MODULE-1

MEANING OF BUSINESS ENVIRONMENT

Business Environment consists of all those factors that have a bearing on the business, such
as the strengths, weaknesses, internal power relationships and orientations of the organisation;
government policies and regulations; nature of the economy and economic conditions;
sociocultural factors; demographic trends; natural factors; and, global trends and cross-border
developments. Transformation of the Indian Two-wheeler Market given at the end of the chapter
illustrates the impact of business environment on the business.

Business environment is the sum total of all factors external to the business firm and that
greatly influence their functioning. It covers factors and forces like customers, competitors,
suppliers, government, and the social, cultural, political, technological and legal conditions

DEFINITION OF BE
According to Keith Davis, Business environment is the aggregate of all conditions, events and
influences that surround and affect it.
According to Reinecke and Schoell, the environment of business consists of all those external
things to which it is exposed and by which it may be influenced directly or indirectly.

NATURE OF BUSINESS ENVIRONMENT

Internal and external environment

Internal Environment refers to all the inlying forces and conditions present within the company,
which can affect the company's working. It is Controllable
External Environment is a set of all the exogenous forces that have the potential to affect the
organization's performance, profitability, and functionality. It is uncontrollable

Dynamic and ever-changing- Business environment is highly flexible and keep changing. It is
not static or rigid that is why it is essential to monitor and scan the business environment
continuously.
Complexity of the environment: It is very difficult to understand the impact of Business
environment on the companies. Although it is easy to scan the environment but it is very difficult
to know how these changes will influence Business decisions. Some-time change may be minor
but it might have large impact. For example, a change in government policy to increase the tax
rate by 5% may affect the income of company by large amount.

Inter-relatedness-Inter-related - Different elements of business environment are closely inter-

related and interdependent. A change in one element affects the other elements. Economic
environment influences the non-economic environment which in turn affects the economic
conditions
Uncertainty-No one can predict the business environment. It is uncertain to predict what
changes should be expected in the factors of the business environment. For example, there could
be raw material which is available easily today, but it can be difficult to get a few years later.

Impact – Long term scenario is one of the most critical features of business environment. Most
changes in the business environment impact the business for a long period. For example, when
there is a change in the political environment the business its impacts not only last for the few
months or few years but they will be there until no further changes take place in the environment.
Some impacts of business environment are good, and some are bad for the business and can also
force the permanent shut down of the business.

Inter-dependence –All different factors of the business environment are interconnected with
one another. For example, if there is inflation in the price of the raw material as a result the total
price of the final product will also be high, which will impact the budget of the consumers as a
result of which consumer will either stop using the goods, or they will buy the lesser amount
which in turn impact the revenue generation of the companies and the evident impact can be seen
in the economy of the country.

COMPONENTS OF BUSINESS ENVIRONMENT

Internal Environment These are those factors or conditions that exist within an organization
and affect its performance. These factors are controllable in nature and organization can try to
change or modify these factors.
Value system the values are the ethical beliefs that guide the organization in achieving its mission
and objectives.
Mission and objectives the objective is the end towards which business activities are directed
Mission is defined as the overall purpose or reason for its existence.
Organization structures the organizational structure is the hierarchy in business that define
roles, responsibilities and supervision.
Corporate culture Shared values and belief in an organization which determine its internal
environment are called corporate culture.
Human resources: Human quality of a firm is an important factor of internal environment Skills,
qualities, capabilities, attitude, competences and commitment of its employees, etc., could
contribute to the strengths and weaknesses of an organization.
Physical resources and financial capabilities Physical resources, such as plant and equipment,
facilities and financial capabilities of a firm determine its competitive strength which is an
important factor for determining its efficiency and unit cost of production

External environment These are those factors and the conditions which are outside the
organization and affect the performance of business. External factors are further divided into
micro environment and macro environment which are as follows:

Micro environment: Those factors which have direct impact on business. The various
constituents under micro environment are as follows
Suppliers of inputs-refer to the people and groups who supply raw materials and components
to the company. Reliable sources of supply enable the company to carry on uninterrupted
operations and to minimise inventory carrying costs. Suppliers also influence quality levels and
costs of manufacturing. It is very risky to depend on a single supplier. A strike or any other
production problem of the supplier may cause interruptions in manufacturing. Therefore, it is
advisable to develop and sustain multiple sources of supply

Customers-The people who buy a firm’s products and services are its customers. A business
exists to create and satisfy customers. A firm may have different types of customers like
individuals, households, Government departments, commercial establishments, etc. For
example, the customers of a paper company may include students, teachers, educational
institutions, business firms and other users of stationery.

Marketing intermediaries-Several marketing intermediaries help a company in promoting,

selling and distributing its products to consumers. Middlemen like agents, wholesalers, and
retailers serve as a link between the company and its customers. Transportation firms and
warehouses assist in the physical distribution of products. Advertising agencies, marketing
research agencies and insurance companies are other types of marketing intermediaries.

Competitors- A company may have both direct and indirect competitors. Direct competitors are
the other firms which offer the same or similar products and services. For example, Sony TV
faces direct competition from other brands like LG, Samsung, Onida,
Public- include all those groups who have an actual or potential, interest in the company or who
influence the company’s ability to achieve its objectives. Media groups, environmentalists, non-
government organisations (NGOs), consumer associations and local community are examples of
publics. These publics can have both positive and negative impact on a business firm. For
example, media groups can be used to disseminate useful information. A company can cooperate
with the local people to improve its image as well as to provide some benefit to the people. On
the negative side, local community concerned with public health can force a company to suspend
operations or to take pollution control measures.

Macro Environment: These are the factors or conditions which are general to all businesses and
are uncontrollable. Because of the uncontrollable nature of macro forces, a firm needs to adjust
or adapt it to these external forces. These factors are as follows
Economic environment
Economic Environment: The Economic Environment consists of the economic forces that
affects the business activities. These forces influences the buying behaviour and spending
patterns of consumers and
institutions.

The main components of Economic Environment are:

Economic System: includes Capitalist, socialist and Mixed Economic System.
Economic Policies: includes Monetary Policy, Fiscal Policy, Supply side Policy etc.
Economic Indices: includes Gross Domestic Product, Consumer Price index, Per Capita Income
etc.
Financial Market: includes Share Market, Money Market, Derivative Market, Capital Market.
Industrial Infrastructure etc.

Political-legal environment

Political Environment: Political Environment consists of the elements relating to government

affairs. The political environment provides the framework within which business has to function.

The main components of Political Environment are:

The Constitution of the Country.
Political Organization: includes Philosophy of political parties, ideology of the government,
nature and extent of bureaucracy, influence of primary groups etc.
Political Stability: includes structure of Military and police force, election system, Law and order
situation etc.
Image of the country and its leaders.
Foreign policy alignment or non-alignment.
Law Governing Business
 Legal Environment: The Legal Environment consists of the regulatory forces that will affect
the business activities and operations.

The main components of Legal Environment are:

Current Legislation.
International Legislation.
Regulatory bodies and processes.
Tax Regulations.
Competitive Regulations.
Industry Specific Regulations.
Government Regulations.

Technological environment
Technological Environment: Technology is changing at a fast pace and technological
environment is dramatically affecting the business environment either due to easy import policies
or because of technology up-gradation.

The main components of Technological Environment are:

Rate of Technological change and Diffusion.
New approaches to the production of goods and services.
Use of New processes and equipment.
Transfer of Foreign Technology.
Impact of Technology on cost, quality and value chain.

Global or international environment

No country can now run their economy in complete isolation. Every national economy is integrated
with the global economy in some way. Internal trade relations, imports, exports, trade agreements
between nations, etc. are all examples. Global environment basically consists of international
interactions of a firm over which it has no control. So, now in this global market with such a high
level of competitiveness, all companies must be mindful of the global environment. Let us look at a
few such factors of the global environment.

Socio-cultural environment
Social And Cultural Environment: Social Environment refers to the characteristics of the
society in which a business firm exists and operates.

The main components of social and cultural environment are:

Demographic Forces: includes Size, Composition and Mobility of Population.
Social Institutions and Groups.
Caste Structure and Family Organisation.
Educational System and Literacy Rate.
Customs, beliefs, values and life styles.
Tastes and Preferences of People.
Entrepreneurial Spirit.
Demographic environment:
It means various dimensions of country’s population. The demographic environment is important
to business because people constitute the market for a business. Moreover, business management
involves management of people and the efficiency of business depends largely on the
competence and motivation of its people. Business firms often use demographic factors (e.g.,
age, sex, family size, occupation, family life cycle, education, social class, income distribution)
as the basis of market segmentation. The demographic environment differs from country to
country and from one place to another within a country.

Natural environment
Natural environment is the ultimate source of many inputs such as raw materials, energy which
business firms use in their productive activity. In fact, availability of natural resources in a region
or country is a basic factor in determining business activity in it.
Climatic Conditions.
Agriculture, Commercial, and other Natural Resources.
Ecological System.
Levels of Pollution.

ENVIRONMENTAL SCREENING
The term screening means the process of evaluation or assessment of anything with the purpose
of gathering data on any subject matter and coming to a conclusion.
Environmental Screening is a process in which an organization makes assessment or analysis of
all the components of the environments and screens their impact on its functioning stability,
growth and profits.
For an effective environmental screening, an organization must follow the following steps:
Defining the type of business
Defining the scope of project
Defining the type of environment
Preparing a report
Monitoring:

Environment Analysis
Environmental Analysis can be defined as the process which examines all the components
whether internal or external that has an influence on the performance of the organization. Here,
the internal components indicates the strength and weaknesses of the business entity whereas the
external components indicates the opportunities and threats outside the organisation.
In other words, Environmental Analysis is the process through which an organisation monitors
and comprehends various environmental forces so as to determine the opportunities and threats
that lie ahead in the future
Environmental analysis is a strategic tool. It is a process to identify all the external and internal
elements, which can affect the organization’s performance. The analysis entails assessing the
level of threat or opportunity the factors might present. These evaluations are later translated into
the decision-making process. The analysis helps align strategies with the firm’s environment.
Definition: Environmental Analysis is described as the process which examines all the
components, internal or external, that has an influence on the performance of the organization.
The internal components indicate the strengths and weakness of the business entity whereas the
external components represent the opportunities and threats outside the organization.
Advantages of Environmental Analysis

Helps in Achieving 0bjectives

When a company neglects to adjust its strategy to the business environment, or does not react to
the demands of the environment by changing its strategy, the company cannot achieve success
in attaining its objectives. However, environmental analysis enables the business enterprises to
study the environment and formulate the strategies accordingly, which will result in successful
attainment of objectives.

Identification of Threats
Business Environment analysis and diagnosis give businessmen time to anticipate opportunities
and to plan to take optional response to these opportunities. It also helps strategies to develop an
early warning system to prevent threats or to develop strategies, which can turn a threat to the
firm’s advantage.

Happenings in the Market Place

Every firm should be in constant touch with the market place and should be aware of what is
happening in the marketplace. If the company fails to adjust or react to the demands of the
environment, by changing their strategies, it can’t achieve corporate objectives.

Threats Inherent in any Opportunity

Business Environmental diagnosis helps the businessmen in two ways. 1. He can ascertain the
possible threats to the business. This will enable him to take proper preventive measures. 2. He
can identify the opportunities and avenues in which the businessman can operate successfully
and achieve the object.

Forecasting the Future

Changes in the environment are often frequent and all of a sudden. Moreover, such changes
cannot be predicted precisely well in advance. Again, the entrepreneur can anticipate only a few
of such changes and not all. If the anticipations and expectations are precise and accurate, the
decisions are likely to be better. Hence business environment analysis helps to forecast the future
prospects of the business concern.

Threats and Opportunities

Some factors of the environment present threats to the company’s present strategy and the
accomplishment of the objectives. While some factors, on the other hand, present greater
opportunities for a great accomplishment of the objectives. A thorough analysis of the
environmental factors shall enable the analyst to recognize the inherent risk involved and also
enable him to take advantage of the opportunities.
In every threat there is an opportunity and, in every opportunity, there is a threat. By properly
analysing the environment and anticipating the changes likely to occur in the environment, the
business manager can estimate the future and adjust his plans accordingly. Of course, not all the
future events can be anticipated but some can and are, the extent to which the expectations are
accurate, managerial decisions are likely to be better. Moreover, the process of environmental
analysis reduces the time pressures on a few which are not anticipated.
Disadvantages of Environment Analysis
Environmental analysis suffers from certain limitations also.

These limitations are as follows:

Lack of Forewarning of Unforeseen Events

Environmental analysis does not predict the future. It does not eliminate uncertainty for the
organization also. Business enterprises sometimes face events, which are unexpected during
analysis. Environmental analysis, however, should aim at minimizing the frequency and extent
of surprises that may attack a business organization.

No Assurance as to Organization Effectiveness

Environmental analysis does not ensure organizational effectiveness. It acts only as inputs in
strategy development and testing. Sometimes, managers place uncritical faith in the data without
thinking about the data’s verifiability or accuracy. If this is the case, it may lead to misleading
outcome.

Not fully Reliable

Normally, people place too much reliance on the information collected through environmental
scanning. But in practice, it is not so. When there is overloading of information, one is likely to
get confused.

Absence of Strategic Approach

Success of any organization lies in adventure and strategic risk-taking. Environmental analysis
often makes an individual too cautious in his approach and he is likely to be left behind the
events. So, this analysis should be strategically done.

Components of Environmental Analysis

Identifying: First of all, the factors which influence the business entity are to be identified, to
improve its position in the market. The identification is performed at various levels, i.e., company
level, market level, national level and global level.
Scanning: Scanning implies the process of critically examining the factors that highly influence
the business, as all the factors identified in the previous step effects the entity with the same
intensity. Once the important factors are identified, strategies can be made for its improvement.
Analysing: In this step, a careful analysis of all the environmental factors is made to determine
their effect on different business levels and on the business as a whole. Different tools available
for the analysis include benchmarking, Delphi technique and scenario building.
Forecasting: After identification, examination and analysis, lastly the impact of the variables is
to be forecasted.
Or
Scanning The term scanning' means analyzing all parts or components of anything in order to
develop some features of that thing.
Monitoring -means keeping a constant eye or check on something. Thus, in environmental
analysis, monitoring keeps a check on environmental changes from time to time.
Forecasting is, thus, making any predictions about future and is, consequently, a part of business
environment analysis.
Assessing After scanning monitoring and forecasting the business environment, organization
must make proper evaluation or assessment of collected data in the above-mentioned steps.

