By Dr. Vineet Walia
Dr. Pradeep Tomar

UNIT-I Nature, components and determinants of business environment; basic nature of Indian economic system; growth of public and private corporate sector; social responsibility of business; economic reforms since 1991 – an overview UNIT-II Review of industrial policy developments and pattern of industrial growth since 1991; industrial licensing policy; public sector reforms; privatization and liberalization trends; growth and problems of SMEs; industrial sickness UNIT-III Development banking: an overview and current developments; regulation of stock exchanges and the role of SEBI; banking sector reforms; challenges facing public sector banks; growth and changing structure of non-bank financial institutions UNIT-IV Trend and pattern of India’s foreign trade and balance of payments; latest foreign trade policy; India’s overseas investments; policy towards foreign direct investment; globalization trends in Indian economy; role of MNCs; impact of multilateral institutions (IMF, World Bank and WTO) on Indian business environment

QUESTION-1 What is Business and how it can be understood? Explain the significant characteristics of Business. Ans: Business – A Business is an important institution in society. Be it for the supply of
goods or services, creation of employment opportunities, offer of better quality life, or contribution to the economic growth of a country, the role of business is crucial. So the first question arises in anyone’s mind is what really a business is? The following definition is an attempt to provide appropriate answer. “A Business is nothing more than a person or group of persons properly organized to produce or distribute goods or services. The study of business is the study of activities involved in the production or distribution of goods and services-buying, selling, financing, personnel and the like”. Practically the above said definition is true but in theoretical sense it is incorrect. Before any activities can be considered in the business, there must exist both the goal of profit and the risk of loss. Thus Business can be accurately defined by K. Ashwathapa as “Complex field of commerce and industry in which goods and services are created and distributed in the hope of profit within a framework of laws and regulations”. Understanding the Business: To understand any business the critical step is to explore all the factors related to business and properly judging its impact on the business. There are many factors and forces which have considerable impact on any business. All these forces come under one word called environment. Hence understanding the business means understanding its environment. Environment refers to all external forces which have a bearing on the functioning of business. From the micro point of view, a business is an economic institution, as it is concerned with production and/or distribution of goods and services, in order to earn profits and acquire wealth. Different kinds of organizations (i.e., sole trader ship, partnership, Joint Stock Company and co-operative organization) are engaged in business and are operating from small scale, as in case of grocery in a start, to large scale, as in case of Tata Iron and Steel Co., Bajaj Auto, Maruti Udyog, and Reliance Industries.

Characteristics of Business
Whatever may be the nature and scale of operations, a business enterprise possesses the following characteristics: 1. Dealings in Goods and Services: The first basic characteristic of a business is that it deals in goods and services. Goods produced or exchanged, may be consumers' goods, such as bread, rice, cloth, etc. or producers' goods such as machines, tools, etc. The consumer goods are meant for direct consumption, either immediately, or after undergoing some processes, whereas the producers' goods are meant for being used for the purposes of further production. Producers’ goods are also known as capital goods. Services include supply of electricity, gas, water finance, insurance, transportation, warehousing, etc.

2. Production and/or Exchange: Every business is concerned with production and exchange of goods and services for value. Thus, goods produced or purchased for personal consumption or for presenting to others as gifts do not constitute business, because there is no sale or transfer for value. For example, if a person cooks at home for personal consumption, it is not business activity. But, if he cooks for others in his 'dhaba', or restaurant and receives payment from them, it becomes his business. 3. Creation of form, time and place utility: All business activities create utilities for the society. Form utility is created, when raw materials are converted into finished goods and services. Place utility is created, when goods are transported from the place of production to the place of consumption. Storage of goods creates time utility. This helps in preserving the goods, when not required and making them available, when demanded by the consumers. 4. Regularity and Continuity in Dealings: Regularity of economic transactions is the essence of business. There should be continuity, or regularity of exchange of goods and services for money. An isolated transaction cannot be called a business. For example, if a person sells his flat and earns some profits, it cannot be called a business. But, if he purchases and sells flats regularly to earn his livelihood, it will be called his business. 5. Profit Motive: Another important feature of a business activity is its objective. The chief objective of a business is to earn reasonable profits or 'surplus' as it is called in case of public enterprises. The survival of a business depends upon its ability to earn profits. Every businessman wants to earn profits, to get return on his capital and to reward himself for his services. Actually, profit is the spur that helps in the continuation of the business. Profit is also essential for growth. Recreation clubs and religious institutions cannot be called business enterprises, as they have nothing to do with the profit motive.

Question- 2. What do you understand by the concept of Indian Business Environment? What are the constituents of Indian Business Environment? Explain in detail. Or Question - Define and Explain the concept of Indian Business Environment alongwith its significant constituents. Or Question. What is the nature of Indian Business Environment? What are the factor which make it dynamic? May 2011 Ans:
Business Environment : It refers to all external forces which have a bearing on the functioning of the business. In fact Environment consists of factors that are largely if not totally, external and beyond the control of individual industrial enterprise and their managements. These are essentially the ‘givers’ within which firms and their management must operate in a specific country and they vary, often greatly, from country to country.

Business environment can be defined as the process by which strategists monitor the economic, governmental, market, supplier, technological, geographic, and social settings to determine opportunities and threats to their firms. From the above definitions we can extract that business environment consists of factors that are internal and external which poses threats to a Business Organization or these provide opportunities for exploitation. In business all the activities are being organized and also carried out by the people to satisfy the needs of the consumers. So, it is an activity carried out by the people for the people which means people occupy a central place around which all the activities revolve. It means business is people and a human is always a dynamic entity who believes in change and it may be right to say that the only certainty today is change. It poses a huge challenge for today’s and especially tomorrow’s businessmen and managers to be aware of specific changes so as to keep themselves abreast with the latest happenings in the field of business to maintain their survival and sustainability in the market. Therefore, the study of business environment is of atmost importance for the managers and practitioners. There are two more factors which are not included in definition and which exercise considerable influence on business. They are physical or natural environment and global environment. Therefore, we will study the following environmental factors one by one. 1. Global Environment 2. Natural Environment 3. Political – Legal Environment 4. Economic Environment 5. Socio-Economic Environment 6. Technological Environment Business environment is becoming very complex day by day as some environmental issues such as deforestation, global warming, depletion of the ozone layer, pollution of land, air and water are no longer strictly the issues related to books and conferences. The leading politicians and managers around the world have picked up the environmental banner. The green marketing movement has been gaining momentum around the world. The businesses are challenged today to develop creative ways to make profits without unduly harming the existing environment. Considering the variety of these sources of change in the environment, global managers are challenged to keep themselves abreast and adjust as necessary. Some companies like Daewoo, Hyundai, Maruti, Tata and Hero-Honda in India, with their pollution prevention programmes are leading the way. Indeed, cleaning up the environment promises to generate whole new classes of jobs in the future. Gone are the days when business was heavily protected and subsidized, licenses, quotas and restrictions were the order of the day. Now competition is the name of modern business. Businessmen always stand on the brink of a fear to eliminate from the market. They stand on

their feet to cut down costs, to eliminate deficiencies and incessant improvement in the quality are order of the day. But by the competition, consumer is obviously benefited by the diverse openings of different competitors. According to Micheal Porter “aggressive home based suppliers and demanding local suppliers competing domestic rivals will keep each other honest in obtaining government support”. Nowadays competition is not only from rival firms but also from the ever improving technology. For example, type writers have been completely wiped out from the market by the computers. Traditional postage telegrams are at the verge of elimination by the increasing use of internet services. So, today’s business is witnessing the manifolds competition which was not prevalent in the past. Indian Business Environment - Environment of a business means the external forces influencing the business decisions. They can be forces of economic, social, political and technological factors. These factors are outside the control of the business. The business can do little to change them. Business environment in fact refers to all external factors which have direct or indirect bearing on the activities of business. The business environment is divided into Internal Environment and External Environment. CONSTITUENTS OF BUSINESS ENVIRONMENT Every business firm consists of a set of internal factors and it also confronts with a set of external factors.

Components of Business Environment

Internal environment  Financial Resources  Human Physical Resources  Objectives of The Business  Management Policy  Morale and Commitment of The Human Resources  Working Conditions  Management Labour  Relationship  Brand And Corporate Image

External environment

 Micro Environment  Supplies  Customer  Market  Intermediaries  Competitors  Public

 Macro Environment  Economic  Political  Social Culture  Technological  Natural  Demographic  International

1. Internal Environment
There are number of factors which influence the various strategies and decisions within the organization’s boundaries. These factors are known as internal factors and are given below : (a) Human Resources : It involves the planning, acquisition, and development of human resources necessary for organizational success. It points out that people are valuable resources requiring careful attention and nurturing. Progressive and successful organizations treat all employees as valuable human resources. The organization’s strengths and weaknesses is also determined by the skill, quality, morale, commitment and attitudes of the employees. Organizations face difficulties while carrying out modernizations or restructuring process by the resistance of employees. So, the issues related to morale and attitudes should seriously be considered by the management. Moreover, global competitive pressures have made the skillful management of human resources more important than ever. The support from the different levels of employees support the management in the different decisions and their implementations. (b) Company Image : One company issues shares and debentures to the public to raise money and its instruments are over subscribed while the other company seeks the help of different intermediaries like underwriters to generate finance from the public. This difference underlies the distinction between the images of the two companies. The image of the company also matters in certain other decisions as well like forming joint ventures, entering contracts with the other company or launching of new products etc. Therefore, building company image should also be a major consideration for the managers. (c) Management Structure : Gone are the days when business was carried out by the single entrepreneur or in the formation of partnerships. Now it has reshaped itself into the formation of company where it is run and controlled by the board of directors who influence almost every decision. Therefore, the composition of board of directors and nominees of different financial institutions could be very decisive in several critical decisions. The extent of professionalization is also a crucial factor while taking business decisions. (d) Physical Assets: To enjoy economies of scale, smooth supply of produced materials, and efficient production capacity are some of the important factors of business which depends upon the physical assets of an organization. These factors should always be kept in mind by the managers because these play a vital role in determining the competitive status of a firm or an organization. (e) R & D and Technological Capabilities: Technology is the application of organized knowledge to help solve problems in our society. The organizations which are using appropriate technologies enjoy a better competitive advantage than that of their competitors. The organizations which do not possess strong Research and Development departments always lag behind in innovations which seems to be a prerequisite for success in today’s business. Therefore, R & D and technological capabilities of an organization determine a firm’s ability to innovate and compete. (f) Marketing Resources : The organizations which possess a strong base of marketing resources like talented marketing men, strong brand image, smart sales persons, identifiable products, wider and smooth distribution network and high quality of different services, make an effortless inroads in the target market. The companies which are having so strong basis can also enjoy the fruits of brand extension, form extension and new product introduction etc. in the market.

(g) Financial Factors : The performance of the organization is also affected by the certain financial factors like capital structure, financial position etc. Certain strategies and decisions are determined on the basis of such factors. The ultimate survival of organizations in both the public and private sectors is dictated largely by how proficiently available funds are managed. So, these were some of factors related to the internal environment of an organization. These factors are generally regarded as controllable factors because the organization commands control over these factors and can modify or alter as per the requirement of the organization.

2. External Environment
Companies operate in the external environment that forces and shape opportunities as well as threats. These forces represent “non-controllable”, which the company must monitor and respond to. SWOT (Strengths, weaknesses, opportunities and threats) analysis is very much essential for the business policy formulation which one could do only after examination of external environment. The external business environment consists of micro environment and macro environment.

Micro Environment
The company’s immediate environment where routine activities are affected by the certain actors. Suppliers, marketing intermediaries, competitors, customers and the publics operate within this environment. It is not necessary that the micro factors affect all the firms. Some of the factors may affect a particular firm and do not disturb to the other ones. So, it depends that to what type of industry a firm belongs. Now let’s discuss in brief some of the micro environmental factors. (a) Suppliers : The supplier to a firm can alter its competitive position and marketing capabilities. These can be raw material suppliers, energy suppliers, suppliers of labour and capital. The relationship between suppliers and the firm epitomizes a power equation between them. This equation is based on the industry conditions and the extent to which each of them is dependent on the other. For the smooth functioning of business, reliable source of supply is a prerequisite. If any kind of uncertainties prevail regarding the supply of the raw materials, it often compels to a firm to maintain a high inventory which ultimately leads to the higher cost of production. Therefore, dependence on a single supplier is a risky venture. Because of the sensitivity of the issue, firm should go to develop relations among the different suppliers otherwise it could lead to a chaotic situation. Simultaneously firms should reduce the stock so as to reduce the costs. (b) Customers : According to Peter F. Drucker “the motive of the business is to create customers”, because a business survives only due to its customers. Successful companies recognize and respond to the unmet needs of the consumers profitably and in continuous manner. Because unmet needs always exist, companies could make a fortune if they meet those needs. For example it is the era when we could witness the increasing participation of women in the different jobs which has already given birth to the child care business, increased consumption of different durable items like microwave ovens, washing machines and food processors etc. A firm should also target the different segments on the basis of their tastes and preferences because to depend upon a single customer is often risky. So, monitoring the customer sensitivity is a pre condition for the success of business.

(c) Competitors : A firm’s products or services are also affected by the nature and intensity of competition in an industry. A firm should extend its competitive analysis to include substitutes also besides scanning direct competitors. The objective of such an analysis is to assess and predict each competitors response to changes in the firm’s strategy and industry conditions. This kind of analysis not only ensures the firm’s competitive position in the market but also able to pick up as its major rival in the industry. Besides the existing competitors, it is also necessary to have an eye on the potential competitors who may join the industry although forecasting of such competitors is a difficult task. Thus an analysis of competition is critical for not only evolving competitive strategy but also for strengthening a firm’s capabilities. (d) Marketing Intermediaries : Marketing intermediaries provide a vital links between the organization and the consumers. These people include middlemen such as agents or brokers who help the firm to find out its customers. Physical distribution firms such as stockiest or warehouse providers or transporters ensure the smooth supply of the goods from their origin to the final destination. There are certain marketing research agencies which assist the organization in finding out the consumers so that they can target and promote their products to the right consumers. Financial middlemen are also there who carry out to finance the marketing activities such as transportation and advertising etc. A firm should ensure that the link between organization and intermediaries is appropriate and smooth because a wrong choice of the link may cost the organization heavily. Therefore, a continuous vigil of all the intermediaries is a must. (e) Publics : an organization has to confront with many types of publics during its life time. According to Cherrunilam “A public is any group that has an actual or potential interest in or impact on an organization’s ability to achieve its interests”. The public includes local publics, media publics and action groups etc. The organizations are affected by the certain acts of these publics depending upon the circumstances. For example if a business unit is establishment in a particular locality then it has to provide employment to the localites at least to the unskilled labour otherwise local group may harm to that very business or they will interrupt the functioning of the business. The media public has also to be taken into confidence because some time they tarnish the image of the organization unnecessarily. Simultaneously media public may disseminate vital information to the target audience. Action groups can also create hindrances in the name of exploitation of consumers or on the issue of environmental pollution. The business suffers due to their activities. Therefore, their concern should also be kept in mind. Albeit, it is wrong to think that all publics are threats to the business yet their concerns should be considered up to a certain level.

Macro Environment
With the rapidly changing scenario, the firm must monitor the major forces like demographic, economic, technological, political/legal and social/cultural forces. The business must pay attention to their casual interactions since these factors set the stage for certain opportunities as well as threats. These macro factors are, generally, more uncontrollable than the micro factors. A brief discussion on the important macro environmental factors are given below: (a) Demographic Environment : The first macro environmental factor that businessmen monitor is population because business is people and they create markets. Business people are keenly interested in the size and growth rate of population across the different regions, age

distribution, educational levels, household patterns, mixture of different racial groups and regional characteristics. For determining the success of the business and to sustain in the market, incessant watching of these demographic factors is a prerequisite. To enter into a particular segment, a marketer needs to understand the age composition in that very segment so as to decide the optimal marketing mix and also take certain strategic decisions related to it. For example, if the youth form a large proportion of the population, it is but natural for firms to develop their products according to the requirement of this group. Besides the age, it is also necessary to break up population according to sex-wise and also the role of women. Today we can observe that more and more women have taken to work and professions and hence it can be seen that many time saving appliances are available in the market. Each gender group has different range of product and service needs and media and retail preferences, which helps marketers fine-tune their market offers. There is yet another dimension of population changes which a businessman needs to address. For example, occupation and literacy profile of the targeted segment. The higher literacy level will imply a more demanding consumer as he is in the touch of the various media which acquaint him with many information on the other hand low literacy make the marketers look for other method of communication. The occupation of the population also affects the choice of the products range and media habits. Any significant moves of the population from one area to another, rural to urban, is another important environmental factor which determines the marketing attention. For example, the movement from north-India to South-India will reduce the demand for warm clothing and home heating equipment on the one hand and will increase the demand for air conditioning on the other hand. So, the companies that carefully analyze their markets can find major opportunities. (b) Economic Environment : Besides people, markets require purchasing power and that depends upon current income, savings, prices, debt and credit facilities etc. The economic environment affects the demand structure of any industry or product. The following factors should always be kept in mind by the business people to determine the success of the business. (i) Per capita income (ii) Gross national product (iii) Fiscal and monitory policies (iv) Ratio of interest changed by different financial institutions (v) Industry life cycle and current phase (vi) Trends of inflation or deflation Each of the above factors can pose an opportunity as well as threat to a firm. For example, in a developing economy, the low demand for the product is due to the low income level of the people. In such a situation a firm or company can not generate the purchasing power of the people so as to generate the demand of the products. But it can develop a low priced product to suit the low income market otherwise it will be slipped out from the market. Similarly, an industry gets a number of incentives and support from the government if it comes under the purview of priority sector whereas some industries face tough task if they are regarded as inessential ones. In the industry life cycle, timing is every thing when it comes to making good cycle-sensitive decisions. The managers need to make appropriate cutbacks prior to the onslaught of recession because at that time sales is bound to decline which leads to increasing inventories and idle resources and that is costly situation. On the other hand, business people cannot afford to get caught short during a period of rapid expansion. This is where accurate

economic forecasts are a necessity and therefore, a manager must pay careful attention to the major economic changes. (c) Technological Environment : Technology is a term that ignites passionate debates in many circles these days. According to some people, technology have been instrumental for environmental destruction and cultural fragmentation whereas some others view that it has been the main cause to economic and social progress. But no doubt it has released wonders to world such as penicillin, open-heart surgery, family planning devices and some other blessings like automobile, cellular phones and internet services etc. It has also been responsible for hydrogen bomb and nerve gas. But the businesses that ignored technological developments, had to go from the world map. For example, in India, cars like Ambassador and Premier had to go from the scene because of obsolete technology. Likewise, containerized movement of goods, deep freezers, trawlers fitted with freezers etc. have affected the operations of all firms including those involved in seafood industry. Now it has been ensured that perishable goods can be transported in a safer manner. Explosion in information technology have made the position of some firms vulnerable. The life cycle of the products have reduced and expectations of the consumers are becoming higher and higher due to all these technological changes. But to cope up with this kind of scenario, a continuous vigil of the happenings and adequate investment on R & D department is to be earmarked by the marketer. Marketers must also be aware of certain government regulations while developing and launching new products with latest technological innovations. (d) Politico-Legal Environment : Business decisions are strongly affected by developments in the political and legal environment. This environment is consists of laws, regulations and policies that influence and limit various organizations. Sometimes these laws create opportunities for the business but these also pose certain odds or threats at the other time. For example, if the government specifies that certain products need mandatory packaging then it will boost the cardboard and packaging companies but it will add to the cost of the product. Regulations in advertising, like a ban on advertisement of certain products like liquor, cigarettes and pan masalas and hoarding of food products, gas and kerosene are the reality of today’s business. Business legislations ensure specific purposes to protect business itself and the society as well like unfair competitions, to protect consumers from unfair business practices and to protect the interest of the society from unbridled business behaviour. In India business is regulated through certain laws like Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), Foreign Exchange and Regulation Act, 1973 (FERA), Partnership Act 1932, Consumer Protection Act, 1986 (CPA), and Companies Act, 1956 etc. A businessman needs to understand the various policies and political ideologies because these things have a profound impact on the functioning and success of the business. (e) Social-cultural Environment : Society shapes the beliefs, values, norms, attitudes, education and ethics of the people in which they grow up and these factors exercise a great influence on the businesses which by far are beyond the company’s control. All these factors are classified as social-cultural factors of the business. The buying and consumption pattern of the people are very much determined by these factors and cost of ignoring the customs, tastes and preferences etc. of the people could be very high for a business. Consumers depend on cultural prescriptions to guide their behaviour, and they assume that others will behave in

ways that are consistent with their culture. Culture unites a group of people in a unique way and support the group’s unity. As consumers, people expect that businessman will deliver according to the values, customs and rituals of the existing culture. As the business is going global day by day and the world is at the verge of ‘global village’ the need for developing understanding cultural differences has become an essential element to survive in such a scenario. Therefore, the marketers who wish to be the part of the ongoing process need to understand the process of acculturation so that they can develop ways to handle the consumers of different cultures. People’s attitudes toward business is also determined by the culture. What is right and what is wrong are basic to all businesses and for doing or not doing a particular work is judged on the basis of prevalent culture and also determines certain ethical code of conduct. Despite the pervasive nature of culture, not all the people within a society think, feel, and act the same way. Every society has subcultures group of people that share values but exhibit them in different ways. Within a society such as the India, there are the different tastes and preferences of the different starta like a Punjabi or a north Indian has altogether different preferences then that of a South Indian in the name of certain products especially in case of food and clothing and the shrewd marketers have always capitalized on this kind of opportunities. Hence, a thorough understanding of social-cultural environment is imperative to be successful.

Question-3 What do you understand by the nature and characteristics of Indian Business Environment? What is the significance of Business Environment? Ans :
Features of Indian Business Environment – The Indian Business Environment is very dynamic but very complex in nature so its features are very comprehensive which must be understood very conceptually and carefully. The major features of Indian Business Environment are as under 1. Totality of external forces: Business environment is the sum total of all things external to business firms and, as such, is aggregative in nature. 2. (Specific and general forces: Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their day-to-day working. General forces (such as social, political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly. 3. Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market.

4. Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information technology or fashion industries. 5. Relativity: Business environment is a relative concept since it differs from country to country and even region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France. Importance of Business Environment Business Environment is very significant for a country as it is very crucial for the economy of the nation so it is very significant to understand the Significance and the importance of the country. The importance of Business Environment can be explained as under 1. Firm to identify opportunities and getting the first mover advantage: Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors. For example, Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars in India. 2. firm to identify threats and early warning signals: If an Indian firm finds that a foreign multinational is entering the Indian market it should gives a warning signal and Indian firms can meet the threat by adopting by improving the quality of the product, reducing cost of the production, engaging in aggressive advertising, and so on. 3. Coping with rapid changes: All sizes and all types of enterprises are facing increasingly dynamic environment. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action. 4. Improving performance: the enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

Question -4 What are the dimensions of Business Environment and what constitutes the general environment of a business? Ans: The following are the key components of general environment of a business.
1. Economic environment economic environment consists of economic factors that influence the business in a country. These factors include gross national product, corporate profits, inflation rate, employment, balance of payments, interest rates consumer income etc. 2. Social environment It describes the characteristics of the society in which the organization exists. Literacy rate, customs, values, beliefs, lifestyle, demographic features and mobility of population are part o the social environment. It is important for managers to notice the direction in which the society is moving and formulate progressive policies according to the changing social scenario. 3. Political environment It comprises political stability and the policies of the government. Ideological inclination of political parties, personal interest on politicians, influence of

party forums etc. create political environment. For example, Bangalore established itself as the most important IT centre of India mainly because of political support. 4. Legal environment This consists of legislation that is passed by the parliament and state legislatures. Examples of such legislation specifically aimed at business operations include the Trade mark Act 1969, Essential Commodities Act 1955, Standards of Weights and Measures Act 1969 and Consumer Protection Act 196. 5. Technological environment It includes the level of technology available in a country. It also indicates the pace of research and development and progress made in introducing modern technology in production. Technology provides capital intensive but cost effective alternative to traditional labor intensive methods. In a competitive business environment technology is the key to development. Economic Environment in India In order to solve economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. The main objectives of India’s development plans were: 1. Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty; 2. Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries; 3. Reduce inequalities of income and wealth; 4. Adopt a socialist pattern of development — based on equality and prevent exploitation of man by man. As a part of economic reforms, the Government of India announced a new industrial policy in July 1991. The broad features of this policy were as follows: 1. The Government reduced the number of industries under compulsory licensing to six. 2. Disinvestment was carried out in case of many public sector industrial enterprises. 3. Policy towards foreign capital was liberalized. The share of foreign equity participation was increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted. 4. Automatic permission was now granted for technology agreements with foreign companies. 5. Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India. Liberalization:  The economic reforms that were introduced were aimed at liberalizing the Indian business and industry from all unnecessary controls and restrictions.  They indicate the end of the licence-pemit-quota raj.  Liberalization of the Indian industry has taken place with respect to: 1. Abolishing licensing requirement in most of the industries except a short list, 2. Freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities, 3. Removal of restrictions on the movement of goods and services,

4. 5. 6. 7.

Freedom in fixing the prices of goods services, Reduction in tax rates and lifting of unnecessary controls over the economy, Simplifying procedures for imports and experts, and Making it easier to attract foreign capital and technology to india.

