12 MM

VENKATESHWARA
OPEN UNIVERSITY
BUSINESS ENVIRONMENT www.vou.ac.in

BUSINESS ENVIRONMENT

BUSINESS ENVIRONMENT
BBA
[BBA-102]

VENKATESHWARA
OPEN UNIVERSITY
www.vou.ac.in
BUSINESS ENVIRONMENT

BBA
[BBA-102]
BOARD OF STUDIES
Prof Lalit Kumar Sagar
Vice Chancellor

Dr. S. Raman Iyer

Director
Directorate of Distance Education

SUBJECT EXPERT
Dr. Richa Agarwal Associate Professor
Dr. Babar Ali Khan Assistant Professor
Dr. Adil Hakeem Khan Assistant Professor

COURSE CO-ORDINATOR
Mr. Tauha Khan
Registrar

Authors
Biswanath Ghosh: Units (1, 2, 3.5-3.7, 4.0-4.2.6, 4.3, 4.5-4.7, 6) © Biswanath Ghosh, 2019
HR Machiraju: Units (3.3-3.4) © HR Machiraju, 2019
MC Kuchhal: Units(5.4-5.5) © MC Kuchhal, 2019
Vikas® Publishing House: Units((3.0-3.2, 3.8-3.11, 4.2.7, 4.4, 5.0-5.3, 5.6-5.10) © Reserved, 2019

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 SYLLABI-BOOK MAPPING TABLE
Business Environment
Syllabi Mapping in Book

UNIT 1 Business Environment: Dynamic factors of Unit 1: An Overview of Business Environment

environment; Importance of scanning the environment, (Pages 3-21)
Fundamental issues captured in PESTLE-Political, Economic,
Socio-cultural, Technological, Legal and Ecological
environment, Opportunities and Threats as environmental
issues to address by Businesses.
UNIT 2 Political Environment: Government and Business;
Unit 2: Political Environment
Political Systems, Political Stability and Political Maturity as
(Pages 23-65)
conditions of business growth; Role of Government in
Business: Entrepreneurial, Catalytic, Competitive, Supportive,
Regulative and Control functions, Government and Economic
planning: Industrial policies and promotion schemes;
Government policy and SSI; Interface between Government
and public sector.
UNIT 3 Economic Environment: Phase of Economic Unit 3: Economic Environment
Development and its impact, GDP Trend and distribution and (Pages 67-140)
Business opportunities, Monetary System and Business capital:
Quantum, Types, Risk and Cost, Role of Banks; Role of
Financial Institutions, Role of Central Bank, Fiscal System:
Government Budget and Taxation Measures, Fiscal Deficits
and Inflation, FDI and collaboration, Foreign Capital tapping
by businesses, Export-Import policy, Foreign Exchange and
Business Development.
UNIT 4 Social and Technological Environment: Societal Unit 4: Social and Technological Environment
Structure and Features, Entrepreneurial Society and its (Pages 141-168)
implications for business, Social and cultural factors and their
implications for business, Technology Development Phase
in the Economy as conditioner of Business opportunity,
Technology Policy, Technology Trade and transfer,
Technology Trends in India, Role of Information Technology,
Clean Technology.
UNIT 5 Legal and Ecological Environment: Legal Unit 5: Legal and Ecological Environment
Environment as the all enveloping factor from inception, (Pages 169-231)
location, incorporation, conduct, expansion and closure of
businesses, Legal Aspects of Entering Primary and Secondary
Capital Markets, Law on Patents, Law on Consumer
Protection, Law on Environmental Protection, Need for Clean
energy and Reduction of Carbon footprint.
UNIT 6 New Economic Policy Environment in India:
Unit 6: New Economic Policy
Liberalization, Privatization and Globalization (LPG):
Efficiency Drive through Competition, Facets of Environment in India
(Pages 233-266)
Liberalization and impact on business growth, Aspects of
Privatization and impact on business development,
Globalization and Enhanced Opportunities and Threats,
Extended competition in Input and Output Markets, Role of
WTO, IMF and World Bank in global economic development.
 CONTENTS
INTRODUCTION 1

UNIT 1 AN OVERVIEW OF BUSINESS ENVIRONMENT 3-21

1.0 Introduction
1.1 Unit Objectives
1.2 Dynamic Factors of Environment
1.3 Importance of Scanning the Environment: Opportunities and Threats as Issues to be Addressed
1.4 Fundamental Issues Captured in PESTLE
1.4.1 Political Environment
1.4.2 Economic Environment
1.4.3 Social Environment
1.4.4 Technological Environment
1.4.5 Legal Environment
1.4.6 Natural Environment
1.5 Summary
1.6 Answers to ‘Check Your Progress’
1.7 Questions and Exercises

UNIT 2 POLITICAL ENVIRONMENT 23-65

2.0 Introduction
2.1 Unit Objectives
2.2 Government and Business
2.3 Role of Government in Business
2.3.1 The Public Sector; 2.3.2 The Private Sector
2.3.3 The Joint Sector; 2.3.4 The Cooperative Sector
2.3.5 Privatization: The Role of Government
2.3.6 Entrepreneurial Role of Government
2.3.7 Catalytic Role of Government
2.3.8 Supportive and Competitive Roles of Government
2.3.9 Regulatory Role of Government
2.4 Government and Economic Planning
2.4.1 Government’s Planning: Regional Imbalances in India
2.4.2 Trend and Pattern of Industrial Growth
2.5 Government Policy and SSI
2.5.1 Latest Developments in Micro, Small and Medium Enterprises (MSME) Sector
2.5.2 The MSME Act
2.6 Summary
2.7 Answers to ‘Check Your Progress’
2.8 Questions and Exercises

UNIT 3 ECONOMIC ENVIRONMENT 67-140

3.0 Introduction
3.1 Unit Objectives
3.2 Economic Development and its Impact
3.2.1 Relationship between Growth and Development
3.2.2 Phases of Economic Development of India
3.2.3 Strategies of Development in Different Five-Year Plans
3.2.4 GDP Trend and Distribution
3.2.5 Economic Growth and Business Opportunities
3.3 Monetary System and Business Capital
3.3.1 Issue of Currency; 3.3.2 Quantum of Money (Money Supply)
 3.3.3 Monetary Policy; 3.3.4 Types of Business Capital in India
3.3.5 Cost of Business Capital and Risks Associated with It
3.4 Banks and Financial Institutions
3.4.1 Central Banking in India (Reserve Bank of India)
3.4.2 Commercial Banks; 3.4.3 National Level Financial Institutions
3.5 Fiscal System: Government Budget and Taxation Measures
3.5.1 Fiscal Policy
3.5.2 Fiscal Policy in India
3.5.3 Government Budget
3.5.4 Fiscal Deficit and Inflation
3.5.5 Taxation Measures
3.6 Foreign Capital and Multinational Corporations
3.6.1 Different Forms of Foreign Investment
3.6.2 Government Policy towards Foreign Capital
3.6.3 Foreign Direct Investment (FDI) and Collaboration
3.6.4 Multinational Corporations
3.6.5 Foreign Capital Tapping by Businesses
3.6.6 Foreign Exchange and Business Development
3.7 Export–Import Policy
3.7.1 Highlights of Foreign Trade Policy (EXIM Policy) 2009–14
3.8 Foreign Exchange and Business Development
3.9 Summary
3.10 Answers to ‘Check Your Progress’
3.11 Questions and Exercises

UNIT 4 SOCIAL AND TECHNOLOGICAL ENVIRONMENT 141-168

4.0 Introduction
4.1 Unit Objectives
4.2 Societal Structure and Features: Entrepreneurial Society
and its Implications for Business
4.2.1 New Management Philosophy
4.2.2 Need for Social Responsibilities
4.2.3 Responsibility of Business Towards Society
4.2.4 Ethics, Values and Business
4.2.5 Resolving Corporate and Socio-Economic Conflict
4.2.6 The Consumer Movement
4.2.7 Social and Cultural Factors and their Implications for Business
4.3 Technology Development Phase in the Economy as Conditioner of Business Opportunity
4.3.1 Sources of Technology
4.3.2 Technology Policy: Technology Trade and Transfer
4.3.3 National Science and Technology Entrepreneurship Development Board (NSTEDB)
4.4 Technology Trends in India: Role of Information Technology and Clean Technology
4.4.1 Business Technology Trends in India
4.4.2 Recent Technological Developments in India
4.4.3 Clean Technology
4.5 Summary
4.6 Answers to ‘Check Your Progress’
4.7 Questions and Exercises

UNIT 5 LEGAL AND ECOLOGICAL ENVIRONMENT 169-231

5.0 Introduction
5.1 Unit Objectives
5.2 Legal Environment as the all Enveloping Factor
5.3 Legal Aspects of Entering Primary and Secondary Capital Markets
5.4 Law on Patents
5.4.1 Amendments to the Patents Act, 1970
 5.5 Law on Consumer Protection
5.6 Laws on Environmental Protection
5.6.1 Water Protection Laws
5.6.2 Air Protection Laws
5.6.3 Forests and Wildlife Protection Laws
5.6.4 General Environmental and Ecological Laws
5.6.5 International Agreements on Environmental Issues
5.6.6 An Assessment of the Legal and Regulatory Framework for
Environmental Protection in India
5.7 Need for Clean Energy and Reduction of Carbon Footprint
5.7.1 Reduction of Carbon Footprint
5.8 Summary
5.9 Answers to ‘Check Your Progress’
5.10 Questions and Exercises

UNIT 6 NEW ECONOMIC POLICY ENVIRONMENT IN INDIA 233-266

6.0 Introduction
6.1 Unit Objectives
6.2 Liberalization: Facets of Liberalization and Impact on Business
6.2.1 Privatization: Aspects of Privatization and Impact
6.2.2 Disinvestment
6.2.3 Globalization and Enhanced Opportunities and Threats
6.2.4 Impact of Globalization on Different Sectors of Indian Economy
6.3 Extended Competition in Input and Output Markets Role of WTO,
IMF and World Bank in Global Economic Development
6.3.1 World Trade Organization (WTO)
6.3.2 International Bank for Reconstruction and Development (World Bank)
6.3.3 The International Monetary Fund (IMF)
6.4 Summary
6.5 Answers to ‘Check Your Progress’
6.6 Questions and Exercises
6.7 Further Reading
 Introduction
INTRODUCTION

Two words ‘business’ and ‘environment’ comprise business environment. Business

refers to the state in which a person remains busy performing some or the other activity. NOTES
From an economic point of view, business implies human activities like production,
extraction or purchase or sales of goods that are performed for earning profits. Ideally,
the external factors influencing a business comprise a business environment. They can
be forces of economic, social, political and technological factors.
In this era of globalization, a business cannot perform in isolation, since it is the
social and economic organ of the society. The government of a particular country has
an important role to play in the functioning of a business. It enacts legislation, formulates
business policies and controls business in the best interest of people. On one hand,
business environment affects the political, social and economic environment of the
region it is operating in and on the other, the business in turn is affected by the country’s
social, legal and political environment. A competent management system is capable of
adapting to the business environment. A sound knowledge of business environment
helps in capitalizing emerging opportunities, forming basis of business strategies and
activating further management. This book takes a detailed look at the notion of business
environment at the backdrop of the Indian business scenario.
The economic environment of business in India has been changing at a fast rate
mainly due to the changes in the economic policies of the government. At the time of
independence, the Indian economy was basically agrarian with a weak industrial base.
The Government adopted several control measures on the functioning of private sector
enterprises. All these efforts resulted a mixed response. There was growth in net national
product, per capita income and development of capital goods sector and infrastructure.
But rate of industrial growth was slow, inflation increased and government faced a
serious foreign exchange crisis during eighties. As a result, the government of India
introduced a radical change in economic policies in 1991. This policy abolished industrial
licensing in most of the cases, allowed private participation in most industries;
disinvestment was carried out in many public sector industrial enterprises and opened
up the economy considerably. Foreign Investment Promotion Board was set up to
channelise foreign capital investment in India.
The book has been designed such as to give an overview of business environment
and its significance in the Indian economic scenario.

Self-Instructional Material 1
 An Overview of Business
UNIT 1 AN OVERVIEW OF BUSINESS Environment

ENVIRONMENT
NOTES
Structure
1.0 Introduction
1.1 Unit Objectives
1.2 Dynamic Factors of Environment
1.3 Importance of Scanning the Environment: Opportunities and Threats as
Issues to be Addressed
1.4 Fundamental Issues Captured in PESTLE
1.4.1 Political Environment
1.4.2 Economic Environment
1.4.3 Social Environment
1.4.4 Technological Environment
1.4.5 Legal Environment
1.4.6 Natural Environment
1.5 Summary
1.6 Answers to ‘Check Your Progress’
1.7 Questions and Exercises

1.0 INTRODUCTION

Environment plays an important role in business. Any form of business is highly influenced
by the environment in which it is performing. Environment refers to the sum total of all
factors, economic, social, political as well as cultural, which are external and beyond
the control of the business organizations. This unit focuses on environment and its
influence on the working of a business enterprise. The several factors and their impact
on a business environment are explained in details. The unit also discusses opportunities
and threats surrounding a business and other fundamental issues related to business
and its environment.

1.1 UNIT OBJECTIVES

After going through this unit, you should be able to:

• Identify the dynamic factors of the environment
• Discuss the importance of scanning the opportunities and threats to businesses
• Describe the fundamental issues outlined in PESTLE

1.2 DYNAMIC FACTORS OF ENVIRONMENT

Suppose your aim is to become a manager. Your success depends on a number of

factors. As a manager, you work in an environment and when you make decisions you
have to consider the strength as well as the limitations of the organization. In order to
ensure smooth flow of work, you have to constantly overview your business
environment.
Self-Instructional Material 3
An Overview of Business Environment refers to the sum total of all factors — economic, political, social,
Environment
and cultural — which are external to and beyond the control of the individual business
enterprises and their management. The environment furnishes the macro-contexts,
while the business firm is the micro-unit. The environmental factors are numerous
NOTES and are ‘given’ within which the firm operates. Some of these factors are static while
others are dynamic. Environmental factors generally vary from country to country.
The environment found in India will not be governing organizations in the USA or
the UK and vice versa.
Environment: Environment may be local, national and international. Again, environment may
The sum total of all factors be market environment and non-market environment. When the business environment
— economic, political, is influenced by market forces like demand, supply or competition, it is referred to as
social, and cultural —
external to and beyond the
market environment. When it is influenced by social customs, government laws, religious
control of the individual taboos and so on, it is referred to as non-market environment.
business enterprises and
their management
Lastly, business environment is influenced by economic and non-economic
factors. Economic environment is shaped by the monetary policies, tax policies,
economic policies, industrial policies, etc. of the country concerned.
The non-economic environment is shaped by political, social, cultural and historical
factors.
It is necessary to examine the business environment because it will enable the
manager to analyse which factors are helping or hindering the success of his business.
If he could identify the factors which hinder his success in business, he can adopt an
alternative course of action.
There are various techniques of scanning the business environment.
First, identify the particular environment. Then, find out what are the elements
of such an environment and analyse them. Since environmental factors are macro
variables, they are beyond the control of a particular firm.
The first technique of scanning is changing the economic activity, i.e., adjusting
means to the ends or ends to the means.
Second, change the decision-making process of the firm. When input is the
constraining factor, the firm’s decision variable is the output and when output is the
constraining factor, the firm’s decision variable is the input.
Components of the Environment
A business cannot function within a vacuum; like any other organic entity, it is in constant
interaction with—and is duly impacted by—its environment. Its immediate environment
may be said to comprise of micro-components such as its suppliers, customers,
competitors, the workforce and attendant working climate, and regulatory agencies.
Extending beyond this troposphere (to use a term more allied to geography) lies a
more diffused but no less influential outer zone acting on the organization—an incredibly
complex medley of influences which may be described as the macro environment.
This peripheral layer comprises macro components such as the economic environment,
natural environment, the political environment, demographic environment, international
environment, and so on. In this section, therefore, we shall study the effects of both the
micro as well as the macro environments of business organizations.
4 Self-Instructional Material
 There does not seem to be any comprehensive and all-encompassing definition An Overview of Business
Environment
of the environment surrounding a business organization. While Gerald Bell says that
‘an organization’s external environment consists of those things outside an organization
such as customers, competitors, government units, suppliers, financial firms and labour
NOTES
pools that are relevant to an organization’s operations’, Paire and Anderson claim that
the business environment is ‘the sum of those inputs to an organization which are under
the control of other organizations or interest groups or are influenced by the interaction
of several groups, such as the economy’.
William F. Glueck and Lawrence R. Jauch imply that there are two distinct
components of the environment, micro and macro. According to them, ‘the environment
includes factors outside the firm which can lead to opportunities for, or threats to,
the firm. Although there are many factors, the most important are socio-economic,
technological, suppliers, competitors and government’. Richman and Copen maintain
that the environmental factors largely if not totally impact the firm, the boundaries of
which extend well beyond its formal limits. Given this cross-section of opinions culled
from management tracts, we shall be on safe ground if—for purposes of academic
study—we treat the micro and macro components as separate sets of factors influencing
the overall business environment of a country.

1.3 IMPORTANCE OF SCANNING THE

ENVIRONMENT: OPPORTUNITIES AND THREATS
AS ISSUES TO BE ADDRESSED

Environmental scanning means an analysis of the environmental variables. A business

manager operates in an environment and not in a vacuum. At the same time,
environmental scanning points towards interaction among environmental factors.
Environmental scanning is a step towards corporate planning.
Need and Technologies of Environmental Scanning
We have already pointed out the need for environmental scanning. Now we shall
discuss the techniques of the same.
William F. Glueck has mentioned the following techniques of environment
scanning:
(i) Verbal and written information
(ii) Search and scanning
(iii) Spying
(iv) Forecasting and formal studies
Another important technique of environment analysis is SWOT analysis.
Corporate managers analyse the Strengths (S), Weaknesses (W), Opportunities (O)
and Threats (T) that exist for the organization in the context of its environment. SWOT
analysis is a systematic identification of these factors and the strategy that reflects the
best match between them. It is based on the assumption that an effective strategy
maximizes a business’s strengths and opportunities but at the same time, minimizes its
Self-Instructional Material 5
An Overview of Business weaknesses and threats. This simple assumption has powerful implications for
Environment
successfully choosing and designing an effective strategy.
Environmental analysis provides the information to identify key opportunities
NOTES and threats in the firm’s environment.
Opportunities: An opportunity is a favourable situation in the firm’s environment.
Identifying previously neglected market segments, changes in competition, technological
changes and improved buyer or supplier relationships might be opportunities for the
firm.
Threats: An unfavourable situation, threat is key hindrance to the growth of the
firm. The entry of a new competitor, slow market growth, increased bargaining power
of main buyers or suppliers, major technological change and changing regulations could
be threats to a firm’s future success. For example, consumer acceptance of home
computers was a major opportunity for IBM. Understanding the key opportunities
and threats facing a firm helps managers identify realistic options from which to choose
an appropriate strategy.
The second fundamental focus in SWOT analysis is identifying key strengths
and weaknesses.
Strength: A strength is a resource, skill or other advantage, relative to competitors
and the needs of market a firm serves. A strength is a distinctive competence that gives
the firm a comparative advantage in the market place. Financial resources, market
leadership and buyer/supplier relations are examples of strengths.
Weaknesses: A weakness is a limitation or deficiency in resources, skills and
capabilities that impede effective performance. Facilities, financial resources,
management capabilities, marketing skills and brand image might be sources of
weaknesses.
SWOT analysis can be used in at least two ways in strategic choice decisions.
The most common application provides a logical framework guiding systematic
discussions of the business’ situation, alternative strategies and ultimately the choice of
strategy. What one manager sees as an opportunity, another may see as a potential
threat. Systematic SWOT analysis ranges across all aspects of a firm’s situation. As a
result, it provides a dynamic and useful framework for choosing a strategy.
A second application of SWOT analysis is shown in Figure 1.1. Key external
opportunities and threats are compared to internal strengths and weaknesses in a
structured approach. The objective is identification of one of the four district patterns
in the match between the firm’s internal and external situations.
Certain patterns are represented by the four cells in our figure. Cell 1 is the most
favourable situation, the firm faces several environmental opportunities and has numerous
strengths that encourage pursuit of such opportunities. This condition suggests growth-
oriented strategies to exploit the favourable match. Cell 4 is the least favourable situation,
with the firm facing major environmental threats from a position of relative weakness.
This condition calls for strategies that reduce involvement in the products/markets
examined using SWOT analysis. In Cell 2, a firm with key strengths faces an
unfavourable environment. In this situation, strategies would use current strengths to
6 Self-Instructional Material
build long-term opportunities in other products/markets. A business in Cell 3 faces An Overview of Business
Environment
impressive market opportunity but is constrained by several weaknesses.

NOTES

Fig. 1.1 A Second Application of SWOT Analysis

A host of external and uncontrollable factors influence a firm’s choice of direction

and action and ultimately its organizational structure and internal processes. The firm
functions as a part of the environment and has no existence apart from the environment.
By exploiting the opportunities present in the environment, the firm achieves its growth
objectives. Again, it is in the environment that it finds its threats, which have to be
faced successfully, if it has to achieve its objectives. The external environment has to
be divided into two categories—the remote environment and the more immediate
operating environment.
Methods and Techniques of Environmental Analysis

The monitoring process of the appropriate environment by an organization to identify

the opportunities and threats, that affect the business, is known as environmental
scanning or analysis.
When the environmental scanning process is completed, planners gather all the
information related to the opportunities and threats for the organization. The techniques
used for environmental scanning:
• Environmental Threat and Opportunity (ETOP) Analysis
• Quick Environmental Scanning Technique (QUEST) Analysis
• Strengths Weaknesses Opportunity and Threats (SWOT) Analysis
• Political, Economic, Social and Technological (PEST) Analysis
ETOP analysis

ETOP is a device that considers the environmental information and determines the
relative impact of threats and opportunities, for the systematic evaluation of environmental
scanning. This analysis divides the environment into different sectors and then analyses
their effect on the organization.
Self-Instructional Material 7
An Overview of Business Table 1.1 The ETOP Analysis for HAL
Environment

Environmental Variable Opportunity Threat

Economic Infrastructural development is Resource constraints.

NOTES enhanced. This development
includes power supply,
transport and internal
consumption.

Technological Organization’s production

increases and technology
upgrades that helps the
organization to grow.

Supplier Scarcity of resources due to

implementation of the new technology.

Government Liberalization of technology Applying new rules and policies in the

import policy. organization.

Competitor To retain the market share, the

organization needs to take the risks based
on new ideas to raise the market demand.
It is difficult for an organization to find a
specialist or highly qualified personnel for
the enhanced technology.

For example, the environmental analysis of Hindustan Aeronautics Limited

(HAL) shows the opportunities and threats of the organization, considering different
environmental variables. Table 1.1 shows the ETOP analysis for HAL.
QUEST Analysis
QUEST analysis was proposed by B. Nanus. It is a four-step process that uses scenario
writing for environmental scanning. The four steps involved in this technique are:
1. Strategy planners first observe the events and trends of the organization.
2. From the above observation they broadly consider important issues that may
affect the organization, using environment appraisal.
3. A report is created by summarizing these issues, their effects and different
scenarios to show the implementation of these strategies.
4. In the last step, reports and scenarios are reviewed by the planners who decide
the feasibility of the suggested strategies that are beneficial for the organization.
SWOT Analysis
SWOT:
The process of carefully SWOT is the heart of strategic analysis. SWOT analysis is the process of carefully
inspecting the strengths, inspecting the business and its environment through the various dimensions of strengths,
weaknesses, opportunities, weaknesses, opportunities, and threats. SWOT is also known as TOWS analysis.
and threats
SWOT is a tool used for auditing the organization, which helps in finding the key issues
and problems in the business. SWOT analyses the problems through internal and
external analysis. In internal analysis, strengths and weaknesses of the organization are
considered, whereas in external analysis, opportunities and threats for the organization
are considered. The factors that are considered during internal analysis are:
8 Self-Instructional Material
 • Organizational structure An Overview of Business
Environment
• Business location
• Organization’s operational efficiency and capacity
• Market share NOTES
• Brand awareness
• Financial resources
• Patents and trade laws
• Expertise of marketing personnel
• Business reputation in the market
Similarly, various factors that an organization needs to consider in external analysis
are:
• Customers and clients
• Competitors
• Market trends
• Suppliers
• Business partners
• Social change
• Latest technology
• Economic situation
• Political and legal restrictions
Figure 1.2 shows the SWOT analysis process.

Strengths Threats

Fig. 1.2 SWOT Analysis

Strengths are a company’s core competencies, and include proprietory

technology, skills, resources, market position, patents, and others. Weaknesses are
the conditions within the company that can lead to poor performance and could be
obsolete equipment, heavy debt burden, poor product or market image, weak
management, and others.
Opportunities are external conditions or circumstances a the company which
suddenly realizes a growth in broad market interest, could turn to its advantage. The
following opportunities must be considered in SWOT analysis:
• Advertising a product on the Internet
• Mergers, joint ventures or strategic alliances
Self-Instructional Material 9
An Overview of Business • Business proposal from a new client with good a reputation in the market
Environment
• Moving into new market segments with improved profits
• Getting a chance to enter the international market
NOTES Threats are the current or future conditions in the environment that may harm
the company and might include an increase in competition. The following threats must
be considered in SWOT analysis:
• A new competitor in the same location
• Price wars with competitors
• Innovative products and services of competitors
• Competitors with superior access to channels of distribution
• Tax to be paid for a product or service
• Purchasing preferences
• Population shifts
• New technologies
• Increase in competition
PEST Analysis

PEST: PEST analysis helps in analysing the environmental factors that highly affect
Analysis helps in analysing organizational strategies.
the environmental factors
that highly affect There are a few questions that need to be considered during PEST analysis to
organizational strategies ascertain the key forces at work in the wider environment. These questions are:
• What environmental factors are affecting the organization?
• Which of these factors is the most important at the present time?
PEST analysis helps in analysing the organizational strategies in the following
ways:
• It helps in identifying the environmental factors that affect the strategies of
the organization. However, it is not necessary that the environmental analysis
provides valuable information to the organization. Hence, it becomes
important for the organization to go in for a more quantitative approach to
get the real data for organizational goals.
• PEST analysis may be used to identify the long-term factors that lead to
globalization. For example, given the increasing globalization of some markets,
it is important to identify the forces that lead to globalization. The worldwide
convergence of production systems and consumer tastes in the market leads
to the possibility of major economies benefiting from global manufacturing
and marketing. The growth of the multinational customer and competitor
has also led to the shift towards global markets, as has the overall pressure
on the business for cost reduction and therefore, the search for scale
economies. A further force for global development is the worldwide search
for raw materials, energy and often, skills to provide service to the global
business networks.
10 Self-Instructional Material
 • PEST analysis helps in identifying the key factors of business and their An Overview of Business
Environment
differential impact on the organization. It also helps in determining the extent
to which these factors affect the competitors of the organization. The three
key external factors that affect the organizations include short life-span of
technology, convergence of customer requirements and access to the NOTES
resources available globally.
Consider an example of the three competitors, A, B and C who have the
differential ability to cope with factors such as short life-span of technology, convergence
of customer requirements and access to the resources available globally. The PEST
analysis shows that firm A can easily handle the technological changes by examining its
track record, its investment in Research and Development and its high market. Similarly,
for firm C, centralized product planning helps in coping with more convergent customer
requirements. However, A and C are not well placed when compared to B, in accessing
the technical changes. But when B is compared to A and C, in terms of purchasing
organizational resources, it is not centralized and does not help to cope with the
convergent customer requirement.

1.4 FUNDAMENTAL ISSUES CAPTURED IN PESTLE

Extending far beyond the boundaries of the firm’s internal and immediately exterior
environments, the larger macro environment includes a host of forces and influences
that have a powerful impact on policies and strategies that it would need to contend
with. Many of these are beyond the power of the firm to control; all it can do is to
capitalize on opportunities while steering clear of obstacles and potential minefields, all
the while staying on the right side of ethicality, public opinion and statutory provisions.
Moreover, with the emergence of regional alliances and the unmistakable signs of the
emergence of a nascent global economy, no firm can afford to ignore the critical factors
in the macro environment.
If one were to define the macro environment, Hill and Jones’ version is worth Macro environment:
Consists of the broader
recalling: “The macro environment consists of the broader economic, social, economic, social,
demographic, political, legal and technological setting within which the industry and demographic, political, legal
the company are placed.” and technological setting
within which the industry
PESTLE (Political, Economic, Social, Technological, Legal and Environmental) and the company are placed
is an analytical tool which considers external factors and helps you to think about their
impacts on the economy of a country. It a useful tool for understanding the ‘big picture’
of the environment (i.e., macro environment) the country is operating in. As the name
suggests, there are six factors in PESTLE analysis— political, economic, social, Check Your Progress
technological, legal and environmental. Let us discuss these factors in detail.
1. Define business
environment.
1.4.1 Political Environment
2. Write the micro-
The economic and political systems of a country are mutually dependent, the one components of business
environment.
reflecting the ideologies of the other. India is a sovereign democratic state operating
3. What do you mean by
through a multi-party parliamentary system of government modeled on the British SWOT analysis?
pattern, majority rule being the basic tenet thereof. There is a ruling party (or coalition 4. What is ETOP analysis?
of parties such as the currently ruling NPA), and there is the ‘opposition’ (represented
Self-Instructional Material 11
An Overview of Business in parliament by opposition members who have seats in parliament by virtue of having
Environment
being elected from their respective constituencies).
The three pillars of the government are
NOTES (i) Legislature
(ii) Executive
(iii) Judiciary
The legislature enacts legislation, i.e., creates laws by means of statutes or Acts,
after issues are debated and passed by majority vote in parliament and the Bill (as an
inchoate Act is called) receives the Presidential assent. The Executive branch of
government, i.e., the bureaucracy, is entrusted with the task of implementing these
statutes (including ordinances or regulations flowing therefrom), while the Judiciary
adjudicates on issues arising from non-compliance with these laws.
This being the basic structure of our political, judicial and administrative set-up,
within which all human activity in the State must operate, it follows that business and
industry are legally and morally bound to conform to it. How well they do so to a large
measure determines their (and the country’s) long-term growth and prosperity. Non-
compliance entails punitive measures that are meant to discourage deviations from the
standards laid down. As the world shrinks and society becomes increasingly more
complex in organization and administration, and as problems multiply across a vast
spectrum of human activities, business and industry will need to be more proactive and
innovative in managing the fallout.
The political and legal environment exerts its influence on business through:
Legal obligation:
The act of binding oneself (i) Legal obligations for business that determine its decisions and actions
or one’s organization by a (ii) Political and ideological postures that underlie defence and strategic
law or contract
positions, have a bearing on business moves vis-à-vis trade pacts, inimical
terms with certain countries that restrict scope for trade and economic
relations, negative features of international trade that impinge on business
initiatives, and regional alliances that foster mutual cooperation and
development.
(iii) Internal strife by aggrieved sections of society that hamper economic activity
and development in certain parts of the country; controversial and
destabilizing issues can divide society on the lines of caste, sex or religion,
thus disrupting normal life, bringing economic activity to a virtual halt and
causing civil unrest and loss of national property.
(iv) Political philosophies that stabilize or disrupt economic progress,
disbalance the stock markets, encourage nepotism and graft, tolerate
bureaucratic inefficiency, foster a nexus between politicians and bureaucrats,
and seriously erode the moral fabric of the nation.
(v) Reaction times of the three pillars of democracy as regards the crying
need to address burning (and long pending) issues crippling progress across
various fronts including social justice, public health, poverty eradication,
employment generation and rise in the standard of living of the people of
the Republic.
12 Self-Instructional Material
 (vi) Foreign policy initiatives that strengthen the nation, hold out hope for An Overview of Business
Environment
betterment of the common man’s lot, instil a sense of national pride in
citizens, and project a positive image of the country and its leadership to
other nations of the world.
NOTES
It goes without saying that policies and decisions of the government should
encourage business by creating conditions that act as a tonic for the tired economic
system, instead of enacting illogical laws and imposing conditions that act as barriers
to progress.
1.4.2 Economic Environment
The economic framework is that within which the firm functions plays a crucial role in
its efforts to thrive, grow and beat its competitors. Since business is fundamentally an
economic activity, the economic environment, both within the country as well as beyond
its national frontiers will have a definite influence on its fortunes. It is inconceivable that
there could be any institution, bodies or persons who are insulated from the effects of
the economic environs. Business has to deal with a vast number of governmental
bodies, rules, regulations, and guidelines relating to its statutory responsibilities, the
capital market, sources of finance including stock market options, venture capital,
offshore funds, disinvestment options, bank funding and so on.
All these factors compel careful analysis before decision or action, since once a
particular business policy is adopted, it is practically irreversible. Economic forecasts
and reports of the state of the national and global economy help the firm in making
business decisions. Overall, it is only those firms that can judge the trends in the economy
that survive and prosper over long periods. In India, we have seen the meteoric rise of
companies like Reliance Industries, Bharti Enterprises, Satyam and Infosys—new age
companies that eclipsed many older, bricks-and-mortar business groups like those of
the Modis, Jaipurias, Shrirams and Mafatlals, whose fortunes were on the wane. Only
the Tata and Birla Groups retained their respectability if not their exclusivity.
Since a firm’s long-term survival depends upon correctly reading the economic
trends, it would be useful to examine in some detail the various components of the
economic scenario, as follows:
(i) Economic system: A country’s economic model, i.e., socialist, capitalist,
mixed economy, etc., has a vital bearing on a firm’s capacity to exploit its
opportunities. India followed a socialistic pattern of economy for several
decades, but it did not bring rapid development. Even the experiment with
a mixed economy has not fared too well, with the result that from 1991,
the country has seen the government making a strategic retreat from several
economic activities, to focus on its role in governance and regulation. With
the noticeable cutback in bureaucratic control following liberalization, the
private sector has shown remarkable initiative in taking the economy
forward, encouraged by several reserved sectors like civil aviation and
petro- and gas prospecting / processing being thrown open to all on an
equal footing. The growth of a resurgent middle class with ample disposable
incomes, and the emergence of a new wealthy class (there are 50,000
Self-Instructional Material 13
An Overview of Business crorepatis in India) seems to indicate that the economy is well set to
Environment
vindicate the Goldman Sachs Report that India will be an economic super-
power by 2050.
NOTES (ii) Economic policies: The government plays a regulatory and supervisory
role in the economic system, by means of:
(a) Annual Budgets
(b) Economic Planning, e.g., Five-Year Plans
(c) Industrial Laws and Statutory Regulations
(d) Industrial Policy, including licencing
(e) Export – Import restrictions
(f) Laws to regulate Commercial and Business activity, including FDI
(Foreign Direct Investment)
(g) Wage and Price Controls
(h) Trade, Commerce and Transport Policy
(i) National Income and BOP/ External debt monitoring
(j) Agricultural produce procurement (foodgrains, sugarcane, etc.)
policies, subsidies, rural economic upliftment programmes
(k) Public distribution system
(l) Controls over various products as regards their availability and
consumption, e.g., addictive substances including tobacco
(m) A plethora of legislation, including the Factories Act, 1948; the
Industrial Disputes Act, 1947; the Companies Act, 1956; and the
Foreign Exchange and Regulation Act, 1947 (as modified by the
FEMA).
(iii) Economic growth: The economic performance and growth of domestic
industry and business is heavily dependent on the growth of the economy
as a whole, since greater all-round prosperity engenders increased levels
of expenditure spending as well as investment, which results in good velocity
of circulation of money in the economy and encourages exports. In contrast,
depressed economic conditions would lead to less production, erode
savings and result in inflationary conditions—a condition known as
‘stagflation’.
(iv) Interest rates: The Reserve Bank of India, the apex bank that monitors
and controls the economy, uses interest rates as one of its prime means of
controlling money supply, promoting savings as well as investment, and
curbing inflation. How well it does its job is reflected by the fact that India
has one of the lowest rates of inflation in the world, at 4 per cent. At the
other extreme is Namibia, where there is 1000% inflationary growth every
month. The difference between bank borrowing (deposits) rates and
lending rates is called the interest ‘spread’. Banks are now allowed to fix
this ‘spread’ within upper and lower limits as set by RBI from time to time;
this encourages open competition between banks, leading to greater
efficiency and better customer service. Interest rates on the lower side
14 Self-Instructional Material
 reflect a more dynamic and healthy economy; e.g., interest rates in India An Overview of Business
Environment
are still very high as compared to the US and other developed countries.
(v) Currency exchange rates: National currencies are valued against each
other at certain rates of exchange. For example, one US Dollar sells for NOTES
about 45 Indian Rupees (selling rate). The costlier the Dollar is against the
rupee, the more exports gain in rupee terms. Rupee devaluation, therefore,
is beneficial for exporters, but not for importers, a property of the exchange
mechanism that the Indian economy has taken advantage of in the past, Currency Exchange Rates:
when foreign exchange reserves of the country were abysmally low and The price of one country’s
exports needed to be boosted, while imports had to be strictly curbed. currency expressed in
another country’s currency
With forex reserves now at US$ 160 billion, the scenario has changed.
The Indian rupee is weighted against other hard currencies by exchange
rates decided by RBI on the basis of a ‘basket’ of currencies. Banks can
now fix their own exchange (buying and selling) rates, subject to RBI
guidelines.
International economic environment
Given the globalization of the Indian economy, it has now become more prone to react
to international economic events, something that it was earlier insulated from. Factors
such as those enumerated below have assumed prominence in the new economic
climate:
(i) Liberalization of the economy, and an increasing number of global alliances and
mergers/acquisitions, means that today, Indian corporates need to see things
from a global perspective when making strategic business decisions.
(ii) B-schools will need to amend their curricula keeping in view the need for thorough
knowledge of business trends, practices and philosophies in foreign countries.
There must be greater faculty exchange to share views, thoughts and problems.
Knowing a foreign language has become important for people who wish to join
multinational companies.
(iii) Greater appreciation of cultural diversities is needed; Indian managers will have
to learn the basics of cross cultural exchanges and the art of negotiation at
different foreign locales. Perhaps this is one reason why Lakshmi Mittal was
once stymied in his attempt to acquire Arcelor and form the world’s biggest
steel conglomerate. Indians are not known internationally for their impeccable
road, table or boardroom manners.
(iv) A better image of India will help in tapping vast offshore funds at (for India)
lower low rates of interest, with repayment spread over as long as twenty years,
as Reliance have done.
(v) Better quality control, productivity and flexible manufacturing will help India’s
business and industry withstand foreign competition.
(vi) In order to retain the best brains, working conditions and compensation will
have to be upgraded. The international business arena is porous, and accesses
workfrence matching need specifications, wherever it can be located.
Self-Instructional Material 15
An Overview of Business (vii) There must be a gradual shift to higher end work; BPOs are a good entry point,
Environment
but the profile of work insourced must graduate to ones offering greater value
addition. This applies to all sectors of the economy.
(viii) Agricultural, horticultural and floricultural—if not plain cultural—exports must
NOTES
be value driven. Quality must replace quantity. A single orchid could earn more
foreign exchange than a sack of wheat. We must import foodgrains from surplus
countries and export high-value items that fetch exponentially higher returns.
That’s one of several ways in which we can maximize returns on our investments
and resources.
(ix) WTO restrictions notwithstanding, we must preserve our right of self
determination, and not get unduly pressured by threats of sanctions. In this light,
the PM’s recent initiative to strengthen trade links with regional trading blocs
deserved a better fate than it suffered.
(x) Narrow political considerations must give way to statesmanship. India must
learn the art of economic diplomacy. Intellectuals like Nobel laureate Amartya
Sen can be consulted with profit. We must learn not to fritter away our internal
resources, which includes our intellectual capital.
1.4.3 Social Environment
Every society has a heritage, of cultural values and belief systems, that plays a vital role
in all decisions concerning the way social life is organized, and which subtly imposes
norms that encourage acceptable individual and group behaviour. This includes
conventions about dress, food habits, notions of personal and public hygiene, formal
and informal relationships, family traditions and local customs, marriage and procreation,
respect and general attitudes and approach to life. In this respect, India is several
countries within a country, for such norms can vary dramatically across regions, making
for heterogeneity within an outwardly homogeneous whole. This is a major reason in
favour of encouraging mutual interaction and acceptance/ tolerance for another’s point
of view.
As regards the impact of this apparently turbulent situation on business and
industry, it may be said (albeit with a little trepidation) that the improvement in primary
education and rising literacy levels has created a better overall climate for investment
(both domestic as well as foreign). With the proliferation of media such as TV, national
(and even international) homogeneity is only a matter of time. This is good news for
national unity and mutually harmonious relations between what used to be discordant
and widely different communities. For instance, West Bengal – a state that has proved
to be the graveyard of many a once-flourishing industry, on account of its Leftist
leanings, general militancy, and apathetic and laid back attitude to work – has finally
had a windfall. The Tatas have declared that they will establish their new small car
project in the state. A strategic move it may be, considering the proximity of TISCO/
coal and the abundance of cheap labour in the region, but a not-so-cynical viewpoint
would be to see it as a sign of improvement in the industrial climate in the state. This
augurs well for the country as a whole, for civil discontent and militancy will die out
when people develop a stake in social stability, as they prosper and get to finally taste
the fruits of democracy.
16 Self-Instructional Material
Demography An Overview of Business
Environment
Demography refers to people, specifically factors usually covered by our decennial
census, some of which are
(i) Population in terms of numbers, or decline/growth over a period NOTES
(ii) Composition in terms of age, sex, family size, and soon.
(iii) Economic strata
(iv) Caste, religion, political affiliations
Demography:
(v) Educational status, and so on. People, specifically factors
All these demographic factors are of direct interest to business, because demand usually covered by our
decennial census
for goods and services stems from the population of the country. India has a vast
market that is growing rapidly. There are several reasons for this, but the major reasons
are political stability, liberalized economy, huge natural resources, a population whose
average age is twenty-five, with fifty percent of the populace being less than thirty
years of age. Fragmentation of the joint family system, with nuclear families due to
economic resurgence, a rural heartland that is showing signs of prosperity, and well-
educated women entering the workforce are some of the reasons for rising levels of
prosperity.
The latest statistics reveal that the per capita income has risen to ` 21,050—
exciting news for marketers who have more and more goods and services to sell. A
new, better educated labour is already apparent, and they need to be handled very
differently from their predecessors. They have different wants, needs, compulsions
and ambitions, and respond to different motivators. Some multinationals have misread
these signals, such as Honda Motorcycles in Gurgaon.
Business has to carefully decode the messages concealed in the census reports.
The retail, construction and the entertainment industries experienced a boom with
greater involvement of FDI. Hence, the demographic factors are crucial indicators of
the direction that business, trade and industry should take to meet the prospects that
lie ahead. Those who do not read the signals sent out by the demographers will get left
behind in the race to grab the market share.
1.4.4 Technological Environment
This is another factor that has given a massive impetus to the economic revival. While
India may be trailing far behind the west in terms of technological prowess, in the long
run it will overhaul the developed countries, as they get swamped by their aging
populations’ gerontological liabilities. Caring for an aged population will put a heavy
burden on social welfare that can only be met by diverting funds from elsewhere, may
be even Research & Development.
Thus, when it comes to survival, India will find that the developed countries will
be increasingly willing to cooperate in sharing technology with us, which is not the case
at present. Time will tell that India and other developed countries will regain their
importance in the eyes of western nations, albeit in their own self-interest. For example,
there are currently 120,000 vacancies for trained nurses in the US, but very few
candidates. In another decade, the demand will touch 800,000. Where will they find
so many trained nurses, except in Third World countries like India? The US will pay
Self-Instructional Material 17
An Overview of Business them premium salaries; already, the going rate is US$ 60 per hour! In return for this,
Environment
will not technological aid flow to India, apart from billions of repatriated US Dollars?
Nevertheless, we need to be more innovative, inventive and adventurous in our
approach to business. In the US, failure is no shame. Henry Ford I failed five times in
NOTES
business before he got his motor car company going smoothly. Institutional finance
must support individual R&D efforts; such efforts should not be left to a few private
sector giants alone (apart from the government’s own research laboratories). Many
great inventions never see the light of day because there are no funds to support
development, and competitors ensure that such new technologies never reach the
commercial stage. Without technological advances, business will stagnate and India
will be left behind in the global marketplace.
1.4.5 Legal Environment
Legal environment of business means all factors relating to laws and legal orders which
affect business and its working. Business must be operated under the rules and regulation
of different laws made by a country. Basically India is an emerging economy and it
promotes Foreign Direct Investments in the country. That’s why the legal system for
businesses in India is very flexible. The implementation of the legal system starts right
from your decision to start a business in India. You have to take an online Digital
Identification number and then you obtain an online Digital signature certificate. It is a
legal requirement to register the name and nature of the business in Registrar of
Companies or ROC. Then you have to get the company documents stamped from a
superintendent. Medical insurance is also required for all sorts of businesses. There is
an employee provident organization, where registration of companies is carried out. It
is a legal requirement for all of the businesses to register for profession tax. Although
India encourage business opportunities but still the legal environment requires a lengthy
process to start or carry on a business.
The following is the list of main economic, labour and industrial laws which
affect business environment of India:
• Indian Contract Act (1872)
• Indian Sale of Goods Act (1930)
• Indian Partnership Act (1932)
• Central Excise Act (1944)
• Industrial Disputes Act (1947)
• Minimum Wages Act (1948)
• Banking Regulation Act (1949)
• Chartered Accountant Act (1949)
• Indian Companies Act (1956)
• Indian Income Tax Act (1961)
• Monopolies and Restrictive Trade Practice Act (1969)
• Foreign Exchange Regulation Act (FERA ) (1973), replaced by Foreign
Exchange Management Act (1999)
• Consumer Protection Act (1986)
18 Self-Instructional Material
 • Security Exchange Board of India Act (1992) An Overview of Business
Environment
• Information Technology Act (2000)
• Competition Act (2002)
• Right to information act (2005) NOTES
• Commissions for Protection of Child Rights Act (2005)
• Micro, Small and Medium Enterprises Development Act (2006)
1.4.6 Natural Environment
Just as our cultural heritage in important, so is our natural heritage. This includes the
land, its forests (what’s left of them), its interlinked ecosystems, and its myriad varieties
of flora and fauna. We learn vicariously from the laments of western conservationists
that development comes at an avoidable price, if only one is alert to the perils of
unrestrained industrial growth. Climatic changes across the planet are warning enough
that hard days lie ahead for humanity if we do not cooperate with nature instead of
conspiring against her. Needless to say, depletion in the earth’s natural resources and
atmosphere that support life will have disastrous effects on all. Business and industry
have a major role to play by seeing to it that their actions reduce environmental impacts
to the barest minimum.
The major factors involved in environment-friendly business operations can be
grouped as follows:
(i) Natural resources and special features of the environment
(ii) Climatic conditions and weather patterns
(iii) Topographic variations
(iv) Locational factors
(v) Infrastructural factors such as roads, ports, etc.
In the final analysis, business is completely dependent on the environment.
No business can survive in climatically inhospitable conditions, even if it were to
be established there. Some of the relevant observations are summarized below:
(i) Business and industry are dependent on a vast variety of natural inputs
(ii) Oil, forest-based produce and mineral wealth come from natural sources
(iii) Agricultural activity, which gives us food, comes from the natural
environment. No amount of technological inputs can help if the environment Check Your Progress
is (rendered) incapable of supporting food production. 5. The three pillars of the
(iv) Domestic and international trade is dependent on geographical factors government are _________,
executive and judiciary.
(v) Business and industry flourish due to certain advantages enjoyed from the 6. The __________ the dollar
natural environment. is against the rupee, the
more profitable are the
With growing awareness of the importance of preserving and protecting the exports.
natural environment and ecologies of the region, the country’s leadership has of late 7. Demography refers to:
shown a certain amount of interest in this direction. While much remains to be done, (a) People
business and industry should, in their own (as well the national) interest, come forward (b) Organizations
and voluntarily play an active role in environmental preservation. (c) Economy

Self-Instructional Material 19
An Overview of Business These are some of the micro- and macro-economic factors that have a powerful
Environment
influence on the Indian economy. Taken as a whole, the picture is far better today than
it was even a decade ago. There is a new sense of pride in India’s accomplishments. A
new generation has grown up that does not suffer from an inferiority complex with
NOTES
regard to the West, as its forefathers did. The third and even fourth generation
entrepreneurs, people like Kumar Mangalam Birla and Anand Mahindra are an affluent,
educated, ambitious and hard enterpreneurs-working breed of people who are ready
to take on the world on their own terms. They are at ease on any continent, in any
clime or locale. It is up to them to take the country forward, as the older torchbearers
relinquish the reins of commerce and industry to them. The skies are not the limit, as
far they are concerned. So far as we can judge, the future of India’s business and
industry seems to be in safe hands.

1.5 SUMMARY

Some of the important concepts discussed in this unit are:

• Environment plays a significant role in the proper functioning of a business.
• Environment refers to the sum total of all factors such as economic, political,
social and cultural, which are instrumental in shaping a business.
• The micro-components of a business environment comprise customers, suppliers
and so on while the macro-components comprise the economic environment,
natural environment demographic environment and so on.
• Environmental scanning means an analysis of the environmental variables. The
best way of analysing a business environment is through the SWOT analysis,
i.e, examining the Strengths, Weaknesses, Opportunities and Threats.
• The process by which an organization identifies the opportunities and threats
that affect the business is known as environmental scanning and analysis.
• The ETOP is a device that considers the environmental information and determines
the relative impact of threats and opportunities, for the systematic evaluation of
environmental scanning.
• QUEST analysis is a four-step process that uses scenario writing for
environmental scanning. It involves four major steps.
• The focal point of strategic analysis, SWOT analysis is the process of carefully
inspecting the business and its environment through the various dimensions of
strengths, weaknesses, opportunities and threats.
• PEST analysis helps in analysing the environmental factors that highly affect
organizational strategies.
• Since business is essentially an economic activity, the economic framework has
a significant role to play. The economic environment is largely influenced by a
country’s economic model, whether socialist, capitalist or a mixed economy.
• Natural heritage such as topographic variations, climatic conditions and others
influence business operations to a large extent.
20 Self-Instructional Material
 An Overview of Business
1.6 ANSWERS TO ‘CHECK YOUR PROGRESS’ Environment

1. Business Environment may be defined as a set of conditions – Social, Legal,

Economical, Political or Institutional that are uncontrollable in nature and affects NOTES
the functioning of organization.
2. The micro-components of a business environment comprise the suppliers,
customers, competitors, and the workforce.
3. SWOT analysis is an important technique of environment analysis where
corporate managers analyse the Strengths (S), Weaknesses (W), Opportunities
(O) and Threats (T) existing in an environment.
4. ETOP is a device that considers the environmental information and determines
the relative impact of threats and opportunities.
5. Legislature
6. Costlier
7. (a) People

1.7 QUESTIONS AND EXERCISES

Short-Answer Questions
1. Define business environment.
2. List the components of business environment.
3. Briefly explain the concept of QUEST analysis.
Long-Answer Questions
1. What is the significance of business environment? What are its components?
2. Evaluate the significance of SWOT analysis.
3. Review the idea of PEST analysis.
4. Discuss political environment and the role of the government in business
development.
5. Evaluate the importance of technological environment and international
environment in the development of business.

Self-Instructional Material 21
 Political Environment
UNIT 2 POLITICAL ENVIRONMENT
Structure NOTES
2.0 Introduction
2.1 Unit Objectives
2.2 Government and Business
2.3 Role of Government in Business
2.3.1 The Public Sector; 2.3.2 The Private Sector
2.3.3 The Joint Sector; 2.3.4 The Cooperative Sector
2.3.5 Privatization: The Role of Government
2.3.6 Entrepreneurial Role of Government
2.3.7 Catalytic Role of Government
2.3.8 Supportive and Competitive Roles of Government
2.3.9 Regulatory Role of Government
2.4 Government and Economic Planning
2.4.1 Government’s Planning: Regional Imbalances in India
2.4.2 Trend and Pattern of Industrial Growth
2.5 Government Policy and SSI
2.5.1 Latest Developments in Micro, Small and Medium Enterprises (MSME) Sector
2.5.2 The MSME Act
2.6 Summary
2.7 Answers to ‘Check Your Progress’
2.8 Questions and Exercises

2.0 INTRODUCTION

The previous unit gave you an idea about business organizations and then environment
with particular reference to India. The present unit shifts focus to the political environment
and the role of government in business. It discusses economic policies such as
liberalization and privatization. Indian economy was initially modeled on the paths of
socialism though private entrepreneurs also existed. However, in the early 90s India
opened its doors to liberalization. Foreign direct investment was encouraged. The unit
discusses both the sectors, i.e., the public and the private in the functioning of the
economy. Economic planning adopted by the Indian government, regional imbalances,
industrial developments and other policies such as small scale industries are elaborated
upon in this unit.

2.1 UNIT OBJECTIVES

After going through this unit, you should be able to:

• Describe the relationship between government and business
• Identify the role of public sector in business
• Discuss the importance of privatization of Indian economy
• Illustrate the significance of government policies and small scale industries

Self-Instructional Material 23
Political Environment
2.2 GOVERNMENT AND BUSINESS

Political stability and business and economic environment can be described under
NOTES the following heads:
Sovereign Risk
India is a vibrant parliamentary democracy and has been one since its political
independence from British rule more than sixty years ago. There is no serious
Political stability: Political revolutionary movement in India; hence, there is no conceivable possibility of the state
scenario characterized by a collapsing. Sovereign risk in India is therefore zero for both ‘foreign direct investment’
stable government that is and ‘foreign portfolio investment.’ It is however advisable to avoid investing in the
secure, predictable and
reliable extreme north-eastern parts of India because of terrorist threats. Kashmir in the northern
tip is also a troubled area, but investment opportunities in Kashmir are anyway restricted
by law.
Political Risk
India suffered political instability for a few years due to the failure of any party to win
an absolute majority in Parliament. However, political stability has returned since the
previous general elections in 1999. However, political instability did not change India’s
economic course though it delayed certain decisions relating to the economy.
The political divide in India is not one of policy, but essentially of personalities.
Economic liberalization (which is what foreign investors are interested in) has
been accepted as a necessity by all parties including the Communist Party of India
(Marxist).
As for terrorism, no terrorist outfit is strong enough to disturb the state. Except
for Kashmir in the north and parts of the north-east, terrorist activity is either non-
existent or too weak to be of any significance. It would take an extreme stretching of
the imagination to visualize a Bangladesh-type state-disrupting revolution in India or a
Kuwait-type annexation of India by a foreign power.
Thus, political instability in India, in practical terms, posed no risk to foreign
direct investors, because no policy framed by a past government has been reversed
by any successive government so far. One can find a comparison in Italy which has
had some forty-five governments in fifty years, yet overall economic policy remains
unchanged. Even if political instability is to return in the future, chances of a reversal in
economic policy are next to nil. Hence, political risk in India is practically non-existent.
Risk of Foreign Sanctions
India did not seem to be in the good books of the United States government due to its
nuclear weapons and missiles development policy. However, US President Bill Clinton’s
state visit to India in 2000 was a massive hit. Subsequent to the visit, visits between the
two countries at different levels took place, and the US government has all but come
to terms with the reality of a nuclear-armed India.
Background to the sanctions: The US had imposed some sanctions against
India because of its nuclear tests in May 1998. But, these sanctions have been theoretical
and even such theoretical sanctions were relaxed within months of their imposition.
Given the fact that US foreign policy in the post-Cold War era is dictated by its
economic interests, it anyway seemed most unlikely that Iraq or Libya-type sanctions
24 Self-Instructional Material
would ever be imposed on India. India is highly self-sufficient in terms of basic Political Environment
technology and requirements, hence the threat sanctions could not bring India to its
knees. The United States seems to understand this, which is perhaps why it never
went ahead with really biting sanctions against India.
NOTES
The United States has often referred to India as a great potential trading partner
as well as, perhaps, a politically strategic partner in Asia. India’s rapidly improving
relations with Israel have only lent further momentum to India-US bonding.
Given the fact that the United States has somehow managed for itself the role of
the world’s policeman (a role to which India is explicitly opposed), other countries –
notably Japan and Australia – have also toned down their opposition to India’s nuclear
weapons programme. In other words, it is now business as usual for the world vis-à-
vis India.
Commercial Risk
Commercial risk exists in business in any country. Not each and every product or
service can be readily sold; hence, it is necessary to study the demand/supply situation
for a particular product or service before making any major investment. There is a Commercial Risk: It is the
large number of market research firms in India (including our own) studying the demand/ financial risk faced by a
supply situation for any product/service and advise the potential investor accordingly seller while extending credit
in exchange of a professional fee. without any collateral
recourse or all risks other
than political risk
2.3 ROLE OF GOVERNMENT IN BUSINESS
Industrial development is an outcome of the economic activities undertaken by the
public, private and joint sector enterprises. Let us discuss the role of the government in
various business activities.
2.3.1 The Public Sector
The public sector or public enterprises include all governmental activities including
public, industrial or commercial enterprises. Public enterprise occupies a strategic and
crucial position in the Indian economy. It is no exaggeration to say that the economy
would sink or swim depending upon the efficiency with which these enterprises operate.
Concept: The modern Indian economy is the creation of the Congress party
and its leaders, Mahatma Gandhi and Nehru, who referred to India as a ‘Socialist’
economy. Socialism is largely a misnomer in the case of India, except for the government
ownership in industry and commerce. India is still primarily an agricultural country and
the distribution of income depends mainly on the distribution of agricultural property.
Although there have been some attempts to distribute land to the peasants, land remains
unequally distributed; however, there is evidence that the range of income inequality
has been reduced. Rather than seeking to achieve ‘Socialist’ objectives through income
redistribution, the architects of the modern Indian economy emphasised the State
ownership in industry. The feeling was that socialism could be achieved through State
control of industry, which would serve as a surrogate for social change.
Public enterprises are expected to be the principal agents for rapid economic
and social transformation by developing infrastructure and the core sector and by
closing the gaps in the industrial structure. Its dominant position in the financial field is
intended to control and guide the private sector, wherever necessary. Lastly, the
economic growth through public enterprise will ensure social justice.
Self-Instructional Material 25
Political Environment In developing countries, public enterprises are largely a necessity and not a
matter of choice. In India, though the Congress government was clearly committed to
expanding the public sector, it did not go into areas where private enterprise was
operating. Nationalization of the existing enterprises has been generally resorted to
NOTES where the public interest was involved or where it was imperative to put the industry
on a sound footing and regulation and control were not found sufficiently effective. The
vast majority of public enterprises is in areas, which were hitherto untouched or
unexplored by the private sector.
In the Industrial Policy Statement of 1956, it was emphasised that public
enterprise was designed to control the ‘commanding heights’ of the economy. But in
recent years, the trends towards increasing liberalization are very much in evidence in
India and one gets the impression that the private sector is designed to play an important
role in the economy in the coming era.
The public enterprises comprise:
(i) Public utilities, e.g. the railways, post and telegraphs and irrigation projects
(ii) Departmental undertakings of the Government, Central as well as State,
e.g. post and telegraph, integral coach factory
(iii) Other industrial undertakings, which derive their finance from the
Government of India in the form of equity capital and loan, e.g. Durgapur
Steel Plant, Hindustan Fertilizers
Public sector units generally are of the following four kinds:
(i) National monopolies like the railways that have downward sloping unit
cost curves. These are hard to assess, being monopolies.
(ii) Entrepreneurial ventures that, at the start and for many years thereafter,
are monopolies or near monopolies. These are generally large units with
sophisticated technologies and long gestation periods that produce basic
products. Many of the Indian public sector manufacturing units are of this
type.
(iii) Sick units in the private sector that have been taken over to maintain
employment etc.
(iv) Units taken over or formed to acquire the ‘commanding heights’ or for
other ideological reasons. The State Trading Corporation is a case in point.
Evolution of the public sector
The entry of the public sector in a big way in the economic sphere is a post-Independence
development. Prior to 1947, public sector investment was limited to the railways, the
post and telegraph department, the ordinance factories and a few state-managed factories
like the quinine factories, salt factories, etc. It was the Industrial Policy Resolution of
the Government of India in 1948 that brought the public sector into the limelight. It
declares that a dynamic national policy must be directed to a continuous increase in
production by all possible means, side-by-side with measures to secure its equitable
distribution. The problem of State participation in industry and the conditions in which
private enterprise should be allowed to operate must be judged in this context. Since
then, the expansion of the public sector has been very rapid.
26 Self-Instructional Material
 The idea that in the economic development of the country the State enterprises Political Environment
would play a predominant role took root with the adoption of a socialist pattern of
society in the second plan.
The growth of public enterprises in India has taken place in two ways: (a) by
NOTES
nationalizing existing enterprises and (b) by starting new enterprises. The State Bank
of India, LIC, the Air India, the nationalization of 20 banks, etc. are included in the
first category, while the Hindustan Steel Ltd., the Fertilizer Corporation of India, etc.
fall in the second category.
The enormous growth of public sector investments has taken place against a
political and ideological background, which is peculiar to Indian political development.
Objectives: The objectives of establishing new enterprises and reasons for
nationalizing some existing ones are varied and often different from case to case and
from time to time. Perhaps, the only generalization possible in this regard is that public
enterprise for us is more a matter of necessity than of choice. It is not so much the
ideology as the compulsion of the situation that has led to the growth of public enterprise
in India.
A brief statement about the need and role of public enterprise in India is contained
in the statement of former Prime Minister Indira Gandhi that we advocate a public
sector for three reasons: to gain control of the commanding heights of the economy: to
promote critical development in terms of social gain or strategic value rather than
primarily on considerations of profit; and to provide commercial surpluses with which
to finance further economic development.
Rationale for the public sector
The reasons that explain the establishment of the public sector in the country are as
follows:
1. Socialist pattern of society: The public sector was meant to socialize the
means of mass production and benefit the masses, as is typically the case in a
socialistic pattern of society. The commanding heights of the economy—the
core sector comprising investment, production, distribution and consumption—
were State owned, so as to promote national development as opposed to
considerations of private profit. In such a situation, the so-called public sector
needs to expand rapidly, cover areas where the private sector is unwilling or
unable to participate and play a dominant role in shaping the economy. Some of
these areas are power, communications, mass transportation, information and
broadcasting, mines and defence production. Initially, the public sector took the
lead in developing basic and capital goods industries, laying the foundations for
national growth unhindered by narrow considerations of profit as would arguably
be seen in a laissez faire economy dominated by private enterprise, where Laissez faire: In economics,
it implies an environment in
motives of personal profit would presumably supersede national priorities. In which transactions between
time, however, some of these monolithic establishments exhausted their early private parties are free from
dynamism and metamorphosed into complacent, inefficient, cash-strapped, over- state intervention, including
staffed, over-unionized islands of mediocrity that generated naught but huge regulations, taxes, tariffs and
enforced monopolies
losses—dinosaurs that had run out of time and relevance.
2. Socio-economic objectives: Reduction of inequalities of wealth and income
is the most important socio-economic objective, going hand in hand with the
Self-Instructional Material 27
Political Environment need to eliminate poverty and establish an egalitarian society by redistributing
wealth and earning potential equitably. Another important objective of a socialistic
system is to help the underprivileged, realize their dormant potential by liberating
them from economic serfdom and to give them all an opportunity to attain social
NOTES justice. Although rarely declared in so many words, the giant public sector
organizations were also meant to serve this purpose by providing upliftment to
these neglected sectors, by means of reserving a certain percentage of jobs for
the weaker sections of society including the physically handicapped. Nationalized
banks rendered yeoman service by extending concessional loans under the
‘Differential Rates of Interest’ scheme, which allowed cheap finance to reach
District Consultative Committee sponsored beneficiaries drawn from such
sections of the local populace—something a purely profit-driven banking system
would never dream of undertaking.
3. Balanced regional development: One of the major goals of planning is to try
and correct regional disparities by spreading the benefits of economic
development as evenly as possible across the country. It is vital for humane as
well as for security reasons to ensure that the fruits of prosperity percolate
throughout the nation, for civil unrest is usually born of discontent with a system
of wealth distribution that serves but to defeat the very purpose of adopting a
socialistic type of governance. This is particularly true of the sensitive north and
north-eastern States, many of which are economically under-developed and,
hence, vulnerable to ideologies incompatible with our peaceful, non-violent,
democratic system of governance run on socialist principles. Industrial
development of these areas is a top priority; Bhilai, Rourkela and Durgapur are
well-known examples, but more such success stories are needed, and quickly.
4. Need for rapid economic development: The need of the hour is rapid
economic development. The private sector has neither the desire nor the
resources to undertake the massive programme of industrialization. Hence,
dependence on the private sector will only slow down economic development.
Expansion of public enterprise will speed up the rate of economic growth.
5. Pattern of resource allocation: The main reason for the expansion of the
public sector lies in the pattern of resource allocation decided upon under the
plans. In the first plan, the major emphasis was on agriculture but in the second
plan the emphasis was shifted to basic and capital goods industries. During the
First Plan period, the private sector was dominant in the field of industrial
activities. But with changed emphasis it was inevitable that the public sector
must grow not only absolutely but also relatively to the private sector.
6. Building infrastructure: Infrastructure provides certain basic facilities for rapid
economic growth. In the economic infrastructure, there are facilities like power,
irrigation, transport and communication, banking, training, etc. Social
infrastructure includes education, health, sanitation, drinking water facilities, etc.
The development of infrastructure is not possible through efforts of private
individuals since its benefits go to society as a whole and not to individuals. It is
therefore mainly the responsibility of the State. The infrastructure has accounted
for 95.1 per cent of the public outlays in the First Plan and nearly 75 per cent in
the subsequent plans.
28 Self-Instructional Material
Role of Public Sector Political Environment

Public sector enterprises play a dominant and dynamic role in the development of
India economy. The major contributions are as under:
1. Strong industrial base NOTES
After independence, serious gaps were felt in the field of heavy industries. Public
sector has helped in filling the structural and demand-supply gaps in achieving a strong
industrial base. There has been significant growth in the state-run defence industries
and industries of strategic importance such as iron and steel, heavy engineering, and
heavy electrical, petroleum and natural gas, chemical, drugs and fertilizers. Since these
industries require considerable investment and have low profitability potential in the
short-run, these industries do not find favour with the private sector. However, unless
these industries are setup, the consumer goods industries cannot progress at a rapid
pace. Thus, by establishing and developing basic heavy and capital-intensive industries,
the public sector has created a strong industrial base for the economy. The share of the
industrial sector in GDP at Factor Cost has increased slowly but steadily during the
plan period.
2. Development of infrastructure
The primary condition of economic development in any underdeveloped country is
that the infrastructure should develop at a rapid pace. Without proper expansion,
infrastructural facilities in the form of irrigation, power, energy, and transportation, the
agricultural sector cannot grow properly. Similarly, in the absence of adequate
development of transport and communication facilities, banking and insurance facilities,
the process of industrialization cannot be sustained. Thus, the public sector has enabled
the economy to develop a strong infrastructure for the future economic development.
The private sector also has benefited immensely from the investment undertaken by
the public sector.
3. Removal of regional disparities
Another objective behind bolstering the public sector happens to be removal of regional
disparities. In pre-independent India, industries were located mostly in an around the
port cities of Mumbai, Kolkata and Chennai. Since the 1950s, the government shifted
attention to suburban landmass. Gradually, four major steel plants were set up in
Rourkela, Bokaro, Durgapur and Bhilai. Fertilizer plants were set up in Assam, Orrisa,
Bihar, Uttar Pardesh and Punjab. Private sector was not interested in setting up units
in backward areas due to poor working and low profits.
4. Public sector and capital formation
The public sector contributes largely to a country’s capital formation. The share of
public sector in total investment during the plans increased initially, reached to 60 per
cent and then declined. However, it remained very high throughout. The contribution
of public sector to capital formation assumes particular importance because its
investment has taken place in essential infrastructural facilities and key industries. Share
of public sector in gross domestic capital formation increased from 3.5 per cent in the
First plan to 10 per cent in the Eighth plan.

