UNIT II: ECONOMIC

ENVIRONMENT

Business
Environment
BBA LLB
 ECONOMIC ENVIRONMENT
• Financial Market Reforms:
• Reforms in Indian Money Market, Primary Capital Market & Secondary Capital Market

• Union Budget:
• Concept, Main Constituents of Budget, Various Types of Budgetary Deficits.

• Price & Distribution Controls:

• Objectives, Price Controls; Direct vs Indirect, Administered Prices, Dual Pricing,
Subsidization, Public Distribution System.

• Privatization:
• Concept, Ways of Privatization, Disinvestment Process in India

• Exit Policy
Components of Indian financial syste
UNION BUDGET
• Union Budget
• Concept,
• Main Constituents of Budget,
• Various Types of Budgetary Deficits.
 BUDGET MEANING

• The term “budget” comes from the old French

word, bougette, meaning a small bag. “That was the
small purse filled with gold coins that the shipowners
gave to the sea captains before sending them off to
the Far East to buy spices and other goods to be brought
back to Europe,” writes Bjarte Bognes in his book, 
Implementing Beyond Budgeting (Wiley, 2017).
 UNION BUDGET -
MEANING
According to Article 112 of the Indian
Constitution, the Union Budget of a year, also
referred to as the annual financial statement, is
a statement of the estimated receipts and
expenditure of the government for that
particular year.

Government budget is an annual statement,

showing item wise estimates of receipts and
expenditure during fiscal year i.e. financial year.
The receipts and expenditure, shown in the
 COMPONENTS OF
BUDGET
Components of budget refers to structure of the
budget.
1. Revenue Budget

2. Capital Budget
 REVENUE BUDGET
 It deals with the revenue aspect of the government budget. It
explains how revenue is generated or collected by the
government and how it is allocated among various
expenditure heads. Revenue budget has two parts:
 Revenue Receipts
 Revenue Expenditures 

 Revenue budget includes the government's revenue receipts

and expenditure. There are two kinds of revenue receipts - tax
and non-tax revenue. Revenue expenditure is the expenditure
incurred on day to day functioning of the government and on
various services offered to citizens. If revenue expenditure
exceeds revenue receipts, the government incurs a revenue
deficit.
 CAPITAL BUDGET: 
 It deals with the capital aspect of the government
budget and it consists of:
 Capital Expenditures

 Capital Receipts

 Capital Budget includes capital receipts and payments of

the government. Loans from public, foreign governments
and RBI form a major part of the government's capital
receipts. Capital expenditure is the expenditure on
development of machinery, equipment, building, health
facilities, education etc. Fiscal deficit is incurred when
the government's total expenditure exceeds its total
revenue.
 BUDGET RECEIPTS
 Budget Receipts refer to the estimated money receipts
of the government from all sources during a given fiscal
year.

 Budget receipts may be further classified as:

i. Revenue Receipts

ii. Capital Receipts Other Receipts Recovery Of Loans

 REVENUE RECEIPTS
 Revenue receipts refer to those receipts which neither
create any liability nor cause any reduction in the assets
of the government. They are regular and recurring in
nature and government receives them in its normal
course of activities. A receipts Is revenue receipt, if it
satisfies the following two essential conditions:

 The receipts must not create a liability for the

government.

 The receipts must not cause decrease in the assets.

 CAPITAL RECEIPTS
 Capital receipts refer to those receipts which either
create a liability or cause a reduction in the assets of the
government. They are non-recurring and non-routine in
nature. A receipt is a capital receipt if it satisfies any
one of the two conditions:

The receipt must create a liability for the government

The receipts must cause a decrease in the assets

 BUDGET EXPENDITURE
 Budget expenditure refers to the estimated expenditure
of the government during a given fiscal year. The budget
expenditure can be broadly categorized as:

A. Revenue Expenditure

B. Capital Expenditure
REVENUE EXPENDITURE
 Revenue Expenditure refers to the expenditure which
neither creates any asset nor causes any reduction in
any liability of the government. It is recurring in nature.
 It is incurred on normal functioning of the government.
 Examples: Payment of salaries, pensions, interests,
etc. An expenditure is a revenue expenditure, if it
satisfies the following two essential condition:

a) The expenditure must not create an asset of the

government.

b) The expenditure must not cause decrease in an

liability.
 CAPITAL EXPENDITURE
 Capital expenditure refers to the expenditure which
either creates an asset or causes a reduction in the
liabilities of the government. It is non-recurring in
nature. It adds to capital stock of the economy and
increases its productivity through expenditure on long
period development programmes. Examples: Loan to
states and Union Territories, etc. An expenditure is a
capital expenditure, if it satisfies any one of the
following two conditions:

1. The expenditure must create an asset for the

government.

