Contents Chapter I Nature ucture Natur e and str uctur e of the economy ........................................................................ 1 1.1 Nature and Structure of the Economy .................................................................... 1 1.2 Functions of the State and the Economic Role of the Government ................... 3 1.3 The Legal and Constitutional Environment ........................................................... 5 1.3.1 Company Laws ................................................................................................... 6 1.3.2 Foreign Exchange Regulation Act .................................................................. 7 1.3.3 The Sick Industrial Companies (Special Provisions) Act, 1985 ............... 7 1.3.4 The Monopolies and Restrictive Trade Practices Act(MRTP),1969 ........ 8 1.3.5 The Consumer Protection Act, 1986 .............................................................. 8 1.3.6 The Environment Protection Act, 1986 .......................................................... 9 1.4 Demographic Facts ..................................................................................................... 10 Summing Up ....................................................................................................................... 10 Self-assessment ................................................................................................................ 11 Chapter II The social environment and its influences on business ...................................... 12 2.1 Parameters of Quality of Life .................................................................................... 12 2.1.1 The Physical Quality of Life Index ................................................................. 14 2.1.2 Introduction to the Human Development Index .......................................... 14 2.2 Socio Economic Protective Legislations .................................................................. 15 2.2.1 Prevention Of Food Adulteration Act (1954) ................................................ 15 2.2.2 The Drugs And Cosmetics Act (1940) .......................................................... 16 2.2.3 Standards of Weights And Measures Act (1956) ......................................... 16 2.2.4 Public Liability Insurance Act ......................................................................... 16 2.3 Consumer Protection Overview ............................................................................... 16 2.3.1 Shortcomings of the CP Act, 1986 .................................................................. 17 2.3.2 Other Dimensions of the CP Act, 1986 .......................................................... 17 Summing Up ....................................................................................................................... 17 Self-assessment .................................................................................................................. 18 Chapter III Industry ............................................................................................................................... 19 3.1 Privatisation .................................................................................................................. 19 3.1.1 Ownership Measures ........................................................................................ 20 3.1.2 Organisational Measures ................................................................................. 20 3.1.3 Operational Measures ...................................................................................... 21 3.2 Disinvestment .............................................................................................................. 21 3.2.1 The Rangarajan Committee on Disinvestment ............................................ 21 3.3 Privatisation in India and the World: ....................................................................... A comparison of Political dynamics ......................................................................... 22 3.3.1 Privatisation or Disinvestment? ...................................................................... 24 3.3.2 Privatisation in India: A Balance Sheet ......................................................... 24 3.4 Competition Policy and Law ...................................................................................... 26 3.4.1 The MRTP: A redundant Act? ......................................................................... 26 3.4.2 The New Competition Law: an advance over MRTP .................................. 27 3.5 Industrial Reforms ...................................................................................................... 27 Summing Up ....................................................................................................................... 29 Self-assessment ................................................................................................................ 29


Business, Government, and Society

Chapter IV The Financial System ....................................................................................................... 30 4.1 Money Market ............................................................................................................. 30 4.1.1 Money Market in India .................................................................................... 31 4.1.2 Instruments traded in the Money Market .................................................... 31 4.2 Gilt Edged Market or Government Securities Market ........................................ 34 4.2.1 Zero Coupon Bonds ........................................................................................... 35 4.2.2 Floating Rate Bond ............................................................................................ 35 4.2.3 Tap Stock ............................................................................................................. 35 4.2.4 Partly Paid Stock ............................................................................................... 35 4.2.5 Capital Indexed Bonds ..................................................................................... 35 4.3 Capital Market Reforms .............................................................................................. 36 4.3.1 Primary Market Reforms ................................................................................. 36 4.3.2 Secondary Market Reforms ............................................................................ 36 4.4 Buy back Ordinance .................................................................................................. 37 4.4.1 Buy back and experience with MNCs ........................................................... 38 4.5 Banking Sector Reforms ............................................................................................ 38 4.6 An Introduction to Fiscal, Monetary and Credit Policy ....................................... 41 4.6.1 Fiscal Policy ........................................................................................................ 41 4.6.2 Monetary and Credit Policy ............................................................................ 44 Summing Up ....................................................................................................................... 46 Self-assessment ................................................................................................................ 46 Chapter V Political System ......................................................................................................... 30 Evolution and History of Democracy ...................................................................... 47 Parliamentary and Presidential Forms of Democracies ...................................... 48 Direct and Indirect Forms of Democracies ........................................................... 49 Direct Democracy: An Experience .......................................................................... 49 Constitutional Reforms ............................................................................................... 50 5.5.1 Controversy Regarding Constitutional Reforms .......................................... 50 5.6 Judicial Reforms in India ........................................................................................... 53 Summing Up ....................................................................................................................... 53 Self-assessment ................................................................................................................ 54 Chapter VI International Inter national Linkages ..................................................................................................... 55 6.1 GATT and WTO .......................................................................................................... 56 6.1.1 WTO: A negotiating Forum ............................................................................. 56 6.1.2 WTO: A system of rules ................................................................................... 56 6.1.3 WTO: A dispute settlement body .................................................................... 56 6.1.4 Principles of WTO ............................................................................................. 56 6.1.5 Agreements under WTO .................................................................................. 57 6.2 Agriculture and WTO ................................................................................................ 58 6.3 Agreement on Sanitary and Phytosanitary Measures ......................................... 59 6.4 Agreement on Technical Barriers to Trade .......................................................... 59 6.5 Agreement on Textiles and Clothing ....................................................................... 60 6.6 General Agreement on Trade in Services ............................................................. 60 6.7 General Agreement on Trade Related Aspects of Intellectual Property Rights .... 60 The 5.1 5.2 5.3 5.4 5.5



6.7.1 Enforcement of TRIPS ...................................................................................... 60 6.8 Agreement on Subsidies and Countervailing Measures ..................................... 61 6.9 Agreement on Safeguards from Imports ................................................................ 61 6.10 Agreement on Trade Related Investment Measures ............................................ 62 6.11 Agreement on Government Procurement .............................................................. 62 6.12 Settlement of Disputes ................................................................................................ 63 6.13 Imposition of Penalties ................................................................................................ 63 6.14 Foreign Exchange Management Act ....................................................................... 64 6.15 Global Competitive Index ........................................................................................... 67 6.16 Corruption Perception Index ..................................................................................... 70 6.17 Index of Economic Freedom ..................................................................................... 71 Summing Up ....................................................................................................................... 72 Self-assessment ................................................................................................................ 72 Chapter VII Corporate Responsibility ................................................................................................. 73 7.1 Need for Sound Corporate Governance ................................................................. 73 7.2 Trend in Corporate Governance .............................................................................. 74 7.3 Recommendations of the Committee on Corporate Governance ....................... 76 7.3.1 Key Constituents of Corporate Governance ................................................. 76 7.3.2 Key Aspects of Corporate Governance .......................................................... 76 7.3.3 Mandatory and Non Mandatory Recommendations .................................. 76 7.3.4 Schedule of Implementation ............................................................................ 77 7.3.5 Composition of Board of Directors ................................................................. 77 7.3.6 Chairman of the Board ..................................................................................... 78 7.3.7 Composition of the Audit Committee ............................................................. 78 7.3.8 Frequency of Meetings and Quorum Requirements of The Audit Committee ........................................................................................ 79 7.3.9 Powers of the Audit Committee ....................................................................... 79 7.3.10 Disclosure of Remuneration Package ......................................................... 79 7.3.11 Accounting Standards and Financial Reporting ....................................... 79 7.3.12 Disclosures Related to Management ........................................................... 80 7.3.13 Complaints of the Shareholders .................................................................... 80 7.3.14 Government's push to Corporate Governance ........................................... 80 7.4 Corporate Social Responsibility ................................................................................ 81 7.4.1 Evolution ............................................................................................................. 81 7.4.2 The Pyramid of Corporate Social Responsibility ......................................... 82 Summing Up ....................................................................................................................... 83 Self-assessment ................................................................................................................ 84

Chapter VIII Business ethics ......................................................................................................... 85 Overview of issues in business ethics ....................................................................... 86 8.1. General business ethics .................................................................................. 86 8.1.1 Ethics of accounting information ...................................................... 86 8.1.2 Ethics of human resource management .......................................... 86 8.1.3 Ethics of sales and marketing ........................................................... 87 8.1.4 Ethics of production ........................................................................... 87 8.1.5 Ethics of intellectual property, knowledge and skills ................... 88 8.2 International business ethics and ethics of economic systems .............. 88 8.2.1 International business ethics ............................................................ 88

. 95 Summing up ........................................2....1 Environmental protection ......................2.............................................................................1..................... 120 Self Assessment .................................................................................................. 89 8................ 96 Self Assessment . 115 • Role of the Judiciary ................................................. 105 Self Assessment . 108 10....................2.........3.....................................................................2...............3 Conflicting interests ..................................................................................3.......... 112 10...3 Measuring globalization ..................2..................................................................... 116 • Enforcement ............ 121 IV/MITSDE . 89 Theoretical issues in business ethics ............................................................... 89 8........ 110 10..........................................3 Environmental law .............................. 114 • Environment and rehabilitation ...................................................................................................................................................................................................... 99 9.......................................................................................................................................................................................................................3.... 90 8....... 104 9.............2 Type of industries and type of pollution .... 108 10.............................. 90 8...............4 Effects of globalization ..............1........................3 Business ethics in the field ..2 Ethics of economic systems ......................................... 105 Summing up ..2...........3.....................................................2 Oil ........................................................................................ 97 9............. 106 Chapter X Industrial Growth and Environmental degradation ....... 120 Answer to Self-assessment ...... History .....................2................ 89 8..........................................................................................1................................ 116 • Working of Environmental regulation .............2................................................................................................... 115 10..............................................................................................1 Corporate ethics policies ..............................4 Ethical issues and approaches ...........................................2......................... 96 ChapterIX Globalization ................ 114 10.............1 Environmental governance and regulation .................. Legislative efforts ........................................ 109 10... 111 10.......................................................................................2..................5 Pro-globalization (globalism) ............ 118 • Monitoring ................................................1 Causes of pollution ............2...... 112 10................................................1 Industries .............................1 Causes of industrial pollution waste ........................................................................................ Government........... 115 • Environmental Governance and regulation in India..... 97 9........6 Anti-globalization .......................................................................................................... 100 9......................... 107 10...............3 Dwelling .................1..........................................2.......................................................................1 Water Pollution Industries ..............................................................................................................2...2... 111 10.................2 Modern Globalization ................................................ and Society 8...........2 Transport .................Business......... 114 10......................................1 Globalization – Definition...2 Causes of Air Pollution ......... 110 10.................................................................................................................................2 Ethics officers ........3.. 99 9.......... 118 Summing up ................

6 The Environment Protection Act. 1985 1.2 Foreign Exchange Regulation Act 1. Such market systems are sometimes called laissez-faire. The motive to supply is the prospect of profit. Economic policy dimensions influence business fortunes and strategies.1 Nature and Structure of the Economy 1.3. a) A free market system allocates resources according to the price system.1 Natur e and Str uctur e of the Economy The purpose of business is to create wealth for all the agents involved in the process of business.Nature and Structure of the Economy Chapter I Nature ucture Natur e and Str uctur e of the Economy Learning Lear ning Objectives Reading this chapter would enable you to understand • Different kinds of economic structures • Performance of an economy based on its nature • The importance of population and its dynamics • Understanding of law and constitution • Different laws applicable under Indian conditions Contents 1.1 Company Laws 1.2 Functions of the State and the Economic Role of the Government 1. The method of creating wealth and the extent to which it can be created depends on the nature and structure of the economy in which business is being carried out. 1986 1. • • • Free Market Systems Command Systems Mixed Economy Systems The three above-mentioned structures represent three different levels of governmental control.3. The economic policy in turn is influenced by the nature of the economy and the nature of the economy is influenced by the dominant political and cultural thought. This depends upon the forces of supply and demand. 1969 1.3.3 The Sick Industrial Companies (Special Provisions) Act. 1986 1.3.5 The Consumer Protection Act. 1/MITSDE . The motive to demand is utility or satisfaction.4 The Monopolies and Restrictive Trade Practices Act (MRTP).4 Demographic Facts Summing Up Self-assessment Nature ucture 1. the world has seen three kinds of politicoeconomic structures of the economy. Over the last 100 years or so.3.3 The Legal and Constitutional Environment 1.3.

Mixed economies are intended to combine the best of both the extreme systems and to avoid the worst to some extent they succeed. etc. Whereas. because in their most advanced state they tend to be dominated by the owners of capital. it also has its attendant problems. There has only been equality of poverty and that too amongst the masses. Since market prices are fixed and supply regulated by the state. which has resulted in a market that lacks an entrepreneurial spirit. ownership is concentrated in the hands of a few and state control is replaced by control by an oligopoly. that is to say. one cannot measure efficiency in terms of maximised national income. producing all output as cheaply as possible. looked at another way. the World Bank Report on Good Governance released in the year 1997 talked about the hazards of extremes of governance and too little governance. but now we do not consider the market value of that output. In Command Systems the determination of need priorities is usually undertaken by the state. countries like Somalia. However.Business. In these systems. It is not government's business to be in business.) are provided because left to itself. national income will be maximised. and such economies are called centrally planned or command economies. 2/MITSDE . Indeed it becomes problematic to value the national output in any way that can be meaningfully compared with the national incomes of free market economies. or. an efficient free market economy will be as large as possible when measured in money. efficiency still means maximising output from limited input. have seen too little governance resulting in the creation of anti market conditions. Antagonists say that the ownership of resources determines the structure and the extent of freedom of the economy. however of erstwhile communist countries having a command system of economy has been very dismal. and Society b) c) since there is no external interference. In a centrally planned system there is no single criterion for efficiency. Whereas. The World Bank Report therefore talked about the right dose of governance that acts as a facilitator for the smooth conduct of market functions. and political choices will be very influential in economic activity. The job of the government is to create conditions for enterprise rather than running the enterprises themselves. the market would under produce these goods. It is a general belief that the free market system creates the urge for hard work and innovation. Congo. or capitalist.) and free education and health care. The experience. (merit goods. Looking at these experiences. Since effective demand means the capacity to pay. By definition. The ruling elite became richer and richer in these systems. efficiency means achieving the maximum satisfaction of effective demand with the limited resources. It argued that erstwhile European countries have seen too much governance. (a negative externality. rather a more subjective evaluation of the needs satisfied. For example social security is often provided as a command style safety net to avoid starvation of the poor. under the ownership of the state social goals are pursued. Government. In such an economy. the nature of social goals may depend on the value system of the politburo but nevertheless society benefits at large.

the Parliament exercises control through laws and enactments and by budgetary allocations for different limbs of the government after discussions on the floor of the house. is largely a figurehead. chooses his council of ministers. The STATE. etc. In this form. The process of governing requires a set structure. the danger is that the presidential form can drift into a dictatorship 3/MITSDE . • • These three institutions are woven in different ways to give different forms of government. which can be • A Presidential form in which. The STATE monopolises rule making within its territory through the medium of an organised government. However. In the Parliamentary cabinet form. the president is elected by the direct vote of the electorate and he. Fiscal Decisions: (related to taxation. whose role is to make the law: This role is performed by the parliament in democracies while the King or the monarch does the same in autocracies. In a theocratic state. expenditure.Nature and Structure of the Economy Government 1. • It will be seen that the Presidential form of government offers greater stability than the parliamentary cabinet form. in turn. In such a system a president. primarily consists of three broad kinds of institutions. In a democracy these powers are distributed according to the form of democracy. These are: • Legislature Legislature. Judiciary. who owe allegiance to him. also sometimes referred to as the ‘government'. Government. refers to a set of institutions that possess the means for legitimate coercion. which exercises power.) are taken much faster in a presidential form than in a parliamentary form of government. with three distinct sets of powers with their assigned roles.2 Functions of the State and The Economic Role of the Gover nment The STATE. in its wider sense. particularly if the largest party does not have an absolute majority. the majority party in the parliament elects its leader as the Prime Minister who then forms a council of Ministers mostly from amongst the elected representatives of his party. The different forms of government decide the way economic matters are conducted and handled by the state. As per the rulings of the Supreme Court of India. like the Vatican City. Judiciary which is responsible for interpreting and applying the law. exercised over a defined territory and its population referred to as society. Executive which is responsible for implementing the law: They are Executive. In an autocratic state all the above institutions are combined into one and all the powers are vested in the monarch or the king. if existent. on the other hand refers to the process of governing. the terms state and government are used interchangeably. even semi autonomous bodies receiving grants from the government will be categorised as state. Because of this. all the powers are vested in the Church or whatever the highest religious body of the land is.

Government. Regulation is very important for the proper functioning of the market economy. 4/MITSDE . unemployment benefits). the direct participation of government was very common in the socialist and developing countries. for example). Certain activities may be encouraged or discouraged through monetary and fiscal incentives and disincentives. the State (read government) can travel in the spectrum from one of performing only basic functions to somewhat advanced functions and then on to activist functions. They can help private activity in market research. As per this report. These are the essential functions of the state. in underdeveloped countries. roads and protection for destitutes. the state is bound to wither as it would be entirely incapable of providing an environment in which markets could function. information on macro level and on canalising activities (grouping non-economic individual efforts and making them an economic group effort. this role of the government assumes special 2. Mercantilists argued for a strong economic role of the government whereas free trade protagonists wanted to limit the role of the government.) Accordingly.Business. control of infectious diseases. they also contribute towards bettering the business and market environment. The provision of these services would depend on the enhanced capability of the government to do so. at the discretion of the State. In somewhat more detail these would be: • Basic functions include pure public goods such as the provision of property rights. a high import duty may discourage imports. However. since the 1980s a belief has gathered momentum that ‘government has no business to be in business'. Direct Controls on the other hand can be applied selectively from firm to firm and industry to industry. For example. regulation of monopolies. safe water. The argument regarding the role of the government has always been changing with times. and Society in the absence of well conceived checks and controls. macroeconomic stability. and the provision of social insurance (pensions. Regulation may cover a wide spectrum from entry into business to the final results of the business and also exit from business. • Activist Functions can be taken up by states with strong capabilities. The World Development Report on Good Governance talks about matching the role of the government to its capability and then in the course of time increasing that capability. For instance. Regulatory Role: The government may regulate the economy through direct and indirect controls. • Somewhat advanced functions include things like management of externalities (pollution. by providing financial regulation and consumer protection. Without the provision of these. However. However. the economic roles of the government can be under the following four heads: 1. Entrepr epreneurial Entrepreneurial Role: Due to ideological reasons and dearth of private enterprise and capital. Indirect controls are exercised through various fiscal and monetary incentives and disincentives or penalties. where the infrastructures for development are inadequate and entrepreneurial activities are scarce. the state overcomes the problem of imperfect information.

you should be interested in a broad overview rather than details. the High Court and the Lower court.Nature and Structure of the Economy significance. such as power. The constitution in itself is a voluminous document. However. All these organs run through organisations and institutions. finance. we present here briefly an overview of some specific socio-economic legislations. Company Laws Laws relating to Capital Markets MRTP (Monopolies and Restrictive Trade Practices Act) FERA (Foreign Exchange Regulation Act) IDRA (Industrial Development and Regulation Act) Trade Unions Act 5/MITSDE • • • • • • • . for the development of certain priority sectors and activities. An understanding of these and the consequent direction of business it entails is critical. Development of certain priority sectors and protecting infant industry are still desired roles of the government in these countries. • The constitution is a politico legal institution in itself. Yet. including measures to cover certain risks. To describe and analyse the legal environment of business in India. some countries have argued for indicative planning (just giving signals to the economy through tools of taxation and government expenditure) rather than involving the government in production and allocation duties. institutions for training and guidance. Promotional Role: The State needs to assume direct responsibility to build up and strengthen the necessary development infrastructures. monetary and other incentives. For example. 1. Instances such as these impress upon us the importance of knowing the legal and constitutional environment. 4. The promotional role of the State also encompasses the provision of various fiscal. marketing. We may list these legislations. Similarly. etc. executive and judiciary. In this chapter. Some of these legislations will be taken up for a detailed discussion in subsequent chapters. which define the legal environment of business in India. another company in Delhi faced the wrath of the executive because it wanted to put up the Indian flag on its premises all throughout the year without being aware that it is illegal to do so. It is thus the most important part of the non-economic environment of business. transport. The role of government as a planner becomes important here. 3. a reference frame for other laws to be made. all readers are advised to go through it at least once. It is also the super law. Planning Role: How to use the limited resources to the best advantage is a question that every underdeveloped country faces. It gives structure to the legislative. the judiciary runs through the Supreme Court.3 The Legal and Constitutional Environment One major Reliance Oil project in Gujarat faced a legal hurdle and incurred tremendous amount of extra expenditure because the person in charge was not aware of certain ecological laws.

but today its scope has increased. Fairness . this law used to be concerned only with joint stock companies. Effective participation and control by shareholders and the protection of their interests. and Society • • • • Bonus Ordinance Factory Legislations Social Security Enactments Laws for Consumer Protection 1. innovative and continuously responsive to the needs of all market participants. a high standard of conduct and good business practices. The main objectives of the Companies Act 1956 are listed as follows: • • • • • Minimum standard of business integrity and conduct in the promotion and management of companies. Based on the recommendations of the Bhabha Committee (1950). Securities and Exchange Board of India Act.The market should be resilient. Enforcement of proper performance of their duties by the company management. 2. Originally.Business. offering high standards of service at reasonable costs. 1992. 6/MITSDE . It covers different types of companies .The market must promote integrity in dealings. which ensures: 1.3.The market should be professionalised and well informed. it is necessary to promote a market. their management and also the manner of their dissolution. The state's power of intervention and investigation into the affairs of companies with regard to interests of the shareholders and the public.The markets must inspire confidence in both investors and issuers to actively participate in and rely more on the security market.their incorporation. A. Capital Market Every Stock Exchange must have rules approved by the Central Government or the SEBI. Confidence .1 Company Laws Company Laws represent the principal laws affecting the organisation and management of corporate business. 1992. 4. 3. Full and fair disclosure of all reasonable information relating to the affairs of the company. Efficiency . the SEBI Bill was passed by both Houses of Parliament and became effective on April 4. (SEBI) 1992 Promulgated as an ordinance on January 30. Flexibility . the companies act was thoroughly amended in 1956. To this end. The objects of the SEBI Act are to develop the securities market on healthy and orderly lines and to provide adequate protection to investors. Government. their constitution.

3 The Sick Industrial Companies (Special Provisions) Act 1985 (SICA. . 1. 2. 1985) This act was enacted to address the problem of Industrial sickness. a condition will be stipulated that the company concerned should undertake to export a minimum of 10 percent of its total annual turnover within a period of two years commencing from the date of approval by the Reserve Bank of India. within a specified period. Indian participation to not less than 49 percent of the equity of the company. The Government has vested SEBI with the necessary statutory powers to deal effectively with all matters relating to the capital market. therefore. ameliorative. Expeditious enforcement of the measures so determined. Cases of companies coming with proposals for substantial exports could be considered on merits for a higher level of equity participation provided such participation is in the overall interest of the economy of the country. The ceiling of 25 percent of the ex-factory value of the annual production for permissible trading activity by multi-activity companies will be raised to 40 percent and 60 percent respectively in the types of cases mentioned in (2) and (3) above. within a specified period. The limit of Rs. 3. 5. 5 crores for permissible trading activity by multi-activity companies will be applicable only in the case of trading activities.2 Foreign Exchange Regulation Act (FERA) The FERA Act of 1973 reflected the requirements for a highly regulatory system. 6. The objectives of SICA are: 1. It is. If the activities of a foreign company account for not less than 75 percent of its total annual turnover. Securing timely detection of sick and potentially sick industrial undertakings. There is increasing participation by the investing public. such a company will be allowed to continue its activities subject to the condition that it will increase.Nature and Structure of the Economy The Capital Market in India has witnessed tremendous growth in the recent past. 3 . If the exports of a company account for more than 40 percent of the total annual turnover. of the preventive. 1 . The main features of this act were: 1. SEBI has been established on the pattern of the Securities and Exchange Commission (SEC) of the USA. Speedy determination. 2. If the same accounts for not less than 60 percent of its total annual turnover. 7/MITSDE 3. by a panel of experts. to not less than 26 percent of the equity capital of the company. such a company will be allowed to continue its activities subject to the condition that it will increase Indian participation.3. it will be required to increase the Indian participation to not less than 49 percent of the equity of the capital. remedial and other measures which need to be taken with respect to such companies. In such cases. 4. imperative to sustain the confidence of the investors by protecting their interests.

. 1.5 The Consumer Protection Act.4 The Monopolies and Restrictive T rade Practices (MR TP) Act Trade 1969 The Monopolies and Restrictive Trade Practices (MRTP) Act has its genesis in the Directive Principles of State Policy embodied in the Constitution of India. BIFR and its functions The Board for Industrial and Financial Reconstruction was constituted on January 12.e. the Consumer Protection Act. Right to choose. 1. The objectives of the MRTP Act are: a) To prevent concentration of economic power to the common detriment and the control of monopolies. and c) To prohibit restrictive trade practices and unfair trade practices. 1986 For the first time in the history of consumer legislation in India. 8/MITSDE . as the case may be. By way of warning to unscrupulous managements. including change of managements. Government. and Society 4. the right to be protected against the marketing of goods and services which are hazardous to life and property.e. 2.Business. i. extends statutory recognition to the rights of consumers. 1986. reduction of share capital. then the BIFR can direct banks and financial institutions not to extend any financial assistance for a period of ten years to such a person or to a firm in which such a person is a partner or to a company in which such a person is a director. potency. 1.. the Act also contains a provision that if the BIFR is satisfied that a person has been responsible for the diversion of funds or for managing the affairs of the company in a manner detrimental to the interests of the company. sale or leasing out of a part or whole of the undertaking or its merger with a healthy unit. i) ii) that the ownership and control of material resources of the community are so distributed as best to subserve the common good. Right to be informed. The Act recognises the following six rights of consumers.. the right of access to a variety of goods and services 3. quantity. standard and price of goods or services.3. i. Right to safety. the right to be informed about the quality. Article 39 (b) and (c) thereof lay down that the state shall direct its policy towards ensuring. purity. so as to protect the consumer against unfair trade practices.e. it can either give reasonable time to the company concerned to make its net worth positive or it can devise suitable measures. 1987. Providing for matters connected with or incidental to the above mentioned objectives. If the BIFR comes to the conclusion that the company has become sick. and that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.3. b) To prohibit monopolistic trade practices. It is a quasi judicial body vested with powers to institute the necessary enquiries to determine if or not the company is sick. i.

1981. cheap labour and a growing market have encouraged many multinationals to invest in developing countries.3. came into effect in November 1986 and is in addition to the two allied acts. etc. The objective of the Act is to provide for the protection and improvement of the environment and matters connected therewith. family size. Water (Prevention and Control of Pollution) Act. the right to seek redressal against unfair practices or restrictive trade practices or unscrupulous exploitation of consumers. in terms of the number of consumers. By 2025. the consumers' interests will receive due consideration at appropriate forums.. other developed countries will have a predominantly older population. say. The law covers not only land and water or air but all aspects of the environment. in some cases more than one third of the population would be more than 65 years of age. The falling birth rate and rising longevity will significantly alter age distribution within the population. i..e. it means the right to be assured of satisfactory quality and service at a fair price. The proportion of the aged in the population would go up. 1. 6. etc. • One of the important objectives of the formation of the European Union (EU) was to bring about a single market that compares. 1. density of population. viz. A high population growth rate also implies an enormous increase in the labour supply. 1974. r ural-urban distribution.e. the population growth was comparatively slow resulting in labour shortage and rising wages. The Environment Protection Act.. ethnic composition. It also includes the right to be represented in various forums formed to consider consumers' welfare. However. It also includes the right to a fair settlement of the genuine grievances of consumers. Right to consumer education. In case of monopolies. to that of USA and Japan. The Environment Protection Act. 4. railways. • • Implications of demography: 9/MITSDE . and Air (Prevention and Control of Pollution) Act. population growth rates. 1986. age composition. i.e. India will be the country with the highest population of young people. When western countries experienced industrial revolution. 1986 5. Right to be heard.4 Demographic Factors Demographic factors such as size of the population.. nature of the family. Right to seek redressal i. telephones. the right to acquire the knowledge and skills to be an informed consumer. Thus. have very significant implications for business. income levels.Nature and Structure of the Economy at competitive prices.6 The Directive Principles of State Policy contained in the Constitution direct the state to endeavour to protect and improve the environment and to safeguard the forests and wild life of the country.

temperaments. Government. ____________ argued for a strong economic role for the government while the free trade protagonists asked for a limited role. and especially to knowledge workers. The free market economy. beliefs. the estimated Indian population was about 102 crores compared to about 130 crores for China. 3. and Society 1. A highly heterogeneous population with its varied tastes. Summing Up Over the last 100 years or so. The three institutions of a STATE are ___________. By 2045. the world has seen three kinds of politicoeconomic structures. _____________ role and _____________role. 3. With migration all around. the Indian population is expected to surpass that of China. As population around the world ages. ____________ role. a shift that will begin in the United States around the year 2010 when the babies of the “baby boom” which began in 1948 reach traditional retirement age. In March 2001. companies are sometimes compelled to adopt different strategies within the ‘same market'. The Companies Act. 2. the demographic profile of an economy and the dynamism of the same affects the economic environment to a great extent. The four economic roles of the government are ___________ role. gives rise to differing demand patterns and calls for differing market strategies. Lastly. India is the second largest market in terms of the number of consumers. a truly heterogeneous population would arise. Self-assessment 1. ___________ and __________. it is said that the centre of gravity in the older population shifts from manual workers to people who have never worked with their hands. The constitution of governance becomes the prime factor which directs the role of the government. 4. the commanding heights and the mixed kind of economy. 10/MITSDE . In such a scenario. Accordingly the role of the government expresses itself into either a regulatory one. 4. personnel management is likely to become a more complex task. The Fiscal role of the government is largely determined by the above politico-economic structures. 1956 was based on the recommendations of the 2. Because of the diversity of the demographic environment. Also the laws that are passed by the government affect the economic environment in their capacity to effect business decisions.Business. or an entrepreneurial one or one of planning or still a combination of all three. 5. 5. preferences. etc. A free market system works because of the forces of ___________and ___________.

Article 39(b) of the Indian constitution is a precursor to the ___________ ACT. 6. The Environment Protection Act was passed in the year ___________. Indian population is expected to surpass that of China. By the year _______.Nature and Structure of the Economy _________ committee. 11/MITSDE . 9. 8. The BIFR is a _______ judicial body to look into the problems of sickness of companies. 7. India is the ________ largest market in the world in terms of the number of consumers. 1969. 10. 1950.

access to drinking water and environment.2.2 Socio Economic Protective Legislations 2.Business.3.3 Standards of Weights and Measures Act (1956) 2. 12/MITSDE . The well-being or quality of life of a population is an important concern in economics and political science. 1986 2.2 Introduction to the Human Development Index 2. 1986 Summing Up Self-assessment 2.2. art.3. • The Mechanism for developing the Human Development Index • Enumeration of different socio-economic protective legislations and their applicability in Indian conditions. Contents 2.1 Parameters of Quality of Life While the income of a nation is just capable of indicating obliquely the standard of living.4 Public Liability Insurance Act 2.1 Parameters of Quality of Life 2.1. and innovation are far difficult to measure. A large part is the standard of living. happiness. these numbers are fairly easily measured. that are very difficult to plan for. etc. Others like freedom. This has created an inevitable imbalance as programmes and policies are created to fit the easily available economic numbers while ignoring the other measures.2 Other Dimensions of the CP Act.2 The Drugs and Cosmetics Act (1940) 2.1 The Physical Quality of Life Index 2.1 Shortcomings of the CP Act.1 Prevention of Food Adulteration Act (1954) 2. environmental health. the quality of life is indicated by a host of other parameters like health. and Society Chapter II The social environment and its influences on business Learning Lear ning Objectives Reading this chapter would enable you to understand: • The concept of quality of life as distinct from quantity • The index measuring physical quality of life. Nobel laureate Amartya Sen has urged the government to concentrate more on health and education of the people as a means of improving the quality of life.1.3 Consumer Protection Overview 2. the amount of money and access to goods and services that a person has.2.2. There are many components to well-being. safety of the citizens. Government. He emphasised the need for a major government role in education and health as a part of the programme to empower the underprivileged for a sustained and balanced growth of the country.