STEPS IN BUSINESS ENVIRONMENTAL ANALYSIS

Scanning: It involves information gathering for assessing the nature of the environment in terms
of uncertainty, complexity, and dynamics. Scanning is the process of analysing the environment
for the identification of the factors

which impact on or have implications for the business. Such factors may include those which
have appeared suddenly or evolved over time. Identification of emerging/ensuing trends is a
critical purpose of the environmental scanning. It includes:
Identifies early signs of future environmental changes. They are indicated by trends and events.
Detects changes already underway. They are happening

Monitoring: It involves tracking environmental trends and events. It is the auditing of the
environment. The likely impact of environmental influences on business performance is
identified. Monitoring entails perspective follow-up and a more in-depth analysis of the relevant
environmental trends identified at the scanning stage. The effort here is more focused and
systematic than in scanning.

Forecasting: This step forecast what is likely to happen. Anticipating the future is essential for
identifying the future threats and opportunities and for
formulating strategic plans. “Forecasting is concerned with the development of plausible
directions of directions, scope, speed, and intensity of environmental change, to lay out the
evolutionary path of anticipatory change. Its layout of the path to anticipate changes. This step
provides:
Key forces at work in the environment. They can be political-legal, economic, social, cultural,
and technological.
Understanding of the nature of key influences and drivers of change.
Projection of future alternatives paths available.
Assessment: This step identifies key opportunities and threats. The purpose of environmental
analysis is to assess the impact of the environmental factors on the
organisation’s business or their implications for the organisation. Assessment, thus, involves
drawing up implications/possible impacts. “In assessment, the frame of reference moves from
understanding the environment — of the focus of scanning, monitoring and forecasting — to
identifying what that understanding of environment means for the organisation.”6 The
competitive position of business analysed in terms of how the organization stands in relation to
other organizations competing for some resources of customers.
Opportunities are a favourable condition that creates risks and weakens the competitive position.
The threat is an unfavourable condition that strengths, organization’ s
competitive position of the organization.

It can broadly further explained as :

Scanning all the required components :
Grouping the scanned components
Observing the internal components
Monitoring the external components
Outlining variables for analysis
Usage of different techniques for analysis
Forecasting future outcomes
Formulating strategies
Execution of formulated strategies
Monitoring

SWOT ANALYSIS

SWOT analysis refers to the analysis of both the internal and external environments of an
organization in this term, S stands for Strengths and W stands for Weaknesses these terms are
internal components of an organization O stands for available Opportunities in the market and T
stands for the possible Threats in the market.
Strengths: The term 'strengths basically means things you are good at or capabilities. In the
organizational context, it means the core competencies or capabilities of an organization for
which it can gain strategic advantages from its competitors.
Weaknesses are exact opposites of Strengths. While strengths are competitive advantages,
weaknesses are competitive disadvantages of an organization.
Opportunities The term 'opportunity means a chance to grab on in a positive sense. This is
actually a favorable condition or circumstance present in the external environment, which should
be grabbed by the organization, in order to increase its strengths and gaining competitive
advantages.
Threats: The term threat means exposing vulnerability of something which might create an
adverse impact in an external environment, if suddenly or even gradually some changes occur
and those are not in favor of the organization, then these are called threats to the organization
ENVIRONMENT SCANNING
Business environment of an organization is managed by environment scanning. It is the process
of collecting and using information about occasions, patterns, trends and relationships within
an organization's micro and macro business environment.
It helps to identify the threats and opportunities in the environment and formulate strategies
accordingly.
One approach of macro environment scanning is PESTLE analysis
The result of PESTLE analysis is to evaluate the big picture surrounding an organization and
the potential of new markets.
PESTLE/PESTEL: Analysis of political, economic, socio-cultural technological,legal,
environmental factors

PESTEL ANALYSIS

PESTEL Analysis is a strategic framework used to evaluate the external environment of a

business by breaking down the opportunities and risks into Political, Economic, Social,
Technological, Environmental, and Legal factors. PESTEL Analysis can be an effective
framework to use in Corporate Strategy Planning and for identifying the pros and cons of a
Business Strategy.

A PESTEL analysis is a framework or tool used by marketers to analyse and monitor the
macro-environmental (external marketing environment) factors that have an impact on an
organization, company, or industry. It examines the Political, Economic, Social, Technological,
Environmental, and Legal factors in the external environment. A PESTEL analysis is used to
identify threats and weaknesses which are used in a SWOT analysis.

Political Factors
When looking at political factors, you are looking at how government policy and actions
intervene in the economy and other factors that can affect a business.
These include the following:
Tax Policy
Trade Restrictions
Tariffs
Bureaucracy

One of the reasons that elections tend to be a period of uncertainty for a country is that different
political parties have diverging views and strategies for policy on the items above.
Political Factor Example: A company decides to move its operations to a different state after
a new government is elected on a campaign to implement policies that would adversely impact
thecompany’s core operations.
Economic Factors
Economic Factors take into account the various aspects of the economy, and how the outlook
on each area could impact your business. These economic indicators are usually measured and
reported by Central Banks and other Government Agencies. They include the following:

Economic Growth Rates

Interest Rates
Exchange Rates
Inflation
Unemployment Rates

Often these are the focus of external environment analysis. The economic outlook is of extreme
importance for a business, but the importance of the other PESTEL factors should not be
overlooked.
Economic Factor Example: A company decides to refinance its debt after an interest rate
decrease is announced.

Social Factors
PESTEL analysis also takes into consideration social factors, which are related to the cultural
and demographic trends of society. Social norms and pressures are key to determining
consumer behaviour. Factors to be considered are the following:

Cultural Aspects & Perceptions

Health Consciousness
Populations Growth Rates
Age Distribution
Career Attitudes

Social Factors Example: The percentage of the American population that smokes has
decreased
since the 1970s, due to changes in society’s perception of health and wellness.

Technological Factors
Technological factors are linked to innovation in the industry, as well as innovation in the
overall economy. Not being up to date to the latest trends of a particular industry can be
extremely harmful to operations. Technological factors include the following:
R&D Activity
Automation
Technological Incentives
The Rate of change in technology
Technological Factors Example: A company decides to digitize their physical data files to
allow for quicker access to company information.

Environmental Factors
Environmental factors concern the ecological impacts on business. As weather extremes
become more common, businesses need to plan how to adapt to these changes. Key
environmental factors include the following:

Additionally, there is increasing importance for businesses to be environmentally friendly with

their operations, as evidenced by the rise of Corporate Sustainability Responsibility (CSR)
initiatives.
Examples of CSR initiatives include carbon footprint reduction efforts and transitions into
renewable material and energy sources.
Environmental Factors Example: An agricultural company has to adjust its harvest forecasts
due to unexpectedly dry seasonal conditions that will prevent crop growth.
Weather Conditions
Temperature
Climate Change
Pollution
Natural disasters (tsunami, tornadoes, etc.)

Legal Factors
There is often uncertainty regarding the difference between political and legal factors in the
context of a PESTEL analysis. Legal factors pertain to any legal forces that define what a
business can or cannot do. Political factors involve the relationship between business and the
government. Political and legal factors can intersect when governmental bodies introduce
legislature and policies that affect how businesses operate.

Legal factors include the following:

Industry Regulation
Licenses & Permits
Labour Laws
Intellectual Property

Legal Factors Example: A restaurant is forced to shut down after not meeting food safety
standards set out in state law.

BALANCE SCORECARD
The term balanced scorecard (BSC) refers to a strategic management performance metric used
to identify and improve various internal business functions and their resulting external
outcomes.
A balanced scorecard is a performance metric used to identify, improve, and control a
business's various functions and resulting outcomes.

The concept of BSCs was first introduced in 1992 by David Norton and Robert Kaplan, who
took previous metric performance
measures and adapted them to include nonfinancial information.

BSCs were originally developed for for-profit companies but were later adapted for use by
non-profits and government agencies.

The balanced scorecard involves measuring four main aspects of a business: Learning and
growth, business processes, customers, and finance.

BSCs allow companies to pool information in a single report, to provide information into
service and quality in addition to financial performance, and to help improve efficiencies.

MODULE 2

Business fortunes and strategies are influenced by the economic characteristics and economic
policy dimensions. The economic environment includes the structure and nature of the
economy, the stage of development of the economy, economic resources, the level of income,
the distribution of income and assets, global economic linkages, economic policies etc.
ECONOMIC ENVIRONMENT
The economic environment is the sum total of the economic conditions and the nature of the
economy in which the business has to operate and compete. The economic environment includes
the structure and nature of the economy, the stage of development of the economy, economic
resources, the level of income, the distribution of income and assets, global economic linkages,
economic policies etc.
FACTORS AFFECTING THE ECONOMIC ENVIRONMENT
The firm has no control over the economic environment in which it must operate. It is an
external macro factor.

Economic Systems
The economic system under which the economy operates has a huge impact on its economic
environment. The three economic systems which usually prevail are:

Capitalist Economy: There are no restrictions in a capitalist economy. The market forces operate
freely, demand and supply will decide the prices in the market. There is private ownership of
factors of production and private companies.
Socialist Economy: This type of economy is characterized by government control and central
planning authority. So, there is no private ownership, all means of production are under state
control. There are no market forces and the price is also set by the state.

Mixed Economy: Here the best features of both capitalism and socialism combine to give us this
system. Market forces are very much in force to decide demand supply and prices. But there is
some government oversight to ensure that there are no discriminatory practices.

Economic Conditions
The economic conditions of the country also have a huge impact on the firms that exist within the
economy. Furthermore, economic conditions are the sum total of many factors that can greatly
affect a business. Such factors include GDP of the economy, per capita income, availability of
capital, utilization of resources, state of the capital market, interest rates, unemployment levels, etc.

Factors affecting economic conditions

Income levels Distribution of income
GDP trends Sectoral growth trends
Demand and supply trends Price trends
Trade and BoP trends Foreign exchange reserves position
Global economic trends

Economic Policies
There are several economic policies which can have a very great impact on business. Important
economic policies are industrial policy, trade policy, foreign exchange policy, monetary policy,
fiscal policy, foreign investment and technology policy.
Industrial Policy: These are all rules, laws, notifications, policies, circulars, etc through which the
government controls and governs the industrial sector of the economy. This helps them shape the
industrial development of the country.
Fiscal Policy: This is the government policy with regard to public expenditure, taxation, and public
debt. This also greatly affects the businesses functioning in the economy.

Monetary Policy: This policy will decide the supply of money to the market. Consequently, will
decide the levels of savings and investments. It will also control the credit supply in the economy.

Foreign Investment Policy: This deals with keeping the foreign investments in-check for all
sectors. So, we can benefit from the new technologies in all sectors.

Import Export Policy: This is how the government controls the export and imports of a country.
Also, the import-export policies will lay out the duties, taxes, subsidies, etc. These days there are
not many barriers to import and export which positively affects the economic environment.
Economic Factors
An economic factor has a direct impact on the economy and its performance, which in turn directly
impacts on the organisation and its profitability. Factors include economic growth, interest rates,
employment or unemployment rates, foreign exchange rates etc

GROSS DOMESTIC PRODUCT (GDP)

The Gross Domestic Product measures the value of economic activity within a country. Strictly
defined, GDP is the sum of the market values, or prices, of all final goods and services produced
in an economy during a period of time.

Growth Rate of GDP

GDP is an excellent index with which to compare the economy at two points in time. That
comparison can then be used formulate the growth rate of total output within a nation.
In order to calculate the GDP growth rate, subtract 1 from the value received by dividing the GDP
for the first year by the GDP for the second year.

Real GDP vs. Nominal GDP

In order to deal with the ambiguity inherent in the growth rate of GDP, macroeconomists have
created two different types of GDP, nominal GDP and real GDP.
Nominal GDP is the sum value of all produced goods and services at current prices. This is the
GDP that is explained in the sections above. Nominal GDP is more useful than real GDP when
comparing sheer output, rather than the value of output, over time.
Real GDP is the sum value of all produced goods and services at constant prices. The prices
used in the computation of real GDP are gleaned from a specified base year. By keeping the
prices constant in the computation of real GDP, it is possible to compare the economic growth
from one year to the next in terms of production of goods and services rather than the market
value of these goods and services. In this way, real GDP frees year-to-year comparisons of
output from the effects of changes in the price level.

GDP Deflator
When comparing GDP between years, nominal GDP and real GDP capture different elements
of the change. Nominal GDP captures both changes in quantity and changes in prices. Real
GDP, on the other hand, captures only changes in quantity and is insensitive to the price level.
Because of this difference, after computing nominal GDP and real GDP a third useful statistic
can be computed. The GDP deflator is the ratio of nominal GDP to real GDP for a given year
minus 1. In effect, the GDP deflator illustrates how much of the change in the GDP from a base
year is reliant on changes in the price level.
The GDP deflator captures changes in the price level. Nominal GDP captures both changes in
prices and changes in quantities. By using nominal GDP, real GDP, and the GDP deflator you
can look at a change in GDP and break it down into its component change in price level and
change in quantities produced.
GDP Per Capita
GDP is the single most useful number when describing the size and growth of a country's
economy. An important thing to consider, though, is how GDP is connected with standard of
living. After all, to the citizens of a country, the economy itself is less important than the
standard of living that it provides.
GDP per capita, the GDP divided by the size of the population, gives the amount of GDP that
each individual gets, on average, and thereby provides an excellent measure of standard of
living within an economy. Because GDP is equal to national income, the value of GDP per
capita is therefore the income of a representative individual. This number is connected directly
to standard of living. In general, the higher GDP per capita in a country, the higher the standard
of living.

GDP per capita is a more useful measure than GDP for determining standard of living because
of differences in population across countries. If a country has a large GDP and a very large
population, each person in the country may have a low income and thus may live in poor
conditions. On the other hand, a country may have a moderate GDP but a very small population
and thus a high individual income. Using the GDP per capita measure to compare standard of
living across countries avoids the problem of division of GDP among the inhabitants of a
country.

