Role of Government InShaping Business Environment

Definition of business
The term business is understood and explained in different ways by different people. For some, business is an activity, for some it is a method of transacting, for sonic others, it is a method of money making and some people argue that business is an organized activity to achieve certain pre-determined goals or objectives. Dictionary meaning of business is: the act of buying and selling of goods and services, commerce and trade. Based on all these meanings of justness, we may define business as: gainful activity through which various elements of society conduct exchanges of the desirable things. But now a day, business is viewed more as a profession or occupation. From the days of family owned business, we have reached a stage of professionals and experts starting and running business. It could also be noted that business administration and business management have emerged as the most prospective field of study and occupation. Persons with educational background in business enter business or join business organizations to make them successfully function. Unlike the olden days, a number of interests are involved in business today, viz. owners, and investors in business, suppliers, customers, employees, government, stake holders, administrators, managers, strategists, executives, and so many others. Hence, every business activity has to meet the goals or aims or objectives of these various groups of people. That in fact, has made business a most complicated activity. Modern business has a number of features. Understanding of these would help to appreciate and organize business activities in a highly professional way.

BUSINESS ENVIRONMENT
Business involves activities, which links an organization with outside world. Within an organization, a business is governed by the behaviour of its employees, management or decision makers. But externally a business is influenced by a score of factors, which range from customers to competitors and government. Therefore, a business cannot be independent of (he influence of these external factors. It should also be noted that a business has absolute control over all the internal factors, it has no control over the external factors. So often it becomes necessary for business houses to modify their internal decisions and policies, on the basis of the pressure from external factors This highlights the need to be ever- cognizant of changes and influences of external factors so as to conduct business on healthy lines. It is in this context that business environment assumes all significance. Business environment therefore refers to the influences and pressures exerted by external factors on the business. The following Figure would help to understand the various factors which constitute the business environment. From the Figure: 1, it would be clear that business organizations function in an environment subject to the influence of various constituents. Earh one of the constituents have in turn a number of factors influencing them. For example, economic environment has micro and macro environmental factors affecting it. To develop a right perspective about business environment, let us discuss briefly about each one of the external environment constituents.

1. Demographic environment: This refers to the size and behaviour of population in a country. Suppose a country has a huge size of population, then, the country would provide extensive business or marketing opportunities for all types of business organizations. On the other hand, a country with low size of population would force the business organizations to seek external market for their products or services. Similarly, if the population in a country is well - tuned to 'use and throw concept [like most of the Western countries] then there would be limited scope for repair shops and employment scope in that segment would be almost nil. But alternatively this would give wide marketing opportunities for manufacturing organizations. On the other hand, if the population is averse to 'use and throw' concept, then the business opportunities would be limited for manufacturing organizations but the repair shops, self-employed technical persons and spares manufacturers, would have roaring business. Hence, the size and quality of population emerges as a vital factor influencing business environment. 2. Economic environment: Economic environment refers to the overall economic factors like economic philosophy of the country, economic structure, planning, economic policies, controls and regulations, etc. All these have a serious impact on the functioning of business organizations in a country. For example, in a Capitalistic economic system, business organizations would be subjected to limited government regulations and controls. They would be more governed by market forces [demand and supply] rather than by other factors. On the other hand, in a Socialist system, the government would determine everything on behalf of the country. In a Communist set up, the government has absolute control over every aspect over production that private enterprises may not exist at all. In a Mixed economic system, government would be selective in allowing die presence of private enterprises in certain activities,

reserving some spheres completely for governmental operations. Hence, the economic philosophy of the country directly determines the scope and functions of business organizations in that country.

3. Geographical and ecological environment: Geographical environment refers to climatic conditions and natural resources, which determines flu manufacturing scope and the nature of the products that could be marketed. For example, a country like Kenya has to manufacture more of products based on forest resources, while the Gulf countries can produce only crude, Japan can have business in fish, fruits, etc., Countries in the tropical region would have organizations specializing in products from geographical resources available in abundant in that region, while organizations in Mediterranean countries have a Different business scope, Scandinavian countries have scope for dairy product manufacturing, etc. Similarly ecological imbalance is taking place at an alarming rate in the world today, that deforestation and hunting of rare species of animals for food are all prohibited now. Hence, while identifying the business opportunities, business organizations have to be conscious of the limitations posed by the geographical and ecological considerations. 4. Legal environment: It is well known that every country has a number of legal regulations to ensure that the interests of business organizations do not run counter to national interests. Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of customer complaints, payment of tax to government, manufacturing practices, human resources development to pricing of products and services, a number of legal regulations have to be fulfilled. For example, in USA and several western countries, consumer protection is very active, that even a medical practitioner is subjected to huge liabilities in limes of deficiency in services. In India and other countries, very rigorous legal provisions arc in place to prevent hunting of rare species, that any organization, which manufactures products based on such species, have lo get legal sanctions. In case of failure to honor cheques issued, organizations are now a days made to pay hefty compensations. Hence, the deterrence in terms of legal provisions has become the order of the day. All organizations have to first of all address these provisions become coming in to steam. 5. Technological environment: This is a very significant external factor determining the destiny of business organizations. Supported by computerize operations, modem business organizations have succeeded in analyzing customers, minimizing the defects in products, ensuring service at the right time and place, etc. While communications use to take unduly long time in those days, business communications are instantaneous these days, thanks to modem satellite technology. Modern organizations have recognized that research and development alone can ensure organizational growth and stability. They have become more and more pro-active and remain as change agents of the economy. Governments have also become more technology conscious that right from police controls to registration of title deeds, computerizations has been adopted. Customer servicing through call centers is the latest necessity of organizations. Manufacturing activities have become more and more technically sophisticated. Therefore business environment has become highly dynamic.

