1> What is the Sensex ?

At the outset, jst keep this analogy in mind ..... many of us get confused .....

BSE : SENSEX : : NSE : CNX S & P NIFTY

more on this later on.

Will give some introduction on BSE first ........

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage.
Popularly known as "BSE", it was established as "The Native Share & Stock Brokers
Association" in 1875. It is the first stock exchange in the country to obtain permanent
recognition in 1956 from the Government of India under the Securities Contracts (Regulation)
Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian
capital market is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an
Association of Persons (AOP), the Exchange is now a demutualised and corporatised entity
incorporated under the provisions of the Companies Act, 1956, pursuant to the
BSE(Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and
Exchange Board of India (SEBI).
The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The
systems and processes of the Exchange are designed to safeguard market integrity and
enhance transparency in operations. During the year 2004-2005, the trading volumes on the
Exchange showed robust growth.

Bullet points :-

First in India to introduce Equity Derivatives

First in India to launch a Free Float Index
First in India to launch US$ version of BSE Sensex
First in India to launch Exchange Enabled Internet Trading Platform
First in India to obtain ISO certification for Surveillance, Clearing & Settlement
First to have an exclusive facility for financial training

May 2006

Total Turnover– Rs 95819.63 Cr

Total Average Daily Rs 4355 Cr
Number of Trades 31078.24 (in 000s)
Number of scrips traded - 2460

Criteria of selection of stocks

Market Capitalisation
Liquidity
Continuity
Industry Representation
Listed History
Track Record
For the premier Stock Exchange that pioneered the stock broking activity in India , 125 years
of experience seem to be a proud milestone. A lot has changed since 1875 when 318 persons
became members of what today is called "Bombay Stock Exchange Limited" by paying a
princely amount of Re1.
Since then, the stock market in the country has passed through both good and bad periods.
The journey in the 20th century has not been an easy one. Till the decade of eighties, there
was no measure or scale that could precisely measure the various ups and downs in the
Indian stock market. Bombay Stock Exchange Limited (BSE) in 1986 came out with a Stock
Index that subsequently became the barometer of the Indian Stock Market.

SENSEX, first compiled in 1986 was calculated on a "Market Capitalization-Weighted"

methodology of 30 component stocks representing a sample of large, well-established and
financially sound companies. The base year of SENSEX is 1978-79. The index is widely
reported in both domestic and international markets through print as well as electronic
media. SENSEX is not only scientifically designed but also based on globally accepted
construction and review methodology.

In a market capitalization weighted index, each stock in the index affects the index value in
proportion to the market value of all shares outstanding. In this type of index, the equity
price is weighted by the market capitalization of the company ( share price * no. of
outstanding shares). Hence each constituent stock in the index affects the index value in
proportion to the market value of all the outstanding shares. This index forms the underlying
for a lot of index based products like index funds and index futures.

Here , Index = (current market capitalistaion / base market cap) * Base value

where,

current market cap = Sum of ( current market price * outstanding shares ) of all securities in
the index

base mkt cap = Sum of ( market price * issue size ) of all securities as on base date.

Outstanding Shares = Stock currently held by investors, including restricted shares owned by
the company's officers and insiders, as well as those held by the public. Shares that have been
repurchased by the company are not considered outstanding stock.
They are also known as "issued shares" or "issued and outstanding".
This number is shown on company's balance sheet under the heading "Capital Stock" and is
more important than the authorized shares or float. It is used in the calculation of many
metrics including market capitalization and earnings per share (EPS).

From September 2003, the SENSEX is calculated on a free-float marke capitalization

methodology. The "free-float Market Capitalization-Weighted" methodology is a widely
followed index construction methodology on which majority of global equity benchmarks are
based. FTSE (London Stock Exchange), STOXX (stock index of European stocks designed by
STOXX Limited) , S&P (Standard and Poor, US) and Dow Jones (NYSE) use the free-float
methodology, amongst others.

As per the "free-float market capitalization" methodology, the level of index at any point of
time reflects the Free-float market value of 30 component stocks relative to a base period.
The market capitalization = Price of Stock * number of shares.

This market capitalization is further multiplied by the free-float factor to determine the free-
float market capitalization.

For example

Assume a one-stock index

Price of stock A is 300 on Jan 1, 2003 which is base year of the index, and the number of
shares are 10000. Today stock is at 360 and number of shares are 15000
Index Today will be = [(360 * 15000) / (300 * 10000)] * 100

However, of the 15,000 shares outstanding not all will be available for trading on a daily
basis. This is because the promoters will hold sizable shares to control the company. Besides,
some shares may carry lock-in period; employee stock options, for instance.
Thus, experts suggest that we should weigh index by the number of shares available for
trading. This number is called the free float.

The free-float method is seen as a better way of calculating market capitalization because it
because it provides a more accurate reflection of market movements. When using a free-float
methodology, the resulting market capitalization is smaller than what would result from a
full-market capitalization method.

Due to its wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse
of the Indian stock market. As the oldest index in the country, it provides the time series data
over a fairly long period of time (From 1979 onwards). Small wonder, the SENSEX has over
the years become one of the most prominent brands in the country.

The growth of equity markets in India has been phenomenal in the decade gone by. Right
from early nineties the stock market witnessed heightened activity in terms of various bull
and bear runs. The SENSEX captured all these events in the most judicial manner. One can
identify the booms and busts of the Indian stock market through SENSEX.

During market hours, prices of the index scrips, at which trades are executed, are
automatically used by the trading computer to calculate the SENSEX every 15 seconds and
continuously updated on all trading workstations connected to the BSE trading computer in
real time, with the help of BOLT system ( BSE online trading system).

Bullet points :-

First compiled in 1986

Market Capitalisation-weighted index of 30 stocks
Base Year is 1978-79
Historic 10000 mark in Feb 2006
Total market capitalisation of 30 stocks accounts for > 38 per cent of the aggregate market
capitalisation of all BSE stocks

A good index is a trade-off between diversification and liquidity. A well diversified index is
more representative of the market/economy. It reflects the overall market picture as well as
of different portfolios. This is achieved by diversification in such a manner that a portfolio is
not vulnerable to any individual stock or industry risk. However there are diminishing
returns to diversification. Going from say 10 stocks to 20 stocks gives a sharp reduction in
risk. Going from 50 stocks to 100 stocks gives very little reduction in risk. Going beyond 100
 stocks gives almost zero reduction in risk. Hence, there is little to gain by diversifying beyond
a point. The more serious problem lies in the stocks that are taken into an index when it is
broadened. If the stock is illiquid, the obsereved prices yield contaminated information and
actually worsen an index. Since an illiquid stock does not reflect the current price behaviour
of the market, its inclusion in the index results in an index, which reflects, delayed or stale
price behaviour rather than current price behaviour of the market.

Few imp. points :-

Closing Sensex on any trading day is computed taking the weighted average of all the trades
on Sensex constituents in the last 30 minutes of trading session

The base year value adjustment ensures that additional issue of capital and other corporate
announcements like bonus etc. do not destroy the value of the index

Index Cell - ensures that Sensex and all the other BSE indices maintain their benchmark
properties by striking a delicate balance between high turnover in index scrips and its
representative character

BSE also calculates dollar version of Sensex – Dollex-30

contd....

The Index Committee meets every quarter to discuss index related issues. In case of a revision in the
Index constituents, the announcement of the incoming and outgoing scrips is made six weeks in
advance of the actual implementation of the revision of the Index.

The latest exclusion from the Sensex has been Tata Power Ltd. on 12th June, 2006. In its place Reliance
Communication Ltd. has been included.

As on Thursday ..... the Sensex had the following stocks .....

SENSEX Constituents: 28-Nov-06

ACC Ltd.
Bajaj Auto Ltd.
Bharat Heavy Electricals Ltd.
Bharti Airtel Ltd.
Cipla Ltd.
Dr Reddy's Laboratories Ltd.
Grasim Industries Ltd.
Gujarat Ambuja Cements Ltd.
HDFC Finance
HDFC Bank Ltd.
Hero Honda Motors Ltd.
Hindalco Industries Ltd.
Hindustan Lever Ltd.
ICICI Bank Ltd.
Infosys Technologies Ltd.
ITC Ltd.
Larsen & Toubro Limited
Maruti Udyog Ltd
 NTPC Ltd.
ONGC Ltd.
Ranbaxy Laboratories Ltd.
Reliance Communications Limited
Reliance Energy Ltd
Reliance Industries Ltd.
Satyam Computer Services Ltd.
State Bank of India
Tata Consultancy Services Limited
Tata Motors Ltd.
Tata Steel Ltd.
Wipro Ltd.

BSE - Other Indices

BSE National Index – also referred as BSE 100 (100 stocks, base year 1983-84) – launched in 1989

BSE 200 in 1994 to have better representation of the industry

BSE 500 Index and 5 Sectoral Indices in 1999

(BSE IT Sector index, BSE FMCG Sector index, BSE Capital Goods Sector Index, BSE Consumer
Durables Sector Index and BSE Healthcare Sector Index)

BSE PSU Index and country’s first free float index BSE TECk Index launched in 2001

BSE TECk is TMT – Technology, Media and Telecom specific.

BANKEX covers bank stocks exclusively

World Indices

Sensex ------------------ India (BSE)

S&P CNX NIFTY --------- India (NSE)

Jakarta Composite In.----Indonesia

Shanghai Co. In.-----------China

KSE100 -----------------------Pakistan

Kuala Lampur Co.In.----Malaysia

Straits Times ---------------Singapore

Taiex --------------------------Taiwan

Hang Seng ------------------Hong Kong

BUX ---------------------------Hungary
 Bolsa --------------------------Mexico

SET Index -------------------Thailand

Bovespa ----------------------Brazil

RTSI ---------------------------Russia

Qs 3 > What do you mean by + 100 points in Sensex ?

The index movements reflect the changing expectations of the stock market about future dividends of
the corporate sector. The index goes up if the stock market thinks that the perspective dividends in
the future will be better than previously thought. When the prospects of dividends in the future
becomes pessimistic, the index drops. The ideal index gives us instant readings about how the stock
market perceives the future of corporate sector. Every stock broadly moves due to two resons; news
about the compnay or news about the economy (budget, etc.)
The job of an index is to purely capture the second part, the movements in the economy. This is
achieved by averaging. Each stock contains a mixture of two elements - stock news and index news.
When we take an average of returns on many stocks , the individual stock news tend to cancel out
and the only thing left is news that is common to all stocks. The news that is common to all stocks is
news about the economy. That is what a good index captures. The correct method of averaging is that
of taking a weighted average, giving each stock a weight proportional to its market capitalization.

For eg. : Suppose an index TATI contains 2 stocks, A and B. A has a market cap of Rs. 1000 cr. and B
has a mkt. cap. of Rs. 3000 cr. Then we attach a weight of 1/4 th to movements in A and 3/4 to
movements in B.

Similarly in Sensex, the 30 stocks have their assigned wightages.

