Business environment

Business environment may be defined as the total surroundings, which have a direct or
indirect bearing on the functioning of business. It may also be defined as the set of
external factors, such as economic factors, social factors, political and legal factors,
demographic factors, and technical factors etc., which are uncontrollable in nature and
affects the business decisions of a firm.

Economic Environment of Business

The term economic environment refers to all the external economic factors that influence
buying habits of consumers and businesses and therefore affect the performance of a
company. These factors are often beyond a company’s control and may be either large-
scale (macro) or small-scale (micro).

Macro factors include:

 Employment/unemployment
 Income
 Inflation
 Interest rates
 Tax rates
 Currency exchange rate
 Saving rates
 Consumer confidence levels
 Recessions

Micro factors include:

 The size of the available market

 Demand for the company’s products or services
 Availability and quality of suppliers
 Competition
 suppliers
 The reliability of the company’s distribution chain (i.e., how it gets products to
customers)
While companies often can’t control their economic environment, they can evaluate
economic conditions before choosing to enter a particular market or industry or pursue
other strategies.

Non-Economic Environment of Business and its Importance

Non-economic environment is as important as economic environment for influencing the
business activity of the country. All non-economic issues related to business are included
in non-economic environment of a country. The non-economic environment of business
can be classified broadly as— politico-legal, demographic, socio-cultural, technological
and natural.

1. Politico-Legal Environment: In modern times, politico-legal environment is

having a paramount importance in business. The politico-legal environment includes
three political institutions viz., legislature, executive and judiciary which usually play
useful role in shaping, directing, developing and controlling business activities.

The legislature take decision on a particular course of action, the executive implements
those decisions through government agencies and the judiciary serves as a watch-dog for
ensuring public interest in all the activities of legislature and executive.

This refers to set of laws, regulations, which influence the business organizations and
their operations. Every business organization has to obey, and work within the framework
of the law. The legal environment of business constitutes legislations related to property
and business organizations, laws of contracts, bankruptcy, mutual obligations of labour
and management etc.

Political factors affecting business:

 Tax and economic policies

 Political stability
 Foreign Trade Regulations
 Employment Laws
 Export and import policies

Factors of legal environment of business:

 Companies Act, 1956

 Foreign Exchange Management Act, 1999
 The Factories Act, 1948
 Industrial Disputes Act, 1972
  Environment Protection Act
 Competition Act, 2002
 Contract Act
 Consumer protection Act
 Sales of goods act

Demographic Environment: Accordingly, demographic factors like, rise and growth

rate of population, age and sex composition of population, rural urban distribution of
population, educational levels etc. influences business.

Socio-Cultural Environment: The social environment of business includes social

factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc.
The social structure and the values that a society cherishes have a considerable influence
on the functioning of business firms. For example, during festive seasons there is an
increase in the demand for new clothes, sweets, fruits, flower, etc. Due to increase in
literacy rate the consumers are becoming more conscious of the quality of the products.
Due to change in family composition, more nuclear families with single child concepts
have come up.

Critical elements of socio cultural environment:

 Social institutions and systems: It includes cast system, joint family system,
marriage, religion
 Social values and movers: customs, traditions, norms, attitudes etc.
 Education and culture: Attitude towards education, need for business education,
role of business schools, business ethics and morality, business culture and
organizational culture etc.
 The social responsibility: Business ethics and social welfare
 Urbanization,
 Education
 Cross Cultural Issues
 Language
 Life style
 Religion

Technological Environment: Technological environment include the methods,

techniques and approaches adopted for
production of goods and services and its distribution. The varying technological
environments of different countries affect the designing of products. Hence, in order to
survive and grow in the market, a business has to adopt the technological changes from
time to time. It may be noted that scientific research for improvement and innovation in
products and services is a regular activity in most of the big industrial organizations.
Nowadays in fact, no firm can afford to persist with the outdated technologies.

Natural Environment: The natural environment includes geographical and ecological

factors that influence the business operations. These factors include the availability of
natural resources, weather and climatic condition, location aspect etc. For example, sugar
factories are set up only at those places where sugarcane can be grown. It is always
considered better to establish manufacturing unit near the sources of input. Further,
government’s policies to maintain ecological balance, conservation of natural resources
etc. put additional responsibility on the business sector.

Emerging rural sector in India and Indian Business

The Rural Development in India is one of the most important factors for the growth of the
Indian economy. India is primarily an agriculture-based country. Agriculture contributes
nearly one-fifth of the gross domestic product in India. In order to increase the growth of
agriculture, the Government has planned several programs pertaining to Rural
Development in India.

Agriculture, handicrafts, fisheries, poultry, and diary are the primary contributors to the
rural business and economy.
Market size
India’s per capita GDP in rural regions has grown at a Compound Annual Growth Rate
(CAGR) of 6.2 per cent since 2000. The Fast Moving Consumer Goods (FMCG) sector
in rural and semi-urban India is reach US$ 100 billion by 2025.

Consumerism
Consumerism means, Organized-efforts by individuals, groups, and governments to help
protect consumers from policies and practices that breach consumer rights against
useless, inferior, or dangerous products, misleading advertising, unfair pricing, etc.

Consumerism in India has started its journey with a need to rise consumer voice against
the quality of goods in 1969 through housewives in Mumbai. Indian parliament passed an
act for the welfare and protection of consumers in 1986.
Consumer protection act:

provides for a system for the protection of consumer rights and the redressal of consumer
disputes. This Act extends to the whole of India except the State of Jammu and
Kashmir.The objective of the Act is to provide for the better protection of the interests of
consumers and for that purpose to make provision for the establishment of consumer
councils and authorities for the settlement of consumer disputes and for matters
connected therewith. This act provide following rights to consumers:

Rights of consumers:

(1) Right to Safety:

A consumer has the right to safety against such goods and services as are hazardous to his
health, life and property.

(2) Right to be Informed/Right to Representation:

A consumer has also the right that he should be provided with all the information on the
basis of which he decides to buy goods or services. Such information relate to quality,
purity, potency, standard, date of manufacture, method of use, etc. of the commodity.
Thus, a producer is required to provide all such information in a proper manner, so the
consumer is not cheated

(3) Right to Choose:

A consumer has the absolute right to buy any goods or services of his choice from among
the different goods or services available in the market. In other words, no seller can
influence his choice in an unfair manner. If any seller does so, it will be deemed as
interference in his right to choice.

(4) Right to be Heard:

A consumer has the right that his complaint be heard. Under this right, the consumer can
file a complaint against all those things which are prejudicial to his interest. First, their
rights mentioned\ above (Right to Safety; Right to be informed and Right to choose) have
relevance only if the consumer has the right to file his complaint against them. These
days, several large organizations have set up Consumer Service Cells with a view to
providing the consumer the right to be heard.
(5) Right to Seek Redressal:

This right provides compensation to the consumers against unfair trade practice of the
seller. For instance, if the quantity and quality of the product do not conform to those
promised by the seller, the buyer has the right to claim compensation.

(6) Right to Consumer Education:

Consumer education refers to educating the consumer constantly with regard to their
rights. In other words, consumers must be aware of the rights they enjoy against the loss
they suffer on account of goods and services purchased by them. Government has taken
several measures to educate the consumers.

The act also provide consumer protection councils on national level, state level and
district level

Techniques of Environmental Scanning

Definition:
Environmental scanning is a part of SWOT Analysis. Environment scanning is a process
in which the organization undertakes a study to identify the opportunities and threats in
an industry. The information obtained through environmental scanning can be used by
leaders to design new objectives and strategies or modify existing objectives and
strategies.

Need and importance of environmental scanning

 Identification of strength
 Identification of weakness
 Identification of opportunities
 Identification of threat
 Optimum use of resources
 Survival and growth
 To plan long-term business strategy
 Environmental scanning aids decision-making
 Techniques Used for Environmental Scanning

 SWOT ANALYSIS
 PEST ANALYSIS
 ETOP
 QUEST

SWOT: Studying Internal & External Environment

The aim of any SWOT analysis is to identify the key (internal and external)
factors which are important to achieve the objective.

