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 with examples the different factors affecting the internal and external environment of the business.
-> 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 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.
Factors affecting the internal and environment of the business:-
The factors are: (1) Value System, (2) Mission and Objectives, (3) Organisation Structure, (4) Corporate Culture and Style of Functioning of Top Management, (5) Quality of Human Resources, (6) Labour Unions, and (7) Physical Resources and Technological Capabilities.
1. Value System:
The value system of an organisation means the ethical beliefs that guide the organisation in achieving its mission and objective. The value system of a business organisation also determines its behaviour towards its employees, customers and society at large. The value system of the promoters of a business firm has an important bearing on the choice of business and the adoption of business policies and practices. Due to its value system a business firm may refuse to produce or distribute liquor for it may think morally wrong to promote the consumption of liquor.
The value system of a business organisation makes an important contribution to its success and its prestige in the world of business. For instance, the value system of J.R.D. Tata, the founder of Tata group of industries, was its self-imposed moral obligation to adopt morally just and fair business policies and practices which promote the interests of consumers, employees, shareholders and society at large. This value system of J.R.D. Tata was voluntarily incorporated in the articles of association of TISCO, a premier Tata company.
2. Mission and Objectives:
The objective of all firms is assumed to be maximization of long-run profits. But mission is different from this narrow objective of profit maximization. Mission is defined as the overall purpose or reason for its existence which guides and influences its business decision and economic activities.
The-choice of a business domain, direction of its development, choice of a business strategy and policies are all guided by the overall mission of the company. For example, “to become a world-class company and to achieve global dominance has been the mission of ‘Reliance Industries of India’. Similarly “to become a research based international pharma company” has been stated as mission of Ranbaxy Laboratories of India.
3. Organisation Structure:
Organisation structure means such things as composition of board of directors, the number of independent directors, the extent of professional management and share -holding pattern. The nature of organisational structure has a significant influence over decision making process in an organisation. An efficient working of a business organisation requires that its organisation structure should be conducive to quick decision making. Delays in decision making can cost a good deal to a business firm.
The board of directors is the highest decision making body in a business organisation. It takes general policy decisions regarding direction of growth of business of the firm and supervises its overall functioning. Therefore, the managerial capability of the board of directors is of crucial importance for the functioning of a business firm and for achievement of its overall mission and objectives.
For efficient and transparent working of the board of directors in India it has been suggested that the number of independent directors be increased. Many private corporate firms in India are managed by family members of their promoters which is not conducive to the efficient working of these firms.
It is therefore highly desirable to increase the extent of professional management of private corporate companies. The share holding pattern has also an important implication for business management. In some Indian companies the majority of shares is held by the promoters of the company themselves.
In some others share-holding pattern is quite diversified among the public. In India financial institutions such as UTI, LIC, GIC, IDBI, IFC etc. have large share holdings in prominent Indian corporate companies and the nominees of these financial institutions play a critical role in making major business policy decisions of these corporate companies.
Technically, shareholders elect directors who make up the board of directors. The directors then appoint company’s top managers who take various business decisions. However, most of the shareholders delegate the voting rights to the management or do not attend the general body meeting.
Thus, most of the shareholders regard ownership of the company as a purely financial investment. However, in recent years in developed countries like the United States the shareholders have come to wield a great influence.
The bankruptcy of business giants such as Enron, World Com. in the United States have created great awareness as well as mistrust among shareholders. In the last few years there has been frequent law suits filed by shareholders against directors and managers for ignoring the interests of shareholders or in fact cheating them by not declaring dividends. That is why there is worldwide debate on proper corporate governance of business firms.
4. Corporate Culture and Style of Functioning of Top Management:
Corporate culture and style of functioning of top managers is important factor for determining the internal environment of a company. Corporate culture is generally considered as either closed and threatening or open and participatory.
In a closed and threatening type of corporate culture the business decisions are taken by top-level managers, while middle level and work-level managers have no say in business decision making. There is lack of trust and confidence in subordinate officials of the company and secrecy pervades throughout in the organisation. As a result, among lower level managers and workers there is no sense of belongingness to the company.
On the contrary, in an open and participatory culture, business decisions are taken at lower levels of management, and top management has a high degree of trust and confidence in the subordinates. Free communication between the top level management and lower-level managers is the rule in this open and participatory type of corporate culture. In this open and participatory system the participation of workers in managerial tasks is encouraged.
Closely related to corporate culture is the style of functioning of top management. Some top managers believe in just giving orders and want them to be strictly followed without holding consultations with lower level managers. This style of functioning is not conducive to the adaptability and flexibility in dealing with the changing external environment of business.
5. Quality of Human Resources:
Quality of employees (i.e. human resources) of a firm is an important factor of internal environment of a firm. The success of a business organisation depends to a great extent on the skills, capabilities, attitudes and commitment of its employees. Employees differ with regard to these characteristics.
It is difficult for the top management to deal directly with all the employees of the business firm. Therefore, for efficient management of human resources, employees are divided into different groups. The manager may pay little attention to the technical details of the job done by a group and encourage group cooperation in the interests of a company. Due to the importance of human resources for the success of a company these days there is a special course for managers how to select and manage efficiently human resources of a company.
6. Labour Unions:
Labour unions are other factor determining internal environment of a firm. Unions collectively bargain with top managers regarding wages, working conditions of different categories of employees. Smooth working of a business organisation requires that there should be good relations between management and labour union.
Each side must implement the terms of agreement reached. Sometimes, a business organisation requires restructuring and modernisation. In this regard, the terms and conditions reached with the labour union must be implemented in both letter and spirit if cooperation of workers is to be ensured for the reconstruction and modernisation of business.
7. Physical Resources and Technological Capabilities:
Physical resources such as plant and equipment, and technological capabilities of a firm determine its competitive strength which is an important factor determining its efficiency and unit cost of production. R and D capabilities of a company determine its ability to introduce innovations which enhance productivity of workers.
It is however important to note that rapid technological progress, especially unprecedented growth of information technology in recent years has increased the relative importance of ‘intellectual capital and human resources as compared to physical resources of a company. The growth of Bill Gates Microsoft Company and Murthy’s Infosys Technologies is mostly due to the quality of human resources and intellectual capital than to any superior physical resources.
Factors affecting the external environment of the business:-
Economic factors throw light on the nature and direction of the economy in which a firm operates. Consumption patterns are usually governed by the relative affluence of market segments. Therefore, while carrying out strategic planning exercises, the firm must focus attention on economic trends in the segments that affect its industry.
Low interest rates on personal savings, for example could compel individuals to equity and bond markets, leading to a boom for the capital market activity and mutual fund industry. At the national and international level, the firm must look into the general availability of credit, the level of disposable income and the propensity of people to spend.
Interest rates, inflation rates, unemployment rates and trends in the gross national product, governmental policies, sectoral growth rates of agriculture, industry infrastructure, etc., are other economic influences it must consider.
The world is a small networked village. Most nations are interconnected and interdependent now—thanks to the rapid advances in technology all over the globe. As a result firms, everywhere, are compelled to scan, monitor, forecast and assess the health of economies outside their host nation.
When the US economy slipped into a recession in 2001 interest rates were cut. They were cut repeatedly with a view to stimulate global output growth. Interest rates on home loans have fallen to rock bottom levels—to spur demand for new homes.
Low interest rates are aimed at boosting up sales of consumer durables, passenger cars, electronic items, gold and jewellery etc. Any expansion of consumer expenditures should lead to increased industrial activity—stimulating demand for various other items.
1. Rate of Inflation:
Likewise the current level of inflation can directly affect how quickly rise, which in turn, might squeeze corporate profits costs. Price inflation can destabilize an economy leading to slower economic growth, higher interest rates and volatile currency movements. If inflation keeps rising, investment planning becomes hazardous.
Further, the current level of unemployment can directly influence how easy or difficult it is to find the kind of people you require. Speciality retailers such as Ikea, Gap and Williams-Sonoma are aware of the impact consumer disposable income has on their sales. Current economic conditions, therefore, will impact how firms have to adjust their antennae to catch the right signals in time to avoid problems later on.
