(P1)-2.8.
Business Environment and Ethics (P-1 middle)- The state of competition in an
Q1. Business Environment
The environment of any organization is the
aggregate of all conditions, events and influences
that surround and affect it.
Types of Environment
Environment can be divided into the following three
broad categories:
a. Internal Environment: Internal environment
is internal to the organization and it is controllable.
Important internal factors are:
1. Culture and Value System: Organizational culture
and values system not only influences the operations
and behaviour, it also influences the choice of
business.
2. Mission and Objectives: The mission and
objectives of the company guide priorities,
direction, of development, business philosophy and
business policy.
3. Management Structure and Nature: Structure is
about the hierarchical relationship, span of
management relationship between different
functional areas.
4. Human Resource: It deals with factors like
manpower planning, recruitment and selection
and development, compensation, communication
and appraisal.
Besides this, internal environment also includes:
Corporate resources
Production/ operation of goods and services
Finance and accounting system and methods
Marketing and distribution.
b. Macro Environment: Macro Environment consist of
factors external to the industry that may have
significant impact on the firm’s strategies. The broad
dimensions are:
1. Political Environment: It is the political
environment of the country which decides the fortune
of the business in a country.
2. Regulatory and Legal Environment:
Regulatory and legal environments play vital role
by telling dos and don’ts to business.
3. Demographic: It is Demographic environment
which decides the
marketing mix for the organization.
4. Socio Culture: Socio culture variable like the
beliefs, value system, attitudes of people, their
demographic composition have a major impact on
their personality and behaviour style.
5. Technological: Technological forces present
wide range of opportunities and threats which have
to be accounted for.
6. Global Environment: It consists of all those factors
that operates at the transnational, cross cultural and
across the border level which have an impact on the
business of an organization.
7. Economic Environment: It consists of macro level
factors related to the means of production and
distribution of wealth, which have an impact on the
business of an organization
8. National Competitive Advantage: Despite
globalization number of industries is clustered in
specific and small number of countries.
c. Micro Environment: Microenvironment refers
to the environment which an organization faces in its
specific arena. All the business decision like new
business, pricing, distribution channel, promotion
strategy, product portfolio, etc., depends upon the
competitive position of the firm.
(P-1-LAST )-The obligation can be divided into
industry is a composite of 5 competitive forces.
1. Threat of New Entrant: A new entrant in an
industry represents a competitive threat to the
established firms. There are various entry barriers
which hinders the entry of new entry. The barriers
are:
Economies of Scale: Existing large firms enjoy low
cost per unit.
They have enough room to reduce price as they
may be selling product at such a low price that new
player could not produce it at that cost as it might be
producing small quantity.
Cost disadvantage independent of scale:
Besides economies of scale existing firm have
other many cost advantages as proprietary
product knowledge such as patent, favourable access
to raw material, favourable location, etc.
Learning and Experience Curve: Established
companies have an advantage of learning curve.
Product Differentiation: A new entrant must
overcome the brand loyalty of the existing brands.
Capital requirement: New entrants
required capital not only to establish new business
but also to compete from established firms
Switching Cost: The costs incurred in switching from
one supplier to another supplier also resists the
customer to go for new vendor
Access to Distribution: The middleman is
reluctant to deal with the product which is new to
market and they usually prefer only established
products.
2. Bargain Power of Supplier: Suppliers have no
bargain power when there are many suppliers and
supply exceeds demand and supplier competes with
each other to grab the order. On the other hand,
bargain power is very high when suppliers have
expertise or supplier is working at economies of scale
or supplier augment the product in interest of
consumer or supplier also finance the buyer.
3. Bargain Power of Buyer: Buyer enjoys a
significant bargain power when sellers are many
and buyers are few or when production capacity
exceeds the demand. Buyer can bargain for
reduction of prices, quantity discount, better quality
at same price, better after sale service and they can
even ask for credit or finance facility.
4. Threat of Substitute: Strong competitive
pressure from substitute product depends upon
three factors
(a) Whether attractively priced substitutes are
available.
(b) Whether the buyers view the substitutes as
being satisfactory in terms of quality, performance and
other relevant attributes,
(c) Whether buyers can switch to substitutes easily.
The presence of readily available and attractively
priced substitutes creates competitive pressure.
5. Rivalry among Competing Sellers: The intensity
of rivalry among competing sellers is a function of
how vigorously they employ such tactics as lower
prices, colourful features, expanded customer service,
longer warranties, special promotions and new
product introductions. All this leads to adverse impact
on the**********************************************
Q.2. SOCIAL RESPONSIBILITY OF BUSINESS
The social responsibility of business means
various obligations or responsibilities or duties
that a business-organization has towards the
society within which it exists and operates from.
four responsibilities:
1. Discretionary Obligation – These refer to
voluntary contributions made by a business for
the benefit of the society without any
government intervention.
2. Ethical Obligation – These obligations make a
business responsible to follow and respect the social
and cultural norms laid down by the society.
3. Legal Obligation – It is the responsibility of every
business to abide with the laws of the county and
follow the legal rules and regulations laid down by the
government.
4. Economic Obligation – Since every business aims
to earn profit, it is the responsibility of every business
to generate surplus cash and use it towards further
development or welfare of the society.
Responsibility towards Different Interest Groups i.
Responsibility towards owners
Owners contribute capital and bear the business
risks. The primary responsibilities of business
towards its owners are to:
1. Run the business efficiently
2. Proper utilization of capital and other resources.
3. Growth and appreciation of capital.
4. Regular and fair return on capital invested.
ii. Responsibility towards investors
Investors are those who provide finance by way of
investment in debentures, bonds, deposits etc. The
responsibilities of business towards its investors
are:
1. Ensuring safety of their investment,
2. Regular payment of interest,
3. Timely repayment of principal amount.
iii. Responsibility towards employees Business
needs employees to work for it. These employees
put their best effort for the benefit of the business.
The responsibilities of business towards its employees
include
1. Fair treatment.
2. Timely and regular payment of wages and salaries.
3. No discrimination on the basis of sex, cast or
creed.
4. Fair Appraisal system.
5. Healthy and safe working environment.
6. Establishment of fair work standards and norms.
7. The provision of labour welfare facilities.
8. Opportunity for better career prospects.
9. Recognition, appreciation and
encouragement of skills and capabilities of the
workers.
10. Installation of an efficient grievances handling
system.
11. An opportunity for participating in managerial
decision
12. Timely training and development.
13. Family welfare schemes.
14. Proper working conditions and welfare amenities.
15. Job and social security.
16. Better living conditions like housing, transport,
canteen, crèches etc.
iv. Responsibility towards suppliers
Suppliers are businessmen who supply raw
materials and other items required by
manufacturers. The responsibilities of business
towards suppliers are:
1. Giving regular orders for purchase of goods.
2. Dealing on fair terms and conditions.
3. Availing reasonable credit period.
4. Timely payment of dues.
v. Responsibility towards customers
The business should provide the following facilities:
1. Providing products and services of proven quality.
2. Products and services must be able to take care
of the needs of the customers.
3. There must be regularity in supply of goods and
services
4. Price of the goods and services should be
reasonable and affordable.
5. Regular R&D to augment the product and to
innovate the product.
6. To ensure that product is reached to customer.
7. To supply goods at reasonable price.
8. To provide required after sale service.
9. To fulfil its commitments impartially and
courteously.
10. To provide sufficient information about the
product.
11. To ensure that product supplied doesn’t have any
adverse effect
12. To hear and redress the genuine grievances of
customer
13. To avoid any type of union formation and to reap
monopoly profits
14. Unfair means like under weighing the product,
adulteration, etc. must be avoided.
vi. Responsibility towards competitors
Competitors are the other organizations involved
in a similar type of business. The responsibilities of
business towards its competitors are
1. Not to offer exceptionally high sales
commission to distributers, agents etc.
2. Not to offer to customers heavy discounts and
/or free products in every sale.
3. Not to defame competitors through false
or ambiguous advertisements.
vii. Responsibility towards government
The various responsibilities of business towards
government are:
1. Setting up units as per guidelines of government
2. Payment of fees, duties and taxes regularly as well
as honestly.
3. Not to indulge in monopolistic and restrictive
trade practices.
4. Conforming to pollution control norms set up by
government.
5. Not to indulge in corruption through bribing
and other unlawful activities.
viii. Responsibility towards society
The various responsibilities of business towards
society are:
1. to help the weaker and backward sections of the
society
2. to preserve and promote social and cultural values
3. to generate employment
4. to protect the environment
5. to conserve natural resources and wildlife
6. to promote sports and culture
7. to provide assistance in the field of
developmental research on education, medical
science, technology etc.
