BE UNIT-2 Structure of Indian economy: Nature and Significance – Economic systems –

Structure of Indian Industry – Economic reforms in various sectors – Nature – Challenges –

Social Justice – Disinvestment Mechanism – Problems and Procedures –Special Economic
Zone (SEZs)- Sickness in Indian Industry-Competition Act 2002.

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Structure of Indian economy:
The structure of the economy encompasses factors such as contribution of different sectors
like primary (agricultural), secondary (industrial) and tertiary (service) sectors. Large,
medium and small sectors, integration of the domestic economy with the world economy etc
are imperative to business because these factors designate the prospectus for different types
of business.
The character of each sector and its various components has bearing on the business. For
instance, even if we are in the first place in the production of several agricultural products, we
cannot collect and process crops efficiently because of the small and scraped nature of the
land possession. Agricultural inputs business may be affected by this.
Nature and Significance –
 The economy of India is the twelfth largest in the world, with a GDP of US $1.25
trillion (2008).
 It is the third largest in terms of purchasing power parity.
 India is the second fastest growing major economy in the world, with a GDP growth
rate of 9.4% for the fiscal year 2006–2007
 India's economy is diverse, Agriculture, Handicrafts, Textile, Manufacturing, and A
multitude of services.
 State planning and the mixed economy
 General budget
 Currency system(Rupee, Exchange rates)
 Five Year Plan System.
 Financial institutions (National Stock Exchange, Bombay Stock Exchange, Railways,
Reserve Bank of India)
 Sectors(primary, secondary and service)
 Socio-economic characteristics(Poverty, Corruption, Occupations and unemployment,
Regional imbalance)
Economic systems –
Introduction An economy is the activities related to the production and distribution of goods
and services in a particular geographic area. An economy consists of the economic system of
a country. Economic system is the framework adopted by each country to run their economy
in the best manner. There are three Economic Systems prevailing in the world.
Capitalist – Production and distribution of goods and services are largely owned by the
private players and the government does not interfere in economic activities. The
government’s role in market economy is limited.
Socialist – Production and distribution of goods and services are largely owned by the
government and very few economic activities are carried out by the private players. The
motive of this economy is welfare of the society.
Mixed Economy – Mixed economy is followed by Socialist countries where equal
importance is given to both public and private sectors. It is the combination of Capitalist and
Socialist economy
Structure of Indian Industry –
Industries can be structured on the following basis:
1. Structure in terms of Use based classification –
(a) Consumer goods- cotton textiles, leather goods, salt sugar & paper
(b) Intermediate goods- Coal, cement steel, power alcohol, chemicals etc.,
(c ) Basic industries - Capital goods- heavy engineering & machine building industries
2. Structure by type of ownership: PS,JS, PS
3. Structure by size of the employment: depending upon the no. of employee’s factories was
divided & their contribution towards national economy was derived.
4. Structure by size of the capital: Large, small, Ancillary & Tiny sector.
5. Structure by type enterprises of organization of industries:
(a) Public Ltd & Pvt. Ltd (b) Govt. & non-govt
Economic reforms in various sectors – Nature – Challenges
Meaning of Economic Reforms "Economic reform" usually refers to deregulation, or at times
to reduction in the size of government, to remove distortions caused by regulations or the
presence of government, rather than new or increased regulations or government programs to
reduce distortions caused by market failure.
Types of Economic Reforms
1. Structural Reforms Initiatives
2. Fiscal Reforms
3. Infrastructure Reforms
4. Capital and Money Market Reforms
Main Features Of Economic Reforms
Reforms Liberalisation, Privatisation and Globalisation
LIBERALISATION
• Simply speaking liberalisation means to free to economy from the controls imposed by the
Govt. Before 1991, Govt. had put many types of controls on Indian economy. These were as
follows:
(a) Industrial Licensing System
(b) Foreign exchange control
(c) Price control on goods
(d) Import License
Steps taken for Liberalization
Independent determination of interest rate
Increase in the investment limit of the Small Scale Industries
Freedom to import capital goods
Freedom to import Technical know-how
Freedom for expansion and production to Industries
 Freedom from Monopolies Act
Removal of Industrial Licensing and Registration
PRIVATISATION
• Simply speaking, privatisation means permitting the private sector to set up industries
which were previously reserved for the public sector. Under this policy many PSU’s were
sold to private sector.
• The main reason for privatisation was in currency of PSU’s are running in losses due to
political interference. The managers cannot work independently. Production capacity
remained under-utilized. To increase competition and efficiency need of privatisation was
felt.
Steps taken for Privatisation
1. Sale of shares
2. Disinvestment in PSU’s
3. Minimization of Public Sector Number of industries reserved for public sector was reduced
from 17 to
4. (a) Transport and railway (b) Mining of atomic minerals (c) Atomic energy (d) Defense
equipment
GLOBALIZATION Globalisation means the establishment of relations of the economy with
world economy in regard to foreign investment, trade, production and financial matters.
Globalisation may be defined as integrating the economy of a country with the economies of
other countries under conditions of free-flow of trade and capital and movement of persons
across the borders. Capital and technology will flow from the developed countries of the
world towards India.
Steps taken for Globalisation
Reduction in tariffs
Long term Trade Policy
Partial Convertibility
Increase in Equity Limit of Foreign Investment
Achievements of Economic Reforms in India
1. Increase in National Product
2. Foreign Investment
3. Agricultural Production
4. Foreign Currency Reserves
5. Fiscal Deficit
6. Imports
7. Deregulation of Interest Rate
8. Control of Inflation
Negative Effect of Reforms
• National sovereignty at stake leads to commercial and Political Colonialism
• Transfers of natural resources
• Widening gap between rich and poor
• Decline demand for domestic products
• Fail to obey the labor laws
• Social inequality
 • Farmer’s suicide rate
• Kills the domestic business