Implications
GDP is important because it gives information about the size of the economy and how an
economy is performing.

When real GDP is growing strongly, employment is likely to be increasing as companies hire
more workers for their factories and people have more money in their pockets.

When GDP is shrinking, as it did in many countries during the recent global economic crisis,
employment often declines.

In some cases, GDP may be growing, but not fast enough to create a sufficient number of jobs
for those seeking them.

But real GDP growth does move in cycles over time. Economies are sometimes in periods
of boom, and sometimes in periods of slow growth or even recession (with the latter often
defined as two consecutive quarters during which output declines).

OTHER ECONOMIC INDICATORS

Gross National Product (GNP) GDP + Net Factor Income from Abroad.
In other words, GNP includes the aggregate income made by all citizens of the country,
whereas GDP includes incomes by foreigners within the domestic economy and excludes
incomes earned by the citizens in a foreign economy.

Per Capita GDP: per capita GDP shows how much economic production value can be
attributed to each individual citizen

GDP Per Capita is GDP Per Capita = GDP/Population

Applications of Per Capita GDP

Governments can use per capita GDP to understand how the economy is growing with its
population.
GDP per capita analysis on a national level can provide insights into a country’s domestic
population influence.

INFLATION
Inflation is the rate of increase in prices over a given period of time. Inflation is typically a
broad measure, such as the overall increase in prices or the increase in the cost of living in a
country.

Inflation erodes purchasing power or how much of something can be purchased with currency.

Inflation requires prices to rise across a "basket" of goods and services, such as the one that
comprises the most common measure of price changes, the consumer price index (CPI)

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of
a basket of consumer goods and services, such as transportation, food, and medical care. It is
calculated by taking price changes for each item in the predetermined basket of goods and
averaging them.

A basket of goods refers to a fixed set of consumer products and services whose price is
evaluated on a regular basis. This basket is used to track inflation in a specific market or
country, so that if the price of the basket of goods increases by 2% in a year, inflation can thus
be said to be 2%. The goods in the basket are meant to be representative of the broader economy
and are adjusted periodically to account for changes in consumer habits.

The basket of goods includes basic food and beverages such as cereal, milk, and coffee. It also
includes housing costs, bedroom furniture, apparel, transportation expenses, medical care costs,
recreational expenses, toys, and the cost of admissions to museums also qualify. Education and
communication expenses are included in the basket's contents, and the government also
includes other random items such as tobacco, haircuts, and funerals.
Application

•Effect of Inflation on Consumers

•As prices rise (inflation) money loses its value and people lose confidence in money as the
value of
savings is reduced
•Inflation can get out of control - price increases lead to higher wage demands as people try to
maintain their living standards
•Consumers on fixed incomes (e.g. pensioners) lose out because their real incomes fall

Effects of Inflation on Businesses

•Positive effects:
•Industry-wide price rises enable revenues to grow
•Growing revenues + constant gross margin = higher gross profit
•Negative effects:
•If costs are rising due to inflation, a business may not be able to pass them onto customers
•Inflation can disrupt business planning and lead to lower investment
•Rising inflation is associated with higher interest rates - this reduces economic growth and can
lead to a recession

STRUCTURE OF THE ECONOMY

The structure of the economy – factors such as contribution of different sectors like primary
(Mostly agricultural), secondary (industrial) and tertiary (secondary) sectors, large, medium,
small and tiny sectors to the economy, and their linkages, integration with the world economy
etc. – are important to business because these factors indicate the prospects for different types
of business, certain factors which affect the business etc. For example, if an economy is highly
integrated with the global economy it will be quickly affected by developments in the global
economy.
Normally, as an economy develops, the share of the primary sector in the GDP and
employment declines and those of the other sectors increase. After a certain stage, the share of
the manufacturing sector may also decline.
The developed economies are primarily service economies in the sense that the service sector
generates bulk of the employment and income. The contribution of services to GDP and
employment is substantially high in, particularly, the developed economies.

LPG AND ITS EFFECTS ON INDIAN ECONOMY

Liberalization
Liberalization refers to the slackening of government regulations. The economic liberalisation
in India denotes the continuing financial reforms which began since July 24, 1991. . It implies
greater autonomy to the business enterprises in decision-making and removal of government
interference. It was believed that the market forces of demand and supply would automatically
operate to bring about greater efficiency and the economy would recover. This was to be done
internally by introducing reforms in the real and financial sectors of the economy and externally
by relaxing state control on foreign investments and trade

Objectives
• To boost competition between domestic businesses
• To promote foreign trade and regulate imports and exports
• Improvement of technology and foreign capital
• To develop a global market of a country
• To reduce the debt burden of a country
• To unlock the economic potential of the country by encouraging the private sector and
multinational corporations to invest and expand.
• To encourage the private sector to take an active part in the development process.
• To reduce the role of the public sector in future industrial development.
• To introduce more competition into the economy with the aim of increasing efficiency

Impacts of Liberalisation in India

Positive impacts of liberalisation in India

Free flow of capital: Liberalisation has improved flow of capital into the country which makes
it inexpensive for the companies to access capital from investors. Lower cost of capital enables
to undertake lucrative projects which they may not have been possible with a higher cost of
capital pre-liberalisation, leading to higher growth rates
Stock Market Performance: Generally, when a country relaxes its laws, taxes, the stock
market values also rise. Stock Markets are platforms on which Corporate Securities can be
traded in real time. Impact of FDI in Banking sector: Foreign direct investment allowed in the
banking and insurance sectors resulted in decline of government’s stake in banks and insurance
firms.

Political Risks Reduced: Liberalisation policies in the country lessens political risks to
investors. The government can attract more foreign investment through liberalisation of
economic policies. These are the areas that support and foster a readiness to do business in the
country such as a strong legal foundation to settle disputes, fair and enforceable laws.
Diversification for Investors: In a liberalised economy, Investors gets benefit by being able
to invest a portion of their portfolio into a diversifying asset class.
Impact on Agriculture: In the area of agriculture, the cropping patterns has undergone a huge
modification, but the impact of liberalisation cannot be properly measured. It is observed that
there are still all-pervasive government controls and interventions starting from production to
distribution for the produce

Negative impacts of liberalisation in India

Destabilization of the economy: tremendous redistribution of economic power and political

power leads to Destabilizing effects on the entire Indian economy. Threat from Multinationals:
Prior to 1991 MNC’s did not play much role in the Indian economy. In the pre-reform period,
there was domination of public enterprises in the economy. On account of liberalisation,
competition has increased for the Indian firms.
Technological Impact: Rapid increase in technology forces many enterprises and small-scale
industries in India to either adapt to changes or close their businesses.
Mergers and Acquisitions: Acquisitions and mergers are increasing day-by-day. In cases
where small companies are being merged by big companies, the employees of the small
companies may require exhaustive re-skilling. Re-skilling duration will lead to non-
productivity and would cast a burden on the capital of the company.

Impact of FDI in Banking sector:

Foreign direct investment allowed in the banking and insurance
sectors resulted in decline of government’s stake in banks and insurance firms.

Privatization
Privatization refers to the participation of private entities in businesses and services and transfer
of ownership from the public sector (or government) to the private sector as well.
Privatization is the transfer of control of ownership of economic resources from the public
sector to the private sector. It means a decline in the role of the public sector as there is a shift
in the property rights from the state to private ownership.
Another term for privatization is Disinvestment. The objectives of disinvestment were to raise
resources through sale of PSUs to be directed towards social welfare expenditures, raising
efficiency of PSUs through increased competition, increasing consumer satisfaction with better
quality goods and services, upgrading technology and most importantly removing political
interference

Objective of Privatization
Providing strong momentum to the inflow of FDI
Privatization aims at providing a strong base to the inflow of FDI.
Increased inflow of FDI improves the financial strength of the economy.
Ways of Privatization:
Government companies are transformed into private companies in 2 ways, Transfer of
Ownership
Government companies can be converted into private companies in two ways
By withdrawal of the government from ownership and management of public sector companies.
By outright sale of public sector companies.

Privatization of the public sector undertakings by selling off part of the equity of PSUs to the
private sector is known as disinvestment.
The purpose of the sale is mainly to improve financial discipline and facilitate modernization.

Impact of Privatisation

Positive Aspect-

Improved efficiency:- The main argument for privatisation is that private companies have a
profit incentive to cut costs and be more efficient. If you work for a government run industry
managers do not usually share in any profits.
Lack of political interference:- It is argued governments make poor economic managers.
They are motivated by political pressures rather than sound economic and business sense.
Short term view:- A government many think only in terms of the next election. Therefore,
they may be unwilling to invest in infrastructure improvements which will benefit the firm in
the long term because they are more concerned about projects that give a benefit before the
election. It is easier to cut public sector investment than frontline services like healthcare.
Shareholders:- It is argued that a private firm has pressure from shareholders to perform
efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state- owned
firm doesn’t have this pressure and so it is easier for them to be inefficient.
Increased competition:- Often privatisation of state-owned monopolies occurs alongside
deregulation – i.e., policies to allow more firms to enter the industry and increase the
competitiveness of the market. It is this increase in competition that can be the greatest spur to
improvements in efficiency.

Negative Aspect-

Natural monopoly:- A natural monopoly occurs when the most efficient number of firms in
an industry is one. For example, tap water has very significant fixed costs. Therefore, there is
no scope for having competition amongst several firms. Therefore, in this case, privatisation
would just create a private monopoly which might seek to set higher prices which exploit
consumers. Therefore, it is better to have a public monopoly rather than a private monopoly
which can exploit the consumer
Public interest:- There are many industries which perform an important public service, e.g.,
health care, education and public transport. In these industries, the profit motive shouldn’t be
the primary objective of firms and the industry.
Problem of regulating private monopolies.:- Privatisation creates private monopolies, such
as the water companies and rail companies. This need regulating to prevent abuse of monopoly
power. Therefore, there is still need for government regulation, similar to under state ownership.
Short-termism of firms:-As well as the government being motivated by short term pressures,
this is something private firms may do as well. To please shareholders, they may seek to
increase short term profits and avoid investing in long term projects.

Globalization
Globalization essentially means integration of the national economy with the world economy.
It implies a free flow of information, ideas, technology, goods and services, capital and even
people across different countries and societies. It increases connectivity between different
markets in the form of trade, investments and cultural exchanges.

IMPACT OF GLOBALISATION IN INDIA

Positive impact

Increase in Employment: With the opportunity of Special Economic Zones (SEZ), there is an
increase in the number of new jobs availability. Including Export Processing Zones (EPZ)
Centre in India is very useful in employing thousands of people. Another additional factor in
India is cheap labour. This feature motivates big companies in the west to outsource employees
from other region and cause more employment.
Increase in Compensation: After Globalisation, the level of compensation has increased as
compared to domestic companies due to the skill and knowledge a foreign company offers. This
opportunity also emerged as an alteration of the management structure.
High Standard of Living: With the outbreak of Globalisation, Indian economy and the
standard of living of an individual has increased. This change is notified with the purchasing
behaviour of a person, especially with those who are associated with foreign companies. Hence,
many cities are undergoing a better standard of living along with business development.
Extension of Market- Due to globalisation any company can extend their limits the size of
business. Now no nation can any longer hope to lead an existence of solitude and isolation in
which only domestics industries can function.
Development of Infrastructure- Its help in the improvement and development of
infrastructure. For example, growing financial facilities, faster communication, rapid
technology changes, new sources of industrial energy etc.
Development of healthy competition. Integration of global markets reduces manufacturing
costs, improves quality, reduces processing time, and business becomes dominant drivers.
Multiplicity of Manufacturing Plants- In globalisation, an MNC by operating in more than one
country gains research and development production, marketing and financial advantages in its
cost and reputation, that are not available to purely domestic marketeers.

Disadvantages of Globalisation

Inequality: Globalisation has been linked to rising inequalities in income and wealth. Evidence
for this is the growing rural–urban divide in countries such as China, India and Brazil. This
leads to political and social tensions and financial instability that will constrain growth
Inflation: Strong demand for food and energy has caused a steep rise in commodity prices.
Food price inflation (known as aflation) has placed millions of the world’s poorest people at
great risk.
Vulnerability to external economic shocks – national economies are more connected and
interdependent; this increases the risk of contagion i.e., an external event somewhere else in the
world coming back to affect you has risen / making a country more vulnerable to macro-
economic problems elsewhere
Threats to the Global Commons: Irreversible damage to ecosystems, land degradation,
deforestation, loss of bio-diversity and the fears of a permanent shortage of water afflict
millions of the worlds most vulnerable
Trade Imbalances: Global trade has grown but so too have trade imbalances. Some countries
are running big trade surpluses and these imbalances are creating tensions and pressures to
introduce protectionist policies such as new forms of import control
Unemployment: Concern has been expressed by some that capital investment and jobs in
advanced economies will drain away to developing countries as firms switch their production
to countries with lower unit labour costs. This can lead to higher levels of structural
unemployment.
Standardisation: Some critics of globalisation point to a loss of economic and cultural
diversity as giant firms and global multinational brands dominate domestic markets in many
countries

MONEY MARKET & CAPITAL MARKET IN INDIA

MONEY MARKET- The Money Market is a market for lending and borrowing of short-term
funds. It deals in funds and financial instruments having a maturity period of one day to one
year. It covers money and financial assets that are close substitutes for money. The instruments
in the money market are of short term nature and highly liquid.
As the Reserve Bank observes, “as in most developing countries, the money market in India
comprises two sectors which may broadly be termed as the Organised and Unorganised
markets, with substantially higher rates of interest in the unorganised sector”.
The organised market comprises in the first place the Reserve Bank which is “the key
constituent of the money market being the residual source of supply of funds and it is this which
invests the bank’s operations with great significance,” and occupies “a strategic position in the
money market.”Then come the commercial banks. They include the public sector banks and
other joint stock banks, Indian and foreign.

