Self Learning Material Business Environment

Self Learning Material

Business Environment(MBA-201)

Course: Masters in Business Administration

Semester-II

Distance Education Programme

I.K. Gujral Punjab Technical University

Jalandhar

SyllabusMBA 201 Business Environment

Objectives: To provide students with an understanding of basic economic principles of

production & exchange-essential tools in making business decisions in today’s global

economy. The objective is to make the student understanding how the economy works,

covering microeconomic description of business applications, including pricing for profit

maximization, price elasticity, market structures and modeling of business in varying

economic climates.

Unit –I

Introduction: definition, components and overview of Business Environment, Complexity

and Diversity of Business Environment in the 21st century, Concept of Business Cycle, Need

to scan the business environment and techniques of scanning the business environment.

Political Environment: Three political institutions: Legislature, Executive and Judiciary.

Brief note on Fundamental rights and Directive Principles of state policy, Rationale and

extent of state intervention.

Unit –II

Economic Environment: Concept and Salient features of various economic system, New

Industrial policy and industrial licensing, New economic policies, Aspects of economic

reforms and its effects on business, Emerging Economies. Effect of recession on Business

and remedies for that, Economic Planning in India: Objectives, Strategies and Evaluation of

current five year plan. Monetary and Fiscal Policy. Legal Environment: Company

Regulatory Legislations in India, FEMA, Latest. EXIM policy. Competition Law, Consumer

Protection Act 1986, Right to Information Act 2005

Unit –III

Public Sector in India: Concepts, Philosophy and Objectives, Performance, Problems and

Constraints. Disinvestment and Privatisation, Joint sector and Cooperative sector in India.

Social Environment: Corporate Social Responsibility, Consumer Movement, Business

Ethics, Cross-Cultural Business Environment, Ecological Environment Protection: Green

Management, Global Warming, Carbon Foot Printing, The Environment Protection Act 1986.

Unit –IV

Technological Environment: Impact of Technology on Business, Technological Policy,

Intellectual Property Rights, Import of Technology, Appropriate Technology, Problems in

Technology Transfer. International Environment: Emergence of Globalisation. Control of

Foreign Direct Investment, Benefits and Problems from MNCs. WTO, its role and functions,

Implications for India. Trading Blocks, Foreign Trade: SEZ (Special Economic Zones), EPZ

(Export processing zone), EOU (Export Oriented Units), Dumping and Anti-Dumping measures.

Note: Student must consult Economic Times, Financial Express and Economic Survey of

current years.

Relevant Case Studies should be discussed in class.

Suggested Readings / Books:

Dr Francis Cherunilam, Business Environment Text & Cases, Himalaya Publishing S.K. Mishra, and V.K Puri, Economic Environment of Business, Himalaya Publishing Paul Justice, Business Environment- Text and Cases, TATA McGraw Hill. Aswathappa, Essential of Business Environment, Himalaya Publishing Aggarwal & Diwan, Business Environment, ExcelBooks Sengupta, Government & Business Vikas Publishing House Economic Survey, Government of India (Latest)

Table of Contents

Chapter Title Written By Page No.

1 Business Environment-Concept,Significance And Nature

Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,CHD

1

2 Environment Scanning-Process AndTechniques

Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,CHD

17

3 Political Environment Dr. Deepali Handa, Assistant Professor,DAV College, Jalandhar

31

4 Economic Environment Of Business Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,CHD

47

5 India’s New Economic Policies Dr. Shaveta Kohli, Assistant Professor,Department Of Economics, CentralUniversity Of Jammu

58

6 Economic Planning In India Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,CHD

75

7 Monetary And Fiscal Policies Dr. Shekhar Sistla, Associate Professor,P.R.R. Colleges, P.R.R EducationalSociety, Hyderabad

93

8 Legal Environment Dr. Harjiv Kaur Sidhu, AssistantProfessor, PG Department Of Economics,Trai Shatabdi Guru Gobind Singh KhalsaCollege, Amritsar

108

9 Consumer Protection Act, 1986 Dr. Harjiv Kaur Sidhu, AssistantProfessor, PG Department Of Economics,Trai Shatabdi Guru Gobind Singh KhalsaCollege, Amritsar

131

10 Right To Information Act, 2005 Dr. Harjiv Kaur Sidhu, AssistantProfessor, PG Department Of Economics,Trai Shatabdi Guru Gobind Singh KhalsaCollege, Amritsar

152

11 Role Of Public Sector In India’sEconomic Development:Performance And Challenges

Dr. Shaveta Kohli, Assistant Professor,Department Of Economics, CentralUniversity Of Jammu

171

12 Socio-Cultural Environment-Role OfSocialGroups And Consumerism In IndianBusiness

1) Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,Chd2) Ms. Priyanka Singh, PIM, Kapurthala

182

13 Ecological Protection Dr. Shaveta Kohli, Assistant Professor,Department Of Economics, CentralUniversity Of Jammu

203

14 Technological Environment Dr. Deepali Handa, Assistant Professor,DAV College, Jalandhar

220

15 Globalisation And FDI Dr. Shekhar Sistla, Associate Professor,P.R.R. Colleges, P.R.R EducationalSociety, Hyderabad

237

16 Trading Blocks Dr. Shekhar Sistla, Associate Professor,P.R.R. Colleges, P.R.R EducationalSociety, Hyderabad

256

Reviewed by:

Dr. Harpreet Singh Chahal,Assistant Professor, GNDURegional Campus, Gurdaspur

© IK Gujral Punjab Technical University JalandharAll rights reserved with IK Gujral Punjab Technical UniversityJalandhar

1

LESSON 1

BUSINESS ENVIRONMENT-CONCEPT, SIGNIFICANCE AND NATURE

Structure1.1 Objectives

1.2 Introduction

1.3 Significance of business environment

1.4 Characteristics of business environment in 21st Century

1.5 A simple model of business and its environment-transforming inputs into output

1.6 Components of Business environment

1.6.1 Internal environment

1.6.2 External environment

1.6.2.1 Macro environment

1.6.2.2 Micro environment

1.7 Summary

1.8 Glossary

1.9 Answers to Check Your Progress

1.10 References/Bibliography

1.11 Suggested Readings

1.12 Terminal / Model Questions

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1.1 Objectives:

After going through the lesson, you will be able to:

i. Define Business Environment concept.

ii. Enumerate the Significance of Business Environment.

iii. Define the nature and scope of Business Environment.

iv. Illustrate internal and external factors affecting business.

1.2 Introduction

The term Business environment is made up of two words: business and environment. ‘Business’

means all activities which are concerned with marketing, production, trade, banking, finance,

insurance, investment, advertising, pricing, distribution, promotion and packaging and so on.

‘Environment’ refers to the all external factors which have influence on the performance and

conduct of the business. Business environment signifies or indicates all external forces which

are beyond the control of business. These factors and forces are: - customers, competitors,

government, the social, political, legal and technological factors and so forth. Some of the factors

or forces have direct influence over the business while others may affect the business indirectly.

In other words it can be said that business environment includes all those external factors which

have potential opportunities or threats for the firm.

According to P. Gisbert “Environment is anything immediately surrounding an object and

exerting a direct influence on it.”

According to E. J. Ross “Environment is an external force which influences us.”

According to Keith Davis, business environment can be defined as “Business environment is the

aggregate of all conditions, events and influences that surround and affect it.”

Thus, the term ‘environment’ literally means the ambiance, external objects, influences or

circumstances in which something exists. From the above discussion, it’s very much apparent

that the business environment is the blend of complex, ever changing and uncontrolled exterior

factors in which a company functions.

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1.3 Significance of Business Environment:

Business Environment denotes to the “Sum total of conditions which surround man at a given

point in space and time. In due course of time and advancement of society, man extended his

environment through his social, economic and political function.”

In global economy, the business environment act significantly in about all business enterprises.

The positive impact of business environment can be subjectively put in words with following

points:

(i) Understanding the inner Environment: It is important for a venture to have effective

management information system to comprehend it’s inside environment, such as industry

policies, organization structure etc. which will help in predicting the business environmental

transformation.

(ii) Understanding the Economic System: Economic factors greatly influence the business. For

a businessman and business firms it is crucial to be acquainted with the functioning of economic

system prevailing in the country i.e. capitalists, socialist and mixed economy. They are the

different kind of fiscal systems that manipulate the business functioning in various ways.

(iii) Understanding the Economic Policies: Economic policies are having its own important

part in trade and influence the business decisions. It helps to identify government policies which

ultimately have impact on business objectives such as, export-import policies, monetary policies,

oversea exchange policies and manufacturing sector policies etc.

(iv) Understanding the Conditions of the market: It is obligatory for a venture to have

awareness about structure of the market and changes that taking place in the market. The

awareness concerning raise or decline in market demands and supplies, monopoly practice,

participation of govt. in company etc. is required for an enterprise.

1.4 Characteristics of the Business Environment in 21st Century

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Business environment today is so dynamic and ever changing that in order to adapt the changes

taking place in the environment, business firms keep on changing its activities, functions and

procedures. The changes in the environment of business take place due frequent changes in the

technological factors, economic factors, political policies, regulatory laws and control

mechanisms laid down by the government, changing demographical characteristics of the

workforce and so on. In order to compete and succeed in the market, business firms adapt the

changes occurring in the external environmental factors. In brief, important features of today’s

business environment are explained as below:

Totality of External Forces: Business environment is the composition of all the total

forces which are present outside the business and business has no control over them.

Specific and General Forces: The forces present outside the business can be divided into

two parts – specific and general.

(i) Specific: These forces affect the firms of an industry separately, e.g., customers,

suppliers, competitive firms, investor etc.

(ii) General: These forces affect all the firms of an industry equally, e.g., social, political,

legal and technical situations.

Complex: Various aspects of business environment are related to one another which

means variation in one aspect affects the other aspect. For example, if there is any

alteration in fiscal policy with the upcoming new government in rule. In this particular

case, the new government in rule has power to alter other political and economic policies

correspondingly. Such interrelatedness of various factors of business environment

increases the complexity of the environment.

Dynamic Nature: It is obvious that environment is the blend of several factors and

forces. Changes continue to take place from time to time in various factors. Therefore,

business environment can be assumed as dynamic or every changing.

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Uncertainty: Dynamic nature of Business Environment adds another feature of

‘uncertainty’. Nothing can be predicted about the factors of the business environment as

they keep on changing rapidly. This is why, specialized people who formulate business

strategies foresee in advance the probable changes in the business environment. For an

instance, technological variations are very quick. No one can predict the timing and

amount of such hurried technological variations.

Diversity: The nature of business environment is very diverse. Diversity can be explained

as: Demographic diversity, Socio-cognitive diversity and organizational diversity.

‘Demographic diversity;’ can be explained as differences in age, gender, nationality and

ethnicity of people who are part of the business enterprise. ‘Socio-cognitive diversity’

can be explained as differences in values, beliefs, norms, religion, culture, level of

awareness and personality traits of the people involved in the business. ‘Organisational

diversity’ is described as diverse viewpoints, functions, occupations, designs and

structures of various departments within the organization and so on.

1.5 A simple model of business and its environment-transform the inputs into

outputs:

Every Business organization is part of External environment and therefore it interacts with

various factors of external environment. In broader sense, business is the activity of producing

goods and services to meet the wants and needs of consumers. The inputs for business activities

are obtained from the environment into the business, and outputs are moved out from the

business to environment. In order to be successful, business organisations have to be very careful

in selecting the necessary inputs from the environment at right time, place price, quantity and

quality so that the customers’ wants may be satisfied by providing the outputs which meet their

expectations. Thus, environment has to comprehend from both ends i.e. inputs and the outputs of

business operations and manage the process of transformation of inputs into outputs within the

organization.

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Fig..1.1: Business interacts with the environment— transforming inputs into outputs.

The firm thus faces vast competition from the market in relation to procurement of input and sale

of output. Porter’s Five Forces Model identifies the five sources of competitive pressures

affecting businesses (Porter, 1980).

Force Analysis presumes that there are five important factors that establish competitive power in

a business state of affairs. These are:

1. Suppliers’ control: In this, we evaluate how easily suppliers drive up the prices. If we

have few options of suppliers, and we need more support from them. The suppliers will

be more powerful. The strength or power of supplier over customers depends on the

uniqueness of the product or service they are offering.

2. Buyers’ Power: It is easy for buyers to lower down the prices. This phenomenon is also

driven by the number of buyers, importance of each buyer for your business activity,

switching cost which the buyer will have to pay if he switches from your product/service

to somebody else’s product/service. If you have few buyers, they will be influential

enough to dictate their own terms to you.

3. Competitive Rivalry: Competitors of your business and their capabilities affect the

businesses. If competitors are offering equally attractive product and service, you’re your

business may have little power to manipulate the market situation, because buyers and

THE TRANSFORMATIONPROCESS USING

ENVIRONMENTAL RESOURES

INPUTS OUTPUTS

PRODUCTION

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suppliers will have varied options available in the market to make a shift from one

product to the other.

4. Substitution threats: This is affected the ability of your consumers to find a substitute of

what your business is doing. If substitution is easily available and its feasible, then this

weakens your power in the market.

5. Threat of New Entry: Power in the market is also affected freedom for new entrants to

enter in the industry. If it costs little time or money to enter in the industry and new

entrants can compete effectively, then new competitors can quickly enter in the industry

and weaken the position of existing firms. If you have powerful and durable barriers to

entry, only then your will be able to protect the present position of your business and take

fair advantage of it.

These forces can be neatly brought together in a diagram like the one in Figure 1.2 below:

This instrument is created by Harvard Business School professor, Michael Porter, to analyze the

attractiveness and likely-profitability of an industry. Since publication, it has become one of the

most important business tactics. The classic article which introduces it is "How Competitive

Forces Shape Strategy" in Harvard Business Review 57, March – April 1979.

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Figure 1.2 – Porter's Five Forces

1.6 Components of Business Environment

Business environment can be broadly categorized into two categories: Internal environment and

external environment. External environment is further categorized into two categories: Micro

environment and macro environment.

1.6.1 Internal Environment: Internal environment is comprised of the factors which are internal

to the firm and are under the control of the business organization. These factors predominately

determine strengths or weaknesses of the business. Important internal factors are described as

follows:

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Organisational Culture: Culture of business organizations is primarily established by the

founders of the company or top management. It is the top management of the company

which establishes morals, norms, policies, working atmosphere, methods and procedures,

signs and symbols, working practices and on the whole an internal environment.

Therefore, culture of the organization can be referred to collective behavior of human

beings which are part of the business. The amount to which the organizational culture is

shared by all members the organization determines the success of the organisation.

Vision, mission and objectives: Vision, mission and objectives of the company is guided

by companies’ priorities, philosophies, policies etc.

The Top Management: The constitution of the board of directors is very serious issue for

the development and working of the company because entire policy making and decision

making is influenced by the top management.

Internal connections: The internal relationships with in the organization such as

relationship between the board members and middle level managers, executives and

workers highly affect the decision making of the firm.

Ambience and technology: Production capacity, distribution logistics, technology,

research and development activities, architectural design and layout of the firm are the

important factors which affect competitiveness as well as smooth functioning of the firm.

Human Resources: Human resources are very important factor of business environment.

Success of every business depends largely on the competence, commitment, attitude and

level of motivation of its employees.

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Leadership style: Leadership quality and the styles of leadership of the firm affect

organizational culture. Effectiveness of the communication, value of employees in the

organisation are the cultural inferences resulting from leadership approach.

1.6.2 External Environment: External environment of the business is comprised of factors

which are external to the business and which are not in the control of the business. Such factors

significantly influence functioning and decision making of business. External environment is of

two types: Macro environment and Micro environment.

1.6.2.1 Macro Environment: Macro environment consists of the factors which are external to

the business and uncontrollable. Macro factors influence strategy formulation and performance

of the business. Following are the important macro factors affecting the business:

Demographic Environment: The term demographics refer to characteristics of population

around us such as age, growth rate, sex ratio, income profile, education etc. These

demographical factors have great influence on the business with different momentum.

Economic Environment: It refers to the character and trend of the economy in which a

company struggle or may struggle. The economic environment includes common

economic situation in the nation, market conditions:- money, manpower, raw material

Check Your Progress A:Fill the Blanks1 Deficiency of skilled labor creates___________ and ____________problems.2 ________________creates distinct market segments instead of mass marketing

strategy.3 Economic policy establishes affiliation between __________and __________.4 The economic system of a country reflects the _________, _____ and_____.

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and so on. These factors have a significant control on the the supply of inputs to the

business, their costs, quality, availability and reliability of supplies.

Political-Legal Environment: There are three important essentials in political-legal

environment:

o Government: Businesses are greatly guided and controlled by government

policies of the country. Hence the form of government administration in a country

has influential control on business.

o Legal: This refers to laws, rules & regulations, which influence the organisations

and their functioning. Every business has to comply with rules and regulations,

and work within the legal framework of the country. Legal environment consists

of all laws governing businesses. In every country there is specific business

legislation which altogether guides, control and regulate business activities. The

important legislations that concern the business enterprises include:

Industries (Development and Regulation) Act, 1951

Foreign Exchange Management Act, 1999

Consumer Protection Act, 1986

1972 Environment Protection Act

Payment of Gratuity Act, 1972

Companies Act, 1956

The Standards of Weights and Measures Act, 1956

Essential Commodities Act, 2002

Prevention of Food Adulteration Act, 1954 (x) Competition Act, 2002

Trade Marks Act, 1999

Bureau of Indian Standards Act, 1986

The Factories Act, 1948

Industrial Disputes Act,

Monopolies and Restrictive Trade Practices Act, 1969

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o Political: Political groups influence and limit organization’s working. In addition

to the erratic activities of political groups against definite product/service and

business organizations, politics has also intensely seeped into unions.

Socio-Cultural Environment: Socio-cultural factors are linked to human relations, social

attitudes and their impact, bearing of cultural ethics on the business. The norms,

standards, beliefs and values of any society are very significant in establishing

interconnections between individuals and organizations.

Technological Environment: Technology acts as either opportunity or the threat to the

industry. Technology can benefit the business in strategic planning and building strategic

advantage. However, at the same time technology can be a threat to the organizations

which are not able to adopt it.

Global Environment: In simple economic terms, globalization refers to the integration of

the countries of the world into one vast market. At the company level, globalization have

two meanings: (a) the company commits itself with several manufacturing operations at

different locations around the world and offers products in several diversified industries,

and (b) it also means ability to compete in domestic markets with foreign competitors.

1.6.2.2 Micro Environment: The micro environment includes the direct surrounding area of an

organization that influences its performance. The micro forces are the forces that influence each

business firm in different ways. Few factors are particular to some firms.

The significant factors of micro environment are explained as under

Suppliers: Trade necessitates suppliers for the supply of raw material as well as other gears to

any business. It is a significant factor of the micro environment of any business.

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Customers: Consumer is the dominant factor and is the vital base of every business. The success

of any business fundamentally depends upon identification of the needs, desires, tastes, liking etc

of all the customers.

Market Intermediaries: Market Intermediaries help an enterprise to fetch more and more clients.

Each and every business enterprise is assisted by market intermediaries i.e. agents and brokers.

This acts as an ultimate linkage between company and absolute consumers.

Competitors: Activities of any business get adjusted according to the measures and response of

competitors. Such factors should be well-known to a company because the upcoming profit or

revenue will only be driven when these factors are in control.

Public: Any group that has potential interest in the business has great impact on the business

organisation. e.g., growth of consumer groups may affect the working of a newly developed

business.

Check your progress: B

Correct the subsequent sentences if found inaccurate.

(a) The business environment is stationary in nature.

___________________________________________________________

(b) Business environment includes factors outer as well as inner to business.

___________________________________________________________

(c) The changes in business environment can be predicted.

___________________________________________________________

(d) Business environment helps the firm to recognize the opportunities and threats to the

company.

___________________________________________________________

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1.7 Summary

Environment is all about external factors that have affect on the performance of the business.

According to Arthur M. Weimer “Business Environment means the -climate’ or set of

conditions, economic, social, political or institutional in which the organization functions”. The

nature of environment is a dynamic, it keeps on changing constantly from time to time which

have strong control on the business decision making function. It can be divided into three

categories-internal environment (Porter’s five forces), macro environment and micro

environment.

A business unit depends on both factors that is internal as well as external for smooth

functioning. While a business must try its best to endlessly improve its internal factors as it

cannot adjust the course of actions happening outside its prospect. Managing the strengths of the

internal operations and recognizing potential opportunities and threats outside of the operations

are keys to business success.

Competition is one of the most serious external business factors. Competitive analysis is required

whether business operate in a concentrated industry with a few chief competitors or a large

business house with several competitors,. Many companies perform competitive analysis in order

to compare their offerings/ products and prices to those of competitors..

1.8 Glossary

Business: An organization where goods and services are exchanged for one another or for

money is termed as ‘businesses

Business environment: “Business Environment encompasses the -climate’ or set of conditions,

economic, social, political or institutional in which business operations are Conducted.”—Arthur

M. Weimer

Macro environment or the general environment includes factors external to the organization

that may have a considerable impact on the firm’s strategies.

Micro environment: or the competitive environment refers to the environment within the

organization.

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Demographic Environment: The term demographics refers to characteristics of population in

country or in world.

Economic Environment: The economic environment refers to the nature and direction of the

economy in which a company competes or may compete.

Socio-Cultural Environment: Socio-cultural environment consist of factors related to human

relationships and the impact of social attitudes and cultural values which has bearing on the

business of the organization.

1.9 Answer to check your progress A:

1: production, organizational

2: Unequal income distribution

3: government, business

4: economic composition, economic thinking and economic liberalization

Answers to Check Your Progress B:

(a) The nature of business environment is dynamic.

(b) correct statement.

(c) The changes in business environment are quite unpredictable.

(d) Correct statement.


Potter(1979): "How Competitive Forces Shape Strategy" in Harvard Business Review 57, pages

86-93.

Henry E.Anthony (2011): Understanding Strategic Management,2nd ed.-Indian, Oxford

University Press, New York.


Wetherly,Paul and Otter,Dorron(2011): The Business Environment-Themes and Issues. Oxford

University Press,New York.

Cherunilam,Francis(2013):Business Environment-Text and Cases. Himalaya Publishing House

pvt. Ltd., Mumbai.

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1.12 Terminal/Model questions:

1. What do you mean by business environment and economic environment respectively?

2. Why are internal factors of a business enterprise regarded as controllable factors?

3. What kind of external factors influence the process of business enterprises?

4. What are the important external factors that constitute the economic environment of a

business?

5. What do you mean by micro environment?

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LESSON-2

ENVIRONMENT SCANNING-PROCESS AND TECHNIQUES

Structure

2.1 Objective

2.2 Introduction

2.3 Environmental Scanning Objectives

2.4 Methods of Scanning the Business Environment

2.5 Techniques for Environmental Analysis

2.5.1 SWOT Analysis

2.5.2 ETOP Analysis

2.5.3 PESTLE Analysis

2.6 Steps of Environmental Analysis6 Environmental Forecasting

2.7 PESTLE Analysis of TOYOTA

2.8 Summary

2.9 Glossary

2.10 Answers to check your progress



2.13 Terminal and Model Questions

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2.1 Objectives

After studying this lesson you will be able to:

1. Describe the meaning of environment scanning

2. Explain the objectives of an Environmental Scanning System.

3. Discuss the Methods of Scanning the Business Environment

4. Illustrate the Techniques of Environmental Appraisal/Diagnosis

2.2 Introduction

“Environmental scanning is the term coined in the mid-1960’s by Francis Aguilar, a Harvard Business

School Professor, to describe the action of watching and collecting information on company’s rivals and

the overall market”. It is the process by which organizations monitor their relevant environment to

identify opportunities available and threats affecting their business. Environmental scanning was earlier

the part of management study of business, but now used by big business houses for collecting the

information from the environment for their cutthroat benefits. Scanning of environment is now used

commonly for business strategies by both public sector and the non public sector. Environmental

scrutiny helps to outline the plan for workplace in accordance with quick changes in the environment,

while keeping the future vision of personnel in mind. For example, environmental scanning helps human

resources department of an organization in understanding the accessibility and aptitude of the working

force and the factors that are important for enrollment and withholding of the employees.

2.3 Environmental Scanning-Objectives

Detecting scientific, technical, economic, social and political trends and events which are

important for the firm.

Defining the potential threats, opportunities or changes for the buisness.

Promoting a future orientation in the thinking of management and staff and alerting the

management and staff regarding the trends that are converging, diverging, speeding up and

slowing down, or interacting.

Provides a system to organize flow of information.

Enables decision makers to understand current and potential changes to determine

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organizational strategies.

2.4 Methods of Scanning the Business Environment:

There are three approaches for scanning the business environment:

Ad-hoc scanning: Short term, infrequent examination, usually initiated by a crisis.

Regular Scanning: Studies done as per the regular schedule (say, once a year).

Continuous scanning: (also called continuous learning)- continuous structured data

collection and processing on a broad range of environment factors.

Most commentators feel that in today's turbulent business environment, the best approach of

environmental scanning is continuous scanning. This allows the firm to act quickly, take advantage of

opportunities before competitor do, and respond to environment threats before significant damage is

done.

2.5 Techniques for Environmental Analysis: Various techniques of environmental scanning are

explained as follows:

2.5.1 SWOT Analysis: A SWOT analysis (alternatively SWOT matrix) is a planned structure which

evaluates the strength, weaknesses, opportunities and threats of any matter. It can be done for

any product, person, plan, industry etc. It specifies the internal and external factors that are

favorable and unfavorable for the achievement of main objective of the business. The technique

is credited to Albert Humphrey, who led a convention at the Stanford Research Institute

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(now SRI International) in the 1960s and 1970s using data from Fortune 500 companies.

. Fig: 2.1: SWOT Analysis

Strengths include the abilities and potential of the organization to deal situations. These are the

benefits over others.

Weaknesses are the weak points of an organization. They are the disadvantageous for a firm in

comparison to other companies.

Opportunities are the available chances or the prospects from the external world for future growth.

They are the advantage to exploit.

Threats are the troubling factors which can negatively affect the organization.

Relevance of SWOT Analysis: SWOT analysis is frequently used by the business organizations for

following purposes:

Business planning

Evaluating strategies of competitors

Business development

Scanning of Business environment

Internal analysis of the organizations

Analysis of existing strategies

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2.5.2 ETOP Analysis: ETOP is the acronym for Environmental threat and opportunity profile. It is

nothing but a summarized picture of the environmental factors and their likely impact on the

organization. ETOP is generally prepared in the following manner:

List Environment Factors: It involves listing the different aspects of the relevant environmental

factors. For example, economic environment may be divided into rate of economic growth,

national income, savings, investment, rate of inflation, capital market reforms, fiscal policy,

monarchy policy etc.

Access Importance of Environmental Factors: At this stage, the importance of each

environmental factor is assessed closely and expressed in qualitative (high, medium or low) or

quantitative terms ( 3,2,1). It is worth mentioning here that not all identified environment factors

will have the same degree of importance.

Assessing the impact: Next step is to identify impact of all factors identified above. A relevant

factor so analyzed might have a positive or negative impact as a threat.

Combine to get a bigger picture: In the final stage , the importance of each factor and its impact

is compared to produce a compact overall picture

Preparing ETOP helps a firm to identify the favorable segments in a chosen field of activity,

presenting excellent growth opportunities. For example most motor cycle manufactures in India

are trying to create a niche in the high-end motor cycle market ( where prices start from Rs. 75000

onwards; Hero Honda through its Eliminator brand; Enfield's Lightening @ 70000; Bajaj's

Eliminator @ Rs. 70000 ; Kinetic Hyousung @ Rs. 50000; and LML Dalcim @ Rs. 50000). Once

this is done, the firm can find out where it stands in the market as compared to its rivals.

Depending upon its manufacturing capabilities, technological strength, brand image and

distribution network, the firm can think of entering into the any segment at an appropriate time.

Table 2.1 ; Environmental Threat and Opportunities Profile for a Motor Cycle

Manufacturers ( only three listed).

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Environmental Factors Impact

(+) Oppotunities (-) Threats

Technology (+) Niche Markets for High End Markets

(+) Vast growing educated youth preffering fuel efficient ,

sleek models

(-) Free imports from cheaper markets

Economic (+) Rising income levels in urban as well as rural markets.

(+) Urban congestion and poor transportation services

(-) Price competition from loacl as well as international brands.

Social (+) Buyer's preference for sporty, fashionable and durable

models

(-) High road accidents forcing people to opt for safer models

of transport.

2.5.3 PESTLE Analysis: PESTLE stands for political, economic, social, technical factors, legal and

environment factors. All these factors depend on one another and keep changing with the passage of

time. As a result, when one factor shows any up or down variation it will impact the others factors

also. This technique is very helpful in strategic planning of the business. PESTLE provides a useful

framework for analyzing environmental pressures on the firm. The diverse factors covered in the

PESTLE analysis are explained below:

Political and legal factors: Political and legal factors can be considered as a single unit. It

is referred to outline given by polity of the country. This framework deals with economic

and political matters relating to the business. The labour laws of the country extremely

influences the location decision. For e.g. Protecting the employees from dismissal is good

from one view point but companies may choose a country with a flexible hire-and-fire-

system. Moreover, the constancy in political system of the country is important deciding

factor for most of the businesses.

Economic factors: It deals with economic development at national and international level.

It has a straight impact on dealer and purchaser market. Gross Domestic Product, inflation

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rate, rate of interest etc are the main determinants of economic factors. These determinants

influence the demand and supply situation, competition in the market, cost of investment.

Suppose, GDP of a country is low, the demand is in general lower than in countries with a

higher GDP.

Social factors: Social factors are the social issues concerning the principles, standards,

opinions and the ethnicity of market participants. Participants of the market can be

employees, customers or suppliers. Even though all the participants are in direct contact of

the business still they have great impact on its working in both ways either negative or

positive. For success of the business, companies have to adapt the changes of the

participants and formulate strategies accordingly.

Technical environmental factors: This factor is important for the industrial sectors which

are highly affected by the technical changes that come with the time. Technological

variations either can be an opportunity or can be a threat to the business, for example

robots can either be good invention for business at the same times can be a failure when it

comes to decision making. Particularly manufacturing companies are affected of that fast

evolution.

Environmental factors: In the last, Environment factors are nowadays becoming the most

important factor out of all. It constitutes natural resource and human life. Availability of

natural resources is the main topic of discussion as fossil fuels are getting scarce with the

passage of time. It’s risky to get completely dependent on fuels. All the more fossil fuels

are contributing in ecological pollution due to which companies are becoming more

environmental friendly. Consequently, eco-friendly products or technologies can even

signify a competitive advantage.

2.6 Steps of Environmental analysis

The segmentation according to the six presented factors of the PESTLE analysis is the starting

point of the global environmental analysis. The evaluation of every segment can be done with

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checklist method. In this approach, the condition of the environment can be cleared. Each segment

needs systematic approach to signify changes so that the impacts of the factors can be interpreted

correctly. After the segmentation, the analysis consists of four further steps:

1. Scanning the environment

2. Monitoring the environment

3. Forecasting the environment

4. Assessing the environment

1. Environmental scanning

Scanning is the first step of the analysis. Each segment is thoroughly analyzed to find the

indicators of the trend. After each segment is examined, development indicators of the segments

are defined. According to Fahey and Narayanan, scanning reveals ‘real or about to happen change

since it clearly focus on spot that the organisation may have earlier neglected’. Scanning is done to

be aware of adverse signals in the environment. It includes published data from media for example

newspapers, TV news, surveys by news channels, periodicals etc. this type of scanning is called

media-scanning. Product-scanning includes scanning of products which proclaim re-emerging

consumer behavior. Looking for global trends on the internet can be defined as online-scanning

Modes of scanning:

There are four ways of scanning as described by Francis Joseph Aguilar (1967) are mentioned

below:

'Undirected viewing' means scanning which is conducted not for specific purpose. It can be done

through reading a multiple publications. Such methods involve less cost and are beneficial for the

scanning. There are numerous sources from where the potential information can be collected. Data

are vague and indistinguishable with no guidelines so exploring ought to be paid attention.

Conditional viewing' the viewer keep in consideration the type of data required and review their

implications for the business. The area of information can be clearly recognized.

'Informal searching' is unstructured scanning for the particular subject matter.

In contrast of informal searching there is 'formal searching', in which the structured scanning is

done regarding the matter of subject concerning the business orgnisation.

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2. Environmental monitoring

After identifying all the relevant indicators the next step is environmental monitoring. It is defined

as 'the procedure of repetitive scrutinizing the definite purpose of more than one element of the

environment as per the pre-arranged schedule, and using comparable methods for sensing the

environment and collecting the data'. By monitoring the developments recorded in the data, the

trend followed is noticed and at last interpreted for the process of decision making. While

monitoring, historical changes are considered and evaluated which serve as a base line for the

monitoring process. Furthermore, data sources are checked for practicality and dependability. In

the end, prognosis is required.

3. Environment forecast

This is done by adequate methods, like strategic foresight or scenario analysis. Several other

methods of forecasting are the following: guessing, rule of thumb, expert

judgement, extrapolation, leading indicators, surveys, time-series models and econometric

systems.

'Guessing' and related methods rely on luck and not in general a useful one. It is impractical to

evaluate the uncertainty by guessing in advance.

'Expert judgment' lacks rationale being the only constituent of forecasting.

'Extrapolation' is successful when trend exist. Prediction in tendencies is likely to miss

concerning extrapolative methods.

'Forecasting based on leading indicators' needs a stable relationship between the variables that

lead and the variables that are led. If the reasons for the lead are not clear the indicators may give

misleading information.

'Surveys' of businesses can give relevant data about the future needs. Business rely on which

needs are need to put stress on so as to do the planning.

'Time-series models' is the most applied tool of forecasting. In this technique pattern of historical

data is described and measures the uncertainty.

'Econometric systems' of equations are the main tool of economic forecasting. They consist of

equations which attempt to “model” the behaviour of economic groups such as consumers,

producers, workers, investors etc. moderated by historical experience.

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4. Environment Assessment

The result of above three steps is the assessment of environment. Assessment is done to check the

practicality of the incidence and to analyze the chances of a risk for the company. The

measurement of the risks is also of significance. Issue-Impact-Matrix is used to measure risk and

practicality of the incidence and an appropriate tool to estimate and prioritize changing trends. The

predicted factors are here categorized by their chances of happening and their impact on the

business. According to their classification, they demonstrate a high, medium or low priority for the

company. The factors with a high occurrence probability and a high, significant impact on the

company have the highest priority. The higher the priority, the faster need to be reacted to avoid

risks and to benefit from chances. The environmental assessment represents the last step of the

global environmental analysis.

Check Your Progress:

i. Environmental scanning is the term coined to describe the action of __________ and___________

on company’s rivals and the overall market.

ii. Premising Method is a method of scenario building in which a series of premises is drawn up

from which ______________is made.

iii. In the last step of the environmental analysis, the results of the three steps -

______________,________ and_________ -are assessed

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2.7 PESTLE Analysis of Toyota

Toyota Motor Corporation is a famous Japanese multinational corporation, and is considered the

world's second largest automaker of automobiles, trucks, buses, robots, and providing financial

services ( 2007). Its founder is Kiichiro Toyoda, born in 1894, and the son of Sakichi Toyoda, who

became popular as the inventor of the automatic loom. Kiichiro inherited the spirit of research and

creation from his father, and devoted his entire life to the manufacture of cars. After many years of

hard work, Kiichiro finally succeeded in his completion of the A1 prototype vehicle in 1935, which

marked the beginning of the history of the Toyota Motor Corporation ( 2007).The first Type A

Engine produced in 1934 was used in the first Model A1 passenger car in May 1935 and the G1

truck in August 1935, and led to the production of the Model AA passenger car in 1936. In addition

to being famous with its cars, it still participates in the textile business and makes automatic looms

that are now fully computerised, and electric sewing machines that are available in different parts of

the world. It has several factories around the world, which serve to manufacture and assemble

vehicles for local markets. The corporation’s factories are located in countries such as the United

States Australia, Canada, Poland, France, Czech Republic, United Kingdom, Turkey, South Africa,

Brazil, Argentina, Venezuela, Mexico, Japan, Indonesia, Pakistan, India, Mexico, Malaysia,

Thailand, China, Vietnam, and the Philippines. Despite the many locations of its factories, its

headquarters is located in Toyota, Aichi, Japan (2007).It invests a great deal of time and effort in its

research into cleaner-burning vehicles, such as promoting a Hybrid Synergy Drive and running a

Hydrogen fuel cell in its vehicles (2007). It has significant market shares in developed countries,

such as the United States, Europe, Africa and Australia, and has significant markets in South East

Asian countries. Its brands include the Scion, its division in the United States, Guam and Puerto

Rico, and the Lexus, which is Toyota’s luxury vehicle brand ( 2007).Aside from producing cars and

other types of automobiles, such as SUVs and coasters, Toyota also, participate in rallying or

racing. The company’s presence in Motorsport can be traced to the early 1970s, when Ove

Andersson, a Swedish driver, drove for Toyota during the RAC Rally in Great Britain, and in

succeeding years, Toyota Team Europe was formed (2007). Up to the present, Toyota cars are still

being used in a variety of racing events indifferent countries around the world. These events include

the CART in Vancouver, the LeMans, the Indy Racing League, the NASCAR, and the Toyota F1

Series (2007).As the leader in the industry of automobile manufacture and production, the company

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adopts philosophy in terms of its production system, which is named The Toyota Way. The

company’s philosophy in production involves a list of fourteen principles that are implemented in

the company, and serve as guides to the operation of the company. These are as follows:

i. becoming a learning business organisation through expression and continuous improvement

ii. Slow but sure decision-making through consensus, through considering a variety of options, and

to implement decisions effectively and efficiently; and,

iii. Actually immersing one’s self to understand the situation;

iv. Respect the work and responsibilities of partners and suppliers by challenging them and helping

them improve;

v. Train and develop a workforce who follow the company‟s philosophy;

vi. Train leaders who understand the company’s work, live its philosophies, and share it to others;

vii. Use reliable and tested technology, which serves both the people and the company’s processes;

viii. Use visual control to let problems surface;

ix. Standardized tasks are the company’s foundation for its continuous improvement and the

development of the employees;

x. Build a culture that stops to fix problems, in order to get quality perfect at the first try;

xi. Level out the workload of the workforce;

xii. Utilise “pull” systems to prevent over-production;

xiii. Foster a continuous process flow to sight problems;

xiv. Base the company‟s management decisions on a long-term philosophy, even at the expense of

short-term goals;

By means of above ideology, the company is guided in terms of its operations and production.

2.8 Summary

“Environmental scanning is the terminology discovered by Francis Aguilar, a Harvard Business

School Professor, to explain the act of surveillance and bring together the informations of

company’s rivals and the in general market”.

It brings about both fact and skewed information on the business factors existing in the

environment in which a business operates. By observing the environment, an enterprise considers

the affect of the diverse trends, concerns and prospects on its calculated managing process. At the

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same time scanning of environment is necessary for the formulation of strategies to have a firm

hold on the market position or to lead the market. The scanning efforts should be such that it

completes in the required time with higher level of accuracy at the same time that no relevant

factor get missed out.

2.9 Glossary

Environmental scanning: Environmental scanning is the term coined in the mid-1960’s by

Francis Aguilar, a Harvard Business School Professor, to describe the action of watching and

collecting information on company’s rivals and the overall market.

Ad-hoc scanning: Short term, infrequent examination, usually initiated by a crisis.

Regular Scanning: Studies done to a regular schedule ( say, once a year).

Continuous scanning: (also called continuous learning)-continuous structured data collection and

processing on a broad range of environment factors.

ETOP Analysis: ETOP is the acronym for environment threat and opportunity profile. It is

nothing but a summarised picture of the environmental factors and their likely impact on the

organization.

SWOT Analysis: (Acronym for the internal strengths and weaknesses of a firm and the

environmental opportunities and threats facing that firm) analysis helps an organization match its

strengths and weaknesses with opportunities and threats operating in the environment. An

appropriate strategy is one that capitalizes on the opportunities by using organizational resources

and capabilities to the best advantage and neutralizes the threats by minimizing the adverse

influence of weaknesses.


Ans. Watching, collecting information

Ans: projection of the future scenarios

Ans: Scanning, Monitoring, Forecasting

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Cherunilam,Francis(2013):Business Environment-Text and Cases, Himalaya Publishing House

Pvt. Ltd., Mumbai.

K.Ashwathappa(2011): Legal Environment of Business, Himalaya Publishing House Pvt. Ltd.,

Mumbai.

Hax, A.C., and Majluf, N.S.(1983): ‘The Use of the Industry Attractiveness- Business Strength

Matrix in Strategic Planning.’ Interfaces, pp.46-60.




Cherunilam,Francis(2013):Business Environment-Text and Cases, Himalaya Publishing House

Pvt. Ltd., Mumbai.


1. What do you understand by Environmental Scanning? Explain any one scanning technique giving

an example of any company using the technique you have mentioned.

2. What is global environmental analysis and how is it conducted?

3. Explain the following in brief:

i. SWOT Analysis

ii. ETOP Analysis

iii. GE Mc Kinsey Matrix

iv. PEST(LE) Analysis.

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LESSON 3

Political Environment

Structure

3.1 Objectives

3.2 Introduction

3.3 Types of Political Systems

3.4 Three institutions of the government

3.4.1 The Legislature

3.4.2 The Executive

3.4.3 Judiciary

3.5 Checks and balances in democracies

3.6 The Preamble

3.7 Fundamental Rights

3.8 Directive Principles of State Policy

3.9 Summary

3.10 Glossary


3.12 References



3.1 OBJECTIVES

After reading this lesson, you should be able:

To describe the political context within which business operates

To illustrate the political institutions and processes

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To explain how business organisations can influence, as well as be influenced by, the

political environment

3.2 INTRODUCTION

Although business is an important economic activity, there are various non-economic

variables which strongly influence its sphere of activity. Political environment is one such

important non-economic variable which influences, promotes, encourages, directs and

controls the business activities in an economy. Political environment describes the political

system prevailing in the country. The critical importance of the political environment to

business is highlighted by the fact that it is often politics that determines economic and

business policies. So we can safely say that political environment has a colossal influence on

business as it deals with the regulations and legislations pertaining to business operations,

government programmes, war, election and such like other problems.

According to Dimock, “The two most powerful institutions in society today are

business and government; where they meet on common ground – amicably or otherwise –

together they determine public policy, both foreign and domestic, for a nation.” Important

economic policies, for instance, fiscal policy, industrial policy, foreign trade policy or even

policy towards foreign capital technology are often political decisions. Many political

decisions, especially the economic policy if the ruling government, tend to have serious

implications for the business activity in an economy. The nature of a country’s political

system including its governmental institutions decides, promotes and controls the business

activity of that particular country. It also tends to reflect certain underlying social values and

philosophies which help to determine how different decisions including economic decisions

(about the allocation of resources) are made. The principal pre-requisite for economic

development for any country is definitely a political system which ensures personal security

and safety to its citizens on all fronts. This is possible only if the prevalent political system

dynamic and efficient besides being stable and honest. The developed nations of the world

bear evidence to this fact. Rapid economic progress in the advanced countries has been

ensured and facilitated by the political development in the first go followed by cultural and

economic development. So the political environment of business is a dynamic environment

involving continuity and change. Further institutional arrangements of a country cause

changes in the political environment. The impact of political factors on a business tends to

vary in accordance with the type of organisation involved. Moreover there is a two way

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relation between business and the political environment - changes in the political

environment cause changes in the business activity and also business activity does influence

government decision makers, often in a way which is beneficial for them.

3.3 Types of Political Systems

The term Government refers to a process which is concerned with the pursuit

and exercise of power – the power to make decisions which affect the lives of a large number

of people, at local, regional, national or even international level. How this power is exercised

by the governments and the ideological foundations on which this is based, helps to indicate

the nature of the political system. Broadly speaking there are two main political philosophies

ranging across two extremes, found all over the world. On the one hand there is

authoritarianism and on the other is democracy.

Authoritarian Political Systems

In an authoritarian political system, the supreme power is in the hands of an established

authority. This authority may be an individual (like a monarch or other powerful individual)

or a group of individuals (may be a political party or military junta) who may have assumed

political power in a variety of ways (which could be by birth, election or coup). The conflicts

are settled through the enforcement of rules, regulations and orders by this established

authority which tends to limit the participation by others in the process of decision making,

even may monopolise the process altogether and may not permit any opposition to occur.

Such totalitarianism or authoritarianism is perhaps best exemplified by Nazi Germany and

Stalinist Russia.

Democratic political systems

A democratic political system is one in which conflicts are resolved by rational discussions

among the various parties concerned and the final solution is accepted voluntarily by all

participants, even if they disagree. Under such a system, the views of individuals are

represented in an established authority (a government) that is normally chosen by the people

and which is accountable to them at regular intervals (through regular and free elections). So

democracy is a political system in which there is government of the people, for the people

and by the people; that is, the supreme power is vested in the hands of the citizens of that

country. People elect their own representatives and choose the members of the government

who, in turn, take decisions and make laws for the electorate.

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Democratic Institutions and Processes

In a democratic government wishes of the people are executed through a complex system of

institutions and processes. Usually there are four common and interlocking elements in a

democratic political system: an electoral system, a party system, a representative assembly

and a system for the articulation of sectional interests each of which are separately discussed

below

The Electoral System

In a representative democracy, the electoral system links the people with the government.

Elections are held periodically to help the citizens choose their representatives. However for a

successful democracy, a system of regular elections based on universal adult franchise should

be accompanied by basic freedoms of speech, movement, assembly, etc.; freedom from

coercion, absence of illegal electoral practices; a secret ballot; and a free media. This would

ensure a transparent and successful democracy.

The Party System

There exist different political parties which compete during elections. It is a convenient

means of organising a system of representative democracy. The political parties not only help

to choose most of the candidates who compete in these elections, but usually also support and

sustain them. Such a party system helps the voters in selecting political leaders and the kind

of policies they may follow if the party achieves political office.

A Representative Assembly

An important feature of a democratic government is the existence of a representative

decision-making body. It comprises of a group of individuals chosen by the citizens to take

important decisions on their behalf. The system of government .could be federal or unitary.

In a federal system the sovereignty is divided between two levels of government - national

and local/regional. Each layer of government has independent powers. On the other hand in a

unitary system ultimate authority lies with the national government. Any powers granted to

subnational governments can be ultimately withdrawn.

A System for Articulating Sectional Interests

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The existence of pressure groups is important indicator of a democratic system of

government. The pressure groups or lobbies represent like-minded people who voluntarily

join together to try to influence government thinking and behaviour to represent the interest

of their members. As a sectional interest within society, pressure groups articulate a

collective and non-party political view in decision-making circles. Such lobbies act as an aid

to efficient and representative decision making by providing detailed information on specific

areas to the government which helps in defending minority interests and also assists in the

implementation of government policy and legislation.

3.4 Three Institutions of the Government

Normally the process of governing involves three major activities: decision making,

executing these decisions and adjudicating over them in case of dispute or non-compliance.

These three functions represent the three vital institutions of the government: legislature,

executive and the judiciary.

3.4.1 The Legislature

In a democratic system of government the power to legislate or to make laws is vested

in the legislature which is elected by the people. As indicated above, this process of choosing

a representative decision-making body by popular election is a central feature of the

democratic approach to government. An important common feature of the legislature in most

of the democracies is a bicameral Legislature. It refers to a legislature with two chambers: an

upper house and a lower house. Each chamber comprises representatives chosen by a separate

CHECK YOR PROGRESS 1

Fill in the blanks:

1. A political system where power remains in the hands of established authority is called_____________________________.

2. The political system, where government is of the people, for the people and by thepeople is ____________________

3. Decision making body chosen by the people to take decisions on their behalf is called_________________________.

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electoral process and has specific powers and roles in the legislative process. Normally the

consent of both chambers is required for a legislative proposal to be accepted. This is one of

the many checks and balances found in democratic systems of government. The multi-stage

legislative process involves the drafting of a legislative proposal, its discussion and

consideration, where necessary amendment, further debate and consideration and ultimate

acceptance or rejection by either or both the legislative chambers.

Opposition parties play a vital role within the legislative body. These opposition

parties can attack the government and articulate alternative views to the public through

media coverage. Various Specialist and Standing Committees also exist for scrutinising

legislation and the working of the executive branch of government. Legislating is a complex

and time consuming process, which may be further delayed by individuals and groups both

within and outside the legislative body (like pressure groups).

3.4.2 The Executive

Once the decision making is done these decisions have to be put into action. The

executive or the ‘state’ is responsible for implementing the governmental decisions. It is the

responsibility of the executive branch of government. In modern states the ‘executive’ refers

to a relatively small group of individuals (some hold political office, others are career

administrators and advisers) chosen to decide on policy and to oversee its implementation.