Major Highlights on the Economic Reforms in India

During the reform period, the growth in service was increasing, while the agriculture sector
saw a decline, and the industrial sector was fluctuating.
The opening up of the Indian economy led to a sharp increase in the FDIs and foreign
exchange reserve.
This foreign investment includes foreign institutional investment and direct investment.
India is one of the successful exporters of engineering goods, auto parts, IT software, textiles
during the time of the reforms.
The price rise during the reforms was also kept under control.

Failures of the Economic Reforms in India

The agriculture sector was neglected and the public investment in this sector was reduced and
hence the infrastructure areas were affected.
The subsidies on the fertilizers were removed and hence it led to an increase in the cost of
production which affected many marginal and small farmers.
Further, many policies were introduced which reduce the import duties on agriculture
products, reduce the minimum support price increased the threat of international
organizations competing with th3 the local farmers.
The industrial sector saw uneven growth.
The imports were made cheaper as a result of which the demand for the industrial goods
reduced.
The globalization which allowed for free trade between the countries affected adversely on
the local industries and thus affected employment opportunities.
The reforms led to an increase in economic colonialism.
It also led to the erosion of culture.
The investments in many infrastructural facilities like power supply were inadequate.
Social Justice –
Meaning & Definitions
What Is Economic Justice?
Economic justice is a component of social justice. It is a set of moral principles for building
economic institutions, the ultimate goal of which is to create an opportunity for each person
to create a sufficient material foundation upon which to have a dignified, productive, and
creative life.

