Course Pack

Subject Title: Business Environment

Course Code: 201
Course: BBA
Semester: II
Year: 2023-24
Course Instructors: Ms. Gurpreet Kaur
Ms. Deepshikha Gandhi
Ms. Neha Guliani
Course Leader: Dr. Mani Bansal

Dr. Pankaj Saini Dr. Parul Agarwal Dr.Yamini Agarwal

Checked by: Program Coordinator Forwarded by: HOD Approved by: Director

Institute of Management & Research, New Delhi

An ISO 9001:2015 & 14001:2015 Certified Institute

A-4, Paschim Vihar, New Delhi – 110063

(Ph.: 011-25284396, 25285808 Fax: 011-25286442)

“Strictly for internal use only”

BVIMR SNAPSHOT

Establishedin1992, Bharati Vidyapeeth (Deemed to be University) Institute of Management and

Research (BVIMR), New Delhi focuses on imbibing the said values across various stakeholders
through adequate creation, inclusion and dissemination of knowledge in management
education. The institute has over the past few years emerged in the lead with a vision of
Leadership in professional education through innovation and excellence. This excellence is
sustained by consistent value enhancement and initiation of value-added academic processes in
institute's academic system.

Based on the fabulous architecture and layout on the lines of Nalanda Vishwa Vidyalaya, the
institute is ascenic marvel of lush green landscape with modern interiors. The Institute which is
ISO9001:2015 certified is under the ambit of Bharati Vidyapeeth University (BVU), Pune as
approved by Govt. of India on the recommendation of UGC under Section3 of UGC Act vide its
letter notification No.F.9–16/2004–U3 dated 25th February, 2005.

Strategically located in West Delhi on the main Rohtak Road, BVIMR, New Delhi has splendid
layout on sprawling four acres of plot with 'state-of-art' facilities with all classrooms, Library
Labs, Auditorium etc., that are fully air-conditioned. The Institute that has an adjacent Metro
station “Paschim Vihar (East)”, connects the entire Delhi and NCR.

We nurture our learners to be job providers rather than jobseekers. This is resorted to by
fostering the skill and enhancement of knowledge base of our students through various
extracurricular, co-curricular and curricular activities by our faculty, who keep themselves
abreast by various research and FDPs and attending Seminars/Conferences. The Alumni has a
key role here by inception of SAARTHI Mentorship program who update and create
professional environment for learners centric academic ambiance and bridging industry-
academia gap.

Our faculty makes distinctive contribution not only to students but to Academia through
publications, seminars, conferences apart from quality education. We also believe in enhancing
corporate level interaction including industrial projects, undertaken by our students under
continuous guidance of our faculty. At BVIMR, we are imparting quality education in
management at Doctorate, Post Graduate and Under Graduate levels.
 PROFILE OF THE COURSE INSTRUCTORS
S.no Name of Faculty Profile
1. Dr. Mani Bansal Dr. Mani Bansal is a Guest Faculty in Bharati Vidyapeeth Institute
(Guest Faculty) of Management and Research, New Delhi. She has 10+ years of
experience in teaching and research. Areas of research interest
include: Wisdom Management, Knowledge Management, Talent
Management, Organizational Behaviour, Human Resource
Development. Currently she is a visiting faculty with Bharati
Vidyapeeth (Deemed To Be University) Institute of Management
and Research, New Delhi. She has published research papers in
National/International journals. She has organized national
conference, faculty development program, seminars and the
member of the cultural committee. . She is also associated taking
sessions on organizational behaviour topics like stress
management, change management, wisdom management.

2. Ms. Neha Guliani

(Guest Faculty) She is B. Tech in Electrical Engg. And MTech in Electronics and
Communication Engg, also pursuing Ph.D. in Electronics and
Communication Engg. Ms. Neha has a flair for teaching and
research in the area of ECE, Innovation and Technology, Business
Communication. Currently with 14.5 years of teaching experience,
in various engineering and management institutes, she is
presently working with Bharati Vidyapeeth (deemed to be
University) Institute of Management & Research, New Delhi, as a
Guest Faculty.Ms. Neha has been teaching subjects like Business
Communication, Business Ethics, Start-up Management, Social
Media Management specifically to UG & PG students of
Management courses and Computer Application trying to induce
the understanding. She has published various quality research
papers in various National and International Conferences.

3. Ms. Deepshikha Ms. Deepshikha Gandhi is an Assistant professor (visiting

Gandhi faculty) at BVIMR, New Delhi. She is working as an Assistant

Professor since year 2011. Her subject areas are Accounting,

Economics, Marketing, Business, Statistics etc. She has been

qualified UGC-NET. She is a Post-graduate in Commerce. Apart

from this, she has also completed her Bachelor’s in Education in

 the year 2018. She has passed IELTS (International English

language testing system) exam also in 2018 with 8 bands.

Furthermore, she has attended many Conferences at National and

International level.

4. Ms. Gurpreet Kaur

 Table of Contents

S.n Particulars
o Page
no.
1 COURSE OUTLINE

2 Unit-1

3 Unit- 2

4 Unit- 3

5 Unit-4

6 Unit-5
 BBA: Semester II, Academic Year 2023-24

1. COURSE CODE: 201

2. COURSE TITLE: BUSINESS ENVIRONMENT
3. COURSE OBJECTIVES:

COURSE OBJECTIVES
• To develop skills in recognizing and analyzing ethical issues
• To define cross cultural variations and similarities in organizational practices in
corporate socialresponsibility and business ethics
• To understand sources of organizational ethical culture and deviant behavior
• To design ethical programs designed to accomplish specific objectives in organizations
• To develop ethical leadership skills
• To develop skills in recognizing and analyzing ethical issues and present this analysis
in writtenform
• To understand cross cultural variations and similarities in organizational practices in
corporatesocial responsibility and business ethics
• To diagnose sources of organizational ethical culture and deviant behavior
• To design ethical programs designed to accomplish specific objectives in organizations
• To develop ethical leadership skills and practices

4. COURSE TEACHING AND LEARNING ACTIVITIES

1. Discussion on different emerging issues of corporates and global economies with regard to
lack of ethics, business frauds,, scams, misappropriation of funds with Group Discussion, Case
Studies, news, articles etc.
2. Organize Role Play (classes), One Act Play (Auditorium) to encourage students to show
theircreativity, critical thinking, and innovative ideas for promotion of ethical conduct and
behaviour.
3. PPT Presentation to encourage students for public speaking, to make power point presentations.
4. Moodle test to assess their learning and learn time management during online exams.

5. LEARNING OUTCOMES OF SUBJECT:

LO1. Argumenting the importance of ethics in business and business communication
interpersonalrelationships
LO2. Ability to apply critical and argumentative thinking in the business judgment
LO3. Evaluate the application of fundamental ethical principles in the business decision-making
andaction taking
LO4. Analyse the relationship between macroeconomic policy and good economics, the importance
ofcorporate social responsibility
LO5. Evaluate the importance of the care for the environment and education
LO6. Be able to prepare a code of ethics as a statement of norms and beliefs, and shape the company
andstrategy in business practice companies.
6. UNIVERSITY SYLLABUS
Module Contents/Concepts

Unit-1 Business Environment – Concept – Significance – Factors - Internal and

external environment, micro environment, macro environment. - Types of
environment. – Environmental influence on Business.

Unit-2 Economic Environment: Nature of economy, structure of the

economy, economic policies, economic conditions.
Political Environment: Economic roles of the government, government and
legal environment, economic roles of government of India.

Unit-3 Technological Environment: Concept and significance of technological

environment, regulation of foreign investment and collaboration.

Social Environment: Business and society, business and culture, language,

culture and organizational behaviour, other social/cultural factors, social
responsibility of business

Unit-4 Financial Environment - Financial System – Commercial banks -

Financial Institutions – RBI- Stock Exchange.
Legal Environment of Business – Implementations on business –
Corporate Governance.

Unit-5 Global Environment: Global Trends in Business and Management - MNCs -

Importance, Advantages and Weakness of MNCs - Foreign Capital and
Collaboration - Trends in Indian Industry.
7. EVALUATION CRITERIA FOR ASSESSMENT (Marks 100)

Component Description Weight Objective

First Internal First internal would be of Marks 40 Mark To evaluate student’s

based on first three units 1, 2 & 3 s 10 cognitive skills
which would be further reduced to (Think, read, learn,
weigh age of Marks 10 remember, reason,
and pay
attention) for first
halfof the course.
Second Internal Second internal will be of Marks 40 Mark To evaluate student’s
based on last three units which would be s 10 cognitive skills
further reduced to weight age of Marks (Think, read, learn,
10 remember, reason,
and pay attention) for
rest half of
the course.
CES activities There would be a class test quiz for Mark To recall their subject
1- class test which s learning.
individual assessment will be done . 5
2-Case study There would be a written case study test. Mark To evaluate their
s5 comprehension
an
danalytical skills.
3- Presentation There would be a PowerPoint presentation Mark To evaluate their
in a s conceptual
group of four on project report. 5 knowledge.
Class participation Class notes and involvement of students To encourage and
&75% attendance will bechecked by faculty during semester. Mark enhanceclass
s 10 participation
Project 1. Submission of Project Mark To associate their
Report Report(20 Marks) s 50 subject learning with
Submission 2. VIVA (30 Marks) (20+30) problem’s assessment
an
d implementing the
same in putting
forward their
views.
Note: All CES activities are mandatory. Only two best CES marks are considered .If one miss
any CES
then the weightage of one CES would be 3.3 marks.
8. RECOMMENDED/REFERENCE BOOKS

Sr.No. NameoftheAuthor Title oftheBook Year of Publisher

Editio
n
01 Francis Business 2010 Himalaya
Cherunilam Environment Publishing
House
02 K. Aswathappa Essential of 2017 Himalaya
Business Publishing
Environme House
nt
03 Sherlekar S.A. Modern 2016 Himalaya
Business Publishin
Organization g House
and
Management
04 A.C. Fernando Business 2011 Pearson
Environment Education
India
05 Prof.M.B.Shukla business 2012 Taxmann’
environment text
and cases s
06 veena keshav pailwar Business 2014 PHI
Learning
Environment Pvt. Ltd.

9. Other Details :

Name of instructor: Dr. Mani Bansal, Ms. Gurpreet Kaur, Ms. Neha Gulliani, Ms.
Deepshikha Gandhi
Course Leader Dr. Mani Bansal
Course Type Regular
No of credits 3

Email: [email protected]

Department Management
BUSINESS ENVIRONMENT
UNIT-1
INTRODUCTION
Business is an organisation or enterprise engaged in producing goods and services
for profit motive. It is a collective effort where a firm is engaged in commercial,
industrial or professional activities. The main aim of business is to satisfy the
needs of customers. The success of every business depends on adapting itself to the
environment within which it functions. For example, with changes in the government
policies, the business needs to adapt itself with the new policies. Similarly, any
technological advancement may render the existing products obsolete, such as
the introduction of smartphones has replaced the telephone to a greater extent.
Therefore, it is very important to have a clear understanding of the basic concept of
business environment and the nature of its various components.

Business environment includes those external factors and institutions over which
it does not have any direct control. These factors affect the functioning of an
organisation directly or indirectly. These include customers, competitors, suppliers,
government, and the social, political, legal and technological factors, etc.

The set of external factors, such as economic factors, social factors, political and legal
factors, demographic factors, and technical factors, etc., which are uncontrollable in
nature and affect the business decisions of a firm, is called business environment.

The relationship between business and its environment can be explained by following
points:
 Business is affected by its environment and, in turn, to some extent, it will also
influence the external factors. Similarly, economic environment influences socio-
cultural environment and vice versa. Other environmental factors also have same
relationship with each other.
 The environmental factors are constantly changing. Similarly, business is also
dynamic.
 One business firm, by itself, may not be able to change its environment. But
together with other businesses, it will be in a position to mould the environment
in its favour.
In this chapter, you will study the concept of business environment, its components and how it is important
for organisations. You will also study about relationship between business environment and strategic
management.

CONCEPT OF BUSINESS ENVIRONMENT

In general sense, all businesses aim to achieve multiple objectives. A business manager identifies and sets
some important objectives like survival, stability, growth, profitability and efficiency. Enterprise needs to
balance these objectives. Profit is the biggest stimulus for the survival of the business and its future
development. There is always a risk involved in business and profit is the reward for taking the risk.
Business can be established, but it is difficult to survive in this competitiveworld where whole world is one
market. So, it is important for business to scan the environment.

Environment refers to all external forces which affect the functioning of business. Environment factors are
largely, if not totally, external and beyond the control of individual industrial enterprises and their
managements. The surrounding in which business operates is called business environment.

The word ‘Business Environment’ has been defined by various authors as follows:

According to Keith Davis, Business environment is the aggregate of all conditions, events and influences that
surround and affect it.

According to Reinecke and Schoell, the environment of business consists of all those external things to which it is
exposed and by which it may be influenced directly or indirectly.

These definitions give a clear understanding of the business environment. We can say that business
environment is a combination or mixture of complex, dynamic and uncontrollable external factors within
which a business is to be operated.

The change in tastes and preferences of customers, introduction of new technologies, innovations,
government policies, etc., all are parts of the business environment. Business needs to accept and adapt these
changes promptly to survive in the market. So, it is necessary for the business to analyse the business
environment.

NATURE OF BUSINESS ENVIRONMENT

The business environment of an organisation usually poses threats as well as opportunities. To grasp the
opportunities and reduce the threat, it is important to know the nature of business environment.
Following are some points which describe nature of business environment:
 Internal and external environment: Every business is surrounded by internal and external environment.
Internal environment can be controlled by an organisation, like men, money, material, machine and
method, whereas external environment is uncontrollable like political conditions, technologies, legal
regulations, etc.
 Dynamic and ever-changing: Business environment keeps on changing frequently
in terms of technologies, government rules and regulations, socio-economic
conditions, etc., which make business dynamic.
  Complexity of the environment: Business environment cannot be easily analysed
because of too much complexity involved. Environment consists of a number of factors, events,
conditions and influences, generating from different sources which impact business, thus, making the
business complex.
 Inter-relatedness: Factors of business environment are related to each other. For
example, change in political parties will result in changing the government rules, fiscal policies, market
conditions, technology, etc. So, all the factors need to be scanned properly because these factors are
inter-related to each other.
 Uncertainty: It is difficult to predict the changes going to take place in future
because environment keeps on changing. These changes are uncontrollable. So, business can only try
to combat from these challenges. For example, in case of fashion industries, changes take place so
frequently, economy could collapse any time.
 Impact: Impact means the effect of environment on business. Business
environment has both long-term and short-term impacts on business. For example, different firms may
get influenced differently from change in monetary policy.
 Inter-dependence: A business firm and its environment are mutually
interdependent. The economic status of a country affects the development of technology or it may
change the lifestyle of people.

SCOPE OF BUSINESS ENVIRONMENT

The aspects which fall under business environment are as follows:
 Internal and external environment: Internal environment includes all those
factors that are within an organisation and impart strength or cause weakness in business. For
example, inefficient human resource, superior raw material, etc.
External environment includes those factors which are beyond the control of business and are outside the
organisation. They provide opportunities and pose threat to business. For example, change in political
conditions, technologicalchange, etc.
 Specific and general environment: Specific environment includes external
forces that directly impact or influence organisations’ decisions and actions and are directly relevant to
the achievement of organisations’ goals. The main forces that make up the specific environment are
customers, suppliers, competitors and pressure groups.
General environment includes the economic, political/legal, socio-cultural, demographic, technological and
global conditions that affect organisations. External forces do not affect organisations to a great extent,
but organisations mustplan, organise, lead and control their activities taking into account these factors.
 Micro environment and macro environment: Micro environment impacts the
working of a particular business. It has direct impact on business activities. It includes customers,
suppliers, market intermediaries, competitors, etc. These
factors are controllable to some extent.
 Macro environment is general environment that impacts the working of all
businesses. It is uncontrollable and influences indirectly. Political conditions,
economy, technology, etc., come under macro environment.
 Controllable and uncontrollable environment: All those factors which are
governed by business come under controllable environment. Internal factors are
treated as controllable factors, like men, material, machine, money, etc.
Uncontrollable factors are external and are beyond the control of business like
technological change and law related change.

IMPORTANCE OF BUSINESS ENVIRONMENT

Following points describe the importance of business environment:
 Identification of business opportunities: Many opportunities are provided by business environment
to the organisation. Scanning business environment would help business get the first mover
advantage. If changes are analysed carefully, then they can be the reason for business success.
 Optimum utilisation of resources: Resources like raw material, machine, money, labour, etc., are
input for business. All these inputs are provided by environment to the business firms for carrying out
their activities and also expect something inreturn.
 Identification of threat and early warning signal: Business can recognise the threat by analysing the
change taking place in the environment. For example, if any new multinational company is entering
the Indian market, the manager of an Indian firm dealing with same product as that of the multinational
company shouldtake it as a warning signal. Before the MNC launches its product, the manager should
implement measures, such as improving the quality of his product and heavy advertisement.
 Coping with the rapid changes: To efficiently cope with these changes, managersmust understand the
environment and should adopt appropriate courses of action at the right time. It helps management
become more sensitive to ever-changing needs of customers. As a result, they are able to respond to such
changes effectively.
 Meeting competition: This helps firms analyse competitors’ strategies and formulate their strategies
accordingly.
 Identifying firm’s strength and weakness: Business environment helps identify the individual
strength and weakness in view of the technological and global developments.
 Assisting in planning and policy formulation: Business environment brings both threats and
opportunities to a business. Having a good understanding of the business environment can
immensely help an organisation’s management in their future planning and decision-making
endeavours. For example, competitionincreases with the entry of new firms in the market.
The management has to draft new plans and policies to deal with new competitors.
Environmental awareness provides intellectual stimulation to planners in their
decision making. They can make changes in their plans efficiently and effectively.`
 COMPONENTS OF BUSINESS ENVIRONMENT
The performance of an organisation is affected by the business environment. It has a far-reaching impact on
its survival, profit and growth. There are certain forces inside and outside the organisation. These
forces affect the business both in positive and negative ways.

Figure 1 displays components of business environment:

Business Environment

External Environment Internal Environment

• Value System
• Mission and
Micro Environment Macro Environment Objectives
• Organisation
Structure
• Suppliers of Inputs • Economic • Corporate Culture
• Customers • Political-legal • Human Resources
• Marketing • Technological • Physical
Intermediaries • Global or International Resources
• Competitors • Socio-cultural and Financial
• Public • Demographic Capabilities
• Natural

FIGURE 1: Components of Business Environment

Various components of business environment are as follows:

 Internal environment: These are those factors or conditions that exist within an
organisation and affect its performance. These factors are controllable in nature and organisation can
try to change or modify these factors. Organisation’s resources like men, material, money, method and
machine come under internal environment. Various internal factors are as follows:
⚫ Value system: The values are the ethical beliefs that guide the organisation in
achieving its mission and objectives. It is framed by top-level managers like
board of directors. The extent to which the value system is shared by all in theorganisation is an
important factor contributing to its success.
 ⚫ Mission and objectives: The objective is the end towards which business
activities are directed. All businesses focus on maximisation of profit.
Mission is defined as the overall purpose or reason for its existence. A mission
guides and influences an organisation’s decisions and economic activities. An
organisation can change or modify its mission and objective accordingly.
⚫ Organisation structure: The organisational structure is the hierarchy in
business that define roles, responsibilities and supervision. The composition
of the board of directors, the professionalism of management, etc., come
under organisation structure and are important factors influencing business
decisions. For efficient working of a business organisation and to facilitate
prompt decision making, the organisation structure should be conducive.
⚫ Corporate culture: Shared values and belief in an organisation which
determine its internal environment are called corporate culture. Organisation
where there is strict supervision and control results in lack of flexibility and
unsatisfied employees. The sets of values that help members understand what
organisation stands for how it does work, what it considers, cultural values of
business forces of business, and so on. It helps in direction of activities.
⚫ Human resources: Human quality of a firm is an important factor of internal
environment. Skills, qualities, capabilities, attitude, competencies and
commitment of its employees, etc., could contribute to the strengths and
weaknesses of an organisation. Organisations may find it difficult to carry out
modernisation and redesigning because of resistance by its employees.
⚫ Physical resources and financial capabilities: Physical resources, such as
plant and equipment, facilities and financial capabilities of a firm determine its
competitive strength which is an important factor for determining its efficiency
and unit cost of production. Also research and development capabilities of
a company determine its ability to introduce innovations which enhance the
productivity of workers. Financial capabilities are company’s source of fund
generation.
 External environment: These are those factors and the conditions which are
outside the organisation and affect the performance of business. External factors
are further divided into micro environment and macro environment which are as
follows:
⚫ Micro environment: Those factors which have direct impact on business. The
various constituents under micro environment are as follows:
✓ Suppliers of inputs: The suppliers of inputs are important factors in the
external micro environment of a firm. Suppliers provide raw material
and resources to the firm. A firm should have more than one supplier for
proper inflow of inputs.
✓ Customers: They are the buyers of firm’s products and services. Customers
are an important part of external micro environment because sales of a
product or service are critical for a firm’s survival and growth, so it is
necessary to keep the customers satisfied.
 ✓ Marketing intermediaries: Intermediaries play an essential role of
selling and distributing its products to the final customers. Marketing
intermediaries are an important link between a business firm and its
ultimate customers. Retailers and wholesalers buy in bulk and sell business
products and services to the ultimate consumer.
✓ Competitors: Competitors are the rivalry in business. Competition can
based on pricing of products or based on competitive advertising. For
example, organisations may sponsor some events to promote the sale
of different varieties and models of their products. Business formulates
strategies after analysing their competitor.
✓ Public: Public or groups, such as environmentalists, media groups,
women’s associations, consumer protection groups, are important factors
in external micro environment. Public, according to Philip Kotler, is any
group that has an actual or potential interest in or impact on the company’s ability
to achieve its objective.
⚫ Macro Environment: These are the factors or conditions which are general to
all businesses and are uncontrollable. Because of the uncontrollable nature of
macro forces, a firm needs to adjust or adapt it to these external forces. These
factors are as follows:
✓ Economic environment: All those forces which have an economic impact
on businesses are called economic environment. It includes agriculture,
industrial production, infrastructure, and planning, basic economic
philosophy, stages of economic development, trade cycles, national
income, per capita income, savings, money, etc., For example, low per
capital income will negatively impact business because people have less
money to spend.
✓ Political-legal environment: The activities of legislature, executive and
judiciary play a vital role in shaping, directing, developing and controlling
business activities. Rules and regulations, framed by the government, like
licensing policy, polythene ban, etc., affect the business. Business growth
can be achieved by using a stable and dynamic political-legal environment.
✓ Technological environment: Systematic application of scientific or other
organised knowledge to practical tasks or activities is called technology.
As it is changing fast, businessmen should keep a close look on those
technological changes for its adaptation in their business activities.
✓ Global or international environment: The global environment is also
important for shaping business activity. In the era of globalisation, whole
world is a market. Business analyses international environment to cope up
with the changes.
✓ Socio-cultural environment: People’s attitude towards work and wealth,
lifestyle, ethical issues, role of family, marriage, religion and education and
also social responsiveness of business affect the business.
✓ Demographic environment: Population size and growth, life expectancy
of the people, rural-urban distribution of population, the technological
 skills and educational levels of labour force come under demographic
environment. These features also affect the functioning of organisations.
✓ Natural environment: The natural environment plays an important role
as it provides raw materials and energy for production in a firm. Natural
environment consists of geographical and ecological factors a such as
minerals and oil reserves, water and forest resources, weather and climatic
conditions and port facilities. These are very important for many business
activities. For example, in places where temperatures are high, the demand
for coolers and air conditioners is high. Also, demand for clothes and
building materials depends on weather and climatic conditions. Natural
calamities like floods, droughts, earthquakes, etc., immensely affect
business activities.

The set of decisions and actions that result in the formulation and implementation
of plans designed to achieve a company objectives are called strategic management.
Strategic decisions are based on what a manager forecasts rather than what he

RELATION BETWEEN BUSINESS ENVIRONMENT AND STRATEGIC

MANAGEMENT
knows. Strategic decisions have complex implications for more areas of the firm.
The characteristics of strategic management decisions vary with the level of strategic
management activity.

 Strategic management helps in defining the objectives and policies for the business.
To make strategy, a business needs to scan its environment.
 In formulating a strategy, the strategic decision makers must analyse internal
as well as external conditions in the environment, which are described in the
following sections:
 ⚫ The analysis of internal and external environment will help managers
determine what goals and mission they can or should adopt, and the strategic
options that are available.
⚫ Strategic planning should be based on business environment analysis. The
world today is changing at a rapid pace. So it is very important for companies
to scan the business environment more clearly, and make up strategic planning
that can match the changes.
⚫ The environment is changing, and the strategy which is suitable for companies
today may bring threat tomorrow. Strategy is effective only if it is flexible.

MEANING AND IMPORTANCE OF ENVIRONMENTAL SCREENING

The term ‘environment’ means surroundings near you, which includes all
components of environment like physical environment, social environment and
governing environment. Physical environment consists of plants, land, water and
all natural resources. Social environment consists of labourers, staff, management,
suppliers, customers or all other human resources. Governing environment are
rules, regulations and policies of the government. The term ‘screening’ means the
process of evaluation or assessment of anything with the purpose of gathering data
on any subject matter and coming to a conclusion.
Thus, you can conclude that environmental screening is a process in which an
organisation makes assessment or analysis of all the components of the environment
and screens their impact on its functioning, stability, growth and profits.

For an effective environmental screening, an organisation must follow the following

steps:
1. Defining the type of business: First, the organisation should assess what type of
business it is dealing in and later on decide how environment will impact it. The
same environment affects the clothing business and food business differently.
2. Defining the scope of project: If screening is done for a particular project, then
it is necessary to define the scope of the project. The scope will decide how
environment will affect the project of the organisation.
3. Defining the type of environment: It is important to define what type of
environment an organisation is working in. It is important to consider all types of
components of environment, such as physical, social or governing, and how the
business will be affected due to them.
4. Preparing a report: A detailed report should be made on how the organisation
will be affected by the surrounding environment.
5. Monitoring: Environment is not a static thing. It keeps on changing its features and
characteristics. For example, employees keep on changing their jobs, customers
keep on changing their choices, government keeps on changing its policies, etc.
Thus, environment and its impacts should also be constantly monitored.
If an effective environmental screening is done properly, then it gives following
benefits:
 It gives the clear picture of what kind of environment the organisation is working
in. Also, the organisation becomes aware of the features of different components
of environment.
 Organisation gets the idea of opportunities and threats possible in the environment.
 Organisation is able to define the scope of its business, like how much the
organisation can grow and to what extent it can raise its targets and profits.
 Organisation becomes aware of the existing and possible competitors.
 Continuous monitoring of environment makes an organisation aware of the
upcoming dangers and updates for future challenges. This makes an organisation
aware of its customers’ choices, so that the organisation could further improve the
quality of its products or services.
BUSINESS ENVIRONMENTAL ANALYSIS
The environmental analysis process is not a universal process. It is rather a dynamic
process which may change from one business to another. For example, the business
process analysis would be different for the airline services to that of the beauty salon
services.

A business manager plays a vital role in the analysis of business environment. He

needs to thoroughly understand the availability of opportunities and possible threats.
As per the analysis, an organisation needs to work on the available opportunities as
per its strength and weakness.