 Internal factors – The strengths and weaknesses of the

organization.
 External factors – The opportunities and threats
presented by the external environment.
STRENGTH: a firm strength are its resources ad capabilities that can be used
as a basis for developing a competitive advantage. Example of such strengths
include:

 Patents
 Strong brand names
 Good reputation among customers
 Exclusive access to high grade natural resources
 Favorable access to distribution networks
Weakness: the absence of certain strengths may be viewed as a weakness.
Such as:

 Lack of patent protection

 Weak brand name
 Poor reputation among customers
 Lack of access to best natural resources
Opportunities: the external environmental analysis may reveal certain new
opportunities for profit and growth. Some example of such opportunities
include:
  An unfulfilled customer needs
 Arrival of new technologies
 Loosening of regulations
 Removal of international trade barriers
Threats: changes in the external environmental also may present threats to
the firm. Some examples of such threats include:

 Shifts in customer tastes away from the firm’s products

 Emergence of substitute products
 New regulations
 Increased trade barriers
PEST Analysis

A scan of the external macro-environment in which the firm operations can be

expressed in terms of the following factors:

• Political
• Economic
• Social
• Technological

ETOP (environmental threat oportunity profile)

The preparation of ETOP involves dividing the environment into different

sectors and then analyzing the impact of each sector on the organization.
  Environmental, Threat, Opportunity Profile (ETOP) is an important
technique for the organizations to analyse its threats and opportunities
and to provide favourable results.
1. By means of ETOP, the organization knows where it stands with respect
to its environment.

QUEST (Quick environmental scanning technique):

It is a four step process-

2. Observe the major events and trends in the industry
3. Speculate on a wide range of important issue
4. Prepare a report summarizing the major issues and their implications
5. Identify feasible strategic options to deal with the evolving
environment.
Economic planning
Planning is a continuous process that involves choices and decision making about
allocation of available resources with the objective of achieving effective and
efficient utilization and growth of these resources. In India, until 2014, planning was
the responsibility of the National Planning Commission that was established on
March 15, 1950. 2014, the government led by Prime Minister Narendra Modi
dissolved the Planning Commission and replaced it NITI stands for National
Institution for Transforming India.

Objectives of economic planning in India:

 Economic Growth and Development: Every five-year plan had a growth target
that had to be achieved by the end of the planning period. In order to bring about
an improvement in standard of living of the people, the per capita income has to
rise. A rise in per capita income is necessary to overcome the problems of poverty
and its effects.
 Increase in Employment: The developing economies generally suffer from open
unemployment and disguised unemployment. India is no exception to it. Slow
growth of the agricultural sector and lack of investments in the industrial sector
 are major causes for high levels of unemployment in the country. Measures have
been taken in every five- year plan to create employment opportunities, thereby,
increasing labour productivity.

 Increase in Investment: Economic growth cannot be achieved unless adequate

investments are made to bring about an increase in output capacity. Investments
help in creating employment opportunities. One of the objectives of planning is,
thus, to push up the rate of investment to ensure smooth flow of capital to various
sectors of the economy.
 Social Justice and Equity: The five-year plans also focused on reducing
inequalities in the distribution of income in order to ensure social justice.
Prevalence of inequalities in the economy results in exploitation of the poor
wherein the rich become richer and the poor become poorer.

 Balanced Regional Development: In India, there exists a wide gap in the

development of different states and regions. While Gujarat, Tamil Nadu,
Maharashtra etc., enjoy high levels of development, there are states like Bihar,
Odisha, Nagaland etc., which remain backward. Planning aims at bringing about a
balanced regional development by diverting more resources to the poor and
backward regions.

 Modernization: Modernization refers to a shift in the composition of output,

innovation and advancement in technology. Modernization helps an
economy to advance at a faster pace and compete with the developed
nations of the world.

 Self-Sufficient: It has been the objective of the plans that the country
becomes self-sufficient regarding food grains and industrial raw material
like iron and steel etc.

 Economic Stability:
Stability is as important as growth. It implies absence of frequent end
excessive occurrence of inflation and deflation. If the price level rises very
high or falls very low, many types of structural imbalances are created in
the economy.
 Social Welfare and Services:
The objective of the five year plans has been to promote labor welfare,
economic development of backward classes and social welfare of the poor
people. Development of social services like education, health, technical
education, scientific advancement etc. has also been the objective of the
Plans.
 Increase in Standard of Living:
The other objective of the plan is to increase the standard of living of the
people. Standard of living depends on many factors such as per capita
increase in income, price stability, equal distribution of income etc. During
the period of Plans, the per capita income at current prices has reached only
up to Rs. 20988.

12th five year plan

Objectives of 12th five years plan:

 To reduce poverty
 To improve regional equality across states and within the states
 To generate attractive employment opportunities for indian youth
 To improve living conditions of citizen
 To eliminate gender gaps
 To provide electricity to all villages
 To ensure that 50% of the rural population have accesses to proper
drinking water.
 Public Sector in India
Definition:- In India, a public sector company is that company in which the Union
Government or State Government or any Territorial Government owns a share of 51
% or more.

 To promote rapid economic development through creation and expansion of

infrastructure
 To generate financial resources for development
 To promote redistribution of income and wealth
 To create employment opportunities
 To promote balanced regional growth
 To encourage the development of small-scale and ancillary industries, and
 To accelerate export promotion and import substitution

Role of public sectors in the development of the country

 Public Sector and Capital Formation: The role of public sector in collecting
saving and investing them during the planning ear has been very important.
 Employment Generation: Public sector has created millions of jobs to tackle the
unemployment problem in the country. The number of persons employed in the
public as on march 2011 was 150 lakh. Public sector has also contributed a lot
towards the improvement of working and living conditions of workers by
serving as a model employer.
 Balanced Regional Development: Public sector undertakings have located
their plants in backward parts of the county. These areas lacked basic industrial
and civic facilities like electricity, water supply, township and manpower. Public
enterprises have developed these facilities thereby bringing about complete
transformation in the socio-economic life of the people in these regions. Steel
plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, are few
examples of the development of backward regions by the public sector.
 Export Promotion and Foreign Exchange Earnings: Some public enterprises
have done much to promote India’s export. The State Trading Corporation (STC),
the Minerals and Metals Trading Corporation (MMTC), Hindustan Steel Ltd., the
Bharat Electronics Ltd., the Hindustan Machine Tools, etc., have done very well in
export promotion.
 Import Substitution: Some public sector enterprises were started specifically to
produce goods which were formerly imported and thus to save foreign exchange.
The Hindustan Antibiotics Ltd., the Indian Drugs and Pharmaceuticals Ltd.
(IDPL), the Oil and Natural Gas Commission (ONGC), the Indian Oil Corporation
Ltd., the Bharat Electronics Ltd., etc., have saved foreign exchange by way of
import substitution.
 Promotion of Research and Development: As most of the public enterprises
are engaged in high technology and heavy industries, they have undertaken
research and development programmes in a big way. Public sector has laid
strong and wide base for self-reliance in the field of technical know-how,
maintenance and operation of sophisticated industrial plants, machinery and
 equipment in the country. Expenditure on research and development reduces
the cost of production.
Performance of Central Public Sector Undertakings
 There were altogether 248 CPSEs under the administrative control of various
ministries/departments as on 31 March 2011. Out of these, 220 were in
operation and 28 were under construction. The share of cumulative investment
(paid-up capital plus long-term loans) in all the CPSEs stood at Rs. 6,66,848 crore
as on 31 March 2011 ,showing an increase of 14.8 per cent over 2009-10. The
share of manufacturing in gross block, during 2010-11, was 27.8 per cent. The
share of mining, electricity, and services in total investment, in terms of gross
block, was 23.0 per cent, 25.2 per cent, and 23.2 per cent respectively. The net
profit of (158) profit-making CPSEs stood at Rs. 1,13,770 crore in 2010-11. The
net loss of (62) loss-making enterprises, on the other hand, stood at Rs. 21,693
crore during the same period. The year also witnessed severe financial 'under-
recoveries' by public-sector oil marketing companies (OMCs) as they had to keep
the prices of petroleum products low in the domestic market despite high input
prices of crude oil.
Problems of Public Sectors

 Poor policy making and its execution

 Over staffing
 Wastage of resources or under utilization of resources
 Higher operating cost
 Lack of motivation for self improvement
 Lack of proper price policy

Privatization
Privatization means transfer of ownership and/or management of enterprises from
public sector to private sector. It is the transfer of state owned enterprises(SOE) to
the private sector by sale(full or partial) of enterprise or by sale of assets after the
liquidation of the company.