8. Promotion of small scale industry
9. Development of region in which they are operating
10Social development of region in which organization
is working********************************************
Q.3. ROLE OF GOVERNMENT IN BUSINESS
Government performs many different roles in
business and economy. These roles are essential to
provide the platform to excel the competiveness of
businesses domestically, to ensure the
balanced regional growth, constitutional
framework, infrastructural improvement and public
utilities.
The following roles are played by the government in
business.
1. Regulatory Role: Listed below are the major
objectives of regulating the business functioning:
PAGE2-MIDDLE
To regulate monopoly in the market
To provide balanced regional growth
To encourage small and new enterprises
To regularize or standardize the functions of
private and public sector
The process of regulating business activities is mainly
done by two ways:
Discretionary Measures
Non-Discretionary Measures
Discretionary measures involve the direct measures
by the discretion of administrative authority. These
include
fixation of prices of commodities,
quantitative restrictions on export or import,
rationing on supplies of goods,
distribution of scare recourses for optimum
utilization of resources,
licensing the goods like hazardous chemicals, etc.
These discretionary measures are performed at the
firm level or industry level. While regulating,
government makes sure that interest of all sections
should be maintained.
Non-Discretionary Measures include the control
without any administrative discretion of an
authority. These measures are exercised at macro
level through fiscal and monetary policies. For
example:
imposing different taxes on different products at
different places,
amending customs tariffs,
regulating the bank interest by changing
repo rates or reverse repo rates,
regulating money supply and credit creation and
granting subsidies to different industries.
In India, the regulatory role is exercised in following
manner:-
(a) The Companies Act, 2013: It is an act to
consolidate and amend the law relating to companies
various acts that was in force for better functioning of
banking sector to help businesses and other economic
activities.
(c) The Securities and Exchange Board of India
(Amendment) Act,
2013: This is an Act which further amends the
Securities and Exchange
Board of India Act, 1992 for directing the functioning
of SEBI.
(d) The National Food Security Act, 2013: This
act provides for food and nutritional security in
human life cycle, by ensuring access to adequate
quantity and quality of food at affordable prices.
(e) Consumer Protection Act, 1986: This is an act to
protect the interest of consumers in India.
(f) Industrial Policy: Industrial Policies aim at
development of
Industrial Structure by Liberalization, Privation and
Globalization.
(g) MRTP Act: The Monopolistic and Restrictive
Trade Practices Act,
1969, make sure that the operation of the
economic system does not result in monopolies
(h) Foreign Exchange Regulation Act: It is an Act to
consolidate and amend laws related to foreign
exchange for the conservation of the foreign
exchange resources of the country.
(i) Commercial Law: This act has been made with
a view to order operational aspects of trade and
business. It includes acts like India Contract Act,
Sales of Goods Act, Negotiable Instruments Act,
Arbitration Act, etc.
2. Entrepreneurial Role
Sometimes private sector is unable to establish its
venture in some area due to constraints like lack of
capital, lack of know how or restrictions by
government. For this, the government has to perform
the entrepreneurial role by entering the market with
its ownership through public sector.
In the entrepreneurial role, the government acts as an
entrepreneur in form of public sector ventures like
Transportation: IRCT Ltd, DMRC Ltd;
Communication MTNL, BSNL;
Electricity and Power BSES, NDPL;
Companies like BHEL, PGCIL, IRCON ltd
3. Promotional Role
In promotion role, government does not regulate or
control the activities of business
The following are major functions performed in
promotional role:-
To provide basic infrastructure for
smooth functioning of business activities
To have coordination among public,
private, joint and cooperative sectors
To have balanced growth among all section
4. Planning Role
Government of India acts as a planner to secure
optimum utilization of resources. In 1950, Planning
Commission was set up by Government of India
with an objective for mobilization of resources and
to formulate the plans for the development of the
nation.
Basically, there are two types of planning i.e.
centralized and decentralized planning. In Centralized
planning, plans come from central level and passed to
state level. In Decentralized planning, the plans are
initiated from the bottom i.e. from individual unit say
panchayat level, sectoral level, regional level and
national level
-------------------------------------
Q4- Q.4. POLITICAL SYSTEM AND ITS INFLUENCE
ON BUSINESS
There are many external environmental factors
that affect business negatively and positively.
Business managers must address these factors and
make decisions that minimize the impact of
external environment. These factors include political
factors, economic, social, technological, legal and
environmental.
Political factors and environment of a country
impacts any business organization and can also
introduce a risk factor that can cause the business
to suffer losses or compromise over its profit stream.
Political environment can change because of the
policies and actions of the prevailing government at
every level, federal to local level. It is very
important that a business should plan for the
variability in the policies and regulations of the
government to maintain a stable business
environment.
Definition
Political factors are government regulations that
influence business operation positively and
negatively. Managers must keep a bird’s eye view over
political factors. These factors may be current
and impending legislation, political stability and
changes, freedom of speech, protection and
discrimination laws are factors affecting business
operation and activities
List of political factors that affect businesses
Corruption level
Trade control
Bureaucracy
Tariffs
Freedom of the press

Competition regulation (P3)
Regulation and deregulation
Education law
Discrimination law
Antitrust law
Data protection law
Employment law
Health and safety law
Environmental law
Tax policy
Government stability and changes
Government participation in trade unions
Import limitations on quantity and quality of the
product
Legislation that manages environment pollution
Consumer e-commerce and protection
Intellectual property law
How Political Factors Affecting Business
Environment
Political factors can impact a business by making the
market environment more or less friendly for that
business. Typically, governments have a great deal
of power over businesses and many times, there is
not much that businesses can do about it.
Political factors can impact businesses in various
ways. These external environmental factors can add
in a risk factor which can lead to a major loss in
business. These factors can change the entire results
and hence, companies should be able to deal with both
local as well as international political outcomes.
What Political Factors Affect Business
Environment
Tax and economic policies: Increasing or
decreasing rate of taxes is a good example of a political
component. Government regulations may raise the tax
rate for some businesses and can lower the same for
others due to specific reasons. This decision will
directly impact businesses.
Political stability: Lack of political stability
within a country can significantly impact the
operations of a business. This can especially be true
for businesses that are operating on the global scale.
Foreign Trade Regulations: Every
business has a need to expand business operation
to other countries. However, political
background of a country can influence the desire for a
business to expand its operations. Tax policies that are
particularly controlled by the government can
induce a particular business to expand operations
in different regions, whereas, other tax policies can
hinder the process of business expansion for some
industries.
Employment Laws: Employment laws
are made to protect the rights of
employees and include every aspect of employer-
employee relationship
Effects of political factors on businesses
1. Government changes in their rules and regulations
could have an impact on business.
2. The political condition of a country affects its
commercial setting.
The economic environment affects the business
presentation.
3. The absence of political stability affects business
operations, most especially for those companies who
operate internationally.
4. Obtaining political risk insurance is a method to
manage political risk. Firms that have international
operations uses this kind of protection to decrease
exposure to risk.
Importance of judicious political environment
Businesses should check their political
environment. The changes in political factors can
impact company strategies because of these reasons:
(P-3 middle )Government view business as a
crucial vehicle for social improvement.
The government is responsible for protecting the
public interest.
A stable political system can affect the
petition of a particular local market.
Governments pass legislations that
can also influence the relationship between the
firm and the suppliers, customers and other
companies.
The government is the primary consumer of
products and services.
Government actions impact the economic
environment
-------------------------
Q.5. CONSTITUTION & BUSINES s
The Constitution of India is not only a document
which tell about the formation and running of
Govt. Rather it influences the life of every
individual.
Directive Principles of State Policy
Directive Principles, in its most simple form, are
the Guidelines in the Indian Constitution to the
State. These guiding principles are meant for
promoting the ideal of social and economic
democracy.
The directive principles are non-justifiable in
nature. They cannot be enforced by the court of law
for their violation. Part IV, Articles 36-51 of the Indian
constitution constitutes the Directive Principles of
State Policy which contain the broad directives or
guidelines to be followed by the State while
establishing policies and laws.
Features of Directive Principles
The Directive Principles consist of the following
guidelines for the States:
The State should strive to promote the welfare of
the people.
Maintain social order through social, economic and
political justice.
The State should strive towards removing
economic inequality.
Removal of inequality in status and opportunities.
To secure adequate means of livelihood for the
citizens.
Equal work opportunity for both men and women.
Prevent concentration of wealth in specific pockets
of the society.
Prevention of child abuse and exploitation of
workers.
Protection of children against moral and material
abandonment.
Free legal advice to avail of justice by the
economically weaker section.
Assistance to the needy including the
unemployed, sick, disabled and old people.