So you see its a very dynamic process. At times you will hear .... Sensex has fallen by 9 % ( if its 10 %
then there would be a 1 hr. market halt if the movement is before 1 : 00 pm. etc ... Its a market-wide
circuit breaker ..... wont get into all that now) but say any other share has risen by 9 % .... u might get
flummoxed ..... but the simple reason behind this is that those shares are not part of the Sensex and
may rise despite the negative feeling of the traders ... there was no trickle down effect on this
particular stock and it managed to rise by 9 % . It could be because of any reason ..... like the sale of
various mill lands few months back in Mumbai led to the unbelievable intra day rise of share prices
of Bombay Dyeing, IndiaBulls (which are not part of Sensex ) and other cos. which held a stake in
these lands ...... over the months also few of the sectors which have shown a sharp increase in share
prices despite the fluctuations in the SENSEX is sugar space (like Renuka, Ponni, Oudh, Bajaj
(handled by Shishir Bajaj whose uncle Rahul is the Founder of Bajaj Auto but Shishir got the sugar
industry aftr the separation between the brothers i.e rahul and Shishir's father), Auto space, IT sector ,
etc. Due to the tremendous performance of the BSE SENSEX ... more and more companies are filing
for IPO ( Initial Public Offerings ) though it has slowed down a bit since the SENSEX crossed 10,000
and cos. became a bit more risk averse at high figures. IPO at a high SENSEX and at a time when the
normal Indian had cash to invest , is a good idea. Many companies during this period stepped in .....
like NDTV whose IPO price was Rs. 100 but today is trading at around Rs. 220 mark ... then there is
Reliance Communication (formerly owned by Mukesh but now by Anil) which opened at Rs. 200 and
now trading at Rs. 440 + ...... and the list just goes on and on .... pyramid retail , INOX , and many
other construction and entertainment cos (primarily).
 But now rather than going for individual shares, smart investors are investing in mutual finds. SIPs
(systematic investment plans) are the in thing right now. You have funds with hardly any entry or
exit load and every other day some or the other co. used to come out with its own mutual fund ( dont
tell me u missed the amazing marketing extravaganza at the launch of Reliance Mutual Fund) till a
few months back. The future lies in the next step and that is ETFs (Exchange Traded Funds) .... these
are mutual funds which shall be traded on the share market just as any other share and will still hav
NAV (Net Asset Value) just like a normal mutual fund. US has many successful ETFs like SPDRs,
QQQs, etc. will talk about mutual funds in detail some other time.

But as far as FIIs are concerned .... we are still a long way to go till we even reach to a 'visible distance'
of where China is right now. Too much of talk goes on about India being close and all that .... but a
long way to go ... yeah we are moving in the right direction but not fast enough. And whatever
progress we have made hass been in the past 15 years since the famous Economic Liberalisation
process of 1991. It was Manmohan Singh , under the PMship of Narsimha Rao who changed the
picture of the Indian Economy. Today the fact that i am typing this post is coz Manmohan Singh the
economist showed us the way. If he would not have taken those steps, the license raj would have
continued and there would not have been any competition. Its because of the competition in each and
every sector, because of the entry of foreign players that the local industries are improving. Its
because Airtel was allowed to start mobile services, Hutch, TATA, Reliance and others were allowed
that the state owned MTNL and BSNL woke up from years of sleep and strtd gud services such as
broadband and triband. You need to shake up the system to see any kind of progress. You need to be
as innovative as Grameen Bank in B'desh which had the belief that micro finance can change the rural
system. It is these visions which win Nobel prize.

phew !!! people i just realised that i have digressed a lot .... so will stop right here ......

i dont know whether this post of mine has been helpful or not but trust me i have enjoyed throughout
........ it has helped me also a lot in knowing many things and enhanching my knowledge.......

Puys please let me know whether this was of any help .... will not get into hedging right now ..... too
late and also i need to know whether i should get into it or not ........

Bibliography

www.investopedia.com
www.wikipedia.org
www.bseindia.com
www.nseindia.com
www.google.co.in
www.my-brain.in

SENSEX - THE BAROMETER OF INDIAN CAPITAL MARKETS

Download Index Constituents

Introduction
For the premier Stock Exchange that pioneered the stock broking activity in India, 128 years of
experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became
members of what today is called "The Stock Exchange, Mumbai" by paying a princely amount of Re1.

Since then, the country's capital markets have passed through both good and bad periods. The
journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale
to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai (BSE) in
1986 came out with a stock index that subsequently became the barometer of the Indian stock
market.

SENSEX is not only scientifically designed but also based on globally accepted construction and
review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks
representing a sample of large, liquid and representative companies. The base year of SENSEX is
1978-79 and the base value is 100. The index is widely reported in both domestic and international
markets through print as well as electronic media.

The Index was initially calculated based on the "Full Market Capitalization" methodology but was
shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market
Capitalization" methodology of index construction is regarded as an industry best practice globally. All
major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float
methodology.

Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the
Indian stock market. As the oldest index in the country, it provides the time series data over a fairly
long period of time (From 1979 onwards). Small wonder, the SENSEX has over the years become
one of the most prominent brands in the country.

The growth of equity markets in India has been phenomenal in the decade gone by. Right from early
nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The
SENSEX captured all these events in the most judicial manner. One can identify the booms and busts
of the Indian stock market through SENSEX.

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology. As per this
methodology, the level of index at any point of time reflects the Free-float market value of 30
component stocks relative to a base period. The market capitalization of a company is determined by
multiplying the price of its stock by the number of shares issued by the company. This market
capitalization is further multiplied by the free-float factor to determine the free-float market
capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often
indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the Free-float
market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor
is the only link to the original base period value of the SENSEX. It keeps the Index comparable over
time and is the adjustment point for all Index adjustments arising out of corporate actions,
replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are
executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated
in real time.

Dollex-30

BSE also calculates a dollar-linked version of SENSEX and historical values of this index are
available since its inception. (For more details click ‘Dollex series of BSE indices’)
Understanding Free-float Methodology

Concept:

Free-float Methodology refers to an index construction methodology that takes into consideration only
the free-float market capitalization of a company for the purpose of index calculation and assigning
weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares
issued by the company that are readily available for trading in the market. It generally excludes
promoters' holding, government holding, strategic holding and other locked-in shares that will not
come to the market for trading in the normal course. In other words, the market capitalization of each
company in a Free-float index is reduced to the extent of its readily available shares in the market.

In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and BANKEX
in June 2003. While BSE TECk Index is a TMT benchmark, BANKEX is positioned as a benchmark
for the banking sector stocks. SENSEX becomes the third index in India to be based on the globally
accepted Free-float Methodology.

Major advantages of Free-float Methodology:

• A Free-float index reflects the market trends more rationally as it takes into consideration only
those shares that are available for trading in the market.
• Free-float Methodology makes the index more broad-based by reducing the concentration of
top few companies in Index. For example, the concentration of top five companies in
SENSEX has fallen under the free-float scenario thereby making the SENSEX more
diversified and broad-based.
• A Free-float index aids both active and passive investing styles. It aids active managers by
enabling them to benchmark their fund returns vis-à-vis an investable index. This enables an
apple-to-apple comparison thereby facilitating better evaluation of performance of active
managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best
suited for the passive managers as it enables them to track the index with the least tracking
error.
• Free-float Methodology improves index flexibility in terms of including any stock from the
universe of listed stocks. This improves market coverage and sector coverage of the index.
For example, under a Full-market capitalization methodology, companies with large market
capitalization and low free-float cannot generally be included in the Index because they tend
to distort the index by having an undue influence on the index movement. However, under the
Free-float Methodology, since only the free-float market capitalization of each company is
considered for index calculation, it becomes possible to include such closely held companies
in the index while at the same time preventing their undue influence on the index movement.
• Globally, the Free-float Methodology of index construction is considered to be an industry
best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted
the same. MSCI, a leading global index provider, shifted all its indices to the Free-float
Methodology in 2002. The MSCI India Standard Index, which is followed by Foreign
Institutional Investors (FIIs) to track Indian equities, is also based on the Free-float
Methodology. NASDAQ-100, the underlying index to the famous Exchange Traded Fund
(ETF) - QQQ is based on the Free-float Methodology.

Definition of Free-float:

Share holdings held by investors that would not, in the normal course come into the open market for
trading are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. In specific,
the following categories of holding are generally excluded from the definition of Free-float:
 • Holdings by founders/directors/ acquirers which has control element
• Holdings by persons/ bodies with "Controlling Interest"
• Government holding as promoter/acquirer
• Holdings through the FDI Route
• Strategic stakes by private corporate bodies/ individuals
• Equity held by associate/group companies (cross-holdings)
• Equity held by Employee Welfare Trusts
• Locked-in shares and shares which would not be sold in the open market in normal course.

The remaining shareholders would fall under the Free-float category.

Determining Free-float factors of companies:

BSE has designed a Free-float format, which is filled and submitted by all index companies on a
quarterly basis with the Exchange. (Format available on www.bseindia.com) The Exchange
determines the Free-float factor for each company based on the detailed information submitted by the
companies in the prescribed format. Free-float factor is a multiple with which the total market
capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the
Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company
is categorized into one of the 20 bands given below. A Free-float factor of say 0.55 means that only
55% of the market capitalization of the company will be considered for index calculation.

Free-float Bands:

% Free-Float Free-Float Factor % Free-Float Free-Float Factor

>0 – 5% 0.05 >50 – 55% 0.55
>5 – 10% 0.10 >55 – 60% 0.60
>10 – 15% 0.15 >60 – 65% 0.65
>15 – 20% 0.20 >65 – 70% 0.70
>20 – 25% 0.25 >70 – 75% 0.75
>25 – 30% 0.30 >75 – 80% 0.80
>30 – 35% 0.35 >80 – 85% 0.85
>35 – 40% 0.40 >85 – 90% 0.90
>40 – 45% 0.45 >90 – 95% 0.95
>45 – 50% 0.50 >95 – 100% 1.00

Index Closure Algorithm

The closing SENSEX on any trading day is computed taking the weighted average of all the trades on
SENSEX constituents in the last 30 minutes of trading session. If a SENSEX constituent has not
traded in the last 30 minutes, the last traded price is taken for computation of the Index closure. If a
SENSEX constituent has not traded at all in a day, then its last day's closing price is taken for
computation of Index closure. The use of Index Closure Algorithm prevents any intentional
manipulation of the closing index value.

Maintenance of SENSEX

One of the important aspects of maintaining continuity with the past is to update the base year
average. The base year value adjustment ensures that replacement of stocks in Index, additional
issue of capital and other corporate announcements like 'rights issue' etc. do not destroy the historical
value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in
the Index should not per se affect the index values.

The Index Cell of the exchange does the day-to-day maintenance of the index within the broad index
policy framework set by the Index Committee. The Index Cell ensures that SENSEX and all the other
BSE indices maintain their benchmark properties by striking a delicate balance between frequent
replacements in index and maintaining its historical continuity. The Index Committee of the Exchange
comprises of experts on capital markets from all major market segments. They include Academicians,
Fund-managers from leading Mutual Funds, Finance-Journalists, Market Participants, Independent
Governing Board members, and Exchange administration.

On-Line Computation of the Index:

During market hours, prices of the index scrips, at which trades are executed, are automatically used
by the trading computer to calculate the SENSEX every 15 seconds and continuously updated on all
trading workstations connected to the BSE trading computer in real time.

