Business Environment

Business Environment M.
Com IST SEM
UNIT – I
WHAT IS BUSINESS?
Business may be defined as an activity involving regular production or purchase of
goods and services for sale, transfer and exchange with an object of earning profit.
Nature and Scope of Business

The scope of business organization has considerably expanded after the industrial
revolution. The process of production is now quite complicated. an organization is
needed to determine what each person will do and how much authority each will
have. The role of business organization in various forms of business ownership is
discussed in brief.
Business includes many activities. Traditionally business activities are classified
broadly into two parts:
(1). Industry, and
(2). Commerce.
This is clearly shown in F.C. Hopper’s definition:
“It (business) means the whole complex field of commerce and industry “. Thus, the
scope of business consists two main components: (1) Industry, and (2) Commerce.
Meaning and Type of Industry:
” Industry ” refers to production of goods by manufacturing or processing. It converts
raw materials into finished goods and thus creates form utility. Goods produced by an
industry may be “consumers’ goods” or “producers’ goods”. Consumer goods are in
the form in which consumer wants them e.g. cloth, radio, television, foodstuffs, etc.
Industry directly satisfy human needs and human wants. Producers’ goods are used by
other producers for further production e.g. machinery, factory, building, plants, tools,
etc. Industry may be further divided into four different types.
1. Genetic Industry
2. Extractive Industry
3. Construction Industry
4. Manufacturing Industry
1. Genetic Industry:
Genetic Industry is related to the reproducing, breeding and multiplying certain
species of plants and plants and animals with the object of earning profit from their
sale. The activities involved are rearing, breeding of animals, birds, and growing
plants. Nurseries, where plants are grown for sale. cattle breeding farms, poultry, etc.
come under genetic industry.
2. Extractive Industry: The Extractive Industry concerned with the extraction or
drawing out products from natural sources. It supplies basic raw materials to other
industries. Examples of such industries are farming, mining, hunting, lumbering,
fishing, etc. Materials once extracted from earth cannot be replaced. Hence, these
industries are also called exhaustive industries because with extraction there is
depletion of resource and exhausts.
3. Construction Industry : This industry is concerned with the construction,
erection, fabrication or building products. Examples of such industries are road,
bridge, dams, canals, buildings, construction, etc. In this type of industry basic
materials are manufactured by other industry like cements, iron, etc. The distinctive
characteristic is that their products are not carried to the market for sale, they are
erected or built at a fixed site. The products of construction industries are immovable.
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Business Environment M.Com IST SEM
4. Manufacturing Industry: Generally the term ‘industry’ refers to the

manufacturing industry. This industry is mainly concerned with the production of
different types of goods by using raw materials or semi-finished goods. It creates form
utility in them. Manufacturing industries produces most of the goods that are used by
the consumers. Textile, cement, soap, television, petrol, etc. are examples of
manufacturing industries. It may be classified as follows:
(a). Analytical Industry : In this industry many types of products are manufactured
by analyzing and separating different elements from the same material. For example
crude oil is processed and separated into petrol, diesel, kerosene, lubricating oil, etc.
(b). Processing Industry: In this industry raw material is processed through different
stages of production resulting in the final product. Textile, paper and sugar are
examples of this type.
(C) Synthetic Industry: In this industry various raw materials are put together in
manufacturing process to make a final product. For example combining and mixing
concrete, gypsum, coal., etc produces cement.
(d). Assembling Industry: In this industry various instruments or component parts
already manufactured are assembled to make new useful product. For example, car,
bicycle, radio, television, etc.
Commerce
“Commerce is the activity of buying and selling of goods and services, especially on
a large scale or quantity”
Evolution of Commerce:
Following are the stages in the evolution of commerce.
1. Non-Existence of Commerce and Trade:
In the early stages of man, there were no surpluses to be exchanged. Our
original ancestors consumed what they produced. The production of goods
was only to satisfy one’s own need. Meanwhile, people did not exchange
goods or services commerce and were no existent.
2. Barter Economy:
Human wants to increase with the advance of civilization. They could not
produce everything, they needed. People came to known that man is skillful in
producing a few commodities. He can make them quite rapidly in large
numbers and in beautiful forms. So, at this stage, people started producing an
excess of their needs what they could produce. People started searching for
persons who could get their surplus products in exchange for those goods,
which they required. Commerce made its beginning and barter exchange of
goods for goods began to be practiced. Means of communication were either
absent or wholly primitive and trade was non-existent.
3. National Economy:
The introduction of money followed by several other improvements of
commercial activities transportation, banking insurance etc. significantly
helped to develop commerce and trade. The division of work and
specialization helped producers to concentrate on few products only. They
started producing goods not only for the local markets but also for the national
markets.
Functions of Commerce:
1. Removing the difficulty of persons:
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Trade removes the difficulty of persons by creating a link between the producers and
consumers.
2. Removing the difficulty of time:
Warehousing removes the difficulty of time by removing the time gap between the
production and consumption.
3. Removing the difficulty of place:
Transport removes the difficulty of place by removing a place gap between the
producers and consumers.
4. Removing the difficulty of finance:
Banking removes the difficulty of finance by helping the buyers and sellers in making
and receiving payments and providing them credit facilities. Even now a day E-
payment make easier and facilitate business.
5. Removing the difficulty of risk:
Insurance removes the difficulty of risk by providing protection and compensation to
the insured against various types of risks. You can insure your business’s stock or fire
insurance against monthly premium.
6. Removing the difficulty of knowledge:
Advertising removes the difficulty of knowledge by making people aware about the
product and related particulars.
Classification of Commerce:
It is also called the Elements of Commerce and can be classified into two categories:
1. Trade.
2. Aids to trade.
1. Trade:
In simple words, trade means buying and selling. It is the exchange of goods and
services among buyer and seller in which both the parties are benefited.
Trade is also divided into different types.
a. Internal trade
b. External trade
c. Wholesale trade
d. Retail trade
a. Internal Trade:
The buying and selling of goods within the boundary of a country are called
internal trade.
b. External Trade:
External trade means any purchase and sale of goods between two countries .it
is called foreign trade.
c. Wholesale trade:
The wholesale trade involves the purchase of goods in large quantities from
producers and the resale to retailers. The retailers sell those goods to consumers.
d. Retail trade:
The retail trade consists of all the activities which are related to a sale of goods
and services to the final consumers. Here goods are sold in small quantities to the
consumers.
2. Aid to Trade:
The activities which facilitate in the purchase of goods and services are called
aid to trade. The aid which are essential for the expansion of the trade are as follow.
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1. Transport:
Transport is a vital element in commerce. The different means of transport
trucks, buses, railways, ships, airplanes etc help in carrying goods from the places of
production to centers of consumption. Transport ensures movement of goods and
services from one place to another. It not only extends the market of goods but also
increases the mobility of labor and capital.
2. Insurance:
Insurance is another important element in commerce. The risk of damages of
goods from flood earthquake fire and other causes is covered by insurance. The
insurance companies make good the loss of commodities due to fire floods etc to the
traders on payment of insurance premiums. Insurance thus helps in the expansion of
trade.
3. Banking:
The commercial banks play an important role in financing the various trade
activities. They finance the traders for stock holding and transportation of goods.
They also assist the buyer and selling of goods in receiving and making payments
both at the national and international level. The finance or credit is provided to the
trader in the form of Cash credit overdrafts and loans.
4. Warehousing:
Warehousing is a kind of storage. Now-a-days most of the goods are produced
in expectation of demand. They are stored in safe places and are released as and when
demanded in the market. Warehousing thus helps in overcoming the barrier of time
and creates time utility.
5. Advertisement:
Selling of goods is the most important and difficult problem for the manufacturer.
An advertisement about the product through newspaper, magazines, TV, internet
helps etc has greatly helped the consumer in choosing the goods of their taste.
The consumer comes to know about the quality and price of the good in a short
time and pick up the product that suits them. Advertisement thus has increased the
sale of goods.
6. Agents:
There is a long chain of middlemen (wholesaler, retailers, brokers) who act as
agent between the producers and the consumer .they bring the sellers and buyer of
goods together and help them in completing the transaction of goods. These agents act
for commission .the mercantile agents thus have greatly helped in the distribution of
goods from the producers to the consumers.
Four Importance of Commerce:
1. Satisfy human Wants Commerce tries to satisfy human wants. Human wants
can be categorized as Basic wants and Secondary wants. Human wants can’t
be ending. Commerce has made a distribution of goods potential from one part
of the world to the other part.
Nowadays we can purchase anything produced anywhere in the world office
line as well as online. This has enabled man to satisfy his uncountable wants
and thereby promoting social welfare.
2. Commerce links producers and consumers: Production is meant for
ultimate consumption. Commerce makes possible to link producers and
consumers through retailers and wholesalers and also through the aids to trade.
Consumers get information about different goods through advertisements and
salesmanship. The manufacturers are commonly up-to-date about the likes and
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dislikes of the consumers through marketing research. Thus commerce creates

contact between the centers of production and consumption and links them.
3. Increase living Standard: Commerce has increased our standard of living.
The standard of living. It refers to a quality of life enjoyed by the members of
a society. In simple words when a man consumes more products his standard
of living improves. To consume a multiplicity of goods he must be able to
secure them first. Commerce helps us to get what we want at right time, right
place and at the right price and thus helps in improving our living standard.
4. Generates employment opportunities Commerce has generated a lot of
opportunities for the world. The growth of commerce, industry, and trade
bring about the growth of agencies of trade such as insurance, transport,
warehousing, banking, advertising, etc. These agencies need people to look
after their operational. An increase in production results in increasing demand,
which further results in improving employment opportunities. Thus the growth
of commerce generates more and more employment opportunities for millions
of people in a country.
CHARACTERISTICS OF BUSINESS:
(i) Deals in goods and services: People in business are engaged in production
and distribution of goods and services. The goods may be consumer goods like
bread, butter, milk, tea, etc. or capital goods like plant, machinery,
equipments, etc. The services may be in the form of transportation, banking,
insurance, warehousing, advertising and so on.
(ii) Sale or exchange of goods and services: If a person produces or buys a

product for self-consumption or for gifting it to another, he is not engaged in
business. But when he produces or buys goods to sell it to somebody, he is
engaged in business. Thus, in business the goods and services produced or
purchased must be exchanged for money or for goods (under barter system)
between the buyers and sellers. Without sale or exchange of goods the
activities cannot be treated as business.
(iii) Regular exchange of goods and services: The production or buying and
selling activities must be carried out on a regular basis. Normally, an isolated
transaction is not treated as business. For example, if Raju sold his old car to
Hari, it is not considered as business , unless he continues to carry buying and
selling of cars on a regular basis.
(iv) Requires investment: Every business activity requires some amount of

investment in terms of land, labour or capital. These resources are utilised to
produce a variety of goods and services for distribution and consumption.
(v) Aims at earning profit: Business activities are performed with the primary
objective of earning income by way of profit. Without profit it is not possible
to survive for a long period. Earning of profit is also required to grow and
expand the business.
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(vi) Involves risk and uncertainty of income: We know that every business aims
of earning profit. The businessman who invests the various resources expects a
fair amount of return. But, inspite of his/ her best efforts, the reward he/she
gets is always uncertain. Sometimes he/she enjoys profits and also times may
come when he suffers heavy losses. This happens because the future is
unpredictable and businessperson has practically no control over certain
factors that affects his/her earnings.
IMPORTANCE OF BUSINESS:
Business is an integral part of modern society. It is an organised and systematic
activity for earning profit. It is concerned with activities of people working towards a
common economic goal. Modern society cannot exist without business. The
importance of business can be described as follows:
(a) Business improves the standard of living of the people by providing better
quality and large variety of goods and services at the right time and at the right
place.
(b) It provides opportunities to work and earn a livelihood. Thus, it generates
employment in the country, which in turn reduces poverty.
(c) It utilises the scarce resources of the nation and facilitates mass production of
goods and services.
(d) It improves national image by producing and exporting quality goods and
services to foreign countries. By participating in international trade fairs and
exhibitions it also demonstrates the progress and achievements of its own
country to the outside world.
(e) It enables the people of a country to use quality goods of international
standard. This is possible by way of importing goods from foreign countries or
by producing quality goods in the country by applying modern methods of
production.
(f) It gives better return to the investors on their capital investment and also
provides opportunities to grow and expand the business.
(g) It promotes social interest by providing tourist services, sponsoring cultural
programmes, trade shows etc. in the country, which enable people of different
parts of the country to exchange their culture, traditions and practices. Thus, it
promotes national integration.
(h) It also facilitates exchange of culture among the people of different nations
and thus, maintains international harmony and peace.
(i) It helps in the development of science and technology. It spends large amount
of money on research and development in search of new products and
services. Hence a number of innovative products and services are developed
through industrial research.
OBJECTIVES OF BUSINESS:
Business objectives are something, which a business organisation wants to achieve or
accomplish over a specified period of time. It is generally believed that a business has
a single objective, that is, to make profit and safeguard the interests of its owners.
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However, no business can ignore the interests of its employees, customers as well as
the interest of society as a whole. Business objectives also need to be aimed at
contributing to national goals and aspirations as well as towards international well-
being. Thus, the objectives of business may be classified as –
(a) Economic objectives
(b) Social objectives
(c) Human objectives
(d) National objectives
(e) Global objectives
Now let us discuss these objectives in detail.
(a) Economic objectives of a business refer to the objective of earning profit and
those which have a direct impact on the profit-earning objective of business. Some of
the main economic objectives of business are:
(i) earning of adequate profits;
(ii) exploring new markets and creation of more customers;
(iii)growth and expansion of business operation;
(iv) making innovations and improvements in goods and services; and
(v) making use of available resources in the best possible manner.
(b) Social objectives of business are those, which are desired to be achieved for
the benefit of the society. Some of the major social objectives are:
(i) production and supply of quality goods and services to the society;
(ii) making goods available at reasonable prices;
(iii)avoidance of unfair practices like hoarding, black-marketing, over-
charging, etc.;
(iv) contributing towards the general welfare and upliftment of the society;
(v) ensuring fair return to the investors;
(vi) taking steps in the direction of consumer education; and
(vii) conserving natural resources and wild life and protecting the
environment.
(c) Human objectives of business primarily refer to the objectives aimed at

safeguarding the interest of its employees and their welfare. Some of the major
human objectives are:
(i) providing fair remuneration and incentives to the employees;
(ii) arrangement of better working conditions and proper work
environment for the employees;
(iii)providing job satisfaction by making the jobs interesting and
challenging, putting the right persons in right job;
(iv) providing the employees with more and more promotional
opportunities;
(v) organising training and development programmes for the growth of the
employees; and
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(vi) providing employment to the backward classes of the society and

people who are physically and mentally challenged.
(d) National objectives of business are the objectives of fulfilling the national
goals and aspirations like:
(i) creation of employment opportunities;
(ii) promotion of social justice;
(iii) produce and supply goods in accordance with the national interest and
priorities;
(iv) payment of taxes and other dues honestly and regularly;
(v) helping the state in maintaining law and order
by promoting good industrial relations; and
(vi) implementing government’s economic and
financial policies framed from time to time.
(e) Global objectives of business are the objectives of facing the challenges of
global market. Some of the global objectives are:
(i) making available globally competitive goods and services; and
(ii) reducing disparities among rich and poor nations by expanding its
operations
MEANING OF BUSINESS ENVIRONMENT:

Business environment may be defined as the total surroundings, which have a direct
or indirect bearing on the functioning of business.
It may also be defined as the set of external factors, such as economic factors, social
factors, political and legal factors, demographic factors, technical factors etc., which
are uncontrollable in nature and affects the business decisions of a firm.
The success of every business depends on adapting itself to the environment within
which it functions.
For example, when there is a change in the government polices, the business has to
make the necessary changes to adapt it to the new policies.
Similarly, a change in the technology may render the existing products obsolete, as
we have seen that the introduction of computer has replaced the typewriters;
The colour television has made the black and white television out of fashion.
Again a change in the fashion or customers’ taste may shift the demand in the market
for a particular product, e.g., the demand for jeans reduced the sale of other traditional
wear.
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FEATURES OF BUSINESS ENVIRONMENT:
On the basis of the above discussion the features of business environment can be
summarized as follows.
(a) Business environment is the sum totals of all factors external to the business
firm and that greatly influence their functioning.
(b) It covers factors and forces like customers, competitors, suppliers,
government, and the social, cultural, political, technological and legal
conditions.
(c) The business environment is dynamic in nature that means, it keeps on
changing.
(d) The changes in business environment are unpredictable. It is very difficult to
predict the exact nature of future happenings and the changes in economic and
social environment.
(e) Business Environment differs from place to place, region to region and
country to country. Political conditions in India differ from those in Pakistan.
Taste and values cherished by people in India and China vary considerably.
IMPORTANCE OF BUSINESS ENVIRONMENT

There is a close and continuous interaction between the business and its environment.
This interaction helps in strengthening the business firm and using its resources more
effectively. As stated above, the business environment is multifaceted, complex, and
dynamic in nature and has a far-reaching impact on the survival and growth of the
business. To be more specific, proper understanding of the social, political, legal and
economic environment helps the business in the following ways:
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(a) Determining Opportunities and Threats: The interaction between the

business and its environment would identify opportunities for and threats to
the business. It helps the business enterprises for meeting the challenges
successfully.
(b) Giving Direction for Growth: The interaction with the environment leads to
opening up new frontiers of growth for the business firms. It enables the
business to identify the areas for growth and expansion of their activities.
(c) Continuous Learning: Environmental analysis makes the task of managers
easier in dealing with business challenges. The managers are motivated to
continuously update their knowledge, understanding and skills to meet the
predicted changes in realm of business.
(d) Image Building: Environmental understanding helps the business
organisations in improving their image by showing their sensitivity to the
environment within which they are working. For example, in view of the
shortage of power, many companies have set up Captive Power Plants (CPP)
in their factories to meet their own requirement of power.
(e) Meeting Competition: It helps the firms to analyse the competitors’ strategies
and formulate their own strategies accordingly.
(f) Identifying Firm’s Strength and Weakness: Business environment helps to

identify the individual strengths and weaknesses in view of the technological
and global developments.
TYPES OF BUSINESS ENVIRONMENT
Confining business environment to uncontrollable external factors, it may be

classified as
(a) Economic environment; and (b) Non-economic environment.
The economic environment includes economic conditions, economic
policies and economic system of the country.
Non-economic environment comprises social, political, legal,
technological, demographic and natural environment. All these have a bearing
on the strategies adopted by the firms and any change in these areas is likely to
have a far-reaching impact on their operations. Let us have a brief idea about
each of these areas of business environment.
ECONOMIC ENVIRONMENT
The survival and success of each and every business enterprise depend fully on its
economic environment. The main factors that affect the economic environment are:
(a) Economic Conditions: The economic conditions of a nation refer to a set of

economic factors that have great influence on business organisations and their
operations. These include gross domestic product, per capita income, markets
for goods and services, availability of capital, foreign exchange reserve,
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growth of foreign trade, strength of capital market etc. All these help in
improving the pace of economic growth.
(b) Economic Policies: All business activities and operations are directly
influenced by the economic policies framed by the government from time to
time. Some of the important economic policies are:
(i) Industrial policy
(ii) Fiscal policy
(iii)Monetary policy
(iv) Foreign investment policy
(v) Export –Import policy (Exim policy)
The government keeps on changing these policies from time to time in view of the
developments taking place in the economic scenario, political expediency and the
changing requirement. Every business firm has to function strictly within the policy
framework and respond to the changes therein.
Important Economic Policies
Industrial policy: The Industrial policy of the government covers all those
principles, policies, rules, regulations and procedures, which direct and control
the industrial enterprises of the country and shape the pattern of industrial
development.
Fiscal policy: It includes government policy in respect of public
expenditure, taxation and public debt.
Monetary policy: It includes all those activities and interventions that aim
at smooth supply of credit to the business and a boost to trade and industry.
Foreign investment policy: This policy aims at regulating the inflow of
foreign investment in various sectors for speeding up industrial development and
take advantage of the modern technology.
Export–Import policy (Exim policy): It aims at increasing exports and
bridge the gap between expert and import. Through this policy, the government
announces various duties/levies. The focus now-a-days lies on removing barriers
and controls and lowering the custom duties.
(c) Economic System: The world economy is primarily governed by three types of
economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii)
Mixed economy. India has adopted the mixed economy system which implies co-
existence of public sector and private sector.
NON-ECONOMIC ENVIRONMENT
The various elements of non-economic environment are as follow:
(a) Social Environment

The social environment of business includes social factors like customs, traditions,
values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the
values that a society cherishes have a considerable influence on the functioning of
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business firms. For example, during festive seasons there is an increase in the demand
for new clothes, sweets, fruits, flower, etc. Due to increase in literacy rate the
consumers are becoming more conscious of the quality of the products. Due to change
in family composition, more nuclear families with single child concepts have come
up. This increases the demand for the different types of household goods. It may be
noted that the consumption patterns, the dressing and living styles of people
belonging to different social structures and culture vary significantly.
b) Political Environment
This includes the political system, the government policies and attitude towards the
business community and the unionism. All these aspects have a bearing on the
strategies adopted by the business firms. The stability of the government also
influences business and related activities to a great extent. It sends a signal of
strength, confidence to various interest groups and investors. Further, ideology of the
political party also influences the business organisation and its operations. You may
be aware that Coca-Cola, a cold drink widely used even now, had to wind up
operations in India in late seventies. Again the trade union activities also influence the
operation of business enterprises. Most of the labour unions in India are affiliated to
various political parties. Strikes, lockouts and labour disputes etc. also adversely
affect the business operations. However, with the competitive business environment,
trade unions are now showing great maturity and started contributing positively to the
success of the business organisation and its operations through workers participation
in management.
(b) Legal Environment

This refers to set of laws, regulations, which influence the business organisations and
their operations. Every business organisation has to obey, and work within the
framework of the law. The important legislations that concern the business enterprises
include:
➢ Companies Act, 1956
➢ Foreign Exchange Management Act, 1999
➢ The Factories Act, 1948
➢ Industrial Disputes Act, 1972
➢ Payment of Gratuity Act, 1972
➢ Industries (Development and Regulation) Act, 1951
➢ Prevention of Food Adulteration Act, 1954
➢ Essential Commodities Act, 2002
➢ The Standards of Weights and Measures Act, 1956
➢ Monopolies and Restrictive Trade Practices Act, 1969
➢ Trade Marks Act, 1999
➢ Bureau of Indian Standards Act, 1986
➢ Consumer Protection Act, 1986
➢ Environment Protection Act
➢ Competition Act, 2002
Besides, the above legislations, the following are also form part of the legal
environment of business.
(i) Provisions of the Constitution: The provisions of the Articles of the Indian
Constitution, particularly directive principles, rights and duties of citizens,
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legislative powers of the central and state government also influence the
operation of business enterprises.
(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the
government function in the interest of the public and act within the boundaries
of the constitution. The various judgments given by the court in different
matters relating to trade and industry also influence the business activities.
(c) Technological Environment

Technological environment include the methods, techniques and approaches adopted
for production of goods and services and its distribution. The varying technological
environments of different countries affect the designing of products. For example, in
USA and many other countries electrical appliances are designed for 110 volts. But
when these are made for India, they have to be of 220 volts. In the modern
competitive age, the pace of technological changes is very fast. Hence, in order to
survive and grow in the market, a business has to adopt the technological changes
from time to time. It may be noted that scientific research for improvement and
innovation in products and services is a regular activity in most of the big industrial
organisations. Now a days infact, no firm can afford to persist with the outdated
technologies.
(d) Demographic Environment

This refers to the size, density, distribution and growth rate of population. All these
factors have a direct bearing on the demand for various goods and services. For
example a country where population rate is high and children constitute a large
section of population, then there is more demand for baby products. Similarly the
demand of the people of cities and towns are different than the people of rural areas.
The high rise of population indicates the easy availability of labour. These encourage
the business enterprises to use labour intensive techniques of production. Moreover,
availability of skill labour in certain areas motivates the firms to set up their units in
such area. For example, the business units from America, Canada, Australia,
Germany, UK, are coming to India due to easy availability of skilled manpower.
Thus, a firm that keeps a watch on the changes on the demographic front and reads
them accurately will find opportunities knocking at its doorsteps.
(e) Natural Environment