ORGANIZED MONEY MARKET INSTRUMENTS AND FEATURES

Call and Notice Money Market: Under call money market, funds are transacted on overnight
basis. Under notice money market funds are transacted for the period between 2 days and 14
days. The funds lent in the notice money market do not have a specified repayment date when
the deal is made. The lender issues a notice to the borrower 2-3 days before the funds are to be
paid. On receipt of this notice, the borrower will have to repay the funds within the given time.
Generally, banks rely on the call money market where they raise funds for a single day.
Treasury Bills (T-Bills): Treasury bills are short-term securities issued by RBI on behalf of
Government of India. They are the main instruments of short term borrowing by the
Government. They are useful in managing short-term liquidity. At present, the Government of
India issues three types of treasury bills through auctions, namely – 91 days, 182-day and 364-
day treasury bills. There are no treasury bills issued by state governments. With the introduction
of the auction system, interest rates on all types of TBs are being determined by the market
forces.
Commercial Bills: Commercial bill is a short-term, negotiable, and self-liquidating instrument
with low risk. They are negotiable instruments drawn by a seller on the buyer for the value of
goods delivered by him. Such bills are called trade bills. When trade bills are accepted by
commercial banks, they are called commercial bills.
Certificates of Deposits (CDs): CDs are unsecured, negotiable promissory notes issued at a
discount to the face value. They are issued by commercial banks and development financial
institutions. CDs are marketable receipts of funds deposited in a bank for a fixed period at a
specified rate of interest.
Commercial Papers (CPs): Commercial Paper (CP) is an unsecured money market instrument
issued in the form of a promissory note with fixed maturity. They indicate the short-term
obligation of an issuer. They are quite safe and highly liquid. They are generally issued by the
leading, nationally reputed, highly rates and credit worthy large manufacturing and finance
companies is the public as well as private sector
Repos: A repo or reverse repo is a transaction in which two parties agree to sell and repurchase
the same security. Under repo, the seller gets immediate funds by selling specified securities
with an agreement to repurchase the same at a mutually decided future date and price. Similarly,
the buyer purchases the securities with an agreement to resell the same to the seller at an agreed
date and price
Discount and Finance House of India (DFHI): It was set up by RBI in April 1988 with the
objective of deepening and activating money market. It is jointly owned by RBI, public sector
banks and all India financial institutions which have contributed to its paid up capital.
Money Market Mutual Funds (MMMFs): RBI introduced MMMFs in April 1992 to enable
small investors to participate in the money market. MMMFs mobilizes savings from small
investors and invest them in short-term debt instruments or money market instruments such as
call money, repos, treasury bills, CDs and CPs. These instruments are forms of debt that mature
in less than a year.

UNORGANIZED SECTOR OF INDIAN MONEY MARKET

Indigenous Bankers: They are financial intermediaries which operate as banks, receive
deposits and give loans and deals in hundies.
Money Lenders: They are those whose primary business is money lending. Money lenders
predominate in villages. However, they are also found in urban areas. Interest rates are
generally high.
Unregulated non-bank Financial Intermediaries: Theconsist of Chit Funds, Nithis, Loan
companies and others.
Chit Funds: They are saving institutions. The members make regular contribution to the fund.
The collected funds is given to some member based on previously agreed criterion (by bids or
by draws).
Finance Brokers: They are found in all major urban markets specially in cloth markets, grain
markets and commodity markets. They are middlemen between lenders and borrowers

CAPITAL MARKET IN INDIA

Capital market is the market for medium and long term funds. It refers to all the facilities and
the institutional arrangements for borrowing and lending term funds (medium-term and long-
term funds). The demand for long-term funds comes mainly from industry, trade, agriculture
and government. The central and state governments invest not only on economic overheads
such as transport, irrigation, and power supply but also an basic and consumer goods industries
and hence require large sums from capital market. The supply of funds comes largely from
individual savers, corporate savings, banks, insurance companies, specialized financial
institutions and government
composition of capital market in India
In the financial market all those institutions and organizations which provide medium term and
longterm funds to business enterprises and public authorities, constitute the capital market. In
simple words, the market which lends long-term funds is called the capital market. The capital
market is composed of those who demand funds and those who supply funds. Thus, the
borrowers and lenders in the financial market for medium-term and long-term funds constitute
the capital market. The Indian Capital Market is broadly divided into two categories:
The securities market consisting of (a) The gilt-edged market and (b) The industrial securities
market; and

The financial institutions (Development Financial Institutions) (DFIs). Thus, the Indian capital
market is composed of (a) The gilt-edged market or the market for government securities and
industrial securities or corporate securities market. (b) Capital market includes Development
Financial Institutions (DFIs) such as IFCI, SFC, LIC, IDBI, UTI, ICICI, etc. They provide
medium-term and long-term funds for business enterprises and public authorities. (c) Apart
from the above, there are financial intermediaries in the capital market such as merchant
bankers, mutual funds, leasing companies, venture capital companies etc. They help in
mobilizing savings and supplying funds to investors.

SOCIAL ENVIRONMENT

The social aspect focuses on the forces within society. Family, friends, colleagues, neighbours,
and the media are social factors. These factors can affect our attitudes, opinions, and interests.
So, it can impact the sales of products and revenues earned.

The social factors shape who we are as people. It affects how we behave and what we buy. A
good example is how people’s attitude towards diet and health is changing. Because of this,
businesses are seeing some changes. More people are joining fitness clubs. There is also a
massive growth in demand for organic food
Changing consumer behaviour patterns
The tastes and fashions are a great example of this change.
One of the most significant differences is the growing popularity of social media.
Social networking sites like Facebook have become very popular among younger people. The
young consumers have grown used to mobile phones and computers.
The younger generation prefers to use digital technology to shop online. Older people will
perhaps stick to their traditional methods. The effect of changing society is often discussed

Products often take advantage of social factors.

The Wii Fit, for instance, attempt to deal with society’s concern about children’s lack
of exercise.

Population changes are also directly affecting organizations.

The supply and demand of goods and services in an economy can change with the structure of
the population. A decline in birth rates means demand will decrease. It also indicates greater
competition as the total consumers fall.

World food shortage predictions can lead to call for more investment in food production.
An increase in the world’s population can have the same effect. African countries like Uganda
are facing food shortages. They are reconsidering the rejection of genetically modified foods
now.
Social Environment consists of social forces like traditions, values, social trends, level of
education, the standard of living etc.

Tradition: It refers to social practices that have lasted for decades, such as Ugadi, Deepavali,
Id, Christmas etc.
Impact: More demand during festivals provides opportunities for various businesses. Eg:
Onam, Id related to purchase of household item, discount sales, bonanzas
Values: It refers to moral principles prevailing in the society, such as Freedom of choice in the
market, Social Justice, Equality of opportunity, Non-discriminatory practices etc.
Impact: The organisations that believe in values maintain a good reputation in society and find
ease in selling their products. Eg: Tata

Social Trends: It refers to a general change or development in the society, such as health and
fitness trend among urban dwellers.
Impact: Health and fitness trend has created demand for gyms, mineral water etc List of social
factors which impact customer needs and the size of markets
Lifestyles
Buying habits
Education level
Emphasis on safety
Religion and beliefs
Health consciousness
Sex distribution
Average disposable income level
Social classes
Family size and structure Minorities
Attitudes toward saving and investing
Attitudes toward green or ecological products
Attitudes toward renewable energy
Population growth rate
Immigration and emigration rates
Age distribution and life expectancy rates
Attitudes toward imported products and services
Attitudes toward work, career, leisure, and retirement
Attitudes toward customer service and product quality

BE Module_3
Syllabus: POLITICAL ENVIRONMENT: BUSINESS- GOVERNMENT INTERFACE-
PUBLIC POLICY FORMULATION -IMPLICATIONS FOR BUSINESS.

Political Environment: Business

In modern society, politics can be defined as all those activities and systems which have a direct
impact on how power and authority are allocated and used. From a business perspective,
changes in these machinations can affect the fortunes of your company in several different
ways, regardless of your size or reach. Political environment includes factors such as the
characteristics and policies of the political parties, the nature of the constitution and
Government system and the Government environment encompassing the economic and
business policies and regulations. Important economic policies such as industrial policy, policy
towards foreign capital and technology, fiscal policy and export-import policy are often
political decisions. Many political decisions have serious economic and business implications.
The economic policy of the ruling party is very important. In the past communists and other
leftists favoured state capitalism and were against private capital, particularly foreign.

CLASSIFICATION OF FUNCTIONS OF STATE

Functions of the state varies from basic minimum requirements to active participation in several
other sectors.
The basic functions include the pure public goods such as the provision of property rights,
macroeconomic stability, control of infectious diseases, safe water, roads, and protection of the
destitute. In many countries, the state is not even providing these. Recent reforms have
emphasised economic fundamentals. But social and institutional (including legal)
fundamentals are equally important to avoid social disruption and ensure sustained
development.
Going beyond these basic services are the intermediate functions, such as management of
externalities (pollution, for example), regulation of monopolies, and the provision of social
insurance (pensions, unemployment benefits). Here, too, the government cannot choose
whether, but only how best to intervene, and government can work in partnership with markets
and civil society to ensure that these public goods are provided.
States with strong capability can take on more activist functions, dealing with the problem of
missing markets by helping coordination. East Asia’s experience has renewed interest in the
state’s role in promoting markets through active industrial and financial policy.

The State sets the formal rules—laws and regulations—that are part and parcel of a country’s
institutional environment. These formal rules, along with the informal rules of the broader
society, are the institutions that mediate human behaviour. But the state is not merely a referee,
making and enforcing the rules from the sidelines; it is also a player, indeed often a dominant
player, in the economic game. Every day, state agencies invest resources, direct credit, procure
goods and services, and negotiate contracts; these actions have profound effects on transactions
costs and on economic activity and economic outcomes, especially in developing economies.
Played well, the state’s activities can accelerate development. Played badly, they will produce
stagnation or, in the extreme, economic and social disintegration. The state, then, is in a unique
position: not only must it
establish, through a social and political process, the formal rules by which all other
organisations must abide; as an organisation itself, it, too, must abide by those rules.

Reinvigorating the State’s Capability

Reinvigorating the state’s capability can be achieved through the following:
Rules and Restraints: Mechanisms for enforcing the rule of law, such as an independent
judiciary, are critical foundations for sustainable development. Along with appropriate
separation of powers and the presence of watchdog bodies, they also restrain arbitrary
behaviour.
Competitive Pressure: Competitive pressure can come from within the state bureaucracy,
through recruitment of civil servants on the basis of merit. It can come from the domestic private
sector, through contracting out for services and allowing private providers to compete directly
with public agencies. Or it can come from the international marketplace, through trade and
through the influence of global bond markets on fiscal decisions.
Voice and Partnership: The means to achieve transparency and openness in modern society are
many and varied—business councils, interaction groups, and consumer groups, to name a few.
Institutional working arrangements with community groups can contribute to greater state
effectiveness by giving citizens a greater voice in the formulation of government’s policies.
And partnerships between levels of government and with international bodies can help in the
provision of local and global public goods.

ECONOMIC ROLES OF GOVERNMENT

The Government plays an important role in almost every national economy of the world. Even
in the countries described as capitalist economies or market economies, “a substantial share of
the nation’s product goes to satisfy public wants, a substantial part of the private income
originates in the public budget and public tax and transfer payments significantly influence the
state of private income distribution. Moreover, the budget policy affects the level of
employment and prices in the private sector.”9 In the predominantly private enterprise
economies, government interference is necessitated by the fact, besides the socio-political
ideological reasons, if any, “that the market mechanism alone cannot perform all economic
functions. Public policy is needed to guide, correct and supplement it in certain respects. It is
important to realise this fact since it implies that the proper size of the public sector is, to a
significant degree, a technical rather than ideological issue.
Governments normally play four important roles in an economy, viz., regulation, promotion,
entrepreneurship, and planning. As stated above, the extent and nature of these roles in a given
situation depend on a number of factors. Some salient features of these roles are outlined below:
Regulatory Role
Government regulation of the business may cover a broad spectrum extending from entry into
business to the final results of a business. The reservation of industries to small-scale, public
and cooperative sectors, licensing system etc. regulate the entry. Regulations of product mix,
promotional activities etc. amount to regulation of the conduct of business. Results of business
operations may be regulated by such measures as ceilings on profit margins, dividend etc. The
State may also regulate the relationship between enterprises. Examples of this include
restrictions on intra-corporate investments, interlocking of directors and appointment of sole
selling agents.
Government regulation of the economy may be broadly divided into direct controls and indirect
controls. Indirect controls are usually exercised through various fiscal and monetary incentives
and disincentives or penalties. Certain activities may be encouraged or discouraged through
monetary and fiscal incentives and disincentives. For instance, a high import duty may
discourage imports and fiscal and monetary incentives may encourage the development of
export-oriented industries. The direct administrative or physical controls are more drastic in
their effect. The distinguishing characteristic of direct controls is their discretionary nature.
They can be applied selectively from firm to firm and industry to industry, at the discretion of
the State. Regulation of the business had been rampant in the developing countries. Since the
late 1980s, however, a deregulation trend has set in. This has drastically transformed the
competitive environment and has given an impetus to globalisation.

Promotional Role:
The promotional role played by the Government is very important in developed countries as
well as in the developing countries. In developing countries, where the infrastructural facilities
for development are inadequate and entrepreneurial activities are scarce, the promotional role
of the Government assumes special significance. The State will have to assume direct
responsibility to build up and strengthen the necessary development infrastructures, such as
power, transport, finance, marketing, institutions for training and guidance and other
promotional activities. The promotional role of the State also encompasses the provision of
various fiscal, monetary and other incentives, including measures to cover certain risks, for the
development of certain priority sectors and activities.

Entrepreneurial Role:
In many economies, the State also plays the role of an entrepreneur – establishing and operating
business enterprises and bearing the risks. A number of factors such as socio-political
ideologies; dearth of private entrepreneurship; neglect of certain sectors, like the unprofitable
sectors, by the private entrepreneurs; absence of or inadequate competition in certain segments
and the resultant exploitation of consumers, etc. have contributed to the growth of State-owned
enterprises (SOEs) in many countries. There was a tendency in many developing countries to
assign a dominant place to the public sector. Public sector dominance was usually established
in capital-intensive projects like steel, capital goods, petrochemicals and fertilisers for which
investment requirements were very large and the expected private returns, at least in the short-
run were too low to provide an incentive for private profitability. In many cases even when the
private sector was prepared to undertake the risk and invest, State ownership of such industries
existed for one reason or other. However, recently, many governments have resorted to
privatisation in varying degrees, and have redefined the role of the public sector.

