DRIVE-WINTER 2013

PROGRAM-BBA

SEMESTER-I

SUBJECT CODE & NAME-BBA 103-BUSINESS ENVIRONMENT

BK ID-B1499

CREDIT-4

MARKS-60

Note: Answer all questions. Kindly note that answers for 10 marks questions should be
approximately of 400 words. Each question is followed by evaluation scheme.

Q1. Monetary policy regulates the money supply in an economy. Analyse how monetary policy play
an important role in the credit availability of an economy.

(Explain monetary policy, Quantitative control, Qualitative control) 2, 4, 4

Answer.

Monetary policy
Monetary Policy is a tool that incorporates the actions that the Reserve Bank takes to influence the level
of GDP. The Reserve Bank can influence the level of output in the short run, through open market
operations, changes in reserve requirements or changes in the discount rate. These tools can be used to
form a suitable monetary policy during the times of both recession and inflation. The aggregate demand
can be raised during recession time by adopting an expansionary or easy monetary policy while it can be
used to control inflation through a contractionary or tight monetary policy.

Monetary policy regulates the money supply in an economy. It is concerned with the cost and availability
of credit. The broad objectives of monetary policy are:
 To establish equilibrium at full employment level of output
 Ensure price stability by controlling inflation and deflation
 Promote economic growth of an economy
 Control Credit Availability
 Stability of Exchange Rate
  Control of Money Supply

Quantitative control

These are the controls that relate to the volume and cost of bank credit in general without regard to the
particular economic activity for which the credit is used. There are three instruments in this method:
(i) Bank rate or discount rate: This is the rate which the Reserve Bank charges for giving loans to the
commercial banks. When a commercial bank has low or no cash reserves above the legal requirements, it
may obtain cash reserves from the Reserve Bank at an interest rate which is the bank rate.
If there is more inflation in the economy, the bank rate is raised. This causes the commercial banks also to
increase their interest rate. This is the interest rate of loans which increases causing less of business
activity. This causes contraction of income and expenditure, causing reduction in the demand for goods
resulting in a fall in prices.
(ii) Open market operations: The direct buying and selling of government securities and Bills in the
money market by the Reserve Bank with the objective of expansion or contraction of credit and economic
activity is known as open market operations. If the securities are purchased then there will be an outflow
of money. This will have an expansionary effect on income, employment, output and prices.
(iii) Reserve requirement: Commercialized banks are legally required to keep a part of their total deposits
with the Reserve Bank of India. This is known as Statutory Liquidity Ratio (SLR).Changes in reserve
requirements affect the amount of reserves that commercial banks must keep as deposits with the Reserve
Bank and consequently the amount available for lending or investing.

Qualitative control

There are several methods by which selective controls can be imposed:

(i) Margin requirements: The Reserve Bank can order the commercial banks to lend an amount lower
than the volume of security. If margin requirement is 40%, then commercial banks can lend only up to
60% of the value of a security.
(ii) Control through Directives: The Reserve Bank may give directions to commercial banks in respect of
their lending policies about the purpose for which advances may be made and the margin to be
maintained in respect of secured loans.
(iii) Moral suasion: It implies request and persuasion made by the Reserve bank to commercial banks to
follow the general policy of the Reserve Bank.
(iv) Regulation of consumer credit: The Reserve Bank can regulate the terms and conditions under which
consumer credit is to be given by the banks.
(v) Rationing of credit: Credit rationing is a method of controlling and regulating the purpose for which
credit is granted by the banks. The Reserve Bank may fix maximum amount of loans for every
commercial bank. This is known as variable portfolio ceiling.
(vi) Direct Action: It refers to all the controls and directions which the Reserve Bank may enforce on all
banks or any bank in particular concerning the lending and investment.

Thus monetary policy can be used to cure recession by making the Reserve Bank undertake open market
operations and buy securities in the open market from banks and the general public. This would increase
the availability of credit with the banks and currency with the public.

