Business environment

Business Environment Meaning:

No business can exist in a vacuum. The rapidly changing business environment might shorten
the life of a given strategy. The external changes might influence the activities and quality of
decisions of both the firm and its competitors. George Salk says, “If you’re not faster than
your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.”

Hence, as Kenich Ohmae says that “environmental analysis is the critical starting point of
strategic thinking.” Charles Darwin has said, “It is not the strongest of the species that survive
nor the most intelligent, but the one most responsive to change.”
We live in a dynamic environment that changes all the time. Businesses must understand the
changes in the environment and how these changes affect their performance. The process of
thinking strategically requires that managers understand how the structure and competitive
dynamics of their industry affect the performance and profitability of their companies. Armed
with an appreciation of the forces in their industry that give rise to opportunities and threats,
managers should be able to make better strategic decisions.

Successful managers must recognize opportunities and threats in their firm’s external
environment. Regardless of the industry, the external environment is critical to a firm’s
survival and success. A host of external factors influence a firm’s choice of direction and
action.

Business and its Environment:

A business depends on certain internal and external factors. These factors are treated as given
and business enterprise is expected to operate under a particular set of environmental
system. These factors are generally uncontrollable and beyond the control of business
enter-prises. But progress, success and survival largely depend upon their capacity and ability
to adapt successfully to environmental changes available in surroundings of a business.

In its operational behaviour, an organization interacts with the various forces in its
environ-ment. It may be in terms of receiving inputs, returning outputs and using feedback to
modify inputs and the transformation process. Moreover, the organization does not operate
in a vacuum but must interact with its environment in order to function. However, level of
interaction may differ from organization to organization and the impact can vary overtime.
Thus, business organizations deal with the environment by
undertaking following transactions:
(i) They Receive Inputs- The manufacturer receives raw materials, a stock broker receives the
latest financial information and a local authority receives data on housing needs.
(ii) They Transform Inputs- The Manufacturer produces the goods from the raw materials the
stock broker interprets the information and the local authority produces housing plans.
(iii) They Produce Outputs- The manufacture sell products, the stock broker advice and the
local builds houses.

Business Environment Definition:

“It is set of those inputs to an organisation which are under the control of other organisations
or interest groups or are influenced by interaction of several groups, such as economy” —
Professor Paire and Anderson

“Environment consists of all external and internal influence the complex interaction of the
market, production and finance, the three basic components of our business world.” —Mr.
J.A. King and Mr. C.J. Duggan

“Business environment is an aggregate of all conditions, events and influences that surround
and affect it. It is broad and ever changing as its separate elements interact. A single firm’s
environment is narrow in scope than the total environment of business. It is complicated and
continuously changing.” —Professor Keith Davis

“An organisation’s external environment consists of those things outside an organisation such
as customers, government units, suppliers, financial firms and labour pools that are relevant
to an organisation’s operations.” —Professor Gerald Bell

“Every organisation exists in an environment that extends beyond its formal boundaries. This
external environment represents a set of conditions, circumstances and influences that
surround and affect the functioning of an organization. Environment is made up of many
different individuals (for example—customers, members of other organisation, local citizens,
organisation of suppliers, civil groups, labour unions and government bodies—regulatory
agencies, legislators, local officials). It includes those people who are capable of influencing
an organisation and its management system, as well as those who might be affected by the
organisation’s actions.” —Professors Randall B. Dunham and John. L. Pierce
In a nutshell business environment is the sum total of all the external factors beyond control
of business that influence the business in a number of ways. In other words, it consists of two
layers of macro level namely general and industry environments. The following picture makes
it amply clear. Thus, the business environment is divided into general environment and
industry environment.
‘General environment’ refers to the general and overall environment within which firms
operate. The experts like Charles W.L. Hill and Gaseth R. Jones call it is a ‘macro’ environment.
Others like Mr. Elbing and others like to call it as the indirect action environment.
The macro- environment consists of the broader economic, social, demographic, political,
legal and technological framework within which the industry and company are placed. It is
called as ‘indirect action’ environment. The forces do not have any immediate direct effect
on the operations but they have influence.
On the other hand, “industry environment” or “direct action environment” or “tasks
environment” or “micro environment” or “operating environment” is by Charles W.L. Hill and
Gareth. R. Jones, Elbing, Paire and Anderson—Randall B. Dunham and Jon. L. Pierre-II, Philip
Kotler, and John A. Pearce II and Richard B. Robinson …, respectively.
A company’s industry environment consists of elements that directly affect the company such
as competitors, customers and suppliers. The forces of industry environment directly affect
and are affected by the organisation’s operations. In other words, the task environment is the
more specific and immediate environment in which an organisation conducts its business.
It implies that the strategists or makers of decision should design those strategies that are
matching to the needs of external environment. It is a question of adjusting the organisation
to these forces so that the firm is in a position to have increased share in market, profitability
and other goals and objectives by utilising its internal strengths and weaknesses.

Nature of Business Environment:

Complex:
Business environment is complex in nature. It consists of several factors, conditions and
events which directly influence the functioning of business. These factors influence the
productivity and profitability of business. It is quite difficult to understand how a particular
factor affects the operations of business. Different factors affect differently the performance
of business.
Dynamic:
Business environment is a dynamic concept and keeps on changing continuously. Various
factors which constitute business environment are always changing from time to time. These
changes are in terms of changes in customer preferences, technological improvements, new
competitor’s entry etc. These ever changing factors bring changes in character and shape of
business environment making it dynamic.
Interdependence:
Factors of business environment are dependent on each other. Business environment include
economic, social, legal, technological and political factors. Changes in any one of the factors
will bring changes in several other factors. Like countries having better economy are able to
enhance their technology by incurring sufficient expenditure on research and development.
Uncertain:
Factors which constitute business environment are uncertain. It is quite difficult to predict
several future conditions because no one knows what is going to happen in nature. These
factors changes too frequently like changes in fashion, technology, demand and economic
conditions.
Relativity:
Business environment is relative in nature which means that it changes from one place to
another and from one country to another. Economic conditions In Canada are different from
those in India. Similarly, demand for women’s salwar kameez is high in India than in U.S.A.
System Approach:
Business environment is a systematic approach which facilitates business in its functioning.
Business is a system which manufactures the products and services. It satisfies the wants of
customers by taking several inputs like raw materials, capital, labour etc. from environment
and delivering the required goods and services.
Social Responsibility Approach:
Social responsibility is another important characteristic of business environment. According
to this, business exists for serving various members of society. These include shareholders,
employees, customers, government etc. and every business should consider their interest
while operating.

Scope of Business Environment:

Identifies Business Opportunities and Threats:
Business environment helps business in identification of various opportunities and threats.
When business is able to detect market opportunities timely, they can easily take advantages
of such opportunity at earliest. They can earn maximum returns by availing such opportunity
before the competitors. By proper interaction between business and its environment all
threats can be easily detected. It will enable business in taking corrective measures timely.
Helps In Planning and Policy Formulation:
Proper understanding of business environment helps in formulating better policies and
strategies. It conveys all current information regarding market conditions to business. All
opportunities and threats are scanned through the study of the business environment.
Businessmen are properly aware of environment and thereby take all decisions according to
it. Their entire plan can be changed effectively and efficiently through environmental
awareness.
Provides Useful Resources:
Business depends on the environment in which they operate for several resources. Business
environment supplies several inputs like raw materials, capital and labour which are used by
the business for its operations. These inputs are converted into goods and services for
satisfying the needs of the market. Without proper supply of inputs, business cannot continue
its operations. It is fully dependent upon environment for taking inputs and delivering the
required goods or services.
Improves Performance:
Business environment has an effective role in accelerating the overall performance of
business organisations. Through continuous environmental awareness, managers update
their knowledge and skills. Environmental study serves as the medium of educating
management. Monitoring of environment provides qualitative information which helps in
developing strategic thinking. It enables managers to adopt suitable management practices
to control and improve the performance of business.

Helps In Coping with Rapid Changes:

Factors which constitute business environment are dynamic in nature. They keep on changing
continuously from time to time. These changes include changes in customer’s preferences,
fashion, technology, economic conditions etc.
Proper understanding of the business environment helps business in detecting all these
frequently occurring changes easily. It enables them in dealing with these changes efficiently
by taking appropriate actions at right time. Managers through continuous monitoring of
environment are sensitive to such changes and respond effectively.

Enhances Business Image:

Business through proper understanding of its environment are able to improve its public
image. They are more responsive and sensitive to the environmental needs through proper
knowledge of business environment. Study of environment provides them information for
making realistic plans and implementing them effectively. Businesses are able to provide
better service and serve the interest of entire society. People are happy with the business and
develop confidence towards it. This enables in developing a better image in market.
Assist In Facing Competition:
Business environment communicates all details about competitors in market to business.
Awareness regarding the actions and strategies of competitors is crucial for every business
for meeting competition effectively. It helps business in formulating plans and policies in
accordance with the competitor’s actions. Businesses are able to face challenges and
competition in market through systematic planning in an efficient way.
 UNIT 2: SOCIAL AND CULTURAL ENVIRONMENT

INTRODUCTION:
Most people hear about culture and business and immediately think about protocol—a list of
dos and don’ts by country. For example, don’t show the sole of your foot in Saudi Arabia;
know how to bow in Japan. While these practices are certainly useful to know, they are just
the tip of the iceberg. We often underestimate how critical local culture, values, and customs
can be in the business environment. We assume, usually incorrectly, that business is the same
everywhere. Culture does matter, and more and more people are realizing its impact on their
business interactions.
Culture, in the broadest sense, refers to how and why we think and function. It encompasses
all sorts of things—how we eat, play, dress, work, think, interact, and communicate.
Everything we do, in essence, has been shaped by the cultures in which we are raised.
Similarly, a person in another country is also shaped by his or her cultural influences. These
cultural influences impact how we think and communicate.
Culture, a society’s “programming of the mind,” has both a pervasive and changing influence
on each national market environment. Global marketers must recognize the influence of
culture and be prepared to either respond to it or change it. Human behavior is a function of
a person’s own unique personality and that person’s interaction with the collective forces of
the particular society and culture in which he or she has lived. In particular, attitudes, values,
and beliefs can vary significantly from country to country.
Also, differences pertaining to religion, aesthetics, dietary customs, and language and
communication can affect local reaction to brands or products as well as the ability of
company personnel to function effectively in different cultures. A number of concepts and
theoretical frameworks provide insights into these and other cultural issues.
Cultures can be classified as high- or low-context; communication and negotiation styles can
differ from country to country. Hofstede’s social value typology sheds light on national
cultures in terms of power distance, individualism v/s collectivism, masculinity v/s femininity,
uncertainty avoidance, and long-versus short-term orientation. By understanding the self-
reference criterion, global marketers can overcome the unconscious tendency for perceptual
blockage and distortion.
THE SOCIAL AND CULTURAL ENVIRONMENT:
The cultural environment consists of the influence of religious, family, educational, and social
systems in the marketing system. Marketers who intend to market their products overseas
may be very sensitive to foreign cultures. While the differences between our cultural
background in the United States and those of foreign nations may seem small, marketers who
ignore these differences risk failure in implementing marketing programs. Failure to consider
cultural differences is one of the primary reasons for marketing failures overseas.
This task is not as easy as it sounds as various features of a culture can create an illusion of
similarity. Even a common language does not guarantee similarity of interpretation. For
example, in the US we purchase “cans” of various grocery products, but the British purchase
“tins”. A number of cultural differences can cause marketers problems in attempting to
market their products overseas. These include: (a) language, (b) color, (c) customs and taboos,
(d) values, (e) aesthetics, (f) time, (g) business norms, (h) religion, and (i) social structures.
Each is discussed in the following sections.
A) Language
The importance of language differences cannot be overemphasized, as there are almost 3,000
languages in the world. Language differences cause many problems for marketers in designing
advertising campaigns and product labels. Language problems become even more serious
once the people of a country speak several languages. For example, in Canada, labels must be
in both English and French. In India, there are over 200 different dialects, and a similar
situation exists in China.
B) Colours
Colours also have different meanings in different cultures. For example, in Egypt, the
country’s national colour of green is considered unacceptable for packaging, because religious
leaders once wore it. In Japan, black and white are colours of mourning and should not be
used on a product’s package. Similarly, purple is unacceptable in Hispanic nations because it
is associated with death.
Consider how the following examples could be used in development of international
marketing programs:
In Russia, it is acceptable for men to greet each other with a kiss, but this custom is not
acceptable in the US.
Germans prefer their salad dressing in a tube, while Americans prefer it in a bottle.
In France, wine is served with most meals, but in America, milk, tea, water, and soft drinks
are popular.
McDonalds Corporation has opened 20 restaurants in India. Since 80 percent of Indians are
Hindu, McDonald’s will use a non-beef meat substitute for its traditional hamburger. The
likely beef substitute will be lamb, a very popular meat in India. In anticipation of its
restaurant openings, McDonald’s conducted extensive market research, site selection
studies, and developed a relationship with India’s largest chicken supplier. McDonald’s has
opted to market its product in India, largely because India’s population of more than 900
million represents one-sixth of the world’s population.
C) Values
An individual’s values arise from his/her moral or religious beliefs and are learned through
experiences. For example, in America, we place a very high value on material well-being and
are much more likely to purchase status symbols than people in India. Similarly, in India, the
Hindu religion forbids the consumption of beef, and fast-food restaurants such as McDonald’s
and Burger King would encounter tremendous difficulties without product modification.
Americans spend large amounts of money on soap, deodorant, and mouthwash because of
the value placed on personal cleanliness. In Italy, salespeople call on women only if their
husbands are at home.