Adjustment for Bonus, Rights and Newly issued Capital:

The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when one of
the component stocks pays a bonus or issues rights shares. If no adjustments were made, a
discontinuity would arise between the current value of the index and its previous value despite the
non-occurrence of any economic activity of substance. At the Index Cell of the Exchange, the base
value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the
SENSEX value.

The Index Cell of the Exchange keeps a close watch on the events that might affect the index on a
regular basis and carries out daily maintenance of all the 14 Indices.

• Adjustments for Rights Issues:

When a company, included in the compilation of the index, issues right shares, the free-float
market capitalisation of that company is increased by the number of additional shares issued
based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then
made to the Base Market Capitalisation (see 'Base Market Capitalisation Adjustment' below).

• Adjustments for Bonus Issue:

When a company, included in the compilation of the index, issues bonus shares, the market
capitalisation of that company does not undergo any change. Therefore, there is no change in
the Base Market Capitalisation, only the 'number of shares' in the formula is updated.

• Other Issues:
Base Market Capitalisation Adjustment is required when new shares are issued by way of
conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-
back of shares, corporate restructuring etc.

• Base Market Capitalisation Adjustment:

The formula for adjusting the Base Market Capitalisation is as follows:

New Market Capitalisation

 New Base Market Old Base Market --------------------------------------
= x
Capitalisation Capitalisation -
Old Market Capitalisation

To illustrate, suppose a company issues right shares which increases the market
capitalisation of the shares of that company by say, Rs.100 crores. The existing Base Market
Capitalisation (Old Base Market Capitalisation), say, is Rs.2450 crores and the aggregate
market capitalisation of all the shares included in the index before the right issue is made is,
say Rs.4781 crores. The "New Base Market Capitalisation " will then be:

2450 x (4781+100)
-------------------------- = Rs.2501.24 crores
4781

This figure of 2501.24 will be used as the Base Market Capitalisation for calculating the index
number from then onwards till the next base change becomes necessary.

Back

SENSEX - Scrip selection criteria:

The general guidelines for selection of constituents in SENSEX are as follows:

1. Listed History:The scrip should have a listing history of at least 3 months at BSE. Exception
may be considered if full market capitalisation of a newly listed company ranks among top 10
in the list of BSE universe. In case, a company is listed on account of merger/ demerger/
amalgamation, minimum listing history would not be required.

2. Trading Frequency:The scrip should have been traded on each and every trading day in the
last three months. Exceptions can be made for extreme reasons like scrip suspension etc.

3. Final Rank:The scrip should figure in the top 100 companies listed by final rank. The final
rank is arrived at by assigning 75% weightage to the rank on the basis of three-month
average full market capitalisation and 25% weightage to the liquidity rank based on three-
month average daily turnover & three-month average impact cost.

4. Market Capitalization Weightage:The weightage of each scrip in SENSEX based on three-

month average free-float market capitalisation should be at least 0.5% of the Index.

5. Industry Representation:Scrip selection would generally take into account a balanced

representation of the listed companies in the universe of BSE.

6. Track Record:In the opinion of the Committee, the company should have an acceptable
track record.

Index Review Frequency:

The Index Committee meets every quarter to discuss index related issues. In case of a revision in the
Index constituents, the announcement of the incoming and outgoing scrips is made six weeks in
advance of the actual implementation of the revision of the Index.
As promised in my earlier post on original thread, I am posting One real life/ recent case of
amortization:-

Many of you, who are working, may be saving some money and may be investing in Mutual
Funds. Of late there is a big change in Mutual Fund structure. Earlier most of the funds were
open ended and you were allowed to buy or sell units whenever you felt like. However since
last six months or so most of the new funds have become closed ended funds and you can not
buy or sell units from Fund house but you have to buy or sell the units at exchange to or from
another investor without affecting fund house. Do you know why? Read on and you will
understand amortization better.

Whenever fund house launch a new fund, lot of expenses are involved, like fees to
bankers/brokers/sub-brokers etc and these expenses can be as high as 6-7% of fund collected.
But if you buy the units later on you are charged only 2.25% as entry load.

Earlier this 6-7% expense was being amortized by fund houses over a period of 5 years or so
and investors never used to know about this and many large players used to exit before all
expenses were amortized and remaining investors were penalized for remaining with the
same fund.

SEBI (Securities and Exchange Board of India) ruled that Fund houses have to amortize
these expenses upfront. As a result as soon as fund will appear in market its NAV will be .93
0r .94 (for every 1 Rupee invested) and any wise investor will buy the units now and pay
only 2.25% load instead of fools who paid 6-7% buy investing in new fund offer. So fund
houses came out with closed fund i.e. after an initial period is over they will not sell any new
units and fund will remain constant through out its life period.

This is just to show how a small accounting practice can change a whole industry.

Back

History of replacement of scrips in SENSEX

 Date Outgoing Scrips Replaced by
01.01.1986 Bombay Burmah Voltas
Asian Cables Peico
Crompton Greaves Premier Auto.
Scinda G.E.Shipping

03.08.1992 Zenith Ltd. Bharat Forge

19.08.1996 Ballarpur Inds. Arvind Mills

Bharat Forge Bajaj Auto
Bombay Dyeing BHEL
Ceat Tyres BSES
Century Text. Colgate
GSFC Guj. Amb. Cement
Hind. Motors HPCL
Indian Organic ICICI
Indian Rayon IDBI
Kirloskar Cummins IPCL
Mukand Iron MTNL
Phlips Ranbaxy Lab.
Premier Auto State Bank of India
Siemens Steel Authority of India
Voltas Tata Chem

16.11.1998 Arvind Mills Castrol

G. E. Shipping Infosys Technologies
IPCL NIIT Ltd.
Steel Authority of India Novartis

10.04.2000 I.D.B.I Dr. Reddy’s Laboratories

Indian Hotels Reliance Petroleum
Tata Chem Satyam Computers
Tata Power Zee Telefilms

08.01.2001 Novartis Cipla Ltd.

07.01.2002 NIIT Ltd. HCL Technologies

Mahindra & Mahindra Hero Honda Motors Ltd.

31.05.2002 ICICI Ltd. ICICI Bank Ltd.

10.10.2002 Reliance Petroleum Ltd. HDFC Ltd.

10.11.2003 Castrol India Ltd. Bharti-Tele-Ventures Ltd.

Colgate Palomive (India) Ltd. HDFC Bank Ltd.
Glaxo Smithkline Pharma. Ltd. ONGC Ltd.
 • Home |
• What's New |
• Site Map |
• Site Index |
• Contact Us

• About the IMF

• What the IMF Does

• Country Info
• News
• Data and Statistics
• Publications
Issues Briefs for 00/01
2006 2005 2004
2003 2002 2001 Globalization: Threat or Français
Deutsch
2000
Opportunity? Russian
Español
The Challenge of By IMF Staff
Globalization in April 12, 2000 (Corrected January 2002)
Africa
Remarks by Stanley
I Introduction
Fischer Acting II What is Globalization?
Managing Director
International III Unparalleled Growth, Increased Inequality: 20th Century
Monetary Fund Income Trends
Given at the France-
Africa Summit IV Developing Countries: How Deeply Integrated?
Yaoundé, Cameroon
January 19, 2001
V Does Globalization Increase Poverty and Inequality?
VI How Can the Poorest Countries Catch Up More Quickly?
Factors Driving
Global Economic VII An Advanced Country Perspective: Does Globalization Harm
Integration Workers’ Interests?
by Michael Mussa
Economic Counselor VIII Are Periodic Crises an Inevitable Consequence of
and Director of Globalization?
Research IMF
August 25, 2000 IX The Role of Institutions and Organizations

Publications on
X Conclusion
Globalization
 Free
Notification
Receive emails
when we post new
items of interest
to you.

Subscribe or
Modify your
profile

I. Introduction

The term "globalization" has acquired considerable emotive force. Some view it as a
process that is beneficial—a key to future world economic development—and also
inevitable and irreversible. Others regard it with hostility, even fear, believing that it
increases inequality within and between nations, threatens employment and living standards
and thwarts social progress. This brief offers an overview of some aspects of globalization
and aims to identify ways in which countries can tap the gains of this process, while
remaining realistic about its potential and its risks.

Globalization offers extensive opportunities for truly worldwide development but it is not
progressing evenly. Some countries are becoming integrated into the global economy more
quickly than others. Countries that have been able to integrate are seeing faster growth and
reduced poverty. Outward-oriented policies brought dynamism and greater prosperity to
much of East Asia, transforming it from one of the poorest areas of the world 40 years ago.
And as living standards rose, it became possible to make progress on democracy and
economic issues such as the environment and work standards.

By contrast, in the 1970s and 1980s when many countries in Latin America and Africa
pursued inward-oriented policies, their economies stagnated or declined, poverty increased
and high inflation became the norm. In many cases, especially Africa, adverse external
developments made the problems worse. As these regions changed their policies, their
incomes have begun to rise. An important transformation is underway. Encouraging this
trend, not reversing it, is the best course for promoting growth, development and poverty
reduction.

The crises in the emerging markets in the 1990s have made it quite evident that the
opportunities of globalization do not come without risks—risks arising from volatile capital
movements and the risks of social, economic, and environmental degradation created by
poverty. This is not a reason to reverse direction, but for all concerned—in developing
countries, in the advanced countries, and of course investors—to embrace policy changes to
build strong economies and a stronger world financial system that will produce more rapid
growth and ensure that poverty is reduced.

How can the developing countries, especially the poorest, be helped to catch up? Does
globalization exacerbate inequality or can it help to reduce poverty? And are countries that
integrate with the global economy inevitably vulnerable to instability? These are some of
the questions covered in the following sections.

II. What is Globalization?

Economic "globalization" is a historical process, the result of human innovation and

technological progress. It refers to the increasing integration of economies around the
world, particularly through trade and financial flows. The term sometimes also refers to the
movement of people (labor) and knowledge (technology) across international borders.
There are also broader cultural, political and environmental dimensions of globalization that
are not covered here.

At its most basic, there is nothing mysterious about globalization. The term has come into
common usage since the 1980s, reflecting technological advances that have made it easier
and quicker to complete international transactions—both trade and financial flows. It refers
to an extension beyond national borders of the same market forces that have operated for
centuries at all levels of human economic activity—village markets, urban industries, or
financial centers.

Markets promote efficiency through competition and the division of labor—the

specialization that allows people and economies to focus on what they do best. Global
markets offer greater opportunity for people to tap into more and larger markets around the
world. It means that they can have access to more capital flows, technology, cheaper
imports, and larger export markets. But markets do not necessarily ensure that the benefits
of increased efficiency are shared by all. Countries must be prepared to embrace the
policies needed, and in the case of the poorest countries may need the support of the
international community as they do so.

III. Unparalleled Growth, Increased Inequality:

20th Century Income Trends

Globalization is not just a recent phenomenon. Some analysts have argued that the world
economy was just as globalized 100 years ago as it is today. But today commerce and
financial services are far more developed and deeply integrated than they were at that time.
The most striking aspect of this has been the integration of financial markets made possible
by modern electronic communication.