6. Social environment: Social environment today has brought compulsions on business organizations to adhere to certain business ethics and morals. Social responsibility of business is an important force that modern business organizations cannot wriggle out of their duties and responsibilities towards the society. For example, every leather manufacturing or process unit is made to install pollution prevention system. Similarly, the expectations of various interests in the society have undergone a sea of change. The shareholders, promoters and owners expect a reasonable return on their investments. The workers expect security of service, terminal benefits, accident relief and various other compensations from the organizations. Government expects the business units to pay tax regularly and participate in social improvement. The distributors and agents expect the organizations to ensure smooth delivery process and demand more commission and compensation. Suppliers expect the organizations to give them continuous business and prompt payment of bills. Therefore each social group has a specific interest, the combination of all these, exerts enormous pressure on the business unit. A business unit which succeeds in meeting the interests of all these groups remains successful and grows. 7. Educational and cultural environment: Educational environment in a country determines the quality of population. A country with very high illiterate population would always experience political and economic instability. Similarly, lack of education may also give scope for the existence of superstitious beliefs, fatalistic attitude, etc. People's choice of goods and services would be more governed, by their religious faiths and beliefs. For instance, in the colonial days, the Indian population was a victim of the Britisher's divide and rule tactics. The economic development of a country completely depends on the literacy level which alone can pave the way for improvement in science and technology, modernization, industrialization, etc. In such a country, the business opportunities are plenty. 8. Political environment: Political stability is one important factor winch determines the business growth or downfall. A country with relative political stability would witness inflow of foreign capital and collaboration. By political stability we mean that the policies of government remaining consistent. As the business decisions arc based on government policies, frequent changes in these policies would force business organizations to change their policies too which, makes functioning very difficult. Sometimes, when the policies determined by a party in power are reversed by the succeeding party forming the government, there would be far reaching changes in business environment For example, India was following a policy of protectionism till late" 1908's. Hence, the industrial development and economic development could not take place at a rapid rate. In the absence of competition, the business organizations, made people to accept inferior quality goods and services. Once, the liberalization policy is adopted, the scene has completely changed. Today, no business can survive unless it provides quality goods or services on par with the multinational corporations. Another aspect of political environment is the political ideology with which a party is wedded to, would make the government tow the lines of countries with similar ideologies. Until the disintegration of USSR, India was simply following USSR's lines, but after the disintegration, India has to literally fend for itself. With the pressures mounted by the Western countries, India had to accept various trade and monetary policies. This has brought about a complete change in business environment.

Role of Government In Business

1. Government: Regulator of Business:

The entire regulatory legislations and policies stand covered under this segment. On the one hand, there is a very large indirect area of government control over the functioning of private sector business through budgetary and monetary policies.

But against this there is also a fast expanding area of direct administrative or physical controls through which the government seeks to ensure that private investment and production in industry and the use of scarce resources conform to governments basic socioeconomic objectives. They have become necessary tools in a system which seeks to avoid total nationalisation of resources. Governments regulatory functions with regard to trade, business and industry aim at laying down the limits for the private enterprise. The regulatory functions of the Government include (i) restraints on private activities, (ii) control of monopoly and big business, (iii) development of public enterprises as an alternative to private enterprises to ensure competitive dualism, (iv) maintenance of a proper socio-economic infrastructure.

2. Promoter of Business:
The promotional role of the government in relation to industries can be seen as providing finance to industry, in granting various incentives and in creating infrastructure facilities for industrial growth and investment. For example, our government has identified certain backward areas as No Industry Districts. To promote development of such areas, Government provides subsidies and tax holiday to attract investment in backward areas. In this way the government will help the process of balanced development and thereby remove regional disparities. The government is assisting the development of small scale industries. The District Industrial Centers are assisting the development of small industries. The government is actively helping the industrial development of the country by providing finance to them through the development banks.

