ourse: MBA

Subject: Business Environment

Paper Code: MBA 105
Semester: I
Questions from Unit I

1. Define the term Business Environment? What are the features of Business Environment?
OR
Define the term Business Environment? Describe the changing role of Government in a developing economy
like India?
Answer:The term Business Environment is composed of two words Business ‘and Environment‘. In simple terms, the
state in which a person remains busy is known as Business. The word Business in its economic sense means human
activities like production, extraction or purchase or sales of goods that are performed for earning profits.

Features of Business Environment:

1. Totality of external forces:Business environment is the sum total of allthings external to business firms
and, as such, is aggregative in nature.
2. Specific and general forces:Business environment includes both specificand general forces. Specific
forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and
immediately in their day-to-day working. General forces (such as social, political, legal and technological
conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly.
3. Dynamic nature:Business environment is dynamic in that it keeps onchanging whether in terms of
technological improvement, shifts in consumer preferences or entry of new competition in the market.
4. Uncertainty:Business environment is largely uncertain as it is very difficultto predict future happenings,
especially when environment changes are taking place too frequently as in the case of information technology
or fashion industries.
5. Relativity:Business environment is a relative concept since it differs fromcountry to country and even region
to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly,
demand for sarees may be fairly high in India whereas it may be almost non-existent in France.
Economic roles of the Government:

1. Regulation
2. Promotion
3. Planning
4. Production

As regulator:Government world over made a body of laws and policies to assure that competition is at least
maintained if not enhanced. The antitrust laws passed in different countries commit the Government to preventing
monopoly and maintaining competition. These laws are generally concerned with six specific areas: price
discrimination, exclusive and tying contracts, interoperate stock holdings, interlocking directorates, mergers and trade
practices that injure independent retailers and wholesalers.

As promoter:Promotional role of the Government in a capitalist economy is determined by the limitations of the
business. Since business firms are profit maximizes, they have virtually no interest in making investments in sectors
where return is either small, because of long gestation periods of projects, quite uncertain.

As planner:The government plays an important role as a planner, especially in developing countries. During the post-
world war II period, many developing countries adopted economic planning for achieving higher growth rate and
better standard of living.

As producer:In most capitalistic countries, the bulk of production is done in the private sector. Small scale
manufacturing, commerce and agriculture are mostly in private hands, while large scale manufacturing mining and
finance are under the control of transnational, domestically owned corporate and public sector enterprises. In
developing countries, state-owned utilities provide electricity, gas and water. Public enterprises also play a significant
role in transport and communications. In contrast, pattern of ownership differs substantially in different countries in
mining and manufacturing.

2. What is the Importance of Business Environment? What are the various elements of Business
Environment?

Answer:The term ‘business environment’ connotes external forces, factors and institutions that arebeyond the control
of the business and they affect the functioning of a business enterprise.These include customers, competitors,
suppliers, government, and the social, political,legal and technological factors etc. While some of these factors or
forces may have directinfluence over the business firm, others may operate indirectly. Thus, business environmentmay
be defined as the total surroundings, which have a direct or indirect bearing on thefunctioning of business. It may also
be defined as the set of external factors, such aseconomic factors, social factors, political and legal factors,
demographic factors, technicalfactors etc., which are uncontrollable in nature and affects the business decisions of a
firm.

FEATURES OF BUSINESS ENVIRONMENT

On the basis of the above discussion the features of business environment can besummarised as follows.
(a) Business environment is the sum total of all factors external to the business firm andthat greatly influence their
functioning.
(b) It covers factors and forces like customers, competitors, suppliers, government, andthe social, cultural, political,
technological and legal conditions.
(c) The business environment is dynamic in nature, which means, it keeps on changing.
(d) The changes in business environment are unpredictable. It is very difficult to predictthe exact nature of future
happenings and the changes in economic and socialenvironment. .
(e) Business Environment differs from place to place, region to region and country tocountry. Political conditions in
India differ from those in Pakistan. Taste and valuescherished by people in India and China vary considerably.

IMPORTANCE OF BUSINESS ENVIRONMENT

There is a close and continuous interaction between the business and its environment. Thisinteraction helps in
strengthening the business firm and using its resources more effectively.
As stated above, the business environment is multifaceted, complex, and dynamic in natureand has a far-reaching
impact on the survival and growth of the business. To be morespecific, proper understanding of the social, political,
legal and economic environmenthelps the business in the following ways:
(a) Determining Opportunities and Threats: The interaction between the businessand its environment would
identify opportunities for and threats to the business. Ithelps the business enterprises for meeting the challenges
successfully.
(b) Giving Direction for Growth: The interaction with the environment leads to openingup new frontiers of growth
for the business firms. It enables the b
00usiness to identify theareas for growth and expansion of their activities.
(c) Continuous Learning: Environmental analysis makes the task of managers easier indealing with business
challenges. The managers are motivated to continuously updatetheir knowledge, understanding and skills to meet the
predicted changes in realm ofbusiness.
(d) Image Building: Environmental understanding helps the business organisations inimproving their image by
showing their sensitivity to the environment within which theyare working. For example, in view of the shortage of
power, many companies haveset up Captive Power Plants (CPP) in their factories to meet their own requirement
ofpower.
(e) Meeting Competition: It helps the firms to analyse the competitors’ strategies andformulate their own strategies
accordingly.
(f) Identifying Firm’s Strength and Weakness: Business environment helps to identifythe individual strengths and
weaknesses in view of the technological and globaldevelopments.

Business Environment has two components:

1. Internal Environment
2. External Environment

Internal Environment:It includes 5 Ms i.e. man, material, money,machinery and management, usually within the
control of business. Business can make changes in these factors according to the change in the functioning of
enterprise.
External Environment:Those factors which are beyond the control ofbusiness enterprise are included in external
environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political Factors, Socio-
Cultural Factors, Demo-Graphical factors etc. It is of two types:

1. Micro/Operating Environment
2. Macro/General Environment

Micro/Operating Environment:
The environment which is close to business and affects its capacity to work is known as Micro or Operating
Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public.

1. Suppliers:They are the persons who supply raw material andrequired components to the company. They
must be reliable and business must have multiple suppliers i.e. they should not depend upon only one
supplier.
2. Customers:Customers are regarded as the king of the market.Success of every business depends upon the
level of their customer‘ssatisfaction.

Types of Customers:

a. Wholesalers
b. Retailers
c. Industries
d. Government and Other Institutions
e. Foreigners

3. Market Intermediaries:They work as a link between business and final consumers. It consists of:
a. Middleman
b. Marketing Agencies
c. Financial Intermediaries
d. Physical Intermediaries

4. Competitors:Every move of the competitors affects the business. Business has to adjust itself according to
the strategies of the Competitors.
5. Public:Any group who has actual interest in business enterprise is termed as public e.g. media and local
public. They may be the users or non-users of the product.
Macro/General Environment: It includes factors that create opportunities and threats to business units. Following
are the elements of Macro Environment:

Economic Environment: It is very complex and dynamic in nature that keeps on changing with the change in
policies or political situations. It has three elements:

a. Economic Conditions of Public

b. Economic Policies of the country
c. Economic System
d. Other Economic Factors: Infrastructural Facilities, Banking, Insurance companies, money markets, capital
markets etc.

Non-Economic Environment: Following are included innon-economic environment:-

1. Political Environment: This includes the political system, the government policies and attitude towards the
business community and the unionism. All these aspects have a bearing on the strategies adopted by the
business firms. The stability of the government also influences business and related activities to a great extent.
It sends a signal of strength, confidence to various interest groups and investors. Further, ideology of the
 political party also influences the business organisation and its operations. You may be aware that Coca-Cola,
a cold drink widelyused even now, had to wind up operations in India in late seventies. Again the trade
unionactivities also influence the operation of business enterprises. Most of the labour unions inIndia are
affiliated to various political parties. Strikes, lockouts and labour disputes etc.also adversely affect the
business operations. However, with the competitive businessenvironment, trade unions are now showing great
maturity and started contributing positivelyto the success of the business organisation and its operations
through workers participationin management.
It affects different business unitsextensively. Components:
a. Political Belief of Government
b. Political Strength of the Country
c. Relation with other countries
d. Defence and Military Policies
e. Centre State Relationship in the Country
f. Thinking Opposition Parties towards Business Unit

2. Socio-Cultural Environment: Influence exercised by social and cultural factors, not within the control of
business, is known as Socio-Cultural Environment. These factors include: attitude of people to work, family
system, caste system, religion, education, marriage etc.
3. Technological Environment: A systematic application ofscientific knowledge to practical task is known as
technology. Every day there has been vast changes in products, services, lifestyles and living conditions, these
changes must be analyzed by every business unit and should adapt these changes. Technological environment
include the methods, techniques and approaches adopted forproduction of goods and services and its
distribution. The varying technological environmentsof different countries affect the designing of products.
For example, in USA and manyother countries electrical appliances are designed for 110 volts. But when
these are madefor India, they have to be of 220 volts. In the modern competitive age, the pace oftechnological
changes is very fast. Hence, in order to survive and grow in the market, abusiness has to adopt the
technological changes from time to time. It may be noted thatscientific research for improvement and
innovation in products and services is a regularactivity in most of the big industrial organisations. Now a days
infact, no firm can afford topersist with the out-dated technologies.
4. Natural Environment: It includes natural resources,weather, climatic conditions, port facilities,
topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors
before choosing the location for their business.
5. Demographic Environment : It is a study of perspective ofpopulation i.e. its size, standard of living, growth
rate, age-sex composition, family size, income level (upper level, middle level and lower level), education
level etc. Every business unit must see these features of population and recognize their various need and
produce accordingly.
6. International Environment: It is particularly important for industries directly depending on import or
exports. The factors that affect the business are: Globalization, Liberalization, foreign business policies,
cultural exchange
7. Legal Environment: This refers to set of laws, regulations, which influence the business organisations and
their operations. Every business organisation has to obey, and work within the framework of the law. The
important legislations that concern the business enterprises include:
(i) Companies Act, 1956
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act

3. Define Political Environment? Explain different types of Political and Economic Systems?

Answer: The political environment of the company includes national and internationalpolitical factors which can
affect its operations. These factors are called politicalas they principally emanate from the actions of governments
which can be at a local or foreign level. This category also includes the methods of thinking and beliefs of all natures
which can influence the behavior of governments
andcitizensopposingthecompanywithoutthememanatingdirectlyfromagovernment (example: nationalism).

A political system is a system of politics and government. It is usually comparedto the legal system, economic
system, cultural system, and other social systems. Itis different from them, and can be generally defined on a spectrum
from left, e.g. communism, to the right, e.g. fascism. However, this is a very simplified view of a much more complex
system of categories involving the views: who should have authority, how religious questions should be handled, and
what the government's influence on its people and economy should be.

Basic forms of political systems are:

The following are examples of political systems, some of which are typically mutually exclusive (e.g. Monarchy and
Republic), while others may (or may not)overlap in various combinations (e.g. Democracy and Westminster system,
Democracy and Socialism).

1. Anarchism:Rule by all/no one.

2. Democracy:Rule by majority.
3. Monarchy:(Rule by monarch) Monarchies are one of the oldest political systems known, developing from
tribal structure with one person the absolute ruler. Communism (Rule by all citizens) Classless with common
ownership and decision making
4. Republic: (Rule by law) the first recorded republic was in India in the 6th century BC (BCE).
5. Sultanates:(Rule by Allah) an Islamic political structure combining aspects of Monarchy and Theocracy.
6. Islamic Democracy:(Rule by majority in Islamic context) an Islamic and democratic political structure,
which combines aspects of Theocracy (as the framework) and Democracy (as the decision making method
under Islam's ethical system). Iran's constitution is based on such a system.
7. Feudalism:(Rule by lord/king).

TYPES OF ECONOMIC SYSTEMS

Free Enterprise Economy

This economic system works on the principle of Laissez Faire system, i.e., the least interference by the government or
any external force. The primary role of the government, if any, is to ensure free working of the economy by removing
obstacles to free competition. A free Enterprise Economy is characterized as follows:

1. Means of production are privately owned by the people who acquire and posses them.
2. Private gains are the main motivating and guiding force for carrying out economic activities.
3. Both consumers and firms enjoy the freedom of choice; consumers have the freedom to consume what they
want to and firms have the choice to produce what they want to.
4. The factor owners enjoy the freedom of occupational choice, i.e., they are free to use their resources in any
legal business or occupation.
5. There exists a high degree of competition in both commodity and factor markets.
6. There is least interference by the government in the economic activities of the people; the government is in
fact supposed to limit its traditional functions viz, to defence, police, justice, some financial organizations and
public utility services.

Government Controlled Economy

The government-controlled economies are also called as Command, Centrally planned or Socialist economies. Such
economies are, in contradistinction to the free enterprise economies, controlled, regulated and managed by the
government agencies. The other features of a pure socialist economy are:

1. Means of production are owned by the society or by the state in the name of the community – private
ownership of factors and property is abolished.
2. Social welfare is the guiding factor for economic activities – private gains, motivations and initiatives are
absent.
3. Freedom of choice for the consumers is curbed to what society can afford for all.
4. The role of market forces and competition is eliminated by law.

Mixed Economy

A mixed economy is one in which there exist both government and private economic systems. It is supposed to
combine good elements of both free enterprise and socialist economies. A mixed economy is widely known as one,
which had both “public sector” (the government economy) and “private sector” (the private economy). The private
sector has features of a free enterprise economy and the public sector has features of socialist economy. It is important
to note here that most economies in the world today are Mixed Economies. There are two different forms of the Mixed
Economies.

Mixed Capitalist Economies

A mixed Capitalist economy is a varient of the free enterprise economic system. To this category fall the highly
developed nations like the United States, U.K., France, Japan etc. though these economies have a very large
government sector, their private sectors work on the principles of the free enterprise system. The government plays a
significant role in preserving capitalist mode of production, ensuring a workable competition in factor and product
markets, providing infrastructure for promotion of private sector economic activities.

Mixed Socialist Economies

To the category of the Mixed Socialist Economies belong the countries which have adopted “ socialist pattern of
society: and economic planning as he means of growth and social justice (e.g. India) and the former communist
countries (eg. Russia and china) which have of late carried out drastic economic reforms and liberalized their
economies for private entrepreneurship. The government of these countries takes upon themselves to control and
regulate the private sector activities in accordance
4. Explain the concept and significance of environmental scanning? What are the basic steps of
environmental scanning?

Answer: The analysis consists of four sequential steps:

Scanning

It involves general surveillance of all environmental factors and their interactions in order to:

1. Identify early signals of possible environmental change.

2. Detect environmental change already underway.

Monitoring

It involves tracking the environmental trends, sequences of events, or streams of activities. It frequently involves
following signals or indicators unearthed during environmental scanning.

Forecasting

Strategic decision-making requires a future orientation. Naturally, forecasting is an essential element in environmental
analysis. Forecasting is concerned with developing plausible projections of the direction, scope, and intensity of
environmental change.

Assessment

In assessment, the frame of reference moves from understanding the environment- the focus of scanning, monitoring
and forecasting – to identify what the understanding means for the organization. Assessment, tries to answer questions
such as what are the key issues presented by the environment, and what are the implications of such issues for the
organization.

Environmental Analysis

Collection of Information

Analysis is done by means of a search of verbal and written information, spying, forecasting and formal studies and
information system. At first there is the gathering of verbal information, the sources of verbal information are:

1. Media such as radio and television

2. The firm's employees such as peers, subordinates and supervisors.

Other sources of verbal information outside the firm are:- Customers of the enterprise, persons in industry channel
(such as wholesalers, brokers, distributors, etc.), suppliers doing business with the firm, competitors and their
employees, financial executives such as bankers, stockholders, and stock analysts, consultants and the government.

Besides verbal sources, information can be gathered by reading. Information about the environment is readily
available in newspapers, trade journals, industry newsletters, journals and publications, government reports, reports of
various marketing research agencies such as Gallup, ORG, etc. It is said (is it not true?) that behind every business
activity there is one government department and one association. This department or association publishes information
related to business on regular intervals.
The second solution to environmental analysis is to design a Management Information System. A formal MIS gives
quick relevant information to the decision-makers, which helps a lot in making timely decisions. Beside this,
information regarding competitors can be gathered through Corporate Intelligence and Spying.

Corporate Intelligence: Corporate Intelligence (CI) can be described "as a technique of adopting industry/research
expertise to analyse the information available on competition from public sources and to draw conclusion based on
this data." A typical CI activity involves collection, organization, analysis and utilisation of business-related data of
competitors to make informed decisions.

Spying: Corporate espionage can be defined as 'spying' on business competitors to acquire proprietary information
such as product design, research projects, marketing plan, trade secret, source code for new software, intellectual
property and research information and other business strategies. In 1996 the US government passed the Economic
Espionage Act to restrict espionage. Similarly, in 1943, a P&G employee reportedly bribed an employee of Levers
Brothers to steal a bar of soap that was under development.

5. Describe PESTLE and SLEPT analysis?

Answer: PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental factors,
which are used to assess the market for a business or organizational unit strategic plan.

In business PESTLE analysis role is very important. PESTLE analysis is a useful tool for understanding the “big
picture” of the environment, in which you are operating, and the opportunities and threats that lie within it. Originally
it is designed as a business environmental scan; this analysis is an analysis of the external macro environment in
which a business operates. By understanding the environment in which you operate (external to your company or
department), you can take advantage of the opportunities and minimize the threats. These are factors which are
beyond the control or influence of a business, however are important to be aware of when doing product development,
business or strategy planning. A PESTLE analysis is a business measurement tool, looking at factors external to the
organization. It is often used within a strategic SWOT analysis. The PESTLE analysis headings are a framework for
reviewing a situation, and can also be used to review a strategy or position, direction of a company, a marketing
proposition, or idea.

It is important to clearly identify the subject of a PESTLE analysis (that is a clear goal or output requirement), because
an analysis of this type is multi-faceted in relation to a particular business unit or proposition – if you dilute the focus
you will produce an unclear picture – so be clear about the situation and perspective that you use PESTLE to analyze.

PESTLE Analysis on an HR Department or other Internal Function

While the PEST or PESTLE analysis is primarily aimed at looking at the external environment of an organization,
many HR courses ask students to use the PEST or PESTLE analysis model to look at their own function. In this
context we need to imagine that the department (HR) is an organization in its own right and look outside. Factors to
include in your analysis may include the following:

1. Political

(a) What is the culture of the organization?

(b) How is the HR function viewed by other functions?

(c) Who are the political champions of HR (or its adversaries)?

(d) Shareholder views

2. Economic

(a) What is the budgetary position of the department?

(b) Is more money available?

(c) Are our customers likely to spend more or less money on the services we offer?

(d) What is happening to the financial status of the organization?

(e) Interest rates

(f) Inflation

(g) Salary trends in the sector

3. Sociological

(a) Other departmental attitudes to HR

(b) Population shifts (age profile)

(c) Education

(d) Fads

(e) Diversity

(f) Immigration/emigration

(g) Health

(h) Living standards

(i) Housing trends

(j) Fashion & role models

(k) Age profile

(l) Attitudes to career

4. Technological

(a) What changes may be coming our way?

(b) What new technology/systems?

(c) How do we record attendance, performance?

(d) Use of and encourage home working?

(e) Communications technologies

(f) Changes of technology that will increase/reduce the need for recruitment

(g) Changes to HR software

5. Legal

(a) What is happening in our sector that will impact what we do?

(b) Minimum wage,

(c) Working time,

(d) Food stuffs,

(e) Under 18 working,

(f) Occupational/ industrial Training etc.

(g) What changes will impact the services of the organization?

6. Environmental

(a) Staff morale

(b) Staff engagement

(c) Need to reduce storage needs

(d) Management attitudes (inside department/ function)

(e) Organizational culture

Social, Legal, Economic, Political and Technological (SLEPT) Analysis

It is important to 'scan' the external environment before creating business plans or when evaluating existing ones.
Doing this takes the form of a SLEPT analysis and thus there is a scanning or an investigation of the Social, Legal,
Economic, Political, and Technological influences that can be or likely to be on a business. It is important that you
should be aware of the actions of your competitors in business. Social factors relate to the pattern of behaviour, tastes,
and lifestyles. A major component of this is a change in consumer behaviour resulting from changes in fashions and
styles. The age structure of the population also alters over time (currently we have an ageing population). To give your
business a better shape it is better to have a good knowledge of the social factors around you.

The legal factors i.e. laws especially the government policy relating to the businesses often undergoes a change with
each budget session and the amendments and laws changed from time to time especially in a country like India. There
are consumer protection legislation, environmental legislation, health & safety and employment law, etc., which are
continually modified in a wide range of areas.

Economic factors are affected with every change in the social ones. There are multiple fluctuations associated with
general booms and slumps in economy. In a boom nearly all businesses benefit and in a slump most lose out. Other
economic changes that affect business include changes in the interest rate, wage rates, and the rate of inflation (i.e.
general level of increase in prices). Businesses will be more encouraged to expand and take risks when economic
conditions are right, e.g. low interest rates and rising demand.

Political changes relate to changes in government influence. In recent years these changes have been particularly
significant because as members of the European Union we have to adopt directives and regulations created by the EU
which then become part of UK law. Political changes are closely tied up with legal changes.

Changes in technology have also become particularly significant in the post-millennium world. This is particularly
true in terms of modern communication technologies. The creation of databases and electronic communications have
enabled vast quantities of information to be shared and quickly distributed in a modern company enabling vast cost
reductions, and often improvements in service. Organisations need to be aware of the latest relevant technologies for
their business and to surf the wave of change.

Methods of Scanning the Business Environment

There are three ways of scanning the business environment:

1. Ad-hoc scanning: Short term, infrequent examinations usually initiated by a crisis

2. Regular scanning: Studies done on a regular schedule (say, once a year)

3. Continuous scanning: (also called continuous learning) – continuous structured data collection and processing on a
broad range of environmental factors.

Some management gurus believe that in today's turbulent business environment the best scanning method available is
continuous scanning. This allows the firm to act quickly, take advantage of opportunities before competitors do, and
respond to environmental threats before significant damage is done.

Scanning the Macro Environment

When we refer to environmental scanning, we usually refer just to the macro environment, but it can also include
industry and competitor analysis, consumer analysis, product innovations, and the company's internal environment.
Macro environmental scanning involves analyzing:

1. Economy

(a) GDP per capita

(b) Economic growth

(c) Unemployment rate

(d) Inflation rate

(e) Consumer and investor confidence

(f) Inventory levels

(g) Currency exchange rates

(h) Merchandise trade balance

(i) Financial and political health of trading partners

(j) Balance of payments

(k) Future trends

2. Government

(a) Political climate – amount of government activity

(b) Political stability and risk

(c) Government debt

(d) Budget deficit or surplus

(e) Corporate and personal tax rates

(f) Payroll taxes

(g) Import tariffs and quotas

(h) Export restrictions

(i) Restrictions on international financial flows

3. Legal

(a) Minimum wage laws

(b) Environmental protection laws

(c) Worker safety laws

(d) Union laws

(e) Copyright and patent laws

(f) Anti-monopoly laws

(g) Sunday closing laws

(h) Municipal licences

(i) Laws that favour business investment

4. Technology

(a) Efficiency of infrastructure, including: roads, ports, airports, rolling stock, hospitals, education, healthcare,
communication, etc.

(b) Industrial productivity

(c) New manufacturing processes

(d) New products and services of competitors

(e) New products and services of supply chain partners

(f) Any new technology that could impact the company

(g) Cost and accessibility of electrical power

5. Ecology

(a) Ecological concerns that affect the firms production processes

(b) Ecological concerns that affect customers' buying habits

(c) Ecological concerns that affect customers' perception of the company or product
6. Socio-cultural

Demographic factors such as:

(a) Population size and distribution

(b) Age distribution

(c) Education levels

(d) Income levels

(e) Ethnic origins

(f) Religious affiliations

Attitudes towards:

(a) Materialism, capitalism, free enterprise

(b) Individualism, role of family, role of government, collectivism

(c) Role of church and religion

(d) Consumerism

(e) Environmentalism

(f) Importance of work, pride of accomplishment

Cultural structures including:

(a) Diet and nutrition

(b) Housing conditions

7. Potential Suppliers Labour Supply

(a) Quantity of labour available

(b) Quality of labour available

(c) Stability of labour supply

(d) Wage expectations

(e) Employee turn-over rate

(f) Strikes and labour relations

(g) Educational facilities

Material Suppliers

(a) Quality, quantity, price, and stability of material inputs

(b) Delivery delays

(c) Proximity of bulky or heavy material inputs

(d) Level of competition among suppliers

Service Providers

(a) Quantity, quality, price, and stability of service facilitators

(b) Special requirements

Stakeholders

(a) Lobbyists
(b) Shareholders

(c) Employees

(d) Partners

While scanning these macro environmental variables for threats and opportunities requires that each issue is rated on
two dimensions. It must be rated on its potential impact on the company, and rated on its likeliness of occurrence.
Multiplying the potential impact parameter by the likeliness of occurrence parameter gives us a good indication of its
importance to the organisation.