it means that social justice is a environment where everybody get the opportunity to do the
things which they desires and they are good for the society and specially the weaker section
doesn’t feel any kind of the problem in achieving the desire objective.
None of the countries of the world can claim that she has totally abolished social injustice.
Yet this problem is more accurate in developing countries as compared to the developed
Nations.
Its main reason is that the developing countries have not made sincere efforts required for the
solution of the problem. Illiteracy, conservative attitude, blind faith, lack of economic
resources, and such other factors are the main hindrances in removing social injustice in
developing countries.
If a country does not make adequate efforts to provide social justice to its citizens then all the
dimensions of its economic development will remain incomplete.
The principal objective of development planning is human development and The attainment
of the higher standard of living for the people.
This requires more equitable distribution of development benefits and opportunities, better
living environment and empowerment of the poor and marginalized. There is a special need
to empower women who can act as catalysts for change.
In making the development process inclusive, the challenges are to formulate policies and
programmes to Bridge regional, social and economic disparities in an effective and
sustainable manner as possible.
Indicators of Social Injustice in Business Environment
It is Essential to identify the indicators of social injustice for the removal of this problem. By
and large, an inference can be drawn on the basis of the following indicators whether the
citizens of the country are getting Social Justice.
1. Human Development Index
The Human Development Index (HDI) is a major indicator of Social Justice. HDI depends
upon several factors such as education, health, and the provision of basic social infrastructure.
The Human Development Report (HDR) published by the United Nations Development
Programme (UNDP) estimates the HDI in terms of three basic compatibilities:
To live a long and healthy life.
To be educated and knowledgeable, and
To enjoy a decent economy standard of living.
There has been significant progress in human development in the world as reflected in broad
indicators such as the improvements registered in educational attainment, Health coverage
and provision of the basic social infrastructure.
2. Gender inequality index
In terms of the gender inequality index GII. GII captures the Lost in achievement due to
gender disparities in the areas of reproductive health, empowerment, And Labour force
participation with values ranging from 0 (perfect equality) to 1 (total inequality).
3. Gender Empowerment Measure (GEM)
The status of Social Justice can also be evaluated on the basis of the index of Gender
Empowerment Measure.
Empowerment of women is closely linked to opportunities they have in education, health,
economics, and political participation.
The government has been operationalizing this approach through legislative and
programmatic interventions as well as by mainstreaming gender into the development
planning process.
4. Poverty
Higher poverty levels are synonymous with poor quality of life, deprivation, malnutrition,
illiteracy and low human resource development. In other words, a high level of poverty is the
indicator of social injustice.
5. Labour and employment
The situation of labour and employment in the country is also an important indicator of
Social justice and important objective of development planning in the world have been to
provide for increasing employment opportunities not only to meet the backlog of unemployed
but also the new additions to the labour force.
6. Education
Education is universally recognized as the central component of ‘human capital’.
The high level of education promotes Social Justice. Education not only plays a significant
role in removing social injustice but it also contributes to economic growth.
The impact of education on Population control, life expectancy, infant mortality, improving
nutritional status and strength training Institutions is well organized.
Moreover, The social rates of return on investments in all levels of education much exceed
the long-term opportunity cost of capital. Proving nutritional status and strength training
Institutions is well organized.
7. Population
The population is also an important indicator of Social Justice. If a country or region has
more population density due to unemployment Social Justice may exit there.
Due to over-population several problems like hunger, unemployment, illiteracy, soci To
increase in population along with other factors has caused a severe problem of increasing
unemployment in rural areas.
Hence, villagers keep migrating every year to urban areas and big cities in search of
employment. It has increased population pressure in urban areas, particularly in big
citie
8. Water Supply and Sanitation
The provision of safe drinking water supply and sanitation facilities is a basic necessity of life
and a crucial input in achieving the goal of Social justice and ‘Health For All’. Provision of
safe drinking water and sanitation is a states subject and is the primary responsibility of the
states.
However, The central government has been supplementing of the states through financial and
Technological inputs under centrally sponsored schemes.
9. Empowerment of Socially Disadvantaged Groups
There are some groups in the society who have to face in inconvenient situations.
These groups include the people of scheduled caste and Scheduled Tribes, religious and
linguistic minorities, socially and educationally backward classes, The aged, the physically
challenged and also social defense and Juvenile social maladjustment. Social injustice can be
stopped by empowering all these groups.