The 20th century saw unparalleled economic growth, with global per capita GDP increasing
almost five-fold. But this growth was not steady—the strongest expansion came during the
second half of the century, a period of rapid trade expansion accompanied by trade—and
typically somewhat later, financial—liberalization. Figure 1a breaks the century into four
periods.1 In the inter-war era, the world turned its back on internationalism—or
globalization as we now call it—and countries retreated into closed economies,
protectionism and pervasive capital controls. This was a major factor in the devastation of
this period, when per capita income growth fell to less than 1 percent during 1913-1950.
For the rest of the century, even though population grew at an unprecedented pace, per
capita income growth was over 2 percent, the fastest pace of all coming during the post-
World War boom in the industrial countries.

The story of the 20th century was of remarkable average income growth, but it is also quite
obvious that the progress was not evenly dispersed. The gaps between rich and poor
countries, and rich and poor people within countries, have grown. The richest quarter of the
world’s population saw its per capita GDP increase nearly six-fold during the century, while
the poorest quarter experienced less than a three-fold increase (Chart 1b). Income inequality
has clearly increased. But, as noted below, per capita GDP does not tell the whole story (see
section IV).

IV. Developing countries: How deeply integrated?

Globalization means that world trade and financial markets are becoming more integrated.
But just how far have developing countries been involved in this integration? Their
experience in catching up with the advanced economies has been mixed. Chart 2a shows
that in some countries, especially in Asia, per capita incomes have been moving quickly
toward levels in the industrial countries since 1970. A larger number of developing
countries have made only slow progress or have lost ground. In particular, per capita
incomes in Africa have declined relative to the industrial countries and in some countries
have declined in absolute terms. Chart 2b illustrates part of the explanation: the countries
catching up are those where trade has grown strongly.

Consider four aspects of globalization:

• Trade: Developing countries as a whole have increased their share of world trade–
from 19 percent in 1971 to 29 percent in 1999. But Chart 2b shows great variation
among the major regions. For instance, the newly industrialized economies (NIEs)
of Asia have done well, while Africa as a whole has fared poorly. The composition
of what countries export is also important. The strongest rise by far has been in the
export of manufactured goods. The share of primary commodities in world exports
—such as food and raw materials—that are often produced by the poorest countries,
has declined.

• Capital movements: Chart 3 depicts what many people associate with

globalization, sharply increased private capital flows to developing countries during
much of the 1990s. It also shows that (a) the increase followed a particularly "dry"
period in the 1980s; (b) net official flows of "aid" or development assistance have
fallen significantly since the early 1980s; and (c) the composition of private flows
has changed dramatically. Direct foreign investment has become the most important
category. Both portfolio investment and bank credit rose but they have been more
volatile, falling sharply in the wake of the financial crises of the late 1990s.

• Movement of people: Workers move from one country to another partly to find
 better employment opportunities. The numbers involved are still quite small, but in
the period 1965-90, the proportion of labor forces round the world that was foreign
born increased by about one-half. Most migration occurs between developing
countries. But the flow of migrants to advanced economies is likely to provide a
means through which global wages converge. There is also the potential for skills to
be transferred back to the developing countries and for wages in those countries to
rise.

• Spread of knowledge (and technology): Information exchange is an integral, often

overlooked, aspect of globalization. For instance, direct foreign investment brings
not only an expansion of the physical capital stock, but also technical innovation.
More generally, knowledge about production methods, management techniques,
export markets and economic policies is available at very low cost, and it represents
a highly valuable resource for the developing countries.

The special case of the economies in transition from planned to market economies—they
too are becoming more integrated with the global economy—is not explored in much depth
here. In fact, the term "transition economy" is losing its usefulness. Some countries (e.g.
Poland, Hungary) are converging quite rapidly toward the structure and performance of
advanced economies. Others (such as most countries of the former Soviet Union) face long-
term structural and institutional issues similar to those faced by developing countries.
Source: IMF World Economic Outlook Databases: (May 2000), Direction of Trade
1/ Excludes oil exporting countries.
2/ Consists largely of bank lending.

V. Does Globalization Increase Poverty and Inequality?

During the 20th century, global average per capita income rose strongly, but with
considerable variation among countries. It is clear that the income gap between rich and
poor countries has been widening for many decades. The most recent World Economic
Outlook studies 42 countries (representing almost 90 percent of world population) for
which data are available for the entire 20th century. It reaches the conclusion that output per
capita has risen appreciably but that the distribution of income among countries has become
more unequal than at the beginning of the century.

But incomes do not tell the whole story; broader measures of welfare that take account of
social conditions show that poorer countries have made considerable progress. For instance,
some low-income countries, e.g. Sri Lanka, have quite impressive social indicators. One
recent paper2 finds that if countries are compared using the UN’s Human Development
Indicators (HDI), which take education and life expectancy into account, then the picture
that emerges is quite different from that suggested by the income data alone.

Indeed the gaps may have narrowed. A striking inference from the study is a contrast
between what may be termed an "income gap" and an "HDI gap". The (inflation-adjusted)
income levels of today’s poor countries are still well below those of the leading countries in
1870. And the gap in incomes has increased. But judged by their HDIs, today’s poor
countries are well ahead of where the leading countries were in 1870. This is largely
because medical advances and improved living standards have brought strong increases in
life expectancy.

But even if the HDI gap has narrowed in the long-term, far too many people are losing
ground. Life expectancy may have increased but the quality of life for many has not
improved, with many still in abject poverty. And the spread of AIDS through Africa in the
past decade is reducing life expectancy in many countries.

This has brought new urgency to policies specifically designed to alleviate poverty.
Countries with a strong growth record, pursuing the right policies, can expect to see a
sustained reduction in poverty, since recent evidence suggests that there exists at least a
one-to-one correspondence between growth and poverty reduction. And if strongly pro-poor
policies—for instance in well-targeted social expenditure—are pursued then there is a
better chance that growth will be amplified into more rapid poverty reduction. This is one
compelling reason for all economic policy makers, including the IMF, to pay heed more
explicitly to the objective of poverty reduction.

VI. How Can the Poorest Countries Catch Up More Quickly?

Growth in living standards springs from the accumulation of physical capital (investment)
and human capital (labor), and through advances in technology (what economists call total
factor productivity).3 Many factors can help or hinder these processes. The experience of
the countries that have increased output most rapidly shows the importance of creating
conditions that are conducive to long-run per capita income growth. Economic stability,
institution building, and structural reform are at least as important for long-term
development as financial transfers, important as they are. What matters is the whole
package of policies, financial and technical assistance, and debt relief if necessary.

Components of such a package might include:

• Macroeconomic stability to create the right conditions for investment and saving;
• Outward oriented policies to promote efficiency through increased trade and
investment;
• Structural reform to encourage domestic competition;
• Strong institutions and an effective government to foster good governance;
• Education, training, and research and development to promote productivity;
• External debt management to ensure adequate resources for sustainable
development.

All these policies should be focussed on country-owned strategies to reduce poverty by

promoting pro-poor policies that are properly budgeted—including health, education, and
strong social safety nets. A participatory approach, including consultation with civil society,
will add greatly to their chances of success.

Advanced economies can make a vital contribution to the low-income countries’ efforts to
integrate into the global economy:

• By promoting trade. One proposal on the table is to provide unrestricted market

access for all exports from the poorest countries. This should help them move
beyond specialization on primary commodities to producing processed goods for
export.

• By encouraging flows of private capital to the lower-income countries, particularly

foreign direct investment, with its twin benefits of steady financial flows and
technology transfer.

• By supplementing more rapid debt relief with an increased level of new financial
support. Official development assistance (ODA) has fallen to 0.24 percent of GDP
(1998) in advanced countries (compared with a UN target of 0.7 percent). As Michel
Camdessus, the former Managing Director of the IMF put it: "The excuse of aid
fatigue is not credible—indeed it approaches the level of downright cynicism—at a
time when, for the last decade, the advanced countries have had the opportunity to
enjoy the benefits of the peace dividend."

The IMF supports reform in the poorest countries through its new Poverty Reduction and
Growth Facility. It is contributing to debt relief through the initiative for the heavily
indebted poor countries.4

VII. An Advanced Country Perspective:

Does Globalization Harm Workers’ Interests?

Anxiety about globalization also exists in advanced economies. How real is the perceived
threat that competition from "low-wage economies" displaces workers from high-wage jobs
and decreases the demand for less skilled workers? Are the changes taking place in these
economies and societies a direct result of globalization?

Economies are continually evolving and globalization is one among several other
continuing trends. One such trend is that as industrial economies mature, they are becoming
more service-oriented to meet the changing demands of their population. Another trend is
the shift toward more highly skilled jobs. But all the evidence is that these changes would
be taking place—not necessarily at the same pace—with or without globalization. In fact,
globalization is actually making this process easier and less costly to the economy as a
whole by bringing the benefits of capital flows, technological innovations, and lower
import prices. Economic growth, employment and living standards are all higher than they
would be in a closed economy.

But the gains are typically distributed unevenly among groups within countries, and some
groups may lose out. For instance, workers in declining older industries may not be able to
make an easy transition to new industries.

What is the appropriate policy response? Should governments try to protect particular
groups, like low-paid workers or old industries, by restricting trade or capital flows? Such
an approach might help some in the short-term, but ultimately it is at the expense of the
living standards of the population at large. Rather, governments should pursue policies that
encourage integration into the global economy while putting in place measures to help
those adversely affected by the changes. The economy as a whole will prosper more from
policies that embrace globalization by promoting an open economy, and, at the same time,
squarely address the need to ensure the benefits are widely shared. Government policy
should focus on two important areas:

• education and vocational training, to make sure that workers have the opportunity to
acquire the right skills in dynamic changing economies; and
• well-targeted social safety nets to assist people who are displaced.

VIII. Are Periodic Crises an Inevitable Consequence of Globalization?

The succession of crises in the 1990s—Mexico, Thailand, Indonesia, Korea, Russia, and
Brazil—suggested to some that financial crises are a direct and inevitable result of
globalization. Indeed one question that arises in both advanced and emerging market
economies is whether globalization makes economic management more difficult (Box 1).
Box 1. Does globalization reduce national sovereignty in economic policy-making?

Does increased integration, particularly in the financial sphere make it more difficult for
governments to manage economic activity, for instance by limiting governments’ choices
of tax rates and tax systems, or their freedom of action on monetary or exchange rate
policies? If it is assumed that countries aim to achieve sustainable growth, low inflation
and social progress, then the evidence of the past 50 years is that globalization contributes
to these objectives in the long term.

In the short-term, as we have seen in the past few years, volatile short-term capital flows
can threaten macroeconomic stability. Thus in a world of integrated financial markets,
countries will find it increasingly risky to follow policies that do not promote financial
stability. This discipline also applies to the private sector, which will find it more difficult
to implement wage increases and price markups that would make the country concerned
become uncompetitive.

But there is another kind of risk. Sometimes investors—particularly short-term investors—

take too sanguine a view of a country’s prospects and capital inflows may continue even
when economic policies have become too relaxed. This exposes the country to the risk that
when perceptions change, there may be a sudden brutal withdrawal of capital from the
country.

In short, globalization does not reduce national sovereignty. It does create a strong
incentive for governments to pursue sound economic policies. It should create incentives
for the private sector to undertake careful analysis of risk. However, short-term investment
flows may be excessively volatile.

