CHAPTER I

MEANING AND NATURE OF BUSINESS

Meaning of Business:

In economics, business is the social science of managing people to organize and maintain
collective productivity towards accomplishing particular creative and productive goals,
usually to generate profit.

The term "business" refers to the state of being busy, in the context of the individual as
well as the community or society. In other words, to be busy is to be doing commercially
viable and profitable work.

In predominantly capitalist economies, businesses are typically formed to earn profit and
grow the personal wealth of their owners. Whether a business unit has one or two people
working at home or 100,000 operating in multiple units spread across the country, all
businesses share the same purpose i.e., to earn profit. Notable exceptions to this rule
include many cooperatives, non-profit organizations, and government institutions.

In other words, the owners and operators of a business have as one of their main
objectives the receipt or generation of a financial return in exchange for their work —
that is, the expense of time and energy — and for their acceptance of risk — investing
work and money without certainty of success.

However, the exact definition of business is disputable as is business philosophy; for

example, most Marxists use "means of production" as a rough synonym for "business."
Socialists advocate either government, public, or worker ownership of most sizable
businesses. Some advocate a mixed economy of private and state-owned enterprises.
Others advocate a capitalist economy where all, or nearly all, enterprises are privately
owned.

Features of Business:

Today’s business has the following charateristics:

1 Dynamic:

In today's turbulent world, globalization and technology are sweeping away the market
and industry structures that have historically defined competition. Swept away with them
are the classic approaches to corporate strategy, nearly all of which mistakenly assume
that a predictable path to the future can be paved from the experience of the past. Today,
the strategy cannot be taken as gospel. There are too many uncertain factors that nobody
can resolve. Even the best strategy is only a hypothesis. The business organisations
should respond to rapid changes in the business environment by adopting a new approach
to strategy – one that combines speed, openness, flexibility, and strategic thinking.
2 Competitive:

A company rarely is alone in selling to a given customer market. The company vies with
a host of competitors both from domestic and foreign markets. Competition though
unwelcome to business firms is a boon to the customers as he is exposed to wide varieties
of products. The customer has a choice. Competition benefits the economy as well. It
defines new ways of doing business and helps build new capabilities.

3 Immense opportunities:

Today there are plenty of business opportunities that can be exploited according to one’s
advantage. About 20 years back terms such as BPO, Call Centres, IT, Wealth
management or Risk management were unheard of. When it comes to outsourcing, India
is where the action is. And the outsourcing boom in the country is opening doors for
boosting the growth of other industries as well, like the retail sector.

4. Globalisation:

Internationalisation or Globalisation is fast becoming imperative for modern business.

Globalisation facilitates integration of economies and societies through cross country
flows of information, ideas, technologies, goods, services, capital, finance and
people. The essence of globalisation is connectivity. Cross border integration has its
own impact on a country’s cultural, social, political and economic environment.

5. Technology:

Technology impacts business in many ways. India’s influence in the technology industry
is clearly growing beyond its borders. For example, several larger systems integrators
who used to outsource work to India, but now look to India for their strategic decision-
making abilities. India has a huge amount working in its favour, including a large
English-speaking population, and a rapidly increasing pool of skilled college graduates
and engineers. At present in the field of information technology, India is looking to
expand its own internal software and services industry, and then move into other global
markets.

6 Information Systems:

Another feature of business is the recognition of and need for information. With rapid
developments in the field of information technology, the world itself has shrunk to one
small global village. Today access of information from anywhere at anytime is possible.
E-business has become the order of the day, which is about making extensive use of
computer and communication technologies in critical business processes such as
designing products, coordinating value added work, and integrating across an enterprise.

7. Mass Production:
Mass production is the norm followed by business enterprises today. With machines
gradually replacing manual labour, production in bulk has been possible. New Channels
of distribution, supermarkets, hypermarkets, discount stores etc., have sprung up to meet
the challenges of mass production.

8. Diversification:

No matter how great a product is, it will surely have, at least, a distant rival. This rival
might not be able to compete on quality but it might be able to compete on price, ease of
use, customer support and so on. ‘One-size-fits-all’ is clearly inappropriate. Therefore the
business enterprises should understand the importance of product diversification.
Generally there are three types of diversifications:

 Concentric Diversification: It refers to the process of adding new and related

products or services to the existing product line. For e.g. A company
manufacturing computer tapes might start manufacturing audio cassette tapes.
 Horizontal Diversification: It refers to the process of adding new products that
could appeal its current customers, but technologically unrelated to its current
product line. For eg., an audio cassette manufacturing company might go into
production of cassette holding trays, even though they require a different
manufacturing process.
 Conglomerate Diversification: A company might seek new businesses that have
no relationship to the company’s current technology, products or markets. In the
above example where the company considers new business areas such as real
estate or fast food services.

Business Objectives:

Objectives are the broad set goals which the organisation seeks to achieve. At this point it
is better to familiarize ourselves with certain terms like the vision and mission statements.
Vision is a broad explanation of why the firm exists and where it is trying to march
ahead. A vision becomes tangible a mission statement. A mission statement typically
gives the organisation its own unique identity, business emphasis and path for
development. Objectives common to most businesses include:

1 Profit making:

Making profit is the primary goal of any business enterprise. It is the main incentive,
motivator, objective indicator of productivity and a solid basis of growth, expansion and
survival.

2. Growth:
Business should grow in all directions. It should over a period of time strive to add more
products into its product line diversify and increase its market share.

3. Power:

Business houses have vast resources. These resources confer enormous economic and
political power on owners and managers of business ventures. Several businessmen have
used their power for the good of the society.

4 Employee satisfaction and Development:

Concern for employees continues to be an important aspect of management. Caring for

employees and providing for their development has been one of the objectives of
enlightened business enterprises. The Tatas are a legend in pursuing this objective.

5 Quality products and Services:

Persistent quality of products earns brand loyalty, a vital ingredient of success. Hindustan
lever is flourishing because of the quality of its products.

6. Market leadership:

If the organisation has the largest market share by volume or by value, then it can claim
to be a market leader. It involves innovating major development in the market i.e.,
breaking through with a totally new product or service. Looked at this way, market
leadership does not require huge financial or material resources. It requires human
capital, ideas, innovation, and determination. The resources lie within yourself if you
choose to lead your market.

7. Challenge:

Business offers vast scope and poses formidable challenges. The worth of an individual is
tested more in business than in any other profession.

8 Creation of new ideas:

It is through business houses new ideas are given shape and converted into useful
products and services.

9 Service to society:

Business is a part of society. It benefits the society by providing safe and quality goods at
reasonable prices, providing employment opportunities and maintaining and protecting
the environment
10. Good Corporate citizenship:

It implies that the unit complies with the rules of the land by paying taxes to the
government regularly and discharging its obligations as per the rules of the land.

Questions

Section A (2 marks)

1. Define Business
2. Mention four characteristics of business
3. Define Objective. Mention any two
4. What do you understand by vision and mission statement?

Section B (8 marks)

1. What are the characteristics today’s business?

2. Explain the nature of business environment

Section C (12 marks)

1. What are the goals and characteristics of today’s business

Reference:

Essentials of Business Environment – K Ashwattappa, Himalaya Publishers

Business Environment – Vijayashree, R Chand & Co

 CHAPTER II

BUSINESS ENVIRONMENT

Meaning and Definition:

Every business organisation has to interact and transact with its environment. Hence, the
business environment has a direct relation with the business organisation. Obviously
then, the effectiveness of interaction of an enterprise with its environment primarily
determines the success or failure of a business.

Environment literally means the surroundings, external objects, influences, or

circumstances under which someone or something exists.

Davis keith defines the business environment as “the aggregate of all conditions, events,
and influences that surround and affect it.”

Wiiliam F Glueck amd Lawrence R Jauch wrote thus “the environment includes factors
outside the firm which can lead to opportunities for or threats to the firm. Although there
are many factors, the most important of the sectors are socio-economic, technological,
supplier, competitors and government.

Salient Features:

The nature of the environment in which the enterprise operates determines the nature of
its business policy. For instance, Rapid social change leading to a transformation of the
society has become the order of the day. Industrialisation has led to the emergence of the
organised segment in our society. Therefore taking care of the nature of the business
environment enables the corporate policy maker to:

 Produce goods and services that match the requirements of the society
 Adapt the organisation to dynamic conditions of the society.
 Match the Organisational policies and resources with social needs and
 Contribute to the social responsibility of business.

Objectives:

The objectives of the study of business environment include:

1. It helps an organisation to develop its broad strategies and long-term policies

2. It enables an organisation to analyse its competitor’s strategies and thereby
formulate effective counter strategies.
3. Knowledge about the changing environment will keep the organisation dynamic
in its approach
 4. Such a study enables the organisation to foresee the impact of socio-economic
changes at the national and international level.
5. Executives are able to adjust to the prevailing conditions and thus influence the
environment in order to make it congenial for business.

There are two sets of factors – internal and external-which influence the business
policy of an organisation.

Business Environment

Internal Factors External Factors

Organisational resources Social Factors

Research and Design Economic Factors

Financial capability Cultural Factors

Marketing capability Geographic Factors

Operations capability Technological Factors

Political Factors

Legal Factors

Ecological Factors

Government Policies

Labour Factors

Competition

Location
The internal factors are known as controllable factors because the organisation
has control over these factors. The external factors are known as uncontrollable
factors because such factors are largely beyond the control of the individual
enterprise. The term ‘business environment’ generally refers to the external
environment and includes factors outside the firm which can lead to
opportunities or threats to the firm.

Environmental Factors:

We may now examine the environmental factors briefly:

1 Social Factors:

There are many social factors that affect the policy and strategy of a firm. These
include Culture, values, tastes, preferences, social integration and disintegration.
Every business organisation has a social responsibility. It operates within the
norms of the society and strives to satisfy the needs and wants of the society.

2 Economic Factors:

The economic factors that influence a business environment are per capita
income, national income, infrastructure development, capital formation, resources
mobilization, etc. There is a close relationship between business and its economic
environment. Besides, the economic performance of a country determines the
business environment.

3 Cultural Factors:

Managers and policy makers in a global business cannot disregard cultural

variables like social and religious practices, rural community norms, beliefs and
so on which are predominant in India especially in the rural society. Cultural
differences play a vital role in rural societies which are unthinkable for any
international manager or an urban Indian manager.

4 Geographic factors:

In geographic location, seasonal variation, climatic conditions, and such other

factors considerably affect the taste and preferences of the customers. Hence,
business policy makers must consider ge

ographic factors analytically.

5 Technological Factors:
Technology is considered to be one of the most important factors of any business
environment. That is why the government, in its industrial policy resolutions,
industrial licensing policies and even in liberalisation policies, assigned great
importance to sophisticated technology and technology transfer. Technology
changes fast therefore the businessmen should stay alert and keep pace with it.

6 Political Factors:

The philosophy and approach of the political party in power substantially

influences the business environment. For example, the communist-ruled state of
West Bengal had the largest number of industrial disputes and man days lost
through agitation. Thus, the management of business enterprises and their policies
are considerably influenced by the existing political systems.

7 Legal Factors:

Every aspect of business is regulated by law in India. Hence the legal

environment plays very vital role in business. Laws relating to industrial
licensing, company formation, factory administration, industrial disputes,
payment of wages, monopoly control etc., are examples of what forms the legal
business environment in India.

8 Ecological factors:

Ecology deals with the study of the Environment, Flora and Fauna. Protection of
the environment and preservation of ecological balance is the responsibility of
every business organisation. Pollution-free technology and recycling of industrial
wastes and effluents has become a corporate concern now. Important legislations
in this connection are:

 The Water (Pollution and Control of Pollution) Act, 1974

 The Air (Prevention and Control of Pollution) Act, 1981
 The Environment (Protection) Act, 1986

9 Labour Factors:

While labour within the organisation makes its internal environment, general
labour policies and climate may form a part of the external environment. If
militant trade unionism is widespread in a particular industrial location, such
militancy would become the labour climate there and make an external element.

10 Competitions:

Competitive market condition is an important environmental factor, especially in

a global business environment. In India the market is controlled by the
centralized authority – the government and the market forces – demand and
supply. In a competitive situation, the market forces of demand and supply must
interact with each other to provide a congenial business environment. As a part of
globalisation, a competitive market has come to stay.

11 Locational factors:

Locational policies are adopted by many countries for attaining economic

balance. In India, metropolitan cities and their suburbs have been active with
business and industrial activities while many areas continued to remain backward.
Inorder to develop the backward areas and to attain economic balance, an
industrial dispersal policy has been adopted by the government to boost business
in India.

Process of Environmental analysis:

Firms which systematically analyse the environment are more effective than those
which don’t. The analysis consists of four sequential steps:

Scanning

Monitoring

Forecasting

Assessment

Scanning:

Scanning is the process of analyzing the environment for the identification of the
factors which would impact the business in the near future. Scanning involves
general surveillance of all environmental factors inorder to identify early signals
of possible environmental change.

Monitoring:

Monitoring involves following signals that were picked up from the process of
scanning. Scanning is essentially exploratory in nature whereas monitoring is
more focused and systematic in approach. The outputs of monitoring are
threefold:

 A specific description of environmental patterns to be forecast

 Identification of trends for further monitoring
 Identification of patterns requiring further scanning
Forecasting:

Anticipating the future is essential for identifying the future threats and
opportunities and for formulating strategic plans. Scanning and monitoring
provide a picture of what has already taken place and what is happening, whereas
forecasting gives the evolutionary path of anticipated change.

Assessment:

Scanning, monitoring and forecasting are not ends in themselves. Assessment

involves identifying and evaluating how and why, current and projected
environmental changes affect or will affect strategic management of the
organisation.

Benefits/Importance of Environmental analysis:

Environmental analysis has several benefits:

1. The very idea of environmental analysis makes one aware of the

environment-organisation linkage.
2. It helps the business organisation to identify the present and future threats
and opportunities.
3. It helps to understand the transformation of the industrial environment.
4. Technological forecasting will indicate some of the future opportunities
and challenges.
5. A very important benefit of environmental analysis is its contribution to
identification of risks.
6. Environmental analysis is prerequisite for formulation and modification of
strategies.
7. It keeps the manager informed, alert and dynamic.

Limitations of Environmental Analysis:

Environmental analysis has certain limitations. These limitations are:

1. Environmental analysis does no foretell future, nor does it eliminate

uncertainty for any organisation.
2. It does not guarantee organisational effectiveness. It is just one of the
inputs for formulation of a strategy.
3. Too much reliance on analysis makes a manager become complacent.
 Questions

Section A (2 marks)

1. What is business environment?

2. Bring out the limitations of environmental analysis
3. What are the steps in environmental analysis?
4. What are the advantages of environmental analysis?
5. What do you mean by scanning in environmental analysis?

Section B (8 marks)

1. Bring out the process in environmental analysis?

2. What are the advantages and disadvantages of environmental analysis?
3. Bring out the features and objectives of business environment

Section C (12 marks)

1. Explain the factors that affect the business environment

References:

Business Environment – K Ashwattappa, Himalaya Publishers

Business Environment Text and Cases – Francis Cherunillam, Himalaya

Publishers
 CHAPTER III

BASIC INDICATORS OF ECONOMIC DEVELOPMENT AND

PERFORMANCE OF INDIAN ECONOMY

Introduction:

The Indian economy, like every other economy, performs three vital functions,
viz production, consumption and growth. While USA, Sweden, West Germany,
Japan etc are developed economies with technologically advanced agriculture,
industry, transport and communication system etc, the Indian economy has been
struggling to become a developed economy. The reasons for underdevelopment
include:

1. Low per capita income

2. Inequitable distribution of wealth and income
3. Heavy dependence on agriculture
4. Heavy population pressure
5. Unemployment
6. Capital scarcity and low rate of capital formation
7. Use of primitive technologies.

After independence, the government took a keen interest in the economy. In the
last fifty years, the Indian economy has developed a large number of industries
that produce capital equipments and raw materials. India has now become self
sustainable. Now let’s look at the basic indicators of economic development:

National Income:

This refers to the money value of all the final goods and services in a country
during a given period of time. Since it is difficult to express the value of output in
different measuring units such as metres, litres, quintals, tones etc., money is used
as a common measure of aggregate output. National income can be estimated
either at current prices (costs prevailing in the current year of estimation) or
against constant prices (some past year’s or base year’s price). In constant prices
the national income of 2005 – 2006 has shown a remarkable increase of 9.1%
over the national income of 2004 – 2005. In current prices during the year 2005
-2006 the national income has shown an impressive growth of 13.8%.

GDP:

GDP can be estimated at market prices and at factor cost. GDP at market price
is the money value of all the final goods and services produced in the domestic
territory of a country in a year’s time. Domestic territory of a country does not
simply comprise of political boundary but it also includes territorial waters of the
country, ships and aircrafts operated by the residents of the country between two
 or more countries, fishing, vessels, oil and natural gas rigs, embassies, consulates
etc located abroad. The money value of all these goods and services taken
together gives us the GDP.

Thus GDP at market Prices is given by:

GDP = P(Q) + P(S)

Where P = per unit market price

Q = gross output of goods and

S = service.

GDP at Factor Prices is estimated as the sum of net value added by the different
producing units and the consumption of fixed capital. Conceptually, the value of
GDP, whether estimated at market prices or at factor cost, must be identical. This
is so because the final value of the goods and services (market prices) must be
equal to the cost involved in their production (factor cost). However, GDP at
market prices includes indirect taxes and does not take into account the subsidies
given by the government, therefore in order to arrive at more realistic results,
indirect taxes must be subtracted from and subsidies must be added to gross
domestic product at market prices.

Therefore,

GDP = GDP – IT + S

IT = Indirect Taxes

S = Subsidies.

GDP for the year 2005 – 2006 has grown by 9% as against the growth rate of
7.5% during the previous year. The growth rate of 9.0 per cent in the GDP during
2005-06 has been achieved due to high growth in agriculture, forestry and fishing
(6.0 %), manufacturing (9.1%), construction (14.2 %), trade, hotels & restaurants
(8.2%), transport, storage and communication (13.9%), financing, insurance, real
estate & business services (10.9%), and community, social and personal services
(7.7%).

Per Capita national Income

It means the total national income divided by the number of people in the nation. The per
capita income (per capita net national product at factor cost) in real terms, has registered
an increase of 7.4 per cent during the year 2005 - 2006.
Growth in Services Sector:

Since 1991, the services sector has been growing at an annual average rate of 9%,
contributing about 60% of the overall growth of the economy, and raising its share to
over 50% of GDP. India’s exports of services have been growing at close to 20% per
annum, increasing their share in world exports to 1.5%, compared to the dismal share of
merchandise exports at only 0.8%.

The most visible growth has been in information technology (IT) and business process
outsourcing (BPO) services. Yet, other services sectors like tele-communications,
financial services, community services and hotels and restaurants have grown
considerably faster in recent years. There is a direct correlation between growth and a
combination of access to external markets and speed of domestic reforms in the sector.
This explains the growth of IT, tourism, maritime transport, and telecommunications.

Savings and Investment:

Savings can be defined as the excess of current income over the current expenditure. For
the purpose of estimating the domestic saving, the economy has been divided into three
broad institutional sectors:

 Household sector
 Private corporate
 Public sector

According to the government data, savings accounted for 32.4% of the Gross Domestic
Product (GDP) in 2005-06, while gross capital formation was 33.8%. This is indeed a
record growth which could easily form the basis for sustaining the 9% growth for the
economy in the coming years. The rise in domestic savings would mean that a large part
of the total requirement of investment, totaling about 32% of the GDP would be easily
met by internal resources.

Foreign Trade and Balance of Payment:

Foreign trade contributes to the growth and development of a developing country by

offering to it opportunities to expand its output base as also opportunities to specialise in
certain areas of production, to gain access to new materials and machinery as also to
acquire latest technological know-how. Foreign trade in India, particularly since
independence, has offered these opportunities in an ample measure.

Balance of Payment account is a systematic record of transactions of a country involving

claims on and liabilities to the rest of the world. Most of these transactions are between
residents and non-residents.

Cumulative exports during April - December 2006 recorded a growth of 22.0 per cent.
India’s merchandise imports maintained the growth momentum in December 2006
registering a growth of 31.1 per cent on a year on- year basis. Non-oil imports accounted
for 70.3 per cent of the incremental imports in December 2006. The cumulative imports
during April-December 2006 posted a 24.8 per cent growth on top of 37.8 per cent a year
ago. Therefore the trade deficit showed a marginal decline during December 2006 due to
a decline in imports.

The current account which is the main component of India’s Balance of Payments (BOP),
started showing deficit trend since 2004-05, after surplus for the consecutive three years
since 2001-02. This trend of deficit on current account was continued in the first half of
the year 2005- 06 (April- September). The size of the current account deficit in the first
half of the current year was about twenty seven times of the deficit that occurred in the
corresponding period of the previous year. This high level of deficit amounted to US $
12.96 billion during April-September, 2005 as against just US $ 0.48 billion registered
during the corresponding period of the previous year. This deficit was caused by a
burgeoning excess of merchandise imports over exports. At present India is one of the
progressive economies in the South-East Asia region to have a fairly large current
account deficit.

The capital account, however, recorded a healthy surplus of US $ 19.46 billion during
first half of the current financial year, which is remarkably more than that of US $ 7.42
billion recorded in April-September, 2004. The cumulative impact of higher debt and
non-debt creating flows was a notable reason for expansion in the size of capital account
surplus. This expansion in the capital account surplus has resulted in retaining an overall
surplus in the balance of payments.

Performance of the Indian Economy

The performance of the Indian economy since Independence as measured by the

normal indicators of economic growth has been impressive. The Indian economy was
literally stagnant during the first half of this century. The growth momentum started with
the attaining of independence. The annual growth rate in GDP, however, remained below
4 per cent until the end of 70s. It was only in the 80s that the annual growth rate crossed
the 5 per cent figure. Between 1981-82 and 1990-91, the growth rate of the economy was
5.68 per cent per annum. 1991-92 was an exceptionally bad year for reasons well known.
If we leave out that year, between 1992-93 and 2004-05 the average growth rate was 6.25
per cent. Even if 1991-92 is included, the growth rate since then would be 5.8 per cent.
Because of the fairly substantial growth in population, the growth rate of per capita
income was much lower. During the period 1950-51 to 2003-04 the per capita income,
in 1993-94 prices, increased from Rs. 3687 in 1950-51 to Rs. 11798 in 2003-04,
registering a growth rate of about 2.18 per cent per annum.

Obviously the growth in national income and per capita income is reflected in a
number of social performance parameters such as rise in the literacy rate, the availability
of medical and health facilities, expansion in education etc. The crude death rate per
thousand has declined from 22.8 during 1951-61 to 8.1 in 2002. Life expectancy at birth
during this period increased from 41 years to 65.4 years. Infant mortality rate per
thousand live births declined from 146 during 1951-61 to 63 in 2002. The general
literacy rate increased from 18.3 per cent of the total population in 1951 to 65.4 per cent
in 2001. More heartening, during this period the female literacy rate went up from 8.86
per cent to 54.2 per cent. The head count poverty ratio has declined from 54.9 per cent in
1973-74 to 26.1 per cent in 1999-2000.

While the achievements of the post-independence Indian economy are indeed

striking in comparison with the record of our performance during the first fifty years of
the twentieth century, it has nevertheless fallen short of our expectations. Our
performance has also been well short of what has been achieved by other developing
countries, particularly, in East Asia triggering the concern that we performed well below
our potential. It is only in this decade that India is beginning to be recognised as one
among the fastest growing economies.

Questions
Section A (2 marks)

1. What do you understand by the term GDP?

2. What is per capita income?
3. What do you understand by the term current prices and constant prices?

Section B (8 marks)

4. Analyse in brief the performance of the Indian economy over the past decade

Section C (12 marks)

5. Explain the basic indicators of economic development

References:

Macro Economics, 3rd Edition – Ugene diulio, Tata McGraw Hill

Macro Economic Theory and Applications – G S Gupta, Tata McGraw Hill
Macro Economic Theory – M L Jhingan, Vrindha Publications
Macro Economic analysis – Edward Shapiro, galgotia Publishers
 Unit II

CHAPTER 1V

ECONOMIC ENVIRONMENT

Nature

Business depends on the economic environment for all its inputs and to sell its finished
goods as well. The Economic environment as far as a business unit is concerned, means
the price levels of factors of production and their availability, purchasing power of
consumers and the general forces that affect production and exchange activities. Indian
economy can be classified in various ways, backward, less developed, developing,
emerging etc. All these point at two important features:

 Indian economy is below its potential growth levels

 The quality of life of people is low

This however presents a partial picture. For any business organisation, the understanding
of the basic nature is essential as it constitutes the core of macro-business environment
under which it operates. The nature of the economy can be understood through the
following sections.

A Socialistic System:

The phenomenal expansion of the public sector by itself bears testimony to the socialist
philosophy of the State. But then there was gradual disinvestment in the public sector
during the process of economic reforms initiated in 1991. This disinvestment process is
construed as an exercise to reduce the gigantic public sector to manageable limits and to
unleash some more competitive forces in the economic system. The socialistic
philosophy of the Indian Economy is reflected more in its macro economic policies, five
– year plans and economic legislations.

A Welfare State:

A welfare state is continuously engaged in improving the average quality of life of the
people and takes particular care of the weaker, marginal or vulnerable sections of the
society, which are prone to exploitation. Right against exploitation is one of the
fundamental rights provided in the constitution. Confirming to the constitutional
obligations, the government undertakes a number of welfare programmes for the broader
enhancement of human well-being and general quality of life of the people. The nature of
welfare economy is adequately reflected in the objectives of five-year plans and other
policy documents like central budget, monetary policy, credit policy and fiscal policy.

Mixed Economy
India has traditionally been called a mixed economy. There are substantial comparable
roles of the private enterprise and market mechanism on the one hand and that of the
government and the public sector on the other. The constitution itself prescribes, though
implicitly, a mixed economic system, in that it promises necessary economic freedom and
progressive ownership of the means of production by the Government. Even in capitalist
economies, a substantial public sector exists but its size relative to the private sector is
smaller. In India public and private sector are comparable in size. Even after
disinvestments of the public sector undertakings, public sector has a dominating presence
in the economy. Under the present industrial policy, a number of areas which were earlier
a preserve of the public sector, have been opened to the private enterprise, but the public
sector, for a good time to come, will continue to have a dominant presence perpetuating
the mixed character of the economy.

Comparison of Capital formation in Public and Private Sector of India’s Mixed

Economy 2001 – ‘02
Parameter Value (Rs ‘000 Cr) As % of GDP
Public Private Sector Public Sector Private Sector
Sector
Gross Fixed 141 316 6.8 15.1
Capital Formation
Gross Domestic 148 330 7.1 15.8
Capital Formation
Source : Compiled from Government of India, Economic Survey, 2001 – ’02 Various
Tables.

The Table shows that is spite of public sector disinvestments and privatisation, capital
formation in the public sector has been substantial, though less than that in the private
sector. The relative position is reversed if we compare the employment figures in the
organised segment. As on March 31, 2000 total employment in the public sector was
about 2 crores compared to only 86 lakhs in the private sector.

Dualistic Economy

The structure of the Indian Economy is typically dualistic, characterised by the co-
existence of an ultra – modern sector using sophisticated technology and traditional
sector using outmoded methods of production. Similar dualism is witnessed in society
with marked variations is life-styles, cultural values, attitudes and beliefs. The sectors
which use highly modern and sophisticated technology include petro – chemical, iron and
steel, Information Technology, telecommunication, mineral exploration, automobiles,
civil construction, civil aviation and shipping where as traditional and outmoded
technology is used in such areas as agriculture, trade, local transportation and small scale
Industries. There are in general, clear lines of demarcation between the two sectors and
the traditional sector is by and large, unable to gain from the modern sector, as the
technology transfer is either absent or extremely slow. As the modern sector is capital-
intensive, it fails to create jobs at the rate at which it grows. The burden of employment
therefore, falls on the traditional sector, which leads to under-employment and disguised
unemployment. Capital formation in the traditional sector is slow and depends heavily on
the state support.

Planned Economy

The development and growth of the Indian Economy takes place under a full fledged
system of economic planning by the Government. Five year plans were started from the
year 1951 and The Planning Commission is charged with the responsibility of framing
them. Indian planning is fairly comprehensive touching all the major segments of the
economy. It lays down objectives as per constitutional obligation and needs of the
economy and established priorities of action in view of limited resources. A fiver-year
plan lays down the overall development strategy, assesses the resource requirements and
lays down resource mobilization pattern. The main objectives of planning have been a
high rate of growth, reduction in income and wealth inequalities, development of
agriculture and infrastructure, poverty reduction, price stability, employment generation,
a healthy balance of payments position and balanced economic development.

