self learning material business environment
TRANSCRIPT
Self Learning Material
Business Environment(MBA-201)
Course: Masters in Business Administration
Semester-II
Distance Education Programme
I.K. Gujral Punjab Technical University
Jalandhar
SyllabusMBA 201 Business Environment
Objectives: To provide students with an understanding of basic economic principles of
production & exchange-essential tools in making business decisions in today’s global
economy. The objective is to make the student understanding how the economy works,
covering microeconomic description of business applications, including pricing for profit
maximization, price elasticity, market structures and modeling of business in varying
economic climates.
Unit –I
Introduction: definition, components and overview of Business Environment, Complexity
and Diversity of Business Environment in the 21st century, Concept of Business Cycle, Need
to scan the business environment and techniques of scanning the business environment.
Political Environment: Three political institutions: Legislature, Executive and Judiciary.
Brief note on Fundamental rights and Directive Principles of state policy, Rationale and
extent of state intervention.
Unit –II
Economic Environment: Concept and Salient features of various economic system, New
Industrial policy and industrial licensing, New economic policies, Aspects of economic
reforms and its effects on business, Emerging Economies. Effect of recession on Business
and remedies for that, Economic Planning in India: Objectives, Strategies and Evaluation of
current five year plan. Monetary and Fiscal Policy. Legal Environment: Company
Regulatory Legislations in India, FEMA, Latest. EXIM policy. Competition Law, Consumer
Protection Act 1986, Right to Information Act 2005
Unit –III
Public Sector in India: Concepts, Philosophy and Objectives, Performance, Problems and
Constraints. Disinvestment and Privatisation, Joint sector and Cooperative sector in India.
Social Environment: Corporate Social Responsibility, Consumer Movement, Business
Ethics, Cross-Cultural Business Environment, Ecological Environment Protection: Green
Management, Global Warming, Carbon Foot Printing, The Environment Protection Act 1986.
Unit –IV
Technological Environment: Impact of Technology on Business, Technological Policy,
Intellectual Property Rights, Import of Technology, Appropriate Technology, Problems in
Technology Transfer. International Environment: Emergence of Globalisation. Control of
Foreign Direct Investment, Benefits and Problems from MNCs. WTO, its role and functions,
Implications for India. Trading Blocks, Foreign Trade: SEZ (Special Economic Zones), EPZ
(Export processing zone), EOU (Export Oriented Units), Dumping and Anti-Dumping measures.
Note: Student must consult Economic Times, Financial Express and Economic Survey of
current years.
Relevant Case Studies should be discussed in class.
Suggested Readings / Books:
Dr Francis Cherunilam, Business Environment Text & Cases, Himalaya Publishing S.K. Mishra, and V.K Puri, Economic Environment of Business, Himalaya Publishing Paul Justice, Business Environment- Text and Cases, TATA McGraw Hill. Aswathappa, Essential of Business Environment, Himalaya Publishing Aggarwal & Diwan, Business Environment, ExcelBooks Sengupta, Government & Business Vikas Publishing House Economic Survey, Government of India (Latest)
Table of Contents
Chapter Title Written By Page No.
1 Business Environment-Concept,Significance And Nature
Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,CHD
1
2 Environment Scanning-Process AndTechniques
Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,CHD
17
3 Political Environment Dr. Deepali Handa, Assistant Professor,DAV College, Jalandhar
31
4 Economic Environment Of Business Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,CHD
47
5 India’s New Economic Policies Dr. Shaveta Kohli, Assistant Professor,Department Of Economics, CentralUniversity Of Jammu
58
6 Economic Planning In India Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,CHD
75
7 Monetary And Fiscal Policies Dr. Shekhar Sistla, Associate Professor,P.R.R. Colleges, P.R.R EducationalSociety, Hyderabad
93
8 Legal Environment Dr. Harjiv Kaur Sidhu, AssistantProfessor, PG Department Of Economics,Trai Shatabdi Guru Gobind Singh KhalsaCollege, Amritsar
108
9 Consumer Protection Act, 1986 Dr. Harjiv Kaur Sidhu, AssistantProfessor, PG Department Of Economics,Trai Shatabdi Guru Gobind Singh KhalsaCollege, Amritsar
131
10 Right To Information Act, 2005 Dr. Harjiv Kaur Sidhu, AssistantProfessor, PG Department Of Economics,Trai Shatabdi Guru Gobind Singh KhalsaCollege, Amritsar
152
11 Role Of Public Sector In India’sEconomic Development:Performance And Challenges
Dr. Shaveta Kohli, Assistant Professor,Department Of Economics, CentralUniversity Of Jammu
171
12 Socio-Cultural Environment-Role OfSocialGroups And Consumerism In IndianBusiness
1) Dr. Anupreet Kaur Mavi, AssistantProfessor, UIAMS, Panjab University,Chd2) Ms. Priyanka Singh, PIM, Kapurthala
182
13 Ecological Protection Dr. Shaveta Kohli, Assistant Professor,Department Of Economics, CentralUniversity Of Jammu
203
14 Technological Environment Dr. Deepali Handa, Assistant Professor,DAV College, Jalandhar
220
15 Globalisation And FDI Dr. Shekhar Sistla, Associate Professor,P.R.R. Colleges, P.R.R EducationalSociety, Hyderabad
237
16 Trading Blocks Dr. Shekhar Sistla, Associate Professor,P.R.R. Colleges, P.R.R EducationalSociety, Hyderabad
256
Reviewed by:
Dr. Harpreet Singh Chahal,Assistant Professor, GNDURegional Campus, Gurdaspur
© IK Gujral Punjab Technical University JalandharAll rights reserved with IK Gujral Punjab Technical UniversityJalandhar
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LESSON 1
BUSINESS ENVIRONMENT-CONCEPT, SIGNIFICANCE AND NATURE
Structure1.1 Objectives
1.2 Introduction
1.3 Significance of business environment
1.4 Characteristics of business environment in 21st Century
1.5 A simple model of business and its environment-transforming inputs into output
1.6 Components of Business environment
1.6.1 Internal environment
1.6.2 External environment
1.6.2.1 Macro environment
1.6.2.2 Micro environment
1.7 Summary
1.8 Glossary
1.9 Answers to Check Your Progress
1.10 References/Bibliography
1.11 Suggested Readings
1.12 Terminal / Model Questions
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1.1 Objectives:
After going through the lesson, you will be able to:
i. Define Business Environment concept.
ii. Enumerate the Significance of Business Environment.
iii. Define the nature and scope of Business Environment.
iv. Illustrate internal and external factors affecting business.
1.2 Introduction
The term Business environment is made up of two words: business and environment. ‘Business’
means all activities which are concerned with marketing, production, trade, banking, finance,
insurance, investment, advertising, pricing, distribution, promotion and packaging and so on.
‘Environment’ refers to the all external factors which have influence on the performance and
conduct of the business. Business environment signifies or indicates all external forces which
are beyond the control of business. These factors and forces are: - customers, competitors,
government, the social, political, legal and technological factors and so forth. Some of the factors
or forces have direct influence over the business while others may affect the business indirectly.
In other words it can be said that business environment includes all those external factors which
have potential opportunities or threats for the firm.
According to P. Gisbert “Environment is anything immediately surrounding an object and
exerting a direct influence on it.”
According to E. J. Ross “Environment is an external force which influences us.”
According to Keith Davis, business environment can be defined as “Business environment is the
aggregate of all conditions, events and influences that surround and affect it.”
Thus, the term ‘environment’ literally means the ambiance, external objects, influences or
circumstances in which something exists. From the above discussion, it’s very much apparent
that the business environment is the blend of complex, ever changing and uncontrolled exterior
factors in which a company functions.
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1.3 Significance of Business Environment:
Business Environment denotes to the “Sum total of conditions which surround man at a given
point in space and time. In due course of time and advancement of society, man extended his
environment through his social, economic and political function.”
In global economy, the business environment act significantly in about all business enterprises.
The positive impact of business environment can be subjectively put in words with following
points:
(i) Understanding the inner Environment: It is important for a venture to have effective
management information system to comprehend it’s inside environment, such as industry
policies, organization structure etc. which will help in predicting the business environmental
transformation.
(ii) Understanding the Economic System: Economic factors greatly influence the business. For
a businessman and business firms it is crucial to be acquainted with the functioning of economic
system prevailing in the country i.e. capitalists, socialist and mixed economy. They are the
different kind of fiscal systems that manipulate the business functioning in various ways.
(iii) Understanding the Economic Policies: Economic policies are having its own important
part in trade and influence the business decisions. It helps to identify government policies which
ultimately have impact on business objectives such as, export-import policies, monetary policies,
oversea exchange policies and manufacturing sector policies etc.
(iv) Understanding the Conditions of the market: It is obligatory for a venture to have
awareness about structure of the market and changes that taking place in the market. The
awareness concerning raise or decline in market demands and supplies, monopoly practice,
participation of govt. in company etc. is required for an enterprise.
1.4 Characteristics of the Business Environment in 21st Century
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Business environment today is so dynamic and ever changing that in order to adapt the changes
taking place in the environment, business firms keep on changing its activities, functions and
procedures. The changes in the environment of business take place due frequent changes in the
technological factors, economic factors, political policies, regulatory laws and control
mechanisms laid down by the government, changing demographical characteristics of the
workforce and so on. In order to compete and succeed in the market, business firms adapt the
changes occurring in the external environmental factors. In brief, important features of today’s
business environment are explained as below:
Totality of External Forces: Business environment is the composition of all the total
forces which are present outside the business and business has no control over them.
Specific and General Forces: The forces present outside the business can be divided into
two parts – specific and general.
(i) Specific: These forces affect the firms of an industry separately, e.g., customers,
suppliers, competitive firms, investor etc.
(ii) General: These forces affect all the firms of an industry equally, e.g., social, political,
legal and technical situations.
Complex: Various aspects of business environment are related to one another which
means variation in one aspect affects the other aspect. For example, if there is any
alteration in fiscal policy with the upcoming new government in rule. In this particular
case, the new government in rule has power to alter other political and economic policies
correspondingly. Such interrelatedness of various factors of business environment
increases the complexity of the environment.
Dynamic Nature: It is obvious that environment is the blend of several factors and
forces. Changes continue to take place from time to time in various factors. Therefore,
business environment can be assumed as dynamic or every changing.
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Uncertainty: Dynamic nature of Business Environment adds another feature of
‘uncertainty’. Nothing can be predicted about the factors of the business environment as
they keep on changing rapidly. This is why, specialized people who formulate business
strategies foresee in advance the probable changes in the business environment. For an
instance, technological variations are very quick. No one can predict the timing and
amount of such hurried technological variations.
Diversity: The nature of business environment is very diverse. Diversity can be explained
as: Demographic diversity, Socio-cognitive diversity and organizational diversity.
‘Demographic diversity;’ can be explained as differences in age, gender, nationality and
ethnicity of people who are part of the business enterprise. ‘Socio-cognitive diversity’
can be explained as differences in values, beliefs, norms, religion, culture, level of
awareness and personality traits of the people involved in the business. ‘Organisational
diversity’ is described as diverse viewpoints, functions, occupations, designs and
structures of various departments within the organization and so on.
1.5 A simple model of business and its environment-transform the inputs into
outputs:
Every Business organization is part of External environment and therefore it interacts with
various factors of external environment. In broader sense, business is the activity of producing
goods and services to meet the wants and needs of consumers. The inputs for business activities
are obtained from the environment into the business, and outputs are moved out from the
business to environment. In order to be successful, business organisations have to be very careful
in selecting the necessary inputs from the environment at right time, place price, quantity and
quality so that the customers’ wants may be satisfied by providing the outputs which meet their
expectations. Thus, environment has to comprehend from both ends i.e. inputs and the outputs of
business operations and manage the process of transformation of inputs into outputs within the
organization.
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Fig..1.1: Business interacts with the environment— transforming inputs into outputs.
The firm thus faces vast competition from the market in relation to procurement of input and sale
of output. Porter’s Five Forces Model identifies the five sources of competitive pressures
affecting businesses (Porter, 1980).
Force Analysis presumes that there are five important factors that establish competitive power in
a business state of affairs. These are:
1. Suppliers’ control: In this, we evaluate how easily suppliers drive up the prices. If we
have few options of suppliers, and we need more support from them. The suppliers will
be more powerful. The strength or power of supplier over customers depends on the
uniqueness of the product or service they are offering.
2. Buyers’ Power: It is easy for buyers to lower down the prices. This phenomenon is also
driven by the number of buyers, importance of each buyer for your business activity,
switching cost which the buyer will have to pay if he switches from your product/service
to somebody else’s product/service. If you have few buyers, they will be influential
enough to dictate their own terms to you.
3. Competitive Rivalry: Competitors of your business and their capabilities affect the
businesses. If competitors are offering equally attractive product and service, you’re your
business may have little power to manipulate the market situation, because buyers and
THE TRANSFORMATIONPROCESS USING
ENVIRONMENTAL RESOURES
INPUTS OUTPUTS
PRODUCTION
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suppliers will have varied options available in the market to make a shift from one
product to the other.
4. Substitution threats: This is affected the ability of your consumers to find a substitute of
what your business is doing. If substitution is easily available and its feasible, then this
weakens your power in the market.
5. Threat of New Entry: Power in the market is also affected freedom for new entrants to
enter in the industry. If it costs little time or money to enter in the industry and new
entrants can compete effectively, then new competitors can quickly enter in the industry
and weaken the position of existing firms. If you have powerful and durable barriers to
entry, only then your will be able to protect the present position of your business and take
fair advantage of it.
These forces can be neatly brought together in a diagram like the one in Figure 1.2 below:
This instrument is created by Harvard Business School professor, Michael Porter, to analyze the
attractiveness and likely-profitability of an industry. Since publication, it has become one of the
most important business tactics. The classic article which introduces it is "How Competitive
Forces Shape Strategy" in Harvard Business Review 57, March – April 1979.
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Figure 1.2 – Porter's Five Forces
1.6 Components of Business Environment
Business environment can be broadly categorized into two categories: Internal environment and
external environment. External environment is further categorized into two categories: Micro
environment and macro environment.
1.6.1 Internal Environment: Internal environment is comprised of the factors which are internal
to the firm and are under the control of the business organization. These factors predominately
determine strengths or weaknesses of the business. Important internal factors are described as
follows:
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Organisational Culture: Culture of business organizations is primarily established by the
founders of the company or top management. It is the top management of the company
which establishes morals, norms, policies, working atmosphere, methods and procedures,
signs and symbols, working practices and on the whole an internal environment.
Therefore, culture of the organization can be referred to collective behavior of human
beings which are part of the business. The amount to which the organizational culture is
shared by all members the organization determines the success of the organisation.
Vision, mission and objectives: Vision, mission and objectives of the company is guided
by companies’ priorities, philosophies, policies etc.
The Top Management: The constitution of the board of directors is very serious issue for
the development and working of the company because entire policy making and decision
making is influenced by the top management.
Internal connections: The internal relationships with in the organization such as
relationship between the board members and middle level managers, executives and
workers highly affect the decision making of the firm.
Ambience and technology: Production capacity, distribution logistics, technology,
research and development activities, architectural design and layout of the firm are the
important factors which affect competitiveness as well as smooth functioning of the firm.
Human Resources: Human resources are very important factor of business environment.
Success of every business depends largely on the competence, commitment, attitude and
level of motivation of its employees.
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Leadership style: Leadership quality and the styles of leadership of the firm affect
organizational culture. Effectiveness of the communication, value of employees in the
organisation are the cultural inferences resulting from leadership approach.
1.6.2 External Environment: External environment of the business is comprised of factors
which are external to the business and which are not in the control of the business. Such factors
significantly influence functioning and decision making of business. External environment is of
two types: Macro environment and Micro environment.
1.6.2.1 Macro Environment: Macro environment consists of the factors which are external to
the business and uncontrollable. Macro factors influence strategy formulation and performance
of the business. Following are the important macro factors affecting the business:
Demographic Environment: The term demographics refer to characteristics of population
around us such as age, growth rate, sex ratio, income profile, education etc. These
demographical factors have great influence on the business with different momentum.
Economic Environment: It refers to the character and trend of the economy in which a
company struggle or may struggle. The economic environment includes common
economic situation in the nation, market conditions:- money, manpower, raw material
Check Your Progress A:Fill the Blanks1 Deficiency of skilled labor creates___________ and ____________problems.2 ________________creates distinct market segments instead of mass marketing
strategy.3 Economic policy establishes affiliation between __________and __________.4 The economic system of a country reflects the _________, _____ and_____.
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and so on. These factors have a significant control on the the supply of inputs to the
business, their costs, quality, availability and reliability of supplies.
Political-Legal Environment: There are three important essentials in political-legal
environment:
o Government: Businesses are greatly guided and controlled by government
policies of the country. Hence the form of government administration in a country
has influential control on business.
o Legal: This refers to laws, rules & regulations, which influence the organisations
and their functioning. Every business has to comply with rules and regulations,
and work within the legal framework of the country. Legal environment consists
of all laws governing businesses. In every country there is specific business
legislation which altogether guides, control and regulate business activities. The
important legislations that concern the business enterprises include:
Industries (Development and Regulation) Act, 1951
Foreign Exchange Management Act, 1999
Consumer Protection Act, 1986
1972 Environment Protection Act
Payment of Gratuity Act, 1972
Companies Act, 1956
The Standards of Weights and Measures Act, 1956
Essential Commodities Act, 2002
Prevention of Food Adulteration Act, 1954 (x) Competition Act, 2002
Trade Marks Act, 1999
Bureau of Indian Standards Act, 1986
The Factories Act, 1948
Industrial Disputes Act,
Monopolies and Restrictive Trade Practices Act, 1969
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o Political: Political groups influence and limit organization’s working. In addition
to the erratic activities of political groups against definite product/service and
business organizations, politics has also intensely seeped into unions.
Socio-Cultural Environment: Socio-cultural factors are linked to human relations, social
attitudes and their impact, bearing of cultural ethics on the business. The norms,
standards, beliefs and values of any society are very significant in establishing
interconnections between individuals and organizations.
Technological Environment: Technology acts as either opportunity or the threat to the
industry. Technology can benefit the business in strategic planning and building strategic
advantage. However, at the same time technology can be a threat to the organizations
which are not able to adopt it.
Global Environment: In simple economic terms, globalization refers to the integration of
the countries of the world into one vast market. At the company level, globalization have
two meanings: (a) the company commits itself with several manufacturing operations at
different locations around the world and offers products in several diversified industries,
and (b) it also means ability to compete in domestic markets with foreign competitors.
1.6.2.2 Micro Environment: The micro environment includes the direct surrounding area of an
organization that influences its performance. The micro forces are the forces that influence each
business firm in different ways. Few factors are particular to some firms.
The significant factors of micro environment are explained as under
Suppliers: Trade necessitates suppliers for the supply of raw material as well as other gears to
any business. It is a significant factor of the micro environment of any business.
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Customers: Consumer is the dominant factor and is the vital base of every business. The success
of any business fundamentally depends upon identification of the needs, desires, tastes, liking etc
of all the customers.
Market Intermediaries: Market Intermediaries help an enterprise to fetch more and more clients.
Each and every business enterprise is assisted by market intermediaries i.e. agents and brokers.
This acts as an ultimate linkage between company and absolute consumers.
Competitors: Activities of any business get adjusted according to the measures and response of
competitors. Such factors should be well-known to a company because the upcoming profit or
revenue will only be driven when these factors are in control.
Public: Any group that has potential interest in the business has great impact on the business
organisation. e.g., growth of consumer groups may affect the working of a newly developed
business.
Check your progress: B
Correct the subsequent sentences if found inaccurate.
(a) The business environment is stationary in nature.
___________________________________________________________
(b) Business environment includes factors outer as well as inner to business.
___________________________________________________________
(c) The changes in business environment can be predicted.
___________________________________________________________
(d) Business environment helps the firm to recognize the opportunities and threats to the
company.
___________________________________________________________
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1.7 Summary
Environment is all about external factors that have affect on the performance of the business.
According to Arthur M. Weimer “Business Environment means the -climate’ or set of
conditions, economic, social, political or institutional in which the organization functions”. The
nature of environment is a dynamic, it keeps on changing constantly from time to time which
have strong control on the business decision making function. It can be divided into three
categories-internal environment (Porter’s five forces), macro environment and micro
environment.
A business unit depends on both factors that is internal as well as external for smooth
functioning. While a business must try its best to endlessly improve its internal factors as it
cannot adjust the course of actions happening outside its prospect. Managing the strengths of the
internal operations and recognizing potential opportunities and threats outside of the operations
are keys to business success.
Competition is one of the most serious external business factors. Competitive analysis is required
whether business operate in a concentrated industry with a few chief competitors or a large
business house with several competitors,. Many companies perform competitive analysis in order
to compare their offerings/ products and prices to those of competitors..
1.8 Glossary
Business: An organization where goods and services are exchanged for one another or for
money is termed as ‘businesses
Business environment: “Business Environment encompasses the -climate’ or set of conditions,
economic, social, political or institutional in which business operations are Conducted.”—Arthur
M. Weimer
Macro environment or the general environment includes factors external to the organization
that may have a considerable impact on the firm’s strategies.
Micro environment: or the competitive environment refers to the environment within the
organization.
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Demographic Environment: The term demographics refers to characteristics of population in
country or in world.
Economic Environment: The economic environment refers to the nature and direction of the
economy in which a company competes or may compete.
Socio-Cultural Environment: Socio-cultural environment consist of factors related to human
relationships and the impact of social attitudes and cultural values which has bearing on the
business of the organization.
1.9 Answer to check your progress A:
1: production, organizational
2: Unequal income distribution
3: government, business
4: economic composition, economic thinking and economic liberalization
Answers to Check Your Progress B:
(a) The nature of business environment is dynamic.
(b) correct statement.
(c) The changes in business environment are quite unpredictable.
(d) Correct statement.
1.10 References/Bibliography
Potter(1979): "How Competitive Forces Shape Strategy" in Harvard Business Review 57, pages
86-93.
Henry E.Anthony (2011): Understanding Strategic Management,2nd ed.-Indian, Oxford
University Press, New York.
1.11 Suggested Readings
Wetherly,Paul and Otter,Dorron(2011): The Business Environment-Themes and Issues. Oxford
University Press,New York.
Cherunilam,Francis(2013):Business Environment-Text and Cases. Himalaya Publishing House
pvt. Ltd., Mumbai.
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1.12 Terminal/Model questions:
1. What do you mean by business environment and economic environment respectively?
2. Why are internal factors of a business enterprise regarded as controllable factors?
3. What kind of external factors influence the process of business enterprises?
4. What are the important external factors that constitute the economic environment of a
business?
5. What do you mean by micro environment?
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LESSON-2
ENVIRONMENT SCANNING-PROCESS AND TECHNIQUES
Structure
2.1 Objective
2.2 Introduction
2.3 Environmental Scanning Objectives
2.4 Methods of Scanning the Business Environment
2.5 Techniques for Environmental Analysis
2.5.1 SWOT Analysis
2.5.2 ETOP Analysis
2.5.3 PESTLE Analysis
2.6 Steps of Environmental Analysis6 Environmental Forecasting
2.7 PESTLE Analysis of TOYOTA
2.8 Summary
2.9 Glossary
2.10 Answers to check your progress
2.11 References/Bibliography
2.12 Suggested Readings
2.13 Terminal and Model Questions
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2.1 Objectives
After studying this lesson you will be able to:
1. Describe the meaning of environment scanning
2. Explain the objectives of an Environmental Scanning System.
3. Discuss the Methods of Scanning the Business Environment
4. Illustrate the Techniques of Environmental Appraisal/Diagnosis
2.2 Introduction
“Environmental scanning is the term coined in the mid-1960’s by Francis Aguilar, a Harvard Business
School Professor, to describe the action of watching and collecting information on company’s rivals and
the overall market”. It is the process by which organizations monitor their relevant environment to
identify opportunities available and threats affecting their business. Environmental scanning was earlier
the part of management study of business, but now used by big business houses for collecting the
information from the environment for their cutthroat benefits. Scanning of environment is now used
commonly for business strategies by both public sector and the non public sector. Environmental
scrutiny helps to outline the plan for workplace in accordance with quick changes in the environment,
while keeping the future vision of personnel in mind. For example, environmental scanning helps human
resources department of an organization in understanding the accessibility and aptitude of the working
force and the factors that are important for enrollment and withholding of the employees.
2.3 Environmental Scanning-Objectives
Detecting scientific, technical, economic, social and political trends and events which are
important for the firm.
Defining the potential threats, opportunities or changes for the buisness.
Promoting a future orientation in the thinking of management and staff and alerting the
management and staff regarding the trends that are converging, diverging, speeding up and
slowing down, or interacting.
Provides a system to organize flow of information.
Enables decision makers to understand current and potential changes to determine
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organizational strategies.
2.4 Methods of Scanning the Business Environment:
There are three approaches for scanning the business environment:
Ad-hoc scanning: Short term, infrequent examination, usually initiated by a crisis.
Regular Scanning: Studies done as per the regular schedule (say, once a year).
Continuous scanning: (also called continuous learning)- continuous structured data
collection and processing on a broad range of environment factors.
Most commentators feel that in today's turbulent business environment, the best approach of
environmental scanning is continuous scanning. This allows the firm to act quickly, take advantage of
opportunities before competitor do, and respond to environment threats before significant damage is
done.
2.5 Techniques for Environmental Analysis: Various techniques of environmental scanning are
explained as follows:
2.5.1 SWOT Analysis: A SWOT analysis (alternatively SWOT matrix) is a planned structure which
evaluates the strength, weaknesses, opportunities and threats of any matter. It can be done for
any product, person, plan, industry etc. It specifies the internal and external factors that are
favorable and unfavorable for the achievement of main objective of the business. The technique
is credited to Albert Humphrey, who led a convention at the Stanford Research Institute
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(now SRI International) in the 1960s and 1970s using data from Fortune 500 companies.
. Fig: 2.1: SWOT Analysis
Strengths include the abilities and potential of the organization to deal situations. These are the
benefits over others.
Weaknesses are the weak points of an organization. They are the disadvantageous for a firm in
comparison to other companies.
Opportunities are the available chances or the prospects from the external world for future growth.
They are the advantage to exploit.
Threats are the troubling factors which can negatively affect the organization.
Relevance of SWOT Analysis: SWOT analysis is frequently used by the business organizations for
following purposes:
Business planning
Evaluating strategies of competitors
Business development
Scanning of Business environment
Internal analysis of the organizations
Analysis of existing strategies
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2.5.2 ETOP Analysis: ETOP is the acronym for Environmental threat and opportunity profile. It is
nothing but a summarized picture of the environmental factors and their likely impact on the
organization. ETOP is generally prepared in the following manner:
List Environment Factors: It involves listing the different aspects of the relevant environmental
factors. For example, economic environment may be divided into rate of economic growth,
national income, savings, investment, rate of inflation, capital market reforms, fiscal policy,
monarchy policy etc.
Access Importance of Environmental Factors: At this stage, the importance of each
environmental factor is assessed closely and expressed in qualitative (high, medium or low) or
quantitative terms ( 3,2,1). It is worth mentioning here that not all identified environment factors
will have the same degree of importance.
Assessing the impact: Next step is to identify impact of all factors identified above. A relevant
factor so analyzed might have a positive or negative impact as a threat.
Combine to get a bigger picture: In the final stage , the importance of each factor and its impact
is compared to produce a compact overall picture
Preparing ETOP helps a firm to identify the favorable segments in a chosen field of activity,
presenting excellent growth opportunities. For example most motor cycle manufactures in India
are trying to create a niche in the high-end motor cycle market ( where prices start from Rs. 75000
onwards; Hero Honda through its Eliminator brand; Enfield's Lightening @ 70000; Bajaj's
Eliminator @ Rs. 70000 ; Kinetic Hyousung @ Rs. 50000; and LML Dalcim @ Rs. 50000). Once
this is done, the firm can find out where it stands in the market as compared to its rivals.
Depending upon its manufacturing capabilities, technological strength, brand image and
distribution network, the firm can think of entering into the any segment at an appropriate time.
Table 2.1 ; Environmental Threat and Opportunities Profile for a Motor Cycle
Manufacturers ( only three listed).
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Environmental Factors Impact
(+) Oppotunities (-) Threats
Technology (+) Niche Markets for High End Markets
(+) Vast growing educated youth preffering fuel efficient ,
sleek models
(-) Free imports from cheaper markets
Economic (+) Rising income levels in urban as well as rural markets.
(+) Urban congestion and poor transportation services
(-) Price competition from loacl as well as international brands.
Social (+) Buyer's preference for sporty, fashionable and durable
models
(-) High road accidents forcing people to opt for safer models
of transport.
2.5.3 PESTLE Analysis: PESTLE stands for political, economic, social, technical factors, legal and
environment factors. All these factors depend on one another and keep changing with the passage of
time. As a result, when one factor shows any up or down variation it will impact the others factors
also. This technique is very helpful in strategic planning of the business. PESTLE provides a useful
framework for analyzing environmental pressures on the firm. The diverse factors covered in the
PESTLE analysis are explained below:
Political and legal factors: Political and legal factors can be considered as a single unit. It
is referred to outline given by polity of the country. This framework deals with economic
and political matters relating to the business. The labour laws of the country extremely
influences the location decision. For e.g. Protecting the employees from dismissal is good
from one view point but companies may choose a country with a flexible hire-and-fire-
system. Moreover, the constancy in political system of the country is important deciding
factor for most of the businesses.
Economic factors: It deals with economic development at national and international level.
It has a straight impact on dealer and purchaser market. Gross Domestic Product, inflation
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rate, rate of interest etc are the main determinants of economic factors. These determinants
influence the demand and supply situation, competition in the market, cost of investment.
Suppose, GDP of a country is low, the demand is in general lower than in countries with a
higher GDP.
Social factors: Social factors are the social issues concerning the principles, standards,
opinions and the ethnicity of market participants. Participants of the market can be
employees, customers or suppliers. Even though all the participants are in direct contact of
the business still they have great impact on its working in both ways either negative or
positive. For success of the business, companies have to adapt the changes of the
participants and formulate strategies accordingly.
Technical environmental factors: This factor is important for the industrial sectors which
are highly affected by the technical changes that come with the time. Technological
variations either can be an opportunity or can be a threat to the business, for example
robots can either be good invention for business at the same times can be a failure when it
comes to decision making. Particularly manufacturing companies are affected of that fast
evolution.
Environmental factors: In the last, Environment factors are nowadays becoming the most
important factor out of all. It constitutes natural resource and human life. Availability of
natural resources is the main topic of discussion as fossil fuels are getting scarce with the
passage of time. It’s risky to get completely dependent on fuels. All the more fossil fuels
are contributing in ecological pollution due to which companies are becoming more
environmental friendly. Consequently, eco-friendly products or technologies can even
signify a competitive advantage.
2.6 Steps of Environmental analysis
The segmentation according to the six presented factors of the PESTLE analysis is the starting
point of the global environmental analysis. The evaluation of every segment can be done with
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checklist method. In this approach, the condition of the environment can be cleared. Each segment
needs systematic approach to signify changes so that the impacts of the factors can be interpreted
correctly. After the segmentation, the analysis consists of four further steps:
1. Scanning the environment
2. Monitoring the environment
3. Forecasting the environment
4. Assessing the environment
1. Environmental scanning
Scanning is the first step of the analysis. Each segment is thoroughly analyzed to find the
indicators of the trend. After each segment is examined, development indicators of the segments
are defined. According to Fahey and Narayanan, scanning reveals ‘real or about to happen change
since it clearly focus on spot that the organisation may have earlier neglected’. Scanning is done to
be aware of adverse signals in the environment. It includes published data from media for example
newspapers, TV news, surveys by news channels, periodicals etc. this type of scanning is called
media-scanning. Product-scanning includes scanning of products which proclaim re-emerging
consumer behavior. Looking for global trends on the internet can be defined as online-scanning
Modes of scanning:
There are four ways of scanning as described by Francis Joseph Aguilar (1967) are mentioned
below:
'Undirected viewing' means scanning which is conducted not for specific purpose. It can be done
through reading a multiple publications. Such methods involve less cost and are beneficial for the
scanning. There are numerous sources from where the potential information can be collected. Data
are vague and indistinguishable with no guidelines so exploring ought to be paid attention.
Conditional viewing' the viewer keep in consideration the type of data required and review their
implications for the business. The area of information can be clearly recognized.
'Informal searching' is unstructured scanning for the particular subject matter.
In contrast of informal searching there is 'formal searching', in which the structured scanning is
done regarding the matter of subject concerning the business orgnisation.
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2. Environmental monitoring
After identifying all the relevant indicators the next step is environmental monitoring. It is defined
as 'the procedure of repetitive scrutinizing the definite purpose of more than one element of the
environment as per the pre-arranged schedule, and using comparable methods for sensing the
environment and collecting the data'. By monitoring the developments recorded in the data, the
trend followed is noticed and at last interpreted for the process of decision making. While
monitoring, historical changes are considered and evaluated which serve as a base line for the
monitoring process. Furthermore, data sources are checked for practicality and dependability. In
the end, prognosis is required.
3. Environment forecast
This is done by adequate methods, like strategic foresight or scenario analysis. Several other
methods of forecasting are the following: guessing, rule of thumb, expert
judgement, extrapolation, leading indicators, surveys, time-series models and econometric
systems.
'Guessing' and related methods rely on luck and not in general a useful one. It is impractical to
evaluate the uncertainty by guessing in advance.
'Expert judgment' lacks rationale being the only constituent of forecasting.
'Extrapolation' is successful when trend exist. Prediction in tendencies is likely to miss
concerning extrapolative methods.
'Forecasting based on leading indicators' needs a stable relationship between the variables that
lead and the variables that are led. If the reasons for the lead are not clear the indicators may give
misleading information.
'Surveys' of businesses can give relevant data about the future needs. Business rely on which
needs are need to put stress on so as to do the planning.
'Time-series models' is the most applied tool of forecasting. In this technique pattern of historical
data is described and measures the uncertainty.
'Econometric systems' of equations are the main tool of economic forecasting. They consist of
equations which attempt to “model” the behaviour of economic groups such as consumers,
producers, workers, investors etc. moderated by historical experience.
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4. Environment Assessment
The result of above three steps is the assessment of environment. Assessment is done to check the
practicality of the incidence and to analyze the chances of a risk for the company. The
measurement of the risks is also of significance. Issue-Impact-Matrix is used to measure risk and
practicality of the incidence and an appropriate tool to estimate and prioritize changing trends. The
predicted factors are here categorized by their chances of happening and their impact on the
business. According to their classification, they demonstrate a high, medium or low priority for the
company. The factors with a high occurrence probability and a high, significant impact on the
company have the highest priority. The higher the priority, the faster need to be reacted to avoid
risks and to benefit from chances. The environmental assessment represents the last step of the
global environmental analysis.
Check Your Progress:
i. Environmental scanning is the term coined to describe the action of __________ and___________
on company’s rivals and the overall market.
ii. Premising Method is a method of scenario building in which a series of premises is drawn up
from which ______________is made.
iii. In the last step of the environmental analysis, the results of the three steps -
______________,________ and_________ -are assessed
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2.7 PESTLE Analysis of Toyota
Toyota Motor Corporation is a famous Japanese multinational corporation, and is considered the
world's second largest automaker of automobiles, trucks, buses, robots, and providing financial
services ( 2007). Its founder is Kiichiro Toyoda, born in 1894, and the son of Sakichi Toyoda, who
became popular as the inventor of the automatic loom. Kiichiro inherited the spirit of research and
creation from his father, and devoted his entire life to the manufacture of cars. After many years of
hard work, Kiichiro finally succeeded in his completion of the A1 prototype vehicle in 1935, which
marked the beginning of the history of the Toyota Motor Corporation ( 2007).The first Type A
Engine produced in 1934 was used in the first Model A1 passenger car in May 1935 and the G1
truck in August 1935, and led to the production of the Model AA passenger car in 1936. In addition
to being famous with its cars, it still participates in the textile business and makes automatic looms
that are now fully computerised, and electric sewing machines that are available in different parts of
the world. It has several factories around the world, which serve to manufacture and assemble
vehicles for local markets. The corporation’s factories are located in countries such as the United
States Australia, Canada, Poland, France, Czech Republic, United Kingdom, Turkey, South Africa,
Brazil, Argentina, Venezuela, Mexico, Japan, Indonesia, Pakistan, India, Mexico, Malaysia,
Thailand, China, Vietnam, and the Philippines. Despite the many locations of its factories, its
headquarters is located in Toyota, Aichi, Japan (2007).It invests a great deal of time and effort in its
research into cleaner-burning vehicles, such as promoting a Hybrid Synergy Drive and running a
Hydrogen fuel cell in its vehicles (2007). It has significant market shares in developed countries,
such as the United States, Europe, Africa and Australia, and has significant markets in South East
Asian countries. Its brands include the Scion, its division in the United States, Guam and Puerto
Rico, and the Lexus, which is Toyota’s luxury vehicle brand ( 2007).Aside from producing cars and
other types of automobiles, such as SUVs and coasters, Toyota also, participate in rallying or
racing. The company’s presence in Motorsport can be traced to the early 1970s, when Ove
Andersson, a Swedish driver, drove for Toyota during the RAC Rally in Great Britain, and in
succeeding years, Toyota Team Europe was formed (2007). Up to the present, Toyota cars are still
being used in a variety of racing events indifferent countries around the world. These events include
the CART in Vancouver, the LeMans, the Indy Racing League, the NASCAR, and the Toyota F1
Series (2007).As the leader in the industry of automobile manufacture and production, the company
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adopts philosophy in terms of its production system, which is named The Toyota Way. The
company’s philosophy in production involves a list of fourteen principles that are implemented in
the company, and serve as guides to the operation of the company. These are as follows:
i. becoming a learning business organisation through expression and continuous improvement
ii. Slow but sure decision-making through consensus, through considering a variety of options, and
to implement decisions effectively and efficiently; and,
iii. Actually immersing one’s self to understand the situation;
iv. Respect the work and responsibilities of partners and suppliers by challenging them and helping
them improve;
v. Train and develop a workforce who follow the company‟s philosophy;
vi. Train leaders who understand the company’s work, live its philosophies, and share it to others;
vii. Use reliable and tested technology, which serves both the people and the company’s processes;
viii. Use visual control to let problems surface;
ix. Standardized tasks are the company’s foundation for its continuous improvement and the
development of the employees;
x. Build a culture that stops to fix problems, in order to get quality perfect at the first try;
xi. Level out the workload of the workforce;
xii. Utilise “pull” systems to prevent over-production;
xiii. Foster a continuous process flow to sight problems;
xiv. Base the company‟s management decisions on a long-term philosophy, even at the expense of
short-term goals;
By means of above ideology, the company is guided in terms of its operations and production.
2.8 Summary
“Environmental scanning is the terminology discovered by Francis Aguilar, a Harvard Business
School Professor, to explain the act of surveillance and bring together the informations of
company’s rivals and the in general market”.
It brings about both fact and skewed information on the business factors existing in the
environment in which a business operates. By observing the environment, an enterprise considers
the affect of the diverse trends, concerns and prospects on its calculated managing process. At the
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same time scanning of environment is necessary for the formulation of strategies to have a firm
hold on the market position or to lead the market. The scanning efforts should be such that it
completes in the required time with higher level of accuracy at the same time that no relevant
factor get missed out.
2.9 Glossary
Environmental scanning: Environmental scanning is the term coined in the mid-1960’s by
Francis Aguilar, a Harvard Business School Professor, to describe the action of watching and
collecting information on company’s rivals and the overall market.
Ad-hoc scanning: Short term, infrequent examination, usually initiated by a crisis.
Regular Scanning: Studies done to a regular schedule ( say, once a year).
Continuous scanning: (also called continuous learning)-continuous structured data collection and
processing on a broad range of environment factors.
ETOP Analysis: ETOP is the acronym for environment threat and opportunity profile. It is
nothing but a summarised picture of the environmental factors and their likely impact on the
organization.
SWOT Analysis: (Acronym for the internal strengths and weaknesses of a firm and the
environmental opportunities and threats facing that firm) analysis helps an organization match its
strengths and weaknesses with opportunities and threats operating in the environment. An
appropriate strategy is one that capitalizes on the opportunities by using organizational resources
and capabilities to the best advantage and neutralizes the threats by minimizing the adverse
influence of weaknesses.
2.10 Answers to check your progress
Ans. Watching, collecting information
Ans: projection of the future scenarios
Ans: Scanning, Monitoring, Forecasting
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2.11 References/Bibliography
Wetherly,Paul and Otter,Dorron(2011): The Business Environment-Themes and Issues. Oxford
University Press,New York.
Cherunilam,Francis(2013):Business Environment-Text and Cases, Himalaya Publishing House
Pvt. Ltd., Mumbai.
K.Ashwathappa(2011): Legal Environment of Business, Himalaya Publishing House Pvt. Ltd.,
Mumbai.
Hax, A.C., and Majluf, N.S.(1983): ‘The Use of the Industry Attractiveness- Business Strength
Matrix in Strategic Planning.’ Interfaces, pp.46-60.
2.12 Suggested Readings
Wetherly,Paul and Otter,Dorron(2011): The Business Environment-Themes and Issues. Oxford
University Press,New York.
Cherunilam,Francis(2013):Business Environment-Text and Cases, Himalaya Publishing House
Pvt. Ltd., Mumbai.
2.13 Terminal and Model Questions
1. What do you understand by Environmental Scanning? Explain any one scanning technique giving
an example of any company using the technique you have mentioned.
2. What is global environmental analysis and how is it conducted?
3. Explain the following in brief:
i. SWOT Analysis
ii. ETOP Analysis
iii. GE Mc Kinsey Matrix
iv. PEST(LE) Analysis.
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LESSON 3
Political Environment
Structure
3.1 Objectives
3.2 Introduction
3.3 Types of Political Systems
3.4 Three institutions of the government
3.4.1 The Legislature
3.4.2 The Executive
3.4.3 Judiciary
3.5 Checks and balances in democracies
3.6 The Preamble
3.7 Fundamental Rights
3.8 Directive Principles of State Policy
3.9 Summary
3.10 Glossary
3.11 Answers to check your progress
3.12 References
3.13 Suggested Readings
3.14 Terminal and Model Questions
3.1 OBJECTIVES
After reading this lesson, you should be able:
To describe the political context within which business operates
To illustrate the political institutions and processes
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To explain how business organisations can influence, as well as be influenced by, the
political environment
3.2 INTRODUCTION
Although business is an important economic activity, there are various non-economic
variables which strongly influence its sphere of activity. Political environment is one such
important non-economic variable which influences, promotes, encourages, directs and
controls the business activities in an economy. Political environment describes the political
system prevailing in the country. The critical importance of the political environment to
business is highlighted by the fact that it is often politics that determines economic and
business policies. So we can safely say that political environment has a colossal influence on
business as it deals with the regulations and legislations pertaining to business operations,
government programmes, war, election and such like other problems.
According to Dimock, “The two most powerful institutions in society today are
business and government; where they meet on common ground – amicably or otherwise –
together they determine public policy, both foreign and domestic, for a nation.” Important
economic policies, for instance, fiscal policy, industrial policy, foreign trade policy or even
policy towards foreign capital technology are often political decisions. Many political
decisions, especially the economic policy if the ruling government, tend to have serious
implications for the business activity in an economy. The nature of a country’s political
system including its governmental institutions decides, promotes and controls the business
activity of that particular country. It also tends to reflect certain underlying social values and
philosophies which help to determine how different decisions including economic decisions
(about the allocation of resources) are made. The principal pre-requisite for economic
development for any country is definitely a political system which ensures personal security
and safety to its citizens on all fronts. This is possible only if the prevalent political system
dynamic and efficient besides being stable and honest. The developed nations of the world
bear evidence to this fact. Rapid economic progress in the advanced countries has been
ensured and facilitated by the political development in the first go followed by cultural and
economic development. So the political environment of business is a dynamic environment
involving continuity and change. Further institutional arrangements of a country cause
changes in the political environment. The impact of political factors on a business tends to
vary in accordance with the type of organisation involved. Moreover there is a two way
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relation between business and the political environment - changes in the political
environment cause changes in the business activity and also business activity does influence
government decision makers, often in a way which is beneficial for them.
3.3 Types of Political Systems
The term Government refers to a process which is concerned with the pursuit
and exercise of power – the power to make decisions which affect the lives of a large number
of people, at local, regional, national or even international level. How this power is exercised
by the governments and the ideological foundations on which this is based, helps to indicate
the nature of the political system. Broadly speaking there are two main political philosophies
ranging across two extremes, found all over the world. On the one hand there is
authoritarianism and on the other is democracy.
Authoritarian Political Systems
In an authoritarian political system, the supreme power is in the hands of an established
authority. This authority may be an individual (like a monarch or other powerful individual)
or a group of individuals (may be a political party or military junta) who may have assumed
political power in a variety of ways (which could be by birth, election or coup). The conflicts
are settled through the enforcement of rules, regulations and orders by this established
authority which tends to limit the participation by others in the process of decision making,
even may monopolise the process altogether and may not permit any opposition to occur.
Such totalitarianism or authoritarianism is perhaps best exemplified by Nazi Germany and
Stalinist Russia.
Democratic political systems
A democratic political system is one in which conflicts are resolved by rational discussions
among the various parties concerned and the final solution is accepted voluntarily by all
participants, even if they disagree. Under such a system, the views of individuals are
represented in an established authority (a government) that is normally chosen by the people
and which is accountable to them at regular intervals (through regular and free elections). So
democracy is a political system in which there is government of the people, for the people
and by the people; that is, the supreme power is vested in the hands of the citizens of that
country. People elect their own representatives and choose the members of the government
who, in turn, take decisions and make laws for the electorate.
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Democratic Institutions and Processes
In a democratic government wishes of the people are executed through a complex system of
institutions and processes. Usually there are four common and interlocking elements in a
democratic political system: an electoral system, a party system, a representative assembly
and a system for the articulation of sectional interests each of which are separately discussed
below
The Electoral System
In a representative democracy, the electoral system links the people with the government.
Elections are held periodically to help the citizens choose their representatives. However for a
successful democracy, a system of regular elections based on universal adult franchise should
be accompanied by basic freedoms of speech, movement, assembly, etc.; freedom from
coercion, absence of illegal electoral practices; a secret ballot; and a free media. This would
ensure a transparent and successful democracy.
The Party System
There exist different political parties which compete during elections. It is a convenient
means of organising a system of representative democracy. The political parties not only help
to choose most of the candidates who compete in these elections, but usually also support and
sustain them. Such a party system helps the voters in selecting political leaders and the kind
of policies they may follow if the party achieves political office.
A Representative Assembly
An important feature of a democratic government is the existence of a representative
decision-making body. It comprises of a group of individuals chosen by the citizens to take
important decisions on their behalf. The system of government .could be federal or unitary.
In a federal system the sovereignty is divided between two levels of government - national
and local/regional. Each layer of government has independent powers. On the other hand in a
unitary system ultimate authority lies with the national government. Any powers granted to
subnational governments can be ultimately withdrawn.
A System for Articulating Sectional Interests
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The existence of pressure groups is important indicator of a democratic system of
government. The pressure groups or lobbies represent like-minded people who voluntarily
join together to try to influence government thinking and behaviour to represent the interest
of their members. As a sectional interest within society, pressure groups articulate a
collective and non-party political view in decision-making circles. Such lobbies act as an aid
to efficient and representative decision making by providing detailed information on specific
areas to the government which helps in defending minority interests and also assists in the
implementation of government policy and legislation.
3.4 Three Institutions of the Government
Normally the process of governing involves three major activities: decision making,
executing these decisions and adjudicating over them in case of dispute or non-compliance.
These three functions represent the three vital institutions of the government: legislature,
executive and the judiciary.
3.4.1 The Legislature
In a democratic system of government the power to legislate or to make laws is vested
in the legislature which is elected by the people. As indicated above, this process of choosing
a representative decision-making body by popular election is a central feature of the
democratic approach to government. An important common feature of the legislature in most
of the democracies is a bicameral Legislature. It refers to a legislature with two chambers: an
upper house and a lower house. Each chamber comprises representatives chosen by a separate
CHECK YOR PROGRESS 1
Fill in the blanks:
1. A political system where power remains in the hands of established authority is called_____________________________.
2. The political system, where government is of the people, for the people and by thepeople is ____________________
3. Decision making body chosen by the people to take decisions on their behalf is called_________________________.
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electoral process and has specific powers and roles in the legislative process. Normally the
consent of both chambers is required for a legislative proposal to be accepted. This is one of
the many checks and balances found in democratic systems of government. The multi-stage
legislative process involves the drafting of a legislative proposal, its discussion and
consideration, where necessary amendment, further debate and consideration and ultimate
acceptance or rejection by either or both the legislative chambers.
Opposition parties play a vital role within the legislative body. These opposition
parties can attack the government and articulate alternative views to the public through
media coverage. Various Specialist and Standing Committees also exist for scrutinising
legislation and the working of the executive branch of government. Legislating is a complex
and time consuming process, which may be further delayed by individuals and groups both
within and outside the legislative body (like pressure groups).
3.4.2 The Executive
Once the decision making is done these decisions have to be put into action. The
executive or the ‘state’ is responsible for implementing the governmental decisions. It is the
responsibility of the executive branch of government. In modern states the ‘executive’ refers
to a relatively small group of individuals (some hold political office, others are career
administrators and advisers) chosen to decide on policy and to oversee its implementation.