3. Government as an Entrepreneur:
The impressive growth of the public sector in India from a small beginning bears testimony to the role of the government as an entrepreneur. Private investors are solely guided by private profit motive and hence they are not interested in developing products of common public use and social services which yield relatively lower returns. But as a social entrepreneur the government does not hesitate to take them up.

4. Government as the Planner:

In its role as a planner, the government indicates various priorities in the Five Year Plans and also the sectoral allocation of resources. Mixed economies are democratically planned economies. The government tries to manage the economy and its business activities through the exercise of planning. Planning is the most important activity in a modern mixed economy. The idea of economic planning can be traced to three different sources: Rationalism, Socialism and Nationalism. Economists advocate a planned economy on the ground that it can be a rational economy which can utilise the available resources in an optimal manner. In other words, the planned economy is a rational economy which attempts to secure the

maximum return with minimum wastage of productive resources. The socialists advocate a planned economy because it helps to achieve some desirable social ends like economic equality. An unplanned economy, left to it, is incapable of attaining the social ends. The nationalists advocate a planned economy because a planned economy is a powerful economy.

Government and business

The question of government interference in economic activities has been debated for a very long time by the economists. While the early economists considered economics as a handmaid of politics, the modem view is that politics is the handmaid of economics. With the growing importance of the role of government in economic welfare, the modem economists firmly believe that the sphere of government in economic development has no boundary. However, there is no unanimity among the economists about the extent and mode of state intervention in the economic sphere. Hence, we can identify the following political ideologies regarding the government intervention in an economy. i. The earliest opinion was that the government has nothing to do in an economy as the society will regulate itself. This opinion also stated that the government will wither away over a period of time. These ideologists are called ANARCHISTS. ii. Opposing the anarchists view is the COMMUNISTS view. According to them, the individuals cannot do anything on their own and there is a need for government to supervise and regulate individuals. The state will own everything and it is the fundamental duty of the government to organize and direct all economic activities. Hence, government becomes the custodian of the society and it has a very wide role to perform. In between the above two views, there are two more views about the extent of government intervention in an economy. While one view highlights the individuals, the other lays emphasis on the need for the government. The areas of government intervention in modern state may be broadly discussed under the following heads :

1. PROTECTIVE FUNCTIONS: By performing these functions, the modem government creates the necessary atmosphere for performing productive activities. Protection from external attacks and maintenance of internal peace are necessary so that economic activities will be performed to maximize the welfare of the society. Some people argue that this function of the government is unproductive, but without this function, no economy can ensure performance of productive activities. 2. ADMINISTRATIVE FUNCTIONS Government activities include a host of administrative works. All these works are performed through various departments and so the government maintains a large number of officials and agencies who implement the government policies. Works of routine nature are performed by these officials and the efficiency in the administration is a must for rapid economic growth.

3. PROVISION OF SOCIAL SECURITY This is a major function of the modern government as it is concerned with the improvement in public welfare. Maintenance of public health, provision of unemployment insurance, free medical and educational facilities, granting old-age pensions, provision of decent housing facilities, maintenance of public perks, libraries, museums, etc., have become part of the government functions. Though these functions are not in any way productive, yet they are necessary to encourage and promote productive activities. 4. ECONOMIC FUNCTIONS One of the basic economic functions of the modern government is to ensure optimal utilization of the available resources. This involves both identification and proper use of the resources. Especially these days every country needs to put the available resources to the best use so that the society gets the maximum benefits. Further if the resources utilization is left in the hands of the private enterprise, they will underutilize the resources as they have only profit maximization as their objective. There are also possibilities of the emergence of monopolist tendencies; concentration of wealth in the hands of a few, etc. Another very important economic function of the government is price control and rationing. This measure aims at preventing escalation in prices of essential commodities and controls the price of other commodities. By resorting to retail and wholesale price maintenance policies, the government can strive to bring down the price level. Yet another area where government intervention is needed is the removal of inequality in a country. This inequality arises because of the mal-distribution of the economic wealth and prosperity. Though national income increases, the rich becomes richer and the poor the poorer. This tendency should be changed through legal and political steps. The government intervention in an economy is a must for the following reasons: 1. In developing economies the vicious circle of poverty impedes the economy from developing faster. This vicious circle can be broken only with the government intervention. In the absence of it, any amount of planning will fail to bring about the necessary impetus to growth in such economies. 2. In the process of economic development, instability should be avoided at any cost. Even in developed countries, such instabilities are avoided with government intervention. In developing countries, therefore, the government should plan for proper allocation and utilization of resources as well as economic stability. Allowing the market forces to operate has certainly some advantages. But in under developed countries market forces do not operate smoothly because of external rigidities and structure bottle-necks. To overcome these forces pinning down economic development, government intervention is needed. 3. The basic requirement for rapid economic development is the economic and social infrastructure. The investment requirement for the provision of such infrastructural facilities runs to crores of rupees. This can be provided only the government and not the private sector. Further such investments are not income or profit yielding and so private enterprises may not come forth to undertake such investments. So government has a concrete role to play in inventing on such social and economic infrastructures.

