Business Environment For Students

BUSINESS ENVIRONMENT: Environment of a business means the external forces influencing the business decisions. They can be forces of economic, social, political and technological factors. These factors are outside the control of the business. The business can do little to change them.

TYPES:

6. INTERNAL ENVIRONMENT: a. b. c. d. e.

Management Manpower Machines Material Money

2. EXTERNAL ENVIRONMENT A. MICRO ENVIRONMENT B. MACRO ENVIRONMENT

A. MICRO ENVIRONMENT: The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers.

FACTORS AFFECTING MICRO ENVIRONMENT:

1

ECONOMIC CONDITIONS: Economic condition is the set of economic factors that have great influence on business organization. Those economic factors are:-

A.

GROSS DOMESTIC PRODUCT (GDP): GDP – or Gross Domestic Product – is a measure of adding together the total value the overall production of goods & services within a country in a year. The GDP shows how well a particular country is doing economically.

GDP can also be measured by income by considering the factors producing the output – the capital and labour – or by expenditure by government, individuals, and business on that output. GDP growth rate: The change in GDP from one year to the next (or from quarter to quarter) can be given as a percentage. This is called the GDP growth rate. Formula for calculating GDP = C+G+I+NX C = All private consumptions. G = All Govt. spending. I = Investments. NX = Country’s Net Exports (total exports – total imports)

B.

PER CAPITA INCOME: Per capita Income means how much an individual earns, of the yearly income that is generated in the country through productive activities. It means the share of each individual when the income from the productive activities is divided equally among the citizens. Per capita income is reported in units of currency. Per capita income reflects the gross national product of a country. Per capita income is also a measure of the wealth of a population of a nation when compared with other countries. It is expressed in terms of

commonly used international currency such as Euro, Dollars because these currencies are widely known. PER CAPITA INCOME IN INDIA: India's per capita income is found by the Atlas method and by employing official exchange rates for conversion. Further, this Atlas method of calculating the per capita income of India is not determined by using purchasing power parity, which essentially adjusts exchange rates for purchasing power of currencies. Economist have been giving considerable importance to the performance of states vis a vis each other in terms of per capita income. It has been observed that those states that were more open and better adapted to economic liberalization have overall shown faster rate of growth. History of India Per Capita GDP: In In In In

2002-03 2003-04 2004-05 2008-09

C.

the Per the Per the Per the Per

Capita Income in India Capita Income in India Capita Income in India Capita Income in India

was Rs was Rs was Rs was Rs

19040. 20989. 23241. 37490.

FOREIGN EXCHANGE RESERVES:

Definition Total of a country's gold holdings and convertible foreign currencies held in its banks, plus special drawing rights (SDR) and exchange reserve balances with the International Monetary Fund (IMF). Liquid assets held by a central bank or government of a country, for use in intervening in the foreign exchange market. Deposits of a foreign currency held by a central bank. Holding the currencies of other countries as assets allow governments to keep their currencies stable and reduce the effect of economic shocks. This includes gold or convertible foreign currencies, e.g. US Dollars for countries other than the United States, and DM for countries other than Germany. This also includes government securities issued in the above currencies.

D.

MEANING AND SCOPE OF FOREIGN TRADE:

Trade between two or more nations is called foreign trade or international trade. This involves the exchange of goods and services between the citizens of two nations. When the citizens of one nation exchange goods and services with the citizens of another nation, it is called foreign trade; for example, India's trade with USA, Japan, France and Pakistan. Foreign trade is also known as external trade. Foreign trade transactions are classified under three categories: ◊ ◊

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Import Trade Export Trade Entrepot Trade.

What is Entrepot trade? An entrepôt (from the French "warehouse") is a trading post where merchandise can be imported and exported without paying import duties, often at a profit. SCOPE OF FOREIGN TRADE:

The aim of foreign trade is to increase production and to raise the standard of living of the people. Foreign trade helps citizens of one nation to consume and enjoy the possession of goods produced in some other nation. There is a need of foreign trade due to the following reasons:

a)

Uneven Distribution of Natural Resources: Natural resources of the world are not evenly divided amongst the nations of the world. Different countries of the world have different amount of natural resources and they differ with each other in regard to climate, minerals and other factors. Some countries can produce more of sugar like Cuba, some can produce more of cotton like Egypt, while there are some others which can produce more of wheat like Argentina. But all these countries need sugar, cotton and wheat. So they have to depend upon one another for the exchange of their surpluses with the goods are in short in their country and hence the need for foreign trade is natural.

b)

Division of Labour and Specialization: Due to uneven distribution of natural resources, some countries are more suitable placed to produce some goods more economically than other countries. But they are geographically at a disadvantageous position to produce other goods. They specialize in the production of such goods in which they have some natural advantage in the form of availability of raw material, labour, technical know-how, climatic conditions, etc., and get other goods in exchange for these goods from other countries.

c)

Differences in Economic Growth Rate: There are many differences in the economic growth rates of different countries. Some countries are developed, some are developing, while there are some other countries which are under-developed; these under- developed and developing countries have to depend upon developed ones for financial help, which ultimately encourages foreign trade.

d)

Theory of Comparative Cost: According to the theory of comparative cost each country should concentrate on the production of those goods for which it is best suited, taking into account its natural resources, climate, labour supply, technical know-how and the level of development. Each country specializes in the production of those goods which it can produce at the lowest cost as compared to other countries which leads to international specialization and division of labour. This reduces the cost of production all over the world and improves the standard of living of the people in various countries. Hence the theory of comparative cost encourages foreign trade.

E.

CAPITAL MARKET Definition: Financial market that works as a center for demand and supply of (primarily) long-term debt and equity capital. It channels the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and investors through a variety of financial instruments (bonds, notes, stocks) called securities. A capital market is not a compact unit, but a highly decentralized system made up of three major parts: (1) stock market, (2) bond market, and (3) money market. It also works as an exchange for trading existing claims on capital in the form of shares. Types of capital market

 

Primary Market: Deals in newly launched shares in the market. Secondary Market: Deals in existing shares in the market.

The market for long-term funds where securities such as common stock, preferred stock, and bonds are traded. Both the primary market for new issues and the secondary market for existing securities are part of the capital market.

