ECO-13 Updated Exam Notes

ECO-13: BUSINESS ENVIRONMENT
Time: 2 hours Maximum Marks: 50 (Weightage 70%)
Note:
ECO-13 exam’s maximum time to attempt is 2 hours and the maximum marks–
50. Then your score is doubled and presented out of 100 in your grade card. In
the final mark sheet, 70% of the marks scored in theory is added to 30% of the
marks scored in assignment and thus final result out of 100 marks is calculated.
Ques 1) Discuss the nature and significance of business environment and state
how environment is affected by business.
Business environment encompasses all those factors that affect a company's

operations and includes customers, competitors, stakeholders, suppliers,
industry trends, regulations other government activities, social and economic
factors and technological developments.
Nature of business environment
The nature of Business Environment could be better understood by the following

approaches:
(i) System Approach:
In original, business is a system by which it produces goods and services for the
satisfaction of wants, by using several inputs, such as, raw material, capital,
labour etc. from the environment.
(ii) Social Responsibility Approach:
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In this approach business should fulfill its responsibility towards several
categories of the society such as consumers, stockholders, employees,
government etc.
(iii) Creative Approach:
As per this approach, business gives shape to the environment by facing the
challenges and availing the opportunities in time. The business brings about
changes in the society by giving attention to the needs of the people.
Significance of Business Environment:
Business Environment refers to the “Sum total of conditions which surround man
at a given point in space and time.” In a globalized economy, the business
environment plays an important role in almost all business enterprises.
(i) Help to understand internal Environment
(ii) Help to Understand Economic System
(iii) Help to Understand Economic Policy
(iv) Help to Understand Market Conditions
There is a close and continuous interaction between the business and its
environment. This interaction helps in strengthening the business firm and using
its resources more effectively.
Proper understanding of the social, political, legal and economic environment

helps the business in the following ways:
(a) Determining Opportunities and Threats: The interaction between the

business and its environment would identify opportunities for and threats to the
business. It helps the business enterprises for meeting the challenges
successfully.
(b) Giving Direction for Growth: The interaction with the environment leads to
opening up new frontiers of growth for the business firms. It enables the
business to identify the areas for growth and expansion of their activities.
(c) Continuous Learning: Environmental analysis makes the task of managers

easier in dealing with business challenges. The managers are motivated to
continuously update their knowledge, understanding and skills to meet the
predicted changes in realm of business.
(d) Image Building: Environmental understanding helps the business

organizations in improving their image by showing their sensitivity to the
environment within which they are working.
(e) Meeting Competition: It helps the firms to analyze the competitors’

strategies and formulate their own strategies accordingly.
(f) Identifying Firm’s Strength and Weakness: Business environment helps to

identify the individual strengths and weaknesses in view of the technological and
global developments.
Ques 2) Explain the various economic and non-economic factors of business

environment.
Business Environment
Economic Non-Economic
Political Legal Competitive Social Cultural Technological
Economic factors of business environment
Economic environment consists of three elements:

1) Economic conditions;
2) Economic policy, and
3) The economic system.
1) Economic conditions: The economic conditions of a nation refer to a set of

economic factors that have great influence on business organizations and their
operations. These include gross domestic product, per capita income, markets
for goods and services, availability of capital, foreign exchange reserve, growth of
foreign trade, strength of capital market etc. All these help in improving the pace
of economic growth.
2) Economic policy: All business activities and operations are directly influenced
by the economic policies framed by the government from time to time. Some of
the important economic policies are:
(i) Industrial policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign investment policy
(v) Export –Import policy (Exim policy)
3) The economic system: The world economy is primarily governed by three

types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and
(iii) Mixed economy. India has adopted the mixed economy system which implies
coexistence of public sector and private sector.
Non-economic factors of business environment
1) Political environment: This includes the political system, the government

policies and attitude towards the business community and the unionism. All
these aspects have a bearing on the strategies adopted by the business firms.
The stability of the government also influences business and related activities to
a great extent. It sends a signal of strength, confidence to various interest groups
and investors
2) Legal environment: This refers to set of laws, regulations, which influence the
business organizations and their operations. Every business organization has to
obey, and work within the framework of the law.
3) Competitive environment: Competition is another external variable which

affects the business strategy of a firm. However, there are three different types
of competition- perfect competition, monopolistic competition, and oligopoly.
Each of these has their own characteristics. Under perfect competition there is
more number of firms and hence the market power of a single firm is of no use.
4) Social environment: The social environment of business includes social factors
like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc.
The social structure and the values that a society cherishes have a considerable
influence on the functioning of business firms.
5) Cultural/Demographic environment: By demographic environment we mean

the size and growth rate of the population. It also includes sex, composition,
family size, religion, etc. All these factors have direct bearing on fie demand.
When, the population is increasing it results in increase in labour supply. It also
brings about a steady rise in demand. When labour supply increases with the
growth of population labour intensive techniques of production get encouraged.
6) Technological Environment: Technological environment include the methods,

techniques and approaches adopted for production of goods and services and its
distribution. The varying technological environments of different countries affect
the designing of products.
Ques 3) Distinguish between the Economic and non-economic environments of

business.
Basis of Economic activities Non-economic activities

difference
Meaning Economic activity refers to a Non-economic activity is
human activity related to an activity performed
production and gladly, with the aim of
consumption of goods and providing services to
others without any
services for economic gain. regard to monetary gain.
Definition Economics activities are Non-economic activities

those activities which are refer to a human activity
associated with the undertaken sheerly out
production, exchange, of love, affection,
distribution, and sympathy or patriotism.
consumption of
merchandise, at every level
of the society.
Motive Economic, i.e. to earn Social or psychological,

money. These activities are i.e. out of love, affection,
performed with the sole aim etc. These activities are
of earning money and conducted voluntarily
producing wealth, to satisfy with an aim of rendering
human wants, with limited services to others for
resources. free, i.e. it cannot be
measured in terms of
money.
Activities Economic activities are It includes all those

included classified as business, activities which are
profession and employment. performed for the
satisfaction of human
a) Business is an activity
sentiments that can be
which involves
social, religious, cultural,
production and
distribution of goods personal, recreational,
and services, for charity, patriotic.
profit.
b) The profession is
related to the services
provided by
profession for
monetary
compensation called
fee.
c) Employment refers to
an occupation in
which a person works
for another person for
salary or wages.
Money Measured in monetary Lacks money

measurement terms. measurement.
Approach Pragmatic Idealistic
Results in Creation of wealth and Satisfaction and

assets. happiness.
National Adds value to national Does not affect national

Income income. income.
Ques 4) "Business environment and business operations influence each other."
Elaborate by giving suitable examples.
Business Environment is not concerned with a single factor. It comprises of

several factors and each factor influences the business firm in its own way. Some
factors influence the performance of the firm directly while the influence of
some other factors is only indirect.
Economic environment consists of three important factors namely, economic

systems, economic policies and economic conditions. The impact of this
environment is much more direct and deliberate than other factors.
1) Economic Systems
The scope of private sector depends mainly on the economic system of a

country. Economic system can be classified into three broad categories:
 Free Trade Economy or Capitalist Economy,

 Centrally Planned Economy or Communist Economy or Socialism, and
 Mixed Economy.
The Industrial Policy of India is an important consideration to our industrialists

while starting their venture. The size of the industrial unit should be in
accordance with the provisions and stipulations of the Policy.
2) Economic Policies
The economic policy of the Government has a very decisive impact on the
business units. Even the very survival of the business firm depends on how the
firm reacts and responds to the Government policies.
In India, industries have been divided into two broad categories namely,
 Priority Sector, and

 Non-priority Sector.
3) Economic Condition
Another major general economic factor, which affects the prospects of the
individual firm, is the size and the overall state of health of the national
economy. Economic condition or the health of the national economy implies the
consideration of many elements namely, the stage of development, economic
resources, the level of income, the distribution of wealth and income etc.
 Business environment (consisting of economic and non-economic

environment) and business operations (management) therefore influence
each other. The environmental factors affect the business, the corporate level
planning, formulation of business strategy and tactics.
 At the operational levels, the success of business would depend on the

capacity of the business to adjust itself to various environmental factors.
When the organizational culture changes, business ethics and practices also
change and standards of business philosophy are reformulated. The
government, labour and society start viewing the affairs with the renewed
attitude. The process thus ceases to be linear. It takes a circular shape.
 Business affects environment and the environment in turn brings out changes
in the business. There is no sequence just as in a circle there is no starting
point and no ending point. Similarly in the interface situation it is difficult to
say where the interaction starts or where the interaction ends. It is a
continuous process.
Ques 5) What are ecological issues? How are ecological issues relevant to
business environment in India?
Environmental issues are effects of human activity on the biophysical

environment, most often of which are harmful effects that cause environmental
degradation.
The business ecosystem consists of a network of interlinked companies that

dynamically interact with each other through competition and cooperation to
grow sales and survive. An ecosystem includes suppliers, distributors, consumers,
government, processes, products, and competitors.
Any business activity will have an impact upon the environment, either through
the natural resources that it uses or the waste products that it produces.
Ecological issues relevant to business environment in India
The four main environmental issues that are most likely to influence the activities
of a business are climate change, pollution, sustainability and waste reduction.
Climate change
Climate change refers to long-term changes to weather patterns. Scientists

believe that business activity contributes to this global warming through the
burning of fossil fuels and the cutting down of trees.
Pollution
Pollution commonly refers to the contamination of air or water with harmful

chemicals. Air pollution can cause a number of health-related issues, and animals
and plants that live in seas and rivers are affected by water pollution. Business
activity may also cause disturbance through noise pollution.
Sustainability
Working in a sustainable way means that business activity does not use up or
destroy natural resources. To achieve this, a business may use renewable energy,
recycle materials such as paper and ink cartridges, or use devices that save
energy and water.
Waste reduction
Traditionally, waste has either been incinerated or sent to landfill sites. However,
these are not environmentally friendly ways of dealing with waste.
Instead, businesses can reduce the amount of waste that they produce, which
reduces costs and means that there is less waste to dispose of. Many businesses
also look for ways in which waste materials can be reused.
Ques 6) Define economic development. Explain briefly different indicators of
economic development.
The term Economic Development is sometimes used as a synonym for economic

growth; generally it is employed to describe a change in a country's economy
involving qualitative as well as quantitative improvements.
Definition
“It refers to the process whereby the total supply of goods and services of the
society increases leading towards improved living standard.”
According to Kindle Berger:
“Economic development relies both on more output and changes in technical

and institutional arrangements by which it is produced and distributed.”
Economic development is the process of improving economic welfare in an

economy. Economic development can involve a stronger economy enabling a
greater range of social services that improve a nation’s welfare. For example, an
undeveloped economy will be primarily based on agriculture and very limited
social services such as health care and education.
Indicators of economic development
1) Growth rate of National Income:
 In this indicator real income is calculated on constant prices.