D) Aesthetics
The term aesthetics is used to refer to the concepts of beauty and good taste. The phrase,
“Beauty is in the eye of the beholder” is a very appropriate description for the differences in
aesthetics that exist between cultures. For example, Americans believe that suntans are
attractive, youthful, and healthy. However, the Japanese do not.

E) Time
Americans seem to be fanatical about time when compared to other cultures. Punctuality and
deadlines are routine business practices in the US. However, salespeople who set definite
appointments for sales calls in the Middle East and Latin America will have a lot of time on
their hands, as business people from both of these cultures are far less bound by time
constraints. To many of these cultures, setting a deadline such as “I have to know next week”
is considered pushy and rude.
F) Business Norms
The norms of conducting business also vary from one country to the next. Here are several
examples of foreign business behaviour that differ from US business behaviour:
In France, wholesalers do not like to promote products. They are mainly interested in
supplying retailers with the products they need.
In Russia, plans of any kind must be approved by a seemingly endless string of committees.
As a result, business negotiations may take years.
South Americans like to talk business “nose to nose”. This desire for close physical proximity
causes American businesspeople to back away from the constantly forward-moving South
Americans.
In Japan, business people have mastered the tactic of silence in negotiations. Americans are
not prepared for this, and they panic because they think something has gone wrong. The
result is that Americans become impatient, push for a closure, and often make business
concessions they later regret.
These norms are reflected in the difficulty of introducing the Web into Europe.

G) Religious Beliefs
A person’s religious beliefs can affect shopping patterns and products purchased in addition
to his/her values, as discussed earlier. In the United States and other Christian nations,
Christmastime is a major sales period. But for other religions, religious holidays do not serve
as popular times for purchasing products. Women do not participate in household buying
decisions in countries in which religion serves as opposition to women’s rights movements.
Every culture has a social structure, but some seem less widely defined than others. That is,
it is more difficult to move upward in a social structure that is rigid. For example, in the US,
the two-wage earner family has led to the development of a more affluent set of consumers.
But in other cultures, it is considered unacceptable for women to work outside the home.
 Political Environment of Business

State and its branches:

The three branches of the union government are charged with
different responsibilities, but the constitution also provides a fair
degree of interdependence. The executive branch consists of the
president, vice president, and a Council of Ministers, led by the prime
minister. Within the legislative branch are the two houses of
parliament—the lower house, or Lok Sabha (House of the People), and
the upper house, or Rajya Sabha (Council of States). The president of
India is also considered part of parliament. At the apex of the judicial
branch is the Supreme Court, whose decisions are binding on the
higher and lower courts of the state governments.

Executive branch
India’s head of state is the president who is elected to a five-year
renewable term by an electoral college consisting of the elected
members of both houses of parliament and the elected members of
the legislative assemblies of all the states. The vice president, chosen
by an electoral college made up of only the two houses of parliament,
presides over the Rajya Sabha. If the president dies or otherwise
leaves office, the vice president assumes the position until an election
can be held.
The powers of the president are largely nominal and ceremonial,
except in times of emergency, and the president normally acts on the
advice of the prime minister. The proper limits of the president’s
power are sometimes a matter for debate. The president may,
however, proclaim a national state of emergency when there is
perceived to be a grave threat to the country’s security or impose
direct presidential rule at the state level when it is thought that a
particular state legislative assembly has become incapable of
functioning effectively. The president may also dissolve the Lok Sabha
and call for new parliamentary elections after a prime minister loses a
vote of confidence.
Effective executive power rests with the Council of Ministers, headed
by the prime minister, who is chosen by the majority party or coalition
in the Lok Sabha and is formally appointed by the president. The
Council of Ministers, also formally appointed by the president, is
selected by the prime minister. The most important group within the
council is the cabinet. Cabinet portfolios are assigned partly on the
basis of interest and competence but also on the basis of
demonstrated loyalty to the ruling party or party leader and on the
implicit need to represent the country’s major regions and population
groups (e.g., based on religion, language, caste, and gender). The
prime minister and the Council of Ministers remain in power
throughout the term of the Lok Sabha, unless they lose a vote of
confidence.

Legislative branch
Of the two houses of parliament, the more powerful is the Lok Sabha,
in which the prime minister leads the ruling party or coalition. The
constitution limits the number of elected members of the Lok Sabha
to 530 from the states and 20 from the union territories, allotted
roughly in proportion to their population. The president may also
nominate two members of the Anglo-Indian community if it appears
that this community is not being adequately represented. Members
of the Lok Sabha serve for terms of five years, unless the house is
dissolved before that.
Membership in the Rajya Sabha is not to exceed 250. Of these
members, 12 are nominated by the president to represent literature,
science, art, and social service, and the balance are proportionally
elected by the state legislative assemblies. The Rajya Sabha is not
subject to dissolution, but one-third of its members retire at the end
of every second year. Legislative bills may originate in either house—
except for financial bills, which may originate only in the Lok Sabha—
and require passage by simple majorities in both houses in order to
become law.

Judicial Branch:
The tradition of an independent judiciary has taken strong root in
India. The Supreme Court, whose presidentially appointed judges may
serve until the age of 65, determines the constitutional validity of
union government legislation, adjudicates disputes between the
union and the states (as well as disputes between two or more states),
and handles appeals from lower-level courts. Each state has a high
court and a number of lower courts. The high courts may rule on the
constitutionality of state laws, issue a variety of writs, and serve as
courts of appeal from the lower courts, over which they exercise
general oversight.

State and local governments:

The government structure of the states, defined by the constitution,
closely resembles that of the union. The executive branch is composed
of a governor—like the president, a mostly nominal and ceremonial
post—and a council of ministers, led by the chief minister.
All states have a Vidhan Sabha (Legislative Assembly), popularly
elected for terms of up to five years, while a small (and declining)
number of states also have an upper house, the Vidhan Parishad
(Legislative Council), roughly comparable to the Rajya Sabha, with
memberships that may not be more than one-third the size of the
assemblies. In these councils, one-sixth of the members are
nominated by the governor, and the remainder are elected by various
categories of specially qualified voters. State governors are also
regarded as members of the legislative assemblies, which they may
suspend or dissolve when no party is able to muster a working
majority.
Each Indian state is organized into a number of districts, which are
divided for certain administrative purposes into units variously known
as tahsils, taluqs, or subdivisions. These are further divided into
community development blocks, each typically consisting of about
100 villages. Superimposed on these units is a three-tiered system of
local government. At the lowest level, each village elects its own
governing council (gram pancayat). The chairman of a gram pancayat
is also the village representative on the council of the community
development block (pancayat samiti). Each pancayat samiti, in turn,
selects a representative to the district-level council (zila parishad).
Separate from this system are the municipalities, which generally are
governed by their own elected councils.

From the state down to the village, government appointees

administer the various government departments and agencies.
Financial grants from higher levels, often made on a matching basis,
provide developmental incentives and facilitate the execution of
desired projects. Approving, withholding, or manipulating grants,
however, often serves as a lever for the accumulation of personal
power and as a vehicle of corruption.

Coalition Government:
A coalition government is a form of government in which political
parties cooperate to form a government. The usual reason for such an
arrangement is that no single party has achieved an absolute majority
after an election.
Meaning of Coalition Government
The term ‘coalition’ is derived from the Latin world ‘coalitio’ which
means ‘to grow together’. Thus, technically, coalition means the act of
uniting parts into one body or whole. Politically, coalition means an
alliance of distinct political parties
Coalition usually occurs in modern parliaments when no single
political party can muster a majority of votes. Two or more parties,
who have enough elected members between them to form a majority,
may then be able to agree on a common programme that does not
require too many drastic compromises with their individual policies
and can proceed to form a government.

Features of Coalition Government:

The features of a Coalition Government are highlighted below:

Coalition is formed for the sake of reward, material or psychic

A coalition implies the existence of a least two partners
The underlying principle of a coalition system stands on the simple fact
of temporary conjunction of specific interest.
Coalition politics is not a static but a dynamic affair as coalition players
and groups can dissolve and form new ones
The keynote of coalition politics is compromise and rigid dogma has
no place in it.
A coalition works on the basis of a minimum programme, which may
not be ideal for each partner of the coalition.
Pragmatism and not ideology is the hall-mark of coalition politics. In
making political adjustments, principles may have to be set aside.
The purpose of a coalition adjustment is to seize power.
In India, coalitions have come up before or after elections. The pre-
poll coalition is considered advantageous as it provides a common
platform for all parties to woo the electorate on the basis of a joint
manifesto. A post-election union is intended to enable constituents to
share political power and run the government.