Privatisation:  The new set of economic reforms aimed at giving greater role to the private sector in the nation building process and a reduced role to the public sector.  To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991  The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernization.  It was also observe that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs.  The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. Globalisation:       Globalizations are the outcome of the policies of liberalisation and privatisation. Globalisation is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries. Globalisation involves an increased level of interaction and interdependence among the various nations of the global economy. Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve a customer in a distant geographical market.

Question- 5 What is the basic nature of Indian Economic System. Or Question- How does the basic nature of Indian Economic System influence business activities in India? Answer :
Indian Economic System - After independence, India opted for a centrally planned economy to try to achieve an effective and equitable allocation of national resources and balanced economic development. The process of formulation and direction of the Five-Year Plans is carried out by the Planning Commission, headed by the Prime Minister of India as its chairperson. The number of people employed in non-agricultural occupations in the public and

private sectors. Totals are rounded. Private sector data relates to non-agriculture establishments with 10 or more employees. India's mixed economy combines features of both capitalist market economy and the socialist command economy, but has shifted more towards the former over the past decade. The public sector generally covers areas which are deemed too important or not profitable enough to leave to the market, including such services as the railways and postal system. Since independence, there have been phases of nationalizing such areas as banking and, more recently, of privatization. Basic Nature of Indian Economic System - The general level of development of the economy has lot of implications for business. It has significance bearing on the nature and size demand, government policies affecting business etc. On the business of per capita income (the average annual income per person) countries are classified as low, middle and high income economics. Low income economic countries are also called underdeveloped countries. High Income – Developed Countries Middle Income - Developing Countries

Economic Policies
There are several economic policies which can have a very great impact on business. Important economic policies are - industrial policies, trade policies, foreign exchange policies, monetary policy, Fiscal policy etc. 1.) Industrial Policies It can even define the scope and role of different sectors like private, public, joint and cooperative or large medium, small and tiny. It may influence the location of industrial undertaking, choice of technology, scale of operation and so on. In India, until the liberalization unhired in 1991, the scope of private sector was very limited. The development of the most important industries was reserved for the state. In development of another 12 major industries, the state was to play a dominant role. The large no. of items was reserved for the exclusive manufacture of small scale sector. Private sector was regulated by licensing policy and MRTP Act. However, the new economic policy or Industrial policy introduced in July 1991. LPG – liberalization, privatization and globalization was introduced which help in economic growth. 2.) Trade Policies It can significantly affect the fortunes of firms. For example – a restriction import policy or a policy of protecting the home industries. As a part of the economic liberalization and WTO compliance, India has very substantially liberated imparts. Many Indian firms which do not come up to the standard in quality cost, marketing etc will not be able to survive. Liberalization of imparts facilitate global sourcing and this could help many Indian firms to become more competitive. 3.) Foreign Exchange Policy Exchange rate policy and the policy in respect of cross-border movement of capital are important for business.  Foreign Investment and Technology Policy

Restriction on foreign capital and technology constrain not only the foreign firms but also the domestic firms because it may cause in their way of acquiring the technology of their choice from the bust source. India has restrictions on foreign investment by Indian companies. A liberal foreign Investment and Technology would benefit many domestic firms by increasing the quantity and quality of domestic supply of many goods and services. 1) Monetary Policy - The central bank by its policy toward the cost of availability of credit can significantly influence the savings, investments and consumer spending in the economy. 2) Fiscal Policy- Government’s strategy in respect of public expenditures and revenue can have significant impact on the business. Taxation Policy, Excise Duty or Sales Tax.

Impact of Government Policy Changes on Business and Industry 1. Increasing competition: As a result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector. 2. More demanding customers: Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services. 3. Rapidly changing technological environment: Increased competition forces the firms to develop new ways to survive and grow in the market. New technologies make it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challenges before smaller firms. 4. Necessity for change: In a regulated environment of pre-1991 era, the firms could have relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations. 5. Threat from MNC Massive entry of multi nationals in Indian marker constitutes new challenge. The Indian subsidiaries of multi-nationals gained strategic advantage. Many of these companies could get limited support in technology from their foreign partners due to restrictions in ownerships. Once these restrictions have been limited to reasonable levels, there is increased technology transfer from the foreign partners.

Question – 6. What do you understand by public sector and private sector? What are the objectives and factors affecting growth of Public and Private Corporate Sector? Or Question. Discuss the comparative growth of Public and Private corporate sector in India in the post-reform years. May 2011 Answer : Public Sector -The public sector, sometimes referred to as the state sector, is a part of
the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal. Examples of public sector activity range from delivering social security, administering urban

planning and organizing national defence. The organization of the public sector (public ownership) can take several forms. The objective of accelerating the pace of economic development and the political ideology which gave the public sector a dominant role in the industrial development of the nation led to rapid growth of the state owned enterprises (SOEs) sector in India. Policy on the public sector has been guided by the Industrial policy Resolutions 1956 and 1991 which gave the public sector a strategic role of economy. At the time of independence there were various problems confronting the country which needed to be tackled in a planned and systematic manner. India was basically an agrarian economy with a week industrial base, low level of savings and investment and near absence of infrastructural facilities. A vast percentage of population was extremely poor. It was, thus, obvious that if the country was to speed up its economic growth and main aim it in the long run at a steady level a big push toward industrial growth was required.

Objectives of Public Sector
1. To help in the rapid economic growth and industrialization of the country and creates the necessary infrastructure for economic development. 2. To earn return on investment and thus generate resources for development. 3. To promote redistribution of income and wealth. 4. To create employment opportunities. 5. To promote balanced regional developments 6. To assists the development of small scale and ancillary industries. 7. To promote import substitution, save and earn exchange for the economy.

Growth and Performance of Public Sector Enterprise
The public sector was assigned an important role in the industrialization and economic development of the country. The Industrial Policy Resolution of 1948 made it very clear that the manufacture of arms and ammunition, the production and control of atomic energy and the ownership and management of railway transport would be the exclusive monopoly of the central government. It was resolved further that another six industries the state alone would set up new undertakings. These six industries were – coal, iron and steel aircraft manufacture, ship building, manufactures of telephone, telegraph and wireless apparatus. The Industrial Policy Resolution of 1956 enlarged the role of public sector. Schedule A to the Resolution enumerated 17 industries, the future development of which would be the exclusive right of the state. Schedule B to the industrial Policy Resolution 1956 contain a list of 12 industries which would be progressively state owned and in which state take he initiative in establishing new units. Major part of the central public sector investment was in the steel, coal, minerals and metals, power ad petroleum sectors. The wide range of products and activities of central public sector enterprises included manufacturing of steel, mining of coal and mineral extraction and refining of crude oil, manufacture of heavy machinery, machine tools, instruments, heavy machine building equipment, heavy electric metal equipment for thermal and hydro station etc.

A significant feature of the public sector investment is the predominance of investment in few crucial sectors, namely, steel, minerals and metals, petroleum, coal and chemical and fertilizers. The public sector certainly had a very important role to play in the development of this vast and populous developing economy characterized by departs of capital, entrepreneurship and technology. However keeping the private sector completely out of many industries and giving the private sector only a secondary role in many other industries have had secure adverse effect on growth and competition. The new economic policy, characterized by scope for a substantial privatization including de-reservation of industries for public sector, in fact amounts to an acceptance of this.

Size or Organization of Public Enterprises Ministry
For the management of the Indian Railway there is a full fledged Ministry of Railways in the government of India. The Ministry of Railway undertakes and manages all the investments and enterprise connected with the railway transport of the country and has its own Annual Budget which has to be presented to parliament and approved by it. The Ministry has a Minister for Railways and the body of management consists of the Railway Board, headed by a chairman. Beside the chairman, the Board has three members and a financial commissioner. All these five personnel have the status of secretary to the Government of India.

Departmental undertakings
(a) It is financed by annual appropriations from the treasury and all or major shares of its revenues are paid in to treasury. (b) It is subject to the budget, accounting and audit controls applicable to government activities (c) Its permanent staff consists of civil servants and the conditions of recruitment and service are the same as for other civil servants.

Relations of Public Enterprises
The Bureau of Public enterprises (BPE) was setup in the Ministry of finance in 1965 to promote a central focal point of reference and consultation to deal with matters of common interest to public enterprises, like organizational patterns, methods of management, personnel policies, collaboration agreements, project ----- and clearance , project and corporate planning etc. In 1985 the Bureau of Public enterprise was brought under the Ministry of industry. In 1990, the Bureau of Public enterprise was conferred the status of a full-fledged department and is now known as the department of public enterprise in the Ministry of Industry. The Department of Public Enterprises (DPE) act as a nodal agency for all Public Sector Enterprise (PSE) and assists in policy formation pertaining to the role of PSE in the economy as also in laying down policy guidelines on performance improvement and evaluation , financial accounting, personnel management and in related area. It also collects, evaluates and maintains information on several areas in respect of PSEs. DPE also provides an interface between the Administrative Ministries and the PSEs.

Private Sector

The private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state. By contrast, enterprises that are part of the state are part of the public sector; private, non-profit organizations are regarded as part of the voluntary sector. In a mixed economy, the private sector too has an important role to play. The industrial Policy Resolution of 1956, which still remained the core of India’s industrial policy and which assigned a dominant role to the public sector in a number of vital industries has made it very clear that as an agency for planned national development in the context of the country’s expanding economy the private sector will have the opportunities to develop and expand. Types of Private Corporate Sector The main types of businesses in the private sector are:
   

Sole proprietor or sole trader Partnership, either limited or unlimited liability Private Limited Company or LTD-limited liability, with private shares Public Limited Company – shares are open to the public. Two examples are:

Franchise – business owner pays a corporation to use their name, receives spec for the business Workers cooperative – all workers have equal pay, and make joint business decisions

In countries where the private sector is regulated or even forbidden, some types of private business continue to operate within them.

Objectives of Private Corporate Sector
Basically the basic objective of the private sector is to get the highest profit as much as they can get. The profit is the Earning before interest and tax. Taxes are government implemented therefore, private sector tries to give a great cushion to EBIT against interest and tax. In at attempt to achieve this aim, the companies in private sector produces where their total revenues are far higher than total costs. This creates high reserves for the stockholders. This shows that private sector has to fulfill the desires of the shareholders and it will always aim to fulfill their satisfaction. Another objective of private sector is to increase the market shares to get a sustainable competitive advantage. Companies in the private sector also want to improve their image by showing social responsibility. Moreover, private sector is more involved in sponsoring events because they know that such events can make their positioning and image better in the market.

Growth of Public Corporate Sector

According to the Industrial Policy Resources 1956 it was expected that the development of the industries outside the schedule A and B would be undertaken ordinarily through the initiative and enterprise of Private sector through it was open to the state to start any industry

even in the category. It was the policy of the state to encourage the development of these industries in the private sector, in accordance with the programmes formulated successive five year plans by ensuring the development of transport power and other services and by appropriate fiscal and other measures. The Industrial Policy Resolution of 1956 has also made it clear that industrial undertaking in ht private sector have necessarily to fit into the framework of the social and economic policy of the state will be subject to control and regulation in terms of the Industries (Development and Regulation)Act and other relevant legislation. When there exist in the same industry both privately and publicly owned units it would continue to be the policy of the state to give fair and non-discriminatory treatment to both of them. Even in the areas where the private sector has been allowed its operations and developments have been regulated by the government in the public interest. The large industrial houses and foreign concerned particularly had been subject to a number of choices and controls. There are many acts like MRTP (Monopolies and Restrictive Trade Practices Act, IDRA (Industries Development and Regulation Act 1951) ,FERA(Foreign Exchange Regulation Act), Industrial Licensing, Export-import Policy which have a great influence and control over private sector. All these Act and Policies shows the dominant role of Public Sector in many Industries but even in some Industries Private Sector is good. Role of private Sector had been confined to certain important areas like the heavy investment sector, the core sector, he export sector and backward areas development. The government’s policy was to prefer small and new entrepreneurs to large industrial houses in the private sector, whenever possible. The private sector has been dominant in most of the consumer goods industries. It plays an important role in a number of capital good industries too. In a number of important industries, it functions side by side with the public sector. The joint sector also reflects to some extent the importance of the role of the private sector. With the New Industrial Policy announced on 24 July 1991 by (Prime Minister-P.V. Narsimha Rao and Finance Minister-Dr.Manmohan Singh) and modifications introduced thereafter, the role of the private sector has been substantially expanded. Now private enterprises are allowed in all but two Industries called delicacy. Only every small number of industries are now industrial licensing (i.e., except of these industries there are no entry and growth restrictions on the private sector). The scope of private sector is increased by the withdrawal of the state from many industries and privatization. The new business Economic Policy comes through LPG-Liberalization, Privatization, and Globalization. The new industrial Policy also indicated that the public sector would withdraw from following cases and open to the private sector. 1) Industries based on low technology 2) Small scale and non-strategic areas 3) Inefficient and unproductive areas. 4) Areas with low or zero social responsibility or public purposes. 5) Areas where private sector has developed sufficient enterprises and resources.

Question – 7. What are the major problems faced by Public Corporate Sector? What is the new Public Sector Policy? Answer:
Problems of Public Sector A large number of PSEs, including several monopolies have made huge losses. Despite the huge losses incurred by a number of enterprises the PSEs as a whole could make profits mainly because of the enormous profit made by several public sector monopolies. Several of the loss making PSEs has been either in non-priority sectors or in sectors where the private sector has provided to be more efficient. A number of loss making units are sick units. 1. A variety of factors have been identified for the unsatisfactory performance of a large number of public enterprises. (i) Due to problem of land acquisition (ii) Procurement of equipment, civil work (iii) Irrational product wise and imposed marketing arrangements. (iv) Choice of technology has been tied to availability of foreign financing (v) In power sector, excessive investment in generation capacity with defective or mismanaged transmission network. (vi) Low rate of return on investment an asset due to weak management and working (vii) Allocation of resources, delays in filling up of top level posts, tight regulations and procedure of investment and restriction on functional autonomy of the enterprises for example in respect of labour and wage policy. 2. 3. 4. 5. 6. Inadequate generation of Interval Resources there is a hug burden on the Public sector and due to these reasons PSE are going into the sick industries. Public sector enterprises were set up not only for commercial considerations but also for factors such as generation of employment, promoting balanced regional development etc. Low return on investment on account of price constraints imposed on certain infrastructural goods and services of public enterprises. A number of sick units in private sector facing closure had to be taken over by the government and these unit form sizable part of central public sector. The impact of escalation increase in the prices of various inputs and periodical wage revision on the PSE is very adverse.

The New Public Sector Policy
Serious problems have been observed in the insufficient growth in productivity, poor project management, over-manning, and lack of continuous techniques logical up gradation and inadequate attention to R and D and human resources development. This resulted in many of the public enterprises becoming a burden rather than an asset to government. It was therefore decided to refine the role of the public sector. According to industrial policy announced on 24-7-1991, the following of public enterprises. 1) Essential infrastructure goods and services 2) Extraction and exploitation of oil and mineral resources.

3) Technology development and building of manufacture using capabilities. 4) Manufacture of products where strategic considerations predominates such as defense equipment. Accordingly the number of Industries reserved for the public sector was presumed to 8. Hen 8 industries were (i) Arms and ammunitions and allied items of defense equipment (ii) Atomic energy (iii) Coal and ignite (iv) Mineral oils (v) Mining of iron ore, manganese ore, chrome ore, sulphur , gold and diamond (vi) Mining of copper, lead, zinc, tin, molybdenum, wolfram (vii) Minerals in Atomic energy (viii) Railway transport The list has been further pruned subsequently and now only atomic and railway transports are reserved for public sector (in 2001). It also decided to close own unviable sick public undertaking.

Question- 8. What do you mean by Social Responsibility of Business or Corporate Social Responsibility? Or Question- Describe the Responsibility of Business or Corporate Social Responsibility towards stakeholders. Is Social responsibility of Business
the same as Business Ethics?

Social responsibility of Business or Corporate social responsibility (CSR) is an obligation, beyond that required by the law and economics, for a firm to pursue long term goals that are good for society. The continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as that of the local community and society at large. Social responsibility of Business or Corporate social responsibility (CSR) is about how a company manages its business process to produce an overall positive impact on society. Social responsibility of business refers to what the business does, over and above the statutory requirement, for the benefit of society. The important generally accepted responsibilities of business to society are described. The pity is that some multinationals which appreciate their social responsibilities in respect of the developing countries do not have the same approach in respect of the developing countries they operate in. It is at the same time equally true that some MNCs fair much better in social responsibility than many domestic firms. Social Responsibility of Business refers to what the business does, over and above the statutory requirements for the benefit of the society. The word responsibility connects that the business

has some moral obligation to the society. Each business must take into account the situation in which it finds itself in meeting stake holder expectations. 1. Business is an economic entity and cannot jeopardize its profitability meeting social needs. 2. Business must assume its share of social burden and be willing to absorb reasonable social costs. 3. Business should recognize that in the long run the general social good benefits everyone. There are four categories of Social responsibilities or obligations of corporate performance – 1. Economic - Efficient operation to satisfy economic needs of the society and generation of surplus for rewarding the investors and future development. 2. Legal Responsibilities - These Responsibilities are also fundamental in nature because a company is bound to obey the low of the land. 3. Ethical Responsibilities - These Responsibilities are certain norms which the society expects the business to observe although these are not mandated by law. 4. Discretionary Responsibilities - These Responsibilities refers to the contribution of business to the social causes like involvement in community development or other social programmes. Social Responsibility of Business or Corporate Social Responsibility means:  Conducting business in an ethical way and in the interests of the wider community  Responding positively to emerging societal priorities and expectations  A willingness to act ahead of regulatory confrontation  Balancing shareholder interests against the interests of the wider community  Being a good citizen in the community Is Social responsibility of Business the same as Business Ethics?  There is clearly an overlap between Social responsibility of Business and business ethics  Both concepts concern values, objectives and decision based on something than the pursuit of profits  And socially responsible firms must act ethically The difference is that ethics concern individual actions which can be assessed as right or wrong by reference to moral principles. Social responsibility of Business is about the organisation’s obligations to all stakeholders – and not just shareholders. There are four dimensions of Social responsibility of Business or corporate responsibility  Economic - responsibility to earn profit for owners  Legal - responsibility to comply with the law (society’s codification of right and wrong)  Ethical - not acting just for profit but doing what is right, just and fair  Voluntary and philanthropic - promoting human welfare and goodwill.

Being a good corporate citizen contributing to the community and the quality of life.

Responsibilities towards Shareholders or Owners
The responsibility of a Business towards its shareholders, who are the owners, is indeed a primary one. The fact that the shareholders have taken a great risk in making investment in the business should be adequately recognized. The shareholders are interested not only in the protection of their investment and the return on it but also in the image of the company. It shall, therefore, be the endeavour of the company to ensure that its public image is such that the shareholders can feel proud of their Business Organization. The responsibility of a Business towards its shareholders or owners is to ensure the following 1. Reasonable Dividend - Shareholders are a source of funds for the company. They expect a high rate of dividend on the money investment by them. 2. Stability And Growth - Stability and Growth of their money in the company or organization. 3. Information - Shareholders should be well informed about the progress and financial position of company. 4. Protection Of Assets - Assets of company which are purchased from funds provided by share holders. 5. Trustee Of Shareholders - Management is the trustee of shareholders’ funds and it should be used for company purposes only not for the personal use of company persons. At the same time, they shall appreciate the responsibility of the business to other sections of society-to the workers, consumers and the community.

Responsibilities towards Human Resources or Employees

Human resources are considered as the biggest resource of company and they are the liability as well as assets of the company. Because of an effective human resource an organization can only achieve their goals and objectives. Employee morale depends to a large extent on the discharge of the company’s responsibilities to them and the employer-employee relationship. The responsibility of the organization to the workers includes:

1. Fair Wages - Fair Wages which can satisfy the needs. 2. Good Working Conditions - Good Working Conditions for maintain the health of the workers. 3. Adequate Service Benefits - Adequate Service Benefits such as housing facility, medical facilities, and insurance cover and retirement benefits. 4. Co-Operation - Management should win the cooperation of the workers. 5. Recognition of Workers’ Right - To fair wage (minimum wages Act), to participate in decisions affecting their working life collective Bargaining.

6. Recognition of Performance -Proper recognition, appreciation and encouragement of special skills and capabilities of the workers. 7. Fair Work Standards and Norms - The establishment of fair work standards and norms for the Human Resources is the responsibility of the Business Organization. 8. Grievance Handling – It is the responsibility of the Organizational management to ensure effective grievance management 9. Participative Management – To ensure employee participation in decision making and empowerment is responsibility of the Organizational management. 10. Opportunity for Growth - Education and other means to improve the skills, knowledge and capabilities of the Employees and arrangements for proper training and development of the Employees is responsibility of the Organizational management.

Responsibilities towards Customers & Consumers
Customer is the person who is most important for company and customer satisfaction. Important responsibilities of the business to the customer are: 1. Need Satisfaction - Company should produce those goods which meet the needs of the consumers of different classes, segments, tastes and preferences. 2. Regular Flow Of Goods - Right quality and quantity of goods available to the right people at the right time. 3. Continuous Service - Business should provide prompt, adequate and continuous services to customers. 4. Right Information - Advertisement and statements issued by the business are true and fair. 5. Fair Trade Practices - Management should not indulge into unfair and unethical practices such as black marketing, hoarding, adulteration etc. 6. Effective Service -To improve the efficiency of the functioning of the business so as to (a) increase productivity and reduce prices, (b) required after-sales services. and (c) smoothen the distribution system to make goods easily available. 7. Quality Improvement -To do research and development, to improve quality and introduce better and new products. 8. Fair Prices - To supply goods at reasonable prices even when there is a seller’s market. 9. Eco-Friendly Products -To ensure that the product supplied has no adverse effect on the consumer. 10. Right of Information -To avoid misleading the customer by improper advertisements or otherwise. 11. Redressal of Customer Grievance -To provide an opportunity for being heard and to redress genuine grievances.

Responsibility towards the Society or Community

A business has a lot of responsibilities to the community around its location and to the society at large. These responsibilities include: 1. Taking appropriate steps to prevent environmental pollution and to preserve the ecological balance. 2. Rehabilitating the population displaced by the operation of the business, if any. 3. Assisting in the overall development of the locality. 4. Improving the efficiency of the business operation. 5. Development of backward areas. 6. Promotion of ancillarisation and small-scale industries. 7. Making possible contribution to furthering social causes like the promotion of education and population control. 8. Contributing to the national effort to build up a better society.

Responsibilities towards Suppliers
1. It should try for fair terms and conditions regarding price, quantity, delivery of goods and payment. 2. If relations between company and suppliers are based on integrity and courtesy the supplier will not supply them goods on credit.

Responsibility towards the Government
Government plays a very important role in the business. Multinationals should accept all the policies made by the Government so that the business transaction takes place easily. A government has their trade policies to the following from time to time. There are instruments of trade policy. They are:  Tariffs  Subsidies  Import Quotas  Voluntary Export Restraints  Local Content Requirements and  Administrative Policies. The Responsibility towards Government is as follows 1. To abide by law of nation. 2. To pay government taxes honestly and in time. 3. To avoid corrupting government employees. 4. Discourage concentration of economic power and monopoly. 5. Encourage fair trade practices

Responsibility towards Society or Community as a whole
Society is the origin of any business as it provide all the resources required for the business. 1. Socio economic objective of society should consider by business also and business should help in economic development of Region and its country.

2. Business should improve local environment and contribute to advancement of local amenities. 3. Business should encourage and create employment opportunities 4. Efficient use of resources – management should make the best possible use of capital, raw material, machinery, technical knowledge and other resources for the well bring of the society. 5. Welfare Activities – business should contribute towards the upliftment of the workers sections of the society. 6. Business Morality – business should not indulge into anti-social and unfair trade practices such as adulteration, hoarding and black marketing.