Efforts to increase the stability of international capital flows are central to the ongoing
work on strengthening the international financial architecture. In this regard, some are
concerned that globalization leads to the abolition of rules or constraints on business
activities. To the contrary—one of the key goals of the work on the international financial
architecture is to develop standards and codes that are based on internationally accepted
principles that can be implemented in many different national settings.
Clearly the crises would not have developed as they did without exposure to global capital
markets. But nor could these countries have achieved their impressive growth records
without those financial flows.

These were complex crises, resulting from an interaction of shortcomings in national policy
and the international financial system. Individual governments and the international
community as a whole are taking steps to reduce the risk of such crises in future.

At the national level, even though several of the countries had impressive records of
economic performance, they were not fully prepared to withstand the potential shocks that
could come through the international markets. Macroeconomic stability, financial
soundness, open economies, transparency, and good governance are all essential for
countries participating in the global markets. Each of the countries came up short in one or
more respects.

At the international level, several important lines of defense against crisis were breached.
Investors did not appraise risks adequately. Regulators and supervisors in the major
financial centers did not monitor developments sufficiently closely. And not enough
information was available about some international investors, notably offshore financial
institutions. The result was that markets were prone to "herd behavior"— sudden shifts of
investor sentiment and the rapid movement of capital, especially short-term finance, into
and out of countries.

The international community is responding to the global dimensions of the crisis through a
continuing effort to strengthen the architecture of the international monetary and financial
system. The broad aim is for markets to operate with more transparency, equity, and
efficiency. The IMF has a central role in this process, which is explored further in separate
fact sheets.5

IX. The Role of Institutions and Organizations

National and international institutions, inevitably influenced by differences in culture, play

an important role in the process of globalization. It may be best to leave an outside
commentator to reflect on the role of institutions:

"...That the advent of highly integrated commodity and financial markets has been
accompanied by trade tensions and problems of financial instability should not come as a
surprise, ...... The surprise is that these problems are not even more severe today, given that
the extent of commodity and financial market integration is so much greater.

" One possibility in accounting (for this surprise) is the stabilizing role of the institutions
built in the interim. At the national level this means social and financial safety nets. At the
international level it means the WTO, the IMF, the Basle Committee of Banking
Supervisors. These institutions may be far from perfect, but they are better than nothing,
judging from the historical correlation between the level of integration on one hand and the
level of trade conflict and financial instability on the other."6 (parentheses added)

X. Conclusion

As globalization has progressed, living conditions (particularly when measured by broader

indicators of well being) have improved significantly in virtually all countries. However,
the strongest gains have been made by the advanced countries and only some of the
developing countries.

That the income gap between high-income and low-income countries has grown wider is a
matter for concern. And the number of the world’s citizens in abject poverty is deeply
disturbing. But it is wrong to jump to the conclusion that globalization has caused the
divergence, or that nothing can be done to improve the situation. To the contrary: low-
income countries have not been able to integrate with the global economy as quickly as
others, partly because of their chosen policies and partly because of factors outside their
control. No country, least of all the poorest, can afford to remain isolated from the world
economy. Every country should seek to reduce poverty. The international community
should endeavor—by strengthening the international financial system, through trade, and
through aid—to help the poorest countries integrate into the world economy, grow more
rapidly, and reduce poverty. That is the way to ensure all people in all countries have access
to the benefits of globalization.
1
The discussion in this section is elaborated in the World Economic Outlook, International Monetary Fund,
Washington D.C., May 2000.
2
Nicholas Crafts, Globalization and Growth in the Twentieth Century, IMF Working Paper, WP/00/44,
Washington DC, April 2000.
3
These issues are explored in greater depth in IMF, World Economic Outlook, May 2000, Chapter IV.
4
These are described in the factsheets "The Poverty Reduction and Growth Facility (PRGF) - Operational
Issues", and "Overview: Transforming the Enhanced Structural Adjustment Facility (ESAF) and the Debt
Initiative for the Heavily Indebted Poor Countries (HIPCs)," which may be viewed at www.imf.org.
5
See "Progress in Strengthening the Architecture of the International Monetary System":
http://wwww.imf.org/external/np/exr/facts/arcguide.ht m and Guide to Progress in Strengthening of the
International Financial System: http://www.imf.org/external/np/exr/facts/arcguide.htm.
6
Bordo, Michael D., Barry Eichengreen, and Douglas A. Irwin, Is Globalization Today Really Different than
Globalization a Hundred Years Ago? Working Paper 7195, National Bureau of Economic Research,
Cambridge, MA, June 1999.

Home What's New Site Map Site Index

About the IMF What the IMF Does Country Info News Data and Statistics Publications

Copyright and Usage Privacy Policy How to Contact Us

) Fiscal deficit is the difference between governments expenditure and governments income...

Few notes - FRBM act calls for the reduction of 0.3% fiscal deficit every year.

Many economists belive that although higher fical deficit hampers growth, to a certain extent fiscal
deficit is recommended especially for developing nations..

Reasons :-

a) Fiscal deficit is filled by debt taken by the government through various financial instruments like
bonds etc. the interest rate of these bonds depends upon the credit rating of the country which in turn
depends on the fiscal deficit. If the fiscal deficit is high then credit rating will be low and hence we have
to pay high interest rates on the debt we take to fill fiscal deficit. If the credit rating falls below certain
level then it might almost be impossible to find debt..

b) Certain amount of fiscal deficit is recommended especially to developing countries because say the
debt is available for x% (which will be quiet low as we have no fiscal deficit and hence hgh rating) then
by taking that debt and using that money to construct roads,dams, ports etc.. the countrya nd increase
its GDP growth and can easily payback the debt from the revenues resulting from such growth.. as
bonus the country grows at a faster rate..
2) Nominal GDP Vs Real GDP -

Nominal GDP growth means the % increase in the GDP compared to last years. However during this
years time because of inflation value of money might also have changed.. Real GDP is caluclated taking
into account the value of inflation...

India is one of the fastest growing economies in the world. The foreign exchange reserves reach
a new high every week ($141 billion at last count), inflation has been controlled and nominal
interest rates continue to be low.

Yet there are concerns about India's fiscal deficit. The combined deficit of the central and the
state governments stands at greater than 10 per cent of the GDP (gross domestic product). The
public debt has almost reached four and half years of revenue.

So there are reasons to worry.

What is fiscal deficit?

Fiscal deficit is essentially the difference between what the government spends and what it
earns. It is expressed as a percentage of GDP.

This is done as it may not be appropriate to compare the deficits of different years in absolute
terms. This percentage though can be misleading. The revised estimates for the financial year
(FY) 2004-05, suggest that the government earned Rs 366,560 crore (Rs 3,665.60 billion) and it
spent Rs 505,791 crore (Rs 5,057.91 billion). The fiscal deficit stands at Rs 139,231 crore (Rs
1,392.31 billion), which is equivalent to 4.5 per cent of the GDP.

Similarly, in the year 2005-06, the government hopes to earn Rs 363,200 crore (Rs 3,632 billion)
and plans to spend Rs 514,344 crore (Rs 5,143.44 billion).

The deficit the government plans to run is Rs 151,144 crore (Rs 1,511.44 billion), which is
equivalent to 4.3 per cent of the GDP.

What this shows us is that in the year 2004-05, the government spent a whopping 38 per cent
more than what it earned. In the year 2005-06, this percentage might go up to 41.6 per cent. This
is very large but the same when expressed as a percentage of GDP sounds less.

Expenditure

The expenditure of the government can be classified into plan expenditure and non-plan
expenditure.

Plan expenditure is an expenditure that the government plans to incur on a scheme to be

implemented in a given year. For example, in the year 2003-04 (as per the revised estimates for
that year), the government had allocated Rs 2588.62 crore (Rs 25.886 billion) for construction of
national highways. This expenditure that was incurred for construction of national highways
came in as a part of plan expenditure.
Non-plan expenditure is defined as expenditure committed by the expenditure. Interest
payments, pensions, salaries, subsidies and maintenance expenditure are all non-plan
expenditure.

Non-plan expenditure is generally an outcome of plan expenditure. For example, the national
highways the government constructed in the year 2003-04 and before, need to be maintained.
All the expenses going towards this is treated as non-plan expenditure.

The budgeted allocation for the maintenance of national highways in the year 2004-05 stood at
Rs 746.70 crore (Rs 7.467 billion).

Expenditure on both plan and non-plan front can be categorised into capital and revenue
expenditure. Capital expenditure includes that expenditure which leads to creation of assets
whereas revenue expenditure does not involve asset creation and is recurring in nature.

The construction of the national highways in the year 2004-05 would involve expenditure on
aggregate, bitumen or cement (depending upon the nature of the road) and certain machinery.

This expenditure would be classified as capital expenditure. The labour charges would be
classified as revenue expenditure. Once the plan expenditure is over the maintenance of the
road would start.

The expenditure on this would be non-plan and can be further categorised into non-plan capital
expenditure and non-plan revenue expenditure.

The devil is in the detail

The government fails to match its expenses with what it earns and thus has to resort to deficit
financing. It makes good of this gap by borrowing in various ways. On this borrowing, the
government has to pay a certain amount of interest. The interest payments as explained above
are a part of non-plan expenditure.

If we take a look at figures starting from 1994-95 till 2002-03, non-plan expenditure has been
steadily rising from 9.2 per cent of the GDP to 12.1 per cent of the GDP. Of that the interest
payments have steadily risen from 4.3 per cent of the GDP to 4.8 per cent of the GDP.

The plan expenditure varied from 4.6 per cent of the GDP in 1994-95 then steadily fell to 3.8 per
cent of the GDP in 1998-99 to rise gain to 4.6 per cent of the GDP in 2002-03.

The actual estimates for the year 2003-04 puts interest payments at Rs 124,088 crore (Rs
1,240.88 billion) -- 4.53 per cent of GDP. The plan expenditure for the same year stood at Rs
122,280 crore (Rs 1,222.80 billion) -- 4.46 per cent of GDP.

The revised estimates for the year 2004-05 puts interest payments at Rs 125,905 crore (Rs
1,259.05 billion) -- 4.07 per cent of the GDP. The plan expenditure for the same period stood at
Rs 137,387 crore (Rs 1,373.87 billion) -- 4.44 per cent of the GDP.

The budgeted estimates for the year 2005-06 put interest payments at Rs 133,945 crore (Rs
1,339.45 billion) -- 3.82 per cent of the GDP. The plan expenditure for the same period is Rs
143,497 crore (Rs 1,434.97 billion) -- 4.08 per cent of the GDP.
From 1995-96 till the year 2003-04, the component of interest payments in the annual Budget
has been greater than plan expenditure though in the financial year 2004-05 plan expenditure
was greater than the interest payments. Non-plan expenditure other than interest payments (like
subsidies, pensions, salaries, etc) has also been going up.

This shows that India is spending more on interest payments and other non-planned expenditure
than on development.

The government wants to invest in infrastructure, power, primary education, health and water
supply to put India on the fast track to growth. But it simply doesn't have the money to implement
its strategy. The deficit is essentially servicing current consumption and not financing capital
investment, which should be the case.