Self-Instructional Material 29
Political Environment 5. Earning of foreign exchange
The foreign exchange problems often emerge as a serious constraint on the programme
of industrialization in a developing economy. Public enterprises have contributed in
NOTES earning foreign exchange to a significant extent. They have contributed to foreign
exchange earning in following ways:
(a) There is a direct export items produced by public sector undertakings. Some
enterprises Hindustan Machine Tools, Hindustan Steel Ltd. The Bharat
Electronics Limited. Have been exporting an increasing proportion of their output
and earning foreign exchange thereby.
(b) Some Public Sector enterprises such as State Trading Corporation, Mineral
and Metal Trading Corporation earn foreign exchange by providing trading and
marketing service.
6. Saving of foreign exchange
The Public Sector enterprises have helped not only by earning valuable foreign exchange
but also in saving the foreign exchange by producing import substitutes. At the time of
independence, India imported capital goods machinery and equipments. A lot of foreign
exchange was spent on them. After independence public sector produced and provided
goods, which are substitutes of imported goods. In this way, public sector helps in
import substitution and saving a lot of precious foreign exchange also.
7. Check over-concentration of economic power
In capitalist earning where the public sector is practically non-existent or has a very
small share, economic power gets increasingly concentrated in a few hands and increase
in equality of income and wealth. Public sector helps in checking the concentration of
economic power in a few hands and reducing inequalities of income and wealth. Public
sector can help in reducing inequalities in the economy in a number of ways:
• Public sector industries can help the workers by giving them higher wages and
by providing various welfare services like houseing, education, medical facilities.
• Thus the government either spent in the industries or spent on special welfare
programmes to help the poor people use the profit earned by the public sector
enterprises.
• Public sector can orient production machinery towards the production of mass
consumption goods.
In this way the public sector promotes equality of income and wealth distribution
and promotes overall economic development of the country.
8. Share in employment
Public sector generates substantial employment opportunities in a situation of widespread
unemployment. There have been two-fold employment opportunities in the public
sector:
(a) Government administration, defence, and other government service like health,
education, research and other activities that promote economic development.
(b) Economic enterprises owned by the central government, and the state
government.

30 Self-Instructional Material
 The number of persons employed with government has shown a considerable Political Environment
increase from 71 lakhs in 1971 to more than 185 lakhs. Public sector employed about
70 per cent of the workers employed in organized sector of the Indian economy.
9. Contribution to Central Exchequer
NOTES
Public sector enterprises contribute to the resources of the central government by way
of dividend, excise duty, custom duty and corporate taxes. In this way, this sector
generates resources for the planned development of the country.
Growth and performance of public sector
Public sector units are frequently started in those sectors where profitability is low and
gestation period long. Therefore, the performance of the public sector units should not
be judged by what they earn in the form of profit but of the total additions they make
to the flow of goods and services in the economy.
In the post independence period, the expansion of the public sector was
undertaken as an integral part of the 1956 Industrial Policy. The Industrial Policy 1956
gave public sector a strategic role in the Indian economy. At the time of Independence,
the country was backward and underdeveloped basically and was an agrarian economy
with a weak industrial base and heavy unemployment, with low level of saving and
investment and absence of infrastructural facilities. Indian economy needed a big push.
This push could not come from the Indian private sector. It was assumed at that time
that only the government intervention in a big planned way could raise agricultural and
industrial production and expand the employment opportunities.
Over the years, operations of Central Public Sector Enterprises (CPSE) have
extended to a wide range of activities in manufacturing, engineering, steel, heavy
machinery, machine tools, fertilizers, drugs, textiles, pharmaceuticals, petrochemicals,
extraction and refining of crude oil and services such as telecommunication, trading,
tourism, warehousing, etc. and a range of consultancy services. In 2006–07, there
were 247 Central Public Sector Enterprises with a total outlay of ` 455,409 crore in
India, as compared to 5 in 1950–51. It is evident that both the quantum of investment
and number of enterprises have steadily increased with every Five-Year Plan. Table
2.1 gives a fair idea of the growth of the public sector enterprises.
Table 2.1 Growth of the Public Sector Enterprises

Plan No. of Enterprises Total outlay (Crore)

I 5 29
II 21 81
III 48 953
IV 55 3902
V 122 6237
VI 186 18229
VII 244 99329
VIII 242 213610
IX 240 324614
X 247 421089
XI 242 455409

Self-Instructional Material 31
Political Environment Table 2.1 reveals that in the beginning of the First Five Year Plan there were
only 4 enterprises in the public sector with ` 29 crore as total investment. It had
increased to 242 enterprises in the Eleventh Plan the with total outlay or ` 455409
crores. During the Eight and Ninth Five Year Plan number of enterprises declined and
NOTES the after that it started to increase. Observations are made regarding the performance
of CPSEs during the plan period:
1. The growth of investment in central public sector enterprises increased
from ` 29, rores in 1951 (First Five Year Plan) to ` 455409 crores in
March 2008 in the first year of the XI plan. The largest share in the
investment is in the service sector, followed by electricity.
2. From a mere 5 public sector enterprises in 1950, the number increased to
242 as on 31 March 2008. It excludes banks, financial institutions, ports,
railways and others.
3. In 2007–08 the profit making industries increased to 160 from 119 in
2002–03.
4. Number of loss incurring CPSEs, has gone down from 105 in 1997–98
to 53 in 2006–07.
5. Turnover increased to ` 9,64,410 crores in 2006-07, from ` 2,76,002
crores in 1997–98 recording a net worth growth of 349 per cent.
6. The turnover was equal to ` 9,64,410 crores in 2006–07, which was an
increase of 349 per cent in comparison to 1997–98 (` 2,76,002 crores).
As regards net worth, it increased by 337 per cent in 2006–07 in
comparison to 1997–98 (` 134,443 crores).
7. Net profit increased by 599 per cent in 2006–07 in comparison to 1997–
98 (` 13582 crores), and is currently to the tune of ` 81550 crores.
8. The share of output of CPSEs in GDP at market price stood at 8.23 per
cent in 2006–07 and 8.21 per cent in 2005–06. The CPSEs made
substantial contribution to the Central Exchequer through the payment of
dividends, interest on government loans and taxes and duties; the major
share of contribution to Central Exchequer by the CPSEs was by way of
payment of taxes and duties growth of 85.91 per cent followed by dividend
(11.74 per cent) and interest (1.33 per cent).
9. It contributed by a significant extent in improving the overall employment
situation in the country and has acted as a model employer by providing
work with better wages and other facilities as compared to the private
sector. Effective utilization of Human Resources is one of the most important
factors for the efficient and profitable functioning of an organization. It has
special significance in the management of public sector enterprises. CPSEs
employ a large workforce in different disciplines and the successful
operation of these enterprises very much depends on the skills and
capabilities of the workforce. Out of around 16 lakhs workforce (as on
31.03.07) deployed presently in CPSEs, about 3.65 lakh are in the
supervisory and managerial cadres which represent about 22.12 per cent
of total workforce. The number of employees during the period has reduced

32 Self-Instructional Material
 from 19.59 lakhs in 1997-98 to 16.14 lakhs in 2006–07, which is a Political Environment
reduction of 17.61 per cent.
10. Public sector has made a significant contribution towards achieving social
objectives. The Food Corporation of India (FCI) and artificial limb
NOTES
manufacturing corporation of India are two main central public sector
enterprises serving social objectives.
11. The average wage for workers in public sector enterprise is also higher
than in the private sector.
12. A great deal of investment in central public enterprises is being made
through internal resources than through investment from outside.
13. In 1990, a forum of women in public sector was established. Its roles
were training, providing support services, operation, and counselling. Out
of the total increase in organized women employment, the public sector is
responsible for 63 per cent during 1971–2005. Thus, it is clear that public
sector has played a major role in the empowerment of women.
Industrial performance in recent years in India
Industrial growth in the country has, in terms of long-run trend, remained aligned with
the growth rate of gross domestic product (GDP). According to Economic Survey
2011-12, the long-term average annual growth of industries comprising mining,
manufacturing, and electricity, during the post-reform period between 1991-2 and
2011-12, averaged 6.7 per cent as against GDP growth of 6.9 per cent. Inclusion of
construction in industry raised this growth to 7.0 per cent. The share of industry,
including construction, in GDP remained generally stable at around 28 per cent in the
post-reform period. Standard deviation of the average share was very small and the
coefficient of variation under 5 per cent validates this stability. The share of
manufacturing, which is the most dominant sector within the industry, also remained in
the 14-16 per cent range during this period.
According to Economic Survey 2011-12, employment in the industrial sector
increased from 64.6 million persons in 1999-2000 to 100.7 million persons in 2009-
10. The share of industry in total employment increased from 16.2 per cent in 1999-
2000 to 21.9 per cent in 2009-10. However, the increase was largely on account of
expansion of employment opportunities in the construction sector, from 17.5 million in
1999-2000 to 44.2 million in 2009- 10.
The index of industrial production (IIP), released each month, is the key indicator
of industrial performance. The new IIP series with 2004-5 as base was released in
June 2011 replacing the earlier IIP series with base 1993-4. Since the IIP is a fixed
weight and fixed base series, a dated base often has limitations in reflecting the industrial
scenario. The new series not only has a more recent base, it has a larger and more
representative product basket and weights that appropriately reflect the relative
importance of the sectors, products, and product groups.
Recent industrial growth, measured in terms of IIP, shows fluctuating trends.
Growth had reached 15.5 per cent in 2007-8 and then started decelerating. Initial
deceleration in industrial growth was largely on account of the global economic
meltdown. There was, however, a recovery in industrial growth from 2.5 per cent in
2008-99 to 5.3 per cent in 2009-10 and 8.2 per cent in 2010-11.
Self-Instructional Material 33
Political Environment Table 2.2 Growth in the IIP and its Major Components

Financial Year
Weight 2008–09 2009–10 2010–11
NOTES
Overall IIP 100.0 2.5 5.3 8.2
In terms of structured national industrial classification
Mining 14.16 2.6 7.9 5.2
Manufacturing 75.53 2.5 4.8 9.0
Electricity 10.32 2.7 6.1 5.5
In terms of use-based classification
Basic goods 45.68 1.7 4.7 6.0
Capital goods 8.83 11.3 1.0 14.8
Intermediates 15.69 0.0 6.0 7.4
Consumer goods 29.81 0.9 7.7 8.6
Durables 8.46 11.1 17.0 14.2
Non-durables 21.35 –5.0 1.4 4.3
Source: MOSPI.

Shortcomings
It is a fact that public sector enterprises contributed less to industrial progress than
what was expected of them. These enterprises suffer from a number of shortcomings
such as over-capitalization, underutilization of plant, bureaucratic and irresponsible
management, political interference and wrong personnel policies and overstaffing.
Underutilization of installed capacity is an important cause for the low-level
profitability in public sector enterprises. In 1988–89, nearly 40 per cent of public
enterprises showed capacity utilization of less than 75 per cent and 20 per cent
enterprises worked at even lower than 50 per cent rate of capacity utilization. Unutilized
capacities means higher overhead charges, which reduces the rate of profit.
There is over-regulation of government undertakings, which is not good for any
business enterprise.
2.3.2 The Private Sector
It is pertinent to discuss the role and future of the private sector against the background
of the socialist pattern of society, which is the declared objective of the government
Private sector: That part of policy in India. The pattern of socialism that we have envisaged is different from that
the economy, which is run pursued by many western countries. Unlike China, India has chosen an economic
by private individuals or
system that is basically capitalist in character, but it combines this system with a significant
groups, usually for profit. It
is not controlled by the state degree of state influence, the latter implemented through various types of controls and
and is often referred to as a state planning system.
the citizen sector
Jawaharlal Nehru, who shaped the destiny of the country for nearly two decades,
was not in favour of socialism for its own sake. He was not in favour of nationalization
of private undertakings until it could be proved that some definite social purpose would
34 Self-Instructional Material
be achieved by such nationalization, a purpose that cannot be secured under private Political Environment

management. The acceptance of the philosophy of socialist pattern of society by the

government had led to a feeling that the private sector in the country has a dark future.
The Third Five-Year Plan, however, clearly stated that the socialist pattern of society
NOTES
envisaged in India’s Plans does not imply that all economic initiative must rest with the
State. Indeed it assigns to private enterprise an important role in national development,
provided it attunes itself to the new philosophy of democratic socialism and operates
in unison with the public sector.
In the private sector, the enterprise is owned by private persons. In the sphere
of the private sector, there is the corporate sector with such organizations as public
limited companies and private limited companies. Outside the corporate sector, there
are many forms of ownership like single entrepreneur and partnership and trade as
also cottage industries. Private sector can be divided into the following two parts:
(i) The organized sector
(ii) The unorganized sector
In the unorganized private sector, it is difficult to enforce policy interventions.
The private sector plays an important supporting role in India’s mixed economy.
Seen in 1948 as complementary to the catalytic, dynamic and fast expanding public
sector, the private sector was nonetheless accorded due recognition as playing a useful
partnership role in rounding up the economy. It was not intended to nationalize it
straight away, but to regulate and direct it properly, and facilitate and encourage its
development through provision of infrastructure along with financial institutions, that
would all serve to promote and assist it to serve social objectives.
It is pertinent to mention that the private sector not only survived this slightly
patronizing approach as well as the hardships of the ‘license Raj’, but also went on to
achieve heights of glory and achievement. Meanwhile, several public sector units
stultified and decayed, to the point that they had to go the Board for Industrial and
Financial Reconstruction (BIFR) way or be disposed of (under the policy of divestment
or ‘disinvestment’). Some of the main reasons as to why the private sector turned the
tables on its bigger, stronger stablemate are as follows:
1. Entrepreneurial talent is its greatest asset, while most of the public sector
units did not have a mindset that promoted cost or profitability consciousness
as opposed to Western countries, where private enterprise has played such
an important role in economic development that Joseph Schumpeter has
described it as the initiator and moving force behind industrialization.
2. Private entrepreneurs are driven by profit and survival needs to constantly
innovate, reduce costs and improve both products and bottomlines, in
response to stakeholders’ demands.
3. In India, the role of the private sector—even after five decades of planning—
translates to 75 per cent of the economy, while the State-aided public sector
is a distant straggler with a mere 25 per cent share.
4. The private sector in India is vast; agriculture—the most important productive
activity—is the largest employer.
Self-Instructional Material 35
Political Environment 5. It employs 66.5 per cent of the working population and contributes around
30 per cent of the net domestic product, though much of it is mere subsistence
farming for a vast multitude of destitute marginal farmers and agricultural
labourers nevertheless, it is practically exclusively in private hands.
NOTES
6. Moreover, trading activities are mostly concentrated in private hands; the
few public sector organizations engaged in trading, like the State Trading
Corporation, withered away after their monopoly was demolished by
liberalization.
7. Forthcoming trends in private sector engagement in large retail and real
estate developments, including the involvement of the two Reliance Groups
of companies, presage a new thrust by the private sector into the service
industry—an evolutionary step that signals that the Indian economy is
approaching the next stage of development already well under way in the
developed countries.
Trading activities are mostly concentrated in private hands. This is because of
the general belief that the trading community renders useful services and its returns are
justifiable.
The private sector in industry can be conveniently classified into the following
three groups:
(i) Unorganized industrial units
(ii) Small-scale industrial units
(iii) Large-scale industrial units
In 1988–89, large units having capital investment of more than ` 35 lakh formed
only 6.3 per cent of the total industrial units in the country. But these units accounted
for 60 per cent of the gross output and 80.1 per cent of the total value added in the
factory sector. Thus, these large-scale industrial units form the backbone of the private
sector in India.
Most of the consumer goods industries are generally left to private enterprise.
The consumer goods industries are left to private enterprise as this sector has already
established itself in some major consumer goods industries like cotton textiles, jute,
edible oils, etc. These industries require small capital and yield quick returns. As such
these are fit for the private sector. These industries are also regulated with a view to
control investment in different industries.
While the large-scale private industries are restricted and regulated, the small
sector is encouraged to expand in the old field and enter into new spheres. Quite a
large number of products, more than 800, are reserved for this sector. These industries
are encouraged for being labour-absorbing industries as also those that can be easily
dispersed over space.
The general pattern of development of the corporate form in India is similar to
that in the Western countries. The methods of growth have been through diversification,
integration, acquisition and merger. Crossing international borders in joint ventures to
other countries is also in progress. Most of the growth in the corporate sector has
36 Self-Instructional Material
been through foreign collaboration in technology and sometimes capital also and rarely Political Environment

through innovation by means of internal research and developing technology.

The hereditary succession is still very powerful, though a professional managerial
class is slowly evolving. Some authorities even equate private sector to the ‘family NOTES
sector’ in view of the widespread prevalence of family management in large companies.
Favourable factors in the environment
The economic environment in India at present has some favourable as well as
unfavourable factors from the point of view of private enterprise. The favourable factors
are as follows:
1. Private enterprises derived many special benefits from the plans and policies
of the government. The vast outlays in the public sector since the beginning
of the Plan period provided the necessary infrastructure for the development
of private business and generated widespread demand for its products.
2. The Plan documents indicated the specific areas in which further investment
could be made. These provided valuable guidelines for the private enterprise
to proceed.
3. The Indian market is completely sheltered since the policy of developing
indigenous resources led to almost total banning of such imports as might
compete with the products of local industry. This is a further reason why the
private enterprise has been able to make good profits even when some of
their products were substandard.
4. The various feasibility studies and demand projection estimates made by the
public sector institutions enabled the potential entrepreneurs to know the
prospects of investment in those fields.
5. Various institutions have been set up to see that industries are not starved of
legitimate financial needs. Development banks like IFC, ICICI, IDBI, SFC,
etc. provide industries with financial accommodation. They help industries
in the form of long-term loans, underwriting of shares and debentures and
participating in equity. A study of the balance sheets of a large number of
companies indicates that finance provided by such institutions enabled them
to grow and prosper.
6. The private enterprise received some direct incentives from the government.
Despite the heavy doses of taxation, many of the Finance Acts contained
various tax concessions such as tax holidays for new undertakings,
developmental rebate, abolition of bonus tax, etc. Income Tax Act also
provides fiscal incentives to the individual and corporate sectors.
Unfavourable factors in the environment
The unfavourable factors are as follows:
1. The government has declared itself to be pursuing the aim of establishing a
socialist pattern of society, which puts a constraint on the expansion plans of the
private enterprise. In pursuance of its declared economic policy, the government
Self-Instructional Material 37
Political Environment has established its own undertakings to capture the ‘commanding heights of the
economy’. If need be, government will use its economic power to put a restriction
on the activities of private undertakings. Nationalization of commercial banks is
a case in point.
NOTES
2. Private undertakings in India have been operating in an environment of taxation.
The heavy burden of taxation has acted as a disincentive to increased production.
By immobilizing funds, which might have flowed into private undertakings, it has
acted as a brake on industrial growth.
3. Big business is subject to a large number of restrictions, especially the Monopolies
and Restrctive Trade Practices (MRTP) Act. After the virtual abolition of the
MRTP in the new industrial policy, the situation has changed.
4. According to industrial policies announced from time to time, there is a large
number of industries, which are either reserved for the public sector or for the
small sector. Also in the remaining sector, the government has reserved the right
to establish new undertakings. Thus, the private sector does not have any
independent field of its own, which is worthwhile for investment.
5. The decision of the government to vest the public financial institutions with powers
to convert their long-term loans of companies into equity capital and to nominate
directors on the boards of the latter is also viewed as an attempt to put a brake
on the growth of private enterprise. The plea that this is being done in the interests
of shareholders does not seem to be very convincing to many.
Despite these constraints, there has been an expansion of private sector activities.
Under the new Industrial Policy of 1991, emphasis has been shifted from the public to
private sector.
It should be noted that there has been growing concentration of economic power
in the hands of big business houses. This economic power has secured control over
political power. Owing to the commanding position of big businesses in the total
industrial sector, they can exercise considerable influence over government policies.
The Report of the Dutta Committee showed that 20 big business houses secured a
disproportionately large share in the number of licenses issued. During the last 25
years, through the process of concentration of wealth and economic power, they have
strengthened themselves and the two top business houses (Tatas and Birlas) have
amassed huge total assets.
Corporate sector sales in 2010-12
Corporate sector sales are another indicator of industrial performance. Abridged
financial results of the listed manufacturing companies indicated robust sales growth
during 2011- 12. According to Economic Survey 2011-12, in the first three quarters
(Q1-Q3) of 2011-12, sales growth varied between 20 and 25 per cent. However,
expenditure growth outpaced revenue growth leading to a lower growth in net profits.
Higher expenditure growth was initially led by high raw materials expenses, but interest
expenses grew more sharply in Q2 and Q3 of 2011-12. The net profit margin of
manufacturing companies measured by the ratio of net profits to sales decelerated
continuously from 8.1 per cent in Q2 of 2010-11 to 5.4 per cent in Q2 of 2011-12.
38 Self-Instructional Material
 Table 2.3 Growth in Key Parameters of Listed Manufacturing Companies Political Environment

Items 2010–2011 2011–2012

Q1 Q2 Q3 Q4 Q1 Q2 Q3*
NOTES
No. of companies 1900 1933 1961 1953 1935 1922 882
Growth rates (in per cent)
Sales 28.8 21.2 19.0 23.3 24.9 19.7 22.6
Raw material 40.6 21.9 20.9 30.5 28.8 23.8 32.2
Staff cost 16.9 20.4 21.1 18.2 17.5 15.3 12.7
Interest costs 10.9 7.8 13.7 23.1 20.5 41.5 44.2
Profits after tax (PAT) 8.2 10.9 14.6 7.1 9.6 –18.3 –15.4
PAT to sales 8.0 8.1 7.7 7.4 6.8 5.4 6.2
Source: Reserve Bank of India (RBI) Studies on Corporate Performance of Private Corporate
Business Sector.

2.3.3 The Joint Sector

The radical shift in the government policy has brought the concept of the joint sector
into sharp focus. It is nothing but a form of partnership between the public sector and Joint sector: A form of
the private sector. partnership between the
public and private sectors
Concept: Although the joint sector concept was conceived by the authors of
the 1956 Industrial Policy Resolution, it was really the brainchild of the industrial
Licensing Policy Enquiry Committee, popularly known as the Dutta Committee. Besides
the public and the private sectors, there was a need for a new sector—a joint sector—
for the harmonious industrial development of the economy. The joint sector is envisaged
as something in between the public and the private sector and in which the state could
actively participate in management, control and decision-making. It is claimed that the
joint sector scheme has the advantages of both the public and the private sectors and
at the same time avoids the evils of both sectors and thus fulfils the basic socio-economic
objectives of the country. Moreover, it offers an avenue of growth when all other gates
to growth seem to have been closed. The concept of a joint sector is basically an
extension of the idea of mixed economy in which the public and private sector units are
separate and function independently but are nevertheless part of a national plan. It is a
compromise between total nationalization and complete private autonomy. In the joint
sector, the relationship between the representatives of the private and public sectors is
much closer as they have to work together within the same unit. The joint sector was
recommended for units where a large proportion of the cost of a new project was to
be met by public financial institutions either directly or through their support.
There are three different concepts of joint sector: First, financial institutions can
exercise the right to convert debt into equity and appoint directors on company boards.
Second, government may appoint directors on company boards through the exercise
of powers granted by the MRTP Act to check malpractices. This need not involve
share participation and must not be confused with the joint sector. The third form is the
real joint sector where the government directly, or through its agencies, is a
co-shareholder in an enterprise. The government in this case plays a promotional and
entrepreneurial role and is an active majority partner.
Self-Instructional Material 39
Political Environment Features of joint sector: In a memorandum submitted to the government,
JRD Tata suggested a slightly different definition of the joint sector. ‘A joint sector
enterprise is intended to be a form of partnership between the private sector and the
government in which the State participation of capital will not be less than 26 per cent,
NOTES the day-to-day management will normally be in the hands of the private sector partner,
and control and supervision will be exercised by a board of directors on which
government is adequately represented’.
The Dutta Committee advocated conversion of some of the private sector units
into joint sector enterprises as an important means of curbing the concentration of
economic power in certain private groups. A number of new industrial projects had
been established in the private sector with the help of funds provided by public financial
institutions but the latter had not asked for a voice in the management. It was strange
that huge private industrial empires should be built up with funds provided by public
institutions without knowing how the money was actually spent. The Dutta Committee
asked the government to enunciate a new industrial policy whereby this anomaly could
be rectified.
There was a change in the industrial policy without there being a change in the
1956 Policy Resolution. The government announced the new industrial policy in
February 1970. The joint sector concept as suggested by the Dutta Committee, was
accepted in principle. It was laid down that while sanctioning loans or subscribing to
debentures, public financial institutions should in future have the option to convert
them into equity within a specified period of time. Specific guidelines had been laid
down. In case the aggregate loans granted were below ` 25 lakh, the financial institutions
are not to insert any convertibility clause in the agreement. If the loans granted were
between ` 25 lakh and ` 50 lakh, it is optional for the financial institutions to insert a
convertibility clause in the agreement. Once convertibility was agreed to, the undertaking
is required to appoint representatives of the lending institutions as directors on company
board.
It is not difficult to understand the logic behind the joint sector. As had been
emphasised by the then Prime Minister, the old concepts of exclusive private ownership
and private profit do not fit in with today’s social values and priorities. An open society
requires an open corporate structure; the joint sector provides this openness without
taking away the advantages of private enterprise and initiative. The joint sector is a
departure from exclusive private ownership but it should be welcomed in preference
to outright nationalization.
The joint sector experiment has been viewed with misgivings by many
industrialists. It has been assailed as ‘nationalization by the backdoor’. But others
have welcomed it on the grounds that it is preferable to wholesale nationalization of
existing private undertakings. There is one serious objection to the joint sector. The
concept is based on mutual trust and confidence, yet the idea originated because the
private sector could not be trusted enough to grow on its own. Thus, conceived in
mistrust, the marriage might be a disastrous failure.
The joint sector was evolved to check the concentration of economic power of
private groups. But some think it is not necessary to check the concentration of economic
power as the existing MRTP Act was adequate for the purpose.
40 Self-Instructional Material
2.3.4 The Cooperative Sector Political Environment

The cooperative sector has emerged as an important sector in our economic

environment. Cooperatives, inspired by the principle of self-help, are of great importance
for the poor people of India. Cooperatives consist of persons of small means. Unable NOTES
to face cut-throat market competition, these people get together and organize themselves
into cooperatives. Thus poor individuals, through cooperative, acquire strength to
perform tasks, which they would not be able to do otherwise.
The cooperative idea took a concrete shape in India for the first time in 1904
when the Cooperative Credit Societies Act—a measure designed to combat rural
indebtedness and provide for registration of credit societies—was passed. Later in
1912, the Cooperative Societies Act also provided for the registration of non-credit
societies as well as federations of cooperatives. Since then the cooperative movement
has made noticeable progress, specially in agricultural credit, marketing and processing
of agricultural produce, supply of farm inputs and distribution of consumer goods. An
idea of the growth of cooperative movement in India can be had from the fact that
there were as many as 3.50 lakh cooperative societies of all types with the total
membership of about 16 crores and total working capital of about ` 62,500 crore as
on June 30, 1990. Other distinguishing feature of the cooperative scene is that it is
largely village based. The government’s emphasis on institutionalization of distribution
of inputs to farmers and marketing of their agricultural produce through cooperatives
owned by them has helped in strengthening cooperative sector in the rural areas.
Functional cooperatives for programmes like dairy, fishery and poultry mainly
extended help to the weaker sections, as such cooperatives provide increased
employment and income opportunities to different sections like small and marginal
farmers and fishermen. The National Cooperative Development Corporation (NCDC)
also gives financial assistance to various types of cooperatives.
Cooperative societies is a state subject under the Constitution. However, such
cooperative societies having their objects not confined to one State, and come under
the jurisdiction of Central Government. The Multi-State Cooperative Societies Act,
1984 came into operation from September 16, 1985. At present, there are 182 Multi-
State Cooperative Societies in the country.
A major development after Independence has been the emergence of the
National Cooperative Federations, which added a new dimension to the cooperative
infrastructure. With the National Cooperative Union of India at the apex, other National
Level Cooperative Federations established in the country are: National Agricultural
Cooperative Marketing Federation, National Federation of State Cooperative Banks,
National Federation of Cooperative Sugar Factories, National Cooperative Agriculture
and Rural Development Banks’ Federation, National Cooperative Consumers’
Federation, National Federation of Industrial Cooperatives, All India Federation of
Cooperative Spinning Mills, National Cooperative Housing Federation, National
Cooperative Dairy Federation, National Federation of Urban Cooperative Banks
and Credit Societies, National Federation of Fishermen’s Cooperatives, National
Federation of Labour Cooperatives and National Cooperative Tobacco Grower’s
Federation.
Self-Instructional Material 41
Political Environment The following Table shows all India position of Primary Agricultural Credit
Societies in India.
Table 2.4 Primary Agricultural Credit Societies Including Farmer Service Societies (FSS)
and Large Sized Adivasi Multipurpose Societies (LAMPS) in Respect of Main Items
NOTES in 2009–10

(As on 31st March) (` in Lakhs)

Sl. No. Main Items (All India Position) 2009–2010

1. Number of Societies 94,647
2. Total Membership 126,419
a. Scheduled Tribes (ST) Membership 26,082
b. Scheduled Caste (SC) Membership 10,515
3. Paid up Capital 714,842
a. Govt. Contribution 65,622
4. Total Reserves 533,021
5. Owned Funds (3 + 4) 1,247,863
6. Total Deposits 3,528,607
7. Total Borrowings 5,176,390
8. Total Resources (5 + 6 + 7) 9,952,860
9. Working Capital 13,519,152
10. Total No. of Borrowers 59,800
a. Scheduled Caste (SC) 6,809
b. Scheduled Tribes (ST) 3,417
11. Total Loans Issued 7,493,754
a. Short Term 6,195,076
b. Medium Term 1,298,678
12. Total Loans Outstanding 7,647,983
a. Short Term 5,497,028
b. Medium Term 2,150,955
13. Total Demand 9,549,660
a. Short Term 8,433,765
b. Medium Term 1,115,895
14. Total Collection 5,597,260
a. Short Term 4,937,930
b. Medium Term 659,350
15. Total Overdues 3,952,401
a. Short Term 3,495,835
b. Medium Term 456,545
16. Total Percentages 41.39
17. Number of Staff 215,529
Source: National Federation of State Cooperative Bank Ltd.

42 Self-Instructional Material
2.3.5 Privatization: The Role of Government Political Environment

Privatization is only a modern name assigned to the concept of laissez faire advocated
by Adam Smith and other classical economists. But in the environment of mixed
economy, it has a new significance. The world economists have adopted it as a tool of NOTES
new economic prosperity. It is expected that the new liberal era of industrialization will
open a new chapter in the field of productivity, efficiency, cost consciousness,
competitiveness and management. The participation of the private sector in the
Privatization: It is the
development process is not an option, it is an essential requirement of development. transfer of ownership of
Earlier private enterprises, which had financial difficulties, were taken over by property or businesses from
a government to a privately
the government in most of the countries. Now the policy has completely changed. owned entity
Public enterprises, which had financial difficulties, are transferred to a private agency.
Government policy in India, as in other countries, is undergoing a sea change
both on account of shifts on ideological account as well as basic economic
considerations. Moreover, international lending agencies have increasingly brought in
the privatisation of public enterprises as a condition for their project lending in several
countries. It is evident from the World Bank report, which has supported privatization
of public sector steel industry and the World Bank experts have suggested that
privatization is essential to attain productivity and efficiency.
After four decades of experiments with nationalization in many countries of the
world, a new worldwide experiment has started during the 1980s in the form of
privatization. Many countries are moving away from nationalization out of sheer
economic compulsions, viz., the widespread failure of the public sector enterprises,
higher pressure on government budgets, particularly due to the subsiding of the public
sector white elephants and various other macro-economic problems. The public sector
has lost its dynamism and, according to some, it is now more a drag on development
than an engine of growth.
It can be said that if a failing private enterprise should go out of business or
close down the organization, the same principle should be followed in case of public
sector. But this is not always the case as the sick PSUs are allowed to operate with
budgetary support.
Contradictory as it may seem, privatization is perfectly compatible with Marx’s
postulate of withering of the State. It really envisages the shifting of ownership of the
means of production from the elite to the masses.
Objectives of privatization
Privatization has the following objectives:
1. Improvement of the economic performance of assets
2. Depoliticalization of economic decisions
3. Reduction in public outlays, taxes and borrowing requirements
4. Promotion of popular capitalism through wider ownership of assets
5. Promotion of equity
Self-Instructional Material 43
Political Environment International experience
Worldwide experience of privatization started during the 1980s with a view to increasing
efficiency and competitiveness of industry, means of earning money for government,
NOTES reducing budgetary deficit, widening the share of ownership of economic assets and
eliminating political interferences. Mrs. Thatcher in the UK and Ronald Reagan in the
USA had championed the cause of privatization.
It was Mrs. Thatcher who pioneered this new drive towards privatization with
an ideological zeal by selling all or part of 13 companies ranging from utilities like
British Telecom and British Gas to industrial companies. In the former Soviet Union,
Mikhail Gorbachev introduced Glasnost and Perestroika (restructuring) which include
a massive decentralization of economic management and decision-making, setting up
of prices through competition, allowing private enterprise in selected areas and so on.
In the USA, privatization has dominated in the areas of ‘contracting out’ of public
services, infrastructure services, health services and public safety. France denationalized
banking and insurance sectors and some profit making industries. Similar experiments
with privatization also started in Italy, Spain, Sweden, Germany, the Netherlands,
Ireland, Austria and Japan.
In the less-developed countries, privatization has been pursued mainly because
of fiscal problems like budget deficit through a variety of ways such as total or partial
denationalization, closure or liquidation of perpetually loss-making enterprises, transfer
of management, selling through auction, etc. Experiments with the privatization process
had started in the 1980s in Bangladesh, Pakistan, Thailand, Malaysia, Latin America
and African countries.
Signals of the privatization process in India began with certain loosening of
controls in the area of industrial licensing, liberalization of import control policy, reduction
in income and corporate tax rates and the long-term fiscal policy since 1985.
India’s development strategy failed to exploit the advantages inherent in the
economy. Instead, through planning, it created high cost-inefficient industries of less
than economic scale and sheltered them from foreign competition. Self-reliance was
perverted into self-sufficiency. The softness of the budget constraint of the bloated
public sector and bureaucracy is at the heart of the problem. The socio-political system
was unable to distribute assets. The instruments of industrial and import licensing policy
have not succeeded in reducing inequalities. Even though tax revenue as a share of
GDP has risen, the revenue has been increasingly squandered. The deficit reflects the
growth of subsidies of various kinds and the soft budget constraints of the public
sector.
Many observers argue that the solution to industrial sickness in the public sector
is privatization. But privatization is not the real solution. Bagaram Tulpule has rightly
observed that closing down PSUs will involve heavy financial as well as other costs.
Closure of these will take away the jobs of over four lakh employees. Payment of
compensation to them at the rate of ` 1.5 lakh each will involve an outgo of over
` 6000 crore. Even if a part of this amount is raised by the sale of assets of the units
concerned, the government has conceded that the net cash outgo will still be very
large. In many of these enterprises, the cash outgo on closure, according to the official
document, will be as much as 6 to 10 times their annual losses. Closing down such
44 Self-Instructional Material
enterprises at such heavy cost and the displacement of such large number of employees Political Environment
may make little economic sense since the annual interest on the present cash outgo will
more or less equal the annual cash losses of these enterprises.
The Government of India has ruled out any overnight handing over of such
NOTES
PSUs to the private sector. It would be better if the management of ailing PSUs comes
out with credible revival packages. The government would take a pragmatic approach
to decide the fate of these undertakings.
The present trend indicates that public enterprises require a radical restructuring
and reorientation. This is likely to take any of the following routes:
(i) Divestiture, i.e., assets of a government enterprise are sold or transferred
to a private owner
(ii) De-nationalization/de-regulation
(iii) Under the Industrial Policy, certain industries are exclusively reserved for
development in the state sector. Any relaxation in respect of such an
exclusive reservation
(iv) Leasing of PE to a private sector party
(v) Transfer of management and control of a PE to a private agency
Privatization has transformed itself from rhetoric to reality in both developed
and developing countries. In the present-day situation, it is an accomplished fact and
not a rigmarole. It is a reform that necessitates the redistribution of income and usually
a change in employment patterns.
Enterprise location: State policy regarding location
of industrial enterprises
The economic liberalization policy, initiated in the country since 1991, led to the Liberalization: It is the
following: removal or reduction in trade
practices that stop free flow
• Large-scale de-licensing of industry of goods and services from
one country to another. This
• Large-scale modifications in the industrial location policies includes removal of tariffs
• Stabilization-cum-structural adjustments of the economy and non-tariff barriers

The role of the state as industrial owner and location regulator was curtailed
due to the above factors; on the other hand, the role of private sector in industrialization
got a boost. However, if the private sector dominates industrialization, facilitated by
the liberalization policy, location and concentration of industries in the leading industrial
regions is expected. To understand the influence of liberalization on the industrial location
in India, we can examine the employment data of organized manufacturing sector for
the pre- and post-reform periods. The outcome of the study of this data suggests that
the manufacturing industries are concentrated in a particular region, in the post
liberalization period in India, and the backward states are stll unable to to catch up
with the industrially developed states.
Liberalization of the location policy: Recently a significantly amended
locational policy that carters to the liberlized licensing policy, has been implemented.
Some of its features are as follows:
• No industrial approval is needed from the government for locations not
falling within 25 km of the periphery of cities that have a population of more Self-Instructional Material 45
Political Environment than one million barring only those industries where industrial licensing is
necessary.
• Non-polluting industries, for example electronics, printing and computer
software can be located within 25 km of the periphery of cities with more
NOTES
than one million population.
• Other industries get the permission for factories in such locations in case
they are located in an industrial area so designated before 25th July 1991.
• Zoning and land-use regulations in addition to environmental legislations are
compulsory.
• Industrial undertakings have their say in selecting the location.
2.3.6 Entrepreneurial Role of Government
Encouragement to entrepreneurship is an extremely important role of any government
which is concerned with the future economic health of its country. That is why there is
a strong relationship between economic growth and the ease of doing business in a
country. If the government of a country is entrepreneurial, the country’s business
environment would be progressive. It has nothing to do with the political system of the
country. It may be observed that non-democratic governments are sometimes more
successful at understanding the advantage of entrepreneurship. The countries with less
bureaucratic formalities for doing business naturally attract more businessmen. In the
interest of their domestic economies, politicians must take an active role in making the
reforms needed to help fuel entrepreneurship.
Traditional bureaucratic governments favour and encourage the people with
tendencies to defend their position, oppose change, erect authority, expand their sphere
of control and protect the schemes irrespective of their relevance to present conditions.
Briefly speaking, such governments promote the feeling of status quo among the people.
On the other hand, an entrepreneurial government initiates more efficient and effective
ways of managing systems and organizations. It recognizes the importance of discarding
old and irrelevant programmes and methods and encourages taking timely and necessary
action. Entrepreneurial governments are creative and innovative. They are business
oriented. They do not hesitate to privatize wherever it makes realistic sense and where
private operators can provide the same service much more efficiently.
2.3.7 Catalytic Role of Government
Sometimes, governments do not play a direct role in business activities. They play the
role of catalysts. They believe in steering rather than rowing. Government should be a
catalyst for the development of business environment; it cannot compensate or substitute
for its absence. Governments, as effective catalysts, do not do anything directly for
business. They encourage businessmen to do things as their own. Business communities
drive their own development; governments facilitate the process. This implies a number
of practical activities that are far easier to talk about than to do. In their role as catalysts,
governments enable a business community to look realistically at itself. Because
businessmen are well conditioned to focus on their problems, facilitators (governments)
emphasize analytic tools and exercises that help the community to identify and recognize
strengths and capacities which they may have overlooked or ignored in the past.
46 Self-Instructional Material
Governments connect business people with each other and their existing resources. In Political Environment
doing so, they emphasize inclusiveness.
2.3.8 Supportive and Competitive Roles of Government
NOTES
The government of a country also plays the supportive and competitive role in the
development of business. The primary economic role of the government is to create an
enabling environment where competitive private activity can flourish. For example, the
government, in its effort to protect the consumer and promote open competition in the
market, requires companies to reveal to the consumer the contents of its products,
and its methods of operation and corporate organizations.
The government guards against monopolistic business practices, such as the
formation of trusts. It has also to protect its citizens against market failures, which
occur when one or all of the following conditions exist:
• When adequate competition does not exist
• Resources are not free to move from one industry to another
• Prices do not reasonably reflect the costs of production
• Buyers and sellers are not well informed
Another important function of the government is to maintain the stability and the
well being of the country. For this, it needs to keep a sufficient level of competition in
the markets by regulating some monopolists’ prices and directing the quality of public
services. The objective of the government is to establish the same prices that might
exist if there were competition.
2.3.9 Regulatory Role of Government
Throughout the globe, governments have been engaged in social and economic regulation
of their people’s lives. Economic regulations have come into focus because such
Check Your Progress
regulations have been associated with declining productivity rates in several
industrialized countries. The governments have also been enacting social regulations. 1. In which year did economic
liberalization of India take
Most of the government regulations involve the setting up and enforcement of standards place?
for conducting legitimate social, political and economic activities. Government regulations 2. Why is sovereign risk in
are different from those brought out by the management. Management involves the India very less?
3. Why did the United States
administration of the properties and realms which the government owns. For example, curb its foreign sanction in
governments mange the national parks and forests; they do not regulate them. On the India?
other hand, toy manufacturing — an activity of private business— is regulated by 4. What do you mean by
public sector undertakings?
government, as are the manufacture and sale of many foods and drugs, the production Give an example.
of cars, and the practice of law, medicine, and other occupations. 5. Enlist the four kinds of
public sector units.
6. The private sector can be
2.4 GOVERNMENT AND ECONOMIC PLANNING divided into two parts.
What are they?
Some nations are economically highly developed, while some countries are still 7. Explain the concept of joint
developing and some of them are under-developed. Quite a few factors are accountable sector undertakings.

for variations in the states of development of nations in addition to political factors.

Self-Instructional Material 47
Political Environment These are as follows:
• The availability of enough natural resources.
• The quality and quantity of human resources.
NOTES • Abundance of financial resources.
• Efficient management and technological skills among the people.
The USA, UK, Western European nations, Japan, Australia, etc. are the major
examples for economically developed countries. India, China, Sri Lanka are the
examples for developing countries. African nations, Bangladesh, etc. are the examples
for under-developed countries.
2.4.1 Government’s Planning: Regional Imbalances in India
India obtained under development from the British who ruled the country for many
years. They did not support industrial development of the country at all. They utilized
India as the supplier of raw material for their industries. Therefore, the country used to
supply raw materials for the British and used to import the finished products.
There have been demands for separate states, mainly due to lack of economic
development in such regions, in India since independence. For example, demands for
a separate Telangana state in Andhra Pradesh. Recently only, a separate Chattishgarh
state was created from Madhya Pradesh, Uttaranchal from Uttar Pradesh and
Jharkhand from Bihar.
For a particular region, the economic development is measured in the name of
per capita income, poverty, gross state domestic product, unemployment, etc. Bihar,
Orissa, Rajasthan, Madhya Pradesh, Uttar Pradesh, Northeastern states are reasonably
backward economically. Maharashtra, Gujarat, Tamilnadu and Punjab are relatively
highly developed.
One of the main results of regional imbalances is the people’s migration to the
developed areas. For example, many skillful people from India migrate to the developed
countries. Likewise, within India, people from under developed regions keep on
migrating to highly developed cities or regions. Such migrations lead to violence, law
and order problems. Almost all the major cities in India (New Delhi, Kolkata, Chennai,
Mumbai, Bangalore, Hyderabad, Pune, Ahmedabad, etc.) face extremely high intensity
of population.
To control the migration levels, the government has been putting into practice
the national rural employment guarantee scheme, which is used for reducing the migration
of rural people to urban areas for work when the agricultural lean season arrives.
Being a plural country, full of diversities of religions, languages, castes, tribes,
cultures, etc., India has a number of cultural and linguistic groups. These are
concentrated in some specific territorial segments. During colonial rule, the British
administration was more interested in economic exploitation of the country and least
interested in its development; it supported various divisions based on religion, region,
caste and language and did not make any plan for a balanced development of India.
These factors led to regional imbalances and group identities. Consequently, independent
India witnessed the rise of regionalism, language movements, separatism, etc.
48 Self-Instructional Material
What is a region? Political Environment

A territory is called a region, as the inhabitants of that territory have an emotional

attachment to it due to commonality of historical traditions, religion, usages and customs,
language, socio-economic and political stages of progress, a common way of living, NOTES
etc. These, in addition to extensively prevalent sentiments of togetherness, reinforce
the bond. This territory can overlap with the boundaries of a state, parts of a state or
even with more than one state. Regionalism develops due to a feeling of discrimination
or competition on political, economic or cultural grounds, yearning for justice or favour.
Due to these factors and specific nature, regionalism results in demand for autonomy
or powers for state, creation of new state, protection of language or culture of the
region or separation from the country.
Regional disparities
Regional disparities or imbalances manifest into wide differences in literacy rates, per
capita income, availability of health and education facilities, stages of industrialisation,
etc. between different regions. These regions could be either states or regions within a
state. India is a country of regions having enormous imbalances on various accounts.
The planning in independent India has not been able to eradicate these regional
imbalances.
Colonial legacy
The British colonial system was mainly interested in selling their goods in Indian markets
and exporting raw materials from here. In some instances, they showed their interest in
establishing some industries in order to put in their surplus capital and use cheap Indian
labour. Thus, they introduced Zamindari system in some regions and peasant proprietary
system in some other regions. They improved agriculture to create markets for their
goods. Therefore, significant variations were created in agriculture in the spheres of
production relations and level of production in various states and regions. At that time,
the pattern of urbanization depended upon the planning of exporting raw material and
importing finished goods. Due to this, the port towns emerged as the major centres of
urban industrial activities. Therefore, as the trade and commerce developed in the
colonial India, jobs and educational opportunities were created at coastal centres like
Bombay, Calcutta and Madras and at some princely states’ capitals. This also resulted
in the emergence of a few consumer industries in these places and, hence, to the
growth of a merchant capitalist class. This gave these regions an advantage over others
where the enormous tracts of agriculture lost their conventional handicrafts and other
small-scale non-agricultural activities due to competition from the technology based
modern processes of industrialization.
Another major factor in the irregular regional development was the development
of the education system. The British had linked India to Europe through trade relations
and the coastal areas particularly around the ports of Bombay, Calcutta and Madras.
The males of these areas thus were introduced to the modern education. As a result,
there grew an educated professional class, which comprise mostly lower paid
government and commercial clerks. An elite group of lawyers and other professionals
was also established in these regions. On the eve of Indian independence, interstate
Self-Instructional Material 49
Political Environment and inter-district disparities were very sharp and widening. The following areas felt the
heat of regional differences:
• Per capita income and consumption
NOTES • Literacy
• Medical and health facilities
• Natural resources
• Population growth
• Infrastructure development
• Employment opportunities
The task of eradicating these disparities was handed over to the independent
India’s government.
Regional policy in independent India
The leaders of the independent India quickly recognized the need for the removal of
regional disparities. According to the Indian Constitution, it is the duty of the central
government to appoint a Finance Commission once at least in every five years. The
aim of this commission is to scrutinize the problems arising out of the gaps between
expenditure and the revenue and other such matters. Thus, the central government,
with the help of its two principal agencies—the Planning Commission and the Finance
Commission—is bound to work for balanced regional development of the country. To
re-establish the equilibrium between various areas and regions was one of the objectives
of planning. Though these institutions were to work within a large socio-economic
fabric of the country and the initial political process. Initially planning was chiefly
restricted to the national level. The problem of regional disparities hardly got the much-
required attention, and the few measures that were taken, were adopted to deal with
particular problems faced by certain areas having natural disasters. Thus, the policy
makers did not give adequate attention to the problem of regional development. A few
of the previously developed regions enjoyed the freedom to develop further at the
expense of the backward regions, which continued to languish.
It was in the Third Five-Year Plan that some attention was given to the problem
of regional disparities. Efforts were made to recognize the backward regions. Beginning
from the Fourth plan, planners have shown more interest in this objective. Planned
policy measures are being taken to enhance the status of living standards of the people
in the backward regions. However, in reality, despite the increasing consciousness of
these aspects, very little has been attained. While the Planning Commission has
recognized industrially backward regions, it has not yet attempted any action, which
can be deemed to be backward from the viewpoint of total economic development.
Actually, the plans of regional policy focus on the dispersal of industry among the
different regions of the country. However, despite several attempts for industrialisation,
agriculture continues to be the most important economic activity from the viewpoint of
production and employment in most of the states, and within the agricultural sector,
due to stress on instant increase in production, interstate disparities in per capita
agricultural output have been increasing. Everyone knows that the green revolution
and its impact have been confined to comparatively small areas. Therefore, the
50 Self-Instructional Material
imbalances in people’s socio-economic conditions have been increasing both inside Political Environment
and between different regions of the nation.
Regional imbalances and regionalism
The sense of neglect, deprivation and discrimination is created if the regional inequalities, NOTES
both among states and within states exist and are not addressed. In a country like
India, having a composite culture, and where groups are concentrated in states or
regions, these inequalities become the cause of social conflicts resulting in political and
administrative problems. In any case, regional imbalances are a chief cause of
regionalism. The movements for the creation of separate states in Jharkhand area of
Bihar and West Bengal, Uttaranchal and Chattisgarh in Uttar Pradesh and Madhya
Pradesh were the result of the underdevelopment of these regions in those states, as a
feeling of exploitation and deprivation had set in among people. Finally, the status of
separate states was bestowed upon these areas in 2001. Such movements are still
going on in the Telengana region of Andhra Pradesh, Vidarbha region of Maharashtra
and Darjeeling region of West Bengal. In addition to the feeling of deprivation in the
neglected states or regions, there also are regrets because of sectoral inequalities.
These consist of lack of industrial development along with agricultural development.
These factors are spreading regionalism in developed states. For instance, in areas
where Green Revolution was introduced and has been successful, the new rich farmer’s
class has become financially and politically significant. They are now inclined in
perpetuating the concessions and facilities that were given to them at the time of Green
Revolution. Despite agriculture having become very much gainful, they want subsidies
to persist and income not to be taxed. These rich farmers in such states offer major
social basis of regional parties.
The problem of regional disparities is a natural outcome of the development
process itself, in which certain regions develop faster than others. Uneven regional
development results in the following complications:
• Wastage of resources
• Increase in public costs
• Social injustice
• Deceleration of economic growth
• Threat to national integration
• Political instability
Many experts in the field of regional and developmental economics have
graphically narrated the unfavourable consequences of persisting disparities in various
studies. Harvey Armstong and Jim Taylor argue that severe regional imbalances in
levels of employment are risky for social cohesion. If the backward regions exist along
with developed ones, the lower purchasing power in the former areas leads to aggravate
inflation. According to them, if regional unemployment disparities are reduced, the
national employment and output could be considerably enhanced.
When such imbalances are controlled with more geographic distribution of
demand for labour, pressures exerted by inflation would be less harsh. There will be
best utilization of social overhead capital.
Self-Instructional Material 51
Political Environment Friedman and Alonso pointed that decline in regional imbalances would pave
way for the following:
• Greater national integration
NOTES • Increase in economic growth
• Political stability
In contrast, if the imbalances sore, a sense of injustice may kindle regional and
parochial movements, as seen in many countries.
Reduction in disparities is also vital to speed up the growth of national economy.
This is mainly relevant in the under-developed economies. Moreover, national income
can be enhanced only when the resources and potentialities in backward regions are
employed for useful activities. Backward regions should be helped so that their potential
is correctly tapped enabling them to reach higher level of development. This requires
evolving exact strategies for the overall development of such regions.
Concept of a region and its economic backwardness
There are different regions classified based on their size for planning purposes. At the
local level, there are micro-regions. These are very small spatial units such as a district.
Next in order is the meso-region consisting of a state or group of states. At the uppermost
order there is the macro-region consisting of the previous two types of regions such as
the country.
While explaining the term ‘backward region’ there have been some attempts to
vaguely define it. These attempts are evasive and do not give a crystal-clear picture of
what exactly constitutes such a region. Experts have defined the term ‘backward
region’ with reference to the distinctive problems encountered by such regions,
possibility of attaining development, effectiveness of regional plans and factor
endowments. Generally, the issue of regional development has been extensively
discussed compared with a developed area and development at a collective level
rather than focussing attention wholly on the backward regions.
However, what seems to be missing is appreciation that most backward areas
have a potential for growth, which can be tapped if some special initiatives are taken.
The important matter is to recognize these special initiatives in each type of backward
area.
The Organisation for Economic Co-operation and Development (OECD) has
classified regions into four types. They are as follows:
• Under-developed
• Un-developed
• Re-conversion
• Congestion regions
Out of the four types, the first one, i.e., under-developed, has many features
such as limited industrialization, declining source of income from the primary sector
and out-migration, which typically belong to a backward region.
R. P. Mishra attempted to examine and analyse the problems of some backward
regions. These regions were located in between the centres of growth. The process of
52 Self-Instructional Material
transition, including increased outflow of men and material, was experienced in these Political Environment
regions. He cited the examples of mining regions in the USA as the proof for this type
of region.
Several empirical studies have been carried out until now. These have tried to
NOTES
classify or categorize regions based on their potential for future development. A few of
such regions have natural advantages for example good and superior soil and adequate
rainfall. These advantages give them instant growth potential. However, there are other
regions, which do not have such advantages and thus remain backward. The absence
of good infrastructure and easy accessibility further increase their problems. Compare
to the regions that have some potentiality, there are other regions, which remain
backward mainly due to technical factors. Such regions are mostly agriculture-oriented
that do not experience the considerable improvement in production technologies. Of
course, the output level of these regions is very low.
Industrial development of backward areas
For the problems of location, be it multi-plant or single plant locations, the industrial
policies set by the government acquire immense importance and their instructions are
considered key guidance. In India, for balanced regional development of the country,
the industrial development of backward areas has always been stressed upon. The
following have been given importance in this regard:
• Licensing policy
• Location of public sector projects
• Investment subsidy
• Concession in financing the projects
• Concession on income tax import duty etc.
• Setting up of industrial estates
All the districts in India have been classified into the following four categories:
A. No industry districts and ‘special region’ districts
B. Moderately backward districts
C. Least backward districts
D. Non-backward districts
The A, B, and C categories are eligible inter alia for subsidy on investment in
fixed assets in an industrial unit.
Taking cognizance of the significance of infrastructural facilities, the Indian
Government offers one-thirds of the expenditures of the progress of infrastructural
facilities in the ‘no industry’ districts, the remaining two-thirds of the expenditure is met
by the concerned state government. However, the utmost limit of central help in this
plan is ` 2 crore in a district. Even companies that fall under the MRTP Act have been
offered some allowances if they locate new plants in category ‘A’ and ‘B’ districts.
The central government also suggests to help the ‘no-industry’ districts by setting up a
‘nucleus’ plant in each such district, which would bring about a number of ancillary
units. The state governments give a variety of incentives to industries with the intention
that they may establish their plants in the backward areas.
Self-Instructional Material 53
Political Environment IDBI bank
The IDBI bank the Industrial Development Bank of India Limited. It is one of India’s
leading public sector banks. It was set up in 1964 through a Parliament Act. The main
NOTES aim of this bank is to provide credit and other facilities for the development of the
fledgling Indian industry; especially the backward regions. Some of the institutions set
up by IDBI are as follows:
• National Stock Exchange of India (NSE)
• National Securities Depository Services Ltd (NSDL)
• Stock Holding Corporation of India (SHCIL)
• Credit Analysis & Research Ltd
• Export-Import Bank of India (Exim Bank)
• Small Industries Development Bank of India (SIDBI)
• Entrepreneurship Development Institute of India
• IDBI BANK
Recent developments
To overcome upcoming challenges and to meet the reforms in financial sector, IDBI
has taken steps to modify its role from a development finance institution to a commercial
institution. IDBI attained the status of a limited company viz. ‘Industrial Development
Bank of India Limited’ (IDBIL) with the Industrial Development Bank (Transfer of
Undertaking and Repeal) Act, 2003. Thereafter, the Reserve Bank of India (RBI)
issued the requisite notification on 30 September 2004, incorporating IDBI as a
‘scheduled bank’ under the RBI Act, 1934. As a result, IDBI, officially entered the
portals of banking business as IDBIL from 1 October 2004.
2.4.2 Trend and Pattern of Industrial Growth
Business environment in India can be studied under the following periods:
• Period I: Business in the ancient period
• Period II: Business in the pre-Independence era, i.e., before AD 1850
• Period III: Business between 1850 and 1947
• Period IV: Business in 1947 and onwards, the post-Independence period
Business in the ancient period: The first phase of entrepreneurship started
when the Aryans emerged on the scene. They faced problems in developing new
artifacts that required labour and land. This period also saw the beginning of science in
India. Studies in the fields of astronomy, medicine and literature gained importance
during this period. Agriculture and handicrafts were the major business activities of the
people in the Gupta and post-Gupta periods. Towns and cities also developed with
the beginning of entrepreneurship.
Business in the pre-independence era, before 1850: Agriculture was the
main source of livelihood for the people of India in the pre-independence era.
Communities like Banias, Parsis, Chettiars and Gujaratis established business activities
like overseas trade and also set up manufacturing industries. The two industries prevalent
at that time were the cottage industry and handloom and textile. Business did not
54 Self-Instructional Material
progress till 1840, on account of British colonialism. During this period, the reasons Political Environment
responsible for the sluggish industrial growth of business in India were as follows:
• Absence of provision of security by the British to the business enterprises
• High transportation cost for the goods because freight charges were more NOTES
for locations that were far from the ports
• Excessive tariffs imposed on Indian goods by the British
• Lack of technical education, transportation and communication facilities
• Pressure on entrepreneurs to get finance and licences to run industries
• Rapid industrialization linelered because heavy industries were not established
by the British
Business during 1850–1947: In this period, the business activities grew due
to rapid industrialization. Coming up of railways in 1853 and development of roads
increased business. Business during this period can be studied under the following
heads:
• Entrepreneurship in the eastern part of the country
• Entrepreneurship in the western part of the country Entrepreneurship: The
process through which
In the eastern part of India, the main entrepreneurs were Europeans who were individuals identify
engaged in export-oriented industries like jute, tea and coal, while in the western part, opportunities, allocate
it was the Indians who flourished. resources, and create value

Entrepreneurship in 1947 and onwards, the post-independence period:

In free India, a mixed economy, which is a rule of the private and public sector, was
adopted. The government was forced to acquire entrepreneurial ventures by starting
new industries and occupations. The Marwaris emerged as big investors and
industrialists.
In 1947, the first industrial policy was announced in which definite rules for the
development of industries and entrepreneurs were outlined.
Emergence of Parsis as entrepreneurs
The East India Company greatly influenced the Parsi community, where they worked
as brokers, suppliers and craftsmen in the ship-building industry. They prospered in a
short time and established the steel industry in Tatanagar (now Mumbai) in 1852. Both
the British and Parsis started exploiting Indian natural resources and encouraged leather
and steel businesses.
Swadeshi movement and the birth of indigenous entrepreneurship
Indian leaders launched the Swadeshi and Boycott movement in 1905. ‘Swadeshi’
means manufacturing and consuming goods manufactured within the country. The
objectives of this movement were as follows:
• Promoting of indigenous goods
• Providing employment opportunities to Indian craftsmen
• Opening a separate and wider market for selling only Indian goods
Swadeshi contribution inspired Jamshedji Tata to set up his first iron and steel
industry, while P.C. Roy founded the Bengal Chemical Works. There was growth in
Self-Instructional Material 55
Political Environment the banking and insurance sectors under the influence of the Swadeshi movement with
indigenous entrepreneurship getting established in various sectors such as pottery and
textiles.