Under a presidential system of government, the chief executive or the President is

usually chosen by separate election for a given period of office and becomes both the

nominal and political head of state. He/she then appoints individuals to head various

government departments/ministries/bureaux. which are responsible for shaping and

implementing government policy. On the other hand, the roles of head of state and head of

government are separated in a parliamentary system. The head of the state is largely

ceremonial and is carried out by either a president (as in Germany, India) or a monarch (as in

UK, Japan). The head of government, the Prime Minister is officially appointed by the head

of state but is an elected politician, invariably the head of the winning party or a coalition in

a general The head of government then chooses the cabinet to head the different government

departments/ministries and to be part of a collective decision-making body. The members of

the cabinet are members of the legislative assembly and are both ‘individually’ and

‘collectively’ responsible to the legislature for the work of government. They have a critical

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role in shaping government policy, directing and controlling the business activities. The

business activities also influence the government in a number of ways as given below:

Responsibilities of Business to Government: Business firms need to obey the government

laws relating to their existence, functioning and operations. Other important responsibilities

of business towards the government are as follows:

Payment of taxes to the government: Taxes are a major source of public revenue

essentially required for government expenditure.

Providing relevant information to the decision makers individually or through various

forums to influence decision making in the larger interest of the business community.

Voluntary cooperation with government agencies with regard to various programmes

such as drought relief, tree plantation, sanitary works, and many other welfare

programmes.

Serving on various advisory boards constituted by the government

Bidding for and executing government contracts to carry out projects such as housing,

oil pipelines and many others.

Corporate contributions to political parties

Political participation of business is another but much debated issue. This involvement is

either through monetary contributions to political parties or business leaders contesting

elections or through lobbying. No matter what the criticism, there does exist a close nexus

between business and politics.

Governmental Responsibilities to Business: The government plays a vital role in

deciding, shaping, guiding and controlling business activities. It promotes and regulates

business activities and fulfils the following responsibilities towards business:

Making and enforcing laws relating to business: The government is responsible for

framing rules and regulations for business systems to help them function smoothly

Maintaining order and protection of persons and property

Providing infrastructure facilities such as power, finance, transport and

communication, civic amenities, etc., to facilitate smooth functioning of business

Promoting balanced regional development, equitable distribution of income and

wealth and help in achievement of other macroeconomic objectives of full

employment and economic stability.

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Publishing and providing important information of various government departments

which is extensively used by business firms

Supporting and assisting small sized business firms in areas of finance, infrastructure,

marketing, and technical know-how

Regulating the prices charged by business firms by competing with the business firms

Regulating money and credit in the economy

Government tariffs and quotas to protect domestic business from foreign competition

There are a few among a wide range of functions performed by the government to

encourage, regulate and develop business activities in an economy.

3.4.3 Judiciary

As an important organ of the state, the judiciary plays a crucial role in the functioning

of a democracy. Judiciary works towards application and enforcement of the government

laws. Legal structures and processes may vary from country to country and are also

influenced by history, culture and politics of a given nation. However, in a democracy there is

a separation of powers between legislature, executive and judiciary such that legislature and

executive cannot interfere in the working of the judiciary. An important feature of a

democracy is an impartial and independent judiciary, that is, the judiciary is free to the

government and to review its decisions. This allows the judiciary to play a major role in

checking any misuse of power by legislature and executive. The judicial system acts as the

final interpreter of the Constitution and has the power to strike down any laws passed by the

Parliament, if it appears to be a violation of the basic structure of the Constitution. This

power is referred to as judicial review. In this manner the judiciary also helps to solve legal

disputes at various levels- between citizens, between citizens and government, between state

governments and between the centre and state governments. The system of courts, thus,

protects the citizens from unlawful acts passed by the Parliament and also from arbitrary

actions of the executive.

As regards to business the judiciary has the power to settle different legal disputes,

maybe between employer and employee, or between two or more employees, or between two

or more employers, or between employer and pumlic or between employer and government,

to name a few. In the sphere of business activities, the verdict of courts may have far reaching

implications. This is especially evident in the sensitive area of industrial relations. The role of

judiciary has been particularly debatable in such like areas. The court is expected to have a

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balanced and reserved consideration of conflicting interests of the workers and the employers

and needs to give due weight to the directive principles, social justice and activist law

making.

However, in practice, the role of judiciary in a democracy and judicial independence

are subject to a considerable amount of debate especially in countries where persons with

judicial powers also have an executive and/or legislative role (for instance, the Lord

Chancellor and Home Secretary in Britain); and also where politicians have a considerable

say in the senior appointments to the judiciary (for instance, Supreme Court judges in the

United States are nominated by the President with the consent of the Senate). Another heavily

debated issue with regards to judiciary is as to how far in modern democratic states there is a

total separation of powers between the different organs of the government and also whether

rule making and rule adjudication should be rigidly different.

Judicial Activism

The term judicial activism refers to the review power vested with the system of

judicial courts and was first used in the United States of America in a historic judgement

in1954. In a historic judgement the Supreme Court declared separate schools for blacks and

whites as unconstitutional. It was a decision which the Congress and the President feared to

take due to the fear of adverse political repercussions. So it can be said that judicial activism

indicates the all pervading role of judiciary touching all the spheres of life of a common man,

thereby protecting the fundamental rights of the citizens. Thus, it is a persistent sustained

effort by the apex court to make justice accessible for underprivileged and the deprived

sections of the society. Although it has also received much criticism and there are arguments

in favour and against judicial activism, still it is a promising step to ensure justice and also to

repose the faith of public in the social and political institutions.

3.5 Checks and Balances in Democracies

A system of checks and balances exists in a democracy which refers to the restraints

on the actions of the state. These restraints not only check government actions but also undue

and unfair influence of these actions on the citizens. Broadly speaking, at the national level

there are two main categories of restraints: (i) political checks and balances, and (ii) social

and economic checks and balances. There are three main sources which tend to generate the

political checks and balances, namely, the separation of powers among the three organs of the

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government; a bicameral legislature; and federalism wherein the central government

delegates powers to sub-national governments. Even if these arrangements are not perfect,

yet their very existence provides time for consultation and negotiation; this in itself is the

main idea behind resolving conflicts in a democratic way.

On the other hand, the social and economic checks and balances include private

business organisations, professional associations, promotional bodies, churches and other

groups which keep the free activity of the government sector under check to help shape our

economic, social and moral environment.

3.6 The Preamable

Our constitution states that “We the people of India having solemnly to constitute India into a

SOVEREIGN, SOCIALIST, DEMOCRATIC, SECULAR, REPUBLIC and to secure all its

citizens:

JUSTICE, social, economic and political;

LIBERTY of thought, expression, belief, faith and worship

EQUALITY of status and opportunity; and promote among them FRATERNITY assuring the

dignity of the individual and the unity of the Nations

IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949, do

HEREBY ADOPT, ENACT AND GIVE OURSELVES THIS CONSTITUTION. "

[The word SOCIALIST and SECULAR were included in The Preamble by making 42nd

Amendment which that came into force on December 18, 1976]

The Preamble of the Constitution clearly depicts that people are the ultimate authority and

source of the Constitution. The Indian Constitution derives its strength from the sovereignty

of the people. As all governmental organs and institutions owe their origins to the

sovereignty of the people, they cannot enjoy unlimited powers. They can enjoy only such

powers, which are conferred by the Constitution. Though the Parliament possesses the power

to amend the Constitution, the power should be exercised in such a manner that the basic

framework of the Constitution is maintained.

From the economic point of view, the word SOCIALIST that was inserted through the 42nd

Amendment is of critical importance. It mentions the economic objectives and policy of the

state and guides the state in making laws that attain a socialist pattern of society. It also

paves the way for the nationalisation of many industries in the 1970s. Indian socialism is

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different from the western type of socialism, which involves nationalisation of all means of

production. As Indira Gandhi explained:

"We have always said that we have our own brand of socialism. We will nationalise the

sectors where we feel the necessity. Just nationalisation is not our type of socialism."

Therefore, while the Indian Constitution doesn't abolish private property altogether, it seeks

to put it under restraints so that it may be used for public benefit.

Shri J.L. Nehru , India's first prime minister had declared the "socialistic pattern of society

and not socialism" as the objective of planning.

He observed that, "Socialism to some people means distribution, which means cutting off the

pockets of the people who have too much money and rationalisation. Both these are desirable

objectives, but neither is by itself socialism

"Any attempt to distribute wealth by affecting the productive machinery is utterly wrong; to

do so would weaken us."

"Secondly, there is a question of nationalization. I think it is dangerous merely without being

prepared to work it properly. To nationalise, we have to select things. My idea of socialism is

that every individual in the State should have equal opportunity for progress."

So we see that term 'socialist' has been accepted in India in a different manner and is a

guiding principle for the economic policy of India. Behind all the major economic policy

decisions such as active participation of the government in business, heavy investment in

public sector, reservation of certain industries for PSUs and small scale, a highly progressive

tax rate, heavy excise on luxury items, curb on expansion in private sector etc.

Socialism is also reflected in the Fundament Rights and Directive Principles of State Policy

mentioned in the Constitution. These Directive Principles have an everlasting and maximum

impact on the economic policy of State, and therefore have direct impact on every aspect of

business whether it is the scope of business (where to invest), supply of raw material, level of

competition, purchasing power of consumers, R&D, entry barriers, level of technology,

pricing or HRM.

3.7 Fundamental Rights

The Constitution of India contains an exhaustive list of Fundamental Rights. They are above

all other laws of the land. The Court ensures their observance by the State. The Constitution

has granted the following fundamental rights to the citizen:

1. Right to Equality (Article 14): Article 14 of the Constitution guarantees equality of

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all persons before law. Article 15 prohibits any discrimination between citizens on the

basis of religion, race, caste, sex, or place of birth. It ensures equality of opportunity

in the matter of public employment. Article 14 prohibits hostile discrimination and

not reasonable classification for the purpose of legislation.

2. Right to Freedom (Article 19): Article 19(1) of the Constitution gives right to six

freedoms:

a. Freedom of speech and expression

b. Freedom to assemble peacefully and without arms

c. Freedom to form associations or unions

d. Freedom to move freely throughout the territory of India

e. Freedom to reside and settle in any part of the territory of India and

f. Freedom to practice any profession or to carry on any occupation, trade or

business

These freedoms are not absolute, they come along with certain limitations. The first

Amendment Bill to the Constitution was passed by the Parliament on June 2, 1951. It

allowed the State to impose reasonable restrictions on the freedom of the individual

in the interest of the security of the State, friendly relations with foreign states, public

order, decency or morality or in relation to contempt of court, defamation or

incitement to an offence.

3. Right to Life and Personal Property: Article 31, 3 1 A and 3 1 B guaranteed the right

of the individuals and trusts to own and trusts to own, and administer their property.

The Constitution says that no person shall be deprived of his property except by

lawful authority. Right to property has been deleted by the 44th Amendment and

now it has been made only a legal right.

4. Right to Freedom of Religion: Article 25 says that all the persons shall be entitled to

freedom of conscience and the right to practice and propagate their religion freely.

5. Right to Cultural and Educational Freedom: The Constitution allows all the

minorities in India to preserve and promote their languages, script and culture. The

Constitution permits all the minorities (even if religious) to start and run their

educational institutes and get financial aid without any discrimination from the State.

6. Right against Exploitation: Our Constitution recognizes the dignity of the individual

and protects him against any form of exploitation either by the State or by the

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privileged classes in the society.

7. Right to Constitutional Remedy: Article 32 confers on the people the right to move

the Supreme Court in case of encroachment of the Fundamental Rights by the State.

3.8 Directive Principles of State Policy

"Although the Directive Principles of State Policy confer no legal rights and create no legal

remedies, they appear to be like an Instrument of Instructions, or general recommendations

addressed to all authorities in the Union, reminding them of the basic principles of the new

social and economic order which the Constitutions aims at building. These fundamental

axioms of State Policy, though of no legal effect, have served as useful beacon-lights to

courts." (M.C. Setalvad)

The Directive Principles of State Policy are given in Part IV of the Constitution. Article 37

postulates that the Directive Principles, although not enforceable by the court, are

nevertheless fundamental in the governance of the country and it shall be the duty of the state

to apply these principles in making the law. The entire regulatory environment of the country

is guided by one principle, that is, the Directive Principle.

Check Your Progress 2:

i. The Directive Principles of State Policy are contained in________________.

ii. The Constitution provides for trifurcation of responsibilities between,

___________,____________ and ___________.

iii. There are two houses involved in The Union Legislature (Parliament) -

______________ and ____________.

iv. The ______________ is responsible for enacting laws in India.

3.9 Summary

Laws and policies which influence business activity are made by politicians and

bureaucrats. Politics is a universal activity which affects all types of business. Political

systems reflect underlying social values and philosophies and these influence the ways in

which major decisions are taken. In a democratic system of government the main political

institutions include an electoral system, a party system, a representative decision-making

assembly and also a system for articulating sectional interests. Legislature, executive and

judiciary are the three key organs of the government. Besides these organs, there also exist

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political, social and economic checks and balances which act as a constraint on the actions of

government. These checks and balances include the activities of pressure groups which seek

to influence government in order to safeguard the interests of common man and even of those

who are under privileged. Business organisations and the bodies which represent them are

key pressure groups in democratic societies and an important part of the external environment

in which government operates.

3.10 Glossary

Legislature: In a democratic system of government the power to legislate or to make

laws is vested in the legislature which is elected by the people.

Executive: The executive or the ‘state’ is responsible for implementing the

governmental decisions.

Judiciary: It is an important organ of the state, the judiciary plays a crucial role in

the functioning of a democracy.

3.11 ANSWERS TO CHECK YOUR PROGRESS

Answers to check your progress 1

1. Authoritarian political system

2. Democratic political system

3. A representative assembly

Answers to check your progress 2

i. Part IV of the Constitution.

ii. the Executive, the Legislature and the Judiciary.

iii. the Lok Sabha (lower house, elected directly by the people of

India) and the Rajya Sabha (upper house, elected by the state

legislatures which in turn, are elected directly by the people).

iv. The Parliament

3.12 REFERENCES

1. Marshall E. Dimock, Business and Government, New York: Rinehan and Winston

Inc.

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2. Paul Justin, Business Environment Text and Cases, Tata McGraw-Hill Publishing

Company Limited, New Delhi

3. Fernando A.C., Business Environment, Pearson

4. Bhushan, Y.K., Fundamentals of Business Organisation and Management, Sultan

Chand and Sons, Delhi

5. Aswathappa, K., Essentials of Business Environment, Himalaya Publishing House

6. Galbriath J.K., Essays From the Poor to the Rich.

7. Ghosh, B., Fundamentals of Marketing Management, Books and Allied Ltd. Kolkata.

8. Raj Agrawal, Business Environment, Excel Books, New Delhi.

3.13 SUGGESTED READINGS

1. Cherunilam, Francis, Business Environment Text and Cases, Himalaya Publishing

House


3. Saleem Shaikh, Business Environment, Pearson

3.14 TERMINAL AND MODEL QUESTIONS

1. What do you understand by political environment? Explain its importance with

reference to business activity in an economy.

2. What do you mean by Government? Discuss its responsibilities to business.

3. Explain the three political institutions in our democratic set up.

4. The role of legislature on business is considerable. Comment.

5. Discuss the business responsibilities to government and also government

responsibilities to business.

6. Explain in detail the impact of legislature, executive and judiciary on business.

7. Explain various fundamental rights contained in the constitution of India.

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.

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LESSON-4

Economic Environment of Business

Structure

4.1 Objective

4.2 Introduction

4.3 The analytical aspects of Economic Environment of business

4.4 Nature of Economy

4.5 Type of Government: Economic System

4.6 Indian Economic Environment-Current Economic Policies and Economic

Trends

4.7 Summary

4.8 Glossary

4.9 Answer to check your progress




4.1 Objectives:

After studying this lesson you will be able to:

1. figure out the critical elements of business economic environment.

2. explain the type of Government and economic system.

3. describe the Current Indian Economic Environment

4.2 Introduction

Business literally means ‘a state of being busy’ .It plays an important role in the society. But the role

of business is crucial as it can perform many activities like creation of employment opportunities,

supply of goods and services, offering better quality of growth and contributing towards progress of

economy. So there arises a question, what is meaning of a business? The following definition

provides an appropriate answer to this question.

“A Business is nothing more than a person or group of persons properly organized to produce or

distribute goods or services. The study of business is the study of activities involved in the

production or distribution of goods and services-buying, selling, financing, personnel and the like”.

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The aforesaid definition is practically correct, although it is incorrect in analytical sense. There must

exist the goal of earning profits and the element of risk of loss, before any activities can be

considered in the business. The following characteristics are possessed by the business enterprise:

Trading in Products and Services on a daily basis: The very first feature of business is that it

deals in products and services on regular basis. Goods may be classified as consumers' goods

or producer goods. Consumers’ goods include wheat, milk, clothes, etc. and the producers'

goods include equipments, raw material, manufacturing machines etc. The goods which can

be directly consumed either immediately or after passing through various stages are called the

consumer products, whereas the products which are meant to be used for further production

are called producer goods. Producer goods are also called capital goods. Warehousing,

Transportation, Gas, supply of water, Insurance etc. are covered under services.

Production and/or Exchange of Products and Services: Business covers the production or

interchange of products or service for some consideration. Purchase of products and services

for own use or for giving it to others as a gift is not a trade. Exchange of products and

services will be considered as business if its purpose is to earn profit. For example, if a

housewife cooks the food for her family, it is not a trade. However, cooking the food at a

restaurant for selling it to others for earning profit is business.

Creation of place, time and form utility: Every business activity creates utility for the

society. When the products are being transferred from the place of manufacturing to the place

of its consumption, it is called Place utility. Products may be manufactured at the time when

they are not required, so it requires storage of goods till the time these are not required for

consumption and hence it creates Time utility. When basic (raw) materials are converted into

polished (finished) goods and services, it creates Form utility.

Continuity in Dealings: It is essential for business to perform the economic transactions

continuously. Products and services must be exchanged for some consideration on continuous

basis. An isolated transaction does not become a trade. For example, it is not a trade if a

person sells his house and in return earns some profits. However, it is trade, if the same

person is engaged in the purchasing and selling of flats regularly to earn his livelihood.

Profit Earning: The main purpose of a business activity is to earn profits. In case of public

enterprises, the main motive of business is to earn fair profits or 'surpluses’. Without earning

profits, even a single business cannot survive. This is the reason why businessman makes an

attempt to earn profits by increasing the sales volume or reducing the costs so as to get better

return on his capital. Even the further growth of business is not possible without profits. The

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non business organizations do not have any profit motive as they work for the welfare of

society.

The scope of business is very wide. It cannot be treated as trade only. Purchase and sale of products

and services simply means 'Trade’. However 'Business' covers all the activities related with the

manufacturing as well as distribution of products and services. It covers commerce i.e. trade and aids

to trade like banking, transport, insurance, and warehousing which helps in the manufacture and

distribution of products and services. J.C Miller states that; "The whole complex field of commerce

and industry, the basic industries, processing and manufacturing industries, the network of ancillary

services : distribution, banking, insurance, transport and so on, which serve and inter-penetrate the

world of business as a whole, are business activities." The activities of business are divided into two

parts viz., (1) Industry and (2) Commerce. Industrial enterprises include those activities which deal

with the growing, extracting, manufacturing, or construction. On the other hand, Commerce includes

trade i.e. those activities which deals with the buying and selling of goods and services, or aids to

trade like transportation, warehousing, banking, insurance and advertising.

Industry: It refers to an activity which converts raw material to useful products. It includes changing

the form from raw material to finished goods. The products of industry may be divided into

following three categories:

(a) Consumers' Goods: These are those products which are finally consumed by the consumers like

Clothes, Bread, Rice, Cheese, T.V., Radio, Bike, Washing machine, etc.

(b) Producers' Goods: These are those products which are used for the manufacturing of other goods

like Equipments, Tools, Manufacturing machinery etc. These are also known as capital goods.

(c) Intermediate Goods: There are some products which are final products of one industry but are

intermediate goods (raw material) of other industries. For example: copper industry, aluminum

industry, and plastic industry as their final products are used in production of electrical appliances,

almirahs, toys, baskets, cupboards , buckets etc.

Industries are mainly divided into two categories namely Primary and Secondary Industries. Primary

Industries include extractive and genetic industries and Secondary Industries includes manufacturing

and construction industries.

(i) Extractive Industries: These industries are committed towards the boosting up of some form of

revenue from the natural sources like earth, air, water. For example: farming, hunting, fishing, etc.

(ii) Genetic Industries: These industries are engaged in the reproduction and multiplication of

convinced collection of plants and animals with the main motive of earning revenue from their sale.

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Nurseries, cattle breeding, fish hatcheries, poultry farms are all covered under genetic industries.

(iii) Manufacturing Industries: These are those industries which are involved in the conversion of

raw material into semi-finished or finished goods and are able to create form utility in products by

making them available for human use. The products of extractive industry are generally used as the

raw materials by manufacturing industries. Manufacturing industry provides their outcome in the

form of factory production.

(iv) Construction Industry: This industry is involved in establishment of infrastructure for the

continuous growth of the economy. These industries are engaged in the building up of bridges,

barriers, roads, canals etc. These industries use the goods of other industries, such as steel, timber,

brick, cement, lime, mortar, stones, marbles etc.

(v) Service Industry: For satisfying human needs there are several services which are provided by the

service industry such as transportation, banking, insurance and warehousing. They help in the

production and distribution of business activity. Service industries are the backbone of all business

activities. These activities include transport, banking, insurance, warehousing, and advertising.

Commerce: Commerce points out all those activities which are involved in the removal of

hindrances of persons, place and time in the exchange of commodities.

According to James Stephenson, “Commerce is an organized system for the exchange of

commodities between the members of industrial world.” Commerce bridges the gap between the

manufacturers and consumers. The major objective of commerce is to ensure the continuous flow of

products and services in order to gratify the consumer needs. Therefore, commerce is the summation

of all those activities, which are involved in the removal of products and services from the

manufacturers to the ultimate purchasers. The services involved in commerce are transportation,

banking, warehousing, insurance and advertising that serves as a bridge between the producers and

the consumers.

4.3 The analytical aspects of Economic Environment of Business :

Considering the viewpoint of both National Economic Management and Corporate Business

Management in India , the analytical aspects of the economic environment of the business can be

described as:

i. Institutional Framework: The philosophy and practice of an economic system will

determine the roles and responsibilities of the private sector, the public sector, the joint sector

etc. to a large extent.

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ii. The Physical Framework of the Environment: It is defined by the structure and level of the

economic development in the economy. The level of growth and development is indicated by

the level and composition of per capita income. Its production is determined by the

endowment factors of a country through the available natural resources, and material

resources. The agriculture, industry and the service sector play a significant role in the

national economy through the distribution of occupational labor strength, system of the

nationwide output, the style and arrangement of foreign trade, format of savings and

investment and capital formation, the arrangement of income distribution and the extent of

urbanization etc.

iii. Real Analysis of National economy: In order to describe national economy the household

zone, the corporate business zone, the government administration, the capital markets, and

the foreign zone are taken together. The economic environment can easily be understood by

considering the form and stability of each of these zones.

iv. Working of the Economy: Business and economic system are immensely dependent upon

money. All the other components like the flow of utilization, savings, investment, revenue,

enrollment and amount are affected by money. The real value of economic variables is

indirectly affected by the nature of monetary transactions. It also considers the role of

central banking, centralized planning, controlled price arrangement as well as free market

pricing.

v. Economic Planning and Programmes: The economic environment is affected by economic

planning. In order to optimize their achievements and to overcome their environmental

constraints over a period of time the economies function through one or other kind of

planning.

vi. Economic Policy Presentation and Legislations: Planning is a schedule for future course of

action, not an end in itself. So, It must be pursued with appropriate implementations. Both

industry and agriculture are affected by the economic policy statements. RBI works through

the instrument of money and credit policies and the government, through fiscal-cum-

budgetary policy, exercises control.

vii. Variations and movements in Macro-economic shifts: The short run fluctuations in and long

term trends of income, money supply, price etc. reflect the functioning of an economy.

viii. Economic Issues and Prospects: The description as well as aspects of macro-economic

variables describe economic issues like boom, unemployment, deflation etc. and various

prospects in the environment put light on corporate as well as national economic management

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challenges

4.4 Nature Of Economy

Economies can be categorized on the basis of their levels of income, especially per capita income.

There are countries which have a very high per capita income such as Singapore, Switzerland,

Sweden, etc. On the other hand, there are countries where people are dying of hunger. Even within

one nation, there are alarming disparities in terms of development, usually termed as dualism.

Thus,dualism refers to the existence of both the developed and the underdeveloped economy in a

country.

Classification on the basis of per capita income:

Low Income Countries: These economies have a very low level of per capita income. All

economies having a per capita GNP of $ 1035 or less(in 2012) are considered as low income

countries.

Middle Income Countries: These economies are further sub-divided into lower middle

income economies having , $1,036 - $4,085 (in 2012) and upper middle income economies

having a per capita GNP between $4,086 - $12,615(in 2012)

High Income Countries: These are countries having a per capita GNP of ,$12,616 or more.

Classification on the basis of Development

Developing or under-developed Economies: Low and middle income countries are usually

regarded as Developing or under-developed countries;

Developed Economies: High income countries are considered as developed economies. But

this may not always be true. Countries like Kuwait, Iran, UAE etc. fall in high-income

countries but are considered as developing countries.

Transition Economies: These are former centralized/ socialist economies, which are moving

to market economies such as Russia, China, eastern European nations, and India. These

transition economies are very big in size in every respect. As they are the largest markets in

terms of Purchasing Power Parity (PPP), they are the cheapest manufacturing and services

hub, and have substantial and, in few cases, the largest natural resources. From the angles of

both demand and supply, they are very rich and will be the playground for all global

organizations in the coming era.

4.5 Type of Government: Economic System

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The economic environment of a country includes three main elements- economic system, economic

policies and economic conditions.

Economic Systems: the economic system of a country reflects the economic composition, economic

thinking and the economic liberalization. The economic systems may be of three types-socialist,

capitalist and mixed economies.

a) Capitalism

Capitalism is a system based upon the private control and use of capital with profit motive. The

major significant character of capitalism is the continuation of private ownership. Everyone has

the right to establish any business in anyplace he wishes, provided he has sufficient funds and

capability. The state interference in economic activity is kept down to the minimum as it is

pillared on the concept of laissez faire. U.S.A and Canada are its examples.

b) Socialism

Socialism is an arrangement in which capital equipments, buildings and land are controlled by

the state. The prime aim of socialism is to run the economy for social benefit rather than private

profit. It focuses to work according to one’s ability, and provides equal opportunities to all

regardless of caste, creed, color and inherited privileges. Socialism includes communism.

Erstwhile Soviet Union followed it. Communism means an idealistic system in which all means

of production and other forms of properties are owned by the community as a whole, with all

members of the community sharing in its work and income. People work according to their

needs and capacities and get according to their desires and wants. In other words it is a social

and economic system characterized by social ownership of the means of production and

cooperative management of the economy as well as political theory which aims at the

establishment of such arrangement. China and Russia are its examples.

c) Mixed Economy

It is a mixture of two and contains neither the pure capitalism features nor the pure features of

socialism. So we can say that in this arrangement, we can find the features of both capitalism

and socialism. Both the private and public enterprises operate in the mixed economy. The

government intervenes to regulate private enterprises in several ways. Heavy engineering goods,

atomic power, industries producing defence equipments etc. are the basic and heavy industries

that are put in the public sector. On the other hand, the consumer goods industries, small and

cottage industries, agriculture etc. are assigned to the private sector. It has been realized that in

the under developed countries, like India, economic development cannot be achieved at the

desired rate of growth without an active government help and guidance. Hence, the government

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in such countries actively participates in economic activities in order to minimize the evils of

capitalism and to accelerate economic growth. In capitalistic economy, the entrepreneurs utilize

the available resources efficiently, as they have strong initiative to earn profit. But the free

functioning of private enterprises results in extreme inequalities of income and wealth. In

socialistic economy, the inequalities in income and wealth get reduced to the minimum and the

national income is more equitably distributed. But the socialistic economy suffers from the

problem of lack of private initiative which results in the lack of innovation and enterprising spirit

and ultimately leads to inefficient use of available resources. The mixed economy aims at

achieving the goals of both capitalism and socialism (i.e., efficient use of resources and equitable

distribution of income and wealth) and at the same time, it emphasizes on the reduction of evils

of capitalism and socialism.

Check Your Progress A

1. Capitalism is a system based upon the__________ control and use of capital with

_____________motive.

2. Socialism is an arrangement in which ___________, _____________ and

_____________ are owned by the state.

3. Dualism refers to __________of the developed and the underdeveloped in a country’s

economy.

4. High income countries are considered as _________economies.

5. Transition Economies are former centralized/ socialist economies, which are moving to

market economies such as Russia, China, eastern European nations, and

India.(True/False)

4.6 Indian Economic Environment-Current Economic Policies and Economic Trends

In the year 2010-11, Indian economy witnessed GDP growth of 8.4 % bringing dowm the fiscal

deficit of GDP in 2009-10 from 6.4% to 4.7%. During 2011-12, the economy showed a GDP of

6.5%.Industrial sector suffered the sharpest deceleration in 2010-11 it was 8.2 percent which

decelerated to 2.9 percent during 2011-12 and this slow-down was shown in all zones of the

economy. During the year 2011-12, the centre’s finance experienced greater shortfall due to

overshooting of expenditure and shortfall in tax revenues. The gross fiscal deficit (GFD)-GDP ratio

moved up to 5.8 per cent in 2011-12 as it was expected to be 4.6 percent. Further the deficit of the

government rose up due to increase in subsidies as a result of high crude oil prices during 2011-12.

During 2011-12 and particularly in second half, there was a deteriorating international investment

position, fall down of foreign exchange reserves, increase in the external obligations and an increase

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in Current Account Deficit (CAD).

In the first eight months of 2011-12 the inflation remained elevated at over 9 percent and it remained

sticky to the range of 6.9-7.7 percent, before softening a little in December.

4.7 Summary

After viewing in a broad way we conclude that the the growth and dispensation of economic

principles in civilization is called business. The business’s range is very wide. Trade and business

can’t be similar to each other. . 'Business' simply includes all behavior regarding invention and

allocation of goods and services wherever 'Trade' refers to purchase and sale of goods. It embraces

activities like industry, trade, insurance, banking, transport and warehousing which make easy the

manufacturing and allocation of all goods and services.

All the behavior of business may be categorized under two broad headings, viz., (1) Industry and (2)

Commerce. Any business enterprise, which deals with extracting, growing, construction or

manufacturing, refers to an industrial venture. And, a business enterprise, which is related with

activities that are incidental to trade, like transport, warehousing, banking, insurance and advertising,

or with exchange (buying and selling) of goods and services, is called a commercial enterprise. The

element of business, which seeks to make possible replace of goods, exchange of goods by removing

various hindrances, through deals, money through money and banking, of the place through

warehousing and storage space, and of lack of knowledge, through advertising is commerce.

4.8 Glossary

Business: The complex field of exchange and manufacturing in which goods and services are

created and disseminated in the optimism of profit within a framework of laws and policies.

Characteristics of Business: The main characteristics of business are as follows-

Dealings in Goods and Services

Production and/or Exchange

Creation of form, time and place utility

Regularity and Continuity in Dealings

Dealings

Consumers' Goods : These are the goods used by final consumers. Edible Oils, Cloth, Jam,

Television, Radio, Scooter, Refrigerator, etc.

Producers' Goods : These are the goods used for the production of other goods. Machine tools and

machinery used for manufacturing other products are its categories.

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Intermediate Goods : The finished products of one industry and becomes the intermediate

products of another industries is called intermediate goods.

Economic System: The country’s economic system reflects the economic composition, economic

thinking and the economic liberalization

Capitalism: The system of monetary organization characterized by the secretive tenure and use of

capital with profit purpose is called Capitalism. The subsistence of personal belongings is the mainly

important feature of capitalism.

Socialism: Where the means of production (capital equipment, buildings and land) are owned by the

state is called Socialism economic system. To run the economy for societal assistance rather than

private proceeds is the main aim of socialism. It equivalent opportunities for all despite of caste,

class and hereditary civil liberties and emphasizes on work according to one’s capability.

Communism: It is socialism’s form. It was followed in the former Soviet Union. It is an unrealistic

scheme in which all resources of construction and other forms of properties are owned by the

community as a whole, is called communism. People get according to their needs and are believed to

work according to their competence. The main aim is to state that machinery is utilized to compress

all antagonism to achieve this end and to create a classless society and.

Difference between communism and socialism: The previous believes and adopts aggressive

innovatory measures to capture the technology of the administration while the latter believes in

nonviolent and parliamentary methods are the main difference between communism and socialism.

Mixed Economy: Neither it is a pure socialism nor pure capitalism but is a combination of both. We

find the characteristics of both capitalism and socialism in this system. Mixed economy is operated

by both private enterprises and public enterprises. To regulate private enterprises the government

intervenes in several ways.

Dualism: When there is co-existence of the developed and the underdeveloped in a country’s

economy is called Dualism.

Developing or under-developed Economies: Low and middle income countries are usually

regarded as Developing or under-developed countries;

Developed Economies: High income countries are considered as developed economies. But this

may not always be true. Countries like Kuwait, Iran, UAE etc. fall in high-income countries but are

considered as developing countries.

Transition Economies: These are former centralized/ socialist economies, which are moving to

market economies such as Russia, China, eastern European nations, and India.

4.9 Answer to check your progress

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11

A.

i. private ownership, use

ii. owned by the state

iii. co-existence

iv. developed

v. True


1. Henry E. Anthony(2011):Understanding Strategic Management,2nd ed.-indian, Oxford

University Press, New York.

2. Singh, Charan, Financial Sector Reforms and State of Indian Economy, Indian Journal of

Economic and Business, Vol. 3, No. 2, (2004), pp 215-239.

3. Kumar Raj, Gupta Kuldeep, Singh Surat and Kumar Pradeep, “ Development

Economics”, Deepak Publication.

4. Gupta K. Shashi, Aggarwal and Gupta neeti, “ Financial Institutions and Markets”,

Kalyani Publishers.


1. Economic Survey, Various Issues, Government of India.

2. Wetherly,Paul and Otter,Dorron(2011): The Business Environment-Themes and

Issues.Oxford University Press,New York.

3. Cherunilam,Francis(2013): Business Environment-Text and Cases, .Himalaya

Publishing House Pvt. Ltd., Mumbai.


1. What is business environment? What are the critical elements of economic environment of

business?

2. What is Socialism? What are the basic features of Socialism?

3. What is Mixed Economy? What are the basic features of Mixed Economy?

4. How is an economy classified on the basis of income and on the basis of development?

5 What are the main initiatives taken in the Industrial Policy Resolution,1991?

6 What are the changes proposed in the policy regarding foreign investment in the New

Industrial Policy of 1991?

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LESSON-5

India’s New Economic Policies

Structure

5.1 Objectives

5.2 Introduction

5.3 Pre-Reform Economic Policies

5.4 Need for New Economic Policy

5.5 India’s Economic Reforms: The New Economic policy

5.6 Objectives of the New Economic Policy

5.7 Components of the New Economic Policy

5.8 Three Pillars of Economic Reforms

5.9 Liberalization Measures

5.9.1 The New Industrial Policy

5.9.2 New Trade Policy

5.10Macroeconomic Reforms and Structural Adjustments

5.10.1 Macroeconomic Stabilization

5.10.2 Structural Adjustment

5.11Assessment of New Economic Policy

5.12Impact of Reforms on Business

5.13Summary

5.14Check Your Progress

5.15Glossary

5.16Answer to Check Your Progress

5.17References

5.18Suggested Readings

5.19Terminal and Model Questions

5.1 Objectives

After reading this lesson, you will be able to:

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Define New Economic Policy?

Explain Policies adopted pre-reform and post-reform period

Illustrate New Industrial Policy and New Trade Policy

Describe the Concept of Macroeconomic Stabilization and Structural Adjustment

5.2 Introduction:

In the mid-1991, India was in dire need of drastic readjustment of policies. After forty years of

economic planning, India in mid-1991 faced a crisis of unprecedented order. As compared to the

liberalization and reform measures, structural adjustment is invariably a far more difficult game.

It amounted to a drastic reversal of past policies and a radical route change for the economy.

Thus, government decided to implement the Structural Adjustment Programme (SAP). The SAP

adopted by Indian Government or the New Economic Policy (NEP) of which it is a part, alters

the economic structure. The core of NEP really consists of structural adjustment in an economy.

Economic reforms launched in the decade of 1990s have rapidly altered the business

environment of India and posed a set of new challenges to the business firms in the country.

Economic policy comprises of all those measures and instruments through which the government

seeks to influence, guide, coordinate or control various economic activities so that the economy

as a whole moves in the direction predetermined by the policy makers and planners. There are

different policies and instruments which are implemented to give desired direction to industry,

trade, agriculture, infrastructure etc., and accordingly are named as industrial policy, trade

policy, agricultural policy etc. All these sectoral economic policies put together form the overall

economic policy of the government.

5.3 Pre-Reform Economic Policies:

The development process in India till the beginning of 1990s was dominated by the public sector.

The government, in its zeal to ensure that all sectors of the economy moved strictly in

accordance with the programmes and targets laid down in the Five-Year Plans, placed many

physical controls, such as licenses, Quotas, permits etc, on the private sector industries and

foreign trade. To maintain the dominant position of the public sector, the government expanded

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area of its operations and pumped in more money in the ever expanding governmental activities.

But these policies did not produce the desired results of securing faster rate of growth or ensuring

near full employment and making significant dent in poverty and other economic problems.

Public sector bred inefficiency and heaped huge losses to the government. Restrictions on

foreign trade resulted in perpetual deficits in balance of payments. Inflow of foreign capital

virtually turned into a trickle. All these developments combined to create conditions of high cost

low efficiency and low growth in the economy.

5.4 Need for New Economic Policy:

In early 1991, a major economic crisis had occurred in the country the like of which people had

never experienced since independence. The crisis made economic reforms absolutely necessary.

The country was on the verge of defaulting on international financial obligations and immediate

policy action was required to save the situation. In response to the crisis situation of 1990-91, the

government decided to introduce economic policy reforms founded on macroeconomic

stabilization and structural reforms. Stabilization deals with demand management i.e. control of

inflation, fiscal adjustment, balance of payments adjustment etc., on the other hand structural

reforms deal with sectoral adjustments designed to back the problems on the supply side of the

economy- trade and capital flow reforms, industrial deregulation, public sector reforms and

financial sector reforms. Some other main reasons are: Slow and unsatisfactory economic growth

under four decades of regulated development process; Experience of other countries shows that

faster development was achieved there under more freedom and less controls; Some drastic

measures were needed to curb continuing inflationary pressures etc.

5.5 India’s Economic Reforms: The New Economic Policy

In the words of former RBI governor “The New Economic Policy comprises various policy

measures and changes introduced since 1991. There is a common thread running through all

these measures. The objective is simple and that is to improve the efficiency of the mechanism

involving multitude of controls, fragmented capacity and reduced competition even in the private

sector. The thrust of New Economic Policy is towards creating a more competitive environment

in the economy as a means to improving the productivity and efficiency of the system. What is

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sought to be achieved is an improvement in functioning of the various entities whether they are

in the private or public sector by injecting an element of competition.”1

Commencing from 1991, India has been going through a process of economic reforms and

liberalization. The reforms have incorporated almost all aspects of the country’s economy. These

reforms fall under two basic categories: (i) Liberalization Measures and (ii) macro-economic

reforms and structural adjustments. Under the liberalization measures, industrial licensing

policies and policies on foreign trade as well as foreign investment have undergone major

changes. Under the second category, a number of macro-economic adjustments likesignificant

changes in economic institutions, reforms in banking sector and capital markets in particular etc.,

have been major targets of overhaul. All these measures together aim at modernizing the India’s

industrial system, removing unproductive controls, encouraging private investment including

foreign investment and integrating India’s economy with the global economy.

5.6 Objectives of the New Economic Policy:

The New Economic Policy seeks to:

Take effective steps to reduce fiscal deficit to ensure an era of relative price stability.

Reduce the area of operation of the public sector and thus open up more fields of activity

for the private sector.

Liberalization of industrial policy and abolition of industrial licensing for most of the

private sector industries.

Encouraging inflow of foreign capital by granting more concessions to foreign direct

investment.

Liberalization of foreign trade by reducing tariff duties and abolishing quota restrictions

in case of many imports.

The above policy measures seek to remove the inefficiencies in the economic system and

bring significant reforms in the working of the economy. Hence, the New Economic policy is

also called the Policy of ‘Economic Reforms’.

1 Rangarajan, c: The New economic policy and the Role of the State

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5.7 Components of New Economic policy:

Various liberalization measures have been adopted by the government during 1980, which

gave a way to reforms in 1990s. Those measures were: Exemption from licensing; Relaxation

to MRTP and FERA companies; Delicencing; re-endorsement of capacity; Broad Banding of

Industries; Development of backward areas; Provision of incentives for export production;

Enhancement of investment limit etc. After the adoption of these liberalization measures in

1980s the government adopted New Economic Policy since 1991. The New Economic Policy

is a set of measures that have been adopted since 1991 to make the economy more efficient,

competitive and global in character. These measures relate to reforms in (a) Industrial Policy

(b) Trade Policy (c) Fiscal Policy (d) Financial Sector Reforms. Thus, the liberalization

measures have been brought about through the new industrial and trade policies; macro-

economic reforms and structural adjustments have been brought about through a large

assortment of enactments and policy revisions. Macroeconomic stabilization policies involve

short run or medium run measures that are designed to deal with problems like high inflation,

large current account deficits in balance of payments etc. Structural adjustment policies on

the other hand are long run in nature and are intended to remove the bottlenecks and

obstacles in the growth path of the economy. These are the policies that seek to lift the

economy out of the low level equilibrium trap by removing various constraints, both physical

and administrative , that hamper the smooth working and steady progress of the economy.

Thus, measures encompasses stabilization policies intend to correct short term disequilibria

and measures consist of structural reforms intend to speed up the process of economic

development over medium and long term. Both are important components of economic

reforms. The main components of the New economic Policy are shown in Figure 1 as

follows:

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Figure 5.1

Source:Brahmananda, P.R.’ “ Strategic Planning in India: The Sea Change in Indian Business

Environment Consequent to economic reforms”

THE NEW ECONOMIC POLICIES

Liberalization Measures Macro- Economic Reforms andStructural Adjustments

New IndustrialPolicy

New Trade Policy Macro-EconomicReforms

StructuralAdjustments

Liberalisationof Industriallicensing

Curtailment ofpublic sector

FERAliberalization

MRTPliberalization

Lowering ofImport Tariffs

Abolition ofimport licenses

A more openEXIM regime

Convertibility ofrupee

Encouragementto exports

Encouragementto foreigninvestment

IntegratingIndia’s economywith the globaleconomy

Fiscal andMonetaryreforms

Bankingsectorreforms

Capitalmarketreforms

Phasing outsubsidies

Dismantling ofprice controlsandintroduction ofmarket drivenpriceenvironment

Public sectorrestructurei.e.disinvestment

Exit policy

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5.8Three Pillars of Economic Reforms:

Liberalization , Privatization, Globalization forms the three pillars of economic reforms. These

policies are aimed at changing the very structure of the economy by changing business

environment, economic outlook and basic thinking behind government policies. Thus, the main

features of economic reforms are:

(i) Liberalization which includes deregulation of industries and abolition of industrial

licensing , providing for greater inflow of foreign capital by relaxing upper limits of

foreign investment, and automatic permission for technology agreements and changes

in MRTP Act. The idea is that the entrepreneurs should be able to operate in an

environment free of controls, permits, or other such regulatory devices and are thus

free to make their decisions.

(ii) Privatization is sought to be achieved through reduced role of public sector,

disinvestment in public enterprises. Disinvestment in public enterprises is the only

way to reduce the financial burden of public enterprises on the government. It is also

expected to improve efficiency of those enterprises with the availability of

professional guidance from the private sector that gets involved as a partner in their

progress. Government went for privatization of some big units like BALCO (Vedanta

Group), VSNL (Tatas), IPCL ( Reliance Industries) etc.

(iii) Globalization means integration of domestic economy with the international economy

which is sought to be done through liberalization of import licensing, rationalization

of tariff structure and reform in foreign exchange management. The new economic

policy seeks to achieve the objective of globalization through reforms in trade policy ,

abolition of import licensing etc.

All these changes are sought to be brought about by the New Economic Policy are essentially of

a long term nature that seek to make structural adjustments in the Economy. Let’s discuss all

these in detail:

5.9 Liberalization Measures:

The economic reforms ushered under the New Economic Policy aim at liberating the industry

and trade from all unnecessary restrictions and removing all impediments in their growth arising

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from licenses, permits, quotas, bureaucratic delays etc. Liberalization has been the crux of the

New Industrial Policy and the New Trade Policy. Let’s discuss in detail both the policies:

5.9.1 The New Industrial Policy

5.9.1.1 Industrial Policy-An Introduction: For the implementation of promotional and

regulatory role of the government the Industrial Policy is a paramount document. The word

“industrial policy” refers to policy of government towards the industries and helps in their

establishment, functioning, growth and management. The areas of small, medium and large scale

sectors are indicated by this policy. It also chalks out the government policy for foreign

exchange, labor, cost and other concerned aspects. In fact, Industrial policy controls, regulates,

fosters, guide and shape the industrial development of a country. As the Fundamental Rights

guaranteed by the Constitution, the Industrial policy has no legal sanction and cannot be

challenged in a court. Even then the ‘Industrial policy’ is one of the most important government

documents, which has a lasting impact on an economy’s industry.

Policy Objectives

Our first Prime Minister, Pandit Jawahar Lal Nehru set the bedrock of modernized India. After

Independence his perception and dedication left deep-rooted impact on each angle of nationwide

effort. India is now considered a big industrial nation of the world and has become a capable and

varied industrial paltry and the credit of it goes to his initiative. The ambitions and aspirations

stated for the nation by Pandit Jawahar Lal Nehru on the occasion of Independence, especially

the speedy industrial and agricultural development of our country, fast growth of occupational

opportunities, continuous minimization of societal and economic disparities, elimination of

scarcity and realization of ascetic-dependence continue as the main focus even today. Any

Industrial policy must help in the achievement of these ambitions and aspirations at a quick

speed. The current aspects of industrial policy are influenced by above stated concerns as well as

depict an improved action towards the consolidating gains of national reconstruction.

The New Industrial Policy: Salient Features

The government announced a New Industrial Policy on 24th July, 1991. This new policy de

regulated the industrial economy in a significant manner. The major objectives of the new policy

at that time were to build on the gains already made, correct distortions or weaknesses that might

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have crept in, to maintain a sustained growth in productivity and gainful employment and above

all to attain international competitiveness. Initiatives taken are as follows:

A. Industrial Licensing: In order to liberalize the economy and to empower entrepreneurs to

make investment decisions on the basis of their own commercial judgement, the 1991

industrial policy abolished industrial licensing for all but 18 industries. At present, licensing

is compulsory for only 5 industries which includes industries like alcohol, cigarettes,

hazardous chemicals, electronics aerospace and defense equipment and industrial explosives.

B. Curtailment of Public Sector: The Industrial Policy of 1956, reserved 17 industrial areas

exclusively for the public sector. The Industrial Policy of 1991, reduced this number to 8.

The number has been further reduced to 3, viz. atomic energy, minerals specified in the

schedule to the atomic energy (control of production and use order) and rail transport.

C. MRTP Liberalization: The Monopolies and Restrictive Trade Practices Act, has been a

growth-restricting regulation. Under the New Industrial Policy, sweeping changes have been

made in MRTP regulations. All firms with assets above a certain size (100 crore since 1985)

were classified as MRTP firms. The MRTP Act has been amended to altogether do away

with the threshold assets limit. Which rendered a firm an MRTP company or a dominant

undertaking. No MRTP clearance is now required for investment applications; nor is any

approval needed for establishing new undertakings, or for implementing expansions,

mergers, amalgamations and takeovers.

D. Freer entry to Foreign investment and Technology i.e. changes in FERA: The New

industrial Policy prepared a specified list of high technology and high-investment priority

industries wherein automatic permission was to be made available for direct foreign

investment upto 51% foreign equity. These industries specifically includes a number of

industries which are important for the rapid growth of the economy. The limit was

subsequently raised from 51% to 74% and then to 100% for many industries. At present,

Foreign Direct Investment (FDI) is permitted upto 100 percent on the automatic route in most

sectors subject to sectoral rules/ regulations applicable. There are certain specific sectors

where FDI is prohibited, these are: (1) retail trading (except single brand product retailing),

(2) Atomic energy, (3) Lottery business, and (4) gambling and betting.