Questions from Unit II

1. Briefly describe Economic Planning and its Rationale in India?

Answer: Economic Planning is the making of major economic decisions. What and how is to be produced and to
whom it is to be allocated – by the conscious decision of a determinate authority, on the basis of a comprehensive
survey of the economic system as a whole.
In an economy like India, the basis socioeconomic problems like poverty, unemployment, stagnation in agricultural
and industrial production and inequality in the distribution of income and wealth can hardly be solved within the
framework of an unplanned economy planning is required to remove these basic maladies.
We can identify the following characteristic features of economic planning:

 Fixation of definite socio-economic targets;

 Prudent efforts to achieve these targets within a given time period;
 Existence of a central planning authority;
 Complete knowledge about the economic resources of the country;
 Efficient utilization of limited resources to get maximum output and welfare.
The Planning Commission of India is of the opinion that, “Planning is essentially a way of organizing and utilizing
resources to get maximum advantage in terms of defined social ends. The two main-constituents of the concept of
planning are: (a) a system of ends to be pursued, and (b) knowledge of available resources and their optimum
allocation to achieve these ends. The availability of resources conditions the ends to be effectively achieved.”
Mixed economy and planning
Mixed economy is the outcome of the compromise between the two diametrically opposite schools of thought—the
one which champions the ,cause of capitalism and the other which strongly pleads for the socialization of all the
means of production and of the control of the entire economy by the state.
Thus, the concept of mixed economy accepts the possibility of the co-existence of private enterprise and public
enterprise.
India is regarded as a good example of a mixed economy. Under the Directive Principles of the Indian Constitution, it
has been laid down that the State should strive “to promote the welfare of the people by securing and protecting as
effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of
national life.”
In the economic sphere, the State is to direct its policy to secure a better distribution of ownership and control of the
material resources of the community and to prevent concentration of wealth in the hands of a. few and the exploitation
of labor. It would be impossible for the State to attain these ends implied in the directive principles unless the State
itself enters the fields of production and distribution. This explains the rationale behind of economic planning. To
protect the weaker sections, the State is also expected to control the distribution of essential commodities.
Similarly, by controlling the financial system, viz., insurance and banking, the State can endeavour to direct
investment in socially desirable channels. Besides, in a poor and under-developed country like India, market forces
based on profit motive cannot, by themselves, induce the private sector to move into infrastructural development
(which involves heavy capital investment, long gestation period, low rate of return, etc.) Accordingly, the State has to
promote infrastructural facilities like hydro-electric projects, irrigation; road and railway transport, and have to create
conditions conducive to a higher level of investment so that national and per capita incomes of the people can be
improved continuously.
Rationale of Planning in India
In India, comprehensive national planning is required to fulfil some broad social and economic objectives. The
followings are some principal reasons for planning in India:
(a) Rapid Economic Development: Before Independence, the long period of British rule and exploitation had made
India one of the poorest nations in the world. The main task before the national government was to undertake some
positive development measures to initiate a process of development, which can be done .effectively only through the
instrument of planning. The state planning mechanism has been proved to be much superior to private market
operations in bringing about it a quick transition in the less-developed economics. The spectacular success of planning
in some countries had inspired the national leaders to adopt the path of planning for an accelerated development of the
shattered economy.
(b) Quick Improvement in the Standard of Living: The fundamental objective of planning is to bring about a quick
improvement in the standard of living of the people in the less-developed countries. In an unplanned economy the
country’s resources and materials cannot be employed for increasing the people’s welfare as the private capitalists in
such an economy direct their activities in increasing their own profits. The path of planning has been chosen to
promote a rapid rise in the standard of living of the people by efficient exploitation of resources, increasing production
of most goods, and offering employment opportunities to the people.
(c) Removal of Poverty: Planning in India is necessary for the early removal of abject poverty of the people. This can
be effectively done through –

 Planned increase in the employment opportunities of the people,

 Planned production of mass consumption goods and their planned distribution among the people,
 Fulfilment of minimum needs programme by providing essential facilities (e.g., housing, roads, drinking
water, public health, primary education, slum improvement, etc.), and,
 Planned increase in the consumption of the poorest section of the people.
(d) Rational Allocation and Efficient Utilization of Resources: India is rich in natural resources, but these resources
are not fully exploited to get maximum advantages. In the unplanned economy resources tend to be engaged in the
production of these goods and services which yield maximum profits, as a result rational allocation of resources is not
possible. An unplanned economy faces frequently the problem of either shortages in some sectors or surpluses in
others. But such misallocation of resources can be rectified in a planned economy in which the planning authority
determines the pattern of the investment of resources. In fact, the development plans in the country are now utilized
for the rational allocation of investable resources.
(e) Increasing the Rate of Capital Formation: Planning can also raise the rate of capital formation in the less-
developed countries like India. The surpluses of public enterprises as found in the planned economy can be utilized for
investment and capital formation. In India, the governments have been increasing the rate of capital formation through
the planned investment in the construction of roads, bridges, manufacturing of machineries and transport equipments
etc.
(f) Reduction in Unequal Distribution of Income and Wealth: Income and wealth are not evenly distributed in
India as in other less-developed countries. In the absence of planning such inequality tends to increase due to growing
concentration of economic resources at the hands of a few capitalists. Besides, the capitalists in the unplanned society
increase their own profits by paying less to the labourers and other suppliers of raw materials. Planning can reverse
this trend through the proper guidance and control of production, distribution, consumption and investment. The
development works can be so planned and so executed that the greater equality is established with the increase of
income and employment.
(g) Reduction of Unemployment and Increase in Employment Opportunities: The backwardness of the different,
sectors of the economy accounts for the presence of widespread unemployment, both open and disguised, in the
country. The rate of economic growth usually becomes low in the unplanned society; as a result it becomes a difficult
task to mitigate this serious problem without proper planning. The government can, however, increase the
employment opportunities by undertaking development programs for the different sectors like agriculture, industries,
social services, transport and communications, etc. Besides, labor-intensive development projects and job-oriented
programs can also be undertaken to provide relief for the problem of unemployment.
The development plans in India have already given proper stress for increasing employment. The steps have been
taken to create both short-term and long-term employment opportunities in various sectors like agriculture, industry,
small and village industries, irrigation works, construction, etc.
(h) Reorganization of Foreign Trade: Economic planning in the less-developed countries can bring about
fundamental Changes in the foreign trade structure of such countries like India. The foreign trade structure may be
reoriented from primary producing economy to the industrialized economy. Through proper controls of import and
effective promotion of export of industrial goods the development plans can reorganize the foreign trade structure. In
India, the trade policy has been reoriented to realize some cardinal objectives such as import control and substitution,
export promotion and growth of economy. Owing to such development the trade structure is no longer regarded as
colonial as it was before Independence.
(i) Regional Balanced Development: Economic planning in India can correct the regional imbalances in
development. Proper development programs may be taken for the all-round development of backward areas, so that all
the regions are sufficiently developed. More and more industries are to be set up in the less-developed areas and the
Plans should provide for dispersal of industries.
(j) Other Considerations: Indian economy requires planning for other purpose also such as the removal of the
shortages of essential goods, attainment of self- sufficiency in essential goods such as food grains and key materials,
economic self-reliance, establishment of social justice for increasing economic facilities for weaker and neglected
sections of the people etc.
The aforesaid discussion points to the supreme necessity of economic planning in India. It is now fully realized that
without planning the country would not be able to initiate a process of quick economic growth.
Objectives of Planning in India 
In India, the First Five year plan began in the year 1951-52. Although the objectives of these plans were different, we
can identify some of the basic long-term and broad objectives of Indian planning. These are:
(i) Raising the growth rate: The economic planning in India was to bring about rapid economic growth through the
growth in agriculture, industry, power, transport and communications and different other sectors in our economy.
Further, the growth in real national income was considered to be the basis for an increase in per Capita real income
and an improvement in the physical quality of life for, the maximum number of people. The growth, in national output
must be higher than the growth rate in population for an increase in per capita output. Indian planners aimed at
increasing national income and per capita income on the assumption that the continuous growth in national income
and per capita income would remove the problem of poverty and raise the standard of living for the maximum people
of the country.
(ii) Raising the investment-income ratio: Growth in investment as a proportion of national income was also one of
the important long-term objectives of Indian five year plans.
(iii) Achieving self-reliance: This objective was considered to be an important objective for keeping the growth
activity free from political pressures of dominant capitalist countries of the world. India had to import a huge quantity
of food grains from abroad for a considerable period. Again, she had to depend on foreign countries for the import of
heavy machinery, transport equipment, machine tools, electrical instruments, etc. This was required for the expansion
of the industrial sector and for building, a strong infrastructural base in India after independence. Hence, it was quite
natural that the developed capitalist countries, supplying food grains, machinery and capital to India, used to take full
advantage of their strong bargaining power, by imposing different conditions while extending such help. In many
cases, the domestic economic policies are also influenced by such conditions. Because of all these reasons, a self-
reliant economic growth became a major objective of economic planning in India, particularly since the inception of
the Third Five Year Plan.
(iv) Removing unemployment: Removal of unemployment and underemployment can be regarded as a precondition
for the elimination of poverty. It was assumed by Planning Commission that an increase in investment would
accompany not only an increase in national output but also a rise in employment opportunities. This argument was put
forward by the Planning Commission quite explicitly during the Third Five Year Plan. The planning commission
however, believed that the removal of unemployment would lead to increase in GDP, on the one hand and improve the
standard of living of the people on the other.
(v) Reducing the incidence of poverty: Various plan documents have all along indicated that the policy of the
Government of India is to reduce the incidence of poverty. The problem of poverty has been conceived as one of low
productivity of a large section of the people. Hence, to remove these handicaps of the poor and to integrate them in the
growth process, alleviation of poverty became one of the broad objectives of Indian planning. So, the long run
objective was to free the economy from the vicious circle of poverty which encircles the economy, not only with poor
purchasing power, low savings, low capital formation, low productivity and low level of national output, but also with
a poor physical quality of life.
(vi) Reducing income inequalities: Indian planners visualized the creation of a socialistic pattern of society where
each member of the society would get equal opportunities in the fields of education, health, nutrition, occupation, etc.
Hence, they felt the need for reducing income and wealth inequalities in our society. These inequalities have their
roots in the feudal system. Hence, reduction in income and wealth necessitated the abolition of semi-feudal relations
of production in Indian villages. Thus; the objective was to abolish the ‘Zamindari’ system, impose ceilings on land-
holdings and distribution of surplus land among the landless in rural areas.
Income and wealth inequalities arising out of industrialization and growth were far more complex. The Planning
Commission felt the need for imposing some restrictive and fiscal measures e.g., by imposing higher rates of direct
taxes on high incomes, to tackle this problem. Further, to reduce the disparity between urban and rural sectors, the
Planning Commission suggested various measures to raise agricultural productivity, development of agro-based
industries, a fair price to farmers for their products, etc. The Planning Commission stated its policy towards income
inequalities in the Fourth Plan document. It emphasized economic growth with the hope that the poor will benefit
from it and thus, income inequalities would be reduced.
A part from these long-term objectives the Sixth plan of India recognized one more objective of modernizing the
production process. The implications of this modernization were to shift the sectoral comparison of national income,
diversification of productive activities and advancement of technology. Modernization, as per the view of the Planning
Commission, also implied introduction of modern technology, both in industrial and agricultural activities. It also
implied an emergence of new types of banking, insurance and marketing institutions, which would facilitate the
dynamics of growth process.
2. Explain the characteristics of Planning in India. Also explain the objectives of twelfth five year plan.

PLAN DETAILS

First Five Year Plan 1951-56 Focused on agriculture, irrigation, power projects
and land rehabilitation.
Second Five Year Plan 1957-61 Industrial Development and Employment generation.

Third Five Year Plan 1962-66 Agriculture and power generation for rapid growth of
industrial sector.
(Economy grappled recession)

Govt. then declared a “plan holiday” for three years due to failure of 3 rd plan, as drought occurred in1966-67.
Instead of 4th plan three annual plans were declared

Fourth Five Year Plan 1969-73 Providing necessary consumption benefits to weaker
section through employment and education.

Fifth Five Year Plan 1974-78 Achieving economic stability, fulfilling nutritional
requirements, health and family planning

Sixth Five Year Plan 1979-84 Speedy industrialization, rise in employment, poverty
reduction and technology self reliance.

Seventh Five Year Plan 1985-89 Rapid growth in food grain production, higher
employment level, JRY was introduced.
(Severe drought in the country)

Eighth Five Year Plan 1992-96 Devaluation of rupee, reducing trade barriers,
reforms in financial sector, tax reforms and LPG
(BOP crisis due to gulf war of policy.
1990)

Ninth Five Year Plan 1997-2001 Improving living conditions of poor, raising
agricultural and rural incomes, checking growth of
(Economy Performed well but population.
benefits didn’t percolate to poor)

Tenth Five Year Plan 2002-2006 Aims to transform country into fastest growing
countries, doubling per capita income and creating
(Country achieved 7% growth rate) 100 million employment opportunities .

Eleventh Five Year Plan 2007-2012 Aims at improving

1- Agriculture

2-Communication and information

3- Backward Areas

4-Education

5- Environment and Forests

6- Financial Resources

7- Health and Family welfare

8- Housing and urban development

9-Industry and Minerals

10-Labour employment and manpower

11- Energy policy

12- Rural Development

 13-Social justice and women empowerment

14-Science and technology

15-Transportation

16-Village and SSI

17-Water resources

18- Child development

19-International economics

3. Describe Twelfth Five Year Plan?

Answer: The Twelfth Plan (2012-17)commenced at a time when the global economy was going through a second
financial crisis, precipitated by the sovereign debt problems of the Eurozone which erupted in the last year of the
Eleventh Plan. The crisis affected all countries including India. Our growth slowed down to 6.2 percent in 2011-12
and the deceleration continued into the first year of the Twelfth Plan, when the economy is estimated to have grown
by only 5 percent . The Twelfth Plan therefore emphasizes that our first priority must be to bring the economy back to
rapid growth while ensuring that the growth is both inclusive and sustainable. The broad vision and aspirations which
the Twelfth Plan seeks to fulfil are reflected in the subtitle: ‘Faster, Sustainable, and More Inclusive Growth’.
Inclusiveness is to be achieved through poverty reduction, promoting group equality and regional balance, reducing
inequality, empowering people etc whereas sustainability includes ensuring environmental sustainability ,development
of human capital through improved health, education, skill development, nutrition, information technology etc and
development of institutional capabilities , infrastructure like power telecommunication, roads, transport etc ,
Apart from the global slowdown, the domestic economy has also run up against several internal constraints. Macro-
economic imbalances have surfaced following the fiscal expansion undertaken after 2008 to give a fiscal stimulus to
the economy. Inflationary pressures have built up. Major investment projects in energy and transport have slowed
down because of a variety of implementation problems. Some changes in tax treatment in the 2012–13 have caused
uncertainty among investors. These developments have produced a reduction in the rate of investment, and a slowing
down of economic growth.
The policy challenge in the Twelfth Plan is, therefore, two-fold. The immediate challenge is to reverse the observed
deceleration in growth by reviving investment as quickly as possible. This calls for urgent action to tackle
implementation constraints in infrastructure which are holding up large projects, combined with action to deal with tax
related issues which have created uncertainty in the investment climate. From a longer term perspective, the Plan must
put in place policies that can leverage the many strengths of the economy to bring it back to its real Growth potential.
Immediate priority is to revive the investor sentiment along with next short term action of removing the impediments
to implementation of projects in infrastructure, especially in the area of energy which would require addressing the
issue of fuel supply to power stations, financial problems of discoms and clarity in terms of New Exploration
Licensing Policy (NELP)
Although planning should cover both the activities of the government and those of the private sector, a great deal of
the public debate on planning in India takes place around the size of the public sector plan. The Twelfth Plan lays out
an ambitious set of Government programmes, which will help to achieve the objective of rapid and inclusive growth.
In view of the scarcity of resources, it is essential to take bold steps to improve the efficiency of public expenditure
through plan programmes. Need for fiscal correction viz. tax reforms like GST , reduction of subsidies as per cent of
GDP while still allowing for targeted subsidies that advance the cause of inclusiveness etc. and managing the current
account deficit would be another chief concerns.
Achieving sustained growth would require long term increase in investment and savings rate . Bringing the economy
back to 9 per cent growth by the end of the Twelfth Plan requires fixed investment rate to rise to 35 per cent of GDP
by the end of the Plan period. This will require action to revive private investment, including private corporate
investment, and also action to stimulate public investment, especially in key areas of infrastructure especially, energy,
transport, water supply and water resource management. Reversal of the combined deterioration in government and
corporate savings has to be a key element in the strategy.
Monitorable Targets of the Plan: Twenty Five core indicators listed below reflect the vision of rapid, sustainable &
more inclusive growth of the twelfth Plan:
Economic Growth
1. Real GDP Growth Rate of 8.0 per cent.
2. Agriculture Growth Rate of 4.0 per cent.
3. Manufacturing Growth Rate of 10.0 per cent.
4. Every State must have an average growth rate in the Twelfth Plan preferably higher than that achieved in the
Eleventh Plan. Poverty and Employment
5. Head-count ratio of consumption poverty to be reduced by 10 percentage points over the preceding estimates by the
end of Twelfth FYP.
6. Generate 50 million new work opportunities in the non-farm sector and provide skill certification to equivalent
numbers during the Twelfth FYP. Education
7. Mean Years of Schooling to increase to seven years by the end of Twelfth FYP.
8. Enhance access to higher education by creating two million additional seats for each age cohort aligned to the skill
needs of the economy.
9. Eliminate gender and social gap in school enrolment (that is, between girls and boys, and between SCs, STs,
Muslims and the rest of the population) by the end of Twelfth FYP. Health
10. Reduce IMR to 25 and MMR to 1 per 1,000 live births, and improve Child Sex Ratio (0–6 years) to 950 by the end
of the Twelfth FYP.
11. Reduce Total Fertility Rate to 2.1 by the end of Twelfth FYP.
12. Reduce under-nutrition among children aged 0–3 years to half of the NFHS-3 levels by the end of Twelfth FYP.
Infrastructure, Including Rural Infrastructure
13. Increase investment in infrastructure as a percentage of GDP to 9 per cent by the end of Twelfth FYP.
14. Increase the Gross Irrigated Area from 90 million hectare to 103 million hectare by the end of Twelfth FYP.
15. Provide electricity to all villages and reduce AT&C losses to 20 per cent by the end of Twelfth FYP.
16. Connect all villages with all-weather roads by the end of Twelfth FYP.
17. Upgrade national and state highways to the minimum two-lane standard by the end of Twelfth FYP.
18. Complete Eastern and Western Dedicated Freight Corridors by the end of Twelfth FYP. 19. Increase rural tele-
density to 70 per cent by the end of Twelfth FYP.
20. Ensure 50 per cent of rural population has access to 40 lpcd piped drinking water supply, and 50 per cent gram
panchayats achieve Nirmal Gram Status by the end of Twelfth FYP. Environment and Sustainability
21. Increase green cover (as measured by satellite imagery) by 1 million hectare every year during the Twelfth FYP.
22. Add 30,000 MW of renewable energy capacity in the Twelfth Plan  
23. Reduce emission intensity of GDP in line with the target of 20 per cent to 25 per cent reduction over 2005 levels
by 2020. Service Delivery
24. Provide access to banking services to 90 per cent Indian households by the end of Twelfth FYP.
25. Major subsidies and welfare related beneficiary payments to be shifted to a direct cash transfer by the end of the
Twelfth Plan, using the Aadhar platform with linked bank accounts.
Sectoral Pattern of Growth: The sectoral pattern of growth associated with the 8.0 per cent growth scenario is
summarised in the table on following page.
The Agriculture Forestry and Fishing Sector is projected to grow at 4 per cent, an improvement over the 3.7 per cent
rate achieved in the Eleventh Plan.
The Mining and Quarrying Sector grew by only 3.2 per cent in the Eleventh Plan, the growth rate being pushed down
by negative growth of 0.6 per cent in 2011–12 reflecting problems in the iron ore sector, gas production and also coal.
The Twelfth Plan assumes a substantial improvement with the growth rate averaging 5.7 per cent. The manufacturing
sector decelerated in the course of the Eleventh Plan with a growth rate of only 2.7 per cent in 2011–12.
The average growth rate in the Twelfth Plan period is projected at over 7 per cent which is a significant improvement
over the situation in 2011–12 and 2012–13. City, gas and water supply are projected to grow at 7.3 per cent on an
average compared with 6.1. per cent achieved in the Eleventh Plan.
Construction, which grew at 7.7 per cent in the Eleventh Plan, is projected to grow at an average rate of 9.1 per cent.
The other service sectors are projected to grow fairly robustly with Trade Hotels and Restaurants at 7.4 per cent;
Transport, Storage and Communication at 11.8 per cent; Insurance and Business Service at 9.9 per cent, and, finally,
Community and Personal Services at 7.2 per cent.
Public Sector Resources in the Twelfth Plan:
There have been several important developments during the Eleventh Plan that have implications for financing of the
Twelfth Plan. The Indian Economy resiliently faced the global financial crisis of 2008. However, slower growth
adversely impacts growth in Centre’s resources, particularly taxes.
The Sixth Central Pay Commission award has been implemented. The 13th FC award for 2011–15 is under
implementation with some changes in the fiscal responsibility and budget management framework targets. Service tax
has emerged as a very promising source of revenue. Efforts are being made to introduce unified Goods and Service
Tax (GST) in consultation with States. This will be a major reform of the indirect tax system.
The projection of fiscal deficits based on Medium Term Fiscal Policy Statement 2012–13 indicates that debt resources
for funding of GBS for the Twelfth Plan will be higher initially but is projected to decline gradually. The Centre’s net
borrowing which was 5.9 per cent of GDP in 2011–12 (RE) is estimated to decline to 5.1 per cent of GDP in 2012–13
(BE). The fiscal deficit as percent of GDP is further projected to decline to 4.5 per cent in 2013–14, 3.9 per cent in
2014–15, 3.2 per cent in 2015–16 and 3.0 per cent of GDP in the last year of the Twelfth Plan.
13th Finance Commission increased the devolution to the states from 30.5 per cent to 32 per cent of divisible pool and
it covers the period up to 2014-15, which includes the first three years of the twelfth Plan. The projections of resources
for the Twelfth Plan have been made assuming 28.45 per cent of tax devolutions of the Gross Tax revenue.
This has been assumed by factoring in the surcharges being phased out and keeping the same ratio beyond 13th FC
period till the terminal year of the Twelfth Plan. This might change later after the recommendations of 14th FC are
available.
The Twelfth Plan assumptions on tax resources of the Centre and States envisage revenue neutrality of GST although
there might be positive spin-off effects of GST mainly through better tax compliance. The projection of GBS of the
Centre indicates that it will grow from 5.13 per cent of GDP in 2012–13 to 5.22 per cent of GDP in 2016–17.
The average GBS for the Central Plan in the Twelfth Plan period stands at 5.23 per cent of GDP as against 4.69 per
cent of GDP realised in the Eleventh Plan. With the reforms being undertaken, the total subsidies, as a proportion of
GDP, are projected to decline to 1.5 per cent by 2016–17.
The balance from current revenue (BCR) as percent of GDP was projected at 2.31 per cent for the Eleventh Plan
which turned negative by (–)0.61 per cent. However, with good buoyancy in tax revenue and a decline in non-plan
expenditure, BCR is estimated to be 1.88 per cent of the GDP for the Twelfth Plan. The imposition of the fiscal deficit
ceiling ensures that borrowings, including net miscellaneous capital receipts, decline from 5.06 per cent of GDP in
Eleventh Plan to 3.35 per cent in the Twelfth Plan.
States Resources:
The fiscal deficit of the States as a whole remained below 3 per cent of GDP during the Eleventh Plan period. While
prescribing different fiscal paths for individual States, the 13th FC has also set the fiscal deficits target of 3 per cent of
GDP to be achieved by 2014–15 by all the States. Accordingly, the fiscal deficit limit of all States which has been a
little over 3 per cent of the GDP in 2012–13 is projected to remain around 2.22 per cent during the Twelfth Plan
period. This inevitably limits the scope for mobilising debt resources of the States, therefore, have to look at
improving revenue realisation and controlling non-Plan expenditure.
The Aggregate Plan resources of the States and UTs including PSE resources have been projected to be Rs 37,16,385
crore at current prices .This comprises of Rs 28,58,599 crore of own resources (including borrowings) and Rs
8,57,786 crore of CA. UTs account for 3.88 per cent of the combined aggregate Plan resources of the States and UTs.
As a proportion of GDP, aggregate Plan resources of the States and UTs are projected at 5.45 per cent of GDP,
registering an increase of 0.44 percentage points over the Eleventh Plan realisation .The BCR, which was Rs 2,74,400
crore at 2006–07 prices in the Eleventh Plan, is projected to increase to Rs 9,59,979 crore at current prices. This
represents an increase of 0.39 percentage points of GDP over the Eleventh Plan. However, projections of resources of
PSEs show a growth of 0.06 percentage points as compared with the Eleventh Plan. CA to the States remains almost at
the same level as percentage of GDP.
Sectoral Allocation of Resources : Energy, Transport & Social Services account for about 70 % of the total outlay
with the individual shares of 19% , 16 % & 35 % respectively and compared to 11th Plan their outlay increased by
110,96 and 112 % respectively.

4. Explain the different functions of NITI Aayog. Explain why planning commission was replaced by NITI
Aayog?

Answer: The National Institution for Transforming India, also called NITI Aayog, was formed via a resolution of the
Union Cabinet on January 1, 2015. NITI Aayog is the premier policy ‘Think Tank’ of the Government of India,
providing both directional and policy inputs. While designing strategic and long term policies and programmes for the
Government of India, NITI Aayog also provides relevant technical advice to the Centre and States.
The Government of India, in keeping with its reform agenda, constituted the NITI Aayog to replace the Planning
Commission instituted in 1950. This was done in order to better serve the needs and aspirations of the people of India.
An important evolutionary change from the past, NITI Aayog acts as the quintessential platform of the Government of
India to bring States to act together in national interest, and thereby fosters Cooperative Federalism.
At the core of NITI Aayog’s creation are two hubs – Team India Hub and the Knowledge and Innovation Hub. The
Team India Hub leads the engagement of states with the Central government, while the Knowledge and Innovation
Hub builds NITI’s think-tank capabilities. These hubs reflect the two key tasks of the Aayog.
NITI Aayog is also developing itself as a State of the Art Resource Centre, with the necessary resources, knowledge
and skills, that will enable it to act with speed, promote research and innovation, provide strategic policy vision for the
government, and deal with contingent issues.
The new institution will be a catalyst to the developmental process; nurturing an overall enabling environment,
through a holistic approach to development going beyond the limited sphere of the Public Sector and Government of
India. This will be built on the foundations of:
 An empowered role of States as equal partners in national development; operationalizing the principle of
Cooperative Federalism.
 A knowledge hub of internal as well as external resources; serving as a repository of good governance best
practices, and a Think Tank offering domain knowledge as well as strategic expertise to all levels of
government.
  A collaborative platform facilitating Implementation; by monitoring progress, plugging gaps and bringing
together the various Ministries at the Centre and in States, in the joint pursuit of developmental goals.
Constitution
Chairperson
ShriNarendraModi, Hon'ble Prime Minister
Vice Chairperson
ShriArvindPanagariya
Full-Time Members
ShriBibekDebroy
Shri V.K. Saraswat
Prof. Ramesh Chand
Ex-officio Members
ShriRajnath Singh, Minister of Home Affairs 
ShriArunJaitley, Minister of Finance; Minister of Corporate Affairs; and Minister of Information and Broadcasting
Shri Suresh Prabhu, Minister of Railways 
ShriRadha Mohan Singh, Minister of Agriculture
Special Invitees
ShriNitinGadkari, Minister of Road Transport and Highways; and Minister of Shipping
ShriThawar Chand Gehlot,Minister of Social Justice and Empowerment 
Smt. SmritiZubinIrani, Minister of Human Resource Development.