NOTES The managing agency system

During the post-War period, a system was started by Sri Dwarkanath Tagore called
the Managing Agency System. He created joint stock companies, and laid stress on
management of an enterprise to be in the hands of the firm instead of an individual.
During this period, the number of Indian entrepreneurs went up and they also faced a
number of problems like:
• Shortage of technical manpower due to lack of technical education
• Scarce managerial skills
• Lack of technical knowledge
• Lack of confidence in the staff for carrying out jobs
Because of such problems, the Tatas had to employ foreign technicians and
managers for their industries.
Emergence of the Marwaris as a business class
In the beginning of the post-Independence era, the Marwaris played an important role
in the creation of new and small enterprises and acquired 60 per cent assets of Indian
industries. Before Independence, the Marwaris managed six companies; but after
Independence, they had 618 directorships, which was one-fourth of the total in 1951.
The report of the Monopolies Inquiry Commission in 1964 mentioned 37 large industrial
houses, from which the traditional strength of various companies can be gauged.
Table 2.5 shows the community of leading industrialists.
Table 2.5 Leading Industrialist Communities

Community No. of Assets in Billion

Firms (`)
Marwari 10 7.5
Gujarati (Hindu) 13 3.8
Bengali 2 1.5
Parsi 2 4.7
Others 10 2.1
Total 37 19.6

In the post-Independence period, the Marwaris appeared as a prominent

entrepreneurial class. During this period, entrepreneurship got scattered socially as
well as geographically due to foreign collaboration, growth of infrastructure and
introduction of technical education. Hence, the entrepreneurial class was completely
modified and reached a new level. The growth of entrepreneurs can be recognized
from the following parameters:
• Panchayati Raj institutions for village expansion
• Growth of money and capital market
Establishment of entrepreneur development institutions like the National Small
56 Self-Instructional Material Industries Corporation (NSIC), Small Industries Service Institute (SISI), Technical
Consultancy Organizations (TCOs) and State Financial Corporations (SFCs). People Political Environment
belonging to the middle and lower classes were encouraged by the government to
start their own industrial ventures for the promotion of enterprise. Business groups like
the Tatas, Birlas, Mafatlals, Dalmias, Ambanis and Kotharis established new ventures
and extended the existing ones. NOTES

2.5 GOVERNMENT POLICY AND SSI

A major thrust of the industrial policy pursued in India during the last four decades has
been the development and promotion of small and cottage industries along with large
industries. The differences between the small-scale and cottage industries are basically
two: (a) while small-scale industries are mainly located in urban centres as separate
establishments, the cottage industries are generally associated with agriculture and
provide subsidiary employment in rural areas and (b) while small-scale industries
produce goods with mechanized equipment employing outside labour, the cottage
industries involve operations mostly by hand, which are carried on primarily with the
help of the members of the family. The Fiscal Commission of 1949 also made a
distinction between small-scale and cottage industries in this manner: A cottage industry
is one which is run wholly or primarily by members of the family either, as a whole or
part-time occupation. A small-scale industry, on the other hand, is one which is operated
mainly with hired labour, usually employing 10 to 50 persons. Perhaps, this definition
has prompted the Industries (Development and Regulations) Act, 1951, to exempt
units employing less than 50 workers with power, and less than 100 workers without
power, from registration. This exempted sector came to be known as the small-scale
sector.
Another criterion for differentiating small-scale and village industries from the
large-scale industries has also been adopted. This relates to the fixed capital investment
in a unit. This limit has continuously been raised upwards. In 1991, the government
raised the investment limit for small-scale industry to ` 60 lakh and for ancillary units to
` 75 lakh. An extra incentive was given to small business engaged in export of their
products. Their investment limit was further raised to ` 75 lakh on condition that they
export at least 30 per cent of their output by the third year of their starting production.
A policy announced on 6 August 1991 raised the investment limit for the tiny units to
` 5 lakh from the earlier limit of ` 2 lakh.
Economists advocate that a labour surplus under developed economy is based
on a network of dispersed, labour-intensive and small-sized industries. These industries
are capital light, skill light, labour intensive and dispersed. They are cheracterized by
‘quick’ investment and by carrying the job to the worker they can overcome the
difficulties of geographical immobility. In the conditions prevailing in many
under-developed countries, the development of small industries may be the most
economical way to form of industrialization; it may be more than either large-scale
organized industry or cottage industry. It avoids the heavy costs, which are often the
result of agglomeration of large labour forces; the overhead capital costs stemming
from such agglomerations are often high and do not directly increase productivity.
Moreover, small industry represents much less of a break from previously established
modes of living and, therefore, is less of a strain than industrialization in the form of
large units. Self-Instructional Material 57
Political Environment Case for small industries
The case for supporting small-scale industries during the plan period is based partly on
ideological and partly on economic grounds. The ideological strand of thought linking
NOTES small-scale industry to cottage and village industries is derived from Gandhian faith in
the role of village crafts for the promotion of rural uplift and employment. Gandhian
economics is the economics of the ‘whole man’ as against the economics of ‘the
economic man’. His economics is based on the revival of village crafts because he
preferred ‘bread for all before cakes for some’. Gandhiji’s hostility to urbanization
and modern mechanized industry is well known, so is his glorification of self-employment.
He firmly believed that the economic conditions of all village folk would be improved
if village crafts were revitalized. Prof G.D.H. Cole remarks that Gandhiji’s compaign
for the development of the homemade cloth industry—Khaddar—is no more a fad of
a romantic eager to revive the past but a practical attempt to relieve the poverty and
uplift the standard of the Indian villagers.
The architects of modern planning in India have moved far away from the tenets
of Gandhian philosophy when they laid down an industrial base for the economic
development of the country. But it would be wrong to suggest that their thinking was
entirely immune from the emotional flavour of Gandhian ideology. In their anxiety to
revitalize cottage industries and extend the market for their products, they were in
favour of not only granting them subsidies but also of sheltering them from the
encroachment of large-scale industry by checking the expansion of output of the latter
through taxes and cesses. The authors of the first plan had envisaged the development
of substantial export market in the artistic products of Indian handicrafts.
The ideological fascination for the village crafts was sought to be buttressed by
putting forward an economic basis for their support and expansion when the second
Five-Year Plan was formulated with its emphasis on heavy industry and production of
capital goods. Prof P.C. Mahalanobis, who is credited with the main responsibility for
the formulation of the second plan, propounded his doctrine of dual strategy under
which there would be simultaneous building up of heavy industries as the basis of rapid
industrial progress and expansion of traditional village industries and small industries
for increased production of consumer goods and for provision of more employment.
Apart from ideological grounds, there is economic justification for the
support and expansion of cottage and small industries in a labour surplus developing
economy like India. All the usual arguments favouring the growth of small-scale industries
have been noted in the Industrial Policy Resolution of 1956. In relation to cottage and
small-scale industries, it states: they provide immediate large-scale employment; they
offer a method of ensuring a more equitable distribution of the national income and
they facilitate an effective mobilization of resources, capital and skill, which might
otherwise remain unutilized. Some of the problems that unplanned urbanization tends
to create will be avoided by the establishment of small centres of industrial production
all over the country. The Industrial Policy Resolution puts forth following four main
arguments in favour of small enterprises:
1. Employment argument: The most important economic task before the
country is the solution of unemployment problem. The scope for creation of
‘wage-employment’ is limited as it depends on industrial growth. But there
is a large scope for the creation of ‘self-employment’ and here the small-
58 Self-Instructional Material
 scale industries can play a significant role. Karve Committee has rightly Political Environment
observed that the principle of self-employment is at least as important to a
successful democracy as that of self-government. The argument is based on
the presumption that small enterprises are labour intensive and, thus, create
more employment per unit of capital employed. Thus, let alone capital goods NOTES
industries where capital-intensive projects are a necessity, in other spheres
of production, small enterprises, which help to enlarge the volume of
employment with scarce capital, should be encouraged. A more sophisticated
form of this argument is that small industries should be developed because
the capital output ratio for such enterprises is lower vis-a-vis large-scale
enterprises.
2. Equality argument: The equality argument suggests that the income
generated in a large number of small enterprises is dispersed more widely in
the community than income generated in a few large enterprises. In other
words, the income benefit of small enterprises is derived by a large population
while large enterprises encourage more concentration of economic power.
In this way, small enterprises bring about greater equality of income
distribution. However, it is a fact that there is a common tendency for the
average wage to be lower in small factories than in large factories. Moreover,
the virtual non-existence of trade unions in small factories enable employers
to exploit the workers to the maximum.
3. Latent resources argument: Small-scale industries are widely dispersed
all-round the country and have provided opportunities for young entrepreneurs
to venture into a number of new fields.
It is suggested that small industries, by tapping latent resources, encourage
the habits of investment in rural areas. This argument is woven out of several
strands of thought. One such strand related to the existence of a large number
of potential entrepreneurs who have no capacity for promoting or managing
large concerns but have the necessary talents for the promotion and
management of smaller units. Another strand relates to the existence of large
reserves of idle savings which could be channelized into productive uses if
the hoarders had the opportunity of establishing business of their own. In a
developing economy, rapid economic growth is hardly possible unless
methods can be found to mobilize rural savings. This can be done in several
ways. The democratic way of mobilizing rural savings, will be to spread
investment opportunities all over the country in such a manner that reliance
on the forced mobilization of rural savings is minimized and an environment
is created in which peasants develop spontaneous habits of thrift and
investment.
4. Decentralization argument: The primary objective of developing small
industries in rural areas is to extend work opportunities, raise incomes and
standard of living and to bring about a more balanced and integrated rural
economy.
In India, the method adopted for developing cottage and small-scale industry is
the construction of industrial estates, usually in small towns. These estates provide
factory space and common facilities. At present, there are 346 such industrial estates
in India.
Self-Instructional Material 59
Political Environment Large industries are mostly concentrated in metropolitan cities. The smaller towns
and the countryside, in order to benefit from modern industrialization, must encourage
small enterprises. Industrialization of the country is complete only if it penetrates into
the remote corners of the country. Small industries, by carrying the job to the worker,
NOTES overcome the difficulties of territorial immobility.
The weak ‘spread effects’ radiating from the establishment of large scale industries
in a country like India has been stressed. It is somewhat reasonable to assume that the
‘spread effects’ of small industries would be relatively more important. Once a number
of small industrial enterprises has sprung up in a locality, it is very likely that there will
be a tendency to multiply. Workers’ skills and aptitudes would be more developed
when they work with machines, which have to be attended to in typical small
establishments than with automatic machinery operating in big industrial units. They
will thus enlarge and improve the skill base of the economy. Smaller establishments
may also grow into larger units. The development of large-scale enterprises as a result
of the growth processes should be more welcome than that fostered by State direction.
Problems of small-scale industries
The small-scale and cottage industries face a number of problems, which are as follows:
1. Problem of finance: Lack of finance is the main obstacle for the development
of small-scale industries. The financial problem of small industries is a part of
the wider problem of capital scarcity in the economy as a whole and it is partly
due to the peculiarity of small industry organization. The creditworthiness of
small borrowers is generally weak and, therefore, they face reluctant creditors
who may be induced to lend only at a very high rate of interest. In the rural
areas, no serious attempt has been made to set up any financial agencies to
meet the genuine industrial needs. The rural artisans running cottage industries
either run their business with whatever little capital they possess or take credit
from Mahajans at a very high rate of interest. The small-scale industries are
somewhat better placed. The main institutional sources for small industries are
the State financial corporations and commercial banks.
Credit provided by banks to small-scale industries is treated as credit to priority
sector. Commercial banks are required to lend 40 per cent of their total loans to
priority sector of which 18 per cent is in the form of direct agricultural advances
and the rest to small-scale industry, small business, small transport operators,
indirect agricultural loans, etc.
2. Problem of raw materials: Another major problem of small-scale industry is
the procurement of raw materials. Scarcity of raw materials means a waste of
productive capacity of the economy and a loss for the unit. Due to scarcity of
resources, competition has increased and those small units which compete with
the large-scale industries have suffered severely. Owing to scarcity of resources,
small industries cannot utilize their capacity fully. For instance, the percentage
utilization of capacity was only 47 in mechanical engineering industries, 50 in
electrical equipment, 58 in automobile ancillary industries, 55 in leather products
and only 29 in plastic products. If on an- average, we assume 50 to 60 per cent
capacity utilization we can perhaps say that 50 to 40 per cent of capacity was
not utilized.
60 Self-Instructional Material
 3. Problem of marketing: One major problem of small-scale industries is Political Environment
marketing. These units often do not possess any marketing organization and
consequently their products compare unfavourably with the quality of the
products of large-scale industries. Therefore, they suffer from a competitive
disadvantage vis.a-vis large-scale units. The inability to procure customers from NOTES
distant markets compels them to restrict their scale of operation and forgo
economies of scale. The National Small Industries Corporation helps the
small-scale units to secure government orders and developing export markets.
4. Problem of high rate of mortality: One major problem is the high rate of
mortality among small industries. Most of the small units are marginal buyers of
inputs and marginal sellers of output. Any unfavourable change in the input or
output situation tends to throw a number of existing units out of existence.
Sickness among small units is a very serious problem. In addition to these
problems, the small-scale industries face a few other problems such as shortage
of power, inefficient management, technological obsolescence, inability to
respond to changes in tastes and fashions of the people.
2.5.1 Latest Developments in Micro, Small and Medium
Enterprises (MSME) Sector
The MSME is a dynamic and vibrant sector that nurtures entrepreneurial talent besides
meeting social objectives including that of providing employment to millions of people
across the country.
According to the Economic Survey 2011-12, some major initiatives that have
been taken by the government in 2011-12 to revitalize the MSME sector are as follows:
(i) The government has recently approved the public procurement policy for
goods produced and services rendered by MSEs by the central ministries/
departments/public-sector undertakings (PSUs). The policy envisages that
every central ministry/PSU shall set an annual goal for procurement from
the MSE sector at the beginning of the year, with the objective of achieving
an overall procurement goal of minimum 20 per cent of total annual
purchases of products or services from MSEs in a period of three years.
A sub-target of 4 per cent is also to be earmarked for procurement from
MSEs owned by scheduled caste/scheduled tribe (SC/ST) entrepreneurs.
(ii) The Securities and Exchange Board of India (SEBI) has permitted setting
up of a stock exchange / trading platform for SMEs by a recognized stock
exchange having nationwide trading terminals and also issued guidelines
and necessary amendments to the SEBI Regulations. The Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE) have been given
final approval for launching SME platforms on 27 September 2011 and
14 October 2011 respectively. With the operationalization of SME
exchanges/platforms, Indian SMEs would find an opportunity to raise funds
from capital markets.
(iii) In line with the overall target set by the Prime Minister’s National Council
on Skill Development, the Ministry of MSME and the agencies under it
will conduct skill development programmes for 4.78 lakh persons during
2011-12. Further, the Ministry aims to train 5.72 lakh persons in the year
Self-Instructional Material 61
Political Environment 2012-13 through its various programmes for development of self-
employment opportunities as well as wage employment opportunities in
the country.
(iv) The government has adopted the cluster approach as a key strategy for
NOTES
enhancing the productivity and competitiveness as well as capacity building
of MSEs and their collectives in the country. During the year 2011-12 (up
to 31 January 2012), 8 new clusters were taken up for diagnostic study, 5
for soft interventions, and 4 for setting up of common facility centres (CFCs).
With this, a total of 477 clusters have so far been taken up for diagnostic
study, soft interventions, and hard interventions. Apart from these clusters,
134 infrastructure development projects have also been undertaken.
2.5.2 The MSME Act
The Government of India has enacted the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006. The main objective of this Act is to facilitate the
promotion and development of and enhancing the competitiveness of micro, small and
medium, enterprises and for matters connected therewith or incidental thereto.
Main features of the Act
• Examining the factors affecting the promotion and development of micro, small
and medium enterprises and review of the policies and programmes of the Central
Government in this direction
• Making recommendations for facilitating promotion and development of and
enhancing the competitiveness of the micro, small and medium enterprises.
• Advising the Central Government on use of the Fund or Funds constituted
under Section 12 of the Act.
The Act provides for the constitution of Advisory Committee at national level to make
recommendations with regard to:
• The level of employment in a class or classes of enterprises
• The level of investment in plant and machinery or equipments
Check Your Progress • The need of higher investment in plant and machinery or equipment’s for
8. Lack of ________ is the technological upgradation, employment generation and enhanced competitiveness
main obstacle for the
development of small-scale • The possibility of promoting and diffusing entrepreneurships
industries.
• The international standards for classification of small and medium enterprises
9. In the ________ Five-Year
Plan, attention was given to Classification of industries into micro, small and medium enterprises
the problem of regional
disparity.
In terms of the MSMED Act, the definition of micro, small and medium enterprises is
10. In India, the industrial
development of backward
as under:
areas has always been (a) Enterprises engaged in the manufacture or production, processing or preservation
stressed upon, for balanced
regional development. of goods as specified below:
(True/False) • A micro enterprise is an enterprise where investment in plant and machinery
11. The full form of the IDBI
does not exceed ` 25 lakh.
Bank is.
• A small enterprise is an enterprise where the investment in plant and
machinery is more than ` 25 lakh but does not exceed ` 5 crore.
62 Self-Instructional Material
 • A medium enterprise is an enterprise where the investment in plant and Political Environment
machinery is more than ` 5 crore but does not exceed ` 10 crore.
In case of the above enterprises, investment in plant and machinery is the original
cost excluding land and building and the items specified by the Ministry of Small
NOTES
Scale Industries vide its notification in 2006.
(b) Enterprises engaged in providing or rendering of services and whose investment
in equipment (original cost excluding land and building and furniture, fittings and
other items not directly related to the service rendered or as may be notified
under the MSMED Act, 2006 are specified below.
• A micro enterprise is an enterprise where the investment in equipment
does not exceed ` 10 lakh.
• A small enterprise is an enterprise where the investment in equipment is
more than ` 10 lakh but does not exceed ` 2 crore.
• A medium enterprise is an enterprise where the investment in equipment is
more than ` 2 crore but does not exceed ` 5 crore.

2.6 SUMMARY

Some of the important concepts discussed in this unit are:

• Political environment has a huge influence on the growth of business of a country
• Industrial development is an outcome of the economic activities undertaken by
the public, private and joint sector enterprises.
• The public sector includes all governmental activities including public, industrial
or commercial enterprises.
• In developing economies like India, public sectors are a necessity rather than
choice. Post-independence, the public sector made a huge entry in the Indian
economic sphere.
• Public sector was initialized in order to socialize the mass means of production
and benefit of the masses. However, with the passage of time these monolithic
establishments were exhausted after incurring huge losses.
• The performance of public sector can be assessed by the share of the same in
the net domestic product; the relative efficiency of investment, employment and
others.
• The private sector plays an important role in supporting India’s mixed economy.
Entrepreneurial talents clubbed with profit-making motive are the biggest asset
of the private sector. It employs more than 50 per cent of the populace and
contributes around 30 per cent of the net domestic product.
• The cooperative sector emerged as an important sector in India’s economic
environment. Cooperatives were inspired by the principle of self-help, which
were of great help to the Indians.
• Disparities in economic and social development across the regions and intra-
regional disparities among different segments of the society have been the major
planks for adopting planning process in India since independence. It was in the
Self-Instructional Material 63
Political Environment Third Five-Year plan that some attention was given to the problem of regional
disparities.
• A major thrust of the industrial policy pursued in India during the last four decades
has been the development and promotion of small scale and cottage industries.
NOTES

2.7 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. Economic liberalization of India took place in 1991.

2. Sovereign risk in India is virtually zero because, there is no serious revolutionary
movement threatening India. Since, the possibility of the state collapsing is virtually
zero, foreign direct investment is easier.
3. India is highly self-sufficient in terms of basic technology and requirements.
Moreover, India’s successful nuclear tests gradually forced the United States to
put a control over its sanctions against India.
4. The public sector undertakings comprise governmental activities including public,
commercial or industrial enterprises. For example, the Indian Railways is an
undertaking of the government of India.
5. The four kinds of public sectors are national monopolies like the railways,
entrepreneurial ventures, sick units in the private sector and units taken over to
form the commanding heights.
6. The private sector can be divided into two parts, the organized sector and the
unorganized sector.
7. Partnership between the public sector and the private sector is referred to as
the joint sector undertakings.
8. Finance
9. Third
10. True
11. Industrial Development Bank of India.

2.8 QUESTIONS AND EXERCISES

Short-Answer Questions
1. Write a short note on the risk of foreign sanctions in India.
2. Explain the concept of public sector undertaking.
3. State one shortcoming of the public sector undertaking.
4. Write two favourable factors influencing the private sector.
Long-Answer Questions
1. Explain at least four grounds based on which the performance of public sector
can be judged.
2. What are the features of the joint sector undertaking?
64 Self-Instructional Material
3. What do you mean by the Cooperative Sector? Discuss in detail. Political Environment

4. Write a note privatization with special reference to Indian economy.

5. What do you mean by regional imbalances? Discuss regional policies adopted
in independent India. NOTES
6. What are the problems faced by small-scale industries in India?

Self-Instructional Material 65
 Economic Environment
UNIT 3 ECONOMIC ENVIRONMENT
Structure
NOTES
3.0 Introduction
3.1 Unit Objectives
3.2 Economic Development and its Impact
3.2.1 Relationship between Growth and Development
3.2.2 Phases of Economic Development of India
3.2.3 Strategies of Development in Different Five-Year Plans
3.2.4 GDP Trend and Distribution
3.2.5 Economic Growth and Business Opportunities
3.3 Monetary System and Business Capital
3.3.1 Issue of Currency; 3.3.2 Quantum of Money (Money Supply)
3.3.3 Monetary Policy; 3.3.4 Types of Business Capital in India
3.3.5 Cost of Business Capital and Risks Associated with It
3.4 Banks and Financial Institutions
3.4.1 Central Banking in India (Reserve Bank of India)
3.4.2 Commercial Banks; 3.4.3 National Level Financial Institutions
3.5 Fiscal System: Government Budget and Taxation Measures
3.5.1 Fiscal Policy
3.5.2 Fiscal Policy in India
3.5.3 Government Budget
3.5.4 Fiscal Deficit and Inflation
3.5.5 Taxation Measures
3.6 Foreign Capital and Multinational Corporations
3.6.1 Different Forms of Foreign Investment
3.6.2 Government Policy towards Foreign Capital
3.6.3 Foreign Direct Investment (FDI) and Collaboration
3.6.4 Multinational Corporations
3.6.5 Foreign Capital Tapping by Businesses
3.6.6 Foreign Exchange and Business Development
3.7 Export–Import Policy
3.7.1 Highlights of Foreign Trade Policy (EXIM Policy) 2009–14
3.8 Foreign Exchange and Business Development
3.9 Summary
3.10 Answers to ‘Check Your Progress’
3.11 Questions and Exercises

3.0 INTRODUCTION

The totality of economic factors, such as income, inflation, production, and wealth that
influence the buying behaviour of consumers is known as economic environment. The
economic environment is affected by the system of economy that a country follows,
whether socialist or capitalist. This unit focuses on the importance of economic
environment in the development of a country. It discusses phases of economic
development and its impact. Economic development generally refers to the sustained,
concerted actions of policymakers that promote the standard of living and economic
health. Monetary system, business capital, risks and costs are elaborated. Role of
banks and financial institutions in the development of economy, fiscal policies, deficits
and inflation, tapping of foreign capitals by businesses, budget, taxation and import–
export policies are explained in detail.
Self-Instructional Material 67
Economic Environment
3.1 UNIT OBJECTIVES

After going through this unit, you should be able to:

NOTES • Discuss economic development, its impact on distribution and business
opportunities
• Describe the functioning of monetary system, business capital, risks and costs
• Discuss the role of banks and financial institutions in the functioning of an economy
• Explain fiscal policy, deficits and inflation and foreign direct investment
• State export–import policy and its importance in an economy
• Identify the importance of foreign exchange

3.2 ECONOMIC DEVELOPMENT AND ITS IMPACT

Economic development: Economic development generally refers to the sustained, concerted actions of
Sustained, concerted policymakers and communities that promote the standard of living and economic health
actions of policymakers and of a specific area. Such actions can involve multiple areas including development of
communities that promote
the standard of living and human capital, critical infrastructure, regional competitiveness, environmental
economic health of a sustainability, social inclusion, health, safety, literacy, and other initiatives. Economic
specific area development differs from economic growth. Whereas economic development is a
policy intervention endeavor with aims of economic and social well–being of people,
economic growth is a phenomenon of market productivity and rise in Gross Domestic
Product (GDP). Consequently, as economist Amartya Sen points out: ‘economic
growth is one aspect of the process of economic development.’
The study of economic development by social scientists encompasses theories
of industrial/economic modernization causes, the historical phases or waves of economic
development, and the organizational aspects of enterprise development in modern
societies. Economic development embraces sociological research on a variety of topics
including business organizations, enterprise development, evolution of markets and
management, and cross–national comparisons of industrial organization patterns. One
example inquiry would be: “Why are levels of direct foreign investment and labour
productivity significantly higher in some countries than in others?” In economics, the
study of economic development was borne out of an extension to traditional economics
that focused entirely on national product, or the aggregate output of goods and services.
Economic development was concerned with the expansion of people’s entitlements
and their corresponding capabilities, morbidity, nourishment, literacy, education, and
other socio–economic indicators. Borne out of the backdrop of Keynesian, advocating
government intervention, and neoclassical economics, stressing reduced intervention,
with rise of high–growth countries (Singapore, South Korea, Hong Kong) and planned
governments (Argentina, Chile, Sudan, Uganda), economic development, more
specitically development economics, emerged amidst these mid-20th century theoretical
interpretations of how economies prosper. Also, economist Albert O. Hirschman, a
major contributor to development economics, asserted that economic development
grew to concentrate on the poor regions of the world, primarily in Africa, Asia and
Latin America, yet on the outpouring of fundamental ideas and models.
68 Self-Instructional Material
3.2.1 Relationship between Growth and Development Economic Environment

Dependency theorists argue that poor countries have sometimes experienced economic
growth with few or no economic development initiatives; for instance, in cases where
they have functioned mainly as resource providers to wealthy industrialized countries. NOTES
There is an opposing argument, however, that growth causes development because
some of the increase in it gets spent on human development such as education and
health.
According to Ranis et al. (2000), economic growth and human development is
a two-way relationship. Moreover, the first chain consists of economic growth benefiting
human development with Gross National Product (GNP). Specifically, GNP increases
human development by expenditure from families, government and organizations such
as non–government organisations (NGOs). With the rise in economic growth, families
and individuals will likely increase expenditures with heightened incomes, which in turn
leads to growth in human development. Further, with the increased consumption, health
and education growth, also contributing to economic growth. In addition to increasing
private incomes, economic growth also generates additional resources that can be
used to improve social services (such as healthcare, safe drinking water, etc.). By
generating additional resources for social services, unequal income distribution will be
mitigated as such social services are distributed equally across each community, thereby
benefiting each individual. Thus, increasing living standards for the public. Concisely,
the relationship between human development and economic development can be
explained in three ways. First, increase in average income leads to improvement in
health and nutrition (known as Capability Expansion through Economic Growth).
Second, it is believed that social outcomes can only be improved by reducing income
poverty (known as Capability Expansion through Poverty Reduction). Lastly, social
outcomes can also be improved with essential services such as education, healthcare,
and clean drinking water (known as Capability Expansion through Social Services).
John Joseph Puthenkalam’s research aims at the process of economic growth theories
that lead to economic development. After analyzing the existing capitalistic growth
apparatus, he introduces the new model which integrates the variables of freedom,
democracy and human rights into the existing models and argue that any future economic
growth–development of any nation depends on this emerging model as we witness the
third wave of unfolding demand for democracy in the Middle East. He develops the
knowledge sector in growth theories with two new concepts of ‘mirco knowledge’
and ‘macro knowledge’.
3.2.2 Phases of Economic Development of India
There have primarily been two phases in India’s economic development history since
independence. These phases were characterized by two different policy regimes.
The period of thirty years from 1950–51 to 1979–80 was the phase of socialist
experimentation, in which the ‘Indian version of socialism’ was developed and instituted.
The second phase of economic development started at the beginning of the 1980s and
continues till today. This is the phase of ‘market experimentation,’ in which the
oppressive control regime set up during the first phase has been modified and physical
controls have gradually been removed.

Self-Instructional Material 69
Economic Environment 1. Phase of Indian version of socialism
The defining policy characteristics of this phase of Indian development were the
introduction and enhancement of the import substituting Industrialization strategy (ISI),
NOTES the restriction and elimination of the freedom of economic agents to compete in many
industries and sectors and the extension of government into more and wider areas of
economic and social activity with a corresponding and progressive neglect of the
fundamental job of government.
The phase of Indian Socialism can be further sub-divided into two sub-phases:
Phase IA (1951–2 to 1964–65) and Phase IB (1965–66 to 1979–80). Though these
sub-phases differ in their rate of growth, the difference in growth is not statistically
significant, once the break in growth between phases IA and IB is accounted for. The
sub-phases are, however, significant from the policy perspective, as the difference in
policy between these two sub-phases helps in refining the policy lessons.
Phase IA: Quest for commanding heights
During this sub-phase, the policy of the Public (government) sector occupying the so-
called ‘Commanding heights’ of the economy was devised and implemented. This had
the effect of (artificially) creating public monopolies and progressively eliminating
competition from many sectors of the economy. This approach was part of the
Mahalanobis model of development, whose second pillar was import substituting
industrialization.
The policy approach was first outlined in the Industrial policy resolution of 1948
and given legal backing through the Industries Development and Regulation Act of
1952. The span of control of ID&RA was ambitious, with every industry required to
obtain a license (from 1953) for any investment above ` 1 lakh. Licensing of all
industries was, however, soon found to be administratively infeasible and licensing
restricted to those industries employing 50 (100) or more people with (without) power.
The exemption limit was also raised to ` 10 lakh in 1960 and further to ` 25 lakh in
1963.
The definition of commanding heights was expanded via the Industrial policy
Resolution of 1956. Besides the State monopolies in Defence (arms, ammunition
etc), atomic energy, railway and air telecommunication, aircraft and ship building, heavy
machinery and electrical equipment transport, public monopolies were created over
time in power, metals (iron and steel and non–ferrous) and minerals (petroleum oil,
coal and all major minerals). Government companies were created in 12 other industries.
These competed with the private sector on a non–level playing field tilted heavily
towards the public sector. Special advantages included government guarantees for
debt, priority in allocation of (domestic and import) controlled goods, services,
technology and finance, purchase preferences and other direct and indirect benefits.
Given the focus of the Mahalanobis strategy on capital-intensive industry and
mining, it was clear that such a policy would not be conducive to employment
generation. This was sought to be counter balanced by a policy of employment
generation through traditional small and cottage industries. The SSI policy reserved
these industries for the sector; medium-large industry was banned from investing in
such industries if the investment needed was above a defined threshold. Thus a dualistic
industrial structure was (deliberately) fostered.
70 Self-Instructional Material
 Some of the most advanced labour legislation was put in place at or soon after Economic Environment
independence, perhaps more advanced than ever seen in a country at India’s level of
per capita income/development. This included the Industrial Disputes Act 1947
(covering all ‘workers’ with salary up to ` 500 per month and dealing with disputes,
strikes and lock outs and retrenchment), The Minimum Wages Act, 1948 (govt NOTES
prescription of minimum wages), the Employee state Insurance Act, 1948 (injuries,
medical requirements) and the Employees Provident Fund Act, 1952 (retirement
benefits).
Phase IB: Legislative–bureaucratic socialism
This phase was characterized by (a) the move from import substituting industrialization
to export promotion and from thence to broader import liberalization and (b) the
restoration of the freedom to compete followed by a move to restore competition in
different sectors and markets.
Having captured the ‘commanding heights’ in sub-phase IA from 1950–51 to
1964–65, the State/ruling establishment turned its attention to controlling the organized/
modern private sector even in areas which it had been allowed to operate, areas not
earlier considered to lie on the peaks. The nature, width and depth of the control and
interference in the private sector and entrepreneurship, was unprecedented for a market
economy (i.e. one in which private agents owned a large proportion of total assets).
Many fast growing East and South East Asian economies, such as S. Korea, Singapore
and Taiwan had a fairly large public sector, including government owned banks, but
none stifled private initiative and competition in the way that India did during this sub–
period. Despite twenty five years of reform, the legacy of this supremely misguided
interference is still with us.
The second major failure of intellectual leadership during this sub-phase was
to ignore the lessons that the NICs (S Korea; Taiwan, China; Singapore) had
learned, that it was time to move on from ISI to export promotion (EP). Indian
policy, in contrast moved after a short reversal following the crises of the mid–sixties
in the other direction. A widening of Import controls into a virtual principle that the
import of anything that was produced in India would automatically be restricted or
banned.
A spate of restrictive laws and rules were introduced during the Legislative–
bureaucratic sub-phase from 1965–66 to 1979–80. The Monopolies and Restrictive
Practices Act 1969 (MRTP) was introduced to control the family owned ‘large industrial
houses.’ The nationalization of the 14 largest banks in 1971 was followed by the
nationalization of general insurance in 1972 so as to control the major sources of
investment funds for the private sector. The notorious ‘convertibility clause’ was
introduced (1978) into loans provided by the Public Financial institutions to private
industry allowing the former to convert loans into equity. The copper industry, coking
and non-coking coal mines, refractory and the Indian Iron and Steel Company were
nationalized during 1971 to 1973. The Foreign Exchange Regulation Act 1973 was
introduced to control the equity holding of foreign investors in Indian industry. Labour
laws and procedures were tightened. For instance, for the first time prior permission
of the state government was required for retrenchment of workers in firms with 300 or
more employees (1978–99). SSI reservation was extended to modern small-scale
Self-Instructional Material 71
Economic Environment industry for the first time in 1967–68 (with the threshold limit for reservation being
` 7.5 lakh).
A spate of restrictive laws and rules were introduced during the Legislative–
bureaucratic sub-phase from 1965–66 to 1979–80. The Monopolies and Restrictive
NOTES
Practices Act 1969 (MRTP) was introduced to control the family owned ‘large industrial
houses.’ The Nationalization of the 14 largest banks in 1971 was followed by the
nationalization of general insurance in 1972 so as to control the major sources of
investment funds for the private sector. The notorious ‘convertibility clause’ was
introduced (1978) into loans provided by the Public Financial institutions to private
industry allowing the former to convert loans into equity. The copper industry, coking
& non–coking coal mines, refractory and the Indian Iron & Steel Company were
nationalized during 1971 to 1973. The Foreign Exchange Regulation Act 1973 was
introduced to control the equity holding of foreign investors in Indian industry. Labour
laws and procedures were tightened. For instance, for the first time prior permission
of the state government was required for retrenchment of workers in firms with 300 or
more employees (1978–79). SSI reservation was extended to modern small-scale
industry for the first time in 1967–68 (with the threshold limit for reservation being
` 7.5 lakh). The list of SSI reserved industries was progressively expanded during
this sub-phase, thus reducing the scope for medium-large industry further. The maximum
marginal rate of income tax was 78 per cent in 1975–76, with the effective marginal
tax on the return to capital around 97 per cent because of the simultaneous application
of wealth tax on capital assets. The climate for private investment thus continued to
deteriorate during this sub-phase (1965–66 to 1979–80).
During this sub-phase, there were also a few modest steps towards liberalization
of licensing. These included, (i) de-licensing of 42 agro-industries. (ii) A progressive
rise in the investment/asset limit for compulsory licensing, from ` 25 lakh at the start of
the sub-phase to ` 3 crore at the end. (iii) Permission for automatic expansion of
licensed capacity (5 per cent per year) for 25 engineering industries included in the set
of 40 core industries. There was also some relaxation in the severity of the Import
control regime, though it occurred in fits and starts and with periodic reversals.
The weather was, however, significantly unfavourable during this sub-phase,
with average rainfall about 2.7 per cent below the long run average. This resulted in
the loss of an estimated 0.48 per cent per annum of growth during this sub-phase. If
we adjust for this poor rainfall, the underlying (adjusted) growth rate was about 3.4
per cent per annum, marginally lower than the rainfall adjusted growth rate in sub-
phase IA. Nevertheless it can be said that the interventionist government policy was
not able to provide any corrective to this rainfall–induced reduction in the growth rate.
Ironically therefore our analysis confirms that there was an underlying rate of growth
of around 3.4 per cent to 3.6 per cent for the Indian economy during 1950–51 to
1979–80 that is better described as the ‘Indian Socialist Rate of growth’ than a ‘Hindu
rate of Growth.’
Looking back, it is clear that there was an inherent assumption that market
failure was a serious underlying problem, that the private sector could not be trusted
and that the public sector would produce economic and socially superior outcomes.
Though the mix of measures used varied over the phase, the vital role of competition
as a disciplining force on producers and the concept of modern regulation as against
72 Self-Instructional Material
bureaucratic control was sorely missing through out the first phase of economic Economic Environment
development.
2. Phase of market reforms
The basic philosophy of economic development that had prevailed since independence NOTES
began to be questioned in the late seventies. The first harbinger of change was perhaps
the braking of the railway strike in 1976 by the avowedly pro–poor Prime Minister
Mrs. Indira Gandhi. The change continued with the coming to power in 1977 of the
so called ‘right–wing’ political parties such as the Congress (O) and the Jan Sangh/
BJP (though some of the coalition partners were Indian socialists the PM was a pro–
capitalist opponent of Mrs Indira Gandhi). A questioning of the traditional development
approach was implicit in the reports of the P. C. Alexander Committee on Export–
Import Policy and the Dagli Committee on Controls and Subsidies. These reports
were submitted in 1978, but with the fall of the Janata Dal government in 1979 few
reforms materialised. One of the few noteworthy liberalization measures during the
Janata regime was the raising of the investment licensing limit under IDR&A to ` 3
crore. These committees however crystallised the doubts that many people had begun
to have about the previous approach.
Anyone who had any direct experience of controls was aware of the evasion &
corruption, rent seeking & rent creation associated with them. Yet few academics and
intellectuals either recognised or were willing to admit publicly, that this ‘Indian socialist’
policy framework was undermining the quality of all governing institutions. This included
both market complementing institutions such as the revenue department (CBDT, CBEC)
as well as market subtracting/substituting institutions such as licensing authorities. The
decline in the former had long lasting negative effects on economic performance while
deterioration of the latter likely increased the rate of growth of the economy during the
1980s.
The phase of market reforms may also be divided into two sub-phases: phase
IIA or the phase of basic reforms (1980–81 to1991–92) and phase IIB or the phase
of wider reforms (1992–93 to present).
Phase IIA: Basic reforms
Policy reforms during the first sub-phase of the market reform experimentation were
characterized by two themes; the move to an export promotion strategy and the
progressive restoration of the freedom of entrepreneurs to compete. The gradual nature
of these reforms was referred to by us a decade and half ago as ‘Tinkerisation.’
Subsequent analysis suggests that the pace of reforms during this decade was not so
misaligned with the ‘optimal.’ These reforms were driven by necessity (slow export &
manufacturing growth), pragmatism (trial and error, incremental change), personal
observation of market economies and business drive. Though the architects of the
1990s reforms were in government during the 1980s they did not have the authority in
the 1980s that they did in the 1990s. The policies that had clearly failed in India were
modified and where the modification appeared to work the degree of change was
increased (e.g. progressive increase of exemption levels). The changes were based
neither on macro–growth analysis nor on the growth policy experience of other
countries. Consequently they appeared more ad hoc and limited. We know, however,
Self-Instructional Material 73
Economic Environment from Tax theory that the welfare effects of tax distortions are non–linear i.e. they rise
more than proportionately with the tax. Thus we would expect the removal of the
greatest, most visible, distortions (critical bottlenecks) to have a disproportionate positive
effect on the economy’s performance.
NOTES
Reforms started after Mrs. Gandhi’s return to power in 1980 (with Mr. P C
Alexander her Principle Secretary). Economic reforms during the eighties attacked
two major failings of the earlier policy regime: Domestic controls on production &
investment and external trade controls & distortions. Reforms during sub-phase IIA
could be characterized as ‘Reforms by Stealth,’ a term that become popular a decade
later. As K.N. Raj (1986), pointed out there was no official resolution or statement
about the ‘new economic policy’, which saw ‘certain changes in policy initiated in
stages over the last several months.’ From our current perspective, we can see that
the implicit objective of these reforms was to free the domestic economy at a faster
pace than the external, so as to prepare domestic entrepreneurs/industry to compete
with foreign ones.
Domestic reforms addressed the most glaringly harmful aspects of the previous policy
framework. The later included a policy that discouraged investment and production
and limited the exploitation of economies of scale and scope so essential for technical
change, productivity improvement and growth. Starting in 1980–81 there was a gradual
liberalization of controls on prices, production, distribution and investment. Among the
reforms undertaken were:
(a) Price and distribution control on two important industries, cement and aluminium,
still subject to control, was removed.
(b) ‘Broad–banding’ expanded the variants and range of products that a given firm
(licensed previously for a specific product) could produce. Thus firms could
(legally) exploit economies of scope for the first time.
(c) The upper limits on how much an ID&R act license could produce, by adding
some equipment or replacing old equipment with higher capacity new equipment,
was gradually raised (to ` 5 crore in 1985, ` 15 crore in 1988). Thus firms
could for the first time legally exploit new economies of scale as they emerged
(from the technology/supply and demand side).
(d) Greenfield investment was gradually de–licensed by progressively freeing
specified sub–sets of industry from its ambit (i.e. expanding the positive list of
de–licensed industries) and raising the value limit on investment below which no
license was required. This represented not just a change in the approach to
economic growth but a freeing of the fundamental instrument of growth.
(e) For the list of industries reserved for investment by the Small Scale Sector, the
investment value limit was raised so as to allow SSI to exploit economies of
scale.
(f) The positive list of MRTP exempt industries was expanded and the investment
value limit (above which a licence was required even for industries in the positive
list) was raised progressively. As only such MRTP groups had the resources
and risk taking ability to invest in large capital-intensive industry, where economies
of scale are most critical for competitiveness. These industries were therefore
implicitly decontrolled.
74 Self-Instructional Material
 The overall effect of these reforms was to greatly increase the degree of domestic Economic Environment
competition in the economy, contrary to what Rodrik and Subramanian (2004) have
asserted. These reforms represented a fundamental change in India’s development
philosophy. A concrete recognition that the jungle of controls put in place during
phase I was not contributing to any of the objectives that they were supposed to NOTES
achieve.
Phase IIB: Wider reforms
Though the main underlying reform themes in the second sub-phase of market reforms
were a continuation of those started in the first sub-phase, the direction, emphasis and
pace was altered sharply: The move to an export substituting strategy in the previous
sub-phase was supplanted by and encompassed within an import liberalisation one.
This in turn was embedded within an overall strategy of eliminating restrictions &
barriers to competition and progressively promoting competition. Static efficiency and
welfare gains also received direct attention.
The BOP crisis of 1990–1991 was turned into an opportunity for wider reforms.
The architects of the 1990s reforms clearly understood the shortcomings of the socialist
approach and appreciated the positive aspects of the market (a la the Miracle growth
economies of East & S.E. Asia). These architects were in charge of the finance
ministry, which had under its purview a substantial number of sectors needing reform
(external, financial, taxation, fiscal, monetary policy). The reform of these sectors
could in principle be undertaken in a relatively integrated and comprehensive way,
though institutional and political constraints affected its pace in different areas. The
widening and deepening of the reforms during the early 1990s was partly due to this
fortunate development. The main challenge for the reformers in the 1990s was to
generate public and political support for these reforms, when few academics,
administrators and politicians had a similar perspective. The 1990–91 BOP crises
helped in this process by making it easier to convince administrators and politicians
that the old approach was not sustainable.
The economic response to the crises was two fold. One was classical macro–
economic management of the Balance of Payment (an accounting record of all Balance of Payment: An
monetary transactions between a country and the rest of the world) crises. That is a accounting record of all
combination of expenditure reduction, through a reduction of the fiscal deficit coupled monetary transactions
between a country and the
with expenditure switching through a devaluation of the exchange rate. The second rest of the world
was to change policies that were retarding productivity, private investment and growth.
The underlying approach was to remove controls and restrictions that were either
limiting/distorting competition in product markets or limiting access to capital and
technology. The scope and content of the reforms was much wider than in the 1980s.
The sectors included manufacturing industry, Central infrastructure services
(Telecom, ports), external sector, finance and taxation. Industry and infrastructure
were not connected with the Ministry of Finance and were characterized by a more
opportunistic approach (in the sense of proposing and pushing reforms as the opportunity
arose). Industrial (manufacturing) decontrol and investment delicensing (under the
industry ministry), represented a completion, at an accelerated pace, of reforms that
started in the late 1980s. Remaining controls on production and licenses on investment
in manufacturing were rapidly removed. Among the last to go, but highly significant,
Self-Instructional Material 75
Economic Environment was the delicensing of investment in consumer durable goods including automobiles
(cars) and white goods in 1993–94. Specific industries, such as sugar, fertiliser and
drugs, however, still remain under control.

NOTES 3.2.3 Strategies of Development in Different Five-Year Plans

Strategy is a word which is often used in the modern world. We come across terms
like war strategy, election strategy and development strategy. In the context of
development planning, strategy refers to a basic long-term policy to realize certain
objectives. Planning strategy includes activities such as determination and formulation
of policies, selection of appropriate technology, implementation of development
programmes, determination of the nature of investment and necessary changes in the
financial management and administrative structure.
India has completed its tenth Five Year Plan and the Eleventh Five Year Plan is
in progress. A plan is a document showing detailed scheme, programme and strategy
worked out in advance for fulfilling an objective. India’s planning strategy is divided in
four phases:
Phase I Growth-Oriented Development Strategy (1951-1966)
Phase II Equity-Oriented Development Strategy (1966-1990)
Phase III Post Liberalization Development Strategy (1990-2007)
Phase IVSustainable Development Strategy (2007 onwards)
Let us discuss these phases in detail:
Phase I: Growth Oriented Development Strategy (1951-1966)
The first three Five Year Plans were parts of phase I.
First Five Year Plan (1951-1956)
The First Five Year Plan was a modest plan with limited objective of tackling difficulties
created by World War II and the partition of the sub-continent in 1947. The First Five
Year Plan was based on Harrod-Domar model of development economics. The Plan
had the target of 2.1 per cent per annum growth in national income. In this Plan, top
priority was given to the development of agricultural sector because planners believed
that agriculture development would lead to higher rate of economic growth. The
performance of the Plan was better than it was estimated due to good harvest in these
years. The national income increased at the rate of 3.6 per cent per annum.
Second Five Year Plan (1956-1961)
In the Second Five Year Plan, the Mahalanobis strategy of development was adopted,
which was prepared by P.C. Mahalanobis. The Mahalanobis strategy had three main
aspects: developing a sound base for initiating the process of long-term growth, high
priority to industrialization and emphasis on development of capital goods industries
against consumer goods industries. This strategy has also been termed as import-
substituting strategy. The Plan focused on self-reliance.
The import-substituting strategy is based on infant industry argument. According
to this argument, domestic industries should be protected from foreign competition in

76 Self-Instructional Material
the initial stage of industrialization. This is done by imposing high import tariffs or Economic Environment
quantitative restriction on imports. In this Plan, industrial allocation was raised
tremendously and investment in other sectors like agriculture was reduced.
Third Five Year Plan (1961-1966) NOTES
The Third Five Year Plan kept the basic elements of industrial strategy, as laid down in
the previous Plan, and also emphasized on the development of agriculture and allied
activities. In this Plan, public sector was assigned the role of promoting growth of
infrastructural facilities, creating the capacity of capital goods industries and reducing
the concentration of economic power through public ownership of means of production.
The Plan aimed at securing 5.6 per cent per annum growth in national income,
achieving self-sufficiency in food-grains and expanding basic industries so that the
requirement of further industrialization could be met. However, the performance of the
Plan fell short of expectations. During this Plan, the growth rate came down to 2.2 per
cent per annum. The main reasons of failure were bad harvest for two consecutive
year (1965-67), drought in 1965-66, devaluation of rupee and war with China in
1962. The failure during the Third Plan created so much distress in the economy that
long-term planning was abandoned for three years. This period of three years was
known as annual Plan period.
Phase II: Equity-Oriented Development Strategy (1966-1990)
This phase covered annual plan period between 1966 to 1969 and the Fourth, Fifth,
Sixth and Seventh Five Year Plans.
Annual plan period (1966-69)
To overcome agricultural stagnation, a new strategy of agricultural development was
formulated during the ‘annual plan period’. The emphasis shifted towards technological
reforms in agriculture in order to increase productivity. Technological reforms included
development of high-yielding seeds, chemical based fertilizers, pesticides, commercial
sources of energy and controlled water supply. The new strategy was supported by
the Agriculture Price Support Policy. The New Agriculture Strategy (NAS) also created
a link between agriculture and industries.
Fourth Five Year Plan (1969-74)
After the failure of the Third Plan, planners emphasized growth with stability in the
Fourth Five Year Plan. The Plan emphasized on reducing fluctuation in agricultural
production and reducing dependence on foreign assistance. During this Plan, the growth
in national income was aimed at 5.7 per cent per annum. However, due to poor
monsoon and shortage of critical inputs, the actual growth rate was as low as 3.4 per
cent per annum.
Fifth Five Year Plan (1974-1979)
The Fifth Five Year Plan stressed on elimination of poverty which was required for the
growth of domestic production. The Plan aimed at 4.4 per cent per annum increase in
national income, however, the actual growth rate was 4.9 per cent per annum.

Self-Instructional Material 77
Economic Environment Sixth Five Year Plan (1980-85)
The strategy of the Sixth Five Year Plan centered around food and fuel. With Green
Revolution, use of chemicals, oil based inputs and commercial sources of energy
NOTES increased in the agricultural sector. In this Plan, special programmes, aimed at tackling
poverty problem, were introduced. The Plan aimed at 5.2 per cent per annum increase
in the national income. The target set for the Plan was achieved due to good performance
of agricultural sector and rapid growth in the service sector.
Seventh Five Year Plan (1985-90)
The Seventh Plan focused on improving existing facilities. This was closely linked to
measures for human resource development, i.e., education, technical training and health.
The government exempted some industries from Monopolies and Restrictive Trade
Practices (MRTP) and also raised the investment limit for some of them. In this Plan,
a policy was introduced under which except 32 industries, all industries could set up
units without taking license from the government.
The Seventh Five Year Plan strategy aimed at tackling the problem of poverty,
unemployment and regional imbalance. Many anti-poverty programmes were
introduced to tackle the problem of unemployment. The Plan aimed at 5 per cent per
annum growth in national income. Due to bumper harvest in some years, the agricultural
sector recorded impressive growth. During this Plan, the actual growth rate in national
income was 6 per cent per annum.
Phase III: Post Liberalization Development Strategy (1990-2007)
This phase includes the Eighth, Ninth and Tenth Five Year Plans.
Eighth Five Year Plan (1992-97)
Between 1990 and 1992, there was economic instability in India and hence no Five
Year Plan was implemented. There were onlyAnnual Plans during this time. The Eighth
Five Year Plan aimed at extending economic reforms and building a sound foundation
for growth.
In this Plan, it was realized that the true meaning of self-reliance was expansion
of exports. Hence, for the expansion of trade, tariff was lowered, quantitative restrictions
were removed, and human development was emphasized.
Ninth Five Year Plan (1997-2002)
Growth with social justice and equity was the focus of this Plan. During this Plan, the
role of state and market in Indian economy was realized. The principal task of the
Ninth Five Year Plan was to usher in a new era of people-oriented planning in which
not only government but people at large, particularly the poor, were effective instruments
of participatory planning process. Thus, people’s participatory bodies like Panchayati
Raj institution, cooperatives and self-help groups were promoted.
In the Ninth Five Year Plan, the annual growth rate in national income was 5.5
per cent per annum. This was lower than the targeted growth rate of 6.5 per cent per
annum. The performance was not good due to East Asian crisis in 1997-98, increase
in oil price in 2000-01, world economic slowdown, adverse security environment and
78 Self-Instructional Material
natural disasters such as Orissa cyclone and earthquake in Gujarat.
Tenth Five Year Plan (2002-07) Economic Environment

In the Tenth Five Year Plan, the development strategy enabled private sector to reach
its full potential for raising production, creating jobs and raising income levels in the
society. This Plan adopted three-pronged strategy to pursue the objective of growth NOTES
with equity and social justice. This strategy covered agricultural development that
ensured widest spread of benefits to the rural poor, rapid growth of those sectors
which were most likely to create gainful employment opportunities, and continuing and
expanding programmes to supplement the impact of development. This was done for
the benefit of those target groups which may not benefit sufficiently from normal growth
process. The Tenth Five Year Plan aimed at 8 per cent growth rate per annum in
national income but achieved 7.2 per cent growth rate per annum.
Phase IV: Sustainable Development Strategy (2007 onwards)
This phase includes only Eleventh Five Year Plan (2007-2012) as of now. The Plan
aims at putting the economy on a sustainable growth rate of approximately 10 per cent
per annum. In 2007-08, economic growth was 9 per cent. In 2008-09, the growth
rate was 6.7 per cent. Table 3.1 summarizes the focus areas of each Five Year Plan.
Table 3.1 Plan Objectives and Strategies of Each Plan from 1950 till Date

Plan Focus Area of Plan

First Plan Agricultural development
Second Plan Import substitution led growth, and growth of heavy and basic
industries.
Third Plan Economic sufficiency
Fourth Plan Technological reforms in agricultural growth with stability
Fifth Plan Elimination of poverty
Sixth Plan Food and fuel strategy
Seventh Plan Human resource development
Eighth Plan Privatization, liberalization and globalization
Ninth Plan Growth with social justice and equity
Tenth Plan Growth with social justice and equity
Eleventh Plan Faster and inclusive growth

3.2.4 GDP Trend and Distribution

Economic growth has always been the main objective of Five Year Plans in India. It is
defined as an increase in the aggregate output of goods and services in a country
within a specified period of time.
Economic growth implies a sustained expansion in economic activities, trade
agriculture, industries, etc. over a long period of time. GDP is the indicator of economic
growth as it is the market value of all goods and services produced in the country in
one year. The growth of the economy, in terms of GDP, in different Five Year Plans is
shown in Table 3.2.

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Economic Environment Table 3.2 GDP in Different Five Year Plans

Plan no. Period of Plan Estimated Growth Rate Actual Growth Rate
I 1951 to 1956 2.1 3.6
NOTES II 1956 to 1961 2.5 3.9
III 1961 to 1966 5.6 2.3
IV 1969 to 1974 5.7 3.3
V 1974 to 1979 4.4 4.9
VI 1979 to 1984 5.2 5.5
VII 1985 to 1990 5.0 6.0
VIII 1992 to 1997 5.6 6.7
IX 1997 to 2002 6.5 5.5
X 2002 to 2007 8.0 7.6
XI 2007 to 2012 10.0 -

The First Five Year Plan covering the period of 1951 to 1956 had a target of
2.1 per cent per annum increase in GDP. However, the growth rate of 3.6 per cent
was achieved which was higher than the estimated growth rate. Similarly, the actual
growth rate was better than the estimated growth rate in the Second Five Year Plan as
well. In the Third Five Year Plan, the actual growth rate of 2.3 per cent per annum was
much lower than the targeted rate of 5.6 per cent. The Third Plan failed miserably. As
a result, the economy found itself in a big trouble. At that time, only vigorous planning
could have saved the country. However, contrary to the need of the hour, long-term
planning was suspended for next three years.
The Fourth Plan was initiated in 1969 instead of 1966. This Plan also showed a
large decline in the actual growth rate which was 3.3 per cent per annum against the
estimated growth rate of 5.7 per cent. In the Fifth and the Sixth Five Year Plan, actual
growth rate was higher than the estimated growth rate.
The Seventh Plan aimed at 5.0 per cent per annum increase in GDP, but the
actual growth rate was 6 per cent. In the first three years of the Seventh Plan, GDP
had increased at the rate of 3.8 per cent per annum. However, during 1988-89 and
1989-90, the growth rate picked up sharply due to bumper harvest and the average
annual increase in GDP during the whole of the Seventh Plan period turned out to be
6.0 per cent per annum against the targeted growth rate of 5.0 per cent per annum.
Similarly, in the Eighth Plan, the growth rate was 5.5 per cent per annum in the
first two years. However, in the remaining three years, there was 7.0 per cent increase
in GDP. Thus, the average rate of increase in GDP turned out to be 6.7 per cent per
annum which was higher than the targeted growth rate of 5.6 per cent per annum.
The performance of the economy during the Ninth Plan was poor and proved
the supporters of liberalization wrong. It is because, during this Plan, the actual growth
rate was 5.5 per cent per annum which was lower than the estimated growth rate of
6.5 per cent per annum.
The Tenth Five Year Plan aimed at achieving the GDP growth rate of 8 per cent
per annum, whereas, the actual growth rate of this Plan was 7.6 per cent per annum.

80 Self-Instructional Material
 The Eleventh Five Year Plan (2007-2012) provides an opportunity to restructure Economic Environment
policies to achieve a new vision based on faster, more broad-based and inclusive
growth. It aims at putting the economy on a sustainable growth trajectory with a GDP
growth rate of approximately 10 per cent by the end of the Plan period.
NOTES
Latest trends in GDP growth
Indian economy is expected to register a growth rate of 6.9 per cent in 2011-12, as
per the Advance Estimates (AE) released by the Central Statistics Office (CSO) on 7
February 2012. At sectoral level, growth is estimated to be 2.5 per cent for 2011-12
for agriculture and allied sectors, a little lower than expected. However, this has to be
seen in light of the high growth of 7 per cent achieved in 2010-11. Growth in the
services sector is likely to be 9.4 per cent in 2011-12 as against 9.3 per cent in 2010-
11. Thus, it is primarily the dip in growth in industry to 3.9 per cent in 2011-12 that has
led to the slowdown in real gross domestic product (GDP) growth.
With the exception of the year 2008-9 when the growth rate was 6.7 per cent,
the growth in real GDP in 2011-12 has been the lowest in nine years. This speaks well
of the last nine years but must also be treated as a wake-up call. Like in 2008-9, a part
of the reason for the slowdown lies in global factors, particularly the crisis in the eurozone
area and near-recessionary conditions prevailing in Europe; sluggish growth in many
other industrialized countries, like the USA; stagnation in Japan; and hardening
international prices of crude oil, which always has a large effect on India. Domestic
factors, namely the tightening of monetary policy, in particular raising the repo rate in
order to control inflation and anchor inflationary expectations, resulted in some slowing
down of investment and growth, particularly in the industrial sector. Since monetary
policy operates largely through demand compression in the short run, the expectation
is that this policy will in fact bolster long-run growth. The 2008-9 downturn came to
India when the country’s fiscal balances were robust. Hence, there was ample scope
for fiscal and monetary stimulus.
Table 3.3 GDP and Related Indicators

Data Categories Units 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12

and Components

GDP
(current market prices) ` crore 4294706 4987090 5630063 6457352PE 7674148QE 8912178AE
Growth Rate % 16.3 16.1 12.9 14.7 18.8 16.1
GDP
(factor cost
2004–05 prices) ` crore 3564364 3896636 4158676 4507637PE 4885954QE 5222027AE
Growth Rate % 9.6 9.3 6.7 8.4 8.4 6.9
Savings Rate % of GDP 34.6 36.8 32.0 33.8 32.3 na
Capital Formation (rate) % of GDP 35.7 38.1 34.3 36.6 35.1 na
Per Capital
Net National Income
(factor cost
at current prices) ` 31206 35825 40775 46117 53331 60972

AE QE PE
GDP figures for 2011–12 are advance estimates; Quick estimates; Provisional estimates.
Not available
Source: Economic Survey 2011–12.
Self-Instructional Material 81
Economic Environment 3.2.5 Economic Growth and Business Opportunities
India’s experiments with market reforms have thrown up lessons about the static and
dynamic effects of reforms and of their timing and phasing. These lessons depend on
NOTES an understanding the nature of the economy that existed in 1979–80. Indian planning
and the Indian economy were very different from that of the USSR and the Soviet
Bloc, which may be termed communist-socialist economies. India’s economy was
always a market economy but in 1970s, perhaps one of the most heavily controlled
market economies in the World (whence the term Indian version of Socialism). This
has to be kept in mind when drawing lessons for other countries.
It is important to distinguish between the static and dynamic effects of reforms.
The former affects allocative efficiency, equity and current welfare and the latter affects
growth rates of productivity, investment and GDP. Though in principle an improvement
in allocative efficiency can lead to an improvement in the investment environment and
growth the lags can be relatively long and unpredictable. The common expectation
that every reform should result in an increase in the growth rate and/or reduction in
poverty, sets up an incorrect benchmark. Thus for instance, the primary objective of
the 1990s income tax reforms was static efficiency and welfare gains (tax payer equity)
that are expected to generate a gradual but sustained increase in income tax revenue.
Financial sector reforms also have a substantial static component. The most
significant reforms related to the removal of interest rate ceilings on bank lending and
a host of associated controls and restrictions affecting nationalized banks. Similarly,
introduction of prudential regulations reduce systemic risk but are unlikely to have any
visible impact on growth. On the contrary, they may reduce growth in the short run as
lenders become more risk averse. The other major reform was the entry of private
banks in competition with the Nationalized Banks. The most significant impact of this
has been the development of a housing loan market and consumer durable financing.
It has also spurred improvement in the quality of service provided to bank customers.
Thus allocative efficiency and welfare have improved. As 40 per cent of credit is still
allocated according to government guidelines and 70 per cent of the Banking system is
owned by the government there has been little competition or innovation (so far) in the
supply of credit for production and investment. The spread of credit to new borrowers
(small and medium) or the introduction of new methods of evaluation and appraisal
are therefore minimal, as are the dynamic effects of these reforms.
Freeing of controls on equity markets has also led to gains in allocation within
the existing set of firms and entrepreneurs. Better regulatory systems and procedures
have reduced systemic risk and facilitated the flow of external funds (FII) into the
equity markets. Though the transaction cost for established/existing entrepreneurs has
fallenm the access of new entrepreneurs does not appear to have widened significantly.
There are two reasons. One is the absence of complementary reforms (company law,
limited partnership, SICA/ bankruptcy law). Second, the general deterioration in the
quality of the police–legal system reduces the probability of catching and convicting
illegal financial behaviour. Regulatory systems are designed to deal with financial grey
areas in a situation in which black (criminal/illegal) acts are dealt with by the normal
legal system. Because of information asymmetry, the risk of financing new entrepreneurs
includes the risk of some of them being financial frauds. Even though the regulatory
system has improved, reducing the transaction cost of financing new borrowers, this
82 Self-Instructional Material
has been partly offset by the increased risk of fraud. The market for risk capital has Economic Environment
therefore not expanded beyond its traditional catchments area, and the dynamic effects
that one might expect from capital market reforms are limited. Entry of venture capital
and other equity funds with sophisticated evaluation capabilities will eventually overcome
the second problem, while policy reform is needed to ensure that the first problem is NOTES
solved.
The market reforms that appear to have had the strongest dynamic effects in
India are those relating to production, investment and external controls. These are
best understood through the prism of competition. For this purpose we distinguish
three aspects of competition: The freedom to compete, the pressure to compete
(competitive pressure) and the means and ability to compete. In a normal market
economy freedom to compete is taken for granted. India created a system of production
and investment controls and in some cases price and distribution controls that restricted
or eliminated the freedom of medium-large firms to compete.

3.3 MONETARY SYSTEM AND BUSINESS CAPITAL

A monetary system is anything that is accepted as a standard of value and measure Monetary system: Anything
of wealth in a particular region. However, the current trend is to use international trade that is accepted as a
standard of value and
and investment to alter the policy and legislation of individual governments. The Indian measure of wealth in a
monetary system India’s colonization by the British created an institutional environment particular region
that, on paper, guaranteed property rights among the colonizers, encouraged free
trade, and created a single currency with fixed exchange rates, standardized weights
and measures and capital markets. It also established a well–developed system of
railways and telegraphs, a civil service that aimed to be free from political interference,
a common–law and an adversarial legal system.
The present currency system in India (i.e., after World War II) is managed by
the Reserve Bank of India and is based on inconvertible paper currency system. It has
two aspects: (a) internal aspect, and (b) external aspect. The internal aspect deals with
the circulation of coins and currency notes, while the external aspect deals with the
external value of currency and the way it is regulated. The main features of the present
currency system in India are coins and currency notes. Originally, the Reserve Bank of
India Act 1934 provided for the proportional reserve system of note issue. According
to this system, the Reserve Bank had to maintain not less than 40% reserves (against
note issue) in gold coins, bullion, and foreign securities with the provision that gold
coins and bullion were not at any time to be less than ` 40 crores.
This monetary policy and business capital are interdependent on each other.
Capital that is financial resources is available for a company to borrow to finance
operations. Capital costs more when demand is high versus supply and decreases in
cost when the reverse is true. The ability of any one firm to borrow all of the financial
capital needed is affected by the relative cost, availability and opportunities for growth.
3.3.1 Issue of Currency
The RBI is the sole authority for the issue of currency in India. Rupee coins/notes and
subsidiary coins are issued by the Government of India but they are put into circulation
only through the RBI.
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Economic Environment In India, currency forms 55 per cent of narrow money (M1) and 15.8 per cent
of broad money (M3), and a significant portion of money supply (2004–05). Currency
notes are legal tender in payment or on account, without limit. One rupee notes and
coins are legal tender for unlimited amounts, 50 paise coins for a sum not exceeding
NOTES ` 10 and smaller coins for any sum not exceeding ` 1.
The Act permits the issue of notes in the denominations of rupees two, five, ten,
twenty, fifty, hundred, five hundred, one thousand, five thousand and ten thousand. At
present denominations up to ` 1000 are being used. The affairs of the bank relating to
note issue and its general banking business are conducted through two separate
departments, the Issue and Banking Department.
The Issue Department is liable for the aggregate value of currency notes of the
Government of India and the currency notes of the RBI in circulation and it maintains
eligible assets for equivalent value. It is responsible for getting its periodical requirements
of notes printed from the currency presses of the Government of India, distribution of
currency among the public and withdrawal of unserviceable notes and coins from
circulation. The Issue Department deals directly with the public in the exchange of
currency for coins and vice versa and exchange of notes of one denomination for
another.
The assets which form the backing for the note issue are kept wholly distinct
from those of the Banking Department. In practice, the distinction between the Issue
Department and the Banking Department has little economic significance, since there
are frequent shifts between the assets of the two departments. However, not all assets
of the Banking Department are eligible for being held in the Issue Department like
State Government securities and small coins. This is to provide a safe check on the
issue of currency.
The expansion and contraction of currency in circulation is effected through the
Banking Department. Cash deposits and withdrawals by scheduled banks are handled
by the Banking Department. The Banking Department replenishes its currency when
necessary from the Issue Department against transfer of eligible assets. Similarly, surplus
cash is returned to the Issue Department in exchange for equivalent assets.
There is no ceiling on the amount of notes that can be issued and the notes are
issued against 100 per cent cover of approved assets which in practice consists of
gold (` 15,828 crore), foreign securities (` 3,61,038 crore), Government of India
rupee securities (` 1,517 crore) and rupee coins (` 102 crore).
3.3.2 Quantum of Money (Money Supply)
The total expansion of money supply depends on the creation of high-powered money
(reserve base) and the multiplier action upon it. The components of the reserve money
are currency with the public, other deposits with the Reserve Bank of India (RBI), and
bankers’ deposits with the RBI. Money multiplier is the mean value of the ratio of
money supply or aggregate monetary resources to reserve money (M/RM). It is the
interacting variable between these two monetary aggregates. In the 1990s, it was 1.13
(narrow money or M) and 3.29 (broad money or M). Reserve requirements consist
of cash reserve ratio and statutory liquidity ratio. The impact of any variation in the
ratio is direct, precise and certain. Reserve requirements bear on the volume of credit
by affecting the credit base or bank reserves. Altering the ratios will affect the credit-
84 Self-Instructional Material
creating capacity of banks, the volume of credit and, therefore, of money supply. The Economic Environment
impact of any change in reserve ratios on money supply depends, besides the extent of
multiple credit creation by banks, on the ratio of bank reserves to total reserves which
is defined as the currency with the public and bank reserves.
NOTES
Money supply measures
As per the recommendations of the Working Group on Money Supply (1997), four
monetary aggregates are compiled on the basis of the balance sheet of the banking
sector in conformity with the norm of progressivity in terms of liquidity: M0 (monetary
base) (weekly), M1 (narrow money), M2 and M3 (broad money) (fortnightly). Further,
three liquidity aggregates in order of progressivity viz., L1, L2 and L3 (quarterly) are
computed incorporating deposits with post office savings banks, term deposits, term
borrowings and certificates of deposits of term lending institutions (FIs) and public
deposits of NBFCs on an aggregation basis.
Statement 3.1 Measures of Financial Aggregates
Monetary Aggregates
M0 = Currency in Circulation + Bankers’ Deposits with the RBI + ‘Other’ Deposits
with the RBI.
M1 = Currency with the Public + Demand Deposits with the Banking System +
‘Other’ Deposits with the RBI = Currency with the Public + Current Deposits
with the Banking System + Demand Liabilities portion of Savings Deposits
with the Banking System + ‘Other’ Deposits with the RBI.
M2 = M1 + Time Liabilities portion of Savings Deposits with the Banking System
+ Certificates of Deposit issued by Banks + Term–deposits (excluding
FCNR(B) deposits) with a contractual maturity of up to and including one
year with the Banking System = Currency with the Public + Current Deposits
with the Banking System + Savings Deposits with the Banking System +
Certificates of Deposits issued by Banks + Term–deposits (excluding
FCNR(B) deposits) with a contractual maturity up to and including one
year with the Banking System.
M3 = M2 + Term Deposits (excluding FNCR(B) deposits) with a contractual
maturity of over one year with the Banking System + Call borrowings from
‘Non–Depository’ Financial Corporations by the Banking System.
Liquidity Aggregates
L1 = M3 + All Deposits with the Post Office Savings Banks (excluding National
Savings Certificates).
L2 = L1 + Term–Deposits with Term–lending Institutions and Refinancing
Institutions (FIs) + Term–borrowing by FIs Certificates of Deposit issued
by FIs.
L3 = L2 + Public Deposits of Non–banking Financial Companies.
Latest trends in monetary aggregates
During the year 2011-12, the growth rates of reserve money (M0) and narrow money
(M1) were lower than in 2010-11, while broad money (M3) growth was higher. The
Self-Instructional Material 85
Economic Environment moderation in growth of M1 as against M3 was on account of decline in the growth of
demand deposits and currency, while time deposits accelerated in response to hike in
the deposit rates of banks. According to Economic Survey 2011-12, M0 registered
a growth of 19.1 per cent in 2010-11 as compared to 17.0 per cent in 2009-10. Net
NOTES domestic assets (NDA), led largely by net RBI credit to the centre, were the main
driver of increase in M0 during 2010-11.
Table 3.4 Movement of Select Monetary Parameters
(per cent)

Parameters Growth rates as on 2 December 2011

Yearly variation Financial-year basis Year-on-year basis
2009–10 2010–11 2010–11 2011–12 2010–11 2011–12
M0 17.0 19.1 6.4 0.7 22.3 12.8
M1 18.2 9.8 4.0 –0.5 17.0 5.0
M3 16.8 16.0 8.5 8.8 15.7 16.3

Source: RBI.