Merits and Demerits of Coalition Government

The merits and demerits of a coalition government is highlighted in
the table below:

Demerits and Merits of Coalition Government:

Merits Demerits
• There is an accommodation of • They are unstable or prone to
diverse interests in the instability. The difference of
functioning of the opinion among coalition
government. members leads to the collapse
• A coalition government acts as of the government
a channel to meet the • Leadership of the Prime
expectations and redress the Minister is a principle of
grievances of different groups parliamentary form of
• India is a highly diversified government. This principle is
country. There are different curtailed in a coalition
cultures, languages, castes, government as the Prime
religions and ethnic groups. Minister is required to consult
This means that the coalition
 government’s more
representative in nature and
reflects the popular opinion of
the electorate
• A coalition government
comprises different political
parties having their own
ideologies or agendas. But the
government policy requires
the concurrence of all the
coalition partners. Therefore,
a coalition government leads
to consensus-based politics
• Coalition politics strengthens
the federal fabric of the Indian
political system. This is
because a coalition
government is more sensitive
and responsive to regional
demands
• A coalition government
reduces the chances of
despotic rule. This is due to
the reduced domination of a
single political party in the
functioning of the
government. All the members
of the coalition participate in
the decision making.
the coalition partners before
taking any major decisions.
• The Steering Committee or
the Coordination Committee
of the coalition partners acts
as the ‘Super-Cabinet’ and
thereby it undermines the role
and position of the cabinet in
the functioning of the
government machinery
• There is a possibility of the
smaller constituents of the
coalition government playing
the role of a ‘king-maker’.
They demand more than
strength in the Parliament
• The leaders of regional parties
bring in the regional facts in
the national decision-making.
They pressurise the central
executive to act on their lines;
otherwise, they would
threaten to withdraw from
the coalition
• The members of the coalition
governments do not assume
responsibility for the
administrative failures and
lapses. They could play blame
games and there by escape
from collective and individual
responsibilities
Unit 3
Facilities - Location
Ideal plant location is a place where unit cost of production and distribution is minimum
and sales volume and prices bring maximum profit
Once such a decision is taken, then the organization has to live for a long time with the
prospects and problems regarding the raw materials, supplies, labour and all other
resources and also markets that location would be present
Once the manufacturing plant has been erected, it is a long term commitment on the
capacity created; capacity not only in terms of the machinery and equipment but also in
terms of arrangement and development of raw materials resources, labour skills, market
and distribution channels and the adjustments with the environment.
The planning for ‘where’ to locate the operations facilities should start from ‘what’ are
organisations objectives, priorities, goals and the strategies required to achieve the same in the
general socio-economic-techno-business-legal environment currently available and expected to be
available in the long term future
Business systems utilize facilities like, plant and machineries, warehouses etc., while
performing the task of producing products/services. A proper planning of these facilities
would definitely reduce their cost of operations and maintenance
Location of facilities for operations is, thus, a long term capacity decision which involves
a long term commitment about the geographically static factors that affect a business
organization.

Factors influencing the location of the facilities – Critical factors & General factors
Critical factors for both products/service can be summarized as follows :
Exposure, Accessibility, Compatibility
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Exposure[E]

It determines reach and frequency of the customers to avail the facilities of the location

E=R*F

Reach [R]

It is the number of customers accessible to the service facility. The number of customers
using/availing the facility at least once during a specified time period.

Reach is more important when launching new services or going after an undefined target market.

Frequency [F] :

Frequency indicates the number of times a customer is accessible to the service facility

The number of times within the specified time period that an average customer is using/availing
the facility of the location.

Frequency is more important where there are strong competitors, a high consumer resistance or a
frequent purchase cycle

Accessibility
It indicates proximity of the customers to the location and the concentration of demand
Health and emergency services are some important facilities which have to be located in
close proximity of customers. In addition, traffic pattern and availability of transport
facilities to suit customers requirement is equally important
The location must be known to customers and they should be able to reach the place easily
Ex: Hospitals, Banks, Shopping malls

Compatibility
It indicates the availability of all the facilities at the service location
Ex: Automobile services, Mobile services, Installation services
supportive industries, suitability of climatic conditions, water supply, seismic zone
considerations, strategic consideration
General factors influencing location

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 Availability of land for present and future needs and cost of land and land development
and building and
Availability of inputs such as labour, raw material, etc., Closeness to the market places
Types of Process
Stability of demand, Availability of communication facilities, necessary modes of
transportation like road, rail, airport and water ways, infrastructure facilities such as power,
water, financial institutions, banks etc
Disposal of waste and effluent and their impact on the environment
Government support, grant, grant, subsidy, tax structure
Availability of housing facilities and recreational facilities
Demographic factors like population, trained man power, academic institutions, standard
of living, income level etc
Security, culture of society
Community attitude – positive or negative
Fuel cost
Plant or facilities location is a product of marketing, technology, personnel and financial
considerations.. Location of facilities is, therefore, an integral part of the operations
strategy of an organization.

⚫ Location Options
There are essentially four options that managers can consider in location planning.
One is to expand an existing facility. This option can be attractive if there is adequate room
for expansion, especially if the location has desirable features that are not readily available
elsewhere.
Another option is to add new locations while retaining existing ones, as is done in many
retail operations.
A third option is to shut down at one location and move to another.
Finally organizations have the option of doing nothing, if a detailed analysis of potential
location fails to uncover benefits that would make one of the previous three alternatives
attractive, a firm may decide to maintain the status quo, at least in the short run.
Location models
Various models are available which help identify a near ideal location. The most popular models
are as follows :

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Factor rating method
Point rating method
Break-even analysis
Qualitative factor analysis
Transportation Models
Ex: Factor rating method
Factor is an underlying dimension that explains the correlation among the variables
The following table gives the various factors considered for location decision and the factor ratings
assigned to each based on its importance for location decision and the locating rating for the
location alternatives based on the merit of each location in each of the factors considered
Evaluate the best location based on the ratings given below:
Table: factor ratings and location ratings for location alternatives
Factor Factor rating Location rating

Location A Location B

Tax advantage 4 8 6

Suitability of labour skill 3 2 3

Proximity to customers 3 6 5

Proximity to suppliers 5 2 4

Adequacy of water 1 3 3

Receptivity of community 5 4 3

Quality of educational system 4 1 2

Access to rail and air transportation 3 10 8

Suitability of climate 2 7 9

Available of power 2 6 4

Solution

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 Factor Factor Location rating Product of rating
rating
Location Location Location Location
A B A B

Tax advantage 4 8 6 32 24

Suitability of labour skill 3 2 3 6 9

Proximity to customers 3 6 5 18 15

Proximity to suppliers 5 2 4 10 20

Adequacy of water 1 3 3 3 3

Receptivity of community 5 4 3 20 15

Quality of educational system 4 1 2 4 8

Access to rail and air 3 10 8 30 24

transportation

Suitability of climate 2 7 9 14 18

Available of power 2 6 4 12 8

Total score 149 144

Conclusion
Since the total score for location A is higher than of location B, location A is the choice

Evaluate the bet location using factor rating method

Table: factor ratings and location ratings for location alternatives
Factor Factor Factor score
weight
Location Location
1 2

Cost of living 10 5 2

Proximity to family 20 4 2

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 Climate 30 2 5

Transportation 10 5 3
system

Quality of life 30 3 3

Problem in factor rating method

Evaluate the best location based on the ratings given below:
Data Ratings for locations Weightag
e
A B C

Land cost 8 7 4 0.9

Market proximity 5 7 8 0.4

Labour 8 5 3 0.6
availability

Labour attitude 4 3 4 0.2

Power cost 7 5 5 0.7

Transport 5 4 8 0.5
facilities

Community 6 5 5 0.5
services

Raw material 7 3 8 0.6

Union attitude 8 3 5 0.4

Political 5 5 5 0.3
Environment

Transportation Models
Transportation problem – deciding the distribution plan of goods/services leading to minimum
transportation cost. It is used to determine the shipping schedule or shortest route for distributing

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the products/services that will minimize the cost of shipping. It is used in the supply chain
management to determine the shipping cost involved in shipping the product from source[factory]
to destination[distribution centre]. The application of the transportation model can be extended
from the area of distribution to the operations including inventory control, manpower scheduling
etc
Methods of Transportation
North West Corner Rule [NWCR]
Least Cost Method [LCM]
Vogel Approximation Method [VAM]
Ex : 1
Find the Initial Basic Feasible Solution (I.B.F.S) using NWCR for the given minimization
problem
Plants Warehouses Suppl
y
W W W W
1 2 3 4

P1 19 30 50 10 7
P2 70 30 40 60 9
P3 40 8 70 20 18
Deman 5 8 7 14
d

Solution
Step 1 : Check whether supply = demand. If supply = demand, then it is balanced transportation
problem
Step 2
Allocate min(supply, demand) to the upper most corner of the cell and cross out corresponding the
row or column. Repeat the same , till the entire supply and demand gets allocated.
Plants Warehouses Supply

W1 W W W
2 3 4

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 P1 195 30 50 10 7-
5=2
P2 70 30 40 60 9
P3 40 8 70 20 18
Deman 5- 8 7 14
d 5=0

Plants Warehouses Suppl

y
W1 W2 W W
3 4

P1 195 302 50 10 2-2=0

P2 70 30 40 60 9
P3 40 8 70 20 18
Deman 5- 8- 7 14
d 5=0 2=6

Repeat the above iterations till the entire supply and demand gets allocated. The final allocation is
as follows :
Plant Warehouses
s
W1 W2 W3 W4

P1 19 30 50 10
5 2

P2 70 30 40 60
6 3

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 P3 40 8 70 201
4 4

The total transportation cost is

Z = ∑∑CijXij
[Z, is the total cost of transportation, Cij is the shipping cost/unit, Xij is the number of units]
Z = 19 x 5 + 30 x 2 + 30 x 6 + 40 x 3 + 70 x 4 + 20 x 14
Z= 95+60+180+120+280+280 = Rs. 1015
P1W2[Chennai to Surat] is the shortest route that minimizes the cost of transportation.
P1W2[Chennai to Surat] is the ideal plant location
Problems in location and distribution
A company has factories A, B and C, which supply warehouses at D,E,F. and G. monthly
factory capacities are 70, 90 and 115, respectively. Monthly warehouse requirements ae 50,
60, 70, and 95, respectively. Unit shipping costs are as follows :
Plant/Origin Destination/Distribution Centers

D E F G Capacity/Suppl
y

A 1 2 1 1 70
7 0 3 2

B 1 2 2 2 90
5 1 6 5

C 1 1 1 1 115
5 4 5 7

Demand/Requiremen 5 6 7 9 275
t 0 0 0 5

Determine the optimum distribution for this company to minimize shipping costs

Problem

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A company has factories A, B and C, which supply warehouses at D,E,F. and G. monthly
factory capacities are 300, 400 and 500, respectively. Monthly warehouse requirements ae
200, 240, 280, and 480, respectively. Unit shipping costs are as follows :
Plant/Origin Destination/Distribution Centers

D E F G Capacity/Suppl
y

A 7 9 9 6 300

B 6 12 12 8 400

C 9 13 10 14 500

Demand/Requiremen 20 24 28 48 1200
t 0 0 0 0

Determine the optimum distribution for this company to minimize shipping costs

Problem
Find the Initial Basic Feasible solution by using NWCR
Factory Distribution Centers Supply

D1 D2 D3 D4

P 5 2 4 3 30

Q 6 4 9 5 45

R 2 3 8 1 55

Deman 15 20 45 50
d

Problem

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Find the Initial Basic Feasible solution by using NWCR
Factory Distribution Centers Supply

D1 D2 D3 D4

P 6 2 6 12 120

Q 4 4 2 4 200

R 13 8 7 2 80

Deman 50 80 90 180
d

Problem
Find the Initial Basic Feasible solution by using NWCR
Factory Distribution Centers Supply

D1 D2 D3 D4

P 21 32 52 12 7

Q 72 32 42 62 9

R 42 10 72 22 18

Deman 5 8 7 14
d

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Unit 4: Facilities Layout
For any business activity, each activity would need a layout for facilitating operations. The
facility should gain maximum advantage out of physical movements of various materials
needed for any activity or operation. The handling cost minimization would be possible, if
there is a smooth operation across all the activities. This should also enhance the worker
productivity. The optimum use of the space available dictates, how well the layout should
be planned to facilitate safe working and smooth flow
Layout concerns the configuration of departments, work centers, and equipment, with
particular emphasis on movement of work (customers or materials) through the system
Thus, both layout and location decisions affect capacity. Conversely, efforts to increase
capacity may involve modifications in layout and changes in location. Moreover, any time
a new location is established, or products or services are introduced or changed, layout is
affected.