Economic Factors

Economy is a complex and dynamic environment and it affects various business

decisions. In turn, the economic growth takes place when more and more business
opportunities are effectively utilized in a society. That is to say, productivity and ability
in technological adaptation of business units help in economic development. Thus
business development and economic growth are inter-dependent. Now we can analyse
individual economic factors which influence the business sector:

1. Capital:

Almost every kind of organisation needs capital in the form of machinery, buildings,
inventories of goods, office equipments, tools of all kinds and cash. Cash resources may
be generated within an organisation out of profits, but organised enterprises are usually
dependent for capital requirements on various outside sources. The sources include
savings of people, loans from institutions, government assistance and issue of shares and
debentures.

All kinds of business operations are dependent on the availability of capital. Countries
vary considerably in this availability. Advance countries have developed financial
markets that help their businessmen in mobilizing capital very easily. Whereas in
developing country like India, the capital market is immature, it is not that easy for our
businessmen to raise the needed capital. Therefore non availability of capital may hamper
productivity.
2. Labour Price: The price of labour is also an important factor. The rise of wages in the
United States has often caused cost problems for the American producer who would sell
in many foreign countries. In India, the wage rates are very low when compared to the
United States and the countries of Western Europe and Western Asia. Therefore, the
price, quality and availability of labour affect the production cost very much. Low wages
in India has resulted in immigration of labour to advanced nations and on the other hand
cheap labour has attracted MNCs to invest here.

3. Price Levels:

The input side of an enterprise is clearly affected by the price level changes. If prices go
up rapidly, the problems created in the economic environment on both input and output
sides are more. That is, if the cost of input or the factors of production increase
enormously then the cost of products will also increase. Therefore the real value of
income of the consumers is eroded by high prices. So a normal inflation alone will help
business activities.

4. Productivity:

Productivity means ratio of input and output. When productivity is high prices can be
low. However productivity is partly dependent on the state of technology. When
technology improves, productivity also develops, that result in economic developments.
The other factors or productivity are entrepreneurial culture, support from government,
quality consciousness and so on.

5. Entrepreneurs and Managers:

Another major economic input is the availability of high quality entrepreneurs and
managers. An entrepreneur is a person who sees business opportunity, obtains the needed
capital, knows how to put together an operation successfully and has the willingness to
take a personal risk of success or failure. The availability of intelligent and able managers
has considerable effect on economy. This availability and that of entrepreneurs, is
correlated with the social environment, particularly in the areas of education, and cultural
development.
6. Government Policies:

Likewise, another important element on the input side is the nature of government
policies. These aspects of the political environment have their economic impacts on all
kinds of organizations. Government’s fiscal policy, that is, collecting tax and pubic
expenditure has impact on business and non-business operations, as the tax affects every
segment of our society. All the decisions, policies, programs and laws of government
influence business decisions. To quote some examples of government policies affecting
business units – Industrial Policy, Monetary Policy exercised through the central bank,
economic planning etc.,

7. Status of Consumers:

On the output side of any enterprise, are the customers. Without customers, a business
cannot survive. Therefore lot of money is spent on research, market analysis, innovation
and sales promotion. So, the output of business (products/services) is directed to satisfy
the consumers, which depends upon their purchasing pattern, which in turn depends upon
income level, standard of living, level of savings and buying capacity of money which are
determined by the economic conditions of the country.

8. Economic Trend:

The economic trend in a country is the set of overall economic conditions or climate. It is
a combination of Government’s attitude, investors mood, consumption pattern and
producers initiative and risk taking ability. It can also add the natural resources, climate,
foreign trade, stock market etc.,

The overall economic trend may be favourable or unfavourable at a point of time, to the
producers. Economists classify the trend into inflation and deflation or, in business terms
both boom and depression. The cause for this trend is not a single factor but it is
multifaceted and dependent on one another. For example a positive trend result in more
production, more employment, more individual income, more consumption, more
demand and hence, again more production. This cycle is further triggered up by more
savings and investment. The other is the reverse of this situation.

9. Globalised Economy:

Today, the global trade has become a dominant factor in most of the economies. Today
India has also entered the open market economy from protective trade. By signing the
GATT agreement out nation also has adopted new economic policy with privatization,
liberalization and globalization. The disputes in Patent Act, Import and Export, Trade
Agreements etc, will be hereafter referred to WTO. Hence, our economy now has become
more competitive with the invasion of foreign goods and operations of MNCs. Globalised
capital will pose new challenges to the home businessmen though they have opportunities
to enter into foreign markets. Thus the Globalised economic situation is a new economic
factor that is much influential on business.

10. Economic Planning

The launching of the First Five Year Plan in April 1951 initiated a process of
development aimed not only at raising the standard of living of the people but also
opening out to them new opportunities for a richer and more varied life. This was sought
to be achieved by planning for growth, modernisation, self-reliance and social justice. A
largely agrarian feudal economy at the time of independence has been transformed into
one based on a well developed and a highly diversified infrastructure with immense
potential for industrialisation through these Five – Year Plans. Income and consumption
levels have significantly risen. Consumption basket has diversified. Incidence of poverty
has visibly declined. The average life expectancy has gone up. The death and the birth
rates have declined. Literacy has improved and the educational base has widened.

11. Agriculture

We now have a robust and resilient agricultural economy with near self-sufficiency in
food production.. We have a large pool of skilled manpower and ample entrepreneurial
resources. About three-fifths of the work force is in agriculture, leading the government
to articulate an economic reform program that includes developing basic infrastructure to
improve the lives of the rural poor and boost economic performance.

12. Industry:

We have built a diversified industrial and service structure India's diverse economy
encompasses traditional village farming, modern agriculture, handicrafts, a wide range of
modern industries, and a multitude of services. Services are the major source of economic
growth, accounting for more than half of India's output with less than one quarter of its
labor force.. The government has reduced controls on foreign trade and investment.
Tariffs averaged 12.5% on non-agricultural items in 2006. Higher limits on foreign direct
investment were permitted in a few key sectors, such as telecommunications. However,
tariff spikes in sensitive categories, including agriculture, and incremental progress on
economic reforms still hinder foreign access to India's vast and growing market.
Privatization of government-owned industries remained stalled in 2006, and continues to
generate political debate. The economy has posted an average growth rate of more than
7% in the decade since 1996, reducing poverty by about 10 percentage points. India
achieved 8.5% GDP growth in 2006, significantly expanding manufacturing. India is
capitalizing on its large numbers of well-educated people skilled in the English language
to become a major exporter of software services and software workers. Economic
expansion has helped New Delhi continue to make progress in reducing its federal fiscal
deficit.

Thus these are the economic factors affecting both input and output side of business
moreover Foreign trade controls, infrastructure etc. also have indirect influence on
business units.

Questions

Section A (2 marks)

1 What do you mean by capitalist economy?

 2 What is meant by mixed economy?

3 Give the features of Indian Economy

Section B (8 marks)

4. Bring out the nature of the Indian Economy

5. Explain any 5 economic factors

Section C (12 marks)

6. Explain the Economic factors that affect the business environment

References:

Macro Economics, 3rd Edition – Ugene diulio, Tata McGraw Hill

Macro Economic Theory and Applications – G S Gupta, Tata McGraw Hill
Macro Economic Theory – M L Jhingan, Vrindha Publications
Macro Economic analysis – Edward Shapiro, galgotia Publishers
 CHAPTER V

INDUSTRIAL POLICY

 Introduction

In 1948, immediately after Independence, Government introduced the Industrial Policy

Resolution. This outlined the approach to industrial growth and development. It
emphasised the importance to the economy of securing a continuous increase in
production and ensuring its equitable distribution.

After the adoption of the Constitution and the socio-economic goals, the Industrial Policy
was comprehensively revised and adopted in 1956. To meet new challenges, from time to
time, it was modified through statements in 1973, 1977 and 1980.

The Industrial Policy Resolution of 1948 was followed by the Industrial Policy
Resolution of 1956 which had as its objective the acceleration of the rate of economic
growth and the speeding up of industrialisation as a means of achieving a socialist pattern
of society. In 1956, capital was scarce and the base of entrepreneurship not strong
enough. Hence, the 1956 Industrial Policy Resolution gave primacy to the role of the
State to assume a predominant and direct responsibility for industrial development.

The Industrial Policy statement of 1973, inter alia, identified high-priority industries
where investment from large industrial houses and foreign companies would be
permitted.

The Industrial Policy Statement of 1977 laid emphasis on decentralisation and on the role
of small-scale, tiny and cottage industries.

The Industrial Policy Statement of 1980 focused attention on the need for promoting
competition in the domestic market, technological upgradation and modernisation. The
policy laid the foundation for an increasingly competitive export based and for
encouraging foreign investment in high-technology areas.

These policies created a climate for rapid industrial growth in the country.

POLICY OBJECTIVES

Pandit Jawaharlal Nehru laid the foundations of modern India. It is due to his initiative
that India now has a strong and diversified industrial base and is a major industrial nation
of the world. The goals and objectives of the Industrial Policy include:

 rapid expansion of opportunities for gainful employment

 progressive reduction of social and economic disparities

  removal of poverty and attainment of self-reliance

 to attain international competitiveness

Any industrial policy must contribute to the realisation of these goals and objectives at an
accelerated pace.

INDUSTRIAL POLICY 1991

In pursuit of the above objectives, Government has decided to take a series of initiatives
in respect of the policies relating to the following areas. 

A. Industrial Licensing.

B. Foreign Investment

C. Foreign Technology Agreements.

D. Public Sector Policy

E. MRTP Act. 

A package for the Small and Tiny Sectors of industry is being announced separately.

A.    INDUSTRIAL LICENSING

Industrial licensing is the most important instrument which has been used by the
Government for directing allocation of resources between industries and regions. But in a
dynamic global market, enterprises must be enabled to swiftly respond to the fast
changing external conditions. Entrepreneurs must be free to make investment decisions
on the basis of their own commercial judgement. This will facilitate them to achieve
technological dynamism and international competitiveness. Therefore, Government
should change its role from exercising control and regulation to that of facilitator and
guide. Keeping this objective in view, the following changes are introduced:

1. All areas of industrial activity excluding areas of security and strategic

importance (Annexure I) are thrown open to private sector.

2. Industrial licensing has been abolished for all industries excluding those (a) where
either strategic or environmental concerns dominate or the import content is
exceptionally high (Annexure II) and (b) which are reserved (836 items) for small
industry manufacturing.

3. Industrial licensing is not needed in location other than cities having a population
of more than one million, as per the 1991 census (Annexure III).
 4. Industrial licensing is not required not only for new units but also for new
products, as also substantial expansion and change of location for existing units.

5. Phased manufacturing Programmes (PMP) have been abolished for all new
industries and subsequently for all existing industrial projects. [Under a PMP, a
concerned enterprise has to progressively replace imported materials, parts and
components with materials, parts and components produced in-house or by other
Indian firms. The PMPs accompanied industrial licenses in a wide range of
industries involving assembly of parts and components (notably the vehicle,
machinery and electronics industries) prior to IP, 1991]

6. Re – endorsement scheme is applicable only (a) for industries where licensing is

compulsory and (b) within cities having a population of more than one million,
for all industries. [Re-endorsement scheme was first introduced in 1982. As per
the scheme, all those industrial units which had utilized 94% of the licensed
capacity over the previous five years were allowed to expand their production by
one-third thereof, without license. In 1986, the scheme was further liberalised by
reducing the cut-off limit to 80% capacity utilization]

7. All the industrial units which have obtained license of an item covered under
Annexure II of IP, 1991 prior to July 25, 1991, have to obtain Carry on Business
(C.O.B) license.

8. All entrepreneurs, who initiate new industrial units and indulge in substantial
expansions in delicenced industries, are required to file Industrial Entrepreneurs
Memorandum (IEM). IEM has to be obtained from and submitted (6 copies) to
Secretariat of Industrial Approvals (SIA) in the Department of Industrial Policy
and Promotion, Ministry of Industry as per the Industries Development and
Regulation (IDR) Act, 1951, along with crossed demand draft for Rs 1000/.

9. For licensing, application has to be obtained from and submitted to (with 8 spare
copies) the Secretariat of Industrial Approvals under IDR Act, 1951 along with a
cross demand draft for Rs 2500/.

10. All Industrial undertaking are required to submit monthly production returns to
concerned technical authorities (For e.g.: Textile Commissioner, etc) and a copy
to concerned administrative ministry or department.

11. An Investment Promotion and Project Monitoring Cell is set up in the Department
of Industrial Policy and Promotion, Ministry of Industry to provide information to
entrepreneurs and to monitor progress of implementation of various projects.

Thus, Industrial Delicensing has been a central feature of IP 1991.

B.    FOREIGN INVESTMENT

Along with Industrial Delicensing, IP 1991 brought about significant changes in the
foreign investment policy. These changes are designed to attract enhanced capital inflows
into India on a sustained basis and to encourage technology collaboration agreements
between Indian and foreign firms. Today, India welcomes direct foreign investment in
virtually every sector of the economy except those of strategic concern such as defence,
railway transport and atomic energy. Foreign trading companies are encouraged to assist
export activities. Foreign equity proposals, unlike in the past, need not necessarily be
accompanied by foreign technology agreements. Accordingly, the Foreign Exchange
Regulation Act (FERA), 1973 has been amended. The salient features of the new policies
towards foreign investment are:

1. Automatic approval for foreign equity participation upto 51% is granted in high
priority industries.

2. Foreign trading companies can have majority equity participation in trading

houses engaged primarily in export activity.

3. Foreign investment in hotel and tourism related industry upto 51% equity is
permitted.

4. Foreign investment upto 50% in Mining sector is allowed

5. Foreign investment proposals, where the parameters for automatic approval are
not met with such as, where foreign investment is in non-high priority industries,
proposals will have to be submitted to the Secretariat of Industrial Approvals
(S.I.A)

6. Existing enterprises can raise foreign equity upto 51% either as part of an
expansion programme or without expansion programme.

7. Foreign investor need not have a local partner, even when the foreign investor
wishes to hold less than full equity of the company. The portion of the equity not
proposed to be held by the foreign investor can be subscribed to by the public.

8. Use of foreign brand names/trade marks for sale of goods in India is permitted.

9. Foreign equity upto 100% is particularly encouraged in export oriented units,

power sector, electronics and software technology parks.

10. Foreign equity is permitted even in small scale enterprises upto 24%

11. Recently a Foreign Investment Promotion Council (FIPC) has been formed which
will promote investment opportunities in the country.
 12. Foreign companies engaged in manufacturing and trading activities abroad may
open branch offices, project offices or liaison offices in India, with necessary
permission of RBI.

C.    FOREIGN TECHNOLOGY AGREEMENTS (FTA)

To inject the desired level of technological dynamism, automatic approval for technology
agreement had been made possible in high priority industries. RBI accords automatic
approval to foreign technology agreements within prescribed monetary limits:

 Lumpsum payments upto Rs 10 million

 Royalty payments upto 5% of domestic sales and 8% of exports, over a period

of 10 years, from the date of the agreement or over a period of 7 years, from
the date of commencement of production.

 These payments are subject to an overall ceiling of 8% of total sales over a

period of 10 years from the date of the agreement of commencement of
commercial production.

Repatriation of Capital

Foreign capital invested in India is allowed to be repatriated with capital appreciation, if

any, after the payment of taxes due on them. The disinvestment is permitted in
accordance with the terms of the letters of approval granted at the time of approving the
foreign collaboration.

Repatriation of Sale Proceeds:

Repatriation of sale proceeds of assets held in India is allowed with prior RBI approvals
subject to the payment of applicable taxes.

Royalties and Technical know-how Fees

Indian companies that enter into technology transfer agreements with foreign companies
are permitted to remit payments towards know-how and royalty in terms of the foreign
collaboration agreement approval.

Technical Service Fees

Companies can hire the services of foreign technicians, and make remittances for
technical service fees, subject to the terms approved by RBI.
D.    PUBLIC SECTOR POLICY

The public sector has been central to our philosophy of development. In the pursuit of our
development objectives, public ownership and control in critical sector of the economy
has played an important role in preventing the concentration of economic power,
reducing regional disparities and ensuring that planned development serves the common
good.

After the initial exuberance of the public sector entering new areas of industrial and
technical competence, a number of problems have begun to manifest themselves in many
of the public enterprises. Serious problems were observed in the insufficient growth in
productivity, poor project management, over-manning, lack of continuous technological
upgradation, and inadequate attention to R&D and human resource development. In
addition, public enterprises have shown a very low rate of return on the capital invested.
This has inhibited their ability to re-generate themselves in terms of new investments as
well as in technology development. The result is that many of the public enterprises have
become a burden rather than being an asset to the Government.

Therefore the Government decided to adopt a new approach to public enterprises. The
priority areas for growth of public enterprises were marked as follows:

 Essential infrastructure goods and services.

 Exploration and exploitation of oil and mineral resources.

 Technology development and building of manufacturing

capabilities in areas which are crucial in the long term
development of the economy and where private sector
investment is inadequate.

 Manufacture of products where strategic considerations

predominate such as defence equipment.

At the same time the public sector will not be barred from entering areas not specifically
reserved for it.

E.    MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT (MRTP

ACT)

The principal objectives sought to be achieved through the MRTP Act are as follows:

i. Prevention of concentration of economic power to

the common detriment, control of monopolies, and

ii. Prohibition of monopolistic, restrictive and unfair

trade practices.
With the growing complexity of industrial structure and the need for achieving
economies of scale for ensuring high productivity and competitive advantage in the
international market, the interference of the Government through the MRTP Act in
investment decisions of large companies has become deleterious in its effects on Indian
industrial growth. The pre-entry scrutiny of investment decisions by so called MRTP
companies will no longer be required. Instead, emphasis will be on controlling and
regulating monopolistic, restrictive and unfair trade practices rather than making it
necessary for the monopoly house to obtain prior approval of Central Government for
expansion, establishment of new undertakings, merger, amalgamation and takeover and
appointment of certain directors. The thrust of policy will be more on controlling unfair
or restrictive business practices. The MRTP Act will be restructured by eliminating the
legal requirement for prior governmental approval for expansion of present undertakings
and establishment of new undertakings. Similarly, the provisions regarding restrictions on
acquisition of and transfer of shares will be appropriately incorporated in the Companies
Act.

Simultaneously, provisions of the MRTP Act will be strengthened in order to enable the
MRTP Commission to take appropriate action in respect of the monopolistic, restrictive
and unfair trade practices. The newly empowered MRTP Commission will be encouraged
to require investigation suo moto or on complaints received from individual consumers or
classes of consumers.

In view of the considerations outlined above Government has decided to take a series of
measures to unshackle the Indian industrial economy from the cobwebs of unnecessary
bureaucratic control. These measures complement the other series of measures being
taken by Government in the areas of trade policy, exchange rate management, fiscal
policy, financial sector reform and overall macro economic management. 

Questions

Section A (2 marks)

1. What are the objectives of Industrial policy 1991?

Section B (8 marks)

2. What are the policy changes that were brought about with the foreign trade
agreements?

Section C(12 marks)

3. Comment on Industrial policy 1991

 References:

Business and Government – Francis Cherunillam, Himalaya Publishers

Business Environment – Francis Cherunillam, Himalaya Publishers

Essentials of Business Environment – K Ashwattapa, Himalaya Publishers

ANNEX I

Proposed List Of Industries To Be Reserved For The Public Sector 

1. Arms and ammunition and allied items of defence equipment,

Defence aircraft and warships.

2. Atomic Energy.

3. Coal and lignite.

4. Mineral oils.

5. Mining if iron ore, manganese ore, chrome ore, gypsum, sulphur,

gold and diamond.

6. Mining of copper, lead, zinc, tin, molybdenum and wolfram.

7. Minerals specified in the Schedule to the Atomic Energy (Control

of Production and Use) Order, 1953.

8. Railway transport. 

ANNEX II

List Of Industries In Respect Of Which Industrial Licensing Will Be Compulsory 

1. Coal and Lignite.

2. Petroleum (other than crude) and its distillation products.

3. Distillation and brewing of alcoholic drinks.

4. Sugar.
 5. Animal fats and oils.

6. Cigars and cigarettes of tobacco and manufactured tobacco

substitutes.

7. Asbestos and asbestos-based products.

8. Plywood, decorative veneers, and other wood based products such

as particle board, medium density fibre board, block board.

9. Raw hides and skins, leather, chamois leather and patent leather.

10. Tanned or dressed furskins.

11. Motor cars.

12. Paper and Newsprint except bagasse-based units.

13. Electronic aerospace and defence equipment; All types.

14. Industrial explosives, including detonating fuse, safety fuse, gun

powder, nitrocellulose and matches.

15. Hazardous chemicals.

16. Drugs and Pharmaceuticals (according to Drug Policy).

17. Entertainment electronics (VCRs, colour TVs, C.D. Players, Tape

Recorders).

18. White Goods (Domestic Refrigerators, Domestic Dishwashing

machines, Programmable Domestic Washing Machines,
Microwave ovens, Airconditioners).

Note: The compulsory licensing provisions would not apply in respect of the small-scale
units taking up the manufacture of any of the above items reserved for exclusive
manufacture in small scale sector.

ANNEX III

List Of Industries For Automatic Approval Of Foreign Technology Agreements

And For 51% Foreign Equity Approvals 

1.    Metallurgical Industries

i. Ferro alloys.
 ii. Castings and forgings.

iii. Non-ferrous metals and their alloys.

iv. Sponge iron and pelletisation.

v. Large diameter steel welded pipes of over 300 mm

diameter and stainless steel pipes.

vi. Pig iron.

2.    Boilers and Steam Generating Plants

3.    Prime Movers (other than electrical generators)

i. Industrial turbines.

ii. Internal combustion engines.

iii. Alternate energy systems like solar wind etc. and

equipment therefore.

iv. Gas/hydro/steam turbines upto 60 MW.

4.    Electrical Equipment

i. Equipment for transmission and distribution of

electricity including power and distribution
transformers, power relays, HT-switch gear
synchronous condensers.

ii. Electrical motors.

iii. Electrical furnaces, industrial furnaces and

induction heating equipment.

iv. X-ray equipment.

v. Electronic equipment, components including

subscribers' end telecommunication equipments.

vi. Component wires for manufacture of lead-in wires.

vii. Hydro/steam/gas generators/generating sets upto 60

MW.
 viii. Generating sets and pumping sets based on internal
combustion engines.

ix. Jelly-filled telecommunication cables.

x. Optic fibre.

xi. Energy efficient lamps and

xii. Midget carbon electrodes.

5.    Transportation

i. Mechanised sailing vessels upto 10,000 DWT

including fishing trawlers.

ii. Ship ancillaries.

iii. (a) Commercial vehicles, public transport vehicles

including automotive commercial three wheeler
jeep type vehicles, industrial locomotives.

(b)    Automotive two wheelers and three wheelers.

(c)    Automotive components/spares and ancillaries.

iv. Shock absorbers for railway equipment and

v. Brake system for railway stock and locomotives.

6.    Industrial Machinery

i. Industrial machinery and equipment.

7. Machine Tools    

i. Machine tools and industrial robots and their

controls and accessories.

ii. Jigs, fixtures, tools and dies of specilised types

and cross land tooling, and

iii. Engineering production aids such as cutting

and forming tools, patterns and dies and tools.

  8. Agricultural Machinery
 i. Tractors.

ii. Self-propelled Harvestor Combines.

iii. Rice transplanters.

9.    Earth Moving Machinery

i. Earth moving machinery and construction

machinery and components thereof.

10.    Industrial Instruments

i. Indicating, recording and regulating devices for

pressures, temperatures, rate of flow weights levels
and the like.

11.    Scientific and Electromedical Instruments and Laboratory Equipment.

12.    Nitrogenous & Phosphatic Fertilizers falling under

i. Inorganic fertilizers under '18-Fertilizers' in the

First Schedule to IDR Act, 1951.

13.    Chemicals (other than fertilizers).

i. Heavy organic chemicals including petrochemicals.

ii. Heavy inorganic chemicals.

iii. Organic fine chemicals.

iv. Synthetic resins and plastics.

v. Man made fibres.

vi. Synthetic rubber.

vii. Industrial explosives.

viii. Technical grade insecticides, fungicides,

weedicides, and the like.

ix. Synthetic detergents

x. Miscellaneous chemicals (for industrial use only)

 a. Catalysts and catalyst supports.

b. Photographic chemicals.

c. Rubber chemicals.

d. Polyols.

e. Isocyanates, urethanes, etc.

f. Speciality chemicals for enhanced oil

recovery.

g. Heating fluids.

h. Coal tar distillation and product

therefrom.

i. Tonnage plants for the manufacture

of industrial gases.

j. High altitude breathing

oxygen/medical oxygen.

k. Nitrous oxide.

l. Refrigerant gases like liquid

nitrogen, carbondioxide etc.in large
volumes.

m. Argon and other rare gases.

n. Alkali/acid resisting cement

compound

o. Leather chemicals and auxiliaries.

14.    Drugs and Pharmaceuticals

According to Drug Policy.

                    15.         i.    Paper and pulp including paper products.

ii.    Industrial laminates.

                    16.         i.     Automobile tyres and tubes.

                                        ii.     Rubberised heavy duty industrial beltings of all types.

iii.    Rubberised conveyor beltings.

iv.    Rubber reinforced and lined fire fighting hose pipes.

v.    High pressure braided hoses.

vi.    Engineering and industrial plastic products.

          17.     Plate Glass

i. Glass shells for television tubes.

ii. Float glass and plate glass.

iii. H.T. insulators.

iv. Glass fibres of all types.

18.    Ceramics

i.    Ceramics for industrial uses.

19.    Cement Products

i. Portland cement.

ii. Gypsum boards, wall boards and the like.

20.    High Technology Reproduction and Multiplication Equipment.

21.    Carbon and Carbon Products

i. Graphite electrodes and anodes.

ii. Impervious graphite blocks and sheets.

22.    Pretensioned High Pressure RCC Pipes.

23.    Rubber Machinery

24.    Printing Machinery.

i. Web-fed high speed off-set rotary printing machine having

output of 30,000 or more impressions per hour.
 ii. Photo composing/type setting machines.

iii. Multi-colour sheet-fed off-set printing machines of sizes

18"x25" and above.

iv. High speed rotograture printing machines having output of

30,000 or more impressions per hour.

25.    Welding Electrodes other than those for Welding Mild Steel

26.    Industrial Synthetic Diamonds.

27.     i. Photosynthesis improvers.

          ii Genetically modified free living symbiotic nitrogen fixer.

iii. Pheromones.

iv.    Bio-insecticides. 

28.    Extraction and Upgrading of Minor Oils

29.    Pre-fabricated Building Material.

30.    Soya Products

i. Soya texture proteins.

ii. Soya protein isolates.

iii. Soya protein concentrates.

iv. Other specialised products of soyabean.

v. Winterised and deodourised refined soyabean oil.

31.    (a) Certified high yielding hybrid seeds and synthetic seeds and

        (b) Certified high yielding plantlets developed through plant tissue culture.

32. All food processing industries other than milk food, malted foods, and flour, but
excluding the items reserved for small-scale sector.

33.    All items of packaging for food processing industries excluding the items
reserved for small scale sector.
34. Hotels and tourism-related industry.

CHAPTER VI

MRTP ACT TO COMPETITION ACT

The MRTP Act became effective in June 1970. The principal objectives sought to be
achieved through the MRTP Act are as follows:

 Control of monopolies

 Prohibition of monopolistic trade practices (mtp)

 Prohibition of restrictive trade practices (rtp)

 Prevention of concentration of economic power to the common

detriment

 Prohibition of unfair trade practices (utp)

MONOPLISTIC TRADE PRACTICES (MTPs)

Monopolistic Trade Practices are those trade practices that abuse market power or
unreasonableness in any practice. Thus the following are MTPs:
  Unreasonable pricing

 Preventing or lessening competition in supply/distribution of goods/ services

 Limiting technical development, capital investment or production/ supply

 Unreasonable profits (profiteering)

 Deterioration in the quality of goods.

The role of the MRTP Commission in regard to control of monopolistic trade practices is
investigatory and advisory. The commission, on initiation of an inquiry, merely
investigates the practice and submits its report t the Central Government. It is only the
Central Government which is vested with the power to pass an appropriate order on
receipt of the report from the Commission.

Any inquiry into monopolistic trade practice can be initiated by the commission:

 On a reference made to it by the Central Government

 On its own motion, on receipt of any information that the owner of any
undertaking is indulging in any trade practice which may be a
monopolistic trade practice or upon knowledge that monopolistic trade
practices prevail in respect of any goods or services.

 On an application made to it by the DGIR and

 If during the course of it inquiry into restrictive trade practice, the

Commission finds that the owner of any undertaking is indulging in
monopolistic trade practices.

RESTRICTIVE TRADE PRACTICES (RTPs)

The term ‘trade’ includes any trade, business, industry, profession or occupations
relating to production, supply, and distribution of goods/services. Thus a Restrictive
Trade practice is not limited to trade alone. It would cover a practice followed in the
production, distribution or supply of goods or in the provision of services. A restrictive
trade practice can be adopted by a manufacturer, distributor, dealer, supplier of goods or
by one who provides any services or carries on any profession or occupation. The
following are RTPs:

Refusal to deal: Any agreement that restricts any person or class of persons from buying
or selling goods or services from any other person.
Tie-up sales/Full Line forcing: Any agreement requiring the purchase of goods and as a
condition of such purchase, to purchase some other goods.

