Course: 101 (Business Environment)
Full Marks: 80
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1(a) What do you mean by Business Environment? Explain the role of Government for the promotion of business environment in India.
-> 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:-
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.
Role of Government for the promotion of business environment in India:-
1. Government: Regulator of Business:
The entire regulatory legislations and policies stand covered under this segment. On the one hand, there is a very large indirect area of government control over the functioning of private sector business through budgetary and monetary policies.
But against this there is also a fast expanding area of direct administrative or physical controls through which the government seeks to ensure that private investment and production in industry and the use of scarce resources conform to government’s basic socio-economic objectives. They have become necessary tools in a system which seeks to avoid total nationalisation of resources. Government’s regulatory functions with regard to trade, business and industry aim at laying down the limits for the private enterprise. The regulatory functions of the Government include (i) restraints on private activities, (ii) control of monopoly and big business, (iii) development of public enterprises as an alternative to private enterprises to ensure competitive dualism, (iv) maintenance of a proper socioeconomic infrastructure.
2. Government: Promoter of Business:
The promotional role of the government in relation to industries can be seen as providing finance to industry, in granting various incentives and in creating infrastructure facilities for industrial growth and investment.
For example, our government has identified certain backward areas as ‘No Industry Districts’. To promote development of such areas, Government provides subsidies and tax holiday to attract investment in backward areas.
In this way the government will help the process of balanced development and thereby remove regional disparities. The government is assisting the development of small scale industries.
The District Industrial Centres are assisting the development of small industries. The government is actively helping the industrial development of the country by providing finance to them through the development banks.
3. Government as an Entrepreneur:
The impressive growth of the public sector in India from a small beginning bears testimony to the role of the government as an entrepreneur.
Private investors are solely guided by private profit motive and hence they are not interested in developing products of common public use and social services which yield relatively lower returns. But as a “social entrepreneur” the government does not hesitate to take them up.
4. Government as the Planner:
In its role as a planner, the government indicates various priorities in the Five Year Plans and also the sectoral allocation of resources. Mixed economies are democratically planned economies.
The government tries to manage the economy and its business activities through the exercise of planning. Planning is the most important activity in a modern mixed economy. The idea of economic planning can be traced to three different sources: Rationalism, Socialism and Nationalism.
Economists advocate a planned economy on the ground that it can be a rational economy which can utilise the available resources in an optimal manner.
In other words, the planned economy is a rational economy which attempts to secure the maximum return with minimum wastage of productive resources.
The socialists advocate a planned economy because it helps to achieve some desirable social ends like economic equality. An unplanned economy, left to it, is incapable of attaining the social ends.
The nationalists advocate a planned economy because a planned economy is a powerful economy.
The nationalists want to use planning as a weapon to strengthen the military power of the country. Hitler in Germany and Mussolini in Italy resorted to planning to achieve political motive.
Planning operation involves a number of steps. The first stage in planning is the formulation of socio-economic objectives of the plan and their definition in quantitative terms.
Such objectives include growth, justice, eradication of poverty, price stability etc. In the second stage, the plan lays down the physical and financial targets.
The third stage is concerned with execution. The Planning Commission is only an advisory body and it has no power to execute the plan.
The various government departments take necessary measures to execute the plan. Executing a plan is more difficult than making it.
The execution of our Five Year Plans is not satisfactory. Prof. Lewis has observed that Indians are better planners than doers. The gap between promise and performance has got to be narrowed down.
Typically, businessmen have held that national planning is incompatible with free enterprise and that a “free economy” is the antithesis of a planned economy.
Planning by business is good but planning by government for the whole society is, in the eyes of most businessmen, ‘bad’ (perhaps because government planning has come to be identified with communist countries).
(b) Describe the role of Indian Financial Systems and Foreign Investment for the growth of Indian economy.
-> Indian Financial Systems
India has a large, sophisticated financial system including private and public, formal and informal sectors. In addition to formal financial institutions, informal institutions such as family and money lenders are important sources of capital. In the formal financial system, lending is dominated by retail banks rather than the wholesale banks or the capital markets for debt. The primary method for firms to raise capital is through the public equity markets, rather than through private placements.
- The banking system
Prior to independence from Britain, the banking system was entirely private and largely family-operated. In the pre-war period, the family-run banks often invested in new venture. After Independence, the Reserve Bank of India (RBI) and the State Bank of India were nationalized, with the State Bank of India continuing to play the role of banker to government agencies and companies. Then, in 1969, the next 14 largest banks were nationalized. With the State Bank of India, the state controlled 90% of all bank assets. The nationalized banking system became an instrument of social policy. During 1969-91, the financial position of the banks progressively weakened, due to loss-making branch expansions, ever-strengthening unions, over standing, and politicized loans. Until 1991, depositors were reluctant to use banks because although their savings were safe, the government set deposit interest rates below the rate of inflation.