Chief Executive Officer

Shri Amitabh Kant

Functions:

1. To evolve a shared vision of national development priorities sectors and strategies with the active involvement
of States in the light of national objectives
2. To foster cooperative federalism through structured support initiatives and mechanisms with the States on a
continuous basis, recognizing that strong States make a strong nation
3. To develop mechanisms to formulate credible plans at the village level and aggregate these progressively at
higher levels of government
4. To ensure, on areas that are specifically referred to it, that the interests of national security are incorporated in
economic strategy and policy
5. To pay special attention to the sections of our society that may be at risk of not benefitting adequately from
economic progress
6. To design strategic and long term policy and programme frameworks and initiatives, and monitor their
progress and their efficacy. The lessons learnt through monitoring and feedback will be used for making
innovative improvements, including necessary mid-course corrections
7. To provide advice and encourage partnerships between key stakeholders and national and international like-
minded Think tanks, as well as educational and policy research institutions.
8. To create a knowledge, innovation and entrepreneurial support system through a collaborative community of
national and international experts, practitioners and other partners.
9. To offer a platform for resolution of inter-sectoral and inter departmental issues in order to accelerate the
implementation of the development agenda.
10. To maintain a state-of-the-art Resource Centre, be a repository of research on good governance and best
practices in sustainable and equitable development as well as help their dissemination to stake-holders
11. To actively monitor and evaluate the implementation of programmes and initiatives, including the
identification of the needed resources so as to strengthen the probability of success and scope of delivery
12. To focus on technology upgradation and capacity building for implementation of programmes and initiatives
13. To undertake other activities as may be necessary in order to further the execution of the national development
agenda, and the objectives mentioned above.
NITI Aayog – How it is different from Planning Commission

In the Planning Commission, there was just one central figure that practically controlled every aspect of the
commission: the Deputy Chairman. To do away with the central authority and to make the Aayog more useful in terms
of policy, direction and implementation, the Deputy Chairman has been replaced by a CEO and a Vice Chairperson
(with a caveat that they’ll be appointed by the PM).
The focus will be on being a catalyst and providing a platform for the States and the Centre to come together and
discuss matters of economic policies and development plans. The planning will be orchestrated at the village level and
an aggregation of these inputs shall be used to formulate national-level plans and policies. Even during the formation
of the Aayog, Chief Ministers from all the States were invited to participate.
Apart from the CEO and the Vice-Chairman Niti Aayog will have a governing council comprising of Chief Ministers
and Lieutenant Governors. They will also be for Union Ministers serving as ex-officio members. There will be full
time members and part-time members. People will also be drawn from regional councils and experts and specialists
from varied fields will also be a part of Niti Aayog, mostly as special invitees nominated by the Prime Minister. The
Aayog will also have 2 part-time members from leading universities and research organizations.
Earlier the Commission was reporting to the National Development Council consisting of State Chief Ministers and
Lieutenant Governors and this has been replaced by a governing council which, again, comprises of State Chief
Ministers and Lieutenant Governors.
The big difference is, as mentioned above, the States will now have a greater say. Previously it was the Planning
Commission that formulated plans and then asked the
States to implement them (provided they agreed), this time the States themselves will be able to actively participate in
the planning so that there is no communication gap and the plans can be implemented effectively.
Special stress will be put on the benefit of those marginalised sections of the society that have been ignored so far.

5. Explain the Industrial Policy of India and its impact on economic reforms?

Answer:Industrial Policy of India: Industrial policy is a comprehensive package of policy measures which
covers various issues connected with different industrial enterprises of the country. This policy is essential for
devising various procedures, principles, rules and regulations for controlling such industrial enterprises of the
country.
The pace, pattern and structure of industrialization in a country is highly influenced by its industrial policy. The
industrial policy consists of a philosophy to determine the pattern of industrial development of country,
procedures, principles, rules and regulations for the control of industries.
The policy also incorporates fiscal policy, monetary policy, the tariff policy, labour policy and the
Government’s attitude towards the public and private sectors of the country. Before independence there was no
proper policy for determining industrial development of the country. It is only after independence a beginning
has been made in this direction.
Industrial Policy, 1948:
On April 6, 1948, the Government of India adopted the industrial policy resolutions for accelerating the
industrial development of the country. The policy resolution contemplated a mixed economy which included
both the public sector as well as private sector on the industrial front.
This policy divided the various Indian industries into four broad categories:
(a) In this first category of exclusive state monopoly, the manufacture of arms and ammunition, the
production and control of atomic energy and ownership and management of railway transport were
included.
(b) The second category included coal, iron and steel, aircraft manufacture, ship-building, manufacture of
telephone, telegraphs and wireless sets and mineral oil industries. In this category all new factories would be
owned and managed by the public sector although the existing units of such industries would continue to be run
by the private industrial establishments. Thus, the State would have the exclusive right in setting up of new
undertaking included in this category.
(c) The third category of industries included 20 important large scale and basic industries which were kept
reserved for the time being to the private sector although the state reserves the right to plan, regulate and control
as and when necessary. In this category various industries such as salt, automobiles, tractors, prime movers,
heavy chemical, electric engineering, machine tools, fertilizers, electro-chemical industries, rubber
manufactures, power and industrial alcohol, non-metals, cotton and woollen textiles, sugar, paper, cement,
newsprint, air and sea transport, minerals and industries related to defence were included.
(d) The fourth category comprised of the ‘remainder of the industrial field’ which was kept open to private
sector including both individual as well as co-operative.
In this industrial policy, special emphasis was laid on the development of cottage and small scale industries.
Besides proper steps were taken to design a suitable tariff policy, taxation policy and also for maintaining sound
industrial relation between management and labour.
Regarding foreign capital, the industrial policy recognized the need for security and participation of foreign capital
and enterprise especially in respect of industrial technique and knowledge for enhancing the pace of industrialization
in the country. But the policy was to lay down the foundation of mixed economy with the participation of both public
and private sector for accelerating the pace of industrial development in the country.
Industrial Policy Resolution, 1956:
Alter the proclamation of industrial policy, 1948; Indian economy had to face a series of economic and political
changes which necessitated the formulation of a fresh industrial policy for the country. In the meantime, the First
Five Year Plan was completed and socialistic pattern of society was accepted as the major objective of the
country’s social and economic policy. Thus, on April 30, 1956, a second Industrial Policy Resolution was adopted
in India replacing the policy Resolution of 1948.
Following are some of the important provisions of the 1956 policy:
(i) New Classification of Industries:
In this new policy, industries were re-classified into three schedules.
These schedules were:
 (a) Schedule A:
In the schedule A, seventeen industries were included and the future developments of these industries were to be
the exclusive responsibility of the State. These industries include arms and ammunition, atomic energy, iron and
steel, heavy castings and forgings of iron and steel, heavy machinery, heavy electrical industries, coal, mineral oil,
mining; iron ore and other important minerals like, copper, lead and zinc; railway transport, aircraft, ship building,
telephone, telegraph and wireless equipment, and generation and distribution of electricity.
(b) Schedule B:
In this schedule 12 industries were placed which will be progressively state- owned. In this schedule, the state
would gradually set up new units and the private industries would also be expected to supplement the effort of the
state in this regard.
These twelve industries include aluminium, other mining industries and other non-ferrous metals not included in
the schedule A, machine tools, Ferro alloys and tool, steels, fertilizers, the chemical industry, antibiotics and other
essential drugs, synthetic rubber, carbonization of coal, chemical pulp, road transport and sea transport.
(c) Schedule C:

In this schedule all the remaining industries were included and their future development would be left to the
initiative and enterprise of the private sector. The state would facilitate and encourage the development of all these
industries in the private sector as per the programmes finalized in the Five Year Plans of the country. These
industries were controlled by the state in terms of the Industries (Development and Regulation) Act of 1951 and
other relevant legislations.

(ii) No water-tight Classification:

It is important to note that the grouping of industries into three schedules was not placed in water-tight
compartments. As these classifications remained open, thus the State may start any industry even in schedule C
and similarly privately owned units may be permitted to establish industrial units even in schedule A in
appropriate cases.
(iii) Fair and Non-discriminatory Treatment for the Private Sector:
The State would facilitate and encourage the private sector industries by ensuring infrastructural facilities like
power, transport and other services and provide non-discriminatory treatment to both public and private owned
units.
(iv) Encouraging Cottage and Small Scale Industries:
The State would continue to support cottage, village and small scale industries by restricting the volume of
production in the large scale industrial units, by imposing differential taxation or by direct subsidies and would
concentrate to improve their competitive strength by modernizing the techniques of production.
(v) Removal of Regional Disparities:
In order to secure a balanced development, the policy emphasized to remove regional disparities in respect of
industrial development and tries to attain higher standard of living for the people of the country.

(vi) Amenities for Labour:

The Resolution recognized the importance of labour and recommended to associate the workers and technicians
with management progressively. The policy stressed the need for improving the living and working conditions of
workers and also to raise their standard of efficiency.
(vii) Attitude towards Foreign Capital:
Regarding the foreign capital the resolution maintained the same attitude as enunciated in our Industrial Policy,
1948. The policy recognized the importance of foreign capital and has given clear assurance for the safety and
facilities for investment of the foreign investors.
Thus the Industrial Policy Resolution, 1956 has made a clear-cut provision for the expansion of both public sector
and private sector enterprises in the country in co-ordinated manner with high degree of flexibility in its policies.
Further, the policy resulted in the rapid expansion of the public sector in basic and heavy industries of the country.
Industrial Policy Statement, 1977:
In December 1977, the Janata Government announced its New Industrial Policy through a statement in the
Parliament.
Following are the main elements of the new policy:
1. Development of Small Scale Industrial Sector:
The main thrust of the new policy was the effective promotion of cottage and small industries widely dispersed in
rural areas and small towns. In this policy the small sector was classified into three groups—cottage and
household sector, tiny sector and small scale industries.
This policy suggested following measures for the promotion of small scale and cottage industries of the
country:
(a) Expanding the list of items from 180 to 807 items.
(b) Establishment of ‘District Industries Centre’ for the development of cottage and small scale industries.
(c) Revamping Khadi and Village Industries Commission.
(d) Special arrangement for widespread application of suitable technology for small scale and village industries.
2. Areas for Large Scale Sector:
The 1977 Industrial Policy prescribed the following areas for large scale industrial sector:
(a) Basic industries,
(b) Capital goods industries,
(c) High technology industries and
(d) Other industries outside the list of reserved items for the small scale sector.
3. Big Business Houses:
The 1977 Industrial Policy restricts the scope of large business houses so that no unit of the same business group
acquired a dominant and monopolistic position in market.
4. Role of the Public Sector:
The new policy prescribed the expansion of the role of public sector especially in respect of strategic goods of
basic nature. The public sector was also encouraged to develop ancillary industries and to transfer its expertise in
technology and management to small scale and cottage industry sectors.
5. Promotion of Technological Self-reliance through the inflow of technology in sophisticated areas is another
feature of the 1977 policy.
6. The policy recommended a consistent line of approach towards sick industrial units of the country.
7. Management-labour Relations:
The new policy of 1977 put emphasis on reducing the occurrence of labour unrest. The Government encouraged
the worker’s participation in management from shop floor level to board level. But the industrial Policy 1977, is
subjected to serious criticism as there was absence of effective measures to curb the dominant position of large
scale units and the policy did not envisage any socioeconomic transformation of the economy for curbing the role
of big business houses and multinationals.
Industrial Policy of 1980:
On 3rd July, 1980 the Congress (I) Government announced its new industrial policy. This new policy seeks to
promote the concept of economic federation, to raise the efficiency of public sector and to reverse trend of
industrial production of the past three years and reaffirms its faith in the Monopolies and Restrictive Trade
Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA). While preparing this policy statement,
the 1956 resolution was considered as its basis.
Socio-economic Objectives of the Policy:
The industrial policy statement, 1980 has laid down the following objectives:

(i) Optimum utilization of installed capacity;

(ii) Maximizing production and to achieve higher productivity and higher employment generation;

(iii) Correction of regional imbalance through a preferential development of industrially backward areas;

(iv) Strengthening of the agricultural base according to a preferential treatment to agro-based industries and
promoting optimum inter-sectoral relationship;

(v) Faster promotion of export-oriented and import substitution industries;

(vi) Promoting economic federalism with an equitable spread of investment over small but growing unit in the
rural as well as urban areas; and

(vii) Revival of the economy by removing the infrastructural gaps.

Policy Measures:

Besides in this industrial policy, 1980 the following policy measures were proposed to normalize the
situation and to put the economy again on its feet:

1. Effective Operational System of Management of the Public Sector:

The new policy reaffirmed its faith in the public sector in-spite of having erosion of faith in it in recent years.
Thus, the Government decided to launch a time bound programme in order to revive the efficiency of public
sector undertakings.
2. Integrating Industrial Development in the Private Sector by Promoting the Concept of Economic
Federalism:
The policy statements state that for integrated industrial development, it would promote the concept of economic
federalism with setting up of a few nucleus plants in each district, identified as industrially backward district, to
generate as many ancillaries and small and cottage units as possible.
3. Nucleus Plants:
The new policy has introduced the concept of nucleus plants which would concentrate on assembling the products
of the ancillary units falling within its orbit, on producing the inputs needed by a large number of smaller units
and making adequate marketing arrangements. The nucleus plant would also make provision for upgrading the
technology of small units.
4. Redefining Small Units:
In view of the sufficient changes in the price level, price escalation and to develop the cottage and small
scale industries, the Government decided:
(a) To raise the limit of investment in respect of tiny units from Rs. 1 lakh to Rs. 2 lakh;
(b) To raise the investment limits in case of small scale units from Rs. 10 lakh to Rs. 20 lakh; and
(c) To rise the investments limit in case of ancillary units from Rs. 15 lakh to Rs. 25 lakh.
Thus, the upward revision of investment limits would eliminate the tendency to circumvent the present limit by
under-estimating the value of machinery and equipment, falsification of accounts or resort to ‘benami’ units. This
would also help the qualified entrepreneurs in order to set up genuine small scale units and also facilitate the long
overdue modernization of the existing small scale units.
Further, the new policy also provides other facilities like financial support to small units, buffer stocks of critical
inputs for small units, marketing support and reservation of items for small scale industries as a whole.
5. Promotion of Industries in the Rural Areas:
The policy statement emphasized the necessity to promote suitable industries in the rural areas in order to generate
bigger employment and for raising per capita income of the rural people without disturbing ecological balance in
rural areas. In this respect the development of handloom, handicrafts and khadi and village industries would be
given greater attention.
6. Removal of Regional Imbalance:
The policy encourages dispersal of industry and setting up of industrial units in industrially backward areas for
making necessary correction in regional imbalances.
7. Liberalisation of Existing Capacities:
The policy statement gave recognition to the excess productive capacity as a result of replacement and
modernization, and regularized these unauthorized excess capacities on selective basis.
8. Automatic Expansion:
The policy also gave concession to the large scale units about their extension and simplification for automatic
expansion until now permitted to 15 industries.
9. Industrial Sickness and State Policy:
The policy statement also proposed to introduce “a checklist” to serve as ‘early warning system’ for identifying
symptoms of sickness and also to take stern measures about deliberate mismanagement and financial
improprieties leading to sickness. In exceptional cases only the management of sick units would be taken over on
public interests.
Conclusion:
In conclusion it can be observed that the New Industrial Policy (1980) is guided mainly by the considerations of
growth. The policy liberalized licensing for large and big business, wanted to promote large scale industries at the
cost of small scale units. Thus the policy favours a more capital intensive path for development and paves the way
for the expansion of large and big industrial houses.
Industrial Policy Development in Eighties—Liberalisation Wave:
During eighties, various steps were taken by the Government for liberalizing the industrial policy of the country.
These steps were as follows:
1. Exemption from Licensing:
In order to liberalise the industries, the exemption limit of licensing was continuously enhanced from non-MRTP
and non-FERA companies. The exemption limit which was Rs. 3 crores in 1978, gradually enhanced to Rs. 5
crores in 1983 and then substantially to Rs. 55 crores for those projects to be located in non-backward areas and to
Rs. 50 crores for those projects located in backward areas in 1988-89.
2. Relaxation to MRTP and FERA Companies:
The government made provision for various relaxations to those companies under MRTP Act (Monopolies and
Restrictive Trade Practices Act) and FERA (Foreign Exchange Regulation Act) in order to expand industrial
production and also to promote exports.
These relaxations include:
(a) Raising the limit of MRTP companies from Rs. 20 crores to Rs. 100 crores in March, 1985;
(b) Allowing the MRTP to set up new capacities in those industries of high national importance and with import
substitution potential or using sophisticated technology without the approval to government in 1983 (May);
(c) Giving permission for unrestricted entry of large industrial houses and companies governed by FERA in 21
high technology items of manufacture in December, 1985. Accordingly, large industrial houses under the purview
of MRTP Act and FERA companies were given permission to freely undertake the manufactures of 83 items.
(d) Specifying a list of 33 broad group of industries under Appendix I where MRTP and FERA companies were
given permission to set up capacities provided these items are not in the reserved list of small scale sector or
public sectors;
(e) Making provision for various other concessions such as regularisation of excess capacity and capacity re-
endorsement, special facilities to set up industries in backward areas etc. to MRTP and FERA companies.
3. Delicensing:
In order to encourage industries, the government delicensed 28 broad categories of industries and 82 bulk drug
and their formulations. These industries would now require any registration with the Secretariat for Industrial
Approval and thus no licence had to be obtained by these industries under the Industries (Development and
Regulation) Act if these industries do not fall within the purview of MRTP Act or FERA, do not produce articles
reserved for small scale industries and the undertaking is not located in an urban area. In 1989-90, provision has
been made for delicensing of some more industries.

4. Re-endorsement of Capacity:

In order to achieve maximum capacity utilisation, in April 1982, the scheme of capacity re-endorsement was
announced. Again in 1986, this scheme was liberalised further to permit those undertakings in availing such
facility which achieved 80 per cent capacity utilization (previously 94 per cent). The industries which were not
permitted for automatic re-endorsement of capacity was reduced from 77 to 26.

5. Broad Banding Industries:

In 1984, the scheme of broad banding of industries was introduced in order to classify these industries into broad
categories. This was done to enable the producers to change their product-mix rapidly in order to match the
changing demand pattern.

6. Minimum Economic Scales of Operation:

In 1986 the government introduced the minimum economic scales of operation in order to encourage relations of
economies of scale through the expansion of its installed capacities. Till 1989, minimum economic capacities
(MECs) were specified gradually for 108 industries and in 1989-90 some more industries were specified under
MECs.

7. Development of Backward Areas:

In order to develop backward areas, the government extended the scheme of delicensing in March 1986 to MRTP
or FERA Companies engaged in 20 industries in Appendix I for their location in backward areas declared
centrally. Later on the scheme was extended to 49 industries.

Again in 1988- 89, the government set up 100 grown centres throughout the country to provide infrastructural
facilities to these backward areas. Moreover, in 1988 income tax reliefs were announced for promoting
industrialisation of backward areas.

Accordingly, new industries established in notified backward areas were entitled to income tax relief under
Section 80HH of I.T. Act by way of 20 per cent deduction from profits for a period of 10 years. Again under
Section 80- I of Act, all new industrial undertakings were entitled to income tax relief by way of 25 per cent
deduction of the profits for a period of 8 years.

8. Incentives for Export Production:

In order to promote exports, the government announced various concessions in its industrial policy and export
(Exim) policy. Again, all 100 per cent export- oriented industries were exempted from Section 21 and 22 of the
Act which were set in Free-Trade Zones. Some more industries were identified from export angle which were
permitted 5 per cent automatic growth rate annually over and above their normal capacity.

9. Enhancement of Investment of Small Scale and Ancillary Units:

The investment limits for small scale units and ancillary units which was Rs. 20 lakhs and 25 lakhs respectively as
per 1980 policy statement, gradually enhanced to Rs. 35 lakhs and Rs. 45 lakhs respectively in 1985 and Rs. 2
lakhs for tiny units.

In 1991, these limits were again raised to Rs. 60 lakhs and Rs. 75 lakhs for both the small scale and ancillary units
respectively. Moreover about 200 times which were earlier reserved, were completely de-reserved and kept open
for large and medium scale sector.

New Industrial Policy, 1991 and Economic Reforms:

The Congress (I) led by NarasimhaRao Government has announced its new industrial policy on July 24, 1991. In
line with the liberalisation move introduced during the 1980s, the new policy radically liberalized the industrial
policy itself and de-regulates the industrial sector substantially.

Objectives:
The prime objectives of the new industrial policy are to “unshakle the Indian industrial economy from the
cobwebs of unnecessary bureaucratic controls”, and to build on the gains already experienced, to correct the
distortions or weakness involved in the system, to introduce liberalisation measures in order to integrate Indian
economy with world economy, to abolish restrictions on direct foreign investment, to liberate the indigenous
enterprise from the restrictions of MRTP Act, to maintain a sustained growth in productivity and employment and
also to achieve international competitiveness. Moreover, the policy also made provision for reducing the load of
public sector enterprises showing either low rate of return or incurring losses over the year.

Thus to fulfil these objectives, the government introduced a series of initiatives in the new industrial policy
in the following areas:

1. Abolition of Industrial Licensing:

In order to liberalise the economy and to bring transparency in the policy, the new industrial policy has abolished
the system of industrial licensing for all industrial undertaking, irrespective of the level of investment, except for a
short list of industries related to security and strategic concerns, social reasons, hazardous chemicals and
overriding environmental concerns and items of elitist consumption. As per Annexure II of the policy there are
only 18 industries for which licensing are compulsory.
These include:
(1) Coal and lignite;
(2) Petroleum (other than crude) and its distillation products;
(3) Distillation and brewing of alcoholic drinks;
(4) Sugar;
(5) Animal fat and oils;
(6) Cigars and Cigarettes of tobacco and manufactured tobacco substitutes;
(7) Asbestos and asbestos based products;
(8) Plywood and decorative veneers and other wood based products;
(9) Raw hides and skins, leather, chamois leather and patent leather,
(10) Tanned and dressed skins;
(11) Motor car;
(12) Paper and newsprint except bagasse based units;
(13) Electronic aerospace and defence equipment—all types;
(14) Industrial explosives;
(15) Hazardous chemicals;
(16) Drugs and Pharmaceuticals;
(17) Entertainment Electronics;
(18) White goods such as domestic refrigerators, washing machines, microwave ovens and air conditioners.
The compulsory licensing provision would not apply in respect of the small scale units taking up the manufacture
of any of the above items reserved for exclusive manufacture in the small scale sector.
2. Policy regarding Public Sector:
In-spite of its huge investment, the public sector enterprises could yield a very low rate of return on capital
invested. A good number of public sector enterprises are incurring huge amount of loss regularly. Thus, in order to
face the situation, the Government should restructure the potentially viable units.
The priority areas for the growth of future public sector enterprises included—essential infrastructure, exploration
and exploitation of minerals and oil, technology development and products with strategic consideration.
The new policy has now reduced the list of industries under public sector to 8 as against the 17 industries reserved
earlier as per 1956 policy. The industries which are now removed from the list of reserved industries include—
iron and steel, electricity, air transport, ship building, heavy machinery industries, telecommunication cables and
instruments.
Those 8 industries which remained in the reserved list for the public sector are :
(1) Arms and ammunition and allied defence equipment, defence aircraft and warships;
(2) Atomic energy;
(3) Coal and lignite;
(4) Mineral oil;
(5) Mining of iron ore, manganese ore, chrome, gypsum, sulphur, gold and diamond;
(6) Mining of copper, lead, zinc, tin, molybdenum and wolfarm;
(7) Minerals specified in the schedule to the Atomic Energy (Control of Production and Use) Order, 1953; and
(8) Rail transport.
6. The new industrial policy states that the government will raise the strength of those public sector units
included in the list of reserved industries or in the priority group of those earning reasonable profits. The
government will now make review of the existing public sector industries.
Industries earning higher profit will be provided with much higher degree of management autonomy through the
system of MOU. Private sector participation would be invited to raise the competitive capacity of these industries.
Sick units will now be referred to the Board of Industrial Finance and Reconstruction (BIFR) for getting advice
about its rehabilitation and reconstruction.
The government has also taken a decision to disinvest the equity shares of selected public units for bringing
market discipline in their performances. In 1991-92, Rs. 3,038 crore was raised and in 1992-93 Rs. 1,866 crore
was raised through disinvestment of PSE shares. Accordingly, a part of the shares of PSEs is now being offered
for sale to mutual funds, financial institutions, general public and workers.
3. MRTP Limit:
As per the MRTP Act any firm with assets over a certain size (Rs. 100 crore since 1985) was classified as MRTP
firms and such firm was allowed to start only selected industries on a case by case approval. But the government
now felt that this MRTP limit has become deleterious in its effects on the industrial growth of the country.
Thus, the new policy states that the pre-entry scrutiny of investment decisions by the so-called MRTP companies
will no longer be required. Instead emphasis will be on controlling and regulation of monopolistic, restrictive and
unfair trade practices rather than making it necessary for the monopoly houses to obtain approval of the centre for
expansion, establishment of new undertaking, merger, amalgamation and take over and appointment of certain
director. “The thrust of the policy will be more on controlling unfair or restrictive business practices”.
Simultaneously, provisions of the MRTP Act will be strengthened in order to enable the MRTP Commission to
take appropriate action in respect of monopolistic, restrictive and unfair trade practices.
4. Foreign Investment and Foreign Technology:
From the very beginning, foreign investment in India was regulated by the government. Thus, for any foreign
investment or foreign technology agreements, prior approval of the government was necessary. All these were
resulting in unnecessary delays and thus hampered the decision making in business.
The new industrial policy thus prepared a specified list of high technology and high investment priority industries
(Annexure III) in which automatic permission will be available for direct foreign investment up to 51 per cent
foreign equity. The Annexure III included 34 priority industries. Such as metallurgy, boilers and steam generating
plants, electrical equipment, telecommunication equipment’s, transportation, industrial and agricultural
machinery, industrial investments, chemicals, food processing, hotel and tourism industry.
In respect of foreign technology agreements automatic permission will be provided in high- priority industry up to
a sum of Rs. 1 crore, 5 per cent royalty for domestic sales and 8 per cent of the sale over a 10 year period from the
date of agreement or seven years from commencement of production. No permission will be required for hiring
foreign technicians or for testing of indigenously developed technology abroad.
5. Location Policy Liberalised:
The new policy mentioned that in location other than cities of more than 1 million population, no industrial
approvals from the centre will be required except for industries subject to compulsory licensing. In cities with
more than 1 million population, industries other than those of non-polluting in nature, will be located outside 25
kms of its periphery.
6. Abolition of Phased Manufacturing Programmes:
Phased manufacturing programme was enforced in order to increase the pace of indigenization. The new policy
has totally abolished such programmes as the government feels due to substantial reforms of trade policy and
devaluation of rupee there is no need to enforce such programmes.
7. Removal of Mandatory Convertibility Clause:
From the very beginning a large part of industrial investment was financed by loans from banks and financial
institutions who have followed a mandatory convertibility clause in their lending operations for new industrial
projects. This has provided an option to convert loans into equity if it was felt necessary by the management.
This was an unwarranted threat to private firm. The new industrial policy removed this system and henceforth,
financial institutions will not impose this mandatory convertibility clause.
Appraisal of the Policy:
Merits:

It is quite logical to think that a country like India is trying to achieve a faster industrial growth. Thus, the new
industrial policy (1991) paves the way for liberalisation which will again result in a faster industrial growth as the
industrial sector is being relieved of unnecessary control and regulation. J.C. Sandesara argued that the new policy
will accelerate industrial production as it reduces project time and project cost of production, attract capital,
technology and managerial expertise from abroad and improve the level of efficiency of production; enhance the
allocative efficiency of the public sector by opening up nine areas from public sector and improve its performance
and finally greater powers of the MRTP Commission will curb the monopolistic and oligopolistic behaviour and
thus promote their competition and efficiency.
Criticism:
But some economists have also criticised this new policy on various grounds. The new policy made the provision
for too much opening up of economy to foreign influences. H.K. Paranjape agreed that those 34 high priority
industries having provision for automatic permission for foreign investment “would make it possible for large
trans-national to dominate certain growing areas of our country and push to the wall any Indian concerns which
attempt to stand out of their own. Indigenous R&D will be doomed.”
 Moreover, past record of the multinationals working in India suggests that these companies are in operation more
as trading than as manufacturing and exporting concerns. Considering our huge manpower resources, we need a
labour intensive and capital saving technologies but the multinationals coming from a reverse situation will find it
very difficult to adopt with such technology.
Moreover, liberalisation of foreign investment up to 51 per cent foreign equity and even 100 per cent export
oriented company will counter the Nehruvian Model where foreign capital was permitted only during transitional
phase with the goal to become self-reliant.
Moreover, free entry of foreign capital will remove the distinction between high priority and low priority
industries and accordingly foreign investment would enter into all different lines of production. But considering
our huge external debt burden, entry of foreign capital should be restricted to only priority industries. Allowing
foreign equity in trading companies was also not justified.
The main idea behind the free flow of foreign capital is backed by the arguments that firstly, it would provide
much needed foreign exchange and then secondly, it would lead to huge volume of foreign direct investment in
the high priority industries. But in this connection, there is a fear that while doing so we may sell our economic
sovereignty to multinationals.
However, the government should be very much careful about the hidden financial implications of reverse outflow
of foreign exchange in the form of remittance of profit, dividends and royalties of the foreign capitalists.
Therefore, considering the existing huge foreign debt burden, the Government must take proper care to invite
foreign capital only in high priority industries and the country should not suffer by following the path followed by
Brazil or Mexico.
The new industrial policy also mentioned about loss incurring public sector enterprises which would be referred to
BIFR. Thus, while passing this sick enterprises to private business houses or to close such sick enterprises
adequate social security measures must be undertaken. But the new policy neglected this provision.
It would be better if the ownership of such sick enterprises be transferred to workers’ co-operative and the
government should provide adequate financial and technical assistance in order to revive such industrial units.
Moreover, the MRTP commission’s capacity to control and regulate the monopolistic and unfair practices is
doubtful as the past experience suggests that the commission has failed in this respect.
From the foregoing analysis we can conclude that the new industrial policy has introduced certain challenging
issues in order to restructure and revive the industrial sector of the country. The policy will rationalise the
industrial investments will pave the way for growing competitiveness and profitability outlook among the Indian
industries in near future.
The policy will attract foreign investment, no doubt, but its capacity to generate employment is doubtful. The exit
policy will render many workers unemployed. Lastly, giving excessive freedom to foreign capital may also affect
our economic sovereignty and will push the country towards debt trap. Thus, considering all these apprehensions
sufficient care should be taken in near future to keep the industrial economy in right track.