4. Investment in social overheads is undertaken by the government by mobilizing financial resources from various sources. These sources of government include taxation, public borrowing and deficit financing and these sources cannot be resorted to by the private enterprises. It is also well known that private enterprises lack comprehensive approach to economic development. 5. Government intervention is indispensable in under developed economies because in such economies, there are several obstacles to economic development which can be overcome only by the government. As Mir and Baldwin observed every under developed economy needs a critical minimum of government intervention to reduce indivisibilities and discontinuities in the economy, to overcome diseconomies of scale and offset certain other forces that arise to depress development, once development begins.

Public control of business

In a mixed economic set up like India, the government retains control over strategic and key industries and operations. This is done through the creation of public sector units. The role of public sector units is explained below.

Discuss the role of Public Sector in India

Since 1948, the public sector in India has been playing a significant role in every sphere along with the private sector. These two sectors have been functioning as complementary to each other, though the government policies have been usually more favourable to public sector than to the private sector. Inspite of this, the private sector has also emerged victorious in several fields and since the announcement of Liberalization polices in 1991, we can reasonably expect the private sector to reach its potential and the public sector would also strive its best to withstand .he domestic and international competition. Hence, the future offers excellent scope for both the sectors, but it is clear that only the most efficient sector can survive, so how the private and public sectors are going to react to this challenge will be known in due course. However, let us now discuss the role of public and private sector in India in detail. 1. Role of public sector: First of all it is necessary to understand that the public sector includes the autonomous corporations, the departmental enterprises owned and controlled by both the State and Central Governments. The role of public sector would be discussed with reference to various indicators like employment, investment, output, national income contribution, savings, coital formation, capital stock, etc. A. Public sector and employment generation: One of the important contributions of public sector to the Indian economy is that it has generated huge employment opportunities and this has reduced the problem of unemployment to a large extent. The employment opportunities in public sector includes government administration, defence, health, education, research and development, enterprise owned by Central and State governments. It offered employment for 107 lakhs of people in 1971 which slowly increased to 154.8 lakhs in 1981 and it has touched 190 lakhs in March, 1991. This constituted nearly 71% of the total employment generated in the economy, in 1991. As regards the sector-wise employment opportunities created by the public sector, in 1989 public sector accounted for 47,8% of the total employment

generated by it through employment in government administration, community, social and personal services, followed closely by transport, storage and communications with 16.1% and manufacturing 10.1% Hence, it is clear that with the growth of public sector, the country is benefited with more and more employment opportunities.

B. Public sector and income of the public sector: The share of public sector income in the net domestic product has been increasing consistently from 7.5% in 1950-51 to about 25% in 1987-88. In a matter of about 35 years the public sector contribution to net domestic product has risen appreciably and constitutes one fourth of the total net domestic product This is mainly because of the rapid expansion of the public sector since 1951. This 25% of contribution in net domestic product is certainly better than 9.6% of contribution by the public administration. However, the private sector income constituted 75.1% of the total net domestic product. It should be noted that the public sector units are run on service motive and very little commercial motive. C. Public sector and saving and capital formation : This is yet another crucial yardstick to evaluate the contribution of public sector. The percentage share of public sector in total domestic savings increased from 1.7 to 2.3 of Gross national product at market prices. But in absolute terms it increased from Rs. 169 crores in I Plan period to Rs. 7815 crores in VII Plan. When we consider the percentage share in total sayings, the contribution of public sector has actually gone down from 17 in I Plan period to 11 in the VII Plan. However, the contribution of public sector in capital formation (gross domestic) is really commendable. It increased from a modest figure of 3.5% of Gross national product at market prices in I Plan period to 10.7% in VII Plan. As a result the ratio of percentage contribution by public sector and private sector in total domestic capital formation changed from 33 : 67 in the I Plan to 47 : 53 in the VII Plan. From this it is clear that the contribution by the private sector during the same period has declined from 67% to 53%. D. Public sector and capital stock: Capital stock refers to the total stock of plant and machinery, equipment and tools and other capital goods available at a point of time for further production. Based on the data available up to 1979-80, it was found that the percentage share of public sector in total capital stock between 1960-61 and 1979-80 increased from 26 to 37 while that of private sector declined from 74 to 63 during the same period. In absolute terms, the capital stock increased from Rs. 16,377 crores in 1960-61 to Rs. 68,478 crores in 1979-80 in public sector (i.e., an increase by over Rs. 52,000 crores) but in the private sector the increase was from Rs. 46,583 crores to Rs. 1,16,089. crores (i.e., an increase by over Rs. 65,000 crores). The increase is less pronounced in public sector because of the following reasons: 1. Public sector investments are mostly in economic infrastructure which does not contribute any output. 2. Public sector is mostly concerned with high capital intensity projects like railways, iron and steel, power, irrigation, etc. 3. The gestation period of public sector projects are very long.