⚫ Characteristics for a good layout

Increased customer satisfaction
Easy flow of materials and information
Efficient utilization of space
Increased productivity of labour and equipment
Enhanced safety and improved morale of the workers
Minimum handling between operations
Planned material handling methods
Adequate storage space and density
Receiving and shipping in logical locations

⚫ Types of layout
Product layouts
Process Layouts
Fixed Position Layouts
Combination or Hybrid Layouts

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⚫ Product Layouts
Product layouts are used to achieve a smooth and rapid flow of large volumes of products
or customers through a system. This is made possible by highly standardized products or
services which require highly standardized (repetitive) processing operations. They are
more conducive to continuous processing. A job is divided into a series of standardized
tasks, permitting specialisation of both labour and equipment. The large volumes handled
by these systems usually make it economical to invest substantial sums of money in
equipment and in job design
Product layouts are highly vulnerable to breakdowns, and preventive maintenance is often
used to reduce the occurrence of breakdowns. Product layouts are geared to high volume
output of standardized items. Men and equipment are arranged according to the
technological sequence required by the product or service involved.

⚫ Ex:
Raw material or customers – station 1 –----- 2 –----- 3 –--------- 4 – finished item
(materials and labour)

⚫ Process layouts
Process layouts are used for intermittent processing,. It can handle a wide range of
processing requirements and are less susceptible to breakdowns, however, the variety of
processing requirements necessitates continual routing and scheduling and the use of
variable path material handling equipment. The output of such systems is generally much
lower than that of product layouts
Process layouts are also include hospitals, colleges and universities, banks, auto repair
shops, airlines and public libraries. For instance hospitals have departments or other units
which specifically handle surgery, maternity, pediatrics, emergency etc.

⚫ Fixed position layouts

In fixed position layouts the product or other item being worked on remains stationary and
workers, materials, and equipment are moved about as needed. This is in marked contrast
to both product and process layouts.
They are used in large construction projects (buildings, power plants, dams) shipbuilding
and production of large aircraft and the rockets used to launch space missions.
Fixed position layouts are widely used for farming, firelighting road building, home
building, remodeling and repair, and drilling for oil.

⚫ Combination layouts or hybrid layouts

The three basic layout types are ideal models which may be altered to satisfy the needs of
a particular situation. For situation, supermarket layouts are essentially of a process nature

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 Hospitals use the basic process arrangement although frequently patient care involves more
of a fixed position approach which has nurses, doctors, medicines and special equipment
brought to the patient. Conveyors used in both farming and construction activities

Unit 5 - Capacity Planning – Models of Capacity Planning

Capacity Planning – Capacity Decisions

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Capacity decisions create limits on the ability of the system to provide goods and services.
Capacity and location decisions also have an effect on transportation costs, labour supply and cost,
material cost and access to market
Importance of capacity decisions
It relates to their potential impact on the ability of the organization to meet future demands for
products or services; capacity essentially limits the rate of output possible
It stems from the relationship between capacity and operation costs. Ideally capacity and demand
requirements will be matched, which will tend to minimize operation costs
It involves the initial cost. Capacity is usually a major determinant of that cost. Typically the
greater the capacity of a productive unit, the greater its cost
The fourth reason for the importance of decision stems form the long term commitment of
resources that is often required, and the fact that once implemented , it may be difficult or
impossible to modify those decisions without incurring major costs
Concept
The capacity of a production unit represents a ceiling on the maximum load the unit can handle
The term capacity generally refers to an upper limit on the rate of output
A measure of capacity that refers to the availability of resources. Thus, a hospital has a certain
number of beds, a factory has a certain number of machine hours available, and a bus has a certain
number of seats and certain amount of standing room. Rather, the measure of capacity must be
somewhat tailored for the situation in hand
Capacity = work + waste

Examples of commonly used measures of capacity

Measures of capacity

Types of business Resources available Output

Automobile Manhours, machine hours Number of cars or trucks per shift

manufacturing

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 Steel mill Size of furnace Tons of steel per week

Oil refinery Size of refinery Gallons of fuel oil per day

Farm Number of acres Tons of grain per year, gallons of

milk per week

Restaurant Number of tables Number of meals served per day

Theatre Number of seats Number of performances per week

Retail sales Size of display area, number Units sold per day
of cashiers

Factors which determine the effective capacity

Process design – Continuous Process, Semi Continuous Process, Intermittent Process – Batch
process & Job Process, Project Process
Elements of New Product/Service Design & Development – Research and Development(R&D),
Reverse Engineering(RE), Standardisation, Robust Design(RD), Concurrent Engineering (CE),
Computer aided Design (CAD), Quality Function Deployment (QFD), Value Analysis (VA),
Value Engineering (VE)
Location factors - Critical factors - Exposure, Accessibility, Compatibility, General factors –
Land, Capital, Licensing, Infrastructure, labour, Raw materials, Inventory management, Supply
Chain Management, Logistics Management etc
Types of Layout – Product layout, Process layout, Fixed layout, Combination or Hybrid layout
Other factors
Human considerations – job content, job design, training and development, motivation,
compensation, learning rates, absenteeism and labour turnover.
Operation factors – scheduling, materials management, quality assurance, maintenance policies,
equipment breakdown.
External forces – product standards, safety regulations, unions, pollution control standards
Determining capacity requirements
Capacity planning decisions involve both long terns and short term considerations
Long terms considerations – determined by forecasting demand over a time horizon and then
converting those forecasts into capacity requirements

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Short terms considerations – they are less concerned with cycles or trends than with seasonal
variations and other variations from average. These deviations are particularly important because
they can place a severe strain on a system’s ability to satisfy demand at some times and yet result
in idle capacity at other times.
Evaluating capacity alternatives contains both qualitative and quantitative aspects.
Quantitative analysis usually reflects economic factors like cost and profit, while qualitative
considerations include such intangibles as public opinion and personal preferences of managers.
Quantitative Techniques for evaluating Capacity Decisions
Decision Tree
Break Even Analysis
Transportation Models

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Eight Ingredients of a Good System of Regulation:
Good Regulation has 8 major characteristics. It is participatory, consensus oriented,
accountable, transparent, responsive, effective and efficient, equitable and inclusive, and
follows the rule of law. Good regulation is responsive to the present and future needs of the
organization, exercises prudence in policy-setting and decision-making, and that the best
interests of all stakeholders are taken into account.

1. Rule of Law
Good regulation requires fair legal frameworks that are enforced by an impartial regulatory
body, for the full protection of stakeholders.

2. Transparency
Transparency means that information should be provided in easily understandable forms
and media; that it should be freely available and directly accessible to those who will be
affected by regulatory policies and practices, as well as the outcomes resulting therefrom;
and that any decisions taken and their enforcement are in compliance with established rules
and regulations.

3. Responsiveness
Good regulation requires that organizations and their processes are designed to serve the
best interests of stakeholders within a reasonable timeframe.

4. Consensus Oriented
Good regulation requires consultation to understand the different interests of stakeholders
in order to reach a broad consensus of what is in the best interest of the entire stakeholder
group and how this can be achieved in a sustainable and prudent manner.

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5. Equity and Inclusiveness
The organization that provides the opportunity for its stakeholders to maintain, enhance, or
generally improve their well-being provides the most compelling message regarding its
reason for existence and value to society.

6. Effectiveness and Efficiency

Good regulation means that the processes implemented by the organization to produce
favourable results meet the needs of its stakeholders, while making the best use of
resources – human, technological, financial, natural and environmental – at its disposal.

7. Accountability
Accountability is a key tenet of good regulation. Who is accountable for what should be
documented in policy statements. In general, an organization is accountable to those who
will be affected by its decisions or actions as well as the applicable rules of law.

8. Participation
Participation by both men and women, either directly or through legitimate representatives,
is a key cornerstone of good regulation. Participation needs to be informed and organized,
including freedom of expression and assiduous concern for the best interests of the
organization and society in general.

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 6. ECOLOGICAL ISSUES AND SUSTAINABLE DEVELOPMENT:
SPECIAL REFERENCE TO INDIA
Economic development is a process whereby an economy’s real national income increases
over a long period of time. There is direct relationship between environment and economy.
Economic development without environmental considerations can cause serious environmental
damage in turn impairing the quality of life of present and future generations. In the process of
economic development, the environmental problems have been ignored or less concentrated. Now,
the need of the hour is to concentrate on sustainable development. Sustainable development means,
“Meeting the needs of present generation without compromising with the needs of future
generations.”

In 1983, the United Nations set up the World Commission on Environment and
Development called 'the Brundtland Commission' to examine the problems related to this area.
The Commission in its report entitled "Our Common Future" submitted in 1987, used and defined
this concept of sustainable development for the first time.
OBJECTIVES OF SUSTAINABLE DEVELOPMENT
Sustainable development aims at the creation of the sustainable improvements in the
quality of life for all people and this should be the principal goal of development policy.
Accordingly, the main objectives of sustainable development are stated as under:
(1) Accelerating economic growth (2) Meeting basic needs (3) Raising living standards (4) Helping
in ensuring clean environment free from all types of pollution (5) Maximizing the net effects of
economic development (6) Preservation and enhancement of the stock of the environmental,
human and physical capital (7) Inter generational equity and (8) Overall strict control on gross
exploitation of the natural resources of each country.
The purpose of this unit is to review the current state of the environment and identifying
the policy issues for promoting sustainable development. It is broadly divided into six sections
they are i) Environment-economy linkages, ii) Review of major environmental concerns, iii)
Impact of environmental degradation on society, (iv) the policies of sustainable development, v)
Global Environmental Issues, and vi) Link between bio-diversity and climate change.

SECTION - I
ENVIRONMENT-ECONOMY LINKAGES:

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 All economic activities either affect or are affected by natural and environmental resources.
Activities such as extraction, processing, manufacture, transport, consumption and disposal change
the stock of natural resources add stress to the environmental systems and introduce Wastes to
environmental media. Moreover, economic activities today affect the stock of natural resources
available for the welfare of the future and have inter-temporal welfare effects. From this
perspective, the productivity of an economic system depends in part on the supply and quality of
natural and environmental resources.
Natural and environmental resources have three economic roles: (1) Waste disposal services,
(2) Natural resources inputs into production and (3) Directly consumed life support services and
authentic amenities. The natural and environmental resource input function is central to
understanding the relationship between economic growth and environment. Water, soil, air,
biological, forest and fisheries resources are productive assets, whose quality helps to determine
the productivity of the economy. Focusing on this role of environment as producer good highlight
the direct effect the environmental problems have on economic growth. Thus economic
management lays emphasis on the environment and the environmental quality in turn on the
efficient working of the economy. Environmental degradation imposes costs on the economy that
results in output and human capital losses.
Loss of labor productivity resulting from ill health, foregone crop output due to soil
degradation and erosion, lost fisheries output and tourism receipts from coastal erosion or lost soil
productivity from deforestation can be some of the manifestations of such reduced output.
Moreover growing bodies of epidemiological studies suggest that air and water population are
taking a heavy toll, particularly of people in the developing world, through ill health and premature
mortality. The impact of water and air pollution is particularly adverse on the younger, the very
aged and the poor. Pollution control is thus linked to sustainable development and not a luxury
good to be afforded after the development process has taken off.
SECTION-II
MAJOR ENVIRONMENTAL CONCERNS:
A country's environmental problems vary with its stage of development; structure of its economy,
production technologies in use and its environmental policies. While some problems may be
associated with the lack of economic development, others are exacerbated by the growth of
economic activity; Poverty presents special problems for a densely populated country with limited
resources.