 If there is rise in national income, this indicates economic development.
 When there is high rate of national income, development rate is high and vice
versa.
2) Per Capita Income (PCI):
 The average income of the people living in the country is the per capita
income.
 A rise in PCI is an important indicator of economic development.
 The rise in PCI indicates economic welfare of the country.
3) Per Capita Consumption (PCC):
 The increase in consumption of goods and services by the people is

measured in PCC.
 Example- clothing, food, education, health etc.
 An increase in PCC shows better quality of life of people and higher economic
development of the country.
4) Physical Quality Life Index (PQLI) and Human Development Index (HDI):
 PQLI is the overall welfare of the people in life expectancy, infant mortality
rate, standard of living.
 HDI measures life expectancy, education and standard of living.
 A rise in PQLI and HDI shows an improvement in quality of life of people and
therefore economic development.
5) Industrial progress:
Industrial progress is an important indicator of the economic development

of a country. It helps to increase per capita income and the national output of
the country.
6) Capital formation:
It means investing in transport, irrigation, roads, electricity, technology
etc. higher capital formation will lead to higher economic development.
The indicators under economic development are more towards the qualitative
improvement of people in the country.
A higher rate of these indicators shows a higher level of economic development.
Ques 7) Define and differentiate between Economic Growth and Economic

Development. Discuss the primary and sub goals of Economic Development.
Economic Growth refers to the increment in amount of goods and services

produced by an economy.
Economic Development refers to the reduction and elimination of poverty,

unemployment and inequality with the context of growing economy.
Differences between Economic Growth and Economic Development
Basis of Economic Growth Economic Development

difference
Definition It refers to the increase It refers to the overall

in the monetary growth development of the
of a nation in a quality of life in a nation,
particular period. which includes
economic growth.
Span of It is a narrower concept It is a broader concept

Concept than that of economic than that of economic
development. growth.
Scope It is a uni-dimensional It is a multi-dimensional

approach that deals with approach that looks into
the economic growth of the income as well as
a nation. the quality of life of a
nation.
Term Short-term process. Long-term process.
Measurement Quantitative. Both quantitative and

qualitative.
Applicable to Developed economies. Developing economies.
Government It is an automatic It requires intervention

Support process that may or may from the government as
not require intervention all the developmental
from the government. policies are formed by
the government.
Kind of Quantitative changes. Quantitative as well as

changes qualitative changes.
expected
Examples GDP, GNP HDI, per capita Income,

industrial development
Primary and sub goals of Economic Development
1) Economic Objectives
 To Reduce Poverty
 To Reduce the Burden of Internal and External Debts
 To Increase the Per Capita Income
 Development of Agricultural Sector
 Development of Industrial Sector
 To Reduce Unemployment
 To Enhance the Productivity Level
 To Correct the Balance of Payment
 To Remove the Deficiency of Capital
 To Use Resources Optimally
 To Remove Market Imperfection
 To Remove the Vicious Circle of Poverty
 To Control Inflation
2) Demographic Objectives
 To Improve the Living Standard

 To Remove Pollution
 To Achieve Better Health
 To Check Brain Drain
 To Develop Infrastructure
3) Cultural & Political Objectives
 To Attain Higher Education

 To Control Un-productive Expenditure
 To Maintain Political Stability
 To Remove the Feudalism
 To Productive Use of Funds
 To Stabilize the Polices
4) Technological & Miscellaneous Objectives
 To Use Modern Technology

 To Reduce the Dependence
 To Fair Distribution
 To Improve Skill
 To Self Reliance
 To Develop Money Market
Conclusion:
Today, economic development is compulsory for every nation. Without

economic development social welfare, progress & prosperity, high living
standard and reduction in poverty & unemployment are impossible.
Ques 8) What do you mean by mixed economy? Why Indian economy is called
mixed economy? Explain its directive principles in India. How did it help in the
economic development of India?
When both, private individuals and government, hold significant proportion of

production units the economy is termed as a mixed economy. In the real world,
the major proportion of production activity in a mixed economy is carried out by
the private sector and a smaller but significant proportion by the government.
Mixed economy implies demarcation and harmonization of the public and

private sectors.
In it free functioning of the market mechanism is not permitted and the

government intervenes or regulates the private sector in such a way that the two
sectors become mutually reinforcing. There is a commitment on the part of both
the sectors to national objectives and priorities. It is a middle path between the
two extreme systems of capitalism and socialism.
A mixed economy represents an achievable balance between individual initiative

and social goals.
The developing countries like India have adopted mixed economy to accelerate
the pace of economic development. Even the developed countries like UK, USA,
etc. have also adopted ‘Mixed Capitalist System’.
Why Indian economy is called mixed economy?
India allows market forces to decide the price and also in some areas
government interferes like in necessary goods and decides the prices to protect
the interest of poor people. That's why; India's economy is called a mixed
economy.
Directive principles of mixed economy in India
The government, therefore, opted for mixed economy within the parameters laid
down in the Directive Principles of the Indian Constitution. The Directive
Principles stated:
"The State shall, in particular, direct its policy towards securing -
(a) that citizens, men and women equally, have the right to an adequate means
of livelihood.
(b) that the ownership and control of the resources of the community are so
distributed as best to sub serve the common good, . I
(c) that the operation of the economic system does not result in the
concentration of wealth and means of production to common detriment.
The government of India, therefore, rejected both the extremes: the socialist
model of the economy following the Soviet system and the capitalist model of
development following the USA. It opted for a middle path which is described as
the mixed economy framework in India. In such a system both the public sector
and private sectors were to coexist.
How did it help in the economic development of India?
A mixed economic system allows the optimum utilization of resources. In fact,

the Government of India undertakes economic planning to allocate and utilize
resources. As a result, it can avoid a shortage, eliminate cyclical fluctuations, and
increase production efficiency.
Ques 9) Highlight the salient features of mixed economy. Also explain how it
helped in developing industrial infrastructure in India?
Salient features of the mixed economy
(i) Co-existence of Private and Public Sector:
Under this system there is co-existence of public and private sectors. In public
sector, industries like defense, power, energy, basic industries etc., are set up.
On the other hand, in private sector all the consumer goods industries,
agriculture, small-scale industries are developed. The government encourages
both the sectors to develop simultaneously.
(ii) Personal Freedom:
Under mixed economy, there is full freedom of choice of occupation, although

consumer does not get complete liberty but at the same time government can
regulate prices in public interest through public distribution system.
(iii) Private Property is allowed:
In mixed economy, private property is allowed. However, here it must be

remembered that there must be equal distribution of wealth and income. It must
be ensured that the profit and property may not concentrate in a few pockets.
(iv) Economic Planning:
In a mixed economy, government always tries to promote economic

development of the country. For this purpose, economic planning is adopted.
Thus, economic planning is very essential under this system.
(v) Price Mechanism and Controlled Price:
Under this system, price mechanism and regulated price operate simultaneously.
In consumer goods industries price mechanism is generally followed. However, at
the time of big shortages or during national emergencies prices are controlled
and public distribution system has to be made effective.
(vi) Profit Motive and Social Welfare:
In mixed economy system, there are both profit motive like capitalism and social
welfare as in socialist economy.
(vii) Check on Economic Inequalities:
In this system, government takes several measures to reduce the gap between
rich and poor through progressive taxation on income and wealth. The subsidies
are given to the poor people and also job opportunities are provided to them.
Other steps like concessions, old age pension, free medical facilities and free
education are also taken to improve the standard of poor people. Hence, all
these help to reduce economic inequalities.
(viii) Control of Monopoly Power:
Under this system, government takes huge initiatives to control monopoly

practices among the private entrepreneurs through effective legislative
measures. Besides, government can also fake over these services in the public
interest.
How it helped in developing industrial infrastructure in India?
 In India, the concept of mixed economy was evolved so that both the private
and public sectors could contribute to the process of economic growth.
 The Industrial Policy Resolution of 1956 gave a definite shape to it by clearly

demarcating the areas in which each sector would operate. The two
instruments of policy were the Industries (Development & Regulation) Act
of.1951 and the Companies Act of 1956. These two Acts conferred on the
government through licensing procedure, the power of regulating location,
production and expansion of major industries in India.
 The Industrial Policy Resolutions of 1977 and 1980 further refined the
operational framework of mixed economy in India. Private sector in India
contributes nearly 80 per cent of the national income whereas the public
sector contributes the balance 20 per cent.
 The organized private sector is modernized, capital-intensive and has access
to modem financial services. Over the years, however, the private sector, has
become a high cost sector, and hence non-competitive with the international
sector. The public sector was supposed to have control over the commanding
heights of the economy.
 The new Industrial Policy was announced on 24th July, 1991 which sought to
delicense and deregulate the economy in many ways. Areas reserved for the
public sector have been narrowed down. Several other measures relating to
liberalizing trade and foreign investment have also been taken. With the
dismantling of artificial controls, it is expected that the economy will become
internationally competitive, and economically efficient. The social dimensions
of the mixed economy continue to be given a pride of place in the emerging
scenario.
Ques 10) Explain the main components of India’s exports and major export
promotion measures initiated by the Government of India.
India is becoming a significant player in the global and national marketplace. It is

currently the world’s 17th largest export economy. This position gives India the
foothold it needs to remain competitive in international trade.
The main exports of India include:
1) Refined Petroleum
2) Diamonds
3) Packaged medicaments
4) Jewelry
5) Rice
Here are India’s top 5 export destinations
1) United States (15%)

2) United Arab Emirates (9.6%)
3) China (5.1%)
4) Hong Kong (4.4%)
5) Germany (3.4%)
Refined petroleum is India’s top export, but none of India’s main export partners
represent this fact. Exports to the US and Hong Kong from India are largely
dominated by diamonds while its exports to the United Arab Emirates are led by
jewelry. On the other hand, China’s main import from India is refined
copper and Germany’s is gas turbines.
Major export promotion measures initiated by the Government of India
A number of institutions have been set up by the government of India to

promote exports. The export and import functions are looked after by the
Ministry of Commerce. The Government formulates the export-import policies
and programmes that give direction to the exports.
Exim policies aim at export assistance such as export credit, cash assistance,
import replenishment, licensing, free trade zones, development of ports, quality
control and pre-shipment inspection, and guidance to Indian entrepreneurs to
set up ventures abroad.
1. International Presence
The Director of Exhibitions makes arrangements for participation in international

exhibitions, holds Indian exhibitions abroad, and runs show rooms in foreign
countries and, sets up Trade centres outside India.
2. Export Promotion Council
The Director of Commercial Intelligence is concerned with commercial publicity

through various media, monthly publications, directories of foreign importers of
Indian products, country-wise. There are 22 export promotion councils for
different products, offering services of export promotion such as price, quality,
packing, marketing, transport etc.
3. Setting up of Commodity boards to promote exports
Commodity Boards are set up to help export of the traditional items. There are
seven Commodity Boards apart from All India Handloom and Handicraft Board
under the Commerce ministry. They advise the government on its policies,
signing trade agreements, fixing quota, etc.
4. Trade representatives
There are Trade Representatives abroad who conduct market surveys, furnish
information on exports-imports, settle trade disputes and pass on information
about the rules and regulations for imports.
5. Indian Institute of Foreign Trade
The Indian Institute of Foreign Trade (IIFT) was set up by the Government in co-
operation with trade, industry, universities, educational and research
institutions. It is an autonomous body, set up to train people in international
trade, conduct research, survey and organizes training programmes.
6. Participation
To promote, organize and participate in the international trade fairs,