The ministry of Social justice and empowerment is undertaking social several welfare
programmes for the empowerment of socially disadvantaged groups

Suggestions for Removing Social Injustice in Business Environment

Policies and Programmes undertaken in recent years with a special focus on various
components of social sectors have yielded positive results in terms of improvement in basic
socio-demographic indicators, quality of life, reduction of overall poverty levels, and
increased access to basic necessities of life.
However, sustained efforts are still needed to reduce the visible disparities amongst states,
between rural and urban areas and between males and females. To promote Social justice and
eradicating injustice in world society following suggestions are offered:
1. Women Empowerment
Empowering world woman is the foremost requirement of ending social injustice. At least
40% of seats should be reserved for women in Municipal councilors, legislative assembly,
and Parliament.
Thus, the political empowerment of women will help them improve their social economic
conditions.
2. Increase in educational facilities
Educational facilities should be raised For spreading literacy and improving the level of
education in the world. It should be ensured that at least 10% of the GDP spent on education.
For removing social injustice not on the level of literacy be raised but almost attention should
be paid to the quality of education.
3. Population control
Increasing population is one of the most important reasons for Social injustice in the whole
world.
It is a mockery that those sections of world society have a higher rate of population growth
which is deprived of social justice.
Hence, their population is controlled by educating them and providing facilities and resources
for population control.
4. Increase in Employment Opportunities
Employment opportunities should be increased by removing unemployment. More emphasis
should be given to the development of Agriculture and tertiary sector for this purpose. These
areas have ample scope of Employment generation.
5. Removal of Poverty
About 37% of the countries population is below the poverty line. Special attention will have
to be paid for eradicating poverty in those States which have a vulnerable situation in this
regard. education about will help in promoting Social Justice.
6. Infrastructure development
Several areas of the country are still very backward so far as development of infrastructure is
concerned.
Therefore infrastructural facilities such as electricity, water supply, sanitation,
telecommunication, transport, education, medical facilities, etc. Should be developed at a
rapid pace.
The development of infrastructure will help in removing the social injustice.
7. Development of slums
The existence of slums at a large scale in the country Is an important indicator of social
injustice. The Govt. Should start a special campaign for rehabilitation of slum dwellers into
the healthy environment.
All the basic amenities should be provided to slum dwellers.
Disinvestment Mechanism – Problems and Procedures –
Disinvestment is a process in which the public undertaking reduces its portion in
equity by disposing its shareholding.
“Disinvestment” as per SEBI (substantial acquisition of shares) guideline, means the
sale by the central government/state government, of its shares or voting rights and/or
control, in PSUs. The disinvestment reduces government participation in the
company.
In India, the new economic policies have given rise to significant focus for
privatization of public sector enterprises.
Hence, disinvestment is one of the methods of privatization, which started in the year
1992.
It implies selling of govt. equity shares of public sector units in the market.
It is a concrete step towards privatization and liberalization of our economy.
Objectives of Disinvestment:
The following are the main objectives of the disinvestment policy of the government:
 To reduce financial burden on the government
 To encourage wider share of ownership
 To introduce competition and market discipline
 To help public enterprise upgrade their technology to become competitive
 To rationalize and retain their workforce
 To improve efficiency and productivity in public enterprise through new
industrial policies.
Modalities of Disinvestment:
 In order to achieve the various objectives and goals of disinvestment many methods
have been formulated and implemented. These include:
(1) Public Offer: offering shares of public sector enterprises at a fixed price through a
general prospectus, the offer is made to the general public through the medium of
recognized market intermediaries.
(2) Cross Holding: In the case of cross holding, the govt. would simply sell part of its
share of one PSU to one or more PSU’s.
(3) Golden Share: in this model, the govt. retains a 26 percent share in the PSU. This 26
percent share will continue to give the govt. the status of majority share holder.
(4) Warehousing: Under this model, the govt. owned financial institutions were expected
to buy the govt.’s share in select PSU’s and holding them until third buyer emerged.
(5) Strategic Sale: Under this model, govt. sells a major portion (51% and above) of its
stake to the strategic buyer and also gives over the management control.
(6) Merits of disinvestment
1. In Private Sector, the decision making process is quick and decisions are
linked with the competitive market changes.
2. The disinvestment process would bring in better corporate governance,
exposure to competitive, corporate responsibility, improvement in work
environment etc.
3. The market participation in capital of PSUs through stock exchanges would
enable the market to discover the latent worth of PSUs.
4. The Loss making PSUs can be successfully revived by asking the strategic
partner to infuse fresh capital and exercising excellent management control
over sick PSUs
Demerits of disinvestment
A. Selling of profit-making and dividend paying PSU would result in loss of
regular source of income to the government.
B. There would be chances of ‘asset stripping’ by the strategic partner. Most of
the PSUs have valuable assets in the shape of plant and machinery, land and
buildings etc.
C. The Government’s Policy or disinvestment includes the disposal of both profit
making, as well potentially viable PSUs.
Criteria for disinvestment
The decision regarding disinvestment or liquidation viewed in the light of following
criteria:
a) Whether the objectives of the company are achieved
b) Whether there is decrease in number of beneficiaries
c) Whether serving the national interest will be affected because of disinvestment
d) Whether private sector can efficiently operate and manage the undertaking.
e) Whether the original rate of return targeted could not be possible to achieve.
f) Whether socio-economic objectives lots its purpose