Appraisal of New Industrial Policy:

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The initiatives taken under New Industrial Policy was adopted with the purpose of improving

efficiency, greater autonomy, enhancing allocative efficiency, good performance of public

sector, greater emphasis in controlling and regulating monopolistic, restrictive and unfair trade

practices. The New Industrial Policy triggered the industrial growth path of India, but besides

this some showed signs of discontent, which are as follows:

No evidence has been found of positive impact of industrial policy on industrial growth.

In the new liberalized scenario that has emerged after the reform phase, the Indian

businessmen struggled and still struggling with unequal competition from MNCs.

The various procedures to promote foreign investment contained in the new industrial

policy along withthe various concessions to such investment announced in recent years

have provided opportunities to MNCs to penetrate the Indian economy.

Personalistic relationships and corrupt practices continue to prevail

5.9.2 The New Trade Policy:

The new economic policy seeks to achieve the objective of globalization through reforms in

trade policy. The changes adopted in new trade policy have drastically changed the country’s

foreign trade scene, releasing export-import trade from the shackles of controls. The government

realized that with a regime of regulation and controls, it was not possible for India to achieve any

competitive edge in international markets, and this realization formed the essence of New Trade

Policy. “Freer Trade and a more open EXIM regime’ became the cornerstone of new economic

policy. Steps taken under new trade policy are as follows:

A. Lowering of import tariffs: Tariff structure refers to the structure and pattern of custom

duties that are levied on various commodity groups. The tariff rates were reduced year

after year, and tariff structure was rationalized in an effort to bring it in line with the tariff

rates prevailing in the other developing countries.

B. Abolition of import licences: In our country imports have always remained subject to

stringent quantitative restrictions like licences and quotas. One of the major reforms in

the trade policy has been phasing out of quantitative restrictions (such as import quotas)

and liberalizing import licensing. Under the new trade policy , most of these licensing

regulations have been abolished and most imports have been put under Open General

Licence (OGL) where largely automatic permission is granted to import goods. There is ,

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however, a small negative list of imports for which licences are still needed, but this list

is also being shortened over time.

C. A more open EXIM regime dispenses with Quantitative Restrictions: The new trade

policy also recognized that for regulating foreign trade flow quantitative restrictions

ought to be dispensed with and replaced by exchange rates and tariff controls.

D. New Exchange Rate System and Convertibility of Rupee: Earlier all exporters had to

surrender foreign exchange earned from exports to the Reserve Bank of India and get

rupees in return at a fixed exchange rate. This was known as exchange control system by

which RBI rationed scarce foreign exchange among importers of various categories of

goods. Under the liberalized exchange management system value of the rupee is

determined by market forces of its demand and supply. Exporters are free to sell their

foreign currency in the open market while the importers could freely buy it from there.

This is called convertibility of rupee. However, this convertibility is subject to certain

restrictions. Hence, India so far adopted only partial convertibility of rupee. The

government introduced partial convertibility of rupee in 1992-93 and full convertibility

on current account in 1993-94.

E. Encouragement to exports: Achieving a sustainable growth of exports has been one of

the significant objectives of the reforms process. The new trade policy offered several

incentives for exports including abolition of export duties, cuts in import duty and

cheaper export credit. These moves resulted in lower cost of production and improved

export competitiveness.

F. Encouragement to Foreign Investment: The reforms were also aimed at enhancing the

flow of foreign direct investment into India in ample measure, in a bid to substitute

India’s external borrowings and curtail debt servicing obligations. The new trade policy

amply complemented the new industrial policy in encouraging foreign investment. While

NIP promoted FDI through FERA relaxation and delicensing, measures under the trade

policy served as a reinforcement. These measures boosted the confidence of foreign

investors.

G. Integrating India’s economy with the global economy: The new trade policy was

essentially aimed at integrating India’s economy with the global economy. It involved the

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change over from government regulated allocation of foreign exchange to market driven

allocation.

5.10 Macroeconomic Reforms and Structural Adjustments:

In addition to the liberalization of industrial and trade policies, the government also brought

about a series of macro-economic corrections, reforms of economic institutions and adoption

of structural adjustment programmes.

5.10.1 Macroeconomic Stabilization:

Macroeconomic stabilization policies involve short run or medium run measures that are

designed to deal with the problems like high inflation , large current account deficits in

balance of payments etc. These problems may have been the consequence of faulty or

inappropriate monetary and fiscal policies. Therefore, through appropriate changes in these

policies and measures such as restraints on monetary expansion or reduced government

spending and suitable adjustment in exchange rates, the problems of inflation and balance of

payment deficits are sought to be dealt with. Thus, the macroeconomic stabilization policies

include only short run measures to solve short and medium term problems. The fiscal

reforms centred around reduction of fiscal deficits and reforms of the taxation system.

Reforms in monetary and credit policy were aimed at slowing down monetary expansion,

lowering interest rates and arresting inflation. In case of banking sector reforms, the

recommendations given by Narasimham committee formed the basis for these reforms. The

government carried out a phased reduction of statutory liquidity ratio (SLR) and permitted a

degree of flexibility to the banks in the matter of deposit interest rates. In a more substantial

move, the government allowed nationalized banks to go to the capital market and raise

additional equity required for strengthening their capital base and meeting the new forms of

capital adequacy. The government also carried out a series of reforms in respect of the capital

markets. The ceiling on the acquisition of shares/debentures of Indian companies by non-

resident Indians and overseas corporate bodies was raised under the portfolio investment

scheme from 5 percent to 24 percent. The government also opened up the capital market to

foreign institutional investors (FIIs), by permitting foreign institutional investmentin mutual

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funds, investment trusts, asset management companies, nominee companies and institutional

portfolio managers to become players in the capital market of India.

5.10.2 Structural Adjustments:

Structural Adjustment Policies are long run in nature and are intended to remove the

bottlenecks and obstacles in the growth path of the economy. These policies contain long

term measures like increase in productive capacity, full utilization of existing capacity,

enhanced factor productivity, removal of constraints on trade and introduce competition to

improve efficiency, reduce production cost and make the country’s economy strong and

internationally competitive. Phasing out of subsidies constituted another major element of the

reform programme. Phasing out of subsidies has been used as means for the ultimate

dismantling of price controls and introduction of a market-driven price environment for

products under administered pricing. The government initiated steps for dismantling of price

controls in respect of number of products, basically in case of raw material used in basic and

heavy industries. For example, it removed the price and distribution controls on iron and

steel. Other than phasing out of subsidies, public sector restructure was a major aspect of

reforms exercise. The government truncated the role of the public sector. The government

made it clear that it would not finance rehabilitation of such Public Sector Units (PSUs);

instead it would try private sector participation to run the units. Disinvestment of government

equity in the PSUs was the other major element of public sector restructuring. Along with all

these measures under structural adjustment, the government recognized that if the industrial

policy reform was to be taken to its logical conclusion, an exit policy for industry was

essential. The main instrument of exit policy were: Voluntary Retirement Scheme (VRS) and

National Renewal Fund (NRF). The government brought in heavily budgeted VRS schemes

for the PSUs and when government came out with tax relief for VRS of even the private

sector, the ‘ golden handshake’ schemes became attractive for the private sector as well. In

case of NRF, government announced that NRF is set up to provide assistance to cover the

costs of retaining and development of employees arising as a result of modernization,

technology upgradation and industrial restructuring.

5.11 Assessment of the New Economic Policy:

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The NEP has been largely welcomed because it has abolished many unnecessary controls

which delayed and in a large number of situations inhibited investment, both domestic and

foreign. It has been increasingly felt that public sector was not able to accelerate production

in the areas reserved for it. Consumers gain immensely in an open market. They have greater

choices and get better products at cheaper prices. Under the NEP, given the climate in which

private sector and the multinationals can undertake investment freely, production will get a

definite boost. Several Indian companies especially in information technology and

pharmaceuticals, have made their marks in the world market.

The critics of NEP agree that policy of liberalization would lead to increase in investment

and in supply, in an oligopolistic market structure that prevails in Indi, excessive dependence

on market mechanism to channel investment in socially desirable channels may prove to be a

failure. The NEP encourages consumerism among the affluent sections instead of marking

investment in wage goods and housing which are very essential for raising social and

economic welfare. Lastly, the NEP does not seriously attack the problem of poverty in India

in an effective and practical way.

5.12 Impact of Reforms on Business

Business environment was directly affected by the reforms undertaken in 1990s. The main

aim was to reduce regulatory obstacles to industrialization, enhancing greater competition,

greater participation of foreign capital, and improving industry environment. The impact of

the reforms can be seen as follows:

New Economic Policy abolished many unnecessary controls which earlier inhibited

investment, both domestic and foreign.

Deregulation of the industry gives greater scope and freedom to private enterprise.

Permission was granted to reputed India companies to float equity abroad.

Permission was granted to foreign institutional investors to take in government

securities and treasury bills.

There was an increase in the number areas for automatic approval to foreign direct

investment proposals.

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Wide range of facilities and incentives was provided to export oriented units, export

processing units for producing products at competitive prices, so that Indian products

can compete at the international market.

5.13 Summary

The New Economic policy aimed at greater freedom for doing businesses outside the

government control , reduced the role for public sector, de0reserving areas and larger role

for the private sector, doing away with MRTP/FERA act and dispensing with MRTP and

FERA Companies. This policy has opened new vistas of development for private sector

industries. This policy has moved the trend towards liberalization, privatization,

globalization and competition in place of regulation and control. The policy shouldn’t be

seen as undermining the importance of public sector, but role of public sector would

undergo a change.

5.14 Check Your Progress:

1. The main strategy adopted in the New Economic policy of 1991 is

(a) Liberalization

(b) Privatization

(c) Globalization

(d) All of the Above

2. The New Economic Policy broadly includes:

(a) Macroeconomic Stabilization Measures

(b) Structural Adjustment Policies

(c) Both a and b

(d) Neither a nor b

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3. The New Economic Policy is a set of measures that have been adopted since 1991 to

make the economy more efficient, competitive and global in character

(a) Efficient

(b) Competitive

(c) Global

(d) All of the Above

4. Government of India announced a New Industrial Policy on

(a) July 15th, 1991

(b) July 20th, 1991

(c) July 24th, 1991

(d) None of these

5.15 Glossary

Globalization: Globalization means integration of domestic economy with the international

economy which is sought to be done through liberalization of import licensing,

rationalization of tariff structure and reform in foreign exchange management.

Macroeconomic stabilization: Macroeconomic stabilization policies involve short run or

medium run measures that are designed to deal with the problems like high inflation , large

current account deficits in balance of payments etc.

5.16 Answer to Check Your Progress

1. (d) 2. (c) 3. (d) 4. (c)

5.17 References

Rangarajan, C, “ Indian Economy: Essays on Money and Finance”, UBSPD, New Delhi

Ramaswamy, V.S. (ed.), “ Strategic Planning Formulation of Corporate strategy,

Macmillan India Ltd., New Delhi

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1. Fernando, A.C., “ Business Environment”, Pearson Publication, New Delhi

2. Misra and Puri, “ Indian Economy”, Himalaya Publishing House, New Delhi


1. What are the principal features of the New economic Policy?

2. What are the main components of the New Economic Policy?

3. Discuss various objectives of New Economic Policy?

4. Evaluate major features of 1991 industrial policy.

5. What are the main features of New Trade Policy in India?

6. What measures have been adopted by India for its macroeconomic stabilization and

structural adjustment process?

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LESSON-6

Economic Planning in India

Structure

6.1 Objectives

6.2 Introduction

6.2.1 Guiding Principles of Indian Planning

6.2.2 Achievements of planning in India

6.2.3 Failures of Indian Planning

6.3 Financing pattern of Indian planning

6.3.1 Sources of financing of five-year plan

6.4 Eleventh Five Year Plan (2007-2012)

6.5 Summary

6.6 Glossary


6.8 References/Suggested Readings


6.1 Objectives


i. List major objectives of planning in India.

ii. Explain major, achievements and failures of planning in India.

iii. Discuss in brief financing pattern of Ninth and Tenth Five Year Plan in India.

iv. Enumerate the overall nature of Eleventh Five Year Plan in India.

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6.2 Introduction

Economic development has been closely linked with planning. Planning has become a craze in

modern times, especially in under-developed and developing countries. The idea of planning

acquired a tremendous support after the end of World War II when advanced but disrupted

economies had to be rehabilitated and the underdeveloped economies were fired with the

ambition of rapid economic development.

The term “planning” is now so much in common use that it seems to be unnecessary to define it

or to explain its meaning. In fact, it is not possible to give it any precise or universally acceptable

definition. There is no unanimity among political thinkers and economists about the concept of

planning. As Raymond Burrows remarks, “Planning as a modern panacea is as perplexing to a

pedant as it is popular to a protagonist”.

It is rather difficult to give a concise definition of economic planning with a fair degree of

precision and acceptability to one and all. Hence different economists have defined economic

planning in a variety of ways by keeping in mind the goals to be achieved and the techniques for

achieving them. Apart from stating that planning is a method, a technique or a means to an end,

the end being the realization of clearly set targets, we discuss the number of definitions which in

their totality convey the full meaning and content of economic planning.

National Planning Commission of India- “Planning under a democratic system may be defined

as the technical co-ordination, by disinterested experts, of consumption, production , investment,

trade and income distribution, in accordance with social objectives set by bodies representative

of the nation. Such planning is not only to be considered from the point of view of economics

and the raising of the standard of living but mist include cultural and spiritual and the human side

of life”.

“Economic Planning is the making of major economic decisions what and how much is to be

produced, how, when and where it is to be produced, and to whom it is to be allocated by the

comprehensive survey of the economic system as whole”. This is by far the most comprehensive

definition as it describes the anatomy of planning. The planning is done by central authority like

state possessing the powers for implementation. It is to be preceded by a comprehensive survey

of economic conditions which will point out the defects and deficiencies of the prevailing

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economic system. After this survey, definite goals are fixed. The manner and timing, quantitative

aspects of achieving these goals are then outlined; finally, the benefits accruing from such action

are to be shared for the maximum satisfaction of the largest number of people through deliberate

decision, control and direction.

To sum up, planning comprises the following essential features:

1. Predetermined and well defied objectives or goals.

2. For economic planning deliberate control and direction of the economy by a central authority,

e.g., the state.

3. Optimum utilization of natural resources and capital which may be scarce and labour that may

be abundant.

4. The objectives are to be achieved within a given interval of time – 5 years, 7 years, etc.

5.The performance of the economic functions of increasing production, maximizing employment

and controlling population growth so that production outstrips population growth.

For having systematic economic development, India has accepted the way of economic planning

since 1951. By realising the various adverse impacts of non-planned economic development

process, India has emphasised the way of planning economic development for developing it’s

under developed economy. Economic planning has helped in achieving some important

objectives of socio-economic development in India. An overall evaluation of economic planning

in India is explained for assessing the major objectives determined at the beginning of economic

planning. Further the brief review of ninth, tenth and eleventh five year plan has been taken into

account. Government of India adopted planning technique from 1951. From 1950-51 to 2011-12

Government of India implemented totally eleven five year plans and five one year plans which

are shown in following table –

Table No. 6.1 : Plans and plan period

Plans Period

1st Five Year Plan 1951-56

2nd Five Year Plan 1956-61

3rd Five Year Plan 1961-66

Annual Plan For 3 Years 1966-67 To 1968-69

4th Five Year Plan 1969-74

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Annual Plan For Two Years 1990-91 To 1991-92






Under planning period Government of India spelt out some long term objectives up to seventh

plan the main objectives were –

6.2.1 Guiding Principles of Indian Planning :

1) Economic Growth : The First objective of Indian planning is to achieve economic growth

approximately 5 per cent per annum increase in the net national product. Economic growth has

always remained in focus as the main objectives. There are number of problems which are faces

by the Indian Economy. It has often been assured that the gain of economic growth would

percolate downwards and thus property, inequalities would be decline and poverty problem

would automatically be solved. The growth of employment was also taken for granted.

High priority to economic growth in Indian plans looks justified from beginning. The economy

of the country had received severe jolt under the British rule on account of massive drain of

wealth from India. In this period while the European countries developed, India suffered under-

development. So, once this country got Independence, the major choice of decision makers was

for economic growth. It was shown in a following table.

Table No. 6.2 Growth Rates of Five Year Plans

Plans Growth rate

Objectives / target

I 2.1

II 4.5

III 5.6

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IV 5.7

V 4.4

VI 5.2

VII 5.0

VIII 5.6

IX 6.5

X 8.00

XI 9.00

2) Self-reliance : Self reliance means independent from other. But in case of country like India

self-reliance is elimination of dependence on foreign aid and capital also. But India was

dependent on foreign countries at least in their respects.

First, despite the fact that Indian economy was agricultural basis, the output of food grains was

not adequate and the country was imported foodgrains from the U.S.A. and some other countries.

Second is on account of virtual non-existence of basic industries, transport facilities, machine

tools, engineering industries, electricity plants, other capital goods had to be acquired from

developed countries.

Third and last is saving rate being low, foreign aid had to be obtained in order to step up the

investment rate in the country. In planning period our import was increased but export doesn’t

increased sufficiently. So Balance of payment disequilibrium was increased, it was affecting the

countries dignity and economic position. So our planners considered about this objectives. It is

now seen that in the field of self reliance, India succeed in almost self-sufficient in food and in

case of production of iron and steel, machine tools heavy engineering industries our country has

made considerable advancement towards self-realiance.

3) Removal of unemployment : Generally unemployment means people able and willing to

work in a prevailing wage rate but not get adequate work. Number of underdeveloped countries

facing the problem of unemployment. India is facing the problem of unemployment. So our

planner given more attention to the removal of unemployment in the country. In each and every

plan in India the main objective was removal of poverty. For the purpose of this objectives,

Government of India adopted different programmes for increase employment opportunities i.e.

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S.F.D.A., M.F.A.L., E.G.S. IRDP, Swarnjaynti Gram Rojgar Yojana, Jawahar and Nehru

Yojana, Priminister employment assurance scheme etc.

4) Reduction of Income Inequalities : Another objectives of Indian planning is a reduction of

income inequalities in the country. However in case of priority it always got a very low place.

According to experts, Indian plans have never made any serious attempt to redistribute income

and wealth. From fourth plan Government of India given a priority to this objectives. In its

opinion, fiscal measures at best can reduce disposable income at the top and thus their

importance for eliminating income inequalities is limited. For this purpose number of

programmes started for poor people for improving their economic conditions. From rapid

growing big business houses like Tata, Birla, Dalmiya, Jain, Chougule etc, it is obvious that

income inequalities have been increasing in urban areas as well. Anti monopoly measures can

reduce inequalities in income and wealth, but from this point of view, Government passed the act

like M.R.T.P. and adopted progressive tax system policy etc.

5) Elimination of Poverty : Poverty problem is also main problem of under developed

countries. India is facing the problem like poverty. Poverty means people doesn’t fulfils their

minimum needs i.e. food clothing, shelter, safe drinking water, education, health etc. Poverty can

be two types one is absolute poverty and second is relative poverty. In our country both types are

prevailing. So our planners and government has given a priority for elimination of poverty in

some plans. From first to Eleventh five year plan, Government has given more attention to the

cottage and small scale industries, agricultural development, social security programmes, welfare

programmes for labour farmers etc. under fifth five year plan. ‘Garibi Hatao’ programmes has

been introduced under these programmes numbers of sub programmes were started.

6) Modernization : After Independence, Indian economy required structural and institutional

changes to cope with the modern world. So our planners adopted modernization is an important

objective of planning up to sixth plan this objective was never on the agenda of any plan. But in

the Sixth, Seventh, eight and eleventh five year plans modernization is main objective

modernization we mean to improve existing industrial, agricultural, transport, communication

system in the country. Modernization also in case of Banking sector, public sector also. In case

of modernization our country like India made considerable progress in all means and all sectors

in the economy.

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Evaluation of Indian Planning :

Government of India adopted planning process from 1950. Till date, Eleventh Five Year plans

were completed. But some critics criticized on India planning as follows:

1) Conflicting and Inconsistent objectives.

2) Over Dominance of welfare consideration etc.

3) Few priority for unemployment problem.

4) Neglect of Agriculture Sector.

5) Too Ambitions and unrealistic objectives.

Indian planning is now completed sixty years. So it is very essential to have a evaluation or to

see achievement and failures of the plans. Actually planning is a process, under which some

objectives are fixed and targets also fixed and government authority or Planning Commission

implemented all the planning process. Financial support is also essential. Russian Government

adopted planning techniques firstly in 1928 and made spectacular achievements within twenty

years. After five plans Government of Russia stopped the planning. So experience of planning in

India is to be evaluated in following way.

6.2.2 Achievements of planning in India :

1) Increase in national and per capita Income : One of the main objectives of Indian planning

is to increase national and per capita income. In planning era India’s national and per capita

income increased considerably. Following table shows growth of both the income up to 2001-

2002.

Table No. 6.3 National Income and per capita Income of India(at 1993-94 and 2003-04

prices)

Year National Income Per Capita Income

(Rs. In crores)

1950-51 1,32,367 3,687

1960-61 1,92,235 4,429

1970-71 2,70,597 5,002

1980-81 3,63,417 5,352

1990-91 6,14,206 7,321

2003-04 12,66.005 11,799

At 2004-05 Prices

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2004-05 26,23,995 24,095

2008-09 36,72,192 31,821

2009-10 39,29,853 33,588

Source: Government of India, Economic Survey, various issues, RBI Handbook of Statistics on

Indian Economy,2009-10.

Table No. 6.4 Average Annual Growth Rates of National Income and per National Income

Year National Income Per Capital Income

1950-51 to 1980-81 3.4 1.2

1980-81 to 1996-97 5.5 3.3

1996-97 to 2003-04 6.2 3.6

2004-05 to 2009-10 8.4 6.9

Source: Government of India, Economic Survey, various issues, RBI Handbook of Statistics on

Indian Economy,2009-10.

Table No. 6.3 & 6.4 show that:

1). Decade wise statistical information between 1950- 51 to 2001-2002. Here net National

Income and per capita Income increased considerably. It is shown that, average annual growth

rate and per capita income. India’s NNP growth rate is greater than PCI, the reason of low

growth rate of PCI is increasing the population of the country.

2) Increased Agricultural Production : Since 1950-51 to till the date Government of India

spent more and more amount on agricultural sector. So Green Revolution, milk production, Eggs

production was increased. So India became Self-sufficient in food production since 1990. Our

food grains like Rice, wheat, Sugar cane, Milk, Oil seeds production increased rapidly. Since

1950-51 to 2001-02 per capita availability of food grains, milk, sugar etc. are increased and the

problem of hunger of Indian people is to be solved to some extent.

3) Increased Industrial Production During five year plans, the Government had invested

heavily on industrial sector especially major and prime industries like Iron and steel, Power,

transport, communication, chemical industries, metallurgical industries etc. As a result, there has

been considerable progress in such industries as steel, aluminium, engineering goods, chemicals,

fertilizers, petroleum products etc. So increasing industrial production became helpful to

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employment activities in the economy and total production, consumption and welfare of the

country. Progress of Industrial production is shown in following table.

Table No. 6.5 Progress of Industrial Production(Selected industries)

Industries 1950-51 1970-71 2001-02 2009-10

1 Coal (m. tones) 32 76 353 566

2 Iron ore (m. tones) 3 32 76 218.6

3 Fertilizers (m tones) 0.02 1 15 16.7

4 Aluminium (Thousand

tonnes)

4 169 552 745.5

5 Petroleum (M. tonnes) 0.3 7 32 33.7

6 Electricity (billion

kwh.)

5 56 579 768

Source:Government of India, Economic Survey,2005-06,2010-11.

4) Infrastructural Development : Another achievement of planning in India is an

Infrastructural development in the country. The expansion of roads and road transport helpful for

the development of market. Irrigation, power etc. development leads to agriculture and industrial

sectors in the economy. The infrastructure has opened the possibilities of modernization of semi-

urban and rural areas. In ninth plan period Vajapaee Government has given more priority to

‘Chatushakon Prakalp’ for infrastructure development such as road development. So

development of transport to be inexperienced.

5) Development of International Trade : Since 1950, in planning era Indians international

trade had increased. The size and composition of our imports and exports also increased. Before

planning period India imported food grains, manufacturing goods etc and exported raw materials,

tea, coffee, cashew etc. In half century of planning India’s dependency on foreign countries for

the import of food-grains and capital goods has declined. This has led to the policy of import

substitution. In short, Indians foreign trade had increased and in the same time composition of

exports has changed in favour of manufactures mineral ores and engineering goods.

6) Development of Science and Technology : After Independence especially under planning

period India’s development of science and technology also upper level. Our management

technique, physics, chemistry, space science became advanced. Now India has been providing

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experts services in science and technology to the countries like middle East and African

countries. This is matter of proud for the country.

7) Increase in standard of living : Another achievement of Indian planning is increased

standard of living of the people in the country. Before planning period per capita availabilities of

essential goods such as Sugar, Milk, food grains, clothes, edible oil etc, is to be small quantity

but it has to be increased in planning period shown in following table.

Table No. 6.6 Net Per capita Availability of some essential Consumer Goods in India

Goods and commodity 1950-1951 1970-71 2002-2003 2009-10

1 Sugar (Kgs) 4 7.4 16 18.6

2 Cereals and Pulses

(kgs)

144 167 180 162

3 Edible oil (kgs) 3.3 4.5 7.2 14.3

4 Cloth (C.meters) 14.4 16 32 43.1

Source:Government of India, Economic Survey, 2005-06,2010-11.

8). Development of Education : One of the great achievement of Indian planning said by the

thinker is Educational Development since 1950. During planning period primary, secondary,

higher secondary educational facilities had increased subsequently. India ranks third country in

the world in the terms of educational system. The total number of students enrolled in colleges

and universities increased from 3.6 lacks to 43 lacks between 1951 to 1997

6.2.3 Failures of Indian planning :

For out of a size decades near about five decade congress Government had ruling in center. The

Government have been proclaiming measures to achieve growth with justice, abolition of

poverty or Garibi hatao, removal of exploitation and inequality of incomes etc. But it is not

slogans. Indian planning has achieved significant success in various area’s, but planning also

failed in some area e.g. shown in following ways.

1) Failure in Elimination of Poverty : The basic objective of planning is the provision of

national minimum level of living. From first plans to eleventh plan Government of India adopted

number of programmes for poverty elimination. But poverty has not eliminate completely. Till

date 27 per cent of people living below the poverty line.

2) Failures to Solve Unemployment Problem : Generally, poverty and unemployment are the

co-related problems. The widespread unemployment is another important failure of our planning.

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According to planning commission, the backlog of unemployed Persons were 5.3 milion at the

end of first plan and 7.5 million at the end of the Eight plan. Taking unemployment and under

employment together, at the beginning of the Tenth plan i.e. 2001-02, 9.2 percent of the labour

force or 35 millions person were unemployed.

3) Failures to Reduce Inequalities : During planning period, the redistribution of income in

favour of poor people is unequal nature. In the year 1991 also 50 per cent of share of national

Income owned by only 10 per cent of the people and 40 per cent of income owned by 70 per cent

of the people, In planning period Government adopted policy like Abolition of Jamindari system.

Redistribution of land etc. But distribution of income and wealth is to be an uneven. This is

important failure of planning.

4) Failure to check black money : During planning period, various controls has been made for

speculation. But shortage, black-marketing, speculation don’t control to the Government. The

fiscal measures adopted by the Government failed to check black money. This is also another

failure of planned economy.

5) Failure of reduce concentration of Economic Power : One of the objectives of our planning

is to reduce concentration of economic power. But in actual practice big business hours like Tata,

Birla, Jain, Ambani, Chougule families are became very rich and richer. This is also important

failures of Indian Planning.

6) Inefficiency : During planning period, number of programmes for employment generation

and rural development etc. are to be started. But in actual practice number of programmes are

working inefficient manner. So planning achievement is limited. This is also another failure of

Indian planning. In above discussion we can conclude that, India’s planning policies and strategy

were sound but there was crisis of implementation due to the existence of a gap between the

theory and practice of socialist planning.

6.3 Financing Pattern Of Five Year Plans

Introduction : Success of any plan depends on two things, one is the targets laid down in the plan

and second is the financing resources available for this purpose. In short, when targets specified

in the plan are higher, larger resources will be needed to achieve them. Absence of adequate

financial resources, Government can not complete his plans and to secure targets and

achievement. For development of plans, resources may be raised from various sources which

may broadly be classified in the domestic sources budgetary surpluses, contribution of public

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enterprises, market borrowings, small savings deserves particular mentions. At the same time

external assistance is obtained from International financial institutions and developed countries.

Sometimes deficit financing may be used for completion of plan.

6.3.1 Sources of Financing of Five-year plan :

Broadly speaking there are three sources of the public sector plans. These are follows –

i) Internal source

a) current revenue balance

b) Public borrowings

c) Small savings.

d) Surplus of public enterprises

ii) Deficit financing

iii) Foreign Aid

6.4 Eleventh Five Year plan (2007 to 2012)

The National Development council approved eleventh plan draft in December 2006. The vision

of new plan i.e. Eleventh plan was ‘Faster and more inclusive growth’. Because the last four

years of the tenth plan recorded a rate of growth of as high as 8.6 per cent per annum making

India one of the fastest growing economies of the world. However, according to the plan, a major

weakness in the economy is that the growth is not perceived as being sufficiently inclusive for

many groups especially, SCs, STs and minorities. Gender inequality also remains a pervasive

problem and some of the structural changes taking place have an adverse effect on women. The

lack of inclusiveness is borne out by date on several dimention of performance.

Objectives of Eleventh plan : The plan envisages a high growth of GDP of the order of 9 per

cent for the country as whole. This implies that per capita GDP would grow at about 7.5 per cent

per year to double in 10 years. However the plan document hastens to add that the target is not

just faster growth but also inclusive growth which ensures broad based improvement in the

quality of the people, especially the poor SCs, STs, OBCs and the minorities etc. Besides the

broad objectives, ‘Faster and inclusive growth’, it has set 27 monitorable targets, classified in to

Six categories and are given below.

6.4.1 Targets set to Achieve the objectives :

1) Income and poverty

i) To achieve average GDP growth rate 9 per cent per year.

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ii) To achieve agricultural GDP growth rate of 4 per cent per year

iii) Increase employment opportunities upto 58 millions in five years.

iv) 5 per cent reduction of educated employment in the country during planning period.

v) To increase approximately 20 per cent wage rates of unskilled workers.

vi) Reduction in poverty by 10 per cent.

2) Education :

i) Reducing the drop out rate of children at the elementary level from 52.2 per cent to 20

per cent

ii) To ensure quality education and developing minimum standard in elementary school.

iii) Increasing literacy rate up to 85 per cent by 2011-12.

iv) Reducing gender gap in literacy to 10 per cent points by 2011-12.

v) Increasing the enrollment ratio in higher education from 10 per cent to 15 per cent.

3) Health

i) To reduce Infact mortality rate upto 28 and maternal mortality rate to 1 per 1000 by

2011-12.

ii) To reduce total fertility rate to 2.1 per cent by 2011-12 iii) Providing clean drinking

water facilities to all by 2009. iv) Reducing the malnutrition among children of age group

i.e. 0-3.

v) To Reduce Anaemia problems of women and girls 50 per cent.

4) Women and Children :

i) Increase sex ratio for age group 0-6 to be raised to 935 by 2011-12.

ii) Ensuring that at least 33 per cent of beneficiaries of all Government Schemes are

women and girl children.

iii) Ensuring that all children enjoy a safe childhood and are not forced to work.

5) Infrastructure:

i) To ensure electricity connection to all villages and BPL households by 2009.

ii) Connecting all habitation with population 1000 and above (500 and above for hilly

areas) by 2009.

iii) To connect every village by telephone and broad band facility to all villages up to

2012.

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iv) To provide homestead site to all by 2012 and set up the pace of house construction for

rural poor so far as to cover all the poor by 2016-17.

6) Environment :

i) Forest and tree cover to be increased by 5 per cent

ii) To attains WTO standards of air quality in all major cities by 2011-12.

iii) To treat all urban waste water by 2011-12 to clean river waters.

iv) To increase energy efficiency by 20 per cent points.

6.4.2 Financing the Eleventh plan :

The Table No. 6.7 Eleventh plan projections of Resourcesng.

Centre States Total

Amount % Amount % Amount %

1 Balance from current

Revenue

653989 30.3 385050 25.9 1039039 28.5

2 Borrowing in Market 767722 35.6 649423 43.6 1417145 38.9

3 Net Inflow from Abroad __ __ __ __ __ __

4 Gross Budgetary

support(1+2+3)

1421711 65.9 1034473 69.5 2456184 67.4

5 Central Assistance to States

&UTs

-324851 -15.1 +324851 21.8 __ __

6 Net Budgetary support(4-5) 1096860 50.8 1359324 91.3 2456184 67.4

7 Resources of Public

Enterprises

1059710 49.2 128824 8.7 1188534 32.6

8 Resources for Public Sector

Plan(6+7)

2156571 100.0 1488147 3644718 1488147 100.0

Source:Compiled and computed from Eleventh Five Year Plan(2007-2012),Vol.1

6.4.3 Sectoral Allocation of Resources :

The size of eleventh five year plan as compared to Tenth five year plan is an increased by 125

per cent i.e. Rs. 16,18,460 crores in Tenth plan and Rs. 36,44,718 crores in Eleventh plan.

However, sectoral allocation of resources are shown in following table.

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Table No. 6.8 Particulars Amount in crores Share in Crores total ( per cent)

11th Plan Projections

(2007-12)

Agri. & Allied activities 1,36,381 3.7

Rural Development 3,01,069 8.3

Special Area Programmes 26,329 0.7

Irrigation & Flood control 20,10,326 5.8

Total Agriculture(1 to 4) 6,74,105 18.5

Energy 8,54,123 23.4

Industry & Minerals 1,53,600 4.2

Transport 5,72,413 15.7

Communication 95,380 2.6

Science, Technology and environment 87,933 2.4

General Economic services 62,523 1.7

Social Services 11,02,327 30.9

General Services 42,283 1.2

Total 36,44,718 100

Source:Compiled and computed from Planning Commission(2007),Eleventh Five Year

Plan(2007-2012),Vol.1

6.4.4 Evaluation of Eleventh Five Year Plan :

In the year June 2007 the U.S. economy came under recession as a result of subprime lending

crises. The financial stress soon extended to other countries as well and on September 14, 2008

with collapse of the US investment Bank Lehman Brothers U.S. economy entered in to

recession.

The collapse of major financial institutions in Europe: As a result, there was a full blown global

financial crisis. The effect on Indian economy was not significant in the beginning. But from

October 2008, adverse effects of American recession on Indian stock market, export and number

of sectors were experienced to some extents. So results of Eleventh five-year plan were against

Indian economy. Most of the sectors of the economy witnessed a market slow down in the year

2008-09. This would be clear from the following facts.

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1) Growth rate of economy in the year 2007-08 was 9.7 per cent. It was gone down up to 6.7 per

cent in the year 2008-09.

2) Rate of growth in agriculture was 4.7 in the year 2007-08. It was also reduced up to 1.6 per

cent in the year 2008-09.

3) Manufacturing industries growth also experienced slow down ward from 10.3 per cent to 3.2

per cent

4) Rate of growth of electricity, gas decreased up to 3.9 per cent from 8.5 per cent in 2007-08.

5) Under Eleventh plan period rate of growth of the construction sector decreased 5.9 per cent

which was10.6 per cent in the year 2006-07.

6) In this planning period growth rate of Six core industries for example oil, petroleum, coal,

electricity, cement and finished steel also go down.

7) India’s growth of export also decreased up to 3.6 per cent as against 29 per cent in the year

2007-08.

8) Indias current account deficit widened to 2.4 per cent of GDP in 2008-09 from 1.3 per cent of

GDP in 2007-08.

9) The portfolio flows to India which were as high as $ 27,433 million in 2007-08 turned

negative and stood at - $ 14,030 million during 2008-09.

10) The average annual exchange rate of the rupee was Rs. 45.99 in terms of dollar in the year

2007-08. It was also decreased by 12 per cent in the year 2008-09

11) Another failures of eleventh five year plan was money and credit markets were also

affected.

12) The most adversely affected were the IT sectors that are closely linked up to the global

economy like the IT sector with the number of qualified engineers being forced to sit out. Many

employees had to bear wage cuts while many were obliged to go on ‘forced leave’

Check your progress

A. Choose the correct alternatives given below –

1) Planning technique is used firstly in …Country. a) India b) America c) Russia.

2) Indian planning commission was established in 1950 under the chairmanship of …………….

a) Dr. Rajendra Prasad b) Pandit Neharu c) M. K. Gandhi

3) In first five year plan first priority was given to …………….. sector.

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a) Industry b) Energy c) agricultural

4) In India five year planning was firstly brake down in the year …………….

a) 1966-69 b) 1978-80 c) 1990-02

5) Tenth five year period in India was …………….

a) 2000 to 2005 b) 2002 to 2007 c) 2007 to 2012.

B. Write whether following the statements are true or a false.

1) Before 1950, planning process was started in India.

2) Under Second five year plan in India priority was given to agriculture sector.

3) The objectives like ‘Garibi Hatao’ was especially designed in fifth five year plan.

4) The Sixth Five year plan was started before New economic policy in India.

5) ‘Bharat Nirman Yojana’ has been especially launched in tenth five year plan.

6.5 Summary :

After discussion regarding economic planning in India we can say that planning technique had

been used by Russia in 1928 for economic development. Afterwards it was followed by number

of countries in the Europe. In India planning process is started before independence. But

systematic planning for economic development adopted by the Government In the year 1950

upto 2011-12, India has completed Eleven Five Year Plans. In this topic some major objectives

of planning have discussed firstly. Secondly evaluation of planning is made. Thirdly Ninth and

Tenth five year plans financing pattern was explained and lastly Eleventh five year plan is also

explained.

6.6 Glossary :

Planning Commission : The machinery established for making draft five year along with

finalised and implementing five year plans.

National Development council : The body of reviewing the draft plan and making some

suggestion and sanctioning in five year plans.

One year plan : Some times five year planning is not possible at that time plan is make for one

year only. It is called as one year plan.

New Economic Policy : The policy of Liberalisation, Globalization and privatization adopted by

the Government of India in the year 1991.

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Bharat Nirman Yojana : The Government of India adopted the policy of rural electrification

and the policy of free of charge electric connection to the weaker sections e.g. S.C., S.T., B.P.L.

families, tribal people family etc.

6.7 Answers to Check your progress

A. 1) Russia 2) Pandit Neharu 3) Agriculture 4) 1966-1969 5)

2002-2007

B. 1) True 2) False 3) True 4) False 5)

False

6.8 References/Suggested readings

1) A. N. Agarwal : Indian Economic Problems : Development and Planning, Wishva Prakashan,

New Delhi (2003)

2) Datta, Sundaram : Indian Economy; S. Chand and Company, New Delhi (2011)

6.9 Terminal and Model questions.

1) Discuss in detail the major objectives of Indian Economic planning.

2) Discuss the achievements of economic planning in India.

3) Explain critically the achievements of economic planning in India.

4) Discuss the targets set in Eleventh Five year plan in India.

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Lesson 7: Monetary and Fiscal policies

Structure

7.1 Objectives

7.2 Introduction

7.3 Introduction to Monetary and Fiscal Policies

7.4 Monetary policy

7.5 Fiscal policy

7.6 Summary

7.7 Glossary



7.10 Terminal and Model questions

7.1 Objectives

After studying this lesson, you should be able to:

Explain different stabilisation policies established in India

Describe the effectiveness of monetary policy in ensuring price stability in India

Explain the objectives of Fiscal Policy and its constituents

Illustrate the suitability of different instruments of monetary and fiscal policies in specific

problems

7.2 INTRODUCTION

Stabilisation is a necessary complement of crucial reform that is driven by crisis in the economy.

But there is always a scope for improvement in the content and pace of a stabilization policy. A

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macroeconomic crisis is well-known in the form of increasing inflation and unsustainable fiscal

and current account deficits. So stabilization policies involve controlling inflation and a

sustainable fiscal and current account position. Economic policies can be classified into two

main divisions which are

Structural policies: These policies relate to the aggregate supply system on the economy like

industrial policy (privatization, liberalization, globalization), foreign trade policy and foreign

investment policy.

Stabilization policies: These policies relate to the demand system of the economy which include

monetary policy and fiscal policy.

The foreign exchange rate policy has not been used much in stabilizing the economy. The other

two have been applied with varied success.

Check your progress:

1. What are structural policies?

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

2. What are the two important stabilization policies?

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Activity: India’s stabilization policy was a response to the crisis of 1991. Discuss the caseof the crisis of 1991 which brought a reformation in the entire finanacial framework ofIndia and what are the steps taken by the RBI and government during the crisis toovercome it.

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7.3 Introduction to Monetary and Fiscal Policies

Monetary and fiscal policies are two strategic economic mechanisms used by

governments or national banks as an intrinsic element of a nation’s overall economic planning.

Monetary policy is the process by which the monetary authority of a nation controls the supply

of money. To promote economic growth, stability and inflation it is important to control the

interest rate.

Normally, a monetary policy is utilized by government or a central bank to control the

supply, availability and rate of interest of money to attain stability of the economy. Fiscal Policy

is changes in government spending or taxes designed to achieve macroeconomic goals. Monetary

Policy is changes in the money supply or credit conditions designed to achieve macroeconomic

goals. The three main goals are full employment, price stability, and steady economic growth.

7.4 Monetary policy

Monetary policy shapes a nation’s economic growth by adjusting the money supply to the

needs of growth by directing the flow of funds into the necessary areas with a purpose to attain

macro-economic goals. The term monetary policy is also known as the credit policy or called as

the Reserve Bank of India’s money management policy in India. The RBI decides how much

should be the supply of money in the economy, ratio of interest etc. It can be concluded from the

above facts that monetary policy is related to the demand and supply of money.

Definition of monetary policy:

Monetary policy is defined as

“It is the deliberate effort by the central bank to control the money supply and credit condition

for the purpose of achieving certain broad objectives” – Professor Wrightsman

“ A policy which influences the public stock of money substitute of public demand for such

assets of both, that is, policy which influences public liquidity position is known as monetary

policy” – A.G.Hart

Objectives of monetary policy:

The objectives of monetary policy can be summarized as

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1. Price stability: Inflation and deflation are hindrances to growth of economy and so it is

important to control big fluctuations in the overall prices.

2. Exchange rate stability: Instability in exchange rate affects international trade which can

lead to financial crisis.

3. Full employment and maximum output: Full employment indicates optimum utilization

of scarce resources like land, labour, capital and organization. The central bank of the

country has the responsibility of stabilizing the economy and taking steps through its

monetary policy to smoothen variations in output and employment.

4. High rate of growth: Monetary policy can contribute to the growth of the economy in

two ways – one way is to balance the aggregate supply of goods and services and other

way is to encourage savings and investment in the economy.

Types of monetary policy:

Monetary policy affects a nation’s monetary supply and the direction of its economy.

The difference between various types of monetary policy lies primarily with the set of

instruments and target variables that are used by the monetary authority to achieve their

goals. Below are few of the different types of monetary policy:

1. Expansionary policy: In this form of monetary policy increase in money supply and a

reduction in interest rates are used to correct the problems of a business cycle


3. Monetary policy is used to regulate the money supply. So what are the feasible

objectives of monetary policy?----------------------------------------------------------------------

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contraction. For example in recession banks are encouraged to extend credit to

consumers and entrepreneurs to solve the unemployment program.

2. Contractionary policy: A contractionary policy will put upward pressure on interest

rates and cause an inflow of short term capital. It is a type of policy in which the

central bank of a country decides that is necessary to decrease the money supply to

prevent inflation or slow down economic growth. For example sometimes central

banks implement this policy by selling of government bills, notes and bonds so that

the buyer pays in terms of money which reduces the money available in the system.

3. Counter cyclical policy: This policy aims at moderating the cyclical fluctuations in

the economy and stabilizing the economy by following counter cyclical measures. It

helps in slowing down the economy when it is growing faster and tries to kindle the

economy when it is going downward. For example, in case of progressive taxation

when there is expansion in the economy if a larger population of income is taxed but

it reduces the demand when the economy is growing.

4. Rule based policy: This is also called as nonactivist monetary policy. It is a policy

based on a predetermined steady growth rate in the money supply for example

allowing the money supply to grow at 3 percent a year no matter what is happening in

the economy.

5. Discretionary policy: This is also called as activist monetary policy. This policy leads

to actions in the case of the occurrence of a certain situation. It is used to harmonize

economic cycles by using an anti-cyclical policy.

Instruments of monetary policy: Instruments used in monetary policy can be classified

into qualitative and quantitative instruments.

Quantitative instruments also called as the general tools refers to the quantity of the

money devised to govern and channelize the gross quantity of bank credit.

1. Bank rate policy: It refers to the rate of interest at which the central bank rediscounts

approved bills of exchange. If the bank rate is increased, it decreases the quantity of

borrowing of banks from the RBI controlling the credit expansion.

2. Open market operations: It is an effective tool in which the RBI sells or buys short

term or long term securities in the open market. The sale of securities causes a

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decrease in the quantity of money and credit. The activity of buying securities from

the market increases the money in circulation which results in an increase in the cash

reserves with commercial banks.

3. Variation in the reserve ratio: It is compulsory for the commercial banks to have a

cash reserve which is a percentage of the total assets decided by the central bank. A

percent of the money kept with the RBI to have liquidity and credit control is called

as Cash Reserve Ratio (CRR) and Statutory liquidity ratio (SLR). Both of them

together are termed as Variation in reserve ratio (VRR). Any change in this VRR

leads to a change in the reserve status of the banks and thereby it’s lending capacity.

4. Lending rate: lending rates are those ratios fixed by the RBI to lend cash to the

customers on the basis of those rates. The higher the rate means the credit to the

customers would be costlier. On the other side lower the rate means encouragement to

the customers to lend more money.

5. Repo rate: Repo rate is the rate at which the banks borrow funds from the RBI to

cover up the difference between the demand they are facing for loans and how much

they have in hand to lend. If RBI increases repo rate it becomes difficult for the

commercial banks to borrow and vice versa.

Qualitative Instruments: They are called selective tools and are employed in

distinguishing between different uses of credit.

1. Consumer credit regulation: Consumer credit supply can be regulated by

determining the installments and down payments in the purchase process of consumer

goods.

2. Fixing margin requirements: Any variation of change in the margin money leads to

a change in the total amount of loan. This technique is used by RBI to promote a

neglected sector by decreasing margin and also increase the margin to prevent any

sector to grow.

3. Credit rationing: RBI controls and directs credit to neglected sectors by fixing the

amount of credit including the bill rediscounting. It can also put a ceiling on the limit

of bank credit.

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4. Moral suasion: This instruments uses moral persuasion by directing banks without

following any rules. The RBI has this power to suggest commercial banks to reduce

credit limit to restrict speculation.

5. Control through directives: The policy of commercial banks can be molded by RBI

by passing directions from time to time which would impact on guiding the credit to a

particular path of an economic sector.

6. Direct action: RBI can take action on any commercial bank if does not follow the

directives by stopping rediscounted bills and securities.

Problems in monetary policy:

There are certain limitations to monetary policy discussed below:

1. Lags in monetary policy: There are two types of lags in monetary policy.

a. Inside lag: Inside lag is again divided into recognition lag and action lag

(i) Recognition lag refers to the time period taken to identify the requirement

of alterations in monetary policy.

(ii) Action lag is the time gap between the recognition of the need and

implementation of the policy.

b. Outside lag: It is described as the time period taken to affect demand and supply

after the execution of the policy.

These lags affect the operational capability of a monetary policy.

2. Pressure of financial intermediaries: pressure of financial intermediaries like

insurance companies, pension funds, cooperative banks etc., convert idle funds into

active balances as they lend against mortgages and assets which yield higher returns.

These actions hike the velocity of money and weaken the power of policy.

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3. Excess non-banking financial institutions: Policy is affected by the credit pumped

into the economy by excess non-banking financial institutions.


4. Which of the following is not an instrument of monetary policy?

a. open market operations

b. bank rate policy

c. reserve requirement changes

d. government spending

5. -----------------rate is the rate at which the central bank rediscounts approved bills ofexchange.

a. lending

b. debt

c. bank

d. forwarding

6. When would the commercial banks have fewer funds to provide credit to the customers?

a. when the central bank decreases the reserve requirements

b. when the central bank increases the reserve requirements

c. when the central bank leaves the reserve requirements unchanged

d. when the commercial bank increases the lending rate

7. The time lag between recognition of the need and the implementation policy is known as

a. recognition lag

b. action lag

c. outside lag

d. inside lag

8. Which of the following is a common feature of monetary policy and fiscal policy?

a. both deal with interest rates

b. both deal with tax rates

c. both deal with foreign exchange

d. both deal with regulatory mechanisms

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4. Contradictions of objectives: When there is a contradiction of objectives the

efficiency of monetary policy is hindered.