Soil Degradation:
In India out of the total geographical areas of 329 million hectares, 175 million hectares are
considered degraded. Erosion by water and wind is the most important factor to soil erosion with
other factors like water logging, salivation etc., adding to the degradation. While soil erosion by
rain and river in hill areas causes landslides and floods, deforestation, overgrazing, traditional
agricultural practices, mining and incorrect setting of development projects in forest areas have

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resulted in opening up of these areas to heavy soil erosion. In the arid west, wind erosion causes
expansion of desert, dust storms, whirlwinds and destruction of crops, while moving sand covers
the land and makes it sterile. In the plains, riverine erosion due to floods and eutrophication due to
agricultural runoff are noticed. Increased dependence on intensive agriculture and irrigation also
results in salination, alkalization and water logging in irrigated areas of the country.
Deforestation:
Forest is renewable resource and contributes substantially to the economic development by
providing goods and services to forest dwellers, people at large and forest based industries, besides
generating substantial volume of employment. Forests are playing main role in enhancing the
quality of environment by influencing the ecological balance and life support system.
Biodiversity:
Biodiversity is one of the major environmental concerns in India, now India is in the tenth position
in the world and fourth in Asia in plant diversity. The biodiversity in forests, non-irrigated lands,
irrigated lands and hill areas deserts and marines ecosystems is subject to many pressures. One of
the major causes of the loss of biological diversity has been the depletion of vegetative cover in
order to expand agriculture. Since most of the biodiversity rich forests also contain the maximum
mineral wealth and also the best sites for water impoundment, mining and development projects
in such areas have led to destruction of habitats. Poaching and illegal trade of wildlife products
too, have adversely affected biodiversity.
Pollution:
The main factors contributing to urban air quality deterioration are growing industrialization and
increasing vehicular pollution. It has been aggravated by developments that typically occur as
countries industrialize, growing cities, increasing traffic, rapid economic development and
industrial growth, all of which are closely associated with higher energy consumption. Industrial
pollution is concentrated in industries like petroleum refineries, textiles, pulp and paper, industrial
chemicals, iron and steel and nonmetallic mineral products. Small scale industries especially
foundries, chemical manufacturing and brick making are also significant polluters. In the power
sector, thermal power, which constitutes bulk of the installed capacity for electricity generation, is
an important source of air pollution.
Vehicle traffic is the most important source of pollution in all the mega cities. The number of
vehicles in these cities has increased manifold. This increase has been characterized by a boom in
private transport. Other reasons for high vehicular pollution are two stroke engines, aged vehicles,
congested traffic, poor roads and outdated automotive technologies and traffic management
system.
Coastal and marine pollutions are most contributing factors to environment. The coastal areas
of India, with a coast line of over 7500 km harbor a variety of specialized marine ecosystems like
mangroves, coral reefs, salt lakes and mudflats which mainly form the habitat for endangered
marine species and commercially important marine flora and fauna.

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 An important impact of climate change and global warming may be the rise in sea level.
The primary effect of sea level rise will be increased coastal flooding, erosion, storm surges and
wave activity. Primary studies on the impact of one-meter sea level rise on the Indian coastline
indicate that 0.41 % of India's coastal area will be inducted.
Poverty is also one of the reasons for environmental degradation in India. The circular link
between poverty and environment is an extremely complex phenomenon. Inequality may foster
unsustainability because the poor, who rely on natural resources more than the rich, deplete natural
resources faster as they have no real prospects of gaining access to other type of resources.
Acceleration in poverty alleviation is imperative to break this link between poverty and
environment.
SECTION - III
IMPACT OF ENVIRONMENTAL DEGRADATION ON SOCIETY:
Environmental degradation is the result of the dynamic interplay of socioeconomic, institutional
and technological activities. Environmental changes may be driven by many factors including
economic growth, population growth, urbanization, intensification of agriculture, rising energy use
and transportation. Poverty still remains a problem at the root of several environmental problems.
The impact of environmental degradation on society has been discussed in the following:
It has been estimated that the process of deforestation, bad soil and water management,
submergence of and in dam reservoirs, industrial and urban expansion, overgrazing, wind and
water erosion, salination, flooding, water logging and so on, contribute to a loss of productivity in
roughly one million hectare of land annually. The above process results in desertification and
creation of drought prone conditions, leading to the immersion of those dependent on land for their
daily subsistence.
Given these processes and the resultant, decline in livelihood for the millions critically dependent
on these resources, there are few options but to cultivate increasingly marginal lands, thereby
compounding the sustainability crisis. The impact on women is even more severe, as the loss
access to fuel, fodder and water forces them to walk miles to collect the essential necessities for
their subsistence.
The consequent escalation in the pressure on available arable land is so enormous that it has
contributed to the growth of criminalization in the country side with illegal occupation of
community lands, the formation of land armies by land lords to oppose any demands by marginal
farmers for land, as well as increasingly militant movements to assert local control over productive
resources like land and forests. The latter process most often results in state repression,
compounding the climate of social unrest.
Much of these have severally strained social relations within communities and between
communities and the state. For instance, every year, over five lakh people are forcibly displaced
by development projects alone. Most of them are not rehabilitated, and alternatives are rarely
provided. In the process, communities and families are broken up, destroying structure of social
and economic support.

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Loss of cultural diversity is an inevitable consequence. For instance, a report based on a
comprehensive survey of people displaced by the Rihan Dam stated that, "Many of the oustees,
particularly the tribals, have fallen into the typical cycle of debt bondage, coupled with increasing
destitution and intermittent employment as contract labourers in coal mines and elsewhere ... most
were simply kicked out with nothing left to fend for themselves."
DIMENSIONS OF THE ENVIRONEMENTAL CRISIS IN INDIA:
Of the 266 million hectares considered productive, about 175 million hectares are degraded in
varying degrees (arid, alkaline, saline, waterlogged, ravine and the like). About 90 million hectare
are acutely degraded, chiefly on account of loss of tree cover and top soil, leading to floods and
drought.
Depletion of forest covers to about 19% of the total geographical area, instead of the desired
33%. India has only 2% of the forestland of the world but supports 16% of the world population.
Shortage of fuel wood and fodder for rural needs, leading to more pressure on the forests.
Threats to faunal and floral species and biological diversity, because of disturbance of their habitat.
Adverse impact of development activities such as mining, power generation, irrigation and
industrialization.
Degradation of fragile ecosystems such as mangroves, irrigation lands, beaches and hill areas due
to over exploitation, use of commercial agricultural practices, tourism and indiscriminate building
activities.
Pollution of water from domestic and industrial waste.
Pollution of coastal areas and seas.
Air pollution due to emission from industries.
Increased production, transportation and use of hazardous chemicals.
Degradation of the urban environment because of rapid expansion and inadequate basic services.
SECTION - IV
POLICIES FOR SUSTAINABLE DEVELOPMENT:
Environmental problems like air pollution, water pollution, soil degradation, deforestation, loss of
bio-diversity, etc are caused by such diverse factors population growth, poverty, industrialization,
agricultural development, transport development, urbanization, market failure etc. Such
environmental degradation harms human health, reduces economic productivity and leads to the
loss of amenities. Therefore, the damaging effects of environmental degradation can be reduced
by a judicious choice of economic and environmental policies and environmental investments. The
important policy measures for sustainable development are as follows:
1. Reducing Poverty:

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Reduction of poverty should be the foremost priority of the Government. It should select those
projects which provide greater employment opportunities to the poor. It should expand health,
family planning and education that will help reduce population growth. Supply of drinking water,
sanitation facilities, and slum clearance should be given top priority.
2. Removing Subsidies:
To reduce environmental degradation at no net financial cost to the Government, subsidies for
resource use by the private and public sectors should be removed. Because, subsidies on the use
of electricity, fertilizers, pesticides, diesel, petrol, gas, irrigation, water etc lead to their wasteful
use and environmental problems.
3. Clarifying and Extending Property Rights:
Lack of property rights over excessive use of resources leads to degradation of environment. This
leads to overgrazing, deforestation and over exploitation of minerals. Therefore, clarifying and
assigning ownership titles to private owners will solve environmental problems.
4. Market based Approaches:
Various market based approaches should be adopted to protect environment. Market based
instruments in the form of emission tax, pollution taxes, marketable permits, depositor fund
system, input taxes, differential tax rates, user administrative charges, subsidies for pollution
abatement equipment etc should be extensively used to protect environment.

5. Regulatory Policies:
Regulatory policies are the other weapons for reducing environmental degradation. Regulators
have to make decisions regarding price, quantity and technology. They decide the technical
standards, regulations and charges on air, water and land pollutants.
6. Public Participation:
Public awareness and participation are highly effective to improve environmental conditions. For
this purpose various formal & informal education programme, environmental awareness
programmes, advertisement, public movements, aforestation, conservation of wild life etc are to
be organized on a large scale.
7. Trade and Environment:
The Government should formulate an environment friendly trade policy covering both domestic
and international trade. It should encourage the establishment of less polluting industries, adoption
of cleaner technologies, adoption of environment friendly processes etc to control environmental
degradation.
8. Participation in Global Environmental Efforts:

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Participation in various international conventions and agreements on environmental protection and
conservation can also help to minimize damages of environmental degradation. They include
the Montreal protocol, the Basel convention, the Rio Declaration, the Agenda 21, the Earth
summits, etc.
9. Renewable energy:
Policies should be framed for the use of renewable energy like solar and wind in place of coal and
petrol. Atomic Energy Agency predicted that renewable energy would overtake natural gas to
become the second largest source of power generation worldwide within two years, and that global
wind and solar generating capacity would increase by more than 30 per cent.
SECTION- V
GLOBAL ENVIRONMENTAL ISSUES:
As early as 1896, the Swedish scientist Svante Arrhenius had predicted that human activities would
interfere with the way, the sun interacts with the earth, resulting in global warming and climate
change. His prediction has become true and climate change is now disrupting global environmental
stability. The last few decades have seen many treaties, conventions, and protocols for the cause
of global environmental protection.
Few examples of environmental issues of global significance are:
· Ozone layer depletion
· Global warming
· Loss of biodiversity
Ozone Layer Depletion:
Earth’s atmosphere is divided into three regions, namely troposphere, stratosphere and
mesosphere. The stratosphere extends from 10 to 50 kms from the Earth’s surface. This region is
concentrated with slightly pungent smelling, light bluish ozone gas. The ozone gas is made up of
molecules each containing three atoms of oxygen; its chemical formula is O3. The ozone layer, in
the stratosphere acts as an efficient filter for harmful solar Ultraviolet B (UV-B) rays. Ozone is
produced and destroyed naturally in the atmosphere and until recently, this resulted in a well-
balanced equilibrium. Ozone is formed when oxygen molecules absorb ultraviolet radiation with
wavelengths less than 240 nanometers and is destroyed when it absorbs ultraviolet radiation with
wavelengths greater than 290 nanometers. In recent years, scientists have measured a seasonal
thinning of the ozone layer primarily at the South Pole. This phenomenon is being called the ozone
hole.
Effects of Ozone Layer Depletion:
Effects on Human and Animal Health:
Increased penetration of solar UV-B radiation is likely to have high impact on human health with
potential risks of eye diseases, skin cancer and infectious diseases.
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Effects on Terrestrial Plants:
In forests and grasslands, increased radiation is likely to change species composition thus altering
the bio-diversity in different ecosystems. It could also affect the plant community indirectly
resulting in changes in plant form, secondary metabolism, etc.
Effects on Aquatic Ecosystems:
High levels of radiation exposure in tropics and subtropics may affect the distribution of
phytoplanktons, which form the foundation of aquatic food webs. It can also cause damage to early
development stages of fish, shrimp, crab, amphibians and other animals, the most severe effects
being decreased reproductive capacity and impaired larval development.
Effects on Bio-geo-chemical Cycles:
Increased solar UV radiation could affect terrestrial and aquatic bio-geo-chemical cycles thus
altering both sources and sinks of greenhouse and important trace gases, e.g. carbon dioxide
(CO2), carbon monoxide (CO), carbonyl sulfide (COS), etc. These changes would contribute to
biosphere-atmosphere feedbacks responsible for the atmosphere build-up of these greenhouse
gases.
Effects on Air Quality:
Reduction of stratospheric ozone and increased penetration of UV-B radiation result in higher
photo dissociation rates of key trace gases that control the chemical reactivity of the troposphere.
This can increase both production and destruction of ozone and related oxidants such as hydrogen
peroxide, which are known to have adverse effects on human health, terrestrial plants and outdoor
materials.
The ozone layer, therefore, is highly beneficial to plant and animal life on earth filtering out the
dangerous part of sun’s radiation and allowing only the beneficial part to reach earth. Any
disturbance or depletion of this layer would result in an increase of harmful radiation reaching the
earth’s surface leading to dangerous consequences.
Ozone Depletion Counter Measures:
International cooperation, agreement (Montreal Protocol) to phase out ozone depleting chemicals
since 1974
Tax imposed for ozone depleting substances
Ozone friendly substitutes- HCFC (less ozone depleting potential and shorter life)
Recycle of CFCs and Halons.
Global Warming:
Before the Industrial Revolution, human activities released very few gases into the atmosphere
and all climate changes happened naturally. After the Industrial Revolution, through fossil fuel
combustion, changing agricultural practices and deforestation, the natural composition of gases in

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the atmosphere is getting affected and climate and environment began to alter significantly. Over
the last 100 years, it was found out that the earth is getting warmer and warmer, unlike previous
8000 years when temperatures have been relatively constant. The present temperature is 0.3 -
0.6oC warmer than it was 100 years ago.
The key greenhouse gases (GHG) causing global warming is carbon dioxide. CFC's, even
though they exist in very small quantities, are significant contributors to global warming. Carbon
dioxide, one of the most prevalent greenhouse gases in the atmosphere, has two major
anthropogenic (human-caused) sources: the combustion of fossil fuels and changes in land use.
Net releases of carbon dioxide from these two sources are believed to be contributing to the rapid
rise in atmospheric concentrations since Industrial Revolution. Because estimates indicate that
approximately 80 percent of all anthropogenic carbon dioxide emissions currently come from
fossil fuel combustion, world energy use has emerged at the center of the climate change debate.

Global Warming (Climate Change) Implications:

Rise in global temperature:
Observations show that global temperatures have risen by about 0.6 °C over the 20th century.
There is strong evidence now that most of the observed warming over the last 50 years is caused
by human activities. Climate models predict that the global temperature will rise by about 6 °C by
the year 2100.
Rise in sea level:
In general, the faster the climate change, the greater will be the risk of damage. The mean sea level
is expected to rise 9 - 88 cm by the year 2100, causing flooding of low lying areas and other
damages.
Food shortages and hunger:
Water resources will be affected as precipitation and evaporation patterns change around the
world. This will affect agricultural output. Food security is likely to be threatened and some regions
are likely to experience food shortages and hunger.
India could be more at risks than many other countries
Models predict an average increase in temperature in India of 2.3 to 4.8oC for the benchmark
doubling of Carbon-dioxide scenario. Temperature would rise more in Northern India than in
Southern India. It is estimated that 7 million people would be displaced, 5700 km of land and 4200
km of road would be lost, and wheat yields could decrease significantly.
Loss of Biodiversity
Biodiversity refers to the variety of life on earth, and its biological diversity. The number of
species of plants, animals, micro organisms, the enormous diversity of genes in these species, the
different ecosystems on the planet, such as deserts, rainforests and coral reefs are all a part of a

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biologically diverse earth. Biodiversity actually boosts ecosystem productivity where each species,
no matter how small, all have an important role to play and that it is in this combination that enables
the ecosystem to possess the ability to prevent and recover from a variety of disasters.
It is now believed that human activity is changing biodiversity and causing massive
extinctions. The World Resource Institute reports that there is a link between biodiversity and
climate change. Rapid global warming can affect ecosystems chances to adapt naturally. Over the
past 150 years, deforestation has contributed an estimated 30 percent of the atmospheric build-up
of CO2. It is also a significant driving force behind the loss of genes, species, and critical
ecosystem services.
SECTION - VI
Link between Biodiversity and Climate change:
Climate change is affecting species already threatened by multiple threats across the globe. Habitat
fragmentation due to colonization, logging, agriculture and mining etc. are all contributing to
further destruction of terrestrial habitats.
Individual species may not be able to adapt. Species most threatened by climate change have small
ranges, low population densities, restricted habitat requirements and patchy distribution.
Ecosystems will generally shift northward or upward in altitude, but in some cases they will run
out of space – as 10C change in temperature correspond to a 100 Km change in latitude, hence,
average shift in habitat conditions by the year 2100 will be on the order of 140 to 580 Km.
Coral reef mortality may increase and erosion may be accelerated. Increase levels of carbon
dioxide adversely impact the coral building process (calcification).
Sea level may rise, engulfing low-lying areas causing disappearance of many islands, and
extinctions of endemic island species.
Invasive species may be aided by climate change. Exotic species can out-compete native wildlife
for space, food, water and other resources, and may also prey on native wildlife.
Droughts and wildfires may increase. An increased risk of wildfires due to warming and drying
out of vegetation is likely. Sustained climate change may change the competitive balance among
species and might lead to forests destruction.
The Kyoto Protocol:
There is a scientific consensus that human activities are causing global warming that could result
in significant impacts such as sea level rise, changes in weather patterns and adverse health effects.
As it became apparent that major nations such as the United States and Japan would not meet the
voluntary stabilization target by 2000, Parties to the Convention decided in 1995 to enter into
negotiations on a protocol to establish legally binding limitations or reductions in greenhouse gas
emissions. It was decided by the Parties that this round of negotiations would establish limitations
only for the developed countries, including the former Communist countries (called annex A
countries).

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 Negotiations on the Kyoto Protocol to the United Nations Framework Convention on
Climate Change (UNFCCC) were completed December 11, 1997, committing the industrialized
nations to specify, legally binding reductions in emissions of six greenhouse gases. The 6 major
greenhouse gases covered by the protocol are carbon dioxide (CO2), methane (CH4), nitrous oxide
(N2O), hydro fluorocarbons (HFCs), per fluorocarbons (PFCs), and sulfur xafluoride (SF6).
Mr. Ban Ki-moon, UN Secretary General, who received the Sustainable Development
Leadership Award 2009 at the Delhi Sustainable Summit said “a balanced, comprehensive and
effective” international agreement will take place by the end of Dec.2009 at Copenhagen. As a
regime, it must also be “rectifiable” as a successor to the Kyoto Protocol.
Mr. Ban said eradication poverty is not possible if we neglect or depleted our natural capital.
He said science had shown that we were depleting the planet’s natural assets at an unsustainable
rate. “Failure to combat climate change would increase poverty and hardships, destabilize
economies, and breed insecurity in many countries.
CONCLUSION:
Rapid environmental degradation that has been taking place all over the world in recent decades
has alarmed economists and environmentalists alike. Fostering sustainable development requires
the effective management of naturally human and physical capital. Improved coordination across
the countries to share the global resources, technology and also scarce resources has become the
need of the hour. Global level generosity in promoting and protecting democracy, exchange of
technology, maintaining stability of prices in the various economies, judicious use of all
environmental material throughout to enhance human development and sustainable development.
Sustainable development can be achieved only if the environment is conserved and improved.

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 Unit 7: National Income and the concept of
Inclusive Growth

Concept of National Income:

National income means the value of goods and services produced by a country
during a financial year. Thus, it is the net result of all economic activities of any
country during a period of one year and is valued in terms of money. National
income is an uncertain term and is often used interchangeably with the
national dividend, national output, and national expenditure. National Income
is the total amount of income accruing to a country from economic activities
in a fixed period of time (i.e., One Year). It includes payments made to all
resources either in the form of wages, interest, rent, and profits. The progress
of a country can be determined by the growth of the national income of the
country.
There are mainly two types of view to define national income.

(i) Traditional Definition,

(ii) Modern definition

Traditional Definition
According to Marshall: “The labour and capital of a country acting on its
natural resources produce annually a certain net aggregate of commodities,
material and immaterial including services of all kinds. This is the true net
annual income or revenue of the country or national dividend.”
The definition as laid down by Marshall is being criticized on the following
grounds. Due to the varied category of goods and services, a correct estimation
is very difficult. Because, there is a chance of double counting, hence National
Income cannot be estimated correctly.
For example, a product runs in the supply from the producer to distributor to
wholesaler to retailer and then to the ultimate consumer. If on every

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movement commodity is taken into consideration then the value of National
Income increases.
A.C. Pigou defined national income as “that part of objective income of the
community, including of course income derived from abroad which can be
measured in money”.
Though Pigou’s definition avoided the fallacy of double counting and included
income from abroad it suffers from the defect that only goods and services
that can be measured in terms of money are included in national income.
According to Pigou, a woman’s services as nurse would be included in the
national income but excluded when she worked in the home to look after the
children because she did not receive any salary for it.
Modern Definition
Simon Kuznets defines national income as “the net output of commodities and
services flowing during the year from the country’s productive system in the
hands of the ultimate consumers.”
Whereas, in one of the reports of United Nations, national income has been
defined on the basis of the systems of estimating national income as net
national product (NNP). There are various concepts pertaining to national
income are as follows:
Gross Domestic Product (GDP)
Gross domestic product relates to the product of the factors of production
employed within the political boundaries i.e., within domestic territory. It is
defined as a measure of the total flow of goods and services produced by an
economy over a specified time period, usually a year. All value of intermediate
products is excluded. So only the market value of final products is included to
define GDP.
Gross National Product (GNP)
Gross national product is the total measure of the flow of goods and services at
market value resulting from current production during a year in a country,
including net income from abroad.
GNP= GDP + Net income from abroad(X-M), where X= Export, M= Import
If the value of (X-M) is negative then, GDP > GNP

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Net National Product (NNP)
Net national product is considered a true measure of national product or
income. It is defined as GNP minus depreciation or capital consumption
allowance or wear and tear.
NNP = GNP – Depreciation
Unlike GDP, GNP, net national product (NNP) may also be categorized as:
NNPmp (Net national product at market price) : Net national product at market
prices is net
value of final goods and services evaluated at market prices in the course of
one year in a country

NNPfc (Net national product at factor cost): Net national product at factor cost
is the net output evaluated at factor prices. It includes income earn by factors
of production through participation in the production process such as wages
and salaries, rents profits etc. NNP at factor cost is also called National Income.
NNPmp = NNPfc – S + (IT+ GS) or,
NNPmp = NNPfc – subsidies + (indirect tax+ surpluses from government
enterprises)
NNPfc = NNPmp + S - (IT+ GS) or,
NNPfc = NNPmp + subsidies - (indirect tax+ surpluses from government
enterprises)
Normally, NNP at market prices is higher than NNP at factor cost because
indirect taxes exceed government subsidies. However, NNP at market prices
can be less than NNP at factor cost when government subsidies exceed indirect
taxes.
Some other concepts of national income
Private income: Private income is income obtained by private individuals from
any source, produce or otherwise and retained income of corporations. It can
be obtained from NNP at factor cost by making certain additions and
deductions.