Objectives of privatization:

 To reduce the burden on Government

  To improve Public finances
 To make optimum use of resources
 To achieve rapid industrial development of the country
 To increase competitive power of the enterprises

New Economic Policy

The year 1991 is an important landmark in the economic history of post-Independence
India. The country went through a severe economic crisis triggered by a adverse Balance
of Payment , lower GDP growth and higher inflation rate. The crisis was converted into
an opportunity to introduce some fundamental changes in the economic policy of the
country.

Former Prime Minister Manmohan Singh is considered to be the father of New Economic
Policy (NEP) of India. Manmohan Singh introduced the NEP on July 24,1991.
Why New Economic Policy 1991 Was Needed?

 The Indian currency, the rupee, was inconvertible and high tariffs and import
licensing prevented foreign goods reaching the market.
 India also operated a system of central planning for the economy, in which firms
required licenses to invest and develop.
 Economic instability/fiscal deficit.
 Gulf war/crisis
 Shortage of foreign exchange reserves.
 Burden of debt/liquidity crisis.
 Inefficient industrial growth.
 Fall in growth rate.
 Inflationary pressure.
 Poor performance of financial sector

Main Objectives of New Economic Policy – 1991, July 24

 The NEP intended to bring down the rate of inflation

 It intended to move towards higher economic growth rate.
 To build sufficient foreign exchange reserves.
 To achieve economic stabilization
  participation of private players
 To permit the international flow of goods, services, capital, human resources
and technology, without many restrictions.
 Liberalization
 Globalization

Branches/components of new economic policy

1. Liberalization: The first aspect of new economic policy was liberalization.

Liberalization of an economy means removing or relaxing government controls
and restrictions on economic activities.

Due to various controls, the economy became defective. The entrepreneurs were
unwilling to establish new industries ( because laws like MRTP Act 1969 de-
motivated entrepreneurs). Corruption, undue delays and inefficiency risen due to
these controls. Rate of economic growth of the economy came down. So in such a
scenario economic reforms were introduced to reduce the restrictions imposed on
the economy.

Following steps were taken under the Liberaliation measure:

(i) Increase in the investment limit for the Small Scale Industries (SSIs):

Investment limit of the small scale industries has been raised to Rs. 1 crore. So
these companies can upgrade their machinery and improve their efficiency.

(ii) Freedom to import capital goods:

Indian industries will be free to buy machines and raw materials from foreign
countries to do their holistic development.
(iii) Freedom for expansion and production to Industries:

In this new liberalized era now the Industries are free to diversify their production
capacities and reduce the cost of production. Earlier government used to fix the
maximum limit of production capacity. No industry could produce beyond that
limit. Now the industries are free to decide their production by their own on the
basis of the requirement of the markets.

(iv) Abolition of Restrictive Trade Practices: According to Monopolies and

Restrictive Trade Practices (MRTP) Act 1969, all those companies having assets
worth Rs. 100 crore or more were called MRTP firms and were subjected to several
restrictions. Now these firms have not to obtain prior approval of the Govt. for taking
investment decision. Now MRTP Act is replaced by the competition Act, 2002.

(v) Removal of Industrial Licensing and Registration: Previously private sector had
to obtain license from Govt. for starting a new venture. In this policy private sector
has been freed from licensing and other restrictions .The New Industrial Policy, 1991
has abolished the system of industrial licensing for all industrial undertaking,
irrespective of the level of investment, except few industries related to security and
strategic concern, social reasons, hazardous chemicals and environmental concerns.

Industries licensing is necessary for following industries:

 Liquor
 Cigarette
 Defence equipment
 Industrial explosives )‫(مواد منفجره‬
 Drugs
 Hazardous chemicals

(vi) Liberalisation in import and export.

(vii) Freedom in fixing the prices of goods and services.

 Impact of libralization

Positive impact negative impact

Increase in foreign investment Increase in Unemployment

Increase in Production Decrease in Tax Receipt

Technological advancement migration of income to foreign countries

Increase in GDP growth rate

2. Privatization: According to World Bank, “Privatisation is the transfer of state

owned enterprises to the private sector by sale of going concerns or by sale of
assets following their liquidation “ privatisation is the process of involving the
private sector-in the ownership of Public Sector Units (PSU’s). The main reason
for privatisation was political interference. The managers cannot work
independently. Production capacity remained under-utilized. To increase
competition and efficiency privatisation of PSUs was necessary.

Step taken for Privatisation

1. Sale of shares of PSUs: Indian Govt. started selling shares of PSU’s to public and
financial institution e.g. Govt. sold shares of Maruti Udyog Ltd. Now the private sector will
acquire ownership of these PSU’s. The share of private sector has increased from 45% to
55%.

2. Disinvestment in PSU’s: The Govt. has started the process of disinvestment in those
PSU’s which had been running into loss. It means that Govt. has been selling out these
industries to private sector. Govt. has sold enterprises worth Rs. 30,000 crores to the
private sector.
3. Minimisation of Public Sector: Previously Public sector was given the importance
with a view to help in industralisation and removal of poverty. But these PSU’s could not
able to achieve this objective and policy of contraction of PSU’s was followed under new
economic reforms. Number of industries reserved for public sector was reduces from
17 to 2.

(a) Railway operations

(b) Atomic energy

3. Globalization: Globalisation means reduction or removal of government restriction

on the movement of goods and service, capital, technology and talent across national
boundaries. It is the increasing interdependence, integration and interaction among
people and cooperation in various locations around the world.

Steps taken for Globalisation:

(i) Reduction in tariffs: Custom duties and tariffs imposed on imports and exports are
reduced gradually just to make India economy attractive to the global investors.

(ii) Long term Trade Policy: Forcing trade policy was enforced for longer duration.

Main features of the policy are:

(a) Liberal policy

(b) All controls on foreign trade have been removed

(c) Open competition has been encouraged.

(iii) In order to make international adjustment of Indian currency, rupee was devalued in July
1991 by nearly 20 per cent which also stimulated exports, discouraged imports
 Structural Adjustment Programmes

Structural Adjustment Programmes (SAPs) are economic policies for developing

countries that have been promoted by the World Bank and International Monetary Fund
(IMF) since the early 1980s by the provision of loans conditional on the adoption of such
policies. They are designed to encourage the structural adjustment of an economy by, for
example, removing “excess” government controls and promoting market competition as
part of the neoliberal agenda followed by the Bank. Structural adjustment
programs (SAPs) consist of loans provided by the International Monetary Fund (IMF)
and the World Bank (WB) to countries that experienced economic crises. The
two Institutions require borrowing countries to implement certain policies in order to
obtain new loans (or to lower interest rates on existing ones).

Conditions for structural adjustment programs:

Short-term adjustment policies usually include:

 balance of payments deficits reduction through currency devaluation

 budget deficit reduction through higher taxes and lower government spending

 raising the price of public services

 monetary policy to finance government deficits

 cutting wages

Long-term adjustment policies usually include:

 liberalization of markets

 privatization, or divestiture, of all or part of state-owned enterprises

 creating new financial institutions

 improving governance and fighting corruption

 enhancing the rights of foreign investors vis-à-vis national laws

  increasing the stability of investment (by supplementing foreign direct
investment with the opening of domestic stock markets).

In 1991, India faced an unprecedented balance of payments crisis. For almost a decade
the government had borrowed heavily to support an economic strategy that relied on
expansionary public spending to finance growth. From 1980 to 1991 India's domestic
public debt increased steadily, from 36 percent to 56 percent of the GDP, while its
external debt more than tripled to $70 billion.

It took a new government, which came to power in June 1991, to launch India's first
comprehensive economic policy reform program, which the World Bank supported with
a $500 million structural adjustment operation (SAL), approved in December 1991 and
closed in December 1993.

 To help India address its immediate balance of payments crisis and

 To support a broad set of policy reforms aimed at liberalizing the Indian economy and
opening it up to more competition both from within and abroad.

Implementation

 The government devalued the rupee by 23 percent, raised interest rates, and revised the
1991/92 union budget, making sharp cuts in subsidies and transfers to public enterprises

 It abolished the complex system of industrial and import licensing

 Liberalized trade policy, and introduced measures to strengthen capital markets and
institutions.

 India had moved from a regime in which private investment was not allowed in major
economic sectors to one whose openness to foreign investment compares favourably with
that of most Asian countries.

Results

 After declining in the first year of the reforms, GDP growth resumed to 5 percent in
1993/94 and 6.3 percent in 1994/95

 Exports increased almost 12 percent.