2

ECONOMIC POLICIES:

All business activities and operations are directly influenced by the economic policies framed by the government from time to time. The actions taken by a government to influence its economy is called Economic Policies.

TYPES OF POLICIES:

A.

INDUSTRIAL POLICY: Industrial Policies are the traditional government policies intended to provide a favorable economic climate for the development of industry in general or specific industrial sectors. Government-sponsored economic program in which the public and private sectors coordinate their efforts to develop new technologies and industries. Definition: “All the principles, policies, rules, regulations and procedures of the government which direct & control the industrial enterprises are called the Industrial Policies.”

B.

FISCAL POLICY: The government's decisions about the amount of money it spends and collects in taxes to achieve full employment. Definition: “Fiscal policy involves the Government changing the levels of Taxation and Govt. Spending in order to influence Aggregate Demand (AD) and therefore the level of economic activity.”

The purpose of Fiscal Policy: ◊

◊ ◊

C.

Reduce the rate of inflation Stimulate economic growth in a period of a recession Basically, fiscal policy aims to stabilize economic growth, avoiding the boom

MONETARY POLICY: The strategy of influencing movements of the money supply and interest rates to affect output and inflation. Aim of this policy is to smooth the supply of credits to the business to boosts Trade & Industry in India. TYPES OF MONETARY POLICY: 1). Tight Monetary Policy: Is also called concretionary monetary policy, tends to curb inflation by contracting the money supply. 2). Easy Monetary Policy: Is also called expansionary monetary policy, tends to encourage growth by expanding the money supply.

D.

FOREIGN INVESTMENT POLICY:

This policy regulates the inflow of foreign investments in various industrial sectors of the country. The present policy permits foreign investors to collaborate with local partners as well as establish wholly owned subsidiaries. India’s present foreign investment policy facilitates easy entry of foreign capital in most areas subject to specific limits on extent of foreign ownership. India’s foreign investment policy has progressed in spite of political opposition and lobbyist pressures. This is primarily due to favorable dispositions of key decision-makers towards foreign investment.

E). EXPORT & IMPORT POLICY (EXIM Policy): EXIM Policy in India aims to increase or maximize the exports and reducing the imports and to bridge a gap between Exports and Imports. No country wants that its imports exceeds its export because more imports means more funds going out of country which will have an adverse effect on the economy of that country. 3. ECONOMIC SYSTEM: WORLD ECONOMY IS DIVIDED INTO THREE TYPES:

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Capitalist Economy: Also called as the free market economy. It’s an economic activity, where the means of production are privately owned. Here in such form of economy there is no Government interference.

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Socialist Economy: In case of a socialist economy, the means of production and distribution are made by the public authority or the Government. It aims at achieving a better distribution of income and wealth.

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Mixed Economy: Mixed Economy can be defined as a form of organization where the elements of both capitalist economy and socialist economy are found. This economy is adopted by India where there is Existence of both Public and Private sectors working together.

MACRO ENVIRONMENT Major external and uncontrollable factors that influence an organization's decision making, and affect its performance and strategies. Factors that influence a company's or product's development but that are outside of the company's control. For example, the macro environment could include competitors, changes in interest rates, changes in cultural tastes, or government regulations. THERE ARE SIX MAJOR MACRO ENVIRONMENT FORCES: 1). Cultural/Social Environment 2). Demographic Environment 3). Economic Environment 4). Natural Environment 5). Political Environment 6). Technological Environment 1). CULTURAL/SOCIAL ENVIRONMENT: The cultural/Social environment includes institutions and other forces that affect the basic values, behaviors, and preferences of the society-all of which have an effect on consumer’s marketing decisions. Along with "economics", "culture" is another so called "environmental uncontrollable" which marketers must consider. In fact, it is a very important one as it is so easy to misread a situation and take decisions which subsequently can prove disastrous. FACTORS:

a) b) c) d) e) f)

Customs Traditions Values Beliefs Poverty Literacy

2). DEMOGRAPHIC ENVIRONMENT: It includes the study of human populations in terms of size, density, location, age, sex, race, occupation, and other statistical information. The main demographic force that marketers monitor is population, because people make up markets. Marketers are keenly interested in the size and growth rate of population in cities, regions; and nations; age distribution; educational levels; household patterns; and regional characteristics and movements. 3). ECONOMIC ENVIRONMENT: The economic environment affects the demand structure of any industry/ product. In order to assess the impact of these forces, it is necessary that a marketer examines the following factors in a greater detail: A. Gross National Product: The Gross National Product (GNP) is the total monetary value of all final goods and services produced for consumption in society during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country. The GNP growth rate is one of the most important ECONOMIC INDICATORS of a country’s health. B. Balance of Payments: The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year. Categories of BOP:

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Current Account: The current account is used to mark the inflow and outflow of goods and services into a country.

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Capital Account It is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.

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Financial Account: In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented. C. Industry Life Cycle: A concept relating to the different stages an industry will go through, from the first product entry to its eventual decline. The four stages that make up the industry life-cycle are:

1. INTRODUCTION 2. GROWTH 3. MATURITY

4. DECLINE

D. Trends in the prices of goods and services:

1.

Inflationary trends: Inflationary trends is basically the constant and substantial rise in general levels of prices in relation to an increase in the volume of wages and resulting in the loss of value of the currency.

2.

Deflationary trends: The term refers to a fall in prices (despite no change in product quality or quantity) and is the opposite of inflation. But like inflation, deflation can have a devastating impact on individual pocketbooks and the broader economy. E. Fiscal Policies: A government policy for dealing with the budget (especially with taxation and borrowing.) fiscal policy -- The government's choice of tax and spending programs, which influences the amount and maturity of government debt as well as the level, composition, and distribution of national output and income. Many summary indicators of fiscal policy exist. Some, such as the budget surplus or deficit, are narrowly budgetary. Others attempt to reflect aspects of how fiscal policy affects the economy. For example, a decrease in the standardized-budget surplus (or increase in the standardized-budget deficit) measures the short-term stimulus of demand that results from higher spending or lower taxes. The fiscal gap measures whether current fiscal policy implies a budget that is close enough to balance to be sustainable over the long term. The fiscal gap represents the amount by which taxes would have to be raised, or spending cut, to keep the ratio of debt to GDP from rising forever. Other important measures of fiscal policy include the ratios of total taxes and total spending to GDP. Another definition... The government's decisions about the amount of money it spends and collects in taxes to achieve full employment and non-inflationary economy. Definition: Fiscal policy involves the Government changing the levels of Taxation and Govt. Spending in order to influence Aggregate Demand (AD) and therefore the level of economic activity. The purpose of Fiscal Policy: ◊

Reduce the rate of inflation, (UK government has a target of 2%)

◊

Stimulate economic growth in a period of a recession.