5. Underdeveloped nature of money and capital markets: unorganized money and

capital markets restrict the monetary authorities from regulating money variables.

6. Higher liquidity: when an economy grows there is an addition in the deposit of

commercial banks. Surplus liquidity due to high deposits is a hindrance to a good

policy.

7.5 Fiscal policy

The fiscal policy plays an important role in the economic front of a nation.

Though fiscal policy started with a role of determining state income and expenditure

policy. But with time its importance grew with the speed of economic growth. So

gradually public borrowing and deficit financing are included as a part of fiscal policy.

An effective fiscal policy is comprised of debt management, public expenditure,

tax revenue, transfers, budgetary deficit etc, including the entire financial structure of the

nation. It tries to attain a proper balance between these units to achieve best possible

results in terms of economic goals.

Definition of fiscal policy:

“Fiscal policy as changes in government expenditure and taxation designed to influence

the pattern and level of activity”. – Harvey and Johnson

“We define fiscal policy to include any design to change the price level, composition or

timing of government expenditure or to vary burden, structure of frequency of the tax

payment”. – G.K.Shaw

“Fiscal policy as changes in taxes and expenditure which aim at short run goals of full

employment price level and stability”. – Otto Eckstein

Activity: Monetary policy pacts with the regulation of the currency supply. Assume that youare the expert in charge for framing the monetary policy in a republic. While outlining thepolicy which instruments do you reflect helpful in regulating credit?

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Objectives of fiscal policy:

1. Mobilization of resources: There are two methods of government to raise funds for

investment mainly voluntary and compulsory savings. Resources can be mobilized

through public borrowing and taxation. The government can mobilize more money by

introducing new taxes and increasing the existing taxes.

2. Reduction of disparities of income: Economic disparities can be reduced by

imposition of more taxes on the richer section, raising the taxes on luxury items.

Revenues so generated can be useful for the up-liftment of weaker sections.

3. Economic development and growth: Resources are mobilized through taxation

policy, public borrowing and public expenditure. Public expenditure is used for

development of infrastructure, expansion of investment opportunities and subsidies

on production of specific items contributes to the development and growth of the

economy.

4. Price stability: Fiscal policies are helpful in maintaining stable prices. When the

economy is deflating the budget should be prepared in a way to increase in

government expenditure creating more income for the people. When the economy is

undergoing inflation the government has to reduce its expenditure and control the

spending capacity of people through taxes.

5. Expansion of employment: Full employment is very important as economic

development would be incomplete without it. Fiscal policy expands employment

opportunities in the economy.

Instruments of fiscal policy: Fiscal policy endeavors to achieve its objectives through

the use of three instruments in its group – taxation, public expenditure and public debt

management.


9. Discuss the objectives of fiscal policy.

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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Taxation: One of the important sources of revenue for the government is taxation. The

tax structure should fetch the government maximum revenue and at the same time avoid

adverse effects on the investment of private sector. There are two types of taxes – direct

and indirect taxes.

Direct taxes: These are levied directly on an individuals income or wealth. Major direct

taxes are personal income tax and corporation tax. Payments of direct taxes is

compulsory. Direct taxes are mainly collected by the central government. Examples of

direct taxes are income tax, corporation tax, capital gains tax, wealth tax and a capital

transfer tax.

Indirect taxes: Indirect taxes are levied on consumer’s expenditure or outlay. Major

indirect taxes are excise duties and custom duties. In indirect tax the impact will be on

manufacturer and the impact is on the ultimate consumer. Indirect taxes are collected by

both the central and state governments. Examples of indirect taxes are custom duties,

motor vehicle tax, excise duty and sales tax.

Public Expenditure: Expenditure by government would be mainly on defence, police

and public administration even including expenditure on roads, parks, etc. Other

expenditure may include on relief works, subsidies of various kinds. Public expenditure

transfers income from the government to the general public while taxation works vice

versa.

Public debt management: Government borrowing and public debt affect the volume of

liquid assets with the public. Public borrowing is an effective anti-inflationary measure

for clearing up excess liquidity in public. It is better than taxation on a positive note as it

supports saving and investment.

Deficit financing: It is the name of those forced savings which are the result of increase

in prices during the period of government investment. Deficit financing is a kind of

forced savings. The deficit financing in India indicates loan taking by the government

from the RBI in the form of issuing fresh dose of currency.

Problems of fiscal policy:

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Instability: the fiscal policy has failed to attain stability in various fronts. The growing

volume of deficit financing has created the problem of inflationary rise in the price level

which give rise to instability.

Inflation: The fiscal policy of the nation has failed to contain the inflationary rise in price

level. The increasing volume of public expenditure on non-developmental heads and

deficit financing has resulted in demand pull inflation. And also the direct taxes has failed

to check the growth of black money, which is again aggravating the inflationary spiral in

the level of prices.

Defective tax structure: The fiscal policy has also failed to provide a suitable tax

structure for the country. The tax structure has failed to raise the productivity of direct

taxes and the nation has been relying much on indirect taxes. Therefore the tax structure

has become burdensome to the poor.

Negative return of the public sector: The negative return in the public sector units has

become a serious problem for the government. The returns on investment has remained

mostly negative. In order to maintain those PSUs the government has to keep huge


10. Write about any one instrument of fiscal policy

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

11. Point out any three differences between direct taxes and indirect taxes

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

12. Discuss any two limitations of fiscal policy.

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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amount of budgetary provisions, creating a drainage of scarce resources of the nation.

Growing inequality: The fiscal policy of the nation has failed to contain the growing

inequality in the distribution of income and wealth throughout the country. The growing

trend of tax evasion has made the tax machinery ineffective for the purpose.

7.6 Summary

Stabilisation is a necessary complement of crucial reform that is driven by crisis in the economy.

Economic policies can be classified into two main divisions which are Structural policies which

relate to the aggregate supply system on the economy like industrial policy (privatization,

liberalization, and globalization), foreign trade policy and foreign investment policy and

Stabilization policies which relate to the demand system of the economy which include monetary

policy and fiscal policy.

Economist’s opinion vary with regard to the comparative effectiveness of diverse stabilizing

policies. The classists favor the monetary policy over the fiscal policy, as they believe that the

demand for money and the other behavioral functions are fairly stable. Both the economists from

these schools believe that for policies to be effective, they have to be dependable.

Monetary and fiscal policies are two strategic economic mechanisms used by governments or

national banks as an intrinsic element of a nation’s overall economic planning. Monetary policy

is the process by which the monetary authority of a nation controls the supply of money. To

promote economic growth, stability and inflation it is important to control the interest rate. Fiscal

Policy is changes in government spending or taxes designed to achieve macroeconomic goals.

7.7 Glossary

Rule based policy: This is also called as nonactivist monetary policy. It is a policy based on a

predetermined steady growth rate in the money supply

Discretionary policy: This is also called as activist monetary policy. This policy leads to actions

in the case of the occurrence of a certain situation.

CRR and SLR: A percent of the money kept with the RBI to have liquidity and credit control is

called as Cash Reserve Ratio (CRR) and Statutory liquidity ratio (SLR).

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VRR: CRR and SLR together are termed as Variation in reserve ratio (VRR)

Economic development: it is defined as a process of economic transition involving the structural

transformation of an economy through industrialization and rising GNP and per capita income.

External debt: This is the amount borrowed by the government from foreign bodies.

National debt: National debt refers to the amount borrowed by government to meet expenditures

that arise out of the deficit in the budget.

7.8 Answers to Check your Progress

Model answers to check your progress questions

1. Structural policies are foreign trade policy and foreign investment policy.

2. Stabilization policies are monetary policy and fiscal policy.

3. Feasible objectives of monetary policy to regulate money supply are

Price stability: Inflation and deflation are hindrances to growth of economy and so it is

important to control big fluctuations in the overall prices.

Exchange rate stability: Instability in exchange rate affects international trade which can

lead to financial crisis.

4. Answer: a

5. Answer: c

6. Answer: b

7. Answer: b

8. Answer: d

9. Objectives of fiscal policy:

Mobilization of resources

Reduction of disparities of income

Economic development and growth

Price stability

Expansion of employment

10. As the answer write about any one out of these three- taxation, public expenditure and

public debt management.

11. Difference between direct tax and indirect tax

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Direct taxes Indirect taxes

Levied directly on income Levied on consumer expenditure

Personal income tax and corporation tax Excise duties and custom duties

Payment is compulsory Payment is not so compulsory

12. Limitations of fiscal policy:

Instability

Inflation

Defective tax structure

Negative return of the public sector


John B Taylor, Economics second edition, Delhi A.I.T.B.S publishers, 1999

D.N. Dwivedi., 2004. Macroeconomics Theory and Policy. Tata McGraw-Hill.

Paul .H (2003) , The economic way of thinking, 10th ed, Pearson education.


1. What do you mean by monetary policy? Discuss its objectives and its instruments.

2. What is the role of fiscal policy in economic growth?

3. Discuss the tools/instruments of fiscal policy.

4. What are the problems of monetary policy?

5. What are the different types of economic policies for a nation?

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1

LESSON 8

LEGAL ENVIRONMENT

Structure

8.1 Objectives

8.2 Introduction

8.3 Structure of Legal Environment

8.3.1 Domestic Legal Environment

8.3.2 Foreign Legal Environment

8.3.3 Global Legal Environment

8.4 Objective of Analyzing Legal Environment

8.5 Changing Dimensions of Legal Environment in India

8.6 Summary

8.7 Glossary


8.9 References


8.1 Objectives

After reading this lesson, you will be able to

Define legal environment

Analyse structure of legal environment

Explain various company regulatory legislations in India

8.2 Introduction

Regulation refers to controlling human or societal behavior by rules or regulations or

alternatively a rule or order issued by an executive authority or regulatory agency of a

government and having the force of law. Regulation covers all activities of private or public

behavior that may be detrimental to societal or governmental interest but its scope varies across

countries. The rules laid down by regulation are supported by penalties or incentives designed to

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2

ensure compliance. India being a democratic country, the main objective is to reduce the

concentration of the wealth in few hands. For this purpose government has enacted special

legislation within which a business should operate. It is binding for the business houses to

understand the legal environment and work accordingly. Legal environment refers to the rules

and regulations framed by the government within which the business is to run. The government

makes law for the smooth functioning of the business and to safeguard the interest of consumers

and workers. These legislations affect the business from starting to the winding up of business.

The government of a nation exercises considerable influence upon the business and Industry by

enacting various legislations. In this process of exercising control over business and industry, the

judiciary plays an important role. Some of the issues which the government fails to implement on

political fronts are implemented through judiciary.

The management of all the economic activities of a business in accordance with legal

guidelines has become a complex task requiring professional services supported by a

professional team work. It has become significant to save the business firm from all kinds of

potential threats that can be posed by legislature to the business in a country. Resolving a trade

disputes legally is a toughest task that consumes huge amount of money, time and productive

energy of the business firm. Thus, it has become essential for a business house to understand the

legal environment of business and its implication on the business. The lack of awareness about

any law is not an excuse for any kind of offence.

8.3 Structure Of Legal Environment

The different components of Legal Environment, from an economic unit’s point of view can be

described as domestic legal, foreign Legal Environment and the global Legal Environment.

8.3.1 Domestic/National Legal Environment

The domestic/national legal environment refers to the legal environment of the home Country. In

other words, the term domestic legal environment refers to the legal framework of the home

country or it is the governance of those laws that govern the domestic business affairs of a

country. These lows interact with business from the pre-formation stage to the end results or till

the closure of business. The Domestic lows usually exhibit the local culture, traditions, religion

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3

and other internal requirement of a particular country. Different countries of the World can have

different kinds of domestic low. Even within a country the same low can have different

implications for different people. For example, on a particular kind of domestic issue, India and

Pakistan can have different laws (e.g. uniform civil code issue, wearing helmet has different

implication for Sikh women and a non Sikh women etc). It is Imperative that a global marketer

must have knowledge and understanding of domestic laws of the different countries. The

domestic lows usually imports restrictions on various kinds of imports and exports. Domestic

lows usually prohibit the imports and exports of products like narcotics, dangerous drugs,

endangered species, alcoholic products, toxic substances, written document, cds, video albums,

and other item associated with the country’s security aspects etc. some of the important

components of domestic legal environment in India are stated as follows:

• The Companies Act, 1956.

• The Consumer Protection Act, 1986.

• The Indian Patents Act, 1970.

• The MRTP Act.

• The FERA.

• The IDRA.

• The Copyright Act.

• The Designs Act.

• The Payment of Wages Act.

• The Sales of Goods Act,1930.

• The Provident Fund Act.

• The Negotiable Instruments Act, 1881.

• The Direct Tax Laws.

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• The Indirect Tax Laws.

• Insurance Legislations:

• The Insurance Act, 1938.

• The Insurance Corporation Act, 1956.

• The General Insurance Business Act, 1972.

• The Insurance Regulatory Authority.

• Public Liability Insurance Act, 1991.

• Motor Vehicle Act, 1939.

• Laws concerning various forms of business organizations such as:

• Sole -proprietorship.

• Hindu Undivided Family.

• Partnership firm.

• Joint stock company.

• The Carriage of Goods by Sea Act, 1917.

• Marine Insurance Act, 1963.

• The Merchant Shipping Act, 1958.

• The Bill of Landing Act, 1855.

• The Indian Ports Act, 1963.

• The Indian railway act 1890.

• The Carries Act, 1865.

• The Indian Post Office Act, 1898.

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• The Carriage by Air Act, 1972.

• The Workmen’s Compensation Act, 1923.

• Employees State Insurance Act, 1948.

• The Indian Stamp Act, 1899.

• Arbitration and Conciliation Act, 1996.

• The Capital Issue Control Act.

• The Competition Act.

• Securities and Exchange Board of India Act, 1992.

• Industrial Disputes Act, 1947.

• The Factory Act, 1948.

• Indian Contract Act, 1872.

• The Indian Partnership Act.

Check your progress 1

1. Regulations cover only private company’s behavior pattern. (True/ False)

2. Legal environment refers to only domestic legal environment. (True/ False)

3. Business establishments work autonomously and do not need any legal procedures to

govern them. (True/ False)

8.3.1.1 Important business legislations of India: A brief account of some of the important

business legislations that are important in the domestic legal environment of India are given as

follows:

1. The Companies Act, 1956: The Companies Act, 1956 contain all provisions from the

formation of a joint stock company to its closure. The Act provides formation classification,

registration, raising of finance, meetings and resolutions and voting rights of shareholders, etc.

The Company Law is the main law effecting organization, management and administration of

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business. The Companies Act contains all the provisions from formation of the company till its

closure. This Act provides the formation, classification, registration and raising of funds, etc. Its

main objectives are full and fair disclosure of all the information related to the company and it

ensures active participation by shareholders and at the same time protection of their interests,

This Act reserves the power of intervention and investigation into the affairs of the companies. It

ensures the enforcement of proper duties by the company management. So the common objective

of this Act is to regulate all private investment for the welfare of society and to protect the

interest of the investors.

2. The Consumer Protection Act: An important breakthrough in the drive of promoting

consumerism is the formation of Consumer Protection Act 1986 by the government of India .

The Consumer Protection Act (CPA) is the Act no 68 of the year 1986. The formation of this Act

provides a legal backing of the philosophy of consumerism and provides a mechanism to get the

consumer rights implemented. The consumer protection Act came into force on 15th of April

1986 (it is Act No. 68 dated 24th of Dec 1986.) The consumer protection Act extends to whole of

India except the state of Jammu and Kashmir which is governed by the provision of section 306

of the constitution. Under the given jurisdiction, the act is applicable on all kinds of goods and

services which are subject matter of consumer affair. The provision of this Act shall be, in

addition to and not in addition to and not in derogation of the provision of any order law for the

time being in force.

The Act is formed with sole objective of protection of consumer against any kind of

exploitation while consuming any goods and services. The various objectives covered under the

broad philosophy of consumer Protection Act are stated as follows:

• To define consumer rights.

• To ensure the enforcement of consumer rights.

• To ensure the health and safety of consumer.

• To create a healthy competition in the market.

• To control black marketing.

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• To control unfair and restricted trade practices.

• To ensure the consumer disputes and heard.

• To ensure the effective redressal of consumer disputes.

• To create healthy trade practices in the country.

• To build confidence of international business community.

• To serve the UNO guidelines with regard to consumerism.

3. The Indian Patents Act: Intellectual property protection, especially through patents, his

tremendous potential in promoting inventions and innovations. Patents which are an integral part

of innovation research and development activities promote trade in technology, transfer of

technology and technological collaborations as they provide exclusive rights often leading to

commercial gains to the inventors. A patent is a document granted by a government patent office

which describes an invention and claims exclusive rights in the subject matter of that invention.

In other words, it can be described as an official document that confers ownership of an

invention to be patentee. Thus, by gaining the patent the state makes both the details of the

invention and the legal rights associated with its matters of public record. The effect of granting

a patent is to grant an exclusive right to the patentee that is authorised to produce, put on the

market and offer for sale or use the subject matter of the invention commercially. The grant of

patent and invention in India is governed by Patent Act 1970. A patent granted under the Act

confers upon the patentee where the patent for an article or a substance , the exclusive rights by

himself, his agent or licensees to use or exercise the method or process in India. The Act was

enacted with following main objectives:

• To promote innovations or further growth and development of the country.

• To encourage research and development for claiming international competitiveness.

• To ensure reward for investment on making an invention either financially or otherwise.

• To protect the right of intellectual property holder just like the holders of other movable

and immovable properties.

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• To promote economic growth and development of the country by following directions of

international and non state bodies such as WTO and IMF etc.

• To promote technological and scientific advancement in the country for benefit of

consumer and industry.

• To promote healthy competitiveness in the economy by protecting the rights of the

competitors.

• To protect the economic rights of disclosed information having commercial value.

• To make way to be a world leader.

• To encourage economic and technological development by rewarding intellectual

creativity.

The advantages of taking out a patent are very specific and technically the owner of a patent

can be excluded all other in the territory covered by the patent from making, using, selling or

importing the invention.

4. The Monopolies and Restrictive Trade Practices Act: The MRTP Act was implemented in

1969. Its main aim was to protect the concentration of economic power in the form of capital,

income and employment in the few hands. Apart from consumer Protection act, the MRTP Act is

one of the important, out of the twenty five legislations enacted by the government of India to

protect the interest of consumers. The Act aims at preventing concentration of economic power,

controlling of monopolies and prohibiting monopolistic and restrictive trade practices.

The MRTP Act 1969 which came into force w.e.f., 1 June, 1970 seeks to achieve the following

objectives

• Prevention of concentration of economic power to the common detriment.

• Control of monopolistic practices

• Prohibition of monopolistic trade practices

• Prohibition of restrictive trade practices.

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Check your progress 2:

1. MRTP Act meant only for preventing monopolies. (True/ False)

2. Globalization has no effect on prevailing legal environment. (True/ False)

5) The Foreign Exchange Regulation (FERA) Act: The Foreign Exchange Regulation Act was

enacted on September 19, 1973 and came into force on January 1, 1974 .The Act applies to

whole of India including the state of Jammu and Kashmir. The provision of the Act is applicable

to all the citizens of India, all person of Indian origin and all companies or body corporate

registered in India.

“It is regulatory framework in the economic and financial sector of India to provide

regulation and controllability to certain payments dealing in foreign exchange and the

conversion of currency”. The Act was enacted with following objectives:

• Regulation of payment.

• Regulate dealings concerned with foreign exchange and securities.

• Regulate indirect foreign exchange transaction.

• Regulation of import and export of currency.

• Conservation of foreign exchange resources.

• To regulate property rights.

• To regulate joint venture.

• Regulating the appointment of foreign nationals.

• To regulate foreign Investments.

• To regulate the foreign companies.

• To regulate the holding and maintaining of immovable property in India by non

residents.

So the main objective was to prevent the outflow of Indian currency and to maintain check on

inflow of foreign exchange.

• The Industrial Development and regulations Act: The Industrial development and regulation

Act is an Act counted as Act No .65 and was passed by the Parliament of India on October

1951. This Act came into force on 8th of May 1952. The provisions of the Act extend to

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whole of India including the state of Jammu and Kashmir. The main objectives of the Act

were to increase the control of government over the industry through an instrument called

the license in other word it is also popular by the name of “Licensing System” or “Licensing

Raj”. The Act was formed with the following objectives :

• To regulate the composition and direction of industrial development.

• To ensure balanced economic growth and development.

• Prevention of monopoly and concentration of economic power.

• To ensure the protection of small scale industrial units from competition of big industrial

houses.

• To ensure the industrial growth, development and production according to the plan

priorities.

• To exercise control over the industries in the country.

• To implement the industrial policy of the country.

The main objective of this Act was to increase the control of the government over the industries

through industrial licensing.

6) Foreign Exchange Management (FEMA) Act, 1999: FEMA Bill was introduced in August

1998 and adopted in 1999. Its main objectives are to amend the restrictive law relating to foreign

exchange and to manage current account and capital account transaction. This Act facilitates

external trade to ensure free flow of capital.

On June 1, 2000, the Foreign Exchange Management Act, 1999 (FEMA) was brought in force to

replace the then existing Foreign Exchange Regulation Act, 1973 (FERA). FEMA has been

enacted with an objective of facilitating external trade and payments and for promoting the

orderly development and maintenance of foreign exchange market tin India. As such it is quite

opposed to FERA which was enacted to regulate or control the foreign exchange. FEMA

provided a de jure status to the shift in policies with regard to the external sector reforms that

began in 1990-91.

Structure of FEMA The present framework of exchange controls in India, consist of basic

legislation (FEMA, 1999) and Notifications, Rules and Circulars [known as Authorized Persons

Directions – AP (Dir Series)] issued by RBI.

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FEMA applies to the whole of India and all branches, offices and agencies outside India which

are owned or controlled by a person resident in India. It also applies to any contraventions

committed outside India by any person to whom FEMA applies. There are 49 sections under

FEMA, of which 9 sections (section 1 to 9) are substantive and the rest are procedural /

administrative provisions as tabulated below:

Section 1 Application and Commencement of FEMA

Section 2 Definitions

Section 3 to 9 Provisions relating to Regulations and Management of Foreign Exchange

Section 10 to 12 Provisions relating to Authorized Person

Section 13 to 15 Provisions relating to Contraventions and Penalties

Section 16 to 38 Provisions relating to Adjudication, Appeal and Directorate of

Enforcement

Section 39 to 49 Miscellaneous Provisions

Section 46 of FEMA grants power to the Central Government to make rules to carry out

the provisions of FEMA and

Section 47 of FEMA grants power to the Reserve Bank of India (RBI) to make

regulations to implement provisions and the rules made under FEMA.

Thus RBI is entrusted with the administration and implementation of FEMA.

Current Account and Capital Account Transaction: In August 1994 India accepted Article VIII

of the Articles of agreement of the International Monetary Fund and became fully convertible on

the current account. Since India is fully convertible on the current account, all current account

transactions (barring a small list of restricted items) are allowed through the normal banking

channels. In case of capital account transactions, only the transactions which are explicitly

enabled under the guidelines are allowed, remaining require specific approvals under FEMA.

Therefore, it is very important to understand the concept of Capital and Current Account

Transactions to Comprehend FEMA.

Capital Account Transaction: “Capital Account transaction” is defined under section

2(e) of FEMA as ‘a transaction which alters the assets or liabilities, including contingent

liabilities, outside India of persons resident in India or assets or liabilities in India of

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persons resident outside India, and includes transactions referred to in sub-section (3) of

section 6.’ Thus any transaction as a result of which the assets or liabilities outside India

of a person who is resident in India and assets or liabilities in India of a person who is

resident outside India are altered i.e. either increased or decreased, is a capital account

transaction.

Current Account Transaction: “Current account transaction” is defined under section

2(j) of FEMA to mean ‘a transaction other than a capital account transaction and without

prejudice to the generality of the foregoing such transaction includes,- (i) payments due

in connection with foreign trade, other current business, services and shortterm banking

and credit facilities in the ordinary course of business, (ii) payments due as interest on

loans and as net income from investments, (iii) remittances for living expenses of parent,

spouse and children residing abroad, and (iv) expenses in connection with foreign travel,

education and medical care of parents, spouse and children.’ All Current Account

transactions are generally permitted unless specifically prohibited whereas all Capital

Account transactions are generally prohibited unless specifically permitted. Current

Account transactions are divided into 3 schedules in Current Account Transaction rules:

Schedule I – Prohibited Transactions

Schedule II – Transactions requiring prior approval of Government of India

Schedule III – Transactions requiring prior approval of RBI

7) The EXIM Policy (2004-2009):

The main objective of this policy is to use foreign trade as an instrument for economic growth.

Its main objectives are to-

(a) Double the percentage share of world trade in the coming five years, i.e. from 2003-04 to

2008-09.

(b) Eliminate control and to create an atmosphere of trust in foreign trade sector.

(c) Simplify the procedure, forms and documents of foreign trade.

(d) Provisions to facilitate agriculture sector by importing of capital goods duty free and to

import seeds and planting material in a liberalized way to increase agricultural

productivity. This policy also facilitates export of medicinal and herbal plants.

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(e) Duty free import of machinery, consumable metals, metal scrap used in jewellary.

(f) Facilities for handloom and handicraft industry and setting up Handicraft Export

Promotion Council.

8) The Competition Act, 2002:

After the introduction of globalization and liberalization in India, Indian industry started

facing the competition from within and outside world. In the newly emerging conditions

MRTP Act has become outdated in certain aspects, so in1999 government appointed a

Committee on Competition Policy and Law. This Committee submitted its report in 2000 and

on the basis of this report the Competition Act, 2002 was passed. The main objectives of this

Act are to:

(a) Prevent practices having adverse effect on competition and to promote competition in the

market.

(b) Protect the interest of the consumers.

(c) Ensure freedom of trade in the Indian Market.

9) The Companies Act, 2013:

Objective behind the 2013 Act is lesser government approvals and enhanced self regulations

coupled with emphasis on corporate democracy. This Act delinks the procedural aspects

from the substantive law and provides greater flexibility in rule making to enable adaptation

to the changing economic and technical environment. This Act empowers the central

government to regulate the formation, financing, functioning and winding up of companies.

8.3.2 FOREIGN LEGAL ENVIRONMENT

The relevance of foreign law arises only when a business unit indulges in foreign trade. The

product or service if traded within the geographical boundaries of a country is the subjected to

domestic law only but once the product or service crosses the national boundaries of a country it

becomes the subject of entirely different law . Thus the international business environment

comprises of various legislations, rules prevailing in different countries of the world concerning

various domains of international business.

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While making the business transactions with foreign nations or with resident of foreign nations

the business houses has to comply with the requirements of law of land or of the foreign laws.

For example, the patenting of an invention is governed by the process patent under the Indian

patient Act while in many other countries including Pakistan it is governed by product patient

regime. For an international marketer, the knowledge of the foreign law is equally important as

the knowledge of the domestic law. The foreign law refers to the law of the host country. Most of

the relevant laws in the international trade are import and exports centred laws. In addition to

domestic legislations of the host country the foreign business environment also includes the

following regulations that the business has to obey:

• International Trade tariffs.

• Anti dumping laws.

• Export import licensing requirements.

• Regulations regarding Foreign Direct Investments.

• Repatriations of earnings.

• Transfer pricing.

• Taxation laws etc.

8.3.3 GLOBAL ENVIRONMENT

Just like domestic laws of various countries there is not a single body recognized by all countries

of the world that is empowered to make an international law for the world as a whole. An

international law, rules or legal principles that are based on custom, treaties, legislation that

control or affect the rights and duties of nation in relation to each other. Thus, international legal

environment is a combination of various legislation, legal systems and laws of various nations

put together that affects the whole worlds. For Example, in the airline industry international air

routes are governed by treaties and agreements made between the various countries of world.

An “International law” can be defined as rules and principle that states and nations

consider binding upon themselves. This raises two interesting characteristics of international law.

(i) The first is that “law” belongs to individual nations and international law only exists to the

degree that individual nations are willing to relinquish their rights. (ii) The second is the lack of

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an adequate international judicial and administrative framework or a body of law which would

form the basis of a truly comprehensive international legal system.

There is not a single international law that is prescribed and acceptable to all the member

countries of world while making the business transactions though some of the international

bodies such as WTO, IMF and World Bank are making efforts to have a uniform business law

for international trade.

The existing international legal framework is somewhat confused. Most control or

regulations revolve around export and import controls, transfer pricing taxes, regulation of

corrupt practices, embargoed nations, antitrust expropriation legal environment is the

International Court of Justice, situated in Hague at Holland. Here a number of International

disputes may be taken for ultimate adjudication some of the laws of global importance are listed

as follow:

• FCN (Friendship, Commerce and Navigation) and Tax Treaties primarily US based

and concerned with giving protection of trading rights avoiding double taxation.

• UNCITRAL (UN) International Trade Law Commission set up with the intent to

provide a uniform commercial code for the whole world, particularly international

sales and payments.

• ISO (international Standard Organization) it work with ILO, WHO etc. and contains

technical committees working on uniform quality standard for the whole world.

• Convention for the protection of Industrial property signed in 1983.

• Air transport in covered mainly by IATA ( International Air Transport Authority)

ICCA(International Civil Aviation Authority) and ITU (International

Telecommunication Company)

• Recourse arbitration is an attempt to reduce disputes by consultation some of the most

widely used is the international chamber of commerce, the American Arbitration

Association, the London Court of Arbitration and the Liverpool cotton Exchange.

• International patent provision of WTO

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• The International investment measures of WTO

• Dispute settlement mechanism of WTO

The global domain of legal environment is a complex whole comprising large number

of legislative provision, designed by keeping in view the traditions, economic

conditions and cultures in various countries of the world.

8.4 Objective of Analyzing The Legal Environment

The various objectives of studying the legal environment of a business are discussed as follows:

• To define the duties, rights and liberties to the business.

• To prevent from indulging in unauthorized activities.

• To maintain law and order while conducting business.

• To work as directive to the other business activities.

• To prevent business from exercising monopolistic and restrictive trade practices.

• To protect the interest of consumers.

• To protect the interest of general public and the nation at large.

• To create healthy competition.

• To ensure uniform growth and development of the nation.

• To prevent black marketing.

• To ensure the fair collection of all direct and indirect taxes.

• To ensure growth and promotion of trade both domestic and foreign.

• To protect the interest of investor.

Although there are many social objective of legal environment but the critics are of the

view that the legal environment of a country or at the international level is full of problems,

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confusions and discrepancies. For example, There is a difference between what is stated in the

Law and what is implemented, secondly, the laws are subject to confusion where the law has the

jurisdiction of both the state government and center government and sometimes both centre and

state have different view point on a particular law. Further sometimes centre confirms the law

but state do not implement it because of political reasons. The expert people take advantage of

the loopholes in the law and the true intention behind the law is killed. Too much legal

formalities are becoming a hurdle in the growth and development of trade and business.


1. International laws do not impose any binding upon States and nations. (True/ False)

8.5 Changing Dimensions of Legal Environment In India:

There is no second opinion on the issue that there are winds of change in various aspects of legal

environment in India. These winds of change have brought a major shift in Indian economy,

from a public sector dominating mixed economic system to a capitalistic economic system. At

the time of independence in 1947, India was under the influence of the then USSR. Russia was

having socialist pattern of economic system. As a technical guide of economic affairs of India,

Russia had recommended the socialist pattern of economic system for India also. On the advice

of the USSR, the then Indian leaders also prefer to adopt socialist system of economic system for

India. But because of strong opposition from within the country they could not get success in

socialist pattern of economic system for India. Consequently, India adopted a mixed type of

economic system. The model of mixed economy was designed in such a way to reflect the

socialist philosophy, almost all the major industries were reserved for public sector and few

industries left for operation of private sector. The private sector was further controlled by strict

provisions of legislations like Industrial Development and Regulation Act(IRDA), Monopoly

and Restrictive Trade Practices Act (MRTP), Foreign Exchange Regulations Act (FERA), etc.

All these legislations depicted the socialist philosophy of strict government over industry.

After more than 50 years of independence the economic indicators of the country such as per

capita income, poverty, unemployment, population were not reflecting satisfactory results. Then

in 1991 government of India announced the liberalization and globalization of India economy,

when the country encountered with an even worst international financial crisis. This may be

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called the changing dimensions of legal environment in India. The various elements of changing

dimensions of legal environment in India are discussed as follows:

Abolition of Strict Provision of MRTP Act: Since its inception in 1936, the MRTP act has

remained a major hurdle in free industrial growth and development of India. The act was enacted

mainly to exercise strict control over concentration of economic power and wealth to protect the

customers from any kind of exploitation. It has acted as a force to restrict the size of industrial

houses within the given limits of the act. The critics of this act argue that, for the past about 50

years the strict provisions of the act did not allow industrial houses to grow freely. Now after

liberalization and globalization of Indian economy, we want these industrial houses to compete

with MNC’s but that seems impossible. Consequently the government realized the justified

criticism of the MRTP Act and as a result they had abolished the strict provisions of MRTP Act

regarding check on growth and development of industrial houses.

Replacing FERA by FEMA: Another strict legislation of the closed regime of Indian economy

was the Foreign Exchange Regulation Act. This Act contained such strict provisions regarding

dealing with foreign exchange that any person with rational commonsense will never go for an

international business transaction involving foreign exchanges. Consequently government of

India announced the replacement of FERA with a softer law FEMA during the budget for the

year 1997-98.

Abolition of IRDA: Another major hurdle in the growth of economic development during

previous regime of India was the strict provisions of Industrial Development and Regulations

Act, 1951. This was also known by the name of licensing. The Act was formed with the main

objective of directing industrial development according to plan priorities. The act directed the

business houses to get licenses at every stage. Such as while starting a new business, while

expanding the size of the business, while producing a new article or while making any other

diversification. After many years of governance through the Act the government realized that the

act failed to achieve the objectives. Further, the Act increased corruption red- tapism,

interference of bureaucracy. Now as member of WTO, India cannot impose any conditions on

foreign investments which are inconsistent to the TRIMS agreement of WTO. Ultimately, the

government had to abolish the restrictive provisions of the Act leading to de-licensing.

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Formation of Consumer Protection Act: One of the great legislations enacted to protect the

interest of consumers is the formation of the Consumer Protection Act, 1986. Although the Act

was enacted even before the liberalization and globalization of Indian economy, but it took roots

during eighties. The credit of formation of this act also goes to United Nations guidelines

regarding consumerism. Thus, by keeping in mind possible consumer exploitation during

capitalistic regime the Consumer Protection Act was enacted.


1. FERA and FEMA are almost the same thing. (True/ False)

2. In the changing scenario of liberalization and globalization, legal environment is

completely intact. (True/ False)

Formation of Environment Act: Most of the Indian goods are not accepted in the European

countries mainly because of environmental factors .Thus, in order to give the taste of

environmental restriction in trade and commerce the government of India has enacted the

Environment Protection Act of India. The provision of the Act emphasizes that after the

liberalization and globalization the business can survive in long run only if

The business houses product of international quality and also comply with Environmental

guidelines.

Formation of the competition act: In order to create healthy competition in the economy the

competition act of India was enacted by keeping in mind the threats of International competition

to the domestic industry. The earlier legislation to deal with problems of competition was given

under the MRTP act. After announcement of Liberalization and globalization of India economy,

a completely new legislation was needed to deal with problems of unhealthy competition.

Consequently, the government of India enacted the competition act of India.

Formation of the Patents Act: The MNCs are not launching their innovative products in India

because of the prevailing threats of piracy. The Indian Patents Act recognizes only the process

patent while the TRIPS agreement of WTO recognizes only the product patent. The variation in

the nature of patenting had been the cause of tension in international economic relation. Thus

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being the member of WTO, India has amended the Indian Patent Act subject to the provision of

TRIPS Agreement of WTO.

Replacement of Companies Act, 1956 with a new bill legislation: The Companies Act is a major

legislation regarding the governance of corporate house of India. The act provides for the

formation, registration, capital contribution, and ways of functionality and exit of joint stock

companies, the Companies Act, 1956 contains large number of provisions regarding governance

of corporate houses that are not suitable for corporate governance in the newly emerged

international economic order. Consequently, the government of India has amended the

Companies Act, 1956 with a new legislation.

Formation of new copyright and related rights act: WTO has recognized seven kinds of

property rights such as copy rights and related rights, trade mark, patent, industrial designs,

geographical indications, layout designs, and undisclosed information. Thus , on the lines of

requirements of the TRIPS agreement of WTO the government of India has amended all the

related legislations.

Formation of SEBI: The Securities and Exchange Board of India was constituted in 1988 and

later it was made a statutory body by the enactment of Securities and Exchange Board of India

Act, 1992. After 1992, so many amendments have also been made in the SEBI act. After

liberlization and globalization, the government has diluted many norms regarding foreign direct

investment in India, investment by foreign institutional investors (FII) in India, investment by

Indian companies abroad, and portfolio investment by foreigners in India. Thus, this act was

amended to meet the requirements of newly emerged international economic order.

Formation of anti-dumping laws: Many countries of the world are working on the long term

strategy of dumping of goods in other country to achieve mainly two objectives; First, to sell

their product and second, to deteriorate the domestic industry of the host country . Thus, in order

to protect the domestic industry from the foreign in healthy competition on the government has

also enacted anti-dumping legislative provision.

Formation of Liability Insurance Act, 1991: The Public Liability Insurance Act, 1991 imposes a

no-fault liability on the person who owns or has control over handling of hazardous substance

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specified in the act. It has provided relief, where death or injury to any person or damage to any

property has resulted from an accident.

Formation of Arbitration and Conciliation Act, 1996: The arbitration and conciliation act 1996

is repealed by the same act of the year 1940. An arbitration condition is incorporated in a

majority of non-marine general insurance policies. The main objectives of new act are to

comprehensively cover international and commercial arbitration and conciliation.

Amending the Capital Issue Control Act: The Capital Issue Control Act was also amended to

tackle the new challengers emerged due to investment of global capital in India.

In addition to above giving changing dimension of Indian legal environment there are so

many other legislation which have been also repealed or amended or enacted on account of

changing needs of Indian economy.

8.6 Summary

Trade and business are more global today than earlier, regimes earlier expanded to encompass

global trade, today it is the large appropriate foot printed nimble innovative companies which

rule the most. In India, the framework for governance of business environment flow from

legislative enactments under the federal structure under whose domain it entails. India is a

constitutional republic with a partly federal system of governance. The Union and the States,

both legislate on the subjects as laid down in the Indian Constitution. This legal framework

created through Indian Constitution play a very important role in the countries over all progress

and economic development. With the changing circumstances and environment, these

enactments are amended from time to time. India, being a democratic country have the main

objective to reduce the concentration of wealth in the few hands and to prevent these things

government has enacted special legislations within which the business should operate and

government makes laws for the smooth functioning of the business and to safeguard the interest

of consumers and workers.

8.7 Glossary

EXIM: Export Import

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IDRA: The Industrial Development & Regulation Act

FEMA: Foreign Exchange Management Act

FERA: Foreign Exchange Regulation Act

MRTP: Monopolistic and Restrictive Trade Practices

MNC: Multinational Corporations.

SEBI: The Security and Exchange Board of India

8.8 Answers to check your progress: All statements of Check your progress 1,2,3 and 4are

false.

8.9 References:

J.M. Bryson (1995): Strategic Planning for Public and Nonprofit Organizations. A Guide to

strengthening and Sustaining Organizational Achievements, Josey Bass, San Francisco.

G. Jhonson and K. Scholes (1999): Expoloring Corporate Strategy Text and Cases, Prentice Hall,

London.


1. Why the formation of Environment Act is important in India?

2. Write short notes on Patents Act, SEBI, Anti- dumping Laws, Liability Insurance Act and

Arbitration on the Conciliation Act.

3. Briefly explain how the legal environment is important for a business unit.

4. Explain the various dimension of Legal environment in India.

5. Write a note on changing dimensions of legal environment in India.

6. What do you mean by the concept ‘regulation’, why is it required?

7. What is meant by legal environment?

8. Describe the structure of legal environment.

9. Why different Acts are formed to protect the business establishments?

10. Elaborate the provisions under MRTP Act.

11. What was the effect of globalization and liberalization on the prevailing legal

environment?

12. What is Competition Law, when did it come into existence?

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13. What is global environment, why its analysis is so important?

14. Legal environment has gone through a change in the changing scenario of liberalization.

Comment.

15. Differentiate FERA and FEMA.

16. What are the objectives of analyzing legal environment?

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LESSON 9

CONSUMER PROTECTION ACT, 1986

Structure:

9.1 Objectives

9.2 Introduction

9.3 Objectives of the Consumer Protection Act:

9.4 The Consumer Protection Act, 1986

9.5 Definitions

9.6 Consumer Protection Councils

9.7 Procedure for meetings

9.8 Objects of the Central Council

9.9 The State Consumer Protection Councils

9.10 The District Consumer Protection Council

9.11 Consumer Disputes Redressal Agencies

9.12 District Forum

9.12.1 Composition of the District Forum

9.12.2 Jurisdiction of the District Forum

9.12.3 Manner in which complaint shall be made

9.12.4 Procedure on admission of complaint:

9.12.5 Finding of the District Forum

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9.12.6 Appeal

9.13 State Commission

9.13.1 Composition of the State Commission

9.13.2 Jurisdiction of the State Commission

9.13.3 Procedure applicable to State Commission

9.13.4 Appeal

9.13.5 Hearing of appeal

9.14 National Commission

9.14.1 Composition of the National Commission

9.14.2 Jurisdiction of the National Commission

9.14.3 Appeal

9.14.3 Limitation Period

9.14.4 Dismissal of frivolous or vexatious claim

9.14.5 Protection of action taken in good faith

9.15 Summary

9.16 Glossary


9.18 References


9.1 Objectives

After reading this lesson, you will be able to

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Define Consumer Protection and objectives of Consumer protection act

Explain consumer protection councils

Explain District forum

Explain State commission

Explain National commission

9.2 Introduction:

Initially there was nothing for the protection of the consumers and they were totally at the mercy

of businessmen. Sometime they had no alternative but to accept whatever is supplied to them

irrespective of the fact whether that corresponds to the terms of the contract or not. The position

of the consumers was more vulnerable particularly in the service sector. Vast expansion has

taken place in business and trade due to industrial revolution and the development in the

international trade and commerce. All this has made it possible that a variety of goods appearing

in the market to meet the needs of the consumers and number of services like insurance,

transport, electricity, housing, entertainment, finance and banking have been made accessible to

them. An organized sector comprising of manufacturers and traders possessing more knowledge

of markets has come into existence, thus affecting the relationship between the traders and the

consumers, making the principle of consumer freedom almost inapplicable. The publicity of

different goods and services in the media by way of advertisements affect the demand

irrespective of different types of drawbacks in them. In addition, so many firms producing close

substitutes led to the consumers to think before they can purchase although they have little time

to make a selection. For public welfare, excess of impure and below par commodities in the

market have to be checked. There are various provisions providing protection to the consumers

and providing for stringent action against impure and below par articles in the different laws like

the Code of Civil Procedure, 1908, Indian Contract Act, 1872, the Sale of Goods Act, 1930,

Indian Penal Code, 1860, Standards of Weights and Measures Act, 1976 and the Motor Vehicles

Act, 1988, there is very little achievement in the field of consumer protection. Monopolies and

Restrictive Trade Practices Act, 1969 and the Prevention of Food Adulteration Act, 1954 have

given relief to the consumers even then it is found necessary to protect the consumers from the

exploitation and protect their interests. Therefore, it became necessary to protect the consumers

and then the Consumer Protection Act came into force on 26th December, 1986 and the Act was

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further amended by the Consumer Protection (Amendment) Act no. 50 of 1993 with effect from

18th June, 1993.

9.3 Objectives of the Consumer Protection Act:

This Act has been enacted to give better protection to the interests of consumers and for

achieving the same provides for Consumer Councils and other authorities for the settling of

consumer disputes and for anything that is connected with it.

It also provides for promoting and protecting the rights of the consumers by ensuring that goods

which are hazardous to both life and property are not marketed; protection against practices

which are not fair; provide assurance and access to an authority of goods at competitive prices;

provide right to be heard and assured that their interests will be redressed at appropriate forums;

right to seek redressal against unfair trade practices and exploitation and right to consumer

education.

9.4 The Consumer Protection Act, 1986-An Introduction

This Act extends to the whole of India except the State of Jammu and Kashmir. It is applicable to

all the consumers defined under the Act since it came to effect. It shall apply to all goods and

services, except as otherwise expressly provided by the central government by notification.

9.5 Definitions

“Appropriate Laboratory”1: It means a laboratory or an organization

1. Which the Central Government has recognized;

2. Which the State Government, subject to such guidelines as may be prescribed by the

Central Government in this behalf, recognizes; or

3. Which is established by or under any other law for the time being in force and is

maintained, financed or aided by the Central Government or the State Government for

carrying out analysis or test of any goods. All this is done with a view to determine

whether such goods suffer from any defect.

Elements of Appropriate Laboratory:

1 Section 2(1)(a) of the Consumer Protection Act, 1986

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1. It should be recognized Central Government or State Government.

2. It should be maintained and financed or aided by the Central or the State Governments.

3. The purpose of such laboratory is to carry out analysis or test of any goods for

determining whether there is any defect in goods or not.

Branch Office2:

1. Any establishment which the opposite party describes as a Branch, or

2. Any establishment carrying on either the same or more or less the same activity as the

head office of the establishment carries out.

In simple words, an establishment is a branch when it carries out the same activity as being

carried in the Head Office of the establishment. It is also a branch when an opposite party

describes it so.

Complainant3

1. Consumer, or

2. Any voluntary consumer association which is registered under the Companies Act, 1956

or under any other law for the time being in force.

3. The Central Government or any State Government is making the complaint on behalf of

one or more consumers where there are numerous consumers having the same interest.

It is not necessary that the complaint is filed by the consumer himself. It may be filed by a

voluntary consumer association or by one or more consumers who have a common interest.

Complaint can also be made by the Central or any State government.

Complaint4

1. Any allegation in writing made by the complainant that

(a) Any trader has indulged in an unfair trade practice or a restrictive trade practice;

2 Section 1(1)(aa) of the Consumer Protection Act, 1986

3 Section 2(1)(b) of the Consumer Protection Act, 19864 Section 2(1)(c) of the Consumer Protection Act, 1986

Page 135 of 274

(b) The goods bought by him or agreed to be bought by him is having one or more

defects;

(c) There is any deficiency in the services hired or availed of or agreed to be hired or

availed of by him

(d) An excessive price, i.e. a price in excess of the price fixed by or under any law for

the time being in force or displayed on the goods or any package containing such

goods has been charged as provided for in the complaint by the trader with a view to

obtaining relief provided by or under this Act.

(e) Goods are being sold to the public which will be hazardous to life and safety and is in

contravention of the provisions of any law for the time being in force making it

mandatory for traders to display information in regard to the contents, manner and

effect of use of such goods.

Elements of Complaint:

A complaint must consist of any of the following elements:

1. Trader adopts restrictive trade practice or unfair trade practice.

2. Goods suffer from defects

3. There is a deficiency in the services availed of or agreed to be availed of.

4. The trader charges excess price.

5. The trader sold the goods which are hazardous to life and safety in contravention of

the provisions of law.

The complaint becomes infructutous in the absence of these elements.

Consumer5: Any person who

1. Has bought any goods for a price paid or promised or partly paid and partly promised or

under any system of deferred payment and includes any person who has used such goods

other than the person who bought such goods with the approval of such person. It,

however, does not include any such person who obtains such goods in resale or for any

commercial purpose.

5 Sec.2 (1)(d) of the Consumer Protection Act, 1986

Page 136 of 274

2. Has hired or availed of any service for a price which has been paid or promised or partly

paid and partly promised or under any system of deferred payment and includes any

person who benefits from such services other than the person who has hired or availed of

the services for a price paid or has been promised or partly paid or partly deferred or has

been partly promised or under any system of deferred payment when such services have

been made use of with the approval of the person mentioned first.

Test of Consumer:

The person who actually uses the goods or who avails of the services is a consumer under

the CPA, 1986. Thus a buyer cannot be a consumer unless he actually uses the goods

himself. The purchase of goods for the purpose of resale or any commercial purpose does

not take the buyer a consumer under the Act.

Consumer Dispute6

It is a dispute where the person against whom a complaint has been made denies or

contests the allegation made in the application.

Defect7

It means any fault, imperfection or shortcoming in the quality, quantity, potency, purity,

or standard which is required to be maintained by under any law for the time being in

force under any contract expressed or implied or as is claimed by the trader in any

manner whatsoever in relation to any goods.

Deficiency8 [Sec. 22(1)(g)]

It means any fault, imperfection, shortcoming or inadequacy in the quality, nature and

manner of performance which is required to be maintained by or under any law for the

6 Sec.2 (1)(e) of the Consumer Protection Act, 1986

7 Sec.2 (1)(f) of the Consumer Protection Act, 19868 Sec.2 (1)(g) of the Consumer Protection Act, 1986

Page 137 of 274

time being in force or has been undertaken to be performed by a person in pursuance of a

contract or otherwise in relation to any service.