2. The expenditure must cause a decrease in the

 BUDGETARY DEFICIT
 Budgetary deficit is defined as the excess of total
estimated over total estimated revenue. When the
government spends more than it collects, then it incurs
a budgetary deficit. With reference to budget of Indian
government, budgetary deficit can be of 3 types:

 Revenue Deficit

 Fiscal Deficit

 Primary Deficit
 WHY PRICE AND DISTRIBUTION
CONTROLS
• Scarcity, market imperfections and social concerns made
price and distribution controls as one of the important
means of achieving the socio-economic goals in many
planned, especially developing, economies
• The important factors that call for price and distribution
controls in countries like India are short supply of goods
and services; an unreasonable level of prices in the free
market and the very low levels of income of a large
number of people
 PRICE AND DISTRIBUTION
CONTROLS
 Government has significant role in regulating price and
distribution to maintain smooth economy in nation. It
has been established that if there is good production,
but it has no value when the goods produced are not
delivered to the end-users at the right time in the right
quantity and at the reasonable price.

 Price Control is a regulatory mechanism used by the

government to achieve socio- economic objective
 OBJECTIVES OF
PRICE AND DISTRIBUTION CONTROL
There are seven objectives which price controls which are
described below

1. To ensure a reasonable degree of price stability.

2. Equity and distributive justice - protection against abnormal

price fluctuation

3. To maintain quality of goods and service

4. For prevention of misuse of monopoly, unfair and restrictive

trade practice

5. To ensure that commodities are available at reasonable price

6. To curb black market

7. To ensure a reasonable degree of price stability.

 METHOD OF
PRICE AND DISTRIBUTION CONTROL
 METHOD OF
PRICE AND DISTRIBUTION CONTROL
 REGULATIONS

• Industries (Development and Regulation) Act, 1951

• Essential Commodities Act, 1955
• Competition Act 2002 (Previously MRTP Act, 1969)
• Foreign Trade Development and Regulation Act [earlier the
Imports and Exports (Control) Act
• Prevention of Blackmarketing and Maintenance of Supplies of
Essential Commodities Act, 1980
• Conservation of Foreign Exchange and Prevention of
Smuggling Act, 1947
 PRIVATIZATION
1. Privatization is the process of transferring ownership
of a business, enterprise, agency, public service or
property from the public sector (government) to the
private sector or to private non-profit organizations.
The term is also used in a quite different sense, to
mean government out-sourcing of services to private
firms.
 THE MAIN ASPECTS OF
PRIVATIZATION IN INDIA ARE AS
FOLLOWS
 Autonomy to Public sector :

Greater autonomy was granted to nine PSUs referred

to as ‘navaratnas’ ( ONGC, HPCL, BPCL, VSNL, BHEL) to
take their own decisions.

 De-reservation of Public Sector :

The number of industries reserved for the public sector

were reduced in a phased manner from 17 to 8 and
then to only 3 including Railways, Atomic energy,
Specified minerals. This has opened more areas of
investment for the private sector and increased
competition for the public sector forcing greater
 THE MAIN ASPECTS OF
PRIVATIZATION IN INDIA ARE AS
FOLLOWS
 Disinvestment Policies :

Till 1999-2000 disinvestment was done basically

through sale of minority shares but since then the
government has undertaken strategic sale of it’s
equity to the private sector handing over complete
management control such as in the case of VSNL ,
BALCO .etc
 POTENTIAL BENEFITS OF
PRIVATIZATION

 Improved efficiency

The main argument for privatisation is that private companies

have a profit incentive to cut costs and be more efficient. If
you work for a government run industry, managers do not
usually share in any profits. However, a private firm is
interested in making a profit, and so it is more likely to cut
costs and be efficient. Since privatisation, companies such as
BT, and British Airways have shown degrees of improved
efficiency and higher profitability.
 THE MAIN ASPECTS OF
PRIVATIZATION IN INDIA ARE AS
FOLLOWS
 Lack of political interference

It is argued governments make poor economic managers.