Q2. Discuss the merits and demerits of Indian economy.

(Merits, demerits) 5, 5

Answer.

Merits and demerits of Indian economy

Any economy is the sum total of all economic units. As individuals, we need to earn a living, and use the
income earned, to buy goods that will help us lead a comfortable life and also plan for the future. The
Indian economy is a complex mixed economic system. Some industries may be completely State-owned,
some may be privately owned and some may be jointly owned. Economic factors like prices, inflation,
interest rate, etc., are influenced and controlled by both central planning as well as market forces. In
India, there is a complex system of liberal rules, strict regulations, control mechanism, planning, and a
host of price regulation.

Merits of a mixed economy

a) Economic and political freedom
It provides enough scope for private enterprise. Freedom of choice of occupation exists. People are free to
save and invest. Consumers are free to choose the goods and services they want to consume. A mixed
economy provides adequate civil, political, and economic freedom to the people, subject to certain
restrictions imposed by the government in the interest of the society.
b) Check on concentration of economic power
The government controls the monopolistic control of industries, consumer‟ exploitation, and protects the
interests of the labourers through labour laws. At the same time, inequality of income is kept under check
by the government through the use of progressive taxation. The government also provides equal economic
opportunities to the people.
c) Proper allocation of resources
Resources are appropriately divided among the public and the private sectors for social interests.
Economic planning ensures that the economic resources are utilized in the best possible way. Thus the
combined use of resources and energies of both the public and the private sectors promote economic
development.
d) Economic stability
A mixed economy eliminates overproduction and underproduction. It ensures economic stability.
Through proper planning and State regulation it tries to avoid inflation and deflation.

Demerits of mixed economy

a) Inefficient operation
Sometimes due to excessive regulation and control of government, the private sector may not be
operating efficiently. The public sector may not be very efficient due to lack of initiative and
responsibility on the part of bureaucrats. The experience of the Indian economy shows that the public
sector has a record of poor performance.
b) Conflict between the two sectors
If by any chance, non-cooperation arises between the public and private sectors, the mixed economy may
not function properly.
c) Short-lived
In course of time, each of the two sectors may try to dominate the other. If the public sector is given more
importance and it is able to take over the private sector, a mixed economy may become a socialist
economy. On the other hand, if the private sector proves dominant, the mixed economy may be converted
into a capitalist economy. To sum up, it may be noted that if the government is efficient in a mixed
economy, these shortcomings can be rectified. In modern days, almost all countries adopt mixed
economy. Capitalism or socialism in its extreme form is being avoided because of its demerits.

Q3. Elucidate the key regulations applicable to business in India.

(Explanation of regulations applicable to business in India) 10

Answer.

Key regulations applicable to business in India

Apart from the laws applicable to industry, the Government of India has also laid down legislations that
cover various areas and aspects of economic set up such as business, market, labour, competition and
industry etc. These legislations and policies are regulatory in nature and are aimed at providing an
equitable and fair business environment to all the people concerned, be it the entrepreneur, investor,
consumer or labourer and so on. Following are the key regulations which are in force in India:

Labour specific regulations/ Manpower legislations:

The government, especially a democratic government, has the responsibility to protect the interests of its
manpower. The Constitution of India has made Labour a subject in the Concurrent List where both the
Central and the State Governments are competent to enact legislations. However, a few areas like
regulation of labour and safety in mines and oil fields and industrial disputes concerning Union
employees etc., are the concern of the centre only. The concurrent List includes the following:
i) Trade Unions; industrial and labour disputes.
ii) Social security and social insurance; employment and unemployment.
iii) Welfare of labour including conditions of work, provident funds, employers' liability, workmen's
compensation, invalidity and old age pensions and maternity benefit.