Under a presidential system of government, the chief executive or the President is
usually chosen by separate election for a given period of office and becomes both the
nominal and political head of state. He/she then appoints individuals to head various
government departments/ministries/bureaux. which are responsible for shaping and
implementing government policy. On the other hand, the roles of head of state and head of
government are separated in a parliamentary system. The head of the state is largely
ceremonial and is carried out by either a president (as in Germany, India) or a monarch (as in
UK, Japan). The head of government, the Prime Minister is officially appointed by the head
of state but is an elected politician, invariably the head of the winning party or a coalition in
a general The head of government then chooses the cabinet to head the different government
departments/ministries and to be part of a collective decision-making body. The members of
the cabinet are members of the legislative assembly and are both ‘individually’ and
‘collectively’ responsible to the legislature for the work of government. They have a critical
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role in shaping government policy, directing and controlling the business activities. The
business activities also influence the government in a number of ways as given below:
Responsibilities of Business to Government: Business firms need to obey the government
laws relating to their existence, functioning and operations. Other important responsibilities
of business towards the government are as follows:
Payment of taxes to the government: Taxes are a major source of public revenue
essentially required for government expenditure.
Providing relevant information to the decision makers individually or through various
forums to influence decision making in the larger interest of the business community.
Voluntary cooperation with government agencies with regard to various programmes
such as drought relief, tree plantation, sanitary works, and many other welfare
programmes.
Serving on various advisory boards constituted by the government
Bidding for and executing government contracts to carry out projects such as housing,
oil pipelines and many others.
Corporate contributions to political parties
Political participation of business is another but much debated issue. This involvement is
either through monetary contributions to political parties or business leaders contesting
elections or through lobbying. No matter what the criticism, there does exist a close nexus
between business and politics.
Governmental Responsibilities to Business: The government plays a vital role in
deciding, shaping, guiding and controlling business activities. It promotes and regulates
business activities and fulfils the following responsibilities towards business:
Making and enforcing laws relating to business: The government is responsible for
framing rules and regulations for business systems to help them function smoothly
Maintaining order and protection of persons and property
Providing infrastructure facilities such as power, finance, transport and
communication, civic amenities, etc., to facilitate smooth functioning of business
Promoting balanced regional development, equitable distribution of income and
wealth and help in achievement of other macroeconomic objectives of full
employment and economic stability.
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Publishing and providing important information of various government departments
which is extensively used by business firms
Supporting and assisting small sized business firms in areas of finance, infrastructure,
marketing, and technical know-how
Regulating the prices charged by business firms by competing with the business firms
Regulating money and credit in the economy
Government tariffs and quotas to protect domestic business from foreign competition
There are a few among a wide range of functions performed by the government to
encourage, regulate and develop business activities in an economy.
3.4.3 Judiciary
As an important organ of the state, the judiciary plays a crucial role in the functioning
of a democracy. Judiciary works towards application and enforcement of the government
laws. Legal structures and processes may vary from country to country and are also
influenced by history, culture and politics of a given nation. However, in a democracy there is
a separation of powers between legislature, executive and judiciary such that legislature and
executive cannot interfere in the working of the judiciary. An important feature of a
democracy is an impartial and independent judiciary, that is, the judiciary is free to the
government and to review its decisions. This allows the judiciary to play a major role in
checking any misuse of power by legislature and executive. The judicial system acts as the
final interpreter of the Constitution and has the power to strike down any laws passed by the
Parliament, if it appears to be a violation of the basic structure of the Constitution. This
power is referred to as judicial review. In this manner the judiciary also helps to solve legal
disputes at various levels- between citizens, between citizens and government, between state
governments and between the centre and state governments. The system of courts, thus,
protects the citizens from unlawful acts passed by the Parliament and also from arbitrary
actions of the executive.
As regards to business the judiciary has the power to settle different legal disputes,
maybe between employer and employee, or between two or more employees, or between two
or more employers, or between employer and pumlic or between employer and government,
to name a few. In the sphere of business activities, the verdict of courts may have far reaching
implications. This is especially evident in the sensitive area of industrial relations. The role of
judiciary has been particularly debatable in such like areas. The court is expected to have a
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balanced and reserved consideration of conflicting interests of the workers and the employers
and needs to give due weight to the directive principles, social justice and activist law
making.
However, in practice, the role of judiciary in a democracy and judicial independence
are subject to a considerable amount of debate especially in countries where persons with
judicial powers also have an executive and/or legislative role (for instance, the Lord
Chancellor and Home Secretary in Britain); and also where politicians have a considerable
say in the senior appointments to the judiciary (for instance, Supreme Court judges in the
United States are nominated by the President with the consent of the Senate). Another heavily
debated issue with regards to judiciary is as to how far in modern democratic states there is a
total separation of powers between the different organs of the government and also whether
rule making and rule adjudication should be rigidly different.
Judicial Activism
The term judicial activism refers to the review power vested with the system of
judicial courts and was first used in the United States of America in a historic judgement
in1954. In a historic judgement the Supreme Court declared separate schools for blacks and
whites as unconstitutional. It was a decision which the Congress and the President feared to
take due to the fear of adverse political repercussions. So it can be said that judicial activism
indicates the all pervading role of judiciary touching all the spheres of life of a common man,
thereby protecting the fundamental rights of the citizens. Thus, it is a persistent sustained
effort by the apex court to make justice accessible for underprivileged and the deprived
sections of the society. Although it has also received much criticism and there are arguments
in favour and against judicial activism, still it is a promising step to ensure justice and also to
repose the faith of public in the social and political institutions.
3.5 Checks and Balances in Democracies
A system of checks and balances exists in a democracy which refers to the restraints
on the actions of the state. These restraints not only check government actions but also undue
and unfair influence of these actions on the citizens. Broadly speaking, at the national level
there are two main categories of restraints: (i) political checks and balances, and (ii) social
and economic checks and balances. There are three main sources which tend to generate the
political checks and balances, namely, the separation of powers among the three organs of the
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government; a bicameral legislature; and federalism wherein the central government
delegates powers to sub-national governments. Even if these arrangements are not perfect,
yet their very existence provides time for consultation and negotiation; this in itself is the
main idea behind resolving conflicts in a democratic way.
On the other hand, the social and economic checks and balances include private
business organisations, professional associations, promotional bodies, churches and other
groups which keep the free activity of the government sector under check to help shape our
economic, social and moral environment.
3.6 The Preamable
Our constitution states that “We the people of India having solemnly to constitute India into a
SOVEREIGN, SOCIALIST, DEMOCRATIC, SECULAR, REPUBLIC and to secure all its
citizens:
JUSTICE, social, economic and political;
LIBERTY of thought, expression, belief, faith and worship
EQUALITY of status and opportunity; and promote among them FRATERNITY assuring the
dignity of the individual and the unity of the Nations
IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949, do
HEREBY ADOPT, ENACT AND GIVE OURSELVES THIS CONSTITUTION. "
[The word SOCIALIST and SECULAR were included in The Preamble by making 42nd
Amendment which that came into force on December 18, 1976]
The Preamble of the Constitution clearly depicts that people are the ultimate authority and
source of the Constitution. The Indian Constitution derives its strength from the sovereignty
of the people. As all governmental organs and institutions owe their origins to the
sovereignty of the people, they cannot enjoy unlimited powers. They can enjoy only such
powers, which are conferred by the Constitution. Though the Parliament possesses the power
to amend the Constitution, the power should be exercised in such a manner that the basic
framework of the Constitution is maintained.
From the economic point of view, the word SOCIALIST that was inserted through the 42nd
Amendment is of critical importance. It mentions the economic objectives and policy of the
state and guides the state in making laws that attain a socialist pattern of society. It also
paves the way for the nationalisation of many industries in the 1970s. Indian socialism is
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different from the western type of socialism, which involves nationalisation of all means of
production. As Indira Gandhi explained:
"We have always said that we have our own brand of socialism. We will nationalise the
sectors where we feel the necessity. Just nationalisation is not our type of socialism."
Therefore, while the Indian Constitution doesn't abolish private property altogether, it seeks
to put it under restraints so that it may be used for public benefit.
Shri J.L. Nehru , India's first prime minister had declared the "socialistic pattern of society
and not socialism" as the objective of planning.
He observed that, "Socialism to some people means distribution, which means cutting off the
pockets of the people who have too much money and rationalisation. Both these are desirable
objectives, but neither is by itself socialism
"Any attempt to distribute wealth by affecting the productive machinery is utterly wrong; to
do so would weaken us."
"Secondly, there is a question of nationalization. I think it is dangerous merely without being
prepared to work it properly. To nationalise, we have to select things. My idea of socialism is
that every individual in the State should have equal opportunity for progress."
So we see that term 'socialist' has been accepted in India in a different manner and is a
guiding principle for the economic policy of India. Behind all the major economic policy
decisions such as active participation of the government in business, heavy investment in
public sector, reservation of certain industries for PSUs and small scale, a highly progressive
tax rate, heavy excise on luxury items, curb on expansion in private sector etc.
Socialism is also reflected in the Fundament Rights and Directive Principles of State Policy
mentioned in the Constitution. These Directive Principles have an everlasting and maximum
impact on the economic policy of State, and therefore have direct impact on every aspect of
business whether it is the scope of business (where to invest), supply of raw material, level of
competition, purchasing power of consumers, R&D, entry barriers, level of technology,
pricing or HRM.
3.7 Fundamental Rights
The Constitution of India contains an exhaustive list of Fundamental Rights. They are above
all other laws of the land. The Court ensures their observance by the State. The Constitution
has granted the following fundamental rights to the citizen:
1. Right to Equality (Article 14): Article 14 of the Constitution guarantees equality of
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all persons before law. Article 15 prohibits any discrimination between citizens on the
basis of religion, race, caste, sex, or place of birth. It ensures equality of opportunity
in the matter of public employment. Article 14 prohibits hostile discrimination and
not reasonable classification for the purpose of legislation.
2. Right to Freedom (Article 19): Article 19(1) of the Constitution gives right to six
freedoms:
a. Freedom of speech and expression
b. Freedom to assemble peacefully and without arms
c. Freedom to form associations or unions
d. Freedom to move freely throughout the territory of India
e. Freedom to reside and settle in any part of the territory of India and
f. Freedom to practice any profession or to carry on any occupation, trade or
business
These freedoms are not absolute, they come along with certain limitations. The first
Amendment Bill to the Constitution was passed by the Parliament on June 2, 1951. It
allowed the State to impose reasonable restrictions on the freedom of the individual
in the interest of the security of the State, friendly relations with foreign states, public
order, decency or morality or in relation to contempt of court, defamation or
incitement to an offence.
3. Right to Life and Personal Property: Article 31, 3 1 A and 3 1 B guaranteed the right
of the individuals and trusts to own and trusts to own, and administer their property.
The Constitution says that no person shall be deprived of his property except by
lawful authority. Right to property has been deleted by the 44th Amendment and
now it has been made only a legal right.
4. Right to Freedom of Religion: Article 25 says that all the persons shall be entitled to
freedom of conscience and the right to practice and propagate their religion freely.
5. Right to Cultural and Educational Freedom: The Constitution allows all the
minorities in India to preserve and promote their languages, script and culture. The
Constitution permits all the minorities (even if religious) to start and run their
educational institutes and get financial aid without any discrimination from the State.
6. Right against Exploitation: Our Constitution recognizes the dignity of the individual
and protects him against any form of exploitation either by the State or by the
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privileged classes in the society.
7. Right to Constitutional Remedy: Article 32 confers on the people the right to move
the Supreme Court in case of encroachment of the Fundamental Rights by the State.
3.8 Directive Principles of State Policy
"Although the Directive Principles of State Policy confer no legal rights and create no legal
remedies, they appear to be like an Instrument of Instructions, or general recommendations
addressed to all authorities in the Union, reminding them of the basic principles of the new
social and economic order which the Constitutions aims at building. These fundamental
axioms of State Policy, though of no legal effect, have served as useful beacon-lights to
courts." (M.C. Setalvad)
The Directive Principles of State Policy are given in Part IV of the Constitution. Article 37
postulates that the Directive Principles, although not enforceable by the court, are
nevertheless fundamental in the governance of the country and it shall be the duty of the state
to apply these principles in making the law. The entire regulatory environment of the country
is guided by one principle, that is, the Directive Principle.
Check Your Progress 2:
i. The Directive Principles of State Policy are contained in________________.
ii. The Constitution provides for trifurcation of responsibilities between,
___________,____________ and ___________.
iii. There are two houses involved in The Union Legislature (Parliament) -
______________ and ____________.
iv. The ______________ is responsible for enacting laws in India.
3.9 Summary
Laws and policies which influence business activity are made by politicians and
bureaucrats. Politics is a universal activity which affects all types of business. Political
systems reflect underlying social values and philosophies and these influence the ways in
which major decisions are taken. In a democratic system of government the main political
institutions include an electoral system, a party system, a representative decision-making
assembly and also a system for articulating sectional interests. Legislature, executive and
judiciary are the three key organs of the government. Besides these organs, there also exist
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political, social and economic checks and balances which act as a constraint on the actions of
government. These checks and balances include the activities of pressure groups which seek
to influence government in order to safeguard the interests of common man and even of those
who are under privileged. Business organisations and the bodies which represent them are
key pressure groups in democratic societies and an important part of the external environment
in which government operates.
3.10 Glossary
Legislature: In a democratic system of government the power to legislate or to make
laws is vested in the legislature which is elected by the people.
Executive: The executive or the ‘state’ is responsible for implementing the
governmental decisions.
Judiciary: It is an important organ of the state, the judiciary plays a crucial role in
the functioning of a democracy.
3.11 ANSWERS TO CHECK YOUR PROGRESS
Answers to check your progress 1
1. Authoritarian political system
2. Democratic political system
3. A representative assembly
Answers to check your progress 2
i. Part IV of the Constitution.
ii. the Executive, the Legislature and the Judiciary.
iii. the Lok Sabha (lower house, elected directly by the people of
India) and the Rajya Sabha (upper house, elected by the state
legislatures which in turn, are elected directly by the people).
iv. The Parliament
3.12 REFERENCES
1. Marshall E. Dimock, Business and Government, New York: Rinehan and Winston
Inc.
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2. Paul Justin, Business Environment Text and Cases, Tata McGraw-Hill Publishing
Company Limited, New Delhi
3. Fernando A.C., Business Environment, Pearson
4. Bhushan, Y.K., Fundamentals of Business Organisation and Management, Sultan
Chand and Sons, Delhi
5. Aswathappa, K., Essentials of Business Environment, Himalaya Publishing House
6. Galbriath J.K., Essays From the Poor to the Rich.
7. Ghosh, B., Fundamentals of Marketing Management, Books and Allied Ltd. Kolkata.
8. Raj Agrawal, Business Environment, Excel Books, New Delhi.
3.13 SUGGESTED READINGS
1. Cherunilam, Francis, Business Environment Text and Cases, Himalaya Publishing
House
2. Aswathappa, K., Essentials of Business Environment, Himalaya Publishing House
3. Saleem Shaikh, Business Environment, Pearson
3.14 TERMINAL AND MODEL QUESTIONS
1. What do you understand by political environment? Explain its importance with
reference to business activity in an economy.
2. What do you mean by Government? Discuss its responsibilities to business.
3. Explain the three political institutions in our democratic set up.
4. The role of legislature on business is considerable. Comment.
5. Discuss the business responsibilities to government and also government
responsibilities to business.
6. Explain in detail the impact of legislature, executive and judiciary on business.
7. Explain various fundamental rights contained in the constitution of India.
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LESSON-4
Economic Environment of Business
Structure
4.1 Objective
4.2 Introduction
4.3 The analytical aspects of Economic Environment of business
4.4 Nature of Economy
4.5 Type of Government: Economic System
4.6 Indian Economic Environment-Current Economic Policies and Economic
Trends
4.7 Summary
4.8 Glossary
4.9 Answer to check your progress
4.10 References/Bibliography
4.11 Suggested Readings
4.12 Terminal and Model Questions
4.1 Objectives:
After studying this lesson you will be able to:
1. figure out the critical elements of business economic environment.
2. explain the type of Government and economic system.
3. describe the Current Indian Economic Environment
4.2 Introduction
Business literally means ‘a state of being busy’ .It plays an important role in the society. But the role
of business is crucial as it can perform many activities like creation of employment opportunities,
supply of goods and services, offering better quality of growth and contributing towards progress of
economy. So there arises a question, what is meaning of a business? The following definition
provides an appropriate answer to this question.
“A Business is nothing more than a person or group of persons properly organized to produce or
distribute goods or services. The study of business is the study of activities involved in the
production or distribution of goods and services-buying, selling, financing, personnel and the like”.
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The aforesaid definition is practically correct, although it is incorrect in analytical sense. There must
exist the goal of earning profits and the element of risk of loss, before any activities can be
considered in the business. The following characteristics are possessed by the business enterprise:
Trading in Products and Services on a daily basis: The very first feature of business is that it
deals in products and services on regular basis. Goods may be classified as consumers' goods
or producer goods. Consumers’ goods include wheat, milk, clothes, etc. and the producers'
goods include equipments, raw material, manufacturing machines etc. The goods which can
be directly consumed either immediately or after passing through various stages are called the
consumer products, whereas the products which are meant to be used for further production
are called producer goods. Producer goods are also called capital goods. Warehousing,
Transportation, Gas, supply of water, Insurance etc. are covered under services.
Production and/or Exchange of Products and Services: Business covers the production or
interchange of products or service for some consideration. Purchase of products and services
for own use or for giving it to others as a gift is not a trade. Exchange of products and
services will be considered as business if its purpose is to earn profit. For example, if a
housewife cooks the food for her family, it is not a trade. However, cooking the food at a
restaurant for selling it to others for earning profit is business.
Creation of place, time and form utility: Every business activity creates utility for the
society. When the products are being transferred from the place of manufacturing to the place
of its consumption, it is called Place utility. Products may be manufactured at the time when
they are not required, so it requires storage of goods till the time these are not required for
consumption and hence it creates Time utility. When basic (raw) materials are converted into
polished (finished) goods and services, it creates Form utility.
Continuity in Dealings: It is essential for business to perform the economic transactions
continuously. Products and services must be exchanged for some consideration on continuous
basis. An isolated transaction does not become a trade. For example, it is not a trade if a
person sells his house and in return earns some profits. However, it is trade, if the same
person is engaged in the purchasing and selling of flats regularly to earn his livelihood.
Profit Earning: The main purpose of a business activity is to earn profits. In case of public
enterprises, the main motive of business is to earn fair profits or 'surpluses’. Without earning
profits, even a single business cannot survive. This is the reason why businessman makes an
attempt to earn profits by increasing the sales volume or reducing the costs so as to get better
return on his capital. Even the further growth of business is not possible without profits. The
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non business organizations do not have any profit motive as they work for the welfare of
society.
The scope of business is very wide. It cannot be treated as trade only. Purchase and sale of products
and services simply means 'Trade’. However 'Business' covers all the activities related with the
manufacturing as well as distribution of products and services. It covers commerce i.e. trade and aids
to trade like banking, transport, insurance, and warehousing which helps in the manufacture and
distribution of products and services. J.C Miller states that; "The whole complex field of commerce
and industry, the basic industries, processing and manufacturing industries, the network of ancillary
services : distribution, banking, insurance, transport and so on, which serve and inter-penetrate the
world of business as a whole, are business activities." The activities of business are divided into two
parts viz., (1) Industry and (2) Commerce. Industrial enterprises include those activities which deal
with the growing, extracting, manufacturing, or construction. On the other hand, Commerce includes
trade i.e. those activities which deals with the buying and selling of goods and services, or aids to
trade like transportation, warehousing, banking, insurance and advertising.
Industry: It refers to an activity which converts raw material to useful products. It includes changing
the form from raw material to finished goods. The products of industry may be divided into
following three categories:
(a) Consumers' Goods: These are those products which are finally consumed by the consumers like
Clothes, Bread, Rice, Cheese, T.V., Radio, Bike, Washing machine, etc.
(b) Producers' Goods: These are those products which are used for the manufacturing of other goods
like Equipments, Tools, Manufacturing machinery etc. These are also known as capital goods.
(c) Intermediate Goods: There are some products which are final products of one industry but are
intermediate goods (raw material) of other industries. For example: copper industry, aluminum
industry, and plastic industry as their final products are used in production of electrical appliances,
almirahs, toys, baskets, cupboards , buckets etc.
Industries are mainly divided into two categories namely Primary and Secondary Industries. Primary
Industries include extractive and genetic industries and Secondary Industries includes manufacturing
and construction industries.
(i) Extractive Industries: These industries are committed towards the boosting up of some form of
revenue from the natural sources like earth, air, water. For example: farming, hunting, fishing, etc.
(ii) Genetic Industries: These industries are engaged in the reproduction and multiplication of
convinced collection of plants and animals with the main motive of earning revenue from their sale.
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Nurseries, cattle breeding, fish hatcheries, poultry farms are all covered under genetic industries.
(iii) Manufacturing Industries: These are those industries which are involved in the conversion of
raw material into semi-finished or finished goods and are able to create form utility in products by
making them available for human use. The products of extractive industry are generally used as the
raw materials by manufacturing industries. Manufacturing industry provides their outcome in the
form of factory production.
(iv) Construction Industry: This industry is involved in establishment of infrastructure for the
continuous growth of the economy. These industries are engaged in the building up of bridges,
barriers, roads, canals etc. These industries use the goods of other industries, such as steel, timber,
brick, cement, lime, mortar, stones, marbles etc.
(v) Service Industry: For satisfying human needs there are several services which are provided by the
service industry such as transportation, banking, insurance and warehousing. They help in the
production and distribution of business activity. Service industries are the backbone of all business
activities. These activities include transport, banking, insurance, warehousing, and advertising.
Commerce: Commerce points out all those activities which are involved in the removal of
hindrances of persons, place and time in the exchange of commodities.
According to James Stephenson, “Commerce is an organized system for the exchange of
commodities between the members of industrial world.” Commerce bridges the gap between the
manufacturers and consumers. The major objective of commerce is to ensure the continuous flow of
products and services in order to gratify the consumer needs. Therefore, commerce is the summation
of all those activities, which are involved in the removal of products and services from the
manufacturers to the ultimate purchasers. The services involved in commerce are transportation,
banking, warehousing, insurance and advertising that serves as a bridge between the producers and
the consumers.
4.3 The analytical aspects of Economic Environment of Business :
Considering the viewpoint of both National Economic Management and Corporate Business
Management in India , the analytical aspects of the economic environment of the business can be
described as:
i. Institutional Framework: The philosophy and practice of an economic system will
determine the roles and responsibilities of the private sector, the public sector, the joint sector
etc. to a large extent.
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ii. The Physical Framework of the Environment: It is defined by the structure and level of the
economic development in the economy. The level of growth and development is indicated by
the level and composition of per capita income. Its production is determined by the
endowment factors of a country through the available natural resources, and material
resources. The agriculture, industry and the service sector play a significant role in the
national economy through the distribution of occupational labor strength, system of the
nationwide output, the style and arrangement of foreign trade, format of savings and
investment and capital formation, the arrangement of income distribution and the extent of
urbanization etc.
iii. Real Analysis of National economy: In order to describe national economy the household
zone, the corporate business zone, the government administration, the capital markets, and
the foreign zone are taken together. The economic environment can easily be understood by
considering the form and stability of each of these zones.
iv. Working of the Economy: Business and economic system are immensely dependent upon
money. All the other components like the flow of utilization, savings, investment, revenue,
enrollment and amount are affected by money. The real value of economic variables is
indirectly affected by the nature of monetary transactions. It also considers the role of
central banking, centralized planning, controlled price arrangement as well as free market
pricing.
v. Economic Planning and Programmes: The economic environment is affected by economic
planning. In order to optimize their achievements and to overcome their environmental
constraints over a period of time the economies function through one or other kind of
planning.
vi. Economic Policy Presentation and Legislations: Planning is a schedule for future course of
action, not an end in itself. So, It must be pursued with appropriate implementations. Both
industry and agriculture are affected by the economic policy statements. RBI works through
the instrument of money and credit policies and the government, through fiscal-cum-
budgetary policy, exercises control.
vii. Variations and movements in Macro-economic shifts: The short run fluctuations in and long
term trends of income, money supply, price etc. reflect the functioning of an economy.
viii. Economic Issues and Prospects: The description as well as aspects of macro-economic
variables describe economic issues like boom, unemployment, deflation etc. and various
prospects in the environment put light on corporate as well as national economic management
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challenges
4.4 Nature Of Economy
Economies can be categorized on the basis of their levels of income, especially per capita income.
There are countries which have a very high per capita income such as Singapore, Switzerland,
Sweden, etc. On the other hand, there are countries where people are dying of hunger. Even within
one nation, there are alarming disparities in terms of development, usually termed as dualism.
Thus,dualism refers to the existence of both the developed and the underdeveloped economy in a
country.
Classification on the basis of per capita income:
Low Income Countries: These economies have a very low level of per capita income. All
economies having a per capita GNP of $ 1035 or less(in 2012) are considered as low income
countries.
Middle Income Countries: These economies are further sub-divided into lower middle
income economies having , $1,036 - $4,085 (in 2012) and upper middle income economies
having a per capita GNP between $4,086 - $12,615(in 2012)
High Income Countries: These are countries having a per capita GNP of ,$12,616 or more.
Classification on the basis of Development
Developing or under-developed Economies: Low and middle income countries are usually
regarded as Developing or under-developed countries;
Developed Economies: High income countries are considered as developed economies. But
this may not always be true. Countries like Kuwait, Iran, UAE etc. fall in high-income
countries but are considered as developing countries.
Transition Economies: These are former centralized/ socialist economies, which are moving
to market economies such as Russia, China, eastern European nations, and India. These
transition economies are very big in size in every respect. As they are the largest markets in
terms of Purchasing Power Parity (PPP), they are the cheapest manufacturing and services
hub, and have substantial and, in few cases, the largest natural resources. From the angles of
both demand and supply, they are very rich and will be the playground for all global
organizations in the coming era.
4.5 Type of Government: Economic System
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The economic environment of a country includes three main elements- economic system, economic
policies and economic conditions.
Economic Systems: the economic system of a country reflects the economic composition, economic
thinking and the economic liberalization. The economic systems may be of three types-socialist,
capitalist and mixed economies.
a) Capitalism
Capitalism is a system based upon the private control and use of capital with profit motive. The
major significant character of capitalism is the continuation of private ownership. Everyone has
the right to establish any business in anyplace he wishes, provided he has sufficient funds and
capability. The state interference in economic activity is kept down to the minimum as it is
pillared on the concept of laissez faire. U.S.A and Canada are its examples.
b) Socialism
Socialism is an arrangement in which capital equipments, buildings and land are controlled by
the state. The prime aim of socialism is to run the economy for social benefit rather than private
profit. It focuses to work according to one’s ability, and provides equal opportunities to all
regardless of caste, creed, color and inherited privileges. Socialism includes communism.
Erstwhile Soviet Union followed it. Communism means an idealistic system in which all means
of production and other forms of properties are owned by the community as a whole, with all
members of the community sharing in its work and income. People work according to their
needs and capacities and get according to their desires and wants. In other words it is a social
and economic system characterized by social ownership of the means of production and
cooperative management of the economy as well as political theory which aims at the
establishment of such arrangement. China and Russia are its examples.
c) Mixed Economy
It is a mixture of two and contains neither the pure capitalism features nor the pure features of
socialism. So we can say that in this arrangement, we can find the features of both capitalism
and socialism. Both the private and public enterprises operate in the mixed economy. The
government intervenes to regulate private enterprises in several ways. Heavy engineering goods,
atomic power, industries producing defence equipments etc. are the basic and heavy industries
that are put in the public sector. On the other hand, the consumer goods industries, small and
cottage industries, agriculture etc. are assigned to the private sector. It has been realized that in
the under developed countries, like India, economic development cannot be achieved at the
desired rate of growth without an active government help and guidance. Hence, the government
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in such countries actively participates in economic activities in order to minimize the evils of
capitalism and to accelerate economic growth. In capitalistic economy, the entrepreneurs utilize
the available resources efficiently, as they have strong initiative to earn profit. But the free
functioning of private enterprises results in extreme inequalities of income and wealth. In
socialistic economy, the inequalities in income and wealth get reduced to the minimum and the
national income is more equitably distributed. But the socialistic economy suffers from the
problem of lack of private initiative which results in the lack of innovation and enterprising spirit
and ultimately leads to inefficient use of available resources. The mixed economy aims at
achieving the goals of both capitalism and socialism (i.e., efficient use of resources and equitable
distribution of income and wealth) and at the same time, it emphasizes on the reduction of evils
of capitalism and socialism.
Check Your Progress A
1. Capitalism is a system based upon the__________ control and use of capital with
_____________motive.
2. Socialism is an arrangement in which ___________, _____________ and
_____________ are owned by the state.
3. Dualism refers to __________of the developed and the underdeveloped in a country’s
economy.
4. High income countries are considered as _________economies.
5. Transition Economies are former centralized/ socialist economies, which are moving to
market economies such as Russia, China, eastern European nations, and
India.(True/False)
4.6 Indian Economic Environment-Current Economic Policies and Economic Trends
In the year 2010-11, Indian economy witnessed GDP growth of 8.4 % bringing dowm the fiscal
deficit of GDP in 2009-10 from 6.4% to 4.7%. During 2011-12, the economy showed a GDP of
6.5%.Industrial sector suffered the sharpest deceleration in 2010-11 it was 8.2 percent which
decelerated to 2.9 percent during 2011-12 and this slow-down was shown in all zones of the
economy. During the year 2011-12, the centre’s finance experienced greater shortfall due to
overshooting of expenditure and shortfall in tax revenues. The gross fiscal deficit (GFD)-GDP ratio
moved up to 5.8 per cent in 2011-12 as it was expected to be 4.6 percent. Further the deficit of the
government rose up due to increase in subsidies as a result of high crude oil prices during 2011-12.
During 2011-12 and particularly in second half, there was a deteriorating international investment
position, fall down of foreign exchange reserves, increase in the external obligations and an increase
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in Current Account Deficit (CAD).
In the first eight months of 2011-12 the inflation remained elevated at over 9 percent and it remained
sticky to the range of 6.9-7.7 percent, before softening a little in December.
4.7 Summary
After viewing in a broad way we conclude that the the growth and dispensation of economic
principles in civilization is called business. The business’s range is very wide. Trade and business
can’t be similar to each other. . 'Business' simply includes all behavior regarding invention and
allocation of goods and services wherever 'Trade' refers to purchase and sale of goods. It embraces
activities like industry, trade, insurance, banking, transport and warehousing which make easy the
manufacturing and allocation of all goods and services.
All the behavior of business may be categorized under two broad headings, viz., (1) Industry and (2)
Commerce. Any business enterprise, which deals with extracting, growing, construction or
manufacturing, refers to an industrial venture. And, a business enterprise, which is related with
activities that are incidental to trade, like transport, warehousing, banking, insurance and advertising,
or with exchange (buying and selling) of goods and services, is called a commercial enterprise. The
element of business, which seeks to make possible replace of goods, exchange of goods by removing
various hindrances, through deals, money through money and banking, of the place through
warehousing and storage space, and of lack of knowledge, through advertising is commerce.
4.8 Glossary
Business: The complex field of exchange and manufacturing in which goods and services are
created and disseminated in the optimism of profit within a framework of laws and policies.
Characteristics of Business: The main characteristics of business are as follows-
Dealings in Goods and Services
Production and/or Exchange
Creation of form, time and place utility
Regularity and Continuity in Dealings
Dealings
Consumers' Goods : These are the goods used by final consumers. Edible Oils, Cloth, Jam,
Television, Radio, Scooter, Refrigerator, etc.
Producers' Goods : These are the goods used for the production of other goods. Machine tools and
machinery used for manufacturing other products are its categories.
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Intermediate Goods : The finished products of one industry and becomes the intermediate
products of another industries is called intermediate goods.
Economic System: The country’s economic system reflects the economic composition, economic
thinking and the economic liberalization
Capitalism: The system of monetary organization characterized by the secretive tenure and use of
capital with profit purpose is called Capitalism. The subsistence of personal belongings is the mainly
important feature of capitalism.
Socialism: Where the means of production (capital equipment, buildings and land) are owned by the
state is called Socialism economic system. To run the economy for societal assistance rather than
private proceeds is the main aim of socialism. It equivalent opportunities for all despite of caste,
class and hereditary civil liberties and emphasizes on work according to one’s capability.
Communism: It is socialism’s form. It was followed in the former Soviet Union. It is an unrealistic
scheme in which all resources of construction and other forms of properties are owned by the
community as a whole, is called communism. People get according to their needs and are believed to
work according to their competence. The main aim is to state that machinery is utilized to compress
all antagonism to achieve this end and to create a classless society and.
Difference between communism and socialism: The previous believes and adopts aggressive
innovatory measures to capture the technology of the administration while the latter believes in
nonviolent and parliamentary methods are the main difference between communism and socialism.
Mixed Economy: Neither it is a pure socialism nor pure capitalism but is a combination of both. We
find the characteristics of both capitalism and socialism in this system. Mixed economy is operated
by both private enterprises and public enterprises. To regulate private enterprises the government
intervenes in several ways.
Dualism: When there is co-existence of the developed and the underdeveloped in a country’s
economy is called Dualism.
Developing or under-developed Economies: Low and middle income countries are usually
regarded as Developing or under-developed countries;
Developed Economies: High income countries are considered as developed economies. But this
may not always be true. Countries like Kuwait, Iran, UAE etc. fall in high-income countries but are
considered as developing countries.
Transition Economies: These are former centralized/ socialist economies, which are moving to
market economies such as Russia, China, eastern European nations, and India.
4.9 Answer to check your progress
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11
A.
i. private ownership, use
ii. owned by the state
iii. co-existence
iv. developed
v. True
4.10 References/Bibliography
1. Henry E. Anthony(2011):Understanding Strategic Management,2nd ed.-indian, Oxford
University Press, New York.
2. Singh, Charan, Financial Sector Reforms and State of Indian Economy, Indian Journal of
Economic and Business, Vol. 3, No. 2, (2004), pp 215-239.
3. Kumar Raj, Gupta Kuldeep, Singh Surat and Kumar Pradeep, “ Development
Economics”, Deepak Publication.
4. Gupta K. Shashi, Aggarwal and Gupta neeti, “ Financial Institutions and Markets”,
Kalyani Publishers.
4.11 Suggested Readings
1. Economic Survey, Various Issues, Government of India.
2. Wetherly,Paul and Otter,Dorron(2011): The Business Environment-Themes and
Issues.Oxford University Press,New York.
3. Cherunilam,Francis(2013): Business Environment-Text and Cases, .Himalaya
Publishing House Pvt. Ltd., Mumbai.
4.12 Terminal and Model Questions
1. What is business environment? What are the critical elements of economic environment of
business?
2. What is Socialism? What are the basic features of Socialism?
3. What is Mixed Economy? What are the basic features of Mixed Economy?
4. How is an economy classified on the basis of income and on the basis of development?
5 What are the main initiatives taken in the Industrial Policy Resolution,1991?
6 What are the changes proposed in the policy regarding foreign investment in the New
Industrial Policy of 1991?
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LESSON-5
India’s New Economic Policies
Structure
5.1 Objectives
5.2 Introduction
5.3 Pre-Reform Economic Policies
5.4 Need for New Economic Policy
5.5 India’s Economic Reforms: The New Economic policy
5.6 Objectives of the New Economic Policy
5.7 Components of the New Economic Policy
5.8 Three Pillars of Economic Reforms
5.9 Liberalization Measures
5.9.1 The New Industrial Policy
5.9.2 New Trade Policy
5.10Macroeconomic Reforms and Structural Adjustments
5.10.1 Macroeconomic Stabilization
5.10.2 Structural Adjustment
5.11Assessment of New Economic Policy
5.12Impact of Reforms on Business
5.13Summary
5.14Check Your Progress
5.15Glossary
5.16Answer to Check Your Progress
5.17References
5.18Suggested Readings
5.19Terminal and Model Questions
5.1 Objectives
After reading this lesson, you will be able to:
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Define New Economic Policy?
Explain Policies adopted pre-reform and post-reform period
Illustrate New Industrial Policy and New Trade Policy
Describe the Concept of Macroeconomic Stabilization and Structural Adjustment
5.2 Introduction:
In the mid-1991, India was in dire need of drastic readjustment of policies. After forty years of
economic planning, India in mid-1991 faced a crisis of unprecedented order. As compared to the
liberalization and reform measures, structural adjustment is invariably a far more difficult game.
It amounted to a drastic reversal of past policies and a radical route change for the economy.
Thus, government decided to implement the Structural Adjustment Programme (SAP). The SAP
adopted by Indian Government or the New Economic Policy (NEP) of which it is a part, alters
the economic structure. The core of NEP really consists of structural adjustment in an economy.
Economic reforms launched in the decade of 1990s have rapidly altered the business
environment of India and posed a set of new challenges to the business firms in the country.
Economic policy comprises of all those measures and instruments through which the government
seeks to influence, guide, coordinate or control various economic activities so that the economy
as a whole moves in the direction predetermined by the policy makers and planners. There are
different policies and instruments which are implemented to give desired direction to industry,
trade, agriculture, infrastructure etc., and accordingly are named as industrial policy, trade
policy, agricultural policy etc. All these sectoral economic policies put together form the overall
economic policy of the government.
5.3 Pre-Reform Economic Policies:
The development process in India till the beginning of 1990s was dominated by the public sector.
The government, in its zeal to ensure that all sectors of the economy moved strictly in
accordance with the programmes and targets laid down in the Five-Year Plans, placed many
physical controls, such as licenses, Quotas, permits etc, on the private sector industries and
foreign trade. To maintain the dominant position of the public sector, the government expanded
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area of its operations and pumped in more money in the ever expanding governmental activities.
But these policies did not produce the desired results of securing faster rate of growth or ensuring
near full employment and making significant dent in poverty and other economic problems.
Public sector bred inefficiency and heaped huge losses to the government. Restrictions on
foreign trade resulted in perpetual deficits in balance of payments. Inflow of foreign capital
virtually turned into a trickle. All these developments combined to create conditions of high cost
low efficiency and low growth in the economy.
5.4 Need for New Economic Policy:
In early 1991, a major economic crisis had occurred in the country the like of which people had
never experienced since independence. The crisis made economic reforms absolutely necessary.
The country was on the verge of defaulting on international financial obligations and immediate
policy action was required to save the situation. In response to the crisis situation of 1990-91, the
government decided to introduce economic policy reforms founded on macroeconomic
stabilization and structural reforms. Stabilization deals with demand management i.e. control of
inflation, fiscal adjustment, balance of payments adjustment etc., on the other hand structural
reforms deal with sectoral adjustments designed to back the problems on the supply side of the
economy- trade and capital flow reforms, industrial deregulation, public sector reforms and
financial sector reforms. Some other main reasons are: Slow and unsatisfactory economic growth
under four decades of regulated development process; Experience of other countries shows that
faster development was achieved there under more freedom and less controls; Some drastic
measures were needed to curb continuing inflationary pressures etc.
5.5 India’s Economic Reforms: The New Economic Policy
In the words of former RBI governor “The New Economic Policy comprises various policy
measures and changes introduced since 1991. There is a common thread running through all
these measures. The objective is simple and that is to improve the efficiency of the mechanism
involving multitude of controls, fragmented capacity and reduced competition even in the private
sector. The thrust of New Economic Policy is towards creating a more competitive environment
in the economy as a means to improving the productivity and efficiency of the system. What is
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sought to be achieved is an improvement in functioning of the various entities whether they are
in the private or public sector by injecting an element of competition.”1
Commencing from 1991, India has been going through a process of economic reforms and
liberalization. The reforms have incorporated almost all aspects of the country’s economy. These
reforms fall under two basic categories: (i) Liberalization Measures and (ii) macro-economic
reforms and structural adjustments. Under the liberalization measures, industrial licensing
policies and policies on foreign trade as well as foreign investment have undergone major
changes. Under the second category, a number of macro-economic adjustments likesignificant
changes in economic institutions, reforms in banking sector and capital markets in particular etc.,
have been major targets of overhaul. All these measures together aim at modernizing the India’s
industrial system, removing unproductive controls, encouraging private investment including
foreign investment and integrating India’s economy with the global economy.
5.6 Objectives of the New Economic Policy:
The New Economic Policy seeks to:
Take effective steps to reduce fiscal deficit to ensure an era of relative price stability.
Reduce the area of operation of the public sector and thus open up more fields of activity
for the private sector.
Liberalization of industrial policy and abolition of industrial licensing for most of the
private sector industries.
Encouraging inflow of foreign capital by granting more concessions to foreign direct
investment.
Liberalization of foreign trade by reducing tariff duties and abolishing quota restrictions
in case of many imports.
The above policy measures seek to remove the inefficiencies in the economic system and
bring significant reforms in the working of the economy. Hence, the New Economic policy is
also called the Policy of ‘Economic Reforms’.
1 Rangarajan, c: The New economic policy and the Role of the State
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5.7 Components of New Economic policy:
Various liberalization measures have been adopted by the government during 1980, which
gave a way to reforms in 1990s. Those measures were: Exemption from licensing; Relaxation
to MRTP and FERA companies; Delicencing; re-endorsement of capacity; Broad Banding of
Industries; Development of backward areas; Provision of incentives for export production;
Enhancement of investment limit etc. After the adoption of these liberalization measures in
1980s the government adopted New Economic Policy since 1991. The New Economic Policy
is a set of measures that have been adopted since 1991 to make the economy more efficient,
competitive and global in character. These measures relate to reforms in (a) Industrial Policy
(b) Trade Policy (c) Fiscal Policy (d) Financial Sector Reforms. Thus, the liberalization
measures have been brought about through the new industrial and trade policies; macro-
economic reforms and structural adjustments have been brought about through a large
assortment of enactments and policy revisions. Macroeconomic stabilization policies involve
short run or medium run measures that are designed to deal with problems like high inflation,
large current account deficits in balance of payments etc. Structural adjustment policies on
the other hand are long run in nature and are intended to remove the bottlenecks and
obstacles in the growth path of the economy. These are the policies that seek to lift the
economy out of the low level equilibrium trap by removing various constraints, both physical
and administrative , that hamper the smooth working and steady progress of the economy.
Thus, measures encompasses stabilization policies intend to correct short term disequilibria
and measures consist of structural reforms intend to speed up the process of economic
development over medium and long term. Both are important components of economic
reforms. The main components of the New economic Policy are shown in Figure 1 as
follows:
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Figure 5.1
Source:Brahmananda, P.R.’ “ Strategic Planning in India: The Sea Change in Indian Business
Environment Consequent to economic reforms”
THE NEW ECONOMIC POLICIES
Liberalization Measures Macro- Economic Reforms andStructural Adjustments
New IndustrialPolicy
New Trade Policy Macro-EconomicReforms
StructuralAdjustments
Liberalisationof Industriallicensing
Curtailment ofpublic sector
FERAliberalization
MRTPliberalization
Lowering ofImport Tariffs
Abolition ofimport licenses
A more openEXIM regime
Convertibility ofrupee
Encouragementto exports
Encouragementto foreigninvestment
IntegratingIndia’s economywith the globaleconomy
Fiscal andMonetaryreforms
Bankingsectorreforms
Capitalmarketreforms
Phasing outsubsidies
Dismantling ofprice controlsandintroduction ofmarket drivenpriceenvironment
Public sectorrestructurei.e.disinvestment
Exit policy
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5.8Three Pillars of Economic Reforms:
Liberalization , Privatization, Globalization forms the three pillars of economic reforms. These
policies are aimed at changing the very structure of the economy by changing business
environment, economic outlook and basic thinking behind government policies. Thus, the main
features of economic reforms are:
(i) Liberalization which includes deregulation of industries and abolition of industrial
licensing , providing for greater inflow of foreign capital by relaxing upper limits of
foreign investment, and automatic permission for technology agreements and changes
in MRTP Act. The idea is that the entrepreneurs should be able to operate in an
environment free of controls, permits, or other such regulatory devices and are thus
free to make their decisions.
(ii) Privatization is sought to be achieved through reduced role of public sector,
disinvestment in public enterprises. Disinvestment in public enterprises is the only
way to reduce the financial burden of public enterprises on the government. It is also
expected to improve efficiency of those enterprises with the availability of
professional guidance from the private sector that gets involved as a partner in their
progress. Government went for privatization of some big units like BALCO (Vedanta
Group), VSNL (Tatas), IPCL ( Reliance Industries) etc.
(iii) Globalization means integration of domestic economy with the international economy
which is sought to be done through liberalization of import licensing, rationalization
of tariff structure and reform in foreign exchange management. The new economic
policy seeks to achieve the objective of globalization through reforms in trade policy ,
abolition of import licensing etc.
All these changes are sought to be brought about by the New Economic Policy are essentially of
a long term nature that seek to make structural adjustments in the Economy. Let’s discuss all
these in detail:
5.9 Liberalization Measures:
The economic reforms ushered under the New Economic Policy aim at liberating the industry
and trade from all unnecessary restrictions and removing all impediments in their growth arising
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from licenses, permits, quotas, bureaucratic delays etc. Liberalization has been the crux of the
New Industrial Policy and the New Trade Policy. Let’s discuss in detail both the policies:
5.9.1 The New Industrial Policy
5.9.1.1 Industrial Policy-An Introduction: For the implementation of promotional and
regulatory role of the government the Industrial Policy is a paramount document. The word
“industrial policy” refers to policy of government towards the industries and helps in their
establishment, functioning, growth and management. The areas of small, medium and large scale
sectors are indicated by this policy. It also chalks out the government policy for foreign
exchange, labor, cost and other concerned aspects. In fact, Industrial policy controls, regulates,
fosters, guide and shape the industrial development of a country. As the Fundamental Rights
guaranteed by the Constitution, the Industrial policy has no legal sanction and cannot be
challenged in a court. Even then the ‘Industrial policy’ is one of the most important government
documents, which has a lasting impact on an economy’s industry.
Policy Objectives
Our first Prime Minister, Pandit Jawahar Lal Nehru set the bedrock of modernized India. After
Independence his perception and dedication left deep-rooted impact on each angle of nationwide
effort. India is now considered a big industrial nation of the world and has become a capable and
varied industrial paltry and the credit of it goes to his initiative. The ambitions and aspirations
stated for the nation by Pandit Jawahar Lal Nehru on the occasion of Independence, especially
the speedy industrial and agricultural development of our country, fast growth of occupational
opportunities, continuous minimization of societal and economic disparities, elimination of
scarcity and realization of ascetic-dependence continue as the main focus even today. Any
Industrial policy must help in the achievement of these ambitions and aspirations at a quick
speed. The current aspects of industrial policy are influenced by above stated concerns as well as
depict an improved action towards the consolidating gains of national reconstruction.
The New Industrial Policy: Salient Features
The government announced a New Industrial Policy on 24th July, 1991. This new policy de
regulated the industrial economy in a significant manner. The major objectives of the new policy
at that time were to build on the gains already made, correct distortions or weaknesses that might
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have crept in, to maintain a sustained growth in productivity and gainful employment and above
all to attain international competitiveness. Initiatives taken are as follows:
A. Industrial Licensing: In order to liberalize the economy and to empower entrepreneurs to
make investment decisions on the basis of their own commercial judgement, the 1991
industrial policy abolished industrial licensing for all but 18 industries. At present, licensing
is compulsory for only 5 industries which includes industries like alcohol, cigarettes,
hazardous chemicals, electronics aerospace and defense equipment and industrial explosives.
B. Curtailment of Public Sector: The Industrial Policy of 1956, reserved 17 industrial areas
exclusively for the public sector. The Industrial Policy of 1991, reduced this number to 8.
The number has been further reduced to 3, viz. atomic energy, minerals specified in the
schedule to the atomic energy (control of production and use order) and rail transport.
C. MRTP Liberalization: The Monopolies and Restrictive Trade Practices Act, has been a
growth-restricting regulation. Under the New Industrial Policy, sweeping changes have been
made in MRTP regulations. All firms with assets above a certain size (100 crore since 1985)
were classified as MRTP firms. The MRTP Act has been amended to altogether do away
with the threshold assets limit. Which rendered a firm an MRTP company or a dominant
undertaking. No MRTP clearance is now required for investment applications; nor is any
approval needed for establishing new undertakings, or for implementing expansions,
mergers, amalgamations and takeovers.
D. Freer entry to Foreign investment and Technology i.e. changes in FERA: The New
industrial Policy prepared a specified list of high technology and high-investment priority
industries wherein automatic permission was to be made available for direct foreign
investment upto 51% foreign equity. These industries specifically includes a number of
industries which are important for the rapid growth of the economy. The limit was
subsequently raised from 51% to 74% and then to 100% for many industries. At present,
Foreign Direct Investment (FDI) is permitted upto 100 percent on the automatic route in most
sectors subject to sectoral rules/ regulations applicable. There are certain specific sectors
where FDI is prohibited, these are: (1) retail trading (except single brand product retailing),
(2) Atomic energy, (3) Lottery business, and (4) gambling and betting.
Appraisal of New Industrial Policy:
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The initiatives taken under New Industrial Policy was adopted with the purpose of improving
efficiency, greater autonomy, enhancing allocative efficiency, good performance of public
sector, greater emphasis in controlling and regulating monopolistic, restrictive and unfair trade
practices. The New Industrial Policy triggered the industrial growth path of India, but besides
this some showed signs of discontent, which are as follows:
No evidence has been found of positive impact of industrial policy on industrial growth.
In the new liberalized scenario that has emerged after the reform phase, the Indian
businessmen struggled and still struggling with unequal competition from MNCs.
