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 E.C.O.-13
Business Environment
ASSIGNMENT SOLUTIONS GUIDE (2013-2014)
Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions
given in the Assignments. These Sample Answers/Solutions are prepared by Tutor for the help of the student
to get an idea of how he/she can answer the questions of the Assignments. Sample answers may be Seen as
the Guide/Reference Book/Assignment Guide. Any Omission or Error is highly regretted though every care

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has been taken while preparing these Sample Answers/Solutions. Please consult you Teacher/Tutor before
you prepare a Particular Answer.

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Attempt all the questions.
Q. 1. Explain the concept of the social responsibilities of business. Discuss the

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views for and against it.
Ans. Corporate Social Responsibility (CSR) is a form of corporate self-regulation inte-
grated into a business model, which defines the responsibility of business organisation

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and corporates towards society. It is also called corporate responsibility, responsible busi-
ness, Sustainable Responsible Business (SRB), corporate citizenship or corporate social
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performance.
It enables business to monitor and ensure adherence to ethical standards, laws and
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international norms. Business must embrace and understand the impact of their activities
on the consumers, employees, environment, communities and all other stakeholders at
large.
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It is reasoned that business activities involve use of country resources, and hence
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these bear a responsibility to use to resources in benefit of the society.

At the times when there existed the traditional market, the sole concern of business
was for making profit by expanding the business operations. However, everything changed
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with times. People realised that the markets have half the value if there is no social devel-
opment. They realised the fact that the business cannot grow without a holistic socio-
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economic growth. It was at this time when the corporate enterprises started implementing
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the plans that could spell growth and development of the society as well.
This idea emerged as the outcome of the expectations of public. According to the
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public, the business units should modify their pursuit of attaining the economic goals.
They should also help the society in redressing the social problems, as per the expecta-
tions.
The business organizations presently have many obligations for adopting new policies
and for making their plans of actions. These actions go in hand with the expectations and
also in the interest of the society. Therefore, there are many organizations, which have
started taking the social criterion along with the economic criterion in carrying out their
business activities.

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 Although these social responsibilities of business are not helping the business units
directly, however, they can definitely help in the betterment of the social resources that
again in the end could spell well for the business organizations.
They realized the significance of power responsibility equation. It was the act of bal-
ancing of responsibility with power as an essential requirement in society for securing
public good. It was adjudged that even the corporate enterprises can use their power in
developing society which can affect the environment, and can make the consumers and
the community more aware to know about their rights. Now-a-days, there is a very ac-
cepted fact that business is an integral part of the society and of the social system.

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Corporate Social Responsibility thus, refer to obligation of business organizations to
adopt business policies and lines of action which are socially desirable. Classical econo-
mists held a contrary view to social responsibilities of business concerns.

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Business must voluntarily refrain from practices which are not in the interest of the

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community or cause environmental deterioration. Businesses must consider public and
environmental interests in decision-making and honor the Triple Bottom Line (TBL) – people,
planet and profit. Thought there are not set standards for CSR, adherence to TBL is widely
accepted.

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Views against Social Responsibilities of Business
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It is argued that CSR distracts business from their fundamental role of businesses. It is
also argued that CSR is merely window-dressing and an attempt to forestall the role of
governments as a watchdog over powerful multinational corporations.
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There are many arguments against social responsibilities of business. Some of these
are:
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1. Business is a free enterprise system, and an employee cannot use owner’s re-
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sources for social cause and benefits. These resources must be best used in the
interests of the organization.
2. Available resources must be allocated to business which can pay higher prices.
While using resources, enterprise considers only those effects which will add value
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to existing assets and does not considers the socially impact/benefit of such change.
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If management considers social impacts while allocating and utilisation of resources

it might cause suppression of economic causes which is not in the interests of the
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shareholders. At times, it might lead to increased public control over the organiza-
tion.
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3. Invest in social cause and interest, would mean reduction in investment in produc-
tive/economic activities to same extend. Even where companies have adequate
resources to engage in social cause, a proportionate large scale commitment would
slower the gross national product.
Cases for Social Responsibilities of Business
If business is seen as an integral part of society, and business values are questioned
in social context rather than narrow economic framework, the concept of ‘corporate social
responsibility is justified’.