In other words deficiency means the goods supplied or services rendered are inadequate

in quality, nature and manner of performance which is required according to the terms of

contract or under law for the time being in force.

District Forum9

It means a Consumer Disputes Redressal Forum established under clause Sec. 9 (a).

Goods10 has the same meaning as provided for in the Sale of Goods Act, 1930.

Manufacturer11

It means a person who makes or manufactures any goods or assembles parts thereof or

does not make or manufacture any goods but assembles parts thereof made of or

manufactured by others and claims the end product to be manufactured by himself or puts

or causes to be put his own mark on any good made or manufactured by any other

manufacturer and claims such goods to be goods made or manufactured by him.

Member12

It includes the President and a member of the National Commission or a State

Commission or a District Forum as the case may be.

National Commission13

It means the National Consumer Disputes Redressal Commission established under Sec

9(c).

9 Sec.2 (1)(h) of the Consumer Protection Act, 198610 Sec.2 (1)(i) of the Consumer Protection Act, 198611 Sec.2 (1)(j) of the Consumer Protection Act, 198612 Sec.2 (1)(jj) of the Consumer Protection Act, 1986

13 Sec.2 (1)(k) of the Consumer Protection Act, 1986

Page 138 of 274

Person14

It includes a firm whether registered or not.

Hindu undivided family.

A cooperative society.

Every other association of persons whether registered under the Societies Registration

Act, 1860 or not.

Restrictive Trade Practices15

It means a trade practice which tends to bring about manipulations of price or its

conditions of delivery or to affect flow of supplies in the market relating to goods or

services in such a manner as to impose on the consumers’ unjustified costs or restrictions.

Service16

It means service of any description which is made available to potential users and

includes, but not limited to, the provision of facilities in connection with banking,

finance, insurance, transport, processing, supply of electrical or other energy, board or

lodging or both, housing construction, entertainment, amusement or the purveying of

news or other information but does not include the rendering of any service free of charge

or under a contract of personal service.

Unfair Trade Practice17

Any trade practice which has the intention of promoting sale, use or supply of any goods

or for the provision of any service and adopts any unfair method or unfair or deceptive practice is

called an unfair practice.


14 Sec.2 (1)(m) of the Consumer Protection Act, 198615 Sec.2 (1)(nnn) of the Consumer Protection Act, 198616 Sec.2 (1)(o) of the Consumer Protection Act, 198617 Sec.2 (1)(r) of the Consumer Protection Act, 1986

Page 139 of 274

Q. 1. Consumer must file a complaint under the Consumer Protection Act personally. (True/

False)

Q.2. A complaint can be filed for redressal in case of deficiency in goods as well as service.

(True/ False)

9.6 Consumer Protection Councils

The Central Government shall establish by notification a Council known as the Central

Consumer Protection Council and it shall be established from such date as specified in the

notification. It shall consist of the Minister in charge of the consumer affairs in the Central

Government, as its Chairman, and such other official or non official members representing such

interests as may be provided for.18

9.7 Procedure for meetings

The Central Council shall meet whenever required but at least once in a year. It shall meet

whenever the Chairman deems it fit at a place decided by him and shall observe the prescribed

procedure.19

9.8 Objects of the Central Council

The Central Council shall promote and protect the rights of the consumers like;

1. Protection against goods and services which are hazardous

2. Information and protection against unfair trade practices.

3. Assurance of competitive prices

4. Hearing and assurance of receiving due consideration

5. Seeking redressal against unfair practices.

9.9 The State Consumer Protection Councils

18 Sec. 4 of the Consumer Protection Act, 198619 Sec. 5 of the Consumer Protection Act, 1986

Page 140 of 274

The State Government shall establish by notification a Council known as the Consumer

Protection Council from such date as specified in the notification. It shall be consisting of the

Minister in charge of the consumer affairs in the State Government, who shall be its Chairman,

and shall also comprise of such other official or non official members representing such interests

as may be prescribed and nominated by the Central Government. However, this number shall not

exceed ten. The Council shall meet as and when required. It shall have at least two meetings in a

year and it shall meet at such time and place as the Chairman decides. It shall observe such

procedure as provided for by the State Government.20

9.10 The District Consumer Protection Council

The State Government shall establish, by notification, a District Consumer Protection Council in

each district of the State from the date as specified in the notification. It shall consist of the

Collector of the district, who shall be its Chairman and such number of other official and non

official members as provided for by the State Government. It shall meet as and when necessary

but at least twice in a year at such time and place as the Chairman may decide. It shall observe

such procedure as may be prescribed by the State Government.21

9.11 Consumer Disputes Redressal Agencies

The following agencies shall be established for the purposes of the Act:

1. Establish a Consumer Disputes Redressal Forum to be known as the District Forum. It

shall be established by a notification of the State Government for each district.

2. Establish a Consumer Disputes Redressal Commission to be known as the State

Commission. It shall be established in the State by notification.

3. The Central Government shall establish a National Consumer Disputes Redressal

Commission by notification22.

9.12 District Forum

9.12.1 Composition of the District Forum

20 Sec. 7 of the Consumer Protection Act, 198621 Sec. 8 & 8A of the Consumer Protection Act, 198622 Sec. 9 of the Consumer Protection Act, 1986

Page 141 of 274

Each District Forum shall consist of23:

1. A person who is or has been or is qualified to be a District Judge as President.

2. Two other members, one being a woman who is not less than thirty-five years of age,

possesses a bachelor’s degree and is a person of ability, integrity and standing and having

adequate knowledge and experience of at least ten years in dealing with problems relating

to economics, law, commerce, accountancy, industry, public affairs or administration.

A person shall, however, be disqualified for appointment as a member if he:

1. Has been convicted and sentenced to imprisonment for any offence which in the opinion

of the State Government amounts to moral turpitude.

2. Is an undischarged insolvent.

3. Is of an unsound mind as declared by the competent court.

4. Has such financial interest as is likely to affect prejudicially his functioning as a member.

5. Has any such disqualification as prescribed by the State Government.

The State Government shall make all the appointments on the recommendations of a selection

committee which shall comprise of the President of the State Commission who shall be its

Chairman, Secretary, Law Department of the State as Member and Secretary, In-charge of the

Department dealing with consumers of the State. When the President of the State is not able to

attend the Selection Committee, the State government may refer the matter to the Chief Justice of

the High Court for nominating a sitting judge of the High Court to act as a Chairman.

Every member of the District Forum shall hold office for a period of five years or up to the age

of sixty five years, whichever is earlier. A member shall be eligible for reappointment for

another term of five years or up to sixty- five years, whichever is earlier. However, it shall be

subject to the condition that he fulfills all the qualifications and other conditions for appointment.

A member may resign from his office in writing under his hand addressed to the State

Government and once this resignation is accepted, his office shall become vacant. It may be

filled by appointment of a person who has the required qualifications.

23 Sec. 10 of the Consumer Protection Act, 1986

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The State Government shall prescribe the salary or honorarium and other allowances payable to

and the other terms and conditions of service of the members of the District Forum. Moreover,

the State Government on the recommendations of the President of the State Commission shall

make appointment of the member on whole time basis taking into account all other factors as

may be prescribed, including the workload of the District Forum.

9.12.2 Jurisdiction of the District Forum

The District Forum shall have jurisdiction to entertain complaints subject to the condition that

the value of the goods or services and the compensation, if any, claimed does not exceed rupee

twenty lakhs. A complaint shall be instituted in a District Forum within the local limits of whose

jurisdiction the opposite party or all the opposite parties actually and voluntarily reside or carries

on business or has a branch office or personally works for gains or the District Forum gives

permission or the cause of action wholly or in part arises.24

9.12.3 Manner in which complaint shall be made

A complaint may be filed with the District Forum by the consumer in relation to any goods sold

or delivered or agreed to be sold or delivered or any service provided or agreed to be provided. It

can also be filed by any recognized consumer association irrespective of whether the consumer is

a member of this association or not. A complaint can also be filed by one or more consumers

with the permission of the District Forum on behalf of or for the benefit of all the consumers so

interested or the Central Government or the State Government as the case may be either in its

individual capacity or as a representative of interests of the consumers in general. Every

complaint shall be accompanied by such fee as required. The said fee shall be payable in such

form as may be prescribed and on such receipt, the District Forum may by order allow the

complaint to be proceeded with or rejected. However, a complaint cannot be rejected without

giving the complainant an opportunity of being heard. Ordinarily the complaint shall be decided

within twenty-one days from the date on which the complaint was received and once the

complaint has been admitted by the District Forum, it shall not be transferred to any other court

or tribunal or any authority set up by or under any law for the time being in force.25

24 Sec. 11 of the Consumer Protection Act, 198625 Sec.12 of the Consumer Protection Act, 1986

Page 143 of 274

9.12.4 Procedure on admission of complaint:

The District Forum shall on admission of a complaint, if it relates to any goods-

Refer a copy of the admitted complaint, within twenty one days from the date of its admission, to

the opposite party and direct him to give his version. This opposite party has to give its version

within thirty days or such extended period not exceeding fifteen days as may be granted by the

District Forum. The District Forum shall proceed to settle the dispute in case the opposite party

denies any dispute or omits or fails to take any action to represent his case within the time given

by it. Wherever the need is felt, the District Forum shall obtain sample of the goods from the

complainant, refer it to the appropriate laboratory along with a direction that such laboratory

make an analysis or test, whichever may be necessary for finding out whether such goods suffer

from any defect. The District Forum may require the complainant to deposit such fees as may be

specified before it refers the sample to the appropriate laboratory, and the same be remitted to the

appropriate laboratory on receipt of the report. If the correctness of the findings of the

appropriate laboratory is disputed by any party, the District Forum shall make the objections to

be put in writing. Parties are given a reasonable opportunity of being heard in this regard. For the

purposes of this Act, the District Forum has the same powers as are vested in the Civil Court

under the Code of Civil Procedure, 1908.26

9.12.5 Finding of the District Forum

If after conducting the proceeding, the District Forum is satisfied that the goods complained

against suffered from any of the defects specified in the complaint, it shall pass necessary

orders27-

For removing the defect

For replacing the goods

For returning the price to the complainant

For paying such amount as may be awarded as compensation


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For discontinuation with the unfair trade practices or the restrictive trade practices

For not offering hazardous goods for sale

For withdrawal of the hazardous goods from sale

For ceasing manufacture of hazardous goods

For payment of such sum as may be determined.

9.12.6 Appeal

Any person aggrieved by the orders of the District Forum may prefer an appeal with the State

Commission within a period of thirty days from the date of the order, in the prescribed. An

appeal can be entertained by the State Commission after the expiry of thirty days if it is satisfied

that there is sufficient cause for not filing the appeal within the given period. However, the State

Commission shall not entertain any such appeal where the appellant is to deposit any amount in

terms of the orders of the District Forum and has not deposited fifty per cent of the said amount

or twenty five thousand rupees whichever is less.28


Q. 3. President of a District Forum should be a person who is or has been or is eligible to be a

District Judge. (True/ False)

Q. 4. A District Forum has the jurisdiction to try complaints where the value of the goods or

services and the compensation claimed does not exceed rupees twenty lakhs. (True/ False)

9.13 State Commission

9.13.1 Composition of the State Commission

Each State Commission shall consist of a President and not less than two and not more than such

members as prescribed and one of them shall be a woman. The President shall be a person who is

or has been a Judge of a High Court and will be appointed by the State Government. However


Page 145 of 274

appointments shall be made only after consultation with the Chief Justice of the High Court.

Members shall have the following qualifications29-

Member should not be less than thirty five years of age

Possess a bachelor’s degree from a recognized university

He is a person of ability, integrity and standing and having adequate knowledge and

experience of at least ten years in dealing with problems relating to economics, law,

commerce, accountancy, industry, public affairs or administration.

Fifty per cent of the members shall be from people with judicial background.


Has been convicted and sentenced to imprisonment for any offence which in the opinion

of the State Government amounts to moral turpitude.

Is an undischarged insolvent.

Is of an unsound mind as declared by the competent court.

Has been removed or dismissed from the service of the Government or a body corporate

owned or controlled by the Government

Has such financial interest as is likely to affect prejudicially his functioning as a member.

Has any such disqualification as prescribed by the State Government.

Every member of the State Commission shall hold office for a term of five years or up to

the age of sixty five years, whichever is earlier. A member shall be eligible for

reappointment for another term of five years or up to sixty- five years, whichever is

earlier, subject to the condition that he fulfills all the qualifications and other conditions

for appointment. A President is also eligible for reappointment.

9.13.2 Jurisdiction of the State Commission

A State Commission shall have jurisdiction to entertain complaints where the value of the goods

or services and compensation, if any, claimed exceeds twenty lakh rupees but does not exceed

rupees one crore and also entertains appeals against the orders of the District Forum within the


Page 146 of 274

State. It can call for the records and pass any orders in any consumer dispute pending before or

decided by the District Forum.30

9.13.3 Procedure applicable to State Commission

The provisions related with the disposal of complaints by the Consumer Forum shall, with such

modifications, be applicable to the disposal of disputes by the State Commission.31

9.13.4 Appeal

Any person aggrieved by the order of the State Commission may prefer an appeal against such

order with the National Commission within a period of thirty days from the date of the order in

such form and manner as may be prescribed. National Commission may entertain any such

appeal even after the expiry of the said period if it feels that the appellant was prevented by

sufficient cause to do so within the specified time. However, the National Commission shall not

entertain any such appeal where the appellant is to deposit any amount in terms of the orders of

the State Commission and has not deposited fifty per cent of the said amount or thirty five

thousand rupees whichever is less.32

9.13.5 Hearing of appeal

An appeal before the State Commission or the National Commission shall be heard as soon as

possible and an endeavour should be to dispose of the appeal within a period of ninety days from

the date of its admission. No adjournment shall ordinarily be granted by the State Commission

unless there is sufficient cause and the same is to be recorded in writing.33


Q. 5. Jurisdiction of the State Commission to try complaints is for the goods or services and

compensation claimed value exceeds rupees twenty lakhs but does not exceed rupees one crore.

(True/ False)

30 Sec. 17 of the Consumer Protection Act, 198631 Sec. 18 of the Consumer Protection Act, 198632 Sec. 19 of the Consumer Protection Act, 1986

33 Sec. 19-A of the Consumer Protection Act, 1986

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Q. 6. Any person aggrieved by the order of the State Commission can file an appeal in the

National Commission within thirty days from the date of the order. (True/ False)

9.14 National Commission

9.14.1 Composition of the National Commission

The National Commission shall consist of a person who is or has been a Judge of the Supreme

Court, appointed by the Central Government, who shall be its President, provided that no

appointment shall be made except after consultation with the Chief Justice of the Supreme Court.

It shall have not less than four members and not more than such members as prescribed and one

of them shall be a woman, and they shall have the following qualifications34-

Member should not be less than thirty five years of age

Possess a bachelor’s degree from a recognized university

Is a person of ability, integrity and standing and having adequate knowledge and experience of at

least ten years in dealing with problems relating to economics, law, commerce, accountancy,

industry, public affairs or administration.

Fifty per cent of the members shall be from amongst persons having judicial background.


Has been convicted and sentenced to imprisonment for any offence which in the opinion of the

State Government amounts to moral turpitude.

Is an undischarged insolvent.

Is of an unsound mind as declared by the competent court.

Has been removed or dismissed from the service of the Government or a body corporate owned

or controlled by the Government

Has such financial interest as is likely to affect prejudicially his functioning as a member.


Page 148 of 274

Has any such disqualification as prescribed by the State Government.

Every member of the State Commission shall hold office for a term of five years or up to the age

of sixty five years, whichever is earlier. A member shall be eligible for reappointment for

another term of five years or up to seventy years, whichever is earlier, subject to the condition

that he fulfills all the qualifications and other conditions for appointment. A President is also

eligible for reappointment.

9.14.2 Jurisdiction of the National Commission

A State Commission shall have jurisdiction to entertain complaints where the value of the goods

or services and compensation, if any, claimed exceeds rupees one crore and also entertains

appeals against the orders of any State Commission. It can call for the records and pass any

orders in any consumer dispute pending before or decided by any State Commission.35

9.14.3 Appeal

Any person aggrieved by the order of the National Commission in the exercise of its powers

conferred may prefer an appeal against such order in the Supreme Court within a period of thirty

days and the Supreme Court may entertain an appeal even after the lapse of thirty days if it is

satisfied that there is enough justification for the delay in filing such appeal.36

Limitation Period

The District Forum, the State Commission or the National Commission shall not admit a

complaint unless it is files within two years of the arising of the cause of action. They may

however entertain a complaint after the lapse of the period if they feel that a sufficient reason

exists, but they have to record reasons for condoning such delay.37

9.14.4 Dismissal of frivolous or vexatious claim

Whenever any frivolous or vexatious complaint is filed before the District Forum, the State

Commission or the National Commission, it shall dismiss the complaint after recording reasons

35 Sec. 21 of the Consumer Protection Act, 198636 Sec. 23 of the Consumer Protection Act, 198637 Sec. 24-A of the Consumer Protection Act, 1986

Page 149 of 274

for the same and make an order that the complainant shall pay to the opposite party cost not

exceeding ten thousand rupees, as may be specified in the order.38

9.14.5 Protection of action taken in good faith

No suit, prosecution or other legal proceeding shall lie against the members of the District

Forum, the State Commission or the National Commission for any action taken in good faith by

them.39

9.15 Summary

Due to development in the international trade and industrial revolution, international trade and

commerce have expanded to a large extent. Because of this market has become very wide and all

this has promoted consumerism. It all has resulted in imperfect knowledge among the consumers

and on the other side a well organized sector of manufacturers and traders having better

knowledge of markets. This resulted in asymmetric information in the market. In these imperfect

kind of markets, advertisements of goods and services through different mediums influence the

demand of the commodities by the consumers about which they have a little knowledge, there

may be manufacturing defects or any other imperfections in the commodities concerned. At the

same time there are adulterated and substandard articles in the market. To check these practices

and to protect the right of consumers and providing for stringent action against adulterated and

sub standard articles in the different enactments like Code of Civil Procedure,1908, the Indian

Contract Act, 1872, the Indian Penal Code, 1860, the Standards of Weights and Measures Act,

etc. very little could be achieved in the field of consumer protection. So to protect the consumers

from exploitation and to safeguard their interests, the Consumer Protection Act, 1986 has been

enacted.

9.16 Glossary

Act: The Consumer Protection Act, 1986.

District Forum: Consumer Disputes Redressal Forum.

Jurisdiction: Area falling under control.


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National Commission: National Consumer Disputes Redressal Commission.

Notification: A notification published in the Official Gazette.

State Commission: State Consumer Disputes Redressal Commission.

9.17 Answers to Check your Progress: 1-False, 2-6- True.

9.18 References:

The Consumer Protection Act, 1996.

Harpal Kaur Khera, Law in India Emerging Trends, Publication Bureau, Punnjabi

University, Patiala.


Q1. Discuss the District Forum under the Consumer Protection Act, 1986.

Q.2. Discuss the composition and jurisdiction of a State Commission and how can an appeal be

filed by any person aggrieved by its orders.

Q. 3. Critically analyze the Consumer Protection Act, 1986.

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1

LESSON 10

RIGHT TO INFORMATION ACT, 2005

Structure

10.1 Objectives

10.2 Introduction

10.3 International Scenario

10.4 Indian Scenario

10.5 Right to Information Act, 2005: An Introduction

10.6 Salient Features of RTI Act, 2005.

10.7 Public Authority

10.8 Obligations of Public Authority & Designation of PIOs

10.9 Request for Obtaining Information

10.10 Disposal of Request for Obtaining Information

10.11 Exemption from Disclosure of Information

10.12 Severability

10.13 Third Party Information

10.14 The Central Information Commission

10.15 The State Information Commission

10.16 Powers and Functions of the Information Commissions, Appeal and Penalties

10.17 Summary

10.18 Glossary

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2


10.20 References


10.1 Objectives


Define RTI Act, 2005.

Explain the important features of RTI Act, 2005

Understand the powers and function of information commissions.

10.2 Introduction

Transparency and accountability are hallmark of any good democratic system. They are, in fact,

the backbone of a democracy. Whenever a government is transparent, it ensures a greater

accountability and thus reduces the levels of corruption. There is a presumption that whatever is

done by the government is done for the betterment of the people. A government which is not

open may be tempted to commit administrative misconduct. An open government on the other

hand ensures reduction in the number of administrative faults. According to Justice P.N.

Bhagwati, “open government is new democratic culture of an open society towards which every

liberal society is moving and our society is no exception”. Informed citizenry is an essential pre -

requisite for bringing about transparency in governance and the same is possible only if there is

easy access to information. Freedom of Information Acts is accordingly becoming standard good

practice at the international level. Right to information generally means the right of citizens to

access the information which is in the possession of the public authorities. Access to information

empowers the citizens and allows them to participate in the governance process. Information also

empowers them to make more meaningful decisions, form informed opinions and influence the

policies affecting the society.

10.3 International Scenario

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3

Efforts to promote the freedom of information go way back to 1893. It was then that a number of

International Conventions of Journalists had been held at different places, but nothing concrete

was achieved.

United Nations convened a Conference at Geneva in March 1948 on the subject matter of

Freedom of Information. This Conference was attended by fifty four countries. A series of

resolutions were passed for further consideration by the United Nations. It ultimately led to the

United Nations General Assembly declaring Freedom of Information a fundamental human right.

Article 19 of the Universal Declaration of Human Rights declares:

Everyone has right to freedom of opinion and expression; the right includes

freedom to hold opinion without interference and to seek, receive and import

information and ideas through media and regardless of frontiers.

In 1948, Sweden went on to become the first country to enact a provision for access to official

information for the citizens. The Economic and Social Council of the United Nations adopted a

derivative from Article 19 of the Universal Declaration of Human Rights in the year 1960.

The United States of America followed the Swedish example in 1966 and in 1970 Norway

enacted the Right to Information Law. The number of countries having the Freedom of

Information laws climbed to 13 and by 2010, 85 countries, including major developing countries

like India and China had enacted national level Right to Information laws.

10.4 Indian Scenario

Justice P B Sawant, the Chairman of the Press Council of India and the Institute of Rural

Development, Hyderabad prepared their respective drafts of the Right to Information Bill in

1996 and 1997 respectively. This resulted in the initiation of a debate for effective and

responsive government. This forced the Government of India to appoint a Working Group on

January 2, 1997 which was to dwell upon the necessity and possibility of enacting a Right to

Information Bill.

Page 154 of 274

4

The Working Group was of the conclusion that the Right to Information had already been made

effective by virtue of Article 19 (1) (a) of the Constitution of India which guarantees the right to

freedom of speech and expression. Accordingly, the Freedom of Information Bill, 2000 was

introduced in the Lok Sabha on 25th July, 2000. The Bill was enacted as the Freedom of

Information Act in 2002, but the Act retained a number of restrictive provisions resulting in the

denial of information to the public.

The new Right to Information Bill, having a wider scope, but subject to reasonable restrictions

was introduced in May, 2005. The Right to Information Act, 2005 extends to the whole of India

except the State of Jammu and Kashmir. The Act came partially into force on 15th June, 2005

and into full force on 12th October, 2005 (120th day of its enactment).

10.5 Right to Information Act, 2005: An Introduction

At the very outset, the Preamble of the Right to Information Act, 2005 states:

An Act to provide for setting out the practical regime of right to information

for citizens to secure access to information under the control of public

authorities, in order to promote transparency and accountability in the working

of every public authority, the constitution of a Central Information Commission

State Information Commissions and for matters connected therewith or incidental

thereto.


1. RTI ensures good governance. (True/ False)

2. In certain circumstances RTI proves to be a hindrance in corrupt activities. (True/

False)

10.6 Salient Features of the Right to Information Act, 2005.

Preliminary:

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5

The Right to Information Act, 2005 is thus a special legislation imposing obligations on every

public authority to provide information to the person asking for it.

10.7 'Public authority’ under the Act has been defined as any authority or body or institution of

self- government established or constituted by or under the Constitution; by any other law made

by Parliament; by any other law made by State Legislature; by notification issued or order made

by the appropriate government and includes anybody owned, controlled or substantially

financed; non-Governmental Organization substantially financed directly or indirectly by funds

provided by the appropriate Government.1

‘Information’ has been defined as any material in any form, including records, documents,

memos, e-mails, opinions, advices, press releases, circulars, orders, logbooks, contracts, reports,

papers, samples, models, data material held in any electronic form and information relating to

any private body which can be accessed by a public authority under any other law for the time

being in force.2

All citizens have the right to information subject to the conditions laid down in the Act.

10.8 Obligations of Public Authorities:

The Act states that every public authority is under obligation to maintain all its records duly

catalogued and indexed and wherever possible, subject to availability of resources, the same be

computerized within a reasonable time and connected through a network all over the country on

different networks to facilitate their access. They were also required to publish within one

hundred and twenty days from the making of the Act, the particulars of the organization, their

functions and duties; the powers and duties of Public Information Officers; the names,

designations and other particulars of the Public Information Officers. It mandates that the

designation of Public Information Officer is to be done within one hundred days. Every public

authority is also required to designate as many officers as Central Public Information or the State

Public Information Officers, as the case may be. This has to be done in all administrative units or

offices under it as may be necessary. Every public authority will also designate an officer at each

sub-divisional level or other sub-district level as Central Assistant Public Information Officer or

1 Section 2 (h) of the Right to Information Act, 20052 Section 2 (f) of the Right to Information Act, 2005

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the State Assistant Public Information Officer, as the case may be, to receive the applications for

information or appeals under this Act. The Central Public Information Officer or the State Public

Information Officer can if need be seek the assistance of any other officer for the discharge of his

duties and such officer shall be treated as Central Public Information Officer or the State Public

Information Officer as the case may be.3

10.9 Request for Obtaining Information:

Anybody desirous of seeking information under the Act has to make a request in writing or

through electronic means declaring the particulars of the information required by him in English,

Hindi or in the official language of the area where the information is being sought along with

such fee as may be specified to the Central Public Information Officer or the State Public

Information Officer as the case may be. No reason is to be given for seeking the information nor

are any personal details required to be given. However information necessary for contacting the

person seeking information is to be given. Whenever an application is made seeking information

and the same is in possession of another authority or the subject matter falls in the domain of

another authority, the authority to whom the request for information is given, will pass on the

request to such authority in a maximum period of five days from the date such request had been

received and information is also sent to the person seeking such information about such transfer.4

10.10 Disposal of request for information:

The Central Public Information Officer or the State Public Information Officer are under an

obligation to dispose of this request for information as soon as possible, but not later than thirty

days from the date such request was received, either by giving the information asked for on

payment of prescribed fee or denying the same for the reasons as provided for in sections 8 and 9

of the RTI Act, 2005. Wherever life and liberty of a person is involved, the information

requested for is to be provided in 48 hours of receiving any such request. In case of failure on the

part of the Central Public Information Officer or the State Public Information Officer as the case

may be, to give a decision on the request for information within the stipulated time, the Central

3 Section 4&5 of the Right to Information Act, 2005

4 Section 6 of the Right to Information Act, 2005

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Public Information Officer or the State Public Information Officer, as the case may be, shall be

considered as refusal to the request.5

Once a decision has been taken for further fees to be paid towards the cost of providing

information, Central Public Information Officer or the State Public Information Officer, as the

case may be, shall send an information of the fee required and the calculations on the basis of

which the amount required was reached. The period taken for the dispatch of the said intimation

and payment of fees shall not be included in the calculation of period of thirty days during which

this information is to be provided. The right of the applicant with regard to review of the decision

as to the amount of fees charged or the way in which it can be accessed, etc. will also be

provided to the applicant.6

When a decision has been taken to provide information with regard to any record or a part

thereof to a person who is sensorily disabled, Central Public Information Officer or the State

Public Information Officer, as the case may be shall provide assistance to make access to the

Information possible, along with such assistance that may be reasonable for the inspection.

However, where the person seeking information falls below the poverty line, as determined by

the appropriate government, no fee shall be charged from him for providing the information.

Information shall also be provided free of cost in cases where a public authority does not provide

the information within the specified time period. Where an application for information has been

turned down, the Central Public Information Officer or the State Public Information Officer as

the case may be shall also communicate to the person requesting for information the reasons for

such refusal; the time within which an appeal against such rejection can be made; and the

particulars of the appellate authority.7

10.11 Exemption from disclosure of information:

There shall no obligation to give any citizen information, which prejudicially affects the

sovereignty and integrity of India, its security, strategic, scientific or economic interests and

relation with a foreign State or lead to incitement of an offence. Any information which is

5 Section 7 of the Right to Information Act, 20056 Id.7 Id.

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forbidden by any court of law or tribunal or which may constitute contempt of court or the giving

of which would cause a breach of privilege of Parliament or State Legislature cannot be given.8

Information will also be not provided in those cases where commercial confidence, trade secrets

or intellectual property, the disclosure of which will adversely affect the third party’s competitive

position unless the competent authority is satisfied that larger public interest warrants such

disclosure. No information is provided where information is available to a person in his fiduciary

relationship, unless the competent authority feels that public interest warrants giving of such

information. Similarly, no information is given which is received in confidence from a foreign

government or the disclosure of which would endanger the life or physical safety of any person

or identify the source of information or assistance given in order to help law enforcement or

security purposes or creates hurdles in the process of investigation or apprehension or

prosecution of offenders.9

Information pertaining to cabinet papers including the records of deliberations of the Council of

Ministers, Secretaries and other officers will not be given till the decision has been taken and the

matter is complete.Information is not provided if it relates to personal information and its

disclosure of has no relationship to any public activity or interest and would cause unwarranted

breach of privacy. However, if the concerned authority feels that larger public interest justifies its

disclosure, it may be given.Public authority may allow access to information in contravention of

what the Official Secrets Act, 1923 says if it is of the opinion that the public interest in

disclosure is much higher than the harm it is going to cause to the protected interest.A Central

Public Information Officer or State Public Information Officer may also refuse to give any

information which it feels may result is infringement of copyright subsisting in a person other

than the State.10

10.12 Severability:

When the information is rejected on grounds of any exemption from disclosure, that part of the

information may be given which does not fall within any exemption and can be easily severed

from rest of the information. The Central Public Information Officer or State Public Information

8 Section 8 of the Right to Information Act, 20059 Id.10 Id.

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Officer, as the case may be, will inform the applicant about any severance, the reasons for such

severance, the name and designation of the person who has taken this decision and the amount of

fee charged or the form of access provided, etc. in case any such part of the information has been

given.11

10.13 Third Party Information:

Whenever any request for third party information is received and the Central Public Information

Officer or State Public Information Officer, as the case may be, intends to give a third party

information, a written notice has to be given to such third party about the request and the fact

that the Central Public Information Officer or State Public Information Officer, or as the case

may intends to disclose the information or record, or part thereof.12

Third party which is affected by the said request and the decision has the opportunity to make a

representation against the proposed disclosure within ten days from the date of the receipt of

such notice. The Central Public Information Officer or State Public Information Officer, as the

case may be are required to give a decision within forty days after the request has been received

as to whether or not to disclose the said information, or record or part thereof. It also has to give

a written notice of this decision to the third party along with the statement that the third party can

prefer an appeal against the said order.13

Check you progress 2:

Q.3 Third party information can be given under the RTI Act. (True/ False)

Q.4. In certain cases the Public Authority can deny disclosure of information. (True/ False)

11 Section 10 of the Right to Information Act, 200512 Section 11 of the Right to Information Act, 200513 Id

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10.14 The Central Information Commission

Constitution:

The Central Information Commission is a body constituted by the Central Government by

notification in the Official Gazette. It is to exercise the powers conferred and perform the

functions assigned to it under the Act. It shall comprise of the Chief Information Commissioner

and such number of Central Information Commissioners may be deemed necessary. However

this number will not in any case exceed ten. They shall be appointed by the President on the

recommendations of a Committee which will be consisting of the Prime Minister, who shall be

the Chairperson of the Committee; the Leader of Opposition in the Lok Sabha; and a Union

Cabinet Minister to be nominated by the Prime Minister. In case where the Leader of the

Opposition in the House of People has not been recognized, the Leader of the single largest

group in opposition of the Government in the House of People shall be deemed to be the Leader

of the Opposition.14

The Chief Information Commissioner shall be vested with the general superintendence, direction

and management of the affairs of the Central Information Commission and the Information

Commissioners shall assist him and may exercise all such powers and do all such acts as may be

exercised by the Central Information Commission autonomously. They will not be subject to

directions by any other authority under the Act. Only persons of eminence in public life having

wide knowledge and experience in law, science and technology, social service, management,

journalism, mass media or administration and governance shall be appointed as the Chief

Information Commissioner and the Information Commissioners. However, a person who

happens to be a Member of Parliament or Member of the Legislature of any State or Union

Territory, as the case may be or hold any office of profit or connected with any political party or

carrying any business or pursuing any profession shall not be so appointed. Delhi shall be the

headquarters of the Central Information Commission, but it may establish offices at other places

in India with the previous approval of the Central Government.15

Term of office and conditions of service:

14 Section 12 of the Right to Information Act, 200515 Id

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The term of the office of the Chief Information Commissioner shall be five years from the date

on which he enters office or the time till he attains the age of sixty five years. He shall, however,

not be eligible for reappointment. As far as the Information Commissioner is concerned, he shall

hold office for a term of five years from the date on which he enters office or till he attains the

age of sixty five years. He shall not be eligible for reappointment. However, he shall be eligible

for appointment as Chief Information Commissioner on the condition that his term of office shall

not be more than five years in aggregate as the Information Commissioner and the Chief

Information Commissioner. The Chief Information Commissioner and the Information

Commissioners have to take an oath or affirmation before the President or any other person

appointed by him in that behalf before entering their office. This is done according to the form

set out for the purpose in the First Schedule.The Chief Information Commissioner and the

Information Commissioners may leave office any time by tendering a written resignation

addressed to the President. They can also be removed as per the provisions of Section 14 of the

RTI Act, 2005. The Chief Information Commissioner shall be governed by the same terms and

conditions as those of the Chief Election Commissioner for his salary and allowances and other

terms of services. As far as the Information Commissioners salary allowances and other terms of

conditions of service are concerned, they shall be similar to those of the Election Commissioners.

In case they are in receipt of any pension, the same shall be deducted from their salary. However,

their salaries, allowances and other conditions of service shall not be varied to their

disadvantage. The Central Government shall provide such officers and employees as may

required for performing their functions efficiently on such terms and conditions as may be

prescribed to the Chief Information Commissioner and the Information Commissioners.16

Removal of Chief Information Commissioner and the Information Commissioners:

Chief Information Commissioner and the Information Commissioners may be removed from

office only by order of the President on the ground of proved misbehavior or incapacity. This can

be done only after the Supreme Court, on a reference made to it by the President, conducts an

inquiry and reports that the Chief Information Commissioner or any Information Commissioner,

as the case may be, should on such ground be removed. The President may, during the pendency

of any enquiry against the Chief Information Commissioner or the Information Commissioner


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against whom any reference has been made to the Supreme Court suspend from office or prohibit

such person from attending the office till he passes order after receiving the report of the

Supreme Court. Apart from this, the Chief Information Commissioner or the Information

Commissioner, as the case may be can also be removed by the President if adjudged insolvent or

has been convicted of an offence which involves moral turpitude or engages during his term of

office in any paid employment outside the duties of his office or unfit to continue in office by

reason of infirmity of mind or body or has acquired such financial interest as is likely to affect

prejudicially his functions as the Chief Information Commissioner or an Information

Commissioner. The Chief Information Commissioner or an Information Commissioner shall

deemed to be guilty of misbehavior if they are concerned with or are interested in any contract or

agreement made by or on behalf of the Government of India or participates in any way in the

profit thereof. However, they are not adversely affected if they make any profit as a member and

in common with the other members of an incorporated company.17

10.15 The State Information Commission

Constitution:

A State Information Commission shall be constituted by notification in the Official Gazette as

…(Name of the State) Information Commission to exercise the powers conferred and to perform

the assigned functions under the Act. It shall comprise of the State Chief Information

Commissioner and such number of State Information Commissioners as may be deemed

necessary. However, this number shall not exceed ten. The Governor appoints them on the

recommendations of a Committee consisting of the Chief Minister, who shall be the Chairperson

of the Committee; the Leader of Opposition in the Legislative Assembly; and a Cabinet Minister

to be nominated by the Chief Minister. In case where the Leader of the Opposition in the

Legislative Assembly has not been recognized, the Leader of the single largest group in

opposition of the Government in the Legislative Assembly shall be deemed to be the Leader of

the Opposition. The State Chief Information Commissioner shall be vested with the general

superintendence, direction and management of the affairs of the State Information Commission.

The State Information Commissioners shall assist him and may exercise all such powers and do


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all such acts as may be exercised by the State Information Commission autonomously. They will

not be subject to directions by any other authority under the Act. Only persons of eminence in

public life having wide knowledge and experience in law, science and technology, social service,

management, journalism, mass media or administration and governance shall be appointed as the

State Chief Information Commissioner and the State Information Commissioners. They shall,

however, not be a Member of Parliament or Member of the Legislature of any State or Union

Territory, as the case may be. They shall also not hold any office of profit or connected with any

political party or carrying any business or pursuing any profession. The State Information

Commission shall have its headquarters at such place in the State as the State Government by

notification in the Official Gazette specify. It may also with the previous approval of the State

Government establish offices at other places in the State.18

Terms of office and conditions of service:

The term of office of the State Chief Information Commissioner shall five years from the date

on which he enters office or till he reaches the age of sixty five years. He shall not be eligible for

reappointment. Similarly the term of office of every State Information Commissioner shall be

five years from the date on which he enters office or till he attains the age of sixty five years. He

shall not be eligible for reappointment. However, he shall be eligible for appointment as State

Chief Information Commissioner on the condition that his term of office shall not be more than

five years in aggregate as the Information Commissioner and the Chief Information

Commissioner. The State Chief Information Commissioner and the State Information

Commissioners have to take an oath or affirmation before the Governor or any other person

appointed by him in that behalf according before entering their office. The same has to be in

consonance with the form set out for the purpose in the First Schedule. The State Chief

Information Commissioner and the State Information Commissioners may relinquish office by

resigning at any time by writing addressed to the Governor. They can also be removed as per the

provisions of Section 17 of the RTI Act, 2005. The salary and allowances and other terms of

services of the State Chief Information Commissioner shall be same as that of the Election

Commissioner while that of the State Information Commissioners shall be similar to those of the

Chief Secretary to the State. In case they are in receipt of any pension, the same shall be


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deducted from their salary. However, their salaries, allowances and other conditions of service

shall not be changed to their disadvantage. Such officers and employees as may required shall be

provided by the State Government to the State Chief Information Commissioner and the State

Information Commissioners for performing their functions efficiently. These officers and

employees shall be appointed on such terms and conditions as may be prescribed.19

Removal of Chief Information Commissioner and the Information Commissioners:

The Governor can remove the State Chief Information Commissioner and the State Information

Commissioners from office only by order of on the ground of proved misbehavior or incapacity

only after the Supreme Court, on a reference made to it by the Governor, has conducted an

inquiry and reported that the State Chief Information Commissioner or any State Information

Commissioner, as the case may be, need to be removed on such grounds. The State Chief

Information Commissioner or the State Information Commissioner may also suspend from office

or prohibited from attending the office by the Governor during the pendency of inquiry in respect

of the person against whom a reference has been made to the Supreme Court till the Governor

passes orders based on the report received from the Supreme Court. The Governor can also

remove the State Chief Information Commissioner or the State Information Commissioner, as

the case may be if adjudged insolvent or has been convicted of an offence which involves moral

turpitude or engages during his term of office in any paid employment outside the duties of his

office or unfit to continue in office by reason of infirmity of mind or body or has acquired such

financial interest as is likely to affect prejudicially his functions as the State Chief Information

Commissioner or State Information Commissioner. The State Chief Information Commissioner

or a State Information Commissioner will be considered guilty of misbehavior if concerned or

interested in any contract or agreement which is made by the Government of the State or on their

behalf or participates in any way in the profit thereof. They will however not be adversely

affected if they make profit as a member and in common with the other members of an

incorporated company.20

10.16 Powers and Functions of the Information Commissions, Appeal and Penalties

19 Section 16 of the Right to Information Act, 200520 Section 17 of the Right to Information Act, 2005

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Powers and functions of Information Commission:

The Central Information Commission or the State Information Commission, as the case may be,

is duty bound to receive and inquire into a complaint made in consonance with the provisions of

the RTI Act from any person who- has not been able to submit a request to a Central Information

Officer or State Public Information Officer as the case may be as no person has been appointed

as such under the Act. It could also be due to refusal by Central Assistant Public Information

Officer or State Assistant Public Information Officer, as the case may be to accept his or her

application for information or appeal under this Act for forwarding the same to the Central

Public Information Officer or State Public Information Officer or Senior Officer or the Central

Information Commission or the State Information Commission as the case may be; has been

denied access to any information requested under this Act; or no response has been given to a

request for information or access to information within the time limits specified; or according to

him/ her has been asked to pay an unreasonable amount of fee; or believes that incomplete,

misleading or false information has been provided; An inquiry into any matter may be initiated

by the Central Information Commission or State Information Commission as the case may be if

it is satisfied that there are reasonable grounds to inquire into the matters. In doing so, it shall

have the same powers as are vested in a civil court while trying a suit under the Code of Civil

Procedure, 1908 with regard to summoning and enforcing the attendance of persons and compel

them to give oral or written evidence on oath and to produce the documents or things; requiring

the discovery and inspection of documents; receiving evidence on affidavit; requisitioning any

public record or copies thereof from any court or office; issuing summons for examination of

witnesses or documents. During the inquiry of any complaint under the Act, the Central

Information Commission or State Information Commission may examine any record to which

the Act applies and is under the control of the public authority. No such record may be withheld

from it on any grounds irrespective of anything inconsistent contained in any other Act.21

Appeal:

An appeal can be made within thirty days from the expiry of the stipulated period or from the

day on which the decision has been received by any person who does not receive a decision


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within the stipulated time as provided for in the Act or is aggrieved by a decision of the Central

Public Information Officer or the State Public Information Officer, as the case may be. He can

file an appeal to such officer who is senior in rank to the Central Public Information Officer or

the State Public Information Officer, as the case may be, in each public authority. Such an appeal

can also be admitted by the said officer after the expiry of the period of thirty days if according

to him/her the appellant had a reasonable ground for not filing the appeal in time. In case the

appeal relates to disclosure of third party information, the appeal can be made within thirty days

from the date of the order by the concerned third party. A second appeal lies within ninety days

from the date on which the decision should have been made or was actually received. An appeal

may be admitted even after the expiry of the period of ninety days if the Central Information

Commission or State Information Commission, as the case may be, feels that there was sufficient

cause preventing the appellant from filing an appeal within the stipulated time. The Central

Public Information Officer or the State Public Information Officer, as the case may be will give a

reasonable opportunity of being heard to the third party, if an appeal preferred relates to the

decision of the Central Public Information Officer or the State Public Information Officer, as the

case may be, regarding the third party information. In any appeal proceedings regarding any

request having been denied, the onus is on the Central Public Information Officer or the State

Public Information Officer, as the case may be, to prove that such denial of request was justified.

An appeal is to be disposed of within thirty days of the receipt of an appeal or within such

extended period, not exceeding a total of forty five days from the date of filing of an appeal.

Reasons for the same are to be recorded in writing and the decision of the Central Information

Commission or State Information Commission, as the case may be, shall be binding.

In its decision, the Central Information Commission or State Information Commission, as the

case may be, can make any public authority to take such steps as may be necessary to secure

compliance under the Act by providing access to information; appointing Central Public

Information Officer or the State Public Information Officer, as the case may be; publishing

information; making necessary changes with regard to maintenance, management and

destruction of records; enhancing training of its officials and providing an annual report. It may

also require compensation to be paid by the public authority to the complainant for any loss or

detriment. It may also impose any of the penalties under the Act or reject the application. The

Central Information Commission or State Information Commission, as the case may be, is

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required to give notice of its decision, including any right of appeal to both complainant and the

public authority. It shall decide the appeal in accordance with the prescribed procedure.22

Penalties:

In case the Central Information Commission or State Information Commission, as the case may

be, feel that the Central Public Information Officer or the State Public Information Officer, as the

case may be, have been unjustified in denial of information or have acted in a malafide manner,

it shall impose a penalty of two hundred and fifty rupees each day till application is received or

information is furnished. However, the total amount of such penalty shall not exceed twenty five

thousand rupees. Central Public Information Officer or the State Public Information Officer, as

the case may be, shall be given a reasonable opportunity of being heard and the burden of

proving that he acted reasonably and diligently lies on the Central Public Information Officer or

the State Public Information Officer, as the case may be. Central Public Information Officer or

the State Public Information Officer, as the case may be, shall also be liable for disciplinary

action under the service rules applicable to him for any malafide on his part.23 However, no suit,

prosecution or other legal proceeding shall lie against any other person for anything which is

done in good faith.24

10.17 Summary

In a democratic set up, accountability and transparency are the two major hallmarks. We can say

that these two are backbones of a good democratic system and the Right to Information Act is

merely an instrument that lays down certain legal procedures to ensure transparency and

accountability in the working of a democratic system. If this Act properly implemented, it will

result in eradication of corruption and will enhance accountability and good governance.

10.18 Glossary:

CIC- Central Information Commission

SIC- State Information Commission

RTI- Right to Information Act, 2005

22 Section 19 of the Right to Information Act, 200523 Section 20 of the Right to Information Act, 200524 Section 21 of the Right to Information Act, 2005

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10.19 Answers to check your progress: All statements in check your progress 1 and 2 are true

10.20 References:

Universal’s The Right to Information Act, 2005.

Law In India Emerging Trends, Publication Bureau, Punjabi University, Patiala.

Understanding Contemporary Issues in India, Civil Services Times.

10.21 Terminal and Model Questions:

1. What is the relevance of Right to Information Act, 2005 in the India scenario?

2. Discuss the role of Central Information Commission in upholding the spirit of the Right

to Information Act, 2005.

3. Discuss the composition of the State Information Commission and the terms and

conditions of service of its members.

4. Critically analyze the working of the Right to Information Act, 2005.

5. Discuss in detail the procedure for taking third party information and what are the

circumstances in which it cannot be furnished? Are there any exceptions thereto?

6. What is the procedure for removal of Chief Information Commissioner and the

Information Commissioners under the RTI Act, 2005.

7. Write a note on the significance of RTI Act, 2005.

8. Under what circumstances our government was forced to implement it?

9. What is being ensured by the RTI Act, 2005?

10. Is RTI helpful in good governance or does it pose hindrance in certain circumstances?

11. Describe the concept of public authority.

12. What are the obligations of public authority?

13. What is the procedure for filing an application under the RTI Act, 2005?

14. What are the circumstances in which the third party information is not given?

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LESSON-11

Role of Public Sector in India’s Economic Development:

Performance and Challenges

Structure

11.1 Objectives

11.2 Introduction

11.3 Importance of Public Sector in India

11.4 Objectives of Public Sector

11.5 Rational for its existence

11.6 Progress of Public Sector in India

11.7 Performance of Public Sector Enterprises

11.8 Achievements

11.9 Causes of Poor Performance

11.10 Privatization, Disinvestment and their rationale

11.11 Method of Privatization in India

11.12 Disinvestment in India

11.13 The Evolution of India Joint Sector Enterprises

11.14 Summary

11.15 Glossary

11.16 Answer to Check your Progress

11.17 References



11.1 Objectives:


Explain Role of Public Sector in India’s economic development

List causes responsible for poor performance of Public Sector Enterprises

Describe the concept of Privatization and Disinvestment

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Illustrate Emergence of Joint Sector Enterprises

11.2 Introduction:

The significant role of public sector in accelerating the growth of the developing countries

cannot be overemphasized. In a developing economy government cannot depend on the private

sector to accelerate the pace of development. Under such circumstances, it is imperative for the

government to play a decisive role and makes considerable investments in establishing public

sector enterprises. Public sector in India includes all those activities which are funded out of the

budget of the government of India as well as budgets of state governments and municipal bodies.

In this sense, the public sector covers all governments departments, government enterprises,

railways communications, irrigation projects, ordinance factories, banking and insurance

companies, public financial institutions, government schools, colleges, hospitals, dispensaries

etc. As we are mre interested into economic analysis, so focus here will be on the industrial and

commercial enterprises of the government. Public sector includes all those industrial and

commercial enterprises that are owned and funded by the government and are managed either by

government itself or by any other authority appointed by the government to manage them on its

behalf. Central public sector enterprises (PSEs) have been established, controlled and managed

by the Government of India as government companies (under the Companies Act or statutory

corporations under the specific statues of Parliament). The Central Government holding in paid

up share capital is more than 50 % in all the public sector enterprises. The government has used

these public enterprises as an instrument for attaining self-reliant economic growth, and over the

years they have played an eminent role in the sustainable growth of Indian economy.