Exclusive dealings: Any agreement restricting in any manner the purchaser from dealing
with any other products other than those of the seller.

Price discrimination: Any act of the seller that involves charging different prices to
different class of people

Re-sale price maintenance: Any agreement by the seller, to sell goods on condition that
the prices to be charged on re-sale by the purchaser shall be the one as fixed by him
(seller).

Area restriction: Any agreement that restricts the buyer or seller from buying or selling
commodities to a particular area i.e., confining their activities to particular limits.

The MRTP Commission can enquire into any restrictive trade practice whether the
agreement relating to the practice has been registered or not. The Commission may
enquire into the practice on its own initiative or in response to specific complaints by
consumers or consumers’ associations or on a reference made by the Central or State
Governments, or an application made by the Director-General.

UNFAIR TRADE PRACTICES (UTPs)

Any trade practice which is considered unfair and harmful to the consumer is an unfair
trade practice. These trade practices are:

 Misleading advertisement and false representation

 Advertising of bargain price, bait and switch selling
 Offering pseudo gifts or prizes and conducting of promotional contests
and lottery
 Supply of unsafe or hazardous products and
 Hoarding or destruction of goods resulting in price increase

The Commission may inquire into any unfair trade practice which may come before it for
enquiry. If after such inquiry, the Commission is of opinion that the practice is prejudicial
to the public interest, or to the interest of any consumer or consumers’ generally it may,
by order, direct that:

 The practice shall be discontinued or shall not be repeated (that is, pass a
cease and desist order)

 Any agreement relating to such unfair trade practice shall be void or shall
stand modified in respect thereof in such a manner as may be specified in
the order.
  Any information, statement or advertisement relating to such unfair trade
practice shall be disclosed, issued or published, as the case may be, in such
manner as may be specified in the order.

How bait and switch selling affects you as a CONSUMER

You are attracted to a store by an advertisement for a bargain-priced product. Once
inside, you discover that the product that was advertised, the "bait," is sold out or
otherwise not available. The switch occurs when a salesperson pressures you into
purchasing a higher priced item as a replacement, or if you find yourself induced to make
other purchases while inside the store. In both cases, the retailer successfully captures
your shopping dollars by luring you to the store with an advertised bargain that was never
intended to be made available in reasonable quantities.

How bait and switch selling affects you as a COMPETITOR

Bait and switch selling is anti-competitive. By advertising products at bargain prices that
are not available in reasonable quantities, retailers can unfairly lure consumers into their
stores, thereby taking business away from honest retailers. As a competitor, your loyal
customer base may begin to slip away, and new customers may not consider entering
your store.

INTRODUCTION TO COMPETITION ACT, 2002

Since attaining Independence in 1947, India, for the better part of half a century
thereafter, adopted and followed policies comprising what are known as Command-and-
Control laws, rules, regulations and executive orders. The Monopolies and Restrictive
Trade Practices Act, 1969 was one such. It was in 1991 that widespread economic
reforms were undertaken and consequently the march from Command-and-Control
economy to an economy based more on free market principles commenced its stride. As
is true of many countries, economic liberalisation has taken root in India and the need for
an effective competition regime has also been recognised.

In the context of the new economic policy paradigm, India has chosen to enact a new
competition law called the Competition Act, 2002. The MRTP Act has metamorphosed
into the new law, Competition Act, 2002. The new law is designed to repeal the extant
MRTP Act.

The Objectives of Competition Policy in India include:

 Creation of an active competitive environment and
  To aid and abet the process of creating globally competitive firms with
enhanced investment and technological capabilities.

Consequently, policies relating to trade, investment and technology development also

come under the purview of competition policy insofar as they impinge on the process of
competition.

COMPONENTS OF COMPETITION ACT

The rubric of the new law, Competition Act, 2002 (Act, for brief) has essentially four
compartments:

 Anti - Competition Agreements

 Abuse of Dominance
 Combinations Regulation
 Competition Advocacy

Anti Competition Agreements

Firms enter into agreements, which may have the potential of restricting competition. A
scan of the competition laws in the world will show that they make a distinction between
horizontal and vertical agreements between firms. The former, namely the horizontal
agreements are those among competitors and the latter, namely the vertical agreements
are those relating to an actual or potential relationship of purchasing or selling to each
other. Most competition laws view vertical agreements generally more leniently than
horizontal agreements, as prima facie, horizontal agreements are more likely to reduce
competition than agreements between firms in a purchaser - seller relationship. An
obvious example that comes to mind is an agreement between enterprises dealing in the
same product or products. In other words, they are per se illegal. The underlying principle
in such presumption of illegality is that the agreements in question have an appreciable
anti-competitive effect.

Abuse of Dominance

Dominant Position has been appropriately defined in the Act in terms of the position of
strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to (i)
operate independently of competitive forces prevailing in the relevant market; or (ii)
affect its competitors or consumers or the relevant market, in its favour.

Section 4 enjoins, No enterprise shall abuse its dominant position. Dominant position is
abused when an enterprise imposes unfair or discriminatory conditions in purchase or
sale of goods or services or in the price in purchase or sale of goods or services. Again,
the philosophy of the Competition Act is reflected in this provision, where it is clarified
that a situation of monopoly per se is not against public policy but, rather, the use of the
monopoly status such that it operates to the detriment of potential and actual competitors.
At this point it is worth mentioning that the Act does not prohibit or restrict enterprises
from coming into dominance. There is no control whatsoever to prevent enterprises from
coming into or acquiring position of dominance. All that the Act prohibits is the abuse of
that dominant position. The Act therefore targets the abuse of dominance and not
dominance per se.

The Act on Combinations Regulation

The Competition Act also is designed to regulate the operation and activities of
combinations, a term, which contemplates acquisitions, mergers or amalgamations. Thus,
the operation of the Competition Act is not confined to transactions strictly within the
boundaries of India but also such transactions involving entities existing and/or
established overseas.

Competition Advocacy

The Regulatory Authority under the Act, namely, Competition Commission of India
(CCI), in terms of the advocacy provisions in the Act, is enabled to participate in the
formulation of the country's economic policies and to participate in the reviewing of laws
related to competition at the instance of the Central Government. The Commission will
therefore be assuming the role of competition advocate, acting pro-actively to bring about
Government policies that lower barriers to entry, that promote deregulation and trade
liberalisation and that promote competition in the market place.

MRTP 1969 Competition Act 2002

Based on pre – reforms scenario Based on post – reforms scenario
Competition offences implicit or Competition offences explicit and defined
not defined
Complex in arrangement and Simple in arrangement and language
language
Frowns upon dominance Frowns upon abuse of dominance
Registrations of agreement No requirement for registration of agreements
compulsory
Commission appointed by the Commission selected by a Collegiums ( search
Government committee)
Very little administrative and Relatively more autonomy
financial autonomy
No Competition advocacy Has competition advocacy role
No penalties for offences Penalties for offences
Reactive and Rigid Proactive and flexible
Unfair Trade practices covered Unfair trade practices omitted (Consumer
Protection Act will deal with it)
 Questions

Section A (2 marks)

1 What are the objectives of MRTP Act?

2 What are the trade practices covered by MRTP Act?

Section B(8 marks)

3 Write short notes on MTP, RTP and UTP

4. When was Competition Act passed? Compare MRTP and Competition Act,

Section C (12 marks)

5. Do you think MRTP should be replaced? Why?

References:

Business Environment – K Ashwattapa, Himalaya Publishers

Business Environment – Francis Cherunillam, Himalaya Publishers

Business Environment – Shaik Saleem, Pearsons Education

CHAPTER VII

FERA TO FEMA

Foreign Exchange Regulation Act (FERA)

The Foreign Exchange Regulation Act is a law that imposes various restrictions on
dealings in foreign exchange by person’s resident in India and by Indian citizens visiting
abroad. Exchange control was introduced in India in 1939 under the emergency powers
derived from the Defence of India rules. The emergency powers were later enacted into a
statute, namely, the Foreign Exchange Regulation Act, 1947. Later a new Act, namely,
the present Foreign Exchange Regulation Act, 1973 was passed in 1973 containing
comprehensive provisions for the regulation and control of foreign exchange dealings in
India. The Act applies to the whole of India, including Indian citizens outside India and
to branches, agencies, companies or corporate bodies within and outside India. The Act
came into force with effect from 1st January, 1974
OBJECTIVES:

The main objective of the Act is to prevent leakage of foreign currency and due receipt of
the same. In detail, the objectives include:

 To regulating certain payments

 To regulate dealings in foreign exchange and securities
 To regulate the transactions indirectly affecting foreign exchange
 To regulate import and export of currency for the conservation of foreign
exchange resources of the country
 To regulate holding of immovable property outside India
 To regulate employment of foreign nationals
 To regulate acquisition, holding etc. of immovable property in India by non-
residents.
 To regulate foreign companies.
.
Broad Scheme of the Foreign Exchange Regulation Act, 1973: The Reserve Bank of
India performs the regulatory functions under the Foreign Exchange Regulation Act,
Central Government formulates the policy relating to exchange control laws through the
Department of Economic Affairs, and the Enforcement Directorate deals with violations
of the Act.

Substantive provisions: The following important provisions of the Foreign Exchange

Regulation Act, 1973 are enforced by the Enforcement Directorate:

Authorisation

The Reserve Bank of India grants licences to various banks to work as "Authorised
Dealer" in foreign exchange. The R.B.I. authorises certain persons to act as "Money-
Changers". Except those who have been authorised by the R.B.I. nobody else can deal in
foreign exchange.

Dealings in foreign exchange

The Act restricts dealings in foreign exchange; unauthorised acquisition of foreign

exchange, unauthorised conversion of currency at rates of exchange other than that
prescribed by the Reserve Bank of India and utilization of foreign exchange other than
the purpose for which it is granted.

Restriction on payments

The Act imposes certain restrictions on payments to or to the credit of any person
resident outside India or the receipt of payments by order or on behalf of any person
resident outside India. Such payments are known as Compensatory or "Hawala"
payments and are resorted to mostly by Indians residing abroad in order to remit their
earnings to India through illegal channels.
Other Provisions

The Act prohibits the import and export of any foreign exchange, or Indian currency by
any person except to the extent permitted by the Central Government

The Act requires a person to surrender to an authorised dealer in India the foreign
exchange owned or acquired by him within a period of three months of his arrival in
India failing which he is liable to penal action.

All those persons who are entitled to receive foreign exchange will have to bring the
foreign exchange to the country.

The exporters shall bring the sale proceeds of the goods exported by them within the
prescribed period unless they have obtained Reserve Bank of India's permission.

Transfer of securities between residents and non-residents and acquisition and holding
foreign securities requires permission of the Reserve Bank of India.

No person resident in India without the permission of the Reserve Bank of India can
acquire an immovable property situated outside India.

Permission of the Reserve Bank of India is required for appointment of certain persons
and companies as agents or Management Advisors in India.

Without the permission of the R.B.I. persons resident outside India including corporate
bodies cannot establish any business in India.

No person who is not a citizen of India, and no Company which is not incorporated in
India, or in which the non-resident interest is more then 40 percent shall acquire any
immovable property in India or dispose off the same without the permission of the
Reserve Bank of India.

Drawbacks of FERA

In the wake of acute shortage of foreign exchange in the country, the Government of
India enacted the Foreign Exchange Regulation Act (FERA) in 1973. The logic behind
the introduction of the legislation was conservation of foreign exchange and controlling
its use. This logic has very limited validity now.

Further under FERA, foreign exchange law violators were treated as criminals and dealt
with sternly. Realising that FERA was not in tune with the economic reforms initiated
since 1991, the Government replaced it with a new legislation – Foreign Exchange
Management (FEMA) 1999 which came into effect from June 1, 2000. FERA remained a
nightmare for the Indian corporate world for 27 years. Under FEMA, foreign exchange
law violators are treated as civil offenders rather than as criminal offenders as was the
case under FERA.

IMPORTANT PROVISIONS FROM FEMA

Some of the relevant provisions of FEMA are:
1. REFUND OF INWARD REMITTANCES
If a request is made from the overseas for cancellation of Inward Remittances, Authorised
Dealers may do so without referring to Reserve Bank, if refund is not to compensate for a
loss.
2. REMITTANCES IN FOREIGN CURRENCY
 A person, firm or bank may apply to an Authorised Dealer for remittances in any
foreign currency to a beneficiary abroad.
 The Authorised Dealer may sell the foreign Exchange applied for if he think fit
provided it is within his powers, and the purpose of remittance is an approved
one.
3. MODE OF PAYMENT OF RUPEES AGAINST SALE OF FOREIGN
EXCHANGE
In case of sale of foreign Exchange or remittance foreign Exchange amounting to Rs.
20,000 or more the payment received by the Authorised Dealer, from the applicant
should be through a crossed cheque drawn on the applicant bank account or on the bank
account of the Firm/ Company. Payment can also be accepted in the form of a Banker's
cheque / Pay Order / Demand Draft.
Receipt of Payment in cash in case of such sale of foreign Exchange or remittance in
foreign Exchange is strictly prohibited.
EXCEPTION:
However where purpose of sale of foreign exchange is for travel abroad for business etc,
cash may be received by Authorised Dealer from Applicant upto Rs. 50,000/-
Where the rupee equivalent for drawing foreign exchange exceeds Rs. 50,000 either for
any single installment or for more than one installment together for a single visit it should
be paid by the traveler by means of a cross cheque / demand draft/ pay order.
4. TRAVELLERS CHEQUE NEGOTIABLE ONLY IN INDIA
Rupee Travellers cheque cannot be encashed outside India, if they are issued solely for
use within India. In such a case they cannot be taken or sent out of India.
Reimbursements should be strictly refused where such travellers’ cheques have been
encashed outside India.
5. REIMBURSEMENT OUTSIDE INDIA
Rupee Travellers cheque, which are issued by authorised dealers, encashable outside
India, may be reimbursed by Authorised Dealers or by their selling Agent.
6. IMPORT OF FOREIGN CURRENCY NOTES
When the stock of foreign currency notes with Authorised Dealer is not adequate for
meeting their normal business requirement they could import foreign currency notes from
their overseas branches or correspondents.
7. RECONVERSION OF INDIAN CURRENCY
 Foreign currency may be sold against Indian Rupees held by persons who are not
resident of India but are passing through or leaving India after a visit, at the time
of their departure from India.
 For this purpose, a Bank or Encashment certificate issued by Authorised Dealer,
exchange bureau or Authorised Money changer in form BCI, ECF OR ECR, is
required to show that the rupee had been acquired by sale of foreign Exchange to
an Authorised Dealer or money changer in India.
 Such a certificate is valid for such reconversion i.e. a period of three months is not
over from the date of sale of the foreign currency by the traveller.
8. RATES OF EXCHANGE
Authorised dealers and their Exchange bureau may buy from and sell to public foreign
currency notes and coins at rates of exchange determined by market conditions. Dealings
in foreign currency notes and coins between authorised dealers and between authorised
dealers and money changers would also be at rates determined by market conditions

COMPARISON BETWEEN FERA AND FEMA

FERA FEMA

Came into force on January 1, 1974 Came into force on 1st june 2000

Lays emphasis on exchange control Lays emphasis on exchange management

It is known as a negative law It is known as appositive law

It was a criminal law It is a civil law

Power to arrest and detention by Only imposition of monetary penalty

Enforcement Directorate
Prevents misuse of foreign exchange Facilitates Trade

It had 81 sections Small enactment with only 49 sections

Necessary to obtain permission from Except Sec(3) that relates to dealing in

RBI
foreign exchange, no other regulation
in most of the regulations.
requires RBI’s permission

Questions
Section A (2 marks)
1 What is FERA? When was the Act passed?
2 Give two objective of FERA?
3 Expand FEMA?
4 Give two differences between FERA and FEMA
Section B (8 marks)
5 State objectives of FERA
6 Give the disadvantages of FERA
7 Compare and contrast FERA and FEMA
Section C (12 marks)

8 Explain the provisions of FERA

9 Comment on FERA

References:

Business Environment – Francis Cherunillam, Himalaya Publishers

Business Environment – Shaik Saleem, Pearsons Education

Money, Banking and Foreign Exchange – Hari Gopal Dass, SPB Publishers

Money, Banking, International Theory and Public finance – M L Seth, Lakshmi

Narain Publishers
 CHAPTER IX

SMALL SCALE INDUSTRIES

The small scale industries sector plays an important role in the economy of our country
on account of its contribution to the gross domestic product, employment, exports,
expansion of entrepreneurship development and dispersal of industries. In recognition of
the growing importance of this sector, the Ministry of Small Scale Industries was created
in 1999. The main function of the Ministry is to formulate policies and support measures
for the growth of small scale industries to facilitate expansion of gainful employment and
equity in regional growth. It also supervises and coordinates the activities of the
promotional agencies operating at the Central and State levels. It interacts with other
Ministries and Departments and facilitates supply of credit and other facilities for the
growth of the sector.

MEANING:
Small Scale Industrial undertaking can be defined as the one in which the investment in
fixed assets in plant and Machinery whether held on ownership terms or on lease or hire
purchase does not exceed Rs. 100 Lacs (Rupees One Hundred Lacs Only)

Ancillary Industrial undertaking: An industrial undertaking which is engaged or is

proposed to be engaged in the manufacture or production of parts, components, sub
assemblies, tooling or intermediates or rendering of services and the undertaking supplies
or propose to supply or render not less than 50% of its production or services, as the case
may be, to one or more other industrial undertaking and whose investment in fixed assets
in plant and machinery whether held on ownership terms or on lease or on hire purchase,
does not exceed Rs. 100 lacs (Rupees One Hundred Lacs Only)

Tiny Enterprises: Investment limit in plant and machinery in respect of tiny enterprises
is Rs. 25 lacs irrespective of location of the unit.

Woman Enterprises : A Small Scale industrial unit/industry related services or business

enterprises, managed by one or more women entrepreneurs in proprietary concern, or in
which she/they individually or jointly have a share capital of not less than 51% as
partners/share holders/Directors of Pvt. Ltd, Company/ members of co-operative society.

FEATURES & CONTRIBUTIONS:

Small Scale Industries have certain unique features as compared to their Large and
Medium counter parts as follows:

a) Less capital requirements

b) Labour intensive character generating more employment opportunities at relatively

lower capital investment.

c) Ensuring regional uniformity and balance in industrial development.

d) Offering diversified product range for meeting the demands of different categories of
consumers and producers.

e) Dispersal in rural/backward areas.

f) Operational flexibility and quick adaptability.

g) Adding to the existing export potential of the economy.

h) Wide spread diffusion of entrepreneurship.

i) Utilization of locally available human and material resources and expertise/experience.

j) Linkage between Large & Medium Scale Industries.

Small Scale Industries (SSI's) sector accounts for about 40% of the total industrial out put
and contribute nearly 35% of the total direct exports. Over 7,500 products are
manufactured in the small scale sector out of which 326 items are reserved for exclusive
manufacture in the small scale sector as on June 2006. 409 items are reserved for
exclusive purchase from Small Scale Sector units under the Govt. Purchase programme.
The sector covers 123.42 lakhs SSI units both registered and unregistered providing
employment to 249.91 lakhs people

SCHEMES FOR SMALL SCALE INDUSTRIES

Small industries development organisation (SIDO) functions under the Ministry of SSI
SIDO was established in 1954 on the basis of the recommendations of the Ford
foundation.  Over the years, it has seen its role evolve into an agency for advocacy, hand
holding and facilitation for the small industries sector.  It has over 60 offices and 21
autonomous bodies under its management.  SIDO provides a wide spectrum of services to
the small industries sector.  These include facilities for testing, toolmenting, training for
entrepreneurship development, preparation of project and product profiles, technical and
managerial consultancy, assistance for exports, pollution and energy audits etc. SIDO
provides economic information services and advises Government in policy formulation
for the promotion and development of SSIs. SIDO operates a number of schemes for the
SSI sector. At a glance these are

Small Industry Cluster Development Programme - For promoting technology

upgradation in clusters for a group of SSI units of one industry

Credit Linked Capital Subsidy Scheme for Technology Upgradation - This revised
scheme aims at facilitating technology upgradation by providing 15 per cent upfront
capital subsidy with effect from the 29th September, 2005 (12 per cent prior to
29.09.2005) to SSI units, including tiny, khadi, village and coir industrial units, on
institutional finance availed of by them for induction of well established and improved
technologies in the specified sub-sectors / products approved under the scheme. The
revised ceiling on loan amount for availing the benefit under this scheme is Rs. 100 lakhs
(Rs. 40 lakhs prior to 29.09.2005).
First supplement of technology approved in 6th TSC on 10[1].08.2006

Credit Guarantee Scheme - Collateral free loans upto a limit of Rs.25 lakhs - for
individual SSI’s.

ISO 9000/ISO 14001 Certification Reimbursement Scheme - Incentive Scheme of

Reimbursement of expenses for acquiring Quality Management System (QMS) ISO 9000
certification/environment management (EMS) ISO 14001 certification to the extent of
75% or Rs.75,000/- whichever is lower.
- For individual SISIs/Ancillary/tiny/SSSBE units

Participation in International Fairs - Full subsidy on space rent and shipment of

exhibits of SSI units - for individual SSIs
Purchase and Price Preference Policy - This is administered through the Single Point
Registration Scheme of NSIC. Under this, 358 items are reserved for exclusive purchase
from SSI by Central Government. Other facilities include tender documents free of cost,
exemption from earnest money and security deposit and 15% price preference in Central
Government purchases - for individual SSIs

Integrated Infrastructure Development (IID Scheme) - Assistance upto 40% or

Rs.2.00 crores, whichever is less for setting up industrial estates for SSI units. For NE,
assistance is 80% or Rs.4.00 crores - for State Governments/industry associations/ NGOs.

Mini Tool Rooms - Assistance upto 90% or Rs.9.00 crores, whichever is less for setting
up new Mini Tool Rooms. For upgradation of existing Tool Rooms, assistance is 75% or
Rs.7.5 crores - for State Governments.

Testing Centres - Assistance upto a 50% or Rs.50 lakhs, whichever is less for setting up
Testing Centres - for industry associations.

Sub-Contracting Exchanges - One time grant for procurement of hardware and

thereafter matching grant on tapering basis at 50%, 30% and 10% of running expenses,
not exceeding Rs. 1.25 lakhs, Rs. 0.75 lakhs and Rs. 0.25 lakhs respectively during the
initial three years, subject to a ceiling of Rs. 1.57 lakhs per exchange - for industry
associations.

SSI Market Development Assistance (MDA) - The scheme offers funding upto 90% in
respect of to and fro air fare for participation by SSI Entrepreneurs in overseas fairs/trade
delegations. The scheme also provide for funding for producing publicity material (upto
25% of costs) Sector specific studies (upto Rs. 2 lakhs) and for contesting anti-dumping
cases (50% upto Rs. 1 lakh) - for individual SSIs & Associations.

Assistance to Entrepreneurship Development Institutes - For strengthening training

infrastructure in EDIs, assistance upto 50% or Rs. 50 lakhs whichever is less - for State
Governments.

Scheme of Micro Finance Programme : The scheme of Micro-Finance Programme has

been tied-up with SIDBI. The Government of India will provide funds for Micro-Finance
Programme to SIDBI, which shall be called ‘Portfolio Risk Fund’ (PRF). This fund
would be used as a security deposit for the loan amount from the NGOs to the SSIs.

Prime Minister's Rozgar Yojana-PMRY- Project limit upto Rs. 1 lakhs for business
and Rs.2.00 lakhs for other activities, subsidy and margin money upto 20% of project
with balance as loan.

PROMOTIONAL MEASURES:
The small scale industry sector output contributes almost 40% of the gross Industrial
value-added 45% of the total exports from India (direct as well as indirect exports) and is
the second largest employer of human resources after agriculture. The development of
Small Scale Sector has therefore been assigned an important role in India's national plans.

In order to protect, support and promote small enterprises as also to help them become
self-supporting, a number of protective and promotional measures have been undertaken
by the Government.

 The promotional measures cover

 - industrial extension services
 - institutional support in respect of credit facilities,
 - provision of developed sites for construction of sheds,
 - provision of training facilities,
 - supply of machinery on hire-purchase terms,
 - assistance for domestic marketing as well as exports,
 - special incentive for setting up enterprises in backward areas etc.
 - technical consultancy & financial assistance for technological upgradation.

While most of the institutional support services and some incentives are provided by the
Central Government, others are offered by the state governments in varying degrees to
attract investments and promote small industries in varying degrees to attract investments
and promote small industries with a view to enhance industrial production and to
generate employment in their respective States.

Questions

Section A (2 marks)

1 What do you mean by the term “SSI”

2 How do you differentiate SSI from Tiny units
3 State any two promotional measures for the growth of SSI

Section B (8 marks)

4 What are the promotional measures instituted by the Government for the
development of SSI in the country?
 Section C (12 marks)

5 Explain the Schemes brought forth by the Government for the promotion of SSIs

References:

Business and Government – Francis Cherunillam, Himalaya Pulishers

Essentials of Business Environment – K Ashattapa, Himalaya Publishers

Business Environment- Shaik Saleem, Pearsons Education

CHAPTER X

PRIVATISATION

Privatisation means transfer of ownership and/or management of an enterprise from the

public sector to private sector. It also means the withdrawal of State from an industry or
sector partially or fully. Another dimension of privatization is opening up of an industry
that has been reserved for the public sector.

Forms of Privatisation

Privatisation is the process of involving the private sector in the ownership or operation
of a state owned or public sector undertaking. It can take three forms:
 1. Ownership measures
2. Organisational measures
3. Operational measures

1 Ownership measures: The degree of privatization is judged by the extent of ownership

transferred from the public enterprise to the private sector. Ownership may be transferred
to an individual, co-operative or corporate sector. This can have the following forms:

Total Denationalisation: It implies 100% transfer of ownership of a public enterprise to

private sector. There are a large number of cases where privatization has taken the form
of denationalization. A considerably large number of enterprises were denationalized in
countries like Chile, Bangladesh and Pakistan.

Joint Venture: It implies partial transfer of a public enterprise to the private sector. It can
have several variants – 25% transfer to private sector in joint venture implies that
majority ownership and control remains with the public sector. 51% transfer of
ownership to the private sector shifts the balance in favour to the private sector, though
the public sector retains a substantial stake in the undertaking. 74% transfer of ownership
to the private sector implies a dominant share being transferred to the private sector. In
such a situation, the private sector is in a better position to change the character of the
enterprise.

Liquidation: It implies sale of assets to a person who may use them for the same purpose
or some other purpose. This solely depends on the preference of the buyer.

Workers Co-operative: It is a special form of denationalization. In this form, ownership

of the enterprise is transferred to workers who may form a co-operative to run the
enterprise. Example ESOP (Employee State Ownership Plan) provides for forming
special fund which takes bank credit to buy a company’s share and distribute them among
the employees at the real value or free of charge. The credit is paid back out of the
company’s profit. The workers become entitled to ownership dividend besides getting
wages for their service. The burden of running the enterprise rests on the workers.

Divestiture: One of the important ways of privatisation is divestiture or privatization of

ownership through the sale of security. A well functioning capital market entails selling
of stock to the public efficiently. In industrial countries, privatization has come mainly
through divestiture of Government Economic activities.

2 Organisational measures: They include,

A Holding Company Structure may be designed in which the Government limits its
control to top level major decisions and leaves a sufficient degree of autonomy for the
operating companies in their day- to – day operations. A big company like the Steel
Authority of India (SAIL) or Bharat Heavy Electricals Limited (BHEL) may acquire a
holding company status, thereby transferring a number of functions to its smaller units. In
this way, a decentralization pattern of management emerges.
Leasing / Management Contracts: In this arrangement, the Government agrees to
transfer the use of assets of a public enterprise to a private bidder for a specified period.
While entering into a lease, the bidder is required to give an assurance of the quantum of
profits that would be made available to the State. This is a kind of tenure ownership. The
Government reserves the right to review the lease to the same person or grant the lease to
another bidder depending upon the circumstances of the cases.

Restructuring: It is said to occur when the public enterprise decides to shed some of its
activities to be taken up be ancillaries or small scale units.

Operational measures: The basic purpose of operational measures is to infuse the spirit
of private enterprise in public enterprises so that Government control is efficiently
reduced and private initiative is promoted. These measures include: a) grant of autonomy
to public enterprises in decision making b) provision of incentives for workers and
executives consistent with increase in efficiency and productivity c) freedom to acquire
certain inputs from the markets with a view to reducing costs. D) Development of proper
criteria for investment planning e) permission to public enterprises to raise resources
from the capital market to execute plans of diversification/expansion.