The various procedures to promote foreign investment contained in the new industrial
policy along withthe various concessions to such investment announced in recent years
have provided opportunities to MNCs to penetrate the Indian economy.
Personalistic relationships and corrupt practices continue to prevail
5.9.2 The New Trade Policy:
The new economic policy seeks to achieve the objective of globalization through reforms in
trade policy. The changes adopted in new trade policy have drastically changed the country’s
foreign trade scene, releasing export-import trade from the shackles of controls. The government
realized that with a regime of regulation and controls, it was not possible for India to achieve any
competitive edge in international markets, and this realization formed the essence of New Trade
Policy. “Freer Trade and a more open EXIM regime’ became the cornerstone of new economic
policy. Steps taken under new trade policy are as follows:
A. Lowering of import tariffs: Tariff structure refers to the structure and pattern of custom
duties that are levied on various commodity groups. The tariff rates were reduced year
after year, and tariff structure was rationalized in an effort to bring it in line with the tariff
rates prevailing in the other developing countries.
B. Abolition of import licences: In our country imports have always remained subject to
stringent quantitative restrictions like licences and quotas. One of the major reforms in
the trade policy has been phasing out of quantitative restrictions (such as import quotas)
and liberalizing import licensing. Under the new trade policy , most of these licensing
regulations have been abolished and most imports have been put under Open General
Licence (OGL) where largely automatic permission is granted to import goods. There is ,
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however, a small negative list of imports for which licences are still needed, but this list
is also being shortened over time.
C. A more open EXIM regime dispenses with Quantitative Restrictions: The new trade
policy also recognized that for regulating foreign trade flow quantitative restrictions
ought to be dispensed with and replaced by exchange rates and tariff controls.
D. New Exchange Rate System and Convertibility of Rupee: Earlier all exporters had to
surrender foreign exchange earned from exports to the Reserve Bank of India and get
rupees in return at a fixed exchange rate. This was known as exchange control system by
which RBI rationed scarce foreign exchange among importers of various categories of
goods. Under the liberalized exchange management system value of the rupee is
determined by market forces of its demand and supply. Exporters are free to sell their
foreign currency in the open market while the importers could freely buy it from there.
This is called convertibility of rupee. However, this convertibility is subject to certain
restrictions. Hence, India so far adopted only partial convertibility of rupee. The
government introduced partial convertibility of rupee in 1992-93 and full convertibility
on current account in 1993-94.
E. Encouragement to exports: Achieving a sustainable growth of exports has been one of
the significant objectives of the reforms process. The new trade policy offered several
incentives for exports including abolition of export duties, cuts in import duty and
cheaper export credit. These moves resulted in lower cost of production and improved
export competitiveness.
F. Encouragement to Foreign Investment: The reforms were also aimed at enhancing the
flow of foreign direct investment into India in ample measure, in a bid to substitute
India’s external borrowings and curtail debt servicing obligations. The new trade policy
amply complemented the new industrial policy in encouraging foreign investment. While
NIP promoted FDI through FERA relaxation and delicensing, measures under the trade
policy served as a reinforcement. These measures boosted the confidence of foreign
investors.
G. Integrating India’s economy with the global economy: The new trade policy was
essentially aimed at integrating India’s economy with the global economy. It involved the
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change over from government regulated allocation of foreign exchange to market driven
allocation.
5.10 Macroeconomic Reforms and Structural Adjustments:
In addition to the liberalization of industrial and trade policies, the government also brought
about a series of macro-economic corrections, reforms of economic institutions and adoption
of structural adjustment programmes.
5.10.1 Macroeconomic Stabilization:
Macroeconomic stabilization policies involve short run or medium run measures that are
designed to deal with the problems like high inflation , large current account deficits in
balance of payments etc. These problems may have been the consequence of faulty or
inappropriate monetary and fiscal policies. Therefore, through appropriate changes in these
policies and measures such as restraints on monetary expansion or reduced government
spending and suitable adjustment in exchange rates, the problems of inflation and balance of
payment deficits are sought to be dealt with. Thus, the macroeconomic stabilization policies
include only short run measures to solve short and medium term problems. The fiscal
reforms centred around reduction of fiscal deficits and reforms of the taxation system.
Reforms in monetary and credit policy were aimed at slowing down monetary expansion,
lowering interest rates and arresting inflation. In case of banking sector reforms, the
recommendations given by Narasimham committee formed the basis for these reforms. The
government carried out a phased reduction of statutory liquidity ratio (SLR) and permitted a
degree of flexibility to the banks in the matter of deposit interest rates. In a more substantial
move, the government allowed nationalized banks to go to the capital market and raise
additional equity required for strengthening their capital base and meeting the new forms of
capital adequacy. The government also carried out a series of reforms in respect of the capital
markets. The ceiling on the acquisition of shares/debentures of Indian companies by non-
resident Indians and overseas corporate bodies was raised under the portfolio investment
scheme from 5 percent to 24 percent. The government also opened up the capital market to
foreign institutional investors (FIIs), by permitting foreign institutional investmentin mutual
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funds, investment trusts, asset management companies, nominee companies and institutional
portfolio managers to become players in the capital market of India.
5.10.2 Structural Adjustments:
Structural Adjustment Policies are long run in nature and are intended to remove the
bottlenecks and obstacles in the growth path of the economy. These policies contain long
term measures like increase in productive capacity, full utilization of existing capacity,
enhanced factor productivity, removal of constraints on trade and introduce competition to
improve efficiency, reduce production cost and make the country’s economy strong and
internationally competitive. Phasing out of subsidies constituted another major element of the
reform programme. Phasing out of subsidies has been used as means for the ultimate
dismantling of price controls and introduction of a market-driven price environment for
products under administered pricing. The government initiated steps for dismantling of price
controls in respect of number of products, basically in case of raw material used in basic and
heavy industries. For example, it removed the price and distribution controls on iron and
steel. Other than phasing out of subsidies, public sector restructure was a major aspect of
reforms exercise. The government truncated the role of the public sector. The government
made it clear that it would not finance rehabilitation of such Public Sector Units (PSUs);
instead it would try private sector participation to run the units. Disinvestment of government
equity in the PSUs was the other major element of public sector restructuring. Along with all
these measures under structural adjustment, the government recognized that if the industrial
policy reform was to be taken to its logical conclusion, an exit policy for industry was
essential. The main instrument of exit policy were: Voluntary Retirement Scheme (VRS) and
National Renewal Fund (NRF). The government brought in heavily budgeted VRS schemes
for the PSUs and when government came out with tax relief for VRS of even the private
sector, the ‘ golden handshake’ schemes became attractive for the private sector as well. In
case of NRF, government announced that NRF is set up to provide assistance to cover the
costs of retaining and development of employees arising as a result of modernization,
technology upgradation and industrial restructuring.
5.11 Assessment of the New Economic Policy:
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The NEP has been largely welcomed because it has abolished many unnecessary controls
which delayed and in a large number of situations inhibited investment, both domestic and
foreign. It has been increasingly felt that public sector was not able to accelerate production
in the areas reserved for it. Consumers gain immensely in an open market. They have greater
choices and get better products at cheaper prices. Under the NEP, given the climate in which
private sector and the multinationals can undertake investment freely, production will get a
definite boost. Several Indian companies especially in information technology and
pharmaceuticals, have made their marks in the world market.
The critics of NEP agree that policy of liberalization would lead to increase in investment
and in supply, in an oligopolistic market structure that prevails in Indi, excessive dependence
on market mechanism to channel investment in socially desirable channels may prove to be a
failure. The NEP encourages consumerism among the affluent sections instead of marking
investment in wage goods and housing which are very essential for raising social and
economic welfare. Lastly, the NEP does not seriously attack the problem of poverty in India
in an effective and practical way.
5.12 Impact of Reforms on Business
Business environment was directly affected by the reforms undertaken in 1990s. The main
aim was to reduce regulatory obstacles to industrialization, enhancing greater competition,
greater participation of foreign capital, and improving industry environment. The impact of
the reforms can be seen as follows:
New Economic Policy abolished many unnecessary controls which earlier inhibited
investment, both domestic and foreign.
Deregulation of the industry gives greater scope and freedom to private enterprise.
Permission was granted to reputed India companies to float equity abroad.
Permission was granted to foreign institutional investors to take in government
securities and treasury bills.
There was an increase in the number areas for automatic approval to foreign direct
investment proposals.
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Wide range of facilities and incentives was provided to export oriented units, export
processing units for producing products at competitive prices, so that Indian products
can compete at the international market.
5.13 Summary
The New Economic policy aimed at greater freedom for doing businesses outside the
government control , reduced the role for public sector, de0reserving areas and larger role
for the private sector, doing away with MRTP/FERA act and dispensing with MRTP and
FERA Companies. This policy has opened new vistas of development for private sector
industries. This policy has moved the trend towards liberalization, privatization,
globalization and competition in place of regulation and control. The policy shouldn’t be
seen as undermining the importance of public sector, but role of public sector would
undergo a change.
5.14 Check Your Progress:
1. The main strategy adopted in the New Economic policy of 1991 is
(a) Liberalization
(b) Privatization
(c) Globalization
(d) All of the Above
2. The New Economic Policy broadly includes:
(a) Macroeconomic Stabilization Measures
(b) Structural Adjustment Policies
(c) Both a and b
(d) Neither a nor b
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3. The New Economic Policy is a set of measures that have been adopted since 1991 to
make the economy more efficient, competitive and global in character
(a) Efficient
(b) Competitive
(c) Global
(d) All of the Above
4. Government of India announced a New Industrial Policy on
(a) July 15th, 1991
(b) July 20th, 1991
(c) July 24th, 1991
(d) None of these
5.15 Glossary
Globalization: Globalization means integration of domestic economy with the international
economy which is sought to be done through liberalization of import licensing,
rationalization of tariff structure and reform in foreign exchange management.
Macroeconomic stabilization: Macroeconomic stabilization policies involve short run or
medium run measures that are designed to deal with the problems like high inflation , large
current account deficits in balance of payments etc.
5.16 Answer to Check Your Progress
1. (d) 2. (c) 3. (d) 4. (c)
5.17 References
Rangarajan, C, “ Indian Economy: Essays on Money and Finance”, UBSPD, New Delhi
Ramaswamy, V.S. (ed.), “ Strategic Planning Formulation of Corporate strategy,
Macmillan India Ltd., New Delhi
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5.18 Suggested Readings
1. Fernando, A.C., “ Business Environment”, Pearson Publication, New Delhi
2. Misra and Puri, “ Indian Economy”, Himalaya Publishing House, New Delhi
5.19 Terminal and Model Questions
1. What are the principal features of the New economic Policy?
2. What are the main components of the New Economic Policy?
3. Discuss various objectives of New Economic Policy?
4. Evaluate major features of 1991 industrial policy.
5. What are the main features of New Trade Policy in India?
6. What measures have been adopted by India for its macroeconomic stabilization and
structural adjustment process?
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LESSON-6
Economic Planning in India
Structure
6.1 Objectives
6.2 Introduction
6.2.1 Guiding Principles of Indian Planning
6.2.2 Achievements of planning in India
6.2.3 Failures of Indian Planning
6.3 Financing pattern of Indian planning
6.3.1 Sources of financing of five-year plan
6.4 Eleventh Five Year Plan (2007-2012)
6.5 Summary
6.6 Glossary
6.7 Answers to Check Your Progress
6.8 References/Suggested Readings
6.9 Terminal and Model Questions
6.1 Objectives
After reading this lesson, you will be able to:
i. List major objectives of planning in India.
ii. Explain major, achievements and failures of planning in India.
iii. Discuss in brief financing pattern of Ninth and Tenth Five Year Plan in India.
iv. Enumerate the overall nature of Eleventh Five Year Plan in India.
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6.2 Introduction
Economic development has been closely linked with planning. Planning has become a craze in
modern times, especially in under-developed and developing countries. The idea of planning
acquired a tremendous support after the end of World War II when advanced but disrupted
economies had to be rehabilitated and the underdeveloped economies were fired with the
ambition of rapid economic development.
The term “planning” is now so much in common use that it seems to be unnecessary to define it
or to explain its meaning. In fact, it is not possible to give it any precise or universally acceptable
definition. There is no unanimity among political thinkers and economists about the concept of
planning. As Raymond Burrows remarks, “Planning as a modern panacea is as perplexing to a
pedant as it is popular to a protagonist”.
It is rather difficult to give a concise definition of economic planning with a fair degree of
precision and acceptability to one and all. Hence different economists have defined economic
planning in a variety of ways by keeping in mind the goals to be achieved and the techniques for
achieving them. Apart from stating that planning is a method, a technique or a means to an end,
the end being the realization of clearly set targets, we discuss the number of definitions which in
their totality convey the full meaning and content of economic planning.
National Planning Commission of India- “Planning under a democratic system may be defined
as the technical co-ordination, by disinterested experts, of consumption, production , investment,
trade and income distribution, in accordance with social objectives set by bodies representative
of the nation. Such planning is not only to be considered from the point of view of economics
and the raising of the standard of living but mist include cultural and spiritual and the human side
of life”.
“Economic Planning is the making of major economic decisions what and how much is to be
produced, how, when and where it is to be produced, and to whom it is to be allocated by the
comprehensive survey of the economic system as whole”. This is by far the most comprehensive
definition as it describes the anatomy of planning. The planning is done by central authority like
state possessing the powers for implementation. It is to be preceded by a comprehensive survey
of economic conditions which will point out the defects and deficiencies of the prevailing
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economic system. After this survey, definite goals are fixed. The manner and timing, quantitative
aspects of achieving these goals are then outlined; finally, the benefits accruing from such action
are to be shared for the maximum satisfaction of the largest number of people through deliberate
decision, control and direction.
To sum up, planning comprises the following essential features:
1. Predetermined and well defied objectives or goals.
2. For economic planning deliberate control and direction of the economy by a central authority,
e.g., the state.
3. Optimum utilization of natural resources and capital which may be scarce and labour that may
be abundant.
4. The objectives are to be achieved within a given interval of time – 5 years, 7 years, etc.
5.The performance of the economic functions of increasing production, maximizing employment
and controlling population growth so that production outstrips population growth.
For having systematic economic development, India has accepted the way of economic planning
since 1951. By realising the various adverse impacts of non-planned economic development
process, India has emphasised the way of planning economic development for developing it’s
under developed economy. Economic planning has helped in achieving some important
objectives of socio-economic development in India. An overall evaluation of economic planning
in India is explained for assessing the major objectives determined at the beginning of economic
planning. Further the brief review of ninth, tenth and eleventh five year plan has been taken into
account. Government of India adopted planning technique from 1951. From 1950-51 to 2011-12
Government of India implemented totally eleven five year plans and five one year plans which
are shown in following table –
Table No. 6.1 : Plans and plan period
Plans Period
1st Five Year Plan 1951-56
2nd Five Year Plan 1956-61
3rd Five Year Plan 1961-66
Annual Plan For 3 Years 1966-67 To 1968-69
4th Five Year Plan 1969-74
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5th Five Year Plan 1974-79
6th Five Year Plan 1980-85
7th Five Year Plan 1985-90
Annual Plan For Two Years 1990-91 To 1991-92
8th Five Year Plan 1992-97
9th Five Year Plan 1997-2002
10th Five Year Plan 2002-2007
11th Five Year Plan 2007-2012
12th Five Year Plan 2012-2017
Under planning period Government of India spelt out some long term objectives up to seventh
plan the main objectives were –
6.2.1 Guiding Principles of Indian Planning :
1) Economic Growth : The First objective of Indian planning is to achieve economic growth
approximately 5 per cent per annum increase in the net national product. Economic growth has
always remained in focus as the main objectives. There are number of problems which are faces
by the Indian Economy. It has often been assured that the gain of economic growth would
percolate downwards and thus property, inequalities would be decline and poverty problem
would automatically be solved. The growth of employment was also taken for granted.
High priority to economic growth in Indian plans looks justified from beginning. The economy
of the country had received severe jolt under the British rule on account of massive drain of
wealth from India. In this period while the European countries developed, India suffered under-
development. So, once this country got Independence, the major choice of decision makers was
for economic growth. It was shown in a following table.
Table No. 6.2 Growth Rates of Five Year Plans
Plans Growth rate
Objectives / target
I 2.1
II 4.5
III 5.6
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IV 5.7
V 4.4
VI 5.2
VII 5.0
VIII 5.6
IX 6.5
X 8.00
XI 9.00
2) Self-reliance : Self reliance means independent from other. But in case of country like India
self-reliance is elimination of dependence on foreign aid and capital also. But India was
dependent on foreign countries at least in their respects.
First, despite the fact that Indian economy was agricultural basis, the output of food grains was
not adequate and the country was imported foodgrains from the U.S.A. and some other countries.
Second is on account of virtual non-existence of basic industries, transport facilities, machine
tools, engineering industries, electricity plants, other capital goods had to be acquired from
developed countries.
Third and last is saving rate being low, foreign aid had to be obtained in order to step up the
investment rate in the country. In planning period our import was increased but export doesn’t
increased sufficiently. So Balance of payment disequilibrium was increased, it was affecting the
countries dignity and economic position. So our planners considered about this objectives. It is
now seen that in the field of self reliance, India succeed in almost self-sufficient in food and in
case of production of iron and steel, machine tools heavy engineering industries our country has
made considerable advancement towards self-realiance.
3) Removal of unemployment : Generally unemployment means people able and willing to
work in a prevailing wage rate but not get adequate work. Number of underdeveloped countries
facing the problem of unemployment. India is facing the problem of unemployment. So our
planner given more attention to the removal of unemployment in the country. In each and every
plan in India the main objective was removal of poverty. For the purpose of this objectives,
Government of India adopted different programmes for increase employment opportunities i.e.
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S.F.D.A., M.F.A.L., E.G.S. IRDP, Swarnjaynti Gram Rojgar Yojana, Jawahar and Nehru
Yojana, Priminister employment assurance scheme etc.
4) Reduction of Income Inequalities : Another objectives of Indian planning is a reduction of
income inequalities in the country. However in case of priority it always got a very low place.
According to experts, Indian plans have never made any serious attempt to redistribute income
and wealth. From fourth plan Government of India given a priority to this objectives. In its
opinion, fiscal measures at best can reduce disposable income at the top and thus their
importance for eliminating income inequalities is limited. For this purpose number of
programmes started for poor people for improving their economic conditions. From rapid
growing big business houses like Tata, Birla, Dalmiya, Jain, Chougule etc, it is obvious that
income inequalities have been increasing in urban areas as well. Anti monopoly measures can
reduce inequalities in income and wealth, but from this point of view, Government passed the act
like M.R.T.P. and adopted progressive tax system policy etc.
5) Elimination of Poverty : Poverty problem is also main problem of under developed
countries. India is facing the problem like poverty. Poverty means people doesn’t fulfils their
minimum needs i.e. food clothing, shelter, safe drinking water, education, health etc. Poverty can
be two types one is absolute poverty and second is relative poverty. In our country both types are
prevailing. So our planners and government has given a priority for elimination of poverty in
some plans. From first to Eleventh five year plan, Government has given more attention to the
cottage and small scale industries, agricultural development, social security programmes, welfare
programmes for labour farmers etc. under fifth five year plan. ‘Garibi Hatao’ programmes has
been introduced under these programmes numbers of sub programmes were started.
6) Modernization : After Independence, Indian economy required structural and institutional
changes to cope with the modern world. So our planners adopted modernization is an important
objective of planning up to sixth plan this objective was never on the agenda of any plan. But in
the Sixth, Seventh, eight and eleventh five year plans modernization is main objective
modernization we mean to improve existing industrial, agricultural, transport, communication
system in the country. Modernization also in case of Banking sector, public sector also. In case
of modernization our country like India made considerable progress in all means and all sectors
in the economy.
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Evaluation of Indian Planning :
Government of India adopted planning process from 1950. Till date, Eleventh Five Year plans
were completed. But some critics criticized on India planning as follows:
1) Conflicting and Inconsistent objectives.
2) Over Dominance of welfare consideration etc.
3) Few priority for unemployment problem.
4) Neglect of Agriculture Sector.
5) Too Ambitions and unrealistic objectives.
Indian planning is now completed sixty years. So it is very essential to have a evaluation or to
see achievement and failures of the plans. Actually planning is a process, under which some
objectives are fixed and targets also fixed and government authority or Planning Commission
implemented all the planning process. Financial support is also essential. Russian Government
adopted planning techniques firstly in 1928 and made spectacular achievements within twenty
years. After five plans Government of Russia stopped the planning. So experience of planning in
India is to be evaluated in following way.
6.2.2 Achievements of planning in India :
1) Increase in national and per capita Income : One of the main objectives of Indian planning
is to increase national and per capita income. In planning era India’s national and per capita
income increased considerably. Following table shows growth of both the income up to 2001-
2002.
Table No. 6.3 National Income and per capita Income of India(at 1993-94 and 2003-04
prices)
Year National Income Per Capita Income
(Rs. In crores)
1950-51 1,32,367 3,687
1960-61 1,92,235 4,429
1970-71 2,70,597 5,002
1980-81 3,63,417 5,352
1990-91 6,14,206 7,321
2003-04 12,66.005 11,799
At 2004-05 Prices
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2004-05 26,23,995 24,095
2008-09 36,72,192 31,821
2009-10 39,29,853 33,588
Source: Government of India, Economic Survey, various issues, RBI Handbook of Statistics on
Indian Economy,2009-10.
Table No. 6.4 Average Annual Growth Rates of National Income and per National Income
Year National Income Per Capital Income
1950-51 to 1980-81 3.4 1.2
1980-81 to 1996-97 5.5 3.3
1996-97 to 2003-04 6.2 3.6
2004-05 to 2009-10 8.4 6.9
Source: Government of India, Economic Survey, various issues, RBI Handbook of Statistics on
Indian Economy,2009-10.
Table No. 6.3 & 6.4 show that:
1). Decade wise statistical information between 1950- 51 to 2001-2002. Here net National
Income and per capita Income increased considerably. It is shown that, average annual growth
rate and per capita income. India’s NNP growth rate is greater than PCI, the reason of low
growth rate of PCI is increasing the population of the country.
2) Increased Agricultural Production : Since 1950-51 to till the date Government of India
spent more and more amount on agricultural sector. So Green Revolution, milk production, Eggs
production was increased. So India became Self-sufficient in food production since 1990. Our
food grains like Rice, wheat, Sugar cane, Milk, Oil seeds production increased rapidly. Since
1950-51 to 2001-02 per capita availability of food grains, milk, sugar etc. are increased and the
problem of hunger of Indian people is to be solved to some extent.
3) Increased Industrial Production During five year plans, the Government had invested
heavily on industrial sector especially major and prime industries like Iron and steel, Power,
transport, communication, chemical industries, metallurgical industries etc. As a result, there has
been considerable progress in such industries as steel, aluminium, engineering goods, chemicals,
fertilizers, petroleum products etc. So increasing industrial production became helpful to
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employment activities in the economy and total production, consumption and welfare of the
country. Progress of Industrial production is shown in following table.
Table No. 6.5 Progress of Industrial Production(Selected industries)
Industries 1950-51 1970-71 2001-02 2009-10
1 Coal (m. tones) 32 76 353 566
2 Iron ore (m. tones) 3 32 76 218.6
3 Fertilizers (m tones) 0.02 1 15 16.7
4 Aluminium (Thousand
tonnes)
4 169 552 745.5
5 Petroleum (M. tonnes) 0.3 7 32 33.7
6 Electricity (billion
kwh.)
5 56 579 768
Source:Government of India, Economic Survey,2005-06,2010-11.
4) Infrastructural Development : Another achievement of planning in India is an
Infrastructural development in the country. The expansion of roads and road transport helpful for
the development of market. Irrigation, power etc. development leads to agriculture and industrial
sectors in the economy. The infrastructure has opened the possibilities of modernization of semi-
urban and rural areas. In ninth plan period Vajapaee Government has given more priority to
‘Chatushakon Prakalp’ for infrastructure development such as road development. So
development of transport to be inexperienced.
5) Development of International Trade : Since 1950, in planning era Indians international
trade had increased. The size and composition of our imports and exports also increased. Before
planning period India imported food grains, manufacturing goods etc and exported raw materials,
tea, coffee, cashew etc. In half century of planning India’s dependency on foreign countries for
the import of food-grains and capital goods has declined. This has led to the policy of import
substitution. In short, Indians foreign trade had increased and in the same time composition of
exports has changed in favour of manufactures mineral ores and engineering goods.
6) Development of Science and Technology : After Independence especially under planning
period India’s development of science and technology also upper level. Our management
technique, physics, chemistry, space science became advanced. Now India has been providing
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experts services in science and technology to the countries like middle East and African
countries. This is matter of proud for the country.
7) Increase in standard of living : Another achievement of Indian planning is increased
standard of living of the people in the country. Before planning period per capita availabilities of
essential goods such as Sugar, Milk, food grains, clothes, edible oil etc, is to be small quantity
but it has to be increased in planning period shown in following table.
Table No. 6.6 Net Per capita Availability of some essential Consumer Goods in India
Goods and commodity 1950-1951 1970-71 2002-2003 2009-10
1 Sugar (Kgs) 4 7.4 16 18.6
2 Cereals and Pulses
(kgs)
144 167 180 162
3 Edible oil (kgs) 3.3 4.5 7.2 14.3
4 Cloth (C.meters) 14.4 16 32 43.1
Source:Government of India, Economic Survey, 2005-06,2010-11.
8). Development of Education : One of the great achievement of Indian planning said by the
thinker is Educational Development since 1950. During planning period primary, secondary,
higher secondary educational facilities had increased subsequently. India ranks third country in
the world in the terms of educational system. The total number of students enrolled in colleges
and universities increased from 3.6 lacks to 43 lacks between 1951 to 1997
6.2.3 Failures of Indian planning :
For out of a size decades near about five decade congress Government had ruling in center. The
Government have been proclaiming measures to achieve growth with justice, abolition of
poverty or Garibi hatao, removal of exploitation and inequality of incomes etc. But it is not
slogans. Indian planning has achieved significant success in various area’s, but planning also
failed in some area e.g. shown in following ways.
1) Failure in Elimination of Poverty : The basic objective of planning is the provision of
national minimum level of living. From first plans to eleventh plan Government of India adopted
number of programmes for poverty elimination. But poverty has not eliminate completely. Till
date 27 per cent of people living below the poverty line.
2) Failures to Solve Unemployment Problem : Generally, poverty and unemployment are the
co-related problems. The widespread unemployment is another important failure of our planning.
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According to planning commission, the backlog of unemployed Persons were 5.3 milion at the
end of first plan and 7.5 million at the end of the Eight plan. Taking unemployment and under
employment together, at the beginning of the Tenth plan i.e. 2001-02, 9.2 percent of the labour
force or 35 millions person were unemployed.
3) Failures to Reduce Inequalities : During planning period, the redistribution of income in
favour of poor people is unequal nature. In the year 1991 also 50 per cent of share of national
Income owned by only 10 per cent of the people and 40 per cent of income owned by 70 per cent
of the people, In planning period Government adopted policy like Abolition of Jamindari system.
Redistribution of land etc. But distribution of income and wealth is to be an uneven. This is
important failure of planning.
4) Failure to check black money : During planning period, various controls has been made for
speculation. But shortage, black-marketing, speculation don’t control to the Government. The
fiscal measures adopted by the Government failed to check black money. This is also another
failure of planned economy.
5) Failure of reduce concentration of Economic Power : One of the objectives of our planning
is to reduce concentration of economic power. But in actual practice big business hours like Tata,
Birla, Jain, Ambani, Chougule families are became very rich and richer. This is also important
failures of Indian Planning.
6) Inefficiency : During planning period, number of programmes for employment generation
and rural development etc. are to be started. But in actual practice number of programmes are
working inefficient manner. So planning achievement is limited. This is also another failure of
Indian planning. In above discussion we can conclude that, India’s planning policies and strategy
were sound but there was crisis of implementation due to the existence of a gap between the
theory and practice of socialist planning.
6.3 Financing Pattern Of Five Year Plans
Introduction : Success of any plan depends on two things, one is the targets laid down in the plan
and second is the financing resources available for this purpose. In short, when targets specified
in the plan are higher, larger resources will be needed to achieve them. Absence of adequate
financial resources, Government can not complete his plans and to secure targets and
achievement. For development of plans, resources may be raised from various sources which
may broadly be classified in the domestic sources budgetary surpluses, contribution of public
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enterprises, market borrowings, small savings deserves particular mentions. At the same time
external assistance is obtained from International financial institutions and developed countries.
Sometimes deficit financing may be used for completion of plan.
6.3.1 Sources of Financing of Five-year plan :
Broadly speaking there are three sources of the public sector plans. These are follows –
i) Internal source
a) current revenue balance
b) Public borrowings
c) Small savings.
d) Surplus of public enterprises
ii) Deficit financing
iii) Foreign Aid
6.4 Eleventh Five Year plan (2007 to 2012)
The National Development council approved eleventh plan draft in December 2006. The vision
of new plan i.e. Eleventh plan was ‘Faster and more inclusive growth’. Because the last four
years of the tenth plan recorded a rate of growth of as high as 8.6 per cent per annum making
India one of the fastest growing economies of the world. However, according to the plan, a major
weakness in the economy is that the growth is not perceived as being sufficiently inclusive for
many groups especially, SCs, STs and minorities. Gender inequality also remains a pervasive
problem and some of the structural changes taking place have an adverse effect on women. The
lack of inclusiveness is borne out by date on several dimention of performance.
Objectives of Eleventh plan : The plan envisages a high growth of GDP of the order of 9 per
cent for the country as whole. This implies that per capita GDP would grow at about 7.5 per cent
per year to double in 10 years. However the plan document hastens to add that the target is not
just faster growth but also inclusive growth which ensures broad based improvement in the
quality of the people, especially the poor SCs, STs, OBCs and the minorities etc. Besides the
broad objectives, ‘Faster and inclusive growth’, it has set 27 monitorable targets, classified in to
Six categories and are given below.
6.4.1 Targets set to Achieve the objectives :
1) Income and poverty
i) To achieve average GDP growth rate 9 per cent per year.
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ii) To achieve agricultural GDP growth rate of 4 per cent per year
iii) Increase employment opportunities upto 58 millions in five years.
iv) 5 per cent reduction of educated employment in the country during planning period.
v) To increase approximately 20 per cent wage rates of unskilled workers.
vi) Reduction in poverty by 10 per cent.
2) Education :
i) Reducing the drop out rate of children at the elementary level from 52.2 per cent to 20
per cent
ii) To ensure quality education and developing minimum standard in elementary school.
iii) Increasing literacy rate up to 85 per cent by 2011-12.
iv) Reducing gender gap in literacy to 10 per cent points by 2011-12.
v) Increasing the enrollment ratio in higher education from 10 per cent to 15 per cent.
3) Health
i) To reduce Infact mortality rate upto 28 and maternal mortality rate to 1 per 1000 by
2011-12.
ii) To reduce total fertility rate to 2.1 per cent by 2011-12 iii) Providing clean drinking
water facilities to all by 2009. iv) Reducing the malnutrition among children of age group
i.e. 0-3.
v) To Reduce Anaemia problems of women and girls 50 per cent.
4) Women and Children :
i) Increase sex ratio for age group 0-6 to be raised to 935 by 2011-12.
ii) Ensuring that at least 33 per cent of beneficiaries of all Government Schemes are
women and girl children.
iii) Ensuring that all children enjoy a safe childhood and are not forced to work.
5) Infrastructure:
i) To ensure electricity connection to all villages and BPL households by 2009.
ii) Connecting all habitation with population 1000 and above (500 and above for hilly
areas) by 2009.
iii) To connect every village by telephone and broad band facility to all villages up to
2012.
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iv) To provide homestead site to all by 2012 and set up the pace of house construction for
rural poor so far as to cover all the poor by 2016-17.
6) Environment :
i) Forest and tree cover to be increased by 5 per cent
ii) To attains WTO standards of air quality in all major cities by 2011-12.
iii) To treat all urban waste water by 2011-12 to clean river waters.
iv) To increase energy efficiency by 20 per cent points.
6.4.2 Financing the Eleventh plan :
The Table No. 6.7 Eleventh plan projections of Resourcesng.
Centre States Total
Amount % Amount % Amount %
1 Balance from current
Revenue
653989 30.3 385050 25.9 1039039 28.5
2 Borrowing in Market 767722 35.6 649423 43.6 1417145 38.9
3 Net Inflow from Abroad __ __ __ __ __ __
4 Gross Budgetary
support(1+2+3)
1421711 65.9 1034473 69.5 2456184 67.4
5 Central Assistance to States
&UTs
-324851 -15.1 +324851 21.8 __ __
6 Net Budgetary support(4-5) 1096860 50.8 1359324 91.3 2456184 67.4
7 Resources of Public
Enterprises
1059710 49.2 128824 8.7 1188534 32.6
8 Resources for Public Sector
Plan(6+7)
2156571 100.0 1488147 3644718 1488147 100.0
Source:Compiled and computed from Eleventh Five Year Plan(2007-2012),Vol.1
6.4.3 Sectoral Allocation of Resources :
The size of eleventh five year plan as compared to Tenth five year plan is an increased by 125
per cent i.e. Rs. 16,18,460 crores in Tenth plan and Rs. 36,44,718 crores in Eleventh plan.
However, sectoral allocation of resources are shown in following table.
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Table No. 6.8 Particulars Amount in crores Share in Crores total ( per cent)
11th Plan Projections
(2007-12)
Agri. & Allied activities 1,36,381 3.7
Rural Development 3,01,069 8.3
Special Area Programmes 26,329 0.7
Irrigation & Flood control 20,10,326 5.8
Total Agriculture(1 to 4) 6,74,105 18.5
Energy 8,54,123 23.4
Industry & Minerals 1,53,600 4.2
Transport 5,72,413 15.7
Communication 95,380 2.6
Science, Technology and environment 87,933 2.4
General Economic services 62,523 1.7
Social Services 11,02,327 30.9
General Services 42,283 1.2
Total 36,44,718 100
Source:Compiled and computed from Planning Commission(2007),Eleventh Five Year
Plan(2007-2012),Vol.1
6.4.4 Evaluation of Eleventh Five Year Plan :
In the year June 2007 the U.S. economy came under recession as a result of subprime lending
crises. The financial stress soon extended to other countries as well and on September 14, 2008
with collapse of the US investment Bank Lehman Brothers U.S. economy entered in to
recession.
The collapse of major financial institutions in Europe: As a result, there was a full blown global
financial crisis. The effect on Indian economy was not significant in the beginning. But from
October 2008, adverse effects of American recession on Indian stock market, export and number
of sectors were experienced to some extents. So results of Eleventh five-year plan were against
Indian economy. Most of the sectors of the economy witnessed a market slow down in the year
2008-09. This would be clear from the following facts.
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1) Growth rate of economy in the year 2007-08 was 9.7 per cent. It was gone down up to 6.7 per
cent in the year 2008-09.
2) Rate of growth in agriculture was 4.7 in the year 2007-08. It was also reduced up to 1.6 per
cent in the year 2008-09.
3) Manufacturing industries growth also experienced slow down ward from 10.3 per cent to 3.2
per cent
4) Rate of growth of electricity, gas decreased up to 3.9 per cent from 8.5 per cent in 2007-08.
5) Under Eleventh plan period rate of growth of the construction sector decreased 5.9 per cent
which was10.6 per cent in the year 2006-07.
6) In this planning period growth rate of Six core industries for example oil, petroleum, coal,
electricity, cement and finished steel also go down.
7) India’s growth of export also decreased up to 3.6 per cent as against 29 per cent in the year
2007-08.
8) Indias current account deficit widened to 2.4 per cent of GDP in 2008-09 from 1.3 per cent of
GDP in 2007-08.
9) The portfolio flows to India which were as high as $ 27,433 million in 2007-08 turned
negative and stood at - $ 14,030 million during 2008-09.
10) The average annual exchange rate of the rupee was Rs. 45.99 in terms of dollar in the year
2007-08. It was also decreased by 12 per cent in the year 2008-09
11) Another failures of eleventh five year plan was money and credit markets were also
affected.
12) The most adversely affected were the IT sectors that are closely linked up to the global
economy like the IT sector with the number of qualified engineers being forced to sit out. Many
employees had to bear wage cuts while many were obliged to go on ‘forced leave’
Check your progress
A. Choose the correct alternatives given below –
1) Planning technique is used firstly in …Country. a) India b) America c) Russia.
2) Indian planning commission was established in 1950 under the chairmanship of …………….
a) Dr. Rajendra Prasad b) Pandit Neharu c) M. K. Gandhi
3) In first five year plan first priority was given to …………….. sector.
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a) Industry b) Energy c) agricultural
4) In India five year planning was firstly brake down in the year …………….
a) 1966-69 b) 1978-80 c) 1990-02
5) Tenth five year period in India was …………….
a) 2000 to 2005 b) 2002 to 2007 c) 2007 to 2012.
B. Write whether following the statements are true or a false.
1) Before 1950, planning process was started in India.
2) Under Second five year plan in India priority was given to agriculture sector.
3) The objectives like ‘Garibi Hatao’ was especially designed in fifth five year plan.
4) The Sixth Five year plan was started before New economic policy in India.
5) ‘Bharat Nirman Yojana’ has been especially launched in tenth five year plan.
6.5 Summary :
After discussion regarding economic planning in India we can say that planning technique had
been used by Russia in 1928 for economic development. Afterwards it was followed by number
of countries in the Europe. In India planning process is started before independence. But
systematic planning for economic development adopted by the Government In the year 1950
upto 2011-12, India has completed Eleven Five Year Plans. In this topic some major objectives
of planning have discussed firstly. Secondly evaluation of planning is made. Thirdly Ninth and
Tenth five year plans financing pattern was explained and lastly Eleventh five year plan is also
explained.
6.6 Glossary :
Planning Commission : The machinery established for making draft five year along with
finalised and implementing five year plans.
National Development council : The body of reviewing the draft plan and making some
suggestion and sanctioning in five year plans.
One year plan : Some times five year planning is not possible at that time plan is make for one
year only. It is called as one year plan.
New Economic Policy : The policy of Liberalisation, Globalization and privatization adopted by
the Government of India in the year 1991.
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Bharat Nirman Yojana : The Government of India adopted the policy of rural electrification
and the policy of free of charge electric connection to the weaker sections e.g. S.C., S.T., B.P.L.
families, tribal people family etc.
6.7 Answers to Check your progress
A. 1) Russia 2) Pandit Neharu 3) Agriculture 4) 1966-1969 5)
2002-2007
B. 1) True 2) False 3) True 4) False 5)
False
6.8 References/Suggested readings
1) A. N. Agarwal : Indian Economic Problems : Development and Planning, Wishva Prakashan,
New Delhi (2003)
2) Datta, Sundaram : Indian Economy; S. Chand and Company, New Delhi (2011)
6.9 Terminal and Model questions.
1) Discuss in detail the major objectives of Indian Economic planning.
2) Discuss the achievements of economic planning in India.
3) Explain critically the achievements of economic planning in India.
4) Discuss the targets set in Eleventh Five year plan in India.
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Lesson 7: Monetary and Fiscal policies
Structure
7.1 Objectives
7.2 Introduction
7.3 Introduction to Monetary and Fiscal Policies
7.4 Monetary policy
7.5 Fiscal policy
7.6 Summary
7.7 Glossary
7.8 Answers to check your progress
7.9 Suggested Readings
7.10 Terminal and Model questions
7.1 Objectives
After studying this lesson, you should be able to:
Explain different stabilisation policies established in India
Describe the effectiveness of monetary policy in ensuring price stability in India
Explain the objectives of Fiscal Policy and its constituents
Illustrate the suitability of different instruments of monetary and fiscal policies in specific
problems
7.2 INTRODUCTION
Stabilisation is a necessary complement of crucial reform that is driven by crisis in the economy.
But there is always a scope for improvement in the content and pace of a stabilization policy. A
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macroeconomic crisis is well-known in the form of increasing inflation and unsustainable fiscal
and current account deficits. So stabilization policies involve controlling inflation and a
sustainable fiscal and current account position. Economic policies can be classified into two
main divisions which are
Structural policies: These policies relate to the aggregate supply system on the economy like
industrial policy (privatization, liberalization, globalization), foreign trade policy and foreign
investment policy.
Stabilization policies: These policies relate to the demand system of the economy which include
monetary policy and fiscal policy.
The foreign exchange rate policy has not been used much in stabilizing the economy. The other
two have been applied with varied success.
Check your progress:
1. What are structural policies?
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
2. What are the two important stabilization policies?
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Activity: India’s stabilization policy was a response to the crisis of 1991. Discuss the caseof the crisis of 1991 which brought a reformation in the entire finanacial framework ofIndia and what are the steps taken by the RBI and government during the crisis toovercome it.
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7.3 Introduction to Monetary and Fiscal Policies
Monetary and fiscal policies are two strategic economic mechanisms used by
governments or national banks as an intrinsic element of a nation’s overall economic planning.
Monetary policy is the process by which the monetary authority of a nation controls the supply
of money. To promote economic growth, stability and inflation it is important to control the
interest rate.
Normally, a monetary policy is utilized by government or a central bank to control the
supply, availability and rate of interest of money to attain stability of the economy. Fiscal Policy
is changes in government spending or taxes designed to achieve macroeconomic goals. Monetary
Policy is changes in the money supply or credit conditions designed to achieve macroeconomic
goals. The three main goals are full employment, price stability, and steady economic growth.
7.4 Monetary policy
Monetary policy shapes a nation’s economic growth by adjusting the money supply to the
needs of growth by directing the flow of funds into the necessary areas with a purpose to attain
macro-economic goals. The term monetary policy is also known as the credit policy or called as
the Reserve Bank of India’s money management policy in India. The RBI decides how much
should be the supply of money in the economy, ratio of interest etc. It can be concluded from the
above facts that monetary policy is related to the demand and supply of money.
Definition of monetary policy:
Monetary policy is defined as
“It is the deliberate effort by the central bank to control the money supply and credit condition
for the purpose of achieving certain broad objectives” – Professor Wrightsman
“ A policy which influences the public stock of money substitute of public demand for such
assets of both, that is, policy which influences public liquidity position is known as monetary
policy” – A.G.Hart
Objectives of monetary policy:
The objectives of monetary policy can be summarized as
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1. Price stability: Inflation and deflation are hindrances to growth of economy and so it is
important to control big fluctuations in the overall prices.
2. Exchange rate stability: Instability in exchange rate affects international trade which can
lead to financial crisis.
3. Full employment and maximum output: Full employment indicates optimum utilization
of scarce resources like land, labour, capital and organization. The central bank of the
country has the responsibility of stabilizing the economy and taking steps through its
monetary policy to smoothen variations in output and employment.
4. High rate of growth: Monetary policy can contribute to the growth of the economy in
two ways – one way is to balance the aggregate supply of goods and services and other
way is to encourage savings and investment in the economy.
Types of monetary policy:
Monetary policy affects a nation’s monetary supply and the direction of its economy.
The difference between various types of monetary policy lies primarily with the set of
instruments and target variables that are used by the monetary authority to achieve their
goals. Below are few of the different types of monetary policy:
1. Expansionary policy: In this form of monetary policy increase in money supply and a
reduction in interest rates are used to correct the problems of a business cycle
Check your progress:
3. Monetary policy is used to regulate the money supply. So what are the feasible
objectives of monetary policy?----------------------------------------------------------------------
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contraction. For example in recession banks are encouraged to extend credit to
consumers and entrepreneurs to solve the unemployment program.
2. Contractionary policy: A contractionary policy will put upward pressure on interest
rates and cause an inflow of short term capital. It is a type of policy in which the
central bank of a country decides that is necessary to decrease the money supply to
prevent inflation or slow down economic growth. For example sometimes central
banks implement this policy by selling of government bills, notes and bonds so that
the buyer pays in terms of money which reduces the money available in the system.
3. Counter cyclical policy: This policy aims at moderating the cyclical fluctuations in
the economy and stabilizing the economy by following counter cyclical measures. It
helps in slowing down the economy when it is growing faster and tries to kindle the
economy when it is going downward. For example, in case of progressive taxation
when there is expansion in the economy if a larger population of income is taxed but
it reduces the demand when the economy is growing.
4. Rule based policy: This is also called as nonactivist monetary policy. It is a policy
based on a predetermined steady growth rate in the money supply for example
allowing the money supply to grow at 3 percent a year no matter what is happening in
the economy.
5. Discretionary policy: This is also called as activist monetary policy. This policy leads
to actions in the case of the occurrence of a certain situation. It is used to harmonize
economic cycles by using an anti-cyclical policy.
Instruments of monetary policy: Instruments used in monetary policy can be classified
into qualitative and quantitative instruments.
Quantitative instruments also called as the general tools refers to the quantity of the
money devised to govern and channelize the gross quantity of bank credit.
1. Bank rate policy: It refers to the rate of interest at which the central bank rediscounts
approved bills of exchange. If the bank rate is increased, it decreases the quantity of
borrowing of banks from the RBI controlling the credit expansion.
2. Open market operations: It is an effective tool in which the RBI sells or buys short
term or long term securities in the open market. The sale of securities causes a
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decrease in the quantity of money and credit. The activity of buying securities from
the market increases the money in circulation which results in an increase in the cash
reserves with commercial banks.
3. Variation in the reserve ratio: It is compulsory for the commercial banks to have a
cash reserve which is a percentage of the total assets decided by the central bank. A
percent of the money kept with the RBI to have liquidity and credit control is called
as Cash Reserve Ratio (CRR) and Statutory liquidity ratio (SLR). Both of them
together are termed as Variation in reserve ratio (VRR). Any change in this VRR
leads to a change in the reserve status of the banks and thereby it’s lending capacity.
4. Lending rate: lending rates are those ratios fixed by the RBI to lend cash to the
customers on the basis of those rates. The higher the rate means the credit to the
customers would be costlier. On the other side lower the rate means encouragement to
the customers to lend more money.
5. Repo rate: Repo rate is the rate at which the banks borrow funds from the RBI to
cover up the difference between the demand they are facing for loans and how much
they have in hand to lend. If RBI increases repo rate it becomes difficult for the
commercial banks to borrow and vice versa.
Qualitative Instruments: They are called selective tools and are employed in
distinguishing between different uses of credit.
1. Consumer credit regulation: Consumer credit supply can be regulated by
determining the installments and down payments in the purchase process of consumer
goods.
2. Fixing margin requirements: Any variation of change in the margin money leads to
a change in the total amount of loan. This technique is used by RBI to promote a
neglected sector by decreasing margin and also increase the margin to prevent any
sector to grow.
3. Credit rationing: RBI controls and directs credit to neglected sectors by fixing the
amount of credit including the bill rediscounting. It can also put a ceiling on the limit
of bank credit.
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4. Moral suasion: This instruments uses moral persuasion by directing banks without
following any rules. The RBI has this power to suggest commercial banks to reduce
credit limit to restrict speculation.
5. Control through directives: The policy of commercial banks can be molded by RBI
by passing directions from time to time which would impact on guiding the credit to a
particular path of an economic sector.
6. Direct action: RBI can take action on any commercial bank if does not follow the
directives by stopping rediscounted bills and securities.
Problems in monetary policy:
There are certain limitations to monetary policy discussed below:
1. Lags in monetary policy: There are two types of lags in monetary policy.
a. Inside lag: Inside lag is again divided into recognition lag and action lag
(i) Recognition lag refers to the time period taken to identify the requirement
of alterations in monetary policy.
(ii) Action lag is the time gap between the recognition of the need and
implementation of the policy.
b. Outside lag: It is described as the time period taken to affect demand and supply
after the execution of the policy.
These lags affect the operational capability of a monetary policy.
2. Pressure of financial intermediaries: pressure of financial intermediaries like
insurance companies, pension funds, cooperative banks etc., convert idle funds into
active balances as they lend against mortgages and assets which yield higher returns.
These actions hike the velocity of money and weaken the power of policy.
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3. Excess non-banking financial institutions: Policy is affected by the credit pumped
into the economy by excess non-banking financial institutions.
Check your progress:
4. Which of the following is not an instrument of monetary policy?
a. open market operations
b. bank rate policy
c. reserve requirement changes
d. government spending
5. -----------------rate is the rate at which the central bank rediscounts approved bills ofexchange.
a. lending
b. debt
c. bank
d. forwarding
6. When would the commercial banks have fewer funds to provide credit to the customers?
a. when the central bank decreases the reserve requirements
b. when the central bank increases the reserve requirements
c. when the central bank leaves the reserve requirements unchanged
d. when the commercial bank increases the lending rate
7. The time lag between recognition of the need and the implementation policy is known as
a. recognition lag
b. action lag
c. outside lag
d. inside lag
8. Which of the following is a common feature of monetary policy and fiscal policy?
a. both deal with interest rates
b. both deal with tax rates
c. both deal with foreign exchange
d. both deal with regulatory mechanisms
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4. Contradictions of objectives: When there is a contradiction of objectives the
efficiency of monetary policy is hindered.
5. Underdeveloped nature of money and capital markets: unorganized money and
capital markets restrict the monetary authorities from regulating money variables.
6. Higher liquidity: when an economy grows there is an addition in the deposit of
commercial banks. Surplus liquidity due to high deposits is a hindrance to a good
policy.
7.5 Fiscal policy
The fiscal policy plays an important role in the economic front of a nation.
Though fiscal policy started with a role of determining state income and expenditure
policy. But with time its importance grew with the speed of economic growth. So
gradually public borrowing and deficit financing are included as a part of fiscal policy.