Following are four basic components of business environment analysis:

 Scanning: The term ‘scanning’ means analysing all parts or components of
anything in order to develop some features of that thing. Being the first component
of the environmental analysis process, this analyses the environmental factors of
an organisation. The purpose of scanning is as follows:
⚫ Scanning helps in identifying the possibilities of environmental changes which
may affect the working of an organisation.
⚫ Understanding the present changes in the environment.
Scanning is basically a non-structured activity. This is because the data in scanning
is unlimited, but is ambiguous and imprecise in nature. So, it is difficult to
distinguish what data is relevant or what is not. For the environmental analysis
process, it is the basic challenge to extract the relevant data and make the best use
of it.
 Monitoring: ‘Monitoring’ means keeping a constant eye or check on something.
Thus, in environmental analysis, monitoring keeps a check on environmental
changes from time to time. For example, employees keep on changing, natural
resources keep on changing, and government and their policies keep on changing.
Thus, after scanning, it is necessary to keep monitoring what sort of changes the
concerned environment is facing and what impact it might cause on the normal
functioning of the organisation. Constant monitoring ensures that business-
persons are aware, and make responses towards the possible change in the business
environment.
 Forecasting: Scanning and monitoring are steps on those aspects which have
already happened and organisation cannot change them. These are sunk aspects,
i.e., which have already taken place in the past and will not change in the future.
But when an organisation is formulating a strategy for its operations, it might
require future prospects and future orientation too. Forecasting is, thus, making
any predictions about future and is, consequently, a part of business environment
analysis. Forecasting can be done for any business-related project or aspect.
For example, a forecasting can be made about whether a particular technology
will arrive in the market or not, what would be the government’s new policies
regarding tax, whether customers would change their preferences or would they
like the innovation in the products or services, etc. These kinds of questions are
being attempted to be answered in forecasting. Scanning and monitoring are
 comparatively easy tasks than forecasting. Forecasting is a complex task which
requires brainstorming with which future predictions are being made. The scope
of forecasting is more specific and clearer than monitoring and scanning. The
results of monitoring and scanning are accurate as study of something present is
done. But results of forecasting are contingent in future.
 Assessing: After scanning, monitoring and forecasting the business environment,
organisation must make proper evaluation or assessment of collected data in the
above-mentioned steps. The organisation also needs to analyse what impact it will
create on functioning. Assessment will provide answer to the following questions:
⚫ What strategy needs to be made for the smooth functioning of the organisation?
⚫ What changes might an organisation want to bring in your current strategy?
⚫ What alternatives does an organisation have in case of negative changes in
environment?
⚫ How will an organisation face the coming changes?

STEPS IN BUSINESS ENVIRONMENTAL ANALYSIS

Following steps need to be followed in the process of business environmental
analysis:
A. Scanning all the required components
B. Grouping the scanned components
C. Observing the internal components
D. Monitoring the external components
E. Outlining variables for analysis
F. Usage of different techniques for analysis
G. Forecasting future outcomes
H. Formulating strategies
I. Execution of formulated strategies
J. Monitoring
Let us discuss the above-mentioned steps in detail:
A. Scanning all the required components: Environment of an organisation consists
of various components. But, not all factors and aspects would be equally important
or even important for the functioning of an organisation. A good strategist always
distinguishes the relevant factors and scans them in detail. He/she looks for all
the required components of environment and would study the relevant factors
in detail. This way, he/she collects the required components and would present a
scanned report.
B. Grouping the scanned components: In the first step, the required raw information
is gathered. In this step, the collected components are to be grouped; for example,
what is affecting the stability, what is affecting the sales, what is affecting the
growth, etc. Grouping is made of all the collected information.
C. Observing the internal components: After scanning and grouping the relevant
components of external environment, the strategist looks at the internal
components of the organisation. For example, how the employees are reacting to
the environmental changes and how smooth an organisation is functioning as the
external components change in the environment.
D. Monitoring external components: As an environment is not static in nature, it
keeps on changing, for example, changing in government policies, changing
in customer’s preferences, changing in supplier’s rates, etc. Thus, just one-time
scanning is not a fruitful activity for the organisation. An organisation needs to
constantly monitor and make aware of the upcoming changes.
E. Outlining variables for analysis: Variables are the components responsible
for bringing a change in an external environment. Some variables are national
minimum wage, GDP, tax policies, competitors’ policies, customers’ preferences,
etc. A strategist must outline all such variables and study them from time to time,
so that he could bring the necessary change in the functioning.
F. Usage of different techniques for analysis: Different techniques are being used
for a proper environmental analysis, such as benchmarking, scenario building,
network methods, etc. The term ‘benchmarking’ means setting the best standard
as per the industry and then comparing company’s performance with the set
standards. Scenario building is presentation of overall picture of the system of
the an organisation along with the affecting components. Network method
is a complex process which is used to analyse the external environment of the
organisation. This method helps in analysing the available opportunities in the
market and studying possible threats. A network method also judges how internal
strengths and weaknesses will be affected by the external environment. Essential
data can be gathered through Delphi method, conceptualising, study and verifiable
enquiry method.
G. Forecasting future outcomes: In a business environment analysis, it is necessary to
make predictions for future outcomes. A good strategist will always make future
predictions of how the environmental components may affect the functioning of
the organisation. The assessment of past results can also be made in this step.
H. Formulating strategies: It is also one of the important steps of business
environmental analysis. After the assessment of all the above environmental
components, an organisation formulates the required strategies for the functioning.
As you have already studied above, conduct the SWOT analysis before making
an effective strategy. SWOT analysis means analysing the strengths, weaknesses,
available opportunities and possible threats of the organisation. There are various
ways of formulating or designing a strategy. Internal or core components are being
recorded in Strategic Advantages Profiles (SAP). However, external components
are being recorded in Environmental Threat and Opportunity Profile (ETOP).
Both SAP and ETOP profiles can be compounded into SWOT profile. To evaluate
internal and external components, External Factor Evaluation (EFE) matrix is
being used by the strategists as a tool.
Let us discuss the above-mentioned tools in brief:
⚫ SAP: It is a tool which is being used by strategists to examine internal
components of the organisation, like strengths and weaknesses. The processes
 of both ETOP and SAP are much similar. Both have positive, neutral and
negative signs. The five utilitarian areas in the majority of the associations
leaned to distinguish their quality and shortcoming are human asset and
corporate arranging, fund or bookkeeping, generation or activity, showcasing
or conveyance and innovative work. Every one of these zones is important to
give a reasonable image of the key position of the association.
⚫ ETOP: It analyses the external components of the business environment. It
is basically the study of factors that are responsible externally to affect the
business functioning. It is essential to study the impact of external components
which might create an impact on an organisation. Components can be both
positive and negative or even neutral in nature. Thus, it becomes necessary to
determine which aspects will create a positive impact and which will create a
negative impact.
I. Execution of formulated strategies: After the above steps, a strategist implements
and executes upon the formulated strategies. The strategist always evaluates how
he had formulated the given strategy and how that can be effectively implemented.
He/she also makes the required future predictions. This process is also often
referred to the process of SWOT analysis
J. Monitoring: The strategist must keep monitoring the external environment. As an
environment keeps on changing, thus, it is necessary to have a continuous look at
the changes and bringing the required changes in the plan or strategy.

SWOT ANALYSIS
SWOT analysis refers to the analysis of both the internal and external environments
of an organisation. In this term, S stands for Strengths and W stands for Weaknesses.
Both these terms are internal components of an organisation. O stands for available
Opportunities in the market and T stands for the possible Threats in the market.
Both of these are the external components of the organisation.

Let us discuss these above-mentioned terms in detail:

 Strengths: The term ‘strengths’ basically means the things you are good at or
your capabilities. In the organisational context, it means the core competencies or
capabilities of an organisation for which it can gain strategic advantages from its
competitors. Even if it does not gain any advantages over competitors, it refers to
an organisation’s capacities in which the organisation is having affirmative aspects.
Strength is necessary for every organisation to gain competitive advantages. For
example, some organisations have their employees as their strength and some
organisations may have low cost of production as their strength.
 Weaknesses: Weaknesses are exact opposites of Strengths. While strengths
are competitive advantages, weaknesses are competitive disadvantages of an
organisation. Weaknesses are responsible for downfall of an organisation. The
term ‘weakness’ also refers to the things in which the organisation is not good. For
example, an organisation might not have better marketing strategies in comparison
to its competitors. Then, in such a case, marketing would be its weakness.
 Opportunities: The term ‘opportunity’ means a chance to grab on in a positive
sense. This is actually a favourable condition or circumstances present in the
external environment, which should be grabbed by the organisation, in order to
increase its strengths and gaining competitive advantages. A company’s strategist
must be aware of the coming opportunity in the market, so that it could grab them
on time and could raise revenues and profits; for example, sudden rise in demand
of customers, new government policies in the favour of the organisation, emerging
technologies, etc.
 Threats: The term ‘threat’ means exposing vulnerability of something which
might create an adverse impact. In an external environment, if suddenly or even
gradually some changes occur and those are not in favour of the organisation, then
these are called threats to the organisation. For example, a changes in preferences
of customers, and changes in government policies, which are not in favour of the
organisation, are considered as threats to the organisation.

It is not necessary that an organisation has only its one single strength. An organisation
might have one or more strengths at one time. More number of strengths would give
an organisation more competitive advantages. An organisation might have one or
more weaknesses which would degrade its competitive position in the market. The
weakness of an organisation would factually hamper the growth of an organisation.
The strengths and weaknesses of an organisation could be collectively determined
and this combination would create a collective impact on the organisation and it is
called a circumstance of synergistic effect. The concept of synergy says that if two
things are merged together, then the resulting effect could be greater or lesser. This
means when strengths and weaknesses of a company are understood together, then
they could create a resulting strength or resulting weakness. This could be better
understood as ‘two plus two could be either five or three’.

The SWOT analysis is a tool to evaluate the strengths, weaknesses, opportunities and
threats of an organisation. Every organisation must do this analysis very effectively,
as all these areas are necessary to be understood in detail. A strategy would be
formed on the basis of these elements only. Through SWOT analysis, a detailed
study could be done about both internal and external factors of an organisation.

The SWOT analysis as a whole matches the organisation’s strengths and weaknesses
with the market’s opportunities and threats. It is in the organisation’s self-interest
to use its strengths to exploit the available opportunities in the market. Further,
an organisation must neutralise its weaknesses and avoid the possible threats in
the external environment of the organisation. A four-cell matrix is being used to
perform the SWOT analysis. In this matrix, the cells are referred to as strengths,
weaknesses, opportunities and threats
ASSESSING RISK IN A BUSINESS ENVIRONMENT
The term ‘risk’ means a situation or circumstance where there is an exposure to
danger. Business risk, therefore, means when an organisation is exposed to danger
or threat, which could lower its profits or which may hamper the achievement of its
targets. Any threat which may harm the normal functioning of an organisation is
known as business risk.

Any exposed risk could affect the organisation in the following ways:
 It could disrupt normal working
 It could create an adverse effect on sales or revenue
 It could defame the brand image
 It could create an adverse impact on growth
It is not factually correct every time to blame managers or staff for the risk. A risk to
business occurs because of many reasons.

Following are the reasons which may cause a business risk:

 Preference of customers, their demand and sales
 Overall per unit cost to the company
 Existing competition in the market
 Economic climate
 Government policies, rules and regulations
Assessing risk means making an estimate of what level of risk is present in the given
business situation. Thus, risk assessment is actually risk measurement. Following
steps are to be taken to assess risk:

1. Define the type of risk: There are various types of risks that are present in the
market, to which a business is exposed. The first step is to identify the types of
risks that are present.
 There are following types of risks present in the market:
⚫ Financial risks: Financial risks are risks which affect the financial or monetary
position of an organisation. Financial risks include credit risk, liquidity risk,
asset-based risk, foreign investment risk, equity risk, currency risk, etc. In
these types of risks, the organisation faces money crisis.
⚫ Marketing risks: When an organisation fails to make a better marketing
strategy for its products or services, it faces such types of risks. These include
a failure of marketing of products or services, risk, risk related to product
development, product pricing, product promotion, etc.
⚫ Operational risks: When an organisation fails to properly operate its day- to-
day functioning, it is known as operational risk. In these kinds of risks,
employees are not able to work properly for the organisation. For example,
risk of electricity cut off, risk of disruption in the Internet, etc.
⚫ Strategic risks: When there is a failure in proper strategy making or when
strategy is not updated as per the changes in the environment, such situation
is known as strategic risk; for example, failure of management in adapting new
technology, failure in meeting customers’ demands, etc.
⚫ Workforce risks: When the workforce of the organisation does not perform
its duties well or does not work for the organisation, it is known as work-
force risks; for example, strike of labourers, continuous absence of labourers
or employees, etc.
2. Estimate the likelihood of occurring: After analysing all types of risks an
organisation needs to estimate what are the fair chances of each risk occurring
in the future. Various techniques like percentages or probability can be used to
estimate the chances of occurrence of risk. For example, there are twenty-five
percent chances that the demand is going to fall down in the coming time for the
said project.
3. Estimate the loss: After identifying the risks, the organisation has to estimate the
chances of its occurrence and the extent of loss it may cause to the organisation.
For example, there are twenty-five percent chances that the demand may fall for
the said project and, consequently, the organisation may suffer loss of revenue of
one million rupees in one month of time.
4. Decide whether or not to take the risk: The organisation has come to a rough figure
of how much loss it is going to suffer if the risk proves to be right. Organisation
takes decision whether or not that risk is worthy to take. In the above example,
there are seventy-five percent chances that the demand would not fall and if the
demand rises, the organisation would have profit of ten million rupees in the
coming month. So, considering all these factors, project is worthy to be taken.
CONCEPT OF MICRO BUSINESS ENVIRONMENT
Micro business environment refers to the factors that have a direct influence on
company’s overall performance. In other words, the most immediate environment
of the company is constituted by these factors. These factors encompass public,
consumers, marketing intermediaries, competitors, suppliers, general public and
shareholders. These factors are influenced by the macro business elements of the
environment.

In contrast to the macro factors, the micro environmental business factors are more
intricately associated to the company. Different industries are influenced by the
micro factors in different ways. Thus, an organisation might take into consideration
the micro factors which are related to a specific business activity. For example, the
micro business environment of a restaurant might be its manpower, raw material
suppliers, customers, other restaurants, etc.

SIGNIFICANCE OF MICRO BUSINESS ENVIRONMENT

Micro environment can be considered as the first pillar for setting up an organisation.
Components of micro environment are utilised to carry out all the marketing plans,
strategies and objectives. It is, hence, the executive wing of business in which
practical execution of concepts, thoughts and ideas are performed. By depending on
the responses of these constituents, a business either moves in the forward direction
or may move back.

Moreover, it guides and directs the future promotion and communication policies
of an organisation. With all of these characteristics, micro environment of an
organisation plays a crucial role in identifying the current potential and assessing
the organisation’s future.

Micro environment encompasses factors of availability and usage of resources that

affect businesses and individuals. A manager or executive of an organisation should
have knowledge of the core microeconomic factors that influence the business.
This will not only assist in planning and preparation, but also in the long-term
development of business strategy.

CONSTITUENTS OF MICRO BUSINESS ENVIRONMENT

Various constituents of micro business environment are as follows:
 Customers: Customers are vital elements of a business environment. The primary
motive of a business is to gain the attention of customers in order to retain them.
This helps the organisation acquire profitability and long-term survival. Therefore,
business enterprises must carefully identify and analyse the needs and wants of their
customers and fulfil them in an effective manner in order to gain loyal customers.
The interest of customers cannot be neglected by any business as this might cause
adverse effects on business. So, business organisations must make changes in their
products and services as per the changing tastes and preferences of customers.
Hence, customers prove to be the central focus of a business environment.
 Suppliers: The business strategy gets influenced by actions of suppliers, as
they provide the raw materials for the process of production. For example, the
production time and the sales will be affected due to delayed production process
if the services of the suppliers are not timely and reasonable.
 Marketing intermediaries: A company channelises and distributes its products
from the manufacturing units to the market and customers with the help of dealers
and distributors. Marketing intermediaries represent the company. They play an
active role in delivering and distributing the products to the end user. They also
ensure that products and inventories are adequately available in stores, retails or
other access points. This is essential for business organisation and its success. For
example, consumers can buy a household item from the nearest retail shop or
outlet. They can also buy items from shopping malls, supermarkets or purchase
stuff online. Hence, it becomes the primary responsibility of the management to
make sure that the products and items are adequately available in all their stores
and outlets so that customers do not have to go home empty-handed and purchase
the product that they need.
 Competitors: Competitors of a firm or company can have a direct influence on
the strategies of the business. The organisation must possess the knowledge of
performing a competitive analysis and gain advantage over its competitors
thereafter. Hence, the unique selling point (USP) of the competitors as well as the
value-added services offered by them must be known to the organisation. The
organisation should also know how to differentiate itself from its competitors.
The focus of the company should be to offer value and something which the
competitors do not offer.
 General public: Companies must pay attention to a very vital component of micro
environment, i.e., the general public, for its long-term survival. However, all the
customers of a particular region would not purchase the company’s product, but
the existence of the company in that region will be dependent on how the people
perceive the product, the company’s image or brand. For example, free sample
products are offered by companies and they also organise and arrange press
releases, media and seminars, and so on. Organisations also engage themselves
in community development, environment and public service programs by
developing sanitation units, etc. This helps the organisations acquire goodwill and
gain the trust and faith of their customers as well as the general public including
social groups, consumer protection activists, media, environmentalists, etc.
 Employees: An organisation can attain its objectives and goals with the help of
skilled employees. This is because employees who are experienced and skilled
possess the necessary expertise to assist the organisation in achieving success. Such
employees are developed through timely and regular training and development
programs and sessions. These programs and sessions help in attaining the goals
and objectives of the organisation efficiently and effectively.
 Shareholders: Shareholders are not just investors who invest in the company. In a
way, they are the actual owners of the company since they own the shares of the
company. This implies that shareholders have a right to know about the activities
and operations of the company. A return on investment will also be demanded
 by the shareholders. Hence, it is the responsibility of the organisation to generate
profits and distribute them among the shareholders. Wealth for the shareholders
has to be created by the organisation. Regular and timely dividends will also have
to be paid to maintain their interest. Therefore, the perfect balance between the
benefits to the shareholders and the health of the company has to be determined
by the organisation.

MEANING OF ORGANISATIONAL APPRAISAL

Organisational appraisal or internal analysis is normally performed to resolve a
problem or an issue within the organisation or to manage an emergency within
the organisation. For example, poor maintenance of production machinery and
equipment results in defects in the finished products. This problem can be solved
with proper maintenance and servicing of the machinery and equipment. Analysis of
internal business condition is also important for designing an appropriate strategy.
Organisational appraisal is performed by the strategic decision makers in order
to get a practical outlook of the company profile, which, in turn, provides a clear
explanation of the strengths and weaknesses of the company.

ORGANISATIONAL APPRAISAL METHODS

Strategists should remember to select only those techniques that match the needs
of organisation from every aspect during the process of analysing the environment.
Among the several methods for organisational appraisal, some of the important
methods are given as follows:
 Value chain analysis: Under the resource analysis or value chain approach, physical
quantities are transformed into monetary units. This analysis is performed in order
to evaluate the amount of resources that are utilised for the economic objective and
have emerged from various likely actions. It is the resource analyst’s responsibility
to evaluate not only the economic cost, but also ensure that the manpower and
 resources utilised are important for the process and are needed at that particular
period of time. Besides this, resource analysis is also helpful in assessing the
strengths and weaknesses of the organisation. This assists the organisation to
devise strategies for enhancing its strengths and overcome its weaknesses.
All business processes are a combination of several allied activities starting from
the inception of a concept of product to sales and service associated with the
product offering. At every stage of this chain of activities, a value is added to the
offering of the company, making it better than earlier stages. This chain of activities
is known as ‘value chain’. Value chain is a related series of activities which creates
or adds value to the organisation. Basically, a company’s value chain consists
of two major processes known as primary activities and the relevant support or
secondary activities. The primary activities are those activities which emphasise
on generating values for its customers and the relevant support activities help and
improve the performance of primary activities.
 Balanced scorecard: Balanced scorecard was introduced by Robert Kaplan and
David Norton in the early 19th century as a method of evaluating the performance.
It helps assess the performance of the organisation from various viewpoints. The
reason behind such views is that managers are greatly identifying the need of
assessing other aspects of organisational performance for measuring their value-
creating activities. Lately, the balanced scorecard has adopted a new approach.
According to this approach, it is a broad mechanism of evaluating the performance
which provides a balance between non-conventional operational methods
and financial methods. In the last few years, balance scorecard has managed to
establish itself as the best approach for strategic control. It serves as a basis for the
firms to validate the financial and strategic controls, they have launched for their
performance evaluation. It is regarded the most appropriate for business-level
strategies and is also applicable to corporate-level strategies.
 Historical analysis: Historical analysis assists in removing several issues associated
with the rules of the industry as it examines the ratio and changes brought in the
organisation over a time period (in case there is an absence of chief strategic shift
in the industry and the organisation has not entered into a new industry). It helps
in resolving the issues related to ratio calculation in several ways. The drawback
involved in computing the historical ratio is that there is no external validation.
For example, a company might have kept its account receivable collection period
to 90 days for many years and has considered it as suitable, if there is no external
validation that other organisations have boosted it up to a period of thirty days.
Historical analysis offers a way to compare the firm’s performance and assists in
identifying its strengths and weaknesses over the years. It serves as an important
tool to study the rise or fall in the organisation’s performance, depending on its
earlier performance records. It is a standard presentation of the balance sheet
involved in designing the description about profit and loss in the organisation’s
annual report. Those areas which have regularly shown progress depict the
strengths and vice versa. It is possible to correctly evaluate the constant progress
in the firm with the help of historical analysis.
 Benchmarking: One of the biggest ways to identify the assets and competencies
of the organisation is to compare it with the current or present (or potential) rivals
 and competitors. Various organisations existing in the similar industry generally
have diverse marketing skills, integrity, managerial ability, brand images, technical
expertise, operating sites and services, financial assets, etc. These different and
diverse internal resources can become the relative strengths (or weaknesses) of
the organisation depending upon the strategy that it chooses. While choosing
a strategy, managers need to emphasise on comparing the important internal
resources of the organisation with that of the rivals or competitors, thus segregating
its own major strengths and weaknesses. Benchmarking is the process which
encompasses comparing the performance standards and business processes of an
organisation with those which are the best practices in the same industry or are the
best standards in other industries. Generally, aspects which are evaluated are cost,
quality and time. With the help of the benchmarking process, the organisation
is able to recognise the best performing organisations in the same industry, or
those with the similar procedures in the other industries; and can compare their
(target firm) outcomes and processes with that of its own. Thus, this allows them
to determine the reasons behind the good performance of the target firms and
major secrets behind their success.
 Key factor rating: Key factor rating is performed on the basis of carefully studying
the important factors which might influence the performance (marketing,
financial, operations and human resource capabilities) and assessing on the whole
competence of the organisation on the basis of the data gathered. The important
factors which influence the organisation’s functioning are taken into consideration
under this method. A number of discussions, sequential meetings and surveys
assist in collecting information about the important factors. With a perspective
to rate the important factors, answers to questions in all the areas of function are
examined carefully. Mathematical models are utilised to study the relative effect
of all the factors (conducive or not conducive) on a particular result. Some of the
basic questions which a strategist can utilise as a guide are related with the vital
elements of the internal environment. The information which was gathered by the
key factor rating can assist the strategist to draw brief estimation and conclusion
about the situation of the internal environment of the organisation.
 Industry standards: Industry standards are popularly accepted to calculate the
value of the financial ratios of the organisation, yet sometimes they might be
misleading. Normally, several matters are taken into consideration while making
use of industry standards. Firstly, the organisation which is being analysed is, in
reality, the actual member of the industry for which the standards are devised.
For example, a lot of work has been done to formulate the industrial standards
for the educational institutions, yet in the category of educational institutions,
there are several sub-categories, like private, government, medical, rural, urban,
engineering, aided, etc. For example, for the purpose of offering grants/aids or
regulation, there is a possibility that the standards of one institute are different
from that of another institute. As the information offered usually by the publication
is the major source of industrial standards, it is very significant to utilise that ratio
for the industry which is being analysed and industrial standards are computed
in somewhat similar ways. Some ratios are computed by only a single method
without any issue, while others can be computed by various legitimate methods,
which might result in certain variations in the outcomes.
SOURCES OF INFORMATION COLLECTION FOR ORGANISATIONAL
APPRAISAL
The information sources for organisational appraisal can be in written format or
verbal. The collection of sources depends on the firm’s information capability.
Sources of information may be classified as internal or external. Internal data is
collected from within the organisation to make decisions for effective operations
and processes. This information is crucial to find out whether the strategies that
the organisation is presently following are effective or if changes or modifications
should be made. The internal sources of information include:
 Accounting resources: A vast amount of internal information is offered by the
accounting resources. A marketing researcher can make use of such information.
 Sales force report: Information pertaining to the sales of the product is offered by
the sales force report.
 Internal experts: The heads of various departments of an organisation are the
internal experts. These individuals can give insights regarding the way a particular
task or an activity should be performed.
 Miscellaneous reports: Operational reports offer such type of information.
The external sources of information are majorly required when a firm attempts to
perform a comparative analysis.

These sources include:

 Government publications: A vast amount of information is provided by the
government sources. However, many internet websites also contain such
information. Data is generated by a variety of government agencies. They are:
⚫ Registrar General of India: Demographic data is generated by this government
body. Data covers details regarding gender, age, income, occupation, and so
on.
⚫ Central Statistical Organisation: Statistics regarding national accounts is
published by this governmental body. It encompasses details like growth rate,
national income, and so on. The annual survey of industries is also published
by this organisation.
⚫ Director General of Commercial Intelligence: The operations of this office are
carried out from Kolkata. Information pertaining to exports and imports, i.e.,
foreign trade is offered by this body.
⚫ Ministry of Commerce and Industries: Information regarding wholesale price
index is offered by this ministry. It operates through the office of economic
advisor. The statistics offered by this body pertains to various sectors, such as
food, fuel, power, etc. All India Consumer Price Index is also offered by this
ministry.
⚫ Planning Commission: The basic statistics about the Indian economy is offered
by the commission.
⚫ Reserve Bank of India: Data regarding savings and investments is offered by
the RBI. Various financial reports and currency are also furnished by RBI.
 ⚫ Labour Bureau: Data regarding employment and jobs is offered by this bureau.
⚫ National Sample Survey: Ministry of Planning carries out the National Sample
Survey. Through this survey, statistics regarding demographics, agriculture,
economy, society, etc., is acquired.
⚫ Department of Economic Affairs: Data pertaining to income, consumption,
expenses, investments and foreign trade is provided by this department.
⚫ State Statistical Abstract: Data regarding activities of state like education,
occupation, etc., is offered by this body.
 Non-government publications: Publications of various trade and industry
associations come under this body. It includes:
⚫ Various mills, such as textile mills, woollen mills, etc.
⚫ Small Industries Development Board of India
⚫ Confederation of Indian Industry (CII)
⚫ Export Promotion Council
⚫ Several press media associations
⚫ Several chambers of commerce
⚫ The Indian Cotton Mill Association
⚫ The Bombay Stock Exchange
 Syndicate services: Some organisations offer these services. Such organisations
collect and tabulate information regarding marketing on a regular basis. They do
so for their clients who are subscribers for such syndicate services. Therefore, the
information which is appropriate for the subscriber is offered under the syndicate
services. Information regarding households as well as institutions is offered under
such services. Three techniques of data collection are utilised for collecting data
from households, viz., survey, electronic scanner services and mail diary panel.

INFORMATIONAL APPRAISAL APPROACHES

Various approaches regarding organisational appraisal are given as follows:
 Systematic approach: Under the systematic approach, information regarding
organisational appraisal is gathered in a systematic manner. A wide variety of
information pertaining to policy statements of the government regarding the firm’s
industry and business, target customers and markets, amendments in regulations
and laws which influence the activities of the firm directly can be easily gathered.
However, it becomes essential to regularly update such information for operational
tasks as well as strategic management.
 Ad hoc approach: Under this approach, various special surveys, researches and
studies can be carried out by an organisation for the purpose of handling the diverse
issues of the environment every now and then. These researches and surveys can
be carried out under occasions when the firm needs to take up any special project,
formulate new strategies or measure the effectiveness of the current strategy.
 Any alterations or unanticipated turn of events can be looked into regarding their
influence on the firm.
 Processed form approach: Processed information, available from within and
outside the firm, can be utilised by any firm if it wants to follow this approach.
Information provided by several private agencies or government bodies is a form
of processed secondary data which can also be used by firms and companies.