Question- 9.What are the significant Economic Reforms in India Since 1991? Or Question – What are the reforms due to which the era after1991 is called Post liberalization era? Or Question - How Industrial Policy reforms and Trade Policy Reforms were introduced after1991? Answer:
Economic Reforms in India since 1991
Since independence, India followed the mixed economy framework by combining the advantages of the market economic system with those of the planned economic system. But over the years, this policy resulted in the establishment of a variety of rules and laws which were aimed at controlling and regulating the economy and instead ended up hampering the process of growth and development. The economy was facing problems of declining foreign exchange, growing imports without matching rise in exports and high inflation. India changed its economic policies in 1991 due to a financial crisis and pressure from international organizations like the World Bank and IMF. India was a latecomer to economic reforms, embarking on the process in earnest only in 1991, in the wake of an exceptionally severe balance of payments crisis. The need for a policy shift had become evident much earlier, as many countries in east Asia achieved high growth and

poverty reduction through policies which emphasized greater export orientation and encouragement of the private sector. India took some steps in this direction in the 1980s, but it was not until 1991 that the government signaled a systemic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of government. Savings, Investment and Fiscal Discipline Fiscal profligacy was seen to have caused the balance of payments crisis in 1991 and a reduction in the fiscal deficit was therefore an urgent priority at the start of the reforms. The combined fiscal deficit of the central and state governments was successfully reduced from 9.4 percent of GDP in 1990-91 to 7 percent in both 1991-92 and 1992-93 and the balance of payments crisis was over by 1993. However, the reforms also had a medium term fiscal objective of improving public savings so that essential public investment could be financed with a smaller fiscal deficit to avoid “crowding out” private investment. This part of the reform strategy was unfortunately never implemented. Public savings deteriorated steadily from +1.7 percent of GDP in 1996-97 to –1.7 percent in 2000-01. This was reflected in a comparable deterioration in the fiscal deficit taking it to 9.6 percent of GDP in 2000-01. Not only is this among the highest in the developing world, it is particularly worrisome because India’s public debt to GDP ratio is also very high at around 80%. Since the total financial savings of households amount to only 11 percent of GDP, the fiscal deficit effectively preempts about 90 percent of household financial savings for the government. What is worse, the rising fiscal deficit in the second half of the 1990s was not financing higher levels of public investment, which was more or less constant in this period. Reforms in Industrial and Trade Policy Reforms in industrial and trade policy were a central focus of much of India’s reform effort in the early stages. Industrial policy prior to the reforms was characterized by multiple controls over private investment which limited the areas in which private investors were allowed to operate, and often also determined the scale of operations, the location of new investment, and even the technology to be used. The industrial structure that evolved under this regime was highly inefficient and needed to be supported by a highly protective trade policy, often providing tailor-made protection to each sector of industry. The costs imposed by these policies had been extensively studied and by 1991 a broad consensus had emerged on the need for greater liberalization and openness. A great deal has been achieved at the end of ten years of gradualist reforms. Industrial Policy Reforms Industrial policy has seen the greatest change, with most central government industrial controls being dismantled. The list of industries reserved solely for the public sector -- which

used to cover 18 industries, including iron and steel, heavy plant and machinery, telecommunications and telecom equipment, minerals, oil, mining, air transport services and electricity generation and distribution -- has been drastically reduced to three: defense aircrafts and warships, atomic energy generation, and railway transport. Industrial licensing by the central government has been almost abolished except for a few hazardous and environmentally sensitive industries. The requirement that investments by large industrial houses needed a separate clearance under the Monopolies and Restrictive Trade Practices Act to discourage the concentration of economic power was abolished and the act itself is to be replaced by a new competition law which will attempt to regulate anticompetitive behavior in other ways. The main area where action has been inadequate relates to the long standing policy of reserving production of certain items for the small-scale sector. About 800 items were covered by this policy since the late 1970s, which meant that investment in plant and machinery in any individual unit producing these items could not exceed $ 250,000. Industrial liberalization by the central government needs to be accompanied by supporting action by state governments. Private investors require much permission from state governments to start operations, like connections to electricity and water supply and environmental clearances. They must also interact with the state bureaucracy in the course of day-to-day operations because of laws governing pollution, sanitation, workers’ welfare and safety, and such. Complaints of delays, corruption and harassment arising from these interactions are common. Some states have taken initiatives to ease these interactions, but much more needs to be done.

Trade Policy Reforms
Trade policy reform has also made progress, though the pace has been slower than in industrial liberalization. Before the reforms, trade policy was characterized by high tariffs and pervasive import restrictions. Imports of manufactured consumer goods were completely banned. For capital goods, raw materials and intermediates, certain lists of goods were freely importable, but for most items where domestic substitutes were being produced, imports were only possible with import licenses. The criteria for issue of licenses were non-transparent, delays were endemic and corruption unavoidable. The economic reforms sought to phase out import licensing and also to reduce import duties. Import licensing was abolished relatively early for capital goods and intermediates which became freely importable in 1993, simultaneously with the switch to a flexible exchange rate regime. Import licensing had been traditionally defended on the grounds that it was necessary to manage the balance of payments, but the shift to a flexible exchange rate enabled the government to argue that any balance of payments impact would be effectively dealt with through exchange rate flexibility.

Although India’s tariff levels are significantly lower than in 1991, they remain among the highest in the developing world because most other developing countries have also reduced tariffs in this period. The weighted average import duty in China and south-east Asia is currently about half the Indian level. The government has announced that average tariffs will be reduced to around 15 percent by 2004, but even if this is implemented, tariffs in India will be much higher than in China which has committed to reduce weighted average duties to about 9 percent by 2005 as a condition for admission to the World Trade Organization. Foreign Direct Investment Liberalizing foreign direct investment was another important part of India’s reforms, driven by the belief that this would increase the total volume of investment in the economy, improve production technology, and increase access to world markets. The policy now allows 100 percent foreign ownership in a large number of industries and majority ownership in all except banks, insurance companies, telecommunications and airlines. Procedures for obtaining permission were greatly simplified by listing industries that are eligible for automatic approval up to specified levels of foreign equity (100 percent, 74 percent and 51 percent). Potential foreign investors investing within these limits only need to register with the Reserve Bank of India. For investments in other industries, or for a higher share of equity than is automatically permitted in listed industries, applications are considered by a Foreign Investment Promotion Board that has established a track record of speedy decisions. In 1993, foreign institutional investors were allowed to purchase shares of listed Indian companies in the stock market, opening a window for portfolio investment in existing companies. Reforms in Agriculture A common criticism of India’s economic reforms is that they have been excessively focused on industrial and trade policy, neglecting agriculture which provides the livelihood of 60 percent of the population. Critics point to the deceleration in agricultural growth in the second half of the 1990s as proof of this neglect.i However, the notion that trade policy changes have not helped agriculture is clearly a misconception. The reduction of protection to industry, and the accompanying depreciation in the exchange rate, has tilted relative prices in favor of agriculture and helped agricultural exports. The index of agricultural prices relative to manufactured products has increased by almost 30 percent in the past ten years. The share of India’s agricultural exports in world exports of the same commodities increased from 1.1 percent in 1990 to 1.9 percent in 1999, whereas it had declined in the ten years before the reforms. Infrastructure Development Rapid growth in a globalized environment requires a well-functioning infrastructure including especially electric power, road and rail connectivity, telecommunications, air transport, and efficient ports. India lags behind east and south-east Asia in these areas. These services were traditionally provided by public sector monopolies but since the investment needed to expand

capacity and improve quality could not be mobilized by the public sector, these sectors were opened to private investment, including foreign investment. However, the difficulty in creating an environment which would make it possible for private investors to enter on terms that would appear reasonable to consumers, while providing an adequate risk- return profile to investors, was greatly underestimated. Many false starts and disappointments have resulted. The greatest disappointment has been in the electric power sector, which was the first area opened for private investment. Private investors were expected to produce electricity for sale to the State Electricity Boards, which would control of transmission and distribution. However, the State Electricity Boards were financially very weak, partly because electricity tariffs for many categories of consumers were too low and also because very large amounts of power were lost in transmission and distribution. Financial Sector Reform India’s reform program included wide-ranging reforms in the banking system and the capital markets relatively early in the process with reforms in insurance introduced at a later stage. Banking sector reforms included: a. Measures for liberalization, like dismantling the complex system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securities. b. Measures designed to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervision. c. Measures for increasing competition like more liberal licensing of private banks and freer expansion by foreign banks. These steps have produced some positive outcomes. There has been a sharp reduction in the share of non-performing assets in the portfolio and more than 90 percent of the banks now meet the new capital adequacy standards. However, these figures may overstate the improvement because domestic standards for classifying assets as non-performing are less stringent than international standards. Privatization The public sector accounts for about 35 percent of industrial value added in India, but although privatization has been a prominent component of economic reforms in many countries, India has been ambivalent on the subject until very recently. Initially, the government adopted a limited approach of selling a minority stake in public sector enterprises while retaining management control with the government, a policy described as “disinvestment” to distinguish it from privatization. The principal motivation was to mobilize revenue for the budget, though there was some expectation that private shareholders would increase the commercial orientation of public sector enterprises. This policy had very limited success. Disinvestment receipts were consistently below budget expectations and the average realization in the first five years was less than 0.25 percent of GDP compared with an average of 1.7 percent in

seventeen countries reported in a recent study. There was clearly limited appetite for purchasing shares in public sector companies in which government remained in control of management. In 1998, the government announced its willingness to reduce its shareholding to 26 percent and to transfer management control to private stakeholders purchasing a substantial stake in all central public sector enterprises except in strategic areas.ii The first such privatization occurred in 1999, when 74 percent of the equity of Modern Foods India Ltd. (a public sector bread-making company with 2000 employees), was sold with full management control to Hindustan Lever, an Indian subsidiary of the Anglo-Dutch multinational Unilever. This was followed by several similar sales with transfer of management: BALCO, an aluminium company; Hindustan Zinc; Computer Maintenance Corporation; Lagan Jute Machinery Manufacturing Company; several hotels; VSNL, which was until recently the monopoly service supplier for international telecommunications; IPCL, a major petrochemicals unit and Maruti Udyog, India’s largest automobile producer which was a joint venture with Suzuki Corporation which has now acquired full managerial controls.

If the economic reforms have given us an opportunity in terms of greater access to global markets and high technology, it has also compromised the welfare of people belonging to poor section. The crisis that erupted in the early 1990s was basically an outcome of the deep rooted inequalities in Indian society and the economic reform policies initiated as a response to the crisis by the government, with externally advised policy package, further aggravated the inequalities.. Further, it has increased the income and quality of consumption of only high-income groups and the growth has been concentrated only in some select areas in the services sector such as telecommunication, information technology, hospitality etc

Question-10. What is the Concept of LPG in Indian Business Environment? Answer :
Liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation. Liberalization of autocratic regimes may precede democratization. Most often, the term is used to refer to economic liberalization, especially trade liberalization or capital market liberalization. Although economic liberalization is often associated with privatization, the two can be quite separate processes. For example, the European Union has liberalized gas and electricity markets, instituting a system of competition; but some of the leading energy companies remain partially or completely in government ownership.

Liberalized and privatized public services may be dominated by just a few big companies particularly in sectors with high capital costs, or high such as water, gas and electricity. In some cases they may remain legal monopoly at least for some part of the market (e.g. small consumers). Liberalization is one of three focal points (the others being privatization and stabilization) of the Washington Consensus's trinity strategy for economies in transition. An example of Liberalization is the "Washington Consensus" which was a set of policies created and used by Argentina. Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with classical liberalism. The arguments for economic liberalization include greater efficiency and effectiveness that would translate to a "bigger pie" for everybody. Thus, liberalisation in short refers to "the removal of controls", to encourage economic development. In developing countries, economic liberalization refers more to liberalization or further "opening up" of their respective economies to foreign capital and investments. Three of the fastest growing developing economies today India has achieved rapid economic growth in the past several years or decades after they have "liberalized" their economies to foreign capital.

Privatization is the incidence or process of transferring ownership of a business, enterprise, agency, public service or property from the public sector (the state or government) to the private sector (businesses that operate for a private profit) or to private non-profit organizations. The term is also used in a quite different sense, to mean government outsourcing of services to private firms, e.g. functions like revenue collection, law enforcement, and prison management. The term "privatization" also has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company's stock, privatizing a publicly traded stock, and often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint stock company. Privatisation generally is believed to improve the output, profits and efficiency of the organisations that are privatised. The repurchasing of all of a company's outstanding stock by employees or a private investor. As a result of such an initiative, the company stops being publicly traded. Sometimes, the company might have to take on significant debt to finance the change in ownership structure. Companies might want to go private in order to restructure their businesses (when they feel that the process might affect their stock prices poorly in the short run). They might also want to go private to avoid the expense and regulations associated with remaining listed on a stock exchange. also called going private. opposite of going public. The process of moving from a government controlled system to a privately run, for-profit system.

Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import quotas. Globalization contributes to economic growth in developed and developing countries through increased specialization and the principle of comparative advantage. The term can also refer to the transnational circulation of ideas, languages, and popular culture. Critics of globalization allege that globalization's benefits have been overstated and its costs underestimated. Among other points, they argued that it decreased inter-cultural contact while increasing the possibility of international and intra-national conflict. However, the assertions of critics of globalization contradict the research in mainstream international trade theory, that, after controlling for relevant factors, globalization reduces conflict between trading nations. Progressive economist Paul Krugman, who won the Nobel Prize in economics in 2008 for his work done in international trade theory, is a staunch supporter of globalization and free trade and has a record of disagreement, going back to the 1990s, with mainstream progressives, who he thinks lack even basic understanding of what comparative advantage is. Globalization is the process of increasing the connectivity and interdependence of the world's markets and businesses. This process has speeded up dramatically in the last two decades as technological advances make it easier for people to travel, communicate, and do business internationally. Two major recent driving forces are advances in telecommunications infrastructure and the rise of the internet. In general, as economies become more connected to other economies, they have increased opportunity but also increased competition. Thus, as globalization becomes a more and more common feature of world economics, powerful pro-globalization and anti-globalization lobbies have arisen. The pro-globalization lobby argues that globalization brings about much increased opportunities for almost everyone, and increased competition is a good thing since it makes agents of production more efficient. The two most prominent proglobalization organizations are the World Trade Organization and the World Economic Forum. The World Trade Organization is a pan-governmental entity (which currently has 144 members) that was set up to formulate a set of rules to govern global trade and capital flows through the process of member consensus, and to supervise their member countries to ensure that the rules are being followed. The World Economic Forum, a private foundation, does not have decision-making power but enjoys a great deal of importance since it has been effective as a powerful networking forum for many of the world's business, government and not-profit leaders. The anti-globalization group argues that certain groups of people who are deprived in terms of resources are not currently capable of functioning within the increased competitive pressure that will be brought about by allowing their economies to be more connected to the rest of the world. Important anti-globalization organizations include environmental groups like Friends of the Earth and Greenpeace; international aid

organizations like Oxfam; third world government organizations like the G-77; business organizations and trade unions whose competitiveness is threatened by globalization like the U.S. textiles and European farm lobby, as well as the Australian and U.S. trade union movements.

Question-11. What is Industrial Policy? Give a Clear cut review of Industrial Policy Developments up to 1991? Or Question – Explain the present Industrial policy of the government. How does it support industrial growth? May 2011 Answer:
The Industrial Policy of a country, sometimes shortened IP, is its official strategic effort to encourage the development and growth of the manufacturing sector of the economy. A country's infrastructure (transportation, telecommunications and energy industry) is a major part of the manufacturing sector that usually has a key role in the IP. The IP purports to "stimulate specific activities and promote structural change.” Industrial policies are sector specific, unlike broader macroeconomic policies. They are sometimes labelled as interventionist as opposed to laissez-faire economics. Examples of horizontal, economy wide policies are tightening credit or taxing capital gain, while examples of vertical, sector-specific policies comprise protecting textiles from foreign imports or subsidizing export industries. Free market advocates consider industrial policies as interventionist measures typical of mixed economy countries. Many types of industrial policies contain common elements with other types of interventionist practices such as trade policy and fiscal policy. An example of a typical industrial policy is import-substitution-industrialization (ISI), where trade barriers are temporarily imposed on some key sectors, such as manufacturing. By selectively protecting certain industries, these industries are given time to learn (learning by doing) and upgrade. Once competitive enough, these restrictions are lifted to expose the selected industries to the international market. Industrial Policy Up To 1991 or Pre Liberalization Era (Pre 1991)


Reservation of Industries 1. Future development of most of the important industries was exclusively reserved for the public sector. 2. Manufacture of a large number of items was prohibited or restricted for private sector industries. Dominance of Public Sector 1. The policy of government was to ensure the public sector gained control over the commanding heights of the economy. The Industrial Resolution of 1948 established public sector monopoly/ near monopoly in industries. 2. Industrial Policy Resolution of 1956 brought out in the light of adoption by the Parliament of socialist pattern of the society as national goal.

3. Second five year plan emphasis to the basic and heavy industries, further expanded substantial the role of public sector. 4. Future development of 17 most important industries was extensively reserved for the public sector (schedule A). 5. Public sector was also assigned priority for establishment of new units in 12 most important of remaining Industries (schedule B). 6. Dominance of Public Sector over many other Industries is also due to IDRA Industrial licensing Act. Entry and Growth Restrictions 1. On the Private Sector (Particularly on the large and foreign firms) entry and growth is restricted due to licensing policy. 2. A license is required for establishing new unit, for expansion, for manufacturing new product. 3. MRTP Act- Monopolies and Restrictive trade practices Act is also to restrict those forms who want to start their additional unit, new product, expansion of existing firm.

Restrictions on Foreign Capital and Technology
The scope of use of foreign capital and technology was limited operation of foreign companies in India and issue of securities abroad by Indian companies was regulated under the Foreign Exchange Regulation Act (FERA), 1973.

The New Industrial Policy
The Industrial Policy announced on July 24, 1991 which assures the economic reform in India has enormously expanded the scope of the private sector by opening up most of the Industries for the private sector and removes the entry and growth restrictions. Adjective such as ‘Dramatic’,’revolutionare’,’drastic’etc have been used to describe the nature of the change in Industrial Policy. The Industrial Policy reforms have reduces the industrial licensing requirements, remove restrictions on investment and expansion and facilitate easy access to foreign technology and foreign direct investment (FDI).

The New Industrial Policy also known in terms of L-P-G

1. 2. 3. 4. To build on the gains already made. To correct the distortions or weakness that may have crept it. To maintain a sustained growth in productivity and gainful employment. To attain international competitiveness.

Redefinition of the Role of Public Sector
1. The number of Industries reserves for the Public sector was reduced to eight and it was later reduced , in stages of two (atomic energy and railway transport) 2. The policy also seeks selective privatization and withdrawal which do not confirm to its refined role.

Expansion of the Scope of Private Sector and Dismantling Of Entry and Growth Restriction
By reducing the number of industries reserved for the public sector and by substantially dismantling the barrier to entry and growth of Private Sector. Deliquescing - All but 18 industries were fraud licensing. The number was later reduced, in stages to six. Removal of MRTP Act Restrictions - Firms who requiring prior permission for establishment of new undertaking, substantial expansion, and manufacture of new item and mergers and acquisition were scraped and these types of restrictions are removed. Liberalization of Foreign Investment - The policy toward foreign capital and technology has been modified very significantly and progressively liberalized. FDI is allowed in all industries, except industries talking in small negative list, in varying level (26% to 1oo% of total equity).

Question-12. What is the Monopolies and Restricted Trade Practices Act (MRTP Act)? Answer: MRTP ACT (Monopolies and Restrictive Trade Practices Act, 1969)
The principal low in India to deal with competition was Monopolies and Restrictive Trade Practices Act, 1969. The MRTP Act, brought into force from 1st June 1970, was a very controversial piece of legislation. The high level committee on competition policy and law, appointed by Government of India, recommended that a new competition Act may be enacted and the MRTP Act may be repeated. The government has accepted this recommendation. The MRTP Act, one of the most controversial pieces of legislation in India, has thus become a document of historical value. The main objectives of the Monopolies and Restrictive Trade Practices Act, 1969, the principal law in India to deal with competition, were 1) Prevention of concentration of economic power to the common detriment 2) Control of monopolies, restrictive and unfair trade practices which are prejudicial to public interest. As a part of the economic reform unshared 1991, the MRTP Act was drastically amended by repeating the provisions of the ct pertaining to concentration of economic power, except the provisions empowering the Government to diffuse concentration of economic power to the common detriment. In their words, the main thrust of the MRTP ACT now is the achievement of prevention of monopolistic, restrictive and unfair trade practices. Thus the ‘M’ has almost

been knocked out of the MRTP Act. In other words, large companies have been fraud from MRTP Act requirement of prior permission of the government for substantial expansion of existing undertakings, establishing new undertakings and M and A. i. The MRTP Act empowered the Central Government to control and prohibit those monopolistic, restrictive and unfair trade practices that are likely to be prejudicial to the public interest. ii. The act also empowered the commission to make any undertaking or person to pay compensation to the party who suffered a loss or damage as a result of the unfair trade practice carried on by the undertaking or person. iii. The MRTP Act was criticized because of its growth detecting provisions. We had a very important situation of not allowing Indian companies to grow by capacity expansion, establishment of new unit or by M and A because of the short supply importing goods produced by foreign multinationals which were far larger in size than the Indian biggies, spending the scare foreign exchange. As mentioned earlier, the high level committee on competition policy and law has recommended that a new law called the Indian competition at may be enacted and the MRTP ACT may be repeated. The MRTP Act, besides adversely affecting economic growth, blunted Indian companies ability to grow, consolidate and improve competitiveness. This has had a very dampening affect on their global competitiveness.

Restrictions on Foreign Capital and Technology
The scope of use of foreign capital and technology was limited operation of foreign companies in India and issue of securities abroad by Indian companies was regulated under the Foreign Exchange Regulation Act (FERA), 1973.

The New Industrial Policy
The Industrial Policy announced on July 24, 1991 which assures the economic reform in India has enormously expanded the scope of the private sector by opening up most of the Industries for the private sector and removes the entry and growth restrictions. Adjective such as ‘Dramatic’ ,’revolutionare’, ’drastic’ etc have been used to describe the nature of the change in Industrial Policy. The Industrial Policy reforms have reduces the industrial licensing requirements, remove restrictions on investment and expansion and facilitate easy access to foreign technology and foreign direct investment (FDI).

Question-13. What is the pattern of Industrial Growth since1991? Or Question – Draw a sketch of the pattern of Industrial Growth since 1991 Answer:
Since 1991, industrial policy measures and procedural simplifications have been reviewed on an ongoing basis. Presently, there are only six industries which require compulsory licensing.

Similarly, there are only three industries reserved for the public sector. Some of important policy measures initiated since 1991 are set out below: · Since 1991, promotion of foreign direct investment has been an integral part of India’s economic policy. The Government has ensured a liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership. FDI up to 100 per cent has also been allowed under automatic route for most manufacturing activities in Special Economic Zones (SEZs). More recently, in 2004, the FDI limits were raised in the private banking sector (up to 74 per cent), oil exploration (up to 100 per cent), petroleum product marketing (up to 100 per cent), petroleum product pipelines (up to 100 per cent), natural gas and LNG pipelines (up to 100 per cent) and printing of scientific and technical magazines, periodicals and journals (up to 100 per cent). In February 2005, the FDI ceiling in telecom sector in certain services was increased from 49 per cent to 74 per cent. · Reservation of items of manufacture exclusively in the small scale sector has been an important tenet of industrial policy. Realizing the increased import competition with the removal of quantitative restrictions since April 2001, the Government has adopted a policy of De-reservation and has pruned the list of items reserved for SSI sector gradually from 821 items as at end March 1999 to 506 items as on April 6, 2005. Further, the Union Budget 200506 has proposed to de-reserve 108 items which were identified by Ministry of Small Scale Industries. The investment limit in plant and machinery of small scale units has been raised by the Government from time to time. To enable some of the small scale units to achieve required economies of scale, a differential investment limit has been adopted for them since October 2001. Presently, there are 41 reserved items which are allowed investment limit up to Rs.50 million instead of present limit of Rs.10 million applicable for other small scale units. · Equity participation up to 24 per cent of the total shareholding in small scale units by other industrial undertakings has been allowed. The objective therein has been to enable the small sector to access the capital market and encourage modernization, technological up-gradation, ancillarisation, sub-contracting, etc. · Under the framework provided by the Competition Act 2002, the Competition Commission of India was set up in 2003 so as to prevent practices having adverse impact on competition in markets. · In an effort to mitigate regional imbalances, the Government announced a new North-East Industrial Policy in December 1997 for promoting industrialization in the North-Eastern region. This policy is applicable for the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura. The Policy has provided various concessions to industrial units in the North Eastern Region, e.g.,10 development of industrial infrastructure,

subsidies under various schemes, excise and income-tax exemption for a period of 10 years, etc. North Eastern Development Finance Corporation Ltd. has been designated as the nodal disbursing agency under the Scheme. · The focus of disinvestment process of PSUs has shifted from sale of minority stakes to strategic sales. Up to December 2004, PSUs have been divested to an extent of Rs.478 billion. · Apart from general policy measures, some industry specific measures have also been initiated. For instance, Electricity Act 2003 has been enacted which envisaged to delicense power generation and permit captive power plants. It is also intended to facilitate private sector participation in transmission sector and provide open access to grid sector. Various policy measures have facilitated increased private sector participation in key infrastructure sectors such as, telecommunication, roads and ports. Foreign equity participation up to 100 per cent has been allowed in construction and maintenance of roads and bridges. MRTP provisions have been relaxed to encourage private sector financing by large firms in the highway sector. Evidently, in the process of evolution of industrial policy in India, the Government’s intervention has been extensive. Unlike many East Asian countries which used the State intervention to build strong private sector industries, India opted for the State control over key industries in the initial phase of development. In order to promote these industries the Government not only levied high tariffs and imposed import restrictions, but also subsidized the nationalized firms, directed investment funds to them, and controlled both land use and many prices. In India, there has been a consensus for long on the role of government in providing infrastructure and maintaining stable macroeconomic policies. However, the path to be pursued toward industrial development has evolved over time. The form of government intervention in the development strategy needs to be chosen from the two alternatives: ‘Outward-looking development 11 policies’ encourage not only free trade but also the free movement of capital, workers and enterprises. By contrast, ‘inward-looking development policies’ stress the need for one’s own style of development. India initially adopted the latter strategy. The advocates of import substitution in India believed that we should substitute imports with domestic production of both consumer goods and sophisticated manufactured items while ensuring imposition of high tariffs and quotas on imports. In the long run, these advocates cite the benefits of greater domestic industrial diversification and the ultimate ability to export previously protected manufactured goods, as economies of scale, low labour costs, and the positive externalities of learning by doing cause domestic prices to become more competitive than world prices. However, pursuit of such a policy forced the Indian industry to have low and inferior technology. It did not expose the industry to the rigours of competition and therefore it resulted in low efficiency. The inferior technology and inefficient production practices coupled with focus on traditional sectors choked further expansion of the India industry and thereby limited its ability to expand employment opportunities.