Ensure proper working conditions and a living
wage.
Promotion of cottage industries in rural areas.
Free and compulsory education for children below
the age of 14years.
Economic and educational uplift of the
SC and ST and other weaker sections of the society.
Prohibition of alcoholic drinks, recreational drugs
and cow slaughter.
Preservation of the environment by
safeguarding the forests and the wildlife
Protection of monuments, places and
objects of historic and artistic interest and national
importance against destruction and damage.
Promotion and maintenance of
international peace and security, just and
honourable relations between nations.
Classification of the Directive Principles
The Directive Principles are divided into the following
three categories: (PAGE-3-LAST)
1. Socialistic Principles
These principles reflect the ideology of socialism.
Following Articles state the guidelines of Socialistic
Principles of state policy:
Article 38: To promote the welfare of
the people by securing a social order and to
minimise inequalities in income, status, facilities
and opportunities.
Article 39: To secure
(a) the right to adequate means of livelihood for all
citizens; (b) the equitable distribution of material
resources;
(c) prevention of concentration of wealth and means
of production; (d) equal pay for equal work for men
and women;
(e) preservation of the health and strength of
workers; and
(f) Opportunities for healthy development of
children.
Article 39 A: To promote equal justice and
to provide free legal aid to the poor.
Article 41: To secure the right to work,
to education and to public assistance in cases of
unemployment, old age, sickness and disablement.
Article 42: To make provision for just and
humane conditions for work and maternity relief.
Article 43: To secure a living wage, a
decent standard of life and social and cultural
opportunities for all workers.
Article 47: To raise the level of nutrition
and the standard of living of people and to improve
public health.
2. Gandhian Principles
These principles are based on Gandhian ideology.
Following Articles state the
guidelines of Gandhian Principles of state policy:
Article 40: To organise village
panchayats and give them with necessary powers
and authority to enable them to function as units of
self-government.
Article 43: To promote cottage
industries on an individual or co- operation basis in
rural areas.
Article 46: To promote the educational and
economic interests of SCs, STs and other weaker
sections of the society and to protect them from social
injustice and exploitation.
Article 47: To prohibit the consumption
of intoxicating drinks and drugs which are injurious
to health.
Article 48: To prohibit the slaughter of
cows, calves and other milk and draught cattle and to
improve their breeds.
3. Liberal–Intellectual Principles
The principles counted in this category signify the
ideology of liberalism. Following articles state the
guidelines of Liberal–Intellectual Principles of state
policy:
Article 44: To secure for all citizens a
uniform civil code throughout the country.
Article 45: To provide early childhood
care and education for all children until they
complete the age of six years.
Article 48: To organise agriculture and
animal husbandry on modern and scientific lines.

.( PAGE-4)
Article 49: To protect monuments,
places and objects of artistic or historic interest.
Article 50: To separate the judiciary from
the executive in the public services of the State.
Article 51: To promote international peace
and security and maintain just and honourable
relations between nations
-------------
UNIT II
Q.6. ETHICS
Ethics is a branch of social science. It deals with moral
principles and social values. It helps us to classify,
what is good and what is bad.
Business ethics are not different from ethics in
normal sense. It is ethics applied in conduct of
business activity.
Business ethics generally deals with what is right or
wrong in the business. Ethics is not only desirable
but is essential for the smooth functioning of
business.
Features of Business Ethics: There are eight major
features of business
ethics −
(a) Code of Conduct − Business ethics lets us know
what to do and what not to do. Businesses must follow
this code of conduct.
(b) Based on Moral and Social Values − Business
ethics offers some
moral and social principles for conducting a business.
(c) Protection to Social Groups − Business ethics
protect various social groups including consumers,
employees, small businesspersons, government,
shareholders, creditors, etc.
(d) Offers a Basic Framework − Business ethics is
the basic framework for doing business properly. It
constructs the social, cultural, legal, economic and
other limits in which a business must operate.
(e) Voluntary − Business ethics is meant to be
voluntary. It should be self- practiced and must not be
enforced by law.
(f) Requires Education & Guidance − Businessmen
should get proper
education and guidance about business ethics.
(g) Relative Term − Business ethics is a relative term.
It changes from one
business to another and from one country to another.
(h) New Concept − Business ethics is a relatively
newer concept.
Principles of Business Ethics: The important
principles of business
ethics are as follows −
(a) Avoid Exploitation of Consumers − Do not
cheat and exploit
consumer.
(b) Avoid Profiteering − Unscrupulous business
activities such as hoarding, black-marketing, selling
banned or harmful goods to earn exorbitant profits
must be avoided
c) Encourage Healthy Competition − A
healthy competitive
atmosphere that offers benefits to the consumers must
be encouraged.
(d) Ensure Accuracy − Accuracy in weighing,
packaging and quality of
supplying goods to the consumers has to be followed.
(e) Pay Taxes Regularly − Taxes and other duties
to the government
must be honestly and regularly paid.( PAGE-4-MIDDLE)
(f) Get the Accounts Audited − Proper business
records, accounts
audited by authorized persons and authorities should
be maintained.
(g) Fair Treatment to Employees − Fair wages or
salaries, facilities and
incentives must be provided to the employees.
(h) Keep the Investors Informed − The shareholders
and investors must know about the financial and other
important decisions of the company.
(i) Avoid Injustice and Discrimination − Avoid all
types of injustice and partiality to employees.
Discrimination based on gender, race, religion,
language, nationality, etc. should be avoided.
(j) No Bribe and Corruption − Do not give expensive
gifts, commissions
and payoffs to people having influence.
(k) Discourage Secret Agreement − Making secret
agreements with other business people to influence
production, distribution, pricing etc. are unethical.
(l) Service before Profit − Accept the principle of
"service first and profit
next."
(m) Practice Fair Business − Businesses should be
fair, humane, efficient
and dynamic to offer certain benefits to consumers.
(n) Avoid Monopoly − No private monopolies
and concentration of
economic power should be practiced.
(o) Fulfil Customers’ Expectations − Adjust your
business activities as per the demands, needs and
expectations of the customers.
(p) Respect Consumers Rights − Honour the
basic rights of the consumers.
(q) Accept Social Responsibilities − Honour
responsibilities towards the society.
(r) Satisfy Consumers’ Wants − Satisfy the wants of
the consumers as the main objective of the business is
to satisfy the consumer’s wants. All business
operations must have this aim.
(s) Service Motive − Service and consumer's
satisfaction should get more
attention than profit-maximization.
(t) Optimum Utilization of Resources − Ensure
optimum utilization of resources to remove poverty
and to increase the standard of living of people.
(u) Intentions of Business − Use permitted legal and
sacred means to do
business. Avoid Illegal, unscrupulous and evil means.
Ethical Decision Making
Michael Davis proposed a seven step guide to ethical
decision making;
1. State problem. State your possible ethical
problem that makes you uncomfortable or creates a
conflict of interest.
2. Check facts. Many problems disappear upon closer
examination of the situation, while others change
radically.
3. Identify relevant factors. For example, the persons
involved, applicable laws, professional codes or
standards, other practical constraints.
4. Develop a list of options. What other actions or
decisions are available to you besides the original one
that started you thinking?
5. Test the options using any one of the following:
a. Harm test: Does this option do less harm than the
alternatives? PAGE-4-LAST)
b. Defensibility test: Could I defend this choice of
option before a committee of peers, or a
Congressional committee
c. Reversibility test: Would I still think this choice of
option was good?
d. Colleague test: What might my profession’s
governing board or
ethics committee say about this option?
e. Organization test: What does my organization’s
ethics officer or
legal counsel say about this?
f. Virtue test: Would a virtuous person do this
6. Make a choice based on steps 1-5.
7. Review steps 1-6. What could you do to make it
less likely that you would have to make such a
decision again?
a. Are there any precautions you can take as an
individual?
b. Is there any way to have more support next time?
C Is there any way to change your organization?
--------------------
Q.7. CORPORATE GOVERNANCE
Corporate governance – Definition and Meaning
Corporate governance is the system of rules,
practices and processes by which a company is
directed and controlled. Corporate governance
essentially involves balancing the interests of
a company's many stakeholders, such as
shareholders, management, customers, suppliers,
financiers, government and the community.
Since corporate governance also provides the
framework for attaining a company's objectives, it
encompasses practically every sphere of
management, from action plans and internal
controls to performance measurement and
corporate disclosure.
