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Chapter – 1: Foundation of Indian Business- India’s Business Sectors

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1. INTRODUCTION

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1.1 Objectives

1.2 The Concept of Business

1.3 Characteristics of Business Activities

1.4 Objectives of Business

1.5 Business Activities

1.6 Summary

1.7 Exercise

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1.1 Objectives

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After studying this chapter, students are able to:

Understand the concept of Business.

Explain the basic activities of business.

Understand the Manufacturing Sector of India.

Understand the Service Sector of India.

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1.2 The Concept of Business

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Business is an ongoing economic activity, which is related with continuous and regular

production and distribution of goods and services for satisfying human wants. Business

activities can comprise of commercial aspects, the service aspects or both. However, business

is carried out with a motive to earn profit and therefore social services without any profit

motive do not come under business activities.

Definitions of Business

Stephenson defines business as, "The regular production or purchase and sale of goods

undertaken with an objective of earning profit and acquiring wealth through the satisfaction

of human wants."

According to Dicksee, "Business refers to a form of activity conducted with an objective of

earning profits for the benefit of those on whose behalf the activity is conducted."

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Lewis Henry defines business as, "Human activity directed towards producing or acquiring

wealth through buying and selling of goods."

According to William Pride, Robert Hughes and Jack Kapoor, business is 'the organized

effort of individuals to produce and sell, for a profit, the goods and services that satisfy

society's needs.' A business, then, is an organization which seeks to make a profit through

individuals working toward common goals. The goals of the business will vary based on the

type of business, and the business strategy being used. Regardless of the preferred strategy,

businesses must provide a service, product or good that meets a need of society in some way.

Thus, the term business means continuous production and distribution of goods and services

with the aim of earning profits under uncertain market conditions.

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1.3 Characteristics of Business

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The following are the important characteristics of a business:

1. Economic activity:

Business is an economic activity of production and distribution of goods and services. All

business activities are directly or indirectly concerned with the exchange of goods or services

for money or money's worth. It provides employment opportunities in different sectors like

banking, insurance, transport, industries, trade etc. it is an economic activity which creates

utilities for the satisfaction of human wants. Business results into generation of employment

opportunities thereby leading to growth of the economy. It brings about industrial and

economic development of the country.

2. Buying and Selling:

The basic activity of any business is trading. Every business transaction has minimum two

parties that are a buyer and a seller. Business is nothing but a contract or an agreement

between buyer and seller. The business involves buying of raw material, plants and

machinery, furniture, etc. On the other hand, it sells the finished products to the consumers,

wholesaler, retailer etc.

Goods may be divided into following two categories:-

Consumer goods: Goods which are used by final consumer for consumption are called

consumer goods e.g. Rice, Biscuit, Mobile, Fridge etc.

Producer goods: Goods used by producer for further production are called producers goods

e.g. Machinery, equipments, etc. Services are intangible but can be exchanged for value like

providing transport, warehousing and insurance services, etc.

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3. Continuous process:

Business is an ongoing process and it is assumed that the business shall continue in the long

run. Business is not a single time activity. It is a continuous process of production and

distribution of goods and services. A single transaction of trade cannot be termed as a

business. In business, the exchange of goods and services is a regular feature. A businessman

regularly deals in a number of transactions and not just one or two transactions.

4. Profit Motive:

Profit is an indicator of success and failure of business. It is the difference between income

and expenses of the business. The business is carried on with the intention of earning a profit.

The profit is a reward for the services of a businessman. The primary goal of a business is

usually to obtain the highest possible level of profit through the production and sale of goods

and services. It is a return on investment. Profit acts as a driving force behind all business

activities. Profit is required for survival, growth and expansion of the business. It is clear that

every business operates to earn profit. Business has many goals but profit making is the

primary goal of every business. It is required to create economic growth.

5. Risk and Uncertainties:

Risk means some sort of uncertainty in the business. Risk is defined as the effect of

uncertainty arising on the objectives of the business. Risk is associated with every business. If

the risk can be predicted it is known as predictable risk and measures can be taken to

overcome the risk. However, where the risk cannot be predicted are said to be non-

predictable risk. Some risks, such as risks of loss due to fire and theft can be insured. There

are also uncertainties, such as loss due to change in demand or fall in price cannot be insured

and must be borne by the businessman.

Business is exposed to two types of risk, Insurable and Non-insurable. Insurable risk is

predictable.

Predictable factors are controllable to some extent, such as:

a) Taxes

b) Change in the volume of expected sales

c) Cost of supplies and equipment

d) Overhead costs

e) Salaries

f) Cost of goods and services offered

Unpredictable factors include:

a) Changes in trends and tastes of customers.

b) Impact of the local economy on customer base.

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c) Any unexpected action taken by your competitors.

The calculation and management of the risk is vital to ensure the success of a business firm.

Insurance and Risk management helps in minimizing the risk associated with the business.

6. Creative and Dynamic:

Modern business is creative and dynamic in nature. Business firm has to come out with

creative ideas, approaches and concepts for production and distribution of goods and services.

It means to bring things in fresh, new and inventive way. One has to be innovative because

the business operates under constantly changing economic, social and technological

environment. Business should also come out with new products to satisfy the growing needs

of the consumers. The real life examples covers changing life style and gadgets say for e.g.

Mobiles with different application and services. Moreover, Mobile banking and M-commerce

are altogether changing very fast. Thus, business needs to continuously update, innovate in

order to survive in the long run.

7. Customer satisfaction:

Business has shifted to consumer-oriented approach. Customer satisfaction is the ultimate

aim of all economic activities. The businessman also desires to satisfy human wants through

conduct of business activities systematically and delivering quality products. Modern

business believes in satisfying the customers by providing quality product at a reasonable

price. Consumers are satisfied only when they get ‘value for money’ for their purchase. The

purpose of the business is to create and retain the customers. The ability to identify and

satisfy the customers is the prime ingredient for the business success.

8. Social Activity:

Business is a socio-economic activity. Modern business is service oriented. Modern

businessmen are conscious of their social responsibility. Today's business is service-oriented

rather than profit-oriented. Both business and society are interdependent. Modern business

runs in the area of social responsibility. Business has some responsibility towards the society

and in turn it needs the support of various social groups like investors, employees, customers,

creditors etc. by making goods available to various sections of the society, business performs

an important social function and meets social needs. Business needs support of different

section of the society for its proper functioning.

9. Government control:

Business organisations are subject to government control. They have to follow certain rules

and regulations enacted by the government. Government ensures that the business is

conducted for social good by keeping effective supervision and control by enacting and

amending laws and rules from time to time.

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10. Optimum utilisation of resources:

Business facilitates optimum utilisation of countries material and non-material resources and

achieves economic progress. The scarce resources are brought to its fullest use for

concentrating economic wealth and satisfying the needs and wants of the consumers.

Check your progress :

1. Uncertainty in the business. Explain

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2. Explain Controllable factors

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3. What is the Control of Government?

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1.4 Objectives of Business

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An important objective of all businesses is to make a profit. Good businesses do this while

rendering social benefits, i.e., benefits to the proprietors, employees, the community at large,

the Government in the form of taxes and above all to the consumer. The objectives can be

classified as economic, social, human and national objectives. Broadly, it can also be divided

as ‘profit’ and ‘other’ objectives. Still others, notably Peter Drucker, suggest a list of ‘key’ objectives — market standing, innovation, productivity, physical and financial resources,

profitability, manager performance and development, worker performance and attitude, and

public responsibility — needed in every area where performance and results directly and

vitally affect the survival and prosperity of the business.

From this viewpoint, it may be emphasized that a business system involves the conversion of

inputs into outputs by employing certain processes with a view to add value (profit) through

the satisfaction of human wants.

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Keeping this perspective, in view, the objectives of business can be divided into the following

five categories:

1. Input-related Objectives

2. Process-related Objectives

3. Output-related Objectives

4. System-related Objectives

5. Society-related Objectives

A brief description of these objectives of business is presented below:

1. Input-Related Objectives:

‘Inputs’ are the resources used for the operation of a business system. Business enterprises need a wide range of inputs or resources such as physical, human, financial, intangible and

relationship resources.

As regards input-resources, the following two things are important:

(i) Securing timely and economical supply of inputs:

Gaining a command over the resources and other inputs for ensuring their steady inflow at

reasonable prices and terms is one of the important input goals of the business enterprise. If

the business system fails to do this, it will either go out of gear (due to delays in production)

or it will go unprofitable (due to high prices of inputs).

(ii) Ensuring quality and reliability of inputs:

Also, the enterprise has to have assurance about the quality and reliability of the inputs such

that their processing and utilisation do not present problems. To sum up, the realization of

input-related objectives demands that enterprises should develop the capability to cope with

diverse, complex, and varying environments of these resource inputs.

2. Process-Related Objectives of Business:

‘Processing’ is the conversion of inputs into useful outputs, that is, changing the form of and adding value to inputs. Business enterprises process input resources into outputs with the help

of other inputs like equipment, technology, human effort and skills in a systematic manner.

The following are the relevant process goals of a business enterprise:

(i) Productive and efficient utilisation of resources:

The resources put at the command of a business enterprise should be utilized in such a

manner that they yield maximum results. It also means that there is no or minimum wastage

of resources.

(ii) Employment of efficient and modern techniques of production:

In order to ensure a productive and efficient utilization of input resources, the processes used

must also be efficient and modern. Efficient and modern techniques of production and

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competent and devoted employees will transform the input resources into useful output with

remarkable success. The increasing use of computers and other electronic devices in

production processes is a pointer in this direction.

(iii) Establishment of effective work processes and systems:

In order to ensure an efficient and productive transformation of input resources, logical work

processes (i.e., series of related tasks that make up the established way of performing a work)

should be established.

The establishment of such procedures would ensure ‘the one best way of doing things’, and their easy handling by employees. Business Process Reengineering (BPR) should be part and

parcel to find out best industry practices.

To sum up, the relevant process goals of a business enterprise are efficiency, high

productivity, minimum wastage, smooth and uninterrupted processes, zero incidence of

accidents, acceptable work behaviour of personnel, establishment of effective work

procedures and systems, and so on. Updating and modernizing work processes is also one of

the significant objectives of the enterprise.

3. Output-Related Objectives of Business:

‘Output’ is the goods and services produced by the business system through the processing of inputs. The kinds of products and services offered by a particular enterprise depends upon its

perception and assumptions, on the availability of sufficient demand, the extent of

competition, the possibility of making adequate profit, and other characteristics of the

external environment.

The most significant product-output objectives of a business enterprise include the

following:

(i) Supply of useful and quality products to customers:

It should be one of the most important goals of a business to produce and market useful

products, i.e., products which meet the varied needs and requirements of customers and are fit

for consumption. Supply of adulterated goods and articles of sub-standard quality will only

alienate the customer goodwill and strike at the very roots of the business.

(ii) Introduction of distinctive features in products:

Apart from the supply of useful and quality products, it is also one of the important output

goals of a business enterprise to introduce distinctiveness (through brand differentiation or

product design) in products so that it is able to carve out its share of the market. Distinctive

and comparative advantages in the products of a business enterprise make it difficult for

competitors to invade its territory. The distinct feature in the products comes through

creativity, new designs, innovative ideas and generally flows from lower level to

management as well as sometimes customer feedback also adds value to the product.

Therefore, product development, product modification requires a lot of research and

development to cater to the customer.

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(iii) Fixation of reasonable prices of products:

The product price charged from the customers must be reasonable — i.e., the money spent by

the customer must be worth the utility of the product. Building genuine customer traffic is

always in the long-term interest of the business. Thus, apart from having different ways of

fixing price for the customer, the competitor price is also concerned along with the demand

and other market forces.

(iv) Utilization of efficient channels of distribution:

Channels of distribution denote the paths used for moving goods from manufacturer to

customer. There is a multitude of channels — like whole-sellers, retailers, dealers, and agents

— that can be used for moving products from manufacturer to the customer. The channels of

distribution should be such that it makes products available to customers at the right time, at

the right place, and in good condition.

It is needless to stress that product-output goals should be formulated in consistency with the

realities of the environment, i.e., customer preferences and tastes, demand conditions cost

factors, the nature of competition, government regulations and policies, and the like.

However, with the growing e-commerce business in last 3 years the trend is shifting towards

online business and moreover nowadays the selling through websites is being taken up by

mobile applications so the business is shifting to a more user friendly and technology savy.