An effective fiscal policy is comprised of debt management, public expenditure,
tax revenue, transfers, budgetary deficit etc, including the entire financial structure of the
nation. It tries to attain a proper balance between these units to achieve best possible
results in terms of economic goals.
Definition of fiscal policy:
“Fiscal policy as changes in government expenditure and taxation designed to influence
the pattern and level of activity”. – Harvey and Johnson
“We define fiscal policy to include any design to change the price level, composition or
timing of government expenditure or to vary burden, structure of frequency of the tax
payment”. – G.K.Shaw
“Fiscal policy as changes in taxes and expenditure which aim at short run goals of full
employment price level and stability”. – Otto Eckstein
Activity: Monetary policy pacts with the regulation of the currency supply. Assume that youare the expert in charge for framing the monetary policy in a republic. While outlining thepolicy which instruments do you reflect helpful in regulating credit?
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Objectives of fiscal policy:
1. Mobilization of resources: There are two methods of government to raise funds for
investment mainly voluntary and compulsory savings. Resources can be mobilized
through public borrowing and taxation. The government can mobilize more money by
introducing new taxes and increasing the existing taxes.
2. Reduction of disparities of income: Economic disparities can be reduced by
imposition of more taxes on the richer section, raising the taxes on luxury items.
Revenues so generated can be useful for the up-liftment of weaker sections.
3. Economic development and growth: Resources are mobilized through taxation
policy, public borrowing and public expenditure. Public expenditure is used for
development of infrastructure, expansion of investment opportunities and subsidies
on production of specific items contributes to the development and growth of the
economy.
4. Price stability: Fiscal policies are helpful in maintaining stable prices. When the
economy is deflating the budget should be prepared in a way to increase in
government expenditure creating more income for the people. When the economy is
undergoing inflation the government has to reduce its expenditure and control the
spending capacity of people through taxes.
5. Expansion of employment: Full employment is very important as economic
development would be incomplete without it. Fiscal policy expands employment
opportunities in the economy.
Instruments of fiscal policy: Fiscal policy endeavors to achieve its objectives through
the use of three instruments in its group – taxation, public expenditure and public debt
management.
Check your progress:
9. Discuss the objectives of fiscal policy.
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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Taxation: One of the important sources of revenue for the government is taxation. The
tax structure should fetch the government maximum revenue and at the same time avoid
adverse effects on the investment of private sector. There are two types of taxes – direct
and indirect taxes.
Direct taxes: These are levied directly on an individuals income or wealth. Major direct
taxes are personal income tax and corporation tax. Payments of direct taxes is
compulsory. Direct taxes are mainly collected by the central government. Examples of
direct taxes are income tax, corporation tax, capital gains tax, wealth tax and a capital
transfer tax.
Indirect taxes: Indirect taxes are levied on consumer’s expenditure or outlay. Major
indirect taxes are excise duties and custom duties. In indirect tax the impact will be on
manufacturer and the impact is on the ultimate consumer. Indirect taxes are collected by
both the central and state governments. Examples of indirect taxes are custom duties,
motor vehicle tax, excise duty and sales tax.
Public Expenditure: Expenditure by government would be mainly on defence, police
and public administration even including expenditure on roads, parks, etc. Other
expenditure may include on relief works, subsidies of various kinds. Public expenditure
transfers income from the government to the general public while taxation works vice
versa.
Public debt management: Government borrowing and public debt affect the volume of
liquid assets with the public. Public borrowing is an effective anti-inflationary measure
for clearing up excess liquidity in public. It is better than taxation on a positive note as it
supports saving and investment.
Deficit financing: It is the name of those forced savings which are the result of increase
in prices during the period of government investment. Deficit financing is a kind of
forced savings. The deficit financing in India indicates loan taking by the government
from the RBI in the form of issuing fresh dose of currency.
Problems of fiscal policy:
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Instability: the fiscal policy has failed to attain stability in various fronts. The growing
volume of deficit financing has created the problem of inflationary rise in the price level
which give rise to instability.
Inflation: The fiscal policy of the nation has failed to contain the inflationary rise in price
level. The increasing volume of public expenditure on non-developmental heads and
deficit financing has resulted in demand pull inflation. And also the direct taxes has failed
to check the growth of black money, which is again aggravating the inflationary spiral in
the level of prices.
Defective tax structure: The fiscal policy has also failed to provide a suitable tax
structure for the country. The tax structure has failed to raise the productivity of direct
taxes and the nation has been relying much on indirect taxes. Therefore the tax structure
has become burdensome to the poor.
Negative return of the public sector: The negative return in the public sector units has
become a serious problem for the government. The returns on investment has remained
mostly negative. In order to maintain those PSUs the government has to keep huge
Check your progress:
10. Write about any one instrument of fiscal policy
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
11. Point out any three differences between direct taxes and indirect taxes
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
12. Discuss any two limitations of fiscal policy.
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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amount of budgetary provisions, creating a drainage of scarce resources of the nation.
Growing inequality: The fiscal policy of the nation has failed to contain the growing
inequality in the distribution of income and wealth throughout the country. The growing
trend of tax evasion has made the tax machinery ineffective for the purpose.
7.6 Summary
Stabilisation is a necessary complement of crucial reform that is driven by crisis in the economy.
Economic policies can be classified into two main divisions which are Structural policies which
relate to the aggregate supply system on the economy like industrial policy (privatization,
liberalization, and globalization), foreign trade policy and foreign investment policy and
Stabilization policies which relate to the demand system of the economy which include monetary
policy and fiscal policy.
Economist’s opinion vary with regard to the comparative effectiveness of diverse stabilizing
policies. The classists favor the monetary policy over the fiscal policy, as they believe that the
demand for money and the other behavioral functions are fairly stable. Both the economists from
these schools believe that for policies to be effective, they have to be dependable.
Monetary and fiscal policies are two strategic economic mechanisms used by governments or
national banks as an intrinsic element of a nation’s overall economic planning. Monetary policy
is the process by which the monetary authority of a nation controls the supply of money. To
promote economic growth, stability and inflation it is important to control the interest rate. Fiscal
Policy is changes in government spending or taxes designed to achieve macroeconomic goals.
7.7 Glossary
Rule based policy: This is also called as nonactivist monetary policy. It is a policy based on a
predetermined steady growth rate in the money supply
Discretionary policy: This is also called as activist monetary policy. This policy leads to actions
in the case of the occurrence of a certain situation.
CRR and SLR: A percent of the money kept with the RBI to have liquidity and credit control is
called as Cash Reserve Ratio (CRR) and Statutory liquidity ratio (SLR).
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VRR: CRR and SLR together are termed as Variation in reserve ratio (VRR)
Economic development: it is defined as a process of economic transition involving the structural
transformation of an economy through industrialization and rising GNP and per capita income.
External debt: This is the amount borrowed by the government from foreign bodies.
National debt: National debt refers to the amount borrowed by government to meet expenditures
that arise out of the deficit in the budget.
7.8 Answers to Check your Progress
Model answers to check your progress questions
1. Structural policies are foreign trade policy and foreign investment policy.
2. Stabilization policies are monetary policy and fiscal policy.
3. Feasible objectives of monetary policy to regulate money supply are
Price stability: Inflation and deflation are hindrances to growth of economy and so it is
important to control big fluctuations in the overall prices.
Exchange rate stability: Instability in exchange rate affects international trade which can
lead to financial crisis.
4. Answer: a
5. Answer: c
6. Answer: b
7. Answer: b
8. Answer: d
9. Objectives of fiscal policy:
Mobilization of resources
Reduction of disparities of income
Economic development and growth
Price stability
Expansion of employment
10. As the answer write about any one out of these three- taxation, public expenditure and
public debt management.
11. Difference between direct tax and indirect tax
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Direct taxes Indirect taxes
Levied directly on income Levied on consumer expenditure
Personal income tax and corporation tax Excise duties and custom duties
Payment is compulsory Payment is not so compulsory
12. Limitations of fiscal policy:
Instability
Inflation
Defective tax structure
Negative return of the public sector
7.9 Suggested Readings
John B Taylor, Economics second edition, Delhi A.I.T.B.S publishers, 1999
D.N. Dwivedi., 2004. Macroeconomics Theory and Policy. Tata McGraw-Hill.
Paul .H (2003) , The economic way of thinking, 10th ed, Pearson education.
7.10 Terminal and Model Questions
1. What do you mean by monetary policy? Discuss its objectives and its instruments.
2. What is the role of fiscal policy in economic growth?
3. Discuss the tools/instruments of fiscal policy.
4. What are the problems of monetary policy?
5. What are the different types of economic policies for a nation?
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1
LESSON 8
LEGAL ENVIRONMENT
Structure
8.1 Objectives
8.2 Introduction
8.3 Structure of Legal Environment
8.3.1 Domestic Legal Environment
8.3.2 Foreign Legal Environment
8.3.3 Global Legal Environment
8.4 Objective of Analyzing Legal Environment
8.5 Changing Dimensions of Legal Environment in India
8.6 Summary
8.7 Glossary
8.8 Answers to check your progress
8.9 References
8.10 Terminal and Model questions
8.1 Objectives
After reading this lesson, you will be able to
Define legal environment
Analyse structure of legal environment
Explain various company regulatory legislations in India
8.2 Introduction
Regulation refers to controlling human or societal behavior by rules or regulations or
alternatively a rule or order issued by an executive authority or regulatory agency of a
government and having the force of law. Regulation covers all activities of private or public
behavior that may be detrimental to societal or governmental interest but its scope varies across
countries. The rules laid down by regulation are supported by penalties or incentives designed to
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2
ensure compliance. India being a democratic country, the main objective is to reduce the
concentration of the wealth in few hands. For this purpose government has enacted special
legislation within which a business should operate. It is binding for the business houses to
understand the legal environment and work accordingly. Legal environment refers to the rules
and regulations framed by the government within which the business is to run. The government
makes law for the smooth functioning of the business and to safeguard the interest of consumers
and workers. These legislations affect the business from starting to the winding up of business.
The government of a nation exercises considerable influence upon the business and Industry by
enacting various legislations. In this process of exercising control over business and industry, the
judiciary plays an important role. Some of the issues which the government fails to implement on
political fronts are implemented through judiciary.
The management of all the economic activities of a business in accordance with legal
guidelines has become a complex task requiring professional services supported by a
professional team work. It has become significant to save the business firm from all kinds of
potential threats that can be posed by legislature to the business in a country. Resolving a trade
disputes legally is a toughest task that consumes huge amount of money, time and productive
energy of the business firm. Thus, it has become essential for a business house to understand the
legal environment of business and its implication on the business. The lack of awareness about
any law is not an excuse for any kind of offence.
8.3 Structure Of Legal Environment
The different components of Legal Environment, from an economic unit’s point of view can be
described as domestic legal, foreign Legal Environment and the global Legal Environment.
8.3.1 Domestic/National Legal Environment
The domestic/national legal environment refers to the legal environment of the home Country. In
other words, the term domestic legal environment refers to the legal framework of the home
country or it is the governance of those laws that govern the domestic business affairs of a
country. These lows interact with business from the pre-formation stage to the end results or till
the closure of business. The Domestic lows usually exhibit the local culture, traditions, religion
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3
and other internal requirement of a particular country. Different countries of the World can have
different kinds of domestic low. Even within a country the same low can have different
implications for different people. For example, on a particular kind of domestic issue, India and
Pakistan can have different laws (e.g. uniform civil code issue, wearing helmet has different
implication for Sikh women and a non Sikh women etc). It is Imperative that a global marketer
must have knowledge and understanding of domestic laws of the different countries. The
domestic lows usually imports restrictions on various kinds of imports and exports. Domestic
lows usually prohibit the imports and exports of products like narcotics, dangerous drugs,
endangered species, alcoholic products, toxic substances, written document, cds, video albums,
and other item associated with the country’s security aspects etc. some of the important
components of domestic legal environment in India are stated as follows:
• The Companies Act, 1956.
• The Consumer Protection Act, 1986.
• The Indian Patents Act, 1970.
• The MRTP Act.
• The FERA.
• The IDRA.
• The Copyright Act.
• The Designs Act.
• The Payment of Wages Act.
• The Sales of Goods Act,1930.
• The Provident Fund Act.
• The Negotiable Instruments Act, 1881.
• The Direct Tax Laws.
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• The Indirect Tax Laws.
• Insurance Legislations:
• The Insurance Act, 1938.
• The Insurance Corporation Act, 1956.
• The General Insurance Business Act, 1972.
• The Insurance Regulatory Authority.
• Public Liability Insurance Act, 1991.
• Motor Vehicle Act, 1939.
• Laws concerning various forms of business organizations such as:
• Sole -proprietorship.
• Hindu Undivided Family.
• Partnership firm.
• Joint stock company.
• The Carriage of Goods by Sea Act, 1917.
• Marine Insurance Act, 1963.
• The Merchant Shipping Act, 1958.
• The Bill of Landing Act, 1855.
• The Indian Ports Act, 1963.
• The Indian railway act 1890.
• The Carries Act, 1865.
• The Indian Post Office Act, 1898.
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• The Carriage by Air Act, 1972.
• The Workmen’s Compensation Act, 1923.
• Employees State Insurance Act, 1948.
• The Indian Stamp Act, 1899.
• Arbitration and Conciliation Act, 1996.
• The Capital Issue Control Act.
• The Competition Act.
• Securities and Exchange Board of India Act, 1992.
• Industrial Disputes Act, 1947.
• The Factory Act, 1948.
• Indian Contract Act, 1872.
• The Indian Partnership Act.
Check your progress 1
1. Regulations cover only private company’s behavior pattern. (True/ False)
2. Legal environment refers to only domestic legal environment. (True/ False)
3. Business establishments work autonomously and do not need any legal procedures to
govern them. (True/ False)
8.3.1.1 Important business legislations of India: A brief account of some of the important
business legislations that are important in the domestic legal environment of India are given as
follows:
1. The Companies Act, 1956: The Companies Act, 1956 contain all provisions from the
formation of a joint stock company to its closure. The Act provides formation classification,
registration, raising of finance, meetings and resolutions and voting rights of shareholders, etc.
The Company Law is the main law effecting organization, management and administration of
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business. The Companies Act contains all the provisions from formation of the company till its
closure. This Act provides the formation, classification, registration and raising of funds, etc. Its
main objectives are full and fair disclosure of all the information related to the company and it
ensures active participation by share- holders and at the same time protection of their interests,
This Act reserves the power of intervention and investigation into the affairs of the companies. It
ensures the enforcement of proper duties by the company management. So the common objective
of this Act is to regulate all private investment for the welfare of society and to protect the
interest of the investors.
2. The Consumer Protection Act: An important breakthrough in the drive of promoting
consumerism is the formation of Consumer Protection Act 1986 by the government of India .
The Consumer Protection Act (CPA) is the Act no 68 of the year 1986. The formation of this Act
provides a legal backing of the philosophy of consumerism and provides a mechanism to get the
consumer rights implemented. The consumer protection Act came into force on 15th of April
1986 (it is Act No. 68 dated 24th of Dec 1986.) The consumer protection Act extends to whole of
India except the state of Jammu and Kashmir which is governed by the provision of section 306
of the constitution. Under the given jurisdiction, the act is applicable on all kinds of goods and
services which are subject matter of consumer affair. The provision of this Act shall be, in
addition to and not in addition to and not in derogation of the provision of any order law for the
time being in force.
The Act is formed with sole objective of protection of consumer against any kind of
exploitation while consuming any goods and services. The various objectives covered under the
broad philosophy of consumer Protection Act are stated as follows:
• To define consumer rights.
• To ensure the enforcement of consumer rights.
• To ensure the health and safety of consumer.
• To create a healthy competition in the market.
• To control black marketing.
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• To control unfair and restricted trade practices.
• To ensure the consumer disputes and heard.
• To ensure the effective redressal of consumer disputes.
• To create healthy trade practices in the country.
• To build confidence of international business community.
• To serve the UNO guidelines with regard to consumerism.
3. The Indian Patents Act: Intellectual property protection, especially through patents, his
tremendous potential in promoting inventions and innovations. Patents which are an integral part
of innovation research and development activities promote trade in technology, transfer of
technology and technological collaborations as they provide exclusive rights often leading to
commercial gains to the inventors. A patent is a document granted by a government patent office
which describes an invention and claims exclusive rights in the subject matter of that invention.
In other words, it can be described as an official document that confers ownership of an
invention to be patentee. Thus, by gaining the patent the state makes both the details of the
invention and the legal rights associated with its matters of public record. The effect of granting
a patent is to grant an exclusive right to the patentee that is authorised to produce, put on the
market and offer for sale or use the subject matter of the invention commercially. The grant of
patent and invention in India is governed by Patent Act 1970. A patent granted under the Act
confers upon the patentee where the patent for an article or a substance , the exclusive rights by
himself, his agent or licensees to use or exercise the method or process in India. The Act was
enacted with following main objectives:
• To promote innovations or further growth and development of the country.
• To encourage research and development for claiming international competitiveness.
• To ensure reward for investment on making an invention either financially or otherwise.
• To protect the right of intellectual property holder just like the holders of other movable
and immovable properties.
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• To promote economic growth and development of the country by following directions of
international and non state bodies such as WTO and IMF etc.
• To promote technological and scientific advancement in the country for benefit of
consumer and industry.
• To promote healthy competitiveness in the economy by protecting the rights of the
competitors.
• To protect the economic rights of disclosed information having commercial value.
• To make way to be a world leader.
• To encourage economic and technological development by rewarding intellectual
creativity.
The advantages of taking out a patent are very specific and technically the owner of a patent
can be excluded all other in the territory covered by the patent from making, using, selling or
importing the invention.
4. The Monopolies and Restrictive Trade Practices Act: The MRTP Act was implemented in
1969. Its main aim was to protect the concentration of economic power in the form of capital,
income and employment in the few hands. Apart from consumer Protection act, the MRTP Act is
one of the important, out of the twenty five legislations enacted by the government of India to
protect the interest of consumers. The Act aims at preventing concentration of economic power,
controlling of monopolies and prohibiting monopolistic and restrictive trade practices.
The MRTP Act 1969 which came into force w.e.f., 1 June, 1970 seeks to achieve the following
objectives
• Prevention of concentration of economic power to the common detriment.
• Control of monopolistic practices
• Prohibition of monopolistic trade practices
• Prohibition of restrictive trade practices.
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Check your progress 2:
1. MRTP Act meant only for preventing monopolies. (True/ False)
2. Globalization has no effect on prevailing legal environment. (True/ False)
5) The Foreign Exchange Regulation (FERA) Act: The Foreign Exchange Regulation Act was
enacted on September 19, 1973 and came into force on January 1, 1974 .The Act applies to
whole of India including the state of Jammu and Kashmir. The provision of the Act is applicable
to all the citizens of India, all person of Indian origin and all companies or body corporate
registered in India.
“It is regulatory framework in the economic and financial sector of India to provide
regulation and controllability to certain payments dealing in foreign exchange and the
conversion of currency”. The Act was enacted with following objectives:
• Regulation of payment.
• Regulate dealings concerned with foreign exchange and securities.
• Regulate indirect foreign exchange transaction.
• Regulation of import and export of currency.
• Conservation of foreign exchange resources.
• To regulate property rights.
• To regulate joint venture.
• Regulating the appointment of foreign nationals.
• To regulate foreign Investments.
• To regulate the foreign companies.
• To regulate the holding and maintaining of immovable property in India by non
residents.
So the main objective was to prevent the outflow of Indian currency and to maintain check on
inflow of foreign exchange.
• The Industrial Development and regulations Act: The Industrial development and regulation
Act is an Act counted as Act No .65 and was passed by the Parliament of India on October
1951. This Act came into force on 8th of May 1952. The provisions of the Act extend to
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whole of India including the state of Jammu and Kashmir. The main objectives of the Act
were to increase the control of government over the industry through an instrument called
the license in other word it is also popular by the name of “Licensing System” or “Licensing
Raj”. The Act was formed with the following objectives :
• To regulate the composition and direction of industrial development.
• To ensure balanced economic growth and development.
• Prevention of monopoly and concentration of economic power.
• To ensure the protection of small scale industrial units from competition of big industrial
houses.
• To ensure the industrial growth, development and production according to the plan
priorities.
• To exercise control over the industries in the country.
• To implement the industrial policy of the country.
The main objective of this Act was to increase the control of the government over the industries
through industrial licensing.
6) Foreign Exchange Management (FEMA) Act, 1999: FEMA Bill was introduced in August
1998 and adopted in 1999. Its main objectives are to amend the restrictive law relating to foreign
exchange and to manage current account and capital account transaction. This Act facilitates
external trade to ensure free flow of capital.
On June 1, 2000, the Foreign Exchange Management Act, 1999 (FEMA) was brought in force to
replace the then existing Foreign Exchange Regulation Act, 1973 (FERA). FEMA has been
enacted with an objective of facilitating external trade and payments and for promoting the
orderly development and maintenance of foreign exchange market tin India. As such it is quite
opposed to FERA which was enacted to regulate or control the foreign exchange. FEMA
provided a de jure status to the shift in policies with regard to the external sector reforms that
began in 1990-91.
Structure of FEMA The present framework of exchange controls in India, consist of basic
legislation (FEMA, 1999) and Notifications, Rules and Circulars [known as Authorized Persons
Directions – AP (Dir Series)] issued by RBI.
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FEMA applies to the whole of India and all branches, offices and agencies outside India which
are owned or controlled by a person resident in India. It also applies to any contraventions
committed outside India by any person to whom FEMA applies. There are 49 sections under
FEMA, of which 9 sections (section 1 to 9) are substantive and the rest are procedural /
administrative provisions as tabulated below:
Section 1 Application and Commencement of FEMA
Section 2 Definitions
Section 3 to 9 Provisions relating to Regulations and Management of Foreign Exchange
Section 10 to 12 Provisions relating to Authorized Person
Section 13 to 15 Provisions relating to Contraventions and Penalties
Section 16 to 38 Provisions relating to Adjudication, Appeal and Directorate of
Enforcement
Section 39 to 49 Miscellaneous Provisions
Section 46 of FEMA grants power to the Central Government to make rules to carry out
the provisions of FEMA and
Section 47 of FEMA grants power to the Reserve Bank of India (RBI) to make
regulations to implement provisions and the rules made under FEMA.
Thus RBI is entrusted with the administration and implementation of FEMA.
Current Account and Capital Account Transaction: In August 1994 India accepted Article VIII
of the Articles of agreement of the International Monetary Fund and became fully convertible on
the current account. Since India is fully convertible on the current account, all current account
transactions (barring a small list of restricted items) are allowed through the normal banking
channels. In case of capital account transactions, only the transactions which are explicitly
enabled under the guidelines are allowed, remaining require specific approvals under FEMA.
Therefore, it is very important to understand the concept of Capital and Current Account
Transactions to Comprehend FEMA.
Capital Account Transaction: “Capital Account transaction” is defined under section
2(e) of FEMA as ‘a transaction which alters the assets or liabilities, including contingent
liabilities, outside India of persons resident in India or assets or liabilities in India of
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persons resident outside India, and includes transactions referred to in sub-section (3) of
section 6.’ Thus any transaction as a result of which the assets or liabilities outside India
of a person who is resident in India and assets or liabilities in India of a person who is
resident outside India are altered i.e. either increased or decreased, is a capital account
transaction.
Current Account Transaction: “Current account transaction” is defined under section
2(j) of FEMA to mean ‘a transaction other than a capital account transaction and without
prejudice to the generality of the foregoing such transaction includes,- (i) payments due
in connection with foreign trade, other current business, services and shortterm banking
and credit facilities in the ordinary course of business, (ii) payments due as interest on
loans and as net income from investments, (iii) remittances for living expenses of parent,
spouse and children residing abroad, and (iv) expenses in connection with foreign travel,
education and medical care of parents, spouse and children.’ All Current Account
transactions are generally permitted unless specifically prohibited whereas all Capital
Account transactions are generally prohibited unless specifically permitted. Current
Account transactions are divided into 3 schedules in Current Account Transaction rules:
Schedule I – Prohibited Transactions
Schedule II – Transactions requiring prior approval of Government of India
Schedule III – Transactions requiring prior approval of RBI
7) The EXIM Policy (2004-2009):
The main objective of this policy is to use foreign trade as an instrument for economic growth.
Its main objectives are to-
(a) Double the percentage share of world trade in the coming five years, i.e. from 2003-04 to
2008-09.
(b) Eliminate control and to create an atmosphere of trust in foreign trade sector.
(c) Simplify the procedure, forms and documents of foreign trade.
(d) Provisions to facilitate agriculture sector by importing of capital goods duty free and to
import seeds and planting material in a liberalized way to increase agricultural
productivity. This policy also facilitates export of medicinal and herbal plants.
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(e) Duty free import of machinery, consumable metals, metal scrap used in jewellary.
(f) Facilities for handloom and handicraft industry and setting up Handicraft Export
Promotion Council.
8) The Competition Act, 2002:
After the introduction of globalization and liberalization in India, Indian industry started
facing the competition from within and outside world. In the newly emerging conditions
MRTP Act has become outdated in certain aspects, so in1999 government appointed a
Committee on Competition Policy and Law. This Committee submitted its report in 2000 and
on the basis of this report the Competition Act, 2002 was passed. The main objectives of this
Act are to:
(a) Prevent practices having adverse effect on competition and to promote competition in the
market.
(b) Protect the interest of the consumers.
(c) Ensure freedom of trade in the Indian Market.
9) The Companies Act, 2013:
Objective behind the 2013 Act is lesser government approvals and enhanced self regulations
coupled with emphasis on corporate democracy. This Act delinks the procedural aspects
from the substantive law and provides greater flexibility in rule making to enable adaptation
to the changing economic and technical environment. This Act empowers the central
government to regulate the formation, financing, functioning and winding up of companies.
8.3.2 FOREIGN LEGAL ENVIRONMENT
The relevance of foreign law arises only when a business unit indulges in foreign trade. The
product or service if traded within the geographical boundaries of a country is the subjected to
domestic law only but once the product or service crosses the national boundaries of a country it
becomes the subject of entirely different law . Thus the international business environment
comprises of various legislations, rules prevailing in different countries of the world concerning
various domains of international business.
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While making the business transactions with foreign nations or with resident of foreign nations
the business houses has to comply with the requirements of law of land or of the foreign laws.
For example, the patenting of an invention is governed by the process patent under the Indian
patient Act while in many other countries including Pakistan it is governed by product patient
regime. For an international marketer, the knowledge of the foreign law is equally important as
the knowledge of the domestic law. The foreign law refers to the law of the host country. Most of
the relevant laws in the international trade are import and exports centred laws. In addition to
domestic legislations of the host country the foreign business environment also includes the
following regulations that the business has to obey:
• International Trade tariffs.
• Anti dumping laws.
• Export import licensing requirements.
• Regulations regarding Foreign Direct Investments.
• Repatriations of earnings.
• Transfer pricing.
• Taxation laws etc.
8.3.3 GLOBAL ENVIRONMENT
Just like domestic laws of various countries there is not a single body recognized by all countries
of the world that is empowered to make an international law for the world as a whole. An
international law, rules or legal principles that are based on custom, treaties, legislation that
control or affect the rights and duties of nation in relation to each other. Thus, international legal
environment is a combination of various legislation, legal systems and laws of various nations
put together that affects the whole worlds. For Example, in the airline industry international air
routes are governed by treaties and agreements made between the various countries of world.
An “International law” can be defined as rules and principle that states and nations
consider binding upon themselves. This raises two interesting characteristics of international law.
(i) The first is that “law” belongs to individual nations and international law only exists to the
degree that individual nations are willing to relinquish their rights. (ii) The second is the lack of
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an adequate international judicial and administrative framework or a body of law which would
form the basis of a truly comprehensive international legal system.
There is not a single international law that is prescribed and acceptable to all the member
countries of world while making the business transactions though some of the international
bodies such as WTO, IMF and World Bank are making efforts to have a uniform business law
for international trade.
The existing international legal framework is somewhat confused. Most control or
regulations revolve around export and import controls, transfer pricing taxes, regulation of
corrupt practices, embargoed nations, antitrust expropriation legal environment is the
International Court of Justice, situated in Hague at Holland. Here a number of International
disputes may be taken for ultimate adjudication some of the laws of global importance are listed
as follow:
• FCN (Friendship, Commerce and Navigation) and Tax Treaties primarily US based
and concerned with giving protection of trading rights avoiding double taxation.
• UNCITRAL (UN) International Trade Law Commission set up with the intent to
provide a uniform commercial code for the whole world, particularly international
sales and payments.
• ISO (international Standard Organization) it work with ILO, WHO etc. and contains
technical committees working on uniform quality standard for the whole world.
• Convention for the protection of Industrial property signed in 1983.
• Air transport in covered mainly by IATA ( International Air Transport Authority)
ICCA(International Civil Aviation Authority) and ITU (International
Telecommunication Company)
• Recourse arbitration is an attempt to reduce disputes by consultation some of the most
widely used is the international chamber of commerce, the American Arbitration
Association, the London Court of Arbitration and the Liverpool cotton Exchange.
• International patent provision of WTO
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• The International investment measures of WTO
• Dispute settlement mechanism of WTO
The global domain of legal environment is a complex whole comprising large number
of legislative provision, designed by keeping in view the traditions, economic
conditions and cultures in various countries of the world.
8.4 Objective of Analyzing The Legal Environment
The various objectives of studying the legal environment of a business are discussed as follows:
• To define the duties, rights and liberties to the business.
• To prevent from indulging in unauthorized activities.
• To maintain law and order while conducting business.
• To work as directive to the other business activities.
• To prevent business from exercising monopolistic and restrictive trade practices.
• To protect the interest of consumers.
• To protect the interest of general public and the nation at large.
• To create healthy competition.
• To ensure uniform growth and development of the nation.
• To prevent black marketing.
• To ensure the fair collection of all direct and indirect taxes.
• To ensure growth and promotion of trade both domestic and foreign.
• To protect the interest of investor.
Although there are many social objective of legal environment but the critics are of the
view that the legal environment of a country or at the international level is full of problems,
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confusions and discrepancies. For example, There is a difference between what is stated in the
Law and what is implemented, secondly, the laws are subject to confusion where the law has the
jurisdiction of both the state government and center government and sometimes both centre and
state have different view point on a particular law. Further sometimes centre confirms the law
but state do not implement it because of political reasons. The expert people take advantage of
the loopholes in the law and the true intention behind the law is killed. Too much legal
formalities are becoming a hurdle in the growth and development of trade and business.
Check your progress 3:
1. International laws do not impose any binding upon States and nations. (True/ False)
8.5 Changing Dimensions of Legal Environment In India:
There is no second opinion on the issue that there are winds of change in various aspects of legal
environment in India. These winds of change have brought a major shift in Indian economy,
from a public sector dominating mixed economic system to a capitalistic economic system. At
the time of independence in 1947, India was under the influence of the then USSR. Russia was
having socialist pattern of economic system. As a technical guide of economic affairs of India,
Russia had recommended the socialist pattern of economic system for India also. On the advice
of the USSR, the then Indian leaders also prefer to adopt socialist system of economic system for
India. But because of strong opposition from within the country they could not get success in
socialist pattern of economic system for India. Consequently, India adopted a mixed type of
economic system. The model of mixed economy was designed in such a way to reflect the
socialist philosophy, almost all the major industries were reserved for public sector and few
industries left for operation of private sector. The private sector was further controlled by strict
provisions of legislations like Industrial Development and Regulation Act(IRDA), Monopoly
and Restrictive Trade Practices Act (MRTP), Foreign Exchange Regulations Act (FERA), etc.
All these legislations depicted the socialist philosophy of strict government over industry.
After more than 50 years of independence the economic indicators of the country such as per
capita income, poverty, unemployment, population were not reflecting satisfactory results. Then
in 1991 government of India announced the liberalization and globalization of India economy,
when the country encountered with an even worst international financial crisis. This may be
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called the changing dimensions of legal environment in India. The various elements of changing
dimensions of legal environment in India are discussed as follows:
Abolition of Strict Provision of MRTP Act: Since its inception in 1936, the MRTP act has
remained a major hurdle in free industrial growth and development of India. The act was enacted
mainly to exercise strict control over concentration of economic power and wealth to protect the
customers from any kind of exploitation. It has acted as a force to restrict the size of industrial
houses within the given limits of the act. The critics of this act argue that, for the past about 50
years the strict provisions of the act did not allow industrial houses to grow freely. Now after
liberalization and globalization of Indian economy, we want these industrial houses to compete
with MNC’s but that seems impossible. Consequently the government realized the justified
criticism of the MRTP Act and as a result they had abolished the strict provisions of MRTP Act
regarding check on growth and development of industrial houses.
Replacing FERA by FEMA: Another strict legislation of the closed regime of Indian economy
was the Foreign Exchange Regulation Act. This Act contained such strict provisions regarding
dealing with foreign exchange that any person with rational commonsense will never go for an
international business transaction involving foreign exchanges. Consequently government of
India announced the replacement of FERA with a softer law FEMA during the budget for the
year 1997-98.
Abolition of IRDA: Another major hurdle in the growth of economic development during
previous regime of India was the strict provisions of Industrial Development and Regulations
Act, 1951. This was also known by the name of licensing. The Act was formed with the main
objective of directing industrial development according to plan priorities. The act directed the
business houses to get licenses at every stage. Such as while starting a new business, while
expanding the size of the business, while producing a new article or while making any other
diversification. After many years of governance through the Act the government realized that the
act failed to achieve the objectives. Further, the Act increased corruption red- tapism,
interference of bureaucracy. Now as member of WTO, India cannot impose any conditions on
foreign investments which are inconsistent to the TRIMS agreement of WTO. Ultimately, the
government had to abolish the restrictive provisions of the Act leading to de-licensing.
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Formation of Consumer Protection Act: One of the great legislations enacted to protect the
interest of consumers is the formation of the Consumer Protection Act, 1986. Although the Act
was enacted even before the liberalization and globalization of Indian economy, but it took roots
during eighties. The credit of formation of this act also goes to United Nations guidelines
regarding consumerism. Thus, by keeping in mind possible consumer exploitation during
capitalistic regime the Consumer Protection Act was enacted.
Check your progress 4:
1. FERA and FEMA are almost the same thing. (True/ False)
2. In the changing scenario of liberalization and globalization, legal environment is
completely intact. (True/ False)
Formation of Environment Act: Most of the Indian goods are not accepted in the European
countries mainly because of environmental factors .Thus, in order to give the taste of
environmental restriction in trade and commerce the government of India has enacted the
Environment Protection Act of India. The provision of the Act emphasizes that after the
liberalization and globalization the business can survive in long run only if
The business houses product of international quality and also comply with Environmental
guidelines.
Formation of the competition act: In order to create healthy competition in the economy the
competition act of India was enacted by keeping in mind the threats of International competition
to the domestic industry. The earlier legislation to deal with problems of competition was given
under the MRTP act. After announcement of Liberalization and globalization of India economy,
a completely new legislation was needed to deal with problems of unhealthy competition.
Consequently, the government of India enacted the competition act of India.
Formation of the Patents Act: The MNCs are not launching their innovative products in India
because of the prevailing threats of piracy. The Indian Patents Act recognizes only the process
patent while the TRIPS agreement of WTO recognizes only the product patent. The variation in
the nature of patenting had been the cause of tension in international economic relation. Thus
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being the member of WTO, India has amended the Indian Patent Act subject to the provision of
TRIPS Agreement of WTO.
Replacement of Companies Act, 1956 with a new bill legislation: The Companies Act is a major
legislation regarding the governance of corporate house of India. The act provides for the
formation, registration, capital contribution, and ways of functionality and exit of joint stock
companies, the Companies Act, 1956 contains large number of provisions regarding governance
of corporate houses that are not suitable for corporate governance in the newly emerged
international economic order. Consequently, the government of India has amended the
Companies Act, 1956 with a new legislation.
Formation of new copyright and related rights act: WTO has recognized seven kinds of
property rights such as copy rights and related rights, trade mark, patent, industrial designs,
geographical indications, layout designs, and undisclosed information. Thus , on the lines of
requirements of the TRIPS agreement of WTO the government of India has amended all the
related legislations.
Formation of SEBI: The Securities and Exchange Board of India was constituted in 1988 and
later it was made a statutory body by the enactment of Securities and Exchange Board of India
Act, 1992. After 1992, so many amendments have also been made in the SEBI act. After
liberlization and globalization, the government has diluted many norms regarding foreign direct
investment in India, investment by foreign institutional investors (FII) in India, investment by
Indian companies abroad, and portfolio investment by foreigners in India. Thus, this act was
amended to meet the requirements of newly emerged international economic order.
Formation of anti-dumping laws: Many countries of the world are working on the long term
strategy of dumping of goods in other country to achieve mainly two objectives; First, to sell
their product and second, to deteriorate the domestic industry of the host country . Thus, in order
to protect the domestic industry from the foreign in healthy competition on the government has
also enacted anti-dumping legislative provision.
Formation of Liability Insurance Act, 1991: The Public Liability Insurance Act, 1991 imposes a
no-fault liability on the person who owns or has control over handling of hazardous substance
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specified in the act. It has provided relief, where death or injury to any person or damage to any
property has resulted from an accident.
Formation of Arbitration and Conciliation Act, 1996: The arbitration and conciliation act 1996
is repealed by the same act of the year 1940. An arbitration condition is incorporated in a
majority of non-marine general insurance policies. The main objectives of new act are to
comprehensively cover international and commercial arbitration and conciliation.
Amending the Capital Issue Control Act: The Capital Issue Control Act was also amended to
tackle the new challengers emerged due to investment of global capital in India.
In addition to above giving changing dimension of Indian legal environment there are so
many other legislation which have been also repealed or amended or enacted on account of
changing needs of Indian economy.
8.6 Summary
Trade and business are more global today than earlier, regimes earlier expanded to encompass
global trade, today it is the large appropriate foot printed nimble innovative companies which
rule the most. In India, the framework for governance of business environment flow from
legislative enactments under the federal structure under whose domain it entails. India is a
constitutional republic with a partly federal system of governance. The Union and the States,
both legislate on the subjects as laid down in the Indian Constitution. This legal framework
created through Indian Constitution play a very important role in the countries over all progress
and economic development. With the changing circumstances and environment, these
enactments are amended from time to time. India, being a democratic country have the main
objective to reduce the concentration of wealth in the few hands and to prevent these things
government has enacted special legislations within which the business should operate and
government makes laws for the smooth functioning of the business and to safeguard the interest
of consumers and workers.
8.7 Glossary
EXIM: Export Import
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IDRA: The Industrial Development & Regulation Act
FEMA: Foreign Exchange Management Act
FERA: Foreign Exchange Regulation Act
MRTP: Monopolistic and Restrictive Trade Practices
MNC: Multinational Corporations.
SEBI: The Security and Exchange Board of India
8.8 Answers to check your progress: All statements of Check your progress 1,2,3 and 4are
false.
8.9 References:
J.M. Bryson (1995): Strategic Planning for Public and Nonprofit Organizations. A Guide to
strengthening and Sustaining Organizational Achievements, Josey Bass, San Francisco.
G. Jhonson and K. Scholes (1999): Expoloring Corporate Strategy Text and Cases, Prentice Hall,
London.
8.10 Terminal and Model questions
1. Why the formation of Environment Act is important in India?
2. Write short notes on Patents Act, SEBI, Anti- dumping Laws, Liability Insurance Act and
Arbitration on the Conciliation Act.
3. Briefly explain how the legal environment is important for a business unit.
4. Explain the various dimension of Legal environment in India.
5. Write a note on changing dimensions of legal environment in India.
6. What do you mean by the concept ‘regulation’, why is it required?
7. What is meant by legal environment?
8. Describe the structure of legal environment.
9. Why different Acts are formed to protect the business establishments?
10. Elaborate the provisions under MRTP Act.
11. What was the effect of globalization and liberalization on the prevailing legal
environment?
12. What is Competition Law, when did it come into existence?
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13. What is global environment, why its analysis is so important?
14. Legal environment has gone through a change in the changing scenario of liberalization.
Comment.
15. Differentiate FERA and FEMA.
16. What are the objectives of analyzing legal environment?
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LESSON 9
CONSUMER PROTECTION ACT, 1986
Structure:
9.1 Objectives
9.2 Introduction
9.3 Objectives of the Consumer Protection Act:
9.4 The Consumer Protection Act, 1986
9.5 Definitions
9.6 Consumer Protection Councils
9.7 Procedure for meetings
9.8 Objects of the Central Council
9.9 The State Consumer Protection Councils
9.10 The District Consumer Protection Council
9.11 Consumer Disputes Redressal Agencies
9.12 District Forum
9.12.1 Composition of the District Forum
9.12.2 Jurisdiction of the District Forum
9.12.3 Manner in which complaint shall be made
9.12.4 Procedure on admission of complaint:
9.12.5 Finding of the District Forum
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9.12.6 Appeal
9.13 State Commission
9.13.1 Composition of the State Commission
9.13.2 Jurisdiction of the State Commission
9.13.3 Procedure applicable to State Commission
9.13.4 Appeal
9.13.5 Hearing of appeal
9.14 National Commission
9.14.1 Composition of the National Commission
9.14.2 Jurisdiction of the National Commission
9.14.3 Appeal
9.14.3 Limitation Period
9.14.4 Dismissal of frivolous or vexatious claim
9.14.5 Protection of action taken in good faith
9.15 Summary
9.16 Glossary
9.17 Answers to check your progress
9.18 References
9.19 Terminal and Model questions
9.1 Objectives
After reading this lesson, you will be able to
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Define Consumer Protection and objectives of Consumer protection act
Explain consumer protection councils
Explain District forum
Explain State commission
Explain National commission
9.2 Introduction:
Initially there was nothing for the protection of the consumers and they were totally at the mercy
of businessmen. Sometime they had no alternative but to accept whatever is supplied to them
irrespective of the fact whether that corresponds to the terms of the contract or not. The position
of the consumers was more vulnerable particularly in the service sector. Vast expansion has
taken place in business and trade due to industrial revolution and the development in the
international trade and commerce. All this has made it possible that a variety of goods appearing
in the market to meet the needs of the consumers and number of services like insurance,
transport, electricity, housing, entertainment, finance and banking have been made accessible to
them. An organized sector comprising of manufacturers and traders possessing more knowledge
of markets has come into existence, thus affecting the relationship between the traders and the
consumers, making the principle of consumer freedom almost inapplicable. The publicity of
different goods and services in the media by way of advertisements affect the demand
irrespective of different types of drawbacks in them. In addition, so many firms producing close
substitutes led to the consumers to think before they can purchase although they have little time
to make a selection. For public welfare, excess of impure and below par commodities in the
market have to be checked. There are various provisions providing protection to the consumers
and providing for stringent action against impure and below par articles in the different laws like
the Code of Civil Procedure, 1908, Indian Contract Act, 1872, the Sale of Goods Act, 1930,
Indian Penal Code, 1860, Standards of Weights and Measures Act, 1976 and the Motor Vehicles
Act, 1988, there is very little achievement in the field of consumer protection. Monopolies and
Restrictive Trade Practices Act, 1969 and the Prevention of Food Adulteration Act, 1954 have
given relief to the consumers even then it is found necessary to protect the consumers from the
exploitation and protect their interests. Therefore, it became necessary to protect the consumers
and then the Consumer Protection Act came into force on 26th December, 1986 and the Act was
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further amended by the Consumer Protection (Amendment) Act no. 50 of 1993 with effect from
18th June, 1993.
9.3 Objectives of the Consumer Protection Act:
This Act has been enacted to give better protection to the interests of consumers and for
achieving the same provides for Consumer Councils and other authorities for the settling of
consumer disputes and for anything that is connected with it.
It also provides for promoting and protecting the rights of the consumers by ensuring that goods
which are hazardous to both life and property are not marketed; protection against practices
which are not fair; provide assurance and access to an authority of goods at competitive prices;
provide right to be heard and assured that their interests will be redressed at appropriate forums;
right to seek redressal against unfair trade practices and exploitation and right to consumer
education.
9.4 The Consumer Protection Act, 1986-An Introduction
This Act extends to the whole of India except the State of Jammu and Kashmir. It is applicable to
all the consumers defined under the Act since it came to effect. It shall apply to all goods and
services, except as otherwise expressly provided by the central government by notification.
9.5 Definitions
“Appropriate Laboratory”1: It means a laboratory or an organization
1. Which the Central Government has recognized;
2. Which the State Government, subject to such guidelines as may be prescribed by the
Central Government in this behalf, recognizes; or
3. Which is established by or under any other law for the time being in force and is
maintained, financed or aided by the Central Government or the State Government for
carrying out analysis or test of any goods. All this is done with a view to determine
whether such goods suffer from any defect.
Elements of Appropriate Laboratory:
1 Section 2(1)(a) of the Consumer Protection Act, 1986
Page 134 of 274
1. It should be recognized Central Government or State Government.
2. It should be maintained and financed or aided by the Central or the State Governments.
3. The purpose of such laboratory is to carry out analysis or test of any goods for
determining whether there is any defect in goods or not.
Branch Office2:
1. Any establishment which the opposite party describes as a Branch, or
2. Any establishment carrying on either the same or more or less the same activity as the
head office of the establishment carries out.
In simple words, an establishment is a branch when it carries out the same activity as being
carried in the Head Office of the establishment. It is also a branch when an opposite party
describes it so.
Complainant3
1. Consumer, or
2. Any voluntary consumer association which is registered under the Companies Act, 1956
or under any other law for the time being in force.
3. The Central Government or any State Government is making the complaint on behalf of
one or more consumers where there are numerous consumers having the same interest.
It is not necessary that the complaint is filed by the consumer himself. It may be filed by a
voluntary consumer association or by one or more consumers who have a common interest.
Complaint can also be made by the Central or any State government.
Complaint4
1. Any allegation in writing made by the complainant that
(a) Any trader has indulged in an unfair trade practice or a restrictive trade practice;
2 Section 1(1)(aa) of the Consumer Protection Act, 1986
3 Section 2(1)(b) of the Consumer Protection Act, 19864 Section 2(1)(c) of the Consumer Protection Act, 1986
Page 135 of 274
(b) The goods bought by him or agreed to be bought by him is having one or more
defects;
(c) There is any deficiency in the services hired or availed of or agreed to be hired or
availed of by him
(d) An excessive price, i.e. a price in excess of the price fixed by or under any law for
the time being in force or displayed on the goods or any package containing such
goods has been charged as provided for in the complaint by the trader with a view to
obtaining relief provided by or under this Act.
(e) Goods are being sold to the public which will be hazardous to life and safety and is in
contravention of the provisions of any law for the time being in force making it
mandatory for traders to display information in regard to the contents, manner and
effect of use of such goods.
Elements of Complaint:
A complaint must consist of any of the following elements:
1. Trader adopts restrictive trade practice or unfair trade practice.
2. Goods suffer from defects
3. There is a deficiency in the services availed of or agreed to be availed of.
4. The trader charges excess price.
5. The trader sold the goods which are hazardous to life and safety in contravention of
the provisions of law.
The complaint becomes infructutous in the absence of these elements.
Consumer5: Any person who
1. Has bought any goods for a price paid or promised or partly paid and partly promised or
under any system of deferred payment and includes any person who has used such goods
other than the person who bought such goods with the approval of such person. It,
however, does not include any such person who obtains such goods in resale or for any
commercial purpose.
5 Sec.2 (1)(d) of the Consumer Protection Act, 1986
Page 136 of 274
2. Has hired or availed of any service for a price which has been paid or promised or partly
paid and partly promised or under any system of deferred payment and includes any
person who benefits from such services other than the person who has hired or availed of
the services for a price paid or has been promised or partly paid or partly deferred or has
been partly promised or under any system of deferred payment when such services have
been made use of with the approval of the person mentioned first.
Test of Consumer:
The person who actually uses the goods or who avails of the services is a consumer under
the CPA, 1986. Thus a buyer cannot be a consumer unless he actually uses the goods
himself. The purchase of goods for the purpose of resale or any commercial purpose does
not take the buyer a consumer under the Act.
Consumer Dispute6
It is a dispute where the person against whom a complaint has been made denies or
contests the allegation made in the application.
Defect7
It means any fault, imperfection or shortcoming in the quality, quantity, potency, purity,
or standard which is required to be maintained by under any law for the time being in
force under any contract expressed or implied or as is claimed by the trader in any
manner whatsoever in relation to any goods.
Deficiency8 [Sec. 22(1)(g)]
It means any fault, imperfection, shortcoming or inadequacy in the quality, nature and
manner of performance which is required to be maintained by or under any law for the
6 Sec.2 (1)(e) of the Consumer Protection Act, 1986
7 Sec.2 (1)(f) of the Consumer Protection Act, 19868 Sec.2 (1)(g) of the Consumer Protection Act, 1986
Page 137 of 274
time being in force or has been undertaken to be performed by a person in pursuance of a
contract or otherwise in relation to any service.
In other words deficiency means the goods supplied or services rendered are inadequate
in quality, nature and manner of performance which is required according to the terms of
contract or under law for the time being in force.
District Forum9
It means a Consumer Disputes Redressal Forum established under clause Sec. 9 (a).
Goods10 has the same meaning as provided for in the Sale of Goods Act, 1930.
Manufacturer11
It means a person who makes or manufactures any goods or assembles parts thereof or
does not make or manufacture any goods but assembles parts thereof made of or
manufactured by others and claims the end product to be manufactured by himself or puts
or causes to be put his own mark on any good made or manufactured by any other
manufacturer and claims such goods to be goods made or manufactured by him.
Member12
It includes the President and a member of the National Commission or a State
Commission or a District Forum as the case may be.