Scope of Corporate Governance
Corporate Governance covers the following functional
area of governance:
1. Preparation of the company’s financial statements
2. Internal controls
3. Review of the compensation arrangements for
senior executives
4. The way in which individuals are nominated for
positions on the board
5. The resources made available to directors in
carrying out their duties
6. Oversight and management of risk.
Principles of Corporate Governance
Commonly accepted principles of corporate
governance include:
1. Rights and equitable treatment of shareholders:
Organizations should respect the rights of
shareholders and help shareholders to exercise
those rights.
2. Interests of other stakeholders: Organizations
should recognize that they have legal, contractual,
social and market driven obligations to non-
shareholder stakeholders, including employees,
investors, creditors, suppliers, local communities,
customers and policy makers.
3. Role and responsibilities of the board: The
board needs sufficient relevant skills and
understanding to review and challenge management
performance.
4. Integrity and ethical behaviour: Integrity should
be a fundamental requirement in choosing
corporate officers and board members.
Organizations should develop a code of conduct for
their directors and executives that promotes ethical
and responsible decision making.

.( PAGE-5)
5. Disclosure and transparency: Organizations
should clarify and make publicly known the roles
and responsibilities of board and management
to provide stakeholders with a level of accountability.
Role/Importance of Corporate Governance
The role of effective corporate governance is of
immense significance to society. It can be
summarized as follows:
1. It ensures efficient use of resources
2. It makes the resources flow to those sectors
where there are efficient production of goods and
services.
3. It provides for choosing the best managers to
administer the scarce resources.
4. It helps the managers to remain focused on
improving performance.
5. It pressurizes the organization to comply with the
laws, regulations and expectations of society.
6. It assist the supervisor in regulating the entire
economic sector without partiality and nepotism.
7. It increases the shareholders’ value which attract
more investors.
8. It helps in increasing market share and sales.
9. Employees are more satisfied in the
organizations which follows corporate governance
policies.
10. It reduces the procurement and inventory cost.
11. It helps in establishing good rapport with
distributors.
Mechanism and Control
Corporate governance mechanisms and controls are
designed to reduce the inefficiencies that arise from
moral hazard and adverse selection. There are both
internal monitoring systems and external monitoring
systems.
(a) Internal corporate governance controls
Internal corporate governance controls monitor
activities and then take corrective actions to
accomplish organisational goals.
Examples include:
Monitoring by the board of directors: The
board of directors, with its legal authority to hire,
fire and compensate top management, safeguards
invested capital. Regular board meetings allow
potential problems to be identified
Internal control procedures and
internal auditors: Internal control procedures are
policies implemented by an entity's board of
directors, audit committee, management and other
personnel to provide reasonable assurance of the
entity achieving its objectives related to reliable
financial reporting, operating efficiency and
compliance with laws and regulations. Internal
auditors are personnel within an organization
who test the design and implementation of the
entity's internal control procedures and the reliability
of its financial reporting
Remuneration: Performance-based
remuneration is designed to relate some proportion
of salary to individual performance. It may be in the
form of cash or non-cash payments such as shares and
share options, superannuation or other benefits.
Monitoring by large shareholders
and/or monitoring by banks and other large
creditors: Given their large investment in the firm,
.( PAGE-5 MIDDLE)
these stakeholders have the incentives, combined with
the right degree of control and power, to monitor the
management
(b) External corporate governance controls
External corporate governance controls encompass
the controls external stakeholders exercise over the
organization. Examples include:
Competition
Debt covenants
Demand for and assessment of performance
information
Government regulations
Managerial labour market
Media pressure
Takeovers
Proxy firms
----------------------------
UNIT III
Q.8. GLOBALISATION
Globalisation is a modern term used to describe the
changes in societies and the world economy that
result from dramatically increased international
trade and cultural exchange.
The IMF defines Globalisation as “the growing
economic interdependence of countries worldwide
through increasing volume and variety of cross-border
transactions in goods and services, freer
international capital flows and more rapid and
widespread diffusion of technology”
With globalisation, people around the globe are
more connected to each other than ever before.
Information and money flow more quickly than ever.
Goods and services produced in one part of the
world are increasingly available in all parts of the
world. International travel is more frequent.
International communication is commonplace.
Characteristics of Globalisation
1. Over the past two decades, there is a rapid
Globalisation of markets and production.
2. The Globalisation of markets implies that
national markets are merging into one huge
marketplace.
3. Erosion of national sovereignty and national
borders through international agreements leading to
organizations like EU.
4. Development of Global Financial System.
5. Reduced transportation costs.
6. The Globalisation of production implies that
firms are basing individual productive activities at
the optimal world locations for the particular
activities.
7. Two factors seem to underlie the trend toward
Globalisation: declining trade barriers and changes
in communication, information and transportation
technologies.
8. Since the end of World War II, there has been a
significant lowering of barriers to the free flow of
goods, services and capital.
9. Increase in international flow of capital.
10. Increase in the share of the world economy
controlled by multinational
---------------
11. Increased role of international organizations
such as WTO, IMF that deal with international
transactions.
12. Increase of economic practices like
outsourcing, by multinational corporations.
13. Intellectual Property Restrictions.
14. Supranational recognition of intellectual
property restrictions (e.g. patents granted by China
would be recognized in the US). PAGE-5-LAST)
15. As a consequence of the Globalisation of
production and markets, world trade has grown
faster than world output, foreign direct
investment has surged and imports have penetrated
more deeply into the world's industrial nations.
16. The developments in communication and
information processing technology have helped
firms link their worldwide operations into
sophisticated information networks.
17. Development of a global telecommunications
infrastructure and greater trans-border data flow,
using Internet communication satellites and
telephones.
18. Increases in the number of standards applied
globally; e.g. copyright laws and patents.
Impact of Globalisation on Corporations
Globalisation has influenced the every part of the
Globe. Corporations are changing their strategies and
are reorganizing their function to cope up with the
changed scenario. In the changed scenario, they are
reorganizing and bringing changes, including:
a.Designing in Global Environment
With globalization, companies adopt global design
strategies. Global design has cost benefits that are very
attractive to today’s manufacturer, but adds new
Product Lifecycle Management challenges and
intensifies existing problem areas such as protecting
intellectual property. Designing products in a
distributed approach makes classic control,
communication and collaboration even more
challenging, requiring better management of
product innovation, product development and
engineering processes and new approaches to
sharing product designs.
b.Production Location Selection
With globalisation, companies are opting for a
production strategy which intended to reduce
production cost by concentrating manufacturing
operations wherever in the world they could be
carried out most cost effectively.
c.Rationalized Production
Companies produce different components or
different portions of their product line in different
parts of the world to take advantage of low labour
costs, capital and raw materials. This is rationalized
production.
d.Vertical Integration
Vertical Integration is a company’s control of the
different stages in a value chain of making of
product - from raw material to production to final
distribution of product. As international trade
barriers are eliminating, organizations can combine
resources located in more than one country.
e.Product Strategy
To cross borders, organization has to face a very
critical question of product standardization vs.
product adaptation. With globalization,
standardization enabled the advantages in low cost
production and distribution of products and services.
In many goods, however, product adaptation is
essential to meet the local conditions or
-----------
Q.9. MULTINATIONAL CORPORATIONS
The word "Multinational" is a combined word of
"Multi" and "National", which when combined refers
to numerous countries.
Multinational Corporations (MNCs) are defined as

enterprises that are headquartered in one country
but have operations in two or more countries.
PAGE-6)
Sometimes it is difficult to know if a firm is a MNC
because multinationals often downplay the fact that
they are foreign held. For example most of people
in India are unaware that Bata is a Canadian company,
Nestle is a Swiss company and Cadbury is British
company.
Benefits of Being MNCs
Benefits of being a MNC include:
1. Survival: Business organizations in countries that
are smaller in size or with shortage of diverse
resources and opportunities do their business
outside their territory as a survival option. Even in
big countries, organization do business outside their
territory to find new markets for their product and
cheap source of resources to remain competitive
and to survive.
2. Growth of Overseas Market: This is the
biggest reason of going abroad. In last 20 years many
economies have opened their doors for world. This
resulted in big opportunity in terms of Market.
3. Diversification: Every organization wants to
diversify the risk and internationalization is a good
manner to diversify the risk.
4. Source of Resources: Organizations go
abroad in search of economical source of supply.
A truly global firm always locates its processing in
the best available location in the world and outsources
HR and other physical resources from the best
suited place in the world.
5. To Protect Market Share: Firms also become
MNCs in response to increased foreign competition
and a desire to protect their home market share.
6. Tariff and Non-Tariff Barrier: Organizations
establish their operation overseas to deal with tariff
and non-tariff barriers.
7. Technology Expertise: A reason for becoming
an MNC is to take advantage of technological
expertise by manufacturing goods directly (by FDI)
rather than allowing others to do it under a license.