4. System Goals of Business:

‘System’ goals refer to the values, interests, and needs of the business enterprise as a

system. The business enterprise as a system has the following goals:

(i) Survival:

Survival is the will and anxiety to perpetuate into the future as long as possible. It is a basic

objective of most business enterprises. In order to have long journey in the business the value

systems and corporate social resources play a vital role.

While survival is a perennial objective, it becomes more relevant during the initial stage of

the establishment of the enterprise and during general economic adversity. In general, a

business enterprise can survive on a sustained basis if it is able to meet its costs from its

revenues, without impairing the productive capacity.

(ii) Growth:

Growth in the business required dynamism, commitment and a passion to keep doing the

things in a planned and systematic manner. The growth here covers the increase in sales that

is high turnover, wealth generation etc. Enterprise growth may take one or more of the forms

like increase in assets and manufacturing facilities, increase in sales volume in existing or

new products, improvement in profits and market share, increase in manpower employment,

acquisition of other enterprises, and so on.

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Enterprise growth is often associated with significant reformulation of directions, major

initiatives and responses involving new investments, exploration of new technology, new

products, and new markets.

Growth opportunities have profit opportunities and foregoing them is often suicidal. Growth

is a source of economic, social, and political power for the enterprise. A growing enterprise

has better capability to overcome adverse complexities in the environment that a non-growing

enterprise.

(iii) Stability:

Stability is a cautious, conservative objective of a business enterprise and is needed to

safeguard and consolidate its existing strengths and interests, to utilize fully the commitments

of resources and funds already made, and to achieve efficiency. A stable and steady-state

enterprise minimises managerial tension, demands less dynamism from managers, and has

less retaliation from competitors and public agencies.

(iv) Efficiency:

Efficiency is an operational objective of business and consists in rationally choosing

appropriate means to achieve its goals, doing things in the best possible manner, and utilizing

resources in a most suitable combination to get highest productivity.

(v) Profitability:

Profit — as surplus of business revenue over the cost of doing business — is the necessary

objective of a business enterprise. Profit provides autonomy, viability, and dynamism to a

business enterprise. Profit is needed for achieving and maintaining stability, for feeding and

sustaining innovation and diversification, and for enhancing the ability of the enterprise to

absorb shocks and set-backs common in business.

After a certain stage, profit induces business enterprises to behave in a socially responsible

manner and assume important social obligations. Profit brings prestige and status to business

because profit is a hallmark of business success apart from being a strong sign of sound and

vibrant corporate health.

Attainment of these goals contributes to the efficiency and effectiveness of the enterprise in

its interactions with the external environment.

5. Society-Related Objectives of Business:

The socio-human objectives relate the business enterprise to its own people and to the society

as a responsible and progressive entity. Corporate social Responsibility assumes importance

insofar as it explains the dependence of a business enterprise on the people for the

performance of its various activities, and the dynamic environmental setting in which it is to

operate.

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In this context, the following goals are of crucial importance:

(i) Development of human resources:

People are the soul of a business enterprise insofar as they are responsible for its operation

and success. A business is not different from the quality of the people working in it.

Therefore, an important objective of business is to develop its people.

Enterprises have to create a proper climate to enable the employees and workers to develop

and utilize their skills and talents in a productive and satisfying manner. Employee welfare

and satisfaction are to be integrated with the other goals of the enterprise. Enterprises have to

recognise the worth and self-respect of the employees.

(ii) Socially and ethically responsible behaviour with all the stakeholders:

Enterprises are also concerned with socially and ethically responsible dealings and behavior

with customers, suppliers, investors, government and other public agencies, trade and other

associations, and the general public. Socially and ethically responsible behaviour goes a long

way in carrying business activities in an uninterrupted manner, and also projecting a good

image of the business to the society.

(iii) Attainment of national aspirations:

Business should act as an instrument of effecting national aspirations of establishing a

democratic, secular, and inclusive society; removal of concentration of economic power in

the hands of a few persons; and achieving growth with stability and social justice. In a word,

a business enterprise should show concern and commitment to social development by even

subordinating their private self-interest.

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1.5 Business Activities

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Business Activity

Business Activity is an activity undertaken by individuals or companies, such as buying,

selling, marketing, or investing, for the purpose of generating profits or developing economic

opportunities.

Business activities are those which are concerned with seeking to meet the needs of

customers by providing a product or service that they require. There are various stages in the

production of finished goods, so business activity typically involves adding value to

resources such as raw materials, to make them more desirable to the end user.

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Combine factors of production to create goods and services. Factors of Production comprises

of Land, Labour, Capital and Entrepreneur.

Goods and services which satisfies human wants.

Employs people and pays them wages so they can consume other products.

Why is business activity needed

- Provides goods and services from limited resources to satisfy unlimited wants.

- Scarcity results from limited resources and unlimited wants.

- Choice is necessary for scarce resources. This leads to opportunity costs.

- Specialisation is required to make the most out of resources.

Classification of Business Activities

Business Activities can be classified into two categories.

i) Industry

ii) Commerce

i) Industry

Industry refers to business activities which are concerned with production, conversion,

processing or extraction of resources into useful goods. Industry is the production of

a good or service within an economy. Manufacturing industry became a key sector of

production and labour during the Industrial Revolution.

Industries can be classified in a variety of ways. At the top level, industry is often classified

into sectors: Primary or extractive, secondary or manufacturing, and tertiary or services.

Some authors add quaternary (knowledge) or even quinary (culture and research) sectors.

Over time, the fraction of a society's industry within each sector changes.

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They are-

Sector Definition

Primary This involves the extraction of resources (natural products) directly from the

Earth; this includes farming, forestry, mining and fishing. They do not

process the products at all. They send it off to factories to make a profit.

Secondary This group is involved in the processing products from primary industries.

Involve the manufacture of raw materials, into another product by manual

labour or machines.

Secondary industries often use assembly lines e.g. a car factory.

Tertiary Neither produces a raw material nor makes a product. Instead they provide

services to other people and industries. Tertiary industries can include

doctors, dentists, refuse collection and banks.

Quaternary This group is involved in the research of science and technology and other

high level tasks. They include scientists, doctors, and lawyers.

Quinary

Sector

Some consider there to be a branch of the quaternary sector called the quinary

sector, which includes the highest levels of decision making in a society or

economy. This sector would include the top executives or officials in such

fields as government, science, universities, nonprofit, healthcare, culture, and

the media.

The service sector which is also called tertiary sector, The service sector provides a service,

not an actual product that could be held in your hand, activities in the service sector include

retail, banks, hotels, real estate, education, health, social work, computer services, recreation,

media, communications, electricity, gas and water supply etc.

The Other kind of industries, and often organized into different classes or sectors by a

variety of classification systems such as the Global Industry Classification Standard and the

Industry Classification Benchmark are used in finance and market research. These

classification systems commonly divide industries according to similar functions and markets

and identify businesses producing related products. See figure 1.4 Service Sector

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Fig 1.4 : Service Sector

Industries can also be identified by product, such as: chemical industry, petroleum

industry, automotive industry, electronic industry, meatpacking industry, hospitality

industry, food industry, fish industry, software industry, paper industry, entertainment

industry, semiconductor industry, cultural industry, and poverty industry.

Goods

All of the companies are linked in one way or another. For example:

The raw material cotton is extracted by primary industries

The cotton may then be turned into an item of clothing in the secondary industry.

Tertiary industries may advertise the goods in magazines and newspapers.

The quaternary industry may involve the product being advertised or researched to check

that the item of clothing meets the standards that it claims too.

ii) Commerce

Commerce refers to those activities which help directly or indirectly in the

distribution of goods to the ultimate consumer.

Functions of Commerce

a) Helps in removing the hindrance of person.

b) Helps in removing the hindrance of place.

c) Helps in removing the hindrance of time.

d) Helps in removing the hindrance of exchange.

e) Helps in removing the hindrance of risk.

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Classification of Commerce

a) Trade

b) Aid to Trade

a) Trade is an integral part of commerce which comprises of buying and selling of goods

and services. Broadly trade can be further classified as Internal trade and external

trade.

i) Internal Trade – Trade (Buying and selling of goods or services) within the

boundaries of nation is said to be domestic trade or Internal trade that is retail

trade, wholesale trade, online trade etc.

ii) External Trade – A trade (Buying and selling of goods and services) taking

place outside the boundaries of trade that is from other countries is said to be

External trade or International trade. Eg. Tata Motors exporting the Nano car to

America. Therefore, export or import of goods to/from other countries is said to

be external trade.

b) Aid to Trade (Auxilliaries to Trade)

Transport and Communication – Transport refers to movement of goods from

one place to another. Communication helps in exchange of information

between producers, consumers, traders etc

Banking and Finance –Banking and financial activities comprises of banking

services including handling bank transations, issue and processing of cheque,

transfer of payment, loan facility etc

Insurance –Insurance activities are undertaken by the Insurance companies to

cover the risk while doing business. Insurance provides protection from

various risk such as theft, accident, fire etc.

Warehousing –Warehousing provides the services for storage of goods.

Warehouses are constructed keeping in mind the nature of goods. Eg. Cold

Storage for perishable goods.

Service Operations vs. Manufacturing Operations

Service and manufacturing operations have differences, but also similarities. For example,

both create mission statements and a vision for how the organization will be run and

perceived by customers. Each provider or manufacturer wants to lead the market in its

specific industry. However, manufacturing and service operations answer different questions

and formulate different strategies when it comes to planning and managing the way in which

an organization is run.

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Characteristics

Manufacturing operations produce tangible goods, which are physical products that can be

held and seen. Manufacturing can be broken down into two branches: process and discrete

manufacturing. While process manufacturers produce goods that typically use a formula and

ingredients, such as soda pop or pharmaceutical drugs, discrete manufacturers produce goods

from parts, such as electronics, appliances and automobiles. On the other hand, service

operations provide certain intangible services that may not be easily identifiable. Service

operations can be classified into many industries, such as banking, hospitality, advertising

and consultancy.

Customization vs. Standardization

In general, manufacturers have a standardized way of producing goods. Goods are produced

en masse in a factory or warehouse-type environment. One finished product is generally the

same as the next. Service operations, by contrast, have more opportunities to customize the

services they provide. For example, beauticians and hairdressers must customize the styling

and treatments to match the customer's hair, shape of face and other characteristics. Even in

service operations where you receive a tangible product, the service you receive from

workers may not always be the same.

Related Reading: How to Improve an Operations Plan in Customer Service

Production Environment

Manufacturing and service operations both plan the environment in which work takes place,

but they focus on different elements. Manufacturing operations, for instance, consider the

manufacturing layout. For example, the manufacturing layout can be fixed, process-focused

or product-focused, such as in an assembly line factory. These issues affect the

manufacturer's workforce performance and total output. Service operations, by contrast, plan

the environment according to how it affects customers. For example, service operations are

concerned with how the atmosphere appears to customers. Dimensions of the service

environment include the layout of furnishings, arrangement of signs and tangible cues, such

as colors and sounds designed to enhance the customer experience.

Operations Management

In a manufacturing environment, operations managers oversee the activities required to

produce goods from raw materials. Issues managers in this environment face include

managing the space to store raw materials, the flow of materials through the manufacturing

process, how much product to produce and quality of output. In a service operation,

operations managers schedule workers to handle customer demand. They must coach and

train employees to provide optimal services to customers. Service operations that also sell

physical goods also face inventory control issues, such as how much to stock and when to

order.

Similar Issues

Service and manufacturing organizations face many similar issues that affect the end result of

the operation. For example, both face issues of cost control. Manufacturing operations must

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find suppliers of raw materials at the lowest cost -- and highest quality -- possible. Likewise,

service operations' indirect cost of providing services must be kept low so that the

organization can provide competitive prices to customers and still turn a profit. Other issues

both types of operations face include forecasting demand for products and services and

staying competitive in the marketplace.

Differences between Service and Manufacturing Organizations

The main differences between service and manufacturing organizations are: the tangibility of

their output; production on demand or for inventory; customer-specific production; labor-

intensive or automated operations; and the need for a physical production location. However,

in practice, service and manufacturing organizations share many characteristics. Many

manufacturers offer their own service operations and both require skilled people to create a

profitable business.

Goods

The key difference between service firms and manufacturers is the tangibility of their output.

The output of a service firm, such as consultancy, training or maintenance, for example, is

intangible. Manufacturers produce physical goods that customers can see and touch.

Inventory

Service firms, unlike manufacturers, do not hold inventory; they create a service when a

client requires it. Manufacturers produce goods for stock, with inventory levels aligned to

forecasts of market demand. Some manufacturers maintain minimum stock levels, relying on

the accuracy of demand forecasts and their production capacity to meet demand on a just-in-

time basis. Inventory also represents a cost for a manufacturing organization.

