Indian Economy, 5th edition (122 page)

The Kyoto Protocol provides for
three
mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET). Under
JI,
a developed country with a relatively higher costs of domestic greenhouse reduction sets up a project in another developed country which has a relatively low cost. Under
CDM,
a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of GHG reduction project activities is usually much lower. The developed country would be given credits for meetings its emission reduction target, while the developing country would receive the capital and clean technology to implement the project. Under
IET
mechanisms, countries can trade in the international carbon credit market. Countries with surplus credits can sell the same to those with quantified emission limitation and reduction commitments under the Kyoto Protocol.

The concept of carbon credit trading seeks to encourage countries to reduce their GHG emissions, as it rewards those countries which meet their targets and provides financial incentives to the others to do so as quickly as possible. Surplus credits (collected by overshooting the emission reducing target) can be sold in the global market. One credit is equivalent to one tonne of C
o
2
emission reduced. Carbon Credit (CC) is available for companies engaged in developing renewable energy projects that offset the use of fossil fields. Developed countries have to spend nearly $25 billion which will be ultimately spent by developing countries. In countries like
India,
GHG emission is much below the target fixed by Kyoto Protocol and so, they are excluded from reduction of GHG emission. On the contrary, they are entitled to sell surplus credits to developed countries. It is here that trading takes place. Foreign companies, who cannot fulfill the protocol norms, can buy the surplus credit from companies in other countries through trading. Thus, the stage is set for Credit Emission Reduction (CER) trade to flourish. India is considered as the
largest
beneficiary claming about 31 per cent of the total world carbon trade through the Clean Development Mechanism (CDM).

The trading takes place on two stock exchanges, the Chicago Climate Exchange and the European Climate Exchange. CC trading can also take place in the open market as well. European countries and Japan are the major buyers of carbon credit. Under the Kyoto Protocol, global warming potential (GWP) is an
index
that allows for the comparison of greenhouse gases with each other in the context of the relative potential to contribute to global warming. For trading purposes, one credit is considered equivalent to one tonne of C
o
2
emission reduced.

Getting carbon credits certified for Kyoto is a rather lengthy and complex process. There are four stages of CDM approval. First stage is at the domestic level where the project gets approved by National CDM Authority (NCM). After NCM’s approval the project is sent to the United Nations Framework Convention on Climate Changes. After this the executive board of UNFCCC reviews the project. The project gets evaluated on every front and is then registered under UN FCCC only if it meets all the norms. Thereafter, certification is done for the reduction in emission and credits are issued.

Carry trade

Borrowing in one currency and investing in another is termed as carry trade. In recent times (upto November 2007) trillions of dollars have been borrowed in low-cost ‘
y
en’ for deployment across money markets, stock markets, and even real estate markets across the globe and a part of the money flowed into India, too.

In recent months, Japan has been the best market for ‘carry trades’ because of a weak Yen and a cost of borrowing that is almost ‘zero’; in seven years since 1999, and after two hikes by the Bank of Japan, the interest rate is 0.5 per cent. The money thus borrowed is usually invested in the respective currencies in markets where the interest rate is higher, or in equities. Preferred destinations include the USA, N. Zealand, and Australia for debt investments, and emerging markets such as India for equity investment.

Cash cow

A profitable business or firm (may belong to either public or private sector) which gives regular cash flow to the owner (this happens either due to regular demand of the popular goods produced by the firm or the compulsions of the consumer to buy the products). As for example the antiseptic lotion ‘Dettol’ is a cash cow for Reckitt and Colman in the private sector and LPG is a cash cow for the manufacturing and marketing government companies (provided there is no subsidy on LPG).

Caveat emptor

A Latin phrase which means
‘let the buyer beware’.
Simply put, it means that the supplier has no legal obligation to inform buyers about any defects in his goods or services; the onus is on the buyer to himself determine the level of satisfaction out of the products.

Ceteris paribus

A Latin phrase which means
‘other things being equal’.
The phrase is used by economists to cover their forecastings.

Chinese wall

The segregation of the different activities of a financial institution (such as jobbing, stockbroking, fund management, etc.) in order to protect clients’ interest.

circuit limit

A limit of regular fall in share indices of Stock Exchanges around the world after which the exchange are closed for further trading. For example, circuit limit decided for the BSE (Bombay Stock Exchange) has been fixed at 10 per cent. The time there is a continuous fall in the BSE Sensex and it reaches 10 per cent, the exchange is closed to further trading.

Such a limit/provision prevents the share market from crashing down.

Classical economics

A school of thought in economics based on the ideas of Smith, Ricardo, Mill, etc. The school dominated the economic thinking of the world until about 1870, when the
‘marginalist revolution’
took place.

Clean coal

Underground coal gasification and liquefaction which converts coal into liquid and gaseous fuel alternatives is a recognised ‘clean coal’ technology–handy in extraction of energy from coal seams which connot be mined through conventional methods.

Closed shop

The requirement that all employees of a given firm be members of a specified trade union. It is a method of restricting labour supply and maintaining high wages applied by a powerful trade union.

Collective products

A product which can only be supplied to a group. Many goods and services provided by the governments fall in this category–national defence, police administration, etc.