The natural environment includes geographical and ecological factors that influence
the business operations. These factors include the availability of natural resources,
weather and climatic condition, location aspect, topographical factors, etc. Business is
greatly influenced by the nature of natural environment. For example, sugar factories
are set up only at those places where sugarcane can be grown. It is always considered
better to establish manufacturing unit near the sources of input. Further, government’s
policies to maintain ecological balance, conservation of natural resources etc. put
additional responsibility on the business sector.
INTERNAL ENVIRONMENT
The internal environment is the environment that has a direct impact on the business.
Here there are some internal factors which are generally controllable because the
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company has control over these factors. It can alter or modify such factors as its
personnel, physical facilities, and organization and functional means, like marketing,
to suit the environment.
A) Value system
The value system of the founders and those at the helm of affairs has important
bearing on the choice of business, the mission and the objectives of the organization,
business policies and practices.
B) Mission, Vision and Objectives
Vision means the ability to think about the future with imagination and wisdom.
Vision is an important factor in achieving the objectives of the organization. The
mission is the medium through which the objectives are achieved.
C) Management structure and nature
The structure of the organization also influences the business decisions. The
organizational structure like the composition of board of directors, influences the
decisions of business as they are internal factors. The structure and style of the
organization may delay a decision making or some other helps in making quick
decisions.
EXTERNAL ENVIRONMENT
It refers to the environment that has an indirect influence on the business. The factors
are uncontrollable by the business. There are two types of external environment:
Micro Environment and Macro Environment
MICRO ENVIRONMENT
The micro environment is also known as the task environment and operating
environment because the micro environmental forces have a direct bearing on the
operations of the firm.
A) Suppliers
An important force in the micro environment of a company is the suppliers, i.e., those
who supply the inputs like raw materials and components to the company.
B) Customer
The major task of a business is to create and sustain customers. A business exists
only because of its customers.
C) Marketing Intermediaries
The marketing intermediaries include middlemen such as agents and merchants that
help the company find customers or close sales with them.
D) Financers
The financers are also important factors of internal environment. It will help for
business expansion and diversification and fulfillment of necessary financial
requirements.
E) Public
Public can be said as any group that has an actual or potential interest in or on an
organization’s ability to achieve its interest. Public include media and citizens.
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F) Competitors
Competitors are businesses that produce goods and services that are similar to a
particular organization’s goods and services. Put differently, they are organisations
that are vying for same customers. Rivalry between competitors is potentially the
most threatening force that managers must deal with. A high level of rivalry often
results in price competition, and falling prices reduce access to resources and lower
profit.
MACRO ENVIRONMENT
Macro environment is also known as General environment and remote environment.
Macro factors are generally more uncontrollable than micro environment factors.
When the macro factors become uncontrollable, the success of company depends
upon its adaptability to the environment.
Economic Environment
Economic environment refers to the aggregate of the nature of economic system of
the country, business cycles, the socio-economic infrastructure etc.
Social Environment
The social dimension or environment of a nation determines the value system of the
society which, in turn affects the functioning of the business. Sociological factors
such as costs structure, customs and conventions, mobility of labor etc. have far-
reaching impact on the business.
Political Environment
The political environment of a country is influenced by the political organizations
such as philosophy of political parties, ideology of government or party in power,
nature and extent of bureaucracy influence of primary groups etc.
Legal Environment
Legal environment includes flexibility and adaptability of law and other legal rules
governing the business. It may include the exact rulings and decision of the courts.
Technical Environment
The business in a country is greatly influenced by the technological development. The
technology adopted by the industries determines the type and quality of goods and
services to be produced and the type and quality of plant and equipment to be used.
ENVIRONMENTAL SCANNING AND ANALYSIS

Environmental scanning is a process of gathering, analyzing, and dispensing
information for tactical or strategic purposes. The environmental scanning process
entails obtaining both factual and subjective information on the business
environments in which a company is operating or considering entering.
Kinds of environmental scanning

Ad-hoc scanning - Short term, infrequent examinations usually initiated by a crisis
Regular scanning - Studies done on a regular schedule (e.g. once a year)
Continuous scanning (also called continuous learning) - continuous structured data
collection and processing on a broad range of environmental factors
15
Environmental scanning usually refers just to the macro environment, but it can also
include industry, competitor analysis, marketing research (consumer analysis), new
product development (product innovations) or the company's internal environment.
A scan of the external macro-environment in which the firm operates can be

expressed in terms of the following factors:
➢ Political
➢ Economic
➢ Social
➢ Technological
➢ Environmental
➢ Legal
The acronym PESTEL is used to describe a framework for the analysis of these
macro environmental factors.
Political Factors: Political factors include government regulations and legal issues
and define both formal and informal rules under which the firm must operate. Some
examples include:
➢ tax policy
➢ employment laws
➢ environmental regulations
➢ trade restrictions and tariffs
➢ political stability
Economic Factors: Economic factors affect the purchasing power of potential

customers and the firm's cost of capital. The following are examples of factors in the
macro economy:
➢ economic growth
➢ interest rates
➢ exchange rates
➢ inflation rate
Social Factors: Social factors include the demographic and cultural aspects of the
external macro environment. These factors affect customer needs and the size of
potential markets. Some social factors include:
➢ health consciousness
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➢ population growth rate

➢ age distribution
➢ emphasis on safety
Technological Factors: Technological factors can lower barriers to entry, reduce

minimum efficient production levels, and influence outsourcing decisions. Some
technological factors include:
➢ R&D activity
➢ Automation
➢ technology incentives
➢ rate of technological change
Environmental Factors: Environmental factor refers to the physical or geographical

environment affecting the business. It also includes the considerations like
environmental pollution.
Legal Factors: Legal dimension describes the framework of legislation impacting the
business. The kind of laws more important to business relate to areas like monopolies
and consumer protection, employment and industrial relations, health and safety, and
joint stock companies.
FIVE FORCE ANALYSIS

• Threat Of New Entrants
• Threat Of Substitutes
• Bargaining Power Of Buyers
• Bargaining Power Of Suppliers
• Rivalry Among Existing Firms
SWOT analysis: SWOT analysis is a structured planning method used to evaluate

the strengths, weaknesses, opportunities, and threats involved in a project or in a
business venture. A SWOT analysis can be carried out for a product, place, industry
or person. It involves specifying the objective of the business venture or project and
identifying the internal and external factors that are favorable and unfavorable to
achieve that objective. Setting the objective should be done after the SWOT analysis
has been performed. This would allow achievable goals or objectives to be set for the
organization.
• Strengths: characteristics of the business or project that give it an advantage

over others.
• Weaknesses: characteristics that place the business or project at a
disadvantage relative to others
• Opportunities: elements that the project could exploit to its advantage
• Threats: elements in the environment that could cause trouble for the business
or project
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NEED AND IMPORTANCE OF ENVIRONMENTAL SCANNING:

‘
Environmental analysis will help the firm to understand what is happening both inside
and outside the organization and to increase the probability that the organisational
strategies developed will appropriately reflect the organizational environment.
Environmental scanning is necessary because there are rapid changes taking place in
the environment that has a great impact on the working of the business firm. Analysis
of business environment helps to identify strength weakness, opportunities and
threats. SWOT analysis is necessary for the survival and growth of every business
enterprise.
The following is the need and importance of environmental scanning:
1. Identification of strength:
Strength of the business firm means capacity of the firm to gain advantage over its
competitors. Analysis of internal business environment helps to identify strength of
the firm. After identifying the strength, the firm must try to consolidate or maximize
its strength by further improvement in its existing plans, policies and resources.
2. Identification of weakness:
Weakness of the firm means limitations of the firm. Monitoring internal environment
helps to identify not only the strength but also the weakness of the firm. A firm may
be strong in certain areas but may be weak in some other areas. For further growth
and expansion, the weakness should be identified so as to correct them as soon as
possible.
3. Identification of opportunities:
Environmental analyses helps to identify the opportunities in the market. The firm
should make every possible effort to grab the opportunities as and when they come.
4. Identification of threat:
Business is subject to threat from competitors and various factors. Environmental
analyses help them to identify threat from the external environment. Early
identification of threat is always beneficial as it helps to diffuse off some threat.
5. Optimum use of resources:

Proper environmental assessment helps to make optimum utilization of scare human,
natural and capital resources. Systematic analyses of business environment helps the
firm to reduce wastage and make optimum use of available resources, without
understanding the internal and external environment resources cannot be used in an
effective manner.
6. Survival and growth:

Systematic analyses of business environment help the firm to maximise their strength,
minimise the weakness, grab the opportunities and diffuse threats. This enables the
firm to survive and grow in the competitive business world.
7. To plan long-term business strategy:

A business organisation has short term and long-term objectives. Proper analyses of
environmental factors help the business firm to frame plans and policies that could
18
help in easy accomplishment of those organisational objectives. Without undertaking

environmental scanning, the firm cannot develop a strategy for business success.
8. Environmental scanning aids decision-making:

Decision-making is a process of selecting the best alternative from among various
available alternatives. An environmental analysis is an extremely important tool in
understanding and decision making in all situation of the business. Success of the firm
depends upon the precise decision making ability. Study of environmental analyses
enables the firm to select the best option for the success and growth of the firm.
CHANGING IN THE BUSINESS ENVIRONMENT OF INDIA
Essentials of the 3Ds – Democracy, Demography and Demand

Despite a diverse demography, India’s democratic system has been integral for the
progress in the country, helping bind its 65 per cent young population with the India
growth story. With a population base of more than 1.25 billion, stable parliamentary
system, technological advancement, and quality resources at competitive price, India
has over the years emerged as a preferred investment destination for manufacturers
and service providers alike. In the recent past, the Government has also been playing a
crucial role in highlighting the above advantages – the essential Ds – Democracy,
Demography and Demand – in the global arena, inviting foreign companies to set
shop in India.
Advantage manufacturing – Make in India
Taking the growth story forward, India is being projected as a manufacturing hub
through the Make in India campaign, with the Government promising to provide a
conducive environment for investors. Panels have been formed to help fast-track
investment proposals, overcome bottlenecks that obstruct the efforts for investing in
India and provide consistent efforts in creating investor-friendly environment. It is
expected that the manufacturing sector in the country could reach USD 1 trillion by
2025, with the sector accounting for around 25 per cent of the GDP and creating 90
million domestic jobs by that period.[1].
It’s a go – Easy to set shop
Setting up operations in India is now becoming far more flexible, thanks to the policy
changes initiated by the Government. With most of the information and submission
options available online, India is providing easier and flexible programs for investors
ready to ship their operations in the country. One of the myths, that one needs an
Indian partner to root themselves in India, is a fallacy of the past, as major companies
are now setting up their hubs in the country on their own.
Easing policy guidelines
The Department of Industrial Policy and Promotion (DIPP) has been focused at
improving policies and guidelines for doing business in India. The emphasis has been
mainly to rationalise and simplify the existing rules, along with introducing
technology for making governance more effective and efficient. A prominent change
had been online availability of applying for Industrial License and Industrial
Entrepreneur Memorandum 24*7[2].
Disintegrating red tapism
The Government has progressed on environmental clearances for more than 300
projects and has made sure that it would be red carpet in India rather than red tapism.
Also committed to fast-track reform process, Government has been able to take
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ordinance route for increasing foreign investment limit in various sectors such as
insurance.
Developing infrastructure – Smart cities and industrial corridors
Being an emerging economy, major emphasis is given on developing infrastructure in
the country. With the Government announcing an outlay of around USD 8 billion for
creating 100 smart cities[3], many international companies may express interest to
collaborate with Indian companies and the Government to build infrastructure,
transportation, renewable energy and other Greenfield projects in the country. With
regards to industrial corridors, Delhi Mumbai Industrial Corridor, Ahmedabad
Dholera Special Investment Region, Chennai Bangalore Industrial Corridor,
Bengaluru Mumbai Economic Corridor and Vizag Chennai Industrial Corridor are
now showing great progress.
Offering strategic locations for doing business in India
Along with the major industrial cities and towns, India is rapidly developing various
strategic locations for companies to establish their base in the country. With the
availability of multiple clusters for centres of excellence for manufacturing,
engineering & design, and skilled talent at competitive cost, India is at an
advantageous position for establishing manufacturing facilities, engineering design
and development centres as well as for sourcing from the country. Further, the
country is emerging as one of the best global locations for talent arbitrage, as foreign
companies are hiring Indians for top leadership positions for their global operations.
Planning to start your business in India or expanding your operations in this rapidly
emerging country? Take advantage of the various policy changes and Government
initiatives, create the right footprints and impressions with your target audience and
generate desired ROI by taking informed investment decisions with the guidance of an
India entry specialist who can offer end-to-end consulting and implementation
support.
20
UNIT - II
ECONOMIC ENVIRONMENT
The survival and success of each and every business enterprise depend fully on its
economic environment. The main factors that affect the economic environment are:
1. Economic Conditions: The economic conditions of a nation refer to a set of

economic factors that have great influence on business organisations and their
operations. These include gross domestic product, per capita income, markets
for goods and services, availability of capital, foreign exchange reserve,
growth of foreign trade, strength of capital market etc. All these help in
improving the pace of economic growth.
Economic conditions are those conditions which are related with the
possibilities of economic development of a country. On the basis of the
economic conditions the government starts various programmes for the
welfare of the people.
These programmes influence business. Businessmen are influenced by these
programmes and they start their own programmes like the advertisement
policy, discovery of new market, bringing new products in the market, new
methods of production, etc. Some of the examples of economic conditions are
as under: (a) Flow of Foreign Capital (b) Supply of Natural Resources (c)
Level of Economic Development (d) Rate of Interest (e) National Income (f)
Industrial Development (g) Foreign Trade (h) General Price Level.
The following are the chief examples of the impact of economic environment
on business:
(i) When reforms were introduced in the banking sector, the bank loans were
allowed on easy terms. It also led to better services. It helped really fast
development of business.
(ii) The change in the economic environment resulted in the establishment of
Leasing Companies, Mutual Funds and Venture Capital Business.
2. Economic Policies: All business activities and operations are directly

influenced by the economic policies framed by the government from time to
time. Some of the important economic policies are:
Industrial policy
Fiscal policy
Monetary policy
Foreign investment policy
Export –Import policy (Exim policy)
The government keeps on changing these policies from time to time in view of the
developments taking place in the economic scenario, political expediency and the
changing requirement. Every business firm has to function strictly within the policy
framework and respond to the changes therein.
Important Economic Policies

Industrial policy: The Industrial policy of the government covers all
those principles, policies, rules, regulations and procedures, which direct and control
21
the industrial enterprises of the country and shape the pattern of industrial
development.
Fiscal policy: It includes government policy in respect of public
expenditure, taxation and public debt.
Monetary policy: It includes all those activities and interventions that
aim at smooth supply of credit to the business and a boost to trade and industry.
Foreign investment policy: This policy aims at regulating the inflow of
foreign investment in various sectors for speeding up industrial development and take
advantage of the modern technology.
Export–Import policy (Exim policy): It aims at increasing exports and
bridge the gap between expert and import. Through this policy, the government
announces various duties/levies. The focus now-a-days lies on removing barriers and
controls and lowering the custom duties.
- Economic System: The world economy is primarily governed by three types of

economic systems, viz., (i) Capitalist economy; (ii) Socialist and controlled
economy; and (iii) Mixed economy. India has adopted the mixed economy system
which implies co-existence of public sector and private sector.
Economic Systems
The way a country’s resources are owned and the way that country takes decisions as
to what to produce, how much to produce and how to distribute what has been
produced determine the type of economic system that particular country practises.
· Market Economy (Also Called Free Enterprise Economies Or Capitalist

Economy)
· Centrally – Planned Or Controlled Economy
· Mixed Economy
Capitalist Economy
e.g. USA, Japan
Private firms or individuals own means of production. They make choices
about:
o What to produce o How to produce
For whom to produce
- What to produce is answered by consumers according their demand for goods
& services
- How to produce is answered by the business-men. They will choose the
production method, which reduces their costs to reach the higher profit.
- For whom to produce – firms produce goods
services which consumers are willing and able to buy.
Role of government
- To pass laws to protect businessmen & consumers
- To issue money
- To provide certain services – police
- To prevent firms from dominating The market and to restrict the power
22
Of trade unions
- Repair and maintain state properties
Advantages:
1. Goods and services go where they are most in demand and free market responds
quickly to people’s wants + wide variety of G&S
2. No need for and overriding authority to determine allocation of
goods&services
3. Producers and consumers are free to make changes to suit their aims
4. Competition and the opportunity to make large profits, greater efficiency,
innovation
Disadvantages:
5. It mis-allocates resources(to those with more $)
6. It creates inequality of incomes
7. It is not competent in providing certain services
8. It leads to inefficiency (market imperfection)
9. It can encourage the consumption of harmful goods - drugs
Socialist economy
e.g. Cuba, China, former Soviet Union State (government) owns all means of
production. Individuals are not permitted to own any property. Government +
government planners make choices about What, How and for whom to produce.
- What to produce is answered by government planners, they make assumptions
about consumers` needs and the mix of goods and services
- How to produce is answered by the gov. planners according the input-output
analysis.
- For whom to produce – for consumers through state outlets. Prices can’t
change without state instructions. (Restrictions)
Role of government
- Government make the most economic decisions with those on top of the
hierarchy giving economic commands to those further down the ladder.
- Government plans, organizes and coordinates the whole production process in
most industries.
- Government is the employer of most workers and tells them how to do their jobs.
Advantages:
- There is more equal distribution of wealth and income
- Production is for need rather than profit.
- Long-term plans can be made taking into account a range of future needs such
as population changes and the environment.
Disadvantages:
- Vast bureaucracies employing – supervisors, coordinators…
- People are poorly motivated
- Planners often get things wrong – shortages of surpluses of some goods
- Poor standard of living
There are no pure free market economies or pure command
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economies. Because of: Command economies are impossible to

regulate all markets
Free market economies can’t provide public goods (defence) and can’t
provide merit goods in sufficient quantity.
3. Mixed economy
All Western European countries
The balance between state provision (government planning) and free market provision
is more or less equal. The government decides the “degree” of mixing. They will
decide how much business activity there will be in the private sector and the public
sector.
- In the countries, where the government plays important - major economic role
the social provision will tend to be greater, taxed higher and distribution of
wealth and income more equal. (Sweden)
- Whereas in countries where the private sector plays the most important
economic role, social provision is lower with fewer free goods and services,
also taxes will be lower and the distribution of wealth and income less
equal.(GB)
Some resources are allocated by the government and the rest by the market system.
Most decisions are taken in the market place but the government plays an important
role in modifying the functioning market.
Role of government
(b) Sets laws and rules that regulate economic life - intervention to control or
regulate markets
(c) Provide certain services e.g. education, police, defense healthcare
(d) Regulate business – to ensure that there is fair competition in the private sector
(e) Restricts the consuming harmful goods by making them illegal or placing high
taxes on them
(f) Planning gives the government the power to give G&S, or money to the poorer
people
PUBLIC SECTOR – is responsible for the supply of public goods & services and
merit goods. These goods are provided free when used and are paid by taxes e.g.
roads, healthcare, street lighting
The central or local government makes decisions regarding resource allocation in
the public sector. In public sector, the state owns a significant proportion of
production factors.
PRIVATE SECTOR – firms in response to the demand or consumers needs and

wants make production decisions
In the private sector individuals are allowed to own the factor of production.
Businesses are set up in this system by individuals to supply a wide variety of goods
and services. Competition exists between these firms.
THE ROLE OF GOVERNMENT IN A MARKET (MIXED) ECONOMY
There are various opinions of various economic thoughts about the role of
government interventions. Governments are generally argued to have four main
24
Macroeconomic goals:
(j) to maintain full employment
(k) to ensure price stability
(l) to achieve high level of economic growth
(m) to keep exports and imports in ballance
FISCAL POLICY
Fiscal Policy Meaning - Its Main Objectives In India - Conclusion
Meaning of Fiscal Policy
The fiscal policy is concerned with the raising of government revenue and incurring
of government expenditure. To generate revenue and to incur expenditure, the
government frames a policy called budgetary policy or fiscal policy. So, the fiscal
policy is concerned with government expenditure and government revenue.
Fiscal policy has to decide on the size and pattern of flow of expenditure from the
government to the economy and from the economy back to the government. So, in
broad term fiscal policy refers to "that segment of national economic policy which is
primarily concerned with the receipts and expenditure of central government." In
other words, fiscal policy refers to the policy of the government with regard to
taxation, public expenditure and public borrowings.
The importance of fiscal policy is high in underdeveloped countries. The state has to
play active and important role. In a democratic society direct methods are not
approved. So, the government has to depend on indirect methods of regulations. In
this way, fiscal policy is a powerful weapon in the hands of government by means of
which it can achieve the objectives of development.
The use of such fiscal policy measures may be grouped into two:
(i) Those which operate automatically— popularly known as automatic or built-in
stabilizers
(ii) Those which are discretionary in the sense that the government takes deliberate
action to manage aggregate demand—popularly called discretionary fiscal policy.
i. Automatic or Built-in Fiscal Policy:
Automatic fiscal policy is a change in fiscal policy that is triggered by the state of the
economy. Note that this kind of fiscal policy adjusts automatically and, hence, no
explicit action by the government is needed.
Under automatic fiscal policy stabilizers, there occurs an automatic change in tax
receipts and expenditures with the changes in income. During depression, as
unemployment rises, income declines. As a result, tax receipts of the government
decline. On the other hand, government expenditures rise.
Thus, tax receipts and expenditures have certain stabilizing forces that are automatic.
There does not occur any deliberate action on the part of the government to influence
aggregate demand. Once the change in economic activity takes place, receipts and
expenditures change automatically.
ii. Discretionary Fiscal Policy:
On the other hand, discretionary fiscal policy is a policy action that is initiated by the
authority. This type of fiscal policy may be used by the government rather
deliberately.
Deliberate policy changes to influence the level of economic activity may be called
discretionary fiscal policy. Discretionary fiscal policy entails a change in the
government budget. Government deliberately alters tax schedules and various
expenditure programmes.
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Main Objectives of Fiscal Policy In India

The fiscal policy is designed to achive certain objectives as follows :-
1. Development by effective Mobilisation of Resources
The principal objective of fiscal policy is to ensure rapid economic growth and
development. This objective of economic growth and development can be achieved
by Mobilisation of Financial Resources.
The central and the state governments in India have used fiscal policy to mobilise
resources.
The financial resources can be mobilised by :-
1. Taxation : Through effective fiscal policies, the government aims to mobilise
resources by way of direct taxes as well as indirect taxes because most
important source of resource mobilisation in India is taxation.
2. Public Savings : The resources can be mobilised through public savings by
reducing government expenditure and increasing surpluses of public sector
enterprises.
3. Private Savings : Through effective fiscal measures such as tax benefits, the
government can raise resources from private sector and households. Resources
can be mobilised through government borrowings by ways of treasury bills,
issue of government bonds, etc., loans from domestic and foreign parties and
by deficit financing.
2. Efficient allocation of Financial Resources
The central and state governments have tried to make efficient allocation of financial
resources. These resources are allocated for Development Activities which includes
expenditure on railways, infrastructure, etc. While Non-development Activities
includes expenditure on defence, interest payments, subsidies, etc.
But generally the fiscal policy should ensure that the resources are allocated for
generation of goods and services which are socially desirable. Therefore, India's fiscal
policy is designed in such a manner so as to encourage production of desirable goods
and discourage those goods which are socially undesirable.
3. Reduction in inequalities of Income and Wealth
Fiscal policy aims at achieving equity or social justice by reducing income
inequalities among different sections of the society. The direct taxes such as income
tax are charged more on the rich people as compared to lower income groups. Indirect
taxes are also more in the case of semi-luxury and luxury items, which are mostly
consumed by the upper middle class and the upper class. The government invests a
significant proportion of its tax revenue in the implementation of Poverty Alleviation
Programmes to improve the conditions of poor people in society.
4. Price Stability and Control of Inflation
One of the main objective of fiscal policy is to control inflation and stabilize price.
Therefore, the government always aims to control the inflation by Reducing fiscal
deficits, introducing tax savings schemes, Productive use of financial resources, etc.
5. Employment Generation
The government is making every possible effort to increase employment in the
country through effective fiscal measure. Investment in infrastructure has resulted in
direct and indirect employment. Lower taxes and duties on small-scale industrial
(SSI) units encourage more investment and consequently generates more
employment. Various rural employment programmes have been undertaken by the
Government of India to solve problems in rural areas. Similarly, self employment
scheme is taken to provide employment to technically qualified persons in the urban
areas.
26
6. Balanced Regional Development

Another main objective of the fiscal policy is to bring about a balanced regional
development. There are various incentives from the government for setting up
projects in backward areas such as Cash subsidy, Concession in taxes and duties in
the form of tax holidays, Finance at concessional interest rates, etc.
7. Reducing the Deficit in the Balance of Payment
Fiscal policy attempts to encourage more exports by way of fiscal measures like
Exemption of income tax on export earnings, Exemption of central excise duties and
customs, Exemption of sales tax and octroi, etc.
The foreign exchange is also conserved by Providing fiscal benefits to import
substitute industries, Imposing customs duties on imports, etc.
The foreign exchange earned by way of exports and saved by way of import
substitutes helps to solve balance of payments problem. In this way adverse balance
of payment can be corrected either by imposing duties on imports or by giving
subsidies to export.
8. Capital Formation
The objective of fiscal policy in India is also to increase the rate of capital formation
so as to accelerate the rate of economic growth. An underdeveloped country is trapped
in vicious (danger) circle of poverty mainly on account of capital deficiency. In order
to increase the rate of capital formation, the fiscal policy must be efficiently designed
to encourage savings and discourage and reduce spending.
9. Increasing National Income
The fiscal policy aims to increase the national income of a country. This is because
fiscal policy facilitates the capital formation. This results in economic growth, which
in turn increases the GDP, per capita income and national income of the country.
10. Development of Infrastructure
Government has placed emphasis on the infrastructure development for the purpose of
achieving economic growth. The fiscal policy measure such as taxation generates
revenue to the government. A part of the government's revenue is invested in the
infrastructure development. Due to this, all sectors of the economy get a boost.
11. Foreign Exchange Earnings
Fiscal policy attempts to encourage more exports by way of Fiscal Measures like,
exemption of income tax on export earnings, exemption of sales tax and octroi, etc.
Foreign exchange provides fiscal benefits to import substitute industries. The foreign
exchange earned by way of exports and saved by way of import substitutes helps to
solve balance of payments problem.
Monetary Policy
The term monetary policy is also known as the 'credit policy' or called 'RBI's money
management policy' in India. How much should be the supply of money in the
economy? How much should be the ratio of interest? How much should be the
viability of money? etc. Such questions are considered in the monetary policy. From
the name itself it is understood that it is related to the demand and the supply of
money.
Definition of Monetary Policy
Many economists have given various definitions of monetary policy. Some prominent
definitions are as follows.
According to Prof. Harry Johnson,
27
"A policy employing the central banks control of the supply of money as an
instrument for achieving the objectives of general economic policy is a monetary
policy."
According to A.G. Hart,
"A policy which influences the public stock of money substitute of public demand for
such assets of both that is policy which influences public liquidity position is known
as a monetary policy."
From both these definitions, it is clear that a monetary policy is related to the
availability and cost of money supply in the economy in order to attain certain broad
objectives. The Central Bank of a nation keeps control on the supply of money to
attain the objectives of its monetary policy.
Objectives of Monetary Policy
The objectives of a monetary policy in India are similar to the objectives of its five
year plans. In a nutshell planning in India aims at growth, stability and social justice.
After the Keynesian revolution in economics, many people accepted significance of
monetary policy in attaining following objectives.
1. Rapid Economic Growth
2. Price Stability
3. Exchange Rate Stability
4. Balance of Payments (BOP) Equilibrium
5. Full Employment
6. Neutrality of Money
7. Equal Income Distribution
These are the general objectives which every central bank of a nation tries to attain by
employing certain tools (Instruments) of a monetary policy. In India, the RBI has
always aimed at the controlled expansion of bank credit and money supply, with
special attention to the seasonal needs of a credit.
Let us now see objectives of monetary policy in detail :-
1. Rapid Economic Growth: It is the most important objective of a monetary
policy. The monetary policy can influence economic growth by controlling
real interest rate and its resultant impact on the investment. If the RBI opts for
a cheap or easy credit policy by reducing interest rates, the investment level in
the economy can be encouraged. This increased investment can speed up
economic growth. Faster economic growth is possible if the monetary policy
succeeds in maintaining income and price stability.
2. Price Stability: All the economics suffer from inflation and deflation. It can
also be called as Price Instability. Both inflation are harmful to the economy.
Thus, the monetary policy having an objective of price stability tries to keep
the value of money stable. It helps in reducing the income and wealth
inequalities. When the economy suffers from recession the monetary policy
should be an 'easy money policy' but when there is inflationary situation there
should be a 'dear money policy'.
3. Exchange Rate Stability: Exchange rate is the price of a home currency
expressed in terms of any foreign currency. If this exchange rate is very
volatile leading to frequent ups and downs in the exchange rate, the
international community might lose confidence in our economy. The monetary
policy aims at maintaining the relative stability in the exchange rate. The RBI
by altering the foreign exchange reserves tries to influence the demand for
foreign exchange and tries to maintain the exchange rate stability.
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4. Balance of Payments (BOP) Equilibrium: Many developing countries like