Many MNCs feel it unwise to give another firm
access to proprietary information such as patent,
trademarks, or
-----------
8. To have an access to Economical Human
Resource: Many a times Companies cross borders to
have an access to the economical human resource.
Advantages of MNCs
Increase Investment: The primary
argument in favour of MNCs is that they enable
investment into less developed countries which is
essential for their growth.
Technological Transfers: Any MNC
operating in a certain country needs to have an
agreement to transfer of technology which would turn
out to be very beneficial for the host country,
since technological advancements require huge
research and development funds that the developing
countries just do not have.
Transfer of skills: Like transfer of
technology, MNCs also bring with them a wealth of
knowledge and experience. Their staff is amongst the
best in the world and employees from the less
developed countries learn plethora of skills from them
Increase in Tax revenue: An increase in tax
revenue is also an added benefit. This can be used to
finance projects that lead to development of
infrastructure, causing economic development.
Reduces gap between capital and labour:
MNCs help in reducing gap between capital and
labour by creating jobs and employment and revenue
for the local population.( PAGE-6-MIDDLE)
Encourages competition: MNCs
encourage entrepreneurship and breeds a culture
of competition. Increasing competitiveness amongst
local companies cause them to improve their own
goods and services by increasing their efficiency.
Improves Balance of Payments: An
added benefit of foreign direct investment is that it
helps the Balance of Payments of both, the capital and
current accounts, of the host country.
Criticism of MNCs:
Critics of MNCs state that the cons far outweigh the
pros that MNCs bring to host countries.
Colonialism: MNC's are seen as an offshoot of
western colonialism.
Unmatchable influence: The power,
influence and reach of MNCs have enabled them to
pressurize governments into letting them become
more competitive via the implementation of
national policies that is conductive to their end goals
Technological fraud: Technological
transfer agreements are not always kept. Even if
technological transfer happens, the technology
passed onto the country is usually obsolete in nature
or is patented so it would be of little use to the host
country on a global scale.
Little or No accountability: MNCs
comprise of international bodies which function
beyond the state authorities, in terms of decision
making power and the power they hold over monetary
assets.
Undermine Social and Economic
Rights: MNCs' can easily undermine economic and
social rights. Their interference leads to social and
economic hazards for the public
Strangles Competition: The
superiority of MNC's throttle competition by
local manufacturers, resulting a lot of them leaving the
field, leaving the MNC's to monopolies the economy.
Unmatched budgets: The MNCs have a
huge advertising budget, which enables them to
portray a much better image in the eyes of the local
populace.
Human Right abuses: The
Multinational Corporation allows for abuses of
human rights to take place internationally.
Environmental impacts: MNCs want to
produce in ways that are as efficient and as cheap as
possible and this may not always be the best
environmental practice
-----------------------
Q.10. GATT
General Agreement on Tariffs and Trade (GATT)
was a legal agreement between many countries,
whose overall purpose was to promote
international trade by reducing or eliminating trade
barriers such as tariffs or quotas.
According to its preamble, its purpose was the
"substantial reduction of tariffs and other trade
barriers and the elimination of preferences, on a joint
and mutually advantageous basis."
GATT was signed by 23 nations in Geneva on
October 30, 1947 and took effect on January 1,
1948. It remained in effect until the World Trade
Organization (WTO) established on January 1,
1995. GATT and its successor WTO, have
successfully reduced tariffs.
Three Provisions of GATT
GATT had three main provisions.
1. The most important requirement was that each
every other member. That means all members must
be treated equally when it comes to tariffs. PAGE-6-LAST)
2. Second, GATT prohibited restriction on the
number of imports and exports. The exceptions
were:
When a government had a surplus of agricultural
products.
If a country needed to protect its balance
of payments because its foreign exchange reserves
were low.
Developing countries that needed to protect new
industries.
In addition, countries could restrict trade
for reasons of national security.
3. The third provision was added in 1965 with
joining of more developing countries in GATT and it
wished to promote them. Developed countries agreed
to eliminate tariffs on imports of developing countries
to boost their economies.
Pros of GATT
For 47 years, GATT reduced tariffs. This
boosted world trade 8 percent a year during the 1950s
and 1960s.
By 1995, there 128 members, generating
at least 80 percent of world trade.
# By increasing trade, GATT promoted world peace
By showing how free trade works,
GATT inspired other trade agreements. It set the
stage for the European Union.
GATT also improved communication by
providing incentives for smaller countries to learn
English.
Cons of
Low tariffs destroy some domestic
industries, contributing to high unemployment in
those sectors.
By the 1980s, the nature of world trade
had changed. GATT did not address the trade of
services, for example, financial services.
GATT reduced the rights of a nation to rule its own
people.
GATT destabilized small, traditional economies
------------------
Q.11. WTO
The World Trade Organization (WTO) is an
intergovernmental organization that regulates
international trade. The WTO officially commenced
on 1
January 1995 replacing the GATT.
WTO is the largest international economic
organization in the world. The WTO deals with
regulation of trade in goods, services and
intellectual property between participating countries
by providing a framework for negotiating trade
agreements and a dispute resolution process aimed
at enforcing participants' adherence to WTO
agreements
Functions of WTO
The most important functions of the WTO are:
It oversees the implementation,
administration and operation of the covered
agreements.
It provides a forum for negotiations and for settling
disputes
It review and propagate the national trade policies
It facilitate the implementation, administration
and operation of this
Agreement

PAGE-7
It provide the forum for negotiations among its
members.
It administer the Settlement of Disputes.
It administer Trade Policy Review Mechanism.
Principles of WTO
Principle of Most-Favoured-Nation
Treatment: With respect to tariffs on exports
and imports, the most advantageous treatment
accorded to the products of any country must be
accorded immediately and unconditionally to the like
products of all other members.
Principle of National Treatment: With
respect to internal taxes, internal laws, etc., applied
to imports, the products of all other Members must be
treated equivalent with like domestic products.
Principle of General Prohibition of
Quantitative Restrictions: No prohibitions or
restrictions other than duties, taxes or other
charges shall be instituted or maintained by any
Members.
Organizational Structure of WTO
The General Council has the following subsidiary
bodies which oversee committees in different areas
1. Council for Trade in Goods: There are 11
committees under the jurisdiction of the Goods
Council each with a specific task.
2. Council for Trade-Related Aspects of
Intellectual Property
Rights: It deals with the intellectual property in the
WTO.
3. Council for Trade in Services: It is responsible for
the administration of the functioning of the General
Agreement on Trade in Services.
4. Trade Negotiations Committee: It deals with the
current trade talks round.
WTO Agreements
The WTO administers about 60 different
agreements. Some of the most important
agreements are:
1. The Agreement on Agriculture came into effect
with the establishment of the WTO at the beginning of
1995.
2. The General Agreement on Trade in Services was
created to extend the multilateral trading system to
service sector.
3. The Agreement on Trade-Related Aspects of
Intellectual Property Rights sets down minimum
standards for many forms of intellectual property
(IP) regulation.
4. The Agreement on the Application of Sanitary
and Phytosanitary Measures sets constraints on
policies relating to food safety as well as animal and
plant health.
5. The Agreement on Technical Barriers to Trade
ensures that technical negotiations and standards do
not create unnecessary obstacles to trade.
6. The Agreement on Customs Valuation
prescribes methods of customs valuation that
Members are to follow.
7. In December 2013, the biggest agreement within
the WTO was signed and known
---------------------
UNIT IV
Q.12. FISCAL POLICY
Fiscal policy is the projected balance sheet of the
member must confer most favored nation status to
country, prepared by the Finance Minister of the state.
It is through fiscal policy that the government tries to
correct inequalities of income and wealth.( PAGE-7-M
Fiscal policy is implemented through Budget, which is
statement of state’s
revenue and expenditure.
Objectives of Fiscal Policy
The following are objectives of fiscal policy:-
1. Development by effective Mobilization of
Resources
2. Efficient allocation of Financial Resources
3. Reduction in inequalities of Income and Wealth
4. Price Stability and Control of Inflation
5. Employment Generation
6. Balanced Regional Development
7. Capital Formation
8. Reducing the Deficit in the Balance of Payment
9. Foreign Exchange Earnings
Constituents of Fiscal Policy
There are mainly four instruments or constituents of
the fiscal policy.
1. Budget,
2. Public revenue
3. Public expenditure and
4. Public debt.
1. Budget: A budget is an estimate of government
expenditures and revenues for a fiscal year, usually
presented to the parliament by the finance minister.
There are three types of budgetary policies:
i. Balanced budget policy: When the government
keeps its total expenditure equal to its revenue.
ii. Deficit budget policy: When the government
spends more than its expected revenue.
iii. Surplus budget policy: When the government
follows a policy of keeping its expenditure
considerably below its current revenue.