11.3 Importance of Public Sector in India

The importance of public sector in the Indian economy has been recognized since 1948. Both in

terms of number and volume of investment, public sector in India, has experienced a phenomenal

growth. The government has made sustained efforts to break the vicious circle of poverty and

underdevelopment by setting up public sector enterprises or by nationalizing certain key

industries.

The following arguments may be put forth in support of the PSEs (public sector) in India in spite

of their criticism on account of inefficiency, government controls, lack of professionalism, etc.

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11.4 Objectives of Public Sector:

The public sector was designed to play an important role in India’s planned economic

development. Public sector enterprises (PSEs) expected to fulfil a number of objectives which

are as follows:

Public sector enterprises have been established in most developing countries including

India to provide public utilities especially basic infrastructure facilities such as roads,

railways, electricity etc.

To ensure rapid economic development by making investment in power, transport,

irrigation sectors in order to ensure an accelerated rate of economic growth in these

areas.

To achieve self-reliance in the production of goods/services.

The public sector was expected to generate substantial employment opportunities and

thus help in minimizing the dimensions and problems of widespread unemployment.

To attain long-term equilibrium in the balance of payments.

Ensure stability in prices and create benchmarks for prices of essential items (in order to

control inflation). It is only the public enterprises, which are governed more by social

responsibility rather than private profitability that can help in developing backward

regions and thus achieve balanced regional growth.

To promote measures like redistribution of income/wealth for greater equality.

11.5 Rationale for its Existence

There are several reasons as to why Public Sector Units are preferred over the private sector in

developing or low income economies, especially in the initial stages of development. In case of

India, under the socialist approach adopted in our constitution, the investment decisions were

based not on narrow consideration of profit maximization, but on the benefit that the society

stands to achieve. One of the important reasons for the government to give added importance to

the public sector at the national level was to establish a strong and viable industrial base. These

enterprises were necessary to establish at that time for promoting national economic

development. Moreover, the employment generated by the public sector, along with the growth

of technical and managerial skill development played its role in ensuring the socio-economic

transformation. The development of public sector played an important role in developing

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resources for future economic growth, which incidentally also benefitted the private sector

industries immensely.

11.6 Progress of Public Sector in India

The growth of public sector is the direct outcome of India’s Industrial Policy, 1956 wherein a

wide sphere of Industrial activity was reserved exclusively for development under this sector.

The government thus set up a number of industrial units and also took over under its control

some industries run by the private sector in the sphere reserved for public sector. The expansion

of public sector proceeded in two ways:

1. The government nationalized the private sector industrial and commercial units, which

according to Industrial Policy, fell in the sphere reserved for the public sector.

2. The government also made massive investment to set up new industrial units such as steel

plants, heavy electricals, machine tools etc.

Before independence, there were few public sector enterprises. It was only under the Industrial

Policy Resolution of 1956 that the state was called upon to assume direct responsibility and play

a dominant role in industrial development. Consequently the number of enterprises in the public

sector which was 5 in 1951 with an investment of ` 29 crores, increased to 47 with investment of

` 948 crores in 1961. Public sector expanded rapidly since then and the number of public

enterprises increased to 242 in 2008 wherein government had made investment of ` 5,208,550

Crores. PSEs undoubtedly, since inception, have extended their eminent contribution in bringing

up the industrial base for the holistic development of Indian economy. Through the development

of public enterprises in all the key sectors, the government thus, dilute such tendencies of

concentration of economic power in private hands and blunt their capacity to exploit the

consumers. For ensuring that the Indian economy continues to scale new heights and emerges as

an economic superpower, it is imperative for the PSEs to continue to exhibit global

competitiveness and achieve market leadership.

11.7 Performance of Public Enterprises

The performance of any private enterprise is judged from the rate of profits that it earns. But, in

case of public enterprises, they have wider social responsibilities to discharge such as securing a

balanced regional growth, redistribution of income and wealth, providing infrastructure for

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development of industry, creating adequate employment etc. Public sector’s performance in

terms of ensuring adequate return on investment has been rather poor. But profitability is not the

only criterion of judging efficiency of the PSUs. Some losses are inevitable due to heavy social

responsibility placed on these enterprises in the form of providing cheaper goods to the common

people and helping development of other industrial sectors. In the era of economic liberalization

and globalization, PSEs have continued to contribute significantly in building Indian economy

and have demonstrated competiveness virtually in almost all major aspects, viz., productivity,

technological capability, product quality etc. Period of post-liberalization i.e. in 1991, the PSEs

have continuously focused their efforts in keeping pace with the competitive environment to

ensure economically viable operations and long-term sustainability. Thus, in this process, several

PSEs have become self-reliant and have transformed into world-class organizations.

11.8 Achievements:

Though the Public Sector Units have been criticized for being inefficient and for causing huge

losses to the exchequer, their contribution to the overall growth and development of the economy

cannot be underestimated. Some remarkable achievement of Public Sector Units are as follows:

The proactive role of government through the instrument of the public sector has helped

to build a strong industrial base, though there are number of weaknesses in the industrial

structure of the country. For this achievement of building a strong industrial base for

ensuring rapid industrialization due credit should be given to the public sector.

Public Sector Units have made significant contribution in ensuring balanced economic

development.

A large number of government companies are engaged in the production and distribution

of goods and cater to the needs of domestic economy, some others have been promoting

the country’s exports. These efforts of public enterprises have helped the country in

saving precious foreign exchange which could be used for more important purposes.

The growth of public sector enterprises has brought about a considerable increase in

employment.

Public Sector Enterprises have been helping substantially in the development of socio-

economic overheads wherever they are located.

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The contribution of public enterprises in introducing modern technology and developing

indigenous content has been significant in the development of Indian industry.

11.9 Causes of poor Performance:

Public sector was established with the great enthusiasm to achieve a variety of development

goals. There are many factors that account for low profitability of public enterprises, some of

which are as follows:

The location of many public enterprises is not economically appropriate and technically

correct, as it has been largely determined by high political considerations and not by

economic factors. The result of which is that the cost of production is high and

profitability is low.

In case of public sector enterprises, under-utilization of installed capacity has been one of

the major drawbacks in its working. Under-utilization of installed capacity obviously

causes low level of profitability or even losses.

Many of the Public Sector Units have been suffering from over-staffing of unskilled

labour due to political interference and payment of higher wages than in the private sector

to such inefficient labour.

One of the major weaknesses of PSUs has been their poor and inefficient materials

management.

The usual red tapism associated with the government departments’ causes delay in

arriving at business decisions. This leads to inefficiency and cost escalation.

In public sector units there is a general lack of accountability. No one is answerable or

held responsible for delays and failures.

The public enterprises are financed through borrowed capital such as loans by the

government and public financial institutions. They have to pay huge interest on these

loans which adds to their cost of production.

A good number of public sector units are social monopolies and as such there is total or

substantial absence of competition. Absence of competition, breeds complacence.

11.10 Privatization, Disinvestment and their rationale:

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Privatization and disinvestment are ways to infuse some efficiency in public sector units.

Privatization means that the government’s stake is reduced to minority and that the private

investors now hold the majority shares so that the management and control of these units passes

into private hands. Whereas, disinvestment means reducing government share in the equity stock

of the PSUs by selling a part of its stockholding to private sector investors. For achieving the

target of socio-economic development of the country, Government of India (as part of its

national agenda to promote growth, increase in efficiency and international competitiveness) has

been continuously framing policies for industrial growth, fiscal, trade and foreign investment. A

structural shift occurred in Indian economy from a controlled economy to a liberalized economy

with greater reliance upon market forces, as a result of exceptionally severe balance of payment

and fiscal crisis in the year 1991. The issues relating to privatization and disinvestment have

emerged as a direct offshoot of public sector’s failure to act as agents of rapid industrial growth

and models of modernization.

11.11 Methods of Privatization in India:

There are different methods of privatization used by different countries to partially or fully sell

the government stakes in Public Sector Enterprises. Governments may use one or a combination

of the following:

Initial Public Offering: It includes the first sale of stock by a company to the public. PSUs by

offering IPOs can dilute their shareholding when the general public subscribes to the shares.

Strategic Sale: In case of this method of privatization, PSUs sells a large chunk of government

holdings to a private enterprise, which would not only acquire substantial equity holdings of upto

51 percent but also bring in the necessary expertise for making the PSE viable and competitive in

the global market. This method includes transfer of chunk of shares to a strategic partner along

with transfer of management control to the strategic partner.

Auction: Auction is one such method for divesting shares under market sale where the sale

proceeds are maximized through bidding. This option consumes less time and involves low

transaction cost.

Offer for Sale: It is offer for shares by existing shareholder(s) of a company to the public for

subscription, through an offer document.

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Sale to foreign companies: When a public sector unit is sold to a company incorporated in

another country.

Public offer: Under this method of privatization equity is offered to retail investors through

domestic public issues.

Disinvestment: In India consequent to the advocacy of privatization of public sector units by the

New Industrial Policy, 1991 the government has chosen a disinvestment programme which

involves the sale of public sector equity to the general public or to the private sector. In 1991, a

small fraction of the equity in selected central PSEs was sold to raise resources to bridge the

fiscal deficit as well. This method of privatization is generally expected to achieve a greater

inflow of private capital and use of private management practices in Public Sector Units. The

other objective is to make monitoring of management more effective by private shareholders.

11.12 Disinvestment in India

Disinvestment in the Public Sector has been resorted to for two main reasons, viz., (1) to provide

fiscal support to the government through financial resources raised by sale of government’s stake

and (2) to improve efficiency of public enterprises by introducing an element of accountability to

the private shareholders. The extent of disinvestment, i.e. how much of its stake the government

should offload, is a policy decision which the government has to take in conformity with overall

economic policy. There is a consensus that no disinvestment be done in the strategic industries.

For non-strategic and non-core sectors, disinvestment can be done upto 51 percent and beyond.

Disinvestment process in India began in 1991-92 when the government sold shares of some

public enterprises from its holding. This disinvestment was however in the nature of sale of

minority shares, which means government sold less than half the stock held by it in these

enterprises so that it could retain their management control. Such process continued till 1999-

2000. However, this policy was changed in 2000-01 with the establishment of the Department of

Disinvestment, which later was converted into Ministry of Disinvestment. The new policy was to

go in for strategic sale of the identified Public Sector Enterprises. Thus, in accordance with this

decision, all disinvestment since the year 2000 has been in the form of strategic sales.

11.13 The Evolution of India Joint Sector Enterprises

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The general perception that the state ownership of Public Sector Units served a special purpose,

but they were inefficient, while private sector was better and more efficiently managed, ensured

the emergence and growth of what has been described as “Joint Sector”. This joint sector concept

became popular in India in the 1980s. With disinvestment, the joint sector concept became

significant in the development of many industrial segments. In the 1990s following economic

reform ad globalization with disinvestment as a focus, the state has been scouting for private

sector participation in many state and central Public Sector Units. The following are the factors

that prompted planners to champion the cause for joint sector. These are:

The joint sector evolves out of the two rather opposite concepts of the private and public

sectors, but incorporates their merits.

The concept of joint sector extends the concept of mixed economy. Under this process,

the representatives of the private and public sectors get close and become more reliant.

It depends entirely on the state governments to promote and develop this concept, according to

their needs and requirements. The following types of joint sector enterprises emerged on the

industrial landscape:

Joint venture between two Public Sector Units

Joint venture between Central Public Sector Units and state governments with public

participation.

Joint venture between Public Sector Units and cooperatives or workers of an enterprise.

Joint venture between public enterprises and domestic private entrepreneurs

Joint venture between public enterprises and foreign collaborators.

When one analyses the growth and future prospects of the joint sector in India, one is struck by

its slow growth. A joint venture with Suzuki Motor Co. Ltd., Japan is one of the earliest and

most important cases where a foreign private corporation has been invited to join hand with the

government. While this is the general outline of the joint sector, there are many unanswered

questions i.e. it is difficult to say how joint sector form was used to pursue the objective of social

control, over private industry.

Check Your Progress:

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1. How many industries are reserved for public enterprises today?

(a) 3 (b) 4 (c) 5 (d) None of these

2. A method for divesting shares under market sale where the sale proceeds are maximized

through bidding is known as _____

(a) IPO (b) Strategic Sale (c) Auction (d) None of these

3. The Joint sector concept became popular in India during

(b) 1970s (b) 1980s (c) 1990s (d) None of these

11.14 Summary

Setting up public sector in India for industrialization was a conscious and deliberate decision for

moving on a pre-determined path of industrialization. It was set up with socio-welfare

considerations. Profit is a function of pure businesses and public sector by virtue of government

being the owner cannot function as pure business. Further comparison of the public sector is

technically incorrect as private sector operates as a commercial venture with an explicit profit

motive unlike the public sector which also have social objectives to fulfill. Public sector has not

to be envisioned from the prospective of profit making or efficiency levels but in the larger

context of the objectives which are assigned to them when they were set up.

11.15 Glossary

Privatization: It is the process by which government transfers the productive activity from the

public sector to the private sector.

Disinvestment: Disinvest means a small fraction of the equity in selected central PSEs was sold

to raise resources to bridge the fiscal deficit as well. Disinvestment is generally expected to

achieve a greater inflow of private capital and use of private management practices in Public

Sector Units, as well as enable more effective monitoring of management by private

shareholders.

Initial Public Offering: An initial public offering (IPO) is the first sale of stock by a company

to the public.

11.16 Answer to Check your Progress

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1. (a) 2. (c) 3. (b)

11.17 References

Kapila, U., “ Indian Economy: Performance and Policies”, Academic Foundation, New

Delhi.


Fernando, A.C., “ Business Environment”, Pearson Publication, New Delhi

Misra and Puri, “ Indian Economy”, Himalaya Publishing House, New Delhi


1. Examine the role of public sector enterprises in the economic development of India.

2. What do you mean by disinvestment policy?

3. Write a summary on disinvestment policy in India.

4. What is the need for joint sector when there are private and public sector to promote

industries?

5. Discuss role and growth of public sector in India. How its role has been changed during

the recent past

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1

LESSON – 12

Socio-Cultural Environment-Role of Social

Groups and Consumerism In Indian Business

Structure

12.0 Objectives

12.1 Socio-cultural environment-An Introduction

12.2 Concept of Consumerism

12.3 Who are Consumers and what are Their Rights?

12.4 Rights covered by the Consumer Protection Act, 1986

12.5 History of Consumerism

12.6 The Underlying Causes of Consumerism

12.7 Introduction to Corporate Social Responsibility

12.7.1 Pros and Cons of corporate social responsibility

12.7.2 Law and corporate social responsibility

12.7.3 Voluntary Guidelines of 2009 under Corporate Social Responsibility

12.7.4 Public Enterprises Guidelines on CSR

12.8 Business Ethics

12.9 Need of Ethics in Business

12.10 Implementing and Institutionalizing Ethics

12.11 Summary

12.12 Glossary





12.0 Objectives:

After studying this lesson, you will be able to:

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1. Discuss critical elements of socio-cultural elements of business.

2. Explain social class and market place behavior.

3. Describe values, attitudes and life style across social classes.

4. Enumerate the cultural values and see to what extend is business affecting the

culture.

5. Illustrate consumerism in Indian Business.

12.1 Social-cultural environment-An Introduction

Social environment is a sum total of societal factors that affect a business and includes social

customs, ideals and faiths, knowledge and education, the ethical morals, extent of cultural

stratum, clashes and conceives, and so forth. Social environment deals with the factors related to

human relationships and the impact of social opinions and cultural ideals on the organization.

The traditions, faiths and norms of a society resolve how individuals and organizations should be

co-related.

The basic norms and traditions of a particular society tend to be fixed. These basic norms and

traditions are difficult to be changed by the business houses, which become a determinant of

their functioning. Some of the core factors of social environment are social concerns and social

attitudes and values

12.2 Concept of Consumerism:

According to Macmillan, consumerism mean, “protection or promotion of consumers’ interests”.

Merriam defines consumerism as, “public concern over the rights of consumer, the quality of

consumer goods, and the honesty of advertising”.

12.3 Who are Consumers and what are Their Rights?

Every individual is a consumer, regardless of sex, age, caste, creed and color, occupation or

religious beliefs. Consumer rights and welfare is now an essential part of the life of an individual

and we all make use of them at some point in our day to day life. March 15th is considered as

"World Consumer Rights Day". It remembers a historic declaration (1962) by former US

President John F. Kennedy and his four basic consumer rights:

The right to safety

The right to be informed

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The right to choose

The right to be heard

This declaration eventually led to the international recognition of the fact that all citizens,

regardless of their incomes or social standing, have basic rights as consumers. Another

significant day is ‘9 April 1985’, when the General Assembly of the United Nations adopted

a set of guidelines for consumer protection and the Secretary General of the United Nations

was authorized to persuade member countries to adopt these guidelines through policy

changes or law. These guidelines constituted a comprehensive policy framework outlining

what Governments need to do to promote consumer protection in the following areas:

Physical safety

Protection and promotion of consumers’ economic interests

Standards for safety

Quality of consumer goods and services

Measures enabling consumers to obtain redressal

Measures relating to specific areas (food, water, and pharmaceuticals) and

Consumer education and information programme

Now it is universally accepted that the consumer has a right to be provided with all relevant

information in order to avoid exploitation. These rights are well-defined, both on

international and national platform and several agencies like the Government as well as

voluntary organizations are constantly working towards safeguarding them.

In India, 24th December is celebrated as "National Consumer Rights Day", since the

Consumer Protection Act, 1986 was enacted on this day. The Consumer Protection Act was

enacted in 1986 based on United Nations guidelines with the objective of providing better

protection of consumers’ interests. The Act provides for effective safeguards to consumers

against various types of exploitations and unfair dealings, relying on mainly compensatory

rather than a punitive or preventive approach. It applies to all goods and services unless

specifically exempted and covers the private, public and cooperative sectors and provides for

speedy and inexpensive adjudication.

12.4 Rights covered by the Consumer Protection Act, 1986

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The rights covered by the Consumer Protection Act, 1986 are included in the rights

mentioned in the Articles 14 to 19 of the Constitution of India. The Right to Information Act

(RTI), which has made governance processes open for general public also has far reaching

implications for consumer protection. As per the Act, a 'Consumer' has been described as:

One, who consume goods according to their needs by paying some consideration, or

one who use the goods with the approval of the customer.

One, who uses any service for a consideration and any beneficiary of such services,

provided the service is being consumed with the approval of the person who had

hired the service for a consideration.

Right to Safety

It means protection from goods and services which are hazardous to life and property. The goods

and services that are purchased should not only meet the current needs, but also fulfill long term

interests. During the time of purchasing, consumers should not be only made aware about the

quality of the products, but guarantee of products and services. Quality marked products such as

ISI, AGMARK; Brand Power etc. are preferably purchased products.

Right to be Informed

It means to protect the customers from unfair trade practices; they must be informed about the

quality, quantity, standard, potency, purity and price of goods. Before making a choice or a

decision the consumers must demand for all the information about the product or service they

want to purchase. This allows the customer to act wisely and get enabled to desist from falling

quest to high pressure selling techniques.

Right to Choose

It means the customer has the right to choose variety of goods and services at competitive price,

wherever access is possible. When there is monopoly, then it means right to be assured of

satisfactory quality and service at a fair price. Basic goods and services are also included in this

right. When the variety of goods and services are available at competitive prices this right can be

better exercised in the market.

Right to be Heard

It means the appropriate forums must pay due consideration to consumer's interests. It also

means that consumers can represent their issues in various forums specifically made for

consumer welfare. For various matters relating to consumers, various committees have been

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framed by the government and other bodies and various non-political and non commercial

consumer organizations may represent issues related to consumers to committees formed by the

government.

Right to Seek Redressal

It means right to be protected against unfair trade practices that exploit the consumers. The

genuine grievances of the consumer are settled under this right. Most of the time the complaints

issued are of small value but has a great impact on the society. Consumers can take the help of

consumer organizations in seeking redressal of their grievances.

Right to Consumer Education

It means that consumer has all rights to obtain necessary knowledge, information and skill at the

time of purchasing goods and services. Consumers’ ignorance particularly in the rural areas is

mainly responsible for their exploitation. Consumers must be aware about their rights and must

know how to exercise them. Through this way only the real consumer protection can be achieved

with success.


1. State whether the following statements are True or False:

a) Right to Safety means protection from goods and services which are hazardous to life and

property.

b) Every individual is a consumer, regardless of sex, age, caste, creed and color, occupation

or religious beliefs.

c) Right to Seek Redressal means right to be protected against unfair trade practices that

exploit the consumers.

d) Is 24th December is celebrated as "National Consumer Rights Day" in India.

12.5 History of Consumerism

The term “consumerism” was first used in 1915. It refers to the movement for protecting the

rights of consumers against unfair practices, unfair pricing, misleading advertisements and so on.

In 19th century, capitalist development and the industrial development primarily focused on the

capital goods sector and the industrial infrastructure, at that time agricultural commodities,

essential commodities and commercial activities had developed to an extent and little time and

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money was spent for consumer activities. After industrial revolution for the first time in the

history products were available in outstanding quantities and even at low prices. So, began the

era of mass consumption, the only area where the concept of consumerism is applicable.

12.6 The Underlying Causes of Consumerism

As the numbers of formal and informal institutions are growing, a number of discontented and

aroused consumers have combined with them which are capable of focusing discontent, to create

a sufficient pressure to overcome the advantage of the traditionally more effective lobbies

representing the producer's interests. Following are the main causes of consumerism:

The unhappy consumer: These consumers are not part of a same group with easily expressed

complaints. Complaints of every consumer are different from each other and therefore there is a

huge variation in level of unhappiness of the consumers. The underlying causes provide a wide

variety of consumers in the extent of their regret. Moreover, it is easy to distinguish specific

source of regret that are trackable to the marketing environment, from other more common

concerns with the nature of society.

Problems generally occurring in the marketplace: The imperfections occurring in the state of

information in consumer markets is the leading cause behind consumerism. If they could learn

quickly about all the available brands, their prices and characteristics, it would help more in

taking care of consumers effectively. However, as products expand rapidly each consumer is not

able to make adequate price and quality comparisons in the market place. This incapability leads

to "increasing shopper confusion, consequent irritation and consequent resentment." This

problem is more serious in case of frequently purchased products.

The revolutionary consumer: The unhappy consumers expressed their discontentment in

number of ways and pressurized to introduce significant change during 1960's. In 1910 and 1935

eras there was a visible development of means of translating displeasure into effective pressure

that distinguishes the recent consumer efforts. Advocates such as Ralph Nader, Senator Warren

Magnuson and a number of Journalists who pursue similar interests helps in consumer

representation. These men were able to identify and publicize problems, and follow up with

Workable programs for improvement. In a true manner, these men were the self elected legal

counsels to a typically unrepresented constituency. Without these men paying attention to many

of consumer problems would have not been possible. Truth is, consumers don't really know what

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is bothering them or realize that others are dealing with the same problem until the problem is

publicized or an alternative is provided. In the recent years the institutional framework has been

widened and enhanced. Government provides a permanent support to these bodies such as

Consumers Union and Consumers Research, Consumer Advisory Council and the Office of the

Special Assistant to the President for Consumer Affairs. Some of the older regulated bodies

have been specifically developed to avoid the problems of extra recognition with regulated

industries.

12.7 Introduction to Corporate Social Responsibility

In the 21st century, the world is facing frequent Climatic changes, the desire for all-encompassing

development and various other challenges and opportunities arising from globalization. The

Indian business has now taken a leadership role in meeting such challenges and due to this today

Indian business is globally recognized as a responsible component of the ascendancy of India. To

ensure the long term success, competitiveness and sustainability of business, integrating social,

environmental and ethical responsibilities into the governance of businesses is very important.

This approach also ensures that business is an indispensable part of society, and has to play very

active role in the survival and progress of healthy ecosystems. Today, even customers are very

conscious and prefer the products and services of the companies which are effectively

performing corporate social responsibility.

The concept of corporate social responsibility came into limelight when Howard R. Bowen,

introduced his book “Social Responsibility of Businessman”. The book suggested that businesses

should consider social implications at the time of taking their decisions. Corporate Social

Responsibility (CSR) is concerned with the business practices which follow ethical norms,

comply with the legal provisions and aim at the promotion of benefits to the individuals and

community at large. H. S. Singhania classifies the social responsibility of business in two parts:

The way through which a business can able to run its activities;

The additional function of business is to perform the welfare activities.

World Bank Group states the recent definition as; “Corporate social responsibility is the

commitment of businesses to contribute to sustainable economic development by working with

employees, their families, the local community and society at large, to improve their lives in

ways that are good for business and for development.”

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12.7.1 Pros and Cons of Social Responsibility of Business

There is a continuous debate going on whether a business should assume social responsibility or

not. This is because every business wants to earn more and more profits. It is generally viewed

that if a business assumes social responsibility, it will not be able to achieve its objective of

profit maximization. So let us have a view of should a business assume its social responsibility

or not, in context of the various arguments put in favor of and against the corporate social

responsibility.

Pros of Corporate Social Responsibility:

1. Public Requirements: The business has a strong inter-relationship with the society. A

business takes its inputs from the society and in return, its output is also consumed by the

society. So, for a business to grow and develop, it must fulfill the needs of the society.

Today, expectations of the public form the business have changed with the passage of

time. Therefore, every business that needs to survive in the changing times has to adapt to

those dynamic expectations of the public.

2. Favorable for business: Fulfillment of corporate social responsibility not only benefits the

society but it is beneficial for the business itself also. The business firm that is more

responsive towards the fulfillment of social responsibility and upliftment of the society

has a better community in which to conduct its business. Moreover, the enterprise is

being rejected which does not fulfill their social responsibility.

3. Moral Response: Nowadays, modern industrial society faces a lot of social problem due

to large scale emergence of industries. It becomes the moral responsibility of the business

concern to work for the betterment of society and resolve the social issues. Moreover, if

we see on ethical grounds also, a business makes use of the different resources from the

society. So it becomes a moral requirement to devote some of these resources for the

overall development of the society as well.

4. Socio-cultural Model: In our country, where people value social heritage, it is much clear

that business promotes social equalities, healthy employer-employee relations and works

for the upliftment of the society, so that it can enjoy better social position. The business

houses that do not work for the welfare of society and work against their traditional

values will definitely receive criticism from the society.

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5. Responsibility must correspond with power: Business enjoy great social power and affect

the economy, minorities and other social issues. So, in order to match their social power,

the business must perform equal amount of social responsibility as well. If they fail to do

so, it will reflect their irresponsible behavior, and will have a negative impact on their

social repute.

6. Creates public image: Every business wants to have a larger customer base, better

employees, increased profitability, more responsive money markets etc. so, a firm can

enjoy better public image if it meets its responsibility towards different sections of the

society.

7. Government regulations: Every business has to regulate its operations in public interest.

A business is compelled by way of government laws and regulations, if it does not work

according to the needs of society.

8. Indebted to society: There exists inter-dependence between the business and society.

Business makes use of the various resources form the society. Thus, it is indebted to the

society for providing vast resources.

Cons of Corporate Social Responsibility:

1. Deviation from the main objective: The primary objective of every business is to

maximize its profits. Thus, economic efficiency is the top priority and any deviation from

this may divert the business from its mission. The welfare of employees and owners will

also be served well by increasing the profitability of the business concern. Moreover, the

performance of social responsibility also requires the cash outflow and it adversely

affects the financial position of the concern. It is to be noted here that the nature of

business activities is economic and not social and the only criteria to measure the success

of the business should be the economical values and not the social service.

2. Increase in prices: We have already discussed that the business will perform social

obligations by incurring certain costs. Now, the actual burden of this cost will be shifted

to the customers by way of increased prices of the goods and services. Thus, whatever

costs, a business occurs on the social welfare, the burden will ultimately shift to

customers, by way of a part of cost of production of the goods and services. So,

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ultimately it is the consumer who bears the ultimate burden of the corporate social

obligation.

3. Excessive concentration of power: If we combine the social activities with the economic

activities of the business, it will imply giving the business excessive concentration of the

power. Business has already got enough social power. If we over power it, this would

mean letting them influence society in education, in home, in government and in the

market. Thus, the society will also start depending upon the business. And this

dependence will create many social, economic and political problems.

4. Lack of social skills: It is also possible that a businessman, who is good at managing

business, may not be good at solving social problems. We know that a businessman

devotes all his energies in running his business efficiently and smoothly. He might not

have the appropriate skills to resolve the complex social issues.

5. Influence on social set-up: When business starts spending its resources for the welfare of

the society and resolving the social issues, it may try to influence the society for its own

good. This may hamper the growth and development of the society and may give rise to

many social, economic and political issues.

6. Lack of Accountability: There is no direct accountability to the people by businessmen.

Therefore, it is not advisable to make them responsible for those areas for which they

have no accountability. We know that the business management is only accountable to

the owners when profits are concerned, but not to the society for the fulfillment of its

social obligations.

7. Opposition from the society: This might also be the case that the various groups in the

society do not want the involvement of the business in the various social goals. There is a

great difference in opinion among the various social groups, businessmen, government

and other stakeholders. There might be one group that is in favor of the involvement of

business in the social activities, while there may be a few others also who do not wish to

have the involvement of business into the social goals.

8. Complex social Problems: There are many social issues which remain unresolved despite

the involvement of large business houses. Some of the prominent social problems include

AIDS, Deforestation, Sex discrimination etc. Similarly, when we talk of business, it has

to face many issues, for instance, how to maximize its profits, reducing the cost of

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productions, ensuring timely supply of goods to its customers etc. Now when a business

itself is facing so many complexities, how can we expect it to fulfill its social

responsibility amidst its own huge complex problems.

12.7.2 Law and Corporate Social Responsibility:

Under the Companies Act, 2013, any company having a turnover of rupees 500 crore or

exceeding rupees 1,000 crore or more or having a net profit of rupees 5 crore or more is bound to

spend 2 per cent of their net profits on CSR activities as per fiscal policy.

12.7.3 Voluntary Guidelines of 2009 under Corporate Social Responsibility:

The Ministry of Corporate Affairs has prepared a list of voluntary guidelines that indicate some

important elements that businesses needs to focus in order to assist the businesses to adopt

responsible governance practices at the time of conducting their affairs. The expectations of the

society have been taken cared while preparing these guidelines. Ideas, norms, guidelines

received from trade and industry chambers, stakeholders and experts are taken care of while

drafting these guidelines.

Basic Principles: Each business house should frame a CSR policy to help its strategic planning

and provide a direction for its CSR initiatives, which should be aligned with its business goals

and be an integral part of overall business policy. The policy should be approved by the Board

only if it is framed with the participation of various level executives.

Important Elements: The CSR Policy should normally cover following important elements:

1. Care for all Stakeholders:

The companies must take care of the interests of all stakeholders including shareholders,

employees, customers, suppliers, society and government and must create value for all of them.

In order to actively engage with all the stakeholders, business must develop a mechanism that

can inform them of inherent risks and mitigate them where they occur.

2. Ethical functioning:

The business should be governed by the principles of Ethics, Transparency and Accountability.

Abusive, unfair, corrupt or anti-competitive practices must be avoided.

3. Respect for the Rights and Welfare of Workers:

In order to promote the dignity of the workers the companies must provide a safe, hygienic and

humanist workplace. They should uphold the freedom of association and the effective

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recognition of the right to collective bargaining of labour, have an effective grievance redressal

system, should not employ child or forced labour and maintain equality of opportunities without

any discrimination on any grounds in recruitment process and so on.

4. Respect for Human Rights:

Human rights must be respected by the companies and any abuses to these rights should be

avoided by the company and third party.

5. Respect for Environment:

In order to check and prevent pollution the companies should take measures to; recycle, manage

and reduce waste and manage the natural resources in a sustainable manner and promoting the

efficient use of energy and environment friendly technologies. It should also ensure the optimal

use of resources like land and water and adopt the method of cleaner production by proactively

responding to the challenges of climate change.

6. Activities for Social and Inclusive Development:

Companies should undertake activities for economic and social development of communities and

geographical areas, particularly in the range of their operations while depending upon their

competency and business interest. While targeting at disadvantaged sections of society the

education, skill building for livelihood of people, health, cultural and social welfare etc., could

be included.

Implementation of these Guidelines:

1. CSR policy of a business firm must accompanied by appropriate implementation strategies.

Implementation strategy must include the description of projects/activities, setting measurable

physical targets with stipulated time period, organizational structure and obligations, time

schedules etc. Civil society/non-government organizations, business associations and other local

authorities may become partners with the companies. For social development they can motivate

the voluntary efforts of the employees and also influence the supply chain for CSR initiatives.

CSR activities may evolve a system of assessment in a particular area. It is also required time to

time to make independent evaluation for selected projects/activities.

2. For the CSR activities, the companies are required to allocate the specific amount from their

budgets. The amount allocated for CSR activities is related to profits after paying tax, planned

CSR activities cost or any other relevant parameter.

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3. CSR activities are responsible for encouraging the business practices in order to share

experiences and network with other organizations and the company should engage with well

established and recognized programmes/platforms. Through this they may become able to

improve their CSR planning and this in return builds their image of being socially responsible.

4. The companies must disclose their information regarding CSR policies, activities and its

development in a systematic manner to all their stakeholders and the society at large through

their annual reports, publications, journals, website and other communication media.

12.7.4 Public Enterprises Guidelines on CSR

The Department of Public Enterprises had issued certain Guidelines on Corporate Social

Responsibility (CSR) for CPSEs in April, 2010 which have been delivered to the

Ministries/Departments as well for compliance in the Central Public Sector Enterprises (CPSEs)

under their directive control. Following are the marking features of guidelines on CSR &

Sustainability:

(i) To conduct the business in an economically, socially and environmentally sustainable manner

which is transparent and ethical companies are required to make commitment towards their

stakeholders through Corporate Social Responsibility and Sustainability.

(ii) CSR and Sustainability agenda is perceived to be equally applicable to external and internal

stakeholders, including the employees of a company, and a company’s corporate social

responsibility is expected to cover even its routine business operations and activities. CPSEs are

expected to formulate their policies with a balanced emphasis on all aspects of CSR and

Sustainability – equally with regard to their internal operations, activities and processes, as well

as in their response to externalities been clubbed together in one set of guidelines for CSR and

Sustainability because of close linkage between the two concepts.

(iv) The Boards of Directors of Public Sector enterprises are required to make approval for their

CSR and Sustainability policy. They are required to undertake such a policy which makes

approval/ratification of their Boards. The Board of Directors of CPSE’s decides the CSR and

Sustainability activities which are to be undertaken within these guidelines.

(v) The CSR and Sustainability are decided by the profitability of the company which is

determined by the Profit after Tax (PAT) on the company in the previous year.

12.8 Business Ethics: What does it really meant to be?

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When we talk about ethics, moral values and beliefs, we generally come across a philosophy that

deals with deciding what is good or what is bad for us. Ethics involves the context of moral duty

and a discipline that examines good or bad practices. But when it comes to everyday business,

ethics mean performing the daily tasks, competing with others in an honest manner and comply

with the law without any element of dishonesty. Thus, it includes those practices and behaviors

that are good or bad.

There are two components of business ethics. These are descriptive and normative ethics.

Descriptive ethics involves a detail study that represents morality. It basically deals with

the concept of – “What is?”

Normative ethics involves justification and supply of moral systems. Thus, this concept

basically answers the question of – “What should be?”

In simple words, business ethics refers to the study of standards regarding the conduct of

business and its moral judgment;

.

Ethics are the main component of human awareness, which helps in promoting good human

being through the journey of common thread of goodness, good society and good life. We can

define ethics as the principles of a framework of philosophy of an individual on the basis of

which we decide what is right or wrong, good or bad, correct or incorrect.

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The value system that we acquire and develop shapes our attitudes, performances, goals and

aspirations. It sets the standards and guidelines that govern our behavior. In business also, we

come across certain situations, where as a manager, we have to take many decisions and these

decisions are governed by our moral values and beliefs. These beliefs guide us about right or

wrong, fair or unfair, good or bad. Thus, ethical beliefs define our conduct in an organization as

well and so we term it as ethical conduct in a business. It deals with behavior of managers in an

organization. The structure of an ethical environment is described as follows:

a) Code of conduct: A code of conduct may be defined as a statement that can able to

resolve the employee’s ethical queries and outlines the organizational expectations and

requirements.

b) Educational Ethics: The detail solution for every ethical situation cannot be provided by

the codes of conduct, so there is a requirement for corporations to provide proper training

and education in ethical reasoning.

c) Ethical Action: It helps in resolving the employee’s ethical problems through recognition

and reasoning and passing them into ethical actions.

d) Ethical Leadership: It states that management must prove ethical behavior in their

actions.

The ethical conduct involves the following values:

a) Regular Improvement: The need and capacity of the organization to start and improve the

ways to develop itself.

b) Customer Satisfaction: The customer feels a positive satisfaction from the company’s

people, products and services emotionally.

c) Promoting the Employees: The need and capacity of the company to boost the ethical

values of the employees working in the organization.

d) Innovation: The capacity and capability of the company to project into current break

through opportunity areas.

e) Optimum Use of Resources: The capacity and capability of the company to uplift its

performance by maximum utilization of its existing resources.

f) Responsibility towards Society: The responsibility of the company is to focus on the

societal desires and demands of the society.

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The following figure gives a detail about the various origins of ethical norms.

12.9 Need of ethics in business

Business in India is passing through tree-bullet times as there is lot of concern for business

survival and growth due to various factors such as global and domestic competition of MNCs,

environmental degradation, need for balancing multiple stakeholders’ expectations etc.

Business is a part of society. Its functioning should contribute to the welfare of society as a

whole and not only to itself. Therefore, organizational decisions should be made in such a way

which not only provides benefit to the organization but also the society at large, so as to

maximize the welfare of society. Many management theorists stress that companies must operate

according to the values that mentor the contemplation and actions of people in the company.

In view of the above discussion, it is appropriate to discuss at this stage the ethical

conduct for a business as propounded by a renowned management thinker, Dr. M. B. Athreya.

He gave a seven factor model to do a business in an ethical manner. These are described as

follows:

a) Righteousness: It is important for the business to follow ‘dharma’ in the creation and

sharing of wealth; maintaining the highest standards of ethics and integrity in every

action taken.

b) Public Good: Another significant value is that individuals and organizations should work

not just for private goal, but also for well-being of community as a whole.

Fellow Employees

Family

Acquaintance

The Law

Provinces of Country

Profession

Boss

Societal Influence

Friends

Spiritual Faiths

The Individual

Conscience

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c) Efficacy: It is critical that all businesses pursue efficiency, productivity, resource

optimization and conserve resources so as to internalize the value of efficacy in the best

interest of sustainable development of the economy as a whole.

d) Innovation: Business has to strive towards innovations and constantly moving ahead in

order to meet the growing social and economic expectations of its various stakeholders.

Thus, every business has to work for the effective solutions to the societal issues with its

innovation.

e) Learning: Business is the key instrument to solve the problems of growth, employment,

education, consumption, information and quality of life. The constant feedback helps a

business to improve and progress. The viability and health of nations and global society

will depend on the skills of learning and utilization of such learning by business.

f) Respect: Prof. Athreya adds another ethical aspect of respect for individuals and human

dignity in the business. It is said that respect begets respect. In business also, we are

dealing with human beings. Everyone wants respect for himself, be it any organization.

So, we should imbibe the feeling of respect and concern for the people.

g) Competitive: Business should be aggressive, competitive, with lot of initiative and

creativity. All its efforts should be directed to increase market share ethically so

12.10 Implementing and Institutionalizing Ethics

In order to fully implement and therefore institutionalize ethical conduct in an organization, there

is a need to initiate the following steps:

a) Selection: The prime activity that we have to do is to make a selection of the values or

ethics that we need to implement in our organization. This is of key consideration

because unless we have a clear idea in our mind about the ethical behavioral aspects that

we want in our organization, it will be very difficult for us to develop a sound code of

conduct for the organization.

b) Commitment: In order to implement the designed ethical conduct, there arises a need to

work with full commitment. It is essential for all the people in the organization to be fully

committed towards their business objectives and strive for improving their performance

so as to ensure growth and development.

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c) Standards: In order to implement the designed ethical conduct, standards must be set for

each activity in the company and it must be accepted by each individual working in the

organization.

d) Structure: For the proper implementation of the ethical conduct, the company must

clearly illustrate their structure that defines job positions, divisions, departments etc., for

the proper working of the organization so as to ensure its growth and development.

e) Jobs, Activities and Systems: For the effective implementation of the values and ethics,

the company needs to transparently mention the job positions, divisions, activities and

up-to-date systems. The values need to be integrated into each job position, division and

activity that needs to be performed in the organization. Specific performing strategies and

even individual performances need to be co-related to these values.

f) Employee Responsibility: The responsibility of every individual regarding the

implementation of each value must be transparently illustrated and accepted. For

instance, when we prepare for job orientation, job description.

Now, we have discussed the various pre conditions for successfully implementing the ethical

conduct in an organization. However, it is important here to note that there are certain on-the-job

ethical dilemmas that need to be addressed. For instance, there may be a situation for personal

gain an employee discloses illegal or perform immoral or unethical practices in the organization

through which a business decision may be influenced. There might be some positive aspects as

well i.e. there may be some employees who are constantly involved in saying truth and support

deeply the ethical principles in business decisions. Thus, people expect the employees to be

trustful and reliable, but in some cases ethical conflicts may occur.

Check Your Progress B


a. Descriptive ethics involves a detail study that represents morality.

b. Is ethical action not able to solve the employee’s problems.

c. Customers preferred their products and services in the long run.

d. Ethics refers to the standards regarding the conduct of business and its moral judgment.

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12.11 Summary

The consolidation of scientific economic and of modern market institutions took place in the

eighteenth century, when also the social role of the consumer, combining traits of hedonism and

rationality was distinguished from the wasteful irrational elites of the ancient regime. Whereas

the early 20th century consumer was a mass market consumer, today’s consumer is characterized

by a general emphasis on individual style, paralleling the customization and niche marketing that

has overtaken the economy. The tendency within consumer culture today is to view lifestyles as

no longer requiring inner coherence; marketers and cultural intermediaries (fashion;

entertainment) cater for and expand the range of styles and lifestyles available to global

audiences and consumers with little regard to authenticity or tradition. And just as the consumer

was theorized into existence by the economic philosophers of the 18th century, and turned into

the linchpin of 20th century economies by economic policy makers.

Corporate social responsibility (CSR) is concerned with the business practices that follow ethical

norms, comply with the legal provisions and aim at the promotion of benefits to the individuals

and community at large. In simple words, it refers to the commitment and duties of the

organization towards different sections of the society. Thus, it means the business practices

which follow ethical norms, comply with the legal provisions and aims at the promotion of

benefits to the individuals and community at large along with their own interests. Business ethics

is a set of moral values and principles that govern what human conduct ought to be. In simple

words, they specify what is right/ wrong, fair/unfair and good/bad.

12.12 Glossary

a) Descriptive ethics – It involves a detail study that represents morality

b) Normative ethics – It involves justification and supply of moral systems.

c) Ethics – It refers to the study of standards regarding the conduct of business and itsmoral judgment.

d) Righteousness – Maintaining the highest standards of ethics and integrity in every

action taken.

e) Ethical Dilemma – The choices of the business that create a tension between business

between their private gain and public gain or between ethics and profits.

f) Corporate Social Responsibility –It concerned with the business practices which

follow ethical norms, comply with the legal provisions and aims at the promotion of

benefits to the individuals and community at large along with their own interests.

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1) a) true

b) true

c) true

d) true


1 a) true

b) false

c) true

d) true

12.14 References

Oxford Dictionary edited by Julie Elliott with Anne Knight and Chris Cowby, Published

by Oxford University press. P-155.

The new international Webster’s student dictionary of the English language by Sidney I.

Landau (editor in chief), Published by trident press international 1996 edition. P-153

Cambridge international dictionary of English by Paul Procter-editor in Chief, Published

by Cambridge University Press, 1996 edition. P-294

Collias Essential English dictionary 2nd edition 2006 c. Harper Collins Publishers 2004,

2006.

The Chamber's Dictionary 11th edition by Chambers, published by chambers harrap 2005

vol. 19 p-148.

http://business.gov.in/consumer_rights/meaning_concept.php

Tom M.Hopkinson, “New Battleground—Consumer Interest,” Harvard Business Review

(September—October, 1964), p-97.

S. Chase & F. J. Schlink, Your Moneys Worth: A Study in the Waste of the Consumers

Dollar (NewYork: Macmillan, 1927).

A. C. Fernando, “Business Ethics – An Indian Perspective”, Pearson Prentice Hall, 2012

Richard T De George, “Business Ethics”, Pearson Education Ltd

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Harold Koontz, Heinz Weihrich, “Essentials of Management, An International andLeadership Perspective”, McGraw Hil

Stephen P Robbins, Mary Coutler and Neharika Vohra, “Management”, Pearson PrenticeHall.

12.15 Suggested readings

1 Joshi,R.K.(2009):International Business, Oxford Publications, New Delhi.

2 Paul, Justin (2010): Business Environment: Text & Cases, Mc Graw Hill

Education.

3 Sundaram, Anant K., Black, J. Stewart: The International Business Environment:

Text And Cases, PHI Learning

4 Cherrunilam, Francis, (2003), Business Environment, New Delhi: Vikas

Publishing House Private Limited.

12.16 Terminal/model questions

1. Describe in detail the rights of the consumers under the Consumer Protection

Act,1986.

2. What is consumerism? What are the various underlying causes of emergence

of consumerism?

3. What do you mean by business ethics? Discuss the need and importance of

ethical business conduct.

4. Should a Business be obliged to fulfill the social responsibility? Give your

arguments. What are the key considerations while implementing corporate

social responsibility?

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Lesson 13

Ecological Protection

13.1 Objectives

13.2 Introduction to Ecological Protection

13.3 Ecology

13.4 Need for Environmental Protection

13.5 Environment and Business

13.6 Sustainable Development through Green Growth

13.7 Green House Effect

13.8 Global Warming

13.9 The Environment Protection Act, 1986

13.10 Carbon Footprint

13.11 Reasons responsible for alarming individual carbon footprints

13.12 Green management

13.13 Strategies to Green Management

13.14 Summary

13.15 Check yourself

13.16 Glossary

13.17 Answers to Check Your progress

13.18 References


13.20 Terminal Questions

13.1 Objectives


Explain the difference between environment and ecology

Describe the need for ecological protection

List the features of Environment (Protection) Act, 1986

Define green management

Explain strategies for green management

13.2 Introduction to Ecological Protection:

The credit for mainstreaming Ecological Protection in the public domain goes to Rachel

Carson’s magnum opus ‘Silent Spring’. This treatise on unregulated economic growth and its

threat to ‘Mother Nature’ and human health led to a start of Environmental movement in

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West, primarily in United States of America. Back home, it was the ‘Chipko’ movement,

where village folks cutting across gender and caste divide protested against deforestation by

timber contractors in the foothills of Himalaya. Whether it be the west or our own country a

strong desire to protect our natural habitats and its inhabitants has shaped the discourse of

Ecological Protection.

As a human being it is important to understand environment because it is this understanding

which would make us appreciate that how humans, animals, ocean currents, water cycles,

food chains, etc are all interrelated and the emergent interrelationships arising between

various ecosystems makes the earth what it is. This understanding would help the mankind to

stop the unbridled damage or work towards repairing what has been already damaged. Thus

an understanding of environment helps the society towards various aspects of environment

like conservation of nature and natural resources, conservation of bio-diversity, stabilization

of human population and environment, social issues in relation to development and

environment, control of environmental pollution and development of non-polluting renewable

energy system etc.

The term environment originates from a French word “environ‟ means “encircle‟ and

includes within it everything on the earth like the land, water, flora, fauna, living creatures,

forests etc. Environment generally comprises of land, water, air, the things imbibed and also

embedded in the land. The more specific meaning is taken as covering the common physical

surroundings such as air, space, water, land, plants and wildlife.

The term “Environment” means totality of all physical, biotic and extrinsic factors effecting

the life and behaviour of all living things. In order to maintain an ecological balance it is

important that the environment of which land, water, air, human beings, plants and animals

are the components be preserved and protected from degradation. It’s the responsibility of

each and every individual to protect their surroundings.

Environment is common as well as equally important for all human beings. Each and every

individual despite having variation in their occupational role is affected by many

environmental issues like global warming, deteriorating forest cover, depletion of ozone

layer, loss of biodiversity, energy resources, etc. The study of environment basically deals

with the analysis of the processes in water, air, land, soil and organisms which leads to

pollute or degrade environment, largely all this happens because of man-made activities.