By 1991, the entire bank system was unprofitable and nearing collapse. The socialized banking system had other perverse effects. For example, although the bank managers were civil servants and very risk- averse, they could offer below-market interest rates. This created excessive demand for funds, but, quite naturally; bankers extended the loans to their safest customers. These were primarily the large firms owned by the government, which operated the largest steel, coal, electrical, and other manufacturing industries. The other large bank borrowers were the giant family conglomerates such as the Tata and Birla group. This increased the group’s economic power, but did not lead to economically efficient decisions about how to deploy capital. Small firms were starved for capital. Thus the Indian banks provided no resources for entrepreneurial firms.
- Equity markets
The first Indian stock markets were established during the British Raj era in the 19th century. During the early part of the 20 th century, Indian equity markets actively financed not only banking, but also the cotton and jute trades. In 1989 there were 14 stock markets in India, though Bombay was by far the largest (World Bank, 1989). The socialization of the economy and particularly banking after independence reinforced the strength of the stock markets as a source of capital, and by the 1960s, India had one of the most sophisticated stock markets in any developing country.
There were several reasons for the growth of the Indian stock market. Motivated by its egalitarian principles, the government supported the stock markets as an instrument for reducing the concentration of ownership in the hands of a few industrialists.
Second, the government industrialist licensing policy instituted in 1961 meant that businesses had to apply for government permission to establish new ventures. Permissions were given only in the context of the Soviet style national plans for each sector. There was a strong element of favouritism in where one receives permission. Most important, due to government central planning controls, shortages were endemic, and thus, permission to produce was a guarantee of profits. The distortion these policies created by encouraging concentration were meant to be offset by RBI stipulated that private sector borrowers could not own more than 40% of the firm’s equity if they wished to receive bank finance. In 1973 the government required all foreign firms to decrease ownership in their Indian subsidiaries to 40%. Faced with a choice between selling stakes privately and listing on the stock exchanges, most firms chose the latter and issued new stock, which led to a large increase in public ownership of such companies. So, to raise money the private sector became reliant on stock markets. Investors, large and small, readily financed ventures since the shortages induced by the planning system guaranteed a ready market for anything produced.
- Other institutional sources of funds
India has a strong mutual funds sector that began in 1964 with the formation of the Unit Trust of India (UTI), an open-ended mutual fund, promoted by a group of public sector, financial institutions. Because UTI’s investment portfolio was to consist of longer-term loans, it was meant to offer savers a return superior to bank rates. In keeping with the risk-averse Indian environment, initially UTI invested primarily in long-term corporate debt. But UTI eventually became the country’s largest public equity owner as well. This was because the government controlled interest rates in order to reduce the borrowing costs of the large manufacturing firms that it owned.
Foreign Investment for the growth of Indian economy:
A survey on FDI conducted by FICCI shows that the performance of 385 foreign investors operating in India was satisfactory, with 61 per cent reporting profits or break-even. And around 51 percent of the respondent has expansion plans on the cards. Despite the overall conditions of slowdown, over 71 percent respondents reported a capacity utilization of 50-75 percent.
As many as 93 percent of the respondents find the handling of approvals and applications at the Centre to be good to average. The simplification of the approval procedure at the Centre can be gauged by the fact that the number of applications going through the automatic route has raised from 16 percent in 2000 to 29 percent in 2001. Also the ratio of FDI inflows to approvals had gone up to 52.8 percent in 2000 compared to 29 percent in 1996.
Around 63 percent find the overall policy framework to be good to average. “The apparent increase in the FDI inflow shows that the improved policy environment is having a positive impact,” says a senior official at FICCI. FDI this year has risen by 61 percent to US$ 2.37 billion in April-November 2001 compared to US$ 1.47 billion in the corresponding period last year. Besides 70 percent feel that bringing funds into the country is relatively easy and 69 percent say that funds into the country is relatively easy and 69 percent say that funds repatriation can be carried out fairly easily. India’s foreign exchange reserves have risen significantly to over US$ 68 billion by the end of December 2002. This has provided the much needed stability to the exchange rate and strengthening of the rupee.
2(a) Explain the main objectives of price control and its effect on Indian economy.
-> Price controls are government-mandated legal minimum or maximum prices set for specified goods. They are usually implemented as a means of direct economic intervention to manage the affordability of certain goods.
Governments most commonly implement price controls on staples—essential items, such as food or energy products. Price controls that set maximum prices are price ceilings , while price controls that set minimum prices are price floors. Over the long term, price controls inevitably lead to problems such asshortages, rationing, deterioration of product quality, and black markets that arise to supply the price-controlled goods through unofficial channels.