2. Public Revenue: The government needs income for
performing a variety of
functions. The income of the government which is
obtained
sources such as taxes, grants, fees and borrowings are
called public income or public revenue.
Generally, government revenue implies the income
raised from the public by the state through taxes.
There are various other non-tax sources of public
revenue such as taxes, price, fees, fines, penalties, gifts,
profits and special assessments.
Public revenue is divided into two groups:
Tax revenue and
Non-tax revenue.
The revenue raised by the government through
various direct and indirect taxes is known as tax
revenue.
Direct taxes are those which are imposed on
individuals or householders, Direct taxes include
income tax, corporate tax, interest tax, wealth tax,
estate duty, expenditure tax, etc.
Indirect taxes are those which are imposed on equity
at some point in the system. Examples of indirect
taxes include excise duty, customs duty, service tax
etc.
The revenue obtained by the Government from
sources other than tax is called non-tax revenue.
This includes fees, fines and penalties, profits of
government enterprises, gifts and grants, etc.
3. Public Expenditure: Public Expenditure
refers to Government Expenditure. The Public
welfare of the people and also for the economic
development.( PAGE-7-LAST)
All public expenditure classified into:
a) Non-plan expenditure b) Plan expenditure
a.Non-plan Expenditure: Non-plan expenditure of
the central govt. is divided into
Revenue expenditure and
Capital expenditure
Revenue expenditure includes interest payment,
defense revenue expenditure, major subsidies,
interest and other subsidies, debt relief to farmers,
postal deficit, police, pension and other general
services, social service, economic service and grants
to states and union territories and grants to foreign
government
Capital non plan expenditure includes such items
as: Defense expenditure, loans to public enterprises,
loans to states and union territories and loans to
foreign government.
b.Plan Expenditure: Plan expenditure is to finance
central plans, such as agriculture, rural development
irrigation and flood control, energy industry and
minerals transport, communications, science and
technology and environment, social services and
others and Central assistance for Plans of the state and
Union Territories.
4.Public Debt: Borrowing by the government leads to
public debt. Public debt is the debt which the
government owes to its subject or to the nationals of
other countries. The government can borrow from
individuals, business enterprises and banks. It can
borrow from within the country and from outside
the country. The main objectives of government
borrowings are to meet the budgetary deficit, to
finance development plans and to fight depression.
Fiscal Policy and Economic Growth
Fiscal policy is a potent tool in the hands of Govt. to
regulate the economic growth. Fiscal policy plays a
leading role in effecting savings in the economy.
Budgets play a direct role in capital accumulation and
economic growth in an underdeveloped country.
Through the fiscal policy govt. can also encourage the
growth of particular industries and in particular
areas. For this, industries are provided with
specific tax concessions and subsidies.
Impact of Fiscal Policy on Business
Fiscal policy decisions have large impact on the
regular decisions and conduct of organizations.
Fundamentally fiscal policy implies how
government taxes us and how it uses the cash.
Increased taxation makes the cost of products
and administrations excessive, lessening interest for
them and decreasing occupation.
Lower taxes mean more disposable wage for shoppers
and more money for organizations to put resources
into employments and supplies.
Low interest rates mean lower interest expense for
organizations and higher disposable wage for
customers.
-------------------------
Q.13. TAX STRUCTURE
India offers a well-structured tax system for its
population. Taxes are the largest source of income
for the government. This money is deployed for
various purposes and projects for the development of
the nation.
Taxes are determined by the Central and State
Governments along with local authorities like
municipal corporations. The government cannot
impose any tax unless it is passed as a law.
Types of Taxes

There are two ways to classify different types of taxes
in India: PAGE-8-MIDDLE)
1. Taxes Levied by the Central
Government and State
Governments
By the Central Government: These include
income taxes, custom duties, corporation taxes, excise
duties, estate duty and more
By the State Government: Taxes on
agricultural incomes, VAT, electricity consumption
and sale taxes, land revenues, tolls and more
By the Local Civic Bodies: Municipal
corporations and other local governing bodies collect
taxes like property taxes
2. Direct and Indirect Taxes
Direct Taxes: These taxes are directly
paid by the individuals to the respective governments.
The most important examples include income tax,
capital gains tax, perquisite tax, corporate tax and
securities transaction tax.
Indirect Taxes: These taxes are not
directly paid to the governments but are collected
by the intermediaries who sell or arrange products
and services. Service tax, sales tax, octroi, customs
duty, value added tax and excise duty are some of the
top examples.
Direct Tax
It is a tax levied directly on a taxpayer who pays it to
the Government and cannot pass it on to someone
else.
Direct taxes imposed in India
Some of the important direct taxes imposed in India
are mentioned below
Income Tax- It is imposed on an
individual who falls under the different tax brackets
based on their earning or revenue and they
have to file an income tax return every year after
which they will either need to pay the tax or be eligible
for a tax refund.
Estate Tax– Also known as Inheritance tax.
It is raised on an estate or the total value of money and
property that an individual has left behind after their
death.
Wealth Tax– Wealth tax is imposed on
the value of the property that a person possesses.
Corporate Tax: Paid by companies and
corporations on their profits.
Gift Tax: An individual receiving the
taxable gift pays tax to the government.
Fringe Benefit Tax: Paid by an
employer that provides fringe benefits to employees,
and is collected by the state government.
Advantages of direct taxes
It curbs inflation: The Government often
increases the tax rate when there is a monetary
inflation which in turn reduces the demand for
goods and services and as a result of descending
demand, the inflation is bound to condense.
Social and economic balance: Based
on every individual’s earnings and overall economic
situation, the Government has well- defined tax slabs
and exemptions in place so that the income
inequalities can be balanced out.
Disadvantage of direct taxes?
Direct taxes come with a handful of
disadvantages. But, the very time-consuming
procedures of filing tax returns is a taxing task
Expenditure is incurred on various activities for the
itself. PAGE-8-MIDDLE)
Indirect Tax
It is a tax levied by the Government on goods and
services and not on the income, profit or revenue of
an individual and it can be shifted from one
taxpayer to another.
A few indirect taxes that were earlier imposed in
India:
Customs Duty- It is an Import duty levied
on goods coming from outside the
country, ultimately paid for by consumers and
retailers in India
Central Excise Duty– This tax was payable
by the manufacturers who would then shift the tax
burden to retailers and wholesalers.
Service Tax– It was imposed on the
gross or aggregate amount charged by the service
provider on the recipient.
Sales Tax– This tax was paid by the retailer,
who would then shifts the tax burden to customers
by charging sales tax on goods and service.
Value Added Tax (VAT)– It was collected
on the value of goods or services that were added at
each stage of their manufacture or distribution and
then finally passed on to the customer.
GST as Indirect Tax
With the implementation of Goods & Services Tax
(GST), we have already witnessed a number positive
changes in the fiscal domain of India. The various
taxes that were mandatory earlier are now obsolete.
Not just that, GST is making sure the slogan “One
Nation, One Tax, One Market” becomes the reality of
our country and not just a dream.
The biggest relief of GST so far is clearly the
elimination of the ‘cascading effect of tax’. Cascading
effect of tax is a situation wherein the end-consumer
of any goods or service has to bear the burden of the
tax to be paid on the previously calculated tax and
as a result would suffer an increased or inflated
price.
Under the GST regime, however, the customer is
exempted from the tax they
would otherwise pay as a result of the cascading effect.
------------------------------
Q.14. DEFICIT FINANCING
Deficit financing is the budgetary situation where
expenditure is higher than the revenue. It is a
practice adopted for financing the excess
expenditure with outside resources. The
expenditure revenue gap is financed by either
printing of currency or through borrowing
Various indicators of deficit in the budget are:
1. Budget deficit = total expenditure – total receipts
2. Revenue deficit = revenue expenditure – revenue
receipts
3. Fiscal Deficit = total expenditure – total receipts
except borrowings
4. Primary Deficit = Fiscal deficit- interest payments
5. Effective revenue Deficit = Revenue Deficit –
grants for the creation of capital assets
6. Monetized Fiscal Deficit = that part of the fiscal
deficit covered by borrowing from the RBI.
Objectives of Deficit Financing
1. To finance war: Deficit financing has generally
being used as a method of financing war expenditure.
2. Remedy for depression: Deficit financing can be
used as an instrument of economic policy for
removing the conditions of depression. PAGE-8-LAST)
3. Economic development: The main objective of
deficit financing is to promote economic
development.
4. Mobilization of Resources: Deficit financing is
also used for the mobilization of surplus, idle and
unutilized resources in the country.