 Most important, there was a huge increase in of foreign investment, which increased
almost sevenfold )‫ (هفت برابر‬over projections.
 Economic Systems

Economic system is a system of production, resource allocation and distribution and

consumption of goods and services within a society or a given geographic area. Economic
systems are the means by which countries and governments distribute resources and trade goods
and services. They are used to control the five factors of production, including: labor, capital,
entrepreneurs, physical resources and information resources.

To be studied from any book

Section – C

Economic Policies in India

Monetary Policy: Monetary policy is the macroeconomic policy laid down by the
central bank. It involves management of money supply and interest rate In the economy.

MONETARY POLICY is the process by which monetary authority of a country,

generally 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. RBI
is the central bank of India

Objectives:

 Full employment: Monetary policies can influence the level of unemployment in

the economy. For example, an expansionary monetary policy generally decreases
unemployment because the higher money supply stimulates business activities that
lead to the expansion of the job market.
 price stability/ healthy inflation: fluctuations in the prices brings instability in the
economy
 Economic growth
 balance of payments
 to control business cycle
 To Regulate and Expand Banking

Types of Monetary Policy

1. Expansionary Monetary Policy: It involves increasing the money supply and lowering
the interest rates. The lower interest rate encourages the borrowers to buy more which
increases the economic activity. The increased economic activity leads to more
employment opportunities thus decreasing unemployment. It also increases
the inflation as more money is available to buy goods and services. It is also known
as Easy Money Policy or Loose Money Policy as central banks seeks to increase the
money supply by lowering the interest rates. It is used during recession.
2. Contractionary Monetary Policy: It involves decreasing the money supply and
increasing the interest rates. As reduction in money supply increases the interest rates,
the borrowers will be reluctant to borrow the money due to higher borrowing cost
which ultimately reduces the economic activity. It leads to decrease in inflation,
increase in unemployment and slowdown in economy. It is also known as tight money
policy as central banks seeks to reduce the money supply by restricting credit by
increasing interest rates. This policy is used during Inflation.

Tools/instruments of monetary policy

1. 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. Higher the CRR with the RBI lower will be the liquidity in the system and
vice versa. For example, if the RBI reduces the CRR from 5% to 4%, it means that
commercial banks will now have to keep a lesser proportion of their total deposits
with the RBI making more money available for business. Similarly, if RBI decides to
increase the CRR, the amount available with the banks goes down. Currently, the
CRR is 4 per cent

2. Statutory Liquidity Ratio (SLR): Apart from CRR, the banks in India are required
to maintain liquid assets in the form of gold, cash and approved securities. The
increase/decrease in SLR affects the availability of money for credit with banks. SLR
is stated in terms of a percentage of total deposits available with a commercial bank
and is determined and maintained by the RBI in order to control the expansion of
bank credit. Currently, the SLR is 19.5 per cent

3. Repo Rate: The rate at which the RBI is willing to lend to commercial banks is called
Repo Rate. Whenever commercial banks have any shortage of funds they can borrow
from the RBI, against securities. If the RBI increases the Repo Rate, it makes
borrowing expensive for commercial banks and vice versa. Currently, the RR is 6 per
cent.

4. Reverse Repo Rate: The rate at which the RBI is willing to borrow from the
commercial banks is called reverse repo rate. Currently, the RRR is 5.75 per cent.

5. Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills
of exchange or other commercial papers. Currently, the BR is 6.25 per cent.
6. Open Market Operations: An open market operation is an instrument of monetary
policy which involves buying or selling of government securities from or to the public
and banks. The RBI sells government securities to control the flow of credit and buys
government securities to increase credit flow.
7. Moral Suasion: Moral Suasion is just as a request by the RBI to the commercial
banks to take certain actions. For example RBI may request commercial banks not to
give loans for unproductive purposes which do not add to economic growth but
increase inflation.

Fiscal Policy
Fiscal policy is the means by which a government adjusts its spending levels
and tax rates to monitor and influence a nation's economy.

Objectives of fiscal policy

 Full employment:
 price stability/ healthy inflation:
 Economic growth
 balance of payments
 to control business cycle
 Balanced Regional Development: there are various projects like building up
dams on rivers, electricity, schools, roads, industrial projects etc run by the
government to mitigate the regional imbalances in the country. This is done with
the help of public expenditure.
 Development of Infrastructure: when the government of the concerned country
spends money on the projects like railways, schools, dams, electricity, roads etc to
increase the welfare of the citizens, it improves the infrastructure of the country.

Types of fiscal policy

1. Expansionary Fiscal Policy: decreasing tax rates and increasing government
expenditure. It is used in recession.
2. Contractionary Fiscal Policy: increasing tax rates and reducing government
expenditure. It is used in inflation
Instruments of fiscal policy
 Budget: Budget: “A Budget is a detailed plan of operations for some specific
future period”
 Taxation: is a financial charge imposed by a taxpayer. It includes:
 Direct Tax: that are directly paid to the government such as Individual
Income Tax & Corporate Tax. • Wealth tax
 Indirect Tax: that are applied by manufacture or sale of goods and services
such GST, custom duty etc.
  Public Expenditure: Public expenditure is spending made by the government of a
country on collective needs and wants such as pension, provision, infrastructure. It
is divided into two parts:
 Revenue expenditure: are those expenditure that neither creates assets nor
reduce liabilities. Such as payment of interests, payment of salaries and
pensions, education and health services, grants and subsidies, defence services
etc
 Capital expenditure: are those that create assets or reduce liabilities such as
constructions of roads, buildings bridges, purchase of land and machinery,
investment in shares, loan to state and foreign governments and repayment of
loans.
 Public Debts: “To fund the deficit, the government has to borrow from domestic
or foreign sources. It can also print money for deficit financing.”
 Internal borrowings
 Borrowings from the public means of treasury bills and govt. bonds.
 Borrowings from the central bank
 External borrowings
 International organizations like World Bank &IMF etc
Income tax slabs
 In case of individual below 60:
 Up to 250000------Nil
 250000-500000-----5%
 500000-1000000----20%
 Above 10 lakhs------30%
 In case of senior citizen (60-80 years)
 Up to 300000--------NIL
 300000-500000-----5%
 500000-1000000----20%
 Above 10 lakhs------30%
 In case of super senior citizen( above 80 years)
 Up to 500000-----NIL
 500000-1000000----20%
 Above 10 lakhs------30%

Industrial policy of India

Industrial Policy refers to the strategies adopted by government for industrial

development in the country. The government of India has amended first industrial policy
of India in 1948. The new Industrial Policy was announced in July, 1991 in the midst of
severe economic instability in the country. The objective of the policy was to raise
efficiency and accelerate economic growth. It covers rules, regulations, principles,
policies, & procedures laid down by government for regulating & controlling industrial
undertakings in the country.

INDUSTRIAL POLICIES
• Industrial Policy Resolution of 1948
• Industrial Policy Resolution of 1956
• Industrial Policy Resolution of 1973
• Industrial Policy Resolution of 1977
• Industrial Policy Resolution of 1980
• The New Industrial Policy of 1991
New Industrial Policy of India, JULY 24, 1991.

In July’24, 1991, the Government of India announced a new industrial policy with
sweeping changes.

1. Except some specified industries (security and strategic concerns, social reasons,
environmental issues, hazardous projects and articles of elitist consumption)
industrial licensing would be abolished.
2. Foreign investment would be encouraged in high priority areas up to a limit of 51
per cent equity.
3. Government will encourage foreign trading companies to assist Indian exporters
in export activities.
4. With a view to injecting the desired level of technological dynamism in Indian
industry, the government will provide automatic approval for technology
agreements related to high priority industries.
5. Disinvestment of Public Sector Units' shares.

Government decided to take a series of initiatives in respect of the policies relating to

the following areas:

A. Industrial Licensing: Under the industrial licensing policies, private sector firms
have to secure licenses to start an industry. This has created long delays in the start up
of industries. The industrial policy of 1991 has almost abandoned the industrial
licensing system. This policy abolished the Industrial licensing for all industries
except for a short list of 18 industries. This list of 18 industries was further pruned in
1999 whereby the number reduced to six industries viz. drugs and pharmaceuticals,
hazardous chemicals, explosives such as gun powder and detonating fuses, tobacco
products, alcoholic drinks, and electronic, aerospace and defence equipment. The
compulsion for obtaining prior approval for setting units in metros was also removed.