◊

Basically, fiscal policy aims to stabilise economic growth, avoiding the boom and bust economic cycle.

4). NATURAL ENVIRONMENT: ◊

Natural Environment involves all the natural resources, such as raw materials or energy sources, needed by or affected by marketers and marketing activities.

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Natural environments are those environments on Earth that includes nature, and is not primarily or solely human creation.

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It exists in contrast to the phrase, the built environment.

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The difficulty with the term natural environment and any definition is that all natural environments have been directly or indirectly influenced by humans at some period in time.

5). POLITICAL ENVIRONMENT: It includes:>> All laws >> Government agencies >> Nation’s governmental system >> Level of political stability and >> Recent political developments that influence or restrict individuals or organizations in the society. It comprises political stability and the policies of the government. Ideological inclination of political parties, personal interest on politicians, influence of party forums etc. create political environment. For example, Bangalore established itself as the most important IT centre of India mainly because of political support. 6). TECHNOLOGICAL ENVIRONMENT: It includes the level of technology available in a country. It also indicates the pace of research and development and progress made in introducing modern technology in production. Technology provides capital intensive but cost effective alternative to traditional labor intensive methods. In a competitive business environment technology is the key to development. The success of many organizations depends on how well they identify and respond to external technological changes. POSITIVE EFFECTS OF TECHNOLOGICAL ENVIRONMENT: >> Increase productivity. >> Production of new & better goods of standardized quality >> Effective use of country’s resources >> Basis of fast growth of the business.

BUSINESS RISK:

Probability or threat of a damage, injury, liability, loss, or other negative occurrence, caused by external or internal vulnerabilities, and which may be neutralized through pre-mediated action. RISK ASSESSMENT: As a component of risk analysis, it involves identification, evaluation, and estimation of the levels of risks involved in a situation, their comparison against benchmarks or standards, and determination of an acceptable level of risk.

TYPES OF BUSINESS RISK: 1. Country Risk. 2. Political Risk. 3. Legal Risk. 4. Regulatory Risk. (Regulatory design) 5. Social Risk. 6. Natural Risk

COUNTRY RISK The potential volatility of foreign stocks or the potential default of foreign government bonds, due to political and/or financial events in the given country. What Does Country Risk Mean? A collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked up or frozen by government action. Country risk varies from one country to the next. Some countries have high enough risk to discourage much foreign investment. Country risk can reduce the expected return on an investment and must be taken into consideration whenever investing abroad. Some country risk does not have an effective hedge. Other risk, such as exchange rate risk, can be protected against with a marginal loss of profit potential. POLITICAL RISK The risk of loss when investing in a given country caused by changes in a country's political structure or policies, such as tax laws, tariffs, The analysis considers four familiar variables or indicators that typically form the basis of macrolevel political risk assessment: ◊

War and external threats, including conflicts over issues of sovereignty and border disputes

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Civil and labour unrest, including strikes, protests and demonstrations against the government

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Internal violence, as evidenced by bombings, assassinations, kidnappings etc.

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Regime stability based on the probability of a change in leadership through either a regularly scheduled election.

METHODS OF HANDLING BUSINESS RISKS Risks in any business are inevitable and they cannot be eliminated completely. But an entrepreneur can control and minimise their negative consequences by adopting a suitable risk management strategy. VARIOUS METHODS THAT MAY BE USED FOR HANDLING BUSINESS RISKS ARE AS FOLLOWS:◊ An entrepreneur can avoid some of the risks by analysing the potential results (losses or gains) of the activity that gives rise to those risks. ◊ The risk is worth taking if the outcome ultimately benefits the firm. Otherwise, such an action should be avoided as far as possible. ◊

The risk may be avoided by substituting the risky process with a relatively safer alternative.

◊

If the risk is unavoidable, try to control and minimise the losses arising from the risk.

THE MAIN TECHNIQUES THAT CAN BE EMPLOYED BY A FIRM ARE AS FOLLOWS:◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊

Scientific forecasting Marketing research of future economic conditions Make appropriate plans in advance Aware of likely opportunities and threats to the business Continuous technological research and development Develop new products before the present products become obsolete. Credit screening of the customers Prompt collection of the outstanding debts Tight inventory control

VARIOUS SAFETY PROGRAMMES LIKE:◊ ◊ ◊ ◊ ◊ ◊ ◊

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Fire fighting equipment and sprinkler system will help in preventing the losses caused by fire Burglar alarms, night watchman, and safety vaults will help in reducing thefts, burglary etc. Cold storage or refrigeration will help in preservation of perishable products of the firm and thus reduce the damages caused to the products Special packing will help in reducing any spoilage, breakage or leakage of the goods in transit or storage Proper pest control methods will also help in reducing the damages caused to the products Safe work environment including adequate lighting, covering of damaged floors as well as proper medical care facilities will help in reducing the number of accidents in the factory. Risk of competition can be reduced through collective action by the competing firms which may agree to restrict output, allocate markets or charge uniform prices.

Proper Government action through appropriate policies and regulations can also help in stabilising the economic environment and thus reducing the business risks.