India suffers from the Disequilibrium in the BOP. The Reserve Bank of India
through its monetary policy tries to maintain equilibrium in the balance of
payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP
Deficit'. The former reflects an excess money supply in the domestic
economy, while the later stands for stringency of money. If the monetary
policy succeeds in maintaining monetary equilibrium, then the BOP
equilibrium can be achieved.
5. Full Employment: The concept of full employment was much discussed after
Keynes's publication of the "General Theory" in 1936. It refers to absence of
involuntary unemployment. In simple words 'Full Employment' stands for a
situation in which everybody who wants jobs get jobs. However it does not
mean that there is a Zero unemployment. In that senses the full employment is
never full. Monetary policy can be used for achieving full employment. If the
monetary policy is expansionary then credit supply can be encouraged. It
could help in creating more jobs in different sector of the economy.
6. Neutrality of Money: Economist such as Wicksted, Robertson have always
considered money as a passive factor. According to them, money should play
only a role of medium of exchange and not more than that. Therefore, the
monetary policy should regulate the supply of money. The change in money
supply creates monetary disequilibrium. Thus monetary policy has to regulate
the supply of money and neutralize the effect of money expansion. However
this objective of a monetary policy is always criticized on the ground that if
money supply is kept constant then it would be difficult to attain price
stability.
7. Equal Income Distribution: Many economists used to justify the role of the
fiscal policy is maintaining economic equality. However in resent years
economists have given the opinion that the monetary policy can help and play
a supplementary role in attainting an economic equality. monetary policy can
make special provisions for the neglect supply such as agriculture, small-scale
industries, village industries, etc. and provide them with cheaper credit for
longer term. This can prove fruitful for these sectors to come up. Thus in
recent period, monetary policy can help in reducing economic inequalities
among different sections of society.
Instruments of Monetary Policy - Quantitative & Qualitative Tools

The instrument of monetary policy are tools or devise which are used by the monetary
authority in order to attain some predetermined objectives. There are two types of
instruments of the monetary policy as shown below.
(A) Quantitative Instruments or General Tools
The Quantitative Instruments are also known as the General Tools of monetary
policy. These tools are related to the Quantity or Volume of the money. The
Quantitative Tools of credit control are also called as General Tools for credit control.
They are designed to regulate or control the total volume of bank credit in the
economy. These tools are indirect in nature and are employed for influencing the
quantity of credit in the country. The general tool of credit control comprises of
following instruments.
1. Bank Rate Policy (BRP)
The Bank Rate Policy (BRP) is a very important technique used in the monetary
policy for influencing the volume or the quantity of the credit in a country. The bank
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rate refers to rate at which the central bank (i.e RBI) rediscounts bills and prepares of
commercial banks or provides advance to commercial banks against approved
securities. It is "the standard rate at which the bank is prepared to buy or rediscount
bills of exchange or other commercial paper eligible for purchase under the RBI Act".
The Bank Rate affects the actual availability and the cost of the credit. Any change in
the bank rate necessarily brings out a resultant change in the cost of credit available to
commercial banks. If the RBI increases the bank rate than it reduce the volume of
commercial banks borrowing from the RBI. It deters banks from further credit
expansion as it becomes a more costly affair. Even with increased bank rate the actual
interest rates for a short term lending go up checking the credit expansion. On the
other hand, if the RBI reduces the bank rate, borrowing for commercial banks will be
easy and cheaper. This will boost the credit creation. Thus any change in the bank rate
is normally associated with the resulting changes in the lending rate and in the market
rate of interest. However, the efficiency of the bank rate as a tool of monetary policy
depends on existing banking network, interest elasticity of investment demand, size
and strength of the money market, international flow of funds, etc.
2. Open Market Operation (OMO)
The open market operation refers to the purchase and/or sale of short term and long
term securities by the RBI in the open market. This is very effective and popular
instrument of the monetary policy. The OMO is used to wipe out shortage of money
in the money market, to influence the term and structure of the interest rate and to
stabilize the market for government securities, etc. It is important to understand the
working of the OMO. If the RBI sells securities in an open market, commercial banks
and private individuals buy it. This reduces the existing money supply as money gets
transferred from commercial banks to the RBI. Contrary to this when the RBI buys
the securities from commercial banks in the open market, commercial banks sell it
and get back the money they had invested in them. Obviously the stock of money in
the economy increases. This way when the RBI enters in the OMO transactions, the
actual stock of money gets changed. Normally during the inflation period in order to
reduce the purchasing power, the RBI sells securities and during the recession or
depression phase she buys securities and makes more money available in the economy
through the banking system. Thus under OMO there is continuous buying and selling
of securities taking place leading to changes in the availability of credit in an
economy.
However there are certain limitations that affect OMO viz; underdeveloped securities
market, excess reserves with commercial banks, indebtedness of commercial banks,
etc.
3. Variation in the Reserve Ratios (VRR)
The Commercial Banks have to keep a certain proportion of their total assets in the
form of Cash Reserves. Some part of these cash reserves are their total assets in the
form of cash. Apart of these cash reserves are also to be kept with the RBI for the
purpose of maintaining liquidity and controlling credit in an economy. These reserve
ratios are named as Cash Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR).
The CRR refers to some percentage of commercial bank's net demand and time
liabilities which commercial banks have to maintain with the central bank and SLR
refers to some percent of reserves to be maintained in the form of gold or foreign
securities. In India the CRR by law remains in between 3-15 percent while the SLR
remains in between 25-40 percent of bank reserves. Any change in the VRR (i.e. CRR
+ SLR) brings out a change in commercial banks reserves positions. Thus by varying
VRR commercial banks lending capacity can be affected. Changes in the VRR helps
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in bringing changes in the cash reserves of commercial banks and thus it can affect
the banks credit creation multiplier. RBI increases VRR during the inflation to reduce
the purchasing power and credit creation. But during the recession or depression it
lowers the VRR making more cash reserves available for credit expansion.
(B) Qualitative Instruments or Selective Tools
The Qualitative Instruments are also known as the Selective Tools of monetary
policy. These tools are not directed towards the quality of credit or the use of the
credit. They are used for discriminating between different uses of credit. It can be
discrimination favoring export over import or essential over non-essential credit
supply. This method can have influence over the lender and borrower of the credit.
The Selective Tools of credit control comprises of following instruments.
1. Fixing Margin Requirements
The margin refers to the "proportion of the loan amount which is not financed by the
bank". Or in other words, it is that part of a loan which a borrower has to raise in
order to get finance for his purpose. A change in a margin implies a change in the loan
size. This method is used to encourage credit supply for the needy sector and
discourage it for other non-necessary sectors. This can be done by increasing margin
for the non-necessary sectors and by reducing it for other needy sectors. Example:- If
the RBI feels that more credit supply should be allocated to agriculture sector, then it
will reduce the margin and even 85-90 percent loan can be given.
2. Consumer Credit Regulation
Under this method, consumer credit supply is regulated through hire-purchase and
installment sale of consumer goods. Under this method the down payment,
installment amount, loan duration, etc is fixed in advance. This can help in checking
the credit use and then inflation in a country.
3. Publicity
This is yet another method of selective credit control. Through it Central Bank (RBI)
publishes various reports stating what is good and what is bad in the system. This
published information can help commercial banks to direct credit supply in the
desired sectors. Through its weekly and monthly bulletins, the information is made
public and banks can use it for attaining goals of monetary policy.
4. Credit Rationing
Central Bank fixes credit amount to be granted. Credit is rationed by limiting the
amount available for each commercial bank. This method controls even bill
rediscounting. For certain purpose, upper limit of credit can be fixed and banks are
told to stick to this limit. This can help in lowering banks credit expoursure to
unwanted sectors.
5. Moral Suasion
It implies to pressure exerted by the RBI on the indian banking system without any
strict action for compliance of the rules. It is a suggestion to banks. It helps in
restraining credit during inflationary periods. Commercial banks are informed about
the expectations of the central bank through a monetary policy. Under moral suasion
central banks can issue directives, guidelines and suggestions for commercial banks
regarding reducing credit supply for speculative purposes.
6. Control Through Directives
Under this method the central bank issue frequent directives to commercial banks.
These directives guide commercial banks in framing their lending policy. Through a
directive the central bank can influence credit structures, supply of credit to certain
limit for a specific purpose. The RBI issues directives to commercial banks for not
lending loans to speculative sector such as securities, etc beyond a certain limit.
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7. Direct Action
Under this method the RBI can impose an action against a bank. If certain banks are
not adhering to the RBI's directives, the RBI may refuse to rediscount their bills and
securities. Secondly, RBI may refuse credit supply to those banks whose borrowings
are in excess to their capital. Central bank can penalize a bank by changing some
rates. At last it can even put a ban on a particular bank if it dose not follow its
directives and work against the objectives of the monetary policy.
These are various selective instruments of the monetary policy. However the success
of these tools is limited by the availability of alternative sources of credit in economy,
working of the Non-Banking Financial Institutions (NBFIs), profit motive of
commercial banks and undemocratic nature off these tools. But a right mix of both the
general and selective tools of monetary policy can give the desired results.
Limitations RBI’s Monetary Policy - India Money Management
Obstacles In Implementation of Monetary Policy
Through the monetary policy is useful in attaining many goals of economic policy, it
is not free from certain limitations. Its scope is limited by certain peculiarities, in
developing countries such as India. Some of the important limitations of the monetary
policy are given below.
1. There exist a Non-Monetized Sector
In many developing countries, there is an existence of non-monetized economy in
large extent. People live in rural areas where many of the transactions are of the barter
type and not monetary type. Similarly, due to non-monetized sector the progress of
commercial banks is not up to the mark. This creates a major bottleneck in the
implementation of the monetary policy.
2. Excess Non-Banking Financial Institutions (NBFI)
As the economy launch itself into a higher orbit of economic growth and
development, the financial sector comes up with great speed. As a result many Non-
Banking Financial Institutions (NBFIs) come up. These NBFIs also provide credit in
the economy. However, the NBFIs do not come under the purview of a monetary
policy and thus nullify the effect of a monetary policy.
3. Existence of Unorganized Financial Markets
The financial markets help in implementing the monetary policy. In many developing
countries the financial markets especially the money markets are of an unorganized
nature and in backward conditions. In many places people like money lenders, traders,
and businessman actively take part in money lending. But unfortunately they do not
come under the purview of a monetary policy and creates hurdle in the success of a
monetary policy.
4. Higher Liquidity Hinders Monetary Policy
In rapidly growing economy the deposit base of many commercial banks is expanded.
This creates excess liquidity in the system. Under this circumstances even if the
monetary policy increases the CRR or SLR, it dose not deter commercial banks from
credit creation. So the existence of excess liquidity due to high deposit base is a
hindrance in the way of successful monetary policy.
5. Money Not Appearing in an Economy
Large percentage of money never come in the mainstream economy. Rich people,
traders, businessmen and other people prefer to spend rather than to deposit money in
the bank. This shadow money is used for buying precious metals like gold, silver,
ornaments, land and in speculation. This type of lavish spending give rise to
inflationary trend in mainstream economy and the monetary policy fails to control it.
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6. Time Lag Affects Success of Monetary Policy

The success of the monetary policy depends on timely implementation of it. However,
in many cases unnecessary delay is found in implementation of the monetary policy.
Or many times timely directives are not issued by the central bank, then the impact of
the monetary policy is wiped out.
7. Monetary & Fiscal Policy Lacks Coordination
In order to attain a maximum of the above objectives it is unnecessary that both the
fiscal and monetary policies should go hand in hand. As both these policies are
prepared and implemented by two different authorities, there is a possibility of non-
coordination between these two policies. This can harm the interest of the overall
economic policy.
These are major obstacles in implementation of monetary policy. If these factors are
controlled or kept within limit, then the monetary policy can give expected results.
Thus though the monetary policy suffers from these limitations, still it has an
immense significance in influencing the process of economic growth and
development.
Monetary Policy of India - 1990 Reforms and its Evaluation
Monetary Policy Reforms in India
The Monetary Policy of the RBI has undergone massive changes during the economic
reform period. After 1991 the Monetary policy is disassociated from the fiscal policy.
Under the reform period an emphasis was given to the stable macroeconomic situation
and low inflation policy.
The major changes in the Indian Monetary policy during the decade of 1990.
1. Reduced Reserve Requirements: During 1990s both the Cash Reserve Ratio
(CRR) and the Statutory Liquidity Ratio (SLR) were reduced to considerable
extent. The CRR was at its highest 15% plus and additional CRR of 10% was
levied, however it is now reduced by 4%. The SLR is reduced from 38.5% to a
minimum of 25%.
2. Increased Micro Finance: In order to strengthen the rural finance the RBI has
focused more on the Self Help Group (SHG). It comprises small and marginal
farmers, agriculture and non-agriculture labour, artisans and rural sections of
the society. However still only 30% of the target population has been
benefited.
3. Fiscal Monetary Separation: In 1994, the Government and the RBI signed an
agreement through which the RBI has stopped financing the deficit in
the government budget. Thus it has separated the monetary policy from the
fiscal policy.
4. Changed Interest Rate Structure: During the 1990s, the interest rate
structure was changed from its earlier administrated rates to the market
oriented or liberal rate of interest. Interest rate slabs are now reduced up to 2
and minimum lending rates are abolished. Similarly, lending rates above Rs.
Two Lakhs are freed.
5. Changes in Accordance to the External Reforms: During the 1990, the
external sector has undergone major changes. It comprises lifting various
controls on imports, reduced tariffs, etc. The Monetary policy has shown the
impact of liberal inflow of the foreign capital and its implication on
domestic money supply.
6. Higher Market Orientation for Banking: The banking sector got more
autonomy and operational flexibility. More freedom to banks for methods of
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assessing working funds and other functioning has empowered and

assured market orientation.
Evaluation of Monetary Policy in India
During the reforms though the Monetary policy has achieved higher success in the
Monetary policy, it is not free from limitation or demerits. It needs to be evaluated on
a proper scale.
1. Failed in Tackling Budgetary Deficit: The higher level of the budget deficit
has made the Monetary policy ineffective. The automatic monetization of the
deficit has led to high Monetary expansion.
2. Limited Coverage: The Monetary policy covers only commercial banking
system leaving other non-bank institutions untouched. It limits the
effectiveness of the Monetory Policy in India.
3. Unorganized Money Market: In our country there is a huge size of the
unorganized money market. It does not come under the control of the RBI.
Thus any tools of the Monetary policy does not affect the unorganized money
market making Monetary policy less effective.
4. Predominance of Cash Transaction: In India still there is huge dominance of
the cash in total money supply. It is one of the main obstacles in the effective
implementation of the Monetary policy. Because Monetary policy operates on
the bank credit rather on cash.
5. Increase Volatility: As the Monetary policy has adopted changes in
accordance to the changes in the external sector in India, it could lead to a high
amount of the volatility.
Indian Trade Policy (EXIM Policy)!
The Export-Import Policy (EXIM Policy), announced under the Foreign Trade
(Development and Regulation Act), 1992, would reflect the extent of regulations or
liberalization of foreign trade and indicate the measures for export promotion.
Although the EXIM Policy is announced for a five- year period, announcing a Policy
on March 31st of every year, within the broad frame of the Five Year Policy, for the
ensuring year.
A very important feature of the EXIM policy since 1992 is freedom. Licensing,
quantitative restrictions and other regulatory and discretionary controls have been
substantially eliminated.
The Union Commerce Ministry, Government of India announces the integrated
Foreign Trade Policy FTP in every five year. This is also called EXIM policy. This
policy is updated every year with some modifications and new schemes. New
schemes come into effect on the first day of financial year, i.e., April 1, every year.
The Foreign Trade Policy which was announced on August 28, 2009 is an integrated
policy for the period 2009-14.
Export-Import (EXIM) Policy frames rules and regulations for exports and imports of
a country. This policy is also known as Foreign Trade Policy. It provides policy and
strategy of the government to be followed for promoting exports and regulating
imports. This policy is periodically reviewed to incorporate necessary changes as per
changing domestic and international environment. In this policy, approach of
government towards various types of exports and imports is conveyed to different
exporters and importers.
Export refers to selling goods and services to other countries, while import means
buying goods and services from other countries. Now in the era of globalization, no
economy in the world can remain cut-off from rest of the world. Export and import
play a significant role in the economic development of all the developed and
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developing economies. With the growth of international organisations like WTO,

UNCTAD, ASEAN, etc., world trade is growing at a very fast rate.
Objectives of EXIM Policy:
The principal objectives of this Policy are:
1) To facilitate sustained growth in exports to attain a share of atleast 1 % of global
merchandise trade.
2) To stimulate sustained economic growth by providing access to essential raw
materials, intermediates, components, consumables and capital goods required for
augmenting production and providing services.
3) To enhance the technological strength and efficiency of Indian agriculture, industry
and services, thereby improving their competitive strength while generating new
employment opportunities, and to encourage the attainment of internationally
accepted standards of quality.
4) To provide consumers with good quality goods and services at internationally
competitive prices while at the same time creating a level playing field for the
domestic produce.
Industrial Policy
At the time of independence, India had an extremely underdeveloped and unbalanced
industrial structure. Industries contributed less than one sixth part of national income.
The country did have some industries like cotton textiles, jute and sugar, but there
were virtually no basic, heavy and capital goods industries on which programmes of
future industrialisation could be based.
Whatever major industries were there, they were largely concentrated in a few areas
such as Bombay. Surat, Ahmedabad. Jameshedpur, Calcutta, Delhi etc. While the rest
of the country remained industrially neglected.
Thus after independence, the government of India had to undertake effective measures
to increase the tempo of industrialisation. Correct regional imbalances in industrial
development and rectify the distorted industrial structure through rapid development
of capital goods industries.
Meaning:
Industrial policy is a statement which defines the role of government in industrial
development. The place of the public and private sectors in industrialisation of the
country. The relative role of large and small industries.
The role of foreign capital etc. In brief, it is a statement of objectives to be achieved in
the area of industrial development and the measures to be adopted towards achieving
these objectives. The industrial policy thus formally indicates the spheres of activity
of the public and the private sectors.
It lays down rules and procedures that would govern the growth and pattern of
industrial activity. The industrial policy is neither fixed nor inflexible. It is amended,
modified and redrafted according to the changed situations, requirements and
perspectives of developments.
Objectives:
The major objectives of industrial policy are:
(i) Rapid Industrial Development:
The industrial policy of the Government of India is aimed at increasing the tempo of
industrial development. It seeks to create a favourable investment climate for the
private sector as well as mobilise resources for the investment in public sector. In its
way the government seeks to promote rapid industrial development in the country.
(ii) Balanced industrial Structure:
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The industrial policy is designed to correct the prevailing lopsided industrial structure.
Thus, for example, before independence, India had some fairly developed consumer
goods industries. But the capital goods sector was not developed at all and basic and
heavy industries were by and large absent.
So the industrial policy had to be framed in such a manner that these imbalances in
the industrial structure are corrected. Thus by laying emphasis on heavy industries
and development of capital goods sector, industrial policy seeks to bring a balance in
industrial structure.
(iii) Prevention of Concentration of Economic Power:
The industrial policy seeks to provide a framework of rules, regulations and
reservation of spheres of activity for the public and the private sectors. This is aimed
at reducing the monopolistic tendencies and preventing concentration of economic
power in the hands of a few big industrial houses.
(iv) Balanced Regional Growth:
Industrial policy also aims at correcting regional imbalances in industrial
development. It is quite well-known that some regions in the country are industrially
quite advanced e.g., Maharashtra and Gujarat while others are industrially backward,
like Bihar, Orissa. It is the task of industrial policy to work out programmes and
policies which lead to industrial development or industrial growth.
The Industrial policy of 1948, which was the first industrial policy statement of the
Government of India, was changed in 1956 in a public sector dominated industrial
development policy that remained in force till 1991 with some minor modifications
and amendments in 1977 and 1980. In 1991, far reaching changes were made in the
1956 industrial policy. The new Industrial Policy of July 1991 heralded the
framework for industrial development at present.
Industrial Policies Prior to 1991
Industrial Policy Resolution, 1948
The first important industrial policy statement was made in the Industrial policy
Resolution (IPR), 1948. The main thrust of IPR, 1948 was to lay down the foundation
of mixed economy whereby the private and public sector was accepted as important
components in the development of industrial economy of India. The policy divided
the industries into four broad categories:
(i) Industries with Exclusive State Monopoly: It included industries engaged in the
activity of atomic energy, railways and arms and ammunition.
(ii) Industries with Government Control: It included the industries of national

importance and so needs to be registered. 18 such industries were put under this
category eg. fertilizers, heavy chemical, heavy machinery etc.
(iii) Industries in the Mixed Sector: It included the industries where private and
public sector were allowed to operate. Government was allowed to review the
situation to acquire any existing private undertaking.
(iv)Industries under Private Sector: Industries not covered by above categories fell
in this category.
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IPR, 1948 gave public sector vast area to operate. Government took the role of
catalytic agent of industrial development. The resolution assigned complementary role
to small-scale and cottage industries. The foreign capital which was seen with suspect
in the pre-independent era was recognized as an important tool to speedup up
industrial development.
Industries (Development and Regulation) Act (IDRA), 1951
IDRA, 1951 is the key legislation in the industrial regulatory framework.