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 1. Business is both a social and an economic activity. Thus, business people must
realise that they are responsible for their actions not just economically, but socially
as well.
2. Market and social system can be satisfactory arbiter of business activities and their
consequences. Economic consideration are not isolated from social values.
3. With the significant growth of an organisation, there is growing interest of public in
the actions and policies of the organisations. Thus, these enterprises should trace
the public demands and work for their fulfillment as it would determine its image. It
should it fulfill the need of owners, community, consumers and public that is crucial

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for its survival and for its growth.
4. The social issues for an organization are a part of the moral realm and are not at all
peripheral issue. As the economic and social obligations of an organization go

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hand in hand, they also define the formation of human values.

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5. The society is not at all judged with the parameters of economic efficiencies. It is
also adjudged by the social efficiencies so the organisations should pay attention to
social issues One can derive the benefits of social welfare that remains parallel to
the GNP.

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6. The good growth of society and the redressal of social needs would eventually help
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in making a sophisticated society that indirectly would help the business organisation
as it will be a favourable market for them to sell their products, services etc.
Q. 2. What is meant by the role of the government in business? Describe
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government’s promotional role in business in the context of India.

Ans. The role of government in economy has been indeterminate since the very be-
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ginning. In India, economic development has been marked mainly in quantitative terms.
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Over the years, the role of the Indian Government has increased and diversified.
The New Economic Policy which pushed the Indian economy to level of globalisation
and liberalisation provided a new economic system, where in the economic was opened
for private sector and abolished the licensing system. Under the New Industrial Policy, the
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entrepreneurial role of government was redefined significantly. The redefined role of

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government included setting up environment for privatisation, Public Private Partnership

(PPP), reduce budgetary burden on public and achieve sustainable growth. The government
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has disinvested in areas where privatisation is seen to be more effective. Under the new
policy, the government portfolio was changed and government off-loaded its investments
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from low technology industries (ones which are more labour intensive), areas of low
productivity , with negligible social significance, areas where private sector is performing
better and has developed expertise, inefficient and low productivity areas, small and non-
strategic areas , like small scale industries. The areas restricted for public sector included
high-end technology, strategic and essential infrastructure (transport and communication).
Sensitive sectors like defence have been also reserved for public sector. The government
aimed at increased private participation through Public Private Partnership (PPP) and
existing public undertakings were converted into joint ventures with private participation.

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Further, management of public enterprises were given more autonomy for taking decisions.
Public sector management was allowed to raise funds from mutual fund, and other banking
and non-banking financial companies to meet their fund requirement. The government
also entered into MOU with public sector units to make them accountable, while being
autonomous at the same time. Government encouraged business restructuring, technical
restructuring, liberalisation, increased privatisation and foreign participation to increase
overall efficiency and productivity.
The promotional role of government includes its efforts to provide adequate infrastructure
and an environment conducive for business, and hence this role is indirect in nature. It

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includes government incentives and schemes for encouraging business activities, building
of basic infrastructure like roads, airports, supply of water and power, bridges,
communication and transportation system, banking and financial systems, industrial training

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centres, marketing network; etc. It also coordinates the working of public, private joint and

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cooperative sector. In promotional role, government does not intervene or regulates the
working business. Some of activities performed under this role are:
1. Maintaining public utilities.
2. Promoting private and foreign investment.

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3. Providing trade incentives for promoting foreign trade.
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4. Matching and controlling money supply with development requirements.
5. Enabling effective utilization of various resources.
6. Encouraging developmental attitude among various sectors.
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7. Encouraging optimal utilization of various natural resources.

