IGNOU MBA MS-03 Solved Assignments 2010

Course Code : MS-3

Course Title : Economic and Social
Environment
Assignment Code : 3/TMA/SEM-I/2010
Coverage : All Blocks

Note: Please attempt all the questions and send it to the Coordinator of the study
center you are attached with

1. “The politico-legal environment of business contains a number of critical

elements.” Examine this statement with the help of examples.

Solution: Let us use THE COMPUTER HARDWARE INDUSTRY IN INDIA, as Example.

Political (incl. Legal)
==========================================
-Tax policies
What tax hinder the business and what taxes incentives are available]
[if the tax policies are liberal / investigated, businesses will add expansion.
-MORE MANUFACTURERS WILL SET UP SHOP.
-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
---------------------------------------------------------------------------
[ if the tax policies are tight, businesses will not add
expansion .
-LESS MANUFACTURERS.
-SUPPLY WILL DECREASE IN THE MARKET.
-PRODUCTS WILL BE EXPENSIVE FOR THE PEOPLE.
========================================
-International trade regulations and restrictions
[ does the government encourage exports / with high tariffs on imports]

[ if the exports policies are liberal / incentivated, businesses will add

expansion ,

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE EXPORTS WILL BE CARRIED.
-COUNTRY WILL EARN FOREIGN EXCHANGE
------------------------------------------------------------------------------------------
[ if the import policies are liberal / incentivated, local mfg. businesses will
contract ,
-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
======================================================
-Employment laws]
[ is the government encouraging skilled immigrants with temp. permits]

[if the government relaxes the rules on skilled migrants

which means the impact on HR

-EMPHASIS WILL BE ON FOREIGN RECRUITMENTS.

-DEVELOPMENT OF OVERSEAS CONTRACTS
-TRAINING FOR THE INCOMING STAFF ON LOCAL CULTURE.
-TRAINING FOR MANAGERS TO MANAGE DIVERSITY

ALL OF WHICH WILL HELP THE INDUSTRY TO GROW

AND DEVELOP TO BECOME WORLD CLASS.
=======================================================

Economic

-Economic growth
[ what is the economic growth rate / what are the reasons ]

[ if the economy is on growth path, businesses will add

expansion ,

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMERS
--------------------------------------------------------------------------------
[ if the economy contracts/demand drops, businesses will reduce
volume ,
-LESS MANUFACTURERS.
-SUPPLY WILL DECREASE IN THE MARKET.
-PRODUCTS WILL BE EXPENSIVE FOR THE PEOPLE

===================================================
-Interest rates & monetary policies
[ are the interest rates under control / is there a sound monetary policies]

[ if the interest rate goes down/ the monetary policies are liberal,
as the demand goes up, businesses will add
expansion ,

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
----------------------------------------------------------------------------
[ if the interest rate goes up , the demand will go down
businesses will downsize / cut cost

-LESS MANUFACTURERS.
-SUPPLY WILL DECREASE IN THE MARKET.
-PRODUCTS WILL BE EXPENSIVE FOR THE PEOPLE
===================================================
-Government spending
[is government spending is significant and is it under control ]

[ if the government increases the spending on infrastructures etc,

the demand goes up , businesses will add
expansion , which means the impact on HR

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
==================================================
-Unemployment policy
[what is the employment / unemployment policies of the government ]

[IF there is a stimulus for employing more people,

and the unemployment is low]

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
=====================================================
-Taxation
[ has the taxation encouraged the industry ]

[ if the taxation policies encouraged the industry, businesses will add

expansion ,

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
=======================================================
-Consumer confidence
[ is the consumer confidence is high/ strong and if not, why ]

[ as the consumer confidence goes up, more jobs are created,

demand for product/services will go up, businesses will add
expansion ,

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
======================================================

*Relative inflation rates

-if the relative inflation goes up, the demand for products/services go down.
BUT
if the relative inflation goes down, the demand for products/services go up.