Government set up Trade Fair Authority of India in 1977. It sets up showrooms
and shops in India and abroad. It assists in development of new items for
diversification and expansion of India’s exports.
7. Trade development Authority
In addition to the above, we have Trade Development Authority to collect

information, conduct research and render export finance and help in securing
and implementing export orders.
8. Financing for export
The Export Credit Guarantee Corporation (ECGC) covers both commercial and
political risks on export credit transactions. Its head office is in Mumbai and
branches are in Delhi, Calcutta and Chennai.
9. Advisory Councils
Some of the State Governments have set up specialized Export Trade
Corporations which undertake export promotion. They are established in Andhra
Pradesh, Bihar, Karnataka, Uttar Pradesh, Madhya Pradesh, Himachal Pradesh.
There are also Advisory Councils like Board of Trade, Export-Import Advisory
Council, etc.
10. Technical assistance and Training
The Small Industries Development Organization (SIDO) with 26 small industries

service institutions, provide techno-managerial assistance like motivating
entrepreneurs to export, provide information on export-import and offer
consultancy services with respect to export procedure, documentation and
export incentives.
Ques 11) How is industrial sickness defined in India? What steps have been
taken to tackle this problem?
Industrial Sickness, as the name suggests is the state of industrial weakness or

illness, i.e. the company fails to earn a reasonable profit. It is the continuous
disproportion in the debt-equity ratio and falsification of the financial status of
the industrial unit.
A developing economy like India cannot afford the growing sickness in industries
as it results in a colossal wastage of physical, financial and human resources.
Industrial Sickness – Special Provisions Act, 1985
The government defined industrial sickness for the first time in the Sick Industrial
Companies (Special Provisions) Act, 1985.
According to this Act, a medium or large (i.e. non-SSI) company was defined as
sick if:
(1) it was registered for at least 7 years (later reduced to 5 years)
(2) it incurred cash losses in the current year and the preceding year.
(3) its entire net worth (i.e. paid-up capital and reserves) was eroded.
A company is regarded, as weak or incipiently sick on the erosion of 50% of its

peak net worth during any of the preceding five financial years.
Industrial sickness has been redefined in the Companies (Second Amendment)

Act, 2002.
Steps taken to tackle the problem of industrial sickness in India
The government undertakes the following measures to revive and rehabilitate

the sick industrial units.
Financial Assistance
As per the directions of the RBI, the commercial banks granted the following
concessions to sick industrial units:
 Rescheduling of loans and interest:

 Grant of additional working capital:
 Waiving off interest on loans:
 Moratorium on payment of interest, etc.
Organizational measures
The different organizational measures are given below:
1) State-level inter-institutional committees: These are set up by the RBI to

ensure better coordination between the banks, state governments, and other
concerned financial institutions.
2) Special Cell: It was set up by the Rehabilitation Finance Division of the IDBI to
assist the banks for the revival of sick units.
Fiscal Concessions
 The government amended the Income Tax Act in 1977 to provide a tax
benefit to those units which take over the sick units for reviving them.
 The government announced a scheme for the grant of excise loans to
sick/weak units.
 Under this scheme, selected sick units are eligible for excise loans not
exceeding 50% of the excise duty paid over the preceding 5 years.
Ques 12) State the indicators of industrial sickness. Describe its causes.
Ans: Symptoms/ indications of industrial sickness:
 Little to no movement of inventory

 Decrease in the company’s sales
 Decline in capacity utilization
 Shortage of cash to meet the day to day obligations
 Frequent proposals to extend the credit limit
 Deteriorating financial ratio
 Continuous fall in the prices of shares
 Non-payment or delay in the payment of dues like taxes, interest, dividends,
salaries, etc.
 Delay in the audit of accounts.
 Disparities among various levels of management.
 Decline in technological innovations
 Irregularity in the maintenance of books of accounts.
 Overdependence on external funds
 Continuous losses
Causes of Industrial Sickness
Internal Causes: The causes which are under the control of the enterprise are
regarded as internal causes. It may be a result of some internal insufficiency or
shortcoming, in different areas of business.
Some of these causes are:
1. Technical feasibility
 Inadequate Technical Knowhow

 Inappropriate choice of technology
 Obsolete production process
 Poor information system
 Wrong or defective idea of industry
2. Economic Viability
 High cost of inputs

 High break-even point
 Excessive investment in fixed assets
 Non-flexibility of fixed assets
 Underestimation of financial requirements.
3. Production Management
 Underutilization of production capacity

 Huge wastage of raw materials and supplies
 Poor maintenance and replacement of plant and machinery
 Wrong location or layout
 Poor quality maintenance
4. Labor Management
 Poor performance and productivity of labour

 Huge workforce, than required.
 Lack of skilled labour
 Unreasonably high wage structure.
 Poor handling of labour
 Inadequate training
5. Marketing Management
 Lack of market research and feedback

 Unsound pricing policy
 Inappropriate product mix
 Improper demand forecast
 Small customer base
 Poor marketing strategies
 Absence of horizontal and vertical integration
6. Financial Management
 Shortage of working capital

 Lack of funds
 Defective Capital structure
7. Administrative Management
 Huge expenditure on Research and Development

 Incompetent Management
 Lack of timely diversification.
External Causes: The causes which are beyond the control of the enterprise
come under external causes, which affects the industry as a whole.
Some of these causes are:
1. General Issues
 Improper supply or non-availability of important raw material, or availability

at higher prices
 Improper supply of critical inputs like power, water and transportation
 Chronic Power storage
 High production cost
 Ignorance of potential market
2. Government controls and policies
 Sudden unfavorable change in the policies of the government

 Taxes and duties
 Price control
3. Market Constraints
 Innovative technological changes, due to which products turn out as obsolete.

 Recessionary trend in the entire economy, affecting the performance of the
firms
4. Extraneous factors
 Natural Calamities, like an earthquake, floods, etc.

 Political Situation
 Industrial Strikes
 War between countries
Ques 13) State the meaning and types of joint ventures. Describe their
advantages and disadvantages.
Joint venture includes commercial and industrial enterprises in which two or

more parties from two or more countries share responsibility for operation. They
provide risk capital, goodwill, know-how and management and natural resources.
There is a controlling partner in joint venture who is a major decision maker.
A joint venture in simple words is an enterprise which is jointly owned and

managed by a local entrepreneur and a foreign entrepreneur.
Types of Joint Ventures
Joint ventures may be investment oriented or non-investment oriented.
1) Non-investment oriented joint ventures involve like use of brand name or to

develop a source of supply of raw material for parent firm's use.
2) In case of investment oriented joint ventures a foreign firm participates in

local firms equity, which may be minority or majority equity. Many combinations
of joint ventures have emerged.
Following are some examples:
a) A foreign private company and a local state government.
b) One foreign company joining with a local company.
c) A government controlled company with joint ventures abroad.
d) Two firms of one foreign country joining together in a foreign market.
e) Companies from two or more countries forming a joint venture in a third

country.
F) More than two nations in one joint venture.
Advantages
Joint ventures have the following advantages:
1) They are an alternative where a country does not allow fully foreign owned
firms.
2) They help a local firm to enter foreign markets.
3) They make possible the use of know-how, patent etc.
4) They help to enhance foreign exchange earnings.
5) The local firm can easily approach the national government and the public.
6) They help diversification of business risk among two countries.
Disadvantages
From the point of view of host country joint ventures play bring some
disadvantages also.
Some of them are as follows:
1) The subsidiaries in host country may he allowed to use only limited or

outdated technology or may dump unwanted technology or even banned
products.
2) The local skilled technical personnel play he restricted from learning process
or to take over key positions. This may lead to drawing away talented personnel.
3) Respect for local social customs and traditions may not be shown. They may
be acting: against objectives of national plans or may manipulate laws by bribing
officials.
4) They map dominate some key industrial sectors. Due to monopolistic

advantage they may be extracting high profits and fees. Producing unnecessary
goods with scarce resources may lead to inflation.
5) They may divert local savings away from 'productive investment by nationals.
The equipment or spare parts to be exported may be over invoiced. The
financing may be mainly through local debt.
Ques 14) What is meant by fiscal policy? Explain the objectives and importance
of Fiscal Policy. What are its tools?
Ans: The word fiscal has been derived from the Latin word ‘fisc’ which means
“state treasury, public treasury or Government funds”.
Fiscal policy is the means by which a government adjusts its spending levels
and tax rates to monitor and influence a nation's economy.
Fiscal policy is a result of several component policies or a mix of policy

instruments. These include the policy on taxation, subsidy, welfare expenditure,
etc.; investment or disinvestment strategies; and debt or surplus management.
There are two fundamental issues of fiscal policies:
1) Should taxes be raised or lowered?
2) Should government spending be reduced or increased?
Fiscal policy in the modern sense refers to the deliberate actions by the
government in its spending and taxing activities to achieve certain objectives like
that of price stability and raise output and employment to the desired levels.
The main objectives of fiscal policy are:
(1) Promoting economic growth,

(2) Creating employment opportunities,
(3) Ensuring stability in prices,
(4) Reducing inequalities of incomes and
(5) Regulating foreign trade and foreign exchange.
Fiscal policy in the Indian context involves ways in which the central
government raises and spends money. The government adopts different
methods for this purpose.
Ways of raising money: The ways of raising money are technically termed as
“sources of revenue” in public finance. Basically, a government has three sources
of revenue: taxation, borrowing or printing new money. In India, there is an
additional source in form of non-tax revenue. Out of these, printing of money is
generally the last resort.
1) Tax revenue: Tax revenue is the income gained by the government through
taxation. Taxation is the primary source of government revenue. Revenue may
be extracted from sources such as individuals, public enterprises, trade, and
royalties on natural resources and/or foreign aid.
2) Non-tax revenue: Non-Tax Revenue is the recurring income that is earned

from the sources other than taxes by the government. They are the revenue
receipts that are not generated by taxing the public.
3) Capital receipts: Capital receipts are those receipts that are produced from
the financing activities and the investment of a business. These do not have a
recurrent nature and do not have a tendency of occurring again and again. They
only occur once in the final accounting year and are specifically mentioned in the
liability corner on a balance sheet.
Ways of spending money: The budget of central government classifies

expenditure into two types:
1) Plan Expenditure
Plan expenditure pertains to the money to be set aside for productive purposes,
like various projects of ministries. They are estimated after discussions between
each of the ministries concerned and the Planning Commission.
2) Non-plan expenditure
Non-plan expenditure is what the government spends on the so-called non-
productive areas, such as salaries, subsidies, loans and interest. Non-plan capital
expenditure mainly includes defense, loans to public enterprises, loans to States,
Union Territories and foreign governments.
Plan and non-plan expenditures are further divided into two parts:
Revenue expenditure: Revenue expenditures are typically referred to as ongoing

operating expenses, which are short-term expenses that are used in running the
daily business operations.
Capital expenditure: Capital expenditures are typically one-time large purchases

of fixed assets that will be used for revenue generation over a longer period.
Ques 15) What was the need for New Economic Policy? Discuss the major
elements of New Economic Policy adopted by the Govt. of India.
Need for New Economic Policy
 Before 1991, the Indian economy was strictly under the control of the
government. It was the public companies that ruled the roost. The very few
private companies that operated those days had to follow myriad
government-sanctioned dos and don'ts. However, as 1991 was approaching,
the Indian economy was on the brink of collapse. The government had to take
the help of the IMF and it secured a bailout package from it.
 NEP was envisioned to bring down the rate of inflation. To increase the
economic growth rate and build significant foreign exchange reserves. To
enable economic stability and to remove market restrictions those are
impediments to growth.
Major elements/features of New Economic Policy adopted by the Govt. of India
The new economic policy of 1991 brought a sea change in the Indian market and
economy. The government, with this policy, did many reforms and went ahead
with radical policy changes.
1) The Government Gave Up Monopolistic Control over Many Industrial Sector
In the pre-1991 era, the key industrial sectors, namely - the iron and steel
industry, heavy machinery industry, air travel sector, shipbuilding sector,
telecommunications and the general communications sector etc. The private
players, after the policy, could enter these industries without many obstacles.
The Indian Railways, the army equipment industry, the nuclear energy industry
etc. still remained under the control of the government.
2) The End of License Raj
Previously, the private players had to obtain licenses from the government in
order to start a business in any industrial sector. After 1991, the practice of
obtaining a license for starting a business was largely done away with.
3) The Government Transferred Its Equity in Public Sector Enterprises to Private