An entrepreneur must assume the possibility of certain risks which are inherent in any form of business organisation. Such risks can be handled through proper planning and adopting two possible strategies. These are:Shifting the risks to the people who are skilled in managing them and are willing to bear them. The risks may be transferred or shifted through:HEDGING:It is a method of risk transfer accomplished by buying and selling for future delivery. It is a form of forward trading to minimise losses due to changes in prices. Under it, the possibility of loss which occurs because of price fluctuations is shifted during the time gap between purchase and sale of a commodity. It involves entering simultaneously into two contracts of an opposite though corresponding nature, one in the spot or cash market and the other in the future market. The purpose of hedging is to protect the trade profit from adverse fluctuations in commodity prices. UNDERWRITING: A public company issuing shares and debentures may face the risk of loss due to the failure to sell the entire issue of securities. Such risk can be shifted to an underwriter which is the financial intermediary between the company issuing securities and the ultimate investors. It provides several benefits to a company:◊ ◊ ◊ ◊ ◊ ◊

It relieves the company of the risk and uncertainty of marketing the securities. Underwriters have an intimate and specialised knowledge of the capital market. They offer valuable advice to the issuing company in the preparation of the prospectus, time of floatation and the price of securities. It helps in financing of new enterprises and in the expansion of the existing projects. It builds up investors' confidence in the issue of securities. The association of well-known underwriters lends prestige to the company and the investors feel that the issue is sound enough for profitable investment. It facilitates the geographical dispersal of securities because generally, the underwriters maintain contacts with investors throughout the country. Sharing the risks with other people so as to minimise the burden on the firm. Generally pooling of the investment of a large number of persons into the organisations.

ENVIRONMENTAL SCANNING/ANALYSIS: It is a process by which managers monitors the economic, governmental, technological, legal, social and cultural factors to determine the threats to the organization and the opportunities available to the organization. Environmental Scanning or Analysis is important in evaluating the present strategy, setting strategic objectives and formulating future strategies. Mismatch between organization and its environment is the major cause of corporate decline. Companies must be sensitive towards environment factors which help them to change in advance regarding the change required by the organization from time to time. SWOT ANALYSIS: S W O T

= = = =

Strength Weakness Opportunities Threats

Definition of SWOT: “Opportunity and threats are the external to the organization whose internal Strength and Weakness are decisive factors whether or not environment can be properly managed or not. With Strengths, an

organization can seize the opportunities and capitalize on it, and because of its weakness, it becomes the victim of threat in the environment” FEATURES OF ENVIRONMENTAL SCANNING: ◊

Continuous Process

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Exploratory Process: Choosing the alternatives available for future.

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Holistic Exercise: Organization must scan the whole environment in order to minimize the chance of surprise and maximize its utilities as an early warning system.

FACTORS AFFECTING THE ENVIRONMENTAL SCANNING: ◊

Age

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Educational Level

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Social values

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Cultural values

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Ability to face challenges

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Ability to cope up with stress

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Ability to motivate people

USES/SIGNIFICANCE/UTILITY/BENEFIT OF ENVIRONMENTAL SCANNING: ◊

To know the socio-economic changes at the national and international levels.

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To make the strategies and long-term policies for organization.

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To know the competitor’s business strategies.

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To understand the transformation of the industry environment.

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To anticipate the present and future opportunities and threats.

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To develop action plans to deal the technological changes.

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To become dynamic for the organizational environment.

APPROACHES OF ENVIRONMENTAL SCANNING: Approaches mean gathering, collecting or intake of essential information which are required for Environmental Scanning. These Approaches are:1.

Systematic Approach: Under this those information for environment scanning are collected which have a direct impact on an organization’s activities such as: ◊

Change in regulations

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Markets

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Customers

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Govt. policies.

Information regarding these should be collected regular basis to monitor changes and to take corrective actions in time. 2.

Adhoc Approach:

Under this approach information for environmental scanning are not collected regularly but organization do special surveys or studies or investigations for some special projects at the time of requirement to identify the unforeseen developments and changes in the economic environment. 3.

Processed-Form Approach: Information is collected through primary or secondary sources:

◊ ◊

Primary Sources: Direct from Govt. Secondary Sources: Newspapers, magazines, periodicals etc.

SOURCES OF INFORMATION FOR ENVIRONMENTAL SCANNING: 1.

Verbal Information: It is very useful for the higher level of managers. They discuss the information with various groups of people outside the organization to know about their general feelings for environment. E.g.

2.

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Attending Management Conferences

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Audio-Visual media

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Conversation with customers

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Suppliers

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Stock Brokers

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Govt. employees

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Consultants

Written or Documentary or Secondary Information: That information which comes only in written form and available through published sources. E.g. ◊

Newspapers

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Journals

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Annual reports

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Industry newsletters

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Govt. publications.

3. Internal Sources: It includes company’s own files and documents of previous years, company employees and management information system (MIS). 4. External Sources: Information collected through various publications, outside agencies, suppliers, trade associations etc. 5. Industrial spying and surveillance:

Information through spying is required when one company wants to collect information of its competitor companies to know the secrets of their operations. This can be done by contacting customers of competitors, dealers, employees etc. 6.

Formal studies:

This type of collecting information is done by employees, consultants, market research agencies etc. through different sources like: ◊

Newspapers & periodicals

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Institutional publications

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Govt. publications

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International sources, like: 

Overseas Business Reports

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World Economic Surveys

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Statistical Year Book etc.

STEPS IN ENVIRONMENTAL SCANNING: Environmental scanning is a process and includes some specific steps. Those steps are:

I.

Preparing groundwork for scanning: Organization try to understand why the changes are taking place in the economy and for that, organization look into the past records and come to the conclusion purely on the basis of historical data.

II.

Estimating future business: On the basis of past records the future business is projected but the organization just use these projections as guidelines and not the absolute truth.

III.

Comparing actual with projected results: At the time of actual changes, organization compares the actual impact of those changes with its projected results to identify any deviation. And if there is any deviation then organization can take the corrective actions as soon as possible.

IV.

Refining the scanning/forecasting process: As the scanning/forecasting is a continuous process, if company lacks in doing an effective scanning, then next time it will try to scan the environment in more effective way to minimize deviations. TYPES OF ANALYSIS/FORECAST: 1. Economic Forecast: To analysis: ◊ ◊ ◊

Economic conditions Consumer price index Productivity

◊ ◊ ◊ ◊ ◊

Personal income and wages Sales Market Share Investments and outputs Balance of Payments

2. Social Forecast Analyzing the trend of: ◊ ◊ ◊ ◊

Population Social security and welfare Education and training Wealth and expenditures

3. Political Forecast: Analyzing factors like: ◊ ◊ ◊ ◊ ◊ ◊

Size of government budgets Tariffs Tax rates Defence Expenditures Govt. Planning Growth of regulatory bodies

4. Technological Forecast: Analyzing the purpose of investment in: ◊ ◊ ◊ ◊ ◊

Nuclear energy projects Satellite projects Communication devices Electric cars Computer development projects

ECONOMIC REFORM IN INDIA The fundamental objective of economic reforms is to bring about rapid and sustained improvement in the quality of the people of India. Central to this goal is the rapid growth in incomes and productive employment… The only durable solution to the curse of poverty is sustained growth of incomes and employment…. Such growth requires investment: ◊

in farms

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in roads

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in irrigation

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in industry

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in power

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in people

And this investment must be productive. Successful and sustained development depends on continuing increases in the productivity of our capital, our land and our labour. NEED/OBJECTIVES OF ECONOMIC REFORM: 1

Due to Increase in fiscal deficit.