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
====================================================
Industry assistance programs
-these are government assistance provided at the point of entry
into the market. Organizations which are eligible should use it
to establish itself in the market. It enables the organization to
market the product and raise revenue / hence profit.

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.

-----------------------------------------------------------------------------
Tariffs and industry protection policies
-these are government tax concessions provided at the point of entry
into the market. Organizations which are eligible should use it
to establish itself in the market. It enables the organization to
market the product and raise revenue / hence profit.

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.

-----------------------------------------------------------------------------
Trade practices
-these are government controls over companies who
employ mal-practices to gain monoploy in the market.
These controls helps the organization to play in
the level field for all. So that, every organization has
equal opportunities.

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.

==================================================
Balance of payments
-If the balance of payments are positive, it is a good news for the
organization, as there will be no government action on the business
sector.

-MORE MANUFACTURERS WILL SET UP SHOP.

-MORE IMPORTS WILL COME IN.
-SUPPLY WILL INCREASE IN THE MARKET.
-PRODUCTS WILL BE CHEAPER FOR THE CONSUMER.
----------------------------------------------------------------------

If the balance of payments are negative, it is possible to have

some government action, which could harm some organizations.
============================================================
Foreign trade policies
-foreign trade policies could have both negative / positive reactions.
Positive actions could help the organization to improve their
performance and Negative actions could hamper the organization
growth in revenue/ profit.
======================================================
Regulation of companies and securities
-Regulations could have both negative / positive reactions.
Positive actions could help the organization to improve their
performance and Negative actions could hamper the organization
growth in revenue/ profit.
=======================================================
Regulations regarding foreign companies
-Regulations regarding foreign companies could have both
negative / positive reactions. Positive actions could help the
organization to improve their performance and Negative actions
could hamper the organization growth in revenue/ profit.
=====================================================
Taxation
-Taxation policies could have both negative / positive reactions.
Positive actions could help the organization to improve their
performance and Negative actions could hamper the organization
growth in revenue/ profit.
========================================================
Subsidies
-Subsidies policies could have both negative / positive reactions.
Positive actions could help the organization to improve their
performance and Negative actions could hamper the organization
growth in revenue/ profit.
=======================================================
Commercial regulations
-Commercial regulations could have both negative / positive reactions.
Positive actions could help the organization to improve their
performance and Negative actions could hamper the organization
growth in revenue/ profit.

1. Explain the factors responsible for industrial sickness and measures to tackle
them in Small Scale Industries Sector (SSI)

Solution: THE FACTORS RESPONSIBLE FOR INDUSTRIAL SICKNESS IN SSI.

INTERNAL FACTORS.[ measures]
1.LACK OF MANAGERIAL SKILLS.
[provide incentive to train managers in SSI
and weekend courses]
------------------------------------------
2.LACK OF INNOVATIONS.
[provide incentives and recognitions for
innovations in SSI business]
------------------------------------------
3.OBSOLETE TECHNOLOGY
[provide tax benefits for acquiring new/
modern technology]
-----------------------------------
4.ABSENCE OF SKILLED MANPOWER.
[government should provide free trade schooling
and incentives to the SSI business to training
employees.]
--------------------------------------------------
5.GROWING STRIKES/ LOCKOUTS.
[provide government sponsored grieveance
committee and arbitrator.]
------------------------------------
6.DIVERSION OF LOANS FUNDS FOR UNPRODUCTIVE USES.
[this should be discouraged by monitoring ]
==============================
EXTERNAL FACTORS.[ measures]
1.LACK OF SUPPLY OF RAW MATERIAL.
2.INADEQUATE SUPPLY OF EQUIPMENTS.
3.SHORT OF WORKING CAPITAL.
4.INADEQUATE SUPPLY OF ELECRICITY.
5.LACK OF DEMAND FOR FINISHED GOODS.
6.DELAY IN DISBURSEMENT OF FIXED CAPITAL [LOANS]
7.COST OVER RUN OF THE PROJECT BUDGET.