6. Explain the concept of EXIM Policy. Highlight the important features of current EXIM Policy.

Indian Trade Policy is prepared and announced by the Central Government (Ministry of Commerce). India's Export
Import Policy also know as Foreign Trade Policy, in general, aims at developing export potential, improving export
performance, encouraging foreign trade and creating favorable balance of payments position.

History of Exim Policy of IndiaIn the year 1962, the Government of India appointed a special committee to review
the government previous export import policies. The committee was later on approved by the Government of India.
Mr. V. P. Singh, the then Commerce Minister and announced the Exim Policy on the 12th of April, 1985. Initially the
EXIM Policy was introduced for the period of three years with main objective to boost the export business in India
The major information in matters related to export and import is given in the document named "Exim Policy 2002-
2007".

Objectives of The Exim Policy : - There are two aspects of Exim Policy; the import policy which is concerned with
regulation and management of imports and the export policy which is concerned with exports not only promotion but
also regulation. The main objective of the Government's EXIM Policy is to promote exports to the maximum extent.
Exports should be promoted in such a manner that the economy of the country is not affected by unregulated
exportable items specially needed within the country. Export control is, therefore, exercised in respect of a limited
number of items whose supply position demands that their exports should be regulated in the larger interests of the
country. In other words, the main objective of the Exim Policy is:

 To accelerate the economy from low level of economic activities to high level of economic activities by making it a
globally oriented vibrant economy and to derive maximum benefits from expanding global market opportunities.
 To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components,'
consumables and capital goods required for augmenting production.
 To enhance the techno local strength and efficiency of Indian agriculture, industry and services, thereby, improving
their competitiveness.
 To generate new employment.
 Opportunities and encourage the attainment of internationally accepted standards of quality.
 To provide quality consumer products at reasonable prices.
Governing Body of Exim Policy

The Government of India notifies the Exim Policy for a period of five years under Section 5 of the Foreign Trade
(Development and Regulation Act), 1992. 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

HIGHLIGHTS OF THE FOREIGN TRADE POLICY 2015-2020

A. SIMPLIFICATION & MERGER OF REWARD SCHEMES Export from India Schemes:

1. Merchandise Exports from India Scheme (MEIS) (a) Earlier there were 5 different schemes (Focus Product
Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip, VKGUY)
for rewarding merchandise exports with different kinds of duty scrips with varying conditions (sector specific or
actual user only) attached to their use. Now all these schemes have been merged into a single scheme, namely
Merchandise Export from India Scheme (MEIS) and there would be no conditionality attached to the scrips issued
under the scheme. Rewards for export of notified goods to notified markets under ‘Merchandise Exports 2 from India
Scheme (MEIS) shall be payable as percentage of realized FOB value (in free foreign exchange). The debits towards
basic customs duty in the transferable reward duty credit scrips would also be allowed adjustment as duty drawback.
At present, only the additional duty of customs / excise duty / service tax is allowed adjustment as CENVAT credit or
drawback, as per Department of Revenue rules.

2. Service Exports from India Scheme (SEIS) (a) Served From India Scheme (SFIS) has been replaced with Service
Exports from India Scheme (SEIS). SEIS shall apply to ‘Service Providers located in India’ instead of ‘Indian Service
Providers’. Thus SEIS provides for rewards to all Service providers of notified services, who are providing services
from India, regardless of the constitution or profile of the service provider. The rate of reward under SEIS would be
based on net foreign exchange earned. The reward issued as duty credit scrip, would no longer be with actual user
condition and will no longer be restricted to usage for specified types of goods but be freely transferable and usable
for all types of goods and service tax 3 debits on procurement of services / goods. Debits would be eligible for
CENVAT credit or drawback

3 Incentives (MEIS & SEIS) to be available for SEZs It is now proposed to extend Chapter -3 Incentives (MEIS &
SEIS) to units located in SEZs also. 4. Duty credit scrips to be freely transferable and usable for payment of custom
duty, excise duty and service tax. (a) All scrips issued under MEIS and SEIS and the goods imported against these
scrips would be fully transferable. (b) Scrips issued under Exports from India Schemes can be used for the following:-
(i) Payment of customs duty for import of inputs / goods including capital goods. (ii) Payment of excise duty on
domestic procurement of inputs or goods, including capital goods as per DoR notification.

4 (iii) Payment of service tax on procurement of services as per DoRnotification. (c) Basic Customs Duty paid in cash
or through debit under Duty Credit Scrip can be taken back as Duty Drawback as per DoR Rules, if inputs so imported
are used for exports.

5. Status Holders (a) Business leaders who have excelled in international trade and have successfully contributed to
country’s foreign trade are proposed to be recognized as Status Holders and given special treatment and privileges to
facilitate their trade transactions, in order to reduce their transaction costs and time. (b) The nomenclature of Export
House, Star Export House, Trading House, Star Trading House, Premier Trading House certificate has been changed
to One, Two, Three, Four, Five Star Export House. (c) The criteria for export performance for recognition of status
holder have been changed from Rupees to US dollar earnings. The new criteria is as under:- 5 Status category Export
Performance FOB / FOR (as converted) Value (in US $ million) during current and previous two years One Star
Export House 3 Two Star Export House 25 Three Star Export House 100 Four Star Export House 500 Five Star
Export House 2000 (d) Approved Exporter Scheme - Self certification by Status Holders Manufacturers who are also
Status Holders will be enabled to self-certify their manufactured goods as originating from India with a view to
qualify for preferential treatment under different Preferential Trading Agreements [PTAs], Free Trade Agreements
[FTAs], Comprehensive Economic Cooperation Agreements [CECAs] and Comprehensive Economic Partnerships
Agreements [CEPAs] which are in operation. They shall be permitted to self-certify the goods as manufactured as per
6 their Industrial Entrepreneur Memorandum (IEM) / Industrial Licence (IL)/ Letter of Intent (LOI). B. BOOST TO
"MAKE IN INDIA"

6. Reduced Export Obligation (EO) for domestic procurement under EPCG scheme: Specific Export Obligation under
EPCG scheme, in case capital goods are procured from indigenous manufacturers, which is currently 90% of the
normal export obligation (6 times at the duty saved amount) has been reduced to 75%, in order to promote domestic
capital goods manufacturing industry.
7. Higher level of rewards under MEIS for export items with high domestic content and value addition. It is proposed
to give higher level of rewards to products with high domestic content and value addition, as compared to products
with high import content and less value addition. 7 C. TRADE FACILITATION & EASE OF DOING BUSINESS

8. Online filing of documents/ applications and Paperless trade in 24x7 environment: (a) 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. In order to move further towards paperless processing of reward schemes, it has been decided to
develop an online procedure to upload digitally signed documents by Chartered Accountant / Company Secretary /
Cost Accountant. In the new system, it will be possible to upload online documents like annexure attached to ANF 3B,
ANF 3C and ANF 3D, which are at present signed by these signatories and submitted physically. (b) Henceforth,
hardcopies of applications and specified documents would not be required to be submitted to RA, saving paper as well
as cost and time for the exporters. To start with, applications under Chapter 3 & 4 of FTP are being covered (which
account for nearly 70% of total applications in DGFT). Applications 8 under Chapter-5 would be taken up in the next
phase. (c) As a measure of ease of doing business, landing documents of export consignment as proofs for notified
market can be digitally uploaded in the following manner:- (i) Any exporter may upload the scanned copy of Bill of
Entry under his digital signature. (ii) Status holders falling in the category of Three Star, Four Star or Five Star Export
House may upload scanned copies of documents.

9. Online inter-ministerial consultations: It is proposed to have Online inter-ministerial consultations for approval of
export of SCOMET items, Norms fixation, Import Authorisations, Export Authorisation, in a phased manner, with the
objective to reduce time for approval. As a result, there would not be any need to submit hard copies of documents for
these purposes by the exporters. Simplification of procedures/processes, digitisation and e-governance (a) Under
EPCG scheme, obtaining and submitting a certificate from an independent Chartered Engineer, confirming the use of
spares, tools, refractory and catalysts imported for final redemption of EPCG authorizations has been dispensed with.
(b) At present, the EPCG Authorisation holders are required to maintain records for 3 years after redemption of
Authorisations. Now the EPCG Authorization Holders shall be required to maintain records for a period of two years
only. Government’s endeavour is to gradually phase out this requirement as the relevant records such as Shipping
Bills, e-BRC are likely to be available in electronic mode which can be archived and retrieved whenever required. (c)
Exporter Importer Profile: Facility has been created to upload documents in Exporter/Importer Profile. There will be
no need to submit copies of permanent records/ documents (e.g. IEC, Manufacturing licence, RCMC, PAN etc.)
repeatedly with each application, once uploaded.

10 (d) Communication with Exporters/Importers: Certain information, like mobile number, e-mail address etc. has
been added as mandatory fields, in IEC data base. This information once provided by exporters, would help in better
communication with exporters. SMS/ email would be sent to exporters to inform them about issuance of
authorisations or status of their applications. (e) Online message exchange with CBDT and MCA: It has been decided
to have on line message exchange with CBDT for PAN data and with Ministry of Corporate Affairs for CIN and DIN
data. This integration would obviate the need for seeking information from IEC holders for subsequent amendments/
updation of data in IEC data base. (e) Communication with Committees of DGFT: For faster and paperless
communication with various committees of DGFT, dedicated email addresses have been provided to each Norms
Committee, Import Committee and Pre-Shipment Inspection Agency for faster communication. (f) Online applications
for refunds: Online filing of application for refund of TED is being 11 introduced for which a new ANF has been
created.

11. Forthcoming e-Governance Initiatives (a) DGFT is currently working on the following EDI initiatives: (i) Message
exchange for transmission of export reward scrips from DGFT to Customs. (ii) Message exchange for transmission of
Bills of Entry (import details) from Customs to DGFT. (iii) Online issuance of Export Obligation Discharge
Certificate (EODC). (iv) Message exchange with Ministry of Corporate Affairs for CIN & DIN. (v) Message
exchange with CBDT for PAN. (vi) Facility to pay application fee using debit card / credit card. (vii) Open API for
submission of IEC application. (viii) Mobile applications for FTP 12 D. Other new Initiatives

12. New initiatives for EOUs, EHTPs and STPs (a) EOUs, EHTPs, STPs have been allowed to share infrastructural
facilities among themselves. This will enable units to utilize their infrastructural facilities in an optimum way and
avoid duplication of efforts and cost to create separate infrastructural facilities in different units. (b) Inter unit transfer
of goods and services have been allowed among EOUs, EHTPs, STPs, and BTPs. This will facilitate group of those
units which source inputs centrally in order to obtain bulk discount. This will reduce cost of transportation, other
logistic costs and result in maintaining effective supply chain. (c) EOUs have been allowed facility to set up
Warehouses near the port of export. This will help in reducing lead time for delivery of goods and will also address
the issue of unpredictability of supply orders. (d) STP units, EHTP units, software EOUs have been allowed the
facility to use all duty free equipment/goods for training purposes. This will help these units in developing skills of
their employees.

13 (e) 100% EOU units have been allowed facility of supply of spares/ components up to 2% of the value of the
manufactured articles to a buyer in domestic market for the purpose of after sale services. (f) At present, in a period of
5 years EOU units have to achieve Positive Net Foreign Exchange Earning (NEE) cumulatively. Because of adverse
market condition or any ground of genuine hardship, then such period of 5 years for NFE completion can be extended
by one year. (f) Time period for validity of Letter of Permission (LOP) for EOUs/EHTP/ STPI/BTP Units has been
revised for faster implementation and monitoring of projects. Now, LOP will have an initial validity of 2 years to
enable the unit to construct the plant and install the machinery. Further extension can be granted by the Development
Commissioner up to one year. Extension beyond 3 years of the validity of LOP, can be granted, in case unit has
completed 2/3rd of activities, including the construction activities. (g) At present, EOUs/EHTP/STPI units are
permitted to transfer capital goods to other EOUs, EHTPs, STPs, SEZ units. Now a facility has been provided that if
such 14 transferred capital goods are rejected by the recipient, then the same can be returned to the supplying unit,
without payment of duty. (h) A simplified procedure will be provided to fast track the de-bonding / exit of the STP/
EHTP units. This will save time for these units and help in reduction of transaction cost. (i) EOUs having physical
export turnover of Rs.10 crore and above, have been allowed the facility of fast track clearances of import and
domestic procurement. They will be allowed fast tract clearances of goods, for export production, on the basis of
preauthenticated procurement certificate, issued by customs / central excise authorities. They will not have to seek
procurement permission for every import consignment. 13. Facilitating & Encouraging Export of dual use items
(SCOMET). (a) Validity of SCOMET export authorisation has been extended from the present 12 months to 24
months. It will help industry to plan their activity in an orderly manner and obviate the need to seek revalidation or
relaxation from DGFT. 15 (b) Authorisation for repeat orders will be considered on automatic basis subject to certain
conditions. (c) Verification of End User Certificate (EUC) is being simplified if SCOMET item is being exported
under Defence Export Offset Policy. (c) Outreach programmes will be conducted at different locations to raise
awareness among various stakeholders.

14 Facilitating & Encouraging Export of Defence Exports (a) Normal export obligation period under advance
authorization is 18 months. Export obligation period for export items falling in the category of defence, military store,
aerospace and nuclear energy shall be 24 months from the date of issue of authorization or co-terminus with
contracted duration of the export order, whichever is later. This provision will help export of defence items and other
high technology items. (b) A list of military stores requiring NOC of Department of Defence Production has been
notified by DGFT recently. A committee has been formed to create ITC (HS) codes 16 for defence and security items
for which industrial licenses are issued by DIPP.

15. e-Commerce Exports (a) Goods falling in the category of handloom products, books / periodicals, leather
footwear, toys and customized fashion garments, having FOB value up to Rs.25000 per consignment (finalized using
eCommerce platform) shall be eligible for benefits under FTP. Such goods can be exported in manual mode through
Foreign Post Offices at New Delhi, Mumbai and Chennai. (b) Export of such goods under Courier Regulations shall
be allowed manually on pilot basis through Airports at Delhi, Mumbai and Chennai as per appropriate amendments in
regulations to be made by Department of Revenue. Department of Revenue shall fast track the implementation of EDI
mode at courier terminals.

16. Duty Exemption (a) Imports against Advance Authorization shall also be eligible for exemption from Transitional
Product Specific Safeguard Duty. 17 (b) In order to encourage manufacturing of capital goods in India, import under
EPCG Authorisation Scheme shall not be eligible for exemption from payment of anti-dumping duty, safeguard duty
and transitional product specific safeguard duty.

17. Additional Ports allowed for Export and import Calicut Airport, Kerala and Arakonam ICD, Tamil Nadu have
been notified as registered ports for import and export.

18. Duty Free Tariff Preference (DFTP) Scheme India has already extended duty free tariff preference to 33 Least
Developed Countries (LDCs) across the globe. This is being notified under FTP.

19. Quality complaints and Trade Disputes (a) In an endeavour to resolve quality complaints and trade disputes,
between exporters and importers, a new chapter, namely, Chapter on Quality Complaints and Trade Disputes has been
incorporated in the Foreign Trade Policy. (b) For resolving such disputes at a faster pace, a Committee on Quality
Complaints and 18 Trade Disputes (CQCTD) is being constituted in 22 offices and would have members from
EPCs/FIEOs/APEDA/EICs.

20. Vishakhapatnam and Bhimavaram added as Towns of Export Excellence Government has already recognized 33
towns as export excellence towns. It has been decided to add Vishakhapatnam and Bhimavaram in Andhra Pradesh as
towns of export excellence.

7. Explain Competition Act. What are the salient features of Competition Act?

The Competition Act, 2002 was enacted by the Parliament of India and governs Indian competition law. It replaced
the archaic The Monopolies and Restrictive Trade Practices Act, 1969. Under this legislation, the Competition
Commission of India was established to prevent activities that have an adverse effect on competition in India. This act
extends to whole of India except the State of Jammu and Kashmir.
It is a tool to implement and enforce competition policy and to prevent and punish anti-competitive business practices
by firms and unnecessary Government interference in the market. Competition law 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.
This is an act to establish a commission, protect the interest of the consumers and ensure freedom of trade in markets
in India-

 To prohibit the agreements or practices that restricts free trading and also the competition between two
business entities,
 To ban the abusive situation of the market monopoly,
 To provide the opportunity to the entrepreneur for the competition in the market,
 To have the international support and enforcement network across the world,
 To prevent from anti-competition practices and to promote a fair and healthy competition in the market.
SALIENT FEATURES
Anti-Competitive Agreements
Enterprises, persons or associations of enterprises or persons, including cartels, shall not enter into agreements in
respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which
cause or are likely to cause an "appreciable adverse impact" on competition in India. Such agreements would
consequently be considered void. Agreements which would be considered to have an appreciable adverse impact
would be those agreements which-

 Directly or indirectly determine sale or purchase prices,

 Limit or control production, supply, markets, technical development, investment or provision of services,
 Share the market or source of production or provision of services by allocation of inter alia geographical area
of market, nature of goods or number of customers or any other similar way,
 Directly or indirectly result in bid rigging or collusive bidding.
Types of agreement
Competition law identifies two type of agreements. Horizontal agreements which are among the enterprises who are
or may compete within same business. Second is the vertical agreement which are among independent enterprise.
Horizontal agreement is presumed to be illegal agreement but rule of reasons would be applicable for vertical
agreements.
Abuse of dominant position
There shall be an abuse of dominant position if an enterprise imposes directly or indirectly unfair or discriminatory
conditions in purchase or sale of goods or services or restricts production or technical development or create hindrance
in entry of new operators to the prejudice of consumers. The provisions relating to abuse of dominant position require
determination of dominance in the relevant market.
Combinations
The Act is designed to regulate the operation and activities of combinations, a term, which contemplates acquisition,
mergers or amalgamations. Combination that exceeds the threshold limits specified in the Act in terms of assets or
turnover, which causes or is likely to cause adverse impact on competition within the relevant market in India, can be
scrutinized by the Commission.
Competition Commission of India
Competition Commission of India is a body corporate and independent entity possessing a common seal with the
power to enter into contracts and to sue in its name. It is to consist of a chairperson, who is to be assisted by a
minimum of two, and a maximum of ten, other members.
It is the duty of the Commission to eliminate practices having adverse effect on competition, promote and sustain
competition, protect the interests of consumers and ensure freedom of trade in the markets of India. The Commission
is also required to give opinion on competition issues on a reference received from a statutory authority established
under any law and to undertake competition advocacy, create public awareness and impart training on competition
issues.
Commission has the power to inquire into unfair agreements or abuse of dominant position or combinations taking
place outside India but having adverse effect on competition in India, if any of the circumstances exists:

 An agreement has been executed outside India

 Any contracting party resides outside India
 Any enterprise abusing dominant position is outside India
 A combination has been established outside India
 A party to a combination is located abroad.
 Any other matter or practice or action arising out of such agreement or dominant position or combination is
outside India.
To deal with cross border issues, Commission is empowered to enter into any Memorandum of Understanding or
arrangement with any foreign agency of any foreign country with the prior approval of Central Government.
Review of orders of Commission
Any person aggrieved by an order of the Commission can apply to the Commission for review of its order within
thirty days from the date of the order. Commission may entertain a review application after the expiry of thirty days, if
it is satisfied that the applicant was prevented by sufficient cause from preferring the application in time. No order
shall be modified or set aside without giving an opportunity of being heard to the person in whose favour the order is
given and the Director General where he was a party to the proceedings.
Appeal
Any person aggrieved by any decision or order of the Commission may file an appeal to the Supreme Court within
sixty days from the date of communication of the decision or order of the Commission. No appeal shall lie against any
decision or order of the Commission made with the consent of the parties.
Penalty
If any person fails to comply with the orders or directions of the Commission shall be punishable with fine which may
extend to ₹ 1 lakh for each day during which such non compliance occurs, subject to a maximum of ₹ 10 crore.
If any person does not comply with the orders or directions issued, or fails to pay the fine imposed under this section,
he shall be punishable with imprisonment for a term which will extend to three years, or with fine which may extend
to ₹ 25 crores or with both.
Section 44 provides that if any person, being a party to a combination makes a statement which is false in any material
particular or knowing it to be false or omits to state any material particular knowing it to be material, such person shall
be liable to a penalty which shall not be less than ₹ 50 lakhs but which may extend to ₹ 1 crore.

8.Explain the merits and demerits of different types of economic systems. Explain how they are different from
each other?

Ans: “An economic system consist of those institutions which a given people or nations have chosen or accepted as
the means through which their resources are utilized for the satisfaction of human wants”

An economic system is the system of production, distribution and consumption of goods and services of an economy.
Alternatively, it is the set of principles and techniques by which problems of economics are addressed.

It refers to the extent of government regulation and intervention in the areas of employment, income distribution,
consumption, competition, saving, investment etc, in the economy.

Features of an economic system

1. A group of people-it explains how people are engaged in production for the satisfaction of their wants.
2. Scarcity of resources.
3.Organisation of the process of consumption.
4.Institutions-way of doing something/managing something
5.Flexibility.
6. Coordinated system.
Different types of economic systems are as follows:

CAPITALISM is an economic system in which productive resources are owned by private individuals who
use these resources to earn profits, and in which the state intervention is minimum, economic activities are
mostly unplanned and uncoordinated.

 Private property- what to produce, how to produce- promoting saving and investment.

 The right of inheritance.

 Freedom of enterprise and occupation.

 Sovereignty of the consumer.

  Price mechanism.

 Competition.

 Profit motive.

 Self-interest.

 Minimum government interference.

Merits of capitalism

 Spirit of enterprise.

 Incentive for technological progress.

 Efficient use of resources.

 Incentives for capital formation.

 New consumer goods.

 Flexibility and adaptability.

 Automatic working-no planning, price mechanism helps in deciding what to produce, how to produce and
when to produce.

 Economic freedom- freedom to consumer, producer, labor.

Demerits of capitalism

 Inequality of income.

 Economic instability-due to uncoordinated activities.

 Waste of capitalist production.(machines, products, advertisement, underutilized capacity due to competition,

exploitation of natural resources)

 Monopolist tendencies.

 Misallocation of resources-luxurious and comforts rather than necessity.

 Domination of economic values-materialism

 Consumers’ sovereignty is illusory-advertisement.

Evaluation of Capitalist economy

A pure capitalist economy is merely impossible because govt interventions are required for the smooth sailing
of the economic activities. If there is no central plans then it would be very difficult to run the economy in a
positive direction.

Socialism may be defined as an economic system in which the means of production are owned by the entire society,
and operated by the public authority according to a general economic plan for the benefit of the entire community.

Socialism or communism is an economic system where means of production are either owned or controlled by
government in such an economic system citizens are not free to do any economic or commercial activity and
government regulates almost each and every sector of the economy.

Characteristics

 Social ownership of means of production.

 Economic planning.

 Social welfare as the motivating force.

 Economic equalities.

 Elimination of competition.
 Merits of socialism

 Better allocation of resources.

 Maximum utilization of resources.

 Eliminates economic instability.

 Equitable distribution of income.

 Provides social security.

 Increase in productive efficiency.

 Rapid economic growth.

 Demerits of socialism

 Loss of efficiency.

 Loss of incentive.

 Loss of consumers’ sovereignty.

 Loss of freedom.

 Concentration of economic and political powers.

 Evaluation of socialism

This system exhibits great parities in the economy in each n every sector. However it is in highly criticized
due to high degree of government intervention. In this kind of system people remain highly dissatisfied.

Mixed Economy is an economy which combines the elements of both capitalism and socialism.

One form of mixed economy is the one where the government tries to control and regulate the private sector
by putting various types of restrictions on the functioning of private enterprises.

The second type- where the government intervenes in the economic affairs not merely by regulating the
private sector, but also by participating in the production activity. In this case, the government undertakes the
production of various commodities in addition to regulation of private sector.

Characteristics of mixed economy

 Co-existence of public and private sectors.

 Economic planning

 Regulation and control of the private sector.

 Promotion of social welfare.

 Profit motive.

Merits of mixed economy

 Proper allocation of resources.

 Economic stability.

 Advantages of the market system.

 Rapid economic development.

 Checks on concentration of economic power.

Demerits of mixed economy

 Conflict between two sectors.

  Short lived nature.

 Inefficient operation.

 Excessive regulations.

Evaluation of mixed economy

Capitalism and socialism are the two extreme types of economic arrangements. In both the cases either the
people are dissatisfied or the country lacks a proper level of control and economic development. So the mixed
economy is preferred. Almost all the countries of the world are mixed economies. However the role of public
and private sector ranges from country to country.

Capitalistic Socialistic system Mixed Economic system

1. It is organised by a
1. It is organized by the public 1. It is organised by both private and public
Number of Private 
enterprises . enterprises.
enterprises.
2. Individual owners
2. State ownership organises 2. Private firms and public enterprises
organise production 
production and supply. organized production and supply.
and supply .
3. It is based on the
objective of  3. Centralized planning mechanism
3. Public and Private both sectors protect the
profit maximization. There responsible for the supply of the
interest of the public on large scale.
is no  commodities.
planning mechanism.
4. Market forces of supply
and demand 
4. Usually the public en terprises 4. The government controls and 
determine price,
determine price, production and  regulates the private sector to protect the 
production, and 
distribution of goods. interest of the public.
distribution of goods and
service.
5. It operates on the
5. Both the private and public enterprises
principle of free  5. The state market only decides the
organize together. Yet the government would
market enterprise yet state free market conditions and price
not effectively 
intervene to  mechanism.
protect the interest.
regulate economy.