2

Due to increase in adverse Balance of Payment

3

Due to fall in foreign exchange reserves

4

Due to rise in prices

5

Due to poor performance of public sector undertakings

PHASES OF ECONOMIC REFORMS: 1

FIRST PHASE:

This phase was introduced in 1985 by the then Prime Minister of India Rajiv Gandhi. Indian Economy was in a very worst condition at that time. He felt the need to:

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Remove control

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Invite private sectors

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Improve productivity

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Adopt modern technologies

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Full utilization of capacity/resources of India

FOLLOWING ACTIONS WERE TAKEN BY HIS GOVT.:

A. B. C. D. E. F. G.

Cement: Industry was totally decontrolled and private sectors units were issued the license. Sugar: Share of free sale of sugar in open market was widen. Asset Limit: Ceiling of assets limit was increased from 20 crores to 100 crores. Drugs: 94 drugs were completely delicensed and 27 industries were freed from MRTP Act. Electronic: Industry was freed from MRTP Act. Foreign companies were allowed to enter in India. Foreign Trade: EXIM policy was introduced which makes import export easier for the organizations, LTFP: Long-Term Fiscal Policy was introduced which helps in increasing the Govt. revenues.

2. SECOND PHASE: First phase did not give the expected results. Nothing was going right for India as foreign companies were hesitating to invest in India. Not much increase in Industrial sectors and its development was very slow. Deficit balance of trade increases from 5930 crores to 10,840 crores. India comes under the burden of huge loan and to get rid if this deficit India took the help of International Monetary Funds (IMF) who instructed India to seriously focus on the economic development. On June, 1991 once again Congress Govt. comes into force and the then Finance Minister, Manmohan Singh immediately introduced the Second Phase of Economic Reform of India. At that time Manmohan Singh realizes the need of:

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Mega-Industrialization through ‘Open Door’ policy

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Monetary policy was tightened by increasing the interest rates

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Focus to improve the exchange rate of rupee

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Liberalization of Trade Policies

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Effort to increase the efficiency and International competitiveness of Industrial production.

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To utilize foreign investments and technologies

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To improve performance of Public sectors

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Modernizing the financial sectors

OBJECTIVES OF SECOND ECONOMIC REFORM: 1.

Increase the economic growth

2.

Reducing the rate of Inflation

3.

Increasing the Foreign Exchange Reserves

4.

Reducing the Fiscal Deficits

5.

Political Reforms for Good Governance

6.

Re-engineering the Role of the government

7.

Agricultural Sector Reforms

8.

Industrial Restructuring

FEATURES OF ECONOMIC REFORMS:

Economic Reforms

Liberalization

Privatisation

Globalization

LIBERALIZATION: It means to free the economy from the direct control of the Govt. before the year 1991, Govt. had imposed its control on the majority of the Indian Economy like: ◊

Industrial Licensing System

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Price Control

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Financial control on goods

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Import License

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Foreign Exchange control

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Restrictions on heavy Investments

After the year 1991, the decision was made to lift up the control of Govt. In order to liberalize the economy for the purpose of increasing the growth rate of Indian Economy and to be capable to compete with world economy. MEASURES TAKEN FOR LIBERALISATION: 1.

Abolition of Industrial Licensing and Registration:

Till now the industrial sector including both public and private industries were functioning under a rigid licensing system. But now it was the time to give the industrial policy more relaxations. Industrial licensing was abolished for the almost whole industrial sector except the following industries:

2.

◊

Liquor

◊

Cigarette

◊

Defense Equipments

◊

Drugs

◊

Industrial Explosives

◊

Dangerous chemicals

Concession from Monopolies Act: At the time of economic reform, the companies having assets more than 100 crores were put under MRTP Act and were facing many restrictions imposed by the Govt. but at the time of Liberalisation all those companies were freed from MRTP Act. Now those companies were free to expand their business and investment limit restrictions were also abolished. Now there was no restriction on the setting up new industries or expansion of industries or taking over and amalgamations.

3.

Freedom for Expansion and Production to Industries: Under this the companies are not required to take official approval by the Govt. for expansion and production of the business. Govt. gave the following freedoms: ◊

Maximum limit of the production capacity policy was removed to provide the industries in India to take full advantage of large-scale production.

◊

4.

Producers are free to produce anything on the basis of market demands.

Increase in the Investment limit of small industries: Investment limits for small scale industries was raised to 1 crore for the purpose of adopting the modern technologies.

5.

Freedom to Import capital goods: After liberalization Indian Industries were freed to buy modernized machineries and raw material from abroad in order to expand their operations of business.

6.

Freedom to Import Technology: Objective of this new economic policy was to develop the fast growing companies like computers and electronics. Govt. allowed those industries to import high technologies from abroad.

7.

Free determination of Interest Rates: Reserve Bank of India was not going to control the interest rates of the banking system in India now. This authority was given to all the banks in India that they can increase or decrease the interest rates of borrowings and deposits.

8.

Action plan for Information Technology and Software Development: Information technology and software development industry submitted 108 points action plan to Indian Govt. which got the recommendation and got approved by the Indian Govt. and orders were issued for the implementation in India at the earliest.

Capital market objectives of liberalisation:



SEBI’s capital market objectives : “To promote, develop, and regulate the securities market by such measures as it thinks fit”



Pre-budget Economic Survey (93), Ministry of Finance: “The corporate sector will have to be encouraged to raise resources increasingly from the market”

Stock market performance since liberalisation:



Interestingly, though Indian capital markets have not become more important as a primary source of funds for the private sector, over the same period the stock markets have experienced much more volume of trading.