Users of the term in this application who tend to be political and/or social conservatives often refer to victimless crimes by the alternate name of "quality-of-life crimes. any child born as a decision was being made would be able to assess its impact over its entire life as an elder. prior to European contact. in connection with the presence or absence of so-called victimless crimes." In conjunction with this. Several First Nations in both Canada and U.S. night jobs. An example of this would be. Wilson's observations have propelled the political agenda of many prominent American mayors. more serious crimes as well end up being committed (the analogy being that a broken window left unrepaired exudes an image of generalised dilapidation). This strategy still would be very difficult to implement as predicting the future is never easy.The social environment and its influences on business The debate over what best maximises the quality of life is millennia old with Aristotle giving it much thought and eventually settling on the notion of eudemonia as central. So. which asserts that relatively minor problems left unattended (such as public urination by homeless individuals) send a subliminal message that disorder in general is being tolerated. which argues that the effect of any decision today should be judged by its effect in six generations. its users in this sense citing the incidence of these to gauge the inherent level of disorder in a society at a particular time. Constitution. Decision makers seven generations ago in the early mid-nineteenth century would have great difficulty comprehending today's realities. ones with extensive travel pay more and difference in salaries can also give a measure of the value of quality of life. Similarly people must be paid more to accept jobs that will lower their quality of life. One attempt to take quality of life more into account in government decisions is the notion of a seventh generation standard. One method for measuring the quality of life is subtracting the standards of living.e. since the 1980s. humans live at most 100-115 years. and reproduce in most tribal cultures at about 15-17 years old. a ratio of about seven to one.S. and as a result. These measures are often associated in the United States with the proposed Seventh Generation Amendment proposal to the U. i. seem to have independently originated this standard. Understanding the quality of life is today most important in health care. where monetary measures do not readily apply. American sociologist James Q. even if it would mean a substantial increase in their standard of living. One can thus see that the quality of life of living in a rural area is of enough value to offset a higher standard of living. according to the standard. people in rural areas and small towns are generally reluctant to move to cities. Wilson has articulated what he calls the Broken Window Theory. which seems to represent the age ratio between the longest-lived elders and newborns expressed in terms of generations. most notably Rudolph Giuliani in New York City and Gavin Newsom in San Francisco. 13/MITSDE . The term has often been used. a Liberal Party of Canada Member of Parliament. and in Canada with the Canada Well-Being Measurement Act co-authored by Mike Nickerson of the Green Party of Ontario and Joe Jordan. Decisions on what research or treatments to invest the most in are closely related to their effect on a patient's quality of life.

Calculating the education index The education index measures a country's relative achievement in both adult literacy and combined primary. Calculating the life expectancy index The life expectancy index measures the relative achievement of a country in life expectancy at birth.2 Introduction to the Human Development Index (HDI) The Human Development Index (HDI) is a summary composite index that measures a country's average achievements in three basic aspects of human development: longevity. the life expectancy index is 0.0 years in 2002. Life expectancy index = 78. education and GDP indices minimum and maximum values (goalposts) are chosen for each underlying indicator. It has also been criticised because there is considerable overlap between infant mortality and life expectancy. For Costa Rica. an index for adult literacy and one for combined gross enrolment are calculated. 2.1. knowledge. Then these two indices are combined to create the education index.1. all equally weighted on a 0 to 100 scale. secondary and tertiary gross enrolment. secondary. knowledge is measured by a combination of the adult literacy rate and the combined primary. To calculate these dimension indices the life expectancy.884. 1. and a decent standard of living.Business. and tertiary gross enrolment ratio. The value is a single number derived from the basic literacy rate. with a life expectancy of 78. and Society 2. infant mortality. with twothird weight given to adult literacy and one-third weight to combined gross 14/MITSDE .0 25/85 25 = 0. First.884 2. It was developed for the Overseas Development Council in 1979 by Morris Davis Morris. Longevity is measured by life expectancy at birth. and life expectancy at age one. and standard of living by GDP per capita (Purchase Power Parity US$) Before the HDI itself is calculated. Calculating the HDI This illustration of the calculation of the HDI uses data for Costa Rica. as one of a number of measures created due to dissatisfaction with the use of GNP as an indicator of development. an index needs to be created for each of these dimensions. PQLI might be regarded as an improvement but shares the general problems of measuring the quality of life in a quantitative way.1 The Physical Quality of Life Index (PQLI) The physical quality of life index (PQLI) is an attempt to measure the quality of life or well-being of a country. Government.

the GDP index is 0.884) + 1/3 (0. with a GDP per capita of $8. It is a simple average of the three dimension indices. 1954 The Drugs and Cosmetics Act.958 Gross enrolment index = 69 .000) log (100) = 0.748.958) + 1/3 (0.834 2.748 4.0 = 0.The social environment and its influences on business enrolment.840 (PPP US$) in 2002. Adult literacy index = 95.870 3.748) = 0. GDP index = log (8. the education index is 0.0/100 . 1940 Standards of Weights and Measures Act. 1 Prevention of Food Adulteration Act (1954) (amended in 1964 and 1971) Under this Act.0/100 . with an adult literacy rate of 95. Accordingly.8 percent in 2002 and a combined gross enrolment ratio of 69 percent in the school year 2001/02. The penalty for adulteration is imprisonment for up to six years and a fine of not less than Rs 1000. Calculating the HDI Once the dimension indices have been calculated.840) log (100)/ log (40. Calculating the GDP index The GDP index is calculated using adjusted GDP per capita (PPP US$). determining the HDI is straightforward. 2 . manufacture and sale of adulterated or misbranded or substandard food is prohibited.870) + 1/3 (0. Income is adjusted because achieving a respectable level of human development does not require unlimited income. HDI = 1/3 (life expectancy index) + 1/3 (education index) + 1/3 (GDP index) = 1/3 (0. It provides for food inspectors who can take samples of any article of food for analysis. Some of the important ones are: a) b) c) d) Prevention of Food Adulteration Act. 1956 Public Liability Insurance Act.8 . For Costa Rica. 2 .690) = 0.2 Socio Economic Protective Legislations Numerous legislations have been passed in the interest of the consumer and the public. In the HDI income serves as a sur rogate for all the dimensions of human development not reflected in a long and healthy life and in knowledge. the logarithm of income is used. 2 . For Costa Rica.690 Education index = 2/3 (adult literacy index) + 1/3 (gross enrolment index) = 2/3 (0.870. 1990 2 .0 = 0. 2 The Dr ugs and Cosmetics Act (1940) 15/MITSDE .

It is common knowledge that a number of deaths take place every year due to food adulteration. These include Sale of Goods Act. used for such manufacture. including multinationals. 1937. They make tall claims for their products which turn out to be false. The central gover nment has set the specifications for any weight and measure in accordance with the recommendations made by the Inter national Organisation of Legal Metrology. a host of legislations have been enacted from time to time. Manufacturers and traders often follow unfair and unethical practices. etc. 2 . the prevention of food adulteration act. Consumers as buyers always had poor bargaining power. Government. Standards Weights Measures 2 . indulge in unethical practices. Manufacture and sale of misbranded or spurious drugs attracts a maximum penalty of imprisonment for ten years and confiscation of all property. Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act. MRTP Act. It is described as a unique legislation of its kind in India to offer protection to consumers. 2 . the Consumer Protection Act. 3 Standar ds of Weights and Measur es Act (1956) (Amended in 1976) Uniform standards of weights and measures based on the metric system were established by this act. 1952. 4 Public Liability Insurance Act The first Act of its kind in the world was passed in December 1990 to provide immediate cash to registered and non-registered companies. Indian Standards Institution Certification Act. 1956. Though many legislations have been enacted. 1930. in spite of these changes in the MRTP Act. 1969. Agricultural Products Grading and Marketing Act (AGMARK). distribution and sale of drugs. However. to meet unforeseen liabilities arising out of accidents. 1986 was born. It also covers the import of drugs and provides for the maintenance of uniformity in standards. The Act was designed after an in-depth study of consumer protection laws and arrangements in the 16/MITSDE . The MRTP Act acquired the elements of consumer protection legislation with amendments in 1984 when unfair trade practices were brought in its fold. 2 . they have failed to provide any ef fective protection to consumers due to lack of ef fective implementation. and Society This Act provides for the uniform control of manufacture. 1954. Many manufacturers and traders. As a consequence.Business.3 Consumer Pr otection Overview There has virtually been a tradition of exploitation of consumers in India due to shortages and a sellers' market. The service sector is no exception to unethical practices and allurements. etc. 1980. Essential Commodities Act. 1955. need was felt for a more comprehensive consumer protection legislation. spurious liquor. Protection 2. Standards of Weights and Measures Act. and contaminated / substandard medicines. This is essential in the light of continuous research and development and the use of various organic synthetics. To check the onslaught on consumers. etc.

Doctors liable under the Consumer Protection Act . The ruling keeps government hospitals out of the purview of the CPA on the grounds that these hospitals provide free services. • • • Summing Up The debate on the economic welfare of people which always centred around the level of income gave rise to a lot of discontent amongst scholars because of its inadequacy to compare dif ferent economies. The Consumer Protection Act was one of the most 17/MITSDE . The Act intends to provide simple.In the mid-nineties the Supreme Court decreed that medical practitioners like any other professionals.A. Unlike other laws. which are punitive or preventive in nature. his act or product could have caused may be much more. Efforts were made to explain this parameter through PQLI and HDI. were liable under the CPA 1986. and compensation given to the complainant.S. while the damage.A notification of the Ministry of Food and Civil Supplies has indicated that the price on labels of all packaged products should be inclusive of all taxes. The main objective of the Act is to promote better protection to consumers. 1986 • Consumer protection by advertising bodies ...The Advertising Standards Council of India (ASCI) set up by numerous advertising agencies has formulated a code to ensure the tr uthfulness and honesty of representations and claims made by advertisements to safeguard consumers against offensive and misleading advertisements. It is felt that the consumer forum should be authorised to specify that the amount should be paid from the salaries of defaulting employees. Australia and New Zealand. Pricing of Packaged Products . The Act needs an important change where negligence is proved on the part of the employees of public utilities and governmental organisations. Various socio-political legislations were passed towards this end. Consumer Education and Research Society .3. 1986 • An important shortcoming is that penalty to a defaulter is limited to 20 times the value of the commodity.The social environment and its influences on business U. Quality of life was considered to be a better comparable parameter than income.2 Other Dimensions of the CP Act.K.This body is doing some excellent work in educating various local consumer bodies as also taking up public interest litigation on various consumer issues.1 Shortcomings of the CP Act.3. the U. 2. the provisions of this act are compensatory in nature. speedy and inexpensive redressal to consumers' grievances. • 2. Preservation of quality of life resulted in many legal measures which aimed at giving higher and better consumption standards.

1986. 6. 4. ____________ and __________________. The Physical Quality of Life Index was developed by ______________. A Supreme Court ruling on the CP Act has kept government hospitals out of the purview of the CPA on the grounds that these hospitals provide ________ services. 18/MITSDE .Business. 7. ______________ and ________________. Government. There has been a traditional environment of exploitation of consumers in India because of the prevalence of a _________ market. The Public Liability Insurance Act was passed in the year ___________. 3. The Human Development Index is a composite summary index that measures a country's average achievements in three basic aspects: ___________. The parameters in the PQLI Index are _________ . and Society important acts which looked at consumer protection in a holistic way. 2. The Broken Window theory was articulated by the American sociologist ___________________. 9. Under the CP Act. 8. 5. the penalty to a defaulter was limited to _________ times the value of the commodity. 10. Prevention of Food Adulteration Act was amended twice in the years _________ and ____________. Self -assessment 1. logarithm of Income is used because achieving a respectable level of human development does not require ______________ income. In calculating the GDP Index.

2.1. which were hitherto reserved for the public sector.3 Operational Measures 3.5 Industrial Reforms Summing Up Self-assessment 3. The basic purpose is to limit the areas of the public sector and to extend the areas of private sector operation including heavy industries and infrastructure.Industry Chapter III Industry Learning Lear ning Objectives Reading this chapter would enable you to understand: • Concept of Privatisation • Methods of Privatisation • Privatisation as distinct from investments • Privatisation experience of India as compared to experiences of the world • A balance sheet of privatisation in India • Concept of Competition Policy and Law • Applicability of Competition Policy in India • An introduction to Industrial reforms in India Contents 3.1.2 Privatisation in India: a balance sheet 3. will over a period of time increase the overall share of the private sector of the economy.1 Ownership Measures 3.1 Privatisation or Disinvestment? 3.1 Privatisation Privatisation deals with the transfer of businesses from the state to the private sector.3.4 Competition Policy and Law 3.4.4. This is the broader view in which privatisation of the economy can be effected.1 The MRTP: a redundant Act? 3.2 Disinvestment 3. But in another sense. it implies the opening up of the private sector to areas. and the industries concerned are usually closely regulated. This commonly involves complex contractual structures to be put in place.2 The New Competition Law: an advance over MRTP 3. Privatisation in a narrow sense indicates transfer of ownership of a public sector undertaking to private sector.1 The Rangarajan Committee on Disinvestment Privatisation in India and the World: a comparison of political dynamics 3. 19/MITSDE .1 Privatisation 3. either wholly or partially.2 Organisational Measures 3. Such deliberate encouragement of investment in the private sector in the economy.

ownership of the enterprise is transferred to workers who may form a co-operative to run the enterprise. Workers' co-operative is a special form of decentralisation. Joint ventur e: implies partial transfer of a public enterprise to the venture: private sector. appropriate provision of bank loans is made to enable workers to buy the shares of the enterprise. though the public sector retains a substantial stake in the undertaking. In this way.1. 1 . This can have three forms: a) b) Total decentralisation: implies 100 percent transfer of ownership of a public enterprise to the private sector. This solely depends on the preference of the buyer. 3. the government agrees to transfer the use of assets of a public enterprise to a private bidder for a specified period. 2.2 Organisational Measur es Include a variety of measures to a limited state control. the private sector is in a better position to change the character of an enterprise. It can take three forms: 1. This is a kind of tenure ownership. In such a situation. Leasing In this arrangement. A big company like the Oil and Natural Gas Commission (ONGC).Business. a decentralised pattern of management emerges. The workers become entitled to ownership dividend besides earning wages for their services. and Society Privatisation is therefore. the bidder is required to give an assurance of the quantum of profits that would be made available to the state. Government. In this form. 51 percent transfer of ownership to the private sector shifts the balance in favour of the private sector. thereby transferring a number of functions to its smaller units. In such a situation. co-operative or corporate sector. The government b) 20/MITSDE . c) d) Measures 3. 74 percent transfer of ownership to the private sector implies a dominant share being transferred to the private sector. Liquidation implies the sale of assets to a person who may use them for the same purpose or some other purpose. a process of involving the private sector in the ownership or operation of state owned or public sector undertakings. Steel Authority of India (SAIL) or Bharat Heavy Electricals Limited (BHEL) may acquire a holding status. Ownership measures Organisational measures Operational measures 3 . say for 5 years. 25 percent transfer to private sector in a joint venture implies that majority ownership and control remains with the public sector. Ownership may be transferred to an individual. It can have several variants. The burden of running the enterprise rests on the workers in a workers' Co-operative. 1 Ownership Measures The Degree of privatisation is judged by the extent of ownership transferred from public enterprises to the private sector. While entering into a lease. They include: a) A holding company may be designed to take top-level major decisions with a sufficient degree of autonomy for the operating companies in its hold in their day to day operations.

The basic purpose of operational measures is to infuse the spirit of private enterprise. 2.K. grant of autonomy to public enterprises in decision making.2 Disinvestment Disinvestment is an important component of efforts towards privatisation. It simply implies privatisation of public sector units. freedom to acquire certain inputs from the markets with a view to reducing costs. 3. Rangarajan. e.3 Operational Measures The efficiency of public sector enterprises depends upon the organisational structure. this indeed would be the best 21/MITSDE . Basic Restr ucturing is said to occur when the public enterprise decides to shed some of its activities to be taken up by ancillaries or small-scale units. Countries like the U.1. in 1993 has in its report made a number of recommendations.Industry c) 1.2. d. b. 3. 3. development of a proper criterion for investment planning. These measures include: a. provision of incentives for workers and executives consistent with increase in efficiency and productivity. However. since these shares have not been traded so far on the stock markets.1 The Rangarajan Committee on Disinvestment The Committee on disinvestment in Public Sector enterprises set up by the Government of India. Once a reasonable time has elapsed and a normal trading atmosphere established in the market. Restr ucturing is of two types: financial restructuring and basic restructuring. The main purpose of this restructuring is to improve the financial health of the enterprise. and permission to public enterprises to raise resources from the capital market to execute plans for diversification/expansion. it cannot raise its efficiency and productivity. it would be difficult to decide the ‘fixed rate' at which they should be offered to the public. Unless this structure grants a sufficient degree of autonomy to the operators of the enterprise or develops a system of incentives. Financial Restr ucturing implies the writing off of accumulated losses Restructuring and rationalisation of capital composition in respect of debt-equity ratio. under the chairmanship of C. The best method for disinvestment is offering shares to the general public at fixed price through a general prospecting. reserves the right to review the lease to the same person or to grant the lease to another bidder depending upon the circumstances of the case. c. Important recommendations of the Committee include the following: 1. have shown as to how disinvestment could solve the fiscal crisis of the state and usher in a new industrial democracy.

But the vast majority of countries. To begin with. Argentina. Ten percent of the proceeds of privatisation may be set apart for lending to public enterprises on concessional terms for meeting their expansion and rationalisation needs. e. The target level of disinvestment should be decided on the basis of the desirable level of public ownership in an activity or unit consistent with industrial policy. including high inflation. when serious economic reform began in India. A number of steps need to be undertaken for efficiently carrying out privatisation. etc. Chile. the percentage of equity disinvested should be 49 percent so that the government. Some countries. 5. 6. A scheme of preferential offer of shares to workers and employees may be devised. the percentage of equity to be divested should be 74 percent. e. the auction method with wide participation may be adopted. But that crisis quickly gave way to a decade of good economic 22/MITSDE . in fact gradual privatisation is the international norm and rapid privatisation is the exception. Although many observers have complained about India's slow privatisation. India was not a likely candidate for rapid privatisation. and Society method. if necessary. yet these countries did not privatise rapidly.g.Business. like Argentina or the Czech Republic. Estonia. a clear action plan should be evolved. Government. restructuring of finance with a proper debt-equity gearing and one Independent Regulatory Commission for the concerned sector.). Czech Republic. by holding the majority of the shares.g. In other cases. which are reserved for the public sector. Only a handful of countries in Latin America and the transitional economies met both criteria and also privatised deeply and quickly (e.g. In all those units. implemented privatisation programmes rapidly. retains control over the management. These may include corporatisation of public enterprises. privatised gradually or not at all. Till then. and a strong executive that could ram policies through. with large chunks divested within 3-5 years of launching the effort. Peru. have implemented privatisation much more gradually. including India. Disinvestment shall be in stages and sales shall be staggered so as to get the best possible price. sub-Saharan Africa. 7. 2. Instead of yearwise targets for disinvestment. Many developing countries satisfied one of these criteria. in fits and starts. 4. To be sure. the country was in the midst of a balance of payments crisis and sought IMF assistance. in 1991. 3 Privatisation in India and the World: a comparison of political dynamics One dimension on which countries' privatisation programmes can be compared is the speed with which they are implemented. Even countries that satisfied both criteria. 3. Brazil and Turkey experienced several bouts of macroeconomic instability. because it did not satisfy two necessary conditions for rapid privatisation: severe macroeconomic crisis. World: 3 .

by selling state enterprises to foreign investors and increase FDI. Rising capital inflows saw the country's foreign exchange reserves climb to $145 billion by September 2005. Under these circumstances. shrinking GDP. In the Czech Republic too. governments either had bare majorities or were coalition governments in which the leading party never had a majority on its own. privatisation was a way to rein in inflation by reducing the fiscal deficit (thereby limiting the monetisation of the deficit). The Congress Government headed by Narasimha Rao which initiated the radical changes.g. At the same time. In Argentina. in India. The severe macroeconomic conditions were also the culmination of a long period of poor economic performance. in India's democratic setting with multiple institutional constraints. continued its ritualistic genuflection to 23/MITSDE . As part of that package of policies. the state was thoroughly discredited by the time President Menem came into office and pursued economic reforms. remittances and service exports grew to limit the current account deficit to average 1. Countries that privatised rapidly either did so under such severe macroeconomic conditions that included hyperinflation. and a severe balance of payments crisis or a sharp political discontinuity leading to a regime change (such as the ouster of a military dictatorship or the fall of communism). for instance. central planning and state ownership were so discredited that sweeping privatisation was politically very popular. including relying on presidential decrees for some of the most important steps. Moreover. they were certainly better than India's previous record as well as the record of most other LDCs in the 1990s. Given that reality. the liberalisation agenda was only grudgingly accepted across a wide swathe of the Indian political spectrum. experienced mediocre economic performance for decades but never experienced very high inflation or prolonged periods of economic stagnation. President Havel and Prime Minister Klaus had a very broad mandate. On the other hand.1 percent.Industry performance by Indian standards. From 1992-93 to 2000-2001. In countries like the Czech Republic. on the other hand. Through the 1990s. inflation averaged 7. and although imports exceeded exports every year. Equally importantly they were ideologically committed to privatisation. e. the executive branch was weak throughout the 1990s. including deep privatisation. progress was understandably slow. the hard economic medicine was acceptable.1 percent. India's GDP grew at an average rate of 6. Menem had much greater powers to push policies through. and a convenient way to both raise foreign exchange. The Indian economy.1 percent of GDP . politicians had little incentive to push through structural reforms like privatisation that would run into fierce resistance from powerful interest groups. In Argentina. While these results were not spectacular compared to the high-growth Asian economies in their heyday.

3. since that would leave it with 26 percent. despite the many changes in policies and regulations. Thus.3. and Society the Nehruvian legacy of planning and SOEs. a level high enough to give it a strong voice in the enterprise. principally to raise resources to plug the budget deficit. Finally. 3. whose aim seemed to be merely to reduce the government's holdings by up to 20 percent. the government escalated its commitment from merely privatising ownership to privatising control. Whenever the Government tried to privatise any public sector undertaking. the fundamental character of the enterprise would be unchanged. Thus. The next stage of escalation was raising the amount that would be divested to 49 percent. outright divestment became acceptable. Individual bureaucrats and ministers might have done so. but no Prime Minister has been willing to go to the people and say this is what we are going to do and these are the reasons why we need to do this.Business. Accordingly. Government. Since this would still leave the government with majority ownership. SP and RJD concerned that economic liberalisation would mean the unwinding of the hard won gains of reservations for their supporters in particular. The government under the provisions of Sick Industrial Companies Act (SICA) referred the cases of sick PSUs 24/MITSDE . and during the 2000-01 budget debate. the government decided that it would sell up to 74 percent of the equity. A lack of conviction translated into a lack of “marketing” reforms to the voter. which at the onset of the reforms exceeded 9 percent of GDP. The caste-based parties the BSP.1 Privatisation or Disinvestment? The government's privatisation programme began as a divestment programme. though not a controlling voice. Finance Minister Yashwant Sinha actually used the term “privatisation” to describe the government's programme for reforming SOEs(State Owned Enterprises). the programme was labelled “disinvestment” and the term “privatisation” assiduously avoided. India's privatisation was of the gradual type. and a less adversarial relationship between business and government. Consequently.3. the opposition to the movement was so strong that the government did not succeed. while on the other hand even more resources could be mobilised to plug the budget deficit. were less than happy. there was a reluctance to overtly criticise earlier policies or explain with conviction and clarity why changes were needed. The Swadeshi Jagaran Manch and other elements of the BJP from the right and the CPM from the left had more in common with regard to economic policies on openness than differences.2 Privatisation in India: a balance sheet 1. initially for loss making enterprises and later even for profitable enterprises. In the next stage.

Elgin Mills Co. 5. KIOCL. RICL. Cawnpore Textile Limited and Tannery and Footwear Corporation Ltd.HCL. 3. defence and railroads were left in the strategic category. But the definition of “strategic” became progressively tighter. SCI. greater deregulation and outsourcing of activities is increasing the role of the private sector. NFL and SAIL. EPIL. ITI. and Bengal Immunity Ltd. CONCOR. The BIFR has taken a decision for the revival of Indian Drugs and Pharmaceuticals Ltd.. The main goal of the MOU policy is to reduce the ‘quality of control' and increase the ‘quality of accountability'. The cases of other registered Public Sector Enterprises are still under enquiry. Although there has been a noticeable increase in the commitment to privatisation after the BJP-led governments came to power. The Commission has recommended disinvestment at varying levels for a number of PSU's like MFIL. but they ended with progressively narrower definitions. Bharat Brakes and Valves Ltd. GAIL. IPCL. Eventually. The MOU's grant greater operational autonomy of PSU's to pursue their objectives. The Disinvestment Commission suggested strategic sales in various proportions for many enterprises like. 4. PPCL. MTNL.Industry 2. The Common Minimum Programme of the United Progressive Alliance Government stipulated that the proceeds of the disinvestments would be used in the two vital areas-health and education. because the proceeds of the disinvestments are being used to reduce the budget deficit. To be sure. to the Bureau for Industrial and Financial Reconstruction. ET&T.. Initially.. R-ASHOK AND UASHOK and NALCO. the debates on which sectors were strategic were contentious. A part of the proceeds of disinvestment will be earmarked to create an investment fund. HTL. HPL. But BIFR did not by and large result in any significant rehabilitation. HVOC. Ltd. HZL. Biecco Lawrie Ltd. HCIL. The term “strategic” was frequently used to describe those state-owned enterprises (SOEs) that the government intended to retain control over the long term.. FACT. The restrictions on the buyers also progressively declined. 7. MFL. 46 were rated as ‘Excellent' and 28 as ‘very good'. Initially the 25/MITSDE . only nuclear power.. even though the party in power changed thrice. 53 Central Public Sector Undertakings were registered with the BIFR.. Out of the 99 PSU's which signed the MOU with their administrative ministries. They are: National Bicycles Corporation of India Ltd. ITDC. for instance. The Government also decided to sign Memoranda of Understanding (MOU's) with various public sector enterprises. BALCO. Critics describe the disinvestments as deficit privatisation. PHL. which will be used to strengthen other public sector enterprises. Upto 31st March 1995. NEPA.. BRPL. 1996. and everything else was eligible for privatisation. but by 2000 the cabinet committee on disinvestment had classified them as non-strategic. there has been more continuity than discontinuity in the privatisation programme. The Disinvestment Commission was set up by the Government of India in August. so that the number of SOEs that could be divested expanded.. 6. to suggest the modalities for undertaking disinvestment of equities for select PSUs. the Ministry of Petroleum argued that oil companies were strategic. British Indian Corporation Limited. Smith Stainstreet and Pharmaceuticals Ltd. and even in the last two. Orissa Drugs and Chemicals Ltd. It has also decided to wind up some PSUs. IBP.

The MR TP (Amendment) Act. the liberalisation of rules governing foreign direct investment. Public Af fairs and Administration. prosecutorial and adjudicative functions will be separate. and Society auction of shares was restricted to public financial institutions that over time were expected to offload them to private investors. Economics. the strategic alliance between Godrej Soap and Proctor and Gamble could not be questioned. Industry.1 MR TP : a r edundant Act? The Primary objective of the MRTP Act was to control the concentration of economic power and control monopolies.4 Competition Policy and Law A high level committee on Competition Policy and Law recommended that a new Competition Act may be enacted on the lines recommended in the report of the committee and the MRTP Act. Law.4. The Competition Commission should be a multi-member body comprised of eminent and erudite persons of integrity and objectivity from the fields of Judiciary. 1969.” that is. A Competition Law Authority christened Competition Commission of India may be established to implement the Indian Competition Act. This followed three concomitant trends the willingness of the government to sell SOEs to “strategic investors. Accountancy. The investigative. to private investors who would own a large block of shares (not necessarily 51 percent) and would enjoy management control. and Air France in partnership with a local Indian group. It will hear competition cases and also play the role of competition advocacy. establishment of new undertakings. Likewise. By 1996 equity was being offered to foreign institutional investors. however big or small are now free to expand. takeovers. may be repealed and the MRTP Commission wound up. Commerce. Consequently. Thus. 1991. etc. while foreigners owned portions of VSNL and MTNL through ADRs traded on the New York Stock Exchange. redundant 3. 3. Government. has omitted provisions regarding the Central Government's permission for substantial expansion. though objected to by certain quarters including the employees of TOMCO. and the opportunity to list Indian firms on foreign stock exchanges through ADRs and GDRs. potential buyers of Air India included Singapore Airlines in partnership with the Tatas. The Union Cabinet on 26th June 2001 cleared a diluted bill on competition law and policies named Trade Related Competition Commission of India (TRCCI) to replace the existing Monopolies and Restrictive Trade Practices Commission. 26/MITSDE . 1986. or establish new undertakings. the merger of Hindustan Lever and TOMCO. or effect mergers. The provisions relating to the Unfair Trade Practices Act need not figure in the Indian Competition Act as they are presently covered by the Consumer Protection Act. this objective has been substantially diluted. With the initiation of the market economy and consequent liberalisation since 1991. mergers. (MRTPC). was allowed by the Supreme Court. International Trade.Business. Establishments.

sugar. 7. having failed to make any headway within India. Abolition of these controls have given Indian Industry much greater freedom 27/MITSDE . 3. 2. the MRTP Act discouraged dominance. 6. 3.2 The New Competition Law: an advance over MR TP Thus. alcoholic beverages. It in fact helped in protecting the market position of the large houses by restricting competition between the large houses. the MRTP act was based on size as a factor. the NCL only frowns upon the abuse of dominance. Licensing was undoubtedly responsible for many of the inefficiencies plaguing Indian Industry. aerospace and defence products. with the language being simple and easily comprehensible. electronics. and contributed to the foreign trade gap.Industry The MRTP Act was designed to prevent monopoly. The TRCCI has much more autonomy and is selected by a collegium. It takes into account the post reform realities of a liberalised economic environment. the only alternative left for the Birlas was to set up firms in other countries and it put up several successful companies in all the ASEAN countries. 1. Thus.. licensing was abolished for all except seven industries viz. the New Competition Law (NCL) is much an advance over the archaic MRTP Act. in addition to Industrial licensing was also abolished. It defines competition offences clearly and explicitly. Whereas. in the early seventies. In a series of steps. The special permission needed under the MRTP Act for any investment by the so called “large houses” which was an additional instrument of control over large houses. Its stated objective was to prevent “concentration of economic power” but in practice it only served as another barrier to entry. This has had many adverse effects. 4. hazardous chemicals and pharmaceuticals.4. Birlas set up a viscose stable fibre plant in Thailand and exported fibre back to India. however. 3. the NCL is based on structure as a factor.5 Industrial Refor ms Industrial licensing was a major instrument of control under which the central government's permission was needed for both investment in new units (beyond a relatively low threshold) and for substantial expansion of capacity in existing units. For example. decelerated growth in the industrial and consequently in other sectors. they have retarded competition. it restricted competition. 5. cigars and cigarettes. reducing potential competition in the system. Whereas.

