarter of 2012 over 2011 (for calendar
year), while that of jewellery grew 7%. Coins, bars and exchang-traded funds
are investment vehicles while jewellery is more of a traditional store of
wealth for women.
Since India does not have enough gold we import it. Tonnes
of it. About 700-800 tonnes are imported each year. Dollars are paid out and
2011-12 saw $62 billion or 3% of the gross domestic product (GDP) flow out of
the country to purchase gold. This outflow of hard currency makes our balance
of payments a mess. Payments for gold explain a large part of the current
account deficit (the shortfall between imports and exports of goods, services,
transfers and investment flows) of 4.2% of the GDP. Recent press statements by
the Reserve Bank of India and the ministry of finance suggest that the
government will announce a gold-linked deposit scheme soon to allow investors
the benefits of holding gold without actually buying the metal, potentially
reducing pressure on the balance of payments. Opinion pieces and reports on
this gold rush of households are condescending in parts—the financially
illiterate household knows no better and buys gold. But I don’t think the
Indian household is making an irrational choice given the situation that the
average household finds itself in. For the un-banked anyway gold has been the
only way to accumulate money, but I refer to the switch that household savings
have made towards gold and real estate.
A cash-fuelled run-away real estate market (it seems the
Delhi real estate market rose 25% after the Commonwealth Games to soak all the
cash the over-invoiced bills threw off) has priced real estate so high that the
average household sees a large part of the disposable income get eaten up by
the monthly mortgage payment. Food and other living cost inflation (caused by
supply side blocks that the government has chosen not to address) has seen
spending more than double over the last few years reducing the surplus left for
discretionary spending and for savings. If the supply side of savings has
shrunk, the behaviour of banks and financial product manufacturers and sellers
has caused a breakdown of trust causing households to switch their investment
vehicles. For example, over Rs.1 trillion have been lost by retail investors in
just life insurance products due to sharp sales practices and trap-like
products. Grumpy stock markets have added to the retail disenchantment with
financial market-linked products while gold returns have been good. Investment
in the metal, either buying it directly or through exchange-traded funds (ETFs)
has seen Rs.1 lakh grow to Rs.3 lakh over the last five years. Over the same
period, the Sensex has turned that Rs.1 lakh into Rs.94,000. If this was not reason enough, add the
overall atmosphere of uncertainty about the future of India and the rush
towards gold is explained. Household money has run towards safety. And
therefore to gold. To blame the household for causing a balance of payment
crisis is uneducated.
End note
The political and governance dysfunction has dented the
India story very badly. A year back a senior financial sector regulator in the
US spoke to me on condition of anonymity and said that the India story was
suddenly over in high finance. “There is just silence about India,” she said.
The buzz was over and India will have to re-sell the story. If there is a story
left. What a pity, she said, to lose momentum mid-way. Speaking to the managing
director of a large private equity firm earlier this week in New Delhi, her
words looked prophetic. He was speaking of having to sell the India story all
over again to investors overseas—and the story is a bit of a stretch given the
political hubris and governance deficit. Worse, he said, not only is the money
slow in coming now, the avenues of investment are also slowly shrinking. Sector
by sector they are cutting off investment destinations. Not just the household,
the smart money is sitting silent as well. Maybe we’ll see the private-equity
firms turn to gold.
Source: Article form Live Mint published: Wed, May 29,2013
Questions:
1.
How
has increase in Gold demand worsened the problem for balance of payment? (10)
2.
What
are the measures to correct the imbalances in Balance of Payments position? (10)
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