At the end of 2004, BSE and NSE combined was the 14th largest stock market in the world (in terms of total market capitalisation), significantly ahead of China (15th).

Banks and financial institutions as a financing source: 

The banking sector in India has grown steadily in size (total deposits) at a fairly uniform annual rate of 18% since the 1980’s.



With deposits of over $385 billion dollars in 2003, the sector accounted for 75% of the country’s financial assets.



On the other hand, the proportion of funds provided by banks and financial institutions actually declined for private sector companies over 1993 – 2002.

PRIVATISATION Privatization means allowing the private sector to set up more and more industries that were previously reserved only for public sector. Under this economy policy many of the existing enterprises of public sector are either wholly or partially sold to private sector.

Definition: “Privatisation is the general process of involving the private sectors in the ownership or operation of the state owned enterprises.” NEED FOR PRIVATISATION:

 Inefficiency of the public sectors.  Most of the public sectors enterprises were making losses.  Managers were not free to take the decisions regarding business.  Biasness of ministers in taking the business decisions.  Production capacity remained under utilized.  To compete with the other economies in the world.  To enhance the quality of production.  To provide maximum benefits to the consumers. KINDS OF PRIVATISATION: There are mainly three types of privatizations such as:

1

Change in Ownership: It means handling over the control wholly or partially into others hand. This can be of four forms:

2



Total Nationalisation: Under this 100% ownership of the business is transferred to the private sectors.



Joint Venture: It means when partial transfer of ownership of the business is made by the public sector to private sector.



Liquidation: In this the assets of the public sector enterprise is sold to other person who may use them for the same purpose or some other purpose depending upon the choice and taste of the buyers in the market.



Workers Co-operatives: It’s a kind of denationalization in which ownership is transferred to its employees or workers who may form a co-operative to run the business. Special provision is made for the bank loans for the workers to buy the shares of the enterprise.

Organizational Measures: Under this there are various measures to limit the state control of the business run by the public sector such as:



Holding Company Structure: Under this type of privatization the Govt. retains or keeps the control for taking the top level decisions and rest of the decision regarding the business operations are given to the private sector.



Leasing: In this the Govt. trasfers the rights to use the assets of the organization to the private sectors but for some fixed period of time. After that particular period the ownership again comes to public sector.



Restructuring: It is of two types:

I.

Financial Restructuring: In this the accumulated losses are written off.

II.

Basic Restructuring: In this some activities of Govt. enterprises are distributed to small scale industries.

3

Operational Measures: It involves the increasing the efficiency in the operations of the public enterprises. Keeping this in mind the areas which were reserved for the public sector now were opened for the private sectors to achieve the high level of efficiency and productivity.

CAUSES OF PRIVATISATION: Public sector was facing many shortcomings due to inefficient economic and political structure of the country which makes the implementation of privatization must for its survival.

1

Disintegration of Socialist Economy: Due to lack of decision making power or ability on the part of management and excessive political interference, public sector becomes inefficient and proved to be the single only factor responsible for the failure of the economy.

2

Inefficient Public Sector: Privatisation becomes the need for the country due to: 

Organizers don’t have the authority to take decisions.



Most decision was taken by the ministers. Decisions were political motivated. Long delays in making decisions. Production capacity not fully utilized.

  

3.

Uneconomic Pricing Policy: Under this prices are not determined on the basis of economic principles for the public utility services like – electricity, irrigation, transport, water etc. politicians keeps the prices low for the political advantages which result in huge losses as the prices charged kept less even than the actual cost of production.

4.

Burden on the Government: In this losses made by the public enterprises due to charging prices less than the cost are bear by the Govt. through its revenues collected from the public in the form of taxes. Govt. faces the shortfall of funds due to which Govt. was not able to undertake the projects which would help in the country’s development. On the other hand inefficiency and production was falling. Quality of production becoming worst and ultimately the sufferers were the consumers.

OBJECTIVES OF PRIVATISATION:   

To increase efficiency To increase competitive power To reduce fiscal deficit

   

To To To To

strengthen the industrial development earn more and more foreign currency make the full utilization of the economic resources achieve rapid industrial development

ADVANTAGES OF PRIVATISATION:      

Reduction in Economic Burden. Increase in efficiency. Reduction in sense of irresponsibility. Scientific management – due to privatization, management of industries has become more scientific conscious and responsive to need. Reduction in political interference. Encouragement in new inventions.

MEASURES ADOPTED FOR PRIVATIZATION: I. Contraction of Public Sector except: a. b. c. d.

Atomic Energy Defense Equipments Mining of Atomic Minerals Railway Transport

II. Disinvestment in existing Public Sector industries. III. Sale of shares of Public sector enterprises. IV. Increase in Private sector investments. V. Conversion of loans into shares is now not necessary.

VI. VII. GLOBALIZATION

Sick industries – Efforts to make them strong.

Memorandum of Understanding (MoU) – This was introduced to improve the working of existing public enterprises and will be accountable for results.

It means the expansion of business into other countries. In this, the economy of one country integrates with the economy of other country under the condition of unrestricted free flow of the trade of goods and services, technology, capital, and movement of persons across the borders. Definition: “Globalisation may be defined as a process associated with increasing openness, growing economic independence and deepening economic integration in the world economy.” PARAMETER OF GLOBALISATION: (i)

Reduction of trade barriers for free flow of goods and services across border.

(ii)

Creating environment for free flow of capital.

(iii)

Creating environment for free flow of technology.

(iv)

Creating environment for free movement of labour in different countries.

FEATURES OF GLOBALISATION:

    

Business expands throughout the world. Goods and services are bought and sold from/to any country in the world. Difference between domestic and foreign markets comes to an end. Production are planned and developed according to the target market of whole world. Manufacturing of goods can be made in any part of the world and distribution of those can be made in entire world.



Outsourcing of goods and services can be done.

SOURCES OF GLOBALISATION: (i)

Technological Advancements.

(ii)

Trade Liberalisation.

(iii)

Organizations having wider reach.

(iv)

Global Agreements.

(v)

Cultural Developments.