Considering these inadequacies, the reforms currently underway aim at infusing the state of the art technology, increasing domestic and external competition and diversification of the industrial base so that it can expand and create additional employment opportunities.

Question –14. What do you understand by Industrial Lincensing? Answer:
Industrial Licensing Industrial policy means rules, regulations, principles, policies and Industrial policy means rules, regulations, principles, policies and procedures laid down by government for regulating, developing procedures laid down by government for regulating, developing and controlling industrial undertakings in the country. and controlling industrial undertakings in the country. It prescribes the respective roles of the public, private, joint and It prescribes the respective roles of the public, private, joint and co-operative sectors for the development co-operative sectors for the development of industries. Incorporates fiscal and monetary policies, tariff policy, labour Incorporates fiscal and monetary policies, tariff policy, labour policy and government attitude towards foreign capital, and role topolicy and government attitude towards foreign capital, and role tobe played by multinational corporations in the development of thebe played by multinational corporations in the development of the industrial sector. Government of India has formulated policies for industrial growth Government of India has formulated policies for industrial growth and development. INDUSTRIAL LICENSINGPOLICY POLICY Automatic clearance if (where imported capital good is required) Automatic clearance if (where imported capital good is required) In case for-ex availability is assured through foreign equity In case for-ex availability is assured through foreign equity If CIF (corporate investment funding) value of imported capital If CIF (corporate investment funding) value of imported capital good required is less than 25% of total value up to maximum

good required is less than 25% of total value up to maximum value of Rs 2 crore value of Rs 2 crore If population of cities is less than 1 million then no government is If population of cities is less then 1 million then no government is required (25 KM). Phase manufacturing program will not be applicable to new projects. Existing unit will be provided a new broad banding Existing unit will be provided a new broad banding facility to enable them to produce any article without facility to enable them to produce any article without any additional investment. All existing registration scheme will be abolished All existing registration scheme will be abolished (De-licensed registration Exempted Industries Registration, DGTD) Entrepreneur will henceforth only be required to file an Entrepreneur will henceforth only be required to file an information on new projects and substantial expansion information on new projects and substantial expansion.

Question –15. How can we analyze Public sector Reforms in India? Write down the Objectives of Public Sector Reforms. Answer:
The effectiveness and efficiency of a country's public sector is vital to the success of development activities, including those the World Bank supports. Sound financial management, an efficient civil service and administrative policy, efficient and fair collection of taxes, and transparent operations that are relatively free of corruption all contribute to good delivery of public services. The Bank has devoted an increasing share of its lending and advisory support to the reform of central governments, so it is important to understand what is working, what needs improvement, and what is missing. IEG has examined lending and other kinds of Bank support in 1999-2006 for public sector reform in four areas: public financial management, administrative and civil service, revenue administration, and anticorruption and transparency. The public sector is the largest spender and employer in virtually every developing country, and it sets the policy environment for the rest of the economy. About one-sixth of World Bank projects in recent years have supported public sector reform, because the quality of the public sector— accountability, effectiveness and efficiency in service delivery, transparency and so forth — is thought by many to contribute to development. Improving the efficiency of government counterparts is also essential for the effectiveness of the Bank's support for development.

The public sector in India is composed of a number of segments. The first is government itself, the central government, state governments and local governments; the second category is that of "departmental enterprises" which are run directly by government departments and are not separately incorporated. This category includes enterprises such as the railways, the post office and the telecommunication system. The third category is of "non-departmental enterprises" which are separately incorporated and run as independent companies. This category includes both manufacturing and non-manufacturing enterprises. Some idea of the expanding role of the public sector can be easily understood. The public sector as a whole has increased its share in GDP from about 8 percent in 1960-61 to about 26 percent in 1991-92. The increase in share has been continuous over this whole period. However, various features can be noted. First, the agriculture sector has remained substantially in private hands as has the trading sector. The nationalisation of the coal mining industries in the early 1970s increased the government share to 100 percent and it has remained so ever since. It is only now that almost all mining, except for coal, has been freed from public sector reservation. The key change in the structure of ownership in the manufacturing sector took place during the 1950s and 1960s. Similar is the case for utilities. The increased public sector share in construction in the 1980s is probably a consequence of better implementation of public sector infrastructure investment during the 6th and 7th five year plan periods along with the spread of public sector housing construction through the spread of housing boards in different states. The declining share in transport and communication may be attributed to the absence of the public sector in the transport of goods by road. The share of road haulage has been increasing consistently with respect to the railways. In the case of banking and insurance the bank nationalisation carried out in 1969 and further in the 1970s is reflected in the increasing share of the public sector in the 1970s and stability thereafter.

Within the public sector it is also possible to observe the changing share of central public sector enterprises during the 1980s. The only significant change that took place in this share was in communications where a part of the telecommunications government monopoly was corporatised in 1986-87. The telephone services in Bombay and New Delhi were separated into a separate public sector enterprise called Mahanagar Telephone Nigam Limited (MTNL). Otherwise there was no significant increase in the presence of public sector enterprises in the overall production structure in the country during the 1980s.

The productivity of public sector investment may be seen by comparing tables 3 and 4 with table 1 and 2. Whereas gross domestic capital formation varied from 40% to 50% as a share of the total between 1960-61 and 1991-92, the share of the public sector in GDP ranged from only 8% to 26%. The difference in these shares is most evident in the manufacturing sector where the public sector share of gross domestic capital formation ranged between about 25% and 40% of the total while its share in GDP was between 5% and 17% only. This reflects the heavy industry strategy pursued by the government and the particular presence of public sector enterprises in capital intensive sectors. In addition to the original PSEs, the government acquired a large number of enterprises which were earlier owned by the private sector but were approaching bankruptcy. The accumulation of financing problems in the public sector towards the late 1980s is illustrated by Table 5 which displays the rapidly changing financing structure of central public enterprises between 1985-86 and 1994-95. Whereas at the beginning of the period, budgetary resources were being provided for investment in public enterprises for almost 50% of their investment requirements. This share has fallen less than 20% in the mid 1990s. Correspondingly, internal and external budgetary resources increased from about 50% to over 80% of total resources required for investment by the PSEs over the same period. The share of direct borrowing within that increased from about 15% to about 25%. These data illustrate the impact of the deteriorating fiscal situation on the resources requirement of public sector enterprise. The government can simply not afford to play an active role as an owner in sustaining these enterprises in the industrial sector in the medium term future without being extremely selective. The increasing exposure of PSEs to both domestic and external debt may also lead to problems of sickness in the future. If the government as the owner is no longer able to supply adequate volumes of equity in support of the financing requirements for new investment there is little alternative to the sharing of equity outside the government. Therefore the need for different degrees of disinvestment or privatisation are indicated by these data. Industrial Structure of Public Sector Enterprises

It has already been shown that the total share of central public sector enterprises in manufacturing is of the order of 14% to 15% in total manufacturing output (both organised and unorganised). The public sector had originally been designed to accelerate the diversification of Indian industry and deepening of the industrial structure towards heavy industry (the capital goods and intermediate goods sectors). Consequently the share of the public sector in sectors such as basic metals and machinery is still over 25%. In other sectors such as chemicals and

transport equipment, this share is 15% to 20%. Despite the large number of enterprises in light industry sectors the share in output of the public sector in textiles and consumer goods is much less than 5%. In areas such as the energy and the non ferrous metals sectors the public sector has been dominant with almost 100% share at present. The other leading areas for public sector presence are steel and fertilisers. Thus, of the total investment in the central public sector, about 60% is in areas of steel, minerals and metals, coal and lignite, and power and petroleum. These are exactly the sectors which can be regarded as the commanding heights of the economy which were originally identified for investment by the public sector. As may be seen from Table 8, while public sector presence has declined over the last 20-25 years in other heavy industry areas such as engineering and transport equipment, and in fertilisers, chemicals, and pharmaceuticals, it has increased in light manufacturing areas and in non manufacturing activities. Although the share of public enterprises in the total output for these areas is not high, there are more than 100 enterprises in these latter two categories where public enterprises were not originally intended to exist. Thus there has been an increasing proliferation of public sector enterprises in what might be termed as low priority sectors of the economy where there is significant competitive presence of the private sector. To the extent that management resources are scarce, this proliferation must inflict a significant drag on the ability of the government to manage the other enterprises whose share in investment is much greater.

Objectives of Public Sector Reforms
The objectives for restructuring of public sector enterprises through Public sector reforms should be very specific and clear. These are as follows: 1. 2. 3. 4. 5. 6. 7. Faster industrial growth Improvement in productivity Deepening of Indian technological capability Development of the Indian corporate sector Further development of the Indian capital market. Fiscal restructuring Freeing public resources for investment in public goods such as basic health and education.

The means of achieving these objectives involve considerations such as the injection of greater competition into the industrial economy in order to foster a healthier market structure. As has been outlined earlier, the overall reform process has provided for free entry into almost all sectors in manufacturing from both domestic and foreign investors, and is progresively opening up the economy to freer external trade with the elimination of trade restrictions and reduction in

tariffs. There is, as yet, little explicit consideration being given to the active practice of competition policy: the assumption being that more open trade will perform this function effectively, along with the freer entry.

Question. 16 .What are the recent trends of liberalisation, privatization and globalisation in India? or Question. What is privatization? What are its motives? Has Indian economy grown faster with privatization? May 2011 Ans.
Indian Economy: Recent Trend of Globalisation and Liberalisation For the Indian economy to grow with equality and economic justice, the informal sector, homebased production and cottage industries need to achieve high growth with policy and institutional support. The contribution of these sectors to any economy cannot be ignored. This is especially true for a country like India, as they are important sources of employment and income for many families. They have 40 percent share in the total industrial output, 35 percent in exports, and over 80 percent in employment. However, many of such sectors are not doing well in this era of globalisation, which encompasses economic liberalisation. It has been found that in order to overcome the challenges and avail opportunities of globalisation and economic liberalisation, these sectors and associated entrepreneurs need institutional support for technology upgradation, infrastructure support for market penetration, and adequate working capital finance from the banking sector. India embarked upon the process of economic liberalisation in 1991. Since then liberalization has exposed all industrial units including small home-based enterprises in the informal sector to the inherent risks of free market competition. Globalisation has intensified the market competition by allowing imports and multinational corporations. The reform process of the Indian economy has a far reaching impact on Indian informal sector. Most of the problems, during this era of economic liberalisation, arise due to the unorganised nature of the sector, lack of data and information, use of low technology and poor infrastructure of the sector. The setting up of the WTO (World Trade Organization) in 1995 has intensified global competition. The World Trade Organization regulates multilateral trade and enforces its member countries to remove import quotas and other import restrictions, and to reduce import tariffs. In addition, countries, especially the developing countries, are asked to stop subsidies to exports as well as to domestic production. As a result, every single individual enterprise in India, small or large, whether exporting or serving the domestic market, has to face competition. In India, selective dereservation of some SSI products and removal of QRs (Quantitative Restrictions) have started taking place with a view to enhancing exports and competing effectively in the global market. Out of 836 items reserved for production under SSI, 162 items have been dereserved and almost all the items are placed on the OGL (open general license) list of imports. This opens up the possibility of direct competition in the domestic market with

the imports of high quality goods from the developed countries and cheap products from the other less developed countries. Competition in the domestic market would further be intensified with the arrival of multinational companies as the restrictions on foreign direct investment have been removed. Removal of quantitative restrictions and lowering tariffs are creating a serious impact on the small and informal sector, leading to closure of some units and consequent displacement of labour. In view of several desirable socio-economic objectives, Abid Hussain Committee made out a strong case for support and promotional policies to encourage the development of SSIs left to free market forces. The committee recommended to effectively addressing the problems faced by the SSI units. The silver lining amidst the fierce competition lies in exploiting the opportunities of globalization in terms of outsourcing, sub- contracting and ancillarisation of the products manufactured by corporate. To be able to face competition in a level playing ground the Indian informal sector needs to be endowed with technological upgradation and modernisation. In the changing economic scenario, it is the knowledge-based technology, organization and information which will be able to improve the quality and competitiveness of products and thus help to face competition from imports. The free economy will usher in accessibility to bigger markets, greater linkages for SSI with larger companies and marketing outfits, improved manufacturing techniques and processes. However, the sector is afraid of adopting new technology because of the huge initial capital investment and adjustment of production process, uncertain input supply, marketing prospect and profit of the products manufactured with new technology. Other major impediments are lack of knowledge of technology sourcing, evaluation and demonstration facilities, lack of surveys and feasibility studies etc. Therefore, for the development of this sector there needs to be a major thrust on technology intervention in clusters which offers the small units an opportunity and easier access to get acquainted with new technologies. Civil society and government agencies can play a significant role in educating small units about the changes in the business environment and the necessity of going in for technological upgradation. Civil society organizations are mostly unable to come to a platform for conducting meaningful dialogues (exchange of information and views), taking forward the outcomes at appropriate levels and disseminate the learning to their respective constituencies. Thus, there is the need to facilitate the process of learning (through exchange of information and views) for policy advocacy at different levels. This will go a long way to instill trust and confidence in these units. Current Phase of Globalization Globalization, of course, is not a new phenomenon. The period 1870 to 1913 experiences a growing trend towards globalization. The new phase of globalization which started around mid 20th century became very wide spread, more pronounced and over charging since the late 1980s by getting more momentum from the political and economic changes that swept across the communist countries, the economic reforms in other countries, the latest multilateral trade agreement which seeks to substantially liberalize international trade and investment and the technological and communication revolutions. There are several similarities and differences between the two phases of globalization. The Human Development Report, 1999, mentioned the following as the new features of current phase of globalization: 1) New Market

Growing global markets in services- banking, insurance, transport. New financial markets- deregulated, globally linked, working around the clock, with action at a distance in real time, with new instruments as derivatives. • Deregulation of antitrust laws and proliferation of mergers and acquisitions. • Global consumers market with global trends. 2) New Actors  Multinational corporations integrating their production and marketing, dominating food production.  The World Trade Organization- the first multilateral organization with authority to enforce national governments’ compliance with rules.  An international criminal court system in the making.  A booming international network of NGOs.  Regional blocs proliferating and gaining importance- European union, Association of South-East Asian Nations, Mercosur, North American Free Trade Association, Southern Africa Development Community, among many others.  More policy coordination groups- G-7, G-40, G-22, G-77, OECD. 3) New Rules and Norms • Market economic policies spreading around the world, with greater privatization and liberalization than in earlier decades. • Widespread adoption of democracy as the choice of political regime. • Human rights conventions and instruments building up in both coverage and number of signatories and growing awareness among people around the world. • Consensus goals and action agenda for development. • Conventions and agreements on the global environment- biodiversity, ozone layer, disposal of hazardous wastes, desertification, and climate change. • Multilateral agreement in trade, taking on such new agenda as environmental and social conditions. • New multilateral agreement for services, intellectual property, communications, more binding on national governments than any previous agreements. • The Multilateral Agreement on Investment under debate. 4) New (Faster and Cheaper) Tools of Communication • Internet and electronic communication linking many people simultaneously. • Cellular phones. • Fax machines • Faster and cheaper transport by air, rail and road. • Computer aided design. Privatization The public sector accounts for about 35 percent of industrial value added in India, but although privatization has been a prominent component of economic reforms in many countries, India has been ambivalent on the subject until very recently. Initially, the government adopted a limited approach of selling a minority stake in public sector enterprises while retaining management control with the government, a policy described as “disinvestment” to distinguish it from privatization. The principal motivation was to mobilize revenue for the budget, though

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there was some expectation that private shareholders would increase the commercial orientation of public sector enterprises. This policy had very limited success. Disinvestment receipts were consistently below budget expectations and the average realization in the first five years was less than 0.25 percent of GDP compared with an average of 1.7 percent in seventeen countries reported in a recent study. There was clearly limited appetite for purchasing shares in public sector companies in which government remained in control of management. In 1998, the government announced its willingness to reduce its shareholding to 26 percent and to transfer management control to private stakeholders purchasing a substantial stake in all central public sector enterprises except in strategic areas.iii The first such privatization occurred in 1999, when 74 percent of the equity of Modern Foods India Ltd. (a public sector bread-making company with 2000 employees), was sold with full management control to Hindustan Lever, an Indian subsidiary of the Anglo-Dutch multinational Unilever. This was followed by several similar sales with transfer of management: BALCO, an aluminium company; Hindustan Zinc; Computer Maintenance Corporation; Lagan Jute Machinery Manufacturing Company; several hotels; VSNL, which was until recently the monopoly service supplier for international telecommunications; IPCL, a major petrochemicals unit and Maruti Udyog, India’s largest automobile producer which was a joint venture with Suzuki Corporation which has now acquired full managerial controls.

If the economic reforms have given us an opportunity in terms of greater access to global markets and high technology, it has also compromised the welfare of people belonging to poor section. The crisis that erupted in the early 1990s was basically an outcome of the deep rooted inequalities in Indian society and the economic reform policies initiated as a response to the crisis by the government, with externally advised policy package, further aggravated the inequalities.. Further, it has increased the income and quality of consumption of only high-income groups and the growth has been concentrated only in some select areas in the services sector such as telecommunication, information technology, hospitality etc
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency, public service or property from the public sector (the state or government) to the private sector (businesses that operate for a private profit) or to private non-profit organizations. The term is also used in a quite different sense, to mean government outsourcing of services to private firms, e.g. functions like revenue collection, law enforcement, and prison management. The term "privatization" also has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company's stock, privatizing a publicly traded stock, and often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint stock company.

Privatisation generally is believed to improve the output, profits and efficiency of the organisations that are privatised. The repurchasing of all of a company's outstanding stock by employees or a private investor. As a result of such an initiative, the company stops being publicly traded. Sometimes, the company might have to take on significant debt to finance the change in ownership structure. Companies might want to go private in order to restructure their businesses (when they feel that the process might affect their stock prices poorly in the short run). They might also want to go private to avoid the expense and regulations associated with remaining listed on a stock exchange. also called going private. opposite of going public. The process of moving from a government controlled system to a privately run, for-profit system.

Question.17. What is SMEs, Explain the problems and growth of SMEs in India? Ans.
Small and medium enterprises (SMEs ) also known as small and medium scale enterprises are the essential part of healthy economy. The SME sector represents over 90 percent of enterprises in most of the developing countries and contribute 40-60 percent of the total output or value added to the national economy. SME sector in India is the key driver of the nation's economic growth with a contribution of over 40 percent of the country's industrial output and about 35 percent of direct exports and another 15 percent of indirect exports. In terms of employment it is a very crucial sector being the second largest sector after agriculture. In recent years the SME sector has consistently registered higher growth rate compared to industrial sector. Small is beautiful but is it Powerful? Yes, say the SMEs. The growth recorded by SSI in India is 2% more than any other sector; it accounts for 40% of the country’s GDP, 35% of Direct exports, 15% of Indirect Exports (through Merchant Exporters, Trading Houses & Export Houses) and employs more than 20 million people. The SSIs needs just Rs. 60, 000 – 70, 000 to generate employment for one man, while for the same a whopping 5- 6lakhs is required for other sectors. SME sector faces a number of problems - absence of adequate and timely banking finance, limited knowledge and non-availability of suitable technology, low production capacity, ineffective marketing and identification of new markets, constraints on modernization and expansions, non availability of highly skilled labour at affordable cost, follow up with various agencies in solving regular activities and lack of interaction with government agencies on various matters. SMEs have strong technological base, international business outlook, competitive spirit and willingness to restructure them shall withstand the present challenges and come out with shining colours to make their own contribution to the Indian economy. ROLE OF SMES IN ECONOMY

Due to fast developing modern technologies and production scales, the small and medium enterprises have become very critical for economic growth. This sector is now very important for those nations whose desire is to be prosperous as it is the starting point of industrial development. Large Scale Enterprises (LSEs) of today were SMEs in the past and SMEs of today would be LSEs of tomorrow. This rule holds good for all countries of the world. SME’S IN DIFFERENT SECTORS OF INDIAN INDUSTRY: SMEs have been established in almost all-major sectors in the Indian industry such as:  Food Processing  Agricultural Inputs  Chemicals & Pharmaceuticals  Engineering; Electricals; Electronics  Electro-medical equipment  Textiles and Garments  Leather and leather goods  Meat products  Bio-engineering  Sports goods  Plastics products  Computer Software, etc. SIGNIFICANCE OF SMES SMEs are considered the engine of economic growth in both developed and developing countries as they:  Provides low cost employment since the unit cost of persons employed is lower for SMEs than for large sized units.  Assists in regional and local development since SMEs accelerate rural industrialization by linking it with more organized urban sector.  Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities.  Contribute significantly to export revenues because of the low cost labour intensive nature of its products.  Have a positive effect on the trade balance since SMEs generally use indigenous raw materials, reducing dependence on imported machinery, raw material or labour.  Assist in fostering self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes.  Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self-sufficiency.  Firms with sales less than $1 million spend 2x - 3x more on R&D per $ of sales than the average. And result is SMEs’ producing 55 percent more innovations than LSEs’.1  Converts the raw material within the country into semi-finished items and later pass it on the LSEs that have capital, skill and equipment to process these into finished goods.

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Provide rural people an opportunity for income generation and personal growth since they can work at home. This helps to achieve fair and equitable distribution of wealth by creating nationwide non-discriminatory job opportunities. Attracts direct foreign investment since multinationals and big conglomerates have started to outsource from countries with strong SME sectors. The low labour cost makes production of semi finished goods very economical for large concerns operating in international markets. The SMEs act as engines through which the growth objectives of developing countries can be achieved.

Growth of SME
ROAD MAP FOR THE DEVELOPMENT OF MICRO DEVELOPMENT UNIT IN THE 11TH PLAN The limit set for investment in the micro units is a major hindrance in this era of Globalization and competitiveness. The limit has been increased to 5 crores. Steps for development of MSE in the eleventh plan are as follows. (1) It has been targeted to raise the production of MSE units to 13,98,803 cores for the year 2011-12. employment has been planned to be increased from 322.28-391.73 lakhs (2) In the MSE scheme in the eleventh plan, previously the manifesto was good for all which has been turned to development. Regarding this, the document (VOL III p. 203) it has been informed that "The eleventh plan approach to the MSE sector marks shift from welfare approach to that of empowerment. The plan looks at the sector as an engine for sustained and inclusive economic growth and employment. The eleventh plan emphasizes on the improvement of living standard of workers and believes that only if a worker is physically and mentally sound, then will he be able to produce a good output. (3) In the eleventh plan, as the MSE sector is unorganized, the plan aims at organizing it so that MSE sector gets maximum benefit of all the govt. schemes and plans. (4) In the eleventh plan, MSE groups have been taken as a cluster and workers have been made into a group (SHGS) so that their bargaining power is increased (5) The MSE sector gets a loan of 5 lakh for 8 % interest without any bailee will be encouraged a vehement drive will be undertaken, to develop this sector. (6) Centre and the state govt. will give prime importance to the MSE sector. Women working in this sector, get their due rights, for that efforts will be made. (7) Technical information will be provided to Small Industries Development Organization now known as Micro, Small and Medium Enterprises Development Organization which has around 3000 technicians who work in testing centres, tool rooms, etc. (8) Ministry of MSME has been formed for the development of Micro, Small and Medium Industries. In the eleventh plan, it has been decided to establish Technology mission, which will help develop dissemination of technology. (9) In the year 2006, the govt. started the National Manufacturing Competitiveness Programme. Under it in 5 years, at the cost of 850 crores, design clinics, steps to increase the competitiveness of groups, and decrease the wastage will be undertaken. (10) This sector faces basic problems like that of electricity. In the eleventh plan it has been suggested, that these small and micro units establish their own power plants.

