Course: 101 (Business Environment)
Full Marks: 80
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1(a) “Business is the product of environment.” Explain. How do the internal factors of environment influence the business policies of an organisation?
-> Business Environment is sum or collection of all internal and external factors such as employees, customer’s needs and expectations, supply and demand, management, clients, suppliers, owners, activities by government, innovation in technology, social trends, market trends, economic changes, etc. These factors affect the function of the company and how a company works directly or indirectly. Sum of these factors influences the companies or business organisations environment and situation.
Business environment helps in identifying business opportunities, tapping useful resources, assists in planning, and improves the overall performance, growth, and profitability of the business. There are various types of Business Environment like Micro Environment and Macro Environment. Business Environment is the most important aspect of any business. The forces which constitute the business environment are its suppliers, competitors, media, government, customers, economic conditions, investors and multiple other institutions working externally. So let us start with the introduction to business environment and learn its importance.
Importance of Business Environment
On the basis of the foregoing discussion, it can be said that the Business Environment is the most important aspect of any business. To be aware of the ongoing changes, not only helps the business to adapt to these changes but also to use them as opportunities.
Business Environment presents threats as well as opportunities for any business. A good business manager not only identifies and evaluates the environment but also reacts to these external forces. The importance of the business environment can be neatly understood if we consider the following facts:
1. Enables to Identify Business Opportunities-
All changes are not negative. If understood and evaluated them, they can be the reason for the success of a business. It is very necessary to identify a change and use it as a tool to solve the problems of the business or populous.
For example, Mr. Phanindra Sama was troubled by the ticket booking condition in India. He used to travel a long distance to his travel agent to book his ticket but even after travelling this distance he was not sure if his seat was confirmed. He saw the opportunity to establish an app in the face of the problem and co-founded the online ticket booking app called ‘redBus’.
2. Helps in Tapping Useful Resources-s
Careful scanning of the Business Environment helps in tapping the useful resources required for the business. It helps the firm to track these resources and convert them into goods and services .
3. Coping with Changes-
The business must be aware of the ongoing changes in the business environment, whether it is changes in customer requirements, emerging trends, new government policies , technological changes. If the business is aware of these regular changes then it can bring about a response to deal with those changes.
For example, when the Android OS market was blooming and the customers preferred Android devices for its easy interface and apps, Nokia failed to cope with the change by not implementing Android OS on Nokia devices. They failed to adapt and lost tremendous market value.
4. Assistance in Planning-
This is another aspect of the importance of the business environment. Planning purely means what is to be done in the future. When the Business Environment presents a problem or an opportunity, it is up to the business to decide what plan would it have to come up with in order to address the future and solve the problem or utilise the opportunity. After analysing the changes presented, the business can incorporate plans to counteract the changes for a secure future.
5. Helps in Improving Performance-
Enterprises that are thoroughly scanning their environment not only deal with the changes presented but also flourish with them. Adapting to the external forces help the business to improve the performance and survive in the market.
The internal factors of environment influence the business policies of an organisation are:-
The factors are: (1) Value System, (2) Mission and Objectives, (3) Organisation Structure, (4) Corporate Culture and Style of Functioning of Top Management, (5) Quality of Human Resources, (6) Labour Unions, and (7) Physical Resources and Technological Capabilities.
1. Value System:
The value system of an organisation means the ethical beliefs that guide the organisation in achieving its mission and objective. The value system of a business organisation also determines its behaviour towards its employees, customers and society at large. The value system of the promoters of a business firm has an important bearing on the choice of business and the adoption of business policies and practices. Due to its value system a business firm may refuse to produce or distribute liquor for it may think morally wrong to promote the consumption of liquor.
The value system of a business organisation makes an important contribution to its success and its prestige in the world of business. For instance, the value system of J.R.D. Tata, the founder of Tata group of industries, was its self-imposed moral obligation to adopt morally just and fair business policies and practices which promote the interests of consumers, employees, shareholders and society at large. This value system of J.R.D. Tata was voluntarily incorporated in the articles of association of TISCO, a premier Tata company.
2. Mission and Objectives:
The objective of all firms is assumed to be maximization of long-run profits. But mission is different from this narrow objective of profit maximization. Mission is defined as the overall purpose or reason for its existence which guides and influences its business decision and economic activities.
The-choice of a business domain, direction of its development, choice of a business strategy and policies are all guided by the overall mission of the company. For example, “to become a world-class company and to achieve global dominance has been the mission of ‘Reliance Industries of India’. Similarly “to become a research based international pharma company” has been stated as mission of Ranbaxy Laboratories of India.
3. Organisation Structure:
Organisation structure means such things as composition of board of directors, the number of independent directors, the extent of professional management and share -holding pattern. The nature of organisational structure has a significant influence over decision making process in an organisation. An efficient working of a business organisation requires that its organisation structure should be conducive to quick decision making. Delays in decision making can cost a good deal to a business firm.
The board of directors is the highest decision making body in a business organisation. It takes general policy decisions regarding direction of growth of business of the firm and supervises its overall functioning. Therefore, the managerial capability of the board of directors is of crucial importance for the functioning of a business firm and for achievement of its overall mission and objectives.
For efficient and transparent working of the board of directors in India it has been suggested that the number of independent directors be increased. Many private corporate firms in India are managed by family members of their promoters which is not conducive to the efficient working of these firms.
It is therefore highly desirable to increase the extent of professional management of private corporate companies. The share holding pattern has also an important implication for business management. In some Indian companies the majority of shares are held by the promoters of the company themselves.
In some others share-holding pattern is quite diversified among the public. In India financial institutions such as UTI, LIC, GIC, IDBI, IFC etc. have large share holdings in prominent Indian corporate companies and the nominees of these financial institutions play a critical role in making major business policy decisions of these corporate companies.
Technically, shareholders elect directors who make up the board of directors. The directors then appoint company’s top managers who take various business decisions. However, most of the shareholders delegate the voting rights to the management or do not attend the general body meeting.
Thus, most of the shareholders regard ownership of the company as a purely financial investment. However, in recent years in developed countries like the United States the shareholders have come to wield a great influence.
The bankruptcy of business giants such as Enron, World Com. in the United States have created great awareness as well as mistrust among shareholders. In the last few years there has been frequent law suits filed by shareholders against directors and managers for ignoring the interests of shareholders or in fact cheating them by not declaring dividends. That is why there is worldwide debate on proper corporate governance of business firms.
4. Corporate Culture and Style of Functioning of Top Management:
Corporate culture and style of functioning of top managers is important factor for determining the internal environment of a company. Corporate culture is generally considered as either closed and threatening or open and participatory.
In a closed and threatening type of corporate culture the business decisions are taken by top-level managers, while middle level and work-level managers have no say in business decision making. There is lack of trust and confidence in subordinate officials of the company and secrecy pervades throughout in the organisation. As a result, among lower level managers and workers there is no sense of belongingness to the company.
On the contrary, in an open and participatory culture, business decisions are taken at lower levels of management, and top management has a high degree of trust and confidence in the subordinates. Free communication between the top level management and lower-level managers is the rule in this open and participatory type of corporate culture. In this open and participatory system the participation of workers in managerial tasks is encouraged.
Closely related to corporate culture is the style of functioning of top management. Some top managers believe in just giving orders and want them to be strictly followed without holding consultations with lower level managers. This style of functioning is not conducive to the adaptability and flexibility in dealing with the changing external environment of business.
5. Quality of Human Resources:
Quality of employees (i.e. human resources) of a firm is an important factor of internal environment of a firm. The success of a business organisation depends to a great extent on the skills, capabilities, attitudes and commitment of its employees. Employees differ with regard to these characteristics.
It is difficult for the top management to deal directly with all the employees of the business firm. Therefore, for efficient management of human resources, employees are divided into different groups. The manager may pay little attention to the technical details of the job done by a group and encourage group cooperation in the interests of a company. Due to the importance of human resources for the success of a company these days there is a special course for managers how to select and manage efficiently human resources of a company.
6. Labour Unions:
Labour unions are other factor determining internal environment of a firm. Unions collectively bargain with top managers regarding wages, working conditions of different categories of employees. Smooth working of a business organisation requires that there should be good relations between management and labour union.