B. Foreign Investment: This was the first Industrial policy in which foreign
companies were allowed to have majority stake in India. In 47 high priority industries,
up to 51% FDI was allowed. For export trading houses, FDI up to 74% was allowed.
Today, there are numerous sectors in the economy where government allows 100%
FDI. The government also established a special empowered board called Foreign
Investment Promotion Board (FIPB) to negotiate with international firms and approve
FDI in selected areas.

C. Foreign Technology Agreements: Automatic permission was given for foreign

technology agreements in high priority industries up to a lump sum payment of Rs. 1
crore.

D. Public Sector Policy: This indicated a disinvestment of the public sector. The
government has adopted disinvestment policy for the restructuring of the public sector
in the country. at the same time autonomy has been given to PSU boards for efficient
functioning. Under industrial deregulation, most of the industrial sectors was opened
to the private sector as well. Previously, most of the industrial sectors were reserved
to the public sector. Under the new industrial policy, only three sectors- atomic
energy, mining and railways will continue as reserved for public sector. All other
sectors have been opened for private sector participation.

E. MRTP Act: According to the Monopolies and Restrictive Trade Practices (MRTP)
Act, 1969, all big companies and large business houses (which had assets of Rs. 100
crores or more, according to the 1985 amendment to the Act) were required to obtain
clearance from the MRTP Commission for setting up any new industrial unit, because
such companies (called MRTP companies) were allowed to invest only in some
selected industries. No prior approval of or clearance from the MRTP Commission is
now required for setting up industrial units by the large business houses.

F. Greater Support to Small-Scale Industries: The New Industrial Policy seeks to

provide greater government support to the small-scale industries so that they may
grow rapidly under environment of economic efficiency and technological
upgradation.
 Industrial licensing in India

Since the liberalization and deregulation of the Indian economy in 1991, most industries
have been exempt from obtaining an industrial license to start manufacturing in India.
Government attention is reserved only for those industries that may impact public health,
safety, and national security.

List of industries for which industrial licensing is compulsory:

1. Alcoholic drinks.
2. Cigars and Cigarettes of tobacco and manufactured tobacco subsitutes.
3. Electronic Aerospace and Defence equipment: all types.
4. Industrial explosives including detonating fuses, safely fuses, gun powder,
nitrocellulose and matches.
5. Hazardous chemicals.
6. Drugs and Pharmaceuticals

License registration for industries

The application for registration must be made to the SIA(Secretarial of Industrial
Assistance), Department of Industrial Policy & Promotion (DIPP) along with a fee. The
government issues the certificate only after due consideration.
Once the license is obtained, an industrial undertaking is eligible for the allotment of
controlled commodities and for the issuance of an import license for goods required for
its construction and operation.
EXIM Policy
Exim Policy or Foreign Trade Policy is a set of guidelines and instructions established by
the DGFT(Directorate General of Foreign Trade) in matters related to the import and
export of goods in India. Exim Policy, also known as the Foreign Trade Policy is
announced every 5 years by Ministry of Commerce and Industry, Government of India. It
is updated every year on the 31st of March and all the amendments and improvements in
the scheme are effective from the 1st of April. Current EXIM policy of India is from
2015-2020.
Objectives of EXIM policy:

 Developing export potential

 Improving export performance
 Encouraging foreign trade and
 Creating favorable balance of payments position.
 To establish the framework for globalization
 to increase export
 to generate new employment opportunities

Current EXIM policy of India

The Government of India notifies the foreign trade Policy for a period of five years (for
example 2015 -20) under Section 5 of the Foreign Trade (Development and Regulation
Act), 1992. The current Export Import Policy covers the period 2015-2020. The FTP is
updated every year on the 31st of March and the modifications, improvements and new
schemes become effective from 1st April of every year.
All types of changes or modifications related to the EXIM Policy is normally announced
by the Union Minister of Commerce and Industry who co-ordinates with the Ministry of
Finance, the Directorate General of Foreign Trade and network of DGFT Regional
Offices.
Some highlights of the present Foreign Trade Policy 2015-2020
 India to be made a significant participant in world trade by 2020: the target to
double India’s exports in goods and services over the next five years (from $465
billion to $900 billion) and upping the Indian share of the world exports pie from
the current 2 percent to 3.5 percent over the same period.
 . Merchandise Exports from India Scheme (MEIS): Earlier there were 5
different schemes (Focus Product Scheme, Market Linked Focus Product Scheme,
Focus Market Scheme, Agri. Infrastructure Incentive Scrip, VKGUY), Now all
these schemes have been merged into a single scheme, namely Merchandise
Export from India Scheme (MEIS).
 Service Exports from India Scheme (SEIS): Served From India Scheme (SFIS)
has been replaced with Service Exports from India Scheme (SEIS).
 FTP would reduce export obligations by 25% and give boost to domestic
manufacturing
  Online filing of documents/ applications and Paperless trade in 24x7
environment: DGFT already provides facility of Online filing of various
applications under FTP by the exporters/importers. However, certain documents
like Certificates issued by Chartered Accountants/ Company Secretary / Cost
Accountant etc. have to be filed in physical forms only.
 Agricultural and village industry products to be supported across the globe at rates
of 3% and 5% under MEIS.
 Industrial products to be supported in major markets at rates ranging from 2% to
3%.
 A new position called ‘Status Holder’ have been formulated, which will recognize
and reward those entrepreneurs who have helped India to become a major export
player.
 Tax and duty on Indian manufacturers have been reduced, to boost Make in India
vision
 Calicut Airport, Kerala and Arakonam ICDs(Inland Container Depots), Tamil
Nadu notified as registered ports for import and export.
 In January 2019, the Government of India approved recapitalisation of the Export
Import Bank of India (EXIM).
 RBI has simplified the rules for credit to exporters, through which they can now
get long-term advance from banks for up to 10 years to service their contracts.

The Competition Act 2000

History: In 1969 Govt. has passed an act and it had given the name monopoly and
restrictive trade practices (MRTP). It became popular with the name of MRTP 1969. This
act has many provisions to control the monopoly and to promote the competition. But its
scope was very narrow so the Govt. of India has made new act called competition act
2002. On the place of MRTP ACT 1969 after this MRTP act 1969 was fully repealed.
This act extends to whole of India except the State of Jammu and Kashmir. Competition
laws is equally applicable on written as well as oral agreement, arrangements between the
enterprises or persons. The Competition Act, 2002 was amended by the Competition
(Amendment) Act, 2007 and again by the Competition(Amendment) Act, 2009. The Act
came into force on 13 Jan 2003.
Objectives of Competition Act, 2002
 To promote healthy competition in the market.
 To prevent those practices which are having adverse effect on competition.
 To ensure freedom of trade in Indian markets.
 To prevent abuses of dominant position in the market actively.
 To Regulate the operation and activities of combinations (acquisitions, mergers
and amalgamation).
 Protection of consumer interest

Main Features of Competition Act, 2002

1. Competition Act is a very compact and smaller legislation which includes only 66
sections.
2. Competition commission of India (CCI) is constituted under the Act.
3. This Act restricts agreements having adverse effect on competition in India.
4. This Act suitably regulates acquisitions, mergers and amalgamation of enterprises.
5. This Act is flexible enough to change its provisions as per needs.
6. Competition Act has replaced MRTP Act.
7. Under this Act, “Competition Fund” has been created.
8. Competition commission of India (CCI): was established under the Competition
Act, 2002 for the administration, implementation and enforcement of the Act.
9. Govt. of India appoints the chairman and other member(min 2 and max 10) of
competition commission. Competition act 2002 gives the rules and regulation
regarding establishment and functions of this commission.
10. Qualification of chairperson of competition commission: He or she should be
Judge of high court +15 years or more experience in the field of international trade
, commerce , economics , law , finance , business and industry .

The four important concepts incorporated in the ACT are:

 Prohibition of anti competitive agreements: An agreement between •enterprise
and enterprise or •Person and person or •Enterprise and person will be null and
void if it has the adverse effect on market or the competition in the market. and
also the practices performed by a entity or a person which are unfair or which
exploit the market then those practices will be banned or considered as void.
 Prohibition of abuse of dominance position: Dominant position means a
position of strength, enjoyed by an enterprise ,in the relevant market in India .
 Directly or indirectly imposing unfair or discriminatory conditions in the purchase
or sale of goods and services
 Regulations of combinations: The Act regulates the various forms of business
combination and not prohibit their formation. Under it, no person or enterprise
shall enter into a combination, in the form of an acquisition, merger or
amalgamation, which causes or is likely to cause an adverse effect on competition
in the relevant market and such a combination shall be void. Thus, the Act does
not seek to eliminate combinations and only aims to eliminate their harmful
effects.
 Competition advocacy: means those activities which are conducted to promote a
competitive environment for economicactivities.The main beneficiaries of
competition policy and law are the consumers, whose welfare is its declared
objective of competition Act.