COMMODITIES TRANSACTION TAX

[See Chapter 17,
Tax Structure in India
]

Commodity money

Products being used as the means of payment as in the traditional barter system. Such practices take place generally when the confidence in money has fell down (as for example in the situations of high inflation and high depreciation).

Communitisation

A method of privatising public service delivery without going for the tendering process. It is done by transfering powers including financial powers to the user community who will take up the job of revenue collection along with an effective and more practical governance of the service delivery. This model is bereft of profit motive and so, more transparent.

Service delivery in communitised elementary schools and health service institutions has improved considerably and power tariff collection has risen by 100 per cent since the reform began in 2002 in Nagaland–
s
ecretary, Union Ministry of Steel Raghaw Sharan Pandey who did it in Nagaland as its
c
hief
s
ecretary.

Comparative advantage

It is about identifying activities that an individual, a firm or a country can do most efficiently, being together.

The idea, usually credited to David
Ricardo,
underpins the case of free trade. It suggests that countries can gain from trading with each other even if one among them is more efficient (i.e., it has an
absolute advantage
) in every kind of economic activity.

Consols

This is the abbreviated form of
consolidated stock.
The government bonds which have no maturity and thus have an indefinite life–are tradable on the floors of the stock exchanges.

Consortium

An
ad hoc
grouping of firms, governments, etc. brought together to undertake a particular project by pooling their resources and skills for major construction projects, loans, etc.

Consumer durables

Consumer goods that are consumed over relatively long periods of time rather than immediately (opposite to the
consumer non-durables
) such as cars, houses, refrigerators, etc.

Consumer non-durables

Consumer goods which yield up all their satisfaction/utility at the time of consumption (
O
pposite to the
consumer durables
)–examples are cheese, pickles, jam, etc.

Conspicuous consumption

c
onsumption for the purpose of showing off ostentatiousness but not for the utility aspect –for example, the use of diamond-studded sandals, watches, pens, etc.

Contagion

A situation or an effect of economic problems in one economy spreading to another also known as the
domino effect
.

Contrarian

A person following an investment strategy (specially in share market) just opposite to the general investors in a given period. For example, when a share is generally being sold by the investors, a contrarion keeps on buying them– the logic is that due to selling pressure the price will fall below the intrinsic value of the share and there is a prospect of future profit out of the share.

CORE INVESTMENT COMPANIES (CICs)

A NBFC carrying on the business of acquisition of shares and securities which satisfied the conditions: it holds not less than 90 per cent of its Total Assets in this form; its investments in the equity shares in group companies constitutes not less than 60 per cent of its Total Assets; it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment; and it does not carry on any other financial activity except investment in bank deposits, money market instruments, government securities, loans to and investments in group companies.

Corporate sustainibility index

The Bombay
s
tock Exchange (BSE) has proposed to come out with a corporate sustainability index (CSI) – a possible new stock exchange which will be created for developing
trust marks
to denote a corporate’s sustainability achievements. This will be the first such index in Asia.

Correction

A term usually used in stock market which shows a reversals of share prices in reaction to an excessive rise or fall of the past.

Creative destruction

The process by which an innovative entrepreneur takes risks and introduces new technologies to stimulate economic activity, replacing old technologies is known as ‘creative destruction’. As per
Schumpeter, Joseph A.
(1883–1950), creative destruction is the key to economic growth. But due to irregularity in such innovations, business cycle is followed by both collapse and crisis (
J. A. S
chumpeter,
c
apitalism, Socialism and Democracy,
1942).

Crony capitalism

An approach of doing business when the firms look after themselves by looking after their own people (i.e., families and friends). Used in negative sense.

Cross subsidy

The process of giving subsidy to one sub-area and fulfilling it through the profits from the other sub-area. As for example, in India
k
erosene oil is cross-subsidised against
p
etrol and aviation fuel.

Crowding-out effect

A concept of public finance which means an increase in the government expenditure which has an effect of reducing the private sector expenditure.

CSR

The concept of corporate social responsibility (CSR) is fast gaining popularity among the corporate sector of the world. As per the experts, the CSR is qualitatively different from the traditional concept of passive philanthropy by the corporate houses. Basically, the CSR acknowledges the
debt
that the corporates owe to the community within which they operate. It defines the corporates’ partnership with social action groups (i.e., the NGOs) in providing financial and other resources to support development plans, especially among disadvantaged communities. There is stress on long-term sustainability of business and environment and the distribution of well-being.

Debenture

An instrument of raising long-term loan by companies, having a maturity period bearing an interest (
coupon rate
). Theoretically they may be secured or unsecured by assets such as land and buildings of the issuing company (known as
collateral
).

Debenture holders are provided with a prior claim on the earnings (by interest) and assets of the company in the situation of liquidation of the company over the
preference
and
equity shareholders
of the company.

Debt Recovery Tribunal (DRT)

Banks and financial institutions have often faced a tough time in recovering loans, on which the borrowers have defaulted. To expedite the recovery process, the Committee on the Financial System, headed by
Mr. Narasimham
considered the setting up of special tribunals, with special adjudicator powers. This was felt to be necessary to carry through financial sector reforms. Since there is an immense overload on the Indian legal system at present, recovery of many unpaid debts, due to banks or financial institutions, are held up, indefinitely. This affects the balance sheets of the banks as the amounts involved are very large.