The current situation leads to a very interesting conclusion. We all know that deficit financing
involves the government financing its excess expenditure over revenue through borrowing.

Conventional wisdom tells us that money that is borrowed needs to be invested in areas where
the return generated is greater than interest to be paid on the debt (i.e. the return generated
should be greater than the cost of capital).

But the government cannot always work with the profit motive in mind. The government is not
earning enough to pay back the interest on its debt. So what is it doing? It is taking in more debt
to repay its earlier debt and the interest that is to be paid on the existing debt. Not a healthy sign
one must say.

Low interest rates

From December 1997 to Jan 2004, the average bank rate fell from 12 per cent to 6 per cent. The
prime-lending rate of banks fell from a peak of 15 per cent to 11 per cent. The interest rates were
brought down substantially, apparently with the objective of boosting business activity.

But what happened makes one think that the government wanted to finance its deficit at lower
interest rates rather than encourage business lending. Ironically, lending by banks to industrial
clients did not really pick up.

The falling interest rates gave very little incentive to banks to lend to industrial clients, as the
returns were not high enough to compensate for the risk involved. Given this, it made more
sense for banks to invest in government securities where the risk involved was minimal.

Banks invested much more than what was statutorily required. (Banks have to invest a minimum
of 25 per cent of their net banks deposits in government securities). And this helped the
government finance its deficits at lower interest rates.

Apart from the government, large corporates also benefited as they could replace their earlier
high cost loans with cheaper loans.

This scenario encouraged banks to concentrate on the retail segment. Banks gave out loans to
finance expenditure, which did not help in capital formation. Charitable trusts, poor pensioners,
senior citizens and widows saw the value of their savings come down considerably.

The fact that India does not have a social security system in place did not help.
Revenue Deficit and Fiscal Responsibility and Budget Management Act (FRBMA)

Revenue deficit is the difference between the revenue expenditure and the revenue receipts (the
recurring income for the government). When a country runs a revenue deficit it means that the
government is unable to meet its running expenses from its recurring income.

The FRBMA was notified on July 2, 2004 and came into force on July 5, 2004. This Act requires
the reduction of fiscal deficit and elimination of revenue deficit by March 31, 2009.

The FRBMA requires the Government of India to reduce fiscal deficit by a minimum of 0.3 per
cent of the GDP every year and revenue deficit by 0.5 per cent each year, so that the fiscal
deficit is not more than 3 per cent of the GDP by March 31, 2009.

The idea seems to be that deficit, if any, should be used to finance capital expenditure that leads
to asset formation and not on revenue expenditure, the benefits of which do not go beyond that
particular year.

The FRBMA has certain loopholes. It does not require capital expenditure leading to a deficit to
recoup its cost of capital (i.e., the return generated on the investment done through capital
expenditure need not be greater than the interest to be paid on it). This might lead to the overall
spending and deficits to be quite unconstrained.

For the year 2005-06, Finance Minister P Chidambaram has chosen to overlook the
requirements of FRBMA. The fiscal deficit for the year has been budgeted at 4.5 per cent of the
estimated GDP, which will be 0.1 per cent less than the required reduction.

The revenue deficit target for the year 2005-06, if FRBMA requirements were followed, had to be
at 1.8 per cent of the GDP. But it has been budgeted at 2.7 per cent of the GDP.

Given the strong growth experienced by the Indian economy better progress could have been
made on this front. One reason for ignoring FRBMA for this year is the fact that the government
has increased grants to the states in line with the recommendations of the Twelfth Finance
Commission.

The government might miss its revenue deficit target of 2.7 per cent of the GDP in the coming
year on account of a likely undershooting of tax revenue collections, as highly optimistic
assumptions of tax revenue growth have been made. This would lead to the budgeted fiscal
deficit also shooting up.

The way out

Taxes are the most important source of revenue for the government. India's tax/GDP ratio stands
at around 10 per cent. This is much less than the average ratio of 20 per cent across the
emerging market countries.

For the OECD (Organisation for Economic Cooperation and Development) countries the ratio
stands at 37.5 per cent. Increasing tax rates is not really an option, as it will hit those who have
already been paying taxes.

So this leaves us with the other option of widening the tax net. The government seems to have
taken steps to widen the net but much remains to be done. The services sector, which forms
almost 50 per cent of the economy, contributes less than 5 per cent of the total taxes collected.
This anomaly needs to be corrected.

More and more people should be brought under the tax net. Income should be taxed irrespective
of where it's coming from. Agricultural income should be taxed, as it's the bigger farmers who are
gaining from the exemption and not the smaller farmers for whom it's meant.

And if India continues to grow at rates at which it has been doing in the recent past, fiscal deficit
will automatically come down to the extent expenditure is held in check.

In closing

Whenever the government runs a deficit it has to meet the deficit either by borrowing or by
printing money. Macroeconomic theory tells us that if the government borrows heavily by selling
government bonds, bond prices go down and the interest rates go up and this leads to the
crowding out of private investment.

If the government prints money to finance the deficit and production does not increase
immediately, this leads to increased inflation as more money in the economy chases the same
amount of goods.

India is not showing any of the above symptoms; interest rates continue to be low and inflation is
well under control. Moreover, foreign institutional investors are making a beeline for investment
into the Indian markets. There are no telltale signs of a crisis.

Given that the Indian economy is looking very robust as of now, the government should have
tried and built some cushion on the fiscal side so that when the growth slows down it could go in
for increased spending to 'pump prime' the economy. The government thus has missed an
opportunity to correct India's fiscal imbalance.

The author is Research Scholar, ICFAI

There are a total of thirty Chief Ministers elected by all twenty-eight states and two out of the
seven union territories. The following table lists the incumbent Chief Ministers of the various
states.

TOOK
STATE NAME PARTY FMR
OFFICE
Dr. Y. S. Rajasekhara
Andhra Pradesh 2004-05-14 Indian National Congress all
Reddy
Arunachal Pradesh Gegong Apang 2003-08-03 Indian National Congress all
Assam Tarun Kumar Gogoi 2001-05-17 Indian National Congress all
Bihar Nitish Kumar 2005-11-24 Janata Dal (United) all
Chhattisgarh Raman Singh 2003-12-07 Bharatiya Janata Party all
Delhi† Sheila Dikshit 1998-12-03 Indian National Congress all
Pratapsingh Raoji
Goa 2005-02-02 Indian National Congress all
Rane
Gujarat Narendra Modi 2001-10-07 Bharatiya Janata Party all
Bhupinder Singh
Haryana 2005-03-05 Indian National Congress all
Hooda
Himachal Pradesh Virbhadra Singh 2003-03-06 Indian National Congress all
Jammu and
Ghulam Nabi Azad 2005-11-02 Indian National Congress all
Kashmir
Jharkhand Madhu Koda 2006-09-18 Independent all
Karnataka H. D. Kumaraswamy 2006-02-03 Janata Dal (Secular) all
Communist Party of India
Kerala V.S. Achuthanandan 2006-05-18 all
(Marxist)
Madhya Pradesh Shivraj Singh Chauhan 2005-11-29 Bharatiya Janata Party all
Maharashtra Vilasrao Deshmukh 2004-11-01 Indian National Congress all
Manipur Okram Ibobi Singh 2002-03-07 Indian National Congress all
Meghalaya J. Dringwell Rymbai 2006-06-15 Indian National Congress all
Mizoram Pu Zoramthanga 1998-12-04 Mizo National Front all
Nagaland Neiphiu Rio 2003-03-06 Nagaland People's Front all
Orissa Naveen Patnaik 2004-05-17 Biju Janata Dal all
Pondicherry† N. Rangaswamy 2001-10-27 Indian National Congress all
Punjab Amarinder Singh 2002-02-27 Indian National Congress all
Vasundhara Raje
Rajasthan 2003-12-08 Bharatiya Janata Party all
Scindia
 Pawan Kumar
Sikkim 1994-12-12 Sikkim Democratic Front all
Chamling
Tamil Nadu M. Karunanidhi 2006-05-12 DMK all
Tripura Manik Sarkar 1998-03-11 CPI-M all
Uttaranchal Narayan Dutt Tiwari 2002-03-02 Indian National Congress all
Uttar Pradesh Mulayam Singh Yadav 2003-08-29 Samajwadi Party all
Buddhadeb
West Bengal 2000-10-06 CPI-M all
Bhattacharya

STATE or UT ADMINIST. LEGIS. JUDIC. SINCE FORMER CAPITAL

Andaman
and Nicobar Port Blair — Kolkata 1956 —
Islands
Arunachal
Itanagar Itanagar Guwahati 1972 —
Pradesh
Andhra
Hyderabad Hyderabad Hyderabad 1956 —
Pradesh
Shillong[1] (1874-
Assam Guwahati Dispur Guwahati 1972
1972)
Bihar Patna Patna Patna 1936 —
Chhattisgarh Raipur Raipur Bilaspur 2000 —
Chandigarh Chandigarh[2] — Chandigarh 1966 —
Dadra and
Silvassa — Mumbai 1961 —
Nagar Haveli
Daman and
Daman — Mumbai 1987 —
Diu
NCT–Delhi Delhi Delhi Delhi 1956 —
Goa Panaji[3] Porvorim Mumbai 1961 —
Ahmedabad (1960-
Gujarat Gandhinagar Gandhinagar Ahmedabad 1970
1970)
Haryana Chandigarh Chandigarh Chandigarh 1966 —
Himachal
Shimla Shimla Shimla 1948 —
Pradesh
• Srinagar (S) • Srinagar (S)
Jammu and
Srinagar 1948 —
Kashmir
• Jammu (W) • Jammu (W)
Jharkhand Ranchi Ranchi Ranchi 2000 —
Karnataka Bengalūru Bengalūru Bengalūru 1956 Mysore —
[4]
Kerala Thiruvananthapuram T'puram Ernakulam 1956 Kochi (1949-1956)
Lakshadweep Kavaratti — Ernakulam 1956 —
Madhya
Bhopal Bhopal Jabalpur 1956 Nagpur [5] (1861-1956)
Pradesh
Mumbai[6] • Mumbai (S+B) 1818
Maharashtra Mumbai —
• Nagpur (W/2nd)[7] • Nagpur (W)[8] 1960
Manipur Imphal Imphal Guwahati 1947 —
Meghalaya Shillong Shillong Guwahati 1970 —
Mizoram Aizawl Aizawl Guwahati 1972 —
Nagaland Kohima Kohima Guwahati 1963 —
Orissa Bhubaneshwar Bhubaneshwar Cuttack 1948 Cuttack (1936-1948)
Pondicherry Pondicherry Pondicherry Chennai 1954 —
• Lahore[9] (1936-
1947)
Punjab Chandigarh Chandigarh Chandigarh 1966
• Shimla (1947-1966)
Rajasthan Jaipur Jaipur Jodhpur 1948 —
Sikkim Gangtok[10] Gangtok Gangtok 1975 —
Tamil Nadu Chennai[11] Chennai Chennai 1956 —
Tripura Agartala Agartala Guwahati 1956 —
Uttaranchal Dehradun[12] Dehradun Nainital 2000 —
Uttar
Lucknow Lucknow Allahabad 1937 —
Pradesh
West Bengal Kolkata Kolkata Kolkata 1905 —
get printout of these list of shayaris..and learn them if pos..impromptu bolne kaam
aayega...we can use them..exact context badme decide karenge....