Each side must implement the terms of agreement reached. Sometimes, a business organisation requires restructuring and modernisation. In this regard, the terms and conditions reached with the labour union must be implemented in both letter and spirit of cooperation of workers is to be ensured for the reconstruction and modernisation of business.
7. Physical Resources and Technological Capabilities:
Physical resources such as plant and equipment, and technological capabilities of a firm determine its competitive strength which is an important factor determining its efficiency and unit cost of production. R and D capabilities of a company determine its ability to introduce innovations which enhance productivity of workers.
It is however important to note that rapid technological progress, especially unprecedented growth of information technology in recent years has increased the relative importance of ‘intellectual capital and human resources as compared to physical resources of a company. The growth of Bill Gates Microsoft Company and Murthy’s Infosys Technologies is mostly due to the quality of human resources and intellectual capital than to any superior physical resources.
(b) Argue the case for and against FDI in Multi-brand Retail in India.
-> FDI in retail industry means that foreign companies in certain categories can sell products through their own retail shop in the country. At present, foreign direct investment (FDI) in pure retailing is not permitted under Indian law. Government of India has allowed FDI in retail of specific brand of products. As India is one of the developing countries, so FDI must be promoted but must be kept under control as it can affect the economy of the country.
FDI in my opinion is bad for the country’s economy. As we are in the category of developing country and to develop properly we need to control the country’s economy very carefully. If the % in FDI in retail sector (multi-brand) is increased then the investment in India’s retail market will be from foreign investors and the profits are also drained to the investors. And moreover in INDIA, the retail sector mainly depends upon the agricultural sectors and the producer and if FDI is increased then it is going to affect the agricultural sector of the Country very badly and which will affect the country’s economy. And if the % of FDI is increased to 100% in retail (both single and multi-brand) sector then government will lose the control over this sector completely and then it cannot help in controlling this sector with its rule and regulations as the whole retail sector would be privatized. And this privatization can make a very serious effect on the country’s economy. And one of the most disadvantage of FDI in retail sector is that as we know that the retail sector is one of the major employment provider and permitting FDI in this sector can displace the unorganized sector and leading to loss of livelihood the most favouring example is if wall mart entry in retail sector is allowed then it will kill the millions of local shops and jobs. The global retailers would exercise monopolistic power to raise prices and monopolistic power to reduce the prices received by the supplier. Hence both the consumer and supplier would lose while the profit margin in such retail change would go up. So from the above points i can say that FDI in retail sector is not good for India.
Advantages of FDI in Retail in India
- Growth in Economy
- Job Opportunities
- Benefits to Farmers
- Benefits to consumers
- Lack of Infrastructure
- Cheaper Production facilities
- Availability of new technology
- Long term cash liquidity
· Conducive for the country’s economic growth
· FDI opens up a new avenue for Franchising
Disadvantages of FDI in Retail in India
- Impact on Local Markets ( Kirana Shops)
- Limited Employment Generation
- Fear of Lowering Prices
- Negative Impact on Indian Economy
- Negative Impact on Indian Domestic Market
Supporting Arguments of FDI in Multi-brand Retail in India:
· No evidence of impact on job losses
· The rate of closure of unorganised retail shops (4.2%) is lower than international standards
· Evidence from Indonesia and China show that traditional and modern retail can coexist and grow
· Majority of small retailers keen to remain in operation even after emergence of organised retail
· Significant positive impact on farmers as a result of direct sales to organised retailers. For instance, cauliflower farmers receive a 25% higher price selling directly to organised retailers instead of government regulated markets (mandis). Profits for farmers selling to organised retailers are about 60% higher than when selling to mandis
· Organised retail could remove supply chain inefficiencies through direct purchase from farmers and investment in better storage, distribution and transport systems. FDI, in particular, could bring in new technology and ideas.
· Organised retail lowers prices. Consumer spending increases with the entry of organised retail and lower income groups tend to save more.
· It will lead to better quality and safety standards of products.
Opposing Arguments FDI in Multi-brand Retail in India:
· Unorganised retailers in the vicinity of organised retailers saw their volume of business and profit decline but this effect weakens over time.
· Other studies have estimated that traditional fruit and vegetable retailers experienced a 20-30% decline in income with the presence of supermarkets.
· There is potential for employment loss in the value chain. A supermarket may create fewer jobs for the volume of produce handled.
· Unemployment to increase as a result of retailers practicing product bundling (selling goods in combinations and bargains) and predatory pricing.
· Current organised retail procures 60-70% from wholesale markets rather than farmers. There has been no significant impact on backend infrastructure investment.
· There are other issues like irrigation, technology and credit in agriculture which FDI may not address.
· Increased monopolistic strength could force farmers to sell at lower prices.
· Evidence from some Latin American countries (Mexico, Nicaragua, Argentina), Africa (Kenya, Madagascar) and Asia (Thailand, Vietnam, India) reveal that supermarket prices for fruits and vegetables were higher than traditional retail prices.
· Even with lower prices at supermarkets, low income households may prefer traditional retailers because they live far from supermarkets, they live far from supermarkets, and they can bargain with traditional retailers and buy loose items.
· Monopolistic power for retailers could result in high prices for consumers.
2(a) Analyse the changes in the Industrial Policies of India since the adoption of New Economic Policy in 1991.
-> New Economic Policy of India was launched in the year 1991 under the leadership of P. V. Narasimha Rao. This policy opened the door of the India Economy for the global exposure for the first time. In this New Economic Policy P. V. Narasimha Rao government reduced the import duties, opened reserved sector for the private players, and devalued the Indian currency to increase the export. This is also known as the LPG Model of growth.
New Economic Policy refers to economic liberalisation or relaxation in the import tariffs, deregulation of markets or opening the markets for private and foreign players, and reduction of taxes to expand the economic wings of the country.
Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy (NEP) of India. Manmohan Singh introduced the NEP on July 24, 1991.
Main Objectives of New Economic Policy – 1991, July 24
The main objectives behind the launching of the New Economic policy (NEP) in 1991 by the union Finance Minister Dr. Manmohan Singh are stated as follows:
1. The main objective was to plunge Indian Economy in to the arena of ‘Globalization and to give it a new thrust on market orientation.
2. The NEP intended to bring down the rate of inflation
3. It intended to move towards higher economic growth rate and to build sufficient foreign exchange reserves.
4. It wanted to achieve economic stabilization and to convert the economy into a market economy by removing all kinds of un-necessary restrictions.
5. It wanted to permit the international flow of goods, services, capital, human resources and technology, without many restrictions.
6. It wanted to increase the participation of private players in the all sectors of the economy. That is why the reserved numbers of sectors for government were reduced. As of now this number is just 2.
Beginning with mid-1991, the govt. has made some radical changes in its policies related to foreign trade, Foreign Direct Investment, exchange rate, industry, fiscal discipline etc. The various elements, when put together, constitute an economic policy which marks a big departure from what has gone before.
The thrust of the New Economic Policy has been towards creating a more competitive environment in the economy as a means to improving the productivity and efficiency of the system. This was to be achieved by removing the barriers to entry and the restrictions on the growth of firms.
Main Measures Adopted in the New Economic Policy
Due to various controls, the economy became defective. The entrepreneurs were unwilling to establish new industries (because laws like MRTP Act 1969 de-motivated entrepreneurs). Corruption, undue delays and inefficiency rose due to these controls. Rate of economic growth of the economy came down. So in such a scenario economic reforms were introduced to reduce the restrictions imposed on the economy.
Following steps were taken under the Liberalization measure:
(i) Free determination of interest rate by the commercial Banks:
Under the policy of liberalisation interest rate of the banking system will not be determined by RBI rather all commercial Banks are independent to determine the rate of interest.
(ii) Increase in the investment limit for the Small Scale Industries (SSIs):
Investment limit of the small scale industries has been raised to Rs. 1 crore. So these companies can upgrade their machinery and improve their efficiency.
(iii) Freedom to import capital goods:
Indian industries will be free to buy machines and raw materials from foreign countries to do their holistic development.