National Commission13
It means the National Consumer Disputes Redressal Commission established under Sec
9(c).
9 Sec.2 (1)(h) of the Consumer Protection Act, 198610 Sec.2 (1)(i) of the Consumer Protection Act, 198611 Sec.2 (1)(j) of the Consumer Protection Act, 198612 Sec.2 (1)(jj) of the Consumer Protection Act, 1986
13 Sec.2 (1)(k) of the Consumer Protection Act, 1986
Page 138 of 274
Person14
It includes a firm whether registered or not.
Hindu undivided family.
A cooperative society.
Every other association of persons whether registered under the Societies Registration
Act, 1860 or not.
Restrictive Trade Practices15
It means a trade practice which tends to bring about manipulations of price or its
conditions of delivery or to affect flow of supplies in the market relating to goods or
services in such a manner as to impose on the consumers’ unjustified costs or restrictions.
Service16
It means service of any description which is made available to potential users and
includes, but not limited to, the provision of facilities in connection with banking,
finance, insurance, transport, processing, supply of electrical or other energy, board or
lodging or both, housing construction, entertainment, amusement or the purveying of
news or other information but does not include the rendering of any service free of charge
or under a contract of personal service.
Unfair Trade Practice17
Any trade practice which has the intention of promoting sale, use or supply of any goods
or for the provision of any service and adopts any unfair method or unfair or deceptive practice is
called an unfair practice.
Check your progress 1
14 Sec.2 (1)(m) of the Consumer Protection Act, 198615 Sec.2 (1)(nnn) of the Consumer Protection Act, 198616 Sec.2 (1)(o) of the Consumer Protection Act, 198617 Sec.2 (1)(r) of the Consumer Protection Act, 1986
Page 139 of 274
Q. 1. Consumer must file a complaint under the Consumer Protection Act personally. (True/
False)
Q.2. A complaint can be filed for redressal in case of deficiency in goods as well as service.
(True/ False)
9.6 Consumer Protection Councils
The Central Government shall establish by notification a Council known as the Central
Consumer Protection Council and it shall be established from such date as specified in the
notification. It shall consist of the Minister in charge of the consumer affairs in the Central
Government, as its Chairman, and such other official or non official members representing such
interests as may be provided for.18
9.7 Procedure for meetings
The Central Council shall meet whenever required but at least once in a year. It shall meet
whenever the Chairman deems it fit at a place decided by him and shall observe the prescribed
procedure.19
9.8 Objects of the Central Council
The Central Council shall promote and protect the rights of the consumers like;
1. Protection against goods and services which are hazardous
2. Information and protection against unfair trade practices.
3. Assurance of competitive prices
4. Hearing and assurance of receiving due consideration
5. Seeking redressal against unfair practices.
9.9 The State Consumer Protection Councils
18 Sec. 4 of the Consumer Protection Act, 198619 Sec. 5 of the Consumer Protection Act, 1986
Page 140 of 274
The State Government shall establish by notification a Council known as the Consumer
Protection Council from such date as specified in the notification. It shall be consisting of the
Minister in charge of the consumer affairs in the State Government, who shall be its Chairman,
and shall also comprise of such other official or non official members representing such interests
as may be prescribed and nominated by the Central Government. However, this number shall not
exceed ten. The Council shall meet as and when required. It shall have at least two meetings in a
year and it shall meet at such time and place as the Chairman decides. It shall observe such
procedure as provided for by the State Government.20
9.10 The District Consumer Protection Council
The State Government shall establish, by notification, a District Consumer Protection Council in
each district of the State from the date as specified in the notification. It shall consist of the
Collector of the district, who shall be its Chairman and such number of other official and non
official members as provided for by the State Government. It shall meet as and when necessary
but at least twice in a year at such time and place as the Chairman may decide. It shall observe
such procedure as may be prescribed by the State Government.21
9.11 Consumer Disputes Redressal Agencies
The following agencies shall be established for the purposes of the Act:
1. Establish a Consumer Disputes Redressal Forum to be known as the District Forum. It
shall be established by a notification of the State Government for each district.
2. Establish a Consumer Disputes Redressal Commission to be known as the State
Commission. It shall be established in the State by notification.
3. The Central Government shall establish a National Consumer Disputes Redressal
Commission by notification22.
9.12 District Forum
9.12.1 Composition of the District Forum
20 Sec. 7 of the Consumer Protection Act, 198621 Sec. 8 & 8A of the Consumer Protection Act, 198622 Sec. 9 of the Consumer Protection Act, 1986
Page 141 of 274
Each District Forum shall consist of23:
1. A person who is or has been or is qualified to be a District Judge as President.
2. Two other members, one being a woman who is not less than thirty-five years of age,
possesses a bachelor’s degree and is a person of ability, integrity and standing and having
adequate knowledge and experience of at least ten years in dealing with problems relating
to economics, law, commerce, accountancy, industry, public affairs or administration.
A person shall, however, be disqualified for appointment as a member if he:
1. Has been convicted and sentenced to imprisonment for any offence which in the opinion
of the State Government amounts to moral turpitude.
2. Is an undischarged insolvent.
3. Is of an unsound mind as declared by the competent court.
4. Has such financial interest as is likely to affect prejudicially his functioning as a member.
5. Has any such disqualification as prescribed by the State Government.
The State Government shall make all the appointments on the recommendations of a selection
committee which shall comprise of the President of the State Commission who shall be its
Chairman, Secretary, Law Department of the State as Member and Secretary, In-charge of the
Department dealing with consumers of the State. When the President of the State is not able to
attend the Selection Committee, the State government may refer the matter to the Chief Justice of
the High Court for nominating a sitting judge of the High Court to act as a Chairman.
Every member of the District Forum shall hold office for a period of five years or up to the age
of sixty five years, whichever is earlier. A member shall be eligible for reappointment for
another term of five years or up to sixty- five years, whichever is earlier. However, it shall be
subject to the condition that he fulfills all the qualifications and other conditions for appointment.
A member may resign from his office in writing under his hand addressed to the State
Government and once this resignation is accepted, his office shall become vacant. It may be
filled by appointment of a person who has the required qualifications.
23 Sec. 10 of the Consumer Protection Act, 1986
Page 142 of 274
The State Government shall prescribe the salary or honorarium and other allowances payable to
and the other terms and conditions of service of the members of the District Forum. Moreover,
the State Government on the recommendations of the President of the State Commission shall
make appointment of the member on whole time basis taking into account all other factors as
may be prescribed, including the workload of the District Forum.
9.12.2 Jurisdiction of the District Forum
The District Forum shall have jurisdiction to entertain complaints subject to the condition that
the value of the goods or services and the compensation, if any, claimed does not exceed rupee
twenty lakhs. A complaint shall be instituted in a District Forum within the local limits of whose
jurisdiction the opposite party or all the opposite parties actually and voluntarily reside or carries
on business or has a branch office or personally works for gains or the District Forum gives
permission or the cause of action wholly or in part arises.24
9.12.3 Manner in which complaint shall be made
A complaint may be filed with the District Forum by the consumer in relation to any goods sold
or delivered or agreed to be sold or delivered or any service provided or agreed to be provided. It
can also be filed by any recognized consumer association irrespective of whether the consumer is
a member of this association or not. A complaint can also be filed by one or more consumers
with the permission of the District Forum on behalf of or for the benefit of all the consumers so
interested or the Central Government or the State Government as the case may be either in its
individual capacity or as a representative of interests of the consumers in general. Every
complaint shall be accompanied by such fee as required. The said fee shall be payable in such
form as may be prescribed and on such receipt, the District Forum may by order allow the
complaint to be proceeded with or rejected. However, a complaint cannot be rejected without
giving the complainant an opportunity of being heard. Ordinarily the complaint shall be decided
within twenty-one days from the date on which the complaint was received and once the
complaint has been admitted by the District Forum, it shall not be transferred to any other court
or tribunal or any authority set up by or under any law for the time being in force.25
24 Sec. 11 of the Consumer Protection Act, 198625 Sec.12 of the Consumer Protection Act, 1986
Page 143 of 274
9.12.4 Procedure on admission of complaint:
The District Forum shall on admission of a complaint, if it relates to any goods-
Refer a copy of the admitted complaint, within twenty one days from the date of its admission, to
the opposite party and direct him to give his version. This opposite party has to give its version
within thirty days or such extended period not exceeding fifteen days as may be granted by the
District Forum. The District Forum shall proceed to settle the dispute in case the opposite party
denies any dispute or omits or fails to take any action to represent his case within the time given
by it. Wherever the need is felt, the District Forum shall obtain sample of the goods from the
complainant, refer it to the appropriate laboratory along with a direction that such laboratory
make an analysis or test, whichever may be necessary for finding out whether such goods suffer
from any defect. The District Forum may require the complainant to deposit such fees as may be
specified before it refers the sample to the appropriate laboratory, and the same be remitted to the
appropriate laboratory on receipt of the report. If the correctness of the findings of the
appropriate laboratory is disputed by any party, the District Forum shall make the objections to
be put in writing. Parties are given a reasonable opportunity of being heard in this regard. For the
purposes of this Act, the District Forum has the same powers as are vested in the Civil Court
under the Code of Civil Procedure, 1908.26
9.12.5 Finding of the District Forum
If after conducting the proceeding, the District Forum is satisfied that the goods complained
against suffered from any of the defects specified in the complaint, it shall pass necessary
orders27-
For removing the defect
For replacing the goods
For returning the price to the complainant
For paying such amount as may be awarded as compensation
26 Sec. 13 of the Consumer Protection Act, 198627 Sec. 14 of the Consumer Protection Act, 1986
Page 144 of 274
For discontinuation with the unfair trade practices or the restrictive trade practices
For not offering hazardous goods for sale
For withdrawal of the hazardous goods from sale
For ceasing manufacture of hazardous goods
For payment of such sum as may be determined.
9.12.6 Appeal
Any person aggrieved by the orders of the District Forum may prefer an appeal with the State
Commission within a period of thirty days from the date of the order, in the prescribed. An
appeal can be entertained by the State Commission after the expiry of thirty days if it is satisfied
that there is sufficient cause for not filing the appeal within the given period. However, the State
Commission shall not entertain any such appeal where the appellant is to deposit any amount in
terms of the orders of the District Forum and has not deposited fifty per cent of the said amount
or twenty five thousand rupees whichever is less.28
Check your progress 2
Q. 3. President of a District Forum should be a person who is or has been or is eligible to be a
District Judge. (True/ False)
Q. 4. A District Forum has the jurisdiction to try complaints where the value of the goods or
services and the compensation claimed does not exceed rupees twenty lakhs. (True/ False)
9.13 State Commission
9.13.1 Composition of the State Commission
Each State Commission shall consist of a President and not less than two and not more than such
members as prescribed and one of them shall be a woman. The President shall be a person who is
or has been a Judge of a High Court and will be appointed by the State Government. However
28 Sec. 15 of the Consumer Protection Act, 1986
Page 145 of 274
appointments shall be made only after consultation with the Chief Justice of the High Court.
Members shall have the following qualifications29-
Member should not be less than thirty five years of age
Possess a bachelor’s degree from a recognized university
He is a person of ability, integrity and standing and having adequate knowledge and
experience of at least ten years in dealing with problems relating to economics, law,
commerce, accountancy, industry, public affairs or administration.
Fifty per cent of the members shall be from people with judicial background.
A person shall, however, be disqualified for appointment as a member if he:
Has been convicted and sentenced to imprisonment for any offence which in the opinion
of the State Government amounts to moral turpitude.
Is an undischarged insolvent.
Is of an unsound mind as declared by the competent court.
Has been removed or dismissed from the service of the Government or a body corporate
owned or controlled by the Government
Has such financial interest as is likely to affect prejudicially his functioning as a member.
Has any such disqualification as prescribed by the State Government.
Every member of the State Commission shall hold office for a term of five years or up to
the age of sixty five years, whichever is earlier. A member shall be eligible for
reappointment for another term of five years or up to sixty- five years, whichever is
earlier, subject to the condition that he fulfills all the qualifications and other conditions
for appointment. A President is also eligible for reappointment.
9.13.2 Jurisdiction of the State Commission
A State Commission shall have jurisdiction to entertain complaints where the value of the goods
or services and compensation, if any, claimed exceeds twenty lakh rupees but does not exceed
rupees one crore and also entertains appeals against the orders of the District Forum within the
29 Sec. 16 of the Consumer Protection Act, 1986
Page 146 of 274
State. It can call for the records and pass any orders in any consumer dispute pending before or
decided by the District Forum.30
9.13.3 Procedure applicable to State Commission
The provisions related with the disposal of complaints by the Consumer Forum shall, with such
modifications, be applicable to the disposal of disputes by the State Commission.31
9.13.4 Appeal
Any person aggrieved by the order of the State Commission may prefer an appeal against such
order with the National Commission within a period of thirty days from the date of the order in
such form and manner as may be prescribed. National Commission may entertain any such
appeal even after the expiry of the said period if it feels that the appellant was prevented by
sufficient cause to do so within the specified time. However, the National Commission shall not
entertain any such appeal where the appellant is to deposit any amount in terms of the orders of
the State Commission and has not deposited fifty per cent of the said amount or thirty five
thousand rupees whichever is less.32
9.13.5 Hearing of appeal
An appeal before the State Commission or the National Commission shall be heard as soon as
possible and an endeavour should be to dispose of the appeal within a period of ninety days from
the date of its admission. No adjournment shall ordinarily be granted by the State Commission
unless there is sufficient cause and the same is to be recorded in writing.33
Check your progress 3
Q. 5. Jurisdiction of the State Commission to try complaints is for the goods or services and
compensation claimed value exceeds rupees twenty lakhs but does not exceed rupees one crore.
(True/ False)
30 Sec. 17 of the Consumer Protection Act, 198631 Sec. 18 of the Consumer Protection Act, 198632 Sec. 19 of the Consumer Protection Act, 1986
33 Sec. 19-A of the Consumer Protection Act, 1986
Page 147 of 274
Q. 6. Any person aggrieved by the order of the State Commission can file an appeal in the
National Commission within thirty days from the date of the order. (True/ False)
9.14 National Commission
9.14.1 Composition of the National Commission
The National Commission shall consist of a person who is or has been a Judge of the Supreme
Court, appointed by the Central Government, who shall be its President, provided that no
appointment shall be made except after consultation with the Chief Justice of the Supreme Court.
It shall have not less than four members and not more than such members as prescribed and one
of them shall be a woman, and they shall have the following qualifications34-
Member should not be less than thirty five years of age
Possess a bachelor’s degree from a recognized university
Is a person of ability, integrity and standing and having adequate knowledge and experience of at
least ten years in dealing with problems relating to economics, law, commerce, accountancy,
industry, public affairs or administration.
Fifty per cent of the members shall be from amongst persons having judicial background.
A person shall, however, be disqualified for appointment as a member if he:
Has been convicted and sentenced to imprisonment for any offence which in the opinion of the
State Government amounts to moral turpitude.
Is an undischarged insolvent.
Is of an unsound mind as declared by the competent court.
Has been removed or dismissed from the service of the Government or a body corporate owned
or controlled by the Government
Has such financial interest as is likely to affect prejudicially his functioning as a member.
34 Sec. 20 of the Consumer Protection Act, 1986
Page 148 of 274
Has any such disqualification as prescribed by the State Government.
Every member of the State Commission shall hold office for a term of five years or up to the age
of sixty five years, whichever is earlier. A member shall be eligible for reappointment for
another term of five years or up to seventy years, whichever is earlier, subject to the condition
that he fulfills all the qualifications and other conditions for appointment. A President is also
eligible for reappointment.
9.14.2 Jurisdiction of the National Commission
A State Commission shall have jurisdiction to entertain complaints where the value of the goods
or services and compensation, if any, claimed exceeds rupees one crore and also entertains
appeals against the orders of any State Commission. It can call for the records and pass any
orders in any consumer dispute pending before or decided by any State Commission.35
9.14.3 Appeal
Any person aggrieved by the order of the National Commission in the exercise of its powers
conferred may prefer an appeal against such order in the Supreme Court within a period of thirty
days and the Supreme Court may entertain an appeal even after the lapse of thirty days if it is
satisfied that there is enough justification for the delay in filing such appeal.36
Limitation Period
The District Forum, the State Commission or the National Commission shall not admit a
complaint unless it is files within two years of the arising of the cause of action. They may
however entertain a complaint after the lapse of the period if they feel that a sufficient reason
exists, but they have to record reasons for condoning such delay.37
9.14.4 Dismissal of frivolous or vexatious claim
Whenever any frivolous or vexatious complaint is filed before the District Forum, the State
Commission or the National Commission, it shall dismiss the complaint after recording reasons
35 Sec. 21 of the Consumer Protection Act, 198636 Sec. 23 of the Consumer Protection Act, 198637 Sec. 24-A of the Consumer Protection Act, 1986
Page 149 of 274
for the same and make an order that the complainant shall pay to the opposite party cost not
exceeding ten thousand rupees, as may be specified in the order.38
9.14.5 Protection of action taken in good faith
No suit, prosecution or other legal proceeding shall lie against the members of the District
Forum, the State Commission or the National Commission for any action taken in good faith by
them.39
9.15 Summary
Due to development in the international trade and industrial revolution, international trade and
commerce have expanded to a large extent. Because of this market has become very wide and all
this has promoted consumerism. It all has resulted in imperfect knowledge among the consumers
and on the other side a well organized sector of manufacturers and traders having better
knowledge of markets. This resulted in asymmetric information in the market. In these imperfect
kind of markets, advertisements of goods and services through different mediums influence the
demand of the commodities by the consumers about which they have a little knowledge, there
may be manufacturing defects or any other imperfections in the commodities concerned. At the
same time there are adulterated and substandard articles in the market. To check these practices
and to protect the right of consumers and providing for stringent action against adulterated and
sub standard articles in the different enactments like Code of Civil Procedure,1908, the Indian
Contract Act, 1872, the Indian Penal Code, 1860, the Standards of Weights and Measures Act,
etc. very little could be achieved in the field of consumer protection. So to protect the consumers
from exploitation and to safeguard their interests, the Consumer Protection Act, 1986 has been
enacted.
9.16 Glossary
Act: The Consumer Protection Act, 1986.
District Forum: Consumer Disputes Redressal Forum.
Jurisdiction: Area falling under control.
38 Sec. 26 of the Consumer Protection Act, 198639 Sec. 28 of the Consumer Protection Act, 1986
Page 150 of 274
National Commission: National Consumer Disputes Redressal Commission.
Notification: A notification published in the Official Gazette.
State Commission: State Consumer Disputes Redressal Commission.
9.17 Answers to Check your Progress: 1-False, 2-6- True.
9.18 References:
The Consumer Protection Act, 1996.
Harpal Kaur Khera, Law in India Emerging Trends, Publication Bureau, Punnjabi
University, Patiala.
9.19 Terminal and Model Questions
Q1. Discuss the District Forum under the Consumer Protection Act, 1986.
Q.2. Discuss the composition and jurisdiction of a State Commission and how can an appeal be
filed by any person aggrieved by its orders.
Q. 3. Critically analyze the Consumer Protection Act, 1986.
Page 151 of 274
1
LESSON 10
RIGHT TO INFORMATION ACT, 2005
Structure
10.1 Objectives
10.2 Introduction
10.3 International Scenario
10.4 Indian Scenario
10.5 Right to Information Act, 2005: An Introduction
10.6 Salient Features of RTI Act, 2005.
10.7 Public Authority
10.8 Obligations of Public Authority & Designation of PIOs
10.9 Request for Obtaining Information
10.10 Disposal of Request for Obtaining Information
10.11 Exemption from Disclosure of Information
10.12 Severability
10.13 Third Party Information
10.14 The Central Information Commission
10.15 The State Information Commission
10.16 Powers and Functions of the Information Commissions, Appeal and Penalties
10.17 Summary
10.18 Glossary
Page 152 of 274
2
10.19 Answers to check your progress
10.20 References
10.21 Terminal and Model questions
10.1 Objectives
After reading this lesson, you will be able to:
Define RTI Act, 2005.
Explain the important features of RTI Act, 2005
Understand the powers and function of information commissions.
10.2 Introduction
Transparency and accountability are hallmark of any good democratic system. They are, in fact,
the backbone of a democracy. Whenever a government is transparent, it ensures a greater
accountability and thus reduces the levels of corruption. There is a presumption that whatever is
done by the government is done for the betterment of the people. A government which is not
open may be tempted to commit administrative misconduct. An open government on the other
hand ensures reduction in the number of administrative faults. According to Justice P.N.
Bhagwati, “open government is new democratic culture of an open society towards which every
liberal society is moving and our society is no exception”. Informed citizenry is an essential pre -
requisite for bringing about transparency in governance and the same is possible only if there is
easy access to information. Freedom of Information Acts is accordingly becoming standard good
practice at the international level. Right to information generally means the right of citizens to
access the information which is in the possession of the public authorities. Access to information
empowers the citizens and allows them to participate in the governance process. Information also
empowers them to make more meaningful decisions, form informed opinions and influence the
policies affecting the society.
10.3 International Scenario
Page 153 of 274
3
Efforts to promote the freedom of information go way back to 1893. It was then that a number of
International Conventions of Journalists had been held at different places, but nothing concrete
was achieved.
United Nations convened a Conference at Geneva in March 1948 on the subject matter of
Freedom of Information. This Conference was attended by fifty four countries. A series of
resolutions were passed for further consideration by the United Nations. It ultimately led to the
United Nations General Assembly declaring Freedom of Information a fundamental human right.
Article 19 of the Universal Declaration of Human Rights declares:
Everyone has right to freedom of opinion and expression; the right includes
freedom to hold opinion without interference and to seek, receive and import
information and ideas through media and regardless of frontiers.
In 1948, Sweden went on to become the first country to enact a provision for access to official
information for the citizens. The Economic and Social Council of the United Nations adopted a
derivative from Article 19 of the Universal Declaration of Human Rights in the year 1960.
The United States of America followed the Swedish example in 1966 and in 1970 Norway
enacted the Right to Information Law. The number of countries having the Freedom of
Information laws climbed to 13 and by 2010, 85 countries, including major developing countries
like India and China had enacted national level Right to Information laws.
10.4 Indian Scenario
Justice P B Sawant, the Chairman of the Press Council of India and the Institute of Rural
Development, Hyderabad prepared their respective drafts of the Right to Information Bill in
1996 and 1997 respectively. This resulted in the initiation of a debate for effective and
responsive government. This forced the Government of India to appoint a Working Group on
January 2, 1997 which was to dwell upon the necessity and possibility of enacting a Right to
Information Bill.
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The Working Group was of the conclusion that the Right to Information had already been made
effective by virtue of Article 19 (1) (a) of the Constitution of India which guarantees the right to
freedom of speech and expression. Accordingly, the Freedom of Information Bill, 2000 was
introduced in the Lok Sabha on 25th July, 2000. The Bill was enacted as the Freedom of
Information Act in 2002, but the Act retained a number of restrictive provisions resulting in the
denial of information to the public.
The new Right to Information Bill, having a wider scope, but subject to reasonable restrictions
was introduced in May, 2005. The Right to Information Act, 2005 extends to the whole of India
except the State of Jammu and Kashmir. The Act came partially into force on 15th June, 2005
and into full force on 12th October, 2005 (120th day of its enactment).
10.5 Right to Information Act, 2005: An Introduction
At the very outset, the Preamble of the Right to Information Act, 2005 states:
An Act to provide for setting out the practical regime of right to information
for citizens to secure access to information under the control of public
authorities, in order to promote transparency and accountability in the working
of every public authority, the constitution of a Central Information Commission
State Information Commissions and for matters connected therewith or incidental
thereto.
Check your progress 1:
1. RTI ensures good governance. (True/ False)
2. In certain circumstances RTI proves to be a hindrance in corrupt activities. (True/
False)
10.6 Salient Features of the Right to Information Act, 2005.
Preliminary:
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The Right to Information Act, 2005 is thus a special legislation imposing obligations on every
public authority to provide information to the person asking for it.
10.7 'Public authority’ under the Act has been defined as any authority or body or institution of
self- government established or constituted by or under the Constitution; by any other law made
by Parliament; by any other law made by State Legislature; by notification issued or order made
by the appropriate government and includes any- body owned, controlled or substantially
financed; non-Governmental Organization substantially financed directly or indirectly by funds
provided by the appropriate Government.1
‘Information’ has been defined as any material in any form, including records, documents,
memos, e-mails, opinions, advices, press releases, circulars, orders, logbooks, contracts, reports,
papers, samples, models, data material held in any electronic form and information relating to
any private body which can be accessed by a public authority under any other law for the time
being in force.2
All citizens have the right to information subject to the conditions laid down in the Act.
10.8 Obligations of Public Authorities:
The Act states that every public authority is under obligation to maintain all its records duly
catalogued and indexed and wherever possible, subject to availability of resources, the same be
computerized within a reasonable time and connected through a network all over the country on
different networks to facilitate their access. They were also required to publish within one
hundred and twenty days from the making of the Act, the particulars of the organization, their
functions and duties; the powers and duties of Public Information Officers; the names,
designations and other particulars of the Public Information Officers. It mandates that the
designation of Public Information Officer is to be done within one hundred days. Every public
authority is also required to designate as many officers as Central Public Information or the State
Public Information Officers, as the case may be. This has to be done in all administrative units or
offices under it as may be necessary. Every public authority will also designate an officer at each
sub-divisional level or other sub-district level as Central Assistant Public Information Officer or
1 Section 2 (h) of the Right to Information Act, 20052 Section 2 (f) of the Right to Information Act, 2005
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the State Assistant Public Information Officer, as the case may be, to receive the applications for
information or appeals under this Act. The Central Public Information Officer or the State Public
Information Officer can if need be seek the assistance of any other officer for the discharge of his
duties and such officer shall be treated as Central Public Information Officer or the State Public
Information Officer as the case may be.3
10.9 Request for Obtaining Information:
Anybody desirous of seeking information under the Act has to make a request in writing or
through electronic means declaring the particulars of the information required by him in English,
Hindi or in the official language of the area where the information is being sought along with
such fee as may be specified to the Central Public Information Officer or the State Public
Information Officer as the case may be. No reason is to be given for seeking the information nor
are any personal details required to be given. However information necessary for contacting the
person seeking information is to be given. Whenever an application is made seeking information
and the same is in possession of another authority or the subject matter falls in the domain of
another authority, the authority to whom the request for information is given, will pass on the
request to such authority in a maximum period of five days from the date such request had been
received and information is also sent to the person seeking such information about such transfer.4
10.10 Disposal of request for information:
The Central Public Information Officer or the State Public Information Officer are under an
obligation to dispose of this request for information as soon as possible, but not later than thirty
days from the date such request was received, either by giving the information asked for on
payment of prescribed fee or denying the same for the reasons as provided for in sections 8 and 9
of the RTI Act, 2005. Wherever life and liberty of a person is involved, the information
requested for is to be provided in 48 hours of receiving any such request. In case of failure on the
part of the Central Public Information Officer or the State Public Information Officer as the case
may be, to give a decision on the request for information within the stipulated time, the Central
3 Section 4&5 of the Right to Information Act, 2005
4 Section 6 of the Right to Information Act, 2005
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Public Information Officer or the State Public Information Officer, as the case may be, shall be
considered as refusal to the request.5
Once a decision has been taken for further fees to be paid towards the cost of providing
information, Central Public Information Officer or the State Public Information Officer, as the
case may be, shall send an information of the fee required and the calculations on the basis of
which the amount required was reached. The period taken for the dispatch of the said intimation
and payment of fees shall not be included in the calculation of period of thirty days during which
this information is to be provided. The right of the applicant with regard to review of the decision
as to the amount of fees charged or the way in which it can be accessed, etc. will also be
provided to the applicant.6
When a decision has been taken to provide information with regard to any record or a part
thereof to a person who is sensorily disabled, Central Public Information Officer or the State
Public Information Officer, as the case may be shall provide assistance to make access to the
Information possible, along with such assistance that may be reasonable for the inspection.
However, where the person seeking information falls below the poverty line, as determined by
the appropriate government, no fee shall be charged from him for providing the information.
Information shall also be provided free of cost in cases where a public authority does not provide
the information within the specified time period. Where an application for information has been
turned down, the Central Public Information Officer or the State Public Information Officer as
the case may be shall also communicate to the person requesting for information the reasons for
such refusal; the time within which an appeal against such rejection can be made; and the
particulars of the appellate authority.7
10.11 Exemption from disclosure of information:
There shall no obligation to give any citizen information, which prejudicially affects the
sovereignty and integrity of India, its security, strategic, scientific or economic interests and
relation with a foreign State or lead to incitement of an offence. Any information which is
5 Section 7 of the Right to Information Act, 20056 Id.7 Id.
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forbidden by any court of law or tribunal or which may constitute contempt of court or the giving
of which would cause a breach of privilege of Parliament or State Legislature cannot be given.8
Information will also be not provided in those cases where commercial confidence, trade secrets
or intellectual property, the disclosure of which will adversely affect the third party’s competitive
position unless the competent authority is satisfied that larger public interest warrants such
disclosure. No information is provided where information is available to a person in his fiduciary
relationship, unless the competent authority feels that public interest warrants giving of such
information. Similarly, no information is given which is received in confidence from a foreign
government or the disclosure of which would endanger the life or physical safety of any person
or identify the source of information or assistance given in order to help law enforcement or
security purposes or creates hurdles in the process of investigation or apprehension or
prosecution of offenders.9
Information pertaining to cabinet papers including the records of deliberations of the Council of
Ministers, Secretaries and other officers will not be given till the decision has been taken and the
matter is complete.Information is not provided if it relates to personal information and its
disclosure of has no relationship to any public activity or interest and would cause unwarranted
breach of privacy. However, if the concerned authority feels that larger public interest justifies its
disclosure, it may be given.Public authority may allow access to information in contravention of
what the Official Secrets Act, 1923 says if it is of the opinion that the public interest in
disclosure is much higher than the harm it is going to cause to the protected interest.A Central
Public Information Officer or State Public Information Officer may also refuse to give any
information which it feels may result is infringement of copyright subsisting in a person other
than the State.10
10.12 Severability:
When the information is rejected on grounds of any exemption from disclosure, that part of the
information may be given which does not fall within any exemption and can be easily severed
from rest of the information. The Central Public Information Officer or State Public Information
8 Section 8 of the Right to Information Act, 20059 Id.10 Id.
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Officer, as the case may be, will inform the applicant about any severance, the reasons for such
severance, the name and designation of the person who has taken this decision and the amount of
fee charged or the form of access provided, etc. in case any such part of the information has been
given.11
10.13 Third Party Information:
Whenever any request for third party information is received and the Central Public Information
Officer or State Public Information Officer, as the case may be, intends to give a third party
information, a written notice has to be given to such third party about the request and the fact
that the Central Public Information Officer or State Public Information Officer, or as the case
may intends to disclose the information or record, or part thereof.12
Third party which is affected by the said request and the decision has the opportunity to make a
representation against the proposed disclosure within ten days from the date of the receipt of
such notice. The Central Public Information Officer or State Public Information Officer, as the
case may be are required to give a decision within forty days after the request has been received
as to whether or not to disclose the said information, or record or part thereof. It also has to give
a written notice of this decision to the third party along with the statement that the third party can
prefer an appeal against the said order.13
Check you progress 2:
Q.3 Third party information can be given under the RTI Act. (True/ False)
Q.4. In certain cases the Public Authority can deny disclosure of information. (True/ False)
11 Section 10 of the Right to Information Act, 200512 Section 11 of the Right to Information Act, 200513 Id
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10.14 The Central Information Commission
Constitution:
The Central Information Commission is a body constituted by the Central Government by
notification in the Official Gazette. It is to exercise the powers conferred and perform the
functions assigned to it under the Act. It shall comprise of the Chief Information Commissioner
and such number of Central Information Commissioners may be deemed necessary. However
this number will not in any case exceed ten. They shall be appointed by the President on the
recommendations of a Committee which will be consisting of the Prime Minister, who shall be
the Chairperson of the Committee; the Leader of Opposition in the Lok Sabha; and a Union
Cabinet Minister to be nominated by the Prime Minister. In case where the Leader of the
Opposition in the House of People has not been recognized, the Leader of the single largest
group in opposition of the Government in the House of People shall be deemed to be the Leader
of the Opposition.14
The Chief Information Commissioner shall be vested with the general superintendence, direction
and management of the affairs of the Central Information Commission and the Information
Commissioners shall assist him and may exercise all such powers and do all such acts as may be
exercised by the Central Information Commission autonomously. They will not be subject to
directions by any other authority under the Act. Only persons of eminence in public life having
wide knowledge and experience in law, science and technology, social service, management,
journalism, mass media or administration and governance shall be appointed as the Chief
Information Commissioner and the Information Commissioners. However, a person who
happens to be a Member of Parliament or Member of the Legislature of any State or Union
Territory, as the case may be or hold any office of profit or connected with any political party or
carrying any business or pursuing any profession shall not be so appointed. Delhi shall be the
headquarters of the Central Information Commission, but it may establish offices at other places
in India with the previous approval of the Central Government.15
Term of office and conditions of service:
14 Section 12 of the Right to Information Act, 200515 Id
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The term of the office of the Chief Information Commissioner shall be five years from the date
on which he enters office or the time till he attains the age of sixty five years. He shall, however,
not be eligible for reappointment. As far as the Information Commissioner is concerned, he shall
hold office for a term of five years from the date on which he enters office or till he attains the
age of sixty five years. He shall not be eligible for reappointment. However, he shall be eligible
for appointment as Chief Information Commissioner on the condition that his term of office shall
not be more than five years in aggregate as the Information Commissioner and the Chief
Information Commissioner. The Chief Information Commissioner and the Information
Commissioners have to take an oath or affirmation before the President or any other person
appointed by him in that behalf before entering their office. This is done according to the form
set out for the purpose in the First Schedule.The Chief Information Commissioner and the
Information Commissioners may leave office any time by tendering a written resignation
addressed to the President. They can also be removed as per the provisions of Section 14 of the
RTI Act, 2005. The Chief Information Commissioner shall be governed by the same terms and
conditions as those of the Chief Election Commissioner for his salary and allowances and other
terms of services. As far as the Information Commissioners salary allowances and other terms of
conditions of service are concerned, they shall be similar to those of the Election Commissioners.
In case they are in receipt of any pension, the same shall be deducted from their salary. However,
their salaries, allowances and other conditions of service shall not be varied to their
disadvantage. The Central Government shall provide such officers and employees as may
required for performing their functions efficiently on such terms and conditions as may be
prescribed to the Chief Information Commissioner and the Information Commissioners.16
Removal of Chief Information Commissioner and the Information Commissioners:
Chief Information Commissioner and the Information Commissioners may be removed from
office only by order of the President on the ground of proved misbehavior or incapacity. This can
be done only after the Supreme Court, on a reference made to it by the President, conducts an
inquiry and reports that the Chief Information Commissioner or any Information Commissioner,
as the case may be, should on such ground be removed. The President may, during the pendency
of any enquiry against the Chief Information Commissioner or the Information Commissioner
16 Section 13 of the Right to Information Act, 2005
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against whom any reference has been made to the Supreme Court suspend from office or prohibit
such person from attending the office till he passes order after receiving the report of the
Supreme Court. Apart from this, the Chief Information Commissioner or the Information
Commissioner, as the case may be can also be removed by the President if adjudged insolvent or
has been convicted of an offence which involves moral turpitude or engages during his term of
office in any paid employment outside the duties of his office or unfit to continue in office by
reason of infirmity of mind or body or has acquired such financial interest as is likely to affect
prejudicially his functions as the Chief Information Commissioner or an Information
Commissioner. The Chief Information Commissioner or an Information Commissioner shall
deemed to be guilty of misbehavior if they are concerned with or are interested in any contract or
agreement made by or on behalf of the Government of India or participates in any way in the
profit thereof. However, they are not adversely affected if they make any profit as a member and
in common with the other members of an incorporated company.17
10.15 The State Information Commission
Constitution:
A State Information Commission shall be constituted by notification in the Official Gazette as
…(Name of the State) Information Commission to exercise the powers conferred and to perform
the assigned functions under the Act. It shall comprise of the State Chief Information
Commissioner and such number of State Information Commissioners as may be deemed
necessary. However, this number shall not exceed ten. The Governor appoints them on the
recommendations of a Committee consisting of the Chief Minister, who shall be the Chairperson
of the Committee; the Leader of Opposition in the Legislative Assembly; and a Cabinet Minister
to be nominated by the Chief Minister. In case where the Leader of the Opposition in the
Legislative Assembly has not been recognized, the Leader of the single largest group in
opposition of the Government in the Legislative Assembly shall be deemed to be the Leader of
the Opposition. The State Chief Information Commissioner shall be vested with the general
superintendence, direction and management of the affairs of the State Information Commission.
The State Information Commissioners shall assist him and may exercise all such powers and do
17 Section 14 of the Right to Information Act, 2005
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13
all such acts as may be exercised by the State Information Commission autonomously. They will
not be subject to directions by any other authority under the Act. Only persons of eminence in
public life having wide knowledge and experience in law, science and technology, social service,
management, journalism, mass media or administration and governance shall be appointed as the
State Chief Information Commissioner and the State Information Commissioners. They shall,
however, not be a Member of Parliament or Member of the Legislature of any State or Union
Territory, as the case may be. They shall also not hold any office of profit or connected with any
political party or carrying any business or pursuing any profession. The State Information
Commission shall have its headquarters at such place in the State as the State Government by
notification in the Official Gazette specify. It may also with the previous approval of the State
Government establish offices at other places in the State.18
Terms of office and conditions of service:
The term of office of the State Chief Information Commissioner shall five years from the date
on which he enters office or till he reaches the age of sixty five years. He shall not be eligible for
reappointment. Similarly the term of office of every State Information Commissioner shall be
five years from the date on which he enters office or till he attains the age of sixty five years. He
shall not be eligible for reappointment. However, he shall be eligible for appointment as State
Chief Information Commissioner on the condition that his term of office shall not be more than
five years in aggregate as the Information Commissioner and the Chief Information
Commissioner. The State Chief Information Commissioner and the State Information
Commissioners have to take an oath or affirmation before the Governor or any other person
appointed by him in that behalf according before entering their office. The same has to be in
consonance with the form set out for the purpose in the First Schedule. The State Chief
Information Commissioner and the State Information Commissioners may relinquish office by
resigning at any time by writing addressed to the Governor. They can also be removed as per the
provisions of Section 17 of the RTI Act, 2005. The salary and allowances and other terms of
services of the State Chief Information Commissioner shall be same as that of the Election
Commissioner while that of the State Information Commissioners shall be similar to those of the
Chief Secretary to the State. In case they are in receipt of any pension, the same shall be
18 Section 15 of the Right to Information Act, 2005
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14
deducted from their salary. However, their salaries, allowances and other conditions of service
shall not be changed to their disadvantage. Such officers and employees as may required shall be
provided by the State Government to the State Chief Information Commissioner and the State
Information Commissioners for performing their functions efficiently. These officers and
employees shall be appointed on such terms and conditions as may be prescribed.19
Removal of Chief Information Commissioner and the Information Commissioners:
The Governor can remove the State Chief Information Commissioner and the State Information
Commissioners from office only by order of on the ground of proved misbehavior or incapacity
only after the Supreme Court, on a reference made to it by the Governor, has conducted an
inquiry and reported that the State Chief Information Commissioner or any State Information
Commissioner, as the case may be, need to be removed on such grounds. The State Chief
Information Commissioner or the State Information Commissioner may also suspend from office
or prohibited from attending the office by the Governor during the pendency of inquiry in respect
of the person against whom a reference has been made to the Supreme Court till the Governor
passes orders based on the report received from the Supreme Court. The Governor can also
remove the State Chief Information Commissioner or the State Information Commissioner, as
the case may be if adjudged insolvent or has been convicted of an offence which involves moral
turpitude or engages during his term of office in any paid employment outside the duties of his
office or unfit to continue in office by reason of infirmity of mind or body or has acquired such
financial interest as is likely to affect prejudicially his functions as the State Chief Information
Commissioner or State Information Commissioner. The State Chief Information Commissioner
or a State Information Commissioner will be considered guilty of misbehavior if concerned or
interested in any contract or agreement which is made by the Government of the State or on their
behalf or participates in any way in the profit thereof. They will however not be adversely
affected if they make profit as a member and in common with the other members of an
incorporated company.20
10.16 Powers and Functions of the Information Commissions, Appeal and Penalties
19 Section 16 of the Right to Information Act, 200520 Section 17 of the Right to Information Act, 2005
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Powers and functions of Information Commission:
The Central Information Commission or the State Information Commission, as the case may be,
is duty bound to receive and inquire into a complaint made in consonance with the provisions of
the RTI Act from any person who- has not been able to submit a request to a Central Information
Officer or State Public Information Officer as the case may be as no person has been appointed
as such under the Act. It could also be due to refusal by Central Assistant Public Information
Officer or State Assistant Public Information Officer, as the case may be to accept his or her
application for information or appeal under this Act for forwarding the same to the Central
Public Information Officer or State Public Information Officer or Senior Officer or the Central
Information Commission or the State Information Commission as the case may be; has been
denied access to any information requested under this Act; or no response has been given to a
request for information or access to information within the time limits specified; or according to
him/ her has been asked to pay an unreasonable amount of fee; or believes that incomplete,
misleading or false information has been provided; An inquiry into any matter may be initiated
by the Central Information Commission or State Information Commission as the case may be if
it is satisfied that there are reasonable grounds to inquire into the matters. In doing so, it shall
have the same powers as are vested in a civil court while trying a suit under the Code of Civil
Procedure, 1908 with regard to summoning and enforcing the attendance of persons and compel
them to give oral or written evidence on oath and to produce the documents or things; requiring
the discovery and inspection of documents; receiving evidence on affidavit; requisitioning any
public record or copies thereof from any court or office; issuing summons for examination of
witnesses or documents. During the inquiry of any complaint under the Act, the Central
Information Commission or State Information Commission may examine any record to which
the Act applies and is under the control of the public authority. No such record may be withheld
from it on any grounds irrespective of anything inconsistent contained in any other Act.21
Appeal:
An appeal can be made within thirty days from the expiry of the stipulated period or from the
day on which the decision has been received by any person who does not receive a decision
21 Section 18 of the Right to Information Act, 2005
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within the stipulated time as provided for in the Act or is aggrieved by a decision of the Central
Public Information Officer or the State Public Information Officer, as the case may be. He can
file an appeal to such officer who is senior in rank to the Central Public Information Officer or
the State Public Information Officer, as the case may be, in each public authority. Such an appeal
can also be admitted by the said officer after the expiry of the period of thirty days if according
to him/her the appellant had a reasonable ground for not filing the appeal in time. In case the
appeal relates to disclosure of third party information, the appeal can be made within thirty days
from the date of the order by the concerned third party. A second appeal lies within ninety days
from the date on which the decision should have been made or was actually received. An appeal
may be admitted even after the expiry of the period of ninety days if the Central Information
Commission or State Information Commission, as the case may be, feels that there was sufficient
cause preventing the appellant from filing an appeal within the stipulated time. The Central
Public Information Officer or the State Public Information Officer, as the case may be will give a
reasonable opportunity of being heard to the third party, if an appeal preferred relates to the
decision of the Central Public Information Officer or the State Public Information Officer, as the
case may be, regarding the third party information. In any appeal proceedings regarding any
request having been denied, the onus is on the Central Public Information Officer or the State
Public Information Officer, as the case may be, to prove that such denial of request was justified.
An appeal is to be disposed of within thirty days of the receipt of an appeal or within such
extended period, not exceeding a total of forty five days from the date of filing of an appeal.
Reasons for the same are to be recorded in writing and the decision of the Central Information
Commission or State Information Commission, as the case may be, shall be binding.
In its decision, the Central Information Commission or State Information Commission, as the
case may be, can make any public authority to take such steps as may be necessary to secure
compliance under the Act by providing access to information; appointing Central Public
Information Officer or the State Public Information Officer, as the case may be; publishing
information; making necessary changes with regard to maintenance, management and
destruction of records; enhancing training of its officials and providing an annual report. It may
also require compensation to be paid by the public authority to the complainant for any loss or
detriment. It may also impose any of the penalties under the Act or reject the application. The
Central Information Commission or State Information Commission, as the case may be, is
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required to give notice of its decision, including any right of appeal to both complainant and the
public authority. It shall decide the appeal in accordance with the prescribed procedure.22
Penalties:
In case the Central Information Commission or State Information Commission, as the case may
be, feel that the Central Public Information Officer or the State Public Information Officer, as the
case may be, have been unjustified in denial of information or have acted in a malafide manner,
it shall impose a penalty of two hundred and fifty rupees each day till application is received or
information is furnished. However, the total amount of such penalty shall not exceed twenty five
thousand rupees. Central Public Information Officer or the State Public Information Officer, as
the case may be, shall be given a reasonable opportunity of being heard and the burden of
proving that he acted reasonably and diligently lies on the Central Public Information Officer or
the State Public Information Officer, as the case may be. Central Public Information Officer or
the State Public Information Officer, as the case may be, shall also be liable for disciplinary
action under the service rules applicable to him for any malafide on his part.23 However, no suit,
prosecution or other legal proceeding shall lie against any other person for anything which is
done in good faith.24
10.17 Summary
In a democratic set up, accountability and transparency are the two major hallmarks. We can say
that these two are backbones of a good democratic system and the Right to Information Act is
merely an instrument that lays down certain legal procedures to ensure transparency and
accountability in the working of a democratic system. If this Act properly implemented, it will
result in eradication of corruption and will enhance accountability and good governance.
10.18 Glossary:
CIC- Central Information Commission
SIC- State Information Commission
RTI- Right to Information Act, 2005
22 Section 19 of the Right to Information Act, 200523 Section 20 of the Right to Information Act, 200524 Section 21 of the Right to Information Act, 2005
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10.19 Answers to check your progress: All statements in check your progress 1 and 2 are true
10.20 References:
Universal’s The Right to Information Act, 2005.
Law In India Emerging Trends, Publication Bureau, Punjabi University, Patiala.
Understanding Contemporary Issues in India, Civil Services Times.
10.21 Terminal and Model Questions:
1. What is the relevance of Right to Information Act, 2005 in the India scenario?
2. Discuss the role of Central Information Commission in upholding the spirit of the Right
to Information Act, 2005.
3. Discuss the composition of the State Information Commission and the terms and
conditions of service of its members.
4. Critically analyze the working of the Right to Information Act, 2005.
5. Discuss in detail the procedure for taking third party information and what are the
circumstances in which it cannot be furnished? Are there any exceptions thereto?
6. What is the procedure for removal of Chief Information Commissioner and the
Information Commissioners under the RTI Act, 2005.
7. Write a note on the significance of RTI Act, 2005.
8. Under what circumstances our government was forced to implement it?
9. What is being ensured by the RTI Act, 2005?
10. Is RTI helpful in good governance or does it pose hindrance in certain circumstances?
11. Describe the concept of public authority.
12. What are the obligations of public authority?
13. What is the procedure for filing an application under the RTI Act, 2005?
14. What are the circumstances in which the third party information is not given?
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LESSON-11
Role of Public Sector in India’s Economic Development:
Performance and Challenges
Structure
11.1 Objectives
11.2 Introduction
11.3 Importance of Public Sector in India
11.4 Objectives of Public Sector
11.5 Rational for its existence
11.6 Progress of Public Sector in India
11.7 Performance of Public Sector Enterprises
11.8 Achievements
11.9 Causes of Poor Performance
11.10 Privatization, Disinvestment and their rationale
11.11 Method of Privatization in India
11.12 Disinvestment in India
11.13 The Evolution of India Joint Sector Enterprises
11.14 Summary
11.15 Glossary
11.16 Answer to Check your Progress
11.17 References
11.18 Suggested Readings
11.19 Terminal and Model Questions
11.1 Objectives:
After reading this lesson, you will be able to:
Explain Role of Public Sector in India’s economic development
List causes responsible for poor performance of Public Sector Enterprises
Describe the concept of Privatization and Disinvestment
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Illustrate Emergence of Joint Sector Enterprises
11.2 Introduction:
The significant role of public sector in accelerating the growth of the developing countries
cannot be overemphasized. In a developing economy government cannot depend on the private
sector to accelerate the pace of development. Under such circumstances, it is imperative for the
government to play a decisive role and makes considerable investments in establishing public
sector enterprises. Public sector in India includes all those activities which are funded out of the
budget of the government of India as well as budgets of state governments and municipal bodies.
In this sense, the public sector covers all governments departments, government enterprises,
railways communications, irrigation projects, ordinance factories, banking and insurance
companies, public financial institutions, government schools, colleges, hospitals, dispensaries
etc. As we are mre interested into economic analysis, so focus here will be on the industrial and
commercial enterprises of the government. Public sector includes all those industrial and
commercial enterprises that are owned and funded by the government and are managed either by
government itself or by any other authority appointed by the government to manage them on its
behalf. Central public sector enterprises (PSEs) have been established, controlled and managed
by the Government of India as government companies (under the Companies Act or statutory
corporations under the specific statues of Parliament). The Central Government holding in paid
up share capital is more than 50 % in all the public sector enterprises. The government has used
these public enterprises as an instrument for attaining self-reliant economic growth, and over the
years they have played an eminent role in the sustainable growth of Indian economy.
11.3 Importance of Public Sector in India
The importance of public sector in the Indian economy has been recognized since 1948. Both in
terms of number and volume of investment, public sector in India, has experienced a phenomenal
growth. The government has made sustained efforts to break the vicious circle of poverty and
underdevelopment by setting up public sector enterprises or by nationalizing certain key
industries.
