GAAR rules notified

• The government has notified the controversial anti-avoidance tax rules, which will be implemented from April, 2016, and apply to business arrangements with a tax benefit exceeding Rs.3 crore.
• The General Anti Avoidance Rules (GAAR) provisions will come into force from April 1, 2016, the Central Board of Direct
• Nuclear waste could supply 800 years of power
• In a drab one-story building here, set between an indoor tennis club and a home appliance showroom, dozens of engineers, physicists and nuclear experts are chasing a radical dream of Bill Gates: a new kind of nuclear reactor that would be fuelled by today’s nuclear waste, supply all the electricity in the United States for the next 800 years and, possibly, cut the risk of nuclear weapons proliferation around the world.
• The people developing the reactor work for a startup, TerraPower, led by Mr. Gates and a fellow Microsoft billionaire, Nathan Myhrvold. So far, it has raised tens of millions of dollars for the project, but building a prototype reactor could cost $5 billion — a reason Mr. Gates is looking for a home for the demonstration plant in rich and energy-hungry China.
• Today’s nuclear reactors run on concentrations of three to five per cent uranium 235, an enriched fuel that leaves behind a pure, mostly natural waste, uranium 238. (A uranium bomb runs on more than 90 per cent uranium 235.)
• In today’s reactors, some uranium 238 is converted to plutonium that is used as a small, supplemental fuel, but most of the plutonium is left behind as waste.
• In contrast, the TerraPower reactor makes more plutonium from the uranium 238 for use as fuel, and so would run almost entirely on uranium 238.
• It would need only a small amount of uranium 235, which would help kick-start the reaction.
• The result, TerraPower’s supporters hope, is that countries would not need to enrich uranium in the quantities they do now, undercutting arguments that they have to have vast stores on hand for a civilian programme.
• TerraPower’s concept would also blunt the logic behind a second route to a bomb: recovering plutonium from spent reactor fuel, which is how most nuclear weapons are built. Since so much uranium 238 is available, there would be no reason to use that plutonium, TerraPower says.
• The engineers working for Gates acknowledge the enormous challenges but say they are convinced that he and they are chasing the solution not only to energy and weapons proliferation but also to climate change and poverty.
• “If you could pick just one thing to lower the price of — to reduce poverty — by far you would pick energy,” Mr. Gates said as he introduced the reactor idea in a speech in 2010. nuclear fuel.
• TerraPower is not alone in pursuing a reactor that will turn waste uranium into energy, and if such a concept can be commercialised, Mr. Gates might not be the first to do it. General Atomics, which has decades of experience in nuclear power, is pursuing what it calls an “energy multiplier” reactor module on the same general principal.

Odisha is the most backward, Bihar comes next, Gujarat is less developed, says Raghuram panel

• A panel headed by Raghuram Rajan has recommended a new index of backwardness to determine which States need special assistance.
• The new methodology ranks Odisha as India’s most backward State, Bihar, which has been seeking ‘special’ status, as the second most backward, and Gujarat as one of the “less developed” States. Goa is the most developed State.
• In May this year, the Union government constituted the committee headed by Mr. Rajan, now RBI Governor, to suggest ways to identify indicators of the relative backwardness of the States for equitable allocation of Central funds.
• Central allocations are governed by the Gadgil-Mukherjee formula that places the greatest weight on the State’s population, followed by other factors like per capita income and literacy.
• Chief Minister Nitish Kumar’s demand for a ‘special category status’ for Bihar has further pushed the government to review how the Centre allocates funds.
• The report, which the Prime Minister and the Finance Minister have reviewed, was made public on Thursday.
• The committee has proposed an index of backwardness composed of 10 equally weighted indicators of monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percentage of the Scheduled Caste/Scheduled Tribe population, urbanisation rate, financial inclusion and physical connectivity.
• The 10 States that score above 0.6 (out of 1) on the composite index have been classified as the “least developed,” the 11 States that scored from 0.4 to 0.6 are “less developed” and the seven that scored less than 0.4 are “relatively developed.”
• The report recommends that each of these 28 States get 0.3 per cent of overall Central funds allocated and of the remaining 91.6%, three-fourths be made allocations based on need and one-fourth based on the State’s improvements on its performance, to be reviewed every five years. Since States now classified as a ‘special category’ will “find their needs met” through the new allocations, the term ‘special category’ will be retired.
• If the recommendations are accepted, Bihar, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh will get a larger share than their current share of the total Central assistance to State plans and Centrally sponsored schemes, while Kerala, Tamil Nadu and Maharashtra will lose substantially.

Dissent note

• One of the panel’s five members, Patna-based Shaibal Gupta of the Asian Development Research Institute, has, in a long dissent note appended to the report, disagreed substantially with the panel’s choice of indicators.
• In its report, the panel, however, defended its choice of indicators: “Since we are interested in measuring the State population’s well-being, a majority of the committee agreed that consumption from the household survey seems more appropriate than income from the national accounts
• The correlation between indices is 0.997.”