2. Exchange Rate Fluctuations:
Further, movement in currency exchange rates has a direct influence on a firm’s products in the global market place. For example, agricultural and petroleum products are hurt by the dollar’s rise against the currencies of Mexico, Brazil, Venezuela and Australia.
A stronger rupee is hurting the bottom lines of software companies in India in recent times. European firms such as Volkswagen AG, Nokia Corp, and Michelin complain that the surging Euro is hurting their financial performance. A weak dollar is prompting many nations to lower interest rates and loosen fiscal policy—and thereby stimulate economic expansion globally.
A low or declining dollar reduces the threat from foreign competitors while creating opportunities for increased sales from overseas. When exchange rate changes happen with frustrating regularity, managers need to take a serious note of this.
For example, when the Russian rouble was devalued in 1998 (causing even bread prices to rise to stunningly high levels) it was unfortunate for the Russian people because their purchasing power has contracted significantly.
The Russian companies have fallen behind in the competitive race, because they did not have enough buying power to buy products from abroad—which meant that the sales of foreign companies declined. At the same time, foreign companies suddenly woke to opportunity and realised how cheaply they could outsource raw materials, labour and so on.
3. Ups and Downs in Economic Cycle:
Economic activity generally tends to move in cycles. It is difficult to predict exactly when an upturn or downturn in economic conditions will occur. However, the knowledge that such a danger is looming over the head would help managers plan their investments either locally or globally.
As the recent events have shown, the construction industry generally tends to have higher peaks and lower valleys than the overall national economy. When there is a mad scramble for scarce resources with a view to catch the upturn in demand for new homes, as it happened in recent times all over the globe, you are compelled to pay a price for the “irrational exuberance”.
4. Dynamic Changes in Economic Activity within a Country:
Additionally, firms have to understand whether changes in the economy are temporary or whether they represent longer term structural changes. Structural changes are changes that significantly affect the dynamics of economic activity now and into the future.
The shift from an agrarian economy to an industrial economy and then from an industrial economy to a service economy were all structural changes that have enveloped most developed nations in the world. (Hitt et al) “They affected where people worked, what work they did, and the education level they needed to do the work and so on.
If structural changes are taking place and you are unaware of them, you can easily make poor managerial decisions”
Understanding the dynamics of global markets, developing appropriate strategies to move in line with changes in the domestic as well as global economies—keeping track of currency movements, interest rates, rate of inflation, cyclical nature of industry in which the firm operates, the growth rate of a particular nation etc.—is one of the toughest challenges confronting global managers.
In the new global marketplace, managers are required to play challenging roles and create a competitive advantage for the firm through people-friendly policies and practices.
The social factors that affect a firm include the values, attitudes, beliefs, opinions and life-styles of persons in the firm’s external environment, as developed from demographic, cultural, religions, educational and ethnic conditioning.
Like other forces in the external environment, social factors change continually. As social attitudes, beliefs and values change, so does the demand for various types of attire, books, leisure activities etc.
Let’s examine these factors in greater detail:
1. Demographic Factors:
Demographic characteristics such as population, age distribution, religious composition, literacy levels, inter-state migration, rural-urban mobility, income distribution, etc., influence a firm’s strategic plans significantly. The entry of women into the labour market has, in recent times, affected the hiring and compensation policies of their employers.
This has also expanded the market for a wide range of products and services necessitated by their absence from their homes (such as convenience foods, microwave ovens, day – care centres, etc.). The shifts in age distribution caused by improved birth control methods have literally compelled producers to go after youth-oriented goods (beauty products, hair and skin care preparations, fitness equipment, etc.).
The growing number of senior citizens has made many a government to pay more attention to tax exemptions, social security benefits etc. Another important concern is the desire for a better quality of work life. Employees expect more from organisations than simply a pay cheque. They want cleaner air and water as well as more leisure time to enjoy life more fully.
2. Labour Mobility:
Across different occupations and regions, in recent times, has cut down wage differentials greatly. If labour is heterogeneous as is the case in India, managing people becomes a tough and demanding task.
The explosive population growth during the last decade has serious implications for Indian government wanting to go after sophisticated technologies, discarding traditional, labour intensive methods.
The presence of a large number of English speaking engineers at the same time, has encouraged many software giants to set up shop in India. Cheap labour, rise in income levels and favourable governmental initiatives have made the Indian market more attractive to multinationals in recent times.
Social attitudes, values, customs, beliefs, rituals and practices also influence business practices in a major way. Christmas offers great financial opportunities for card companies, toy retailers, tree growers, mail order catalogue firms and other related businesses.
Social values refer to abstract thinking about what is good, right and desirable. Beliefs, on the other hand, reflect the characteristics of physical and social phenomena. We may believe, for example, that a high-fat diet causes cancer or that chocolate causes acne. Beliefs are important (whether right or wrong) in that they affect how we behave and what we buy.
For example, McDonald’s does not serve the beef burgers in India because Indians consider cows as sacred animals (Hindu tradition prohibits the consumption of beef in any form). Values and beliefs vary from culture to culture and before going ahead in a big way, companies must study the socio-cultural environment of a country thoroughly to avoid costly mistakes.
To market soup in Japan, the manager/marketer must realise that soup is regarded there as a breakfast drink rather than a dish served for lunch or dinner. The loyalty shown by Japanese workers towards their employees, to take another example, is far greater than that shown by Indian workers for their employers. The distinction, obviously can be traced back to their respective socio-cultural roots!
4. Religious, Ethical and Moral/Actors:
India is a country where people belonging to almost all religious faiths live—Hindus, Muslims, Sikhs, Christians, Budhists and Jains. They speak different languages. With a population of over 1 billion and 65 per cent literacy level, the country offers exciting opportunities to marketers.
The country – specific risks in terms of corruption, political instability, vast cultural differences, poor infrastructure etc. are equally threatening. The ethical and moral roots of society are, however, very strong. People believe in joint family system (especially in North India), carry on prayers daily, believe in destiny, respect elders and senior citizens, perform rituals scrupulously, and are generally God-fearing.
The spread of consumerism, the rise of middle-class with high disposable incomes, the flashy life styles of people working in software, telecom, media and multinational companies and stock market addicts seem to have changed the socio-cultural scenario in recent times.
After the 90s, people have started rationalising the philosophy – ends justify the means. Such lower ethical standards have become a real threat now to business organisations which have traditionally been carrying out their operations in a fair way.
Many political factors influence how managers formulate and implement strategic direction. Due to the socialist learning’s of some of the ministers, Coca Cola and IBM had to move out of India in late 70s. A deep-seated fear of multinationals prevented political leaders to shut the door on giant multinational companies for a painfully long-time in India.
Barriers to entry protectionist policies, high tariffs, anti-nationalist slogans, bad publicity have had a cumulative effect in creating a closed economic model where people had to wait years together to buy a Bajaj Scooter or a Fiat car in India. When things turned bad to worse, the situation is sought to be remedied through a bold liberalisation programme in early 90s.
Apart from willingness to bend the rules and get along with the times, political stability is also essential for economic growth. After the Babri Masjid demolition in 1992, economic reforms again took a back seat and the then prime minister, P V Narasimha Rao could not carry on the bold liberalisation programme further.
The subsequent securities scam derailed the economy, all the more. Subsidies were never cut as planned at that time, public sector units could not be put on sale, Industrial Disputes Act remained intact, Urban Land Ceiling Act could not be amended (it happened finally in 1999), a National Renewal Fund could not be set up and the Insurance sector reforms remained in the basket.
Now small donations (imagine how cheaply Indian’s most powerful are willing to sell their souls!) to political parties – a mere $2127 in the case of the Bharatiya Janata Party’s Bangaru Laxman and $4,255 by the Samata party’s Jaya Jaitly for introducing arms dealers to higher-ups – have again come in the way of the bold economic steps proposed by NDA Government led by Vajpayee.
The Tehelka expose covering the whole shady deals on videotapes in the recent past has put a big question mark on crucial economic issues such as disinvestment, downsizing, de-reservation, labour reforms, power sector reforms, etc. Corruption, in recent years, has spread like cancer and even social activists like Anna Hazare, Baba Ramdev, Medha Patkar have not been able to get the government take effective steps to contain the menace.
