Economic Environment

Of

Business

Assignment # 1

Submitted by:-

Rahul Vashisht
Roll No.-00216609809
2ndSemester
MBA(Consultancy)

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 Que.1
Compare and contrast the advantages and disadvantages of
Capitalism and socialism

Ans.1
Capitalism:-
Profit oriented system which is characterized by private ownership of objects
of labor, instruments of labor and means of labor. Production is mainly
carried out with the help of labors services rendered by the working
class in return for wages & the class of capitalists had the sight to
whether output is produced in the system.

Properties of Capitalism

• Social/cultural rules and political laws define the environment.

• Supply and demand provide environmental pressures.
• Those that best "fit" that environment survive and maintain the rules/laws.
• Those that can't/don't thrive in the system, and otherwise lack participation, are culled.
• Successful capitalistic systems tend to be open and competitive.
• A healthy capitalistic system results in economic incentives.

Advantages of Capitalism

• Capitalism is an internally stable economic system, in that it is consistent with human

behavior. People understand that life is not fair - there's no "free lunch". You have to
work to survive, and only the lucky who manage to thrive within the socio-economic
matrix make it to the top. As long as there is a belief/hope that one can advance in the
system, there is an incentive to participate.
• Capitalism is also externally stable, in that survival in a capitalistic system requires
innovation and flexibilty to keep up with the changes in supply and demand. Such a
system is generally prepared to deal with the influx of competition from external sources.
• Large populations are likely to be diverse, which is beneficial to healthy capitalistic
systems.
• Large, diversified societies tend to gravitate towards heirarchical social systems;
capitalism easily adapts to such structures.

Disadvantages of Capitalism

• It is not acceptable in most modern societies to allow portions of their population to be

"culled".

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 • Those in power tend to construct rules that limit diversity and competition, thereby
weakening the flexibility and strength of the system as a whole.
• A vast imbalance in opportunity encourages revolt, which disrupts and destabilizes the
system.

Remedies for Capitalism

• Create secondary social mechanisms to support those that do not "fit" in the socio-
economic system.
• Encourage the inclusion of all members of the population to compete, and open up
competition to external markets, in order to maximize diversity and flexibility.
• Educate the elite to the systemic benefits of resource distribution, and encourage
incentives for such distribution.

Socialism:-

There is not only social ownership of the product but also the of the economy
is such so as to maximize social benefit rather than private benefit. Instead of
the market mechanism playing the all dominating role of the determining the
types & quantity of various commodities sequence & the necessary allocation
of resources the national planning agency after making an estimate of the
goods & services required to maximize social welfare draws out the basic of
& development plans for the economy.

Properties of Socialism

• All members of the economy share both work and benefits.

• Those that do not provide their share of effort and resources to the system are culled.
• Successful communistic systems tend to be small and homogeneous.
• A healthy communistic system results in a cooperative society.

Advantages of Socialism

• Communism is an internally stable economic system, in that those that participate benefit
and those that don't are culled - creating an incentive to participate.
• Communism requires common goals and agreed upon rules/laws to allocate
responsibilities and resources. If successful, this leads to a spirit of sharing - which builds
stronger social communities, creating a stabler economy.
• Due to their sense of cooperation, healthy communistic systems are very efficient at
distributing resources within their localized areas - particularly in times of need.

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Disadvantages of Socialism

• Large or geographically broad populations tend to be diverse, making it difficult to

maintain a common goal or set of rules for shared effort and resources.
• Large, diversified societies tend to gravitate towards systems of hierarchy, reducing the
perception of fair distribution of work and resources - which can destablize a
communistic society.
• Allowing an influx external culture increases the likelihood of destablizing the
homogeneity of the society. As such, communistic systems tend to block out external
cultures and exclude outside competition, weakening the system's ability to learn from, or
compete with, external economies.

Remedies for Socialism

• Keep the society small and homogeneous, and minimize hierarchies.

• Block out external cultural influences and control external trade.

Que. 2(a)
Explain India’s latest Industrial Licensing Policy?
Ans.2 (a)
Industrial Policy:-

Main features

Objectives of the Industrial Policy of the Government are –

• to maintain a sustained growth in productivity;

• to enhance gainful employment;
• to achieve optimal utilisation of human resources;
• to attain international competitiveness and
• to transform India into a major partner and player in the global arena.

Policy focus is on –

• Deregulating Indian industry;

• Allowing the industry freedom and flexibility in responding to market forces and
• Providing a policy regime that facilitates and fosters growth of Indian industry.