8. Ensuring equitable income distribution.
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Making economic resources productive and efficient. Thus, it can be said that the
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promotional role of the government encompasses fiscal, budgetary and monetary incentives
for expansion of business and priority sectors of the economy.
Q. 3. “As a consumer, you have rights, but there are duties also”. Elaborate with
suitable examples.
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Ans. Consumer rights and responsibilities

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The government has constituted various rights to protect the interests of consumers.
Initially these were mere social codes of conduct, but most of these rights now have
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legislative backing. This implies that that there are various 'Consumer Protection Laws',
law-enforcement agencies and jurisdiction for upholding consumer rights.
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Consumer Rights
Basic consumer rights like human rights had been recognised globally. In India, Con-
sumer Protection Act, 1986 encompasses various consumer rights.
Section 6 of Consumer Protection Act, 1986 recognises the following rights of con-
sumers:
● Right to Safety
● Right to be Informed
● Right to Choose

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 ● Right to be Heard
● Right to seek Redressal
● Right to Consumer Education
Right to Safety: Right to safety ensure protection of consumers against marketing
and supply of such goods/services which are hazardous for consumer health, life or prop-
erty. For example, certain drugs, electrical appliances, cosmetics; etc cause harm to con-
sumers. The manufactures of such goods must enclose safety and usage instructions
with the products. In case of electrical appliances, consumers must be also given safety
and caution instructions/demonstration before they use the product.

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Right to Choose: Right to choose ensures that the consumers have access to various
products/services in the market at competitive rates and make choice for product at their
discretion. Firms must not resort to over-marketing and aggressive salesmanship to influ-

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ence buyer's behaviour and decision.

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Right to be Informed: The consumer has the right to know about the quality, quantity,
purity and standards of the products.
Right to Choose: The consumer has the right to choose the product of his choice
from a variety of products depending on its quality and fair price value.

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Right to be Heard: It also ensures that the customer is heard by different forums if he
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has any grievances against the product.
Right to seek Redressal: The consumer’s problems also need to be redressed by the
authority. The issues should be settled within the due course of time.
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Right to Consumer Education: The consumer has the right to remain well informed.
The consumer, or the consumer association or one or more consumers or the central
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or state government have the right to file a complaint if they have any issues with the
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product or its marketing or its standard or quality or service.

If the value of goods or services remain below Rs. 20. lakh, the complaint can be filed
at district forum, whole those higher from Rs. 20 lakh and lower than Rs.1 crore can be
filed at state commission. However, the value of compensation if exceeds
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Rs. one crore can be filed before national commission. That complainant had to pay a
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subtle amount of fee. It should carry the name, description and address of complainant,
the name description and address of opposite party, the facts relating to complaint.
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Some Other Rights

Section 6 of Consumer Protection Act, 1986 also following rights of consumers:
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● Right to Healthy Environment: The right ensures protection against environmen-

tal pollution and hazards, where the individual consumer has no control. Thus these
rights by their nature help in enhancing quality of life.
● Right to Satisfaction of Basic Needs: A person has right to basic necessities like
food, clothing, shelter, health care, education, sanitation and essential goods and
services.
Duties and Responsibilities of Consumers
Right and duties go hand in hand. Thus, if a consumer reserves certain, he or she is
also entitled to certain duties.

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 There are two duties of consumers:
1. Duty to ensure the enforcement of rights (these duties are inseparable from con-
sumer rights)
2. Duties towards other consumers.
Duties Related to Consumer Rights
1. While buying it is the duty of the consumers to ensure about the quality of goods.
The consumers must ensure that the goods bought are not hazardous and that they
receive safety assurance and necessary usage guidelines from the buyer. Consum-
ers can also insist on issue of guarantee for the purchased product.

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2. Consumer must insist on getting necessary information about product and service
before choosing the product. It includes knowing about product variants, dealer ser-
vices, special discounts, product performance; etc.

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3. Consumers must form consumer associations to protect their interests. Every per-

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son must be aware about such associations and work towards collective action.
4. Consumer must inspect and compare the variety of goods in terms of quality, finish,
price, durability, brand; etc before making any purchase. However, this is possible
only in a competitive market where a variety of goods are available.

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5. Consumers must make complaint to appropriate authority for genuine grievances,
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though it may involve small value.
6. It is also the duty of the consumers to know/acquire knowledge about consumer
rights and duties provided by the law. Informed consumers should help in creating
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consumer awareness and help less/ill-informed consumers.