India's software industries show the clustering of the software companies in three distinct areas: • Southern states. Software continues to contribute a major portion of the Indian IT Industry's revenues. With the opening up of the Indian economy. Japan and China.assemblies and equipment manufacturing.978 billion in 2000-01. specifically Tamilnadu (Chennai. • • Software companies located in these regions account for almost the entire software and services exports of the country. Karnataka (essentially confined to Bangalore) and Andhra Pradesh (essentially confined to Hyderabad) In the west. The IT manufacturing Industry has over 150 major hardware players supported by over 800 ancillary units and small time vendors engaged in sub .875 billion in 2001-02 as against $5. In absolute terms. India's overall IT exports grew to $ 9.7percent in 2001-02.183 billion from $ 1.Business. thus increasing the pressure of competition as well as the ability to face competition. Coimbatore and Trichy). The combined export of software and services.019 billion in 2000-01. Maharashtra (Mumbai and Pune). This gave more importance to competition than to control. Delhi.4 percent. 28/MITSDE .041 billion in 2000-01. In absolute terms.6 percent in 2001-02 to $ 1. and the increased receivables from IT enabled services like back office operations. And in the North. Madurai. India has tried its own brand of privatisation which gathered speed after 1991.04 billion in 2001-02 from $ 7. The steady growth in exports of software is a combined effect of software giants setting up bases in India to meet their global software requirements in the aftermath of 9/11. Between 1995 and 2000. the Indian IT Industry recorded a CAGR (Compounded Annual Growth Rate) of more than 42. and Society and flexibility to expand existing. gradual market penetration that India is making in the non . Australia. In 1999-00. India's exports of electronics hardware grew by 13. the country's information technology Industry has been the biggest beneficiary.4 percent. and electronic hardware registered a growth of 28. MRTP laws in this context became archaic and a new legislation called competition law acquired its space. or to set up new units in a location of their choice. India's exports of computer software beat global recession in 20012002 (April-March) to grow by a healthy 31.traditional markets like the EU. Government. more than 185 of the Fortune 500 companies outsourced their software requirements to Indian software houses. highest number of firms and employment in the sector. software and services exports went up to $ 7. Noida and Gurgaon. Summing Up It is not the business of government to be in business. This has been the mantra around the world especially since the decade of 80s.

2000. the most important argument against privatisation is that it is a tool for deficit management. 6. During the 2000-01 budget debate. Between 1995. A lot has depended on the political ideologies of the time along with practical realities facing the world today. 10. Critics describe the dis-investments as deficit privatisation. A Union Cabinet on 26th June 2001 cleared a diluted bill on competition law and policies named _________________ to replace the existing Monopolies and Restrictive Trade Practices Commission. the MRTP act was based on size as a factor. India was not a likely candidate for rapid privatisation. 5. Whereas. Finance Minister Yashwant Sinha used the term “____________” to describe the government's programme for reforming SOEs. the NCL is based on ____________ as a factor. because it did not satisfy two necessary conditions for rapid privatisation: severe _________ crisis. As per the Rangarajan committee on disinvestment. ____________ measures and ______________ measures. The liberalisation wave in particular has seen the software segment in India expanding to phenomenal proportions. disinvestment should be to the tune of ____________ percent. because the proceeds of the dis-investments are being used to reduce the _________ deficit. The term “__________” was frequently used to describe those state-owned enterprises (SOEs) that the government intended to retain control over the long term. 7. and a strong ___________ that could ram policies through. the Indian IT Industry recorded a CAGR of more than ________ percent. 8. including high inflation. 2. 3. (MRTPC). whose aim seemed to be merely to reduce the government's holdings by up to _________ percent. 29/MITSDE . The three forms privatisation can take are ____________ measures.Industry We have also witnessed numerous debates for and against privatisation. The government's privatisation programme began as a divestment programme. 4. 9. Self -assessment 1. those units which are reserved for the public sector. principally to raise resources to plug the _________ deficit.

as distinct from the Capital Market which deals in long term funds. The Reserve Bank of India defines the Money Market as a “centre for dealings.5 Banking Sector Reforms 4.1 Fiscal Policy 4. Zero Coupon Bonds 4.2 Secondary Market Reforms 4.5 Capital Indexed Bonds 4. Around this objective is woven the entire gamut of financial institutions which interlinked.1 Money Market in India 4. no matter how simple or complex.6 An Introduction to Fiscal.1 Primary Market Reforms 4.2. mainly of a short term character. forms the financial system.1 Buy back and experience with MNCs 4. monetary and credit policies • Reforms of the fiscal environment in India Contents 4.6.3 Tap Stock 4.2.2 Instruments Traded in the Money Market 4. Monetary and Credit Policy 4.2 Gilt Edged Market or Government Securities Market 4.2.4 Partly Paid Stock 4.2 Monetary and Credit Policy Summing Up Self-assessment The fundamental function of any monetary and financial system.1.1 Money Market 4.Business.3.2.1 Money Market Money Market is the market for short term funds.2 Floating Rate Bond 4. in 30/MITSDE . and thus to contribute to economic welfare.4 Buy back Ordinance 4.3 Capital Market Reforms 4. and Society Chapter IV The Financial System Learning Lear ning Objectives Reading this chapter would enable you to understand • The concept of Money Market • The development of the money market in India • Instruments traded in the Indian Money Market • Introduction to the Government Securities Market and instruments traded therein • Reforms in the Indian capital markets • Understanding of the Buy back law of India • Reforms in the Banking sector • Understanding of fiscal. is to promote efficiency in the process of exchange or trade in real goods and services. Government.

certificates of deposits. such as. Several financial innovations in terms of money market instruments.1 Money Market in India The Money Market str ucture has undergone a change over the years. ii) iii) enabling market evaluation of associated risks. 1989. 4. auctions of Treasury Bills. 5. The Reserve Bank has gradually developed the Money Market through a five pronged effort. in India. inter bank term money. Barriers to entry were gradually eased by i) increasing the number of players (beginning with the Discount and Finance House of India in April 1988 followed by primary and satellite dealers and money market mutual funds). particularly under the impetus of economic reforms. commercial paper and RBI repos were introduced. such as. 4. It is the place where short term surplus investible funds at the disposal of the financial and other institutions and individuals are bid by borrowers. especially after a market based exchange rate system was put in place in March 1993.The Financial System monetary assets. as in many other developing countries.6 percent 91-day tap Treasury Bills.” 4. Interest rate ceilings on inter bank call/notice money. 3. again comprising institutions and individuals and also by the government. Unlike in developed economies where Money Markets are promoted by financial intermediaries out of efficiency considerations. rediscounting of commercial bills and inter bank participation without risk were withdrawn effective May 1.2 Instr uments T raded in the Money Market Call/Notice Money Market The most active segment of the monetary market segment has been the call money market where imbalances in the fund positions mostly of the banks 31/MITSDE . shifting the onus of cash management from banks to borrowers and phasing out the 4.1. and 2. Institutional development has been carried out to facilitate inter linkages between the money market and the foreign exchange market. the evolution of the money market and its structure has been integrated into the overall deregulation process of the financial sector. relaxing both issuance restrictions and subscription norms in respect of money market instruments and allowing determination of yields based on the demand and supply of such paper. 1. The development of markets for short term funds at market determined interest rates has been fostered by a gradual switch from a cash credit system to a loan based system.1. which in the past provided an avenue for investing in short term funds. by withdrawing regulatory restrictions. bank guarantees in respect of CPs. it meets the short term requirements of the borrowers and provides liquidity or cash to lenders.

The most important of these has been the bunching of banks needs for short term funds in order to meet CRR compliance. the specified entities are not allowed to lend below 14 days . the call money rate has shown a tendency to fluctuate significantly on occasions. The entry restrictions are the same as those for Call/Notice Money except that. There have been a variety of other reasons as well. etc. the move towards fuller integration between forex and money markets. Steps have been taken to phase out non-bank participants from the call/notice/money market with the development of an active repo market and market for other money market instruments. term money market as purely an interbank market with additional access only to PDs. slow off -take of credit. and Society are evened out. With the deregulation of the interest rate and widening of the market through a large number of participants. The Call/Notice money market has graduated into a broad and a vibrant market from a restricted and narrow one. the call money market has been playing an increasingly important role in equilibrating the banking system demand and supply of short term funds. Presently Banks and PD (Primary Dealers) operate as both lenders and borrowers with a large number of financial institutions and mutual funds operating only as lenders. The volatility in the call money rates has also been the result of the asset liability mismatches of some large banks and their over reliance on call money market for liquidity management. like bunching of payment of tax at specific periods. as per existing regulations.The market in this segment is presently not very deep. RBI has been moderating liquidity and volatilities in the call money market. are all the driving forces for the development 32/MITSDE . initially it had injected liquidity through DFHI and STCI.Business. However. RBI has taken several steps in the past few years. Since the withdrawal of the ceiling on the call rates. the growing desire for fixed interest rate borrowing by corporates. RBI has taken a decision to restrict the call. the volatility in the call money market with accompanying risks in running asset/liability mismatches. there had been a relatively high degree of volatility in the call money market in the post 1991 period. In order to reduce the instability in the call money market. Another factor has been the withdrawal of substantial liquidity from the system at one time to take care of Government needs. notice. The declining spread in lending operations. through continuous use of repos and refinance operations and change in procedure for maintenance of CRR requirements. consequent on the steps initiated with the onset of the process of liberalisation and deregulation. Since December 1992. The sharp imbalances that arise in demand supply of money due to the combination of several factors have led to the volatile behaviour of call money rate. Government. despite widening of the call money market and DFHI's attempt to smoothen liquidity needs as mentioned earlier. In the subsequent years. erm T er m Money Inter bank market for deposits of maturity beyond 14 days and upto three months is referred to as term money market. etc. Corporate entities who have lendable surplus are permitted to lend through Primary Dealers. In pursuance of the recommendation of the Narasimhan Committee II.

Under a repo transaction. the credit worthiness of the borrower. a holder of securities sells them to an investor. the rate at which it is possible to borrow through a repo is lower than the same offered on unsecured (or clean) inter bank loan for the reason that it is a collateralised transaction and the credit worthiness of the issuer of the security is often higher than the seller. Commercial Paper (CP) The introduction of Commercial Paper (CP) in January 1990 as an additional money market instr ument was the first step towards securitisation of commercial bank's advance into marketable instruments. The CP yield is slightly lower than the prime lending rate and is higher than comparable 33/MITSDE . this transaction is nothing but collateralised lending as the terms of the transaction are structured to compensate for the funds lent and the cost of the transaction is the ‘repo rate'. as per RBI rules. In the case of a repo. In the money market.. coupled with the proposals for rationlisation of reserve requirements and stringent guidelines by regulators/managements of institutions. liquidity of the collateral and comparable rates of other money market instruments. Forward Ready Forwar d Operations (Repo) Repo is a money market instrument. In other words. should stimulate the evolution of the term money market sooner than later. CPs issued by top rated corporates are considered sound investments.e. These. CPs are mostly issued to finance current transactions and seasonal needs for funds and are not tied to any specific transaction. which enables collateralised short term borrowing and lending through sale purchase operations in debt instruments. Commercial Papers are unsecured debts of corporates. in the asset/liability and interest rate risk management. they could be good investments if proper caution is exercised. Though CPs are issued by corporates. Market forces freely determine the discount rate. Only corporates who get an investment grade rating can issue CPs. The market is generally segmented into the PSU CPs i. with an agreement to repurchase at a predetermined date and rate. It is an unsecured and negotiable instrument. the inflow of cash from the transaction can be used to meet temporary liquidity requirement in the short term money market at comparable cost. redeemable at par to the holder at maturity. Repo rate is nothing but an annualised interest rate for the funds transferred by the lender to the borrower. the forward clean price of the bonds is set in advance at a level which is different from the spot clean price by adjusting the difference between repo interest and coupon earned on the security. They are issued in the form of promissory notes. The instrument provides banks and other institutions an opportunity to invest their short term surpluses in high earning securities. those issued by public sector and departmental undertakings and the private sector CPs. Other factors affecting the repo rate include. and is usually issued in a bearer form and on discount to face value basis.The Financial System of the term money market. Generally.

Primary Dealers. But of late. Banks. When trade bills are accepted by commercial banks they are called commercial bills. Certificates of Deposits are unsecured promissory notes issued by banks with specific maturity similar in nature to the commonly available fixed deposits of the banks.Business. Mutual Funds. Since April 1992. all India Financial Institutions like IDBI. the entire central government borrowing programme in dated government security is conducted through auctions. he may approach his bank for discounting his bill. 4. Certificate of Deposits (CDs) A certificate of deposit (CD) is a document of title to a time deposit. (The RBI introduced the Bill Market Scheme in 1952 and a new scheme called the Bill Rediscounting Scheme in November 1970. Individuals also do invest in the government securities. ICICI. with the difference between the two being that CDs are freely transferable from one party to another by endorsement and delivery. which treasuries do not and also the CDs are less liquid than treasury papers. the Government has resorted to private placement of government securities with RBI and later the same are 34/MITSDE . The government borrows from the market by issuing loan stock of various maturities. the bill would be payable at a future date (Usance bill). IFCI. One of the methods for providing credit to customers by bank is by discounting commercial bills at a prescribed discount rate. FIs. Along with scheduled commercial banks. and Society bank deposit rates. This is because investors bank paper carry some credit risk. During the currency of the bill. Provident Funds. it can rediscount the bill already discounted by it in the commercial bill rediscount market at the market related discount rate. Government. Commercial Bills Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) for the value of the goods delivered to him.Bill of the same maturity. Such bills are called trade bills.2 Gilt Edged Market or Gover nment Securities Market The Government resorts to the market for its borrowing programme. If the seller wishes to give some period for payment. but not in large quantum. In the case of government dated securities. if the bank is in need of funds. CDs are issued at a discount to the face value and the market determines the rate of discount. IRBI. The maximum maturity was reduced from 20 years to 10 years. CDs are always traded at a spread over a T .). NBFCs are the various categories of institutions who normally invest in government securities. if the seller is in need of funds. The bank will receive the maturity proceeds (face value) of the discounted bill from the drawee. SIDBI and EXIM Bank have also been permitted to issue CDs. In the meanwhile. coupon rates were declared and maturities shortened to bring these securities to market terms.

4 Partly Paid Stock An innovative instrument for which payment is made in instalments.2.5 Capital Indexed Bonds These bonds were floated on December 29.2 Floating Rate Bond Floating Rate Bond is an instrument whose periodic interest or dividend rates are indexed to some reference index such as Treasury Bills etc. 1995 linking them to the 364 day treasury bills. In contrast coupon bonds make a series of periodic coupon payments to the buyer as well as paying face value at maturity. 1997 on tap basis. No periodic interest payment is made. Some other kinds of Gilt edged securities are: 4. 4.2. The volatility of interest rates have led to the creation of these instr uments designed to of fer some protection to the players. The objective of the capital indexed bonds was to provide a complete hedge against inflation for the principal amount of the investment. 35/MITSDE . The tap was kept open up to 28th January 1998 and an amount of Rs 704 crore was mobilised. It is designed for institutions with a regular flow of investable resources requiring investment outlets. at maturity of the bond. The buyer of Zero coupon bonds receives one and only one payment. Zero Coupon bonds on auction basis were introduced by GOI in January 1994. These bonds are of four year maturity and carry a coupon rate of 6 percent. 4. 4. These instruments give a variable rate.3 Tap Stock A gilt edged security from an issue that has not been fully subscribed and is released into the market slowly when its market price reaches predetermined levels. Short taps are short dated securities and long taps are long dated stocks. Zero coupon bonds bear no reinvestment risk but they are prone to interest rate risk making their prices highly volatile.2.2. 4. Floating rate bonds were introduced by the GOI on September 29. 1994. The difference between the issue price and redemption price represents the return to the investor. a characteristic that allows both the issuer and investor to share the risk inherent in changing interest rates. Thus.The Financial System sold through ‘on tap'. floating rate bonds enable investors to take advantage of movements in interest rates. These stocks were introduced by GOI on July 29.2.1 Zero Coupon Bonds Bonds issued at discount and repaid at face value. The instrument has attracted good market response and is being traded actively.

Further. Trading modalities have been modernised. A criterion for accessing the securities market has been strengthened. Merchant Bankers and Issuers. default and disciplinary committee. 4. The eligibility criterion for issuers has been strengthened. introduced in 1996. investment trusts. inspection of bankers to an issue will be done by the Reserve Bank on request from the SEBI. Government. Competition. Stringent and detailed disclosure norms have been prescribed. The government has allowed foreign institutional investors (FIIS) such as pension funds. 4. Dematerialisation of stocks. remain responsible for ensuring compliance with the norms on disclosure and investment protection prescribed by the SEBI. The system allows brokers located in 140 cities and towns all over the country to trade in a single unified market. and Society Reforms 4. The process of demat and trading through depositories has helped to push the volume of business rapidly. This condition is relaxable under specific conditions. Under the regulations. SEBI notified regulations for bankers to issues in July 1994. The regulations make registration of bankers to issues with SEBI compulsory. matching buy and sell orders with price priorities. In October 1993.2 1. Offer documents need no longer be vetted by SEBI. The government of India at the end of 1995 permitted IPO's through the ‘Book Building' route. The advantages of this technique of obtaining advance feedback are that it helps in optimal pricing and removes uncertainties regarding mobilisation of funds. 5. regulations for underwriters of capital issues and capital adequacy norms for stock brokers in the stock exchanges were announced.3 Capital Market Refor ms Reforms 4.3. Reforms Secondary Market Refor ms The stock exchanges have been directed to broad base their governing boards and change the composition of their arbitration. with linkages to brokers all over the country. 3. 2. separate criteria for finance companies have been prescribed. mutual funds. asset or portfolio management companies. Book building is a process to ascertain the indicative subscription bids of interested investors to the public issue of securities. and greater transparency in the draft prospectus is required.3. eliminated delays and uncertainties in transfer of ownership. It also ensures transparency for investors and assurance of best prices. etc.Business. 36/MITSDE . however. They stipulate the general obligation and responsibilities of the bankers to issues and contain a code of conduct. thus led BSE also to introduce an on-line trading system in 1995. 6. The National Stock Exchange introduced on-line electronic trading in 1994. 3. 4.1 Primary Market Refor ms 1. Issuers proposing to make their first offer of equity to the public should have a track record of dividend payments in three years of the immediately preceding five years. to invest in the Indian Capital market provided they register with SEBI. At the same time SEBI took several measures to provide issuers with more flexibility in the issue process. 2.

4. The buy. through the book building process or the stock exchange. Royal Philips Electronics of Netherlands (Philips). 1998. whether through a stock exchange. or proceeds of any earlier issue specifically made with the purpose of buying back shares. a company was not allowed to buy back its shares from any person through a negotiated deal. The SEBI has made it compulsory for credit rating of debentures and bonds of more than 18 months' maturity. and repayment to financial institutions from buying back its shares. The maximum debt equity ratio of banks is 2:1 and the minimum debt service coverage ratio required is 1:2.1 Buy back and experience with MNCs In October 2000. 4. The ordinance allowed companies to buy back shares to the extent of 25 per cent of their paid up capital and free reserves in a financial year. securities premium account.4 Buy back Ordinance The buy back ordinance was introduced by the Government of India (GOI) on October 31.The Financial System 5. The ordinance also required the company to pass a special resolution at a general meeting and obtain the shareholders' approval for the buy back. except by way of bonus issues and conversion of warrants. The ordinance was issued along with a set of conditions intended to prevent its misuse by companies and protect the interests of investors. announced its first offer to buy back the shares of its Indian subsidiary. The buy back had to be financed only out of the company's free reserves. Moreover. According to guidelines issued under SEBI's Buy Back of Securities Regulation. preference shares or debentures. redemption of debentures or preference shares. a company could buy back its shares from existing shareholders on a proportionate basis through tender offer. 1998.4. 6. It also allowed the promoters of a company to make an open offer (similar to acquisition of shares) to purchase the shares of its subsidiary. From odd lot holders. This allowed foreign promoters to utilise their surplus funds and make an open offer to acquire a 100% stake in their Indian subsidiaries. 1997. The ordinance also prevented a company that had defaulted in the repayment of deposits. the Dutch parent of Philips India Limited. 1998. The buy back of shares was allowed only if the Articles of Association of the company permitted it to do so. or any private arrangement. • • From the open market. The open offer was initially made for 23 percent of the 37/MITSDE . companies were not allowed to make a public or rights issue of equity shares within a period of 24 months from the day of completing the buy back. and Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and Takeover Regulations. spot transactions.back of shares was governed by the Securities and Exchange Board of India's (SEBI) Buy Back of Securities Regulation. The major objective of the buy back ordinance was to revive the capital markets and protect companies from hostile takeover bids. In addition.

This resulted in an increase in the price. and Society outstanding shares held by institutional investors. Soon after. Besides.5 Banking Sector Refor ms The Indian financial system in the pre-reform period (i. bringing it closer to the intrinsic value and providing investors with a higher price for their investment in the company. Some of these companies were Cadbury India. The declining liquidity of these shares prompted critics to say that the Government of India's attempt to revive capital markets by allowing buy back of shares had failed. There is perhaps an element of commonality of such a ‘repressed' regime in the financial sector of many emerging market economies. the buy back option was offered by several multinational companies (MNCs) to increase their stake in their Indian ventures. Carrier Aircon. Otis Elevators. essentially catered to the needs of planned development in a mixed-economy framework where the public sector had a dominant role in economic activity. there was a complex structure of administered interest rates guided by social concerns. critics of the buy back option claimed that large multinationals had utilised the buy back option to repurchase the entire floating stock from the market with the objective of delisting from the stock exchange and eliminating an investment opportunity for investors.105. private bodies and the general public. Philips became one of the first multinational (MNCs) companies in India to offer the buy back option to its shareholders. It provided a much needed exit option for shareholders in depressed market conditions. Fund managers who held these companies' stocks felt that allowing buy back of shares was one of most favourable developments in the Indian stock markets.e. 1. With this. most MNCs that offered the buy back option reported a steep decline in the trading volumes of the shares of their Indian ventures. Reckitt Benkiser. etc. which was met through the Government's dominance of ownership of banks.. These not only distorted the interest rate mechanism but also adversely affected the viability and profitability of banks by the end of 1980s. The strategy of planned economic development required huge development expenditure. Moreover. prior to the Gulf crisis of 1991). Reform measures were initiated and sequenced to create an enabling environment for banks to overcome external constraints. automatic monetisation of the fiscal deficit and subjecting the banking sector to large pre-emptions both in terms of the statutory holding of Government securities (statutory liquidity ratio. a premium of 46 percent over the then prevailing stock market price. However. Reforms 4. These were 38/MITSDE .Business. The offer was made at Rs. Government. A narration of the broad contours of reform in India would be helpful in appreciating both the commonalities and the differences in the paths of reform. It follows that the process of reform of the financial sector in most emerging economies also has significant commonalities while being specific to the circumstances of each country. Buy back by the company usually indicated that the management felt that its stock was undervalued. resulting in crosssubsidisation. or SLR) and cash reserve ratio (CRR).

initially. As a major step towards enhancing competition in the banking sector. on a cumulative basis. Diversification of ownership has led to greater market accountability and improved efficiency. high levels of pre-emption in the form of reserve requirements. subject to conformity with the guidelines issued from time to time. administered interest rates still prevail in the small saving schemes of the government. Sequencing of interest rate deregulation has been an important component of the reform process which has imparted greater efficiency to resource allocation. This also encompassed the Development Financial Institutions (DFIs).e. infusion of funds by the Government into the public sector banks for the purpose of recapitalisation amounted. Interest rates in the banking system have been largely deregulated except for certain specific classes. a figure much lower than that for many other countries. As regards the policy environment of public ownership. The process has been gradual and predicated upon the institution of prudential regulation for the banking system. it must be recognised that the lion's share of financial intermediation was accounted for by the public sector during the pre-reform period. which was followed by expanding the capital base with equity participation by the private investors. and credit allocation to certain sectors. there was infusion of capital by the Government in public sector banks. an element of private shareholding in public sector banks has been injected by enabling a reduction in the Government shareholding in public sector banks to 51 percent. Since 1993. to less than one per cent of India's GDP. which have been providers of long-term finance while the distinction between short-term and long-term finance provider has increasingly become blurred over time.The Financial System 2. As already mentioned. these are: savings deposit accounts. As part of the reforms programme. 4. market behaviour.. financial opening and. the current market value of the share capital of the Government in public sector banks has increased manifold and as such what was perceived to be a bail-out of public sector banks by the Government seems to be turning out to be a profitable investment for the Government. 3. foreign direct investment in private sector banks is now allowed up to 74 percent. Even after accounting for the reduction in the Government's shareholding on account of losses set off. twelve new private sector banks have been set up. However. above all. small loans up to Rs. The complexities involved 39/MITSDE . related to the administered structure of interest rates. The need for continuance of these prescriptions as well as those relating to priority sector lending have been flagged for wider debate in the latest annual policy of the RBI. non-resident Indian (NRI) deposits. One of the major objectives of the banking sector reforms has been to enhance efficiency and productivity through competition. The share of the public sector banks in the aggregate assets of the banking sector has come down from 90 percent in 1991 to around 75 percent in 2004. The share of wholly Government-owned public sector banks (i. the underlying macroeconomic conditions. where no diversification of ownership has taken place) sharply declined from about 90 percent to 10 percent of aggregate assets of all scheduled commercial banks during the same period.2 lakh and export credit. Guidelines have been laid down for the establishment of new banks in the private sector and foreign banks have been allowed more liberal entry. Since the initiation of reforms. Consolidation in the banking sector has been another feature of the reform process.

Recently. Such unrealised gains coupled with the creation of IFR helped in 40/MITSDE . and Society 5. The BFS also ensures an integrated approach to supervision of commercial banks. Illustratively. two points are noteworthy. This was prescribed at a time when interest rates were falling and banks were realising large gains out of their treasury activities. Government. and second. which generally meets once a month. another large term-lending institution has been converted to a bank. all cases of penalty imposed by the RBI on banks as also directions issued on specific matters. as appropriate. subject to the provisions of the relevant legislation. including those arising out of inspection. First. The principles underlying these guidelines would be applicable. While guidelines for mergers between non-banking financial companies and banks were issued some time ago. non-banking finance companies. While the regulatory framework and supervisory practices have almost converged with the best practices elsewhere in the world. In 1994. 6. The BFS. It also provides direction on supervisory actions in specific cases. There have been a number of measures for enhancing the transparency and disclosure standards. with a view to enhancing further transparency.. one percentage point above the international norm. a Board for Financial Supervision (BFS) was constituted comprising select members of the RBI Board with a variety of professional expertise to exercise ‘undivided attention to supervision'. authorise the payment and settlement systems and determine criteria for membership to these systems. set standards for existing and future systems. A Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) has also been recently constituted to prescribe policies relating to the regulation and supervision of all types of payment and settlement systems. to public sector banks also. The Credit Information Companies (Regulation) Bill. 2004 has been passed by both the Houses of the Parliament while the Government Securities Bills. the conservative accounting norms did not allow banks to recognise the unrealised gains. Impressive institutional and legal reforms have been undertaken in relation to the banking sector. Major amendments relate to the requirement of prior approval of the RBI for acquisition of five percent or more of shares of a banking company with a view to ensuring ‘fit and proper' status of the significant shareholders. at five percent of their investment portfolio under the categories ‘held for trading' and ‘available for sale'. urban co-operative banks and primary dealers. guidelines for mergers between private sector banks have been issued a few days ago. provides direction on a continuing basis on regulatory policies including governance issues and supervisory practices. development finance institutions.e. towards interest rate risk. the minimum capital to risk assets ratio (CRAR) has been kept at nine percent i. 7. Simultaneously.Business. are to be placed in the public domain. the banks are required to maintain a separate Investment Fluctuation Reserve (IFR) out of profits. 2004 is under process. in harmonising the role and operations of the DFIs were examined and the RBI enabled the reverse-merger of a large DFI with its commercial banking subsidiary which is a major initiative towards universal banking. Certain amendments are being considered by the Parliament to enhance the Reserve Bank's regulatory and supervisory powers. aligning the voting rights with the economic holding and empowering the RBI to supersede the Board of a banking company.

6. Monetary and Cr edit Policy 4. distribution of income and wealth in accordance with what society considers as ‘fair' or ‘just' distribution.1 Fiscal Policy There are three major functions of a fiscal policy: i) The allocation function of budget policy. Directors are also required to sign a covenant indicating their roles and responsibilities. On the other hand. Fiscal reforms in the States were. The regulatory framework in India.6 An Intr oduction to Fiscal. The stabilisation function of budget policy. The distribution function of budget policy. • 41/MITSDE .The Financial System 8. inter alia. in the case of states. It is a process by which the total resources are divided between private and social goods and by which the mix of social goods is chosen. ii) iii) Fiscal Refor ms in India While the move towards fiscal adjustment was discer nible in the pronouncements made as a part of long term fiscal policy announced in the mid 1980s. a comprehensive fiscal reform programme at the Central Government level was initiated only at the beginning of the 1990s as part of the economic adjustment programme initiated in 1991-92. Introduction of reform-linked assistance as a part of Medium term Fiscal reform programme on the basis of the recommendations of the Eleventh Finance Commission. efforts towards fiscal adjustments began only in the late 1990s. The transfer of a shareholding of five percent and above requires acknowledgment from the RBI and such significant shareholders are put through a ‘fit and proper' test. in addition to prescribing prudential guidelines and encouraging market discipline. is increasingly focusing on ensuring good governance through "fit and proper" owners. directors and senior managers of the banks. that is maintaining high employment. Banks have also been asked to ensure that the nominated and elected directors are screened by a nomination committee to satisfy ‘fit and proper' criteria. the provision for social goods. The RBI has recently issued detailed guidelines on ownership and governance in private sector banks emphasising diversified ownership. a reasonable degree of price stability and an appropriate rate of economic growth. that is. with due consideration of its effects on trade and the balance of payments. that is. cushioning the valuation losses required to be booked when interest rates in the longer tenors have moved up in the last one year or so. Introduction Credit 4. which was linked to borrowing from multilateral agencies. necessitated by: • Growing fiscal imbalances • • Sluggishness in central transfers resulting in falling tax to GDP ratio. Adjustment programme taken in some of the states.

Business. Rationalisation attempted has widened the tax base and improved tax revenues substantially during the year 2003-04.5 percent in 1991-92. Progr ogress refor Pr ogr ess chart on tax r efor ms In 2002-03.75 percent to 57. the system should become more income elastic. In the area of personal income tax. reforms have succeeded in establishing a regime of moderate tax rates. Chelliah. India ranked 50th out of a total of 75 countries ranked in the GCR on corporate income tax rates in 2001. However. which compare well with other countries. especially on the administration front. 1. and central excise. the GOI had set up another committee to review fiscal reforms and suggest an appropriate framework under the chairmanship of Mr. has been unified and reduced to 35 percent. the committee postulated that the reforms should be fully or at least. The rate of corporation tax on Indian companies. the tax structure in India still remains very complicated with high rates of taxation with regard to both direct and indirect taxes. 42/MITSDE . T ax Refor ms The blueprint for tax reforms in India was provided by the Tax Reforms Committee (TRC)(1994) headed by R. Experience in other countries shows that a shift to VAT would help improve revenue generation but this is not possible in India due to federal pressures. Vijay Kelkar. i) ii) iii) iv) reduction of rates of all major taxes. widening of bases of all taxes by removing or curtailing exemptions and concessions. is under way. drastic simplifications of the laws and procedures. however. which varied from 51. As per the GCR 200102. Replacement of the existing taxes on domestic production and trade by a Value Added Tax (VAT). Several of the recommendations of the TRC have been implemented while action on some. depending upon the nature of the company. nearly revenue neutral in their totality. a thorough revamping and modernisation of the administration. Corporate tax rates are still quite high in India despite the reductions announced in the Union budget for foreign companies. Regarding the revenue objective. restructuring of PSUs and better co-ordination between monetary and fiscal policies. Government. customs. and Society Fiscal reforms at the Centre covered tax reforms. income tax. expenditure pruning. The following goals were enunciated by the committee.J. The current thinking is of widening the Service Tax in the indirect tax portfolio to make a significant contribution to the revenue stream. While progress has been made in the area of tax reforms. The maximum rate of personal income tax has come down from 56 percent at the start of the reform to 30 percent. Chief Economic Advisor. viz.