(v) Freedom for expansion and production to Industries:
In this new liberalized era now the Industries are free to diversify their production capacities and reduce the cost of production. Earlier government used to fix the maximum limit of production capacity. No industry could produce beyond that limit. Now the industries are free to decide their production by their own on the basis of the requirement of the markets.
(vi) Abolition of Restrictive Trade Practices:
According to Monopolies and Restrictive Trade Practices (MRTP) Act 1969 , all those companies having assets worth Rs. 100 crore or more were called MRTP firms and were subjected to several restrictions. Now these firms have not to obtain prior approval of the Govt. for taking investment decision. Now MRTP Act is replaced by the competition Act, 2002.
Meaning and Types in India:
1 . Liberalisation
Removal of Industrial Licensing and Registration:
Previously private sector had to obtain license from Govt. for starting a new venture. In this policy private sector has been freed from licensing and other restrictions.
Industries licensing is necessary for following industries:
(iii) Defence equipment
(iv) Industrial explosives
(vi) Hazardous chemicals
Simply speaking, privatisation means permitting the private sector to set up industries which were previously reserved for the public sector. Under this policy many PSU’s were sold to private sector. Literally speaking, privatisation is the process of involving the private sector-in the ownership of Public Sector Units (PSU’s).
The main reason for privatisation was in currency of PSU’s are running in losses due to political interference. The managers cannot work independently. Production capacity remained under-utilized. To increase competition and efficiency privatisation of PSUs was inevitable.
Step taken for Privatisation:
The following steps are taken for privatisation:
1 . Sale of shares of PSUs:
Indian Govt. started selling shares of PSU’s to public and financial institution e.g. Govt. sold shares of Maruti Udyog Ltd. Now the private sector will acquire ownership of these PSU’s. The share of private sector has increased from 45% to 55%.
2. Disinvestment in PSU’s:
The Govt. has started the process of disinvestment in those PSU’s which had been running into loss. It means that Govt. has been selling out these industries to private sector. Govt. has sold enterprises worth Rs. 30,000 crores to the private sector.
3. Minimisation of Public Sector:
Previously Public sector was given the importance with a view to help in industrialisation and removal of poverty. But these PSU’s could not able to achieve this objective and policy of contraction of PSU’s was followed under new economic reforms. Number of industries reserved for public sector was reduces from 17 to 2.
(a) Railway operations
(b) Atomic energy
Literally speaking Globalisation means to make Global or worldwide, otherwise taking into consideration the whole world. Broadly speaking, Globalisation means the interaction of the domestic economy with the rest of the world with regard to foreign investment, trade, production and financial matters.
Steps taken for Globalisation:
Following steps are taken for Globalisation:
(i) Reduction in tariffs:
Custom duties and tariffs imposed on imports and exports are reduced gradually just to make India economy attractive to the global investors.
(ii) Long term Trade Policy:
Forcing trade policy was enforced for longer duration.
Main features of the policy are:
(a) Liberal policy
(b) All controls on foreign trade have been removed
(c) Open competition has been encouraged.
(iii) Partial Convertibility of Indian currency:
Partial convertibility can be defined as to convert Indian currency (up to specific extent) in the currency of other countries. So that the flow of foreign investment in terms of Foreign Institutional Investment (FII) and foreign Direct Investment (FDI).
This convertibility stood valid for following transaction:
(a) Remittances to meet family expenses
(b) Payment of interest
(c) Import and export of goods and services.
(iv) Increase in Equity Limit of Foreign Investment:
Equity limit of foreign capital investment has been raised from 40% to 100% percent. In 47 high priority industries foreign direct investment (FDI) to the extent of 100% will be allowed without any restriction. In this regard Foreign Exchange Management Act (FEMA) will be enforced.
If the Indian economy is shining at the world map currently, its sole attribution goes to the implementation of the New Economic Policy in 1991.
(b) Critically analyse the role of MNC’s in the Indian economy.
-> Multinational Corporations (MNC) operate in more than one country. In 1991, India faced economic crisis and to lift the country out of crisis, Indian government rolled out economic reforms, and hence openly opted for economic liberalisation. This allowed private investments and thereby MNCs to operate in India. Initially, many economists expressed fears over allowing MNCs to India. But with time, everyone is agreeing that MNCs are playing an important role in India and have been helpful for our economy.
Role of Multinational Corporations in the Indian Economy!
Prior to 1991 Multinational companies did not play much role in the Indian economy. In the pre-reform period the Indian economy was dominated by public enterprises.
To prevent concentration of economic power industrial policy 1956 did not allow the private firms to grow in size beyond a point. By definition multinational companies were quite big and operate in several countries.
1. Promotion Foreign Investment:
In the recent years, external assistance to developing countries has been declining. This is because the donor developed countries have not been willing to part with a larger proportion of their GDP as assistance to developing countries. MNCs can bridge the gap between the requirements of foreign capital for increasing foreign investment in India.
The liberalized foreign investment pursued since 1991, allows MNCs to make investment in India subject to different ceilings fixed for different industries or projects. However, in some industries 100 per cent export-oriented units (EOUs) can be set up. It may be noted, like domestic investment, foreign investment has also a multiplier effect on income and employment in a country.
For example, the effect of Suzuki firm’s investment in Maruti Udyog manufacturing cars is not confined to income and employment for the workers and employees of Maruti Udyog but goes beyond that. Many workers are employed in dealer firms who sell Maruti cars.
Moreover, many intermediate goods are supplied by Indian suppliers to Maruti Udyog and for this many workers are employed by them to manufacture various parts and components used in Maruti cars. Thus their incomes also go up by investment by a Japanese multinational in Maruti Udyog Limited in India.
2. Non-Debt Creating Capital inflows:
In pre-reform period in India when foreign direct investment by MNCs was discouraged, we relied heavily on external commercial borrowing (ECB) which was of debt-creating capital inflows. This raised the burden of external debt and debt service payments reached the alarming figure of 35 per cent of our current account receipts. This created doubts about our ability to fulfil our debt obligations and there was a flight of capital from
India and this resulted in balance of payments crisis in 1991. As direct foreign investment by multinational corporations represents non-debt creating capital inflows we can avoid the liability of debt-servicing payments. Moreover, the advantage of investment by MNCs lies in the fact that servicing of non-debt capital begins only when the MNC firm reaches the stage of making profits to repatriate Thus, MNCs can play an important role in reducing stress strains and on India’s balance of payments (BOP).
3. Technology Transfer:
Another important role of multinational corporations is that they transfer high sophisticated technology to developing countries which are essential for raising productivity of working class and enable us to start new productive ventures requiring high technology. Whenever, multinational firms set up their subsidiary production units or joint-venture units, they not only import new equipment and machinery embodying new technology but also skills and technical know-how to use the new equipment and machinery.
As a result, the Indian workers and engineers come to know of new superior technology and the way to use it. In India, the corporate sector spends only few resources on Research and Development (R&D). It is the giant multinational corporate firms (MNCs) which spend a lot on the development of new technologies can greatly benefit the developing countries by transferring the new technology developed by them. Therefore, MNCs can play an important role in the technological up-gradation of the Indian economy.
4. Promotion of Exports:
With extensive links all over the world and producing products efficiently and therefore with lower costs multinationals can play a significant role in promoting exports of a country in which they invest. For example, the rapid expansion in China’s exports in recent years is due to the large investment made by multinationals in various fields of Chinese industry.
Historically in India, multinationals made large investment in plantations whose products they exported. In recent years, Japanese automobile company Suzuki made a large investment in Maruti Udyog with a joint collaboration with Government of India. Maruti cars are not only being sold in the Indian domestic market but are exported in a large number to the foreign countries.
As a matter of fact until recently, when giving permission to a multinational firm for investment in India, Government granted the permission subject to the condition that the concerned multinational company would export the product so as to earn foreign exchange for India.
However, in case of Pepsi, a famous cold -drink multinational company, while for getting a product license in 1961 to produce Pepsi Cola in India it agreed to export a certain proportion of its product, but later it expressed its inability to do so. Instead, it ultimately agreed to export things other than what it produced such as tea.