Policy measures

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Some of the important policy measures announced and procedural simplifications undertaken to
pursue the above objectives are as under:

i) Liberalisation of Industrial Licensing Policy

The list of items requiring compulsory licensing is reviewed on an ongoing basis. At present,
only six industries are under compulsory licensing mainly on account of environmental, safety
and strategic considerations. Similarly, there are only three industries reserved for the public
sector.

ii) Introduction of Industrial Entrepreneurs’ Memorandum(IEM)

Industries not requiring compulsory licensing are to file an Industrial Entrepreneurs’

Memorandum (IEM) to the Secretariat for Industrial Assistance (SIA). No industrial approval is
required for such exempted industries. Amendments are also allowed to IEM proposals filed
after 1.7.1998.

iii) Liberalisation of the Locational Policy

A significantly amended locational policy in tune with the liberlised licensing policy is in place.
No industrial approval is required from the Government for locations not falling within 25 kms
of the periphery of cities having a population of more than one million except for those industries
where industrial licensing is compulsory. Non-polluting industries such as electronics, computer
software and printing can be located within 25 kms of the periphery of cities with more than one
million population. Permission to other industries is granted in such locations only if they are
located in an industrial area so designated prior to 25.7.91. Zoning and land use regulations as
well as environmental legislations have to be followed.

iv) Policy for Small Scale Industries

Reservation of items of manufacture exclusively for the small scale sector forms an important
focus of the industrial policy as a measure of protecting this sector. Since 24th December 1999,
industrial undertakings with an investment upto rupees one crore are within the small scale and
ancillary sector. A differential investment limit has been adopted since 9th October 2001 for 41
reserved items where the investment limit upto rupees five crore is prescribed for qualifying as a
small scale unit. The investment limit for tiny units is Rs. 25 lakhs.

749 items are reserved for manufacture in the small scale sector. All undertakings other than the
small scale industrial undertakings engaged in the manufacture of items reserved for manufacture
in the small scale sector are required to obtain an industrial licence and undertake an export
obligation of 50% of the annual production. This condition of licensing is, however, not
applicable to those undertakings operating under 100% Export Oriented Undertakings Scheme,
the Export Processing Zone (EPZ) or the Special Economic Zone Schemes (SEZs).

V) Non-Resident Indians Scheme

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The general policy and facilities for Foreign Direct Investment as available to foreign
investors/company are fully applicable to NRIs as well. In addition, Government has extended
some concessions specially for NRIs and overseas corporate bodies having more than 60% stake
by the NRIs. These inter-alia includes (i) NRI/OCB investment in the real estate and housing
sectors upto 100% and (ii) NRI/OCB investment in domestic airlines sector upto 100%.

NRI/OCBs are also allowed to invest upto 100% equity on non-repatriation basis in all
activities except for a small negative list. Apart from this, NRI/OCBs are also allowed to invest
on repatriation/non-repatriation under the portfolio investment scheme.

vi) Electronic Hardware Technology Park (EHTP)/Software Technology Park (STP)

scheme

For building up strong electronics industry and with a view to enhancing export, two schemes
viz. Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) are in
operation. Under EHTP/STP scheme, the inputs are allowed to be procured free of duties.

The Directors of STPs have powers to approved fresh STP/EHTP proposals and also grand post-
approval amendment in repsect of EHTP/STP projects as have been given to the Development
Commissioners of Export Processing Zones in the case of Export Oriented Units. All other
application for setting up projects under these schemes, are considered by the Inter-Ministerial
Standing Committee (IMSC) Chaired by Secretary (Information Technology). The IMSC is
serviced by the SIA.

vii) Policy for Foreign Direct Investment (FDI)

Promotion of foreign direct investment forms an integral part of India’s economic policies. The
role of foreign direct investment in accelerating economic growth is by way of infusion of
capital, technology and modern management practices. The Department has put in place a liberal
and transparent foreign investment regime where most activities are opened to foreign
investment on automatic route without any limit on the extent of foreign ownership. Some of the
recent initiatives taken to further liberalise the FDI regime, inter alia, include opening up of
sectors such as Insurance (upto 26%); development of integrated townships (upto 100%);
defence industry (upto 26%); tea plantation (utp 100% subject to divestment of 26% within five
years to FDI); Encenhancement of FDI limits in private sector banking, allowing FDI up to
100% under the automatic route for most manufacturing activities in SEZs; opening up B2B e-
commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail
to 100% foreign investment subject to 26% divestment condition; etc.

The Department has also strengthened investment facilitation measures through Foreign
Investment Implementation Authority (FIIA).

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 Que. 2(b)
Explain Foreign Exchange Management Act?

Ans. 2(b)
FEMA(Foreign Exchange Management Act)

The Indian government has formulated the Foreign Exchange Management Act (FEMA), which
relates to the foreign direct investment in the country. Foreign Exchange Management Act
(FEMA) has assisted the country by encouraging external payment and trade.