Questions from Unit III

1. What are the objectives of Monetary Policy? What are the reasons for failure of Monetary Policy in
India?
Answer: From its inception, the RBI has followed the policy of controlled expansion, i.e., adequate financing
of economic growth while ensuring reasonable price stability. Expansion of money is required in developing
country for the purpose of development and investment. But this expansion results in inflation. So the RBI has
to be cautious in order to achieve a trade-off between expansion and inflation. Not only this, the RBI also
manages the forex exchange rate through open market operations, as after liberalisation it is the market forces
that decide the exchange rate. The keynote of monetary policy can be said to be controlled expansion of bank
credit and money supply, with special attention to seasonal requirement for credit. The RBI regards money
supply and the volume of bank credits as the two major intermediate variables, but it seeks to control the
former through the latter. It is said that money supply doesn't change on its own; it changes because of certain
underlying development with regard to bank credit.
RBI and Credit Control
For the sake of credit control, the RBI resorts to bank rate manipulations, open market operations, reserve
requirement changes, direct action, and rationing of credit and moral suasion. Apart from employing these
traditional methods of credit control, it directly influences commercial banks' lending policy, rate of interest,
and form of securities against loans and portfolio distribution. The instrument of monetary policy (methods of
credit control) may be broadly divided into the following parts:
1. Open Market Operations
2. Bank Rate
3. Direct Regulation of Interest Rates on Commercial Banks' Deposits and Loans
4. Cash Reserve Ratio (CRR)
5. Statutory Liquidity Ratio (SLR)
6. Direct Credit Allocation and Credit Rationing
7. Selective Credit Controls (SCC)
8. Credit Authorisation Scheme (CAS)
9. Fixation of Inventory and Credit Norms
10. Credit Planning
11. Moral Suasion
12. Liquidity Adjustment Facility (LAF)
1. Open Market Operations: Open market operations involve the sale and purchase of government securities
by the RBI to influence the volume of cash reserve with commercial banks and thus influence the volume of
loans and advances they can make to the industrial and commercial sectors. The environment for open market
operations is quite favourable because the government securities market is fairly developed in the country. At
present, the RBI is authorised to conduct purchase and sale operations in government securities, treasury bills
and other approved securities. The RBI is also empowered to buy and sell short-term commercial bills.
Through the sale of securities the RBI withdraws a part of the deposit resources of the banking sector, thereby
reducing resources available with the banks for lending. This reduces the supply of money, which in turn
reduces inflation. The opposite happens when the RBI purchases securities. The stock of securities with the
seller banks is reduced and the cash with them expands. This augments the credit-creating capacity of banks,
reducing the interest rates and increasing the level of investment. Some monetary economists and bankers
assert that the bank rate policy and open market operations are complementary measures in the realm of
monetary management. Open Market Operations have both monetary policy and fiscal policy goals. Their
multiple objectives include:
(a) To control the amount of and changes in bank credit and monetary supply through controlling the reserve
base of banks,
(b) To make bank rate policy more effective,
(c) To maintain stability in government securities market,
(d) To support government borrowing programme,
(e) To smoothen the seasonal flow of funds in the bank credit market.
2. Bank Rate: The bank rate is also known as discount rate. It is the rate at which the central bank discounts,
or more accurately rediscounts, eligible bills. In a broader sense it refers to the minimum rate at which the
central bank provides financial accommodation to commercial banks in the discharge of its function as the
lender of the last resort. The bank rate is the basic cost of refinance and rediscounting facilities. Section 49 of
the RBI Act, 1934 defines it as the standard rate at which the Bank is prepared to buy or rediscount bills of
exchange or other eligible commercial paper. The technique of bank rate and discretionary control of
refinance are used to regulate the cost and availability of refinance, and to change the volume of lendable
resources of banks and other financial institutions. If monetary policy is effective, then change in bank rate
affects the prime-lending rate. Any increment in bank rate means that now the RBI will charge higher interest
rate from banks against the advances, so it results in the increment in the interest rate charged by commercial
banks. This results in low level of investment and low level of inflation. To control inflation, bank rate was
increased to 12% from 10% in 1991. In 1953, bank rate was 3.5% and rose to 10% in 1981, to 11% in July
1991, and to 12% in October 1991. In India, bank rate policy is not effective because commercial banks in
India are not much dependent on the RBI for financial assistance. Also, because of bill market that is not well-
organised, they lack adequate quantity of eligible bills which can be rediscounted to the RBI. Proper
organisation of the various components of the money market is a prerequisite.
3. Direct Regulation of Interest Rates: It is expected that change in bank rate will bring a change in all
market rates of interest in the same direction. But when the bank rate loses its significance in regulating
market rates, the RBI is compelled to directly regulate interest rates on bank deposits and credit. Since 1964 it
has been fixing all deposits rates of commercial banks, and since 1960, their lending rates. Deposit rates of co-
operative banks came under regulation in 1974 and their lending rates in 1980. The RBI and some other
authorities in India have been directly fixing many other interest rates also. Deregulation in interest rate began
in 1985 after the recommendation of the Chakravarty Committee Report. In the past 14 years important
changes in the deregulation of interest rate are:

(a) The Bank Rate has been activated.

(b) Most of the money market rates have been deregulated.
(c) The ceiling on the call rate was withdrawn with effect from May 1, 1989.
(d) The interest rates on treasury bills, certificates of deposits, commercial paper, and inter-bank participations
are allowed to be flexible, variable and market determined.
(e) The deposits and lending rates of commercial banks, RRBs, urban co-operative banks, and other co-
operative banks have been freed.
(f) Interest on public deposits accepted by all non-banking companies (financial and non-financial) have been
deregulated.
(g) The coupon rate on government dated securities has been made market-related.
(h) The interest rates on convertible, non-convertible and other types of debentures have been made free.
(i) The term lending institutions can now charge interest rates unhindered by State intervention.
4. Cash Reserve Ratio: The CRR refers to the cash which banks have to maintain with the RBI as a certain
percentage of their demand and time liabilities. According to the RBI Act 1935, every commercial bank has to
keep certain minimum cash reserve with the RBI. Initially, it was 5% against demand deposit and 2% against
time deposits. Under the RBI (Amendment Act) 1962, the RBI is empowered to determine CRR for the
commercial banks in the range of 3% to 15% for the aggregate demand and time liabilities. CRR has been
quite often used to control inflation. An increase in CRR reduces the cash with commercial bank which results
in low supply of currency in the market, higher interest rate and low inflation. In the late 1980s there was a
rapid growth of liquidity which resulted in higher inflation and thus the CRR was raised to its maximum limit
of 15%, which resulted in higher interest rate and liquidity crunch in early 1990s when Prime Lending Rate
was raised to as high as 17%.The Narsimhan Committee that submitted its report in November 1991
recommended that high CRR adversely affected bank profitability. Because of this, they charge higher interest
rates, eventually reducing the level of investment and increasing the cost of production. The government
decided to reduce the CRR in a phased manner. Initially it was reduced by .5% to 14.5% and by April 22,
2000 it was reduced to 8%. As a result, lending rate of banks was reduced to 12% from 17% of 1991.
5. Statutory Liquidity Ratio: Under the Section 24 of the Banking Regulation Act, 1949, commercial banks
have to maintain liquid assets in the form of cash, gold and unencumbered approved securities equal to not
less than 25% of their total demand and time deposits liabilities. This is known as statutory liquidity reserve
requirements. There are three objectives of the SLR:
(a) To restrict expansion of bank credit.
(b) To augment banks' investment in government securities.
(c) To ensure solvency of banks.
The Banking Regulation (Amendment Act, 1962) provides for maintaining a minimum statutory liquidity
ratio of 25% by the bank against their net demand and time liabilities. It gradually reached as high as 38.5% in
1990 and remained there till 1992. The objective of such a high SLR is to counter inflationary pressure which
touched double digits at that time. As an impact of SLR on inflation and interest rate is same as that of CRR,
so it is the combined affect of CRR and SLR that during 1990-92, the economy faced severe liquidity crunch
and commercial banks' interest rates were as high as 17% and even more. The RBI increased CRR and SLR
for two reasons:
(a) Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources' illiquid
form and thus reduces their capacity to grant loans and advances to business and industry. This it leads to an
inflationary condition.
(b) A higher liquidity ratio diverts banks from loans and advances to investment in government and other
approved securities. It diverts funds from banks to government expenditure.
After accepting the Narsimhan Committee recommendations, the RBI reduced in 1993-94 to 25% in a phased
manner.
6. Direct Credit Allocation and Credit Rationing: The RBI directs the distribution and allocation of credit
among different sectors, borrowers, and users through the fixation of specific and direct quantitative credit
ceilings or credit targets. The objective was to mobilise the money in the priority sector. This technique was
first introduced in November 1973 when the RBI stipulated a ceiling of 10% on the increase in non-food
credit by the banking system for the busy season of 1973-74 over the outstanding amount, as at the end of
September 1973.
In order to achieve regional or geographical balances in respect of credit disbursal, the RBI has been asking
banks to achieve a certain prescribed credit-deposits ratio in respect of their rural and semi-urban branches
separately.
7. Selective Credit Control: Selective and qualitative credit control refers to regulations of credit for specific
purposes or branches of economic activity. The aim of selective control is to discourage such forms of activity
as are considered to be relatively inessential or less desirable. Selective control has been used in Western
countries to prevent the demand for durable consumer goods outrunning the supply and generating
inflationary pressure.
Under the Banking Regulation Act, 1949, Section 21 empowers the RBI to issue directives to banks regarding
their advance. The RBI mainly relies on three techniques of selective credit controls:
(a) The determination of margin requirement for loans against certain securities,
(b) Determination of maximum amount of advances or other financial accommodation,
(c) Charging of discriminatory interest rates on certain types of advances.
Besides this, the RBI may also give directions to banks in general or even some particular bank as to the
purpose for which loans may or may not be given. These directions may relate to:
(a) The purpose for which advances may or may not be made.
(b) The margins to be maintained in respect of secured advances.
(c) The maximum amount of advances to any borrower.
 (d) The maximum amount upto which guarantees may be given by the banking company on behalf of any
firm, company, etc.
(e) The rate of interest and other terms and conditions for granting advances.
The Credit Authorization Scheme introduced in 1965 is also a kind of selective credit control. Under these
schemes the RBI regulates not only the quantum but also the terms on which credit flows to the different large
borrowers, so that credit is directed to genuinely productive purposes, that it is in accordance with the needs of
the borrower, and there is no undue channelling of credit to any single borrower or group of borrowers.
8. Credit Authorization Scheme: This technique was introduced in November 1965 with a view to
regulating the volume and terms of credit supplied to large borrowers. As per this scheme, if the fresh working
capital limit (inclusive of bill finance) to be sanctioned to any single party by any one bank or the entire
banking system exceeded a stipulated level, the bank would require prior authorisation of the RBI for
sanctioning such a loan. This stipulated level or cut-off point was fixed at 1 crore at the beginning. It was
subsequently increased to 2 crore in November 1975, 4 crore in 1983 and to 6 crore thereafter.
In the second half of 1988, the RBI withdrew the scheme, and in its place a Credit Monitory Arrangement was
introduced. According to the new scheme, credit proposal for 5 crore and above in the case of working capital
and 2 crore and above in the case of term loans, had to be submitted to the RBI for post-sanction scrutiny.
9. Fixation of Inventory Norm and Credit Norms: The banks were required to advance credit for working
capital to different industries in the light of inventory norms laid down by the Committee of Direction (COD)
and its sub-committees. These committees reviewed and revised the norms from time to time in case of
different industries and banks had to implement the new norms as and when they were formulated.

10. Moral Suasion: Besides all these, the RBI also circulates letters to the banks regarding the policies and
priorities of the RBI about credit control and money supply. It also regularly discusses its policies with the bank.
The objective is that the banks should work in the same direction.

11. Liquidity Adjustment Facility (LAF): LAF is a new technique of monitory policy in India. It matches
the new requirement which emerges because of newer economic policies. LAF was introduced on June 5,
2000.
LAF introduced variable REPO auctions with same-day settlement. The amount of REPO and reverse REPO
are changed on a daily basis to manage liquidity. The maturity of REPOs is between one day to fourteen days.
The funds under LAF are expected to be used by the banks for their day-to-day mismatches in liquidity. All
transferable Government of India dated securities/TB (except fourteen days TBs) can be traded in REPO and
reverse REPO markets.
Interest rates in the REPO market usually emerge out of bids (i.e. auctions are conducted on "uniform price"
basis), and the RBI occasionally conducts fixed interest rate (multiple price) auctions to send signals to the
market. Under LAF, the RBI, periodically, if necessary even daily, sets/resets its REPO and reverses the
REPO rate. It uses 3-day or 4-day REPOs to siphon off liquidity from the market. The REPOs are used for
absorbing liquidity at a given rate (floor), and not infusing liquidity through reverse REPOs at a given rate
(ceiling).
REPOs: A REPO is purchase of one loan against the sale of another. They involve the sale of securities
against cash with a future buy back agreement. Under such an agreement, the seller sells specified securities
with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer
purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined
price. The transaction is called a REPO when viewed from the perspective of the seller of the securities, and a
reverse REPO when viewed from the perspective of the buyer of the securities.
REPOs are part of open market operations undertaken to influence short-term liquidity.
There are two types of REPO auctions: discretionary price auctions and fixed rate auctions, or uniform price
auctions. Under the former, bidders submit multiple price-quantity sealed bids. Under the fixed rate REPOs
auction, the rates are pre-announced and the bidders are required to submit bids indicating the volume of
REPOs.
(a) Monetary policy in India has been formulated in the context of economic planning, whose main objective
has been to accelerate the growth process in the country. In a country like India that has followed an
expansionary fiscal policy, which leads to inflationary conditions, to manage a monetary policy under these
circumstances is like tightrope walk. During the planning period prior to liberalisation, the RBI used higher
CRR and SLR rates to control inflation.
(b) After 1992, the demand of the day was development and investment and the development sector was
expanding and was and in need of money.
(c) Indian corporations had to compete with companies, which were getting money at 4% to 5% interest rates.
Then the RBI had to reduce CRR and SLR to reduce interest rates and to make available money for
investment purposes.

2. Describe, in brief, the functions of Reserve Bank of India?

Answer: Functions of the Reserve Bank of India are as follows:

1. Issue of Currency: The RBI has the sole right to issue currency notes. To issue notes, it follows a minimum
reserve system. According to RBI (Amendment Act) modified in 1957, the bank has to keep a minimum reserve
of 200 crore, of which 15 crore has to be in gold coins and bullion and 85 crore in foreign securities. Although
one rupee coins and notes as well as coins of smaller denominations are issued by the Government of India, they
are put into circulation through the RBI. The Bank also exchanges notes and coins of one denomination into those
of other denominations as demanded by the public. The RBI has 15 full-fledged issue offices and 2 sub-offices,
along with 4,127 currency chests where the stock of new and re-issuable notes, rupees and coins are stored at the
end of March 1997.

2. Banker to Government: The Reserve Bank of India acts as the banker to the central government as also to the
governments of the constituent units of India's federal system. Banks transact the banking business of the
Government of India and accordingly perform the following functions: accept money on account of the
government, make payment on its behalf, and carry out exchange remittance and other banking operations,
including the management of public debt. The RBI plays an important role in financing government expenditure.
In addition to financial transaction, the Bank acts as the agent of the government in respect of India's membership
of the International Monetary Fund and International Bank of Restructuring and Development. It also acts as an
adviser to the government on banking and financial matters. Ways and Means Advances: The Bank can make
"Ways and Means Advances", i.e., temporary advances to both the Central and state governments to bridge the
temporary gap between receipts and payments. The maximum maturity period of these advances is three months.

3. Banker's Bank: RBI has extensive powers to control the commercial banking system. All scheduled banks are
under a statutory obligation to maintain a certain minimum of cash reserve which is to be decided by the RBI
against their demand and time liabilities. With this, the RBI determines the deposits/credit creating ability of the
bank. The RBI provides financial assistance to scheduled commercial banks and state co-operative banks in the
form of discounting of legible bills, loans and advances against approved securities. The RBI is expected to help
banks in their crises. RBI is not only a banker's bank but it also works as a lender of last resort.

4. Controller of Credit: The RBI functions as the controller of credit. As such, it regulates the quantity of credit
and the rate at which it is made available. It does this through the use of general and selective controls.

5. Exchange Management and Control: The RBI is required to stabilise the external value of the rupee. For this
purpose, it functions as the custodian of the nation's foreign exchange reserves. It is obligatory for the RBI to buy
and sell currencies of all the members of the IMF. In this field the RBI has following dimensions:

a) To administer the 'foreign exchange control'.

(b) To choose the exchange rate system and fix or manage the exchange rate between the rupee and other
currencies.

(c) To exchange reserve.

(d) To interact or negotiate with the monetary authorities of the Sterling Area, Asian Clearing Union and other
countries, and with international financial institutions such as the IMF, World Bank and the Asian Development
Bank.

The RBI administers 'exchange control' in terms of the Foreign Exchange Management Act (FEMA). The
objective of exchange control is to limit the demand of foreign exchange in keeping with its supply. The RBI
manages this through the buying and selling of foreign exchange from and to scheduled banks, which are the
authorised dealers in the Indian Foreign Exchange market. The Bank also manages the investment of reserves in
gold accounts abroad and the shares and securities issued by foreign government and international banks or
financial institutions.

The role of the RBI as a participant in the foreign exchange market, and as a stabiliser of the market and of the
rupee exchange rate has become all the more important with the introduction of the floating exchange rate system
and the rupee convertibility on trade, current and capital accounts.

6. Collection and Publication of Data: The RBI has been entrusted with the task of collection and compilation of
statistical information relating to banking and other financial sectors of the economy.

7. Supervisory Function: The RBI has a wide power of supervision and control over commercial and co-
operative banks relating to licensing and establishments, branch expansion, liquidity of their assets, management
and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorised to carry out
periodical inspection of banks and to call for returns and necessary information from them. It has the following
powers in this field:

(a) To issue licences for the establishment of new banks.

(b) To prescribe minimum requirement regarding paid up capital and reserves, transfer to reserve fund and
maintenance of cash reserve and other liquid assets.

(c) To inspect the working of banks in India as well as abroad in respect of their organizational set up, branch
expansion, mobilisation of deposits, investment and credit portfolio management, credit appraisal, region-wise
performance, man power planning and so on.

(d) To conduct ad hoc investigation into complaints, irregularities and frauds in respect of banks, from time to
time.

(e) To control methods of operation of banks so that they do not fritter away funds in improper investments and
injunctions advances.

(f) To control appointment, reappointment, termination of appointment of the chairman and chief executive
officers of private sector banks.

(g) To approve or force amalgamations.

In keeping with the recommendations of the Narshimhan Committee (1991), the RBI's functions of bank
supervision was separated from its traditional central banking function by the creation of a separate Department of
Supervision (DOS). The Board of Financial Supervision was set upto oversee the IFS.

The RBI performs many development and promotional functions. It has done valuable work in aiding
development and in promoting saving and banking habits. The RBI established Deposit Insurance Corporation of
India in 1962 to provide securities to depositors against frequent bank failures. The RBI played an important role
in the establishment of UTI, IFCI, SFC, IDBI, and Agriculture Refinance Corporation, etc.

8. Promoter of the Financial System: The RBI delivers various promotional and development services to
strengthen the country's banking and financial structure.

9. Money Market: In order to increase the strength and viability of the banking system, it carried out a
programme of amalgamations and mergers of weak banks with the strong ones. When the social control of banks
was introduced in 1968, it was the responsibility of the RBI to administer it in the country to achieve the desired
objectives. After the nationalisation of banks it was the responsibility of the RBI to develop banking interest in the
national interest. With the help of a statutory provision for licensing and branch expansion of banks, the RBI has
been trying to bring about an appropriate geographical distribution of bank branches. In order to ensure the
security of deposits with banks, the RBI in 1962, took the initiative to create the Deposits Insurance Corporations.

10. Agriculture Sector: The RBI directs and increases the flow of credit to the agricultural sector. It has
appointed a separate deputy governor in charge of rural credit. It has conducted many studies and research on the
problem of rural credit. It has created a data base on rural credit through various surveys.

The RBI has been strengthening the co-operative banking structure through the provision of finance, supervision,
and inspection to increase the supply of agricultural credit. It provides short-term finance at a concessional rate for
seasonal agriculture operations and marketing of crops through co-operative banks. It established the Agricultural
Refinance Cooperation (now known as NABARD) in July 1963 for providing medium term and long-term finance
for agriculture. It also helped in establishing an Agriculture Finance Corporation.

11. Industrial Finance: The RBI has either created or has advised and helped in creation of many development
institutions and financial institution at the centre and state level. These include IDBI, SIDBI, NHB, NCB and UTI.
Through these institutions, the RBI has been providing short-term and long-term funds to the agriculture and rural
sectors, to small scale industries, to medium and large industries and to the export sector.

3. What are Capital Account and Current Account Transactions? Discuss the role of FEMA in regulating
Capital and Current Account Transactions.

Answer: Capital Account Transaction: Section 2(e) states that 'Capital Account Transaction' means:

1. A transaction that alters the assets or liabilities, including contingent liabilities outside India of a person
residing in India.

2. A transaction that alters the assets or liabilities in India of persons residing outside India.

3. Transfer or issue of any foreign security by a person residing in India.

4. Transfer or issue of any security by a person residing outside India.

5. Transfer or issue of any security or foreign security by any branch, office or agency in India or a person
residing outside India.

6. Any borrowing or lending in foreign exchanges in whatever form or by whatever name known.

7. Any borrowing or lending in rupees in whatever form or by whatever name known between a person residing in
India and a person residing outside India.

8. Deposits between persons residing in India and person residing outside India.

9. Export, import or holding of currency or currency notes.

10. Transfer of immovable property outside India, other than lease not exceeding five years, by a person residing
in India.

11. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a
person resident outside India.

12. Giving of guarantee or surety in respect of any debt, obligation or other liability incurred, by a person residing
in India and owed to a person residing outside India, by a person residing outside in India.

Regulation of Capital Account Transaction

Subject to the provision of sub-section (2), any person may sell or draw foreign exchange to or from an authorised
person for a capital account transaction.

The RBI may, in consultation with the Central government, specify:

1. Any class or classes of capital account transaction that are permissible;

2. The limit up to which foreign exchange shall be admissible for such transactions.

Provided that the RBI shall not impose any restrictions on the withdrawal of foreign exchange for payments due
on account of amortisation of loans for depreciation of direct investment in the ordinary course of business.

Without prejudice to the generality of the provision of sub-section (2), the Reserve Bank may, by regulations
prohibit, restrict or regulate the following:

1. Transfer or issue of any foreign security by a person residing in India.

2. Transfer or issue of any security by a person residing outside India.

3. Transfer of issue of any security of foreign security by any branch, office or agency in India of a person
residing outside India.

4. Any borrowing or lending in foreign exchange in whatever form or by whatever name known.

5. Any borrowing or lending in rupees in whatever form or by whatever name known between a person residing in
India and a person residing outside India.

6. Deposits between persons residing in India and persons residing outside India.

7. Export, import or holding of currency or currency notes.

8. Transfer of immovable property outside India, other than lease not exceeding five years, by a person residing in
India.

9. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years by a person
residing outside India.

10. Giving a guarantee or surety in respect of any debt, obligation or other liability incurred:

(a) By a person residing in India and owed to a person residing outside India; or

(b) By a person residing outside India.

A person residing in India may hold, own, transfer or invest in foreign currency, foreign security or any
immovable property situated outside India if such currency, security or property was acquired, held or owned by
such persons when he was residing, outside India or inherited from a person who was residing outside India.
 A person residing outside India may hold, own, transfer or invest in Indian currency, security or any immovable
property situated in India if such currency, security or property was acquired, held or owned by such person when
he was residing in India or inherited from a person who was residing in India.

Without prejudice to the provision of the section, the RBI may, by regulations prohibit, restrict or regulate
establishment in India of a branch, office or other place of business by a person residing outside India, for carrying
on any activity relating to such branch, office or other place of business.

Current Account Transactions

FEMA has eased the regulation over transactions in foreign exchange and security. Transactions in current
account have been made restrictions-free:

1. No restriction on current account transaction unless specified: Any person can sell or draw foreign
exchange to or from authorized persons if such sale or withdrawal is a current account transaction. Reasonable
restrictions on current account transaction can be imposed by the Central Government in public interest, in
consultation with the RBI.

2. Current Account Transaction: Section 2(j) states that current account transaction means a transaction other
than a capital account transaction. It includes the following:

(a) Payment due in connection with foreign trade, other current businesses, services and short term banking, and
credit facilities in the ordinary course of business.

(b) Payment due as interest on loans as net income from investment.

(c) Remittances for living expenses of parents, spouse and children residing abroad.

(d) Expense in connection with foreign travel, education and medical care of patents, spouse and children.

(e) The definition is 'inclusive', i.e., besides of aforesaid expenses, any expenditure that is not a 'capital account
transaction' will be a current account transaction. For examples, expenditure incurred on oneself own expenses on
foreign travel, education, and medical care are covered as 'current account transaction' not specified above.

(f) Any person may sell or withdraw foreign exchange to or from an authorised person if such sale or drawl is a
current account transaction.

Foreign Currency/Security/Property by Resident

A person resident in India may hold, own transfer or invest in foreign currency, foreign security or any immovable
property situated outside India, if such currency, security or property was acquired, held or owned by such person
when he was residing outside India or inherited from a person who was residing outside India [section 6 (4)].

Indian Currency/Security/Property by Non-resident

A person residing outside India may hold, own transfer or invest in Indian currency, security or any immovable
property situated in India if such currency, security or property was acquired, held or owned by such person when
he was residing in India or inherited from a person who was residing in India. [section 6 (4)].

Restrictions on Branches, Offices of Non-residents

The RBI may prohibit, restrict or regulate establishment of branch, office or other place of business by a person
residing outside India; for carrying on any activity relating to such branch, office or other place of business.
[Section 6 (6)]

4.Define the term Foreign Direct Investment (FDI). Describe the determinants and impact of FDI in a
developing economy?

Answer: Foreign Direct Investment (FDI) is defined as an investment made by an investor of one country to acquire
an asset in another country with the intent to manage that asset (IMF, 1993). The IMF definition of FDI includes as
many as following elements: equity, capital, reinvested earning of foreign companies, inter-company debt transactions
including short-term and long term loans, overseas commercial borrowings, non-cash acquisition of equity, investment
made by foreign venture capital investors, earnings data of indirectly-held FDI enterprises, control premium, non-
competition fee and so on. Foreign investment and technology play an important role in the economic development of
a nation and have been exploited by a number of developing countries.
Even communist countries like China have welcomed foreign investment to improve their economies. Governments of
developing nations are attracting FDI along with the technology and management skills that accompany it. To attract
multinational companies, governments are offering tax holidays, import duty exemption, subsidised land and power
and many other incentives. FDI are supposed to bring many benefits to the economy. They contribute to GDP, capital
formation, balance of payment and generate employment.