3.3.3 Monetary Policy

Monetary policy: The Monetary policy is that instrument which is used to control the volume of money and
instrument which is used to credit in the economy. In other words, it is the policy of the government executed by
control the volume of money
and credit in the economy
the medium of the Central Bank, i.e., the RBI in case of India, to achieve predetermined
economic objectives like price stability, exchange stability, full employment and economic
growth.
Monetary policy means the control over credit. The measures available to the
Central Bank to influence money and credit are called the tools of credit control. They
include quantitative instruments like bank rate policy, open market operations, changes
in the reserve ratio and quantitative instruments like control over consumer’s credit
control, moral persuasion, and so on.
The monetary policy has the following characteristics:
1. Monetary policy is meant to regulate the supply of money and credit.
2. Money and credit supply can be influenced through (a) quantitative changes
(b) changes in the velocity of circulation (c) changes in the availability and cost.
Since the velocity of circulation cannot be directly controlled by the monetary
authority, the other measures are brought into play to restrain money and credit.
3. The monetary authority has a specific objective to which the monetary policy is
focussed.
4. The objectives are achieved by continuous use of the instruments of money and
credit control.
Monetary policy in India: Monetary policy refers to the use of official
instruments under the control of the Government and the RBI to regulate the availability
cost and use of money and credit with the aim of achieving optimum levels of output
employment, price level and balance of payments. The efficiency of the monetary
policy depends on the overall supply–demand situation, liquidity position and the degree
86 Self-Instructional Material
of control over monetary transactions. Monetary policy operates best when it is used Economic Environment
in conjunction with fiscal policy.
Scope of monetary policy in India: Monetary policy in India is operated in
relation to the overall economic policy and planned development strategy. However,
NOTES
sizeable non–monetary transactions and limited coverage of banking and financial
institutions restrict the operations of the monetary policy.
Limits of monetary policy in India: We must note that the RBI does not
have unlimited ability to control the money supply. Suppose, the RBI wants that money
supply should not grow this year. However, if the Government impelled by its budgetary
policies has expenditure which can be financed from current revenue and borrowing
from the public, then willy–nilly the RBI has to lend to the government and that will
mean an increase in money supply dictated by the government budget.
Again, suppose the RBI wants the money supply to expand and for this it starts
lending money to commercial banks. Commercial banks will like to use this money to
create extra deposits by lending to the public. But what happens if the businessmen,
who are to take loans from the commercial banks, do not wish to contract these
loans? This may very well happen when the country is going through a recession. In
such a situation, the RBI may like the commercial banks to lend more to businessmen
so that they expand their business and the economy is pulled out of the recession. But
the businessmen may not find it viable to take loans and expand their projects. So, in
that situation again, the effort of the RBI and the commercial banks will fail to expand
money supply. This problem lends emphasis to fiscal policy. However, within these
limits, the RBI can expand and contract the money supply to some extent.
Objectives of the monetary policy in India: The most important objective
of the monetary policy is growth with price stability. In a poor country like India, the
urge to develop is so high that the supply of savings fails to keep pace with the demand
for investment. The gap between desired saving and investment is then bridged by the
expansion of money and credit.
Price stability: For the routine work of business a certain amount of credit is
necessary. When producers are engaged in production, they have to incur costs on
raw materials, wages, transport and marketing which will be recovered only after the
sale of the product. Meanwhile, they need money to go on with these activities.
Normally, they would not have so much cash of their own and would have to take
bank credit.
This is true of other activities like agriculture and trading also. A farmer has to
finance his purchase of seeds, fertilizer and other implements and pay for water and
electricity charges and wages throughout the crop season. Similarly, traders have to
first subscribe to the producers to be able to sell the products to the consumers at a
future date. One aim of the monetary policy is to see that the normal working of these
economic activities is not hampered by the shortage of credit. Expansion in credit
results in expansion in money supply.
While permitting growth, if money supply expands too much it may create a
different kind of problem in the economy. Suppose the Government is borrowing a
large amount from the RBI and that is the reason for the rapid growth of money
supply. This means that the Government is acquiring large purchasing power directly
Self-Instructional Material 87
Economic Environment by making the RBI print money, and is not reducing anybody’s purchasing power by
either taxing them or borrowing money away from them. So, the purchasing power of
the Government on top of that of the public, will create too much demand for goods
and services compared to their supply. In response to this extra demand, supply may
NOTES sometimes also rise, but it takes time and sometimes may not rise at all. Thus, the
prices of goods and services start rising under the pressure of extra demand.
Similarly, if too much bank credit is available, this extra credit may be utilized
for speculative activities which will create inflationary pressure.
Thus, if there is too much of money supply, this destabilizes the price situation.
The key objective of monetary policy is to see that the supply of money and bank
credit does not expand either too slowly to hamper growth or too fast to generate
inflation.
A substantial amount of monetary expansion in India is because of government
deficit financing. If the monetary policy is too restrictive in allowing public expenditure
financed through borrowings from banks, then many vital public services and projects
may have to be closed. On the other hand, if the monetary policy is too accommodative,
then the real value of not only public services but also of private income would erode
through inflation. Thus, on the one hand, monetary policy has to be evolved to meet
the credit needs of a growing economy and on the othe, it has to be restrictive in order
to keep in check inflationary pressures. There has to be therefore, a controlled expansion
of money supply and credit.
In the early years of planning, price level in India did not rise much. From the
mid–sixties onwards, the general price level started rising regularly. On an average, the
general price level in India has risen at about 6 per cent per annum up to 1980. In the
1980s, it has become about 7 per cent per annum. It may be noted that prices in India
do not rise only on account of money supply. In fact, the more serious price rises were
caused by severe agricultural shortfalls and external factors like war expenditures, oil
price hikes, and so on.
Other objectives of monetary policy: A major objective of the monetary
policy in India is to ensure an adequate amount of credit to backward and priority
sectors — agriculture and small scale industry and also to prevent diversion of credit
from unproductive purposes like hoarding and speculation. Another major objective is
to maintain the exchange value of the rupee in relation to foreign currencies.
Instruments of monetary policy: It is quite evident from the above discussion
that the objective of the monetary policy is to maintain growth with stability. To achieve
this objective there are two types of instruments of monetary policy in India—general
or quantitative and selective or qualitative. The instruments of general control are the
Bank Rate, Cash Reserve Ratio, Statutory Liquidity Ratio and Open Market
Operations. Their instruments are called quantitative as they affect the quantity of the
overall supply of the money and credit. The most important instrument of qualitative
control is selective credit control which affects direction rather than amount of credit
as such.
Cash Reserve Ratio (CRR): Under the provision of the RBI Act, all scheduled
banks are required to maintain with the RBI a minimum proportion of their deposits as
cash reserve. The RBI can vary CRR between 3 and 15 per cent. The higher the
88 Self-Instructional Material
CRR, the lower the banks’ capability to increase credit and deposit.
The Monetary Policy 2011-12 Economic Environment

The Reserve Bank of India (RBI) in its first quarter review of the Monetary Policy
2011-12 on July 26, 2011 raised the repo rate from 7.5 per cent to 8.0 per cent. The
reverse repo rate under the liquidity adjustment facility, determined with a spread of NOTES
100 basis points below the repo rate automatically stands adjusted to 7.0 per cent.
Taking cues from the tightening of monetary conditions, banks have also been raising
their deposit and lending interest rates. Scheduled Commercial Banks (SCBs) raised
their deposit rates in the range of 25-500 basis points between mid-March 2010 and
July 30, 2011 across all maturities. The rise in deposit rates was relatively sharper for
maturity up to 1 year. With regard to the lending rates, the Base Rates of banks, which
replaced the erstwhile Benchmark Prime Lending Rate (BPLR) system from July 1,
2010, also increased in the range of 75-325 basis points during July 2010-July 2011.
The monetary policy focus during 2011-12 has been on controlling inflation and
containing inflationary expectations. As an indication of strong anti-inflationary stance,
the Reserve Bank of India (RBI) has raised policy rates 13 times since March 2010.
The measures have helped contain inflation and anchor inflationary expectations,
although both remain at elevated levels. The task was rendered difficult due to supply-
side factors contributing to food inflation, low interest rates and repeated liquidity
injections by industrial nations battling recessionary tendencies, and rise in international
commodity prices. High inflation and some of the measures to control liquidity have
also had detrimental effect on growth in the short run. The priority, however, has been
to contain price rise so that long-term growth prospects are not affected. With inflation
projected to follow a downward trajectory and downside risks to growth increasing,
the RBI in the Third Quarter Review of Monetary Policy 2011-12 on 24 January
2012, has lowered the Cash Reserve Ratio (CRR) by 50 bps from 6.0 per cent to 5.5
per cent of net demand and time liabilities (NDTL) of scheduled banks to ease the
liquidity situation in the banking system and revive growth.
Liquidity conditions for a large part of 2011- 12 remained broadly around the
comfortable level of liquidity deficit (1 per cent of NDTL of the banking system), with
occasional stress on account of quarterly tax flows or divergence between deposit
and credit mobilization. There has, however, been rapid tightening of liquidity since
November 2011. This was on account of pressure created by foreign exchange outflows
and quarterly advance tax collections in December. The RBI responded with a number
of measures aimed at addressing the tightness in the foreign exchange market, including
the conduct of open market operations (OMOs) to address rupee liquidity concerns.
3.3.4 Types of Business Capital in India
A company may raise funds for different purposes depending on the time periods
ranging from very short to fairly long duration. The total amount of financial needs of a
company depends on the nature and size of the business. The scope of raising funds
depends on the sources from which funds may be available. The business forms of
sole proprietor and partnership have limited opportunities for raising funds. They can
finance their business by the following means:
• Investment of own savings
• Raising loans from friends and relatives
Self-Instructional Material 89
Economic Environment • Arranging advances from commercial banks
• Borrowing from finance companies
Companies can raise finance by a number of methods. To raise long-term and medium-
NOTES term capital, they have the following options:
1. Shares
It is the most important method. The liability of shareholders is limited to the face value
of shares, and they are also easily transferable. A private company cannot invite the
general public to subscribe for its share capital and its shares are also not freely
transferable. But for public limited companies there are no such restrictions. There are
two types of shares:
• Equity shares: The rate of dividend on these shares depends on the profits
available and the discretion of directors. Hence, there is no fixed burden on the
company. Each share carries one vote.
• Preference shares: Dividend is payable on these shares at a fixed rate and is
payable only if there are profits. Hence, there is no compulsory burden on the
company’s finances. Such shares do not give voting rights.
2. Debentures
Companies generally have powers to borrow and raise loans by issuing debentures.
The rate of interest payable on debentures is fixed at the time of issue and is recovered
by a charge on the property or assets of the company, which provide the necessary
security for payment. The company is liable to pay interest even if there are no profits.
Debentures are mostly issued to finance the Long-term requirements of business and
do not carry any voting rights.
3. Loans from financial institutions
Long-term and medium-term loans can be secured by companies from financial
institutions like the Industrial Finance Corporation of India, Industrial Credit and
Investment Corporation of India (ICICI), State level Industrial Development
Corporations, etc. These financial institutions grant loans for a maximum period of 25
years against approved schemes or projects. Loans agreed to be sanctioned must be
covered by securities by way of mortgage of the company’s property or assignment of
stocks, shares, gold, etc.
4. Loans from commercial banks
Medium-term loans can be raised by companies from commercial banks against the
security of properties and assets. Funds required for modernization and renovation of
assets can be borrowed from banks. This method of financing does not require any
legal formality except that of creating a mortgage on the assets.
5. Public deposits
Companies often raise funds by inviting their shareholders, employees and the general
public to deposit their savings with the company. The Companies Act permits such
deposits to be received for a period up to 3 years at a time. Public deposits can be
raised by companies to meet their medium-term as well as short–term financial needs.
The increasing popularity of public deposits is due to:

90 Self-Instructional Material
 • The rate of interest the companies have to pay on them is lower than the interest Economic Environment
on bank loans.
• These are easier methods of mobilising funds than banks, especially during
periods of credit squeeze.
NOTES
• They are unsecured.
• Unlike commercial banks, the company does not need to satisfy credit-worthiness
for securing loans.
6. Reinvestment of profits
Profitable companies do not generally distribute the whole amount of profits as dividend
but, transfer certain proportion to reserves. This may be regarded as reinvestment of
profits or ploughing back of profits. As these retained profits actually belong to the
shareholders of the company, these are treated as a part of ownership capital. Retention
of profits is a sort of self financing of business. The reserves built up over the years by
ploughing back of profits may be utilized by the company for the following purposes:
• Expansion of the undertaking
• Replacement of obsolete assets and modernisation.
• Meeting permanent or special working capital requirement.
• Redemption of old debts.
The benefits of this source of finance to the company are as follows:
• It reduces the dependence on external sources of finance.
• It increases the credit worthiness of the company.
• It enables the company to withstand difficult situations.
• It enables the company to adopt a stable dividend policy.
7. Trade credit
Companies buy raw materials, components, stores and spare parts on credit from
different suppliers. Generally suppliers grant credit for a period of 3 to 6 months, and
thus provide short–term finance to the company. Availability of this type of finance is
connected with the volume of business. When the production and sale of goods increase,
there is automatic increase in the volume of purchases, and more of trade credit is
available.
8. Factoring
The amounts due to a company from customers on account of credit sale generally
remain outstanding during the period of credit allowed, i.e., till the dues are collected
from the debtors. The book debts may be assigned to a bank and cash realized in
advance from the bank. Thus, the responsibility of collecting the debtors’ balance is
taken over by the bank on payment of specified charges by the company. This method
of raising short-term capital is known as factoring. The bank charges payable for the
purpose is treated as the cost of raising funds.
9. Discounting Bills of Exchange
This method is widely used by companies for raising short–term finance. When the
goods are sold on credit, bills of exchange are generally drawn for acceptance by the
Self-Instructional Material 91
Economic Environment buyers of goods. Instead of holding the bills till the date of maturity, companies can
discount them with commercial banks on payment of a charge known as bank discount.
The rate of discount to be charged by banks is prescribed by the Reserve Bank of
India from time to time. The amount of discount is deducted from the value of bills at
NOTES the time of discounting. The cost of raising finance by this method is the discount
charged by the bank.
10. Bank overdraft and cash credit
It is a common method adopted by companies for meeting short–term financial
requirements. Cash credit refers to an arrangement whereby the commercial bank
allows money to be drawn as advances from time to time within a specified limit. This
facility is granted against the security of goods in stock, or promissory notes bearing a
second signature, or other marketable instruments like Government bonds. Overdraft
is a temporary arrangement with the bank which permits the company to overdraw
from its current deposit account with the bank up to a certain limit. The overdraft
facility is also granted against securities. The rate of interest charged on cash credit
and overdraft is relatively much higher than the rate of interest on bank deposits.
3.3.5 Cost of Business Capital and Risks Associated with It
Cost of capital: The rent, or Capital is the money businesses use to finance their operations. The cost of capital is
interest rate, it costs the simply the rent, or interest rate, it costs the business to obtain financing. To understand
business to obtain financing cost of capital, you need to first understand the concept of capital. For very small
businesses, capital may just be the supplier credit they rely on. As far as large businesses
are concerned, capital may be the supplier credit and longer term debt or liabilities,
which are the firm’s liabilities.
In case a company is public or takes on investors, capital also includes equity
capital or common stock. Other equity accounts are retained earnings, paid-in capital,
etc. If a company only uses current liabilities and long-term debt for financing its
operations, then it uses debt and the cost of capital is normally the interest rate on that
debt.
If a company is public and has investors, then cost of capital gets more complex.
If the company only makes use of the funds provided by investors, the cost of capital
is the cost of equity. Such a company is usually in debts, but it can use equity financing
or money that investors supply. In such a situation, the cost of capital is the cost of
debt and the cost of equity.
The cost of debt financing is an important component of the cost of capital. In
case of big businesses, debt usually means large loans or bonds. For very small
companies, on the other hand, the debt can mean trade credit. In both the cases, the
cost of debt is the interest rate the company pays on debt.
The cost of equity financing is another component of the cost of capital if your
company is a public company. It is possible when you have investors in your company
who can provide money in exchange for an ownership stake in the company.
The following are the important components of the cost of equity capital:
• There is the cost of retained earnings or the money that the company invests
back into the company, instead of paying out dividends.

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 • There is the cost of new common stock or stock that the company issues to Economic Environment
raise money.
• The company may even issue preferred stock to raise money.
Risks associated with the cost of capital NOTES
The cost of capital includes three key risk components, namely risk free rate of return,
business risk premium and financial risk premium.
• Risk free rate of return: It is an investment completely free of risk (i.e.,Treasury
Note)
• Business risk premium: It is a reason to increase the rate of return due to the
uncertainty of the future. For instance, potential investors would heavily factor
in the business risk premium with the major US automakers since the auto
industry as a whole is influx.
• Financial risk premium: It is another factor into the cost of capital since a
company’s current debt levels and interest payment to debt holders will play a
role in their attempts at profitability.

3.4 BANKS AND FINANCIAL INSTITUTIONS

Indian economy is largely dependent on the Indian banking system. The banking system
has been quite effective, the most important of all being, its extensive reach, even to
the remote corners of the country. Banks as well as financial institutions play a very
significant role in the economy of a country, foremost being catering to the need of
credit for all sections of society. An effective banking system is required to for the
economy of a country to function properly.
3.4.1 Central Banking in India (Reserve Bank of India)
The pattern of central banking in India was based on the Bank of England. England
had a highly developed banking system in which the functioning of the central bank as
a banker’s bank and their regulation of money supply set the pattern. The central
bank’s function as ‘a lender of last resort’ was on the condition that the banks maintain
stable cash ratios as prescribed from time to time. The effective functioning of the
British model depends on an active securities market where open market operations
can be conducted at the discount rate. The effectiveness of open market operations
however depends on the member banks’ dependence on the central bank and the
way it influences interest rates. Later models, especially those in developing countries
showed that central banks play an advisory role and render technical services in the
field of foreign exchange, foster the growth of a sound financial system and act as a
banker to government.
The Reserve Bank of India (RBI) is the supreme monetary authority responsible
for controlling the banking system in the country. It was established in 1935 in
accordance with the provisions of the Reserve Bank of India Act, 1935. Though
originally privately owned, since nationalization in 1949, the Reserve Bank is fully
owned by the Government of India. It was nationalized on the basis of the Reserve
Bank of India (Transfer to Public Ownership) Act, 1948. As a result all shares in the
Self-Instructional Material 93
Economic Environment capital of the bank were deemed transferred to the Central Government on payment
of a suitable compensation. The central office of the Reserve Bank is established at
Mumbai and the bank has 22 regional offices, most of which are in state capitals. The
Banking Regulation Act, 1949, provides the legal framework for regulation of the
NOTES banking sector by the Reserve Bank of India.
The main functions of RBI are as follows:
• It formulates, implements and monitors the monetary policy with the objective
of maintaining price stability and ensuring adequate flow of credit to productive
sectors.
• It regulates and supervises the financial system by prescribing the broad
parameters of banking operations within which the system must function.
• It manages foreign exchange in order to facilitate external trade and promotes
orderly development and maintenance of foreign exchange market in India.
• It issues and exchanges or destroys currency and coins not fit for circulation, so
as to give the public adequate quantity of supplies of currency notes and coins
and in good quality.
• It performs a wide range of promotional functions to support national objectives.
• It is the banker to the Central and state governments.
• It is the banker to banks by maintaining banking accounts of all scheduled banks.
RBI’s role in monetary control
One of the most important functions of the RBI is monetary management—regulation
of the quantity of money and the supply and availability of credit for industry, business
and trade. The monetary or credit management activities of the bank are of two types:
general monetary and credit management functions which encompass the total supply
of money and credit and the general level of interest rates. The RBI relies on two types
of instruments, the direct and the indirect. The direct instruments of monetary control
are reserve requirements, administered interest rates and credit controls; and the indirect
instrument of control is open market operations.
RBI’s role in banking supervision
The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect
and supervise commercial banks. These powers are exercised through on–site inspection
and off site surveillance.
Till 1993, regulatory as well as supervisory functions over commercial banks
were performed by the Department of Banking Operations and Development (DBOD).
Subsequently, a new Department of Banking Supervision (DBS) was set up to take
over the supervisory functions relating to the commercial banks from DBOD. For
dedicated and integrated supervision over all credit institutions, i.e., banks, development
financial institutions and non–banking financial companies, the Board for Financial
Supervision (BFS) was set up in November 1994 under the aegis of the Reserve
Bank of India. For focussed attention in the area of supervision over non–banking
finance companies, Department of Supervision was further bifurcated in August 1997
into Department of Banking Supervision (DBS) and Department of Non–Banking
94 Self-Instructional Material
Supervision (DNBS). These Departments now look after supervision over commercial Economic Environment
banks & development financial institutions and non–banking financial companies,
respectively. Both these departments now function under the direction of the Board
for Financial Supervision (BFS).
NOTES
The Board for Financial Supervision constituted an audit sub–committee in
January 1995 with the Vice–Chairman of the Board as its Chairman and two non–
official members of BFS as members. The sub–committee’s main focus is upgradation
of the quality of the statutory audit and concurrent / internal audit functions in banks
and development financial institutions.
• On-site inspection: On-site inspection of banks is carried out on an
annual basis. Besides the head office and controlling offices, certain specified
branches are covered under inspection so as to ensure a minimum coverage
of advances. The Annual Financial Inspection (AFI) focusses on statutorily
mandated areas of solvency, liquidity and operational health of the bank. It
is based on internationally adopted CAMEL model modified as CAMELS,
i.e., capital adequacy, asset quality, management, earning, liquidity and system
and control. While the compliance to the inspection findings is followed up
in the usual course, the top management of the Reserve Bank addresses
supervisory letters to the top management of the banks highlighting the major
areas of supervisory concern that need immediate rectification, holds
supervisory discussions and draws up an action plan, that can be monitored.
All these are followed up vigorously. Indian commercial banks are rated as
per supervisory rating model approved by the BFS which is based on
‘CAMELS’ concept.
• Off–site monitoring: As part of the new supervisory strategy, a focussed
off–site surveillance function was initiated in 1995 for domestic operations
of banks. The primary objective of the off site surveillance is to monitor the
financial health of banks between two on–site inspections, identifying banks
which show financial deterioration and would be a source for supervisory
concerns. This acts as a trigger for timely remedial action. During December
1995 first tranche of off–site returns was introduced with five quarterly returns
for all commercial banks operating in India and two half yearly returns one
each on connected and related lending and profile of ownership, control
and management for domestic banks. The second tranche of four quarterly
returns for monitoring asset–liability management covering liquidity and
interest rate risk for domestic currency and foreign currencies were introduced
since June, 1999. The Reserve Bank intends to reduce this periodicity with
effect from April 1, 2000.
• Corporate governance: With a view to strengthening the corporate
governance and internal control function in the banks, several steps have
been initiated. Introduction of concurrent audit system, constitution of
independent audit committee of board, appointment of RBI nominees on
boards of banks, creation of a post of compliance officer, such are some
steps. Besides, the Reserve Bank monitors the implementation of
recommendations of Jilani Committee relating to internal control systems in
banks on an on–going basis during the annual financial inspection of banks.
Self-Instructional Material 95
Economic Environment • Initiatives and directions: The Reserve Bank has taken several other
supervisory policy initiatives. These include quarterly monitoring visits to
banks displaying financial and systemic weaknesses, appointment of
monitoring officers and direct monitoring of certain problem areas in
NOTES housekeeping, etc. In addition the department provides secretarial support
to the Board for Financial Supervision and acts as its executive arm. It is the
BFS which evolves policies relating to supervision. It also attends to
appointment of statutory central auditors / branch auditors for all banks and
selected all India financial institutions and to complaints against banks. The
department monitors cases of frauds perpetrated in banks and reported to
it. The department as a one time measure, issued several guidelines to banks
and all India financial institutions to enable them to become Y2K compliant.
• Core principles: Against the backdrop of banking sector reforms in India
and the global focus on internal control and supervisory mechanism, the
need for building a strong and efficient banking system comparable to the
international standards cannot be gainsaid. A detailed study was carried out
so as to ascertain gaps, if any, in implementing the 25 core principles of
effective banking supervision enunciated by the Bank for International
Settlements (BIS). Necessary steps have already been initiated to fill in the
gaps, so as to make the regulatory as well supervisory system more sound
and comparable to international standards.
• Supervision over FIs: On the basis of the recommendations made by an
in–house group, the monitoring of the financial institutions first started after
1990. This was done through prescribed quarterly returns on liabilities /
assets, source and deployment of funds, etc. The objective of this monitoring
was to obtain a macro level perspective for evolving monetary and credit
policy, to assess the quality of assets of the financial system and to improve
co–ordination between banks and FIs. In 1994, these institutions were
brought under the prudential regulation of the Reserve Bank.
The Reserve Bank has adopted more or less, the CAMELS approach for
regulation of Fis. Since FIs are vested with developmental role as well and with
responsibility of supervision of other institutions, evaluation of their
developmental, coordinating and supervisory role is also undertaken.
The newly created division in the department at present supervises and regulates
ten select all–India financial institutions viz., IDBI, ICICI, IFCI, IIBI, Exim
Bank, NABARD, NHB, SIDBI, IDFC and TFCI. With a view to having a
continuous monitoring and supervision of these FIs, an off-site surveillance system
has also been put in place.
Further, the division collects from LIC, GIC and UTI information relating to
Bank rate: The standard assets and liabilities and flow of funds for the purpose of overall assessment of
rate at which (the Bank) is the impact of the operations of FIs on the total flow of resources in the economy
prepared to buy or and for compiling new liquidity and monetary aggregates.
rediscount bills of exchange
or other commercial papers Bank rate and discount rate
eligible to purchase under
the Reserve Bank of India Bank rate has been defined in Section 49 of the Reserve Bank of India Act, 1934 as
Act, 1934
the standard rate at which (the Bank) is prepared to buy or rediscount bills of exchange
96 Self-Instructional Material
or other commercial papers eligible to purchase under the Act. It is the rate at which Economic Environment
the central bank lends funds as a ‘lender of the last resort’ to banks against approved
securities, purchases and discount-eligible bills of exchange. The effect of change in
the discount rate is to make the cost of securing funds from the central bank cheaper
or more expensive, bring about changes in the structure of interest rates and serve as NOTES
a signal to the money market of the relaxation or restraint of credit policy. Its effectiveness
depends on the dependence of commercial banks on the central bank for additional
resources.
A rise in the cost of borrowing from the central bank would result in a
corresponding levering up of rates, increasing the cost of credit and consequently
reducing the volume. Before changing the bank rate, the market should be conditioned.
For instance, before raising the rate, the surplus liquidity in the market should be
absorbed. The effect of bank rate change on the structure of interest rates depends on
market interpretation of how durable the change is, and the degree of integration of the
money and capital markets. The effect on Long-term rates is appreciable owing to
infrequent changes and their expected long tenure. Initially, financial accommodation
from the Reserve Bank was largely provided at the bank rate. In the absence of a
genuine bill market, application of bank rate was confined to Ways and Means
Advances to state governments and advances to primary cooperative banks for SSIs
and state financial corporations, besides penal interest rates on shortfalls in reserve
requirements.
In its monetary policy for 2011–12, the RBI kept the bank rate at six per cent.
RBI as the banker to government
The RBI is the banker to the Government of India statutorily and to state governments
by virtue of agreements entered into with them. The Bank accepts money on deposit,
withdrawal of funds by cheques, receipt and collection of payments to the government
and transfer of funds by various means throughout India. The terms and conditions on
which the bank acts as a banker to the Central and State Governments are set out in
separate agreements which the bank has entered into with them. Under the agreement,
the RBI is required to transact the general banking business of the Central Government
and keep accounts in its books. The Central Government earlier maintained a minimum
cash balance of ` 50 crore. Whenever the balance fell below it, the account was
replenished by the creation of treasury bills known as ad hocs which are held in the
Issue Department. During the period 1985–92, net RBI credit to the Central
Government accounted for over 96 per cent of the monetary base. According to an
agreement between the Government of India and the RBI in September 1994, the net
issue of ad hocs was not allowed to exceed ` 5,000 crore at the end of the financial
years 1995–96 and 1996–97 and ` 9,000 crore for more than ten consecutive working
days at any time during the year 1996–97. The impact on monetization was reduced
as a result.
Current data on RBI credit to government
According to Economic Survey 2011-12, net RBI credit to the central government
increased by ` 1,82,454 crore in 2010-11, as compared to an increase of ` 1,49,820
crore during 2009-10.
Self-Instructional Material 97
Economic Environment The expansion in net RBI credit to the centre in 2010-11 reflected the combined
effects of monetary operations conducted through OMOs, including liquidity adjustment
facility (LAF) operations.
Ways and means advances: According to the agreement between the
NOTES
Government of India and the RBI (26 March 1997), the bank will provide Ways and
Means Advances (WMA) to the government, as and when required at an interest rate
mutually agreed from time to time. These advances will have to be repaid within three
months. When 75 per cent of the agreed level of Ways and Means Advances are
utilized, the RBI will trigger fresh floatation of government securities.
3.4.2 Commercial Banks
As per the Reserve Bank of India Act, 1934, banks in India are classified into scheduled
and non–scheduled banks. Scheduled banks are those which are entered into the
second schedule of the RBI Act, 1934. It includes those banks which have a paid-up
capital and reserves of an aggregate value of not less than ` 5 lakhs and which satisfy
RBI that their affairs are being carried out in the interests of the depositors. While,
non–scheduled banks are those which have not been included in the second schedule
of the Act. The scheduled banks comprise scheduled commercial banks and scheduled
cooperative banks. Further, the scheduled commercial banks in India are categorized
into five different groups according to their ownership and/or nature of operation:
(i) Nationalized Banks; (ii) State Bank of India and its associates; (iii) Regional Rural
Banks (RRBs); (iv) Foreign banks; and (v) Other Indian private sector banks.
Scheduled Co–operative Banks consist of Scheduled State Co–operative Banks and
Scheduled Urban Co–operative Banks.
At present, there are 170 scheduled commercial banks in the country, which
includes 91 regional rural banks (RRBs), 19 nationalized banks, 8 banks in State
Bank of India group and the Industrial Development Bank of India Limited (IDBI
Ltd). Besides, there are only four non–scheduled commercial banks in the country.
RBI report on operation and performance of commercial banks
in 2010-11
According to a RBI report, the Indian banking sector performed better in 2010-11
over 2009-10 despite the challenging operational environment. The banking business
of Scheduled Commercial Banks (SCBs) recorded higher growth in 2010-11 as
compared with their performance during few years preceding 2010. Credit grew at
22.9 per cent and deposits grew at 18.3 per cent in 2010-11 over 2009-10. Accordingly,
the outstanding credit-deposit ratio of SCBs increased to 76.5 per cent in 2010-11 as
compared with 73.6 per cent in 2009-10. Despite the growing pressures on margins
owing to higher interest rate environment, the return on assets (RoA) of SCBs improved
to 1.10 per cent in 2010-11 from 1.05 per cent in 2009-10. The capital to risk weighted
assets ratio under both Basel I and II frameworks at 13.0 per cent and 14.2 per cent,
respectively in 2010-11 remained well above the required minimum of 9 per cent. The
gross NPAs to gross advances ratio declined to 2.25 per cent in 2010-11 from 2.39
per cent in 2009-10, displaying improvement in asset quality of the banking sector.
Though there was improvement in the penetration of banking services in 2010-11
over 2009-10, the extent of financial exclusion continued to be staggering. The number
98 Self-Instructional Material
of complaints received at the Banking Ombudsman offices witnessed decline in Economic Environment
2010-11 over 2009-10.
Performance of banks was conditioned by the dynamics of
growth-inflation trade-off NOTES
The Indian banking sector, which is the edifice of the Indian financial sector, though
weathered the worst consequences of the global financial turmoil to a large extent, had
to traverse through a challenging macroeconomic environment during the post crisis
period. Followed by the financial turmoil, the global financial sector was generally
turbulent mainly because of the European sovereign debt crisis, and sluggish growth
recovery in the Euro zone as also in the US. In contrast, the banking sectors in the
emerging market economies displayed better performance in 2010-11 as compared
with their western counterparts. However, improving economic growth while keeping
inflation at tolerable levels was a policy challenge faced by many of the emerging
market economies including India during the post crisis period. To keep inflation at
tolerable levels, the Reserve Bank has also undertaken monetary tightening during
2010-11. Accordingly, the operations and performance of commercial banks during
2010-11 was conditioned to a great extent by the dynamics of growth-inflation trade-
off experienced by the Indian economy.
Banks operated in a challenging operational environment
During 2010-11, higher interest rate environment not only caused concerns about
slowdown in credit growth, but also increased the possibility of deterioration in asset
quality on the back of the possible weakening of the repayment capacities of borrowers
in general. The tight interest rate environment also affected the profit prospects of
commercial banks due to the possibility of lower margins in 2010-11. During the year,
the large credit intake by some of the crucial sectors such as NBFCs and infrastructure,
also raised concerns about financial soundness through the potential build up of sectoral
credit booms. Large borrowings by the telecommunication companies to participate
in the auction of 3G spectrum, reduction in Government spending as also the large
currency holdings by the public due to high inflation made the liquidity conditions more
stringent in 2010-11. Further, the need to migrate towards advanced approaches of
capital calibration under Basel II was also a challenge that loomed large in the Indian
banking sector. Alongside, there was also a pressing need to become more innovative
to transform unbanked villages into profitable business locations thereby strengthening
the financial inclusion process, to keep up with the latest technological developments
and to improve the quality of customer service.
3.4.3 National Level Financial Institutions
Important national financial institutions in India are as follows:
1. Small Industries Development Bank Of India [SIDBI]
SIDBI has been set up by the Government of India with its headquarters in Lucknow,
Uttar Pradesh, as the principal financial institution for promotion, financing and
development of industries in the small scale sector and to coordinate functions of the
institutions engaged in similar activities.

Self-Instructional Material 99
Economic Environment SIDBI aim is to serve as the principal financial institutions for promotion financing
and development of industry in the small scale sector and to co–ordinate the functions
of the institutions engaged in promoting, financing or developing industry in the small
scale sector.
NOTES
2. Industrial Development Bank of India (IDBI)
IDBI was a wholly owned subsidiary of RBI up to February 1976. It was delinked
from RBI w.e.f. February 1976 and was made an autonomous corporation fully owned
by the Government of India. The IDBI is the apex financial institution and besides
providing financial assistance on consortium basis, the major function of coordination
between the various institutions is looked after by the bank. It also provides refinance
facility to the eligible financial institutions including term loans. The bank sanctions the
financial assistance to the industrial concerns engaged in the manufacture or processing
of goods, mining, transport generation and distribution of power etc. both in private
and public sectors. There is no restriction on the quantum of assistance or the maximum
or minimum limits.
IDBI finances new projects/expansions/diversification/modernizations of
projects. It provides refinance facility to the primary lending institutions i.e. SFC/SIDC/
Commercial Banks etc.
3. Industrial Finance Corporation of India (IFCI)
The Industrial Finance Corporation of India (IFCI) was established on July 1, 1948,
Check Your Progress as the first Development Financial Institution in the country to cater to the Long-term
1. State any two theories that finance needs of the industrial sector. The newly-established DFI was provided access
encompass the study of to low-cost funds through the central bank’s Statutory Liquidity Ratio or SLR which in
economic development by turn enabled it to provide loans and advances to corporate borrowers at concessional
social scientists.
rates.
2. What is the main argument
put forth by dependency IFCI has fulfilled its original mandate as a DFI by providing Long-term financial
theorists?
support to all segments of Indian Industry. It has also been chiefly instrumental in
3. State the two phases in
India’s economic
translating the Government’s development priorities into reality. Until the establishment
development history since of ICICI in 1956 and IDBI in 1964, IFCI remained solely responsible for
Independence . implementation of the government’s industrial policy initiatives. Its contribution to the
4. How did the BOP crisis of modernization of Indian industry, export promotion, import substitution, entrepreneurship
1990–1991 turn into an
opportunity for wider development, pollution control, energy conservation and generation of both direct and
reforms in India market? indirect employment is noteworthy.
5. What is the function of the 4. National Bank for Agriculture And Rural Development (NABARD)
Issue Department of the
Reserve Bank of India? NABARD is established as a development Bank, in terms of the Preamble of the Act,
6. What are the tools of credit ‘for providing and regulating Credit and other facilities for the promotion and
control?
development of agriculture, small scale industries, cottage and village industries,
7. What do you understand by
factoring? handicrafts and other rural crafts and other allied economic activities in rural areas with
8. When was the Reserve Bank a view to promoting integrated rural development and securing prosperity of rural
of India nationalized? areas and for matters connected therewith or incidental thereto.’
9. What is the bank rate?
The main functions of the NABARD are as follows:
10. When was the Industrial
Finance Corporation of (i) It serves as an apex financing agency for the institutions providing investment
India (IFCI) established? and production credit for promoting the various developmental activities in rural
areas.
100 Self-Instructional Material
 (ii) It takes measures towards institution building for improving absorptive capacity Economic Environment
of the credit delivery system, including monitoring, formulation of rehabilitation
schemes, restructuring of credit institutions, training of personnel, etc.
(iii) It coordinates the rural financing activities of all institutions engaged in
NOTES
developmental work at the field level and maintains liaison with Government of
India, State Governments, Reserve Bank of India (RBI) and other national
level institutions concerned with policy formulation.
(iv) It undertakes monitoring and evaluation of projects refinanced by it.

3.5 FISCAL SYSTEM: GOVERNMENT BUDGET AND

TAXATION MEASURES

The term fiscal system refers to government finances, especially tax revenues. The
term is also used to refer to the government’s financial matters.
3.5.1 Fiscal Policy
The objective of fiscal policy differs from country to country and from time to time,
depending upon the nature of the economy of the country and the particular
circumstances and problems faced by the country.
Fiscal policy refers to the policy in connection with the Government (1) spending Fiscal policy: The policy in
(2) taxation and (3) borrowing. The total volume of expenditure can be increased by connection with the
government spending,
the right type of fiscal policy. Though the fiscal techniques were discovered and first taxation and borrowing
made use of during the depression of the 30s, the techniques are capable of being
applied equally effectively in times of inflation. In Figure 3.1, C+I line shows the
aggregate expenditure of the community. It can be raised to a higher level by the
appropriate fiscal policy. The result will be a shift of E to E1 the full employment
equilibrium position.
Y
E1

E C+I
C

45°

O M N X

Fig. 3.1 Fiscal Policy

Fiscal measures to achieve full employment and to avoid depression include

(1) compensatory tax policy and (2) Government expenditure policy.
1. The traditional view regards that taxation is for revenue only and the opposite
view expressed by the Keynesian school is that taxation is for maintaining an
adequate volume of public expenditure. All taxes bring about some reduction
in the level of consumption or investment and this affects the level of national
income. Since the level of employment depends on the level of total
Self-Instructional Material 101
Economic Environment expenditure, it is always necessary to maintain that level of total expenditure
which assures full employment. Experience has shown that private
consumption expenditure and private investment expenditure, if left
uncontrolled, cannot be relied upon for maintaining a level of expenditure
NOTES which is appropriate to a state of full employment. In a depression, the
policy should be to substitute public spending for deficient public spending
and to reduce taxation to encourage private spending. During boom
conditions, a maximum of taxation is necessary to defend the economy against
price inflation. The general purpose of counter–cyclical taxation is to
encourage private consumption and investment when national income is below
the full employment level and to break consumption and investment when
full employment has been reached and further spending can result only in
inflation.
2. It is held that the Government should maintain a state of full employment
means of what is called compensatory spending. When prices go on falling
and depression sets in, it is necessary for the Government to go on injecting
more and more money in order to offset the increasing disappearance of
private funds from flow of spendings. When prices go on rising and inflationary
conditions appear, the Government should reduce public expenditure to
contain inflation. At this stage, the Government should have surplus budgets
in order to stave off inflation. The main purpose of compensatory spending
is to fill up the gap between full employment expenditure and actual
expenditure. If private consumption and investment expenditures are not
appropriate for full employment, the Government should spend huge sums
of money to make good the deficiency in total spending.
Modern fiscal policy involves the process of shaping taxation and public
expenditure in order to (1) reduce the fluctuations of trade cycle and (2) to contribute
towards the maintenance of a growing, high–employment economy from excessive
inflation or deflation. When private investment and consumption spending creates an
inflationary (or deflationary) gap, it is the task of the fiscal and monetary policy to
offset the gap in the attempt to preserve price stability and full employment. The
objective of the fiscal policy is to achieve growth and full employment without inflation.
3.5.2 Fiscal Policy in India
Public finance is the major instrument of public policy. This subject area deals in
economic analysis of government budget operations. It is concerned with the real
effects of government expenditures and receipts on production, consumption,
employment and distribution in the economy.
India is a federal country with a 3-tier government—Central government–state
and union territory governments and local authorities—municipalities, panchayats etc.
The budget for these governmental agencies cover not only their own account receipts
and expenditures but also various types of transfers. With a major exception in the
case of Railways, budgets of Central and state governments also cover receipts and
expenditures of government–run departmental public undertakings like All India Radio,
Doordarshan and Post and Telegraphs. Non–departmental public undertakings, such
as SAIL, Bharat Heavy Electricals and HMT are not covered in the government
102 Self-Instructional Material budget.
 The major objective of the fiscal policy in India is to promote a balanced growth Economic Environment
of the economy. Growth is basically a domain of planning. However, the implementation
of planning depends on fiscal operations of the government corresponding to annual
budget. An annual plan is prepared that shows budgetary allocation for public investment
in different sectors. Public investment gives direction to private investment. Another NOTES
major objective of the fiscal policy is to stabilize aggregate demand and price level.
This objective of the fiscal policy is in close correspondence with the monetary policy.
When the general price level rises, taxes are raised and a squeeze is applied on the
growth of Government expenditure. Fiscal policy in India is generally expansionary,
i.e., it generates more demand than supply in the short run. When price level rises very
fast the Government restrains the growth of public expenditure.
The third major objective of the fiscal policy in India is to encourage saving and
discourage consumption, particularly conspicuous consumption. The Government
discourages consumption by levying higher taxes on luxury consumption goods and on
the income and wealth of richer persons. Saving is encouraged by allowing tax
concessions on household financial savings. Private companies are also given rebates
for investment.
Apart from discouraging consumption in general, the fiscal policy puts a special
emphasis on curbing of import of consumer goods. Until recently, imports of luxury
consumer goods were heavily taxed and put beyond the purchasing power of the
middle class. Even now, they are taxed heavier than the imports of intermediate and
capital goods.
Another major objective of fiscal policy is to alter the allocation of resources in
favour of more productive and socially more desirable sectors. Higher taxes are levied
on mill–made textile products and lower taxes are levied and subsidy given to handloom
and khadi products. Similarly, the small scale sector is encouraged at the expense of
the large–scale sector. Fiscal policy is also used to discourage the use of scarce capital
and encourage the use of labour in production. Tax concessions and subsidy are given
for labour intensive productions. Tax policy also favour agriculture; relatively less tax
is levied on agriculture than in industry.
Balanced regional growth is a prime objective of the fiscal policy in India. In the
pre–Independence days, most industries were concentrated around a few metropolitan
cities. In the post–Independence period, the fiscal policy is pursued vigorously to
decentralize industrial growth. New public investment in industries has gone to hitherto
industrially backward regions. Tax concessions are given for starting private industries
in rural and backward regions.
Inter–personal equity is another key objective of the fiscal policy. Tax policies
favour the poor at the expense of the rich. No income and wealth taxes are levied on
the low income classes and progressively more taxes are levied on higher income
classes. Less indirect taxes are also levied on consumption goods of poor people—
matches, kerosene, etc. and more taxes are levied on consumption goods of rich
people. Subsidy is given on purchase of food from ration shop. Government budget: A legal
document that is often
3.5.3 Government Budget passed by the legislature,
and approved by the chief
A government budget is a legal document that is often passed by the legislature, and executive or President
approved by the chief executive–or president. For example, only certain types of
Self-Instructional Material 103
Economic Environment revenue may be imposed and collected. The two basic elements of any budget are the
revenues and expenses. In the case of the government, revenues are derived primarily
from taxes. Government expenses include spending on current goods and services,
which economists call government consumption; government investment expenditures
NOTES such as infrastructure investment or research expenditure; and transfer payments like
unemployment or retirement benefits.
In India, the budget documents presented to Parliament include the Annual
Financial Statement (AFS), Demands for Grants (DG), Appropriation Bill, Finance
Bill and Fiscal Policy Strategy Statement for the financial year. In addition to these,
individual Departments/Ministries also prepare and present to Parliament their Detailed
Demands for Grants, Outcome Budget, and their Annual Reports. The Economic
Survey which highlights the economic trends in the country and facilitates a better
appreciation of the mobilization of resources and their allocation in the Budget is brought
out by the Economic Division of Department of Economic Affairs, Ministry of Finance.
The Economic Survey is presented to Parliament in advance of the Union Budget.
To monitor the performance management of various Ministries/Departments,
Result Framework Document (RFD) system has been adopted by the Government.
The RFD system is being implemented in the various Ministries/Departments in phased
manner. Performance Management in the Government is a new concept which
determines the performance index based upon the agreed objectives, policies, programs
and projects/schemes. To ensure the success in achieving the agreed objectives and
implementing agreed policies, programs and projects, the RFD also includes a
commitment for required resources and necessary operational autonomy.
1. Annual Financial Statement (AFS)
Annual Financial Statement (AFS), the document as provided under Article 112, shows
estimated receipts and expenditure of the Government of India for a year in relation to
estimates and expenditures for the previous year. The receipts and disbursements are
shown under the three parts, in which Government Accounts are kept viz.,
(i) consolidated fund, (ii) contingency fund and (iii) public account. Under the
Constitution, Annual Financial Statement distinguishes expenditure on revenue account
from other expenditure. Government Budget, therefore, comprises Revenue Budget
and Capital Budget. The estimates of receipts and expenditure included in the Annual
Financial Statement are for the expenditure net of refunds and recoveries, as will be
reflected in the accounts.
(i) Consolidated fund: The existence of the Consolidated Fund of India (CFI)
flows fromArticle 266 of the Constitution. All revenues received by Government,
loans raised by it, and also its receipts from recoveries of loans granted by it
form the Consolidated Fund. All expenditure of Government is incurred from
the Consolidated Fund of India and no amount can be drawn from the
Consolidated Fund without authorization from Parliament.
(ii) Contingency fund: Article 267 of the Constitution authorizes the Contingency
Fund of India which is an imprest placed at the disposal of the President of
India to facilitate Government to meet urgent unforeseen expenditure pending
authorization from Parliament. Parliamentary approval for such unforeseen
expenditure is obtained, post–facto, and an equivalent amount is drawn from
104 Self-Instructional Material
 the Consolidated Fund to recoup the Contingency Fund. The corpus of the Economic Environment
Contingency Fund as authorized by Parliament presently stands at ` 500 crore.
(iii) Public account: Moneys held by Government in Trust as in the case of Provident
Funds, Small Savings collections, income of Government set apart for expenditure
NOTES
on specific objects like road development, primary education, Reserve/Special
Funds etc. are kept in the Public Account. Public Account funds do not belong
to Government and have to be finally paid back to the persons and authorities
who deposited them. Parliamentary authorization for such payments is, therefore,
not required, except where amounts are withdrawn from the Consolidated Fund
with the approval of Parliament and kept in the Public Account for expenditure
on specific objects, in which case, the actual expenditure on the specific object
is again submitted for vote of Parliament for withdrawal from the Public Account
for incurring expenditure on the specific object.
(iv) Revenue budget: Revenue Budget consists of the revenue receipts of
Government (tax revenues and other revenues) and the expenditure met from
these revenues. Tax revenues comprise proceeds of taxes and other duties
levied by the Union. The estimates of revenue receipts shown in the Annual
Financial Statement take into account the effect of various taxation proposals
made in the Finance Bill. Other receipts of Government mainly consist of interest
and dividend on investments made by Government, fees, and other receipts for
services rendered by Government. Revenue expenditure is for the normal running
of Government departments and various services, interest payments on debt,
subsidies, etc. Broadly, the expenditure which does not result in creation of
assets for Government of India is treated as revenue expenditure. All grants
given to State Governments/Union Territories and other parties are also treated
as revenue expenditure even though some of the grants may be used for creation
of assets.
(v) Capital budget: Capital Budget consists of capital receipts and capital payments.
The capital receipts are loans raised by Government from public, called market
loans, borrowings by Government from Reserve Bank and other parties through
sale of Treasury Bills, loans received from foreign Governments and bodies,
disinvestment receipts and recoveries of loans from State and Union Territory
Governments and other parties. Capital payments consist of capital expenditure
on acquisition of assets like land, buildings, machinery, equipment, as also
investments in shares, etc., and loans and advances granted by Central
Government to State and Union Territory Governments, Government companies,
Corporations and other parties.
2. Demands for Grants
Article 113 of the Constitution mandates that the estimates of expenditure from the
Consolidated Fund of India included in the Annual Financial Statement and required
to be voted by the Lok Sabha are submitted in the form of Demands for Grants. The
Demands for Grants are presented to the Lok Sabha along with the Annual Financial
Statement. Generally, one Demand for Grant is presented in respect of each Ministry
or Department. However, more than one Demand may be presented for a Ministry or
Department depending on the nature of expenditure.
Self-Instructional Material 105
Economic Environment 3. Appropriation Bill
Under Article 114(3) of the Constitution, no amount can be withdrawn from the
Consolidated Fund without the enactment of such a law by Parliament. After the
NOTES Demands for Grants are voted by the Lok Sabha, Parliament’s approval to the
withdrawal from the Consolidated Fund of the amounts so voted and of the amount
required to meet the expenditure charged on the Consolidated Fund is sought through
the Appropriation Bill.
4. Finance Bill
At the time of presentation of the Annual Financial Statement before Parliament, a
Finance Bill is also presented in fulfillment of the requirement of Article 110 (1)(a) of
the Constitution, detailing the imposition, abolition, remission, alteration or regulation
of taxes proposed in the Budget. A Finance Bill is a Money Bill as defined in Article
110 of the Constitution. It is accompanied by a Memorandum explaining the provisions
included in it.
5. Fiscal Policy Strategy Statement
The Fiscal Policy Strategy Statement, presented to Parliament under Section 3(4) of
the Fiscal Responsibility and Budget Management Act, 2003, outlines the strategic
priorities of Government in the fiscal area for the ensuing financial year relating to
taxation, expenditure, lending and investments, administered pricing, borrowings and
guarantees. The Statement explains how the current policies are in conformity with
sound fiscal management principles and gives the rationale for any major deviation in
key fiscal measures.
3.5.4 Fiscal Deficit and Inflation
The difference between the government’s total expenditure and its total receipts
(excluding borrowing) is called fiscal deficit. The elements of the fiscal deficit are as
follows:
• Revenue deficit, which is the difference between the government’s current (or
revenue) expenditure and total current receipts (i.e., excluding borrowing)
• Capital expenditure
The fiscal deficit is financed by borrowing from the RBI (which is also called
deficit financing or money creation) and market borrowing (i.e., from the money
market).
A fiscal deficit does not necessarily lead to inflation
Two arguments are usually given to connect a high fiscal deficit to inflation. The first
argument is based on the fact that the portion of the fiscal deficit which is financed by
borrowing from the RBI results in an increase in the money stock. Some believe that a
higher money stock automatically brings inflation as ‘more money chases the same
goods’. However, this is an unsubstantiated argument. There are two flaws in this
argument.
(i) It is not the ‘same goods’ which the new money stock chases as output of
goods may raise due to the increased fiscal deficit. If any economy has unutilized
106 Self-Instructional Material
 resources, output is held in check by the lack of demand and a high fiscal deficit Economic Environment
may be followed by greater demand and greater output.
(ii) The pace with which money ‘chases’ goods is not stable. It varies owing to
changes in other economic variables. Thus, even if a part of the fiscal deficit
NOTES
translates into a larger money stock, it need not lead to inflation.
The second argument to associate fiscal deficits with inflation is that in an economy
in which the output of some important goods cannot be increased, the increase in
demand due to a larger fiscal deficit will raise prices. This argument is also criticized on
the following grounds:
(i) This argument is evidently irrelevant for the economy with abundant supplies
of foodgrains and foreign exchange.
(ii) Even if some particular goods are in short supply, rationing and similar
strategies can halt any rise in price.
Inflation in 2011-12
According to Economic Survey 2011-12, financial year 2011-12 started with a
headline inflation of 9.7 per cent, which briefly touched double digits in September
2011 before coming down to 6.6 per cent in January 2012. Consumer price inflation
(CPI) for the major indices declined to below 7 per cent in December 2011, and fell
further in January 2012. Headline wholesale price index (WPI) inflation remained
relatively sticky at around 9 per cent during the calendar year 2011.The factors
contributing to this situation and their relative importance have, however, been changing
over time. Some of the contributory factors during this period include (a) higher primary
articles prices driven by vegetables, eggs, meat, and fish due to changing dietary pattern
of consumers; (b) increasing global commodity prices especially metal and chemical
prices which ultimately led to higher domestic manufactured prices; and (c) persistently
high international crude petroleum prices in the last two years averaging around
US $ 111 per barrel in 2011 (Jan.–Dec.) as compared to US $ 80 per barrel
(Jan.–Dec.) in 2010.
3.5.5 Taxation Measures
India has a well–developed tax structure with clearly demarcated authority between
Central and State Governments and local bodies. Central Government levies taxes on
income (except tax on agricultural income, which the State Governments can levy),
customs duties, central excise and service tax. Value Added Tax (VAT), stamp duty,
state excise, land revenue and profession tax are levied by the State Governments.
Local bodies are empowered to levy tax on properties, octroi and for utilities like
water supply, drainage etc.
Indian taxation system has undergone tremendous reforms during the last decade.
The tax rates have been rationalized and tax laws have been simplified resulting in
better compliance, ease of tax payment and better enforcement. The process of
rationalization of tax administration is ongoing in India.
Direct taxes
In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the
taxpayer.
Self-Instructional Material 107
Economic Environment • Income tax: According to Income Tax Act 1961, every person, who is an
assessee and whose total income exceeds the maximum exemption limit, shall
be chargeable to the income tax at the rate or rates prescribed in the Finance
Act. Such income tax shall be paid on the total income of the previous year in
NOTES the relevant assessment year.
• Corporate tax: A company has been defined as a juristic person having an
independent and separate legal entity from its shareholders. Income of the
company is computed and assessed separately in the hands of the company.
However the income of the company, which is distributed to its shareholders as
dividend, is assessed in their individual hands. Such distribution of income is not
treated as expenditure in the hands of company; the income so distributed is an
appropriation of the profits of the company.
• Capital gains tax: A capital gain is income derived from the sale of an
investment. A capital investment can be a home, a farm, a ranch, a family business,
work of art etc. In most years slightly less than half of taxable capital gains are
realized on the sale of corporate stock. The capital gain is the difference between
the money received from selling the asset and the price paid for it. Capital gain
also includes gain that arises on ‘transfer’ (includes sale, exchange) of a capital
asset and is categorized into short–term gains and Long-term gains.
Indirect taxes
Indirect taxes include sales tax, value added tax, excise duty and customs duty.
• Central Sales Tax (CST): Central Sales tax is generally payable on the sale
of all goods by a dealer in the course of inter–state trade or commerce or,
outside a state or, in the course of import into or, export from India. The ceiling
rate on central sales tax (CST), a tax on inter–state sale of goods, has been
reduced from 4 per cent to 3 per cent in the current year.
Value Added Tax (VAT): A • Value Added Tax (VAT): VAT is a multi–stage tax on goods that is levied
multi-stage tax on goods across various stages of production and supply with credit given for tax paid at
that is levied across various
stages of production and
each stage of value addition. Introduction of state level VAT is the most significant
supply with credit given for tax reform measure at state level. The state level VAT has replaced the existing
tax paid at each stage of State Sales Tax. The decision to implement State level VAT was taken in the
value addition meeting of the Empowered Committee (EC) of State Finance Ministers held on
June 18, 2004, where a broad consensus was arrived at to introduce VAT from
April 1, 2005. Accordingly, all states/UTs have implemented VAT.
• Excise duty: Central Excise duty is an indirect tax levied on goods manufactured
in India. Excisable goods have been defined as those, which have been specified
in the Central Excise Tariff Act as being subjected to the duty of excise.
There are three types of Central Excise duties collected in India namely
o Basic excise duty: This is the duty charged under section 3 of the Central
Excises and Salt Act,1944 on all excisable goods other than salt which
are produced or manufactured in India at the rates set forth in the schedule
to the Central Excise tariff Act,1985.
o Additional duty of excise: Section 3 of the Additional duties of Excise
(goods of special importance) Act, 1957 authorizes the levy and collection
108 Self-Instructional Material
 in respect of the goods described in the Schedule to this Act. This is levied Economic Environment
in lieu of sales Tax and shared between Central and State Governments.
These are levied under different enactments like medicinal and toilet
preparations, sugar etc. and other industries development etc.
NOTES
o Special excise duty: As per the Section 37 of the Finance Act,1978
Special excise Duty was attracted on all excisable goods on which there is
a levy of Basic excise Duty under the Central Excises and Salt Act,1944.
Since then each year the relevant provisions of the Finance Act specifies
that the Special Excise Duty shall be or shall not be levied and collected
during the relevant financial year.
• Customs duty: Custom or import duties are levied by the Central Government
of India on the goods imported into India. The rate at which customs duty is
leviable on the goods depends on the classification of the goods determined
under the Customs Tariff. The Customs Tariff is generally aligned with the
Harmonized System of Nomenclature (HSL). In line with aligning the customs
duty and bringing it at par with the ASEAN level, government has reduced the
peak customs duty from 12.5 per cent to 10 per cent for all goods other than
agriculture products. However, the Central Government has the power to
generally exempt goods of any specified description from the whole or any part
of duties of customs leviable thereon. In addition, preferential/concessional rates
of duty are also available under the various Trade Agreements.
• Service tax: Service tax was introduced in India way back in 1994 and started
with mere 3 basic services viz. general insurance, stock broking and telephone.
Today the counter services subject to tax have reached over 100. There has
been a steady increase in the rate of service tax. From a mere 5 per cent,
service tax is now levied on specified taxable services at the rate of 12 per cent
of the gross value of taxable services. However, on account of the imposition of
education cess of 3 per cent, the effective rate of service tax is at 12.36 per
cent.
Tax proposals in 2012–13 Budget
Direct taxes
• Tax proposals for 2012–13 mark progress in the direction of movement towards
DTC and GST.
• DTC rates proposed to be introduced for personal income tax.
• Exemption limit for the general category of individual taxpayers proposed to be
enhanced from ` 1,80,000 to ` 2,00,000 giving tax relief of ` 2,000.
• Upper limit of 20 per cent tax slab proposed to be raised from ` 8 lakh to ` 10
lakh.
• Proposal to allow individual tax payers, a deduction of up to ` 10,000 for
interest from savings bank accounts.
• Proposal to allow deduction of up to ` 5,000 for preventive health check up.
• Senior citizens not having income from business proposed to be exempted from
payment of advance tax.
Self-Instructional Material 109
Economic Environment • To provide low cost funds to stressed infrastructure sectors, rate of withholding
tax on interest payment on ECBs proposed to be reduced from 20 per cent to
5 per cent for 3 years for certain sectors.
• Restriction on Venture Capital Funds to invest only in 9 specified sectors
NOTES
proposed to be removed.
• Proposal to continue to allow repatriation of dividends from foreign subsidiaries
of
• Indian companies at a lower tax rate of 15 per cent up to 31.3.2013.
• Investment link deduction of capital expenditure for certain businesses proposed
to be provided at the enhanced rate of 150 per cent.
• New sectors to be added for the purposes of investment linked deduction.
• Proposal to extend weighted deduction of 200 per cent for R&D expenditure
in an inhouse facility for a further period of 5 years beyond March 31, 2012.
• Proposal to provide weighted deduction of 150 per cent on expenditure incurred
for agri–extension services.
• Proposal to extend the sunset date for setting up power sector undertakings by
one year for claiming 100 per cent deduction of profits for 10 years.
• Turnover limit for compulsory tax audit of account and presumptive taxation of
SMEs to be raised from ` 60 lakhs to ` 1 crore.
• Exemption from Capital Gains tax on sale of residential property, if sale
consideration is used for subscription in equity of a manufacturing SME for
purchase of new plant and machinery.
• Proposal to provide weighted deduction at 150 per cent of expenditure incurred
on skill development in manufacturing sector.
• Reduction in securities transaction tax by 20 per cent on cash delivery
transactions.
• Proposal to extend the levy of Alternate Minimum Tax to all persons, other than
companies, claiming profit linked deductions.
• Proposal to introduce General Anti Avoidance Rule to counter aggressive tax
avoidance scheme.
• Measures proposed to deter the generation and use of unaccounted money.
• A net revenue loss of ` 4,500 crore estimated as a result of Direct Tax proposals.
Indirect taxes
Service tax
• Service tax confronts challenges of its share being below its potential, complexity
in tax law, and need to bring it closer to Central Excise Law for eventual transition
to GST.
• Overwhelming response to the new concept of taxing services based on negative
list.
• Proposal to tax all services except those in the negative list comprising of 17
heads.
110 Self-Instructional Material
 • Exemption from service tax is proposed for some sectors. Economic Environment

• Service tax law to be shorter by nearly 40 per cent.

• Number of alignment made to harmonize Central Excise and Service Tax. A
common simplified registration form and a common return comprising of one NOTES
page are steps in this direction.
• Revision Application Authority and Settlement Commission being introduced in
Service Tax for dispute resolution.
• Utilization of input tax credit permitted in number of services to reduce cascading
of taxes.
• Place of supply rules for determining the location of service to be put in public
domain for stakeholders’ comments.
• Study team to examine the possibility of common tax code for Central Excise
and Service Tax.
• New scheme announced for simplification of refunds.
• Rules pertaining to point of taxation are being rationalized.
• To maintain a healthy fiscal situation proposal to raise service tax rate from
10 per cent to 12 per cent, with corresponding changes in rates for individual
services.
• Proposals from service tax expected to yield additional revenue of ` 18,660
crore.
Other proposals for indirect taxes
• Given the imperative for fiscal correction, standard rate of excise duty to be
raised from 10 per cent to 12 per cent, merit rate from 5 per cent to 6 per cent
and the lower merit rate from 1 per cent to 2 per cent with few exemptions.
• Excise duty on large cars also proposed to be enhanced.
• No change proposed in the peak rate of customs duty of 10 per cent on
nonagricultural goods.
• To stimulate investment relief proposals for specific sectors, especially those
under stress.

3.6 FOREIGN CAPITAL AND MULTINATIONAL

CORPORATIONS

If an underdeveloped economy is interested in rapid economic development, the country

has to import foreign capital. Since the domestic capital is insufficient, the country has
to depend on foreign capital which contributes in many important ways to the process
of economic growth and industrialization. The need for foreign capital for a developing
country like India can arise on account of the following reasons:
(i) Domestic capital is inadequate for the purposes of economic growth, and it is
necessary to invite foreign capital.
(ii) Due to lack of experience, domestic capital and entrepreneurship may not flow
into certain lines of production. Foreign capital can show the way for domestic
capital.
Self-Instructional Material 111
Economic Environment (iii) In the early stages of development, the capital market is underdeveloped. During
the period in which the capital market is in the process of development, foreign
capital is essential.
(iv) Foreign capital brings with it technical know-how and business experience,
NOTES
which are equally necessary for economic development.
3.6.1 Different Forms of Foreign Investment
The different forms of foreign investment are as follows:
(i) Direct Foreign Investment: Foreign capital can enter India in the form of
direct investments. In the past, companies have been formed in advanced
countries with the purpose of operating in India. Sometimes, companies from
advanced countries start their subsidiary offices in India. Alternatively, foreigners
may subscribe to the stocks and debentures of companies in India.
(ii) Foreign Collaboration: Recent years have seen a joint participation of foreign
and domestic capital. India has been encouraging this form of import of foreign
capital.
(iii) Inter–government Loans: After the Second World War, there was a growing
tendency towards direct inter–government loans and grants. Under Marshall
Aid, US aid was given to the war–torn European countries to reconstruct their
economies. Other developed countries also provided loans and grants to the
less developed countries.
(iv) Loans from International Institutions: Since the Second World War, the
World Bank and its affiliates have been providing capital to India.
The International Monetary Fund, the World Bank, Aid India Consortium and
Asian Development Bank are the major sources of external capital to India.
3.6.2 Government Policy towards Foreign Capital
At the time of independence, the attitude towards foreign capital was one of fear and
suspicion. This was quite natural because of the previous exploitative role played by it
in ‘draining away’ resources from this country. The suspicion and hostility found
expression in the Industrial Policy of 1948, which though recognizing the role of private
foreign investment in the country, emphasized that its regulation and control was
necessary in the national interest. Due to this attitude, foreign capitalists were dissatisfied
and the flow of import of capital goods diminished. As a result, the prime minister had
to give the following assurances to the foreign capitalists in 1949.
1. No discrimination between foreign and Indian capital: The Government of
India will not make any discrimination between foreign and Indian capital.
2. Full opportunities to earn profits: The foreign interests operating in India
would be permitted to earn profits without subjecting them to undue controls.
Only such restrictions would be imposed which also apply to the Indian enterprise.
3. Guarantee of compensation: In the case of nationalization of foreign
enterprises, compensation would be paid on a fair and equitable basis.

112 Self-Instructional Material

Policy regarding foreign investment (1991) Economic Environment

The Industrial Policy (1991) announced by the Government accepted the fact that
foreign investment is essential for modernization, technology upgradation and industrial
growth of India. The policy therefore was to encourage foreign capital to come to NOTES
India. The main features of the policy were:
(i) Approval would be given for direct foreign investment up to 51 per cent, foreign
equity in high–priority industries would be available if foreign equity covered
foreign exchange requirements for imported capital goods.
(ii) The payments of dividends would be monitored through the RBI so as to ensure
that outflows on account of dividend payments are balanced by export earnings
over a period of time.
(iii) To provide access to international markets, majority foreign equity holding up
to 51 per cent equity would be allowed for trading companies primarily engaged
in export activities.
(iv) Automatic permission would be given for foreign technology agreements in high
priority industries up to a lump sum payment of ` 1 crore, 5 per cent royalty for
domestic sales and 8 per cent for exports, subject to a total payment of 8 per
cent of sales over a 10 per cent from the date of agreement or seven years from
commencement of production.
The Government of India liberalized its policy towards foreign investment in 1991 to
permit automatic approval for foreign investment up to 51 per cent equity in thirty–
four industries. The Foreign Investment Promotion Board (FIPB) was also set up to
process applications in cases not covered by automatic approval. During 1992–93
several additional measures were taken to encourage direct foreign investment, portfolio
investment, NRI investment, etc. These measures were:
1. The dividend–balancing condition earlier applicable to foreign investment up to
51 per cent equity was no longer applied except for the consumer goods
industries.
2. Existing companies with foreign equity can raise it to 51 per cent subject to
certain prescribed guidelines. Foreign direct investment has also been allowed
in exploration, production and refining of oil and marketing of gas. Captive coal
mines can also be owned and run by private investors in power.
3. NRI investment up to 100 per cent of equity is also allowed in export houses,
trading houses, hospitals, sick industries, hotels and tourism–related industries.
4. Provisions of the Foreign Exchange Regulation Act (FERA) have been liberalized,
as a result of which companies with more than 40 per cent of equity are also
now treated on a par with fully Indian–owned companies.
5. Foreign companies have been allowed to use their trade marks on domestic
sales.
In January 1997, this limit was raised to 74 per cent in the case of foreign
investors and 100 per cent for NRIs.
As a result of the measures taken by the Government during August 1991 and
August 1998, the Government approved total foreign investment of the order of

Self-Instructional Material 113

Economic Environment ` 1,73,510 crore, about 137 times of ` 1,270 crore of foreign investment in the last
decade (1981–1990).
All these measures were taken to promote the inflow of foreign capital by granting
a large number of concessions. This is in sharp contrast to the policy pursued during
NOTES
the first four decades of planning. This indicates that the government has been quite
successful in changing the climate for the inflow of foreign investment.
3.6.3 Foreign Direct Investment (FDI) and Collaboration
The largest source of FDI to India over the period of 1991–2000 has been the US
and its share in total FDI approved has been 22 per cent. The second position was
occupied by Mauritius with its share in FDI during that period by 12 per cent. However,
it should be noted here that Mauritius–based investments are nothing but US investments.
They are routed through Mauritius because of tax advantages. Since the tax rates
prevailing in Mauritius are among the lowest in the world, many MNCs prefer to route
their investments to India through Mauritius.
Prior to the 1990s, India had to depend on a few developed Western countries
for capital. During the 1990s, a number of other countries took interest in investing in
India. These included countries like Italy, Australia, South Korea, Singapore, Malaysia,
and so on. Many other countries like Israel, Thailand, Saudi Arabia, South Africa,
whose names did not appear in the FDI list prior to 1991, have increased their share
over the years.
FDI inflows to India during 1991-2012
FDI, being a non-debt capital flow, is a leading source of external financing, especially
for the developing economies. It not only brings in capital and technical know-how but
also increases the competitiveness of the economy. Overall it supplements domestic
investment, much required for sustaining the high growth rate of the country. Since
2000, significant changes have been made in the FDI policy regime by the government
to ensure that India becomes an increasingly attractive and investor-friendly destination.
Cumulative amount of FDI inflows from April 2000 to December 2011 stood
at US$ 240.06 billion, out of which FDI equity inflows amounted to US$ 157.97
billion. FDI inflows declined globally in 2009 and 2010. While India was able to
largely insulate itself from the decline in global inflows in 2009-10, FDI flows moderated
in 2010-11. For India to maintain its momentum of GDP growth, it is vital to ensure
that the robustness of its FDI inflows is also maintained. FDI inflows rose to US$
24.19 billion during April-December 2011, an increase of 50.8 per cent compared to
the corresponding period of the previous year.
Table 3.5 Growth in FDI Inflows (US$ billion)

Financial Year As per Growth FDI Equity Growth

International Inflows#
Practices*
2003-04 4.32 – 14% 2.19 – 19%
2004-05 6.05 + 40% 3.22 + 47%
2005-06 8.96 + 48% 5.54 + 72%
(Contd…)
114 Self-Instructional Material
 2006-07 22.83 + 146% 12.49 + 125% Economic Environment
2007-08 34.84 + 53% 24.58 + 97%
2008-09 (P) 41.87 + 20% 27.33 + 11%
2009-10 (P) 37.75 –10% 25.83 –5%
NOTES
2010-11 (P) 32.90 –13% 19.43 –25%
2011-12 35.35 24.19 –
(April-Dec.)
Apr. 2000- 240.06 157.97
Dec. 2011
Source: Office of the Economic Adviser, DIPP
Note: As per RBI estimates, As per DIPP estimates.

Services (financial and non-financial), telecom, construction, drugs &

pharamaceuticals, metallurgical Industries and power were the sectors that attracted
maximum FDI during the first nine months of 2011-12. Sector-wise FDI inflow into
some key industrial and infrastructure sectors is given in Table 3.6.
Table 3.6 Sector-wise FDI Flows into Industry and Infrastructure

1991-2000 2000-10 2010-11 2010- 2011-12 Growth

11(Apr.-Dec.) (Apr.-Dec.) (%)
Food products 707.4 1237.3 246.9 170.7 190.8 11.8

Fermentation industries 24.0 770.1 57.7 18.0 53.2 195.0

Textiles 241.8 828.6 129.8 74.8 94.0 25.6
Wood products 0.0 18.8 1.6 1.1 11.6 1002.9
Paper 250.5 716.9 44.0 30.8 341.7 1008.6
Leather 33.5 42.6 9.3 0.4 5.6 1360.5
Chemicals 1480.9 4446.1 734.0 589.6 4001.7 578.7
Rubber, plastic & petroleum products 90.3 2953.6 573.6 555.0 323.6 -41.7
Non-metallic minerals 261.1 2263.6 657.3 623.3 207.7 -66.7
Metals and metal products 186.2 3143.2 1098.1 964.4 1495.3 55.0
Machinery and equipment 2043.1 15670.4 1846.7 1447.6 3279.0 126.5
Transport equipments 0.0 4603.2 1286.1 1048.0 609.6 -41.8
Other manufacturing 1761.6 5705.6 1495.3 1249.7 706.2 -43.5
Mining (including mining services) 0.0 730.9 79.5 75.9 136.6 80.0
Power* 1038.9 5220.9 1464.4 1072.0 1729.4 61.3
Telecommunication 1089.4 8915.9 1664.5 1326.7 1988.7 49.9
Total 16699.6 110289.3 19426.9 16039.2 24187.8 50.8

Procedure for receiving FDI in an Indian company

An Indian company may receive Foreign Direct Investment under the two routes as
given under :
(i) Automatic route
FDI up to 100 per cent is allowed under the automatic route in all activities/
sectors except where the provisions of the consolidated FDI Policy, paragraph on
‘Entry Routes for Investment’ issued by the Government of India from time to
time, are attracted.