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Private Income = National income (NNP at factor cost) +Transfer Payments +
Interest on Public Debt – Social Security – Profits and Surpluses of Public
Undertakings.
Personal Income: Personal income is the total income received by the
individuals of a country from all sources before direct taxes in one year.
Personal income is never equal to the national income because the former
includes the transfer payments whereas they are not included in national
income. Personal income is derived from national income by deducting
undistributed corporate profits, profit taxes, and employee’s contributions to
social security schemes. Personal income is differs than private income actually
it is less than private income because it excludes undistributed corporate
profits.
Personal Income = National Income – Undistributed Corporate Profits – Profit
Taxes – Social Security Contributions + Transfer Payments + Interest on Public
Debt.
Disposable Income: Disposable income or personal disposable income means
the actual income which can be spent on consumption by individuals and
families.

Disposable Income = National Income – Business Savings – Indirect taxes plus

Subsidies – Direct Taxes on persons – Direct Taxes on Business – Social Security
Payments + Transfer Payments + Net Income from Abroad (X-M).
Real Income: Real Income is the income expressed in terms of a general level
of prices of a particular year taken as base year. National income in terms of
money at current prices does not indicate the real state of the economy. So
the concept of real income has been propounded to rectify such illusions. This
is also known as National Income at constant prices.
Real NNP = NNP for the Current Year Multiply with Base Year Index (100)
Divided by Current Year Index.
Per Capita Income: The average income of the people of a country in a
particular year is called Per Capita Income for that year.
Per Capita Income for 2021 = National Income for 2021 divided by Population
in 2021

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This concept enables us to know the average income and the standard of living
of the people. But it is not very reliable due to unequal distribution of national
income exist in every country.

Concept of Inclusive growth:

Introduction
• Inclusive growth means economic growth that creates employment
opportunities and helps in reducing poverty.
• It means having access to essential services in health and education by the
poor. It includes providing equality of opportunity, empowering people
through education and skill development.
• It also encompasses a growth process that is environment friendly growth,
aims for good governance and helps in creation of a gender sensitive
society.
• As per OECD (Organisation for Economic Co-operation and Development),
inclusive growth is economic growth that is distributed fairly across society
and creates opportunities for all.
Elements of Inclusive Growth
1. Skill Development
• Harnessing the demographic dividend will depend upon the employability
of the working age population, their health, education, vocational training
and skills. Skill development plays a key role here.
• India is facing a dual challenge in skill development:
o First, there is a paucity of highly trained workforce
o Second, there is non-employment of conventionally trained youths
• According to the Economic Survey 2017, over 30% of youth in India are
NEET (Not in education, employment or training).
• Similarly, UNICEF 2019 reports stats that at least 47% of Indian youth are
not on track to have the education and skills necessary for employment in
2030.

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2. Financial Inclusion:
• Financial Inclusion is the process of ensuring access to financial services to
vulnerable groups at affordable costs.
• Financial inclusion is necessary for inclusive growth as it leads to the culture
of saving, which initiates a virtuous cycle of economic development.
3. Technological Advancement
• The world is moving towards an era of Industrial Revolution 4.0. These
technological advancements have capabilities to both decrease or increase
the inequality depending on the way these are being used.
• Several initiatives have been taken by the government, eg. Digital India
Mission, so that a digitally literate population can leverage technology for
endless possibilities.
• Technology can help to combat other challenges too, eg: Agriculture-
Modern technology can help in making an agro-value chain from farmer to
consumer more efficient and competitive.
• Manufacturing- Technology can resolve the problems of finance, procuring
raw materials, land, and linkages with the user market. GST was made
possible only with the help of sound technology.
• Education- Innovative digital technologies can create new forms of adaptive
and peer learning, increasing access to trainers and mentors, providing
useful data in real-time.
• Health- Technologies could transform the delivery of public health services -
extend care through remote health services
• Governance- Technology can cut down delays, corruption, and inefficiency
in the delivery of a public service
3. Economic Growth
• India is among the fastest-growing major economies in the world. However,
currently Indian economy is facing slowdown due to both cyclic and
structural challenges.
• However, the target of becoming a $ 5 trillion economy by 2024-25 can
allow India to reduce inequality, increase social expenditure and provide
employment to all.

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4. Social Development:
• It means the empowerment of all marginalized sections of the population
like SC/ST/OBC/Minorities, women and transgender.
• Empowerment can be done by improving institutions of the social structure
i.e. hospitals especially primary care in the rural areas, schools, universities,
etc.
• Investment in social structures will not only boost growth (by fiscal
stimulus) but will also create a healthy and capable generation to handle
future work.
Challenges in Achieving Inclusive Growth:
1. Poverty
• As per the Multidimensional Poverty Index (MPI) 2018, India lifted 271
million people between 2005-06 and 2015-16, with the poorest regions,
groups, and children, reducing poverty fastest. India demonstrates the
clearest pro-poor pattern at the sub-national level.
• Still, despite the massive gains, 373 million Indians continue to experience
acute deprivations. Additionally, 8.8% of the population lives in severe
multidimensional poverty and 19.3% of the population are vulnerable to
multidimensional poverty.
2. Unemployment
• As per the Periodic Labour Force Survey (PLFS) of NSSO, the unemployment
rate among the urban workforce was 7.8%, while the unemployment rate
for the rural workforce was 5.3% totaling the total unemployment rate at
6.1%.
• The quality and quantity of employment in India are low due to illiteracy
and due to over-dependence on agriculture.
• The quality of employment is a problem as more than 80% of people work
in the informal sector without any social security.
o Low job growth is due to the following factors:
o Low investment
o Low capital utilization in industry
o Low agriculture growth
o Agriculture Backwardness

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• Around 44% of people in India have agriculture-related employment but its
contribution to the Indian GDP is only 16.5% which lead to widespread
poverty
• Issues in agriculture are as follows:
o Declining per capita land availability
o A slow reduction in the share of employment
o Low labour productivity
o Decline in agriculture yield due to climate change, land
degradation and unavailability of water
o Disparities in growth across regions and crops
3. Issues with Social Development
• Social development is one of the key concerns for inclusive growth. But it is
facing some problems such as:
• Significant regional, social and gender disparities
• Low level and slow growth in public expenditure particularly in health and
education
• The poor quality delivery system
• Social indicators are much lower for OBC, SC, ST, and Muslims
• Malnutrition among the children - India ranks 102nd in Global Hunger Index

4. Regional Disparities
• Regional disparities are a major concern for India. Factors like the caste
system, gap between rich and poor etc. contribute to the regional
disparities which create a system where some specific groups hold more
privileges over others.
• Some of the regional disparities problems are as follow:
o In terms of literacy rate, Kerala is the most literate state with 93.1%
literacy, on the other hand, literacy rate of Bihar is only 63.82%
o In terms of per capita income, Goa's per capita income is Rs 4,67,998
in 2018 while per capita income of Bihar is just one-tenth of that ie Rs
43,822
Measuring Inclusive Growth:

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1. Inclusive Development Index (IDI)
In the Inclusive Development Index (IDI) compiled by the World Economic
Forum (WEF), India ranked 62nd out of 74 emerging countries and was among
the least inclusive countries in Group of 20 (G-20) countries.
The IDI is based on the idea that most people base their country’s growth not
on GDP but by their own standard of living.
It gives a measure of inequality based on three parameters:
o Growth and development
o Inclusion
o Inter-generational equity and sustainability.
India also did not make it to the top 10 most inclusive emerging and
developing economies, where its neighbours Nepal, China and Sri Lanka made
a mark.
India performed its best in terms of “intergenerational equity and
sustainability”, ranking 44th, for which credit can be attributed to its
demographic dividend.

2. Social Progress Index (SPI)

It is an aggregate index of social and environmental indicators which includes
the following:
• Basic human need
• Foundation of well being
• Opportunity
Limitation of other indices:
GDP: It does not include non-market activities.
Excludes factors like environment, equality, etc
Gini Coefficient:
Only income inequalities are included and other inequalities like social
inequality, equality of opportunities, etc are ignored.
Gross Happiness Index:

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Ignores gender neutrality, education, etc
HDI:
The unequal distribution of wealth is ignored.
Benefits of SPI:
SPI measures the outcomes of the government measures rather than money
spent. It also takes account of efficiency by which money spent by the
government has been used.
It is more comprehensive.
3. Global Slavery Index
It is released by the Walk Free Foundation of Australia.
Modern Slavery means a situation where one person has taken away another
person's freedom, to control their body so that they can be exploited.
Factors responsible for modern slavery:
• Absence of rights
• Lack of physical safety
• Access to necessities such as health care, education, food, etc
• Pattern of migration
Government actions to reduce modern slavery:
India has worked in the right direction by criminalizing trafficking, slavery,
forced labor, child prostitution, and child marriage.

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Unit 10 - Budget, budgetary deficit, fiscal deficit and fiscal policy: aims,
objectives and efficacy

According to Article 112 of the Indian Constitution, the Union Budget of a year
is referred to as the Annual Financial Statement (AFS).
It is a statement of the estimated receipts and expenditure of the Government
in a financial year (which begins on 01 April of the current year and ends on 31
March of the following year). In addition to it, the Budget contains:
• Estimates of revenue and capital receipts,
• Ways and means to raise the revenue,
• Estimates of expenditure,
• Details of the actual receipts and expenditure of the closing financial year
and the reasons for any deficit or surplus in that year, and
• The economic and financial policy of the coming year, i.e., taxation
proposals, prospects of revenue, spending programme and introduction of
new schemes/projects.
Objectives of Government Budget
• Reallocation of Resources – It helps to distribute resources keeping in view
the social and economic conditions of the country.
• Reducing Inequalities in Income and Wealth – Government aims to bring
economic equality by imposing taxes on the elite class and spending the
collected money on the welfare of the poor.
• Contributing to Economic Growth – A country’s economic growth is based
on the rate of investment and savings. Therefore, the budgetary plan
focuses on preparing adequate resources for investing in the public sector
and raise the overall rate of investments and savings.
• Bringing Economic Stability – The Budget focuses on avoiding business
fluctuations so as to accomplish the aim of financial stability. Policies such
as Deficit Budget (during deflation) and Surplus Budget (during inflation)
assist in balancing the prices in the economy.
• Managing Public Enterprises – Many public sector industries are built for
the social welfare of the people. The Budget is planned to deliver different
provisions for operating such business and imparting financial help.