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==

.
1. ‘Rao - Manmohan Model of Growth is different from Gandhian Model of
Growth.’ Critically evaluate this statement.

2. ‘An important factor which influences the Balance of Payments of a country

is the exchange rate of its currency vis-a- vis other major currencies.’ Briefly
explain this statement.

Solution: IT IS TRUE THAT THE EXCHANGE RATE WITH REFERENCE

TO THE MAJOR CURRENCIES PLAY A SIGNIFICANT PART
IN INFLUENCING THE BALANCE OF PAYMENTS.

Factors which move for Foreign exchange rates are extremely volatile and it is incumbent on those
involved with foreign exchange - either as a purchaser, seller, speculator or institution - to know what
causes rates to move. Actually, there are a variety of factors - market sentiment, the state of the economy,
government policy, demand and supply and a host of others. The more important factors that influence
exchange rates are discussed below.

Strength of the Economy

The strength of the economy affects the demand and supply of foreign currency. If an economy is
growing fast and is strong it will attract foreign currency thereby strengthening its own. On the other
hand, weaknesses result in an outflow of foreign exchange.
If a country is a net exporter (as were Japan and Germany), the inflow of foreign currency far outstrips
the outflow of their own currency. The result is usually a strengthening in its value.
Political and Psychological Factors
Political or psychological factors are believed to have an influence on exchange rates. Many currencies
have a tradition of behaving in a particular way such as Swiss francs which are known as a refuge or safe
haven currency while the dollar moves (either up or down) whenever there is a political crisis anywhere
in the world. Exchange rates can also fluctuate if there is a change in government. Some time back,
India’s foreign exchange rating was downgraded because of political instability and consequently, the
external value of the rupee fell. Wars and other external factors also affect the exchange rate. For
example, when Bill Clinton was impeached, the US dollar weakened. During the Indo-Pak war the rupee
weakened. After the 1999 coup in Pakistan (October/November 1999), the Pakistani rupee weakened.
Economic Expectations
Exchange rates move on economic expectations. After the 1999 budget in India there was an expectation
that the rupee would fall by 7% to 9%. Since such expectations affect the external value of the rupee, all
economic data - the balance of payments, export growth, inflation rates and the likes - are analysed and its
likely effect on exchange rates is examined. If the economic downturn is not as bad as anticipated the rate
can even appreciate. The movement really depends on the “market sentiment” - the mood of the market -
and how much the market has reacted or discounted the anticipated/expected information.
Inflation Rates
It is widely held that exchange rates move in the direction required to compensate for relative inflation
rates. For instance, if a currency is already overvalued, i.e. stronger than what is warranted by relative
inflation rates, depreciation sufficient enough to correct that position can be expected and vice versa. It is
necessary to note that an exchange rate is a relative price and hence the market weighs all the relative
factors in relative terms (in relation to the counterpart countries). The underlying reasoning behind this
conviction is that a relatively high rate of inflation reduces a country’s competitiveness and weakens its
ability to sell in international markets. This situation, in turn, will weaken the domestic currency by
reducing the demand or expected demand for it and increasing the demand or expected demand for the
foreign currency (increase in the supply of domestic currency and decrease in the supply of foreign
currency).
Capital Movements
Capital movements are one of the most important reasons for changes in exchange rates. Capital
movements of foreign currency are usually more than connected with international trade. This occurs due
to a variety of reasons - both positive and negative. When India began its economic liberalisation and
invited Foreign Institutional Investors (FIIs) to purchase equity shares in Indian companies, billions of US
dollars came into the country strengthening the currency. In 1996 and 1997, FIIs took several billion US
dollars out of the country weakening the currency. These were capital outflows. One of the reasons
popularly believed for the rupee not depreciating in the manner other South-east Asian currencies did in
1997-98 was because the rupee was not convertible on the “capital account”.
Speculation
Speculation in a currency raises or lowers the exchange rate. For instance, the foreign exchange market in
Kenya is very shallow. If a speculator enters and buys US $1 million, it will raise the value of the US
dollar significantly. If a few others do so too, the price of the US dollar will rise even further against the
Kenya shilling.
The most famous speculator in foreign currency is Mr George Soros who made over a billion pounds
sterling in Europe (by correctly predicting the devaluation of the pound) and then is believed to have
triggered the free fall of the currencies of South-east Asia.
Balance of Payments
As mentioned earlier, a net inflow of foreign currency tends to strengthen the home currency vis-à-vis
other currencies. This is because the supply of the foreign currency will be in excess of demand. A good
way of ascertaining this would be to check the balance of payments. If the balance of payments is positive
and foreign exchange reserves are increasing, the home currency will become stronger.
Government’s Monetary and Fiscal Policies
Governments, through their monetary and fiscal policies affect international trade, the trade balance and