The following arguments may be put forth in support of the PSEs (public sector) in India in spite
of their criticism on account of inefficiency, government controls, lack of professionalism, etc.
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11.4 Objectives of Public Sector:
The public sector was designed to play an important role in India’s planned economic
development. Public sector enterprises (PSEs) expected to fulfil a number of objectives which
are as follows:
Public sector enterprises have been established in most developing countries including
India to provide public utilities especially basic infrastructure facilities such as roads,
railways, electricity etc.
To ensure rapid economic development by making investment in power, transport,
irrigation sectors in order to ensure an accelerated rate of economic growth in these
areas.
To achieve self-reliance in the production of goods/services.
The public sector was expected to generate substantial employment opportunities and
thus help in minimizing the dimensions and problems of widespread unemployment.
To attain long-term equilibrium in the balance of payments.
Ensure stability in prices and create benchmarks for prices of essential items (in order to
control inflation). It is only the public enterprises, which are governed more by social
responsibility rather than private profitability that can help in developing backward
regions and thus achieve balanced regional growth.
To promote measures like redistribution of income/wealth for greater equality.
11.5 Rationale for its Existence
There are several reasons as to why Public Sector Units are preferred over the private sector in
developing or low income economies, especially in the initial stages of development. In case of
India, under the socialist approach adopted in our constitution, the investment decisions were
based not on narrow consideration of profit maximization, but on the benefit that the society
stands to achieve. One of the important reasons for the government to give added importance to
the public sector at the national level was to establish a strong and viable industrial base. These
enterprises were necessary to establish at that time for promoting national economic
development. Moreover, the employment generated by the public sector, along with the growth
of technical and managerial skill development played its role in ensuring the socio-economic
transformation. The development of public sector played an important role in developing
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resources for future economic growth, which incidentally also benefitted the private sector
industries immensely.
11.6 Progress of Public Sector in India
The growth of public sector is the direct outcome of India’s Industrial Policy, 1956 wherein a
wide sphere of Industrial activity was reserved exclusively for development under this sector.
The government thus set up a number of industrial units and also took over under its control
some industries run by the private sector in the sphere reserved for public sector. The expansion
of public sector proceeded in two ways:
1. The government nationalized the private sector industrial and commercial units, which
according to Industrial Policy, fell in the sphere reserved for the public sector.
2. The government also made massive investment to set up new industrial units such as steel
plants, heavy electricals, machine tools etc.
Before independence, there were few public sector enterprises. It was only under the Industrial
Policy Resolution of 1956 that the state was called upon to assume direct responsibility and play
a dominant role in industrial development. Consequently the number of enterprises in the public
sector which was 5 in 1951 with an investment of ` 29 crores, increased to 47 with investment of
` 948 crores in 1961. Public sector expanded rapidly since then and the number of public
enterprises increased to 242 in 2008 wherein government had made investment of ` 5,208,550
Crores. PSEs undoubtedly, since inception, have extended their eminent contribution in bringing
up the industrial base for the holistic development of Indian economy. Through the development
of public enterprises in all the key sectors, the government thus, dilute such tendencies of
concentration of economic power in private hands and blunt their capacity to exploit the
consumers. For ensuring that the Indian economy continues to scale new heights and emerges as
an economic superpower, it is imperative for the PSEs to continue to exhibit global
competitiveness and achieve market leadership.
11.7 Performance of Public Enterprises
The performance of any private enterprise is judged from the rate of profits that it earns. But, in
case of public enterprises, they have wider social responsibilities to discharge such as securing a
balanced regional growth, redistribution of income and wealth, providing infrastructure for
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development of industry, creating adequate employment etc. Public sector’s performance in
terms of ensuring adequate return on investment has been rather poor. But profitability is not the
only criterion of judging efficiency of the PSUs. Some losses are inevitable due to heavy social
responsibility placed on these enterprises in the form of providing cheaper goods to the common
people and helping development of other industrial sectors. In the era of economic liberalization
and globalization, PSEs have continued to contribute significantly in building Indian economy
and have demonstrated competiveness virtually in almost all major aspects, viz., productivity,
technological capability, product quality etc. Period of post-liberalization i.e. in 1991, the PSEs
have continuously focused their efforts in keeping pace with the competitive environment to
ensure economically viable operations and long-term sustainability. Thus, in this process, several
PSEs have become self-reliant and have transformed into world-class organizations.
11.8 Achievements:
Though the Public Sector Units have been criticized for being inefficient and for causing huge
losses to the exchequer, their contribution to the overall growth and development of the economy
cannot be underestimated. Some remarkable achievement of Public Sector Units are as follows:
The proactive role of government through the instrument of the public sector has helped
to build a strong industrial base, though there are number of weaknesses in the industrial
structure of the country. For this achievement of building a strong industrial base for
ensuring rapid industrialization due credit should be given to the public sector.
Public Sector Units have made significant contribution in ensuring balanced economic
development.
A large number of government companies are engaged in the production and distribution
of goods and cater to the needs of domestic economy, some others have been promoting
the country’s exports. These efforts of public enterprises have helped the country in
saving precious foreign exchange which could be used for more important purposes.
The growth of public sector enterprises has brought about a considerable increase in
employment.
Public Sector Enterprises have been helping substantially in the development of socio-
economic overheads wherever they are located.
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The contribution of public enterprises in introducing modern technology and developing
indigenous content has been significant in the development of Indian industry.
11.9 Causes of poor Performance:
Public sector was established with the great enthusiasm to achieve a variety of development
goals. There are many factors that account for low profitability of public enterprises, some of
which are as follows:
The location of many public enterprises is not economically appropriate and technically
correct, as it has been largely determined by high political considerations and not by
economic factors. The result of which is that the cost of production is high and
profitability is low.
In case of public sector enterprises, under-utilization of installed capacity has been one of
the major drawbacks in its working. Under-utilization of installed capacity obviously
causes low level of profitability or even losses.
Many of the Public Sector Units have been suffering from over-staffing of unskilled
labour due to political interference and payment of higher wages than in the private sector
to such inefficient labour.
One of the major weaknesses of PSUs has been their poor and inefficient materials
management.
The usual red tapism associated with the government departments’ causes delay in
arriving at business decisions. This leads to inefficiency and cost escalation.
In public sector units there is a general lack of accountability. No one is answerable or
held responsible for delays and failures.
The public enterprises are financed through borrowed capital such as loans by the
government and public financial institutions. They have to pay huge interest on these
loans which adds to their cost of production.
A good number of public sector units are social monopolies and as such there is total or
substantial absence of competition. Absence of competition, breeds complacence.
11.10 Privatization, Disinvestment and their rationale:
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Privatization and disinvestment are ways to infuse some efficiency in public sector units.
Privatization means that the government’s stake is reduced to minority and that the private
investors now hold the majority shares so that the management and control of these units passes
into private hands. Whereas, disinvestment means reducing government share in the equity stock
of the PSUs by selling a part of its stockholding to private sector investors. For achieving the
target of socio-economic development of the country, Government of India (as part of its
national agenda to promote growth, increase in efficiency and international competitiveness) has
been continuously framing policies for industrial growth, fiscal, trade and foreign investment. A
structural shift occurred in Indian economy from a controlled economy to a liberalized economy
with greater reliance upon market forces, as a result of exceptionally severe balance of payment
and fiscal crisis in the year 1991. The issues relating to privatization and disinvestment have
emerged as a direct offshoot of public sector’s failure to act as agents of rapid industrial growth
and models of modernization.
11.11 Methods of Privatization in India:
There are different methods of privatization used by different countries to partially or fully sell
the government stakes in Public Sector Enterprises. Governments may use one or a combination
of the following:
Initial Public Offering: It includes the first sale of stock by a company to the public. PSUs by
offering IPOs can dilute their shareholding when the general public subscribes to the shares.
Strategic Sale: In case of this method of privatization, PSUs sells a large chunk of government
holdings to a private enterprise, which would not only acquire substantial equity holdings of upto
51 percent but also bring in the necessary expertise for making the PSE viable and competitive in
the global market. This method includes transfer of chunk of shares to a strategic partner along
with transfer of management control to the strategic partner.
Auction: Auction is one such method for divesting shares under market sale where the sale
proceeds are maximized through bidding. This option consumes less time and involves low
transaction cost.
Offer for Sale: It is offer for shares by existing shareholder(s) of a company to the public for
subscription, through an offer document.
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Sale to foreign companies: When a public sector unit is sold to a company incorporated in
another country.
Public offer: Under this method of privatization equity is offered to retail investors through
domestic public issues.
Disinvestment: In India consequent to the advocacy of privatization of public sector units by the
New Industrial Policy, 1991 the government has chosen a disinvestment programme which
involves the sale of public sector equity to the general public or to the private sector. In 1991, a
small fraction of the equity in selected central PSEs was sold to raise resources to bridge the
fiscal deficit as well. This method of privatization is generally expected to achieve a greater
inflow of private capital and use of private management practices in Public Sector Units. The
other objective is to make monitoring of management more effective by private shareholders.
11.12 Disinvestment in India
Disinvestment in the Public Sector has been resorted to for two main reasons, viz., (1) to provide
fiscal support to the government through financial resources raised by sale of government’s stake
and (2) to improve efficiency of public enterprises by introducing an element of accountability to
the private shareholders. The extent of disinvestment, i.e. how much of its stake the government
should offload, is a policy decision which the government has to take in conformity with overall
economic policy. There is a consensus that no disinvestment be done in the strategic industries.
For non-strategic and non-core sectors, disinvestment can be done upto 51 percent and beyond.
Disinvestment process in India began in 1991-92 when the government sold shares of some
public enterprises from its holding. This disinvestment was however in the nature of sale of
minority shares, which means government sold less than half the stock held by it in these
enterprises so that it could retain their management control. Such process continued till 1999-
2000. However, this policy was changed in 2000-01 with the establishment of the Department of
Disinvestment, which later was converted into Ministry of Disinvestment. The new policy was to
go in for strategic sale of the identified Public Sector Enterprises. Thus, in accordance with this
decision, all disinvestment since the year 2000 has been in the form of strategic sales.
11.13 The Evolution of India Joint Sector Enterprises
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The general perception that the state ownership of Public Sector Units served a special purpose,
but they were inefficient, while private sector was better and more efficiently managed, ensured
the emergence and growth of what has been described as “Joint Sector”. This joint sector concept
became popular in India in the 1980s. With disinvestment, the joint sector concept became
significant in the development of many industrial segments. In the 1990s following economic
reform ad globalization with disinvestment as a focus, the state has been scouting for private
sector participation in many state and central Public Sector Units. The following are the factors
that prompted planners to champion the cause for joint sector. These are:
The joint sector evolves out of the two rather opposite concepts of the private and public
sectors, but incorporates their merits.
The concept of joint sector extends the concept of mixed economy. Under this process,
the representatives of the private and public sectors get close and become more reliant.
It depends entirely on the state governments to promote and develop this concept, according to
their needs and requirements. The following types of joint sector enterprises emerged on the
industrial landscape:
Joint venture between two Public Sector Units
Joint venture between Central Public Sector Units and state governments with public
participation.
Joint venture between Public Sector Units and cooperatives or workers of an enterprise.
Joint venture between public enterprises and domestic private entrepreneurs
Joint venture between public enterprises and foreign collaborators.
When one analyses the growth and future prospects of the joint sector in India, one is struck by
its slow growth. A joint venture with Suzuki Motor Co. Ltd., Japan is one of the earliest and
most important cases where a foreign private corporation has been invited to join hand with the
government. While this is the general outline of the joint sector, there are many unanswered
questions i.e. it is difficult to say how joint sector form was used to pursue the objective of social
control, over private industry.
Check Your Progress:
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1. How many industries are reserved for public enterprises today?
(a) 3 (b) 4 (c) 5 (d) None of these
2. A method for divesting shares under market sale where the sale proceeds are maximized
through bidding is known as _____
(a) IPO (b) Strategic Sale (c) Auction (d) None of these
3. The Joint sector concept became popular in India during
(b) 1970s (b) 1980s (c) 1990s (d) None of these
11.14 Summary
Setting up public sector in India for industrialization was a conscious and deliberate decision for
moving on a pre-determined path of industrialization. It was set up with socio-welfare
considerations. Profit is a function of pure businesses and public sector by virtue of government
being the owner cannot function as pure business. Further comparison of the public sector is
technically incorrect as private sector operates as a commercial venture with an explicit profit
motive unlike the public sector which also have social objectives to fulfill. Public sector has not
to be envisioned from the prospective of profit making or efficiency levels but in the larger
context of the objectives which are assigned to them when they were set up.
11.15 Glossary
Privatization: It is the process by which government transfers the productive activity from the
public sector to the private sector.
Disinvestment: Disinvest means a small fraction of the equity in selected central PSEs was sold
to raise resources to bridge the fiscal deficit as well. Disinvestment is generally expected to
achieve a greater inflow of private capital and use of private management practices in Public
Sector Units, as well as enable more effective monitoring of management by private
shareholders.
Initial Public Offering: An initial public offering (IPO) is the first sale of stock by a company
to the public.
11.16 Answer to Check your Progress
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1. (a) 2. (c) 3. (b)
11.17 References
Kapila, U., “ Indian Economy: Performance and Policies”, Academic Foundation, New
Delhi.
11.18 Suggested Readings
Fernando, A.C., “ Business Environment”, Pearson Publication, New Delhi
Misra and Puri, “ Indian Economy”, Himalaya Publishing House, New Delhi
11.19 Terminal and Model Questions
1. Examine the role of public sector enterprises in the economic development of India.
2. What do you mean by disinvestment policy?
3. Write a summary on disinvestment policy in India.
4. What is the need for joint sector when there are private and public sector to promote
industries?
5. Discuss role and growth of public sector in India. How its role has been changed during
the recent past
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1
LESSON – 12
Socio-Cultural Environment-Role of Social
Groups and Consumerism In Indian Business
Structure
12.0 Objectives
12.1 Socio-cultural environment-An Introduction
12.2 Concept of Consumerism
12.3 Who are Consumers and what are Their Rights?
12.4 Rights covered by the Consumer Protection Act, 1986
12.5 History of Consumerism
12.6 The Underlying Causes of Consumerism
12.7 Introduction to Corporate Social Responsibility
12.7.1 Pros and Cons of corporate social responsibility
12.7.2 Law and corporate social responsibility
12.7.3 Voluntary Guidelines of 2009 under Corporate Social Responsibility
12.7.4 Public Enterprises Guidelines on CSR
12.8 Business Ethics
12.9 Need of Ethics in Business
12.10 Implementing and Institutionalizing Ethics
12.11 Summary
12.12 Glossary
12.13 Answers to check your progress
12.14 References/Bibliography
12.15 Suggested Readings
12.16 Terminal and Model Questions
12.0 Objectives:
After studying this lesson, you will be able to:
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1. Discuss critical elements of socio-cultural elements of business.
2. Explain social class and market place behavior.
3. Describe values, attitudes and life style across social classes.
4. Enumerate the cultural values and see to what extend is business affecting the
culture.
5. Illustrate consumerism in Indian Business.
12.1 Social-cultural environment-An Introduction
Social environment is a sum total of societal factors that affect a business and includes social
customs, ideals and faiths, knowledge and education, the ethical morals, extent of cultural
stratum, clashes and conceives, and so forth. Social environment deals with the factors related to
human relationships and the impact of social opinions and cultural ideals on the organization.
The traditions, faiths and norms of a society resolve how individuals and organizations should be
co-related.
The basic norms and traditions of a particular society tend to be fixed. These basic norms and
traditions are difficult to be changed by the business houses, which become a determinant of
their functioning. Some of the core factors of social environment are social concerns and social
attitudes and values
12.2 Concept of Consumerism:
According to Macmillan, consumerism mean, “protection or promotion of consumers’ interests”.
Merriam defines consumerism as, “public concern over the rights of consumer, the quality of
consumer goods, and the honesty of advertising”.
12.3 Who are Consumers and what are Their Rights?
Every individual is a consumer, regardless of sex, age, caste, creed and color, occupation or
religious beliefs. Consumer rights and welfare is now an essential part of the life of an individual
and we all make use of them at some point in our day to day life. March 15th is considered as
"World Consumer Rights Day". It remembers a historic declaration (1962) by former US
President John F. Kennedy and his four basic consumer rights:
The right to safety
The right to be informed
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The right to choose
The right to be heard
This declaration eventually led to the international recognition of the fact that all citizens,
regardless of their incomes or social standing, have basic rights as consumers. Another
significant day is ‘9 April 1985’, when the General Assembly of the United Nations adopted
a set of guidelines for consumer protection and the Secretary General of the United Nations
was authorized to persuade member countries to adopt these guidelines through policy
changes or law. These guidelines constituted a comprehensive policy framework outlining
what Governments need to do to promote consumer protection in the following areas:
Physical safety
Protection and promotion of consumers’ economic interests
Standards for safety
Quality of consumer goods and services
Measures enabling consumers to obtain redressal
Measures relating to specific areas (food, water, and pharmaceuticals) and
Consumer education and information programme
Now it is universally accepted that the consumer has a right to be provided with all relevant
information in order to avoid exploitation. These rights are well-defined, both on
international and national platform and several agencies like the Government as well as
voluntary organizations are constantly working towards safeguarding them.
In India, 24th December is celebrated as "National Consumer Rights Day", since the
Consumer Protection Act, 1986 was enacted on this day. The Consumer Protection Act was
enacted in 1986 based on United Nations guidelines with the objective of providing better
protection of consumers’ interests. The Act provides for effective safeguards to consumers
against various types of exploitations and unfair dealings, relying on mainly compensatory
rather than a punitive or preventive approach. It applies to all goods and services unless
specifically exempted and covers the private, public and cooperative sectors and provides for
speedy and inexpensive adjudication.
12.4 Rights covered by the Consumer Protection Act, 1986
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4
The rights covered by the Consumer Protection Act, 1986 are included in the rights
mentioned in the Articles 14 to 19 of the Constitution of India. The Right to Information Act
(RTI), which has made governance processes open for general public also has far reaching
implications for consumer protection. As per the Act, a 'Consumer' has been described as:
One, who consume goods according to their needs by paying some consideration, or
one who use the goods with the approval of the customer.
One, who uses any service for a consideration and any beneficiary of such services,
provided the service is being consumed with the approval of the person who had
hired the service for a consideration.
Right to Safety
It means protection from goods and services which are hazardous to life and property. The goods
and services that are purchased should not only meet the current needs, but also fulfill long term
interests. During the time of purchasing, consumers should not be only made aware about the
quality of the products, but guarantee of products and services. Quality marked products such as
ISI, AGMARK; Brand Power etc. are preferably purchased products.
Right to be Informed
It means to protect the customers from unfair trade practices; they must be informed about the
quality, quantity, standard, potency, purity and price of goods. Before making a choice or a
decision the consumers must demand for all the information about the product or service they
want to purchase. This allows the customer to act wisely and get enabled to desist from falling
quest to high pressure selling techniques.
Right to Choose
It means the customer has the right to choose variety of goods and services at competitive price,
wherever access is possible. When there is monopoly, then it means right to be assured of
satisfactory quality and service at a fair price. Basic goods and services are also included in this
right. When the variety of goods and services are available at competitive prices this right can be
better exercised in the market.
Right to be Heard
It means the appropriate forums must pay due consideration to consumer's interests. It also
means that consumers can represent their issues in various forums specifically made for
consumer welfare. For various matters relating to consumers, various committees have been
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framed by the government and other bodies and various non-political and non commercial
consumer organizations may represent issues related to consumers to committees formed by the
government.
Right to Seek Redressal
It means right to be protected against unfair trade practices that exploit the consumers. The
genuine grievances of the consumer are settled under this right. Most of the time the complaints
issued are of small value but has a great impact on the society. Consumers can take the help of
consumer organizations in seeking redressal of their grievances.
Right to Consumer Education
It means that consumer has all rights to obtain necessary knowledge, information and skill at the
time of purchasing goods and services. Consumers’ ignorance particularly in the rural areas is
mainly responsible for their exploitation. Consumers must be aware about their rights and must
know how to exercise them. Through this way only the real consumer protection can be achieved
with success.
Check Your Progress A
1. State whether the following statements are True or False:
a) Right to Safety means protection from goods and services which are hazardous to life and
property.
b) Every individual is a consumer, regardless of sex, age, caste, creed and color, occupation
or religious beliefs.
c) Right to Seek Redressal means right to be protected against unfair trade practices that
exploit the consumers.
d) Is 24th December is celebrated as "National Consumer Rights Day" in India.
12.5 History of Consumerism
The term “consumerism” was first used in 1915. It refers to the movement for protecting the
rights of consumers against unfair practices, unfair pricing, misleading advertisements and so on.
In 19th century, capitalist development and the industrial development primarily focused on the
capital goods sector and the industrial infrastructure, at that time agricultural commodities,
essential commodities and commercial activities had developed to an extent and little time and
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money was spent for consumer activities. After industrial revolution for the first time in the
history products were available in outstanding quantities and even at low prices. So, began the
era of mass consumption, the only area where the concept of consumerism is applicable.
12.6 The Underlying Causes of Consumerism
As the numbers of formal and informal institutions are growing, a number of discontented and
aroused consumers have combined with them which are capable of focusing discontent, to create
a sufficient pressure to overcome the advantage of the traditionally more effective lobbies
representing the producer's interests. Following are the main causes of consumerism:
The unhappy consumer: These consumers are not part of a same group with easily expressed
complaints. Complaints of every consumer are different from each other and therefore there is a
huge variation in level of unhappiness of the consumers. The underlying causes provide a wide
variety of consumers in the extent of their regret. Moreover, it is easy to distinguish specific
source of regret that are trackable to the marketing environment, from other more common
concerns with the nature of society.
Problems generally occurring in the marketplace: The imperfections occurring in the state of
information in consumer markets is the leading cause behind consumerism. If they could learn
quickly about all the available brands, their prices and characteristics, it would help more in
taking care of consumers effectively. However, as products expand rapidly each consumer is not
able to make adequate price and quality comparisons in the market place. This incapability leads
to "increasing shopper confusion, consequent irritation and consequent resentment." This
problem is more serious in case of frequently purchased products.
The revolutionary consumer: The unhappy consumers expressed their discontentment in
number of ways and pressurized to introduce significant change during 1960's. In 1910 and 1935
eras there was a visible development of means of translating displeasure into effective pressure
that distinguishes the recent consumer efforts. Advocates such as Ralph Nader, Senator Warren
Magnuson and a number of Journalists who pursue similar interests helps in consumer
representation. These men were able to identify and publicize problems, and follow up with
Workable programs for improvement. In a true manner, these men were the self elected legal
counsels to a typically unrepresented constituency. Without these men paying attention to many
of consumer problems would have not been possible. Truth is, consumers don't really know what
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is bothering them or realize that others are dealing with the same problem until the problem is
publicized or an alternative is provided. In the recent years the institutional framework has been
widened and enhanced. Government provides a permanent support to these bodies such as
Consumers Union and Consumers Research, Consumer Advisory Council and the Office of the
Special Assistant to the President for Consumer Affairs. Some of the older regulated bodies
have been specifically developed to avoid the problems of extra recognition with regulated
industries.
12.7 Introduction to Corporate Social Responsibility
In the 21st century, the world is facing frequent Climatic changes, the desire for all-encompassing
development and various other challenges and opportunities arising from globalization. The
Indian business has now taken a leadership role in meeting such challenges and due to this today
Indian business is globally recognized as a responsible component of the ascendancy of India. To
ensure the long term success, competitiveness and sustainability of business, integrating social,
environmental and ethical responsibilities into the governance of businesses is very important.
This approach also ensures that business is an indispensable part of society, and has to play very
active role in the survival and progress of healthy ecosystems. Today, even customers are very
conscious and prefer the products and services of the companies which are effectively
performing corporate social responsibility.
The concept of corporate social responsibility came into limelight when Howard R. Bowen,
introduced his book “Social Responsibility of Businessman”. The book suggested that businesses
should consider social implications at the time of taking their decisions. Corporate Social
Responsibility (CSR) is concerned with the business practices which follow ethical norms,
comply with the legal provisions and aim at the promotion of benefits to the individuals and
community at large. H. S. Singhania classifies the social responsibility of business in two parts:
The way through which a business can able to run its activities;
The additional function of business is to perform the welfare activities.
World Bank Group states the recent definition as; “Corporate social responsibility is the
commitment of businesses to contribute to sustainable economic development by working with
employees, their families, the local community and society at large, to improve their lives in
ways that are good for business and for development.”
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12.7.1 Pros and Cons of Social Responsibility of Business
There is a continuous debate going on whether a business should assume social responsibility or
not. This is because every business wants to earn more and more profits. It is generally viewed
that if a business assumes social responsibility, it will not be able to achieve its objective of
profit maximization. So let us have a view of should a business assume its social responsibility
or not, in context of the various arguments put in favor of and against the corporate social
responsibility.
Pros of Corporate Social Responsibility:
1. Public Requirements: The business has a strong inter-relationship with the society. A
business takes its inputs from the society and in return, its output is also consumed by the
society. So, for a business to grow and develop, it must fulfill the needs of the society.
Today, expectations of the public form the business have changed with the passage of
time. Therefore, every business that needs to survive in the changing times has to adapt to
those dynamic expectations of the public.
2. Favorable for business: Fulfillment of corporate social responsibility not only benefits the
society but it is beneficial for the business itself also. The business firm that is more
responsive towards the fulfillment of social responsibility and upliftment of the society
has a better community in which to conduct its business. Moreover, the enterprise is
being rejected which does not fulfill their social responsibility.
3. Moral Response: Nowadays, modern industrial society faces a lot of social problem due
to large scale emergence of industries. It becomes the moral responsibility of the business
concern to work for the betterment of society and resolve the social issues. Moreover, if
we see on ethical grounds also, a business makes use of the different resources from the
society. So it becomes a moral requirement to devote some of these resources for the
overall development of the society as well.
4. Socio-cultural Model: In our country, where people value social heritage, it is much clear
that business promotes social equalities, healthy employer-employee relations and works
for the upliftment of the society, so that it can enjoy better social position. The business
houses that do not work for the welfare of society and work against their traditional
values will definitely receive criticism from the society.
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5. Responsibility must correspond with power: Business enjoy great social power and affect
the economy, minorities and other social issues. So, in order to match their social power,
the business must perform equal amount of social responsibility as well. If they fail to do
so, it will reflect their irresponsible behavior, and will have a negative impact on their
social repute.
6. Creates public image: Every business wants to have a larger customer base, better
employees, increased profitability, more responsive money markets etc. so, a firm can
enjoy better public image if it meets its responsibility towards different sections of the
society.
7. Government regulations: Every business has to regulate its operations in public interest.
A business is compelled by way of government laws and regulations, if it does not work
according to the needs of society.
8. Indebted to society: There exists inter-dependence between the business and society.
Business makes use of the various resources form the society. Thus, it is indebted to the
society for providing vast resources.
Cons of Corporate Social Responsibility:
1. Deviation from the main objective: The primary objective of every business is to
maximize its profits. Thus, economic efficiency is the top priority and any deviation from
this may divert the business from its mission. The welfare of employees and owners will
also be served well by increasing the profitability of the business concern. Moreover, the
performance of social responsibility also requires the cash outflow and it adversely
affects the financial position of the concern. It is to be noted here that the nature of
business activities is economic and not social and the only criteria to measure the success
of the business should be the economical values and not the social service.
2. Increase in prices: We have already discussed that the business will perform social
obligations by incurring certain costs. Now, the actual burden of this cost will be shifted
to the customers by way of increased prices of the goods and services. Thus, whatever
costs, a business occurs on the social welfare, the burden will ultimately shift to
customers, by way of a part of cost of production of the goods and services. So,
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ultimately it is the consumer who bears the ultimate burden of the corporate social
obligation.
3. Excessive concentration of power: If we combine the social activities with the economic
activities of the business, it will imply giving the business excessive concentration of the
power. Business has already got enough social power. If we over power it, this would
mean letting them influence society in education, in home, in government and in the
market. Thus, the society will also start depending upon the business. And this
dependence will create many social, economic and political problems.
4. Lack of social skills: It is also possible that a businessman, who is good at managing
business, may not be good at solving social problems. We know that a businessman
devotes all his energies in running his business efficiently and smoothly. He might not
have the appropriate skills to resolve the complex social issues.
5. Influence on social set-up: When business starts spending its resources for the welfare of
the society and resolving the social issues, it may try to influence the society for its own
good. This may hamper the growth and development of the society and may give rise to
many social, economic and political issues.
6. Lack of Accountability: There is no direct accountability to the people by businessmen.
Therefore, it is not advisable to make them responsible for those areas for which they
have no accountability. We know that the business management is only accountable to
the owners when profits are concerned, but not to the society for the fulfillment of its
social obligations.
7. Opposition from the society: This might also be the case that the various groups in the
society do not want the involvement of the business in the various social goals. There is a
great difference in opinion among the various social groups, businessmen, government
and other stakeholders. There might be one group that is in favor of the involvement of
business in the social activities, while there may be a few others also who do not wish to
have the involvement of business into the social goals.
8. Complex social Problems: There are many social issues which remain unresolved despite
the involvement of large business houses. Some of the prominent social problems include
AIDS, Deforestation, Sex discrimination etc. Similarly, when we talk of business, it has
to face many issues, for instance, how to maximize its profits, reducing the cost of
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productions, ensuring timely supply of goods to its customers etc. Now when a business
itself is facing so many complexities, how can we expect it to fulfill its social
responsibility amidst its own huge complex problems.
12.7.2 Law and Corporate Social Responsibility:
Under the Companies Act, 2013, any company having a turnover of rupees 500 crore or
exceeding rupees 1,000 crore or more or having a net profit of rupees 5 crore or more is bound to
spend 2 per cent of their net profits on CSR activities as per fiscal policy.
12.7.3 Voluntary Guidelines of 2009 under Corporate Social Responsibility:
The Ministry of Corporate Affairs has prepared a list of voluntary guidelines that indicate some
important elements that businesses needs to focus in order to assist the businesses to adopt
responsible governance practices at the time of conducting their affairs. The expectations of the
society have been taken cared while preparing these guidelines. Ideas, norms, guidelines
received from trade and industry chambers, stakeholders and experts are taken care of while
drafting these guidelines.
Basic Principles: Each business house should frame a CSR policy to help its strategic planning
and provide a direction for its CSR initiatives, which should be aligned with its business goals
and be an integral part of overall business policy. The policy should be approved by the Board
only if it is framed with the participation of various level executives.
Important Elements: The CSR Policy should normally cover following important elements:
1. Care for all Stakeholders:
The companies must take care of the interests of all stakeholders including shareholders,
employees, customers, suppliers, society and government and must create value for all of them.
In order to actively engage with all the stakeholders, business must develop a mechanism that
can inform them of inherent risks and mitigate them where they occur.
2. Ethical functioning:
The business should be governed by the principles of Ethics, Transparency and Accountability.
Abusive, unfair, corrupt or anti-competitive practices must be avoided.
3. Respect for the Rights and Welfare of Workers:
In order to promote the dignity of the workers the companies must provide a safe, hygienic and
humanist workplace. They should uphold the freedom of association and the effective
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recognition of the right to collective bargaining of labour, have an effective grievance redressal
system, should not employ child or forced labour and maintain equality of opportunities without
any discrimination on any grounds in recruitment process and so on.
4. Respect for Human Rights:
Human rights must be respected by the companies and any abuses to these rights should be
avoided by the company and third party.
5. Respect for Environment:
In order to check and prevent pollution the companies should take measures to; recycle, manage
and reduce waste and manage the natural resources in a sustainable manner and promoting the
efficient use of energy and environment friendly technologies. It should also ensure the optimal
use of resources like land and water and adopt the method of cleaner production by proactively
responding to the challenges of climate change.
6. Activities for Social and Inclusive Development:
Companies should undertake activities for economic and social development of communities and
geographical areas, particularly in the range of their operations while depending upon their
competency and business interest. While targeting at disadvantaged sections of society the
education, skill building for livelihood of people, health, cultural and social welfare etc., could
be included.
Implementation of these Guidelines:
1. CSR policy of a business firm must accompanied by appropriate implementation strategies.
Implementation strategy must include the description of projects/activities, setting measurable
physical targets with stipulated time period, organizational structure and obligations, time
schedules etc. Civil society/non-government organizations, business associations and other local
authorities may become partners with the companies. For social development they can motivate
the voluntary efforts of the employees and also influence the supply chain for CSR initiatives.
CSR activities may evolve a system of assessment in a particular area. It is also required time to
time to make independent evaluation for selected projects/activities.
2. For the CSR activities, the companies are required to allocate the specific amount from their
budgets. The amount allocated for CSR activities is related to profits after paying tax, planned
CSR activities cost or any other relevant parameter.
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3. CSR activities are responsible for encouraging the business practices in order to share
experiences and network with other organizations and the company should engage with well
established and recognized programmes/platforms. Through this they may become able to
improve their CSR planning and this in return builds their image of being socially responsible.
4. The companies must disclose their information regarding CSR policies, activities and its
development in a systematic manner to all their stakeholders and the society at large through
their annual reports, publications, journals, website and other communication media.
12.7.4 Public Enterprises Guidelines on CSR
The Department of Public Enterprises had issued certain Guidelines on Corporate Social
Responsibility (CSR) for CPSEs in April, 2010 which have been delivered to the
Ministries/Departments as well for compliance in the Central Public Sector Enterprises (CPSEs)
under their directive control. Following are the marking features of guidelines on CSR &
Sustainability:
(i) To conduct the business in an economically, socially and environmentally sustainable manner
which is transparent and ethical companies are required to make commitment towards their
stakeholders through Corporate Social Responsibility and Sustainability.
(ii) CSR and Sustainability agenda is perceived to be equally applicable to external and internal
stakeholders, including the employees of a company, and a company’s corporate social
responsibility is expected to cover even its routine business operations and activities. CPSEs are
expected to formulate their policies with a balanced emphasis on all aspects of CSR and
Sustainability – equally with regard to their internal operations, activities and processes, as well
as in their response to externalities been clubbed together in one set of guidelines for CSR and
Sustainability because of close linkage between the two concepts.
(iv) The Boards of Directors of Public Sector enterprises are required to make approval for their
CSR and Sustainability policy. They are required to undertake such a policy which makes
approval/ratification of their Boards. The Board of Directors of CPSE’s decides the CSR and
Sustainability activities which are to be undertaken within these guidelines.
(v) The CSR and Sustainability are decided by the profitability of the company which is
determined by the Profit after Tax (PAT) on the company in the previous year.
12.8 Business Ethics: What does it really meant to be?
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When we talk about ethics, moral values and beliefs, we generally come across a philosophy that
deals with deciding what is good or what is bad for us. Ethics involves the context of moral duty
and a discipline that examines good or bad practices. But when it comes to everyday business,
ethics mean performing the daily tasks, competing with others in an honest manner and comply
with the law without any element of dishonesty. Thus, it includes those practices and behaviors
that are good or bad.
There are two components of business ethics. These are descriptive and normative ethics.
Descriptive ethics involves a detail study that represents morality. It basically deals with
the concept of – “What is?”
Normative ethics involves justification and supply of moral systems. Thus, this concept
basically answers the question of – “What should be?”
In simple words, business ethics refers to the study of standards regarding the conduct of
business and its moral judgment;
.
Ethics are the main component of human awareness, which helps in promoting good human
being through the journey of common thread of goodness, good society and good life. We can
define ethics as the principles of a framework of philosophy of an individual on the basis of
which we decide what is right or wrong, good or bad, correct or incorrect.
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The value system that we acquire and develop shapes our attitudes, performances, goals and
aspirations. It sets the standards and guidelines that govern our behavior. In business also, we
come across certain situations, where as a manager, we have to take many decisions and these
decisions are governed by our moral values and beliefs. These beliefs guide us about right or
wrong, fair or unfair, good or bad. Thus, ethical beliefs define our conduct in an organization as
well and so we term it as ethical conduct in a business. It deals with behavior of managers in an
organization. The structure of an ethical environment is described as follows:
a) Code of conduct: A code of conduct may be defined as a statement that can able to
resolve the employee’s ethical queries and outlines the organizational expectations and
requirements.
b) Educational Ethics: The detail solution for every ethical situation cannot be provided by
the codes of conduct, so there is a requirement for corporations to provide proper training
and education in ethical reasoning.
c) Ethical Action: It helps in resolving the employee’s ethical problems through recognition
and reasoning and passing them into ethical actions.
d) Ethical Leadership: It states that management must prove ethical behavior in their
actions.
The ethical conduct involves the following values:
a) Regular Improvement: The need and capacity of the organization to start and improve the
ways to develop itself.
b) Customer Satisfaction: The customer feels a positive satisfaction from the company’s
people, products and services emotionally.
c) Promoting the Employees: The need and capacity of the company to boost the ethical
values of the employees working in the organization.
d) Innovation: The capacity and capability of the company to project into current break
through opportunity areas.
e) Optimum Use of Resources: The capacity and capability of the company to uplift its
performance by maximum utilization of its existing resources.
f) Responsibility towards Society: The responsibility of the company is to focus on the
societal desires and demands of the society.
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The following figure gives a detail about the various origins of ethical norms.
12.9 Need of ethics in business
Business in India is passing through tree-bullet times as there is lot of concern for business
survival and growth due to various factors such as global and domestic competition of MNCs,
environmental degradation, need for balancing multiple stakeholders’ expectations etc.
Business is a part of society. Its functioning should contribute to the welfare of society as a
whole and not only to itself. Therefore, organizational decisions should be made in such a way
which not only provides benefit to the organization but also the society at large, so as to
maximize the welfare of society. Many management theorists stress that companies must operate
according to the values that mentor the contemplation and actions of people in the company.
In view of the above discussion, it is appropriate to discuss at this stage the ethical
conduct for a business as propounded by a renowned management thinker, Dr. M. B. Athreya.
He gave a seven factor model to do a business in an ethical manner. These are described as
follows:
a) Righteousness: It is important for the business to follow ‘dharma’ in the creation and
sharing of wealth; maintaining the highest standards of ethics and integrity in every
action taken.
b) Public Good: Another significant value is that individuals and organizations should work
not just for private goal, but also for well-being of community as a whole.
Fellow Employees
Family
Acquaintance
The Law
Provinces of Country
Profession
Boss
Societal Influence
Friends
Spiritual Faiths
The Individual
Conscience
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c) Efficacy: It is critical that all businesses pursue efficiency, productivity, resource
optimization and conserve resources so as to internalize the value of efficacy in the best
interest of sustainable development of the economy as a whole.
d) Innovation: Business has to strive towards innovations and constantly moving ahead in
order to meet the growing social and economic expectations of its various stakeholders.
Thus, every business has to work for the effective solutions to the societal issues with its
innovation.
e) Learning: Business is the key instrument to solve the problems of growth, employment,
education, consumption, information and quality of life. The constant feedback helps a
business to improve and progress. The viability and health of nations and global society
will depend on the skills of learning and utilization of such learning by business.
f) Respect: Prof. Athreya adds another ethical aspect of respect for individuals and human
dignity in the business. It is said that respect begets respect. In business also, we are
dealing with human beings. Everyone wants respect for himself, be it any organization.
So, we should imbibe the feeling of respect and concern for the people.
g) Competitive: Business should be aggressive, competitive, with lot of initiative and
creativity. All its efforts should be directed to increase market share ethically so
12.10 Implementing and Institutionalizing Ethics
In order to fully implement and therefore institutionalize ethical conduct in an organization, there
is a need to initiate the following steps:
a) Selection: The prime activity that we have to do is to make a selection of the values or
ethics that we need to implement in our organization. This is of key consideration
because unless we have a clear idea in our mind about the ethical behavioral aspects that
we want in our organization, it will be very difficult for us to develop a sound code of
conduct for the organization.
b) Commitment: In order to implement the designed ethical conduct, there arises a need to
work with full commitment. It is essential for all the people in the organization to be fully
committed towards their business objectives and strive for improving their performance
so as to ensure growth and development.
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c) Standards: In order to implement the designed ethical conduct, standards must be set for
each activity in the company and it must be accepted by each individual working in the
organization.
d) Structure: For the proper implementation of the ethical conduct, the company must
clearly illustrate their structure that defines job positions, divisions, departments etc., for
the proper working of the organization so as to ensure its growth and development.
e) Jobs, Activities and Systems: For the effective implementation of the values and ethics,
the company needs to transparently mention the job positions, divisions, activities and
up-to-date systems. The values need to be integrated into each job position, division and
activity that needs to be performed in the organization. Specific performing strategies and
even individual performances need to be co-related to these values.
f) Employee Responsibility: The responsibility of every individual regarding the
implementation of each value must be transparently illustrated and accepted. For
instance, when we prepare for job orientation, job description.
Now, we have discussed the various pre conditions for successfully implementing the ethical
conduct in an organization. However, it is important here to note that there are certain on-the-job
ethical dilemmas that need to be addressed. For instance, there may be a situation for personal
gain an employee discloses illegal or perform immoral or unethical practices in the organization
through which a business decision may be influenced. There might be some positive aspects as
well i.e. there may be some employees who are constantly involved in saying truth and support
deeply the ethical principles in business decisions. Thus, people expect the employees to be
trustful and reliable, but in some cases ethical conflicts may occur.
Check Your Progress B
1. State whether the following statements are True or False:
a. Descriptive ethics involves a detail study that represents morality.
b. Is ethical action not able to solve the employee’s problems.
c. Customers preferred their products and services in the long run.
d. Ethics refers to the standards regarding the conduct of business and its moral judgment.
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12.11 Summary
The consolidation of scientific economic and of modern market institutions took place in the
eighteenth century, when also the social role of the consumer, combining traits of hedonism and
rationality was distinguished from the wasteful irrational elites of the ancient regime. Whereas
the early 20th century consumer was a mass market consumer, today’s consumer is characterized
by a general emphasis on individual style, paralleling the customization and niche marketing that
has overtaken the economy. The tendency within consumer culture today is to view lifestyles as
no longer requiring inner coherence; marketers and cultural intermediaries (fashion;
entertainment) cater for and expand the range of styles and lifestyles available to global
audiences and consumers with little regard to authenticity or tradition. And just as the consumer
was theorized into existence by the economic philosophers of the 18th century, and turned into
the linchpin of 20th century economies by economic policy makers.
Corporate social responsibility (CSR) is concerned with the business practices that follow ethical
norms, comply with the legal provisions and aim at the promotion of benefits to the individuals
and community at large. In simple words, it refers to the commitment and duties of the
organization towards different sections of the society. Thus, it means the business practices
which follow ethical norms, comply with the legal provisions and aims at the promotion of
benefits to the individuals and community at large along with their own interests. Business ethics
is a set of moral values and principles that govern what human conduct ought to be. In simple
words, they specify what is right/ wrong, fair/unfair and good/bad.
12.12 Glossary
a) Descriptive ethics – It involves a detail study that represents morality
b) Normative ethics – It involves justification and supply of moral systems.
c) Ethics – It refers to the study of standards regarding the conduct of business and itsmoral judgment.
d) Righteousness – Maintaining the highest standards of ethics and integrity in every
action taken.
e) Ethical Dilemma – The choices of the business that create a tension between business
between their private gain and public gain or between ethics and profits.
f) Corporate Social Responsibility –It concerned with the business practices which
follow ethical norms, comply with the legal provisions and aims at the promotion of
benefits to the individuals and community at large along with their own interests.
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12.13 Answers to check your progress
Check Your Progress A
1) a) true
b) true
c) true
d) true
Check Your Progress B
1 a) true
b) false
c) true
d) true
12.14 References
Oxford Dictionary edited by Julie Elliott with Anne Knight and Chris Cowby, Published
by Oxford University press. P-155.
The new international Webster’s student dictionary of the English language by Sidney I.
Landau (editor in chief), Published by trident press international 1996 edition. P-153
Cambridge international dictionary of English by Paul Procter-editor in Chief, Published
by Cambridge University Press, 1996 edition. P-294
Collias Essential English dictionary 2nd edition 2006 c. Harper Collins Publishers 2004,
2006.
The Chamber's Dictionary 11th edition by Chambers, published by chambers harrap 2005
vol. 19 p-148.
http://business.gov.in/consumer_rights/meaning_concept.php
Tom M.Hopkinson, “New Battleground—Consumer Interest,” Harvard Business Review
(September—October, 1964), p-97.
S. Chase & F. J. Schlink, Your Moneys Worth: A Study in the Waste of the Consumers
Dollar (NewYork: Macmillan, 1927).
A. C. Fernando, “Business Ethics – An Indian Perspective”, Pearson Prentice Hall, 2012
Richard T De George, “Business Ethics”, Pearson Education Ltd
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Harold Koontz, Heinz Weihrich, “Essentials of Management, An International andLeadership Perspective”, McGraw Hil
Stephen P Robbins, Mary Coutler and Neharika Vohra, “Management”, Pearson PrenticeHall.
12.15 Suggested readings
1 Joshi,R.K.(2009):International Business, Oxford Publications, New Delhi.
2 Paul, Justin (2010): Business Environment: Text & Cases, Mc Graw Hill
Education.
3 Sundaram, Anant K., Black, J. Stewart: The International Business Environment:
Text And Cases, PHI Learning
4 Cherrunilam, Francis, (2003), Business Environment, New Delhi: Vikas
Publishing House Private Limited.
12.16 Terminal/model questions
1. Describe in detail the rights of the consumers under the Consumer Protection
Act,1986.
2. What is consumerism? What are the various underlying causes of emergence
of consumerism?
3. What do you mean by business ethics? Discuss the need and importance of
ethical business conduct.
4. Should a Business be obliged to fulfill the social responsibility? Give your
arguments. What are the key considerations while implementing corporate
social responsibility?
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Lesson 13
Ecological Protection
13.1 Objectives
13.2 Introduction to Ecological Protection
13.3 Ecology
13.4 Need for Environmental Protection
13.5 Environment and Business
13.6 Sustainable Development through Green Growth
13.7 Green House Effect
13.8 Global Warming
13.9 The Environment Protection Act, 1986
13.10 Carbon Footprint
13.11 Reasons responsible for alarming individual carbon footprints
13.12 Green management
13.13 Strategies to Green Management
13.14 Summary
13.15 Check yourself
13.16 Glossary
13.17 Answers to Check Your progress
13.18 References
13.19 Suggested Readings
13.20 Terminal Questions
13.1 Objectives
After reading this lesson, you will be able to:
Explain the difference between environment and ecology
Describe the need for ecological protection
List the features of Environment (Protection) Act, 1986
Define green management
Explain strategies for green management
13.2 Introduction to Ecological Protection:
The credit for mainstreaming Ecological Protection in the public domain goes to Rachel
Carson’s magnum opus ‘Silent Spring’. This treatise on unregulated economic growth and its
threat to ‘Mother Nature’ and human health led to a start of Environmental movement in
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West, primarily in United States of America. Back home, it was the ‘Chipko’ movement,
where village folks cutting across gender and caste divide protested against deforestation by
timber contractors in the foothills of Himalaya. Whether it be the west or our own country a
strong desire to protect our natural habitats and its inhabitants has shaped the discourse of
Ecological Protection.
As a human being it is important to understand environment because it is this understanding
which would make us appreciate that how humans, animals, ocean currents, water cycles,
food chains, etc are all interrelated and the emergent interrelationships arising between
various ecosystems makes the earth what it is. This understanding would help the mankind to
stop the unbridled damage or work towards repairing what has been already damaged. Thus
an understanding of environment helps the society towards various aspects of environment
like conservation of nature and natural resources, conservation of bio-diversity, stabilization
of human population and environment, social issues in relation to development and
environment, control of environmental pollution and development of non-polluting renewable
energy system etc.
The term environment originates from a French word “environ‟ means “encircle‟ and
includes within it everything on the earth like the land, water, flora, fauna, living creatures,
forests etc. Environment generally comprises of land, water, air, the things imbibed and also
embedded in the land. The more specific meaning is taken as covering the common physical
surroundings such as air, space, water, land, plants and wildlife.
The term “Environment” means totality of all physical, biotic and extrinsic factors effecting
the life and behaviour of all living things. In order to maintain an ecological balance it is
important that the environment of which land, water, air, human beings, plants and animals
are the components be preserved and protected from degradation. It’s the responsibility of
each and every individual to protect their surroundings.
Environment is common as well as equally important for all human beings. Each and every
individual despite having variation in their occupational role is affected by many
environmental issues like global warming, deteriorating forest cover, depletion of ozone
layer, loss of biodiversity, energy resources, etc. The study of environment basically deals
with the analysis of the processes in water, air, land, soil and organisms which leads to
pollute or degrade environment, largely all this happens because of man-made activities.
Section 2 (a) of the Environment (Protection) Act 1986 defines environment as “Environment
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includes water, air and land and the inter-relationship which exists among and between water,
air and land and human beings, other living creatures, plants, micro-organism and property”.
While disposing the case M.C. Mehta vs. Union of India, the Supreme Court explained the
environment as follows:
“A point has been reached in history when we must shape our actions throughout the
world with a more prudent carte for the environmental consequences. Through ignorance
or indifference we can do massive and irreversible harm to the earthly environment on
which our life and well-being depend. Conversely, through fuller knowledge and wiser
action, we can achieve for ourselves and our posterity a better life in an environment more
in keeping with human needs and hopes. There are broad vistas for the enhancement of
environmental quality and the creation of a good life. What is needed is an enthusiastic but
calm state of mind and intense but orderly work. For the purpose of attaining freedom in
the world of nature, man must use knowledge to build in collaboration with nature a better
environment. To defend and improve the human environment for present and future
generations has become an imperative goal for mankind – a goal to be pursued together
with, and in harmony with, the established and fundamental goals of peace and of
worldwide economic and social development”.