BENEFITS OF DISINVESTMENT
For the Government Can focus more on core activities such as infrastructure, defense,
education, healthcare, and law & order.
For the Markets and Economy Brings about greater efficiencies for the economy and
markets as a whole.
For the Taxpayers Unlocking of shareholder value
For the Employees Greater opportunities and avenues for career growth- further
employment generation
For the PSUs Greater autonomy leading to higher efficiencies

TYPES OF DISINVESTMENT
• Minority Disinvestment • Majority Disinvestment • Complete Privatisation
1Minority Disinvestment
• When the government retains a majority stake in the company, greater than 51%, thus
ensuring management control.
• Minority stakes have been either auctioned off to financial institutions or offloaded to the
public as Offer for Sale.
• Present governments policy - All disinvestments would only be minority disinvestments via
Public Offers
MAJORITY DISINVESTMENT
• The governments post disinvestment will retain a minority stake in the company (it sells off
a majority stake)
• Its been made to strategic partners like CPSE,BRPL to IOC, MRL to IOC, KRL to BPCL
• Majority stake is offloaded as an Offer for Sale to a strategic partner.
COMPLETE PRIVATISATION
• Form of majority disinvestment wherein 100% control of the company is passed on to a
buyer
• Disinvestment and Privatisation When the Government retains 26% of the shares carrying
voting powers while selling the remaining to a strategic buyer, it would have disinvested, but
would not have privatised because with 26%, generally a special resolution 3/4th majority is
required.