4. Legal Environment:
The legal framework/regulatory environment is decided by the political party in power. The government, therefore, may legislate on matters like wage fixation, managerial remuneration, safety and health at work, location of plants, entry of multinationals, price control, import – export policy, licensing policy etc.
In a centrally planned and controlled economy like India, it is the government that lays down the rules of the game and the industry has to scrupulously adhere to the rule book.
Lobbying, political donations, public awareness campaigns still help in bending the policy stipulations a bit but, by and large, the levers of control are held by the ministers and bureaucrats only.
During the license-permit-raj that prevailed till late 80s, CEOs of most companies in India were expected to know the domestic market (only), know the government, make short-term plans, be able to handle diversified companies, and also implement the vision of the Babu, the owner (Team. C.D).
The family-owned businesses that existed wanted fixers, yes-men, collaborators and people with right connections with government officials. Licensing policies, quota restrictions, import duties, forex regulations, and restrictions on FDI flows, controls on distribution and pricing of commodities, regulations on all aspects of corporate functioning – have really put the captains of industry in a spot and pushed them to the wall.
A sort of love – hate relationship between corporate heads and bureaucrats prevailed for a frustratingly long time. The liberalisation measures macro-economic reforms and structural adjustments brought about in early 90s have altered the economic scenario quite dramatically.
Obviously companies that want to do business globally must pay attention to the above developments closely and learn to adapt themselves to the laws of the land. The rules of competition, trademark rights, price controls, product quality laws, and a number of other legal issues in individual countries may be of special importance to global companies such as Coca-Cola, Unilever, IBM, and McDonald’s.
Technological factors represent major opportunities and threats that must be taken into account while formulating strategies. Technological breakthroughs can dramatically influence organisation’s products, services markets, suppliers, distributors, competitors, customers, manufacturing processes, marketing practices and competitive position.
Technological advancements can open up new markets, result in a proliferation of new and improved products, change the relative cost position in an industry, and render existing products and services obsolete.
Technological changes can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills, and result in changing values and expectations of customers and employees (F.R David). Technological advancements can create new competitive advantages that are more powerful than existing ones.
Recent technological advances, as we well know, in computers, lasers, robotics, satellite networks, fibre optics, biometrics, cloning and other related areas have paved the way for significant operational improvements.
Manufacturers, banks and retailers, for example, have used advances in computer technology to carry out their traditional tasks at lower costs and higher levels of customer satisfaction.
Consider the case of an old economy giant, Ford Motor Company, which is morphing into a new economy animal using web-based technologies to the best advantage (Anand). Thanks to the Internet, the old days of being able to concentrate only on the nuts and bolts of the business seem to be over.
The winners are going to be companies that move closer and connect well with customers. Take the stunningly successful case of MP3, a freely-available standard for the compression and transmission of digital audio.
The big guns of the music business – Sony, RCA and the rest – were so confident about their control over the music industry that they couldn’t see the threat posed by a tiny player like MP3.com, which quietly spun its own B-web.
The company didn’t try doing everything- the B-web had a combination of content companies (like MP3); manufacturers such as S3 (maker of the Rio MP3 player]; distribution technologies (like Napster); and, of course, hundreds of thousands of teenagers who swore by the music, but couldn’t pay for it.
Technological change, thus, can create or even decimate existing businesses or even entire industries, since it shifts demand from one product to another. Examples of such change include the shifts from vacuum tubes to transistors, from steam locomotives to diesel and electric engines, from fountain pens to ball points, from propeller aeroplanes to jets, and from typewriters to computer-based word processors [Wright].
The natural environment comprising of ecological, geographical and topographical factors (such as natural resources, weather, climate, location etc.) are all relevant to business. Historically, Industries were set up in places where natural resources were available in abundance. This has created pockets of affluence, congestion and pollution all at the same time.
The natural endowments began to be used recklessly leading to air, water and land pollution and ozone depletion, gradually. Air pollution is created by dust particles and gaseous discharges that contaminate the air and cause global warming. Over the years, the growing number of coal-burning factories, thermal plants, automobiles etc. have precipitated the problem further.
Water pollution occurs mainly when industrial toxic wastes are thrown into the nature’s water ways. Land pollution is caused by the disposal of hazardous industrial toxic wastes in underground dumps.
The situation has become quite alarming in recent years when pollution levels have risen to unmanageable proportion causing serious damage to ozone layer – heating up the soil, water and air.
Thanks to environmental activists, many companies are now seriously trying to come out with-
(a) Eco-friendly products,
(b) Modified processes,
(c) Redesigned production equipment and
(d) Recycled by-products. Steel companies have been forced to spend heavily in cleaner – burning fuels and pollution control equipment.
The automobile industry has been asked to redesign engines that conform to strict emission control norms. The gasoline industry has been compelled to formulate new low-lead or no-lead products. And, thousands of companies have found it necessary to direct their R&D efforts towards finding ecologically superior products such as Sear’s phosphate – free laundry detergent, Pepsi cola’s biodegradable plastic soft drink bottle (Pearce and Robinson).
International developments can greatly impact the ability of an organisation to do business abroad. For example, fluctuations of the rupee against foreign currencies influence the ability of an Indian company to compete in global markets. When the price of the rupee is high against foreign currencies, Indian companies find it difficult to compete in the international market.
Conversely, when the rupee falls against foreign currencies, new business opportunities open up. International factors influence domestic companies in another way, i.e. by producing new global competitors. For example, a number of technological advances pioneered in the United States have led to successful products.
Yet, in regard to such items as phonographs, colour televisions, audio and video tape recorders, telephones, semi-conductors, and computers, US producers have gradually lost a major share of the domestic market to foreign competitors, who took the basic technology and successfully built upon it.
International factors assume greater importance when domestic companies directly depend on (imports) or exports to certain countries. For example, the slowdown in US economy is impacting the fortunes of software exporters in India, who derive more than 60 per cent of their revenues from the Silicon Valley.
The dismantling of quantitative restrictions, to take another example, from 1.4.2001 is going to affect the fortunes of domestic companies manufacturing goods such as dry cell batteries, toys, stereos, telephone equipment, shoes, wrist watches, drinks and juices, chandeliers, colour televisions etc. (especially cheap imports from China).
Thanks to the advances in transportation and communication technology in the past century, almost no part of the world is cut off from the rest. The world is a big global village now and virtually every organisation, no matter what it offers and from which place it operates, is affected by international developments in one form or the other.
The task environment is that part of the external environment consisting of specific outside forces with which an organisation interfaces in the course of carrying out its operations. It consists of the factors in the organisation’s immediate environment (micro-environment).
Usually, a single organisation has difficulty in exerting a direct influence on the external environment, but it may be more successful in affecting its own task or market environments. The various elements of micro-environment need not necessarily affect all the firms in a particular industry in the same way.
Important elements in the task environment of an organisation typically include:
4. Labour supply and
5. Government agencies (regulators).
Clients include the customers, owners and partners of an organisation. The purpose of a business is to create and sustain customers. In an open market, the organisation turns into a lifeless machine without customers. We cannot think of hospitals without patients, universities without students, departmental stores without shoppers.
Organisations that stay close to the customer, survive and flourish in a competitive environment. Owners, shareholders and partners, too, have a stake in the continued success of an organisation.
They get appropriate economic returns on their investments. Additionally, they can exert greater influence on the way, the firm deals with environmental pollution, worker safety, product liability, etc.
Competitors’ actions and responses to them are key in determining whether a firm will prosper. Important data about competitors that should be examined from time to time include number of product lines, product differentiation, prices, quality, market share, advertising location, productivity, service, competitive advantages etc. Competition may be local, regional, national or international in scope, and this is constantly changing.
In higher-technology fields, competition can be fierce and turbulent. For example, computer companies have undergone dramatic changes and extremely tough product and price competition, within a rapidly expanding market.
In recent years, deregulation has changed the face of competition in several industries such as banking, airlines, media, telecommunications, passenger car industry etc.
Suppliers of raw materials, equipment, parts and money are a very important part of an organisation’s external environment. Without a continuous flow of supplies, the organisation’s profitability will suffer. The energy crisis in the early 70s have affected the fortunes of many companies which depended heavily on petroleum for running their show.