Objectives:

The objectives include:

 To achieve high rate of growth of national income
 To achieve full employment
 To achieve self – reliance
 To reduce inequality of income and wealth
 To reduce the number of people living below the poverty line
 To develop a pattern of society based on equality and absence of
exploitation

State Owned Enterprise / Public sector and its defects:

It is true that the operation of public sector and the regulatory framework resulted in
certain problems. These problems include:

1. The excessive development of bureaucratic controls began to act as shackles on

growth
2. Overstaffing in public sector enterprises leads to an increase in cost of operation
3. Low rate of return of investment
4. Poor work ethic in public sector enterprises due to excessive job security and
absence of incentives for better work
 5. Entry of public sector in areas of consumer goods for which it was never meant.
This unnecessary expansion resulted in absence of focus and dilution in the
quality of management.
6. Some public sector enterprises were incurring loss year – after – year and as such
had become a burden on the public exchequer instead of being an asset to the
nation.

The measures undertaken, whether liberalisation, globalisation or privatisation are all

designed to rectify these problems so that working of the economy becomes more
efficient and the rate of growth of the economy improves.

Benefits of Privatisation:

Privatisation benefits the society in several ways:

1. It reduces the fiscal burden of the State by retrieving it of the losses of the State
Owned Enterprises (SOE) and reducing the size of bureaucracy.
2. Privatisation of SOEs enables the Government to mop up funds
3. Privatisation helps the State to trim the size of the administration machinery
4. It enables the government to concentrate more o the essential state functions
5. It helps to accelerate the pace of economic development as it attracts more
resources from the private sector for development
6. It may result in better management of the enterprises
7. It encourages entrepreneurship
8. Privatisation encourages more of workers and common men to participate in the
share holding of the enterprise, thus exposing the enterprises to more of vigilance.

Disadvantages of Privatisation:

Privatisation does not guarantee unconditional success. It has its own pitfalls. The
commonly observed flows of privatisation are as follows:

1 Lack of proper strategy: An important reason for failure of privatisation is absence of

proper strategy or norms regarding the industries/units to be privatized, the method of
privatisation, extent of disinvestment, selection of buyers/investors etc.

2 Ambiguity of objectives: The real objective of privatisation is another problem. Is it

for raising revenue? Is it for making the enterprise competitive? If there are multiple
objectives then what is the priority list?

3 Hidden reasons: Sometimes politicians have hidden objectives behind privatisation. In

many cases, privatisation has taken place for wrong reasons, under wrong conditions and
in the wrong way.
4 Wrong timing: Many privatisation schemes could not get good price because of wrong
timing

5 lack of political consensus: privatisation is a political process too. Privatisation is not

carried out in real earnest because of lack of political will.

6 Wrong labour strategies: Most public enterprises have surplus labour. Privatisation
means getting rid of this excess labour force. This would lead to severe unemployment
problem as prospects for retraining and redeployment of labour are yet to be properly
explored in countries like India.

7 Poor financial strategies: Many privatisations are carried out without a good financial
strategy.

8 Problem of cultural change: Improvement of performance of an enterprise after the

privatisation will depend, inter alia, on bring about a change in the work culture and the
total enterprise culture. This is no easy task.

9 Wrong environments: Mere transfer of ownership does not help improve the
performance of an enterprise, environmental factors are the ones that contribute to
success of a firm. But where the market functions poorly, transferring ownership to
private sector is unlikely to achieve much.

Questions

Section A(2 marks)

1. Give the meaning of privatisation

Section B (8 marks)

2. What are the objectives and benefits of privatisation?

Section C (12 marks)

1. Comment on privatisation?
2. Bring out the different forms of privatisation
3. What are the arguments put forth against privatisation?

References:

Business Environment – Shaik Saleem, Pearsons Education

Essentials of Business Environment – K Aswattappa, Himalaya Publishers
Business Environment – Francis Cherunillam
 CHAPTER XI

MONETARY POLICY

The modern economy is regarded as a credit economy in the sense that credit forms the
basis of most of the economic activities in such an economy. The level and nature of
economic activities obviously are influenced by the cost and availability of credit. The
Central Bank controls the cost and availability of credit through the monetary policy.
Therefore monetary policy refers to the use of credit control instruments to influence the
level of aggregate demand for goods and services or to influence the trends in certain
sectors of the economy.
Measure of Money:

The Reserve Bank of India employs 4 measures of money stock, namely M1, M2, M3
and M4, where money supply is designated as “M”.

 M1 = Currency with the public + Demand deposits with banks

 M2 = M1 + Post office Savings Bank Deposits.

 M3 = M1 + Time Deposits with the Banks

 M4 = M3 + Total Post Office Deposits.

INSTRUMENTS OF MONETARY POLICY

General (Quantitative) methods Selective (Qualitative) methods

The general methods affect the total quantity of credit and affect the economy generally.
The selective methods on the other hand affect certain select sectors.

General (Quantitative) methods: There are three instruments of credit control.

1. Bank Rate
2. Open market operations
3. Variable Reserve Requirements

Bank Rate policy: the Bank rate, also known as discount rate, is the rate at which the
central bank discounts or more accurately re-discounts the eligible bills of commercial
banks. In a broader sense, it refers to the minimum rate at which the central bank
provides financial accommodation to commercial banks ion the discharge of its function
as the lender of last resort. An increase in the bank rate means an increase in the rate of
interest charged by the central bank on its advances to commercial banks. Hence, an
increase in the bank rate compels commercial banks to raise the rate of interest they
charge on their loans and advances to their customers. This reduces the extent of
borrowings, bringing about contraction in the money supply. A reduction in the Discount
rate has opposite effects. The central bank may, therefore, attempt to contain an
inflationary situation by raising the bank rate and fight a depression or recession by
lowering it.

Open market operations: open market operations refer broadly to the purchase and sale
by the central bank of a variety of assets, such as foreign exchange, gold, government
securities and even company shares. However, in India, they are confined to the purchase
and sale of government securities alone. To increase the money supply, central bank buys
securities from the commercial banks and public. Sale of securities by the central bank
has opposite effects.

Variable Reserve Requirements: Commercial banks in every country are required to

maintain a certain percentage of their deposits in the form of balances with the central
banks. The central bank has the power to vary this reserve requirement and the variation
affects the credit creating capacity of the commercial banks. For, instance, if the reserve
requirement is 10% the maximum amount the commercial bank can lend is 90% of its
total reserves. If this reserve ratio is increased by 40% then the bank cannot lend more
than 60% of its total reserves. The RBI is empowered to vary the cash reserve ratio
between 3% and 15% of the total demand and time liabilities.

Statutory Liquidity Ratio (SLR): Action has also been taken to prevent banks from off
setting the impact of variable reserve requirements by liquidating their government
security holdings. The Banking Regulation Act has been amended requiring all the banks
to maintain a minimum amount of liquid assets, which shall not be less than a certain
specified percentage of their demand and time liabilities.

Selective (Qualitative) methods: Selective or qualitative credit controls refers to the

regulation of credit for specific purposes or branches of economic activity. The
techniques of selective credit controls are:

1. Rationing of credit
2. Moral suasion
3. Direct action
4. Margin requirements
5. Regulation of consumer credit
6. Other methods

Rationing of credit: It means restrictions placed by the central bank, on demand for
accommodation, during the time pf monetary stringency. Restrictions are placed only on
a specific type of credit or to a particular sector.

Moral Suasion: It is also called indirect action, where in the central bank persuades the
commercial bank to exercise control over credit. For instance, during inflation the
commercial banks are asked to exercise proper control over non-essential, unproductive
and speculative loans

Direct Action: It embraces those cases where the central bank decides to take such
coercive measures against the defaulting commercial banks. For example if the central
bank knows that certain banks have made use of bank credit for speculation, it may
restrict credit and penalize the offending banks.

Margin requirements: While granting loans against the pledge of securities, only a
certain amount of book-value of the securities is permitted as loan. Margin refers to the
difference between the book value of these securities and the amount of loan. The higher
the percentage of margin, the lower will be the amount of loans against the securities.
The margin requirements in India have become a forceful instrument in checking
inflation. The margin requirements are prevalent in the cases of wheat, cotton, rice and
other commodities. This method has been used to prevent hoarding and speculations in
food grains and other commodities.

Regulation of Consumer Credit: The restrictions and availability of consumer credit

have become powerful instruments in averting the inflationary and deflationary trend.

Other Methods: The central bank may use other methods of controlling credit. The bank
may be vested with the direct power of controlling bank advances with mutual consent
between the central bank and commercial banks. The central bank can advise the
purposes for which advances may be made and the margin to maintain in the case of
secured loans.

Questions

Section A (2 marks)

1 What do you mean by monetary policy?

2 What is Bank rate policy?

3 What are the measures of money stock?

Section B (8 marks)

4 What are the quantitative measures taken by the central bank to control money supply?

Section C (12 marks)

5 What are the instruments of credit control? Explain

References:

Monetary Theory – M C Vaish, Vikas Publishers

Money, Banking and International Trade – M N Mishra – M N Mishra, S Chand & Co

Macro Economic Theory- M L Jhingan, Vrindha Publishers

Macro Economics – Ugene Diulio, Tata McGraw Hill

 CHAPTER XII

FISCAL POLICY

Fiscal policy plays an important role in the economic and social set up of a country.
Traditionally, fiscal policy was concerned with the determination of State income and
expenditure. However, over a period of time, the importance of fiscal policy has been
increasing given the need to attain rapid economic growth. Accordingly, public
borrowing and deficit financing have become a part of fiscal policy. An effective fiscal
policy consists of policy decisions relating to the entire financial structure of the
Government including tax revenue, public expenditure, loans transfers, debt
management, and budgetary deficit and so on.
Definitions: According to G K Shaw “We can define fiscal policy to include any design
to change the price level, composition or timing of government expenditure or to vary the
burden, structure of frequency of tax payment.”

Otto Eckstein defines fiscal policy as “Changes in taxes and expenditure which aim at
short run goals of full employment and price level stability.”

Objectives:

The most important goal of the fiscal policy is to attain rapid economic development. For
this purpose, the fiscal policy has adopted the following objectives:

To mobilize adequate resources for financing various programmes and projects adopted
for economic development.

 To raise the rate of savings and investment for increasing the rate of capital
formation
 To promote private sectors by providing fiscal incentives
 Equal distribution of wealth and income
 To maintain price stability
 Attainment of full employment
 To reduce regional disparities

Aspects of fiscal policy:

The instruments of fiscal policy are expenditure, taxes and public debts which constitute
the nation’s budget. The expenditures include normal government expenditures, subsidies
of various types, transfer payments and social security benefits. While the government
expenditures are income generating, taxes are primarily, incomes reducing. Management
of public debt has become am important instrument of fiscal policy in most of the
countries. It aims at influencing aggregate spending through changes in the liquid asset
position.

Budget:

The fiscal policy operates through the budget. The budget is an estimate of government
expenditure and revenue for the ensuing financial year, presented to Parliament (Union
Budget) by the Finance Minister. Occasionally, in times of financial crises, interim
budgets may be introduced later in the year to increase taxation, expenditures etc.

The Union Budgets:

The Constitution of India provides that:

No tax can be levied or collected except by authority of law

No expenditure can be incurred for public funds except in the manner provided in the
Constitution.

The executive authorities must spend public money only of Union and by the State
legislature in the case of a State legislature in the case of a State.

An estimate of all anticipated revenue and expenditure of the Union government for the
ensuing financial year is laid before Parliament on the last working day of February every
year. This is known as the Budget and covers the central government’s transactions of all
kinds in and outside India during the year. All receipts and disbursements of the Union
Government are kept under two separate headings namely, the Consolidated Fund and
Public Account of India.

Consolidated Fund:

It comprises of all expenses received, loans raised and money received in repayment of
loans by the Union Government. No money can be withdrawn from this fund except
under the authority of an Act of Parliament.

Public Account:

All other receipts and disbursements, such as deposits, service funds and remittances go
into the Public Account which is not subject to vote by the Parliament.

Contingency Fund:

To meet unforeseen needs not provided in the Annual Appropriation Act, a Contingency
Fund of India has also been established under Article 267 (1) of the Constitution.

The Structure of the Budget:

Budget

Receipts Disbursements
 Revenue Capital Revenue Capital

The budget is divided into revenue (receipts) and expenditure (disbursements). The
receipts are, thus, broken up into revenue receipts and capital receipts and
disbursements are broken up into revenue expenditure and capital expenditure.

The revenue expenditure includes all current expenditure of the government on

administration and the capital expenditure includes all the capital transactions of the
government.

The revenue receipts include revenue from taxes while capital receipts include market
loans, external aid, income from repayments and other receipts such as income from
public undertakings.

State Budgets:

Like the Union Government, State governments, too, have their own budgets. Estimates
of receipts and expenditure are presented by the State Governments to their legislatures
before the beginning of the financial year and legislative sanction of expenditure is
secured through similar procedure.

As in the case of the Union Government, the Constitution has provided for the
establishment of Consolidated Fund, a Public Account and a Contingency Fund for each
state.

Questions

Section A (2 marks)

1 Define Fiscal Policy

2 Give two objectives of fiscal policy

3 What is a budget?

Section B (8 marks)

What are the objectives of fiscal policy?

Write short notes on Union Budget and Structure of Budget

Reference:

Monetary Theory – M C Vaish, Vikas Publishers

Money, Banking and International Trade – M N Mishra – M N Mishra, S Chand & Co

Macro Economic Theory- M L Jhingan, Vrindha Publishers

Macro Economics – Ugene Diulio, Tata McGraw Hill

Macro Economics Theory and Applicatons – G S Gupta, Tata McGraw Hill

CHAPTER XIII

EXIM POLICY

EXIM POLICY, 2002-07

The following is the sector wise policy changes and initiatives of the Exim Policy 2002-
07;

Special Economic Zones (SEZs)

Offshore Banking Units (OBUs) shall be permitted in SEZs. This should help some of
our cities emerge as financial nerve centres of Asia. Units in SEZ would be permitted to
undertake hedging of commodity price risks, provided such transactions are undertaken
by the units on stand-alone basis. This will impart security to the returns of the unit. It has
also been decided to permit External Commercial Borrowings (ECBs) for tenure of less
than three years in SEZs. This will provide opportunities for accessing working capital
loan for these units at internationally competitive rates.

Employment oriented

(a) -Agriculture

Export restrictions like registration and packaging requirement are removed on Butter,
Wheat and Wheat products, Coarse Grains, Groundnut Oil and Cashew to Russia .
Quantitative and packaging restrictions on wheat and its products, Butter, Pulses, grain
and flour of Barley, Maize, Bajra, Ragi and Jowar have already been removed on 5th
March, 2002. Restrictions on export of all cultivated (other than wild) varieties of seed,
except Jute and Onion, removed. To promote export of agro and agro based products, 20
Agri export zones have been notified. In order to promote diversification of agriculture,
transport subsidy shall be available for export of fruits, vegetables, floriculture, poultry
and dairy products.

b) Cottage Sector and Handicrafts

An amount of Rs. 5 crores under Market Access Initiative (MAI) has been earmarked for
promoting cottage sector exports coming under the KVIC. The units in the handicrafts
sector can also access funds from MAI scheme for development of website for virtual
exhibition of their product. Under the Export Promotion Capital Goods (EPCG) scheme,
these units will not be required to maintain average level of exports, while calculating the
Export Obligation. These units shall be entitled to the benefit of Export House status on
achieving lower average export performance of Rs.5 crores as against Rs. 15 crores for
others; and the units in handicraft sector shall be entitled to duty free imports of an
enlarged list of items as embellishments upto 3% of FOB value of their exports.

c) Small Scale Industry

With a view to encouraging further development of centres of economic and export

excellence such as Tirupur for hosiery, woollen blanket in Panipat, woollen knitwear in
Ludhiana, following benefits shall be available to small scale sector:

i. Common service providers in these areas shall be entitled for facility of EPCG scheme.

ii. The recognised associations of units in these areas will be able to access the funds
under the Market Access Initiative scheme for creating focused technological services
and marketing abroad.

iii. Such areas will receive priority for assistance for identified critical infrastructure gaps
from the scheme on Central Assistance to States
iv Entitlement for Export House status at Rs. 5 crores instead of Rs. 15 crores for others.

(d) Leather

Duty free imports of trimmings and embellishments upto 3% of the FOB value hitherto
confined to leather garments extended to all leather products.

(e) Textiles

i. Sample fabrics permitted duty free within the 3% limit for trimmings and
embellishments. ii.10% variation in GSM be allowed for fabrics under Advance Licence.

iii. Additional items such as zip fasteners, inlay cards, eyelets, rivets, eyes, toggles,
Velcro tape, cord and cord stopper included in input output norms. iv. Duty Entitlement
Passbook (DEPB) rates for all kinds of blended fabrics permitted. Such blended fabrics to
have the lowest rate as applicable to different constituent fabrics.

(f) Gem & Jewellery

i. Customs duty on import of rough diamonds is being reduced to 0%. Import of rough
diamonds is already freely allowed. Licensing regime for rough diamond is being
abolished. This should help the country emerge as a major international centre for
diamonds. ii. Value addition norms for export of plain jewellery reduced from 10% to
7%. Export of all mechanised unstudded jewellery allowed at a value addition of 3 %
only. Having already achieved leadership position in diamonds, now efforts will be made
for achieving quantum jump on jewellery exports as well. iii. Personal carriage of
jewellery allowed through Hyderabad and Jaipur airport as well.

Technology oriented

a) Electronic hardware

The Electronic Hardware Technology Park (EHTP) scheme is being modified to enable
the sector to face the zero duty regime under ITA(Information Technology Agreement)-1.

b) Chemicals and Pharmaceuticals

All pesticides formulations to have 65% of DEPB rate of such pesticides. Free export of
samples without any limit. Reimbursement of 50% of registration fees for registration of
drugs.

c) Projects
Free import of equipment and other goods used abroad for more than one year.

Growth Oriented

a) Strategic Package for Status Holders

The status holders shall be eligible for the following new/ special facilities:

i. Licence/Certificate/Permissions and Customs clearances for both imports and exports

on self-declaration basis. ii. Fixation of Input-Output norms on priority; iii. Priority
Finance for medium and long term capital requirement as per conditions notified by RBI;
iv. Exemption from compulsory negotiation of documents through banks. The remittance,
however, would continue to be received through banking channels; v. 100% retention of
foreign exchange in Exchange Earners/ Foreign Currency (EEFC) account; vi.
Enhancement in normal repatriation period from 180 days to 360 days.

b) Neutralising high fuel costs

I. Fuel costs to be rebated by it in Standard Input Output Norms (SIONs) for all export
products. This would enhance the cost competitiveness of our export products. The value
of fuel to be permitted as a percentage of FOB value of exports for various product
groups is as under:

Product Group Value of fuel as a percentage of FOB value of exports Bulk Drug and
Drug Intermediates 5%Dye and Dye Intermediates 4%Glass 5%Ceramic Products
5%Paper made from wood pulp/ waste paper 5%Pesticides (Technical)/ Pesticides
formulation from Basic Stage 5%Refractory items 7%Ferrous engineering products
manufactured though forging/ casting process 7%Non ferrous basic metal 4%Plastic and
plastic products from basic/ monomer stage 5%Fibre to yarn 4%Yarn to fabric/ madeups/
garments 3%Fibre to fabric/ makeup’s/ garments 7%

c) Diversification of markets

Setting up of "Business Centre" in Indian missions abroad for visiting Indian

exporters/businessmen.

ITPO portal to host a permanent virtual exhibition of Indian export product.

iii) Focus LAC (Latin American Countries) was launched in November, 1997 in order to
accelerate our trade with Latin American countries. This has been a great success. To
consolidate the gains of this programme, we are extending this upto March, 2003.

Focus Africa is being launched today. There is tremendous potential for trade with the
Sub Saharan African region. During 2000-01, India’s total trade with Sub Saharan
African region was US$ 3.3 billion. Out of this, our exports accounted for US$ 1.8 billion
and our imports were US$ 1.5 billion. The first phase of the Focus Africa programme
shall include 7 countries namely, Nigeria, South Africa, Mauritius , Kenya, Ethiopia,
Tanzania and Ghana. The exporters exporting to these markets shall be given Export
House Status on export of Rs.5 crores

v) Links with CIS countries to be revived. We have traditional trade ties with these
countries . In the year 2000-01, our exports to these countries were to the extent of US$
1082 million. In this group, Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Ukraine
and Azerbaijan to be in special focus in the first phase.

d) North Eastern States, Sikkim and Jammu & Kashmir

Transport subsidy for exports to be given to units located in North East, Sikkim and
Jammu & Kashmir so as to offset the disadvantage of being far from ports.

e) Re-location of industries

To encourage re-location of industries to India, plant and machineries would be permitted

to be imported without a licence, where the depreciated value of such relocating plants
exceeds Rs. 50 crores.

Reduction in transaction time & cost

With a view to reducing transaction cost, various procedural simplifications have been
introduced. These include:

DGFT

i. A new 8 digit commodity classification for imports is being adopted from today. This
classification shall also be adopted by Customs and DGCI&S shortly. The common
classification to be used by DGFT and Customs will eliminate the classification disputes
and hence reduce transaction costs and time. Similarly, Ministry of Environment and
Forests is in the process of finalisation of guidelines to regulate the import of hazardous
waste.

ii. Further simplification of all schemes.

iii. Reduction of the maximum fee limit for electronic application under various schemes
from Rs. 1.5 lakh to Rs. 1.00 lakh. iv. Same day licensing introduced in all regional
offices.

Customs

Adoption and harmonisation of the 8 digit ITC(HS) code.

The percentage of physical examination of export cargo has already been reduced to less
than 10 percent except for few sensitive destinations.

The application for fixation of brand rate of drawback shall be finalised within 15 days.

Banks

Direct negotiation of export documents to be permitted. This will help the exporters to
save bank charges.

100% retention in EEFC accounts.

The repatriation period for realisation of export proceeds extended from 180 days to 360
days. The facility is already available to units in SEZ and exporters exporting to Latin
American countries.

These facilities are being made available to status holders only for the present.

Trust Based

Import/Export of samples to be liberalised for encouraging product upgradation.

Penal interest rate for bonafide defaults to be brought down from 24% to 15%.

No penalty for non-realisation of export proceeds in respect of cases covered by ECGC

insurance package.

No seizure of stock in trade so as to disrupt the manufacturing process affecting delivery

schedule of exporters.

i. Foreign Inward Remittance Certificate (FIRC) to be accepted in lieu of Bank

Realisation Certificate for documents negotiated directly. ii. Optional facility to convert
from one scheme to another scheme. In case the exporter is denied the benefit under one
scheme, he shall be entitled to claim benefit under some other scheme. iii. Newcomers to
be entitled for licences without any verification against execution of Bank Guarantee.

Duty neutralisation instruments

a) Advance Licence:

The exporters can avail Advance Licence for any value. Mandatory spares to be allowed
in the Advance Licence upto 10% of the CIF value.

b) Duty Free Replenishment Certificate (DFRC)

Technical characteristics to be dispensed with for audit purpose.

c) Duty Entitlement Passbook (DEPB)

Value cap exemption granted on 429 items to continue. DEPB rates for composite items
to have lowest rate.

d) Export Promotion Capital Goods (EPCG)

EPCG licences of Rs.100 crores or more to have 12 year export obligation (EO) period
with 5 year moratorium period. EO fulfillment period extended from 8 years to 12 years
in respect of units in agri-export zones and in respect of companies under the revival plan
of BIFR. Supplies under Deemed Exports to be eligible for export obligation fulfillment
along with deemed export benefit. Re-fixation of EO in respect of past cases of imports
of second hand capital goods under EPCG Scheme.

References:

Money Banking and International Trade – M N Mishra, Himalaya Publishers

Money, Banking and Foreign Exchange – Hari Gopal Dass, SPB Publishers

Foreign Exchange - Jeevanandam

UNIT III

CHAPTER XIV

TECHNOLOGICAL ENVIRONMENT

The concept of technology:

Technology essentially means “know-how” that is, ways of designing, manufacturing and
utilizing things. It can also be defined as the “know-how” to transfer concepts into goods
and services for the satisfaction of customers. It is a broad form of resource endowment –
an embodiment of knowledge for production of goods and services. Technology is
imbibed in various forms; These forms would comprise know – how, know-why,
technological processes, designs, drawings, specifications, computer programmes and
other information, besides industrial training, industrial property rights etc.

Definitions:

"Technology is the application of organized knowledge to practical tasks by ordered

systems of people and machines."--Arnold Pacey

J K Gailnraith defines “technology as a systematic application of scientific or other

organised knowledge to practical tasks”

Difference between Science and Technology

Science Technology
In pursuit of knowledge In pursuit of socio-economic gains
People involved are scientists People involved are engineers
Research institutions and universities are Industrial establishments are involved
involved
Governments provides funds for the projects Industry provides funds for the
projects
To satisfy curiosity To satisfy customers
It is not a private affair It is a private affair
It is not a continuous process It is a continuous process
It is uncertain It is evolutionary

Features of Technology: Includes,

1. Change

2. Reduces time gap between Idea and Implementation

3. More benefits

4. Self-reinforcing

Change: The first feature of technology is change. Technology forces change on people
whether they are prepared for it or not. But technology gains importance only when it is
accepted by people. For example, the acceptance of Mobile technology in India. A
decade before very few people in India has heard about this technology. But now almost
everyone is aware of this technology and majority of them depend on this technology.
Sometimes it so happens that changes come too fast that it creates a “future shock” for
the people to cope up.

Reduces time gap between Idea and Implementation: The time gap between
conception of a new idea and its implementation is falling rapidly.

More benefits: Spread of technology is too fast and can see the impact even in remote
places of the world. For example, the internet technology has spread in every nuke and
corner of the word.

Self-reinforcing: An additional feature of technology is that it is self-reinforcing.

“Technology feeds on itself. Technology makes more technology possible” One
invention gives way to another invention. Technology improves itself. For example the
invention of Information technology gave way to another technology called Bio-
Technology.

Impact of Technology:

Now let us analyse the impact of technology under the following heads:

1. Impact of technology on mankind

2. Technology's Effect on economy

3. Impact of technology on Education

4. Plant level implications

5. Technology's Effect on Society
6. Technology's Effect on the Environment

Impact of Technology on mankind: Mankind had made quantum leaps in bring

standards and economic levels through the use of specific technologies in the past. For
example, our civlisation has gone through different phases of evolution in which
technologies have played a major role. Right from the stone age, technological
breakthroughs like the discovery of fire, production of cereals, crops, oil and mineral
exploration, invention of wheel, printing press, electricity, integrated circuits etc have
changed the very fabric of life. We are entering a development phase in which our lives
are getting revolutionised with the advent of science – based technologies like genetic
engineering, super conductivity, artificial intelligence, fuzzy logics etc. Thus technology
has become an important factor to be reckoned with at the national level.

Technology's Effect on economy: Whether it is an existing historical technology or a

burgeoning one that is just beginning, the impact of technology on the commercial
aspect of human culture is a major one.

Most technological changes begin in the economic realm. Technology is a key factor in
the supporting and developing of an economy, in the securing and maintaining of jobs for
the population, and most certainly in determining the level of economic welfare
experienced by the members of the society. What is the effect of the new technology on
business and commerce? Does it represent new goods and services? Are we dealing with
new products resulting from technological change? If so, how will the new products
impact the economic structure?

One source of new technology is the search for increased economic efficiency and a
sincere desire to reduce the cost that the society has to pay for the availability of goods.
Technology impacts what people buy, what they choose to do with their time and
possibly the price of other goods.

As a secondary effect, how will the new technology create changes in unrelated or
distantly related markets? The computer was a fantastic new technology. Indeed, it still
is. The changes that have taken place in the business world reach far beyond the
immediate impact anticipated. On the surface, it was not difficult to realize that the
computer would affect the market for mechanical devices designed to do tasks that a
computer does, such as adding machines, typewriters, or even automatic mechanical
control mechanisms.

As a result of computer technology, an entirely new industry had been born in the form of
the microprocessor, a stepchild of the larger computer industry available only to big
businesses with big dollars to buy big computing power. New skills and new
opportunities for employment have come about as a result. Jobs tend to become more
intellectual. Here is a new technology that has transformed the entire economic structure.

The most fundamental effect of technology is greater productivity in terms of quantity

and quality. As a result of productivity, real wages of employees tend to rise and prices of
products decline, which spreads the beneficial economic effects of technology through
out the whole social system. The result is that employees and citizens are motivated to
want more technological advancement.

High end technology adoption requires larger investment. The country’s economy is in
the hands of people who can make such huge investments. Today’s technology is
characterised by insatiable demand for capital. Therefore financial management
assumes greater responsibility.
Technological change is a potent force in reconfiguring of industrial boundaries, it
may broaden or narrow generally accepted industrial boundaries. With the advent of
internet, the whole world has become one global village. Therefore technology has
redefined business boundaries.