Formulation of Foreign Exchange Management Act (FEMA):

The Indian government formulated the Foreign Exchange Management Act (FEMA) in 1999. On
the 1st of June, 2000, FEMA came into existence replacing the Foreign Exchange Regulation
Act (FERA), which was formulated in 1973.In India, Extensive economic reforms were
undertaken in the early 1990s and this led to the deregulation and liberalization of the country's
economy. Therefore, Foreign Exchange Management Act (FEMA) was formulated in order to be
compatible with the policies of pro- liberalization of the Indian government.

Extent of Foreign Exchange Management Act (FEMA):

Foreign Exchange Management Act (FEMA) is applicable to the entire country. Agencies,
offices and branches, outside India, which are owned by Indian residents, also fall under the
jurisdiction of this act. Foreign Exchange Management Act (FEMA) also extends to any dispute
that are committed in offices, agencies and branches outside India owned by individuals covered
by this act.

Objectives of Foreign Exchange Management Act (FEMA):

Among the various objectives of the Foreign Exchange Management Act (FEMA), an important
one is to unite and revise all the laws that relate to foreign exchange. Further foreign Exchange
Management ACT (FEMA) aims to promote foreign payments and trade in the country. Another
significant objective and goal of the Foreign Exchange Management Act (FEMA) is to
encourage the orderly maintenance and development of the foreign exchange market in India.

Implementation of Foreign Exchange Management Act

Extensive efforts have been undertaken to ensure the effective implementation of FEMA in
India. Proper implementation and efficient supervision are the significant preconditions for the
success of the Foreign Exchange Management Act (FEMA).

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When a business enterprise imports goods from other countries, exports its products to them or
makes investments abroad, it deals in foreign exchange. Foreign exchange means 'foreign
currency' and includes:- (i) deposits, credits and balances payable in any foreign currency; (ii)
drafts, travellers' cheques, letters of credit or bills of exchange, expressed or drawn in Indian
currency but payable in any foreign currency; and (iii) drafts, travellers' cheques, letters of credit
or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian
currency.

In India, all transactions that include foreign exchange were regulated by Foreign Exchange
Regulations Act (FERA),1973. The main objective of FERA was conservation and proper
utilisation of the foreign exchange resources of the country. It also sought to control certain
aspects of the conduct of business outside the country by Indian companies and in India by
foreign companies. It was a criminal legislation which meant that its violation would lead to
imprisonment and payment of heavy fine. It had many restrictive clauses which deterred foreign
investments.

In the light of economic reforms and the liberalised scenario, FERA was replaced by a new Act
called the Foreign Exchange Management Act (FEMA),1999.The Act applies to all
branches,offices and agencies outside India,owned or controlled by a person resident in India.
FEMA emerged as an investor friendly legislation which is purely a civil legislation in the sense
that its violation implies only payment of monetary penalties and fines. However,under it, a
person will be liable to civil imprisonment only if he does not pay the prescribed fine within 90
days from the date of notice but that too happens after formalities of show cause notice and
personal hearing. FEMA also provides for a two year sunset clause for offences committed under
FERA which may be taken as the transition period granted for moving from one 'harsh' law to
the other 'industry friendly' legislation.

Broadly,the objectives of FEMA are: (i) To facilitate external trade and payments; and (ii) To
promote the orderly development and maintenance of foreign exchange market. The Act has
assigned an important role to the Reserve Bank of India (RBI) in the administration of FEMA.
The rules,regulations and norms pertaining to several sections of the Act are laid down by the
Reserve Bank of India, in consultation with the Central Government. The Act requires the
Central Government to appoint as many officers of the Central Government as Adjudicating
Authorities for holding inquiries pertaining to contravention of the Act. There is also a provision
for appointing one or more Special Directors (Appeals) to hear appeals against the order of the
Adjudicating authorities. The Central Government also establish an Appellate Tribunal for
Foreign Exchange to hear appeals against the orders of the Adjudicating Authorities and the
Special Director (Appeals). The FEMA provides for the establishment, by the Central
Government, of a Director of Enforcement with a Director and such other officers or class of
officers as it thinks fit for taking up for investigation of the contraventions under this Act.

FEMA permits only authorised person to deal in foreign exchange or foreign security. Such an
authorised person, under the Act, means authorised dealer,money changer, off-shore banking
unit or any other person for the time being authorised by Reserve Bank. The Act thus prohibits
any person who:-

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 Deal in or transfer any foreign exchange or foreign security to any person not being an
authorized person;
 Make any payment to or for the credit of any person resident outside India in any manner;
 Receive otherwise through an authorized person, any payment by order or on behalf of
any person resident outside India in any manner;
 Enter into any financial transaction in India as consideration for or in association with
acquisition or creation or transfer of a right to acquire, any asset outside India by any
person is resident in India which acquire, hold, own, possess or transfer any foreign
exchange, foreign security or any immovable property situated outside India.