5. Investment in Infrastructure:
With a large command over financial resources and their superior ability to raise resources both globally and inside India it is said that multinational corporations could invest in infrastructure such as power projects, modernisation of airports and posts, telecommunication.
The investment in infrastructure will give a boost to industrial growth and help in creating income and employment in the India economy. The external economies generated by investment in infrastructure by MNCs will therefore crowd in investment by the indigenous private sector and will therefore stimulate economic growth.
In view of above, even Common Minimum Programme of the present UPA government provides that foreign direct investment (FDI) will be encouraged and actively sought, especially in areas of (a) infrastructure, (b) high technology and (c) exports, and (d) where domestic assets and employment are created on a significant scale.
3(a) Explain the main objectives of Monetary Policy. Briefly discuss the Monetary Policy of India.
-> Monetary policy is concerned with the changes in the supply of money and credit. It refers to the policy measures undertaken by the government or the central bank to influence the availability, cost and use of money and credit with the help of monetary techniques to achieve specific objectives. Monetary policy aims at influencing the economic activity in the economy mainly through two major variables, i.e., (a) money or credit supply, and (b) the rate of interest.
The techniques of monetary policy are the same as the techniques of credit control at the disposal of the central bank. Various techniques of monetary policy, thus, include bank rate, open market operations, variable cash reserve requirements, selective credit controls. R.P. Kent defines monetary policy as the management of the expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment.
According to A. J. Shapiro, “Monetary Policy is the exercise of the central bank’s control over the money supply as an instrument for achieving the objectives of economic policy.” In the words of D.C. Rowan, “The monetary policy is defined as discretionary action undertaken by the authorities designed to influence (a) the supply of money, (b) cost of money or rate of interest and (c) the availability of money.”
Monetary policy is not an end in itself, but a means to an end. It involves the management of money and credit for the furtherance of the general economic policy of the government to achieve the predetermined objectives. There have been varying objectives of monetary policy in different countries in different times and in different economic conditions.
Different objectives clash with each other and there is a problem of selecting a right objective for the monetary policy of a country. The proper objective of the monetary policy is to be selected by the monetary authority keeping in view the specific conditions and requirements of the economy.
Objectives of Monetary Policy:
The goals of monetary policy refer to its objectives such as reasonable price stability, high employment and faster rate of economic growth. The targets of monetary policy refer to such variables as the supply of bank credit, interest rate and the supply of money.
These are to be changed by using the instruments of monetary policy for attaining the objectives (goals). The instruments of monetary policy are variation in the bank rate, the repo rate and other interest rates, open market operations (OMOs), selective credit controls and variations in reserve ratio (VRR). [The targets are to be changed by using the instruments to achieve the objectives.]
Four most important objectives of monetary policy are the following:
Monetary policy has an important effect on both actual GDP and potential GDP. Industrially advanced countries rely on monetary policy to stabilise the economy by controlling business. But it becomes impotent in deep recessions.
Keynes pointed out that monetary policy loses its effectiveness during economic downturn for two reasons:
(i) The existence of liquidity trap situation (i.e., infinite elasticity of demand for money) and
(ii) Low interest elasticity of (autonomous) investment.
Price stability is perhaps the most important goal which can be pursued most effectively by using monetary policy. In a developing country like India the acceleration of investment activity in the face of a fall in agricultural output creates excessive pressure on prices. The food inflation in India is a proof of this. In such a situation, monetary policy has much to contribute to short-run price stability.
Due to various changes in the structure of the economy in a developing country like India some degree of inflation is inevitable. And mild inflation or a functional rise in prices is desirable to give necessary incentive to producers and investors. As P. A. Samuelson put it, mild inflation at the rate of 3% to 4% per annum lubricates the wheels of trade and industry and promotes faster economic growth.
Price stability is also important for improving a country’s balance of payments. In the opinion of C. Rangarajan, “The increasing openness of the economy, the need to service external debt and the necessity to improve the share of our exports in a highly competitive external environment require that the domestic price level is not allowed to rise unduly”. This is more so in view of the fact that India’s major trading partners have achieved notable success in recent years in achieving price stability.
Monetary policy can promote faster economic growth by making credit cheaper and more readily available. Industry and agriculture require two types of credit—short-term credit to meet working capital needs and long-term credit to meet fixed capital needs.
The need for these two types of credit can be met through commercial banks and development banks. Easy availability of credit at low rates of interest stimulates investment or expansion of society’s production capacity. This in its turn enables the economy to grow faster than before.
4. Exchange Rate Stability:
In an ‘open economy’—that is, one whose borders are open to goods, services, and financial flows— the exchange-rate system is also a central part of monetary policy. In order to prevent large depreciation or appreciation of the rupee in terms of the US dollar and other foreign currencies under the present system of floating exchange rate the central bank has to adopt suitable monetary measures. India by the Reserve
Conflicts among Objectives:
In the long run there is no conflict between the first two objectives, viz., price stability and economic growth. In fact, price stability is a means to achieve faster economic growth. In the context of the Indian economy C. Rangarajan writes, “It is price stability which provides the appropriate environment under which growth can occur and social justice can be ensured.”
However, in the short run there is a trade-off between price stability and economic growth. Faster economic growth is achieved by increasing-the availability of credit at a lower rate of interest. This amounts to an increase in the money supply.
But an increase in the money supply and the consequent rise in consumer demand tend to generate a high rate of inflation. This raises the question of what is the minimum acceptable rate of inflation which does not act as a growth-retarding factor. The question still remains unanswered.
There is also a conflict between exchange rate stability and economic growth. If the rupee depreciates in terms of the dollar, then RBI has to tighten its monetary screws, i.e., it has to raise the interest rate and reduce excess liquidity of banks (from which loans are made).
On the other hand in order to promote faster economic growth the RBI has to lower interest rate and make more credit available for encouraging private investment. Thus the RBI often faces a dilemma situation.
Monetary Policy of India:-
Monetary Policy is the process by which the monetary authority of a country, generally the central bank, controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth.  In India, the central monetary authority is the Reserve Bank of India (RBI). It is designed to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are:
Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.
Controlled Expansion of Bank Credit
One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.
Promotion of Fixed Investment
The aim here is to increase the productivity of investment by restraining non essential fixed investment.
Restriction of Inventories and stocks
Overfilling of stocks and products becoming outdated due to excess of stock often results in sickness of the unit. To avoid this problem, the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organisation.
To Promote Efficiency
It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, easing operational constraints in the credit delivery system, introducing new money market instruments, etc.
Reducing the Rigidity
RBI tries to bring about flexibilities in operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.
These instruments are used to control the money flow in the economy,
Open Market Operations
An open market operation is an instrument of monetary policy which involves buying or selling of government securities like government bond from or to the public and banks. This mechanism influences the reserve position of the banks, yield on government securities and cost of bank credit. The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow. Open market operation makes bank rate policy effective and maintains stability in government securities market.
Cash Reserve Ratio (CRR)
Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances. The higher the CRR with the RBI, the lower will be the liquidity in the system, and vice versa. RBI is empowered to vary CRR between 15 percent and 3 percent. Per the suggestion by the Narasimham Committee report, the CRR was reduced from 15% in 1990 to 5 percent in 2002. As of 31 December 2019, the CRR is 4.00 percent.
Statutory Liquidity Ratio (SLR)
Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets have to be kept in non cash form such as G-secs precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is termed as the statutory liquidity ratio . There was a reduction of SLR from 38.5% to 25% because of the suggestion by Narsimham Committee. As on 31-December -2019, the SLR stands at 18.25%.
Bank Rate Policy
The bank rate , also known as the discount rate, is the rate of interest charged by the RBI for providing funds or loans to the banking system. This banking system involves commercial and co-operative banks, Industrial Development Bank of India, IFC , EXIM Bank , and other approved financial institutions. Funds are provided either through lending directly or discounting or buying money market instruments like commercial bills and treasury bills . Increase in bank rate increases the cost of borrowing by commercial banks which results in the reduction in credit volume to the banks and hence the supply of money declines. Increase in the bank rate is the symbol of tightening of RBI monetary policy. As of 31 December 2019, the bank rate is 5.40 percent.