Customers

Service firms do not produce a service unless a customer requires it, although they design and

develop the scope and content of services in advance of any orders. Service firms generally

produce a service tailored to customers' needs, such as 12 hours of consultancy, plus 14 hours

of design and 10 hours of installation. Manufacturers can produce goods without a customer

order or forecast of customer demand. However, producing goods that do not meet market

needs is a poor strategy.

Labor

A service firm recruits people with specific knowledge and skills in the service disciplines

that it offers. Service delivery is labor intensive and cannot be easily automated, although

knowledge management systems enable a degree of knowledge capture and sharing.

Manufacturers can automate many of their production processes to reduce their labor

requirements, although some manufacturing organizations are labor intensive, particularly in

countries where labor costs are low.

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Location

Service firms do not require a physical production site. The people creating and delivering

the service can be located anywhere. For example, global firms such as consultants Deloitte

use communication networks to access the most appropriate service skills and knowledge

from offices around the world. Manufacturers must have a physical location for their

production and stock holding operations. Production does not necessarily take place on the

manufacturer's own site; it can take place at any point in the supply chain.

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1.6 Summary of the Chapter

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Business is an economic activity, which is related with continuous and regular production and

distribution of goods and services for satisfying human wants. Business needs can comprise

of commercial aspects, the service aspects or both. However, business is carried out with a

motive to earn profit and therefore social services without any profit motive do not come

under business activities.

An important objective of all businesses is to make a profit. Good businesses do this while

rendering social benefits, i.e., benefits to the proprietors, employees, the community at large,

the Government in the form of taxes and above all to the consumer. The objectives can be

classified as economic, social, human and national objectives. Broadly, it can also be divided

as ‘profit’ and ‘other’ objectives. Still others, notably Peter Drucker, suggest a list of ‘key’ objectives — market standing, innovation, productivity, physical and financial resources,

profitability, manager performance and development, worker performance and attitude, and

public responsibility — needed in every area where performance and results directly and

vitally affect the survival and prosperity of the business.

From this viewpoint, it may be emphasized that a business system involves the conversion of

inputs into outputs by employing certain processes with a view to add value (profit) through

the satisfaction of human wants.

Check your progress

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1.7 Exercise 1: Fill in the blanks

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1. Business is an ongoing economic activity, which is related ..... ....................................

................................ and distribution of goods and services for satisfying human

wants.

2. According to William Pride, Robert Hughes and Jack Kapoor, business is

........................................................................... to produce and sell, for a profit, the

goods and services that satisfy society's needs.'

3. The basic activity of any business is trading. Every business transaction has minimum

two parties that are a...................................... Business is nothing but a contract or an

agreement between buyer and seller.

4. The primary goal of a business is usually to obtain the highest possible level of profit

through the production and sale of....................................

5. Business is exposed to two types of risk....................................

Ans 1. with continuous and regular production, 2. the organized effort of individuals, 3.

buyer and a seller, 4. goods and services, 5. Insurable and Non-insurable

Exercise 2: True and False

State the following statements. Please mark ( T ) on the correct statement and (F) on false

Statement.

1. The term business means continuous production and distribution of goods and services with

the aim of earning profits under uncertain market conditions.

2. Human activity directed towards producing or acquiring wealth through buying and selling of

goods.

3. The basic activity of any business is trading

4. Profit is not required for survival, growth and expansion of the business.

5. The regular production or purchase and sale of goods undertaken with an objective of earning

profit and acquiring wealth through the satisfaction of human wants.

Ans 1 ( T ), 2( T ), 3( T ), 4( F ), 5( T )

Exercise 3: Mix and Match

Match statement A with Statement B

S.No Statement (A) Statement (B)

1. Goods which are used by final consumer for

consumption are called consumer goods e.g. Rice,

Biscuit, Mobile, Fridge etc.

Quaternary

19

2. This group is involved in the research of science and

technology and other high level tasks. They include

scientists, doctors, and lawyers.

Consumer goods

3. A Surplus of business revenue over the cost of doing

business — is the necessary objective of a business

enterprise. Profit provides autonomy, viability, and

dynamism to a business enterprise. Profit is needed

for achieving and maintaining stability, for feeding

and sustaining innovation and diversification, and for

enhancing the ability of the enterprise to absorb

shocks and set-backs common in business.

Primary

4. This involves the extraction of resources (natural

products) directly from the Earth; this includes

farming, forestry, mining and fishing. They do not

process the products at all. They send it off to

factories to make a profit.

Stephenson defines business as,

5. "The regular production or purchase and sale of

goods undertaken with an objective of earning profit

and acquiring wealth through the satisfaction of

human wants."

Profit

Ans. 1. (2), 2. (1), 3. (5), 4. (3), 5. (4)

Exercise 4: Very Short Questions

1. Give an example of genetic Industry?

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2. Give an example of analytical Industry?

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3. Give an example of processing Industry?

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4. Name the Industry which is concerned with extraction of natural resources. (Primary

Industry).

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5. Name the industry which provides various services to the primary and secondary

industries? (Tertiary Industries)

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Exercise 5 : Descriptive Questions

1. Write a short note on manufacturing Industry?

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2. Enumerate the various objectives of business?

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3. Define business and explain its features?

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4. Explain the various types of Industries with suitable examples?

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5. Why is business considered as an economic activity?

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Analyse the Situation

Case -1

Ram’s father gifted him a wrist watch on his birthday. The cost of the wrist watch was 3000. Few months later, ram sold it to shyam (classmate) for RS 3600. He was happy to earn a

profit of Rs 600. He was motivated with his idea of dealing and decided to start his business

of selling wrist watch after his graduation. He started his business as ‘M/S Ram Wrist Stores’ and generated huge profits in two years.

A. Can the transaction between Ram and shyam be termed as business transaction?

No, Single transaction of sale or purchase does not constitute business. It should be

done on regular basis.

B. Can the transaction between M/S Ram Wrist Stores’ and other persons be termed as business transaction?

Yes, because these are the regular transactions undertaken with the intention of

making profit.

22

Chapter – 2: Manufacturing and Service Sector _______________________________________________________________________

2. INTRODUCTION

_______________________________________________________________________

2.1 Objectives

2.2 The Concept of Manufacturing

2.3 Need and Scope of Manufacturing

2.4 SWOT Analysis

2.5 India’s Manufacturing Sector 2.6 Key Constraints of Manufacturing Sector

2.7 Service Sector

2.8 Service Sector in India

2.9 Contribution of Service Sector to Indian Economy

2.10 Summary

2.11 Exercise

_______________________________________________________________________

2.1 Objectives

_______________________________________________________________________

After study this chapter, students are able to:

Understand the meaning and concept of Manufacturing Business.

To understand the need and scope of Manufacturing Sector.

Study the Manufacturing Sector of India.

Study the Service Sector of India.

______________________________________________________________________

2.2 The Concept of Manufacturing

______________________________________________________________________

Manufacturing

The process of converting raw materials, components, or parts into finished goods in

order to meet the customer's expectations. Manufacturing commonly employs a man-

machine setup with division of labour in a large scale production.

Manufacturing is to make or process (a raw material) into a finished product,

especially by means of a large scale industrial operations.

Manufacturing is to make or process (a product), especially with the use of

industrial machines.

A manufacturing business is any business that uses components, parts or raw materials to

make a finished good. These finished goods can be sold directly to consumers or to other

manufacturing businesses that use them for making a different product. Manufacturing

businesses in today's world are normally comprised of machines, robots, computers and

humans that all work in a specific manner to create a product.

Manufacturing plants often use an assembly line, which is a process where a product is

put together in sequence from one work station to the next. By moving the product down

an assembly line, the finished good can be put together quicker with less manual labor. It

is important to note that some industries refer to the manufacturing process

as fabrication.

23

Manufacturing businesses can be very simple, with only a few parts required for

assembly, or they can be very complicated, with hundreds of parts to create a finished

product. Compared to other businesses, manufacturing businesses usually have more

legal regulations and environmental laws to deal with. These things can range from

scrutinized labour laws to environmental and pollution issues.

Although labour unions are not as common as they were 30 years ago, they still exist in

the manufacturing industry where wages, benefits and other rights are negotiated.

Manufacturing of Car, textiles are some of the examples of manufacturing Industry.

______________________________________________________________________

2.3 Need and Scope of Manufacturing

______________________________________________________________________

Need for Manufacturing

Manufacturing is the need of the hour since it contributes to employment as well as the

GDP of country through increase in consumption. The need to raise the global

competitiveness of the Indian manufacturing sector is imperative for the country’s long term-growth. The National Manufacturing Policy is by far the most comprehensive and

significant policy initiative taken by the Government. The policy is the first of its kind

for the manufacturing sector as it addresses areas of regulation, infrastructure, skill

development, technology, availability of finance, exit mechanism and other pertinent

factors related to the growth of the sector.

Manufacturing sector generates employment.

Manufacturing sector generates revenue for the Government.

It contributes to the GDP of the country.

The demand of the economy can be fulfilled through manufacturing industry.

Reduces the dependence on imports.

Supports other auxiliary business/service sectors indirectly.

Scope for Indian Manufacturing

India has already marked its presence as one of the fastest growing economies

of the world.

The country is expected to rank amongst the world’s top three growth economies and amongst the top three manufacturing destinations by 2020.

Favourable demographic dividends for the next 2-3 decades. Sustained

availability of quality workforce.

The cost of manpower is relatively low as compared to other countries.

Responsible business houses operating with credibility and professionalism.

Strong consumerism in the domestic market.

Strong technical and engineering capabilities backed by top-notch scientific

and technical institutes.

Well-regulated and stable financial markets open to foreign investors.

24

______________________________________________________________________

2.4 SWOT Analysis

______________________________________________________________________

SWOT(Strength, Weakness, Opportunities, Threats) Analysis of India Economy

STRENGTH WEAKNESS

Vast Industrial Presence in both Public and

Private Sectors.

Presence of Vast Industrial sickness

Huge demand for Domestic Industrial

goods.

Outdated labor laws, and presence

of too many political labor and

trade union.

Avail of Low-cost, Skilled Human

Resources.

Inadequate and poor quality

infrastructure cost and time delays.

Proactive government continued thrust on

reforms- Further liberalization under

process.

Nascent Regulatory systems to

check misuse of market power by

firms.

Increasing investment in real assets

(Capacity Expanding),

Dependency of Subsidies(SSI –

Small scale industries)

Inflow of FDI(Foreign Direct Investment)

across Industrial sector.

Regulations for FDI and slow system

for approvals.

OPPORTUNITIES THREATS

Vast export marked to explore. Power crises and the virtuous

growth cycling manufacturing

sector.

Growing recognition of “Made in India” brand in global market

Major growth through outscoring

opportunities

Heavy competition in

manufacturing field from china.

Growing number of overseas investment

and acquisition by Indian Firms.

Large informal sector, Poor

working condition and low wages.

Growing Competition of Indian industry

due to focus on efficient and quality.

High corruption and inadequate

environmental safety norms could

affect sustainability

Presence of Deming award winning firms

(Focus on quality)

Inclusion of social (Labor) issues in

trade dialogues could happens

exports (e.g., Child labor)

25

______________________________________________________________________

2.5 India’s Manufacturing Sector

______________________________________________________________________

Manufacturing is slowly but surely sweeping back in the national economic space. India

is witnessing a wave of growth in manufacturing after its decline in the late nineties.

With this new manufacturing opportunity slated to be more skills intensive, the industry

leaders foresee India as well poised to take advantage of this shift. India has also set for

itself an ambitious target of increasing the contribution of manufacturing output to 25 per

cent of gross domestic product (GDP) by 2025, from 16 per cent currently. India's

economy is expected to grow at 7.4 per cent in 2014-15 as per a Government forecast.

Besides, the cost competitiveness, India boasts a nearly 500-million-strong labour force

comprising unskilled workers and English-speaking scientists, researchers, and

engineers, making it a potential destination for cost-effective research and development-

oriented manufacturing.

Manufacturing has large stakes involved, not just because the sector employs 30 per cent

of the non-agricultural workforce in India, but also because of its contribution to the

overall economy/GDP. According to FICCI even though agriculture supports 60% of the

working population, it contributes only 22% of the country's gross domestic product.

This mismatch between distribution of workforce and value added in agriculture is one of

the main reasons for the large number of poor, and this trend is expected to further widen

in the coming decades. Against this background, only a sharp increase in the Indian

manufacturing sector workforce will increase overall income levels of the country. The

economic benefits of playing the manufacturing card are quite clear - if India is to sustain

overall GDP growth of 8% per annum, it is essential that both manufacturing and

services grow at more than 11% even when agriculture growth picks up from its current

2.3%.