Objectives price control is:-
(i) Achieving a Target Return on Investments:
This is the most important objective which every concern wants to achieve. The objective is to achieve a certain rate of return on investments and frame the pricing policy in order to achieve that rate. For example, the concern may have a set target of 20% return on investment and 10% return on investments after taxes. The targets may be a short term (usually for a year) or a long term. It is advisable to have a long term target.
Sometimes, it is observed that the actual profit rates may be more than the target return. This is because the targets already fixed are low and new opportunities and demand of the product exceeding the return rate already fixed.
(ii) Price Stability:
This is another important objective of an enterprise. Stability of prices over a period reflects the efficiency of a concern. But in practice, on account of changing costs from time to time, price stability cannot be achieved. In the market where there are few sellers, every seller wants to maintain stability in prices. Price is set by one producer and others follow him. He acts as a leader in price fixation.
(iii) Achieving Market Share:
Market share refers to the share of the company in the total sales of the product in the market. Some of the concerns when introduce their product in the competitive market want to achieve a certain share in the market in the initial stages. In the long run the concern may aim at achieving a sizeable portion of the market by selling its products at lower prices.
The main objective of achieving larger share in the market is to enjoy more reputation and goodwill among the people. The other consideration of widening the markets by lowering prices is to eliminate competitors from the market.
It has been observed that companies may not like to increase the size of their share on account of fear of Govt, intervention and control. General Motors, America, capturing about 50% of the automobile market, passed through this situation. Some companies like General Electric and Johns-Mauville preferred to have relatively small market say 20% rather than 50%.
(iv) Prevention of Competition:
Modern industrial set up is confronted with cut throat competition. Pricing can be used as one of the effective means to fight against the competition and business rivalries. Lesser prices are charged by some firms to keep their competitors out of the market. But a firm cannot afford to charge fewer prices over a long period of time.
(v) Increased Profits:
Maximisation of profits is one of the main objectives of a business enterprise. A firm can adopt such a price policy which ensures larger profits. However, such enterprises are also expected to discharge certain social obligations also.
Price control and its effect on Indian economy:-
Price Control: The Maximum Price Legislation:
And Government may find it wise to prevent rise in prices above the market equilibrium or to prevent fall in prices below the market equilibrium. Such method of intervention is called price control.
Sometimes businessmen create an artificial scarcity of an essential commodity with the motive of raising the price of the commodity. The basic motive is, of course, profit-maximization. In the process, consumers are exploited since they are now forced to purchase commodity at a higher price.
(b) Describe the objectives of MRTP Act and also analyse the Powers of the commission under this Act.
-> The Monopolies & Restrictive Trade Practices Commission will be renamed fair Trade Practices Commission under the revamped Monopolies and Restrictive Trade Practices (MRTP) Act being considered by the government.
Under the proposed MRTP Act, there will be a complete bifurcation of jurisdictions of the new act and the Consumer Redressal Act. This would help the commission to concentrate on larger issues rather than take up individual consumer grievances.
The MRTP Commission at present is flooded with individual consumer complaints and over 3000 such cases are pending with the commission. Officials assert that these complainants are only interested in claiming their compensation from companies which have indulged in unfair or restrictive trade practice. Hence, these cases need to be addressed by the Consumer Redressal Act, letting the MRTP Act concentrate on larger issues.
Another clause being considered by the government for inclusion in the revamped Act is the conferring of powers on the commission to impose financial penalties on offenders whose guilt has been proven.
At present, the MRTP Act allows only cease and desist orders against any party whose unfair or restrictive trade practice has been proven.
The government is also considering the withdrawal of writ jurisdiction from the act which allows offenders to contest the commission’s decision in high courts.
According to MRTP officials, the parties often seek stay orders from high courts which lengthen the time period for the cases.
The new act may also bring the directorate-general (investigation & registration), a statutory body under the MRTP Act, under direct control of the commission and also withdrawal of the suo motu powers of DGIR under the proposed recast act.
The new act would also seek to raise the status of the members of the commission from additional secretary level to secretary level. Besides, the act is likely to provide for additional members to the commission.
According to officials in the MRTP Commission, the recast of the act is being undertaken to give more teeth to the commission in discharging its duties. The thrust of the new act would be to allow the commission to undertake more issue-related cases and act in its capacity as a quasi-judicial body.
The objectives and scope of MRTP Act are:
1. To promote and then sustain an enabling competition culture through engagement and enforcement which would inspire businesses to be fair, competitive and innovative.
2. To enhance the consumer welfare.
3. To support economic growth.
4. The Competition Commission of India aims to establish a robust competitive environment through proactive engagement with all the stakeholders including the consumers, industry, government as well as international jurisdictions.