IDRA, 1951 gave powers to the government to regulate industry in a number of ways.
The main instruments were the regulation of capacity (and hence output) and power to
control prices. It specified a schedule of industries that were subject to licensing. Even
the expansion of these industries required prior permission of the government which
means the output capacity was highly regulated. The Government was also
empowered to control the distribution and prices of output produced by industries
listed in the schedule. The IDR Act gave very wide powers to the Government. This
resulted in more or less complete control by the bureaucracy on the industrial
development of the country.
The main provisions of the IDRA, 1951 were
a) All existing undertakings at the commencement of the Act, except those owned by
the Central Government were compulsorily required to register with the designated
authority.
b) No one except the central Government would be permitted to set up any new
industrial undertaking “except under and in accordance with a licence issued in that
behalf by the Central Government.”
c) Such a license or permission prescribed a variety of conditions, such as, location,

minimum standards in respect of size and techniques to be used, which the Central
Government may approve.
d) Such licenses and clearances were also required in cases of ‘substantial expansion’
of an existing industrial undertaking.
Industrial Policy Resolution, 1956

IPR, 1956 is the next important policy statement. The important provisions are
as follows:
(1) New classification of Industries: IPR, 1956 divided the industries into the
following three categories:
(a) Schedule A industries: The industries that were the monopoly of state or
Government. It included 17 industries. The private sector was allowed to operate in
these industries if national interest so required.
(b) Schedule B industries: In this category of industries state was allowed to

establish new units but the private sector was not denied to set up or expand existing
units e.g. chemical industries, fertilizer, synthetic, rubber, aluminum etc.
37
(c) Schedule C industries: The industries not mentioned in the above category
formed pat of Schedule C. Thus the IPR, 1956 emphasized the mutual existence of
public and private sector industries.
(2) Encouragement to Small-scale and Cottage Industries: In order to strengthen

the small-scale sector supportive measures were suggested in terms of cheap credit,
subsidies, reservation etc.
(3) Emphasized on Reduction of Regional Disparities: Fiscal concessions were

granted to open industries in backward regions. Public sector enterprises were given
greater role to develop these areas.
The basic rationale of IPR, 1956 was that the state had to be given primary role
for industrial development as capital was scarce and entrepreneurship was not strong.
The public sector was enlarged dramatically so as to allow it to hold commanding
heights of the economy.
Monopolies Commission
In April 1964, the Government of India appointed a Monopolies Inquiry
Commission “to inquire into the existence and effect of concentration of economic
power in private hands.” The Commission looked at concentration of economic power
in the area of industry. On the basis of recommendation of the commission,
Monopolistic and Restrictive Trade Practices Act (MRTP Act), 1969 was enacted.
The act sought to control the establishment and expansion of all industrial units that
have asset size over a particular limit.
Industrial Policy Statement, 1973

The Policy Statement of 1973 drew up a list of industries to be started by large
business houses so that the competitive effort of small industries was not affected.
The entry of competent small and medium entrepreneurs was encouraged in all
industries. Large industries were permitted to start operations in rural and backward
areas with a view to developing those areas and enabling the growth of small
industries around.
Industrial Policy Statement, 1977: The main elements of the new policy were:
1. Development of Small-Scale Sector: The main thrust of the new industrial policy
was an effective promotion of cottage and small industries. Government initiated
wide-spread promotional and supportive measures to encourage small sector. The
small sector was classified into 3 categories viz. Cottage and household industries
which provide self-employment; tiny sector and small-scale industries. The purpose
of the classification was to specifically design policy measures for each category. The
policy statement considerably expanded the list of reserved items for exclusive
manufacture in the small-scale sector.
2. Restrictive Approach towards Large Business Houses: The large scale sector
was allowed in basic, capital goods and high-tech industries. The policy emphasized
that the funds from financial institutions should be made available largely for the
38
development of small sector. The large sector should generate internal finance for
financing new projects or expansion of existing business.
3. Expanding Role of Public sector: The industrial policy stated that the public
sector would be used not only in the strategic areas but also as a stabilizing force for
maintaining essential supplier for the consumer.
Further, the policy statement reiterated restrictive policy towards foreign capital
whereby the majority interest in ownership and effective control should rest in Indian
hands.
Industrial Policy, 1980
The industrial policy 1980 emphasized that the public sector is the pillar of
economic infrastructure for reasons of its greater reliability, for the large investments
required and the longer gestation periods of the projects crucial for economic
development. The IPR1956 forms the basis of this statement. The important features
of the policy were:
1. Effective Management of Public Sector:

The policy emphasized the revival of efficiency of public sector undertaking.
2. Liberalization of Industrial licensing:

The policy statement provided liberalized measures in the licensing in terms of
automatic approval to increase capacity of existing units under MRTP and FERA. The
asset limit under MRTP was increased. The relaxation from licensing was provided
for large number of industries. The broad-banding concept was introduced so that
flexibility is granted to the industries to decide the product mix without applying for a
new license.
3. Redifining Small-Scale Industries:

The investment limit to define SSI was increased to boost the development of
this sector. In case of tiny sector the investment limit was raised to Rs.1 lakh; for
small scale unit the investment limit was raised from Rs.10 lakh to Rs.20 lakh and for
ancillaries from Rs.15 lakh to Rs. 25 lakh.
Industrial policy, 1980 focused attention on the need for promoting

competition in the domestic market, technological up gradation and modernization.
The policy laid the foundation for an increasingly competitive export based industries
and for encouraging foreign investment in high-technology areas.
Era of Liberalization after 80’s:

After 1980, an era of liberalization started, and the trend was gradually to dilute
the strict licensing system and allow more freedom to the entrepreneurs. The steps
that were taken in accordance with the policy included:
(i) Re-endorsement of licenses: The capacity indicated in the licenses could be re-
endorsed, provided it was 25 percent more than the licensed capacity (1984).
(ii) Liberalization of 1990: The measures were as follows:
39
a) Exemption from licensing for specific new units.

b) Investment of foreign equity up to 40 percent was freely allowed.
c) Location restrictions were removed.
Major Features of Pre-1991 Industrial Policy:
1. Protection to Indian Industries: Local industries were given shelter from

international competition by introducing partial physical ban on the imports of
products and high imports tariffs. Protection from imports encouraged Indian industry
to undertake the manufacture of a variety of products. There was a ready market for
all these products.
2. Import-Substitution Policy: Government used its import policy for the healthy
development of local industries. Barring the first few years after Independence, the
country was facing a shortage of foreign exchange, and so save scarce foreign
exchange imports-substitution policy was initiated i.e. Government encouraged the
production of imported goods indigenously.
3. Financial Infrastructure: In order to provide the financial infrastructure

necessary for industry, the Government set up a number of development banks. The
principal function of a development bank is to provide medium and long-term
investments. They have to also play a major role in promoting the growth of
enterprise. With this objective, Government established the Industrial Finance
Corporation of India (IFCI) (1948), Industrial Credit and Investment Corporation of
India (ICICI) (1955), Industrial Development Bank of India (IDBI) (1964), Industrial
Reconstruction Corporation of India (1971), Unit Trust of India (UTI) (1963), and the
Life Insurance Corporation of India (LIC).
4. Control over Indian Industries: Indian industries were highly regulated through
legislations such as Industrial licensing, MRTP Act, 1969 etc. These legislations
restricted the production, expansion and pricing of output of almost all kinds of
industries in the country.
5. Regulations on Foreign Capital under the Foreign Exchange and Regulation

Act (FERA): FERA restricted foreign investment in a company to 40percent. This
ensured that the control in companies with foreign collaboration remained in the
hands of Indians. The restrictions were also imposed on technical collaborations and
repatriations of foreign exchange by foreign investors.
6. Encouragement to Small Industries: Government encouraged small-scale

industries (SSIs) by providing a number of support measures for its growth. Policy
measures addressed the basic requirements of the SSI like credit, marketing,
technology,entrepreneurship development, and fiscal, financial and infrastructural
support.
7. Emphasis on Public Sector: The Government made huge investments in

providing infrastructure and basic facilities to industries. This was achieved by
establishing public sector enterprises in the key sectors such as power generation,
capital goods, heavy machineries, banking, tele- communication, etc.
40
Review of Pre-1991 Industrial Policy

The pre1991 industrial policies created a climate for rapid industrial growth in
the country. It has helped to create a broad-base infrastructure and basic industries.
A diverse industrial structure with self-reliance on a large number of items had been
achieved. At the time of independence the consumer goods industry accounted for
almost half of the industrial production. In 1991 such industries accounted for only
about 20 percent. In contrast capital goods production was less than 4 percent of the
total industrial production. In 1991 it had gone up to 24 percent. Industrial investment
took place in a large variety of new industries. Modern management techniques were
introduced. An entirely new class of entrepreneurs has come up with the support
system from the Government, and a large number of new industrial centers have
developed in almost all parts of the country. Over the years, the Government has built
the infrastructure required by the industry and made massive investments to provide
the much-needed facilities of power, communications, roads etc. A good number of
institutions were promoted to help entrepreneurship development, provide finance for
industry and to facilitate development of a variety of skills required by the industry.
However, the implementation of industrial policy suffered from shortcomings.

It is argued that the industrial licensing system has promoted inefficiency and resulted
in the high-cost economy. Licensing was supposed to ensure creation of capacities
according to plan priorities and targets. However, due to considerable discretionary
powers vested in the licensing authorities the system tended to promote corruption
and rent-seeking. It resulted into pre-emption of entry of new enterprises and
adversely affected the competition. The system opposite to its rationale favored large
enterprises and discriminate against backward regions. Government announced a
number of liberalization measures in the industrial policy of 1970, 1973 and 1980.
However, the dramatic liberalization efforts were made in the industrial policy, 1991.
New Industrial Policy, 1991

India’s New Industrial Policy announced in July 1991 (hereafter NIP) was
radical compared to its earlier industrial policies in terms of objectives and major
features. It emphasized on the need to promote further industrial development based
on consolidating the gains already made and correct the distortion or weaknesses that
might have crept in, and attain international competitiveness. (Ministry of Industry,
1991). The liberalized Industrial Policy aims at rapid and substantial economic
growth, and integration with the global economy in a harmonized manner. The
Industrial Policy reforms have reduced the industrial licensing requirements,
removed restrictions on investment and expansion, and facilitated easy access to
foreign technology and foreign direct investment.
Pre vs. Post 1991 Policy
1. Distinctive Objectives of New Industrial Policy (NIP), 1991: NIP had two
distinctive objectives compared to the earlier industrial policies:
i) Redefinition of Concept of Self-Reliance: NIP redefined the concept of economic

self-reliance. Since 1956 till 1991, India had always emphasized on Import
Substitution Industrialization (ISI) strategy to achieve economic-self reliance.
Economic self-reliance meant indigenous development of production capabilities and
producing indigenously all industrial goods, which the country would demand rather
41
than importing from outside. The goal of economic self-reliance necessitated the
promotion of ISI strategy. It helped to built up the vast base of capital goods,
intermediate goods and basic goods industries over a period of time. NIP redefined
economic self-reliance to mean the ability to pay for imports through foreign
exchange earnings through exports and not necessarily depending upon the domestic
industries.
ii) International Competitiveness: NIP emphasized the need to develop indigenous

capabilities in technology and manufacturing to world standards. None of the earlier
industrial policies, either explicitly or implicitly, had made reference to international
technology and manufacturing capabilities in the context of domestic industrial
development (Ministry of Commerce and Industry, 2001). For the first time, NIP
explicitly underlined the need for domestic industry to achieve international
competitiveness.
To achieve these objectives, among others, NIP initiated changes in India’s

industrial policy environment, which gained momentum gradually over the decade.
The important elements of NIP can be classified as follows:
1. Public sector de-reservation and privatization of public sector through dis-

investment;
2. Industrial Delicensing;
3. Amendments of Monopolies and Restrictive Trade Practices (MRTP) Act, 1969;
4. Liberalised Foreign Investment Policy;
5. Foreign Technology Agreements (FTA);
6. Dilution of protection to SSI and emphasis on competitiveness enhancement.
1. Public Sector De-Reservation and Privatization through Dis-Investment:

Till 1991, Public Sector was assigned a pre-eminent position in Indian Industry
to enable it to achieve “commanding heights of the economy” under the Industrial
Policy Resolution (IPR), 1956. Accordingly, areas of strategic importance and core
sectors were exclusively reserved for public sector enterprises. Public enterprises
were accorded preference even in areas where private investments were possible.
Since 1991, the public sector policy consists of:

(i) Reduction in the number of industries reserved for public sector: Now only
two industries (atomic energy and railway transport) are reserved for the Public
Sector. They are known as “Annexure I” industries (Ministry of Commerce and
Industry, 2001). The essence of government’s Public Sector Undertakings (PSUs)
policy since 1991 has been that government should not operate any commercial
enterprises. The policy emphasized to bring down government equity in all non-
strategic PSUs to 26 percent or lower, restructure or revive potentially viable PSUs,
close down PSUs, which cannot be revived and fully protect the interests of workers.
Government’s withdrawal from non-core sectors is indicated on considerations of
long-term efficient use of capital, growing financial un-viability and the compulsions
for these PSUs to operate in an increasingly competitive and market oriented
environment (Disinvestment Commission, 1997).
(ii) Implementation of Memorandum of Understanding (MOU): As a part of the

measures to improve the performance of public enterprises, more and more of public
42
sector units have been brought under the purview of Memorandum of Understanding
(MoU) system. A memorandum of understanding is a performance contract, a freely
negotiated document between the Government and a specific public enterprise.
(iii) Referral to BIFR: Many sick public sector units have been referred to the
Board for Industrial and Financial Reconstruction (BIFR) for rehabilitation or, where
necessary, for winding up.
(iv) Manpower Rationalization: In order to make manpower rationalization

Voluntary Retirement Scheme (VRS) has been introduced in a number of PSUs to
shed the surplus manpower.
(v) Private Equity Participation: PSUs have been allowed to raise equity finance
from the capital market. This has provided market pressure on PSUs to improve their
performance.
(vi) Disinvestment and Privatization: Disinvestment and privatization of existing

PSUs has been adopted to improve corporate efficiency, financial performance and
competition amongst PSUs. It involves transfer of Government holding in PSUs to the
private shareholders.
2. Industrial Delicensing:
The removal of licensing requirements for industries, domestic as well as
foreign, commonly known as “de-licensing of industries” is another important feature
of NIP. Till the 1990s, licensing was compulsory for almost every industry, which
was not reserved for the public sector. This licensing system was applicable to all
industrial enterprises having investment in fixed assets (which include land, buildings,
plant & machinery) above a certain limit. With progressive liberalization and
deregulation of the economy, industrial license is required in very few cases.
Industrial licenses are regulated under the Industries (Development and Regulation)
Act 1951. At present, industrial license is required only for the following:
(i) Industries retained under compulsory licensing (five industries are reserved
under this category).
(ii) Manufacture of items reserved for small scale sector by larger units: An
industrial undertaking is defined as small scale unit if the capital investment does not
exceed Rs. 10 million (approximately $ 222,222). The Government has reserved
certain items for exclusive manufacture in the small-scale sector. Non small-scale
units can manufacture items reserved for the small-scale sector if they undertake an
obligation to export 50 percent of the production after obtaining an industrial license.
(iii) When the proposed location attracts locational restriction: Industrial
undertakings to be located within 25 kms of the standard urban area limit of 23 cities
having a population of 1 million as per 1991 census require an industrial license.
Thus, excluding these, investors are free to set up a new industrial enterprise,
expand an industrial enterprise substantially, change the location of an existing
industrial enterprise and manufacture a new product through an already established
industrial enterprise. The objective of industrial delicencing would be to enable
business enterprises to respond to the fast changing external conditions. Entrepreneurs
will be free to make investment decisions on the basis of their own commercial
judgment. This will facilitate the technological dynamism and international
43
competitiveness. Further industries will have freedom to take advantage of

‘economies of scale’ as well as ‘economies of scope’ in the current industrial policy
environment.
3. Amendment of Monopolies and Restrictive Trade Practices (MRTP) Act,

1969: An important objective of India’s earlier industrial policies was to prevent
emergence of private monopolies and concentration of economic power in a few
individuals. Accordingly, Monopolies and Restrictive Trade Practices (MRTP) Act,
1969 was enacted and MRTP Commission was set up as a permanent body to
periodically review industrial ownership, advice the government to prevent
concentration of economic power, investigate monopolistic trade practices and inquire
into restrictive trade practices, which are prejudicial to public interest. An MRTP firm
was mainly defined in terms of asset size. An MRTP company had to obtain prior
approval of the government for setting up a new enterprise as well as for expansion.
However, MRTP Act was applicable only to private sector companies.
Since 1991 MRTP Act has been restructured and pre-entry restrictions have
been removed with regard to prior approval of the government for the establishment
of a new undertaking, expansion, amalgamation, merger, take over, and appointment
of directors of companies. The asset restriction and market share for defining an
MRTP firm has been done away with. MRTP Act is now applicable to both private
and public sector enterprises and financial institutions. Today only restrictive trade
practices of companies are monitored and controlled. The MRTP act has been
replaced by the Competition Act, 2002. This law aims at upholding competition in
the Indian market. The competition commission has been established in 2003 which
mainly control the practice that have an adverse impact on competition.
4. Liberalized Foreign Investment Policy:

India’s earlier industrial policies welcomed FDI but emphasized that ownership
and control of all enterprises involving foreign equity should be in Indian hands. The
Balance of Payments (BoP) difficulties in the mid 1960s forced the country to adopt a
more restrictive approach towards FDI through the setting up of a Foreign Investment
Board, which classified industries into two groups: banned and favored for foreign
technical collaboration and FDI. The number of industries for foreign investment was
steadily narrowed down and by 1973 there were only 19 industries where FDI was
permitted (Kucchal, 1983).The enactment of FERA, 1973 marked the beginning of
the most restrictive phase of India’s foreign investment policy. The NIP
radically reformed foreign investment policy to attract foreign investment. The
important foreign investment policy measures are as follows:
i) Repeal of FERA, 1973: FERA, 1973 has been repealed and Foreign Exchange
Management Act (FEMA) has come into force with effect from June 2000 (RBI,
2003). Investment and returns can be freely repatriated except where the approval is
subject to specific conditions such as lock-in period on original investment, dividend
cap, foreign exchange neutrality, etc. as specified in the sector specific policies. The
condition of ‘dividend balancing’ was withdrawn for dividends declared. A foreign
investor can freely enter, invest and operate industrial enterprises in India,
ii) Dilution of Restrictions on Foreign Direct Investment (FDI): FDI is allowed in

all sectors including the services sector except atomic energy and railway transport.
44
FDI in small scale industries is allowed up to 24 percent equity. Use of brand

names/trade marks is allowed. Further, FDI up to 100 percent is allowed under the
automatic route in all activities/sectors except the following which require prior
approval of the Government:-
- Sectors prohibited for FDI;

- Activities/items that require an industrial license;
- Proposals in which the foreign collaborator has an existing financial/technical
collaboration in India in the same field;
- Proposals for acquisitions of shares in an existing Indian company in financial
service sector and where Securities and Exchange Board of India (substantial
acquisition of shares and takeovers) regulations, 1997 is attracted;
- All proposals falling outside notified sectoral policy/CAPS under sectors in
which FDI is not permitted.
Thus most of the sectors fall under the automatic route for FDI.
5. Foreign Technology Agreement

The automatic approvals for technology agreement are allowed to industries
within specified parameters. Indian companies are free to negotiate the terms of
technology transfer with their foreign counterparts according to their own commercial
judgment.
6. Dilution of Protection to Small Scale Industries (SSI) and Emphasis on

Competitiveness: SSIs enjoyed a unique status in Indian economy due to its
diversified presence across the country and thereby utilizing resources and skills,
which would have otherwise remained unutilized. Due to their potential to generate
large-scale employment, produce consumer goods of mass consumption, alleviate
regional disparities, etc., industrial policies protected the sector for its growth. The
principal protective measures for SSI comprised: (i) Demarcating SSI from the rest of
industry through a definition under the IDR Act, 1951, (ii) Concessional credit from
the banking system, (iii)Fiscal concessions, (iv) Exemption from industrial licensing
and labor legislations, (v) Preferential access to scarce raw materials, both domestic
and imported, (vi) Market support from the government through reservation of
products for government purchase and price preferences, and (vii) Reservation of
products for exclusive manufacturing in SSIs and restrictions on the growth of output
and capacity in the large-scale sector for products reserved for SSI manufacturing.
These policy measures protected SSIs from both internal and external competition.
However, since 1991 the protective emphasis of SSI policy has undergone
dilution. In August 1991, government of India brought out an exclusive policy for
SSI. The policy marked: (i) the beginning of an end to protective measures to small
industry and (ii) promotion of competitiveness by addressing the basic concerns of the
sector namely technology, finance and marketing. Subsequently, the number of items
reserved exclusively for small industry manufacturing has been gradually brought
down. This policy has lost its relevance to a large extent because though these
products could not be manufactured by large enterprises domestically, they can be
imported from abroad due to the removal quantitative and non-quantitative
restrictions on most imports by April 1, 2001 (Ministry of Finance, 2002). Concession
element in lending rates for small industry has been largely withdrawn during the
1990s (RBI, 2003). The number of products reserved exclusively for purchase from
45
small industry by the government has been reduced to 358 items from 409 items.
Measures have been adopted to improve technology and export capabilities of SSIs.
Thus the overall promotion orientation of SSI has shifted from protection towards
competitiveness.
Impact Of Industrial Policy, 1991

The all-round changes introduced in the industrial policy framework have given
a new direction to the future industrialization of the country. There are encouraging
trends on diverse fronts. Industrial growth was 1.7 per cent in 1991-92 that has
increased to 9.2 percent in 2007-08.The industrial structure is much more balanced.
The impact of industrial reforms is reflected in multiple increases in investment
envisaged, both domestic and foreign. This is due to encouraging response from the
private sector. There has been dramatic increase in FDI since 1991. The foreign
investment as a percentage of total GDP has increased from 0.5 percent in 1990-91 to
5.7 percent in 2006.Investments in infrastructure sector such as power generation
have surged from players of various sizes in different states. The capital goods have
grown at an accelerated pace, over a high base attained in the previous years, which
augurs well for the required industrial capacity addition.
ROLES PLAYED BY PUBLIC SECTOR IN INDIAN ECONOMY
Here we detail about the following nine important roles played by public sector in
Indian economy, i.e., (1) Generation of Income, (2) Capital Formation, (3)
Employment, (4) Infrastructure, (5) Strong Industrial Base, (6) Export Promotion and
Import Substitution, (7) Contribution to Central Exchequer, (8) Checking
Concentration of Income and Wealth, and (9) Removal of Regional Disparities.
1. Generation of Income:
Public sector in India has been playing a definite positive role in generating income in
the economy. The share of public sector in net domestic product (NDP) at current
prices has increased from 7.5 per cent in 1950-51 to 21.7 per cent in 2003-04. Again
the share of public sector enterprises only (excluding public administration and
defence) in NDP was also increased from 3.5 per cent in 1950-51 to 11.12 per cent in
2005-06.
2. Capital Formation:
Public sector has been playing an important role in the gross domestic capital
formation of the country. The share of public sector in gross domestic capital
formation has increased from 3.5 per cent during the First Plan to 9.2 per cent during
the Eighth Plan. The comparative shares of public sector in the gross capital formation
of the country also recorded a change from 33.67 per cent during the First Plan to 50
per cent during the, Sixth Plan and then declined to 21.9 per cent in 2005-06.
But the Public sector is not playing a significant role in respect of mobilization of
savings. The share of public sector in gross domestic savings increased from 1.7 per
cent of GNP during 1951-56 to only 3.6 per cent during 1980-85. During 1980s, the
share of public sector in gross domestic savings declined from 16.2 per cent in 1980-
81 to 7.7 per cent in 1988-89.
In this connection Narottam Shah observed, “The failure of the public sector
contributes only 21 per cent of the nation’s savings; that also in part, through heavy
46
taxation and semi-fictitious profits of the Reserve Bank. The remaining 79 per cent of
the nation’s savings came from the private sector.” Again the share of public sector in
gross domestic savings increased from 4.78 per cent in 1990-91 to 6.61 per cent in
2005-06.
3. Employment:
Public sector is playing an important role in generating employment in the country.
Public sector employments are of two categories, i.e:
(a) Public sector employment in government administration, defence and other

government services and
(b) Employment in public sector economic enterprises of both Centre, State and Local
bodies. In 1971, the public sector offered employment opportunities to about 11
million persons but in 2003 their number rose to 18.6 million showing about 69 per
cent increase during this period.
Again in 2003, the public sector offered employment opportunities to 18.6 million
persons which was 69 per cent of the total employment generated in the country as
compared to 71 per cent employment generated in 1991. However, there is
considerable decline in the annual growth rate of employment in the public sector
from 1.53 per cent during 1983-1994 to 0.80 per cent during 1994- 2004.
Moreover, about 69.0 per cent of the total employments are generated in the public
sector. Moreover, at the end of March 2004, about 51.7 per cent of the total
employment (i.e. about 96 lakh) generated in public sector is from Government
administration, community, social and personal services and the remaining 48.3 per
cent (i.e., nearly 89.7 lakh) of the employment in public sector is generated by
economic enterprises run by the Centre, State and Local Governments.
The maximum number of employment is derived from transport, storage and

communications (28.1 lakh). The public sector manufacturing is the next industry
which generated employment to the extent of 11.1 lakh persons.
4. Infrastructure:
Without the development of infrastructural facilities, economic development is

impossible. Public sector investment on infrastructure sector like power,
transportation, communication, basic and heavy industries, irrigation, education and
technical training etc. has paved the way for agricultural and industrial development
of the country leading to the overall development of the economy as a whole. Private
sector investments are also depending on these infrastructural facilities developed by
the public sector of the country.
5. Strong Industrial base:
Another important role of the public sector is that it has successfully build the strong
industrial base in the country. The industrial base of the economy is now considerably
47
strengthened with the development of public sector industries in various fields like—
iron and steel, coal, heavy engineering, heavy electrical machinery, petroleum and
natural gas, fertilizers, chemicals, drugs etc.
The development of private sector industries is also solely depending on these

industries. Thus by developing a strong industrial base, the public sector has
developed a suitable base for rapid industrialization in the country. Moreover, public
sector has also been dominating in critical areas such as petroleum products, coal,
copper, lead, hydro and steam turbines etc.
6. Export Promotion and Import Substitution:
Public sector enterprises have been contributing a lot for the promotion of India’s
exports. The foreign exchange earning of the public enterprises rose from Rs. 35 crore
in 1965-66 to Rs. 5,831 crore in 1984-85 and then to Rs. 34,893 crore in 2003- 04.
Thus, the export performance of the public sector enterprises in India is quite
satisfactory.
The public sector enterprises which played an important role in this regard include—
Hindustan Steel Limited, Hindustan Machine Tools (HMT) Limited, Bharat
Electronics Ltd., State Trading Corporation (STC) and Metals and Minerals Trading
Corporation.
Some public sector enterprises have shown creditable records in achieving import
substitution and thereby saved precious foreign exchange of the country. In this
regard mention may be made of Bharat Heavy Electricals Limited (BHEL), Bharat
Electronics Ltd., Indian Oil Corporations, Oil and Natural Gas Commission (ONGC).
Hindustan Antibiotics Ltd. (HAL) etc. which have paved a successful way tor import
substitution in the country.
7. Contribution to Central Exchequer:
The public sector enterprises are contributing a good amount of resources to the
central exchequer regularly in the form of dividend, excise duty, custom duty,
corporate taxes etc. During the Sixth Plan, the contribution of public enterprises to the
central exchequer was to the tune of Rs. 27,570 crore.
Again this contribution has increased from Rs. 7,610 crore in 1980-81 to Rs. 18,264
crore in 1989-90 and then to Rs. 85,445 crore in 2003-04. Out of this total
contribution, the amount of dividend contributed only 2 to 3 per cent of it.
8. Checking Concentration of Income and Wealth:
Expansion of public sector enterprises in India has been successfully checking the
concentration of economic power into the hands of a few and thus are redressing the
problem of inequalities of income and-wealth of the economy. Thus, the public sector
can reduce this problem of inequalities through diversion of profits for the welfare of
the poor people, undertaking measures for labour welfare and also by producing
commodities for mass consumption.
9. Removal of Regional Disparities:
48
From the very beginning industrial development in India was very much skewed
towards certain big port cities like Mumbai, Kolkata and Chennai. In order to remove
regional disparities, the public sector tried to disperse various units towards the
backward states like Bihar, Orissa, and Madhya Pradesh. Thus, considering all these
foregoing aspects it can be observed that in-spite of showing poor performance, the
public sector is playing dominant role in all-round development of the economy of the
country.
INTRODUCTION -INDIAN ECONOMIC PLANNING AND FIVE YEARS

PLANS IN INDIA
• Economic Planning is a term used to describe the long term plans of
government to co-ordinate and develop the economy with efficient use of
resources.
• Economic Planning is the making of major economic decisions. What and how
is to be produced and to whom it is to be allocated – by the conscious decision
of a determinate authority, on the basis of a comprehensive survey of the
economic system as a whole.
• Economic planning in India was stared in 1950 after independence, it was
deemed necessary for economic development and growth of the nation.
• The idea of Five year planning was taken from the erstwhile Soviet Union
under socialist influence of first Prime Minister Jawahar lal Nehru.
Features of economic planning:
• Fixation of definite socio-economic targets;
• Prudent efforts to achieve these targets within a given time period;
• Existence of a central planning authority;
• Complete knowledge about the economic resources of the country;
• Efficient utilization of limited resources to get maximum output and welfare.
• Economic self-reliance.
• Social justice and reduction of inequalities.
• Modernization of the economy.
• Economic stability for prosperity
Objective of Economic Planning in India
Indian Economic Planning And Five Years Plans In India
• Rapid Economic Development
• Quick Improvement in the Standard of Living
• Removal of Poverty:
• Rational Allocation and Efficient Utilization of Resources
• Increasing the Rate of Capital Formation
• Reduction in Unequal Distribution of Income and Wealth
• Reduction of Unemployment and Increase in Employment Opportunities
• Reorganization of Foreign Trade
• Regional Balanced Development
Indian Economic Planning And Five Years Plans In India
Plans Analysis
First plan(1951 • It was based on Harrod-Damor model

to 56) • Community development programme was launched in
49
Plans Analysis
1952
• Emphasised technical, price stability, power and
transport
• It was more than a success, because of good are blessed
in the last two years
Major focus point of first 5-year plan:
• Industrial sector
• Energy and Irrigation
• Transport and Communications
• Land rehabilitation
• Social services
• Developments of agriculture and community
• Miscellaneous issues in India
Some important events that took place during the tenure of
the 1st five-year plan: The following Irrigation projects
were started during that period:
• Mettur Dam
• Hirakud Dam
• Bhakra Dam.
• Also called Mahalanobis plan after its chief architect.