Self-Instructional Material 115

Economic Environment FDI in sectors /activities to the extent permitted under the automatic route does
not require any prior approval either of the Government or the Reserve Bank of India.
(ii) Government route
NOTES FDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
Department of Economic Affairs, Ministry of Finance. Indian companies having foreign
investment approval through FIPB route do not require any further clearance from the
Reserve Bank of India for receiving inward remittance and for the issue of shares to
the non–resident investors.
The Indian company having received FDI either under the Automatic route or
the Government route is required to report in the Advance Reporting Form, the details
of the receipt of the amount of consideration for issue of equity instrument viz. shares/
fully and mandatorily convertible debentures / fully and mandatorily convertible
preference shares through an AD Category –I Bank, together with copy/ ies of the
FIRC evidencing the receipt of inward remittances along with the Know Your Customer
(KYC) report on the non–resident investors from the overseas bank remitting the
amount, to the Regional Office concerned of the Reserve Bank of India within 30
days from the date of receipt of inward remittances.
Sectors where FDI is not allowed in India, both under the automatic
route as well as under the government route
FDI is prohibited under the Government Route as well as the Automatic Route in the
following sectors:
• Retail Trading (except single brand product retailing)
• Atomic Energy
• Lottery Business
• Gambling and Betting
• Business of Chit Fund
• Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal
Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under
controlled conditions and services related to agro and allied sectors) and
Plantations activities (other than Tea Plantations)
• Housing and Real Estate business.
• Trading in Transferable Development Rights (TDRs).
• Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of
tobacco substitutes.
3.6.4 Multinational Corporations
MNC: An enterprise that
owns or controls producing The emergence of the multinational corporation (MNC) as a powerful agent of world
facilities in more than one social and economic change has been a signal development of the post–war era. Its
country, such as factories,
mines, oil refineries, evolution has been regarded with mixed feelings by the host countries.
distribution channels, and An MNC is an enterprise that owns or controls producing facilities in more
so on
than one country, such as factories, mines, oil refineries, distribution channels, and so
116 Self-Instructional Material
on. The United Nations (UN) defined multinational corporations as ‘enterprises which Economic Environment
control assets—factories, mines, sales offices and the like—in two or more countries’.
According to another definition, a multinational company is one with sales above $100
million with operations in at least six countries and with subsidiaries accounting for at
least 20 per cent of its assets. There are about 4,000 companies qualifying for this NOTES
definition and these account for as much as 15 per cent of the Gross World Product.
MNCs account for one-fifth of the world’s output, excluding socialist economies.
Their production in recent years has been growing at the rate of 10 per cent a year,
nearly twice the growth rate of the world output and half as much as the world trade.
The estimated level of production of the multinationals exceeds 750 billion dollars a
year, which is greater than the GNP of any country other than the US. Therefore,
multinationals are gigantic in size.
Most of the multinationals enjoy predominantly oligopolistic market positions
and are characterized by the importance of new technologies, special skills or product
differentiation and heavy advertising which sustain their oligopolistic nature by making
the entry of competitors more difficult.
Almost every large enterprise has foreign involvement of some kind. Wherever
its home, it will send agents to other nations, establish representative offices abroad,
import foreign materials, export some products, license foreign firms to use its patents
or know–how, employ foreign nationals, have foreign stockholders, borrow money
from foreign banks and even have foreign nationals on its board of directors. None of
these, however, would make an enterprise multinational because none would require a
substantial direct investment in foreign assets nor entail a responsibility for managing
organizations of people in alien societies. Only when an enterprise confronts the problems
of designing, producing, marketing and financing its products within foreign nations
does it become truly multinational.
A domestic corporation may become multinational by establishing foreign
branches, by operating wholly or partially–owned subsidiaries in other countries or by
entering into joint ventures with enterprises in other countries.
It is interesting to note the concentration of multinational corporations in certain
fields of industries. Taking the US as the leader of such enterprise, we find that 85 per
cent of US investment is concentrated in the following industries: vehicles, chemicals,
mechanical and electrical engineering.
If we take the multinationals as a whole, we find that they have established
almost complete domination on such industries as rubber tyres, oil, tobacco,
pharmaceuticals and motor vehicles.
Concentration in specific areas
The geographical distribution of MNCs shows an interesting pattern. If we consider
the distribution by the origin of enterprise, we find that in 1966, about 55 per cent of
the multinationals were of US origin, 20 per cent of British origin, while about 25 per
cent were of European or Japanese origin.
Multinational operations by private business corporations are comparatively of
origin. The companies of merchant traders in medieval Venice and the English, Dutch

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Economic Environment and French trading companies of the 17th and 18th centuries were forerunners, but
not true prototypes of today’s MNC. They were essentially trading rather than
manufacturing organizations, with comparatively little fixed investment. And they
operated mainly within the colonial territories rather than under the jurisdiction of foreign
NOTES sovereign states.
Historical background
During the 19th century, foreign investment flowed extensively from Western Europe
to the underdeveloped areas of Asia, Africa and the Americas. In this age of empire
building, Victorian Britain was the great capital exporter, followed by France, Germany
and the Netherlands. Little of this capital flow was direct investment outside imperial
boundaries.
The first substantial multinational corporate investment came in the mining and
petroleum industries during the initial years of the 20th century. A wide geographical
separation existed between the great mineral deposits of the world and the consuming
markets in the US and Western Europe. Hence, large oil companies like British
Petroleum and Standard Oil and mineral corporations like International Nickel were
among the first true multinationals. Coca–Cola, Singer, Woolworth were early American
multinationals.
Multinational corporate investment spread further in the years after World War
I, spurred by rising barriers to international trade and led by burgeoning automobile
and associated industries. After the Second World War, multinationals flowered as
American firms invested heavily abroad in a wide variety of manufacturing and
merchandising operations.
American corporations led the world trend towards business multinationalism.
The great size and wealth of the US economy generated capital for investment.
Companies were attracted by the relatively higher foreign rates of return on investment.
American capital outflow took the form of corporate direct investment because of the
superior organization ofAmerican capital markets and the larger capabilities of American
managers. American corporate investment abroad is concentrated in the hands of the
largest firms. Of the total investment of $65 billion at the end of 1968, 500 of the
largest American corporations had invested more than $50 billion.
Direct investment in foreign manufacturing facilities was an alternative to exporting
home– made products. Why did manufacturers endure the harder tasks and larger
risks of foreign operations instead of shipping their products abroad? Evidently, direct
investment appeared to be more profitable.
The second reason for direct foreign investment was that entrepreneurs
confronted foreign barriers to their exports. Nationalistic sentiments led most nations
to build their own industrial capabilities. By raising barriers against imports of
manufactured products, they induced foreign as well as local firms to establish domestic
industries. A large number of American corporations became multinationals simply to
maintain or expand markets in Canada or in EEC, now the European Union (EU), that
could not be as profitably served by exports.
Third, business firms also multinationalized because their presence as a producer
in a foreign nation enabled them to adapt their products to local demands more
effectively.
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 Another reason for direct foreign investment was that the anti–trust laws and Economic Environment
keen competition at home tended to restrict the expansion of dynamic American
business, channelling corporate attention to opportunities abroad.
Organizational forms NOTES
A multinational business corporation may adopt one of the two basic organizational
forms—(i) a world corporation form in which domestic and foreign operations are
merged or (ii) an international division form in which foreign business is done in separate
national divisions, apart from domestic operations.
MNCs plough back their profits on a significant scale. This removes, to some
extent, the basis of the charge that they indulge in economic drain. But some countries
also feel that ploughing back of profits is not a good solution because it increases the
foreign stake in a country’s economy and polity.
American corporate investment in developing countries has been gradually shifting
from an earlier emphasis on the mining, extractive and raw material industries towards
diversified manufacturing and merchandising operations. One important consequence
has been a great increase in American exports of technological and managerial skills
and knowledge to the recipient country. This shift will serve to reduce the charge of
foreign exploitation.
The potential contribution of multinationals to the development of poorer countries
is large. Its realization depends mainly on the development of stable governments in
those countries and their actions to encourage private investment. Any developing
country that offers political stability, respect for contracts, financial responsibility and
equitable taxation will attract investment, foreign and domestic. The remarkable evolution
of such regions as Hong Kong and Taiwan testify to this truth.
Private business investment is superior to governmental aid as an instrument of
development because it combines transfer of managerial and technical assistance with
that of capital. General dissatisfaction with bilateral governmental aid makes it important
to expand the flow of business investment. While measures to limit or to insure against
risks will help to enlarge this flow, they will not remove the root causes of international
tensions. The foreign subsidiary of the American corporation will still be charged with
‘exploitation’ of local resources and making too much profit. When it pays higher than
the prevailing wages and benefits to its employees, their higher living standards provoke
envy and resentment amongst others.
The political and social effects of MNCs in developing countries are not as
clear as their economic effects. The process of development is inherently unsettling to
a society. By producing shifts in the distribution of income and wealth and by redistributing
economic power among social classes, development creates political stresses. Often
these tensions can be relieved by peaceful political reforms; not infrequently they are
followed by more or less violent upheavals. Indeed, being an agent of change, the
foreign corporation is seen in the developing country as a threat to privileged positions
in the traditional society. However, some leading development economists have
counselled Latin American countries that their best interests would be served by
compelling foreign firms to sell affiliates to local owners or to the government. They argue
that the foreign affiliates stunt the growth of local enterprise. While nationalistic pride
may be bolstered by such a policy, its cost in slower development appears to be high.
Self-Instructional Material 119
Economic Environment The cultural consequences of American corporate penetration in the developing
countries can be plainly seen in the ready acceptance by natives of soft drinks, packaged
foods, automobiles, electrical appliances and much of the paraphernalia of American
life. At a more fundamental level, it is likely that the status and value systems, the social
NOTES attitudes and behavioural patterns, the arts and the essential cultural foundations of
many of these countries will also undergo profound changes. These should ultimately
reduce barriers of communication between people and lay a common basis for a
stable world order.
MNCs are carriers of new values and ideas that threaten the old ways, which
have served the people of developing countries well. MNCs introduce ‘the idea of
meritocracy instead of aristocracy, of rewarding talent instead of status, of distinguishing
poeple by ability instead of by colour or sex’.
Fear of ‘loss of control’ of their national destinies because of massive foreign
private investment has caused many developing countries to enact laws for screening
such investment in the future. The case for home country controls is not necessarily
based on charges of ‘abuses’ or ‘exploitations’ by multinationals. The case for home
country controls over multinational business enterprises is based on the reality that the
goals of the multinational firms and the goals of host country are not identical.
A developing country should lay emphasis on exporting manufactures. This view
reflects the vision that a modern country needs industry and that the small domestic
markets of most developing countries will impose high costs unless industrial products
are exported. Developing countries complain frequently that multinational firms usually
prohibit exports by their foreign subsidiaries. For example, 43 per cent of all written
collaboration agreements between Indian firms and foreign firms from 1961 to 1964
contained clauses restricting exports.
Much of the hatred against American multinationals is based on a mistaken
identification of the American MNCs with the imperialistic enterprises of former colonial
powers. The initial experience with foreign corporations of most host countries in the
developing regions of the world was with the imperial monopolies of Britain, France,
Holland and Spain. These early companies were the ‘chosen instruments’ of their
Governments. They followed the flags of the mother countries into their colonies to
mine and harvest natural resources and to sell manufactured goods at high profit margins.
It was natural that these early MNCs were regarded as instruments of imperialism by
the colonial people. These attitudes have been carried over to the more recent American
MNCs, which are viewed as an instrument of ‘neocolonialism’ and probably as an
agent of CIA. But the US does not treat its enterprises as ‘chosen instruments’ of
national policy.
Multinationals operate in India in two ways: (i) through branches established in
the country and (ii) through Indian companies which are subsidiaries of foreign
companies, which hold more than 50 per cent of the paid-up equity capital.
In March 1977, there were 482 branches of multinationals operating in India.
Of these, 319 were branches of UK–based companies. The US-based companies
had the second largest number of branches – eighty–eight; Japanese, W. German,
Swiss, French and Canadian companies came next, with twenty–one, twelve, eleven,
eight and seven respectively.

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 Out of 540 branches operating in India in 1973–74, 163 came under the broad Economic Environment
head of commerce; branches in the field of agriculture and allied activities numbered
115, business services eighty-seven and processing and manufacturing eighty-two.
Transport, communication and storage had thirty–nine branches and construction and
utilities thirty-three. There were seven branches in mining and quarrying and fourteen NOTES
in personal and other services. Readers’ Digest is the only multinational operating in
the field of journalism.
The total assets of Indian subsidiaries amounted to ` 1363.7 crore at the end of
1973–74.
The debate in the Indian Parliament over Coca-Cola highlighted a different
perspective. Although the industry minister referred to Coca-Cola’s fantastic profits of
nearly ` 10 crore remitted abroad so far on an initial investment of ` 6.6 lakhs, this
was not what actually bothered the Government. The case rested on two provisions of
the 1973 Foreign Exchange Regulation Act, under which (i) foreign companies engaged
in low–priority, low–technology industry have to transfer 60 per cent of the equity
shares to Indians; and (ii) also fully transfer technical know-how to the Indian company
within a fixed time limit. The Reserve Bank of India issued orders under Foreign
Exchange Regulation Act, asking the Coca-Cola Export Corporation to comply with
the two provisions or just pack up and leave.
At a seminar held in New Delhi by the All India Peace and Solidarity Organization
to discuss the problem of MNCs and Indian development, more than 40 economists
warned the country of the dangers of further penetration of the Indian economy by
multinational corporations. They called for mobilization of public opinion for an
independent path of national development. They said, ‘Indian laws like the Foreign
Exchange Regulation Act were inadequate in containing the “exploitation by
multinationals”. Further, they stressed the need for a new strategy to ensure the country’s
sovereignty over its resources.
Evaluation
In recent years, there has been a growing concern over the operation of multinationals
in the developing countries. In the overthrow of Dr. Allende’s elected government in
Chile, US multinational, International Telephone and Telegraph Company played an
important role. The underhand dealings of the Lockheed Aircraft Corporation led to
the fall of the government in Japan. Small wonder that some critics see in the
multinationals an agent of economic imperialism by its home country. Others view it as
an international carrier of advanced management, and science and technology, and as
an agent for the global transmission of cultural values, bringing closer the day when a
common set of ideals will unite mankind.
In 1973, the United Nations took note of the growing size of the multinationals and
recommended an in–depth study of the rise of multinationals and its impact on trade
and development of other countries. A group of eminent persons led by Mr L.K. Jha
submitted a report on the subject in 1974. Important points made in the report are as
follows:
1. International corporations are organizations largely beyond the control of any
single government.

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Economic Environment 2. Their overall goal is worldwide profits without regard for what is best for an
individual country.
3. The interests of the country where a subsidiary is established for the development
of export markets are subjected to the market interests of the parent company.
NOTES
4. Parent companies do not make the most modern technology available to their
subsidiaries.
5. International corporations prevent the growth of locally-owned enterprises by
aggressive and unfair competition.
Multinationals are criticized on the following grounds:
• To begin with, there is hardly any reason to justify the term multinational because
in most cases only nationals of one country serve on the governing body or
board. They operate in several countries and may have employees from many
nations, but most policy and investment decisions as well as control is from one
centre. It is also pointed out that multinationals do not regard themselves obligated
to the interests of the region in which they are located. They neglect the training
of the local people for the top management position.
• Second, there is also an inherent danger that at the time of crisis, these
corporations are capable of diverting vast sums of money from one area to
another, which could bring about the collapse of the economic system.
• Third, the technology that MNCs transfer was invented in an environment where
capital was abundant and labour was scarce. The reverse is true for the third
world countries which have abundance labour and shortage of capital. So, the
technology is not appropriate for the developing countries.
• Fourth, Raul Prebisch and Hans Singer speak of the ‘enclave’ effect of foreign
investment in that the multinational tycoons never become part of the internal
economic structure of the less developed countries.
• Fifth, worse than the economic dominance is the cultural devastation of the host
countries. Operations of these multinationals strike a resounding similarity to the
ways of the old imperialists which imposed their own culture on the colonies.
They create a small nucleus of parallel culture in the host countries through
payment of considerably higher salaries and perks to the local staff, thereby
alienating them from the mainstream.
• Sixth, a French critic has said that governments cannot stop inflation partly,
because they no longer can control huge multinational tycoons whose search
for profits and creation of consumer demands are at the base of the problems.
A president of General Motors had declared, ‘What is good for General Motors
is good for America’. But what is good for America may not be good for the host
country.
Regulation of multinationals
Under Section 29 of the Foreign Exchange Regulation Act, it is obligatory for all
branches of foreign companies operating in India as also for Indian companies with 40
per cent and above foreign holdings to obtain general and special permission of the
Reserve Bank of India to continue their existence.
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In January, 1974, the RBI issued the following guidelines: Economic Environment

(1) Branches of foreign companies will be required to convert themselves into Indian
companies.
(2) Branches and companies engaged in manufacturing activities in sophisticated NOTES
areas in which India did not have indigenous know-how and which were
predominantly export-oriented will be allowed to continue on the basis of the
existing approvals, subject to Indian participation not being less than 26 per
cent of the equity of the company.
(3) Companies engaged in trading activities or in manufacturing activity will be
required to bring down their foreign holding to 40 per cent.
Though some units had not paid much attention to the FERA guidelines, many
including MICO, Philips, Bayer, reduced foreign holdings as a result of expansion and
diversification of business. Some companies diluted the foreign holding by merger.
Government policy towards MNCs
The policy of the Government is to ensure that operations of foreign companies as also
those of indigenous concerns conform to the overall socio–economic policy of the
country, and their activities, including their size of operations are regulated by the
policy guidelines announced by the Government from time to time. All foreign companies
are also subject to the discipline of industrial licensing even in areas where exemptions
are available to other categories of industries. Cases of excess production are being
brought before the licensing committee for a decision on a case by case basis. In cases
where it is established that the capacity installed by the company is more than the
licensed capacity and this resulted in production in excess of licensed capacity, suitable
action will be taken as permissible under the law.
Indian joint ventures abroad
Indian joint ventures abroad have shown encouraging performance in relation to the
twin policy objectives of extending co–operation to developing countries and creating
opportunities for this country in exports of capital goods, technology and know–how.
The ventures have been contributing to the progress of import substitution and
industrialization in the developing countries where they are primarily located. In the
process, they have resulted also in increased exports of technology–intensive products
from India. Even in terms of commercial profitability, the performance of the joint
ventures has shown improvement. The total profits they earned have doubled between
1974–75 and 1976–77. Also the losses have declined during the period.
By the end of July 1978, the government had approved a total of 329 joint
venture proposals from Indian entrepreneurs. The proposals involved projects in as
many as 48 countries.
The trend towards higher investment in recent times indicates that Indian
entrepreneurs have now started embarking upon some ambitious and well–planned
projects as are capable of yielding handsome returns after a few years. Such projects
also speak volumes for India’s technological capability and competence.
A region–wise analysis of the ventures in production discloses a marked
preference by Indian entrepreneurs to invest in the neighbouring countries of South–
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Economic Environment East Asia especially in the ASEAN countries. Some big joint ventures in telecom,
steel, pharmaceutical sectors have also taken place with advanced countries as well.
In South–East Asia, India has several joint ventures (actual and projected) in
countries like Malaysia, Indonesia, Thailand, Singapore, the Philippines (3) and Fiji
NOTES
(1). In South Asia, there are Indian joint ventures in Sri Lanka Nepal and Afghanistan.
India has also entered into joint ventures in Iran, UAE, Oman, Kenya, Mauritius,
Nigeria and Uganda, France, UK, Germany, Canada and the US.
Among the joint ventures that have become operative, they in the field of light
engineering textiles, the traditional field in which Indian entrepreneurs have acquired
capability. The other fields of collaboration include auto-ancillaries, chemicals and
pharmaceuticals, plastic products, engineering, construction, hotels and restaurants,
pulp and paper, sugar, leather and rubber products, iron and steel products, non-
ferrous metal products, exploration of minerals, consultancy, etc.
3.6.5 Foreign Capital Tapping by Businesses
As regards foreign capital, it was recognized that in securing rapid industrial
development, it had an important part to play. A free flow of foreign capital would be
welcome because it would ensure the supply of capital goods and of technical know-
how. However, at the same time, the conditions under which foreign capital would
participate in Indian industry should be carefully regulated in the national interest. The
government’s policy gives the following assurances to foreign capital: (i) there will be
no discrimination between foreign and Indian undertakings in the application of the
general industrial policy; (ii) reasonable facilities would be given for the remittance of
profits and repatriation of capital consistent with foreign exchange position of the
country; and (iii) in the event of nationalization, fair and equitable compensation would
be paid.
For increasing industrial production, the resolution enunciated a policy of social
justice, fair wages, increasing participation of labour in industrial affairs as a basis of
harmonious relations between labour and management.
Forms in which business can be conducted by a foreign company in India
A foreign company planning to set up business operations in India may:
• Incorporate a company under the Companies Act, 1956, as a Joint Venture or
a Wholly- Owned Subsidiary.
• Set up a Liaison Office / Representative Office or a Project Office or a Branch
Office of the foreign company which can undertake activities permitted under
the Foreign Exchange Management (Establishment in India of Branch Office or
Other Place of Business) Regulations, 2000.
3.6.6 Foreign Exchange and Business Development
India’s foreign exchange reserves comprise foreign currency assets (FCA), gold, special
drawing rights (SDRs), and reserve tranche position (RTP) in the International Monetary
Fund (IMF). The level of foreign exchange reserves is largely the outcome of the
RBI’s intervention in the foreign exchange market to smoothen exchange rate volatility
and valuation changes due to movement of the US dollar against other major currencies
124 Self-Instructional Material
of the world. Foreign exchange reserves are accumulated when there is absorption of Economic Environment
the excess foreign exchange flows by the RBI through intervention in the foreign exchange
market, aid receipts, and interest receipts and funding from the International Bank for
Reconstruction and Development (IBRD), Asian Development Bank (ADB),
International Development Association (IDA), etc. NOTES
According to Economic Survey 2011-12, beginning from a low level of US$
5.8 billion at end March 1991, India’s foreign exchange reserves gradually increased
to US$ 25.2 billion by end March 1995, US$ 38.0 billion by end March 2000, US$
113.0 billion by end March 2004, and US$ 199.2 billion by end March 2007. The
reserves stood at US$ 314.6 billion at end May 2008, before declining to US$ 252.0
billion at the end of March 2009. The decline in reserves in 2008-09 was inter alia a
fallout of the global crisis and strengthening of the US dollar vis-à-vis other international
currencies. During 2009-10, the level of foreign exchange reserves increased to US$
279.1 billion at end March 2010, mainly on account of valuation gain as the US dollar
depreciated against most of the major international currencies. In fiscal 2010-11, foreign
exchange reserves reached US$ 304.8 billion at end March 2011.

3.7 EXPORT–IMPORT POLICY

Reforms in trade policy that begun in 1991 have considerably changed the scenario in
foreign trade and led to a shift from inward–looking to an outward–looking policy.
With the liberalization process that is taking place currently in this sector, the protection
provided to the Indian industry has come down considerably. This is because the
government has taken recourse to a massive removal of import tariffs and allowed a
liberal regime of imports of goods whose imports were earlier either banned or restricted.
The Commerce and Industry Ministry has taken a number of initiatives like
providing tax concessions, streamlining certain procedures and removing quantitative
restrictions, to encourage special economic zones, so that exports can grow at a
compound growth rate of 11.9 per cent per annum during the Tenth Plan period to
touch $ 80 million by 2007. This is a welcome initiative.
Another positive step of the policy is ‘Focus Africa’ so that Indian exports to
African countries can be developed. This initiative would help Indian exporters to
explore this fast growing market which had been neglected earlier.
A big initiative to permit offshore banking units will help in the development of
foreign branches of Indian banks. The move is intended to provide international finance
at international rates. This will lower the cost of credit to our exporters and thus make
them more competitive.
The EXIM policy has laid emphasis on special economic zones which are a
new form of the export promotion zones and export-oriented units promoted earlier.
The EXIM policy has made some concessions to help cottage and handicrafts
sectors and small-scale units which account for nearly 35 per cent of the country’s
exports. But, the policy has not paid adequate attention to the important aspect of
increasing bank credit to this sector.
To extract a higher value for our agricultural products, it is essential that food
processing should be undertaken. A separate ministry of food processing was created
Self-Instructional Material 125
Economic Environment for the purpose but the performance of the ministry has not been satisfactory. The
value addition in India from agro-processing has been 15–20 per cent, whereas in
some of the developed countries, it has been over 100 per cent.
Export–Import Policy (2002–07) had a narrow focus on duty reduction, but it
NOTES
had to be enlarged to make it a success.
The main requirement was strengthening of the infrastructure. Without this it
would have ben impossible to maintain a 16 per cent growth in export to achieve 1 per
cent share in world trade by 2007.
The then Union Commerce and Industry Minister, Mr Murasoli Maran,
announced the EXIM policy for the period 2002–2007 on 31 March 2002. According
to his policy, the main objective of the policy was to push India’s exports aggressively
by taking several measures aimed at augmenting exports of farm products, small scale–
sector, textiles, gems and jewellery, electronic hardware, etc. Besides these, the policy
aimed at reducing transaction costs to trade through a number of measures to bring
about procedural simplifications. In addition, the EXIM policy was to remove
quantitative restrictions on exports.
The salient features of EXIM policy were as follows:
1. Agriculture: Exim policy removed all quantitative restrictions on all agricultural
products except jute and onions. In order to promote diversification of agriculture,
transport subsidy would be available for export of fruits, vegetables, poultry
and dairy products.
2. Cottage Sector: An amount of ` 5 crore under market access initiative was
earmarked for promoting cottage sector exports. The units under handicrafts
could also get funds under marked access initiatives.
These units were not required to maintain an average level of exports while
calculating export obligations as per the export promotion capital goods scheme.
These units had the right to claim benefit of ‘export house’ status after achieving
lower average export performance of ` 5 crore as against ` 15 crore for others.
The units in the handicraft sector were entitled to duty-free imports of a list of
items up to 3 per cent of free on board value of their exports.
Special economic zones: Indian banks were allowed to set up offshore banking
units in special economic zones. These units acted as magnets to attract foreign direct
investments. They were to be virtually foreign branches of Indian banks, but located in
India. Offshore banking units were exempt from cash reserve ratio and statutory liquid
ratio and were given access to SEZ units and SEZ developers to international finance
and international rates. This measure made special economic zones internationally
competitive.
Small-scale industry: Further development of centres of economic and export
excellence such as Tirupur for hosiery, woollen blankets in Panipat, and woollen knitwear
in Ludhiana was encouraged. The following benefits were available to small-scale
sectors:
(i) Common service providers in these areas were entitled to the Export Promotion
Capital Goods scheme.

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 (ii) The recognized associations of units in these areas were able to access funds Economic Environment
under the market access initiative for technological services and marketing abroad.
(iii) Entitlement for Export House status at ` 5 crore instead of ` 15 crore for
others.
NOTES
Leather: Duty-free imports up to 3 per cent of f.o.b. value combined will leather
garments has been extended to all leather products.
Gems and jewellery: Rough diamonds import allowed on zero custom basis. Licensing
regime for rough diamonds was abolished.
Technology–oriented: Electronic Hardware Technology Park scheme was modified
to enable this sector to face zero duty regime under the Information Technology
Agreement.
The Commerce and Industry Minister hoped that as a result of the EXIM policy
(2002–07), India would be able to capture 1 per cent of global share of trade by
2007, up from the then existing level of 0.67 per cent. Translated in value, the projected
growth meant doubling of the export of $ 46 billion in 2001–02 to more than $ 80
billion by 2007.
The features of the Policy for 2008 were as follows:
• Extension of the DEPB (Duty Entitlement Passbook) scheme till May 2009
• Service tax was to be refund on almost all the services.
• Government had extended the benefit of income to 100 per cent EOUs.
• Coverage of FMS had widened with the inclusion of another ten countries like
Mongolia, Bosnia–Herzegovina, Albania, Macedonia, Croatia, Honduras,
Djibouti, Sudan, Ghana and Colombia.
• DFIA Scheme (Duty Free Import Authorization) had introduced split–up facility.
• Duty free import of samples had been increased from ` 75, 000 to ` 1, 00,000.
• Value of jeweller parcels, through Foreign Post Office was raised to US$ 75,000.
Earlier it was from US$ 50,000.
• A monthly basis excise duty was to be paid by the EOUs rather than the present
system of paying duty on consignment basis.
• Customs duty payable under EPCG Scheme had been reduced from 5 per cent
to 3 per cent.
• A new Export Promotion Council was to be set up for the Telecom Sector.
Source: Adapted from http://www.infodriveindia.com/Exim/DGFT/Exim–Policy/2008/Highlights.aspx

3.7.1 Highlights of Foreign Trade Policy (EXIM Policy) 2009–14

The highlights of Foreign Trade Policy (EXIM Policy) 2009–14 may be presented
under the following heads:
Higher support for market and product diversification
1. Incentive schemes under Chapter 3 have been expanded by way of addition of
new products and markets.

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Economic Environment 2. 26 new markets have been added under Focus Market Scheme (FMS).
3. Incentive available under FMS raised from 2.5% to 3%.
4. Incentive available under Focus Product Scheme (FPS) raised from 1.25% to
NOTES 2%.
5. Widens scope for products to be included for benefits under FPS. Additional
engineering products, plastic and some electronics get a look in.
6. Market Linked Focus Product Scheme (MLFPS) expanded by inclusion of
products like pharmaceuticals, textile fabrics, rubber products, glass products,
auto components, motor cars, bicycle and its parts, .etc. Benefits to these
products will be provided, if exports are made to 13 identified markets (Algeria,
Egypt, Kenya, Nigeria, South Africa, Tanzania, Brazil, Mexico, Ukraine,
Vietnam, Cambodia, Australia and New Zealand).
7. Common simplified application form introduced for taking benefits under FPS,
FMS, MLFPS and VKGUY.
8. Higher allocation for Market Development Assistance (MDA) and Market
Access Initiative (MAI)
9. To aid technological upgradation of export sector, EPCG Scheme at Zero Duty
has been introduced.
10. Jaipur, Srinagar and Anantnag have been recognised as ‘Towns of Export
Excellence’ for handicrafts; Kanpur, Dewas and Ambur for leather products;
and Malihabad for horticultural products.
11. Export obligation on import of spares, moulds etc. under EPCG Scheme has
been reduced by 50%.
12. Taking into account the decline in exports, the facility of Re–fixation of Annual
Average Export Obligation for a particular financial year in which there is decline
in exports from the country, has been extended for the 5 year Policy period
2009–14. Support for Green products and products from North East
13. Focus Product Scheme benefit extended for export of ‘green products’ and
some products from the North East.
Status holders
14. To accelerate exports and encourage technological upgradation, additional Duty
Credit Scrips shall be given to Status Holders @ 1% of the FOB value of past
exports. The duty credit scrips can be used for procurement of capital goods
with Actual User condition. This facility shall be available for sectors of leather
(excluding finished leather), textiles and jute, handicrafts, engineering (excluding
Iron & steel & non–ferrous metals in primary and intermediate form, automobiles
& two wheelers, nuclear reactors & parts, and ships, boats and floating
structures), plastics and basic chemicals (excluding pharma products) [subject
to exclusions of current beneficiaries under Technological Upgradation Fund
Schemes (TUFS)]. This facility shall be available up to 31 March, 2011.
15. Transferability for the Duty Credit scrips being issued to status holders under
paragraph 3.8.6 of FTP under VKGUY Scheme permitted on condition that
scrips would be utilized for the procurement of cold chain equipments only.

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Stability/ continuity of the Foreign Trade Policy Economic Environment

16. To impart stability to the Policy regime, Duty Entitlement Passbook (DEPB)
Scheme is extended beyond 31–12–2009 till 31.12.2010.
17. Interest subvention of 2% for pre–shipment credit for 7 specified sectors has NOTES
been extended till 31.3.2010 in the Budget 2009–10.
18. Income Tax exemption to 100% EOUs and to STPI units under Section 10B
and 10A of Income Tax Act, has been extended for the financial year 2010–11
in the Budget 2009–10.
19. The adjustment assistance scheme initiated in December, 2008 to provide
enhanced ECGC cover at 95%, to the adversely affected sectors, is continued
till March, 2010.
Marine sector
20. Fisheries have been included in the sectors which are exempted from maintenance
of average EO under EPCG Scheme, subject to the condition that Fishing
Trawlers, boats, ships and other similar items shall not be allowed to be imported
under this provision. This would provide a fillip to the marine sector which has
been affected by the present downturn in exports.
21. Additional flexibility under Target Plus Scheme (TPS) / Duty Free Certificate of
Entitlement (DFCE) Scheme for Status Holders has been given to Marine sector.
Gems and jewellery sector
22. To neutralize duty incidence on gold Jewellery exports, it has now been decided
to allow Duty Drawback on such exports.
23. In an endeavour to make India a diamond international trading hub, it is planned
to establish “Diamond Bourse(s)”.
24. A new facility to allow import on consignment basis of cut & polished diamonds
for the purpose of grading/ certification purposes has been introduced.
25. To promote export of Gems & Jewellery products, the 13 value limits of personal
carriage have been increased from $ 2 million to US$ 5 million in case of
participation in overseas exhibitions. The limit in case of personal carriage, as
samples, for export promotion tours, has also been increased from US$ 0.1
million to US$ 1 million.
Agriculture sector
26. To reduce transaction and handling costs, a single window system to facilitate
export of perishable agricultural produce has been introduced. The system will
involve creation of multi–functional nodal agencies to be accredited by APEDA.
Leather sector
27. Leather sector shall be allowed re–export of unsold imported raw hides and
skins and semi finished leather from public bonded ware houses, subject to
payment of 50% of the applicable export duty.
28. Enhancement of FPS rate to 2%, would also significantly benefit the leather
sector.

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Economic Environment Tea
29. Minimum value addition under advance authorization scheme for export of tea
has been reduced from the existing 100% to 50%.
NOTES 30. DTA sale limit of instant tea by EOU units increased from 30% to 50%.
31. Export of tea has been covered under VKGUY Scheme benefits.
Pharmaceutical sector
32. Export Obligation Period for advance authorizations issued with 6–APA as
input increased from existing 6 months to 36 months.
33. Pharma sector extensively covered under MLFPS for countries in Africa and
Latin America; some countries in Oceania and Far East.
Handloom sector
34. To simplify claims under FPS, requirement of ‘Handloom Mark’ for availing
benefits under FPS has been removed.
EOUs
35. EOUs have been allowed to sell products manufactured by them in DTA upto a
limit of 90% instead of existing 75%, without changing the criteria of ‘similar
goods’, within the overall entitlement of 50% for DTA sale.
36. To provide clarity to the customs field formations, DOR shall issue a clarification
to enable procurement of spares beyond 5% by granite sector EOUs.
37. EOUs will now be allowed to procure finished goods for consolidation along
with their manufactured goods, subject to certain safeguards.
38. During this period of downturn, Board of Approvals (BOA) to consider,
extension of block period by one year for calculation of Net Foreign Exchange
earning of EOUs.
39. EOUs will now be allowed CENVAT Credit facility for the component of SAD
and Education Cess on DTA sale.
Thrust to value added manufacturing
40. To encourage Value Added Manufactured export, a minimum 15% value addition
on imported inputs under Advance Authorization Scheme has now been
prescribed.
41. Coverage of Project Exports and a large number of manufactured goods under
FPS and MLFPS.
DEPB
42. DEPB rate shall also include factoring of custom duty component on fuel where
fuel is allowed as a consumable in Standard Input–Output Norms.
Flexibility provided to exporters
43. Payment of customs duty for Export Obligation (EO) shortfall under Advance
Authorization / DFIA / EPCG Authorization has been allowed by way of debit
of Duty Credit scrips. Earlier the payment was allowed in cash only.
44. Import of restricted items, as replenishment, shall now be allowed against
transferred DFIAs, in line with the erstwhile DFRC scheme.
130 Self-Instructional Material
 45. Time limit of 60 days for re–import of exported gems and jewellery items, for Economic Environment
participation in exhibitions has been extended to 90 days in case of USA.
46. Transit loss claims received from private approved insurance companies in India
will now be allowed for the purpose of EO fulfillment under Export Promotion
NOTES
schemes. At present, the facility has been limited to public sector general insurance
companies only.
Waiver of incentives recovery, on RBI specific write off
47. In cases, where RBI specifically writes off the export proceeds realization, the
incentives under the FTP shall now not be recovered from the exporters subject
to certain conditions.
Simplification of procedures
48. To facilitate duty free import of samples by exporters, number of samples/pieces
has been increased from the existing 15 to 50. Customs clearance of such
samples shall be based on declarations given by the importers with regard to
the limit of value and quantity of samples.
49. To allow exemption for up to two stages from payment of excise duty in lieu of
refund, in case of supply to an advance authorization holder (against invalidation
letter) by the domestic intermediate manufacturer. It would allow exemption for
supplies made to a manufacturer, if such manufacturer in turn supplies the products
to an ultimate exporter. At present, exemption is allowed upto one stage only.
50. Greater flexibility has been permitted to allow conversion of Shipping Bills from
one Export Promotion scheme to other scheme. Customs shall now permit this
conversion within three months, instead of the present limited period of only
one month.
51. To reduce transaction costs, dispatch of imported goods directly from the Port
to the site has been allowed under Advance Authorization scheme for deemed
supplies. At present, the duty free imported goods could be taken only to the
manufacturing unit of the authorization holder or its supporting manufacturer.
52. Disposal of manufacturing wastes / scrap will now be allowed after payment of
applicable excise duty, even before fulfillment of export obligation under Advance
Authorization and EPCG Scheme.
53. Regional Authorities have now been authorized to issue licences for import of
sports weapons by ‘renowned shooters’, on the basis of NOC from the Ministry
of Sports and Youth Affairs. Now there will be no need to approach DGFT(Hqrs.)
in such cases.
54. The procedure for issue of Free Sale Certificate has been simplified and the
validity of the Certificate has been increased from 1 year to 2 years. This will
solve the problems faced by the medical devices industry.
55. Automobile industry, having their own R&D establishment, would be allowed
free import of reference fuels (petrol and diesel), upto a maximum of 5 KL per
annum, which are not manufactured in India.
56. Acceding to the demand of trade & industry, the application and redemption
forms under EPCG scheme have been simplified.

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Economic Environment Reduction of transaction costs
57. No fee shall now be charged for grant of incentives under the Schemes in
Chapter 3 of FTP. Further, for all other 18 Authorizations/ licence applications,
maximum applicable fee is being reduced to ` 100,000 from the existing
NOTES
` 1,50,000 (for manual applications) and ` 50,000 from the existing ` 75,000
(for EDI applications).
58. To further EDI initiatives, Export Promotion Councils/ Commodity Boards have
been advised to issue RCMC through a web based online system. It is expected
that issuance of RCMC would become EDI enabled before the end of 2009.
59. Electronic Message Exchange between Customs and DGFT in respect of
incentive schemes under Chapter 3 will become operational by 31.12.2009.
This will obviate the need for verification of scrips by Customs facilitating faster
clearances.
60. For EDI ports, with effect from December ’09, double verification of shipping
bills by customs for any of the DGFT schemes shall be dispensed with.
61. In cases, where the earlier authorization has been cancelled and a new
authorization has been issued in lieu of the earlier authorization, application fee
paid already for the cancelled authorization will now be adjusted against the
application fee for the new authorization subject to payment of minimum fee of
` 200.
62. An Inter Ministerial Committee will be formed to redress/ resolve problems/
issues of exporters.
63. An updated compilation of Standard Input Output Norms (SION) and ITC
(HS) Classification of Export and Import Items has been published.
Directorate of trade remedy measures
64. To enable support to Indian industry and exporters, especially the MSMEs, in
availing their rights through trade remedy instruments, a Directorate of Trade
Remedy Measures shall be set up.
Source: www.business–standard.com/india/news/highlightsforeign–trade–policy–2009–14–/71929/on

3.8 FOREIGN EXCHANGE AND BUSINESS

DEVELOPMENT

When a business enterprise imports goods from other countries, exports its products
to them or makes investments abroad, it deals in foreign exchange. Foreign exchange
means ‘foreign currency’ and includes: (i) deposits, credits and balances payable in
any foreign currency; (ii) drafts, travellers’ cheques, letters of credit or bills of exchange,
expressed or drawn in Indian currency but payable in any foreign currency; and
(iii) drafts, travellers’ cheques, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India, but payable in Indian currency.
Foreign exchange: A form of Foreign exchange is a form of exchange for the global decentralized trading
exchange for the global
decentralized trading of of international currencies. Financial institutions across the world function as anchors
international currencies of trading between different types of buyers and sellers round the clock. Foreign
exchange plays a very important role in the growth and development of a business.
132 Self-Instructional Material
The relative values of different currencies are determined by the foreign exchange Economic Environment
market. International trading and investments are largely dependent on the foreign
exchange market. Market forces based on trade, investment, tourism and geo–political
risk determine the value of any particular currency. For example, every time a foreign
tourist visits India, the person must exchange the currency of his or her country for NOTES
the local currency. Another form of foreign exchange is the process of investment.
When an organisation belonging to a foreign country seeks to invest in another, the
former will have to make the payments in the local currency. To carry out such
transactions, the system of foreign exchange is very much required. These are some
of the reasons why the foreign exchange markets are so much in demand.
The Indian Foreign Exchange Market is made up of the buyers, sellers, market
mediators and the Monetary Authority of India. Mumbai, the commercial capital of
India, is the main centre of the foreign exchange market. A voluntary association,
named Foreign Exchange Dealers Association helps in market regulation
Until 1999, in India, all transactions that include foreign exchange were regulated
by Foreign Exchange Regulations Act (FERA), 1973. The main objective of FERA
was conservation and proper utilization of the foreign exchange resources of the country.
It also sought to control certain aspects of the conduct of business outside the country
by Indian companies and in India by foreign companies. It was a criminal legislation
which meant that its violation would lead to imprisonment and payment of heavy fine.
It had many restrictive clauses which deterred foreign investments.
Indian economy was somewhat modeled on the Russian socialist economy after
independence. Until 1991, India still had a fixed exchange rate system, where the
rupee was pegged to the value of a basket of currencies of major trading partners.
However, since the mid–80s, India started facing a financial crunch, which came to be
known as balance of payments. By the end of 1990, India was in a neck–deep economic
crisis. The government was close to default when the International Monetary Fund
(IMF) came to its rescue. In return, the IMF demanded certain reform policies, which
were to be adapted by India. India opened its doors to liberalization. Until 1992, all
Foreign Investments in India required previous approval of the government. The Foreign
Exchange Regulation Act rarely allowed foreign majority holdings for foreign exchange
in India. However, a new Foreign Investment Policy announced in July 1991, declared
automatic approval for Foreign Exchange in India for thirty–four industries. These
industries were designated with high priority, up to an equivalent limit of 51 percent.
The foreign exchange market in India is regulated by the Reserve Bank of India through
the Exchange Control Department.
In the light of economic reforms and the liberalized scenario, FERA was replaced
by a new Act called the Foreign Exchange Management Act (FEMA),1999.The Act
applies to all branches, offices and agencies outside India, owned or controlled by a
person resident in India. FEMA emerged as an investor friendly legislation which is
purely a civil legislation in the sense that its violation implies only payment of monetary
penalties and fines. However, under it, a person will be liable to civil imprisonment
only if he does not pay the prescribed fine within 90 days from the date of notice but
that too happens after formalities of show cause notice and personal hearing. FEMA
also provides for a two year sunset clause for offences committed under FERA which
Self-Instructional Material 133
Economic Environment may be taken as the transition period granted for moving from one ‘harsh’ law to the
other ‘industry friendly’ legislation.
Broadly, the objectives of FEMA are: (i) To facilitate external trade and payments;
NOTES and (ii) To promote the orderly development and maintenance of foreign exchange
market. The Act has assigned an important role to the Reserve Bank of India (RBI) in
the administration of FEMA. The rules, regulations and norms pertaining to several
sections of the Act are laid down by the Reserve Bank of India, in consultation with
the Central Government. The Act requires the Central Government to appoint as
many officers of the Central Government as Adjudicating Authorities for holding inquiries
pertaining to contravention of the Act. There is also a provision for appointing one or
more Special Directors (Appeals) to hear appeals against the order of the Adjudicating
authorities. The Central Government also establish an Appellate Tribunal for Foreign
Exchange to hear appeals against the orders of the Adjudicating Authorities and the
Special Director (Appeals). The FEMA provides for the establishment, by the Central
Government, of a Director of Enforcement with a Director and such other officers or
class of officers as it thinks fit for taking up for investigation of the contraventions
under this Act.
FEMA permits only authorized person to deal in foreign exchange or foreign security.
Such an authorized person, under the Act, means authorized dealer, money changer,
off–shore banking unit or any other person for the time being authorized by Reserve
Bank. The Act thus prohibits any person who:
• Deal in or transfer any foreign exchange or foreign security to any person not
being an authorized person;
• Make any payment to or for the credit of any person resident outside India in
any manner;
• Receive otherwise through an authorized person, any payment by order or on
behalf of any person resident outside India in any manner;
• Enter into any financial transaction in India as consideration for or in association
with acquisition or creation or transfer of a right to acquire, any asset outside
India by any person is resident in India which acquire, hold, own, possess or
transfer any foreign exchange, foreign security or any immovable property situated
outside India.
RBI Report on Foreign Exchange Reserves in India
The Reserve Bank of India makes public half–yearly reports on management of foreign
exchange reserves for bringing about more transparency and enhancing the level of
disclosure. These reports are prepared half yearly with reference to the position as of
March 31 and September 30 each year with a time lag of about three months.
The highlights of the RBI report released on September 30, 2011 may be
presented under the following heads:
1. Review of growth of reserves
The foreign exchange reserves stood at US$ 304.8 billion as in end–March, 2011. It
increased to the peak level of US $ 322.0 billion as at end– August, 2011. Thereafter,
it came down to US$ 311.5 billion at the end of September 2011. The main reasons
134 Self-Instructional Material
of decline are, inter alia, the revaluation effect and intervention in the domestic foreign Economic Environment
exchange market.
Although both US dollar and Euro are intervention currencies and the Foreign
Currency Assets (FCA) are maintained in major currencies like US dollar, Euro, Pound NOTES
Sterling, Japanese Yen etc., the foreign exchange reserves are denominated and
expressed in US dollar only. Movements in the FCA occur mainly on account of
purchases and sales of foreign exchange by the RBI in the foreign exchange market in
India, income arising out of the deployment of the foreign exchange reserves, external
aid receipts of the Central Government and the effects of revaluation of the assets.
2. Sources of accretion to the reserves
On balance of payments basis (i.e., excluding valuation effects), the foreign exchange
reserves increased by US$ 5.7 billion during April–September 2011 as compared
with an increase of US$ 7.0 billion during the same period previous year. The valuation
gain, reflecting the depreciation of the US dollar against the major international currencies,
accounted for US$ 0.9 billion during April–September 2011 as compared to a valuation
gain of US$ 6.8 billion during the same period a year ago.
3. External liabilities vis-à-vis foreign exchange reserves
The accretion of foreign exchange reserves needs to be seen in the light of total
external liabilities of the country. India’s net International Investment Position (IIP)—
a summary record of the stock of country’s external financial assets and liabilities—
as at end September 2011 was negative at US$ 224.9 billion, implying that our
external liabilities are more than the external assets. The net IIP as at end–September
2010 and end–March 2011 was US$ (–) 205.0 billion and US$ (–) 224.3 billion
respectively.
4. Adequacy of reserves
Adequacy of reserves has emerged as an important parameter in gauging the ability to Check Your Progress
absorb external shocks. With the changing profile of capital flows, the traditional
11. The ________ policy refers
approach of assessing reserve adequacy in terms of import cover has been broadened to the policy regarding
to include a number of parameters which take into account the size, composition and government spending,
taxation and borrowing.
risk profiles of various types of capital flows as well as the types of external shocks to
12. India is a ________ country
which the economy is vulnerable. In the recent period, assessment of reserve adequacy with a 3-tier government.
has been influenced by the introduction of new measures. One such measure requires 13. A _______ ______ is a legal
that the usable foreign exchange reserves should exceed scheduled amortization of document passed by the
legislature and approved by
foreign currency debts (assuming no rollovers) during the following year. At the end of the President.
September 2011, the import cover declined to 8.5 months from 9.6 months at end– 14. The difference between the
March 2011. The ratio of short–term debt to the foreign exchange reserves which was government’s total
21.3 per cent at end–March 2011 increased to 23.0 per cent at end–September expenditure and its total
receipts is called ____ ____.
2011. The ratio of volatile capital flows (defined to include cumulative portfolio inflows 15. ______ ______ duty is an
and short–term debt) to the reserves increased from 67.3 per cent as at end–March indirect tax levied on goods
2011 to 68.3 per cent as at end–September 2011. manufactured in India.
16. FDI is prohibited under the
5. Management of gold reserves government route as well as
the Automatic route in the
The Reserve Bank held 557.75 tonnes of gold forming about 9.2 per cent of the total Retail Sector. (True/False).
foreign exchange reserves in value terms as on September 31, 2011. Of these, 265.49
Self-Instructional Material 135
Economic Environment tonnes are held abroad in deposits / safe custody with the Bank of England and the
Bank for International Settlements.
6. Investment pattern and earnings of the foreign currency assets
NOTES The foreign currency assets are invested in multi–currency, multi–asset portfolios as
per the existing norms which are similar to the best international practices followed in
this regard. As at end–September 2011, out of the total foreign currency assets of
US$ 275.7 billion, US$ 144.4 billion was invested in securities, US$ 125.8 billion
was deposited with other central banks, BIS and the IMF and US$ 5.5 billion was
placed with the External Asset Managers (EAMs). The rate of earnings on foreign
currency assets and gold decreased from 2.09 per cent in July 2009 – June 2010 to
1.74 in July 2010 to June 2011 reflecting the generally low global interest rate
environment.
Source: www.rbi.org.in/scripts/PublicationsView.aspx?id=14016

3.9 SUMMARY

Some of the important concepts discussed in this unit are:

• Economic development generally refers to the sustained, concerted actions of
policymakers and communities that promote the standard of living and economic
health of a specific area.
• Economic development embraces sociological research on a variety of topics
including business organizations, enterprise development, evolution of markets
and management, and cross-national comparisons of industrial organization
patterns.
• Dependency theorists argue that poor countries have sometimes experienced
economic growth with little or no economic development initiatives.
• There have primarily been two phases in India’s economic development history
since independence. These phases were characterized by two different policy
regimes. The period of thirty years from 1950–51 to 1979–80 was the phase
of socialist experimentation, in which the ‘Indian version of socialism’ was
developed and instituted. The second phase of economic development started
at the beginning of the 1980s and continues till today.
• During the phase of ‘quest for commanding heights’, the policy of the public
(government) sector occupying the so-called ‘commanding heights’ of the
economy was devised and implemented. This had the effect of (artificially)
creating public monopolies and progressively eliminating competition from many
sectors of the economy.
• The legislative–bureaucratic socialism phase of development was characterized
by (a) the move from import substituting industrialization to export promotion
and from thence to broader import liberalization and (b) the restoration of the
freedom to compete followed by a move to restore competition in different
sectors and markets.

136 Self-Instructional Material

• Policy reforms during the first sub-phase of the market reform experimentation Economic Environment
were characterized by two themes; the move to an export promotion strategy
and the progressive restoration of the freedom of entrepreneurs to compete.
• The BOP crisis of 1990–1991 was turned into an opportunity for wider reforms.
NOTES
The architects of the 1990s reforms clearly understood the shortcomings of the
socialist approach and appreciated the positive aspects of the market. These
architects were in charge of the finance ministry, which had under its purview a
substantial number of sectors needing reform (external, financial, taxation, fiscal,
monetary policy).
• During the phase characterized by the Indian version of socialism, GDP growth
was slow and poverty increased. In the phase of market reform economic
growth accelerated sharply and poverty declined substantially.
• It is important to distinguish between the static and dynamic effects of reforms.
The former affects allocative efficiency, equity and current welfare, while the
latter affects growth rates of productivity, investment and GDP.
• The present currency system in India is managed by the Reserve Bank of India
and is based on inconvertible paper currency system. It has two aspects: (a)
internal aspect, and (b) external aspect. The internal aspect deals with the
circulation of coins and currency notes, while the external aspect deals with the
external value of currency and the way it is regulated.
• The RBI is the sole authority for the issue of currency in India. Rupee coins/
notes and subsidiary coins are issued by the Government of India but they are
put into circulation only through the RBI.
• The total expansion of money supply depends on the creation of high-powered
money (reserve base) and the multiplier action upon it. The components of the
reserve money are currency with the public, other deposits with the Reserve
Bank of India (RBI), and bankers’ deposits with the RBI.
• Money and credit supply can be influenced through (a) quantitative changes
(b) changes in the velocity of circulation (c) changes in the availability and cost.
• The total amount of financial needs of a company depends on the nature and
size of the business. The scope of raising funds depends on the sources from
which funds may be available.
• The liability of shareholders is limited to the face value of shares, and they are
also easily transferable.
• The rate of interest payable on debentures is fixed at the time of issue and is
recovered by a charge on the property or assets of the company, which provide
the necessary security for payment.
• The amounts due to a company from customers on account of credit sale generally
remain outstanding during the period of credit allowed, i.e., till the dues are
collected from the debtors. The book debts may be assigned to a bank and
cash realized in advance from the bank. Thus, the responsibility of collecting the
debtors’ balance is taken over by the bank on payment of specified charges by
the company. This method of raising short-term capital is known as factoring.

Self-Instructional Material 137

Economic Environment • A company’s cost of capital is simply the cost of money the company uses for
financing. If a company only uses current liabilities and Long-term debt to finance
its operations, then it uses debt and the cost of capital is usually the interest rate
on that debt.
NOTES
• One of the most important functions of the RBI is monetary management—
regulation of the quantity of money and the supply and availability of credit for
industry, business and trade.
• The Banking Regulation Act, 1949 empowers the Reserve Bank of India to
inspect and supervise commercial banks.
• In India, the bank rate has been of little significance except as an indicator of
changes in the direction of credit policy.
• The RBI is the banker to the Government of India statutorily and to state
governments by virtue of agreements entered into with them. The Bank accepts
money on deposit, withdrawal of funds by cheques, receipt and collection of
payments to the government and transfer of funds by various means throughout
India.
• The major objective of the fiscal policy in India is to promote a balanced growth
of the economy. Growth is basically a domain of planning. However, the
implementation of planning depends on fiscal operations of the government
corresponding to annual budget. An annual plan is prepared that shows budgetary
allocation for public investment in different sectors.
• In India, the budget documents presented to Parliament include the Annual
Financial Statement (AFS), Demands for Grants (DG), Appropriation Bill,
Finance Bill and Fiscal Policy Strategy Statement for the financial year. In addition
to these, individual Departments/Ministries also prepare and present to Parliament
their Detailed Demands for Grants, Outcome Budget, and their Annual Reports.
• India has a well-developed tax structure with clearly demarcated authority
between Central and State Governments and local bodies. Central Government
levies taxes on income (except tax on agricultural income, which the State
Governments can levy), customs duties, central excise and service tax. Value
Added Tax (VAT), stamp duty, state excise, land revenue and profession tax
are levied by the State Governments. Local bodies are empowered to levy tax
on properties, octroi and for utilities like water supply, drainage etc.
• The Industrial Policy (1991) announced by the Government accepted the fact
that foreign investment is essential for modernization, technology upgradation
and industrial growth of India. The policy therefore was to encourage foreign
capital to come to India.
• A foreign company planning to set up business operations in India may:
o Incorporate a company under the Companies Act, 1956, as a joint venture
or a wholly- owned subsidiary.
o Set up a Liaison Office/Representative Office or a Project Office or a
Branch Office of the foreign company which can undertake activities
permitted under the Foreign Exchange Management (Establishment in India
of Branch Office or Other Place of Business) Regulations, 2000.
138 Self-Instructional Material
 • Foreign exchange means ‘foreign currency’ and includes: (i) deposits, credits Economic Environment
and balances payable in any foreign currency; (ii) drafts, travellers’ cheques,
letters of credit or bills of exchange, expressed or drawn in Indian currency but
payable in any foreign currency; and (iii) drafts, travellers’ cheques, letters of
credit or bills of exchange drawn by banks, institutions or persons outside India, NOTES
but payable in Indian currency.

3.10 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. Two theories that encompass the study of economic development are the causes
of industrialization/economic modernization causes and the historical phases or
waves of economic development.
2. According to the dependency theorists, poor countries have sometimes
experienced economic growth with little or very less development.
3. There have primarily been two phases in India’s economic development history
since independence. These phases were characterized by two different policy
regimes. The period of thirty years from 1950–51 to 1979–80 was the phase
of socialist experimentation, in which the ‘Indian version of socialism’ was
developed and instituted. The second phase of economic development started
at the beginning of the 1980s and continues till today.
4. The BOP crisis of 1990–1991 provided an opportunity for wider reforms as it
helped the architects of the reforms clearly understand the shortcomings of the
socialist approach and appreciate the positive aspects of the market.
5. The Issue Department of the RBI is liable for the aggregate value of currency
notes of the Government of India and the currency notes of the Central Bank in
circulation and it maintains eligible assets for equivalent value. It is responsible
for getting its periodical requirements of notes printed from the currency presses
of the Government of India, distribution of currency among the public and
withdrawal of unserviceable notes and coins from circulation. It deals directly
with the public in the exchange of currency for coins and vice versa and exchange
of notes of one denomination for another.
6. The measures available to the Central Bank to influence money and credit are
called the tools of credit control. They include quantitative instruments like bank
rate policy, open market operations, changes in the reserve ratio and quantitative
instruments like control over consumer’s credit control, moral persuasion, and
so on.
7. The amounts due to a company from customers on account of credit sale generally
remain outstanding during the period of credit allowed, i.e., till the dues are
collected from the debtors. The book debts may be assigned to a bank and
cash realized in advance from the bank. Thus, the responsibility of collecting the
debtors’ balance is taken over by the bank on payment of specified charges by
the company. This method of raising short–term capital is known as factoring.
8. The Reserve Bank of India (RBI) was nationalized in 1949.

Self-Instructional Material 139

Economic Environment 9. The bank rate is the rate at which the central bank lends funds as a ‘lender of
the last resort’ to banks against approved securities, purchases and discount-
eligible bills of exchange.

NOTES 10. The Industrial Finance Corporation of India (IFCI) was established on July 1,
1948, as the first development financial institution in the country to cater to the
Long-term finance needs of the industrial sector.
11. Fiscal
12. Federal
13. Government budget
14. Fiscal deficit
15. Central Excise
16. True

3.11 QUESTIONS AND EXERCISES

Short-Answer Questions
1. Write a short note on the dependency theorists.
2. Briefly describe the monetary system in India.
3. Discuss in brief the role the Reserve Bank of India in the economic development
of the country.
Long-Answer Questions
1. What do you mean by bank rate? Discuss.
2. Discuss how the Reserve Bank of India supervises financial institutions of the
country.
3. Monetary policy is that instrument which is used to control the volume of money
and credit in an economy. Explain the concept of fiscal policy in this light with
special reference to India.
4. Explain the growth of multinational corporations in India.
5. Discuss the important features of India’s export-import policy for 2009-14.

140 Self-Instructional Material

 Social and Technological
UNIT 4 SOCIAL AND Environment

TECHNOLOGICAL
NOTES
ENVIRONMENT
Structure
4.0 Introduction
4.1 Unit Objectives
4.2 Societal Structure and Features: Entrepreneurial Society
and its Implications for Business
4.2.1 New Management Philosophy
4.2.2 Need for Social Responsibilities
4.2.3 Responsibility of Business Towards Society
4.2.4 Ethics, Values and Business
4.2.5 Resolving Corporate and Socio-Economic Conflict
4.2.6 The Consumer Movement
4.2.7 Social and Cultural Factors and their Implications for Business
4.3 Technology Development Phase in the Economy
as Conditioner of Business Opportunity
4.3.1 Sources of Technology
4.3.2 Technology Policy: Technology Trade and Transfer
4.3.3 National Science and Technology Entrepreneurship Development Board
(NSTEDB)
4.4 Technology Trends in India: Role of Information Technology
and Clean Technology
4.4.1 Business Technology Trends in India
4.4.2 Recent Technological Developments in India
4.4.3 Clean Technology
4.5 Summary
4.6 Answers to ‘Check Your Progress’
4.7 Questions and Exercises

4.0 INTRODUCTION
Society and technology are dependent on each other. This synergistic relationship
dates back to the dawn of humankind, which continues into modern technologies such
as computers. The arrangement of social institutions where individuals in a society
interact is termed social interaction. This unit explains the idea of societal structure and
its involvement in shaping the society. Concepts such as management philosophy, social
responsibility and the need for the same are discussed in detail. Business ethics and the
role of business towards society are elaborated. The unit also examines consumerism
and consumer movement, where it discusses the notion of consumerism—an economic
order based on fostering a desire to purchase goods and services in greater amounts.
Subsequent sections deal with technology trends and the impact of information
technology in India.