4. The capacity utilization is very much less in public sector units. Most of the projects of public sector are having higher capital-output ratio.

E. Public sector and infrastructure: The economic development of a country depends on the development and maintenance of infrastructural facilities. The essential requirement is provided by public sector. The industrialization is accelerated only through infrastructural development. Investment in power, roads, bridges, irrigation, etc., is non-income yielding, long gestation period oriented, and heavy investment projects. Hence these are not attractive for private sector. But without them the country cannot develop faster. Therefore it is apt to state that the public sector units are responsible for the creation of infrastructures which constitute the backbone of economic development and industrialization. F. Public sector and industrial base: There is no denying the fact that public sector has provided a strong base for our industrialization. Our industrial policy has clearly assigned a significant role for public sector, till the end of the third five year plan; industrialization was taking place at a slower pace because only the important public sector units were established till then. Since the private sector could not really rise up to meet the task, since the IV Plan the establishment of public sector units started on a brisk rate and the industrialization has been accelerated to a commendable level. Further private sector with its commercial objectives could not undertake several of the projects and investment requirement of these projects was also beyond the potential of the private sector. Hence, if at all India today is having a strong industrial base; it is mainly due to the contribution of the public sector. G. Public sector and export promotion: Public sector has responded well to the needs of the nation by taking up the task of exporting our products and finding market for them in other countries. In this respect the contribution of State Trading Corporation, Minerals and Metal Trading Corporation, Hindustan Steel Limited, Hindustan Machine Tools, etc., are worth noting. Infact, these units are primarily responsible for exploiting the captive market for our goods abroad. The foreign exchange earnings of the public sector has gone up from a modest figure of Rs. 35 crores in 1965-66 to Rs. 170 crores in 1969-70, to Rs. 5,831 crores in 1984-85 and then to Rs. 9,198 crores in 1991-92. The increase has been more than 300 times comparing 1965-66 figures with that of 1991-92. Though there may be criticisms about the performance of the public sector units, yet there can be no dispute about the export achievements of public sector units within a period of 25 years. H. Public sector and saving of foreign exchange through import substitution: India's balance of payments has been a cause for worry since Independence, the main reason being increasing imports. This trend had to be reversed and the government rightly selected public sector to establish units to produce domestically the goods imported so as

to conserve the foreign exchange and also utilize more the domestic resources. Units like Hindustan Antibiotics Limited and Indian Drugs and Pharmaceutical Limited, have together effectively checked the inroads attempted by the multinational corporations in the field of drugs and pharmaceutical. Similarly Indian Oil Corporation Limited and Oil and Natural Gas Commission have succeeded in bringing down our dependence on other countries for crude to some extent. They are very active in identifying oil deposits and natural gas. Their efforts are supplemented by research and development to invent methods of using the natural gas and reduce the imports of crude. In this respect the public sector works towards achieving self sufficiency. With concerted efforts it should be possible for India to achieve self-sufficiency in the near future. However, the poor performance of the public sector is causing concern, as unless steps are taken to improve their performance, the achievement of self-sufficiency' may be delayed. I. Public sector and generation of internal resources : A close scrutiny of the public sector performance will certainly make one to note the contribution towards internal resources made by the public sector. For example, the internal resources generated by the public sector during V Five year plan was Rs. 3,439 crores, during VI Five year plan Rs. 11,721 crores and during the period 1985-86 to 198990, the generation was Rs. 37,678 crores. In 1990-91 and 1991-92 also the public sector undertakings together generated Rs. 24,376 crores. This indicates that the public sector units have turned the corner and with the measures taken up already to spruce up their working we should be able to realize still greater generation of internal resources. J. Public sector and contribution to exchequer: Public sector contribution to the Central Exchequer is, in terms of dividend, corporate tax, excise duty, customs and other forms. These contributions add to the mobilization of resources for our planned development. It is interesting to note that the contributions totaledRs. 27,570 crores in the VI Plan period, Rs. 70,893 crores during the VII Plan and Rs. 19,520 crores in 1990-91 and Rs. 20,366 crores in 1991-92. It may be noticed that the annual contributions during the VII Plan period is nearly 75% of the contributions during VI Plan. Among the different forms in which these contributions are made, Excise duty and Customs alone constituted more than 82% of the total in the VI Plan period, while this was 76% during the VII Plan. Subsequently, in 1990-91 these two accounted for 82% of the total contributions and in 1991-92 it was almost 83% indicating that public sector units do make a valuable contribution to the Exchequer. Since the performance of the public sector is poor, their contribution in terms of dividend is very insignificant and this has to be changed at the earliest so as to make them contribute sizably even in this form. K. Public sector and growth of ancillary units: Public sector also makes a valuable contribution by helping the growth of ancillary units and small scale units. The Bureau of Public Enterprises have undertaken the study to find out the public sector units which could transfer their production and other facilities to small scale sector. Under this scheme about 1800 units were set up till 1986. The public sector also enters into regular contracts for purchasing the entire production or 50% of the production of small scale and ancillary units. Such purchases from ancillary units amounted to Rs. 451 crores in 1985-86. L. Public sector and development of states and backward regions:

One of the objectives in establishing public sector units is to facilitate the states and the backward region to develop faster. In this connection, public sector has certainly creditable performance. Public sector contributes to the State government's resources in terms of sales tax and other state level taxes. Public sector investments are directed towards the projects in the backward regions and industrially poor districts. In this way the public sector works in its own way to eliminate the industrial imbalance in states and districts.

So far we have explained in detail the contributions made by the public sector towards Indian economic development. It is often said, that even when their performance is poor, the public sector contributions have been so much, and by improving their performance, we should be able to make them contribute their full potential to achieve a higher rate of economic development. It is satisfactory to note that efforts in this direction to improve the public sector performance have been initiated and by the turn of the century public sector will emerge as the main contributor to our economic development.

GOVERNMENT CONTROLS AND REGULATIONS

Since independence, Government of India introduced a number of controls and regulations so as to lead the country on the path of progress. Originally these controls and regulations were considered to be a part of development strategy. But subsequently, they emerged as the need of the society. While the 1948 Industrial policy resolution did not lay much emphasis on the controls and regulations, in 1951 the government brought in the Industrial [Development and Regulations] Act. This Act made licensing a part of industrial development. The objectives of licensing were stated as: Facilitate desired pattern of industrial development Provide for development of backward regions To encourage broad based ownership of industries To prevent concentration of power in the hands of a few To offer protective environment for the small scale industries To regulate inflow of foreign capital and technology To provide for the use of appropriate technology To eliminate industrial pollution To encourage more of exports and adopt import substitution measures To ensure conservation of foreign exchange resources and to ensure proper allocation of the exchange resources To achieve high growth in employment opportunities

With the above objectives, the government passed the Act. Consequent to this Act, the following categories of industries were required to obtain license: New undertaking Manufacture of new article Expansion of existing capacity substantially Continuation of certain category of business in certain

areas

 Changing the location of the industry This licensing policy continued for a long time till 1991 Industrial policy adopted the policy of liberalization. The licensing policy has resulted in a number of malpractices among the large industrial houses. This was brought to light by the Dutt Committee report in 1967 The revelations of the Dutt committee led to the enactment of Monopolies and Restrictive Trade Practices Act in 1970. In 1991, the government changed the contents of the Licensing policy and the important provisions are spelt out hereunder. The Dutt committee identified 20 larger industrial houses, 53 large industrial. houses and 60 large independent concerns through its study. Some of the important findings of the Committee are given below:
1. a] 73 large houses accounted for 56 % of the total proposed investment on machinery by the entire private corporate sector b] 60% of the value of import of capital goods by the entire private corporate sector was accounted for by these 73 large industrial houses c] 20 larger industrial houses accounted for 41 % in the total proposed investment on machinery and for 40 % in the total approved import of capital goods. 2. The percentage of unimplemented issued licenses was the highest for the large independent companies and other foreign companies. The largest number of unimplemented licenses was for the house of Birlas [168] followed by Tatas [41J. The Birlas were also leading on charges of preemption. The private sector was allowed to participate in areas reserved exclusively for the public sector. The four industrially advanced states namely Maharashtra, West Bengal, Gujarat and Tamilandu were able to acquire 62 % of the J0tal licenses issued. This was against the spirit of balanced regional development. There was no indication as to which industries could be treated as specifically reserved for the small and medium sector. Foreign collaboration was allowed even in non-essential consumer goods. The Committee observed that: as a matter of fact, by permitting foreign collaborations sometimes in multiple numbers, and thus permitting capacities to be created, an inevitable demand for import of various components and raw materials for feeding plants is set up. This, combined with the allocation of other scarce materials, helps to satisfy the demand of the higher income groups, but it is not necessarily a contribution to economic growth nor is it the best way of utilizing the scarce foreign exchange resources of the country. Financial institutions showed a distinct preference to the large industrial houses over the public sector.