Between development and non-development expenditure. the fiscal system cannot absorb such subsidies. he had also indicated that in order to carry out the process of downsizing in a systematic way towards reducing the role and the administrative structure of the Government. in fact. Education and Health expenditure: The government in India spends relatively more on education than on health. an Expenditure Reforms Commission headed by an eminent and experienced person would be constituted. While proposing certain initiatives in this regard. These are defence. 43/MITSDE . the volume of subsidies given has been accelerating with time mainly because of vested political interests. In the eighties. i) Defence expenditure: Since Independence the defence budget of India has accounted between 1 to 4 percent of GDP and between 10 to 16 percent of total government expenditure. Beyond a point. Overprotection through subsidies has prevented the potential competitiveness of the system from being realised. The share of Government expenditure in GDP in India is five percentage points above the average of the low income countries. the share of Government expenditure in GDP has increased from 10 percent to about 35 percent. employment and wages. which could be used to buy down the public debt. the Hon'ble Minister for Finance had observed that the high rate of growth of non-developmental expenditure by the Government is a growing and critical source of concern. Public Expenditure There are four broad categories of public expenditure in India. However the distinction between development and nondevelopment expenditure as used in of ficial publications has no special significance in economics. there was no noticeable acceleration. however. Not only would the stock of debt itself be reduced. The growth has been more or less uniform in all decades. In the four and a half decades of economic planning in India. except in a broad sense. but also the interest costs of servicing the debt would surely decline as the debt stock itself was brought under control. Internal public debt: Privatisation of public enterprises could raise significant funds as a percent of GDP. Expenditures on education and health vary widely between the states with southern states like Kerala spending relatively more on education.The Financial System 2.9 percent of GDP in 2001-02. the total defence expenditure in India as a proportion of either GDP or total Government expenditure would be much lower than that of some of our principal adversaries like Pakistan and China. He had further observed that the most effective and lasting solution to this problem is to begin the process of downsizing the Government. Subsidy: Unfortunately. Interest payments alone accounted for as high as 4. education. However. and subsidies. ii) iii) iv) Balance sheet of public expenditure i) While presenting the Budget for 1999-2000. the former has increased relatively faster than the latter. health.

The targeted GDP growth seems to be achievable. Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) help in providing funds to the IDBI and its downstream development financial institutions (IFCI. The RBI foresees rising global crude oil prices and large liquidity in markets as major concerns. In the sphere of raising literacy levels and providing greater access to basic health services.5 To 7 Percent. But this is unlikely to continue for long because the subsidy provided by the Government of India will increase the fiscal deficit. This will have a significant impact on inflation. SFCs. it is important to increase government expenditure in important areas. The recent development on the political front indicates stable fuel prices in the country. and provide greater resources for. The target seems achievable in the current scenario considering the growth rates that have been witnessed across various sectors and industries. the central Bank of a country controls the money supply and thereby stability of prices. the state governments are required to play a much more enlarged role. Government. normal monsoon and good performance of exports. The global crude oil prices are at their historic highs.) at lower rates of interest for term lending. It is believed that inflation will spur once fuel prices are hiked in the country. and Society ii) Accordingly. With the global demand for commodities picking up. It has also revised the GDP growth for the FY04 at 8. an ERC was constituted and by now it has given ten reports on rationalising government expenditure. Outlook of the Monetary and Credit Policy for 2005 Projected Real GDP Growth Rate Of 6.6. at the same time. etc.1 percent as against 4 percent in FY03.0 percent real GDP growth during FY05 on account of sustained growth in the industrial sector.5-7. The government needs to give greater attention to. Liquidity ratios in particular. The RBI has an optimistic outlook on the Indian economy and expects to achieve 6. Interest Rates 44/MITSDE . While it will be necessary to reduce government expenditure by cutting non-essential expenditure.Business.2 Monetary and Cr edit Policy The major instruments of a country's monetary policy are: a) Bank Rate b) Liquidity Reserve Ratio. experts expect strong growth to continue in the industry and services sector. education and health. c) Open Market Operations By operating on these three parameters. Credit 4. ICICI. Inflation The RBI plans to keep inflation stable at around 5 percent in FY05.

Credit Cr edit Of ftake The RBI has estimated a strong credit growth of 16-16. The surge in retail growth was mainly on account of lower prices and availability of cheap money.5 percent during FY05. Mr. Clearly. reforms were carried out in the primary and secondary markets. “building a higher level of foreign exchange reserves taking into account anticipated current account deficit and ‘liquidity at risk' arising from capital movement has been a top priority”. This could be an indicator for higher interest rate going forward. Even the chairman of the US Federal Reserve. The current account of balance of payments remained in surplus consecutively during FY03 and FY04 and expects a similar trend in FY05 as well. Allan Greenspan has stressed strongly on hardening of the US interest rate. stability in prices and macroeconomic activities. which is likely to have a significant impact on Indian interest rates. the policy expects to maintain the growth momentum.5 percent respectively. Cash Reserve Ratio (CRR) and Repo Rate are kept unchanged at 6 percent. Emergence of the Left Parties as a strong group in the new government is expected to annoy overseas investors and may cap Foreign Direct Investment in India. Along with this. Non-food credit accounts for 90 percent of bank credit. 4. These global forces will also have a significant impact on Indian interest rates in the long-term. Benchmark interest rate such as Bank Rate. Globally. piggybacking a strong 18. Banking sector reforms were carried out in order to improve the profitability of banks and also to tune them towards their new found role of competing in an atmosphere of competition.5 percent and 4. Summing Up The wave of financial reforms introduced many new kinds of instruments in the money and capital markets.6 percent increase in housing and retail sector lending.The Financial System The RBI has indicated stable interest rates in the current scenario. However.6 percent during FY04. The RBI's stance has changed from a soft bias to neutral in the current credit policy. as on September 2005. Forex For ex Reserves The RBI has maintained that. Developing Asian countries like Philippines and Indonesia have a much higher interest rate vis-a-vis India. 45/MITSDE . interest rates are on a rising spree. This gave a lot of momentum to funds transfer and hence impacted the profitability of enterprises. the country is sitting comfortably on a huge foreign kitty that currently stands at a whopping US$145 bn. The plight of foreign money going out of Indian shores will have a negative impact on rupee value. The buy back ordinance was one major step to give a boost and also the required security to primary and secondary markets. The current Monetary and Credit Policy has pegged non-food credit growth at 17.

no matter how simple or complex. ___ Bond is an instrument whose periodic interest /dividend rates are indexed to some reference index such as Treasury Bills etc. with an agreement to _______ at a predetermined __________ and rate. is to promote efficiency in the process of ___________ in real goods and services.Business. 5. 7. The introduction of Commercial Paper (CP) in January 1990 as an additional money market instrument was the first step towards _____ of commercial banks advance into marketable instruments. 2. In the four and a half decades of economic planning in India. Government. 4. Self -assessment 1. Since Independence the _____________ budget of India has accounted between 1 to 4 percent of GDP and between 10 to 16 percent of total government expenditure. Taxation was sought to be revamped in a major way along with rationalisation of expenditure. the share of Government expenditure in GDP has increased from ________ percent to about _______ percent. Thus a two pronged strategy aiming at both fiscal and monetary policy tools sought to stabilise inflation. 8. 10.5-7. and Society Fiscal reforms were carried out to remove impediments to business and improve the efficiency of governance. improve the accountability of public expenditure and increase growth was adopted. The fundamental function of any monetary and financial system. 6. The blueprint for tax reforms in India was provided by the Tax Reforms Committee (1994) headed by __________. a holder of securities sells them to an investor. 3. normal monsoon and good performance of exports. Under a repo transaction. 46/MITSDE . The major objective of the buyback ordinance was to _____the capital markets and protect companies from _____takeover bids. The volatility in the call money rates has also been the result of the _________ mismatches of some large banks and their over reliance on call money market for liquidity management.0 percent real GDP growth during FY05 on account of sustained growth in the __________ sector. The RBI has an optimistic outlook on the Indian economy and expects to achieve 6. 9.

By virtue of the fact that democracy has evolved over time (and is still continuing to in some respects).The Political System Chapter V The Political System Learning Lear ning Objectives Reading this chapter would enable you to understand • The origin of democracy in the world • Parliamentary and presidential forms of democracy • Direct and Indirect forms of democracies • A peep into the constitutional reforms of India • A peep into judicial reforms in India Contents 5. Democracy had (and for some people still has) the meaning of equality in decisions and of elections in decisions. First. not the election of persons charged to decide (see representative democracy). to describe the revolutionary system of government. the ancients did not consider such a system a democracy but an oligarchy.1 Evolution and History of Democracy 5.5 Constitutional Reforms 5. women.2 Parliamentary and Presidential Forms of Democracies 5.4 Direct Democracy: An Experience 5.5. the Athenian democracy's principle was selection by lot. participation is limited to voting. resident alien groups that together made up a majority of the city's population had no rights to participate in the assembly. One of the reasons why this system was feasible was because of the relatively small population of Athens-only 300. Citizenship rights were limited strictly to male adult citizens of Athens. The Athenian democracy provides an example of the first democracy. there were severe restrictions that dictated who had the right to participate as a citizen.1 Controversy Regarding Constitutional Reforms 5. there are a few key differences between the Athenian democracy and democracies which exist today. foreigners. An assembly of all male citizens in Athens participated in decision-making directly (compare direct democracy).3 Direct and Indirect Forms of Democracies 5. Voting itself is usually 47/MITSDE .000 people. modern democracy has its own limitations in comparison to the ancient model. On the other hand. slaves. Elected officials did not determine decisions. children.1 Evolution and History of Democracy The word democracy was invented in Athens. Therefore. as for most citizens.6 Judicial Reforms in India Summing Up Self-assessment 5. Additionally. and one of the most important in ancient times. which excluded over half of the total population.

which. the following formal differences can be noted: • The American president and the members of Congress are elected during separate elections.with the exception of the vice-president. however. power is transferred to state the the classic parliamentary system of government . even when the possibility of differing coalitions exists. even though Athens had previously encouraged democracy in her allies and dependent states. Government. • • • 48/MITSDE . although the Roman republic elected its leaders. While the British prime minister . she was no longer in a position to do so. The Romans favoured similar systems in the states they controlled. the parliament also has the power to vote the government out of office. While most other western European countries have this form of political system. perform the acts of state in the name of the people. in turn.the parliamentary system of government. that the president lacks an important means of keeping discipline in Congress. and Society limited to once every several years. who is also the chairman of Congress . Only if the president commits a criminal of fence. the Periclean democracy was restored in less than a year. The president is unable . the government and members of parliament are elected in a single election. can the House of Representatives and Congress force the president out of office following a vote on impeachment and a two-thirds-majority vote respectively. democracy in the United States is based on a presidential system. Presidential Forms 5. Instead. The Congress cannot force the president out of office. The president and the members of his/ her government . In a parliamentary system of government. Democracy declined. and passed its laws by popular assemblies. for instance. and voters merely get to choose their representatives in the legislative or executive branches (with the exception of occasional referendums). In comparison. Parliament elects the government in a parliamentary system. The British parliament in London is regarded as the home of the most common type of constitutional system .unlike the British prime minister .to dissolve parliament and order new elections. However. the system had been effectively gerrymandered in the interest of the rich and well-born. Under normal circumstances the American Congress does not have the power to remove the president from also a member of parliament. however. the American constitution demands incompatibility between the government office and parliamentary mandate. This means.cannot be members of Congress. After the fall of Athens.Business. because it holds a different opinion or because the ruling majority in Congress has changed. When making a comparison between the presidential and parliamentary systems of government.2 Parliamentary and Pr esidential For ms of Democracies People do not exercise power directly in representative forms of democracy such as the parliamentary and presidential systems of government.

However. and this despite the fact that direct democracy does play a large role. the plebiscite elements are only slightly weaker.4 Direct Democracy: An Experience Switzerland is often seen as an example of direct democracy. however. In the United States. The constitution of the Swiss Confederation was written in 1848 (revised in 1874) and recognises the Federal Assembly as the highest-ranking state body. the Federal Council.but not in constitutional reality .is elected by the Federal Assembly for a four-year term. The real power of government is reserved for the head of government. this claim cannot be maintained. whose members remain in of fice for an extended period. can be overruled with a two-thirds-majority vote in both houses of Congress. The president is only permitted to veto legislative initiatives from the Congress.prevented from introducing legislative initiatives. Control over both parliament and the government is the job of those entitled to vote. The Assembly is made up of the National Assembly (lower house) and the Council of States (representatives of the cantons). all important issues are settled through the process of plebiscite or referendum. the government has developed into the most important of the three state powers.the government . though has introduced the system of recall at its Panchayati raj level. Its position vis-à-vis the Federal Assembly is not very strong. especially in the form of the canton referendums. The president of the United States is formally . The Federal Council (Budesrat) . It means that the elected representative can be recalled any time the electorate feels that he or she is not up to the mark. Most of the countries have the Indirect kind of democracy. Also. The electorate not only chooses its representatives but also decides important issues by means of referenda. however.3 Dir ect and Indir ect For ms of Democracies A Direct democracy is one which gives provisions for recall and plebiscite. Federal legislation may also be made subject to referenda. The president's veto. Because the Federal Council has no powers to dissolve the Federal Assembly and the Federal Assembly cannot vote the government out of of fice. • Direct Indirect 5. If the representative elements of the Swiss constitution are strong. In constitutional reality.The Political System • The job of the executive is split in a parliamentary system of government. On taking a closer look.000 voters and must be ratified by referenda. Constitutional amendments may be initiated by a petition of 50. however. and mirroring other democratic systems closely. The Swiss constitution awards the greatest importance to parliament. chancellor or premier. India. this is a costly approach and not possible in large economies or countries. Representative duties of state are performed by the state president or monarch. In a parliamentary system the government may introduce legislation and sometimes has an absolute right to veto expenditure laws. actually has a strong position in constitutional reality. 5. an integral part of the Swiss government. the president is both head of state and head of government. the prime minister. in contrast. 49/MITSDE . that is.

Advani points out that while free and fair elections are fundamental to democracy. the BJP has been advocating radical changes in India's constitutional framework with Lal Krishna Advani. The 1991 election manifesto of his party also promised to abrogate • • 50/MITSDE . 6. Parliamentary democracy Electoral reforms Centre-state relations Enlargement of Fundamental rights Effectuation of fundamental duties of citizens Directive Principles of State Policy. These direct elements in the Swiss constitution have become long-lasting rather than leading to revolution or chaos. which the country has been following since it became independent in 1947. 7. The objective was to review the Constitution “in the light of the experience of the past 50 years” and to develop recommendations for changes that can meet the requirements of an “efficient. representative bodies are essential."pouvoir constituant" . Advani was vocal in demanding a fixed term of five years for Parliament to offset the legacy of rickety coalitions. 2. The Swiss electorate has more direct political influence and more possibilities open to it for controlling government than any other democracy. as in Germany.1 Contr oversy Regar ding Constitutional Refor ms • For more than a decade. in order for the government and political system to work properly. the American type of Presidency would be more efficient in India's political milieu than the Westminster model of parliamentary democracy. and Society Unlike Germany's experience with direct democracy between 1918 and 1933 during a period referred to as the Weimar Republic. which has seen seventysix amendments in five decades of its life compared to twenty-one amendments of the American Constitution since 1787. 3. can demonstrate the legislative strength to provide an alternative. 5.5. smooth and effective system of governance and socioeconomic development of a modern India. the Union government of India created a National Commission to review the working of its Constitution. the then Union Home Minister. the doctrine of “basic structure” of the Constitution does not bind India to the existing parliamentary scheme. The belief that all democratic power is derived from the people . 4. 5. He also wanted that Parliament should admit a motion of no confidence against an existing government only if the mover. According to him.5 Constitutional Reforms Refor ms In Febr uary 2000.” The commission was supposed to review the working of the constitution in the following areas: 1.has been realised most sharply in Switzerland. Government. elements of direct democracy in the Swiss constitution have proved sustainable. and Socio-economic Development Controversy Regarding Reforms 5.Business. leading the campaign for a switch-over to a presidential system of governance. Nonetheless.

also a more genuine political representation. As is evident . At least 20 percent of the legislators should be elected indirectly from universities and other professional bodies to improve the quality of legislative work. while the Union government groomed an alternative leader. This he can do on the satisfaction that a State government is unable to function in accordance with the provisions of the Constitution. Between 1970 and 1974. As such they have created a controversy of sorts. as in France. Some of the other suggestions made for reforms are: • Electoral reforms are urgent. the aforementioned reforms are reflections of the ideals of a particular political party. He was forced to resign. The Chief Minister Bhargava did not favour Nehru's policy to suppress the Sikh agitation for a linguistic reorganisation of Punjab. The Constitution should be amended to permit the leader of the government to take Ministers on his Council from outside Parliament. President Rajinder Prasad was unhappy. without impairing the principle of collective responsibility to the legislature. President's rule was proclaimed to keep the State Legislative Assembly in suspended animation. He told Nehru that the situation in Punjab did not justify the use of Article 356 and the intervention set “a very bad and a very wrong precedent…”Nehru was not impressed. In 1951. The legislators. That would ensure stability. Article 356 allows the President of India to assume all the powers of the State governments through the office of the Governor. Because of such abuse of the aforementioned article. the need for reforms is felt only by a few political parties and the essence of this need is not all pervasive. In all. The pretext was the “deterioration of public order”. when it came under the Communist Party's government with EMS Namboodaripad as the Chief Minister. seven State governments run by political parties inimical to the Congress government at the Centre were dismissed.The Political System Article 370 of the Constitution that confers limited autonomy to Jammu and Kashmir. the State government of Tamil Nadu was toppled on the ground that it did not implement the Central directive to censure the press and to detain members of the opposition political parties. a deterioration engineered by the Union government. nineteen State governments were so subverted. on nomination to the Council of Ministers. In fact. nearly all the states feel that Article 356 be scrapped. • • 51/MITSDE . as in Japan. should resign from the houses to which they are elected. and to place their legislatures under the authority of Parliament. India should switch over to at least a partial proportional representation in Parliament. During Indira Gandhi's experiment with dictatorship from June 1975 to March 1977. and to modify Article 30. The next State to suffer the abuse was Kerala in 1959. From 1967 to 1969. which permits India's minority communities to run their own educational and cultural institutions. the Union has used Article 356 more than 120 times to interfere in the affairs of the States. so that they do not waste their time and resources on politicking and pandering to local constituencies. The Congress is of the opinion that there is no need for reviewing the constitution as the process of amendment allows much flexibility to the executive and the legislature. Punjab became the first victim.

like land revenue. vertically and horizontally. the regime of controls. It has the potential to provide opportunities to the local democracy of citizenship. nearly all public sector enterprises continuously incurred staggering losses. Economic development in the States was further stunted by the Central monopoly of key industries although Entry 24 in the States' List of the Constitution placed industry as a State Subject. disparities of regional development. through decentralisation of information and technology. Inevitably. interest payments and discharging other non-productive liabilities. the Union assumed monopoly over key defence industries. and Society In Part XII of the Constitution. The structures of authority have to give way. A revision in the Industrial Policy Resolution of 1955 transferred the remaining important sectors including oil.5 per cent and the States only 28. and by creating local units of human associations to link up with planetary processes. etc. 5. foreign relations. the Centre reserved for itself the power to impose the most remunerative and elastic of taxes by arguing that it needed finances to fulfil its responsibilities for defence. The statutes.6 Judicial Refor ms in India The Indian Judicial system is badly in need of reforms. 52/MITSDE . machine tools. Government. It is common belief that law has not kept pace with the changes in society the last century. Conclusion Today. their tax base began to shrink rapidly. and the absence of accountability. Decentralisation of political power downwards. International competitiveness that does not care for the strengthening of community infrastructure. amended ten times since then.laws are archaic and based on ancient principles of law. This meant that the Union alone could grant licences. Moribund resources. local employment and environment will destroy what little meaning to democracy there remains in a country that has joined the race very late.5 percent. But for this to happen. Of the combined aggregate resources during the period 1951-85. The Union's resources were squandered on defence.Business. The Act. were left to the provinces. to the sovereignty of political engagement that alone can make the community of experts conscious of local needs. It is widely acknowledged that globalisation is a double-edged process. places 171 items divided into 38 different categories. electricity. regulate production and distribution of these items. under Central control. laws and by. With all its talk about planning and the efficiency of central control. The Industries Development and Regulation Act 1951 took further 37 items away. All this has created much heartburn among federal units and therefore all of them feel that there is need for reforms in this area. the Union government raised 71. consolidation of international networks for co-operation in the fields of knowledge and diffusion of responsibility to the civil society are the preconditions for the process of globalisation to be beneficial to all. Through the Industrial Policy Resolution of 1948. India's economy seems to have moved irreversibly in the direction of globalisation and open market even as the vast masses of people remain trapped in abysmal levels of poverty. fertilisers and dr ugs from the States to the Centre. illiteracy. the arrangements of governance have to harmonise with the heterogeneous and autonomous character of the initiatives.

The Speedy Justice Mechanism and local justice models . certain articles and provisions like article 356 have been sought to be changed. This Indian constitution is in dire need of reforms.The best practices in speedy justice models (such as the small claims courts in the US) in various countries should be studied. Switzerland is an example of Direct Democracy.The Political System Urgent Judicial reforms are warranted in the following areas: 1. Judicial appointments and accountability mechanisms . USA is an example of the presidential form of democracy whereas UK is an example of the parliamentary form of democracy. the review should also come up with recommendations to make appropriate changes to the law in India. US. Adversorial vs. a set of best practices suitable to Indian conditions should be recommended. Concomitant to constitution reforms are the judicial reforms which are yet much warranted in India. Also. Inquisitorial systems of justice. France and newly emerging democracies such as South Africa. 53/MITSDE .the prevailing process for judicial appointments and regulations in India should be evaluated in the light of the experience over the past 50 years. There has been an advocacy to move towards a presidential system of governance. 3.e. Particular emphasis should be on countries such as UK. critically analysed and documented. Based on the outcome of the study. Experiences in each of these countries and the pros and cons of their systems should be critically analysed. Justice Systems : In reviewing Justice systems. India is basically an indirect and parliamentary form of democracy. Keeping in view global practices and the Indian experience of the past 50 years. There have been controversies regarding different aspects of reforms. Unlike UK where parliament is the supreme or USA where Judiciary is the supreme. The Athenian democracy provides an example of the first democracy. Self-assessment 1. The pros and cons of the various judicial systems should be critically analysed. Crime Investigation Mechanisms .mechanisms to reform the crime investigation machinery in India in order to insulate them from political control and restore public faith in the criminal justice system and rule of law. 4. Summing Up Democracy is a form of government which belongs to the people. what is supreme is the constitution. Direct democracy is one which has a system of recall. 2. particular emphasis should be given to contrasting the two leading judicial schools of practice i. compared. The word democracy was invented in _______. to describe the revolutionary system of government used. Indian constitution makers thought it was better to keep the constitution the supreme. In India. Germany. being elected by the people and for the people.

the Centre reserved for itself the power to impose the most remunerative and elastic of taxes by arguing that it needed finances to fulfil its responsibilities for defence.the __________ system of government. A Direct democracy is one which gives provisions for _________ and _________. In all. the Union has used Article 356 more than _________ times to interfere in the affairs of the States. etc. Government.Business. 4. 54/MITSDE . Article 356 allows the President of India to assume all the powers of the State governments through the office of the Governor. and Society 2. and to place their legislatures under the authority of __________. In Part ________ of the Constitution. 3. foreign relations. The British parliament in London is regarded as the home of the most common type of constitutional system . 5. 6.

5 Agreement on Textiles and Clothing 6.7 General Agreement on Trade Related Aspects of Intellectual Property Rights 6.16 Corruption Perception Index 6.5 Agreements under WTO 6.1 WTO: A negotiating Forum 6.2 Agriculture and WTO 6.14 Foreign Exchange Management Act Agreement on Trade Related Investment Measures 6.2 WTO: A system of rules Agreement on Sanitary and Phytosanitary Measures 6.4 Principles of WTO 6.1 GATT and WTO 6.1.International Linkages Chapter VI Inter national Linkages Learning Lear ning Objectives Reading this chapter would enable you to understand • Transformation of GATT into WTO • Nature of WTO • Principles of WTO • Agreements under WTO • Agriculture and WTO • TRIPS • TRIMS • Subsidies • Government Procurement • Dispute settlement • An understanding of the Foreign Exchange Management Act • An understanding of the Global Competitive Index • An understanding of the Corruption Perception Index • An understanding of the Index of Economic Freedom Contents 6.17 Index of Economic Freedom Summing Up Self-assessment 55/MITSDE .15 Global Competitive Index 6.4 Agreement on Technical Barriers to Trade 6.9 Agreement on Safeguards from Imports 6.13 Imposition of Penalties 6.3 WTO: A dispute settlement body 6.8 Agreement on Subsidies and Countervailing Measures 6.12 Settlement of Disputes 6.1 Enforcement of TRIPS 6.11 Agreement on Government Procurement 6.6 General Agreement on Trade in Services 6.

Government. 3. often need interpreting.1 WTO: A negotiating For um Essentially. countries cannot normally discriminate between their trading partners. Intellectual Property rights. In other words. Agriculture and Services. 6.4 Principles of WTO 1. the rules have to be “transparent” and predictable. The same should apply to foreign and domestic services. The WTO (World Trade Organisation) came into being as a result of the Uruguay round of negotiations (1986-94) on 1st January 1995 and its head office is located at Geneva. The latest Uruguay Round of Multilateral negotiations brought in some major trade reforms. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation.Under WTO agreements. The first step is to talk. copyrights and patents. The WTO was born out of negotiations. 146 countries were members. Four new areas were included.1 GATT and WTO GATT(General Agreement on Tariffs and Trade) was an agreement on tariffs and its primary concern had been negotiations on matters related to trade policy and tariff restrictions.2 WTO: A system of r ules The system's overriding purpose is to help trade flow as freely as possible so long as there are no undesirable side-effects. Freer Trade through Fr eer T rade thr ough negotiations: Lowering trade barriers is one 2. Foreign Investment Policies. As of 4th April. and to foreign and local trademarks. 2003. and everything the WTO does is the result of negotiations.1. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.Business. companies and governments know what the trade rules are around the world. That is the purpose behind the dispute settlement process written in the WTO agreements.1. 6.3 WTO: A dispute settlement body Trade relations often involve conflicting interests. and Society 6. It also means ensuring that individuals. 56/MITSDE . Most-favoured-nation (MFN): treating other people equally . 6. i. the Uruguay Round. and giving them the confidence that there will be no sudden changes of policy.1.1. the WTO is a place where member governments try to sort out the trade problems they face with each other. treatment: National treatment: Treating foreigners and locals equally. The Eighth Round. 6. That partly means removing obstacles.e. was a break from the past with widening scope for negotiations. Agreements. The General Agreement on Trade and Tariff has culminated into the World Trade Organisation.Imported and locally-produced goods should be treated equally at least after the foreign goods have entered the market. including those painstakingly negotiated in the WTO system..

developing countries and transition economies were much more active and influential in the Uruguay Round negotiations than in any previous round. refor Encouraging development and economic r efor m: Over three quarters of WTO members are developing countries and countries in transition to market economies. the commitments state how much access foreign service providers are allowed for specific sectors. For GATT. From time to time other issues such as red tape and exchange rate policies have also been discussed.) extra agreements and annexes dealing with the special requirements of specific sectors or issues. schedules (or lists) of commitments made by individual countries allowing specific foreign products or service-providers access to their markets. The multilateral trading system is an attempt by gover nments to make the business environment stable and predictable. For GATT. services and intellectual property). also falls into this category although at present it has no additional parts. investment is encouraged. annexes.5 Agreements under WTO The table of contents of “The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts” is a daunting list of about 60 agreements. and they are even more so in the current Doha Development Agenda. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively.1.International Linkages of the most obvious means of encouraging trade.2 Agriculture and WTO 57/MITSDE . 4. dispute settlement. Predictability through commitment and transparency: Sometimes. over 60 of these countries implemented trade liberalisation programmes autonomously. (The third area. and combinations of tariffs and quotas for some agricultural goods. Trade-Related Aspects of Intellectual Property Rights (TRIPS). With stability and predictability. 5. these take the form of binding commitments on tariffs for goods in general. During the seven and a half years of the Uruguay Round. and they include lists of types of services where individual countries say they are not applying the “most-favoured-nation” principle of nondiscrimination. 6. because the promise gives businesses a clearer view of their future opportunities. the agreements fall into a simple structure with six main parts: an umbrella agreement (the Agreement Establishing the WTO). jobs are created and consumers can fully enjoy the benefits of competition choice and lower prices. and reviews of governments' trade policies. agreements for each of the three broad areas of trade that the WTO covers (goods. promising not to raise a trade barrier can be as important as lowering one. • broad They start with br oad principles: the General Agreement on Tariffs and Trade (GATT) (for goods). and the General Agreement on Trade in Services (GATS). • • 6. In fact. At the same time. decisions and understandings.

Business, Government, and Society

The original GATT did apply to agricultural trade, but it contained loopholes. For example, it allowed countries to use some non-tariff measures such as import quotas, and to subsidise. Agricultural trade became highly distorted, especially with the use of export subsidies which would not normally have been allowed for industrial products. The Uruguay Round produced the first multilateral agreement dedicated to the sector. These were launched in 2000, as required by the Agriculture Agreement. The new rules and commitments under the Agriculture Agreement are: • Market Access - The new r ule for market access in agricultural products is “tariffs only”. Before the Uruguay Round, some agricultural imports were restricted by quotas and other non-tariff measures. These have been replaced by tariffs that provide more-or-less equivalent levels of protection if the previous policy meant domestic prices were 75 percent higher than world prices, then the new tariff could be around 75 percent. Domestic Support - Green, Amber and Blue Box categories i) Amber box - Domestic policies that do have a direct ef fect on production and trade have to be cut back. WTO members calculated how much support of this kind they were providing per year to the agricultural sector (using calculations known as “total aggregate measurement of support” or “Total AMS”) in the base years of 1986-88. Developed countries agreed to reduce these figures by 20 percent over six years starting in 1995. Developing countries agreed to make 13 percent cuts over 10 years. Least-developed countries do not need to make any cuts. This category of domestic support is sometimes called the “amber box”, a reference to the amber colour of traffic lights, which means “slow down”. ii) Green box - Measures with minimal impact on trade can be used freely they are in a “green box”. They include government services such as research, disease control, infrastructure and food security. They also include payments made directly to farmers that do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture, and direct payments under environmental and regional assistance programmes. iii) Blue box - Also permitted, are certain direct payments to farmers where the farmers are required to limit production (called “blue box” measures), certain government assistance programmes to encourage agricultural and rural development in developing countries, and other support on a small scale when compared with the total value of the product or products supported (5 percent or less in the case of developed countries and 10 percent or less for developing countries). Export Subsidies The Agriculture Agreement prohibits export subsidies on agricultural products unless the subsidies are specified in a member's lists of commitments. Where they are listed, the agreement requires WTO members to cut both the amount of money they spend on export subsidies and the quantities of exports that receive subsidies. Taking averages for 1986-90 as the base level, developed countries agreed to cut the value of export subsidies by 36 percent over the six years starting in 1995 (24 percent over 10 years for developing countries). Developed


International Linkages

countries also agreed to reduce the quantities of subsidised exports by 21percent over six years (14 percent over 10 years for developing countries). Least-developed countries do not need to make any cuts. Least Developed Countries dependant on food imports Under the Agriculture Agreement, WTO members have to reduce their subsidised exports. But some importing countries depend on supplies of cheap, subsidised food from major industrialised nations. They include some of the poorest countries, and although their farming sectors might receive a boost from higher prices due to reduced export subsidies, they might need temporary assistance to make the necessary adjustments to deal with higher priced imports, and eventually to export. A special ministerial decision sets out objectives, and certain measures, for the provision of food aid and aid for agricultural development. It also refers to the possibility of assistance from the International Monetary Fund and the World Bank to finance commercial food imports.