Impact of technology on Education: With the changes in technology, the whole concept
of education changed. As a result, the traditional one-room school of the last century has
shifted to the mass education institutions of today. Indeed, education is ever in the
throes of technological change. One hundred years ago, a person might spend five to
seven years in the same school, learning from the same teacher. Less than fifty years ago,
education meant larger, more centralized schools, with more facilities shared by a larger
number of students, and extended opportunities for gaining knowledge. Today, there is a
shift away from the centralized approach, we are looking at e-learning or online
education where in the students need not even leave their homes in order to receive the
education that they desire.

Technological advancement has made business more complex and demanding. Today’s
business requires bio-professional and multi - professional managers. Therefore the
Educational Institutions design their curriculum in such a way to cater to the needs of
business organisations

Plant level implications: Technology impacts organisation is many ways. They include:

Technology has considerable influence on organisation structure like length of the line
of command, span of control etc. Where companies use technology which is fast
changing, matrix structure are more common.

There is always a fear of risk. Even a research-oriented company like DU-PONT, with
its introduction of synthetic fibres in 1939, had to face failures.

Resistance to change towards adoption to new technology is another problem.

Resistance to change could be due to, Psychological attachment to the existing products
and processes, huge capital investments, lack of successful entrepreneurs, labour
resistance etc.

The concept of Total Quality Management (TQM) is being practiced by almost all the
organisations these days. It implies, meeting the customer’s requirements on time, error-
free work and measurement of performance in terms of quality.

Along with TQM, concepts like Business process re-engineering (BPRE) and Flexible
manufacturing systems (FMS) are also followed by organisations these days. BPRE
essentially involves considering how thing would be done if the organisation were to start
all over from the scratch. BPRE is being considered essential in the modern competitive
world. An organisation can earn profits only if it can cut down its costs and wastages and
improve its product quality. BPRE helps the organisation to achieve all these. It would
also mean shuffling of work and employees as well according to the requirements of the
re-engineered process. FMS is another by-product of technology. Under FMS,
machines are designed to produce batches of different products. The unique characteristic
of FMS is that by integrating computer aided design, engineering and manufacturing they
can produce low-volume products for customers at a cost comparable to what had been
previously possible through mass production.

Technology's Effect on Society:

No let us see the extent to which a technology affects social systems, the basic patterns
among social groups, the changing patterns of needs and need fulfillment again resulting
from technological change.

Migration of population: Workers in an industrial setting are able to command higher

wages than farm workers. This is a fact of economic life. It is the result of the efficiency
of labor in an industrial setting compared with the efficiency and productivity of farm
workers, on whom, at the time of the first industrializing moves in India, the country's
economy was based. Economic systems recompense workers in accordance with their
productivity rather than how hard or how long they work. It is their production level that
determines how valuable they are. For the industrial worker, whose level of productivity
working in a mill or production plant is as much as ten times what his or her farmer
counterpart could achieve, this meant ten times the wages for the same amount of work
by simply shifting from farming to industrial work. Thus the mass migration from the
country to the city occurred, with its accompanying rapid rise in urban population.

Industrial concentration: The industries were located in urban areas near supplies of
raw materials, centers of transportation and communication, and markets. Industrial
concentration and bigness, being the way to achieve efficiency, meant concentrating
industry in small areas, which led to the packing of population in and around those
locations where high-paying, high-productivity jobs existed.

Over crowding: With these heavy concentrations of large number of people came all the
problems of urban life which were no more than mere annoyances to the general
population. Families lived closer to one another. The unavailability of living space
created multistory and multifamily living. Families found themselves in close proximity
to neighbors, unable to depend on themselves for food and simple tools, dependent
instead on supplies bought in local neighborhood markets. With crowding came an
increase in crime, an increase in disease, and an increase in stress on the family unit.

City life, with its compacted physical structure and rapid pace, replaced the easygoing,
steady pace of rural communities. One no longer knew everyone in the neighborhood or
in the community People came and went more frequently. Mobility increased for some
and decreased for others. Time telescoped as efficiency in business spread as a concept to
efficiency in life style.
Dispersion, particularly among generations, tended to decrease the level of interaction
among members of the extended family and to increasingly isolate the primary family
unit.

New social institutions have arisen as a result of the industrialization process. Unions
arose as groups of workers fought for their collective rights. New groups within the work
environment have risen to satisfy or thwart many of the needs of individual workers who
are no longer able to obtain need fulfillment through the extended family. Identification
with cliques, social groups from the work environment, or the company itself forms
social structures for the benefit of the urbanized worker, a condition neither necessary nor
possible in the older, agrarian culture of pre-industrialised India.

Communication technology: These processes are still taking place in the late twentieth
century as our technology alters our perceptions and our patterns of living. Television and
telephone communication have replaced the more personalized forms of communication,
again isolating us from one another and reducing the opportunity for interaction and the
need to form social structures through traditional channels. The high-tech is no myth. It
exists and promises to have a strong influence on our social behavior in the foreseeable
future.

The key is to determine how a technology will affect the opportunity and the probable
form of social systems as it alters our day-today lives. As an evolving species, humans
should expect change and the changes in social structure that result from technological
innovation will determine to a large degree the quality and kind of life available to us in
the future.

Technology's Effect on the Environment

Every technology affects the environment to some extent, just as it affects every physical
entity to some degree. Many of the technological advances brought forth in recent years
have been viewed as detrimental to ecological balance. Acid rain threatens wide ranges of
forests and farmland. Pollution from nuclear tests is suspected of causing cancer in
victims unfortunate enough to be exposed to it, Diversion of water from natural sources
feeds towns and cities, only to create shortages elsewhere. Leisure use of natural habitats
destroys landscapes and threatens the homes of wildlife. Oil spills pollute our oceans, the
main source of oxygen for the planet, leaving a trail of tar and oil solids from one
continent to another. The list could go on and on . . .

In addition to the detrimental effects that technology can be viewed as creating, there are
also positive effects .It is through our understanding of nature that we can prevent
disaster by destroying diseases detrimental to wildlife or save endangered species facing
starvation and extinction, not from the hands of humankind but from the pressure of
natural droughts. Science and technology can reclaim natural wilderness areas as well as
destroy them, protect the integrity of ecological systems as well as disrupt them, and
prevent catastrophic occurrences as well as create them. As with any other human
system, it is the use to which technology is put that determines its desirability, not the
nature of the technology itself.

MANAGEMENT OF TECHNOLOGY

The degree to which technology plays a role in a company’s strategy varies from one
company to another. For some, technology plays a major role, for others it may be minor.
However, every company employs technology of some sort which has to be managed. It
is one resource which influences the entire gamut of business management operations
viz, human resource management, financial management, engineering, manufacturing,
marketing etc. more intensively than any other factor. This is primarily due to:

 Shorter life cycles of technology (i.e., the rate of technological obsolescence

becoming significantly high)
 Globalisation of market (i.e., business needs have to be viewed in global
context)
 Business becoming more and more technology-driven rather than market-
driven
 Multifold increase in technology trade (i.e., technology becoming an
international commodity)
 Emergence of faster communication networks and information technologies
(ideas know no national barriers)
 Significant reduction of time between innovation and commercialization of
innovative products
 Fueling of competition through liberalisation of economies
 Research and development becoming extremely capital and skill intensive

Therefore Technology Planning becomes essential.

The first task in planning for technology is identification of key technologies with
reference to company, which are crucial to its business operations, necessary financial
and human resources must be committed in the company for the development of these
technologies. The next step in technology planning is upgradation and prepare for change
instead of being overtaken by surprises. Thus there are two main routes for technology
upgradation:

a) Technology acquisition
b) Indigenous development through R&D

In today’s world, technology has become a global commodity and there is nothing like
self-sufficiency in technology. Technology generators are also major technology buyers
and there is global technology market existing today. A company must therefore, assess
both its short-term and long-term technology needs and choose a strategy of indigenous
development or acquisition depending upon the market/business needs. The key factors to
be considered while deciding upon indigenous development Vs technology acquisition
could be as follows:
a) Acquisition of Technology is preferred where:

i. Technology gap is high and in-house R&D is expected to be too costly and
time consuming
ii. Technology is available easily on attractive terms. Indian competitors have
access to contemporary technology either through collaborations or through
their principals (in case of Multinational or Joint Venture companies)
iii. Customers prefer a particular technology or insist on back-up guarantee from
a collaborator.

b) In-house Development of Technology of preferred where:

i. Gap is narrow to enable in-house development on time

ii. There is not much competition in the are aor market is still in the nascent stage
iii. Technology is not available commercially
iv. Technology acquisition cost is prohibitive
v. Sufficient skills/expertise are available in-house/in the country to undertake
indigenous development
vi. Cost of indigenous R&D, including demonstration plant/prototype etc is within
reasonable limits.

INSTITUTIONAL AND OTHER FACILITIES TO PROMOTE SCIENCE AND

TECHNOLOGY

Government has established series of research establishments and granted recognition to

in-house R&D centres run by private industries and educational institutions. The
Government has been offering many monetary ad fiscal sops for the purpose. The
facilities available are as follows:

Institutional Arrangement

1. Apex level organisations:

1. Department of Scientific and Industrial Research(DSIR)

2. national Research Development Corporation (NRDC)
3. Department of Science and Technology (DST)
4. Council of Scientific and Industrial Research(CSIR)
5. Department of Biotechnology
6. Department of space(DOS)
7. Department of Atomic Energy (DAE)
8. Department of Electronics(DOE)
9. Department of Defence R&D
10. Ministry if Industry
11. Department of Mines
12. Department of Ocean development
13. Venture Capital companies for Technology Development
2. Research and Development by industry:

In house R&D units recognised by the government include:

1. Chemical and allied industries

2. Electrical and Electronics industries
3. Mechanical Engineering
4. Processing industries
5. Agro industries

Major industry associations such as FICCI, ASSOCHAM, CII, Indian chemical

Manufacturers Association and the like have also been active in promoting research.

3. Incentives

1. Income Tax relief on R&D expenditure

2. Weighted tax deduction for sponsored research
3. Accelerated depreciation allowance
4. Five year tax holiday to commercial R&D projects
5. Excise duty exemption on goods imported for R&D projects
6. Excise duty waiver on patented products
7. Excise duty waiver on non-commercial research institutions
8. Price control exemption on domestic R&D based bulk drugs

4. New Technological Initiative

1. Technology parks
2. Joint R&D companies
3. Joint Industry-national laboratory programmes
4. Joint Test/Evaluation Centres
5. Technology-Business incubation Centres
6. C0-operative Research Associations for SSIs
7. Commercial R&D companies

Suggested Reading:

SCIENCE AND TECHNOLOGY POLICY 2003

POLICY OBJECTIVES
Recognizing the changing context of the scientific enterprise, and to meet present
national needs in the new era of globalisation, Government enunciates the following
objectives of its Science and Technology Policy:

 To ensure that the message of science reaches every citizen of India, man and
woman, young and old, so that we advance scientific temper, emerge as a
progressive and enlightened society, and make it possible for all our people to
participate fully in the development of science and technology and its application for
human welfare. Indeed, science and technology will be fully integrated with all
spheres of national activity.

 To ensure food, agricultural, nutritional, environmental, water, health and energy

security of the people on a sustainable basis.

 To mount a direct and sustained effort on the alleviation of poverty, enhancing

livelihood security, removal of hunger and malnutrition, reduction of drudgery and
regional imbalances, both rural and urban, and generation of employment, by using
scientific and technological capabilities along with our traditional knowledge pool.
This will call for the generation and screening of all relevant technologies, their
widespread dissemination through networking and support for the vast unorganized
sector of our economy.

 To vigorously foster scientific research in universities and other academic, scientific

and engineering institutions; and attract the brightest young persons to careers in
science and technology, by conveying a sense of excitement concerning the
advancing frontiers, and by creating suitable employment opportunities for them.
Also to build and maintain centres of excellence, which will raise the level of work
in selected areas to the highest international standards.

 To promote the empowerment of women in all science and technology activities and
ensure their full and equal participation.

 To provide necessary autonomy and freedom of functioning for all academic and
R&D institutions so that an ambience for truly creative work is encouraged, while
ensuring at the same time that the science and technology enterprise in the country is
fully committed to its social responsibilities and commitments.

 To use the full potential of modern science and technology to protect, preserve,
evaluate, update, add value to, and utilize the extensive knowledge acquired over the
long civilizational experience of India.

 To accomplish national strategic and security-related objectives, by using the latest

advances in science and technology.

 To encourage research and innovation in areas of relevance for the economy and
society, particularly by promoting close and productive interaction between private
and public institutions in science and technology. Sectors such as agriculture
(particularly soil and water management, human and animal nutrition, fisheries),
 water, health, education, industry, energy including renewable energy,
communication and transportation would be accorded highest priority. Key leverage
technologies such as information technology, biotechnology and materials science
and technology would be given special importance.

 To substantially strengthen enabling mechanisms that relate to technology

development, evaluation, absorption and upgradation from concept to utilization.

 To establish an Intellectual Property Rights (IPR) regime which maximise the

incentives for the generation and protection of intellectual property by all types of
inventors. The regime would also provide a strong, supportive and comprehensive
policy environment for speedy and effective domestic commercialisation of such
inventions so as to be maximal in the public interest.

 To ensure, in an era in which information is key to the development of science and

technology, that all efforts are made to have high-speed access to information, both
in quality and quantity, at affordable costs; and also create digitized, valid and usable
content of Indian origin.

 To encourage research and application for forecasting, prevention and mitigation of

natural hazards, particularly, floods, cyclones, earthquakes, drought and landslides.

 To promote international science and technology cooperation towards achieving the

goals of national development and security, and make it a key element of our
international relations.

 To integrate scientific knowledge with insights from other disciplines, and ensure
fullest involvement of scientists and technologists in national governance so that the
spirit and methods of scientific enquiry permeate deeply into all areas of public
policy making.

 It is recognized that these objectives will be best realized by a dynamic and flexible
Science and Technology Policy, which can readily adapt to the rapidly changing
world order. This Policy, reiterates India’s commitment to participate as an equal and
vigorous global player in generating and harnessing advances in science and
technology for the benefit of all humankind.

STRATEGY AND IMPLEMENTATION PLAN:

a. Science and Technology Governance and Investments
b. Optimal Utilization of Existing Infrastructure and Competence
c. Strengthening of the Infrastructure for Science and
Technology in Academic Institutions
d. New Funding Mechanisms for Basic Research
 e. Human Resource Development
f. Technology Development, Transfer and Diffusion
g. Promotion of Innovation
h. Industry and Scientific R&D
i. Indigenous Resources and Traditional Knowledge
j. Technologies for Mitigation and Management of Natural Hazards
k. Generation and Management of Intellectual Property
l. Public Awareness of Science and Technology
m. International Science and Technology Cooperation
n. Fiscal Measures
o. Monitoring

Questions

Section A (2 marks)

1. Define is technology?
2. Give two differences between science and technology
3. What is impact of technology on the environment?
4. Mention two institutions that promotes science and technology

Section B (8 marks)

5. Define technology. Bring out the features of technology

6. Give the institutional support for promoting science and technology
7. Brief on management of technology

Section C (12 marks)

8. Analyse the impact of technology

References:

Business Environment – Francis Cherunillam, Himalaya Publishers

Essentials of Business Environment – K Ashwattappa, Himalaya Publishers

UNIT IV

CHAPTER XV

POLITICAL ENVIRONMENT
The political environment can be called as legal or regulatory environment. Presently, the
central, state and local governments of many countries are increasingly affecting the
operations of almost all businesses. The governments may legislate on matters like wage
and price control, safety and health at work, location of the plants, waste treatment etc.
Government policies about its relationship with business can change over time. With the
change in government the policies of the firms and the complexion of threats and
opportunities may also change. Sometimes the government may subsidise certain goods
or give certain concession to the firm which produce certain goods. These activities will
encourage some firms to grow faster.

Three Political institutions: The political system in a democratic country like India
comprises of three vital institutions. They are legislature, executive or government and
judiciary.

Legislature:

Of the three, legislature is the most powerful political institution vested with such powers
as policy making, law-making, budget approving, executive control and acting as a
mirror of public opinion. It comprises of the union which is called Parliament, consists of
President and two houses, Lok Sabha and Rajya Sabha.

The influence of the legislature on business is considerable. It decides such vital aspects
as the type of business activities the country should have, who should own them, what
should be their size of operations, what should happen to their earnings and other related
factors.

Comparison between the two houses

Rajya Sabha (Council of States) Lok Sabha (House of the People)

Also known as “The Upper House” Also known as “The Lower House”
Has got more than 250 members Has got 552 members
Of these 250, 12 are nominated by the President Out of 552, 2 are appointed by the
President to represent Anglo-Indian
community
The rest 238 are indirectly elected by the state Upto 530 members are elected to
legislative assembly represent the states.
They are selected by the elected members of Upto 50 members are elected to
legislative assemblies of the states in accordance represent the Union Territories
with the system of proportional representation by
means of single transferable vote
The council of states cannot be dissolved The house of people can be
dissolved
All the members have term of 6 years to serve in All the members have 5 years term
parliament to serve in the parliament, unless
dissolved
1/3 members (83 members) retire at the end of Lok Sabha elects its presiding
 every 2nd year officer, the Speaker

Executive or Government:

Also called the ‘state’, the term Government refers to “the centre of political authority
having the power to govern those it serves”. The founders of our constitution provided
for a federal set-up, with powers being divided between the union and state governments.
The powers and functions of the central and state governments are described in the
Constitution.

Economic Roles of Government:

The Government plays an important role in almost every national economy of the world.
While the state control of economy is a universal phenomenon, the extent and nature of
the control vary widely between nations, depending upon the nature and stage of
development of the economy, the behaviour of the private sector, the political
philosophy, social attitudes, administrative system etc.

Government normally plays four important roles in an economy, viz, regulations,

promotion, entrepreneurship and planning. Some salient features of these roles are as
follows:

Regulatory Role:

Government regulation of the business may cover a broad spectrum extending from entry
into business to the final results of a business. The reservation of industries to small scale,
public and co-operative sectors, licensing system etc, regulate the entry. Regulation of
product mix, promotional activities etc. amount to regulation of the conduct of business.

Results of business operations may be regulated by such measures as ceilings on profit

margins, dividend etc. The State may also regulate the relationship between enterprises
for example restrictions on intra – corporate investments. Government regulation of the
economy may be broadly divided into direct controls and indirect controls. Indirect
controls are exercised through fiscal and monetary policies for example discouraging
imports by increasing import duty. Direct controls are discretionary in nature. They can
be applied selectively from firm to firm or industry to industry, at the discretion of the
State. Since the late 1980’s however, a deregulation trend has set in. This has drastically
transformed the competitive environment and has given a impetus to globalization.

Promotional Role:

The promotional role played by the government is very important in developed as well as
developing countries. In developing countries, where the infrastructural facilities for
development are inadequate and entrepreneurial activities are scarce, the promotional role
of the government assumes special significance. The State will have to assume direct
responsibility to build up and strengthen the necessary development of infrastructures,
such as power, transport, finance, marketing, institutions for training and guidance and
other promotional activities.
The promotional role of the State also encompasses the provisions of various fiscal,
monetary and other incentives, including measures to cover certain risks for the
development of certain priority sectors and activities.

Entrepreneurial Role:

In many economies, the State also plays the role of an entrepreneur – establishing and
operating business enterprises and baring the risks. A number of factors such as socio-
political ideologies, dearth of private entrepreneurship, neglect of certain sectors etc, have
contributed to the growth of State Owned Enterprises in many countries.
There was a tendency in many developing countries to assign a dominant place to the
public sector. Public sector dominance was usually established in capital-intensive
projects like steel, capital goods, petrochemicals and fertilizers for which investment
requirements were very large and the expected returns, at least in the short run were too
low to provide an incentive for profitability.
However, recently many governments have resorted to privatisation in varying degrees
and have redefined the role of the public sector.

Planning Role:

Especially in the developing countries, the State plays a very important role as a planner.
The need for economic planning is very well implied in the famous ‘scarcity definition’
of Economics. As Robbins points out in his ‘scarcity definition’, the main business of
science of Economic is the optimum allocation of scarce resources between the
competing ends.
The modern State is a custodian of the welfare of the society. It is the responsibility of
Government to bring about all around prosperity. But, in the case of developing
countries, the most important problem is scarcity of resources. Therefore some of the
purposes should go unserved. This calls for establishing national priority sectors and
optimal allocation of resources to these sectors. This is the principle objective of national
planning.

Government responsibility to Business:

As promoter and regulator of business activities, the Government has been discharging its
obligations quite effectively. Specifically, the Governments’ responsibilities towards
business are as follows:
 Maintenance of law and order
 Money and credit systems
 Orderly growth
 Proper infrastructure
 Provide information
 Assistance to small industries
  Transfer of technology
 Inspections and licenses
 Tariffs and quotas

Business responsibilities to Government:

Government sets the laws to protect all types of business firms. It is the responsibility of
the business firms to adhere to all these laws. The other responsibilities include:
 Payment of taxes
 Provision of information for the Government, for making strategic decisions
 Complete Government contracts on time
 Providing services to the Government like development of infrastructure etc.,
 Voluntary programs like drought relief, Tsunami relief etc
 Political activity like providing monetary support at the time of elections

The Judiciary:

The following are the salient features of the Indian Judiciary System:

1 Single and Integrated Judicial System: Unlike the U.S Constitution which provides
for a Federal judiciary ad a State judiciary for each State of the federation, the Indian
Constitution provides for a single integrated judiciary system with the Supreme Court at
the apex, the High Courts at the State level and other courts under the High Courts.

2 Independence of Judiciary: it provides for all the features which are essential for
making the judiciary independent. It provides for a) appointment of judges by the
President b) High qualifications and experience as a condition for appointment to the
office of Judgeship c) removal of judges by a difficult method of impeachment d) High
salaries for judges e) grant of pension and other service benefits to judges f) Adequate
powers and functional autonomy for the courts.

3 Judicial Review: The Supreme Court has the power to strike down any Act or a part of
any Act which is found to be unconstitutional by the Court.

4 Judiciary as the Final Interpreter of the Constitution: The Constitution of India is a

written and enacted Constitution. The right to interpret and apply the constitution stands
vested in the Supreme Court.

5 Provisions for Joint High Courts: There shall be a High Court for each State.
However, two or more States can by mutual consent, have common/Joint High Court.

6 Supreme Court as the Arbiter between the Union and the States: it acts as a arbiter
between (i) the government of India and one or more states or (ii) the government of
India and any other State or States on one side and one or more States on the other (iii)
between two or more States.
7 Guardian of Fundamental Rights: The people have the right to constitutional
remedies under which they can seek the protection of the court for preventing a violation
or for meeting any threat to their rights. The supreme Court and high Courts have been
vested with the power to issue orders, directions and writs for this purpose.

8 Separation of Judiciary from the Executive: The Constitution provides for separation
between the Judiciary and the other two organs of the Government. The judiciary is
neither a branch of the Executive nor in any way subordinate to it. The Judicial
administration in India is organised and run in accordance with the rules and orders of the
Supreme Court. Judicial administration is independent of the federal and state
administration

9 Seniority principles in the appointment of Chief Justice of India: With a view to

ensure non-interference of the executive in the appointment of Judges and Chief justice
of India, the seniority principle is fully adhered to.

10 Open trials: the accused is always given full opportunity to defend himself.

11 Judicial Activism: It means a pro-active approach of judiciary towards prevailing

socio-economic conditions in the country. It is aimed at securing a due implementation of
laws, policies and programmes by the executive. It constitutes a bold attempt on the part
of the judiciary to act as the effective guardian of law by acting to check executive
apathy. Example: The Public Interest Litigation System. Under it any citizen or a group
or a voluntary organisation, or even a court can suo motto, bring to notice any case
demanding action in the interest of the public. It provides for an easy, simple, speedier
and less expensive system of providing relief, under orders of the court, to the aggrieved
public or any section of the public.

12 Special Courts: A special court consists of a sitting judge of a High Court or of the
District Court within the local limits of whose jurisdiction the Special Court is situated. A
special court is empowered to try only specified cases involving specified crimes.

13 Fast Track Courts: The fast track court scheme envisages the appointment of adhoc
Judges from among the retired sessions or additional sessions Judges, member of the Bar
and judicial officers who were to be promoted on an adhoc basis with a tenure of 2 years.
Their selections were to be made by the concerned High Court. These are designed to
provide speedy justice to people.

Questions

Section A (2 marks)

1 What do you mean by Legislature?

2 What are the three Political Institutions?

3 What do you mean by Executive?

4 What is Judicial Activism?

5 Give the meaning of judicial review?

Section B (8 marks)

6 Give the Government responsibilities to Business

7 Differentiate Lok Sabha and the Rajya Sabha

Section C (12 marks)

8 Bring out the different roles played by the Government to develop Business activities in
the Country

9 Explain the salient features of The Judiciary

References:

Business Environment – Vijaya Shree, R Chand & Co, New Delhi

Indian Constitution - B Srinivasan, Himalaya Publishers

Indian Constitution – Ramachandra

CHAPTER XVI

THE CONSTITUTION OF INDIA

The Constitution of India became fully operational on 26 January 1950 and from that
golden day till today, it has been evolving through several constitutional amendments,
Act of Parliament, decisions of the Supreme Court and several conventions. The
following are the salient features of the Constitution of India.

1 Written and Detailed Constitution: The constitution is a wholly written document. It

incorporates constitutional law of India. It was drafted, debated and enacted by the
Constituent Assembly of India. It took the Assembly 2 years, 11 months and 18 days to
write and enact the Constitution. It is described as the ‘largest written constitution in the
world”. It consists of 395 Articles, divided into 22 Parts with 12 Scheduled and 92
Constitutional amendments.

2 Self – made and Enacted Constitution: Indian Constitution is a constitution made by

the people of India through their duly elected and representative body – the constituent
Assembly. It was organised in December 1946 under the Cabinet Mission Plan. Its first
session was held on 9th December 1946. Thereafter, it initiated the process of Constitution
– making and was in a position to finally pass and adopt the Constitution on 26th
November 1949. It is thus a self made and duly enacted constitution.

3 Preamble of the Constitution: The Preamble is the key to the constitution. It is a well
drafted document which states the philosophy of the constitution. It declares India to be a
Sovereign, Socialist, Secular, Democratic, Republic and a Welfare State committed to
secure justice, liberty and equality for the people for promoting fraternity, dignity of the
individual and unity and integrity of the nation.

(i) India is a Sovereign State: it testifies that India is no longer the dependency or
colony or possession of British Crown. It proclaimed the result of the freedom struggle
and affirmed that India was free internally and externally to take her own decisions and
implement these for her people and territories.

(ii) India is a Socialist State: it signifies the commitment to socio-economic justice

which is to be secured by the State through the democratic process and organised
planning. Now the goal of socialism means socio-economic development of the country
and is being secured by making the Indian economic system liberalised and competitive.

(iii) India is a Secular State: It provides for equal rights to all the citizens without any
discrimination, rule of law and special protection to minorities. The State does not
interfere with the religious freedom of the citizens and prohibits the levying of taxes for
religious purposes.

(iv) India is a Democratic State: The Constitution of India provides for a democratic
system. The people enjoy equal political rights like Universal Adult Franchise, right to
contest elections, Right to hold public offices, Right to form associations and right to
criticize and oppose the policies of the government. They elect their government.
Elections are held after regular intervals as when the need arises. These elections are free,
fair and impartial and are based on universal adult franchise, secret ballot, single member
constituencies and simple majority vote victory system. For all its acts the government is
responsible for its people.
(v) India is a Republic: It means India has an elected head of State who wields power
for a fixed term. Therefore India is not ruled by monarch or nominated head of the State

4 India is a Union of States: India has now 28 States and 7 Union Territories.
Uttranchal, Chattisgarh and Jharkand have been the three new states of the Indian Union.

5 Federal Structure and a Unitary Spirit: Like a federation, the Constitution of India
provides for: (i) division of powers between the centre and states (ii) a written and rigid
constitution (iii) Supremacy of the constitution (iv) Independent judiciary with the power
ti decide central-state disputes over division of powers and (iv) bicameralism. However,
by providing a very strong centre, common constitution, single citizenship, emergency
provisions, common election commission, common All India Services etc the constitution
clearly reflects the unitary spirit. Hence, the constitution provides for a federals structure
with unitary spirit.

6 Fundamental Rights: The Constitution of India grants and guarantees fundamental

eights to its citizens:

(i) Right to Equality: it provides for equality before law, end of discrimination, equality
of opportunity, abolition of untouchability and abolition of titles.

(ii) Right to Freedom: It includes freedom of speech and expression, freedom to form
associations, freedom to assemble peaceably without arms, freedom to move freely in
India, freedom of residence in any part, and freedom of adopting any profession or trade
or occupation.

(iii) Right against Exploitation: It prohibits trafficking of human beings, forced labour
and employment of children in hazardous jobs

(iv) Right to Freedom of Religion: it gives to all religious sects freedom to establish and
maintain their religious institutions. It holds that no person can be compelled to pay any
tax for the propagation of any religion

(v) Cultural and Educational Rights: Under this category the constitution guarantees
the rights of the minorities to maintain and develop their languages and cultures. It also
confers upon them the right to establish, maintain and administer their educational
institutions.