(11) Owing to the industrial laws and disputes act, the worries of this sector have increased. According to the planning commission, it has been advised to form a third party which will investigate into the matter. THE NON GOVERNMENT PROMOTION STRUCTURE: There are three national associations representing all type of industries, small and large. These are 'Federation of Indian Chambers of Commerce and Industries' (FICCI), Confederation of Indian Industries (CII) and 'Associatioan of Chambers of Commerce and Industries' (ASSOCHAM). These associations represent mainly the interests of large scale industries. However, these associations have membership of small sector as well and represent mainly the policy related interests of SSI sector. The Indian auto component industry is poised for robust growth till 2010. There is a perceptive exuberance in the industry and growth estimates indicate a booming industry. Going by current trends in production and exports of auto components, indicate a doubling of the domestic auto component industry by 2010. The production of auto components could grow to US$22 bn by 2010. Similarly, India’s exports of auto components could grow to US$4.5 bn as compared to US$1.8 bn in 2005. CHALLENGES & PROBLEMS OF SMALL AND MEDIUM SCALE ENTERPRISES IN INDIA: In the current economic slowdown SME sector has been hit very hard due to raising interest rates and financial crunch. The small size and capacity of the firms and their lack of awareness have bred many hindrances to their growth such as Under-utilization of capacity, Inadequate and untimely credit flows, Inability in technology up gradation, Insufficient raw-material procurement Inability to market finished goods and Ineffective monitoring and feedback mechanism. The problem which continues to be a big hurdle for the development of the sector is the lack of access to timely and adequate credit. Increasing competition and globalization, along with the need to produce quality products at best prices, have prompted the industry to introduce new product development methods with modern technology. The need to evolve technologically superior methods of product development holds true, especially for players in the SME segment. The small and medium enterprise sector is widely regarded as the engine of the Indian economy. Small and medium enterprises (SME) contribute to the industrial, economic, technological and regional development in all developed and developing countries. The Indian SME market is valued at $5 million. The 11 million SME units, which make up the Indian SME sector. Produce over 8000 products. These constitute 95 % of all industrial units and contribute 40% to industrial output. The SME sector also plays a significant role in the development of entrepreneurial skills and forms a substantial portion of the country’s export earnings. The contribution of SME’s in the industrial development of the country has been remarkable. At the state level, the government has played the major role in ensuring growth by establishing various institutes to support this sector. Which include small industry Development Corporations (SIDC) and several Centers for Entrepreneurship Development (CEDs). There are many institutes that currently support SMEs at the national level. These include the National Research Development Corporation (NRDC) and the Bureau of Indian Standards (BIS). However, since the early 1990’s Indian SMEs have been exposed to intense Competition due to increasing globalization. This has made survival and growth of this sector difficult.

INFRASTRUCTURE DEVELOPMENT The quality of the infrastructure affects the growth prospects of SMEs to a great extent, especially in a developing country like India . Here, 77% of the population lives in villages. Many rural areas still suffer due to the deplorable state of basic infrastructure like transport, telecommunications and electricity. The integration of rural industries with mainstream industries is proving to be difficult for these reasons. This has been identified as a key deterrent to the growth of SME clusters in rural areas. TECHNOLOGICALLY HANDICAPPED Technology plays a crucial role in the development of SMEs. Technology not only helps in evolving a multipronged strategy but also in maximizing business opportunities for these enterprises. Technologies for SMEs should aim at fuelling innovation and business agility. They should be easy to integrate with existing systems and processes, and help in leveraging communicate and information management. Today, most SMEs in rural areas undertake manufacturing using old methods and outdated technology. But today, the competition is fierce, unlike in the past, when buyers were simply looked forward to purchasing the best products at the lowest prices. There are additional challenges to be met. The influx of low-cost products from china has made it even more difficult for Indian manufacturers to compete solely on the price front. China is considered the world’s manufacturing backyard, due to its low manufacturing and labour costs when compared to those in India. UPCOMING MARKET TRENDS AND INFORMATION One of the factors limiting the growth of SMEs is the lack of adequate information. Once SMEs start the business, they may be interested in knowing about the suppliers of specific machinery that suit their needs, technical information and market trends for their products. This information is rarely available at the grassroots level. NEW PRODUCT DEVELOPMENT The SME market requires a strong new product development base. In India, most SMEs work on the designs given to them by domestic or foreign buyers. There is very little innovation in product design development, and even the technology used by the SMEs in India is Outdated. This has direct implication on the profit margins, and a dip in productivity levels. The use of traditional tools, old techniques, poor labour productivity, they have not been used to a large extent, resulting in no substantial effect on the output. MARKETING PROBLEMS: The nature of marketing is ever changing so does the problems associated with the marketing. The Indian SMEs are facing a lot of problems related to marketing in the national and international arenas. This is mainly due to the fact that these organizations belong to rural or semi urban areas where the resources are easily available to them and cheap labour is associated with . But when it comes to selling of these products the SMEs have to face a difficulty in creating an impression and awareness in the minds of urban and other potential buyers about the quality and related aspects of their products and services. THE WAY AHEAD

There e is a strong need to find ways to manage modern technology and labour market constraints, which impede the productivity of SMEs. Policy-makers and research institutions have repeatedly pointed out to the need for extensive research on the SME sector. What these SMEs need today is knowledge and access to new technology, adequate financial aid, high levels of R&D and adaptability to the changing trends in their respective industries. With the increasing competition, globalization and the uncertainty due to the global downturn, SMEs will have to continuously incorporate the latest technology into their production processes as well as in their marketing and management functions, to cut costs, gain efficiency and consistency. This will help them become successful, and contribute to the Indian economy in the long run. Overall, the small industry sector has performed well, and has enabled the country to achieve considerable industrial growth and diversification.

Question.18. Define and explain industrial sickness. What are the major causes and remedial measures for Industrial sickness? Answer. Industrial Sickness
Industrial sickness is defined in India as "an industrial company (being a company registered for not less than seven years) which has, at the end of any financial year, accumulated losses equal to, or exceeding, its entire net worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year". “A sick unit is one which is not healthy. To an investor, it is one which skips dividends”. To a industrialist, “a unit which is making losses and tottering on the brink of closure.” To a Banker, “It is a unit which has incurred cash losses in the previous year and is likely to repeat the performance in current and following years.” The sick Industrial companies (special provisions)act, 1985 as amended in 1993 defines a sick industrial company as an company (being a company registered for not less than five years)which has at the end of any financial year accumulated losses equal to or exceeding its entire net growth. Meaning for common people Industrial sickness is an umbrella term applied to various things associated with industry that make people ill and cause them to miss work. The solutions will have to be tailored to the specific industry, and only in that way can any real effect be made on improving the health and productivity of the industrial workforce. The key is an aggressive work-up on the health issues for a given segment of the industrial workforce, and usually broken down by type of work (which makes sense). Even as coal miners face overpowering respiratory threats, and foundry and mill workers have to confront major physical threats from large (heavy) quantities of extremely hot materials, each facet of industrial production has its hot-button health issues.

Industrial health managers need training and experience identifying and remediating conditions that present major health threats to their respective workforces. Then they can train the rest of management and can teach the workers themselves about the best way to carry out their jobs with minimum threats to their health.

Meaning for companies
Under the repealed Sick Industrial Companies (Special Provisions) Act, 1985 (the SICA), a moratorium period of five years was given before an industrial company could either embrace sickness or declared to be sick. But under the new dispensation for addressing industrial sickness that is a part of the Companies Act 1956 itself, no moratorium period whatsoever seems to have been given as would be evident from the definition of `sick industrial company' given thereunder:

Clauses for Sick Industrial Company
According to Companies Act, 2002 "`Sick Industrial Company' means an industrial company which has i) The Accumulated losses in any financial year equal to 50 per cent or more of its average net worth during four years immediately preceding such financial year; or ii) Failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company."

The above definition tell us that, one may say that moratorium period has after all not been done away with — if anything, it has been retained at the same level of five years. It is clear that the moratorium period has been completely done away with. For, had the fouryear moratorium period been intended that would have been made a common factor for both clauses (i) and (ii). In the event, every industrial company would inevitably and invariably have to press the panic button needlessly in vast majority of cases and a trifle prematurely in others. This would happen because no industrial company can start making profit from year one. Gestation period ranges from a couple of years to a decade.

Industrial Sickness In India
Industrial sickness specially in small-scale Industry has been always a demerit for the Indian economy, because more and more industries like – cotton, Jute, Sugar, Textiles small steel and engineering industries are being affected by this sickness problem. As per an estimate 300 units in the medium and large scale sector were either closed or were on the stage of closing in the year 1976. About 10% of 4 lakhs unit were also reported to be

ailing. And this position also remain same in the next decades. At the end of year 1986, the member of sick units in the portfolio of scheduled commercial banks stood at 1.47,740 involving an out standing bank credit of Rs. 4874 crores.      Where the total number of large Industries which are sick were 637 units at the end of year 1985 increased to 714 units in the end of next year 1986. Likewise on the other hand the number of sick small scale units were also increased 1.18 lacks at the end of 1985 to 1.46 lakhs at the end of 1986. The bank amount which was outstanding in case of large industries for the same period also increased from Rs.2,900 crores to Rs. 3287 crores at the end of year 1986 Dues of Small Scale sector also increased from Rs.1071 crores to Rs.1306 at the end of the year 1986. Of the 147, 740 sick industrial units which contains large medium as well as small scale involving the total bank loan (credit) of Rs. 4874 at the end of the year 1986.

Causes of Industrial Sickness
Industrial unit may become sick the difference stages ad due to different reasons. Indeed, some industrial units “are born sick, some achieved sickness and some have sickness thrust upon them.”

Born Sick
Born Sick are those which are destines for disasters right from their conception due to various causes. A study conducted by the Institute of Economics, Hyderabad found that 50% of the dead closed within three years of opening. Any one or more of the following factors may cause the birth of sick units. 1) Lack of experience of promotions, wrong selection of project, faulty project panning, etc may give birth to sick units. 2) Pan city of funds and faulty financial management may also cause the birth of sick units 3) Time and cost overruns sometimes prove to very disastrous. Particularly in case of large projects, delays in project commissionaire due to the delay in supply of equipment both indigenous and imported slippage in the schedule of civil works creation of equipment etc. 4) Sickness may arise from location problems also. It has been observe that “high technology based unit are established in areas without skilled labor or supporting infrastructure.” 5) Technological factor like selection of obsolete or improper technology. 6) Wrong assessment of market potential or fully demand forecasting, change in market conditions including the change in customer taste and preferences.

Achieved Sickness
Those which are fail after becoming operational due to internal causes like – 1) Bad management, which “covers a wide range from in experience, ineffecting, lack of professional expertise, neglect and internal squabbles to delinquency and dishonesty.” 2) Unwanted expansion and diversions of resources

3) Poor Inventory Management (finished, semi finished and raw material also) 4) Failure to modernize the productive apparatus (Technological change) 5) Poor labour –management relationship

External causes
1) Energy crisis arising out of power cuts and shortage of coal and oil 2) Shortage of raw material du to production set back in supply industrial, poor agricultural output due to the natural reasons. 3) Infrastructure problem like transport bottleneck 4) Shortage of making capital/liquidity constraint 5) Natural calamities and extraneous change in the external environment.

Prevention and Curative Measure
As the Tiwari committee observes, “Industrial sickness tends to cause loss of production very often leading to unemployment /loss of employment and resulting in blocking of scares’ resources of the banks and financial institution, besides entailing loss of substantial revenue to the exchequer.” There are some loans which enable the Central Government to collect information from he different Industrial sector monitor and central the functioning of industrial undertakings and to deal with the problem of sickness. The company Act, 1956, empowers the government to collect information from the companies which would be enabling it to assess the state of affairs of the companies and to take certain measures to prevent mismanagement. The Industrial (Development and Regulation) Act, 1951(IDRA) empower the government to regulate management of industrial undertakings including the take –over of the management or the undertaking. The sick industrial companies (special provision) Act was passed in 1985 to deal with the problem of industrial sickness. In next section we will discuss in detail how SICA is deals with the problem of sickness and what re its objectives and roles.

Sick Industrial Companies Act
An important price of legislation dealing with industrial sickness was the sick Industrial companies (special provision) Act 1985. The objectives of the (SICA) were – 1) The timely detection of sick and potentially companies owning industrial undertaking. 2) The speedy determination by a board of experts of the preventative, ameliorative, remedial and other measures which need to be taken with respect to such companies. 3) The expedition’s enforcement of the measures so determined and for matters connected therewith or incidental thereto. According to SICA, amended in 1993 a sick industrial companies meant an industrial company (being a company registered for not less than five years) which had at the end of any financial year accumulated losses equal to or exceeding its entire net worth.

An industrial company regarded as potentially sick, if the accumulated losses of an industrial company as at the end of any financial year had resulted in the erosion of fifty percent or more of its peak net worth during the immediately preceding four financial years Under the Central Government establishment a board for Industrial and financial Reconstruction (BIFR) to exercise the jurisdiction and power and discharge the function and duties conferred or imposed on the Board by the Act. The SICA require the Board of directors of a sick industrial company to make reference to (BIFR) for determination of measures to be adopted with respect to the companies. The scheme could provide following measure – 1) The financial reconstruction of the company 2) The proper management of the sick industrial company by change in or take over of management of the sick industrial company. 3) The amalgamation of the sick industrial company with the sick companies the sale or any other company with the sick company. 4) The sale or lease of apart or whole of industrial undertaking of sick industrial company.

Causes of sickness in small scale industry
The different types of industrial sickness in Small Scale Industry (SSI) fall under two important categories. They are as follows:

Internal causes for sickness
We can say pertaining to the factors which are within the control of management. This sickness arises due to internal disorder in the areas justified as following: a) Lack of Finance: This including weak equity base, poor utilization of assets, inefficient working capital management, absence of costing & pricing, absence of planning and budgeting and inappropriate utilization or diversion of funds. b) Bad Production Policies : The another very important reason for sickness is wrong selection of site which is related to production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality control, lack of standard research & development and so on. c) Marketing and Sickness : This is another part which always affects the health of any sector as well as SSI. This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods, and bad sales promotions. d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is inappropriate personnel management policies which includes bad wages and salary administration, bad labour relations, lack of behavioural approach causes dissatisfaction among the employees and workers. e) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or bad corporate management which includes improper corporate planning, lack of integrity in top management, lack of coordination and control etc.

External causes for sickness
a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of skilled labour or manpower wages disparity in similar industry and general labour invested in the area. b) Marketing Constraints: The second cause for the sickness is related to marketing. The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and market recession. c) Production Constraints: This is another reason for the sickness which comes under external cause of sickness. This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions. d) Finance Constraints: The another external cause for the sickness of SSIs is lack of finance. This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization. Magnitude of Industrial Sickness Of late, the magnitude of industrial sickness has been quite alarming. It was first noticed in the mid-sixties, which also coincided with the period of industrial stagnation. Thereafter, it was continuously on increase with the liberalization of industrial policy. In the eighties, new technologies ware introduced resulting in increased competitiveness and the units, which could not stand against competition, fell sick. The incidence of sickness has assumed serious proportions in recent years, which are reflected in the increase in the number of sick industrial units, and alarming increases in the amount of funds locked therin. In the corporate sector, small sector units are worst sufferers of industrial sickness as 95% of sick units in the country were from SSI sector during 1980. This % has further risen to 99 by the year 1999. Industrial sickness in India is growing at an alarming rate, as the number of all types of sick industries by nine-fold during 1980-82 and bank credit against them increased by four-fold over same period. One indication of severity of growing industrial sickness is that of the total sick units, more than nine-tenth is beyond cure. According to a survey, about 18% of the outstanding bank credit to industries was locked up in sick industries at the end of March 1991. The number of sick SSI units increased from 256452 as at the end of March 1994 to 268815 units by the end of March 1995.However, the outstanding bank credit locked in these units over the same period decreased from Rs.3680.37 crore to Rs.3547.13 crore. Subsequently, the number of sick units declined from 268815 units in March 1995 to 262376 by the end of the March 1996.Outstanding bank credit locked up in these units increased marginally from Rs. 3547.13 crore to Rs. 3722 crore as at the end of March 1996.

This is good sign of declining in sick units and their outstanding bank credit. However, it cannot be claimed as a major achievement towards eradication of sickness in SSI as it still needs sincere efforts to minimize the sickness. Government Assistances for Industrial Sickness: Marketing and Technical Government both Central and State, have in the past taken a number of measures for the development of small and medium enterprises. Government has set up a number of development institutions to support entrepreneurs. Some of the institutions assisting entrepreneurs include District IndustriesCentres (DICs) and Industrial Estate, Small Industries Development Organizations (SIDO), Small Industries Service Institutes (SISI), Small Industry Development Corporation (SIDCO), entrepreneurial guidance Bureau (EGB), National Alliance of Young Entrepreneurs (NAYE), National Productivity Council (NPC) and Venture capital funds (VCF). In addition, all India financial institutions IDBI, IFCI, ICICI have promoted /sponsored a number of Technical Consultancy Organizations (TCOs) to assist small entrepreneurs in different ways. Recently, the Small Industries Development Bank of India (SIDBI) has been established to help small-scale units. Besides, agencies like khadi and village industries commision, commercial banks, cooperative banks, and exim bank and national science and technology entrepreneurship development

Question-19. Give an exact overview of Development Banking in India. Or QuestionHow Development Banking in India is linked with Industrial Financial Institutions? Or Question – What is development banking? Discuss the recent developments in development banking in India? May 2011 Answer:
Development Bank- A development bank is multi Purpose institutions which shares entrepreneurial risk, changes its approach in tune with the industrial climate and encourage new industrial projects to bring about speedier economic growth. The concept of development banking is based on the assumption that mere provision of finance will not help to bring about entrepreneurial development. Successful entrepreneurial banking should include the discovery of investment projects, undertakings the preparation of project reports, provision of technical advice and management services and finally assisting the management of industrial units. After independence, starting with the Industrial Finance Corporation of India in 1948, a number of development banks have been setup at all India and state levels for assisting c development of large, medium and small industries by providing financial and various other promotional assistances. Overview of Development Banking in India The concept of development banking rose only after Second World War, after the Great Depression in 1930s. The demand for reconstruction funds for the affected nations compelled in setting up a worldwide institution for reconstruction. As a result the IBRD was set up in 1945 as a worldwide institution for development and reconstruction. This concept has been widened all over the world and resulted in setting up of large number of banks around the world which coordinating the developmental activities of different nations with different objectives among the world. The Narashimam committee had recommended to give up its direct financing functions and to perform only the promotional and refinancing role. However, the S.H.Khan committee, appointed by the RBI, recommended its transformation into a universal bank. The course of development of financial institutions and markets during the post-Independence period was largely guided by the process of planned development pursued in India with emphasis on mobilisation of savings and channeling investment to meet Plan priorities. At the time of Independence in 1947, India had a fairly well developed banking system. The adoption of bank dominated financial development strategy was aimed at meeting the sectoral credit needs, particularly of agriculture and industry. Towards this end, the Reserve

Bank concentrated on regulating and developing mechanisms for institution building. The commercial banking network was expanded to cater to the requirements of general banking and for meeting the short-term working capital requirements of industry and agriculture. Specialised development financial institutions (DFIs) such as the IDBI, NABARD, NHB and SIDBI, etc., with majority ownership of the Reserve Bank were set up to meet the long-term financing requirements of industry and agriculture. To facilitate the growth of these institutions, a mechanism to provide concessional finance to these institutions was also put in place by the Reserve Bank. The first development bank In India incorporated immediately after independence in 1948 under the Industrial Finance Corporation Act as a statutory corporation to pioneer institutional credit to medium and large-scale. Then after in regular intervals the government started new and different development financial institutions to attain the different objectives and helpful to five-year plans. The early history of Indian banking and finance was marked by strong governmental regulation and control. The roots of the national system were in the State Bank of India Act of 1955, which nationalized the former Imperial Bank of India and its seven associate banks. In the early days, this national system operated alongside of a large private banking system. Banks were limited in their operational flexibility by the government’s desire to maintain employment in the banking system and were often drawn into troublesome loans in order to further the government’s social goals. The financial institutions in India were set up under the strong control of both central and state Governments, and the Government utilized these institutions for the achievements in planning and development of the nation as a whole. Thus India financial institutions can be classified under five heads according to their economic importance:
    

All-India Development Banks Specialized Financial Institutions Investment Institutions State-level institutions Other institutions.

Question –20. Write short notes on (i) IDBI or Industrial Development Bank of India (ii) IFCI or Industrial Finance Corporation of India (iii) ICICI or Industrial Credit and Investment Corporation India (i) IDBI or Industrial Development Bank of India Answer:
Industrial Development Bank of India (IDBI) The industrial investment bank of India is one of oldest banks in India. The Industrial Reconstruction Corporation of India Ltd., set up in 1971 for rehabilitation of sick industrial companies, was reconstituted as Industrial Reconstruction Bank of India in 1985 under the IRBI Act, 1984. With a view to converting the institution into a full-fledged development financial institution, IRBI was incorporated under the Companies Act, 1956, as Industrial Investment Bank of India Ltd. (IIBI) in March 1997. IIBI offers a wide range of products and services, including term loan assistance for project finance, short duration non-project assetbacked financing, working capital/ other short-term loans to companies, equity subscription, asset credit, equipment finance as also investments in capital market and money market instruments. IDBI was established in 1964 b the Indian Government under an act of the Indian Parliament, the Industrial Bank of India Act, 1964. IDBI was entrusted with the additional responsibility of acting as the principal institution for co-coordinating the activities of institutions engaged in the financing, promotion or development of industry. IDBI was initially established as a wholly owned subsidiary of Reserve Bank of India. In 1976, the ownership of IDBI was transferred to the Government of India (GOI). The IDBI Act was amended in October 1994 to; inter alliance permit IDBI to raise equity from the public. IDBIs strategic objectives is to position itself as India’s premier wholesale bank through a full range of wholesale products-lending, capital markets, advisory and risk management through an integrated group structure. 1) 2) 3) 4) 5) 6) 7) 8) According to IDBI sources, its strength lies in Diversified portfolio across different industries regions and sectors. Long-standing business relationships with all major industrial houses. Core competence in project financing. Large balance sheet and sound finances Capacity to take single party exposure Capacity to leverage. Sizeable stock of cost-effective, long term funds. Fairly good retail network with a large investor base.

Subsidiary Organization 1) SIDBI - To give focused attention to the needs of small-scale industry, IDBI had set up the Industries Development Bank of India (SIDBI) in 1990. 2) IDBI Capital - A stock broking company, IDBI capital Market Services Limited (IDBI capital) was set up in 1993 to provide a range of capital market related services. 3) IDBI Bank - IDBI set up a commercial bank, IDBI Bank Limited in 1994. IDBI offers high technology based top of the line branded products, which have been will received by the market. 4) INTECH - To take advantage of the emerging business prospects of IT sector, IDBI setup IDBI INTECH Limited (INTECH) in March 2000 to undertake IT related activities.

Products of IDBI
1. Project Finance - Project Finance is to provide log term finance (Rupee and foreign currency loan) for new projects and expansion, diversification and modernization of existing projects. Term loan, underwriting, direct subscription of equity capital and deferred payment guarantee are type of assistance under scheme. 2. Equipment Finance - Equipment Finance is available for acquiring specific machinery/equipment to financially sound companies which have been in operation for a minimum period of 5 years. 3. Asset Credit - This product has been designed to help companies to acquire new machinery equipmentation or any other assets. 4. Corporate Loan - To provide assistance for capital expenditure and long term working capital to financially sound companies. 5. Working Capital Loan - The purpose of this scheme is to provide loan component of working capital finance to companies already assisted by IDBI. 6. Direct Discount Bill - Financially sound companies which have been operated for at least 3 year and having no defaults to financial institutions can avail this facility for selling machinery / equipment. 7. Equipment Lease - Financially sound companies are eligible for financial lease facility for purchase of equipment on lease basis. 8. Venture Capital Fund - This has been established to encourage commercial applications of indigenous technology or adaptation of imparted technology, development of innovative products and services. 9. Finance For Medium Scale Industries 10. Services To Promote - Services to Promote and develop industries and merchant banking, debentures trust ship and foreign exchange services. Types of Institutions The most important all-India Development Financial Institutions (DFIs) are Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI). The Industrial Reconstruction Corporation

of India (IRCI) established in 1971 with the main objective of revival and rehabitation of viable sick units was converted into the Industrial Reconstruction Bank of India (IRBI) in 1985. Besides above, all Indian Financial Institution (AIFIs) providing industrial finance also includes some institutions like the Unit Trust Of India (UTI), Life Insurance Corporation of India (LIC) and the General Insurance of India (GIC) and its subsidiaries. Types of Assistance Provision of rupee and foreign currency loans, subscription to share and debentures, underwriting of shares and debentures, guaranteeing of deferred payments and loans are the important type of financial assistance provided by these institutions. Development activities of the DFIs include identifying industrial potentials of different areas of development of entrepreneurship through training and motivation; assistance in project identification, feasibility studies and preparation of project reports; technical and managerial consultancies; seed/risk capital assistance etc.

(ii) IFCI or Industrial Finance Corporation of India Answer: Industrial Finance Corporation of India
IFCI or Industrial Finance Corporation of India was established in 1948 under the IFCI Act, with the object of making medium and long-term credit more readily available to industrial concerns in India. IFCI was corporate in 1993 as a part of the financial sector reforms and an initial public offer was made in the same year. Principal Activities of IFCI IFCIs financial operations principally include project financing, Financial Services and comprehensive corporate advisory services. Project Financing It is the core business of IFCI Financial assistance is provided by way of medium or ling term credit for – 1) Setting up new projects 2) Expansion /diversification scheme 3) Modernization/ balancing schemes of existing projects.

Financial Services
IFCI provide assistance tailor made to meet specific needs of corporate through various specially designed schemes – 1) Equipment finance 2) Equipment credit, equipment leasing 3) Supplier’s/buyer’s credit 4) Leasing and hire purchase concerns 5) Corporate loans, short term loans 6) Working capital term loans

Finance assistance is provided by way of Rupee loans, loans in foreign currencies, underwriting of direct subscription to share and debentures, providing guarantee for deferred payment and foreign loans.