The MRTP Commission has the following powers:
1. Power of Civil Court under the Code of Civil Procedure, with respect to:
a. Summoning and enforcing the attendance of any witness and examining him on oath;
b. Discovery and production of any document or other material object producible as evidence;
c. Reception of evidence on affidavits;
d. Requisition of any public record from any court or office.
e. Issuing any commission for examination of witness; and
f. Appearance of parties and consequence of non-appearance.
2. Proceedings before the commission are deemed as judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code.
3. To require any person to produce before it and to examine and keep any books of accounts or other documents relating to the trade practice, in its custody.
4. To require any person to furnish such information as respects the trade practice as may be required or such other information as may be in his possession in relation to the trade carried on by any other person.
5. To authorize any of its officers to enter and search any undertaking or seize any books or papers, relating to an undertaking, in relation to which the inquiry is being made, if the commission suspects that such books or papers are being or may be destroyed, mutilated, altered, falsified or secreted.
3(a) Define Monetary Policy? Analyse the main features of Monetary Policy in 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%.
Features of Monetary Policy in India:-
Today, Central bank transparency has become one of the important features of monetary policy. During the past 20 years, central bank has made a tremendous change in its policy of disclosure from being highly confidential to a state of full disclosure. Transparency is now a widely accepted broad goal to which all central banks are bound to perform. The following assignment gives an explanation to the transparency of central banks and its importance in practice. The theoretical perceptions are also compared to the various ways in which central banks have become transparent in practice.
Central bank as the term indicates is a bank of treasury and the bank for the external sector of the economy. It regulates the flow of money supply and maintains the soundness of financial sector. As the bank of banks it has many diverse functions and therefore it possesses huge importance in a country. Therefore a central bank requires independence and transparency in its operations.
The new touchstone in monetary policy of central bank appears to be independence and transparency. Although the importance of central bank independence has long been recognized however research in favour of transparency of monetary policy is relatively new and largely seems a response to the new best practice in central banking. Most economists agree that greater transparency in monetary policy is desirable because it allows making better that is, welfare improving decisions, as well as better informed decisions (Blinder, 1998). But not all agree. Some argue that incomplete transparency is optimal, as the effect on the Central Bank’s reputation and its consequent ability to control inflation has to be balanced against the private sector’s wish to see output, employment and prices stabilised (see for example Faust and Svensson, 2001 or Jensen, 2000).
Central bank transparency could be defined as a balanced information flow between monetary policymakers and other economic agents. Therefore it reduces uncertainty and this is often believed to be beneficial (although it need not be).
An increase in central bank transparency can be seen by observing the past two decades of functioning of central bank. Practically, many Central Banks have actually increased their transparency. Prominent examples can be of the central banks of the United Kingdom, New Zealand, Sweden and Canada that took on a framework of ‘Inflation Targeting’ in the early 1990’s, which is characterized by an explicit inflation target and the publication of inflation forecasts. Others such as central bank of Brazil, the European Central Bank (ECB), and even well established central banks like those of the United States, Japan and Switzerland have adopted greater transparency as well by using inflation forecasts, extensive explanations of the reasoning behind their decisions, and sometimes voting records on policy decisions. In addition the evidence in support of central bank transparency as one of the important features of monetary policy is documented in the 1998 survey of 94 central banks by Fry, Julius, Mahadeva, Roger and Sterne (2000), it explains that 74% of central banks consider transparency as very important component of their monetary policy framework, only surpassed by central bank independence and the maintenance of low inflation expectations (with 83% and 82%, respectively;
Due to increase in transparency there has been also an increase in faith for the central bank, which works for welfare for the economy of a country but also because of this increase in transparency there have been unlikely many events which were of temporary basis but lead to decrease in confidence level among the investors across the globe causing malfunctioning in an economy or throughout the world.
This assignment is structured in various parts; the first section describes about transparency and tries to explain its importance. The second section explains about transparency in central banks and practical incidents which were exposed because of transparency in addition to it there is an explanation on different types of transparency and their functions as related with central bank’s monetary policy. Derived evidence on the impact of transparency is discussed in the next section. Section 4 provides a detailed discussion on accountability of central bank, and addresses the different grounds for central bank transparency; it also defines the relationship between central bank independence and transparency. Lastly there is a detailed conclusion on transparency in context of central bank.
(b) What do you mean by Fiscal Policy? Explain the different types of Fiscal Policy in India?
-> The means by which the government adjust its spending levels along with tax rates to influence and monitor the nation’s economy it is known as fiscal policy.