5. For granting subsidies: Granting subsidies is a very
costly affair which cannot meet with the regular
income.
6. Increase in aggregate demand: Deficit financing
leads to increase in aggregate demand through
increased public expenditure.
7. For payment of interest: Deficit financing is an
important tool to get the income for the repayment of
loan along with the interest.
Adverse Effects of Deficit Financing
Important evil effects of deficit financing are given
below.
Leads to inflation: Deficit financing may lead to
inflation as it increases money supply and the
purchasing power of the people
2. Adverse effect on saving: Deficit financing leads to
inflation and inflation affects the habit of voluntary
saving adversely.
3. Adverse effect on Investment: An inflation in the
economy can adversely affect the level of investment.
4. Inequality: Deficit financing makes the rich richer
and the poor, poorer.
5. Problem of balance of payment: Deficit financing
leads to a deficit in balance of payment and
the balance of payment will become
unfavourable.
6. Increase in the cost of production: Since the deficit
financing leads to the rise in the price level, the cost of
development projects also rises.
7. Change in the pattern of investment: Deficit
financing leads to inflation.
During inflation, instead of indulging in productive
activities people start doing speculative activities.
-------------------------------
Q.15. VAT
VAT is a kind of indirect tax on value added.
Value Added taxation is a percentage of tax on value
added to the production or service at each selling
point.
VAT is paid at every stage from which good or service
passes but it is paid on the value added only and
not on whole cost. Thus everybody in the
production and distribution chain pays the tax but
only on the value added at his level only.
Objectives of VAT
VAT is implemented with following objectives:
1. To remove the double taxation having cascading
effect.
2. To eliminate multiplicity of taxes
3. To eliminate inter-state tax.
4. To reduce inspector Raj.
5. To make the tax structure simple, efficient and
transparent.
6. To widen the tax net.
7. Coordinate revenue growth with development.
8. To create level playing field for industry and trade
Methods of VAT Calculation
The value added can be derived either by
(a) Subtraction method or
(b) Cumulative method.
PAGE-9-
(a) Subtraction Method: According to this method,
VAT is calculated on the difference between
selling value and purchasing value of a
product/service at a predetermined tax rate. We
can understand this by following example:
Suppose
M is a raw material supplier
P is a Manufacturer
W is a Wholesaler
R is a retailer.
And VAT is at 10%
If M sales a product to P for Rs. 100 and pays tax at the
applicable VAT rate of 10%. It is assumed that M is a
primary producer of product thus his input can be
assumed as zero. So the tax will be 10% of Rs. 100 that
is Rs. 10.
Rs. 100 is the purchase price of P
Manufacturer P will add value to the product
increasing its usability through the manufacturing
process. In this process he invest some money and
add his profit so his sale value is 200. Value
added is the difference value that is Rs. 200 - Rs. 100
= 100, tax @ 10 is Rs. 10.
The sale price of P is the purchase price of W the
wholesaler. Wholesaler will add his operating cost
and profit and thus suppose his sale value is Rs.
250. At this point value addition in terms of money is
Rs. 250 - 200 = 50 and applicable VAT at the rate of
10% will be Rs. 5. The Retailer R purchases it at Rs.
250 and sells it at Rs. 350 the value addition is Rs. 350
– Rs. 250 = Rs. 100 and tax will be Rs. 10.
Total VAT collected at four stages = 10 + 10 + 5 + 10 =
35
Last point retail Sales Tax @ 10 on 350 = 35.
(b) Cumulative Method: As per cumulative
method, tax is collected on overall sale value. In
this system accumulation takes place for the cost
increased for producing goods and profit added at
each previous sage. In this method, tax is computed on
purchasing value is deducted from the amount of tax
computed on selling value. The difference amount of
tax is payable to Govt. by seller of product or service.
Here the tax paid at previous stage is set off against
the total amount of tax on selling value for fixing
net tax liability of seller at each stage.
As in the example M sales a product to Mr. P for Rs.
100 and pays tax at the applicable VAT rate of 10%
or Rs. 10. As M is the primary producer of
product, his input could be assumed Zero. Hence the
sale would be Rs. 100 and on this sale value of Rs. 100
@ 10% VAT would be Rs. 10.
This Rs. 100 is the purchase price of P. Manufacturer P
will add value to the purchased product. Assume that
after adding all the cost incurred by him and his own
profit his sale value is Rs. 200. On this sale value of Rs.
200@
10% total VAT would be Rs. 20. As Raw material
producer M has already paid VAT on his sale value of
Rs. 100 @ 10% Rs. 10 and Manufacturer P will get
credit/set - off for this tax. Hence net liability of VAT
for P Rs. 10.
Similarly the sale value of Rs. 250 by wholesaler W
would have net liability of VAT of Rs. 5. And the sale
value of Rs. 350 by Retailer R would also have net
liability of Rs.10.
Advantages of VAT
VAT has following advantages:
1. Simplicity: It is very simple tax system.
2 Transparency: It is a fully transparent.
3. No cascading effect: VAT avoids multiple taxation.
4. A few rates of tax: In VAT there is mainly four tax
rates (0%, 1%, 4%,
12.5%).
5. Self-Assessment: It replaces existing system of
inspection by built in assessment by the dealers and
internal auditing.
6. Less incentive to tax evasion (wider coverage): In
VAT, a less amount of tax is paid by everyone in a
value chain and collects it from its customer.
7. Revenue security: VAT represents an important
instrument against tax evasion.
8. Selectivity: VAT may be selectively applied to
specific goods or business entities.
VAT in India
The Indirect Taxes Inquiry Committee set up by
Govt. of India in 1976 recommended the adoption of
MANVAT (VAT at the manufacturing level) in India. As
a result the MODVAT (Modified Value Added Tax)
scheme was introduced with effect from May 1, 1986.
Initially it covered selected items in only 37 Chapters
which was gradually extended to 77 chapters.
MODVAT was renamed as CENVAT (Central Value
Added Tax) with effect from April 1, 2000. All
inputs used directly or indirectly are eligible for
CENVAT.
In addition to CENVAT, a central sales tax is also
imposed on interstate sales of goods. This tax is
generally at 4%. Besides there is a provision of
10% service tax on various services
----------------------------------------------------
16.2 CONSUMER RIGHTS
Every year the 15th march is observed as
the “world consumer right day” the
significance of this day is that on this day
in 1962, John Fitzerald Kennedy, the then
president of USA declared four consumer
---------------------------------
rights. Later International Organization of 16.9 JURISDICTION
Consumers Union (IOCU) added three The question has to be considered with reference to the
more rights to the list. The government of value, place, and nature of the subject matter: District
Forum District forum deals the cases where the value of
India too included these rights in its 20- claim is up to Rs. 5 lakhs. Territorial Jurisdiction: A case
point programme. These have also been is supposed to fall within the purview of District Council
incorporated in the United Nations Charter when at the time of the institution of the complaint: (a) The
party against whom the claim is made actually and
of Human Rights. These are: voluntarily resides or carries on business or has a branch
1) Right to Safety (2) Right to be
Informed (3) Right to Choose (4)
Right to be Heard
{Mentioned by President Kennedy}
(5) Right to Redress (6) Right to Healthy
Environment (7) Right to Consumer
Education {Added by International
Organization of Consumers Union
(IOCU)}
------------------------------------------
16.3 CONSUMER PROTECTION ACT, 1986 Consumer
The term consumer is defined in Section 2(d) of the
Consumer Protection Act, 1986 in two parts, one in
reference to a consumer who purchases goods and the
second in reference to a person who hires services.
“Consumer” means any person who:
1buys any goods for a consideration which has been
paid or promised or partly paid and partly promised, or
under system of deferred payment and includes any
user
2hires or avails of any services for a consideration
which has been paid or promised or partly paid and
partly promised, or under any system of deferred
payment and
16.4 AIMS AND OBJECTIVE OF ACT
The main objective of the Act (as per preamble to the Act)
is to provide for better protection of interest of consumers.
Consumer councils and other authorities are provided for
settling the consumers’ disputes and other matters. The
objective of the Act, 1986 is as follows:
1. The foremost objective of Consumer Protection Bill is
to provide for better protection of the interest of consumer
and for that purpose, to make provision for the
establishment of Consumer Protection Councils and other
authorities for the settlement of consumer disputes and for
matters connected therewith.
2. Rights of Consumer: The act is intended to protect
following rights of the consumers [Section 6]: (i) The right
to be protected against marketing of goods which are
hazardous to life and property, (ii) The right to be informed
about the quality, quantity, potency, purity, standard and
price of goods to protect the consumer against unfair trade
practices, (iii) The right to be assured, whether possible,
access to a variety of goods at competitive prices, (iv) The
right to be heard and to be assured that consumers’ interest
will receive due consideration at appropriate forums, (v)
The right to seek redressal against unfair trade practices or
unscrupulous exploitation of consumers, and (vi) The right
to consumer education.