With launch of the ‘Make in India’ initiative, Mr Narendra Modi, the Prime Minister of India, aims to give global recognition to the Indian economy and also place India on the

world map as a manufacturing hub.

Role of Govt –‘Make in India’

The Government of India has an ambitious plan to locally manufacture as many as 181

products. The move could help infrastructure sectors such as power, oil and gas, and

automobile manufacturing that require large capital expenditure and revive the Rs 1.85

trillion (US$ 29.74 billion) Indian capital goods business. India is an attractive hub for

foreign investments in manufacturing sector. Several mobile phone, luxury and

automobile brands, among others, have set up or are looking to establish their

manufacturing bases in the country. With impetus on developing industrial corridors and

smart cities, the government aims to ensure holistic development of the nation. The

corridors would further assist in integrating, monitoring and developing a conducive

environment for the industrial development and will promote advance practices in

manufacturing. The Modi government has said it wants to radically de-bureaucratise,

26

deregulate, change officers’ mindsets, cut paperwork and removes the notorious legal

and infrastructure hurdles to starting and doing business in India.

The Government of India has received investment proposals for electronics

manufacturing worth Rs 18,000 crore (US$ 2.89 billion) for 2015-16 and expects the

figure to double in another two years.

India has become one of the most attractive destinations for investments in the

manufacturing sector. Some of the major investments and developments in this sector in

the recent past are:

US-based First Solar Inc and China’s Trina Solar have plans to set up manufacturing facilities in India. Clean energy investments in India increased to

US$ 7.9 billion in 2014, helping the country maintain its position as the seventh

largest clean energy investor in the world.

Samsung Electronics Co Ltd has invested Rs 517 crore (US$ 83.11 million)

towards the expansion of its manufacturing plant in Noida, Uttar Pradesh (UP)

under the UP Mega Policy. “Samsung India Electronics is committed to strengthen its manufacturing infrastructure and will gradually expand capacity at

this plant to meet the growing domestic demand for mobile handsets, as per the

company.

India is currently among the top 10 sourcing countries for IKEA. The plan is to

double sourcing from India to €630 million (US$ 688.61 million) by 2020. Shantha Biotechnics Pvt Ltd has started building a facility to manufacture

Insuman, an insulin product to treat diabetes. Sanofi SA, which acquired Shantha

Biotechnics, will invest Rs 460 crore (US$ 73.93 million) to build the facility.

BMW and Mercedes-Benz have intensified their localization efforts to be part of

‘Make in India’ initiative. "The localization efforts will reduce the waiting period

and accelerate the servicing process of our cars as we had to (previously) depend

on our plants overseas for supply and will help us on the pricing front.”

Suzuki Motor Corp plans to make automobiles for Africa, the company’s next big bet, as well as for India at its upcoming factory in Hansalpur, near Ahmadabad,

Gujarat, as per Mr Toshihiro Suzuki, Executive Vice-President, Suzuki.

Government Initiatives

In a bid to push the 'Make in India' initiative to the global level, Mr Narendra Modi,

Prime Minister of India, plans to pitch India as a manufacturing destination at the World

International Fair in Germany's Hannover. Mr Modi is likely to showcase India as a

business friendly destination to attract foreign businesses to invest and manufacture in

the country.

The Government of India has taken several initiatives to promote a healthy environment

for the growth of manufacturing sector in the country. Some of the notable initiatives and

developments are:

The government has asked New Delhi's envoys in over 160 countries to focus on

economic diplomacy to help government attract investment and transform the

'Make In India' campaign a success to boost growth during the annual heads of

missions conference. Prime Minister Mr Modi has also utilized the opportunity to

brief New Delhi's envoys about the Government's foreign policy priority and

27

immediate focus on restoring confidence of foreign investors and augmenting

foreign capital inflow to increase growth in manufacturing sector.

The Government of Uttar Pradesh (UP) has secured investment deals valued at Rs

5,000 crore (US$ 803.77 million) for setting up mobile manufacturing units in the

state.

The Government of Maharashtra has cleared land allotment for 130 industrial

units across the state with an investment of Rs 6,266 crore (US$ 1.01 billion)

Dr Jitendra Singh, Union Minister of State (Independent Charge) of the Ministry

of Development of North Eastern Region (DoNER), MoS PMO, Personnel,

Public Grievances & Pensions, Atomic Energy and Space, Government of India,

has announced the 'Make in Northeast' initiative beginning with a comprehensive

tourism plan for the region.

The goal of turning India into an industrial manufacturing zone serving Asia all sounds

well and good, but until the country gets its ports and highway system up to modern

standards, able to handle the volume and speed of delivery required, this will just remain

a dream.

______________________________________________________________________

2.6 Key Constraints of Manufacturing Sector

_______________________________________________________________________

Some of the Key Constraints of Manufacturing Sector are -

Higher input costs for manufacturing Sector.

Cost of Finance -Higher rate of Interest and procedural bottlenecks.

Infrastructural problems –Shortage of power, higher transportation cost.

Higher taxes/duties in India.

Labour laws and labour problems.

Getting approvals is a time taking process.

Environmental and Industrial laws are not business friendly.

______________________________________________________________________

2.7 Service Sector

_______________________________________________________________________

In economics, a service is an economic activity where an immaterial exchange of value occurs. Every economy consists of three sectors. They are primary sector (extraction such as mining, agriculture and fishing), secondary sector (manufacturing) and the tertiary sector (service sector). Economies tend to follow a developmental progression that takes them from a heavy reliance on primary, toward the development of manufacturing and finally toward a more service based structure. Historically, manufacturing tended to be more open to international trade and competition than services. As a result, there has been a tendency for the first economies to industrialize to come under competitive attack by those seeking to industrialize later. The resultant shrinkage of manufacturing in the leading economies might explain their growing reliance on the service sector.

28

Service sector comprises of the portion of the economy that produces intangible goods.

Individuals employed in this sector produce services rather than products.

Examples of service sector jobs include housekeeping, KPO, Administrative and

Managerial Jobs, tax preparation and teaching.

The service sector consists of the soft parts of the economy such as insurance,

government, tourism, banking, retail, education, and social services. In soft-sector

employment, people use time to deploy knowledge assets, collaboration assets,

and process-engagement to create productivity, effectiveness, performance

improvement potential and sustainability. Service industry involves the provision

of services to businesses as well as final consumers. Services may involve

transport, distribution and sale of goods from producer to a consumer as may

happen in wholesaling and retailing, or may involve the provision of a service,

such as in pest control or entertainment. Goods may be transformed in the process

of providing a service, as happens in the restaurant industry or in equipment

repair. However, the focus is on people interacting with people and serving the

customer rather than transforming physical goods.

Characteristics of services

Service is an act or performance offered by one party to another. They are

economic activities that create value and provide benefits for customers at specific

times and places as a result of bringing about a desired change in or on behalf of

the recipient of the service. The term service is not limited to personal services

like medical services, beauty parlors, legal services, etc. According to the

marketing experts and management thinkers the concept of services is a wider

one. The term services are defined in a number of ways but not a single one is

universally accepted. The distinct characteristics of services are mentioned below.

Intangibility: Services are intangible we cannot touch them are not physical

objects. According to Carman and Uhl, a consumer feels that he has the right and

opportunity to see, touch, hear, smell or taste the goods before they buy them.

This is not applicable to services. The buyer does not have any opportunity to

touch smell, and taste the services. While selling or promoting a service one has to

concentrate on the satisfaction and benefit a consumer can derive having spent on

these services.

For e.g. An airline sells a flight ticket from A destination to B destination. Here it

is the matter’ of consumer’s perception of services than smelling it or tasting it.

Perishability : Services too, are perishable like labor, Service has a high degree of

perish ability. Here the element of time assumes a significant position. If we do

not use it today, it is a complete waste. It cannot be stored. Utilized or unutilized

29

services are an economic waste. An unoccupied building, an unemployed person,

credit unutilized, etc. are economic waste. Services have a high level of

perishability.

Inseparability: Services are generally created or supplied simultaneously. They

are inseparable. For an e.g., the entertainment industry, health experts and other

professionals create and offer their service at the same given time. Services and

their providers are associated closely and thus, not separable. Donald Cowell

states ‘Goods are produced, sold and then consumed whereas the services are sold and then produced and consumed’. Therefore inseparability is an important

characteristic of services which proves challenging to service management

industry.

Heterogeneity: This character of services makes it difficult to set a standard for

any service. The quality of services cannot be standardized. The price paid for a

service may either be too high or too low as is seen in the case of the

entertainment industry and sports. The same type of services cannot be sold to all

the consumers even if they pay the same price. Consumers rate these services in

different ways. This is due to the difference in perception of individuals at the

level of providers and users. Heterogeneity makes it difficult to establish standards

for the output of service firm.

Ownership: In the sale of goods, after the completion of process, the goods are

transferred in the name of the buyer and he becomes the owner of the goods. But

in the case of services, we do not find this. The users have only an access to

services. They cannot own the service.

For e.g. a consumer can use personal care services or medical services or can use

a hotel room or swimming pool, however the ownership remains with the

providers.

According to Philip Kotler, “A service is an activity or benefit that one party can offer to another that is essentially intangible and does not result in the ownership

of anything. “From this it is clear that the ownership is not affected in the process of selling the services.

Simultaneity: Services cannot move through channels of distribution and cannot

be delivered to the potential customers and user. Thus, either users are brought to

the services or providers go to the user. It is right to say that services have limited

geographical area. According to Carman, “Producers of services generally have a small size area of operations than do the producers of items. largely because the

producer must to get the services or vice- versa.”

When the producers approach the buyer time is taken away from the production of

services and the cost of those services is increased. On the other hand it cost time

30

and money for the buyers to come to producers directly. Here the economics of

time and travel provide incentives to locate more service centers closer, to

prospective customer, resulting in emergence of smaller service centers for e.g.

aeroplane cannot be brought to customer, etc.

Quality Measurement: A service sector requires another tool for measurement.

We can measure it in terms of service level. It is very difficult to rate or quantify

total purchase. E.g. we can quantify the food served in a hotel but the way waiter

serves the customer or the behaviour of the staff cannot be ignored while rating

the total process.

Hence we can determine the level of satisfaction at which users are satisfied. Thus

the firm sells good atmosphere convenience of customers, consistent quality of

services, etc.

Nature of demand- Generally, the services are fluctuating in nature. During the

peak tourist seasons there is an abnormal increase in the demand of services.

Therefore, while identifying the salient features of services one cannot ignore the

nature of demand. E.g. tourists go to hill stations during summer season wherein

public transport utilities are used substantially. This indicates that flexibility is the

important feature of service.

Growth of Services through Government Initiatives

The Government of India recognises the importance of promoting growth in

services sectors and provides several incentives in wide variety of sectors such as

health care, tourism, education, engineering, communications, transportation,

information technology, banking, finance, management, among others.

The Government of India has adopted a few initiatives in the recent past. Some of

these are as follows:

The Central Government is considering a two-rate structure for the goods

and service tax(GST), under which key services will be taxed at a lower

rate compared to the standard rate, which will help to minimize the impact

on consumers due to increase in service tax.

By December 2016, the Government of India plans to take mobile network

to nearly 10 per cent of Indian villages that are still unconnected.

The Government of India has proposed provide tax benefits for transactions

made electronically through credit/debit cards, mobile wallets, net banking

and other means, as part of broader strategy to reduce use of cash and

thereby constrain the parallel economy operating outside legitimate

financial system.

The Reserve Bank of India (RBI) has allowed third-party white label

31

automated teller machines (ATM) to accept international cards, including

international prepaid cards, and has also allowed white label ATMs to tie up with

any commercial bank for cash supply.

______________________________________________________________________

2.8 Service Sector in India

_______________________________________________________________________

Service Sector in India today accounts for more than half of India's GDP.

According to data for the financial year 2013-2014, the share of services

contributes to 58.1 per cent of the GDP, where as industry, and agriculture in

shares 25.4 per cent, and 17.5 per cent respectively. This shows the importance of

service industry to the Indian economy and as service sector now accounts for

more than half the GDP marks a watershed in the evolution of the Indian economy

and takes it closer to the fundamentals of a developed economy.

There was marked acceleration in the growth of services sector in the nineties.