Fiscal policy is playing an important role on the economic and social front of a country. Traditionally, fiscal policy in concerned with the determination of state income and expenditure policy. But with the passage of time, the importance of fiscal policy has been increasing continuously for attaining rapid economic growth.
Accordingly, it has included public borrowing and deficit financing as a part of fiscal policy of the country. An effective fiscal policy is composed of policy decisions relating to entire financial structure of the government including tax revenue, public expenditures, loans, transfers, debt management, budgetary deficit, etc. There are several component policies or a mix of policies that contribute to the fiscal policy. These include subsidy, taxation, welfare expenditure, etc. Also, there are a certain investment and disinvestment policies and debt and surplus management that contribute to fiscal policies.
Objectives of a Fiscal Policy
· 1. In order to stabilize the pricing level in the economy.
· 2. The main objective is to achieve and maintain the level of full employment in the country.
· 3. Also, to stabilize the growth rate in the economy.
· 4. Also, promote the economic development in a country.
· 5. In order to maintain the level of balance of payment in the economy.
Various Types of Fiscal Policies
Contractionary Fiscal Policy
This involves cutting government spending or raising taxes. Thus, the tax revenue generated is more than government spending. Also, it cuts on the aggregate demand in the economy. So, the economic growth leading to the reduction in inflationary pressures of the economy.
Expansionary Fiscal Policy
This is generally used to give a boost to the economy. Thus, it speeds up the growth rate of the economy. Also, during the recession period when the growth in national income is not enough to maintain the current living of the population.
So, a tax cut and an increase in government spending would boost economic growth and decrease the unemployment rates. Although this is not a sustainable solution. Because this can lead to a budget deficit. Thus, the government should use this with caution.
Neutral Fiscal Policy
This policy implies a balance between government spending and Furthermore, it means that tax revenue is fully used for government spending. Also, the overall budget outcome will have a neutral effect on the level of economic activities.
Types of Fiscal Policy
There are major components to the fiscal policies and they are
Government expenditure includes capital expenditure and revenue expenditure. Also, the government budget is the most important instrument that embodies government expenditure policy. Furthermore, the budget is also for financing the deficit. Thus, it fills the gal between income and government spending.
The government generates its revenue by imposing both indirect taxes and direct taxes. Thus, it is important for the government to follow a judicial system for taxation and impose correct tax rates. This is because of two reasons. The higher the tax, the reduction in the purchasing power of the people.
This will lead to a decrease in investment and production. Furthermore, the lower tax will leave more money with people that lead to high spending and thus higher inflation.
4(a) Explain the rights and responsibilities of the Consumer under the provision of Consumer Protection Act, 1986.
-> 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 needs 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.
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) Define Capital Market. Explain the different submarkets of Indian Capital Market.
-> There are broadly two types of financial markets in an economy – capital market and money market. Now capital market deals in financial instruments and commodities that are long-term securities. They have a maturity of at least more than one year.
Capital markets perform the same functions as the money market. It provides a link between the savings/investors and the wealth creators. The funds will be used for productive purposes and create wealth in the economy in the long term.
One of the important functions of the capital markets is to provide ease of transactions for both the investors and the companies. Both parties should be able to find each other with ease and the legal aspect of things should go smoothly. Now let us take a look at the two major types of capital markets.
Capital market is referred to as a place where saving and investments are done between capital suppliers and those who are in need of capital. It is, therefore, a place where various entities trade different financial instruments.
Capital market is where both equity and debt instrument like equity shares, preference shares, debentures, bonds, etc. are bought and sold.
Features of Capital Market:-
1. Link between Savers and Investment Opportunities:
Capital market is a crucial link between saving and investment process. The capital market transfers money from savers to entrepreneurial borrowers.
2. Deals in Long Term Investment:
Capital market provides funds for long and medium term. It does not deal with channelizing saving for less than one year.
3. Utilises Intermediaries:
Capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of capital market and are very important elements of capital market.
4. Determinant of Capital Formation:
The activities of capital market determine the rate of capital formation in an economy. Capital market offers attractive opportunities to those who have surplus funds so that they invest more and more in capital market and are encouraged to save more for profitable opportunities.
5. Government Rules and Regulations:
The capital market operates freely but under the guidance of government policies. These markets function within the framework of government rules and regulations, e.g., stock exchange works under the regulations of SEBI which is a government body.
An ideal capital market is one:
1. Where finance is available at reasonable cost.
2. Which facilitates economic growth?
3. Where market operations are free, fair, competitive and transparent.
4. Must provide sufficient information to investors.
Submarkets of Indian Capital Market:-
1. Primary Market and
2. Secondary market.
The most important type of capital market is the primary market. It is what we call the new issue market. It exclusively deals with the issue of new securities, i.e. securities that are issued to investors for the very first time.