FACTORS AFFECTING ORGANISATIONAL APPRAISAL APPROACH

Organisational appraisal is affected by the following factors:
 Ability of strategists: This refers to the skill and expertise of the strategist to assess
the influences and forces influencing the firm.
 Organisational size: Size of the organisation influences the quality of appraisal in
the organisation. Smaller organisations are easier to analyse as compared to the
larger ones.
 Traits of internal environment: This encompasses the characteristics of people,
teams and organisational politics. The appraisal process may suffer if no co-
ordination exists between the teams. Hence, at last, it can be said that appraisal of
the organisation is essential for the organisation’s growth.
 Satisfaction with success: At times, successful firms become satisfied with their
success and are not able to improve their performance further and, hence, neglect
the process of appraisal.
 Lack of strategic planning: Certain firms are not able to think in a strategic manner
and, hence, fail to focus on important constituents of the external and internal
environment. Planning is considered as a routine or regular activity in such firms.
Every organisation should have an overall view of its complete environment and
appraise it in an effective manner in order to identify the factors affecting it either
in a negative or a positive manner.
CONCEPT OF MACRO BUSINESS ENVIRONMENT
All organisations, whether big or small, are part of the business environment. The
business environment surrounds them and forms the context in which they have to
operate. Two major types of business environments are given as follows:
 Macro business environment: This is the general environment that affects the
operations of all the business entities that operate in an economy. It affects its
business enterprises indirectly and distantly.
 Micro business environment: This is the immediate environment in which a
particular organisation operates. Thus, it only affects that organisation directly
and regularly.

SIGNIFICANCE OF MACRO BUSINESS ENVIRONMENT

No business organisation functions in a vacuum. It makes decisions within an
environment of customers, competitors, suppliers, distributors, political factors,
social framework and legislation. Managers can easily control some of these
environmental factors, whereas others cannot be controlled. Therefore, they must
accommodate these uncontrollable factors in their decision-making process.

Significance of Macro Business Environment on Family Businesses in India

In 1947, when India became independent, almost all private businesses were family-
owned. Some business houses, such as the Tatas, the Birlas, the Mafatlals and the
Walchands were major players. Post independence, the Indian economy observed
significant developments and changes in the macro business environment, including
high tariff rates, import restriction, foreign exchange regulation, creation of public
sector monopolies, and nationalisation of banking and insurance sectors. Despite
these restrictions and regulations, family-owned businesses in India continued to
retain a majority control on the private business sector.

In 1990, the government was compelled to liberalise the Indian economy due to
the balance of payments crisis. A large scale of economic reforms transformed the
structure, operations, investment and competitiveness of businesses in India. Several
sectors, which were reserved for public entities, opened up for private players.
These included telecommunication, power generation and distribution, mining, and
airlines. The rules and norms for the entry of foreign multinational companies to set
up businesses in India were relaxed. This resulted in growth in the Indian economy.
In 10 years, the GDP growth rate increased from 5.6% (in 1990) to 7.4% (in 2000) as
shown in Table 1:

TaBLE 1: India’s GDP Growth Rate from 1990 to 2015 (%)

1950-80 1981-90 1991-2000 2001-10 2011-15

GDP growth 3.5 5.6 6.2 7.4 6.7
Source: 1950-2000: Das, Gurucharan. [2007]. “India: How a rich nation become poor and will be
rich again”, https://grucharandas.org/rich-nation-poor, accessed on April 10, 2017; 2001-2015:
Data Source- World Development Indicators, http://data.worldbank.org/indicator/NY.GDP.MKTP.
KD.ZG?contextural=default&end=2015&locations=IN&start=1961&view=chart,accessed on April 10, 2017,
averages calculated by the authors.

While business houses, such as Tatas, Birlas, Ambanis (Reliance), Bajajs and
Mahindras were able to reinvent themselves, other major players, such as Thapars,
Mafatlals, Shrirams (DCM) and Shahs (Mukund) sank. New business houses, such
as Adanis, Dr. Reddy’s, Mittals (Bharti) and Shangvis (Sun Pharma) emerged.

30 years after liberalisation, many business houses are newly facing existential crisis
in the digital economy.

CONSTITUENTS OF MACRO BUSINESS ENVIRONMENT

The macro environment consists of political, economic, socio-cultural, technological,
legal and environmental factors. These factors can be easily remembered as PESTLE.
Let us discuss these factors in detail:
 Political and legal environment: All business organisations are affected by
the political forces shaping the country. These forces determine the laws and
regulations within which businesses have to operate. Therefore, managers must
 analyse the major political and legal forces influencing their market,
organisationand industry. Some examples of political forces are:
⚫ Patent legislation: Intellectual property, patent and copyright laws have
significant influence in high-tech industries and pharmaceuticals. Governments
establish the rules about what may or may not be patented. The patent (and
copyright) laws are often a matter of high-profile litigation and settlement.
⚫ Taxation: Governments impose general tax as well as selective tax on companies’
specific products to manage demand and raise revenue. For example, many
state governments in India have a high tax on tobacco and liquors.
⚫ Safety regulations: Governments expect products to confirm to specified
safety regulations.
⚫ Labour law: Governments set and change labour laws after ratification from
the Parliament. Different countries have different labour laws. In India, the
labour laws are quite restrictive, whereas the US has relaxed labour laws.
⚫ Consumer protection law: Governments enact laws to protect consumers. For
example, the government introduced the Real Estate Regulatory Authority
(RERA) Act in 2013 to protect home-buyers and boost investments in the real
estate sector.
⚫ Bankruptcy law: In 2016, the Indian government introduced the Insolvency and
Bankruptcy Code (IBC) to create a single law for insolvency and bankruptcy
of businesses. Since then, there has been a significant rise of cases in the IBC
Code.
A change in the central or local government can make substantial changes in
the law policy. For example, left-wing governments in India [such as coalition
governments formed with the support of Communist Party of India (CPI) or
Communist Party of India (Marxist) (CPI (M))] traditionally increase the number
of laws and regulations on businesses, whereas the right-wing governments (such
as those formed by or in coalition with the Bharatiya Janata Party (BJP) tend to
reduce restrictions on businesses. The laws are enforced by specialist bodies such
as the Securities and Exchange Board of India (SEBI).
In India, laws are created through three sources:
⚫ Legislation from the Parliament
⚫ Laws decided by the Supreme Court based on the Constitution of India
⚫ Local laws passed by the state governments
The Supreme Court makes laws when a law is unclear and the judges need to
clarify matters by referring to other cases.
 Economic environment: Most economies follow a cycle of growth for 7-8 years
followed by a recession of 7-8 years. Companies have to carefully scrutinise the
economic environment particularly in periods of recession. In recession, consumers
are likely to delay the purchase of major items due to employment insecurity. By
the same token, business organisations reduce their capital expenditure on new
 factories or equipment. They will borrow less, as they are not confident about
their ability to repay. All these factors will dampen the demand even further. In
most cases, recession periods last for a few months to a year. However, in 2008,
the mortgage sub-prime crisis created a worldwide recession in which many
economies were able to recover only after about five years.
 Socio-cultural environment: This environment is made up of:
⚫ Demographic forces: These are the factors that determine the structure of a
population, such as age, income distribution and ethnicity.
⚫ Cultural forces: These are the differences in beliefs, behaviours and customs
among different people.
⚫ Social responsibility and ethics: These include the ethical beliefs of people as
in how businesses should operate socially and ethically.
⚫ Consumerism: This is the tectonic shift from business organisations to
consumers.
Figure 1 illustrates the relationship between these factors:

Social Responsibility and

Demographics
Ethics

Culture Consumerism

FIGURE 1: Socio-cultural Factors

Source: https://uk.sagepub.com/sites/default/files/upm-binaries/58888_blythe_pandp_chapter_2_the_
marketing_environment.pdf

The socio-cultural environment determines the value system of a society. It

includes factors such as:
⚫ Purchase and consumption behaviour
⚫ Ethical values and beliefs
⚫ Literacy and education
⚫ Consumer tastes and preferences
⚫ Human relationships
⚫ Language and norms in society
⚫ Social customs and traditions
⚫ Family structure
⚫ Changing life style patterns
 All these factors have far-reaching impacts on organisations, as they
determine the work culture, labour mobility, etc. Even when people of
different cultures use the same product, their consumption behaviour,
conditions of use, purpose or perception of the product may differ. Some
examples of different cultural perceptions of the same product/message/item
are given as follows:
⚫ While Vicks Vaporub ointment is used for cold and pain in India, it is used as
a mosquito repellent in some tropical countries.
⚫ The slogan ‘sticks like crazy’ of 3Ms is translated as ‘sticks foolishly’ in Japanese.
⚫ Blue is a feminine and warm colour in Holland, but masculine and cold in
Sweden.
⚫ Green is a preferred colour in the Muslim nations, but it represents illness in
Malaysia.
⚫ Red is a popular colour in Russia, but it represents disaster in Africa.
⚫ White is the colour of death and mourning in China and Korea, but it is
popularly used in bridal dress in the western countries, as it is a symbol of
purity for them.
 Technological environment: To understand the impact of technological
environment, read the story of Blackberry demise. The company went from
owning 50% share of the smartphone market in 2007 to less than 1% in 2012. And,
all this was because of its ignorance to the iPhone’s mass appealing concepts, such
as performance and ease of use. New technologies have a tremendous capacity to
make and destroy businesses. Technological innovation is a pervasive factor that
cannot be ignored. IT giants in India today are facing a severe reduction in profit
margins because of artificial intelligence and automation. It has been predicted
that in 20 years, thousands of jobs will cease to exist, as robots will be doing them.
Business managers have to analyse technological developments and adapt their
organisations accordingly. For example, robots may take over a lot of jobs today.
However, there will also be new sorts of jobs that will be created for which skilled
people will be needed.
 Natural and global environment: Ecological or natural forces, such as weather
and climate, are relevant to business. For example, an umbrella might be a staple
necessity in Mumbai, but it is not a requirement in the desert city of Dubai. The
different types of marketing mix are prepared for different geographical conditions.
For example, industries with high requirement of raw materials such as steel and
cement plants are located near the raw material sources. Topological factors may
also impact demand. For example, jeeps and sports utility vehicles (SUVs) are in
greater demand in hilly areas than sedans or hatchbacks. Recently, environmental
factors have assumed tremendous importance due to rising pollution, global
warming and changing weather patterns.
The global environment refers to factors that are relevant to the internal business
environment. These factors include:
⚫ World Trade Organization (WTO) agreements
⚫ International conventions
 ⚫ Business treaties among countries
⚫ International agreements
⚫ Rise in oil prices

FACTORS AFFECTING MACRO BUSINESS ENVIRONMENT

Although macro business environment trends are cyclic in nature, it is important to
analyse them closely. Otherwise, businesses run the risk of finding themselves in
the middle of a downward spiral caused due to an out-of-control factor. Therefore,
managers should be aware of the global headwinds that may impact the economy of
their country, workforce or industry, and take appropriate actions to adapt to them
proactively.

Business environment of an organisation is managed by environment scanning. It

is the process of collecting and using information about occasions, patterns, trends,
and relationships within an organisation’s micro and macro business environment.
It helps to identify the threats and opportunities in the environment and formulate
strategies accordingly. One approach of macro environment scanning is PESTLE
analysis. There are various versions of PESTLE analysis. You can select any suitable
version depending on your context. Some of the versions of PESTLE analysis are as
follows:

 PESTLE/PESTEL: Analysis of political, economic, socio-cultural, technological,

legal, environmental factors
 PEST: Analysis of political, economic, socio-cultural, and technological factors
 PESTLIED: Analysis of political, economic, socio-cultural, technological, legal,
international, environmental, demographic factors
 STEEPLE: Analysis of social/demographic, technological, economic,
environmental, political, legal and ethical factors
 SLEPT: Analysis of socio-cultural, legal, economic, political, technological factors
 LONGEPESTLE: Local, national and global versions of PESTLE (most suitable for
environment scanning in multinational organisations)
 PESTELI: PESTEL + Industry analysis
The result of PESTLE analysis is to evaluate the ‘big picture’ surrounding an
organisation and the potential of new markets. Doing business in markets under the
influence of negative forces becomes quite difficult. Figure 2 illustrates the process
of conducting PESTLE analysis:

Brainstorm Identify Identify Take Appropriate

Factors Opportunities Threats Action

FIGURE 2: PESTLE Analysis

1. Brainstorm factors: Consider political, economic, socio-cultural, technological,

legal and environment factors.
a. Political factors:
✓ When are the next national or state elections? How could their results
change the government policy?
✓ Who is tipped to win elections? What are their views on business policies
or any other policies that impact your organisation/industry?
✓ How much established are the property rights?
✓ What is the level of corruption and/or organised crime? What are the
political steps to counter them?
✓ How will business regulation and planned changes impact your
organisation?
✓ Is the political parties’ trend toward more regulation or deregulation?
✓ How does the government approach corporate policy, corporate social
responsibility (CSR), environment issues and consumer protection laws?
b. Economic factors:
✓ What is the state of the current economy? Is it stable? Is it growing or
declining?
✓ What is the status of key exchange rates? Are they stable or fluctuating?
✓ Is the customers’ level of disposable income increasing or decreasing?
What will be the trend in the next few years?
✓ What is the rate of unemployment? Will it be easy to create jobs? Will there
be sufficient skilled manpower?
✓ Do businesses and individuals have easy access to credit?
✓ What is the cash flow situation of businesses?
✓ What are the impacts of globalisation or free trade economy?
 Figure 3 displays Porter’s Diamond model which is a useful tool to align or-
ganisation’s strategy to the economic environment of the country.

Firm Strategy,
Chance Structure and
Rivalry

Factor Home Demand

Conditions Conditions

Related and
Support Government
Industries

FIGURE 3: Porter’s Diamond Model

Source: https://www.toolshero.com/strategy/porter-diamond-model/

Porter’s Diamond model resembles a diamond. It offers a structure that can

help a country to understand its competitive position internationally. Porter
has introduced a new term called clusters, which are groups of interrelated
organisations, suppliers, industries and institutions in a specific location. He
suggested that the sustained competitive advantage of a country is an outcome
of the following four inter-related factors and activities within these clusters:
1. Firm strategy, structure and rivalry: Direct competition compels compa-
nies to increase productivity and innovation.
2. Home demand conditions: The more the demand in an economy, the
greater is the pressure for companies to innovate and improve competi-
tiveness.
3. Related and support industries: When the upstream and/or downstream
industries are located in close proximity of an organisation, it leads to an
unobstructed exchange of ideas and innovation.
4. Factor conditions: Skilled labour, capital and infrastructure are the most
important factors of production. If an organisation invests wisely in these
factors of production, it leads to sustained competitive advantage.
c. Socio-cultural factors:
✓ What is the age profile and growth rate of the population?
✓ Will there be any generational shifts that may impact your business?
✓ What is the level of health, education and social mobility in the society?
How are these levels changing?
✓ What are the job market trends? What is the attitude of the population
towards work?
✓ What social attitudes and customs can impact your business?
✓ What are the religious beliefs and lifestyle choices of the population?
To understand values in a society, you can use the following tools:
✓ Competing values framework: Figure 4 shows a framework developed by
Robert Quinn and Kim Cameron, is a useful tool to identify organisation’s
values.

Flexibility

Create
Collaborate Do New Things
Do things together
Clan Adhocracy
Culture Culture

Internal External

Market Hierarchical
Culture Culture
Control Compete
Do Things Right Do Things Fast

Stability

FIGURE 4: Competing Values Framework

Source: https://www.toolshero.com/leadership/competing-values-framework/

There are four corporate cultures given as follows:

⧫ Clan culture: It is highly flexible and internally focussed. The company
resembles a large family. The leaders are perceived as mentors or father
figures. Loyalty, relationships and morality are valued. Most start-ups
or family businesses follow this culture.
⧫ Hierarchical culture: These are formal, structured, controlling and
internally focussed organisations. Government agencies are a typical
example. Employees follow procedures religiously. All work processes
are efficiently organised to manage control systems. Formal rules and
policies are followed. The hierarchy is maintained. The focus is on
reliable supply, tight deadlines and low costs.
⧫ Market culture: This culture focusses on results and achievement
of objectives. It observes a high degree of control and is externally
focussed. Competition and goal orientation are valued among
employees. Examples of such organisations include banks and
insurance companies. Outwardly, they profile themselves market
leaders, but inside they are ruthless competitors.
⧫ Adhocracy culture: These organisations focus on innovation. They are
highly flexible and externally focussed. Marketing and advertising
 agencies follow this culture. Employees are encouraged to achieve
creative outcomes and are allowed considerable freedom to take risks.
✓ Hofstede’s cultural dimensions: Hofstede proposed six dimensions to
explain cultural differences among people:
⧫ Power distance index (PDI): This refers to the acceptable degree of
inequality in a society. A high PDI means that people accept an unequal
distribution of power, whereas a low PDI means that the power is
shared in society. For example, Malaysia is a high PDI country where
team members wait for the directions of their manager to start a task.
⧫ Individualism vs. Collectivism: In an individual society, people
take less responsibility for other individual’s actions. In a collectivist
society, people are loyal to their communities, and the community, in
turn, will defend their interests. For example, Panama is a collectivist
society. Businesses that focus on benefits to the community are valued.
⧫ Masculinity vs. Femininity: In masculine societies, assertiveness and
demonstration of success are valued. In feminine societies, modesty
and good relationships are valued. For example, Japan is a highly
masculine society where feelings of pride and ego are seen as status
symbols. Money and achievement are valued over good relationships.
On the other hand, Sweden is a feminine society, where there is more
focus on the quality of life.
⧫ Uncertainty avoidance index (UAI): This refers to the ability of people
to cope with anxiety. For example, Greece has a high UAI. People
attempt to avoid uncertainty and try to make their life as predictable
as possible. In Singapore (low UAI), people are more open to change
or innovation.
⧫ Long vs. Short-term orientation: Countries with a long-term
orientation are practical, modest and economical. Countries with short-
term orientation focus on principles, consistency, truth and religion/
nationalism. For example, the US is a short-term orientation country,
as people value short-term gains and quick results. They also have a
strong sense of nationalism and social standards.
⧫ Indulgence vs. Restraint: Countries that are high on indulgence
promote individual drives and emotions, such as having fun. Countries
that exhibit restraint focus on suppressing immediate gratification and
have strict social norms to regulate people’s conduct and behaviour.
For example, Russia has a restrained culture.
d. Technological factors:
✓ What are the new technologies that the business should be using?
✓ Are there potentially any technologies being developed that could severely
impact the business or industry?
✓ Does any competitor(s) have access to new, path-breaking technologies?
✓ What are the focussed areas of research among governments and
educational institutions? How can you leverage them?
✓ Does any technology require you to change infrastructure to adjust work
patterns?
✓ Can you leverage any existing technological hubs?
e. Legislative factors:
✓ What are the employment laws in the country (such as minimum wage,
benefits, etc.)?
✓ What are the health and safety regulations that must be considered?
✓ What are the environmental regulation laws of the land?
✓ What data laws and copyright protection laws concern your business?
f. Environmental factors:
✓ What sustainable environmental practices are applicable?
✓ What is the status of ethical sourcing in the land? How can you adopt it for
your business?
✓ How can you reduce your carbon footprint in the business?
✓ What data handling and user privacy practices can you incorporate in the
business?
2. Identify opportunities: After identifying the relevant macro environment factors,
identify the opportunities that these factors could open up for you. For example,
you can analyse whether any of these factors enable you to develop new products
or enter new markets or make processes more efficient.
3. Identify threats: You should also analyse which of these factors pose any
threats. This will help you to forecast changes that could disrupt your business.
For example, if a core customer base of your business is aging, then you should
analyse whether you can open up to other demographics. If your product is under
threat due to new technology on the horizon, then you can evaluate how you can
leverage that technology to improve your product.
4. Take action: Finally, take suitable actions to exploit opportunities in your business
plan, and manage or remove risks.
UNIT -2
INTRODUCTION
In the previous chapter, you studied about the concept of the macro business
environment, its significance and constituents. The chapter also discussed the factors
which affect the macro business environment.

Business units are affected by the political environment through various means.
Thus, it is essential to have a stable political environment for the growth of the
business. Political stability, relation with other countries, Centre-State relations,
the views of the opposition parties, etc. are the major elements of the political
environment. Therefore, the stability and efficiency of political environment lead
to business growth. Long-term plans are difficult to formulate while there is lack
of proper political environment. Also, the business is drastically affected by the
unstable government. Likewise, business is also influenced by the relations of the
government with other countries. Friendly relations with other countries provide a
favourable environment for foreign trade.

In this chapter, you will study about the political environment of India and the
environmental perspective of the public sector. You will also study the intervention
of government in the private sector. The reforms and performance of the public
sector have been described at the end of this chapter.

POLITICAL ENVIRONMENT OF INDIA

A political system, including kingship, democratic, socialist, etc., as well as political
openness to the market forces is referred to as political environment of a country.
Business activities in a country are widely affected by its political environment.

The Directive Principles of the State Policy and Fundamental Rights as per the
provisions of the Constitution of India and execution of those provisions by the state
machinery have a significant effect on the business environment. The government is
also mutually working with several private firms and various multilateral companies
in order to attain this objective.

There are some major elements of the political environment with respect to business,
namely Political System, Political Processes, Stability of Political Structure and Centre-
State Relations. Now, let us discuss briefly the above-mentioned elements of the
political environment:

 Political System: The Constitution of India governs the Indian political system.
It was stimulated by Pandit Jawaharlal Nehru on 9 December, 1946 and was later
 implemented by the Constituent Assembly in January 1947. It came into existence
on 26th January 1950. The Constitution of India is not the creation of political
revolution, but the study of the prominent people who made an exertion to mend
upon the prevailing system.
The head of the Indian Union is President of India and has to perform an act in
accordance with the advice of the council of ministers and the Prime Minister of
India.
Parliament is the supreme legislative body of the Indian Union. It consists of two
houses:
a. Lok Sabha: It is also known as House of People, and members of Lok Sabha are
elected by direct election for a time period of maximum five years.
b. Rajya Sabha: It is also known as Council of States, and members of Rajya Sabha
are indirectly chosen. The elected members of legislative assemblies of state are
the members of Rajya Sabha.
The president of India also nominates some members, and one-third members
retire every year.
States have:
a. Legislative assemblies or Vidhan Sabha.
b. Legislative councils or Vidhan Parishad (not all states have Vidhan Parishad).
Union Territories have Administrators who are directly appointed by the President
whereas local Government in urban areas has elected municipal bodies.
 Political Processes: The creation and functioning of political parties at national and
state levels are governed by Election Commission of India which is an independent
authority. Election Commission has the right to register political parties. Further,
the state or government cannot prefer only one religion as against others. In the
42nd Constitutional Amendment, the term ‘Secular’ was added in the Preamble to
the Constitution in 1976, which means giving equal reassurance to all religions.
Moreover, during elections, the issues which are of personal benefit are focussed
more by the national leaders and occasionally takes up issues, such as alleviation
of poverty, rural upliftment, problems of backward classes, etc. It is important to
focus on problems of the constituency of leaders during the election campaign.
This has led to no individual party having a clear majority which not only leads
to instability in politics, but also impacts the growth of the business as well as the
nation.
 Stability of the Political Structure: It is necessary to have a balance between
executive, legislation and judiciary in order to achieve a stable political structure.
In India, executive power at centre and state lees with ministries, departments,
secretariats and offices. The President appoints Comptroller and Auditor General
(CAG). CAG is responsible to report on account of Union and States to the President
and respective Governors.
Moreover, local leadership sometimes leads to political instability as an outcome
of their ulterior interests.
 Centre-State Relations: A threefold distribution of power, namely Union List, State
List and Concurrent List is provided by the Constitution of India to evade conflict
between Union and federating states. Policy-making on the subjects mentioned
in Union List lies with only Central government whereas policy making on the
subjects mentioned in the State list is the responsibility of only state government.
But policy-making on subjects mentioned in Concurrent List lies with both centre
and state governments. The President’s rule can be imposed under Article 356
which also provides for the dissolution of state assembly in the situation of failure
of constitutional machinery in the states.
The Constitution also specifies Centre-State relations with respect to:
⚫ Distribution of financial powers between the Centre and states
⚫ Mechanism of resource transfer from the Centre to states

DIFFERENT ECONOMIC SYSTEMS AND THE ROLE OF THEGOVERNMENT

Due to the failure of the free market mechanism, the intervention of government
became indispensable for the growth of an economy. Now, the question arises of
determining the extent of government intervention in regulating and managing
economic activities. This remains a debatable issue among various economists. This
is because of the reason that the government intervention is also not able to eradicate
the economic problems of a nation completely. Different economists have given
different viewpoints for the role of the government in an economy.

According to Colin Clark, “the role of government must be held at a ceiling of 25 percent
of the national income.”

According to Samuelson, “there are no rules concerning the proper role of government
that can be established by a priori reasoning.”

From the aforementioned viewpoints, it can be concluded that the accurate and exact
percentage or amount of government intervention in an economy is hard to decide
and calls for an issue of collective social choice. The extent of the role of government
differs in different economies. An economic system is a way through which economic
resources are owned and distributed. On the basis of the ownership and distribution
of resources, the economic system can be grouped into three categories namely
capitalist economy, socialist economy and mixed economy.

A capitalist economy refers to an economy that works on the principle of the free
market mechanism. It is also termed as laissez faire system. In a capitalist economy,
the role of government is very limited. The main functions of government, as
given by Adam Smith, are to maintain law and order in a country, make national
defense stronger, and regulate the money supply. According to Smith, the market
system administers various economic functions. However, over a period of time, the
functions of government in an economy have increased. In a capitalist economy, the
main responsibilities performed by the government are as follows:
 Developing and sustaining the free market mechanism system
 Eliminating any kind of restrictions on the working of a free competitive market
 Increasing the effectiveness of the free competitive market system through various
measures
In the view of Meade, following are the responsibilities of a government in a capitalist
economy:
 Regulating and controlling various economic situations, such as inflation and
deflation, by formulating and implementing various fiscal and monetary measures
 Controlling the power of monopolistic and large corporations to elude various
economic problems, such as unemployment and inequitable distribution of
resources
 Possessing the ownership of public utilities, such as railways, education, medical
care, water, and electricity, which are required by an economy as a whole
 Prohibiting discrimination among individuals and providing them equal
educational and job opportunities
 Limiting restrictive trade practices and power of trade unions
 Maintaining law and order, administering justice, and safeguarding the freedom
of individuals in an economy
 Supporting private ventures in an economy
 Creating a central planning body that helps in the development of an economy on
a larger scale
 Handling problems to the environment, extinction of natural resources, and
growth of population
Therefore, we can conclude that the major role of government in a capitalist economy
is to control and encourage the free market mechanism. In addition, the government
should encourage private ventures for safeguarding the future of an economy.

In a socialist economy, the function of government is entirely different from

the function of government in a capitalist economy. In a capitalist economy, the
government acts as a regulatory and complementary body. On the other hand,
in a socialist economy, the government plays a comprehensive role in almost all
economic activities, such as production, distribution, and consumption, of a nation.
In a socialist economy, not only the ownership of private property is allowed to a
limited amount, but the concept of the free market mechanism is also eliminated.
The private ownership of resources, in a socialist economy, is changed by state
ownership. In addition, in a socialist economy, the government plans and regulates
all the economic activities centrally at a state level. Moreover, the decisions related
to production, allocation of resources, employment, pricing, and consumption,
are completely dependent on the government or its central planning authority. In
a socialist economy, an individual’s decisions are totally dependent on the limit
decided by the government. For example, individuals are given the freedom of choice,
but it is subject to the limitations of policy framework of the socialist economy.
The countries in which the socialist economy is adopted are China, Yugoslavia,
Czechoslovakia, and Poland.