Ecological and Social Duties
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Consumers must choose products and services in relation to environment and society.
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For example, irresponsible consumption of certain goods causes wastage of resources,

energy and environmental degradation. For example, smoking in public is harmful for
people around. Similarly, electricity and waste are value resources and must be used
judiciously.
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Hoarding of goods in scarce supply further intensifies the scarcity in market and causes
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price elevation. It must be understood that activity of one consumer affects other consum-
ers and hence it is required that people must understand their social duties as consumers.
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Q. 4. What is meant by industrial sickness? Discuss the Sick Industrial Compa-

nies (Special Provisions) Act, 1985.
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Ans. Nature of Industrial Sickness

The term sickness with reference to industrial units indicates malfunctioning.
The survival of a sick unit is doubtful, unless appropriate remedial and recovery measure
are taken.
Industrial sickness is not an unnatural phenomenon.
Sick Industrial Companies (Special Provision) Act, 1985, (amended 1993), defines a
sick industrial unit as, “one which has been in existence for at least than five years, and
has the accumulated losses equal to or exceeding its entire networth at end of any financial
year.”

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 Weak units or potentially sick units, as these are alternatively called, are defined as
industrial units which had at the end of any accounting year, accumulated losses equal to
more than 50 per cent of peak networth during preceding four years. It is used as an
indicator for revival and recovery of the sick unit.
Incipient and Actual Sickness
Sickness of an industrial unit which can be identified during early stages is called
incipient sickness.
For small scale units, if the capacity utilisation achieved during preceding five years is
less than 50 percent of the highest capacity achieved during preceding five years, it is

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taken as an indicator of incipient sickness. Incipient sickness is also identified on basis of
events like liquidity crunch, decline in revenue, decline in market price of the company'
shares, skipping of dividend payout; etc. Default in repayment is considered as an early

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indicator of sickness by all financial institutions.

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Decline in net worth by 50 percent or more, default in loan repayment, or halt in business
for a period of 6 months or more is an indicator of actual sickness.
An industrial unit is considered as sick by financial company if the company sustains
losses for period of two years or more, and if the latest balance sheet shows accumulated

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losses more than 50 percent of the paid-up capital and reserves.
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Sick Industrial Companies (Special Provisions) Act, 1985 [Sica]
Need for Sica
In 1985, a separate legislation, Sick Industrial Companies (Special Provisions) Act,
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1985 [SICA] was provided for dealing with industrial sickeness on recommendations of
special committee set-up by the central government under the chairmanship of T.R Tiwari.
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The following factors necessitated the same:

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1. Widespread and increasing industrial sickenss.

2. Loss of production.
3. Threat of employment.
4. Loss of exchequer revenue.
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5. Inefficient use of funds and other resource.

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6. Lock up off investments made by banks and other financial institutions.

7. Inadequacy of measures taken so far.
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8. Ensure timely detection and revival of ‘potentially sick’ industrial units.

9. Liquidation of non-viable units to reduce debt and recover salvage assets as much
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as possible.
10. Ensure that the measures for revival and implemented.
The Sick Industries Companies (Special Provisions Act, came into force in 1985. The
act was amended in 1991 and 1993.
Objectives of SICA
The aims of SICA are in securing timely detection of sick companies that own industrial
undertakings, quick determination of board of experts of preventive remedial and other
methods that can be adopted, expeditious enforcement of measures determined and lastly

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connecting the matter to the concerned persons. As per Supreme Court, SICA’s main aim
is to afford protection to the employment, to optimize the use of funds if available in
productive assets, to realize amounts that are due to banks, institutions and creditors, and
to provide efficient authority consisting of experts.
Applicability and coverage of SICA: SICA is extended to all over India and its
provisions apply to all industrial companies that have been specified in the first schedule
to the industries (Development and Regulation, Act 1951).
The Act applies to all industries except to shipping. It applies to government and private
undertaking. However, it does not apply to cooperative societies and units owned by trust,

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industries relating to shop, small scale industries etc.
Q. 5. Write short notes on the following:
(a) Balance of Payments

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Ans. International Monetary Fund has defined Balance of Payments (BOP) as “A sta-