Generally speaking, organisations must have sources of supply that are dependable in terms of quantity, quality, delivery, and service and that offer suitable prices and terms of purchase. Over-dependence on a single source of supply should also be avoided. The organisation should also be able to get credit on easy terms for its operations.
The environment’s labour supply represents those individuals that may be employed to work for the organisation. All organisations need qualified, trained hands to take care of assigned duties.
This, in turn, is influenced by the economy, employment, socio-cultural factors, technological growth, unions, etc. The influence of unions in regulating supply of labour, when required, is diminishing in recent years due to recessionary trends, global competition, deregulation, disenchantment of members over limited successes achieved by unions, etc.
The task environment contains a number of government agencies that provide services and monitor compliance with laws and regulations at local, state or regional, and national levels. These regulatory bodies have the potential to control, legislate and influence an organisation’s policies and practices.
They also exercise considerable influence on the cost of doing. When doing business globally, the firm must also take into account the procedures to be adopted in line with the stipulations laid down by institutions such as IFC, World Bank, IMF, Environmental Protection Agency, etc.
Components of Internal Environment Organisations also have an internal environment which includes all the elements within the organisation’s boundaries such as human resources, resources, mission, culture, etc.
(b) Discuss the present state of Indian economy and explain the development strategies adopted by the Government of 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)
• Start-up 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.
The development strategies adopted by the Government of India:-
Strategy refers to the methods adopted for attainment of a specific objective. Strategy of development, therefore, deals with the long term policies formulated to attain the stated objectives of the Five-Year Plans.
Strategy refers to the methods adopted for attainment of a specific objective. Strategy of development, therefore, deals with the long term policies formulated to attain the stated objectives of the Five-Year Plans. This strategy also determines the pattern of investment in the economy to achieve the national objectives. In the Indian-context, the planners had to make a proper allocation limited resources among different desired sector in order to reduce the volume of poverty and increase the production and productivity of the economy.
The development strategy adopted during the initial days of planning had three principal components. These are
(i) To build a strong base for long-term growth
(ii) To give priority to industrialization; and
(iii) To lay emphasis on the growth of capital goods industries instead of consumer goods industries.
(iv) To assign priority to Public sector.
(i) Sound Base for Long-term growth:
There was no strategy of development as such in the First Five Year Plan, though it emphasized the agricultural sector including irrigation and power. But the Second Five Year Plan stressed to create a sound base for long term economic development. This long term growth is very much essential to reduce the incidence of poverty in the rural sector. Prof. Mahalanobis, the real architect of the Second Plan argued to achieve a long term growth through rapid industrialization of the economy.
(ii) Top Priority to Industrialization:
Indian economy was primarily an agricultural economy at the eve of independence with a semi-feudal structure. The basic objective was to change this structure of the economy through rapid industrialization. Hence in the Second Plan the strategy was to achieve growth through emphasizing the industrial sector. These industries are required not only to increase the volume of production and productivity but also to employ the thousands of unemployed youths of the country.
iii) Development of Capital-goods industries:
While advocating for industrialization, Prof. Mahalanobis preferred capital-goods industries with both forward and backward linkages to accelerate the pace of economic development. Industries like iron and steel, coal, heavy machinery heavy chemicals had to be promoted for quick industrialization. These industries would provide opportunities for further industrialization by use of their output and by-products. Growth of these heavy basic industries would help in promoting infrastructures like power, transport and communication.
(iv) Role of Public Sector:
The investment strategy assigned importance to the public sector as the huge amount required for the purpose could not be arranged by the private entrepreneurs of the country. Further, the objective of socialistic pattern of society can be achieved through this growth of public sector and the growth of monopoly power in the economy can be controlled. Hence the planners attached importance to the public sector in the investment strategy of the Second Plan.
The strategy of development adopted during the second plan is known as Nehruvian model of development . This model with minor modification continued to shape the development till the New Economic Policy announced in 1991. However, in the process of planning, special poverty alleviation programmes like integrated Rural Development Programme, Minimum Needs programme, National Rural Employment Programme were adopted to combat with rural poverty and uplift the weaker sections of the society.
2(a) Explain the direct and indirect price control measures taken to control the prices in India. State the limitations of these controls.
-> A number of measures have been taken to control the prices. These measures include both indirect and direct controls.
1. Indirect control-:
Indirect controls are exercised mainly through the monetary policy, fiscal policy and commercial policy.
The term monetary policy refers to the policy of central bank of the country of the cost and availability of credit. The rational of using the monetary policy to control prices is that there is a very strong direct relationship between money supply and prices. Ceteris paribus, an increase in money supply results in an increase in prices and vice versa. Hence the price rise is sought to be arrested by monetary contraction and a fall in prices is dealt by monetary expansion.
The reserve bank of India (RBI) has been employing the bank (discount) rate Policy, open market operation variable reserve ratio requirement and various methods of selective (qualitative) credit control.
A policy that should go hand in hand with the monetary policy to make it effective is effective is the fiscal policy. The fiscal policy refers to the policy of the government in respect of public revenue and public expenditure. A fiscal policy can influence the price level by increasing or reducing the purchasing power of the public. Further, it can affect prices by imposing or removing or varying taxes on commodities or services, and by subsidies. Taxes, like excise duties and sales-tax have a profound impact on the prices of commodities.
Commercial policy has also been used a certain extent to stabilize the domestic economy. Prices can be kept under control by increasing the supply by importing goods which are in short supply. This has been done for such commodities as edible oils. Further, the government bans the export of certain item the supply position of which is not comfortable within the economy.
To prevent an unwarranted fall in the prices, the government may sometimes resort to the deliberate export of certain items.
There are other measures, too, such as buffer stock operation which can help avoid wide fluctuation of prices.
2. Direct control-:
The central and state Governments in India have armed themselves with a number of acts to exercise direct control over the functioning of the economy. Laws like the industries (development and regulation) act, the essential Commodities Act, the MRTP Act, the Companies Act, the Imports and exports (control) Act, etc., empower the central government to control production, supply, distribution and price in a large number of cases.
With the emergence of new problems and the aggravation of existing problems, the government has arming itself, justified or not, with more and more power of control. Today, the production, supply, distribution, and price of a number or commodities are subject to government control.
(b) Explain the role played by the MRTP Act to minimise the restrictive and unfair trade practices in India. Is there any replacement of this Act? If yes, explain.
-> The role played by the MRTP Act to minimise the restrictive and unfair trade practices in India:-
1. Authorities under the Act:
The main administrative body under the Act is the MRTP Commission. The MRTP Act lays down provisions detailing the terms of office, conditions of service of members, and the appointment of directors. The Commission is a quasi-judicial body, and investigates complaints into monopolistic and restrictive trade practices.
2. Concentration of Economic Power :
The scheme of the Act to prevent the concentration of economic power is to make compulsory the registration of all enterprises which are of a certain size and those which have more than a certain share of the market. The idea behind registration is that this makes it impossible for registered concerns to make any further expansion without permission from the Central Government.
Under the law as at present, companies (along with their subsidiaries and associates) having assets more than Rs. 100 crores, have to register compulsorily with Government and obtain permission for any substantial expansion of their units. Similarly, units enjoying one-fourth or more of the market share of a product or service, and having assets of Rs. 1 crore or more, are also subject to the same restrictions.
Such registered companies cannot promote new undertakings or amalgamate with others without Government clearance. The rationale behind this is that an economically powerful enterprise, which already controls a major portion of the market, should not, unless there are compelling reasons, be allowed to increase their dominance of the market.
Investment companies have also been covered under the Act by an amendment made in 1984.
Other key concepts in the MRTP Act are restrictive trade practices, monopolistic trade practices and unfair trade practices. In order to control these trade practices, the prime instrument is the registration of agreements relating to restrictive trade practices. Section 33 details 12 particular types of agreement which are, by definition, restrictive such as Resale Price Maintenance, Price Fixing Agreements etc.
Any agreement which contains characteristics of these agreements will have to be registered with the authorities, the rationale behind registration being that companies will not want to lose goodwill-by having such unethical agreements on public display, and so will avoid getting into such agreements.
Only if the company can show that certain good results will follow from restrictive trade practices, which outweigh the harm from the practice, will the restrictive trade practice be allowed. These “good results” are detailed in Section 38.