4.1 UNIT OBJECTIVES

After going through this unit, you should be able to:
• Describe societal structure and list its features
• Discuss the emergency of entrepreneurial society and its implications on business Self-Instructional Material 141
Social and Technological • Explain the idea of consumerism and importance of the consumer movement
Environment
• Describe the evolution of technology and its influence on society
• Identify various Information Technology trends in India and their impact on the
NOTES Indian society

4.2 SOCIETAL STRUCTURE AND FEATURES:

ENTREPRENEURIAL SOCIETY AND
ITS IMPLICATIONS FOR BUSINESS

Maximizing profits was the underlying maxim in the heyday of laissez faire capitalism
of Europe. Social responsibility had no place in this philosophy. The business of
business is business. Business began merely as an institution for the purpose of making
money. So long as a man made money and kept himself out of jail he was considered
successful. He felt no particular obligation and acknowledged no responsibility to the
community. As he was the owner of his business, he thought he had a right to do
whatever he pleased. Social welfare was not his job.
But such attitude does not hold good in the present scenario. The recognition of
social responsibility is the latest development in corporate business environment.
Business is not an end in itself. It is only the means to an end. The end is man
himself. Therefore, business has to contribute to man’s happiness, his freedom, his
material, moral and spiritual growth.
4.2.1 New Management Philosophy
A new philosophy of management is emerging which has deeply influenced corporate
goals and business policies. The major elements that contributed to its evolution are:
1. The business leaders as a whole were becoming increasingly conscious of the
fact that the public was an integral part of the general business scheme. Sense of
service thus came to qualify and modify the greed for profit.
2. The second element was the purchasing power of the public. The demand of
the public meant nothing unless sufficient purchasing power was placed in their
hands. The industry had come to understand that its functions were to manufacture
and distribute purchasing power as well as to manufacture and distribute
merchandise. The most important effect of this changed attitude was a new
business policy which demanded higher wages and lower prices.
3. The third consideration in the process is the rise of a new relationship between
the public and the business, slowly displacing the era of purely private business
for private profits. Business has a duty to report to the public, whose money it
is constantly asking for, in order to conduct the business itself.
The concept of social responsibility by Oliver Sheldon, a British business leader,
was derived from four basic observations of the social environment. First, he saw an
awakening of public interest in the inner workings of business. This was a result of the
close cooperation that existed between industry and the community during the war
effort. Second, Sheldon understood the demand of the workers for more leisure time
and increased opportunity for self-development. Third, he observed that the association
142 Self-Instructional Material
of workers into large groups such as trade unions and political clubs, was the beginning
of an atmosphere conducive to social change. Lastly, he noted a new spirit of enquiry Social and Technological
Environment
emerging from application of the scientific approach to problem-solving. He subscribed
to the view that the future problem of management would be to obtain a proper balance
between production and human areas.
NOTES
Social Responsibility: Its Meaning
According to the classical view, if a business was efficiently using the resources at its
disposal in producing the requisite goods and services, it was acting in a socially
responsible manner. But the modern concept of social responsibility has grown, though Social Responsibility:
no consensus is available regarding its definition or the extent of its scope. business was efficiently
using the resources at its
According to K.R. Andrews, social responsibility may be taken to mean intelligent disposal in producing the
and objective concern for the welfare of the society that restrains individual and requisite goods and
corporate behaviour from ultimately destructive activities. According to H.R. Bowen, services, it was acting in a
a businessman has an obligation to pursue those policies, to make those decisions or socially responsible manner
to follow those lines of action which are desirable in terms of the objectives and values
of our society. Therefore, business must recognize and understand the aspirations of
the society and determine to contribute to its achievement. According to Keith Davis,
social responsibility begins where the law ends. A firm is not being socially responsible
if it merely complies with the minimum requirements of law, because this is what any
good citizen would do. Social responsibility goes one step further. It is a firm’s
acceptance of a social obligation beyond the requirements of law.
Social responsibility means that organizations have significant influence on the
social system and that this influence must be properly considered and balanced in all
organizational actions. It simply means that business organizations must function as
part of a larger social system because they are, in fact, a part of that system.
The social responsibilities may be internal or external to a business organization.
Internal obligations are concerned with assuring due process of justice, equity and
morality in employees’ hiring and firing, their promotion or training. They may also
relate to such issues as increasing employees’ productivity, or improving work
environment. External obligations refer to such actions as fair deal to minority
shareholders, earning foreign exchange or training or hiring the unemployed etc.
4.2.2 Need for Social Responsibilities
1. The Iron Law of Responsibility: The institution of business exists only because
it performs an invaluable service to society. Society gives business its charter to
exist and the charter can be amended or revoked at any time if it fails to live up
to society’s expectations. Therefore, if business intends to retain its existing
social role and social power, it must respond to society’s needs constructively. Iron Law of Responsibility:
This is called the Iron Law of Responsibility which is that in the long run, if business intends to retain
those who do not use power in a manner which society considers responsible its existing social role and
social power, it must
will tend to lose it. Though the long run may be decades or even centuries in respond to society’s needs
some instances, history confirms that society ultimately acts to reduce the power constructively
of those who have not used it responsibly.
2. To fulfil long-term self-interest: A business organization most sensitive to
community needs would in its own self-interest like to have a better community
in which to conduct its business. To achieve that, it would implement special
programmes for social welfare. As a result of social improvements, crime will
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Social and Technological decrease. Less money will be required to protect property. Labour recruitment
Environment
will be easier. Turnover and absenteeism will be substantially reduced. A better
society would produce a better environment in which the business may aim at
long-run profit maximization.
NOTES
3. To establish a better public image: Each business organization must enhance
its public image to secure more customers, better employees and higher profits.
The public image concept may be extended to the accomplishment of various
types of social goals. According to this line of argument, social goals are now a
top priority with members of the public. So, if a firm wants to project a favourable
public image, it will have to show that it supports these social goals.
4. To avoid government regulation or control: Regulation and control are costly
to business, both in terms of energy and money and it also the restricts the
flexibility of decision-making. Failure of businessmen to assume social
responsibilities voluntarily invites government intervention and regulation or control
of their activities. By their own socially responsible behaviour they can prevent
government intervention. Businessmen have learnt that once government control
is established it is seldom removed even though the warranting conditions change.
If these are the facts, then the prudent course for business is to understand the
limit of its power and to use that power responsibly, giving government no
opportunity to intervene.
5. To avoid misuse of national resources and economic power: Businessmen
command considerable power on the productive resources of a community.
They are obliged to use those resources for the common good of society. They
should not forget that the power to command national resources has been
delegated to them by the society to generate more wealth for its betterment.
They must honour social obligations while exercising the delegated economic
power. Society will not tolerate indefinitely their misdeeds in wasting away these
resources.
6. To avoid class-conflicts: Industrial peace is a precondition for the success of
business. Trade unions are becoming more and more militant and demand social
welfare measures, better wages, better working conditions and soon. Their
demand derives its force from the fast changing social environment. Businessmen
must win over the confidence of workers and avoid violent class conflicts in
their own interests.
7. To convert resistances into resources: If the innovative ability of a business is
used to solve social problems, many resistances (problems) can be transformed
into resources and the functional capacity of resources may be increased
manifold. All problems may not be capable of being handled this way, but many
of them would be solved to the ultimate benefit of society. It is recognized that
prevention is better than cure. Any delay in dealing with social problems now
may leave business managements constantly occupied with extinguishing social
fires in the future. It is economical and wise to deal with such problems before
they snowball and become uncontrollable. Business organizations can do a lot
in this regard.
8. The effluence of many factories damages the surrounding environment. Corporates
are duty-bound to repair the damage by recognizing their responsibility towards
144 Self-Instructional Material society.
4.2.3 Responsibility of Business Towards Society Social and Technological
Environment
According to Earnest Dale, it is the duty of business to provide a fair return to the
shareholders, fair working conditions to the employees, fair deal to the suppliers and
customers and to make the business an asset to the local community and the nation. NOTES
1. Owners of Business: Management must provide fair, adequate and stable long-
run rate of return and steady capital appreciation to the shareholders for their
investments. It must also provide to them regular, accurate and up-to-date
information about the working of the company. Maximum disclosure about the
progress and achievements of the company is very satisfying to the shareholders.
It must ensure planned growth, solvency of the business and optimum utilization
of the resources of the business.
2. Employees: Employees need security of jobs, higher wages, full employment,
better conditions of work, opportunities for self-development and promotion.
They want to unite and form their trade unions to achieve rights and to seek
protection against the high-handedness of the management. They also desire
their work itself to be rewarding. Management, as a part of its social
responsibilities, is expected to provide for their social security, welfare,
grievances settlement machinery and sharing of excess profits.
Management should serve as a model employer. A model employer is one who
does not exploit his employees. As a model employer, the management should
provide stable employment, adequate wages, good and safe working conditions,
job satisfaction and opportunities for self-development. Healthy trade union
practices may be encouraged. Employees may be considered as partners in
business, since their interests in business is not very much different from the
interests of the shareholders. They may be allowed to participate in the decision-
making process at all levels of management. A feeling of fellowship and a sense
of belonging to the company as a whole should be allowed to grow.
3. Consumers: In the words of Henry Ford, the management must provide those
goods and services which the society needs at a price which the society can
afford to pay. Management is supposed to provide good quality products to the
consumers at reasonable prices. It should develop a liberal and fair attitude
towards the consumers. It must maintain regular supply of high quality products
and provide services to the consumers. Managers must meet the needs of the
consumers of different classes, tastes and with different purchasing powers at
the right time, place, price and in right quality. A businessman should act as a
friend and guide to the consumer. It is his duty to protect consumers’ interests at
any cost. He must guard against adulteration, poor quality, lack of service to the
consumer, misleading and dishonest advertisements, under-weighing, supply of
stale goods, etc. He must handle the complaints of the consumers carefully and
efficiently.
The concept of social responsibility of private business may be new to the western
world, but in India it is not so. Gandhiji reminded us of these values when he propounded
the theory of trusteeship. The rich businessman should recognize that he is the trustee
for all the wealth which he has collected from the members of the society. So, the
entrepreneur has to strike a balance between profit and social good.
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Social and Technological The concept of social responsibility of business was first mooted by President
Environment
Wilson in USA as early as 1913 as a measure of the ‘New Democracy’. He gave a
new shape to the manners and morals of business through the Chamber of Commerce
under the doctrine of self-rule in industry which listed fair trade practices and enforced
NOTES self-discipline by the business community.
Social issues with which business corporations have been concerned since the
60s may be divided into three categories: The first of these refers to social problems
external to the corporation which were not caused by any direct business action.
Poverty, drug abuse, decay of the cities are examples of problems in this category.
The second category consists of the external impact of regular economic activities.
Pollution by production is a case in point. The quality, safety, reliability of goods and
services, deception from marketing practices, the social impact of plant closings and
plant location belong to this category. The final category of issues occurs within the
firm and is tied up with regular economic activities. Equal employment opportunity,
occupational health and safety, the quality of work life and industrial democracy belong
to this category.
The second and third categories are of increasing importance and are tied up
with the regular economic operations of business. Improved social performance
demands changes in these operations.
Broadly speaking, business has two major objectives — economic and social.
Economic objectives
The first objective of business is economic in nature. ‘Management is that activity
whereby economic forces (land, labour and capital) are utilized in combination, always
with a view to profits of one kind or another’. In the words of Drucker, it is the
purpose, nature and necessity of this institution to take risks, to create risks. ‘Unless
we provide for risk, we are going to destroy capacity to produce. And therefore, a
minimum profitability, adequate to the risks which by necessity, assume and create, is
an absolute condition of survival not only for the enterprise but for society.’
Profits are the reward for which a business enterprise is brought into being. No
one will take the risks involved unless he is assured of adequate returns. Once a
business is started, the profits must continue to accrue if the business is to continue. A
business may bear losses provided there are chances of being compensated by adequate
profits in the long run.
Apart from meeting the costs of being and continuing to be in business, profits
serve two other purposes. They ensure the supply of future capital for expansion
either through retained earnings or providing inducement to new outside capital. Profit
is also an ultimate test of business performance; it is a criterion of efficiency. The more
efficient a business is, the greater the profit it earns.
Social objectives
Business consultant and thinker, Lyndall Urwick, has rightly observed that profit can
no longer be an objective of business than eating the objective of living. Although profit
is one of the major objectives of business, it does not mean that there is no limit to the
profit which the firm can make. Profit should be distinguished from profiteering.
Limitation on the profit motive arises from the fact that business does not thrive in a
146 Self-Instructional Material
vacuum. It exists in society. Even in a free enterprise system, individual business may Social and Technological
Environment
be restricted by social pressure, political action and legislative interference. A business
organization may be compelled to maintain the quality of its product, charge a prescribed
price from its customers or pay a living wage to its employees. It may also be prevented
from earning profits beyond a fixed ceiling. NOTES
So, good business keeps before itself some social objectives such as those of
producing articles of good quality, charging reasonable prices, adopting fair labour
practices and so on. Society is based on some ethical principles and makes some
promises to its members. Business has to conform to these beliefs and promises. It
must not behave in a manner which is not conducive to the stability of society. On the
other hand, business should aim at positively contributing to the well-being and uplift
of the community in which it is situated. This it does by participating in the welfare
activities of the surrounding area such as running of schools, libraries, hospitals,
organizing sports, providing entertainment, and so on. Bowen has propounded a doctrine
of social responsibilities, according to which business should be conducted for the
attainment of valued social goals like a high standard of living, economic progress,
economic stability, personal and national security.
It is a fact that the concept of social responsibility of business has received
public attention in India in recent times. Some enlightened companies like TISCO
have focused on social responsibility and proposed social audit. But the following
facts show that social responsibility is at a low pitch in India.
(a) A large section of business firms are inspired solely by the profit motive to
the complete neglect of social good.
(b) Tax evasion is widespread. Many firms maintain duplicate books of
accounts.
(c) Essential commodities like baby food, kerosene, cement, etc. are frequently
hoarded and artificial scarcity is created by dishonest businessmen for
making abnormal profit.
(d) Adulteration is rampant, particularly in respect of food articles.
4.2.4 Ethics, Values and Business
Today, it is generally accepted that business has social responsibilities, and that
management must ensure goods at fair, reasonable and relatively stable prices without
seasonal fluctuations and without unethical practices such as hoarding, black-
marketeering and profiteering. While there are legal deterrents for these, business
should unilaterally encourage the adoption of a code of ethics analogous to professions
such as law, medicine and accountancy as a means of punitive self-regulation.
Moreover, judgements at apex Court level have proclaimed that no industry
has the right to function if it cannot ensure fair or at least minimum wages to its workmen.
Labour has the right to organize peacefully for collective bargaining, including going on
pre-notified strike outside the business premises, while management has the
responsibility of providing working conditions that enable its workforce to give their
best. A plethora of seesaw judgements have swung the pendulum of justice either in
favour of or against business, and it is only now – with the looming threat of global
competition – that a degree of stability has emerged in management - labour relations.
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Social and Technological Traditionally, business believed that that government is best which governs
Environment
the least—a typically laissez-faire approach that stood for non-intervention. Today,
it is a well recognized fact that under such conditions, government abdicated executive
power in favour of economic power—a situation incompatible with our socialistic
NOTES pattern of society. In fact, business has to partner closely with government to ensure
that all interests, including those of the public, are catered for adequately. While in
several fields the two sectors are de facto rivals, a planned economy such as ours tries
to ensure a degree of balance between the two.
As realization dawns that cooperation is better than confrontation, the social
responsibilities of business toward government demand that a businessman (1) pays
all taxes and dues promptly and honestly, and behaves like a law abiding citizen (2)
does not resort to corrupt practices or subvert democratic processes for selfish motives
(3) refrains from adulterating goods or commodities for pecuniary advantage at the
cost of the public, and eschews hoarding or other methods for creating artificial scarcities.
Of course, it follows therefrom that government, in turn, will reciprocate by maintaining
the highest ethical and moral standards—a remote possibility given the enormous
expense involved in having a shy businessman at the hustings, which exacts its own toll
on democratic processes and ethical standards. As Otto von Bismarck said, ‘Politics
ruins the character.’ The recent media reports (April 2006) about Tony Blair’s
government receiving huge donations from parties who were beneficiaries of official
patronage tell their own sad story of human bondage to mammon.
Place of ethics and values
Ethical systems tend to pass value judgements on human behaviour with reference to
a certain moral ideal. Based on what that ideal represents in a particular society –
because a universal morality has yet to be found – value judgements are judgements of
what ought to be, as opposed to judgements of facts, which are judgements of what
prevails. The day has passed when all that a businessman had to do was to make
profits and stay out of jail; ethics and business were hardly felt to have any correlation.
In our 21st century world, hard-pressed by the global fallouts of unethical malpractices
of multinational corporations and even national governments, there is a new realization
that ethical behaviour is the cornerstone of human progress, both material as well as
spiritual.
Managements are becoming increasingly aware of the social repercussions of
unethical decisions, so much so that the subject has become a compulsory paper in
many management institutes abroad: a welcome addition in the light of deteriorating
family relationships and parental guidance from early childhood. There is general
consensus that there must never be another Andrew Fastow of Enron, or a Bernard
Ebbers of WorldCom, irrespective of the relentless pressures of quarterly financial
results, annual profitability estimates or shareholder expectations. With the rise of a
hedonistic consumer society that believes in flaunting its wealth, obsessed with constantly
updating its outward appearance at the expense of inner harmony, it is hardly surprising
that venerable social institutions like marriage are on the way out. This alarming global
scenario of declining moral and ethical standards brings with it the awareness that
everything is inter-related and intrinsically interconnected. Nothing functions in isolation.
This is especially true of governments or multinational corporations, and their actions.
One irresponsible currency trader on a remote island can bring down a hoary old
148 Self-Instructional Material
institution like Baring’s Bank and trigger a regional crisis that cripples the economies of Social and Technological
Environment
several countries.
While businessmen feel obliged to interpret themselves and the industrial systems
they represent in terms of democracy or (as in our case) a socialist system, the dilemma
NOTES
is that the system of free enterprise, perhaps the most successful model of business,
still fails to co-exist happily with the idea of giving precedence to global or national
priorities over personal interest. Despite a large and vocal body of organizational
thinkers who champion the cause of maintaining ethical standards in business, the fact
remains that as yet, there is no compulsion apart from legal deterrents that can force
professional managers, beset by the overwhelming need to balance morality with survival,
to be consistently ethical in their functioning…even if some objective yardstick was
available to measure the same. As such, the search for a universally acceptable moral
philosophy continues.
4.2.5 Resolving Corporate and Socio-Economic Conflict
The executive has to strike a balance between the technical must and the ethical
ought. To resolve the conflict between personal and social objectives, Adam Smith
evolved the concept of enlightened self-interest. Self-interest, Smith maintained, was
the best guide to social and personal policy. With a view to harmonizing personal,
social and corporate values, George Geyder recently developed the concept of the
responsible company. This concept of responsible business is a part of the larger
concept of a responsible society: a society in which the individual discharges his
responsibility to the community, the community to the individual, the citizen to the
State, the State to the citizen, the father to the son, the son to the father, the teacher to
the students, the student to the teacher, the management to the employee, the employee
to the management, and so on. The responsible society is the universal goal of mankind.
The concept of social responsibility of private business may be new to the
Western world, but not to India where Gandhiji reminded us of these values when he
propounded the theory of trusteeship. All life is a trust and all power carries with it
obligations. Idea of trusteeship expresses the inherent responsibility of business
enterprise to its consumers, workers, shareholders and the society and the mutual
responsibilities of these to one another.
The business is a community and justice should be its rule. This means that there
should be a company code of conduct which facilitates improved performance. It is
the duty of the management to see that responsibilities of business to shareholders as
well as to stockholders are fulfilled. Each of the parties involved in business has no
more than a partial interest in the enterprise; only management entrusted with its
governance carries the overall responsibilities for its success and growth. Management
must be freed from one-sided dependence on any single interest if it has to take a
broad view of its obligation.
Sachar Committee’s suggestions
The Committee (1978), inter alia, looked into the social responsibilities of companies.
Every company apart from being able to justify itself on the test of economic
viability will have to pass the test of a socially responsible entity. In this context, it will
be judged by various tests dependent upon the circumstances in each company and in
Self-Instructional Material 149
Social and Technological each area. Thus, a chemical company which may declare very high dividends may yet
Environment
be responsible for polluting the water and air and would have to be named as a socially
irresponsible company. Similarly, the waste discharge from the factories resulting in
loss of fish and thereby depriving a large number of fishermen of their livelihood and
NOTES also posing a risk to those eating fish, would certainly be ranked as an irresponsible
act. No company in these days can disown its social responsibility.
For securing responsible behaviour, the committee was in favour of ‘openness
in corporate affairs’, i.e., adequate disclosure of information for the benefit of
shareholders, creditors, workers and the community. It suggested that social costs-
benefit analysis, which was one of the prime considerations for investment decisions in
the public sector, ought to be taken into account in the matter of investments in the
private sector. It remarked: The accountability of the public sector to the people through
Parliament must find its parallel in the private sector in the form of social accountability,
at least to the extent of informing the public about the extent and the manner in which
it has or has not been able to discharge its social obligations in the course of its own
economic operations. It is in this sense that social responsibility of business, as far as
the private sector is concerned, is but social accountability and is a mere extension of
the principle of public disclosure to which the corporations must be subject.
Other relevant suggestions of the Committee are as follows:
1. A majority of the population of the country lives in rural areas and its well-
being is essential. A company which consciously and with deliberate choice
establishes its business in such areas will certainly be held to have played a
more socially responsible role even though in terms of its returns on investment
it is less profitable than other companies.
2. Social responsiveness may also be judged from the policy of employment
followed by a company so far as the socially handicapped and the weaker
sections of the community are concerned.
3. The test for judging a company’s consciousness towards the interests of the
public may include the interest it takes in the area of its operation, the welfare
of its employees, the spread of adult literacy and so on.
4. It should be obligatory on a company to give a social report every year
showing to what extent it has been able to meet its social obligations.
5. While quantifying the contribution that a company claims to have made
towards social obligations, the social report should specify that no part of
the benefits from contribution made by the company have gone either to the
directors or their relatives or to any association in which the directors and
their relatives have any personal interest.
6. The Companies Act should be suitably amended requiring every company
to give alongwith the director’s report a social report, which will indicate
and quantify, the various activities relating to social responsibilities carried
out by a company in the previous year.
In 1980, there was a significant development in which TISCO invited a team of
eminent people to undertake a ‘social audit’ of their organization and published the
findings in the form of a report.

150 Self-Instructional Material

 It is noteworthy that an estimated ` 400 crore is spent every year by corporate Social and Technological
Environment
organizations on philanthropy in India.
4.2.6 The Consumer Movement
The basic idea behind the consumer protection movement is protection of the rights of NOTES
consumers. It was President Kennedy who declared the consumers’ rights for the first
time in his message to the American Congress in March 1962. They were the right to
information, the right to choose and the right to be heard. Later, the International
Organization of Consumers’ Union added four more rights, viz., the right to redress,
the right to consumer education, the right to healthy environment and the right to basic
needs. These rights were incorporated in the United Nation’s Charter of Human Rights.
The Government of India later recognized these rights.
The consumer movement exercises considerable influence on the socio-economic
environment of business. In a country like India, where there is a high percentage of
illiteracy, where people are less informed and where critical goods are always in short
supply, the Government has a significant role in safeguarding the interests of consumers
by promoting a climate of fair competition and preventing exploitation of consumers.
For many centuries, there was a Roman dictum Caveatemptor—buyers
beware. The consumer movement has changed it and sellers feel now it is a question
of sellers beware. The objective of the consumer movement is to secure the interests
of the consumer against all types of unfair trade practices. Consumerism as an effective
and organized movement started in the 1960s in the US. Ralph Nader has transformed
consumerism into a major social force.
Consumerism may be defined as a social force within the environment designed
to aid and protect the consumers by exerting legal, moral and economic pressures on
business and government.
The consumer movement highlights the following four fundamental rights of
consumers:
1. Right to Safety—to be protected against the marketing of goods which are
hazardous to health or life.
2. Right to be Informed—to be protected against fraudulent, deceitful or grossly
misleading information, advertising, labelling or other practices and to be
given the facts needed to make an informed choice.
3. Right to Choose—to be assured access to a variety of products and services
at competitive prices and in those industries in which Government regulations
are substituted, to be assured satisfactory quality and service at fair price.
4. Right to be Heard—to be assured that consumer interests will receive full
and sympathetic consideration in the formulation of Government policy and
fair and expeditious treatment in its administrative tribunals.
The following features of the consumer movement are noteworthy:
1. It is basically a protest movement.
2. It is a mass movement in the sense that masses are the general body of
consumers.

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Social and Technological 3. It is generally a non-official movement. Public and voluntary consumers as
Environment
well as organizations initiate the movement.
4. Though it is not a government-sponsored movement, it is recognized and
backed up by the Government.
NOTES
In a laissez-faire society, consumer is king and he is free to choose. But consumer
sovereignty is a myth and the supposed benefit to the consumer accruing from perfect
competition has not been realized. The actual world is a world of imperfect or
monopolistic competition and the consumer has only a limited amount of freedom in
making purchase choices. When the consumer will be able to assert himself, then ‘the
take it or leave it’ nature of transactions in the Indian market will end. As the
manufacturer has the free choice to produce and sell his goods so the consumer should
have the free choice to select from the range of products available. This is what is
meant by consumer’s sovereignty in the present socio-economic context.
Consumers as a class in our country are the only group of people who are so
disorganized that they are being exploited all the time by other sectors of the economy—
industry, labour and agriculture. The Indian consumer is confronted with foodstuff and
goods that are adulterated, substandard and unsafe; prices that are inflated and weights
and measures that perennially short-change him.
We do not agree with Prof. Samuelson when he says that the business of business
is business. Business is not an island in itself. It is part and parcel of society as a whole.
Hence, it should be constantly alive and alert to the responsibilities of the society. The
consumer protection movement is an attempt to make the businessmen aware of their
social responsibilities.
Some legislative measures have already been taken by the Government to
safeguard the interests of the Indian consumer. There are a wide range of enactments
which operate to protect the consumer. The Agricultural Produce (Grading and
Marketing) Act, 1937 constitutes the basic law for the grading of agricultural produce.
The Drugs and Cosmetics Act, 1940, regulates the import, manufacture, sale and
distribution of drugs and cosmetics. The Prevention of Food Adulteration Act, 1959,
aims at preventing the sale of impure foodstuff. The Essential Commodities Act, 1955,
regulates the production, supply, distribution and trade in essential commodities for
the maintenance of supplies of essential commodities and securing equitable distribution
and availability at fair prices. The Packaged Commodities (Regulation) Order, 1979,
requires manufacturers to display on labels and packages the weight, contents of the
product, date of manufacture, selling price and address of the manufacturer. Some
other important acts include the Display of Prices Order, 1973, the Drugs and Magic
Remedies (objectionable advertisement) Act, 1954, and the Cigarettes (Regulation of
Production, Supply and Distribution) Act, 1975. Lately, the Government has enacted
the Consumer Protection Act, 1986. Through this Act, an attempt has been made to
strengthen the institutional framework in order to protect the consumer at the local,
state and central levels.
There are various institutional factors which are responsible for the growing
concern for consumer protection in India. To begin with, the Government is anxious to
protect the vulnerable sectors of the community through schemes like streamlining the
public distribution system. Owing to inflation, different anti-social elements have
appeared in the marketplace for exploiting the poor consumers through unfair trade
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practices like adulteration, underweight, substandard products and goods in short Social and Technological
Environment
supply. Hence, the Government has come forward to protect the consumers through
the Maintenance of the Internal Security Act, MRTP Act, 1969 and the Consumer
Protection Act, 1986.
NOTES
Secondly, the Indian traders did not bother about consumers because it was a
sellers’ market. Today, the market environment for most products has changed. Now,
it is a buyers’ market. Unless the consumers are protected against dishonest and unethical
business practices, the long-run business interest will suffer. Now, the business
community is becoming aware of its social responsibility towards customers.
Thirdly, the consumers are becoming more and more conscious of their rights
and legitimate demands. The present day consumers are not ignorant of the market
environment. They are conscious of customers’ rights and to protect their interest,
they form organizations like Consumer Cooperatives and Consumers’ Councils.
Lastly, the consumer burden imposed by the Government is on the increase. On
the pretext of fiscal discipline, the tax burdens are increased every year. It has almost
become a regular practice to announce a pre-budget hike in administered prices like
petro-products, railway fares and post and telegraph rates. It is quite natural that there
will be consumers’ resistance to these additional burdens.
In India, consumerism is still in its infancy although the consumers suffer from
exaggerated advertisements, impure quality of products, underweights, high prices
and artificial scarcity of many essential articles. Though some consumer organizations
have been set up in different parts of the country, the movement has yet to gain sufficient
strength to become a force to reckon with.
Hindrances to the growth of consumer movement in India
First, there is lack of leadership and management. In India, there is no Ralph Nader
who can give a dynamic leadership to this movement.
Second, the majority of the people are illiterate. They lack consumer education
and do not have the necessary consciousness to organize themselves.
Third, India is a vast country and it is very difficult to have quick, effective and
regular communication among different parts of the country. Different languages and
different customs of different regions hamper the growth of the movement.
Fourth, huge financial resources are needed to organize the consumer movement
throughout the country. Lack of financial resources is a handicap to the growth of the
movement.
Lastly, the attitude of the people is not favourable to the growth of a consumer
movement in India.There is a tendency among the people to look to the Government
for protection and assistance rather than to stand on their own feet and organize
resistances.
Till recently, apart from the legal measures, the main protection for consumers
came from the public distribution system and consumer co-operative movement. The
public distribution system started during the Second World War and it is now in
operation providing consumer goods. It covers foodgrains, sugar, kerosene and
controlled cloth. The Fifth Plan proposed to expand the coverage to include pulses
and edible oil. It was intended to keep prices in check and to ensure equitable distribution
Self-Instructional Material 153
Social and Technological of scarce but basic foods. The system also helped to check hoarding and black
Environment
marketing. The public distribution system does not necessarily improve the distribution
of income but it helps to prevent a deterioration in distribution in inflationary conditions.
Shortages of essential goods as well as inflation can be highly regressive if a public
NOTES distribution system does not prevent serious cuts in the consumption of the poor.
Though the prices of essential items such as cereals bought from the fair price
shops have been lower than prices in the open market, the quality is substandard and
the quantity insufficient. The poor are often unable to buy their necessities from the fair
price shops because they do not have cash in hand. They usually go to private traders
who provide credit facility even if it means actually paying a much higher price. Since
most of the unfair trade practices are due to shortage in supply, what is needed is an
increase in production of all consumer goods, and quality, price and distribution would
take care of themselves.
The National Consumer Protection Council under the Chairmanship of the Union
Minister of Civil Supplies and Cooperation has been established to promote and develop
consumer movement throughout the country. The Council will inform itself fully about
‘consumers’ problems, collect and disseminate information relating to consumer matters,
assist the state governments in the development of consumer movement, examine
consumer grievances and initiate remedial action and promote equitable distribution of
mass consumption commodities at fair prices.
The Consumer Protection Act is discussed in detail in Unit 5.
4.2.7 Social and Cultural Factors and their Implications
for Business
The social-cultural environment includes everything that is not included in the economy
or the political system. Economic life is organized primarily through a market in which
individuals relate to one another as buyers and sellers and the purpose is production.
In political life individuals relate to one another as citizens and the basic purpose is
making collective decisions and rules. The economic and political systems together
create the conditions—goods, services and rules—which we all need in order to live
the kinds of lives that we choose. The social-cultural environment, then, consists of the
whole range of behaviours and relationships in which individuals engage in their personal
and private lives, including: the characteristics of the population (e.g. age, sex, race or
ethnicity, class) values and attitudes, lifestyles and relationships.
Culture is an attribute of groups, and this can mean society as a whole (e.g.
national culture), groups within society (sub-cultures), or even groups of societies and
nations (trans-national culture).
For example, it is quite common to speak of ‘western culture’. This term implies
that there are certain values and ways of life that western societies might be said to
share, such as:
Secularism: This refers to • Secularism—this refers to the increasing influence of rational and scientific
the increasing influence of thought, and the decline of religion as a framework of understanding and
rational and scientific guide to behaviour.
thought, and the decline of
religion as a framework of • Consumerism or materialism—this refers to the view that achieving higher
understanding and guide to levels of consumption of goods and services leads to greater happiness. A
behaviour. good life means having more ‘things’. This attitude lies behind the belief that
154 Self-Instructional Material
economic growth is always a good thing.
 • Individualism—this usually refers to the idea that individuals make their Social and Technological
Environment
own life-style choices and are motivated primarily by self-interest. It can
also involve the idea that individuals should strive to be self-reliant.
However these attitudes or values vary in strength between western societies (e.g.
NOTES
UK society is more secular than the United States), and they also have their own
distinctive cultural traits.

4.3 TECHNOLOGY DEVELOPMENT PHASE

IN THE ECONOMY AS CONDITIONER OF
BUSINESS OPPORTUNITY

There are about 33 national laboratories and about seven research associations. During
the course of last four decades these forty organizations have developed over 5000
processes which are ready for handing over to industry and converting them into
commercial success.
The business environment of India is at the moment characterised by
(a) A boom in the share market.
(b) Dearth of foreign technology owing to high charges of donors and low
capabilities of Indian parties to pay in foreign exchange.
(c) Frequent sickness in Industry both in small scale as well as in the organized
sector.
(d) Owing to present (1992) change in the industrial policy, an environment of
rapid industrialisation through technology import from foreign countries
both from foreign companies as well as NRIs (Non-Resident Indians).
In such a business environment, technology transfer is somewhat short of
requirement though a lot of new technology has already been transferred in 80s.
(a) A boom in packaging technology has completely revolutionised the
consumer product marketing. New materials of packaging from petroleum
products. e.g., LDPE, HDPE, Polypropylene, Polystyrene, PVC, BOPP
etc. to development of machines for making pouches or sachets in brilliant
colour and painting has brought in a new era in marketing, packaging and
advertisement. Typical examples are Fun Munch, Cadbury’s products,
Kurmur, Pan Parag (Al foil), Sunsilk Shampoo, PVC toothpaste. Capsules,
pharmaceutical packaging like multilayer and blister packaging,
unbreakable, polythene bottles, milk, mustard oil and so on.
(b) The business environment is replete with indigenous technology from
National Laboratories Universities, and R&D laboratories from existing
business houses. However, a large number among such technology transfers
have resulted in failure or partial success only. But there are many cases of
success stories such as the following:
(i) Process of making milk powder from buffalo milk has been
developed by Central Food Technological Research Institute at
Mysore and licenced to AMUL in Gujarat which has successfully
converted the laboratory process into a very big industry.
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Social and Technological (ii) The design of Swaraj Agricultural tractor was developed by Central
Environment
Mechanical Engineering Research Institute (CMERI) at Durgapur
and licenced to Punjab Tractors and is now controlled by a scientist
of CMERI who developed the design originally. A large number of
NOTES such tractors have been manufactured and sold by Punjab Tractors
Ltd.
Along with these success stories of technology transfer of CSIR processes
there are many cases of failure also, e.g., from glass of CGCRI, Metallurgy of Magnesium
by NML and the like. There are of course many cases of partial success, e.g.,
Technology of making bricks from fly ash by CFRI, malted milk food by CFTRI,
optical glass by CGCRI etc.
On the whole the CSIR processes that were sold directly or through NRDC
have resulted in production of goods worth ` 5,000 crores per year in this country.
4.3.1 Sources of Technology
The sources of technology for a manufacturing unit in India are as follows:
(i) Twyfors of U.K. for Hindustan Twyfors of Batadwgarh, Haryana for the
manufacture of sanitaryware is an example of an industrial unit from a foreign
country.
(ii) G. Nycer of Madras (collaboration with Keramug of Germany) to GMB Ceramics
of Balasore in Orissa for manufacture of sanitaryware is an example of an
industrial unit from domestic sources.
(iii) Engineering consulting organizations, e.g., M.N. Dastur transfering the technology
of Steel Making to Vishakhapatnam Steel Plant.
(iv) NRDC, the technology licensing corporation, e.g., the National Ceramics at
Palta, North Barrackpur for brick making machine and High Draught kiln for
firms of bricks from CBRI at Rourkela or making of fly ash bricks by Siddheswari
Brickworks under licence from CFRI.
(v) Non-Profit research Institutes like CSIR or Sri Ram Institutes, e.g., rice husk
insulating brick by Orissa Refractories at Bhadrak by CGCRI technology or
Porons Filter Candle by India Potteries on the basis of technology by RRL,
Jorhat.
(vi) Universities/academic institutions, e.g., Extraction of Tannin from Myro balan
by BG Chemicals at Jhargram on the basis of technology developed by IIT,
Kharagpur.
(vii) Individual inventors, e.g., Heat Wheel developed by Dr. M. Chakravorti of
NML and sold to Millars Process Engineering Corporation.
Mr. Palhan of DGTD defined technology as society’s pool of knowledge regarding
industrial arts. According to him, technology is the knowledge of details of process,
design engineering, selection of raw materials, optimisation of operating conditions,
operational and manufacturing techniques, applications, procedures and quality control
as a package in the manufacture of a product or delivery of services.

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 The technology package may have various components such as: Social and Technological
Environment
(a) Project Profile/Feasibility Report/Project Report/Detailed Project Report
(b) Design of the product, its specifications and properties
(c) Specifications of the raw materials inputs to various components NOTES
(d) Details of the Plant & Machinery and their layout
(e) Engineering and process flow chart, manufacturing instructions
(f) Load diagrams and material balance
(g) Control of operations, production and planning
(h) Managerial practice and data processing
(i) Workforce requirements and training of personnel at various levels
(j) Scale of operations
(k) Infrastructural inputs like energy and water etc.
(l) Performance characteristics under varying conditions
(m) Testing procedure and quality control
On the legal side, technology package may include patent rights and use of
trademarks and so on.
Technology transfer has, by and large, been recognized and accepted as a route
for accelerated development of a developing country.
According to Dr. R.S. Hamsagar, technology exists not in research laboratories,
not in factories machines, nor in engineering data, drawings and patients. It exists in the
multi-disciplinary group consisting of scientists, engineers, accountants, managers,
operation and maintenance teams and other groups who have together developed the
technology. So in business, technology exists where it has been assimilated and adapted
successfully and is able to undergo diffusion. In fact the assimilation, adaptations and
diffusion of ‘know-how’ results in technology.
Technology Development, Assimilation, Adaptation and Diffusion (DAAD)
requires a system approach. Each technology has a relation with, and is affected by,
the several systems around. An analysis and understanding of these subsystems, in
relation to the particular technology, requires a multi disciplinary approach. In fact
almost every discipline that is needed for a running an enterprise, has to develop new
technologies, assimilate and adapt them.
A multidisciplinary approach has to start from the pilot plant design and running
stage and has to continue till the scale up and commercialization of the technology.
Using a technology is obviously multi-disciplinary.
Indian technologies have not experienced the testing phase of competition. Indian
industries with unsatisfactory and outdated technologies, be it textiles, automobiles,
chemicals or else, had a heyday of a prosected market environment. This has put
brakes on technological advancements and assimilation and adoptation of advanced
technologies in many areas. As a result, Indian business world has now opened the
floodgates of foreign technologies in every field. Maybe this will enable us to catch up
with the advanced world. But like Japan we should start with the latest in technological

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Social and Technological advancements and bring innovations in them for the future. This too can take us to the
Environment
forefront of technological advancements.
Even though India has imported a large number of technologies during the last
half a century, the present technologies of the developed countries are not necessarily
NOTES
the future technologies of the developing countries.
4.3.2 Technology Policy: Technology Trade and Transfer
In any society economic growth would be possible only through the introduction of
improved technical inputs into the process of economic transformation. In the last few
decades it has become quite clear that no economic development would be possible
without higher technological input available in the society. Our planners have pointed
out that capital must be created and selective capital be invested in growth for
development of the economy if the country wants to achieve a desired rate of growth.
The importance of capital cannot be denied, but capital by itself will not be able to
bring about the change which we are looking for. Capital can only be a means for
facilitating input of technology. The economic growth of Japan, Korea and Taiwan
presents clear examples that the input technology and the improved grade of technology
have been responsible for their progress. In spite of our eight Five-Year Plans, we
have not been able to grow at the desired rate nor are we in a position to produce and
compete with Japan and Korea as we have not been able to bring in and use the latest
technology. Hence, we can conclude that capital and money alone cannot make us
move faster towards our desired goal; instead it is the application of latest technology
which is needed.
Technology means scientific knowledge for the manufacture of a product or
rendering of a service.
Science produces knowledge, technology helps to produce wealth. Technology
gives its owner temporary advantage over his competitors. That is why the owner of
technology protects his technique from others through registration as patent and charges
money from those who want to use it. The acquisition of technology from external
sources is known as technology transfer.
Technology may be considered as improving something already being done,
satisfying a long pending need and creating the possibility of a new need. There may
be invention or innovation in this process. In its early stage of development technical
change in a country is mainly the result of advanced technology imported from industrially
and technologically advanced countries. That is to say technical progress is an agent of
technology transfer.
Technical change is defined as a shift in the production function whereas factor
accumulation is identified with a movement along the function.
There are two distinct components of technological progress. One are the
elements that are ‘embodied’ in the original machinery and equipments and the second
are the ‘disembodied’ components which are subsequently added by innovation in the
recipient country in the fields of production, management, marketing, raw materials
etc. known as technology transfer. There is evidence to show that the rate of
technological progress can be stepped up by the disembodied component even with
existing technology.
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 The scope of technology may be explained as a resource which comprises Social and Technological
Environment
knowledge, skills and means for using and controlling the factors of production to
produce, maintain, and distribute goods and services for which there is an economic
and social demand. Under this broad definition various sources of technology transfer
can be grouped under the following categories: NOTES
1. Projects—Foreign direct investment; turn-key construction and co-
production.
2. Trade—Sale of equipment, tools and end-products.
3. Contractors and Development—Licensing of patents, trademarks,
management and equipment, maintenance, risk contracts for oil drilling.
4. Research and Development—Location of R&D operations in foreign
countries; joint R&D projects.
5. Personnel Exchanges—Development assistance under bilateral and
multilateral aid programmes, international executive corps, employment of
foreign technicians.
6. Publications—Professional and scientific literature, technical publications.
7. Conferences—Professional and scientific meetings, academic preferences,
technical societies, and trade associations.
8. Teaching and Training—Foreign study in regular undergraduate and
graduate programmes, training programmes of United Nations and other
international agencies, internal training programmes of business firms etc.
9. Others—Transfers through international tender invitations, acquisition of
companies, Government-to-Government agreements etc.
The great majority of developing countries including India are poor and suffer
from over-population and consequent higher rates of unemployment. The technology
of advanced countries by definition is capital-intensive, whereas the technology required
in most developing countries has to be employment-intensive. This is, therefore, the
basic contradiction. The transfer of capital-intensive technology into developing countries
is likely to worsen the employment position as such technology would deny the
unemployed the gains of economic growth through the adoption of capital-intensive
techniques. The extremists, therefore, argue for an almost total rejection of transferring
western technology to Indian conditions and advocate for the adoption of Gandhian
or Maoist patterns of economic development in which emphasis is not on maximisation
of income but on the maximisation of employment. Those who are of moderate views
are of the opinion that the transference of western technology may not be feasible in
toto, yet there are certain areas like the generation of power where capital-intensive
technology may pay desired dividends. Both the views ascertain that import of
technology needs careful handling. The priorities of national planning and the choice of
technologies both have to be optimised. An appropriate technology that will maximize
employment and at the same time provide to the consumers products at reasonable
prices has yet to be evolved.
Sometimes it is argued that developed countries must evolve appropriate
technology suitable to the environment of developing countries and should not transfer
their highly sophisticated technologies.
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Social and Technological Advanced industrialised countries are trying to sell their technology to less
Environment
developed countries. This is being done either by establishing multinational companies
or through technical collaboration with leading companies. This is transfer of technology.
It should be selective and its application should be according to the conditions prevailing
NOTES in the developing country concerned.
Methods of technology transfer
Transfer of technology can be achieved:
(i) by improving and updating technologies
(ii) by adopting and absorbing newer technologies
(iii) by innovating and improving the technology imported
(iv) by better using technology in production
(v) by producing new kinds of products
(vi) through improved systems and improved organizations and the effective use of
technology
4.3.3 National Science and Technology Entrepreneurship
Development Board (NSTEDB)
The National Science & Technology Entrepreneurship Development Board (NSTEDB),
established in 1982 by the Government of India under the aegis of Department of
Science & Technology, is an institutional mechanism to help promote knowledge based
and technology driven enterprises. The Board, having representations from socio-
economic and scientific Departments and Institutions aims to convert “job-seekers”
into “job-generators” through Science & Technology (S&T) interventions.
Major objectives of NSTEDB
• To promote and develop high quality entrepreneurship amongst S&T manpower
and to promote self-employment by utilising S&T infrastructure.
• To facilitate and launch various promotional services relating to development of
entrepreneurship.
• To network agencies of the support system, academic institutions and Research
& Development (R&D) organizations to foster entrepreneurship and self-
employment using S&T with special focus on backward areas as well.
The programmes are broadly classified into the following areas:
Training programmes
• Entrepreneurship Awareness Camp (EAC)
• Entrepreneurship Development Programme (EDP)
• Faculty Development Programme (FDP)
• Open Learning Programme in Entrepreneurship (OLPE)
• Technology Based EDP (TEDP)

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Institutional mechanisms for entrepreneurship development Social and Technological
Environment
• Entrepreneurship Development Cell (EDC)
• Science & Technology Entrepreneurship Development (STED) Project
• Science & Technology Entrepreneurs Park (STEP) NOTES
• Technology Business Incubator (TBI)

4.4 TECHNOLOGY TRENDS IN INDIA:

ROLE OF INFORMATION
TECHNOLOGY AND CLEAN TECHNOLOGY Clean Technology: It
includes recycling, review
Today India has become one of the strongest in the world in terms of scientific manpower able energy in order to
in capability and maturity. Hence, we are in a position not only to understand the create electricity and fulls
technologies that we may have to borrow, but also to create our own technologies
with extensive scientific inputs of indigenous origin. Basically we have come a long
way since our independence, from mere buyers of technology to those of who have
made science and technology as an important contributor for national development
and societal transformation. In a world where the powers are determined by their
share of the world’s knowledge, reflected by patents, papers and so on, the WTO
starts to play a crucial role in the economic development. It is important for India to
put all her acts together to become a continuous innovator and creator of science and
technology intensive products”.
4.4.1 Business Technology Trends in India
As organisations enter the evolution from ‘Transactional Systems’ to ‘Engagement
Systems’, a shift is happening. And engagement requires a way different design point
and business model for success. These shifts have massive impacts on the societal,
technological, economical, environmental and political landscapes. According to
Constellation Research analysis, the following trends are visible in business environment
technology:
• If consumerisation of IT is not enterprise class, the businesses has failed.
• Organizations that master data visualization gain the advantage of speed. Check Your Progress
• New growth comes from monetising the complete ownership life cycle. 1. What is the underlying maxim
of laissez-faire?
• Successful organizations are emphasizing on social shifts from B2B/B2C to 2. What do you understand by
P2P networks. social responsibility?
• The corporate digital divide is growing larger. 3. State one suggestion of the
Sachar Committee.
• Market leaders know how to manage innovation. 4. Define consumerism.
5. State two sources of
4.4.2 Recent Technological Developments in India technology required for a
manufacturing unit in India.
Let us discuss some latest technological developments in India. 6. Define technical change.
1. Blu-Ray: Remember the 1.44 MB humble floppy? Now we only talk about 7. List three methods of
CDs (can store around 650 MB) and DVDs (anywhere from 4.7 GB to 17 technology transfer.
GB). However, with the announcement of Pioneer’s Blu-ray or Blu-disc format,
the game is changing.
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Social and Technological Blu-ray is the next generation large capacity optical disc video recording format
Environment
— enables recording, rewriting and play back of up to 27 gigabytes (GB) of
data on a single side and can transfer date at 36 Mbps (the CD transfers data at
around 150 Kbps while DVDs do the same at around 11 Mbps).
NOTES
The High Density Digital Versatile Disc (HD-DVD) is also in the news. However,
HD-DVDs can store up to 15 GB on a single layer. While HD-DVD is promoted
by Toshiba, NEC, Sanyo and Microsoft and backed by four major film studios,
Blu-ray is backed by Japanese consumer electronics giant Sony.
At CES 2006, Sony already announced plans for its first high-definition Blu-ray
DVD players and recorders. High-definition technology from Toshiba called
HD DVD will also be available to consumers in March 2006.
HD-DVD is similar to DVD, hence analysts consider it cheaper for manufacturers
to switch production lines. On the other hand, Blu-ray will need whole new
equipment setups. Both formats are yet to agree on a standard, which is a
problem.
Market monitor SMD sees Blu-Ray and HD DVD discs (Moser Baer is already
working on them) really kicking in only from 2007 onwards in India. For now,
CDs and DVDs are here to stay
2. Digital ticket: After the convenience of booking cinema tickets online, comes
the ease of buying tickets on your cellphone. And also paying for it through the
phone. Bangalore-based Jigharak is believed to be working on the software
application. Not only this, you will be able to book tickets using your personal
digital assistant (PDA) or any hand held.
Vijay Basrur of Inox Leisure says it is kicking-off one such initiative this February,
either in Bangalore or Pune. Shringar Cinemas also has plans to start hawking
tickets through PDAs in the next couple of months at its multiplex in Andheri,
says Arshad Kazi, technology head.
Moreover, with the setting up of self-collection kiosks, buying tickets will become
as simple as withdrawing cash from an ATM.
3. Mobile games: The global mobile games’ business is pegged at $ 2.2 billion,
with India accounting for around $100 million of the overall pie. Nasscom states
this market could well touch $500 million in exports alone by 2010.
And thanks to the next generation of cell phones with enhanced graphical, sound
and data capabilities, mobile gaming is poised as the next big thing for the Indian
gaming scenario.
However, a console/PC genre, awaiting its day, in India is the massively
multimedia online role playing game (MMORPG). Indeed, even the introduction
of MMORPGs in the mobile market should bring in a whole new audience.
Due to the stratified nature of online gamers, there is little crossover between
those who play first-person shooter (FPS) games and those who play
MMORPGs, states a recent Juniper report.
4. Movies on Demand: With Tata Sky planning to launch Direct to Home (DTH)
services in May-June this year, consumers will have much more choice. Not to
mention better picture and sound quality, thanks to set-top boxes.
162 Self-Instructional Material
 Vikram Kaushik, CEO, Tata Sky, says his company will leverage the expertise Social and Technological
Environment
of BSkyB and Foxtel and customise the programmes to suit local needs.
Gaming channels too are likely to become a reality. We should also see the
launch of digital video recorders this year which can record 100 hours of
NOTES
programing, says Sunil Khanna, CEO, Dish TV. So you can always record
your favourite programmes — six channels at a time — and watch them at your
leisure.
Last month, DishTV kicked-off with a Movie-on-Demand Service for Hindi
films and this will be followed up with a service for English films in March. India
might also see High Definition TV (HDTV) before 2006 is over. Khanna notes
that HD-compatible television sets are already here but broadcasters need to
get their act together.
5. IP Phone: While Internet Protocol telephony is known in India — many of us
having used it on the sly for the last four years — what is little known is that
Indian enterprises have bought over 100,000 IP phones in the last couple of
years.
IP phones transmit voice using data packets (similar to the way the Internet
routes data) instead of circuit-switched (the way your vanilla telephone operates)
connections over voice-only networks. Since the calls are routed through the
Net (these phones have an ethernet phone in which your phone (copper) cable
can be inserted), all the user pays for is the IP phone software and the Internet
connection.
While it took Cisco three years to sell its first million IP phone, it took just four
months to sell the sixth million (total global sales till date). In a few year’s time,
one out of two phones in India could be an IP phone, opines Ranajoy Punja,
VP (Marketing), Cisco. Frost & Sullivan estimates the Indian IP telephony
market in India to be around $ 54 million.
6. Robots: AIBO has a cult following in the United States and Japan. Of course,
American AIBO buyers tend to be computer geeks who want to hack the
robotic dog’s programming. Japanese consumers, on the other hand, treat this
Sony robot as a pet.
Robots in the US have already taken over domestic tasks like lawn-mowing,
vacuum cleaning (the Roomba by iRobot) and window cleaning. iRobot says it
has sold hundreds of thousands of units of the Roomba — a self-guided, self-
propelled vacuum cleaner that sells for around $200 — in just one year.
A United Nations report on Robotics expects the sales of such robots to reach
4.5 million units with an estimated value of $3 billion. The market for
entertainment and leisure robots, including toy robots, is tipped to touch 2.5
million units. The sales value is estimated at over $4.4 billion.
With labour cheap in India, will domestic robots become popular? Not likely in
the coming years. However, robots have other uses in our country. Many Indian
auto, auto-ancillary majors and machine tool players are using robots to meet
global precision standards. Robots have also been used in cardiac surgeries.
7. RFID: Radio Frequency Identification (RFID) technology is no longer only
about the US and Wal-Mart. Pune University’s Jayakar library uses RFID tags
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Social and Technological on its books as well as library cards; the Chitale Dairy at Bhilwadi in
Environment
Maharashtra’s Sangli district has installed RFID to monitor the feeding patterns
of cattle and bisons; Pantaloon Retail India and Shopper’s Stop have RFID
tags in their factories; more than 45 colleges in Pune have introduced student
NOTES identity RFID cards that allow students access to hostels and monitor their
classroom attendance; and ITC uses RFID to track what goes into the
manufacturing of its cigarettes.
These are but a few cases in point. Indian suppliers to retail majors such as
Wal-Mart, Metro, Target and Tesco have already been issued directives to
replace barcodes with RFID tags.
While this may lower margins of these suppliers, it will unwittingly create a
demand for RFID tags in India. The estimated market size of this industry in
India is anywher between ` 125–150 crore (` 1.25–1.50 billion) and is said to
be growing at 30 per cent per annum.
The current cost of tags is anywhere from ` 5 to ` 30, considered to be prohibitive
when tagging hundreds of products. The rates are bound to decrease this year.
Worldwide RFID spending is expected to surpass $3 billion in 2010, predicts
Gartner. A Research and Markets report pegs the figure at $6 billion by 2010.
RFID is not a bar code replacement, note analysts. While bar codes are better
at collecting data in structured places like warehouses (likely to continue for the
next five to seven years), RFID tags are expected to be used for data collection
in largely chaotic or unstructured business processes like retail environments to
hospitals.
8. GPS: Telematics, integrated use of telecommunications and informatics, is
catching up in the transportation sector. Global Positioning System (GPS) is
being used in Karnataka State Road Transport Corporation (KSRTC) buses
(pilot project) in Bangalore. Many Indian logistics companies too are using
GPS to track vehicle movements and errant drivers.
The recently-introduced Tata Novus range of commercial vehicles feature the
‘TRAK i t’ Vehicle Locater — a GPS system for vehicle tracking; ‘TRAK i t’
Vehicle Data Recorder — for critical vehicle and driver performance recording;
and electrical systems that ensure ‘vehicle start’ in neutral gear, as an enhanced
safety feature.
Our cars too are becoming smarter. For instance, the REVA-NXG introduced
this April as a “concept car” in Monaco, was fitted with a `wireless tablet’ — an
embedded computer based on Mobilius having a touch screen display which
shows all essential information about the car like speed and mileage. It also
doubles up as a GPS navigation system. Internet is accessible via GPRS. It also
has a MP3 player.
Vehicle telematics systems are also increasingly being used to provide remote
diagnostics; a vehicle’s in-built systems will identify a mechanical or electronic
problem, and the telematics package will automatically make this information
known to the vehicle manufacturer and service organisation. Other forthcoming
applications include on-demand navigation, audio and audio-visual entertainment
content.
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 9. Podcast: If you have an iPod, you would know what podcasting is. For the Social and Technological
Environment
uninitiated, imagine a desktop aggregator where you subscribe to a set of feeds.
Podcasting works similarly, except that instead of reading, you listen to the
content on an iPod.
NOTES
Juice was the first major podcasting software (downloads podcast media file
like oggs/MP3) and is still the most popular podcast aggregator.
With smartphones getting cheaper by the day and 3G networks becoming
commonplace (well at least in developed nations), 2006 will see the growth in
‘mobilecasting’, predict tech pundits.
All we need now is empower people with video phones, 3G mobile telephony,
and a Flickr-like tool to upload audio and video to RSS-enabled websites. This
is not mobile blogging or podcasting now—we’re talking about a social revolution
and that’s mobcasting.
Mobilecast (a software to convert podcasts to Adaptive Multi Rate (AMR)
converter for mobile phones) and mobilecasting have become the ‘One’ when
it comes to downloading and listening to podcasts on mobile phones. All you
need to do is install and configure Mobilecast on the iPod.
Thereon, it will be run after each podcast downloads, splitting the podcast into
segments of 10-minute AMR audio files for the mobile phone. Podcasters have
now begun brainstorming on how to create podcasts specifically for mobile
phones.
10. Wi-Fi: Worldwide Interoperability of Microwave Access or WiMAX is the
new kid on the block. Taking over from Wi-Fi or the 802.11 b technology,
WiMAX (802.16 a) promises to bring bandwidth to the masses at higher speeds
this year.
It broadcasts its signal over many more channels than WiFi, and those channels
are less cluttered. Its signals face less interference, thus helping them travel as far as 30
miles. Besides, WIMAX provides metropolitan area network connectivity at speeds
of up to 75 Mbps (compare that to Wi-Fi’s 11 Mbps).
WIMAX covers wider metropolitan or rural areas. It is meant to solve the last-
mile problem. In India, where the telecom infrastructure is poor and last-mile connections
are typically through copper cable, Digital Subscriber Line (DSL) and fibre optic,
installation costs are high as it requires ripping up streets to lay cables. The ability to
provide these connections wirelessly, without laying wire or cable in the ground, greatly
lowers the cost of providing these services.
4.4.3 Clean Technology
Clean technology includes recycling, renewable energy (wind power, solar power,
biomass, hydropower, biofuels), information technology, green transportation, electric
motors, green chemistry, lighting, Greywater, and many other appliances that are now
more energy efficient. It is a means to create electricity and fuels, with a smaller
environmental footprint and minimise pollution. To make green buildings, transport
and infrastructure both more energy efficient and environmentally benign. Environmental
finance is a method by which new clean technology projects that have proven that they
are “additional” or “beyond business as usual” can obtain financing through the
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Social and Technological generation of carbon credits. A project that is developed with concern for climate
Environment
change mitigation (such as a Kyoto Clean Development Mechanism project) is also
known as a carbon project.

NOTES While there is no standard definition of “clean technology,” it has been described
by Clean Edge, a clean technology research firm, as “a diverse range of products,
services, and processes that harness renewable materials and energy sources,
dramatically reduce the use of natural resources, and cut or eliminate emissions and
wastes.” It notes that “Clean technologies are competitive with, if not superior to, their
conventional counterparts. Many also offer significant additional benefits, notably their
ability to improve the lives of those in both developed and developing countries”
Investments in clean technology have grown considerably since coming into the
spotlight around 2000. According to the United Nations Environment Program, wind,
solar and biofuel companies received a record $148 billion in new funding in 2007 as
rising oil prices and climate change policies encouraged investment in renewable energy.
$50 billion of that funding went to wind power. Overall, investment in clean-energy
and energy-efficiency industries rose 60 percent from 2006 to 2007. By 2018 it is
forecast that the three main clean technology sectors, solar photovoltaics, wind power,
and biofuels, will have revenues of $325.1bn.
Silicon Valley: Hence to In the United States, the clean technology industry is largely based in Silicon
many of the world’s largest Valley.
technology corporation,
Silicon Valley refers to the
southern part of San 4.5 SUMMARY
Francisco Bay Area
Some of the important concepts discussed in this unit are:
• Society and technology are dependent on each other. This synergistic relationship
dates back to the dawn of humankind, which continues into modern technologies
such as computers. The arrangement of social institutions whereby individuals
in a society interact is termed as social interaction.
• Business is not an end in itself. It is only a means to an end. The end is man
himself. Therefore, business has to contribute to man’s happiness, his freedom,
his material and moral growth.
• Social responsibility means that organizations have significant influence on the
social system and that this influence must be properly considered and balanced
in all organizational actions.
Check Your Progress • The major objective of business is economic in nature and management is that
8. _________ is the next activity whereby economic forces are utilized in combination, always with a
generation large capacity view of profits of one kind or another.
optical disc video recording
format that allows • It is accepted that business has social responsibilities and that management
recording, rewriting and must ensure goods at reasonable price.
play back.
9. _________ __________ • Ethics play an important role in the business environment. Ethical systems tend
includes recycling, to pass value judgements on human behaviour. These days, managements are
renewable energy, and use of
energy efficient appliances.
becoming increasingly aware of the social repercussions of unethical decisions.

166 Self-Instructional Material

 • The Sahar Committee laid down that, every company apart from being able to Social and Technological
Environment
justify itself on the test of economic viability will have to pass the test of a
socially responsible entity. It will be judged by various tests dependent upon the
circumstances in each company and in each area.
NOTES
• The motive behind the consumer movement was protection of the rights of
consumers.
• The consumer movement exercises considerable influence on the socio-economic
environment of business.
• The Consumer Protection Act came into existence in 1986. It is a unique
legislation of its kind in India, which offers better protection to its consumers.
The Act applies to all sectors, public, private and cooperative.
• Introduction of technology has helped in boosting Indian economy. For example,
a boom in the packaging industry and technology has revolutionized the consumer
product marketing.
• Various technology trends have forayed into the Indian market. These include
Blue-Ray, Digital Ticket and others.

4.6 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. The underlying maxim of laissez-faire is maximizing profits. Laissez-faire believes

in a free market economy where interference of government in minimum.
2. Social responsibility refers to a business efficiently using the resources at its
disposal in producing the requisite goods and services. However, according the
modern ideas, social responsibility may be defined as objective concern for the
welfare of the society that restrains individual and corporate behaviour.
3. The Sachar Committee was set up to put a check on the social responsibilities
of companies. One such responsibility is, if a company chooses a rural area to
establish its business, will be certainly more socially responsible in the development
of the society. For that, the company might to take on its stride, its profit and
loss.
4. Consumerism is a social and economic order based on fostering a desire to
purchase goods and services in large amounts. It lays emphasis on consumption
and the belief that consumers should dictate the economic structure of a society.
5. Two sources of technology required for a manufacturing unit are, Twyfors of
U.K. for Hindustan Twyfors of Batadwgarh, Haryana for the manufacturing of
sanitary ware and engineering consulting organization such as transferring the
technology of steel making to Vishakapatnam Steel Plant.
6. Technical change is defined as a shift in the production function whereas factor
accumulation is identified with a movement along the function.
7. Technology can be transferred by improving and updating technology and by
adopting as well as absorbing newer technologies.
8. Blue-ray
9. Clean technology
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Social and Technological
Environment 4.7 QUESTIONS AND EXERCISES

Short-Answer Questions
NOTES
1. Discuss the importance of social structure in shaping business.
2. What do you understand by new management philosophy?
3. Why do we need social responsibility?
Long-Answer Questions
1. Explain the responsibility of business towards society.
2. Write a note on ethical values and business.
3. Enlist a few suggestions of the Sachar Committee.
4. The basic idea behind the consumer movement is protection of the rights of
consumers. Justify the statement.
5. What are the sources of technology for a manufacturing unit in India?

168 Self-Instructional Material

 Legal and Ecological
UNIT 5 LEGAL AND ECOLOGICAL Environment

ENVIRONMENT
NOTES
Structure
5.0 Introduction
5.1 Unit Objectives
5.2 Legal Environment as the all Enveloping Factor
5.3 Legal Aspects of Entering Primary and Secondary Capital Markets
5.4 Law on Patents
5.4.1 Amendments to the Patents Act, 1970
5.5 Law on Consumer Protection
5.6 Laws on Environmental Protection
5.6.1 Water Protection Laws
5.6.2 Air Protection Laws
5.6.3 Forests and Wildlife Protection Laws
5.6.4 General Environmental and Ecological Laws
5.6.5 International Agreements on Environmental Issues
5.6.6 An Assessment of the Legal and Regulatory Framework for
Environmental Protection in India
5.7 Need for Clean Energy and Reduction of Carbon Footprint
5.7.1 Reduction of Carbon Footprint
5.8 Summary
5.9 Answers to ‘Check Your Progress’
5.10 Questions and Exercises

5.0 INTRODUCTION
In today's world, business is subject to an increasing number of rules and regulations.
Some developed by the judicial system, others imposed by the state legislatures. Legal
environment of business included every rule and regulation as it plays a very significant
role in the functioning of a business. A good legal environment helps in the proper
functioning of a business. This unit discusses the importance of legal environment in the
development of a business. The various legal aspects of entering into primary and
secondary capital markets are explained in details. Capital market is concerned with
raising capital for long-term purposes whereas fresh capital in the form of shares and
debentures are raised in the primary market. The unit explains the various policy
measures and initiatives taken up by the government. Different laws pertaining to patents
and trademarks as well as opposition towards the grant of the same are elaborated
upon. The unit concludes with a description of the laws associated with environmental
protection and the need for clean energy.

5.1 UNIT OBJECTIVES

After going through this unit, you should be able to:
• Explain the importance of legal environment as an all-enveloping factor
• Discuss the various aspects of primary and secondary capital markets
• Describe the various laws pertaining to patents and consumer protection
Self-Instructional Material 169
Legal and Ecological • Identify the various laws on environmental protection
Environment
• Discuss the need for clean energy and reduction of carbon footprint

NOTES 5.2 LEGAL ENVIRONMENT AS

THE ALL ENVELOPING FACTOR
A free-market economy, India has a robust and well-established legal system as well,
modelled after that of the United Kingdom. The legal system is responsible for
maintaining a balance between the proper functioning of the economy and private
businesses.
Over the years, there has been an increasing consciousness and realisation that
environmental quality and economic development are complementary and not mutually
exclusive. This is because, with technological advancements, environmental challenges
are also on the rise. As a result, there is a need to bring about necessary changes in the
industrial and agricultural production patterns, utility services, consumer behaviour
and life styles of the people keeping in view our social and developmental priorities for
conservation and sustainable use of natural resources. Hence, environmental regulations
and standards have been set up by environmental bodies the world round. Indian
industry and business too are under increasing pressure of meeting these environmental
standards and regulations.
Legal aspects are an indispensable part of a successful business environment in
any country. They reflect the policy framework and the mindset of the Governmental
structure of that country. They ensure that every company is functioning as per the
statutory framework of the country. Every enterprise must take into account this legal
setup while framing the basic aims and objectives of its company. This is because, it is
necessary for efficient and healthy functioning of the organization and helps it to know
the rights, responsibilities as well as the challenges that it may have to face.
In India, the most important law, which regulates all aspects relating to a company,
is the Companies Act, 1956. It contains provisions relating to formation of a company,
powers and responsibilities of the directors and managers, raising of capital, holding
company meetings, maintenance and audit of company accounts, powers of inspection
and investigation of company affairs, reconstruction and amalgamation of a company
and even winding up of a company.

5.3 LEGAL ASPECTS OF ENTERING PRIMARY AND

SECONDARY CAPITAL MARKETS
Capital market is one of the most important segments of the Indian financial system. It
is the market available to the companies for meeting their requirements of long-term
funds. It refers to all the facilities and the institutional arrangements for borrowing and
lending funds. In other words, it is concerned with the raising of money capital for
purposes of making long-term investments. The market channelize of a number of
individuals and institutions (including the Government) that canalise the supply and
demand for long-term capital and the claims on it. The demand for long-term capital
comes predominantly from private sector manufacturing industries, agriculture sector,
trade and the Government agencies. While, the supply of funds for the capital market
170 Self-Instructional Material
comes largely from individual and corporate savings, banks, insurance companies, Legal and Ecological
Environment
specialised financing agencies and the surplus of Governments.
The Indian capital market is broadly divided into the gilt-edged market and the
industrial securities market.
NOTES
• The gilt-edged market refers to the market for Government and semi-
government securities, backed by the Reserve Bank of India (RBI).
Government securities are tradeable debt instruments issued by the
Government for meeting its financial requirements. The term gilt-edged means
‘of the best quality’. This is because the Government securities do not suffer
from risk of default and are highly liquid (as they can be easily sold in the
market at their current price). The open market operations of the RBI are
also conducted in such securities.
The industrial securities market refers to the market which deals in equities and
debentures of the corporates. It is further divided into primary market and secondary
market.
• Primary market (new issue market):- deals with ‘new securities’, that is,
securities which were not previously available and are offered to the investing
public for the first time. It is the market for raising fresh capital in the form of
shares and debentures. It provides the issuing company with additional funds
for starting a new enterprise or for either expansion or diversification of an
existing one, and thus its contribution to company financing is direct. The
new offerings by the companies are made either as an initial public offering
(IPO) or rights issue.
• Secondary market/ stock market (old issues market or stock
exchange):- is the market for buying and selling securities of the existing
companies. Under this, securities are traded after being initially offered to
the public in the primary market and/or listed on the stock exchange. The
stock exchanges are the exclusive centres for trading of securities. It is a
sensitive barometer and reflects the trends in the economy through fluctuations
in the prices of various securities. It been defined as, “a body of individuals,
whether incorporated or not, constituted for the purpose of assisting, regulating
and controlling the business of buying, selling and dealing in securities”. Listing
on stock exchanges enables the shareholders to monitor the movement of
the share prices in an effective manner. This assists them to take prudent
decisions on whether to retain their holdings or sell off or even accumulate
further. However, to list the securities on a stock exchange, the issuing
company has to go through set norms and procedures.
Regulatory Framework
In India, the capital market is regulated by the Capital Markets Division of the
Department of Economic Affairs, Ministry of Finance. The division is responsible for
formulating the policies related to the orderly growth and development of the securities
markets (i.e., share, debt and derivatives) as well as protecting the interest of the
investors. In particular, it is responsible for (i) institutional reforms in the securities
markets, (ii) building regulatory and market institutions, (iii) strengthening investor
protection mechanism, and (iv) providing efficient legislative framework for securities
markets, such as Securities and Exchange Board of India Act, 1992 (SEBI Act 1992); Self-Instructional Material 171
Legal and Ecological Securities Contracts (Regulation) Act, 1956; and the Depositories Act, 1996. The
Environment
division administers these legislations and the rules framed thereunder.
The Securities and Exchange Board of India (SEBI) is the regulatory authority
established under the SEBI Act 1992, in order to protect the interests of the investors
NOTES
in securities as well as promote the development of the capital market. It involves
regulating the business in stock exchanges; supervising the working of stock brokers,
share transfer agents, merchant bankers, underwriters, etc; as well as prohibiting unfair
trade practices in the securities market. The following departments of SEBI take care
of the activities in the secondary market:-
• Market Intermediaries Registration and Supervision Department (MIRSD)—
concerned with the registration, supervision, compliance monitoring and
inspections of all market intermediaries in respect of all segments of the
markets, such as equity, equity derivatives, debt and debt related derivatives.
• Market Regulation Department (MRD)—concerned with formulation of new
policies as well as supervising the functioning and operations (except relating
to derivatives) of securities exchanges, their subsidiaries, and market
institutions such as Clearing and settlement organizations and Depositories.
• Derivatives and New Products Departments (DNPD)—concerned with
supervising trading at derivatives segments of stock exchanges, introducing
new products to be traded and consequent policy changes.
Policy Measures and Initiatives
A number of initiatives have been undertaken by the Government, from time to time,
so as to provide financial and regulatory reforms in the primary and secondary market
segments of the capital market. These measures broadly aim to sustain the confidence
of investors (both domestic and foreign) in the country’s capital market.
The policy initiatives that have been undertaken in the primary market during
2006—07 include:-
• SEBI has notified the disclosures and other related requirements for
companies desirous of issuing Indian depository receipts in India. It has
been mandated that:- (i) the issuer must be listed in its home country; (ii) it
must not have been barred by any regulatory body; and (iii) it should have a
good track record of compliance of securities market regulations.
• As a condition of continuous listing, listed companies have to maintain a
minimum level of public shareholding at 25 per cent of the total shares issued.
The exemptions include:- (i) companies which are required to maintain more
than 10 per cent, but less than 25 per cent in accordance with the Securities
Contracts (Regulation) Rules, 1957; and (ii) companies that have two crore
or more of listed shares and ` 1,000 crore or more of market capitalization.
• SEBI has specified that shareholding pattern will be indicated by listed
companies under three categories, namely, ‘shares held by promoter and
promoter group’; ‘shares held by public’ and ‘shares held by custodians
and against which depository receipts have been issued’.
• In accordance with the guidelines issued by SEBI, the issuers are required
to state on the cover page of the offer document whether they have opted
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 for an IPO (Initial Public Offering) grading from the rating agencies. In case Legal and Ecological
Environment
the issuers opt for a grading, they are required to disclose the grades including
the unaccepted grades in the prospectus.
• SEBI has facilitated a quick and cost effective method of raising funds,
NOTES
termed as ‘Qualified Institutional Placement (QIP)’ from the Indian securities
market by way of private placement of securities or convertible bonds with
the Qualified Institutional Buyers.
• SEBI has stipulated that the benefit of ‘no lock-in’ on the pre-issue shares
of an unlisted company making an IPO, currently available to the shares
held by Venture Capital Funds (VCFs)/Foreign Venture Capital Investors
(FVCIs), shall be limited to:- (i) the shares held by VCFs or FVCIs registered
with SEBI for a period of at least one year as on the date of filing draft
prospectus with SEBI; and (ii) the shares issued to SEBI registered VCFs/
FVCIs upon conversion of convertible instruments during the period of one
year prior to the date of filing draft prospectus with SEBI.
• In order to regulate pre-issue publicity by companies which are planning to
make an issue of securities, SEBI has amended the ‘Disclosure and Investor
Protection Guidelines’ to introduce ‘Restrictions on Pre-issue Publicity’.
The restrictions, inter alia, require an issuer company to ensure that its publicity
is consistent with its past practices, does not contain projections/ estimates/
any information extraneous to the offer document filed with SEBI.
Similarly, the policy initiatives that have been undertaken in the secondary market
during 2006–07 include:
• In continuation of the comprehensive risk management system put in place
since May 2005 in T+2 rolling settlement scenario for the cash market, the
stock exchanges have been advised to update the applicable Value at Risk
(VaR) margin at least 5 times in a day by taking the closing price of the
previous day at the start of trading and the prices at 11:00 a.m., 12:30 p.m.,
2:00 p.m. and at the end of the trading session. This has been done to align
the risk management framework across the cash and derivative markets.
• In order to strengthen the ‘Know Your Client’ norms and to have sound
audit trail of the transactions in the securities market, ‘Permanent Account
Number (PAN)’ has been made mandatory with effect from January 1,
2007 for operating a beneficiary owner account and for trading in the cash
segment.
• In order to implement the proposal on creation of a unified platform for
trading of corporate bonds, SEBI has stipulated that the BSE Limited would
set up and maintain the corporate bond reporting platform. The reporting
shall be made for all trades in listed debt securities issued by all institutions
such as banks, public sector undertakings, municipal corporations, corporate
bodies and companies.
• In line with the Government of India’s policy on foreign investments in
infrastructure companies in the Indian securities market, the limits for foreign
investment in stock exchanges, depositories and clearing corporations, have
been specified as follows:- (i) foreign investment up to 49 per cent will be
Self-Instructional Material 173
Legal and Ecological allowed in these companies with a separate Foreign Direct Investment (FDI)
Environment
cap of 26 per cent and cap of 23 per cent on Foreign institutional investment
(FII); (ii) FDI will be allowed with specific prior approval of Foreign
Investment Promotion Board (FIPB); (iii) FII will be allowed only through
NOTES purchases in the secondary market; and (iv) FII shall not seek and will not
get representation on the board of directors.
• The application process of FII investment has been simplified and new
categories of investment (insurance and reinsurance companies, foreign central
banks, investment managers, international organizations) have been included
under FII.
• Initial issue expenses and dividend distribution procedure for mutual funds
have been rationalised.
• Mutual funds have been permitted to introduce Gold Exchange Traded
Funds.
• In the Government securities market, the RBI has ceased to participate in
primary issues of Central Government securities, in line with the provisions
of Fiscal Responsibility and Budget Management Act (FRBM Act).
• Foreign institutional investors have been allowed to invest in security receipts.
Thus, the capital market plays a vital role in fostering economic growth of
the country, as it augments the quantities of real savings; increases the net
capital inflow from abroad; raises the productivity of investments by improving
allocation of investible funds; and reduces the cost of capital in the economy.
Source: http://business.gov.in/business_financing/capital_market.php, accessed on 22 March,
2012.