Agreement Measures 6.3 Agr eement on Sanitary and Phytosanitary Measur es This is a separate agreement on food safety and animal and plant health standards. It allows countries to set their own standards. But it also says regulations must be based on science. They should be applied only to the extent necessary to protect human, animal or plant life or health, and they should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail. Member countries are encouraged to use international standards, guidelines and recommendations where they exist. However, members may use measures which result in higher standards if there is scientific justification. They can also set higher standards based on appropriate assessment of risks so long as the approach is consistent, not arbitrary. They can to some extent apply the “precautionary principle”, a kind of “safety first” approach to deal with scientific uncertainty. Article 5.7 of the SPS Agreement allows temporary “precautionary” measures. Agreement Technical Trade 6.4 Agr eement on T echnical Bar riers to T rade The Technical Barriers to Trade Agreement (TBT) tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles. The agreement recognises countries' rights to adopt the standards they consider appropriate, for example, for human, animal or plant life or health, for the protection of the environment or to meet other consumer interests. Moreover, members are not prevented from taking measures necessary to ensure their standards are met. In order to prevent too much diversity, the agreement encourages countries to use international standards where these are appropriate, but it does not require them to change their levels of protection as a result. 6.5 Agreement on Textiles and Clothing Since 1995, the WTO Agreement on Textiles and Clothing (ATC) has taken over from the Multifibre Arrangement. By 1 January 2005, the sector was to

Business, Government, and Society

be fully integrated into normal GATT rules. In particular, the quotas would come to an end, and importing countries would no longer be able to discriminate between exporters. The Agreement on Textiles and Clothing would itself no longer exist: it's the only WTO agreement that has selfdestruction built in. 6.6 General Agr eement on T rade in Services Agreement The agreement covers all internationally-traded services, for example, banking, telecommunications, tourism, professional services, etc. It also defines four ways (or “modes”) of trading services: • • • Cross Border Cross Border Supply or Mode 1 - services supplied from one country to another (e.g. international telephone calls) Consumption abroad or Mode 2 - consumers or firms making use of a service in another country (e.g. tourism) Commercial Presence or Mode 3 - a foreign company setting up subsidiaries or branches to provide services in another country (e.g. foreign banks setting up operations in a country) Presence of Natural Persons or Mode 4 - individuals travelling from their own country to supply services in another (e.g. fashion models or consultants) General Agreement on Trade Related Aspects of Intellectual Property Pr operty Rights


The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), negotiated in the 1986-94 Uruguay Round, introduced intellectual property rules into the multilateral trading system for the first time. The areas covered by the TRIPS Agreement are: • • • • • • • Copyright and Related Rights Trade marks including service marks Geographical indicators Industrial Designs Patents Layout designs (topographies) of integrated circuits Undisclosed Information including trade secrets

6.7.1 Enforcement of TRIPS The agreement describes in some detail how enforcement should be handled, including rules for obtaining evidence, provisional measures, injunctions, damages and other penalties. It says courts should have the right, under certain conditions, to order the disposal or destruction of pirated or counterfeit goods. Wilful trademark counterfeiting or copyright piracy on a commercial scale should be criminal offences. Governments should make sure that intellectual property rights owners receive the assistance of customs authorities to prevent imports of counterfeit and pirated goods. 6.8 Agr eement on Subsidies and Countervailing Measur es Agreement Measures This agreement does two things: it disciplines the use of subsidies, and it

ending on 31 of December 1999. This category existed for five years. The agreement defines three types of damage they can cause. or to use domestic goods instead of imported goods. Otherwise. If no agreement is reached the exporting country can retaliate 61/MITSDE . • Prohibited Prohibited subsidies: subsidies that require recipients to meet certain export targets. One country's subsidies can hurt a domestic industry in an importing country. and was not extended. They are prohibited because they are specifically designed to distort international trade. which expired at the end of 2003. except when the subsidies are exempt under the Agriculture Agreement's “peace clause”. Here. the subsidy must be withdrawn or its adverse effect must be removed. The agreement says the exporting country (or exporting countries) can seek compensation through consultations.International Linkages regulates the actions countries can take to counter the effects of subsidies. the injury has to be serious. or it can be an increase in the importers' share of a shrinking market. It says a country can use the WTO's dispute settlement procedure to seek the withdrawal of subsidy or the removal of its adverse effects. If the Dispute Settlement Body rules that the subsidy does have an adverse effect. and are therefore likely to hurt other countries' trade. They can hurt rival exporters from another country when the two compete in third markets. Otherwise the subsidy is permitted. Actionable subsidies: in this category the complaining country has to show that the subsidy has an adverse effect on its interests. The agreement defines two categories of subsidies: prohibited and actionable. Again. • Safeguards from 6. When a country restricts imports in order to safeguard its domestic producers. and domestic subsidies in one country can hurt exporters trying to compete in the subsidising country's domestic market. Or the country can launch its own investigation and ultimately charge extra duty (known as “countervailing duty”) on subsidised imports that are found to be hurting domestic producers. An import “surge” justifying safeguard action can be a real increase in imports (an absolute increase). it must be withdrawn immediately. The agreement applies to agricultural goods as well as industrial products. a countervailing duty can be imposed. if domestic producers are hurt by imports of subsidised products. in principle it must give something in return. They can be challenged in the WTO dispute settlement procedure where they are handled under an accelerated timetable. even if the import quantity has not increased (relative increase). a countervailing duty can be imposed.9 Agr eement on Safeguar ds fr om Imports A WTO member may restrict imports of a product temporarily (take “safeguard” actions) if its domestic industry is injured or threatened with injury caused by a surge in imports. It originally contained a third category: non-actionable subsidies. If the dispute settlement procedure confirms that the subsidy is prohibited. the complaining country can take counter measures. If domestic producers are hurt by imports of subsidised products.

11 Agreement Procur ocurement Agr eement on Gover nment Pr ocur ement In most countries the government. It includes measures which require particular levels of local procurement by an enterprise (“local content requirements”). For central government purchases of goods and services. It recognises that certain measures can restrict and distort trade. the threshold is SDR (Special Drawing Rights ) 130. regulations. and Society by taking equivalent action. the exporting country has to wait for three years after the safeguard measure is introduced before it can retaliate in this manner. the 62/MITSDE .e. An importing country can only apply a safeguard measure to a product from a developing country if the developing country is supplying more than 3 percent of the imports of that product. violates “national treatment” principles in GATT). It is designed to make laws. and the agencies it controls. In some circumstances. The agreement applies to contracts worth more than the specified threshold values. are together the biggest purchasers of goods of all kinds. or if developing country members with less than 3 percent import share collectively account for more than 9 percent of total imports of the product concerned. for instance. the political pressure to favour domestic suppliers over their foreign competitors can be very strong. procedures and practices regarding government procurement more transparent and to ensure they do not protect domestic products or suppliers or discriminate against foreign products or suppliers. 6. ranging from basic commodities to high-technology equipment. and states that no member shall apply any measure that discriminates against foreigners or foreign products (i. Its purpose is to open up as much of this business as possible to international competition.000 in June 2003).Business. It also discourages measures which limit a company's imports or set targets for the company to export (“trade balancing requirements”). it can raise tariffs on exports from the country that is enforcing the safeguard measure. 6. i.000 (some $185. For purchases of goods and services by sub-central government entities. At the same time. Under the agreement.e. It also outlaws investment measures that lead to restrictions in quantities (violating another principle in GATT). if the measure conforms with the provisions of the agreement and if it is taken as a result of an increase in the quantity of imports from the exporting country. countries must inform fellow-members through the WTO of all investment measures that do not conform with the agreement.10 Agreement on Trade Related Investment Measures The Trade-Related Investment Measures (TRIMs) Agreement applies only to measures that affect trade in goods. Government. An Agreement on Government Procurement was first negotiated during the Tokyo Round and entered into force on 1 January 1981. To some extent developing countries' exports are shielded from safeguard actions.

tariff reductions in areas of particular interest to the complaining side. The Dispute Settlement Body has the sole authority to establish “panels” of experts to consider the case. The country “in the dock” can block the creation of a panel once. On 23 January 1995. and formally requested consultations with the United States. It must state its intention to do so at a Dispute Settlement Body meeting held within 30 days of the report's adoption. one year and four months after the complaint was first lodged. which consists of all WTO members.000 and for construction contracts. but when the Dispute Settlement Body meets for a second time. 6. Second stage: the panel (up to 45 days for a panel to be appointed. Venezuela complained to the Dispute Settlement Body that the United States was applying rules that discriminated against gasoline imports.International Linkages threshold varies but is generally in the region of SDR 200. • 6. It monitors the implementation of the rulings and recommendations.12 Settlement of Disputes Settling disputes is the responsibility of the Dispute Settlement Body. (By then.000. lodging its own complaint in April 1996. plus 6 months for the panel to conclude). and to accept or reject the panels' findings or the results of an appeal.000. If that fails. Before taking any other actions. Just over a year later (on 29 January 1996) the dispute panel completed its final report. the appointment can no longer be blocked (unless there is a consensus against appointing the panel). If complying with the recommendation immediately proves impractical. If it fails to act within this period. it has to enter into negotiations with the complaining country (or countries) in order to determine the mutuallyacceptable compensation. If consultations fail.000. The Dispute Settlement Body must grant this authorisation within 30 days of the expiry of the “reasonable period of time” unless there is a consensus against the request. If after 20 days. the complaining country can ask for a panel to be appointed. the member will be given a “reasonable period of time” to do so. they can also ask the WTO director-general to mediate or try to help in any other way. The United States and Venezuela then took six and a half months to agree on 63/MITSDE . • First stage: consultation (up to 60 days). For utilities. Brazil had joined the case. the countries in dispute have to talk to each other to see if they can settle their differences by themselves.13 Imposition of Penalties If the country that is the target of the complaint loses. and the Dispute Settlement Body adopted the report on 20 May 1996. The same panel considered both complaints. it must follow the recommendations of the panel report or the appeals report. for instance. in general the threshold value is SDR 5. thresholds for goods and services are generally in the area of SDR 400. the complaining side may ask the Dispute Settlement Body for permission to impose limited trade sanctions (“suspend concessions or obligations”) against the other side. The Appellate Body completed its report. no satisfactory compensation is agreed to.) The United States appealed. and has the power to authorise retaliation when a country does not comply with a ruling.

or resident in India receives any payment by order or on behalf of any person resident outside India through any other 64/MITSDE . Government. It violated the “national treatment” principle and could not be justified under exceptions to normal WTO rules for health and environmental conservation measures. no person can :a. civil offences. Hence the tenor and tone of the Act was very drastic. 6. The dispute panel agreed with Venezuela and Brazil. under FERA nothing was permitted unless specifically permitted. FEMA extends all over India. make any payment to or for the credit of any person resident outside India in any manner. any payment by order or on behalf of any person resident outside India in any manner. whereas FEMA seeks to make offences relating to foreign exchange. Unlike other laws where everything is permitted unless specifically prohibited. d. and Society what the United States should do. receive otherwise through an authorised person. Any offence under FERA was a criminal offence liable to imprisonment. deal in or transfer any foreign exchange or foreign security to any person not being an authorised person. 1973. c.14 Foreign Exchange Management Act The Foreign Exchange Management Act (FEMA) is a law to replace the draconian Foreign Exchange Regulation Act. Where any person in. offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom this Act applies. The appeal report upheld the panel's conclusions making some changes to the panel's legal interpretation. The agreed period for implementing the solution was 15 months from the date the appeal was concluded (20 May 1996 to 20 August 1997). The case arose because the United States applied stricter rules on the chemical characteristics of imported gasoline than it did for domesticallyrefined gasoline. Venezuela (and later Brazil) said this was unfair because US gasoline did not have to meet the same standards. a person is presumed innocent unless he is proven guilty. a need was felt to remove the drastic measures of FERA and replace them by a set of liberal foreign exchange management regulations. a person was presumed guilty unless he proved himself innocent whereas under other laws. It applies to all branches. With liberalisation. It provided for imprisonment of even a very minor offence. Regulation and management of foreign exchange Except with the general or special permission of the Reserve Bank.Business. The United States agreed with Venezuela that it would amend its regulations within 15 months and on 26 August 1997 it reported to the Dispute Settlement Body that a new regulation had been signed on 19 August. Under FERA. b. Therefore FEMA was enacted to replace FERA.

restrict or regulate the following :transfer or issue of any foreign security by a person resident in India. any asset outside India by any person. prohibit. hold. foreign security or any immovable property situated outside India except with the general or special permission of the Reserve Bank. the Reserve Bank cannot impose any restrictions on the drawal of foreign exchange for payments due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business. transfer or issue of any security by a person resident outside India. the Central Government may. deposits between persons resident in India and persons resident outside India. or for the credit of any person. own. specify :• • any class or classes of capital account transactions which are permissible. transfer of immovable property outside India. by a person resident in India. any borrowing or lending in foreign exchange in whatever form or by whatever name called. in consultation with the Central Government. the limit up to which foreign exchange shall be admissible for such transactions: However. The Reserve Bank can. Any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction. by order or on behalf of any person. Financial transaction means making any payment to. transfer or issue of any security or foreign security by any branch. or drawing. export. However. then. issuing or negotiating any bill of exchange or promissory note. import or holding of currency or currency notes. such a person shall be deemed to have received such payment otherwise than through an authorised person. The Reserve Bank may. office or agency in India of a person resident outside India. person (including an authorised person) without a corresponding inward remittance from any place outside India. No person resident in India can acquire. in public interest and in consultation with the Reserve Bank. or transferring any security or acknowledging any debt. any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India. or receiving any payment for. 65/MITSDE .International Linkages e. by regulations. possess or transfer any foreign exchange. Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction. other than a lease not exceeding five years. enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire. impose such reasonable restrictions for current account transactions as may be prescribed.

by a person resident outside India. security or property was acquired. security or property was acquired. Where any amount of foreign exchange is due or has accrued to any person resident in India. or regulate establishment in India of a branch. furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified. and Society acquisition or transfer of immovable property in India. office or other place of business. office or other place of business by a person resident outside India.Business. A person resident in India may hold. A person resident outside India may hold. own. held or owned by such person when he was resident in India or inherited from a person who was resident in India. 66/MITSDE . furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realisation of the export proceeds by such exporter. The Reserve Bank may. giving of a guarantee or surety in respect of any debt. Every exporter of services shall furnish to the Reserve Bank or to such other authorities a declaration in such form and in such manner as may be specified. having regard to the prevailing market-conditions. transfer or invest in foreign currency. restrict. for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines. such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. own. containing the true and correct material particulars in relation to payment for such services. the value which the exporter. b. obligation or other liability incurred (i) by a person resident in India and owed to a person resident outside India or (ii) by a person resident outside India. held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. direct any exporter to comply with such requirements as it deems fit. is received without any delay. expects to receive on the sale of the goods in a market outside India. containing true and correct material particulars. The Reserve Bank may. foreign security or any immovable property situated outside India if such currency. having regard to the prevailing market conditions. for carrying on any activity relating to such branch. transfer or invest in Indian currency. if the full export value of the goods is not ascertainable at the time of export. other than a lease not exceeding five years. including the amount representing the full export value or. by regulation. security or any immovable property situated in India if such currency. Every exporter of goods must :a. prohibit. Government.

in the process pulling large segments of the population out of poverty. 5. 9. 6. 14. 10. repatriation or surrender of forex Receipt and payment Receipt from or payment to non-resident Remittance of assets Rupee transactions with Nepalese and Bhutanese Security Issue by person resident outside India Transfer or issue by non-resident Transfer or issue of foreign security 6. 8. while others remain stagnant or.15 Global Competitive Index For well over two decades the World Economic Forum has been trying to shed light on the question of why some countries are able to grow on a sustained basis for prolonged periods of time. Till date it has issued 25 notifications related to the following areas: 1. 24. creating opportunities for the thoughtful exchange of ideas and experiences on best practices. It brings key representatives from the private sector and the corporate world together with a broad spectrum of senior policymakers in government. actually see an erosion of living standards. 4. 11. 16. 15. 12. This exchange may be an important catalyst in identifying the most critical factors in the development process. 3. 18. 25. Through its flagship publication. 22 23. the central importance of women's education for boosting per capita incomes. the World Economic Forum has led the way in assessing the competitiveness of nations. the interplay between political and civil rights and the willingness of the public to engage in economic activity. 17. Borrowing or Lending in Forex Borrowing or Lending in Rupees Branch or Office in India Capital account transactions Currency Deposits Derivative contracts Export . and the type of safety net 67/MITSDE . 21. 13. worse. 7.International Linkages The Reserve Bank of India under the FEMA issues notifications on separate issues concerning foreign exchange from time to time. 19. 20. the role of a free press. 2.import in forex Export of goods and services Forex accounts by resident persons Guarantees Immovable property in India Immovable property Insurance Investment in firm or proprietorship in India Possession and retention of forex Postal order and money orders Realisation. The Global Competitiveness Report. The role of corruption in delaying the development process.

” The responses to the Executive Opinion Survey are what is referred to as Survey data. labour market legislation. the public institutions index. and the macroeconomic environment index. The Forum has developed a vehicle. The weightings for the core innovators are as follows: Growth Competitive Index for Core Innovators = Technology Index + + Public Institutions Index Macroeconomic Environment Index For the non-core innovators. On the basis of the information provided by the EOS. the Executive Opinion Survey (EOS). business executives in these countries assess the importance of a broad range of factors central to creating a healthy business environment in support of successful and productive economic activity. and the challenges faced by the business community. with responses ranging from 1 to 7. which annually conveys a wealth of information about the obstacles to growth in more than 100 countries. working to improve economic performance and the quality of people's lives. Core innovators are countries with more than 15 US utility patents registered per million population in 2003. The sample of countries is divided into two groups: the core innovators and the non-core innovators. Composition of the Growth Competitive Index The Growth Competitiveness Index is composed of three component indexes: • • • the technology index. For the core innovators. aid agencies and others. the quality of the country's infrastructure and education are but a few of the areas covered by the EOS. the prevalence of corruption and other irregular practices in the economy at large. Over the years. extra emphasis is placed on the role of innovation and technology. the Survey has continued to deliver a treasure trove of information about both country. The tax and regulatory environment.specific strengths and weaknesses. the overall macroeconomic environment. non-core innovators are all other countries. These indexes are calculated on the basis of both “hard data” and “Survey data. Through the Survey. the Country Profiles prepared by the Forum offer extremely valuable information for policymakers.Business. Government. are but some of the topics that have been at the centre of the agenda in many of the summits and other interactions organised by the World Economic Forum. it calculates the Growth Competitiveness Index 68/MITSDE . and Society arrangements that governments put in place to enhance the ability of economic agents to participate in the life of the nation. accounting for the lion's share of global GNP.

07. While China slipped down from 44 to 46 with a score of 4. are clearly defined and well protected by law? Is the government neutral among bidders when deciding among public contracts? Does organised crime impose significant costs on business? How commonly are bribes paid in connection with import and export permits? How commonly are bribes paid when being connected with public utilities? How commonly are bribes paid in connection with annual tax payments? Macroeconomic Environment Index It looks comprehensively at the following questions: • Is the country's economy likely to be in a recession next year? • Has obtaining credit for a company become easier or more difficult over the past year? • Government surplus/deficit • National savings rate • Inflation • Real effective exchange rate • Lending borrowing interest rate spread • Is the composition of public spending in the country wasteful. How much do companies in the country spend on R&D relative to other countries.29. or does it provide necessary goods and services not provided by the market? GCI Rankings in 2004 Finland was ranked number 1 with a score of 5. India improved its ranking from 56 to 55 with a score of 4.82. At the 69/MITSDE .International Linkages values as a simple average of the three component indexes: Growth Competitive Index for Non Core Innovators = 1/3 Technology Index + 1/3 Public Institutions Index + 1/3 Macroeconomic Environment Index Technology Index Technology Index comprehensively looks at the following questions. Public Institutions Index It looks comprehensively at the following questions: • • • • • • • Is the judiciary in your country independent from political influences of members of government. including over financial assets. Extent of business collaboration in R&D with local universities.95 and USA was ranked number 2 with a score of 5. • • • • Country's position in technology relative to world leaders Companies in the Country not interested/aggressive in absorbing new technology. citizens or firms? Property rights.

India stands at 71 out of the 90 countries while Nigeria is at the bottom with the last ranking of 90. 70/MITSDE . 3. It consists of credible sources using diverse sampling frames and different methodologies. These perceptions enhance our understanding of real levels of corruption from one country to another. and Society bottom was Chad with rank 104 and a score of 2. the Index of Economic Freedom has offered the international community an annual in-depth examination of the factors that contribute most directly to economic freedom and prosperity. making use of surveys of business people and assessments by country analysts.17 Index of Economic Freedom Since 1995. Hongkong is 16th while USA is 19th.Business. Lebanon and MDB (a multilateral development bank) . 6. Evaluation of the extent of corruption in countries is done by nonresident experts (in the CPI 2004. and resident business leaders evaluating their own country (in the CPI 2004. 2003 and 2004). As the first comprehensive study of economic freedom ever published. Pakistan was ranked 91 with a score of 3.50. IMD (The International Institute for Management Development. Perception Cor r uption Per ception Index 2001 Finland ranks first with a score of 10. PERC (The Political and Economic Risk Consultancy. 2.84. this includes the following sources: BEEPS The Business Environment and Enterprise Performance Survey). All sources measure the overall extent of corruption (frequency and/or amount of corruption) in the public and political sectors. Singapore is ranked 5th. Bribe Payers Index Survey). Hong Kong) and WEF (World Economic Forum. this includes the following sources: CU (the State Capacity Survey by the Centre for International Earth Science Information Network (CIESIN) at Columbia University). EIU (The Economist Intelligence Unit) . Beirut.e. Since then.16 Perception Cor r uption Per ception Index The goal of the CPI is to provide data on extensive perceptions of corruption within countries. The CPI is a composite index.17. this includes the following sources: TI/GI (Gallup International on behalf of Transparency Inter national. other studies have joined the effort. All sources provide a ranking of countries. 4. this includes surveys from 2002. Bangladesh ranked 102 with a score of 2. analysing such issues as trade or government intervention in the economy. the 1995 Index defined the method by which economic freedom can be measured in such vastly different places as Hong Kong and North Korea. MIG (Grey Area Dynamics Ratings by the Merchant International Group)and WMRC (The World Markets Research Centre). Government. 6. non-resident business leaders from developing countries (in the CPI 2004. i.. Lausanne. Methodology: The CPI gathers data from sources that span the last three years (for the CPI 2004. include an assessment of multiple countries. II(Infor mation International. 1.

including corruption. and global competitive index are a few of them. corporate tax rates. such as import bans and quotas as well as strict labelling and licensing requirements. It has succeeded in attending to a majority of issues through consensus and has set up a dispute settlement body in case any issue requires arbitration and judgment. and environmental regulation. The fiscal bur den of gover nment. ef ficiency within the judiciary. judiciary. There have been several indices to compare different economies on the basis of their accomplishments and present conditions. and the ability to enforce contracts. No doubt it has largely succeeded in bringing about uniformity and greater opportunities for transparent business. and trends in government expenditures as a percent of output. which encompasses income tax rates. USA is ranked 8th while Pakistan is at rank 89. smuggling. regar egarding Restrictions on banks regar ding financial services. barriers Non-tarif f bar riers to trade. Index of freedom. corruption index. such as selling securities and insurance. including health. Cor r uption in the judiciary. burden government. such as established work weeks and mandatory separation pay. Labour market regulations. Also the flow of funds in and out of India have been set into a new legislation recognising the needs of a changed time. customs service. • • • • • Index of Economic Freedom 1996 rankings Hong Kong tops the list with Myanmar at the bottom ranked 123rd. The r ule of law. and the underground provision of labour and other services. It has been a negotiating forum for all countries and has brought the bargaining strength of different country groups to prominence. India does poorly at rank 85 just a notch above China which is at 86. 71/MITSDE . law.International Linkages There is overlapping coverage among these indices. and government bureaucracy. and Informal Infor mal market activities. The RBI till date has issued 25 notifications regarding the FEMA act. burdens Regulatory bur dens on business. but the Index of Economic Freedom includes the broadest array of institutional factors determining economic freedom: • • • judiciary. safety. piracy of intellectual property rights. Summing Up The attempts at the Global level to integrate business around the world has seen the culmination of WTO in 1995.

1973. and Society Self -assessment 1. __________ ranks first with a score of 10 as per the Corruption perception index 2001. developed countries agreed to cut the value of export subsidies by ______ percent over six years starting in 1995. Domestic policies that do have a direct effect on production and trade are put under the ________ box category. The 1995 Index defined the method by which ___________ freedom can be measured in such vastly different places as Hong Kong and North Korea. 8. 6. The ____________ Agreement (TBT) tries to ensure that regulations. the threshold is SDR ____________. The agreement on Government procurement applies to contracts worth more than specified threshold values. 72/MITSDE . 2003. standards.Business. As of 4th April. Taking averages for 1986-90 as the base level. For central government purchases of goods and services. 10. 9. Agreement on _________ and _________ measures is a separate agreement on food safety and animal and plant health standards. 2. Government. 5. 7. The Foreign Exchange Management Act (FEMA) is a law to replace the draconian _____________ Act. ___ countries were members. ______________ and __________. 3. 4. testing and certification procedures do not create unnecessary obstacles. The Growth Competitiveness Index is composed of three component indexes ________________. The WTO came into being as a result of _______ round of negotiations (1986-94) on 1st January _____ and its head office is located at ______. Composition of Board of Directors 7.3.4 Schedule of Implementation 7.8 Frequency of Meetings and Quorum Requirements of The Audit Committee 7.1 Key Constituents of Corporate Governance 7. just as quickly as information.2 Key Aspects of Corporate Governance 7.7 Composition of the Audit Committee 7.12 Disclosures Related to Management 7. the financial crisis in emerging markets has led to renewed discussions and inevitably focussed them on the lack of corporate as well as governmental oversight. Internationally too.3. Progressive firms in India have voluntarily put in place systems of good corporate governance.2 The Pyramid of Corporate Social Responsibility Summing Up Self-assessment 7.2 Trend in Corporate Governance Need for Sound Corporate Governance 7.6 Chairman of the Board 7.3.4 Corporate Social Responsibility 7.3.10 Disclosure of Remuneration Package 7. the link between a 73/MITSDE .1 Need for Sound Corporate Gover nance The concept of corporate governance has been attracting public attention for quite some time in India. risks its very stability and future health. independent oversight. Powers of the Audit Committee 7.3 Recommendations of the Committee on Corporate Governance 7.3. In an age where capital flows worldwide.Corporate Responsibility Chapter VII Corporate Responsibility Learning Lear ning Objectives Reading this chapter would enable you to understand: • Need and Trend of Corporate Governance • Recommendations of the committee on corporate governance • Understanding of the concept of corporate social responsibility Contents 7.1 Evolution 7.3 Mandatory and Non Mandatory Recommendations 7.3. The topic is no longer confined to the halls of academia and is increasingly finding acceptance for its relevance and underlying importance in the industry and capital markets.13 Complaints of the Shareholders 7.3.14 Government's push to Corporate Governance 7. As a result. a company that does not promote a culture of strong.11 Accounting Standards and Financial Reporting 7.3. while this topic has been accepted for a long time.

while remaining within a framework of effective accountability. Investors have suf fered on account of unscr upulous management of companies. which allow sufficient freedom to the boards and management to take decisions towards the progress of their companies and to innovate. As the boards provide stewardship of companies. which could have been avoided. code of conduct and specific rules for the conduct of its directors and employees and other insiders. The control and reporting functions of boards. leading to further dilution of wealth of minority shareholders. The issue of corporate governance involves besides shareholders. The principle should be ‘disclose or desist'. but there are many more. with higher valuations. It is important that insiders do not use their position of knowledge and acces to inside information about the company. A common feature of such companies is that they have systems in place. and take unfair advantage of the resulting information asymmetry. There are also many companies. with better and more transparent reporting practices. Studies of firms in India and abroad have shown that markets and investors take notice of well-managed companies. which have raised capital from the market at high valuations and have performed much worse than the past reported figures. 3. 6. directors and its financial reporting system has never been more crucial. insiders abstain from transacting in the securities of the company.Business. 5. Another example of bad governance has been the allotment of promoter's shares. 74/MITSDE . reporting requirements. corporates are expected to disseminate the material price sensitive information in a timely and proper manner and also ensure that till such information is made public. they play a significant role in their efficient functioning. especially after losses suffered by investors and lenders in the recent past. all assume special significance when viewed from this perspective. There are some Indian companies. disproportionate to market valuation of shares. which are not paying adequate attention 2. respond positively to them. on preferential basis at preferential prices. and in particular the shareholders and investors. confidentiality norms. all other stakeholders. and Society company's management.2 T r end in Corporate Gover nance 1. This practice has however since been contained. and reward such companies. Government. There is also an increasing concern about standards of financial reporting and accountability. which have voluntarily established high standards of corporate governance. This therefore calls for companies to devise an internal procedure for adequate and timely disclosures. leave alone the future projections at the time of raising money. 4. the roles of the various committees of the board. The other way of looking at corporate gover nance is from the contribution that good corporate governance makes to the efficiency of a business enterprise. the role of management. to the creation of wealth and to the country's economy. Tr 7. In other words they have a system of good corporate governance. whose practices are a matter of concern. To prevent this from happening.

To further improve the level of corporate governance. Some of these steps were: • strengthening of disclosure norms for Initial Public Offers following the recommendations of the Committee set up by SEBI under the Chairmanship of Shri Y H Malegam. delay in despatch of share certificates and dividend warrants and non-receipt of dividend warrants. The SEBI has been regularly receiving a large number of investor complaints on these matters. to accelerate the adoption of globally acceptable practices of corporate governance. declaration of quarterly results. and it is therefore a priority on SEBI's agenda. mandatory appointment of a compliance officer for monitoring the share transfer process and ensuring compliance with various rules and regulations. inclusion of cash flow and funds flow statements in annual reports. Indeed corporate governance has been a widely discussed topic at recent meetings of the International Organisation of Securities Commissions (IOSCO). it is evident that global capital will flow to markets which are better regulated and observe higher standards of transparency.Corporate Responsibility to the basic procedures for shareholders' service. Besides in an environment in which emerging markets increasingly compete for global capital. While enough laws exist to take care of many of these investor grievances. timely disclosures of material and price sensitive information including details of all material events having a bearing on the performance of the 75/MITSDE • • • • . 9. efficiency and integrity. need was felt for a comprehensive approach at this stage of development of the capital market. for example. 8. many of these companies do not pay adequate attention to redress investors' grievances such as delay in transfer of shares. Corporate governance is considered an important instrument for investor protection. 7. companies also do not pay sufficient attention to timely dissemination of information to investors as also to the quality of such information. SEBI took many steps before the constitution of the Committee on corporate governance to raise the standards of corporate probity. providing information in directors' reports for utilisation of funds and variation between projected and actual use of funds according to the requirements of the Companies Act. This would ensure that Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world. Securities market regulators in almost all developed and emerging markets have for some time been concerned about the importance of the subject and of the need to raise the standards of corporate governance. The financial crises in the Asian markets in the recent past have highlighted the need for an improved level of corporate governance and the lack of it in certain countries has been mentioned as one of the causes of the crises. the implementation and inadequacy of penal provisions have left a lot to be desired. Raising standards of corporate governance is therefore also extremely relevant in this context.

7. • the Shareholders. some recommendations may also need change of statute. It's terms of reference were the following: • to suggest suitable amendments to the listing agreement executed by the stock exchanges with the companies and any other measures • to improve the standards of corporate governance in the listed companies. Besides. such as the Companies Act. both financial and non-financial. and issue of regulations providing for a fair and transparent framework for takeovers and substantial acquisitions. responsibilities of independent and outside directors.3.3. member SEBI Board. Fundamental to this examination and permeating throughout this exercise is the recognition of the three key aspects of corporate governance.Business. • the Board of Directors and • the Management 7.3 Mandatory and Non-mandatory Recommendations The Committee felt that some of the recommendations are absolutely essential for the framework of corporate governance and virtually form its core. 7. to promote and raise the standards of Corporate Governance.2 Key Aspects of Corporate Gover nance It has attempted to identify in respect of each of these constituents. namely. • transparency and • equality of treatment for all stakeholders. in areas such as continuous disclosure of material information.3 Recommendations of the Committee on Corporate Gover nance The Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7.3. • • • despatch of one copy of the complete balance sheet to every household and abridged balance sheet to all shareholders. and Society company. their roles and responsibilities as also their rights in the context of good corporate governance. In the case of others. • to draft a code of corporate best practices. issue of guidelines for preferential allotment at market related prices. enforcement would be possible by amending the 76/MITSDE . 1999 under the Chairmanship of Shri Kumar Mangalam Birla.1 Key Constituents of Corporate Gover nance The Committee has identified the three key constituents of corporate governance as. for their enforcement. 7. manner and frequency of such disclosures. and • to suggest safeguards to be instituted within the companies to deal with insider information and insider trading. • accountability. Government. while others could be considered desirable.