3. 4.

5. 6.

7.

All these would help to judge that industrial licensing system failed to achieve the objectives of planned economic development as well as of preventing concentration of economic power. The Dutt committee made the following recommendations To set up a core sector consisting of industries of basic, critical and strategic importance to the economy To adopt the concept of Joint Sector or undertakings where both the public and private sectors acted as partners in a project. The Joint Sector could have collaborations with foreign concerns as well as with the private sector in India To change the basis of financial assistance by nationalized banks and public sector financial institutions i.e., away from the large industrial houses The government to have the right to convert its loans and debentures into equity

The middle sector to be kept open for new entrepreneurs

INDUSTRIAL LICENSING POLICY

To achieve the objectives of the strategy of the industrial sector in the 90s a number of changes in the system of industrial approvals have been brought about. The domestic producers will be able to withstand the competition in the country as well as abroad only through procedural reforms. Hence, the role of government will be changed from that of exercising control to one of providing help and guidance. Changes in the policy towards public sector in the last few years have clearly indicated that private sector enterprises will be allowed to compete in many areas hitherto earmarked for public sector. Consequently, the new policy has completely reclassified the Indian industries as below: a) Eight industries have been completely reserved for the public sector. They are: i. Arms and ammunition and allied items of defence equipment, defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral oils, v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tin, molybdenum and wolfram, vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii. railway transport. Eighteen industries have been listed as industries which require compulsory licensing. However, this provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacturing in small scale sector. Compulsory licensing would be required in the following industries: As regards the provisions of the industrial licensing policy: i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector ,and the list of 18 industries and the areas reserved for small scale industries will continue. Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations. In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported goods does 1101 exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required. Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central government for their location in ares other than cities of more than one million population. In cities with more than one million population, nonpolluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery.

b)

ii)

iii)

iv)

MRTP ACT
A major deviant of the new policy is in respect of the MRTP Act. The new policy aim at removing the unnecessary bureaucratic controls and allow the industries to breathe in an atmosphere of freedom. The efforts of the government in the past intervening in the investment decisions of the MRTP companies; have been proved to be counter-productive. Hence, the newly empowered MRTP Commission will enquire into complaints received from individual consumers or classes of consumers. The following is the essence of the provisions in the new policy regarding MRTP Act. 1. The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course. 2. The need to obtain the prior approval of the central government for establishing new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed. 3. The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair trade practices. As a follow-up the MRTP Commission will be authorized to inquire suomotto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices. 4. All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers to the MRTP Commission.

Control of capital issues

Since independence, capital issues in India have gone through different types of control mechanism. Initially control of Stock exchanges was contemplated and accordingly Securities Contracts [Regulation] Act was passed in 1956. It aimed at centralization of control, regulation of the stock exchanges and the transactions entered therein, the avoidance of illegitimate and manipulative speculation and the protection of genuine investors, The Act applied to all transactions whether forward or ready and it prohibited or regulated factors, which facilitated speculation in stock exchanges. But the Act could not abolish forward trading which ultimately caused erratic behaviour of the Stock exchange. The government basically depended on two institutions to control the capital market viz., the Controller of Capital Issues [CCI] and the Directorate of Stock Exchanges. CCI gave consent to the issue of non-government companies consisting of equity and preference shares, partly and fully convertible debentures, bonus shares and right shares. It also gave consent to the issue of bonds of public sector undertakings. But on the recommendations of the Narasimham committee, the government abolished the office of CCI and freed the primary capital market from the government regulations. The recommendations of Narasimham Committee II on financial sector reforms The main recommendations of the Narasimham committee are:

1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

Phased reduction of Statutory Liquidity Ratio to 25 % over a period of five years Progressive reduction in Cash Reserve Ratio Phasing out of directed credit programs and redefinition of the priority sector. Deregulation of interest rates so as to reflect emerging market conditions Stipulation of minimum capital adequacy ratio of 4% to risk weighted assets by March 1993, 8% by March 1996 and 8% by those banks having international operations by March, 1994. Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts. Imparting transparency to bank balance sheets and making full disclosures Setting up of special tribunals to speed up the process of recovery of loans Setting up of Asset Reconstruction Fund to lake over from banks a portion of their bad and doubtful advances at a discount Restructuring of the Banking system so as to have three or four large banks which could become international in character, 8 to 10 national banks and local banks confined to specific regions and rural banks including RRBs confining to rural areas. Setting up one or more rural banking subsidiaries by public sector banks Permitting RRBs to engage in all types of Banking business Abolition of branch licensing Liberalising the policy with regard to allowing foreign banks to open offices in India Rationalisation of foreign operations of Indian banks Giving freedom to individual banks to recruit officers Inspection by supervisory authorities based essentially on the internal audit and inspection reports Ending duality of control over Banking system by Banking division and RBI A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI A revised procedure for selection of Chief Executives and Directors on Boards of Public Sector banks Segregation of direct lending functions of IDBI to a separate institution Obtaining resources from the market on competitive terms by DFIS Speedy liberalization of capital market by removing restrictions on premia dispensing with prior government approval etc. Supervision of merchant banks, mutual funds, leasing companies, etc., by separate agency to be set up by RBI and enactment of separate legislation providing appropriate framework for mutual funds and laying down prudential norms for such institutions.