Player
As part of the New Economic Policy, it was mandated that the government would
have to give up control over the commercial enterprises. This led the
government to transfer its equities held in the public sector enterprises to
private players. As a result of this privatization, the government achieved
significant monetary gains which helped it to fill the deficits and clear debts.
4) The Financial Sector Reforms
Just like the industrial sector, in the financial sector too, the central bank - the
RBI - ceded much of the power it held in the financial sector. Private Banks could
now operate in the country. However certain key aspects of the financial sector
were kept under the control of RBI to prevent any unfortunate financial incident
happening to the account holders.
5) FDI
The foreign direct investment policy in India also became mature after the NEP.
Now, foreign players could easily enter the Indian Market. It was allowed to buy
a 51% stake in a domestic company.
6) Reforms in Taxation
The NEP reformed the prevailing tax policy. On one hand, it benefited the
citizens by lowering the tax rate and on the other; it benefited the government
by bringing many previously non-taxable sectors under the purview of taxation.
7) Import-Export Reforms
After 1991, the companies were allowed to import a wider range of products.
The outward-looking approach to trade offered the citizens to enjoy high-quality
overseas products. The monopoly of the domestic businesses was over and the
price of the commodities went down. The import taxes were lowered.
8) Globalisation
Because of the opening up of the Indian market to foreign players and products,
the Indian society tasted the advantages of globalisation. More and more Indian
businessmen, students and politicians came in contact with global powerhouses
and the exchange of ideas proved valuable.
9) Privatization
Due to the disinvestments of the government from many public sector
enterprises, the private players cropped up to gain control of these enterprises.
The private players made these hitherto government-controlled companies
disciplined.
Ques 16) Discuss the progress made (achievements), problems faced and
weaknesses in the implementation of New Economic Policy, 1991.
Beginning with mid-1991, the govt. has made some radical changes in its policies
related to foreign trade, Foreign Direct Investment, exchange rate, industry,
fiscal discipline etc. The various elements, when put together, constitute an
economic policy which marks a big departure from what has gone before.
The thrust of the New Economic Policy has been towards creating a more
competitive environment in the economy as a means to improving the
productivity and efficiency of the system. This was to be achieved by removing
the barriers to entry and the restrictions on the growth of firms.
The Major areas of New Economic Policy 1991 are:
 Fiscal policy reforms

 Monetary policy reform
 Pricing policy reform
 External policy reform
 Industrial policy reform
 Foreign investment policy reform
 Trade policy reform
 Public sector policy reform
The Major Achievements of New Economic Policy are:
 GDP Growth
 Increase in Gross rate of return (ROR) on Capital
 Decline in inflationary trend of Wholesale Price Index (WPI)
 Rise in foreign reserves
 Improvement in Index of Industrial Production
 Export growth
Problems faced in the implementation of New Economic Policy 1991
 The New Economic Policy that India adopted in 1991 proved to be an

immediate solution to the Economy crisis which the country was facing. The
Balance of Payment crisis left no choice but to accept the terms and
conditions of the International agencies IMF & Word bank to open up and
liberalize the economy.
 On one hand this step was beneficial for the economy and was the need of
the hour but the policy should be designed taking into consideration the
nature of the whole of Indian economy.
 As a result of this policy Indian economy has grown to 2 trillion and we are
able to have a large forex reserve. But on the other hand we see India is still
facing a crisis which is hindering the integration of whole of the nation. Even
after around 25 years of this policy our farmers are forced to commit
suicide.
 Now since Indian Economy is agriculture based economy, though the share
of Agriculture in GDP has decreased to 14% but it still continues to provide
employment to more than 50%of the population.
 The New Economic policy has been highly successful in liberating the
Economy, creating job opportunities, but it has not been successful in
integration all the sections of the society which today lives in an atmosphere
of uncertainty and deprivation.
Some of the major weaknesses of New Economic Policy are:
 The New Economic Policy concentrates mainly on large corporate sector.

The policy largely ignores small scale industries and agriculture sectors on
which large population depend.
 Large dependence on foreign investment in several sectors of economy.
 The rate of Consumer Price Index (CPI) has increased over the years.
 Inadequate privatization due to strong resistance from labor unions.
 Government has disinvestment mostly in healthy industrial units and mote

so to reduce the fiscal deficit, which is unjustifiable.
 The implementation of new economic policy has not helped in reducing

fiscal deficit. Non-plan expenditures have been not reduced.
Ques 17) What is meant by monetary policy? Discuss the main objectives of
monetary policy. Describe various instruments of monetary policy in India.
Monetary policy is the deliberate exercise of the monetary authority's power to

induce expansions or contractions in the money supply with the objective of
influencing investment, income and employment and maintaining price stability
in general within the broad framework of economic policy objectives of
government.
“Monetary policy implies those measures designed to ensure an efficient

operation of the economic system or set of specific objectives through its
influence on the supply, cost and availability of money.”
The central bank of a country is the monetary authority of the country. In India,
Reserve Bank of India (RBI) is the central bank of the country. Each country has a
central bank known by differen1 names.
Main objectives of monetary policy
The objectives of monetary policy are nearly the same as that of fiscal policy.
However the nature of measures adopted and the agencies responsible for
implementation are different.
Fiscal policy is operated by government while the monetary policy by the central
bank (i.e. RBI).
Fiscal policy involves changes in taxes and government spending, monetary

policy involves variations in money supply, interest rates, lending by commercial
banks etc.
The objective of monetary policy varies from country to country and from time to
time, these can be summarized as:
 Promotion of saving and investment

 Controlling the imports and exports
 Managing business cycles
 Regulation of aggregate demand
 Generation of employment
 Helping with the development of infrastructure
 Allocating more credit for the priority segments
 Managing and developing the banking sector
 Various instruments of monetary policy in India
Instruments
Quantitative Qualitative or Selective
Variations in Margin requirements

reserve
requirements
Moral suasion
Bank rate
Ceilings on credit
Open market operations Discriminatory rates of

interests
Quantitative Instruments
1) Variations in reserve requirements
When prices are rising, the central bank raises the reserve ratio. Banks are
required to keep more with the central bank. Their reserves are reduced and
they lend less. The volume of investment, output and employment are adversely
affected. In the opposite case, when the reserve ratio is lowered, the reserves of
commercial banks are raised. They lend more and the economic activity is
favorably affected.
2) Bank rate
The bank rate is the minimum lending rate of the central bank at which it
rediscounts first-class bills of exchange and government securities held by the
commercial banks.
3) Open market operations
Open market operations refer to the sale and purchase of securities in the
money market by the central bank of the country. When prices start rising and
there is a need to control them, the central bank sells securities.
Qualitative (or Selective) Instrument
1) Margin requirements
Commercial banks lend against security in the form of property, merchandise or

financial instruments like shares, bonds, debentures etc. While lending against a
security banks keep a margin as a safeguard against fluctuations in the market
value.
2) Moral Suasion
Under this method, RBI urges commercial banks to help in controlling the supply
of money in the economy.
3) Ceilings on credit
To check undue expansion of credit in certain directions, the RBI puts ceiling on
granting of credit for certain purposes. This instrument can also be used to
ensure equitable flow of credit towards all sectors of the economy.
4) Discriminatory rates of interests
RBI is empowered to direct commercial banks to charge different interest rates

for granting credit to different sectors. Priority sectors are generally given loans
at lower rates.
Ques 18) What is economic planning? Highlight the major achievements of

economic planning in India. State the meaning and components of macro-
economic policy.
An economic plan is a proposed list of goals that an economy wants to achieve

within a specific period of time. It suggests the optimum ways to utilize the
scarce available resources to achieve the enlisted goals. In India, planning is done
for a period of five years, which is called five year plan.
What is the economic planning in India?
Economic planning in India is undertaken by the Planning Commission, which was

replaced by NITI Aayog on January 1, 2015. NITI (National Institution for
Transforming India) Aayog was established with the objective of achieving
sustainable development goals through cooperative federalism.
Major achievements of economic planning in India
1. Increase in National Income and Per Capita Income:
The per capita income which was 254.7 at current prices in 1950-51 increased to
Rs. 1741.3 in 1980-81 to Rs. 5365.3 in 1990-91 and further increasing.
2. Development in Agriculture:
Agricultural productivity has also marked an upward trend during the plan
period.
3. Development of Industry:
In the first five year plan much of the capital was invested to develop the
industry and defense. About fifty per cent of the total outlay of the plans was
invested for their development.
4. Development of Transport and Communication:
During the planning period, much attention has been paid towards the
development of transport and communication. In the first two plans, more than
one-fourth of the total outlay was invested on the development of transport and
communication.
5. Self-Reliance:
During the last five decades, considerable progress seems to have been made
towards the achievement of self-reliance. We are no longer dependent on other
countries for the supply of food-grains and a number of agricultural crops.
6. Employment Generation:
In India, the problem of unemployment is most crucial. During the first Nine
plans much emphasis was laid on the creation of larger employment
opportunities, such as, emphasis on the establishment of small and cottage
industries, spread of technical education, development of self-employment
schemes, creation of larger industries, improvement of agriculture and service
sectors etc.
7. Power:
Total installed capacity (including non-utility), which was only 2,301 MW in 1950,
increased to 97,899 MW (including non-utility of 12,079 MW) by the end of
March, 2000.
8. Price Stability:
Attaining economic stability has been considered as one of the major objective of
economic planning throughout the entire plan period.
9. Capital Formation:
In India due to the development of agriculture, industry and defense, the rate of
capital formation has also increased.
10. Development of Science and Technology:
In the era of planning, India has made much progress in the field of science and
technology. In reality, the development is so fast that India stands third in the
world in the sphere of science and technology.
11. Social and Miscellaneous Services:
Development of social and miscellaneous services is also another important

sector of our five year plans. It consists of such vital services as education, health
and family planning, housing, labour welfare and welfare of backward classes
etc.
12. Social Justice:
The planning in India has an objective of sustained growth with social justice. It
has also been emphasizing the achievement of this objective.
Meaning of macro-economic policy:
Macroeconomics is the branch of economics that studies the behavior and

performance of an economy as a whole. It focuses on the aggregate changes in
the economy such as unemployment, growth rate, gross domestic product and
inflation.
Macroeconomic policy is concerned with the operation of the economy as a

whole. In broad terms, the goal of macroeconomic policy is to provide a stable
economic environment that is conducive to fostering strong and sustainable
economic growth, on which the creation of jobs, wealth and improved living
standards depend.
Components of macro-economic policy:
The key components of macroeconomic policy are: fiscal policy, monetary policy
and exchange rate policy.
1) Fiscal policy is the use of government spending and taxation to influence the
economy. Governments typically use fiscal policy to promote strong and
sustainable growth and reduce poverty.
2) Monetary policy is a set of actions to control a nation's overall money supply

and achieve economic growth.
3) The exchange rate policy refers to the manner in which a country manages its
currency in respect to foreign currencies and the foreign exchange market.
Ques 19) Discuss the role of government in business.
Government performs many diverse roles in an economy. Usually, the role of

government is to maintain the law and order, defend a country from outside
attacks, give social security, take care of public utilities, and sustain peace within
a nation. Regulating Business Organization is also an essential part of a
Government.
Government plays a fourfold role in regulating business.
1) Regulatory role of government:
The direct and indirect measures used by the government from time to time to
control and regulate the private sector are included under the regulatory role.
It means, the regulatory roles include all direct and indirect policy measures
which the government employs from time to time to control and regulate
private business to prevent the growth of socially undesirable business
activities, to prevent concentration of economic power and to direct private
activities, to prevent concentration of economic prosperity, employment and
social justice.
The regulatory functions of the Government include:
(i) Restraints on private activities,