Planning Role:
Especially in the developing countries, the State plays a very important role as a planner. The
importance of planning to a less developed economy was often emphasised by Jawaharlal
Nehru, the chief architect of Development Planning in India. He rightly observed: “Whatever it
may be in
other countries, in underdeveloped countries like ours, which have to develop fairly rapidly,
the time element is important and the question is how to use our resources to the best advantage.
If our resources are abundant, it will not matter how they are used. They will go into a common
pool of development. But where one’s resources are limited; one has to see that they are
directed to the
right purpose so as to help to build up whatever one is aiming at”

Technological Environment:
Technology is one of the important determinants of success of a firm as well as the economic
and social development of a nation. “Technology includes the tools – both machines (hard
technology) and ways of thinking (soft technology) – available to solve problems and promote
progress between, among and between societies. “Technology includes not only knowledge or
methods that are necessary to carry on or to improve the existing production and distribution
of goods and services, but also entrepreneurial expertise and professional know-how.”3 The
latter two elements may often prove to be the essential competitive advantage possessed by the
technology owner.4 The MNCs are often in a particularly advantageous position in this regard.
SOURCES OF TECHNOLOGICAL DYNAMICS:
There are a number of factors which determine the technological dynamics of a company. The
source of technological change may be internal or external.
The important factors which determine the technological dynamics of a company include the
following.
Innovative Drive of the Company
Many companies view technology as a driving force of competitiveness and development and
give great importance to R&D. Recognising the critical role of R&D in the pharmaceutical
industry, Ranbaxy, for instance, has positioned itself as a research-based international
company. Several other firms, such as Dr. Reddy’s Laboratories, have also been investing
considerably on R&D and they have been significantly benefiting out of it. It is a policy of some
companies that a certain percentage of their sales every year shall come from new products.
Customer Needs/Expectations
Technological orientation and R&D efforts of a company may also be influenced by the
customer needs and expectations. In several cases, the customer and the supplier have a
collaborative relationship to develop products or solutions. If the consumers are highly
demanding, companies would be compelled to be innovative.
Demand Conditions
Besides customer needs/expectations, there are certain demand related factors which influence
the technology choice. For example, the size of the demand influences the choice of the
technological scale. Expected future trend could also be important. For example, a fast-growing
trend of demand would encourage adoption/development of technology of large scale. It would
also encourage R&D efforts. The situation may be different in a declining industry.
Suppliers’ Offerings
Many a time, technological changes are encouraged by the suppliers of a company, like capital
goods suppliers and other technology suppliers etc. In many process industries, for example,
the key source of technology is construction engineering firms that design production processes
and build plants. The competitiveness of the Italian tile industry, for example, owes a lot to the
dynamic and innovative technology suppliers.
Competitive Dynamics
Competition compels the adoption of the best technology and constant endeavor to innovate.
Japanese companies have, generally, a high degree of technological orientation. According to
Akio Morita, the glory and the nemesis of Japanese business, the lifeblood of the industrial
engine, is good old-fashioned competition. And this makes the consumer in Japan a king. In
Japan, there are more makers of civilian industrial products than in any other country, including
the United States.19 Absence of/lack of competition was a major reason for the technological
backwardness of corporate India. The impact of competition on technological improvement is
very evident in many industries in India after the liberalization.

Substitutes
Emergence of new substitutes or technological improvements of substitutes which alter a
firm’s/industry’s competitive advantage vis-à-vis the substitutes is a compelling reason for
technological change. Porter points out that perhaps the most commonly recognized effect of
technology on industry structure is its impact on substitution. Substitution is a function of the
relative value to price of competing products and the switching costs associated with changing
between them. Technological change creates entirely new products or product uses that
substitute for others, such as fiberglass for plastic or wood, word processors for typewriters,
and microwave ovens for conventional ovens. It influences both the relative value/price and
switching costs of substitutes. The technological battle over relative value/price between
industries producing close substitutes is at the heart of the substitution process.
Social Forces
Certain social forces like protest against environmental pollution or other ecological problems,
demand/preference for eco-friendly products, the need to tackle certain social problems etc.
may prompt efforts to technological developments in certain direction. The technological
environment has some other social/cultural dimension too. For instance, Morita points out that
the Japanese have always been eager to develop their own technology from abroad, and blend
them to make suitable objects or systems.
Research Organizations/Technical Facilities
The technological environment of the business is enriched by research organizations, including
research departments of universities, which develop new technologies and provide other
technical inputs. Research establishments like Indian Council for Scientific Research (ICSR),
Central Food Technological Research Institute (CFTRI), Defense Food Research Laboratory
etc. are well known in India. The technology developed by the CFTRI for making baby food
from buffalo milk and its commercialization by Amul, for example, was a milestone
development.
Another supportive technological environment is the availability of common technical facilities
like testing facilities or facilities to do certain jobs.

Government Policy
Technology policy of the government is a very important element of the technological
environment. For example, a government may favor or disfavor certain types of
technologies. Government’s policy towards foreign technology is also a critical factor. Some
labor-abundant countries have a preference for labor-intensive technology. Mechanization and
automation may be opposed in such countries. Such a situation may adversely affect the
business. Lack of adequate patent protection in many countries was a serious problem for
multinationals. The absence of product patent facilitated several Indian pharmaceutical firms
to copy patented products by employing processes different from the patented one. The new
patent regime stipulated under the WTO is ushering in a different environment. This has
prompted companies like Ranbaxy and Reddy’s Laboratories to give a thrust to R&D. Ranbaxy
has positioned itself as research based international company.
IMPACT OF TECHNOLOGY ON GLOBALISATION:
Technological advances have tremendously fostered globalization. Technology has, in fact,
been a very important facilitating factor of globalization. Several technological developments
become a compelling reason for internationalisation. Technological breakthroughs are
substantially increasing the scale economies and the market scale required to break-even.

Global sourcing was encouraged not only by trade liberalisation but also by technological
developments which reduced transport costs. Advent of containerisation and super tonnage
cargo ships drastically reduced transport costs. Technology monopoly, like possession of
patented technology, encourages internationalisation because the firm can exploit the
respective demand without any competition. The pace of globalisation has been accelerated by
several enabling technologies. Technological revolution in several spheres, like transport and
communication, has given a great impetus to globalisation by their tremendous contribution to
the reduction of the disadvantages of natural barriers like distance and cost. The IT revolution
has made an enormous contribution to the emergence of the global village. The developments
in the field of air cargo transportation has fostered globalisation by enabling quick and safe
transportation of sensitive goods (like perishables and goods subject to quick changes in
fashion/taste). Developments of containerisation and refrigeration have also been of high
significance. The steep fall in the cost of transportation and communication have considerably
accelerated pace of globalisation. All these have contributed to the drastic transformation of
the logistical and global distribution of the value chain system. The world wide web has a
stupendous impact on globalisation.

ICT AND MARKETING

Advances in information and communications technology are revolutionising the modus
operandi of marketing and the business system. The business horizon is humming with
buzzwords like internet, world wide web (www), cyberspace, information superhighways etc.
which are changing the way of contacting customers; order receiving and processing; and
networking and integrating business system. The revolutionary changes being ushered in by
the internet are indeed exciting. Technology experts are anticipating that the internet and the
www would become the centre of commercial universe. Electronic markets will eliminate the
need for intermediaries and that direct contact between manufacturer and customer will bring
down the cost of transaction and the cost of the final product.
The internet has the potential to evolve into an interconnected electronic marketplace
(cyberspace) bringing buyers and sellers together to facilitate commercial exchanges. The
internet is fast becoming an important new channel for commerce in a range of business – much
faster than anyone who would have predicted in the past. The opportunities presented by this
new channel seem to be readily apparent; by allowing for direct ubiquitous links to anyone
anywhere, the internet allows companies build interactive relationships with consumers and
suppliers and deliver new products and services at low cost. Revolutionary changes in
information technology have been sweeping across the global business. Developments in
telecommunications and information technologies have reduced the barriers to time and place
in doing business. It is now possible for customers and suppliers to transact business at any
time in any part of the globe, without having to come together physically, thanks to the
developments in optical fibre technology, videophone and teleconferencing facilities. The net
has changed face and pace of business-to-business marketing and retailing.
Effective use of information technology helps a company to identify and profile customers,
reach out to customers quickly and more effectively, and make inventory management and
distribution system more efficient.

TRANSFER OF TECHNOLOGY
Technology transfer is the process by which commercial technology is disseminated. This will
take the form of a technology transfer transaction, which may or may not be a legally binding
contract, but which will involve the communication, by the transferor, of the relevant
knowledge to the recipient. Among the types of transfer transactions that may be used, the
Draft TOT Code by UNCTAD has listed the following:
The assignment, sale and licensing of all forms of industrial property, except for trademarks,
service marks and trade names when they are not part of transfer of technology transactions;
The provision of know-how and technical expertise in the form of feasibility studies, plans,
diagrams, models, instructions, guides, formulae, basic or detailed engineering designs,
specifications and equipment for training, services involving technical advisory and managerial
personnel, and personnel training;
The provision of technological knowledge necessary for the installation, operation and
functioning of plant and equipment, and turnkey projects;
The provision of technological knowledge necessary to acquire, install and use machinery,
equipment, intermediate goods and/or raw materials which have been acquired by purchase,
lease or other means;
The provision of technological contents of industrial and technical cooperation arrangements.
The list excludes non-commercial technology transfers, such as those found in international
cooperation agreements between developed and developing states. Such agreements may relate
to infrastructure or agricultural development, or to international; cooperation in the fields of
research, education, employment or transport.

LEVELS OF TT
A simplified treatment of the subject would suggest four levels of TT.
Operational Level: At the bottom level are the simplest ones, needed for operating a given
plant. These involve basic manufacturing skills, as well as some more demanding
troubleshooting, quality control, maintenance and procurement skills.
Duplicative Level: At the intermediate level are duplicative skills, which include the
investment capabilities needed to expand capacity and to purchase and integrate foreign
technologies.
Adaptive Level: At this technological self-reliance level, imported technologies are adapted
and improved, and design skills for more complex engineering learned.
Innovative Level: This level is characterised by innovative skills, based on formal R&D, that
are needed to keep pace with technological frontiers or to generate new technologies.

Channels of Technology Flow

The most important channels for the flow of technology are Foreign Investment and
Technology Licence Agreements and Joint Ventures.
Foreign Investment: Traditionally, the flow of technology to developing countries has been
an integral part of direct foreign investment. Multinational corporations and other firms have
resorted to foreign direct investment for a variety of reasons like protection and development
of foreign markets, utilisation of local resources (in the host country) including cheap labour,
overcoming or lessening of the impact of tariff restrictions and tax laws. The flow of
sophisticated technology, in particular, has thus been associated with direct investment.
Technology Licence Agreements and Joint Ventures: Technology transfer has been taking
place on a significant scale through licensing agreements and joint ventures. There has been a
fairly rapid growth of joint ventures, encouraged by government restrictions on foreign
investment and foreign trade or the perceived advantages of such ventures. When foreign
capital participation in joint ventures is below 50 per cent, technological agreements assume
considerable significance.

Methods of Technology Transfer:

Transfer of technology takes a variety of forms depending on the type, nature and extent of
technological assistance required. The following are the important methods of technology
transfer:
Training or Employment of Technical Expert: Fairly simple and unpatented manufacturing
techniques/processes can be transferred by imparting the requisite training to suitable
personnel. Alternatively, such technology can be acquired by employing foreign technical
experts. The modes operandi of TT is influenced by the decision of proprietor of technology to
internalise or externalise the technology.

Contracts for Supply of Machinery and Equipment: Contracts for supply of machinery and
equipment, which normally provide for the transfer of operational technology pertaining to
such equipment, is often quite adequate for manufacturing purposes not only in small-scale
projects but also in a number of large-scale industries where the nature of technology is not
particularly complex.

Licensing Agreements: Licensing agreements, under which the licensor enters into an
agreement with a licensee in another country to use the technical expertise of the former, is an
important means for the transfer of technology. Licensing agreements are usually entered into
when foreign direct investment is not possible or desirable.
Turnkey Contracts: Transfer of complex technology often takes place through turnkey project
contracts, which include the supply of such services as design, creation, commissioning or
supervision of a system or a facility to the client, apart from the supply of goods. Many times,
a combination of two or more of the above-mentioned methods is used. Turnkey contracts,
obviously, are the most comprehensive of such combinations.

Issues in Transfer of Technology

In many cases, the developing countries obtain foreign technology at unreasonably high prices.
In a number of cases of foreign direct investment associated with technology transfer, the net
outflow of capital by way of dividend, interest, royalties and technical fees has been found to
be much higher than the corresponding inflow. The appropriateness of the foreign technology
to the physical, economic and social conditions of the developing countries is an important
aspect to be considered in technology transfer. It has been argued that there are a large number
of cases where the foreign technology transferred has been irrelevant or inappropriate to the
recipient country’s socio- economic priorities and conditions. Further, heavy reliance on
foreign technology may lead to technological dependence.

BE_Module4

Syllabus: An over view of industrial policies during the post liberalization period. Policy
towards MSME --Industry– The growth and development of public sector enterprises - Trends
in foreign participation in Indian Business-Industrial Policy, Export - Import policy
Competition Commission, - FEMA--Regulation & Licensing-IDRA - Government policy
towards Foreign Collaborations – FDI& FII.

An over view of industrial policies during the post liberalization period.

There is no other economic policy in India which has so dominantly determined the pattern and
direction of development of the economy as the Industrial Policy. To a large extent, the
Industrial Policy reflected the socio-economic and political ideology of development. Indeed,
the Industrial Policy Resolution of 1956, the fundamental principles of which reined until 1991,
was described by some people as the Economic Constitution of India. The Industrial Policy
indicated the respective roles of the public, private, joint and cooperative sectors; small,
medium and large-scale industries and underlined the national priorities and the economic
development strategy. It also expressed government’s policy towards foreign capital and
technology, labour policy, tariff policy etc. in respect of the industrial sector. In short, the
industrial development, and thereby the economic development to a very significant extent, has
been guided, regulated and fostered by the industrial policy. The Industrial Policy of
Government of India and the regulatory measures introduced to achieve the policy objectives
had been matters of severe controversy. While the industrialists and many others in India and
abroad and many foreign governments and international development organisations regarded
the policy as too restrictive and the regulations and procedures too cumbersome and perplexing,
the leftists in India had been demanding a more restrictive regime. The industrial policy and
regulation had grown more and more restrictive until about the mid-seventies. Having realised
the deleterious effects of the restrictive regime, the 1980s saw a very slow process of
liberalisation. In tune with the economic reforms ushered in 1991, the Industrial Policy too
underwent a drastic change.