5.4 LAW ON PATENTS

Sec.2(m) states that a ‘patent’ means a patent for an invention granted under the
Patents Act, 1970. Patent is a form of industrial property or intellectual property.
Patent is an exclusive right granted to the patent holder, for a limited period, as a
reward of creative work based on his private initiative. The objective of patent law is
to encourage scientific research, new technology and industrial progress. A patent
must have elements of ‘novelty’, ‘utility’ and ‘no prior knowledge or use’ like any
property; it can be sold or even mortgaged. It can be transmitted by operation of law.
The owner of a patent can grant licence to others to exploit the patent.
Inventions not Patentable
Some inventions which are not patentable under the Act are:
(a) an invention which is frivolous or which claims anything obviously contrary to
well-established natural laws;
(b) an invention the primary or intended use or commercial exploitation of which
could be contrary to public order or morality, or which causes serious prejudice
to human, animal or plant life, or health or to the environment;
(c) the mere discovery of a scientific principle or the formulation of an abstract
174 Self-Instructional Material
theory or discovery of any living thing or non-living substance occurring in nature;
 (d) mere discovery of a new form of a known substance which does not result in Legal and Ecological
Environment
the enhancement of the known efficacy of that substance, or the mere discovery
of any new property or new use for a known substance, or of mere use of a
known process, machine or apparatus, will not be an invention, unless such
known process results in a new product or employs at least one new reactant; NOTES
(e) a substance obtained by a mere admixture resulting only in the aggregation of
the properties of the components thereof or a process for producing such
substances;
(f) the mere arrangement or re-arrangement or duplication of known devices, each
functioning independently of the another in a known way;
(g) a method of agriculture or horticulture;
(h) any process for the medicinal, surgical, curative, prophylactic, diagnostic,
therapeutic, or other treatment of human beings or any process for a similar
treatment of animals or plants to render them free of disease or to increase their
economic value or that of their products;
(i) plants and animals in whole or any part thereof other than microorganisms but
including seeds, varieties and spices and essentially biological processes for
production or propagation of plants and animals;
(j) a mathematical or business method or a computer program per se or algorithms;
(k) a literary, dramatic musical or artistic work or any other aesthetic creation
whatsoever including cinematographic works and television productions;
(l) a mere scheme or rule or method of performing a mental act or method of
playing a game;
(m) a presentation of information;
(n) topography of integrated circuits;
(o) an invention which, in effect, is traditional knowledge or which is an aggregation
or duplication of known properties of traditionally known component or
components. (Sec. 3)
As provided in Section 4 of the Act, no patent shall be granted in respect of an
invention relating to atomic energy falling within sub-section (1) of Section 20 of the
Atomic Energy Act, 1962.
Application for Patents
An application for a patent may be made by any of the following persons either alone
or jointly:
(a) true and first inventor of the invention;
(b) assignee of the person claiming to be the true and first inventor;
(c) the legal representative of any deceased person who immediately before his
death was entitled to make such an application (Sec. 6)
Form of Application
Every application for a patent shall be for one invention only and shall be made in the
prescribed form and filled in the patent office. The application shall be accompanied
Self-Instructional Material 175
Legal and Ecological by provisions or a complete specification. The Patents Act, 1970, also provides for
Environment
international application under the Patent Cooperation Treaty for a patent.
Where the application is made by virtue of an assignment of the right to apply
NOTES for a patent for the invention, there shall be furnished with the application, within such
period as may be prescribed after the filing of the application, proof of the right to
make the application.
Every application shall state that the applicant is in possession of the invention
and shall name the person claiming to be the true and first inventor and where the
person so claiming is not the applicant or one of the applicants, the application shall
contain a declaration that the applicant believes the person so named to be the true
and first inventor. (Sec. 7)
Provisional and Complete Specification
Where an application for a patent is accompanied by a provisional specification, a
complete specification must be filled within 12 months from date of filing of earliest
provisional specification. If the complete is not so filed, application shall be deemed to
be abandoned. (Sec. 9)
Contents of Specification
Every specification, whether provisional or complete, shall describe the invention and
shall begin with a title sufficiently indicating the subject matter to which the invention
relates.
The complete specification filed after the provisional specification should not
differ from the latter as to the nature of the invention. If adequate drawings have been
furnished with the provisional specification, it is unnecessary to file a further set of the
same drawings with the complete specification again.
Every complete specification should:
(a) fully and particularly describe the invention and its operation or use and
the method by which it is to be performed;
(b) disclose the best method of performing the invention which is known to
the applicant and for which he is entitled to claim protection;
(c) end with a claim or claims defining the scope of the invention for which
protection is claimed; and
(d) be accompanied by an abstract to provide technical information on the
invention. (Sec.10)
Publication and Examination of Application
Application for a patent will not be open to the public for such period as may be
prescribed. The applicant may request the controller to publish his applications at any
time before the expiry of the period prescribed. However, every application for a
patent shall be published on the expiry of the period prescribed except in case of
secrecy direction given for defence purpose under Section 35. The publication will
include particulars of the date of application, number of application, name and address
of applicant and an abstract.

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 Upon publication of an application for a patent, the depository institution shall Legal and Ecological
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make the biological material mentioned in the specification available to the public. The
patent office may make the specification and drawings available to the public on payment
of fees. (Sec. 11A)
NOTES
Request for an Examination
An applicant shall make request for examination of the patent within the prescribed
period. No application for a patent shall be examined unless a specific request is
made. If such an application is not made within the prescribed period, it will be treated
as withdrawn by the applicant. (Sec. 11B)
Examination of the Application
When a request for examination is made by the applicant, the controller shall refer the
application and specification to an examiner for making a report to him. The examiner
will make a report of his examination of specifications and other documents related
thereto within the prescribed period. (Sec. 12)
Where the report of the examiner received by the controller is adverse, the
controller is required to issue a notice to the applicant, giving a gist of the objections.
(Sec. 14)
After hearing the applicant, the controller may refuse the application or may
require the applicant to amend the same. If amendments are not carried out to his
satisfaction, the controller can refuse the application. (Sec. 15)
Opposition Proceedings to Grant of Patents
The subsequent paragraphis discuss the opposition proceedings to granl of patents.
Opposition before grant of patent: Where an application for a patent has been
published but a patent has not been granted, any person can file a petition opposing
the grant of a patent within four months from the date of advertisement on the specified
grands that included (i) the invention for which patent has been claimed was publicly
known or publicly used in India; (ii) the invention is obvious and does not involve an
inventive step; (iii) the invention is not patentable under in Patents Act, 1970, (iv) the
complete specification wrongly mentions the source of geographical origin of biological
material used in the invention, and (v) the invention on which the patent is claimed
forms part of the traditional knowledge whether in India or elsewhere. The controller
shall consider and dispose of such representation in such manner and within such
period as may be prescribed. If the applicant requests, personal hearing shall be given
to him before disposing of the application for patent.
Opposition after Grant of Patent: At any time after the grant of patent but
before the expiry of a period of one year from the date of publication of grant of a
patent, any person interested may give notice of opposition to the controller in the
prescribed manner on specified grounds stated above (under opposition before grant
of patent).
If notice of opposition is received after grant of a patent, notice will be issued to
the patentee. The controller shall constitute an ‘Opposition Board’ consisting of such
officers as he may determine and refer such notice of opposition along with the documents
to that Board for examination and submission of its recommendations to the controller.
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Legal and Ecological On receipt of the recommendation of the ‘Opposition Board’ the controller
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shall give a hearing to the patentee and opponent and then can either maintain, amend
or revoke the patent. (Sec. 25)

NOTES Provision for Secrecy of Certain Inventions

Where in respect of an application for a patent, it appears to the controller that the
invention is one of a class notified to him by the Central Government as relevant for
defence purposes, he may give directions for prohibiting or restricting the publication
of information with respect to the invention or the communication of such information.
(Sec. 35)
The question whether an invention in respect of which directions have been
given under Section 35 continues to be relevant for defence purposes shall be
periodically reviewed by the Central Government at intervals of six months or on a
request made by the applicant. If on such reconsideration it appears to the Central
Government that the publication of the invention would no longer be prejudicial to the
defence of India, it shall forthwith give notice to the controller to revoke the direction.
(Sec. 36)
Grant of Patents and Rights Conferred
Grant of Patent: Where an application for a patent has been found to be in order for
grant of the patent, the patent shall be granted as expeditiously as possible to the
applicant with the seal of the patent office and the date on which the patent is granted
shall be entered in the register.
On the grant of the patent, the controller shall publish the fact that the patent has
been granted and thereupon the application, specification and other documents related
to the patent shall be open for public inspection (Sec. 43)
Date of Patent: Every patent shall be dated as of the date on which the
application for the patent was filed. (Sec. 45)
Form, Extent and Effect of Patent: Every patent shall be in the prescribed
form and shall have effect throughout India. A patent shall be granted for one invention
only. (Sec. 46)
Rights of Patentee: The patent granted under this Act shall confer upon the
patentee the exclusive right to prevent third parties, who do not have his consent, from
the act of making, using, offering for sale, selling or informing for those purposes the
patented product in India. (Sec. 48)
Term of Patent: The term of every patent shall be twenty years from the date
of filing the application for the patent. (Sec. 53)
Patents of Addition
Where an application is made in respect of any improvement in or modification of a
patented invention (known as main invention), the controller may grant the patent for
the improvement or modification as a patent of addition. A patent of addition shall not
be granted before grant of the patent for the main invention. (Sec. 54)
A patent of addition shall be granted for a term equal to that of the patent for the
main invention, or so much thereof as has not expired and shall remain in force during
178 Self-Instructional Material
that term or until the previous cesser of the patent for the main invention and no longer. Legal and Ecological
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(Sec. 55)
Amendment of Application and Specification
The controller is empowered to allow the application for the patent or the complete NOTES
specification (including drawings) or any document related thereto to be amended
subject to such condition as the controller thinks fit. Every such application shall state
the nature of the proposed amendment and shall give full particulars of the reasons for
which the application is made. If such an application is made after the grant of the
patent, the nature of the proposed amendment may be published. (Sec. 57)
However, no amendment of the complete specification shall be allowed the
effect of which would be that the specification as amended would claim or describe
matter not in substance disclosed in the specification before the amendment, or that
any claim of the specification as amended would not fall wholly within the scope of a
claim of the specification before the amendment. (Sec. 59).
Restoration of Lapsed Patents
Where a patent has ceased to have effect by reason of failure to pay any renewal fee
within the prescribed period, then an application may be made to the controller for the
restoration of the patent. Application may be made within 18 months from the date on
which the patent ceased to have effect.
An application shall contain a statement verified in the prescribed manner, fully
setting out the circumstances which led to the failure to pay the prescribed fee and the
controller may require from the applicant such further evidence as he may think
necessary. (Sec. 60)
Disposal of application for restoration: If the controller is satisfied that the
failure to pay the renewal fee was unintentional, he shall publish the application in the
prescribed manner. If a person wants to oppose the renewal, he shall give notice of
opposition to the controller in the prescribed form, alongwith necessary fees. Controller
will hear both parties and will allow the restoration or refuse the restoration, as the
case may be. (Sec. 61)
Surrender and Revocation of Patents
Surrender of Patents: A patentee may at any time by giving notice to the controller
in the prescribed manner, offer to surrender his patent. Where such offer is made, the
controller shall publish the offer in the prescribed manner. The Controller shall also
notify every person other than the patentee whose name appears in the register as
having an interest in the patent; opposition can be expressed and settled and then only
will the controller revoke the patent. (Sec. 63)
Revocation of Patent: The Appellate Board may revoke the patent on a petition
of any person interested or of the Central Government. The High Court is also
empowered to revoke a patent on a counter claim in a suit for infringement of the
patent on specified grounds. (Sec. 64)
Revocation of Patent in Public Interest: Where the Central Government is
of the opinion that a patent or the mode in which it is exercised is mischievous to the
State or generally prejudicial to the public interest, it may, after giving the patentee an
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Legal and Ecological opportunity to be heard, make a declaration to that effect in the Official Gazette and
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thereafter the patent shall be deemed to be revoked. (Sec.66)
Register of Patents
NOTES A register of Patents shall be kept at the patent office. The following particulars shall
be entered in the register:
(a) the names and addresses of grantees of patents;
(b) notifications of assignments and transmission of patents and amendments,
extension and revocation of patents;
(c) particulars of such other matters affecting the validity or proprietorship of patents.
The controller can keep the register of patents in computer floppies, diskettes
or any other electronic form subject to such safeguards as may be prescribed.
(Sec. 67)
Rectification of Register by Appellate Board
The Appellate Board may, on the application of any aggrieved person, make an order
for the making, variation or deletion of any entry in the Register of Patents as it may
think fit. Before making such order, notice of any application made by an aggrieved
party to the Appellate Board shall be given to the controller.
Any order of the Appellate Board for rectifying the register shall be served
upon the controller in the prescribed manner, who shall, upon receipt of such order,
rectify the register accordingly. (Sec. 71)
Register to be Open for Inspection
The register of patents shall at all convenient times be open for inspection by the
public. Certified copies of any entry in the register shall be given to any person on
payment of the prescribed fee.
The register shall be prima facie evidence of any matters required or authorized
to be entered therein. (Sec. 72)
Powers of Controller
Controller to have Certain Powers of a Civil Court: The controller in any
proceeding before him under this Act shall have the powers of a civil court in respect
of the following matters, namely:
(a) Summoning and enforcing the attendance of any person and examining him on
oath;
(b) Requiring the discovery and production of any document;
(c) Receiving evidence on affidavits;
(d) Issuing commissions for the examination of witnesses or documents;
(e) Awarding Costs;
(f) Reviewing his own decision;
(g) Setting aside an order passed ex parte on an application made within the
prescribed time and in the prescribed manner;
(h) Any other manner which may be prescribed. (Sec. 77)
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 Power to Correct Clerical Errors: The controller has powers to correct any Legal and Ecological
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clerical error in any patent or in any specification or other document filed in pursuance
of such application, or in any application for a patent, or any clerical error in any
matter which is entered in the register. (Sec. 78)
NOTES
Power of Controller in Respect of Evidence: The controller may take
evidence either orally or BY affidavit. The controller may allow any party to be cross-
examined on the contents of his affidavit. (Sec. 79)
Use of Inventions for Purposes of Government
The Central Government is empowered to use any invention for purposes of
Government. The Government shall give royalty or fee as per terms agreed upon. If
the terms are not mutually agreed to these can be decided by High Court. (Sec. 100)
Acquisition of Patent by Government
The Central Government can acquire an invention or patent, by issue of a notification,
for public interest. Compensation shall be paid to the patentee as mutually agreed
upon or as decided by the High Court. (Sec. 102)
Suits for Infringement of Patents
The court can grant relief in cases of groundless threats of infringement, including an
injunction and damages. (Sec. 106)
In a suit for infringement, the court may grant an injunction and seizure of goods
and either damages or an account of profits. (Sec. 108)
5.4.1 Amendments to the Patents Act, 1970
Amendments in the Patents Act (in 1999, 2002, 2005 and 2006) were necessitated
by India’s obligations under TRIPS, allowing product patents in drugs and chemicals.
Another important feature was the introduction of pre-grant representation (opposition)
Check Your Progress
in addition to the existing post-grant opposition mechanism. The pre-grant representation
has had success in a short span. A controversial provision of the 2002 amendment 1. Define Legal Environment.

was on software patent-ability, which was later withdrawn in another amendment 2. What does Companies Act
1956 state?
(Patents Act, 1970, as amended by Patents (Amendment) Act, 2005). Patent Rules 3. What do you mean by
2003 were amended in 2005 and again in 2006. Some of the important features of Capital Market?
both the 2005 and 2006 Rules are as follows: 4. Explain the concept of
secondary market.
• Introduction of reduced time lines
5. State any one policy
• A fee structure based on specification size and number of claims, in addition to measure undertaken by the
a basic fee. government in order to
reform the primary and
secondary market.
5.5 LAW ON CONSUMER PROTECTION 6. Enlist any three inventions,
which are not patentable.
7. How is it possible to apply
A Consumer means: for patents?
(i) any person who buys any goods for a consideration which has been paid or 8. How can the government go
about acquiring patents?
promised or partly paid and partly promised, or under any system of deferred
payment, and includes any person who uses such goods with the approval of

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Legal and Ecological the buyer. It does not include a person who buys goods for resale or for any
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commercial purpose; or
(ii) any person who hires or avails any services for a consideration which has been
paid or promised or partly paid and partly promised, or under any system of
NOTES
deferred payment, and includes any person who is a beneficiary of such services
with the approval of the hirer. It does not include a person who avails of such
services for any commercial purpose.
Explanation: For the purposes of this clause, ‘commercial purpose’ does not
include use by a person of goods bought and used by him and services availed by him
exclusively for the purpose of earning his livelihood, by means of self-employment.
The term ‘person’includes a firm, Hindu undivided family, company, cooperative
society, and every other association of persons whether registered under the Societies
Registration Act, 1860 or not.
It may be observed that the aforestated definition of the term ‘consumer’ is in
two parts:
I. Consumer of goods
II. Consumer of services
Consumer of Goods
The important features of the definition of ‘consumer of goods’ may be stated as
follows:
1. Buying goods for consideration: There must be a contract of sale of goods
between a seller and a buyer. The seller should be a ‘business seller’, i.e., a
trader or manufacturer, and the buyer should be a ‘consumer buyer’, i.e., one
who buys goods for consumption or private use. The buying of goods must be
for consideration, which may be paid immediately or promised to be paid later–
even in instalments. Thus, it includes credit sale and hire purchase transactions
also. Consideration may be in terms of money or other goods and services.
The meaning of the term ‘goods’ is to be construed according to the Sale of
Goods Act. According to Section 2(7) of the Sale of Goods Act, “goods means
every kind of movable property other than actionable claims and money; and
includes stock and shares, growing crops, grass, and things attached to or forming
part of the land which are agreed to be severed before sale or under the contract
of sale.” Thus, goodwill, trade marks, copyrights, patents-right, are all regarded
as goods.
2. User of goods with the approval of the buyer: The term ‘consumer’ also
includes any person who uses the goods with the permission of the buyer though
he is himself not a buyer. When a person buys goods, they may be used by his
family members, relatives and friends. The actual user of the goods may come
across the defects in goods. Thus, the law treats the rightful user of the goods as
the consumer.
Illustration: A purchases a scooter. One of his family members B was using it
from the date of purchase. B had a complaint regarding the scooter. B sued the
seller. The seller pleaded that since B did not buy the scooter, he was not a
consumer under the Act. The Delhi State Consumer Disputes Redressal
182 Self-Instructional Material
 Commission held that B, the complainant was using it with the approval of A, Legal and Ecological
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the buyer, and therefore he was a consumer under the Act (Dinesh Bhagat vs
Bajaj Auto Ltd.).
3. Goods should not be purchased for resale or for any commercial purpose:
NOTES
The term ‘consumer’ does not include a person who buys goods for ‘resale’ or
for any ‘commercial purpose’. The expression ‘commercial purpose’ implies
that the goods are bought to commercially exploit them with the object to earn
profits. Thus, where a company purchases a computer system to facilitate its
work, the said purchase is a purchase for ‘commercial purpose’ and the company
is not a ‘consumer’ under the Act.
Illustration: A charitable trust was running a diagnostic centre, where patients
taking advantage of X-ray, CT scan etc., were ordinarily required to pay for the
same and only 10 per cent of them being provided free service. It was held that
the machines purchased by the ‘Trust’ for use in the diagnostic centre were
meant for ‘commercial purpose’and therefore the ‘Trust’ was not a consumer
[Kalpavraksha Charitable Trust vs Toshniwal Brothers (Bombay) (P) Ltd.].
4. Person buying goods for self-employment is a consumer: When the goods
are bought and used by the buyer himself, exclusively for the purpose of earning
his livelihood, by means of self-employment, then such buyer/user is also
recognised as a consumer under the Act. Thus, a person who purchases a taxi,
or a sewing machine or a photostat machine exclusively for the purpose of
earning his livelihood by means of self-employment, will be a consumer.
Illustration: P, an eye surgeon, purchased a machine from R for his private
nursing home. The machine was found to be defective one. P sued R for damages.
R contended that P was not a consumer under the Act as the machine was
bought for commercial purposes. The National Commission rejected this
contention and held that P is a medical practitioner, a professional working by
way of self-employment by using his knowledge to earn his livelihood and
therefore he is a ‘consumer’ (Rampion Pharmaceuticals vs Dr. Preetam Shah).
Consumer of Services
The second category of ‘consumer’ is that of ‘consumer of services’. A person is a
‘consumer of service’ if he satisfies the following criteria:
1. Hiring of services for consideration: There must be a transaction of hiring
or availing of service for consideration. However, the payment of consideration
need not necessarily be immediate. It may be paid later. If the service is provided
without charging any thing in return, the person availing the service is not a
‘consumer’.
Illustrations
(a) A goes to a doctor to get himself treated for fever. The doctor charged
` 200 for the treatment. Here A is hiring the services of the doctor. Thus
he is a ‘consumer’.
(b) X goes to a doctor to get himself treated for a fracture. The doctor, being
his friend, charged him nothing for the treatment. X is not a ‘consumer’
under the Act.
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Legal and Ecological (c) Where services are rendered at a Government Hospital on payment of
Environment
charges and also free of charge, the free service also comes under “service”
as defined in Section 2(1) (O) of the Act and the person availing such
service is a ‘consumer’ within the meaning of the Act, entitled to file
NOTES complaint thereunder (Sukhwarsha Ravi vs General Hospital).
(d) A hires an advocate to file a suit for recovery of money from his employer.
He promises to pay the fee to the advocate after settlement of the suit. A
is a ‘consumer’ under the Act.
(e) A customer of a bank is a ‘consumer’ entitled to seek compensation under
the Act, and the bank is liable for deficiency of service (Vimal Chandra
Grover vs Bank of India).
(f) A landlord neglected and refused to provide the agreed amenities to his
tenant. The tenant filed a complaint against the landlord under the Consumer
Protection Act. The National Commission dismissed the complaint saying
that it was a case of lease of immovable property and not of hiring of
services of the landlord (Laxmiben Laxmichand Shah vs Sakerben Kanji
Chandan).
2. Beneficiary of service is also a ‘consumer’: A beneficiary of service, though
not the hirer himself, is also regarded as a ‘consumer’ provided the beneficial
use is made with the approval of the person who hired the service. Thus, a
nominee under an insurance policy and an actual user of the subscriber’s
telephone have been held to be ‘consumers’.
Illustration: R takes his wife S to a doctor to get his wife treated for a fracture.
The doctor charged ` 1200 for the treatment. Here R is a hirer of services of
the doctor and S is beneficiary of the service. For the purpose of the Act, both
R and S are ‘consumers’.
3. Service should not be availed for any commercial purpose: The term
‘consumer of service’ does not include a person who avails service for any
‘commercial purpose’. Thus, where a person hires the services of a goods
carrier and starts plying it on hire as public carrier with the object to earn profits,
the said hiring of services of a goods carrier is for ‘commercial purpose’ and the
person is not a ‘consumer’ under the Act.
‘Service’ defined: Section 2(1) (O) defines the term ‘service’ as follows:
‘Service’ means service of any description which is made available to potential
users and includes, but not limited to, the provision of facilities in connection with
banking, financing, insurance, transport, processing, supply of electrical or other energy,
boarding or lodging or both, housing construction, entertainment, amusement or the
purveying of news or other information. However, it does not include the rendering of
any service free of charge or under a contract of personal service.
The expression ‘contract of personal service’ means contract to render service
in a private capacity to an individual. For example, where a servant enters into a
contract with a master for employment, it is a contract of personal service. The rationale
for excluding a ‘contract of personal service’ from the definition of ‘service’ is that the
master can discontinue the service at any time according to his will, he need not
approach Consumer Forum to complain about deficiency in service.
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 Complaint. Literally the word ‘complaint’ means a formal allegation against a Legal and Ecological
Environment
party. In the present context, ‘complaint’ is an allegation made in writing to the National
Commission, the State Commission or the District Forum, by a person competent to
file it, with a view to obtaining relief provided under the Act.
NOTES
Who Can File a Complaint [Sec. 2(1) (b) and Sec. 12(1)]
A complaint in relation to any goods sold or delivered or agreed to be sold or delivered
or any service provided or agreed to be provided, may be filed, with a Consumer
Forum, by—
(a) A consumer; or
(b) any recognised consumer association, namely, any voluntary consumer association
registered under the Companies Act or under any other law for the time being in
force, whether the consumer is a member of such association or not; or
(c) one or more consumers, where there are numerous consumers having the same
interest, with the permission of the Consumer Forum, on behalf of, or for the
benefit of, all consumers so interested; or
(d) the Central Government or the State Government, as the case may be, either in
its individual capacity or as a representative of interests of the consumers in
general; or
(e) in case of death of a consumer, his legal heir or representative.
Further, the following are also considered as a consumer and hence they may
file a complaint:
(i) User of goods and beneficiary of services. It may be recalled that the
definition of ‘consumer’ itself includes user of goods and beneficiary of
services.
(ii) Husband of the consumer. A husband can file a complaint on behalf of
his wife (Punjab National Bank, Bombay vs K.B. Shetty).
(iii) Insurance company. Where Insurance Company pays and settles the
claim of the insured, it can file a complaint for the loss caused to the
insured goods by negligence of goods/service providers. For example,
when loss is caused to such goods because of negligence of transport
company, the insurance company can file a claim against the transport
company (New India Assurance Company Ltd. vs Green Transport
Co.).
Grounds on Which a Complaint Can be Made [Sec. 2(1)(c)]
The Consumer Protection Act has provided certain grounds on which complaint can
be made. A complaint must contain any of the following allegations:
(i) An ‘unfair trade practice’ or a ‘restrictive trade practice’ has been adopted by
any trader or service provider;
Illustration: A sold a second-hand computer to B representing it to be a new
one. Here B can make a complaint against A for adopting an unfair trade practice.
(ii) The goods bought by him or agreed to be bought by him suffer from one or
more defects;
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Legal and Ecological Illustration: A bought a computer from B. It was not working properly since
Environment
day one. A can make a complaint against B for supplying him a defective computer.
(iii) The services hired or availed of or agreed to be hired or availed of by him suffer
from deficiency in any respect;
NOTES
Illustration: A booked a taxi at a Taxi Stand which should reach at his residence
at 5.30 a.m. The taxi did not reach at the appointed hour. As a result A had to
miss his train. A can make a complaint against the Taxi Stand for deficiency in
service.
(iv) A trade or service provider, as the case may be, has charged for the goods or
for the services mentioned in the complaint, a price in excess of the price fixed
by any law or displayed on the goods or any package containing such goods or
displayed on the price list exhibited by him or agreed between the parties;
Illustration: A bought a Maruti car from an authorized dealer of the Company
who charged him ` 4000 over and above the price displayed on the price list of
the Maruti Company. A can file a complaint against the dealer.
(v) Goods which will be hazardous to life and safety when used, are being offered
for sale to the public in contravention of any standards relating to safety of such
goods as required to be complied with by any law or if the trader could have
known with due diligence that the goods so offered are unsafe to the public;
Under the Sale of Goods Act also, there is an implied warranty on the part of
the seller to disclose the dangerous nature of goods to the ignorant buyer. If
there is breach of this warranty, the buyer is entitled to claim compensation for
the injury caused to him.
Illustration: C purchases a tin of disinfectant powder from A. A knows that
the lid of the tin is to be opened in a specific manner and if it is opened without
special care it may be dangerous, but tells nothing to C. C opens the tin in the
normal way whereupon the disinfectant powder flies into her eyes and causes
injury. C can make a complaint against A as he should have warned C of the
probable danger.
(vi) Services which are hazardous or likely to be hazardous to life and safety of the
public when used, are being offered by the service provider which such person
could have known with due diligence to be injurious to life and safety.
Note: The terms ‘unfair trade practice’, ‘restrictive trade practice’, ‘defect’, ‘deficiency’, ‘trader’,
etc., as defined under the Act have been discussed after the next heading.
Time Frame Within Which a Complaint Can be Filed (Limitation Period):
Section 24A provides that a complaint can be filed before the Forums constituted
under the Act (District Forum, State Commission or National Commission) within two
years from the date on which the cause of action has arisen.
There are no set rules to decide the point of time when cause of action arises. It
depends on the facts and circumstances of each case.
Illustration:
(a) B got his eye operated by A in 1989. He got a certificate of blindness on
18th December, 1989. He was still in the hope of regaining his eyesight
and went for second operation in 1992 and was discharged on 21st
186 Self-Instructional Material
 January, 1992. He filed a complaint against A for deficiency of service on Legal and Ecological
Environment
11th January, 1994. A opposed the petition on the ground that the suit
was not maintainable as more than two years have elapsed after 18th
December, 1989. It was held that in the instant case the cause of action
for filing the complaint would arise after the second operation when B lost NOTES
complete hope of recovery. Thus the suit is maintainable (Mukundlal
Ganguly vs Dr. Abhijit Ghosh).
(b) A house was alloted on 15th May, 2004. Defects in construction of the
house appeared on 25th May, 2004. Here the cause of action will arise
on 25th May, 2004.
It may be noted that the Section further provides that a complaint may be
entertained after the expiry of period of limitation specified above, if the complaintant
satisfies the Consumer Forum that he had sufficient cause for not filing the complaint
within the prescribed period. However, the Forum must record its reasons for
condonation of delay.
Unfair Trade Practice
Section 2(1) (r) defines ‘unfair trade practice’ as follows:
‘Unfair trade practice’ means a trade practice which, for the purposes of ‘Unfair trade practice’:
promoting the sale, use or supply of any goods or for the provision of any service, Means a trade practice
adopts any unfair method or unfair or deceptive practice including any of the following which, for the purposes of
promoting the sale, use or
practice, namely,— supply of any goods or for
1. The practice of making any statement, whether orally or in writing or by the provision of any service,
adopts any unfair method or
visible representation which, — unfair or deceptive practice
(i) falsely represents that the goods are of a particular standard, quality,
quantity, grade, composition, style or model;
(ii) falsely represents that the services are of a particular standard, quality or
grade;
(iii) falsely represents any rebuilt, second-hand, renovated, reconditioned or
old goods as new goods;
(iv) represents that the goods or services have sponsorship, approval,
performance, characteristics, accessories, uses or benefits which such
goods or services do not have;
(v) represents that the seller or the supplier has a sponsorship or approval or
affiliation which such seller or supplier does not have;
(vi) makes a false or misleading representation concerning the need for, or the
usefulness of, any goods or services;
(vii) gives to the public any warranty or guarantee of the performance, efficacy
or length of life of a product or of any goods that is not based on an
adequate or proper test thereof:
(viii) makes to the public a representation in a form that purports to be —
(a) a warranty or guarantee of a product or of any goods or services; or
(b) a promise to replace, maintain or repair an article or any part thereof or
to repeat or continue a service until it has achieved a specified result. Self-Instructional Material 187
Legal and Ecological If such purported warranty or guarantee or promise is materially misleading
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or if there is no reasonable prospect that such warranty, guarantee or
promise will be carried out;
(ix) materially misleads the public concerning the price at which a product or
NOTES
like products or goods or services, have been or are, ordinarily sold or
provided, and, for this purpose, a representation as to price shall be deemed
to refer to the price at which the product or goods or services has or have
been sold by sellers or provided by suppliers generally in the relevant
market unless it is clearly specified to be the price at which the product
has been sold or services have been provided by the person by whom or
on whose behalf the representation is made;
(x) gives false or misleading facts disparaging the goods, services or trade of
another person.
Explanation. For the purpose of this clause, a statement that is:
(a) expressed on an article offered or displayed for sale, or on its wrapper or
container; or
(b) expressed on anything attached to, inserted in, or accompanying, an article
offered or displayed for sale, or on anything on which the article is mounted
for display or sale; or
(c) contained in or on anything that is sold, sent, delivered, transmitted or in
any other manner whatsoever made available to a member of the public.
Shall be deemed to be a statement made to the public by the person who
had caused the statement to be so expressed, made or contained.
2. Permits the publication of any advertisement whether in any newspaper or
otherwise, for the sale or supply at a bargain price, of goods or services that
are not intended to be offered for sale or supply at the bargain price, or for
a period that is, and in quantities that are, reasonable, having regard to the
nature of the market in which the business is carried on, the nature and size
of business, and the nature of the advertisement.
Explanation. For the purpose of this clause, “bargain price” means:
(a) a price that is stated in any advertisement to be a bargain price, by reference
to an ordinary price or otherwise, or
(b) a price that a person who reads, hears or sees the advertisement, would
reasonably understand to be a bargain price having regard to the prices at
which the product is advertised or like products are ordinarily sold.
3. Permits: (a) the offering of gifts, prizes or other items with the intention of not
providing them as offered or creating impression that something is being
given or offered free of charge when it is fully or partly covered by the
amount charged in the transaction as a whole; (b) the conduct of any contest,
lottery, games of chance or skill, for the purpose of promoting, directly or
indirectly, the sale, use or supply of any product or any business interest.
4. Withholding from the participants of any scheme offering gifts, prizes or
other items free of charge, on its closure the information about final results of
the scheme.
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 Explanation. For the purpose of this clause, the participants of a scheme Legal and Ecological
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shall be deemed to have been informed of the final results of the scheme
where such results are within a reasonable time published prominently in the
same newspapers in which the scheme was originally advertised.
NOTES
5. Permits the sale or supply of goods intended to be used, or are of a kind
likely to be used, by consumers, knowing or having reason to believe that
the goods do not comply with the standards prescribed by competent
authority relating to performance, composition, contents, design,
constructions, finishing or packaging as are necessary to prevent or reduce
the risk of injury to the person using the goods.
6. Permits the hoarding or destruction of goods, or refuses to sell the goods or
to make them available for sale or to provide any service, if such hoarding
or destruction or refusual raises or tends to raise or is intended to raise, the
cost of those or other similar goods or services.
7. Manufacture of spurious goods or offering such goods for sale or adopting
deceptive practices in the provision of services.
Restrictive Trade Practice
Section 2(1) (nnn) defines ‘restrictive trade practice’ as follows:
‘Restrictive trade practice’ means a trade practice which tends to bring about
manipulation of price or its conditions of delivery or to affect flow of supplies in the
market relating to goods or services in such a manner as to impose on the consumers
unjustified costs or restrictions and shall include:
(a) delay beyond the period agreed to by a trader in supply of such goods or
in providing the services which has led or is likely to lead to rise in the
price;
(b) any trade practice which requires a consumer to buy, hire or avail of any
goods or, as the case may be, services as condition precedent to buying,
hiring or availing of other goods or services.
The definition of the expression ‘restrictive trade practice’ reveals, inter alia,
that where sale or purchase of a product or service is made conditional on the sale or
purchase of one or more other products and services, it amounts to restrictive trade
practice. Thus, where a cooking gas distributor insists his customers to buy gas stove
as a condition to give gas connection, it amounts to restrictive trade practice. However,
where there is no such precondition and the buyer is free to take either product, no
tying arrangement could be alleged even though the seller may offer both the products
as a single unit at a composite price.
Illustration. A furniture dealer offers to sell a sofa at ` 20,000 and double bed
at ` 15,000. He has an offer that whoever will buy sofa and bed both, he will charge
` 30,000 only. Here, the choice is open to the customer to buy the products single or
composite. This is not a restrictive trade practice.
Defect [Sec. 2(1) (f)]. ‘Defect’ means any fault, imperfection or shortcoming
in the quality, quantity, potency, purity or standard which is required to be maintained
by or under any law for the time being in force or under any contract, express or implied,
or as is claimed by the trader in any manner whatsoever in relation to any goods.
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Legal and Ecological This is an exhaustive definition. It means that the Act recognises only those
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defects which are covered by the definition. For example, A sells a stolen car to B. B
wants to sue A for defect in the title of the car. B cannot sue A under the Consumer
Protection Act as the defect in title of goods does not constitute defect in goods as
NOTES defined under the Act.
Deficiency [Sec. 2(1) (g)]. ‘Deficiency’ means any fault, imperfection,
shortcoming or inadequacy in the quality, nature and manner of performance which is
required to be maintained by or under any law for the time being in force or has been
undertaken to be performed by a person in pursuance of a contract or otherwise in
relation to any service.
Illustrations. (i) A boarded a train. The compartment in which he travelled
was in bad shape–fans and shutters of windows were not working, rexin of the berth
was badly torn and there were rusty nails which caused some injury to his wife who
was also travelling along with him. A made a complaint against the Railways for deficiency
in service. It was held that the faults or shortcomings pointed out in the plaint constituted
‘deficiency in service’ and the compensation of ` 1500 was awarded to A (General
Manager, South Eastern Railway vs Anand Prasad Sinha).
(ii) Intentional withholding of delivery of car for two months after receipt of full
payment to take advantage of price hike was held as ‘deficiency in service’ (Mohinder
Pratap Das vs Modern Automobiles).
(iii) Non-intimation by the Carrier to the consignee about arrival of the goods at
the destination, and non-compliance with subsequent instruction of the consignor for
reshipment of the goods to a new consignee was held as ‘deficiency in service’ (Saddler
Shoes Pvt. Ltd. vs Air India).
But if abnormal circumstances beyond the control of the person performing
service prevent him from rendering service of the desired quality and manner of
performance, such person should not be penalised for the same. For example, L
undertook to supply water to B for irrigation of crops. Due to power grid failure of the
State, L could not get sufficient power to perform the service. L cannot be held liable
for ‘deficiency in service’.
However, negligence on the part of performer of service may not be excused
under the cover of circumstances beyond control.
Illustration. A agreed to supply water to B for irrigation of crops. He failed to
do so because of a power breakdown due to burning of his transformer. As a result
crops were damaged. B sued A for ‘deficiency in service’. The National Commission
held that it was the duty of A to get the transformer repaired immediately. Since he was
negligent in doing so, he is liable for the deficiency in service (Orissa Lift Irrigation
Corpn. Ltd vs Birakishore Raut).
Manufacturer [Sec. 2(1) (j)]. ‘Manufacturer’ means a person who —
(i) makes or manufactures any goods or part thereof; or
(ii) does not make or manufacture any goods but assembles parts thereof
made or manufactured by others; or
(iii) puts or causes to be put his own mark on any goods made or manufactured
by any other manufacturer.
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 The explanation to the clause provides that where a manufacturer despatches Legal and Ecological
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any goods or part thereof to any branch office maintained by him, such branch office
shall not be deemed to be the manufacturer even though the parts so despatched to it
are assembled at such branch office and are sold or distributed from such branch office.
NOTES
Thus, a manufacturer is a person who either manufactures goods himself, or
assembles parts of any goods manufactured by others, or puts his own mark (trade
mark) on the goods manufactured by others.
Illustration. M Ltd. used to buy components and assemble ceiling fans
therefrom. It was selling them under the brand name ‘Pearson’. B bought a ‘Pearson’
fan which turned out to be defective. B can hold M Ltd. liable for the loss as it will be
deemed manufacturer of ‘Pearson’ fans under the Act.
Trader [Sec. 2(1) (q)]. ‘Trader’ in relation to any goods means a person who
sells or distributes any goods for sale and includes the manufacturer thereof, and where
such goods are sold or distributed in package form, includes the packer thereof.
Generally speaking ‘trader’ means any person who carries on a trade. Under
the Consumer Protection Act, ‘trader’ is a wider term which includes a manufacturer
and a packer also. For example,
(a) A got an agency of ‘Polar Fans’. He sells and distributes these fans in
North India. He is a trader under the Act.
(b) Polar Co. Ltd. manufactures the fans. It is a trader under the Act.
(c) B provides cartons to pack the detergent manufactured by M. B is a trader
under the Act.
Generally, when a consumer finds defects in the goods, he sues the person from
whom he bought the goods. Reason being privity of contract. It can well be imagined
that the purchaser may not even know who the manufacturer is. As such it is not the
requirement of the Act that alongwith the trader, the manufacturer must also be made
a party in the suit. Of course, if the defect is a manufacturing defect, the consumer may
sue the manufacturer also along with the seller. This is an option with the consumer.
Thus, the manufacturer is a possible party, and not a necessary party. For example, in
case the vehicle has any defect, the buyer may sue the seller alone or the seller and
manufacturer both. But where excess price has been charged it is only the seller who
is to bear the liability, for it is his own act and not that of the manufacturer.
Consumer Dispute [Sec. 2(1) (e)]. ‘Consumer dispute’ means a dispute where
the person against whom a complaint has been made, denies or disputes the allegations
contained in the complaint. Thus, where the claim of insurance is repudiated by the
Insurance Company, it amounts to consumer dispute. On the other hand, where the
respondent agreed to supply a specified quantity of iron rods to the appellant at a fixed
rate and the respondent charged a higher price, the matter is purely one of the description
of breach of contract. In no way does it amount to consumer dispute as envisaged by
the Consumer Protection Act. The appellant in the instant case must approach the civil
court.
Consumer Protection Councils
The Consumer Protection Councils are established at the Centre, State and District
levels. We have one Central Council, many State Councils and many District Councils.
Self-Instructional Material 191
Legal and Ecological These Councils work towards the promotion and protection of the rights of the
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consumers. They give publicity to the matters concerning consumer interests, take
steps towards furthering consumer education and protecting consumers from exploitation.
They advice the Government in matters of policy formulation regarding protection of
NOTES the consumer rights. The Government has notified ‘The Consumer Protection Rules,
1987’ to prescribing procedure a regarding the transaction of business by the Central
Council and to prescribe the rules as to the composition of the Central Council. These
Rules also prescribe the terms and conditions of service of the members of the National
Commission, the procedure to be followed for conduct of business and for hearing of
appeal by the National Commission.
Central Consumer Protection Council (Central Council)
Section 4 provides that:
1. The Central Government shall, by notification, establish with effect from such
date as it may specify in such notification, a council to be known as the Central
Consumer Protection Council (hereinafter referred to as the Central Council).
2. The Central Council shall consist of the following members, namely,:
(a) the Minister-in-charge of Consumer Affairs in the Central Government,
who shall be its Chairman, and
(b) such number of other official or non-official members representing such
interests as may be prescribed.
Constitution of Central Council: The constitution of Central Council has
since been prescribed under Rule 3 of the Consumer Protection Rules, 1987. It
provides that the Central Council shall consist of the following members, not exceeding
150, namely, —
(i) The Minister-in-charge of Consumer Affairs in the Central Government
who shall be the Chairman of the Central Council.
(ii) The Minister of State (where he is not holding independent charge) or
Deputy Minister-in-charge of Consumer Affairs in the Central Government
who shall be the Vice-Chairman of the Central Council.
(iii) The Minister-in-charge of Consumer Affairs in States.
(iv) Eight Members of Parliament — five from the Lok Sabha and three from
the Rajya Sabha.
(v) The Secretary of the National Commission for Scheduled Castes and
Scheduled Tribes.
(vi) Representatives of the Central Government Departments and autonomous
organisations concerned with consumer interests — not exceeding twenty.
(vii) The Registrar, National Consumer Disputes Redressal Commission, New
Delhi.
(viii) Representatives of the Consumer Organisations or Consumers — not
less than thirty-five.
(ix) Representatives of women — not less than ten.
(x) Representatives of farmers, trade and industries — not exceeding twenty.
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 (xi) Persons capable of representing consumer interests not specified above Legal and Ecological
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— not exceeding fifteen.
(xii) The Secretary-in-charge of Consumer Affairs in the Central Government
shall be the member secretary of the Central Council.
NOTES
It may thus be observed that members of the Council are selected from various
areas affecting Consumer interest, who are leading members of statewide organisations
representing segments of the consumer public, so as to establish a broadly based and
representative Central Council.
Term: The term of the Council shall be three years.
Vacancy: Any member may, by writing under his hand to the Chairman of the
Central Council, resign from the Council. The vacancies, so caused or otherwise, shall
be filled from the same category by the Central Government and such person shall
hold office so long as the member whose place he fills would have been entitled to
hold office, if the vacancy had not occurred.
Procedure for meetings of the Central Council: (Sec. 5). The Central
Council shall meet as and when necessary, but at least one meeting of the Council shall
be held every year. It shall meet at such time and place as the Chairman may think fit
and shall observe such procedure in regard to the transaction of business as may be
prescribed.
Rule 4 of the Consumer Protection Rules, 1987 provides that the Central Council
shall observe the following procedure regarding the transaction of its business:
1. The meeting of the Central Council shall be presided over by the Chairman.
In the absence of the Chairman, the Vice-Chairman shall preside over the
meeting of the Central Council. In the absence of the Chairman and the
Vice-Chairman, the Central Council shall elect a member to preside over
that meeting of the Council.
2. Each meeting of the Central Council shall be called by giving not less than
ten days from the date of issue, notice in writing to every member.
3. Every notice of a meeting of the Central Council shall specify the place and
the day and hour of the meeting and shall contain statement of business to be
transacted thereat.
4. No proceeding of the Central Council shall be invalid merely by reasons of
existence of any vacancy in or any defect in the constitution of the Council.
5. For the purpose of performing its functions, the Central Council may constitute
from amongst its members, such working groups as it may deem necessary
to perform the assigned functions. The findings of such working groups shall
be placed before the Central Council for its consideration.
6. The non-official members attending meetings of the Council or its Working
Group shall be entitled to travelling and daily allowances at the specified
rates.
7. The resolution passed by the Central Council shall be recommendatory in
nature.
Objects of the Central Council (Sec. 6). In fact, the objects of the Central
Council are the various rights of consumers recognised under the Act which are to be
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Legal and Ecological promoted and protected by the Council. Thus, the Act (under Section 6) has enumerated
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some rights of consumers which need to be protected by the Council. These rights of
consumers are:
1. Right to safety: This right has been recognised by Section 6(a) as, ‘the
NOTES
right to be protected against the marketing of goods and services which are
hazardous to life and property.’ The rationale behind this provision is to
ensure physical safety of the consumers. The law seeks to ensure that those
responsible for bringing goods to the market, in particular, manufacturers,
distributors, retailers and the like should ensure that the goods are safe for
the users. In case of dangerous or risky goods, consumer should be informed
of the risk involved in improper use of goods. Vital safety information should
be conveyed to consumers.
Illustration: M bought an insecticide from N. N did not inform M that
touching this insecticide with bare hands can create skin problem. M, while
using the insecticide came in contact with it and suffered from skin problem
consequently. Here N can be held liable under the Act.
2. Right to information: Under Section 6(b) this right has been recognised
as, ‘the right to be informed about the quality, quantity, potency, purity,
standard and price of goods or services, as the case may be, so as to protect
the consumer against unfair trade practices.’Adequate information is very
important in order to make a right choice of goods to be purchased. This
right ensures that the consumer should be made aware of the quality, weight,
contents and price of the product at the very pre-purchase stage. The fixing
of I.S.I. mark and Agmark enables the consumer to know about its quality.
Under some other legislations it is mandatory for the manufacturers and
packers to provide information on the package to the consumers about the
contents, weight, purity and potency of the product being sold. Consumers
suffer much on the price front as the prices often printed or tagged in the
product are misleading and no price control is there except with respect to
essential commodities. Advertisements also often mislead the consumers.
3. Right to choose: This right has been recognised by Section 6(c) as, ‘the
right to be assured, wherever possible, access to a variety of goods and
services at competitive prices.’ Fair and effective competition must be
encouraged so as to provide consumers with maximum information about
the wide variety of competing goods available in the market. Shoppers’ or
buyers’ guide should be made available to the consumers by the Government
or Business Organisations to protect this right of consumers.
4. Right to be heard: This right is ensured by Section 6(d) as, ‘the right to be
heard and to be assured that consumers’ interests will receive due
consideration at appropriate forums.’ The Consumer Protection Act, 1986
has well taken care of this right by providing three stages redressal machinery
to the consumers, namely District Forum, State Commission and National
Commission. Every consumer has a right to file a complaint and be heard in
that context. Further, with a view to providing better protection of this right,
various public and private sector undertakings have provided Consumer
Ombudsman (Complaint cells) to provide redressal to consumer complaints
outside the courts.
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 5. Right against exploitation. This right is guaranteed under Section 6(e) of Legal and Ecological
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the Act as, ‘the right to seek redressal against unfair trade practices or
restrictive trade practices or unscrupulous exploitation of consumers.’
Consumers are the most helpless lot in our country due to very many factors.
When consumers are exploited, an adequate remedy must be made available. NOTES
The Act has thus ensured to prevent exploitation of consumers by invoking
the jurisdiction of Consumer Forums in cases involving unfair trade practices
and restrictive trade practices.
6. Right to education. This right has been recognised under Section 6(f) of
the Act as, ‘the right to consumer education.’The right to consumer education
is a right which ensures that consumers are informed about the practices
prevalent in the market, their rights and the remedies available to them.
Unless the consumers are aware of their rights and remedies, protection of
their interest shall remain a myth. In this connection, the role of Consumer
Protection Councils is vital. The Central Council must ensure to educate the
consumers about their rights and remedies under the Act throughout the
country and the State Councils and the District Councils must ensure to
educate about these rights to consumers within their territories. For spreading
this education, media, school curriculum and cultural activities, etc. may be
used as a medium.
State Consumer Protection Councils (State Concils)
The power to establish State Councils is with the States. Section 7 provides that:
1. The state Government shall, by notification, establish with effect from such date
as it may specify in such notification, a council to be known as the State Consumer
Protection Council (hereinafter referred to as the State Council).
2. The State Council shall consist of the following members, namely,:
(a) the Minister-in-charge of Consumer Affairs in the State Government who
shall be its Chairman;
(b) such number of other official or non-official members representing such
interests as may be prescribed by the State Government;
(c) such number of other official or non-official members, not exceeding ten,
as may be nominated by the Central Government.
3. The State Council shall meet as and when necessary but not less than two
meetings shall be held every year.
4. The State Council shall meet at such time and place as the Chairman may think
fit and shall observe such procedure in regard to the transaction of its business
as may be prescribed by the State Government.
It may thus be observed that the State Government has been empowered to
decide the number and qualifications of the members of the State Council besides the
members nominated by the Central Government. The State Government has been
further empowered to prescribe the procedure to be followed by the State Council
regarding the transaction of its business.

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Legal and Ecological Objects of the State Council (Sec. 8). ‘The objects of every State Council
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shall be to promote and protect within the State the rights of the consumers laid down
in Clauses (a) to (f) of Section 6.’ Thus, the objects of the State Councils are the same
as that of the Central Council discussed above.
NOTES
District Consumer Protection Councils (District Councils)
Sections 8-A and 8-B of the Consumer Protection Act added by the Amendment Act
of 2002 deals with the establishment of the District Councils at district level. Section
8-A provides as follows:
1. The State Government shall establish for every district, by notification, a council
to be known as the District Consumer Protection Council with effect from such
data as it may specify in such notification.
2. The District Consumer Protection Council (hereinafter referred to as the District
Council) shall consist of the following members, namely,:
(a) the Collector of the district (by whatever name called), who shall be its
Chairman; and
(b) such number of other official and non-official members representing such
interests as may be prescribed by the State Government.
3. The District Council shall meet as and when necessary but not less than two
meetings shall be held every year.
4. The District Council shall meet at such time and place as the Chairman may
think fit and shall observe such procedure in regard to the transaction of its
business as may be prescribed by the State Government.
Objects of the District Council (Sec. 8-B). ‘The objects of every District
Council shall be to promote and protect within the district the rights of the consumers
as laid down in clauses (a) to (f) of Section 6.’ These clauses have already been
discussed under the sub-heading — Objects of the Central Council.
Consumer Disputes Redressal Agencies
The Consumer Protection Act, 1986 provides for a three-tier remedial machinery for
speedy redressal of consumer disputes. According to Section 9, there shall be established
for the purposes of this Act, the following agencies, namely,:
1. Consumer Disputes Redressal Forum to be known as the ‘District Forum’. It is
to be established by the State Government in each district of the State by
notification. The State Government may, if it deems fit, establish more than one
District Forum in a district.
2. State Consumer Disputes Redressal Commission (SCDRC) to be known as
‘State Commission.’ This is also to be established by the State Government in
the State by notification.
3. National Consumer Disputes Redressal Commission (NCDRC) to be known
as ‘National Commission’. This is to be established by the Central Government
by notification.
These Forums have not taken away the jurisdiction of the civil courts but have
provided an alternative remedy. Their prime objective is to relieve the conventional
196 Self-Instructional Material
courts of their burden which is ever increasing and delaying the disposal of suits due to Legal and Ecological
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technicalities. These agencies are quasi-judicial bodies. They are manned by qualified
persons and have been vested with considerable powers. They are required to assign
reasons for their conclusions. Obligation to give reasons not only introduces clarity but
it also excludes, or at least minimises, the chances of arbitrariness. NOTES

District Forum

Composition of the District Forum

Section 10 elaborates upon the composition of the District Forum. It provides that:
Each District Forum shall consists of:
(a) a person who is, or has been, or is qualified to be a District Judge, who shall be
its President;
(b) two other members, one of whom shall be a woman who shall have the following
qualifications, namely,:
(i) be not less than 35 years of age;
(ii) possess a bachelor’s degree from a recognised university; and
(iii) be persons of ability, integrity and standing, and have adequate knowledge
and experience of at least 10 years in dealing with problems relating to
economics, law, commerce, accountancy, industry, public affairs or
administration.
Disqualifications. A person shall be disqualified for appointment as
member if:
(a) he has been convicted and sentenced to imprisonment for an offence
involving moral turpitude; or
(b) he is an undischarged insolvent; or
(c) he has been adjudged to be of unsound mind; or
(d) he has been removed or dismissed from the service of the Government or
a body corporate owned or controlled by the Government; or
(e) he has, in the opinion of the State Government, such financial or other
interest as is likely to affect prejudicially the discharge by him of his functions
as a member; or
(f) he has such other disqualifications as may be prescribed by the State
Government.
Appointing authority [Sec. 10(1-A)]. Every appointment of the President Appointing authority: Every
and members of the District Forum shall be made by the State Government on the appointment of the
recommendation of a selection committee consisting of the following: President and members of
the District Forum shall be
(i) President of the State Commission — Chairman. made by the State
Government on the
(ii) Secretary, Law Department of the State — Member. recommendation of a
(iii) Secretary in-charge of the Department dealing with consumer affairs in selection committee
the State — Member.
Where the President of the State Commission is, by reason of absence or
otherwise, unable to act as Chairman of the Selection Committee, the State Government Self-Instructional Material 197
Legal and Ecological may refer the matter to the Chief Justice of the High Court for nominating a sitting
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judge of that High Court to act as Chairman.
Term of office [Sec. 10(2)]. Every member of the District Forum shall hold
office for a term of 5 years or up to the age of 65 years, whichever is earlier. However,
NOTES
he shall be eligible for re-appointment subject to similar conditions as stated before.
Terms and conditions of service [Sec. 10(3)]. The salary or honorarium and
other allowances payable to, and the other terms and conditions of service of the
members of the District Forum shall be such as may be prescribed by the State
Government.
In terms of proviso to Section 10(3), the appointment of a member on whole-
time basis shall be made by the State Government on the recommendation of the
President of the State Commission taking into consideration such factors as may be
prescribed including the workload of the District Forum.
Jurisdiction of the District Forum
The term jurisdiction may be defined as authority or legal power to hear and decide
the cases. Thus, a court may adjudicate only those matters which fall under its jurisdiction.
The question of jurisdiction has to be considered with reference to the value, place
and the nature of subject-matter. For example, where A and B reside in Bombay and
they have some dispute, their dispute may be subjected to the jurisdiction of the Bombay
courts only. Courts of any other place cannot adjudicate the issue.
Pecuniary jurisdiction [Sec. 11(1)]. The District Forum shall have jurisdiction
to entertain complaints where the value of goods or services and the compensation, if
any, claimed does not exceed ` 20 lakh.
In Farook Haji Ismail vs Gavabhai Bhesania, the Gujarat High Court held
that the pecuniary jurisdiction depends upon the amount of relief claimed and not upon
the value of the subject-matter, nor upon the relief allowed by the Forum.
Thus, the District Forum entertains the cases where the value of claim is up to
` 20 lakh. Where a claim exceeds this limit, the matter is beyond the jurisdiction of the
Forum.
Territorial jurisdiction [Sec. 11(2)]. A complaint shall be instituted in a District
Forum within the local limits of whose jurisdiction:
(a) the opposite party or each of the opposite parties, where there are more
than one, at the time of the institution of the complaint, actually and
voluntarily resides or carries on business, or has a branch office or
personally works for gain; or
(b) any of the opposite parties, where there are more then one, at the time of
the institution of the complaint, actually or voluntarily resides, or carries on
business or has a branch office, or personally works for gain, provided
the other parties not so residing or working agrees or the District Forum
gives permission in this regard; or
(c) the cause of action, wholly or in part, arises.
It may be recalled that a limitation period has also been prescribed under Section
24-A. Accordingly, a complaint can only be lodged within two years from the date on
198 Self-Instructional Material which the cause of action has arisen.
Manner in which Complaint Shall be Made (Sec. 12) Legal and Ecological
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Section 12(1) lists the persons who can file a complaint. This has been explained
earlier under the side-heading — ‘Who can file a Complaint’. The expression
‘Complaint’ has also been explained earlier. NOTES
Section 12(2) (3) (4) elaborates the manner in which complaint shall be made.
It provides that:
1. Every complaint filed with a District Forum shall be accompanied with such
amount of fee and payable in such manner as may be prescribed.
The fee for making complaints before District Forum and the manner in
which the fee shall be payable has since been prescribed under Rule 9A of
the Consumer Protection Rules, 1987. It provides that:
Every complaint filed with a District Forum shall be accompanied by a fee,
as specified in the table given below, in the form of crossed Demand Draft
drawn on nationalised bank or through a crossed India Postal Order drawn
in favour of the Registrar of the State Commission and payable at the
respective place where the State Commission is situated. The concerned
District Forum shall deposit the amount of fee so received in the State
Government Receipt Account.
Sl.No. Value of goods or services and the Compensation claimed Amount of
fee payable
(1) (2) (3)

1. Upto one lakh rupees ` 100

2. One lakh rupees and above but less than five lakh rupees ` 200
3. Five lakh rupees and above but less than ` 10 lakh ` 400
4. Ten lakh rupees above but not exceeding ` 20 lakh ` 500

2. On receipt of a complaint, the District Forum may, by order, admit the

complaint or reject the same. However, a complaint shall not be rejected
unless an opportunity of being heard has been given to the complainant. The
admissibility of the complaint shall ordinarily be decided within
21 days from the date on which the complaint was received.
3. Where a complaint is admitted, the District Forum shall follow the procedure
prescribed in Section 13 (explained under the next heading).
4. Once a complaint is admitted by the District Forum, it shall not be transferred
to any other court or tribunal set up under any other law.
Note: The above provisions of Section 12 and the rules made thereunder regarding the fee
payable for making complaints shall also be applicable to the disposal of disputes by the State
Commission and National Commission as per Section 18 and Section 22(1) respectively.

Procedure to be followed on Admission of a Complaint (Sec. 13)

The procedure to be followed by the District Forum on admission of a complaint can
be discussed under the following two heads:
I. Where a laboratory test is required to determine the defects in goods.
II. Where no laboratory test is required to determine the defects in goods or the
complaint relate to services.
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Legal and Ecological I. Where laboratory test is required to determine the defects in goods.
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The procedure to be followed is as follows:
(a) The District Forum shall refer a copy of the admitted complaint, within 21
days from the data of its admission, to the opposite party directing him to
NOTES
give his version of the case within a period of 30 days which can be
extended by a period up to 15 days.
(b) Where the opposite party, on receipt of the complaint referred to him,
admits the allegation, the District Forum shall decide the matter on the
basis of merits of the case and documents before it.
(c) Where the opposite party, on receipt of a complaint referred to him, denies
or disputes the allegations contained in the complaint, or omits or fails to
take any action to represent his case within the time given by the District
Forum, the District Forum would take the following steps to settle this
dispute:
(i) The District Forum may require the complainant to deposit specified
fee for payment to the appropriate laboratory for carrying out the
necessary analysis or test in relation to the goods in question.
(ii) The District Forum will obtain a sample of the goods from the
complainant, seal it, authenticate it and refer the sample so sealed to
the appropriate laboratory for an analysis or test, whichever may be
necessary, with a view to finding out whether such goods suffer from
any defect and to report its findings thereon to the District Forum
within a period of 45 days of the receipt of the reference or within
such extend period as may be granted by the District Forum.
(iii) The District Forum will remit the fees to the appropriate laboratory
to enable it to carry out required analysis or test.
(iv) Upon receiving the laboratory’s report, its copy will be forwarded
by the District Forum to the opposite party alongwith its own remarks.
(v) In the event of any party disputing the correctness of the findings, or
the methods of analysis or test adopted by the appropriate laboratory,
the District Forum shall require the objecting party to submit his
objections in writing.
(vi) The District Forum will give a reasonable opportunity of being heard
to the objecting party.
(d) The District Forum shall issue an appropriate order under Section 14
after hearing the parties.
II. Where no laboratory test is required to determine the defects in goods
or the complaint relates to services. In such a case the following procedure
is followed:
(a) The District Forum shall refer a copy of the admitted complaint, within 21
days from the date of its admission, to the opposite party directing him to
give his version of the case within a period of 30 days which can be
extended by a period not exceeding 15 days.

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 (b) The opposite party on receipt of the complaint referred to him may: Legal and Ecological
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(i) admit the allegation, or
(ii) deny or dispute the allegations contained in the complaint, or
(iii) omit or fail to respond within the time given by the District Forum. NOTES
(c) (i) Where the opposite party admits the allegation, the District Forum
shall decide the matter on the basis of the merits of the case.
(ii) Where the opposite party denies or disputes the allegations made in
the complaint, the District Forum will proceed to settle the dispute on
the basis of evidence brought to its notice by both the parties.
(iii) Where the opposite party omits or fails to respond within the time
given by the District Forum, the Forum will proceed to settle the dispute
ex-parte on the basis of evidence brought to its notice by the
complainant.
(d) The District Forum shall issue an appropriate order, under Section 14,
after hearing the parties and taking into account available evidence.
(e) Where the complainant fails to appear on the date of hearing before the
District Forum, the Forum may either dismiss the complaint for default or
decide it on merits.
Time limit for disposal of complaint [Sec. 13(3A)]. Every complaint shall
be heard as expeditiously as possible and endeavour shall be made to decide the
complaint within a period of 3 months from the date of receipt of notice by the opposite
party where the complaint does not require analysis or testing of commodities and
within 5 months if it requires analysis or testing of commodities. In the event of a
complaint being disposed of after the period specified above, the District Forum shall
record in writing the reasons for the same.
Power to pass interim order [Sec. 13(3B)]. Where during the pendency of
any proceeding before the District Forum, it appears to it necessary, it may pass such
interim order as is just and proper in the facts and circumstances of the case.
Note: The above provisions of Section 13 regarding procedure to be followed
by the District Forum on admission of a complaint shall also be applicable to the
disposal of disputes by the State Commission and National Commission as per Section
18 and Section 22(1) respectively.
State Commission
After the District Forum, State Commission is next in the hierarcy of Consumer Disputes
Redressal Agencies under the Act.
Composition of the State Commission
Section 16 contains the provisions regarding the composition of the State Commission.
These are:
1. Each State Commission shall consist of:
(a) a person who is or has been a judge of a High Court, appointed by the
State Government, who shall be its president. But no such appointment
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Legal and Ecological shall be made except after consultation with the Chief Justice of the High
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Court;
(b) at least two other members or such higher number of members as may be
prescribed, one of whom shall be a woman, who shall have the following
NOTES
qualifications, namely:
(i) be not less than 35 years of age;
(ii) possess a bachelor’s degree from a recognised university; and
(iii) be persons of ability, integrity and standing, and have adequate
knowledge and experience of at least 10 years in dealing with
problems relating to economics, law, commerce, accountancy,
industry, public affairs or administration:
Provided that not more than 50 per cent of the members shall be from amongst
persons having a judicial background.
Explanation. For the purposes of this clause, the expression ‘persons having
judicial background’ shall mean persons having knowledge and experience for at least
a period of 10 years as a presiding officer at the district level court or any tribunal at
equivalent level.
Disqualifications. A person shall be disqualified for appointment as member if:
(a) he has been convicted and sentenced to imprisonment for an offence
involving moral turpitude; or
(b) he is an undischarged insolvent; or
(c) he has been adjudged to be of unsound mind; or
(d) he has been removed or dismissed from the service of the Government or
a body corporate owned or controlled by the Government; or
(e) he has, in the opinion of the State Government, such financial or other
interest, as is likely to affect prejudicially the discharge by him of his
functions as a member; or
(f) he has such other disqualifications as may be prescribed by the State
Government.
Appointing authority [Sec. 16(1-A)]. The provisions to the process of
appointment of the President and members of the State Commission are similar to
those discussed in the context of appointment of the President and members of the
District Forum. Refer preceding heading “District Forum” for details.
Benches [Sec. 16(1-B)]. The jurisdiction, powers and authority of the State
Commission may be exercised by Benches thereof. A Bench may be constituted by
the President with one or more members as the President may deem fit.
If the members of a Bench differ in opinion on any point, the point shall be
decided according to the opinion of the majority. But if the members are equally divided,
they shall state the point or points on which they differ, and make a reference to the
President who shall either hear the point(s) himself or refer the case for hearing on
such point(s) by one or more or the other members and such point(s) shall be decided
according to the opinion of the majority of the members who have heard the case,
including those who first heard it.
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 Terms and conditions of service [Sec. 16(2)]. The salary or honorarium and Legal and Ecological
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other allowances payable to, and the other terms and conditions of service of the
members of the State Commission shall be such as may be prescribed by the State
Government. Provided that the appointment of a member on whole-time basis shall be
made by the State Government on the recommendation of the President of the State NOTES
Commission taking into consideration such factors as may be prescribed including the
workload of the State Commission.
Term of office [Sec. 16(3)]. Every member of the State Commission shall
hold office for a term of five years or up to the age of 67 years, whichever is earlier.
However, he shall be eligible for reappointment subject to similar conditions as stated
here in before. Further, a person appointed as President of the State Commission shall
also be eligible for reappointment.
Jurisdiction of the State Commission
Pecuniary jurisdiction [Sec. 17(1)]. The State Commission shall have jurisdiction to
entertain complaints where the value of goods or services and compensation, if any,
claimed exceeds ` 20 lakh but does not exceed ` one crore.
It may be recalled that the decisive factor regarding pecuniary jurisdiction is the
value of claim. Thus, the State Commission entertains cases where the value of claim
is more than ` 20 lakh but is upto ` one crore.
Territorial jurisdiction [Sec. 17(2)]. A suit can be instituted in the State
Commission within the local limits of whose jurisdiction:
(a) the opposite party or each of the opposite parties, where there are more
than one, at the time of the institution of the complaint, actually and
voluntarily resides or carries on business or has a branch office or personally
works for gain; or
(b) any of the opposite parties, where there are more than one, at the time of
the institution of the complaint, actually and voluntarily resides, or carries
on business or has a branch office, or personally works for gain, provided
the other parties not so residing or working agrees or the State Commission
gives permission in this regard; or
(c) the cause of action, wholly or in part, arises.
Appellate jurisdiction [Sec. 17(1) (a) (ii)]. The State Commission has power Appellate jurisdiction: The
to entertain the appeals against the orders of any District Forum within the State, State Commission has power
to entertain the appeals
within 30 days from the date of service of the order to the appellant. against the orders of any
Revisional jurisdiction [Sec. 17(1) (b)]. The State Commission has power District Forum within the
State, within 30 days from
to call for the records and pass appropriate orders in any consumer dispute which is
the date of service of the
pending before or has been decided by any District Forum within the State, where order to the appellant
State Commission is of the view that the District Forum:
(i) has exercised a jurisdiction/power which it was not entitled to, or
(ii) has failed to exercise a power which was vested in it, or
(iii) has exercised its authority illegally or with material irregularity.
Such revisional power may be exercised by the State Commission either on its
own or on the application of a party.
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Legal and Ecological Procedure to be followed by the State Commission. As observed earlier,
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the provisions of Section 13 regarding procedure to be followed by the District Forum,
which have already been discussed, shall be applicable also to the disposal of disputes
by the State Commission as per Section 18.
NOTES
National Commission
The National Commission is the topmost layer in the three-level hierarchy of the
Consumer Disputes Redressal Agencies.
Composition of the National Commission
National Commission: The
National Commission is the
Section 20 elaborates upon the composition of National Commission. It provides that:
topmost layer in the three-
level hierarchy of the 1. The National Commission shall consist of:
Consumer Disputes
Redressal Agencies (a) a person who is or has been a judge of the Supreme Court, to be appointed
by the Central Government, who shall be its President. But no such
appointment shall be made except after consultation with the Chief Justice
of India;
(b) at least four other members or such higher number of members as may be
prescribed, and one of whom shall be a woman.
The provisions as to the qualifications and disqualifications of the members of
National Commission are similar to those discussed under the preceding Centre heading:
“State Commission”.
Appointing authority. The appointment of members of the National Commission
is made by the Central Government on the recommendation of a Selection Committee
consisting of the following:
(i) a person who is a judge of the Supreme Court, to be nominated by the
Chief Justice of India — Chairman.
(ii) the secretary in the Department of Legal Affairs in the Government of
India — Member.
(iii) Secretary of the Department dealing with consumer affairs in the
Government of India — Member.
Benches [Sec. 20(1A)]. The jurisdiction, powers and authority of the National
Commission may be exercised by Benches thereof. A Bench may be constituted by
the President with one or more members as the President may deem fit.
Term of office [Sec. 20(3)]. Every member of the National Commission shall
hold office for a term of five years or up to the age of 70 years, whichever is earlier.
However, he shall be eligible for re-appointment subject to similar conditions as stated
here in before. Further, a person appointed as President of the National Commission
shall also be eligible for reappointment.
Jurisdiction of the National Commission
Pecuniary jurisdiction [Sec. 21(a) (i)]. The National Commission shall have
jurisdiction to entertain complaints where the value of goods or services and
compensation, if any, claimed exceeds ` 1 crore.