Activities Prevented Under Competition Act

 Price fixing: If two or more supplier fixes the same price for supplying the goods
then it will be restricted practice.
 Bid rigging : If two or more supplier exchange sensitive information of bid, then
it will also be restricted practice and against competition.
 Re-sale price fixation: If the producer sells the goods to the distributors on the
condition that he will not sell on any other price which is not fixed by the
producer.
 Exclusive dealing: This is also restricted practice. If the distributor purchases the
goods on a condition that supplier will not supply the goods to any other
distributor.

Foreign Exchange Management Act (FEMA)

The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as
a replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA became an
act on the 1st day of June, 2000. FEMA was introduced because the FERA didn’t fit in
with post-liberalisation policies. FEMA is applicable to all parts of India. The act is also
applicable to all branches, offices and agencies outside India owned or controlled by a
person who is a resident of India.
Objectives:
 To facilitate external trade and payments in India.
 To develop the maintenance of foreign exchange market in India.
 To consolidate and amend )‫ (تحکیم و اصالح‬the law related to foreign exchange.
 To facilitate external trade.

FEMA Act is applicable to:

The FEMA, is applicable:

 To the whole of India.

 Any Branch, office & agency, which is situated outside India, but is owned or
controlled by a person resident in India.

Broadly speaking FEMA, covers three different types of categories are:

 Person.
 Person Resident in India.
 Person Resident outside India.
 Export: Goods & services from India to outside
 Foreign Currency: Other than Indian Currency.
 Foreign Exchange: Means foreign currency.
 Foreign Security: Security expressed in foreign currency.
 Import: Goods & services from outside to India.
 Security: Share, Stock etc. as defined in the Public Debt Act of 1994.
 Service: Banking, Financing, Insurance etc..
 Transfer: sale, Purchase, Exchange etc..
 Non-Resident Indian (NRI): Citizen of India residing outside.

 Major Foreign Exchange Regulations

 An individual should not involve in any foreign exchanges or foreign securities for
another individual unless he/she is an authorized person.
 An individual should not make any payments or should not credit any money to an
NRI.
 An individual should not receive any money from an authorized person on behalf
of an NRI.
 An individual should not interfere in any financial transactions in India for an
NRI.
  An individual in India cannot acquire hold, own, possess or transfer any security
of immovable property outside India.

Penalty:
If a taxpayer commits any offense under this act, he/she would be indebted to remit a
penalty which is equivalent to thrice the amount occurring due to such default, if the
amount is quantifiable or a sum of Rs. 2lakhs if the amount is not quantifiable. If the
taxpayer continues with his offense, the quantum of penalty extends up to Rs. 5,000 for
each day of default.
The concerned authority is also entitled to confiscate currency, security or any other
property belonging to the assessee in favor of the Central Government. In addition to it,
the officer is empowered to bring back the defaulters foreign exchange earnings to India.

RTI Act 2005 (ppt)

Section D
International economic environment

Globalization: the process by which businesses or other organizations develop

international influence or start operating on an international scale. Globalization is the
spread of products, technology, information, and jobs across national borders and
cultures. In economic terms, it describes an interdependence of nations around the globe
caused by free trade. Globalization is the process of interaction and integration among
people, companies, and governments worldwide.

Dimensions of globalization
 Economic: Economic globalization is the intensification and stretching of economic
interrelations around the globe. It encompasses such things as the emergence of a new
global economic order, the internationalization of trade and finance, the changing power
of transnational corporations, and the enhanced role of international economic
institutions.
 Political: Political globalization is the intensification and expansion of political
interrelations around the globe. Such as movement towards political cooperation
among transnational actors, aimed at negotiating responses to problems that affect more
than one state or region.

 Military: Military globalization, as sub domain of political globalization, is defined as

the intensification and stretching of military power across the globe through various
means of military power (nuclear military weapons, radiation weapons simply weapons
of mass destruction). This form of globalization occurs across offensive and defensive
uses of power and survival in international field.

 Cultural: Cultural globalization is the intensification and expansion of cultural flows

across the globe.

 Ecological: Topics of ecological globalization include population growth, access to food,

worldwide reduction in biodiversity, the gap between rich and poor as well as between
the global North and global South, human-induced climate change, and global
environmental degradation.

Emergence of globalization

The emergence of globalization was introduced to promote inherent wealth among all
countries in the world.

 The United States has notably been identified as the leader in globalization after the
World War II. In 1993, they introduced the North American Free Trade Agreement
(NAFTA) which was a movement aimed at eliminating trade boundaries and promoting
globalization.

 In the 19th century, most countries started investing in new forms of transport and
communication services. Additionally, there were other transport systems such as road
and air transport and communication forms such as the introduction of the internet and
the cell phone. With the invention of these advanced forms of transport and
communication, billions of people were connected globally. In 2000, the International
 Monetary Fund acknowledged four fundamental aspects of globalization. These aspects
include:
 Trade and transactions
 Capital and investment movements
 Migration and
 Dissemination of knowledge.
 Early in the 21st century, the developing states augmented their global trade share.
 Also, the movement of people to different places in the world had a significant impact on
the globalization factor. In most cases, it was noted that individuals migrated from their
countries to other regions where the economy was advanced.
 In addition, dissemination of information is also an integral aspect in globalization.
 Technological innovations formed significant benefits to the least developing countries in
the world.
 Lastly, the aspect of investment and capital movements still remains significant in
globalization.Most of the corporations which are located in the United States have moved
their services to other countries where it is cheap to perform their business.

Emergence of globalization in India

Fiscal deficit, inflation, and economic crises during the preceding years caused India to
open its boundaries to global trade. The wake of globalization was first felt in the 1990s
in India when the then finance minister, Dr Manmohan Singh initiated the economic
liberalization plan in 1991. The licensing of industries was called for the New Industrial
Policy. FDI started to come to India and a policy of automatic approval for foreign direct
investment up to 51 per cent was approved. Since then, India has gradually become one
of the economic giants in the world. Today, it has become one of the fastest growing
economies in the world with an average growth rate of around 6-7 %. There has also been
a significant rise in the per capita income and the standard of living. Poverty has also
reduced by around 10 %. As per the data of 2018-19 The service industry has a share of
around 54% of the annual Gross Domestic Product while the industrial and agricultural
sectors share around 30% and 15% respectively. Due to the process of globalization, the
exports have also improved significantly.

Effect of Globalization on Indian Economy:-

Positive effects of globalization on Indian economy: -

Increase in Foreign Trade: - As a result of foreign trade policies adopted in the wake of
globalization, India’s share in the world trade has gone up. as a result of globalization of India’s
foreign trade there has been some increase in India’s share in world trade. In 1990-91 India’s
share in world trade was 0.53 percent. In 1995-96 it rose to 0.60% in 2009-10 increase to 1.78
and in 2010-11 it farther increased to 1.96 percent and it is increasing year by year.

Increase in Foreign investment: - As a consequence of globalization in forging investment

policy 1991, Indian govt. started encouraging the entry of foreign investment; there has been a
considerable increase in foreign direct investment as well as foreign portfolio investment.

Expansion of Market: - globalization has expanded the size of market, it has permitted Indian
business unit to expand their business in the whole world. Now multinational corporations, have
no national boundaries. Indian companies like Infosys, Tata consultancy, Wipro, Tata Steel,
reliance etc, are doing their business in many countries of the world.

Technological Development: - globalization has promoted the technical collaboration of foreign

companies. This collaboration enabled the inflow of modern advanced and superior foreign
technology in India. Now Indian business units use this modern technology. It has resulted
technological development of Indian business units.

Brand Development: - Globalization has promoted the use of branded goods. Now not only
durable goods are branded but products like garments, Juices, Snacks, food grains etc. are also
branded. Brand development has led to quality improvement.

Development of Capital Market: - Globalization has helped in Indian capital market

development now many foreign investors invest in Indian capital market recently there has been
substantial increase in inflow of foreign direct investment and portfolio investment.