4. Monopolistic Trade Practices:
The MRTP Act provides that where some undertakings are indulging in monopolistic trade practices, it may refer the matter to the MRTP Commission for investigation.
The MRTP Commission is then supposed to make a thorough investigation into the matter and recommend to the Government what steps should be taken to discontinue the practice. The Government may make any order which, in effect, eliminates the monopolistic trade practice.
The amendment of 1984 gives the Government power to break-up an undertaking and even acquire the broken-up shares.
The Amending Act, which seeks to amend the Monopolies and Restrictive Trade Practices Act, 1969, and the Companies Act, 1956, was brought before the house in pursuance of the recommendations made by the Sachar Committee, to plug certain loopholes in the Act which had been pointed out by the court.
5. ‘Unfair Trade Practices’—A new concept introduced by the MRTP (Amendment) Act, 1984:
Section 36A lists a number of activities, like misleading advertisements etc., as unfair trade practice, into which the MRTP Commission may enquire and, if thought fit, pass suitable orders to stop such practice. The Commission has been given power to issue ‘interim injunctions’ also, in order to make its orders effective.
6. Comments on MRTP Act:
The main objective of the MRTP Act is to protect the interest of the consumers and small business firms so as to make the economic environment of the country more healthy. But the Act should not be a constraint for the growth and diversification of big business.
The Act attempts to amend monopolies in line with the requirements of economic growth and social justice — the twin goals of our planning process. The main criterion for regulating monopolies should be the ultimate interest of the consumer.
If the break-up of large houses into small firms results in loss of efficiency and low quality product, the interest of the consumer is unlikely to be served. Any anti-monopoly legislation in India should take note of this reality. An increase in the number of firms is no guarantee of efficiency.
7. MRTP Amendment Ordinance 1991:
On September 27,1991, the Government amended the MRTP Act, 1969 through a Presidential Ordinance which substantially changed the entire character of the original Act. The Ordinance removed all pre-entry restrictions on the setting up of new undertakings and expansion of the existing ones.
The following are the main changes introduced by the Ordinance:
The Main Amendments to MRTP Act:
1. The Ordinance removes all pre-entry restrictions regarding prior approval by the Government for new undertakings, expansions, amalgamations, mergers, takeovers, appointments of Directors and registration of undertakings, under Section 20 to 26 of the MRTP Act.
2. The Government, however, retains the power to direct division of an undertaking and severance of inter-connection between undertakings if it is of the opinion that the working of an undertaking, is prejudicial to the public interest, or has led or is leading to emergence of any monopolistic or restrictive trade practice.
3. The outlining restrictions on acquisition or transfer of share, have been reverted back to the Companies Act, 1956, as Sections 108-A to 108-1. [These sections were removed from the Companies Act in 1984.]
4. The Ordinance seeks to enlarge the scope of inquiry by the MRTP Commission to enable it to take effective steps to curb and regulate unfair business practices. It also provides for deferent punishment for contravention of the orders passed by the Commission.
5. The definition of ‘goods’ has been enlarged by including issue of shares before allotment. According to the new definition, ‘service’ now covers chit funds and real estate also. This implies that any monopolistic or restrictive practice in respect of real estate (land) or share allotments etc., will now come under Monopoly Commission surveillance.
6. The Government feels that there is no longer any justification for continuing the exemptions available to Government companies and cooperative societies, especially in view of the removal of the pre-entry restrictions under the Act. The Act will accordingly be applicable to Government undertakings and departments also. This would bring the railways, airlines, electricity boards, banks and financial institutions under the purview of the MRTP Commission.
7. However, the Act will not apply to undertakings, which are owned or controlled by a Government company or the Government, and are engaged in the production of arms and ammunition and allied items of defence equipment, defence aircraft and warships, atomic energy, minerals specified in the schedule to the Atomic Energy (Control of production and use) Order 1953, and industrial units under the currency and coinage division, Ministry of Finance, Department of Economic Affairs.
Yes, there is replacement of Act.
MRTP Act repealed and is replaced by the Competition Act, 2002, with effect from September 1, 2009
The Ministry of Corporate Affairs, Government of India has issued a Notification dated 28th August 2009, whereby the most controversial the Monopolies and Restrictive Trade Practices Act, 1969 (“the MRTP Act”) stands repealed and is replaced by the Competition Act, 2002, with effect from September 1, 2009.
As you would recall, the MRTP Act was a grim reminder of the “ licence-quota- permit-raj” of 1970’s & 1980’s. The Act had become redundant post July 1991 when the new economic policy was announced and Chapter III of the MRTP Act dealing with restrictions on M&A activities was made inoperative. The MRTP Commission will continue to handle all the old cases filed prior to September 1, 2009 for a period of 2 years. It will, however, not entertain any new cases from now onwards.
I wish to clarify that the provisions relating to M&A transactions (Sections 5 & 6 of the new Competition Act dealing with regulation of combinations) are yet to be notified. As of now, there is no clarity as to when these provisions would be made effective. It is also not clear whether these new provisions will be applicable in cases where definitive agreements have been signed before the notification but closing of the transaction has not happened.
It would, therefore, be advisable to put a clause in all M&A transaction documents executed from now onwards that the closing of the transaction would be subject to any prior clearance that may be required from the Competition Commission of India under the provisions of the Competition Act, 2002, if applicable.
Details of the transitional provisions are given below:-
Subject Transitional Provisions – the MRTP Act, 1969 to the Competition Act, 2002 w.e.f. September 1, 2009)
The Ministry of Corporate Affairs, Government of India has issued a Notification dated 28th August 2009, whereby the most controversial the Monopolies and Restrictive Trade Practices Act, 1969 (“the MRTP Act”) stands repealed and is replaced by the Competition Act, 2002, with effect from September 1, 2009.
The following transitional provisions would apply as provided in Section 66 of the Competition Act, 2002:-
1. MRTP Commission
a) The MRTP Commission will continue to exercise jurisdiction and power under the repealed MRTP Act in respect of any case or proceeding filed before 1 September 2009, for a period of two years. It will not, however entertain any new case arising under the MRTP Act on or after 1 September 2009.
b) Upon the expiry of the specified two year period, the MRTP Commission shall stand dissolved.
2. Transfer of pending cases
Upon the expiry of two years from 1 September 2009, cases pending before the MRTP Commission will be transferred as follows:-
a) Monopolistic or restrictive trade practice cases: All pending cases pertaining to monopolistic or restrictive trade practices, including cases having an element of unfair trade practice, shall stand transferred to the Competition Appellate Tribunal, which shall adjudicate such cases in accordance with the provisions of the repealed MRTP Act.
b) Unfair trade practice cases: All pending cases relating solely to unfair trade practices shall stand transferred to the National Commission as constituted under the Consumer Protection Act, 1986, which may in turn transfer such cases to a State Commission constituted under the said Act under circumstances it deems appropriate. These cases will be dealt with by them in accordance with the provisions of the Consumer Protection Act.
c) Cases relating to giving false or misleading facts disparaging the goods, services or trade of another person under the MRTP Act: All such pending cases shall be transferred to the Competition Appellate Tribunal which will be dealt in accordance with the provisions of repealed MRTP Act.
3. Investigations/proceedings undertaken by the Director General under the MRTP Act
With effect from 1 September 2009, all pending investigations and proceedings by the Director General relating to:-
a) Monopolistic/ restrictive trade practices will be transferred to the Competition Commission of India (CCI), who may conduct such investigations/ proceedings in any manner it deems appropriate.
b) Unfair trade practices will be transferred to the National Commission under the Consumer Protection) Act 1986.
c) Cases giving false or misleading facts disparaging the goods, services or trade of another person will be transferred to the CCI.
Objectives of the competition Act 2002 are;
1. To protect the interests of the consumers by providing them good products and services at reasonable prices.
2. To promote healthy competition in the Indian market.
3 . To prevent the interests of the smaller companies or prevent the abuse of dominant position in the market.