13.3 Ecology
The interactions and organization of various creatures along with the total function of eco-
system are known as ecology. If we see the dictionary meaning of ecology then, it is a branch
of biology dealing with relation of living organism to their surroundings along with their
different modes of life. The word ecology is derived from the Greek words Oikos which
means habitation and logos meaning study. Ecology not only studies the relationship of
individual organisms with their environment, but also deals with the study of various
communities, ecosystems, populations, biomes and the biosphere as a whole. Thus, the
subject matter of ecology is broadly divided into four main broad categories viz. population
ecology, physiological ecology, community ecology and ecosystems ecology. The word
"Environment" generally means relating to the natural versus man-made world whereas
“Ecology” focuses not just on the inclusion of the components of nature individually but
especially in searching out how the various parts of eco-system (which includes land, air,
water, soil etc.) interact with each other. The study of both ecology and environmental
science as a disciplines are very much interlinked and familiarity with the principles of one is
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essential to fully comprehend the other. Environmental science incorporates many elements
of earth and life sciences to understand various natural processes whereas ecology, on the
other hand, is usually more focused on how various organisms interact with each other with
their immediate surroundings. Ultimately, both sciences provide very significant information
about nature and what people can do better to protect and save the planet earth by doing
efforts to conserve its resources.
13.4 Need for Environmental Protection:
The world along with its development centric needs must show an equal resolve for
environmental protection. This is an indispensable need of the hour. What needs to be
emphasized in the global context is that, universal legal statutes and laws need to be adopted
along with a strong will and adequate machinery to enforce the legal mandate to protect the
endangered environment. Without law, environmental standards cannot be enforced in a
proper manner. It is only if these laws are strongly implemented that would lead to
Environmental Conservation. Environmental laws may be an amalgamation of common law,
miscellaneous provisions in some statutes which include specific statutes exclusively dealing
with environmental problems.
13.5 Environment and Business
Any developmental activity undertaken by any country has its impact on environment as
economic growth, human well-being and environmental performance are inseparable. The
welfare of the region’s population and the profitability of all its economic activities will
depend on accepting different strategies and how policy makers and businesses act on this.
Contemporary situation of environmental degradation is showing its alarming harm effects on
human wellbeing. The development of both economic and environmental activities can be
mutually beneficial or mutually destructive. Thus, there is an urgent need of business
enterprises where people can integrate the tools of business and sustainability for better
development. Undoubtedly, business has its impact on environment and it becomes necessary
for almost all the countries across the globe to frame the measures to manage any potential
trade-offs which can best exploit the synergies between green growth and poverty reduction.
Growth with sustainability is a bigger issue in the context of growth of Indian economy. If
business firms can keep a check on environmental degradation then only the goal of
sustainable development can be achieved. For development to be sustainable various means
can be adopted for example by bringing in more efficient infrastructure to people (e.g. in
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energy, road, water and transport), introducing efficient technologies that can provide the
goods at cheaper rates also increases its productivity and tackling poor health associated with
environmental degradation. Green growth strategies i.e. those strategies which can provide a
clear framework for the countries with the help of which they can achieve economic growth
and development along with the control over environmental degradation. It is being
recognized by the proponents of green growth strategies that focusing on GDP (Gross
Domestic Product) for the measurement of development in a particular country or as the main
tool to measure economic progress generally overlooks the contribution of natural assets to
wealth, health and well-being of the individuals. Thus, there is dire need to rely on a broader
range of measures of progress, development including the quality and composition of growth
along with environmental concerns and how this affects people’s wealth and welfare. “Green
Growth Model” offers real opportunities for development by bringing in more inclusive
growth in developing countries along with environmental protection.
Paradigm shift in global business reflects a new social structure as we look through global
information. Now, here comes the role of entrepreneurs. Entrepreneurs are the individuals
who identify business opportunities and allocate resources for meeting the demands of the
customers. Green entrepreneurs are the entrepreneurs who integrate social and environmental
concerns into economic actions. Green entrepreneurs provide innovative solutions to the
ways in which services are produced and consumed. Green entrepreneurs have a lot of
objectives like profit maximization as well as societal objectives too. They try to adopt those
strategies which will be green, ethical and fulfill social motives as well. So, green
entrepreneurs may be called as social entrepreneurs who focus on financial objectives. With
the emerging development paradigm along with societal responsive green entrepreneurship,
the two together can bring about major changes in practices the way the consumption of
natural resources take place, thus fostering sustainable economic development.
Most of the times, GREEN is used for linking business with environment or ecological
sustainability. The term “Ecopreneur” was used by Isaak (1998) for those individuals who
found green businesses and achieved social as well as ecological goals along with profit. For
moving towards a truly sustainable society, it needs to be believed that ecopreneurs are
actually the change agents who would drive the sustainability transformation process (Isaak,
1998). Many organizations have framed policies for implementing green growth strategies
which can bring in more sustainable development. Green growth policies can help in more
sustained growth thereby providing certain benefits like:
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Improving productivity by creating incentives for greater competence
Providing more opportunities for innovation and value creation.
Boosting investors’ confidence through greater likelihood in generalizing how
ministries/governments/environmental organizations deal with major environmental
issues or problems.
Opening up those kind of markets where demand for green goods, services and
technologies can be stimulated for sustainability.
Contribution of enterprising entities to fiscal consolidation by organizing revenues
through green taxes and through the elimination of all those subsidies which do harm
to the environment. This move can take the economy towards more sustainable
environment.
Reducing the risk of negative shocks to growth due to various resource bottlenecks.
The developed and the developing world together is working on adapting sustainable
measures along with identifying the policy mixes and measurement tools which countries (in
different situations) can adopt to implement green growth strategies for development. Thus,
in a way which can contributes to sustainable development objectives like controlling
environmental degradation, poverty eradication, generating employment opportunities etc.
13.6 Sustainable Development through Green Growth:
Policy makers across the globe are recognizing the importance of creating harmony and
balance between economic development and environmental sustainability. The focus is on
integrating environmental considerations into the various economic developments planning
process. This would lead to a balanced approach which would not shift focus from
development while keeping the ecological concerns too into considerations. Sustainable
development stresses the importance of taking a long term perspective about the
consequences of all those activities which are happening today. The global cooperation
among countries need to be strengthened in order to reach at viable solutions for controlling
environmental degradation. Sustainable development refers to that development path wherein
we will not compromise with the resources of our future generations. As a part of sustainable
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development, green growth strategy is about settling and strengthening various aspects of
economic, environmental and social policies of the nation. By adopting green growth
strategies an economy can move towards environmentally sustainable development. In
addition to this, country needs to take into account the real value of natural capital of the
nation and recognizing its essential role in economic growth process and development. An
adoption of green growth model promotes a cost-effective and resource efficient way of
managing sustainable production. This sustainable path can help us in achieving the
following outcomes if designed and implemented effectively. Some of the green growth
outcomes are as follows:
Economic Outcomes
More equitable distribution through production of conventional goods and services in
an economy. This will enhance employment opportunities as well.
Increased production of unpriced ecosystem services
Economic diversification which can reduce the negative shocks to growth
Production, access, innovation and uptake of green technologies for development
which will help in enhancing market confidence as well.
Environment Related Outcomes
Efficient utilization of limited resources can increase productivity and efficiency of
natural resource use.
The natural capital of a nation must be used within ecological limits to save resources
for future generations
Capital enhancement through use of non-renewable natural capital
Better risk management strategies for better environment.
Social Outcomes
The target of welfare for all can be achieved by adopting these kind of practices.
There will be more livelihood opportunities which can enhance human well-being,
income and better quality of life, notably of the poor.
Enhanced social, human and knowledge capital of the nation
13.7 India’s initiatives for implementing globally specified targets and indicators:
India’s latest report published on implementation of Millennium Development Goals (GoI,
2011) contains a section on MDG7 i.e. to ensure environment sustainability which includes
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number of indicators such as forest cover, access to safe drinking water, sanitation facilities,
reduction in CO2 emissions etc. Environmental impacts are enormous as they act at varying
level influencing the quality of human life. Most of the times the various developmental
activities undertaken to improve the living standard of people, at large, affects the natural
environment adversely in many ways and cause severe threats to bio-diversity at large. The
MDG-7 addresses the concern for sustainable development to reverse the impact of various
activities which causes environmental degradation and loss with focus on improving/
monitoring indicators associated with it. Essentially the Goal 7 is about ensuring
environmental sustainability, so that the present generation may not utilise the resources of
future generation. In case of Target 7A of MDG 7 i.e. to integrate principles of sustainable
development into country policies and programmes and reverse the loss of environmental
resources, certain steps has been initiated in case of India. The Green India Mission targets to
increase forest and tree cover to make India’s development more sustainable. In order to
protect forest cover of the country, certain initiatives have been taken by the government for
the inclusion of more area under protected area of the country. India’s protected area cover
has been increased by about 70,000 hectares from 1999 to 2011. As per assessment in 2013,
the total forest cover of the country is estimated around 697898 sq. km which comprises
21.23% of the geographic area of the country. During 2011-2013, there is an increase of 5871
sq. km in forest cover of the country. In the fields of energy use focus is more on its efficient
utilization. Carbon emissions need to be controlled and in case of India, CO2 emissions have
‘experienced dramatic growth’, with India becoming the world’s third largest CO2 emitting
country. In case of Target 7B i.e. reduce biodiversity loss, the link is missing in the report and
most probably it is integrated with the above figure. Some data is required for the estimation
of loss of bio-diversity so that government can initiate steps for its recovery. Target 7C i.e.
Halve the proportion of people without sustainable access to safe drinking water and basic
sanitation by 2015, which is the very much necessity of one’s life. In this regard, in case of
India, proportion of households without access to safe drinking water has reduced
significantly (which is a good sign for a nation) from about 34 percent in 1990 to about 9 per
cent in 2008–09 and moreover India is on its way to 100 per cent coverage for safe drinking
water. As far as sanitation facilities are concerned, proportion of households without
sanitation facilities has reduced from about 76 per cent in 1990 to about 50 per cent in 2008–
09 (at which rate, 43 per cent will remain without such facilities, missing the MDG target by
about 5 percentage points). For further improvements in human wellbeing, Target 7D
focusses on significant improvement in the lives of at least 100 million slum dwellers by
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2020 across the country. In case of India, slum population increased from 46.26 million in
1991 to 61.82 million in 2001; while the number of slums declined about 13 per cent from
1993 to 2008–09, the latest estimates of slum population according to census 2011 shows an
increasing trend.
13.8 Green House Effect:
One of the factors that affect the world's environmental conditions is the greenhouse effect.
The greenhouse effect held responsible for contributing to earth's environmental woes, but it
has a vital positive effect on the planet as well. Life on earth would be vastly different, or
even non-existent, without this atmospheric condition. The composition of earth's atmosphere
is mostly made up of gases like nitrogen and oxygen, which do not have much effect in
regulating the climate. The other gases which are smaller in proportion (i.e. <1% of the
atmosphere) have a much larger impact. These gases even though they occur in relatively
small quantities usually known as the greenhouse gases (GHGs) has its larger impact on
climate change. The energy released by the sun passes through the earth’s atmosphere but is
not absorbed by the greenhouse gases due to its shorter wavelength. But, earth absorbs this
energy and radiates heat energy back into the atmosphere. The greenhouse gases absorb and
radiate much of it back towards the surface whereas the rest is radiated out to space. This is a
natural process that warms earth’s atmosphere. The earth would be much colder without this
greenhouse effect. On the other side there must be balance otherwise it will be harder to live
in warm environment as this is clear from the present situation of rising temperature day by
day. The problem we now face is that human activities are increasing the concentrations of
greenhouse gases. This enhancing greenhouse effect creates a situation of serious effects of
global warming.
13.9 GLOBAL WARMING
Global climate is increasing day by day as there is an increase in the average temperature of
earth's atmosphere, particularly a sustained increase which cause changes in the global
climate. Global warming is synonymous with enhanced greenhouse effect and this increase in
the greenhouse gases leads to entrapment of more and more solar radiations and this results in
an increase in the overall temperature of the earth. Recent observations of warming support
the theory that greenhouse gases are warming the world and this need to be controlled. In the
last few decades, the planet Earth has experienced the largest increase in surface temperature.
Data reveals that the average surface temperature of the Earth rose from 0.6 to 0.9 degrees
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celsius (1.08°F to 1.62°F) between 1906 and 2006. This increase in the rate of temperature
nearly doubled in the last 50 years. Measurements of sea level show a rise of about 0.17
meters (0.56 feet) during the twentieth century. Since 1978, the arctic sea ice extent has been
melting by 2.7 percent per decade. Decade of 2000 witnessed a solar output decline resulting
in an abnormally deep solar minimum in 2007-2009 and as a result surface temperatures
continued to increase. India being a developing nation has always showed a concern in
safeguarding environment and in this regard India always supported international decisions
on it. The Constitution of India has a number of provisions defining the responsibility of the
central and state government towards protecting environment. The state’s responsibility has
been laid down under article 48-A which is as follows, “the state shall endeavour to protect,
improve and safeguard the environment, forests cover and wildlife of the country. Similarly,
a fundamental duty has been stated by the constitution of India for every citizen of this nation
under article 51 –A (g) which read as “it shall be the duty of every citizen of India to protect,
improve and safeguard the natural environment including forests, lakes, rivers and wild life”.
All these initiatives taken by respective governments for achieving the targets of more
sustainable environment.
13.10 The Environment (Protection) Act, 1986
The Environment (Protection) Act 19861 was enacted by the Government of India after the
aftermath of the Bhopal gas tragedy in 1984 claiming more than 3000 lives. Bhopal gas
tragedy was a catastrophe that had no parallel in the world’s industrial history. This was an
initiative to protect environment so that the citizens can have a healthy place to live in.
Environment Protection Act refers to the decisions taken at the Stockholm Conference in
June 1972 wherein members from different nations expresses their concern about the decline
in environmental degradation, excessive concentrations of harmful chemicals, increasing
pollution, protection of biological diversity, growing risks of environmental accidents and
threats to life system. In the contemporary period also we are combating with all these and
these were the concerns to protect environment as well as lives of the people. According to
this Act the following powers are given to the central government:
(a) Coordination is required between the acts initiated by the state governments, officers and
other authorities in order to protect environment.
1 http://envfor.nic.in/legis/env/env1.html
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(b) Nationwide initiatives must be well planned and implemented for the prevention, control
and abatement of environmental pollution.
(c) Certain standards must be fixed for the quality of environment in its various aspects.
(d) There must be control on emission or discharge of environmental pollutants from various
sources.
(e) Details about restricted areas in which any industry, operations or processes or class of
industries shall not be carried out or established until and unless it meets certain safeguard
limits.
(f) Safeguards and procedures for the prevention of accidents which may cause
environmental pollution and remedial measures for such accidents.
(g) Assessment and evaluation of certain manufacturing processes, materials and substances
as are likely to cause environmental pollution.
(h) Enhancing research activities relating to problems of environmental pollution
(i) Government must take initiatives for the inspection of any premises, plant, equipment,
machinery, manufacturing or other processes, materials or substances and must provide
guidelines/directions to such authorities for the prevention, control and abatement of
environmental pollution
(j) Acknowledgement, establishment or recognition of environmental laboratories and
institutions
(k) Proper dissemination of information in respect of all matters relating to environmental
pollution; and
(l) Provision and preparation of manuals, codes, reports or guides relating to the prevention,
control and abatement of environmental pollution. The central government may constitute an
authority or authorities for the purpose of exercising such of the powers and functions under
this Act.
The central government may make rules covering quality concerns, pollution control and
certain other safety measures. The prohibitions and restrictions on the handling of hazardous
substances in different areas along with decision about their locations. In addition to this act,
India’s strong commitment towards protecting environment is clear from the establishment of
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‘The Indian Green Building Council’ (IGBC) which was formed in the year 2001. The vision
of the council is, "To enable a sustainable built environment for all and facilitate India to be
one of the global leaders in the sustainable built environment by 2025".
13.11 Carbon Footprint
The term ‘Carbon footprint’ has been extensively used nowadays in the ecological discourse.
Carbon footprint as a concern has found acceptance in all spheres of life; whether it is the
media, government or the business outlook. The question that needs a well-defined
explanation is that what exactly constitutes a carbon footprint and why it matters. Primarily
speaking carbon footprint is the sum total of emissions emitted by greenhouse gases into the
environment. The carbon footprint stands for a certain amount of gaseous emissions
associated with human production or consumption activities. What is of importance is that
these are relevant to climate changes, occurring all around and affecting us. The problem lies
with the measurement and quantification of a carbon footprint because as of now there is no
consensus on this. The continuum of definitions ranges from direct CO2 emissions to full life-
cycle greenhouse gas emissions and the units of measurement are not clear. The Kyoto
Protocol2 recognizes 6 GHGs and carbon footprint considers all six of the Kyoto Protocol
greenhouse gases viz. Carbon dioxide, methane, nitrous oxide, hydrofluorocarbons,
perfluorocarbons and sulphur hexafluoride.
Carbon footprint is a measurement of the impact, which human activities have on the
environment around them locally and in particular on climate change across the globe. The
various activities which man undertakes in his day to day life, which results into the
production of greenhouse gases like burning fossil fuels like coal and petroleum products
for electricity, heating and transportation etc. Essentially carbon footprint consists of sum
total of two parts, the primary footprint and the secondary footprint.
1. The measure of our direct emissions of CO2 from the burning of fossil fuels including
domestic energy consumption and transportation (e.g. automobiles and air plane)
comprises primary footprint. It is important to understand that man can control all those
activities which come under primary footprint.
2 Kyoto Protocol: It is a protocol to the United Nations Framework Convention on Climate Change. It wasinitially adopted on 11th December, 1997 in Kyoto, Japan and entered into force on 16th February, 2005. As ofJuly, 2010, 191 states have signed and ratified the protocol.
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2. The secondary footprint is a measurement based on the entire lifecycle of the product. The
indirect CO2 emission is an output of all those activities which are connected with the
manufacture and eventual breakdown of the product. Basically, the more consumerist human
beings become the source of the emissions which pollutes environment.
13.12 Reasons responsible for alarming individual carbon footprints
The abuse caused by Humans to the planet’s natural resources is alarming. There are various
reasons responsible for alarming increase, in environmental degradation. Some of the reasons
are as follows:
Daily Human activities results in huge amounts of polluted contents of air, water and
land.
Anti-environmental behaviour of humans results in production of huge and
completely inexcusable amounts of waste materials.
It has been generally observed that people usually have been impervious to embrace
alternative energy sources.
The change in our eating habits also bring changes to carbon footprint levels.
Excessive fixation on animal-based diets not only destroy our health, but also cause
unparalleled amounts of deforestation and shrink our fresh water supplies to nothing.
For example, studies shows that vegetarianism can definitely reduce carbon
footprints.
Some of the Facts about
The major greenhouse gases which affect our environment are those which are
responsible for trapping heat in the atmosphere and causing global warming. Gases
like Carbon Dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), and several types
of fluorinated gases are largely because of man-made activities. The most alarming
fact is that over the last few decades there has been a 0.9o F (0.5o C) rise in the
average sea temperatures which can have hazardous consequences for mankind.
Scientists have demonstrated that over 20,000 square kilometers of ice melted in the
Arctic between a period of 1965 and 1995.
The average global sea levels have risen between 10 to 25 cm.
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Over the past 100 years , surface temperatures worldwide have risen 0.7o C
According to World Meteorological Organization (WMO) estimates, the years 2011-
2015 have been the warmest five-year period on record, with many extreme weather
events - especially heat waves - influenced by climate change.
13.13 Green Management:
Green management is fundamentally about doing business in an environmentally sensitive
manner. In other words, business management strategies focusses on those procedures and
processes that can reduce environmental pollution. Green management, on the other hand, is
the couture method of producing profits. Green management is the latest branding strategy
for establishing a reputation/status for the product as well as for the enterprise. These
enterprises usually promote those good which takes care of environment as well. Thus, the
reliance on expertise, quality of customer service and quality of the product service is no
longer enough. People now usually prefer eco-friendly products as compared to other
products. That’s why businesses nowadays are downplaying the message of being
environmentally conscious. In addition to this, businesses are also expressing through their
actions about their product and productive process being environmental friendly. Business
houses have realized that preserving the environment is of paramount importance. If
environment is taken care of then only all the development processes can prove to be a win-
win situation for the society where businesses can grow and as well as give back to the
environment.
13.14 Strategies to Grow Green Management:
Whether it be the developed or developing nation state, it is imperative to create environment
in which entrepreneurs can work efficiently and to best of their abilities. The entrepreneurs
too should chart a course which would lead towards a path of environmentally-sustainable
development. In today’s world it becomes necessary to generate more and more green
entrepreneurs to save guard the present ecological habitats so that these natural resources can
be protected for future generations. Certain strategies can be adopted like:
Factors like green purchasing, green building standards, community education and
sustainability goals can work wonders for the environmental health. Adoption of
various activities by the business world like building markets at the local level
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through procurement and policy initiatives can be a correct step towards sustainable
development.
Various endeavors centered on green incentives like Green PILOTS for LEED
construction, Green Business Award Programs, Green Revolving Loan Funds and
Green Business Certification Programs etc. must be created to advance sustainability.
The bottom line strategies to deal with environmental degradation can fundamentally
revolve around the following activities like waste reductions, reuse of various
products, recycling policies, and replacing disposable items with reusable items.
13.15 Summary
With the help of different green strategies based on the availability of natural resource
endowment of a particular nation, economies can slowly move towards the path of
development which will be environmentally sustainable as well. If business activities
deals with the environment solutions and environmentally superior products and if
their innovations substantially influence the mass market then only growth will be
sustainable. Business deals must addresses the issues related to impact of business
activities on environment as well. The business owners can assimilate personal values
of environmental integrity, social justice, development of high-quality products and
services with the professional values to make economic progress more sustainable.
Companies need a clear global framework providing consistent values and business
strategy supported by more local capacity and understanding to respond to specific
concerns and expectations within individual countries Social awareness of these green
businesses may be in direct contrast to traditional businesses. The adoption and
implementation of green processes can help any kind of industry to move sustainably.
On the other hand, natural resource scientists could focus on how green businesses
interact with public lands via physical or psychosocial perceptions and behaviours.
The need of the hour is to create a global framework but ensure you have local
capacity to respond to local priorities and needs.
If more businesses go for green strategies or adopt green values then only the opportunities
for local economic viability, social justice and environmental integrity can be enhanced.
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Check your progress
1. ________ is the study of the interactions between biotic and abiotic aspects of the
environment.
(a) Environment (b) Ecology (c) Biosphere (d) None of these
2. The Environment (Protection) adopted by Government of India in ________
(a) 1980 (b) 1986 (c) 1990 (d) 1996
3. __________ measures the greenhouse gases caused directly and indirectly by a human
production or consumption activities.
(a) Global warming (b) Greenhouse effect (c) Carbon Footprint (d) None of these
13.16 Glossary
Environment: The term “Environment” means totality of all extrinsic, physical and biotic
factors effecting the life and behaviour of all living things.
Green House Effect: The foremost reason of rise in global temperature is green house effect.
This effect is basically because of large presence of green house gases, which are responsible
for global warming and unprecedented rates of climate change. Human or man-made
activities are increasing greenhouse gas levels and leading to enhanced green house levels.
These green house gases normally trap some of the sun’s heat.
13.17 Answers to Check Yourself
1. (b) 2. (b) 3. (c)
13.18 References
http://envfor.nic.in/legis/env/eprotect_act_1986.pdf
Wackernagel, M., Rees, W.E., 1996. Our Ecological Footprint: Reducing Human Impact onthe Earth. Gabriola Press New Society Publishing, B.C.
http://www.in.undp.org/
https://igbc.in/igbc/
13.19 Suggested Readings
Chiras, D., “ Environmental Science”, Laxmi Publications, New Delhi
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13.20 Terminal Questions
1. Why there is a need for environmental protection?
2. Define Carbon Footprint and why are individual carbon footprints so alarmingly high?
3. Write main features of Environment (Protection) Act, 1986.
4.What do you understand by Green Management? Discuss various strategies for green
management?
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Lesson 14
Technological Environment
Structure
14.1 Objectives
14.2 Introduction
14.3 Meaning of Technology
14.4 Technological Innovation
14.5 Benefits of Technology for Business
14.6 Transfer of Technology
14.7 Modes of Technology Transfer
14.8 Barriers/Challenges to Technology Transfer
14.9 Intellectual Property Rights (IPRs) and Transfer of Technology
14.10 What Are IPRs?
14.11 Legislations Covering IPRs in India
14.12 Who are responsible for administration of IPRs in the country?
14.13 Technology Policy
14.14 Appropriate Technology
14.15 Information technology (IT)
14.16 Summary
14.17 Glossary
14.18 Answers to Check Your Progress
14.19 References
14.20 Suggested Readings
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14.21 Terminal and Model Questions
14.1 OBJECTIVES
After reading this lesson, you should be able:
To Discuss the advantages that technology offers to an organisation
To describe how a business uses technology
To define the meaning of information technology (IT) and how IT is used by a
business
14.2 INTRODUCTION
The influence of technology on the business organisations is very profound and
cannot be ignored. The twentieth century has witnessed a massive growth and expansion of
technology. The world today is very very different from what it was in the previous century.
No doubt the scientific heritage dates back to many hundreds of years, but the development
of technology, its application and effects on society and business has been enormous since
the early years of this century. In the year 1900, the world was entirely different from what it
is today - it was a world where nobody ever thought of or imagined about flight, television,
antibiotics, anaesthetics, computers, etc. These massively changing circumstances have had
enormous effects on almost every aspect of life be it personal and business. Profound
development and improvements in technology have made possible global communications,
inter-planetary transport, the worldwide development of businesses along with increased
speed both in manufacturing and distribution, as well as quality of manufactured products.
Technology has moved civilisation from straw hats and oxen to virtual reality and high-speed
trains, and from 100 beads on an abacus to sixty- gigabyte personal computers.
In case of business organisations, improved technology involves and results in labour
saving techniques and machinery, increased productivity, better and new methods of working
and more efficient systems and processes. For instance, in modern times we find the evidence
of improved and better technology in the form of information technology (PCs, intranets,
extranets, the internet); digital electronics (broadbanding, digital TV, mobiles); new synthetic
materials (synthetic drugs, celluloid, polymers); new sources of energy (wind power, solar
power, tidal, wave power); micro-technologies (fibre optics, microchips); biotechnology
(cloning, genetically modified foods, human genome mapping); and so on.
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14.3 Meaning of Technology
One among the important determinants of the success of a business firm, industry as
well as a nation is technology. The word technology has been derived from the greek word
technologia which means systematic treatment. In a narrow sense, technology is identified
with the knowledge about machines and processes. However, in its broader sense technology
includes the tools – both machines (hard technology) and ways of thinking (soft technology)
– available to solve problems and promote progress between, among and between societies.
According to UNCTAD’s Draft TOT Code, technology is described as “a systematic
knowledge for the manufacture of a product, for the application of a process or for the
rendering of a service and does not extend transactions involving mere sale or lease of
goods.” Besides knowledge or methods required to carry on or to improve the existing
production and distribution of goods and services, technology also includes entrepreneurial
expertise and professional know-how; two elements which may and do tend to give a
competitive edge to the business owning and using technology.
The most elaborate and comprehensive definition of technology seems to have been
offered by the Webster’s Encyclopedic Dictionary of the English Language which is,
“Technology is the branch of knowledge that deals with the creation and use of technical
means and their interaction with life, society and the environment, drawing upon such
subjects as industrial arts, engineering, applied science and pure science.”
The global competitiveness of nations has been evaluated by the World Economic
Forum on the basis of eight factors and technology is one of them. In its Global
Competitiveness Report, 1999, the focus continued to be on information technology as a new
source of competitiveness. In this regard three aspects, namely, e-mail, internet and e-
commerce were observed to be potential factors leading to increased advantages for the
concerned business firm.
For a business firm engaged in production, both the technology available and the
technology in use are important for its growth, development and success. Technology plays a
decisive role whenever there is need for improvement and development, be it the need for
more food, better education, improved health facilities, increase in industrial output, or an
improved and more efficient system of transportation and communication. This is so because
technology encompasses a system of knowledge, skill, experience and organisation needed to
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produce, use and control goods and services. In economic terms technology is the main
determinant of economic growth as increased use of improved technology leads to increased
output for given inputs and also better and a greater variety of products. Nations which have
access to (and use) superior technology, enjoy greater productivity and higher standards of
living as compared to the nations with low technology.
14.4 Technological Innovation
Innovation in business provides competitive advantage and eventually leads to
success, growth and development. In fact the overall economic development of a country is
strongly influenced by innovations in the form of introduction of a new product, or of a new
means of production, or of a new market, or of a new source of raw material, and so on.
Innovations in the form of technological innovations provide an edge to the business
companies by increasing their competitiveness. This may be reflected in the form of creation
of new markets or market segments; increase in the market shares; or creation of new
industries.
Technological innovation in the context of business includes technical, industrial and
commercial steps undertaken by a business firm which eventually lead to the marketing of
new manufactured products and also to commercial use of new technical processes and
equipment. Technological innovations may be of the following main types:
- Incremental Innovation: Such a technological innovation refers to an incremental
change in the existing technology which improves the performance or features or
quality but in no way changes the basic structure and functions of the present
existing technology.
- Radical Innovation: Such a technological innovation does not involve an
incremental change in the existing technology but changes the basic structure and
functions of the present existing technology.
- Next-Generation Technological Innovation: Such a technological innovation
refers to a change in the existing technology which does not change the basic
structure and functions of the present existing technology, but at the same time
bring about profound improvement in the performance, quality, features, etc.,
reducing cost and opening new applications.
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However all new innovations may not always be commercially successful. New
products, one of the possible outcomes of technological innovation, may fail due to many
reasons like failure to generate enough demand, intense competition from firms with
established market share and customer loyalty, deficiencies of marketing management,
ignorance of environmental factors or even due to higher pricing. Usually the pattern of
innovation in an industry which is based on a new technology is such that first there is
product innovation (wherein the performance and quality, etc., improve for the better);
followed by innovations in the technique of production (which helps in reducing the cost of
production). With the passage of time, the key technologies of the industry mature and
eventually the market for the given industry will saturate; such that these key technologies of
the industry become obsolete and make ground for technology substitution.
14.5 Benefits of Technology for Business
Technological change influences not only the structural change in industry but also
plays a major role in creating new industries. It strongly influences competitive advantage of
firms in the industry; their relative cost position or differentiation; and even the profit
potential of all firms. Normally technology brings a lot of benefits for business. To name a
few, following are some of the advantages enjoyed by a business firm by the use of improved
and better technology.
Technology can help reduce costs: An important way in which this has been made
possible is by automation of manual tasks so that same work could now be done by
lesser number of workers with the help of different machines.
Technology leads to improved quality: Quality standards may be improved by
introduction of more consistent procedures which help in removal of human error.
This is possible by increased automation through better and high quality machines
which leads to reduction in cost and increase in quality.
Technology increases productivity and profits: With the application of new and better
technology to business, business becomes more efficient, costs reduce, productivity
and hence profit increases.
Technology leads to improved efficiency: The increased use of machines in a business
organisation leads to more work and removes the problems faced by workers like
falling sick or getting tired. Hence, the use of technology speeds up the processes as
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machines are definitely more efficient than humans and more work output can be
produced for the same cost, or even less cost.
Technology facilitates the making of better and more accurate decisions: This is made
possible by the more rapid transmission of information (through such media as radio,
television and other electronic means of communications) along with mechanisation
of many tasks, which ensures faster decisions. The rapidity and accuracy of
information transmission in business has enabled well informed and faster decisions.
Technology creates new and more interesting jobs: With the advent of new
technology there arises a need for skilled and technically trained workers for different
areas of business. This leads to the creation of new employment opportunities.
Technology helps to develop new products: Based on the research and development in
the industry, customer needs and expectations, demand conditions, social forces (like
demand for eco-friendly products), new products are developed and introduced in the
market.
However, it is important to note that not all technological change is beneficial; it may
even worsen a firm’s competitive position as high technology does not guarantee
profitability. Looking at the flip side, certain adverse affects of new technology could be:
(i) introduction of new and more machines may lead unemployment as it dehumanises
work; (ii) many high technology projects and machinery have increased the levels of
different types of pollution; (iii) may create new dangers for the employees and public;
(iv) employees are always on call, have to be available on the internet, (v) implementation
of new technology involves heavy costs and (vi) new technology does not remain for
long, becomes out dated very soon.
14.6 Transfer of Technology
In simple words, technology transfer is the process of transferring skills, knowledge,
technologies, methods of manufacturing, samples of manufacturing and facilities among two
units which may be governments or universities and other institutions. The transfer of
technology may involve physical assets, know-how, and technical knowledge. The transfer
may be said to be successful if the receiving entity (maybe a firm, an industry, a region or
even a nation), is able to effectively utilise the technology transferred and eventually
assimilate it for its benefit. So technology transfer is the transmission of know-how
(knowledge) to suit local conditions, with effective absorption and diffusion both
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within and across countries with a view to achieving three core objectives: 1) the
introduction of new techniques by means of investment of new plants; (2) the improvement
of existing techniques and (3) the generation of new knowledge. In other words, it is
application of technology and considered as process by which technology developed for
one purpose is used either in a different application or by a new user. Technology transfer
is usually considered as dissemination of information, matching technology with
needs and creative adaptation of items for new uses. Technology transfer can also be
described as the process through which technology moves from outside sources to the
organization. The implicit assumption is that technology can be “transferred” with a lower
expenditure of resources than were required to develop it in the first instance.
14.7 Modes of Technology Transfer
Technology transfer has almost become inevitable given the fact that technological
progress is the engine of growth. High income and developed countries are technologically
more advanced than their developing counterparts. Those countries which cannot match the
technological pace through their indigenous technology, thus, rely on technological transfers
to keep pace with growth and development. The technology transfer can be done across
countries in various modes. Some of the major modes of transferring technology are:
1. Projects: When the concerns enter into a project where the ownership and control of
operations is with the international partner, or turnkey projects where the entire
facility is set up under the technological expertise of international partner are the
instances where technology flows in from the technologically rich counterpart.
2. International trade: When goods and services are traded across borders: equipments,
tools, consulting and technological services, they help in transferring the benefits of
technological advancement to the country behind the technology frontier.
3. Research and development: Joint R& D projects, subcontracts, setting up R&D
facilities and operations in an international location are the instances of this mode of
transfer.
4. International Conferences, visits and exhibitions can also provide exposure to
technological advancements in other countries for the benefit of the recipient.
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5. Contracts and agreements: Agreements for patents, trademarks, and know-how,
contracts for equipment maintenance, management services are the common instances
through which technological assistance can be availed.
6. Training and teaching: The age old methods of transfer and sharing of knowledge can
be availed across borders with the intent of letting the technology flow from the
strengthened partner to the one needing help.
7. Research publications: The dissemination of technology also takes place through
technical, professional and scientific literature and academic books for general
advantage of the readers and practitioners.
8. Employment and migration: employment of nationals by foreign firms, migration of
trained personnel to developing countries, development assistance under various
schemes etc.
9. Licensing—the exchange of access to a technology and perhaps associated skills from
one company for a regular stream of cash flows from another.
10. Cross-licensing—an agreement between two firms to allow each other use of or
access to specific technologies owned by the firms.
11. Strategic supplier agreement—a long-term supply contract, including guarantees of
future purchases and greater integration of activity than a casual market relationship.
One prominent example is the second-source agreements signed between
semiconductor chip manufacturers.
12. Contract R&D—an agreement under which one company or organization, which
generally specializes in research, conducts research in a specific area on behalf of a
sponsoring firm.
13. Research consortium—any organization with multiple members formed to conduct
joint research in a broad area, often in its own facilities and using personnel on loan
from member firms and/or direct hires.
These are some of the prominent and prevalent methods through which the
technological edge developed and nurtured by one country can flow to the advantage
of the aspirational country on its road to growth and development.
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Check Your Progress A
1. State whether the following statements are True or False:
(i) In case of business organisations, improved technology involves and results in labour
saving techniques and machinery.
(ii) Technology includes only tools and machines, that is hard technology.
(iii) Technology can help to reduce costs and improve quality.
(iv) International Trade is the only possible method to transfer technology.
14.8 Barriers/Challenges to Technology Transfer
In transfer of technology, in the receiving country technologies have to be adapted and
modified, but few believe that technologies developed and used in technically advanced
countries cannot be usefully applied in countries behind the frontier (developing countries).
Some of the problems which creep up in the technology transfer process are:
1. Operational problems: The technology and algorithms developed in one part of the
world are found to be unsuitable and inadequate at the place of use. This imposes
operational problems for the users of technology which the developers are unable to
suitably resolve.
2. High cost: Technology transfer assignments often are impeded by the challenges of
high cost and limited capability of data processing equipment. The best of processors
and hardware adopted in the process suffer from restrictions of slow speed and limited
memory which makes the entire process of technology transfer challenging and makes
the process of transfer of research successes almost impractical.
3. Infrastructural challenges: The developing countries, the recipients of better
technology often face challenges in adopting and implementing the new technology
on account of infrastructural challenges. The processing systems and work
environments sometimes fail to adopt the technological advances due to the inherent
limitations of infrastructural set-ups. Standardization, however, can make the job of
technology transfer easy.
4. Political issues: Political differences arising from different ideologies of political
parties across borders and also within the same country work as challenges in transfer
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of technology. The political disposition and preference of both the transferor and
recipient would influence the type, amount and terms of technology transfer.
5. Managerial and psychological problems: The managerial approach also matters when
organisations contemplate the issue of transferring or receiving technology.
The technology transfer process is rather a daunting task which needs to be worked out on
broader as well as finer grounds so that the process results in the mutual benefit of both
the parties.
14.9 Intellectual Property Rights (IPRs) and Transfer of Technology
Intellectual property comes in many forms, trade secrets, copyrights, and patents
being the most important in relation to technology transfer. There is relatively little attention
paid to why intellectual property (IP) protection should matter for technology transfer. It has
also been pointed out that technology can be involuntarily transferred, via imitation. When
the creators of innovative exercise allow the sharing of benefits of their creative activities
which are protected by strong IPRs it provided an impetus to R&D paving way for innovation
and higher economic growth.
14.10 What are IPRs?
Intellectual property (IP) refers to creations of the mind: inventions, literary and
artistic works, and symbols, names, images, and designs used in commerce. Intellectual
Property Rights are legal rights, which result from intellectual activity in industrial, scientific,
literary and/or artistic fields. These rights safeguard creators and other producers of
intellectual goods and services by granting them certain time-limited rights to control their
use. Some common types of intellectual property rights (IPR) are copyright, patents,
and industrial design rights; and the rights that protect trademarks, trade dress, and in some
jurisdictions trade secrets: all these cover music, literature, and other artistic works;
discoveries and inventions; and words, phrases, symbols, and designs.
14.11 Legislations Covering IPRs in India
Following is the list of important legislations covering the IPRs in India:
Patents: The Patents Act, 1970 as amended in 1999, 2002 and 2005
Design: The Designs Act, 2000
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Trade Mark: The Trade Marks Act, 1999
Copyright: The Copyright Act, 1957 as amended in 1983, 1984 and 1992, 1994, 1999
Layout Design of Integrated Circuits: The Semiconductor Integrated Circuits Layout
Design Act, 2000
Protection of Undisclosed Information: No exclusive legislation exists but the matter
would be generally covered under the Contract Act, 1872
Geographical Indications: The Geographical Indications of Goods (Registration and
Protection) Act, 1999
Plant Varieties: The Protection of Plant Variety and Farmers’ Rights Act, 2001
14.12 Who are responsible for administration of IPRs in the country?
Patents, designs, trademarks and geographical indications are administered by the
Controller General of Patents, Designs and Trademarks which is under the control of the
Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.
Copyright is under the charge of the Ministry of Human Resource Development. The Act on
Layout-Design of Integrated Circuits is administered by the Ministry of Telecommunication
and Information Technology. Protection of Plant Varieties and Farmers’ Rights Authority,
Ministry of Agriculture administers the Act on Plant Variety.
14.13 Technology Policy
Technology policy is defined as a set of government actions that affect the generation,
acquisition, adaptation, diffusion and use of technological knowledge in a way that the
government deems useful for the society rather than individuals. There is, naturally, a large
overlap between technology policy and industrial policy. While most technology policies can
be regarded as part of industrial policy, there are some areas that are unique to technology.
The overlapping areas include policies, such as research and development (R&D) subsidies to
industrial firms, regulation of foreign direct investment (FDI) in relation to technology
imports or regulation of technology licensing in designated industries. The area that does not
overlap between the two policies include support for “basic R&D”, that do not relate directly
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to particular industries or the management of the patent law and other intellectual property
rights (IPR) laws.
In the past many governments followed the policy of restriction of foreign technology
which worked as a bias against domestic firms, because on the one hand domestic firms were
not allowed to use foreign technology while on the other hand foreign firms in the very same
countries could bring in foreign technology. Such a situation could adversely affect the
competitiveness of these domestic firms. So an important factor responsible for improving
the competitiveness is the access to global technology for domestic firms. So the
technological policy of the government is very important factor influencing the technological
environment as the nature of technology can strongly affect the location of production base
and also the global trade flows.
Modern India has had a strong focus on science and technology, realising that it is a
key element of economic growth. India is among the topmost countries in the world in the
field of scientific research, positioned as one of the top five nations in the field of space
exploration. According to recent official information provided to the Lok Sabha, 27 satellites
including 11 that facilitate the communication network to the country are operational,
establishing India’s progress in the space technology domain. There has been considerable
emphasis on encouraging scientific temperament among India’s youth through numerous
technical universities and institutes, both in the private and government sectors. The
Government aims to invest 2 per cent of the country’s GDP on research and development
(R&D) in its 12th Five-Year Plan period (2013–17). Accordingly, the Government has
undertaken various measures for promoting growth of scientific research. The central
government plans to soon institute a nation-wide consultation process with a view to develop
the first publicly accessible Science and Technology policy. The policy ‘Vision S&T 2020’
would articulate the country’s future towards self-reliance and technological independence in
the 21st century. India is aggressively working towards establishing itself as a leader in
industrialisation and technological development. he Government of India, through the
Science, Technology and Innovation (STI) Policy-2013, among other things, aspires to
position India among the world’s top five scientific powers.
14.14 Appropriate Technology
The availability of a variety of technologies both indigenous and foreign, requires
each nation to decide and choose that technology which is most appropriate for the given firm
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or given nation. A given technology may be suitable for one environment or country but may
not be appropriate for another environment or country. Such a difference may be attributed to
many factors like difference in natural factors (for instance weather and climatic conditions,
soil conditions, topographical conditions, etc.), difference in demand conditions, income
levels, scale of operation, customer characteristics, etc. The latest sophisticated capital
intensive technologies pursued by the advanced countries of the world, most of the times, do
not suit as such to the less developed and under developed countries. As such there arose a
need for an appropriate technology which suits the local needs and environment. Usually in
the context of the less developed, underdeveloped and the developing countries, appropriate
technology refers to an intermediate technology which here refers to a combination of
traditional technology and modern technology. The foreign technology transferred from the
highly developed countries cannot be used as such by the developing world, rather such an
ultra modern technology has to customised and tailor made to fit the requirements and the
business environment of the developing world. Only then can this appropriate technology can
benefit the recipient nations and add the growth and development.
14.15 Information technology (IT)
A particular application of new technology which is most relevant to almost all the
business organisations is information technology (IT, the use and application of computer in
different areas). IT is in fact more than just an application. It can impact almost all the
business activities and their related aspects:
IT can be used for administrative purposes – computerised records and reports, data
processing
IT can be used to communicate – for example, Internet, intranet, e-mail, mobile
phone, voice mail, video-conferencing
IT can be used for computer-based analyses for decision making, and for monitoring
and control activities, for example software for business awareness analyses such as
SWOT, benchmarking, balanced scorecard, etc.
IT can be used to produce goods – computer-controlled production processes, design
processes such as CAD (computer-aided design)
IT can be used for supply, storage and distribution – for example electronic point of
sale (EPOS), electronic data interchange (EDI), extranets. The Internet and its
technologies have totally modified the business environment in the modern times be
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it e-commerce sites, broadbanding, WAP phones etc, which have paved way for m-
commerce – doing business on your always-connected mobile phone.
Recent advancements in technology have drastically transformed the way in which
business firms make use of technology in their working. This in turn makes it imperative
for the organisations and its managers to have updated knowledge of the uses and
applications of technology, especially information technology, for the given organisation.
Check Your Progress B
Fill in the blanks with appropriate word(s).
(i) Technology transfer assignments are often obstructed by the challenges of ______
and _____________.
(ii) Usually appropriate technology refers to _________ which refers to a combination
of traditional technology and modern technology.
(iii) __________ are legal rights, which result from intellectual activity in industrial,
scientific, literary and/or artistic fields.
(iv) ________ is a particular application of new technology which is most relevant to
almost all the business organisations.
14.16 Summary
Technological environment include the methods, techniques and approaches adopted for
production of goods and services and its distribution. The influence of technology on the
business organisations is very profound and cannot be ignored. In its broader sense,
technology includes the tools – both machines (hard technology) and ways of thinking (soft
technology) – available to solve problems and promote progress between, among and
between societies. Technological innovation in the context of business includes technical,
industrial and commercial steps undertaken by a business firm which eventually lead to the
marketing of new manufactured products and also to commercial use of new technical
processes and equipment. Technological innovations may be of different types including
incremental innovation, radical innovation and next-generation technological innovation.
Technological change not only reduces costs, it also improves quality, productivity,
efficiency and profits among the innumerable benefits it brings for a business organisation.
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Technology transfer is the process of transferring skills, knowledge, technologies, methods of
manufacturing, samples of manufacturing and facilities among two units and it may involve
physical assets, know-how, and technical knowledge. There are various possible ways of
transfer of technology. However, the foreign technology transferred from the highly
developed countries cannot be used as such by the developing world. Usually in the context
of the less developed, underdeveloped and the developing countries, appropriate technology
refers to an intermediate technology which here refers to a combination of traditional
technology and modern technology. Due attention needs to be given to IPRs in the process of
transfer of technology. In this context each government needs to pursue an appropriate
technological policy in order to reap maximum possible benefits of technological change.
14.17 GLOSSARY
Technology: Technology includes the tools – both machines (hard technology) and ways of
thinking (soft technology) – available to solve problems and promote progress between,
among and between societies.
Technological innovation: It includes technical, industrial and commercial steps undertaken
by a business firm which eventually lead to the marketing of new manufactured products and
also to commercial use of new technical processes and equipment.
Transfer of Technology: The process of transferring skills, knowledge, technologies,
methods of manufacturing, samples of manufacturing and facilities which may involve
physical assets, know-how, and technical knowledge.
Technology Policy: A set of government actions that affect the generation, acquisition,
adaptation, diffusion and use of technological knowledge for the benefit of the nation as a
whole.
14.18 ANSWERS TO CHECK YOUR PROGRESS
Check Your Progress A
1) (i) true
(ii) false
(iii) true
(iv) false
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Check Your Progress B
1) (i) high cost, limited capability of data processing equipment
(ii) an intermediate technology
(iii) Intellectual Property Rights
(iv) information technology
14.19 REFERENCES
1. Marshall E. Dimock, Business and Government, New York: Rinehan and Winston
Inc.
2. Paul Justin, Business Environment Text and Cases, Tata McGraw-Hill Publishing
Company Limited, New Delhi
3. Fernando A.C., Business Environment, Pearson
4. Stewart Frances, Technology and Underdevelopment, London and Basingstoke: The
Macmillan Press Ltd., 1977.
5. Aswathappa, K., Essentials of Business Environment, Himalaya Publishing House
6. Wartick, Steven, L., Wood, Donna J., International Business and Society, Blackwell
Publishers Inc., Massachusetts, 1998.
7. Frederick, Betz J., Managing Technological Innovation, Wiley ans Sons Inc., New
York, 1998.
14.20 SUGGESTED READINGS
1. Cherunilam, Francis, Business Environment Text and Cases, Himalaya Publishing
House, 2004
2. Aswathappa, K., Essentials of Business Environment, Himalaya Publishing House
3. Saleem Shaikh, Business Environment, Pearson
14.21 TERMINAL AND MODEL QUESTIONS
1. What do you understand by technology?
2. Explain the uses of technology for business.
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3. Discuss in detail the modes of transfer of technology.
4. Explain the significance if IT for business.
5. What do you mean by IPRs?
6. What is appropriate technology?
7. Discuss the challenges of transfer of technology.
8. What is technological policy?
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________________________________________________________________________
Lesson 15: Globalisation and FDI
Structure
15.1 Objectives
15.2 Introduction
15.3 Emergence of Globalisation
15.4 Foreign Direct Investments
15.5 Multi National Corporations (MNCs)
15.6 World Trade Organisation
15.7 WTO in India
15.8 Summary
15.9 Glossary
15.10 Answers to Check your progress
15.11 Suggested Reading
15.12 Terminal and Model questions
15.1 Objectives
After studying this lesson, you should be able to:
Explain the process of Globalisation. Enumerate the advantages and disadvantage of globalization.
Explain the meaning of foreign direct investments. Enumerate the need for and benefits of FDI.