(ii) Control of monopoly and big business,
(iii) Development of public enterprises as an alternative to private enterprises
to ensure competitive dualism,
(iv) Maintenance of a proper socio-economic infrastructure.
2) Promotional role of government:
The promotional roles, on the other hand, include all the activities that are
undertaken and all the policies that are adopted to build the development
infrastructure (i.e., the economic and social overhead capital) necessary for
industrial growth; to enhance the resource potential of both mean and
materials to enlarge the production capacity of economy and to create all other
facilities deemed to be necessary for the overall growth of the economy. In a
mixed economy like ours, the government through a comprehensive program
of development carries out the development activities.
3) Entrepreneurial role of government:
The impressive growth of the public sector in India from a small beginning bears
testimony to the role of the government as an entrepreneur.
Private investors are solely guided by private profit motive and hence they are
not interested in developing products of common public use and social services
which yield relatively lower returns. But as a “social entrepreneur” the
government does not hesitate to take them up.
Entrepreneurial role of the government comprises of:
a) Making Investment in New Units: Government makes investments in

industries which require heavy investments or whose development is in the
interests of the nation.
b) Acquiring Exiting Units: Government acquires sick units for their revival. In
1977, government introduced the merger scheme, with an objective of
encouraging merger of sick industrial units with healthy. Under the scheme,
healthy units absorbing sick units could set off the depreciation and
accumulated losses against their tax liabilities.
c) Nationalization: Certain industries have been reserved exclusively for the
public sector.
4) Role of government as the planner:

In its role as a planner, the government indicates various priorities in the Five
Year Plans and also the sectorial allocation of resources. Mixed economies are
democratically planned economies.
The government tries to manage the economy and its business activities through
the exercise of planning. Planning is the most important activity in a modern
mixed economy. The idea of economic planning can be traced to three different
sources: Rationalism, Socialism and Nationalism.
Economists advocate a planned economy on the ground that it can be a rational
economy which can utilize the available resources in an optimal manner.
Ques 20) Outline the long term goals of planning laid down by the Planning
Commission in the first five year plan. Explain the main features of the Nehru
Mahalanobis strategy of development and its achievements. (5+15)
Ans: Planning plays an important role in the smooth functioning of an economy.

In 1950, the Government set up the Planning Commission to create, develop, and
execute India’s five-year plans.
Long term goals of planning laid down by the Planning Commission in the first
five year plan were:
On December 8, 1951, the Prime Minister Jawaharlal Nehru presented the first
five-year plan to the Parliament of India. This was based on the Harrod-Domar
model. At that time, India was facing three problems – the influx of refugees, a
severe shortage of food, and also mounting inflation. India had to recover from
the partition and the disequilibrium in the economy due to the Second World
War.
Its main thrusts were as follows:

1. to invest in dams and irrigation to improve agricultural sector with the urgent
attention.
2. Huge allocations were made for large scale projects like Bhakra-Nangal Dam.
3. It focused on land reforms for the development in rural areas.
4. It aimed to increase level of National Income.
Main features of the Nehru Mahalanobis strategy of development:
 The second five year plan is based on so called Mahalanobis model. This was
the model by PC Mahalanobis, the founder of Indian Statistical Institute and a
close aide of Nehru.
 This model is known to have set the statistical foundations for state-directed
investments and created the intellectual underpinnings of the license-raj
through an elaborate input-output model.
 This Model suggested that there should be an emphasis on the heavy
industries, which can lead the Indian Economy to a long term higher growth
path.
 India’s second five year plan and Industrial policy Resolution 1956, which
paved the way for development of Public Sector and license raj; were based
upon this model.
 This strategy was based on the two sector model, that is, consumer goods
sector and capital goods sector. The strategy emphasized investment in heavy
industry to achieve industrialization for rapid economic development. It was
based on the Russian experience.
 The objective was to become self-reliant and overcome capital constraint. This
strategy was adopted in the 2nd Five Year Plan and with minor modifications,
up to the 5th Plan. It was a long-term strategy.
The Mahalanobis strategy called for larger role for public sector because of two
reasons.
(i) Private Sector was not mature enough to undertake the responsibility.
(ii) It was feared that opening industries to private sectors could lead to
concentration of wealth in private hands.
The three main aspects of the strategy of development in the earlier phase of
planning were:
1) Developing a sound base for initiating the process of the long-term growth
2) High priority to industrialization
3) Import substitution.
Achievements:
 Steel mills at Bhilai, Durgapur, and Rourkela were established in second

five year plan.
 Enhanced coal production and more railway lines were introduced in this
plan.
 Atomic Energy Commission was formed in 1957 with Homi J. Bhabha as
the first chairman.
 Tata Institute of Fundamental Research was established as a research
institute.
 In 1957 a talent search and scholarship program was begun to find
talented young students to train for work in nuclear power.
Ques 21) Define the significance of small scale sector in Indian economy.
Discuss various promotional schemes/policies of the government for the
development of small scale industries.
Roles and significance/importance of small scale industries in India:
1. Employment generation: Small scale industries are one of the best sources of
employment generation in India.
2. Less Capital Requirement: Small scale industries are less capital intensive than
the large scale industries.
3. Use of resources and development of entrepreneurial skills: Small scale
industries allow for the development of entrepreneurial skills among the rural
population which is not having the scope of large scale industries.
4. Equal income distribution: Small scale industries by generating employment
opportunities create equal income opportunities for the youth of the
underdeveloped areas.
5. Maintains regional balance: It has been seen that large scale industries are
mostly concentrated in the large cities or restricted to areas which leads to
migration of people in search of employment to these cities.
6. Short production time: Small scale industries have a shorter production time
than the large scale industries which results in flow of money in the economy.
7. Supporting the large scale industries: Small scale industries help in the growth
of the large scale industries by producing ancillary products for the large
industries.
8. Improvement in Export: Small scale industries contribute to around 40% of
the total exports done by India, which forms a significant part of the revenue
earned from the exports.
9. Reduce the dependence of agriculture: Small scale industries by providing
employment opportunities to the rural population provides more avenues for
growth and also paves way for a more arranged distribution of occupation.
Government Policies for Development and Promotion of Small-Scale Industries
in India
In India, Small-scale enterprises have been given an important place for both
ideological and economic reasons. It is well documented that the small scale
industries have an important role in the development of the country. It
contributes almost 40% of the gross industrial value added in the Indian
economy. Government's approach and intention towards industries in general
and SSIs in particular are revealed in Industrial policy Resolutions. There are
many Government Policies for development and promotion of Small-Scale
Industries in India. These are mentioned as below:
1) Industrial Policy Resolution (IPR) 1948
The Industrial Policy 1948 emphasized the role of cottage and small scale
industries in economic development. It sought to provide encouragement to
these industries in India's industrial development programmes because these
industries make use of local resources and provide larger employment
opportunities.
IPR -1956 promoted the role of cottage and small scale industries by increasing
employment opportunities and making use of available human and resources
and reducing- regional inequalities in industrial development. Also, various
subsidies and tax deductions were provided to small scale industries.
The 1977 policy gave highest priority to the small scale and tiny industries. For
the first time, 1977 Industrial policy defined a “tiny unit” as a unit with
investment in machinery and equipment up to Rs. 1 Lakh and situated in towns
or villages with a population of less than 50,000 (as per 1971 census).
The main purpose of IPR 1980 was defined as assisting an increase in industrial
production through optimum utilization of installed capacity and expansion of
industries. This policy statement focused on the need for promoting competition
in domestic market, technological up gradation and modernization.
The IPR 1990 was declared during June 1990. As to the small-scale sector, the
resolution continued to give significance to small-scale enterprises to serve the
objective of employment generation. This policy emphasized on the need of
modernization and technology up gradation to meet the objectives of
employment generation and dispersal of industry in rural areas, and to enhance
the contribution of small scale industries to exports.
Ques 22) Distinguish between the Public sector and private sector.
Basis of Public sector Private sector
difference
Meaning The section of a nation's The section of a
economy, which is under nation's economy,
the control of which is under the
government, whether it is control of
central, state or local, is government,
known as the Public whether it is central,
Sector. state or local, is
known as the Public
Sector.
Definition Public sector Private sector
organizations are owned, organizations are
controlled and managed owned, controlled
by the government or and managed by
other state-run bodies. individuals, groups or
business entities.
Ownership The ownership of the The ownership of
public sector units can be private sector units is
by central, state or local by individuals or
government bodies, and entities with zero
this ownership is either interference from the
full or partial. government.
Motive The main motive of The main motive of
public sector the private sector is
organizations is to to earn profits from
engage in activities that their business
serve the general public. operations.
Source of Capital The capital for public The capital for
sector undertakings private sector
comes from tax entities comes either
collections, excise and from its owners or
other duties, bonds, through loans,
treasury bills etc. issuing shares and
debentures, etc.
Employment Public sector units Private sector units
Benefits provide several offer benefits like
employment benefits like higher salary
job security, housing packages, better
facilities, allowances and chances of
retirement benefits. promotion and
recognition,
competitive
environment and
greater incentives in
terms of bonus and
other benefits.
Job Stability Jobs within the public Jobs within the
sector are very stable private sector are not
since the chances of very secure since
getting sacked due to non-performance can
non-performance are lead to sacking.
very low. Companies can also
fire people in case of
cost cutting or scaling
down of operations.
Promotions The criteria for The criteria for
promotion in the public promotion in the
sector units are generally private sector units
based on the seniority of are generally based
the employee. on the merit and job
performance of the
employee.
Areas Some of the main areas Some of the main
that come under the areas that come
public sector are police, under the private
military, mining, sector are
manufacturing, information
healthcare, education, technology, finance,
transport, banking, etc. fast moving
consumer goods,
construction,
hospitality,
pharmaceuticals, etc.
Ques 23) Evaluate the policy of public sector reforms.
Objectives of public sector reforms
 To create an industrial base in the country

 To generate a better quality of employment
 To develop basic infrastructure in the country
 To provide resources to the government
 To promote exports and reduce imports
 To reduce inequalities and accelerate the economic growth and
development of a country.
The major problems of PSUs can be:
1. Inappropriate investment decisions