Special Economic Zone (SEZs)-

A special economic zone (SEZ) is a geographical region that has economic laws that are
more liberal than a country's domestic economic laws. India has specific laws for its SEZs.
The category 'SEZ' covers a broad range of more specific zone types, including
free-trade zones (FTZ),
export processing zones (EPZ),
free zones (FZ),
industrial estates (IE),
free ports,
urban enterprise zones and others. Usually, the goal of a structure is to increase foreign direct
investment by foreign investors, typically an international business or a Multi National
Corporation (MNC).
Objectives of setting up SEZ in India
1. Generation of additional economic activity
2. Promotion of exports of goods and services
3. Promotion of investment from domestic and foreign sources
4. Creation of employment
5. Development of infrastructure facilities Simplified procedures for development,
operation, and maintenance of the Special Economic Zones and for setting up units
and conducting business
6. Single window clearance for setting up of a SEZ and an unit in SEZ
7. Easy and simplified compliance procedures and documentations with stress on self
certification
Benefits from SEZs
1. Investment of the order of Rs.100,000 crore including FDI of US $ 5-6 billion by
the end of December 2007,
 2. 500,000 direct jobs by December 2007.
3. At present, 1016 units are in operation in the SEZs, providing direct employment
to over 1.79 lakh persons; about 40 per cent of whom are women.
4. Exports from the SEZs during the 10-year period could touch 352 billion dollars,
nearly half of India’s total annual exports, with IT and ITeS SEZs contributing 30 per
cent at 105 billion dollars
Disadvantages
1. Revenue losses because of the various tax exemptions and incentives.
2. Many traders are interested in SEZ, so that they can acquire at cheap rates and create
a land bank for themselves.
The number of units applying for setting up EOU's is not commensurate to the number of
applications for setting up SEZ's leading to a belief that this project may not match up to
expectations.
Sickness in Indian Industry-
Industrial Sickness
DefinitionOf Industrial Sickness— According to the RBI, "A sick unit is one which incurs
cash losses for one year and which, in the judgment of the bank, is likely to incur losses for
the current year as well as the following year, and which has imbalances in its financial
structure, such as a current ratio of less than 1:1 and worsening debt-equity ratio (total outside
liabilities to net worth.).
" The Sick Industrial Companies (Special Provision) Act (SICA),
According to 1985 defined that a unit can be declared as a sick unit if: A unit that is at least
registered for seven years (in 1992, the registration requirement was reduced to 5 years).
Incur cash losses for the latest and the immediately preceding year (this condition was
eliminated in 1992).
It has accumulated losses equal to or exceeding its entire net worth and has also suffered cash
losses in such financial year and the financial year immediately proceeding such financial
year.
Signals and Symptoms of Sickness
1. Decline in capacity utilization
2. Shortage of liquid funds to meet short term obligations
3. Inventories in excessive quantities
4. Non submission of data to banks and other financial units
5. Irregularities in maintaining bank accounts
6. Frequent breakdowns in plants and equipments
7. Decline in quality of products manufactured or service rendered
8. Delay or default in the payment of statutory dues
9. Continuous tumble in the prices of the shares
10. Frequent request to banks for loans
Actual Sickness
Erosion of net worth by 50% or more. Units being closed for a total period of six months and
more during the last year. Default in the payment of loan instalments
CAUSES CONSEQUENCES OF INDUSTRIAL SICKNESS
https://www.learnpick.in/prime/documents/ppts/details/1291/industrial-sickness
External Causes:
1. Power Cuts:
A large number of industrial units, particularly in West Bengal and Bihar, face power cuts
from time to time. Power cuts are necessitated by the fact that generation of power is much
below its actual requirements.
2. Erratic Supply of Inputs:
Lack of regular supply of raw materials and other inputs disturb the production schedule
causing losses to the unit. This is particularly the case of units depending upon the supply of
imported inputs. Also transport bottlenecks sometimes affect the supply of inputs.
3. Recession:
General recessionary trends in the market adversely affect the demand for most of the goods
resulting in unsold stocks and losses to individual units. Products with high prices like cars,
tractors, VCR etc. depend for their sustained demand on easy availability of credit to buyers.
If credit is restrained, the buyers are not able to arrange for finance and consequently the
demands for such products suffer and ultimately such manufacturing units get sick.
4. Official Policy:
Sudden and unfavourable changes in the government policy regarding taxation, export and
import can turn viable units into sick units. For example, liberal import policy for a particular
product might cause damage on domestic units producing similar products.
Internal Causes:
1. Mismanagement:
The most important internal cause of sickness is mismanagement. Faulty managerial decision
regarding production, finance, marketing and personnel and poor control can ruin a business.
According to a study of the Reserve Bank of India sickness of more than 52 per cent of large
industrial units can be attributed to mismanagement, 23 per cent to market recession, 14 per
cent to faulty initial planning and other technical defects and 11 per cent to other causes.
2. Faulty Initial Planning:
Wrong location of an industrial unit might lead to its ruin. If the place of industrial location
lacks infrastructural facilities, the Another fault is lack of proper demand forecasting for the
products to be sold. Small industries start production without making a market survey and
plunge into difficulties later.
Some industries start with a defective capital structure and some spend lavishly on
unproductive assets. Moreover, inability to raise adequate finance to withstand operational
losses is a severe constraint.
3. Financial Problems:
A growing shortage of working capital appears to be a real constraint. The equity base of
many small scale units is very weak and slight disturbance in the market puts them into
trouble and turns them into sick units.
4. Improper Choice of Technology:
Small entrepreneurs cannot afford to take technical guidance from experts in choosing proper
machinery. An improper choice of technology, unsuitable product mix and single product
technology contribute to industrial sickness.
5. Labour Problems:
Bad employer-employee relations result in strikes, lockouts and even closure of industrial
units. If wages, bonus and dearness allowances problems are tackled promptly to the
satisfaction of labour, these problems may not cause sickness.
Competition Act 2002.