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
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