The objective of the government in a socialist economy is the same as in the capitalist
economy, such as growth, efficiency, and maintaining justice. However, the ways
adopted by the socialist economy to achieve those objectives are different from
the capitalist economy. For example, in the capitalist economy, the main force of
motivation is the private profit, whereas, in the social economy, the encouraging
factor is the social welfare. The socialist way of managing an economy facilitates
the elimination of various evil activities of the capitalist economy, such as labor
exploitation, unemployment, and inequality in the society. This is only the classical
view of the socialist economy. However, over a passage of time, the scope of socialist
economy has also been reduced due to various reasons, such as prohibition of
profits from private ventures, inadequate utilisation of resources, and restrictions
on economic development as noted by Union of Soviet Socialist Republics (USSR).

Mixed economy refers to an economy that comprises the features of both, the
socialist economy and capitalist economy. This implies that working of a mixed
economy is based on the principles of the free market mechanism and centrally
planned economic system. In a mixed economy, the private sector is encouraged to
work on the principle of the free market mechanism under a political and economic
policy outline decided by the government. On the other hand, the public sector, in
a mixed economy, is involved in the growth and development of public utilities,
which is based on the principle of socialist economy. In a mixed economy, the public
sector comprises certain industries, businesses, and activities that are completely
owned, managed, and operated by the government. Moreover, in a mixed economy,
certain laws have been enacted by the government to restrict the entry of private
entrepreneurs in industries reserved for the public sector. Apart from this, the
government also strives hard for the expansion of the public sector by nationalising
various private ventures. For example, in India, the government has nationalised
several private banks, which has resulted in the expansion of the public sector. Besides
working for the growth and development of the public sector, the government, in a
mixed economy, controls the activities of the private sector by implementing various
monetary and fiscal policies.

It should be noted here that a free market mechanism is actually a form of a mixed
economy. This is because of the reason that in a free market mechanism, both the
private and public sectors exist simultaneously. However, the public sector in a
free market mechanism economy is different from the public sector of the mixed
economy. In free market mechanism economy, the public sector is responsible to
maintain law and order in a country, make national defense stronger, and regulate
money supply. On the other hand, the public sector of a mixed economy is involved
in almost all economic activities, such as production, distribution, and consumption.
For example, the public sector of an economy, such as India, is based on the socialist
pattern of society.
PUBLIC SECTOR—AN ENVIRONMENTAL PERSPECTIVE
Public sectors are those industrial sectors which are controlled and regulated either
by central government or state governments or both. Thus, it can be said that the
public sectors comprise the government owned corporations. Central or state
government holds the majority of public shares of these Public Sector Undertakings
(PSUs) which are not less than 51%.

Before 1947, there were only a few sectors, which were controlled by the states
including ports, railways, telegraphs, postal services, etc. Industrial policy was
formed after independence, which favoured the concept of large PSUs. Also, a
roadmap for the business sector in India was constructed as a part of 1956 industrial
policy, envisioning the view of a self-reliant economic growth. In the Indian
economy, a strategic role was assigned to the public sectors through the Industrial
Policy Resolution of 1956.

There are various types or forms of public enterprises including:

i. Departmental undertakings such as Railways, Defence, etc.
ii. Statutory Corporations such as LIC, the Indian Airlines Corporations, etc.
iii. Government Companies such as Heavy Electricals Ltd., HMT Ltd., etc.
iv. Holding Company such as Steel Authority of India Ltd.
Following are the major objectives of Public sectors:
 To encourage prompt economic development through construction and
development of Infrastructure
 To create financial resources for development
 To generate employment opportunities
 To encourage redistribution of wealth and income
 To promote balanced regional growth
 To promote exports and import substitution
 To encourage Supplemental Security Incomes (SSIs)
GOVERNMENT INTERVENTION IN THE PRIVATE SECTOR
The development and growth of a company is widely depended on the government
of the country. It works for social welfare and makes optimal distribution of resources
in order to achieve economic growth. Although, the role of government should be
restricted in an economy as per the views of classical economists. Moreover, they
proposed that the economy changes independently without any governing unit.
Although, these situations are not valid in this practical world. For instance, the
economy could not be restored itself at the time of the Great Depression of 1930s.
Apart from this, the free-market mechanism can fail due to various other reasons
such as:

 Inequitable distribution of goods and job opportunities: It is one of the main

reasons behind the failure of the free-market mechanism. As proposed by Slither,
there are two basic necessities of an economy that are essential to be fulfilled in the
free-market mechanism. Initially, the goods should be offered to those people in
an economy who seeks maximum pleasure by consuming those goods. Thereafter,
people with greater efficiency should be given the job of producing goods as they
can perform the task with greater efficiency. According to economics, the marginal
utility of each good should be equal for all consumers while distributing the goods
in an economy. Whereas the marginal productivity of each factor of production
should remain equal while allocating resources to each industry. Although,
according to Slither, the goods and resources are not distributed in such a manner
in the free-market mechanism. Here, individual those are capable of paying
maximum prices are offered goods regardless of the marginal utility derived from
those goods. Thus, the theory of the relationship between the ability to purchase
goods and satisfaction derived by consuming that good is not justified here. Also,
the satisfaction level of poor varies with that of rich for the same product. For
instance, an ordinary clothing of a rich man can be a delight for a poor as the
buying power of a poor is far less than a buying power of a rich person and he/she
is incapable of purchasing the apparel that belongs to the rich person.
Likewise, jobs are not given in a manner that an individual is able to perform them
with no extra efforts in the free-market mechanism. Also, the wages of people
do not depend on their productivity in the free-market mechanism. Numerous
unproductive labourers in an economy are paid more salary than the productive
ones, such as politicians, bureaucrats and commission brokers.
 Existence of perfect competition: Another drawback of the free-market mechanism
is the existence of perfect competition. Although, perfect competition plays a
significant role in efficient and proper working of an economy in free-market
mechanism. Increase in production cost in every market, non-existence of public
goods, exclusion principle of consumption, mobilisation of factors of production
and perfect knowledge of buyers and sellers are the major other aspects for the
efficient functioning of an economy under the free-market mechanism. Although,
practically no perfect competition exists in the real world. Also, perfect competition
is not only the factor affecting the efficient functioning of the economic system.
For instance, the improper balance between social and private costs also act as an
obstacle for the proper functioning of the economy even under perfect competition.
 Judgment of individuals: It is believed that people are always the best evaluator of
their needs, preferences and tastes in the free-market mechanism. Thus, the decision
regarding the choice of individuals is also the most appropriate. Although, there
are some factors such as prejudices, habits, impulses and comparison between
alternatives, etc. that influence the buying behaviour of individual, especially
in case of consumer goods. Therefore, the decision made by individuals are not
restricted to their own choices but are also influenced by various other factors.
Thus, individual’s decision cannot be considered always as the best.
 Emphasis on profit: In a free-market mechanism, profit is considered as the prime
motive for private entrepreneurs. Thus, it is not suitable to make an investment in
those industries which are not fruitful, regardless of whether the industry has a
significance role in the economic development of the nation or not. On the other
hand, maximisation of profit in present monopolistic and oligopolistic markets are
leading to underutilisation of resources which eventually leads to a decrease in
productivity as well as employment.
 Low priority for public utilities: The failure of the free market is mainly due to this
factor. There are few public utilities which are of significant nature for all people
in an economy irrespective to whether they are rich or poor such as water, medical
care, electricity and education. Besides these, there are some other facilities which
also add up in the development of an economy of a country such as transport
and communication which are referred to as socio-economic infrastructure.
Although, these sectors incur huge starting cost and few returns due to which
private companies are not willing to invest in these sectors. Apart from these,
public utilities are consumed mutually under which the principle of exclusion
in pricing is not applied. If the private sector would have owned and governed
public utilities, it may have been possibility that only the individuals from the
high-income class group would be able to afford such utilities. And eventually, it
would have been led to inequitable distribution of resources among people.
 Growth of monopolies: The failure of the free-market mechanism is widely
affected by the growth of monopolies. As discussed earlier, perfect competition
widely influences on free-market mechanism. There should be parity among
all competitors in perfect competition. Though, practically, it is not possible as
efficiency among competitors cannot be equal, thus, it leads to the state of imperfect
competition. It is evident that imperfectly competitive markets can certainly
not be perfectly competitive which concludes in the growth of oligopolistic and
monopolistic competition. Various economic problems, such as low employment,
low production and high prices rises are due to the evolution of private monopolies.

All the above-mentioned aspects are the reason behind the failure of the free-market
mechanism in an economy.

For instance, in a free-market, the objective of proper allocation of goods, optimum

utilisation of scarce resources, etc., is not attained. Instead it leads to the growth
of improper distribution of income, private monopolies and increase in poverty
and unemployment. Though, the growth of the economy can be seen through free-
market mechanism, but was unable to retain and withstand such growth. Therefore,
in such a situation, the intervention of government plays a significant role in the
growth of an economy.

PUBLIC SECTOR REFORMS AND PERFORMANCE

There are various strategic roles of the public sector in the Indian economy, which
are as follows:
 Development of defence industries
 Capital formation
 Development of power projects
 Balanced economic growth
 Development of infrastructure
 Strong industrial base
 Development of basic and key industries such as iron and steel, cement, etc.
 Economies of scale
 Development of banking and insurance
 Balanced regional development
 Removal of regional disparities
 Import substitution
 Export promotion
 Saving in foreign exchange
 Diversity of projects
 Optimal allocation and utilisation of resources
 Expansion of employment opportunities
 Source of revenue to the government
Some of the issues and drawbacks of the Indian public sector are as follows:
 Mounting losses
 Delay in completion of the projects
 Over-capitalisation
 Price policy of public enterprises
 Increase in costs of construction
 Faulty planning and controls
 Political factors influence the decision about location
 Under-utilisation of capacity
 Inefficient management
 Unfavourable input-output ratio
 Shortage of raw materials and power
 Use of manpower resources in excess of actual requirements
 Labour problem resulting in strikes and lockouts
 Higher capital intensity -- low employment generation
Some of the remedies/measures that can be taken for boosting the performance of
the Indian public sector are as follows:
 Reduction in unproductive expenditure
 Utilisation of installed capacity
 Better utilisation of manpower and materials
 Proper planning and control
 Improvement of efficiency of management
 Suitable price policy
 Making them autonomous
 Improvement of industrial relations
 Motivation of staff and workers
ECONOMIC ENVIRONMENT
Economic environment of a country encompasses external factors which have a
significant effect on the creation and dissemination of wealth. The demand and
supply of a firm are directly influenced by such economic factors. From the financial
point of view, it also justifies the viability of a country regarding the carrying out of
business practices.

The economic environment of a firm comprises various external factors like economic
conditions, economic system and economic policies. A country’s economic condition
can be explained in the form of the income distribution, per capita income, economic
nature, economic resources, and so on.

Demand is a very important element of the economic environment. The demand for
products of a firm is influenced by the confidence or insecurities of consumers and
their buying ability. Hence, the economic environment has a crucial role to play in
the decision making of a business.

The economic system acts as the basis for determining the degree of private business.
There are several types of economic system followed across nations. Some nations
have free market economies or capitalist economies whereas some have centrally
planned economy or socialist economy. There are also some countries which follow
the mixed economy, i.e., carrying characteristics of both capitalist and socialist
economies.

In this chapter, you will study about the Indian economic environment, kinds of
economic systems and economic policies. The chapter also discusses the current
inflationary position and its impact on the business sector and economic legislations.
The economic transition in India has been discussed at the end of this chapter.

INDIAN ECONOMIC ENVIRONMENT

India can be regarded as the fastest developing economy in the world and over
the next 10-15 years, it is believed to become one of the top three global economic
superpowers, because of its robust democracy and relationships with the world. In
2017-18, the GDP of India increased by 7.2 per cent, whereas in 2018-19, it increased
by 7 per cent. With more than 4750 start-ups based on technology, India is still the
third largest start-up base in the world.

As per research conducted by Thought Arbitrage Research Institute and

ASSOCHAM, by 2020, the labour force of India is estimated to reach 160-170 million.

According to RBI, as of March 15, 2019, the foreign exchange reserves of India were
US$ 405.64 billion.

By FY27, the GDP of India is estimated to touch US$ 6 trillion and because of the
favourable reforms, demographics, globalisation and digitisation, India is set to
attain an upper-middle income status.

By 2019, the revenue receipts of India are expected to reach US$385412 billion.
This is due to the reforms like GST and demonetisation and measures to boost the
infrastructure.

KINDS OF ECONOMIC SYSTEMS

An economic system can be referred to as a system that encompasses the methods

of production, distribution and exchange of goods and services (excluding their
consumption). The different economic systems differ on the basis of means of
establishment of ownership.

CAPITALIST ECONOMY
Capitalism is an economic system in which the industries, trade and production
means are completely owned by private bodies. This type of economy is also known
as a capitalist economy or a free-market economy. This type of economy involves
no governmental interference. There are many developing as well as developed
nations which follow the capitalist economy system such as Germany, U.S., etc.

The production task of a capitalist economy is completely controlled by firms

and industries. The market mechanism, decision-making process, the means of
production carried out for the supply of products in the market are owned by private
organisations.
In the words of Karl Marx, “Capitalism is a particular mode of organisation of production
which is characterised by wage slavery, production of profit, and creation of surplus value”.
As per Louks and Hoots, “Capitalism is a system of the economic organisation featured
by the private ownership and the use for private profit of man-made and nature made capital.”

In a free-market economy, there is no ownership of government as all the activities of

production are owned by private bodies. The productive activities are not controlled
or planned by anyone instead they are decided by the demand and supply of products
and the price mechanism. In this type of economy, the consumers are sovereign. If
the demand for products exceeds the supply, then prices increase and producers
raise their level of production. On the other hand, if the supply of products exceeds
the demand, then the prices of products decrease and producers reduce their level
of production.

Features of Capitalism
Capitalism can be explained as the economy which utilises its capital optimally in
the process of production. Technically, in capitalism, capital and goods are privately
owned by businesses or individuals. Capitalism has the following features:
 Private property: The setting up of private property acts as the basis of economic
life in the modern world. Therefore, private property is regarded as the terra ferma
of capitalism. In capitalism, it is a fundamental right of all the individuals to be the
owner of private property.
 Large scale production: Industrial revolution gave a boost to capitalism along
with the commencement of large-scale production. The installation of large plants
and the division of labour resulted in increased levels of production. As a result,
high production led to proper capital utilisation and a huge amount of profits.
 Profit institution: Profit institution is a significant characteristic of capitalism.
Here, capitalists earn profits by making investments. Therefore, the process of
production is oriented towards profit.
 Competition: A capitalist economy has to face strong competition in the market.
This results from the artificial rise in the demand and reduction in the supply.
Therefore, competition is regarded as an indivisible constituent of a capitalist
economy.
 Price mechanism: In capitalism, the prices of goods and services are decided by
their demand and supply. Production cost is not taken into consideration while
setting the prices of goods and services.
 Wage institution: Workers are exploited under the system of capitalism. The rates
of wages of workers are largely bargained. Here, the capitalist tries to extract
maximum possible output from the workers and pays very less wages in return.
 Money and credit: Credit institutions sanction loan to capitalists for the purposes
of investment. Capitalists establish their business and generate profit on the basis
of credit. It further assists the capitalists in the expansion of their property.
 Business organisation: Presence of large business organisations with widespread
business structures is another characteristic of a capitalist economy. Therefore, an
enormous industrial infrastructure can be set up by combining a huge amount of
funds from them and similarly from other shareholders too.
 Market Economy: The process of production, distribution and exchange
under a capitalist economy is governed by the market forces. There is
interference of government over such activities. The economy of the market is
greatly dependent on the law of demand and supply. Hence, it is also referred to
as a free or liberalisedeconomy.

SOCIALIST ECONOMY
Socialism is an economic system where ownership and regulation are under the
government. All the activities of production and other functions like allocation of
resources, consumption, distribution of income, investment pattern, etc., are under
the direction and control of the government. It is also referred to as the socialist or
command economy. In contrast to capitalism, socialism ensures public welfare and
equality among people.

The communist countries are the origin of socialist economies. In these nations,
the common interest of the entire community was preferred over the interest of the
individuals. After the 1980s, the number of communist nations started to reduce.
But there are still some democratic nations which are presently run by governments
which are socialist-inclined. They have adopted some components of a command
economy. For example, India and France both function under the planning system
of the government.

In socialism, enterprises which are owned by the government have limited access
to incentives for cost control since they cannot go past their policies of the business.
This is against the socialist economy’s objective which makes sure resource
mobilisation for the society’s welfare. Under socialism, private firms are restricted
and no incentives are offered for their efforts to cater to the needs of the consumers.
Therefore, command economies are not innovative and dynamic which may bring
the economy to a standstill.

In the words of Leftwitch, “In socialism the role of the state is central. It owns the means
of production and directs economic activity.”

As per H.D. Dickinson, “Socialism is an economic organisation of society in which the

material means of production are owned by the whole community and operated by the organs
representative of and responsible to the community according to a general economic plan,
all members of the community being entitled to benefit from the results of such socialised
production on the basis of equal right.”

Features of Socialism
The salient features of a socialist economy are as follows:
 Social ownership: In socialism, there is no private ownership since all the
production means such as banks, railways, mines, factories, farms, etc., belong
to the society. A person can only possess a private property by way of consumer
goods, furniture, residence, and so on.
 Social welfare: Social welfare is one of the crucial objectives of socialism. This is
achieved through proper resource utilisation and catering to the society’s needs
 and wants. It takes care of the economy’s benefits as a whole instead of the needs
of some individuals. Unlike a capitalist economy, where means of production is
profit oriented, in socialism, productive resources are utilised in order to produce
goods and services for the purpose of attaining social welfare. Here, the production
of necessary goods is given more significance instead of the luxury goods.
 Central planning: Under socialism, all the activities of production and their
associated goals and plans are designed by the Central Planning Authority. As
per these plans, various programmes and objectives are implemented by the
government.
 Equality of income and opportunity: Socialism strives to remove or reduce
disparities in income and wealth and offers equal opportunity to every individual.
Social ownership and production for the welfare of the society and community
abolish unequal distribution of wealth and income. It also offers equal opportunity
to every person by way of professional training, free education, and so on.
However, it is not possible to have absolute equality since capabilities differ from
person to person.
 Classless society: Contrary to capitalism, socialism is a classless society, where
there is no division of society into classes like labour class or elite class, etc. Here,
all the activities of production are carried out by the community as a whole and,
therefore class-conflict is very less likely to happen.

MIXED ECONOMY
Mixed economy combines the characteristics of both capitalism and socialism. It is
the aggregate of both public and private ownership. A mixed economy offers private
enterprises the freedom to function and develop but also permits government
interference in matters for maintaining economic objectives. The combination of
government interference and private sector varies from one nation to another. India
is a mixed economy and comprises all the relevant characteristics of capitalism and
socialism for the regulation and control of the economy.

The decisions pertaining to economic planning and resources allocation is undertaken

by the Central Government. The economy’s overall growth and development depend
upon the achievement of its goals through collaborative efforts of both the private
and public firms. In a mixed economy, some areas are operated by private firms,
whereas some areas are reserved for the public firms. Also, there are few areas,
where both private and public sectors work in a collaborative way.

As per Samuelson, “Mixed economy is that economy in which both public and private
institutions exercise economic control.”

In the words of Pickersgill, “The primary difference between the mixed economy and
market socialism is the relatively greater importance of individual decision making, private
property and the reliance on market-determined prices to guide the allocation of resources.
The mixed economy differs from competitive capitalism with respect to the share of collective
decision making in the economy.”
Features of Mixed Economy
The main features of a mixed economy are as follows:
 Co-existence of the public and private sector: In a mixed economy, both public
and private sectors operate independently but strive to achieve a single objective.
Public sectors operate for the society’s welfare while the private sector is oriented
towards earning profits. Therefore, the government has devised several economic
policies in order to regulate and govern the economic activities of the private
sector. Such policies include monetary policy, fiscal policy, taxation policy, etc.
 Individual freedom: Government imposes restrictions for ensuring the welfare of
the society. Hence, manufacturers have to abide by these rules and regulations. For
example, the government might put restrictions on the production of harmful and
hazardous goods. However, individuals are free to buy any product. Therefore,
despite all sorts of government control, people have the freedom to purchase and
choose the occupation or profession of their own choice.
 Economic welfare: The primary purpose of a mixed economy is to ensure
economic welfare. This can be brought about by reducing regional imbalances
and by offering opportunities for employment. The government has taken several
steps towards society’s upliftment. The monetary and fiscal policies are designed
to govern and control the economic activities of the private sector.
 Economic planning: The Central Government devises economic plans and direct
the functions of both the public and private firms in view of that. The public sector
activities are directly regulated by the government whereas different incentives
and subsidies are offered to the private sector for functioning as per the economic
objectives.
 Price mechanism: Price system of the economy is regulated by the price policy
framed by the government. For offering commodities at economical rates to the
weaker sections of the society, the government provides financial and economic
aid to the producers. It offers subsidies to the target groups and also provides
material inputs below the market price or free of cost to various firms. Therefore,
under a mixed economy, people avail an enormous amount of benefits and support
from the government.
 Free and controlled economic development: Mixed economy is regarded as the
best alternative to the socialist and capitalist economies. It attempts to eliminate all
the issues and drawbacks associated with the sustainable growth and development
of the economy. It gives freedom of occupation and choice as well as controls and
governs the economic activities.
 Government intervention: Under the mixed economy, the government can
interfere in order to stabilise the economy, particularly during a crisis. For example,
during the global crisis of 2008, the governments of the United States and other
nations intervened into the affairs of the economy for controlling and managing
the effect of the crisis.
ECONOMIC POLICIES
For giving a boost to the development of the country and eliminating the issues
of the economy (such as poverty, lack of infrastructure, low industrial production,
and so forth). India embarked on the path of economic reforms in the year 1991.
Economic policy enables the government to formulate and take various actions for
the economy’s welfare. These actions involve designing yearly budgets, framing tax
rates and other plans. In a business environment, such economic policies influence
the nature of ownership, labour markets, industrial relations and the other related
aspects.

Both the internal and external factors influence the formulation of the economic
policy of the nation. The political beliefs and philosophy of the various political
parties come under the internal factors, whereas, the several international
institutions such as World Bank, International Monetary Fund (IMF), credit rating
agencies come under the external factors. By formulating the economic policy, a
broad approach was taken to achieve a notable position in the world economy. The
economic reforms of 1991 transformed the prevailing economic mind-set of India.
The protectionism image was eliminated and the nation became liberal. The doors
were opened to foreign investors and they were permitted to invest in Indian firms
and organisations. Huge amounts of funds flowed into the Indian economy by way
of FDI and portfolio investments. For enjoying the full benefits from such economic
policies, some level of consistency between economic policies and the type of trade
was maintained. However, while the new economic policies were formulated,
the old ones were also kept in mind. This was done with the objective of keeping
developmental targets in mind.

FISCAL POLICY
Fiscal policy implies the policy of the government regarding expenditure and tax. It
is a form of economic policy which regulates and controls the management of public
debt, borrowings, expenditure and tax system within a country. The prime emphasis
of fiscal policy is on the currency flow in a specific economy.
The process of flow of money is initiated by the private sector which is normally
transferred to the government. The government makes use of these funds for the
economy’s welfare. Private sector uses the tax system as a medium to channelise
funds to the government and these funds then return to the economy by the way of
public expenditure. Management of public debt is another important aspect in fiscal
policy. Loans from the government, payment of interests and retirement of matured
debts, all come under the purview of public debt management. Hence, fiscal policy
is considered to be very crucial for the economy of India.

The role of fiscal policy varies as per the country’s requirements. Developed countries
make use of fiscal policy as an instrument to increase the level of employment and
maintain stability in the economy. On the other hand, underdeveloped countries
make use of fiscal policy to give a boost to economic growth.

As per Buehler, “By fiscal policy is meant the use of public finance or expenditure, taxes,
borrowing and financial administration to further our national economic objective.”

In the words of Arthur Smithies, “Fiscal policy is a policy under which government uses
its expenditure and revenue programmes to produce desirable effects and avoid undesirable
effects on the national income, production and employment.”

MONETARY POLICY
Monetary policy is referred to as the policy of Central Bank (RBI, in the context of
India) of an economy in which the cost, availability and the usage of money
are controlled and regulated by using monetary methods in order to achieve
predetermined goals and objectives. It uses several tools to set the level of aggregate
demand for goods and services or to assess the patterns and trends in the economic
sectors.

The extent of economic activities and the supply and demand of flow of credit are
influenced by the variations in the economy. These variations occur because of
the amendments made in the monetary policy. Consecutively the monetary policy
changes because of the varying availability and cost of credits. This change makes an
impact on the asset pattern of commercial banks and financial institutions.

In the words of Paul Einzig, “Monetary policy is the attitude of the political authority
towards the monetary system of the community under its control.”

As per Johnson, “Monetary policy is defined as policy employing central bank’s control
of the supply of money as an instrument for achieving the objectives of general economic
policy.”

The role of monetary policy is crucial in the economic development of a nation. Over
the years, the requirement for monetary control has been realised extensively. It not
only regulates the extent of supply and demand of currency but also controls the
functioning of currency, deposits, credit and foreign exchange of the country.
CURRENT INFLATIONARY POSITION AND ITS IMPACT ON THEBUSINESS SECTOR

In February 2019, the Indian consumer prices increased by 2.57 per cent annually,
following a downwardly revised 1.97 percent increase in January and higher than the
expectations of the market of 2.43 per cent. As prices of food dropped, this was the
highest rate of inflation in four months. RBI (Reserve Bank of India), in its meeting
in February 2019, lowered its predictions of inflation to 2.8 per cent for the period
of January-March 2019. It also highlighted a deflation in food products and a drop-
in inflation of fuel. From 2012 until 2019, India’s inflation rate was at an average of
6.22 per cent; lowest being at 1.54 percent in June, 2017 and highest being at 12.17
per cent in November 2013. Impact of inflation on the business sector is as follows:
 Reduced demand for products and services: In the situations of high inflation,
both savings and investments are negatively influenced in a negative manner.
Because of low demand of goods and services, most of the businesses get
adversely affected. Many customers tend to shift towards the Internet marketing,
as the prices of goods and services are comparatively cheaper on the websites. The
services provided by the business portals also get affected in a negative manner
because of a reduction in demand for goods and services. Many industries in India
are also affected negatively due to the reduction in demand in various sectors like
consumer durable goods and automobiles, etc., which results due to price rise
because of inflation.
 Increased product price: There are primarily two key factors responsive to the cost-
push inflation. First is the high price of raw materials and second is the increase
in the rate of wages. In fact, the rise in prices in any of the production factors like
land, labour, material or technology can lead to a price rise of the products. Profit
margins of businesses get affected whenever the production or operation cost is
increased. The increased costs of operations are transferred to the customers by
way of increased prices which gives rise to cost-push inflation.
 Market bubbles: When the central bank maintains the rate of inflation in the
economy within limits artificially, different forms of market bubbles are created.
Conventionally, easy credit and increased supply of money are related to low rates
of interest. It creates speculations and market bubbles in the economy.
 Economic downturn: Sometimes, downturns in the economy are resulted due
to the combined effect of high prices and economic bubbles. Bursting of such
bubbles takes place when some remedial measures are taken. The impact of such
situations is mostly realised by small businesses and workers. The employment
 industry faces the worst of high inflation rates. It leads to an increased rate of
unemployment and also decreases consumer spending.
 Reduced purchasing power: The reduction in the purchasing power of currency
and its depreciation are the two key and immediate outcomes of inflation. It is the
retired individuals with limited or fixed incomes who are affected the worst by
depreciation as the purchasing power of their money gets substantially reduced.
However, individuals who are not dependent on a fixed income are less affected
since they can counteract the depreciation by raising their fees.