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tistical statement that summarizes transactions between residents and nonresidents dur-
ing a period.”
Thus balance of payment is a statement showing all economic transaction (visible and
invisible) done by a country during a given time period, usually a year. It is primary tool for

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analyzing international trade and economics of a country.
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The BOP statement has all the recorded transactions in a given period between resi-
dents of a given country with those of another country.
Current Account and Capital Account
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The balance of payments consist of the current account, the capital account, and the
financial account. These accounts balance in the sense that the sum of the entries is
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conceptually zero.
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● Current Account: consists of the goods and services account, the primary income
account and the secondary income account.
● Financial Account consists of asset inflows and outflows, such as international
purchases of stocks, bonds and real estate.
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● Capital Account is much smaller than the other two and consists primarily of debt
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forgiveness and assets from migrants coming to or leaving the country.

Current Account
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The current account of Balance of Payments comprises of Balance of Trade (BOT)

and Balance of Services (BOS).
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Balance of Trade (BOT): It shows transactions of only visible items (merchandise).

Mathematically, balance of trade is the difference between total monetary value of mer-
chandise of exports (X) and imports (M) of a country during a given period of time.
Current account = Balance of trade
+ Net factor income from
abroab
+ Net unilateral transfers
from abroad

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 Thus, balance of trade can be considered as net exports of a country during a given
period. It can be given by the following equation:
NX = X – M, where
NX is Balance of Trade (BOT)
X is monetary value of exports of the country
M is monetary value of imports of the country
Implications of Balance of Trade
The value of net can be positive, negative or null, depending upon which the balance
of trade can be:

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● Deficit: A deficit is said to occur when value of monetary value of imports exceeds
the exports. Alternatively stated, X < M. It is also called unfavourable balance of
trade or trade gap.

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● Surplus: A surplus is said to occur when value of monetary value of exports ex-

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ceeds the imports. Alternatively stated, M < X . It is also called favourable balance of
trade.
● Balance/equilibrium: When the value of exports is same as that of imports, it is
said to be balance in BOT. Here, M = X.

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Important Note: Please note that balance of trade here considers monetary value of
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merchandise. The 'physical balance of trade' is expressed in terms of amount of raw
materials. Most developed countries import primary raw materials at low cost from devel-
oping countries, which are processed to add value. Thus, if a country has negative physi-
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cal balance of trade, it implies that the country has excess of imports over imports of
material.
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Balance of trade can be affected by many factors. Some of these are:

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● Production cost in the exporting versus importing economy. Production cost mainly
includes cost of land, labor, capital, taxes, incentives, etc.
● Cost and availability of raw material and other inputs;
● Exchange rate fluctuations,
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● Trade restrictions,
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● Duty and other taxes on multilateral, bilateral and unilateral trades,

● Other non-tariff barriers, like environment, safety standards; etc
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● Availability of foreign exchange for payment for imports

● Price of domestic goods
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Balance of trade also varies across the economic cycle. For instance, during eco-
nomic expansion:
● Balance of trade will improve, in an export driven economy (such as oil and early
industrial goods),
● In domestic demand driven economy, as in the United States and Australia, BOT will
worsen.
Balance of Trade in Services (BOS)
It shows trade/transactions in invisibles/intangibles done by a country with other coun-
tries.

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 There are five broad categories of invisibles (or services):
1. Banking and financial services like credit, securities; etc and other services like
insurance, postal, consultancy, royalty, civil aviation, etc.
2. Investment income and interest earnings. Investment income includes profits and
dividends on capital investments. Interest earnings are interest earned on multi-and
bi-lateral loans.
3. Travel (tourist and business, both)
4. Government transfers
5. Private transfers

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All services mentioned above described as 'two-way transactions'. In a two way trans-
action, people of one country can exchange (provide and take) services to people of other
countries. Current receipts (R) are the rewards earned by people of a country for render-

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ing services. Current Payment (P) is the payment for the services received by a country.