the supply and demand for a currency. Increasing the supply of money raises prices and makes imports
attractive. Fiscal surpluses will slow economic growth and this will reduce demand for imports and
encourage exports. The effectiveness of the policy depends on the price and income elasticities of demand
for the particular goods. High price elasticity of demand means the volume of a good is sensitive to a
change in price.
Monetary and fiscal policy support the currency through a reduction in inflation. These also affect
exchange rate through the capital account. Net capital inflows supply direct support for the exchange rate.
Central governments control monetary supply and they are expected to ensure that the government’s
monetary policy is followed. To this extent they could increase or decrease money supply. For example,
the Reserve Bank of India, to curb inflation, restricted and cut money supply. In Kenya, the central bank
in order to attract foreign money into the country is offering very high rates on its treasury bills.
In order to maintain exchange rates at a certain price the central bank will also intervene either by buying
foreign currency (when there is an excess in the supply of foreign exchange) and selling foreign currency
(when demand for foreign exchange exceeds supply). This is known as ‘central bank intervention’.
It must be noted that the objective of monetary policy is to maintain stability and economic growth and
central banks are expected to - by increasing/decreasing money supply, raising/lowering interest rates or
by open market operations - maintain stability.
Exchange Rate Policy and Intervention
Exchange rates are also influenced, in no small measure, by expectation of change in regulations relating
to exchange markets and official intervention. Official intervention can smoothen an otherwise disorderly
market. As explained before, intervention is the buying or selling of foreign currency to increase or
decrease its supply. Central banks often intervene to maintain stability. It has also been experienced that if
the authorities attempt to half-heartedly counter the market sentiments through intervention in the market,
ultimately more steep and sudden exchange rate swings can occur.
Interest Rates
An important factor for movement in exchange rates in recent years is interest rates, i.e. interest
differential between major currencies. In this respect the growing integration of financial markets of
major countries, the revolution in telecommunication facilities, the growth of specialised asset managing
agencies, the deregulation of financial markets by major countries, the emergence of foreign trading as
profit centres per se and the tremendous scope for bandwagon and squaring effects on the rates, etc. have
accelerated the potential for exchange rate volatility.
Kenya intrinsically has a very weak economy but the rates offered within the country have always been
very high. To illustrate this point the Treasury bill rate in September 1998 was as high as 23%. High
interest rates attract speculative capital moves so the announcements made by the Federal Reserve on
interest rates are usually eagerly awaited - an increase in the same will cause an inflow of foreign
currency and the strengthening of the US dollar.
Tariffs and Quotas
Tariffs and quotas exist to protect a country’s foreign exchange by reducing demand. Till before
liberalisation, India followed a policy of tariffs and restrictions on imports. Very few items were
permitted to be freely imported. Additionally, high customs duties were imposed to discourage imports
and to protect the domestic industry. Tariffs and quotas are not popular internationally as they tend to
close markets. When India lifted its barriers, several industries such as the mini steel and the scrap metal
industries collapsed (imported scrap became cheaper than the domestic one). Quotas are not restricted to
developing countries. The United States imposes quotas on readymade garments and Japan has severe
quotas on non-Japanese goods.
Exchange Control
The purpose of exchange control is to manage the supply and demand balance of the home currency by
the government using direct controls basically to protect it. Currency control is the restriction of using or
availing of foreign currency at home/abroad.
In India, up to liberalisation in the nineties there was very severe exchange control. Access to foreign
currency was tightly controlled and the same was released only for permitted purposes. This was because
Indian exports had not taken off and there were still large imports. There are several countries that
maintain their rates at artificial levels such as Bangladesh.
India is now fully, convertible on the current account but not as yet on the capital account. This, to an
extent, possibly saved India when the run on currencies took place in Asia in 1997. If the Indian rupee
was fully convertible and there were no exchange control restrictions, the rupee would have been open for
speculation. There would have been large outflows at a time of concern resulting in a snowballing plunge
in its value.
As long as the par value system prevailed, the rates could not go beyond the upper and lower intervention
points. The only real question under the fixed rate system was whether the balance of payments and
foreign exchange reserves had deteriorated to such an extent that devaluation was imminent or possible.
Countries with strong balance of payments and reserve positions were hardly called upon to revalue their
currencies. Hence, a watch had to be kept only on deficit countries. However, under generalised floating
regime, exchange rates are influenced by a multitude of economic, financial, political and psychological
factors. But the relative significance of any of these factors can vary from time to time making it difficult
to predict precisely how any single factor will influence the rates and by how much.