2. Improper Pricing Policy
3. Excessive overhead cost
4. Lack of Autonomy & Accountability
5. Overstaffing
6. Trade Unionism
7. Under Utilization of capacity
Policy of public sector reforms
The public sector policy followed by the government at present including

disinvestment programmes were launched after the New Industrial Policy of
1991. The New Industrial Policy, which acts as core policy behind economic
reforms, has brought extensive changes in the working of Public Sector
Undertakings (PSUs).
The changes made by the Industrial Policy 1991 on PSUs were several, starting
from sectors where the PSUs to be concentrated, removal of reservation for
PSUs in most sectors, their restructuring by adopting market oriented practices,
selling of loss making PSUs, reduction of government ownership through
disinvestment etc. The sum of these reform was that the PSUs are no more
occupying the commanding heights of the economy, rather they have to
compete with the private sector on an equal footing.
The major PSU reforms are given below:
1. New Industrial Policy 1991

2. Voluntary Retirement Scheme, 1988 (Golden Handshake)
3. Administered Price Mechanism
4. The policy of Navratnas (Best performing PSUs were called Navaratnas)
 The government gave them a significant degree of autonomy so
they can perform better.
5. The policy of Mini Ratnas (Presently 60 PSUs have been granted this
status)
6. The policy of Maharatnas (category created in 2010)
 Net profit should be 2500 crore
 Net worth should be 10000 crore
 Turnover should be 20000 crore
 PSU must be a Navratna and must be listed in Stock Exchange
 PSU also must have a significant global presence.
 In 2010 Govt granted 4 Navratnas Maharatnas status to ONGC, IOCL,

SAIL, and NTPC. After sometime Govt granted this status to CIL.
Ques 24) What is the importance of foreign capital in economic and industrial
development? Describe briefly various types of foreign capital.
The term 'foreign capital' has wider connotation and includes any inflow of
capital into the home country from abroad.
It may be in the form of foreign aid or loans and grants from the host country or
an institution at the government level as well as foreign investment and
commercial borrowings at the enterprise level or both.
Foreign capital may flow in any country with technological collaboration as well.
Foreign capital is useful for both developed and developing countries. Advanced
countries try actively to invest capital in developing countries. In India, foreign
capital has been given a significant role, although it has been changing overtime.
Foreign investment involves capital flows from one country to another, granting
the foreign investors extensive ownership stakes in domestic companies and
assets.
Foreign investment denotes that foreigners have an active role in management

as a part of their investment or an equity stake large enough to enable the
foreign investor to influence business strategy.
Types of Foreign Capital
Foreign
Capital
Private
Foreign Aid Foreign
Investment
Foreign Foreign
Loans Grants Direct Portfolio
Investment Investment
Foreign capital can be divided into two types:
1) Foreign Aid
It consists of loans and grants. Loans may be taken from individual countries or
from institutional agencies like World Bank, IMF and International Financial
Corporation. Usually loans are taken for medium and long term capital needs of a
country. Loans impose a heavy burden on the borrower country because they
are to be rapid, along with interest, called surviving of loans. Loans may be tied
because of restrictions.
2) Private Foreign Investment
It is of two types: 1) Foreign Direct Investment 2) Foreign Portfolio Investment. A

private foreign investment is an investment made by a private individual or a
private entity in a foreign country. This type of investment differs from other
investments made by a foreign public or governmental entity in another country
in that it is made by an individual or a private entity.
Private Foreign Investment in India can be further classified as follows:
Private
Foreign
Investment
Foreign Direct
Foreign Portfolio Investment
Investment
Wholly Joint Investment

owned venture Acquisitions by Foreign Investme
subsidiary Institutional nt in a)
Investors GDRs and
and NRIs b) FCCBs
Ques 25) What do you mean by foreign direct investment? Describe briefly the
characteristics of foreign direct investment. Explain the two forms of portfolio
investment in India.
Foreign direct investment (FDI) is an investment made by a company or an

individual in one country into business interests located in another country.
It is also known as 'direct business investment'.
Foreign direct investment (FDI), according to IMF manual on 'Balance of

payments' is "all investment involving a long term relationship and reflecting a
lasting interest and control of a residual entity in one economy in an enterprise
resident in an economy other than that of the direct investor. Such investment
involves both initial transaction between the two entities and all subsequent
transactions between them and among foreign affiliates".
Foreign affiliate means a subsidiary company or an associate in which an

investor owns a total of at least 10% or more than half of shareholder’s voting
power or branches.
Characteristics of Foreign Direct Investment (FDI)
1) It is an investment made by a foreign company in a home country.
2) The foreign company may take an investment either by opening its branch or
by having a subsidiary or foreign controlled company in home country. It may
have wholly owned subsidiary or joint venture or may acquire a stake in the
existing business.
3) Profit is the prime motive of such an investment. It may be in the form of a

royalty and dividend payments.
4) Investor retains control over investment and management of the firm

concerned. In FDI investor may obtain effective voice in the management
through other means such as subcontracting, management contracts, turnkey
arrangements, franchising, licensing, trademarks and patents and product
sharing.
5) On the winding up of the firm, the assets may be repatriated to the country of
origin.
Two forms of Foreign Portfolio Investment in India
1) Investment by Foreign Institutional Investors and NRIs
 A foreign institutional investor is an investor in a financial market outside its

official home country.
 Foreign institutional investors can include pension funds, investment banks,
hedge funds, and mutual funds.
 Some countries place restrictions on the size of investments by foreign
investors.
 Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons
of Indian Origin (PIOs) are allowed to invest in the primary and secondary
capital markets in India through the portfolio investment scheme (PIS).
 Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian
companies through the stock exchanges in India.
2) Investment in Global Depository Receipt (GDRs) and Foreign Currency

Convertible Bonds (FCCBs)
 A global depositary receipt (GDR) is a certificate issued by a bank that

represents shares in a foreign stock on two or more global markets.
 GDRs typically trade on American stock exchanges as well as Eurozone or
Asian exchanges.
 A foreign currency convertible bond (FCCB) is a type of bond that is issued in
a currency other than the issuer's home currency.
 Convertible bonds fall in the middle of debt and equity financial instruments,
both acting as a bond but allowing investors to convert the bond into stock.
 These kinds of bonds are often listed by large, multinational companies with
offices around the world, seeking to raise money in foreign currencies.
Ques 26) Define the term Balance of Payment and explain its components.
Distinguish between Current account and Capital account of Balance of
Payments.
The balance of payment (BOP) is a statement that documents all transactions

from one nation to another between entities, government agencies, and people
during a specific time period. The statement includes all transaction information,
giving the authorities a clear picture of the money movement.
Components of Balance of Payment
BOP has the following major components:

1) Current Account: This account tracks all products and services that enter and
leave the country. This account is used to cover all payments for raw materials
and finished items. Tourism, engineering, stocks, commercial services,
transportation, and royalties from licenses and copyrights are among the various
deliveries mentioned in this category. All of these factors come together to form
a country's BOP.
The four major components of the current account are as follows:
 Visual Trade
 Invisible trade
 Transfers to and from abroad
 Salary receipts and payments
2) Capital Account: This account tracks capital transactions such as the

acquisition and selling of non-financial assets such as lands and properties. This
account also tracks the flow of taxes, as well as the purchase and sale of fixed
assets by immigrants relocating to a new nation. Finance from the capital
account controls the current account deficiency or surplus, and vice versa.
Three main components of a large/capital account:
 Loans and loans

 Investments to/from abroad
 Stored foreign exchange reserves
3) Financial Account: This account records the monies that move to and from
other nations through investments such as real estate, foreign direct
investments, business companies, and so on. This account estimates the foreign
owner of domestic assets and the domestic owner of foreign assets, as well as
determining if it is buying or selling additional assets such as stocks, gold, or
equity.
Differences between Current account and Capital account of Balance of

Payments
BASIS FOR
CURRENT ACCOUNT CAPITAL ACCOUNT
COMPARISON
Meaning An account which records the An account which records the

export and import of trading of foreign assets and
merchandise and unilateral liabilities during the year by a
transfers done during the country is known as Capital
year by a nation are known as Account.
Current Account.
Reflects Net Income of the country. Net change in ownership in

national assets.
Deals with Receipt and disbursements of Sources and application of

cash and non-capital items. capital.
Components Trade in goods and services, Foreign Direct Investment,

investment income, Portfolio Investment,
unrequited transfers. Government loans etc.
Balance If the current account If there is a surplus in the

balance is negative, then a capital account, it indicates an
country is a net borrower. inflow of money for a country.
Similarly, if the account Similarly, if there is a deficit in
balance is positive, then the the capital account, it indicates
country is a net lender. an outflow of currency from the
BASIS FOR
CURRENT ACCOUNT CAPITAL ACCOUNT
COMPARISON
country.
Ques 27) Describe the causes of Balance of Payments deficits. What are the
measures adopted to solve the problem of deficit in Balance of Payment?
A balance of payments deficit means the nation imports more commodities,

capital and services than it exports. It must take from other nations to pay for
their imports.
Balance of payment deficit is given by – (Current account + capital account

receipts) < (current account + capital account payments)
Causes of Balance of Payments deficits
BoP deficit can arise due to several reasons. These are –
1) Rapid Economic Development: High outflow of foreign exchange to meet

import demands like technology, machines, and equipment can lead to BoP
deficit.
2) Inflation: Sustained rise in a country’s prices can often make foreign products
cheaper, leading to a high volume of imports.
3) Political Disturbance: Unstable tax structures, change in government, etc. can

lead to a loss in foreign investment, and give way for BoP deficit.
Apart from these, factors like population explosion, change in the preference and
tastes of the general population, etc. can also contribute to the balance of
payment of a country.
Measures adopted to solve the problem of deficit in Balance of Payment
Monetary Measures for Correcting the BoP:
1. Deflation
Deflation means falling prices. Deflation has been used as a measure to correct
deficit disequilibrium. A country faces deficit when its imports exceeds exports.
2. Exchange Depreciation
Exchange depreciation means decline in the rate of exchange of domestic

currency in terms of foreign currency. This device implies that a country has
adopted a flexible exchange rate policy.
3. Devaluation
Devaluation refers to deliberate attempt made by monetary authorities to bring

down the value of home currency against foreign currency. While depreciation is
a spontaneous fall due to interactions of market forces, devaluation is official act
enforced by the monetary authority.
4. Exchange Control
It is an extreme step taken by the monetary authority to enjoy complete control

over the exchange dealings. Under such a measure, the central bank directs all
exporters to surrender their foreign exchange to the central authority.
Non-Monetary Measures for Correcting the BoP:
1. Tariff
Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the
prices of imports would increase to the extent of tariff. The increased prices will
reduced the demand for imported goods and at the same time induce domestic
producers to produce more of import substitutes. Non-essential imports can be
drastically reduced by imposing a very high rate of tariff.
2. Quotas
Under the quota system, the government may fix and permit the maximum
quantity or value of a commodity to be imported during a given period. By
restricting imports through the quota system, the deficit is reduced and the
balance of payments position is improved.
3. Export Promotion
The government can adopt export promotion measures to correct disequilibrium