ECONOMIC LEGISLATIONS

Socio-economic issues such as unethical trade practices, exploitation of labour and

growth of monopolies are always present in an economy. The principal reasons
behind these problems are conflicts between the government and private sector
regarding social and private interests and social responsibilities which are normally
discarded by private business organisations. Therefore, some laws and acts called
the economic legislations are formulated by the governments to manage them.
Following are some economic legislations formulated by the Indian government for
private business organisations:

MONOPOLIES AND RESTRICTIVE TRADE PRACTICES (MRTP) ACT

Various new and large business organisations have entered the Indian trade market
after independence. The level of competition was not extreme hence, they tried to
establish their monopoly. The intentions of those business organisations were not
hidden from the eyes of the Indian government. Hence, the MRTP bill was passed
for protecting the consumers’ interest, which eventually resulted in the emergence
of Monopolies and Restrictive Trade Practices Act of 1969. This law empowered the
MRTP commission to close down all those firms and organisations which attempted
to hinder or get in the way of healthy competition.

The MRTP bill was passed to safeguard the rights of consumers and check any kind of
monopoly or alliance which might prove harmful for the interests of the consumers.
Its purpose is to curb the practice of build-up of wealth in a few hands, which can
be harmful to the consumers. It also curbs the monopoly and unfair practices of the
trade.

Following are the main objectives of the MRTP Act:

 To regulate and control the build-up of financial power
 To curb monopoly and dominant practices of trade until they prove to be helpful
for the people
 To restrict unfair trade practices

FOREIGN EXCHANGE REGULATION ACT (FERA), 1973

In 1973, Foreign Exchange regulation Act (FERA) was passed. It put very strict
regulations on some specific form of payments, securities and dealings that had
a negative effect on the export and import of currency and foreign exchange. The
FERA bill was framed in order to regulate foreign exchange and payments. From
January 1, 1974, FERA was brought into effect.

At the time when the foreign exchange reserves in India were low, the FERA was
introduced. The foreign exchange became rare. Hence, FERA assumed that the
Indian Government was the rightful owner of all the foreign exchange earned by the
residents of India. Therefore, it had to be accumulated and given to the RBI (Reserve
Bank of India). The transactions restricted by the RBI were mainly not allowed under
FERA. The objectives of FERA are as follows:

 To regulate the foreign payments

 To regulate the transactions in securities and foreign exchange
 To conserve foreign exchange for India

FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 1999

In 1999, Foreign Exchange Management Act (FEMA) was brought to replace Foreign
Exchange Regulation Act (FERA), 1973. The purpose of FERA was to regulate the
conducting of the business of Indian companies in foreign markets and foreign
companies in the Indian market. FEMA was bought into effect from January 1, 2000.
This act applies to every office, branch or agency in India and also to the foreign
offices and branches of people who are the Indian residents.

FEMA was framed by the Indian Government and is directly associated with
the foreign direct investment in the economy. FEMA has a crucial role to play in
facilitating external payment and trade.

Hence, FEMA is an Act of the Parliament of India “to consolidate and amend the law
relating to the foreign exchange with the objective of facilitating external trade and payments
and for promoting the orderly development and maintenance of foreign exchange market in
India.” The main Objectives of FEMA are as follows:

 To amend and consolidate FERA

 To assist in external payments and trade
 To facilitate the systematic development of the Indian foreign exchange market
ECONOMIC TRANSITION IN INDIA
India has been the concept of a mixed economy since the beginning of the 1950s. This
means that the Indian economy is a mixture of both socialism and capitalism. During
that time, many international donors and top development economists praised this
approach of India. The mixed economy made way for a highly controlled private
sector, import substitution and a huge public sector. The result was actually ‘mixed’
since it resulted in both the slow growth of socialism and the disparities of capitalism.
India is a mixed economy due to the presence of the following factors:

1. Coexistence of public and private sectors: India transformed into a mixed

economy because of the coexistence of public sector and huge private sectors.
Such coexistence has been possible because of the industrial policies framed by
the Government of India. Public sector runs some basic and heavy industries.
However, the scope of private sector has widened with the liberalisation of the
Indian economy.
2. Planned development: During independence, the industrial sector of India was
poor. The Indian economy became weak because of the long period of stagnation
under the rule of British Raj. Therefore, five-years plans were formulated as per
the Directive Principles of State Policy in order to boost the rural economy and
provide a basis for the development of the industrial sector.
3. Planned objectives: The concept of the five-year plan was introduced in India in
1951. These plans had the following basic objectives:
⚫ Growth of the economy
⚫ Modernisation
⚫ Social justice
⚫ Self-reliance
⚫ Poverty elimination
⚫ Employment opportunities
⚫ Fulfilment of basic needs such as food, shelter, clothing, etc.
 In 2015, the concept of five-year plan was dissolved and NITI Ayog was established.
It became operational from 1st January 2015. The NITI Ayog is a think-tank which
works as a strategic advisory authority for the central and state governments. NITI
Ayog provides strategic and technical advice with respect to various policy areas.
4. Role of public sector: The public sector had a crucial role to play in India’s
development. The speed of economic growth was boosted by the public sector.
Moreover, it tried to eliminate the inequality in the wealth and income. Public
sector works for the following areas:
⚫ Infrastructure development
⚫ Spreading the industries in various remote and backward areas
⚫ Setting up of basic and heavy industries
⚫ Marketing and trading activities along with international trade.
5. Private sector: Private sector encompasses the organized industry along with
small scale industries, agriculture, housing, construction and trade. Almost three-
fourth of the economy is employed under the private sector. The MRTP Act and
the Industries Development and Regulation Act have been established to control
the private sector.
UNIT 3
INTRODUCTION SOCIAL ENVIRONMENT
The socio-cultural environment includes social customs, values, codes of conduct,
beliefs, traditions, etc. Every business is influenced by the socio-cultural environment;
therefore, it is essential to examine the environment and make strategies accordingly.
Education level of people, values and attitude, work ethics, family structure define
social cultural environment. Social practice, beliefs and associated factors are helpful
for promotion of the certain products, services or ideas; the success of marketing
depends on a large extent, on the success in terms of changing social attitude or
value systems.

Business failures and dissatisfaction with the way many corporate functions have
led to the global realisation of the need of a proper system for corporate governance.
Corporate governance refers to a process of balancing between the organisation,
its stakeholders’ interest to achieve organisation goals and the social goals. The
governance framework is there to encourage and boost the efficient and effective use
of scarce resources and equally to require accountability and transparency for the
stewardship of those resources. The motive is to protect the interest of individuals,
corporations and society. The business firm functions and acts in such a way that it
will accomplish social gains along with the traditional economic gains in which the
business firm is interested. The concept of social responsibility is based on the idea
that a business functions in the society and uses the physical and human resources
of the society for its operations, and hence it is under the obligation to serve the
society. The concept of social responsibility is also based on the idea that anything
good done by a business firm for the society is good for the business itself in the
long run.

This chapter begins with the description of socio-cultural environment. Further,

it clears the concept of corporate governance and its need. It also illustrates the
guidelines for good corporate governance. Next, the chapter discusses the Corporate
Social Responsibilities and its evolution in India. Towards the end, the chapter
explains social audit and its uses.

\MEANING OF SOCIO-CULTURAL ENVIRONMENT

Culture is a very crucial part of any business. There should be a proper understanding
of the cultural dimensions for taking key business decisions. According to E.B. Tylor,
“Culture of civilisation is that complex whole which includes knowledge, belief, art, morals,
law, customs and other capabilities and habits acquired by man as a member of society.”
Customs, traditions, values, beliefs, practices, behaviour, poverty, literacy, etc., that
exist within a population comes under socio-cultural Environment. The social values
and structure that society admires have a significant impact on the functioning of a
business. For example, during Diwali, there is a huge demand for new clothes, sweets,
fruits, flower, etc. Due to increase in literacy rate the consumers are becoming more
conscious of the quality of the products. In addition, there has been a significant
increase in consumerism. All these factors have led to tremendous increase in the
demand for the different types of household goods. The consumption patterns, the
dressing and living styles of people belonging to different social structures and
culture vary significantly. This leads to generation of demands for different kinds
of products.

The behaviour and attitudes of individuals and their relationships determine socio-
cultural environment. Factors responsible for the creation of a socio- cultural
environment include beliefs, values, norms and traditions of the society. These factors
determine how individuals and organisations should be interrelated. These factors
affect the business to a large extent. For example, the demand for goods and
services is highly affected by the factors, such as customs, values, norms, preferences,
etc., of the customers

The important socio-cultural factors that have a major impact on the operation of a
business are as follows:
 Culture: According to the definition by House, Javidan et al., “culture is defined
as shared motives values, beliefs, identities, and interpretations or meaning of significant
events that result from common experiences of members of collectives and are transmitted
across age generations.”
The culture that exists within a society or community has an overwhelming impact
on any business. It has been an established fact that the culture drives people’s
behaviour, innovation and customer service.
 Language: Because of diversity, people in different state, countries use different
languages to communicate. An organisation operating in different states or
countries should have its business communication designed in a way that can be
comprehended by the local audience. English is accepted as a universal business
language.
 Religion: Religion even determines the way people think of work. As a result,
religion influences enterprise and its operations. Many companies adapt their
working processes according to a religion of a given state or countries in terms of
the holidays, working hours, food habits, a way of dressing, etc.
 Social systems: The way individual interacts and socialises with other individuals
in the society is called Social system. It includes family systems, marriage, caste
system, etc. Social systems influence the consumption habit of people. For example,
with an increasing number of families, the demand for fast foods and ready to
cook foods has increased.
 Level of education: Education is about teaching, learning skills and knowledge.
Education changes the lifestyle of people, their thoughts and the way of doing
work. The level of education changes state-wise. However, in many countries,
 the level of education has a tendency to increase. The education level and level
of literacy of population of a given country are indicators of the quality of their
potential workforce.
 Customer preferences: With the spread of global communication and facilitated
travel opportunities, certain social behaviours are getting similar globally. Today,
people around the world watch the same movies, listen to the same music, play
the same video games and use the same Internet websites. Apparently, the taste
and habits of the population are becoming the same. This social trend is called
global convergence.
 Social institutions: Social institutions such as family, economics, religion,
education and state define the collective modes of behaviour. They prescribe a
way of doing things. Secondary institutions are derived from primary institutions.
The secondary institutions derived from family such as marriages, divorces,
monogamy, polygamy, etc. The secondary institutions of education are school,
college, university, etc. The secondary institutions of state are interest groups,
party system, democracy, etc.
 Population growth rate: The increases in the number of individuals in a population.
The rise in demand for food ultimately depletes natural resources needed by
everyone for living.

CONCEPT OF CORPORATE GOVERNANCE

The term governance has been derived from the word gubernare, which means to rule
or steer. It is a relatively new discipline of management that focuses on the regulation
and control of an organisation. Corporate governance deals with looking after
complete governance of various organisations with respect to financial disclosures,
transparency, legal practices, organisational structure and social welfare.

The discipline of corporate governance is worth exploring because it includes

various organisational aspects such as executive compensation, financial scandals,
and shareholder activism.

According to OECD, “Corporate Governance is the system by which business corporations

are directed and controlled. The Corporate Governance structure specifies the distribution of
rights and responsibilities among different participants in the corporation, such as, the board,
managers, shareholders and other stakeholders, and spells out the rules and procedures for
making decisions on corporate affairs. By doing this, it also provides the structure through
which the company objectives are set, and the means of attaining those objectives and
monitoring performance.”
Corporate governance can be defined as systematic process, practice and guidelines
which make sure that an organisation is governed in best interest of its stakeholders
and the social groups. Also, it brings clarity, fairness and accountability in operation
of the organisation. Corporate governance helps in achieving various organisational
objectives as well as social goals as follows:

 Prompt decision making and releasing useful and relevant information

 Full discloser and clarity in operations
 Adherence to the laws
 Promoting shareholders interest

NEED FOR CORPORATE GOVERNANCE

 It helps in giving complete independence to the management and board so that
they can take major business decision without any pressure and biasness.
 It also helps in bringing new ideas into business and operation.
 It helps in attracting sources of fund by taking domestic and foreign investor into
confidence. Corporate governance focuses on building a long-term shareholders’
value.
 It is needed to gain the trust and confidence of domestic and foreign investors.
 It helps in operational performance of an organisation by the following ways:
⚫ Improving strategic thinking at the top through induction of independent
directors who bring in experience and new ideas
⚫ Rationalising the management and constant monitoring of risk that a firm
faces globally
⚫ Improving the decision-making process of the organisation
⚫ Assuring the integrity of financial reports, etc.
 It reduces perceived risks, consequently reduces cost of capital and enables board
of directors to take quick and better decisions which ultimately improves bottom
line of the corporate.
 It minimises the probable risks, as a result cost of capital decreases and enables
board of directors to take prompt and better decisions which consequently
improves the bottom line of the corporate.
 It ensures long-term survival and build up stakeholders’ relationship.
 It attracts investors because of it the credential of an organisation are good.
 It ensures commitment to values and ethical conduct of business.

CORPORATE GOVERNANCE GUIDELINES

 Clear identification of role and powers: Proper and clear communication of
powers, roles, responsibilities and accountability of the Board, CEO and the
Chairman of the board is the important requirement of good corporate governance.
 Laws should be clear and specific. All the rules and laws of regulatory framework
should be clearly specified. This is must for effective corporate governance.
 Code of conduct: It is important that an organisation’s code of conduct is
communicated to all stakeholders and is clearly understood by them.
 Board independence: For sound corporate governance, an independent board
is essential. It means that the board is capable of analysing the performance of
managers with an objective perspective. A complete independent board is needed
for the organisation so the members of board members reflect their effectiveness
in dealings with other organisation.
 Board skills: The board must possess the necessary blend of qualities, skills,
knowledge and experience so as to make quality contribution. It includes
operational or technical expertise, financial skills, legal skills as well as knowledge
of government and regulatory requirements.
 Management environment: A transparent, responsible, and objective-oriented
framework should be established. This type of management environment
implements robust business and operational planning, establishes clear
communication system, making opportunities in a manner that the human
resources engage with as per their skill-sets.

CORPORATE GOVERNANCE IN INDIA

India’s first code of corporate governance was released in 1998, by the confederation
of Indian Industry (CII). In India, the CII, Ministry of Corporate Affairs (MCA)
and the Securities and exchange board of India (SEBI) are the part of corporate
governance administration. In February 2000, SEBI followed the recommendations
given in Kumar Mangalam Birla committee report and entrenched the first formal
and official framework of corporate governance for all the listed companies (Clause
49). One more committee was set up under the chairmanship of Mr. N.R. Narayana
Murthy to review Clause 49. This committee gave recommendations on the matter
related to audit committees, audit reports, independent directors, related party
transactions, risk management, directorships and director compensation, codes of
conduct, and financial disclosures.

In 2002, the MCA appointed Naresh Chandra committee on corporate audit and
governance for investigating different corporate governance issues. The committee
highlighted the aspects like financial and non-financial disclosures, independent
auditing and board oversight of management. National foundation for corporate
governance was set up by the MCA as a not-for-profit trust in association with CII,
ICAI and ICSI to review the importance of good corporate governance practices and
to facilitate good corporate governance in India.

Following laws and agreements ensure the implementation of good corporate

governance:
 The Companies Act, 2013: This act includes laws relating to board constitution,
board meetings, board processes, independent directors, general meetings, audit
committees, related party transactions, disclosure requirements in financial
statements, etc.
 Securities and Exchange Board of India (SEBI) guidelines: SEBI is a regulatory
authority having jurisdiction over listed companies and which issues regulations,
rules and guidelines to the companies to ensure the protection of investors interests.
 Standard Listing Agreement of Stock Exchanges: For companies whose shares
are listed on the stock exchanges.
 Accounting Standards issued by the Institute of Chartered Accountants of
India (ICAI): ICAI is an autonomous body, which issues accounting standards
providing guidelines for disclosures of financial information. Section 129 of the
New Companies Act provides that the financial statements shall give a true and
fair view of the state of affairs of the company or companies, comply with the
accounting standards notified under Section 133 of the New Companies Act. It
is further provided that items contained in such financial statements shall be in
accordance with the accounting standards.
 Secretarial Standards issued by the Institute of Company Secretaries of India
(ICSI): ICSI is an autonomous body, which issues secretarial standards in terms of
the provisions of the New Companies Act. So far, the ICSI has issued Secretarial
Standard on “Meetings of the Board of Directors” (SS-1) and Secretarial Standards
on “General Meetings” (SS-2). These Secretarial Standards have come into force
w.e.f. July 1, 2015. Section 118(10) of the New Companies Act provide that every
company (other than one-person company) shall observe Secretarial Standards
specified as such by the ICSI with respect to general and board meetings.

CORPORATE SOCIAL RESPONSIBILITY OF BUSINESS AND ITSIMPORTANCE

All the activities a business does over and above the statutory requirement comes
under Corporate Social Responsibility (CSR). CSR depicts that the business has
moral responsibilities towards the society. According to Archie B. Caroll, “Corporate
Social Responsibility is the entire range of obligations business has to society.” He has
derived four models of CSR. They are as follows:
 Economic: Since the firm is primarily an economic entity, its activities should
contribute to the prosperity of the economy.
 Legal: A company is legally bound in many aspects and it is ought to obey the law
of the land.
 Ethical: These are certain standards which the society expects the business to do
though they are not demanded by the law. Example Avoiding corruption and
unfair trade practices.
 Discretionary: These are the voluntary contributions of the business to the social
affluence like participation in the community development programmes.
The Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the
Companies Act, 2013, as well as the provisions of the Companies (Corporate Social
Responsibility Policy (CSR)) Rules, 2014, to come into effect from April 1, 2014.
Every company, private limited or public limited, which either has a net worth of
` 500 crores or a turnover of ` 1,000 crores or net profit of ` 5 crores, needs to spend at
least 2% of its average net profit for the immediately preceding three financial years
on CSR activities. The CSR activities should not be undertaken in the normal course
of business and must be with respect to any of the activities mentioned in Schedule
VII of the 2013 Act. Contribution to any political party is not considered to be a
CSR activity, and only in India CSR activities would be considered for computing
expenditure.

COMPONENTS OF CSR
The social responsibility of an organisation refers to such decisions and activities
which provide for the welfare of the society as a whole along with the earning of
profit for the organisation. Following are the components of social responsibility:
 Towards owners of enterprise: The responsibilities of business enterprises
towards their owners are:
⚫ Payment should be at regular basis at fair rate of dividend
⚫ Increase the present net value of the organisation with the help of a productive
management system
⚫ Making the full participation of the owners in the operation of the organisation
⚫ Establishing the effective communication system to send a detailed and
indiscriminate reports on operation of the organisation.
⚫ Financial doubts should be clarified in a manner so that there is no room for
doubt.
⚫ Owners/chairman of the organisation available for the directors or top
management for discussing or getting information relating to the operation of
the organisation.
 Towards workers: Some of the responsibilities of a business enterprise towards its
workers are:
⚫ Fair salary process, security for job, medical facility with family of workers,
bonus, etc. are to maintained
⚫ Appraisal process is done in trustworthy manner.
⚫ A fair-minded opportunity process should be set up within the organisation.
This helps workers and employee to enhance their skills and quality.
 ⚫ Participative in management, decision making, etc., are to be promoted in the
organisation.
⚫ Facilitating better work environment and social security
⚫ Implementing occupational hazards policy in an effective manner
⚫ Trade union leadership policy should be encouraged
⚫ Management manages human resources so attitude towards employee/
workers should be professional as well as humane
 Towards consumers: The responsibilities of business enterprise towards consumers
of its products are:
⚫ Ensuring availability of products in the right quantity, at the right place and
at the right time
⚫ Supplying products of high quality
⚫ Charging reasonable prices for its products
⚫ Using correct measures
⚫ Providing good after sales services
⚫ Avoiding restrictive trade practices and other undesirable methods to exploit
the consumers
⚫ Encouraging the formation of associations of consumers and consumers’
advisory councils and maintaining close links with them
⚫ Developing appropriate products and services for satisfying the needs of the
consumers
⚫ Taking such measures which would promote consumer satisfaction and
welfare
 Towards the society: The obligations of a business to the society are:
⚫ Adopting a set of methods to use resources in optimised manner.
⚫ Providing sustainability and economic growth for the society.
⚫ Facilitating opportunity and amenities such as sports event, eco-friendly goods
and water sanitation program for the society.
⚫ Maintaining natural resources through initiatives like waste management, air
pollution control system, renewable energy system, etc.
⚫ Contributing in social welfare programmes by conducting sanitation programs
in villages and urban slums, facilitating medical care for senior citizens, women
and children, making awareness for skill development, etc.
⚫ Improving quality of life of the people at large by capacity building, creating
employment and providing opportunity to making wealth.
 Towards the government: The obligations of business enterprise to the government
are:
⚫ Strictly observing the provisions of the various laws and enactments
 ⚫ Paying taxes and other dues to the government regularly and honestly
⚫ Extending full support to the government in its efforts to solve national
problems such as unemployment, food, inflation, regional imbalance in
economic development, etc.
 Towards the weaker section of society: The obligations of business enterprise to
the weaker section of the society are:
⚫ Providing vocational training like cookery, tailoring, selling techniques for
their economic growth
⚫ Donating funds to various voluntary agencies and NGOs, which are participated
in population and family welfare, literacy and education, development of
women and children of the schedule cast and schedule tribes.

IMPORTANCE OF CSR
 Optimum utilisation of resources: Resources are limited in nature. By following
social responsibilities, an organisation is expected to use resources in a justified
way. Resources are to be used for the productions of those goods and services
which are not detrimental to the interest of the society. Organisation is not expected
to produce unnecessary and unwanted goods. Production of such goods not only
reduces national resources, but also encourages people to spend on unnecessary
consumption.
 Producing goods and services efficiently and contributing to the economic well-
being of society: Organisations are expected to produce goods without wastage.
Organisations are expected to practice business process reengineering. This helps
the organisation to identify new and improved ways of doing improvement in
the product. Product safety is also taken care of. All these factors contribute to the
economic well-being of the society.
 Providing public amenities and avoiding the conditions of slums and congestion:
Organisations are expected to protect the surrounding environment. It cannot
handover this responsibility to the government. If healthy environment exists,
the organisation takes initiative to avoid slums and congestion and pollution of
surroundings.
 Maintain environmental ecology and adopting anti-pollution measures.

SOCIAL AUDITS

Social audit is a set process of reviewing the organisation performances, code of

conduct, and its CSR work report and initiatives. Social audits making transparencies
in work-culture of the organisation and its performances. Social audits reduce
wrong practices, wastages, and improves the way of working of the organisation.
The customers may protest violently, seek justice through courts and press the
government to put an end to such unlawful operations.

The main purpose of social audit is to improve the local governance of an organisation,
Strengthen the accountability, and maintain transparency among shareholders. An
annual statement is prepared that shows the information regarding the organisation
shareholders, various social projects, initiatives taken up for the benefits of
employees.

The process of social audit involves the following four steps:

1. Find circumstances leading to the commencement of the social audit programme.
2. List goals of the social programme.
3. State how the organisation is going to meet such goals.
4. Quantitatively evaluate what is actually done as against what has been planned.

USES OF SOCIAL AUDITING

Following are the uses of social auditing:
 To indemnify the requirements in accurate manner and helps in making an
environmental-oriented work culture within the organisation.
 To make sure transparency in financial and accounting report.
 To facilitate free from harassment and equal opportunity organisational system.
To ensure the utilisation of funds as per the requirement.
UNIT 4
UNDERSTANDING SERVICE SECTOR
The service sector is the producer of services (intangible goods) instead of goods. It
includes various types of services are as follows:
 Information technology sevices
 Transportation services
 Financial services
 Investment services
 Waste management services
 Healthcare services
 Entertainment services
 Education services
The service sector is also called the third tier or tertiary sector in an economy. Allan
Fisher, Colin Clark, and Jean Fourastié proposed three sectors of an economy. They
are as follows:
 Primary sector/tier: It includes extraction of raw materials, mining, fishing and
agriculture produce, forestry and other tangible goods.
 Secondary sector/tier: It includes manufacturing tangible products such as such
as cars, clothes, fuels, etc.
 Tertiary sector/tier: It includes services such as consultancy, software development,
transportation, etc.
As an economy, its focus shifts from the primary tier, through the secondary tier, to
the tertiary tier. Developing countries with low per capita income achieve the main
part of their national income through the primary tier. Countries in a more advanced
stage of development achieve their income mostly in the second tier. However, highly
advanced countries with a high per capita income rely on the tertiary (services) tier
as the major contributor to the economy.

According to the CIA World Factbook released in 2018, the largest countries by
tertiary output are presented in Table 1:

TaBLE 1: Largest Countries by Tertiary Output

Rank Country (Economy) Services GDP % of Total GDP

1 United States 15,526,720 80.2%
2 China 6,232,680 52.2%
3 Japan 3,384,612 69.3%
4 Germany 2,530,836 69.3%
5 United Kingdom 2,062,260 80.4%
6 France 2,005,925 77.9%
7 Brazil 1,514,968 72.8%
8 India 1,499,985 61.5%
9 Italy 1,419,619 73.9%
10 Canada 1,151,280 70.2%

Source: http://statisticstimes.com/economy/countries-by-gdp-sector-composition.php

The service sector contributes maximum to the business sector of an economy.

Businesses in this sector constitute ‘knowledge economy,’ or the ability to gain a
competitive edge by understanding customer’s needs and meeting those needs
quickly and cost-effectively.