PROCESS OF GLOBALISATION: Globalisation is a process which happens slowly and gradually. It does not take place at once. Normally company has to follow a certain process to be a part of the global market. There are five stages through which an organization can make its place in global market. STAGE – I :

Domestic Company exports to foreign country through the dealers and distributors of the home country.

STAGE – II :

Domestic Company now exports its goods and services to foreign country directly on its own.

STAGE – III :

Domestic Company establishes its production and marketing operations in various potential countries and becomes an international level company (MNC).

STAGE – IV :

The Company replicate (becomes almost same) as a foreign company in the foreign country by having all facilities like R&D, full-fledged human resource etc.

STAGE – V :

The Company becomes a true foreign company as it starts to serve the needs of foreign customers just like the host country’s company.

ESSENTIAL CONDITIONS FOR GLABALISATION: There are few essential conditions which should be provided by the host country’s government for making the Globalisation successful. They are as follows:

 

All the tariffs should be removed. Freedom should be given to the business and industries.

       

Complete freedom to be provided to public sector to compete with private sector. Bureaucratic hurdles should be removed. Rules & regulations of control are librelised to encourage globalization. Competitiveness should be based on quality, prices, delivery, customer services etc. Administrative and Governmental support for making globalization successful. Money and capital markets should be developed. Govt. should provide the facilities in form of R&D, Finance etc. Suitable globalization strategies should be made.

TYPES / COMPONENTS OF GLOBALISATION:

1)

GLOBALISATION OF TECHNOLOGY

GLOBALISATION OF MARKETS

GLOBALISATION OF INVESTMENTS

GLOBALISATION OF PRODUCTION

GLOBALISATION OF MARKETS: Globalisation of markets means integration or merger of the different markets of the world into a single market. Under this situation, there are common norms, values, tastes, preferences and convenience which are observed in this kind of markets.

Features:



Size of the company which is willing to enter into global market does not matter. It is not necessary that only large companies can create global market but small scale industries can also be a part of it.



Distinction between the Domestic market and Foreign market still prevails/remains depending upon the quality, pricing etc. of the goods manufactured by them.



Due to this distinction, different strategies are needed for the companies to produce goods and services as good as foreign companies.



Global firms have to compete with each other in different markets for their survivals.

Reasons for Globalisation of Markets:



Size of domestic market is becoming small for the companies due to increase in the production level of the companies.  To increase the income of the company and to maximize the profitability of the business.  Shortage of production as compared to the excessive demand in the country pulled foreign companies to enter into the global markets to fulfill the actual demand of the target market.  Adverse selling environment regarding any product in the country will push that organization to identify and sell its products in the markets out of their country.  Expanding business globally which will also help that company to reduce its business risk. 2)

GLOBALIZATION OF PRODUCTION: Globalisation of production means when a company establish its plant or unit in other country to produce some particular product to sell in that particular market. It also happens if the manufacturing facilities of the host country seems to be favorable than the home country.

Features: 

To produce good quality of goods and services at low and reasonable cost.



Economy of that country is favorable for establishing the industry.



Availability of cheap raw material.



Availability of cheap labour in underdeveloped countries.

Reasons for Globalisation of Production: 

Raw Material availability in bulk/excess in foreign country or underdeveloped countries.



Availability of skilled and unskilled labour.



Some countries impose restrictions on imports but on the other hand they allow foreign countries to establish the industry in their country.



To reduce transportation cost.

 3)

To produce goods and services as per the requirements and preferences of the customers.

GLOBALIZATION OF TECHNOLOGY: Under this process the Technological advancement is the only way for the foreign companies to enter into the foreign market and to develop itself into a global company. Methods of Globalisation of Technology:

a)

Joint-Ventures and Mergers. (i) Joint – Ventures: Partnership of two or more companies of different countries. (ii) Merger:

4)

One company Takeover the other (foreign) company under its ownership.

b)

On the basis of Royalty or Outright Purchase of Technology: Under this method the companies with higher technologies allows the companies of other countries to adopt their technology on the basis of royalty payments or on outright purchase basis.

c)

Technological Collaboration: In this method the companies of less developed countries collaborates with the companies of developed countries having advance technologies.

d)

Latest Technology: Companies with latest technologies obtains advantageous position of producing high quality products at low prices. Due to these advantages, companies enter the foreign markets to earn huge profits.

GLOBALIZATION OF INVESTMENTS: It is also popularly known as Foreign Direct Investments (FDI). All the countries in the world have removed the investment barriers. In India Foreign Direct Investment in some specific sectors is allowed upto 51% out of the total capital share and in almost all other sectors 49% out of the total capital share is allowed as the Foreign Direct Investments. Reasons for Globalisation of Investments:  Foreign companies go for FDI to avoid the restrictions imposed by the host country on exports.



MNC’s invest in foreign countries to have control over the manufacturing and marketing activities of the business.



Volume of global trade has increased and it needs the foreign money for further business.



Some countries imposed the restrictions of licensing which is to be issued only to domestic companies so in case foreign companies enter these markets through FDI.  Rate of Interest and rate of Returns are high in less developed countries as compared to developed countries. INDUSTRIAL POLICY AND INDUSTRIALIZATION TRENDS: After the Independence, there was a need to improve the industrial sector of the country. Industries were in a very bad shape at the time of independence and lots of changes and improvements were required with immediate effect. Definition:

“It refers to all objectives, principles, rules, regulation, procedures, location, functioning of the industries, ownership pattern, and rate of growth of the industry in the country.” FEATURES OF INDUSTRIAL POLICY: 

Economic growth & development of a country mainly depends upon the Industrial production.



To attain the better growth rate, the Industrial production needs to grow and develop at a very fast speed. This policy also describes the government policy towards foreign capital, labour and other related aspects. It shows the relationship between government and business. It provides clear guidelines for promoting, regulating and controlling the industrial development of that country.

  

INDUSTRIAL POLICY 1948: Government introduced this policy on 06/04/1948 immediately after the Independence of India. Focus was on to securing a continuous increase in production and ensuring its equal distribution throughout the country. This policy was introduced in keeping in view a mixed economy in which both sectors, public as well as private, will be operating with a common goal of economic development. CATEGORIES OF INDUSTRIAL POLICY – 1948: Industrial Policy 1948 divides the industries of India into four main categories.