In this operation, RBI issues prior information or direction that loans to the commercial banks will be given up to a certain limit. In this case, commercial bank will be tight in advancing loans to the public. They will allocate loans to limited sectors. A few examples of credit ceiling are agriculture sector advances and priority sector lending.
Credit Authorisation Scheme
Credit Authorisation Scheme was introduced in November, 1965 when P C Bhattacharya was the chairman of RBI. Under this instrument of credit regulation, RBI, as per the guideline, authorise the banks to advance loans to desired sectors.
Moral Suasion is just as a request by the RBI to the commercial banks to take certain actions and measures in certain trends of the economy. RBI may request commercial banks not to give loans for unproductive purposes which do not add to economic growth but increase inflation.
Repo Rate and Reverse Repo Rate
Repo rate is the rate at which RBI lends to its clients generally against government securities. Reduction in repo rate helps the commercial banks to get money at a cheaper rate and increase in repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Reverse repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. As the rates are high the availability of credit and demand decreases resulting to decrease in inflation . This increase in repo rate and reverse repo rate is a symbol of tightening of the policy. As of 31 December, 2019 Repo rate is 5.15% and Reverse Repo rate is 4.90%.
(b) Describe the scenario of resource mobilisation through direct and indirect taxes in India.
-> Taxation is an important instrument for fiscal policy which can be used for mobilizing resources for capital formation in the public sector. To raise ratio of savings to national income and thereby raise resources for development, it is necessary that marginal saving rate be kept higher than the average saving rate.
By imposition of direct progressive taxes on income and profits and higher rates of indirect taxes such as excise duties and sales tax on luxury goods for which income elasticity of demand is higher, the marginal saving rate can be made higher than the average saving rate. This will cause a continuous increase in the saving rate of the economy.
An important merit of taxation is that it is not only a good instrument of resource mobilization for development but it also cuts down consumption of goods and thereby helps in checking inflation. Whereas direct taxes on income, profits and wealth reduce the disposable incomes of the people and thereby tend to reduce aggregate demand in the economy, indirect taxes directly discourages the consumption of the goods on which they are levied by raising their prices.
Taxation policy should be used to prevent this potential economic surplus from being wasted inconspicuous consumption and unproductive investment. It may be noted that this potential economic surplus is not a given amount but it increases in the very process of economic development.
Firstly, economic development raises the incomes of the people, especially the business class and agriculturists and this augments the economic surplus.
Secondly, some inflation is inherent in the process of development and this greatly benefits the traders, farmers and businessmen whose incomes rise much faster than others.
The prices rise more than the costs and they get a good deal of profits. Further, due to the inflationary pressures market value of their investment in real estate, gold, shares, etc go up and enormous capital gains accrue to them. All these enlarge economic surplus and therefore the taxation potential of the economy.
Direct Taxes and Mobilisation of Resources:
Now the question arises what should be the taxation structure of a developing economy which will mobilise the potential economic surplus to the maximum, that is, what kinds of taxes be levied, how much progressive should be their rates and what should be the exemptions and concessions in various taxes.
This is, however, a highly controversial issue. It has been suggested that an appropriate tax which would mobilise resource or mop up economic surplus is the progressive income tax. In India and the other developing countries income has been regarded as a good base for direct taxation.
And the imposition of highly progressive income tax not only mops up relatively greater amount of resources but also tend to reduce inequalities of income. However, a progressive income tax with a high marginal rates of taxes adversely affects private saving and investment and also raises the propensity to evade the tax.
In view of this, two proposals have been put forward to make the income tax both as an effective instrument of resource mobilisation for the public sector and of providing incentives to save and invest. First, Prof. Kaldor of Cambridge University, who in 1956 was invited by Government of India to suggest reforms in the Indian tax system for mobilising resources for development, suggested that whereas the marginal rate of income tax be reduced to, say, 45 to 50 per cent, expenditure tax be levied to discourage the people belonging to upper income brackets from dissipating their income in conspicuous consumption.
According to him, this will also reduce the tendency to evade income tax on the one hand and promote private savings on the other. The second proposal to reform the income tax put forward by others is that whereas marginal rates of income tax be kept high but some exemptions for approved forms of saving and investment be allowed to the individuals. This will channel individual savings along desired lines and at the same time mobilise resources for development.
Apart from the income tax on individuals and companies, the imposition of other direct taxes such as wealth tax, gift tax, and estate duty are also needed to mobilise sufficient resources for capital formation. Unlike income tax, these capital taxes do not have any adverse effects on incentives to save and invest.
They are also important instruments of reducing inequalities of income and wealth. Because of these advantages, Professor Kaldor in his report of taxation reforms in India recommended the imposition of these capital taxes and this recommendation was accepted and the annual wealth tax and gift tax were levied in 1957 with estate duty having been already introduced in 1954.
Agricultural Taxation and Resource Mobilisation:
A major part of national income in India and other developing countries originates in the agricultural sector which has substantial economic surplus which can be tapped for capital formation. This economic surplus mainly goes to rich farmers, landlords, merchants and other intermediaries and, in the absence of suitable taxation on agriculture, this is used for conspicuous consumption and for investing in unproductive activities such as buying gold, jewellery, real estate.
Thus, according to Professor Kaldor, “the taxation of agriculture by one means or another has a critical role to play in the acceleration of economic development.” Further, owing to economic growth in general and agricultural development in particular income of the agricultural class and therefore economic surplus enormously increases and therefore need to be mopped up for further development. Besides, the agricultural sector has to be taxed not only because it has a potential surplus but also to achieve maximum utilisation of land through devising a system of land taxation which would penalise poor use of good land.
Merits and Demerits of Direct Taxes for Resource Mobilisation:
As seen above, as an instrument of resource mobilisation for development direct taxes enjoy several advantages:
(1) They raise resources in a non-inflationary way. Indeed, they tend to check inflation by curtailing consumption demand.
(2) They help to reduce inequalities of income and wealth, and
(3) They discourage conspicuous and non-necessary consumption and thereby enlarge economic surplus. But the direct taxation of agricultural and non-agricultural sectors has its own limits. The coverage of direct taxes is quite narrow and difficult to expand.
For instance, in India not more than one per cent of the population comes within the purview of income tax as incomes of the majority of the people fall below the exemption limit which has now been raised to the annual income of Rs. 40,000. Moreover, there is a considerable evasion of income tax. Yield from other direct taxes such as wealth tax, gift tax is quite meagre due to very small coverage, low rates and considerable evasion of them.
Role of Indirect Taxes in Resource Mobilisation:
As a result of limitations of direct taxes, developing countries have resorted to extensive use of indirect taxes. In India, almost all commodities have been brought within the net of indirect taxes such as excise duties and sales tax. Besides, there are custom duties (i.e., taxes on imports and exports).
Indirect taxation is an important source of development funds in a developing country. In the last five decades of planned development, revenue from several indirect taxes has been rising as a percentage of total revenue as well as of national income.
It has been found that indirect taxes are better suited to the conditions obtaining in developing countries for reducing current consumption and mobilising resources for development. This is because in such countries quite a large proportion of national income tends to be diverted to current consumption instead of being productively invested.
The average propensity to consume in such countries is much higher than is the case in advanced countries. Indirect taxes which reduce consumption must thus play a more important part. They will raise the rate of savings which are so essential for economic growth.
“High rates of taxes on commodities with a high income elasticity of demand are quite effective in siphoning a substantial proportion of increase in output into the resources of the public sector needed for development financing and a stiff rate of commodity taxes on luxury articles tends to introduce an element of progressiveness in an otherwise predominantly regressive tax structure in developing countries.”
But in order to make sure that the resources raised through commodity taxes are adequate, it will be necessary to extend their coverage to include some articles of mass consumption. In the poor countries, it is not possible to exempt entirely goods of general and necessary consumption, because they are the only goods that provide a base broad enough to assure an adequate amount of resources.
4(a) Describe the redressal machinery under the Consumer, Protection Act. What are the consumer’s rights and responsibilities under the Act?