Section 2 (a) of the Environment (Protection) Act 1986 defines environment as “Environment

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includes water, air and land and the inter-relationship which exists among and between water,

air and land and human beings, other living creatures, plants, micro-organism and property”.

While disposing the case M.C. Mehta vs. Union of India, the Supreme Court explained the

environment as follows:

“A point has been reached in history when we must shape our actions throughout the

world with a more prudent carte for the environmental consequences. Through ignorance

or indifference we can do massive and irreversible harm to the earthly environment on

which our life and well-being depend. Conversely, through fuller knowledge and wiser

action, we can achieve for ourselves and our posterity a better life in an environment more

in keeping with human needs and hopes. There are broad vistas for the enhancement of

environmental quality and the creation of a good life. What is needed is an enthusiastic but

calm state of mind and intense but orderly work. For the purpose of attaining freedom in

the world of nature, man must use knowledge to build in collaboration with nature a better

environment. To defend and improve the human environment for present and future

generations has become an imperative goal for mankind – a goal to be pursued together

with, and in harmony with, the established and fundamental goals of peace and of

worldwide economic and social development”.

13.3 Ecology

The interactions and organization of various creatures along with the total function of eco-

system are known as ecology. If we see the dictionary meaning of ecology then, it is a branch

of biology dealing with relation of living organism to their surroundings along with their

different modes of life. The word ecology is derived from the Greek words Oikos which

means habitation and logos meaning study. Ecology not only studies the relationship of

individual organisms with their environment, but also deals with the study of various

communities, ecosystems, populations, biomes and the biosphere as a whole. Thus, the

subject matter of ecology is broadly divided into four main broad categories viz. population

ecology, physiological ecology, community ecology and ecosystems ecology. The word

"Environment" generally means relating to the natural versus man-made world whereas

“Ecology” focuses not just on the inclusion of the components of nature individually but

especially in searching out how the various parts of eco-system (which includes land, air,

water, soil etc.) interact with each other. The study of both ecology and environmental

science as a disciplines are very much interlinked and familiarity with the principles of one is

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essential to fully comprehend the other. Environmental science incorporates many elements

of earth and life sciences to understand various natural processes whereas ecology, on the

other hand, is usually more focused on how various organisms interact with each other with

their immediate surroundings. Ultimately, both sciences provide very significant information

about nature and what people can do better to protect and save the planet earth by doing

efforts to conserve its resources.

13.4 Need for Environmental Protection:

The world along with its development centric needs must show an equal resolve for

environmental protection. This is an indispensable need of the hour. What needs to be

emphasized in the global context is that, universal legal statutes and laws need to be adopted

along with a strong will and adequate machinery to enforce the legal mandate to protect the

endangered environment. Without law, environmental standards cannot be enforced in a

proper manner. It is only if these laws are strongly implemented that would lead to

Environmental Conservation. Environmental laws may be an amalgamation of common law,

miscellaneous provisions in some statutes which include specific statutes exclusively dealing

with environmental problems.

13.5 Environment and Business

Any developmental activity undertaken by any country has its impact on environment as

economic growth, human well-being and environmental performance are inseparable. The

welfare of the region’s population and the profitability of all its economic activities will

depend on accepting different strategies and how policy makers and businesses act on this.

Contemporary situation of environmental degradation is showing its alarming harm effects on

human wellbeing. The development of both economic and environmental activities can be

mutually beneficial or mutually destructive. Thus, there is an urgent need of business

enterprises where people can integrate the tools of business and sustainability for better

development. Undoubtedly, business has its impact on environment and it becomes necessary

for almost all the countries across the globe to frame the measures to manage any potential

trade-offs which can best exploit the synergies between green growth and poverty reduction.

Growth with sustainability is a bigger issue in the context of growth of Indian economy. If

business firms can keep a check on environmental degradation then only the goal of

sustainable development can be achieved. For development to be sustainable various means

can be adopted for example by bringing in more efficient infrastructure to people (e.g. in

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energy, road, water and transport), introducing efficient technologies that can provide the

goods at cheaper rates also increases its productivity and tackling poor health associated with

environmental degradation. Green growth strategies i.e. those strategies which can provide a

clear framework for the countries with the help of which they can achieve economic growth

and development along with the control over environmental degradation. It is being

recognized by the proponents of green growth strategies that focusing on GDP (Gross

Domestic Product) for the measurement of development in a particular country or as the main

tool to measure economic progress generally overlooks the contribution of natural assets to

wealth, health and well-being of the individuals. Thus, there is dire need to rely on a broader

range of measures of progress, development including the quality and composition of growth

along with environmental concerns and how this affects people’s wealth and welfare. “Green

Growth Model” offers real opportunities for development by bringing in more inclusive

growth in developing countries along with environmental protection.

Paradigm shift in global business reflects a new social structure as we look through global

information. Now, here comes the role of entrepreneurs. Entrepreneurs are the individuals

who identify business opportunities and allocate resources for meeting the demands of the

customers. Green entrepreneurs are the entrepreneurs who integrate social and environmental

concerns into economic actions. Green entrepreneurs provide innovative solutions to the

ways in which services are produced and consumed. Green entrepreneurs have a lot of

objectives like profit maximization as well as societal objectives too. They try to adopt those

strategies which will be green, ethical and fulfill social motives as well. So, green

entrepreneurs may be called as social entrepreneurs who focus on financial objectives. With

the emerging development paradigm along with societal responsive green entrepreneurship,

the two together can bring about major changes in practices the way the consumption of

natural resources take place, thus fostering sustainable economic development.

Most of the times, GREEN is used for linking business with environment or ecological

sustainability. The term “Ecopreneur” was used by Isaak (1998) for those individuals who

found green businesses and achieved social as well as ecological goals along with profit. For

moving towards a truly sustainable society, it needs to be believed that ecopreneurs are

actually the change agents who would drive the sustainability transformation process (Isaak,

1998). Many organizations have framed policies for implementing green growth strategies

which can bring in more sustainable development. Green growth policies can help in more

sustained growth thereby providing certain benefits like:

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Improving productivity by creating incentives for greater competence

Providing more opportunities for innovation and value creation.

Boosting investors’ confidence through greater likelihood in generalizing how

ministries/governments/environmental organizations deal with major environmental

issues or problems.

Opening up those kind of markets where demand for green goods, services and

technologies can be stimulated for sustainability.

Contribution of enterprising entities to fiscal consolidation by organizing revenues

through green taxes and through the elimination of all those subsidies which do harm

to the environment. This move can take the economy towards more sustainable

environment.

Reducing the risk of negative shocks to growth due to various resource bottlenecks.

The developed and the developing world together is working on adapting sustainable

measures along with identifying the policy mixes and measurement tools which countries (in

different situations) can adopt to implement green growth strategies for development. Thus,

in a way which can contributes to sustainable development objectives like controlling

environmental degradation, poverty eradication, generating employment opportunities etc.

13.6 Sustainable Development through Green Growth:

Policy makers across the globe are recognizing the importance of creating harmony and

balance between economic development and environmental sustainability. The focus is on

integrating environmental considerations into the various economic developments planning

process. This would lead to a balanced approach which would not shift focus from

development while keeping the ecological concerns too into considerations. Sustainable

development stresses the importance of taking a long term perspective about the

consequences of all those activities which are happening today. The global cooperation

among countries need to be strengthened in order to reach at viable solutions for controlling

environmental degradation. Sustainable development refers to that development path wherein

we will not compromise with the resources of our future generations. As a part of sustainable

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development, green growth strategy is about settling and strengthening various aspects of

economic, environmental and social policies of the nation. By adopting green growth

strategies an economy can move towards environmentally sustainable development. In

addition to this, country needs to take into account the real value of natural capital of the

nation and recognizing its essential role in economic growth process and development. An

adoption of green growth model promotes a cost-effective and resource efficient way of

managing sustainable production. This sustainable path can help us in achieving the

following outcomes if designed and implemented effectively. Some of the green growth

outcomes are as follows:

Economic Outcomes

More equitable distribution through production of conventional goods and services in

an economy. This will enhance employment opportunities as well.

Increased production of unpriced ecosystem services

Economic diversification which can reduce the negative shocks to growth

Production, access, innovation and uptake of green technologies for development

which will help in enhancing market confidence as well.

Environment Related Outcomes

Efficient utilization of limited resources can increase productivity and efficiency of

natural resource use.

The natural capital of a nation must be used within ecological limits to save resources

for future generations

Capital enhancement through use of non-renewable natural capital

Better risk management strategies for better environment.

Social Outcomes

The target of welfare for all can be achieved by adopting these kind of practices.

There will be more livelihood opportunities which can enhance human well-being,

income and better quality of life, notably of the poor.

Enhanced social, human and knowledge capital of the nation

13.7 India’s initiatives for implementing globally specified targets and indicators:

India’s latest report published on implementation of Millennium Development Goals (GoI,

2011) contains a section on MDG7 i.e. to ensure environment sustainability which includes

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number of indicators such as forest cover, access to safe drinking water, sanitation facilities,

reduction in CO2 emissions etc. Environmental impacts are enormous as they act at varying

level influencing the quality of human life. Most of the times the various developmental

activities undertaken to improve the living standard of people, at large, affects the natural

environment adversely in many ways and cause severe threats to bio-diversity at large. The

MDG-7 addresses the concern for sustainable development to reverse the impact of various

activities which causes environmental degradation and loss with focus on improving/

monitoring indicators associated with it. Essentially the Goal 7 is about ensuring

environmental sustainability, so that the present generation may not utilise the resources of

future generation. In case of Target 7A of MDG 7 i.e. to integrate principles of sustainable

development into country policies and programmes and reverse the loss of environmental

resources, certain steps has been initiated in case of India. The Green India Mission targets to

increase forest and tree cover to make India’s development more sustainable. In order to

protect forest cover of the country, certain initiatives have been taken by the government for

the inclusion of more area under protected area of the country. India’s protected area cover

has been increased by about 70,000 hectares from 1999 to 2011. As per assessment in 2013,

the total forest cover of the country is estimated around 697898 sq. km which comprises

21.23% of the geographic area of the country. During 2011-2013, there is an increase of 5871

sq. km in forest cover of the country. In the fields of energy use focus is more on its efficient

utilization. Carbon emissions need to be controlled and in case of India, CO2 emissions have

‘experienced dramatic growth’, with India becoming the world’s third largest CO2 emitting

country. In case of Target 7B i.e. reduce biodiversity loss, the link is missing in the report and

most probably it is integrated with the above figure. Some data is required for the estimation

of loss of bio-diversity so that government can initiate steps for its recovery. Target 7C i.e.

Halve the proportion of people without sustainable access to safe drinking water and basic

sanitation by 2015, which is the very much necessity of one’s life. In this regard, in case of

India, proportion of households without access to safe drinking water has reduced

significantly (which is a good sign for a nation) from about 34 percent in 1990 to about 9 per

cent in 2008–09 and moreover India is on its way to 100 per cent coverage for safe drinking

water. As far as sanitation facilities are concerned, proportion of households without

sanitation facilities has reduced from about 76 per cent in 1990 to about 50 per cent in 2008–

09 (at which rate, 43 per cent will remain without such facilities, missing the MDG target by

about 5 percentage points). For further improvements in human wellbeing, Target 7D

focusses on significant improvement in the lives of at least 100 million slum dwellers by

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2020 across the country. In case of India, slum population increased from 46.26 million in

1991 to 61.82 million in 2001; while the number of slums declined about 13 per cent from

1993 to 2008–09, the latest estimates of slum population according to census 2011 shows an

increasing trend.

13.8 Green House Effect:

One of the factors that affect the world's environmental conditions is the greenhouse effect.

The greenhouse effect held responsible for contributing to earth's environmental woes, but it

has a vital positive effect on the planet as well. Life on earth would be vastly different, or

even non-existent, without this atmospheric condition. The composition of earth's atmosphere

is mostly made up of gases like nitrogen and oxygen, which do not have much effect in

regulating the climate. The other gases which are smaller in proportion (i.e. <1% of the

atmosphere) have a much larger impact. These gases even though they occur in relatively

small quantities usually known as the greenhouse gases (GHGs) has its larger impact on

climate change. The energy released by the sun passes through the earth’s atmosphere but is

not absorbed by the greenhouse gases due to its shorter wavelength. But, earth absorbs this

energy and radiates heat energy back into the atmosphere. The greenhouse gases absorb and

radiate much of it back towards the surface whereas the rest is radiated out to space. This is a

natural process that warms earth’s atmosphere. The earth would be much colder without this

greenhouse effect. On the other side there must be balance otherwise it will be harder to live

in warm environment as this is clear from the present situation of rising temperature day by

day. The problem we now face is that human activities are increasing the concentrations of

greenhouse gases. This enhancing greenhouse effect creates a situation of serious effects of

global warming.

13.9 GLOBAL WARMING

Global climate is increasing day by day as there is an increase in the average temperature of

earth's atmosphere, particularly a sustained increase which cause changes in the global

climate. Global warming is synonymous with enhanced greenhouse effect and this increase in

the greenhouse gases leads to entrapment of more and more solar radiations and this results in

an increase in the overall temperature of the earth. Recent observations of warming support

the theory that greenhouse gases are warming the world and this need to be controlled. In the

last few decades, the planet Earth has experienced the largest increase in surface temperature.

Data reveals that the average surface temperature of the Earth rose from 0.6 to 0.9 degrees

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celsius (1.08°F to 1.62°F) between 1906 and 2006. This increase in the rate of temperature

nearly doubled in the last 50 years. Measurements of sea level show a rise of about 0.17

meters (0.56 feet) during the twentieth century. Since 1978, the arctic sea ice extent has been

melting by 2.7 percent per decade. Decade of 2000 witnessed a solar output decline resulting

in an abnormally deep solar minimum in 2007-2009 and as a result surface temperatures

continued to increase. India being a developing nation has always showed a concern in

safeguarding environment and in this regard India always supported international decisions

on it. The Constitution of India has a number of provisions defining the responsibility of the

central and state government towards protecting environment. The state’s responsibility has

been laid down under article 48-A which is as follows, “the state shall endeavour to protect,

improve and safeguard the environment, forests cover and wildlife of the country. Similarly,

a fundamental duty has been stated by the constitution of India for every citizen of this nation

under article 51 –A (g) which read as “it shall be the duty of every citizen of India to protect,

improve and safeguard the natural environment including forests, lakes, rivers and wild life”.

All these initiatives taken by respective governments for achieving the targets of more

sustainable environment.

13.10 The Environment (Protection) Act, 1986

The Environment (Protection) Act 19861 was enacted by the Government of India after the

aftermath of the Bhopal gas tragedy in 1984 claiming more than 3000 lives. Bhopal gas

tragedy was a catastrophe that had no parallel in the world’s industrial history. This was an

initiative to protect environment so that the citizens can have a healthy place to live in.

Environment Protection Act refers to the decisions taken at the Stockholm Conference in

June 1972 wherein members from different nations expresses their concern about the decline

in environmental degradation, excessive concentrations of harmful chemicals, increasing

pollution, protection of biological diversity, growing risks of environmental accidents and

threats to life system. In the contemporary period also we are combating with all these and

these were the concerns to protect environment as well as lives of the people. According to

this Act the following powers are given to the central government:

(a) Coordination is required between the acts initiated by the state governments, officers and

other authorities in order to protect environment.

1 http://envfor.nic.in/legis/env/env1.html

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(b) Nationwide initiatives must be well planned and implemented for the prevention, control

and abatement of environmental pollution.

(c) Certain standards must be fixed for the quality of environment in its various aspects.

(d) There must be control on emission or discharge of environmental pollutants from various

sources.

(e) Details about restricted areas in which any industry, operations or processes or class of

industries shall not be carried out or established until and unless it meets certain safeguard

limits.

(f) Safeguards and procedures for the prevention of accidents which may cause

environmental pollution and remedial measures for such accidents.

(g) Assessment and evaluation of certain manufacturing processes, materials and substances

as are likely to cause environmental pollution.

(h) Enhancing research activities relating to problems of environmental pollution

(i) Government must take initiatives for the inspection of any premises, plant, equipment,

machinery, manufacturing or other processes, materials or substances and must provide

guidelines/directions to such authorities for the prevention, control and abatement of

environmental pollution

(j) Acknowledgement, establishment or recognition of environmental laboratories and

institutions

(k) Proper dissemination of information in respect of all matters relating to environmental

pollution; and

(l) Provision and preparation of manuals, codes, reports or guides relating to the prevention,

control and abatement of environmental pollution. The central government may constitute an

authority or authorities for the purpose of exercising such of the powers and functions under

this Act.

The central government may make rules covering quality concerns, pollution control and

certain other safety measures. The prohibitions and restrictions on the handling of hazardous

substances in different areas along with decision about their locations. In addition to this act,

India’s strong commitment towards protecting environment is clear from the establishment of

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‘The Indian Green Building Council’ (IGBC) which was formed in the year 2001. The vision

of the council is, "To enable a sustainable built environment for all and facilitate India to be

one of the global leaders in the sustainable built environment by 2025".

13.11 Carbon Footprint

The term ‘Carbon footprint’ has been extensively used nowadays in the ecological discourse.

Carbon footprint as a concern has found acceptance in all spheres of life; whether it is the

media, government or the business outlook. The question that needs a well-defined

explanation is that what exactly constitutes a carbon footprint and why it matters. Primarily

speaking carbon footprint is the sum total of emissions emitted by greenhouse gases into the

environment. The carbon footprint stands for a certain amount of gaseous emissions

associated with human production or consumption activities. What is of importance is that

these are relevant to climate changes, occurring all around and affecting us. The problem lies

with the measurement and quantification of a carbon footprint because as of now there is no

consensus on this. The continuum of definitions ranges from direct CO2 emissions to full life-

cycle greenhouse gas emissions and the units of measurement are not clear. The Kyoto

Protocol2 recognizes 6 GHGs and carbon footprint considers all six of the Kyoto Protocol

greenhouse gases viz. Carbon dioxide, methane, nitrous oxide, hydrofluorocarbons,

perfluorocarbons and sulphur hexafluoride.

Carbon footprint is a measurement of the impact, which human activities have on the

environment around them locally and in particular on climate change across the globe. The

various activities which man undertakes in his day to day life, which results into the

production of greenhouse gases like burning fossil fuels like coal and petroleum products

for electricity, heating and transportation etc. Essentially carbon footprint consists of sum

total of two parts, the primary footprint and the secondary footprint.

1. The measure of our direct emissions of CO2 from the burning of fossil fuels including

domestic energy consumption and transportation (e.g. automobiles and air plane)

comprises primary footprint. It is important to understand that man can control all those

activities which come under primary footprint.

2 Kyoto Protocol: It is a protocol to the United Nations Framework Convention on Climate Change. It wasinitially adopted on 11th December, 1997 in Kyoto, Japan and entered into force on 16th February, 2005. As ofJuly, 2010, 191 states have signed and ratified the protocol.

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2. The secondary footprint is a measurement based on the entire lifecycle of the product. The

indirect CO2 emission is an output of all those activities which are connected with the

manufacture and eventual breakdown of the product. Basically, the more consumerist human

beings become the source of the emissions which pollutes environment.

13.12 Reasons responsible for alarming individual carbon footprints

The abuse caused by Humans to the planet’s natural resources is alarming. There are various

reasons responsible for alarming increase, in environmental degradation. Some of the reasons

are as follows:

Daily Human activities results in huge amounts of polluted contents of air, water and

land.

Anti-environmental behaviour of humans results in production of huge and

completely inexcusable amounts of waste materials.

It has been generally observed that people usually have been impervious to embrace

alternative energy sources.

The change in our eating habits also bring changes to carbon footprint levels.

Excessive fixation on animal-based diets not only destroy our health, but also cause

unparalleled amounts of deforestation and shrink our fresh water supplies to nothing.

For example, studies shows that vegetarianism can definitely reduce carbon

footprints.

Some of the Facts about

The major greenhouse gases which affect our environment are those which are

responsible for trapping heat in the atmosphere and causing global warming. Gases

like Carbon Dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), and several types

of fluorinated gases are largely because of man-made activities. The most alarming

fact is that over the last few decades there has been a 0.9o F (0.5o C) rise in the

average sea temperatures which can have hazardous consequences for mankind.

Scientists have demonstrated that over 20,000 square kilometers of ice melted in the

Arctic between a period of 1965 and 1995.

The average global sea levels have risen between 10 to 25 cm.

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Over the past 100 years , surface temperatures worldwide have risen 0.7o C

According to World Meteorological Organization (WMO) estimates, the years 2011-

2015 have been the warmest five-year period on record, with many extreme weather

events - especially heat waves - influenced by climate change.

13.13 Green Management:

Green management is fundamentally about doing business in an environmentally sensitive

manner. In other words, business management strategies focusses on those procedures and

processes that can reduce environmental pollution. Green management, on the other hand, is

the couture method of producing profits. Green management is the latest branding strategy

for establishing a reputation/status for the product as well as for the enterprise. These

enterprises usually promote those good which takes care of environment as well. Thus, the

reliance on expertise, quality of customer service and quality of the product service is no

longer enough. People now usually prefer eco-friendly products as compared to other

products. That’s why businesses nowadays are downplaying the message of being

environmentally conscious. In addition to this, businesses are also expressing through their

actions about their product and productive process being environmental friendly. Business

houses have realized that preserving the environment is of paramount importance. If

environment is taken care of then only all the development processes can prove to be a win-

win situation for the society where businesses can grow and as well as give back to the

environment.

13.14 Strategies to Grow Green Management:

Whether it be the developed or developing nation state, it is imperative to create environment

in which entrepreneurs can work efficiently and to best of their abilities. The entrepreneurs

too should chart a course which would lead towards a path of environmentally-sustainable

development. In today’s world it becomes necessary to generate more and more green

entrepreneurs to save guard the present ecological habitats so that these natural resources can

be protected for future generations. Certain strategies can be adopted like:

Factors like green purchasing, green building standards, community education and

sustainability goals can work wonders for the environmental health. Adoption of

various activities by the business world like building markets at the local level

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through procurement and policy initiatives can be a correct step towards sustainable

development.

Various endeavors centered on green incentives like Green PILOTS for LEED

construction, Green Business Award Programs, Green Revolving Loan Funds and

Green Business Certification Programs etc. must be created to advance sustainability.

The bottom line strategies to deal with environmental degradation can fundamentally

revolve around the following activities like waste reductions, reuse of various

products, recycling policies, and replacing disposable items with reusable items.

13.15 Summary

With the help of different green strategies based on the availability of natural resource

endowment of a particular nation, economies can slowly move towards the path of

development which will be environmentally sustainable as well. If business activities

deals with the environment solutions and environmentally superior products and if

their innovations substantially influence the mass market then only growth will be

sustainable. Business deals must addresses the issues related to impact of business

activities on environment as well. The business owners can assimilate personal values

of environmental integrity, social justice, development of high-quality products and

services with the professional values to make economic progress more sustainable.

Companies need a clear global framework providing consistent values and business

strategy supported by more local capacity and understanding to respond to specific

concerns and expectations within individual countries Social awareness of these green

businesses may be in direct contrast to traditional businesses. The adoption and

implementation of green processes can help any kind of industry to move sustainably.

On the other hand, natural resource scientists could focus on how green businesses

interact with public lands via physical or psychosocial perceptions and behaviours.

The need of the hour is to create a global framework but ensure you have local

capacity to respond to local priorities and needs.

If more businesses go for green strategies or adopt green values then only the opportunities

for local economic viability, social justice and environmental integrity can be enhanced.

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Check your progress

1. ________ is the study of the interactions between biotic and abiotic aspects of the

environment.

(a) Environment (b) Ecology (c) Biosphere (d) None of these

2. The Environment (Protection) adopted by Government of India in ________

(a) 1980 (b) 1986 (c) 1990 (d) 1996

3. __________ measures the greenhouse gases caused directly and indirectly by a human

production or consumption activities.

(a) Global warming (b) Greenhouse effect (c) Carbon Footprint (d) None of these

13.16 Glossary

Environment: The term “Environment” means totality of all extrinsic, physical and biotic

factors effecting the life and behaviour of all living things.

Green House Effect: The foremost reason of rise in global temperature is green house effect.

This effect is basically because of large presence of green house gases, which are responsible

for global warming and unprecedented rates of climate change. Human or man-made

activities are increasing greenhouse gas levels and leading to enhanced green house levels.

These green house gases normally trap some of the sun’s heat.

13.17 Answers to Check Yourself

1. (b) 2. (b) 3. (c)

13.18 References

http://envfor.nic.in/legis/env/eprotect_act_1986.pdf

Wackernagel, M., Rees, W.E., 1996. Our Ecological Footprint: Reducing Human Impact onthe Earth. Gabriola Press New Society Publishing, B.C.

http://www.in.undp.org/

https://igbc.in/igbc/


Chiras, D., “ Environmental Science”, Laxmi Publications, New Delhi

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13.20 Terminal Questions

1. Why there is a need for environmental protection?

2. Define Carbon Footprint and why are individual carbon footprints so alarmingly high?

3. Write main features of Environment (Protection) Act, 1986.

4.What do you understand by Green Management? Discuss various strategies for green

management?

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Lesson 14

Technological Environment

Structure

14.1 Objectives

14.2 Introduction

14.3 Meaning of Technology

14.4 Technological Innovation

14.5 Benefits of Technology for Business

14.6 Transfer of Technology

14.7 Modes of Technology Transfer

14.8 Barriers/Challenges to Technology Transfer

14.9 Intellectual Property Rights (IPRs) and Transfer of Technology

14.10 What Are IPRs?

14.11 Legislations Covering IPRs in India

14.12 Who are responsible for administration of IPRs in the country?

14.13 Technology Policy

14.14 Appropriate Technology

14.15 Information technology (IT)

14.16 Summary

14.17 Glossary


14.19 References


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14.1 OBJECTIVES

After reading this lesson, you should be able:

To Discuss the advantages that technology offers to an organisation

To describe how a business uses technology

To define the meaning of information technology (IT) and how IT is used by a

business

14.2 INTRODUCTION

The influence of technology on the business organisations is very profound and

cannot be ignored. The twentieth century has witnessed a massive growth and expansion of

technology. The world today is very very different from what it was in the previous century.

No doubt the scientific heritage dates back to many hundreds of years, but the development

of technology, its application and effects on society and business has been enormous since

the early years of this century. In the year 1900, the world was entirely different from what it

is today - it was a world where nobody ever thought of or imagined about flight, television,

antibiotics, anaesthetics, computers, etc. These massively changing circumstances have had

enormous effects on almost every aspect of life be it personal and business. Profound

development and improvements in technology have made possible global communications,

inter-planetary transport, the worldwide development of businesses along with increased

speed both in manufacturing and distribution, as well as quality of manufactured products.

Technology has moved civilisation from straw hats and oxen to virtual reality and high-speed

trains, and from 100 beads on an abacus to sixty- gigabyte personal computers.

In case of business organisations, improved technology involves and results in labour

saving techniques and machinery, increased productivity, better and new methods of working

and more efficient systems and processes. For instance, in modern times we find the evidence

of improved and better technology in the form of information technology (PCs, intranets,

extranets, the internet); digital electronics (broadbanding, digital TV, mobiles); new synthetic

materials (synthetic drugs, celluloid, polymers); new sources of energy (wind power, solar

power, tidal, wave power); micro-technologies (fibre optics, microchips); biotechnology

(cloning, genetically modified foods, human genome mapping); and so on.

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14.3 Meaning of Technology

One among the important determinants of the success of a business firm, industry as

well as a nation is technology. The word technology has been derived from the greek word

technologia which means systematic treatment. In a narrow sense, technology is identified

with the knowledge about machines and processes. However, in its broader sense technology

includes the tools – both machines (hard technology) and ways of thinking (soft technology)

– available to solve problems and promote progress between, among and between societies.

According to UNCTAD’s Draft TOT Code, technology is described as “a systematic

knowledge for the manufacture of a product, for the application of a process or for the

rendering of a service and does not extend transactions involving mere sale or lease of

goods.” Besides knowledge or methods required to carry on or to improve the existing

production and distribution of goods and services, technology also includes entrepreneurial

expertise and professional know-how; two elements which may and do tend to give a

competitive edge to the business owning and using technology.

The most elaborate and comprehensive definition of technology seems to have been

offered by the Webster’s Encyclopedic Dictionary of the English Language which is,

“Technology is the branch of knowledge that deals with the creation and use of technical

means and their interaction with life, society and the environment, drawing upon such

subjects as industrial arts, engineering, applied science and pure science.”

The global competitiveness of nations has been evaluated by the World Economic

Forum on the basis of eight factors and technology is one of them. In its Global

Competitiveness Report, 1999, the focus continued to be on information technology as a new

source of competitiveness. In this regard three aspects, namely, e-mail, internet and e-

commerce were observed to be potential factors leading to increased advantages for the

concerned business firm.

For a business firm engaged in production, both the technology available and the

technology in use are important for its growth, development and success. Technology plays a

decisive role whenever there is need for improvement and development, be it the need for

more food, better education, improved health facilities, increase in industrial output, or an

improved and more efficient system of transportation and communication. This is so because

technology encompasses a system of knowledge, skill, experience and organisation needed to

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produce, use and control goods and services. In economic terms technology is the main

determinant of economic growth as increased use of improved technology leads to increased

output for given inputs and also better and a greater variety of products. Nations which have

access to (and use) superior technology, enjoy greater productivity and higher standards of

living as compared to the nations with low technology.

14.4 Technological Innovation

Innovation in business provides competitive advantage and eventually leads to

success, growth and development. In fact the overall economic development of a country is

strongly influenced by innovations in the form of introduction of a new product, or of a new

means of production, or of a new market, or of a new source of raw material, and so on.

Innovations in the form of technological innovations provide an edge to the business

companies by increasing their competitiveness. This may be reflected in the form of creation

of new markets or market segments; increase in the market shares; or creation of new

industries.

Technological innovation in the context of business includes technical, industrial and

commercial steps undertaken by a business firm which eventually lead to the marketing of

new manufactured products and also to commercial use of new technical processes and

equipment. Technological innovations may be of the following main types:

- Incremental Innovation: Such a technological innovation refers to an incremental

change in the existing technology which improves the performance or features or

quality but in no way changes the basic structure and functions of the present

existing technology.

- Radical Innovation: Such a technological innovation does not involve an

incremental change in the existing technology but changes the basic structure and

functions of the present existing technology.

- Next-Generation Technological Innovation: Such a technological innovation

refers to a change in the existing technology which does not change the basic

structure and functions of the present existing technology, but at the same time

bring about profound improvement in the performance, quality, features, etc.,

reducing cost and opening new applications.

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However all new innovations may not always be commercially successful. New

products, one of the possible outcomes of technological innovation, may fail due to many

reasons like failure to generate enough demand, intense competition from firms with

established market share and customer loyalty, deficiencies of marketing management,

ignorance of environmental factors or even due to higher pricing. Usually the pattern of

innovation in an industry which is based on a new technology is such that first there is

product innovation (wherein the performance and quality, etc., improve for the better);

followed by innovations in the technique of production (which helps in reducing the cost of

production). With the passage of time, the key technologies of the industry mature and

eventually the market for the given industry will saturate; such that these key technologies of

the industry become obsolete and make ground for technology substitution.

14.5 Benefits of Technology for Business

Technological change influences not only the structural change in industry but also

plays a major role in creating new industries. It strongly influences competitive advantage of

firms in the industry; their relative cost position or differentiation; and even the profit

potential of all firms. Normally technology brings a lot of benefits for business. To name a

few, following are some of the advantages enjoyed by a business firm by the use of improved

and better technology.

Technology can help reduce costs: An important way in which this has been made

possible is by automation of manual tasks so that same work could now be done by

lesser number of workers with the help of different machines.

Technology leads to improved quality: Quality standards may be improved by

introduction of more consistent procedures which help in removal of human error.

This is possible by increased automation through better and high quality machines

which leads to reduction in cost and increase in quality.

Technology increases productivity and profits: With the application of new and better

technology to business, business becomes more efficient, costs reduce, productivity

and hence profit increases.

Technology leads to improved efficiency: The increased use of machines in a business

organisation leads to more work and removes the problems faced by workers like

falling sick or getting tired. Hence, the use of technology speeds up the processes as

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machines are definitely more efficient than humans and more work output can be

produced for the same cost, or even less cost.

Technology facilitates the making of better and more accurate decisions: This is made

possible by the more rapid transmission of information (through such media as radio,

television and other electronic means of communications) along with mechanisation

of many tasks, which ensures faster decisions. The rapidity and accuracy of

information transmission in business has enabled well informed and faster decisions.

Technology creates new and more interesting jobs: With the advent of new

technology there arises a need for skilled and technically trained workers for different

areas of business. This leads to the creation of new employment opportunities.

Technology helps to develop new products: Based on the research and development in

the industry, customer needs and expectations, demand conditions, social forces (like

demand for eco-friendly products), new products are developed and introduced in the

market.

However, it is important to note that not all technological change is beneficial; it may

even worsen a firm’s competitive position as high technology does not guarantee

profitability. Looking at the flip side, certain adverse affects of new technology could be:

(i) introduction of new and more machines may lead unemployment as it dehumanises

work; (ii) many high technology projects and machinery have increased the levels of

different types of pollution; (iii) may create new dangers for the employees and public;

(iv) employees are always on call, have to be available on the internet, (v) implementation

of new technology involves heavy costs and (vi) new technology does not remain for

long, becomes out dated very soon.

14.6 Transfer of Technology

In simple words, technology transfer is the process of transferring skills, knowledge,

technologies, methods of manufacturing, samples of manufacturing and facilities among two

units which may be governments or universities and other institutions. The transfer of

technology may involve physical assets, know-how, and technical knowledge. The transfer

may be said to be successful if the receiving entity (maybe a firm, an industry, a region or

even a nation), is able to effectively utilise the technology transferred and eventually

assimilate it for its benefit. So technology transfer is the transmission of know-how

(knowledge) to suit local conditions, with effective absorption and diffusion both

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within and across countries with a view to achieving three core objectives: 1) the

introduction of new techniques by means of investment of new plants; (2) the improvement

of existing techniques and (3) the generation of new knowledge. In other words, it is

application of technology and considered as process by which technology developed for

one purpose is used either in a different application or by a new user. Technology transfer

is usually considered as dissemination of information, matching technology with

needs and creative adaptation of items for new uses. Technology transfer can also be

described as the process through which technology moves from outside sources to the

organization. The implicit assumption is that technology can be “transferred” with a lower

expenditure of resources than were required to develop it in the first instance.

14.7 Modes of Technology Transfer

Technology transfer has almost become inevitable given the fact that technological

progress is the engine of growth. High income and developed countries are technologically

more advanced than their developing counterparts. Those countries which cannot match the

technological pace through their indigenous technology, thus, rely on technological transfers

to keep pace with growth and development. The technology transfer can be done across

countries in various modes. Some of the major modes of transferring technology are:

1. Projects: When the concerns enter into a project where the ownership and control of

operations is with the international partner, or turnkey projects where the entire

facility is set up under the technological expertise of international partner are the

instances where technology flows in from the technologically rich counterpart.

2. International trade: When goods and services are traded across borders: equipments,

tools, consulting and technological services, they help in transferring the benefits of

technological advancement to the country behind the technology frontier.

3. Research and development: Joint R& D projects, subcontracts, setting up R&D

facilities and operations in an international location are the instances of this mode of

transfer.

4. International Conferences, visits and exhibitions can also provide exposure to

technological advancements in other countries for the benefit of the recipient.

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5. Contracts and agreements: Agreements for patents, trademarks, and know-how,

contracts for equipment maintenance, management services are the common instances

through which technological assistance can be availed.

6. Training and teaching: The age old methods of transfer and sharing of knowledge can

be availed across borders with the intent of letting the technology flow from the

strengthened partner to the one needing help.

7. Research publications: The dissemination of technology also takes place through

technical, professional and scientific literature and academic books for general

advantage of the readers and practitioners.

8. Employment and migration: employment of nationals by foreign firms, migration of

trained personnel to developing countries, development assistance under various

schemes etc.

9. Licensing—the exchange of access to a technology and perhaps associated skills from

one company for a regular stream of cash flows from another.

10. Cross-licensing—an agreement between two firms to allow each other use of or

access to specific technologies owned by the firms.

11. Strategic supplier agreement—a long-term supply contract, including guarantees of

future purchases and greater integration of activity than a casual market relationship.

One prominent example is the second-source agreements signed between

semiconductor chip manufacturers.

12. Contract R&D—an agreement under which one company or organization, which

generally specializes in research, conducts research in a specific area on behalf of a

sponsoring firm.

13. Research consortium—any organization with multiple members formed to conduct

joint research in a broad area, often in its own facilities and using personnel on loan

from member firms and/or direct hires.

These are some of the prominent and prevalent methods through which the

technological edge developed and nurtured by one country can flow to the advantage

of the aspirational country on its road to growth and development.

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(i) In case of business organisations, improved technology involves and results in labour

saving techniques and machinery.

(ii) Technology includes only tools and machines, that is hard technology.

(iii) Technology can help to reduce costs and improve quality.

(iv) International Trade is the only possible method to transfer technology.

14.8 Barriers/Challenges to Technology Transfer

In transfer of technology, in the receiving country technologies have to be adapted and

modified, but few believe that technologies developed and used in technically advanced

countries cannot be usefully applied in countries behind the frontier (developing countries).

Some of the problems which creep up in the technology transfer process are:

1. Operational problems: The technology and algorithms developed in one part of the

world are found to be unsuitable and inadequate at the place of use. This imposes

operational problems for the users of technology which the developers are unable to

suitably resolve.

2. High cost: Technology transfer assignments often are impeded by the challenges of

high cost and limited capability of data processing equipment. The best of processors

and hardware adopted in the process suffer from restrictions of slow speed and limited

memory which makes the entire process of technology transfer challenging and makes

the process of transfer of research successes almost impractical.

3. Infrastructural challenges: The developing countries, the recipients of better

technology often face challenges in adopting and implementing the new technology

on account of infrastructural challenges. The processing systems and work

environments sometimes fail to adopt the technological advances due to the inherent

limitations of infrastructural set-ups. Standardization, however, can make the job of

technology transfer easy.

4. Political issues: Political differences arising from different ideologies of political

parties across borders and also within the same country work as challenges in transfer

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of technology. The political disposition and preference of both the transferor and

recipient would influence the type, amount and terms of technology transfer.

5. Managerial and psychological problems: The managerial approach also matters when

organisations contemplate the issue of transferring or receiving technology.

The technology transfer process is rather a daunting task which needs to be worked out on

broader as well as finer grounds so that the process results in the mutual benefit of both

the parties.

14.9 Intellectual Property Rights (IPRs) and Transfer of Technology

Intellectual property comes in many forms, trade secrets, copyrights, and patents

being the most important in relation to technology transfer. There is relatively little attention

paid to why intellectual property (IP) protection should matter for technology transfer. It has

also been pointed out that technology can be involuntarily transferred, via imitation. When

the creators of innovative exercise allow the sharing of benefits of their creative activities

which are protected by strong IPRs it provided an impetus to R&D paving way for innovation

and higher economic growth.

14.10 What are IPRs?

Intellectual property (IP) refers to creations of the mind: inventions, literary and

artistic works, and symbols, names, images, and designs used in commerce. Intellectual

Property Rights are legal rights, which result from intellectual activity in industrial, scientific,

literary and/or artistic fields. These rights safeguard creators and other producers of

intellectual goods and services by granting them certain time-limited rights to control their

use. Some common types of intellectual property rights (IPR) are copyright, patents,

and industrial design rights; and the rights that protect trademarks, trade dress, and in some

jurisdictions trade secrets: all these cover music, literature, and other artistic works;

discoveries and inventions; and words, phrases, symbols, and designs.

14.11 Legislations Covering IPRs in India

Following is the list of important legislations covering the IPRs in India:

Patents: The Patents Act, 1970 as amended in 1999, 2002 and 2005

Design: The Designs Act, 2000

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Trade Mark: The Trade Marks Act, 1999

Copyright: The Copyright Act, 1957 as amended in 1983, 1984 and 1992, 1994, 1999

Layout Design of Integrated Circuits: The Semiconductor Integrated Circuits Layout

Design Act, 2000

Protection of Undisclosed Information: No exclusive legislation exists but the matter

would be generally covered under the Contract Act, 1872

Geographical Indications: The Geographical Indications of Goods (Registration and

Protection) Act, 1999

Plant Varieties: The Protection of Plant Variety and Farmers’ Rights Act, 2001

14.12 Who are responsible for administration of IPRs in the country?

Patents, designs, trademarks and geographical indications are administered by the

Controller General of Patents, Designs and Trademarks which is under the control of the

Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

Copyright is under the charge of the Ministry of Human Resource Development. The Act on

Layout-Design of Integrated Circuits is administered by the Ministry of Telecommunication

and Information Technology. Protection of Plant Varieties and Farmers’ Rights Authority,

Ministry of Agriculture administers the Act on Plant Variety.

14.13 Technology Policy

Technology policy is defined as a set of government actions that affect the generation,

acquisition, adaptation, diffusion and use of technological knowledge in a way that the

government deems useful for the society rather than individuals. There is, naturally, a large

overlap between technology policy and industrial policy. While most technology policies can

be regarded as part of industrial policy, there are some areas that are unique to technology.

The overlapping areas include policies, such as research and development (R&D) subsidies to

industrial firms, regulation of foreign direct investment (FDI) in relation to technology

imports or regulation of technology licensing in designated industries. The area that does not

overlap between the two policies include support for “basic R&D”, that do not relate directly

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to particular industries or the management of the patent law and other intellectual property

rights (IPR) laws.

In the past many governments followed the policy of restriction of foreign technology

which worked as a bias against domestic firms, because on the one hand domestic firms were

not allowed to use foreign technology while on the other hand foreign firms in the very same

countries could bring in foreign technology. Such a situation could adversely affect the

competitiveness of these domestic firms. So an important factor responsible for improving

the competitiveness is the access to global technology for domestic firms. So the

technological policy of the government is very important factor influencing the technological

environment as the nature of technology can strongly affect the location of production base

and also the global trade flows.

Modern India has had a strong focus on science and technology, realising that it is a

key element of economic growth. India is among the topmost countries in the world in the

field of scientific research, positioned as one of the top five nations in the field of space

exploration. According to recent official information provided to the Lok Sabha, 27 satellites

including 11 that facilitate the communication network to the country are operational,

establishing India’s progress in the space technology domain. There has been considerable

emphasis on encouraging scientific temperament among India’s youth through numerous

technical universities and institutes, both in the private and government sectors. The

Government aims to invest 2 per cent of the country’s GDP on research and development

(R&D) in its 12th Five-Year Plan period (2013–17). Accordingly, the Government has

undertaken various measures for promoting growth of scientific research. The central

government plans to soon institute a nation-wide consultation process with a view to develop

the first publicly accessible Science and Technology policy. The policy ‘Vision S&T 2020’

would articulate the country’s future towards self-reliance and technological independence in

the 21st century. India is aggressively working towards establishing itself as a leader in

industrialisation and technological development. he Government of India, through the

Science, Technology and Innovation (STI) Policy-2013, among other things, aspires to

position India among the world’s top five scientific powers.

14.14 Appropriate Technology

The availability of a variety of technologies both indigenous and foreign, requires

each nation to decide and choose that technology which is most appropriate for the given firm

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or given nation. A given technology may be suitable for one environment or country but may

not be appropriate for another environment or country. Such a difference may be attributed to

many factors like difference in natural factors (for instance weather and climatic conditions,

soil conditions, topographical conditions, etc.), difference in demand conditions, income

levels, scale of operation, customer characteristics, etc. The latest sophisticated capital

intensive technologies pursued by the advanced countries of the world, most of the times, do

not suit as such to the less developed and under developed countries. As such there arose a

need for an appropriate technology which suits the local needs and environment. Usually in

the context of the less developed, underdeveloped and the developing countries, appropriate

technology refers to an intermediate technology which here refers to a combination of

traditional technology and modern technology. The foreign technology transferred from the

highly developed countries cannot be used as such by the developing world, rather such an

ultra modern technology has to customised and tailor made to fit the requirements and the

business environment of the developing world. Only then can this appropriate technology can

benefit the recipient nations and add the growth and development.

14.15 Information technology (IT)

A particular application of new technology which is most relevant to almost all the

business organisations is information technology (IT, the use and application of computer in

different areas). IT is in fact more than just an application. It can impact almost all the

business activities and their related aspects:

IT can be used for administrative purposes – computerised records and reports, data

processing

IT can be used to communicate – for example, Internet, intranet, e-mail, mobile

phone, voice mail, video-conferencing

IT can be used for computer-based analyses for decision making, and for monitoring

and control activities, for example software for business awareness analyses such as

SWOT, benchmarking, balanced scorecard, etc.

IT can be used to produce goods – computer-controlled production processes, design

processes such as CAD (computer-aided design)

IT can be used for supply, storage and distribution – for example electronic point of

sale (EPOS), electronic data interchange (EDI), extranets. The Internet and its

technologies have totally modified the business environment in the modern times be

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it e-commerce sites, broadbanding, WAP phones etc, which have paved way for m-

commerce – doing business on your always-connected mobile phone.

Recent advancements in technology have drastically transformed the way in which

business firms make use of technology in their working. This in turn makes it imperative

for the organisations and its managers to have updated knowledge of the uses and

applications of technology, especially information technology, for the given organisation.


Fill in the blanks with appropriate word(s).

(i) Technology transfer assignments are often obstructed by the challenges of ______

and _____________.

(ii) Usually appropriate technology refers to _________ which refers to a combination

of traditional technology and modern technology.

(iii) __________ are legal rights, which result from intellectual activity in industrial,

scientific, literary and/or artistic fields.

(iv) ________ is a particular application of new technology which is most relevant to

almost all the business organisations.

14.16 Summary

Technological environment include the methods, techniques and approaches adopted for

production of goods and services and its distribution. The influence of technology on the

business organisations is very profound and cannot be ignored. In its broader sense,

technology includes the tools – both machines (hard technology) and ways of thinking (soft

technology) – available to solve problems and promote progress between, among and

between societies. Technological innovation in the context of business includes technical,

industrial and commercial steps undertaken by a business firm which eventually lead to the

marketing of new manufactured products and also to commercial use of new technical

processes and equipment. Technological innovations may be of different types including

incremental innovation, radical innovation and next-generation technological innovation.

Technological change not only reduces costs, it also improves quality, productivity,

efficiency and profits among the innumerable benefits it brings for a business organisation.

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Technology transfer is the process of transferring skills, knowledge, technologies, methods of

manufacturing, samples of manufacturing and facilities among two units and it may involve

physical assets, know-how, and technical knowledge. There are various possible ways of

transfer of technology. However, the foreign technology transferred from the highly

developed countries cannot be used as such by the developing world. Usually in the context

of the less developed, underdeveloped and the developing countries, appropriate technology

refers to an intermediate technology which here refers to a combination of traditional

technology and modern technology. Due attention needs to be given to IPRs in the process of

transfer of technology. In this context each government needs to pursue an appropriate

technological policy in order to reap maximum possible benefits of technological change.

14.17 GLOSSARY

Technology: Technology includes the tools – both machines (hard technology) and ways of

thinking (soft technology) – available to solve problems and promote progress between,

among and between societies.

Technological innovation: It includes technical, industrial and commercial steps undertaken

by a business firm which eventually lead to the marketing of new manufactured products and

also to commercial use of new technical processes and equipment.

Transfer of Technology: The process of transferring skills, knowledge, technologies,

methods of manufacturing, samples of manufacturing and facilities which may involve

physical assets, know-how, and technical knowledge.

Technology Policy: A set of government actions that affect the generation, acquisition,

adaptation, diffusion and use of technological knowledge for the benefit of the nation as a

whole.

14.18 ANSWERS TO CHECK YOUR PROGRESS


1) (i) true

(ii) false

(iii) true

(iv) false

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1) (i) high cost, limited capability of data processing equipment

(ii) an intermediate technology

(iii) Intellectual Property Rights

(iv) information technology

14.19 REFERENCES

1. Marshall E. Dimock, Business and Government, New York: Rinehan and Winston

Inc.

2. Paul Justin, Business Environment Text and Cases, Tata McGraw-Hill Publishing

Company Limited, New Delhi

3. Fernando A.C., Business Environment, Pearson

4. Stewart Frances, Technology and Underdevelopment, London and Basingstoke: The

Macmillan Press Ltd., 1977.


6. Wartick, Steven, L., Wood, Donna J., International Business and Society, Blackwell

Publishers Inc., Massachusetts, 1998.

7. Frederick, Betz J., Managing Technological Innovation, Wiley ans Sons Inc., New

York, 1998.

14.20 SUGGESTED READINGS

1. Cherunilam, Francis, Business Environment Text and Cases, Himalaya Publishing

House, 2004


3. Saleem Shaikh, Business Environment, Pearson

14.21 TERMINAL AND MODEL QUESTIONS

1. What do you understand by technology?

2. Explain the uses of technology for business.

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3. Discuss in detail the modes of transfer of technology.