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==

3. What are privatizations? Briefly discuss the three forms adopted for
privatizing Public Sector Enterprises.

Solution: Privatization is the incidence or process of transferring ownership of a

business, enterprise, agency or public service from the public sector (government) to the
private sector(business). In a broader sense, privatization refers to transfer of any
government function to the private sector including governmental functions like revenue
collection and law enforcement.

Types of privatization
There are three main methods of privatisation:
1.SHARE ISSUE PRIVATIZATION - selling shares on the STOCK MARKET.
2.ASSET SALES PRIVATISATION - selling the entire firm or part of it to a strategic
investor, usually by AUCTION or using the TREUHAND model
3.VOUCHER PRIVATISATION - shares of ownership are distributed to all citizens,
usually for free or at a very low price. Share issue privatisation is the most common type
of privatisation. Share issues can broaden and deepen domestic capital markets, boosting
liquidity and potentially economic growth , but if the capital markets are insufficiently
developed it may be difficult to find enough buyers, and transaction costs (e.g.
underpricing required) may be higher. For this reason, many governments elect for
listings in the more developed and liquid markets, for example LONDON. NEW
YORK, HONG KONG ETC STOCK EXCHANGES.

2.As a result of higher political and currency risk deterring foreign investors, asset sales
are more common in DEVELOPING COUNTRIES.
 3.Voucher privatisation has mainly been used in the TRANSITION ECONOMIES of
Central and Eastern Europe, such as RUSSIA, POLAND, CZECH ETC.
A substantial benefit of share or asset sale privatisations is that bidders compete to offer
the highest price, creating income for the state in addition to tax revenues. Voucher
privatisations, on the other hand, could be a genuine transfer of assets to the general
population, creating a real sense of participation and inclusion. If the transfer of vouchers
is permitted, a market in vouchers could be created, with companies offering to pay
money for them.

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==

4. Write short notes on the following:-

a) Externalities

Solution: An externality exists when the consumption or production choices of one

person or firm enters the utility or production function of another entity without that
entity’s permission or compensation. For example, two firms are located in river. The
first is producing steel, while the second, operates resort hotel. Both are using the river,
but in different ways. The steel firm uses it as a receptacle for its waste, while the resort
hotel uses it to attract the customers seeking water recreation. Above facilities have
extracted by two owners, even though an efficient use of the water is not likely to result.
Because the steel plant does not bear the cost of reduced business at the resort resulting
from waste being dumped into the river. So if there will be continuation of dumping too
much of waste in to the river, and an efficient allocation of the river would not be
attained.
External effects can be either positive or negative. However external effects often
negative (also referred to as an external diseconomy or external cost). This occurs when
the affected person suffers a loss in utility that is uncompensated. Examples of negative
externalities are air, water and noise pollution. A positive externality (external economy,
or external benefit) occurs when the effect is benefited to the affected person. An
example of a positive externality is immunization.