The environmental regulations:

Over the years, there has been an increasing consciousness and realization that environmental quality and
economic development are complementary and not mutually exclusive. With tremendous technological
advancements, environmental challenges are also on the rise. Therefore, the Government has framed
many laws to protect every aspect of environment. Broadly, the environmental concerns include the
emission standards for gasses into the air, noise, water, etc. Separate set of laws for emission of hazardous
wastes have also been enacted. Every industry has to abide by these guidelines and parameters for
environmental protection. The Ministry of Environment and Forests (MoEF) and the Pollution Control
Boards at the centre and the state levels perform the duty of ensuring that the environment is not
adversely affected because of industrial activity. The Environment (Protection) Act, 1986, is the umbrella
legislation which authorizes the Central Government to protect and improve environmental quality,
control and reduce pollution from all sources, and prohibit or restrict the setting up and /or operation of
any industrial facility on environmental grounds. The main priority of these regulations is controlling
water and air pollution, forest conservation, wildlife protection and safeguarding biological diversity.

Occupational health and safety regulations:

An organization must ensure the health and safety of its employees. To this end, India has enacted major
legislations such as the Factories Act, 1948; the Mines Act, 1952 and the Dock Workers (Safety, Health
& Welfare) Act, 1986 to ensure the well being of the workers. The regulations are implemented through
the Directorate General of Mines Safety (DGMS), the Directorate General of Factory Advice Service and
Labour Institutes (DGFASLI).

Competition Act, 2002:

The Competition Act, 2002 provides for a modern framework of competition protection. The Act
replaced the Monopolies and Restrictive Trade Practices (MRTP) Act of 1969. The main objectives of the
Act are:
i) Establishment of a Commission to prevent practices having adverse effect on competition.
ii) Promotion and sustenance of healthy competition in Indian markets.
iii) Protection of the interests of consumers.
iv) Ensuring freedom of trade to the participants in Indian markets.

The Consumer Protection Act, 1986:

It is the most important and comprehensive act for the protection of consumer rights. It was amended in
1989, and since then has been amended five times to keep pace with the changing times and increased
awareness about consumer rights. The Act identifies the following six rights of the consumers which are
protected by legislation and enforced through consumer courts:
i) The right to be protected against goods and services that are hazardous to life and property.
ii) The right to be informed about the quality, quantity, potency, purity, standard and price of goods or
services.

The Foreign Trade (Development and Regulation) Act, 1992 and the
EXIM Policy:
Foreign trade is the exchange of goods and services between two countries, across their international
borders. Imports and exports are the two important components of a foreign trade. 'Imports' imply the
physical legal movement of goods into one country from another while 'exports' imply the physical
movement of goods out of a country in a legal manner. Thus, imports and exports have made the world a
global market.

Q4. Analyse two examples or cases of privatization in India.

(Each example)5*2

Answer.

Cases of privatization in India

Privatization refers to transfer of ownership of public sector enterprises from the government to the
private sector. In a broader sense, it is the induction of private control and management in the public
sector units. The policy of the government on disinvestment has evolved over a period. A brief account is
given below. The disinvestment carried out in India can be divided into two phases as per the mode of
investment and the methodologies adopted.

The Initial Phase (1991-92 to 1998-99)

In India, the disinvestment programme started by the Chandrashekhar Government in the interim Budget
1991-92. Afterwards the government announced its new economic policy on 24th July 1991 and stressed
the importance of privatization which is an ongoing process even today. The Finance Minister, while
presenting the interim budget for the year 1991-92 mentioned, ”It has been decided that Government
would disinvest up to 20% of its equity in selected public sector undertakings, in favour of mutual funds
and financial or investment institutions in the public sector”.