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The Balance Of Services is the net of current receipts (R) and current payments (P).
Implications of balance of trade. The value of net receipt can be positive, negative or
null, depending upon which the balance of trade can be:
● BOS Deficit: A deficit is said to occur when current payments exceed current re-

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ceipts. Alternatively stated, R < P. It is also called unfavourable balance of service or
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service gap.
● BOS Surplus: A surplus is said to occur when current receipts exceed current re-
ceipts. Alternatively stated, R > P. It is also called Favourable balance of service or
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service gap.
● BOS Balance/Equilibrium: When the current payments are same as current re-
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ceipts, it is said to be Balance of Service equilibrium. Alternatively stated, R=P.

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Balance on current account is total of Balance of Trade (BOT) and Balance of Service
(BOS).
Mathematically,
Current Account = Balance of Trade + Balance
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of Service
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Balance of Payment
Mathematically, Balance of Payment is aggregate of current and capital account.
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Gross External Debt (Increase )

= Current Account deficit – direct
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and long term capital inflows

+ official reserve increase +
private capital outflows
It is important to note that a small deficit in current account is essential for economic
development. In other words, foreign savings and capital investment though give negative
impact to current account, these are must for the development of the economy.
Capital Account
Capital account is that component of balance of payment that represents changes in
country's assets and liabilities, due to transfer of money and other capital items.

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 The following items constitute credits in capital account:
1. Borrowings (in case of deficit)
2. Payment receipts from rest of the world
The following items constitute debits in capital account:
1. Lendings to other countries
2. Repayment of old debts
Most developing countries like India, borrow new loans (credit) while continuing to
repay the old ones (debits). The net of credits and debits constitutes Capital Account of
BOP.

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Capital account transactions provide balance for current account surpluses or deficits.
Surplus on capital account are used to finance deficit in current account.
Capital account = Change in foreign ownership

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of domestic assets

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= Change of domestic ownership
of foreign assets
= Foreign direct investment
+ Portfolio investment

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+ Other investment
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Balance of Payments (BOP)
Balance of payment is a statement showing all economic transaction done by a coun-
try during a given time period, usually a year. It is primary tool for analyzing international
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trade and economics of a country. The BOP statement has all the recorded transactions in
a given period between residents of a given country with those of another country.
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Mathematically, BOP is aggregate of current and capital accounts. The current and
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capital account work in opposite directions, in such a way that surplus in one finances
deficit in other. These accounts balance each other, though practically it is rarely achieved.
Thus it is merely an accounting equality.
If current accounts of a country incur ongoing deficit, which are financed/balanced by
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capital account surpluses, it means that while the country is repaying its old debts, it is at
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the same time postponing its current liabilities to future. In this case the external debt
keeps mounting, as new loans/borrowings are contracted.
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BOP account reflects the relation between gross external debt (borrowings), imports
and spending of economy.
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Balance of Payments
(BOP)

Current Account Capital Account

Balance of Balance of
Trade (BOT) Services (BOS)

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 In developing economy, a small deficit in current account is necessary to maintain
country’s reserves and take advantage of foreign savings.
(b) W T O
Ans. The formation of International Trade Organization was proposed by Bretton Woods
Conference, 1994, failing which influential nations including US, UK and others came
together to form GATT in 1947.
GATT was essentially a ‘rich men’ club’ and favoured the cause of rich and influential
member nations. This was opposed by developing countries, which insisted on formation
of an international trade organization, which equally looked into the interests of member

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nations. However, US dissented the proposal and the matter was taken up by UN
organisation, which appointed a committee to resolve the matter. The committee proposed
formation of an organisation named, United Nation Conference on Trade and Development

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(UNCTD). The organisation worked towards the betterment of developing nations. The

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General Scheme for Trade References (GSTR) was one such achievement.
Over the period, GATT also liberalized. Uruguay Round of GATT which concluded in
March 1994, proposed to set up WTO (World Trade Organization).
WTO came into formal existence January 1, 1995 under Marrakesh Agreement. The

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organisation has 153 member countries and is headquatered at Centre William Rappard,
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Geneva, Switzerland.
Unlike its precursor, GATT which was a more of a multilateral instrument governing
international trade, WTO provided an institutional mechanism and framework for
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international trade.
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