While the share of services in India's GDP increased by 21 per cent points in the

50 years between 1950 and 2000, nearly 40 per cent of that increase was

concentrated in the nineties. While almost all service sectors participated in this

boom, growth was fastest in communications, banking, hotels and restaurants,

community services, trade and business services. One of the reasons for the

sudden growth in the services sector in India in the nineties was the liberalization

in the regulatory framework that gave rise to innovation and higher exports from

the services sector. In the current economic scenario it looks that the boom in the

services sector is here to stay as India is fast emerging as global services hub.

Indian service industry covers a wide gamut of activities like trading, banking

& finance, infotainment, real estate, transportation, security, management and

technical consultancy among several others. The major sectors that combine

together to constitute service industry in India are listed below.

Communication and Information Technology Trade Healthcare & social assistance

Tourism Education Financial services Media Hospitality, accommodation and food services Entertainment and recreation

32

Transportation, Storage and warehousing Professional, scientific and technical services

2.8.1 Indian financial services industry - an overview

Financial services refer to services provided by the finance industry and it

encompasses a broad range of organisations that deal with the management of

money. It is an umbrella category that encompasses a variety of services,

including banks, insurance companies, asset management companies, credit card

companies, consumer finance companies, stock brokerages, investment funds and

government sponsored enterprises. India has one of the most developed financial

services markets in the developing world. Top companies from the United

Kingdom and the United States among others are already active in India's

financial markets. Some of the big names are: Merrill Lynch, Oppenheimer, J.P.

Morgan, Morgan Stanley, Grindlays, Standard Chartered, Hong Kong and

Shanghai Banking Corporation among others. Local financial Institutions such as

the Industrial Development Bank of India (IDBI), Industrial Credit and Investment

Corporation of India (ICICI), Industrial Finance Corporation of India, Unit Trust

of India and the Shipping Credit and Investment Corporation of India have raised

billions through the most sophisticated financial instruments including Deep

Discount Bonds. The two segments that constitute the major part of the Indian

financial services industry are Banking and Life Insurance.

2.8.2 Indian banking industry

Indian banks have played a significant role in the development of Indian

economy by inculcating the habit of saving among Indians and by lending finance

to Indian industry. India has a well-developed banking system. Most of the banks

in India were founded by Indian entrepreneurs and visionaries in the pre-

independence era to provide financial assistance to

33

traders, agriculturists and budding Indian industrialists. Indian banks can be broadly

classified into nationalized banks or public sector banks, private banks and foreign banks.

2.8.2.1 Public Sector Banks (Nationalized Banks)

Banking System in India is dominated by nationalised banks. The nationalisation

of banks in India took place in 1969. The major objective behind nationalisation was to

spread banking infrastructure in rural areas and make available cheap finance to Indian

farmers. Fourteen banks were nationalised in 1969. Before 1969, State Bank of India

(SBI) was the only public sector bank in India. SBI was nationalised in 1955 under the

SBI Act of 1955. The second phase of nationalisation of Indian banks took place in the

year 1980. Seven more banks were nationalised with deposits over 200 crores. List of

Public Sector Banks in India is as follows

Table 4.1 List of Public Sector Banks in India

1. Allahabad Bank 15. State Bank of Bikaner & Jaipur

2. Andhra Bank 16. State Bank of Hyderabad

3. Bank of Baroda 17. State Bank of India (SBI)

4. Bank of India 18. State Bank of Indore

5. Bank of Maharashtra 19. State Bank of Mysore

6. Canara Bank 20. State Bank of Patiala

7. Central Bank of India 21. State Bank of Saurashtra

8. Corporation Bank 22. State Bank of Travancore

9. Dena Bank 23. Syndicate Bank

10. Indian Bank 24. UCO Bank

11. Indian Overseas Bank 25. Union Bank of India

12. Oriental Bank of Commerce 26. United Bank of India

13. Punjab and Sind Bank 27. Vijaya Bank

14. Punjab National Bank

(Source: RBI)

34

2.8.2.2. Private Banks in India

All the banks in India were earlier private banks. But after nationalisation of banks

in 1969 public sector banks came to occupy dominant role in the banking structure.

Private sector banking in India received a fillip in 1994 when Reserve Bank of India

encouraged setting up of private banks as part of its policy of liberalisation of the Indian

Banking Industry. Private Banks have played a major role in the development of Indian

banking industry. They have made banking more efficient and customer friendly. In the

process they have jolted public sector banks out of complacency and forced them to

become more competitive. Major Private Banks in India are listed below

Table 4.2: List of Private Banks in India

1. Bank of Rajasthan 11. ING Vysya Bank

2. Bharat Overseas Bank 12. Jammu & Kashmir Bank

3. Catholic Syrian Bank 13. Karnataka Bank

4. Centurion Bank of Punjab 14. Karur Vysya Bank

5. Dhanalakshmi Bank 15. Kotak Mahindra Bank

6. Federal Bank 16. SBI Commercial and International

7. HDFC Bank Bank

8. ICICI Bank 17. South Indian Bank

9. IDBI Bank 18. United Western Bank

10. IndusInd Bank 19. UTI Bank

20. YES Bank

(Source: RBI)

2.8.2.3. Foreign Banks in India

Foreign banks have brought latest technology and latest banking practices in India.

They have helped Indian Banking system to be more competitive and efficient.

Government has come up with a road map for expansion of foreign banks in India. The

road map has two phases. During the first phase between March 2005 and March 2009,

foreign banks may establish a presence by way of setting up a wholly owned subsidiary

(WOS) or conversion of existing branches into a WOS. The second phase will

35

commence in April 2009 after a review of the experience gained after due consultation

with all the stake holders in the banking sector. The review would examine issues

concerning extension of national treatment to WOS, dilution of stake and permitting

mergers/acquisitions of any private sector banks in India by a foreign bank. Major foreign

banks in India are as listed below.

Table 4.3 List of Foreign banks in India

1 ABN-AMRO Bank

2 Abu Dhabi Commercial Bank Ltd.

3 American Express Bank Ltd

4 BNP Paribas

5 Citibank

6 DBS Bank Ltd

7 Deutsche Bank

8 HSBC Ltd

9 Standard Chartered Bank

(Source: RBI)

2.8.3 Indian Life Insurance - An Overview

Life Insurance in its modern form came to India from England in the year

1818.The Indian Life Assurance Companies Act, 1912 was the first statutory measure to

regulate life business. An Ordinance was issued on 19th January 1956 nationalizing the

Life Insurance sector and Life Insurance Corporation came into existence in the same

year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies-

245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the

Insurance sector was reopened to the private sector. The process of re-opening of the

sector had begun in the early 1990s and the last decade and more has seen it been opened

up substantially. In 1999, the Insurance Regulatory and Development Authority (IRDA)

was constituted as an autonomous body to regulate and develop the insurance industry.

The IRDA opened up the market in August 2000 with the invitation for application for

36

registrations. The Authority has the power to frame regulations under Section 114A of

the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging

from registration of companies for carrying on insurance business to protection of

policyholders’ interests.

India is the fifth largest life insurance market in the emerging insurance

economies globally and the segment is growing at a healthy 32-34 per cent annually. The

insurance industry’s sales rose the fastest in two years since April 2007. The country’s 22 life insurance companies saw 29.5 per cent rise in premium collected through sale of

new policies to US$ 758 million in April 2009, as against US$ 585 million in the

corresponding period last year. In case of LIC, which recorded 69.33 per cent growth in

first-year premium during April 2009, a bulk of the growth came from the group single

premium segment and individual single premium rose to US$ 89.8 million from US$ 77

million in the corresponding period of last year. According to a report by research firm

RNCOS—'Booming Insurance Market in India (2008– 2011)'—the total life insurance

premium in India is projected to grow to US$ 259.72 billion by 2010–11. Life Insurance

Corporation (LIC) is bullish on growth and is targeting business in excess of US$ 59.14

billion by 2011–12.

Table 4.4 Important milestones in the Indian life insurance industry

1818 Oriental Life Insurance Company, the first life insurance company on

Indian soil started functioning.

1870 Bombay Mutual Life Assurance Society, the first Indian life insurance

company started its business.

1912 The Indian Life Assurance Companies Act enacted as the first statute to

regulate the life insurance business.

1928 The Indian Insurance Companies Act enacted to enable the government to

collect statistical information about both life and non-life insurance

businesses.

1938 Earlier legislation consolidated and amended to by the Insurance Act with

the objective of protecting the interests of the insuring public.

1956 245 Indian and foreign insurers and provident societies are taken over by

the central government and nationalized. LIC formed by an Act of

Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore

from the Government of India.

37

Until Life Insurance industry comprised mainly Life Insurance Corporation of

1.4.2000 India.

Date of Reg. Name of the Company.

7 new

23.10.2000 HDFC Standard Life Insurance Company Ltd.

entrants 15.11.2000 Max New York Life Insurance Co. Ltd.

In the 24.11.2000 ICICI Prudential Life Insurance Company Ltd.

financial year

2000- ’01 10.01.2001 Kotak Mahindra Old Mutual Life Insurance Ltd

31.01.2001 Birla Sun Life Insurance Company Ltd.

12.02.2001 Tata AIG Life Insurance Company Ltd.

30.03.2001 SBI Life Insurance Company Ltd.

02.08.2001 ING Vysya Life Insurance Company Private Ltd.

2001-’02 03.08.2001 Bajaj Allianz Life Insurance Company Limited.

06.08.2001 Metlife India Insurance Company Pvt. Ltd.

03.01.2002 Reliance life Insurance Company Pvt. Ltd. (ANP Sanmar

LICPL.)

2002-’03 14.05.2002 Aviva Life Insurance Co. India Pvt. Ltd.

2003-’04 06.02.2004 Sahara India Insurance Company Ltd.

2005-’06 17.11.2005 Shriram Life Insurance Company Ltd.

2005-’07 22.08.2006 Bharti AXA Life Insurance Company Ltd.

04.09.2007 Future General India Life Insurance Company Limited

2007-‘08 19.12.2007 IDBI Fortis Life Insurance Company Ltd.

08.05.2008 Canara HSBC Oriental Bank of Commerce Life

27.06.2008

Insurance Co. Ltd.

2008-‘09 27.06.2008 Aegon Religare Life Insurance Company Ltd.

27.06.2008

DLF Pramerica Life Insurance Company Ltd.

Star Union Dai-ichi Life Insurance Co. Ltd.

38

_______________________________________________________________________

2.9 Contribution of Service Sector to Indian Economy

_______________________________________________________________________

The services sector with an around 57 per cent contribution to the gross domestic product

(GDP), has made rapid strides in the last few years and emerged as the largest and fastest-

growing sector of the economy. Besides being the dominant sector in India’s GDP, it has also contributed substantially to foreign investment flows, exports, and employment. India’s services sector covers a wide variety of activities that have different features and dimensions. They

include trade, hotel and restaurants, transport, storage and communication, financing, insurance,

real estate, & business services, community, social and personal services and services associated

with construction. Services in India are emerging as a prominent sector in terms of contribution

to national and states’ incomes, trade flows, foreign direct investment (FDI) inflows, and

employment. The compound annual growth rate (CAGR) of services sector GDP was 8.5 per

cent for the period 2000-01 to 2013-14. As per the survey, in India, the growth of services-sector

gross domestic product (GDP) has been higher than that of overall GDP between the FY01-

FY14. Services constitute a major portion of India’s GDP with a 57 per cent share in GDP at factor cost (at current prices) in 2013-14, an increase of 6 per cent points over 2000-01.

The shift from primary and secondary activities to tertiary activities by the citizens of a country

indicates that it is on the path of progress. The growth in the services sector can be attributed

mostly to the emergence of the Indian Information Technology (IT) and IT enabled Services

(ITeS) sectors as well as e-commerce.

Market Size

The services sector in India comprises a wide range of activities such as transportation, logistics,

financial, business process outsourcing services, healthcare, trading, and consultancies, among

many others. The HSBC India Services PMI stood at 51.1 in November 2014 – a reading above

50 signals expansion. According to the data provided by International Data Corporation (IDC),

the total mobile services market revenue in India is expected to touch US$ 37 billion in 2017

growing at a compound annual growth rate (CAGR) of 5.2 percent. The growth in the ITeS

sector has resulted in increasing competition between the different brands in the e-commerce

sector. As a result, it is expected that the e-commerce sector will generate close to 150,000 jobs

within the next 2-3 years.

The logistics sector in India which was valued at US$ 101 billion in 2013 is expected to grow by

10 per cent per annum to reach US$ 136 billion by 2016, according to Mr R Dinesh, Chairman,

CII Institute of Logistics Advisory Council and Joint Managing Director, TVS Sons Ltd.