INDUSTRIAL POLICY UP TO 1991

The industrial policy of India prior to the liberalisation ushered in 1991 was characterised by
the following features.
Reservation of Industries
Future development of most of the import industries was exclusively reserved for the public
sector.
Manufacture of a large number (over 850 in 1991) of items was reserved for the smallscale
sector.
Dominance of Public Sector
The policy of the Government was to ensure that the public sector gained control over the
commanding heights of the economy. The Industrial Policy Resolution of 1948 established
public sector monopoly/near monopoly in 9 industries.

The Industrial Policy Resolution of 1956, brought out in the light of the adoption by the
Parliament of the socialist pattern of society as the national goal and the Second Five Year Plan
model which gave emphasis to the basic and heavy industries, further expanded substantially
the role of the public sector. Future development of 17 most important industries was
exclusively reserved for the public sector (Schedule A). Further, public sector was assigned
priority for establishment of new units in 12 most important of the remaining industries
(Schedule B). See Annexure 11.1 for the list of industries in Schedules A and B. The public
sector also established its monopoly or dominance in several other industries which did not
belong to any of the above two categories of industries. This was done by the government by
not giving licence to the private enterprises or by nationalisation.

Entry and Growth Restrictions

There were a number of entry and growth restrictions on the private sector (particularly on the
large firms and foreign firms) even in respect of industries where the private sector was allowed.
A licence was mandatory for establishing new units with investments above a specified limit,
for manufacturing new products and for substantial expansion of existing undertakings. Large
firms (having assets, including those of interconnected undertakings, of ` 100 crore or more)
and dominant undertakings (i.e., those having a market share of 25 per cent or more) had to
obtain clearance under the Monopolies and Restrictive Trade Practices (MRTP) Act, in
addition to the industrial licence, for establishing new undertakings, substantial expansions and
manufacture of new items. There were also restrictions on import of capital goods etc.
Restrictions on Foreign Capital and Technology
The scope of use of foreign capital and technology was limited. Even in industries where
foreign capital was allowed, it was normally subject to a ceiling of 40 per cent of the total
equity, although exceptions were allowed in certain cases. Operations of foreign companies in
India and issue of securities abroad by Indian companies were regulated under the Foreign
Exchange Regulation Act (FERA), 1973.

THE NEW INDUSTRIAL POLICY

The Industrial Policy announced on July 24, 1991, which heralded the economic reforms in
India, has enormously expanded the scope of the private sector by opening up most of the
industries for the private sector and substantially dismantling the entry and growth restrictions.
Adjectives such as ‘dramatic’, ‘revolutionary’, ‘drastic’ etc. have been used to describe the
nature of the change in the industrial policy.
The salient features of the new policy are the following. Objectives The major objectives of
the new Industrial Policy package are:
To build on the gains already made.
To correct the distortions or weaknesses that may have crept in.
To maintain a sustained growth in productivity and gain full employment.
To attain international competitiveness.
It has been stated that the pursuit of these objectives will be tempered by the need to preserve
the environment and ensure the efficient use of available resources. All sectors of industry,
whether small, medium or large, belonging to the public, private or cooperative sectors will be
encouraged to grow and improve on their past performance

Limitations of Industrial Policies in India

Stagnation of Manufacturing Sector: Industrial policies in India have failed to push
manufacturing sector whose contribution to GDP is stagnated at about 16% since 1991.
Distortions in industrial pattern owing to selective inflow of investments: There is concern
over the slow pace of investments in many basic and strategic industries such as engineering,
power, machine tools, etc.
Displacement of labour: Restructuring and modernization of industries as a sequel to the new
industrial policy led to displacement of labour.
Absence of incentives for raising efficiency: Focusing attention on internal liberalization
without
adequate emphasis on trade policy reforms resulted in ‘consumption-led growth’ rather than
‘investment’ or ‘export-led growth’
Vaguely defined industrial location policy: The New Industrial Policy, while emphasized the
detrimental effects of damage to the environment, failed to define a proper industrial location
policy, which could ensure a pollution free development of industrial climate.
Industrial policies in India have taken a shift from predominantly Socialistic pattern in 1956 to
Capitalistic since 1991.
India ranked 77th on World Bank’s Doing Business Report 2018. Reforms related to
insolvency resolution (Bankruptcy and Insolvency Act, 2017) and the Goods and Services
Taxes (GST) are impressive and will result in long-term gains for the industrial sector.
Campaigns such as Make in India and Start up India have helped to enhance the business
ecosystem in the country.
There is a need for a new Industrial Policy to boost the manufacturing sector in the country.
Government in December 2018 also felt the need to introduce a new Industrial Policy that
would be a road map for all business enterprises in the country.

Micro, Small and Medium Enterprises Development Act, 2006

The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), provides
the first- ever legal framework for recognition of the concept of “enterprise” (comprising both
manufacturing and services) and integrating the three tiers of these enterprises, viz., micro,
small and medium. The following are the salient features of the Micro, Small and Medium
Enterprises Development Act, 2006 (MSMED Act), are given below.

Categorisation of SMEs
Under the Act, enterprises have been categorised broadly into those engaged in: (i)
manufacturing and (ii) providing/rendering of services. Both categories have been further
classified into micro, small and medium enterprises, based on their investment in plant and
machinery (for manufacturing enterprises) or in equipment (in case of enterprises providing or
rendering services) as under:
 Manufacturing Enterprises
The investment limits of various categories of manufacturing enterprises are as follows: • Micro
Enterprises: investment up to ` 25 lakh. • Small Enterprises: investment above ` 25 lakh and up
to ` 5 crore. • Medium Enterprises: investment above ` 5 crore and up to ` 10 crore.

Service Enterprises The investment limits of various categories of manufacturing enterprises

are as follows: • Micro Enterprises: investment up to ` 10 lakh • Small Enterprises: investment
above ` 10 lakh and up to ` 2 crore. • Medium Enterprises: investment above ` 2 crore and up
to ` 5 crore.

Other Features
The other important features of the Act include the following:
Provision for a statutory consultative mechanism at the national level with wide representation
of all sections of stakeholders, particularly the three classes of enterprises, and with a wide
range of advisory functions, and an Advisory Committee to assist the Board and the
Centre/State Governments.
• Establishment of specific funds for the promotion, development and enhancement of
competitiveness of these enterprises.
• Notification of schemes/programmes for this purpose.
• Progressive credit policies and practices.
• Preference in Government procurements to products and services of the micro and small
enterprises.
• More effective mechanisms for mitigating the problems of delayed payments to micro and
small enterprises.
• Simplification of the process of closure of business by all three categories of enterprises.

PUBLIC SECTOR
The objective of accelerating the pace of economic development and the political ideology
which gave the public sector a dominant role in the industrial development of the nation led to
rapid growth of the state-owned enterprises (SOEs) sector in India.

Objectives
• The public enterprises which were promoted as an instrument for implementation of the
government’s socio-economic policies, had a multitude of objectives set for them, viz.,
• To help in the rapid economic growth and industrialisation of the country and create the
necessary infrastructure for economic development.
• To earn return on investment and thus generate resources for development.
• To promote redistribution of income and wealth.
• To create employment opportunities.
• To promote balanced regional development.
• To assist the development of small-scale and ancillary industries.
• To promote import substitution, save and earn foreign exchange for the economy

Growth and Performance of Public Enterprises

There had been a phenomenal growth of the public sector since the commencement of planning.
In fact, even before the commencement of planning and the adoption of the goal of the
socialistic pattern of society, the public sector was assigned an important role in the
industrialisation and economic development of the country. The Industrial Policy Resolution
of 1948 made it very clear that the manufacture of arms and ammunition, the production and
control of atomic energy, and the ownership and management of railway transport would be
the exclusive monopoly of the Central Government. It was resolved further that in another six
industries the state alone would set up new undertakings. These six industries were: coal, iron
and steel, aircraft manufacture, shipbuilding, manufacture of telephone, telegraph and wireless
apparatus, excluding radio receiving sets, and mineral oils. The Industrial Policy Resolution of
1956 enlarged the role of the public sector. It stated: “The adoption of the socialist pattern of
society as a national objective as well as the need for planned and rapid development require
that all industries of basic and strategic importance, or in the nature of public utility services,
should be in the public sector.
Other industries which are essential and require investment on a scale which only the State, in
present circumstances, could provide, have also to be in the public sector. The state has,
therefore, to assume direct responsibility for the future development of industries over a wide
area.” Schedule A to the Resolution enumerated 17 industries, the future development of which
would be the exclusive right of the state. Schedule B to the Industrial Policy Resolution, 1956,
contained a list of 12 industries which would be progressively state-owned and in which the
state would, therefore, generally take the initiative in establishing new units. The Schedules A
and B are reproduced in the Annexure to the chapter on Industrial Policy. The four decades
since the commencement of planning witnessed a substantial growth and expansion of the
public sector in India.

Major part of the Central public sector investment was in the steel, coal, minerals and metals,
power and petroleum sectors. The wide range of product and activities of Central public sector
enterprises (CPSEs) included manufacturing of steel, mining of coal and minerals, extraction
and refining of crude oil, manufacture of heavy machinery, machine tools, instruments, heavy
machine building equipment, heavy electronical equipment for thermal, and hydel stations,
transportation
equipment, telecommunication equipment, ships, ‘sub-marines, fertilisers, drugs and
pharmaceuticals, petrochemicals, cement, textile, and a few consumer items such as bread,
newsprint/paper, footwear and contraceptives, operation of air, sea, river and road transport,
operation in national and international trade, consultancy, contract and construction services,
inland and overseas telecommunication services, hotel and tourists services, etc
 A significant feature of the public sector investment is the predominance of investment in few
crucial sectors, namely, steel, minerals and metals, petroleum, coal and chemicals and
fertilisers. The public sector certainly had a very important role to play in the development of
this vast and populous developing economy characterised by dearth of capital, entrepreneurship
and technology. However, keeping the private sector completely out of many industries and
giving the private sector only a secondary role in many other industries have had severe adverse
effects on growth and competition. The new economic policy, characterised by scope for a
substantial privatisation, including dereservation of industries for the public sector, in fact,
amounts to an acceptance of this.

The public sector is generally criticised for inadequate generation of internal resources. The
Department of Public Enterprises points out that generation of internal resources by public
enterprises is constrained by the following factors.
• Public Sector Enterprises were set up not only for commercial consideration but also for
factors such as generation of employment, promoting balanced regional development, etc.
• Low return on investment on account of price constraints imposed on certain infrastructural
goods and services of public enterprises.
• A number of sick units in the private sector facing closure had to be taken over by the
Government and these units form sizeable part of the Central Public Sector.
• Number of industries promoted in the public sector with long gestation period.
• The impact of escalation in the prices of various inputs and periodical wage revision.

THE NEW PUBLIC SECTOR POLICY

After the initial exuberance of the public sector entering new areas of industrial and technical
competence, a number of problems have begun to manifested themselves in many of the public
enterprises. Serious problems were observed in the insufficient growth in productivity, poor
project management, overmanning, lack of continuous technological upgradation and
inadequate attention to R&D and human resource development. The low rate of return on
capital invested has inhibited the ability of the public enterprises to regenerate themselves in
terms of new investments as well as in new technology development. This resulted in many of
the public enterprises becoming a burden rather than an asset to the Government. It was,
therefore, decided to redefine the role of the public sector, in tandem with the economic
liberalisation. According to the industrial policy announced on 24-7-1991, the following have
been set as the priority areas for growth of public enterprises.

• Essential infrastructure goods and services.

• Exploration and exploitation of oil and mineral resources.
• Technology development and building of manufacturing capabilities in areas which are
crucial in the long-term development of the economy where private sector investment is
inadequate.
• Manufacture of products where strategic considerations predominate such as defence
equipment.

MULTINATIONALS IN INDIA
Comparatively very little foreign investment has taken place in India due to several reasons, as
stated in the previous chapter (like the dominant role assigned to the public sector in the
industrial policy and the restrictive Government policy towards foreign investment). Some
multinationals, Coca Cola and IBM, even left India in the late 1970s as the Government
conditions were unacceptable to them. A common criticism against the MNCs is that they tend
to invest in the low priority and high profit sectors in the developing countries, ignoring the
national priorities. However, in India, the Government policy confined the foreign investment
to the priority areas like high technology and heavy investment sectors of national importance
and export sectors. Firms which had been established in non-priority areas prior to the
implementation of this policy have, however, been allowed to continue in those sectors. The
controversial Foreign Exchange Regulation Act (FERA), 1973 required the foreign companies
in India to dilute the foreign equity holding to 40 per cent (exceptions were allowed in certain
cases like high technology and export-oriented sectors).

Comparatively very little foreign investment has taken place in India due to several reasons, as
stated in the previous chapter (like the dominant role assigned to the public sector in the
industrial policy and the restrictive Government policy towards foreign investment). Some
multinationals, Coca Cola and IBM, even left India in the late 1970s as the Government
conditions were unacceptable to them. A common criticism against the MNCs is that they tend
to invest in the low priority and high profit sectors in the developing countries, ignoring the
national priorities. However, in India, the Government policy confined the foreign investment
to the priority areas like high technology and heavy investment sectors of national importance
and export sectors. Firms which had been established in non-priority areas prior to the
implementation of this policy have, however, been allowed to continue in those sectors. The
controversial Foreign Exchange Regulation Act (FERA), 1973 required the foreign companies
in India to dilute the foreign equity holding to 40 per cent (exceptions were allowed in certain
cases like high technology and export-oriented sectors).

Industrial policy
There are several economic policies which can have a very great impact on business. Important
economic policies are industrial policy, trade policy, foreign exchange policy, monetary policy,
fiscal policy, foreign investment and technology policy.