• Its objective was rapid industrialisation
• Advocated use imports which led to emptying of funds
leading to foreign loans. It shifted basic emphasis from
agriculture to industry far too soon. During this plan,
Second
price level increased by 30% against a decline of 13%
plan(1956 to
during the first plan
61)
• The Tata Institute of Fundamental Research was
established as a research institute. In 1957 a talent
search and scholarship program was begun to find
talented young students to train for work in nuclear
power.
• At its conception time, it was felt that Indian economy

has entered it takeoff stage. Therefore, a was to make
India a self reliant and self generating economy.
• Also, it was realised from the experience of first two
Third
planes that agriculture could be given the top priority to
plan(1961 to
suffice the requirements of export and industry.
66)
• Complete failure due to unforeseen misfortunes viz.
Chinese aggression(1962), Indo Pak war (1962) , Indo
Pak war (1965 ), Seve rest drought to 100 years (1965
to 66)
Three annual • Plan holiday for three years. The prevailing crisis in
50
Plans Analysis
plans(1966 to agriculture and serious food shortage necessitated the

69) emphasis on agriculture during the annual plans.
• During these plans a whole new agriculture strategy
involving widespread of distribution of highly-yielding
varieties of seeds, the extensive use of fertilisers,
exploitation of irrigation potential and soil conservation
was put into action to tide over the crisis in agriculture
production.
• During the annual plans, the economy basically
absorbed the shocks given during the third plan, making
way for a planned growth
• Main emphasis on agriculture’s growth rate so that

chain reaction can start
Fourth
• Fared well in the first two years with record production,
plan(1969 to
last three years failure cause of poor monsoon.
74)
• Had to tackle the influx of Bangladeshi refugees before
and after 1971 Indo Pak war
• The fifth plan repaired and launched by D.D Dhar

proposed to achieve two main objectives viz removal of
poverty(Garibi Hatao) and attainment of self reliance,
Fifth plan through promotion of high rate, better distribution of
(1974 to 79 ) income and a very significant growth in the domestic
rate of saving.
• the plan was terminated in 1978 (instead of 1979 )
when Janata government came to the power.
• There were two sixth plans. One by Genta

Rolling government.(For 78 to 73) which was in operation for
plan(1978 to two years only and the other by Congress government
80) when it returned to power in 1980
• the Janata government plan is also called Rolling plan
• Objectives: Increase in national income, modernisation

Sixth
of technology, ensuring continuous decrease in poverty
plan(1980 to
and unemployment, population control through family
85)
planning etc.
• The seventh plan emphasized policies and programmes

which aimed at rapid growth in food grains production,
Seventh
increased employment opportunities and productivity
plan(1985 to
within the framework of basic tenants of planning.
90)
• It was a great success, the economy recorded 6%
growth rate against the targeted 5%
51
Plans Analysis
The thrust areas of the seventh Five-year Plan were:

• Social Justice
• Removal of oppression of the weak
• Using modern technology
• Agricultural development
• Anti-poverty programs
• Full supply of food, clothing, and shelter
• Increasing productivity of small- and large-scale
farmers
• Making India an Independent Economy
• The eighth plan was postponed by two years because of

political upheavals at the Centre and it was launched
after a worsening balance of payment position and
inflation during 1990-91
Eighth • the plan undertook various drastic policy measures to
plan(1992 to combat the bad economic situation and to undertake an
97) annual average growth of 5.6%
• some of the main economic performance during eighth
plan period were rapid economic growth, high growth
in exports and imports, improvement in trade and
current account deficit.
Ninth • It was developed in the context of four important

plan(1997 to dimensions: quality of life, generation of productive
2002) employment, a regional balance and self-reliance.
• Its objectives included achieving the growth rate of 8%,

reduction of poverty ratio to 20% by 2007 and 210% by
Tenth plan
2012, universal access to primary education by 2007,
(2002 to 2007)
increase in literacy rate to 72% within the plan period
and to 80% by 2012
• Accelerate growth rate of GDP from 8% to 10% and

then maintain at 10% in the 12th plan in order to double
per capita income by 2016-17
• Increase agricultural GDP growth rate of 4% per year to
ensure a broader spread of benefits.
Eleventh
• Reduce drop out rates of children from elementary
plan(2007 to
school from 52.2% in 2003-04 to 20% by 2011-12
2012)
• Increase the literacy rate for persons of faith seven
years or more to 85%
• reduce infant mortality rate(MR) 28 and maternal
mortality ratio(MMR) to 1 part 1000 live births.
• raise the sex ratio for age group 0-6 to 935 by 2011-12
52
Plans Analysis
and to 950 by 2016-17

• Ensure electricity connection to all village and BPL
households by 2009 and the round-the-clock power by
the end of the plan
• increase forest and free cover by the five percentage
points
• “faster, sustainable and more inclusive

growth”.proposes a growth target of 8 percent.Raising
Twelfth plan agriculture output to 4 per cent.
(2012 to 2017) • Manufacturing sector growth to 10 %
• Target of adding over 88,000 MW of power generation
capacity.
Growth Rates during Five Year Plans:
Particulars Target growth rate Actual growth rate
First plan 2.1% 3.6%
Second plan 4.5% 4.2%
Third plan 5.6% 2.8%
Annual plan NA 3.9%
Fourth plan 5.7% 3.3%
Fifth plan 4.4% 4.7%
Annual plan NA -5.2%
Sixth plan 5.2% 5.7%
Seventh plan 5.0% 5.8%
Annual plan NA 3.4%
Eighth plan 5.6% 5.8%
Ninth plan 6.5% 5.5%
Tenth plan 8.1% 7.8%
Eleventh plan 8.1% (MYR) 7.9%
Twelfth plan(initial) 9-9.5 %(Approach paper) 8.0 %(plan document)
Note-National accounts statistics (2000).
Economic Reforms Taken by Government of India
For the attainment of the above-mentioned objectives, the government of India has
taken the following major steps:
(1) New Industrial Policy

Under Industrial Policy, keeping in view the priorities of the country and its economic
development, the roles of the public and private sectors are clearly decided.
Under the New Industrial Policy, the industries have been freed to a large extent from
the licenses and other controls. In order to encourage modernisation, stress has been
laid upon the use of latest technology. A great reduction has been effected in the role
of the public sector.
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Efforts have been made to encourage foreign investment. Investment decision by

companies has been facilitated by ending restrictions imposed by the MRTP Act.
Similarly, Foreign Exchange Regulation Act (FERA) has been replaced with Foreign
Exchange Management Act (FEMA).
Some important points of the New Industrial Policy have been highlighted here
(i) Abolition of Licensing:

Before the advent of the New Industrial Policy, the Indian industries were operating
under strict licensing system. Now, most industries have been freed from licensing
and other restrictions.
(ii) Freedom to Import Technology:

The use of latest technology has been given prominence in the New Industrial Policy.
Therefore, foreign technological collaboration has been allowed.
(iii) Contraction of Public Sector:

A policy of not expanding unprofitable industrial units in the public sector has been
adopted. Apart from this, the government is following the course of disinvestment in
such public sector undertaking. (Selling some shares of public sector enterprises to
private sector entrepreneurs is called disinvestment. This is a medium of
privatisation.)
(iv) Free Entry of Foreign Investment:

Many steps have been taken to attract foreign investment. Some of these are as
follows:
(a) In 1991, 51% of foreign investment in 34 high priority industries was allowed
without seeking government permission.
(b) Non-Resident Indians (NRIs) were allowed to invest 100% in the export houses,
hospitals, hotels, etc.
(c) Foreign Investment Promotion Board (FIPB) was established with a view to
speedily clear foreign investment proposals.
(d) Restrictions which were previously in operation to regulate dividends repatriation
by the foreign investors have been removed. They can now take dividends to their
native countries.
(v) MRTP Restrictions Removed:

Monopolies and Restrictive Trade Practices Act has been done away with. Now the
companies do not need to seek government permission to issue shares, extend their
area of operation and establish a new unit.
(vi) FERA Restrictions Removed:

Foreign Exchange Regulation Act (FERA) has been replaced by Foreign Exchange
Management Act (FEMA). It regulates the foreign transactions. These transactions
have now become simpler.
(vii) Increase in the Importance of Small Industries:
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Efforts have been made to give importance to the small industries in the economic
development of the country.
(2) New Trade Policy

Trade policy means the policy through which the foreign trade is controlled and
regulated. As a result of liberalisation, trade policy has undergone tremendous
changes. Especially the foreign trade has been freed from the unnecessary controls.
The age-old restrictions have been eliminated at one go. Some of the chief
characteristics of the New Trade Policy are as follows:
(i) Reduction in Restrictions of Export-Import:

Restrictions on the exports-imports have almost disappeared leaving only a few items.
(ii) Reduction in Export-Import Tax:

Export-import tax on some items has been completely abolished and on some other
items it has been reduced to the minimum level.
(iii) Easy Procedure of Export-Import:

Import-export procedure has been simplified.
(iv) Establishment of Foreign Capital Market:

Foreign capital market has been established for sale and purchase of foreign exchange
in the open market.
(v) Full Convertibility on Current Account:

In 1994-95, full convertibility became applicable on current account.
Here it is important to clarify the meaning of current account and full convertibility.
Therefore, this has been done as follows:
Current Account:
Transactions with the foreign countries are placed in two categories: (i) transaction
with current account, for example, import-export, (ii) Capital account transactions,
like investment.
Full Convertibility:
In short, full convertibility means unrestricted sale and purchase of foreign exchange
in the foreign exchange market for the purpose of payments and receipts on the items
connected with current account. It means that there is no government restriction on
the sale and purchase of foreign exchange connected with current account.
On the other hand, sale and purchase of foreign exchange connected with capital
account can be carried on under the rates determined by the Reserve Bank of India
(RBI),
(vi) Providing Incentive for Export:

Many incentives have been allowed to Export- oriented Units (EOU) and Export
Processing Zones (EPZ) for increasing export trade.
(3) Fiscal Reforms

The policy of the government connected with the income and expenditure is called
fiscal policy. The greatest problem confronting the Indian government is excessive
55
fiscal deficit. In 1990-91, the fiscal deficit was 8% of the GDP. (It is important to
understand the meaning of fiscal deficit and GDP.)
(i) Fiscal Deficit:

A fiscal deficit means that the country is spending more than its income,
(ii) Gross Domestic Product (GDP):

The GDP is the sum total of the financial value of all the produced goods and services
during a year in a country. Generally, the financial deficit is calculated in the form of
GDP’s percentage. Presently, the government of India is making efforts to take it to
4%.
Solutions of Fiscal Deficit

In order to handle the problem of fiscal deficit, basic changes were made in the tax
system. The following are the major steps taken in this direction:
(i) The rate of the individual and corporate tax has been reduced in order to bring
more people in the tax net.
(ii) Tax procedure has been simplified.
(iii) Heavy reduction in the import duties has been implemented.
(4) Monetary Reforms

Monetary policy is a sort of control policy through which the central bank controls the
supply of money with a view to achieving the objectives of the general economic
policy. Reforms in this policy are called monetary reforms. The major points with
regard to the monetary reforms are given below:
(i) Statutory Liquidity Ratio (SLR) has been lowered. (A commercial bank has to
maintain a definite percentage of liquid funds in relation to its net demand and time
liabilities. This is called SLR. In liquid funds, cash investment in permitted securities
and balance in current account with nationalised banks are included.)
(ii) The banks have been allowed freedom to decide the rate of interest on the amount
deposited.
(iii) New standards have been laid down for the income recognition for the banks. (By
recognition of income, we mean what is to be considered as the income of the bank.
For example, should the interest on the bad debt be considered as the income of the
bank directions have been issued in this context.
(iv) Permission to collect money by issuing shares in the capital market has been
granted to nationalised banks.
(v) Permission to open banks in the private sector has also been granted.
(5) Capital Market Reforms

The market in which securities are sold and bought is known as the capital market.
The reforms connected with it are known as capital market reforms. This market is the
pivot of the economy of a country. The government has taken the following steps for
the development of this market:
(i) Under the Portfolio Investment Scheme, the limit for investment by the NRIs and
foreign companies in the shares and debentures of the Indian companies has been
raised. (Portfolio Investment Scheme means investing in securities.)
(ii) In order to control the capital market, the Securities and Exchange Board of India
(SEBI) has been established.
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(iii) The restriction in respect of interest on debentures has been lifted. Now, it is
decided on the basis of demand and supply.
(iv) The office of the Controller of Capital Issue which used to determine the price of
shares to be issued has been dispensed with. Now, the companies are free to
determine the price of the shares.
(v) Private sector has been permitted to establish Mutual Fund.
(vi) The registration of the sub broker has been made mandatory.
(6) Phasing out Subsidies

Cash Compensatory Support (CCS) which was earlier given as export subsidy has
been stopped. CCS can be understood with the help of an example.
If an exporter wants to import some raw material which is available abroad for 100,
but the same material is available in India for 120 and the governments wants the raw
material to be purchased by the exporter from India itself for the protection of
indigenous industries, the government is ready to pay the difference of 20 to the
exporter in the form of subsidy.
The payment of 20 will be considered as CCS. In addition to this, the CCS has been
reduced in case of fertilizers and petro products.
(7) Dismantling Price Control

The government has taken steps to remove price control in case of many products.
(Price Control means that the companies will sell goods at the prices determined by
the government.) The efforts to remove price control were mostly in respect of
fertilizers, steel and iron and petro products. Restrictions on the import of these
products have also been removed.
LIBERALISATION
Progressive elimination of government control over economic activities is known as
“liberalisation”.
Liberalisation refers to freedom to business enterprises from excessive government
control and they are given freedom to make their own decisions regarding production,
consumption, pricing, marketing, borrowing, lending & investments.
The major elements of Liberalisation in India includes the followings:
1. De-licencing of industries:
The Industrial Policy 1991 abolished (cancelled), licencing for most industries which
helped Indian companies to concentrate on productive activities.
The 6 industries that required licencing are alcohol, cigarattes, industrial explosives,
defence product, drugs & pharmaceuticals, hazardous chemicals, etc.
2. Liberalisation of foreign investment:

The necessity to obtain approval for foreign investment from various government
authority often caused delayed. At present FDI is 100 % in certain sectors such as
infrastructure, exports, hotels, tourism, etc. The Liberalisation of FDI has resulted in
certain benefits such as increased in inflow of foreign capital, Development of skills
of Indian personnels due to foreign MNCs training transfer of technology by foreign
partners to Indian firms.
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3. Liberalisation of foreign technology imports:

The liberalized import of foreign technology led to technological improvement in
Indian industries. This helped in getting automatic permision for foreign technology
imports and no permision was required for hiring foreign technitians & foreign
technology testing.
4. Liberalisation of industrial location:

The Industrial Policy 1991 stated that, there is no need to obtain approval from central
government for industrial location. This enabled the Indian firms to set up industries
at a right location of their choise without much interference from government
authority.
5. Liberal taxation:
The government of India has introduced liberal reduction in taxation rates on direct
tax & indirect tax, customs, excise, service which has greatly benefited the firms
operating in India.
Impacts of New Economic Policy in India

This era of reforms has also ushered in a remarkable change in the Indian mindset.
Social and cultural impacts
Access to television grew from 10% of the urban population (1991) to 75% of
the urban population (1999).Cable television and foreign movies became widely
available for the first time and have acted as a catalyst in bulldozing the cultural
boundaries.
All these technologies have changed perceptions and dreams of ordinary people.
-Unmarried boys and girls are sharing same apartment and staying away from their
parents.
-Indian youths leaving education in mid-way and joining MNC's
-There has been an increase in the violence, particularly against women.
Scientific and technological innovations have made life quite comfortable, fast and
enjoyable.
-More availability of cheap and filthy material (CD's or DVD's of Hollywood movies,
porn movies, sex toys, foreign channels like MTV) in the name of liberalization.
-In India, land-line or basic phone was a prestige symbol few years back but now you
find people riding bicycle with a mobile in hand, talking or listening music or even
clicking cameras of their phones targeting pretty girls or ladies.
-Society has become more open compared to its earlier conservative look due to
exposure to other cultures through DTH or cable network.
-This has contributed to dating, celebration of friendship days/valentine day, and
resulted to rising number of call girls and make them more prone to sexually
transmitted diseases .
-People are less worried for government jobs as MNC's and private or public sector
are offering more lucrative jobs.
-Extension of internet facilities even to rural areas.
-In place of old cinema halls, multiplex theatres are coming up.
-Old restaurants are now replaced by Mc. Donald. Fast food and Chinese dishes have
replaced juice corners and Parathas.
-More inflow of money has aggravated deep rooted problem of corruption?
-More scandals and scams compared tp pre-globalization era.
-Girls being blackmailed by their ex-boy friends using MMS
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-Ban on TV channels for showing sex and violence violating all norms
-Girls being raped in moving vehicles
-There is deterioration in social values as evident from less respect for ladies, older
people
Economic Impacts
Notwithstanding what has been listed above, globalization has definitely brought
positive changes and been helpful in improving living conditions of people.
Improvement in financial status and livelihood of people can be understood by the
following figures and facts:
Personal Finance:
Entry of the private sector banks has completely transformed the functioning of public
sector banks.Opening up of mutual funds; thirty five players; 15 joint ventures
Commencement of the depository that helped common men to become the retail
investors
Deregulation of insurance industry; Nineteen players; 14 joint ventures in life
insurance sector
Fall in interest rates; smaller monthly installments made life more simple to Indian
customer
ATM's (Automated Teller Machines) made bank transactions more easier to common
men than few years back
Online trading, online purchanse of various finance products and online banking have
helped common men to participate in investment process.
Job Sector:
Salaries are now more attractive than in the nineties.Average annual IT salary has
increased from Rs 1.6 lakh in 1998 to Rs 5.5 lakh in 2008
Students get selected by the companies through campus recruitment an year before the
date of completion of their technical education.
Large salary hikes than offered few years ago.
More emphasis on performance and not on number of years in the job
More flexibilities in timings and work from home arrangements are becoming
common
In the last ten years, annual revenue of software industries has grown by 350%.
Around 1.16 crore people are employed in BPO sector compared to only few lakh in
the year 1998
Office automation has helped improving effeciency of employees
More and more recruitment are being made using job portals. Earlier ads were placed
in the newspapers.
Banking sector:
Number of ATMs has increased from 500 in 1998 to 32300 in 2008; 1st ATM was
installed by HSBC in 1987.Computerization of banks has helped speed up the bank
transactions.Net banking is used by 32% of saving bank account holders in 2008
compared to 1% in 1998. Likewise mobile banking was offered by 6% banks in 1998
that is now being offered by 90% banks in 2008 .1stdebit card and 1st credit card were
issued by Citibank in 1998 and 1990, respectively.
Tax reforms:
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Tax reforms have given common men more freedom to invest money and more
purchasing power than ever before .Tax concessions on interest of houising loan, and
easy availability of house loans have helped common men to own a dream house.
However, increase in interest rates recently has made life difficult for salaried people.
Housing loan accounts have increased from 4 lakh in 1998 to 45 lakh in 2008.
Some common indicators of change:

Now most of the households have more than one color TV sets .Number of people
travelling by air or AC class in trains have increased tremendously .There are 42
million internet users in India in the year 2008 compared to 1.4 m users in 1998. The
number of mobile phone users has grown to 246 million in 2008 from 1.0 million
users in 1998 .There has been a great increase in sales of passenger cars. The sale has
increased by 96% in the last ten years .Monthly pocket money of 10-17 years old has
risen by 500% from Rs 300 in the year 1998
Political Impacts
The state has withdrawn from its previous role.The disappeared eventually.It became
a facilitator.Politicans became class in India.Corruption increased.But economic
inequality led way open to violence,maoist and Naxal insurgencies.
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UNIT - III
The Political Environment
Defining the Political Environment
Inter-linkages occur in many ways, for example:

• Political decisions inevitably affect the economic environment.
• Political decisions also influence the social and cultural environment of a country.
• Politicians can influence the pace at which new technologies appear and are
adopted.
The political environment is one of the less predictable elements in an organisation's

business environment. The fact that democratic governments have to seek re-election
every few years has contributed towards a cyclical political environment.
The political environment in its widest sense includes the effects of pressure groups who
seek to change government policies.
The government is a political institution, but it has a social purpose, it enacts and
executes social policies, it exists with social consent, it provides the ways and means
of maximizing social benefits and minimizing social costs. In other words, the
government itself has a social value and culture. You must consider the structure and
style of government and examine its impact on business.
In the modern world, business of any type and any size is often affected by
government policies, programmes and legislations. The government has its own form,
structure, style and philosophy. Depending on the nature of the government at work,
business strategy and business tactics. In other words, business policy decisions are
designed in the realm of the governments overall policy and the system environment.
Starting with a particular ideology or philosophy the government of every country
formulates and executes a set of policies and programmes. Quite a few of these
policies are executed through legislations. These legislation and enactments, rules and
regulations, systems and procedures, policies and plans, statements and
announcements, directives and guidelines by the government, constitute the politico –
legal environment.
Some critical elements:

The politico – legal environment of business contains a number of critical
elements:
• The form of government
• The ideology of the ruling party
• The strength of the opposition
• The role and responsibility of the bureaucracy
• Political stability
• The velocity of government policies, plants and programmes
• Socio – economic legislations
• Politico – legal institutions
Government intervention to some extent in business activity all over the
world is a rule rather than an exception. Therefore, the form and structure of the
government is a very important and decisive factor for the business sector. A couple
of examples may be cited to illustrate this point. Under democracy, we have a
“government of the people by the people and for the people”. People’s participation is
61
so important that even at the enterprise level, we seek workers participation in

management. i.e., industrial democracy. Similarly, under a federal form of
government we tend to confine the authority of the central government with the
functional autonomy of the state governments and therefore, we allow both central as
well as state level public enterprises.
The ideology of the ruling party influences ownership, management,
structure and size of business. A ruling party, with a ‘rightist inclination may
formulate liberal pro – business policies, where as a ruling party with a leftist bias will
go in for measures like nationalization and excessive centralization. The philosophy
of the ruling party thus may help or hurt the course of business activity earlier, under
the leadership of Mr. Rajivgandhi, and then with the significant economic reforms
initiated under the regime of Mr, P. V. Narasimha rao and Dr. Manmohan singh
(which were continued by the 13 party coalition government led by Mr. H.D.
Devegowda and now by Mr. I. K. Gujral) there seems to be more stress on
“efficiency” rather than “equity” considerations. This in turn has affected the work
culture and work ethos in the day to day operations of public enterprises.
The opposition has a very significant role to play. Under the two party system,
the party which gets an absolute majority forms the government. Under the multi –
party system, the party which gets a relative majority forms the government with the
collaboration or support of some other political parties. Others which do not
command majority form the opposition. The strength of the opposition very often
depends on whether or not the opposition parties are united or divided. There may be
ideological differences between parties but the opposition must act as a whole, and the
parties must rise above their ideological differences and should judge every move of
the ruling party critically. If the opposition is fair, firm and consistent, it can make
constructive criticism of government policies affecting business. As a result, the
government cannot afford to act irresponsibly with regard to the business sector in the
economy.
The government works through the bureaucracy. The bureaucracy is very
powerful in enforcing government rules and regulations, systems and procedures,
licenses and restrictions. Businessmen, therefore tend to oblige the bureaucracy in a
number of ways.
Political stability is another critical element which affects business operations.
Business grows in a region which is politically stable. A few decades ago, many
industries and businesses moved out of west Bengal because of the naxalite
movement. Similary a few years ago when Punjab was infested with terrorism,
business came to a halt. Business ethics also depend on the political situation. The
nation becomes politically unstable, the flow of foreign capital and enterprise is
adversely affected and this in turn tells on business, both national and multinational.
The government formulates and executes a number of policies and
programmes. If the government frequently changes its industrial licensing policy, tax
policy or trade policy and the like, then it unnerves the business sector and thereby
adversely affects business investment and related activities. If policies and
programmes are stable then business can plan its activities, otherwise it faces a
tremendous amount of what is called “non market “ risks and uncertainties, stable
policies build up business confidence and help corporate planning. This is one of the
reasons why the government of India has recently gone for a long – term fiscal policy
statement or a quasi – long – term export – import policy.
Socio – economic legislations subject to which business operates constitute
the legal environment. Today there are so many laws that at every turn a business man
62
meets law; modern businessmen need legal advice constantly. Modern business is
more in the nature of a “legal contract” than a “Social contract”. Business laws are
many in number and various in form. The laws are enacted to protect the business
interests of various groups in society. You may recall from the preceding unit that
laws are needed to protect consumers, workers, managers, owners, shareholders and
society at large.
The politico – legal institutions as a part of the non – economic environment
of business. The functioning of the legislative, executive and judicial organs of the
government affects business environment directly and indirectly. All these organs run
through organizations and institutions. For example the judiciary runs through the
Supreme Court the high courts and the lower courts. Unless these courts function
efficiently, adjudication of business matters will be at stake. Similarly, unless the
police department acts with vigilance, economic offences will increase.
POLITICAL SYSTEMS
There are different possible political systems. An open system of government is

democratically elected by the population of a country. Totalitarian systems of
government occur where power derives from a select group (e.g., communism) or based
on the interests of sectional groups (often military-based).
The idea that autocratic regimes have an advantage in economic development was once
quite fashionable. The plausibility of such a notion lies in the advantages such regimes
were said to have in forcing through development in the long term. An alternative view
is that democracy is likely to foster economic development.
Corruption remains a barrier to economic development in many countries. Some

companies may survive and prosper by bribing government officials, but the success
and growth of such companies is not necessarily based on the value they create for
consumers.
The importance of monitoring the political environment
It is important for organisations to monitor their political environment, because change

in this environment can impact on business strategy and operations in a number of ways:
• The stability of the political system affects the attractiveness of a particular national
market.
• Governments pass legislation that directly affects the relationship between the firm
and its customers, its suppliers and other firms.
• Governments see business organisations as an important vehicle for social reform.
• The government is additionally responsible for protecting the public interest at large.
• The economic environment is influenced by the actions of government.
• Government is itself a major consumer of goods and services.
• Government policies can influence the dominant social and cultural values of a
country.
Organisations have to not only monitor the political environment – they also
contribute to it.
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Structure of Government of India

India achieved its independence in the year 1947. The Constitution of India came into
effect in 1950 and India became “Sovereign, Socialist, Secular, Democratic,
Republic” in the true sense. There is separation of powers between Legislature,
Executive and Judiciary. The Union of India is formed of union of 28 states and 7
union territories. The head of the executive heads the Government of India or Central
Government. The seat of authority of Central Government is in New Delhi which is
the capital of India.
As mentioned earlier, the Indian Constitution provides three separate entity for
carrying out the functioning of the government which are:
• The Executive
• The Legislative
• The Judiciary
The titular head of the executive branch of the government is the President, who is the
Head of State and exercises his authority through his Cabinet which consists of group
of ministers headed by Prime Minister, who is the real head of the government for all
practical purposes.
The Legislature is entrusted with the duty of making policies for the country. The
Parliament which represents the elected representatives of the people is the seat for
making such policies. Parliament of India consists of two houses, the Lok Sabha
("House of the People")or the lower house, and the Rajya Sabha ("Council of States")
which is the upper house. Members to the Lok Sabha are directly elected and has 552-
members. The Rajya Sabha consists of 250-members who are indirectly elected and
nominated.
The Parliament enjoys parliamentary supremacy. All the members of the Council of
Ministers as well as the Prime Minister are members of Parliament. If they are not,
they must be elected within a period of six months from the time they assume their
respective office. The Prime Minister and the Council of Ministers are responsible to
the Lok Sabha collectively.
Judiciary in India is unified and divided into three tiers with the Supreme Court at its
apex followed by 21 High Courts in the States, and Lower courts at the district level
which are first level for seeking justice in civil or criminal cases.
The Constitution of India is the highest legal document from which all other laws are
derived or interpreted. Aiding that, there are different Codes for guiding Civil and
Criminal Procedures in the country. These are Civil Procedure Code, the Indian Penal
Code, and the Criminal Procedure Code. India is also signatory of and so accepts the
rules and regulations of International Court of Justice.
All the state have their own set up of legislature, executive and judiciary. By the
Constitutional 73rd and 74th Amendment Acts, a third level of local self government
or the Panchayati Raj has been set up.
Collective Responsibility
The executive headed by the Prime Minister and the Council of Ministers have a
collective responsibility towards the Legislature. In the event of the policy decision or
its failure, an individual ministry cannot be held responsible alone. Instead it is
considered the policy failure of the entire government. Similarly, a vote of no
64
confidence passed by the legislature brings down the whole government even if the
lapse of policy is discovered in any one individual ministry. In short, collective
responsibility means that the members of the executive sail or drown collectively.
Executive Branch
The laws for conducting the affairs of the government are formed in the Legislature.
The executive has the responsibility of executing these laws and taking care of the day
to day administration. These are executed through a number of departments catering
to the different business of the government such as Police Department, Income Tax
Department, Post and Telegraph Department and so on. Every department has a
political head in the form of Minister who guides his ministry and a bureaucratic head
or Secretary, who is the custodian of the continuity of the functioning of the
department.
President
Article 53 (1) of the Constitution of India entrust the President with all executive
powers. The President exercises his power either directly or through his officers who
are subordinate to him. The President carries on his functioning in accordance with
the aid and advice of the Prime Minister who is the Head of Government. Prime
Minister is aided by a Council of Ministers which is mentioned in Article 74 of Indian
Constitution.
The Constitution authorizes the President to appoint a number of officials for proper
functioning of the government. They are:
• Governors of States
• The Chief Justice, other judges of the Supreme Court and High Courts of India
• The Attorney General
• The Comptroller and Auditor General
• The Chief Election Commissioner and other Election Commissioners
• The Chairman and other Members of the Union Public Service Commission
• The President's Officer
• The Cabinet Secretary, who holds an equal position as compared to the
Ministers holding various departments in the Central Government. He has a
multiplicity of roles to play. Firstly, it is his duty to facilitate smooth
functioning of the different ministries and departments under the Central
Government. He heads an office called the Cabinet Secretariat which acts as a
mediator in between the various ministries and departments, thereby assisting
in decision-making of the government. He ensures a smooth coordination
exists in between the ministries. Whenever there is clash or confusion in
regards to the authority or policy, the Cabinet Secretariat headed by the
Cabinet Secretary irons out the differences between them and tries to evolve
consensus on the policy decision.
• Ambassadors and High Commissioners to other countries
The President also receives the credentials of Ambassadors and High Commissioners
from other countries.
The President is also head and the Commander- in- Chief of the Indian Armed Forces.
The President of India is the final authority in granting pardon and can give respite,
reprieve or reduce the sentence of a person convicted by Indian court of law
especially in those cases which involves death punishment.
65
Vice President
The Vice-President of India acts as the Chairman of the Rajya Sabha. The Indian
Constitution entrusts the Vice-President of India to act on behalf of the President of
India in the event of his death or absence and so in that capacity is the second highest
official in the executive branch of the Indian Government.
Cabinet, Executive Departments and Agencies
The Indian Constitution mentions “council of ministers” to aid and advice the
President in carrying out his executive powers. Cabinet is however term given to the
small group of ministers who hold all the important portfolios and ministries. All the
important decisions are virtually taken by the Cabinet. The Constitution empowers
only those people to hold the ministry who are members of Parliament, either Lok
Sabha or Rajya Sabha. The Cabinet has an office called Cabinet Secretariat to help in
carrying out the functioning. Cabinet Secretariat also acts as the repository of all
decisions taken by the Ministers. Cabinet Secretariat is headed by the Cabinet
Secretary, who is the senior most officer of Indian Administrative Service.
Council of Ministers is categorized as Cabinet Ministers, Ministers of State, and
Junior Ministers of State. The Cabinet Ministers are the senior leaders, experienced
statesman and very close to the Prime Minister. Almost all the important decisions in
the government is taken in a consensus with the Cabinet Ministers. Ministers of State
are junior to Cabinet Ministers and hold a little less important charge. They in fact
learn the nuances of government working under the leadership of senior ministers and
report directly to the Cabinet Ministers. There could be few Junior Ministers of State
who generally hold independent charges and have the responsibility to look after
some functional area of the ministry.
Judicial Branch
Judicial system in India is based on the British legacy and their laws of jurisprudence.
In fact, a number of laws made during the colonial period and procedure established
at that time are prevalent till day. Civil Procedure Code, the Indian Penal Code, and
the Criminal Procedure Code were written during the British time and the legal
system today is guided by these codes. However, there have been a number of new
laws made and old laws modified to suit the modern day demand of the society.
Indian judiciary is a unified system under which The Supreme Court of India is at the
apex and the High Courts in the states come second in the hierarchy with a number of
district courts. The judgment of the lower courts could be over-ruled by the High
Courts and the order of the High Courts could be surpassed by the Supreme Court.
Supreme Court and High Courts, both have original as well as appellate jurisdiction.
Supreme Court
The Supreme Court of India is the final judicial authority in India. While a number of
cases on which High Court has pronounced its judgment could be appealed in the
Supreme Court, there are number of occasions on which the apex court could be
reached for its original jurisdiction. The matters like resolving dispute between the
Central Government and one or more states, or in situation of conflict over a matter
between the Centre and one or more states on one side and one or more states on the
other, or a dispute between two or more states, could be directly taken to the Supreme
Court. The apex court also looks into those matters directly which has to do with the
question of interpretation of the Constitution and constitutional rights of the citizens.
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Public Interest Litigation (PIL)

In the recent times, Public Interest Litigation or PIL has become one of the greatest
tools in the hands of the citizens to raise their voice against any action of the
government, public authority or big corporate if they contradict with the general
public good. PIL could be filed by any person but the fact, objective and the
consequence should be directed to the general public interest. The Supreme Court has
in recent times pronounced a number of landmarks judgment on the issues of Public
Interest. The fundamental rights mentioned under the constitution have been
interpreted in recent times to expand the purview and periphery of the rights of the
citizens. The Supreme Court could be directly involved in the interpretation of these
rights. Filing a PIL is also very simple. It could be done by any individual or group of
persons either by filing a Writ Petition at the Filing Counter of the Court, or by
addressing a letter to the Hon'ble Chief Justice of India highlighting the question of
public importance for invoking this jurisdiction.
Civil Service
The Civil Services of India is the steel structure on which the administration of India
depends. Civil Services, a British legacy in India, is the machinery which implements
the executive decisions of the government which in turn are shaped by the laws
formed by the legislature. However, it must be noted that Civil servants are
employees of the Indian government and not Indian Parliament. Civil Services is also
a repository of the information and past decisions and a permanent, continuing
administrative machinery.
Cabinet Secretary
The Cabinet Secretary of India is the senior-most civil servant head of civil services in
India. By that capacity he is the ex-officio Chairman of the Civil Services Board. The
whole civil services look at him with utmost respect and derive motivation and morale
from him. In a way he is the prime coordinator between the administration and
political heads at the highest level. It would not be an exaggeration to say that Cabinet
Secretary is the most powerful bureaucrat and most trusted lieutenant of the Prime
Minister of India.
Elections and Voting
India is a democratic country with Parliamentary form of government. The de jure and
de facto head of the State is the President and the Prime Minister respectively. The
Indian citizens elect their representatives directly by universal adult suffrage and send
to the Parliament. The party which has secured the majority of seats forms the
government for five years. The elected members of the party forming the government
choose their leader and he becomes the Prime Minister of India. Similar political set
up is found in the respective States also, forming the Union of India.
State and Local Governments
Being a federal country, India has government both at the Centre and at State levels.
There is division of powers between them. Constitution provides subjects on which
Centre and States have exclusive rights to form laws. In addition to that, there is
concurrent list on which both the Centre and the States could form the laws but in the
event of conflict, the laws made by the Centre would prevail.
The state governments also have similar political set up as it is in the Centre.
However, not all the state have bicameral legislature, i.e. Lower House or Vidhan
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Sabha and Upper House or Vidhan Parishad. Barring 6 states in which there is
bicameral legislature, all other state are unicameral. Lower house is elected for a term
of 5 years, and Upper house for a term of 6 years out of which 1/3rd members retire
and election to the vacant seats takes place every two years.
The Constitutional 73rd and 74th Amendment Act provided for a third tier of
government at the local level – Panchayats in the villages and Municipalities in cities.
The members of the local government are directly elected by the people.
Legal Environment
This refers to set of laws, regulations, which influence the business organisations and
their operations. Every business organisation has to obey, and work within the
framework of the law. The important legislations that concern the business enterprises
include:
➢ Companies Act, 1956
➢ Foreign Exchange Management Act, 1999
➢ The Factories Act, 1948
➢ Industrial Disputes Act, 1972
➢ Payment of Gratuity Act, 1972
➢ Industries (Development and Regulation) Act, 1951
➢ Prevention of Food Adulteration Act, 1954
➢ Essential Commodities Act, 2002
➢ The Standards of Weights and Measures Act, 1956
➢ Monopolies and Restrictive TradePractices Act, 1969
➢ TradeMarks Act, 1999
➢ Bureau of Indian Standards Act, 1986
➢ Consumer Protection Act, 1986
➢ Environment Protection Act
➢ Competition Act, 2002
The Companies Act 1956 is an Act of the Parliament of India, enacted in 1956, which
enabled companies to be formed by registration, and set out the responsibilities of
companies, their directors and secretaries.
The Companies Act 1956 is administered by the Government of India through the
Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official
Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The
Registrar of Companies (ROC) handles incorporation of new companies and the
administration of running companies.
Since its commencement, it has been amended many times, in which amendment of
1988, 1990, 1996, 2000 and 2011 are notable.
Company objective and legal procedure based on the Act

The basic objectives underlying the law are:
• A minimum standard of good behaviour and business honesty in company
promotion and management.
• Due recognition of the legitimate interest of shareholders and creditors and of
the duty of managements not to prejudice to jeopardize those interests.
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• Provision for greater and effective control over and voice in the management
for shareholders.
• A fair and true disclosure of the affairs of companies in their annual published
balance sheet and profit and loss accounts.
• Proper standard of accounting and auditing.
• Recognition of the rights of shareholders to receive reasonable information
and facilities for exercising an intelligent judgment with reference to the
management.
• A ceiling on the share of profits payable to managements as remuneration for
services rendered.
• A check on their transactions where there was a possibility of conflict of duty
and interest.
• A provision for investigation into the affairs of any company managed in a
manner oppressive to minority of the shareholders or prejudicial to the interest
of the company as a whole.
• Enforcement of the performance of their duties by those engaged in the
management of public companies or of private companies which are
subsidiaries of public companies by providing sanctions in the case of breach
and subjecting the latter also to the more restrictive provisions of law
applicable to public companies.
The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament
of India "to consolidate and amend the law relating to foreign exchange with the
objective of facilitating external Tradeand payments and for promoting the orderly
development and maintenance of foreign exchange market in India". It was passed in
the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation
Act (FERA). This act seeks to make offenses related to foreign exchange civil
offenses. It extends to the whole of India.,[1] replacing FERA, which had become
incompatible with the pro-liberalisation policies of the Government of India. It
enabled a new foreign exchange management regime consistent with the emerging
framework of the World TradeOrganisation (WTO). It also paved way to Prevention
of Money Laundering Act 2002, which was effected from 1 July 2005.
Switch from FERA
FERA, in place since 1975, did not succeed in restricting activities such as the
expansion of transnational corporations (TNCs). The concessions made to FERA in
1991-1993 showed that FERA was on the verge of becoming redundant. After the
amendment of FERA in 1993, it was decided that the act would become the FEMA.
This was done in order to relax the controls on foreign exchange in India, as a result
of economic liberalization. FEMA served to make transactions for external
Trade(exports and imports) easier – transactions involving current account for
external Tradeno longer required RBI’s permission. The deals in Foreign Exchange
were to be ‘managed’ instead of ‘regulated’. The switch to FEMA shows the change
on the part of the government in terms of foreign capital.
Main Features
• Activities such as payments made to any person outside India or receipts from
them, along with the deals in foreign exchange and foreign security is
69
restricted. It is FEMA that gives the central government the power to impose
the restrictions.
• Restrictions are imposed on residents of India who carry out transactions in
foreign exchange, foreign security or who own or hold immovable property
abroad.
• Without general or specific permission of the MA restricts the transactions
involving foreign exchange or foreign security and payments from outside the
country to India – the transactions should be made only through an authorised
person.
• Deals in foreign exchange under the current account by an authorised person
can be restricted by the Central Government, based on public interest.
• Although selling or drawing of foreign exchange is done through an
authorised person, the RBI is empowered by this Act to subject the capital
account transactions to a number of restrictions.
• Residents of India will be permitted to carry out transactions in foreign
exchange, foreign security or to own or hold immovable property abroad if the
currency, security or property was owned or acquired when he/she was living
outside India, or when it was inherited by him/her from someone living
outside India.
• Exporters are needed to furnish their export details to RBI. To ensure that the
transactions are carried out properly, RBI may ask the exporters to comply to
its necessary requirements.
The Factories Act, 1948
The Factories Act, is a social legislation which has been enacted for occupational
safety, health and welfare of workers at work places. This legislation is being
enforced by technical officers i.e. Inspectors of Factories, Dy. Chief Inspectors of
Factories who work under the control of the Chief Inspector of Factories and overall
control of the Labour Commissioner, Government of National Capital Territory of
Delhi
Applicability
It applies to factories covered under the Factories Act, 1948. The industries in which
ten (10) or more than ten workers are employed on any day of the preceeding twelve
months and are engaged in manufacturing process being carried out with the aid of
power or twenty or more than twenty workers are employed in manufacturing process
being carried out without the aid of power, are covered under the provisions of this
Act.
Salient features of the act are:-
 Approval of Factory Building Plans before construction/extension, under
the Delhi Factories Rules, 1950.
 Grant of Licences under the Delhi Factories Rules, 1950, and to take action
against factories running without obtaining Licence.
 Renewal of Licences granted under the Delhi Factories Rules, 1950, by the
Dy. Chief Inspectors of Factories.
70
 Inspections of factories by District Inspectors of Factories, for investigation

of complaints, serious/fatal accidents as well as suomoto inspections to
check compliance of provisions of this Act relating to :-
 Health
 Safety
 Welfare facilities
 Working hours
 Employment of young persons
 Annual Leave with wages etc.
Administrative Machinery: -
The enforcement of this legislation is being carried out on district basis by the district
Inspectors of Factories. After inspection, Improvement Notices are issued to the
defaulting managements and ultimately legal action is taken against the defaulting
managements. The Inspectors of Factories file Challans against the defaulters, in the
Courts of Metropolitan Magistrates. The work of Inspectors of Factories is supervised
by the Dy. Chief Inspector of Factories on district basis.
Penalties:-
This Act provides for a maximum punishment up to two years and or a fine up to Rs.
one lakh or both.
The Industries Development and Regulation Act of India (1951)

The Industries (Development and Regulation) Act, (IDRA), came into force from 8th
May 1952 under a notification of the Central Government published in the Gazette of
India.
The Act extends to whole of India including the state of Jammu & Kashmir with a
view to being under Central and regulation of a number of important industries, the
activities of which affect the country as a whole and the development of which must
be governed by economic factors of all India importance.
Objectives of the Act:
The Important objectives are,
(i) To Implement the Industrial Policy:
The Act provides the necessary means to the Central Government in order to
implement its industrial policy.
(ii) Regulation and Development of Important Industries:
The Act brings under the control of the Central Government the development and
regulation of a number of important industries listed m the first schedule attached to
the Act as the activities of such industries will affect the country as a w о e and,
therefore, the development of such important industries must be governed by the
economic factors of all India importance.
(iii) Planning and Future Development of New Undertakings:
A system of licensing is introduced under the Act to regulate planning and future
development of new undertaking on sound and balance lines and may be deemed
expedient in the opinion of the Central Government.
The Act confers on the Central Government power to make rules for the registration
of existing undertakings for regulating he production and development of the
industries specified in the schedule attached to the Act The Ac a so provided for the
constitution of the Central Advisory Council and Development Council.
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THE MRTP ACT 1969

The Competition Act 2002 considers the modern issues of globalization and WTO
besides the shortcomings of the now repealed MRTP Act 1969. But the success of the
Compititon Act 2002 depends on the identification and determination of anti-
competitive agreement.
The MRTP Act, 1969, aims at preventing the concentration of economic power in
order to avoid damage. The act allows for the probation of monopolistic, unfair and
restrictive Trade practices. This results in the control of monopolies and the
consumer interest is thus protected. Monopolistic Trade Practice
Practices such as monopolistic trade reflects misuse of one's power to abuse the terms
of production and sales of goods and services in the Market. Eliminating competition
from the market is the main objective of firms involved in monopolistic Trade
practice. They take advantage of their monopoly and charge unreasonably high prices.
They also deteriorate the product quality, limit technical development, prevent
competition and adopt unfair Trade practices.
Unfair Trade practices are caused due to:

• False representation and misleading advertisement of goods and services. *
Falsely representing second-hand goods as new.
• Unreliable representation regarding usefulness, need, quality, standard, style
etc of goods and services. * False claims or representation regarding price
of goods and services. * Giving false facts regarding sponsorship, affiliation
etc. of goods and services. * Giving false guarantee or warranty on goods and
services without adequate tests. Restrictive Trade Practice
• In order to maximize profits and to gain power in the market, Traders often
indulge in activities that have a tendency to block the flow of capital into
production. These traders manipulate the conditions of delivery to affect the
flow of supplies leading to unfair costs. About the MRTP Act, 1969
What are the Salient Features of Consumer Protection Act (India)?