-> Redressal Machinery under the Act:
The CPA provides for a 3 tier approach in resolving consumer disputes. The
District Forum has jurisdiction to entertain complaints where the value of
goods / services complained against and the compensation claimed is less
than Rs. 5 lakhs, the State Commission for claims exceeding Rs. 5 lakhs but
not exceeding Rs. 20 lakhs and the National Commission for claims exceeding
Rs. 20 lakhs.
Under the CPA, the State Government has to set up a district Forum in each district of the State. The Government may establish more than one District Forum in a district if it deems fit. Each District Forum consists of:-
(a) a person who is, or who has been, or is qualified to be, a District Judge who shall be its President
(b) two other members who shall be persons of ability, integrity and standing and have adequate knowledge or experience of or have shown capacity in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman.
Appointments to the State Commission shall be made by the State Government on the recommendation of a Selection Committee consisting of the President of the State Committee, the Secretary – Law Department of the State and the secretary in charge of Consumer Affairs
Every member of the District Forum holds office for 5 years or upto the age of 65 years, whichever is earlier and is not eligible for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government.
The District Forum can entertain complaints where the value of goods or services and the compensation, if any, claimed is less than rupees five lakhs. However, in addition to jurisdiction over consumer goods services valued upto Rs. 5 lakhs, the District Forum also may pass orders against traders indulging in unfair trade practices, sale of defective goods or render deficient services provided the turnover of goods or value of services does not exceed rupees five lakhs.
A complaint shall be instituted in the District Forum within the local limits of whose jurisdiction –
(a) The opposite party or the defendant actually and voluntarily resides or carries on business or has a branch office or personally works for gain at the time of institution of the complaint; or
(b) Any one of the opposite parties (where there are more than one) actually and voluntarily resides or carries on business or has a branch office or personally works for gain, at the time of institution of the complaint provided that the other opposite party/parties acquiescence in such institution or the permission of the Forum is obtained in respect of such opposite parties; or
(c) The cause of action arises, wholly or in part.
The Act provides for the establishment of the State Consumer Disputes
Redressal Commission by the State Government in the State by notification.
Each State Commission shall consist of:-
(a) a person who is or has been a judge of a High Court appointed by State Government (in consultation with the Chief Justice of the High Court ) who shall be its President;
(b) two other members who shall be persons of ability, integrity, and
standing and have adequate knowledge or experience of, or have shown
capacity in dealing with, problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one of whom must
be a woman.
Every appointment made under this hall be made by the State Government on the recommendation of a Selection Committee consisting of the President of the State Commission, Secretary -Law Department of the State and Secretary in charge of Consumer Affairs in the State.
Every member of the District Forum holds office for 5 years or up to the age of 65 years, whichever is earlier and is not eligible for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government.
The State Commission can entertain complaints where the value of goods or services and the compensation, if any claimed exceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs;
The State Commission also has the jurisdiction to entertain appeal against the orders of any District Forum within the State
The State Commission also has the power to call for the records and
appropriate orders in any consumer dispute which is pending before or has
been decided by any District Forum within the State if it appears that such
District Forum has exercised any power not vested in it by law or has
failed to exercise a power rightfully vested in it by law or has acted
illegally or with material irregularity.
The Central Government provides for the establishment of the National Consumer Disputes Redressal Commission The National Commission shall consist of:-
(a) a person who is or has been a judge of the Supreme Court, to be appoint by the Central Government (in consultation with the Chief Justice of India ) who be its President;
(b) four other members who shall be persons of ability, integrity and
standing and have adequate knowledge or experience of, or have shown
capacity in dealing with, problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one of whom shall
be a woman
Appointments shall be by the Central Government on the recommendation of a Selection Committee consisting of a Judge of the Supreme Court to be nominated by the Chief Justice of India, the Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer Affairs in the Government of India.
Every member of the National Commission shall hold office for a term of five years or up to seventy years of age, whichever is earlier and shall not be eligible for reappointment.
The National Commission shall have jurisdiction :-
a. to entertain complaints where the value of the goods or services and the compensation, if any, claimed exceeds rupees twenty lakhs:
b. to entertain appeals against the orders of any State Commission; and
c. to call for the records and pass appropriate orders in any consumer
dispute which is pending before, or has been decided by any State
Commission where it appears to the National Commission that such Commission
has exercised a jurisdiction not vested in it by law, or has failed to
exercise a jurisdiction so vested, or has acted in the exercise of its
jurisdiction illegally or with material irregularity.
Complaints may be filed with the District Forum by:-
1. The consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such service provided or agreed to be provided
2. Any recognised consumer association, whether the consumer to whom goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided, is a member of such association or not
3. one or more consumers, where there are numerous consumers having the same interest with the permission of the District Forum, on behalf of or for the benefit of, all consumers so interested
4. The Central or the State Government.
On receipt of a complaint, a copy of the complaint is to be referred to the
opposite party, directing him to give his version of the case within 30
days. This period may be extended by another 15 days. If the opposite party
admits the allegations contained in the complaint, the complaint will be
decided on the basis of materials on the record. Where the opposite party
denies or disputes the allegations or omits or fails to take any action to
represent his case within the time provided, the dispute will be settled in
the following manner:-
I. In case of dispute relating to any goods: Where the complaint alleges a defect in the goods which cannot be determined without proper analysis or test of the goods, a sample of the goods shall be obtained from the complainant, sealed and authenticated in the manner prescribed for referring to the appropriate laboratory for the purpose of any analysis or test whichever may be necessary, so as to find out whether such goods suffer from any other defect. The appropriate laboratory’ would be required to report its finding to the referring authority, i.e. the District Forum or the State Commission within a period of forty- five days from the receipt of the reference or within such extended period as may be granted by these agencies.
Appropriate laboratory means a laboratory or organisation:-
(i) Recognised by the Central Government;
(ii) Recognised by a State Government, subject to such guidelines as may be prescribed by the Central Government
(iii) Any such laboratory or organisation established by or under any law
for the time being in force, which is maintained, financed or aided by the
Central Government or a State Government for carrying out analysis or test
of any goods with a view to determining whether such goods suffer from any
The District Forum / State Commission may require the complainant to deposit with it such amount as may be specified towards payment of fees to the appropriate laboratory for carrying out the tests. On receipt of the report, a copy thereof is to be sent by District Forum/State Commission to the opposite party along with its own remarks.
In case any of the parties disputes the correctness of the methods of
analysis/test adopted by the appropriate laboratory, the concerned party
will be required to submit his objections in writing in regard to the
report. After giving both the parties a reasonable opportunity of being
heard and to present their objections, if any, the District Forum/Slate
Commission shall pass appropriate orders.
II. In case of dispute relating to goods not requiring testing or analysis or relating to services: Where the opposite party denies or disputes the allegations contained in the complaint within the time given by the District Forum / State Commission, it shall dispose of the complaint on the basis of evidence tendered by the parties. In case of failure by the opposite party to represent his case within the prescribed time, the complaint shall be disposed of on the basis of evidence tendered by the complainant.
The consumer’s rights and responsibilities under the Act are:-
The Right to Satisfaction of Basic Needs Citizens must demand access to essential goods and services such as adequate food, clothing, shelter, health care, education, public utilities, water, and sanitation.
The Right to Safety and protection from hazardous goods or services.
The Right to be Informed and protected against fraudulent, deceitful or misleading information and to have access to accurate information and facts needed to make informed choices and decisions.
The Right to Choose and have access to a variety of products and services at fair and competitive prices.
The Right to be heard and to express and represent consumer interests in the making of economic and political decisions.
The Right to redress and to be compensated for misrepresentation, shoddy goods or unsatisfactory services.
The Right to Consumer Education and to become a skilled and informed consumer capable of functioning effectively in the marketplace.
The Right to a Healthy Environment that will enhance the quality of life and provide protection from environmental problems for present and future generations.
The Responsibility to be aware of the quality and safety of goods and services before purchasing.
The Responsibility to gather all the information and facts available about a product or service as well as to keep abreast of changes and innovations in the marketplace.
The Responsibility to Think Independently and make choices about well considered sneeds and wants.
The Responsibility to Speak Out , to inform manufacturers and governments of needs and wants.
The Responsibility to Complain and inform business and other consumers of dissatisfaction with a product or service in a fair and honest manner.