in the balance of payments. This includes substitutes, tax concessions to
exporters, marketing facilities, credit and incentives to exporters, etc.
4. Import Substitution
A country may resort to import substitution to reduce the volume of imports and
make it self-reliant. Fiscal and monetary measures may be adopted to encourage
industries producing import substitutes. Industries which produce import
substitutes require special attention in the form of various concessions, which
include tax concession, technical assistance, subsidies, providing scarce inputs,
etc.
Ques 28) What is meant by consumer rights? State the rights and
responsibilities of consumers defined under Consumer Protection Act, 1986.
Consumer right is 'the right to have information about the quality, potency,
quantity, purity, price and standard of goods or services', as it may be the case,
but the consumer is to be protected against any unfair practices of trade. It is
very essential for the consumers to know these rights.
Consumer Protection Act, 1986
Consumer complaints are easily and quickly compensated under the Consumer
Protection Act, which was enacted in 1986. It protects and encourages customers
to speak up about inadequacies and defects in products and services.
Rights of the Consumer
1) Right to Safety- Before buying, a consumer can insist on the quality and
guarantee of the goods. They should ideally purchase a certified product like
ISI or AGMARK.
2) Right to Choose- Consumer should have the right to choose from a variety of
goods and in a competitive price.
3) Right to be informed- The buyers should be informed with all the necessary
details of the product, make her/him act wise, and change the buying
decision.
4) Right to Consumer Education- Consumer should be aware of his/her rights

and avoid exploitation. Ignorance can cost them more.
5) Right to be heard- This means the consumer will get due attention to express
their grievances at a suitable forum.
6) Right to seek compensation- This defines that the consumer has the right to
seek redress against unfair and inhumane practices or exploitation of the
consumer.
Responsibilities of the Consumer
According to the consumer protection act, the following are the responsibilities
of a customer:
 Responsibility to speak out
 Responsibility to complain
 Responsibility to think independently
 Responsibility to be aware
 Responsibility to be an ethical customer
As a result, the consumer must act responsibly. The customer should be able to:
 Keep an eye on the market.
 Constantly double-check the accuracy of weights and measurements.
 Keep in mind the date of manufacturing and the expiration date.
 Pay close attention to the pricing and ingredient labelling.
 Look for certification labels such as ISI, Agmark, and Eco-mark.
 Before making a purchase, read the warranty and guarantee terms and
conditions.
 When seeking value for money in market transactions, consumers should
express, but not abuse, their consumer rights.
 Know what questions to ask and when to ask them.
Ques 29) What are the main causes of industrial disputes? Describe briefly
statutory and non-statutory measures for resolving them.
Industrial disputes refer to the differences between the employers and workers
in an industry. These disputes take various forms of protest. From the workers
side the forms of protest are strikes, gheraos, demonstration, etc. from the
employer’s side the forms of protest are retrenchment, dismissal, lockouts etc.
The two most important forms of protest lead to loss in industrial production and
decline in the national income. Hence, it is essential to know the nature and
magnitude of industrial disputes, factors responsible for their occurrence and
measures used to resolve them.
Causes of Industrial Disputes:
The main causes of industrial disputes are:
(i) Wages:
Low wages of industrial workers constitute a major cause of industrial disputes in

the country. Wages have not been rising in proportion to the rise in prices. This
has forced the laborers to demand higher wages, consequently leading to
disputes.
(ii) Bonus:
The demand for bonus or increase in bonus has been the second major cause of
industrial disputes. The workers feel that they should have a greater share in the
profits of the industrial concern. Non-acceptance of this fact by the employers
has been a source of friction among the employers and the workers.
(iii) Working Conditions:
The demand for improvement in working conditions such as lesser working

hours, security of job, better safety measures in the factory, leave, canteen,
gratuity facilities, etc., are also responsible for many industrial disputes.
(iv) Other Causes:
Among other causes that lead to disputes are failure of employers to recognize
trade unions, conflict between rival unions for representation, insult to trade
union leadership by the employer, introduction of rationalization in the factory,
the fear of retrenchment of workers, sympathetic strikes with fellow employees
in other establishments, general discontent and sense of frustration among
laborers, political issues etc.
Most of measures relating to industrial disputes aim at settlement rather than
preventing their occurrences. The measures for prevention of disputes can be
statutory and non-statutory measures.
Statutory measures for resolving industrial disputes
The statutory measures relate to industrial relationship machinery provided

under the Industrial Disputes Act, 1947. These include conciliation, arbitration
and adjudication.
Conciliation: Conciliation involves settlement of a dispute by involving a third

party, with an objective to achieve speedy settlement of disputes, Conciliation
can be voluntary, where the state provides conciliation machinery which can be
used by the disputing parties when required. In compulsory conciliation, the
state creates conciliation machinery and makes it obligatory for the disputing
parties to the disputes to conciliation services.
Arbitration: The process of arbitration involves an arbitrator whose decision is

binding on the parties involved in the dispute. The arbitrator arrives at a decision
on basis of reports submitted by the disputing parties (employees and
employers).
Adjudication: It is the last resort for resolving an industrial dispute. Under the
Industrial Disputes Act, 1947 has provides three mechanism for adjudication
Labor courts, Industrial tribunals and National tribunals.
Non-statutory measures for resolving industrial disputes
The Non-statutory measures include Code of Discipline, Collective Bargaining and

Workers Participation Management (WPM).
Code of Discipline: The Code of Discipline was laid out in 1958, with an aim to
maintain harmonious industrial relations and promote industrial peace. It
requires industrial workers and employers to settle disputes using existing
machinery, avoid lock-outs, strikes and other unfair/disruptive actions. The code
also specifies how to deal with disputes and other industrial disputes.
Collective Bargaining: Collective bargaining is a process of negotiation about
working conditions and terms of employment between a group of employees
and the employers. It aims to avoid confrontation and arrive at a mutual
agreement.
Workers Participation Management (WPM): The Worker’s Participation in

Management (WPM) refers to mechanism which allows increased participation
of workers in decision making process of an enterprise.
Ques 30) What is WTO? State the major objectives of WTO. Describe its various
functions.
The WTO (World Trade Organization) is an international organization. It enacts

the rules governing trade between countries of goods, services, agricultural and
industrial goods, and intellectual property.
It was officially constituted on January 1, 1995 which took the place of GATT as
an effective formal, organization. GATT was an informal organization which
regulated world trade since 1948.
The WTO has nearly 153 members accounting for over 97% of world trade.
Around 30 others are negotiating membership. Decisions are made by the entire
membership.
The WTO secretariat, based in Geneva, has around 600 staff and is headed by a
Director-General.
Objectives of WTO:
The WTO has six major objectives:
(1) to set and enforce rules for international trade,
(2) to provide a forum for negotiating and monitoring further trade liberalization,
(3) to resolve trade disputes,
(4) to increase the transparency of decision-making processes,

(5) to cooperate with other major international economic institutions involved in
global economic management, and
(6) to help developing countries benefit fully from the global trading system.
Functions of WTO:
The main functions of WTO are:
1. To implement rules and provisions related to trade policy review mechanism.
2. To provide a platform to member countries to decide future strategies related

to trade and tariff.
3. To provide facilities for implementation, administration and operation of

multilateral and bilateral agreements of the world trade.
4. To administer the rules and processes related to dispute settlement.
5. To ensure the optimum use of world resources.
6. To assist international organizations such as, IMF and IBRD for establishing
coherence in Universal Economic Policy determination.
Ques 31) What is Exim Bank? State the role of EXIM Bank in India's foreign
trade. Explain its various lending programmes.
The Export-Import Bank is the country’s largest and leading export finance-based
institution engaged in integrating the foreign trade and investment with the
national economic growth.
Export-Import Bank of India (Exim Bank) was set up in 1982 by an Act of

Parliament for the purpose of financing, facilitating and promoting India’s foreign
trade.
It is the principal financial institution in the country for coordinating the working
of institutions engaged in financing exports and imports. Exim Bank is fully
owned by the Government of India.
Role of EXIM Bank in India’s foreign trade and its various lending programmes:
 The Bank provides financial assistance to export-oriented Indian companies

by way of term loans in Indian rupees or foreign currencies for setting up new
production facilities, expansion/modernization or up gradation of existing
facilities and for acquisition of production equipment or technology.
 The Bank lays special emphasis on extension of Lines of Credit (LOCs) to

overseas entities, national governments, regional financial institutions and
commercial banks.
 The Bank also extends Buyers’ credit and Suppliers’ credit to finance and
promote country’s exports.
 To promote hi-tech exports from India, the Bank has a lending programme to
finance research and development (R&D) activities of export-oriented
companies.
 The Bank has put in place an Export Marketing Services (EMS) Programme to
assist Indian companies in identification of prospective business partners,
facilitating placement of final orders and also identification of opportunities
for setting up plants or projects or for acquisition of companies overseas.
 Exim Bank supplements its financing programmes with a wide range of value-
added information, advisory and support services, which enable exporters to
evaluate international risks, exploit export opportunities and improve
competitiveness, thereby helping them in their globalisation efforts.
Ques 32) Explain the concept and types of collective bargaining. Give its
objectives and important features.
Collective bargaining is a process of negotiating between management and

workers represented by their representatives for determining mutually agreed
terms and conditions of work which protect the interest of both workers and the
management.
It is called “collective” because both the employer and the employee act
collectively and not individually in arriving at an agreement. It is known as
‘bargaining’ because the process of reaching an agreement involves proposals
and counter proposals, offers and counter offers.
Types of Collective Bargaining
1) Distributive Bargaining: This is a type of competitive bargaining strategy

wherein one party wins over the other. One party gains only when the other
party loses something. Both the parties try their best to get the maximum share
from the asset or the resource that needs to be distributed. This is also known
as Conjunctive Bargaining or Zero-sum bargaining.
2) Integrative Bargaining: Under this type of bargaining, both the parties sit and
try to resolve the problems of their common interest. This is also known as
cooperative bargaining as it tends to be more cooperative than distributive
bargaining.
3) Productivity Bargaining: In this type of Collective Bargaining, both the

employer as well as the employee enjoys the benefits in the form of increased
production and increased pay respectively.
4) Composite Bargaining: Under this type of bargaining, along with bargaining

for wages, the workers go a step ahead and also express concern over the
working conditions, environmental issues, recruitment and training policies etc.
so as to safeguard their interest.
Collective Bargaining Involves:
(i) Negotiations
(ii) Drafting
(iii) Administration
(iv) Interpretation of documents written by employers, employees and the union

representatives
(v) Organizational Trade Unions with open mind.
Major objectives of collective bargaining:
 To foster and maintain cordial and harmonious relations between the

employer/management and the employees.
 To protect the interests of both the employer and the employees.
 To keep the outside, i.e., the government interventions at bay.
 To promote industrial democracy.
Major features of collective bargaining:
The features of collective bargaining are as under:
 It is a collective process. The representatives of both workers and

management participate in bargaining.
 It is a continuous process. It establishes regular and stable relationship

between the parties involved. It involves not only the negotiation of the
contract, but also the administration of the contract.
 It is a flexible and dynamic process. The parties have to adopt a flexible