The main function of the primary market is capital formation for the likes of companies, governments , institutions etc. It helps investors invest their savings and extra funds in companies starting new projects or enterprises looking to expand their companies.
The companies raise money in the primary market through securities such as shares, debentures, loans and deposits, preference shares etc. Let us take a look the various methods of how new securities are floated in the primary market.
Primary market is the part of capital market where issue of new securities takes place. Public sector institutions, companies and governments obtain funds for further growth of the company after the sale of their securities or bonds in primary market. The selling process of new issues in primary market is called as Underwriting and this process is done by a group of people called underwriters or security dealers. From a retail investor’s point of view, investing in the primary market is the first step towards trading in stocks and shares.
Role of Primary Market
Capital formation – It provides attractive issue to the potential investors and with this company can raise capital at lower costs.
Liquidity – As the securities issued in primary market can be immediately sold in secondary market the rate of liquidity is higher.
Diversification – Many financial intermediaries invest in primary market; therefore there is less risk if there is failure in investment as the company does not depend on a single investor. The diversification of investment reduces the overall risk.
Reduction in cost – Prospectus containing all details about the securities are given to the investors hence reducing the cost is searching and assessing the individual securities.
Features of Primary Market
· It is the new issue market for the new long term capital.
· Here the securities are issued by company directly to the investors and not through any intermediaries.
· On receiving the money from the new issues, the company will issue the security certificates to the investors.
· The amount obtained by the company after the new issues are utilized for expansion of the present business or for setting up new ventures.
· External finance for longer term such as loans from financial institutions is not included in primary market. There is an option called ‘going public’ in which the borrowers in new issue market raise capital for converting private capital into public capital.
Prerequisites for Investor to Participate in Primary market Activities:
- PAN Number
- Bank Account
- Demat Account
Types of issues
Public issues can be classified into 3 types:
Initial Public Offering (IPO) – Fresh issue of shares or selling existing securities by an unlisted company for the first time is known as IPO. Listing and trading of securities of a company takes place in IPO.
Rights Issue – Rights issue is when the listed company issues new securities and provides special rights to its existing shareholders for buying the securities before issuing it to public. The rights are issued on particular ratio based on the number of securities currently held by the share holder.
Preferential Issue – It is the fresh issue of securities and shares by listed company. It is called as preferential as the shareholders with preferential shares get the preference when it comes to dividend disbursement.
· Price manipulation is very less in primary market compared to secondary market.
· There is no payment of brokerage, transaction fees, and stamp duty or service tax.
· Investors get the shares at same prices so market fluctuations do not affect it.
· The shares are allotted proportionately if there is over subscription which means, the small investors may not get any allotment.
· Money is locked in for longer time, as it is a long term investment.
· The shares allotment for the investor takes few days in primary market compared to secondary market where it takes only 3 days to allot the shares.
- Secondary Market
After the primary market is the secondary capital market. This is more commonly known as the stock market or the stock exchange . Here the securities (shares, debentures, bonds, bills etc) are bought and sold by the investors.
The main point of difference between the primary and the secondary market is that in the primary market only new securities were issued, whereas in the secondary market the trading is for already existing securities. There is no fresh issue in the secondary market.
The securities are traded in a highly regularised and legalized market within strict rules and regulations. This ensures that the investors can trade without the fear of being cheated. In the last decade or so due to the advancement of technology, the secondary capital market in India has seen a great boom.
The secondary market facilitates the liquidity and marketability of securities. For management of company it serves as a monitoring and controlling channel by:
· Facilitating value build-up control activities and,
· Accumulates information with market capitalization
Secondary market provides real time valuation of securities on the basis of demand and supply.
Secondary market definition itself states that it is second-hand market, when previously issued securities are bought and sold.
Now let’s see what secondary market is for general investors, secondary market is a place which provides an efficient platform for trading of securities i.e. to provide liquidity to convert investments into cash.
Types of Secondary Market:
· Over the Counter market:
OTC market refers to the process where securities are traded in an informal way i.e. that is not listed on a formal exchange.
Under this the securities that didn’t fulfil the requirements to have a listing on a standard market exchange. It is a bilateral contract, where two parties are involved i.e. the investor and dealer.
Stocks traded in OTC market are basically of smaller companies that cannot meet exchange requirements for formal exchange.
· Exchange traded market:
Exchange-traded market also known as auction market is a place where all the transactions are routed through a central source (exchange) that is completely responsible for being the intermediary that connects buyers and sellers.