IMPORTANCE OF SERVICE SECTOR IN INDIA

According to Table 1, India ranks eighth in the top 10 service producers’ countries in
the world. The Gross Domestic Product (GDP) amount by the services in India was
$ 1,499,985, as of 2017. Some reasons why the service sector is important to India’s
growth story are given below:
 Contribution to GDP: The expansion of the service sector was largely responsible
for India’s economic growth since the 1990s, where exports played a major role.
After 1996-97, the share of services in GDP increased significantly. From just 1.9%
in 186-87, it increased to 6.8% in 2006-07. Today, the service sector accounts for
more than half of the country’s GDP. Table 2 illustrates this trend more clearly:

TaBLE 2: Share of Services in India’s GDP Over the Years

1950 - 51 2013 – 14

Share of total services, excluding 28.5% 51.3%

construction to India’s GDP

Share of total services, excluding 30.5% 55.7%

construction to India’s GDP at factor cost
(at current prices)

Share of transport, communication and 11% 18.6%

trade in India’s GDP (at constant prices)

Share of community and personal services 8.5% 12.9%

to GDP (at constant prices)

Share of finance insurance, real estate, and 9% 19.8%

business services

 Support to agriculture and manufacturing: The service sector achieved the

Compound Annual Growth Rate (CAGR) of 10.3% for the period 2004-5 to 2011-
12. This rate was higher than the CAGR of India’s GDP achieved during the
same period, which was 8.6%. In other words, the service sector increased at a
higher rate than both the agriculture and industry sectors, which was only 6.6%.
Significantly, this growth was due to the growth of public services, information
technology and financial services. Today, India is a service-oriented economy.
It skipped the traditional growth models of manufacturing growth stage and
directly jumped from the agricultural growth to the services growth stage. This
growth in the service sector will help the agriculture and the industry sectors in
the following ways:
⚫ Support to agriculture: Services will expand agriculture by providing better
network, transportation and credit facilities to farmers.
⚫ Support to industrialisation: Services such as transport, communication,
electricity and banking will boost industrialisation in the country.
The growth of the service sector will also help to generate more employment and
raise overall productivity.
 Boost exports: The growth in services was largely associated with the surge in
the exports. India’s share of services in total exports (38%) is much higher than in
countries such as China, Mexico, and Brazil, and is close to ratios in the US and
the UK.
 The ratio is presented in Figure 1:

Export profile
Share of services exports in total exports (2016)
(In %)
50

40

30

20

10

0
India China Mexico Brazil UK US

FIGURE 1: Export Profile

Source: https://www.thehindubusinessline.com/opinion/columns/c-p-chandrasekhar/indias-services-sector-
boom-has-failed-on-the-jobs-front/article25540761.ece

 Employment generation: Agriculture is still the dominant employer in India, but

the service sector is quickly taking over. From 1999-00 to 2009-10, employment in
the service sector increased by 25% as shown in Figure 2:

Rising share
Share of services in total employment
(In %)
25.5

24.5

23.5

22.5

21.5

20.5
1993-1994 1999-2000 2004-2005 2009-2010

FIGURE 2: Share of Services in Total Employment

Source: https://www.thehindubusinessline.com/opinion/columns/c-p-chandrasekhar/indias-services-sector-
boom-has-failed-on-the-jobs-front/article25540761.ece

This rise was particularly observed in the construction sector. The total employment
in the construction sector increased from 17 million in 2000 to 50 million in 2011-12
(double from 2004-05). Thus, the share of the construction sector in total employment
increased from 4.4% in 1999 – 2000 to 10.5% in 2011 – 12.
According to the National Sample Survey Organisation (NSSO) report on Employment
and Unemployment Situation in India in 2009-10, for every 1000 people employed in
rural India, the share of employment is as shown in Table 3:

TaBLE 3: Share of Employment Over Three Sectors of Economy

Total Number of People Employed in People Employed in People Employed in

People Employed Agriculture Manufacturing Services
Rural India
1000 679 80 241
Urban India
1000 75 242 683

Studies further indicate that the employment growth of the service sector in both
rural and urban areas is steadily moving from low-income jobs to high-income jobs.
 Contribution towards human development: The service sector provides valuable
services towards human development, such as health services, education, IT and
IT Enabled Services (ITES), skill development, health tourism, sports, and cultural
services. These services help to empower and improve the quality of life of the
public at large.
 Contribution towards Foreign Direct Investment (FDI): A modest growth of
the service sector has streamlined the flow of FDI into India. The combined FDI
share of financial and non-financial services, computer hardware and software,
telecommunication and real estate was 40.5% of cumulative FDI equity during
April 2000 – December 2012. If the construction sector is also included, then the
FDI inflows increase to 47%.
 Contribution towards infrastructure development: The service sector plays a key
role in developing, expanding and managing transportation and communication
infrastructure. The transport, storage and communication contributed 7.1% (at
current prices) to the GDP in 2011-12.
 Contribution towards IT and ITES growth: The IT and ITES industries have four
key parts:
⚫ IT services
⚫ Business Process Outsourcing (BPO)
⚫ Engineering services, and Research and Development (R&D)
⚫ Software products
Over the year, this industry has generated considerable revenue and employment
in the Indian economy. According to NASSCOM, the IT-BPM sector (excluding
hardware) revenues of India were $ 167 billion in 2018. The sector is projected to
create 1 lakh IT jobs in 2019-20.
 Development of social services: The service sector also plays a significant role in
the development and expansion of some social services, such as sports and cultural
services. These are core sectors of job creation and a vehicle of cultural identity.
They promote valuable social services and enrich the society.
TRENDS IN SERVICE SECTOR GROWTH
According to a report by IBEF, the service sector is poised for strong growth in the
coming years. Some key trends are as follows:
 It has grown at a CAGR of 6.25% from 2012-2019 (at current prices) to reach
$ 1,294.41 billion.
 It will continue to be a major employment provider. As of 2018, it provided direct
employment to 34.49% of India’s population.
 It will continue to contribute significantly to the total exports of India. In 2017,
India was the 8th largest exporter of commercial services. In the first half 2018-19,
the exports of services amounted to $ 38.95 billion.
 It will continue as a major contributor of FDI inflows in India. In the period of
April 2000-December 2018, the service sector received FDI inflows of $ 70.91.
 The key performers in the service sector are as follows:
⚫ Aviation: From 2011 to 2017, the air passenger traffic in India quadrupled from
59.87 million to 117 million passengers.
⚫ Tourism: The earnings in the tourism in 2017 were $ 27.7 billion, which was an
increase of 20.8% on a year-on-year basis.
⚫ IT-BPM: Revenues from the IT-BPM industry increased by 8.38% year-on-year
from $ 167 in 2018 to $ 181 billion in the first quarter of 2019.

India’s financial sector is dominated by the banking industry. It has several structural
weaknesses, which cannot be removed without radical reforms.

Indian banks have around $ 150 billion in non-performing assets (NPAs) or about 15%
of total loans. Public sector banks hold a majority of these NPAs. In early 2018, the
government injected a package of $ 14 billion followed by $ 6.8 billion in early 2019
to help the banks. To improve recovery rates, the government has also implemented
several key amendments to the bankruptcy code. However, these reforms are not
sufficient, as they do not resolve structural challenges such as:

BANKING REFORMS AND CHALLENGES

 High level of government involvement in the financial sector
 Inadequate financial inclusion of a large scale of population
 Wasteful misallocation of capital
 Poor governance
These problems arise because there are two competing forces in the country, which
are difficult to reconcile. Out of a straight line, the Indian state needs compliant
banks to lend to favoured sectors and finance the government by purchasing bonds.
On the other hand, there are capital requirements of businesses and consumer
requirements for basic banking.

Let us discuss the structural problems in the banking sector of India.

 High level of state ownership: The public sector banks own about 70% of deposits
and 50% of loans. Although they are listed on the stock market with minority
shareholders, these banks are mostly used as the tools of the government policy.
The top appointments in banks are politically influenced. Ministers decide capital
allocations after evaluating their impact on the fiscal deficit and other funding
priorities.
 Distorted financial system: About 25% of loan share is through private banks. Due
to the existence of public banks, private banks choose to operate in commercially
profitable segments. As a result, public banks have to bear most of the cost of
servicing remote areas and unprofitable accounts. This has led to artificially-high
valuations for some private sector banks.
 Liquidity risks: The deposit base of private banks is not adequate to finance
lending growth. Their high loan-to-deposit ratios make their liquidity vulnerable
in wholesale money markets.
 Financial exclusion: There are still around 190 million people in India who have
no bank account.
 Constrained credit: To improve the capital ratios of banks, the Reserve Bank has
imposed a Prompt Corrective Action Plan. As a result, more than half of the public
sector banks cannot expand lending, which hurts small borrowers, such as farmers.
 Misallocation of capital: The government prefers public sector banks to grant
loans to its business backers and state-owned enterprises, which become NPAs in
the downturn of the economic cycle. Multiple governments have been unwilling
to deal with bad debts, which ties up their capital.
 Shadow banking: It is a term used to describe the non-bank financial intermediaries
which provide financial services, such as loans and other services to individuals
or business entities. This type of banking is usually related to risky investments,
pawnshop and peer-to-peer lending. Shadow banking is widespread in India. As of
March 2019, its share in the total loan share is 25%. Just as banks, these institutions
use short term borrowings to finance long-term loans. However, for funding, they
rely on volatile money markets and interbank loans, which increase their risk. On
September 2018, IL&FS, an infrastructure finance group, defaulted on short-term
lending and required a bailout. The exposure of Indian banks to shadow banks is
also threateningly high, as they have lent about $70 billion to shadow banks (40%
of the banking sector’s capital).
 Corruption and governance: Since 2018, banking frauds amounting to more than
$2.5 billion have come to the public’s attention. This includes the $2 billion case
of the Punjab National Bank by companies associated with the celebrity jeweller
Nirav Modi and his uncle Mehul Choksi. The private sector banks are also not
doing well. The CEOs of several reputed private banks have exited in questionable
conduct. For example, Chanda Kochhar, the former CEO of ICICI Bank (a large
private sector bank), resigned on October 2018 on charges of having a conflict of
interest. She has been accused of granting loans from the ICICI Bank to a company
founded by her husband.

The above challenges require some structural reforms to the banking sector. The
reforms are as follows:
 Full privatisation of public sector banks: This will allow banks to operate
autonomously without any interference from the government. The government
will benefit, as it will get cash funds and will be able to remove future capital
claims on the budget.
 Consolidation of the banking industry: The consolidation of the banking industry
will help to remove poorly managed lenders.
 Reform of shadow banks: There must be an amendment in the law to reduce
regulatory arbitrage of shadow banks. They must meet the requisite standards of
capital requirement to the letter and the spirit.
 Improvement in financial inclusion: To bring in financial inclusivity, commercial
financial groups and private banks may be given subsidies to operate in low-profit
sectors. Public banks may be roped in to provide limited services to target sectors.
However, the above reforms are difficult to implement due to the following issues:
 Resistance from all political parties to privatise banks
 Protest from trade unions and employees against deregulation due to fear of job
loss and a more competitive employment environment
 Pressure from the government on the RBI to lower interest rates on lending and
recognise NPAs
CURRENT INDUSTRIALISATION TRENDS AND INDUSTRIAL POLICY
ENVIRONMENT FOR THE SME SECTOR
After the agriculture sector, the Small and Medium Enterprises (SMEs) are the
second largest employment generators in India. According to the National Sample
Survey (NSS), the sector has created 11 crores jobs in the rural and urban areas of the
country in 2015-16. The sector contributes around 31% to India’s GDP.

Figure 3 shows the contribution of SMEs in the national economy at current prices:

Share of SME Share of MSME

Year SME GVA Growth (%) Total GVA Total GDP
in GVA (%) in GDP (%)
2011-2012 2583263 - 8106946 31.86 8736329 29.57
2012-13 2977623 15.27 9202692 32.36 9944013 29.94
2013-14 3343009 12.27 10363153 32.26 11233522 29.76
2014-15 3658196 9.43 11481794 31.86 12445128 29.39
2015-16 3936788 7.62 12458642 31.60 13682035 28.77

FIGURE 3: The Contribution of SMEs in the National Economy

Source: MSME Annual Report (http://ficci.in/spdocument/23035/Key-to-SME-Growth.pdf

The share of SMEs in the overall exports stands at 45% and in manufacturing output
at 34%.

Section 7 of the MSMED Act, 2006 has identified three classes of SMEs:
 Micro enterprise: A unit producing goods or rendering services with the maximum
annual turnover of INR 5 crores.
 Small enterprise: A unit producing goods or rendering services with an annual
turnover of INR 5 crores-75 crores.
 Medium enterprise: A unit producing goods or rendering services with an annual
turnover of INR 75 crores-250 crores.
The contribution of MSMEs to the total industrial sector is more than 80%. They
employ about 117 million people. They contribute more than 40% to industrial
output and exports. However, there is still a considerable unidentified potential in
this sector, which needs to be tapped.

A majority of MSMEs in India do not have access to structured finance from banks.
This could be because more than 50% of MSMEs in India are rural enterprises in low-
income states. Therefore, they are a priority sector to focus on for inclusive economic
growth and poverty alleviation.

To allocate funds to MSMEs, alternative sources of financing have been proposed.

They are as follows:
 Factoring mechanism: Factoring mechanism involves the selling of accounts
receivable (borrowers) to a third party (factor) at a discounted rate. This arrangement
is very useful for companies who have inadequate working capital and cash flow
problems. The company pays cash against the credit sales of the customer and
obtains the right to receive future payments on those invoices from the debtors. In
February 2012, The Factoring Regulation Act was enacted to promote and regulate
 the factoring business in India. However, much still needs to be done to raise its
awareness.
 Private equity: Private Equity (PE) investment is another way to raise capital for
MSMEs. This method is not only easier than the public issue, but also requires
minimum regulation. Currently, PE investments in India are tilted towards larger
businesses; they still have to gain a foothold on small business investments.
Although venture capital funds and angel investors have shown interest in
MSMEs, much still needs to be done. The regulatory authority has taken a crucial
step in the listing of companies on the MSME exchange. But the market for public
issues of MSMEs is in a nascent stage and there is a lack of underwriters to support
their PE investments. Another challenge is that MSMEs balance sheets are under
pressure due to heavy reliance on debt. They need to shift their focus from debt
to equity capital mix to grow in a healthier way. This alternative funding method
will improve their balance sheets, increase their capacity to bear the volatile
business environment, and make them more flexible in determining the return on
investment.
 Crowdfunding: It is also known as democratised funding, this is a web-based tool
that involves raising capital from various lenders through a social platform. This
concept is also in nascent stage in India, whereas it is a major source of raising
capital in the US, UK, and China. SEBI is considering a framework to promote,
streamline and regulate crowd funding in India.
 Peer to Peer (P2P) lending: This is a popular form of crowdfunding where interested
investors and borrowers with matching requirements connect to fund a venture,
without involving a formal financial institution. It does not require collaterals and
offers affordable rates of interest, which are lower than of the banks. This scheme
allows investors with extra cash to fund lucrative ventures. However, in India, this
funding concept is at its nascent stage and unregulated.
 Fin-tech start-ups: These act as intermediaries between banks/NBFCs and
borrowers. The charge a processing fee from both for a transaction. As against
traditional credit rating agencies, fin-techs arrive at more holistic credit scores,
which help the MSME to build a good credit history. As a result, their loan
applications are processed more quickly.
The aim of the ‘Make in India’ campaign is to transform India as a manufacturing
hub by promoting exports and FDIs, raising industrial productivity, and improving
the ease of doing business. This is expected to create 100 million jobs by 2022 and
increase the share of manufacturing sector to 25% in the national GDP. There are
two main groups of industries that can be leveraged here:
 Open up and enhance India’s traditional unskilled labour-intensive manufacturing
products such as clothing, footwear and toys.
 Become a major player as the final assembly line for high-end product
manufacturing, such as cars, electronics and electrical goods.
The emerging opportunities for the SMEs in the coming years include:
 Going digital and embracing the e-commerce trend to gain a competitive edge
 Adopting social media, mobile phones and cloud technology to open up new
opportunities for revenue growth and operational efficiency
 Taking benefits from government initiatives such as ‘Make in India’, ‘Startup
India’, and ‘Skill India’ to promote entrepreneurial culture
 Taking advantage of fin-tech firms to get accessible and affordable funds for
business

EMERGING SERVICE SECTORS OF THE INDIAN ECONOMY

There are several service sectors within the Indian economy that are expected to
rapidly grow quite large in the near future. These emerging sectors are as follows:
 Food processing: The food processing sector received FDI of about $ 7.54 billion
from April 2000-March 2017. According to the Confederation of Indian Industry
(CII), this sector will attract up to $ 33 billion FDI over the next decade and employ
about 9 million person-days. Key initiatives to boost this sector include:
⚫ 100% FDI in marketing and e-commerce of food products through automatic
routing
⚫ Research in the fertiliser sector with international cooperation
⚫ Enhancement and development of skills in food and food processing industry
⚫ Adoption of international food safety and quality assurance mechanisms
⚫ Good Manufacturing Practices (GMP) and Good Hygiene Practices (GHP)
 Healthcare: The growth in the healthcare market is estimated to be INR 8.6 trillion
by 2022. The average growth of medical tourism in the country is 22%-25%. By 2025,
the government will increase health expenditure to 2.5% of the country’s GDP.
The government’s Pradhan Mantri Jan Arogya Yojana (PMJAY) provides health
insurance of INR 5 lakhs to more than 100 million families every year. Ayushman
Bharat National Health Protection Mission is the world’s largest government
funded health scheme. The diversified healthcare sector provides opportunities
for both public and private players. More and more companies are now getting
Abbreviated New Drug Application (ANDA) approvals.
 Retail: The retail market is likely to increase by 60% to achieve $ 1.1 trillion by 2020
due to rising disposable incomes, quality of life and digital connectivity. India’s e-
commerce market is phenomenally growing due to robust investment, rapidly
increasing Internet users, increasing disposable income, entry of foreign players
and positive demographics. By 2021, the retail market is expected to be shared as
follows: traditional retail (75%), organised retail (18%) and e-commerce retail (7%).
 Education and training: India has the world’s largest population in the age of5
– 24 years. This provides a great opportunity for the education sector, which is
forecasted to reach $ 10.1 billion in 2019. India is the second largest eLearning
market after the US. By 2021, the eLearning is expected to reach $ 1.96 billion. Due
to the need for developing skill in the growing economy, education infrastructure
development has assumed considerable significance. The availability of English-
speaking, technology-educated talent and a strong legal and Intellectual Property
(IP) protection framework boost the network.
 Tourism and Hospitality: The Indian tourism and hospitality industry is an
emerging sector that has the potential to provide a large scale of employment
and generate massive FOREX capital. The rising disposable income is a strong
contributor to the growth of domestic and international tourism. During 2018,
foreign tourist arrivals (FTAs) grew by 5.2% year-on-year, and stood at 10.56
million. The sector contributed 8% share in employment generation in 2018,
employing around 41.6 million people in 2018. It is estimated that by 2028, about
 52.3 million jobs will be created in this sector. International hotel chains are
increasing their footprint in the country, while debt-ridden domestic hotel chains
are consolidating to improve their profitability.

INTRODUCTION LEGAL ENVIRONMENT

In the previous chapter, you have studied about the concept of Indian economic
environment, kinds of economic systems and economic policy. The chapter also
discussed about the current inflationary position and its impact on the business
sector. Economic legislations and economic transition have been also described at
the end of the chapter.

Martin Luther King once said, “Morality cannot be legislated, but behaviour can be
regulated. Judicial decrees may not change the heart, but they can restrain the heartless.”
As a future business manager and a leader, you must have a good understanding
of the law and legal risks involved in making and influencing business decisions.
This will help you not only to gain a competitive advantage but also avoid legal
pitfalls. The Indian legislation has several acts and amendments to protect consumer
rights, resolve disputes, protect Intellectual Property rights, and prohibit unfair
trade practices. Gaining an in-depth understanding of these laws would require an in-
depth analysis.

However, this chapter provides concise and relevant information about the
legislation and laws affecting businesses in India. You will also learn about the legal
provisions describing agreements and contracts, consumer protection rights, IP and
trademarks, and unfair trade practices and monopolies.

WHAT IS LEGAL ENVIRONMENT?

The legal environment in business is a code of conduct that defines the boundaries
of business within a legal jurisdiction. The law has been meant to mean different
things at different periods. Given below are some definitions:
 Traditionalist approach: Legal traditionalists define law as a body of principles
and rules that courts use during dispute resolution. As per them, no matter how
much society changes its beliefs, the basic concepts of right and wrong will remain
intact.
 Environmental approach: Law is a tool used to control society. Thus, it must
always demonstrate the moral constructs of the society through the execution of
rules and regulations. This environmental approach is wider than the traditional
viewpoint.
 Social jurisprudence approach: Law is shaped by the society and its means of
enforcement. It is a way to provide a systematic, predictable system of social order,
change and legal reform.
Thus, the main objectives of the law are as follows:
 Maintain peace
 Deliver justice
 Provide equality and uniformity
 Protect individual rights
 Protect minorities against injustice
 Maintain social control
 Maintain law and order
 Resolve disputes
 Provide systematic social change and legal reform
Before you learn about the different categories of the law, you should have an idea
about the terms right and duty. A right is the ability of an individual, as provided
by the law, to demand someone else to perform or stop in a certain activity. A duty
is a commitment of an individual to perform or refrain from a certain activity. Right
and duty are correlated in that an individual cannot have a right without having a
corresponding duty to another person.

The main categories of law are:

 Substantive law vs. Procedural law: Substantive law includes all the laws that
define and regulate legal rights and duties. If a rule states that promises are
enforced only if a party gets something of value from the other party, then it is the
part of the substantive law. For example, business contracts are substantive law.
But what happens if a contract is violated? Then, procedural law comes into play.
Procedural law is used to enforce the rights established by the substantive law. It
answers questions such as:
⚫ How should a lawsuit be filed?
⚫ What papers should be filed?
⚫ Which court should be attended?
⚫ What witnesses are required?
 Civil law vs. Criminal law: Civil law includes all the laws that define the duties
of individuals or legal entities, such as corporations or companies. Violations of
civil law include employment violation, contract breach, product liability and
copyright infringement. Criminal law, on the other hand, is an act proscribed by
the law to protect the public at large. Criminal violations include when individuals
in positions of authority to commit crime against other individuals, the company,
or the consumer. Examples include fraud, bribery, insider trading, embezzlement,
cybercrime, public corruption, identity theft, consumer fraud and forgery.
There are three main sources of law:
 Customs: Customs refer to the set practices or unwritten rules that have become a
society’s norm. These were the primary sources of law in ancient societies. Some
customs still prevail as an important source of law. For example, Saptapadi or
‘seven steps’ is the most important rite of a Hindu marriage ceremony, when the
newly-wed couple takes seven steps around the fire. This custom of Saptapadi is
incorporated in Section 7 of the Hindu Marriage Act, 1955. Customs can be divided
into two classes:
⚫ Customs without sanction: These customs are not mandatory and are followed
due to public opinion.
⚫ Customs with sanction: These customs are mandatory and enforced by the
state. These include:
✓ Legal custom: This custom’s authority is absolute. It is recognised and
enforced by a court of law. These may be general (throughout a state) or
local (restricted to a part of the state).
✓ Conventional custom: These are enforced on parties on account of an
agreement. For example, an agreement between a landlord and a tenant
about the payment of rent is a conventional custom bound by the rent
agreement.
 Judicial precedent: This includes the previously decided judgements of the High
Courts and the Supreme Court of India, which judges are obliged to follow. It is a
legacy from the British-India legal system.
 Legislation: This is the most important and modern source of the law. It includes the
laws enacted and recognised by the state. There are two main types of legislation:
⚫ Supreme legislation: This includes laws directly enacted by the Indian
Parliament. The powers of the Parliament are regulated and controlled by the
Constitution of India.
⚫ Subordinate legislation: This includes laws that are made by any subordinate
authority of the supreme legislation. It is further divided into:
✓ Autonomous law: This is the law enacted by a group of individuals legally
recognised as an autonomous body, such as universities or incorporated
companies.
✓ Judicial rules: Under the Constitution of India, the Supreme Court and
the High Courts have the power to make rules for their administrative
procedures.
✓ Local laws: Laws enacted by local bodies like Panchayats or Municipal
Corporations are recognised as local laws under the 73rd and 74th
amendments.
✓ Laws made by the executive: In India, there are three organs of the state:
the legislature, the executive, and the judiciary. Each has specific functions.
The legislature (the Indian Parliament) is responsible for making law
within the Constitution of India. The executive (the Indian government)
 is responsible to implement the laws enacted by the Parliament. However,
the Indian Parliament delegates some of its law-making powers to the
executive (delegated legislation), as it is not possible for it to go through all
the details of the law.

ACTS INFLUENCING THE LEGAL ENVIRONMENT OF BUSINESS

The legal environment of business in India mainly comprises the legal policy,
framework and laws in which businesses have to operate. These laws are enacted
to protect the interests of both the producers and the customers. Let us discuss the
main acts:
 Indian Contract Act, 1872: This act is applicable to entire India, except Jammu
and Kashmir. This act ensures that the rights and duties arising out of a contract
are honoured and that legal remedies are available to the parties bound by the
contract. It defines a contract and an agreement, as follows:
⚫ Contract: An agreement between two or more persons/parties subject to certain
terms and conditions for legal consideration.
Thus, Contract = Agreement + Enforceability
Example: ‘A’ offers to sell his house to ‘B’ for a specified amount. ‘B’ accepts to
purchase the house. Here, ‘A’ offers an agreement. When ‘B’ accepts the offer,
it becomes a contract.
⚫ Agreement: An offer that must satisfy the following three conditions:
✓ There must be at least two parties.
✓ There must be an offer (proposal) from one party to another.
✓ There must be an acceptance from the other party/person.
Thus, Agreement = Offer + Acceptance
Table 1 lists the main differences between a contract and an agreement:

TaBLE 1: Contract vs. Agreement

Contract Agreement
It originates from an agreement. It originates from the consent of parties.
It is always legal and enforceable by law. It may be illegal, so may not be
enforceable.
 Contract Agreement
Every contract is an agreement. Every agreement is not a contract. For
example, ‘A’ hires ‘B’ to kill ‘C’. Then, it
is an agreement, but not a contract, as it
is not legal to kill a person and, thus, not
enforceable by law.

 Sale of Goods Act, 1930: This act enforces the contracts relating to the sale of
goods. It also applies to entire India, except the State of Jammu and Kashmir. The
contract for the sale of goods is subject to the law relating to the Indian Contract
Act. Its features include as follows:
⚫ Transfer of ownership
⚫ Delivery of moveable goods
⚫ Rights and duties of both the buyers and the sellers
⚫ Measures against breach of contract
⚫ Terms and conditions under the contract for sale
To become effective a contract of sale, there must be a buyer and a seller. The buyer
purchases/agrees to purchase goods from the seller, who sells/agrees to sell them.
Goods must be moveable or transferrable from the seller to the buyer. Transfer of
immovable property is not regulated under this act. Price is a necessary factor for
all transactions of sale. If there is no price, then the transfer of goods is not a sale.
The price normally means money, which can be paid fully in cash or partly paid/
partly promised to be paid in the future.
 Indian Partnership Act, 1932: According to this act, a relationship between two
or more individuals where they agree to split the profits of a business is called
a partnership. The business may either be run by them directly or by one/more
person(s) acting on their behalf. This act is also applicable to the whole of India,
except Jammu and Kashmir. The partners must be the age of majority as per the
law, of sound mind and qualified for contracting. They can be an individual, firms,
a Hindu Undivided Family (HUF), a company, or trustees. The maximum number
of partners in a firm should be 20. The essential features of partnership are as
follows:
⚫ Agreement: This defines the relationship between partners. If the only
proprietor of a firm dies, then although his/her heirs inherit the firm, they do
not become partners. This is because there is no agreement between them.
⚫ Profit sharing: The partners may agree to share profits, but not losses. Sharing
of losses is not necessary to form a partnership.
⚫ Business: This may include every trade, occupation, or professions that are
continued with a profit motive.
⚫ Relation between partners: The partner that conducts the business of the
partnership is called:
✓ A principal: He is called so because he acts for himself.
✓ An agent: He is called so because he acts for the rest of the partners too.
 ⚫ Duties of a partner: A partner conducts the business of the firm in good faith,
renders true accounts, indemnifies for loss caused due to fraud, indemnifies
the firm for wilful neglect of a partner and conducts duties carried out by the
contract.
⚫ Rights of a partner: A partner can participate in the conduct and management
of the business, express the viewpoints in business matters, access all the
records and account books of the firm, share the profits, and earn interest on
advance payments. In case he incurs any expenses or losses on behalf of the
firm, then he has the right to be indemnified by the firm against that amount.
 Companies Act, 2013: This act defines the incorporation, dissolution and running
of companies in India. It was enforced on September 12, 2013 and includes a
few amendments to the previous Companies Act, 1956. The new act has fewer
sections (470) than the previous act (658). It empowers shareholders and focuses
on corporate governance. Some of its features are as follows:
⚫ Class action suits for shareholders: This is done to make shareholders and
other stakeholders more informed about their rights.
⚫ More power for shareholders: Now, approvals from shareholders are required
for various key transactions.
⚫ Women empowerment: At least one Director on the Board (for a specific class
of companies) should be a woman.
⚫ Corporate Social Responsibility (CSR): A certain class of companies must
spend a specific amount of money each year on CSR activities.
⚫ National Company Law Tribunal: The National Company Law Tribunal and
the National Company Law Appellate Tribunal replace the Company Law
Board and Board for Industrial and Financial Reconstruction.
⚫ Fast track mergers: The procedure for mergers and acquisitions for a certain
class of companies has been simplified and fast-tracked.
⚫ Cross-border mergers: Now a foreign company can merge with an Indian
company and vice versa with prior permission of the RBI.
⚫ Prohibition on forward dealings and insider trading: Directors and key
managers are forbidden from purchasing call and put options of shares of the
company, if they have access to price-sensitive information.
⚫ Increase in number of shareholders: The maximum number of shareholders
in a private company is now 200 (from 50).
⚫ One-Person Company (OPC): A new form of private company called one-
person company can be formed under the new act. It may have only one
director and one shareholder.
 LAWS PROTECTING CONSUMERS, SOCIETY AND PUBLIC INTEREST
Consumers are vulnerable to unscrupulous business practices. They may be
exploited through high prices, defective goods, deficient services, misleading
advertisements, hazardous products, black marketing, cybercrimes, etc. The
government is responsible for protecting the interests and rights of consumers by
setting appropriate policies, legal structure and administrative framework. In 1986,
the government enacted the Consumer Protection Act, 1986, to establish a legal
framework for protecting the rights and interests, and to provide socio-economic
justice to the consumers. Its main objectives are as follows:

 Protect consumers’ interest

 Promote free competition in markets
 Prohibit anti-competitive practices and abuse of dominant position
 Ensure free trade
The Consumer Protection Act prescribes establishment of three tier quasi-judicial
bodies to redress consumer-related disputes, give relief and award compensation
to the aggrieved party. These quasi-judicial consumer disputes redressal bodies
include:
 District Forums: This is composed of a President and two members (one member
is a woman).
⚫ Maximum term for office: 5 years or up to the age of 65 years, whichever is
earlier.
⚫ Minimum educational qualification: Graduation.
⚫ Maximum amount of adjudication: INR 20 lakhs.
 State Commissions: These are headed by the retired High Court judges.
⚫ Maximum amount of adjudication: INR 1 crore.
 National Commission: This is headed by a retired Supreme Court judge.
⚫ Maximum amount of adjudication: Above INR 1 crore.
The proceedings before these bodies are regulated according to the principles of
natural justice. A complaint can be filed against any of the following cases:
 A trader adopts an unfair or a restrictive trade practice.
 The goods purchased/agreed to be purchased from a trader are defective.
 The services hired or availed of from a trader are inadequate.
 The trader has charged a higher price for the goods than the price fixed by or in
force for the time being or displayed on the package.
 The trader has sold goods hazardous to life and safety while flouting the law to
display information about the contents, manner and effect of the use of such goods.
The fee structure for filing of complaints is shown in Table 2:

TaBLE 2: Fee Structure for Filing of Complaints

Value of Goods or Services and

Fee Structure for Filing of Complaints
Compensation Claimed
Up to INR 1 lakh INR 100
INR 1 lakh - 5 lakhs INR 200
INR 5 lakhs - 10 lakhs INR 400
INR 10 lakhs - 20 lakhs INR 500
INR 20 lakhs - 50 lakhs INR 2000
INR 50 lakhs - 1 crore INR 4000

Note that a complaint cannot be filed if:

 The complainant does not come under the gambit of ‘consumer’ under the
Consumer Protection Act, 1986.
 If the complaint is on behalf of the general public (unidentifiable consumers).
The District Forum, State Commissions and National Commission must decide
a complaint at the most within 3 months from the date of notice received by the
opposite party, if there is no requirement for any commodity testing/analysis for
the complaint. If the complaint requires analysis or testing, then it must be decided
within 5 months.