RBI focus still on currency stability

• Reserve Bank of India governor Raghuram Rajan’s maiden monetary policy announcement has evoked contrary responses.
• India’s financial markets and a section of the business community have reacted adversely to his decision to increase the repo rate in his policy statement.
• This is understandable. Dr. Rajan had been in favour of lowering interest rates during his brief stint at the Finance Ministry.
• That and the terrific buzz that accompanied his assumption of office had led to expectations in some quarters that a rate cut was likely. Others in the business community and many in the media, who had pilloried Dr. Subbarao for his anti-inflationary stance, have made something of a volte face . They have been quick to portray Dr. Rajan as an inflation hawk.

Reading of the policy

• Both Dr. Rajan’s detractors and admirers may be wrong in their reading of the monetary policy statement. It appears more plausible that Dr. Rajan’s policy stance is aimed at shoring up the rupee ahead of a change in the U.S. Fed’s policy about three months from now.
• The RBI may find it prudent not to say so for fear of adding to nervousness in the currency markets. It may choose to couch its stance in anti-inflationary terms.
• But currency stability seems to weigh more heavily on the RBI than its statement would suggest. Sustaining growth also appears to be a consideration.
• One is the repo route but only to the extent of 0.5 per cent of their liabilities. Any requirement in excess of what can be financed by repos can be met through the Marginal Standing Facility (up to 2 per cent of liabilities).
• In its policy statement, the RBI cut the MSF rate by 75 basis points and raised the repo rate by 25 basis points. The governor claimed that the net effect would be to “reduce the cost of bank financing substantially.”
• Analysts estimate that the MSF and the repo account for about 55 per cent and 45 per cent respectively of bank borrowing from the RBI.
• Factoring in the changes in the two rates, yes, the cost of bank borrowings from the RBI can be expected to decline.
• The cost of certificates of deposit (CD), which are of maturity of one year or less, has also fallen. However, a cut in the MSF rate only impacts short-term interest rates. Long-term rates are influenced by the repo rate. We should expect long-term rates to rise following the RBI statement — and this is already reflected in a rise of about 30 basis points in 10-year government securities.
• It is not just yields on long-term government securities that will rise. When the RBI raises the repo rate, it is a signal that rates across the spectrum will go up, including rates on term deposits.
• The overall cost of a bank’s deposits will be determined by the composition of its deposits — how much of these are short-term and how much long-term. Once long-term yields rise, deposits will veer towards the long end.
• It is more than likely than the total cost of deposits will increase and that this increase will overwhelm the decrease in the cost of borrowing from the RBI.
• The overall cost of funds for banks may, therefore, be expected to go up.
• Several bankers have been quoted as saying that they see the overall cost of funds rising for their own banks. Indeed, an anti-inflationary stance, in order to be effective, must necessarily mean a rise in banks’ aggregate funding costs and hence in lending rates. There is a contradiction in claiming that the recent moves are intended to fight inflation but will end up lowering banks’ cost of funds.
• For banks, short-term costs of borrowing had risen sharply following the RBI’s tightening of liquidity in July.
• It was only a matter of time before long-term rates began to catch up. If fighting inflation was the overriding priority, the RBI might have simply persisted with the status quo . What considerations, then, underlie the measures in the latest policy statement?
• One is maintaining the present tempo of growth. The sharp rise in short-term rates was having a big impact on firms’ working capital costs.
• There was the danger that this could cause growth to fall even below the modest 5 per cent that is expected in 2013-14. Moreover, the MSF rate was in danger of becoming the de facto policy rate.
• This could have caused long-term rates to rise to stratospheric levels. It was important, therefore, to lower the MSF rate and bring it closer to the repo rate.

Inflation and growth

• The hike in the repo rate has been positioned as an anti-inflationary stance. Of course, it is so.
• What is overlooked, however, is that the measures announced last July, put together, were even more anti-inflationary in their potential impact. What is attempted now is a better balance between inflation and growth.
• The more important consideration in hiking the repo rate appears to be to push up yields on long-term government securities.
• This will help maintain a desirable differential with respect to U.S. interest rates ahead of the tapering of QE (quantitative easing) due in about three months from now. Evidently, the RBI takes a serious view of the impact the impending taper could have on the rupee and the Indian economy.
• The RBI’s caution is well-merited in light of the debate on the taper in the U.S. itself. It is becoming evident that the calibrated reversal of QE, which the Fed would like, may not be easy to accomplish. Financial markets are forward-looking in nature.
• Once they know that taper has begun, they will immediately price in the final outcome. This means that the gradual increase in interest rates, which the Fed would like to engineer, may not happen. Instead, yields will rise sharply right away to reflect the end of the taper. It appears that the Fed is trapped in a Chakravyuha of its own making.

Sources: Various News Papers & PIB