Within the financial year 2000-2001. be classified as non-mandatory. it has been the practice of most of the companies in India to fill the board with representatives of the promoters of the company. 2003 by all the entities which are presently listed. 2001 by all entities. can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory. The Committee therefore felt that the recommendations should be divided into mandatory and non. Till recently. These companies would cover more than 80 percent of the market capitalisation. which are included either in Group ‘A'of the BSE or in S&P CNX Nifty index as on January 1. The latter. Within the financial year 2002-2003. 7. for the time being. at the time of listing. Within the financial year 2001-2002.but not later than March 31. which are either desirable or which may require change of laws. 1957 and by amending the listing agreement of the stock exchanges under the direction of SEBI. the non-executive directors bring external and wider perspective and independence to the decision making. director-personnel) are involved in the day to day management of the companies. 10 crore and above.mandatory categories • Those recommendations which are absolutely essential for corporate governance. may.but not later than March 31. with paid up share capital of Rs. 77/MITSDE . would be less time consuming and would ensure speedier implementation of corporate governance. 2002 by all the entities which are presently listed. these companies may have to begin the process of implementation as early as possible. and independent directors if chosen were also handpicked thereby ceasing to be independent. or net worth of Rs 25 crore or more any time in the history of the company. with paid up share capital of Rs 3 crore and above.5 Composition of Board of Directors The composition of the board is important in as much as it determines the ability of the board to collectively provide leadership and ensures that no one individual or group is able to dominate the board. there is a need for phasing out the implementation as follows: • • By all entities seeking listing for the first time. 2000. Others. • • This is a mandatory recommendation.4 Schedule of Implementation The Committee recommends that while the recommendations should be applicable to all the listed companies or entities. However to comply with the recommendations.3.but not later than March 31. • 7.3. • • The executive directors (like director-finance.Corporate Responsibility Securities Contracts (Regulation) Rules.

its management or its subsidiaries. as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the Committee but on occasions it may also meet without the presence of any executives of the company.Business. its promoters. This is a mandatory recommendation. the chairman should be present at the Annual General Meeting to answer shareholder queries. those who are independent and those who are not. at least half of the board should be independent. and Society This has undergone a change and increasingly the boards comprise of the following groups of directors • promoter director. Finance director and head of internal audit and when required.6 Chair man of the Boar d Given the importance of the Chairman's role. In case a company has a non-executive chairman. a representative of the external auditor should be present as an invitee for the meetings of the audit committee. at least one-third of the board should comprise of independent directors and in case a company has an executive chairman. Chairman 7. Government. (promoters being defined by the erstwhile Malegam Committee). This is a non-mandatory recommendation. the audit committee should invite such of the executives.3. a part of whom are independent. with the majority being independent. and with at least one director having financial and accounting knowledge. This will enable him to discharge responsibilities effectively. the Company Secretary should act as the secretary to the committee • • • • 78/MITSDE . The number of independent directors (directors who apart from receiving director's remuneration do not have any other material pecuniary relationship or transactions with the company. all being non executive directors. the chairman of the committee should be an independent director. 7.3. namely. which in the judgement of the board may affect their independence of judgement) would depend on the nature of the chairman of the board. • executive and non executive directors. The Committee recommended that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty percent of the board comprising the non-executive directors.7 Composition of the Audit Committee • the audit committee should have minimum three members. the Committee recommended that a non-executive Chairman should be entitled to maintain a Chairman's office at the company's expense and also allowed reimbursement of expenses incurred in the performance of his duties. A conscious distinction has been made by the Committee between two classes of non-executive directors.

To obtain outside legal or other professional advice.3.e. Stock option details.11 Accounting Standar ds and Financial Reporting Over time financial reporting and accounting standards in India have been upgraded. whichever is higher and there should be a minimum of two independent directors. To seek information from any employee. along with performance criteria. Details of fixed component and performance linked incentives.Corporate Responsibility These are mandatory recommendations. Service contracts. To secure attendance of outsiders with relevant expertise. benefits. These are mandatory recommendations. One meeting must be held before finalisation of annual accounts and one necessarily every six months. The Committee therefore recommends that the following disclosures should be made in the section on corporate governance of the annual report: • • • • All elements of remuneration packages of all the directors i.9 Powers of the Audit Committee • • • • To investigate any activity within its terms of reference. 79/MITSDE . • The quorum should be either two members or one-third of the members of the audit committee. if it considers necessary. Standards 7. Segmented reporting where a company has multiple lines of business. The Committee took note of the discussions of the SEBI Committee on Accounting Standards referred to earlier and made recommendations regarding the following aspects of financial reporting. etc.8 Fr equency of Meetings and Quor um Requir ements of the Audit Committee • To begin with the audit committee should meet at least thrice a year. This however is an ongoing process and we have to move speedily towards the adoption of international standards. 7. 7. This is a mandatory recommendation. notice period.3. Both the above are mandatory recommendations. stock options. salaries. if any and whether issued at a discount as well as the period over which accrued and over which exercisable.10 Disclosure of Remuneration Package It is important for the shareholders to be informed of the remuneration of the directors of the company. bonuses. This is particularly important from the angle of corporate governance. Frequency Requirements 7.3. severance fees. pensions.3. • • Consolidation of accounts of subsidiaries.

12 Disclosures Related to Management As a part of the disclosures related to Management. Risks and concerns Internal control systems and their adequacy. 80/MITSDE . This Management Discussion and Analysis should include discussion on the following matters within the limits set by the company's competitive position: • • • • • • • • Industry structure and developments. non-receipt of declared dividends etc. The first award was won by Infosys technology. is aimed at strengthening investor confidence in the capital markets by encouraging Indian companies to follow internationally accepted practices of corporate governance. Government. the Committee recommended that as part of the directors' report or as an addition thereto. a Management Discussion and Analysis report should form part of the annual report to the shareholders. non-receipt of balance sheet. 7. The award. including number of people employed.3. instituted by the Union Finance ministry and sponsored by the Unit Trust of India (UTI). This is a mandatory recommendation 7.14 Gover nment's push to Corporate Gover nance While presenting the Union Budget for 1999-2000. 7.Business. This is a mandatory recommendation. Treatment of deferred taxation.3.13 Complaints of the Shareholders The Committee recommended that a board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressing of shareholder complaints like transfer of shares. Discussion on financial per formance with respect to operational performance. Opportunities and Threats Segment-wise or product-wise performance. and Society • • Disclosure and Treatment of related party transactions. Material developments in Human Resources /Industrial Relations front. Outlook. Tata Steel won the award for 2000. the finance minister announced the institution of a national award for excellence in corporate governance.3. The Committee believes that the formation of such a committee will help focus the attention of the company on shareholders' grievances and sensitise the management to redressal of their grievances.

Corporate Responsibility


Corporate Social Responsibility

This term indicates the doings of corporates over and above the statutory requirements for the benefit of the society. According to N R Narayanmoorthy, Chief Mentor of Infosys Technology, a corporate's foremost social responsibility is to create maximum share holder value working under the circumstances where it is fair to all its stake holders workers, consumers, the community, government and the environment. He points out that by living in harmony with the community and environment around us and not cheating our customers and workers, we might not gain anything in the short run, but in the long run it means greater profits and shareholder value. 7.4.1 Evolution

What does it mean for a corporation to be socially responsible? Academics and practitioners have been striving to establish an agreed-upon definition of this concept for 30 years. In 1960, Keith Davis suggested that social responsibility refers to businesses' "decisions and actions taken for reasons at least partially beyond the firm's direct economic or technical interest." At about the same time, Eells and Walton (1961) argued that CSR refers to the "problems that arise when corporate enterprise casts its shadow on the social scene, and the ethical principles that ought to govern the relationship between the corporation and society." In 1971 the Committee for Economic Development in USA used a "three concentric circles" approach to depicting CSR. • • The inner circle included basic economic functions - growth, products, jobs. The intermediate circle suggested that economic functions must be exercised with a sensitive awareness of changing social values and priorities. The outer circle outlined newly emerging and still amorphous responsibilities that business should assume to become more actively involved in improving the social environment.

From social responsibility to social responsiveness Attention was shifted from social responsibility to social responsiveness by several other writers. Their basic argument was that the emphasis on responsibility focused exclusively on the notion of business obligation and motivation and that action or performance were being overlooked. The social responsiveness movement, therefore, emphasised corporate action, pro-action, and implementation of a social role. This was indeed a necessary reorientation. The question still remained, however, of reconciling the firm's economic orientation with its social orientation. A step in this direction was taken when a comprehensive definition of CSR was set forth. in this view, a four-part conceptualisation of CSR included the idea that the corporation has not only economic and legal obligations, but ethical and discretionary (philanthropic) responsibilities as well (Carroll 1979). The point here was that CSR, to be

Business, Government, and Society

accepted as legitimate, had to address the entire spectrum of obligations business has to society, including the most fundamental-economic. It is upon this four-part perspective that our pyramid is based. In recent years, the term corporate social performance (CSP) has emerged as an inclusive and global concept to embrace corporate social responsibility, responsiveness, and the entire spectrum of socially beneficial activities of businesses. The focus on social performance emphasises the concern for corporate action and accomplishment in the social sphere. With a performance perspective, it is clear that firms must formulate and implement social goals and programmes as well as integrate ethical sensitivity into all decision making, policies, and actions. With a results focus, CSP suggests an all-encompassing orientation towards normal criteria by which we assess business performance to include quantity, quality, effectiveness, and efficiency. 7.4.2 The Pyramid of Corporate Social Responsibility For CSR to be accepted by a conscientious business person, it should be framed in such a way that the entire range of business responsibilities are embraced. It is suggested here that four kinds of social responsibilities constitute total CSR: economic, legal, ethical, and philanthropic. Furthermore, these four categories or components of CSR might be depicted as a pyramid. To be sure, all of these kinds of responsibilities have always existed to some extent, but it has only been in recent years that ethical and philanthropic functions have taken a significant place. Each of these four categories deserves a closer consideration. Economic Responsibilities Historically, business organisations were created as economic entities designed to provide goods and services to societal members. The profit motive was established as the primary incentive for entrepreneurship. Before it was anything else, the business organisation was the basic economic unit in our society. As such, its principal role was to produce goods and services that consumers needed and wanted and to make an acceptable profit in the process. At some point the idea of the profit motive was transformed into a notion of maximum profits, and this has been an enduring value ever since. All other business responsibilities are predicated upon the economic responsibility of the firm, because without it the others become moot considerations. Legal Responsibilities Society has not only sanctioned business to operate according to the profit motive; at the same time business is expected to comply with the laws and regulations promulgated by federal, state, and local governments as the ground rules under which business must operate. As a partial fulfilment of the "social contract" between business and society, firms are expected to pursue their economic missions within the framework of the law. Legal responsibilities reflect a view of "codified ethics" in the sense that they embody basic notions of fair operations as established by our lawmakers. They are depicted as the next layer on the pyramid to portray their historical development, but they are appropriately seen as co-existing with


Corporate Responsibility

economic responsibilities as fundamental precepts of the free enterprise system. Ethical Responsibilities Although economic and legal responsibilities embody ethical norms about fairness and justice, ethical responsibilities embrace those activities and practices that are expected or prohibited by societal members even though they are not codified into law. Ethical responsibilities embody those standards, nor ms, or expectations that reflect a concer n for what consumers, employees, shareholders, and the community regard as fair, just, or in keeping with the respect or protection of stakeholders' moral rights. Philanthropic Responsibilities Philanthropy encompasses those corporate actions that are in response to society's expectation that businesses be good corporate citizens. This includes actively engaging in acts or programmes to promote human welfare or goodwill. Examples of philanthropy include business contributions of financial resources or executive time, such as contributions to the arts, education, or the community. A loaned-executive programme that provides leadership for a community's United Way campaign is one illustration of philanthropy. The distinguishing feature between philanthropic and ethical responsibilities is that the former are not expected in an ethical or moral sense. Communities desire firms to contribute their money, facilities, and employee time to humanitarian programmes or purposes, but they do not regard the firms as unethical if they do not provide the desired level. Therefore, philanthropy is more discretionary or voluntary on the part of businesses even though there is always the societal expectation that businesses provide it.

Summing Up In an age where capital flows worldwide, just as quickly as information, a company that does not promote a culture of strong, independent outlook, risks its very stability and future health. As a result, the link between a company's management, directors and its financial reporting system has never been more crucial. As the boards provide stewardship of companies, they play a significant role in their efficient functioning. The Kumarmangalam Birla committee on corporate gover nance was appointed because of the aforementioned concern. It has given a comprehensive list of recommendations to improve the fabric of corporate governance in India. At the same time, corporates are also working towards their social responsibility. They are becoming increasingly aware of their role in this regard to sustain business on a long term basis. Self-assessment 1. The issue of corporate governance involves besides shareholders, all other stakeholders, and in particular shareholders and ____________.

or expectations that reflect a concern for what ________. and the entire spectrum of socially beneficial activities of businesses. and Society 2. 3. A four-part conceptualisation of CSR included the idea that the corporation has not only economic and legal obligations. 5. responsiveness. ___________and ______________. but _____ and ____________ responsibilities as well (Carroll 1979). 84/MITSDE . 9. _________. is aimed at strengthening ___________ confidence in the capital markets by encouraging Indian companies to follow internationally accepted practices of corporate governance. ____________. 6. The Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7. 4. The award. and the community regard as fair. instituted by the Union Finance ministry and sponsored by the Unit Trust of India (UTI). 1999 under the Chairmanship of _____________. Government. just. In 1971 the Committee for Economic Development in USA used a "________ __________ _________" approach to depicting CSR. 7. or in keeping with the respect for the protection of stakeholders' moral rights. ___________ and _________. The three key aspects of corporate governance as per this committee are __________. Ethical responsibilities embody those standards. norms.Business. In recent years. 8. 10. The Committee has identified the three key constituents of corporate governance as _________. The Committee recommended that the board of a company have an optimum combination of executive and non-executive directors with not less than __________ percent of the board comprising the nonexecutive directors. the term ________ has emerged as an inclusive and global concept to embrace corporate social responsibility.

To understand the ethical issues in business. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole.1. however.2. Lear ning Objectives 1.3 Conflicting interests 8.4 Ethical issues and approaches 85/MITSDE . interest in business ethics accelerated dramatically during the 1980s and 1990s. In academia descriptive approaches are also taken.2 Ethics of economic systems Theoretical issues in business ethics 8. To understand that taking decisions which based on ethics helps businesses in surviving many ups and downs. such behaviours tend to undermine the economy over time. Simultaneously.1 International business ethics 8. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values.2. 4. Contents Overview of issues in business ethics 8.2. knowledge and skills 8. To understand the benefits of being ethical greatly outweigh being nonethical in business.5 Ethics of intellectual property.2Ethics of human resource management 8.2. General business ethics 8. Historically. To understand the emphasis which companies are giving on commitment to promoting non-economic social values? 2.1.4 Ethics of production 8. legal and business ethics.3 Ethics of sales and marketing 8. today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings. Applied ethics is a field of ethics that deals with ethical questions in many fields such as medical. In the increasingly conscience-focused marketplaces of the 21st century. both within major corporations and within academia. the field is primarily normative. As a corporate practice and a career specialization.2 International business ethics and ethics of economic systems 8.1. technical. pressure is applied on industry to improve business ethics through new public initiatives and laws.Business ethics Chapter VIII Business ethics Business ethics is a form of applied ethics that examines ethical principles and moral or ethical problems that arise in a business environment.1.1Ethics of accounting information 8.1. For example. Businesses can often attain shortterm gains by acting in an unethical fashion. 3. Business ethics can be both a normative and a descriptive discipline. the demand for more ethical business processes and actions is increasing.1.

industrial espionage.1 General business ethics • This part of business ethics overlaps with the philosophy of business. misleading financial analysis.3 Overview of issues in business ethics 8 .1 Corporate ethics policies 8. 8 . Insider trading. earnings management. and Society Business ethics in the field 8. 1 . • • • • • • • information 8 . one of the aims of which is to determine the fundamental purposes of a company. Political contributions made by corporations. Executive compensation: concerns excessive payments made to corporate CEO's and top management. securities fraud. religion. disabilities. such as the ethical debate over introducing a crime of corporate manslaughter. Corporate social responsibility or CSR: an umbrella term under which the ethical rights and duties existing between companies and society is debated. gender.3. these practices may be anti-competitive or offend against the values of society. 2. forex scams: concerns (criminal) manipulation of the financial markets. and facilitation payments: while these may be in the (short-term) interests of the company and its shareholders. stakeholder concept v. The misuse of corporate ethics policies as marketing instruments. 1. 86/MITSDE . See also: affirmative action. 1 .3. shareholder concept. kickbacks. Ethical issues concerning relations between different companies: e. 3. Government.Business. Law reform. 4. If a company's main purpose is to maximize the returns to its shareholders. Bribery. Discrimination issues include discrimination on the bases of age (ageism). Creative accounting. Ethics of accounting infor mation 1. Issues regarding the moral rights and duties between a company and its shareholders: fiduciary responsibility. race. such as the rights and duties owed between employer and employee. then it should be seen as unethical for a company to consider the interests and rights of anyone else. sexual harassment. 2 Ethics of human resource management The ethics of human resource management (HRM) covers those ethical issues arising around the employer-employee relationship. bucket shops. hostile take-overs.g. 1 . weight and attractiveness.2 Ethics officers Summing up Self Assessment 8. Leadership issues: corporate governance.

The entire above are also related to the hiring and firing of employees. antitrust law. • • • • Specific marketing strategies: green wash. An employee or future employee can not be hired or fired based on race. Issues sur rounding the representation of employees and the democratization of the workplace: union busting. carbon emissions trading Ethical problems arising out of new technologies: . shill. addictive and inherently dangerous products and services (e. Content of advertisements: attack ads. also known as At-will employment. 4. 8 . planned obsolescence. 1 . viral marketing. 3. 5. Issues affecting the privacy of the employee: workplace surveillance. • • Ethical relations between the company and the environment: pollution. Black markets. 3 Ethics of sales and marketing Marketing. 4 Ethics of production This area of business ethics usually deals with the duties of a company to ensure that products and production processes do not cause harm. because marketing makes heavy use of media. price discrimination. strike breaking. See also: privacy.g. tobacco. which goes beyond the mere provision of information about (and access to) a product. or any other discriminatory act. • Anti-competitive practices: these include but go beyond pricing tactics to cover issues such as manipulation of loyalty and supply chains. Some of the more acute dilemmas in this area arise out of the fact that there is usually a degree of danger in any product or production process and it is difficult to define a degree of permissibility. To some extent society regards this as acceptable. However. weapons. 1 . age. alcohol. . products regarded as immoral or harmful Children and marketing: marketing in schools. Issues relating to the fairness of the employment contract and the balance of power between employer and employee: slavery. 7. motor vehicles. 6. gender. • Defective. See: anti-competitive practices. Issues affecting the privacy of the employer: whistle-blowing. but where is the ethical line to be drawn? Marketing ethics overlaps strongly with media ethics. Occupational safety and health. sex in advertising. 87/MITSDE . media ethics is a much larger topic and extends outside business ethics. may seek to manipulate our values and behavior. spam (electronic). Issues arising from the traditional view of relationships between employers and employees. religion. employment law. subliminal messages. bungee jumping). grey markets. mobile phone radiation and health. or the degree of permissibility may depend on the changing state of preventative technologies or changing social perceptions of acceptable risk. • Pricing: price fixing. indentured servitude. environmental ethics. price skimming. chemical manufacturing.Business ethics 2. pyramid scheme. bait and switch. 8 .

These drugs are protected by patents and there are no generic drugs available. patent troll.[6] Many new practical issues arose out of the international context of business. knowledge and skills Knowledge and skills are valuable but not easily "ownable" as objects. and privacy invasion.[5] Medical technology has improved as well. This leads to data mining. copyright infringement. submarine patent. Theoretical issues such as cultural relativity of ethical values receive more emphasis in this field. older issues can be grouped here as well. copyright misuse. 1 . in order to prevent any competitors employing them. and Society • Product testing ethics: animal rights and animal testing. global view on business ethical matters. Other. Comparison of business ethical traditions from various religious perspectives. attempts to assert ownership and ethical disputes over ownership arise. 1 Inter national business ethics While business ethics emerged as a field in the 1970s. 8 . Nor is it obvious that has the greater rights to an idea: the company who trained the employee or the employee themselves? The country in which the plant grew or the company which discovered and developed the plant's medicinal potential? As a result. 8.2 Inter national business ethics and ethics of economic systems The issues here are grouped together because they involve a much wider. Issues and subfields include: • • • The search for universal values as a basis for international commercial behaviour. Pharmaceutical companies have the technology to produce life saving drugs. regardless of need. 2 . It is easy to gain access to information. Business intelligence and industrial espionage. 5 Ethics of intellectual pr operty. This raises many ethical questions. looking back on the international developments of that decade. property operty. 8 . international business ethics did not emerge until the late 1990s. Government. Employee raiding: the practice of attracting key employees away from a competitor to take unfair advantage of the knowledge or skills they may possess.Business. • • Ethics and Technology The computer and the World Wide Web are two of the most significant inventions of the twentieth century. • Patent infringement. trademark infringement. There are many ethical issues that arise from this technology. Also on the basis of their respective GDP and [Corruption rankings]. use of economically disadvantaged groups (such as students) as test objects. • • • Misuse of the intellectual property systems to stifle competition: patent misuse. 88/MITSDE . Even the notion of intellectual property itself has been criticized on ethical grounds: see intellectual property. workplace monitoring. The practice of employing all the most talented people in a specific field. Comparison of business ethical traditions in different countries.

society.g. clothes) and services (e. Thus. situations arise in which there is conflict between one and more of the parties. the International Trade Commission has been researching anti-dumping laws. and society as a whole.e.2. call centres) to low-wage countries. such that serving the interest of one party is a detriment to the other(s). The way in which multinationals take advantage of international differences. However. Some ethicists see the principal role of ethics as the harmonization and reconciliation of conflicting interests. some point out that self89/MITSDE . or vice versa. including the perspective of the employee. 2 . Very often. some suggest that the principal purpose of a business is to maximize returns to its owners. For example. The permissibility of international commerce with pariah states. 2 Ethics of economic systems Ethics is a matter of doing justice to the human without twisting the facts and ignoring the constraints. establish a humanistic and universal approach. Theoretical issues in business ethics 8. which are informed by both ethical criteria and economic knowledge. the fair trade movement.3 Conflicting interests Business ethics can be examined from various new perspectives. 4 Ethical issues and approaches Philosophers and others disagree about the purpose of a business ethic in society. a particular outcome might be good for the employee.Business ethics • Ethical issues arising out of international business transactions. 8 . Some believe that the only companies that are likely to survive in a competitive marketplace are those that place profit maximization above everything else. The study introduces seven criteria of human justice that fundamentally relate to the Christian revelation and. It becomes difficult for these markets to compete with the pricing set by foreign markets. the commercial enterprise.g. • • • • Foreign countries often use dumping as a competitive threat. Subsequently it focuses on the concrete economic systems and their problems. e. bioprospecting and biopiracy in the pharmaceutical industry. the use of child labor. Issues such as globalization and cultural imperialism. Varying global standards . only those activities that increase profitability and shareholder value should be encouraged.g. Dumping is often seen as an ethical issue. its shareholders.g. For example. such as outsourcing production (e. under this view. whereas. and evaluates them in the light of middle-level principles. This can lead to problems in domestic markets. because any others function as a tax on profits. 2 . In 2009. as larger companies are taking advantage of other less economically advanced companies. at the same time. transfer pricing. or in the case of a publicly-traded concern. It describes and analyses various models of market and centrally planned economies. selling products at prices lower than their normal value. it would be bad for the company. 8 .

where secondary stakeholders are people who are not affected directly such as the government. These policies can be simple exhortations in broad. Some companies even require their employees to sign agreements stating that they will abide by the company's rules of conduct. many companies have formulated internal policies pertaining to the ethical conduct of employees. Lying has become expected in fields such as trading. or even society as a whole. because the consequences of failing to do so could be very costly in fines.1 Corporate Ethics Policy As part of more comprehensive compliance and ethics programs. for example. Stakeholders can also be broken down into primary and secondary stakeholders. Many companies are assessing the environmental factors that can lead employees to engage in unethical conduct. 3. They would say that stakeholders have certain rights with regard to how the business operates. Government. and some would suggest that this includes even rights of governance. It is hoped that having such a policy will lead to greater ethical awareness. which often include discussion of the company's policies. highlygeneralized language (typically called a corporate ethics statement). or they can be more detailed policies.Business. An increasing number of companies also require employees to attend seminars regarding business conduct. containing specific behavioral requirements (typically called corporate ethics codes). specific case studies. and legal requirements.1 8. vendors. people who have an interest in the conduct of the business.3. or company reputation. or should it follow the less stringent laws of the developing country in which it does business? It is claimed that in a competitive business environment. Under this. 8. Ethical issues can arise when companies must comply with multiple and sometimes conflicting legal or cultural standards. those companies that survive are the ones that recognize that their only role is to maximize profits. ethical behavior is required of individual human beings. and the avoidance of ethical disasters. but not of the business or corporation. which might include employees. They are generally meant to identify the company's expectations of workers and to offer guidance on handling some of the more common ethical problems that might arise in the course of doing business.3 Business ethics in the field 8. and Society interest would still require a business to obey the law and adhere to basic moral rules. Primary stakeholders are people that are affected directly such as stockholders. Other theorists contend that a business has moral duties that extend well beyond serving the interests of its owners or stockholders. 90/MITSDE . and that these duties consist of more than simply obeying the law. They believe a business has moral responsibilities to so-called stakeholders. customers. as in the case of multinational companies that operate in countries with varying practices. ought a company to obey the laws of its home country. consistency in application. loss of licensure. A competitive business environment may call for unethical behavior. The question arises. Some take the position that organizations are not capable of moral agency. the local community.

• Remain neutral and nonsexist. at best.". customers. suppliers and dealers. Others believe that corporate ethics policies are primarily rooted in utilitarian concerns. whether or not such conduct is explicitly sanctioned by management. Increasingly. international business and economic system. • Doable. According to International Ethical Business Registry. with routine inspections for compliance and improvement. most ethicists would suggest that an ethics policy should be: • Given the unequivocal support of top management. Should a lawsuit occur. it is merely a marketing tool.Business ethics Not everyone supports corporate policies that govern ethical conduct. and. Some claim that ethical problems are better dealt with by depending upon employees to use their own judgment.. Business Ethics is a form of the art of applied ethics that examines ethical principles and moral or ethical problems that can arise in business environment. this makes the policy duplicitous. with periodic reinforcement. clients and employees are deliberately seeking out those who define the basic ground. right or wrong. Henry Ford said. • Monitored by top management. Importance of Ethics in Business • Ethics is important not only in business but in all aspects of life because it is the vital part and the foundation on which the society is build. Ethics is related to all disciplines of management like accounting information. rules of their operations on a day today. at worst. government. customers. 91/MITSDE • • .. To be successful." • Ethics refers to a code of conduct that guides an individual in dealing with others. intellectual property knowledge and skill. A business/society that lacks ethical principles is bound to fail sooner or later. "Quite apart from the issues of rightness and wrongness.something employees can both understand and perform.. production. "there has been a dramatic increase in the ethical expectation of businesses and professionals over the past 10 years. "Business that makes noting but money is a poor kind of business". and that they are mainly to limit the company's legal liability. It deals with issues regarding the moral and ethical rights. he added.. the fact is that ethical behavior in business serves the individual and the enterprise much better in long run.. the company will avoid a lawsuit because its employees will follow the rules. sales and marketing. In business world the organization's culture sets standards for determining the difference between good or bad. employees. fair or unfair. human resource management. • Backed up by clearly stated consequences in the case of disobedience. Ideally. Thus. duties and corporate governance between a company and its shareholders.. by both word and example. Holland. • Explained in writing and orally. or to curry public favor by giving the appearance of being a good corporate citizen. wrote business executive R. the company can claim that the problem would not have arisen if the employee had only followed the code properly? Sometimes there is disconnection between the company's code of ethics and the company's actual practices. "It is perfectly possible to make a decent living without compromising the integrity of the company or the individual. media.

Business. this is the foundation of ethical decision making. customers. "Consumers are used to buying products despite how they feel about the company that sells them. If you respect values in life. induction. REMEMBER: GOOD ETHICS IS GOOD BUSINESS. But if you are steadfast in observing ethics in your business. you may be equipped with the far-sightedness to foresee such eventualities and may have taken the appropriate steps that may free you from such tricky situations. Value is what you get" Warren Buffet Thus. To understand the situations in the right perspective and consider ethical decisions for implementation. you will definitely understand that ethical business will definitely give you the leverage of peace of mind in doing your business.Mahatma Gandhi. "Price is what you pay. The ethical issues in business have become more complicated because of the global and diversified nature of many large corporation and because of the complexity of economic. social. sometimes. selecting. framing attitudes for acceptable behavior. a manager should treat his employees. hence the company must decide whether to adhere to constant ethical principles or to adjust to domestic standards and culture. monetary / non-monetary motivation. keeping in mind your success in the business. you may have to know the approaches that are available to you. deciding the policies for recruiting. your goals in the business. setting high standards. Government. you may be forced adopt austerity measures for managing the finances of the company or there may be so many allurements that you may be tempted to make compromises on the quality of the products you manufacture or to terminate the services of some of the existing employees so as to increase profits. political. legal and government regulations and environment. global. media and society in an honest and fair way by knowing the difference between right or wrong and choosing what is right. But a valued company earned a kind of customer loyalty most corporations only dream of because it appeals to its customers more than a product". "Non-corporation with the evil is as much a duty as is co-operation with good" . that behavior is copied down through the organization". remuneration and retention of employees. • • • Business and Ethics • As an entrepreneur. This is not true. and Society • Some management guru stressed that ethical companies have an advantage over their competitors. 1. Some people may argue that business and ethics cannot go together. Managers have to remember that leading by example is the first step in fostering a culture of ethical behavior in the companies as rightly said by Robert Noyce. norms. natural. and your responsibilities to your customers. • The situation may demand your immediate decision and the easy and simple way out may be to make such compromises. making written code of ethics implacable at all levels from top to bottom. promotion. government. training. Said Cohen and Greenfield. You take a stand that would be beneficial to all. shareholders. your responsibilities to the • 92/MITSDE . "If ethics are poor at the top. however the other methods can be creating a common interest by favorable corporate culture.