The appeals can be filed within 30 days against the order of quasi-judicial body.
An appeal against the order of the National Commission can also be referred to
the Supreme Court within 30 days. However, the Supreme Court will not entertain
any appeal by a person who needs to pay any amount in terms of an order of the
National Commission, unless that person deposits 50% of that amount or INR
50,000, whichever is less. Similarly, there is a requirement for depositing INR 35,000
and INR 25,000 in appeals against order of State Commissions and District Forums,
respectively.
INTELLECTUAL PROPERTY REGIME
With globalisation and free trade, Intellectual Property (IP) has assumed significant
place in the legal space of India. On January 1, 1995, India signed the Agreement on
Trade Related Aspects of Intellectual Property Rights (TRIPS) mandated by the World
Trade Organization (WTO). TRIPS is the most significant multi-country agreement
on IP. TRIPS-compliance is a necessary requirement for statutes, enforcement
provisions, and dispute resolution methods related to IP protection.

Under the TRIPS-Agreement, India is obliged to protect trademarks, inter alia, protect
distinguishing marks, recognise service marks, periodically renew registration and
abolish compulsory licensing of trademarks. The brand names, trade names and
trademarks must have minimum standards of protection and efficient procedures
for enforcement.

India has various laws that deal with protection of IP. These are as follows:
 The Trade Marks Act, 1999: After a wide review and resulting repeal, the old
Indian Trade and Merchandise Act, 1958 was replaced by the new Trade Marks
Act, 1999, which conforms to TRIPS. This act provides, inter alia, for:
⚫ Registration of service marks
⚫ Filing of multiclass applications
⚫ Increasing the registration terms of a trademark to 10 years
⚫ Recognition of the concept of ‘well-known trademark’
⚫ Protection of domain names
Section 135 of the act provides legal remedies against both infringement and
passing off trademarks.
⚫ Infringement: If a person uses an identical/similar/deceptively similar mark to
a registered trademark without the permission of the registered proprietor of
the trademark, then it is called trademark infringement.
⚫ Passing off: Suppose party A has a registered trademark. Party B misrepresents
as being the owner of this trademark or having some relationship with party
A such that it damages the goodwill of party A, then it is called passing off.
The above actions are cognisable offences and can invite civil and criminal actions.
In case of a criminal action for infringement or passing off, the punishment is jail
for a term of 6 months to 3 years and a fine of INR 50,000 to 2 lakhs.
 The Patents Act, 1970 (as amended in 2005): The patent law in India is governed by
the provisions of the Patents Act, 1970, as amended by the Patents (Amendment)
 Act, 2005, and Patents Act Rules, 2006. This act provides for the definition of
the invention, which is compliant with the provisions of TRIPS. The criteria for
patentability are novelty, inventive step, and industrial applicability.
 The Indian Copyright Act, 1957: The India Copyright Act, 1957, as amended
several times and the Indian Copyright Rules, 1958, protects the interests of
creators of IP in the form of literary, dramatic, musical, and artistic works and
cinematograph films and sound recordings, against:
⚫ Reproduction of work
⚫ Issuing copies of work to the public
⚫ Performing the work in the public
⚫ Communicating the work to the public
⚫ Making any translation or adaptation of the work
A copyright lasts for 60 years, following the death of the author or the date of
publication, depending upon the work type. However, to protect the interests of
the public at large, a copyright can be used for research, review, reporting, judicial,
amateur performance and education purposes.
Infringement of copyright is a punishable offense with minimum jail time of 6
months and a fine of at least INR 50,000. In case of multiple violations, the minimum
imprisonment is 1 year and a fine of at least INR 1 lakh.
 The Information Technology Act, 2000: This act has been established to deal with e-
commerce and cybercrime in India. It was enacted to deliver and facilitate lawful
electronic, digital and online transactions, and reduce cybercrime. It focuses on
privacy issues and information security. Its objectives are as follows:
⚫ Give legal recognition to all electronic transactions and digital signatures
⚫ Facilitate e-filing of documents
⚫ Promote electronic storage of data
⚫ Facilitate e-transfer of funds
⚫ Facilitate electronic book keeping of accounts
LEGISLATION FOR UNFAIR TRADE PRACTICES
There are two main legislations to deal with unfair trade practices:
 Consumer Protection Act, 1986
 Competition Act, 2002
You have already studied about the Consumer Protection Act in a previous section
of this chapter. Section 2(1)(r) of this Act defines unfair trade practice as any practice
that:
 Makes a statement (oral/written/visible) which falsely represents:
⚫ That the goods or services are of a particular standard or quality or grade
⚫ That second-hand, renovated, or old goods are new goods
⚫ That goods or services have specific sponsorship, performance, characteristics,
or benefits
 Gives any false, untested warranty/guarantee of a product
 Misleads the public on a warranty or guarantee of the goods/services
 Gives false or misleading facts damaging the reputation of the goods/services/
trades of another person
 Offers a false gift or prize with the goods/services without the intention of
honouring them
The concept of unfair trade practice was also described in the Monopolies and
Restrictive Trade Practices (MRTP) Act, 1969. This act has now been replaced by the
Competition Act, 2002. Section 36 A of the previous MRTP Act defined unfair trade
practice as a practice to promote the sale, use, or supply of any goods or for the
provision of any services using unfair methods or deceptive practices.
 Such unfair/deceptive practices may include:
 Oral, written, or visible misrepresentation about the standard, quality, usefulness and the price of
goods/services
 False warranty/guarantee of goods/services
 False advertising
 False gifts, prizes and offers in sale
Although the Competition Act, 2002 does not define unfair trade practices, it derives their meaning from
the previous MRTP Act. Section 3 of the Competition Act restricts businesses from entering into anti-
competitive agreements. These anti-competitive agreements include any agreement:
 Regarding production, distribution, or the control of goods or services, whichdamages the free
competition within India
 That fixes the purchase or sale prices
 That restricts production, supply, markets, technical development, investment, orthe provision of
services
 That fixes the sharing of the market
 That causes bid rigging or collusive bidding
Section 4 of the Competition Act deals with the abuse of a dominant position. Abusiness
abuses its dominant position in the following cases:
 Unfair/discriminatory purchase of goods/services
 Unfair/discriminatory pricing
 Limited or restricted production of goods or services
 Denial of market access
 Uses its dominant position in one relevant market to enter into/protect otherrelevant
market
Along with the enactment of the Competition Act, 2002, the government establisheda statutory
body called the Competition Commission of India (CCI) to ensure that there are no unfair
trade practices in the market.

The functions of the CCI are follows:

 Ensure fair competition and consumer benefits in markets
 Cooperate with other regulating authorities to ensure compliance with theCompetition
Act
 Advocate competition by educating ministries, state governments, regulators andother
authorities about its benefits to the economy
UNIT 5
In the previous chapter, you studied about the business environment of the service
sector. You studied about the importance of service sector in India. The chapter
discussed about the banking reforms and challenges. The later section of the chapter
described the emerging service sectors in Indian context.

No matter wherever you are in the world, you are touched by globalisation. You may
like it or hate it, but you cannot ignore it. Streets of New York or Old Delhi, you will
find most of the people in denims. McDonald’s is one of the most recognised brands
in the world today, serving more than 119 countries. For the first time in the history
of mankind, people-to-people exchange has spread to such a vast global level. On
one end, they are working together in multinational corporations (MNCs) for shared
goals, and on the other end, they are exchanging their culture and viewpoints on
social media platforms.

If globalisation has brought people and cultures together, then it has also touched
some raw nerves. The free migration of workers have generated a feeling of
protectionism among countries and started anti-immigrant movements in the US and
Europe. Farmers in India feel threatened by the invasion of MNCs who are bringing
in genetically modified products and patents over ‘local’ plants and seeds. People in
the US want to ban ‘illegal’ immigrants from having access to public services.

There are myriad arguments for and against globalisation, but one thing is certain.
Globalisation is here to stay because technologically, we’ve come too far and simply
cannot remain isolated. Therefore, it is crucial that you understand the aspects and
impacts of globalisation so that you can leverage it effectively for your business.
This chapter describes the concept of globalisation and its impacts, modes of
entries in the international market, types of international trade strategies, and the
environment for foreign trade and investment. You will also learn about exchange
rate movements and their impacts, globalisation trends and challenges, and balance
of payment trends.
GLOBALISATION AND ITS IMPACT ON THE INDIAN INDUSTRY
Globalisation is defined as the rise in economic interdependencies on a global
scale. It is an ongoing process that opens world markets and amalgamates societies
and cultures. It dismantles the trade barriers between countries and increases the
interchange of goods and services across nations. The main aspects of globalisation
are:

 Alignment of local economies with global economies through free trade

 Foreign direct investment (FDI) flows
 Flow of capital
 Technological advancement
 Easier global communication
 Large-scale migration
 Sharing of cultural values
 Competitive advantage through easy access to low cost materials and labour
 Investment opportunities
Globalisation of the Indian economy started in 1991 after the Indian government
took a series of economic reforms to resolve the severe balance of payment crisis.
The Gulf War had just ended. India had to pay a massive import oil bill while
the collections from exports were meagre. The total trade deficit was INR 17,369
crore. Making the crisis even more serious, India had made high-cost external
commercial borrowings and non-resident deposits on which it was going to default.
As a major policy change, the government of India initiated a new economic reform
called Liberalisation, Privatisation, and Globalisation (LPG). The purpose of the
LPG reform was to make the economy more efficient, fast growing, and globally
competitive. The government introduced the following measures:

 Devaluation: To maintain the equilibrium of the Balance of Payments (BOP), the

Indian currency was devalued by 18-19% in the international forex market.
 Disinvestment: Most of the private sector enterprises were sold to private bidders
to generate revenue, make enterprises more efficient, and offload the government’s
burden.
 Dismantling: The industrial licensing ‘raj’ was dismantled. At present, only five
industries are under the compulsory licensing policy due to environmental safety
and strategic conditions. These are:
⚫ Distilleries of alcoholic drinks
⚫ Tobacco products manufacturing units
⚫ Electronic aerospace and defence production units
⚫ Industrial explosives units
⚫ Hazardous chemicals, such as:
✓ Hydrocyanic acid and its derivatives
 ✓ Phosgene and its derivatives
✓ Isocyanates and diisocyanates of hydrocarbons
 FDI: Investment from foreign companies was allowed across a wide range of
industries, through an automatic route.
 Non-resident Indian (NRI) scheme: The NRI and overseas corporate bodies
(having more than 60% stake by NRIs) were offered concessions and facilities for
FDI.
Almost 30 years from LPG reforms, the Indian economy stands tall in the global
map. From a potential defaulter, globalisation has made India the world’s seventh
largest economy by GDP. On the other hand, it has generated the highest level of
income inequalities in the Indian population. Let’s consider both the positive and
negative effects of globalisation on the Indian economy.

The following are some of the positive effects of globalisation on the Indian economy:
 Growth of GDP: In 1980-90, the GDP of India was just 5.6%. In 1993-2001, the GDP
increased to more than 7%, and has mostly stayed at that level on a year-to-year
basis. The current estimate of GDP stands at 7% for 2018-19.
 Increase in FOREX reserves: In 2001, the Reserve Bank of India (RBI) had forex
reserves of $39 billion. By March 2019, they have increased to $ 402 billion, as
shown in Figure 1:

FIGURE 1: Growth of FOREX Reserves in India

 FDI inflows: From 1991 to 2006, the cumulative FDI inflows were $43.39 billion.
The following industries were the top gainers:
⚫ Computer software (18%)
⚫ Services (13%)
⚫ Telecom (10%)
⚫ Transportation (9%)
 Global outsourcing: The availability of cost-effective, highly skilled, English
speaking, and technologically proficient local talent has made India a top
destination for the global outsourcing business. In 2017, India’s share was 52% in
the global outsourcing market.
 Market capitalisation: India is today the eighth largest country by market
capitalisation. India’s market capital is $2.12 trillion, which is larger than that of
Germany’s $2.08 trillion. The world’s top capital markets as of March 2019 are:
1. US: $30.17 trillion
2. China: $7.16 trillion
3. Japan: $5.73 trillion
4. Hong Kong: $5.53 trillion
5. UK: $3.27 trillion
6. France: $2.43 trillion
7. Canada: $2.15 trillion
8. India: $2.12 trillion
9. Germany: $2.08 trillion
10. South Korea: $1.45 trillion
 Billionaires rising: As per the Forbes list 2018, India has the third largest number
of billionaires after the US and China. As of 2018, there are 131 billionaires in India
with assets worth more than the public sector undertakings in India.
The following are some of the negative effects of globalisation on the Indian economy:
 Exploitation of child labour: India has the largest number of child labourers in
the world. As per official records, there are more than 12 million child workers in
India. Some non-government organisations (NGOs) claim that the actual figure is
up to 60 million. The main causes of child labour are poverty and lack of financial
security. After LPG reforms, the child labour has drastically increased, as the role
of the public sector was reduced. Since private sectors operate only for profit, the
general financial insecurity has increased.
 Neglected agriculture sector: Agriculture is the primary pillar of Indian economy.
About 58% of Indian population rely on it for their livelihood. The LPG reforms
have boosted the manufacturing and services sector, but have neglected the
agricultural sector. Farmers’ suicides due to debt burden are issues of grave
concern. The lack of public investment and the presence of intermediaries between
sellers and consumers are the two main issues for their debt burden.
 Job insecurity: LPG reforms have dwindled public sector jobs, which offered more
security and benefits than private sector jobs. Due to this job insecurity, there is
a huge imbalance where the skilled people are more but jobs are less. A single
government job for a peon invites millions of applicants, and some of them are
even qualified engineers and MBAs. The social insecurity has also increased the
rates of crime and fraud across India.
 Poverty and unemployment: The gap between the rich (haves) and the poor (have
nots) has increased significantly. As of 2012, 22% of its population was below the
poverty line. Malnutrition, child labour, and crimes have increased. A large section
of Indian youth is unemployed and survives on subsistence wages.

EFFECTS OF GLOBALISATION
Globalisation has brought in several positive and negative effects. Let’s explore
them.

Positive Effects of Globalisation

The following are some of the positive effects of globalisation:
 Global market: Globalisation enables easier access to cheaper raw materials
and labour. It also enables easier access to international markets. This promotes
industrial growth. Competitive companies gain the ability to acquire other
businesses to grow inorganically. They develop strategic partnerships with local
players to capture a larger market share.
 Cross-cultural exchange: Culture refers to the values and beliefs of a certain group
of people that shape their behaviour. Globalisation has spread the American
culture across the planet. Before globalisation, women were not encouraged to
work in several countries; even if they were, they would do traditional jobs such
as teaching or nursing. With globalisation, the number of women workers joining
the workforce in non-traditional sectors has increased. Another example is that
like the US, most countries have started to understand the value of time.
 Foreign trade: Globalisation has expanded foreign trade across the world. Popular
brands from the US and Western Europe can be seen anywhere in the world. This has
boosted exports for developed countries and created jobs in developing countries.
World Trade Organisation (WTO) has emerged as a powerful organisation with
far-reaching influences on international trade policies, taxes, and tariffs. More and
more countries are depending on trade, foreign investments, and global financial
markets.
 Competition: Globalisation has increased global competition among companies.
Companies are investing in Research & Development (R&D) to develop more
 innovative products. More and more young people are confident of setting their
own ventures and becoming entrepreneurs.
 Foreign investment: Companies and institutions in developed countries prefer
to invest in profitable business ventures in developing nations, instead of banks,
as it enables them to earn good profits without any efforts. However, defaults in
economies in third-world countries make them a risky investment.
 Advanced technology: A positive impact of globalisation is the rapid advancement
in technology and global communication. The phenomenal expansion of
smartphones and their reach to the person at the lowest level of income in
developing countries have led to the rapid development of start-ups, which are
effectively planning and implementing venture to bring benefits to the public
directly.
 Legal effects: Globalisation has made people aware about basic human rights.
Consequently, causes such as environmental protection, rights of workers, and
women empowerment have amassed global appeal and movement. Due to
international courts of justice and increased coordination among countries, it has
now become convenient to apprehend and extradite loan defaulters and criminals
in hiding. Countries are also cooperating to curb global terrorism and block funds
of organisations supporting terrorist movements.
 Culture: Globalisation has brought together cultures of the world. It is due to the
globalisation only that the Indian food has become popular worldwide and Barbie
has become the most popular doll in the world. Films, music, books, and other
art forms have spread easily through people-to-people exchange via social media
platforms. Global tourism has increased impressively, with all countries big or
small welcoming people from across the world to visit their countries.
 Poverty eradication: Before globalisation, several resource-rich, developing
countries did not know how to use their resources. Most of their population was
uneducated and employed in agriculture or mining. They lacked the infrastructure
to transport raw materials and goods. After globalisation, developing countries
learned from foreign investors on how to leverage their resources efficiently.
Local populations realised the benefits of education and they started sending their
children regularly to schools to make them employable. The living standard of
families improved. Suddenly, a lot of people had more disposable income than
ever before in their lives. Although there still needs to be done in terms of poverty
alleviation, particularly in reducing the gap between the rich and the poor,
globalisation has contributed significantly to raising a large section of population
above the poverty line.
 Employment situation: Globalisation has provided jobs to people in developing
nations. Through outsourcing, millions of people in India got jobs and this
alleviated a large section of world population from poverty.
 Education: Globalisation has increased access to higher education in foreign
countries. Now, more and more students are availing student loans to study in
the prestigious universities in foreign countries to make them employable for high
paying jobs.
Negative Effects of Globalisation
The following are some of the negative effects of globalisation:
 Terrorism: After globalisation, terrorism has also increased due to the easy
movement of people across countries. After 9/11 attacks, airports around the
world beefed up their security. Now, it has become a common practice for normal
citizens to be body screened at railways, airports, hotels, markets, or convention
centres.
 Job insecurity: When companies decided to shift their manufacturing bases to low-
cost countries, many local people lost their jobs. In countries such as India, public
sector enterprises dwindled after globalisation. Private companies work for the
profit motive and thus seek cheap labour. As a result, they short charge their
employees by expecting them to work for more hours and have a quick hire and
fire policy.
 Price fluctuation: Industries cut their production costs by moving their factories
to countries of cheap labour and then sell their goods at different prices in the
world markets. For example, to compete with Chinese products, which are offered
at lower costs, many companies in the US were forced to slash their prices to retain
their customers.
 Currency fluctuation: The US dollar is the currency of doing international trade.
Therefore, local currencies in developing countries fluctuate relative to the dollar
price.
 Spread of fast foods chain and fast fashion: Fast food brands such as McDonald’s,
KFC, Domino’s, and Dunkin Donuts have changed the food habits of people
worldwide. Their food is cheap and tasty, but high in fat, sugar, and salt. This
has increased the obesity levels among the world population to alarming degree.
Fast fashion companies like H&M and Zara offer fashionable clothes at very cheap
prices. They are able to offer these low-priced dresses because they get most of
their manufacturing done in cheap labour countries, where workers work for long
hours in hazardous conditions. The Rana Plaza accident in Bangladesh is one such
example.
MODE OF ENTRIES IN INTERNATIONAL MARKET
A company can enter a new global market through various modes of entry including:
 Exporting: It is a traditional mode of entry where a company sells its goods/
services in a foreign land, without establishing its operations there. Exporting can
be:
⚫ Direct exporting: In this approach, a company directly exports its products/
services to an international market. This enables the company to have greater
control on its marketing and operations. For example, the Austrian energy
drink Red Bull entered India via the direct exporting route.
⚫ Indirect exporting: In this approach, a company employs an agency in the
foreign country to handle its product or service. For example, the US chewing
gum company Wrigley entered the Indian market by using the distribution
outlets of Parrys, a local confectionary company.
Table 1 lists the favourable conditions, benefits, and drawbacks of exporting:

TaBLE 1: Conditions, Benefits and Drawbacks of Exporting

Favourable Conditions
Benefits Drawbacks
for Exporting
Little product Distribution of surplus High cost of starting up in
adaptation required in case of direct exports
the foreign market
Close proximity of Cheap, maximum economy Less control on distribution of
distribution channels to of scale due to use of existing products
the plant facilities
High production costs Quick market access High cost due to the
in the foreign market involvement of intermediaries
Liberal policies for Control over market High tariffs and trade barriers
import selection increase costs
Political risk in foreign Safe as it minimises risk and Difficulty in product
land investment customisation

 Licensing: In this mode of entry, a company (foreign licensor) sells a right to a

local manufacturer (licensee) to produce its product or service. The foreign licensor
invests its own capital in the venture. The licensee pays a fee to get the royalty
from the foreign licensor to use its trademark, business system, and format. For
example, Walt Disney Corporation used the licensing mode to enter India.
Table 2 lists the favourable conditions, benefits, and drawbacks of licensing:

TaBLE 2: Conditions, Benefits and Drawbacks of Licensing

Favourable Conditions for

Benefits Drawbacks
Licensing
Barriers to importing and Minimum risk of Knowledge spillover
investment investment
 Favourable Conditions for
Benefits Drawbacks
Licensing
Legal protection is available in Cost-effective and Loss of goodwill due to
foreign market high return on poor quality maintained
investment (ROI) by the licensee
Low sales potential in foreign Ability to avoid trade Threat of the licensee
market barriers becoming a future
competitor
Huge cultural gap Quick access to Less control over
foreign markets manufacturing of
products or use of asset
by the licensee
Lower capability of the licensee to Utilises the expertise Limited license period
become a competitor of licensee

 Franchising: In this approach, a company (franchiser) sells the right to use its
trademark and sell its products or services to a semi-independent local business
(franchisee). The franchisee bears the cost and risks of establishing the operations
in the foreign market. For example, McDonald’s and KFC entered Indian market
through franchising.
Table 3 lists the conditions, benefits, and drawbacks of franchising:

TaBLE 3: Conditions, Benefits, and Drawbacks of Franchising

Favourable conditions for

Benefits Drawbacks
franchising
The franchisee has good local Safer than other Lack of quality control
knowledge. modes of entry
Legal protection is available in Ability to avoid trade Lower ROI as franchisor
foreign market barriers only receives a royalty
and not the entire profit
Quick access to Threat of the franchisee
foreign markets becoming a future
competitor

 Joint venture: In a joint venture (JV), a company establishes a new company in a

foreign market in collaboration with a local partner. The reasons could be to:
⚫ Enter into a foreign market
⚫ Share risks and rewards in a specific proportion
⚫ Share technology
⚫ Develop a product jointly as partners
⚫ Conform to regulations by the local government
For example, Singapore Airlines entered the Indian market in a joint venture with
the Tata Group, as it was not possible for them to enter India as a wholly owned
 subsidiary. Table 4 lists the favourable conditins, benefits, and drawbacks of a
joint venture:

TaBLE 4: Conditions, Benefits, and Drawbacks of Joint Venture

Favourable Conditions of
Benefits Drawbacks
Joint Venture
Barriers to importing and Overcomes ownership and Difficult to manage
government restrictions on cultural barriers conflicts
foreign ownership
Huge cultural gap Optimum use of resources Dilution of control
of two companies
Impossibility of fair pricing Less investment needed Riskier venture than
of assets exporting, licensing, and
franchising
High sales potential Useful learning experience Less protection of trade and
technology secrets
Political risk Technological capability Costly venture
Availability of good local Vulnerable to political and
partners cultural backlash

 Mergers and acquisitions: A merger is a process where two or more companies

combine into a single entity to accumulate their mutual assets and liabilities. The
merger enables them to:
⚫ Achieve economies of scale
⚫ Avail tax benefits
⚫ Get synergy and diversify products/services
After a merger, the merging entities lose their previous identities and assume the
identity of the newly formed entity.
Acquisition, on the other hand, is the process where a company acquires
controlling shares of another company. The acquired company does not lose its
identity after an acquisition. The acquisition may be a friendly acquisition (such as
Walmart acquiring Flipkart) or a hostile takeover (such as L&T Infotech acquiring
Mindtree).
 Strategic alliance: In a strategic alliance, two or more companies formalise an
agreement to share their risks and resources in order to achieve a common set
of objectives, while assuming their independent identities. The strategic alliance
enables them to:
⚫ Expand production capacity
⚫ Increase market share for a product or service
⚫ Develop core technologies
⚫ Use brand image and market knowledge of both entities
For example, Motorola formed a strategic alliance with Toshiba to enter Japanese
cellular phone market.
 Foreign direct investment (FDI): In FDI, a company enters a foreign market by
investing in that country, either through the acquisition of a local entity or by
setting up a new entity. This mode of entry is subject to the local government’s
policies and regulations. For example, LG and Samsung entered India through
FDI route. Table 5 lists the favourable conditions, benefits, and drawbacks
of FDI:

TaBLE 5: Conditions, Benefits, and Drawbacks of FDI

Favourable Conditions of
Benefits Drawbacks
FDI
Barriers to importing and High degree of control over High requirement of
licensing operations resources
Small cultural gap Ability to serve customers High commitment
better necessary
Impossibility of assets to be Ability to meet competitors’ Restrictive government
fairly priced challenges better policies
Low political risk Possibility of introducing Lower ROI
changes anytime
High sales potential Easy mode of entry Higher risk than other
modes
Better utilisation of Difficulty to manage local
specialised skills resources
Minimum knowledge spill
over

 Outsourcing: This is a method by which a company can reduce its costs and focus
on core operations by transferring a part of work to low-cost suppliers in a foreign
land. It involves both domestic and foreign contracting as well as offshoring
(relocation of a business function to another country).
Table 6 lists the benefits and drawbacks of outsourcing:

TaBLE 6: Benefits and Drawbacks of Outsourcing

Benefits Drawbacks
Quick operations Risk of data privacy breach
Gaining the ability to focus on core Hidden costs
operations, as supporting functions are
outsourced
Sharing of risks Lack of customer focus
Drastic cutting of costs

 Contract manufacturing: In this process, a foreign company hires a local

manufacturer to produce a product or a part of the product. It is a cost-effective
mode of production while utilising local skills and expertise. The foreign firm
retains the control to market and sell the product.
Table 7 lists the benefits and drawbacks of contract manufacturing:

TaBLE 7: Benefits and Drawbacks of Contract Manufacturing

Benefits Drawbacks
Cost-effective production Difficulty in maintaining quality standards
 Benefits Drawbacks
Small and medium enterprise (SME) Risks to local manufacturers
development
Retain of control over the product and/or
process

 Turnkey projects: In these projects, a foreign organisation takes the responsibility

of setting up a new organisation on behalf of a client organisation. The client will
pay the contractor company for planning the infrastructure, constructing new
facilities, and training of staff. After the project is complete, the contractor hands
over the new organisation to the client for initiating the actual operations. For
example, a Singapore based company takes a contract from the Indian government
to set up a smart city project. Such projects depend on various factors, such as the
local government’s policies, competition, and resource availability.