3. To provide speedy and simple redressal at minimum
expenses to consumer disputes, a quasi-judicial body is to
be set up at the district, state and central levels.
(a) To enlarge the scope of the Act so as to enable the
consumers to file class action complaints where such
consumers have a common interest and to file complaints
relating to restrictive practices adopted by trader; (b) To
enable the consumers who are all self-employed to file
complaints before the redressal agencies where goods
bought by them exclusively for earning their livelihood,
suffer from any defect; (c) To add services relating to
housing construction; (d) To enable filing of class action
complaints on behalf of groups of consumer having the
same interest; (e) To provide for the constitution of
selection committees for the selection of non-judicial
members of various redressal agencies; (f) To increase the
monetary jurisdiction of District forum/State
Commissions/ National Commission;
office or personally works for gain in that area, or (b)
Where there are more than one opposites party, each such
party actually and voluntarily resides or carries on business
or has a branch office or personally works for gain in that
area, or (c) Where there are more than one opposite party,
and any such party actually and voluntarily resides or
carries on business or has a branch office or personally
works for gain in that area; provided the other parties not
so residing or working agrees, or the district Forum gives
permission in this regard, (d) The cause of action, wholly
or in part, arises in that area.
State Commission Cases having a claim exceeding 5 Lakhs
but up to the limit of Rs. 20 Lakhs can go to State
Commission. The Consumer Protection Act does not
specifically provide for the territorial jurisdiction of the
State Commission. Broadly these are on similar lines on
which the territorial jurisdiction of District Forum is based.
National Commission National Commission is the highest
level of Consumer Forums; it may entertain all the matters
where the value of claim exceeds Rs. 20 Lakhs. Territorial
Jurisdiction of the National Commission is whole of India
except the State of Jammu & Kashmir. Orders of the
Consumer Forum are like orders of the Civil Court and are
enforceable like decree of the court. The decree of a junior
Forum is appealable with senior Forum, and when no
appeal is instituted, the order is final. Every order made by
the District Forum, or State Commission, or the National
Commission may be enforced in the same manner as if it
were a decree of the court (Section 25).

17.2 PATENT:
In India intellectual property rights fall
under item 49 of list I – Union List – of
Seventh Schedule to Constitution. The
items read – Patents, inventions and
designs; copyright; trademark; and
merchandise marks, Thus patent is a
Union subject. Patent protection was
first introduced in 18th century. Formal
patent protection in Indian was
introduced by Patent Act, 1911. A
patent is a grant of property right by
the government to an inventor. Patent
are exclusive property rights that can
be sold, transferred, willed licensed, or
used as collateral much like other
valuable assets. Patent law stipulates
broad categories of
17.2.1 What can be Patented?
Patentable subject matter can be
broadly classified into four broad
categories: 1. Process: The word
process as used in patents refers to
new methods of manufacturing or new
technological procedures that can be
validated as unique. As a new method
of gene splitting can be patented, or a
new patent of manufacturing a drug
can be patented. 2. Machine: The word
machine in patent law means that the
patent application is for a specific
physical item. It has to be new and
useful, not merely a work of art or
some curiosity. 3. Manufacture: The
word manufacture refers to physical
items that have been fabricated
through new combination of materials
or technical applications. In most
instances the application must explain
how the product is made, including
material, manufacturing processes, and
additional modification that the
inventor wants to include for
protection under the patent grant. 4.
Composition of Matter: The law also
permits patenting composition of
matter. This category is related to
compounds such as synthetic material,
medicines, cosmetics, fertilizing agents,
and biogenetic catalyst. Simply having a
mixture of ingredients, however, does
not constitute a patentable
composition.
17.2.2 Type of PatentThe patent law
provides three categories of Patents:
utility patents, design patents and plant
patents. 1. Utility Patents: A utility
patent is granted for a new product
process machine methods of
manufacturing, and composition of
matter. This category excludes most
botanical creations related to plant and
agriculture use.
2. Design Patents: Design patents are
granted for any new or original
ornamental design for an article of
manufacture. A design patents protect
the appearance of the article not the
article itself. An inventor can easily
register both a utility patent and a
design patent. Design as per Design Act:
Section 2(5) of Design Act defines that
‘design’ means only the features of
shape, configuration, pattern or
ornament applied to any article by any
industrial process or means, whether
manual, mechanical or
The highlights of definition are: a)
Design Deals with external experience
only. b) It relates to features of shape,
configuration, pattern or ornamental
decoration to any article. c) Application
of shape, configuration etc. to an article
should be by an industrial process or
means.
3. Plant Patent: In botanical term, any
new variety of plant that has been
asexually reproduced can be granted a
plant patent. The new plant must not
exist in nature or in an uncultivated
state. Therefore new plants, mutants,
hybrids, and seedlings may be patented,
provided the inventor can satisfy the
Patent Office that the new plant did not
evolve from nature
----------------------------------------------
18.2 FUNCTIONS OF SEBI SEBI is entrusted
with following function (objective):
1. regulating the business in stock
exchanged and any other securities market;
2. registering the regulating the working of
stock brokers, sub-brokers, share transfer
agents, bankers to an issue, merchant
bankers, underwriters, portfolio managers,
investment advisers and such other
intermediaries who may be associated with
securities market in any manner;
3. Registering and regulating the working of
collective investment schemes including
mutual funds;
4. Promoting and regulating self-regulatory
organization;
5. Prohibiting fraudulent and unfair trade
practices relating to securities market;
6. Promoting investors’ education and
training of intermediaries of securities
market;
7. Prohibiting insider trading in securities;
8. Regulating substantial acquisition of
shares and take-over and mergers of
companies;
9. Calling for information from, undertaking
inspection, conducting inquiries and audits
of the stock exchange and intermediaries
and self- regulatory organization in the
securities market;
10. Levying fees or other changes for
carrying out the above purposes.
18.3 DEPARTMENT AT SEBI SEBI has five operational
departments, besides it, it has two more department
the legal department and the investigation department.
The department and there scope is as follows:
The Primary Market Policy, Intermediaries, Self-
Regulatory Organizations (SROs), and Investor
grievances and Guidance Department: It looks after all
policy matters and regulatory issues in respect of
primary market, registration, merchant bankers,
portfolio management services, investment advisers,
debentures trustees, underwriters, SROs and investor
grievances, guidance, education and association.
The Issue Management and Intermediaries
Department: It is responsible for vetting of all
prospectuses and letters of offer for public and right
issues, for coordinating with the primary market policy,
for registration, regulation and monitoring of
issuerelated intermediaries.
The Secondary Market Policy, Operation and Exchange
Administration, New Investment Products and Insider
Trading Department: It is responsible for all policy and
regulatory issues of secondary market and new
investment products, registration and monitoring of
members of stock exchanges, administration of some of
the stock
The Secondary Market Exchange Administration,
Inspection and Non-member Intermediaries
Department: It looks after the smaller stock exchange
of Guwahati, Indore, Mangalore etc. It also responsible
foe inspection of all stock exchanges, registration,
regulation and monitoring or non-member
intermediaries such as sub-brokers
Legal Department: This department looks after all legal
matters under the supervision of the General Counsel.
Investigation Department: This department carries out
inspection and investigation under the supervision of
the Chief of Investigation. SEBI has its regional offices
at Calcutta, Chennai, and Delhi. SEBI has also formed
two non statutory advisory committees, the Primary
Market Advisory Committee and Secondary Market
Advisory committee with the members from market
player, recognized investors associates and other
eminent persons. SEBI is also a member of
International Organization of Securities Commissions
(IOSCO).
18.4 POWERS AND SCOPE OF SEBI Functional area
of SEBI is very wide it is the rule maker, it is custodian,
it is watch dog of the security market. In brief it has the
power to regulate: (i) depositors and participants, (ii)
custodians, (iii) debentures trustees and trust deeds,
(iv) FIIs (v) inside traders, (vi) mutual fund, (vii)
portfolio manager, (viii) investment advisers, (ix)
merchant bankers, (x) registrars to issue and share
transfer agents, (xi) stock brokers and sub-brokers,
(xii) underwriters, (xiii) venture capital funds, and
(xiv) bankers to issue. The SEBI can issue guidelines in
respect of following: z Information disclosure,
operational transparency, and investor protection z
Development of financial institutions z Priding of issues
z Bonus issues z Preferential Issues z Financial
Instruments z Firm allotment and transfer of shares
among promoters