(vi) Right to constitutional remedies: This fundamental right is the soul of the entire
Bill of rights. It provides for the enforcement and protection of fundamental Rights by the
Courts. It empowers the Supreme Court to issue orders, directions and writs for the
enforcement of these rights.

7 Fundamental Duties of the Citizens of India: They include:

(i) Respect the constitution, the national flag and the national anthem
(ii) Cherish the noble ideas of the freedom struggle

(iii) Uphold and protect the sovereignty, unity and integrity of India

(iv) Defend the Country and render national service when called

(v) Promote the common brotherhood of all the people of India and renounce any practice
derogatory to the dignity of Women

(vi) Preserve the rich heritage of the nation’s composite culture

(vii) Protect the natural environment and have compassion for living creatures

(viii) Develop scientific temper, humanism and spirit of inquiry and reform

(ix) Safeguard public property and abjure violence

(x) Strive for excellence in all individual and collective activity

8 Directive Principles of State Policy: These are instructions to the States and the Union
for securing socio-economic developmental objectives through its policies. The Directive
Principles for example, direct the Indian State to ensure for the people adequate means of
livelihood, equal pay for equal work etc.

9 Bi – Cameral Union Parliament: The Constitution provides for a Bicameral

legislature at the Union level and designates it as the Union parliament. Its two houses are
Lok Sabha and the Rajya Sabha

10 Universal Adult – Suffrage: All men and women above the age of 18 years are
eligible to vote in elections. However, it is compulsory that their names must figure in the
electoral lists.

11 Single Integrated Judiciary: The constitution of India provides for a single judicial
system with the Supreme Court at the apex, High Courts at the state level and other
subordinate courts under the High Courts. The Supreme Court is the highest court of the
land. It controls and runs the judicial administration in India.

12 Emergency Provisions: the Constitution stipulates three types of emergencies viz

National emergency, Constitutional Emergency and Financial Emergency.

13 Special provision relating to Schedule Castes and Schedule Tribes: With a view to
protect the interest of people belonging to schedule castes and schedule tribes the
Constitution provides for reservation of seats upto 2010.
14 Provision regarding language: the constitution states that the official language of the
Union shall be Hindi. But along with this, it also provides for the continuance of English.
A State Legislature can adopt the language of the province as its official language.

Questions

Section B (8 marks)

1 Explain the Preamble to the Constitution of India

Section C (12 marks)

2 Explain the salient features of the Constitution of India

References:

Indian Constitution - B Srinivasan, Himalaya Publishers

Indian Constitution – Ramachandra

Indian Constitution – K K Ghai

UNIT V

CHAPTER XVII

SOCIAL RESPONSIBLITIES OF BUSINESS

Introduction
Business is an economic activity to earn profit for the owner and social responsibility
means serving community without any expectation. Every business organization must be
sensitive to social needs. It is the society that provides an environment in which the
business can develop and prosper, allowing investors to earn returns. It also provides
adequate resources like people, raw materials, services and infrastructure. Business
organizations, which form an important part and control a conspicuous share of the
resources of the society, must, therefore, be responsive to social needs. Social
responsibility, therefore, is the company’s mission to be responsive to social needs by
earmarking a part of its resources so that they may be allocated for achieving social goals
and tackling social problems.

Definition:

Adolph Berle defined social responsibility as “the manager’s responsiveness to public

consensus”. There cannot be the same set of social responsibilities applicable to all
countries at all times. These would be determined in each case by the customs, religions,
traditions, level of industrialization etc about which there is a public consensus at any
given time in a given society.

Need for Social Responsibility of Business:

1. A societal approach to business is the contemporary business philosophy, which

demands business organizations to be responsive to social problems.

2. As a result of globalization of business, global companies and MNCs operate in a

big way in their host countries. In order to establish a good corporate image they
include social responsibility as their corporate objective. Indigenous companies
are forced to follow them.
3. Social Responsibility could also be a part of terms and conditions of collaboration
agreements.
4. On the basis of legal provisions, companies have to concentrate on social
problems. For example, an industrial organization in India must obtain a
certification from the Pollution Control Board.
5. Corporate donations to social welfare projects of approved NGOs are exempted
from income tax in India.
6. An organisation’s commitment to social responsibility creates a good corporate
image, and thereby a better business environment.
7. Social responsibility of business enables the organization to improve its product
positioning and thereby improve its market share.
8. Very often situation demands due to natural calamities, accidents and so on, for
example, gas leak at the Union Carbide plant in Bhopal, wherein the company had
to monetarily compensate through medical treatment.
9. For extraneous considerations some organisations are sometimes forced to take up
social responsibility.
10. The organisational culture of certain organisations makes it necessary for them to
take up social cause as their moral responsibility
Social Responsibility Model:

Policy Stage Strategy Organisational Social

Formulation Commitment Audit
Problem Rejection Breadth
identification
Adversary Depth

Resistance Influence

Compliance Integration

Accommodation

Proaction

In the Policy stage, the firm becomes aware of those parts of the environment in which it
needs to respond and act on.

As a second step a firm must develop a socially responsive strategy. The strategy may
vary from outright rejection to a proactive approach.

 Rejection is a strategy in which a firm denies any responsibility for taking

action on a social issue.

 Adversary is a strategy wherein the firm fights to avoid having to take social
actions but will under severe pressure, cave in.

 Resistance is a strategy wherein the firm starts acting slowly to satisfy

demands that it considers are beyond its social responsibilities.

 Compliance is a strategy wherein the firm simply decides to abide by a

government request.

 Accommodation is a strategy in which the firms develop social programmes

to meet the felt needs of the committees.

 Proaction is a strategy in which a firm takes actions designed to address

potential demands

The third step is the Organisational commitment, which includes institutionalization of

the new social policy by the firm. It means new policies and routines in the first two
stages become so well accepted throughout the firm that they are considered to be a
normal part of doing business. Here a socially responsive structure is developed which
comprises of the following dimensions – breadth, depth, influence and integration.
  Breadth is the number of staff units that specialise in the socially responsive
strategies undertaken by the firm.

 Depth is the intensity of the organisational learning process in response to the

potential for social challenges.

 Influence and Integration represents the quality of relationships that exist

among the firm’s staff units.

Social audit is the last stage. It is a systematic study and evaluation of a firm’s social
performance..

SOCIAL RESPONSIBILITIES OF BUSINESS TOWARDS DIFFERENT

GROUPS

Responsibility towards the customers:

In a competitive market the customer is king and is the company’s first priority because it
exists for the customers. Earlier, the product-selling approach was the basic approach of
the managers who were considered capable when they were able to create demand. When
a salesperson was able to sell refrigerators’ even to Eskimos, he was considered
successful. Though demand creation is not totally out of the scope of a salesperson, the
manager’s real job is to identify actual demand, target customers and to project a product
which would provide maximum satisfaction to customer needs. It is the responsibility of
business towards the customers to provide proper quality at fair price.

Social Responsibility to Prospects:

Prospects are probable or expected customers. At the product planning stage, every
company thinks in terms of existing market and then expected markets. Welfare
programmes which benefit the prospective customers may convert potential customers
into actual customers.

Social Responsibility to community:

A company is a part of the community or immediate society where it exists. Hence it has
a great responsibility to be conscious and concerned with community welfare. Therefore
the company should lend positive assistance to community objectives. For example
business can set up educational institutions, social service institutions etc.

Responsibility to Human Resources:

An organisation’s social responsibility is first visible in its approach to its internal

environment. The internal environment of an organisation primarily consists of its human
resources. A company’s policy which does not take care for the welfare of its people may
not be able to care for its external environment – the society. Therefore, it is the
responsibility of the organisation to provide fair wages, proper organisational climate,
good career prospects and all such aspects that makes the workforce to gain a sense of
belongingness and confidence.

Social Responsibility to Ecological Environment:

The company must be committed to the welfare of the environment. This calls for
initiating pollution-free and environment-friendly technology, conservation of the
surrounding ecological environment, social afforestation, preventing emission of fumes
and effluents and so on not only to satisfy the government or legal provisions, but
because of a commitment to environmental protection.

Some of the drivers pushing business towards corporate social responsibility

include:

Corporate social responsibility promotes a vision of business accountability to a wide

range of stakeholders, besides shareholders and investors. Key areas of concern are
environmental protection and the wellbeing of employees, the community and civil
society in general, both now and in the future.

The concept of social responsibility is underpinned by the idea that corporations can no
longer act as isolated economic entities operating in detachment from broader society.
Traditional views about competitiveness, survival and profitability are being swept away.

1. The shrinking role of government

In the past, governments have relied on legislation and regulation to deliver social and
environmental objectives in the business sector. Shrinking government resources,
coupled with a distrust of regulations, has led to the exploration of voluntary and non-
regulatory initiatives instead.

2. Demands for greater disclosure

There is a growing demand for corporate disclosure from stakeholders, including

customers, suppliers, employees, communities, investors, and activist organizations.

3. Increased customer interest

There is evidence that the ethical conduct of companies exerts a growing influence on the
purchasing decisions of customers. In a recent survey one in five consumers reported
having either rewarded or punished companies based on their perceived social
performance.

4. Growing investor pressure

Investors are changing the way they assess companies' performance, and are making
decisions based on criteria that include ethical concerns. The Social Investment Forum
reports that in the US in 1999, there was more than $2 trillion worth of assets invested in
portfolios that used screens linked to the environment and social responsibility. A
separate survey revealed that more than a quarter of share-owning Americans took into
account ethical considerations when buying and selling stocks.

5. Competitive labour markets

Employees are increasingly looking beyond paychecks and benefits, and seeking out
employers whose philosophies and operating practices match their own principles. In
order to hire and retain skilled employees, companies are being forced to improve
working conditions.

6. Supplier relations

As stakeholders are becoming increasingly interested in business affairs, many

companies are taking steps to ensure that their partners conduct themselves in a socially
responsible manner. Some are introducing codes of conduct for their suppliers, to ensure
that other companies' policies or practices do not tarnish their reputation.

Some of the POSITIVE OUTCOMES that can arise when businesses adopt a policy of
social responsibility include:

1. Company benefits:

 Improved financial performance;

 Lower operating costs;
 Enhanced brand image and reputation;
 Increased sales and customer loyalty;
 Greater productivity and quality;
 More ability to attract and retain employees;
 Reduced regulatory oversight;
 Access to capital;
 Workforce diversity;
 Product safety and decreased liability.

2. Benefits to the community and the general public:

 Charitable contributions;
 Employee volunteer programmes;
 Corporate involvement in community education, employment and homelessness
programmes;
 Product safety and quality.

3. Environmental benefits:
  Greater material recyclability;
 Better product durability and functionality;
 Greater use of renewable resources;
 Integration of environmental management tools into business plans, including
life-cycle assessment and costing, environmental management standards, and eco-
labeling.

Barriers to Social Responsibility:

Awareness of the problems is helpful to take steps to overcome them.

The Individual Manager: The individual manager is the person who is ultimately
responsible for the social action programmes of any organisation. The manager can
initiate or hinder programmes from being planned or implemented. His career may be in
jeopardy if he consistently advocates actions of which his superiors disapprove. For this
reason, most managers are cautious about proposing significant changes in their
organisation’s behaviour.

The Organisation: At the organisation’s level, the greatest barrier is the focus on profits.
Social action projects must always be evaluated in terms of the net cost. Shareholders
want profits distributed in dividends. Employees want higher salaries and better working
conditions. Against these competing claims, social programmes may have little chance

The Industry: There may not be support from competitors in the same industry for social
action programmes.

The Division: Like the organisation of which it is part, a division must try to maintain
itself as a profit centre. Any social responsibility decision that reduces the level of profit
might threaten the division’s viability.

Questions
 Section A

1 What do you mean by social responsibility of business?

Section B (8 marks)

2 What is need for social responsibility in business

3 Give the model of social responsibility

4 Give the benefits of social responsibility

5 What are the barriers to social responsibility?

Section C (12 marks)

6 State the drivers that push social responsibility and also bring out the accountability of
business to various groups

References:

Business Environment: Shaik Saleem, Pearsons Education

Business Environment – Vijaya Shree, R Chand and Co, New Delhi

Essentials of Business Environment – K Ashwattappa, Himalaya Publishers

CHAPTER XVIII
 BUSINESS ETHICS

The development of a sense of responsibility in the way business is conducted has

become critical and the need for inculcation of ethics in the corporate world has never
been more pressing. Ethics “ethicus” is Latin, is derived from the word “ethos”, meaning
character and manners. Ethics is thus a science of morals and principles. Ethics as a set
of moral values within the business perspective has never had fixed boundaries.

According to Wayno Mondy “Ethics is the discipline dealing with what is good and bad,
or right and wrong, or with moral duty and obligation.” Thus Ethics is concerned with
right and wrong, good and bad, and virtue and vice.

Business Ethics refers to the value structure that guide individuals in the decision making
process when they are faced with a dilemma of how to behave within their business or
professional lives. Usually the impact of that decision will be felt only in their immediate,
organizational environment.

Need:

The need for business ethics spring from the philosophy that since business operates and
exists within the society and is a part of sub-system of society, its functioning must
contribute to the welfare of the society. Arguments against business ethics say that since
business is an economic entity, it should have nothing to do with morals or with ethics.
This view has changed drastically over the years and more and more companies are
resorting to ethical means of conducting themselves and doing business.

Moreover, a business needs to remain ethical for its own good. Unethical actions and
decisions may yield results only in the short run. For a long existence and sustained
profitability, a business is required to conduct itself ethically and run its activities on
ethical lines. Ethics give rise to an efficient economy. It is not the government or the law
which will protect society, ethics alone has the power to protect it.

Sources of Ethical Development

Now let's consider the range of sources from which we each as individuals draw at
least some of the principles and rules that, for each of us, underlie our standards of
right and wrong behavior.

1. Childhood Upbringing

Without really thinking or even being able to avoid it, each person learns ethics from his
or her parents—what they teach in words and through their actions. These teachings
shape our most fundamental attitudes about what is "right" and what is "wrong." As a
very brief insurance-related example, the child of an insurance agent, upon reaching
adulthood, is much more likely to be honest and truthful in settling claims under his or
her insurance policies than is the grown child of another insurance agent if the other
agent was terminated by the insurer under disputed circumstances. The child may not
have understood the intricacies of those circumstances at the time, but as an adult, he or
she is likely to believe in their heart that insurers are not to be to be trusted and do not
deserve to be treated honestly.

2. Later Life Experiences

Similarly, a life-shaping event later in life may more directly and consciously shape a
person's ethics. Thus, someone severely injured in an automobile accident may have a
much higher opinion of the entire automobile-injury reparations system—including the
police who investigated, the hospital that provided care, the lawyers and courts that
resolved any legal issues, and the insurers that helped finance. If however, this victim
feels the result was medically inferior or legally unfair, the victim may well treat
everyone in the system unfairly even years later in circumstances unrelated to the original
accident just to seek some measure of personal "justice."

3. Religious Beliefs

Virtually all the world's religions teach an essentially similar code of ethics that
emphasizes honesty, respect for others and their rights, and selflessness. Therefore, in
both business and personal situations, a highly religious person is likely to act in ways
that most of us will regard as highly ethical. Their religion will give them highly explicit,
generally internally consistent, guides to "good" personal conduct. These guidelines
usually can be broadened to apply quite well to business activity. Moreover, those for
whom religion is not a central force in their lives are more likely to act in self-centered,
ethically questionable ways.

4. Codes of Ethics

Perhaps the most direct and explicit sources of our daily ethical guidance are codes of
ethics for business conduct. Whether issued by professional societies such as the Risk and
Insurance Management Society, the ICAI etc these ethical codes generally have two
goals. The first is to set forth objectives like quality output, honesty, and public service in
the customer or community. The second goal deals with specific rules about what those
governed by the code definitely must, or must not, do in their dealings with customers,
one another, and the public at large.

5. Social Consensus

Unless we have strong personal reasons or other commitments to believe otherwise, most
of us tend to "go along" with the opinions of those around us, rather than by
independently evaluating the ethical aspects of others' actions. Thus, often almost
automatically, the social consensus can become the approved, although unexamined,
ethical standard.
 6. Ethical Dilemmas

A final source of ethical insight is pondering ethical dilemmas. These dilemmas are real
or imagined situations that pit two or more ethical principles, rules, or objectives against
one another. To resolve the dilemma, one has to decide which of these ethically desirable
ends is the more/most important or, alternatively, if there is a way to achieve both/all of
these ends without committing some other ethical wrong.

Managing Ethics:

In the past, it was assumed that ethics was a matter of individual conscience. But the
scenario has changed. Today, many companies are using managerial techniques that are
designed to encourage ethical behaviours.

1 Top Management: It is the chief executive officer who should take initiative in
ensuring ethical standards in his organisation. In addition, management must avoid
adopting business strategies, schedules and reward systems that place unreasonable
pressure on employees.

2 Codes of Ethics: Codes of Ethics have become popular. Codes vary from book-length
formulations to succinct statement which is one or two pages. Nearly 95% of the Fortune
500 companies have codes and the trend is visible in our corporate sector also.

3 Ethics Committees: Many companies have ethics committees to advice on ethical

issues. Such a committee can be a high-level one comprising the board of directors,
chaired by the CEO of the company. These committees help the company establish policy
in new or uncertain areas, advise the board of directors on ethical issues and oversee the
enforcement of the code of ethics.

4 Hot Lines: In some companies, when employees are troubled about some ethical issue
but may be reluctant to raise it with their immediate supervisor, they can place a call on
the company’s ethics hot line. A member of the ethics committee receives the
confidential call and then quickly investigates the situation. Elaborate steps are taken to
protect the identity of the caller, so as to encourage more employees to report any deviant
behaviour. This technique is advantageous in as mush as ethics hotlines encourage
internal whistle-blowing, which is better for a company than to have disgruntled
employees take their ethical complaints to the media.

5 Training programmes: Nearly all companies which take ethics seriously provide
training in ethics for their managers and employees. Such training programmes acquaint
company personnel with the official company policy on ethical issues. Often, simulated
cases based on actual events in the company are used to illustrate how to apply ethical
principles to on-the-job problems.

Benefits of Ethical Business:

 1. Maintains a moral cause in turbulent times

2. Cultivates strong teamwork and productivity

3. Supports employee growth and meaning

4. Helps to ensure that policies are legal

5. Helps avoid criminal acts “of omission” and lower fines

6. Helps to mange values associated with quality management, strategic planning

7. Promotes a strong public image

8. Improves trust in relationships

9. Legitimizes managerial actions

10. Strengthens the coherence and balance of the organisation’s culture

11. Cultivates greater sensitivity towards the impact of the enterprise’s values and
messages

12. Every significant management decision has an ethical value dimension

13. There exists a clear vision and picture of integrity throughout the organisation.

Section A (2 marks)

1 What are ethics

Section B (8 marks)

2 How does a company manage ethics with its work force?

3 Explain the sources of ethical developments

References:

Business Environment: Shaik Saleem, Pearsons Education

Business Environment – Vijaya Shree, R Chand and Co, New Delhi

Essentials of Business Environment – K Ashwattappa, Himalaya Publishers

 CHAPTER XIX

CORPORATE GOVERNANCE

Being typically perceived in academic literature as dealing with “problems that result
from the separation of ownership and control”, Corporate Governance (CG) is a new
buzzword, both in business and academic circles. It is concerned with the formulation of
long-term objectives and plans and the proper management structure (organisation,
systems and people) to achieve them. At the same time, it entails making sure that the
structure functions to maintain the corporation’s integrity and responsibility to its various
constituencies like shareholders, directors, auditors and management.

Definition:

Corporate Governance is system by which companies are run, and the means by
which they are responsive to their shareholders, employees and society.

Corporate governance is the relationship among corporate managers, directors and

providers of equity, people and institutions who save and invest their capital to earn
a return.

Factors influencing Corporate Governance:

Four factors influencing corporate governance namely,

1. The ownership structure

2. Financial structure

3. Company boards

4. Political environment
1 The ownership structure: The structure of a company determines, to a considerable
extent, how a corporation is managed and controlled. The ownership structure can be
either dispersed among individual and institutional shareholders or can be concentrated in
the hands of a few large shareholders. Our corporate sector is characterised by the co-
existence of public sector, private sector and the multinationals. It has been found that a
company which has widely dispersed shareholdings has better governance than the rest,
as regular auditing has to be done for the sake of these shareholders.

2 Financial structure: Along with the notion that the structure matters in corporate
governance is the notion that the financial structure of the company, i.e., proportion
between debt and equity, has implications for the quality of governance. For instance
bank as a creditor can keep a track of the credit worthiness of the company.

3 The structure of company Boards: The board of directors is responsible for

establishing corporate objectives, developing broad policies and selecting top-level
executives to carry out those objectives and policies. Company boards vary in size,
composition and structure so as to best serve the interests of the corporation and the
shareholders. Board membership may include both inside directors and outside directors.
With regard to the size of board, opinion and practices vary. Depending upon the quantity
and quality of the directors the style of governance will vary.

4 The Institutional Environment: Corporate mechanisms are economic and legal

institutions and often the outcome of political decisions. For example, the extent to which
shareholders can control the management depends on their voting rights as defined in the
company law.

Mechanisms of Corporate Governance:

In our country there are 6 mechanisms to ensure corporate governance. They are:

1 Companies Act: Companies in our country are regulated by the Companies Act, 1956.
The companies Act is one of the biggest legislations with 658 sections and 14 schedules.
To ensure Corporate Governance, the Act confers legal rights to shareholders to (a) vote
on every resolution placed before an annual general meeting (b) to elect directors who are
responsible for specifying objectives and laying down policies (c) determine
remuneration of directors and the CEO (d) removal of director and take active part in the
annual general meetings.

2 Securities law: The primary securities law in our country is the SEBI Act. Since its
inception in 1992, the Board has taken a number of initiatives towards investor protection
such as:

 Disclosure of mandate information both in prospectus and in annual accounts

  The promoters are required to take a minimum stake of about 20% in the
capital of the company and to retain these shares for a minimum lock-in
period of three years

 Prohibition of preferential allotments to dominant shareholders at a price

lower than the average market price during the preceeding six months

Finally, the Board constituted a committee under the chairmanship of Kumaramangalam

Birla. It provides for optimum composition of executive and non-executive directors,
setting up of qualified and independent audit committee, remuneration of directors,
Management Discussion and Analysis Report to form part of annual report to the
shareholders, a separate section on Corporate Governance in the annual reports of the
company to be furnished and auditor’s compliance certificate to the effect that all the
conditions of corporate governance have been complied with.

3 Discipline of the Capital market: Capital market itself has a considerable impact on
corporate governance. In the last few years, we have seen Indian companies voluntarily
accepting international accounting standards though they are not legally binding. They
have voluntarily gone for greater disclosures and more transparent governance practices
than are mandated by law. They have sough to cultivate an image of being honest with
their investors and of being concerned about shareholder value maximization.

4. Nominees on company Boards: Development banks hold large block of shares in

companies. They are equally big debt holders too. Being equity holders, these investors
have their nominees in the boards of companies. These nominees can effectively block
resolutions which may be detrimental to their interests.

5. Statutory audit: Statutory audit is yet another mechanism directed to ensure good
corporate governance. Auditors are the conscience-keepers of shareholders, lenders and
other who have financial stakes in companies. Auditing enhances the credibility of
financial reports prepared by an enterprise. The auditing process ensures that financial
statements are accurate and complete, thereby enhancing their reliability and usefulness
for making investment decisions. Obviously, good corporate governance depends on
good auditing.

6 Codes of conduct: Code of conduct are guidelines for all board members and senior
management of a company and which are obligatory on them. SEBI prescribes that there
should be conduct for board of director. It shall be obligatory for the board of a company
to lay down the code of conduct for all board members and senior management of a
company. This code of conduct shall be posted on the website of the company. While
drafting the code of conduct for corporate governance for the entire corporate sector, the
following aspects can be kept in view:

 Prescribing of ethical values which are universally acceptable

  Providing for highest standards for functioning as board of directors in an
impartial and objective manner

 Ensuring transparency in functioning

 How requisite care and diligence has to be ensured in functioning

 Encouraging discipline

 Avoiding conflict of interests

 Ensuring confidentiality

 Providing of requisite incentives for efficient and effective functioning

 Respecting one another

 Loyalty to the organisation

 Providing motivation

Questions

Section A (2 marks)

1 What do you mean by corporate governance?

Section B (8 marks)

2 What are the factors that influence corporate governance? Explain

3 Brief on the mechanics involved in corporate governance

References:

Business Environment: Shaik Saleem, Pearsons Education

Business Environment – Vijaya Shree, R Chand and Co, New Delhi

Essentials of Business Environment – K Ashwattappa, Himalaya Publishers

Business Environment – Francis Cherunillam, Himalaya Publishers

CHAPTER XX

SOCIAL AUDIT

A social audit is a systematic study and the evaluation of an organisation’s social

performance, as distinguished from its economic performance. It is a tool for evaluating
how well a company has discharged its social responsibilities. It helps to assess a firm’s
social responsiveness.

Bauer and Fenn jr. define social audit as”a commitment to systematic assessment of
activities on some meaningful, definable domain of the company’s activities that have
social impact.” According to Ahmed belkaoui, “social audit much like financial audit – is
an identification and examination of the activities of the firm in order to assess, evaluate,
measure and report their impact on the immediate social environment”. Therefore social
audit involves:

 Identification of the firm’s activities having potential social impact

  Assessment and evaluation of the social costs and social benefit of such
activities
 Measurement of the social costs and benefits and
 Reporting that is presenting in a proper format and manner, the social
performance of the firm

Objectives and benefits:

1. The basic objective of social audit is to evaluate the social dimensions of

the performance of the company
2. Another principal objective which follows the objective mentioned above
is to take measures to improve the social performance of the company on
the basis of the feed back provided by the social audit
3. Social audit increases the public visibility of the organisation
4. If the social audit reveals a socially commendable performance of the
company, it will help boost the public image of the company

Methods of Social audit:

Some of the important methods of social audits developed by different people or

organisation are given below:

1 Social Process Audit: The aim of social process audit, also known as Programme
management audit, is to develop an internal management information system that will
allow management to create and administer the social programmes in a better way.

2 Financial Statement Format Audit: Under the financial statement format audit, the
social information is presented in the conventional financial statement format i.e., balance
sheet and / or income statement.

3 Macro-Micro Social Indicator Audit: The macro-micro social indicator audit

attempts to evaluate the micro indicators against a set of macro indicators such as
national policies.

4 Constituency Group Audit: Under this audit, the preference and attitudes of various
constituencies (like employees, creditors, suppliers and customers) are identified and
measured and the firm’s performance is evaluated against the criteria developed for each
group.

5 Partial Social Audit: Partial social audit evaluates any particular aspects of social
performance like energy conservation or ecological preservation

6 Comprehensive Audit: Comprehensive audit attempts to evaluate the total

performance of the organisation including social performance
7 Corporate Rating Approach: This is an external evaluation of the company’s
performance by public groups like consumer organisations, social welfare organisations
or media.

Obstacles to Social Audit:

Social audit encounters a number of problems. The important obstacles are:

1. Being a relatively new concept, social audit is yet to gain wide appreciation and
acceptance
2. A clear and generally well accepted methodology for conducting the social audits
is not available
3. There is no agreement as to the items to be included for social audit
4. It is very difficult, and in several cases even impossible, to quantify the social
costs and benefits of different activities or items
5. There may be resistance within the company to social audit because of the time,
effort, and difficulty involved in the task
6. There may also be resistance because of the fear of a dismal or unsatisfactory
picture that may be presented by the social audit.

Section A (2marks)

1. What is social audit?

Section B (8 marks)

2. What are the benefits and methodology used in social audit?

References:

Business Environment: Shaik Saleem, Pearsons Education

Business Environment – Vijaya Shree, R Chand and Co, New Delhi

Essentials of Business Environment – K Ashwattappa, Himalaya Publishers

Business Environment – Francis Cherunillam, Himalaya Publishers

 CHAPTER XXI

BUSINESS AND CULTURE

Culture includes several behavioural influencing factors shared by members of a society

and passed through generations. Culture consists of the thought and behavioural patterns
that members of a society learn through language and other forms of symbolic interaction
– their customs, habits, beliefs, and values, the common viewpoints which bind them
together as asocial entity. Cultures change gradually, picking up new ideas and dropping
old ones, but many of the cultures of the past have been so persistent and self-contained
that the impact of any sudden change tears them apart, uprooting their people
psychologically.
Definition: According to E B Taylor “Culture of civilisation is that complex whole which
includes knowledge, belief, art, morals, law, custom and other capabilities and habits
acquired by man as a member of society.