CAUSES OF EXTERNALITIES
1. Interdependence between economic agents - one person’s activity affects the utility or
production of another. However the market system fails to ‘price’ this interdependence,
so that affected party is uncompensated.
2. Lack of or weak property rights - Due to the lack of property rights, the affected party
is
unable to demand or ask the compensation for the damage, which are made by
externality.
3. High transaction costs - The cost of negotiation, implementation and enforcement
between the parties maybe high.

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a) Incremental Capital-Output Ratio (ICOR)

Solution: The incremental capital-output ratio (ICOR) is a summary expression for the
existing technical conditions in the economy which determine the relationship between
and additional output. Though, the ICOR is expressed as a relationship between
investments and additional output of the same period (i.e., the plan period), it in fact
depends on the pace of investment in the past creating additional output in the plan period
and also takes into account the investment which will create capacities for growth in
future. Capacity utilisation improved during the Seventh Plan and also there were good
gains in operational efficiencies in a number of sectors. The average ICOR for the
Seventh Plan period turned out to be 3.9. However, due to a dip in the growth rate during
the subsequent two year period, the ICOR for the seven year period, 1985-86 to 1991-92,
is estimatedtobe 4.3. While there is a much scope for improving operational efficiencies,
gains in output from better utilisation of existing capacities may not be available in the
Eighth Plan to the same extent as during the Seventh Plan. This holds particularly in the
power generation, rail transport, agriculture (in the north-west regions), oil production
and mining. Moreover the stock of investments in pipeline today is less than what it was
at the commencement of the Seventh Plan. Investments for "Human Capital", which is a
priority area in the Eighth Plan, show up in improved performance in terms of output
with a longer time lag than the industrial and infrastructure projects. Project costs in the
energy and transport sectors are at present increasing as the more easily available natural
resources have been exploited first and the more difficult ones remain to be harnessed.
The efforts that are required to curb the ecological damage will also add to the costs.
Expectations of productivity gains (and its consequent impact on ICOR) mainly rest on
the extension of the best available technology to the underdeveloped regions and sectors
of the economy, say, for example, to agriculture in the eastern region, to large segments
of services in public sector and to the traditional (decentralised ) sectors in industry.
Though the immediate impact of measures for structural adjustments will lead to some
fall in output, in the medium term the industrial sector is expected to respond well to the
liberalised policies. On balance of assessment it appears to be reasonable to assume an
ICOR of 4.1 for the period of the Eight Plan.

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=

c) Administered Prices
The country has traditionally operated under an Administered Pricing Mechanism for petroleum
products. This system is based on the retention price concept under which the oil refineries, oil
marketing companies and the pipelines are compensated for operating costs and are assured a
return of 12% post-tax on networth. Under this concept, a fixed level of profitability for the oil
companies is ensured subject to their achieving their specified capacity utilisation. Upstream
companies, namely ONGC,oil and GAIL, are also under retention price concept and are assured
a fixed return.
The administered pricing pilicy of petroleum products ensures that products used by the
vulnerable sections of the society, like kerosene, or products used as feedstocks for production of
fertilizer, like naphtha, may be sold at subsidized prices.
Gradually, the Government of India is moving away from the administered pricing regime to
market-determined, tariff-based pricing. Free imports are permitted for almost all petroleum
products except petrol and diesel. Free imports are permitted for almost all petroleum products
except petrol and diesel. Free marketing of imported kerosene, LPG and lubricants by private
parties is permitted. It is contemplated that in a phased manner, all administered price products
will be taken out of the administered pricing regime and the system will be replaced by a
progressive tariff regime in order to provide a level playing field for new investments in a free
and competitive market

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