Lending Policies
IFCI adopts a flexible and programmatic approach in applying these norms, wherever adequate justification exists. During the 5 years following corporatization in 193-94, there was a surge in business volumes and net profits. However, from 1988-99 q decline set in its sanctions, disbursements ad profits began falling, which in turn adversely impacted on its financial ratios. During this period IFCI witnessed a sharp increase in the quantum of its non-performing assets. We will discuss it later that many problems are coming in the way of all financial institution likes non-performing assets. Challenges Faced By Public Sector Banks and Problems of Non-Performing Assets in Indian Banks In April 2000, the Board of Directors of IFCI Ltd. constituted an expert committee under the chairmanship of D. Badu to formulate a medium to long term strategic plan for the future of ICICI. The focus of the committee’s deliberations was to be on the future course of action, taking into account the current portfolio of IFCI its assets and disability mix, the financials of the company and the recovery frame work and the emerging opportunities as a result of the reforms in the financial sector.

(iii) ICICI or Industrial Credit and Investment Corporation India Answer:
ICICI BANK ICICI Bank or Industrial Credit and Investment Corporation India Ltd., which was merged with the ICICI Bank in 2001, was founded by the World Bank, the Government of India and representative of private industry on Jan 5, 1955 to encourage and assist industrial development and investment in India. The main objectives of ICICI were –

Objectives and Functions
1. Providing assistance in the creation, establish expansion and modernization of Industrial enterprises. 2. Encouraging and promoting the participation of private capital, both internal and external in such enterprise. 3. Encouraging and promoting industrial investment and the expansion of investment markets. Over the years, ICICI has evolved in to a diversified financial institution. ICICIs principal business activities include –

1. Medium-term and long –term projects financing for the infrastructure and manufacturing sector. 2. Corporate finance to meet the treasury requirements of India companies 3. A comprehensive range of financial and advisory services. Verification - The Liberalization of the Indian economy in the 1990s offered ICICI an opportunity to provide a wide range of financial services. For regulatory and strategic reasons. ICICI set up specialized subsidiaries in the areas of commercial banking, investment banking, non-banking finance, investor servicing, broking, venture capital financing and state level infrastructure financing. ICICI Venture Funds Management Company Limited With new environment in country, venture capital and private equity capital financing are fast attaining a role of prominence. ICICI, therefore, established the ICICI venture funds as a wholly owned subsidiary. ICICI Securities and Finance Company Limited Formed in 1993 when ICICI’s Merchant Banking Division was change off into a new company, I-sec today is India’s leading Investment Bank and one of the most significant players in Indian Capital Market. The ranges of product offered by I-SEC are – (i) Corporate Finance – merger and Acquisition, Equity, Bidding (ii) Fixed Income – Primary Dealership and Debt Research (iii) Equity – Land Management, Underwriting etc. ICICI Brokerage Services Limited ICICI Brokerage Services Limited was set in March 1995; ICICI Brokerage is a 100% subsidiary of I-SEC. It commenced its securities brokerage activities in February 1996 and is registered with the National Stock Exchange of India Ltd. ICICI Personal Finance Services Limited Formally ICICI –credit, was one of the first four companies of obtaining registration as a nonbanking financing company (NBFC) from Reserve Bank of India (RBI) in 1997. ICICI Capital Services Limited ICICI Capital Services Limited was incorporated in the name of SCICI Securities Ltd, on September 24 1994 as a wholly owned subsidiary of erstwhile SCICI Ltd, with the objective of providing of providing stock broking services to the institutional client. ICICI Bank The commercial banking outfit of the ICICI group was established in 1994. In October 2001, the ICICI and two of its retail finance subsidiaries – ICICI PFs and ICICI capital Services Ltd. were merged with ICICI Bank.

Question-21. What do you understand by Stock exchanges and their regulation in Indian Corporate Law? Or Question- Explain the regulation of Stock Exchanges in context with the Indian Corporate law according to contemporary Indian Business Environment. Answer Stock Exchange
Stock Exchange is the market in which securities are brought and it is an essential component of a developed capital market. According to the securities contracts (Regulation) act 1956, stock exchange means anybody of individuals, whether incorporated or not, constituted for the purpose of assisting regulating or controlling the business of buying selling or dealing in securities. According to this Act, securities included (i) Shares, stocks, bonds, debentures, stocks or other marketable securities of a like nature in or of any incorporated company or body corporate. (ii) Government securities, such other instrument as may be declared by the central Government to be securities (iii) Right or interest in securities

The Objective and Role of the Stock Exchange

1) To safe guar the interest of investing public having dealing on the exchange and the members. 2) To establish and promote honorable and just practice in securities transactions. 3) To promote, develop and maintain a well regulated market for dealing in securities. 4) To promote industrial developments in the country through efficient resources mobilization by way of investment in corporate. Securities.

Dealing on Stock Exchange

Dealing on Stock Exchange are subject to the by law and rule of stock exchange dealing in India are regulated by the securities contract (Regulation) Act and the Securities and exchange board of India (SEBI). There are the two type of trading on the stock exchange namely ready delivery contract and forward delivery contract. Ready delivery contract also known as cash trading or cash transactions are to be settled either on the same date or with in a short period of time that may extend at best up to seven days. Against these, the forward delivery contracts are discharged on fixed settlement days. Ready delivery contract can be made in respect of all securities whereas forward delivery contract are confined to those securities which are placed off the forward list.

Regulation of Stock exchanges

In India the development of the stock market is directed and the dealings on the stock exchanges are regulated by the Central Government in accordance with the securities contracts (Regulation) Act 1956 (SCRA) and the Securities and exchange Board of India (SEBI)established by the Central Government. The securities contracts (Regulation) Act, enacted in 1956, comes into force on February 20, 1957.

Objective of the Act
According to the preamble to the securities contracts (Regulation)Act, 1956,(SCRA), the objective of the Act is to prevent undesirable transactions in securities by regulating the business of the dealings in securities and by providing for certain other matters connected with transactions in securities. Important Provisions of the SCRA will indicate that the important objectives of the Act are: 1) To empower the Central Government to regulate the dealings in and functioning of the stock exchange in India. 2) To promote healthy and orderly development of the stock market in India. 3) To prevent unhealthy speculation and other undesirable activities on the stock exchange. 4) To protect the interest of the investors 5) To provide for reasonable uniformity in respect of the bye-laws and rules of the different stock exchange in India.

Main Provisions of Regulation of Stock Exchange
The securities contracts (Regulation) Act 1956, empowers the Central Government to take appropriate above. The important provisions of the act encompass the authority given to the Central Government or in certain cases the SEBI pertaining to: 1) The grant of recognition or withdrawal of recognition to any stock exchange 2) Approval of the bye-laws and rules of stock exchanges. 3) Power to make or amend bye-laws or roles for stock exchange 4) Power to direct the stock exchange to make or amend roles and bye-laws in certain cases. 5) Monitoring the activities and functioning of the stock exchanges by calling for periodic returns and specific exchanges by calling for periodic returns and specific information as and when required and by conducting enquiry into certain matters when the situation or warrants. 6) Power to suspend business of stock exchange 7) Power to supersede governing body of any stock exchange on account of specific reasons. 8) Regulation of listing of securities. The proposed establishment of a new stock exchange in India has caused a revival of the debate pertaining to regulation of stock exchanges. There are unique issues: stock exchanges are not only profit-making institutions that are companies in form and substance, but they also carry out a regulatory role in respect of companies that are listed on them. This creates an inherent conflict of interest in their operations. “MCX Stock Exchange (MCX-SX) has applied to the Securities and Exchange Board of India, or Sebi, the capital market regulator, to offer trading in equities. If it wins approval, it would be the first greenfield equities exchange in India since the National Stock Exchange (NSE) started about 15 years ago.

The proposed new stock exchange would compete with NSE and the Bombay Stock Exchange (BSE). It would also be the first stock exchange with a common ownership and management in the post-demutualization era. Globally, when stock markets moved from being broker-owned mutual associations to shareholder-owned entities—a process known as demutualization—concerns arose over the governance of for-profit equity exchanges. In most cases, the regulatory function has been spun off to a different entity to remove any conflict of interest. A stock exchange’s responsibilities include surveillance of market participants and ensuring that a robust risk management mechanism is in place. It does this by monitoring position limits and collecting adequate margins on time. When the owners of the exchange oversee such regulatory functions, there could be a conflict of interest, some analysts say.” Although the establishment of this new stock exchange will promote competition in the field and thereby encouraging innovation and better service to clients, there is a genuine concern (expressed by experts in the above Mint article) that this may lead to laxity in regulation of listed companies by stock exchanges (so as to promote listing and trading on them) thereby leading to an overall decline in regulatory standards, this trend being generally known as “the race to the bottom”. This has been a serious governance issue world over. For example, Professor Allen Ferrell of Harvard Law School lays out the crux of the problem: “The global movement of traditional stock exchanges to for-profit businesses has put pressure on the self-regulatory function of exchanges. A for-profit stock exchange, burdened with expensive regulatory duties (as a result of being a self-regulatory organization (SRO) under the Exchange Act), and competing with trading platforms that have lower regulatory burdens or no regulatory duties must grow its business to be successful. As with any business, profit growth may come from increased revenues or reduced costs. For a stock exchange, revenue growth must come from increased trading volume, by adding new listings or by acquiring other exchanges or trading platforms. Cost reduction may come from a reduction in regulatory burdens or through economies of scale, such as the consolidation of separate market surveillance units and operating acquired trading platforms on existing surplus IT capacity. This emerging business dynamic may be driving a variety of fundamental changes in global regulation. There are concerns that this has placed undue strains on the regulatory structure. These issues have included the concern that trading might move to markets with lower regulatory requirements, the existence of inconsistent rules across markets, and that exchanges may reduce the rigor of their regulatory oversight in order to gain market share. There is also the concern that exchanges may be “too soft in regulating themselves and too severe in regulating competitors.” For example, the SEC in its concept release, and in an earlier concept release, discussed the possibility of regulatory arbitrage, whereby, for example, an exchange might reduce its market surveillance function to attract trading volume, or lower listing requirements to attract companies.” There are a number of methods used in various jurisdictions by which this conflict of interest can be mitigated. These may be employed individually or through a combination of

more than one method: Separate the ownership and management of the exchanges. This can be achieved by imposing a cap on share ownership by a single entity or grouop. This is the model that NSE has been following. House the regulatory functions in a separate subsidiary company that has a separate board (in other words, create “Chinese walls”). Ferrell notes that the NYSE and NASDAQ followed this approach. Create a strong independent board that pays adequate attention to the regulatory functions of the stock exchange. Provide for enhanced governmental supervision of the regulatory function of the exchange rather than by the exchange itself. Ferrell notes that some exchanges follow this: Australian Stock Exchange, the Hong Kong Stock Exchange, the Singapore Exchange and the Stockholm Stock Exchange. Constitute a separate Regulatory Conflicts Committee of the board to deal with the conflicts between the commercial and regulatory sides of the exchange. The Singapore Stock Exchange follows this model. At this stage, from the information available, it appears that the new exchange will largely follow the first approach of separation of ownership and management. Although many of these models will dilute the possibility of conflicts, such conflicts cannot be obliterated altogether given the basic feature of a stock exchange that is run on a for-profit basis.

Question-22 What is Stock Exchange Board of India ( SEBI)? What are the prominent roles of SEBI in context of Indian Business Environment? Or Question - Define and Explain Stock Exchange Board of India ( SEBI). How it functions and what are major roles SEBI plays in Indian Business Environment?

Securities and Exchange Board of India (SEBI)
The establishment of the securities and Exchange Board of India (SEBI) was a land mark government measure to monitor and regulate capital market activities and to promote healthy development of the markets. The SEBI was constituted in 1988 by a resolution of Government of India and it was made a statutory by the securities and Exchange Board of IndiaAct, 1992.

Section 4 of the Act lays down the constitution of the management of SEBI. The Board of members of SEBI shall consist of a chairman, two members from amongst the officials of the Ministers of the Central Government dealing with Finance and Law, on member from amongst the officials of the Reserve Bank of India, two other members to be appointed by the Central Government, who shall be professional and interalignment have experience or special knowledge relating to the securities markets.

Objectives -

According to the Act, the objectives of SEBI are to protect the interest of investors in securities and to promote the development of and to regulate the securities market for matters connected therewith or incidental therewith.

Powers and Functions -

The SEBI Act casts upon SEBI the duty to protect the interests of investors in securities ad to promote the development of and to regulate securities market through appropriate measures. These measure provide for – 1) Regulating the business in stock exchange and any other securities market. 2) Registering and regulating the working of stock brokers, sub brokers, share transfer agents, bakers to an issue trustees of trust deeds, registers to an issue, merchant bankers, underwriting, portfolio managers, investment advisor etc. 3) Registering and regulating the working of collective investment schemes, including mutual funds 4) Promoting and regulating self-regulatory org. 5) Promoting investor education and training of intermediaries in securities market. 6) Prohibiting of unfair trade practices in securities market. 7) Prohibiting insider trading in securities 8) Regulating acquisition of share and take over of companies. SEBI is regulator to control Indian capital market. Since its establishment in 1992, it is doing hard work for protecting the interests of Indian investors. SEBI gets education from past cheating with naive investors of India. Now, SEBI is more strict with those who commit frauds in capital market. The role of security exchange board of India (SEBI) in regulating Indian capital market is very important because government of India can only open or take decision to open new stock exchange in India after getting advice from SEBI. If SEBI thinks that it will be against its rules and regulations, SEBI can ban on any stock exchange to trade in shares and stocks.Now, we explain role of SEBI in regulating Indian Capital Market more deeply with following points: 1. Power to make rules for controlling stock exchange : SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5 PM in stock market. 2. To provide license to dealers and brokers : SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature, then SEBI can also control to that product and its dealers. One of main example is ULIPs case. SEBI said, " It is just like mutual fundsand all banks and financial and insurance companies who want to issue it, must take permission from SEBI." 3. To Stop fraud in Capital Market : SEBI has many powers for stopping fraud in capital market. It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market. It can impose the penalties on capital market intermediaries if they involve in insider trading.

4. To Control the Merge, Acquisition and Takeover the companies : Many big companies in India want to create monopoly in capital market. So, these companies buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is for development of business or to harm capital market. 5. To audit the performance of stock market : SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges. 6. To make new rules on carry - forward transactions: Share trading transactions carry forward can not exceed 25% of broker's total transactions 90 day limit for carry forward. 7. To create relationship with ICAI : ICAI is the authority for making new auditors of companies. SEBI creates good relationship with ICAI for bringing more transparency in the auditing work of company accounts because audited financial statements are mirror to see the real face of company and after this investors can decide to invest or not to invest. Moreover, investors of India can easily trust on audited financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are doing their duty by ethical way or not. 8. Introduction of derivative contracts on Volatility Index : For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index, subject to the condition that; a. The underlying Volatility Index has a track record of at least one year. b. The Exchange has in place the appropriate risk management framework for such derivative contracts. 2. Before introduction of such contracts, the Stock Exchanges shall submit the following: i. Contract specifications ii. Position and Exercise Limits iii. Margins iv. The economic purpose it is intended to serve v. Likely contribution to market development vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading. vii. The infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and viii. Details of settlement procedures & systems 9. To Require report of Portfolio Management Activities : SEBI has also power to require report of portfolio management to check the capital market performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for demanding report. 10. To educate the investors : Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may 2010 SEBI imposed workshop. If you are investor, you can get education through SEBI leaders by getting update information on this page.

Question –23. How can you analyze Banking Sector Reforms in India? Or Question – Explain the major banking sector reform in India in recent years. May 2011 Answer :
Indian banking sector has undergone major changes and reforms during economic reforms. Though it was a part of overall economic reforms, it has changed the very functioning of Indian banks. This reform have not only influenced the productivity and efficiency of many of the Indian Banks, but has left everlasting footprints on the working of the banking sector in India. Let us get acquainted with some of the important reforms in the banking sector in India. 1. Reduced CRR and SLR : The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are gradually reduced during the economic reforms period in India. By Law in India the CRR remains between 3-15% of the Net Demand and Time Liabilities. It is reduced from the earlier high level of 15% plus incremental CRR of 10% to current 4% level. Similarly, the SLR Is also reduced from early 38.5% to current minimum of 25% level. This has left more loanable funds with commercial banks, solving the liquidity problem. 2. Deregulation of Interest Rate : During the economics reforms period, interest rates of commercial banks were deregulated. Banks now enjoy freedom of fixing the lower and upper limit of interest on deposits. Interest rate slabs are reduced from Rs.20 Lakhs to just Rs. 2 Lakhs. Interest rates on the bank loans above Rs.2 lakhs are full decontrolled. These measures have resulted in more freedom to commercial banks in interest rate regime. 3. Fixing prudential Norms : In order to induce professionalism in its operations, the RBI fixed prudential norms for commercial banks. It includes recognition of income sources. Classification of assets, provisions for bad debts, maintaining international standards in accounting practices, etc. It helped banks in reducing and restructuring Non-performing assets (NPAs). 4. Introduction of CRAR : Capital to Risk Weighted Asset Ratio (CRAR) was introduced in 1992. It resulted in an improvement in the capital position of commercial banks, all most all the banks in India has reached the Capital Adequacy Ratio (CAR) above the statutory level of 9%. 5. Operational Autonomy : During the reforms period commercial banks enjoyed the operational freedom. If a bank satisfies the CAR then it gets freedom in opening new branches, upgrading the extension counters, closing down existing branches and they get liberal lending norms. 6. Banking Diversification : The Indian banking sector was well diversified, during the economic reforms period. Many of the banks have stared new services and new products. Some of them have established subsidiaries in merchant banking, mutual funds, insurance, venture capital, etc which has led to diversified sources of income of them. 7. New Generation Banks : During the reforms period many new generation banks have successfully emerged on the financial horizon. Banks such as ICICI Bank, HDFC Bank, UTI

Bank have given a big challenge to the public sector banks leading to a greater degree of competition. 8. Improved Profitability and Efficiency : During the reform period, the productivity and efficiency of many commercial banks has improved. It has happened due to the reduced Nonperforming loans, increased use of technology, more computerization and some other relevant measures adopted by the government. These are some of the import reforms regarding the banking sector in India.

With these reforms, Indian banks especially the public sector banks have proved that they are no longer inefficient compared with their foreign counterparts as far as productivity is concerned.

Question -24. What are the major and significant challenges faced by Public sector Banks in India ? Answer : Public Sector Banks Facing innumerable challenges
Indian banks are facing innumerable challenges such as worrying level of NPAs, deteriorating asset quality, increasing pressures on profitability, asset-liability management, liquidity risk management, market risk management and ever tightening prudential norms. Besides this, the disclosure requirements are also increasing. It must be said to the credit of Public Sector Banks (PSB) that they have shown considerable resilience in meeting the challenges of change. They have also withstood testing times in the context of Southeast Asian financial crisis. Although Indian banks have consistently rated by the international agencies as the most fragile in Asia, the annual BT-KPMG rankings of the best banks in 1997-98 revealed that the fragile system has demonstrated a surprising resilience to turmoil. However, it must be recognised that there is little to celebrate, as the banking system in India has to remain on toes to face myriad changes and to deliver banking of international standards and quality. Narsimham Committee I and II have made number of path breaking recommendations to strengthen the banking system and many of the key recommendations of NCR-I also stand implemented. This is however not enough. The greatest challenge that the PSBs are today facing is the Asset Management, both financial and human. The present article attempts to discuss this.

Financial Assets Asset quality is the key challenge before the banks. An improvement in asset quality is fundamental to strengthening the working of banks and improving their financial viability. The single most important indicator reflecting the status of quality of assets and its impact on bank's viability is the figure of net non-performing assets in relation to advances (NPAs). In fact a number of banks have remained weak despite their satisfying capital-adequacy norms because of high NPA proportion in their assets portfolio. An important aspect of the continuing reform process is to reduce further the level of NPAs as a means of strengthening the banks. Thus the ever-burgeoning level of NPAs is the most serious challenge before the bankers. Of the Rs. 45,000 crores of gross NPAs, over Rs. 12,000 crores is locked up in the courts. Although till date the banking system has provided for Rs. 20,000 crores, it is still stuck with net NPAs worth Rs. 25,000 crores. This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare minimum. Experiencing the inadequacy of legal systems, recoveries of NPA are not likely to be quick through legal recourse. When banks are ought to bring down net NPA figures to BSR's stipulated level, the given legal system's delays would hardly be helpful to comply with the prescribed time frame. In view of the inadequacy of legal infrastructure in prompt reduction of NPA, the only feasible alternative is to encourage non-legal recourse. This would need each bank to have framework for early detection of acceptable compromise proposals and supportive recovery policy directed towards out-of-court settlements. Appointment of recovery agents, utilizing services of private security agencies of ascertaining means of NPA borrowers etc. are the other areas, which require fresh review. While banks require non-legal time bound surgical solutions to meet the statutory requirements in reducing the level of net NPA, the internal legal machinery in banks should obviously be so strengthened as to ensure speedy disposal of suit-filed cases and execution of decreed cases. For strengthening the legal system, the banks may have to consider providing services of trained legal officers at controlling/branch levels, depending upon the quantum of NPA. Banks are to engage services of dynamic young lawyers to have desired momentum in follow-up of suit-filed cases for timely disposal and subsequent execution of decrees. Since commercial banks are undergoing a metamorphosis of de-regulations and liberalizations, it is imperative that micro-level credit administrations should be handled by each PSB individually with their own risk-perceptions, risk-analysis and risk forecasting. Also, there has to be tightening of loan review mechanism to ensure end-use of funds so that scarce credit resources are prevented from preemption and diversion, particularly by large borrowers. There is need for continuous improvement in asset quality by strengthening skill at the grass root level, adopting regular inter-face with borrowers, ascertaining periodical operating performance of the firm etc. Periodical exchange of information among financing banks is the

need of the day to understand the warning symptoms to prevent deterioration of asset quality. To minimize erosion of asset quality in future banking, there is immediate need for implementation of rigorous systems to eliminate diversion of funds by the borrowers towards less viable activities such as investments, loans to subsidiaries facing financial woes etc. Quality asset building will also require up-to-date market information on various industries, a deeper and penetrating insight about the financial transactions of large borrowal groups, economic trends in a globalised environment and industry knowledge about new areas for financing like software, infrastructure, service sector and other IT based industries etc. The bankers who have so far focussed on marketing of deposits have to adopt a new mindset for credit marketing, which require a high degree of analytical, financial and negotiating skills. Human Assets Although NCR-I and II have shown their concern about the quality of human asset and the prevailing problems in HR areas, very little initiative has been taken in the last few years in this crucial but significant area. As the demands on the banking system are increasing and its priorities are re-focussed to create sustainability and profitability, it is time to restructure HR policies, which have generally remained static and ad-hoc so far. In a highly competitive environment, banks have to address to the following changes in this critical area : Man-power Planning The banks have to suitably realign their existing human resources from surplus to deficit pockets and readjust staffing pattern in a computerised environment. Surplus staff from very large branches which are now computerised, need to be relocated or assigned newer jobs such as marketing etc. Mobility of staff has to be negotiated with employees' organizations as a measure to improve organizational efficiency and improve productivity. About 70% staff in each bank constitutes clerical and subordinate staff. In spite of many changes that the industry has faced over the years, essentially the role of this category of staff has remained unchanged. There is the need to re-define the clerical roles in the bank and there is also a need to enrich clerical roles by introducing discretionary elements in front-line clerical roles and giving them responsibility of higher nature such as initiating correspondence, working in marketing teams, operational roles, public relation roles etc. The banks also need to develop existing staff in newer competencies through a systematic and rigorous training and also recruit, if necessary super specialist and specialist in areas like technology, treasury management, marketing, FOREX operations and project management. The existing managers need to be developed as turn-around managers through training in selfmanagement and inculcation of skills in problem solving, conflict management and change management. Needless to say that succession planning in managerial cadre must occupy central concern for bank management.

Talent Management Banks have an excellent pool of competent personnel in all the cadres. Such personnel need to be identified, nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career. Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower. Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes, Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times. Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences, both nationally and internationally, to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals. In other words, within the work organisation, banks will have to provide professionally satisfying quasi-academic environment for growth and development. Pro-active, progressive and positive approach in talent management should be important feature of HR policies. Awareness development There is also need to develop organisation-wide awareness about banks key-business problems including stagnant business units, strain on profitability, cost of operations, unexplored business opportunities, manpower costs, NPAS etc. This could be done by senior and top management at various key centres for all the staff to make them aware about the areas of concern for the bank with a view to seek their involvement in improving business growth and profitability. It can be said from the personal experience of the author that such sharing is always useful and trade unions' as well as employees' response to organisational improvement process is generally encouraging. Industrial relations climate Trade unions and bank management have to identify key issues for reform in HR areas that could be crucial to meet competition. By and large, bi-partitism is well established in each bank and many contentious issues can be resolved by discussions. Tender mindedness, compromises on principles and appeasement must give way to more serious dialogue on important issues. Issues such as review of existing settlements, re-deployment of surplus staff, removal of restrictive practices, re-defining clerical and subordinate staff roles, performance appraisal of clerical staff are some of the issues that require negotiations with unions to improve productivity, work-culture and finally a smooth transition to competitive environment. Finally, there is a need to re-define the HR roles in the bank by forging HR-business

partnership. This will require very matured handling and monitoring of this critical function. In the ultimate analysis, one of the key agenda before PSBs should be to improve quality of their assets-both financial as well as human.