A.

EXCLUSIVE MONOPOLY OF THE CENTRAL GOVT.:

 Companies fall under this categories were:

B.

i.

Atomic Energy Production.

ii.

Arms & Ammunition Production.

iii.

Railways and Air Transport.

iv .

Rights to takeover any company by Govt. at the time of War or Emergency.

EXCLUSIVE RESPONSIBILITY OF THE STATE: It includes those Industries for which the changing of ownership or undertaking would be made only by the State Govt. Under this category if any company is under private sector then also the change of ownership or undertaking would be made by the State Government.

 Companies fall under this categories were: i.

Coal Industry.

ii.

Iron & Steel Industry.

iii.

Aircraft Manufacturing Industry.

C.

iv .

Ship Building.

v.

Manufacturing of Telephone, Telegraph and Wireless Apparatus.

BASIC INDUSTRIES SUBJECT TO CENTRAL GOVT. REGULATIONS: Under this category, companies which are very important for the country’s economy are regulated by the Central Government. Companies under this category contribute major part in the economic growth so it becomes necessary for the Govt. to plan & regulate those companies for the betterment of the country.

 Companies fall under this categories were:

D.

i.

Salt Industry

ii.

Automobiles

iii.

Electric Engineering

iv .

Heavy Machinery

v.

Minerals Industry

v i.

Power Industry

v ii.

Air/Sea/Road Transportation

v iii.

Non-Ferrous Metal Industries

ix .

Rubber Industry

x.

Heavy Chemicals

x i.

Fertilizer Industry

x ii.

Cement & Sugar Industry

x iii.

Cotton & Woolen Industry

x iv .

Paper & News-Print Industry

PRIVATE SECTOR INDUSTRIES: These were those companies which were not included in the above mentioned three categories. These industries were left open for private sector (private enterprises, Individual firms & Cooperatives) But still the government retains the rights to participate or takeover any industry falling under this category as and when required.

GUIDELINES OF INDUSTRIAL POLICY RESOLUTION 1948: These guidelines were made under this policy specifically for:

   

Small – scale & Cottage Industry. Industrial Labour. Foreign Capital. Role of Small-scale & Cottage Industry: This guideline emphasizes on putting

focus on the development of the small-scale and cottage industries as the development of these industries can help in the development of the masses.



Labour –Management Relations and Remuneration to Labour: Under these

guidelines, the focus was on the development of healthy relationship between the workers and the employees. This was essential for the peace and progress of the industry as well as country. Labour should be given fair wages, and suitable and reasonable working conditions should also be provided to the labour in order to get maximum out of them. Workers participation in the management was also proposed in this Industrial Resolution



Attitude towards Foreign Capital:

Government adopted a very positive

attitude towards the foreign capital investment in India as it can increase the speed of economic growth. Foreign capital was to be regulated in the national interest and ownership and control was to be kept in the Indian hands.

ADVANTAGES OF I. P. – 1948:

1.

New Acts were introduced for the welfare and betterment of the workers such as:

a)

Minimum Wages Act.

b ) Employee’s state insurance Act. c)

Labour Welfare Act.

2 . Nationalization of limited but important industrial sectors to strengthen the economy. 3 . A mixed economy pattern was adopted.

DISADVANTAGES OF I. P. – 1948:

1 . Limitations of private sector were a hurdle. 2 . Complete development and progress of the private sector was not possible due to interference of the government.

3 . Red Tapism in the public sector restricted the growth. 4 . Lack of co-ordination.

INDUSTRIAL POLICY RESOLUTION – 1956:

The developments which took place in the country with the help of the first Industrial Policy Resolution – 1948 was needed to carry on for the sake of economic development and few more developments were needed to be added with the previous ones. This Industrial Policy Resolution was announced on 30-Apr1956. Features:



Enactment of the constitution of India which guarantees certain fundamental rights.



Adoption of socialistic pattern of society by the Parliament.



Launching of the First Five Year Plan.

Objectives of Industrial Policy – 1956:



To accelerate the rate of economic growth.



To speed up the rate of industrialization.



To develop heavy industry and machine making industries.



To prevent private monopoly.



To expand the public sector.



To build up large and growing co-operatives sector.



To reduce disparities in income and wealth.

MAIN PROVISIONS OF INDUSTRIAL POLICY – 1956:

A . NEW CLASSIFICATION OF INDUSTRIES: SCHEDULE ‘A’ INDUSTRIES

SCHEDULE ‘B’ INDUSTRIES

SCHEDULE ‘C’ INDUSTRIES

a) SCHEDULE ‘A’ INDUSTRIES: This category includes those industries which were exclusively responsibility of the State. Following industries falls under this category:

 

Arms & Ammunitions & other Defense Equipments. Atomic Energy.

         

Iron & Steel Heavy plant & machinery. Electric plants. Coal, Gold & Diamond. Minerals. Aircraft & Air Transport. Railways. Ship building. Telephones, Telegraphs & wireless apparatus. Generation & Distribution of electricity.

b)

SCHEDULE ‘B’ INDUSTRIES: These are those companies or industries

which were to be mainly owned and managed by the States. New undertakings falling under this category will only be set up by the State and the private sector will be allowed to play only supplementary role in the business. Following industries falls under this category:

        

Aluminum and other metals. Machine tools. Manufacturing of Drugs, Dyestuffs and Plastics. Antibiotics and other essential Drugs. Fertilizers. Synthetic Rubber industry. Chemicals industry. Road Transport. Sea Transport.

c)

SCHEDULE ‘C’ INDUSTRIES:

All the remaining industries which

are not included in the Schedule ‘A’ &’B’ categories. Development of these industries under this category was the responsibility of the private sector. These industries would be controlled and regulated as per the Industrial Act 1951 and other regulations if any.

B.

NON-DISCRIMINATING TREATMENT OF PRIVATE SECTOR: Special provision were made in this policy for no discrimination or partiality will be done with private sector in the country as they are given the important role in the economic development. Private sector was encouraged by the government by developing essential infrastructure facilities such as electricity, transport facilities, consideration for monetary and fiscal policies. Special financial institutions were established to provide necessary funds to private sector. If in an industry both sectors are operating, then there should not be any discrimination on part of the private sector.