4. To prevent those practices which have adverse impact on competition in the Indian markets?
5. To ensure freedom of trade in Indian markets.
6. To regulate the operation and activities of combinations (acquisitions, mergers and amalgamation).
3(a) Define Monetary Policy. Discuss features of the Indian 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 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 sit 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) Discuss the role of taxation in the mobilisation of resources 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) Define Consumer as per Consumer Protection Act. Discuss the objectives of the Act. Explain the redressal machinery under the Consumer Protection Act.
-> The Consumer Protection Act was passed in 1986 and it came into force from I 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.
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.
Redressal Machinery under the Act:
The CPA provides for a 3 tier approach in resolving consumer disputes. The District Forum has jurisdiction to entertain complaints where the value of goods / services complained against and the compensation claimed is less than Rs. 5 lakhs, the State Commission for claims exceeding Rs. 5 lakhs but not exceeding Rs. 20 lakhs and the National Commission for claims exceeding Rs. 20 lakhs.
Under the CPA, the State Government has to set up a district Forum in each
district of the State. The Government may establish more than one District
Forum in a district if it deems fit. Each District Forum consists of:-
(a) a person who is, or who has been, or is qualified to be, a District Judge who shall be its President
(b) two other members who shall be persons of ability, integrity and standing and have adequate knowledge or experience of or have shown capacity in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman.
Appointments to the State Commission shall be made by the State Government
on the recommendation of a Selection Committee consisting of the President
of the State Committee, the Secretary – Law Department of the State and the
secretary in charge of Consumer Affairs
Every member of the District Forum holds office for 5 years or 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 District Forum can entertain complaints where the value of goods or services and the compensation, if any, claimed is less than rupees five lakhs. However, in addition to jurisdiction over consumer goods services valued up to Rs. 5 lakhs, the District Forum also may pass orders against traders indulging in unfair trade practices, sale of defective goods or render deficient services provided the turnover of goods or value of services does not exceed rupees five lakhs.
A complaint shall be instituted in the District Forum within the local limits of whose jurisdiction-
(a) The opposite party or the defendant actually and voluntarily resides or carries on business or has a branch office or personally works for gain at the time of institution of the complaint; or
(b) Any one of the opposite parties (where there are more than one) actually and voluntarily resides or carries on business or has a branch office or personally works for gain, at the time of institution of the complaint provided that the other opposite party/parties acquiescence in such institution or the permission of the Forum is obtained in respect of such opposite parties; or
(c) The cause of action arises, wholly or in part.
The Act provides for the establishment of the State Consumer Disputes Redressal Commission by the State Government in the State by notification. Each State Commission shall consist of:-
(a) a person who is or has been a judge of a High Court appointed by State Government (in consultation with the Chief Justice of the High Court ) who shall be its President;
(b) two other members who shall be persons of ability, integrity, and standing and have adequate knowledge or experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom must be a woman.
Every appointment made under this hall is made by the State Government on the recommendation of a Selection Committee consisting of the President of the State Commission, Secretary -Law Department of the State and Secretary in charge of Consumer Affairs in the State.
Every member of the District Forum holds office for 5 years or up to the age of 65 years, whichever is earlier and is not eligible for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government.
The State Commission can entertain complaints where the value of goods or services and the compensation, if any claimed exceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs;
The State Commission also has the jurisdiction to entertain appeal against the orders of any District Forum within the State
The State Commission also has the power to call for the records and appropriate orders in any consumer dispute which is pending before or has been decided by any District Forum within the State if it appears that such District Forum has exercised any power not vested in it by law or has failed to exercise a power rightfully vested in it by law or has acted illegally or with material irregularity.
The Central Government provides for the establishment of the National Consumer Disputes Redressal Commission The National Commission shall consist of:-
(a) a person who is or has been a judge of the Supreme Court, to be appoint by the Central Government (in consultation with the Chief Justice of India ) who be its President;
(b) four other members who shall be persons of ability, integrity and standing and have adequate knowledge or experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman
Appointments shall be by the Central Government on the recommendation of a Selection Committee consisting of a Judge of the Supreme Court to be nominated by the Chief Justice of India, the Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer Affairs in the Government of India.
Every member of the National Commission shall hold office for a term of five years or upto seventy years of age, whichever is earlier and shall not be eligible for reappointment.
The National Commission shall have jurisdiction:-
a. to entertain complaints where the value of the goods or services and the
compensation, if any, claimed exceeds rupees twenty lakhs:
b. to entertain appeals against the orders of any State Commission; and
c. to call for the records and pass appropriate orders in any consumer dispute which is pending before, or has been decided by any State Commission where it appears to the National Commission that such Commission has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with material irregularity.
Complaints may be filed with the District Forum by:-
1. The consumer to whom such goods are sold or delivered or agreed to be
sold or delivered or such service provided or agreed to be provided
2. Any recognised consumer association, whether the consumer to whom goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided, is a member of such association or not
3. one or more consumers, where there are numerous consumers having the same interest with the permission of the District Forum, on behalf of or for the benefit of, all consumers so interested
4. The Central or the State Government.
On receipt of a complaint, a copy of the complaint is to be referred to the opposite party, directing him to give his version of the case within 30 days. This period may be extended by another 15 days. If the opposite party admits the allegations contained in the complaint, the complaint will be decided on the basis of materials on the record. Where the opposite party denies or disputes the allegations or omits or fails to take any action to represent his case within the time provided, the dispute will be settled in the following manner:-
I. In case of dispute relating to any goods: Where the complaint alleges a defect in the goods which cannot be determined without proper analysis or test of the goods, a sample of the goods shall be obtained from the complainant, sealed and authenticated in the manner prescribed for referring to the appropriate laboratory for the purpose of any analysis or test whichever may be necessary, so as to find out whether such goods suffer from any other defect. The appropriate laboratory’ would be required to report its finding to the referring authority, i.e. the District Forum or the State Commission within a period of forty- five days from the receipt of the reference or within such extended period as may be granted by these agencies.
Appropriate laboratory means a laboratory or organisation:-
(i) recognised by the Central Government;
(ii) recognised by a State Government, subject to such guidelines as may be prescribed by the Central Government
(iii) any such laboratory or organisation established by or under any law for the time being in force, which is maintained, financed or aided by the Central Government or a State Government for carrying out analysis or test of any goods with a view to determining whether such goods suffer from any defect.
The District Forum / State Commission may require the complainant to deposit with it such amount as may be specified towards payment of fees to the appropriate laboratory for carrying out the tests. On receipt of the report, a copy thereof is to be sent by District Forum/State Commission to the opposite party along with its own remarks.
In case any of the parties disputes the correctness of the methods of analysis/test adopted by the appropriate laboratory, the concerned party will be required to submit his objections in writing in regard to the report. After giving both the parties a reasonable opportunity of being heard and to present their objections, if any, the District Forum/Slate Commission shall pass appropriate orders.
II. In case of dispute relating to goods not requiring testing or analysis or relating to services: Where the opposite party denies or disputes the allegations contained in the complaint within the time given by the District Forum / State Commission, it shall dispose of the complaint on the basis of evidence tendered by the parties. In case of failure by the opposite party to represent his case within the prescribed time, the complaint shall be disposed of on the basis of evidence tendered by the complainant.
(b) Define Foreign Exchange. Why is it so necessary for a country? Critically evaluate the relevance of FEMA.
-> Foreign exchange is the conversion of one country’s currency into another. In a free economy, a country’s currency is valued according to the laws of supply and demand . In other words, a currency’s value can be pegged to another country’s currency, such as the U.S. dollar, or even to a basket of currencies. A country’s currency value may also be set by the country’s government.
The value of any particular currency is determined by market forces based on trade , investment, tourism, and geo-political risk . Every time a tourist visits a country, for example, they must pay for goods and services using the currency of the host country. Therefore, a tourist must exchange the currency of his or her home country for the local currency. Currency exchange of this kind is one of the demand factors for a particular currency.
Another important factor of demand occurs when a foreign company seeks to do business with another in a specific country. Usually, the foreign company will have to pay in the local company’s currency. At other times, it may be desirable for an investor from one country to invest in another, and that investment would have to be made in the local currency as well. All of these requirements produce a need for foreign exchange and contribute to the vast size of foreign exchange markets .
Foreign exchange is handled globally between banks and all transactions fall under the auspice of the Bank for International Settlements (BIS).