Question –25. What do you understand by Non Banking Financial Institutions or Non Banking Financial Companies? How these are growing and what about the changing structure of Non Banking Financial Institutions in present scenario? Answer : Non-Banking Financial Institutions or Non-banking financial companies
Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. Operations are, regardless of this, still exercised under bank regulation. However this depends on the jurisdiction, as in some jurisdictions, such as New Zealand, any company can do the business of banking, and there are no banking licenses issued.

Services Provided by NBFCs
Non-bank financial companies or institutions frequently acts as
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

suppliers of loans and credit facilities, supporting investments in property, Trading money market instruments funding private education, wealth management such as Managing portfolios of stocks and shares and Underwrite stock and shares, TFCs and other obligations retirement planning Advise companies in merger and acquisition Prepare feasibility, market or industry studies for companies Discounting services e.g., discounting of instruments

However they are typically not allowed to take deposits from the general public and have to find other means of funding their operations such as issuing debt instruments.

Regulation of Non Banking Financial Companies
For European NBFCs the Payment Services Directive (PSD) is a regulatory initiative from the European Commission to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA). The PSD describes which type of organizations can provide payment services in Europe (credit institutions (i.e. banks) and certain authorities (e.g. Central Banks, government bodies), Electronic Money Institutions (EMI), and also creates the new category of Payment Institutions). Organizations that are not credit institutions or EMI, can apply for an authorization as Payment Institution in any EU country of their choice (where they are established) and then passport their payment services into other Member States across the EU.

Classification of Non Banking Financial Companies
Depending upon their nature of activities, non- banking finance companies can be classified into the following categories: 1. Development finance institutions 2. Leasing companies 3. Hiring Companies 4. Investment companies 5. Modaraba companies 6. House finance companies 7. Venture capital companies 8. Discount & guarantee houses

Question –26. What is the trend and pattern of foreign trade in India? Answer :
Foreign trade is nothing but trade between the different countries of the world. It is also called as International trade, External trade or Inter-Regional trade. It consists of imports, exports and entrepot. The inflow of goods in a country is called import trade whereas outflow of goods from a country is called export trade. Many times goods are imported for the purpose of reexport after some processing operations. This is called entrepot trade. Foreign trade basically takes place for mutual satisfaction of wants and utilities of resources. Foreign Trade or International trade is the exchange of capital, goods, [1] In most countries, such trade and services across international borders or territories. represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of laborintensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country.

3 Types of Foreign Trade
Foreign Trade can be divided into following three groups :1. Import Trade : Import trade refers to purchase of goods by one country from another country or inflow of goods and services from foreign country to home country. 2. Export Trade : Export trade refers to the sale of goods by one country to another country or outflow of goods from home country to foreign country. 3. Entrepot Trade : Entrepot trade is also known as Re-export. It refers to purchase of goods from one country and then selling them to another country after some processing operations. Need and Importance of Foreign Trade ↓ Following points explain the need and importance of foreign trade to a nation.

1. Division of labour and specialisation Foreign trade leads to division of labour and specialisation at the world level. Some countries have abundant natural resources. They should export raw materials and import finished goods from countries which are advanced in skilled manpower. This gives benefits to all the countries and thereby leading to division of labour and specialisation. 2. Optimum allocation and utilisation of resources Due to specialisation, unproductive lines can be eliminated and wastage of resources avoided. In other words, resources are channelised for the production of only those goods which would give highest returns. Thus there is rational allocation and utilization of resources at the international level due to foreign trade. 3. Equality of prices Prices can be stabilised by foreign trade. It helps to keep the demand and supply position stable, which in turn stabilises the prices, making allowances for transport and other marketing expenses. 4. Availability of multiple choices Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties to consumers all over the world.

5. Ensures quality and standard goods Foreign trade is highly competitive. To maintain and increase the demand for goods, the exporting countries have to keep up the quality of goods. Thus quality and standardised goods are produced. 6. Raises standard of living of the people Imports can facilitate standard of living of the people. This is because people can have a choice of new and better varieties of goods and services. By consuming new and better varieties of goods, people can improve their standard of living. 7. Generate employment opportunities Foreign trade helps in generating employment opportunities, by increasing the mobility of labour and resources. It generates direct employment in import sector and indirect employment in other sector of the economy. Such as Industry, Service Sector (insurance, banking, transport, communication), etc. 8. Facilitate economic development Imports facilitate economic development of a nation. This is because with the import of capital goods and technology, a country can generate growth in all sectors of the economy, i.e. agriculture, industry and service sector. 9. Assitance during natural calamities During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the problem of shortage of essential goods. Foreign trade enables a country to import food grains and medicines from other countries to help the affected people. 10. Maintains balance of payment position Every country has to maintain its balance of payment position. Since, every country has to import, which results in outflow of foreign exchange, it also deals in export for the inflow of foreign exchange. 11. Brings reputation and helps earn goodwill A country which is involved in exports earns goodwill in the international market. For e.g. Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic goods.

12. Promotes World Peace Foreign trade brings countries closer. It facilitates transfer of technology and other assistance from developed countries to developing countries. It brings different countries closer due to economic relations arising out of trade agreements. Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace as such countries try to maintain friendly relations among themselves.

Question –27. What is the concept of Balance of payments? What are the significant features of the Balance of Payments ? Or Question – Define and explain Balance of Payments. How Balance of Payments can be in equilibrium or in disequilibrium? Or Question- Explain the present state of balance of payment (BOP). How can the country’s BOP position be improved? May 2011 Answer : Balance of Payments
Balance of payments refers to the recording of all economic transactions of a given country with rest of the world. Each country has got to enter into economic transactions with other countries of the world. As a result of such transactions, it receives payments from and makes payments to other countries. Balance of Payments is a statement of accounts of these receipts and payments. Definition 1. In the words of Kindleberger, “The balance of payments of a country is a systematic record of all economic transactions between its residents and residents of foreign countries.” 2. In the words of Benham, “Balance of Payments of a country is a record of the monetary transactions over a period with the rest of the world.” 3. In the words of James O Ingram, “The Balance of Payments is a summary record of all economic transactions between residents of one country and the rest of the world during a given period of time.” Features of Balance of Payments Main features of balance of payments are as under: 1. Systematic Record- It is a systematic record of receipts and payments of a country with other countries.

2. Fixed Period of Time- It is a statement of account pertaining to a given period of time, usually, one year. 3. Comprehensiveness- It includes all the three items, i.e., visible, invisible and capital transfers. 4. Double entry System- Receipts and payments are recorded on the basis of double entry system. 5. Self-balanced- From the point of view of accounting, double entry system keeps automatically debit and credit sides of the accounts in balance. 6. Adjustment of differences- Whenever there is difference in actual total receipts and payments, need is felt for necessary adjustment. 7. All items-Government and Non-Government- Balance of payments includes receipts and payments of all items government and non-government. Structure and Forms of Balance of Payments Study of structure and forms of balance of payments may be made as under: Structure of Balance of Payments Structure of balance of payments has therefore, two aspects as under: 1. Credit side 2. Debit side

Credit side includes those values received or is likely to be received from abroad. Under debit side are included all the payments made to other countries. Forms of Balance of Payments Balance of payments has three forms; namely, (1) Current Account (2) Capital Account (3) Overall Balance of Payments.

(1) Current Account- Balance of Payments on current account is a statement of actual receipts and payments in the short-period. It includes the value of imports and exports of both visible and invisible items. Current account transactions are called account by actual transactions, because all items included in it are actually transacted. These items have a direct effect on the income, output and employment of a country’s economy. Balance of Payments on Current Account = (Visible + Invisible Exports) – (Visible + Invisible Imports)

Balance of Payments on current account may be both balanced and unbalanced (in the sense of deficit or surplus). Disequilibrium of the balance of payments on current account is usually balanced by the medium of capital account. (2) Capital Account- Capital Account refers to financial transactions. All kinds of shortterm and long-term international capital transfers, movement of gold, payments on private account, payments and receipts o0n national institutional account and government loans, interest, grants, etc. are included in capital account. All transactions under capital account are concerned merely with financial transfers, as such; they have no direct effect on the income, output and employment of a country’s economy. (3) Overall Balance of Payments- Total of a country’s current account and capital account is reflected in overall balance of payments. It is always in balance; because the deficit or surplus of current account is set off by capital account and that of capital account is set off by current account. Disequilibrium in Balance of Payments Disequilibrium may sometimes be on minus or deficit or unfavourable side and sometimes on plus or surplus or favourable side. Unfavorable or favourable balance of payment can be explained as under:Unfavourable or Favourable balance of payments- Balance of Payments is said to be unfavourable when the payments (debit) of the country are less than its receipts (credit). On the other hand, when the payments (debit) of the country are less than its receipts (credit), the balance of payments is said to be favourable. In other words, balance of payments may be of three kinds . 1. Balanced Balance of Payments- When total receipts of a country or exports (visible and invisible) are equal to its total payments or imports (visible and invisible) then its balance of payments is in balance. B = R-P = O (Here B = balanced balance of payment; R = receipt or exports; P = payments or imports) 2. Favourable Balance of Payments- When, in order to balance the receipts and payments, a country receives gold from abroad or it has to give short-term loans, then its receipts are more than payments and balance of payments turns favourable. BF = R – P >O

(Here, BF = Favourable balance of payments; R –P >O = Receipts, are greater than payments or their difference is positive.) 3. Unfavourable balance of Payments- Balance of payments is unfavourable when to balance its receipts and payments, a country has either to give gold or indulge in short-term borrowing from abroad. Bu = R – P < O (Here, Bu = Unfavourable balance of payments; R –P < O = Receipts are less than payments or their difference is negative.) In short, balance of payments is unfavourable, if to meet the deficit between receipts and payments a country either makes payments in terms of gold or borrows from abroad for a short period. On the contrary, if to meet the surplus between receipts and payments a country either receives payment in terms of gold or lends to foreign countries for a short period, the balance of payments is said be favourable. Causes of Disequilibrium in Balance of Payments Although types of disequilibrium are indicative of the main causes of disequilibrium in balance of payments, yet to make things more clear the major causes are divided as under: Natural Causes- Natural calamities like famines, droughts, earthquakes, floods etc. causes disequilibrium in balance of payments. Imports of a country multiply under the impact of these calamities leading to disequilibrium in balance of payments. Economic causes- Following economic causes also influence balance of payments:  Economic Development Plans  Price-cost Effect  Cyclical Fluctuations  Change in Foreign Exchange Rates  Decline in Foreign Demand  Change in terms of trade  Demonstration effect  Population Explosion  Foreign Capital Investment Flow  International Economic Practices and Policies Political Factors- In addition to economic factors, there are political factors also accounting for disequilibrium in balance of payments. Main political factors are:  Political Instability  International Relation  Partition or Unification of a country Social Factors- there are some social factors like:  Changes in taste and preferences

Cross-border prejudice which sometimes force the countries to shift to expensive source of imports and less lucrative areas of exports. Such situations often drive an economy towards the state of deficit BOP disequilibrium.

Measures to Correct Disequilibrium in BOP 1. To promote exports and reduce the imports. 2. Economic measure- Economic measures are mainly divided into two parts: (a) Monetary measures Deflation  Devaluation  Exchange Depreciation  Exchange Control  External Debts (b) Non-monetary measures Discouraging Imports  Export Promotion  Encouragement to Foreign Investment  Attraction to Foreign Tourists  Liberal Industrial Policy  State Trading 3. Political measures- With a view to correcting an adverse balance of payments, political measures can also be taken as under Less Expense on Embassies  End of Political Alliances  Political and Administrative Thriftiness  Changes in basic Political Ideology  Participation of Non-Residents 4. Social Measures- balance of payments can be corrected through the medium of social psychology. 5. International Measures- Formation of new regional or international alliances or market organizations or participation in the existing organization can help reduce adverse balance of payments. SAARC, NAM, EEC, WTO, UNCTAD, etc. are the examples of such alliances. Importance of Balance of Payments Balance of payments occupies an important place in the economy of a country. The same is highlighted as under1. 2. 3. 4. 5. Guide to Economic Conditions and Direction Pictogram of Economic changes Indicator of foreign Dependency Knowledge of Foreign Receipts and payments Indicator of Foreign trade

Question -36. What is the Latest Foreign Trade Policy of India? Or Question –28. What do you understand by new and latest Export Import Policy (EXIM Policy) of India? Answer:
New Foreign Trade Policy of India The Government of India, Ministry of Commerce and Industry announced New Foreign Trade Policy on 27th August 2009 for the period 2009-2014, earlier this policy known as Export Import (Exim) Policy. After five years foreign trade policy needs amendments in general, aims at developing export potential, improving export performance, encouraging foreign trade and creating favorable balance of payments position. The Export Import Policy (EXIM Policy) or Foreign Trade Policy is updated every year on the 31st of March and the modifications, improvements and new schemes becomes effective from April month of each year. The Foreign Trade Policy for the period 2009-2014 was announced on 27th August 2009 at a time when the world was emerging from the shadow of a challenging economic period, the worst we have seen in the last 7 decades. Economies and markets across the world were in turmoil, causing sharp contraction in international trade, adversely impacting global investment flows, rendering over 50 million people jobless. The world trade witnessed an unprecedented contraction of over 12%. In this backdrop, the key objective for the Foreign Trade Policy was to arrest the declining exports and reverse the trend. A multipronged strategy was adopted to provide stability of policy and giving additional support, especially to employment intensive sectors. Market diversification strategy under pinned our approach to reach out to non-traditional destinations in Africa, Latin America and Asia since our traditional markets in the developed world witnessed a sharp contraction in demand. We were also committed to encourage technological up-gradation of exports and undertake an exercise of simplification of procedures for reducing transaction costs. Highlights of the Annual Supplement 2010-11 to the Foreign Trade Policy 2009-14
 

6. 7. 8. 9.

Helpful in National Planning Determinant of National Economic Policy Knowledge of Foreign Investment Helpful for International Financial Organizations

Additional benefit of 2% bonus, over and above the existing benefits of 5% / 2% under Focus Product Scheme, allowed for about 135 existing products. 256 new products added under FPS (at 8 digit level), which shall be entitled for benefits @ 2% of FOB value of exports to all markets.

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Tea and CSNL Cardinol included for benefits under VKGUY @ 5% of FOB value of exports. Zero duty EPCG scheme, introduced in August 2009 and valid for only two years upto 31.3.2011, has been extended by one more year till 31.3.2012. Duty Entitlement Passbook (DEPB) scheme has been extended beyond 31.12.2010 till 30.06.2011. Concessional Export Credit: Interest subvention of 2% for pre-shipment credit for export sectors namely, Handloom, Handicraft, Carpet and SMEs for all export sectors. Exporters shall now have the flexibility to get a high value EPCG authorisation by filing their EPCG application on Annual basis. Clarification on the availability of 4% SAD refund benefit. Facility of a data preparation module for Advance Authorization and Export Promotion Capital Good (EPCG) has been provided on an offline mode. Finished Leather export shall be entitled for Duty Credit Scrip @ 2% under FPS. Duty free import of specified trimmings, embellishments etc. shall be available on Handloom made-ups exports @ 5% of FOB value of exports. Readymade Garment sector granted enhanced support under MLFPS for a period of further 6 months Higher Support for Market and Product Diversification Support for Technological up-gradation Benefit and flexibility to Status Holders Stability / Continuity of the Foreign Trade Policy Procedural Simplification and Reduction of Transaction Cost EDI Initiatives Leather Sector Handloom sector Textiles sector Gems & Jewellery sector Handicraft Sector Service sector Agriculture and Plantation Engineering and Electronics Toys and Sports goods

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Higher Support for Market and Product Diversification 1. Additional benefit of 2% bonus, over and above the existing benefits of 5% / 2% under Focus Product Scheme, allowed for about 135 existing products, which have suffered due to recession in exports. Major sectors include all Handicrafts items, Silk Carpets, Toys and Sports Goods (all of which were earlier eligible for 5% benefits); Leather Products and Leather Footwear, Handloom Products and Engineering Items including Bicycle parts and Grinding Media Balls (all of which were earlier eligible for 2% benefit).

2. 256 new products added under FPS (at 8 digit level), which shall be entitled for benefits @ 2% of FOB value of exports to all markets. Major Sectors / Product Groups are Engineering, Electronics, Rubber & Rubber Products, Other Oil Meals, Finished Leather, Packaged Coconut Water and Coconut Shell worked items. 3. Instant Tea and CSNL Cardinol included for benefits under VKGUY @ 5% of FOB value of exports. 4. Nearly 300 products (at 8 digit level) from the readymade garment sector incentivised under MLFPS for further 6 months from October, 2010 to march, 2011 for exports to 27 EU countries. Support for Technological up-gradation 5. Zero duty EPCG scheme, introduced in August 2009 and valid for only two years upto 31.3.2011, has been extended by one more year till 31.3.2012. In addition, to give a boost to technological up-gradation for additional sectors as well, the benefit of the scheme has been expanded to cover paper & paperboard and articles thereof, ceramic products, refractories, glass & glassware, rubber & articles thereof, Plywood and allied products, marine products, sports goods and toys and additional engineering products. 6. Additional Towns of Export Excellence (TEEs) announced viz. Barmer (Rajasthan) for Handicrafts; Bhiwandi (Maharashtra) for Textiles; and Agra (Uttar Pradesh) for Leather Products. Benefit and flexibility to Status Holders: 7. Status Holders contribute to a substantial part of our exports. To support them to upgrade their technology, 1% Status Holder Incentive Scheme (SHIS) introduced in August 2009 and valid for only two years upto 31.3.2011, has been extended by one more year for 2011-12 exports. In addition, to give a boost to technological upgradation for additional sectors as well, the benefit of the scheme has been expanded to cover chemical & Allied products, paper, paperboard and articles thereof, ceramic products, refractories, glass & glassware, rubber & articles thereof, plywood and allied products, electronics products, sports goods and toys and additional engineering products. 8. Additional flexibility provided for transferability of Duty Credit Scrips being issued to Status Holders under paragraph 3.13.4 of FTP under VKGUY scheme by allowing transfer of scrip for import of cold chain equipments to unit(s) in the Food Park. Stability / Continuity of the Foreign Trade Policy: 9. The popular and exporter friendly Duty Entitlement Passbook (DEPB) scheme has been extended beyond 31.12.2010 till 30.06.2011.

10. Availability of concessional Export Credit: Interest subvention of 2% for pre-shipment credit for export sectors namely, Handloom, Handicraft, Carpet and SMEs for all export sectors, have been allowed till 31.3.2011 in the budget 2010-11. This facility has now been extended to a number of additional products pertaining to sectors like Engineering, leather, textiles, Jute. 11. Advance Authorization for Annual Requirement shall also be exempted from payment of anti-dumping & Safeguard duty in line with the underlying principle that goods and services should be exported and not the taxes and levies. Procedural Simplification and Reduction of Transaction Cost: 12. Exporters shall now have the flexibility to get a high value EPCG authorisation by filing their EPCG application on Annual basis, without the need to file the application for individual capital goods from time to time. It will reduce transaction time and cost. 13. Exporters shall now have the flexibility to Club Advance authorisation with Advance Authorisation for Annual Requirement for the purpose of account closure. 14. To impart flexibility to exporters and to facilitate smooth clearance of consignments, a Single customs notification for the two variants of Advance Authorization scheme namely advance authorisation for physical exports & deemed exports shall be issued. It will also eliminate the ambiguity in clubbing of such exports. 15. Adhoc Norms ratified under Advance Authorisation scheme shall henceforth apply to all cases for the same export product upto one year not only prospectively but also retrospectively. 16. Clarification on the availability of 4% SAD refund benefit, as given by DOR in terms of customs Notification No. 102/2007, only to trader importers, to be also extended to manufacturers, who sell the imported items like traders. 17. Chartered Engineer Certificate for Advance Authorisation on self declared basis, has been dispenced with. This will reduce documentation and the transaction cost. EDI Initiatives: 18. To reduce the transaction cost and time, the scope and domain of EDI is endeavoured to be continuously broadened. To remove redundancy of repeated submissions of RCMC, an ‘e-RCMC’ initiative has been commenced. Under this, the Export Promotion Councils would upload the RCMC data of their members on DGFT’s website only once, thus reducing the procedural burden of repeated submissions and associated cost and time. 19. Facility of a data preparation module for Advance Authorization and Export Promotion Capital Good (EPCG) has been provided on an offline mode, which would reduce the need of continuous online interaction for long and address the connectivity and server response issues significantly.

20. In order to provide wider choice to the users and enlarge access for online filing, additional licenced certifying authorities for digital signatures and banks for electronic fund transfer (EFT) operations have been included in the gamut of EDI operations. 21. The online message exchange for Annual Advance Authorization and Duty Free Import Authorization (DFIA) shall also be made operational with Customs w.e.f. 1.12.2010. Leather Sector: 22. Leather sector shall be allowed re-export of unsold imported raw hides and skins and semi-finished leather from Public bonded warehouses, without payment of any export duty. This will facilitate the logistics for establishment of such warehouses and easy access to raw material for the leather sector. 23. Finished Leather export shall be entitled for Duty Credit Scrip @ 2% under FPS. 24. Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme would significantly benefit the Leather Sector. Handloom sector: 25. Duty free import of specified trimmings, embellishments etc. shall be available on Handloom made-ups exports @ 5% of FOB value of exports. 26. Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme would significantly benefit the Handloom Sector. Textiles sector: 27. Duty free import of specified trimmings, embellishment etc shall be available @ 3% on exports of polyester made-ups in line with the facility available to sectors like Textiles & Leather. It will promote export of products such as micro cloth, which has become popular in home textiles. 28. Readymade Garment sector granted enhanced support under MLFPS for a period of further 6 months from October, 2010 to March, 2011 for exports to 27 EU countries. Gems & Jewellery sector: 29. The list of items allowed for duty free import by Gems & Jewellery sector has been expanded by Inclusion of additional items such as Tags and labels, Security censor on card, Staple wire, Poly bag. This will reduce the cost of the product to some extent. Handicraft Sector:

30. The facility of duty free import of tools under Duty Free Import scrips for Handicraft sector shall be made operational. 31. Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme will significantly benefit the Handicrafts and Silk Carpets sectors. Service sector: 32. Scrips issued under Served From India Scheme (SFIS) can now be used for payment of duty on import of Vehicles, which are in the nature of professional equipment. Agriculture and Plantation: 33. Instant Tea and CSNL Cardinol included for benefits under VKGUY @ 5% of FOB value of exports. 34. Oil Meals (Cotton, rape seed, groundnut), Castor Oil derivatives, Packed Coconut Water and Coconut Shell worked items shall be entitled for benefits @ 2% of FOB value of exports to all markets under FPS. Engineering and Electronics: 35. Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme will significantly benefit Bicycle parts and Grinding Media Balls exporters. 36. Additional items of Engineering, namely, Pipes & Tubes, Electric Generating Sets, Cast Articles of Iron & Steel, Ferro Manganese and Ferro Silicon shall now be entitled for benefit @ 2% under FPS. 37. A number of Engineering items namely, Machine Tools, Compressors, Iron & Steel Structures including Transmission Towers and Scaffolding, LPG Cylinders, Ductile Tubes & Pipes shall now be entitled for benefits @ 2% of FOB value of exports to all markets under FPS instead of their exports to specific markets under MLFPS earlier. 38. Telecom Equipments, Colour TVs, Audio Systems, Optical Media, Semi-conductors, Capacitors, Resistors, PCBs, LEDs, Conductors, Desktops and Notebooks shall now be entitled for benefits @ 2% of FOB value of exports to all markets under FPS instead of their exports to limited market under MLFPS earlier. Toys and Sports goods: 39. Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme will significantly benefit the Toys and Sports Goods Sector.

40. Benefits under Zero duty EPCG and SHIS schemes will significantly promote technological upgradation of Toys and Sports Goods sectors.

Question -29. What are the forms in which business can be conducted by a foreign company in India? What is the procedure for receiving Foreign Direct Investment in an Indian company? Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

A foreign company planning to set up business operations in India may:
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Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary. Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000. An Indian company may receive Foreign Direct Investment under the two routes as given under :

i. Automatic Route FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for Investment' issued by the Government of India from time to time, are attracted. FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. ii. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from Plain paper applications carrying all relevant details are also accepted. No fee is payable.

Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors. The Indian company having received FDI either under the Automatic route or the Government route is required to report in the Advance Reporting Form, the details of the receipt of the amount of consideration for issue of equity instrument viz. shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares through an AD Category –I Bank, together with copy/ ies of the FIRC evidencing the receipt of inward remittances along with the Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount, to the Regional Office concerned of the Reserve Bank of India within 30 days from the date of receipt of inward remittances. Further, the Indian company is required to issue the equity instrument within 180 days, from the date of receipt of inward remittance or debit to NRE/FCNR (B) account in case of NRI/ PIO. After issue of shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares, the Indian company has to file the required documents along with Form FC-GPR with the Regional Office concerned of the Reserve Bank of India within 30 days of issue of shares to the non-resident investors. Sector where FDI is not allowed in India FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors: i) Retail Trading (except single brand product retailing) ii) Atomic Energy iii) Lottery Business iv) Gambling and Betting v) Business of Chit Fund vi) Nidhi Company vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003). viii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005). ix) Trading in Transferable Development Rights (TDRs). x ) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes. Question –30. Economy? What is globalization? What are the Globalization Trend in Indian

Answer. Globalization trends in Indian Economy GlobalisationThe IMF defines globalisation as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.” Globalisation




The world economy has been emerging as global or transnational economy. A global or transnational economy is one which transcends the national borders unhindered by artificial restrictions like Government restrictions on trade and factor movements. The Transnational economy is different from the international economy. The international economy is characterised by the existence of different national economies the economic relations between them being regulated by the national governments. The transnational economy is a border less world economy characterised by free flow of trade and factors of production across national borders. According to Drucker, the transnational economy is characterised by, inter alia the following features:

1. The transnational economy is shaped mainly by money flows rather than by trade in goods and services. These money flows have their own dynamics. The monetary and fiscal policies of sovereign governments increasingly react to events in the international money and capital markets rather than actively shape them. 2. In the transnational economy management has emerged as the decisive factor of production and the traditional factors of production, land and labour, have increasingly become secondary. Money and capital markets too have been increasingly becoming transnational and universally obtainable. 3. In the transnational economy the goal is market maximisation and not profit maximisation. 4. Trade, which increasingly follows investment, is becoming a function of investment. 5. The decision making power is shifting from the national state to the region. (e.g., European Union, NAFTA, etc.) 6. There is a genuine – and almost autonomous – world economy of money, credit and investment flows. It is organised by information which no longer knows national boundaries. 7. Finally, there is a growing pervasiveness of the transnational corporations which see the entire world as a single market for production and marketing of goods and services. Drivers of Globalisation In general, globalisation represents the increasing integration of the world economy, based on five interrelated drivers of change:

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International trade (lower trade barriers and more competition) Financial flows (foreign direct investment, technology transfers/licensing, portfolio investment, and debt) Communications (traditional media and the Internet) Technological advances in transportation, electronics, bioengineering and related fields Population mobility, especially of labor

Globalisation of Business Globalisation is an attitude of mind – it is a mind-set which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environment. Globalisation encompasses the following:
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Doing or planning to expand business globally. Giving up the distinction between the domestic market and foreign market and developing a global outlook of the business. Locating the production and other physical facilities on a consideration of the global business dynamics, irrespective of national considerations. Basic product development and production planning on the global market considerations. Global sourcing of factors of production, i.e., raw materials, components, machinery/technology, finance etc., are obtained from the best source anywhere in the world. Global orientation of the organisational structure and management culture.

Features of current globalisation The period 1870 to 1913 experienced a growing trend towards globalisation. The new phase of globalisation which started around the mid 20th century became very widespread, more pronounced and overcharging since the late 1980s by gathering more momentum from the political and economic changes that swept across the communist countries, the economic reforms in other countries, the latest multilateral trade agreement which seeks to substantially liberalise international trend and investment and the technological and communication revolutions. Essential conditions for globalisation

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Business Freedom: There should not be unnecessary government restrictions which come in way of globalisation, like import restriction, restrictions on sourcing finance or other factors from abroad, foreign investments etc. Facilities: The extent to which an enterprise can develop globally from home country base depends on the facilities available like the infrastructural facilities. Government Support: Although unnecessary government interference is a hindrance to globalisation, government support can encourage Globalisation. Government support may take the form of policy and procedural reforms, development of common facilities like infrastructural facilities, R&D support, financial market reforms and so on. Resources: Resources is one of the important factors which often decides the ability of a firm to globalise. Resourceful companies may find it easier to thrust ahead in the

global market. Resources include finance, technology, R&D capabilities, managerial expertise, company and brand image, human resource etc. Competitiveness: The competitive advantage of the company is very important determinant of success in global business. A firm may derive competitive advantage from any one or more of the factors such as low costs and price, product quality, product differentiation, technological superiority, after sales service, marketing strength etc. Orientation: A global orientation on the part of the business firms and suitable globalisation strategies are essential for globalisation

Globalisation of Indian Business India’s economic integration with the rest of the world was very limited because of the restrictive economic policies followed until 1991. Indian firms confined themselves, by and large, to the home market. Foreign investment by Indian firms was very insignificant. With the new economic policy ushered in 1991, there has, however, been a change. Globalisation has in fact become a buzz-word with Indian firms now, and many are expanding their overseas business by different strategies. Obstacles to Globalisation

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Government policy and procedures: Government policy and procedures in India are among the most complex, confusing and cumbersome in the world. Even after the much publicised liberalisation, they do not present a very conducive situation. One prerequisite for success in globalisation is swift and efficient action. Government policy and the bureaucratic culture in India in this respect are not that encouraging. High Cost: High cost of many vital inputs and other factors like raw materials and intermediates, power, finance infrastructural facilities like port etc., tend to reduce the international competitiveness of the Indian Business. Poor Infrastructure: Infrastructure in India is generally inadequate and inefficient and therefore very costly. This is a serious problem affecting the growth as well as competitiveness. Obsolescence: The technology employed, mode and style of operations etc., are, in general, obsolete and these seriously affect the competitiveness. Resistance to Change: There are several socio-political factors which resist change and this comes in the way of modernisation, rationalisation and efficiency improvement. Technological modernisation is resisted due to fear of unemployment. The extent of excess labour employed by the Indian industry is alarming. Because of this labour productivity is very low and this in some cases more than offsets the advantages of cheap labour. Poor Quality Image: Due to various reasons, the quality of many India products is poor. Even when the quality is good, the poor quality image India has becomes a handicap. Supply Problems: Due to various reasons like low production capacity, shortages of raw materials and infrastructures like power and port facilities, Indian companies in many instances are not able to accept large orders or to keep up delivery schedules.

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Small Size: Because of the small size and the low level of resources, in many cases Indian firms are not able to compete with the giants of other countries. Even the largest of the Indian companies are small compared to the multinational giants. Lack of Experience: The general lack of experience in managing international business is another important problem. Limited R&D and Marketing Research: Marketing Research and R&D in other areas are vital inputs of development of international business. However, these are poor in Indian Business. Expenditure on R&D in India is less than one per cent of GNP while it is two to three per cent in most of the developed countries. Growing Competition: The competition is growing not only from the firs in the developed countries but also from the developing country firms. Indeed, the growing competition from the developing country firms is a serious challenge to India’s international business. Trade Barriers: Although the tariff barriers to trade have been progressively reduced thanks to the GATT/WTO, the non-tariff barriers have been increasing, particularly in the developed countries. Further, the trading blocs like the NAFTA, EC etc., could also adversely affect India’s business.

Factors Favouring GlobalisationHuman Resources: Apart from the low cost of labour, there are several other aspects of human resources to India’s favour. India has one of the largest pool of scientific and technical manpower. The number of management graduates is also surging. It is widely recognised that given the right environment, Indian scientists and technical personnel can do excellently. Similarly, although the labour productivity in India is generally low, given the right environment it will be good. While several countries are facing labour shortage and may face diminishing labour supply, India presents the opposite picture. Cheap labour has particular attraction for several industries. Wide Base: India has a very broad resource and industrial base which can support a variety of business. Growing Entrepreneurship: Many of the established industries are planning to go international in a big way. Added to this is the considerable growth or new and dynamic entrepreneurs who could make a significant contribution to the globalisation of Indian business.

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Growing Domestic Market: The growing domestic market enables the Indian companies to consolidate their position and to gain more strength to make foray into the foreign market or to expand their foreign business. Niche Markets: There are many marketing opportunities abroad present in the form of market niches. Expanding Markets: The growing population and disposable income and the resultant expanding internal market provides enormous business opportunities. Transnationalisation of World Economy: Transnationalisation of the world economy. i.e., the integration of the national economies into a single world economy as evinced by the growing interdependence and globalisation of markets is an external factor encouraging globalisation of India Business NRIs: The large number of non-resident Indians who are resourceful – in terms of capital, skill, experience, exposure, ideas etc.– is an assed which can contribute to the

globalisation of Indian Business. The contribution of the overseas Chinese to the recent impressive industrial development of China may be noted here. Economic Liberalisation: The economic liberalisation in India is an encouraging factor of globalisation. The delicensing of industries, removal of restrictions on growth, opening up of industries earlier reserved for the public sector, import liberalisations, liberalisation of policy towards foreign capital and technology etc., could encourage globalisation of Indian Business. Competition: The growing competition, both from within the country and abroad, provokes many Indian companies to look to foreign markets seriously to improve their competitive position and to increase the business.

Question -31. What is the concept of MNC (Multi National Companies or Corporations)? Write down the roles of MNCs. Answer:
Multi- National Corporation or Multi National Company (MNC) A multinational corporation (MNC) or multinational Company is a corporation enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation. The International Labour Organization (ILO) has defined an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries. Some multinational corporations are very big, with budgets that exceed some nations' gross domestic products (GDPs). Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization.

Role of Multinational Corporations Multinational corporations (MNCs) are huge industrial organizations having a wide network of branches and subsidiaries spread over a number of countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies. Such a company may enter into joint venture with a company in another country. There may be agreement among companies of different countries in respect of division of production, market, etc. These companies are to be found in almost all the advanced countries, with the USA perhaps the biggest amongst them. Their operations extend beyond their own countries, and cover not only the advanced countries but also the LDCs. Many MNCs have annual sales volume in excess of the entire GNPs of the developing countries in which they operate. MNCs have great impact on the development process of the Underdeveloped countries.

Let us discuss the arguments for and against the operation of MNCs in underdeveloped countries. Arguments for MNCs (The positive role): The MNCs play an important role in the economic development of underdeveloped countries. 1. Filling Savings Gap: The first important contribution of MNCs is its role in filling the resource gap between targeted or desired investment and domestically mobilized savings. For example, to achieve a 7% growth rate of national output if the required rate of saving is 21% but if the savings that can be domestically mobilised is only 16% then there is a ‘saving gap’ of 5%. If the country can fill this gap with foreign direct investments from the MNCs, it will be in a better position to achieve its target rate of economic growth. 2. Filling Trade Gap: The second contribution relates to filling the foreign exchange or trade gap. An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the MNCs can generate a net positive flow of export earnings. 3. Filling Revenue Gap: The third important role of MNCs is filling the gap between targeted governmental tax revenues and locally raised taxes. By taxing MNC profits, LDC governments are able to mobilize public financial resources for development projects. 4. Filling Management/Technological Gap: Fourthly, Multinationals not only provide financial resources but they also supply a “package” of needed resources including management experience, entrepreneurial abilities, and technological skills. These can be transferred to their local counterparts by means of training programs and the process of ‘learning by doing’. Moreover, MNCs bring with them the most sophisticated technological knowledge about production processes while transferring modern machinery and equipment to capital poor LDCs. Such transfers of knowledge, skills, and technology are assumed to be both desirable and productive for the recipient country. 5.Other Beneficial Roles: The MNCs also bring several other benefits to the host country. (a) The domestic labour may benefit in the form of higher real wages. (b) The consumers benefits by way of lower prices and better quality products. (c) Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to ‘feed’ the main industries of the MNCs (d) MNCs expenditures on research and development(R&D), although limited is bound to benefit the host country. Apart from these there are indirect gains through the realization of external economies.

Arguments Against MNCs (The negative role): There are several arguments against MNCs which are discuss below. 1. Although MNCs provide capital, they may lower domestic savings and investment rates by stifling competition through exclusive production agreements with the host governments. MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of indigenous firms. 2. Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts. The current account may deteriorate as a result of substantial

importation of intermediate and capital goods while the capital account may worsen because of the overseas repatriation of profits, interest, royalties, etc. 3. While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host government. 4. The management, entrepreneurial skills, technology, and overseas contacts provided by the MNCs may have little impact on developing local skills and resources. In fact, the development of these local skills may be inhibited by the MNCs by stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets. 5. MNCs’ impact on development is very uneven. In many situations MNC activities reinforce dualistic economic structures and widens income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites. 6. MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country. 7. The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs. 8. MNCs often use their economic power to influence government policies in directions unfavorable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidized inputs, cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits. 9. Multinationals may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They drive out local competitors and inhibit the emergence of small-scale enterprises.

Role of MNCs and Indian Policy Commitment to Multilateral Institutions
For the first time in 1971, the group of 77 resolved to have surveillance on the activities of MNCs so that the balance of payments of the lo-income countries is not strained on account of greater outflow. Again, it was reiterated at the Non-aligned Conference of 1972 that foreign investment should be in conformity with the national development objectives in the host country. During 1970s the UN Commission on Transnational Corporations prepared a code of conduct for MNCs. The code required an MNC to bide by the rules and regulation of the host country, adhere to its economic policy and socio-cultural objectives share information with the host government and not to engage in unethical activities. There are thus a number of mechanisms for controlling MNCs operation both at the national and the international levels. The mechanism at the national level is better implemented. But those at the international level are only suggestive and not binding on MNCs with the result that they are not very effective. The need of the day is to make the international codes legally bindings. Trade regulation at the national level was found as far back as during mercantilism. But the regulation of trade the international level is of recent origin. The creation of the General Agreement of Tariffs and Trade (GATT) in 1947 was beginning of multilateral regulation in

international trade. The creation of GATT was an interim arrangement and so with the evolution of consequences at the international level, the World Trade Organization (WTO) came into being in 1995. The WTO substituted GATT for providing more effective stimuli to the multilateral trading system. It also regulates foreign direct investment through TRIMS. The GATT will always be remembered for conferring upon the world trading system a multilateral character as also for making world trade more restriction free. The WTO has steeped into same shoes with more vibrant measures. It would thus be worthwhile to explain what actually formed the basis for multilateral trade negotiation during the past five decades. Hock man and Kostecki (1995) refer to four principles. They are – 1.) Non – Discrimation - It is referred to in the very preamble of the GATT, is amplifies in two key provisions, they are, Article I, adopting the principle of “Most – favored Nation’s Treatment (MFNT)”and Article III, adopting the principle of national treatment. 2.) Reciprocity - It implies quid pro quo. Any reduction in the level of protection on one member country has to be matched by a equivalent reduction in the level of protection given tot eh country. The reciprocity criteria may be interpreted in two ways. One involves the exchange of similar concession such as tariff concession against tariff concession. The other proved for the exchange of dissimilar concessions such as tariff concession as against removal of quota. This principle based on quid pro quo that is any concession given by one country has to be matched by the other. 3.) Market Access - The concept of market access is based on an open trading system where competition prevails among suppliers located in different countries. A country cannot arise tariff beyond level for limiting access to its market. If it does, it will have to compensate the affected parties. 4.) Fair Competition - Competition should be fair and it should not harm the trading partner. The WTO maintains transparency it its own dealings and likes its members to maintain transparency in their trade policies and procedure. This is way the GATT rules have provided for imposing anti-dumping duty in order to counter any move for unwarranted dumping. Dumping refer to selling gods abroad at a price lower than the domestic price.

Foreign Investment

FDI Wholly Owned Subsidiary

Joint Venture


Port Folio Investment

Investment by Foreign Institutional Investors

Investment by Global Depositary Receipt American Depositary Receipts

Question. 32. What is the impact of multilateral institution like WTO, IMF, World Bank on Indian Business Environment? Or Question- Write short note on following: (i) WTO (ii) IMF (iii) World Bank Question- Discuss the impact of WTO on India’s environment for foreign trade. May 2011 Answer: (i) WTO WTO (World Trade Organization)
WTO is a new globally recognized trade organization with the new name succeeding GATT (General Agreement on Tariffs and Trade) on renewed agreements and having new vision and strong enforcement power to promote international trade. WTO consists of a council for goods, council for service and a council for intellectual property right. WTO along with a World Bank and the IMF will greatly influence global stage policy. Now there is need for strengthen relationship between the activities of the WTO, IMF and the World Bank as a way of ensuring greater coherence in global economic policy making.

Features of WTO
1.) 2.) 3.) 4.) 5.) It is an international organization to promote multilateral trade. It has replaced GATT. It promotes free trade by removing tariff and non-tariff barriers in international trade It has fixed set of rules and regulation and it has legal status Agreements agreed by members-countries are binding on all members of WTO and if any members does not follow such agreements, then its complains can be lodged with the dispute settlement Body of WTO. 6.) It includes trade in goods; trade in services, protection of intellectual – property rights, trade related investment measures etc. 7.) Unlike international monetary fund (IMF) and the World Bank, it I not an agent of United Nations. 8.) Unlike international monetary fund (IMF) and the World Bank, there is no weighted voting; rather all the WTO members have equal voting rights (One country, One Vote.)

Objectives of WTO

a.) The primary aim of WTO is to implement the new world trade system as visualized in the agreement. b.) To promote world trade in a manner that benefits every country. c.) To ensure that developing countries secure a better balance in the sharing of the advantage resulting from the expansion of international trade corresponding to their developmental needs d.) To demolish all hurdles to an open world trading system and use world trade as an effective instrument to foster economic growth. e.) To enhance competitiveness among all trading partners so as to benefits consumers. f.) To increase the level of production and productivity with a view to increase level of employment in the world. g.) To expand and utilize world resources in the most optimum manner. h.) To improve the level of living for the global population and speed up economic development of the member nations. i.) To promote multilateral trade. j.) To eliminate discrimatory treatment in international trade by abolishing tariff and nontariff barriers.

Function of WTO
1.) To lay down code of conduct aiming at reducing tariff and non-tariff barriers in international trade. 2.) To implement WTO agreement and administer the international trade. 3.) To cooperate with IMF and World Bank and its associates for establishing coordination in global economic policy making. 4.) To settle trade related dispute with the help of its dispute settlement Body (DSB). 5.) To review trade related economic policies of member countries with the help of its Trade Policy Review Body (TPRB). 6.) To provide technical assistance and guidance related to management of foreign trade and fiscal budget to its member nations. 7.) To act as forum for trade liberalization.

Scope of WTO
GATT was mainly concerned with promotion of trade of goods. Trade in services was not given much emphasis. While in WTO trade in services have also been promoted. It has following main areas – 1.) Trade in goods 2.) Trade related intellectual property right 3.) Trade related investment measures 4.) General agreement on trade in services
The WTO has stronger implementation power and wider acceptance for the implementation of the Agreement than ever before under GATT. Its principal agreement is as under – 1.) Reduction in domestic subsidies. 2.) Reduction in export subsidies. 3.) Improvement in Market Access. 4.) Public distribution system.

WTO STRUCTURE All WTO members may participate in all councils, committees, etc, except Appellate Body,
Dispute Settlement panels, Textiles Monitoring Body, and plurilateral committees

Answer: (ii) IMF
International Monetary Fund (IMF) The International Monetary Fund (IMF) is a post war international monetary institution. United States Treasury in 1943 published a proposal for establishment of an international Stabilization Fund. U.K. around the same time proposed the establishment of an International Clearing Union. The USA’s proposal is known as ‘White Plan’ (Mr. White is the author) and UK’s proposal is known as ‘Keynes Plan’ (author is Lord Keynes). A joint plan is prepared in 1944 in the form of joint statement by experts for the establishment of International Monetary Fund. This became the basis for International Monetary and Financial Conference at Bretton Woods, New Hampshire during July 1-22, 1944. An agreement was reached to establish International Monetary Fund by 44 Nations in this conference. Thus, the International Monetary Fund (IMF) came into being to promote economic and financial co-operation among the member countries with a view to facilitate the expansion and balanced growth of world trade with effect from March 1, 1947. The number of members of IMF increased from 44 in 1947 to 181 in June 1996. Objectives of IMF To avoid the competitive devaluation and exchange control. To establish and maintain currency convertibility with stable exchange rates. To develop multilateral trade and payments. To promote international monetary co-operation through a permanent institution which provides machinery for consultation and collaboration on international monetary problems.  To provide exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.  To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange transactions which hamper the growth of world trade.  To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.     Organization Structure The IMF is an autonomous organization affiliated to the U.N.O. The organization structure of the IMF consists of:  Board of Governors

 Executive Board  A Managing Director  IMF secretariat helps managing director in carrying out the activities  Interim Committee  Development Committee Board of Governors: The Board of Governors is the decision-making organ of the Fund. The Board of Governors is the highest body. It exercises powers and takes decisions. The Board of governors consists of one Governor and one Alternate Governor appointed by each member country. The member country appoints its Finance Minister or the Governor of its Central Bank as the Governor. The Governor has the right to vote. The Alternate Governor participates in the Board Meetings, but has voting right only in the absence of the Governor. Board of Governors meets once in a year and reviews previous year’s activities of the Fund. It also takes policy decisions. Any five member countries having 25 per cent of the total voting rights can convene a special meeting. However, power to make major decisions in the following area is delegated to the Board of Directors:  Access by the members to the Fund’s resources.  Charges and remuneration.  Review of fund and consultations among its members. The Executive Board: The Executive Board, at present has 21 members. Five major members of Fund are appointed by the countries having largest quotas, viz., USA, UK, Germany, France and Japan. The Sixth Executive director is appointed by the Kingdom of Saudi Arabia (as it has the two largest contributors to the fund). The remaining 15 directors are elected by the remaining member countries. Articles of Agreement confer vast powers on the Board. And the Board of Governors also delegates the powers. These powers include: All fund activities including regulatory, supervisory and financial. To bring the major changes, 85% of voting rights is essential. Thus the Executive Board is an important organ of the IMF. Managing Director: The Executive Directors elect the Managing Director, who is a politician or an important international official. The Managing Director is a non-voting chairman of the Board and the head of the Fund staff. The Interim Committee: The interim committee, at present has 22 members. It was created in 1974. The objectives of this committee are:   To advise the Board of Governors on supervising the management. To advise the Board of Governors on adaptation of the international monetary system with a view to avoid disturbance.

The Development Committee: This committee was also established in 1974 and has 22 members. Its objective is top:  Advise and report to Board of Governors on all aspects of the transfer of real resources to developing countries.

Functions of IMF  The fund is regarded as, “the guardian of good conduct” in the area of balance of payments.  IMF aims at reducing tariffs and other trade restrictions by the member countries.  It provides technical advice to its members regarding monetary and fiscal policies.  It provides short-term financial assistance to its members to get rid of the balance of payments problems/crisis.  It provides machinery for the orderly adjustment of exchange rates.  It functions as a lending institution of foreign currencies. It functions as a reservoir of currencies of member countries and enables the members to borrow the other currencies.  It also provides machinery for international consultancy.  It conducts research studies and publishes the reports.  It conducts short-term training courses on fiscal, monetary and balance of payments for employees of member countries through its Central Banking Services Department, the Fiscal Affairs Department, Bureau of Statistics and the IMF institute.

Answer: (iii) World Bank
International Bank for Reconstruction and Development (IBRD) The International Monetary and Financial Conference was held at Bretton Woods, New Hampshire during July 1-22, 1944 has given birth to the twin international financial institution, viz., International Monetary Fund (IMF) and the International Bank for Reconstruction and development (IBRD). IBRD is popularly known as World Bank. IBRD is established on 5th December 1944.IMF was established to provide short-term assistance to correct the balance of payment disequilibrium while the IBRD was established to provide long-term assistance for the reconstruction and development of the economies of the member countries. IBRD is an inter-governmental institution, corporate in form. Its capital is entirely owned by its member-governments. Functions The functions of the World Bank are:

 To assist in the reconstruction and development of territories of its members by facilitating the investment of capital for productive purpose and the encouragement of the development of productive facilities and resources in developing countries.  To promote private foreign investment by means of guarantees on participation in loans and other investment made by private investors, when capital is not available on reasonable terms, to supplement private investment by providing finance for productive purpose out of its own resources or from borrowed funds.  To promote the long-range balanced growth of international trade and the maintenance of equilibrium in the balance of payments of member countries by encouraging international investment for the development of their productive resources, thereby assisting in raising productivity, the standard of living and conditions of workers in their territories.  To arrange the loans or guarantees by it in relation to international loans through other channels so that more useful and urgent small and large projects are dealt with first. Memberships Any country can join as a member of the IBRD by signing in the Charter of the Bank as its subscriber. Bank can suspend any member, if the country concerned fails to discharge its responsibilities o the IBRD. The members of the IMF are also the members of the World Bank. The membership of the Bank as on June 30, 1996 was 181. The member country has to pay all the dues and also its share of losses, if it resigns. Organization Structure The IBRD is managed by a three-tier structure including Board of Governors, Executive Directors and President. Board of governors: The Board of Governors is vested with full authority and control over the Bank’s activities. Each member country appoints normally its Finance Minister as a Governor and the Governor of its Central Bank as Alternate Governor for the Board of Governors of World Bank for a period of 5 years. The alternate Governor exercises his voting right only in the absence of the Governor. The strength of the voting rights of the Governor depends upon the amount of the contribution of the country to the share capital of the bank. Out of the total voting rights the share of USA is 22.5% and UK’s share is 9.11%. The Board of Governor normally meets once in a year. However, it meets quite often, if necessary. Executive Directors: A body of 21 Executive Directors supervises the entire operations of the Bank. Out of these 21 directors, five are appointed by the five largest shareholders of the World Bank, viz., USA, UK, Germany, France and Japan. The remaining 16 Directors elected by

the Governors of the remaining member countries. These 21 directors elect the President of the Bank, who presides over the monthly meetings of the executive Directors. The Scope of the decisions of the Executive Directors includes:  Policy making within the framework of the Articles of Agreement.  Loans and credit proposals. The executives Directors present to the Board of Governors:  Audited annual accounts  Administrative budget  Annual report on the operation and policies of the bank. President: The president of the Bank normally does not have voting right except in case of exercising equal rights. He is assisted by senior Vice Presidents and Directors of various departments in the day-to-day functioning of the bank.