attitude through the process of bargaining.
 It is a method of partnership of workers in management.
Ques 33) What are different types of collective bargaining agreements? Discuss
the pre - requisites for collective bargaining.
Different types of collective bargaining agreements
The following types of collective bargaining agreements are prevalent in India:
1. Voluntary agreements
These agreements, also known as bipartite agreements, are a result of voluntary
negotiations between employer and trade union and are binding, as per the
provisions of the ID Act.
2. Settlements
It is tripartite in nature as it involves the employer, trade union and the
conciliation officer. Settlements arise out of specific disputes which are resolved
by a reconciliation officer. If, during the conciliation proceedings, the conciliation
officer believes at any point of time that there is a possibility of reaching a
settlement, then the officer may withdraw himself from the negotiations.
The parties are free to finalize the terms of the agreement and must inform the
conciliation officer within a specified timeframe if such an agreement is reached
after his withdrawal.
3. Consent awards
These are agreements reached while a dispute is pending before an adjudicatory
authority. Such agreement is incorporated in the authority’s award and although
the agreement is reached voluntarily between parties, it becomes binding under
the award passed by the authority.
Pre - requisites for collective bargaining
Important Prerequisites for a successful Collective Bargaining are:
(1) The parties must attain a sufficient degree of organization. If the workers’
organization is weak, employers can say that it does not represent the workers
and will refuse to negotiate with it. Unless the workers are able to form strong
and stable unions, collective bargaining will not be successful.
(2) Freedom of association is essential for collective bargaining. Where there is

no freedom of association, there can be no collective bargaining.
(3) There should be mutual recognition between both the groups. Collective
bargaining cannot begin if the employers do not recognize the workers’
organization. The conflict of interests makes the two groups hostile to each
other.
(4) There must exist a favorable political climate, essential for successful
collective bargaining. If the government encourages collective bargaining as the
best method of regulating conditions of employment, it will be successful.
(5) Agreement must be observed by those to whom they apply. The workers’
organization must be strong enough to exercise its authority over its members.
(6) A give and take policy must prevail in the organization. The difference
between two parties can be adjusted only by compromise so that an agreement
can be reached. Neither side should be too rigid on its demand.
(7) Sometimes unfair labour practices are resorted to by both the employers and
the trade unions. These will restrict the development of collective bargaining.
Unfair labour practices should be avoided by both the sides, as this will create an
atmosphere of goodwill.
Ques 34) Explain the concept of money supply in India. What instruments of
monetary policy are used by Reserve Bank of India?
The money supply is the total amount of money (currency + deposit money)
present in an economy at a particular point in time.
The record of the total money supply is kept by the Central Bank of the country.
The Reserve Bank of India (RBI) is vested with the responsibility of conducting
monetary policy. This responsibility is explicitly mandated under the Reserve
Bank of India Act, 1934.
The primary objective of monetary policy is to maintain price stability while

keeping in mind the objective of growth. Price stability is a necessary
precondition for sustainable growth.
To maintain price stability, inflation needs to be controlled. The government of

India sets an inflation target for every five years. RBI has an important role in the
consultation process regarding inflation targeting. The current inflation-targeting
framework in India is flexible in nature.
Instruments of Monetary Policy
There are several direct (qualitative or selective) and indirect (general or

quantitative) instruments that are used for implementing monetary policy.
1) Repo Rate: The (fixed) interest rate at which the Reserve Bank provides
overnight liquidity to banks against the collateral of government and other
approved securities under the liquidity adjustment facility (LAF).
2) Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank
absorbs liquidity, on an overnight basis, from banks against the collateral of
eligible government securities under the LAF.
3) Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as

term repo auctions. The aim of term repo is to help develop the inter-bank
term money market, which in turn can set market-based benchmarks for
pricing of loans and deposits, and hence improve the transmission of
monetary policy. The Reserve Bank also conducts variable interest rate
reverse repo auctions, as necessitated under the market conditions.
4) Marginal Standing Facility (MSF): A facility under which scheduled

commercial banks can borrow an additional amount of overnight money
from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR)
portfolio up to a limit at a penal rate of interest. This provides a safety valve
against unanticipated liquidity shocks to the banking system.
5) Corridor: The MSF rate and reverse repo rate determine the corridor for the
daily movement in the weighted average call money rate.
6) Bank Rate: It is the rate at which the Reserve Bank is ready to buy or
rediscount bills of exchange or other commercial papers. The Bank Rate is
published under Section 49 of the Reserve Bank of India Act, 1934. This rate
has been aligned to the MSF rate and, therefore, changes automatically as
and when the MSF rate changes alongside policy repo rate changes.
7) Cash Reserve Ratio (CRR): The average daily balance that a bank is required
to maintain with the Reserve Bank as a share of such percentage of its Net
demand and time liabilities (NDTL) that the Reserve Bank may notify from
time to time in the Gazette of India.
8) Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to
maintain in safe and liquid assets, such as unencumbered government
securities, cash and gold. Changes in SLR often influence the availability of
resources in the banking system for lending to the private sector.
9) Open Market Operations (OMOs): These include both, outright purchase

and sale of government securities, for injection and absorption of durable
liquidity, respectively.
10) Market Stabilization Scheme (MSS): This instrument for monetary

management was introduced in 2004. Surplus liquidity of a more enduring
nature arising from large capital inflows is absorbed through the sale of
short-dated government securities and treasury bills. The cash so mobilized
is held in a separate government account with the Reserve Bank.
Ques 35) Explain the mechanism of exchange rate determination. Discuss the
three types of roles of Reserve Bank of India in regulating the financial
activities and economic development of India.
An exchange rate mechanism (ERM) is a set of procedures used to manage a

country's currency exchange rate relative to other currencies. It is part of an
economy's monetary policy and is put to use by central banks.
It is a way that governments can influence the relative price of their national
currency in forex markets. It allows the central bank to tweak a currency peg in
order to normalize trade and/or the influence of inflation.
Three types of roles of Reserve Bank of India
1) The traditional role that a central bank is expected to play;
2) The supervisory role i.e., regulation of the functioning of commercial banks in

India and
3) Promotional role i.e. helping the developmental process in the country.
1) Traditional role:
Traditionally like any other central bank in the world, RBI performs various
functions like issuing currency notes, handling government accounts, advising
government on economic matters, regulating lending by commercial banks,
regulating foreign exchange transactions etc.
2) Supervisory role:
Although RBI was established in 1934 to perform traditional functions, the

Banking Regulation Act, 1949 gave RBI the powers of supervision and control
over commercial banks. These powers concern granting licenses to new banks,
permission for opening more branches, framing rules for management and
working etc. This role is to ensure smoothness in day to day working of
commercial banks in India.
3) Promotional role:
a) Rural credit: RBI takes direct interest in rural credit. Before 1982 it used to
provide loans to the agricultural sector through cooperative institutions and
state governments. Later this function was transferred by RBI to National Bank
for Agriculture and Rural Development (NABARD) which was set up in 1982.
b) Industrial finance: The RBI has played a dominant role in setting up of credit
institutions to finance industry. Main examples of such institutions are: Industrial
Finance Corporation of India, State Financial Corporations, and Industrial
Development Bank of India, Industrial Credit and Investment Corporation of
India.
c) Finance of priority sectors: The RBI directs commercial banks in India to give
special attention to the credit needs of priority sectors like agriculture, small
industries, small traders, self-employed professionals, educated unemployed etc.
It has designed schemes for these sectors implemented through the commercial
banks.
Ques 36) What do you mean by globalisation? Discuss the various components
of globalisation. Explain the merits of globalisation from the point of view of
India's economic development.
The term globalisation refers to the process of opening of the economy to the
rest of the world economy so that a free flow of goods and services, technology
and investment can take place. The basic purpose of globalisation is to integrate
the Indian economy with the rest of the world.
Components of globalisation:
It has four components:
i) Reduction of trade barriers so as to permit free flow of goods and services

across the border;
ii) Creation of an environment in which free flow of capital can take place;
iii) Creation of an environment in which free flow of technology can take place;
and
iv) Creation of an environment in which free flow of labour can take place along
different countries.
Merits of globalisation from the point of view of India's economic

development:
1. More Employment Opportunities: The introduction of globalisation brought

an influx of foreign investments and the favorable policies of the Indian
government also helped companies to set up units in this country. This has
resulted in new employment opportunities. Also, access to low-cost labor
prompted foreign businesses to outsource work to companies operating here.
2. Increase in per-capita Income: As a direct effect of more employment

opportunities, the per-capita income of Indian households also increased after s
a result, it altered their standard of living and improved the purchasing power of
an average Indian. This gave birth to a new middle-class and recorded an
increase in demand for consumer products in this country.
3. More Choices for Consumers: Globalisation and the Indian economy provided
Indian consumers with a plethora of choices. Indian, as well as foreign
manufacturers, brought various products of the same kind, and consumers got a
chance to select their preferred one. This increase in competition prompted
manufacturers to create better products at a much lower price point.
4. Access to Untapped Markets: A noticeable benefit of globalisation is that it

provides access to many untapped markets with huge potential. The
globalisation of the Indian economy means it allowed foreign companies to
operate in the Indian market. Also, Indian businesses got an opportunity to
operate on a global scale. As a result, the import-export sector in India saw an
astonishing rise after 1991.
5. High standard of living: With the outbreak of globalisation, the Indian

economy and the standard of living of an individual have increased. This change
is notified with the purchasing behavior 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.
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ECO-13: BUSINESS ENVIRONMENT

Time: 2 hours Maximum Marks: 50 (Weightage 70%)

Business environment encompasses all those factors that affect a company's

Nature of business environment

The nature of Business Environment could be better understood by the following

(i) System Approach:

(ii) Social Responsibility Approach:

(iii) Creative Approach:

Significance of Business Environment:

(i) Help to understand internal Environment

(ii) Help to Understand Economic System

(iii) Help to Understand Economic Policy

(iv) Help to Understand Market Conditions

Proper understanding of the social, political, legal and economic environment

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

(c) Continuous Learning: Environmental analysis makes the task of managers

(d) Image Building: Environmental understanding helps the business

(e) Meeting Competition: It helps the firms to analyze the competitors’

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

Ques 2) Explain the various economic and non-economic factors of business

Political Legal Competitive Social Cultural Technological

Economic factors of business environment

Economic environment consists of three elements:

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

3) The economic system: The world economy is primarily governed by three

Non-economic factors of business environment

1) Political environment: This includes the political system, the government

3) Competitive environment: Competition is another external variable which

5) Cultural/Demographic environment: By demographic environment we mean

6) Technological Environment: Technological environment include the methods,

Ques 3) Distinguish between the Economic and non-economic environments of

Basis of Economic activities Non-economic activities

Definition Economics activities are Non-economic activities

Motive Economic, i.e. to earn Social or psychological,

Activities Economic activities are It includes all those

Money Measured in monetary Lacks money

Approach Pragmatic Idealistic

Results in Creation of wealth and Satisfaction and

National Adds value to national Does not affect national

Business Environment is not concerned with a single factor. It comprises of

Economic environment consists of three important factors namely, economic

The scope of private sector depends mainly on the economic system of a

 Free Trade Economy or Capitalist Economy,

The Industrial Policy of India is an important consideration to our industrialists

 Priority Sector, and

 Business environment (consisting of economic and non-economic

 At the operational levels, the success of business would depend on the

Environmental issues are effects of human activity on the biophysical

The business ecosystem consists of a network of interlinked companies that

Ecological issues relevant to business environment in India

Climate change refers to long-term changes to weather patterns. Scientists

Pollution commonly refers to the contamination of air or water with harmful

The term Economic Development is sometimes used as a synonym for economic

According to Kindle Berger:

“Economic development relies both on more output and changes in technical

Economic development is the process of improving economic welfare in an

Indicators of economic development

1) Growth rate of National Income:

 In this indicator real income is calculated on constant prices.

2) Per Capita Income (PCI):

3) Per Capita Consumption (PCC):

 The increase in consumption of goods and services by the people is

Industrial progress is an important indicator of the economic development

A higher rate of these indicators shows a higher level of economic development.