Inflation can have a major effect on the value of a country’s currency and its foreign exchange rates with other currencies. While it is just one factor among many, inflation is more likely to have a significant negative effect on a currency’s value and foreign exchange rate. A very low rate of inflation does not guarantee a favourable exchange rate, but an extremely high inflation rate is very likely to have a negative impact.
Inflation is also closely related to interest rates , which can influence exchange rates. The interrelationship between interest rates and inflation is complex and often difficult for currency-issuing countries to manage. Low interest rates spur consumer spending and economic growth , and generally positive influences on currency value. If consumer spending increases and demand grows to exceed supply, inflation may ensue, which is not necessarily a bad outcome. However, low interest rates don’t usually attract foreign investment the way higher interest rates can. Higher interest rates attract foreign investment , which is likely to increase demand for a country’s currency.
Foreign Exchange, usually known as Forex market, helps any country in transactions of another country and thus it holds greater importance in trading, payments, and receipts from the service providers as well as citizens because every country has different currency with different base values.
If you are a beginner in the world of forex trading or investing then you need to train and introduce yourself in a better way because this market is completely different than national markets and trading system. You can learn everything about the foreign exchange market on the internet. Like, you can get yourself registered at forex forum where you will not only learn about the important aspects but can also get the info of the daily market rates. Given below are some major benefits of the forex market for any country:
The base of international trade
Without the forex market, the exporter won’t be able to trade their goods and currencies as when a product is exported then the payments from the importing country are done in their national currency and obviously, that currency can’t be used by the exporters. Also, it is not possible for the importers to pay in the currency of foreign countries as all they have is their national currency. These necessities are fulfilled through the forex market which converts the currencies at a global rate and conversion value. It not only helps the traders in their global business efficiently and also common people can send money to their family members and friends who are living in a foreign country.
Hedging Function – This is one of the most important functions of the foreign exchange market for the businessmen and investors who deal on a global level. Many times, when the payments are made by the services or goods receiver, it might not be the same when it reaches to the goods or service provider because of the continuous changes in the values of the currencies and it can also cause loss to any of the parties. So, in order to eliminate these losses, people use the function of hedging which is a risk management strategy. It offsets the probability of fluctuations which might cause losses in the investments, payments, receipts, and other transactions.
Controls inflation – The management of a foreign exchange market is regulated by the central bank of that country. For this, central banks have to hold large reserves to balance the net amount that occurs in the foreign receipts and payments which eventually help in balancing a healthy economy of any country.
In any condition, if the economy starts falling then the central bank of any country decreases the interest rates as an illusion to make domestic currency unattractive in front of foreign countries’ investors. The bank of the country will also try to buy more reserve currency by selling its weak domestic currency. As an effect to this step, there will be a rise in the competition of the exports which will eventually raise the liquidity of the country and expenditures will be encouraged with low-interest rates. Thus, in this way, the foreign exchange market helps any country to shift itself into an economically strong and growing area.
The relevance of FEMA:-
FEMA was to help facilitate external trade and payments in India. It was also meant to help orderly development and maintenance of foreign exchange market in India. It defines the procedures, formalities, dealings of all foreign exchange transactions in India. These transactions are mainly classified under two categories — Current Account Transactions and Capital Account Transactions.
FEMA is applicable to all parts of India and was primarily formulated to utilize the foreign exchange resources in efficient manner. It is also equally applicable to the offices and agencies which are located outside India however is managed or owned by an Indian Citizen. FEMA head office is known as Enforcement Directorate and is situated in heart of city of Delhi.
Applicability of FEMA Act:
· exports of any foods and services from India to outside, foreign currency, that is any currency other than Indian currency,
- foreign exchange,
- foreign security,
· Imports of goods and services from outside India to India,
· securities as defined in Public Debt Act 1994,
· banking, financial and insurance services,
· sale, purchase and exchange of any kind (i.e. Transfer),
· any overseas company that is owned 60% or more by an NRI (Non Resident Indian) and
· any citizen of India, residing in the country or outside (NRI)
Major Provisions of FEMA Act 1999:
Here are major provisions that are part of FEMA (1999) –
· Free transactions on current account subject to reasonable restrictions that may be imposed.
- RBI controls over capital account transactions.
· Control over realization of export proceeds.
· Dealing in foreign exchange through authorized persons like authorized dealer or money changer etc.
· Appeal provision including Special Director (Appeals)
- Directorate of enforcement
· Any person can sell or withdraw foreign exchange, without any prior permission from RBI and then can inform RBI later.
· Enforcement Directorate will be more investigative in nature
· FEMA recognized the possibility of Capital Account convertibility.
- The violation of FEMA is a civil offence.
· FEMA is more concerned with the management rather than regulations or control.
· FEMA is regulatory mechanism that enables RBI and Central Government to pass regulations and rules relating to foreign exchange in tune with foreign trade policy of India.
As per Section 3 of FEMA, all the current account transactions are free; however central government at any time could impose reasonable instructions by issuing special rules. As per Section 6 of FEMA, Capital Account Transactions are permitted only to the extent as specified by RBI in its issued regulations. As per Section 10 of FEMA, RBI have controlling role in its management however RBI cannot directly handle foreign exchange transaction and must authorize a person to deal with it as per directions set by RBI. FEMA also have provisions of various enforcement, penalties, adjudication and appeals in this area.
5(a) Analyse the structural reforms in the Indian economy 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:
The fundamental feature of the new economic reforms in India was that it offered freedom to the entrepreneurs to establish any trade or industry or business venture. Economic liberalization means freedom to make economic decisions.
In other words, the producers, owners or consumers of the factors of production are free to take their decisions in order to promote their interests. The Government of India announced the liberalization policy in the:
- Industrial sector
- Foreign trade
- Exchange rate
- Banking and financial sector
· The fiscal sector, etc.
Further, the government also freed the capital markets and opened them to private enterprises. Also, it permitted foreign equity participation of up to 51 percent or more.
Additionally, the government de-licensed the industrial sector and abolished the Monopolies and Restrictive Trade Practices (MRTP) Act.
Further, the government also allowed foreign investments to enter the infrastructure sector. Finally, the policy amended the Foreign Exchange Regulation Act (FERA) and enacted the Foreign Exchange Management Act (FEMA).
Extension of Privatization
Another important feature of the new economic reforms in India was the extension of privatization in the country. In simple words, privatization is a process which helps to reduce the role of the State or the public sector in the economic activity of a country.
The primary objective of privatization is improving the overall performance of the public sector undertakings. This is especially beneficial to the taxpayers as it reduces the financial burden on them.
As a part of privatization, the government gave 11 industries to the private sector. These were out of the 17 industries reserved for the public sector. Further, the government offered better opportunities for investment to the foreign private investors and extended the scope of privatization.
Globalization of the Economy
The new economic reforms in India made our country’s economy outwardly oriented. Globalization is basically a process of increasing the economic integration and growing economic interdependence between different countries in the world economy.
The processes of economic liberalization and privatization of the public sector enterprises eventually led to the globalization of the Indian economy. Globalization is the flow of capital, commodities, technology, and labour across national boundaries. As a result of globalization, both domestic and world markets started governing the economic activities in India.
The impact of structural reforms on income generation and poverty alleviation in India: Poverty is defined as the state of being poor and not having access to adequate necessities. Poverty is a multifaceted concept, which also includes social, economic, and political elements. It is a social condition wherein human beings do not have enough financial means to meet the most basic standards of life that is acceptable by the society. Individuals suffering from poverty do not have the means to pay for basic needs of daily life such as food, clothes and shelter. Those who suffer from poverty also do not have access to social tools of well-being such as education and health requirements. The direct effects of poverty are hunger, malnutrition and susceptibility to diseases. These have been identified as huge problems across the world. It affects the individuals in a socio-psychological manner. This condition disables them from being able to afford simple recreational activities and getting progressively marginalized in the society. There can be various different causes of poverty. These may be categorized as follows:
1. Demographic – One of the biggest reasons of poverty in India is over population. India is a highly populated country. The growth of population in India is way beyond the growth in economy and the gross result is such that the poverty figures have remained more or less constant. As far as the rural areas are concerned, the basic size of the family is bigger which eventually leads to lowering the per capita income values and consequently lowering of standard of living of an individual.
