2017 – Solved Question Paper | Business Environment | Previous Year – Masters of Commerce (M.Com) | Dibrugarh University

2017 – Solved Question Paper | Business Environment | Previous Year – Masters of Commerce (M.Com) | Dibrugarh University

2017

COMMERCE

Course: 101 (Business Environment)

Full Marks: 80

Time: 3 hours

The figures in the margin indicate full marks for the questions.

1(a) Explain the micro and macro factors of external environment of business.

-> There are two elements within the external marketing environment; micro and macro. These environmental factors are beyond the control of marketers but they still influence the decisions made when creating a strategic marketing plan.

Every business is affected by a myriad of factors. In other words, an organization as such can never exist and operate “in a vacuum”. It is a part of a larger entity known as the business environment. In broad terms, this environment can be divided into two categories. The first one is the micro-environment. This category influences the functionality of a particular business itself. The latter one is the macro-environment which affects the operation of all existing business entities out there.

The two categories may be different, but both are essential to understand in order to truly see your business in its full context. You have to be knowledgeable about the business environment in order to be able to track and comprehend how various factors affect your company.

Micro Environment Factors

The micro-environment is basically the environment that has a direct impact on your business. It is related to the particular area where your company operates and can directly affect all of your business processes. In other words, it consists of all the factors that affect particularly your business. They have the ability to influence your daily proceedings and general performance of the company. Still, the effect that they have is not a long-lasting one.

The micro-environment includes customers, suppliers, resellers, competitors, and the general public.

Micro-environment factors:

Customers

The kind of customer base that your company attracts, as well as the reasoning behind purchasing your product, are going to highly affect the way you create marketing campaigns. Your customers can be B2C, B2B, international, local, and so on.

Important factors related to customers are:

§ Stability of demand

§ Prospects of sale growth

§ Relative profitability

§ Intensity of competition

Suppliers

If a supplier of a particular product is the largest, or even the only one, they are certainly going to have a big influence on how successful your business is.

The suppliers are extremely important factors as:

§ Key link in the value delivery process

§ Insurance that your business has the necessary resources

§ Essential determinants in terms of price increase or decrease

Resellers

If you decide to sell your product via a third party reseller, or middlemen such as wholesalers and retailers, then the success of your marketing is going to be highly dependent on them. If let’s say, a certain retail seller has a strong reputation, it will pass on to your product.

As a link between you and the customer, they are important in terms of these factors:

§ Promotion

§ Sale

§ Distribution

§ Marketing

§ Financial mediation

Competitors

Logically, every business that sells the same or a similar kind of product as you do is your competition on the market . So, their sale and marketing tactics matter to you a lot. You need to answer various questions, such as how their product and its price affects yours and how you can make use of that in order to gain an edge over them.

The three factors that matter in this case are:

§ Desire competition

§ Product form competition

§ Brand competition

The general public

Of course, every business organization has in its best interest to appease to the general public. Every step that you take needs to be viewed from their perspective as well. It is extremely important how your actions affect others because their opinion can be the one thing that either pushes you towards success or pulls you down from the pedestal.

So, the general public is very important in terms of:

§ Public opinion

§ Media

§ Environmental pollution

Macro Environment Factors

The macro-environment is more general – it is the environment in the economy itself. It has an effect on how all business groups operate, perform, make decisions, and form strategies simultaneously. It is quite dynamic, which means that a business has to constantly track its changes. It consists of external factors that the company itself doesn’t control but is certainly affected by.

The factors that make up the macro-environment are economic factors, demographic forces, technological factors, natural and physical forces, political and legal forces, and social and cultural forces.

Macro-environment factors

Economic factors

Basically, the very environment of the economy can have an effect on two essential aspects – your company’s levels of production and the decision-making process of your customers.

Some examples of economic factors affecting business:

§ Interest rates

§ Exchange rates

§ Recession

§ Inflation

§ Taxes

§ Demand / Supply

Demographic forces

Each and every chunk of the market is affected by universal demographic forces . These are age, education level, cultural characteristics, country and region, lifestyle, and so on.

The crucial variables include:

§ How income variables influence business

§ Age variables that affect business

§ Geographic Region Variables

§ Education Level as a Variable

Technological factors

These factors are related to skills and ability that are implemented into production, as well as all the materials and technology that a particular product requires to be made. They are essential and can have a big impact on how well your business is running. It boils down to even the most basic factors, such as what kind of maintenance trolleys you use in order to preserve your tools and equipment for as long as you possibly can.