The second Phase (1999-00 to 2003-04) The government policy in India on privatization hase volved
from selling minority shares in 1991-92 to an emphasis on strategic sales during the late
1990s.The department of Disinvestment was set up in 1999 under the Ministry of Disinvestment. Main
features of the current Disinvestment policy were laid out in the 2000-01 budget speech. The main
features of the policy were as follows:
 To restructure and revive potentially viable PSEs.
 To close down PSEs that cannot be revived.
 To bring down Government equity in all non-strategic PSEs to 26 % or lower, if necessary.
 To fully protect the interests of workers.
 To use the entire receipt from disinvestment for meeting expenditure in social sectors,
restructuring of PSEs and retiring public debt.

Some of the cases of privatization in India in the recent years are given in the following table below:
Table: Some examples of Privatisation in India
Q5. Differentiate GATT and WTO.

(Explain GATT, Explain WTO) 5, 5

Answer.

GATT

GATT was a multinational treaty that was signed in 1948 by 102 countries with the objective of bringing
down tariff and non-tariff barriers of international trade. Until 1994, the main concerns of GATT were to
check „dumping‟ and unethical business practices. The Uruguay Round Agreements of GATT (held
from1986 to 1994) envisaged an increase in the coverage of the legal provisions and establishment of an
institution called the World Trade Organization.

WTO (World Trade Organisation)

Members of all the trading blocs and agreements are also part of the World Trade Organization, more
popularly known as WTO. WTO is now the only globally recognized trade organization that deals with
the rules of trade between nations. It administers the rule of law in international trade. It came into
existence on January1, 1995, which took the place of GATT (General Agreement on Tariffs and Trade) as
an effective formal organization.
Functions of WTO
 It settles the trade related disputes.
  It co-operates with other international institutions like IMF, IBRD, WB, and associates to
establish coherence in trade policy making.
 It oversees the national trade policies of member governments with the help of its Trade Policy
Review Body.
 It acts as a management consultant for world trade.
 It oversees the implementation of the significant tariff cut. (Averaging 40%).
 It implements WTO agreements and administers international trade.

GATT and WTO

The following table shows the basic differences between the GATT and WTO.

Q6. Compare and contrast the different forms of Public sector Enterprises.

(Explain Public sector Enterprises, Explain different forms)1, 3*3

Answer.

Public sector Enterprises

Public sector plays an important role in the industrial development of a nation. The growth of public
sector led to the growth of (SOEs), State owned enterprises in India. Industrial Policy Regulations 1956
&1991, gave the public sector a strategic role in the Indian economy. It was the conscious decision of the
government to speed up the industrialization of the country so as to boost economic growth and to
achieve certain socio- economic goals. Basic and heavy industries like coal, steel, petroleum, heavy
engineering, chemicals, fertilizers etc., became the monopoly of the public sector. Consumer goods,
financial services, trading and marketing activities, development of small industries etc., are also a part of
public sector enterprises.
Public sector enterprises help the government and the country in thefollowing ways:
a. To promote economic growth and industrialization of the country by creating necessary infrastructure.
b. To promote redistribution of income and wealth.
c. To create more employment opportunities.
d. To help the small scale industries.
e. To promote import substitution, thereby, save and earn foreign exchange.

Different forms of Public sector Enterprises

Suitable Form of Organization

The Study Team on Public Sector Undertakings recommended the following facts for a suitable form of
organization.
a. Industrial and Manufacturing Undertakings: All public undertakings in the industrial and
manufacturing field should be given to Public Corporations. The company form of units will be retained,
if there is private participation in it. But the company’s State owned shares should
come under the name of public corporations and should not be owned by the Government.
b. Public Utilities and Services: The Public Corporation is more suitable for public utilities and services.
They require greater statutory authority for their operations. The statutes of the present corporations
should be revised. It will lead to autonomy and flexibility which will benefit the community in general.
c. Promotional and Developmental Undertakings: The objectives of Promotional and Developmental
Undertakings are non-commercial, although the operations are to be carried, on commercial lines and not
on departmental lines.
d. Commercial and Trading Concerns: These act as instruments for the social regulation of trade and
business in their respective fields. These undertakings compete with private sectors and so retaining the
company form of organization can be justified.