Increase IN Employment: - As a result of Globalization foreign companies are establishing

their production and trading units in India. It has increased employment opportunities for Indian.
E.g. many Indian’s are employed in foreign insurance companies, mobile companies etc.

Reduction in brain Drain: - as a result of globalization, many multinational corporations have

set up their business units in India. These MNCs provide attractive salary package and good
working conditions to efficient, Skilled Indian get good employment opportunities in India. It
has resulted in reduction in brain- drain.

Negative impact of globalization on Indian economy

Loss of Domestic industries: - as a result of Globalization foreign competition has increased in

India. Because of better quality and low cost of foreign goods, many Indian industrial units have
failed to face competition and have been closed.

Problem of Unemployment: - as a result of globalization foreign companies or even some

Indian companies use capital intensive technology. With the increasing use of capital intensive
technology the employment opportunities are reduced and increase the problem of
unemployment in Indian economy.

Exploitation of Labour: - Globalization is exploiting unskilled workers by giving lower wages,

less job security long working hours and worse working condition.

Bad Effect on Culture and Value System: - Many global companies sell such products as
distort our culture and value system. The vulgar advertisements shown by some MNCs pollute
the thinking of young generation in India.

Foreign Direct Investment

It is a process which enables the residents of one country to directly invest their funds in another
country and acquire ownership of assets and exercise control over the investment in terms of
production, management, distribution, effective decision making, employment etc.

TYPES OF FDI

There are two main types of foreign investment:

1. Portfolio investments - Portfolio investments are investments in purely financial

assets such as bonds, stocks denominated in national currency. Portfolio or financial
investments take place primarily through financial institution such as banks investment
funds.

2. Direct investments - These investments are the real investments in factories,

capital goods, land and inventories where both capital and management are involved and
the investors retains control over use of the invested capital. Foreign direct investment
(FDI) is investment directly into production in a country by a company located in another
country, either by buying a company in the target country or by expanding operations of
an existing business in that country.

FDI in india: Foreign direct investment (FDI) in India is a major monetary source
for economic development in India. Foreign companies invest directly in fast growing
private Indian businesses to take benefits of cheaper wages and changing business
environment of India. Economic liberalisation started in India in wake of the 1991
economic crisis and since then FDI has steadily increased in India which subsequently
generated more than one crore jobs.

 Rank: India stands at No. 11 in terms of FDI country attraction index

  Rules: The population of area in which the investment to be made must be more
than 10 lakh
 Employment: FDI has provided more than 1 crore jobs
 Investment: Singapore stands No. 1 in terms of foreign investment in India

Market size

The total FDI investments in India April-December 2018 stood at US$ 33.49 billion.

Data for April-December 2018 indicates that the services sector attracted the highest FDI
equity inflow of US$ 6.59 billion, followed by computer software and hardware – US$
5.00 billion, trading – US$ 3.04 billion and telecommunications – US$ 2.29 billion. Most
recently, the total FDI equity inflows for the month of December 2018 touched US$ 4.39
billion.

During April-December 2018, India received the maximum FDI equity inflows from
Singapore (US$ 12.98 billion), followed by Mauritius (US$ 6.02 billion), Netherlands
(US$ 2.95 billion), USA (US$ 2.34 billion), and Japan (US$ 2.21 billion).

Government Initiatives
 As of February 2019, the Government of India is working on a road map to achieve its
goal of US$ 100 billion worth of FDI inflows.

 Government of India is planning to consider 100 per cent FDI in Insurance

intermediaries in India to give a boost to the sector and attracting more funds.

 In February 2019, the Government of India released the Draft National e-Commerce
Policy which encourages FDI in the marketplace model of e-commerce. According to
the new policy,
 FDI in ecommerce is allowed only in the B2B space, and not B2C.
 Further, it bars ecommerce companies from selling products of companies in
which they hold a stake.
 The new policy for e-commerce bars companies from selling products exclusively
on their online portals

Routes of FDI

Automatic Route: Under the Automatic Route, the non-resident investor or the Indian company
does not require any approval from Government of India for the investment.
 Government Route: Under the Government Route, prior to investment, approval from the
Government of India is required.

Rules regarding FDI

 FDI up to 100% for cash and carry wholesale trading and export trading allowed under
automatic route.
 100% FDI allows investment in power trading, petroleum infrastructure, processing and
warehousing of rubber and coffee, diamond and coal mining. And the rest of the sectors
require prior approval from RBI or FIPB.
 100% FDI under automatic route is permitted in construction sector for cities and
townships.
 100% FDI is permitted in automotive sector via automatic route. Automobiles shares
7% of the India's GDP.
 Indian pharma industry is expected to grow at 20% compound annual growth rate from
2015 to 2020. 74% FDI is permitted in this sector.
 100% FDI is allowed in Chemical sector under automatic route.
 100% FDI is allowed under automatic route.
 100% FDI is allowed under automatic route in most of areas of railway, other than the
operations, like High speed train, railway electrification, passenger terminal, mass rapid
transport systems etc.
In Retail sector:

 100% FDI is allowed in single brand‘ retailing but after government approval that is
from Foreign Investment Promotion Board (FIPB).
 51 % FDI Allowed in Multi Brand Retailing

MNCs in India

A multinational corporation is a corporate organization which owns or controls

production of goods or services in one or more countries other than its home country.

A multinational company is a business that operates in many different countries at the

same time. In other words, it’s a company that has business activities in more than one
country.
Some MNCs in India

1. Microsoft
2. IBM
3. Coca cola
4. Nestle
 5. P&G ( Procter and gamble)
6. PepsiCo
7. Google etc

Role of MNCs in Indian economy:

 Transfer of technology
 Capital investment
 Employment opportunities
 Increased in export: due to cheap wages and labor, MNCs produce their
products in India and export it to other countries which has direct impact on Indian
economy.
 Managerial practices: MNCs brought best managerial practices such as human
resources practices, financial control, advertising strategies etc.
 Competitive advantage
 Infrastructural investments
 Large amount of tax collections through MNC’s
 Increased revenue
 Improves Balance of Payments: An added benefit of foreign direct investment is
that it helps the Balance of Payments of both, the capital and current accounts, of
the host country.
 Foreign relation increased: MNCs helps host countries in maintaining a better
relations not just with their home countries, but also with the countries that they
have trade relations.

Problems from MNCs:

 Exploitation of natural resources – MNCs use natural resources of the home

country in order to make huge profit which results in the depletion of the resources
thus causing a loss of natural resources for the economy
 Loss to Local Businesses – MNCs products sometimes lead to the killing of the
domestic company operations. The MNCs establishes their monopoly in the
country where they operate thus killing the local businesses which exists in the
country.
 Transfer of capital takes place from the home country to the foreign ground
which is unfavorable for the economy.
  Political Risks – As the operations of the MNCs is wide spread across national
boundaries of several countries they may result in a threat to the economic and
political sovereignty of host countries.
 Pollution and Environmental hazards
 Exploitation of Labour: - Globalization is exploiting unskilled workers by giving
lower wages, less job security long working hours and worse working condition.
 Bad Effect on Culture and Value System: - Many global companies sell such
products as distort our culture and value system. The vulgar advertisements shown
by some MNCs pollute the thinking of young generation in India.

WTO

The World Trade Organization (WTO) is the global international organization dealing
with the rules of trade between nations. It is an intergovernmental organization that is
concerned with the regulation of international trade between nations. officially
commenced on 1 January 1995 under the Marrakesh Agreement, signed by 124 nations
on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which
commenced in 1948. It is the largest international economic organization in the world.
The WTO deals with regulation of trade in goods, services and intellectual property
between participating countries.

Functions of WTO in international business

 To look after the administration of agreements signed at the Uruguay Round: In

the Uruguay Round, new agreements such as the General Agreement on Trade in
Services (GATS) and the Agreement on Trade Related Aspects of Intellectual
Property Rights (TRIPS) and Trade Related Investment Management System
(TRIMS) were negotiated. All the three major agreements along with their
associate agreements now rest under the umbrella organization, namely the WTO.

 WTO facilitates implementation, administration and smooth operations of trade

agreements between the countries.
 It provides a forum for the trade negotiations between its member countries.
 Settlements of disputes between the member countries through the established
rules and regulations.
 It cooperates with the IMF(International Monitory Fund) and World Bank in terms
of making cohesiveness in making global economic policies.
 To provide a global platform where member nations continuously negotiate the
exchange.
  Examine foreign trade policies of the member nations, and to see that such policies
are in tune with WTO‘s guidelines.
 Provide necessary consultancy to the member nations on the development in the
world economy.