Some of the most common technological factors are:

§ Automation

§ Internet connectivity

§ 3D technology

§ Speed/power of computer calculation

§ Engine performance and efficiency

§ Security in terms of cryptography

§ Wireless charging

Natural and physical forces

Every business must also take into account the very planet and its resources. There are those that can be renewed, such as forests and agricultural products, and those that cannot, such as coal, minerals, oil, and the like. Both are strongly related to production. So, natural and physical forces can be:

§ Climate change

§ Pollution

§ Weather

§ Availability of both non-renewable and renewable resources

§ Laws that regulate the environment

§ Survival of particular biological species

Political and legal forces

The market develops according to the political and legal environment in various areas. This means that every business needs to be up to date with such forces worldwide in order to be able to make the right decisions.

This generally includes legal factors such as:

§ Copyright law

§ Employment law

§ Fraud law

§ Discrimination law

§ Health and Safety law

§ Import/Export law

Social and cultural forces

Finally, it is crucial to understand that the product that you bring to the market can have a strong impact on society. For example, your production needs to eliminate every practice that is hazardous to society, and show that it is socially responsible.

There is a wide variety of social and cultural factors, some of them being:

§ Purchasing habits

§ Level of education

§ Religion and beliefs

§ Consciousness about health issues

§ Social classes

§ Structure and size of a family

§ Growth rate of the population

§ Emigration and immigration rates

§ Life expectancy rates and age distribution

§ Different lifestyles.

(b) Describe the present state of Indian economy and analyse the business environment in India.

-> The Indian economy was in distress at the brink of the country’s independence. Being a colony, she was fulfilling the development needs not of herself, but of a foreign land. The state that should have been responsible for breakthroughs in agriculture and industry, refused to play even a minor role in this regard. On the other hand, during the half century before India’s independence, the world was seeing accelerated development and expansion in agriculture and industry – on the behest of an active role being played by the states.

British rulers never made any significant changes for the benefit of the social sector, and this hampered the productive capacity of the economy. During independence, India’s literacy was only 17 percent, with a life expectancy of 32.5 years. Therefore, once India became independent, systematic organisation of the economy was a real challenge for the government of that time. The need for delivering growth and development was in huge demand in front of the political leadership – as the country was riding on the promises and vibes of national fervour. Many important and strategic decisions were taken by 1956, which are still shaping India’s economic journey.

Top Performing Sectors of Indian Economy

The adoption of the New Economic Policy in 1991 saw a landmark shift in the Indian economy, as it ended the mixed economy model and license raj system – and opened the Indian economy to the world. An overview of the top performing sectors of the Indian economy is given below –

1. Agricultural Sector:

One of the most important sectors of the Indian economy remains Agriculture. Its share in the GDP of the country has declined and is currently at 14%. However, more than 50% of the total population of the country is still dependent on agriculture. Keeping this in mind, the Union Budget 2017 – 18 gave high priority to the agricultural sector and aimed to double farmers’ incomes by 2022.


• Government subsidies to agriculture are at an all – time high.


• Further, cropping patterns have shifted in favour of cash crops such as sugarcane and rubber.


• Introduction of cooperative farming like – e – choupal etc.


• Rise of SHGs such as Lijjat Papad.


• Agricultural land is being brought under industrial and commercial use, thereby straining the remaining agricultural land.


• Many export sectors have been opened for agricultural goods.


• Food processing is emerging as a ‘Sunrise Industry’


2. Industry Sector:

Another important part of the Indian economy is the Industry sector. Changes such as the end of the ‘Permit Raj’ and opening up of the economy were welcomed in the country with great enthusiasm and optimism. As a result of these changes, the industrial potential of the economy has increased since 1991.


• Proliferation of industries, from traditional iron and steel to jute and automobiles.


• Autonomy in production, marketing and distribution.


• Reduced red – tapism.


• Encouragement to private investments, both domestic as well as FDI.


• Transfer of technology and benefits of research and development to the advantage of the economy.


• Arrival of investment models such as joint ventures, public-private partnerships, MNCs.


• Private players got an opportunity to enter new sectors, which were earlier under government monopoly.

3. Services Sector:

The sector that benefited most from the New Economic Policy was the services sector. Banking, Finance, Business Process Outsourcing – and most importantly Information Technology services – have seen double – digit growth.


• Indian IT giants such as Infosys, WIPRO and TCS have made their mark on the global platform.