Industrial Policy: Industrial policy can even define the scope and role of different sectors like
private, public, joint and cooperative, or large, medium, small and tiny. It may influence the
location of industrial undertakings, choice of technology, scale of operation, product mix and
so on. In India, until the liberalisation ushered in 1991, the scope of private sector, particularly
of large enterprises, was very limited. The development of 17 of the most important industries
was reserved for the state. In the development of another 12 major industries, the state was to
play a dominant role. In the remaining industries, cooperative enterprises, joint sector
enterprises and small-scale units were to get preferential treatment over large entrepreneurs in
the private sector. Further, the production of a large number of items was reserved for the
exclusive manufacture of the small-scale sector.
Even in respect of industries which were open to the private sector, entry and growth were
regulated by licensing and also by, in the case of certain categories of large firms, the MRTP
Act. The government policy, thus, limited the scope of private business. However, the new
policy ushered in July 1991 has wide opened all but a few industries for the private sector,
dramatically changing the business environment. In the pre-liberalisation era, the government
policy was a severe constraint on the portfolio and growth strategies of companies.

Export & Import Policy in India

India’s import and export system is governed by the Foreign Trade (Development &
Regulation) Act of 1992 and India’s Export Import (EXIM) Policy. The Directorate General of
Foreign Trade is the chief governing body for the matters
pertaining to such policy. The Foreign Trade Policy is prepared and announced by the Central
Government (Ministry of Commerce). of the country.
The Export Import Policy is updated every year on the 31st of March and the modifications,
improvements and new schemes becomes effective from 1st April of every year.
Objectives of Import Policy
To improve the industry and economy and to create strong economic infrastructure.
Developing countries import certain raw materials, which are scarce, and other capital goods
To implement the economic and social commitment of the government. This enables the
country to ensure its sovereignty and territorial integrity.
This enables the country to ensure its sovereignty and territorial integrity.

FOREIGN EXCHANGE MANAGEMENT ACT

The FEMA, which came into effect from January 1, 2000, extends to the whole of India and
also applies to all branches, offices, and agencies outside India, owned or controlled by a person
resident in India.

Objectives
The objectives of FEMA are:
To facilitate external trade and payments
To promote the orderly development and maintenance of foreign exchange market. Dealing in
Foreign Exchange etc. Section 3 of FEMA imposes restrictions on dealings in foreign exchange
and foreign security and payments to and receipts from any person outside India. Accordingly,
except as provided in terms of the Act, or with the general or special permission of the Reserve
Bank, no person shall—
deal in any foreign exchange or foreign security with any person other than an authorised
person;
make any payment to or for the credit of any person resident outside India in any manner;
receive otherwise through an authorised person, any payment by order or on behalf of any
person resident outside India in any manner;
enter in to any financial transaction in India as a consideration for or in association with
acquisition or creation or transfer of a right to acquire, any asset outside India by any person.
Further, same as otherwise provided in this Act, no person resident in India shall acquire, hold,
own, possess or transfer any foreign exchange, foreign security or any immovable property
situated outside India.
Holding of Foreign Exchange etc. Same as otherwise provided in this Act, no person resident
in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or
any immovable property situated outside India.
Current Account Transactions
FEMA permits dealings in foreign exchange through authorised persons for current account
transactions. However, the Central Government can impose reasonable restrictions in public
interest.
Capital Account Transactions
Any person may sell or draw foreign exchange to or from an authorised person for a capital
account transaction permitted by the Reserve Bank in consultation with the Central
Government.
Administration of the Act
The FEMA has assigned an important role to the Reserve Bank of India in the administration
of this Act. The rules, regulations and norms pertaining to several sections of the Act are to be
laid down by the RBI, in consultation with the Central Government. The Act requires the
Central Government to appoint as many officers of the Central Government as Adjudicating
Authorities for holding inquiries pertaining to contravention of the Act. There is also a
provision for appointing one or more Special Directors (Appeals) to hear appeals against the
order of the Adjudicating Authorities. The Central Government shall also establish an
Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the Adjudicating
Authorities and the Special Director (Appeals). The FEMA provides for the establishment, by
the Central Government, of a Director of Enforcement with a Director and such other officers
or class of officers as it thinks fit for taking up for investigation the contraventions under this
Act.

INDUSTRIES (DEVELOPMENT AND REGULATION) ACT

The industries (Development and Regulation) Act, 1951, amended from time to time, is one of
the most effective weapons the Government possesses to regulate the development and to
control the activities of the industrial sector.
 Objectives
The main object of the Act is to provide the Central Government with the means to implement
their Industrial Policy. Thus, the principal objective of the IDRA is to empower the
Government:
• To take necessary steps for the development of industries.
• To regulate the pattern and direction of industrial development.
• To control the activities, performance and results of industrial undertakings in the public
interest.

Main Provisions
The IDR Act contains provisions to realise the above objectives. Some of the salient features
of the Act are the following.
Development Measures: The Act provides for the establishment, by the Central Government,
of a Central Advisory Council, consisting of representatives of the owners of industrial
undertakings, employees, consumers, primary suppliers, etc., for the purpose of advising the
Central Government on matters concerning the development of the industries. It also provides
for the establishment, for any scheduled industry or group of scheduled industries, a
Development Council consisting of members representing the interests of the owners,
employees, consumers, etc., and persons having special knowledge of matters relating to the
technical or other aspects of the industries, for purposes such as recommending measures for
improving the performance of the industries.
Regulation of Entry and Growth: The IDR Act empowers the Central Government to
regulate the development of industries by means of licensing with suitable exemptions as
decided by the Government. Accordingly, the entry into a business or the expansion of an
existing business may be regulated by licensing.
Supervision and Control: The Government, under this Act, can make a full and complete
investigation if it is of the opinion that — (a) in respect of any scheduled industry or
undertaking, there has been or is likely to be a substantial fall in the volume of output, or a
marked deterioration in the quality of output or an unjustifiable rise in the price of the output;
(b) any industrial undertaking is managed in a manner highly detrimental to the scheduled
industry concerned or to the public interest.
Takeover of Management: The power of control entrusted to the Central Government under
the IDRA extends to that of the takeover of the management of the whole or any part of an
industrial undertaking which fails to comply with any of the directions mentioned above. The
Government can also take over the management of an undertaking which is being managed in
a manner highly detrimental to the scheduled industry concerned or to public interest. Further,
the Central Government can take over the management of industrial undertaking owned by a
company under liquidation, with the permission of the High Court, if the Government is of the
opinion that the running or restarting the operations of such an undertaking is necessary for the
maintaining or increasing the production, supply or distribution in the public interest. In respect
of the industrial undertaking, the management of which has been taken over by the
Government, the IDRA empowers the Government to take steps, in appropriate cases, to
liquidate or reconstruct the company concerned in the public interest.
Price and Distribution Controls: For securing the equitable distribution and availability at
fair prices of any article or class of articles relatable to any scheduled industry, the Central
Government is empowered by the Act to control its/their supply, distribution and price.
Exemptions: The Central Government is empowered to exempt any industrial undertaking or
class of industrial undertakings or any scheduled industry or class of scheduled industries from
all or any of the provisions of the Act in certain cases in the public interest.

INDUSTRIAL LICENSING
The industries (Development and Regulation) Act, 1951, empowers the Central Government
to regulate the establishment and certain activities of the industrial undertakings by means of
licensing. The licensing provisions of the IDRA may apply to industrial undertakings set up by
any person or authority including the Government. A licence is a written permission from the
Government to an industrial undertaking to manufacture specified articles included in the
Schedule to the Act. If a new company has to be formed, the industrial licence in the first
instance, is issued in the name of the applicant, and later when the company has been formed,
the necessary endorsement to that effect will be made in the licence. If an application for licence
is approved and further clearance (such as foreign collaboration and capital goods import) are
not involved and no other prior conditions have to be fulfilled, an industrial licence is issued to
the applicant. In other cases, a letter of intent is issued, which will later be converted into a
licence on fulfilling the conditions stipulated in the letter of intent. In other words, a letter of
intent conveys the intention of the Government to grant a licence subject to the fulfilment of
certain conditions. The conditions to be fulfilled relate to the approval of foreign investment
proposal, import of capital goods, application to be made to the financial institutions, taking of
steps to control pollution, etc. A letter of intent enables the applicant to finalise and formulate
the proposals on matters relating to the terms of foreign collaboration, import of capital
equipment and/or issue of capital with the assurance that if the proposals are otherwise found
satisfactory an industrial licence will be issued.

Government policy towards Foreign Collaborations

Government policy is a declaration of government political activities, plans and intentions
relating to a particular cause.
Government policies contain the reasons things that are to be done in a certain way and the
reason for doing in that direction. Public problems can originate in endless ways, and they
require different policy responses.
The government implements a policy that changes social behaviour in the business
environment. The government can enter into agreements to develop new technology that will
bring the necessary change.
The government makes policies to take action against the current complications. The
government policies make sure to fulfil the future obligations/requirements of the economy.
The policy followed by the Government of India on Foreign Collaboration and foreign private
investment is based mainly in the approach adopted in 1949.
The basic policy followed is to welcome foreign private investment on a selective basis in those
areas which are advantageous to the Indian economy. The conditions under which foreign
capital or foreign collaboration is welcome include:
All undertakings (Indian or Foreign) have to conform to the general requirements of the
Industrial policy of the Government.
Foreign enterprises are to be treated at par with their Indian counterparts.
Foreign enterprises were given freedom to remit profits and repatriate capital, subject to foreign
exchange considerations.

Foreign Investment:
It is an investment made by a firm in a foreign country.

FDI (Foreign Direct Investment)

Foreign direct investment is an investment from a party of one country into a company in
another country with the intention of establishing lasting interest ( lasting interest is established
when investor obtains at least 10% voting power in firm).

It is the investment in the form of controlling ownership ( intention of actively managing and
influencing the operations of a foreign firm ) in a business in one nation by an entity based in
another nation.

Foreign companies invest in other countries to take advantage of relatively lower wages, special
investment privileges like tax exemptions, etc. For a country where foreign investment is being
made, it also means achieving technical know-how and generating employment.
The Industrial Policy 1991 prepared a specified list of high technology and high investment 34
priority industries in which automatic permission will be available for foreign direct investment
up to 51% foreign equity.
Thus, this new policy faced Indian industries from official controls for fully exploiting
opportunities for promotion of foreign investment. Thus, it is felt that foreign investment and
foreign collaboration would bring advantages of technology transfer, marketing expertise,
product diversification, introduction of modern managerial techniques and new possibilities
for export promotion for Indian Industries.

FDI Routes in India

Types of Foreign Direct Investment:

• Horizontal direct investment
• Vertical direct investment
• Conglomerate type of foreign direct investment

Foreign direct investments are commonly categorized as horizontal, vertical, or conglomerate.

Horizontal direct investment- a company establishes the same type of business operation in
a foreign country as it operates in its home country. A U.S.-based cell phone provider buying a
chain of phone stores in China is an example.
 Vertical direct investment- a business acquires a complementary business in another country.
For example, a U.S. manufacturer might acquire an interest in a foreign company that supplies
it with the raw materials it needs.
Conglomerate type of foreign direct investment- a company invests in a foreign business
that is unrelated to its core business. Since the investing company has no prior experience in
the foreign company's area of expertise, this often takes the form of a joint venture.

Advantages of Foreign Direct Investment (FDI)

• FDI can foster and maintain economic growth, both in the recipient country and in the country
making the investment
• Developing countries have encouraged FDI as a means of financing the construction of new
infrastructure and the creation of jobs for their local workers
• On the other hand, multinational companies benefit from FDI as a means of expanding their
footprints into international markets
Disadvantages of Foreign Direct Investment (FDI)
• Domestic companies fear that they may lose their ownership.
• Small companies fear that they may not be able to compete with world class large companies.
• Foreign companies invest more in machinery and intellectual property than in wages of the
local people.
• Government has less control over the functioning of such companies as they usually work as
wholly owned subsidiary of an overseas company.

Foreign Institutional Investors

It is an entity or institution which makes investments in a foreign country by getting registered
in the stock,Exchange of foreign market to trade in securities.

Foreign Institutional Investor means “an institution incorporated outside India which proposes
to make investments in India in securities”.
Advantages of Foreign Institutional Investors (FII)
FII’s will enhance the flow of capital into the country
These investors generally prefer equity over debt. So, this will also help maintain and even
improve the capital structures of the companies they are investing in.
They have a positive effect on the competition in the financial markets
FII help with the financial innovation of capital markets

Disadvantages of Foreign Institutional Investors (FII)

• The demand for the local currency (rupee) increases. This can cause severe inflation in
the economy.
• These FII’s drive the fortune of big companies in which they invest. But their buying and
selling of
• securities have a huge impact on the stock market. The smaller companies are affected
by this.
• Sometimes these FII’s seek only short-term returns. When they pull their investments
banks can face a shortage of funds.