FOREIGN CAPITAL AND THE POLICY OF GOVERNMENT REGARDING THE USE OF FOREIGN CAPITAL
Foreign capital or investment has become significant part of sources of funding for various projects in every country. This source of funding has received the attention of both the government as well as the corporate sector that there has been increasing reliance on this source for planning and execution of projects by the government as well as the corporate sector. Foreign capital can come into a country in different forms. Let us first understand these forms of foreign capital before discussing the need for foreign capital. Forms of foreign capital: (a) Direct entrepreneurial investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in

India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad may participate in the stocks or share capital of Indian companies. Whenever the Indian companies go for public issue of shares or debentures, the foreign investors may respond by participating in such public issue. This is also called foreign capital. In the past external business group used to invest in new companies and that form of foreign capital used to flow much, but now-a-days participation in the equity or debenture of companies by foreign investors and non-resident Indians is becoming more predominant. (b) Foreign collaboration: Foreign collaboration is another form of foreign capital. Under this a domestic company may join with the foreign company, mostly the reputed one in the industry, and start with the joint operation in India. Usually this type of effort is undertaken to get the state of the art1 or the latest technology available abroad in the Indian companies. Foreign collaboration may be only for technology or for funding or both. Accordingly we may have technical collaboration, financial collaboration or mixed collaboration. The collaboration may be between private parties or companies in the two countries, or the foreign company with Indian Government or between the foreign government and the Indian government. Inter-government loans: This type of foreign capital refers to the loans granted by the government of one country to that of the other for a specific purpose or for general economic reconstruction. For example under the Marshall plan, USA gave loans to various European governments to help them in the reconstruction of their war-shattered economies. The developed countries also grant loans and grants to the under developed countries to help them in economic development programme. Loans from international institutions: This source of foreign capital has emerged as a very important source in the recent years. Most of the developing countries get sizeable quantum of funds from this source. International institutions like International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD), Asian Development Bank, Aid India Consortium, and others have all become very important providers of funds for developing countries. The role of IMF and IBRD in tiding over the balance of payment difficulties and execution of power and irrigation projects, cannot be exaggerated. The Asian Development, Bank has also been a major provider of funds for development in Indian case. External commercial borrowing: Another source of foreign capital is the borrowing in the capital market of other countries. This can be done either directly or indirectly by the government. In both ways, the inter-government understanding and political relationship apart from the domestic investment climate are all important. Such capital is normally used for international trade purposes and specifically for export credits. Agencies like US EXIM bank, Japanese EXIM bank, ECGC of UK, etc., are all playing vital role in this segment of foreign capital.

(c)

(d)

(e)

Foreign assistance and Indian five year plans:

In the Table given below we find that the external assistance is playing a vital role in the financing of our five year plans. Right from the I Five Year Plan, we find that in absolute terms the inflow of foreign assistance is very much on the increase. While it was a modest figure of Rs. 190 crores in the I Plan, it was Rs. 15,139 crores by VII Plan and during the VIII Plan it rose to nearly Rs. 28,700 crores. Hence, it is clear that the external assistance or foreign capital has become a major component of

financing of Indian five year plans. In terms of percentage, the external assistance went up from a mere 9.6 in the I Plan to 28.2 in the III Plan, 35.9 during the Annual plans. From the IV Plan onwards, the percentage of external assistance declined from 13 to 8.2% during the VIII Plan, but this decline should not be misunderstood as declining importance of external assistance in the financing of our five year plans. The table given below will clarify this aspect

FOREIGN ASSISTANCE AND INDIAN FIVE YEAR PLANS PLAN AMOUNT (Rs.crores) FIRST SECOND THIRD FOURTH FIFTH SIXTH SEVENTH EIGHTH 190 1,090 2,390 2,090 5,830 10,930 15,139 28,700 10 24 28 13 15 11 8.4 8.2 Percentage

POLICY ON FDI
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.[3] Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) in this regard had issued a notification,[4] which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time. The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP). The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (FIPB) would be required.