Describe establishment of World Trade Organisation. Enumerate implication of WTO in India. List the benefits and problems of MNCs
15.2 Introduction
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International environment refers to the factors in the global scenario that affect businessesfor example import and export laws, licenses etc. These factors can be a threat or an opportunityfor any enterprise or even an economy. International trade is growing at a fast pace and alongwith it international investment is also growing. It has become vital for organisations includinggovernments to understand the nuances of the international environment, so as to avoid costlymistakes and take advantage of opportunities available.
There are two major reasons that compel a firm to go international— push and pullfactors. The pull factors are those forces of attraction that motivate a firm to go international, forexample, higher profit margins and/or growth options for the organisation. The push factors referto the compulsions and restrictions of the domestic market that force the companies to gointernational, for example, saturated or small domestic markets, domestic recession, competitionand stifling Government policies and regulations.
Globalization is a process that dilutes national boundaries and opens, national economiesfor the other countries of the world. Internationalisation is a synonym for globalization. Trade iseasy and there are few or nil restrictions. It helps to enlarge business of companies and enlightensthe minds towards global and world issues, rather than concentrating on local aspects. It bringsincome to impoverished people and allows more countries to devote their resources in improvingthe global standard of living. Globalization allows people and companies to reach global markets,bringing them opportunities for success not possible in their own localities. Companies who havea global outlook, stop thinking of themselves as national marketers, but start thinking ofthemselves as global marketers. The entire globe is just like one country for business.
15.3 Emergence of Globalization:-
International monetary fund defines globalization, as, “The growing economic interdependence of countries worldwide through increasing volume and variety of cross-bordertransactions in goods and services and of international capital flows and also through the morerapid and wide spread diffusion of technology”.
Globalization brings economy-of-scale efficiencies and helps to provide the fruits of themodern world to countries that might not otherwise see it for centuries, builds dependenciesamong countries that might otherwise attempt to wipe each other off from the map. Allowshumanity to work together as a team towards noble goals rather than as individuals grasping tomeet their own needs. It makes organisations more competitive, as they have to compete in theworld market.
Reasons for going Global:-
1) Market Saturation.2) Trade Deficit.3) Foreign Competition.
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4) Emergence of new Markets.5) Opportunities via Foreign Aid programmes.6) Other reasons like:
a. Economies of scaleb. Risk reduction from economic fluctuations of one countryc. Labour dynamicsd. Tax policiese. Availability of natural resources
Globalization Process:-
Globalization does not happens overnight. It happens over a period of time as an evolutionaryapproach. According to Ohamae, globalization has five stages.
They are:-
(1) Exporting through distributors.(2) Direct overseas distributors marketing.(3) Overseas production completely controlled by headquarters.(4) Autonomous overseas operations.(5) Global Integration.
Thus, globalization means globalizing the marketing, production, investment, technologyand other activities.
Globalization is the trend towards a more integrated global economic system. Figure-1shows the components of globalization.
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Advantages of Globalisation:-
1) Free flow of capital from one country to another country.2) Exchange of technology.3) Industrialization.4) Economies of Scale.5) Balanced development of world economies.6) Commodities at lower prices with higher quality.7) Mutual exchange and demand for a variety of products.8) Increases in jobs and income of the nation.9) Higher standards of living.10) Balanced human development and resources.11) Increase in welfare and prosperity.
Disadvantages of Globalisation:-
1) Globalization demotivates domestic business.2) Exploits human resources.3) Leads to unemployment and underemployment.4) Decline in demand and production for domestic products.5) Decline in income.6) Increasing the gap between rich and poor.7) Transfer of natural resources.8) National sovereignty at stake.
Globalisation ofMarkets
Advantages of Globalisation:-
1) Free flow of capital from one country to another country.2) Exchange of technology.3) Industrialization.4) Economies of Scale.5) Balanced development of world economies.6) Commodities at lower prices with higher quality.7) Mutual exchange and demand for a variety of products.8) Increases in jobs and income of the nation.9) Higher standards of living.10) Balanced human development and resources.11) Increase in welfare and prosperity.
Disadvantages of Globalisation:-
1) Globalization demotivates domestic business.2) Exploits human resources.3) Leads to unemployment and underemployment.4) Decline in demand and production for domestic products.5) Decline in income.6) Increasing the gap between rich and poor.7) Transfer of natural resources.8) National sovereignty at stake.
components ofGlobalisation
Globalisation ofInvestment
Globalisation ofTechnology
Globalisation ofProduction
Advantages of Globalisation:-
1) Free flow of capital from one country to another country.2) Exchange of technology.3) Industrialization.4) Economies of Scale.5) Balanced development of world economies.6) Commodities at lower prices with higher quality.7) Mutual exchange and demand for a variety of products.8) Increases in jobs and income of the nation.9) Higher standards of living.10) Balanced human development and resources.11) Increase in welfare and prosperity.
Disadvantages of Globalisation:-
1) Globalization demotivates domestic business.2) Exploits human resources.3) Leads to unemployment and underemployment.4) Decline in demand and production for domestic products.5) Decline in income.6) Increasing the gap between rich and poor.7) Transfer of natural resources.8) National sovereignty at stake.
Globalisation ofTechnology
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9) Leads to commercial and political colonialism.
Globalization is the process of integration of world markets for goods and services, technology,finance and to some extent labour. It is the integration of a country with the world economy. Theentire globe is perceived as a global village. Anyone in a country can supply to and buy from anyother entity in the world. Technology can said to be an important factor that has facilitatedglobalization. Globalization has made markets highly competitive and there is an immensegrowth of new products and services, in which the consumer has emerged the winner.
Check your progress 1:
Fill in the blanks:-
1. Economic factors, social factors and political factors comprehensively influence theoverall _________________ process.
2. Production in widely dispersed location is getting _____________ due toglobalization.
3. ___________________ results in connecting the markets in different countries.
4. Globalization is the process of _____________________ of different counties.5. _______________________ is the shift towards a more integrated and interdependent
world economy.
15.4 FOREIGN DIRECT INVESTMENT (FDI):
Vital factor of production is the capital. For the expansion of a nation’s economy in terms
of an increase in the production of goods and services, the input of capital would be essential.
While the capital can come from different sources within the country, it could also be obtained
from abroad. Foreign investment has become an important input in today’s global economy.
Free flow of capital is good for the global economy. Capital, as a factor of production can then
move to the place where it can be used most efficiently.
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Companies invest in foreign countries in order to gain control over the market and thereby
increase sales. Market control is possible by establishing and control of managerial decision
making through investment in equity share capital.
Definition of Foreign Direct Investment
International Monetary Fund defines FDI (Foreign Direct Investment) “an investment
made to acquire lasting or long-term interest in enterprises operating outside of the economy of
the investor”. The investment is considered direct as the foreign investor seeks to control, and
manage the foreign enterprise. The Organization of Economic Cooperation and Development
(OECD) define control as owning 10% or more of the business. Organisations making foreign
direct investments are popularly known as Multinational Enterprises (MNEs) or Multinational
Corporations (MNCs). Direct Investment is generally done by establishing a new company or a
subsidiary or by through acquisition of an existing firm.
Measures to control Foreign direct investment (FDI)*
Foreign companies willing to setup business in India have to follow certain procedure
It has to incorporate a company as a joint venture or a subsidiary company under
the companies act, 1956
Under the foreign exchange management regulation, 2000 it has to setup a liaison
office, branch office or a project office of a foreign company.
Procedure for receiving FDI by an Indian company:-
With prior approval of the RBI or the government, FDI is allowed to enter through
automatic route or government route in all the activities as mentioned in the FDI
policy.
Financial instruments for receiving FDI by an Indian company:-
Investment in FDI is reckoned only if the investment is made through equity
shares, fully & mandatory convertible preference shares, fully & mandatory
convertible debentures.
Gives an option to the Indian investor to convert or not to convert it into equity.
Modes of payment allowed for receiving FDI by an Indian company: - An Indian
Company issuing equity shares or convertible debentures through FDI scheme to a person
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residing outside India shall receive the amount of consideration that is required to be paid
for shares/ convertible debentures by:-
inward remittance through normal banking channels
Debit to NRE / FCNR account of a person concerned maintained with an AD
category I bank.
Conversion of royalty / lump sum / technical knowhow fee due for payment or
conversion of ECB shall be treated as consideration for issue of shares.
Conversion of import payables / pre incorporation expenses / share swap can be
treated as consideration for issue of shares with the approval of FIPB.
debit to non-interest bearing Escrow account in Indian Rupees in India which is
opened with the approval from AD Category – I bank and is maintained with the
AD Category I bank on behalf of residents and non-residents towards payment of
share purchase consideration.
Sectors where FDI are not allowed by Indian companies under automatic or government
route:-
Atomic Energy
Lottery Business
Gambling and Betting
Business of Chit Fund
Nidhi Company
Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes.
Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal
Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under
controlled conditions and services related to agro and allied sectors) and
Plantations activities (other than Tea Plantations), Housing and Real Estate
business.
*Source: https://www.rbi.org.in/scripts/FAQView.aspx?Id=26
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Advantages of FDI
In the context of foreign direct investment, advantages and disadvantages are often a
matter of perspective. An FDI may provide some great advantages for the MNE but not for the
foreign country where the investment is made. On the other hand, sometimes the deal can work
out in a better way for the foreign country depending upon how the investment plans out. Ideally,
there should be numerous advantages for both the MNE and the foreign country, which is often a
developing country.
Advantages: -
(1) FDI provides the much needed ready capital and it can act as a nucleus of growth.
(2) In the case of countries with large trade deficits, increased FDI inflows would help.
(3)FDI – particularly the substitutable type off FDI can generate a healthy competition.
(4)The production could increase all around.
(5)New technologies may become available through foreign direct investments and this may start
a virtuous technology transfer cycle.
(6)FDI may provide additional employment.
(7)FDI can bring with it worldwide class management culture, systems, and skills.
(8)FDI can cause an increase an increase in the host country’s exports improving its balance of
payments position.
Forms of FDI:-
1) Purchase of existing assassin foreign country.
2) New investment in property plant and equipment.
3) Participation in a joint venture with a local partner.
4) Transfer of many types assets like human resources, systems, technological knowhow in
exchange for equity in foreign companies.
5) Export of goods for equity.
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Factors influencing FDI:-
Factors influencing FDI are of three categories,
Supply factors
1 production cost
2 logistics
3 resource availability
4 access to technology
demand factors
1 customer access.
2 Marketing advantages
3 Exploitation of competitive advantages.
4 Customer mobility
Political factors:
1 avoidance of trade barriers
2 economic development incentives
Foreign direct investment in India
The policy of the government of India towards the foreign direct investment has been
positive due to the shortage of domestic capital. The economic liberalizations of 1991 have given
greater fillip to the foreign direct investment. The Government of India with regard to FDI
announces significant measures since 1991 include.
Granting of automatic permission for foreign equity participation up to 51 per cent in high
technology and high-investment priority industries.
Allowing foreign equity participation up to 51 percent in international trading companies,
hotel industry and tourist industry.
Constitution of a Specialized Empowered Board in order to attract FDI by negotiating
with multinational corporations.
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Dispersing with the bureaucratic rules and regulations which caused delays and created
hurdles for the FDI.
Allowing the MNCs to use their trade marks in India with effect from 14th May, 1992.
Allowing 100 percent equity for setting up of power plants with free repatriation of
profits.
100% FDI is permitted in business to business (B2B) e-commerce, power sector and oil
refining.
Check your progress 2: -
Choose the correct answers: -
6. FDI is an acronym that stands for ( )a) Federation of direct investorsb) Federal diversification initiativec) Foreign direct investmentd) Formal direct internationalization
7. The _____________ of foreign direct investment refers to the amount of FDIundertaken over a given period (normally a year). The ___________ of foreigndirect investments refers to the total accumulated value of foreign ownedassets at any time.
a) Portfolio / current ( )b) Flow / stockc) Source / off shoringd) Advantage / risk
8. The flow of foreign direct investment out of a country is :- ( )a) Forfeiture of national investmentb) Speculation of FDIc) Hedging of FDId) Outflow of FDI
9. An argument in favour of direct foreign investment is that it tends to :-a) Reduce inequality ( )b) Promote rural developmentc) Increase access to modern technologyd) Decrease local ownership
Activity 1: Obtain information on the volume of funds coming into India through theFII (Foreign Institutional investors) route. Gather this information for all the weeks of ayear. Where did these FII'S invest? Why did they invest in India? What has been the inand out movement of these funds? Do interest rates elsewhere (other countries) matter?
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Check the corresponding interest rate movements in the USA. Investigate and presentyour observations.
15.5 MULTINATIONAL COMPANIES (MNCs)
MNCs are companies which owns & control production activities in more than one
country. MNCs produce goods in one or more countries and sell them in many countries. These
companies setup their offices & plants for production in such regions where they can get cheap
labour & other resources. MNCs are corporations involved in various activities of importing,
exporting & manufacturing in different nations. Some Multinational companies sizes are so
enormous that these companies assets are much bigger than GDPs many nations of the world.
Examples of such companies are large oil companies such as Exxon & shell are larger
economically than nations like South Africa, Australia. MNCs are known by various names such
as multinational corporations, transnational companies, international corporations & global
corporations.
As ILO report observes, “The essential feature of MNC lies in the truth that its managerial
headquarters are located in one country generally called home country, while the other carries its
operations by opening subsidiaries companies in many other countries called as host countries.
Such activities of carrying out its production operations in many countries, such facilities can be
acquired through the process of foreign direct investment (FDI).
Features of Multinational corporations:-
The features of the MNCs depend on the countries environment in which they operate. As we
have discussed they are two main concerns the home countries environment where headquarters
will be located & the host country environment where the business is carry out.
Subsidiaries of MNCs: - subsidiary companies of MNCs should respond to the specific
environmental forces of both home & host countries.
Resources: - selection of resources plays an important role. Resources could be financial
resources, human resources, information, material resources, copy rights & trademarks
etc. MNCs get more or less same resources both at home country & host country.
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Location: - MNCs have their headquarters in the home country & have
subsidiaries/operational divisions are widely spread across the various countries to reduce
the expenses such as low labour rate, low transportation cost & low raw material cost etc.
Management of MNCs: - majorly the board of directors of the MNCs are the citizens of
the home country. Major portion of the assets of the MNCs are owned by the citizens of
the home country.
Strategies: - MNCs headquarters &subsidiaries are linked by a common goal &mission.
However, each subsidiary should formulate its strategies.
Factors contributing growth of MNCs: - several factors are contributed for the growth
of MNCs. Some of them are listed below.
Expanding market boundaries: - Developing economies of the world have a growth in
GDP & per capita income resulting in high standard of living. These factors influenced
towards expansion of market territories. Apart from this, markets reputation of these
MNCs builds an image which helps in market expansion.
Market excellence:-MNCs have a number of benefits in terms of market superiority over
the domestic companies resulting in facing less difficulties in marketing the products.
MNCs use more effective marketing advertising & sales promotion techniques. They also
enjoy transportation & warehousing facilities.
Superiority in technology: - MNCs offer knowledge to licensed foreign producers through
patent rights which relieve the MNCs to invest through FDI. MNCs are rich in advanced
technologies. Through continuous research & development they develop the technology.
The rich financial resources of these companies enable them to invest in R& D and
develop the new technology.
Exhale in Financial resources:-Many MNCs enjoy financial superiority over some
national economies. MNCs use these resources for turning environment into its favour.
MNCs can use the excess funds of one country to meet the requirements of another
country. MNCs have access to all international banks & financial institutions from where
they can access the funds easily.
Product innovation through R& D: - MNCs as they have world wide spread operations
across the countries they collect the information of various customer taste & preferences.
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MNCs with their strong R & D departments invent new product & develop existing
product.
Advantages & disadvantages of MNCs:-
Advantages of MNCs
Easy access to consumers: - MNCs have primary advantage of having easy access to
consumers over other companies whose operations are limited to smaller region. MNCs
have greater access to wider geographical regions which help them to get larger pool of
potential customers leading companies to expand, grow at a faster pace as compared to
others.
Technological superiority: - MNCs helps to improve products by introducing advanced
technologies. Different industries get updated technologies from international countries
through MNCs which helps them to improve technological parameters.
Increase employment & income levels: - MNCs have an easy access to cheap labour,
which plays a great advantage over the other companies. MNCs operations are spread
widely across geographical regions which help to setup production units in countries with
cheap labour leading to increase in employment. Some of the countries like India, china &
Pakistan cheap labour are available.
Tax & other cost reduction: - In order to get increase foreign exposure & international
trade, countries are imposing reduced tax on imports & exports. Some international
countries impose lower excise & custom duty resulting in higher profit margins for
MNCs.
Research & development: - MNCs are rich in advanced technologies. Through continuous
research & development they develop the product. The rich financial resources of these
companies enable them to invest in R& D and develop the new technology.
Balance of payments: - MNCs operations help to get improved balance of payments by
increasing exports & decreasing imports.
Industrial & economic development: -Due to growth in MNCs, level of industrial &
economic development improves.
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Over all development :- when MNCs operate in widely spread geographical areas it helps
in expanding market territory, investment level increases, employment increases, income
levels increases and research & development activities increase.
Disadvantages of MNCs
Local business loss: - Monopolistic practices of MNCs are a problem for local businesses.
Local consumers get attracted to international products sometimes leading to killing of
domestic company operations.
Stringent rules & regulations:- one of the major problem of MNCs are strict rules &
regulations applicable in the country. MNCs are subjected to more rules & regulations
than other companies. Some countries does not allow companies to easily run its
operations as it is being doing in other countries, leading to conflict within the country &
organizations.
Political environment: - Different countries have different political risks. As MNCs do
operate internationally across national boundaries which may result in a threat to
economic & political environment of the host countries.
Loss in natural resources:- MNCs use home countries natural resources in order to get
huge profits which may result in excessive exploitation of the resources leading to loss of
natural resources of the economy.
Transfer of capital: - Transfer of capital to other countries from home country may cause
unfavourable balance of payment for the economy.
Intellectual properties:- MNCs face problems related to intellectual properties that is not
applicable in case of local domestic companies.
Domestic culture:- MNCs operations may cause erosion of domestic culture.
Check your progress 3 : -
Fill in the blanks: -
10. ___________ produces goods in one or more countries and sells them in manycountries.
11. Activities of carrying out its production operations in many countries such facilities
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cane acquired through the processor ___________________
12. MNC'S helps to improve products by introducing ______________________.
13. MNC'S through continuous ___________ they develop the technology.
14. MNC'S operations help to get improved balance of ______________.
15.6 WORLD TRADE ORGANIZATION (WTO)*
The International Trade Organization was proposed to be set up along with the WorldBank and the IMF on the recommendations of the Bretton Woods Conference in 1944. Althoughthe IMF and World Bank were establish in 1946, the proposal for the ITO did not materialize;instead of the GATT a less ambitious organization was formed in 1948The developing countriesinsisted on setting up of ITO but opposition to the proposal came from US. To solve the issue, theUN appointed a committee in 1963; the committee recommended, the UNCTAD (United NationsConference on Trade and Development). UNCTAD came into being in 1964. It could manage tosecure some concessions for the developing countries.
It may be noted that as a result of the Uruguay Round, GATT was transformed into WorldTrade Organization with effect from January 1995.Thus after five decades, the original proposalof an International Trade Organization has been shape as the WTO.
Objectives of WTO
Its activities shall ensure raising fee standard of living, ensuring full employment and asteadily growing real income for its member countries.
To allow for the optimal use of world resources in accordance with the objectives ofsustainable development
To make sure that developing countries secure a share in the growth of international trade, To ensure linkages between trade policies, environmental policies and sustainable
development To develop an integrated and more viable multilateral trading system and sustainable
development
To co-operate with the IMF and World Bank and its affiliated agencies with a view toachieve greater clarity in global economic policy making.
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To administer understanding on rules and procedures governing the settlement ofdisputes.
To provide a forum for negotiation among its members concerning their trade relations.
Functions of WTO: Its functions are:
Administering and implementing the multilateral trade agreements, which togethermake up the WTO
Acting as a forum for multilateral trade negotiations Seeking to resolve trade disputes
Overseeing national trade policies Cooperating with other international institutions involved in global economic policy-
making
Maintaining trade related database. Members are required to notify in detail varioustrade measure and statistics
Acting as a watchdog of international trade, constantly examining the trade regimes ofindividual members
Acting as a management consultant for world trade. Experts on the panel of WTOscan the world economic environment and make observations on contemporary issues.
Technical assistance and training for developing countries.
As the functions make it clear, WTO does not aim at economic or politicalintegration, but seeks to promote free trade among member’s countries.
The WTO Agreement contains some 29 individual legal texts - coveringeverything from agriculture to textiles and clothing and from services to governmentprocurement, rule of origin, and intellectual property. Added to these are more than, 25additional ministerial declarations, decision, and understanding, which spell out furtherobligations and commitments for WTO members
* Source: https://www.wto.org/english/res_e/booksp_e/agrmntseries1_wto.e.pdf.
15.7 WTO IMPLICATION IN INDIA
India was one of the founder members of the GATT. There have been divergentviews in favor and against India becoming the member of the WTO. We will study here,the advantages and disadvantages to India after becoming a member of WTO.
The following are the advantages are available to India:
Benefits from reduction of tariffs on the products of export of interest to India.
Improved prospects for agricultural exports as a result of likely increase in the worldprices of agricultural products due to reduction in domestic subsidies and barriers to trade
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Increase in the export of textiles and clothing due to the phasing out of the MFA by 2005. Advantages from greater security and predictability of the international trading system
due to the revamped dispute settlement procedures and the agreements on safeguard,subsidies and anti-dumping measures.
Compulsion imposed on us to be competitive in the world market.
Disadvantages:
Tariff reductions on goods of export of interest to India are very small. On the otherhand, there will be erosion of the preference enjoyed by India, and India will mostprobably be graduated out of the Generalized System of Preferences( GSP)
Meager prospects of increase in agriculture exports due to the very limited extent ofagricultural liberalization.
India will be under the tremendous pressure to liberalize her service industries.
There will be only marginal liberalization to the movements of labor services in whichIndia is competitive.
India will lose policy options in several areas because of – extensive bindingsundertaken by the country, prohibition of certain type of subsidies and making certainother types actionable, giving up the option of granting process patents in somesectors and limitations put on India’s ability to apply restrictions on balance ofpayments ground
Increased outflow of foreign exchange due to commitments undertaken in the field ofTRIMs and services
Check your progress 4: -
Fill in the blanks: -
15. The WTO was established to implement the final act of ___________round agreement of GATT.
16. UNCTAD came into being in _________.
17. Administering and implementing the multilateral trade agreements,which together make up the ______________.
18. ____________ was one of the founder members of the GATT.
19. Increased outflow of foreign exchange due to commitments undertakenin the field of _____________ and services.
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15.8 Summary: -
In this chapter we understand that Globalisation is the shift towards a more
integrated and interdependent world economy .It is a process by which businesses or other
organizations develop international influence or start operating on an international scale.
Foreign direct investment (FDI) is an investment in business operations by an investor
from different another countries for which the foreign investor has control over the
company purchased. MNCs are companies which owns & control production activities in
more than one country. MNCs produce goods in one or more countries and sell them in
many countries.
15.9 Glossary: -
Globalisation : - Thinking globally , establishing manufacturing facilities , market the product ,procure finance , human resources , raw materials throughout the world is globalization.
Foreign Direct Investment : - Companies invest in foreign countries in order to gain controlover the market and thereby increase sales. Market control is possible by establishing control ofmanagerial decision making through investment in equity share capital.
Foreign direct investment is influenced by supply, demand, and political factors.
MNCs: - MNCs are companies which owns & control production activities in more than onecountry. MNCs are corporations involved in various activities of importing, exporting &manufacturing in different nations.
WTO: - The World trade organization was established on the 1st January, 1995 to implement thefinal act of Uruguary round agreement of GATT. The basic purpose of the WTO is to promoteinternational trade without ant discriminations.
15.10 Answers to Check your progress: -
(1)Globalization.
(2)Interlinked.
(3)Foreign trade.
(4)Rapid integration.
(5)Globalization.
(6) C
(7) B
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(8) A
(9) C
(10)MNC’S
(11)Foreign direct investment.
(12)Research and development.
(13)Advanced technologies.
(14)Payments.
(15)Uruguay.
(16)1964.
(17)WTO.
(18)India.
(19)TRIMS.
15.11 Suggested Reading: -
(1) International business (Text and cases):-P.Subba rao second revised edition and enlargededition 2008.Himalaya publishing house pvt ltd.
(2) International business theory and practice 2nd edition : - Riad A.Ajami (University of northcarolina at greensboro). Karel cool (Insead , Fontainebleau , France) G.Jason Goddard (Wachoviacorporation) Prentice hall of india.
15.12 Terminal and Model Questions
(1)What is globalisation? Explain the features of globalisation?
(2)Analyze the steps taken by Indian government to globalise the economy?
(3)What is foreign direct investment? Factors that affect FDI?
(4)Describe the organizational structure of the World trade organisation and its advantages?
(5)Describing MNC'S its advantages and disadvantages?
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________________________________________________________________________
Lesson 16: Trading Blocks
Structure
16.1 Objectives
16.2 Introduction
16.3 Meaning of Trading Blocs
16.4 European Union
16.5 North American Foreign Trade Association (NAFTA)
16.6 The Association of South-East Asian Nations (ASEAN)
16.7South Asian Association for Regional Cooperation (SAARC)
16.8 Foreign Trade: SEZ, EPZ, EOU
16.9 Dumping and antidumping methods
16.10 Summary
16.11 Glossary
16.12 Answers to check your progress
16.13 Suggested Reading
16.14 Terminal and Model questions
16.1 Objectives
After studying this lesson, you should be able to:
Explain the logic underlying the formation of trade blocks.
Explain the objectives and functioning of NAFTA. Explain the operation of foreign trade. Outline the activity of a SEZ, EPZ, EOU
Discuss the activities of dumping and antidumping measures.
16.1 Introduction
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Economic integration among several countries takes several forms. It coversdifferent kinds of arrangements between or among countries by which to be morecountries link their economies closure either in part of total. Economic integrationis also known as Trading Blocs. Economic integration among the worldeconomies varies in degree. The economies are
1. Free trade area.2. Custom union.3. Common market.4. Economic union.
The trade impacts of the trade blocks are normally measured by weighing thebenefits of trade creation against the adverse effects of trade diversion. Tradecreation occurs when lower cost partner country imports display higher pricedomestic production, and there by decrease cost of production and consumerprices within the country. Trade diversion happens when lower cost imports fromoutside the block are displaced by higher cost imports from within the blocks. Themost important trade blocks include EU, NAFTA, ASEAN and SAARC.
16.3 Meaning of Trading Blocks
A bloc means groups. Trading blocs means grouping of countries. It means agroup of nations united for some common actions. Trading bloc is a voluntarygrouping of countries with a specific region for common benefit.
It indicates regional economic integration of nations for mutual benefits. Ingeneral terms, regional trade blocks are associations of nations to promotetrade within the block and compete its members against global competition.
Trading blocs are highly organized and based on shared interest to promoteeconomic and social interest of the member countries.
Objectives of Trading Blocs:
1. To remove trade restrictions among member nations.2. To improve social, political, economic and cultural relations among
member nations.3. To encourage free transfer of resources.4. To establish collective bargaining.5. To promote economic growth.
16.4 EUROPEAN UNION (EU): -
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The origin of the European union goes back to the European coal and steelcommunity(ECSC)which was formed with the countries West Germany,France, Italy, Belgium, Netherlands, and Luxembourg in 1952.The aim of theECSC was to eliminate import duties and quotas on coal, iron ore, steel andscarp regarding the international trade among the member countries.EuropeanUnion stages are: -
(1) European coal and steel community.
(2) European common market/European economic community.
(3) European economic union.
The European Economic Community was made up of 12 countries – Austria,Belgium, Denmark, France, Ireland, Italy, Luxembourg, Norway, Portugal,Spain, Sweden, and the United Kingdom. The EEC member countries agreedto:
Eliminate all trade barriers between members Establish a common external tariff
Introduce a common agricultural and transport policy Create a European Social Fund Establish a European Investment Bank
Develop closer relations between member countries
The European Union has grown in size from its first attempt at a regionalintegration with six European countries to its present membership of 25countries. With the year the expanded European Union can continue tofunction efficiently, it needs a more streamlined system for making decisions.The countries that make up the European Union (Its members states) remainindependent sovereign nations, but they pool their sovereignty in order to gaina strength and world influence none of them could have their own.
Functions and Activities of the European Union:
1. Legislation: Much of EU legislation adopted jointly by the council andparliament. Once adopted, correctly applied.
2. Coordination of the policies of member’s states: EU countries have decidedthat they want an overall economic policy based on close coordination of theirnational economic policies such as economic and financial affairs.
3. Concluding international agreements: Each year the council “ concludes” anumber of agreements between the EU and non- EU countries, as well as withinternational organizations
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4. Approving the EU budget: The EU’s annual budget is decided jointly by thecouncil and the European Parliament.
5. Common Foreign and Security Policy: The member states of the EU areworking to develop a common Foreign and Security Policy (CFSP). Butforeign policy, security and defense are matters over which they individualnational government retain independent control.
6. Freedom, security and justice: EU citizen are free to live and work inwhichever EU country they choose, so they should have equal access to civiljustice everywhere in the EU.The European Commission has four main roles:
1. Proposing new legislation: The commission has the “right to initiative”. Thecommission alone is responsible for drawing up proposal for new Europeanlegislation.
2. Implementing EU policies and the budget: A the EU’s executive body, thecommission is responsible for managing and implementing the EU budget.Most of the actual spending is done by national and local authorities, but thecommission is responsible for supervising it.
3. Enforcing European law: The commission act as “guardian of the treaties”.This means Court of justice, the commission is responsible for making sureEU law is properly applied to all the member states.
The European Union ( EU)
EuropeanParliament732 Member
The Council ofthe European
Union
EuropeanCommission
Court of Justice25 Judges
Court of Auditors
25 members
25 Members
Main Decision making bodies European Union’s Executive body
Ensures that the EUmember states andinstitutions do what thelaw requires; has thepower to settle legaldisputes
Ensures that EU funds arecollected properly and spentlegally, economically and for
the intended purpose; has the
power to audit any person ororganization handling EUfunds
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4. Representing the European Union on the International stage: TheEuropean commission is an important mouth piece for the EU on theinternational stage i.e., at World Trade Organization (WTO).
________________________________________________________________
16.5 NORTH AMERICAN FREE TRADEAGREEMENT (NAFTA):-
The North American Free Trade Agreement (NAFTA), the world’s largestfree trade area, comprising of USA, Canada and Mexico and was on January1st, 1994. A free trade agreement was signed by the USA and Canada in 1989.This was extend to Mexico in 1994. NAFTA eliminated all tariffs and tradebarriers as on 1st January, 2008.
Objectives
The objectives of the NAFTA include:
1. Eliminate barriers to trade in, and facilitate the cross border movement ofgoods and services between the territories of the member countries;
2. Promote conditions of fair competition in the free trade area3. Increase substantially, investment opportunities in the member countries.4. Enhance the competitive advantage of the companies operating in the
member countries in wider international markets.
5. To enhance industrial development and thereby employment throughout
the region.
6. To provide stable and predictable political environment for the investors.
Economic Integration through NAFTA
Economic integration amongst nations is evolving in several stages. From theleast integrated stage to most integrated. The stages are:
1. Free Trade Area: In a free trade area, most barriers to the trade of goodsand services among the member countries are removed i.e. nodiscrimination tariffs, quotas, subsidies or administrative impedimentsare allowed to distort trade between members.
2. The Custom’s Union: Elimination of trade barriers between the membercountries and also formulating common external trade policy i.e. bysetting up of significant administrative machinery to oversee traderelations with non members.
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3. A Common Market: It allows factors of production to move betweenmember countries. Labor and capital are free to move as there is norestriction on immigration or cross border flow of capital between themember countries.
4. Economic Union: It involves the free flow of products and factors ofproduction between member countries and adoption of common externaltrade policy.
5. The Political Union: The EU is on the road to political union. TheEuropean parliament has been directly elected by the citizen of membercountries.__________________________________________________________
16.6 THE ASSOCIATION OF SOUTH-EAST ASIAN NATIONS(ASEAN)
ASEAN is looked up to as a highly successful economic integration in thedeveloping world, going by the rapid and astounding economic growth shown bymany of its member countries such as Singapore, Malaysia, Philippines, Thailandand Indonesia. During 1992, it was agreed to establish a Common EffectivePreferential Tariffs (CEPT) plan. This plan helped to create an Association ofSouth-East Asian Nations (ASEAN) free trade area in 15 years with effect fromJanuary 1993.
ASEAN has enabled the member states to represent their region as a collectivebody and improve their bargaining position with non-members states, especiallythe industrialized countries. The aura of political stability and regional amityengendered by the body has also been a major factor in attracting overseasinvestment in several member countries. In recent years, the region has been oneof the leading recipients of foreign direct investment, trailing only China andIndia.
Active cooperation between members is supported by a small secretariat locatedat Jakarta, Indonesia. The notable achievements of ASEAN are:
1. An emergency sharing scheme on crude oil and oil products2. Joint approaches to problems in international commodity trade3. A program for cooperation on the development and utilization of mineral
resources4. A planning centre for agricultural development5. A center for development of forest tree seeds6. A program for tourism cooperation
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7. A plant quarantine training center8. An agreement to align national standards with international standards ( Such
as International Organization for Standardization IOS)___________________________________________________________
16.7 SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION(SAARC)
SAARC is a group of seven South Asian countries Bangladesh, Bhutan, India,Pakistan, the Maldives Nepal and Sri Lanka. Established in December 1985 topromote economic, social, cultural and scientific collaboration, it proposes totransform the lives of a population of about 1.4 billion in its member countries.Afghanistan joined SAARC in April 2007.
Members of SAARC with observer status as on 1st March, 2011 were: Australia,Burma, China, EU, Iran, Japan, Mauritius and USA.
Objectives
The objectives of the SAARC are:
To promote the welfare of the people of South Asia and to improve their
quality of life
To increase speed economic growth, social progress and cultural
development in the province and to grant all individuals the prospect to
live with pride and to recognize their full potentials
To encourage and strengthen shared self confidence among the countries
of South Asia
To contribute to shared trust, sympathetic and gratitude of one another’s
problems
To endorse active association and mutual support in the economic, social,
cultural, technical and scientific field
To reinforce cooperation with other developing countries
To strengthen cooperation among themselves in international forums on
matters of general interest
To cooperate with global and local organizations with similar aims and
purposes.
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Principles of SAARC:
Teamwork within the framework of the alliance is based on respect for
the values of sovereign equality, territorial integrity, political
independence, non-interference in the internal affairs of other states
and shared benefits.
Such cooperation is to harmonize and not to substitute bilateral or
multilateral cooperation
Such cooperation should regular with bilateral and multilateral of the
member states
Decisions at all levels in SAARC are taken on the basis of agreement
Bilateral and controversial issues are excluded from its discussions
Check your progress 1: -
Choose the correct answers: -
(1) ___________ is also known as trading blocks. ( )
(a)Economic integration (b) Free trade (c) Economic union (d) none of the above
(2)NAFTA came into being on _____________. ( )
(A) 2nd Jan 1994 (b) 4th Jan 1994 (c) 1st Jan 1994 (d) 7th Jan
1994
(3)The emergence of successful operation of EEC and NAFTA gave impetus for
the forming of _________. ( )
(a)SAARC (b) EU (c) NAFTA (D) ASEAN
(4)Afghanistan joined SAARC in April _____________. ( )
(A) 2008 (b) 2007 (c) 2004 (d) 2001
(5)NAFTA as a population of __________- million and hence it is one of the
significant trading areas in the globe. ( )
(a) 363 (b) 373 (c) 453 (d) 370
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16.8 FOREIGN TRADE
International trade is broadly classified as the switching of capital, goods and
services across global borders or territories, which could involve the actions of the
government and individuals. In most countries, such trade represents a major
share of gross domestic product.
The Meaning and Definition of Foreign Trade or International Trade!
Foreign trade is exchange of capital, goods, and services across internationalborders or territories. In most countries, it represents a significant share of grossdomestic product (GDP). While international trade has been present throughoutmuch of history, its economic, social, and political importance has been on therise in recent centuries.
Foreign trade includes export and import of goods across international borders.All countries need goods and services to satisfy wants of their people. Productionof goods and services requires resources. Every country has only limitedresources. No country can produce all the goods and services that it requires. Ithas to buy from other countries what it cannot produce or can produce less thanits requirements. Similarly, it sells to other countries the goods which it has insurplus quantities. India too, buys from and sells to other countries various typesof goods and services.
Generally no country is self-sufficient. It has to depend upon other countries forimporting the goods which are either non-available with it or are available ininsufficient quantities. Similarly, it can export goods, which are in excess quantitywith it and are in high demand outside.
International trade means trade between the two or more countries. Internationaltrade involves different currencies of different countries and is regulated by laws,rules and regulations of the concerned countries. Thus, International trade is morecomplex.
According to Wasserman and Haltman, “International trade consists oftransaction between residents of different countries”.
According to Anatol Marad, “International trade is a trade between nations”.
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According to Eugeworth, “International trade means trade between nations”.
Industrialization, advanced transportation, globalization, multinationalcorporations, and outsourcing are all having a major impact on the internationaltrade system. Increasing international trade is crucial to the continuance ofglobalization. Without international trade, nations would be limited to the goodsand services produced within their own borders.
International trade is in principle not different from domestic trade as themotivation and the behavior of parties involved in a trade do not changefundamentally regardless of whether trade is across a border or not. The maindifference is that international trade is typically more costly than domestic trade.
The reason is that a border typically imposes additional costs such as tariffs, timecosts due to border delays and costs associated with country differences such aslanguage, the legal system or culture. International trade consists of ‘export trade’and ‘import trade’. Export involves sale of goods and services to other countries.Import consists of purchases from other countries.
International or Foreign trade is recognized as the most significant determinantsof economic development of a country, all over the world. The foreign trade of acountry consists of inward (import) and outward (export) movement of goods andservices, which results into. Outflow and inflow of foreign exchange. Thus it isalso called EXIM Trade.
For providing, regulating and creating necessary environment for its orderlygrowth, several Acts have been put in place. The foreign trade of India isgoverned by the Foreign Trade (Development & Regulation) Act, 1992 and therules and orders issued there under. Payments for import and export transactionsare governed by Foreign Exchange Management Act, 1999. Customs Act, 1962governs the physical movement of goods and services through various modes oftransportation.
To make India a quality producer and exporter of goods and services, apart fromprojecting such image, an important Act – Exports (Quality control & inspection)Act, 1963 has been in vogue. Developmental pace of foreign trade is dependenton the Export-Import Policy adopted by the country too. Even the EXIM Policy2002-2007 lays its stress to simplify procedures, sharply, to further reducetransaction costs.
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As a part of the export promotion drive, Government have, from time to time,introduced several schemes to promote units primarily devoted to exports. Theseinclude Export Processing Zones (EPZs), Hundred Per cent Export-OrientedIndustrial Units (EOUs), and different categories of Technology Parks (TPs). In2000, a scheme of Special Economic Zones (SEZs) was also introduced.
SPECIAL ECONOMIC ZONE (SEZ)
A Special Economic Zone (SEZ) is place or a location within a country
categorized on the basis of geographical environment. They provide an ideal place
for working environment to compete with world class infrastructure facilities. The
scheme of SEZ started with Public Private Partnership (PPP) and plays a major
role in developing infrastructure in the region. The primary objective of SEZ is to
attract foreign investment.
A SEZ is a tool for development of trade capacity with an objective of promoting
rapid economic growth by applying tax incentives to attract investment and
technology from foreign countries. The rules and regulations such as investment,
trading, customs , quotas, taxation and labour related to trade and business are
different from one country to another country.
The objectives of the SEZ includes:
Increased trade and business,
Increased foreign investment,
Employment creation and
Efficient administration.
To encourage business
The SEZs provides a channel to foreign companies who are looking for cheaper
and efficient location to start their business. They also encourage the local
companies to enhance their exports through a proper channel. It offers relaxation
on tax and tariff policies. For example- No import Duty on raw materials for
production process. A transparent single window system is used for setting up of
businesses.
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Advantages:
Corporate tax holiday
Licenses are not required for imports made under SEZ units.
Duty free import on procurement of goods
Exempted from
Customs duty on import of capital goods, raw materials
Central Excise duty on the purchase of capital goods, raw materials
Central Sales Tax on the sale or purchase of goods
Payment of Service Tax.
Government has exempted SEZ Units for the deposit of stamp duty andregistration fees on the leasing or licensing of plots.
Disadvantages
Because of the various tax exemptions and incentives there is a loss ofrevenue
Many companies shows interest towards SEZ, in order to get everything atcheap rates
EXPORT PROCESSING ZONES (EPZs)
An Export Processing Zone (EPZ) is an area of customs where the participants are
allowed to import machinery, equipments and materials for manufacturing of
goods without payment of duty. The imported goods are subject to the conditions
of customs. These are usually placed near sea ports or airports for promoting
export industries.
Mostly, these are assembling plants by using labor available at cheaper rates. EPZ
helps to gather components from various countries so that a new product can be
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exported. The rules and regulations of EPZ are different from one country to
another country.
In many situations , hosting countries invest in infrastructure to help amenities
such as power, water supplies and allow “one stop shops” that the companies can
finish the entire process. Especially, Units in these Zones are allowed for foreign
equity up to 100 per cent.
The main objectives of an EPZ are:
To gain foreign exchange.
To create job opportunities.
To promote technology transfer by foreign investment
To furnish the overall development of the economy.
EXPORT-ORIENTED UNIT (EOU):
Export-Oriented Unit (EOU) is an business unit which offers for exports its entire
production. In industries, EOUs were allowed for potential exports. The Export
targets are contemplated by the relevant Council of Export Promotion. Normally
EOUs does not provide any support to products unless subject to export control
quota ceilings. Thus, the scheme of 100 per cent export oriented units had been
designed in order to create additional export capacity units. This will results in
substitution for the existing units of production.
An EOU unit is considered to be a major partner of net foreign exchange. From
the commencement of commercial production, for a period of 5 years the level of
foreign exchange earnings as a percentage of exports (NFEP) was computed
annually and cumulatively. The NFEP concern for various products varies from
10 per cent to 60 per cent for plain gold, computer soft ware and tissue culture
plants. Though, electronic hardware goods were allowed to be set up without any
obligation.
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Check your progress 2: -
Fill in the blanks: -
(6)A ___________ is a geographical region that has economic laws that are more
liberal than a countries domestic economic laws.
(7) __________ is exchange of capital, goods, and services across international
borders or territories.
(8)EPZ stands for ______________________________.
(9) __________ refers to an industrial unit which offers for exports its entire
production excluding permitted levels of rejects.
16.9 DUMPING AND ANTIDUMPING MEASURES:
Dumping refers to an approach of pricing policy for a country to enter into aboardor foreign markets by means of reduction in the price of the commodity.Generally, it is referred as selling of goods at less than fair or normal value. In thecontext of international trade law, it is defined as an act of a manufacturerexporting goods from one country to another country at a price which is eitherbelow the price in the domestic market or below its costs of production.
According to Haberler dumping can be defined as: “The sale of goods abroad at
a price which is lower than the selling price of the same goods at the same time
and in the same circumstances at home, taking account of differences in transport
costs”
According to Viner, “Dumping is price discrimination between two markets in
which the monopolist sells a portion of his produced product at a low price and
the remaining part at a high price in the domestic market.”
A standard technical definition of dumping is the act of charging goods at lowerprice in a foreign market than one charge for the same goods in a domesticmarket. Dumping ,in practical terms, means sale of goods at a higher price in thehome market and at a lower price in the abroad market.
Types of Dumping:
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Dumping can be classified as sporadic , intermittent or over a long period.
Sporadic Dumping:
It is mostly resorted under rare or exceptional cases. First when the production ofcommodity in the home market is higher than the targeted demand and secondlythe presence of unsold commodities, after sales in the home market. In suchsituations, the manufacturer sells the remaining or unsold stockings at a lowerprice in the abroad market. The primary objective is to identify new markets forhis product or to manage competition in a foreign market or to liquidate theexcess stock. In this type of dumping, the manufacturer sells his products at alower price at least to recover losses.
Intermittent Dumping:
It refers to the periodic sale of goods in the aboard at a lower price than the homecountry. The basic objective is to gain an advantage in the abroad market. Incompetition, the manufacturer sells goods in the abroad market at a very less priceor even at a state of loss. After that he will increases the price of the products inthe abroad market.
Long Period Dumping:
This type of dumping may be resorted to facilitate the optimum utilisation of plantcapacity. This may results in lowering the average cost and increases the profit inthe domestic market.
Objectives of Dumping:
1. To enter into the abroad Market:
A producer adopts dumping, to find an appropriate place for doing business in theabroad market. Because of heavy competition in the abroad markets he willreduce the price of the product as compared to the other players of a market. Itresults in the increase of the demand for his product
2. To Sale the Surplus goods:
If the manufacturer is not able to sale the excess production in the home market,then he will search for new places to sell these additional goods at a very lowerprice in the abroad market. But this happens occasionally.
3. Expansion of the Industry:
For increasing returns on investments, the producer concentrates on dumping forthe expansion of business. The cost of production can be reduced by selling more
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and more quantities at a lower price in the abroad market, so that he can earnadditional profits.
4. New Trade Relations:
For expanding the business the producer develops new trade relations by sellinggoods at a lower price in the abroad market, thereby he establishes relations innew market with those countries.
Effects of Dumping:
Dumping affects both the parties i.e. importing and exporting countries.
On the Importing country:
The impact of dumping towards the importing countries depends upon the pointthat the dumping is for a short term or for a long term basis; the nature of theproduct; the dumping objectives. Domestic industry may be affected due todecline in the sales and profits. In long run dumpling may threatening the survivalof the domestic industry. This may create problems in balance of payments.
On the exporting country: Through dumping, the exporting countries earn moreforeign currency by sale of goods in huge quantities. As there is more demand forthe commodity which Increases the employment opportunities.
Antidumping and its measures:
Anti dumping is a measure of protection towards domestic markets. It suggestsvarious remedial measures for solving problems related to the unfair tradepractices of dumping. It is defined as an instrument for ensuring fair trade. Thefollowing are the measures adopted to control dumping:
a. Tariff Duty:
An importing country charges a tariff on products which results in price increaseof the importing commodity to have a control over dumping. A point to be noted,that the tax rate on imports should be equal to the difference between the price ofdomestic and dumped commodity. In order restrict, dumping generally the tariffduty is imposed higher than this difference.
b. Import Quota:
Import on Quota is another measure to have a control over dumping. Thismeasure specifies volume of the goods that are allowed to be import into the
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country. It includes the levy of tax along with fixing of quota. So the contributionof foreign exchange to the importers is limited.
c. Import Embargo:
Import embargo is another measure against the practices of dumping. It means theimports of certain type of commodities are banned.
d. Voluntary Export Restraint:
Importing and exporting countries voluntarily enter into bilateral agreements. Thebasic objective of this agreement is to restrict dumping of commodities. ABilateral VER agreement is an example for exporting textiles between India andEU countries.
16.10 Summary:-
In this chapter we can understand the meaning of economic integration
and trading blocks. Thetrade impacts of trade blocks are normally measured by
weighing the benefits of trade creation against the adverse effects of trade
diversion. A Special Economic Zone (SEZ) is a geographical region that has
economic laws that are more liberal than a country’s domestic economic laws.
India has specific laws for its SEZ’s.Dumping refersto an approach of pricing
policy for a country to enter into aboard or foreign markets by means of reduction
in the price of the commodity.
16.11 Glossary: -
Trade Blocks: - Economic integration among the world economies varies in
degree.They are:-free trade area, customs union, common market, and economic
union.
NAFTA: -It is expected to eliminate all tariffs and trade barriers among the USA,
Canada, and Mexico.
SAARC: -Ithas been trying for improving the quality of life and welfare of the
people, develop the region economically and provide the opportunities to the
people of the member countries.
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Globalisation implies opening up the economy for rest of the globe by liberalizing
the rules and regulations.
Special Economic Zone: -A Special Economic Zone (SEZ) is a geographical
region that has economic laws that are more liberal than a country’s domestic
economic laws. India has specific laws for its SEZ’s.
Export-Oriented Unit (EOU): - Hundred per cent Export-Oriented Unit (EOU)
refers to an industrial unit which offers for exports its entire production, excluding
permitted levels of rejects.
Dumping:-Dumping refersto an approach of pricing policy for a country to enter
into aboard or foreign markets by means of reduction in the price of the
commodity.
16.12 Answers to check your progress:
(1) A
(2) C
(3) D
(4) B
(5) A
(6)Special economic zone.
(7)Foreign trade.
(8)Export processing zones.
(9)Export oriented units.
16.13 Suggested Readings: -
1. Title : International Business: Text and Cases, Author: P. SubbaRao,
Edition: 2, Publisher: Himalaya Publishing House pvt. Ltd., 2001, ISBN
817866206X, 9788178662060
2. International Business Text and Cases, Author: Francis Cherunilam,
Edition: 3, Publisher: Prentice Hall of India Pvt. Ltd., ISBN 81-203-2425-0
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16.14 Terminal and Model questions: -
(1)What is economic integration? Explain the different kinds of economic
integration?
(2)Describe the steps taken by NAFTA in bringing economic among the
USA,Canada, and Mexico?
(3)Briefly explain the formation of the association of south – EastAsian nations
(ASEAN)?
(4)Explain the activities of dumping and anti dumping measures?
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