They are motivated by political pressures rather than sound
economic and business sense. For example, a state enterprise
may employ surplus workers which is inefficient. The
government may be reluctant to get rid of the workers
because of the negative publicity involved in job losses.
Therefore, state-owned enterprises often employ too many
workers increasing inefficiency.
 THE MAIN ASPECTS OF
PRIVATIZATION IN INDIA ARE AS
FOLLOWS
 Short term view

A government many think only in terms of the next election.

Therefore, they may be unwilling to invest in infrastructure
improvements which will benefit the firm in the long term
because they are more concerned about projects that give a
benefit before the election.

 Shareholders

It is argued that a private firm has pressure from shareholders

to perform efficiently. If the firm is inefficient then the firm
could be subject to a takeover. A state-owned firm doesn’t
have this pressure and so it is easier for them to be inefficient.
 THE MAIN ASPECTS OF
PRIVATIZATION IN INDIA ARE AS
FOLLOWS
 Increased competition

Often privatisation of state-owned monopolies occurs alongside

deregulation – i.e. policies to allow more firms to enter the industry
and increase the competitiveness of the market. It is this increase in
competition that can be the greatest spur to improvements in
efficiency. For example, there is now more competition in telecoms
and distribution of gas and electricity.

 Government will raise revenue from the sale

Selling state-owned assets to the private sector raised significant

sums for the UK government in the 1980s. However, this is a one-off
benefit. It also means we lose out on future dividends from the
profits of public companies.
 DISADVANTAGES OF
PRIVATISATION
 Natural monopoly

A natural monopoly occurs when the most efficient number of

firms in an industry is one. For example, tap water has very
significant fixed costs. Therefore there is no scope for having
competition amongst several firms. Therefore, in this case,
privatisation would just create a private monopoly which
might seek to set higher prices which exploit consumers.
Therefore it is better to have a public monopoly rather than a
private monopoly which can exploit the consumer.
 DISADVANTAGES OF
PRIVATISATION
 Public interest

There are many industries which perform an important public

service, e.g., health care, education and public transport. In
these industries, the profit motive shouldn’t be the primary
objective of firms and the industry. For example, in the case of
health care, it is feared privatising health care would mean a
greater priority is given to profit rather than patient care. Also,
in an industry like health care, arguably we don’t need a profit
motive to improve standards. When doctors treat patients,
they are unlikely to try harder if they get a bonus.
 DISADVANTAGES OF
PRIVATISATION
 Government loses out on potential dividends.

Many of the privatized companies in the UK are quite

profitable. This means the government misses out on their
dividends, instead going to wealthy shareholders.

 Problem of regulating private monopolies.

Privatisation creates private monopolies, such as the water

companies and rail companies. These need regulating to
prevent abuse of monopoly power. Therefore, there is still
need for government regulation, similar to under state
ownership.
METHOD OF PRIVATISATION
 Liquidation / Dis-investment:

Government to sale of a state-owned firm to the private

sector

 Subsidization:

Government makes provision of grants to non-profit orgs for

public service

 Outsourcing :

Retention of responsibility but hiring a private contractor

BUSINESS ENVIRONMENT

Chapter
15 PRIVATISATION AND
DISINVESTMENT
• Privatisation means transfer of ownership and/or
management of an enterprise from the public sector
to the private sector. It also means the withdrawal of
the State from an industry or sector, partially or fully.
Another dimension of privatisation is opening up of
an industry that has been reserved for the public
sector to the private sector.
 WAYS OF PRIVATISATION
• There are different ways of achieving privatisation.
• One of the important ways of privatisation is
divestiture, or privatisation of ownership, through
the sale of equity.
• Another way of privatisation is contracting.
• Another option for the government is to withdraw
from the provision of certain goods and services
leaving them wholly or partly to the private sector.
• Privatisation may also take the form of
privatisation of management, using leases and
management contracts.
• The important ways of privatisation are the following:
1. Divestiture
2. Denationalisation
3. Contracting
4. Franchising
5. Government withdrawing
6. Privatisation of management
7. Liquidation
 BENEFITS OF PRIVATISATION

• Privatisation benefits the society in several ways.