Determinants of FDI

Liberalization is not the sole reason to attract FDI. There are many other determinant of FDI, India may lagging there.
As at Kearney's FDI Confidence Audit: India, February 2001 said "India gain's in attractiveness because of its market
size and its potential is diminished by negative assessment of its regulatory environment." Other important
determinants are rule of law, competitive wages, labour skill, infrastructure and well developed financial institutions.
Determinants of FDI can be better understood by the Porter's diamond model of international competitiveness, which
has identified four major determinants:

1. Factor Conditions (i.e. factor of production)

2. Demand condition

3. Related and supporting industries

4. Firm strategy, structure a rivalry

Factor Condition

A nation may have comparative advantage over others because of certain factors of production. Organizations will
shift their production base to those countries where the critical factors of production of there industry specific is
economical. India's human resources are of proven quantity as well as more economical in comparison to the US and
Europe leading many countries to establish their manufacturing units here. India has the largest pool of English
speaking people in Asia causing MNCs to shift their BPO, to India. India has also proven its competitive edge in R&D
and Software Development, it is the reason that almost all the major software companies of the world have invested in
India in software development and more and more companies like GE, NOKIA are establishing there Research center
in India. But India doesn't have proved its advantage in basic research. In basic research it is the USA who has
established its reputation, hence most of companies established there basic research set up in USA.

Most of the Software companies established their Application software research center in USA and Customized
Research Centre in India. Italy has established its comparative advantage in terms of Industrial Design the result is
that job of industrial design goes to Italy from all over world.

Demand Condition

This is also a significant factor in deciding the level of FDI. Higher the demand higher will the FDI. China and India
are hot destinations of FDI because of their aggregate demand. In terms of PPP they are in top five countries of the
world. Even the companies like P&G who don't believe in the customization of product for low income group is
investing in R&D for the sake of customization of product for low income group. Most of MNCs whether it is
Electronics, FMCG, Automobiles, White Goods etc. are investing in India and China and are investing in R&D in
developing product for the local people only because huge demand in these countries specially in the low income and
middle income group.

Related and Supported Industry

MNCs prefer to go to the destination where there is well developed supported industry (ancillaries units) for the
specific industry. Infrastructure plays a critical role in a selection of site. It is well said that take care of roads and
electricity investment will take care of itself. Well-developed ancillaries units facilitate the FDI. As now organization
don't have to invest in ancillaries. Not only ancillaries but other supported industry as the availability of well-
developed financial market, distribution network etc. also plays role.

Rivalry and Firm Strategy

The Competitive environment in a nation also plays a critical role. Organizations like to invest in countries where
there is no stiff competition. Level of rivalry also decides the FDI. If all the above mentioned reasons are favorable to
attract FDI even after that ultimately it is the Firms strategy which decides that whether it will invest in a most
attractive destination or not. Few organizations are very aggressive in grabbing overseas investment opportunity on
the other hand few are reluctant and follow a policy of wait and watch.

Impact of FDI
FDI has a wide spread impact on a country not only economically but also socially. Foreign investment is always
accompanied by superior technology and transfer of technical knows how. It has an impact on local industry as it
provides them both opportunity and threat. It gives consumers a wide choice that too at reasonable price. FDI
increases not only GDP but also exports and therefore results in higher per capita income and large forex reserves.

Impact on Local Industry

McKinsey studied the impact of FDI on local industry and it found that FDI unambiguously helped the receiving
economy. It raised productivity and output in the sector involved thereby raising national income, while lowering
prices and improving the quality and selection of services and products and consumers. FDI nearly always generated
positive spill over for the rest of economy. It generated big opportunities for local manufacturers as they become OEM
to them. Not only an opportunity for manufacturing, FDI also give technical know-how to OEM which increases the
level of quality. Today's Coca-Cola' bottling plant are far better, infact of international quality then those of Parle
which Coca-Cola acquired.

Simultaneously it gives impetus to service industry. FDI has a big role in the development of the BPO industry in
India. The entire framework of BPO industry in India is an outcome of FDI. And today India is the most preferred
nation for BPO in the world.

Impact on Employment

FDI in India has contributed in the creation of a more than $10–billion-a-year software and outsourcing industry
which employees 5,00,000 people directly. Projections suggest that it will employ 2,000,000 people by 2008. These
are the estimates of only one industry. FDI has created jobs in every field manufacturing, telecommunication,
advertising, media, and above all services.

Impact on Consumer

Perhaps biggest beneficiary of the FDI is the Indian consumer. By the 1980 we were driving Ambassador or Premier
Padmini and after the investment by Suzuki 8 new models were launched. Now we have access to many international
brands. Prices have been steadily decreasing in all the segments because of FDI, like electronics, computers, ACs,
automobiles, and even soft drinks, two wheelers, etc. Not only this, today consumer has wide choice as these
organizations are launching new variants with improved performance every day.

Besides this there is a are macro economic impact as contribution to GDP, though it may be argued that there is not
any significant growth after liberalization as compared to previous decade. But FDI has contributed a lot in
transforming whole economy. Earlier we were producing substandard goods and driving cars of 1960s and today
gradually we are becoming the exporting hub of telecommunication tools, software and automobile. It had not only
improved Balance of Payment but also fetched Foreign Exchange for the nation because of this Forex reserve of the
nation is very high. Opponents of FDI argue that it will cannibalize local industry, to a extent it is true also which may
be true. But it is not the MNCs, which threaten them, in fact it is their inefficiency, which is their biggest threat.

5. What do you mean by the term Fiscal Policy? Describe its main objectives?

Answer: The fiscal policy is concerned with the raising of government revenue and incurring of government
expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or
fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue.Fiscal policy
has to decide on the size and pattern of flow of expenditure from the government to the economy and from the
economy back to the government. In broad term fiscal policy refers to "that segment of national economic policy
which is primarily concerned with the receipts and expenditure of central government." In other words, fiscal policy
refers to the policy of the government with regard to taxation, public expenditure and public borrowings.

The importance of fiscal policy is high in underdeveloped countries. The state has to play active and important role. In
a democratic society direct methods are not approved. So, the government has to depend on indirect methods of
regulations. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can
achieve the objectives of development.

In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy.

Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to
stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy
are government expenditure and taxation. Changes in the level and composition of taxation and government spending
can impact on the following variables in the economy:

 Aggregate demand and the level of economic activity;

 The pattern of resource allocation;
 The distribution of income.

Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of
fiscal policy are neutral, expansionary, and contractionary:

 A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax
revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral
effect on the level of economic activity.

 An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises
in government spending, a fall in taxation revenue, or a combination of the two. This will lead to a larger
budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government
previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.

 A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher
taxation revenue, reduced government spending, or a combination of the two. This would lead to a lower
budget deficit or a larger surplus than the government previously had, or a surplus if the government
previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.

The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s, partly as a
response to the Great Depression.

Methods of funding

Governments spend money on a wide variety of things, from the military and police to services like education and
healthcare, as well as transfer payments such as welfare benefits.

This expenditure can be funded in a number of different ways:

 Taxation
 Seigniorage, the benefit from printing money
 Borrowing money from the population, resulting in a fiscal deficit
 Consumption of fiscal reserves.
 Sale of fixed assets (e.g., land).

Funding the deficit

A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edged securities. These pay
interest, either for a fixed period or indefinitely. If the interest and capital repayments are too large, a nation may
default on its debts, usually to foreign creditors.

Consuming the surplus

A fiscal surplus is often saved for future use, and may be invested in local (same currency) financial instruments, until
needed. When income from taxation or other sources falls, as during an economic slump, reserves allow spending to
continue at the same rate, without incurring additional debt.

Economic effects of fiscal policy

Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve
economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that
adjusting government spending and tax rates are the best ways to stimulate aggregate demand. This can be used in
times of recession or low economic activity as an essential tool for building the framework for strong economic
growth and working towards full employment. The government can implement these deficit-spending policies to
stimulate trade due to its size and prestige. In theory, these deficits would be paid for by an expanded economy during
the boom that would follow; this was the reasoning behind the New Deal.

Governments can use budget surplus to do two things: to slow the pace of strong economic growth, and to stabilize
prices when inflation is too high. Keynesian theory posits that removing funds from the economy will reduce levels of
aggregate demand and contract the economy, thus stabilizing prices.
Some classical and neoclassical economists argue that fiscal policy can have no stimulus effect; this is known as the
Treasury View, which Keynesian economics rejects. The Treasury View refers to the theoretical positions of classical
economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same general
argument has been repeated by neoclassical economists up to the present. From their point of view, when government
runs a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas
borrowing, or the printing of new money. When governments fund a deficit with the release of government bonds,
interest rates can increase across the market. This is because government borrowing creates higher demand for credit
in the financial markets, causing a lower aggregate demand (AD), contrary to the objective of a budget deficit. This
concept is called crowding out; it is a "sister" of monetary policy.

In the classical view, fiscal policy also decreases net exports, which has a mitigating effect on national output and
income. When government borrowing increases interest rates it attracts foreign capital from foreign investors in the
form of hot money. This is because, all other things being equal, the bonds issued from a country executing
expansionary fiscal policy now offer a higher rate of return. In other words, companies wanting to finance projects
must compete with their government for capital so they offer higher rates of return. To purchase bonds originating
from a certain country, foreign investors must obtain that country's currency. Therefore, when foreign capital flows
into the country undergoing fiscal expansion, demand for that country's currency increases. The increased demand
causes that country's currency to appreciate. Once the currency appreciates, goods originating from that country now
cost more to foreigners than they did before and foreign goods now cost less than they did before. Consequently,
exports decrease and imports increase.

Other possible problems with fiscal stimulus include the time lag between the implementation of the policy and
detectable effects in the economy, and inflationary effects driven by increased demand. In theory, fiscal stimulus does
not cause inflation when it uses resources that would have otherwise been idle. For instance, if a fiscal stimulus
employs a worker who otherwise would have been unemployed, there is no inflationary effect; however, if the
stimulus employs a worker who otherwise would have had a job, the stimulus is increasing demand while labor supply
remains fixed, leading to inflation.

The fiscal policy is designed to achieve certain objectives as follows:

1. Development by effective Mobilisation of Resources

The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of
economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state
governments in India have used fiscal policy to mobilise resources.

The financial resources can be mobilised by :

1. Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes
as well as indirect taxes because most important source of resource mobilisation in India is taxation.

2. Public Savings: The resources can be mobilised through public savings by reducing government expenditure
and increasing surpluses of public sector enterprises.

3. Private Savings: Through effective fiscal measures such as tax benefits, the government can raise resources
from private sector and households. Resources can be mobilised through government borrowings by ways of
treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit
financing.

2. Efficient allocation of Financial Resources

The central and state governments have tried to make efficient allocation of financial resources. These resources are
allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-
development Activities includes expenditure on defence, interest payments, subsidies, etc.

But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services
which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage
production of desirable goods and discourage those goods which are socially undesirable.

3. Reduction in inequalities of Income and Wealth

Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the
society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups.
Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper
middle class and the upper class. The government invests a significant proportion of its tax revenue in the
implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.
4. Price Stability and Control of Inflation

One of the main objectives of fiscal policy is to control inflation and stabilize price. Therefore, the government always
aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, Productive use of financial
resources, etc.

5. Employment Generation

The government is making every possible effort to increase employment in the country through effective fiscal
measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-
scale industrial (SSI) units encourage more investment and consequently generate more employment. Various rural
employment programmes have been undertaken by the Government of India to solve problems in rural areas.
Similarly, self-employment scheme is taken to provide employment to technically qualified persons in the urban areas.

6. Balanced Regional Development

Another main objective of the fiscal policy is to bring about a balanced regional development. There are various
incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes
and duties in the form of tax holidays, Finance at concessional interest rates, etc.

7. Reducing the Deficit in the Balance of Payment

Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export
earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc.

The foreign exchange is also conserved by providing fiscal benefits to import substitute industries, imposing customs
duties on imports, etc.

The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of
payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or
by giving subsidies to export.

8. Capital Formation

The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of
economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of
capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to
encourage savings and discourage and reduce spending.

9. Increasing National Income

The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital
formation. This results in economic growth, which in turn increases the GDP, per capita income and national income
of the country.

10. Development of Infrastructure

Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth.
The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is
invested in the infrastructure development. Due to this, all sectors of the economy get a boost.

11. Foreign Exchange Earnings

Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export
earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute
industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve
balance of payments problem.

Conclusion
The objectives of fiscal policy such as economic development, price stability, social justice, etc. can be achieved only
if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing are effectively used. Though
there are gaps in India's fiscal policy, there is also an urgent need for making India's fiscal policy a rationalised and
growth oriented one. The success of fiscal policy depends upon taking timely measures and their effective
administration during implementation.
 6. Briefly describe the three pillars of democracy – Legislation, Execution and Judiciary. Explain the
relationship between business and the Government?

Answer: Legislature, Executive and Judiciary are considered to be the three Pillars or Columns of our democracy; an
additional one being Media.  All four together constitute what is called “The Check and Balance” wings to keep the
Governance of our Democracy on even keel. Legislature is supreme in the sense that it is constituted by people’s
representatives directly elected by the public.  It’s main function being, to make laws keeping public welfare in mind.

Executive is the cabinet based on the principle of joint responsibility.  This entity is the so called ‘Rulers’ who preside
over the fate of the country.  It is generally formed by a party or a coalition of parties representing majority numbers
in the Legislature.  It implements a political party’s Policies and program in case of a single party rule or what is
called the ‘Common Minimum Program’ if there is a coalition of parties. Judiciary ensures that Rule of Law prevails. 
It even reviews the constitutional validity of an enacted law passed by the Legislature and consented to by the
President of India.  Thus the judiciary is heavily loaded with a very high and unique responsibility.

Implementation of the decisions by all above three wings is through what is called Bureaucracy, which in turn is
considered the real vehicle of Governance.  Without this structure the policies, programs and judicial orders remain
only on paper and hence this constitutes what is in popular parlance termed as ‘Public service’.   The individuals
occupying the hierarchy are called ‘Public Servants’.  Commitment to public service is thus a sort of ‘Hall Mark’ of
this important branch of the ‘Executive’.  The members of this ‘Service’ have continuity, whereas the ones heading
their respective departments namely the Ministers keep on changing through the medium of elections and even during
the currency of continued ruling majority.  Onus of Governance, thus, rests on the shoulders of this branch.  Honesty,
integrity and impartiality of this wing are thus a must characteristic for public service.

In a democracy or even in any other form of Government the Media represent public sentiments and opinion on the
working of all the other three entities.  This has assumed the role of ‘Fourth Pillar’ in our democracy.  In ideal
conditions this entity occupies a unique position of keeping the other three on even keel.  It is through this medium
that the public knows every bit of what is going on and supplies public opinion to the ‘Rulers’.  Any biased reporting
will result in upsetting the balance.

With such a finely conceived arrangement in place a Utopian status should have been the result. However, in today’s
scenario one finds oneself but in a thoroughly disappointing environment as regards constituents of the Legislature
and the Executive.  Simultaneously with the allegations of ‘Paid News’ the role of Media too has been under the
Cloud. In this regretful environment only the Judiciary has been providing a glimmer of hope despite its many short
comings and occasional allegations of ‘Judicial Activism’.  However, the recently passed Legislation for appointment
and transfers of Judges of the Supreme Court and High Courts in place of the ‘Collegium’ system hitherto in operation
is likely to bring the Executive and the Legislature on one side and the Judiciary on the other on a course of
confrontation.

It is noteworthy that almost all political parties have supported the new legislation.  It is also a notable point that the
‘Collegiums’ was an instrument devised by the Honorable Supreme Court (first in 1993 and then fine-tuned in
1998)and does not have any constitutional backing and on the surface it is only in India where Judges appoint other
Judges.

However, to analyze as to why this rare political unanimity has taken place a need arises to go back to the two rulings
of the Honorable Supreme Court of India to answer the reason behind it.

In the famous Golaknath’s case (1967), the Supreme Court held that the fundamental rights were outside the purview
of Parliament’s power to amend the Constitution. This triggered a growing demand among politicians to appoint
Judges who were committed to the Government’s political philosophy. Then in KesavanandaBharati case (1973), the
court held that the “basic structure” or “the fundamental features” of the Constitution should not be altered by the
process of amendment. After this the demand for “committed judge” got a further boost.

The Emergency that followed since June 1975 exposed the country to virtual dictatorship for about a year and a half
and we must remember that during that period, the first victim was the Judiciary. Although the Emergency came to
end in early 1977, fear of the Executive’s domination over the judiciary was seen as a looming danger.  It was in that
atmosphere that the Supreme Court devised the Collegiums to keep the judiciary out of bounds for the Executive. 
This arrangement has been in existence as said earlier since 1993 for over two decades.

With the constitution now having been amended to establish a permanent autonomous body called the National
Judicial Appointments Selection Committee the days for the Collegiums seem to be ending.

The new law envisages or rather expects the commission to work with the assistance only of the Ministry; the
independence of the Judiciary remains under cloud with the provision of Veto powers to “the Law Minister plus one”
to reject decisions approved by the majority.  The readers may also recall the rejection of the government recently of
one name recommended by the Collegium for his appointment as a Judge of the Supreme Court.   That clearly shows
that the Executive even now had the power to accept or reject the nomination and thereby the fact that the function of
the Collegiums was only recommendatory in nature.  On the other side the fact remains that an alternate name could
come only from the constituents of the Collegiums.  The Executive is not ready even for this.  Therefore, whether the
new arrangement was passed with proper public participation or not is no longer valid now.

We are aware through news that the Chief Justice of India only a few days ago in the open court supported the
Collegiums and many other predecessors of his also had expressed faith in that system. Also there is news that the
new laws have been challenged in the Supreme Court and will be heard. The Honorable Court will now decide which
of the two would survive. Thus the fear of confrontation is now a reality. The concept of committed Judiciary will be a
great set back to our democracy.  It is, therefore, necessary that enlightened citizens should come in the fore front and
present a forceful public opinion against this concept so that independence of Judiciary could be ensured. In order to
avoid a show-off a remodeled “Collegiums” may be suggested as a solution which could combine the good features of
both-the Collegiums and the new law.

Government tries to shape and control business activities to the benefit of the economy. Government and business
institutions in a country in many ways are interrelated and interdependent on each other. In today’s global economy,
its businessmen and entrepreneurs are the driving forces of the economy.

In planned economy or even in market economy government holds control of shaping the business activates of a
country. For maintaining a steady and upward economic growth The Government must try to make the environment
for business organizations suitable. And the organizations must follow the laws of governments’ to run the businesses
smoothly and making sure there is a level playing field.

The main goal of businesses is to make profit and governments’ goal is to ensure economic stability and growth. Both
of them are different but very co-dependent.

For this the government and organizations or businesses always tries to influence and persuade each other in many
ways for various matters.

A balanced relationship between the government and businesses is required for the welfare of the economy and the
nation.

Let’s see how government and business organizations try to influence each other.

How Business Organizations Influences the Government

Organizations try to force the government to act in ways that benefits the business activities. Of Course for that an
organization must go through in a legitimate way. But sometimes we see that organizations try to go over the line.

Any ways, these are the common methods that business organizations us to influence government policies.

Personal Conducts and Lobbying

The corporate executives and political leaders and government officials are in the same social class. This creates a
personal relationship between both parties. Also organizations formally forms group to present its issues to
government bodies.

Forming Trade Unions and Chamber Of Commerce

Trade unions and chamber of commerce are associations of business organizations with common interest. They work
to find the common issues of organizations and present reports, holds dialogue to discuss on them with government
bodies.

Political Action Committees

Recently in the 2012 US elections, the term “super PACs” was a common topic in many discussions. Political action
committees (PACs) or are special organizations formed to solicit money and distribute to political candidates.

Most times the rich executives donate money to the political candidates whose political views are similar to them.

Large Investment

The companies if can make a very large investment in industries or projects, them could somehow effect the
government policies.

We see these very often in developing countries where foreign corporate wants to invest in these countries.

These works in other way around, where government tries to implement polices to attract foreign investment.

How Government Influences the Business Organizations

The government attempts to shape the business practices through both directly and indirectly implementing rules and
regulations.

The government most often directly influences organizations through establishing regulations, laws and rules that
dictate what organizations can and cannot do.

To implement legislation, the government generally creates special agencies to monitor and control certain aspects of
business activity.

For example, environment protection agency handles Central Bank, Food and Drug Administration, Labor
Commission, Securities and Exchange Commission and many more. These agencies directly creates, implements laws
and monitors its application in organization.

Governments sometimes take an indirect approach to shape the activities of business organizations. These are also
done by implementing laws or regulations but they are not always mandatory.

For instance, the government sometimes tries to change organizations polices by their tax codes. Government could
give tax incentives to companies that have an environment friendly waste management system in production factory.

Or, tax incentives could be provided to companies that has established its production facilities in a less developed
region in the country. As a result, more often the businesses would probably do so.

However these regulations and its implementation must be at an optimal degree

Explain Competition Act. What are the salient features of Competition Act?

Questions from Unit IV

1. Explore previous and current status of information technology in India and analyzes various strategies
to overcome its bottlenecks for its future growth and impact on various sectors of the Indian economy.

Answer: The stature of being one of the largest global IT capitals at this information age, India's information and
technology services date back in 1967 with the establishment of TCS of Tata Groups in Mumbai and its influence and
applications now has reached no doubt beyond the perceptions. In hindsight, the Indian IT sector by the end of 2020
poising to a huge US$ 225 billion industry has been instrumental in transformation of India's image on the global map
from a decelerating economy to an innovative global catalyst in rendering hotshot technology solutions and services,
acclaimed by the National Association of Software and Service Companies (NASSCOM) report. The industry of
information technology comprising of IT and IT-enabled services has been fueling Indian economic growth and
influencing the livelihood of the Indians with its contribution to different multifaceted parameters suchlike diversity,
standard of life, employment and profession directly or indirectly.

Science of information technology or IT

Information technology is said to be a science or technology with a combination of hardware and software involving
data storage and processing information or it may be a science of computer and telecommunication that incurs
information capturing, storing and transmittance world over and the study includes the structural design, development,
application, support and management of computer-based data systems, especially software development, applications
and hardware computing. The science of information technology administers using computers and its software to
store, process, transmit, preserve, and recuperate information safely. At this information epoch, the science of IT
integrates other sorts of inventional technologies like usage of cell phones, iPods, and Apple TV in addition to the
conventional PC and networking/internet technologies.

The services of IT industry in India

The industry of information technology in India includes the following services namely IT and software services, IT
enabled services, hardware (engineering) services, and e-businesses/e-governance associated with government
services.

 IT services are outsourcing of software support/installation, processing services, systems integration, exports
of products and services, and training/education of the information technology science.
 IT enabled services include those that have been transformed through telecom and networking associated with
remote maintenance, back office operations, data processing, medical record transcription, BPO, KPO, LPO,
etc.
 Engineering/hardware services consist of industrial design, mechanical design (CAD/CAM), electronic
system design (chip/board and embedded software design), design validation testing services, industrialization
and prototyping.
 Business executed through internet is electronic business or e-business, i.e., purchase and sale of products and
services, customer service, and business collaborations related to any kind of business undertaking and e-
governance in the public sector.

With a new mantra popular as IT, India has been a pioneer in the software development, application and
networking remained to be a preferred destination for software/ITES services. It strategical success of
software export industry has played a significant role in the transformation from IT sector a decade ago to a
current booming IT industry enabling a paradigm transition that Indian IT industry has emerged as a hub to
competitive value-added services in the global market. This rapid growth in the IT industry is an effect of the
following strength of the industry.
 Highly skilled technical resource.
 Minimum wage structure.
 Service quality and operational efficiency.
 Favorable government policies and initiatives by the government such as setting up of tech-parks and
implementation of e-governance projects.
 Global giants like Microsoft, Oracle, IBM, etc., holding operations in India.
 Adopting quality standards such as ISO 9000, SEI CMM etc.
 Cost competitiveness.
 Effective English-speaking professionals.
 Development of significant telecommunication infrastructure systems reducing internet and
telecommunication cost to larger extent.
 Country's geographical location, ability to offer 24x7 service and reduced turn-around times taking advantage
of time difference.
Major government initiatives augmenting growth of the IT industry

The department of information technology (DIT) controlled by the Ministry of Communications and Information
Technology in India has been accountable for formulation, execution and reassessment of national policies related to
IT such as hardware and software, standardization of procedures, internet, e-commerce, e-business, e-medicine,
education of IT and computer science, development of electronics and administration of IT related and Cyber laws.
Along with the DIT, Electronics Export and Computer Software Promotion Council (ESC) and National Informatics
Centre (NIC) functions for hardware/software industry development that comprises of knowledge-based enterprises,
various measures to promote IT exports and industrial competitiveness of the industry as well.

National Association of Software and Services Company (NASSCOM)

As a non-profit organization, NASSCOM was established in 1988 to facilitate software and IT-enabled services
industry and to promote research and development in software and allied industries. As a coordinating structure for the
information technology and its enabled services in India, NASSCOM has a significant part supporting the Indian
government to framework industry-friendly policies of the IT sector and to ensure Indian Information Security
environment standardization at its best across the world proactively. Data Security Council of India (DSCI) as a self-
governing body was set up by the NASSCOM as an initiative with the framework consisting of best practices for
Indian IT and ITES industry and enforcement of the established security standards since these BPO/KPO companies
deal with the international organizations that they need to be aware of and to be compliant with regulative measures in
respect to each country.

Various schemes launched by the Government of India in the previous decades

Aiming to promote the export of software products and services to the global market, to push up domestic and foreign
investment, technology/process know-how transfer, technical collaboration, etc. in the Indian IT industry, several
schemes had been implemented by the Indian Government and State governments through which policy packages
consisting of tax holidays, import duty concessions, liberalization of regulations in trade and commerce, etc. were
offered during the past decades as follows:

 Export Oriented Units (EOU) Scheme to encourage exports with the increase in productivity.
 Electronics Hardware Technology Park (EHTP) complexes to be established by the central government, state
government, public or private sector undertakings with the consent of the Inter-Ministerial Standing
Committee (IMSC) under the ministry of communication and information technology.
 The Software Technology Parks of India (STPI) to be installed by the ministry of information technology,
Government of India and international technology park by the state governments in affiliation.
 Special Economic Zones (SEZs) to be initiated to empower reliable manufacture and trade in terms of export
promotions.
 Sales from Domestic Tariff Area (DTA) to SEZs have been facilitated by providing drawback/DEPB benefits,
CST exemption and service tax exemption to the domestic providers.
 Units under the specified special economic zones to be availed income tax exemption for export profits for
five years, 50% for the following two years and 50% of plow-back profits for three years thenceforth.
 Export Promotion Capital Goods (EPCG) Scheme to permit capital goods importation required for pre-
production, production and post-production with customs duty levied at 5% liable to export obligations.
 Export Oriented Unit (EOU) scheme, Electronic Hardware Technology Park (EHTP) scheme or Software
Technology Park (STP) scheme to be established through which IT units can make export of their whole
goods and services.
 Electronic City, an IT park in Bangalore in 1991 was set up in which major IT/electronic industries are
functioning to empower knowledge-based industries.