Salient features of consumer protection act are as follows:
Coverage of Items:
This Act is applicable on all the products and services, until or unless any product or
service is especially debarred out of the scope of this Act by the Central Government.
Coverage of Sectors:
This Act is applicable to all the areas whether private, public or cooperative.
Compensatory Nature of Provisions:
Many Acts have been passed for the help of consumers. Consumers enjoy the benefits
of these Acts but if a consumer wishes the Consumer Protection Act can provide extra
help. As a result the nature of provisions of this Act is compensating for the loss or
providing extra help. Consumer is totally free to enjoy the benefits provided in the
Act.
Group of Consumer’s Rights:
This Act provides many rights to consumers. These rights are related to safety,
information, choice, representation, redressal, education etc.
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Effective Safeguards:
This Act provides safety to consumers regarding defective products, dissatisfactory
services and unfair Trade practices. So under the purview of this Act there is a
provision to ban all those activities which can cause a risk for consumer.
Three-tier Grievances Redressal Machinery:
Consumer courts have been established so that the consumers can enjoy their rights.
This Act presents Three- tier Grievances Redressal Machinery:
(i) At District Level-District Forum
(ii) At State Level -State Commission
(iii) At National Level – National Commission.
Time Bound Redressal:
A main feature of the Act is that under this, the cases are decided in a limited time of
period.
Consumer Protection Council:
To favour consumer protection and to encourage consumer’s awareness there is a
provision in this Act to establish Consumer Protection Councils.
Q) Difference between Political and Legal Environment
Political environment legal environment

1. Political environment is concerned 1. Legal environment refers to all the legal
with natural and direction of political surrounding that affects organization's
forces related to management of activities. It consists of an array of acts,
public affairs. rules, regulations, precedent, institutions
2. The elements of political and processes. It defines what
environment that influence organizations can be cannot do.
organization are: Political system, 2. Legal environment is concerned with.
Political industry and Political ✓ Protecting the rights and interests of
philosophy organizations, consumers,
3. Political system: It consists of employees, and the society.
ideological forces. Political, election Intellectual property rights are also
procedures, and power center .A produced.
stable, efficient and honest political ✓ Providing grounds on which
system is essential for the growth of organizations activities can be carried
organization. out. It encourages of restrains
4. Political industry: They consist of activities by providing facilities to
legislature, executive and judiciary. low abide rs. It gives punishments to
low breakers.
✓ The legislature enacts laws ✓ Regulations activities through legal
that guide organizational provisions relating to licensing,
activities. employment, monopoly, foreign
✓ The executive implements investment, foreign exchange,
the decisions of the environment protection, consumer
legislature. It lays down protection, product safety, industrial
policies, regulations and location, imports, exports, pricing,
procedures that influence and taxation etc.
the of organization. ✓ Organization must ensure that their
✓ The judiciary service as a activities conform to the low of the
watching. Its rulings land. They must comply with legal
influence organizational provisions in force. A change in lows
73
practices. It settles disputes affects strategy.

and carries out judicial
review. 3. The elements of legal environments that
influence organization are: Laws,
5. Political philosophy: The political Courts of low and Law administrators.
ideology can be democratic, 4. Laws: They consist of an array of lows
totalitarian or a mix of both. enacted by the parliament. They also
Democracy vests power in the hands protect the rights and interests of
of people. Totalitarian vests power in consumer’s labor, business, and society.
the hands of the state. Political They affect business organizations.
philosophies influence organization's B) Courts of low: Courts are institutions
activities. Democracy provides established bylaw solves legal. The
greater role to private sector. Supreme Court is at the national level
Totalitarianism provides greater role and is the highest levels of district
to state. Mixed philosophies provide courts are at district level.
roles to both private sectors and state. C) Law administrators: Various law
enforcement agencies ensure
implementation of laws and the
judgment of the courts of law.
Government’s agencies, lawyers, police
and jail play important role in law
administration.
GOVERNMENT INTERVENTION
NEED FOR GOVERNMENT INTERVENTION
1. Wastages of Market economy: Whenever there is a depression in a market

system, the resources of production remain unutilized. These productive resources
can take care of provide a living for the poor.
2. Indifference to and sacrifice of social welfare: In a market since the sole aim is
to maximize profits, no one pays any heed to social welfare.
3. Presence of externalities: Diversion between social & private costs and benefits
4. Poverty in the midst of plenty: In an economy which is based on the principle of

private profit maximization, tremendous technological advancement has taken
place. This has resulted in tremendous rise in production. But due to institution of
private property and the law of inheritance, the rich become richer and poor
masses continue to be exploited.
5. Exploitation of backward areas and world rivalry: By their MNC’s and

MNE’s and by selling arms and ammunition to poorer and underdeveloped
countries, the developed countries keep on exploiting backward countries of
African and Asia. These countries also put restrictions on exports from developing
74
countries and inversely try to dump their products in developing countries. This
hampers the rapid economic development of developing countries.
GOVERNMENT INTERVENTION IN INDIA
A wide range of measures are in place to stabilize economy and reduce the gap
between rich and poor. These measures are :
➢ Fiscal measures: To reduce the fiscal and revenue deficit the government of
India has a strong control over its own expenditure. In 1984, the government
announced a package programme to curtail public expenditure and to postpone
fresh recruitments to government jobs. Post 1991 ( after adoption of LPG ),
the govt. has curbed the size of ministries to control fiscal deficit ( difference
between govt expenditure & govt. revenue ).
➢ Monetary measures: The monetary policy of RBI, consists of extensive use

of general and selective control credit. The main thrust has been to restrict the
bank credit against the inflation of sensitive goods and to influence the cost
and availability of commercial bank credit. The CRR was raised from 6% to
15% to have control over liquidity and expansion and contraction of credit.
➢ Supply Management: Supply Management is related to the volume of

supply and its distribution system. The government has focused its attention in
having greater control over the prices of wheat, rice, sugar, oils and other
commodities of mass consumption. Some important measures are :
➢ Fixation of maximum prices: For the elimination of incentives for hoarding

and speculative activity of food grains the government fixes the maximum
wholesale and retail prices of food grains. It also fixes minimum procurement
price for major crops to protect the interests of farmers.
➢ The system of dual prices: The items of mass consumption are made
available to the people below poverty line at subsidized rates.
➢ Increase in the supplies of food grains: The government takes care of

additional requirement of food grains through heavy imports in situations of
shortage.
➢ Adoption of Open General License ( OGL ) import policy for importing sugar
and pulses.
➢ Adjustments in trade and tariff policies in the Central Government budgets to

ensure that domestic prices of Industrial products remain competitive.
➢ Great reduction in excise duties on a number of items is expected to accelerate

the speed of industrial revival and raise industrial growth.
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➢ A number of acts of have been formulated to protect the interest of

Consumers. Stern action is taken against those found guilty.
➢ A number of acts are also in place to take care of protection of environment,

ecology, water and air pollution. Due to the global awareness about
environment protection, various incentive schemes for eco – friendly products
have been formulated.
WHAT SHOULD BE THE FORM OF STATE INTERVENTION?
1) One aspect of the intervention in future relates to the quality of intervention.
2) The other aspect of the new intervention strategy that deserves careful
attention is the selectivity (in terms of strategic sectors, products and processes
in different stages of early industrialization.
3) The third aspect of the new intervention relates to its primary orientation
goals.
4) Pure public goods such as defence, law and order and environmental
protection cannot be provided by private sector alone. because everybody
shares their benefits automatically, no one willing to pay them individually.
But government can provide them and impose their cost on tax payers.
5) Good with positive externalities benefits, are worth more to society than to any
one consumer. publlic health and education for example, reduce infection
rates, raise productivity etc. markets tend to undersupply these goods ,and
complementary funding or provision can therefore improve efficiency.
simalrly markets ignore negative externalities ,such as industrial pollution,
regulation to curb or clean up the activity causing the pollution can improve
social welfare.
6) Imperfect information on the part of either consumers or providers may make

markets fail. For example-private commercial insurance cannot efficiently insure
against risks like unemployment ,longevity and death deteriorating heath in old age,
because these risks are influenced by characteristics and behavior of the insured that
the insurer cannot observe along with the government policy and they affect large
parts of the population equally and simultaneously.
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UNIT – IV
What is Socio-cultural Environment?

Socio-cultural environment is a collection of social factors affecting a business and
includes social traditions, values and beliefs, level of literacy and education, the
ethical standards and state of society, the extent of social stratification, conflict and
cohesiveness, and so forth.
Socio-cultural environment consists of factors related to human relationships and the
impact of social attitudes and cultural values on the business of the organization. The
beliefs, values and norms of a society determine how individuals and organisations
should be inter-related.
The core beliefs of a particular society tend to be rigid. It is difficult for businesses to
change these core values, which become a determinant of its functioning. Some of the
important factors and influences operating in this environment are as follows:
a) Social concerns, such as the role of business in society, environmental pollution,
corruption, use of mass media, and consumerism.
b) Social attitudes and values, such as expectations of society from business, social
customs, beliefs, rituals and practices, changing lifestyle patterns, and materialism.
c) Family structure and the changes in it, attitude towards and within the family, and
family values.
d) Role of women in society, position of children and adolescents in family and
society.
e) Educational levels, awareness and consciousness of rights, and work ethics of
members of society.
Critical elements of the sociological environment:

The critical elements of the sociological environment of business. These elements are:
i. Social institutions and systems
ii. Social values and attitudes
iii. Education and culture
iv. Role and responsibility of the government
v. Social groups and movements
vi. Socio – economic order
vii. Social problems and prospects
Social institutions and systems develop through history, culture and heritage. The
caste system, the joint family system, child marriage, sati and the patriarchal family
are all examples of social institutions and systems. Until the recent past the caste
system ensured a very simple occupational division of labour in our society. The place
of the individual was very clearly defined in the social hierarchy of the joint family
system where decision making was centralized in the head of the family who
commanded respect for his age and experience. The position of women and children
was also defined by the then social set up.
In India today most of these age – old social institutions are dying fast. It is
because the social values and attitudes are changing very fast. The western values of
individualism have caught our imagination. Indian women o longer remain satisfied
as house wives. Business does not remain confined any more within a given
community or caste. Customs, traditions, and conventions are o longer rigid. They
have become flexible. Society’s view of its authorities, responsibilities and
delegation, its attitude towards business as a profession towards achievement and
77
work towards ownership and management – all have very definite implications for the
sociological environment of business.
Then come education and culture as an ingredient of the sociological
environment. In this category you may list the attitude towards education; the need
for business education; education matching the skill requirement of industry and
manpower utilization; the role of business schools and executive development
programmes; education versus training correlation between formal literacy and the
level of culture; the spread of education and it’s the impact on business ethics;
material progress and business morality; business culture and organizational culture.
Role and responsibility of the government - At a given point of time, society
has a level of achievements and aspirations. Such achievements and aspirations have
to be defined clearly and categorically and any divergence between the two has to be
bridged through relentless social effort taking care of social welfare and social
constraints. This is where the role of the government as a welfare state comes. In the
government is the apex social institution. Particularly in a democracy the government
has the very responsible function of maintaining social order and harmony in view of
the interests of the majority. It is the government which has to make sure that social
progress is not handicapped by the tyranny of the majority, otherwise social tensions
will mount even under democracy, certainly business cannot grow under social
tension.
Social tension originates in groups composed of frustrated individuals. In a
society, individuals from groups on the basis of caste, creed, religion, language, trade
and profession and similar other factors. Social groups and the social movements that
they engineer are a critical variable of the non – economic environment. Some of
these groups have direct business interest. Thus, consumerism trade unionism, the
cooperative movement, professional management and shareholders associations all
pose challenges for business operation.
Socio – economic order -In a country like India, we have a plural society. Ours is a
land of a variety of food, dress, languages, religions and culture. We also have a dual
economy with the traditional (subsistence or unorganized) sector co – existing with
the modern (commercialized or organized) sector. Technological dualism in India is
very pronounced. Bullock carts ply on the road and the airbus flies through the sky.
All these make a very unique socio – economic order for India today. From time to
time this social order gets disturbed and modified hopefully for the better, through
social movements and social policy formulation on subjects like science and
technology, ecology and forestry, family planning, animal husbandry, etc.
Social problems and prospects are just offshoots of a changing socio –
economic order. You might be aware that consequent to industrialism and socio –
economic development in many developing countries, the death rate has fallen faster
than the birth rate. And this has resulted in an explosive growth of population. This in
turn has brought about growing unemployment and poverty, poor housing and
sanitation urban congestion pollution and increasing incidence of anti – social
activities. Economics therefore suggest that you should always attempt a social cost –
benefit analysis of industrial development. As society moves from the pre – industrial
stage to the post – industrial development. As society moves from the pre – industrial
stage to the post – industrial stages of development, social benefits must outweigh
social costs, otherwise the emerging new social order will prove unusable.
78
How Does Socio-cultural Environment Impact a Business?

Social and cultural environment has a profound effect on the policies and strategies of
a business. We will take a look at the impact socio-cultural factors have on a business.
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The aim of a business is to make optimum use of its available resources to generate
revenue, and maximize its profits. Whether or not a business is able to make optimum
use of its available resources depends upon numerous internal and external factors.
One of such notable factors that plays a decisive role in the functioning of an
organization is the socio-cultural environment of the region in which the organization
is operating. Socio-cultural factors such as social attitudes, belief systems, education,
law, politics, etc., have a bearing on the prospects of a business.
Religion and Custom
Religion and custom are two of the most important factors impacting a business.
Every organization has to adapt itself to the prevalent customs and traditions in a
region. A uniform business policy cannot be implemented throughout the world, as
allowances need to be made for the religious sensibilities of the local population. Let
us understand the concept in detail with the help of an example.
McDonald's, one of the largest restaurant chains in the world, started its India
operations in 1996. Although McDonald's had been in business for roughly 40 years,
during which it had expanded to different parts of the world, its foray into the Indian
sector was met with skepticism. The prime reason why many people didn't give
McDonald's a chance in India was because most of the McDonald's restaurants around
the world served beef in their burgers. India, with its Hindu majority population,
considers cow as sacred, and vegetarianism is taken so seriously that many
vegetarians avoid sitting with someone having a non-vegetarian meal. The marketing
heads at McDonald's were also aware of the vast diversity in Indian food habits, and
they had to come up with a menu that would appeal to such a large number of people.
To succeed in a country where frugality was an inherent characteristic, McDonald's
also had to work towards keeping the price of its products under check, without
compromising on the hygiene and quality factors. To succeed in such a behemoth and
diverse market, McDonald's had to pay attention to all these socio-cultural factors.
Change in Preferences
One of the most important socio-cultural trends which has an impact on a business is
the constantly changing preferences of customers. A business may build a brand name
for itself and model its core strategies in a certain manner, but if it fails to recognize
and adapt to the changing preferences of the customers, it is doomed to fail. The
example given below will analyze this in detail.
Nokia was one of the biggest mobile handset manufacturers until recently. In 2007,
Apple launched the iPhone, which completely changed the rules in the smartphone
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market. iPhone was a bold statement by Apple on what a phone could achieve. The
launch of iPhone, and its subsequent critical and commercial acclaim, was a clear
indicator to all handset manufacturers that customers expected quality experience
while browsing the internet, listening to songs, watching videos, etc. iPhone's
unprecedented sales, despite the fact that it came with a higher contract cost, was a
testimony to the fact that the customers were appreciative of innovation and
technology, and didn't mind paying extra to get the best thing in the market.
Change in Demographics
Demographics is another socio-cultural factor that has an impact on the fortunes of a
business. The number of people living in a region, their ethnicity, age, gender, race,
sex, etc., are important factors to consider for any business organization. An
understanding of the demographics of the customer base can provide a business with
invaluable pointers towards launching new products, pricing, marketing strategies,
etc. The following example will illustrate how demographics lead to a change in
strategy.
Harley Davidson, the iconic US-based motorcycle manufacturer, has established itself
as one of the premier bike makers in the world. Most of the customer base of Harley
Davidson comprises Baby Boomers, over the age of 35. After the World War II
ended, America emerged as one of the most powerful nations of the world. The period
after the war was filled with optimism and exhilaration. The Baby Boomer generation
grew up in a period marked with added emphasis on individuality and adventure.
Motorcycling had emerged as an alternate lifestyle, with most motorcyclists
preferring the heavy, cruiser bikes of Harley Davidson. The increase in sales, and the
fact that it was the favorite bike of numerous motorcycle clubs, helped Harley
Davidson in achieving a cult status.
Marketing
Socio-cultural factors play a major role in the marketing strategy of a business. In
fact, the whole idea of marketing is to connect with the existing customers, and to
reach out to potential customers. The way a society is composed, and the manner in
which it views itself culturally, plays an important role in the development of a robust
marketing strategy. The marketing strategies vary from one country to another, and
the factors that influence the strategy are literacy levels of the population, its core
beliefs, its sensitivities, willingness to change, etc. In the following example, we will
take a look at how Nestlé had to change its marketing policy to prevent itself from
being in the center of a controversy.
Nestlé, one of the largest food-processing brands in the world, was involved in a
controversy in the 1970s, when it was accused of causing deaths and malnutrition in
infants in sub-Saharan Africa. The center of the controversy was Nestlé's
breastfeeding substitute - a baby milk powder. The substitute was marketed
aggressively all around the world, but in several African countries, where literacy
levels were low, people failed to realize that the product was aimed to act as a
substitute for those children, whose mothers were unable to breastfeed them. Due to
the fallacy that Nestlé's baby powder was as good as mother's milk, many women in
Africa stopped breastfeeding their children altogether. Also, due to the poor living
standards and unhygienic conditions, the baby milk substitute was not being prepared
in the right way. The milk powder which was scheduled to last for 3 days, was being
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stretched to over a week. The water which was used in preparing the substitute was
highly contaminated, and children frequently fell sick after consuming the substitute.
All this meant a lot of negativity for Nestlé, not only in Africa, but also in the rest of
the world. As a result of the controversy, Nestlé reviewed its marketing strategy in
developing countries, and laid more emphasis on providing adequate informational
and educational material with their baby milk substitute products to raise awareness
among the people. Nestlé also cut down on the mass media advertising of its baby
milk substitute, and changed its marketing strategy completely, so that it does not,
inadvertently, make women in developing countries shun breastfeeding altogether.
SOCIAL RESPONSIBILITY OF BUSINESS
We all know that people engage in business to earn profit. However, profit making is
not the sole function of business. It performs a number of social functions, as it is a
part of the society. It takes care of those who are instrumental in securing its existence
and survival like- the owners, investors, employees, consumers and government in
particular and the society and community in general. So, every business must
contribute in some way or the other for their benefit. For example, every business
must ensure a satisfactory rate of return to investors, provide good salary, security and
proper working condition to its employees, make available quality products at
reasonable price to its consumers, maintain the environment properly etc.
However, while doing so two things need to be noted to view it as social

responsibility of business. First, any such activity is not charity. It means that if any
business donates some amount of money to any hospital or temple or school and
college etc., it is not to be considered as discharge of social responsibility because
charity does not imply fulfilling responsibility. Secondly, any such activity should not
be such that it is good for somebody and bad for others. Suppose a businessman
makes a lot of money by smuggling or by cheating customers, and then runs a hospital
to treat poor patients at low prices his actions cannot be socially justified. Social
responsibility implies that a businessman should not do anything harmful to the
society in course of his business activities.
Thus, the concept of social responsibility discourages businessmen from adopting

unfair means like black-marketing, hoarding, adulteration, tax evasion and cheating
customers etc. to earn profit. Instead of this, it encourages them to earn profit through
judicious management of the business, by providing better working and living
conditions to its employees, providing better products, after sales-service, etc. to its
customers and simultaneously to control pollution and conserve natural resources.
RESPONSIBILITY TOWARDS DIFFERENT INTEREST GROUPS:

After getting some idea about the concept and importance of social responsibility of
business let us look into the various responsibilities that a business has towards
different groups with whom it interacts. The business generally interacts with owners,
investors, employees, suppliers, customers, competitors, government and society.
They are called as interest groups because by each and every activity of business, the
interest of these groups is affected directly or indirectly.
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(i) Responsibility towards owners and Investor
The primary responsibilities of business towards its owners are to:

a. run the business efficiently;
b. proper utilisation of capital and other resources;
c. growth and appreciation of capital;
d. regular and fair return on capital invested;
e. ensuring safety of their investment;
f. regular payment of interest; and
g. Timely repayment of principal amount.
(ii) Responsibility towards Creditors

a. to make payment timely;
b. to ensure safety of credit allowed by them; and
c. To follow norms of business as followed by others.
(iii)Responsibility towards employees

The responsibilities of business towards its employees include:
a. timely and regular payment of wages and salaries;
b. proper working conditions and welfare amenities;
d. opportunity for better career prospects;
e. job security as well as social security like facilities of provident fund,
group insurance, pension, retirement benefits etc;
f. better living conditions like housing, transport, canteen, crèches etc;
and
g. Timely training and development.
(iv) Responsibility towards suppliers

The responsibilities of business towards the suppliers are:
a. giving regular orders for purchase of goods;
b. dealing on fair terms and conditions;
c. availing reasonable credit period; and
d. Timely payment of dues.
(v) Responsibility towards customers

The responsibilities of business towards its customers:
a. products and services must be able to take care of the needs of the
customers;
b. products and services must be qualitative;
c. there must be regularity in supply of goods and services;
d. price of the goods and services should be reasonable and affordable;
e. all the advantages and disadvantages of the product as well as
procedure to use the products must be informed to the customers;
f. there must be proper after-sales service;
g. grievances of the consumers, if any, must be settled quickly; and
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h. Unfair means like under weighing the product, adulteration etc. must
be avoided.
(vi) Responsibility towards competitors
The responsibilities of business towards its competitors are not to :

a. offer exceptionally high sales commission to distributers, agents etc;
b. offer to customers heavy discounts and /or free products in every sale;
and
c. Defame competitors through false or ambiguous advertisements.
(vii) Responsibility towards government

The various responsibilities of business towards government are:
a. setting up units as per guidelines of government;
b. payment of fees, duties and taxes regularly as well as honestly;
c. not to indulge in monopolistic and restrictive trade practices;
d. conforming to pollution control norms set up by the government; and
h. Not to indulge in corruption through bribing and other unlawful activities.
(viii) Responsibility towards society(community)

A society consists of individuals, groups, organizations, families etc. They all are the
members of the society. They interact with each other and are also dependent on each
other in the performance of almost all activities. There exists a relationship among
them, which may be direct or indirect. Business, being a part of the society, also
maintains its relationship with all other members of the society. Thus, it has certain
responsibilities towards society, which may be as follows:
a. to help the weaker and backward sections of the society;
b. to preserve and promote social and cultural values;
c. to generate employment;
d. to protect the environment;
e. to conserve natural resources and wildlife;
BUSINESS ETHICS
The word ‘Ethics’ originated from the Greek word ‘ethos’ meaning character, conduct
and activities of the people based on moral principles. It is concerned with what is
right and what is wrong in human behaviour on the basis of standard behaviour or
conduct accepted by the society. Honesty, truthfulness, compassion, sympathy,
feeling of brotherhood etc. are considered ethical.
Similarly, ethics from business point of view or business ethics are the moral
principles, which guide the behaviour of businessmen or business activities in relation
to the society. It provides certain code of conduct to carry on the business in a morally
justified manner. Running the business without adopting unfair practices, being
honest and truthful about quality of goods, charging fair prices, abiding to laws,
paying taxes, duties and fees to the government honestly are some of the ethical
behaviour of business.
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Reasons to behave ethically

From the point of view of the internal customer, ethical behaviour improves the
atmosphere at work and helps motivate the employees, sets a good example to the
employees, and evokes a sense of pride for the company and improves its image in the
eyes of the employees. From the point of view of external customer, ethical behaviour
improves the public image of the company and adds to the overall development of
ethical behaviour in the society.
The four levels of organizational ethics

• Social disregard: the company shows carelessness for the consequences of its
actions.
• Social obligation: the company does not wish to extend its activity any further
than just meeting its legal responsibilities.
• Social responsiveness: the company adjusts its policies according to the
social conditions, demands and pressures.
• Social responsibility: the company decides to concentrate on its long-term
goals for the benefit of society in general.
List of important ethical principles that a business should follow:
1. Do not deceive or cheat customers by selling substandard or defective products by

under measurements or by any other means.
2. Do not resort to hoarding, black marketing or profiteering.
3. Do not destroy or distort competition
4. Ensure sincerity and accuracy in advertising, labeling and packaging.
5. Do not tarnish the image of competitors by unfair practices.
6. Make accurate business records available to all authorized persons.
7. Pay taxes and discharge other obligation promptly
8. Do not farm cartel agreements, even informal, to control production, price etc to the
common detriment.
9. Refrain from secret kickbacks on payoffs to customers, suppliers, administrators,
politicians etc.
10. Ensure payment of fair wages to and fair treatment of employees.
Corporate Governance Defined:

Corporate governance may be defined as follows:
Corporate governance refers to the accountability of the Board of Directors to all
stakeholders of the corporation i.e. shareholders, employees, suppliers, customers and
society in general; towards giving the corporation a fair, efficient and transparent
administration.
Following are cited a few popular definitions of corporate governance:
(1) “Corporate governance means that company managers its business in a manner
that is accountable and responsible to the shareholders. In a wider interpretation,
corporate governance includes company’s accountability to shareholders and other
stakeholders such as employees, suppliers, customers and local community.” –
Catherwood.
(2) “Corporate governance is the system by which companies are directed and
controlled.” – The Cadbury Committee (U.K.)
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Points of comment:
Certain useful comments on the concept of corporate governance are given
below:
(i) Corporate governance is more than company administration. It refers to a fair,
efficient and transparent functioning of the corporate management system.
(ii)Corporate governance refers to a code of conduct; the Board of Directors must
abide by; while running the corporate enterprise.
(iii)Corporate governance refers to a set of systems, procedures and practices which
ensure that the company is managed in the best interest of all corporate stakeholders.
Need for Corporate Governance:
The need for corporate governance is highlighted by the following factors:
(i) Wide Spread of Shareholders:
Today a company has a very large number of shareholders spread all over the nation
and even the world; and a majority of shareholders being unorganised and having an
indifferent attitude towards corporate affairs. The idea of shareholders’ democracy
remains confined only to the law and the Articles of Association; which requires a
practical implementation through a code of conduct of corporate governance.
(ii) Changing Ownership Structure:
The pattern of corporate ownership has changed considerably, in the present-day-
times; with institutional investors (foreign as well Indian) and mutual funds becoming
largest shareholders in large corporate private sector. These investors have become
the greatest challenge to corporate managements, forcing the latter to abide by some
established code of corporate governance to build up its image in society.
(iii) Corporate Scams or Scandals:
Corporate scams (or frauds) in the recent years of the past have shaken public
confidence in corporate management. The event of Harshad Mehta scandal, which is
perhaps, one biggest scandal, is in the heart and mind of all, connected with corporate
shareholding or otherwise being educated and socially conscious.
The need for corporate governance is, then, imperative for reviving investors’
confidence in the corporate sector towards the economic development of society.
(iv) Greater Expectations of Society of the Corporate Sector:
Society of today holds greater expectations of the corporate sector in terms of
reasonable price, better quality, pollution control, best utilisation of resources etc. To
meet social expectations, there is a need for a code of corporate governance, for the
best management of company in economic and social terms.
(v) Hostile Take-Overs:
Hostile take-overs of corporations witnessed in several countries, put a question mark
on the efficiency of managements of take-over companies. This factors also points out
to the need for corporate governance, in the form of an efficient code of conduct for
corporate managements.
(vi) Huge Increase in Top Management Compensation:
It has been observed in both developing and developed economies that there has been
a great increase in the monetary payments (compensation) packages of top level
corporate executives. There is no justification for exorbitant payments to top ranking
managers, out of corporate funds, which are a property of shareholders and society.
This factor necessitates corporate governance to contain the ill-practices of top
managements of companies.
(vii) Globalisation:
Desire of more and more Indian companies to get listed on international stock
exchanges also focuses on a need for corporate governance. In fact, corporate
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governance has become a buzzword in the corporate sector. There is no doubt that
international capital market recognises only companies well-managed according to
standard codes of corporate governance.
Principles of Corporate Governance:

(or major issues involved in corporate governance)
The fundamental or key principles of corporate governance are described below:
(i) Transparency:
Transparency means the quality of something which enables one to understand the
truth easily. In the context of corporate governance, it implies an accurate, adequate
and timely disclosure of relevant information about the operating results etc. of the
corporate enterprise to the stakeholders.
In fact, transparency is the foundation of corporate governance; which helps to
develop a high level of public confidence in the corporate sector. For ensuring
transparency in corporate administration, a company should publish relevant
information about corporate affairs in leading newspapers, e.g., on a quarterly or half
yearly or annual basis.
(ii) Accountability:
Accountability is a liability to explain the results of one’s decisions taken in the
interest of others. In the context of corporate governance, accountability implies the
responsibility of the Chairman, the Board of Directors and the chief executive for the
use of company’s resources (over which they have authority) in the best interest of
company and its stakeholders.
(iii) Independence:
Good corporate governance requires independence on the part of the top management
of the corporation i.e. the Board of Directors must be strong non-partisan body; so
that it can take all corporate decisions based on business prudence. Without the top
management of the company being independent; good corporate governance is only a
mere dream.
SEBI Code of Corporate Governance:
To promote good corporate governance, SEBI (Securities and Exchange Board of
India) constituted a committee on corporate governance under the chairmanship of
Kumar Mangalam Birla. On the basis of the recommendations of this committee,
SEBI issued certain guidelines on corporate governance; which are required to be
incorporated in the listing agreement between the company and the stock exchange.
An overview of SEBI guidelines on corporate governance is given below, under
appropriate heads:
(a) Board of Directors:
Some points in this regard are as follows:
(i) The Board of Directors of the company shall have an optimum combination of
executive and non-executive directors.
(ii) The number of independent directors would depend on whether the chairman is
executive or non-executive.
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In case of non-executive chairman, at least, one third of the Board should comprise of
independent directors; and in case of executive chairman, at least, half of the Board
should comprise of independent directors.
The expression ‘independent directors’ means directors, who apart from receiving
director’s remuneration, do not have any other material pecuniary relationship with
the company.
(b) Audit Committee:
Some points in this regard are as follows:
(1) The company shall form an independent audit committee whose constitution
would be as follows:
(i) It shall have minimum three members, all being non-executive directors, with the
majority of them being independent, and at least one director having financial and
accounting knowledge.
(ii)The Chairman of the committee will be an independent director.
(iii)The Chairman shall be present at the Annual General Meeting to answer
shareholders’ queries.
(2) The audit committee shall have powers which should include the following:
1.To investigate any activity within its terms of reference
2.To seek information from any employee
3. To obtain outside legal or other professional advice
4. To secure attendance of outsiders with relevant expertise, if considered necessary.
(3) The role of audit committee should include the following:
(i) Overseeing of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.
(ii) Recommending the appointment and removal of external auditor.
(iii) Reviewing the adequacy of internal audit function
(iv) Discussing with external auditors, before the audit commences, the nature and
scope of audit; as well as to have post-audit discussion to ascertain any area of
concern.
(v) Reviewing the company’s financial and risk management policies.
(c) Remuneration of Directors:
The following disclosures on the remuneration of directors shall be made in the
section on the corporate governance of the Annual Report:
(i) All elements of remuneration package of all the directors i.e. salary, benefits,
bonus, stock options, pension etc.
(ii) Details of fixed component and performance linked incentives, along with
performance criteria.
(d) Board Procedure Some Points in this Regards are:
(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4
months between any two meetings.
(ii) A director shall not be a member of more than 10 committees or act as chairman
of more than five committees, across all companies, in which he is a director.
(e) Management:
A Management Discussion and Analysis Report should form part of the annual report
to the shareholders; containing discussion on the following matters (within the limits
set by the company’s competitive position).
(i) Opportunities and threats
(ii) Segment-wise or product-wise performance
(iii) Risks and concerns
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(iv) Discussion on financial performance with respect to operational performance

(v) Material development in human resource/industrial relations front.
(f) Shareholders:
Some points in this regard are:
(i) In case of appointment of a new director or reappointment of a director,
shareholders must be provided with the following information:
1.A brief resume (summary) of the director
2.Nature of his expertise
3. Number of companies in which he holds the directorship and membership of
committees of the Board.
(ii) A Board Committee under the chairmanship of non-executive director shall be
formed to specifically look into the redressing of shareholders and investors’
complaints like transfer of shares, non-receipt of Balance Sheet or declared dividends
etc. This committee shall be designated as ‘Shareholders / Investors Grievance
Committee’.
(g) Report on Corporate Governance:
There shall be a separate section on corporate governance in the Annual Report of the
company, with a detailed report on corporate governance.
(h) Compliance:
The company shall obtain a certificate from the auditors of the company regarding the
compliance of conditions of corporate governance. This certificate shall be annexed
with the Directors’ Report sent to shareholders and also sent to the stock exchange.
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UNIT – V
What are the features of globalization?

The features of globalization may be discussed as follows:
1. It means free access to the markets in the world without any physical (quota) or
fiscal (tariff) or any other governments) restriction. Hence, global consumers emerge
demanding high quality products and more value for their money without any
restrictions like parochial, regional or national consideration.
2. Globally standardized products need be marketed ail over the world. There are
already many such products having world market. It includes the "lead" products in a
region taking care of dominant needs of that region.
3. Globalization requires resources like raw materials, finance and technology. Free
access to quality raw materials, latest technology and cheap finance are important
characteristics of this process at less cost.
4. in globalization. Free mobility of managerial personnel and entrepreneurs result
into mergers, takeovers and structural regrouping in countries across the globe.
INTERNATIONAL ENVIRONMENT OF BUSINESS

In international environment of business, we can comprise all the factors which affect
international business. These factors are international financial system, exchange
rates, international lending operations, International organisations which control
foreign business.
To know international business environment is very necessary because after knowing

it, we can know its effect on Indian business. For example, we have to study WTO's
rules and regulations. Check whether, these rules and regulations are in the favor
of Indian business or not. There are also other international organisations like IMF
and World Bank. We also study their changes and its effect on Indian business.
Foreign aid and foreign investment is also developing international factor in

developing countries. We should study whether it is helpful for development of
developing countries or not.
GLOBAL ENVIRONMENT
Globalization is an attitude of mind – which views the entire world as a single market
so that the corporate strategy is based on the dynamics of the global business
environment. Globalization encompasses the following:
1. Expanding business globally
2. Giving up distinction between domestic and foreign market and developing global
outlook of business.
3. To maximize profit
4.For growth
Essential conditions for globalization
1. Business freedom: There should not be necessary govt. restriction like import
restriction, foreign investments etc.
2. Facilities: Enterprise can develop globally from home country bare depends on
facilities available like the infrastructural facilities.
3. Govt. support: Govt support can encourage globalization, like infrastructural
facilities, R & D support, and financial market reforms.
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4. Resources: It decides the ability of firm to globalize. Resourceful companies may

find it easier to thrust ahead in global market. Resources include finance, R&D,
company and grand image, HR etc.
5. Competitiveness: A firm may drive a competitive advantage from any one or more
of the factors such as low costs and price, product quality, product differentiation,
technology superiority, marketing strength etc.
How to go global?
Important foreign market entry strategies –
1. Exporting: Exporting the most traditional mode of entering global market.
2. Licensing & franchising: It involves minimal commitment of resources and effort
on the part of international marketer, are easy way of entering foreign markets.
Finalizing is a form of licensing in which a parent company grants another
independent entity the right to do business.
3. Contract manufacturing: a company doing international marketing contracts with
firms in the foreign countries to manufacture the products while retaining the
responsibility of marketing the product.
4. Management contracting: In this supplier brings together a package of skills that
will provide an integrated service to clients without risk on owner.
5. Turnkey contracts: A turnkey contracts is an agreement by seller to supply a
buyer with a facility fully equipped and ready to be operated.
6. Wholly owned manufacturing facilities: It provides the firm with complete
control over production and quality. It does not have risk in the development.
7. Assembly operations: Assembly facilities in foreign markets are very ideal when
there are economies of scale in the manufacture. When assembly operations are
labour intensive and labour is cheap in foreign country.
8. Joint ventures: Joint venture is a very common strategy of entering foreign
market. Any form of association which implies collaboration for more than a
transitory period is a joint venture. A joint venture may bring about by a foreign
investor buying an interest in a local company.
9. Third country location: Third country location is also an entry strategy, when
there is no commercial transaction between two nations for some reasons, a firm in
one of their nations which wants to enter the other market will have to operate third
country base.
10. Mergers and acquisitions: It has very good market entry strategy as well as
expansion strategy. It provides instant access to markets and distribution network.
11. Strategic alliances: It is also used as market entry strategy it is also known as
coalition, this strategy seeks to enhance the long term competitive advantage of the
firm by farming alliance with competitors.
12. Counter trade: It is a form of international trade in which certain export and
import transaction are directly linked with each other.
Types of Mergers
1. Horizontal Merger: Takes place where the two margin companies’ products
similar product in the some industry.
E.g. in 1998 – combination of Chrysler cooperation and similar sense to create
Dainles Chrysler.
2. Vertical Merger: Occur when two firms each working at different stages in the
production of the same good combine.
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E.g. General Motors acquisition of fisher body companies (an auto parts
manufacturer).
3. Conglomerate Mergers: takes place when two firms operate in different
industries.
E.g. Acquisition of Montgomery Ward and Co., (a retailer) by Mobil Oil Company)
MULTINATIONAL CORPORATION (MNC):

A multinational corporation (MNC) is a corporation that operating in two or more
countries, known as host countries but managed from one country, known as home
country. Multinational Corporation is Also Known As International Corporation.
Besides that, MNC can be defined as a corporation that derives revenues from
operations in countries other than home country (Business Dictionary, 2011). The
objective of MNC to operate in other countries is to gain competitive advantage
through several ways. Firstly, MNC is able to take advantage of difference in country-
specific circumstances.
For example, MNC may choose to locate its productions in less developed country
like Vietnam to gain cheap labor cost. Secondly, MNC is trying to reach economies of
scale.
Some of the benefit оf multinational соmраniеѕ are:
1. There iѕ uѕuаllу hugе capital investment in major есоnоmiс асtivitiеѕ
2. The country enjoys varieties of рrоduсtѕ, services and fасilitiеѕ, brought tо thеir
dооr ѕtерѕ
3. There iѕ сrеаtiоn оf mоrе jobs fоr thе рорulасе
4. Thе nаtiоn'ѕ pool of ѕkillѕ аrе best utilized аnd put tо uѕе еffесtivеlу аnd efficiently
5. There is аdvаnсеmеnt in tесhnоlоgу аѕ thеѕе соmраniеѕ bring in ѕtаtе-оf-thе-аrt-
tесhnоlоgу for thеir buѕinеѕѕеѕ
6. The dеmаnd for trаining and retraining аnd аdvаnсеmеnt in thе реорlе'ѕ еduсаtiоn
bесоmеѕ аbѕоlutеlу nесеѕѕаrу. Thiѕ will in turn hеlр ѕtrеngthеn thе есоnоmу of thе
nаtiоn
7. The living ѕtаndаrd of the реорlе is bооѕtеd
PROBLEMS/CHALLENGES FACING MULTINATIONAL COMPANIES

There is nо company without problems it iѕ fасing. Whеthеr аn organization iѕ big or
ѕmаll, there will certainly bе ѕоmе ѕоrt оf рrоblеmѕ оr nеgаtivе fасtоr/influеnсе
militаting against itѕ survival оr соntinuitу. Wеihriсh аnd Kооntz (1994) states that
thе ореrаtiоn of multinational соmраniеѕ nееdѕ tо be wеighеd аgаinѕt thе
environmental сhаllеngеѕ and mоѕt оf thе challenges bеing fасеd bу multinational
соmраniеѕ аrе:
1. Thеrе iѕ usually acute shortage оf mаnроwеr - реорlе with lасk оf mаnаgеriаl
аnd tесhniсаl skills
2. The challenge of unfriendly business еnvirоnmеnt
3. Thеrе is usually thе problem оf conflicting intеrеѕt аmоng the thrее parties - the
government, thе MNC and the general public
4. Thеrе mау be hugе cost of lаbоur in thе hоѕt соuntrу, at least tо gеt thе
еxраtriаtе mаnаgеrѕ frоm hоmе country оr ѕоmеwhеrе еlѕе
Conclusively, thе above mеntiоnеd аuthоrѕ hаvе givеn all round аnd соmрrеhеnѕivе
nоtе оn the bеnеfitѕ оf MNCѕ tо the hоѕt country where they ореrаtе and аѕ well
highlightеd the dеrivаblе bеnеfitѕ to thе MNCѕ thеmѕеlvеѕ from the hоѕt country.
Likеwiѕе, in ѕрitе оf thе сhаllеngеѕ аnd thе рrоblеmѕ bеing faced bу thеѕе MNCѕ,
thеу still соntinuе to ѕurvivаl аnd wаxing stronger.
91
What are the Advantages and Disadvantages of Multinational Corporations?

Multinational Corporations no doubt, carryout business with the ultimate object of
profit making like any other domestic company. According to ILO report "for some,
the multinational companies are an invaluable dynamic force and instrument for wider
distribution of capital, technology and employment; for others they are monsters
which our present institutions, national or international, cannot adequately control, a
law to themselves with no reasonable concept, the public interest or social policy can
accept. MNC's directly and indirectly help both the home country and the host
country.
Advantages of MNC's for the host country
MNC's help the host country in the following ways
1. The investment level, employment level, and income level of the host country
increases due to the operation of MNC's.
2. The industries of host country get latest technology from foreign countries through
MNC's.
3. The host country's business also gets management expertise from MNC's.
4. The domestic traders and market intermediaries of the host country gets increased
business from the operation of MNC's.
5. MNC's break protectionalism, curb local monopolies, create competition among
domestic companies and thus enhance their competitiveness.
6. Domestic industries can make use of R and D outcomes of MNC's.
7. The host country can reduce imports and increase exports due to goods produced
by MNC's in the host country. This helps to improve balance of payment.
8. Level of industrial and economic development increases due to the growth of
MNC's in the host country.
Advantages of MNC's for the home country
MNC's home country has the following advantages.
1. MNC's create opportunities for marketing the products produced in the home
country throughout the world.
2. They create employment opportunities to the people of home country both at home
and abroad.
3. It gives a boost to the industrial activities of home country.
4. MNC's help to maintain favourable balance of payment of the home country in the
long run.
5. Home country can also get the benefit of foreign culture brought by MNC's.
Disadvantages of MNC's for the host country
1. MNC's may transfer technology which has become outdated in the home country.
2. As MNC's do not operate within the national autonomy, they may pose a threat to
the economic and political sovereignty of host countries.
3. MNC's may kill the domestic industry by monpolising the host country's market.
4. In order to make profit, MNC's may use natural resources of the home country
indiscriminately and cause depletion of the resources.
5. A large sums of money flows to foreign countries in terms of payments towards
profits, dividends and royalty.
Disadvantages of MNC's for the home country
1. MNC's transfer the capital from the home country to various host countries causing
unfavourable balance of payment.
2. MNC's may not create employment opportunities to the people of home country if
it adopts geocentric approach.
92
3. as investments in foreign countries is more profitable, MNC's may neglect the

home countries industrial and economic development.
Applicability to particular business

MNC's is suitable in the following cases.
1. Where the Government wants to avail of foreign technology and foreign capital e.g.
Maruti Udyog Limited, Hind lever, Philips, HP, Honeywell etc.
2. Where it is desirable in the national interest to increase employment opportunities
in the country e.g., Hindustan Lever.
3. Where foreign management expertise is needed e.g. Honeywell, Samsung, LG
Electronics etc.
4. Where it is desirable to diversify activities into untapped and priority areas like
core and infrastructure industries, e.g. ITC is more acceptable to Indians L&T etc.
5. Pharmaceutical industries e.g. Glaxo, Bayer etc.
TECHNOLOGICAL ENVIRONMENT
Definition of Technological Environment:-

“Technological Environment means the development in the field of technology which
affects business by new inventions of productions and other improvements in
techniques to perform the business work. "
Explanation
We see that in 21st century, technology is changing fastly. Now, all work is done
online and business shops are using machinery at high level. There are following
technological environment factors which affects business.
• New inventions to produce the products.
• New inventions relating to marketing like BPO for selling online in international
market.
Status of Technological Environment or Technology in India:-
After Independence, India had basic problems like poverty, unemployment and
development of India . Indian Govt. has taken many following steps for technological
development.
1. Establishment of technological and research institute
Indian govt. has established 500 technological institutes for providing education to
Indian students. It has also established 1080 research institutes. In these institutes
major names like space research centre, medical research centre and agricultural
research centre have developed India technically.
2. Positive Technical policy
India has strong and positive technical policy for technological development. This
policy opens door to import technology from foreign countries for increasing
agricultural and industrial developments.
3. High Growth Rate of Information Technology in India
In India, IT sector is developing with 35% growth rate; India is second country after
China who is using internet at large scale for e-commerce, e-education and e-
accounting.
4. Incentive for promoting Technology in India
• Indian Govt. has given 100% income tax exemption for expenses incurred in
research of technology in India.
• State financial corporation is uplifting domestic technology by supporting finance to
domestic Industries.
93
TECHNOLOGICAL ENVIRONMENT
Technology is one of the important determinants of success of a firm as well as

economic and social development of nation. It includes both hardware and software to
solve problems and promote progress.
1. Innovative drive of company
The term innovation means introduction of new product, the use of new method of
production. “The technical, industrial and commercial steps which leads to marketing
of new products and to commercial use of new technical process and equipment.”
2. Customers Needs / Expectation
Technological orientation and R&D effects of a company may also be influenced by
the customer needs and expectation. In several cases the customer and the supplier
have a collaborative relationship to develop the product or solutions. If the customers
are highly demanding, companies would be compelled to be innovative
3. Demand conditions
The size of demand influences the choice of the technology. The size of demand
influences the choice of the technological scale. Fast growing trend of demand would
encourage development of technology of large scale.
4. Suppliers offering
Many times technological changes are encouraged by the suppliers of a company, like
a capital goods supplier etc.
5. Competitive dynamics
Competition compels the adoption of the best technology and constant endeavor to
innovate.
6. Substitutes
Emergence of new substitutes or technological improvements or substitutes which
alter technological change.
7. Social forces
Certain social forces like pretext against environment pollution or other ecological
problems demand for eco-friendly products.
8. Research organization
The technological environment of business is enriched by researched organizations
which develops new technologies and provide other technical inputs.
9. Govt. policy
The govt. contributes to the development to the technology by its own direct
involvement by establishing research organization and funding R & D. The govt. may
encourage private R & D by various incentives.
Science and Technology Policy of India

➢ Science is becoming increasingly inter- and multi-disciplinary, and calls for
multi-institutional and, in several cases, multicountry participation.
➢ The continuing revolutions in the field of information and communication
technology have had profound impact on the manner and speed with which
scientific information becomes available, and scientific interactions take place.
➢ Science and technology have had unprecedented impact on economic growth
and social development.
➢ Knowledge has become a source of economic might and power. This has led
to increased restrictions on sharing of knowledge, to new norms of intellectual
property rights, and to global trade and technology control regimes.
94
Objectives
➢ Recognizing the changing context of the scientific enterprise, and to meet
present national needs in the new era of globalisation, Government enunciates
the following objectives of its Science and Technology Policy:
➢ To ensure that the message of science reaches every citizen of India.
➢ Make it possible for all our people to participate fully in the development of
science and technology and its application for human welfare.
➢ To ensure food, agricultural, nutritional, environmental, water, health and
energy security of the people on a sustainable basis.
➢ To mount a direct and sustained effort on the alleviation of poverty, enhancing
livelihood security, removal of hunger and malnutrition, reduction of drudgery
and regional imbalances, both rural and urban, and generation of employment,
by using scientific and technological capabilities along with our traditional
knowledge pool.
➢ This will call for the generation and screening of all relevant technologies,
their widespread dissemination through networking and support for the vast
unorganized sector of our economy.
➢ To vigorously foster scientific research in universities and other academic,
scientific and engineering institutions; and attract the brightest young persons
to careers in science and technology.
➢ By conveying a sense of excitement concerning the advancing frontiers, and
by creating suitable employment opportunities for them.
➢ To build and maintain centres of excellence, which will raise the level of work
in selected areas to the highest international standards.
➢ To promote the empowerment of women in all science and technology
activities and ensure their full and equal participation.
➢ To provide necessary autonomy and freedom of functioning for all academic
and R&D institutions so that an ambience for truly creative work is
encouraged
➢ To accomplish national strategic and security-related objectives, by using the
latest advances in science and technology.
EFFECTS OF TECHNOLOGY
So often these days we hear and speak of 'the conquest of nature', 'the taming of a
river', 'the war against insects' and so on. Often these phrases are used without
consciously attaching any value to them, but they have underlying them an attitude of
hostility towards Nature & it's creatures, a viewpoint which seems to assume nature as
an enemy that needs to be vanquished. Alternatively, nature is seen merely as a
'resource' to be exploited to take the maximum out of it, regardless of what this does
to natural processes & to other creatures which depend on these processes. It is this
attitude which sees fellow humans too as a resource to be exploited or other human
communities as enemies to be conquered.
Well, most of this destruction of nature is mainly because of the fast-running human
mind and the more rapidly increasing advancements in the modern day technology.
Science and its inventions over the centuries have made life easier & enjoyable. Its
application has proved to be a blessing in more ways than one. The first significant
advancement in technology was the invention of fire around 1 million years ago, this
enabled humans to cook food, and create other items such as spears and utensils.
Technology now has improved sharply, and with TVs, MP3s, Computers etc., our
95
way of life has changed. We have become the people of modern ideas and innovations
& this shows our stinking richness.
With the introduction of Mp3s, TVs and computers, life for humans have become
easier but also lazier. Obesity in children is at peak levels in India, United States, etc.
Kids are preferring to stay at home and play computer games rather than going out
and socializing like they used to. Quite simply kids are losing their social life, getting
fatter and are having low academic achievements all because of their addictive games
on Xboxes, Play Stations etc.
But not only the children, it has also affected lives of adults. Cell phones can cause
brain tumors and computers cause problems with your hands and fingers, and
posture. So is technology really helping us? Are the pros outweighing the cons.
Should we take the risks? We have probably heard that listening to music at high
volume levels from iPod can damage our hearing capability but have we cared how
other gadgets are also causing damage to our overall health? Cell phones, microwave
ovens and even the little Bluetooth device that we have attached to our ear causes
radiation that might cause harm to our natural health.
Technology has helped the nature as well, as it helps us to determine when disaster is
going to struck, also when earth will vanish and many other theories, but Technology
is necessary but not always a positive influence in modern life. This issue has
especially come into vogue in the last decade due to the mind-boggling pace of
technology. Technology has really been very hazardous to the environment as well.
The modern world gadgets use technology of radiations and other harmful rays that
have immense affect on the environment. They imbalance all the processes in turn
causing a great affect on the entire living world and also the eco-cycle. Now, coming
to geosciences. It has largely affected the earth and the environment as it involves
digging up of the earth to extract various resources of one's daily need. This in turn
has led to over-exploitation of the resources all around the world. These resources
take millions of years to be converted from the fossil fuels, organic matter. But due to
extreme usage of them they are getting depleted.
"Technology, when misused, poisons air, soil, water and lives. But a world
without technology would be prey to something worse: the impersonal
ruthlessness of the natural order, in which the health of a species depends on
relentless sacrifice of the weak. "
96

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Business Environment M.

Com IST SEM

Nature and Scope of Business

4. Manufacturing Industry: Generally the term ‘industry’ refers to the

dislikes of the consumers through marketing research. Thus commerce creates

(ii) Sale or exchange of goods and services: If a person produces or buys a

(iv) Requires investment: Every business activity requires some amount of

(c) Human objectives of business primarily refer to the objectives aimed at

(vi) providing employment to the backward classes of the society and

MEANING OF BUSINESS ENVIRONMENT:

FEATURES OF BUSINESS ENVIRONMENT:

IMPORTANCE OF BUSINESS ENVIRONMENT

(a) Determining Opportunities and Threats: The interaction between the

(f) Identifying Firm’s Strength and Weakness: Business environment helps to

TYPES OF BUSINESS ENVIRONMENT

Confining business environment to uncontrollable external factors, it may be

(a) Economic Conditions: The economic conditions of a nation refer to a set of

Important Economic Policies

(a) Social Environment

(b) Legal Environment

(c) Technological Environment

(d) Demographic Environment

(e) Natural Environment

ENVIRONMENTAL SCANNING AND ANALYSIS

Kinds of environmental scanning

A scan of the external macro-environment in which the firm operates can be

Economic Factors: Economic factors affect the purchasing power of potential

➢ population growth rate

Technological Factors: Technological factors can lower barriers to entry, reduce

Environmental Factors: Environmental factor refers to the physical or geographical

FIVE FORCE ANALYSIS

SWOT analysis: SWOT analysis is a structured planning method used to evaluate

• Strengths: characteristics of the business or project that give it an advantage

NEED AND IMPORTANCE OF ENVIRONMENTAL SCANNING:

5. Optimum use of resources:

6. Survival and growth:

7. To plan long-term business strategy:

help in easy accomplishment of those organisational objectives. Without undertaking

8. Environmental scanning aids decision-making:

CHANGING IN THE BUSINESS ENVIRONMENT OF INDIA

Essentials of the 3Ds – Democracy, Demography and Demand

1. Economic Conditions: The economic conditions of a nation refer to a set of

2. Economic Policies: All business activities and operations are directly

Important Economic Policies

- Economic System: The world economy is primarily governed by three types of

· Market Economy (Also Called Free Enterprise Economies Or Capitalist

economies. Because of: Command economies are impossible to

PRIVATE SECTOR – firms in response to the demand or consumers needs and

THE ROLE OF GOVERNMENT IN A MARKET (MIXED) ECONOMY

Main Objectives of Fiscal Policy In India

6. Balanced Regional Development

4. Balance of Payments (BOP) Equilibrium: Many developing countries like

Instruments of Monetary Policy - Quantitative & Qualitative Tools

6. Time Lag Affects Success of Monetary Policy

assessing working funds and other functioning has empowered and

developing economies. With the growth of international organisations like WTO,

Industrial Policies Prior to 1991

Industrial Policy Resolution, 1948

(ii) Industries with Government Control: It included the industries of national

Industries (Development and Regulation) Act (IDRA), 1951

IDRA, 1951 is the key legislation in the industrial regulatory framework.

The main provisions of the IDRA, 1951 were

c) Such a license or permission prescribed a variety of conditions, such as, location,