The Responsibility to be an Ethical Consumer and to be fair by not engaging in dishonest practices which cost all consumers money.
The Responsibility to Respect the Environment and avoid waste, littering and contribution to pollution.
(b) Explain the trends of exports and imports of India in the post-liberalisation era.
-> Composition of trade means a study of the goods and services of imports and exports of a country. In other words, it tells about the commodities of imports and the commodities of exports of a country. Therefore it indicates the structure and level of economic development of a country. Developing countries export raw materials, agricultural products and intermediate goods; developed countries export finished goods, machines, equipments and technique.
Direction of trade means a study of the countries to whom the exports are made and from whom the imports are made.
Composition of Imports of India
Imports of India may be divided into three parts namely capital goods, raw materials and consumer goods.
Imports of capital goods
Capital goods include metals, machines and equipments, appliances and transport equipments, and means of communications. These goods are essential for industrial development of the country. Imports of these goods amounted to Rs.356 crore in 1960-61 which increased to Rs.26, 532 crore in 1997-98.
Imports of raw materials and intermediate goods
It includes the imports of cotton, jute, fertilizer, chemicals, crude oil etc. A number of raw materials and intermediate goods have to be imported during the process of economic development. If amounted to Rs.527 crore in 1960-61 which increased to Rs.13, 966 crore in 1985-86. Petroleum products include crude oil, petrol and lubricating oil. Imports of these products have ever been increasing. In 1960-61, imports of these products amounted to Rs.69 crore which increased to Rs.30, 538 crore in 1997-98. Import of petroleum products constitutes about 23 percent of our total imports. Fertilizers are an important input for agriculture. Chemical products are an important input for industrial development. The import of these products is continuously increasing in India. In 1960-61 import of these items amounted to Rs.88 crore only which increased to Rs.3755 crore in 1997-98.
Imports of consumer goods
It includes the import of food grains, electrical goods, medicines, paper etc., India faced an acute shortage of food grains till the end of Third Five Year Plan. As a result, India had to import food grains in large quantities. Import of food grains in 1960-61 was 3748 thousand tonnes (Rs.181 crore). In 1997-98 it was 1399 thousand tones. Now India has achieved self-reliance in food production.
Direction or sources of imports of India
Sources of imports of India have undergone several important changes during the planning period. Some important facts are as follows:
At the beginning of economic planning, we were importing from selected countries only. Now the picture has changed. We import different goods and services from different countries of the world. At present we get our imports from almost all the countries of the world. For the purchase of machines and equipments, we depend mainly on OECD (Organization for Economic Cooperation and Development) countries and East European countries. For the supply of food grains and petroleum products, we depend on OPEC (Oil Producing and Exporting Countries) countries. The OECD countries supply largest part of our imports. In 1997-98 out of the total imports of Rs.1, 51,553 crore, the imports of Rs.75, 593 crore were made (49.9%) from these countries. Other important suppliers of our imports are USA, Belgium, Germany, Japan and Britain.
Composition of exports of India
Exports of India may be divided into two parts I) Exports of traditional items and ii) Exports of non-traditional items.
Exports of traditional items
It includes the exports of tea, coffee, jute, jute products, iron ore, species, animal skin, cotton, fish, fish products, mineral products etc. At the beginning of the planning era, their items contributed about 80 percent of our total exports. Gradually, the contribution of these items is declining and that of non-traditional items is increasing. At present the contribution of traditional items is about 18.8% in our total exports.
It includes the export of sugar, engineering goods, chemicals, iron and steel electrical goods, leather products, gems and jewellery. There is a significant change in the pattern of exports of India during recent years. India has started to export a number of non-traditional items to a number of countries of the world. Contribution of these items is gradually increasing in total exports of India and shows a declining trend during some years also. Some facts to illustrate the changes are given below:
Agriculture and allied products which constituted 20.4 percent of total exports in 1996-97, decreased to 18.8 percent in 1999-2000. ii) Ores and minerals which constituted 3.5 percent of total exports in 1996-97, decreased to 3 percent in 1999-2000. iii) Manufactured good which contributed 73.4 percent of total exports in 1996-97, increased to 75.7 percent in 1999-2000. iv) Crude and petroleum products constituted 1.4 percent of total exports in 1996-97 but decreased to 1.0 percent in 1999-2000. v) With regard to other items of exports which constituted 1.2 percent in 1996-97 increased to 1.3 percent in 1999-2000.
Direction of exports of India
During the planning era, several important charges have taken place in the destination of exports of India. At present, we deal with about 180
Countries including many developed countries. Our major exports are directed towards the following countries:
OECD countries (Belgium, France Germany, U.K. North America, Canada, USA, Australia and Japan). Our exports which constituted percent of the total exports in 1990-91 increased to 55.7 percent in 1999-2000.
OPEC countries (Iran, Iraq, Kuwait, Saudi Arabia etc.). Our exports which constituted 5.6 percent of the total exports in 1990-91 increased to 10.0 percent in 1999-2000.
Eastern Europe (GDR, Romania, Russia etc.). Our exports which constituted 17.9 percent in 1990-91 decreased to 3.1 percent in 1999-2000.
Other LDC’s (Africa, Asia, Latin America). Our exports
Constitute 16.8 per cent in 1990-91, increased to 28.2 percent in 1999-2000.
To sum up, during the last five decades, significant changes have been observed in the volume, composition and direction of India’s trade. Most of these changes have been in consonance with the development needs of the economy.
5(a) Explain the process of structural reforms in the Indian economy. Discuss briefly the impact of structural reforms on income generation and poverty alleviation in India.
-> The year 1991, is an important year in the economic history of India . As soon as the new government resumed office on June 21, 1991, it adopted a number of stabilization measures to restore internal and external confidence in India’s economy. In 1991, the government made some radical changes in its policies regarding foreign investment, trade, exchange rate, industries, banking, and fiscal affairs, etc. It also announced several new policies under the name – New Economic Reforms of India, which gave a new direction and dimension to the Indian economy.
Nature of Economic Reforms in India
The nature of the new economic reforms in India is as follows:
The fundamental feature of the new economic reforms in India was that it offered freedom to the entrepreneurs to establish any trade or industry or business venture. Economic liberalization means freedom to make economic decisions.
In other words, the producers, owners or consumers of the factors of production are free to take their decisions in order to promote their interests. The Government of India announced the liberalization policy in the:
- Industrial sector
- Foreign trade
- Exchange rate
- Banking and financial sector
· The fiscal sector, etc.
Further, the government also freed the capital markets and opened them to private enterprises. Also, it permitted foreign equity participation of up to 51 percent or more.
Additionally, the government de-licensed the industrial sector and abolished the Monopolies and Restrictive Trade Practices (MRTP) Act.
Further, the government also allowed foreign investments to enter the infrastructure sector. Finally, the policy amended the Foreign Exchange Regulation Act (FERA) and enacted the Foreign
Exchange Management Act (FEMA).
Extension of Privatization
Another important feature of the new economic reforms in India was the extension of privatization in the country. In simple words, privatization is a process which helps to reduce the role of the State or the public sector in the economic activity of a country.
The primary objective of privatization is improving the overall performance of the public sector undertakings. This is especially beneficial to the taxpayers as it reduces the financial burden on them.
As a part of privatization, the government gave 11 industries to the private sector. These were out of the 17 industries reserved for the public sector. Further, the government offered better opportunities for investment to the foreign private investors and extended the scope of privatization.
Globalization of the Economy:-
The new economic reforms in India made our country’s economy outwardly oriented. Globalization is basically a process of increasing the economic integration and growing economic interdependence between different countries in the world economy.
The processes of economic liberalization and privatization of the public sector enterprises eventually led to the globalization of the Indian economy. Globalization is the flow of capital, commodities, technology, and labour across national boundaries. As a result of globalization, both domestic and world markets started governing the economic activities in India.