• 60 percent of the GDP contribution comes from the services sector.


• India, with its huge demographic dividend potential, has emerged as the IT hub of the world.


• New employment opportunities are being created in this sector.


• Opening of transportation, tourism and medical sectors have led to the growth of service sector competencies.


• RBI has transitioned from being a regulator to a facilitator.


• Product diversity of financial investments.


• Wider penetration of services such as insurance, banking, stock market etc.


• Considerable improvement in forex reserves.

4. Food Processing:

Food processing has emerged as a high – growth, high – profit sector and is one of the focus sectors of the ‘Make in India’ initiative. The vast availability of raw materials, resources, favourable policy measures and numerous incentives have led India to be considered as a key attractive market for the sector. With a population of 1.3 bn and an average age of 29, as well as a rapidly growing middle – class population that spends a high proportion of their disposable income on food, India boasts of a large consumer base. The total consumption of the food and beverage segment in India is expected to increase from $ 369 bn to $ 1.14 tn by 2025. The output of the food processing sector (at market prices) is expected to increase to $ 958 bn during the same period. India is the second largest producer of food grains in the world, second only to China. This sector has huge potential in India due to increasing urbanization, income levels and a high preference for packaged and processed food. Visit the sectors category to read more about the food processing industry .

5. Manufacturing Sector:

The manufacturing sector is the second largest contributor to India’s GDP after the Services sector. Various government initiatives like Make in India, MUDRA, Sagarmala, Startup India, Freight Corridors, along with a whole – hearted contribution from states, will raise the share of the manufacturing sector in the foreseeable future.


However, if India aims to raise its share of manufacturing in GDP to around 25%, the industry will have to significantly step up its research and development expenditure. The quantum of value addition has to be increased at all levels and the government needs to offer attractive remuneration to motivate people to join the manufacturing sector.

Recent Developments in the Economy of India

Besides these developments and reforms, it is imperative to bear in mind that in order to tap the highest potential of the economy and ensure good governance, an optimal level of synergy is required between the central and state government. This will not only add strength to our cooperative federal structure but will also strengthen India’s economy. Initiatives such as –


• Goods and Services Tax (GST)


• Insolvency and Bankruptcy Code (IBC)


• Startup India


• Digital India

These, among others, have helped the Indian economy jump 65 ranks (in the last four years) in the World Bank’s Ease of Doing Business Report.

These measures cemented India’s reputation as one of the few bright spots in an otherwise grim global economy. India is among the fastest growing major economies, underpinned by a stable macro – economy with declining inflation and improving fiscal and external balances. Not only that, it was also one of the few economies enacting major ‘structural reforms’, that have positioned India as a competitive player in the international market.

2(a) Explain the main objectives and features of New Industrial Policy (1991) in India.

-> The Industrial Policy specifies the relevant roles of the public, private, joint and co-operative sectors; small, medium and large scale industries. It emphasises the national significances and the financial development strategy. It also explains the Government’s policy towards industries, their establishment, functioning, progress and management; foreign capital and technology, labour policy, and tariff policy. The Industrial Policy of India has determined the pattern of financial and industrial development of the economy. The Industrial Policy revealed the socio-economic and political philosophy of development.

Objectives of New Industrial Policy 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:

(i) Liquor

(ii) Cigarette

(iii) Defence equipment

(iv) Industrial explosives

(v) Drugs

(vi) Hazardous chemicals

2. Privatisation:

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

Indian Economy: A Complete Study Material

4. Globalization:

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 evaluate the role of Multinational Corporations in the Indian 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.

While multinational companies played a significant role in the promotion of growth and trade in South-East Asian countries they did not play much role in the Indian economy where import-substitution development strategy was followed. Since 1991 with the adoption of industrial policy of liberalisation and privatisation rote of private foreign capital has been recognized as important for rapid growth of the Indian economy.

Since source of bulk of foreign capital and investment are Multinational Corporation, they have been allowed to operate in the Indian economy subject to some regulations. The following are the important reasons for this change in policy towards multinational companies in the post-reform period.

Some of world’s largest multinational corporations are given below:

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) What is meant by Monitory Policy? Explain the main objectives of Monetary Policy.

-> 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

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.

Credit Ceiling

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

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%.

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:

1. Stabilising the Business Cycle :

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.

2. Reasonable Price Stability :

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.

3. Faster Economic Growth :

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.

(b) Discuss the role of direct and indirect taxes in mobilisation of resources for economic growth 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) Explain the main objectives and important provisions of the Consumer Protection Act, 1986.