Investments

The Indian services sector has attracted the highest amount of FDI equity inflows in the period

April 2000-December 2014, amounting to about US$ 41,755.46 million which is about 18 per

cent of the total foreign inflows, according to the Department of Industrial Policy and Promotion

(DIPP).

39

Some of the developments and major investments by companies in the services sector in the

recent past are as follows:

Zomato has acquired Cibando, one of Italy’s largest restaurant search services. With this acquisition, the company has a presence in 20 countries. Zomato further aims to widen its

international presence by entering 15 more countries in 2015.

The private security services industry in India is expected to register a growth of over 20

per cent over the next few years, doubling its market size to Rs 80,000 crore (US$ 12.94

billion) by 2020.

Snapdeal.com has acquired gifting recommendation technology platform

Wishpicker.com. The acquisition will enable Snapdeal to further personalise user

experience and drive conversions through intelligent recommendations.

The Government of India has awarded a contract worth Rs 1,370 crore (US$ 221.63

million) to Ricoh India Ltd and Telecommunications Consultants India Ltd (TCIL) to

modernise 129,000 post offices through automation.

Global online food delivery marketplace Foodpanda has acquired TastyKhana in India.

Now, Foodpanda will have a selection from over 2,500 restaurants in 10 cities.

Taxi service aggregator Ola plans to scale up operations to 100 cities from 19 currently.

The company, which is looking at small towns for growth, also plans to invest in driver

eco-system, such as training centres and technology upgrade.

Government Initiatives

Strong and consistent emphasis on self-reliance in its economic development programmes over

the years by the Government of India has also enabled India to build up a big and versatile cadre

of professionals. They now have expertise and skills across a vast and wide-ranging spectrum of

disciplines, such health care, tourism, education, engineering, communications, transportation,

information technology, banking, finance, management, among others.

The Government of India has adopted a few initiatives in the recent past. Some of these are as

follows:

The Government of India plans to take mobile network by December 2016 to nearly 10

per cent of Indian villages that are still unconnected.

The Reserve Bank of India (RBI) has allowed third-party white label automated teller

machines (ATM) to accept international cards, including international prepaid cards, and

has also allowed white label ATMs to tie up with any commercial bank for cash supply.

The Government of India has launched tourist visa on arrival (TVoA) enabled by

electronic travel authorisation (ETA) to 43 countries.

India and Japan held a Joint Working Group conference for Comprehensive Cooperation

Framework for Information and Communication Technologies (ICT). India also offered

Japan to manufacture ICT equipment in India.

Citizens of India is expected to get a minimum of 2 megabits per second (MBPS) Wi-Fi

speed at every government owned service point such as railways stations, airports, bus

stops, hospitals and all government departments that deal with the public on a daily basis.

40

Road Ahead

Services sector growth is governed by both domestic and global factors. The sector is expected to

perform well in FY16. Some improvement in global growth and recovery in industrial growth

will drive the services sector to grow 7.4 per cent in FY16 (FY15: 7.3 per cent). The

performance of trade, hotels and restaurants, and transport, storage and communication sectors

are expected to improve in FY16. Loss of growth momentum in commodity-producing sectors

had adversely impacted transport and storage sectors over the past two years. The financing,

insurance, real estate and business services sectors are also expected to continue their good run in

FY16. The growth performance of the community, social and personal services sector is directly

linked with government expenditure and we believe that the government will remain committed

to fiscal consolidation in FY16.

_______________________________________________________________________

2.10 Summary

________________________________________________________________________

The process of converting raw materials, components, or parts into finished goods in order to

meet the customer's expectations. Manufacturing commonly employs a man-

machine setup with division of labour in a large scale production. Strong and consistent

emphasis on self-reliance in its economic development programmes over the years by the

Government of India has also enabled India to build up a big and versatile cadre of professionals.

They now have expertise and skills across a vast and wide-ranging spectrum of disciplines, such

health care, tourism, education, engineering, communications, transportation, information

technology, banking, finance, management, among others.

Manufacturing is slowly but surely sweeping back in the national economic space. India is

witnessing a wave of growth in manufacturing after its decline in the late nineties. With this new

manufacturing opportunity slated to be more skills intensive, the industry leaders foresee India as

well poised to take advantage of this shift.

_______________________________________________________________________

2.11 Exercise

Exercise 1: Fill in the blanks

1. Manufacturing is to make or process (a raw material) into a …………………….. especially by means of a large scale industrial operations.

2. Manufacturing is the need of the hour since it contributes to employment as well as the

GDP of country through increase in ………………………...

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3. Indian banks have played a significant role in the development of Indian economy

by inculcating the habit of saving among Indians and by …………. …………. to Indian industry.

4. The manufacturing industry where wages, benefits and other rights are negotiated.

Manufacturing of Car, textiles are some of the examples of ………………………….. 5. The services sector in India comprises a wide range of activities such as

transportation, logistics, financial, business process outsourcing services,

healthcare, trading, and consultancies,………………………………..

Ans 1. Finished product, 2. Consumption 3. lending finance , 4. manufacturing Industry ,

5. among many others,

Exercise 2: True and False

State the following statements. Please mark ( T ) on the correct statement and (F) on false

Statement.

1. Manufacturing is to make or process (a product), especially with the use of industrial

machines.

2. Manufacturing sector generates employment.

3. Strong technical and engineering capabilities backed by top-notch scientific and technical

institutes.

4. Well-regulated and stable financial markets open to foreign investors.

5. Indian service industry covers a wide gamut of activities like trading, banking &

finance, infotainment, real estate, transportation, security, management and

technical consultancy among several others.

Ans 1 ( T ), 2( T ), 3( T ), 4( T ), 5( T )

Exercise 3: Mix and Match

Match statement A with Statement B

S.No Statement (A) Statement (B)

1

1870

Oriental Life Insurance Company, the first life insurance

company on Indian soil started functioning.

42

2

1818

Bombay Mutual Life Assurance Society, the first Indian

life insurance company started its business.

3

1928

The Indian Life Assurance Companies Act enacted as the

first statute to regulate the life insurance business.

4

1938

The Indian Insurance Companies Act enacted to enable

the government to collect statistical information about

both life and non-life insurance businesses.

5

1912

Earlier legislation consolidated and amended to by the

Insurance Act with the objective of protecting the

interests of the insuring public.

Ans. 1. (2), 2. (1), 3. (5), 4. (3), 5. (4)

Exercise 4: Very Short Questions

1. Does service involve sale of a product or transfer of ownership of any physical

product?

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2. What do you mean by the statement that services are intangible?

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3. State any one difference between services and goods?

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4. What is the scope of Indian manufacturing Sector?

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Exercise 5 : Descriptive Questions

1. Differentiate between manufacturing sector and Service Sector?

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2. Discuss the India’s service sector and the role of Government?

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3. Why is Indian economy focusing on manufacturing sector through ‘Make in India’ whereas other economies are focusing on service sector?

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4. Do the ‘SWOT’ Analysis of Indian Economy?

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5. Can India become a developed country without a strong industrial base?

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6. Consider any service sector; categorize the types of service personnel in that

sector.

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Chapter – 3 : Liberalisation, Privatisation and Globalisation _______________________________________________________________________

3.0 INTRODUCTION ________________________________________________________________________

3.1 Objectives

3.2 Introduction

3.3 Economic Reforms

3.4 Privatisation

3.5 Liberalisation

3.6 Concept of Globalisation

3.7 Summary

3.8 Exercise

_______________________________________________________________________

3.1 Objectives ________________________________________________________________________

After study this chapter, students are able to:

Understand the concept of LPG.

To understand the advantages and disadvantages of Liberalisation.

To understand the concept of privatisation and PPP Model.

To discuss the phases of globalisation.

To discuss the opportunities and threats of globalisation.

_______________________________________________________________________

3.2 Introduction ________________________________________________________________________

The economy of India had undergone significant policy shifts in the beginning of the 1990s.

This new model of economic reforms is commonly known as the LPG or Liberalisation,

Privatisation and Globalisation model. The primary objective of this model has been to

liberalise the economy and integrate it with other economies in order to increase share in

external trade. Other objectives were to make the economy of India the fastest developing

economy in the globe. The economic reforms undertaken with respect to industrial sector,

trade sector and financial sector aimed at making the economy more efficient. The economic

reforms have transformed the state of Indian economy towards growth and development.

Moreover, the economy has been integrating with rest of the countries on trade and financial

aspects through various agreements and trade policies in force. Indian economy has

established itself amongst other economies to be growing economy and is considered as

emerging economy and named as ‘BRICS’ by economist Jim O'Neill, of Goldman Sachs in

2001, in a report on growth prospects for the economies of Brazil, Russia, India and China –

which together represented a significant share of the world's production and population. The

acronym ‘BRICS’ is Brazil, Russia, India, China and South Africa and the common thing is

that all these countries are growing and attracting the foreign investors to do business with

45

them. It is said in the international market that if a country is not doing business with

‘BRICS’ than the country is not doing international business at all. That’s how the country India is felt in the International Market.

Now that India is in the process of restructuring her economy, with aspirations of elevating

herself from her present position in the world, and is set to attract FDI through the campaign

‘Make in India’. The need to speed up her economic development is even more imperative.

And having witnessed the positive role that Foreign Direct Investment (FDI) has played in

the rapid economic growth of most of the Southeast Asian countries and most notably China,

India has embarked on an ambitious plan to emulate the successes of her neighbors to the east

and is trying to sell herself as a safe and profitable destination for FDI.

This era of reforms has also ushered in a remarkable change in the Indian mindset, as it

deviates from the traditional values held since Independence in 1947, such as self reliance

and socialistic policies of economic development, which mainly due to the inward looking

restrictive form of governance, resulted in the isolation, overall backwardness and

inefficiency of the economy, amongst a host of other problems. This, despite the fact that

India has always had the potential to be on the fast track to prosperity.

Globalization has many meanings depending on the context and on the person who is talking

about. Though the precise definition of globalization is still unavailable a few definitions are

worth viewing, Guy Brainbant: says that the process of globalization not only includes

opening up of world trade, development of advanced means of communication,

internationalization of financial markets, growing importance of MNCs, population

migrations and more generally increased mobility of persons, goods, capital, data and ideas

but also infections, diseases and pollution. The term globalization refers to the integration of

economies of the world through uninhibited trade and financial flows, as also through mutual

exchange of technology and knowledge. Ideally, it also contains free inter-country movement

of labor. In context to India, this implies opening up the economy to foreign direct investment

by providing facilities to foreign companies to invest in different fields of economic activity

in India, removing constraints and obstacles to the entry of MNCs in India, allowing Indian

companies to enter into foreign collaborations and also encouraging them to set up joint

ventures abroad; carrying out massive import liberalization programs by switching over from

quantitative restrictions to tariffs and import duties, therefore globalization has been

identified with the policy reforms of 1991 in India.

Indian economy is set to attract foreign investment and that’s how ‘Make in India’ campaign is spreading across the globe. Some of the changes which are being observed in Indian

economy are discussed here. Havells is one of several Indian companies to have shifted

production or sourcing from China, as costs climb in the Middle Kingdom. Consumer

appliances company Godrej, mobile-phone maker Micromax, auto-parts maker Bosch and

stationery manufacturer ITC have all started expanding or exploring manufacturing

operations in India. Chinese companies, too, are forming joint ventures with Indian partners

to set up production bases in the country. Business Today report says that selected companies

46

have already shifted part of their production from China to India and a few more which said

they were considering a similar move to take advantage of lower Indian labour costs and

favourable currency movements. "Chinese costs are going up. This is a great time to move

production from China to India," says Adi Godrej, Chairman of the Godrej Group, which has

shifted air conditioner and washing machine production to India. He thinks the trend will

continue for 20 years. "The earlier India leverages this trend, the better off we will be. If we

don't leverage it soon, other countries will do it better." Other countries, in fact, are already

benefiting as China begins to lose the competitive advantage that lured companies from

across the world.

_______________________________________________________________________

3.3 Economic Reforms ________________________________________________________________________

Economic Reforms through New Industrial policy

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. 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. India’s economic performance in the post-reforms period has many positive features. The average growth rate in the ten year period from 1992-93 to 2006 was around 6.0 percent, which puts India among the fastest growing developing countries in the 1990s.

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.

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.

Industrial Policy

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

47

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.

Trade Policy

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 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. 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.