Module 5

Economic integration
Economic integration is an arrangement among nations that typically includes the
reduction or elimination of trade barriers and the coordination of monetary and fiscal policies.
Economic integration can reduce the costs of trade, improve the availability of goods and
services, and increase consumer purchasing power in member nations.
Economic integration is an agreement among nations to reduce or eliminate trade barriers and
agree on fiscal policies
 International economic institutions
International economic institutions refer to organized international bodies whose aim is to
stabilize economic relationships between and among member countries through monetary,
fiscal, financial and trade integration. These institutions may operate on world-wide or at
regional levels.
They Promote conditions of fair competition in the free trade and aim to provide a level playing
field for all the countries and develop economic cooperation.
Trade agreements
Trade Agreements regulate international trade between two or more nations. An agreement may
cover all imports and exports, certain categories of goods, or a single category
These common rules and regulations are set by various international economic institutions.
General Agreement on Trade Services (GATS)
North American Free Trade Agreement (NAFTA)
European Union
Trade blocs
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
SAFTA

Advantages
• Tariff reduction
• Access to new markets and broadened customer base
• Improvement of manufacturing operations by moving it abroad partially or completely
• Innovation and competition
• Optimization of supply chain by managing with suppliers from countries under the
international agreement.
• Technology transfer
• Simplified access to foreign labor force and simplified access of employees to target markets
• Impact

These Institutions strongly affect the economic development of countries and act in society at
all levels by determining the frameworks in which economic exchange occurs.
They determine the volume of interactions available, the benefits from economic exchange and
the form which they can take.
Economic integration can reduce the costs of trade, improve the availability of goods and
services, and increase consumer purchasing power in member nations.
Trade agreements between countries lower trade barriers on imported goods and, according to
theory, they should provide welfare gains to consumers from increases in variety, access to
better quality products and lower prices.
 IMF
International organization that promotes global economic growth and financial stability,
encourages international trade, and reduces poverty.
conceived in July 1944 at the United Nations Bretton Woods Conference in New Hampshire,
United States.
The IMF's primary mission is to ensure the stability of the international monetary system—the
system of exchange rates and international payments that enables countries and their citizens
to transact with each other.
Objectives
• Facilitate international trade
• Promote high employment and sustainable growth
• Ensure Exchange Stability
• Balanced Growth of member countries
• Reduce poverty
• Structure
Board of governors at the top of organization-representative from each member country
24 member executive board control day to day activities
Managing director is the head of all IMF staff
Deputy managing directors to assist managing director
Activities
Financial assistance – providing loan to member countries that are experiencing economic
crisis
Surveillance – monitoring member countries financial and economic policies to maintain
stability in international monitory system
Capacity development - Provide technical assistance & training to countries to develop their
economic system

Roles of IMF
• Promoting research in various areas of international economics and monetary economics.
• Providing a forum for discussion and consultation among" member countries.
• Focusing on its core macroeconomic and financial areas of responsibility.
• It works to foster global growth and economic stability

The IMF is playing an expanding role in the global monetary system.

To facilitate the expansion and balanced growth of international trade. To promote international
monetary cooperation
 World Bank
An international organization dedicated to providing financing, advice and research to
developing nations to aid their economic advancement
Founded in 1944 at the UN Monetary and Financial Conference (commonly known as the
Bretton Woods Conference), which was convened to establish a new, post-World War II
international economic system, the World Bank officially began operations in June 1946
Its first loans were geared toward the postwar reconstruction of western Europe.

World Bank Groups

International Bank for Reconstruction and Development- provides loans at market rates of
interest to middle-income developing countries and creditworthy lower-income countries
International Development Association- provides interest-free long-term loans, technical
assistance, and policy advice to low-income developing countries in areas such as health,
education, and rural development.
International Finance Corporation- operating in partnership with private investors, provides
loans and loan guarantees and equity financing to business undertakings in developing
countries.

Multilateral Investment Guarantee Agency - Loan guarantees and insurance to foreign

investors against loss caused by noncommercial risks in developing countries
International Centre for Settlement of Investment Dispute- is responsible for the settlement by
conciliation or arbitration of investment disputes between foreign investors and their host
developing countries
Objectives of WB
• To provide long-run capital to member countries for economic
reconstruction and development.
• To induce long-run capital investment for assuring Balance of Payments (BoP) equilibrium
and balanced development of international trade.
• To provide guarantee for loans granted to small and large units and other projects of
member countries.
• To ensure the implementation of development projects so as to bring about a smooth
transference from a war-time to peace economy.
• To promote capital investment in member countries by the following ways;
• To provide guarantee on private loans or capital investment.
• If private capital is not available even after providing guarantee, then IBRD povides loans for
productive activities on considerate conditions.

ADB
Regional Development Bank that is dedicated to reducing poverty in Asia and the Pacific
through inclusive economic growth, environmentally sustainable growth, and regional
integration.
 This is carried out through investments
– in the form of loans, grants and information sharing
– in infrastructure, health care services, financial and
public administration systems, helping nations prepare for the impact of climate change or
better manage their natural resources, as well as other areas.

• ADB was conceived in the early 1960s as a financial institution that would be Asian in
character.
• ADB envisions a prosperous, inclusive, resilient, and sustainable Asia and the Pacific while
sustaining its efforts to eradicate extreme poverty in the region.
• ADB assists its members, and partners, by providing loans, technical assistance, grants, and
equity investments to promote social and economic development.
• ADB maximizes the development impact of its assistance by facilitating policy dialogues,
providing advisory services, and mobilizing financial resources through co-financing
operations that tap official, commercial, and export credit sources.

UNCTAD
The United Nations Conference on Trade and Development (UNCTAD) is a body of the UN
that aims to develop opportunities, investments and trade in developing countries.
UNCTAD was established by the United Nations General Assembly in 1964 and is
headquartered in Geneva, Switzerland.
UNCTAD was created because the existing institutions, such as GATT, IMF, and World Bank
were not concerned with the problem of developing
countries.
UNCTAD’s main objective is to formulate the policies related to
areas of development, such as trade, finance, transport, and technology.

Objectives of UNCTAD
• Working at the national, regional, and global level, UNCTAD help countries to:
• Comprehend options to address macro-level development challenges
• Achieve beneficial integration into the international trading system
• Diversify economies to make them less dependent on commodities
• Limit their exposure to financial volatility and debt
• Attract investment and make it more development friendly
• Increase access to digital technologies
• Promote entrepreneurship and innovation
• Help local firms move up value chains
• Speed up the flow of goods across borders
• Protect consumers from abuse
 • Curb regulations that stifle competition
• Adapt to climate change and use natural resources more effectively

WTO
Intergovernmental Organization that Regulates and facilitates International Trade between
Nations.
WTO replaced the General Agreement on Tariffs and Trade (GATT) that had been established
in 1948.
World's Largest International Economic Organization- 164 member states representing 98% of
global trade and global GDP . •
Facilitates Trade in goods, services, and intellectual property among participating countries-
by providing a Framework for Negotiating Trade agreements. •
Used by the Government to establish, revise, and enforce the rules that govern International
Trade.

Objectives of WTO
• To ensure the reduction of tariffs and other barriers to trade.
• To eliminate discriminatory treatment in international trade relations.
• To facilitate higher standards of living, full employment, a growing volume of Real income
and effective demand, and an increase in production and trade in goods and services of the
member nations
• To make positive effect, which ensures developing countries, especially the least developed
secure a level of share in the growth of international trade that reflects the needs of their
economic development.
• To facilitate the optimal use of the world’s resources for sustainable
• development.
• To promote an integrated, more viable and durable trading system incorporating all the
resolutions of the Uruguay Round’s multilateral trade negotiations.
Functions of WTO
Trade Negotiations - Creation of an international legal framework - ensuring the smooth
exchange of goods and services among the member countries
Implementation and Monitoring - ensure that the signatory countries adhere to their
commitments.
Dispute Settlement - acts as a dispute settlement body when there is a trade conflict between
its member states
Building Trade Capacity - runs special programs to support developing countries to build the
capacity and thereby participate in free trade
Outreach- acts as a dispute settlement body when there is a trade conflict between its member
states to reduce barriers of trade - free, fair, and open markets around the world

CROSS NATIONAL CO-OPERATION AND AGREEMENTS- SAARC, SAPTA,

BRICS, ASEAN

SAARC
Regional intergovernmental organization and geopolitical union of states in South Asia
SAARC was established with the signing of the SAARC Charter in Dhaka on 8 December
1985. SAARC comprises of eight Member States: Afghanistan, Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan and Sri Lanka

Structure
Heads of State – Summit- highest decision making authority
Council of Ministers (COM)- comprises of the Ministers of Foreign /External Affairs
Standing Committee (SC)- comprises of the Foreign Secretaries
Programming Committee (PC
Technical Committee (TC)
Working Group (WG)

Objectives
• to promote the welfare of the peoples of South Asia and to improve their quality of life
• to accelerate economic growth, social progress and cultural development in the region
• to provide all individuals the opportunity to live in dignity and to realize their full
potentials
• to promote and strengthen collective self-reliance among the countries of South Asia
• to contribute to mutual trust, understanding and appreciation of one another's problems
• to promote active collaboration and mutual assistance in the economic, social, cultural,
technical and scientific fields
 SOUTH ASIAN FREE TRADE AGREEMENT SAFTA
• agreement in order to promote and sustain mutual trade and economic cooperation within the
region.
• It Succeeded the 1993 SAARC Preferential Trading Arrangement. The agreement
incorporates trade in goods.
• Services and investment are not part of the Agreement
• Among its aims are:
• Promoting and enhancing mutual trade and economic cooperation by eliminating barriers
in trade
• Promoting conditions of fair competition in the free trade area
• Ensuring equitable benefits to all
• Establishing a framework for further regional cooperation to expand the mutual benefits of
the agreement.
• agreement Ultimate aim is to put in place a full-fledged South Asia Economic Union in a
phased manner on the lines of the EU

SAPTA
The SAARC Preferential Trading Arrangement (SAPTA) envisages the creation of a
Preferential Trading Area among the seven member states of the SAARC.
Provides each other the preferential treatment to reduce import tariffs on preferential items.
First step towards the transition of South Asian free trade.

Objectives
• Promoting cooperation for the benefit of their people.
• Bringing awareness about the expansion of trade.
• Providing greater opportunities of employment.
• Strengthening intra regional economic cooperation.
• Increasing the share in the total volume of South Asian trade.
• Measures of SAPTA
• Promoting cooperation for the benefit of their people.
• Bringing awareness about the expansion of trade.
• Providing greater opportunities of employment.
• Strengthening intra regional economic cooperation.
• Increasing the share in the total volume of South Asian trade.

BRICS
Brics started in 2001 as BRIC, an acronym coined by Goldman Sachs for Brazil, Russia,
India, and China. South Africa was added in 2010.
 Objectives
• To achieve regional development
• To remove trade barriers
• Economic Development
• Optimum use of Development
• Building Relationship
• Areas of Cooperation
• Economic Cooperation
• People-to-People exchange
• Political and Security Cooperation

Cooperation Mechanism Cooperation among members is achieved through

Track I: Formal diplomatic engagement between the national governments.
Track II: Engagement through government-affiliated institutions, e.g. state-owned enterprises
and business councils.
Track III: Civil society and People-to-People engagement.
ASEAN
ASEAN is an organisation formed by the government of Malaysia, Indonesia, the Philippines,
Thailand and Singapore in 1967 to promote economic growth, peace, security, social progress
and cultural development in the Southeast Asian region.
The motto of ASEAN is “ One Vision, One Identity, One Community”.
ASEAN Secretariat – Indonesia, Jakarta.
Chairmanship of ASEAN rotates annually, based on the alphabetical order of theEnglish names
of Member States.
ASEAN Summit: The supreme policy making body of ASEAN. As the highest level of
authority in ASEAN, the Summit sets the direction for ASEAN policies and objectives. Under
the Charter, the Summit meets twice a year.
Objectives of ASEAN
• To accelerate economic growth, social progress and cultural development for a prosperous and
peaceful community of Southeast Asian Nations.
• To promote regional peace and stability through abiding respect for justice and the rule of law
and adherence to the principles of the United Nations Charter.
• To promote active collaboration and mutual assistance on matters of common interest in the
economic, social, cultural, technical, scientific and administrative fields.
• To collaborate more effectively for the greater utilization of agriculture and industries, the
expansion of their trade, the improvement of transportation and communications facilities and
the raising of the living standards of peoples.
• To promote Southeast Asian studies.
• To maintain close and beneficial cooperation with existing international and regional
organizations.
 Regional Economic Integration
Regional economic integration is a process in which two or more countries agree to eliminate
economic barriers, with the end goal of enhancing productivity and achieving greater economic
interdependence

Levels of Regional Economic Integration

Free trade area- Eliminates all barriers to the trade of goods and services among member
countries

Customs union- Eliminates trade barriers between member countries and adopt a common
external trade policy .
Common market- No restrictions on emigration, immigration , or cross border flows of capital
among member countries. Eg-MERCOSUR
Economic union- Requires a high degree of integration a coordinating bureaucracy and the
sacrifice of national sovereignty to the bureaucracy .Eg- EU
Political union - Separate nations are essentially combined to form a single nation. US is an
closer example

Trade Blocs.
A Trade bloc can be defined as a type of intergovernmental agreement, often part of a regional
intergovernmental organisation, where regional barriers to trade are reduced or eliminated
among the participating states.

Group of countries having similar trade policies, join together to promote trade with mutual
cooperation.
Also known as Regional Economic Cooperations or Regional trade blocs.
Failure of global organisations, geographical proximity, similarity and complementarities etc
altogether lead to the formation of trade blocs

Objectives
• Reduce of trade barriers among the member countries; thus enhancing trade liberalisation.
• Improve social, political, economic and cultural relations among member nations.
• Establish collective bargaining and generate competition.
• Promote free transfer of labour, capital and other resources.
• Maintain better relations among member countries.
• Enhance welfare of consumers.
• Promote economic growth.
 Major Trade Blocs
• European Union(EU)
• NAFTA
• OPEC
• ASEAN
• SAARC
• MERCOSUR
• RCEP

Customs Union
A customs union is generally defined as a type of trade bloc which is composed of a free trade
area with a common external tariff.
Customs unions are established through trade pacts where the participant countries set up
common external trade policy
A common external tariff is imposed on non-members of the union.
Third stage of economic integration

Objectives of CU
• To increase economic efficiency and establishing closer political and cultural ties between
member countries.
• To eliminate internal tariffs and non-tariff barriers.
• To facilitate the formation of one large market and investment area.
• To enable partner states to ensure economies of scale and contribute to economic
development.
• To form a single customs territory and make trade at the core of customs union
 Examples
• Southern Common Market (MERCOSUR)
• Southern African Customs Union (SACU)
• Switzerland – Liechtenstein (CHFL

Advantages
• Increase in trade flows and economic integration
• Better economic integration and political cooperation between member nations
• Creation of common market ,monetary union and fiscal union.
• Trade creation vs Trade Diversion
• Trade creation occurs when the more efficient members of the union sell to less efficient
members , leading to better allocation of resources.
• Trade diversion occurs when efficient non-member countries sell fewer goods to member
countries because of external tariffs.
Disadvantages
• Loss of economic sovereignty. If a country wants to protect an infant industry in it’s market,
it is unable to do so by imposing tariffs or other protective barriers due to liberal trading
policies.
• If a country wants to liberalize it’s trade outside the union, it is unable to do due to common
external tariff
• Problems created by exceptions and ‘sensitive’ products
• Complexity of setting tariff rate - The tariff rate setting is complex , costly and time-
consuming