-> The Consumer Protection Act was passed in 1986 and it came into force from 1 July, 1987. The main objectives of the Act are to provide better and all round protection to consumers and effective safeguards against different types of exploitation such as defective goods, deficient services and unfair trade practices. It also makes provisions for simple, speedy and inexpensive machinery for redressal of consumer’s grievances.

Salient Features

The salient features of Consumer Protection Act (CPA), 1986 are as follows

1. It applies to all goods, services and unfair trade practices unless specifically exempted by the Central Government.

2. It covers all sectors-private, public or co-operative.

3. It provides for establishment of consumer protection councils at the central, state and district levels to promote and protect the rights of consumers and a three-tier quasi-judicial machinery to deal with consumer’s grievances and disputes.

4. It provides a statutory recognition to the six rights of consumers.

Objectives of Consumer Protection Act of 1986:-

1) To protect the consumers from immoral activities and unfair trade practices of the traders.

2) To protect and promote the rights of the consumers.

3) To set up “Consumer Protection Councils” to educate the consumers and to make them aware of their rights.

4) To redress disputes of the consumers, and matters connected with them, speedily.

5) To make provision for Quasi Judicial machinery to control marketing.

Consumer Protection Act has been implemented (1986) or we can bring into existence to protect the rights of a consumer. It protects the consumer from exploitation that business practice to make profits which in turn harm the well being of the consumer and society.

This right help to educate the consumer on the right and responsibilities of being a consumer and how to seek help or justice when faced exploitation as a consumer. It teaches the consumer to make right choices and know what is right and what is wrong.

Two Tier System under Consumer Act:-

State Commission:-

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.


National Commission:-

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.

Important provisions of the Consumer Protection Act, 1986:

The industrial revolution and the development in the international trade and commerce has led to the vast expansion of business and trade, as a result of which a variety of consumer goods have appeared in the market to cater to the needs of the consumers and a host of services have been made available to the consumers like insurance, transport, electricity, housing, entertainment, finance and banking. A well organized sector of manufacturers and traders with better knowledge of markets has come into existence, thereby affecting the relationship between the traders and the consumers making the principle of consumer sovereignty almost inapplicable. The advertisements of goods and services in television, newspapers and magazines influence the demand for the same by the consumers though there may be manufacturing defects or imperfections or short comings in the quality, quantity and the purity of the goods or there may be deficiency in the services rendered. In addition, the production of the same item by many firms has led the consumers, who have little time to make a selection, to think before they can purchase the best. For the welfare of the public, the glut of adulterated and sub-standard articles in the market has to be checked. In spite of various provisions providing protection to the consumer 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 Sale of Goods Act, 1930, the Indian Penal Code, 1860, the Standards of Weights and Measures Act, 1976 and the Motor Vehicles Act, 1988, very little could be achieved in the field of Consumer Protection. Though the Monopolies and Restrictive Trade Practices Act, 1969 arid the Prevention of Food Adulteration Act, 1954 have provided relief to the consumers yet it became necessary to protect the consumers from the exploitation and to save them from adulterated and sub-standard goods and services and to safe guard the interests of the consumers. In order to provide for better protection of the interests of the consumer the Consumer Protection Bill, 1986 was introduced in the Lok Sabha on 5th December, 1986.

The Consumer Protection Bill, 1986 seeks to provide for better protection of the interests of consumers and for the purpose, to make provision for the establishment of Consumer councils and other authorities for the settlement of consumer disputes and for matter connected therewith.

1. It seeks, inter alia, to promote and protect the rights of consumers such as-

(a) The right to be protected against marketing of goods which are hazardous to life and property;

(b) The right to be informed about the quality, quantity, potency, purity, standard and price of goods to protect the consumer against unfair trade practices;

(c) The right to be assured, wherever possible, access to an authority of goods at competitive prices;

(d) The right to be heard and to be assured that consumers interests will receive due consideration at appropriate forums;

(e) The right to seek redressal against unfair trade practices or unscrupulous exploitation of consumers; and

(f) right to consumer education.

2. These objects are sought to be promoted and protected by the Consumer Protection Council to be established at the Central and State level.

3. To provide speedy and simple redressal to consumer disputes, quasi-judicial machinery is sought to be setup at the district, State and Central levels. These quasi-judicial bodies will observe the principles of natural justice and have been empowered to give relief of a specific nature and to award, wherever appropriate, compensation to consumers. Penalties for noncompliance of the orders given by the quasi-judicial bodies have also been provided.