Foreign Direct Investment

Liberalizing foreign direct investment has been 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). These reforms have created a very different competitive environment for India’s industry than existed in 1991, which has led to significant changes. Indian companies have upgraded their technology and expanded to more efficient scales of production. They have also restructured through mergers and acquisitions and refocused their activities to concentrate on areas of competence.

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. The index of agricultural prices relative to manufactured products has increased by almost 30 percent in the past ten years (Ministry of Finance, 2002, Chapter 5). 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. However, there is no doubt that investment in agriculture-related infrastructure is critical for achieving higher productivity and this investment is only likely to come from the public sector.

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. The results in telecommunications have been much better and this is an important factor underlying India’s success in information technology. Civil aviation and ports are two other areas where reforms appear to be succeeding, though much

48

remains to be done. The railways are a potentially important means of freight transportation but this area is untouched by reforms as yet. The sector suffers from severe financial constraints, partly due to a politically determined fare structure in which freight rates have been set excessively high to subsidize passenger fares, and partly because government ownership has led to wasteful operating practices.

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. The impact of economic reforms in India on the policy environment presents a mixed picture.

The industrial and trade policy reforms have gone far, though they need to be supplemented

by labor market reforms which are a critical missing link. The logic of liberalization also

needs to be extended to agriculture, where numerous restrictions remain in place. Reforms

aimed at encouraging private investment in infrastructure have worked in some areas but not

in others.

_______________________________________________________________________

3.4 Privatisation ________________________________________________________________________

Privatisation, also spelled as privatization, may have several meanings. Primarily, it is the

process of transferring ownership of a business, enterprise, agency, public service or public

property from the public sector (a government) to the private sector, either to a business that

operates for a profit or to a non-profit organization.

According to the World Bank, privatisation is the transfer of ownership of state-owned

enterprises (SOEs) to the private sector by sale (full or partial) of going concerns or by sale

of assets following their liquidation.” It may also mean government outsourcing of services

or functions to private firms. Privatization has also been used to describe two unrelated

transactions. The first is the buying of all outstanding shares of a publicly traded company by

a single entity, making the company privately owned. This is often described as private

equity. The second is a demutualization of a mutual organization or cooperative to form

a joint-stock company.

At one point of time when private organizations were facing financial problems, these units

were taken by Government in most of the countries. However, the policy has taken U turn

now. Public organizations having financial problems are now transferred to private

organization. Moreover, the trend followed in international scenario is a shift towards

privatization. It is also evident from the world bank report which has supported privatization

49

of public steel industry and world bank economist have suggested that privatization is

essential to attain productivity and efficiency.

The private sector in Industry can be conveniently classified into three groups:

i) Unorganised Industrial Units

ii) Small-Scale Industrial Units

iii) Large-Scale Industrial Units

Objectives of Privatisation

Promotion of Equity

Improvisation of economic performance of resources

Focus on capitalism through ownership pattern

Quick and faster decisions by Non-politicalisation of economic decisions

Follow transparent approach using managerial expertise

Maximum utilisation of resources and economies of scale

ADVANTAGES OF PRIVATISATION

Risk Involved - Privatisation places the risk in the hands of business or Private

Enterprise since there is no role of Government. Since, the policy and business

environment is dynamic and keeps on changing which in turn increases the risk

for business. Eg risk of exchange rate, risk of technology, interest rate etc.

Customer Oriented -Private enterprise is more responsive to customer complaints

and innovation. Therefore, private organisation works closely with the needs of

customer and satisfaction. Customer plays a vital role and therefore customer care

is given importance in business.

Govt Intervention -The Govt. should not be a player and an umpire. The reason is

plethora of Government norms are there that is Environmental norms, Industrial

law, labour law etc

Lower Prices -Privatisation leads to lower prices and greater supply. Due to open

market and competition the prices are generally lower.

Differentiation -Competition in privatization increases differentiation.

Disadvantages of Privatisation

1. Privatisation is expensive and generates a lot of income in fees for specialist advisers such

as banks.

2. Public monopolies have been turned into private monopolies with too little competition, so

consumers have not benefited as much as had been hoped. This is the main reason why it has

been necessary to create regulators. This is an important point. It partly depends on how the

privatisation took place.

50

3. The nationalised industries were sold off too quickly and too cheaply. With patience a

better price could have been had with more beneficial results on the government's revenue. In

almost all cases the share prices rose sharply as soon as dealing began after privatisation.

4. The privatised businesses have sold off or closed down unprofitable parts of the business

(as businesses normally do) and so services eg transport in rural areas have got worse.

5. Wider share ownership did not really happen as many small investors took their profits and

didn't buy anything else

Modes of Privatisation

A firm can be privatized through the following modes:

i) Sale of enterprise

ii) Lease of entity (with short-term purpose)

iii) Joint ventures

iv) Public Share offers (Example Initial Public offer i.e IPO)

The modes and methods of privatisation adopted by Government are different and include the

following:

A. Strategic Sale by Auction Method

B. Offer of shares through a public offering (domestic and international)

Strategic sale by Auction method has been widely used by Indian Government for

privatization which is evident from BALCO, Maruti, CMC and ITDC hotels. In a strategic

sale, there is the transfer of block of shares by Government to the strategic partner together

and sometimes with the transfer of management control of the company to the strategic

partner. The strategic sale method of disinvestment enables Governments to receive a higher

value for the shares transferred by it, as the strategic partner pays a premium for acquiring

management control of the target company. Basically this system is more prevalent in China

and UK. In India, the route of strategic sale method has been the preferred choice over that of

public offerings.

Reasons for privatization

i) To acquire competitiveness and efficiency

One of the reasons for privatisation is to increase its competitiveness over its

rivals by increasing the size of production, reducing the cost of production and

operating with better technology leading to the higher efficiency.

ii) Infrastructural development

Privatisation is also leading to the infrastructural development within the country

and thus creative a conducive environment for business. Connectivity with road,

rail, ports etc have indirectly contributed towards faster mode of doing business

and Mundra Port, SEZ (Special economic zones), 4-6 lane highways are all such

examples of infrastruactual development. Thus, private capital has been funded

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for most of the infrastructure projects in order to propel the growth of business

and economy.

iii) Innovative Practices

Private organisation have realised the need of innovation in business and thereby

recruiting the talent from across the country and globe to have innovative way of

working. The young generation is said to be more creative and innovative thereby

leading to new ideas. The technological development is brought by young and

talented brains making a revolutionary change. Most of the organisations have

budget and resources for R&D (Research and development) for product

development and services.

iv) Technological development

It is said that technology and innovation drives the company, Industry and the

nation. Thus, the use of advanced technology has resulted in better performance,

quality and output. The business model is based on technological development,

the use of IT technology and faster mode of communication. The business model

is working on how to increase the product life, increase the customer base and

sustain in the long run.

v) Managerial Style of working

The managerial style of working involves systematic way of dealing with

situation. POSDCORB as coined by Luther Gullick that proper planning,

organising, staffing, directing, co-ordinating and reporting are the buzzword for

management. Similarly, the organisations are shifting from EOQ(Economic order

quantity) to JIT(Just in time) and now towards Just in case. Therefore, making it

more customer centric and responsive. Moreover, the use of latest technology and

E-comerce is the mantra for success of business today.

vi) Quick Decision making

Privatisation helps in quick decision making in comparison to the public

organisations. Therefore, the decision for procuring raw material, production,

marketing, finance, human resource are expedited and turning the organisation

towards customer centric and resulting in profitability and growth.

Problems of Privatisation

i) Lack of Social Responsibility

The private organisation are working with an objective of having profits,

productivity and pricing. In most of the organisations, belongingness towards

society, employees or Government is negligible. Thus, the responsibility for

society is not undertaken by Private organisation. In case of any riots, earthquake,

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disasters, floods etc the role played and support given by private organisations is

negligible.

ii) Exploitation of Labour

Private organisations have their own ways of dealing with the manpower except

for the laws governing the labours laws e.g ‘Minimum Wages Act’, “factories at’, etc Sometimes, the norms being followed by these private organisation are bare

minimum and are not bothered for the betterment of employees. In most of the

organisations proper salary is not given, treatment to labour is not proper, hire and

fire policies are there, Political and power dynamism is existing. The job is not

secure and the problem of child labour is a problem in some of the organisations.

iii) Acquiring Monopoly

Private organisations have adopted a policy to become big by acquiring small

units and thereby once they attain this monopoly they have their own pricing

system and resulting in higher profit margins. This practice of monopoly does not

take into consideration the interest of the customers due to lack of competition.

However, the Competition Act is there and plays it role in case of any violation of

provisions mentioned therein.

iv) Exploitation of Resources

Exploitation of limited resources is taking place by private organisations. The

resources like water, coal, minerals are exploited largely by these organisations.

Environmental disturbance is taking place i.e. the problem of global warming, the

problem of pollution, etc It is forecasted that for the coming generation the

availability of resources can be a constraint.

PUBLIC PRIVATE PARTNERSHIP

A Co-operative venture between the public and the private sectors, built on the expertise of

each, through the appropriation of resources, risks and returns jointly is known as ppp. The

main thrust of the ppp arrangement is the sharing of risks jointly by the public and private

sectors. Fig 3.1 A PPP

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Fig 3.1A Public Private joint venture for filling gapes in the polices and timely completion of

the projects

Features of PPP

The main features of PPP are as under:

1. Allocation of Risk

Under public and private partnership, projects are built through joint appropriation

and allocation of resources. Hence, risk and returns are jointly shared by both.

2. Ensure economy, effectiveness and efficiency

Under this model, investment and reward both are shared by public and private

sectors both, hence the projects undertaken under public private partnership model

ensure that our resources are used in the most optimal manner. Moreover, 3Es that is

economy, effectiveness and efficiency can also be achieved.

3. Faster Implementation – Under PPP, private sector contributes for funds and expertise

towards technology and managing the things. They are interested to recover the

benefits from PPP model and ensure thatv the project is completed in time and

expedite the things as per plans.

4. Overall economic development – To ensure overall economic development, resources

should be allocated prudently and wisely. Under the PPP model the public sector

helps in getting the necessary approvals and making the resources available whereas

the private sector executes the things in an effective and efficient way thereby

contributing towards overall economic development.

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_______________________________________________________________________

3.5 Liberalisation

________________________________________________________________________

Liberalization (or liberalisation) refers to a relaxation of previous government restrictions,

usually in such areas of social, political and economic policy. In some contexts this process

or concept is often, but not always, referred to as deregulation. Liberalisation means free flow

of goods and services from one country to another. It covers dismantling of duties, surcharges

and export subsidies. Liberalisation is relaxation in the non-tariff barriers such as quotas,

licensing regulations. The economic liberalisation in India refers to the ongoing economic

liberalization, initiated in 1991, of the country's economic policies, with the goal of making

the economy more market-oriented and expanding the role of private and foreign investment.

Specific changes include a reduction in import tariffs, deregulation of markets, reduction of

taxes, and greater foreign investment. Liberalization has been credited by its proponents for

the high economic growth recorded by the country in the 1990s and 2000s. The critical issues

of liberalization on the other side have blamed it for increased poverty, inequality and

economic degradation. The overall direction of liberalisation has since remained the same,

irrespective of the ruling party, although no party has yet solved a variety of politically

difficult issues, such as liberalizing labour laws and reducing agricultural subsidies. There

exists a lively debate in India as to what made the economic reforms sustainable. Indian

government coalitions have been advised to continue liberalisation. India grows at slower

pace than China, which has been liberalising its economy since 1978. There has been

significant debate, however, around liberalisation as an inclusive economic growth strategy.

Advantages of Liberalisation

Free Trade -Liberalization leads to free trade by removing obstacles such as tariffs

and subsidies. The same has been done with the onset of New Industrial Policy 1991

wherein the tariffs have been continuously reduced.

Specialisation -Countries learn to specialize in what they can do best and yield

maximum returns.

Optimum use of resources -Local industries focus on optimal use of land, labor, and

physical and human capital.

Domestic Production - The total domestic production of goods and services is boosted

this way. Also, the industry can get the raw material and other inputs from other

markets at economic prices.

Accesses to low cost funds -Exporters are able to access expensive markets for their

products.

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Disadvantages of Liberalisation

Removal of trade barriers often subjects the domestic economy to the effects of

international events.

Economic recession in one trading partner's economy can spiral into another's

economy.

It can hurt employees and consumers of affected economies.

International competition may hurt local industries, especially when importers are

able to find cheaper alternatives from abroad and dump them in domestic markets.

It’s best for governments to prop up young local industries by restricting foreign

participation, according to opponents of liberalization.

