Piketty Principle UPSC

Piketty Principle

Piketty in his book (capital in 21st centuary) explained the reasons for the widening difference in growth of economic disparity. He observed that “The rate of return on the investments the wealthy make will normally be greater than the rate of growth in a nation’s economy and total wealth.”.

This lead to increase in divergence of the earnings of the rich with respect to poor. He indicates increasing r-g gap(r – rate of asset return, g – real income growth) . The increasing r-g gap will lead to unrest and other social issues. The divergence is increasing with time. The  skill development, knowledge diffusion can lead to convergences – ie reduction in in-equality.

UPSC finance External Commercial Borrowing

External Commercial Borrowing

Finance upsc, finance basics

Capital is needed to achieve growth investment is needed. The capital needed for this can be from domestic (Indian) or foreign (external).

The type of deposits considered as ECB

• ·         Loans including bank loans;
• ·         Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares / debentures);
• ·         Buyers’ credit;
• ·         Suppliers’ credit;
• ·         Foreign Currency Convertible Bonds (FCCBs);
• ·         Financial Lease; and
• ·         Foreign Currency Exchangeable Bonds (FCEBs)

Advantages:

The companies need capital for expansion, and the foreign route provides finance at lower interest rates.

The borrower gets finance cost advantage. The borrower can diversify his investments, plan new initiatives.

Disadvantages:

The multiplicity of legislations and constant changes in policy are often criticized.

The bigger firms are able to get capital at lower interest while a smaller company may be paying heavy interest in domestic lending. This means that higher finance cost is born by them.

The lower interest funds to firms may lead to heavy borrowing and debt burden.