2. Economic – There are many economic reasons behind poverty. These are:
a. Poor Agricultural Infrastructure – Agriculture is the backbone of the economy in India. India is an agricultural country. The only area where India lacks is the agricultural infrastructure such as outdated and old farming practices; obsolete technology and lack of formal agricultural education amongst the farmers. The income is too less for a farmer to meet the economic needs of his/ her family.
b. Unequal distribution of assets – The Upper and middle income groups in India see a faster increase in earnings as compared to the lower income groups. The scenario in India is such that 80% wealth in the country is controlled by just 20% of the population.
c. Unemployment – Unemployment is one factor that hugely increases and multiplies the effect of poverty by 10 times. Almost, 77% of families do not have a regular source of income in India.
3. Social – The various social issues that contribute largely to poverty are:
a. Education and illiteracy – Lack of education and growing illiteracy is majorly responsible for poverty in India. Due to the increase in the illiteracy rates, unemployment rises and resultantly poverty rates increase.
b. Outdated Social Customs – Social customs like caste system cause segregation and marginalization of certain sections of the society also play a major role in spreading poverty.
c. Gender inequality– India is a country where till today there is discrimination on the basis of gender. The weak status attached with women is hugely responsible for the poor condition of women.
d. Corruption – Although the government promises to make considerable efforts every now and then in order to make India corruption free but the reality is very different. Corruption is deep rooted in India. It is immensely difficult to make India corruption free. Due to the rise in the rates of corruption every hour, poverty is increasing simultaneously.
4. Individual – Individual lack of efforts also become a huge reason behind increase in the poverty rates. There are people who are lazy and do not wish to work hard. Such people suffer from poverty due to lack of personal efforts.
Effects of Poverty:
Poverty is like a disease that has devastating effects on an individual and his family. The major effects are as follows:
1. Effect on Health – The biggest effect of poverty is poor health. Those who suffer from poverty do not have access to enough food, adequate clothing, medical facilities, and clean surroundings. The lack of all these basic facilities leads to poor health. Such individuals and their families suffer from malnutrition. Further, when these people get ill, they do not have enough money to visit a doctor and buy medicines. Many such poor people die on a daily basis due to prolonged illness etc. Further, these people are unable to afford a clean house for themselves, which also makes them prone to diseases.
2. Effects on Society – The effects of poverty on society are as follows:
a. Violence and crime rate –Occurrence of violence and crime have been found to be geographically coincident. Due to unemployment and marginalization, the poor people often indulge in wrong practices such as prostitution, theft and criminal activities such as chain snatching etc.
b. Homelessness – Poor people are usually homeless. They sleep on the road sides at night. These makes the entire scenario vey unsafe for women and children.
c. Stress – Due to lack of money, poor people suffer from a lot of stress which leads to a reduction in the productivity of individuals, thereby making poor people poorer.
d. Child labour – Poverty forces poor people to send their children to work instead of sending them to schools. This is because the families fail to bear the burden of their child/ children. Among the poor families, children start earning at an average age of 5 years only.
e. Terrorism – Youngsters from poor families are usually targeted and involved in terrorist activities. These people are offered huge amount of money in lieu of which they are assigned with a destructive task of terrorism.
3. Effect on Economy –Poverty is a directly proportional to the success of the economy. The number of people living under the poverty is reflective of how powerful is the economy.
The measures that should be taken in order to fight the demon of poverty in India are follows:
1. A check should be maintained on the population rate in India.
2. The employment opportunities must be increased by inviting more foreign investments into the country.
3. A check should be maintained upon the gap that remains in the distribution of wealth.
4. Few Indian states are more poverty stricken than the others like Odisha and the North Eastern states. Government should work in order to encourage investment in these states by offering special concessions on taxes.
5. Primary needs of people such as food, shelter and clothing should be taken care of by the government especially for those who are unable to afford these facilities.
(b) Discuss the features and problems of globalisation. Analyse the impact of globalisation on the Indian economy .
-> Globalisation is the concept of securing real social, economic, political and cultural transformation of the world into a real global community. Globalisation involves a conscious and active process of expanding business and trade across the borders of all the states.
It stands for expanding cross-border facilities and linkages leading to an integration of economic interests and lives of the people living in all parts of the world. The objective of making the world a truly interrelated, inter-dependent, developed global community governs the process of Globalisation.
In the words of Baylis and Smith, “Globalisation is the process whereby social relations acquire relatively distance-less and borderless qualities.”
In simple words, Globalisation means securing of socio-economic integration and development of all the people of the world through a free flow of goods, services, information, knowledge and people across the borders of all states.
Features of Globalisation:
It stands for the freedom of the entrepreneurs to establish any industry or trade or business venture, within their own countries or abroad.
2. Free trade:
It stands for free flow of trade relations among all the nations. It stands for keeping business and trade away from excessive and rigid regulatory and protective rules and regulations.
3. Globalisation of Economic Activity:
Economic activities are being governed both by the domestic markets and also the world market. It stands for the process of integrating the domestic economies with the world economy.
4. Liberalisation of Import-Export System:
It stands for liberalization of the import-export activity involving a free flow of goods and services across borders.
Globalisation stands for keeping the state away from ownership of means of production and distribution and letting the free flow of industrial, trade and economic activity among the people and their corporations.
6. Increased Collaborations:
Encouraging the process of collaborations among the entrepreneurs with a view to secure rapid modernisation, development and technological advancement, is a feature of Globalisation.
7. Economic Reforms:
Encouraging fiscal and financial reforms with a view to give strength to free trade, free enterprise and market forces of the world. Globalisation stands for integration and democratisation of the world’s culture, economy and infrastructure through global investments.
Problems of Globalisation:-
The general complaint about globalization is that it has made the rich richer while making the non-rich poorer. “It is wonderful for managers, owners and investors, but hell on workers and nature.”
1. Globalization is supposed to be about free trade where all barriers are eliminated but there are still many barriers. For instance161 countries have value added taxes (VATs) on imports which are as high as 21.6% in Europe. The U.S. does not have VAT.
2. The biggest problem for developed countries is that jobs are lost and transferred to lower cost countries.” According to conservative estimates by Robert Scott of the Economic Policy Institute, granting China most favoured nation status drained away 3.2 million jobs, including 2.4 million manufacturing jobs. He pegs the net losses due to our trade deficit with Japan ($78.3 billion in 2013) at 896,000 jobs, as well as an additional 682,900 jobs from the Mexico –U.S. trade-deficit run-up from 1994 through 2010.”
3. Workers in developed countries like the US face pay-cut demands from employers who threaten to export jobs. This has created a culture of fear for many middle class workers who have little leverage in this global game
4. Large multi-national corporations have the ability to exploit tax havens in other countries to avoid paying taxes.
5. Multinational corporations are accused of social injustice, unfair working conditions (including slave labour wages, living and working conditions), as well as lack of concern for environment, mismanagement of natural resources, and ecological damage.
6. Multinational corporations, which were previously restricted to commercial activities, are increasingly influencing political decisions. Many think there is a threat of corporations ruling the world because they are gaining power, due to globalization.
7. Building products overseas in countries like China puts our technologies at risk of being copied or stolen, which is in fact happening rapidly
8. The anti-globalists also claim that globalization is not working for the majority of the world. “During the most recent period of rapid growth in global trade and investment, 1960 to 1998, inequality worsened both internationally and within countries. The UN Development Program reports that the richest 20 percent of the world’s population consume 86 percent of the world’s resources while the poorest 80 percent consume just 14 percent. “
9. Some experts think that globalization is also leading to the incursion of communicable diseases. Deadly diseases like HIV/AIDS are being spread by travellers to the remotest corners of the globe.
10. Globalization has led to exploitation of labour. Prisoners and child workers are used to work in inhumane conditions. Safety standards are ignored to produce cheap goods. There is also an increase in human trafficking.
11. Social welfare schemes or “safety nets” are under great pressure in developed countries because of deficits, job losses, and other economic ramifications of globalization.
Globalization is an economic tsunami that is sweeping the planet. We can’t stop it but there are many things we can do to slow it down and make it more equitable.
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.