4. The Bill seeks to achieve the above objects.

ACT 68 OF 1986

The Consumer Protection Bill, 1986 was passed by both the Houses of Parliament and it received the assent of the President on 24th December, 1986. It came on the Statutes Book as THE CONSUMER PROTECTION ACT, 1986 (68 of 1986).

(b) Describe the trends in composition and direction of India’s foreign trade in recent years.

-> 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.

Non-traditional items

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) Analyse the structural reforms in Indian economy in recent years and its impact on the business environment of the country.

-> 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:

Liberalization

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 objectives of the reform process were:

(a) To promote a faster rate of growth,

(b) To enlarge employment potential leading to full employment,

(c) To reduce the incidence of poverty,

(d) To promote equity, leading to a better deal for the poor and less well-off sections of society,

(e) Reduction of regional disparities, i.e., the gap between the rich and the poor states, and

(f) Improving the BOP position.

We may now examine economic reforms in terms of the above goals:

1. GDP Growth:

The annual growth rate in the post-reform decade (1990-91 to 2000-01) was the same as that of the pre-reform decade (1980-81 to 1990-91), viz., 5.6% per annum. After the teething troubles of the first two years, viz., 1991-92 and 1992-93, the growth rate during 1993-94 and 1997-98 has averaged to more than 7% per annum.

After 1991-92, the growth momentum has been sustained. Reforms have, no doubt, improved the growth potential of the economy. This is clear from the fact that the growth rate of GDP during the 5-year period (2000-01 to 2005-06) was 7% p.a. It increased to about 8.9% in the next year. (2006-2007)

2. Poverty Alleviation:

The overall poverty ratio declined from 36% in 1993-94 to 27.5% in 2004-05—a decline of 8.5% during the 11-year period. Annual average reduction of poverty during this period was 0.74%. However, the rate of poverty reduction during 1973-74 and 1987-88 was from 54.9% to 38.9%—a reduction of 14 percentage points during the 14-year period.

So, poverty reduction was at the rate of 1 % p.a., which was higher than that during the post-reform period, even though GDP growth rate during the post-reform period was much higher than that in the pre-reform period.

The number of persons below the poverty line was 300 million in 2004-05 compared to 320 million in 1993-94. This means that the absolute number of poor declined very slowly during the post-reform period. So, the trickledown effect of the growth process did not benefit the poor.

3. Employment Generation:

One of the causes of poverty is growing unemployment or underemployment. Total employment increased from 302 lakhs in 1983-84 to 3,568 lakhs in 1990-91 and then to 3,829 lakhs in 1997- 98. The rate of growth of employment was of the order of 2.39% p.a. during 1983-84 and 1990- 91, which was just equal to the rate of growth of labour force during this period.

But over the period 1990-91 and 1997-98 the overall growth rate of employment was only 1%. Since the reform process is limited to the organised sector, more so to the large corporate sector, the growth rate of employment in the organised sector decelerated to 0.60% during 1990-91 to 1997-98 as against 1.73% p.a. witnessed in the 7-year pre-reform period of 1983-84—1990- 91.

There was also a substantial slowdown in the employment growth rate of the unorganised sector to merely 1.1% during 1990-91 and 1997-98 as against employment growth rate of 2.41% witnessed during the 7-year pre-reform period.

4. Economic Reforms and its Impact on Labour:

(a) Person Days Lost:

The number of person days lost due to strikes and lockouts declined during the period 1991- 2000 compared to that in the period 1981-1990 this can be treated as an index improvement of industrial relations in the post- reform period.

(b) Downsizing:

Although the government has not formally accepted an exit policy, by the scheme of voluntary retirement, the load of workers is being reduced, both in the public and private sectors. So workers are being pushed from the organised to the unorganised sector and from secure to insecure employment.

5. Increase in Productivity and Movements, Real Wage:

Although labour productivity had increased by 3.32% during 1987-88 and 1993-94, the real earning of workers increased at the annual average rate of 1%. In other words, the gains of increased labour productivity were not shared by the workers.

The basic problem with economic reforms is not to treat labour as an asset but as a mere instrument which can be disposed with when it is no longer useful. Thus economic reforms so far had an adverse effect on labour welfare, more so in view of the fact that there is no comprehensive social security system in India.