1. kate nahi katthe lamhe intezar ke,

nazre bichakar bethe hai raste pe yaar ke..
dil ne kaha dekhe jo jalwe husn yaar ke,
laaya hai kaun inhe palakh se utar ke.....
(this one is frm hum apke hai kaun....)
context-atul ko shaadi ka intezaar kab se hai aur bhabhi ka bhi.........

2. mandir se mange duaee,

khuda se kare faryad,
ki humari umar tumhe lag jaye,
aur tumhari mout pe hum mar jaye...
(or tumhari raho mein humesha,
khilta rahe gulab)...
chand se pyari chandni,
chandni se pyari raat,
raat se gehri dosti,
dosti se pyaari hai aap....
PRIYANKA dosti se pyari hai aap....
(context-atul praising bhabhi..........)

3. agar shahajahan marwadi hota,

toh karodo na kharchata tajmahal par,
woh hazoron mumtaz le aata,
un karode ke baat par....
(context-humour general one....)

4. humne har sham chirago se jala rakhi hai,

magar shart hawaon se laga rakhi hai..
na jaane kis gali se mere ATULJI aa jaye,
humne toh har gali saja rakhi hai.....
(context- ladki wale waitng for the phere and saja ke rakhi hai har chaukhat
unhone....)
so diffclt hindi na!!!!!!!!!!!!!!!!!!

5. ae khuda apne chand pe itna gurur mat kar,

ek chand si PRIYANKA hum bhi rakhte hai,
jab tarif hoti hai tere chand ki,
aksar log is chand ki misal dete hai....
(context-autl praising bhabhi...)

6. shaad raho abad raho,

 geet kushi ke tum gaoo,
phool hi phool ho un raho par,
jin raho par tum jaoo....
(context-conclusion...happy ending/...)
7. aapko banane wale ki nazakhat toh dekho,
kambakt betha hai appke intezar mein,
uski tanhai toh dekho....
(context-praising bhabhi....)

DIRECTIONS (1- 6): Choose the correct alternative.

1. Which of the following choices MOST accurately captures the meaning of edifice as
used in the sentence below?
The edifice of 'public space', built up through literacy or informative institutions of
popular education and on which the pillars of democracy were mounted, is now
crumbling.
A. Infrastructure
B. Building
C. Paraphernalia
D. None of the above

2. The__ of the Sanskrit Vedic hymns into English is often not possible; what experts do
is a

Below there are three words indicated. Choose the alternative (among A, B,C, D) that
you think has the right combination of words that can be used to fill the gaps in the
sentence above and give it a coherent meaning.
X: Translation
Y Rendition
Z: Conversion

A. X,Z in that order

B. Y,X in that order
C X, Y in that order
D. Cannot be determined, since the choice depends on the context in which the sentence
is used

3. The phrase 'Ranch on the Ganges':

A. Denotes an object
B. Qualifies an object
C. Alludes to a suggestive meaning
D. None of the above

4. 'In this place flowed a river. A town came up by its banks sometime. And today there
is a concrete road of the metropolitan city. When I bend down and place my ears on the
road, I can still hear the splashing of the water flowing underneath.'
The passage above is:
A. Literal
B. Discursive
C. Descriptive
D. None of the above

QUESTIONS 5-6

'When I become aware of the pain in my injured leg, it begins to hurt and the pain
becomes so excruciating that I often loose control over my senses.'

5. In the above passage, 'excruciating' refers to:

A. Suddenness of the pain
B. Objectivity of the pain
C. Longevity of the pain
D. None. of the above

6. Which of the following words can possibly replace 'excruciating' without CHANGING
the underlying meaning?
A. Dominating
B. Massive
C. Overwhelming
D. Irritating
QUESTIONS 7-9: In each of the following questions, choose the correct order of
statements (A, B, C...) to give a coherent meaning to the text?

Question 7
Statement A: Such inter-operability of a software service or product appears to be only
one aspect, and the interoperable system is itself evolving.

Statement B: Each software product introduces a variation and consequently a change in

the system.

Statement C: An operating system must work with applications and other elements in a
hardware platform.

Statement D: A software firm while introducing its product or service, therefore, does
not strive for mute complementarities alone but tries to bring about a change in the
existing structure.

Statement E: In other words the components must be designed to be inter-operable.

A. BCDAE
B. CEABD
C DAEBC
D. CBEAD

Question 8
Statement A: Moreover, as argued above, knowledge is entailed not by way of
justification as such. but by the realization of good or fruit ladenness of meaning and
actions or iterated actions.

Statement B: Knowledge is required in order to resolve doubts and thus in order to act
meaningfully.

Statement C: Therefore the actions in a commonly led daily life are both meaningful and
knowledge-driven.
Statement D: Indian theorists argue for a common knowledge, which is obtained
through iterated fruitful! actions, through the authority of sentences (or words).

Statement E: We argue for four sources of validation of knowledge, viz., sentence,

inference, direct perception and analogy.
A. AECBD
R BAECD
C. BDCEA
D. EADCB

Question 9
Statement A: But PST has also used satellite pictures to suggest that an ancient fortified
town had existed 30 Km from Junagadh.
Statement B: Soil and vegetation patterns were used in the search.

Statement C: The site marches the description of Krishna's town in an ancient scripture.

Statement D: PST's primary job at Space Applications Centre has been tracking land use
and forest cover with satellite images.

Statement E: An archeologist however cautioned that remote sensing and scriptures by

themselves would not be enough to identify a township.

Statement F: It was claimed that soil and vegetation patterns at ancient abandoned sites
reveal specific patterns that can be picked by satellite images.
A. DACBEF
B. DACBFE
C. FDCABE
D. FDACBE
10. "If the forest continues to disappear at its present pace, the Royal Bengal tiger will
approach extinction," said the biologist.
"So all that is needed to save the tiger is to stop deforestation," said the politician.

Which one of the following statements is consistent with the biologist's claim but not
with the politician's claim?
A. Deforestation continues and the tiger becomes extinct.
B. Deforestation is stopped and the tiger becomes extinct.
C. Reforestation begins and the tiger survives.
D. Deforestation is slowed and the tiger approaches extinction.

11. There is little point in looking to artists for insights into political issues. Most of them
hold political views that are less insightful than those of any reasonably well-educated
person who is not an artist. Indeed, when taken as a whole, the statements made by
artists, including those considered to be great» indicate that artistic talent and political
insight are rarely found together.

Which one of the following can be inferred from the passage?

A. There are no artists who have insights into political issues.
B. Some artists are no less politically insightful than some reasonably well-educated
persons who are not artists.
C. Every reasonably well-educated person who is not an artist has more insight into
political issues than any artist.
D. Politicians rarely have any artistic talent.

12. All intelligent people are nearsighted. I am very nearsighted. So I must be a genius.

Which one of the following exhibits both of the logical flaws exhibited in the argument
above?

A. Iacocca is extremely happy, so he must be extremely tall because all tall people are
happy.
B. All chickens have beaks. This bird has a beak. So this bird must be a chicken.
C. All geniusses are very nearsighted. I must be very near sighted since I am a genius.
D. I must be stupid because all intelligent people are nearsighted and I have perfect
eyesight.

13. The district health officer boasts that the average ambulance turnaround time, the
time from summons to delivery of the patient, has been reduced this year for top-
priority emergencies. This is a serious misrepresentation. This "reduction" was produced
simply by redefining "top priority". Such emergencies Used to include gunshot wounds
and electrocutions, the most time-consuming cases. Now they are limited strictly to
heart attacks and strokes.

Which one of the following would strengthen the author's conclusion that it was the
redefinition of "top priority" that produced the reduction in turnaround time?

A. The number of heart attacks and strokes declined this year.

B. The health officer redefined the district's medical priorities this year.
C. One half of all last year's top-priority emergencies were gunshot wounds and
electrocution cases.
D. Other cities include gunshot wound cases in their category of top-priority
emergencies.
QUESTIONS 36: Please choose the alternative that CANNOT go into the sentence in the
blank space to make a coherent sentence:

36. The sale of the hotel chain under— resulted in extremely low yield for the promoter.
A. DURESS B. DISTRESS C. DISTRUST D. All the above

Questions 37-38: Please choose the correct alternative that can go into the sentence in
the blank space to make a coherent sentence:

37. The — of the country should take a greater interest in promoting the indigenous
works that are rooted in the deep traditions of scholarship across the world.
A. LITERATI B. LITERATE C. LITERATURE D. LITERAL

38. ——of different categories of problems often leads to design of improper solutions
that fail to address the complexities of the problem.

A. CONFABULATION B. CONFLATION C. CONFLICT D. CONFESSION

__________________

QUESTIONS 39-40: are based on the following dialogue between a Japanese (J)
manager and an American (A) manager. Based on the dialogue please answer the
following questions.
J: Welcome to Japan! We are at your service. May I have the privilege of inviting you to
play a round of golf together?

A: That is excellent! Golf has been one of my favorites. Some of my most memorable
moments were on the golf course. Let us go. It will be a nice relaxation for me as well -
it would take away the jet lag, before we sit to discuss the contract.

J: Surely, thanks for giving me the privilege to play host. I will take you to the best golf
club in this part of the world.

A: Is golf very common among Japanese executives?

J: It depends, you know, on how you look at it. Doesn't everything really depend like
that – on how we look at it — even concepts of winning and loosing!

A. That sounds interesting.

J: Is it!

A: Well, there it goes.. Wah!

J: So, you have won ~ you are really good at golf.

Why don't we -play another round tomorrow.

A: Well.. (long pause).0K.

S: so, you have won again.. tomorrow is a good day for golf- many of my business
friends would be here and I will introduce you to them.

A: But, when will we sit for discussing the contract.

J: Well, if you want we can sit right away, we can go down to my office.

A: That is what I think we should do.

J. It is my privilege.

39. Emotions often get manifested as a 'mental state' of a speaker. A dialogue often
reveals that. Based on the dialogue. Which of the following best characterizes the
emotional state of the American manager?

A. Reposed
B. Recalcitrant
C. Resplendent
D. None of the above

40. The dialogue reveals a swing in the mood of the American manager from ____ to
_____ . Which of the following pairs of words (in the same order) best completes the
sentence coherently?
A. Rejuvenation, Desperation
B. Elation, Exasperation
C. Relaxation, Tension
D. Happiness, Fury
(Question 41-45):
Seven instructors - J, K, L, M, N, P and Q – teach management courses at a premier
institute in east India. Each instructor teaches during exactly one term: the first term,
the second term, or the third term. The following conditions apply:

K teaches during the third term.

L and M teach during the same term.
Q teaches during either the first term or the second term.
Exactly twice as many instructors teach during the third term as teach during the first
term. N and Q teach during different terms.
J and P teach during different terms.