Role of WTO:

 Resolving disputes
 Consultancy
 Helps to run smooth and fair operations: The main goal of WTO is to help the
countries involved in international trade to run their operations fairly and
smoothly.
 Trade without discrimination: Under the WTO agreements, countries engage in
international trade cannot normally discriminate between their trading partners.
Grant someone a special favor such as a lower customs duty rate for one of their
products that practice is considered unfair so you have to do the same for all other
WTO members.
 Lowering trade barriers through negotiation: Lowering trade barriers allows
trade to increase, which adds to increase national incomes and personal incomes.
WTO tries to minimize these barriers so as to enhance free trade.
 Promoting fair competition: Although WTO is described as a “free trade”
institution, but on the other hand it is also a system of rules and regulations for
international trade to promote fair competition.
 Stimulate economic growth and employment: WTO system motivates the
member countries to produce high quality goods by using latest technology and
skilled labor. These results in high profits for the Countries engaged in
international trade which ultimately improves their economy and creates new
employment opportunities.

Implications/Role of WTO in Indian economy

The WTO has both favourable and non-favourable impact on the Indian economy.

A. FAVOURABLE IMPACT

1) Increase in export earnings: General Agreement on Tariffs & Trade (GATT):

Increase in export earnings can be viewed from growth in merchandise exports and
growth in-service exports:
 Growth in merchandise exports : The establishment of the WTO has increased
the exports of developing countries because of reduction in tariff and non-tariff trade
barriers.

 Growth in service exports : The WTO introduced the GATS (general Agreement on
Trade in Services ) that proved beneficial for countries like India. Services exports
account for 40% of India's total exports of goods and services. India's exports are mainly
in the IT and IT enabled sectors, Travel and Transport, and Financial sectors.

2) Agricultural exports: Agreement on Agriculture (AOA): Reduction of trade

barriers and domestic subsidies raise the price of agricultural products in international
market, India hopes to benefit from this in the form of higher export earnings from
agriculture. This will benefit India because All major agricultural development programs
are exempted from the provision of WTO agreement.

3) Textiles and Clothing: Multi-Fiber Agreement (MFA): This agreement is

dismantled with effect from 1 January 2005. The result was removal of quantitative
restrictions on the textile imports in several European countries. As a consequence a
huge textile market is opened up for developing countries textile industry as well as for
other countries that have competitive advantage in this area. The immediate impact is on
the garment and textile manufacturers and exporters. It will help the developing countries
like India to increase the export of textiles and clothing.

4) Foreign Direct Investment: Trade Related Investment Measures (TRIMS): As

per the TRIMs agreement, restrictions on foreign investment have been withdrawn by
themember nations of the WTO.This has benefited developing countries by way of
foreign direct investment, euro equities and portfolio investment.

5) Agreement on Sanitary and psyto-sanitary measures (SPM): this agreement refers

to restricting exports of a country if they do not comply with the international standards
of germs/bacteria etc… if the country suspects that allowing of such products inside the
country would result in spread of disease and pest, then there is every right given to the
authorities to block the imports.
Indian standards in this area are already mentioned and therefore there is no need to
change the law, but the problem is that of strictly implementing the laws. There is an
urgent need to educate the exporters regarding the changing scenario and standards at the
international arena, and look at the possible consequence and losses to be incurred if the
stipulations are not followed. Therefore, to meet the standards certain operational
changes are required in the industries such as food processing, marine food and other
packed food that is being currently exported from India.
UNFAVOURABLE IMPACT

Trade Related Intellectual Property Rights (TRIPS): Protection of intellectual

property rights has been one of the major concerns of the WTO.As a member of the
WTO, India has to comply with the TRIPs standards. However, the agreement on TRIPs
goes against the Indian patent act, 1970. As a result, in India there was a requirement to
change the patents act, Trade and merchandise mark act and the copyright right act.
Besides these main laws, other related laws also required changes.

TRIPS negatively impact the following sectors of India economy:

Pharmaceutical sector: Indian pharmaceutical company only needed to develop and

patient a process to produce and sell the drugs. India companies were in a positions to sell
quality drugs with low cost in domestic as well as in foreign matket.but under the
agreement of TRIPS, product patents need to be granted which will benefit the MNCs
and will increase the price of medicines heavily. Many India companies may be closed or
take over by large MNCs.

Agriculture: the agreement of TRIPS extends to agriculture through the patent of plant
varieties. Patenting of plant varieties may transfer all gains in hands of MNCs who will
be in a position to develop almost all new verities with the help of their large financial
resources and expertise.

Non tariff barriers: several countries have put trade barriers on non tariff barriers. This
has affected the export from developing countries.

Contemporary issues in Indian economic environment

On one hand, India is receiving accolades for a sustained growth rate and on the other, it
is still a low-income developing economy. Even today, nearly 25 percent of India’s
population lives below the poverty line. Also, there are many human and natural
resources which are under-utilized. Major economic issues of Indian economy are:

 Low level of national income and per capita income: Comparing India’s per capita
income with the other countries of the world, one comes to the conclusion that India is
one of the poorest nations of the world.
 Vast inequalities in income and wealth: Indian economy is also marked by great
inequalities in the distribution of income and wealth.
 Heavy population pressure: Another factor which contributes to the economic issues
in India is population. Today, India is the second most-populated country in the world,
the first being China. We have a high-level of birth rates and a falling level of death
rates. In order to maintain a growing population, the administration needs to take care
of the basic requirements of food, clothing, shelter, medicine, schooling, etc. Hence,
there is an increased economic burden on the country.

 Massive unemployment: The huge unemployed working population is another aspect

which contributes to the economic issues in India.
 Underdeveloped infrastructure: India’s infrastructural facilities are inadequate. It
consists of (a) transport and communications, (b) energy, (c) finance, housing and
insurance, (d) science and technology, and (e) health, education, etc.
 Low level of technology: New technologies are being developed every day. However,
they are expensive and require people with a considerable amount of skill to apply
them in production. Any new technology requires capital and trained and skilled
personnel. Therefore, the deficiency of human capital and the absence of skilled labor
are major hurdles in spreading technology in the economy.
 Lack of access to basic amenities: only around percent of households in India have
access to drinking water within their premises. Also, only near 50% percent of
households have toilet facilities within the household premises.
 Inefficient agriculture
 Poverty
 Corruption

Devaluation of Indian rupee

Devaluation is the deliberate downward adjustment of the value of a country's
money relative to another currency, group of currencies, or currency
standard. Devaluation means reduction in the external value of the domestic currency
while internal value of the domestic currency remains constant. A country goes for
devaluation of its currency to correct its adverse Balance of Payment (BOP). If a country
is experiencing an adverse Balance of Payment (BOP) situation then it has to devalue its
currency so that its export gets cheaper and import became costlier.
In 1947 the exchange rate was 1 USD to 1 INR but today we have to spend 66 INR to
buy a USD.
History of devaluation:

War with China and Pakistan: Indian government was facing budget deficit and was
in a state that it could not borrow more additional loan from outside due to negative rate
of savings. India- China war of 1962, Indo-Pakistan war of 1965 and huge drought in
1966, crippled the production capacity of the Indian economy so inflation increased in the
economy.
To increase the domestic production scenario, Indian government needed technology , to
have technology and to tackle higher inflation and to open the Indian economy for
foreign trade, government devalued external value of rupee and now
exchange rate became 1 $- Rs. 7.

Political Instability and Oil Shock of 1973: Oil shock of 1973 caused when the
Organization of Arab Petroleum Exporting Countries (OAPEC) decided to cut the crude
oil production which further increased the oil import bill. So to pay this import bill India
borrowed foreign currency which reduced the value of Indian currency. Assassination of
P.M. Indira Gandhi also reduced the confidence of foreigners in the Indian
economy. Hence all these cases bring the exchange rate at USD = 12.34 INR in 1985 and
in the 1990 it became to 1 USD = 17.50 INR.

Economic Crisis of 1991: It is claimed as the toughest time for Indian economy. During
this phase fiscal deficit was 7.8 % of GDP , interest payment was eating 39% of the total
revenue collection of the government, Current Account Deficit (CAD)was 3.69% of
GDP. So to tackle all these problems government devalued Indian currency again and
the exchange rate became 1 USD = 24.58 INR