Characteristics:

Learned: Culture is not inherited or biologically based, it is acquired by learning and

experience

Shared: People as members of a group, organisation, or society share culture, it is not

specific individuals

Transgenerational: Culture is passed on from one generation to the next

Symbolic: Culture is based on the human capacity to symbolize or use one thing to
represent another

Adaptive: Culture s based on the human capacity to change or adapt as opposed to the
more genetically driven adaptive process of animals

Levels of Culture: Include:

National Culture: National culture is the dominant culture within the political
boundaries of a country. Formal education is usually taught and business is generally
conducted in the language of the dominant culture.

Business Culture: Business culture guides everyday business transaction. What to wear
in a meeting, when and how to use business cards, whether to shake hands or embrace are
all examples of business etiquette taught by business culture Business culture is a part of
national culture.

Organisational and Occupational Culture: Organisation culture is a culture shared by

members of an organisation. Organisational members tend to internalize culture, which
later on becomes institutionalized.

Different occupational groups such as physicians, professors, lawyers, accountants etc

have different cultures called occupational cultures. They are the norms, beliefs and
expected ways of behaviour of people in the same occupation regardless of the
organisation they work for.

Impact of Culture on Business:

1. People and Culture: The concept of culture is of great significance to business

because it is the culture which generally determines the ethos of the people. It trains
people along particular lines, tending to put a personality stamp upon them. Thus we have
Indians, Japanese, Americans, and Germans and so on. When people with different
cultural backgrounds promote, own and manage organisations, a distinct culture tend to
emerge.

2. Culture and organisation: Culture creates distinctions between one organisation and
another. Culture is how an organization has learned to deal with its environment. It is a
complex mixture of stories, myths, behaviors and other ideas that fit together to define,
what it means to work in a particular organization. For instance there is culture of safety
at Dupont, a culture of service at Dell, and a culture of Innovation at 3M.

3. Culture and Globalisation: Modern organizations function in Global Economy, they

need to be sensitive to the differing cultures that are encountered. As business units go
international, the need for understanding and appreciating cultural difference across
various countries is essential. Any move from on e country to another will create a
certain amount of emotional disturbance which is otherwise called as cultural shock.

4. Culture determines goods and services: Culture broadly determines the type of
goods and services a business should produce. The type of food people eat, the clothes
they wear, the beverages they drink and the building materials they use to construct
dwelling houses vary from culture to culture and from time to time within the same
culture. Business should realize these cultural differences and bring out products
accordingly.

5. Language and Culture: language is the foundation of any culture. It includes speech,
written characters, numerals, symbols and gestures of non-verbal communication. Since
language impacts the way we think about what we see and behave, it determines cultural
patterns.

6. Attitudes: Attitudes are positive or negative evaluations that determine ones

behaviour. Attitudes to a large extent depend upon the culture we hail from. For instance
Japanese workers are supposed to have positive attitudes towards work. Therefore the
culture of land determines the people’s attitude towards work.

7. Collectivism and Individualism: the spirit of collectivism and individualism is related

to such personnel aspects as employees morale, multiplicity of trade unions and inter and
intra-union rivalries. Collectivism is the hall mark of our society. Whether it is
celebrating a marriage or inauguration of a business unit, we believe in people and
crowds.

8. Education: In our traditional society, education was the preserve of the upper castes
and it was they who occupied higher positions in business organisations. Things changed
over the passage of time. Economy gradually shed it primitiveness and turned into an
industrialised one, demanding technical education at levels and of all castes. As a result
educational institutions sprang up in all corners of the country.

9. Family: Family is a remarkable institution vested with several significant

contributions. Indian firms, by and large, continue to be family-run. And that, too, by the
Bania families of the traditional trading castes. It is predominantly the Aggarwals and
Guptas in the North, the Chettiars in the South, the Parsees, Gujarati Jains and Banias,
Muslim Khojas and Memons in the West, and Marwaris in the East, and, in fact, across
the country. Today’s industrialists, thus, rose from the bazaar. Their roots in industry are
relatively recent. Before that they were traders and moneylenders engaged in the hustle
and bustle of the bazaar. Even in Bombay and Ahmedabad in western India, where the
cotton textile mills came up earlier in the last half of the 19th century, it was the trading
communities who became industrialists. They were Parsees, Khojas, and Bhatia traders of
Bombay and Jain Banias in Ahmedabad.

10. Religion: Religion has its impact on the economy of a country. People go to any
extent and practice abnormal activities in the name of religion. In modern democracies,
elections are fought in the name of religion. Customs and manners differ from one
religion to another. For instance, shaking hands or embracing opposite sex is not
appreciated in certain religions.

Business participation in cultural affairs

The Public, Social and Cultural Affairs Service is responsible for representing,
developing and protecting a company’s social responsibility program and identity as a
corporate citizen. An organisation’s concern of social responsibility comes through not
only in the relationships it maintains with communities, but also by its contributions. The
actions and programs of the Public, Social and Cultural Affairs Service make the
organisation global, proactive and creative. It also helps in recruiting and retaining
employees. Moreover cultural opportunities may challenge youth in the community to
raise their achievements, drives and provide favourable outlets for their energies, thereby
reducing tendencies towards delinquency.

Section C (12 marks)

Define Culture. How does culture influence business?

References:

Business Environment: Shaik Saleem, Pearsons Education

Business Environment – Vijaya Shree, R Chand and Co, New Delhi

Essentials of Business Environment – K Ashwattappa, Himalaya Publishers

Business Environment – Francis Cherunillam, Himalaya Publishers

CHAPTER XXII

GLOBALISATION

The International Monetary Fund defines globalisation as “the growing economic

interdependence of countries worldwide through increasing volume and variety of cross-
border transactions in goods and services and international capital flows and also through
the more rapid and widespread diffusion of technology”

Charles U.L. Hill defines globalisation as “the shift towards a more integrated and
interdependent world economy. Globalisation has two main components – the
globalisation of markets and the globalisation of production”.
Interdependency and integration of individual countries of the world may be called
globalisation. Thus globalisation integrates not only economies but also societies. The
globalisation process includes globalisation of markets, globalisation of production,
globalisation of technology and globalisation of investment.

Features:

Globalisation encompasses the following features:

1. Operating and planning to expand business throughout the world

2. Erasing the differences between domestic market and foreign market
3. Buying and selling goods and services from/ to any country in the world
4. Establishing manufacturing and distribution facilities in any part of the world
based on feasibility and viability rather than national consideration
5. Product planning and development are based on market consideration of the entire
world
6. Sourcing of factors of production and input like raw materials, machinery,
finance, technology, human resources, managerial skills from the entire globe.
7. Global orientation in strategies, organisation structure, organisational culture, and
managerial expertise
8. Setting the mind and attitude to view the entire globe as a single market

Nature of globalisation:

In simple economic terms, globalisation refers to the process of integration of the world
into one huge market. Such unification calls for removal of all trade barriers among
countries. Even political and geographical barriers become irrelevant. A global company
is the one that views the world as one market, minimizes the importance of national
boundaries, and raises capital and markets wherever it can do the best. Therefore
Globalisation is multidimensional. It includes:

1. Globalisation of market presence: It refers to the extent to which company targets

customers in all major markets across the globe.

2. Globalisation of supply chain: It refers to the extent to which the company is

accessing the optimal locations for the [performance of various activities in its supply
chain.

3. Globalisation of Capital base: It refers to the extent to which the company is

accessing capital markets for financial resources

4. Globalisation of mindset: It refers to the ability of the company to understand and

integrate diversity across cultures and markets.

Reasons for going global:

 1. There is lot of money in the overseas market
2. Domestic markets are no longer adequate and rich
3. Companies often set up overseas plants to reduce high transportation costs
4. To access resources those are unavailable or more expensive at home
5. Labour market also attract companies into international business
6. Competition

Multinational Corporations:

An MNC is an organisation that engages in production or service activities through its

own affiliates in several countries, maintains control over the policies of those affiliates,
and manages from a global perspective.

Benefits from MNCs can be studied under two broad heads:

1. Benefits to the host countries and

2. Benefits to the home countries

1 Benefits to the host countries: To the host countries, MNCs are likely to bring the
following benefits:

1. Transfer of technology, capital and entrepreneurship

2. Improvement in the Balance of payment
3. Creation of job and career opportunities
4. Greater availability of products for local consumers
5. Greater access to high quality managerial talent that tends to be scarce in the host
country
6. Political and economic integration

2. Benefits to home countries: The following benefits are likely to accrue to the home
countries:

1. Acquisition of raw materials from abroad at a low price than can be found
domestically
2. Technology and managerial expertise acquired from competing in global markets
3. Export of components and finished goods for assembly or distribution in foreign
markets
4. Inflow of income from overseas profits, royalties, licensing fees and management
contracts
5. Job and career opportunities at home and abroad in connection with overseas
operations

Demerits:

MNCs have, however, been subject to a number of criticisms, like those mentioned
below:
 1. The MNC’s technology is designed for world-wide profit maximization, not the
development needs of poor countries, in particular employment needs and relative
factor scarcities in these countries. In general, it is asserted, the imported
technologies are not adapted to (a) the consumption needs, (b) the size of
domestic markets (c) resource availabilities
2. Through their power and flexibility, MNCs can evade or undermine national
economic autonomy and control, and their activities may be unfavourable to the
national interests
3. MNCs may destroy competition and acquire monopoly powers
4. The tremendous power of the global corporations poses the risk that they may
threaten the sovereignty of the nations in which they do business like paying
bribes, not respecting human rights etc
5. The transnational companies cause fast depletion of some of the non-renewable
natural resources in the host country.
6. The transfer pricing enables MNCs to avoid taxes by manipulating prices on intra-
company transactions
7. The MNCs have been criticized for their business strategies and practices in the
host countries. They undermine local cultures and traditions, change the
consumption habits, and dump harmful products in the developing countries

Challenges of International Business:

Challenges before MNCS include:

1. Maintaining competitiveness:

Competitive advantage of a nation depends on

a) Factor conditions: According to basic international trade theory, a nation will export
those goods that make best use of the factor conditions with which the country is
relatively well endowed. These factor conditions include land, labour and capital. For
example if a country has large uneducated workforce, it will seek to export goods that are
highly labour-intensive. Sometimes nations may develop factor conditions even if they
are not endowed with. For instance, Japan has gained world market share in auto and
consumer goods industries, though raw materials for these have been imported. To offset
this disadvantage, Japanese manufacturers have improved productivity by using advanced
production methods. High productivity has enabled Japan to gain advantage.

b) Demand conditions: A nation’s competitive advantage, is strengthened if there is

strong local demand for its goods and services. Strong local market benefits sellers at
least in two ways: First, it helps the seller understand what buyers want. Secondly, if
buyers want any change, local sellers can quickly respond before distant competitors can
react.

c) Related and supporting industries: The third major determinant of national

competitive advantage is the presence of related and supporting industries that are
globally competitive. These industries typically know what is happening in the industrial
environment and are in a position to both forecast and react to these changes. These
supporting industries include suppliers and service industries. Constant interactions with
these supporting industries help the manufacturers to remain competitive.

d) Environment: the fourth determinant is the environment in which the firms are
created, organised and managed. In Italy, for example, successful firms typically are
small or medium sized, operating in fragmented industries. These Italian industries
expect similar context in other countries also.

e) Growing competition: Domestic rivalry is another determinant of a nation’s

competitive advantage. The competition is growing not only from the firms in the
developed countries but also from the developing countries.

2. Government and Trade regulations: The Government of any country can influence
its international business intervention, for the purpose of protecting domestic industries.
This usually results in less movement of goods and services across borders.

3. Developing an international perspective: Firms operating in cross border markets

need to develop and international perspective. There are 3 ways:

a) Experience: One way to acquire international perspective is to hire experienced

people with global exposure. A company cannot become a true MNC without having
managers with overseas perspective.

b) Focus: the second way to develop an international orientation is by focusing on human

resources activities such as hiring, remunerating, performance appraisal, promotions and
the like

c) Attitude: The third way to develop an international perspective is by changing the

attitudes of existing managers according to overseas requirements.

4. Managing Diversity: Diversity is the outcome of globalisation. Workforce of any

MNC comprises people from different countries. Within this diversity of cultures,
religions, languages and dialects, races etc. Diversity has both benefits and problems. The
benefits include enhancing creativity, better decision making, and prevention of groupism
and better solutions to problems. The problems are absence of cohesion among workers,
inaccurate communication etc.

To manage diversity, the manager must take the following steps. In the entry stage, the
focus should be on building trust among the team members. This can be a difficult task,
as in a diverse group the members come from different cultures and customs, therefore,
are accustomed to working in a different style. In the work stage, attention needs to be
directed more towards describing and analyzing the task. This stage is fairly easy for the
manager of a diverse group, as the group generates plenty of innovative ideas. In the
action stage, decision is made on the basis the ideas generated in the previous stage, and
is implemented.

5. Good corporate Citizenship: As MNCs disperse their activities worldwide; they

become highly visible and are required to operate under diverse compulsions such as
political, cultural, economic and legal factors of different host countries. An international
business will be successful if only it creates and sustains the image of a good corporate
citizenship – the two hall marks of which are honesty and social responsiveness.

Questions

Section A (2 marks)

1. Define globalisation. Give the reasons for companies entering foreign markets

2. What do you mean by Multinational Corporation? What are its benefits?

Section B (8 marks)

3. What are the characteristics of globalisation? Examine the disadvantages of

globalisation

Section C (12 marks)

4. Comment of Globalisation

References:

Money, Banking and International Trade - M N Mishra, Himalaya Publishers

Money, Banking, International Trade and Public Finance – M L Seth, Lakshmi Narain
Publishers

Business Environment – Francis Cherunillam, Himalaya Publishers

CHAPTER XXIII

INTERNATIONAL BUSINESS ENVIRONMENT

Globalisation involves decision-making on the following lines:

1. Deciding whether to go global

2. Deciding which markets to enter
3. Deciding how to enter the market
4. Learning to handle differences
5. Adjusting the management process
 6. Selecting a managerial approach
7. Deciding organisation structure

1. Deciding whether to go global:

Globalisation has come to stay. Every manufacturer, whether producing tooth powder,
herbal products or software, is planning to take his products beyond Indian shores.
However, theoretically, it may be argued that deciding whether or not to go global is
difficult job, particularly when domestic market is vast as it is the case with our country.
For a long time, our business person enjoyed a sheltered and vast market where they
could sell whatever they produced. But today’s environment is different. Technological
innovations, crumbling trade barriers, global flow of capital, revolution in the information
technology, and intensity of market competition, changing lifestyles and demand for new
products are making Internationalisation inevitable.

Before going international, the company must weigh several risks and answer many
questions about its ability to operate globally. Can the company learn to understand the
preferences and buying behaviour of consumers in other countries? Can it offer
competitively with foreign nationals? Do the company’s managers have the necessary
international experience? Has the management considered the impact of foreign
regulations and political environments?

2. Deciding which markets to enter:

This involves deciding on:

 Volume of foreign sales

 Number of countries to market in and
 The types of countries to enter

Most companies start small when they go abroad. Some plan to stay small, viewing
foreign sales as a small part of their business. Other companies have bigger plans, seeing
foreign business more equal to, even more important than their home business.

There is temptation for a company to spread its wings in as many countries as possible,
but it makes better sense to operate in fewer countries with a deeper market penetration in
each.

The types of countries to enter depend on the type of product, geographical factors,
income and population, political climate and other related factors. It is advisable to rank
the countries on specific factors. The goal is to determine the potential of each country. It
goes without saying that the country which assures long run returns on investments must
be selected for entering its market.
3) Deciding how to enter the market: One of the most important strategic decisions in
international business is the mode of entering the foreign market. Important foreign
market entry strategies are the following:

a) Exporting
b) Licensing / franchising
c) Contract manufacturing
d) Management contract
e) Turnkey Contracts
f) Fully owned manufacturing facilities
g) Joint venturing
h) Counter trade
i) Mergers and acquisitions
j) Third country location

a) Exporting: Exporting, the most traditional mode of entering the foreign market, is
quite a common one even now. It is the appropriate strategy when one of the following
conditions prevails:

 The volume of foreign business is not large enough to justify production in

the foreign market
 Cost of production in foreign market is high
 The foreign market is characterised by production bottlenecks like
infrastructural problems, problems with materials supplies, etc
 There are political or other risks of investment in the foreign country
 The company has no permanent interest in the foreign market concerned
or that there is no guarantee of the market available for a long period
 Foreign investment is not favoured by the foreign country concerned
 Licensing or contract manufacturing is not a better alternative

Exporting is more attractive than other modes particularly when underutilised capacity
exists. Even when there is no excess capacity, expansion of the existing facility may
sometimes be easier and less costly than setting up production facilities abroad. Further,
many governments, as in India, provide incentives for establishing facilities for export
production.

b) Licensing / franchising: Franchising is “a form of licensing in which a parent

company (the franchiser) grants another independent entity (the franchisee) the right to
do business in a prescribed manner. This right can take the form of selling the
franchisor’s products, using its name, production and marketing techniques, or general
business approach.” One of the common forms of franchising involves the franchisor
supplying an important ingredient for the finished product, like the Coca-Cola supplying
the syrup to the bottlers. Licensing has been used by many companies also to harvest
their obsolete products. This strategy has been employed, in particular, in developing
countries. When the market is closed by the host country regulations either to imports or
to foreign investment, licensing may provide a viable opportunity to enter such a market.
c) Contract Manufacturing: Under contract manufacturing, a company doing
international marketing contracts with firms in foreign countries to manufacture or
assemble the products while retaining the responsibility of marketing the product. This a
common practice in international business. Contract manufacturing has the following
advantages:

 The company does not have to commit resource for setting up production
facilities
 It frees the company from the risks of investing in foreign countries
 If idle production capacity is readily available in the foreign country, it
enables the marketer to get started immediately
 In many cases, the cost of the product obtained by contract manufacturing is
lower than if it were manufactured by the international firm. For example, the
product cost in the small scale sector is much lower than in the large scale
sector for many products because of the lower wages, lower overheads, and
tax concessions. Moreover, if excess capacities are available with existing
units, it may even be possible to get the product supplied on the marginal cost
basis.
 It is less risky to start with. If the business does not pick up sufficiently,
dropping it is easy, but if the company had established it own production
facilities, the exit would be difficult.

d) Management Contracting: Under the management contract, the firm providing

management know-how may not have any equity stake in the enterprise being managed.
In short, in a management contract the supplier bring together a package of skills that will
provide an integrated service to the client without incurring the risk and benefit of
ownership. Some Indian companies – Tata Tea, Harrison Malayalam and AVT – have
contracts to manage a number of plantations in Sri Lanka.

e) Turnkey Contracts: Turnkey contracts are common in International business in the

supply, erection and commissioning of plants, as in the case of construction project, oil
refineries, steel mills, cement and fertilizer plants etc . It is an agreement by the seller to
supply the buyer with a facility fully equipped and ready to be operated by the buyer’s
personnel, who will be trained by the seller. Many turnkey contracts involve
government/public sector as buyer.

f) Wholly Owned Manufacturing Facilities: Companies with long term and substantial
interest in the foreign market normally establish fully owned manufacturing facilities
there. A number of factors like trade barriers, difference in the production and other
costs, government policies etc, encourage the establishment of production facilities in the
foreign markets. Establishment of manufacturing facilities abroad has several advantages.
It provides the firm with complete control over production and quality. It does not have
the risk of developing potential competitors as in the case of licensing and contract
manufacturing. But this method demands sufficient financial and managerial resources on
the part of the company.
g) Joint Ventures: Joint venture is a very common strategy of entering the foreign
market. In the widest sense, any form of association which implies collaboration for more
than a transitory period is a joint venture. The essential feature of a joint ownership
venture is that the ownership and management are shared between a foreign firm and a
local firm. In some cases there are more than two parties involved. A joint ownership
venture may be brought about by a foreign investor buying an interest in a local
company, a local firm acquiring an interest in an existing foreign firm or by both the
foreign local entrepreneurs jointly forming a new enterprise. One important advantage of
joint venturing is that it permits a firm with limited resources to enter more foreign
market than might be possible under a policy of forming wholly owned subsidiaries.

h) Third Country Location: Third country location is sometimes used as an entry

strategy. When there are no commercial transactions between two nations because of
political reason or when direct transactions between two nations are difficult due to
political reasons, a firm in one of these nations which want to enter the other market will
have to operate from a third country base. For example, Taiwanese entrepreneurs found it
easy to enter People’s Republic of China through bases in Hong Kong.

i) Mergers and Acquisitions: Mergers and Acquisitions have been a very important
market entry strategy as well as expansion strategy. A number of Indian companies have
also used this entry strategy. Mergers and acquisitions have specific advantages. It
provides instant access to markets and distribution network. It also has the advantage of
reducing the competition.

j) Counter Trade: Counter Trade is a form of international trade in which certain export
and import transactions are directly linked with each other and in which import of goods
are paid for by export of goods, instead of money payments.

4) Learning to handle differences: Another stage in evolving a global strategy is

learning to handle differences that persist across countries in the political, economic and
socio-cultural environments. Differences are often difficult to perceive but careful
observations yields dividends in the form of new opportunities and new ways of reducing
risks.

5) Adjusting the management process: Management process, as is well known,

involves planning, organizing, staffing and controlling. Now this process needs to be
different for an MNC operating in an international environment. Management process at
macro and micro levels needs to be oriented differently. At the macro-level, issues
generally involved are – what special steps are needs in the planning and control systems
of MNCs? Should organisations be structured and co-coordinated differently in different
countries? How to recruit people and compensate them adequately? Should the
performance appraisal system differ from country to country?

At the macro-level, the decisions involved are: How should one individual interact with
another from a different country? Should people in one country be managed differently
 from people in another county? The objective of management process is to motivate
people to think and act globally.

6) Selecting a managerial approach: What must be the managerial approach suitable for
an MNC? For along time, the popular belief was that West European - American
approach was ideal for any company, including a multinational. Then came the Japanese
approach. Therefore the organisation must decide the approach it wishes to follow.

7) Deciding an organisation structure: An MNC can adopt any of the six fundamental
structures:

a) International Division Structure:

CEO

VP DOMESTIC VP DOMESTIC VP
DIVISION A DIVISION B INTERNATIONALD
IVISION
 Manufacturing Manufacturing
 Financing Financing
 Marketing Marketing Area A Area B
o Manufacturing Manufacturing
o Financing Financing
o Marketing Marketing

In the international division structure, the overseas unit is an adjunct to the domestic
business. All the overseas subsidiaries Area A and Area B in this case, are under the
authority of the international division Vice President who coordinates the entire foreign
operations. As the international activities are under one head, control and communication
are easy.

b) Worldwide Functional Organisation: In this structure, each functional unit is

responsible for its own worldwide operations and profitability. Communication among
finance, marketing and manufacturing departments may become difficult since each
department may have its operations in different foreign locations.

CEO

MANUFACTURING MARKETING FINANCING OTHER

FUNCTIONS
Plant A(U S A) Germany

Plant B (U K) Brazil

(Worldwide Functional Organisation)

c) Geographic Area Structure:

CEO

NORTH AMERICAN FAR EASTERN EUROPEAN

DIVISION DIVISION DIVISION
 Manufacturing
 Financing
 Marketing

According to geographic area organisation, worldwide activities are organised by

dividing the globe into different geographic areas. The Regional manager or Vice
President of each area is responsible for all business activities within that geographical
area.

d) Product Organisation
CEO

PRODUCT PRODUCT PRODUCT

DIVISION DIVISION DIVISION
A B C
 manufacturing financing marketing

subsidiaries subsidiaries subsidiaries

In product structure, the company is divided into product divisions. Each division is
headed by a manager who is responsible for all functional departments.

e) Mixed Organisations:
CEO

PRODUCT PRODUCT INTERNATIONAL

DIVISION A DIVISION B DIVISION

AREA 1 AREA 2 AREA 3 Mfg Mktg R&D Mfg

Mixed organisation combines structures of functions, product and geographic formats

Questions

Section B (8 marks)

1 Discuss the organisation structures for a multinational corporation

Section C (12 marks)

2 Discuss the issues involved in globalisation

3 Explain the strategies to enter the foreign market

CHAPTER XXIV

WTO AND TRADING BLOCS

The WTO was established in 1995. It includes 145 countries and is headquartered in
Geneva, Switzerland. The WTO has been used to push an expansive array of policies on
trade, investment and deregulation that exacerbate the inequality between the North and
the South, and among the rich and poor within countries. The WTO enforces some
twenty different trade agreements, including the General Agreement on Trade in Services
(GATS), the Agreement on Agriculture (AoA) and Trade-Related Intellectual Property
Rights (TRIPS).
Principles of WTO

Five principles are of particular importance in understanding both the pre-1994 GATT
and the WTO: nondiscrimination, reciprocity, enforceable commitments, transparency,
and safety valves.

Nondiscrimination:

Nondiscrimination has two major components: the most-favored-nation (MFN) rule,

and the national treatment principle. The MFN rule requires that a product made in
one member country be treated no less favorably than a “like” (very similar) good that
originates in any other country. Thus, if the best treatment granted a trading partner
supplying a specific product is a 5 percent tariff, this rate must be applied immediately
National treatment ensures that that foreign products be treated no less favorably than
competing domestically produced products gives foreign suppliers greater certainty
regarding the regulatory environment in which they must operate. It is a very wide-
ranging rule: it covers taxes and other policies, which must be applied in a
nondiscriminatory fashion between domestic and foreign products.

Reciprocity:

Reciprocity operates during negotiations among countries. When governments negotiate

in WTO rounds, they do so with the objective of obtaining mutually beneficial
arrangements through reciprocal reductions in tariff bindings.

Binding and Enforceable Commitments

Once tariff commitments are bound, it is important that there be no resort to other, non
tariff measures that have the effect of nullifying or impairing the value of the tariff
concession. The member concerned cannot raise tariffs above bound levels without
negotiating compensation with the principal suppliers of the products concerned.

Transparency:

Transparency is a basic pillar of the WTO, and it is a legal obligation, embedded in

Article X of the GATT and Article III of the GATS.WTO members are required to
publish their trade regulations inorder to establish and maintain institutions allowing for
the Review of administrative decisions affecting trade, to respond to requests for
information by other members, and to notify changes in trade policies to the WTO.

Safety Valves:

A final principle embodied in the WTO is that, in specific circumstances, governments

should be able to restrict trade for economic reasons. It includes:
(a) Public health or national security and to protect industries that are seriously injured by
competition from imports.
(b) Right to impose countervailing duties on imports that have been subsidized and
antidumping duties on imports that have been dumped (sold at a price below that charged
in the home market).
(c) Measures to correct a serious unfavourable balance of payment or the desire to protect
an infant industry

Functions of WTO:

The basic functions of the WTO are:

1. Administering WTO trade agreements: The WTO shall facilitate the

implementation, administration and operation, and further the objectives, of this
Agreement and of the Multilateral Trade Agreements, and shall also provide the
framework for the implementation, administration and operation of the Plurilateral Trade
Agreements.

2. Forum for trade negotiations: The WTO shall provide the forum for negotiations
among its Members concerning their multilateral trade relations in matters dealt with
under the agreements in the Annexes to this Agreement. The WTO may also provide a
forum for further negotiations among its Members concerning their multilateral trade
relations, and a framework for the implementation of the results of such negotiations, as
may be decided by the Ministerial Conference.

3. Handling trade disputes: The WTO shall administer the Understanding on Rules and
Procedures Governing the Settlement of Disputes (hereinafter referred to as the "Dispute
Settlement Understanding" or "DSU") in Annex 2 to this Agreement.

4. Monitoring national trade policies: The WTO shall administer the Trade Policy
Review Mechanism (hereinafter referred to as the "TPRM") provided for in Annex 3 to
this Agreement.

5. Technical assistance and training for developing countries

6. Cooperation with other international organizations: With a view to achieving

greater coherence in global economic policy-making, the WTO shall cooperate, as
appropriate, with the International Monetary Fund and with the International Bank for
Reconstruction and Development and its affiliated agencies.

Differences between WTO and GATT

Nature: The GATT was a set of rules, with no institutional foundation, applied on a
provisional basis. The WTO is a permanent institution with a permanent framework and
its own secretariat

Scope: The GATT rules applied to trade in goods. The WTO Agreement covers trade in
goods, trade in services and trade-related aspects of intellectual property rights.

Approach: Whilst the GATT was a multilateral instrument, a series of new agreements
were adopted during the Tokyo Round on a plurilateral - that is, selective - basis, causing
a fragmentation of the multilateral trading system. The WTO has been adopted, and
accepted by its Members, as a single undertaking: the agreements which constitute the
WTO are all multilateral, and therefore involve commitments for the entire membership
of the organization.

Dispute settlement: The WTO dispute settlement system has specific time limits and is
therefore faster than the GATT system; it operates more automatically, thus ensuring less
blockages than in the old GATT; and it has a permanent appellate body to review
findings by dispute settlement panels. There are also more detailed rules on the process of
the implementation of findings.

The WTO Structure:

The WTO has 145 members who account for approx 90% of world trade. Most
agreements in the WTO are arrived at by consensus (i.e. everybody agrees - not one
member dissents). Majority votes are possible but none so far have occurred. It is also
worth noting that all the WTO's agreements have been ratified by the members’ states'
parliaments (where such exist) in contrast to the case for GATT.