41. Which one of the following could be an accurate matching of instructors to terms?
A. M: the first term; P: the second term; Q: the first term
B. J: the third term; L: the third term; P: the third term
C. L: the first term; N: the second term; P: the third term
D. J: the first term; M: the third term; N: the second term

42. Which one of the following cannot be true?

A. L teaches during the first term
B. M teaches during the second term
C. M teaches during the third term
D. N teaches during the second term

43. If exactly one instructor teaches during the second term, which one of the following
must be true?
A. J teaches during the third term
B. L teaches during the first term
C. M teaches during the third term
D. P teaches during the second term

44. Each of the following contains a list of instructors who can all teach during the same
term EXCEPT:
A. J,K,M
B. J,L,M
C. K,L,P
D. K,P,Q

45. If more instructors teach during the second term than teach during the first term,
then which one of the following instructors must teach during the second term?
A. J
B. M
C. N
D. P
Sourav's Fish Salon serves a special Friday night seafood banquet consisting of seven
courses - hilsa, pomfret, Indian shrimp, rahu, kingfish, lobster, and bhetki. Diners are
free to select the order of the seven courses, according to the following conditions:

The kingfish is served sometime after rahu. Exactly one course should be served
between the pomfret and the Indian shrimp.
The lobster is served some time before the pomfret.
The kingfish is served either fifth or sixth. The hilsa is served second.
46. Which one of the following sequences would make for an acceptable banquet?
A. rahu, hilsa, lobster, bhetki, pomfret, kingfish, Indian shrimp
B. rahu, hilsa, bhetki, pomfret, kingfish, Indian shrimp, lobster
C lobster, hilsa, pomfret. rahu, kingfish, Indian shrimp, bhetki
D. lobster, hilsa, rahu. kingfish. pomfret, bhetki, Indian shrimp

47. If kingfish is the fifth course served, then which one of the following MUST BE true?
A. Pomfret is the third course served
B. Indian shrimp is the fourth course served
C. Bhetki is the seventh course served
D. Lobster is the first course served

48. Which one of the following would make it possible to determine the EXACT ordering
of the courses?
A. Pomfret is the fourth course served
B. Indian shrimp is the fifth course served
C. Kingfish is the sixth course served
D; Lobster is the first course served

49. If kingfish is the sixth course served, then which one of the following CANNOT be
true?
A. Rahu is the fifth course served
B. Indian shrimp is the seventh course served
C. Pomfret is the fifth course served
D. Lobster is the third course served

50. If Bhetki is the third course served, which one of the following MUST BE true?
A. Pomfret is the fourth course served
B. Kingfish is the fifth course served
C. Rahu is the first course served
D. Indian shrimp is the seventh course served
During one week, a human resource director conducts five interviews for a new job, one
interview per day, Monday through Friday. There are six candidates for the job - Ram,
Shyam, Trilochan, Usha, Veena, and Kishore. No more than two candidates are
interviewed more than once. Neither Shyam nor Usha nor Veena is interviewed more
than once, and no other candidate is interviewed more than twice. The schedule of
interviews is subject to the following conditions:

If Trilochan is interviewed, then Trilochan must be interviewed on both Monday and

Friday.
If Shyam is interviewed, then Usha is also interviewed, with Shyam's interview taking
place earlier than Usha's interview.
If Ram is interviewed twice, then Ram's second interview takes place exactly two days
after Ram's first interview.
If Veena is interviewed, then Kishore is interviewed twice, with Veena's interview taking
place after Kishore's first interview and before Kishore's second interview.
If Usha is interviewed, then Ram is also interviewed, with Usha's interview taking place
on a day either immediately before or immediately after a day on which Ram is
interviewed.

51. Which of the following could be a complete and accurate list of candidates the
human resources director interviews and the days on which those interviews take place?
A. Monday: Shyam: Tuesday: Usha; Wednesday:Ram; Thursday: Kishore; Friday:
Ram;
B. Monday: Shyam; Tuesday: Kishore; Wednesday: Ram; Thursday: Kishore; Friday:
Usha;
C Monday: Trilochan; Tuesday: Ram; Wednesday: Shyam; Thursday: Ram; Friday:
Trilochan;
D. Monday: Trilochan; Tuesday: Ram; Wednesday: Kishore; Thursday: Veena; Friday:
Trilochan;

52. If Veena is interviewed on Tuesday, then which one of the following MUST BE true?
A. Trilochan is interviewed on Friday
B. Usha is interviewed on Thursday
C. Ram is not interviewed
D. Shyam is not interviewed

53. If Kishore is not interviewed, then which one of the following MUST BE true?
A. Ram is interviewed on Thursday
B. Shyam is interviewed on Tuesday
C. Trilochan is interviewed on Monday
D. Usha is interviewed on Wednesday

54. If Shyam is interviewed, then which one of the following could be true?
A. Kishore is interviewed on both Tuesday and Wednesday
B. Usha is interviewed on Monday.
C. Veena is interviewed on Tuesday
D. Shyam is interviewed on Thursday

55. If neither Usha nor Trilochan is interviewed, then each of the following MUST BE true
EXCEPT:
A. Ram is interviewed on Monday
B. Ram is interviwed on Thursday
C. Veena is interviewed on Tuesday
D. Kishore is interviewed on Wednesday

56. If both Usha and Veena are interviewed, then which one of the following is a
complete and accurate list of the days on which Kishore could be interviewed?
A. Monday, Friday
B. Tuesday, Thursday
C. Monday, Wednesday,Friday
D. Tuesday, Wednesday, Thursday
QUESTIONS 7-9: In each of the following questions, choose the correct order of
statements (A, B, C...) to give a coherent meaning to the text?

Question 7
Statement A: Such inter-operability of a software service or product appears to be
only one aspect, and the interoperable system is itself evolving.

EA is the link.

Statement B: Each software product introduces a variation and consequently a change in

the system.

Statement C: An operating system must work with applications and other elements in a
hardware platform.

Statement D: A software firm while introducing its product or service, therefore, does
not strive for mute complementarities alone but tries to bring about a change in the
existing structure.

cannot be the opening sentence

the word therefore also indicates conclusion.

Statement E: In other words the components must be designed to be inter-operable.

A. BCDAE
B. CEABD
C DAEBC
D. CBEAD

Question 8
Statement A: Moreover, as argued above, knowledge is entailed not by way of
justification as such. but by the realization of good or fruit ladenness of meaning and
actions or iterated actions.

BA is the link. A cannot be the opening sentence.

Statement B: Knowledge is required in order to resolve doubts and thus in order to act
meaningfully.

Statement C: Therefore the actions in a commonly led daily life are both meaningful and
knowledge-driven.

Statement D: Indian theorists argue for a common knowledge, which is obtained

through iterated fruitfull actions, through the authority of sentences (or words).

Statement E: We argue for four sources of validation of knowledge, viz., sentence,

inference, direct perception and analogy.

I am a bit confused here DEC might be a link.

A. AECBD
B BAECD
C. BDCEA
D. EADCB

Question 9

Statement A: But PST has also used satellite pictures to suggest that an ancient
fortified town had existed 30 Km from Junagadh.

DA is the link.

Statement B: Soil and vegetation patterns were used in the search.

Statement C: The site marches the description of Krishna's town in an ancient scripture.

Statement D: PST's primary job at Space Applications Centre has been tracking land
use and forest cover with satellite images.

Statement E: An archeologist however cautioned that remote sensing and scriptures by

themselves would not be enough to identify a township.

Statement F: It was claimed that soil and vegetation patterns at ancient abandoned
sites reveal specific patterns that can be picked by satellite images.

BF is the link

A. DACBEF
B. DACBFE
C. FDCABE
D. FDACBE
(Questions 57 to 61); Analyze the following statements and give an appropriate answer.
K.C. Das is preparing special puja sweet packages. Different sweet packages are
numbered 1 through 5 from left to right, and K.C. Das is filling them with different
sweets. Each package will contain at least one, but not more than two of the following
types of sweets: Gulabjamun, Kaju barfi, Petha, Rasgulla, Sohan halwa, and Cham
cham. Each type of sweet will be placed in at least one sweet package. These sweets will
be packed either in a bucket, or a carton or a tin. K.C. Das fills the packages according
to the following conditions:

At least two packages must contain Rasgulla. Exactly two packages must contain Kaju
barfi, and these packages cannot be adjacent to each -other.
Both packages that contain Kaju barfi must be to the left of any packages that contain
Gutabjamun.
Package 2, 3, and 4 cannot contain Sohan halwa:
Any package that contains Rasgulla must be packed in a carton.
Any package that contains, Kaju barfi must be packed in a bucket.
Package 2 is packed in a carton.

57. Which one of the following CANNOT be true?

A. Package 1- is packed in a tin.
B. Package 2 contains Cham cham.
C. Package 3 is packed in a tin.
D. Package 4 contains Kaju barfi.

58. If a package containing sweets and packed in a tin is not adjacent to a package
packed in a bucket, then which one of the following MUST be true?
A. Package I contains Petha
B. Package 4 contains Kaju barfi.
C. Package 4 contains Rasgulla.
D. Package 5 contains Gulabjamun.

59. If Rasgulla are contained in the maximum number of packages, which one of the
FOLLOWING must be troe?
A. Packaged is packed in a bucket.
B. Package 4 is packed in a bucket.
C A package containing Sohan halwa is packed in a bucket.
D. A package containing Gulabjamun is packed in a carton.

60. If package 4 contains Petha and Cham cham, which one of the following pairs of
sweets must be contained in the same package as each other?
A, Kaju barfi and Sohan halwa.
B. Gulabjamun and Petha.
C. Rasgulla and Cham cham.
D. Gulabjamun and Sohan halwa.

61. If package 3 is packed in a tin, which one of the FOLLOWING COULD be false?
A. Package 1 contains Sohan halwa.
B. Package 2 contains Rasgulla.
C. Package 3 contains Cham cham.
D. Package 4 is packed in a bucket.
Questions 62-65 are based on the following:
Seven persons A, B, C, D, E, F and G contested in a game show that had total prize
money ofRsl4 lakhs. Every contestant won some prize money and the highest prize
money was Rs. 3.5 lakhs. No two contestants won the same amount of prize money. For
every contestant the difference with the next highest and the next lowest winner is the
same won Rs.21akhs
B won more money than A
The difference of prize money between B and A was the minimum.
The difference of prize money between D and F was not the least.
There was at least one person whose prize money was between that of E and G

62. Which of the following is a proper list of persons in increasing order of prize money
won?
A. G,C,F,B,E,D,A
B. D,F,C,E,A,B,G
C. F,C,D,E,A, B,G
D. A,B,G,C,F,E,D

63. If D won more than E, and Band G together won Rs 3.5 lakhs, which of the following
MUST be true?
A. D won Rs 3.5 lakhs
B. A won Rs 1.5 lakhs
C. B won Rs 1.5 lakhs
D. C won Rs 50,000

64. If the difference of prize money between A and C is the minimum, which of the
following pairs MUST NOT have won prize money that differs by the minimal amount?
A. Band E
B. C and G
C. D and G
D. A and E

65. If the total money won by A and D is equal to that of G, and the difference between
E and D is at least 1 lakh, then which of the following MUST be TRUE?

A. A and B together won Rs. 3 lakhs

B. B and F together won Rs. 3.5 lakhs
C. Cand E together won Rs. 3 lakhs
D. B and c together won Rs. 3.5 lakhs