4. Satyam. then you believe it is the right decision. to quote Mahatma Gandhi's words.A business that makes nothing but money is a poor kind of business. WorldCom. Can Ethics and a Healthy Bottom Line For Companies Co-Exist? • There's a view that soaring profits and ethics are mutually exclusive concepts. however. we come across entrepreneurs of this kind. the overriding consideration should be "Commerce with ethics". The company and its management might get diversified to malpractices. 3. you may go ahead with those decisions. The third approach is based on the golden rule. There are very few second acts once the public perceives the organization flawed by dishonesty or inferior quality. • Experience shows that taking decisions based on ethics helps businesses in surviving many ups and downs. The world of business is generally perceived as jungle where the bottom line takes precedence over all other matters. Enron. But it must understood very clearly Relativity applies to physics. Xerox and other scandals shook public confidence in ethical value system of organizations. If you do not feel good taking a decision. You do not worry about the consequences of your decisions and you possess the courage of conviction and conventions to assert that ethical decisions are supreme in business. you stick to that stand. then you may not opt for it and if the benefits outweigh the cost. In certain situations. Hence while taking decisions during such situations. This approach may not appeal to all entrepreneurs and very rarely. But ultimately companies following the path of ethical value system succeed in long run as sooner or later consumers learn to separate fact from fiction. Even if it may entail closing down of your business. While it is certainly true that profits are the true measure of success. This is otherwise called the Utilitarian approach. not ethics (Albert Einstein) 93/MITSDE • . You may opt to stick to ethics. if you have a good feeling. • Nowadays Money and Ethics are seen to be diametrically opposed to each other but it turns out money and ethics do have much in common. Any corporation large or small ultimately lives by its reputation. There sometimes arises an inevitable conflict in the company between their moral obligations and improving the bottom lines.Business ethics society at large and also to your employees. As is very rightly said by Henry Ford . You clearly and unambiguously opt for decisions you know to be right. But. 2. Ethics must sit at the top of the mountain for any successful company that wants the trust of the consumers and investors. then it is wrong. If the consequences of the decisions are going to cost you more than the benefits that you may derive. come what may. Ethical decision-making gets especially interesting when organizations must reconcile their core values and show a healthy bottom line which end up in conflict with one another. the two can co-exist. Business history clearly shows that adopting unethical means to run a business always leads to reversal of fortunes. commercial ruthlessness doesn't necessarily lead to unethical practices. you will be forced to weigh the cost of the decisions as against the benefits derived from them.

nothing else matters. and another employee can "audit" the financials and make sure • · 94/MITSDE . If you don't have integrity.Alan K. Hindustan Unilever. Ethics are important not only in business but in all aspects of life because it is an essential part of the foundation on which civilized society is build. "If you have integrity. Looking at names like Tata group. In order to prevent fraud in companies. ITC. fraud will be detected before any of the financial statements are sent out to the shareholders. must be truthful and honest when auditing a company's financial information. Ethics is also especially important when working with financial information. Simpson • • Are Why Ethics Ar e Important in Business • When working in the business world. In other words. It is very difficult to trust someone handling lots of money. and Society • Profits and ethics are in reality part of the same equation. if a company is caught altering their financial information. the company will collapse and it will be that much harder for people to put their trust into another company similar to the one that has collapsed. Rockwell Automation. This is a complex journey especially during tremendous economic pressures. Auditors. and momentarily gained fame and fortune but what was the end result?? Many companies strive for and achieve ethical behavior. The drive for success in the marketplace and to maximize return of capital can lead a company astray with disastrous results. If honesty is not involved in the auditing process." -. Successful businesses fail. There are companies that have crossed ethical lines in the pursuit of profit. A business that lacks ethical principles is bound to fail sooner or later. it is hard to trust the financial statements. Similarly. or "independent third parties". nothing else matters. it is a great idea to let the accountants have vacation days lined up and have other accountants fill in for the job. For example. Companies in the past have distorted their financial statements in order to look better to stockholders. separation of duties also comes into play when dealing with important financials. Just like allowing accountants to take time off. Government. without thinking of the consequences that may follow if they get caught. one employee can balance the books. If a company does not promote good ethical behavior within the organization. and the employee creating the financials can be fired. there should be separation of responsibility within each department. Infosys Technologies. A corporation that wishes to grow and increase its financial return to its owners must balance ethics and operations. No one will want to buy their stocks anymore and many people will lose their faith in the company. it is tremendously hard to have confidence the business.Business. ONGC it is inferred that Ethics remain being important in business and strong ethical values takes the business a long way. Ford India. it is a necessity to encompass moral ethics. profitably running businesses suf fer from a downfall and some seemingly ef fective corporate receive a great fall in their profits and popularity all due to the lack of business ethics. This way. it will be very hard for a shareholder to trust the company. therefore putting the company in a bad situation. Most likely.

Employee performance also improves while working in an ethical environment. Being non-ethical can lead to failure and the fall of the business. especially to co-workers and new bosses. as are corporate relationships. This may become time consuming. Arriving to work on time. Personal relationships are based upon trust. or else there would be more fraudulent financials. however. and having a good relationship with associates within the company are ways to prove to be a trustworthy person as well. It is hard to prove honesty to new people. Non-ethical behavior can scorn the company and create bad publicity. partners and suppliers need to be able to trust the company. and as a result.2 Ethics of ficers Ethics officers (sometimes called "compliance" or "business conduct officers") have been appointed formally by organizations since the mid-1980s. success will be established. Accountants must have strong moral values. everyone wins. The benefits of being ethical greatly outweigh being non-ethical in business.Business ethics that everything is balanced and in the right place. Sincerely wanting the company to do well and succeed is a key factor in helping to prove trustworthiness. one might expect the efficacy to be minimal. such as having an honest and truthful reputation. this is because ethical business practices result from a corporate culture that consistently places value on ethical behavior. getting projects completed. There are plenty of reasons why being honest and truthful is the better decision to make when creating financials for other businesspeople to see and use to make conclusions. By making ethics mandatory within a company. If the appointment is made primarily as a reaction to legislative requirements. Although it can be said that ethics is a given when working for a business. There is a chain reaction when ethical behavior occurs and when non-ethical behavior occurs. and business to a similar company. • • • 8.3. at least. money. companies should enforce being ethical and ultimately become more successful because of it. If employee performance improves. it is possible. over the short term. Most companies would want to make sure that the financials are correct and save the hassle of having ruined financials. The mere establishment of a 95/MITSDE . This would prevent any bad publicity for the company and keep them out of negative spotlights. the company will thrive. a culture and climate that usually emanates from the top of the organization. shareholders can see the true potential the company has and base their decisions off of honesty. Corporate partners can count on the company when making business decisions. By being honest with the financials. • There are also personal reasons as to keep financials accurate. However. In part. In addition to shareholders having confidence in the company. The effectiveness of ethics officers in the marketplace is not clear. Shareholders and corporate partners will lose their confidence in the company and give their support. it is essential that the financials are accurate and completed with ethical precision. Companies thrive on networking in order to be successful.

Can Ethics and a Healthy Bottom Line For Companies Co-Exist? 96/MITSDE . Explain ethics of accounting information Explain ethics of human resource management Ethics of sales and marketing Ethics of production Ethics of intellectual property. the other institutions that affect an individual. to equal employment practices. 5. The foundation for ethical behavior goes well beyond corporate culture and the policies of any given company. Business ethics are standards that govern business behavior. 8. knowledge and skills What are the suggestions about ethics policy? Who are Ethics officers? Why Ethics Are Important in Business What is the importance of Ethics in Business Explain few approaches of business and Ethics. the competitive business environment the company is in and.Business. 10. Many have found that they believed that a code of ethics was the most effective way to encourage ethical business behavior. Summing up • A code of ethics or conduct is a statement of ethical practices or guidelines to which an enterprise adheres. There are many such codes. These codes of ethics can promote positive behavior among corporations in a variety of ways. Sometimes these codes are written down or a code of ethics is communicated orally or even through the overall climate or cultural values of the organization • • Self Assessment 1. and Society position to oversee ethics will most likely be insufficient to inculcate ethical behaviour: a more systemic programme with consistent support from general management will be necessary. ranging from misuse of corporate assets. and antitrust violations. 11. 2. falsification of books and records. These codes cover a multitude of subjects. for it also depends greatly upon an individual's early moral training. 4. society as a whole. 9. Government. indeed. conflict of interest. and consumerism represent the major part of the social responsibility of business. Recognizing and trying to solve the problems involving equality. the environment. 6. some related to industry at large and others related directly to corporate conduct. 7. 3. and use of inside information.


Chapter IX Globalization

Globalization has had an impact on different cultures around the world. Globalization describes an ongoing process by which regional economies, societies, and cultures have become integrated through a globe-spanning network of communication and exchange. The term is sometimes used to refer specifically to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. However, globalization is usually recognized as being driven by a combination of economic, technological, socio-cultural, political, and biological factors. The term can also refer to the transnational circulation of ideas, languages, or popular culture. Lear ning Objectives 1. To define globalization and international business and show how they affect each other 2. To understand why companies engage in international business and why international business growth has accelerated 3. To discuss the major criticisms of globalization 4. To become familiar with dif ferent ways in which a company can accomplish its global objectives 5. To apply social science disciplines to understanding the differences between international and domestic business Contents 9.1 Globalization – Definition, History 9.2 Modern Globalization 9.3 Measuring globalization 9.4 Effects of globalization 9.5 Pro-globalization (globalism) 9.6 Anti-globalization 9.1 Definition An early description of globalization was penned by the American entrepreneurturned-minister Charles Taze Russell who coined the term 'corporate giants' in 1897. However, it was not until the 1960s that the term began to be widely used by economists and other social scientists. It had achieved widespread use in the mainstream press by the later half of the 1980s. Since its inception, the concept of globalization has inspired numerous competing definitions and interpretations. The United Nations ESCWA has written that globalization "is a widely-used term that can be defined in a number of different ways. When used in an economic context, it refers to the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, and services and labour... although considerable barriers remain to the flow of labour...”


Business, Government, and Society

Globalization is not a new phenomenon. It began in the late nineteenth century, but its spread slowed during the period from the start of the First World War until the third quarter of the twentieth century. This slowdown can be attributed to the inward looking policies pursued by a number of countries in order to protect their respective industries. However, the pace of globalization picked up rapidly during the fourth quarter of the twentieth century. History The historical origins of globalization are the subject of on-going debate. Though some scholars situate the origins of globalization in the modern era, others regard it as a phenomenon with a long history. Great Britain grew rich in the 19th century as the first global economic superpower, because of its superior manufacturing technology and improved global communications such as steamships and railroads. The 19th century witnessed the advent of globalization approaching its modern form. Industrialization allowed cheap production of household items using economies of scale, while rapid population growth created sustained demand for commodities. Globalization in this period was decisively shaped by nineteenth-century imperialism. After the Opium Wars and the completion of British conquest of India, vast populations of these regions became ready consumers of European exports. It was in this period that areas of sub-Saharan Africa and the Pacific islands were incorporated into the world system. Meanwhile, the conquest of new parts of the globe, notably sub-Saharan Africa, by Europeans yielded valuable natural resources such as rubber, diamonds and coal and helped fuel trade and investment between the European imperial powers, their colonies, and the United States. Said John Maynard Keynes. The first phase of "modern globalization" began to break down at the beginning of the 20th century, with the first World War. The novelist VM Yeates criticized the financial forces of globalization as a factor in creating World War I. The final death knell for this phase came during the gold standard crisis and Great Depression in the late 1920s and early 1930s. In the middle decades of the twentieth century globalization was largely driven by the global expansion of multinational corporations based in the United States and Europe, and worldwide exchange of new developments in science, technology and products, with most significant inventions of this time having their origins in the Western world according to Encyclopedia Britannica. Worldwide export of western culture went through the new mass media: film, radio and television and recorded music. Development and growth of international transport and telecommunication played a decisive role in modern globalization. In late 2000s, much of the industrialized world entered into a deep . Some analysts say the world is going through a period of delocalization after years of increasing economic integration. Up to 45% of global wealth had been destroyed by the global financial crisis in little less than a year and a half. China has recently become the world's largest exporter surpassing Germany.



9.2 Moder n Globalization Globalization, since World War II, is largely the result of planning by politicians to break down borders hampering trade to increase prosperity and interdependence thereby decreasing the chance of future war. Their work led to the Bretton Woods conference, an agreement by the world's leading politicians to lay down the framework for international commerce and finance, and the founding of several international institutions intended to oversee the processes of globalization. These institutions include the International Bank for Reconstruction and Development (the World Bank), and the International Monetary Fund. Globalization has been facilitated by advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of the General Agreement on Tariffs and Trade (GATT), which led to a series of agreements to remove restrictions on free trade. Since World War II, barriers to international trade have been considerably lowered through international agreements — GATT. Particular initiatives carried out as a result of GATT and the (WTO), for which GATT is the foundation, has included: • Promotion of free trade: elimination of tariffs; creation of free trade zones with small or no tariffs • • • • • • Reduced transportation costs, especially resulting from development of containerization for ocean shipping. Reduction or elimination of capital controls Reduction, elimination, or harmonization of subsidies for local businesses Creation of subsidies for global corporations Harmonization of intellectual property laws across the majority of states, with more restrictions Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)

Cultural globalization, driven by communication technology and the worldwide marketing of Western cultural industries, was understood at first as a process of homogenization, as the global domination of American culture at the expense of traditional diversity. However, a contrasting trend soon became evident in the emergence of movements protesting against globalization and giving new momentum to the defense of local uniqueness, individuality, and identity, but largely without success. 9.3 Measuring globalization Looking specifically at economic globalization, demonstrates that it can be measured in different ways. This center around the four main economic flows that characterize globalization: • Goods and services, e.g., exports plus imports as a proportion of national income or per capita of population • • Labor/people, e.g., net migration rates; inward or outward migration flows, weighted by population Capital, e.g., inward or outward direct investment as a proportion of national income or per head of population

social. International trade in manufactured goods increased more than 100 times in the 50 years since 1955.5 trillion in national currencies were traded daily to support the expanded levels of trade and investment.emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. proportion of populations (and rates of change thereof) using particular inventions (especially 'factor-neutral' technological advances such as the telephone.g. Particularly movement of material and goods between and within national boundaries.4 Ef fects of globalization Globalization has various aspects which affect the world in several different ways such as: Industrial . and political. Data is available on a yearly basis for 122 countries. motorcar. the United Kingdom and the Netherlands.. as detailed in Dreher. we calculate an overall index of globalization and sub-indices referring to • actual economic flows • economic restrictions • data on information flows • data on personal contact • And data on cultural proximity.Business. In addition to three indices measuring these dimensions. The least globalized countries according to the KOF-index are Haiti. The KOF Index of Globalization measures the three main dimensions of globalization: • economic • social • And political. Myanmar. economic restrictions. and data on cultural proximity is calculated. a multivariate approach to measuring globalization is the recent index calculated by the Swiss think tank KOF. In addition to three indices measuring these dimensions. followed by . As these worldwide structures grew more quickly than any transnational regulatory regime. the Central African Republic and Burundi. Sweden. Gaston and Martens (2008). According to the index. inter national research & development flows. the instability of the global financial infrastructure dramatically increased. e. an overall index of globalization and sub-indices referring to actual economic flows. and Society • Technology. Government. Financial . 9. and data on personal contact. The index measures the three main dimensions of globalization: economic.emergence of worldwide financial markets and better access to external financing for borrowers. China's trade with Africa rose seven-fold during 200007 alone. broadband) As globalization is not only an economic phenomenon. 100/MITSDE . By the early part of the 21st century more than $1. data on information flows. as evidenced by the financial crisis of 2007–2009. the world's most globalized country is Belgium.

cross-boundary water and air pollution. The construction of continental hotels is a major consequence of globalization process in affiliation with tourism and travel industry. Language . then it is very likely that in the next twenty years. China will have enough wealth. If China continues to grow at the rate projected by the trends. Political . and it is argued that developing countries should not. companies in various industries have to upgrade their products and use technology skillfully in order to face increased competition. With the influence of globalization and with the help of The United States' own economy. however meant that an economic collapse in any one given country could not be contained. industry. Politically. On the other hand. Approximately 40% of the world's radio programs are in English. The interconnectedness of these markets. advent of new categories of consciousness and identities which embodies cultural diffusion. the People's Republic of China has experienced some tremendous growth within the past decade. Since many factories are built in developing countries with less environmental regulation. over-fishing of the ocean. such as climate change. and participate in a "world culture". Iran Cultural . Economic . Competition . About 35% of the world's mail. Dariush Grand Hotel. and the spread of invasive species. Ecological . satellites.increase in information flows between geographically remote Informational locations. 101/MITSDE . be prohibited from increasing their standard of living. adopt new technology and practices. Infor mational . the United States has enjoyed a position of power among the world powers.growth of cross-cultural contacts.the advent of global environmental challenges that might be solved with international cooperation. and increased availability of telephone and Internet. via regulation. economic development historically required a "dirty" industrial stage.Survival in the new global business market calls for improved productivity and increased competition. telexes.realization of a global common market. globalism and free trade may increase pollution. Due to the market becoming worldwide. the Port of Shanghai holds the title as the World's busiest port. Kish. Arguably this is a technological change with the advent of fiber optic communications. the desire to increase one's standard of living and enjoy foreign products and ideas. About 50% of all Internet traffic uses English. and technology to rival the United States for the position of leading world power.the most popular language is Mandarin (845 million speakers) followed by Spanish (329 million speakers) and English (328 million speakers). there will be a major reallocation of power among the world leaders. and cables are in English. in part because of its strong and wealthy economy.some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization.Globalization As of 2005-2007. based on the freedom of exchange of goods and capital. Some bemoan the resulting consumerism and loss of languages.

causing reduction in diversity or even assimilation. Facebook. and wireless telephones. Cultural ef fects Japanese McDonald's fast food as an evidence of international integration. Greater international travel and tourism. Accessible to those who have Internet or Television. Legal/Ethical The creation of the international criminal court and international justice movements. Spread of local consumer products (e. Others consider multiculturalism to promote peace and understanding between peoples. Religious The spread and increased interrelations of various religious groups. communication satellites. Idol series. Worldwide sporting events such as FIFA World Cup and the Olympic Games. e. Greater immigration. Worldwide fads and pop culture such as Pokémon. submarine fiber optic cable. 102/MITSDE . copyright laws. Crime importation and raising awareness of global crime-fighting efforts and cooperation.9% as compared to 2007. Orkut. patents and world trade agreements. including illegal immigration.development of the system of non-governmental organizations as main agents of global public policy. Social . data flow. Adidas had created a parallel website with a downloadable interactive rugby game for its fans to play and compete. Origami.g. global telecommunications infrastructure. As the sponsors of the All-Blacks rugby team. leaving out a substantial segment of the Earth's population. and MySpace. WHO estimates that up to 500.. since it may supplant the local culture. including humanitarian aid and developmental efforts. and Society Spreading of multiculturalism. food) to other countries (often adapted to their culture). The emergence of Global administrative law. Sudoku. through the export of Hollywood and. and better individual access to cultural diversity (e.. Numa Numa.g. The IOM estimates there are more than 200 million migrants around the world today. there were over 922 million international tourist arrivals. Bollywood movies). YouTube. Government. and practices and their ideas of the meanings and values of particular spaces. Incorporation of multinational corporations in to new media. with a growth of 1. ideas. Technical Development of a Global Information System. Increase in the number of standards applied globally.g. using such technologies as the Internet. Newly available data show that remittance flows to developing countries reached $328 billion in 2008.000 people are on planes at any one time? In 2008.Business. Some consider such "imported" culture a danger. to a lesser extent.

from the National Geographic article titled “Globalization” states. the Westerners who get these tattoos often don't know what they mean. One example of this occurring is AIDS/HIV. It calms the body and helps one connect to their inner being while shying away from their conditioned self. and then almost immediately start to transform them. Those locations include Kuwait. Another common practice brought about by globalization is Chinese symbol tattoos. Meditation has been a sacred practice for centuries in Indian culture. the flow of information. Also. India is known for its curry and exotic spices. lowering the quality of life in locations that have not adapted to the change. “When cultures receive outside influences. near-instantaneous communication between people anywhere in a variety of digital forms and media. The internet breaks down cultural boundaries across the world by enabling easy.” One classic culture aspect is food. Globalization has joined different cultures and made it into something different. beliefs they hold. Photo sharing websites allow interaction even where language would otherwise be a barrier. These tattoos are popular with today's younger generation despite the fact that. Negative ef fects Globalization has been one of the most hotly debated topics in international economics over the past few years. making this an example of cultural appropriation. Modern modes of transportation allow more people and products to travel around the world at a faster pace. Australia is eating classic Italian meatballs. globalization has eaten away at its competitive edge in industry and agriculture. America is known for its burgers and fries. This company is just one example of food causing cultural influence on the global scale. in China. how they dress. tattoos are not thought of as cool. In the Midwestern United States. and Malta. There are more Americans meditating and practicing yoga now. and activities they practice. Culture is what people eat. goods. they also open the airways to the transcontinental movement of infectious disease vectors.Globalization Culture is defined as patterns of human activity and the symbols that give these activities significance. The Internet is associated with the process of cultural globalization because it allows interaction and communication between people with very different lifestyles and from very different cultures. Globalization. capital and people across political and geographic boundaries. Globalization has also generated significant international opposition over concerns that it has increased inequality and environmental degradation. 103/MITSDE . they ignore some and adopt others. has also helped to spread some of the deadliest infectious diseases known to humans. Egypt. McDonalds is an American company which is now a global enterprise with 31. Some people are even traveling to India to get the full experience themselves.000 locations worldwide. As Erla Zwingle. France is known for its cheeses. Someone in America can be eating Japanese noodles for lunch while someone in Sydney.

more employment. and also ingredients from animals and minerals.3 billion people and as incomes rise. grain production increased by over 250%. there would be greater famine and malnutrition than the UN presently documents (approximately 850 million people suffering from chronic malnutrition in 2005). without the Revolution.000 expatriate professionals annually. 9. Indian students going abroad for their higher studies costs India a foreign exchange outflow of $10 billion annually. From 1950 to 1984. with all countries involved in the trade benefiting. Growing populations. The head of the International Food Policy Research Institute stated in 2008 that the gradual change in diet among newly prosperous populations is the most important factor underpinning the rise in global food prices.Business. It is becoming increasingly difficult to maintain food security in a world beset by a confluence of "peak" phenomena. especially among developing nations. as the Green Revolution transformed agriculture around the world. enhances civil liberties and leads to a more efficient allocation of resources. Brain drain has cost the African continent over $4 billion in the employment of 150. stem. this leads to lower prices. peak grain and peak fish. the UN estimates there are more than 50 million regular users of heroin. food and water by 2030. Dr. leading to brain drains. Traditional Chinese medicine often incorporates ingredients from all parts of plants. Director of the USA Club of Rome suggests that “the world government should reflect the political and economic balances of world nations. namely peak oil. A world confederation would not supersede the authority of the State governments but rather complement it. falling energy sources and food shortages will create the "perfect storm" by 2030. They see globalization as the beneficial spread of liberty and capitalism. according to the UK government chief scientist. root. Proponents of laissez-faire capitalism. The United Nations Office on Drugs and Crime (UNODC) issued a report that the global drug trade generates more than $320 billion a year in revenues. higher output and a higher standard of living for those in developing countries. the United Nations' Food and Agriculture Organization (FAO) warned. The world population has grown by about 4 billion since the beginning of the Green Revolution and most believe that. Worldwide. Francesco Stipo. as both the States and the world authority would have power within their sphere of competence". and Society Opportunities in richer countries drive talent away. flower. In general. and some libertarians. the leaf. The international trade of endangered species is second only to drug trafficking.5 Pro-globalization (globalism) Supporters of free trade claim that it increases economic prosperity as well as opportunity. Economic theories of comparative advantage suggest that free trade leads to a more efficient allocation of resources. say that higher degrees of political and economic freedom in the form of democracy and capitalism in the developed world are ends in themselves and also produce higher levels of material wealth. The world will have to produce 70% more food by 2050 to feed a projected extra 2. Government. cocaine and synthetic drugs. He said food reserves are at a 50-year low but the world requires 50% more energy. peak phosphorus. peak water. 104/MITSDE .

aid. housing calamity. goods and beliefs. encouraged by organizations such as the International Monetary Fund or the World Trade Organization.6 Anti-globalization The "anti-globalization movement" is a term used to describe the political group who oppose the neoliberal version of globalization. if a business does not aim international market and the international customers then the company will not only be lagging behind taking the first mover's benefit of preserving customer dependability. 9. Going by the global demands and considering the total size of international economies would reveal that in comparison with the size of national market the potential buyers generally reside in international markets. dip in equity markets. Joseph Stiglitz and Andrew Charlton write: “The anti-globalization movement developed in opposition to the perceived negative aspects of globalization. restricted influx of funds. petroleum costing. In comparison. 105/MITSDE . With increase in consumers' demands and flattening of global market the international business is expected to assist several markets in a faultless manner. "Anti-globalization" may also involve the process or actions taken by a state in order to demonstrate its sovereignty and practice democratic decisionmaking. which was market-oriented. assistance for refugees.Globalization Supporters of democratic globalization are sometimes called pro-globalists. With so many negative traits in world economy. since the group represents a wide range of interests and issues and many of the people involved in the anti-globalization movement do support closer ties between the various peoples and cultures of the world through. Starting business internationally is as defensive as an offensive play. They believe that the first phase of globalization. particularly free market deregulation. To remain competitive in today's scenario aggressive measures should be implemented to expand business. while criticisms of globalization are some of the reasons used to justify this group's stance. and total cost of living is defying us than ever before. but would also lose on collaborations with key partners and distribution pacts. Examining the alleviating factor that globalization had on the world business would reveal that trade shortage. The term 'anti-globalization' is in many ways a misnomer. Anti-globalization may occur in order to maintain barriers to the international transfer of people. Changing slowly to economic alterations in today's world could ultimately harm the business. for example. conservative economic theory recommends that the interest rate today hold similarity with that of 1980 than the low interest rates we are witnessing today. should be followed by a phase of building global political institutions representing the will of world citizens.” Summing up The Impact of Globalization on Business: Expanding the geographic footprint of any business in the era of globalization is not at all a perilous and costly job as it has been in the past. and global environmental issues.

• • Self Assessment • • • • • Definition of Globalization? What is KOF Index of Globalization What is GATT? What are the effects of Globalization? Explain four main economic flows that characterize globalization: 106/MITSDE . privatization of state owned firms. utilities. and liberalization of norms related foreign direct investment. Infrastructure development – Communications. and well-organized transportation has steadily improved over the past few years as compared to what it was few decades ago. it is estimated that by 2015. • Growing economies – Over the last few years China and India has witnessed 9% and 7% of annual growth respectively. growing middle class populations. as well as the existence of worldwide firms that accompanies job opportunities focused around intellectual capital is generating need for marketable real estate infrastructure. increasing number of well-qualified population. The factors which trigger growth and monetary infusions incorporate property privileges. By considering the following. and Society In comparison with the financial scenario of 1980.Business. Commercial need – The financial growth. legal procedure. the developing economies will account for 50% of world GDP. removal of capital management. Demographics – Economies now characterize younger populations. published guideline. uctures Opening up of closed market str uctur es – Most flourishing developing economies have been occupied in methodical reorganization of basic community norms ignored in the developed economies. Government. elevating incomes and urbanization. the contemporary market is the outcome of a worldwide economy which is performing the role of an alleviating factor.

air.1.2 Type of industries and type of pollution 10. solid waste etc.1. with special reference to industries.2.2. particularly in products which have good export potential.1 Water Pollution Industries 10.2 Causes of Air Pollution 10.2.3 Environmental law 10. • Students learn about the environmental governance and regulation in terms of protection and rehabilitation • Students learn to appreciate social and economic solutions for problems of water supply.2.1.3. Since environment regulation tends to be weak in developing countries some of these countries have begun to specialize in pollution intensive manufacturing.2.4 Air 10.2.3 Soil 10.3.3 Dwelling 10.2 Oil 10. noise pollution. Legislative efforts • Role of the Judiciary • Working of Environmental regulation • Enforcement • Monitoring Summing up Self Assessment 107/MITSDE .1 Causes of pollution 10.2. has adversely affected the quality of the environment. However it is also extremely important for developing countries to achieve a high level of economic growth to mitigate their socio-economic problems.1.1 Causes of industrial pollution waste 10. Lear ning Objectives • Students learn the causes of pollution like water.3.1 Industries 10.1. imposed considerable social costs and livelihood impacts and has become a major threat to sustainable development. sanitation and health Contents 10.2 Transport 10.1 Environmental governance and regulation 10.Industrial Growth and Environmental degradation Chapter X Industrial Growth and Environmental degradation The rapid economic growth achieved after globalization by some of the developing countries. But the major challenge here is: how to ensure development in a sustainable manner by a proper trade-of f between environment and development.2.1 Environmental protection – • Environment and rehabilitation • Environmental Governance and regulation in India 10.2.

Human activities mainly include industries for various human needs – directly and indirectly 10. Science has evolved technologies and technologies have helped the human welfare. solid wastes and sound pollution Water pollution. steel and other mine based industries Textile industries and their ancillaries Transport vehicle manufacturing Petroleum based industries Forest dependent industries Food industries Paper industries Sugar industry Brick industry Aircraft industry Electrical appliances and electric goods industries IT based industries Telecom industries Type of pollution Water pollution. In such a broad sense.2 Industries A vast array of industries can cause pollution contrary to popular perception that only a chemical industry can cause pollution. sound pollution Water pollution. water pollution. Classified list of industries causing different types of pollution is presented in table. noise pollution Solid wastes.Business. indirect or negligible. medicines Manufacture of gases Cement. In the process. air pollution Water pollution. noise pollution. In some industries. no industry is free of pollution. solid wastes Air pollution. food pollution Water pollution. noise pollution Water pollution. the pollution has been a part of technology and therefore a part of human miseries. In others. Pollution is a human contribution to nature. air pollution. air pollution. air pollution Air pollution Air pollution and solid wastes. it may be invisible. air pollution Solid wastes. the pollution is out rightly visible and substantial. Type of industries Manufacture of chemicals. air pollution Air pollution Solid wastes and air pollution 108/MITSDE . and Society 10. water pollution Solid wastes. pesticides. air pollution. air pollution.1 Causes of Pollution The ultimate cause of pollution is human activity itself. The nature and intensity of pollution may be different in different industry. solid wastes. air pollution Air pollution. Government.

etc. etc.home. Most of these industries are established as core industries for progress of human society. Accumulation of wastes due to its improper disposal is a major problem in our country. They should be put where the radiation can do no harm. How far these technologies are adopted will decide the nature and extent of pollution. The recent Surat plague epidemic is an indication.Industrial Growth and Environmental degradation Although all these industries have potentiality to generate pollutants in the environment. steel. Lead Plumbing. are becoming a serious problem. Unfortunately.The wastes include kitchen waste. mining coal. medical wastes. paper. but the technology adopted by such industry. Causes anemia. Causes bone damage.. pesticide and pharmaceutical industries due to cement.1 Causes of industrial pollution waste Pollution from thermal power plants due to chemical fertilizers. Hence. kidney malfunction and nervous disorder. For example. As the scientific research progresses.. Classification of Wastes . Radioactive Waste -Waste products from nuclear power stations etc. They are • Chemicals. food. there has also been an increase in the amount of wastes. polythene. new technologies for industries are added. Waste Management .is not the industry itself. steel industries • Textile manufacturing and processing industries • Paper industries • Sugar industries • Food industries All industries other than above cause relatively lesser pollution and are less dangerous than above industries. Many nonbiodegradable materials are recyclable. it is undisputable that they have to exist for human existence and development. old tyres.2. pesticides. plastic. Population in India has been growing at the rate of 1. mottled teeth.The garbage should be segregated at the source . construction materials. Some of them cause serious pollution then others. With this increase. one must understand the types of wastes being generated. sugar industries due to textile and textile related industries due to petroleum and other…. New technologies to minimize the pollution are also generated in every industry. office. 109/MITSDE .in many situations . there is no way of stopping a radioactive nucleus from emitting radiation. metallic. papers. The recyclable material can automatically be sent to recycling plants. 10. This should be followed by door to door collection.7%.. shops. The cause of pollution . Nuclear energy has some advantages over fossil fuel such as coal. gasoline. medicines manufacturing industries • Cement. glass. In order to understand the severity of the problem and to work towards a solution. The only disputable point is how they have to be managed to make them free of pollution. Toxic Elements Commonly Present in Municipal and Industrial Waste Waters Industrial wastes.

nuclear reactors release a lot of hot water from their cooling plants. ammonia. and Society Water 10. These organisms besides spreading diseases also consume the oxygen present in water. lips and tongue. blurred vision. Metals-Mercury Industrial wastes Minamata disease (resulted from the contaminated waters of the Minamata bay in Japan in 1953) causes numbness of limbs. This creates an imbalance in the aquatic ecosystems. and urban areas. Lead Industrial wastes 110/MITSDE . mercury. etc. refineries. bone. This hot water is let into the water bodies without the temperature being reduced. This results in heating up of the water and thereby killing the aquatic life.Business. Pollutant Source/Cause Effect Ef fect Oxygen depletion Spread of diseases/ epidemics Sewage that includes Sewerage of rural domestic wastes. The sewage most often contains the organic matter that encourages the growth of microorganisms. hospital wastes. The oil tankers and offshore petroleum refineries cause oil leakage into the waters. liver. It also coats the body of the aquatic animals and birds which may also kill them. The aquatic organisms like the fish cannot then survive in such waters.2. But these wastes include various acids. This is called thermal pollution. Oil floats on the water surface and prevents the atmospheric oxygen from mixing in the water. This is called oxygen depletion. and other chemicals like the fluorides. There are also detergents that create a mass of white foam in the river waters.1. Absorbed into blood and affects PBCs. alkalis. cadmium. Certain industries such as power plants. The oxygen content of water also becomes less due to increase in the temperature.1. This pollutes the waters.1 Water Pollution Sewage that includes organic matter. etc. brain and the penpheral nervous Lead poisoning can even lead to coma.2. All these chemicals are quite harmful or even fatally toxic to fish and other aquatic populations. 10. Government.2 Oil Oil spill is a major problem in the oceans and seas. The industrial wastes include toxic metals like lead. animal and human excreta-one of the major pollutants of water in the urban and rural areas is the sewage. Industries The industries are mostly situated along the riverbanks for easy availability of water and also disposal of the wastes. kidney. excreta. The oil enters the body of the organisms. They change the pH of water. etc. dyes and other chemicals. deafness and mental derangement.

