22.20         ndian    onom
     To neutralise this negative impact, governments         grant of a shipping ‘flag’ by a member of these
     usually increase personal tax allowances.               treaties to a non-member nation establishing the
                                                             legality of shipping to the latter (usually used for
        fiscAl neutrAlity                                    illegal activities).
     A stance in policy making by governments when               forceD sAving
     the net effect of taxation and public spending is
     neutral—neither encouraging nor discouraging            The enforced reduction of consumption in an
     the demand. As for example, a balanced budget is        economy. It may take place directly when the
     the same attempt of fiscal policy when the total tax    government increases taxes or indirectly as a
     revenue equals the total public expenditure.            consequence of higher inflation—a tool usually
                                                             utilised by the developing countries to generate
        fisher effect                                        extra funds for investment. Also known as
                                                             involuntary saving.
     A concept developed by Irving Fisher (1867–1947)
     which shows relationship between inflation and              fob
     the interest rate, expressed by an equation popular
     as the fisher equation, i.e., the nominal interest rate This is the abbreviation of ‘free-on-board’—when
     on a loan is the sum of the real interest rate and      in the balance of payment accounting, only the
     the rate of inflation expected over the duration of     basic prices of exports and imports of goods
     the loan:                                               (including loading costs) are counted. It does not
                                                             count the ‘cost-insurance-freigth’ (CiF) charges
                           R = r + F;
                                                             incurred in transporting the goods from one to
          where R = nominal interest rate, r = real          another country.
     interest rate and F = rate of annual inflation.
          The concept suggests a direct relationship             form of A life insurAnce firm
     between inflation and nominal interest rates—
     changes in inflation rates leads to matching            A life insurance company can be a joint-stock or
     changes in nominal interest rates.                      mutual entity. If joint-stock, it has to have some
          The Fisher effect can be seen each time one        capital, to begin with. A mutual fund company
     goes to the bank; the interest rate an investor has     need not have any. Prudential, the second largest
     on a savings account is really the nominal interest     life insurance company in the UK was a mutual
     rate. For example, if the nominal interest rate on      fund company till a few years ago and had no
     a savings account is 4 per cent and the expected        capital. Standard Life, another big company, was
     rate of inflation is 3 per cent, then money in the      a mutual company till a few months ago. If such
                                                             big companies could function without any capital
     savings account is really growing at 1 per cent. The
                                                             till recently, there is no reason why LIC cannot.
     smaller the real interest rate the longer it will take
     for savings deposits to grow substantially when               The policyholders are the owners of a mutual
     observed from a purchasing power perspective.           company and the entire profit goes to them.
                                                             A significant proportion of the profit goes to
        flAg of convenience                                  shareholders in the case of joint-stock companies.
                                                             The LIC, owned fully by the Government, is
     Shipping rights in oceans and seas are governed         effectively a mutual fund company and it is
     by international treaties. Flag of convenience is a     not surprising, therefore, that pressure is being