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• Reducing Regional Differences – It aims to reduce regional inequalities by
promoting the installation of production units in the underdeveloped
regions.

Types of Budget:
1. Revenue Budget– It consists of the Revenue Expenditure and Revenue
Receipts.
• Revenue Receipts are receipts which do not have a direct impact on the
assets and liabilities of the government. It consists of the money earned by
the government through tax (such as excise duty, income tax) and non-tax
sources (such as dividend income, profits, and interest receipts).
• Revenue Expenditure is the expenditure by the government which does not
impact its assets or liabilities. For example, this includes salaries, interest
payments, pension, and administrative expenses.
2. Capital Budget– It includes the Capital Receipts and Capital Expenditure.
• Capital Receipts indicate the receipts which lead to a decrease in assets or
an increase in liabilities of the government. It consists of: (i) the money
earned by selling assets (or disinvestment) such as shares of public
enterprises, and (ii) the money received in the form of borrowings or
repayment of loans by states.
• Capital expenditure is used to create assets or to reduce liabilities. It
consists of: (i) the long-term investments by the government on creating
assets such as roads and hospitals, and (ii) the money given by the
government in the form of loans to states or repayment of its borrowings.

Balanced, Surplus and Deficit Budget

Balanced Budget – A government Budget is assumed to be balanced if the
expected expenditure is equal to the anticipated receipts for a fiscal year.
Surplus Budget – A Budget is said to be surplus when the expected revenues
surpass the estimated expenditure for a particular business year. Here, the
Budget becomes surplus, when taxes imposed, are higher than the expenses.

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Deficit Budget- A Budget is in deficit if the expenditure surpasses the revenue
for a designated year.
Measures of Government Deficit
There are various measures that capture government Deficit:
• Revenue Deficit: It refers to the excess of government’s revenue
expenditure over revenue receipts.
Revenue Deficit = Revenue expenditure – Revenue receipts
The revenue Deficit includes only such transactions that affect the current
income and expenditure of the government.
When the government incurs a revenue deficit, it implies that the
government is dissaving and is using up the savings of the other sectors of
the economy to finance a part of its consumption expenditure.
• Fiscal Deficit: It is the gap between the government’s expenditure
requirements and its receipts. This equals the money the government
needs to borrow during the year. A surplus arises if receipts are more than
expenditure.
Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt creating
capital receipts).
It indicates the total borrowing requirements of the government from all
sources.
From the financing side: Gross fiscal deficit = Net borrowing at home +
Borrowing from RBI + Borrowing from abroad
The gross fiscal deficit is a key variable in judging the financial health of the
public sector and the stability of the economy.
Fiscal Policy
Fiscal policy is the use of government revenue collection (mainly taxes but also
non-tax revenues such as divestment, loans) and expenditure (spending) to
influence the economy.
Through the fiscal policy, the government of a country controls the flow of tax
revenues and public expenditure to navigate the economy. If the government
receives more revenue than it spends, it runs a surplus, while if it spends more

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than the tax and non-tax receipts, it runs a deficit. To meet additional
expenditures, the government needs to borrow domestically or from overseas.
Alternatively, the government may also choose to draw upon its foreign
exchange reserves or print additional money.
Fiscal policy in India is the guiding force that helps the government decide how
much money it should spend to support the economic activity, and how much
revenue it must earn from the system, to keep the wheels of the economy
running smoothly.
Attaining rapid economic growth is one of the key goals of fiscal policy
formulated by the Government of India. Fiscal policy, along with monetary
policy, plays a crucial role in managing a country’s economy.
Main objectives of Fiscal Policy in India
• Economic growth: It helps to maintain the economy’s growth rate so that
certain economic goals can be achieved.
• Price stability: It controls the price level in the country so that when the
inflation is too high, prices can be regulated.
• Full employment: It aims to achieve full employment, or near full
employment, as a tool to recover from low economic activity.

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Unit 11 - The LPG model (Liberalization, Privatization and Globalization):
genesis, features, problems and prospects
Introduction to LPG:
LPG stands for Liberalization, Privatization, and Globalization. India under its New Economic
Policy approached International Banks for development of the country. These agencies
asked Indian Government to open its restrictions on trade done by the private sector and
between India and other countries.
Indian Government agreed to the conditions of lending agencies and announced New
Economic Policy (NEP) which consisted wide range of reforms. Broadly we can classify the
measures in two groups:

1. Structural Reforms
With long-term perspective and eyeing for improvement of the economy and enhancing the
international competitiveness, reforms were made to remove rigidity in various segments of
Indian economy.
2. Stabilization Measures (LPG)
These measures were undertaken to correct the inherent weakness that has developed in
Balance of Payments and control the inflation. These measures were short-term in nature.
Various Long-Term Structural Reforms were categorized as:

Collectively they are known by their acronym LPG. The balance of Payment is the system of
recording the economic transactions of a country with the rest of the world over a period of
one year. When the general prices of goods and services are increasing in an economy over
a period of time, the same situation is called Inflation. Let’s understand each terminology in
detail.

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Liberalization
The basic aim of liberalization was to put an end to those restrictions which became
hindrances in the development and growth of the nation. The loosening of government
control in a country and when private sector companies’ start working without or with
fewer restrictions and government allow private players to expand for the growth of the
country depicts liberalization in a country.

Objectives of Liberalization Policy

• To increase competition amongst domestic industries.

• To encourage foreign trade with other countries with regulated imports and exports.
• Enhancement of foreign capital and technology.
• To expand global market frontiers of the country.
• To diminish the debt burden of the country.

Privatization
This is the second of the three policies of LPG. It is the increment of the dominating role of
private sector companies and the reduced role of public sector companies. In other words, it
is the reduction of ownership of the management of a government-owned enterprise.
Government companies can be converted into private companies in two ways:

• By disinvestment
• By withdrawal of governmental ownership and management of public sector companies.
Forms of Privatization
Denationalization or Strategic Sale: When 100% government ownership of productive assets
is transferred to the private sector players, the act is called denationalization.
Partial Privatization or Partial Sale: When private sector owns more than 50% but less than
100% ownership in a previously construed public sector company by transfer of shares, it is
called partial privatization. Here the private sector owns the majority of shares.
Consequently, the private sector possesses substantial control in the functioning and
autonomy of the company.
Deficit Privatization or Token Privatization: When the government disinvests its share capital
to an extent of 5-10% to meet the deficit in the budget is termed as deficit privatization.

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Objectives of Privatization
Improve the financial situation of the government.
Reduce the workload of public sector companies.
Raise funds from disinvestment.
Increase the efficiency of government organizations.
Provide better and improved goods and services to the consumer.
Create healthy competition in the society.
Encouraging foreign direct investments (FDI) in India.
Globalization
It means to integrate the economy of one country with the global economy. During
Globalization the main focus is on foreign trade & private and institutional foreign
investment. It is the last policy of LPG to be implemented.

Globalization as a term has a very complex phenomenon. The main aim is to transform the
world towards independence and integration of the world as a whole by setting various
strategic policies. Globalization is attempting to create a borderless world, wherein the need
of one country can be driven from across the globe and turning into one large economy.

Outsourcing as an Outcome of Globalization

The most important outcome of the globalization process is Outsourcing. During the
outsourcing model, a company of a country hires a professional from some other country to
get their work done, which was earlier conducted by their internal resource of their own
country.

The best part of outsourcing is that the work can be done at a lower rate and from the
superior source available anywhere in the world. Services like legal advice, marketing,
technical support, etc. As Information Technology has grown in the past few years, the
outsourcing of contractual work from one country to another has grown tremendously. As a
mode of communication has widened their reach, all economic activities have expanded
globally.

Various Business Process Outsourcing companies or call centres, which have their model of
a voice-based business process have developed in India. Activities like accounting and book-
keeping services, clinical advice, banking services or even education are been outsourced
from developed countries to India.

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Economic Reforms in India
It was during Dr. P.V. Narasimha Rao’s government in 1991, that India met with the
economic crisis which occurred due to its external debt. Due to debt, the government was
not able to make the payments for the borrowings it had made from the foreign countries.

As a result, the government had to adopt new measures to reform the conditions of the
Indian economy suggested by Narasimhan Committee Report. There were many programs
and initiatives introduced primarily consisted of liberalization, privatization, and
globalization.

The Crisis of 1991 and the Reforms

The crisis of 1991 happened largely due to inefficient management of the economy of India
in the 1980s. The revenues that government was generating were not enough to meet the
ever increasing expenses. Thus, the government had to borrow to pay for the debts and
thus was caught in a term called debt-trap. Debt-trap is the deficit that occurs due to an
increase in government expenses in comparison to the government’s revenue.

Due to the failure of earlier economic policies till 1990 there was a need for need for new
economic policies. The situation was worsening as India had foreign reserves which could
last only for the next two weeks. There was a shortage of new loans and Indian people living
abroad (NRIs) were withdrawing money in large amounts.

There was a little confidence for international investors towards the Indian economy. These
points will highlight the need for a new economic policy in India. Crisis in Gulf countries,
increase in fiscal deficit, prices rising, the worse balance of payments, public sector units
(PSUs) performing badly, and many more.

The Emergence of New Reforms

India approached the world and international monetary fund for loan and received $7
million to manage their crisis. As a result to this, international firms and agencies expected
that India will open up the door in the country by removing various restrictions majorly on
private sector and thereby removing the trade restrictions between India and the other
foreign countries.

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India agreed to the terms and conditions and as a result, new reforms were introduced.
These economic reforms in India are structurally classified as liberalization, globalization,
and privatization.

Liberalization
Liberalization was brought up with the fact that any restrictions which became a hindrance
to development and growth will be put to an end. Largely, this reforms made government
regulations and policies lose. It allowed for opening up of economic borders for foreign
investment as well as multinationals.

There were many economic reforms introduced under liberalization. These included
expansion of production capacity, abolishing industrial licensing by the government, de-
reserving producing areas, and freedom to import goods.

Privatization
Privatization largely refers to giving more opportunities to the private sector, such that the
role of the public sector is reduced. The main objectives of privatization are reducing the
workload of the public sector, providing better goods and services to the end users,
improving the government’s financial condition, and many more. Privatization is a way to
allow the entry of foreign direct investments and bringing healthy competition into the
economy.

Globalization
Globalization in simpler terms is to connect with the world. In this context, globalization
means the integration of the economy of India with that of the world. Thus, it encourages
private and foreign investment and also foreign trade. Globalization attempts to establish
the links in such a way that the Indian happenings can be met by the world or vice versa.
Major Highlights on the Economic Reforms in India

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

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Failures of the Economic Reforms in India

• The agriculture sector was neglected and the public investment in this sector was
reduced and hence the infrastructure areas were affected.
• The subsidies on the fertilizers were removed and hence it led to an increase in the cost
of production which affected many marginal and small farmers.
• Further, many policies were introduced which reduce the import duties on agriculture
products, reduce the minimum support price increased the threat of international
organizations competing with th3 the local farmers.
• The industrial sector saw uneven growth.
• The imports were made cheaper as a result of which the demand for the industrial
goods reduced.
• The globalization which allowed for free trade between the countries affected adversely
on the local industries and thus affected employment opportunities.
• The reforms led to an increase in economic colonialism.
• It also led to the erosion of culture.
• The investments in many infrastructural facilities like power supply were inadequate.

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