TYPES OF INTERNATIONAL TRADE STRATEGIES

Companies adopt three types of international trade strategies to guide their way
across foreign markets:
 Multi-domestic strategy: In this strategy, a company focuses on providing specific,
tailor-made products and services in response to local demands within each
foreign market. For example, the MTV channel customises its programs according
to the regions in which they are being broadcasted. Similarly, Heinz offers a no-
garlic, no-onion version of its signature ketchup for Indian customers.
 Global strategy: This strategy is the opposite of multi-domestic strategy.
Here, a company focuses on being efficient. Its aim is to achieve economies of
scale by offering the same products/services in each foreign market, with a few
modifications. For example, Microsoft offers the same programs worldwide albeit
with minor modifications to match local languages.
 Transnational strategy: This strategy is mid-way between the multidomestic
and the global approach. It focuses on being efficient as well as adjusting to local
preferences. For example, McDonald’s and KFC use the same business format and
efficient processes in their worldwide restaurants, but they adjust their products
to suit local tastes. McDonald’s in France offers wine to customers, as wine is a
staple part of the French diet.

ENVIRONMENT FOR FOREIGN TRADE AND INVESTMENT

A favourable environment must be developed and sustained for FDI. Factors to
consider include:
 Clear investment policy and regulations: The FDI policy should be transparent,
protective of investors’ property, and non-discriminatory. There should be
minimum discriminatory restrictions. Whatever restrictions are there, they should
be transparent and clear. They should be periodically evaluated to determine
their cost-benefit ratio. The process of screening investment proposals should be
transparent and efficient.
 Good law enforcement: Good laws must be developed and enforced to protect
intellectual property (IP), enforce contracts, and resolve disputes. The host country
should also have adequate, timely, and effective methods of registering property
ownership. Finally, the domestic legal system should have sufficient capacity to
take up litigation and dispute related matters and settle them on a timely manner.
 Sustainable environment: As important as it is to attract foreign trade and
investment, it is equally important to sustain them in the long run and use it for
the country’s development. This can be done by promoting innovation and export
growth through special economic zones (SEZs) and industrial parks. There should
be a single window with a single-point authority. It is also important to follow
up with investors after they have established facilities and troubleshoot their
problems. There should be coordination among authorities for export promotion,
 business registration, or land allocation for businesses. Their performance should
be frequently evaluated.
 Incentive planning: Most countries use tax incentives to attract FDI, without
paying attention to whether FDI inflows are proportionally increasing as a result
of these incentives. These incentives should be carefully planned so that any
chances of corruption are avoided. The governments should also promote linkages
between foreign players and domestic players.
 Infrastructure development: Infrastructure is a major reason for attracting FDI.
There should be a clear and fair policy for both public and private providers of
infrastructure services. Private players should be encouraged to play a greater role
in infrastructure development, as they are more efficient than public units. The
regulatory framework for infrastructure investment should be transparent and
have enough safety provisions to address risky long-term investments.
 Synergy between trade and investment: To promote both exports and improve
FDI inflows, countries should coordinate and align their trade and investment
strategies. The common structural bottlenecks should be removed. The export
sectors and destination markets should be diversified. Investments should be made
for developing and enhancing human resource skills. Excess red tape for investors
should be removed. The supply of labour should be aligned with demand and
forecasted for long-term by focusing on a few key market areas that offer long
term potential.
 Responsible business conduct: Finally, there should be strong, regulatory and
institutional frameworks to foster responsible business conduct among businesses.
EXCHANGE RATE MOVEMENTS AND THEIR IMPACT

Suppose you need to travel to New York. Before you travel, you go to a forex dealer
to get the US currency and pay a specific amount of Indian rupees in exchange. The
exchange rate is the rate at which the Indian rupees will exchange for the US dollar.

The exchange rate of currency changes daily depending on various factors. Before
you learn about these factors, you should realise the importance of the exchange rate
movements on a country’s foreign trade.
Table 8 illustrates this relationship:

TaBLE 8: Effect of Currency Value on Country’s Imports, Exports & Balance of Trade

Currency value Effect on imports Effect on exports

High, e.g., US Dollar, GBP Less expensive for the More expensive in foreign
Sterling, Euro country markets
Low, e.g., INR More expensive for the Cheaper in foreign markets
country

The difference between the value of imports and that of exports in a given period
determines the company’s balance of trade. A higher exchange rate for a country
deteriorates its balance of trade, while a lower exchange rate improves it.

The factors determining the exchange rate between countries are:

 Differences in inflation: If a country has a steadily lower inflation rate, then its
currency will have a higher value. This will increase the purchasing power of the
currency with respect to other currencies. For example, Japan has a consistently
lower rate of inflation and thus the Japanese Yen has a higher purchasing power.
 Differences in interest rates: You may have heard about the Reserve Bank of India
(RBI) changing the interest rates to control inflation. These changes in interest
rates lower the value of INR. When the Fed keeps the interest rates high in the US,
lenders get better returns. Thus, higher interest rates attract investment and raise
the value of the dollar.
 Current account deficits: India and the US are trading partners. The balance of
trade between India and the US is called the current account. This current account
will include all the payments between India and the US for goods, services,
interests, and dividends. If there is a deficit in the current account, then it means
that India is spending more on foreign trade with the US than it is earning. In
other words, India needs more US dollars that it receives through exports, and
it supplies more Indian rupees than the US demands for its products. This extra
demand for the US dollar lowers the value of INR, until domestic goods are cheap
enough for the US citizens and foreign assets are too expensive for the Indians.
 Public debt: To stimulate the Indian economy, sometimes the Indian government
offers a stimulus package to provide large-scale deficit financing for public sector
projects. However, this may not generate an adequate response from foreign
investors if the public deficit and debt are high. This is because the inflation rate will
be very high due to debt. If inflation is high, then the debt will be eventually paid
off with cheaper US dollars. In the worst case scenario, the Indian government has
also printed money to pay part of a large debt. However, this increase in the money
supply also causes inflation. If the government is still not able to pay its deficit,
then it must increase the supply of securities for sale to foreign investors to lower
their prices. However, if the risk of defaulting is evident, then foreign investors
will not purchase securities too. Therefore, the debt rating of a country by rating
agencies such as Moody’s or Standard & Poor’s is a key factor in determining the
exchange rate.
 Terms of trade: This is a ratio of a country’s exports prices and its imports prices.
If the country’s exports prices increase at a greater rate than that of its imports,
then the terms of trade are favourable. This means that the country’s exports are in
greater demand, which increases the revenue generated from them. This, in turn,
will increase the demand for that country’s currency and increase its exchange
rate. On the other hand, if the country’s imports prices increase at a greater rate
than that of its exports, then its currency’s value will decline.
 Political stability and economic performance: Foreign investors are likely to
invest more in politically stable countries with good economic performance. If
there is political chaos, such as in Venezuela, then the investors will lose confidence
in its currency and the value of the currency will reach the bottom. As of 2018,
Venezuela is grappling with hyperinflation of 1,000,000% (IMF report).

In conclusion, the exchange rate of a country determines its purchasing power,

interest, rates, inflation, and capital gains from domestic securities. Let’s understand
the impacts of exchange rate movements:
 Impact on inflation: The exchange rate movement affects inflation by:
⚫ Changing the prices of imported goods and services. This directly raises the
consumer price index. For example, a reduction in the exchange rate will
generally increase the price of imported goods.
⚫ Changing the price of commodities, such as oil. A weaker INR will increase the
price of crude oil, as it is traded in the dollar.
⚫ Changing the growth of exports. For example, if the exchange rate of INR
is high, then it increases the prices of exports. On the other hand, if the INR
weakens, then the Indian exports become cheaper.
 Impact on unemployment: Rise in the exchange rate will reduce net exports
and increase the demand for imports. If the demand and output are low, then
businesses will try to control their costs. To do so, they may cut jobs. Some job
losses are temporary. However, if imports are permanently higher than exports,
then job losses will be more permanent in nature.
 Impact on recession: Sometimes when an economy is in recession, its currency
is depreciated (its value is decreased in the free market) to stimulate demand,
increase output, and create jobs. This will improve the balance of trade by driving
higher export sales and widening of output in industries (particularly exporters).
This effect is called the supply chain effect.
A cheaper currency has some downsides also. For one thing, investors may lose
confidence in a weakened currency and may take away their capital (capital flight).
This will make it tough for the government to finance budget deficits and trade
deficits. The cost of imports will be higher than the revenues from exports. This
may cause inflationary risks.
 Impact on balance of payments adjustments: A short-term depreciation may not
be beneficial to improve the BOP because of the low price elasticity of demand for
imports and exports in the short term. In the beginning, there will not be any change
in the number of imports as their contracts have already been signed. However,
the demand for exports will be inelastic with the exchange rate movement. The
 net earnings from exports may be inadequate to compensate for higher spending
on imports. This may further deteriorate the BOP. This phenomenon is called the
J curve effect, as shown in Figure 2:

The diagram below shows the “J Curve effect” – it shows the time
lags between a falling currency and an improved trade balance

Trade
surplus
Currency
depreciation
here
Trade deficit may Time
grow in initial period after
period after depreciation
depreciation
Trade Net improvement
deficit in trade, provided
certain conditions
are met

FIGURE 2: J Curve Effect

Source: https://www.tutor2u.net/economics/reference/exchange-rates-macroeconomic-effects-of-currency-
fluctuations

With time, the trade balance will improve because the elasticity of demand for
imports and exports is more than one. This effect is called the Marshall-Lerner
condition.
GLOBALISATION TRENDS AND CHALLENGES

Globalisation has significantly affected people and communities around the world.
With technology advancements and increased mobility, globalisation has enabled
several economies to touch new heights, but in the process, it has irreversibly
impacted societies and natural environment. Over the last 30 years, the world has
undergone massive transformation. From $ 50 trillion in 2000, the world GDP has
grown to $ 75 trillion in 2016. The gap between the rich and the poor has increased
tremendously. In 2017, 82% of the global wealth goes to the richest 1% people in the
world (Oxfam report).

If globalisation has to sustain its momentum, then it has to overcome such challenges.
In general, there are three major trends:
 Shifts in production and labour markets: This trend explains how changes in
production, such as through outsourcing and mechanisation, have impacted the
labour markets globally and resulted in job losses. This trend is related with the
increasing gap between rich and poor.
 Quick technology advancements: This trend refers to the rapid technology
advancements in IT, communication, and artificial intelligence. Although these
technologies will pave way for sustainable development, there is a threat for
countries that cannot afford them of being left out.
 Climate change: Economic activity, changes in lifestyle, and growing urbanisation
have adversely affected the natural environment. The climate change problem
needs to be addressed globally.
There are three main challenges to globalisation:
 Job mobility: The largescale shifting of jobs, particularly manufacturing jobs,
from developed countries to developing countries has made globalisation highly
unpopular politically and culturally. Lower-skilled workers in developed countries
who lose their jobs often find it difficult to find alternative employment, which
compensates them equally. This also adds a burden on the social welfare system
of those countries. Due to fewer jobs, less tax is collected, which is required for
funding the social welfare systems.
 Dominance of the West: Western Europe and the US continue to dominate the
international order, despite the rise of China and BRICS. For instance, the heads of
the IMF and the World Bank are either from the US or from the European Union
(EU). However, if western values are forcibly imposed, they may lead to disastrous
results, such as the fall of Arab leaders during the Arab Spring who were propped
up by the Western countries.
 Cultural identity loss: Although globalisation has made it easier for people to
share cultural values, it has also led to the destruction of traditional values in
various societies. The American culture has emerged as a dominant culture with
young people around the world copying their lifestyles, food preferences, and
consumer behaviour. This has shifted the savings balance of several societies,
which have been traditionally frugal and conservative.
BALANCE OF PAYMENTS TRENDS
The Balance of Payments (BOP) is a statement that summarises all the international
transactions conducted by the residents of a country, involving:
 Goods, services and income
 Financial claims on and liabilities to the rest of the world
 One-sided transactions or transfers (such as gifts)
The BOP helps to determine how much financial capital has flown out of a country
and how much capital has come inside. It is prepared on a quarterly and annual
basis in the domestic currency of the country. It has the following four components:
 Current account: This includes all imports and exports of goods and services,
income receipts and payments from investments, and one-sided transfers of
foreign aid. In a current account, if the amount of debits (imports) is more than
the credits (exports), then the country is in a trade deficit. In a contrary situation
(imports>exports), the country is running a trade surplus.
 Capital account: This account determines the net difference between the sales
of assets of a country to foreign investors and the country’s purchase of foreign
assets. It includes FDI, portfolio and other investments.
 Official reserves account: This account includes gold, foreign currencies, and
special drawing rights (SDRs). SDRs are reserve positions with the IMF.
 Statistical discrepancy: This includes the entries made to balance omissions and
inaccurate transactions in the BOP.
The BOP is recorded in a double entry system, where all transactions are debit or
credit transactions, as illustrated in Table 9:

TaBLE 9: Debit and Credit Transactions In BOP

Debit (= Payments to foreigners) Credit-Receipts of payments from foreigners)

Imports of goods Exports of goods
Transportation and travel expenses Transportation and travel receipts
Income paid on investments of foreigners Income received from investments made in
foreign lands
Gifts to foreign residents Gifts received from foreign residents or non-
resident domestic people
 Debit (= Payments to foreigners) Credit-Receipts of payments from foreigners)
Aid given by the country to foreign Aid received from foreign governments
nations
Overseas investments by residents

For each credit transaction in the BOP, there must be a balancing debit transaction,
and vice versa (double entry system condition). Thus, the current and capital accounts
must sum to be 0 for maintaining equilibrium in the BOP. However, the BOP’s
equilibrium can be disturbed due to the following factors:
 Economic factors: Imbalance between exports and imports, huge development
expenditure, etc.
 Political factors: Restrictive imports policy, such as anti-dumping duty
 Social factors: Changes in lifestyles and consumer tastes, which imbalance imports
and exports
To restore the equilibrium of the BOP, the following measures should be taken:
 Promotion of exports by granting sufficient rewards to manufacturer and exporters
 Discouraging imports through import substitution and reasonable tariffs
 Reducing inflation
 Controlling the exchange rates by asking all exporters to surrender their FOREX to
the central bank and then rationing the FOREX to licensed importers
 Devaluating the domestic currency in case of the fixed exchange rate
 Depreciating the domestic currency in the free market system
Figure 3 displays India’s BOP in Q3 of 2017-18:

Table 1: Major Items of India’s Balance of Payments

(US$ Billion)
October-December October-December April-December April-December
2017 P 2016 2017-18 P 2016-17
Credit Debit Net Credit Debit Net Credit Debit Net Credit Debit Net
A. Current Account 150.1 163.6 -13.5 130.2 138.1 -8.0 435.6 471.3 -35.6 382.8 394.6 -11.8
1. Goods 77.5 121.6 -44.1 68.8 102.0 -33.3 226.8 345.6 -118.9 202.8 285.5 -82.7
of which:
POL 9.9 29.2 -19.3 8.1 21.8 -13.7 26.5 75.8 -49.2 22.5 61.3 -38.8
2. Services 50.0 29.0 20.9 42.1 24.4 17.8 143.3 85.7 57.6 122.4 72.6 49.8
3. Primary Income 4.9 11.3 -6.4 4.0 10.4 -6.4 14.3 34.9 -20.6 11.8 32.5 -20.7
4. Secondary Income 17.7 1.6 16.1 15.3 1.4 13.9 51.3 5.1 46.3 45.8 4.0 41.8
B. Capital Account and Financial Account 168.8 156.2 12.6 138.7 131.4 7.3 470.9 437.0 33.9 406.8 395.0 11.8
of which:
Change in Reserve (Increase (-)/Decrease (+)) 0.0 9.4 -9.4 1.2 0.0 1.2 0.0 30.3 -30.3 1.2 15.5 -14.2
C. Errors & Omissions (-) (A+B) 0.8 0.8 0.7 0.7 1.8 1.8 0.0 0.01 -0.01
P: Preliminary
Note: Total of subcomponents may not tally with the aggregate due to rounding off.

FIGURE 3: BOP in Q3 of 2017-18

Source: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=43403
INDIA’S COMPETITIVENESS IN THE WORLD ECONOMY
For an economy, competitiveness refers to its ability to provide products and services
in a more effective and efficient manner than its competitors. When a country is able
to maintain or enhance its share of trade in the global economy without protection
or subsidies, it means that the country is highly competitive. When an organisation
is able to succeed in its home country or in the nearby country, it is usually a
result of optimal transportation costs. On the contrary, if an organisation is able
to truly trade with far-off countries, it is usually a result of superior productivity
or technology. Truly competitive organisations gain competitive advantage using
superior productivity. The competitiveness of a country is dependent upon the
competitiveness of its domestic organisations.

The competitiveness of any country with respect to other countries of the world
can be estimated using various ad-hoc or customised measures. However, the
Global Competitiveness Report published by the World Economic Forum (WEF)
is used as the internationally accepted measure of global competitiveness. WEF
evaluates the competitive landscape of 137 countries on the grounds of economic
and productive factors. The top three positions are attained by the United States,
Switzerland and Singapore, respectively. India has earned the 58th position in the
WEF and is considered as the leader among the South Asian economies because of
its market size and innovation. Indian economy should improve its health, skills and
education sector in order to accelerate its position in the list. With rapid expansion
in the service industry and globalisation, India has gained the status of the fastest
growing economy in the world.

EXTERNAL INFLUENCES ON INDIA’S BUSINESS ENVIRONMENT

Business Environment is comprised of various factors such as demographic factors,
economic factors etc. Each and every factor affect the business environment directly
or indirectly. In order to sustain in the competitive environment, every organisation
has to identify, learn, change and adapt the new business trends and policies so as
to keep up with the dynamic business environment.

Business environment has some internal and external factors that influence the
smooth working of business. According to Barry M. Richman and Melvyn Copen
“Environment factor or constraint largely if not totally, external and beyond the control of
individual industrial enterprises and their management. These are essentially the ‘givers’
within which firms and their management must operate in a specific country and the vary,
often greatly, country to country.”

Business environment can be categorised into two types; Micro Environment and
Macro environment. Micro environment consist of employees, suppliers, customers,
competitors and the local community. On other hand, macro environment included
all the external factors such as economic, demographic, political, etc.

Environment must be scanned to determine the threat and opportunities for the
business. It is the process of gathering all the information regarding organisation’s
environment, analysing and predicting the impact of environment changes. It helps
an organisation in achieving its objectives and goals by making informed decisions.
External factors which influence an organisation working is beyond the direct
influence and control of the organisation. External factors include individuals, group,
agencies, events and conditions. To understand the impact of external influences on
business environment we must go through with the factors given below:
 Economic Factors: The economic environment includes economic status of
the country i.e. manpower market, money market, supply market, and so on.
It influences the supply of raw material, their cost and quality. The purchasing
power of the company depend on the income, price of the product or services,
credit availability. Strategist must analyse, understand, scan, monitor and forecast
key economic factors that are:
⚫ Level of disposable income
⚫ Global Movement of labours
⚫ Import & Export
⚫ Inflation Rates
⚫ Income distribution
⚫ Demands of Product
⚫ Interest Rate
⚫ Tax Rate
⚫ Government Budget
⚫ Consumption Pattern
 Technological Environment: Technology is the most important factor which
affects the business environment. Technology has changed the communication
and system via internet and telecommunication. It has been changing the business
trends and creating new business opportunities both in domestic and international
market. Technological innovations help to adopt new ways of performing business
tasks. E-Trading, e-retailing are a few emerging trends in today’s competitive
business environment.
 Demographic Factors: The term Demographic factor consist of age, gender, income,
education, population, employment. Demography refers to the characteristics of
the population. India has younger population in the comparison of other country.
Multinational companies are interested in India just because of its population size.
India is having approximately 16% of world’s population, our country holds great
potential in all over the world in terms of man power.
Business organisation screened out the different demographic factors, which has
direct influence on business environment, they need to understand the following
issue:
⚫ Population size has great impact on business environment. As increase and
decrease in birth rate affect the demand and supply pattern. Indian market size
is larger than other countries which provide massive growth opportunities for
business within the domestic market.
 ⚫ Geographic dispersal has direct impact on business. Population who shifted
from one state to other state or non-metro city to metro city can affect the
organisation’s strategic competitiveness.
⚫ Ethnic group has an implication for the organisation. Change in ethnic
group has direct influence on organisation’s potential customer and existing
workforce.
⚫ Distribution of income is important because changes in income will affect the
consumption and saving patterns. Income distribution determines the market
possibilities.
 Global Environments: In the present time organisation must screen out the global
environment as it is rapidly changing. Migration of people from one region to other
and from one country to other country, affects the operation of the organisation.
Now Indian companies are going global in order to explore the opportunities
in global market. Modes of entry, currency valuation etc. should be taken into
consideration in order to know the global business environment.
 Legal Environment: Every organisation has to fulfil legal obligations and
government rules and regulations. If legal compliance is not executed timely, it
hampers the smooth functioning of the organisation. It is important to know the
requirement of licensing, income tax compliance etc in order function as per the
country’s laws and regulation.

COMPETITIVE TRENDS IN BUSINESS ENVIRONMENT

Here, we will discuss the emerging trends of business environment. The competitive
trends in the business environment and economic environment take place in a
number of areas and are dependent on one another. Nowadays, the workforce is
diversified, competition has intensified and technology has dramatically accelerated
the scope and speed of different tasks. All organisations, whether small or large,
have to function properly while meeting these changing and competitive challenges.
The major competitive trends in the business environment are as follows:
 Globalisation: One of the major changes in the business environment is the
globalisation of business. Over the number of years, business organisations
have become global in character and are crossing their national boundaries in
the pursuit of expanding business opportunities. As businesses go global, the
economic and environmental changes of countries other than the home country
in which a company carries out its operations, affect the performance levels and
business decisions of firms. Moreover, the transformation of the manufacturing
economy into rapidly growing service economy has posed challenges in respect
of the need for expert knowledge and skills of employees and their improved job
performance.
 Business Process Outsourcing (BPO): One of the emerging trends in business is
the procurement of goods or services from an outside manufacturer or service
provider. Organisations have nowadays adopted a new strategy of outsourcing
which has increasingly resulted in the reorganisation of supply chain. Outsourcing
refers to the process of delegating non-core jobs or business processes from the
internal production to an outside party. It is generally adopted by businesses so
as to focus on their core competencies, achieve efficiency and cost effectiveness.
 Revolution in Information Technology: Information Technology (IT) creates
competition in the business world and one can easily get information related
to anything from anywhere. Through the digitisation of information and rise
in technology innovations, more and more business enterprises are fruitfully
leveraging the benefits offered by digital tools to improve their future business
prospects. Organisations must update their technologies to ensure continuous
business development and to secure their stake in the marketplace.
 Removal of trade and tariff barriers: With the liberalisation of trade, barriers or
restrictions on the free exchange of goods and services between nations have taken
place easily. Such tariff barriers comprise of duties, surcharges, licence regulations
and quotas. The reduced regulation results in reduction in costs for countries
which often trade with other countries or nations. This ultimately promotes free
trade and lowers the consumer costs since imports are subjected to lower fees and
increase in competition.
 Changes in customer needs and habits: Customers are the kings of all businesses
as their satisfaction leads to optimum profits or sales. However, customers’ needs
and habits are changing rapidly. Nowadays, orgnaisations find it difficult to
determine as to which products can fulfil the needs or demands of the customers.
Businesses are hugely impacted by varied tastes and diversified requirements of
customers. Identification of customers’ demands and findings out ways to satisfy
their specifications or priorities is a complex task faced by business enterprises.
BUSINESS OPPORTUNITIES IN THE RURAL SECTOR

Business in rural areas has an important role to play in the development of Indian
the economy. Taking into consideration the fact that about 70 per cent of the Indian
population recognise rural India its home, adequate funding and support can
provide a thriving entrepreneurial atmosphere in the rural sector. However, it is
known that rural India as compared to the mainstream population is economically
poor, younger, geographically isolated, isolated from the markets, culturally rooted
in tradition, less flexible economically and facing depopulation.

With a young population that is rising to leadership and technology driving growth
and innovation, there are several business opportunities in multiple sectors.
It is a way easier to start a business in rural areas because the business can be started with
less initial capital and the overhead expenses are comparatively low. And secondly, it is
easier to organise a business in a rural area where people know each other. The government
is also providing funds and schemes to enhance the business opportunity in rural areas.
There are some businesses that can be started in rural areas. Here, we will discuss the
important business opportunities in rural areas:

 Fertilisation and seed store: Fertilisers are extensively being used to improve per
hectare production of crops that can be used for food and industrial applications. This
business can be started in rural areas.
 Organic farming: A local farming business can be started which adopts strictly
organic methods to cultivate vegetables, fruits, sauces and local delicacies. This
business would be a success, as people would come from different areas to buy
organic products. For this type of business, one can sell produce, which are officially
labelled organic or still organic with no label.
 Selling fresh eggs: Starting a poultry business or rearing does not need a lot of lands.
However, state laws need to be checked to see if the requirements are to be met
without difficulty.
 Jute bags making: It is the best eco-friendly business opportunity. Jute is also called
golden fibre which is grown by farmers of rural areas and is bio-degradable along with
a high cash value. Purchase raw jute from the farmers and start a business, then it will
bring profit to them as well as you.
 Waste management: Tons of waste is generated in rural and urban areas. The
disposed waste is a conglomerated form of organic as well as non-organic waste.
utilising scores of wastes and transforming it into a usable product is a good deed as
well as a business in rural areas.
 Development of solar project: Solar energy is finding important applications in this
field. If India starts using solar power as an alternative source of energy, it can lead to
positive social and economic gains.
 Tea gardening: Tea gardening is a good choice for people who are passionate about tea.
This business does not require a huge tract of land for planting tea shrubs. In fact, tea
gardening can be done in balconies. For this choice, the soil needs to be fully drained
and sandy.
 Beekeeping: Beekeeping is an area of investment that has not been explored fully and
it is a beneficial and high return business because it requires less time and money.
Also, the infrastructure investments are minimum. This can be initiated by
individuals or groups.
 Fish farming: In India, fish farming is one of the most profitable and successful
businesses. Due to increasing population, the demand and therefore the price of fish
has been increasing. Therefore, fish farming is one of the most sought after business.
 Dairy enterprises: Rural areas are more suitable for setting up a dairy farming
business. In India, the majority of the dairy farmers raise animals using traditional
methods. It does not require highly skilled labour. This business can easily set up
small scale dairy farm with family members.