Market Participant in Secondary Market:
Products in Secondary market:
Equity is the ownership in a company where all the shareholders have equal rights irrespective of the number of shares held by them. This includes:
1. Equity shares
2. Right issue or Right share
3. Bonus shares
· Preference shares:
Preferred shares also referred to as Preferred stocks. It is a form of stock which is a mix of features, not possessed by common stock properties; it is generally considered as a Hybrid Instrument.
Owners of these securities are entitled to a fixed dividend to be paid regularly before any dividend can be paid on Equity shares. The preference shares are categorized into:
1. Cumulative preference shares
2. Participating preference shares
· Government Securities (G-sec):
G-sec is a bond or debt obligation that is issued by Reserve Bank of India on behalf of Government of India, in substitute of the central government’s market borrowing programme with a promise of repayment upon the security maturity date.
These are generally considered as low-risk investments because they are backed by the taxing power of a government.
These securities have fixed coupon that is paid on specific dates on half-yearly basis.
Debentures are referred to as long-term securities bearing a fixed rate of interest which are issued by a company and secured against the assets. These are usually payable half yearly on specific dates with principal amount repayable on maturity date.
Debentures are divided into two categories:
1. Non-convertible debentures
2. Convertible debentures
Bond is a negotiable instrument generally issued by a company, municipality or government agency which provides evidence of indebtedness. An investor in bond lends money to the issuer and the issuer in exchange promises to repay the loan on a specified maturity date. The issuer pays interest periodically over the tenure of the loan. Its tenure can be up to 30 years. There are various types of bonds:
1. Zero Coupon Bonds
2. Convertible Bonds
3. Commercial paper
4. Treasury Bills.
5(a) What do you mean by Household Income? Explain the impact of household income for the food security and poverty elimination in India.
-> Household income is the combined gross income of all members of a household who are 15 years or older. Individuals do not have to be related in any way to be considered members of the same household. Household income is an important risk measure used by lenders for underwriting loans, as well as a useful economic indicator of an area’s standard of living.
Household income is a frequently reported economic statistic. Because many households consist of a single person, median household income is usually less than median family income, another frequently reported economic statistic, because a household consisting of a single person is not included in the average family income calculation. Looking at household income statistics is instructive when comparing affluence and living standards between different cities, states or countries. At an individual level, household income is adjustable gross income, meaning that it is the income left after tax.
Household income refers to the combined gross income of all members of a household, defined as a group of people living together, who are 15 years or older.
It is used to determine the economic health of an area or to compare living conditions between geographic regions.
Generally, it is less than the median family income.
Impact of Household Income:
There are no surveys available at national or regional level n India to find out changes in income of farm households due to changes in policy during the decade of reforms. However, National Sample Surveys on consumer expenditure conducted by National Sample Survey Organization, Government of India, provide authentic data on total household expenditure, which has been often used as a proxy for income. In the absence of any other source for estimating changes in income of farm households this paper also use total expenditure as a proxy for income. This includes income coming from all sources that is farm and non-farm. This proxy has been used to estimate growth in income (total expenditure) during 1993-94 to 1999-2000. These two years correspond to nationwide main simple survey during the reform period. Nominal income was deflated by Consumer Price Index for Agricultural Labour for rural households.
During 1993-94 to 1990-00 real per capita income of rural households increased 2.01 percent. Per capita income as measured by total expenditure in real prices at cultivator and labour households increased at the rate of 2.17 and 2.59 percent annually.
Change in poverty and household food security was seen during the period 1983 to 1999-00. The reason for including year 1983 in the analysis was to compare the change process before reforms as observed from the data for year 1983 and 1987-88 with the change process during reforms as revealed by comparing 1987-88 situation with 1993-94 and 1999-00. Level of energy intake and protein intake and per cent of population consuming less than suggested norm of calorie and protein were used as indicators of food security. Average per capita calorie intake at cultivator households in India during the year 1983 was 2289 kcal, which increased to 2423 during 1987-88. With the beginning of economic reforms calorie intake declined to 2277 and remained at this level during the year 1999-2000. Protein intake increased between 1983 and 1987-88 and declined thereafter in 1993-94 and 1999-00. Among different size classes calorie intake showed decline in the beginning of reforms and increase thereafter except in the case of large farm size group which recorded decline. In all the survey years’ per capita calorie intake increased with the increase in size of farm, which represents economic class.
Calorie intake at labour households dropped sharply in the beginning of reforms and recovered subsequently. Calorie intake at labour households during 1999-00 is slightly higher as compared to the year 1983 but lower as compared to 1987-88.
There was a sharp reduction in percent of population consuming less than minimum level of calorie suggested for a healthily person between 1983 and 1987-88. The process got reversed in the beginning of economic reforms. With further progress in reforms, undernourished population among farm households increased but there was a sharp decline in the case of labour households.