Current status of Indian IT services

The vision to propel India as a global superpower in the field of IT, a cutting-edge competitor in the innovative sphere
and to bring forth the advantages of IT in each and every aspect of manhood by the Department of Information
Technology has been a major catalyst with the adoption and implementation of the National e-Governance Action
Plan and the Unique Identification Development Authority of India (UIDAI) program. The different policy packages
involve growth of electronics and hardware production, increased PC penetration in every nook and corner of the
country, more utilization of internet throughout the country, progression of domestic software market, facilitating
local languages through IT, increasing productivity in other sectors and exploring IT in creating more employment
opportunities. In this regard, following are the measures adopted by the Indian government.

 The Technical Advisory Group for Unique Projects (TAGUP) has been set up and Mr.NandanNilekani, one of
the founders of the outsourcing jumbo, Infosys has been appointed as a chairman of this project to develop IT
infrastructure in major areas inclusive of the issuance of unique ID to Indian citizens, new pension system and
goods and services tax.
 Constitution of National Task Force on Information Technology and Software Development to make a
framework of long-term IT policy nationally.
 Legislation of the Information Technology Act to furnish a legal patronage facilitating electronics business
and trade.
 Establishment of Software Technology Parks of India to augment software exports of the country and 51 STPI
centres have been set up at present with certain exemptions and benefits.
 Projects to develop Information Technology Investment Regions invested with good infrastructure to derive
maximum benefits of networking and greater efficiency.

Growth history of IT and IT enabled services from statistical standpoint

  On the basis of the NASSCOM report, clocking revenue growth of about US$ 76 billion, contributing 19% in
the fiscal year 2011 has been estimated and recorded more than the anticipated growth in the IT sector, as
hailed by the NASSCOM.
 Estimation of revenues from exports in the financial year 2011 summing up to US$ 59 billion that brings
about 26% of its contribution to total Indian exports including products and services by a research report.
 Internal revenues from IT-BPO exclusive of hardware have been estimated at a growth rate of nearly 16%
touching US$ 17.35 billion in the year 2011.
 According to the IDC India report, the nation's data centre services market has been expected to reach almost
US$ 2.2 billion at the end of the year 2011 that was aggregated at US$ 1.39 billion in 2009.
 Domestic BPO industry is targeted at US$ 1.4 billion in 2011 that was US$ 1.1 billion in 2010 whereas it has
been forecasted to touch US$ 1.69 billion and 2.47 billion by 2012 and 2014 respectively.

Investments in the domestic IT industry

 As per the report of the Department of Industrial Policy and Promotion, worth of US$ 10,705 million as a
cumulative foreign direct investment has been invested in the computer software and hardware sector during
the period of April 2000 and February 2011.
 Indian IT giants such as Infosys, TCS, HCL Technologies, Accenture, and Wipro have been making plans to
acquire a major share of the US market by 2012 that has been the largest in the world backing up discretionary
projects, robust clientele volumes and better pricing of the services.
 By the year 2014, investments made by the EMC Corporation, eminent global tech leader in India will be
around US$ 2 billion.
 Kaspersky Lab, the Russian Internet security and antivirus software company plans to invest US$ 2 million
through its retail launching at Hyderabad in 2011.
 Aiming to pursue additional software development and training facilities in various special economic zones in
some of the major cities designating 55,000 employees, Cognizant Technologies will capitalize over US$ 500
million by the end of 2014 as an expansion project.
 Polaris Software Lab, Chennai-based financial technology company has planned to acquire 85.3% stake of
San Francisco-based Iden-Trust, worldwide tech provider of digital trusted identity solutions valuing about
US$ 20 million thus making a threshold into the cloud computing space for financial technology services.
 Capgemini, the biggest consulting and computer servicing company in Europe has stepped in to provide
internal support services to India.
 Wal-Mart has been planning to elaborate its existing executions given Indian IT dominance and its capability
of tracking more businesses.
 In terms of manufacturing lightweight PC, the worldwide notable chip maker, Intel is looking forward to
invest above US$ 1 billion in India in the coming years.
 Cisco for its SME business and Oracle for its CRM services in India looking for 100% growth in view of
emerging technology know-how and requiring cost-efficient clientele servicing.
 Dell India gaining 80% sales during last year with US$ 700 million revenues.
 ARM, the British chip designer, dominating in the mobile market initiates to develop the biggest design centre
in India out of Britain.
 Yahoo Inc and CRL (Computational Research Laboratories), a subsidiary of Tata Sons have jointly agreed in
propelling Tata's EKA, (supercomputer that has been ranked as fourth fastest in the world) and for research in
cloud computing in India.

Diversified impact of IT in various spheres

Overall in a nutshell, we need to get acquainted with the proliferation of this newer information systems and
technology since its applications in our daily needs have been numerous, though we should be aware of the negative
implications in relation to the emergent technology. Convergence of digital and multimedia, mobile, satellite,
embedded systems, wireless communications, and diffused computation among different sectors, etc., have been the
evidence of the state-of-the-art information systems and technology. Current information era visualizes technology
applications in each and every aspect of our life and impact of IT on other sectors including agriculture, health care,
legal systems, entertainment, biomedical sciences, and so on.

Agriculture and information systems

Information technology catalyzes all spheres of the economic development of a nation and agriculture too has never
been exception. Since India is predominantly agriculture-based country it is necessary to have expert
agriculture/irrigation methodologies and trading/business strategies of agriculture produces supporting integrated crop
management of various kinds of crops, field-level intelligent decision-making system, and optimal machinery
management practices in order to have potential maximum yields. Numerous organizations and institutions have been
inculcating technology to provide solutions in the agriculture sector cost-effectively and Media Lab Asia, Ministry of
Communications and IT (Government of India), Development Gateway Foundation (Government of India and World
Bank) and Pan Asia Networking have been funding several research projects comprising design and evaluation of
computer devices and interfaces, handheld and mobile users in lingual-related information, retrieval, translation,
education, and e-learning. Agricultural universities have been facilitated to make use of IT in agriculture with the
launching of technology courses in Agriculture Information Technology that involves developing expert systems of
agri portals for weather, market information, etc., mobile knowledge dissemination, deploying GPS for agriculture,
robotic systems for green house, irrigation and so many.

Medical sciences and Information technology

One of the major fields in which computer and technology has been a necessity is unquestionably the medical
sciences. Computer technology has its application in the diagnosis, treatment, and prognosis of life-threatening
diseases such as cancer, AIDS, and neural disorders. With the help of digital computerized sonography, diseases can
be diagnosed and interpretations can be attained with the support of artificial intelligence providing greater degree of
accuracy. Complex surgeries are carried out with the surgical robots. Implementing advanced wireless devices,
processors, memory chips, and relevant operating systems is common nowadays in the health care
discipline. Bluetooth and smart phone technologiesassist in remote patient monitoring, wireless biometric data, and
medicine dispenser. For instance, a smart phone with its advanced capacities and greater functionality as of laptops
provides support in remote monitoring of patients with chronic diseases in their home environment irrespective of
their locations.

Computer technology and social media

No doubt a computer minus software or its relevant applications may be as such a brain-death patient at its vegetative
value. Also educational cum social networking setups such as India Study Channel, Facebook, Twitter, Orkut,
blogs, wikis and web-based e-mail clients like Gmail, Yahoo or MSN have been instrumental in galvanizing social
environment and political issues as well. As due to the outgrowth of this information technology, globe has become a
small village in fact. This is the high-tech world we live in indeed. Can we imagine technology would maintain world
peace and security? Yes! It can do. In a recent session organized by the United Nations Security Council entitled as,
"Voices of a New Generation," seeking perception of the global youth between 13 and 21 years of age on international
peace and security, it has been mentioned by the speaker of the session, that thousands of submissions by the young
people worldwide extending their support for world peace and security by sending e-mail, videos through YouTube,
Facebook, and hand-written mails as well and this definitely exhibits the power of social media and it is evident that to
what extent technology can be fueling and energizing such kind of marvelous initiatives. However, technology can
also be instrumental to negative provoking like terrorist organizations since most of terror attacks have been executed
through these applications.

Information technology in trade and business

Through implementation of the data integration, network storage, and database systems, technology has an immense
drive for E-business and E-commerce because of the proliferation of the Internet and Web. Nowadays, shoppers can
make online shopping for books, music, videos, toys, electronic devices, and games. The aviation and transportation
sectors have come a long way with the Blue tooth technology increasing revenue, efficiency, customer base, and
productivity being cost-effective.

Growth of Indian economy and IT industry

Needless to say, information technology plays a significant part in Indian economic development and has great
potential of longstanding economic progression through greater productivity in different aspects of the economy. IT
can shape the national economy decisively by various means of creating more workforce deployment, raising literacy
rates, rendering maximum health services, and providing effective administration through e-governance. In addition to
the major sectors such as biotechnology, pharmaceutical research, nanotechnology and so on, information systems has
been crucial in the field of defense and intelligence, space exploration, weather forecasting, and transportation. In
India, almost all public sector organizations have initiated IT-based systems in payrolls, stock market, rail and air
ticketing reservation so that ensuring transparency, accountability and hence efficiency of the government
administration and paving the way for economic growth to some extent.

Would Indian IT sector need to be reshaped in the future?

With high expectation of the IT industry to be revolutionized by 2015 at the global settings, the Indian IT sector needs
to be information-smart with modernized information idealogy and sorting out new leads as how to organize broad-
spectrum information management strategies not only in terms of IT sphere but for entire economy. It is evident that
the country has immense potential for progression of the industry through its consolidation, maximization and cost
transparency projects. However, possessing the potentiality and accomplishing have been distinct with the challenge
lying in between. Challenged with the dearth of technically skilled man power, educational excellence, data growth
 and a host of internal political issues in addition to the need for focused efforts to info-infrastructure, streamlining IT
hardware development that has been neglected to certain degree, and reduced cost base, under-mentioned strategies
need to be highlighted.

 Strong base for PSTN network at the Indian end to facilitate international call centers and software companies
in India in order to propel telecommuting and enabling internet leased circuits to get linked into PSTN
connectivity.
 Although there has been income tax exemption for certain IT enabled servicing units, it is imperative to
provide exemption to the entire ITES units.
 Immediate requirement for the provision of affordable and on-demand network connectivity with 100% up-to-
date and reliability.
 Tariff rates for high-speed data communication need to be lessened to promote value addition from India since
bandwidth tariffs in India have not been reduced with more volume as compared to that of international
standards.
 As the Indian IT business operations go round the clock especially in the ITES services 7x24 support of DoT
links should be necessary.
 Instant provision of international bandwidth is a must and it is advisable to allow the ITES firms to set up their
own international gateways or they may utilize substitute satellite networks.
 Domestic markets need to be augmented rather than sole reliability on international demands since serving
more primary and secondary industries in IT would be a driveway for speedy growth of the information
services sector.
 Indian education system and its course contents need to be revamped to have knowledge-based human
resources and launching of vocational courses especially for ITES that require specialized training, practical-
oriented methodologies, language proficiency, accent training, and basic technical skills would be of highly
importance.
 To propagate IT into the rural areas and small towns, cost-effective data processing centers in small towns and
nearby villages may be established to facilitate employment opportunities in those areas since more educated
youth have been populated over there.
 A framework of policies pertinent to information technology promoting women entrepreneurship thereby
creating more employment among women is the prerequisite to have ideal information-smart business.
 Improved info-infrastructure with adequate transportation and power supply and ensuring good governance
would promote the IT industry further by leaps and bounds in India.

Conclusion

Thus analyzing our strength and weakness, it seems the Indian IT industry has to confront some challenges but with
implementation of strategic plans, Indian techies could move ahead in the competitive international zone to retain its
leadership with more focus necessitated in IT engineering (hardware) services along with its software counterpart.
Concurrently, information services industry should be instrumental in raising the standard of living in all walks of life
and enhancing their sustenance. Otherwise, India will not be able to derive maximum benefits of its success in the
information services.

2. Explain the merits and demerits of privatization for Indian economy.

Privatisation involves selling state owned assets to the private sector. This is often achieved through listing the new
private company on the stock market. In the 1980s and 1990s, the UK privatised many previously state-owned
industries such as:

 BP
 BT
 British Airways
 Electricity companies
 Gas companies
Potential benefits of privatisation
1. Improved efficiency
The main argument for privatisation is that private companies have a profit incentive to cut costs and be more
efficient. If you work for a government run industry, managers do not usually share in any profits. However, a private
firm is interested in making profit and so it is more likely to cut costs and be efficient. Since privatisation, companies
such as BT, and British Airways have shown degrees of improved efficiency and higher profitability.
2. Lack of political interference
It is argued governments make poor economic managers. They are motivated by political pressures rather than sound
economic and business sense. For example a state enterprise may employ surplus workers which is inefficient. The
government may be reluctant to get rid of the workers because of the negative publicity involved in job losses.
Therefore, state owned enterprises often employ too many workers increasing inefficiency.
3. Short Term view
A government many think only in terms of the next election. Therefore, they may be unwilling to invest in
infrastructure improvements which will benefit the firm in the long term because they are more concerned about
projects that give a benefit before the election.
4. Shareholders
It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the
firm could be subject to a takeover. A state owned firm doesn’t have this pressure and so it is easier for them to be
inefficient.
5. Increased competition
Often privatisation of state owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to
enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the
greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution
of gas and electricity.
However, privatisation doesn’t necessarily increase competition, it depends on the nature of the market. E.g. there is
no competition in tap water because it is a natural monopoly. There is also very little competition within the rail
industry.
6. Government will raise revenue from the sale
Selling state owned assets to the private sector raised significant sums for the UK government in the 1980s. However,
this is a one off benefit. It also means we lose out on future dividends from the profits of public companies.

Disadvantages of privatisation
1. Natural monopoly

A natural monopoly occurs when the most efficient number of firms in an industry is one. For example tap water has
very significant fixed costs, therefore there is no scope for having competition amongst several firms. Therefore, in
this case, privatisation would just create a private monopoly which might seek to set higher prices which exploit
consumers. Therefore it is better to have a public monopoly rather than a private monopoly which can exploit the
consumer.

2. Public interest
There are many industries which perform an important public service, e.g health care, education and public transport.
In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. For example, in the
case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than
patient care. Also, in an industry like health care, arguably we don’t need a profit motive to improve standards. When
doctors treat patients they are unlikely to try harder if they get a bonus.
3. Government loses out on potential dividends.
Many of the privatised companies in the UK are quite profitable. This means the government misses out on their
dividends, instead going to wealthy shareholders.
4. Problem of regulating private monopolies.
 Privatisation creates private monopolies, such as the water companies and rail companies. These need regulating to
prevent abuse of monopoly power. Therefore, there is still need for government regulation, similar to under state
ownership.
5. Fragmentation of industries
In the UK, rail privatisation led to breaking up the rail network into infrastructure and train operating companies. This
led to areas where it was unclear who had responsibility. For example, the Hatfield rail crash was blamed on no one
taking responsibility for safety. Different rail companies has increased the complexity of rail tickets.
6. Short-termism of firms.
As well as the government being motivated by short term pressures, this is something private firms may do as well. To
please shareholders they may seek to increase short term profits and avoid investing in long term projects. For
example, the UK is suffering from a lack of investment in new energy sources; the privatised companies are trying to
make use of existing plants rather than invest in new ones.
Evaluation of Privatisation

 It depends on the industry in question. An industry like telecoms is a typical industry where the incentive of
profit can help increase efficiency. However, if you apply it to industries like health care or public transport the profit
motive is less important.
 It depends on the quality of regulation. Do regulators make the privatised firms meet certain standards of
service and keep prices low?
 Is the market contestable and competitive? Creating a private monopoly may harm consumer interests, but if
the market is highly competitive, there is greater scope for efficiency savings.

3. Explain the role of private sector in India. Also bring out the problems of private sector
enterprises in India
The Government of India opted for a mixed economy in which both public and private sectors were allowed to
operate. For example, the 1948 Industrial Policy Resolution divided industries into four categories: (i) three industries
in which State was given a monopoly; (ii) six industries where State was to have the exclusive right to set up new
units but existing private sector units were allowed to operate; (iii) eighteen industries where regulation and direction
was necessary; and (iv) all other industries (not included in the above three categories) where private sector was
allowed the freedom to operate. The 1956 Industrial Policy Resolution divided industries into three categories: (i)
seventeen industries (listed in Schedule A) whose future development was to be the exclusive responsibility of the
State; (ii) twelve industries where the State would increasingly establish new units and increase its participation but
would not deny the private sector opportunities to set up units or expand existing units; and (iii) all other industries
(not listed in Schedules A and B) where the private sector was given freedom to operate. However, the private sector
had to operate within the provisions of the Industries Development and Regulation Act 1951 and other relevant
legislations. In this context, the Industrial Policy Resolution 1956 stated, ―Industrial undertakings in the private
sector have necessarily to fit into the framework of the social and economic policy of the State and will be subject to
control and regulation in terms of the Industries Development and Regulation Act and other relevant legislation. The
Government of India, however, recognizes that it would, in general, be desirable to allow such undertakings to
develop with as much freedom as possible, consistent with the targets and objectives of the national plan. When there
exist in the same industry both privately and publicly owned units, it would continue to be the policy of the State to
give fair and non discriminatory treatment to both of them. The Resolution also emphasized the mutual dependence of
public and private sectors. While State could start any industry not included in Schedule A and Schedule B, the private
sector could be allowed to produce an item falling within schedule A. In fact, the 1956 Resolution emphasized not
only the mutual co-existence of private and public sectors but also provided for their mutual co-operation and help.
The private sector took full advantage of the loopholes and exceptions in the legislation and the elbow room‘ allowed
by the 1956 Resolution to set up industries even in areas exclusively reserved for the State sector. In fact, with the
passage of time, more and more concessions were granted to the private sector to expand its business activities. The
working of Industries Development and Regulation Act 1951, was also full of flaws as the licensing committee
worked in a very haphazard and ad hoc manner and there were no definite criteria adopted for acceptance or rejection
of applications. Because of widespread criticism of the working of the Act, the government considerably liberalised
the industrial licensing policy as well. The New Industrial Policy, 1991, ushered in a new era of liberalisation as
industrial licensing was abolished, role of public sector diluted, doors to foreign investment considerably opened, and
numerous incentives and initiatives granted to the private sector to expand its business activities. The 1991 policy was
therefore welcomed with unbridled enthusiasm by the private sector initially. It welcomed the thought of lower taxes,
less red tape, less paperwork, more space‘ to work and less government interference. However, the 1991 policy had
also opened the doors to multinationals and increased competition from abroad as tariffs were reduced substantially.
Consequently, many domestic producers suddenly discovered their market shares shrinking drastically as their goods
failed to meet foreign competition both on grounds 116 of quality and price. The corporate world also saw significant
changes with many old businessmen being knocked out from their top positions and a number of new entrants making
their mark.

Role of the private sector in Indian economy

1. The dominant sector. Despite the rapid progress of the public sector in the period of planning, private sector is the
dominant sector in the Indian economy . Thus as many as 86.4 per cent of the total companies were in the private
sector, the share of public sector being only 9.4 per cent. However, in terms of fixed capital, gross output and value
added, private sector's share was much lower. For instance, its share in fixed capital was only 28.1 per cent in 2005-
06. Its share in gross output and value added was only 38.9 per cent and 33.8 per cent respectively in that year. In
terms of employment, private sector's share was greater in 2005-06. It employed 61.5 per cent of workers as against
34.1 per cent employed by the public sector.

2. Importance for development. In western countries, private entrepreneurs have played an important role in
economic development so much so that Schumpeter has characterised them as the initiator and moving force behind
the industrialisation process. The private entrepreneur is guided by the profit motive. He is responsible for the
introduction of new commodities, new techniques of production, assembling the necessary plant and equipment,
labour force and management and organising them into a going concern. The private entrepreneur acts as an innovator
who revolutionises the entire method of production. Such activities help the process of industrialisation and economic
development. It was because of this reason that the industrial policy resolutions of 1948 and 1956 of the government
gave immense opportunities to the private sector to expand its activities. In the new liberalised scenario that has
emerged after the announcement of the new industrial policy in 1991, private sector has been assigned the dominant
role in industrial development.

3. Extensive modern industrial Sector. A number of modern industries have been set up in the private sector.
Important consumer goods industries were set up in the pre-Independence period itself. Particular mention in this
regard can be made of the cotton textile industry, sugar industry, paper industry and edible oil industry. These
industries were set up in response to the opportunities offered by the market forces. They were highly suitable for
private sector since they ensured early returns and required less capital for establishment. Though the engineering
industries did not make an appearance in the pre-Independence period yet a start was made by Tata in the field of iron
and steel industry at Jamshedpur. After Independence, a number of consumer goods industries were set up in the
private sector. Today India is practically self reliant in its requirements for consumer goods. According to the 1956
resolution, "industries producing intermediate goods and machines can be set up in the private sector." As a
consequence, chemical industries like paints, varnishes, plastics etc. and industries manufacturing machine tools,
machinery and plants, ferrous and non-ferrous metals, rubber, paper, etc. have been set up in the private sector.

4. Potentialities due to personal incentive in the small sector. Small and cottage industries have an important role to
play in the industrial field. These industries employ labour intensive techniques and are, accordingly, important from
the point of view of providing employment opportunities. In India, all small and cottage industries are in the private
sector. Personal initiative plays a decisive role in small-scale industries. With the help of a small capital, the small
entrepreneur uses his resources efficiently to earn maximum profit. Such management is not available to public sector
enterprises. The government has reserved a large number of items for production in the small-scale sector. This sector
is granted loans at concessional rates of interest and marketing outlets are also provided. In addition, industrial estates
have been established at various places where all facilities are provided under one roof to the small scale industries

Problems of the Private Sector

1. Profit generation is the main motive. Industrialists in the private sector operate with the sole motive of
maximizing profits. Consequently, they are interested in investing only in those industrial sectors where quick profit
generation is possible. Therefore, they tend to invest in consumer goods industries and ignore investments that are
crucial for building up a proper industrial infrastructure. Since lack of infrastructure and capital goods industries
plagued the Indian economy after Independence, while private sector was reluctant to invest in these areas, the public
sector had to step in. Thus, for a considerable period of planning, while the public sector bore the responsibility of
developing the capital goods and basic industries and industrial infrastructure (electricity and power, transportation,
communications etc.), the private sector concentrated on consumer goods industries; where investments were low and
profits high.

2. Focus on consumer durables sector. Even in the consumer goods sector, the focus of the private sector is on the
elite consumer groups since it is these groups that have ample purchasing power. Thus, the production pattern is
skewed in favour of the relatively small richer sections of the society. As a result, while production of elite consumer
durable goods like consumer electronics and automobiles is encouraged, the production of mass consumption goods is
neglected. Some economists allege that this implies the wastage of the economic surplus of the country on
unnecessary industrial activities while the core‘ economic activities suffer. This leads to, what they call, distortions in
production structure.‘ However, if the increasing trends of liberalisation in the Indian economy during the last two
decades are any indication, the Government of India now regards such investments as 'prime movers of growth' rather
than distortions.

3. Monopoly and concentration. It is the general pattern of capitalist development that, as the economy progresses,
the monopoly organisations is strengthened and concentration of wealth and economic power in a few hands
increases. This has happened in India also. In the pre-Independent India, this was encouraged by the managing agency
system. After Independence, with the initiation of economic planning in the country, it was expected that this tendency
would be effectively controlled. However, this was not to be. The Mahalariobis Committee pointed out in 1964 that
the operation of the system had actually resulted in increase in the concentration of wealth and economic power.
Similar conclusions were arrived at by the Monopolies Enquiry Commission in 1965. These tendencies have been
further strengthened by the substantial liberalisation of industrial policy in the last two decades which has enabled the
large business houses to amass considerable wealth with the result that concentration of economic power has further
increased.

4. Declining share of net value added in total output. Net value added is defined as the amount generated over and
above the cost of raw materials which go to the production system after allowing for the depreciation charges. It, thus,
indicates the efficiency of the production process. Many industries in the private sector have reported a fall in the
share of net value added in output in a number of years. This fall means that the same amount of raw materials has
generated less output. It, thus, implies a decline in efficiency.

5. Infrastructure bottlenecks. Severe capacity shortfalls, poor quality and high ―cost of infrastructure continues to
constrain Indian businesses. The most important infrastructural constraint is power. Industry surveys have found that
acute power shortfalls, unscheduled power cuts, erratic power quality (low voltage coupled with fluctuation), delays
and informal payments required to obtain new connections, and very high industrial energy costs, hurt industry
performance and competitiveness. Frequent and substantial power cuts (mostly unscheduled) have forced many units
to operate their own (captive) generators, further increasing the cost of power for industry and reducing firm
competitiveness. Moreover, the quality‘ of power is also poor. Some 40 per cent of the industries surveyed in Andhra
Pradesh reported damage to equipment due to the poor quality of power with damage much more costly for industries
with sensitive equipment, and process and quality heavily dependent on motor speed. The second most important
infrastructural constraint is transport. While India has one of the most extensive transport systems in the world, there
are severe capacity and quality constraints. It has currently no inter-State 126 expressways linking the major economic
centres, and only 3,000 kilometers of four-lane highways. Poor riding quality and congestion result in truck and bus
speeds on Indian highways that average 30-40 kilometers an hour, about half the expected average. India's high
density rail corridors also face severe capacity constraints, compounded by poor maintenance.

6. Contribution to trade deficit. A large number of private sector companies have been resorting to massive imports
in the post-liberalisation phase to upgrade then-technology in a bid to brace up to global competition. As a result, their
import expenditures have increased at a much faster rate than their export earnings. This has pushed up the country's
trade deficit.

7. Industrial disputes. As compared to public sector enterprises, the private sector enterprises suffer from more
industrial disputes. Differences and conflicts between the owners and employees regarding wages, bonus,
retrenchment and other issues frequently emerge. Although there is a provision for Works Committees, Arbitration
Boards, etc. for settlement of industrial disputes, the employers have better bargaining strength. Taking advantage of
this, they often refuse to accede even the genuine demands of workers and the conflicts assume the shape of long
drawn out struggles. Industrial disputes often result in strikes, lockouts, etc.

8. Industrial sickness. This is a serious problem confronting the small, medium and large units in the private sector.
Substantial amount of loanable funds of the financial institutions is locked up in sick industrial units causing not only
wastage of resources but also affecting the healthy growth of the industrial economy adversely. As at the end of March
2007, the total number of sick/weak units in the portfolio of scheduled commercial banks stood at 1.18 lakh involving
a bank credit of Rs. 30,333 crore. Causes of industrial sickness are many and are generally divided into two
categories: (i) external and (ii) internal. The former include factors which originate outside the unit and are, therefore,
not under the control of the unit such as power cuts, demand (or market) recession, erratic availability of inputs,
government policies etc. The latter include factors which originate within the unit and can, therefore, be said to be
under the control of the unit such as production, management, finance etc.