Steel industries . NH3 Cement industries .CO2.2 Causes of Air Pollution 10. Cl2. Cl2. intestinal mucosa. NO3 Food industries .CO2.2.Cl2.CO2. NO3. CO2 Pesticide industries . SO2. vomiting. CO2. etc.1 Industries Industries are responsible for large scale air pollution as compared to other causes because: the extent of gaseous pollution from industries is very high as compared to any other cause number of industries being established are regarded as yard stick of progress. kidney and liver disorders.CO2. CH4. Arsenic Fertilizers Agrochemicals like DDT Pesticides Ef fects and Causes of Soil Pollution • Industrial • Dangerous chemicals entering underground water • Ecological imbalance • Release of pollutant gases • Release of radioactive rays causing health problems • Increased salinity • Reduced vegetation 10. SO2. SO2. muscular atrophy. Cl. H2S. NO2 Textile industries . Accumulates in the bodies of fishes. Adversely affects the nervous system. NO2. It can cause nerve disorder. Arsenic poisoning causes renal failure and death. etc. liver. CO Paper industries . fertility. Cadmium poisoning causes headache. Not all industries can lead to air pollution. NH3.Cl.NH3. kidney necrosis. H2S. SO2. Causes thinning of egg shells in birds. H2S. SO2 Atomic energy units . mammals including man. SO2. NH3. NH3. NO2. CO Fertilizer industries . SO2. bronchial pneumonia.Cl2. etc. pancreas. Following type of industries are responsible for air pollution. Cl2. CO. SO2. NO3.2.CO. CN2. H2S. CH4. CO2. • • • • • • • • • • • • Thermal power plants . CO.CO2. CO Pharmaceutical industries .Industrial Growth and Environmental degradation Cadmium Cadmium Fertilizers Deposited in organs like the kidney. CH4.HCN. Petroleum industries .2. NH3 Sugar industries .radioactive gases 111/MITSDE . NH3. birds.

Business. Calcutta. Some socially relevant issues related to vehicular pollution have been recently raised in public debates: Although vehicular transport is inevitable in cities. Pune is so high that a natural air with its natural composition has become rare.2. Government. Vehicular pollution in many agglomerates like Delhi. They are potential pollutants. Cities with very high population have recorded high level of air pollution due to vehicles. 10.2. Bombay. Each one of them has dangerous ef fect on human health. CO. CO2. Cl. is it possible that individual ownership of vehicle could be avoided and public transport system could be more efficiently used. air coolers. CO. animal health as well as ef fect on the whole ecosystem. The main pollutants like SO2. CO2 are main gases being released into air due to transport vehicles.2. the extent of pollution due to transport vehicles is directly dependent upon the level of urbanization density of vehicles As the urban development increases. NO2. CH3. Is it necessary that a single travelling person use a four wheeler? Can we not partially replace the transport needs by electrically operated public transport systems than present petroleum dependent vehicles? Is there any possibility using electricity operated vehicles? 10.2 T ransport Burning the petroleum products to run automotive transport vehicles is the main cause of air pollution. But. Due to large number of such equipments in a smaller geographical area (like in city) large amount of Chlorofluorocarbon are released to atmosphere. and Society These industries release the pollutant gases in their normal course of functioning as a part of manufacturing process. As the dependence on vehicle increases. and some electronic equipments release a group of chlorinated chemicals called Chlorofluorocarbon. Chlorofluorocarbon Refrigerators. the density of vehicle increases.3 Dwelling Air pollution due to dwelling of human population is caused by three reasons. Bangalore. the necessity of transport vehicles becomes inevitable.the total air pollution due to industries is increasing.2. 112/MITSDE . The dominant gases and pollutants due to industrial activities are SO2. Although some industries have modified their manufacturing process and brought some structural changes to reduce the pollution . Most of industrially active areas in our country are highly polluted changing the composition of air.

Deforestation and the logging industry have destroyed many tropical rain forests around the world. Environmental Change and Human Health. UNEP (the United Nations Environment Programme). 113/MITSDE . There are many forms of environmental degradation. and mostly due to malaria. This has destroyed many natural habitats. smog and poor air quality have been the result of air pollution. they rise into the stratosphere and degrade the ozone. When industrial processes release these chemicals. UNDP (the United Nations Development Programme) and the World Bank have made public an important report on health and the environment worldwide on May 1. Environmental degradation can occur naturally. the effects of marine degradation are obvious. In these poorest regions of the world an estimated one in five children will not live to see their fifth birthday. a special section of World Resources 1998-99 in this report describes how preventable illnesses and premature deaths are still occurring in very large numbers. ozone depletion. Both industrial operations and automobiles have released gigantic amounts of emissions that have intensified these problems. equal to the combined populations of Norway and Switzerland. Acid rain. In some areas. are the primary cause of ozone depletion. Environmental degradation is one of the ten threats officially cautioned by the High Level Threat Panel of the United Nations. and the plants and animals native to the areas. Eleven million children die worldwide annually. The largest areas of concern at present are the loss of rain forests. CFCs. If vast improvements are made in human health. or natural resources are depleted. Their constant intake of oxygen and release of carbon dioxide has the potentiality to change the composition of air. acute respiratory infections or diarrhea — illnesses that are largely preventable. the natural environment has been exposed to hazardous waste. air pollution and smog. and the destruction of the marine environment. healthier lives than ever before. or chlorofluorocarbons. When habitats are destroyed. When the environment becomes less valuable or damaged. Pollution is occurring all over the world and poisoning the planet's oceans. WRI (the World Resources Institute).Industrial Growth and Environmental degradation High Density Population Density of population in many cities and urban centers is so high that their respiration has caused imbalance in air composition. In other places. millions of people will be living longer. the environment is hurt. 1998. Even in remote areas. environmental degradation is said to occur. biodiversity is lost. or through human processes. major disasters such as oil spills have ruined the local environment. primarily because of environment-related diseases.

global climate change.1 ENVIRONMENTAL GOVERNANCE AND REGULATION 10. 10. biodiversity. Areas of concern in environmental law include air quality. environmental law has become seen as a critical means of promoting sustainable development (or "sustainability"). agriculture. and conservation.Business. smart growth. Government. There has been considerable experimentation in the search for more effective methods of environmental control beyond traditional "command-and-control" style regulation. pesticides and hazardous chemicals. regulations and policies which. both on the natural environment and on humanity itself. and Society Environmentalists are working hard to combat environmental degradation." Article 48-A of the Constitution comes under Directive Principles of State Policy and Article 51 A (g) of the Constitution comes under Fundamental Duties. 2006). species protection. public participation. waste management. There are countless organizations located all over the world that are dedicated to preventing the global destruction of the environment. voluntary standards such as ISO 14000 and negotiated agreements are some of these innovations. stewardship and management of public lands and natural resources. conventions. Policy concepts such as the precautionary principle. operate to regulate the interaction of humanity and the rest of the biophysical or natural environment. and the polluter pays principle have informed many environmental law reforms in this respect (see further Richardson and Wood. treaties. remediation of contaminated land and brown fields. rivers and wildlife and to have compassion for living creatures." Article 21 of the Constitution is a fundamental right which reads as follows: "No person shall be deprived of his life or personal liberty except according to procedure established by law. responsibility and sustainability. stewardship.3.1 ENVIRONMENT PROTECTION – a) The State's responsibility with regard to environmental protection has been laid down under Article 48-A of our Constitution. including ecology. While many countries worldwide have accumulated impressive sets of environmental laws.1. lakes. emission trading. environmental justice. impact review. their implementation has often been woeful. Environmental protection is a fundamental duty of every citizen of this country under Article 51-A (g) of our Constitution which reads as follows: "It shall be the duty of every citizen of India to protect and improve the natural environment including forests. water quality. Environmental law draws from and is influenced by principles of environmentalism. very broadly. which reads as follows: "The State shall Endeavour to protect and improve the environment and to safeguard the forests and wildlife of the country". 10.3 Environmental law Environmental law is a complex and interlocking body of statutes. In recent years.3. common law. . b) c) D) 114/MITSDE . . From an economic perspective it can be understood as concerned with the prevention of present and future externalities. sustainable development. toward the purpose of reducing or minimizing the impacts of human activity.

1986 (EPA). These Boards were entitled to initiate proceedings against infringement of environmental law. was passed. the Department of Environment was changed to the Ministry of Environment and Forests (MoEF) and given greater powers.3. Perhaps inspired by the Stockholm Declaration of 1972. With the passing of the Air (Prevention and Control of Pollution) Act. The Bhopal Gas leak disaster of December 1984 precipitated the tightening of environmental regulation. to act as an umbrella legislation. The Environment (Protection) Act. negligence. 1981 (the Air Act). The latter. h) ENVIRONMENTS AND REHABILITATION ENVIRONMENTAL GOVERNANCE AND REGULATION IN INDIA 10. 1977. The Water Pollution Control Boards were authorized to deal with air pollution as well. the need was felt for an integrated approach to pollution control. Action against polluters had necessarily to be initiated in courts by those affected." The 42nd amendment to the Constitution was brought about in the year 1974 makes it the responsibility of the State Government to protect and improve the environment and to safeguard the forests and wildlife of the country. in particular. liability. the Water (Prevention and Control of Pollution) Act. Pollution and environmental degradation were addressed very generally in terms of nuisance. 115/MITSDE .2 LEGISLATIVE EFFOR TS Legislative efforts at pollution control in India date back to the mid-nineteenth century. In 1985. The spate of legislations2 in the post-independence period also dealt only incidentally with pollution. rivers and wildlife and to have compassion for living creatures. The Water Cess Act. and a few principles of tort law. The Act also vested powers with the central government to take all measures to control pollution and protect the environment. makes it the fundamental duty of every citizen to protect and improve the natural environment including forests. and became the Central Pollution Control Board (CPCB) and the State Pollution Control Boards (SPCBs). supplemented the Water Act by requiring specified industries to pay cess on their water consumption. Both air and water pollution continued to increase. the State shall Endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health. provided for the institutionalization of pollution control machinery by establishing Boards for prevention and control of pollution of water.Industrial Growth and Environmental degradation e) The State's responsibility with regard to raising the level of nutrition and the standard of living and to improve public health has been laid down under Article 47 of the Constitution which reads as follows: "The State shall regard the raising of the level of nutrition and the standard of living of its people and the improvement of public health as among its primary duties and.1 many of these Acts dealt with environmental regulation in a piecemeal manner and proved ineffective at reducing the levels of pollution. 1974 (the Water Act). without waiting for the affected people to launch legal action. under Fundamental Duties.1. lakes.

1951. the Insecticides Act. The EPA identifies the MoEF as the apex policy making body in the field of environment protection.Business. the Industries (Development and Regulation) Act. the Indian Easement Act. the Bengal Smoke Nuisance Act. citizen groups. and the increase in the frequency of public interest litigations. 3 . and the Motor Vehicles Act. 1. The fundamental right to life and personal liberty enshrined in Article 21 of the Constitution has been interpreted by the courts to include the right to pollution-free air and water. 1860. the Air and Water Acts. the Rio Conference of 1992. 116/MITSDE . 1956. 1986 were subsequently notified to facilitate exercise of the powers conferred on the Boards by the Act. roughly 20 times the size in 1985). 2. and Society The Environment (Protection) Rules. The backdrop of all this has been the growing environmental awareness among the public. 1905. more or less. the River Boards Act. This implies That the state agencies are to function as watchdogs to keep an eye on the existing industries. subject to certain terms and conditions. 1853. before they start to function. Role of the Judiciary The Supreme Court and High Courts have played an active role in the enforcement of constitutional provisions and legislations relating to environmental protection. Constitutional Directives In terms of constitutional provisions. Environmental Working of Envir onmental Regulation An analysis of the principal pollution control legislations. the Indian Penal Act. the Merchant Shipping (Amendment) Act. 1970. the Atomic Energy Act. and pressure groups in India (today. relaxing the enforcement of strict rules of proof and modification of the traditional rule of standing so as to facilitate public interest litigations has served. 1962. Government. and the Radiation Protection Rules. growth in environment and development oriented non-governmental organizations (NGOs). The Shore Nuisance Act. These included the Factories Act. would in this approach require prior permission to do so. The agency responsible then permits them to carry out industrial activity. The MoEF acts through the CPCB and the SPCBs. the 42nd Amendment of 1976 for the first time imposed an obligation on the part of the state (Article 48A) and the citizens (Article 51A (g)) to endeavour to protect and improve the environment and to safeguard the forests and wildlife of the country. Also. 1948. 1971. 1939 were some of the pioneering legislative attempts. The Pollution Control Boards (PCBs) have thus restricted their approach to pollution control to 'Command and Control' (CAC). This has been demonstrated by public demonstrations and protests throughout the 1970s and 1980s4. 1912. The EPA in 1986 and the amendments to the Air and Water Acts in 1987 and 1988 furthered the ambit of the Boards' functions. Environment and Rehabilitation 97 and growing environmental awareness all resulted in further amendments to the constitution. 1882. The CPCB is a statutory organization and the nodal agency for pollution control. reveals that these legislations are mostly punitive in nature. All new industries. 1968. to remove the difficulty in individuals approaching courts for redressal. the Bombay Smoke Nuisance Act. The economic reforms of 1991.

and regulation of location of industries. the Boards were given more teeth—they can now close errant factories or cut off their water or electricity by an administrative order. and the imposition of the penalty (fines. More severe punishments are provided under both Acts for continued violation after the first conviction (Section 41 to 45A of the Water Act and Section 37 to 39 of the Air Act). and standards for air and water pollution.Industrial Growth and Environmental degradation While the basic functions of the CPCB remain prevention. and so forth. Under the Water Act. namely. Failure to obtain consent and violation of consent conditions makes the occupier of an industrial unit liable for punishment under both Acts. Prior to 1988. consent to operate. disposal of hazardous wastes. The Water Act prohibits the discharge of pollutants into water bodies beyond established standards (Section 24). It also lays down penalties. such as fines and imprisonment. which 'includes the power to direct closure. a PCB can give 'directions to any person.000 or both. they may not dilute the standards stipulated by the CPCB. obstructing personnel of the Board from discharging their duties. In an extreme case. or stoppage or regulation of supply of electricity. For minor violations of the Acts. While the SPCBs may prescribe stricter limits if they choose. The SPCBs employ three instruments. enforcement was through criminal prosecution initiated by State Boards and by seeking injunctions to restrain polluters. The other functions of the SPCBs are advising the state governments. water or any other service' (Section 33A of the Water Act and Section 31A of the Air Act). and the primary functional tool employed by them for controlling industrial pollution is inspection of polluting units. and requires that generators of all new and existing sources of discharge into water bodies get the prior consent of the PCBs (Section 25 and 26 respectively). the role of the CPCB is restricted to providing technical or scientific assistance. and abatement of air and water pollution. The CPCB has maintained the major role of prescribing the standard limits for various pollutants. The PCBs also have the power to move court for 'restraining apprehended pollution' as a preventive measure (Section 33 of the Water Act and Section 22A of the Air Act). the role of the Boards is mostly that of an enforcer. The punishment prescribed is imprisonment with unlimited fine. formulation of preventive methods. consent is necessary for an industry to 'discharge effluent into a stream'. prohibition or regulation of any industry or process. while the 'control' is the power to withdraw the power supply. water supply. for not complying with these (and other) regulations of the Act. After amendments to the Act in 1988. consent is necessary to 'Establish or operate an industrial plant in an air pollution control area'. officer or authority' in the interest of pollution control. Thus. such as failure to provide information. consent to establish producing units. technology development. 117/MITSDE . control. the penalty prescribed is imprisonment up to three months or fine of Rs 10. The 'command' therefore is the stipulation of certain upper limits of parameters. with the various SPCBs assuming these functions. Under the Air Act. and collection and dissemination of information on the prevention and control of pollution. imprisonment).

such as the Air and Water Acts. Small industries are known to contribute as much as 40 per cent of air and water pollution. the PCBs are ill-structured. annually. neither the CPCB nor the SPCBs have the capacity to even collect samples. For instance. further undermining efforts at pollution control. accidents. Inspections are undertaken at the time that operating consent is granted and thereafter usually only in response to complaints. both motivationally and in ability. The costs of operating these facilities are anywhere between 15–30 per cent of the investment made. have a strong centralizing tendency. nor have they operationalized the space that exists for popular participation if these directives are truly understood. 118/MITSDE . Government. Studies conducted reveal that there appears to be no impact of inspections on emissions. and also the tendency to not fill vacancies of members representing local bodies.13 As operating costs are high. Monitoring Monitoring conducted by the PCBs is also far from effective. the impact of inspections on compliance is only as strong as the threat of enforcement and punishment faced by the industrial units.Business. Further. Thus. Poor monitoring almost always allows units to get away without operating these plants properly. or other emergencies. the Biomedical Waste (Management and Handling) Rules. a study conducted by the Planning Commission found that they do not have a complete inventory of polluting and potentially polluting industries. Environmental legislations. let alone analyze these toxins. Poorly Staf fed The Planning Commission study revealed that the PCBs are very poorly staffed. as a result. Further. The study highlighted the predominance of non-technical members in most of the Boards. none of these laws provide for co-ordinated functioning of the various enforcement agencies with the third tier of governance— panchayats and municipalities. 1998 specify the working of incinerators so as to reduce emissions of toxins like furans and dioxins. Lack Technical Skills One of the reasons for ineffective monitoring is the lack of technical skills of the PCBs. The PCBs claim that inadequate manpower limits their monitoring. Given the penalties in force for noncompliance in India and keeping in mind the extent of the SPCBs' powers. The reality is that environmental management often degenerates into crisis management. is woefully inadequate. Enforcement by the PCBs. on the contrary. Polluting industries may make a one-time investment and set up Effluent Treatment Plants (ETPs). However. Small industries (capable of high levels of pollution) have been left out of the purview. There is nothing at all to involve local communities. and Society Pollution control laws have neither kept pace with constitutional directives. the lack of professionals in the composition of the Boards. industries are often reluctant to run these plants. with the state and Central government as the exclusive decision makers. Enforcement The primary functional tool employed by the PCBs for controlling industrial pollution is inspection of polluting units. Around 2–5 per cent of its capital investment may be so spent on pollution control.

For instance. which administers pollution laws in the second most populous state of the country. and an inability to discharge their primary functions. and research and development was for all practical purposes negligible. and internal sabotage of most cases is then almost inevitable. and regional of fices. not able to exercise powers to force compliance because of interference from powerful interest and pressure groups. the BPCB did not have a single laboratory or analyst to test effluent samples. For example. Some SPCBs grant consents for a fixed period. training. An analysis of the expenditure incurred by the SPCBs during the Eighth Five Year Plan shows that the primary expenditure was on administration amounting to 57 per cent. suggesting inequitable horizontal treatment of industrial units. For several years. and other expenses constituted the major chunk of the remaining part. which in turn may result in unemployment and protests. The consent fee structure and industry classifications also differ widely across States. This interference is hardly surprising given that often the Boards are represented by vested interests responsible for pollution. Maintenance. In actual fact. Such interference is sometimes based on the argument that strict compliance with standards will lead to closure of industrial units. restricting BPCB expenditure to less than a third of its modest requisition. For example. Even ten years after the enactment of the Water Act. Enforcement Variations in Enfor cement The high degree of political interference may be one of the factors responsible for wide variations in enforcement across states. the Bihar Pollution Control Board (BPCB). With the position of the Chairman of the Boards invariably being a political appointee. PCBs are starved for funds. monitoring equipment. The result is inadequate infrastructure in terms of laboratories. inadequate staf f. sometimes. they can get around this by lax enforcement. It follows that expenditure on pollution prevention activities. usually between 1 and 3 years while the others may issue open-ended consents. the argument is made that PCBs are.Industrial Growth and Environmental degradation Inadequate Funding The principal sources of funding for PCBs are government grants and revenue collected under the Water Cess Act. It has been argued that although states cannot compete by lowering environmental standards in order to attract new investment. political interference is rampant. depreciation.14 A subset of the issue of inadequate funding is the manner in which the SPCBs have made expenses. ference Political Inter fer ence However. both technical and administrative. the state government withheld funding. if an industrial unit falling in the investment limit between Rs 50 119/MITSDE . The ratio of capital expenditure to total expenditure was about 14 per cent.16 This could be the outcome of a so-called 'race to the bottom' for environmental quality in which states invariably sacrifice the environment in the competition for jobs and economic growth. has continuously been deprived of funds. there exists no uniform procedure for the grant of consents under the Air and Water Acts.

Summing up No industry is out of pollution. rivers and wildlife and to have compassion for living creatures. the fee would be Rs many situations . it is bound to pay Rs 7500 as fees whereas if the same unit applied for consent from the Kerala Pollution Control Board. The oxygen content of water also becomes less due to increase in the temperature. How far these technologies are adopted will decide the nature and extent of pollution. waste management.Business. Government. and Society lakhs and Rs 100 lakhs applies for consent from the Madhya Pradesh Pollution Control Board. and conservation. remediation of contaminated land and brown fields. "It shall be the duty of every citizen of India to protect and improve the natural environment including 5. Self assessment 1. 2. smart growth. not the industry itself. pesticides and hazardous chemicals. but the technology adopted by such industry. species protection. Most of these industries are established as core industries for progress of human society. global climate change. ____________Oil spill is a major pollution problem in the oceans and seas. water quality. it is undisputable that they have to exist for human existence and development. Nonfilling of the sanctioned strength is one of the factors behind widely varying per unit staff ratios across SPCBs. The norms for determining the staffing pattern of the boards have not been prescribed. Areas of concer n in environmental law include ________________________________________________________________________________________________ ________________________________________________________________________________________________ _______________________________________________________________________________________________ _____________air quality. This is called ______________________thermal pollution. Major challenge is: how to ensure development in a sustainable manner by a proper trade-of f between environment and development. agriculture. New technologies to minimize the pollution are also generated in every industry. It is also extremely important for developing countries to achieve a high level of economic growth to mitigate their socio-economic problems. The ultimate cause of pollution is ___________________human activity itself. 3. one technical person has to monitor 100 units whereas Kerala and Himachal Pradesh have 14 and 12 persons respectively for the same task. 4. impact review. biodiversity. stewardship and management of public lands and natural resources. The cause of pollution . forests. lakes. In Andhra Pradesh." 120/MITSDE . leading to wide differences in the per polluting unit availability of staff for monitoring. The only disputable point is how they have to be managed to make them free of pollution.

life expectancy 4. planning. 20. quasi 9. 1986 8. 1990 8. twenty 10. macroeconomic. 1971 7. longevity. judiciary 3. 1964. operational 2.4 10. 42. Monopolies & Restrictive Trade Practices 7. budget 5. executive. Structure 9. basic literacy. demand 2. Bhabha 6. organisational. ownership. entrepreurial. sellers' 9. unlimited 6. second 10. Legislature. Supply. 2045 Chapter II: The Social Environment and its influences on business 1. promotional 5. budget . knowledge. Trade Related Competition Commission of India (TRCCI) 8. Morris Davis Morris 3. executive 4. decent standard of living 5. James Q Wilson 2. privatisation 6.Answers Chapter I: Nature and Structure of the Economy 1. infant mortality. 49 3. Mercantilists 4. Regulatory. strategic 7. free Chapter III: Industry 1.

technical barriers to trade 6. phytosanitary 5. 35 Chapter V: The Political System 1. 2. 3. asset-liability 3. macroeconomic environment 9. 130. The Uruguay. defence 9. date 4.Chapter VI: The Financial System 1. 4. 146 2. Geneva.000 7. securitisation 5. floating rate 6. industrial 10. 6. technology. Chellieh 8.J. hostile 7. revive. plebiscite parliament 120 XII Chapter VI: International Linkages 1. Foreign Exchange Regulation Act 8. 5. Finland 10. R. public institutions. 10. repurchase. sanitary. 1995. Exchange or trade 2. amber 3. economic . 36 4. Athens parliamentary recall.

earnings management. fifty 6. Board of directors. Issues affecting the privacy of the employer: whistle-blowing. Issues affecting the privacy of the employee: workplace surveillance e. transparency. shareholders Chapter VIII: Business ethics 1. shareholders. Insider trading. g. misleading financial analysis. The ethics of accounting information are as under: a. ethical. Issues surrounding the representation of employees and the democratization of the workplace: union busting. Kumarmangalam Birla 3. investor 7. employees. . also known as At-will employment. The ethics of human resource management are as under: a. religion. disabilities. bucket shops. Creative accounting. investors 2. b. gender. forex scams: concerns (criminal) manipulation of the financial markets. consumers. Occupational safety and health. accountability. discretionary 9. corporate social performance 10. and facilitation payments: while these may be in the (short-term) interests of the company and its shareholders. Discrimination issues include discrimination on the bases of age (ageism). Bribery. employment law. d. The management 4. Issues relating to the fairness of the employment contract and the balance of power between employer and employee: slavery.Chapter VII: Corporate Responsibility 1. race. indentured servitude. kickbacks. equality of treatment for all shareholders 5. strike breaking. securities fraud. d. Three Concentric Circles 8. Issues arising from the traditional view of relationships between employers and employees. weight and attractiveness. f. c. Executive compensation: concerns excessive payments made to corporate CEO's and top management. these practices may be anti-competitive or offend against the values of society. b. c. 2.

it would be up to the ethics office to investigate why they are quitting and take measures to attempt to resolve any issues surrounding that decision. • Backed up by clearly stated consequences in the case of disobedience. with routine inspections for compliance and improvement. • Misuse of the intellectual property systems to stifle competition. • Remain neutral and nonsexist. It is this person's responsibly to handle communication breakdowns and unethical conduct. • Monitored by top management. in order to prevent any competitors employing them. • Employee raiding • The practice of employing all the most talented people in a specific field. Ethics officers (sometimes called "compliance" or "business conduct officers") have been appointed formally by organizations since the mid-1980s. 7. • Even the notion of intellectual property itself has been criticized on ethical grounds. by both word and example. When an employee gives notice that they are intending to quit their job. 6. • Business intelligence and industrial espionage. • Explained in writing and orally. trademark infringement. copyright infringement. Suggestions about the ethic policy are: • Given the unequivocal support of top management. regardless of need. Ethics of production are: • Defective. addictive and inherently dangerous products and services • Ethical relations between the company and the environment • Ethical problems arising out of new technologies • Product testing ethics 5.3. with periodic reinforcement. Ethics of sales and marketing are as under: • Pricing • Anti-competitive practices • Specific marketing strategies • Content of advertisements • Children and marketing • Black markets and grey markets 4. Ethics of intellectual property. • Doable: something employees can both understand and perform. knowledge and skills are as under: • Patent infringement. .

success will be established. partners and suppliers need to be able to trust the company. it is a necessity to encompass moral ethics. Importance of ethics in business: • Ethics is important not only in business but in all aspects of life because it is the vital part and the foundation on which the society is build. Ethics are important in business because of the following reasons: • When working in the business world. 9. • By making ethics mandatory within a company. • Most companies would want to make sure that the financials are correct and save the hassle of having ruined financials. • The ethical issues in business have become more complicated because of the global and diversified nature of many large corporation . • Ethics is related to all disciplines of management like accounting information. Ethics is also especially important when working with financial information. international business and economic system. • In addition to shareholders having confidence in the company. production. • Auditors. must be truthful and honest when auditing a company's financial information.8. intellectual property knowledge and skill. • Ethics refers to a code of conduct that guides an individual in dealing with others. sales and marketing. human resource management. • The benefits of being ethical greatly outweigh being non-ethical in business. or "independent third parties".

because the consequences of failing to do so could be very costly in fines. but not of the business or corporation. Some take the position that organizations are not capable of moral agency. because any others function as a tax on profits. customers. some point out that selfinterest would still require a business to obey the law and adhere to basic moral rules. However. 11. vendors. ethical behavior is required of individual human beings.10. Thus. under this view. • Nowadays Money and Ethics are seen to be diametrically opposed to each other but it turns out money and ethics do have much in common. people who have an interest in the conduct of the business. or company reputation. loss of licensure. • Ethics are important not only in business but in all aspects of life because it is an essential part of the foundation on which civilized society is build. • Ethical decision-making gets especially interesting when organizations must reconcile their core values and show a healthy bottom line which end up in conflict with one another. and that these duties consist of more than simply obeying the law. • Profits and ethics are in reality part of the same equation. A business that lacks ethical principles is bound to fail sooner or later. . Ethics and healthy bottom line for companies co-exist because of the following reasons: • Companies following the path of ethical value system succeed in long run as sooner or later consumers learn to separate fact from fiction. Under this. or even society as a whole. Approaches of business and Ethics are: Philosophers and others disagree about the purpose of a business ethic in society. Other theorists contend that a business has moral duties that extend well beyond serving the interests of its owners or stockholders. which might include employees. only those activities that increase profitability and shareholder value should be encouraged. Some believe that the only companies that are likely to survive in a competitive marketplace are those that place profit maximization above everything else. They believe a business has moral responsibilities to so-called stakeholders. the local community.

inward or outward migration flows. inward or outward direct investment as a proportion of national income or per head of population) • Technology: (e. Globalization has various aspects which affect the world in several different ways such as: • Industrial • Financial • Economic • Political • Informational • Ecological • Cultural • Social • Technical • Legal/ethical • Regional 5.g. The four main economic flows that characterize globalization are: • Goods and services: (e. proportion of populations using particular inventions) .. The KOF Index of Globalization measures the three main dimensions of globalization: • economic • social • political 3. 2. GATT(General Agreement on Tariffs and Trade) is an agreement on tariffs and its primary concern has been negotiations on matters related to trade policy and tariff restrictions.Chapter IX: Globalization 1. Globalization is process by which the experience of everyday life.g. 4. net migration rates. exports plus imports as a proportion of national income or per capita of population) • Labor/people: (e.g. marked by the diffusion of commodities and ideas... is becoming standardized around the world. international research & development flows. weighted by population) • Capital: (e..g.

pesticides and hazardous chemicals. rivers and wildlife and to have compassion for living creatures. Forests. sustainable development. agriculture. stewardship and management of public lands and natural resources. impact review. remediation of contaminated land and brown fields. Oil spill air quality.Chapter X: Industrial Growth and Environmental degradation 1. species protection. 4. 3. 2." . human activity Thermal pollution. waste management. smart growth. biodiversity. water quality. lakes. 5. global climate change. and conservation.

Sign up to vote on this title
UsefulNot useful