Some of them are
1. reduces the fiscal burden
2. enables the government to mop up funds
3. result in better management of the enterprises
4. encourage entrepreneurship
SINS AND PITFALLS OF PRIVATISATION

1. Lack of Proper Strategy

2. Ambiguity of Objectives
3. Connivance
4. Wrong Timing
5. Lack of Political Consensus
6. Wrong Labour Strategies
7. Lack of Political Will
8. Poor Financial Strategies
9. Wrong Environment
10. Prevalence of Monopoly Elements
11. Problem of Cultural Change
BUSINESS ENVIRONMENT

Chapter
18 PRICE AND
DISTRIBUTION
CONTROLS
 OBJECTIVES OF PRICE AND
DISTRIBUTION CONTROLS
1. Equity or Distributive Justice
2. Maintain Quality of Goods and Services
3. Prevention of Monopolistic, Restrictive and Unfair
Trade Practices
4. Augmentation of Supply
5. Enlargement and Smoothening of the Supply System
6. Supply of Inputs to Priority Sectors
7. Resource Allocation
8. Prevention of Hoarding and Blackmarketing
9. Control of Inflation and Deflation
 PRICE CONTROLS

INDIRECT CONTROLS
Indirect controls are exercised mainly
through the monetary policy, fiscal policy
and commercial (foreign trade) policy.
DIRECT CONTROLS
Direct controls work through legislative
and administrative measures.
 ADMINISTERED PRICES

The term administered price often refers to the

government determined price.
Administered prices were generally fixed on the
recommendations of an expert body.
The principal aim of the administered price
system is the protection of the interests of both
the producers and consumers.
 DUAL PRICING

• Some commodities like sugar, cotton

textiles, paper and aluminium were subject
to dual pricing in India in the past.
 SUBSIDISATION

• Prices of certain commodities are directly affected

by the policy of subsidisation.
• The principal objective of subsidies is the
protection of weaker sections and priority sectors.
 THE ESSENTIAL COMMODITIES ACT

• The main purpose of the Essential Commodities Act,

1955, was to provide, in the interest of the general
public, for the control of the production, supply and
distribution of, and trade and commerce in, certain
commodities.
• This Act empowers the Central Government to
regulate or prohibit the production, supply and
distribution of, and trade and commerce in, any
essential commodity.
 THE PUBLIC DISTRIBUTION SYSTEM

• Public Distribution System (PDS), under which the

government makes available essential mass consumption
goods at reasonable prices, especially to the poor.
• In June 1997 the Government launched the Targeted
Public Distribution System (TPDS) by streamlining the
PDS by issuing special cards to the families below the
poverty-line (BPL) and selling essential articles under
PDS to them at specially subsidised prices.
BUSINESS ENVIRONMENT

Chapter
33 EXIT POLICY
• Exit policy refers to the policy regarding the retrenchment of
the surplus manpower resulting from restructuring of industrial
units or the workers becoming unemployed by the closure of
sick units. The exit policy in its wider context covers the policy
for the compensation for the employees who leave the
organisation and the measures for their rehabilitation also.
 NEED FOR THE EXIT POLICY
• Surplus manpower is a major problem of many
industrial units in India.
1. Surplus manpower increases costs which becomes a
major drawback in to days correct competitive market.
2. Many unviable risk units both in public and private
sector to be closed. Otherwise, they society has to
been the cost of the same.
3. Technology is converting industry from labour
intensive to capital intensive.
 EXTENT OF OVERMANNING
• The overmanning has two dimensions, viz., the surplus
even with the existing technology employed by the
enterprises and the surplus that will emerge if the
existing technology is replaced by modem technology.
A study by Mrityunjaya Athreya, conducted in 1987,
revealed that the Steel Authority of India (SAIL) had a
surplus of 80,000 workers.
At least 50 per cent of the workers of the State road
transport undertakings were estimated to be surplus.
The same may be true of state electricity boards.
The figures given above give some indication of the
extent of the alarming overmanning of the Indian
economy.
 VRS AND GOLDEN HANDSHAKE
• A popular method to trim the manpower is the
voluntary retirement scheme (VRS). Under the VRS,
employees who have attained forty years of age or
ten years of service would seek voluntary retirement.
The minimum benefits under this scheme would be
forty five days emoluments for each completed year
of service before normal date of retirement or the
monthly emoluments at the time of retirement
multiplied by the remaining months of service before
the normal date of service, whichever is less. The
benefits would be in addition to the amount that has
accrued to the Provident Fund as per the rules or to
the Gratuity fund whichever is applicable.
 NATIONAL RENEWAL FUND

• The objectives of the NRF are the following.

1. To provide assistance to firms to cover the cost of
retraining and redeployment of employees
2. To provide funds for compensation to employees
affected by restructuring or closure of industrial
units
3. To provide funds for employment generation
schemes in the organised and unorganised sectors
in order to provide social safety net for labour.