4. Explain the significance if IT for business.

5. What do you mean by IPRs?

6. What is appropriate technology?

7. Discuss the challenges of transfer of technology.

8. What is technological policy?

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________________________________________________________________________

Lesson 15: Globalisation and FDI

Structure

15.1 Objectives

15.2 Introduction

15.3 Emergence of Globalisation

15.4 Foreign Direct Investments

15.5 Multi National Corporations (MNCs)

15.6 World Trade Organisation

15.7 WTO in India

15.8 Summary

15.9 Glossary

15.10 Answers to Check your progress

15.11 Suggested Reading


15.1 Objectives


Explain the process of Globalisation. Enumerate the advantages and disadvantage of globalization.

Explain the meaning of foreign direct investments. Enumerate the need for and benefits of FDI.

Describe establishment of World Trade Organisation. Enumerate implication of WTO in India. List the benefits and problems of MNCs

15.2 Introduction

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International environment refers to the factors in the global scenario that affect businessesfor example import and export laws, licenses etc. These factors can be a threat or an opportunityfor any enterprise or even an economy. International trade is growing at a fast pace and alongwith it international investment is also growing. It has become vital for organisations includinggovernments to understand the nuances of the international environment, so as to avoid costlymistakes and take advantage of opportunities available.

There are two major reasons that compel a firm to go international— push and pullfactors. The pull factors are those forces of attraction that motivate a firm to go international, forexample, higher profit margins and/or growth options for the organisation. The push factors referto the compulsions and restrictions of the domestic market that force the companies to gointernational, for example, saturated or small domestic markets, domestic recession, competitionand stifling Government policies and regulations.

Globalization is a process that dilutes national boundaries and opens, national economiesfor the other countries of the world. Internationalisation is a synonym for globalization. Trade iseasy and there are few or nil restrictions. It helps to enlarge business of companies and enlightensthe minds towards global and world issues, rather than concentrating on local aspects. It bringsincome to impoverished people and allows more countries to devote their resources in improvingthe global standard of living. Globalization allows people and companies to reach global markets,bringing them opportunities for success not possible in their own localities. Companies who havea global outlook, stop thinking of themselves as national marketers, but start thinking ofthemselves as global marketers. The entire globe is just like one country for business.

15.3 Emergence of Globalization:-

International monetary fund defines globalization, as, “The growing economic interdependence of countries worldwide through increasing volume and variety of cross-bordertransactions in goods and services and of international capital flows and also through the morerapid and wide spread diffusion of technology”.

Globalization brings economy-of-scale efficiencies and helps to provide the fruits of themodern world to countries that might not otherwise see it for centuries, builds dependenciesamong countries that might otherwise attempt to wipe each other off from the map. Allowshumanity to work together as a team towards noble goals rather than as individuals grasping tomeet their own needs. It makes organisations more competitive, as they have to compete in theworld market.

Reasons for going Global:-

1) Market Saturation.2) Trade Deficit.3) Foreign Competition.

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4) Emergence of new Markets.5) Opportunities via Foreign Aid programmes.6) Other reasons like:

a. Economies of scaleb. Risk reduction from economic fluctuations of one countryc. Labour dynamicsd. Tax policiese. Availability of natural resources

Globalization Process:-

Globalization does not happens overnight. It happens over a period of time as an evolutionaryapproach. According to Ohamae, globalization has five stages.

They are:-

(1) Exporting through distributors.(2) Direct overseas distributors marketing.(3) Overseas production completely controlled by headquarters.(4) Autonomous overseas operations.(5) Global Integration.

Thus, globalization means globalizing the marketing, production, investment, technologyand other activities.

Globalization is the trend towards a more integrated global economic system. Figure-1shows the components of globalization.

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Advantages of Globalisation:-

1) Free flow of capital from one country to another country.2) Exchange of technology.3) Industrialization.4) Economies of Scale.5) Balanced development of world economies.6) Commodities at lower prices with higher quality.7) Mutual exchange and demand for a variety of products.8) Increases in jobs and income of the nation.9) Higher standards of living.10) Balanced human development and resources.11) Increase in welfare and prosperity.

Disadvantages of Globalisation:-

1) Globalization demotivates domestic business.2) Exploits human resources.3) Leads to unemployment and underemployment.4) Decline in demand and production for domestic products.5) Decline in income.6) Increasing the gap between rich and poor.7) Transfer of natural resources.8) National sovereignty at stake.

Globalisation ofMarkets





components ofGlobalisation

Globalisation ofInvestment

Globalisation ofTechnology

Globalisation ofProduction





Globalisation ofTechnology

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9) Leads to commercial and political colonialism.

Globalization is the process of integration of world markets for goods and services, technology,finance and to some extent labour. It is the integration of a country with the world economy. Theentire globe is perceived as a global village. Anyone in a country can supply to and buy from anyother entity in the world. Technology can said to be an important factor that has facilitatedglobalization. Globalization has made markets highly competitive and there is an immensegrowth of new products and services, in which the consumer has emerged the winner.


Fill in the blanks:-

1. Economic factors, social factors and political factors comprehensively influence theoverall _________________ process.

2. Production in widely dispersed location is getting _____________ due toglobalization.

3. ___________________ results in connecting the markets in different countries.

4. Globalization is the process of _____________________ of different counties.5. _______________________ is the shift towards a more integrated and interdependent

world economy.

15.4 FOREIGN DIRECT INVESTMENT (FDI):

Vital factor of production is the capital. For the expansion of a nation’s economy in terms

of an increase in the production of goods and services, the input of capital would be essential.

While the capital can come from different sources within the country, it could also be obtained

from abroad. Foreign investment has become an important input in today’s global economy.

Free flow of capital is good for the global economy. Capital, as a factor of production can then

move to the place where it can be used most efficiently.

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Companies invest in foreign countries in order to gain control over the market and thereby

increase sales. Market control is possible by establishing and control of managerial decision

making through investment in equity share capital.

Definition of Foreign Direct Investment

International Monetary Fund defines FDI (Foreign Direct Investment) “an investment

made to acquire lasting or long-term interest in enterprises operating outside of the economy of

the investor”. The investment is considered direct as the foreign investor seeks to control, and

manage the foreign enterprise. The Organization of Economic Cooperation and Development

(OECD) define control as owning 10% or more of the business. Organisations making foreign

direct investments are popularly known as Multinational Enterprises (MNEs) or Multinational

Corporations (MNCs). Direct Investment is generally done by establishing a new company or a

subsidiary or by through acquisition of an existing firm.

Measures to control Foreign direct investment (FDI)*

Foreign companies willing to setup business in India have to follow certain procedure

It has to incorporate a company as a joint venture or a subsidiary company under

the companies act, 1956

Under the foreign exchange management regulation, 2000 it has to setup a liaison

office, branch office or a project office of a foreign company.

Procedure for receiving FDI by an Indian company:-

With prior approval of the RBI or the government, FDI is allowed to enter through

automatic route or government route in all the activities as mentioned in the FDI

policy.

Financial instruments for receiving FDI by an Indian company:-

Investment in FDI is reckoned only if the investment is made through equity

shares, fully & mandatory convertible preference shares, fully & mandatory

convertible debentures.

Gives an option to the Indian investor to convert or not to convert it into equity.

Modes of payment allowed for receiving FDI by an Indian company: - An Indian

Company issuing equity shares or convertible debentures through FDI scheme to a person

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residing outside India shall receive the amount of consideration that is required to be paid

for shares/ convertible debentures by:-

inward remittance through normal banking channels

Debit to NRE / FCNR account of a person concerned maintained with an AD

category I bank.

Conversion of royalty / lump sum / technical knowhow fee due for payment or

conversion of ECB shall be treated as consideration for issue of shares.

Conversion of import payables / pre incorporation expenses / share swap can be

treated as consideration for issue of shares with the approval of FIPB.

debit to non-interest bearing Escrow account in Indian Rupees in India which is

opened with the approval from AD Category – I bank and is maintained with the

AD Category I bank on behalf of residents and non-residents towards payment of

share purchase consideration.

Sectors where FDI are not allowed by Indian companies under automatic or government

route:-

Atomic Energy

Lottery Business

Gambling and Betting

Business of Chit Fund

Nidhi Company

Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco

substitutes.

Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal

Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under

controlled conditions and services related to agro and allied sectors) and

Plantations activities (other than Tea Plantations), Housing and Real Estate

business.

*Source: https://www.rbi.org.in/scripts/FAQView.aspx?Id=26

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Advantages of FDI

In the context of foreign direct investment, advantages and disadvantages are often a

matter of perspective. An FDI may provide some great advantages for the MNE but not for the

foreign country where the investment is made. On the other hand, sometimes the deal can work

out in a better way for the foreign country depending upon how the investment plans out. Ideally,

there should be numerous advantages for both the MNE and the foreign country, which is often a

developing country.

Advantages: -

(1) FDI provides the much needed ready capital and it can act as a nucleus of growth.

(2) In the case of countries with large trade deficits, increased FDI inflows would help.

(3)FDI – particularly the substitutable type off FDI can generate a healthy competition.

(4)The production could increase all around.

(5)New technologies may become available through foreign direct investments and this may start

a virtuous technology transfer cycle.

(6)FDI may provide additional employment.

(7)FDI can bring with it worldwide class management culture, systems, and skills.

(8)FDI can cause an increase an increase in the host country’s exports improving its balance of

payments position.

Forms of FDI:-

1) Purchase of existing assassin foreign country.

2) New investment in property plant and equipment.

3) Participation in a joint venture with a local partner.

4) Transfer of many types assets like human resources, systems, technological knowhow in

exchange for equity in foreign companies.

5) Export of goods for equity.

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Factors influencing FDI:-

Factors influencing FDI are of three categories,

Supply factors

1 production cost

2 logistics

3 resource availability

4 access to technology

demand factors

1 customer access.

2 Marketing advantages

3 Exploitation of competitive advantages.

4 Customer mobility

Political factors:

1 avoidance of trade barriers

2 economic development incentives

Foreign direct investment in India

The policy of the government of India towards the foreign direct investment has been

positive due to the shortage of domestic capital. The economic liberalizations of 1991 have given

greater fillip to the foreign direct investment. The Government of India with regard to FDI

announces significant measures since 1991 include.

Granting of automatic permission for foreign equity participation up to 51 per cent in high

technology and high-investment priority industries.

Allowing foreign equity participation up to 51 percent in international trading companies,

hotel industry and tourist industry.

Constitution of a Specialized Empowered Board in order to attract FDI by negotiating

with multinational corporations.

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Dispersing with the bureaucratic rules and regulations which caused delays and created

hurdles for the FDI.

Allowing the MNCs to use their trade marks in India with effect from 14th May, 1992.

Allowing 100 percent equity for setting up of power plants with free repatriation of

profits.

100% FDI is permitted in business to business (B2B) e-commerce, power sector and oil

refining.

Check your progress 2: -

Choose the correct answers: -

6. FDI is an acronym that stands for ( )a) Federation of direct investorsb) Federal diversification initiativec) Foreign direct investmentd) Formal direct internationalization

7. The _____________ of foreign direct investment refers to the amount of FDIundertaken over a given period (normally a year). The ___________ of foreigndirect investments refers to the total accumulated value of foreign ownedassets at any time.

a) Portfolio / current ( )b) Flow / stockc) Source / off shoringd) Advantage / risk

8. The flow of foreign direct investment out of a country is :- ( )a) Forfeiture of national investmentb) Speculation of FDIc) Hedging of FDId) Outflow of FDI

9. An argument in favour of direct foreign investment is that it tends to :-a) Reduce inequality ( )b) Promote rural developmentc) Increase access to modern technologyd) Decrease local ownership

Activity 1: Obtain information on the volume of funds coming into India through theFII (Foreign Institutional investors) route. Gather this information for all the weeks of ayear. Where did these FII'S invest? Why did they invest in India? What has been the inand out movement of these funds? Do interest rates elsewhere (other countries) matter?

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Check the corresponding interest rate movements in the USA. Investigate and presentyour observations.

15.5 MULTINATIONAL COMPANIES (MNCs)

MNCs are companies which owns & control production activities in more than one

country. MNCs produce goods in one or more countries and sell them in many countries. These

companies setup their offices & plants for production in such regions where they can get cheap

labour & other resources. MNCs are corporations involved in various activities of importing,

exporting & manufacturing in different nations. Some Multinational companies sizes are so

enormous that these companies assets are much bigger than GDPs many nations of the world.

Examples of such companies are large oil companies such as Exxon & shell are larger

economically than nations like South Africa, Australia. MNCs are known by various names such

as multinational corporations, transnational companies, international corporations & global

corporations.

As ILO report observes, “The essential feature of MNC lies in the truth that its managerial

headquarters are located in one country generally called home country, while the other carries its

operations by opening subsidiaries companies in many other countries called as host countries.

Such activities of carrying out its production operations in many countries, such facilities can be

acquired through the process of foreign direct investment (FDI).

Features of Multinational corporations:-

The features of the MNCs depend on the countries environment in which they operate. As we

have discussed they are two main concerns the home countries environment where headquarters

will be located & the host country environment where the business is carry out.

Subsidiaries of MNCs: - subsidiary companies of MNCs should respond to the specific

environmental forces of both home & host countries.

Resources: - selection of resources plays an important role. Resources could be financial

resources, human resources, information, material resources, copy rights & trademarks

etc. MNCs get more or less same resources both at home country & host country.

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Location: - MNCs have their headquarters in the home country & have

subsidiaries/operational divisions are widely spread across the various countries to reduce

the expenses such as low labour rate, low transportation cost & low raw material cost etc.

Management of MNCs: - majorly the board of directors of the MNCs are the citizens of

the home country. Major portion of the assets of the MNCs are owned by the citizens of

the home country.

Strategies: - MNCs headquarters &subsidiaries are linked by a common goal &mission.

However, each subsidiary should formulate its strategies.

Factors contributing growth of MNCs: - several factors are contributed for the growth

of MNCs. Some of them are listed below.

Expanding market boundaries: - Developing economies of the world have a growth in

GDP & per capita income resulting in high standard of living. These factors influenced

towards expansion of market territories. Apart from this, markets reputation of these

MNCs builds an image which helps in market expansion.

Market excellence:-MNCs have a number of benefits in terms of market superiority over

the domestic companies resulting in facing less difficulties in marketing the products.

MNCs use more effective marketing advertising & sales promotion techniques. They also

enjoy transportation & warehousing facilities.

Superiority in technology: - MNCs offer knowledge to licensed foreign producers through

patent rights which relieve the MNCs to invest through FDI. MNCs are rich in advanced

technologies. Through continuous research & development they develop the technology.

The rich financial resources of these companies enable them to invest in R& D and

develop the new technology.

Exhale in Financial resources:-Many MNCs enjoy financial superiority over some

national economies. MNCs use these resources for turning environment into its favour.

MNCs can use the excess funds of one country to meet the requirements of another

country. MNCs have access to all international banks & financial institutions from where

they can access the funds easily.

Product innovation through R& D: - MNCs as they have world wide spread operations

across the countries they collect the information of various customer taste & preferences.

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MNCs with their strong R & D departments invent new product & develop existing

product.

Advantages & disadvantages of MNCs:-

Advantages of MNCs

Easy access to consumers: - MNCs have primary advantage of having easy access to

consumers over other companies whose operations are limited to smaller region. MNCs

have greater access to wider geographical regions which help them to get larger pool of

potential customers leading companies to expand, grow at a faster pace as compared to

others.

Technological superiority: - MNCs helps to improve products by introducing advanced

technologies. Different industries get updated technologies from international countries

through MNCs which helps them to improve technological parameters.

Increase employment & income levels: - MNCs have an easy access to cheap labour,

which plays a great advantage over the other companies. MNCs operations are spread

widely across geographical regions which help to setup production units in countries with

cheap labour leading to increase in employment. Some of the countries like India, china &

Pakistan cheap labour are available.

Tax & other cost reduction: - In order to get increase foreign exposure & international

trade, countries are imposing reduced tax on imports & exports. Some international

countries impose lower excise & custom duty resulting in higher profit margins for

MNCs.

Research & development: - MNCs are rich in advanced technologies. Through continuous

research & development they develop the product. The rich financial resources of these

companies enable them to invest in R& D and develop the new technology.

Balance of payments: - MNCs operations help to get improved balance of payments by

increasing exports & decreasing imports.

Industrial & economic development: -Due to growth in MNCs, level of industrial &

economic development improves.

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Over all development :- when MNCs operate in widely spread geographical areas it helps

in expanding market territory, investment level increases, employment increases, income

levels increases and research & development activities increase.

Disadvantages of MNCs

Local business loss: - Monopolistic practices of MNCs are a problem for local businesses.

Local consumers get attracted to international products sometimes leading to killing of

domestic company operations.

Stringent rules & regulations:- one of the major problem of MNCs are strict rules &

regulations applicable in the country. MNCs are subjected to more rules & regulations

than other companies. Some countries does not allow companies to easily run its

operations as it is being doing in other countries, leading to conflict within the country &

organizations.

Political environment: - Different countries have different political risks. As MNCs do

operate internationally across national boundaries which may result in a threat to

economic & political environment of the host countries.

Loss in natural resources:- MNCs use home countries natural resources in order to get

huge profits which may result in excessive exploitation of the resources leading to loss of

natural resources of the economy.

Transfer of capital: - Transfer of capital to other countries from home country may cause

unfavourable balance of payment for the economy.

Intellectual properties:- MNCs face problems related to intellectual properties that is not

applicable in case of local domestic companies.

Domestic culture:- MNCs operations may cause erosion of domestic culture.

Check your progress 3 : -

Fill in the blanks: -

10. ___________ produces goods in one or more countries and sells them in manycountries.

11. Activities of carrying out its production operations in many countries such facilities

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cane acquired through the processor ___________________

12. MNC'S helps to improve products by introducing ______________________.

13. MNC'S through continuous ___________ they develop the technology.

14. MNC'S operations help to get improved balance of ______________.

15.6 WORLD TRADE ORGANIZATION (WTO)*

The International Trade Organization was proposed to be set up along with the WorldBank and the IMF on the recommendations of the Bretton Woods Conference in 1944. Althoughthe IMF and World Bank were establish in 1946, the proposal for the ITO did not materialize;instead of the GATT a less ambitious organization was formed in 1948The developing countriesinsisted on setting up of ITO but opposition to the proposal came from US. To solve the issue, theUN appointed a committee in 1963; the committee recommended, the UNCTAD (United NationsConference on Trade and Development). UNCTAD came into being in 1964. It could manage tosecure some concessions for the developing countries.

It may be noted that as a result of the Uruguay Round, GATT was transformed into WorldTrade Organization with effect from January 1995.Thus after five decades, the original proposalof an International Trade Organization has been shape as the WTO.

Objectives of WTO

Its activities shall ensure raising fee standard of living, ensuring full employment and asteadily growing real income for its member countries.

To allow for the optimal use of world resources in accordance with the objectives ofsustainable development

To make sure that developing countries secure a share in the growth of international trade, To ensure linkages between trade policies, environmental policies and sustainable

development To develop an integrated and more viable multilateral trading system and sustainable

development

To co-operate with the IMF and World Bank and its affiliated agencies with a view toachieve greater clarity in global economic policy making.

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To administer understanding on rules and procedures governing the settlement ofdisputes.

To provide a forum for negotiation among its members concerning their trade relations.

Functions of WTO: Its functions are:

Administering and implementing the multilateral trade agreements, which togethermake up the WTO

Acting as a forum for multilateral trade negotiations Seeking to resolve trade disputes

Overseeing national trade policies Cooperating with other international institutions involved in global economic policy-

making

Maintaining trade related database. Members are required to notify in detail varioustrade measure and statistics

Acting as a watchdog of international trade, constantly examining the trade regimes ofindividual members

Acting as a management consultant for world trade. Experts on the panel of WTOscan the world economic environment and make observations on contemporary issues.

Technical assistance and training for developing countries.

As the functions make it clear, WTO does not aim at economic or politicalintegration, but seeks to promote free trade among member’s countries.

The WTO Agreement contains some 29 individual legal texts - coveringeverything from agriculture to textiles and clothing and from services to governmentprocurement, rule of origin, and intellectual property. Added to these are more than, 25additional ministerial declarations, decision, and understanding, which spell out furtherobligations and commitments for WTO members

* Source: https://www.wto.org/english/res_e/booksp_e/agrmntseries1_wto.e.pdf.

15.7 WTO IMPLICATION IN INDIA

India was one of the founder members of the GATT. There have been divergentviews in favor and against India becoming the member of the WTO. We will study here,the advantages and disadvantages to India after becoming a member of WTO.

The following are the advantages are available to India:

Benefits from reduction of tariffs on the products of export of interest to India.

Improved prospects for agricultural exports as a result of likely increase in the worldprices of agricultural products due to reduction in domestic subsidies and barriers to trade

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Increase in the export of textiles and clothing due to the phasing out of the MFA by 2005. Advantages from greater security and predictability of the international trading system

due to the revamped dispute settlement procedures and the agreements on safeguard,subsidies and anti-dumping measures.

Compulsion imposed on us to be competitive in the world market.

Disadvantages:

Tariff reductions on goods of export of interest to India are very small. On the otherhand, there will be erosion of the preference enjoyed by India, and India will mostprobably be graduated out of the Generalized System of Preferences( GSP)

Meager prospects of increase in agriculture exports due to the very limited extent ofagricultural liberalization.

India will be under the tremendous pressure to liberalize her service industries.

There will be only marginal liberalization to the movements of labor services in whichIndia is competitive.

India will lose policy options in several areas because of – extensive bindingsundertaken by the country, prohibition of certain type of subsidies and making certainother types actionable, giving up the option of granting process patents in somesectors and limitations put on India’s ability to apply restrictions on balance ofpayments ground

Increased outflow of foreign exchange due to commitments undertaken in the field ofTRIMs and services



15. The WTO was established to implement the final act of ___________round agreement of GATT.

16. UNCTAD came into being in _________.

17. Administering and implementing the multilateral trade agreements,which together make up the ______________.

18. ____________ was one of the founder members of the GATT.

19. Increased outflow of foreign exchange due to commitments undertakenin the field of _____________ and services.

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15.8 Summary: -

In this chapter we understand that Globalisation is the shift towards a more

integrated and interdependent world economy .It is a process by which businesses or other

organizations develop international influence or start operating on an international scale.

Foreign direct investment (FDI) is an investment in business operations by an investor

from different another countries for which the foreign investor has control over the

company purchased. MNCs are companies which owns & control production activities in

more than one country. MNCs produce goods in one or more countries and sell them in

many countries.

15.9 Glossary: -

Globalisation : - Thinking globally , establishing manufacturing facilities , market the product ,procure finance , human resources , raw materials throughout the world is globalization.

Foreign Direct Investment : - Companies invest in foreign countries in order to gain controlover the market and thereby increase sales. Market control is possible by establishing control ofmanagerial decision making through investment in equity share capital.

Foreign direct investment is influenced by supply, demand, and political factors.

MNCs: - MNCs are companies which owns & control production activities in more than onecountry. MNCs are corporations involved in various activities of importing, exporting &manufacturing in different nations.

WTO: - The World trade organization was established on the 1st January, 1995 to implement thefinal act of Uruguary round agreement of GATT. The basic purpose of the WTO is to promoteinternational trade without ant discriminations.

15.10 Answers to Check your progress: -

(1)Globalization.

(2)Interlinked.

(3)Foreign trade.

(4)Rapid integration.

(5)Globalization.

(6) C

(7) B

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(8) A

(9) C

(10)MNC’S

(11)Foreign direct investment.

(12)Research and development.

(13)Advanced technologies.

(14)Payments.

(15)Uruguay.

(16)1964.

(17)WTO.

(18)India.

(19)TRIMS.

15.11 Suggested Reading: -

(1) International business (Text and cases):-P.Subba rao second revised edition and enlargededition 2008.Himalaya publishing house pvt ltd.

(2) International business theory and practice 2nd edition : - Riad A.Ajami (University of northcarolina at greensboro). Karel cool (Insead , Fontainebleau , France) G.Jason Goddard (Wachoviacorporation) Prentice hall of india.


(1)What is globalisation? Explain the features of globalisation?

(2)Analyze the steps taken by Indian government to globalise the economy?

(3)What is foreign direct investment? Factors that affect FDI?

(4)Describe the organizational structure of the World trade organisation and its advantages?

(5)Describing MNC'S its advantages and disadvantages?

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________________________________________________________________________

Lesson 16: Trading Blocks

Structure

16.1 Objectives

16.2 Introduction

16.3 Meaning of Trading Blocs

16.4 European Union

16.5 North American Foreign Trade Association (NAFTA)

16.6 The Association of South-East Asian Nations (ASEAN)

16.7South Asian Association for Regional Cooperation (SAARC)

16.8 Foreign Trade: SEZ, EPZ, EOU

16.9 Dumping and antidumping methods

16.10 Summary

16.11 Glossary


16.13 Suggested Reading


16.1 Objectives


Explain the logic underlying the formation of trade blocks.

Explain the objectives and functioning of NAFTA. Explain the operation of foreign trade. Outline the activity of a SEZ, EPZ, EOU

Discuss the activities of dumping and antidumping measures.

16.1 Introduction

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Economic integration among several countries takes several forms. It coversdifferent kinds of arrangements between or among countries by which to be morecountries link their economies closure either in part of total. Economic integrationis also known as Trading Blocs. Economic integration among the worldeconomies varies in degree. The economies are

1. Free trade area.2. Custom union.3. Common market.4. Economic union.

The trade impacts of the trade blocks are normally measured by weighing thebenefits of trade creation against the adverse effects of trade diversion. Tradecreation occurs when lower cost partner country imports display higher pricedomestic production, and there by decrease cost of production and consumerprices within the country. Trade diversion happens when lower cost imports fromoutside the block are displaced by higher cost imports from within the blocks. Themost important trade blocks include EU, NAFTA, ASEAN and SAARC.

16.3 Meaning of Trading Blocks

A bloc means groups. Trading blocs means grouping of countries. It means agroup of nations united for some common actions. Trading bloc is a voluntarygrouping of countries with a specific region for common benefit.

It indicates regional economic integration of nations for mutual benefits. Ingeneral terms, regional trade blocks are associations of nations to promotetrade within the block and compete its members against global competition.

Trading blocs are highly organized and based on shared interest to promoteeconomic and social interest of the member countries.

Objectives of Trading Blocs:

1. To remove trade restrictions among member nations.2. To improve social, political, economic and cultural relations among

member nations.3. To encourage free transfer of resources.4. To establish collective bargaining.5. To promote economic growth.

16.4 EUROPEAN UNION (EU): -

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The origin of the European union goes back to the European coal and steelcommunity(ECSC)which was formed with the countries West Germany,France, Italy, Belgium, Netherlands, and Luxembourg in 1952.The aim of theECSC was to eliminate import duties and quotas on coal, iron ore, steel andscarp regarding the international trade among the member countries.EuropeanUnion stages are: -

(1) European coal and steel community.

(2) European common market/European economic community.

(3) European economic union.

The European Economic Community was made up of 12 countries – Austria,Belgium, Denmark, France, Ireland, Italy, Luxembourg, Norway, Portugal,Spain, Sweden, and the United Kingdom. The EEC member countries agreedto:

Eliminate all trade barriers between members Establish a common external tariff

Introduce a common agricultural and transport policy Create a European Social Fund Establish a European Investment Bank

Develop closer relations between member countries

The European Union has grown in size from its first attempt at a regionalintegration with six European countries to its present membership of 25countries. With the year the expanded European Union can continue tofunction efficiently, it needs a more streamlined system for making decisions.The countries that make up the European Union (Its members states) remainindependent sovereign nations, but they pool their sovereignty in order to gaina strength and world influence none of them could have their own.

Functions and Activities of the European Union:

1. Legislation: Much of EU legislation adopted jointly by the council andparliament. Once adopted, correctly applied.

2. Coordination of the policies of member’s states: EU countries have decidedthat they want an overall economic policy based on close coordination of theirnational economic policies such as economic and financial affairs.

3. Concluding international agreements: Each year the council “ concludes” anumber of agreements between the EU and non- EU countries, as well as withinternational organizations

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4. Approving the EU budget: The EU’s annual budget is decided jointly by thecouncil and the European Parliament.

5. Common Foreign and Security Policy: The member states of the EU areworking to develop a common Foreign and Security Policy (CFSP). Butforeign policy, security and defense are matters over which they individualnational government retain independent control.

6. Freedom, security and justice: EU citizen are free to live and work inwhichever EU country they choose, so they should have equal access to civiljustice everywhere in the EU.The European Commission has four main roles:

1. Proposing new legislation: The commission has the “right to initiative”. Thecommission alone is responsible for drawing up proposal for new Europeanlegislation.

2. Implementing EU policies and the budget: A the EU’s executive body, thecommission is responsible for managing and implementing the EU budget.Most of the actual spending is done by national and local authorities, but thecommission is responsible for supervising it.

3. Enforcing European law: The commission act as “guardian of the treaties”.This means Court of justice, the commission is responsible for making sureEU law is properly applied to all the member states.

The European Union ( EU)

EuropeanParliament732 Member

The Council ofthe European

Union

EuropeanCommission

Court of Justice25 Judges

Court of Auditors

25 members

25 Members

Main Decision making bodies European Union’s Executive body

Ensures that the EUmember states andinstitutions do what thelaw requires; has thepower to settle legaldisputes

Ensures that EU funds arecollected properly and spentlegally, economically and for

the intended purpose; has the

power to audit any person ororganization handling EUfunds

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4. Representing the European Union on the International stage: TheEuropean commission is an important mouth piece for the EU on theinternational stage i.e., at World Trade Organization (WTO).

________________________________________________________________

16.5 NORTH AMERICAN FREE TRADEAGREEMENT (NAFTA):-

The North American Free Trade Agreement (NAFTA), the world’s largestfree trade area, comprising of USA, Canada and Mexico and was on January1st, 1994. A free trade agreement was signed by the USA and Canada in 1989.This was extend to Mexico in 1994. NAFTA eliminated all tariffs and tradebarriers as on 1st January, 2008.

Objectives

The objectives of the NAFTA include:

1. Eliminate barriers to trade in, and facilitate the cross border movement ofgoods and services between the territories of the member countries;

2. Promote conditions of fair competition in the free trade area3. Increase substantially, investment opportunities in the member countries.4. Enhance the competitive advantage of the companies operating in the

member countries in wider international markets.

5. To enhance industrial development and thereby employment throughout

the region.

6. To provide stable and predictable political environment for the investors.

Economic Integration through NAFTA

Economic integration amongst nations is evolving in several stages. From theleast integrated stage to most integrated. The stages are:

1. Free Trade Area: In a free trade area, most barriers to the trade of goodsand services among the member countries are removed i.e. nodiscrimination tariffs, quotas, subsidies or administrative impedimentsare allowed to distort trade between members.

2. The Custom’s Union: Elimination of trade barriers between the membercountries and also formulating common external trade policy i.e. bysetting up of significant administrative machinery to oversee traderelations with non members.

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3. A Common Market: It allows factors of production to move betweenmember countries. Labor and capital are free to move as there is norestriction on immigration or cross border flow of capital between themember countries.

4. Economic Union: It involves the free flow of products and factors ofproduction between member countries and adoption of common externaltrade policy.

5. The Political Union: The EU is on the road to political union. TheEuropean parliament has been directly elected by the citizen of membercountries.__________________________________________________________

16.6 THE ASSOCIATION OF SOUTH-EAST ASIAN NATIONS(ASEAN)

ASEAN is looked up to as a highly successful economic integration in thedeveloping world, going by the rapid and astounding economic growth shown bymany of its member countries such as Singapore, Malaysia, Philippines, Thailandand Indonesia. During 1992, it was agreed to establish a Common EffectivePreferential Tariffs (CEPT) plan. This plan helped to create an Association ofSouth-East Asian Nations (ASEAN) free trade area in 15 years with effect fromJanuary 1993.

ASEAN has enabled the member states to represent their region as a collectivebody and improve their bargaining position with non-members states, especiallythe industrialized countries. The aura of political stability and regional amityengendered by the body has also been a major factor in attracting overseasinvestment in several member countries. In recent years, the region has been oneof the leading recipients of foreign direct investment, trailing only China andIndia.

Active cooperation between members is supported by a small secretariat locatedat Jakarta, Indonesia. The notable achievements of ASEAN are:

1. An emergency sharing scheme on crude oil and oil products2. Joint approaches to problems in international commodity trade3. A program for cooperation on the development and utilization of mineral

resources4. A planning centre for agricultural development5. A center for development of forest tree seeds6. A program for tourism cooperation

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7. A plant quarantine training center8. An agreement to align national standards with international standards ( Such

as International Organization for Standardization IOS)___________________________________________________________

16.7 SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION(SAARC)

SAARC is a group of seven South Asian countries Bangladesh, Bhutan, India,Pakistan, the Maldives Nepal and Sri Lanka. Established in December 1985 topromote economic, social, cultural and scientific collaboration, it proposes totransform the lives of a population of about 1.4 billion in its member countries.Afghanistan joined SAARC in April 2007.

Members of SAARC with observer status as on 1st March, 2011 were: Australia,Burma, China, EU, Iran, Japan, Mauritius and USA.

Objectives

The objectives of the SAARC are:

To promote the welfare of the people of South Asia and to improve their

quality of life

To increase speed economic growth, social progress and cultural

development in the province and to grant all individuals the prospect to

live with pride and to recognize their full potentials

To encourage and strengthen shared self confidence among the countries

of South Asia

To contribute to shared trust, sympathetic and gratitude of one another’s

problems

To endorse active association and mutual support in the economic, social,

cultural, technical and scientific field

To reinforce cooperation with other developing countries

To strengthen cooperation among themselves in international forums on

matters of general interest

To cooperate with global and local organizations with similar aims and

purposes.

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Principles of SAARC:

Teamwork within the framework of the alliance is based on respect for

the values of sovereign equality, territorial integrity, political

independence, non-interference in the internal affairs of other states

and shared benefits.

Such cooperation is to harmonize and not to substitute bilateral or

multilateral cooperation

Such cooperation should regular with bilateral and multilateral of the

member states

Decisions at all levels in SAARC are taken on the basis of agreement

Bilateral and controversial issues are excluded from its discussions


Choose the correct answers: -

(1) ___________ is also known as trading blocks. ( )

(a)Economic integration (b) Free trade (c) Economic union (d) none of the above

(2)NAFTA came into being on _____________. ( )

(A) 2nd Jan 1994 (b) 4th Jan 1994 (c) 1st Jan 1994 (d) 7th Jan

1994

(3)The emergence of successful operation of EEC and NAFTA gave impetus for

the forming of _________. ( )

(a)SAARC (b) EU (c) NAFTA (D) ASEAN

(4)Afghanistan joined SAARC in April _____________. ( )

(A) 2008 (b) 2007 (c) 2004 (d) 2001

(5)NAFTA as a population of __________- million and hence it is one of the

significant trading areas in the globe. ( )

(a) 363 (b) 373 (c) 453 (d) 370

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16.8 FOREIGN TRADE

International trade is broadly classified as the switching of capital, goods and

services across global borders or territories, which could involve the actions of the

government and individuals. In most countries, such trade represents a major

share of gross domestic product.

The Meaning and Definition of Foreign Trade or International Trade!

Foreign trade is exchange of capital, goods, and services across internationalborders or territories. In most countries, it represents a significant share of grossdomestic product (GDP). While international trade has been present throughoutmuch of history, its economic, social, and political importance has been on therise in recent centuries.

Foreign trade includes export and import of goods across international borders.All countries need goods and services to satisfy wants of their people. Productionof goods and services requires resources. Every country has only limitedresources. No country can produce all the goods and services that it requires. Ithas to buy from other countries what it cannot produce or can produce less thanits requirements. Similarly, it sells to other countries the goods which it has insurplus quantities. India too, buys from and sells to other countries various typesof goods and services.

Generally no country is self-sufficient. It has to depend upon other countries forimporting the goods which are either non-available with it or are available ininsufficient quantities. Similarly, it can export goods, which are in excess quantitywith it and are in high demand outside.

International trade means trade between the two or more countries. Internationaltrade involves different currencies of different countries and is regulated by laws,rules and regulations of the concerned countries. Thus, International trade is morecomplex.

According to Wasserman and Haltman, “International trade consists oftransaction between residents of different countries”.

According to Anatol Marad, “International trade is a trade between nations”.

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According to Eugeworth, “International trade means trade between nations”.

Industrialization, advanced transportation, globalization, multinationalcorporations, and outsourcing are all having a major impact on the internationaltrade system. Increasing international trade is crucial to the continuance ofglobalization. Without international trade, nations would be limited to the goodsand services produced within their own borders.

International trade is in principle not different from domestic trade as themotivation and the behavior of parties involved in a trade do not changefundamentally regardless of whether trade is across a border or not. The maindifference is that international trade is typically more costly than domestic trade.

The reason is that a border typically imposes additional costs such as tariffs, timecosts due to border delays and costs associated with country differences such aslanguage, the legal system or culture. International trade consists of ‘export trade’and ‘import trade’. Export involves sale of goods and services to other countries.Import consists of purchases from other countries.

International or Foreign trade is recognized as the most significant determinantsof economic development of a country, all over the world. The foreign trade of acountry consists of inward (import) and outward (export) movement of goods andservices, which results into. Outflow and inflow of foreign exchange. Thus it isalso called EXIM Trade.

For providing, regulating and creating necessary environment for its orderlygrowth, several Acts have been put in place. The foreign trade of India isgoverned by the Foreign Trade (Development & Regulation) Act, 1992 and therules and orders issued there under. Payments for import and export transactionsare governed by Foreign Exchange Management Act, 1999. Customs Act, 1962governs the physical movement of goods and services through various modes oftransportation.

To make India a quality producer and exporter of goods and services, apart fromprojecting such image, an important Act – Exports (Quality control & inspection)Act, 1963 has been in vogue. Developmental pace of foreign trade is dependenton the Export-Import Policy adopted by the country too. Even the EXIM Policy2002-2007 lays its stress to simplify procedures, sharply, to further reducetransaction costs.

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As a part of the export promotion drive, Government have, from time to time,introduced several schemes to promote units primarily devoted to exports. Theseinclude Export Processing Zones (EPZs), Hundred Per cent Export-OrientedIndustrial Units (EOUs), and different categories of Technology Parks (TPs). In2000, a scheme of Special Economic Zones (SEZs) was also introduced.

SPECIAL ECONOMIC ZONE (SEZ)

A Special Economic Zone (SEZ) is place or a location within a country

categorized on the basis of geographical environment. They provide an ideal place

for working environment to compete with world class infrastructure facilities. The

scheme of SEZ started with Public Private Partnership (PPP) and plays a major

role in developing infrastructure in the region. The primary objective of SEZ is to

attract foreign investment.

A SEZ is a tool for development of trade capacity with an objective of promoting

rapid economic growth by applying tax incentives to attract investment and

technology from foreign countries. The rules and regulations such as investment,

trading, customs , quotas, taxation and labour related to trade and business are

different from one country to another country.

The objectives of the SEZ includes:

Increased trade and business,

Increased foreign investment,

Employment creation and

Efficient administration.

To encourage business

The SEZs provides a channel to foreign companies who are looking for cheaper

and efficient location to start their business. They also encourage the local

companies to enhance their exports through a proper channel. It offers relaxation

on tax and tariff policies. For example- No import Duty on raw materials for

production process. A transparent single window system is used for setting up of

businesses.

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Advantages:

Corporate tax holiday

Licenses are not required for imports made under SEZ units.

Duty free import on procurement of goods

Exempted from

Customs duty on import of capital goods, raw materials

Central Excise duty on the purchase of capital goods, raw materials

Central Sales Tax on the sale or purchase of goods

Payment of Service Tax.

Government has exempted SEZ Units for the deposit of stamp duty andregistration fees on the leasing or licensing of plots.

Disadvantages

Because of the various tax exemptions and incentives there is a loss ofrevenue

Many companies shows interest towards SEZ, in order to get everything atcheap rates

EXPORT PROCESSING ZONES (EPZs)

An Export Processing Zone (EPZ) is an area of customs where the participants are

allowed to import machinery, equipments and materials for manufacturing of

goods without payment of duty. The imported goods are subject to the conditions

of customs. These are usually placed near sea ports or airports for promoting

export industries.

Mostly, these are assembling plants by using labor available at cheaper rates. EPZ

helps to gather components from various countries so that a new product can be

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exported. The rules and regulations of EPZ are different from one country to

another country.

In many situations , hosting countries invest in infrastructure to help amenities

such as power, water supplies and allow “one stop shops” that the companies can

finish the entire process. Especially, Units in these Zones are allowed for foreign

equity up to 100 per cent.

The main objectives of an EPZ are:

To gain foreign exchange.

To create job opportunities.

To promote technology transfer by foreign investment

To furnish the overall development of the economy.

EXPORT-ORIENTED UNIT (EOU):

Export-Oriented Unit (EOU) is an business unit which offers for exports its entire

production. In industries, EOUs were allowed for potential exports. The Export

targets are contemplated by the relevant Council of Export Promotion. Normally

EOUs does not provide any support to products unless subject to export control

quota ceilings. Thus, the scheme of 100 per cent export oriented units had been

designed in order to create additional export capacity units. This will results in

substitution for the existing units of production.

An EOU unit is considered to be a major partner of net foreign exchange. From

the commencement of commercial production, for a period of 5 years the level of

foreign exchange earnings as a percentage of exports (NFEP) was computed

annually and cumulatively. The NFEP concern for various products varies from

10 per cent to 60 per cent for plain gold, computer soft ware and tissue culture

plants. Though, electronic hardware goods were allowed to be set up without any

obligation.

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(6)A ___________ is a geographical region that has economic laws that are more

liberal than a countries domestic economic laws.

(7) __________ is exchange of capital, goods, and services across international

borders or territories.

(8)EPZ stands for ______________________________.

(9) __________ refers to an industrial unit which offers for exports its entire

production excluding permitted levels of rejects.

16.9 DUMPING AND ANTIDUMPING MEASURES:

Dumping refers to an approach of pricing policy for a country to enter into aboardor foreign markets by means of reduction in the price of the commodity.Generally, it is referred as selling of goods at less than fair or normal value. In thecontext of international trade law, it is defined as an act of a manufacturerexporting goods from one country to another country at a price which is eitherbelow the price in the domestic market or below its costs of production.

According to Haberler dumping can be defined as: “The sale of goods abroad at

a price which is lower than the selling price of the same goods at the same time

and in the same circumstances at home, taking account of differences in transport

costs”

According to Viner, “Dumping is price discrimination between two markets in

which the monopolist sells a portion of his produced product at a low price and

the remaining part at a high price in the domestic market.”

A standard technical definition of dumping is the act of charging goods at lowerprice in a foreign market than one charge for the same goods in a domesticmarket. Dumping ,in practical terms, means sale of goods at a higher price in thehome market and at a lower price in the abroad market.

Types of Dumping:

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Dumping can be classified as sporadic , intermittent or over a long period.

Sporadic Dumping:

It is mostly resorted under rare or exceptional cases. First when the production ofcommodity in the home market is higher than the targeted demand and secondlythe presence of unsold commodities, after sales in the home market. In suchsituations, the manufacturer sells the remaining or unsold stockings at a lowerprice in the abroad market. The primary objective is to identify new markets forhis product or to manage competition in a foreign market or to liquidate theexcess stock. In this type of dumping, the manufacturer sells his products at alower price at least to recover losses.

Intermittent Dumping:

It refers to the periodic sale of goods in the aboard at a lower price than the homecountry. The basic objective is to gain an advantage in the abroad market. Incompetition, the manufacturer sells goods in the abroad market at a very less priceor even at a state of loss. After that he will increases the price of the products inthe abroad market.

Long Period Dumping:

This type of dumping may be resorted to facilitate the optimum utilisation of plantcapacity. This may results in lowering the average cost and increases the profit inthe domestic market.

Objectives of Dumping:

1. To enter into the abroad Market:

A producer adopts dumping, to find an appropriate place for doing business in theabroad market. Because of heavy competition in the abroad markets he willreduce the price of the product as compared to the other players of a market. Itresults in the increase of the demand for his product

2. To Sale the Surplus goods:

If the manufacturer is not able to sale the excess production in the home market,then he will search for new places to sell these additional goods at a very lowerprice in the abroad market. But this happens occasionally.

3. Expansion of the Industry:

For increasing returns on investments, the producer concentrates on dumping forthe expansion of business. The cost of production can be reduced by selling more

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and more quantities at a lower price in the abroad market, so that he can earnadditional profits.

4. New Trade Relations:

For expanding the business the producer develops new trade relations by sellinggoods at a lower price in the abroad market, thereby he establishes relations innew market with those countries.

Effects of Dumping:

Dumping affects both the parties i.e. importing and exporting countries.

On the Importing country:

The impact of dumping towards the importing countries depends upon the pointthat the dumping is for a short term or for a long term basis; the nature of theproduct; the dumping objectives. Domestic industry may be affected due todecline in the sales and profits. In long run dumpling may threatening the survivalof the domestic industry. This may create problems in balance of payments.

On the exporting country: Through dumping, the exporting countries earn moreforeign currency by sale of goods in huge quantities. As there is more demand forthe commodity which Increases the employment opportunities.

Antidumping and its measures:

Anti dumping is a measure of protection towards domestic markets. It suggestsvarious remedial measures for solving problems related to the unfair tradepractices of dumping. It is defined as an instrument for ensuring fair trade. Thefollowing are the measures adopted to control dumping:

a. Tariff Duty:

An importing country charges a tariff on products which results in price increaseof the importing commodity to have a control over dumping. A point to be noted,that the tax rate on imports should be equal to the difference between the price ofdomestic and dumped commodity. In order restrict, dumping generally the tariffduty is imposed higher than this difference.

b. Import Quota:

Import on Quota is another measure to have a control over dumping. Thismeasure specifies volume of the goods that are allowed to be import into the

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country. It includes the levy of tax along with fixing of quota. So the contributionof foreign exchange to the importers is limited.

c. Import Embargo:

Import embargo is another measure against the practices of dumping. It means theimports of certain type of commodities are banned.

d. Voluntary Export Restraint:

Importing and exporting countries voluntarily enter into bilateral agreements. Thebasic objective of this agreement is to restrict dumping of commodities. ABilateral VER agreement is an example for exporting textiles between India andEU countries.

16.10 Summary:-

In this chapter we can understand the meaning of economic integration

and trading blocks. Thetrade impacts of trade blocks are normally measured by

weighing the benefits of trade creation against the adverse effects of trade

diversion. A Special Economic Zone (SEZ) is a geographical region that has

economic laws that are more liberal than a country’s domestic economic laws.

India has specific laws for its SEZ’s.Dumping refersto an approach of pricing

policy for a country to enter into aboard or foreign markets by means of reduction

in the price of the commodity.

16.11 Glossary: -

Trade Blocks: - Economic integration among the world economies varies in

degree.They are:-free trade area, customs union, common market, and economic

union.

NAFTA: -It is expected to eliminate all tariffs and trade barriers among the USA,

Canada, and Mexico.

SAARC: -Ithas been trying for improving the quality of life and welfare of the

people, develop the region economically and provide the opportunities to the

people of the member countries.

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Globalisation implies opening up the economy for rest of the globe by liberalizing

the rules and regulations.

Special Economic Zone: -A Special Economic Zone (SEZ) is a geographical

region that has economic laws that are more liberal than a country’s domestic

economic laws. India has specific laws for its SEZ’s.

Export-Oriented Unit (EOU): - Hundred per cent Export-Oriented Unit (EOU)

refers to an industrial unit which offers for exports its entire production, excluding

permitted levels of rejects.

Dumping:-Dumping refersto an approach of pricing policy for a country to enter

into aboard or foreign markets by means of reduction in the price of the

commodity.

16.12 Answers to check your progress:

(1) A

(2) C

(3) D

(4) B

(5) A

(6)Special economic zone.

(7)Foreign trade.

(8)Export processing zones.

(9)Export oriented units.

16.13 Suggested Readings: -

1. Title : International Business: Text and Cases, Author: P. SubbaRao,

Edition: 2, Publisher: Himalaya Publishing House pvt. Ltd., 2001, ISBN

817866206X, 9788178662060

2. International Business Text and Cases, Author: Francis Cherunilam,

Edition: 3, Publisher: Prentice Hall of India Pvt. Ltd., ISBN 81-203-2425-0

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16.14 Terminal and Model questions: -

(1)What is economic integration? Explain the different kinds of economic

integration?

(2)Describe the steps taken by NAFTA in bringing economic among the

USA,Canada, and Mexico?

(3)Briefly explain the formation of the association of south – EastAsian nations

(ASEAN)?

(4)Explain the activities of dumping and anti dumping measures?

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