9. Problems relating to finance and credit. Since the rate of capital formation in the economy is low and the capital
market is in an underdeveloped state, the private sector enterprises have to encounter serious difficulties in arranging
finances. Because of high inflationary tendencies in the economy, people are attracted towards purchasing land, gold
and jewellery and are not willing to invest in industries. Inflationary conditions have also given birth to black
marketing and a large parallel economy which weans away funds from productive activities. The industrial finance
institutions have filled up this gap to some extent but the problem continues to be enormous.

10. Threat from foreign competition. The process of liberalisation unleashed in 1991 has opened up the gates to
foreign investors and the government has progressively introduced measures to open up‘ the economy to foreign
competition. This process of globalization and 'integration' of the Indian economy with the world economy has led to
an unequal competition a competition between giant MNCs (multinational corporations)‘ and dwarf Indian
enterprises‘. In the early euphoria of liberalisation, the private sector welcomed the measures of the government, but it
soon came to realise that opening up the Indian economy to foreign competition meant not .only more and cheaper
imports and more foreign investment but also opportunities to the MNCs to raid and takeover their enterprises. Even
the large Indian enterprises are just pygmies compared to the. Multinational corporations and while some of them have
already been gobbled up by the latter, some others are awaiting their turn with bated breath. As once noted by an MP
from West Bengal, the globalization of the Indian economy is like integrating a mouse into a herd of elephants.

4. Bring out the role of public sector enterprises in India.

The present Indian economic structure is often characterised as 'mixed economy. There are two fields of production in
the structure — the private sector and the public sector.

At the time of Independence, activities of the public or were restricted to a limited field like irrigation, power,
railways, ports, communications and some departmental undertakings. After Independence, the area of activities of the
public sector expanded at a very rapid speed. Some fields were left, entirely for. the public sector, some fields were
divided between the public and the private sector and some others were left totally to the private sector. A cursory
glance at the division of fields of industrial activity into the public and private sectors clearly brings out, that while
heavy and basic industries were kept for the public sector, the entire field of consumer goods industries (having high
and early returns) was left to the private sector. Outside the industrial field, while most of the banks, financial
corporations, railways, air transport, etc., are in the public sector, the entire agricultural sector (which is the largest
sector of the economy) has been left for the private sector.

Role of Public Sector in the Indian Economy

Public sector in India has been criticized vehemently by a number of supporters of the private sector who have chosen
to shut their eyes towards the achievements of the public sector. Following description should be sufficient to
convince one that public sector has played a definite positive role in the economy.

1. Public sector and capital formation. The role of public sector in collecting savings and investing them during the
planning era has been very important. During the first and second plans of the total investment, 54 per 91 cent was in
the public sector and the remaining in the private sector. The share of public sector and the remaining in the private
sector. The share of public sector rose to 60 percent in the third plan but fell thereafter. However, even then it was as
high as 45.7 per cent in the seventh plan. With increasing trends of liberalization in 1990s, the share of public sector in
total investment fell drastically to 34.3 per cent in the eighth plan (i.e., only one-third) and further to 29.5 per cent in
the Ninth Plan. This reflects the increasing importance that is now being accorded to the private sector. The
nationalized banks, State Bank of India, Industrial Development Bank of India, Industrial Finance Corporation of
India, State Financial Corporations, LIC, UTI etc., have played an important role in collecting savings and
mobilisation of resources. However, savings in the public sector itself are not much. In fact, there has been a
precipitous fall in the share of public sector in gross domestic savings. During the period of Sixth Plan as a whole,
public saving was 23.7 per cent of total domestic saving and this fell to 14.8 per cent during the period of the Seventh
Plan and just 9.2 per cent in the Eighth Plan (at 1999- 2000 prices). During the first year of the Ninth Plan, 1997-98,
share of public sector in total savings was just 7.5 per cent. Savings in the public sector were negative in all other
years of the Ninth Plan. The first year of the Tenth Plan, i.e., 2002-03 also recorded negative savings in the public
sector. However, things have distinctly improved since. In 2003-04, savings in the public sector were Rs. 29,521 crore
which rose significantly to Rs. 1,37,926 crore in 2006- 07 and Rs. 2,12,543 crore in 2007-08. The share of public
sector in total savings was 3.6 per cent in 2003-04 which rose significantly to 9.3 per cent in 2006-07 and further to
11.9 per cent in 2007-08. The share of public sector in gross domestic capital formation (GDCF) which was 44.6 per
cent during Sixth Plan fell to 31.7 per cent during Eighth Plan. It is estimated to have declined further to 27.3 per cent
in the Ninth Plan and 22.2 per cent during the Tenth Plan.

2. Development of infrastructure. The primary condition of economic development in any underdeveloped country
is that the infrastructure should 92 develop at a rapid pace. Without a sufficient expansion of irrigation facilities and
power and energy, one cannot even conceive of agricultural development. In the same way without an adequate
development of transportation and communication facilities, fuel and energy, and basic and heavy industries, the
process of industrialization cannot be sustained. India had inherited an undeveloped basic infrastructure from the
colonial period. After Independence, the private sector neither showed any inclination to develop it nor did it have any
resources to make this possible. It was comparatively weak both financially and technically, and was incapable of
establishing a heavy industry immediately. These factors made the State's participation in industrialization essential
since only the 'government could enforce‘ a large-scale mobilization of capital, the co-ordination of industrial
construction, and training of technicians. The government has not only improved the road, rail, air and sea transport
system, it has also expanded them manifold. Thus the public sector has enabled the economy to develop a strong
infrastructure for the future economic growth. The private sector also has benefited immensely from these investments
undertaken by the public sector.

3. Strong industrial base. The share of the industrial sector (comprising manufacturing, construction, electricity, gas
and water supply) in Gross Domestic Product at factor cost has increased slowly but steadily during the period of
planning. The share of the industrial sector in GDP at factor cost rose from 15.1 per cent in 1950-51 to 24.0 per cent in
1980-81 and further to 25.8 per cent in 2008-09 (at 1999-2000 prices). This shows the increasing importance of the
industrial sector in the Indian economy. Not only this, the industrial base of the Indian economy is now much stronger
than what it was in 1950-51. There has been significant growth in the defence industries and industries of strategic
importance. The government has strengthened the industrial base considerably by placing due emphasis on the setting
up of industries in the following fields — iron and steel, heavy engineering, coal, heavy electrical machinery,
petroleum and natural gas, chemicals and drugs, fertilizers, etc. Because of their low profitability potential in the short
run, these industries do not find favour with the private sector. However, unless these 93 industries are set up, the
consumer goods industries cannot progress at a sufficiently rapid pace. Therefore, the production of consumer goods
industries in the private sector is also likely to suffer if the State does not invest in heavy and basic industries. As
noted by A.H. Hanson, "Even the view that ; it is the function of the State to provide only basic 'services' leaves room
for a great deal of public enterprise in manufacturing industry, as well as in power, transport, communications, etc.
For consumer-goods industries, which; are usually capable of attracting; some private capital, depend on the 'services'
of the producer-goods industries in which private capital is — at least initially — less interested. Hence one can argue,
without any 'socialistic' overtones, that as — for instance — textile or food-processing industries; need the support of
native metallurgical and engineering industries (the necessary equipment not being available; from abroad owing to
foreign exchange difficulties, delivery; delays, etc.) and as no private entrepreneurs show any;: inclination to pioneer
the latter, the State must step in arid;; do the pioneering itself.

4. Economies of scale. In the case of those industries where for technological reasons, the plants have to be large
requiring huge investments, setting up of these industries in the public sector can prevent the concentration of
economic; and industrial power in private hands. It is a known fact that; in the presence of significant economies of
scale, the free market does not produce the best results. Accordingly, considerations of economic efficiency require
some form of government regulation or public ownership. Even in the U.S.A. firms in electric power, natural gas,
telephone and some other industries are being regulated by Federal and State regulatory commissions. Countries like
France and le United Kingdom have explicitly preferred public ownership in these fields.

5. Removal of regional disparities. The government in India has sought to use its power of setting up of industries as
a means of removing regional disparities in industrial development; In the pre-Independence period, lost of the
industrial progress of the country was limited in and around the port towns of Mumbai, Kolkata and Chennai. Other
parts of the country lagged far behind. After the, initiation of the planning process in the country in 1951, the
government paid particular attention to the problem and set up industries in a number of areas neglected by the private
sector. Thus, a major proportion of public sector investment was directed towards backward States. All the four major
steel plants in the public sector—Bhilai Steel plant, Rourkela Steel Plant, Durgapur Steel Plant and Bokaro steel Plant
were set up in the backward States. It was believed that the setting up of large-scale public sector projects. in the
backward areas would unleash a propulsive mechanism in them and cause economic development of tie hinterland.
These considerations also guided the location if machinery and machine tools factories, aircraft, transport equipment,
fertiliser plants etc.

6. Import substitution and export promotion. The foreign exchange problem often emerges as a serious constraint
on the programmes of industrialization in a developing economy. This constraint appeared in a rather strong way in
India during the Second Plan and the subsequent plans. Because of these considerations, all such industries hat help in
import substitution are of crucial importance for the economy. Bharat Heavy Electricals Limited, Bharat electronics
Ltd:, Hindustan Antibiotics Ltd., Indian Oil Corporation, Oil and Natural Gas Commission, etc., in the public sector
are of special importance from this point of view. Several public sector enterprises have also played an important role
in expanding the exports of the country. Specific reference of Hindustan Steel Limited, Hindustan Machine Tools
Limited, Bharat Electronics Ltd., State Trading Corporation and Metals and Minerals Trading Corporation can be
made in this context.

7. Check over concentration of economic power. In a capitalist economy where the public sector is practically non-
existent or is of a very small size, economic power gets increasingly concentrated in a few hands and inequalities of
income and wealth increase. During the four and a half decades of planning in this country, it has been said time and
again that the expansion of public sector will help in putting a brake on the tendency towards concentration of wealth
and economic power in the private sector.

Public sector can help in reducing inequalities in the economy in a number of ways. For instance (i) profits of the
public sector can be used directly by the government on the welfare programmes of the poorer sections of community;
(ii) public sector can adopt a discriminatory policy by supplying materials to small industrialists at low prices and big
industrialists at high prices; (ii) public sector can give better wages to the lower staff as compared to the private sector
and can also implement programmes of labour welfare, construction of colonies and townships for labourers, slum
clearance, etc: and (iv) public sector can orient production machinery towards the production of mass consumption
goods.

5.What is meant by social responsibility of business? Mention the various sections of society towards which the
business is responsible.
Every business must contribute in some way or the other for their benefit. For example, every business must ensure a
satisfactory rate of return to investors, provide good salary, security and proper working condition to its employees,
make available quality products at reasonable price to its consumers, and maintain the environment properly etc.
However, while doing so two things need to be noted to view it as social responsibility of business. First, any such
activity is not charity. It means that if any business donates some amount of money to any hospital or temple or school
and college etc., it is not to be considered as discharge of social responsibility because charity does not imply fulfilling
responsibility.
Secondly, any such activity should not be such that it is good for somebody and bad for others. Suppose a
businessman makes a lot of money by smuggling or by cheating customers, and then runs a hospital to treat poor
patients at low prices his actions cannot be socially justified. Social responsibility implies that a businessman should
not do anything harmful to the society in course of his business activities.
The obligation of any business to protect and serve public interest is known as social responsibility of business. Thus,
the concept of social responsibility discourages businessmen from adopting unfair means like black-marketing,
hoarding, adulteration, tax evasion and cheating customers etc. to earn profit. Instead, it encourages them to earn profit
through judicious management of the business, by providing better working and living conditions to its employees,
providing better products, after sales-service, etc. to its customers and simultaneously to control pollution and
conserve natural resources.
Need For being Socially Responsible:

Social responsibility is a voluntary effort on the part of business to take various steps to satisfy the expectation of the
different interest groups. As you have already learnt, the interest groups may be owners, investors, employees,
consumers, government and society or community. But the question arises, why the business should come forward
and be responsible towards these interest groups. Let us consider the following points:

i. Public Image - The activities of business towards the welfare of the society earn goodwill and
reputation for the business. The earnings of business also depend upon the public image of its
activities. People prefer to buy products of a company that engages itself in various social welfare
programmes. Again, good public image also attracts honest and competent employees to work
with such employers.
ii. Government Regulation - To avoid government regulations businessmen should discharge their
duties voluntarily. For example, if any business firm pollutes the environment it will naturally
come under strict government regulation, which may ultimately force the firm to close down its
business. Instead, the business firm should engage itself in maintaining a pollution free
environment.
iii. Survival and Growth -Every business is a part of the society. So for its survival and growth,
support from the society is very much essential. Business utilizes the available resources like
power, water, land, roads, etc. of the society. So it should be the responsibility of every business
to spend a part of its profit for the welfare of the society.
iv. Employee satisfaction - Besides getting good salary and working in a healthy atmosphere,
employees also expect other facilities like proper accommodation, transportation, education and
training. The employers should try to fulfil all the expectation of the employees because employee
satisfaction is directly related to productivity and it is also required for the long-term prosperity of
the organisation. For example, if business spends money on training of the employees, it will have
more efficient people to work and thus, earn more profit.
v. Consumer Awareness - Now-a-days consumers have become very conscious about their rights.
They protest against the supply of inferior and harmful products by forming different groups. This
has made it obligatory for the business to protect the interest of the consumers by providing
quality products at the most competitive price.

Responsibility towards Different Interest Groups

The business generally interacts with owners, investors, employees, suppliers, customers, competitors,
government and society. They are called as interest groups because by each and every activity of business, the
interest of these groups is affected directly or indirectly.
i. Responsibility towards owners
Owners are the persons who own the business. They contribute capital and bear the business risks. The primary
responsibilities of business towards its owners are to:
a. Run the business efficiently.
b. Proper utilisation of capital and other resources.
c. Growth and appreciation of capital.
d. Regular and fair return on capital invested.
ii. Responsibility towards investors
Investors are those who provide finance by way of investment in debentures, bonds, deposits etc. Banks, financial
institutions, and investing public are all included in this category. The responsibilities of business towards its investors
are:
a. Ensuring safety of their investment,
b. Regular payment of interest,
c. Timely repayment of principal amount.
iii. Responsibility towards employees
Business needs employees or workers to work for it. These employees put their best effort for the benefit of the
business. So it is the prime responsibility of every business to take care of the interest of their employees. If the
employees are satisfied and efficient, then the only business can be successful. The responsibilities of business
towards its employees include:
a. Timely and regular payment of wages and salaries.
b. Proper working conditions and welfare amenities.
d. Opportunity for better career prospects.
e. Job security as well as social security like facilities of provident fund, group insurance, pension, retirement benefits,
etc.
f. Better living conditions like housing, transport, canteen, crèches etc.
g. Timely training and development.
iv. Responsibility towards suppliers
Suppliers are businessmen who supply raw materials and other items required by manufacturers and traders. Certain
suppliers, called distributors, supply finished products to the consumers. The responsibilities of business towards these
suppliers are:
a. Giving regular orders for purchase of goods.
b. Dealing on fair terms and conditions.
c. Availing reasonable credit period.
d. Timely payment of dues.
v. Responsibility towards customers
No business can survive without the support of customers. As a part of the responsibility of business towards them the
business should provide the following facilities:
a. Products and services must be able to take care of the needs of the customers.
b. Products and services must be qualitative
c. There must be regularity in supply of goods and services
d. Price of the goods and services should be reasonable and affordable.
e. All the advantages and disadvantages of the product as well as procedure to use the products must be informed do
the customers.
f. There must be proper after-sales service.
g. Grievances of the consumers, if any, must be settled quickly.
h. Unfair means like under weighing the product, adulteration, etc. must be avoided.
vi. Responsibility towards competitors
Competitors are the other businessmen or organizations involved in a similar type of business.
Existence of competition helps the business in becoming more dynamic and innovative so as to make itself better than
its competitors. It also sometimes encourages the business to indulge in negative activities like resorting to unfair trade
practices. The responsibilities of business towards its competitors are
i. not to offer exceptionally high sales commission to distributers, agents etc.
ii. not to offer to customers heavy discounts and /or free products in every sale.
iii. not to defame competitors through false or ambiguous advertisements.
vii. Responsibility towards government
Business activities are governed by the rules and regulations framed by the government. The various responsibilities
of business towards government are:
a. Setting up units as per guidelines of government
b. Payment of fees, duties and taxes regularly as well as honestly.
c. Not to indulge in monopolistic and restrictive trade practices.
d. Conforming to pollution control norms set up by government.
h. Not to indulge in corruption through bribing and other unlawful activities.
viii. Responsibility towards society
A society consists of individuals, groups, organizations, families etc. They all are the members of the society. They
interact with each other and are also dependent on each other in almost all activities. There exists a relationship among
them, which may be direct or indirect. Business, being a part of the society, also maintains its relationship with all
other members of the society. Thus, it has certain responsibilities towards society, which may be as follows:
a. to help the weaker and backward sections of the society
b. to preserve and promote social and cultural values
c. to generate employment
d. to protect the environment
e. to conserve natural resources and wildlife
f. to promote sports and culture
g. to provide assistance in the field of developmental research on education, medical science, technology etc.

7. Explain the concept of consumerism along with its relevance in today’s scenario.

Consumer is regarded as the king in modern marketing. In a market economy, the concept of consumer is given the
highest priority, and every effort is made to encourage consumer satisfaction.

However, there might be instances where consumers are generally ignored and sometimes they are being exploited as
well. Therefore, consumers come together for protecting their individual interests. It is a peaceful and democratic
movement for self-protection against their exploitation. Consumer movement is also referred as consumerism.

Features of Consumerism
Highlighted here are some of the notable features of consumerism −

 Protection of Rights − Consumerism helps in building business communities and institutions to protect their
rights from unfair practices.

 Prevention of Malpractices − Consumerism prevents unfair practices within the business community, such
as hoarding, adulteration, black marketing, profiteering, etc.

 Unity among Consumers − Consumerism aims at creating knowledge and harmony among consumers and
to take group measures on issues like consumer laws, supply of information about marketing malpractices,
misleading and restrictive trade practices.

 Enforcing Consumer Rights − Consumerism aims at applying the four basic rights of consumers which are
Right to Safety, Right to be Informed, Right to Choose, and Right to Redress.

Advertising and technology are the two driving forces of consumerism −

 The first driving force of consumerism is advertising. Here, it is connected with the ideas and thoughts
through which the product is made and the consumer buys the product. Through advertising, we get the
necessary information about the product we have to buy.
  Technology is upgrading very fast. It is necessary to check the environment on a daily basis as the
environment is dynamic in nature. Product should be manufactured using new technology to satisfy the
consumers. Old and outdated technology won’t help product manufacturers to sustain their business in the
long run.

8. What are the various stages in the process of globalization? Explain the factors favouring Globalization
in India. Also explain the obstacles of globalization in India.

Answer: India’s economic integration with the rest of the world was very limited because of the restrictive economic
policies followed until 1991. Indian firms confined themselves, by and large, to the home market. Foreign investment
by Indian firms was very insignificant. With the new economic policy ushered in 1991, there has, however, been
change. Globalization has in fact become a buzzword with Indian firms now and many are expanding their overseas
business by different strategies.

Globalization may be defined as “ the growing economic interdependence of countries worldwide through increasing
volume and variety of cross border transactions in goods and services and of international capital flows, and also
through the more rapid and widespread diffusion of technology”. Globalization may be considered at two levels .Viz,
at the macro level (i.e., globalization of the world economy) and at the micro level (i.e., globalization of the business
and the firm). Globalization of the world economy is achieved, quite obviously, by globalising the national
economies. Globalization of the economies and globalization of business are very much interdependent.

REASONS FOR GLOBALISATION

1. The rapid shrinking of time and distance across the globe thanks to faster communication, speedier
transportation, growing financial flows and rapid technological changes.
2. The domestic markets are no longer adequate rich. It is necessary to search of international markets and to set
up overseas production facilities.
3. Companies may choose for going international to find political stability, which is relatively good in other
countries.
4. To get technology and managerial know-how.
5. Companies often set up overseas plants to reduce high transportation costs.
6. Some companies set up plants overseas so as to be close to their raw materials supply and to the markets for
their finished products. Other developments also contribute to the increasing international of business.
7. The US, Canada and Mexico have signed the North American Free Trade agreement (NAFTA), which will
remove all barriers to trade among these countries.
8. The creation of the World Trade Organization (WTO) is stimulating increased cross-border trade.

FEATURES

The following are the features of the current phase of globalization:

New Markets

1. Growing global markets in services – banking, insurance, and transport.

2. New financial markets - deregulated, globally linked, working around the clock, with action at a distance in
real time, with new instruments such as derivatives.
3. Deregulation of anti - trust laws and proliferation of mergers and acquisitions.
4. Global consumer markets with global brands.

New Actors

1. Multinational corporations integrating their production and marketing, dominating food production.
2. The World Trade Organization - the first multilateral organization with authority to enforce national
governments compliance with rule.
3. An international criminal court system in the making.
4. A booming international network of NGOs.
5. Regional blocs proliferating and gaining importance – European Union, Association of South- East Asian
Nations, Mercosur, North American Free Trade Association, Southern African Development Community,
among many others.
6. More policy coordination groups – G-7, G40, G22, G77, and OECD etc.

New Rules and Norms

 1. Market economic policies spreading around the world, with greater privatization and liberalization than in
earlier decades.
2. Widespread adoption of democracy as the choice of political regime.
3. Human rights conventions and instruments building up in both coverage and number of signatories – and
growing awareness among people around the world.
4. Consensus goals and action agenda for development.
5. Conventions and agreements on the global environment – biodiversity, ozone layer, disposal of hazardous
wastes, desertification, climate change.
6. Multilateral agreements in trade, taking on such new agendas as environmental and social conditions.
7. New multilateral agreements- for services, intellectual property, communications – more binding on national
governments than any previous agreements.
8. The multilateral agreements on investment under debate.

New Tools of Communication

1. Internet and electronic communications linking many people simultaneously.

2. Cellular phones.
3. Fax machines.
4. Faster and cheaper transport by air, rail and road.
5. Computer-aided design.

STAGES OF GLOBALISATION

There are five different stages in the development of a firm into global corporations.

First Stage

The first stage is the arm’s length service activity of essentially domestic company, which moves into new markets
overseas by linking up with local dealers and distributors.

Second Stage

In the stage two, the company takes over these activities on its own.

Third Stage

In the next stage, the domestic based company begins to carry out its own manufacturing, marketing and sales in the
key foreign markets.

Fourth Stage

In the stage four, the company moves to a full insider position in these markets, supported by a complete business
system including R & D and engineering. This stage calls on the managers to replicate in a new environment the
hardware, systems and operational approaches that have worked so well at home.

Fifth Stage

In the fifth stage, the company moves toward a genuinely global mode of operation.

FACTORS FAVOURING GLOBALISATION IN INDIA

 Human resources.

 Wide base.

 Growing Entrepreneurship.

 Growing domestic market.

 Niche market.

 Expanding market.

 Transnationalisation of world economy.

 Economic liberalisation.

 Competition.
GLOBALISTION IN INDIA-OBSTACLES

 Government policy and procedures.

 High cost.

 Poor infrastructure.

 Obsolescence.

 Resistance to change.

 Poor quality image.

 Supply problem.

 Small size.

 Lack of experience.

 Limited R&D and marketing research.

 Growing competition

 Trade barriers

The intent of globalisation is efficiency improvement and market optimisation taking advantage of the
opportunities of the global environment. Therefore, in many cases, Indian companies have to globalise to
survive and grow in the emerging competitive environment.

The limitations of national market, the diversity and unevenness of resource endowment of different nations,
complexity of technological development, differences in the level of development and demand pattern,
production efficiencies, cost etc are few factors that enforces the need for globalised operations. This is the
reason because of which not only India but also a number of developing nations which, in the past, were
against globalisation have now opened their doors for globalisation.

IMPACT OF GLOBALISATION ON INDIAN ECONOMY

In India, the process of dismantling trade barriers was started in 1991 and subsequently, every year the Government
has been announcing reduction in custom duties and removing quantitative restrictions. It is argued that this shall
enable free flow of goods, capital and technology and thus globalization becomes a motivating force for nations to
develop themselves at a faster rate. For a developing country like India, it opens access to new markets and new
technology. Thus, the import-substitution strategy has been replaced by export led growth during the last decade in
India. The recent developments in information and communications technology have further facilitated and
accelerated the pace of globalization. International financial markets, trans border production networks and
acceleration in capital flows across national frontiers have been the driving forces leading to greater global integration
of the economies.

Question 9: Define the term Liberalization, Privatization and Globalization? What is the Impact of
Government Policy Changes on Business andIndustry?

Answer: The economic reforms that were introduced were aimed at liberalizing the Indian business and industry
from all unnecessary controls and restrictions.They indicate the end of the licence-permit-quota raj.Liberalization of
the Indian industry has taken place with respect to:

1. Abolishing licensing requirement in most of the industries except a short list,

2. Freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of
business activities,
3. Removal of restrictions on the movement of goods and services,
4. Freedom in fixing the prices of goods services,
5. Reduction in tax rates and lifting of unnecessary controls over the economy,
6. Simplifying procedures for imports and experts, and
7. Making it easier to attract foreign capital and technology to India.

The new set of economic reforms aimed at giving greater role to the private sector in the nation building process and a
reduced role to the public sector. To achieve this, the government redefined the role of the public sector in the New
Industrial Policy of 1991.The purpose of the sale, according to the government, was mainly to improve financial
discipline and facilitate modernization. It was also observe that private capital and managerial capabilities could be
effectively utilized to improve the performance of the PSUs. The government has also made attempts to improve the
efficiency of PSUs by giving them autonomy in taking managerial decisions.

Globalization is defined as follow:

Globalizations are the outcome of the policies of liberalization and privatization.Globalization is generally understood
to mean integration of the economy of the country with the world economy, it is a complex phenomenon. It is an
outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and
integration. It involves creation of networks and activities transcending economic, social and geographical
boundaries.Globalization involves an increased level of interaction and interdependence among the various nations of
the global economy.Physical geographical gap or political boundaries no longer remain barriers for a business
enterprise to serve a customer in a distant geographical market.

The Impact of Government Policy Changes on Business and Industry are as follows:

1. Increasing competition: As a result of changes in the rules of industrial licensingand entry of foreign firms,
competition for Indian firms has increased especially in service industries like telecommunications, airlines,
banking, insurance, etc. which were earlier in the public sector.
2. More demanding customers: Customers today have become more demandingbecause they are well-
informed. Increased competition in the market gives the customers wider choice in purchasing better quality
of goods and services.
3. Rapidly changing technological environment: Increased competition forces thefirms to develop new ways
to survive and grow in the market. New technologies make it possible to improve machines, process, products
and services. The rapidly changing technological environment creates tough challenges before smaller firms.
4. Necessity for change: In a regulated environment of pre-1991 era, the firms couldhave relatively stable
policies and practices. After 1991, the market forces have become turbulent as a result of which the
enterprises have to continuously modify their operations.
5. Threat from MNC: Massive entry of multi nationals in Indian marker constitutes newchallenge. The Indian
subsidiaries of multi- nationals gained strategic advantage. Many of these companies could get limited support
in technology from their foreign partners due to restrictions in ownerships. Once these restrictions have been
limited to reasonable levels, there is increased technology transfer from the foreign partners.