Incidence of malnourishment showed a sharp decline before reforms. With the beginning of economic reforms farm population deficit in protein showed a slight increase. Intensification of reforms with trade liberalization however was accompanied by sharp increase in malnourishment of farm population. The situation is somewhat different in the case of labour households. Their protein deficit population increased substantially in the beginning of reforms and dropped subsequently. According to the estimate for the year 1999-2000 more than 26 percent farm population and more than 45 percent of rural labours are suffering from energy and protein deficiency.
(b) Explain the objectives of digital cash transaction and its impact on Indian economy.
-> Digital cash has been pioneered by digiCash. Its founder, David Chaum, is an expert in financial cryptography and is the inventor of more than half a dozen cryptographic processes covered by US Patents. DigiCash has created and markets a software program called “ecash”, which basically creates DBCs that represent units of various currencies.
Currently, US Dollars, Finnish Markkas and Australian Dollars circulate on the Internet using the ecash system, with several other currencies to be introduced in the near future. Although DigiCash is the only company with a working product that is now available for use, there are other companies and independent developers who are working on digital cash systems as well.
Cost of Printing Money – It is the direct cost and affects the Indian economy. If there is cash system, people will work on cash transaction and government will be bound to produced the new notes. But on adaptation of cashless economy we will be able to save this cost up to a certain level.
Reduce the Maintenance cost – Other than printing cost of currency notes such as storage cost of notes, transportation cost of notes, security cost of notes, and device for detection counterfeit notes etc. may be saved. Cashless transaction will also reduce the cost of maintenance of ATM machines.
Fast Transaction – A queuing at the point of sale terminals and vending machine will be reduced. It means three times more people can be served using a cashless system than could have been if they were paying cash.
Save Money and Time – Cash less economy will reduce the costs as there is no need to maintain the manual accounting because the banks employees a large no of staff attend and redress the complained.
Collection of higher revenue- It will increase the collection of taxes. This increased collection may be converted into public welfare policy and schemes.
Convenience and Lower Risk- It is safer of both Bank as well as customers because of having high degree of secrecy and if stolen, may be easily locked credit cards or mobile wallet remotely.
Reduction of Income Tax Rate- Due to the lesser availability of hard cash in home and banks, it will be very easy to hide and evade the income tax. It will certainly increase not only the no of tax payer but also the collection of income tax. It will ultimately lead to reduce the income tax rate for the whole country.
Objectives of digital cash transactions:-
i. To reduce the corruption this takes place mostly through the cash medium.
ii. To reduce the burden of the cost of printing currency and also handling them.
iii. The transfer of money from one place to another is also gruesome.
iv. To track the movement of money this is not possible completely in cash medium.
v. To revive the banking sector this is high on NPA and bad loans.
vi. To make loans cheaper and affordable for everyone.
vii. To study the opportunities and advantages if India become a cashless economy.
viii. Studying the current position of cashless India.
ix. To identify the prospects and challenges of cashless transaction system in India.
x. Studying the concept of cashless economy.
xi. To find out the challenges to establish cashless economy in India. To suggest the future prospects of cashless India.
xii. To analyze the future trend of cashless transaction.
In short, cashless is better in all aspects. But there are certain challenges for India to go completely this way. Otherwise, it’s good for a growing economy like India.
Impact of Cashless Transaction on Indian Economy:-
1) Transparency and Accountability -Cashless transactions are generally electronic transactions which leave the digital proof. Digital proofs are beneficial not only for government but also for the tax payer (Consumer). It makes the overall system nor transparent and compliant.
2) Eradication of the Corruption- Cashless economy will be simple, transparent and easy. It will show the every transaction in both the parties i.e. sender and receiver. Hence it will eradicate the corruption in Indian economy up to some extent. In fact, it will hit the corruption in much planned manner and will save enough money in the Indian economy.
3) To check an Organized Crime- Organized crime such as armed robbery, kidnapping, terrorist activities and money laundering requires huge volume of cash to carry out their nefarious operations so that they cannot be easily traced. Thus, cashless economy will surly these type f unsocial activities.
4) To Wipe Away the Black Money from the Indian Market- The habit of evading sales on paper by the small shopkeeper and big industrialist to save the taxes create the problem of loss of tax to exchequer and lead to parallel economy. It creates big losses to towards the government as well as common people goal. The cashless economies will surly lead to the development of India by means of collecting surplus taxes and also to spend these taxes for the benefit of the scheme for poor people in India.
5) Stopping the Leakages- In cashless economy, the direct benefit transfer policy of Indian government will help in identification of the beneficiary on the basis of biometric identity such as AADHAR or UID no. and people will get their dues directly in their banks accounts. It will stop the leakage of money by the officials of the government while distributing money to the beneficiary.