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3.6 Concept of Globalisation

________________________________________________________________________

Globalisation is a process of moving from localisation towards internationalisation and when

the degree of internationalisation becomes high it can be said to be globalised country. In fact

it may be defined as the integration of nation with rest of the countries in terms of trade,

culture, financial flow, human resource and the technology. Thus, we find that there is

difference in the level of integration of one economy with the rest of the world which has

been addressed through the research carried out by AT Kearney and has been termed as the

globalisation index.

Globalisation has been said to be the tool used for the growth of the economy, adapting

knowledge through different economies, transfer of technology, contributes to the

competition and thus innovation, recognition and brand positioning but for all these

ultimately Government of an economy is said to be accountable. Government of an economy

can decide various factors say tariffs, taxes, subsidies, trade regulations, foreign trade policy

and the agreements between the countries and so the degree of globalisation largely depends

on the Government policies.

Globalisation Phases

There are three phases of globalization.

Phase 1 – First wave of Globalisation – 1870-1914

– Retreat to Nationalism– 1914-1945

Phase 2 – Second wave of Globalisation – 1945-1980

Phase 3 – Third wave of Globalisation – 1980 Onwards

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Phase 1 – First wave of Globalisation – 1870-1914

During this period the following changes took place.

Export was almost doubled and contributed to the global income.

Foreign capital in the developing countries increased from 9 % to 32 %.

Growth rate in the per capita income increased from .5 % to 1.3% p.a

On the other side the drivers for globalization were the falling transportation cost and

lowering of tariff barriers.

Retreat to Nationalism– 1914-1945

This was shifting back to the nationalism and the period of World war I. The government

imposed restrictions and strict national policies were formed and implemented during this

period.

Phase 2 – Second wave of Globalisation – 1945-1980

During this period the following changes took place.

Overall trade doubled.

Inequality between developed and developing countries that is distinction between developed

and developing countries was visible through growth pattern, GDP etc. The richer were

becoming rich and the poorer the poor.

Economies of scale were used to reduce the cost and gain the higher market share.

Protective policies in nationalism were responsible for less growth.

On the other side the drivers for globalization were the falling transportation cost and

lowering of tariff barriers.

Phase 3 – Third wave of Globalisation – 1980 Onwards

This wave finally lead to revolution in the world economies.

Integration of Economies through Trade.

Integration of economies through human resource.

Integration of economies through capital.

Free trade agreements between countries

Increase in cross-border investments

Sustained growth in the world GDP

Thus, this stage of globalization made MNCs and developing countries to join the

globalization pattern. Integration in terms of trade, capital and HR were also taking place

rapidly.

Globalisation can have both opportunities and threats on to the economy which will be

analysed at length to understand the behaviour of firms and the economies.

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Opportunities of Globalisation

Globalisation has economic, political, social and cultural benefits to a nation and the same

can be summed up under various categories.

Economic Benefits

Political Benefits

Government Benefits

Trade Benefits

Socio-Cultural Benefits

Economic Benefits

An economy can be benefited in terms of macro-economic factors by way of globalisation

and the same can be illustrated as follows.

Thus, if the external trade of an economy is increasing it will contribute to the GDP of the

nation followed by an increase in the Purchasing Power Parity and thus the standard of living

of people in the nation will increase which is also the ultimate objective of any economy. An

economy can be benefited in the tough time of inflationary pressures and at that point of time

the nation starts importing in turn taking benefits from the low cost economies across the

globe. The development of an economy can take place by liberalisation and the FDI policies

of the government which will utilise the resources and contribute to the development of the

nation.

Globalisation of an economy will contribute towards the increase in the privatisation of the

economy and reduction of the Monopoly powers as well. Entry of Multi-National Companies

(MNCs) in an economy will contribute to the utilisation of resources as well as will create

opportunities for the employment. MNCs will bring innovative methods in the Industry and

contribute to the training and development of the personnel which will add value to their

employability.

Political Benefits

Political benefits of an economy with rest of the world can be studied on the agreement of an

economy in the formation of trade blocks in the form of bilateral or multilateral agreements.

The integration of politics makes the business deals smooth and the trade relations strong in

order to have the binding on the countries for eg- European Union has been increasing in

terms of number of countries, size and trade due to the political integration between them.

Increase in External Trade Increase in GDP Increase in PPP Standard of Living will

increase

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Thus, making European Union amongst the top three trade blocks of the world along with

NAFTA which is an agreement between the Mexico, Canada and the America.

Government Benefits

Reduction in the duties.

Access to international markets.

FTAs initiated by Government e.g. ISLFTA (Indo-Sri Lanka Free Trade Agreement)

Incentives and Subsidies on export of goods.

Trade Benefits

Expansion of Markets – Globalisation has helped integration of markets and thereby

increasing the external trade.

Access to new markets – As per Foreign trade policy access to new markets is there.

MEIS and SEIS schemes for exporters having manufacturing and service exports.

Status Holders – As per FTP 2015-2020, benefits are provided to those who are

having major exports that is threshold limit is decided for one star exporter to 5 star

exporter. Table 3.1

Table 3.1 Star Exporters

S.No Status Exp Per-FOB

$ Mill

1 One Star 3

2 Two Star 25

3 Three Star 100

4 Four Star 500

5 Five Star 2000

Socio-Cultural Integration through the events which includes the IPL,

Conferences, common wealth games, Trade fairs etc.

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Socio-Cultural integration through international movement of people such as

tourists, migrants, and guest workers.

Socio-Cultural integration through cross-country flow of information, ideas which

is through media, social media and internet.

Threats of Globalisation

MNCs are exploiting resources by setting business in developing countries. The

large Multi-National Companies are producing at low cost and therefore are

exploiting the SMEs(Small and Medium Enterprises). Moreover, the MNCs are

also exploiting the resources eg water resources, human resources etc.

Income gap between high-income and low income countries has grown. The

richer are becoming rich and the poorer are becoming poor that is the rich people

are getting the benefit of globalisation.

Increase Poverty and inequality –Richer are becoming rich and poor are becoming

poorer. Globalisation has not been able to address the problem of Poverty.

Displaces workers from high-wage jobs and decreases the demand for less skilled

workers. That is the brain drain is taking place and therefore displaces workers.

Globalization is deepening food insecurity the world over.

With greater volatility of financial markets and increased risk, real interest rates

have risen substantially

Exploitation of SMEs that is can effect domestic enterprise of developing

countries.

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Discuss the Pros and Cons of globalization from the given diagram. See Fig 3.2

Case – Side effects of Globalisation on the Strongest Economy of the World- USA America is an economy which is said to have the largest import in the world as well as

second largest exports after Germany is significant evidence that the economy is globalised

in context to the trade. There are numerous opportunities available to America in this era of

Globalised world as well as threats being posed by the competitive and innovative nations.

The big question is that in this battle of globalisation of products, markets and the

economies where will this economy find its pace in the world. It is natural to understand the

trade pattern and the trade relations of the economy with the major trade partners say-

Canada, Mexico and the China. China on the one side has posed threat to the American

economy by having its currency Yuan to artificially low levels thus making the Chinese

exports more competitive to the American market. American economy has threat from the

Mexico due to the low salary and low cost economy and thus there is every possibility that

the employees may lose job in America and on competitive grounds of low cost products.

America has been posed threat from an emerging economy like India and thus one of a state

ohio and the economy has a debate on as to shut its outsourcing activities to India. Job

market is badly affected and the impact of recession will be larger if the degree of

globalisation is high. Moreover, the dependence of America on energy resources that is

petroleum products is from 15 to 20% of their total imports thus in all raising the negative

Balance of trade over the years from as low as 100 Bn $ in 1994 to about 800 $ in the year

2007. The journey of America with the degree of globalisation has been continuously

sliding on the AT Kearney scale of degree of globalisation.

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Fig 3.2 Discuss the phases of globalization.

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3.7 Summary ________________________________________________________________________

Economy of India had undergone significant policy shifts in the beginning of the 1990s. This

new model of economic reforms is commonly known as the LPG or Liberalisation,

Privatisation and Globalisation model. The primary objective of this model has been to

liberalise the economy and integrate it with other economies in order to increase share in

external trade.

India is in the process of restructuring her economy, with aspirations of elevating herself

from her present position in the world, and is set to attract FDI through the campaign ‘Make in India’. The need to speed up her economic development is even more imperative. And

having witnessed the positive role that Foreign Direct Investment (FDI) has played in the

rapid economic growth of most of the Southeast Asian countries and most notably China,

India has embarked on an ambitious plan to emulate the successes of her neighbors to the east

and is trying to sell herself as a safe and profitable destination for FDI.

Now that India is in the process of restructuring her economy, with aspirations of elevating

herself from her present position in the world, and is set to attract FDI through the campaign

‘Make in India’.

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The need to speed up her economic development is even more imperative. And having

witnessed the positive role that Foreign Direct Investment (FDI) has played in the rapid

economic growth of most of the Southeast Asian countries and most notably China, India has

embarked on an ambitious plan to emulate the successes of her neighbors to the east and is

trying to sell herself as a safe and profitable destination for FDI.

Globalisation has been said to be the tool used for the growth of the economy, adapting

knowledge through different economies, transfer of technology, contributes to the

competition and thus innovation, recognition and brand positioning but for all these

ultimately.

Government of an economy is said to be accountable. Government of an economy can decide

various factors say tariffs, taxes, subsidies, trade regulations, foreign trade policy and the

agreements between the countries and so the degree of globalisation largely depends on the

Government policies.

_______________________________________________________________________

3.8 Exercise ________________________________________________________________________

Exercise 1: Fill in the blanks

1. The primary objective of this model has been to ……………………… and integrate

it with other economies in order to increase share in external trade.

2. Now that India is in the process of restructuring her economy, with aspirations of

elevating herself from her present position in the world, and is set to

…………………………………‘Make in India’. 3. The first is the …………………………………..of a publicly traded company by a

single entity, making the company privately owned. This is often described as private

equity.

4. A Co-operative venture between the public and the private sectors, built on the

expertise of each, through the appropriation of resources…………………… jointly is

known as ppp.

5. Liberalization (or liberalisation) refers to a…………………………………………,

usually in such areas of social, political and economic policy.

6. Government of an economy can decide various factors say tariffs, taxes, subsidies,

trade regulations, foreign trade policy and the agreements between the countries and

so the degree of globalisation largely depends on the………………………………..

Ans 1. liberalise the economy , 2. attract FDI through the campaign , 3. buying of all

outstanding shares, 4. , risks and returns, 5. relaxation of previous government restrictions , 6. Government policies.

Exercise 2: True and False State the following statements. Please mark ( T ) on the correct statement and (F) on false Statement.

1. ‘BRICS’ is Brazil, Russia, India, China and South Africa.

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2. FDI through the campaign ‘Make in India’. 3. Globalisation has been said to be the tool used for the growth of the economy.

4. MNCs are exploiting resources by setting business in developing countries.

5. Income gap between high-income and low income countries has grown.

6. Increase Poverty and inequality –Richer are becoming rich and poor are becoming

poorer.

Ans 1 ( T ), 2( T ), 3( T ), 4( T ), 5( T ), 6( T )

Exercise 3: Mix and Match Match statement A with Statement B S.No Statement (A) Statement (B)

1 Access to new

markets –

Globalisation has helped integration of markets and thereby increasing the external trade.

2

Expansion of

Markets

As per Foreign trade policy access to new markets is there.

3 Status Holders

Schemes for exporters having manufacturing and service exports.

4 MEIS and SEIS

As per FTP 2015-2020, benefits are provided to those who are having major exports that is threshold limit is decided for one star exporter to 5 star exporter.

Ans. 1. (2), 2. (1), 3. (4), 4. (3)

Exercise 4: Very Short Questions 1. Explain Other objectives were to make the economy of India the fastest

developing economy in the globe?

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2. Era of reforms has also ushered in a remarkable change in the Indian mindset,

as it deviates from the traditional values held since Independence Comment.?

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3. Globalisation has helped integration of markets and thereby increasing the

external trade. Explain the Statement?

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4. What is ‘BRICS’?

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Exercise 5 : Descriptive Questions

1. According to the World Bank, privatisation is the transfer of ownership of state-

owned enterprises (SOEs) to the private sector by sale (full or partial) of going

concerns or by sale of assets following their liquidation.”

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2. The most preferred option of government for privatisation so far. Comment

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3. Increase Poverty and inequality –Richer are becoming rich and poor are becoming

poorer. Explain this comment.

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4. Globalisation has been said to be the tool used for the growth of the economy. If

agree, Explain.

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5. How quick decision making in comparison to the public organisations.

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