The impact of structural reforms on income generation and poverty alleviation in India: Poverty is defined as the state of being poor and not having access to adequate necessities. Poverty is a multifaceted concept, which also includes social, economic, and political elements. It is a social condition wherein human beings do not have enough financial means to meet the most basic standards of life that is acceptable by the society. Individuals suffering from poverty do not have the means to pay for basic needs of daily life such as food, clothes and shelter. Those who suffer from poverty also do not have access to social tools of well-being such as education and health requirements. The direct effects of poverty are hunger, malnutrition and susceptibility to diseases. These have been identified as huge problems across the world. It affects the individuals in a socio-psychological manner. This condition disables them from being able to afford simple recreational activities and getting progressively marginalized in the society. There can be various different causes of poverty. These may be categorized as follows:
1. Demographic – One of the biggest reasons of poverty in India is over population. India is a highly populated country. The growth of population in India is way beyond the growth in economy and the gross result is such that the poverty figures have remained more or less constant. As far as the rural areas are concerned, the basic size of the family is bigger which eventually leads to lowering the per capita income values and consequently lowering of standard of living of an individual.
2. Economic – There are many economic reasons behind poverty. These are:
a. Poor Agricultural Infrastructure – Agriculture is the backbone of the economy in India. India is an agricultural country. The only area where India lacks is the agricultural infrastructure such as outdated and old farming practices; obsolete technology and lack of formal agricultural education amongst the farmers. The income is too less for a farmer to meet the economic needs of his/ her family.
b. Unequal distribution of assets – The Upper and middle income groups in India see a faster increase in earnings as compared to the lower income groups. The scenario in India is such that 80% wealth in the country is controlled by just 20% of the population.
c. Unemployment – Unemployment is one factor that hugely increases and multiplies the effect of poverty by 10 times. Almost, 77% of families do not have a regular source of income in India.
3. Social – The various social issues that contribute largely to poverty are:
a. Education and illiteracy – Lack of education and growing illiteracy is majorly responsible for poverty in India. Due to the increase in the illiteracy rates, unemployment rises and resultantly poverty rates increase.
b. Outdated Social Customs – Social customs like caste system cause segregation and marginalization of certain sections of the society also play a major role in spreading poverty.
c. Gender inequality– India is a country where till today there is discrimination on the basis of gender. The weak status attached with women is hugely responsible for the poor condition of women.
d. Corruption – Although the government promises to make considerable efforts every now and then in order to make India corruption free but the reality is very different. Corruption is deep rooted in India. It is immensely difficult to make India corruption free. Due to the rise in the rates of corruption every hour, poverty is increasing simultaneously.
4. Individual – Individual lack of efforts also become a huge reason behind increase in the poverty rates. There are people who are lazy and do not wish to work hard. Such people suffer from poverty due to lack of personal efforts.
Effects of Poverty:
Poverty is like a disease that has devastating effects on an individual and his family. The major effects are as follows:
1. Effect on Health – The biggest effect of poverty is poor health. Those who suffer from poverty do not have access to enough food, adequate clothing, medical facilities, and clean surroundings. The lack of all these basic facilities leads to poor health. Such individuals and their families suffer from malnutrition. Further, when these people get ill, they do not have enough money to visit a doctor and buy medicines. Many such poor people die on a daily basis due to prolonged illness etc. Further, these people are unable to afford a clean house for themselves, which also makes them prone to diseases.
2. Effects on Society – The effects of poverty on society are as follows:
a. Violence and crime rate –Occurrence of violence and crime have been found to be geographically coincident. Due to unemployment and marginalization, the poor people often indulge in wrong practices such as prostitution, theft and criminal activities such as chain snatching etc.
b. Homelessness – Poor people are usually homeless. They sleep on the road sides at night. These makes the entire scenario vey unsafe for women and children.
c. Stress – Due to lack of money, poor people suffer from a lot of stress which leads to a reduction in the productivity of individuals, thereby making poor people poorer.
d. Child labour – Poverty forces poor people to send their children to work instead of sending them to schools. This is because the families fail to bear the burden of their child/ children. Among the poor families, children start earning at an average age of 5 years only.
e. Terrorism – Youngsters from poor families are usually targeted and involved in terrorist activities. These people are offered huge amount of money in lieu of which they are assigned with a destructive task of terrorism.
3. Effect on Economy –Poverty is a directly proportional to the success of the economy. The number of people living under the poverty is reflective of how powerful is the economy.
The measures that should be taken in order to fight the demon of poverty in India are follows:
1. A check should be maintained on the population rate in India.
2. The employment opportunities must be increased by inviting more foreign investments into the country.
3. A check should be maintained upon the gap that remains in the distribution of wealth.
4. Few Indian states are more poverty stricken than the others like Odisha and the North Eastern states. Government should work in order to encourage investment in these states by offering special concessions on taxes.
5. Primary needs of people such as food, shelter and clothing should be taken care of by the government especially for those who are unable to afford these facilities.
(b) Explain the features of Globalisation. Analyse the impact of globalisation on the business environment in India.
-> Globalisation is the concept of securing real social, economic, political and cultural transformation of the world into a real global community. Globalisation involves a conscious and active process of expanding business and trade across the borders of all the states.
It stands for expanding cross-border facilities and linkages leading to an integration of economic interests and lives of the people living in all parts of the world. The objective of making the world a truly interrelated, inter-dependent, developed global community governs the process of Globalisation.
In the words of Baylis and Smith, “Globalisation is the process whereby social relations acquire relatively distance-less and borderless qualities.”
In simple words, Globalisation means securing of socio-economic integration and development of all the people of the world through a free flow of goods, services, information, knowledge and people across the borders of all states.
Features of Globalisation:
It stands for the freedom of the entrepreneurs to establish any industry or trade or business venture, within their own countries or abroad.
2. Free trade:
It stands for free flow of trade relations among all the nations. It stands for keeping business and trade away from excessive and rigid regulatory and protective rules and regulations.
3. Globalisation of Economic Activity:
Economic activities are being governed both by the domestic markets and also the world market. It stands for the process of integrating the domestic economies with the world economy.
4. Liberalisation of Import-Export System:
It stands for liberalization of the import-export activity involving a free flow of goods and services across borders.
Globalisation stands for keeping the state away from ownership of means of production and distribution and letting the free flow of industrial, trade and economic activity among the people and their corporations.
6. Increased Collaborations:
Encouraging the process of collaborations among the entrepreneurs with a view to secure rapid modernisation, development and technological advancement, is a feature of Globalisation.
7. Economic Reforms:
Encouraging fiscal and financial reforms with a view to give strength to free trade, free enterprise and market forces of the world. Globalisation stands for integration and democratisation of the world’s culture, economy and infrastructure through global investments.
Impact of globalisation on the business environment in India:
Positive Effects of Globalization
1. Globalization has opened new markets for Indian companies to sell their services and products. They have cheap resources such as labour due to which they can compete with other companies at international level.
2. Foreign investors invested in India to establish their businesses due to cheap resources. It will increase output, employment opportunities and economic development of the country.
3. Living standard of people in India has been developed due to increase in the wages of skilled and unskilled labour. The poverty ratio of urban and rural areas has been decreased to a greater level. These results are due to government policies and strategies to encourage foreign investors to invest in India.
4. Companies are producing quality products at competitive prices due to globalization. This tough competition forces local and international companies to utilize their resources efficiently and effectively to compete at global level.
5. Developing countries have become modernized due to Globalization. They adopt latest technologies and strategies quickly to compete with other companies.
6. Globalization strengthened the economic growth of the country due to increase in exports of the country.
7. Infrastructure has been improved; new employment opportunities have been created due to globalization.
Negative effects of Globalizations
1. Globalization can damage environment of India due to the establishment of industry at large scale. It has brought water and air pollution e.g. Delhi is one of the most polluted cities of the world.
2. Profits earned from the business will move to the foreign countries although investment of foreigner will bring economic prosperity for short term. The long term advantages will be attained by the foreigners. In recession periods investors withdraw their funds which can create critical economic conditions for the country.
3. Human resources can be exploited in India by multinational firms. Moreover they can use natural resources inefficiently and ineffectively. Foreign investors might think that it is not in their interest to care for the resources of the country.
4. The entrance of overseas giants can cause closure of the local firms because they can invest more resources as compare to the local or small businesses. They might have other competitive advantages on the local firms due to which they can win the market of the country. The small firms will not be able to compete with them at such scale therefore they would be forced to close their businesses.