Ministerial Conference

There shall be a Ministerial Conference composed of representatives of all the Members,

which shall meet at least once every two years. The Ministerial Conference shall carry
out the functions of the WTO and take actions necessary to this effect. The Ministerial
Conference shall have the authority to take decisions on all matters under any of the
Multilateral Trade Agreements, if so requested by a Member, in accordance with the
specific requirements for decision-making in this Agreement and in the relevant
Multilateral Trade Agreement.

General Council

There shall be a General Council composed of representatives of all the Members, which
shall meet at appropriate intervals between meetings of the Ministerial Conference. The
General Council shall carry out the functions assigned to it by this Agreement. The
General Council shall establish its rules of procedure and approve the rules of procedure
for the Committees.
 Multitude of Committees, Bodies and Councils
For example: Dispute Settlement Body (DSU), Councils for Trade in Goods, Trade in
Services and for TRIPS etc.

MINISTERIAL
G C meeting as trade policy CONFERENCE G C meeting as dispute
review body settlement body (Appellate
body for dispute settlement)
GENERAL
COUNCIL

Committees on Council for Council for trade Council for

trade in goods related aspects of trade in
Intellectual properties Services
Trade and rights
Environment
Trade and
Development etc

THE FINAL ACT:

The WTO’s agreements are often called the Final Act of the 1986–1994 Uruguay Rounds
of trade negotiations, although strictly speaking the Final Act is the first of the
agreements.

1. Agriculture: fairer markets for all

The WTO agreement on agriculture is a significant first step towards fair competition and
less distorted trade in agricultural products. The most fundamental objective of the
agreement is to introduce reform that will make agricultural policies more market-
oriented. It establishes new rules and commitments in market access, domestic support
and export competition and includes provisions that encourage the use of less trade-
distorting domestic support policies to main the rural economy. It also allows actions to
be taken to ease adjustment burdens and provides some flexibility in the implementation
of the commitments. Specific concerns for developing countries are addressed including
those of net-food importing developing countries and less developed countries.

2. Health and Safety measures:

This agreement concerns the application of sanitary and phytosanitary measures — in
other words food safety and animal and plant health regulations. The agreement
recognises that governments have the right to take sanitary and phytosanitary measures
but that they should be applied only to the extent necessary to protect human, animal or
plant life or health and should not arbitrarily or unjustifiably discriminate between
Members where identical or similar conditions prevail.

In order to harmonize sanitary and phytosanitary measures on as wide a basis as possible,

Members are encouraged to base their measures on international standards, guidelines
and recommendations where they exist. However, Members may maintain or introduce
measures which result in higher standards if there is scientific justification or as a
consequence of consistent risk decisions based on an appropriate risk assessment. The
Agreement spells out procedures and criteria for the assessment of risk and the
determination of appropriate levels of sanitary or phytosanitary protection.

3. Helping Least Developed and food importing countries:

It is recognized that during the reform programme least-developed and net food
importing developing countries may experience negative effects with respect to supplies
of food imports on reasonable terms and conditions. Therefore, a special Decision sets
out objectives with regard to the provision of food aid, the provision of basic foodstuffs
in full grant form and aid for agricultural development. It also refers to the possibility of
assistance from the International Monetary Fund and the World Bank with respect to the
short-term financing of commercial food imports. The Committee of Agriculture, set up
under the Agreement on Agriculture, monitors the follow-up to the Decision.

4. Agreement on Technical Barriers to Trade

This agreement will extend and clarify the Agreement on Technical Barriers to Trade
reached in the Tokyo Round. It seeks to ensure that technical negotiations and standards,
as well as testing and certification procedures, do not create unnecessary obstacles to
trade. However, it recognizes that countries have the right to establish protection, at
levels they consider appropriate, for example for human, animal or plant life or health or
the environment, and should not be prevented from taking measures necessary to ensure
those levels of protection are met. The agreement therefore encourages countries to use
international standards where these are appropriate, but it does not require them to change
their levels of protection as a result of standardization.

5. Agreement on Trade Related Aspects of Investment Measures

The agreement recognizes that certain investment measures restrict and distort trade. It
provides that no contracting party shall apply any TRIM inconsistent with Articles III
(national treatment) and XI (prohibition of quantitative restrictions) of the GATT. To this
end, an illustrative list of TRIMs agreed to be inconsistent with these articles is appended
to the agreement. The list includes measures which require particular levels of local
procurement by an enterprise (“local content requirements”) or which restrict the volume
or value of imports such an enterprise can purchase or use to an amount related to the
level of products it exports (“trade balancing requirements”).

6. Anti-dumping

Article VI of the GATT provides for the right of contracting parties to apply anti-
dumping measures, i.e. measures against imports of a product at an export price below its
“normal value” (usually the price of the product in the domestic market of the exporting
country) if such dumped imports cause injury to a domestic industry in the territory of the
importing contracting party. More detailed rules governing the application of such
measures are currently provided in an Anti-dumping Agreement concluded at the end of
the Tokyo Round.

7. Customs Valuation

The Decision on Customs Valuation would give customs administrations the right to
request further information of importers where they have reason to doubt the accuracy of
the declared value of imported goods.

8. Agreement on Preshipment Inspection

Preshipment inspection (PSI) is the practice of employing specialized private companies

to check shipment details — essentially price, quantity, quality — of goods ordered
overseas. Used by governments of developing countries, the purpose is to safeguard
national financial interests (prevention of capital flight and commercial fraud as well as
customs duty evasion, for instance) and to compensate for inadequacies in administrative
infrastructures. The agreement recognizes that GATT principles and obligations apply to
the activities of preshipment inspection agencies mandated by governments. T

9. Agreement on Import Licensing Procedures

The revised agreement strengthens the disciplines on the users of import licensing
systems — which, in any event, are much less widely used now than in the past — and
increases transparency and predictability. For example, the agreement requires parties to
publish sufficient information for traders to know the basis on which licences are granted.
It contains strengthened rules for the notification of the institution of import licensing
procedures or changes therein. It also offers guidance on the assessment of applications.

With respect to automatic licensing procedures, the revised agreement sets out criteria
under which they are assumed not to have trade restrictive effects. With respect to non-
automatic licensing procedures, their administrative burden for importers and exporters
should be limited to what is absolutely necessary to administer the measures to which
they apply. The revised agreement also sets a maximum of 60 days for applications to be
considered.
10. Agreement on Subsidies and Countervailing Measures

Unlike its predecessor, the agreement contains a definition of subsidy and introduces the
concept of a “specific” subsidy — for the most part, a subsidy available only to an
enterprise or industry or group of enterprises or industries within the jurisdiction of the
authority granting the subsidy. Only specific subsidies would be subject to the disciplines
set out in the agreement.

One part of the agreement concerns the use of countervailing measures on subsidized
imported goods. It sets out disciplines on the initiation of countervailing cases,
investigations by national authorities and rules of evidence to ensure that all interested
parties can present information and argument.

11. Agreement on Safeguards

Article XIX of the General Agreement allows a GATT member to take a “safeguard”
action to protect a specific domestic industry from an unforeseen increase of imports of
any product which is causing, or which is likely to cause, serious injury to the industry.

13. General Agreement on Trade in Services

The Services Agreement which forms part of the Final Act rests on three pillars. The first
is a Framework Agreement containing basic obligations which apply to all member
countries. The second concerns national schedules of commitments containing specific
further national commitments which will be the subject of a continuing process of
liberalization. The third is a number of annexes addressing the special situations of
individual services sectors.

14. Agreement on Trade Related Aspects of Intellectual Property Rights, Including

Trade in Counterfeit Goods

The agreement recognises that widely varying standards in the protection and
enforcement of intellectual property rights and the lack of a multilateral framework of
principles, rules and disciplines dealing with international trade in counterfeit goods have
been a growing source of tension in international economic relations. Rules and
disciplines were needed to cope with these tensions. To that end, the agreement addresses
the applicability of basic GATT principles and those of relevant international intellectual
property agreements; the provision of adequate intellectual property rights; the provision
of effective enforcement measures for those rights; multilateral dispute settlement; and
transitional arrangements.

15. Understanding on Rules and Procedures Governing the Settlement of Disputes

The dispute settlement system of the GATT is generally considered to be one of the
cornerstones of the multilateral trade order. The system has already been strengthened
and streamlined as a result of reforms agreed following the Mid-Term Review Ministerial
Meeting held in Montreal. The DSU contains a number of provisions taking into account
the specific interests of the developing and the least-developed countries. It also provides
some special rules for the resolution of disputes which do not involve a violation of
obligations under a covered agreement but where a Member believes nevertheless that
benefits are being nullified or impaired.

TRADING BLOCS:

Regional trade blocs are intergovernmental associations that manage and promote trade
activities for specific regions of the world.

Trade bloc activities have political as well as economic implications. For example, the
European Union, the world’s largest trading block, has “harbored political ambitions
extending far beyond the free trading arrangements sought by other multistage regional
economic organizations“(Gibb and Michalak 1994: 75). Indeed, the ideological
foundations that gave birth to the EU were based on ensuring development and
maintaining international stability, i.e., the containment of communist expansion in post
World War II Europe (Hunt 1989). The Maastricht Treaty which gave birth to the EU in
1992 included considerations for joint policies in regard to military defense and
citizenship.

Impact of Trading Blocs:

There are potential gains for member countries from trading blocs:

Trade Creation and Trade Diversion:

Trade creation occurs when, because of free trade, industries produce more and more
goods at Sesser cost. This adds to the trade. Trade barriers being removed, new
opportunities for trade are created. Trade diversion occurs when trade is diverted from
countries outside the trading area to countries inside. Generally there will be gainers and
losers from trade diversion-the net gain or loss will depend on the particular
circumstances.

Prices and Competition:

Trade barriers, when removed, will result in lower prices of products. Buyers can buy
more at cheap rates. The more relevant issue relates to competition. By removing barriers
between national markets, trading blocs create competition. Competition benefits
consumers immensely in the form of lower prices, wider choice and better value for
money.

Economies of Scale
Trading blocs necessitate huge volumes resulting in economies of scale.

Dynamic Effects of Integration

Trading blocs promote integration which in turn results in efficient allocation of

resources, promotion of some businesses and development of new technology

Questions:

Section B (8 marks)

1. What is WTO? Give the functions of WTO

2. Differentiate WTO and GATT

3. What are trading blocs? What are its impacts?

4. Explain the Structure of WTO

Section C (12 marks)

5. Bring out the provisions of the FINAL ACT

References:

Business Environment: Shaik Saleem, Pearsons Education

Business Environment – Vijaya Shree, R Chand and Co, New Delhi

Essentials of Business Environment – K Ashwattappa, Himalaya Publishers

Business Environment – Francis Cherunillam, Himalaya Publishers

 Annexure

EUROPEAN UNION
Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta,
Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom

OPEC MEMBER COUNTRIES

Austria, Australia, Belgium, Canada, Czech Republic, Denmark, Finland, France,
Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, New Zealand,
Netherlands, Norway, Poland, Portugal, Republic of Korea, Slovak Republic, Sweden,
Switzerland, Turkey, United Kingdom, United States of America
COMMONWEALTH MEMBER COUNTRIES
Antigua and Barbuda, Australia, The Bahamas, Bangladesh, Barbados, Belize, Botswana,
Brunei Darussalam, Cameroon, Canada, Cyprus, Dominica, Fiji Islands, The Gambia,
Ghana, Grenada, Guyana, India, Jamaica, Kenya, Kiribati, Lesotho, Malawi, Malaysia
Maldives, Malta, Mauritius, Mozambique, Namibia, Nauru, New Zealand, Nigeria,
Pakistan, Papua New Guinea, St Kitts and Nevis, St Lucia, St Vincent and the
Grenadines, Samoa, Seychelles, Sierra Leone, Singapore, Solomon Islands, South Africa,
Sri Lanka, Swaziland, Tonga, Trinidad and Tobago, Tuvalu, Uganda, United Kingdom,
United Republic of Tanzania, Vanuatu, Zambia

NATO MEMBER COUNTRIES

Belgium, Bulgaria, Czech Republic, Canada, Denmark, Estonia, France, Germany,
Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Turkey, United Kingdom, United States of
America

SAARC MEMBER COUNTRIES

Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka

OPEC MEMBER COUNTRIES

Founder Member: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela
Full member: Qatar, Libya, Indonesia, United Arab Emirates, Algeria and Nigeria
Associate member: Gabon

EFTA MEMBER COUNTRIES

Austria, Belgium, France, Germany, Italy, Netherlands, Spain, Switzerland, United
Kingdom

APEC MEMBER COUNTRIES

Australia, Brunei Darussalam, Canada, Chile, People's Republic of China, Hong Kong,
China, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua
New Guinea, Peru, Philippines, Russia, Singapore, Chinese Taipei, Thailand, United
States of America, Vietnam
ASEAN MEMBER COUNTRIES
Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand, Vietnam

NAFTA MEMBER COUNTRIES

Canada, Mexico, United States of America

ANDEAN COMMUNITY
Bolivia, Colombia, Ecuador, Peru, Venezuela
CARRIBEAN COMMUNITY
Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana,
Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the
Grenadines, Suriname, Trinidad and Tobago

MERCOSUR / MERCOSUL COUNTRIES

Argentina, Brazil, Paraguay, Uruguay

SADC MEMBER COUNTRIES

Angola, Botswana, DR Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia,
Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe

COMMONWEALTH OF INDEPENDENT STATES

Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia,
Tajikistan, Turkmenistan, Ukraine, Uzbekistan

BALTIC STATES, FORMERLY PART OF THE SOVIET UNION:

Estonia, Latvia, Lithuania

PACIFIC COMMUNITY / COMMUNAUTÉ DU PACIFIQUE

American Samoa, Australia, Cook Islands, Fiji, France, French Polynesia, Guam,
Kiribati, Marshall Islands, Micronesia, Nauru, New Caledonia, New Zealand, Niue,
Northern Mariana, Palau, Papua New Guinea, Pitcairn islands Samoa, Solomon islands,
Tokelau, Tonga, Tuvalu, UK, USA, Vanuatu, Wallis and Futuna

GULF COOPERATION COUNCIL MEMBER CONTRIES

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, U.A.E.

ECONOMIC COMMUNITY OF WESTERN AFRICAN STATES - ECOWAS

Benin, Burkina Faso, Cape Verde, The Gambia, Ghana, Guinea, Guinea Bissau, Ivory
Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo

COMESA MEMBER CONTRIES

Angola, Burundi, Comoros, D.R.Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya,
Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland,
Uganda, Zambia, Zimbabwe
 CHAPTER XXV

FOREIGN EXCHANGE

“The mechanism through which payments are effected between two countries having
different currency systems is termed as foreign exchange. “ Foreign exchange is loosely
associated with foreign currencies inmost of the cases. In fact it is a collective term that
includes all kinds of negotiable claims expressed in foreign currencies.

Currency Convertibility:

Currency convertibility refers to the freedom to convert the domestic currency into other
internationally accepted currencies and vice versa. Convertibility in that sense is the
obverse of controls or restrictions on currency transactions. While current account
convertibility refers to freedom in respect of ‘payments and transfers for current
international transactions’, capital account convertibility (CAC) would mean freedom
of currency conversion in relation to capital transactions in terms of inflows and
outflows.

Foreign Exchange market:

Foreign exchange market is the place where foreign moneys are bough and sold. The
buyers, the sellers and the intermediaries in the exchange transactions constitute foreign
exchange market. It is not restricted to any area or geographical location, it the market for
a foreign money. The financial centres of the world dealing in foreign moneys are
combined and termed as foreign exchange market.

The central banks or its authorised dealers constitute the most important component of
foreign exchange market. Commercial banks are also entrusted with the power of dealing
in foreign money. There are special banks known as exchange banks which deal mainly
in foreign exchange. These banks discount and sell foreign bills of exchange, issue bank
drafts, telegraphic transfers and other credit instruments. They discount and collect
amounts on the basis of foreign exchange documents for their clients. Brokers and dealers
in foreign exchanges also help in the settlement of foreign transactions. Acceptance and
discount houses are also engaged in the settlement of foreign dues. They assist in foreign
remittances by accepting and discounting foreign bills. In India we have strict exchange
control and no agency except the Reserve Bank of India and its authorised dealers can
transact in foreign exchanges. All exporters in India have to surrender their foreign
exchange earnings to the RBI or to its authorised dealers within three months of their
earnings and can get Indian Rupee in exchange of that. Similarly, the importers can get
the foreign exchanges through the RBI or its authorised dealers.

Functions of Foreign Exchange Market:

The foreign exchange market performs the following three functions:

1. Transfer function: The foreign payment can be made through transmit of gold and
paper money, bankers’ bills of exchange, cables, telegraphic transfers, cheques, cash,
letters of credit, travellers’ letter of credit, travellers cheque, international money order
and commercial letters of credit. The banks play an important role in realising foreign
dues. Importers willing to acquire foreign exchanges may purchase these bills of
exchange from the bankers or brokers. They may send it to their exporters directly who
realize the dues by depositing the bills of exchange with the foreign exchange dealers and
banks. The bills of exchange are generally sight bills.

2. Credit Function: The credit functions are smoothly performed by the dealers of
foreign exchange market. The exporters draw bills of exchange on importers or on their
bankers. The bills of exchange are accepted by the importer on their bankers and are sent
to the exporters who can get the dues realised at the maturity of the bills. In case, the
exporters are willing to receive money promptly, they can get the bills discounted from a
foreign exchange banks or their bankers or discount houses.

3. Hedging Function: The exchange rates frequently fluctuate and the exporters may
suffer loss. When the rates become favourable, they may gain. If payment is to be
received in future, the fluctuations in exchange rates may cause a great loss to the
exporter or to the importer. Foreign exchange market provides hedges against such
fluctuations. They guarantee payment of foreign exchanges at affixed rate, even if the
exchange rates might have gone down or gone up. The dealers have contracted for
purchasing of foreign exchanges from the selling agencies of the currencies and they pay
the required amount at fixed rates after a given period of time.

Questions

Section A (2 marks)

1 Give the meaning of the term foreign exchange.

2 What do you mean by current account and capital account convertibility?

Section B (8 marks)

3 Write notes on (1) the intermediaries in the Foreign Exchange market and (2) functions
of the FOREX markets

Reference:

Foreign Exchange – C Jeevanandam,

Money Banking and Foreign Exchange – Hari Gopal dass, SPB Publishers

CHAPTER XXVI

NATURAL ENVIRONMENT

The natural environment comprises all living and non-living things that occur naturally
on Earth. In its purest sense, it is thus an environment that is not the result of human
activity or intervention. The natural environment may be contrasted to the built
environment, and is also in contrast to the concept of a cultural landscape. In many
contexts, the term used is simply environment.

Nature and impact on business:

The natural environment ultimately is the source and support of everything used by
businesses – every raw material, every energy source, every life-sustaining factor, even
every waste disposal site.
The natural environment determines what can be got done in a society and how
institutions can function. Resource availability is the fundamental factor in the
development of business in societies.

Thus geographical and ecological factors, such as natural resource endowments, weather
and climatic conditions, topographical factors, Locational aspects in the global context,
port facilities etc, are relevant to business

Differences in geographical conditions between markets may sometimes call for changes
in the marketing mix. Geographical and ecological factors also influence the locations of
certain industries. For example, industries with high material index tend to be located
near the raw material sources.

The dreadful earthquakes that ravaged several areas of Gujarat in early 2001 and the
potential for such occurrences in a number of other places would influence the decision
making in respect of location of business. It is also likely to affect the demand for flats
and accommodation in high rise buildings. It could also influence the choice of building
technology, design, material etc.

Climatic and weather conditions affect the location of certain industries like the cotton
textile industry. Topographical factors may affect the demand pattern in some cases. For
example, in hilly areas with a difficult terrain jeeps may be in greater demand than cars.

Weather and climatic factors affect the demand for certain type of products. For example,
in several regions where the temperature is very high in summer, there is good demand
for desert coolers, but they are not at all used in some of the States in India. In regions
characterised by very cold climate in winter and very hot climate in summer both room
heaters and air conditioners may in good demand in the respective seasons.

Ecological factors have recently assumed great importance. The depletion of natural
resources, environmental pollution and the disturbance of the ecological balance has
caused great concern. Government policies aimed at the preservation of environmental
purity and ecological balance, conservation of non-replinishable resources etc, have
resulted in additional responsibilities for business, and some of these have the effect of
increasing the cost of production and marketing.

Pollution:

Pollution is the introduction of substances or energy into the environment, resulting in

deleterious effects of such a nature as to endanger human health, harm living resources
and ecosystems, and impair or interfere with amenities and other legitimate uses of the
environment. The major forms of pollution include:
Air pollution, the release of chemicals and particulates into the atmosphere. Common
examples include carbon monoxide, sulfur dioxide, chlorofluorocarbons (CFCs), and
nitrogen oxides produced by industry and motor vehicles. Photochemical ozone and smog
are created as nitrogen oxides and hydrocarbons react to sunlight.

Water pollution via surface runoff and leaching to groundwater.

Soil contamination occurs when chemicals are released by spill or underground storage
tank leakage. Among the most significant soil contaminants are hydrocarbons, heavy
metals, MTBE[2], herbicides, pesticides and chlorinated hydrocarbons.

Radioactive contamination, added in the wake of 20th-century discoveries in atomic

physics. (See alpha emitters and actinides in the environment.)

Noise pollution, which encompasses roadway noise, aircraft noise, industrial noise as
well as high-intensity sonar.

Light pollution, includes light trespass, over-illumination and astronomical interference.

Visual pollution, which can refer to the presence of overhead power lines, motorway
billboards, scarred landforms (as from strip mining), open storage of trash or municipal
solid waste.

Thermal Pollution, is a temperature change in natural water bodies caused by human

influence

Deforestation:

Deforestation is the conversion of forested areas to non-forest land use such as arable
land, pasture, urban use, logged area or wasteland. Generally the removal or destruction
of significant areas of forest cover has resulted in a degraded environment with reduced
biodiversity. In many countries, massive deforestation is ongoing and is shaping climate
and geography.

Deforestation results from removal of trees without sufficient reforestation and usually
results in a significant loss of biodiversity. There are many causes, ranging from slow
forest degradation to sudden and catastrophic wildfires. Deforestation can be the result of
the deliberate removal of forest cover for agriculture or urban development, or it can be a
consequence of grazing animals, wild or domesticated. The combined effect of livestock
herding and fires can be a major cause of deforestation in dry areas. In addition to the
direct effects brought about by forest removal, indirect effects caused by edge effects and
habitat fragmentation can greatly magnify the effects of deforestation.

While tropical rainforest deforestation has attracted most attention, tropical dry forests
are being lost at a substantially higher rate, primarily as an outcome of slash-and-burn
techniques used by shifting cultivators. Generally loss of biodiversity is highly correlated
with deforestation.

Impact of Deforestation on the Environment:

Deforestation affects the amount of water in the soil and groundwater and the moisture in
the atmosphere. Forests support considerable biodiversity, providing valuable habitat for
wildlife; moreover, forests foster medicinal conservation and the recharge of aquifers.
With forest biotopes being a major, irreplaceable source of new drugs (like taxol),
deforestation can destroy genetic variations (such as crop resistance) irretrievably.

Shrinking forest cover lessens the landscape's capacity to intercept, retain and transport
precipitation. Instead of trapping precipitation, which then percolates to groundwater
systems, deforested areas become sources of surface water runoff, which moves much
faster than subsurface flows. That quicker transport of surface water can translate into
flash flooding and more localized floods than would occur with the forest cover.
Deforestation also contributes to decreased evapotranspiration, which lessens
atmospheric moisture which in some cases affects precipitation levels downwind from
the deforested area, as water is not recycled to downwind forests, but is lost in runoff and
returns directly to the oceans. According to one preliminary study, in deforested north
and northwest China, the average annual precipitation decreased by one third between the
1950s and the 1980s

The continual degradation of forest habitat is primarily due to human related causes.
Agriculture, slash and burn practises, urban sprawl, unsustainable forestry practices,
mining, and petroleum exploration all contribute to human-caused deforestation. Natural
deforestation can be linked to tsunamis, forest fires, volcanic eruptions, glaciation and
desertification, although the desertification process is driven primarily by human causes.
The effects of human related deforestation can be mitigated through environmentally
sustainable practices that reduce permanent destruction of forests or even act to preserve
and rehabilitate disrupted forestland (see Reforestation and Treeplanting

Long-term gains can be obtained by managing forest lands sustainable to maintain both
forest cover and provide a biodegradable renewable resource. Forests are also important
stores of organic carbon, and forests can extract carbon dioxide and pollutants from the
air, thus contributing to biosphere stability and probably relevant to the greenhouse
effect. Forests are also valued for their aesthetic beauty and as a cultural resource and
tourist attraction.
Ecology and Economy

Ecology: eco- from Greek oiko=house, and logos=study of

Economy: eco- from Greek oiko=house, and nemein=distribute/manage

So, in ecology we are studying our "house" (i.e., this planet and the universe in which we
dwell), and with that knowledge we should be properly managing the distribution/use of
its resources. Economy and ecology go hand in hand or maybe more accurately, they are
just different fingers on the same hand. Thus, it would take a very narrow-minded person
to try to view them as being at odds with each other.

A human society involves a lot of interdependence among people to function at all (e.g.,
person A makes clothing to sell to persons B and C. Person B is a farmer and sells food to
persons A and C. Person C is a carpenter who builds houses and furniture for persons A
and B.) But the interdependence goes much further than just the humans. A continuous
regeneration of animals and plants is needed to provide the fiber for person A to make
clothing from, for the food production of the farmer, and for the wood that is used by
person C.

Ecology is the study of how to maintain these interdependent relationships, allowing the
energy from the earth's only energy source (the sun) to flow through all the necessary
channels to keep the various life cycles running smoothly, rather than screwing up one of
them for the seeming short-term benefit of another. The sun's energy goes into plants
which pass it on to animals and humans who eat the plants (and sometimes the animals),
all of which pass it back into the earth and atmosphere when decaying. The sun's energy
also fuels the water cycles of the earth, evaporating water from the oceans surface waters,
allowing it to be transported over land and fall as rain to water crops and refill the
underground aquifers that provide drinking water.

Too often in recent decades, the two big "e" words -- ecology and economy have been
used as though they represented opposing concerns. It has been said, "The economy is a
wholly owned subsidiary of the environment." The Earth itself is what ultimately controls
economic activity because it is the source of the materials upon which economic activity
works. That is why economy and ecology cannot be separated. When we speak about
environmental crisis, we are not to think only of spiraling poverty and mortality, but
about brutal and uncontainable conflict. An economics that ignores environmental
degradation invites social degradation -- in plain terms, violence. For instance, It is no
news that access to water is likely to be a major cause of serious conflict in the century
just beginning

Therefore, it is up to us as consumers and voters to do better justice to the "house" we

have been invited to keep, the world where we are guests.

Questions:
 Section B (8 marks)

1 What do you understand by the term ‘pollution’? What are the different forms?

Section C (12 marks)

2 How does ecology affect the economic environment?

References:

1. Essentials of Business Environment - K Ashwattapa, Himalaya Publishers

2. Business Environment, Text and cases – Francis Cherunillam, Himalaya Publishers

Model Question Paper

Section A

Answer any 12 (2 X 12 = 24)

1) a. Give the meaning of the term “Business Environment”. What do you understand by
vision and mission statement?

b. What are the steps in environmental analysis? Bring out its limitations.

c. Expand GDP? And give its meaning.

 d. Give the features of Indian Economy

e. State the objectives of Industrial policy 1991?

f. What are the objectives of MRTP Act? Mention the trade practices covered by the
Act

g. What is FERA? Give two objectives.

h. How do you differentiate SSI from Tiny units?

i. State the meaning of privatisation

j. What are the measures of money stock?

k. Define Fiscal Policy

l. What is a budget?

m. Give two differences between science and technology

n. What is Judicial Activism?

o. Give the meaning of the term “corporate governance”

Section B

Answer any 5. The 2nd Question is compulsory. (5 X 8 = 40)

2 a. Explain the Preamble to the Constitution of India

(or)

b. What are the objectives and benefits of privatisation?

3. What is need for social responsibility in business?

4. What are the promotional measures instituted by the Government for the development
of SSI in the country?

5. Write short notes on MTP, RTP and UTP

6. What are the characteristics of globalisation? Examine the disadvantages of

globalisation
7. Write notes on (1) the intermediaries in the Foreign Exchange market and (2) functions
of the FOREX markets

Section C

Answer any 3. 8th Question is compulsory. ( 3 X 12 = 36)

8 a. Analyse the impact of technology

(or)

b. Do you think MRTP should be replaced? Why?

9. Bring out the provisions of the FINAL ACT

10. How does ecology affect the economic environment?

11. Write notes on: (i) WTO and its functions

(ii) Differentiate WTO and GATT

(iii) Trading blocs and their impacts?

12. Explain the factors that affect the business environment