6. Neglect of Agriculture—The Main Drawback of Economic Reforms:

A major criticism of the process of economic reforms is the neglect of agriculture—the mainstay of livelihood of two-thirds of the population. Due to inadequate attention given to agriculture food grains production did not increase much. Even during 2004-05 and 2006-07, food grains production stagnated at around 2008-09 million tones. As a result foods prices rose sharply. This created inflation and, thus, was one of the causes of poverty.

The reform process has emphasised the growth of manufacturing and service sectors and thus neglected agriculture. As a result, agricultural growth has stagnated around 2% during the last decade. It was 2.1% during the Ninth Plan (1997-2002) and was estimated to be 2.3% during the Tenth Plan (2002-2007).

The structural weakness of the agricultural sector reflected in low level of investment, exhaustion of the yield potential of new high yield varieties of wheat and rice, an inadequate incentive system and post-harvest value addition all conjointly accounted for slow agriculture growth, or virtual stagnation since 2000-2001. Moreover, public sector investment in irrigation, flood control, water harvesting, rural infrastructure, reclamation of degraded lands, etc., also had a spread effect.

The neglect of agriculture casts a shadow on sustainability of agricultural growth unless there is a reorientation of priorities with much greater emphasis on agriculture and rural industrialisation. It is time the state, instead of withdrawing from investment in agriculture, irrigation and rural infrastructure, strengthened public sector investment in these areas.

7. Economic Reforms and Industrial Growth:

Economic reforms were mainly intended to remove the bottlenecks which acted as obstacles to industrial growth. The reform process dismantled the system of industrial licensing which was considered to be a main roadblock to the progress of India’s industrial economy, measured in terms of industrial growth and diversification.

In spite of this, India’s industrial sector took a back seat. Whereas, in the pre-reform period (1981-82 to 1990-91), the general index of industrial production recorded an annual average growth rate of 7.8%, the growth rate of industrial production slowed down to 6.7% during 1993-94 and 2004-05, which is generally identified as a period of wide-ranging reforms in the industrial sector.

The growth was much below the target. It failed even to equal the performance observed in the 1980s, not to speak of improving the performance, as a consequence of the reform process. The failure of the basic goods and capital goods sectors really put a question mark on the success of the reform process.

8. Performance of the Public Sector Enterprises:

The Central Public Sector Enterprises have shown an improved performance during the 10-year period of reform (1993-94 to 2003-04). In spite of this, the Government has undertaken disinvestments of these enterprises instead of improving their performance still farther through the reform process.

(b) What is Globalisation? Explain the gains derived by India as member of WTO .

-> 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:

1. Liberalisation:

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 be 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.

5. Privatisation:

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 Globalization

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.

The gains derived by India as member of WTO:-

Now almost a decade has passed when India joined WTO from the very beginning in Jan. 1, 1995. India has benefitted from joining WTO, despite the failures of two ministerial level conferences at Seattle and Cancun. The gains India has achieved by joining WTO are given below:-

Exports and Imports:

According to the recent estimates, India’s exports have almost doubled in less than a decade. With exports going up from $26.33 billion in 1994-1995 when India joined WTO to $51.7 billion in 2002-03. Besides, India’s share in total world exports of goods and commercial services increased from 0.6 in 1995 to 0.86 whereas its total world imports of goods and commercial services increased from 0.78 in 1995 to 0.99 per cent during the same period.

Exports of Textiles and Clothing:

According to a WTO agreement known as Multi-Fibre Agreement (MFA) entire quotas in textile and clothing trade will come to end from January 1, 2005. Till now WTO agreement has required the member countries to phase out their existing quotas by the Dec. 31, 2004. It has further restrained them from expanding the size of quotas annually.

These measures have helped India to increase its market access for its textile and clothing products. With effect from January 1, 2005, the entire textiles and clothing trade would get integrated into the multilateral trade framework of WTO.

Gain in Exports of Software Services:

Further, thanks to WTO agreement on free trade in services India has become a world leader in software services which are contributing a lot to foreign exchange earnings and employment generation for Indians.

A Good Deal of Earnings from BPO:

BPO (Business Processing Outsourcing Services) from USA and UK are coming to India which has enabled us to earn not only foreign exchange but also to generate a large number of employment opportunities for educated Indian youth.

Recently, there is resentment in the USA against BPO to India and other countries because it is causing loss of jobs in the USA and UK. But BPO to India and other developing countries are in accordance with the comparative advantage principle and raises profits of American companies which on being used for further investment will generate more employment opportunities in the USA.

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