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 Since National Commission is the highest level of Consumer Forums, it entertains Legal and Ecological
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all the cases where the value of claim is more than ` one crore.
Territorial jurisdiction. The territorial jurisdiction of the National Commission
is the whole of India except the State of Jammu and Kashmir.
NOTES
Appellate jurisdiction [Sec. 21(a) (ii)]. The National Commission has
jurisdiction to entertain appeals against the order of any State Commission, within 30
days from the date of service of the order to the appellant.
Revisional jurisdiction [Sec. 21(b)]. The National Commission has power to
call for the records and pass appropriate orders in any consumer dispute which is
pending before or has been decided by any State Commission, where it is of the view
that the State Commission:
(i) has exercised a jurisdiction/power not vested in it by law, or
(ii) has failed to exercise a power which was vested in it, or
(iii) has exercised its authority illegally or with material irregularity.
Such revisional power may be exercised by the National Commission either on
its own or on the petition of a party.
Procedure to be followed by the National Commission
Rule 14 of the Consumer Protection Rules, 1987, as amended by the Consumer
Protection (Amendment) Rules, 2004, lays down the procedure, which is as follows:
1. A complaint containing the following particulars shall be presented by the
complainant in person or by his agent to the National Commission or be sent by
registered post:
(a) the name, description and address of the complainant;
(b) the name, description and address of the opposite party or parties, as the
case may be, so far as they can be ascertained;
(c) the facts relating to complaint and when and where it arose;
(d) documents in support of the allegations contained in the complaint;
(e) the relief which the complainant claims.
2. Every complaint filed with the National Commission shall be accompanied by
the relevant fee as is specified in Rule 9A of the Consumer Protection Rules,
1987. For details refer to the Side Heading: “Manner in which complaint shall
be made to the District Forum” (given before).
3. The National Commission shall, in disposal of any complaint before it, as far as
possible, follow the procedure as laid down in Section 13 in relation to the
complaints received by the District Forum (discussed already under the Side-
Heading: ‘Procedure to be followed on Admission of a Complaint’). Section
22(1) also provides to the same effect.
4. On the date of hearing, it shall be obligatory on the parties or their agents to
appear before the National Commission. Where the complainant or his agent
fails to appear, the National Commission may either dismiss the complaint for
default or decide it on merits. Where the opposite party or its agent fails to

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Legal and Ecological appear on the date of hearing, the National Commission may decide the complaint
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ex-parte.
5. The complaint shall be decided, as far as possible, within a period of three
months from the date of notice received by the opposite party where complaint
NOTES
does not require analysis or testing of commodities and within five months if it
requires analysis or testing of commodities. In the event of a complaint being
disposed of after the period specified above, the National Commission shall
record in writing the reasons for the delay.
6. After the proceedings, the National Commission shall issue an appropriate order
under Section 14. It shall also have the power to direct that any order passed
by it, where no appeal has been preferred under Section 23, be published in the
Official Gazette or through any other media.
Powers of the Consumer Forums
For the purpose of adjudicating a consumer dispute, Section 13(4) has vested the
Consumer Forums, namely District Forum, State Commission and National
Commission, with certain powers of a civil court. Apart from these powers, the Central
Government has provided some additional powers to them under Rule 10 of the
Consumer Protection Rules, 1987. Finally Section 14(1) has given them the power to
issue orders.
Powers similar to those of civil court [Sec. 13(4)]. The Consumer Forums
are vested with the powers of a civil court, while trying a suit, in respect of the following
matters:
(i) summoning and enforcing the attendance of any defendant or witness and
examining the witness on oath;
(ii) discovery and production of any document or other material object
producible as evidence;
(iii) receiving of evidence on affidavits;
(iv) requisitioning of the report of the concerned analysis or test from the
appropriate laboratory or from any other relevant source;
(v) issuing of any commission for the examination of any witness; and
(vi) any other matter which may be prescribed.
Sub-section (5) of Section 13 further provides that every proceeding before
the District Forum, the State Commission or the National Commission, as the case
may be, shall be deemed to be a judicial proceeding within the meaning of Sections
193 and 228 of the Indian Penal Code (punishment for false evidence and intentional
insult or interruption to public servant sitting in judical proceeding) and the Forums
shall be deemed to be civil courts for the purposes of Section 195 and Chapter XXVI
of the Code of Criminal Procedure, 1973 (prosecution for contempt and provisions
as to offences affecting the administration of justice).
Additional powers of the consumer forums (Rule 10 of the Consumer
Protection Rules, 1987). The National Commission, the State Commission and the
District Forum have the following additional powers:

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 (a) Requiring production of any books, accounts, documents, or commodities Legal and Ecological
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from any person and getting them examined by an officer specified in this
behalf.
(b) Obtaining information required for the purpose of the proceedings from
NOTES
any person.
(c) Authorising any officer to enter and search any premises and seize from
premises such books, papers, documents and commodities as are required
for the purpose of proceedings under the Act.
(d) On examination of such seized documents or commodities, ordering the
retention thereof or returning them to the party concerned.
Power to issue order [Sec. 14(1)]. If, after the proceeding conducted under
Section 13 (explained earlier), the National Commission, the State Commission or the
District Forum, as the case may be, is satisfied that the goods complained against
suffer from any of the defects specified in the complaint or that any of the allegations
contained in the complaint about the services are proved, it shall issue an order to the
opposite party directing him to do one or more of the following things:
(a) to remove the defect pointed out by the appropriate laboratory from the
goods in question;
(b) to replace the goods with new goods of similar description which shall be
free from any defect;
(c) to return to the complainant the price, or, as the case may be, the charges
paid by the complainant;
(d) to pay such amount as may be awarded by it as compensation to the
consumer for any loss or injury suffered by the consumer due to the
negligence of the opposite party. The Consumer Protection (Amendment)
Act, 2002 has further empowered these Forums to grant punitive damages
in such circumstances as it deems fit;
(e) to remove the defects in goods or deficiencies in the services in question;
(f) to discontinue the unfair trade practice or the restrictive trade practice or
not to repeat it;
(g) not to offer the hazardous goods for sale;
(h) to withdraw the hazardous goods from being offered for sale;
(i) to cease manufacture of hazardous goods and to desist from offering services
which are hazardous in nature;
(j) to pay such sum as may be determined by it if it is of the opinion that loss
or injury has been suffered by a large number of consumers who are not
identifiable conveniently, provided that the minimum amount or sum so
payable shall not be less than 5 per cent of the value of such defective
goods sold or service provided, as the case may be, to such consumers,
and the amount so obtained shall be credited in favour of such person and
utilized in such manner as may be prescribed;

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Legal and Ecological (k) to issue corrective advertisement to neutralize the effect of misleading
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advertisement at the cost of the opposite party responsible for issuing
such misleading advertisement;
(l) to provide for adequate costs to parties.
NOTES
Sub-section (2) of Section 14 provides that every proceeding is required to be
conducted by the President of the Forum and at least one member thereof sitting
together. Where the member, for any reason, is unable to conduct the proceeding till it
is completed, the President and the other member shall continue the proceeding from
the stage at which it was last heard by the previous member.
Sub-section (2A) of Section 14 provides that every order made under this
Section shall be signed by the President and the member or members who conducted
the proceedings.
Special Powers of the State Commission
Through the Consumer Protection (Amendment) Act, 2002 two new provisions have
been added for conferring additional powers on the State Commission in the interest
of justice. These provisions are as follows:
1. Transfer of cases (Sec. 17A). On the application of the complainant or of its
own motion, the State Commission may, at any stage of proceeding, transfer
any complaint pending before the District Forum to another District Forum
within the state if the interest of justice so requires.
It may thus be noticed that the State Commission has been given the power to
transfer cases from one District Forum to another, that too at any stage of
proceeding. The transfer of case can be ordered either on the application of the
complainant or on its own motion. However, the defendant cannot move for
transfer of case.
2. Circuit Benches (Sec. 17B). The State Commission shall ordinarily function
in the State Capital but may perform its functions at such other place as the
State Government may, in consultation with the State Commission, notify in the
Official Gazette, from time to time.
Special Powers of the National Commission
The National Commission too has been conferred additional powers by the Consumer
Protection (Amendment) Act, 2002 which are as follows:
1. Power to set aside ex-parte orders (Sec. 22A). Where an order is passed
by the National Commission ex-parte against the opposite party or a
complainant, as the case may be, the aggrieved party may apply to the
Commission to set aside the said order in the interest of justice.
It may be observed that the insertion of this new Section will obviously lessen
the number of appeals from going to the Supreme Court from the orders of the
National Commission.
2. Transfer of cases (Sec. 22B). On the application of the complainant or on its
own motion, the National Commission may, at any stage of proceeding, in the
interest of justice, transfer any complaint pending before the District Forum of
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 one State to a District Forum of another State or before one State Commission Legal and Ecological
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to another State Commission.
3. Circuit Benches (Sec. 22C). The National Commission shall ordinarily function
at New Delhi and perform its functions at such other place as the Central
NOTES
Government may, in consultation with the National Commission, notify in the
Official Gazette, from time to time.
4. Power to make regulations (Sec. 30A). The National Commission may, with
the previous approval of the Central Government, by notification, make
regulations not inconsistent with this Act to provide for all matters for which
provision is necessary or expedient for the purpose of giving effect to the
provisions of this Act.
In particular, such regulations may make provisions for the cost of adjournment
of any proceeding before the District Forum, the State Commission or the
National Commission, as the case may be, which a party may be ordered to
pay.
Enforcement of Orders of the Consumer Forums (Sec. 25). Regarding the
enforcement of orders of the District Forum, State Commission or the National
Commission, Section 25 provides as follows:
1. Where an interim order made under this Act is not complied with, the District
Forum or the State Commission or the National Commission, as the case
may be, may order the property of the person not complying with such
order to be attached.
2. No attachment made under sub-section (1) (stated above) shall remain in
force for more than 3 months at the end of which, if the non-compliance
continues, the property attached may be sold and out of the proceeds thereof,
the District Forum or the State Commission or the National Commission
may award such damages as it thinks fit to the complainant and shall pay the
balance, if any, to the party entitled thereto.
3. Where any amount is due from any person under an order made by a District
Forum, the State Commission or the National Commission, as the case may
be, the person entitled to the amount may make an application to the
concerned Forum and such Forum may issue a certificate for the said amount
to the Collector of the District and the Collector shall proceed to recover
the amount in the same manner as arrears of land revenue.
Appeals Against Orders of the Forums
1. Appellate power of the State Commission (Sec. 15). Any person aggrieved
by an order made by the District Forum may prefer an appeal against such
order to the State Commission within a period of 30 days from the date of the
order or within such extended time as the Commission may allow if it is satisfied
that there was sufficient cause for not filing it within that period. However, no
appeal by a person, who is required to pay any amount in terms of an order of
the District Forum, shall be entertained unless the appellant has deposited fifty
per cent of that amount or ` 25,000, whichever is less.

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Legal and Ecological It is worth noting here that the High Court is not a statutory appellate authority
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under the provisions of the Consumer Protection Act, 1986.
2. Appellate power of the National Commission (Sec. 19). Any person
aggrieved by an order made by the State Commission may prefer an appeal
NOTES
against such order to the National Commission within a period of 30 days from
the date of the order. The National Commission may, however, entertain an
appeal after the expiry of the said period of 30 days if it is satisfied that there
was sufficient cause for not filing it within that period. But no appeal by a person,
who is required to pay any amount in terms of an order of the State Commission,
shall be entertained unless the appellant has deposited fifty per cent of that
amount or ` 35,000, whichever is less.
Hearing of appeal (Sec. 19A). An appeal filed before the State Commission
or the National Commission shall be heard as expeditiously as possible and an
endeavour shall be made to finally dispose of the appeal within a period of 90
days from the date of its admission.
3. Appeal to the Supreme Court (Sec. 23). Any person aggrieved by an order
made by the National Commission may prefer an appeal against such order to
the Supreme Court within a period of 30 days from the date of the order or
within such time as the Supreme Court allows. However, no appeal by a person,
who is required to pay any amount in terms of an order of the National
Commission, shall be entertained unless the appellant has deposited fifty per
cent of that amount or ` 50,000, whichever is less.
Administrative Control
Section 24B gives power to the National Commission to exercise administrative control
over all the State Commissions. It also empowers the State Commissions to exercise
administrative control over all the District Fora within their respective jurisdiction.
Vacancies or Defects in Appointment not to invalidate Orders (Sec. 29A).
No act or proceeding of the District Forum, the State Commission or the National
Commission shall be invalid by reason only of the existence of any vacancy amongst
its members or any defect in the constitution thereof.
Dismissal of Frivolous or Vexatious Complaints (Sec.26). Where a
complaint instituted before the District Forum, the State Commission or, as the case
may be, the National Commission, is found to be frivolous or vexatious, it shall, for
reasons to be recorded in writing, dismiss the complaint and make an order that the
complainant shall pay to the opposite party such cost, not exceeding ` 10,000, as may
be specified in the order.
Penalties
Regarding the penalties, Section 27 provides as follows:
1. Where a trader or a person against whom a complaint is made or the complainant
fails or omits to comply with any order made by the District Forum, the State
Commission or the National Commission, as the case may be, such trader or
person or complainant shall be punishable with imprisonment for a term which
shall not be less than one month but which may extend to three years, or with
fine ranging between ` 2,000 and ` 10,000, or with both.
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 2. The District Forum or the State Commission or the National Commission, as Legal and Ecological
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the case may be, shall have the power of a Judicial Magistrate of the First Class
for the trial of offences under this Act, and on such conferment of powers, they
shall be deemed to be a Judicial Magistrate of the First Class for the purpose of
the Code of Criminal Procedure, 1973. NOTES
3. All offences under this Act may be tried summarily by the District Forum or the
State Commission or the National Commission, as the case may be.
Amendments proposed in the Consumer Protection Act
In December 2011, the Government of India introduced the Consumer Protection
(Amendment) Bill, 2011, in Lok Sabha to facilitate quicker disposal of cases and to
widen and amplify the scope of some of the provisions of the Act. With a view to faster
redressal of complaints and to rationalize procedure of appointments in consumer
disputes redressal agencies, it is being felt necessary to amend the Act.
The proposed Bill requires the following:
• To make provision in the law to permit consumers to file complaints as well
as pay fee online, which would make the consumer for a move towards e-
governance/ time bound redressal
• To enforce an order of the District Forum / State Commission/ National
Commission as a Decree of a Civil Court
• To make provision for payment by every person for not complying of the
order of District Forum / State Commission / National Commission of an
amount of not less than ` 500 or 1½ per cent of the value of the amount
awarded, whichever is higher, for each day of delay of such non-compliance
of the order
• To empower District Forum to function in any other place apart from District
HQrs, in consultation with State Government / State Commission
• To empower State Government to refer back the recommendation of the
Selection Committee for making fresh recommendation in order to avoid
any delay in the Selection process
• To increase the minimum age for appointment as Member in the case of
State Commissions from 35 to 45 years, and in case of National Commission
from 35 to 55 years

5.6 LAWS ON ENVIRONMENTAL PROTECTION

In the Constitution of India it is clearly stated that it is the duty of the state to ‘protect
and improve the environment and to safeguard the forests and wildlife of the country’.
It imposes a duty on every citizen ‘to protect and improve the natural environment
including forests, lakes, rivers, and wildlife’. Reference to the environment has also
been made in the Directive Principles of State Policy as well as the Fundamental
Rights. The Department of Environment was established in India in 1980 to ensure a
healthy environment for the country. This later became the Ministry of Environment
and Forests in 1985.
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Legal and Ecological The constitutional provisions are backed by a number of laws – acts, rules, and
Environment
notifications. The EPA (Environment Protection Act), 1986 came into force soon after
the Bhopal Gas Tragedy and is considered an umbrella legislation as it fills many gaps
in the existing laws. Thereafter a large number of laws came into existence as the
NOTES problems began arising, for example, Handling and Management of Hazardous Waste
Rules in 1989.
Over the years, together with a spreading of environmental consciousness, there
has been a change in the traditionally-held perception that there is a trade-off between
environmental quality and economic growth as people have come to believe that the
two are necessarily complementary. The current focus on environment is not new-
environmental considerations have been an integral part of the Indian culture. The
need for conservation and sustainable use of natural resources has been expressed in
Indian scriptures, more than three thousand years old and is reflected in the constitutional,
legislative and policy framework as also in the international commitments of the country.
Even before India’s independence in 1947, several environmental legislation
existed but the real impetus for bringing about a well-developed framework came only
after the UN Conference on the Human Environment (Stockholm, 1972). Under the
influence of this declaration, the National Council for Environmental Policy and Planning
within the Department of Science and Technology was set up in 1972. This Council
MoEF: Ministry of later evolved into a full-fledged Ministry of Environment and Forests (MoEF) in 1985
Environment and Forests which today is the apex administrative body in the country for regulating and ensuring
environmental protection. After the Stockholm Conference, in 1976, constitutional
sanction was given to environmental concerns through the 42 Amendment, which
incorporated them into the Directive Principles of State Policy and Fundamental Rights
and Duties.
Since the 1970s an extensive network of environmental legislation has grown in
the country. The MoEF and the pollution control boards (CPCB i.e. Central Pollution
Control Board and SPCBs i.e. State Pollution Control Boards) together form the
regulatory and administrative core of the sector.
A policy framework has also been developed to complement the legislative
provisions. The Policy Statement for Abatement of Pollution and the National
Conservation Strategy and Policy Statement on Environment and Development were
brought out by the MoEF in 1992, to develop and promote initiatives for the protection
and improvement of the environment. The EAP (Environmental Action Programme)
was formulated in 1993 with the objective of improving environmental services and
integrating environmental considerations in to development programmes.
Other measures have also been taken by the government to protect and preserve
the environment.
5.6.1 Water Protection Laws
Water quality standards especially those for drinking water are set by the Indian Council
of Medical Research. These bear close resemblance to WHO standards. The discharge
of industrial effluents is regulated by the Indian Standard Codes and recently, water
quality standards for coastal water marine outfalls have also been specified. In addition
to the general standards, certain specific standards have been developed for effluent
discharges from industries such as, iron and steel, aluminium, pulp and paper, oil
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refineries, petrochemicals and thermal power plants. Legislation to control water Legal and Ecological
Environment
pollution are listed below.
Water (Prevention and Control of Pollution) Act, 1974
This Act represented India’s first attempts to comprehensively deal with environmental NOTES
issues. The Act prohibits the discharge of pollutants into water bodies beyond a given
standard, and lays down penalties for non-compliance. The Act was amended in 1988
to conform closely to the provisions of the EPA, 1986. It set up the CPCB (Central
Pollution Control Board) which lays down standards for the prevention and control of
water pollution. At the State level, the SPCBs (State Pollution Control Board) function
under the direction of the CPCB and the state government.
Water (Prevention and Control of Pollution) Cess Act, 1977
This Act provides for a levy and collection of a cess on water consumed by industries
and local authorities. It aims at augmenting the resources of the central and state boards
for prevention and control of water pollution. Following this Act, The Water (Prevention
and Control of Pollution) Cess Rules were formulated in 1978 for defining standards
and indications for the kind of and location of meters that every consumer of water is
required to install.
5.6.2 Air Protection Laws

Air (Prevention and Control of Pollution) Act, 1981

To counter the problems associated with air pollution, ambient air quality standards
were established, under the 1981 Act. The Act provides means for the control and
abatement of air pollution. The Act seeks to combat air pollution by prohibiting the use
of polluting fuels and substances, as well as by regulating appliances that give rise to air
pollution. Under the Act establishing or operating of any industrial plant in the pollution
control area requires consent from state boards. The boards are also expected to test
the air in air pollution control areas, inspect pollution control equipment, and
manufacturing processes.
National Ambient Air Quality Standards (NAAQS) for major pollutants were
notified by the CPCB in April 1994. These are deemed to be levels of air quality
necessary with an adequate margin of safety, to protect public health, vegetation and
property (CPCB 1995 cited in Gupta, 1999). The NAAQS prescribe specific
standards for industrial, residential, rural and other sensitive areas. Industry-specific
emission standards have also been developed for iron and steel plants, cement plants,
fertilizer plants, oil refineries and the aluminium industry. The ambient quality standards
prescribed in India are similar to those prevailing in many developed and developing
countries.
To empower the central and state pollution boards to meet grave emergencies,
the Air (Prevention and Control of Pollution) Amendment Act, 1987, was enacted.
The boards were authorized to take immediate measures to tackle such emergencies
and recover the expenses incurred from the offenders. The power to cancel consent
for non-fulfilment of the conditions prescribed has also been emphasized in the Air Act
Amendment.
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Legal and Ecological The Air (Prevention and Control of Pollution) Rules formulated in 1982, defined
Environment
the procedures for conducting meetings of the boards, the powers of the presiding
officers, decision-making, the quorum; manner in which the records of the meeting
were to be set etc. They also prescribed the manner and the purpose of seeking
NOTES assistance from specialists and the fee to be paid to them.
Complementing the above Acts is the Atomic Energy Act of 1982, which was
introduced to deal with radioactive waste. In 1988, the Motor Vehicles Act, was
enacted to regulate vehicular traffic, besides ensuring proper packaging, labelling and
transportation of the hazardous wastes. Various aspects of vehicular pollution have
also been notified under the EPA of 1986. Mass emission standards were notified in
1990, which were made more stringent in 1996. In 2000 these standards were revised
yet again and for the first time separate obligations for vehicle owners, manufacturers
and enforcing agencies were stipulated. In addition, fairly stringent Euro I and II emission
norms were notified by the Supreme Court on April 29, 1999 for the city of Delhi. The
notification made it mandatory for car manufacturers to conform to the Euro I and
Euro II norms by May 1999 and April 2000, respectively, for new non-commercial
vehicle sold in Delhi.
5.6.3 Forests and Wildlife Protection Laws

The Wildlife (Protection) Act, 1972, Amendment 1991

The WPA (Wildlife Protection Act), 1972, provides for protection to listed species of
flora and fauna and establishes a network of ecologically-important protected areas.
The WPA empowers the central and state governments to declare any area a wildlife
sanctuary, national park or closed area. There is a blanket ban on carrying out any
industrial activity inside these protected areas. It provides for authorities to administer
and implement the Act; regulate the hunting of wild animals; protect specified plants,
sanctuaries, national parks and closed areas; restrict trade or commerce in wild animals
or animal articles; and miscellaneous matters. The Act prohibits hunting of animals
except with permission of authorized officer when an animal has become dangerous to
human life or property or so disabled or diseased as to be beyond recovery (WWF-
India, 1999). The near-total prohibition on hunting was made more effective by the
Amendment Act of 1991.
The Forest (Conservation) Act, 1980
This Act was adopted to protect and conserve forests. The Act restricts the powers of
the state in respect of de-reservation of forests and use of forestland for non-forest
purposes (the term non-forest purpose includes clearing any forestland for cultivation
of cash crops, plantation crops, horticulture or any purpose other than re-afforestation).
5.6.4 General Environmental and Ecological Laws

1. Environment (Protection) Act, 1986 (EPA)

This Act is an umbrella legislation designed to provide a framework for the co-ordination
of central and state authorities established under the Water (Prevention and Control)
Act, 1974 and Air (Prevention and Control) Act, 1981. Under this Act, the central
government is empowered to take measures necessary to protect and improve the
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quality of the environment by setting standards for emissions and discharges; regulating Legal and Ecological
Environment
the location of industries; management of hazardous wastes, and protection of public
health and welfare.
From time to time the central government issues notifications under the EPA for NOTES
the protection of ecologically-sensitive areas or issues guidelines for matters under the
EPA.
Some notifications issued under this Act are:
• Doon Valley Notification (1989), which prohibits the setting up of an industry
in which the daily consumption of coal/fuel is more than 24 MT (million
tonnes) per day in the Doon Valley.
• Coastal Regulation Zone Notification (1991), which regulates activities along
coastal stretches. As per this notification, dumping ash or any other waste in
the CRZ is prohibited. The thermal power plants (only foreshore facilities
for transport of raw materials, facilities for intake of cooling water and outfall
for discharge of treated waste water/cooling water) require clearance from
the MoEF.
• Dhanu Taluka Notification (1991), under which the district of Dhanu Taluka
has been declared an ecologically fragile region and setting up power plants
in its vicinity is prohibited.
• Revdanda Creek Notification (1989), which prohibits setting up industries
in the belt around the Revdanda Creek as per the rules laid down in the
notification.
• The Environmental Impact Assessment of Development Projects Notification,
(1994 and as amended in 1997). As per this notification:
• All projects listed under Schedule I require environmental clearance from
the MoEF.
• Projects under the delicenced category of the New Industrial Policy also
require clearance from the MoEF.
• All developmental projects whether or not under the Schedule I, if located
in fragile regions must obtain MoEF clearance.
• Industrial projects with investments above ` 500 million must obtain MoEF
clearance and are further required to obtain a LOI (Letter Of Intent) from
the Ministry of Industry, and an NOC (No Objection Certificate) from the
SPCB and the State Forest Department if the location involves forestland.
Once the NOC is obtained, the LOI is converted into an industrial licence
by the state authority.
• The notification also stipulated procedural requirements for the establishment
and operation of new power plants. As per this notification, two-stage
clearance for site-specific projects such as pithead thermal power plants
and valley projects is required. Site clearance is given in the first stage and
final environmental clearance in the second. A public hearing has been made
mandatory for projects covered by this notification. This is an important
step in providing transparency and a greater role to local communities.

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Legal and Ecological • Ash Content Notification (1997), required the use of beneficiated coal with
Environment
ash content not exceeding 34% with effect from June 2001, (the date later
was extended to June 2002). This applies to all thermal plants located beyond
one thousand kilometres from the pithead and any thermal plant located in
NOTES an urban area or, sensitive area irrespective of the distance from the pithead
except any pithead power plant.
• Taj Trapezium Notification (1998), provided that no power plant could be
set up within the geographical limit of the Taj Trapezium assigned by the Taj
Trapezium Zone Pollution (Prevention and Control) Authority.
• Disposal of Fly Ash Notification (1999) the main objective of which is to
conserve the topsoil, protect the environment and prevent the dumping and
disposal of fly ash discharged from lignite-based power plants. The salient
feature of this notification is that no person within a radius of 50 km from a
coal-or lignite-based power plant shall manufacture clay bricks or tiles without
mixing at least 25% of ash with soil on a weight-to-weight basis. For the
thermal power plants the utilisation of the flyash would be as follows:
• Every coal-or lignite-based power plant shall make available ash for at least
ten years from the date of publication of the above notification without any
payment or any other consideration, for the purpose of manufacturing ash-
based products such as cement, concrete blocks, bricks, panels or any
other material or for construction of roads, embankments, dams, dykes or
for any other construction activity.
• Every coal or lignite based thermal power plant commissioned subject to
environmental clearance conditions stipulating the submission of an action
plan for full utilisation of fly ash shall, within a period of nine years from the
publication of this notification, phase out the dumping and disposal of fly ash
on land in accordance with the plan.
Rules for the Manufacture, Use, Import, Export and Storage of Hazardous
Micro-organisms/Genetically Engineered Organisms or Cell were introduced in 1989
with the view to protect the environment, nature and health in connection with gene
technology and micro-organisms, under the Environmental Protection Act, 1986.
2. The Environment (Protection) Rules, 1986
These rules lay down the procedures for setting standards of emission or discharge of
environmental pollutants. The Rules prescribe the parameters for the Central
Government, under which it can issue orders of prohibition and restrictions on the
location and operation of industries in different areas. The Rules lay down the procedure
for taking samples, serving notice, submitting samples for analysis and laboratory
reports. The functions of the laboratories are also described under the Rules along
with the qualifications of the concerned analysts.
3. The National Environment Appellate Authority Act, 1997
This Act provided for the establishment of a National Environment Appellate Authority
to hear appeals with respect to restriction of areas in which any industry operation or
process or class of industries, operations or processes could not carry out or would
be allowed to carry out subject to certain safeguards under the Environment (Protection)
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Act, 1986.
 In addition to these, various Acts specific to the coal sector have been enacted. Legal and Ecological
Environment
The first attempts in this direction can be traced back to the Mines Act, 1952, which
promoted health and safety standards in coal mines. Later the Coal Mines (Conservation
and Development) Act (1974) came up for conservation of coal during mining
operations. For conservation and development of oil and natural gas resources a similar NOTES
legislation was enacted in 1959.
Hazardous wastes
There are several legislation that directly or indirectly deal with hazardous waste. The
relevant legislation are the Factories Act, 1948, the Public Liability Insurance Act, 1991,
the National Environment Tribunal Act, 1995 and some notifications under the
Environmental Protection Act of 1986. A brief description of each of these is given
below.
Under the EPA 1986, the MoEF has issued several notifications to tackle the
problem of hazardous waste management. These include:
• Hazardous Wastes (Management and Handling) Rules, 1989, which brought
out a guide for manufacture, storage and import of hazardous chemicals and
for management of hazardous wastes.
• Biomedical Waste (Management and Handling) Rules, 1998, were
formulated along parallel lines, for proper disposal, segregation, transport
etc. of infectious wastes.
• Municipal Wastes (Management and Handling) Rules, 2000, whose aim
was to enable municipalities to dispose municipal solid waste in a scientific
manner.
• Hazardous Wastes (Management and Handling) Amendment Rules, 2000,
a recent notification issued with the view to providing guidelines for the
import and export of hazardous waste in the country.
4. Factories Act, 1948 and its Amendment in 1987
The Factories Act, 1948 was a post-independence statute that explicitly showed concern
for the environment. The primary aim of the 1948 Act has been to ensure the welfare
of workers not only in their working conditions in the factories but also their employment
benefits. While ensuring the safety and health of the workers, the Act contributes to
environmental protection. The Act contains a comprehensive list of 29 categories of
industries involving hazardous processes, which are defined as a process or activity
where unless special care is taken, raw materials used therein or the intermediate or
the finished products, by-products, wastes or effluents would:
• Cause material impairment to health of the persons engaged
• Result in the pollution of the general environment
5. Public Liability Insurance Act (PLIA), 1991
The Act covers accidents involving hazardous substances and insurance coverage for
these. Where death or injury results from an accident, this Act makes the owner liable
to provide relief as is specified in the Schedule of the Act. The PLIA was amended in
1992, and the Central Government was authorized to establish the Environmental
Relief Fund, for making relief payments.
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Legal and Ecological 6. National Environment Tribunal Act, 1995
Environment
The Act provided strict liability for damages arising out of any accident occurring while
handling any hazardous substance and for the establishment of a National Environment
NOTES Tribunal for effective and expeditious disposal of cases arising from such accident,
with a view to give relief and compensation for damages to persons, property and the
environment and for the matters connected therewith or incidental thereto.
5.6.5 International Agreements on Environmental Issues
India is signatory to a number of multilateral environment agreements (MEA) and
conventions. An overview of some of the major MEAs and Indiaýÿs obligations under
these is presented below. These are discussed at length in the respective chapters.
Convention on International Trade in Endangered Species of wild fauna and
flora (CITES), 1973.
The aim of CITES is to control or prevent international commercial trade in
endangered species or products derived from them. CITES does not seek to directly
protect endangered species or curtail development practices that destroy their habitats.
Rather, it seeks to reduce the economic incentive to poach endangered species and
destroy their habitat by closing off the international market. India became a party to
the CITES in 1976. International trade in all wild flora and fauna in general and species
covered under CITES is regulated jointly through the provisions of The Wildlife
(Protection) Act 1972, the Import/Export policy of Government of India and the
Customs Act 1962 (Bajaj, 1996).
Montreal Protocol on Substances that deplete the Ozone Layer (to the Vienna
Convention for the Protection of the Ozone Layer), 1987
The Montreal Protocol to the Vienna Convention on Substances that deplete
the Ozone Layer, came into force in 1989. The protocol set targets for reducing the
consumption and production of a range of ozone depleting substances (ODS). In a
major innovation the Protocol recognized that all nations should not be treated equally.
The agreement acknowledges that certain countries have contributed to ozone depletion
more than others. It also recognizes that a nation’s obligation to reduce current emissions
should reflect its technological and financial ability to do so. Because of this, the
agreement sets more stringent standards and accelerated phase-out timetables to
countries that have contributed most to ozone depletion (Divan and Rosencranz, 2001).
India acceded to the Montreal Protocol along with its London Amendment in
September 1992. The MoEF has established an Ozone Cell and a steering committee
on the Montreal Protocol to facilitate implementation of the India Country Program,
for phasing out ODS production by 2010.
To meet India’s commitments under the Montreal Protocol, the Government of
India has also taken certain policy decisions.
• Goods required to implement ODS phase-out projects funded by the
Multilateral Fund are fully exempt from duties. This benefit has been also
extended to new investments with non-ODS technologies.
• Commercial banks are prohibited from financing or refinancing investments
with ODS technologies.
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 The Gazette of India on 19 July 2000 notified rules for regulation of ODS Legal and Ecological
Environment
phase-out called the Ozone Depleting Substances (Regulation and Control) Rules,
2000. They were notified under the Environment (Protection) Act, 1986. These rules
were drafted by the MoEF following consultations with industries and related
government departments. NOTES

1. Basel Convention on Transboundary Movement of

Hazardous Wastes, 1989
Basel Convention, which entered into force in 1992, has three key objectives: Basel Convention: An
• To reduce transboundary movements of hazardous wastes; international treaty designed
to reduce the movements of
• To minimize the creation of such wastes; and hazardous waste between
nations.
• To prohibit their shipment to countries lacking the capacity to dispose hazardous
wastes in an environmentally sound manner.
India ratified the Basel Convention in 1992, shortly after it came into force. The
Indian Hazardous Wastes Management Rules Act 1989, encompasses some of the
Basel provisions related to the notification of import and export of hazardous waste,
illegal traffic, and liability.
2. UN Framework Convention on Climate Change (UNFCCC), 1992
The primary goals of the UNFCCC were to stabilize greenhouse gas emissions at
levels that would prevent dangerous anthropogenic interference with the global climate.
The convention embraced the principle of common but differentiated responsibilities
which has guided the adoption of a regulatory structure.
India signed the agreement in June 1992, which was ratified in November 1993.
As per the convention the reduction/limitation requirements apply only to developed
countries. The only reporting obligation for developing countries relates to the
construction of a GHG inventory. India has initiated the preparation of its First National
Communication (base year 1994) that includes an inventory of GHG sources and
sinks, potential vulnerability to climate change, adaptation measures and other steps
being taken in the country to address climate change. The further details on UNFCC
and the Kyoto Protocol are provided in Atmosphere and climate chapter.
3. Convention on Biological Diversity, 1992
The Convention on Biological Diversity (CBD) is a legally binding, framework treaty
that has been ratified until now by 180 countries. The CBD has three main thrust
areas: conservation of biodiversity, sustainable use of biological resources and equitable
sharing of benefits arising from their sustainable use.
The Convention on Biological Diversity came into force in 1993. Many
biodiversity issues are addressed in the convention, including habitat preservation,
intellectual property rights, biosafety, and indigenous people’s rights.
India’s initiatives under the Convention are detailed in the chapter on Biodiversity.
These include the promulgation of the Wildlife (Protection) Act of 1972, amended in
1991; and participation in several international conventions such as CITES.

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Legal and Ecological 4. UN Convention on Desertification, 1994
Environment
Delegates to the 1992 UN Conference on Environment and Development (UNCED)
recommended establishment of an intergovernmental negotiating committee for the
NOTES elaboration of an international convention to combat desertification in countries
experiencing serious drought and/or desertification. The UN General Assembly
established such a committee in 1992 that later helped formulation of Convention on
Desertification in 1994.
The convention is distinctive as it endorses and employs a bottom-up approach
to international environmental cooperation. Under the terms of the convention, activities
related to the control and alleviation of desertification and its effects are to be closely
linked to the needs and participation of local land-users and non-governmental
organizations. Seven countries in the South Asian region are signatories to the
Convention, which aims at tackling desertification through national, regional and sub-
regional action programmes. The Regional Action Programme has six Thematic
Programme Networks (TPN’s) for the Asian region, each headed by a country task
manager. India hosts the network on agroforestry and soil conservation.
International Tropical Timber Agreement and The International Tropical Timber
Organisation (ITTO), 1983, 1994
The ITTO established by the International Tropical Timber Agreement (ITTA),
1983, came into force in 1985 and became operational in 1987. The ITTO facilitates
discussion, consultation and international cooperation on issues relating to the
international trade and utilization of tropical timber and the sustainable management of
its resource base. The successor agreement to the ITTA (1983) was negotiated in
1994, and came into force on 1 January 1997. The organization has 57 member
countries. India ratified the ITTA in 1996.
Durban Climate Change Conference, 2011
Durban Climate Change Conference in November-December 2011(COP 17) marked
an important step forward in the climate change negotiations. The Durban outcomes
made significant contribution towards fulfilment of the Bali Road Map (2007) as they
established the second commitment period of the Kyoto Protocol and operationalized
some of the key Cancún agreements (2010) related to Green Climate Fund (GCF),
Technology Mechanism (TM), and Adaptation Framework. The Durban outcomes
also opened a window for discussions on the post 2020 arrangements for the global
climate change regime for which a Durban Platform has been launched.
Though India and other developing countries came under tremendous pressure
at Durban, India took lead in ensuring that the new arrangements are firmly anchored
in the Convention and are based on the principles of ‘common but differentiated
responsibilities’ and ‘equity’. The faith that the Parties had reaffirmed in a consensus-
based multilateral regime for climate change deliberations in Cancún was reinforced in
Durban. Unlike the Cancún agreements, which were adopted despite explicit rejection
by Bolivia, the Durban outcomes were adopted unanimously. Durban has reestablished
the primacy of the UNFCCC negotiations as the multilateral forum for reaching decisions
on climate change-related issues.

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Key Durban outcomes Legal and Ecological
Environment
• The most significant achievement of the Durban Conference was to establish a
second commitment period of the Kyoto Protocol, which will begin on January
1, 2013 and end either on December 2017 or December 2020. The quantified NOTES
emission limitation and reduction objectives (QELROs) for developed country
Kyoto Protocol Parties will be determined during 2012.
• Durban also made significant progress in operationalization of Cancún agreements
related to GCF and the Adaptation Framework. It was decided to confer legal
personality and legal capacity to GCF and that the Fund will function under the
guidance of COP. It was also decided to expeditiously operationalize the Fund
for which Global Environment Facility (GEF) and the UNFCCC Secretariat
have been asked to set up an interim Secretariat to support the GCF Board
• Significant progress was made towards operationalization of the Technology
Mechanism and its components viz. Climate Technology Centre and Network
(CTCN) and Technology Executive Committee (TEC), established at Cancun.
• The transparency arrangements agreed in Cancún were elaborated in Durban
and the reporting guidelines for developed countries viz. Biennial Reports (BRs)
and the developing countries viz. Biennial Update Reports (BURs) were adopted.
It was ensured that the reporting and Measurable, Reportable and Verifiable
(MRV) obligations for the developing countries are not more onerous than the
developed country parties.
• A significant outcome in Durban was to launch a Durban Platform to discuss the
post 2020 arrangements for global climate change regime. It was decided that
the post 2020 arrangements would be finalized by 2015 and implemented from
2020. India played a crucial role in ensuring that the new arrangements are not
limited to either a Protocol or a legal instrument but also include an option of ‘an
agreed outcome with a legal force under the Convention’. Thus it was ensured
that the outcome of negotiations to finalize the post 2020 arrangements is firmly
rooted in the Convention and all its established principles including CBDR and
Equity apply. A web-based registry was also agreed upon to be set up under
the management of the UNFCCC Secretariat to serve as a platform for the
developing countries to upload their Nationally Appropriate Mitigation Actions
(NAMAs) for seeking international support or recognition of achievement of
voluntary mitigation goals.
• Progress was made in Durban on issues relating to Reducing Emissions from
Deforestation and Degradation and Sustainable Management of Forests
(REDD+) with an agreement on guidance on systems for providing information
about how safeguards are being addressed and respected and there was also
agreement on modalities for forest reference emission levels and forest reference
levels.
5.6.6 An Assessment of the Legal and Regulatory Framework for
Environmental Protection in India
The extent of the environmental legislation network is evident from the above discussion
but the enforcement of the laws has been a matter of concern. One commonly cited
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Legal and Ecological reason is the prevailing command and control nature of the environmental regime.
Environment
Coupled with this is the prevalence of the all-or nothing approach of the law; they do
not consider the extent of violation. Fines are levied on a flat basis and in addition,
there are no incentives to lower the discharges below prescribed levels.
NOTES
Some initiatives have addressed these issues in the recent past. The Government
of India came out with a Policy Statement for Abatement of Pollution in 1992, before
the Rio conference, which declared that market-based approaches would be considered
in controlling pollution. It stated that economic instruments will be investigated to
encourage the shift from curative to preventive measures, internalize the costs of pollution
and conserve resources, particularly water. In 1995, the Ministry of Environment and
Forest (MoEF) constituted a task force to evaluate market-based instruments, which
strongly advocated their use for the abatement of industrial pollution. Various economic
incentives have been used to supplement the command-and-control policies.
Depreciation allowances, exemptions from excise or customs duty payment, and
arrangement of soft loans for the adoption of clean technologies are instances of such
incentives. Another aspect that is evident is the shift in the focus from end-of-pipe
treatment of pollution to treatment at source.

Measuring India’s environmental performance

In a recent ranking of environmental performance (EPI 2012), India was placed

122 out of 132 countries. Its performance was better on protecting its forests
(rank 21) and fisheries (39), and on climate change (55). Poorer ratings were
given to air quality (132), agriculture (126), and water resources (122). Like all
such rating exercises, this one too has significant data and methodological
problems. In agriculture, India’s performance on two sub-components—banned
pesticides and protection— has been wrongly evaluated. India has banned or
restricted a dozen organic pesticides and its protection to agriculture is negative.
The environmental health indicator, with the largest weight, uses child mortality
rates between ages 1 and 5; this exaggerates differences. A broader life
expectancy at birth index would be less biased. Three other adjustments—more
appropriate country normalizations for biodiversity, energy, and water—should
be made. The cumulative impact might improve India’s overall ranking closer
to the middle of all countries. The other methodological issue is how to separate
environmental performance from incomes. While ‘distance-to-targets’
methodology helps, this does not fully correct the problem: richer countries still
tend to perform better (because they can afford to) and economic development
is still a critical driver of sustainability.
The EPI exercise is nevertheless useful in flagging some areas of concern. We
should do better on public health and environmentally preventable child mortality,
as has Bangladesh (Sen and Dreze 2011). Another is an alarming increase in
airborne respirable small particulate matter (PM) of less than 2.5 microns. Delhi
has seen recent PM 2.5 levels that surpass Beijing’s. Increased private diesel
transport, power plant emissions, burning of agricultural residues, and sub-
Himalayan winter inversion are the culprits. A MOEF study has identified a
menu of options, none of them easy: tougher regulations (e.g. ban on burning
residues, power plants), prices (diesel and private transport), and investments
in public transport, to address these problems.
Source: Economic Survey 2011-12

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 Legal and Ecological
5.7 NEED FOR CLEAN ENERGY AND REDUCTION Environment
OF CARBON FOOTPRINT

Clean energy is energy which comes from natural resources such as sunlight, wind, NOTES
rain, tides, and geothermal heat, which are renewable (naturally replenished). About
16% of global final energy consumption comes from renewables, with 10% coming
from traditional biomass, which is mainly used for heating, and 3.4% from
hydroelectricity. New renewables (small hydro, modern biomass, wind, solar, Clean energy: Energy which
geothermal, and biofuels) accounted for another 3% and are growing very rapidly. comes from natural
The share of renewables in electricity generation is around 19%, with 16% of global resources such as sunlight,
wind, rain, tides, and
electricity coming from hydroelectricity and 3% from new renewables. geothermal heat, which are
Wind power is growing at the rate of 30% annually, with a worldwide installed renewable
capacity of 238,000 megawatts (MW) at the end of 2011, and is widely used in
Europe, Asia, and the United States. At the end of 2011 the photovoltaic (PV) capacity
worldwide was 67,000 MW, and PV power stations are popular in Germany and
Italy. Solar thermal power stations operate in the USA and Spain, and the largest of
these is the 354 megawatt (MW) SEGS power plant in the Mojave Desert. The
world’s largest geothermal power installation is the Geysers in California, with a rated
capacity of 750 MW. Brazil has one of the largest renewable energy programs in the
world, involving production of ethanol fuel from sugarcane, and ethanol now provides
18% of the country’s automotive fuel. Ethanol fuel is also widely available in the USA.
While many renewable energy projects are large-scale, renewable technologies
are also suited to rural and remote areas, where energy is often crucial in human
development.As of 2011, small solar PV systems provide electricity to a few million
households, and micro-hydro configured into mini-grids serves many more. Over 44
million households use biogas made in household-scale digesters for lighting and/or
cooking, and more than 166 million households rely on a new generation of more-
efficient biomass cookstoves. United Nations’ Secretary-General Ban Ki-moon has
said that renewable energy has the ability to lift the poorest nations to new levels of
prosperity.
Climate change concerns, coupled with high oil prices, peak oil, and increasing
government support, are driving increasing renewable energy legislation, incentives
and commercialization. New government spending, regulation and policies helped the
industry weather the global financial crisis better than many other sectors. According
to a 2011 projection by the International Energy Agency, solar power generators may
produce most of the world’s electricity within 50 years, dramatically reducing the
emissions of greenhouse gases that harm the environment.
Mainstream forms of renewable energy
Energy which comes from natural resources such as wind, rain, and sunlight is known
as renewable energy. Major forms of renewable energy are discussed.
Wind power
Airflows can be used to run wind turbines. Modern wind turbines range from around
600 kW to 5 MW of rated power, although turbines with rated output of 1.5–3 MW
have become the most common for commercial use; the power output of a turbine is
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Legal and Ecological a function of the cube of the wind speed, so as wind speed increases, power output
Environment
increases dramatically. Areas where winds are stronger and more constant, such as
offshore and high altitude sites, are preferred locations for wind farms. Typical capacity
factors are 20-40%, with values at the upper end of the range in particularly favourable
NOTES sites.
Globally, the long-term technical potential of wind energy is believed to be five
times total current global energy production, or 40 times current electricity demand.
This could require wind turbines to be installed over large areas, particularly in areas
of higher wind resources. Offshore resources experience average wind speeds of
~90% greater than that of land, so offshore resources could contribute substantially
more energy.
Hydropower
Grand Coulee Dam is a hydroelectric gravity dam on the Columbia River in the U.S.
state of Washington. The dam supplies four power stations with an installed capacity
of 6,809 MW and is the largest electric power-producing facility in the United States.
Energy in water can be harnessed and used. Since water is about 800 times
denser than air, even a slow flowing stream of water, or moderate sea swell, can yield
considerable amounts of energy. There are many forms of water energy:
Hydroelectric energy: • Hydroelectric energy is a term usually reserved for large-scale hydroelectric
Hydroelectric energy is a
term usually reserved for
dams. Examples are the Grand Coulee Dam in Washington State and the
large-scale hydroelectric Akosombo Dam in Ghana.
dams • Micro hydro systems are hydroelectric power installations that typically
produce up to 100 kW of power. They are often used in water rich areas as
a remote-area power supply (RAPS).
• Run-of-the-river hydroelectricity systems derive kinetic energy from rivers
and oceans without using a dam.
Solar energy
Solar energy is the energy derived from the sun through the form of solar radiation.
Solar powered electrical generation relies on photovoltaics and heat engines. A partial
list of other solar applications includes space heating and cooling through solar
architecture, daylighting, solar hot water, solar cooking, and high temperature process
heat for industrial purposes.
Solar technologies are broadly characterized as either passive solar or active
solar depending on the way they capture, convert and distribute solar energy. Active
solar techniques include the use of photovoltaic panels and solar thermal collectors to
harness the energy. Passive solar techniques include orienting a building to the Sun,
selecting materials with favorable thermal mass or light dispersing properties, and
designing spaces that naturally circulate air.
Biomass

Biomass: Renewable energy Biomass (plant material) is a renewable energy source because the energy it contains
source because the energy it comes from the sun. Through the process of photosynthesis, plants capture the sun’s
contains comes from the sun energy. When the plants are burnt, they release the sun’s energy they contain. In this
way, biomass functions as a sort of natural battery for storing solar energy. As long as
224 Self-Instructional Material
biomass is produced sustainably, with only as much used as is grown, the battery will Legal and Ecological
Environment
last indefinitely.
In general there are two main approaches to using plants for energy production:
growing plants specifically for energy use (known as first and third-generation biomass), NOTES
and using the residues (known as second-generation biomass) from plants that are
used for other things. See biobased economy. The best approaches vary from region
to region according to climate, soils and geography.
Biofuel
Brazil has bioethanol made from sugarcane available throughout the country. Shown a
typical Petrobras gas station at São Paulo with dual fuel service, marked A for alcohol
(ethanol) and G for gasoline.
Biofuels include a wide range of fuels which are derived from biomass. The
term covers solid biomass, liquid fuels and various biogases. Liquid biofuels include
bioalcohols, such as bioethanol, and oils, such as biodiesel. Gaseous biofuels include
biogas, landfill gas and synthetic gas.
Bioethanol is an alcohol made by fermenting the sugar components of plant
materials and it is made mostly from sugar and starch crops. With advanced technology
being developed, cellulosic biomass, such as trees and grasses, are also used as
feedstocks for ethanol production. Ethanol can be used as a fuel for vehicles in its pure
form, but it is usually used as a gasoline additive to increase octane and improve
vehicle emissions. Bioethanol is widely used in the USA and in Brazil.
Biodiesel is made from vegetable oils, animal fats or recycled greases. Biodiesel
can be used as a fuel for vehicles in its pure form, but it is usually used as a diesel
additive to reduce levels of particulates, carbon monoxide, and hydrocarbons from
diesel-powered vehicles. Biodiesel is produced from oils or fats using transesterification
and is the most common biofuel in Europe. Biofuels provided 2.7% of the world’s
transport fuel in 2010.
Geothermal energy
Geothermal energy is thermal energy generated and stored in the Earth. Thermal energy
is the energy that determines the temperature of matter. Earth’s geothermal energy Geothermal energy:
Thermal energy generated
originates from the original formation of the planet (20%) and from radioactive decay and stored in the Earth
of minerals (80%). The geothermal gradient, which is the difference in temperature
between the core of the planet and its surface, drives a continuous conduction of
thermal energy in the form of heat from the core to the surface. The adjective geothermal
originates from the Greek roots geo, meaning earth, and thermos, meaning heat.
The heat that is used for geothermal energy can be stored deep within the Earth,
all the way down to Earth’s core – 4,000 miles down. At the core, temperatures may
reach over 9,000 degrees Fahrenheit. Heat conducts from the core to surrounding rock.
Extremely high temperature and pressure cause some rock to melt, which is commonly
known as magma. Magma convects upward since it is lighter than the solid rock. This
magma then heats rock and water in the crust, sometimes up to 700 degrees Fahrenheit
From hot springs, geothermal energy has been used for bathing since Paleolithic
times and for space heating since ancient Roman times, but it is now better known for
electricity generation.
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Legal and Ecological Green House Gas (CHG) emissions: Latest data
Environment
GHG emissions have risen sharply since 1945. As per a working paper published by
the World Resources Institute (World Greenhouse Gas Emissions in 2005, WRI),
NOTES total GHGs were estimated at 44,153 million metric tons CO2 equivalents in 2005.
This is the most recent year for which comprehensive emissions data are available for
every major gas and sector across countries. Total global GHG emissions grew by
12.7 per cent between 2000 and 2005, an annual average of 2.4 per cent. CO2 was
the predominant gas (with long life exceeding 100-150 years), accounting for 77 per
cent of world GHG emissions in 2005 followed by methane (15 per cent) and nitrous
oxide (7 per cent). In 2005, North America accounted for 18 per cent of world GHG
emissions, China 16 per cent, and the EU 12 per cent. India’s share stood at 4 per
cent. Equally important are the figures for the cumulative emissions which are responsible
for the current rise in global temperature.
According to the Economic Survey, 2011-12, the World Bank database has
CO2 emissions data estimate up to the year 2008. As CO2 is the most predominant
GHG, an analysis of CO2 emissions across countries in absolute and per capita terms
in 2008 compared to 1992 is worthwhile. The absolute emission level of United States
in 1992 was the highest at 4876 million metric tons of CO2. China with 2695 million
metric tons of CO2 stood at the second place and was followed by Russia, Japan,
Germany and India. Whereas in 2008 China had the highest absolute emission at
7031 million metric tons of CO2 and United States stood second at 5461 million
metric tons of CO2. India’s absolute emission levels were at 1742 million metric tons
of CO2 which was closely followed by Russia, Japan, Germany and Canada.
Per capita emissions, which are more important, reflect a different picture. Both
in 1992 and 2008, Qatar had the highest per capita CO2 emissions at 54.89 and
49.05 CO2 tons. In 2008, Qatar was followed by countries like Trinidad and Tobago
(37.39 CO2 tons), Kuwait (30.11 CO2 tons), Brunei Darussalam (27.53 CO2 tons),
and United Arab Emirates (24.98 CO2 tons). Whereas, countries like China (5.30
CO2 tons) and India (1.52 CO2 tons) ranked among the middle and bottom with 68
and 122 ranks, respectively. Some of the developed countries like Australia (rank 9),
United States (rank 10), Canada (rank 13) and Germany (rank 31) had one of the
highest per capita CO2 emission levels which is also reflected in their absolute emissions.
5.7.1 Reduction of Carbon Footprint
Carbon footprint is a ‘measure of the impact of human activities leave on the
environment in terms of the amount of green house gases (CHGs) produced, measured
in units of carbon dioxide’. It is meant to be useful for individuals and organizations to
conceptualize their personal or organizational impact in contributing to global warming.
Reduce your carbon footprint. Whether in coal, oil or gas, carbon is the essential
ingredient of all fossil fuels. When these fuels are burned to provide energy, carbon
dioxide (CO2), a “greenhouse gas”, is released to the Earth’s atmosphere.
As we’ve become more dependent on carbon-based fuels, we’ve seen a rapid
increase in the atmospheric concentration of CO2; from around 280 parts per million
(ppm) before the industrial revolution, to 370 ppm today. If current trends of fossil fuel
use continue the concentration of CO2 is likely to exceed 700 ppm by the end of this
century. According to experts, this could lead to global warming of between 1.4 and
226 Self-Instructional Material
5.8°C, which may results in more frequent severe weather conditions and damage to Legal and Ecological
Environment
many natural ecosystems. Many believe that it is realistic to promote actions that
ensure stabilization of atmospheric CO2 concentrations at around 500–550 ppm. This
is a considerable challenge, given that global energy demand is expected to double
between 2000 and 2050. NOTES
As carbon footprint is the measure of carbon dioxide during the life of a particular
industry, ‘life cycle’ concept of carbon footprint is familiar. The life cycle concept of
the carbon footprint means that it is all-encompassing and includes all possible causes
that give rise to carbon emissions. In other words, all direct (on-site, internal) and
indirect emissions (off-site, external, embodied, upstream, downstream etc.) need to
be taken into account.
The carbon footprint can be efficiently and effectively reduced by applying the
following steps:
(a) Life Cycle Assessment (LCA) to accurately determine the current carbon
footprint,
(b) Identification of hot-spots in terms of energy consumption and associated
CO2-emissions,
(c) Optimisation of energy efficiency and, thus, reduction of CO2-emissions
and reduction of other GHG emissions contributed from production
processes,
(d) Identification of solutions to neutralise the CO2 emissions that cannot be
eliminated by energy saving measures,
(e) The last important step includes carbon offsetting; investment in projects
that aim at the reducing CO2 emissions, for instance bio-fuels or tree
planting activities.
C. Calculating carbon footprints – Carbon footprints are calculated using a
method called life cycle assessment (LCA). This method is used to analyse the
cumulative environmental impacts of a process or product through all the stages of its
life. It takes into account energy inputs and emission outputs throughout the whole
production chain from exploration and extraction of raw materials to processing,
transport and final use. The LCA method is internationally accredited by ISO 14000
standards.
D. Carbon footprints of power generation using various technologies -
a. Fossil fuelled technologies – The carbon footprint of fossil fuelled power Fossil fuelled technologies:
plants is dominated by emissions during their operation. Indirect emissions The carbon footprint of
during other life cycle phases such as raw material extraction and plant fossil fuelled power plants is
dominated by emissions
construction are relatively minor. during their operation
i) Coal burning power systems have the largest carbon footprint of all
the electricity generation systems analyzed .
ii) Oil accounts for only a very small proportion (about 1%) of the
electricity generated in most of the countries. It is primarily used
as a back-up fuel to cover peak electricity demand periods. The
average carbon footprint of oil-fired electricity generation plants is
~650gCO2eq/kWh.
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Legal and Ecological iii) Current gas powered electricity generation has a carbon footprint
Environment
around half that of coal (~500gCO2eq/kWh), because gas has a
lower carbon content than coal. Like coal fired plants, gas plants
could co-fire biomass to reduce carbon emissions in the future.
NOTES
b. Low carbon technologies – In contrast to fossil fuelled power generation,
the common feature of renewable and nuclear energy systems is that
emissions of greenhouse gases and other atmospheric pollutants are
‘indirect’, that is, they arise from stages of the life cycle other than power
generation.
i) Biomass – Biomass is obtained from organic matter, either directly
from dedicated energy crops like short-rotation coppice willow and
grasses such as straw, or indirectly from industrial and agricultural
by-products such as wood-chips. The use of biomass is generally
classed as ‘carbon neutral’ because the CO2 released by burning is
equivalent to the CO2 absorbed by the plants during their growth.
However, other life cycle energy inputs affect this ‘carbon neutral’
balance, for example emissions arise from fertilizer production,
harvesting, drying and transportation.
Biomass fuels are much lower in energy and density than fossil fuels.
This means that large quantities of biomass must be grown and
harvested to produce enough feedstock for combustion in a power
station. Transporting large amounts of feedstock increases life cycle
CO2 emissions, so biomass electricity generation is most suited to
small-scale local generation facilities,
ii) Photovoltaic (PV) – Photovoltaic (PV), also known as solar cells,
Photovoltaic: Also known as are made of crystalline silicon, a semi-conducting material which
solar cells, are made of converts sunlight into electricity. The silicon required for PV modules
crystalline silicon, a semi- is extracted from quartz sand at high temperatures. This is the most
conducting material which
converts sunlight into energy intensive phase of PV module production, accounting for
electricity 60% of the total energy requirement. Life cycle CO2 emissions for
photovoltaic power systems are currently 58gCO2eq/kWh.
However, future reductions in the carbon footprint of PV cells are
expected to be achieved in thin film technologies which use thinner
layers of silicon, and with the development new semi-conducting
materials which are less energy intensive.
iii) Marine technologies (wave and tidal) – There are two types of
marine energy devices; wave energy converters and tidal (stream
and barrage) devices. Marine based electricity generation is still an
emerging technology and is not yet operating on a commercial scale.
iv) Hydro - Hydropower converts the energy from flowing water, via
turbines and generators, into electricity. There are two main types of
hydroelectric schemes; storage and run-of -river. Storage schemes
require dams. In run-of-river schemes, turbines are placed in the
natural flow of a river. Once in operation, hydro schemes emit very
little CO2, although some methane emissions do arise due to

228 Self-Instructional Material

 decomposition of flooded vegetation. Storage schemes have a higher Legal and Ecological
Environment
footprint, (~10-30gCO2eq/kWh), than run-of-river schemes as they
require large amounts of raw materials (steel and concrete) to
construct the dam.
NOTES
v) Wind - Electricity generated from wind energy has one of the lowest
carbon footprints. As with other low carbon technologies, nearly all
the emissions occur during the manufacturing and construction phases,
arising from the production of steel for the tower, concrete for the
foundations and epoxy/fibreglass for the rotor blades. Emissions
generated during operation of wind turbines arise from routine
maintenance inspection trips. This includes use of lubricants and
transport. Onshore wind turbines are accessed by vehicle, while
offshore turbines are maintained using boats and helicopters. The
manufacturing process for both onshore and offshore wind plant is
very similar, so life cycle assessment shows that there is little difference
between the carbon footprints of onshore (4.64gCO2eq/kWh) versus
offshore (5.25gCO2eq/kWh) wind generation.

5.8 SUMMARY

Some of the important concepts discussed in this unit are:

• Legal environment of business is a regulation that is applicable in all business
organizations
Check Your Progress
• Capital market is one of the most important segments of the Indian financial
system, which refers to all the facilities and the institutional arrangements for 9. The payment for
consideration of services
borrowing and lending funds. must be immediate. (True/
• Primary market is the market used for raising fresh capital in the form of shares False)

and debentures. It provides the company with additional funds thereby 10. A complaint against unfair
trade practices can be filed
contributing directly to the company’s funds. within _________
• Secondary market is the market for buying and selling securities of the existing ________ from the date of
cause of action.
companies. 11. _________ trade practice is
• The regulatory authority, Securities and Exchange Board of India, (SEBI) was one which trends to bring
about manipulation of price
established in order to protect the interests of the investors in securities. or conditions of delivery
• A patent is a form of intellectual property. It is an exclusive right granted to the such that it imposes
unjustified costs on
patent holder for a limited period, as a reward of creative work based on his customers.
private initiative. 12. __________ energy is the
• Consumer refers to any person who buys any goods for a consideration, which energy generated and stored
in the earth.
has been paid or promised payment.
13. The primary goals of
• Trade, which adopts unfair means for promoting sales, is referred to as unfair ________ were to stabilize
greenhouse gas emissions at
trade practice. levels that would prevent
• The department of Environment was established in India in 1980 to ensure a dangerous anthropogenic
interference with the global
healthy environment for the country. The Ministry of Environment and Forests climate.
and the pollution control boards, together form the regulatory and administrative
core of the sector.
Self-Instructional Material 229
Legal and Ecological • Prevention and Control of Air Pollution Act, 1981, seeks to combat air pollution
Environment
by prohibiting the use of polluting fuel and substances.
• The Forest Conservation Act, 1980, was adopted to protect and conserve
forests.
NOTES
• Energy that comes from natural resources such as sunlight and wind is known
as clean energy. These are renewable in nature.
• The total set of greenhouse gas emissions caused by an organization, event or
production is termed as carbon footprint.

5.9 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. An environment where all legal obligations are taken into consideration and
business is carried out keeping in mind the same, is referred to as legal
environment.
2. The Companies Act 1956, envisages powers of inspection and investigation of
company affairs
3. Capital market is a market open for securities where business enterprises and
government can raise long-term funds. Capital market is one of the most
important segments of the Indian financial system.
4. Primary market deals with new securities. It is the market for raising fresh capital
in the form of shares and debentures.
5. One policy measure undertaken by the government includes the following; the
SEBI has notified the disclosures and other requirements for companies desirous
of issuing Indian depository receipts in India. It has mandated the issuer must be
listed in its home country.
6. Three inventions, which are not patentable, are the following, (i) an invention
which is frivolous or which claims anything obviously contrary to well-established
natural laws. (ii)The mere discovery of a scientific principle or the formulation of
an abstract theory or discovery of any living thing or non-living thing occurring
in nature, and (iii) a mathematical or business method or a computer program
per se or algorithms.
7. Patents can be applied in the following ways, (i) true and first inventor of the
invention, (ii) assignee of the person claiming to be the true and first inventor.
8. The Central Government can acquire an invention or patent by issue of a
notification, for public interest.
9. False
10. Two years
11. Restrictive
12. Geothermal
13. UNFCCC

230 Self-Instructional Material

 Legal and Ecological
5.10 QUESTIONS AND EXERCISES Environment

Short-Answer Questions
NOTES
1. Discuss the importance of legal environment.
2. Differentiate between primary market and secondary market.
3. What do you understand by capital market?
Long-Answer Questions
1. Write a detailed note on patents.
2. Write a note on consumer of goods.
3. Review the environment protection Acts with special reference to air and wildlife.
4. Explain the concept of geothermal energy.
5. Discuss fossil-fuelled technologies.

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 New Economic Policy
UNIT 6 NEW ECONOMIC POLICY Environment in India

ENVIRONMENT IN INDIA
NOTES
Structure
6.0 Introduction
6.1 Unit Objectives
6.2 Liberalization: Facets of Liberalization and Impact on Business
6.2.1 Privatization: Aspects of Privatization and Impact
6.2.2 Disinvestment
6.2.3 Globalization and Enhanced Opportunities and Threats
6.2.4 Impact of Globalization on Different Sectors of Indian Economy
6.3 Extended Competition in Input and Output Markets Role of WTO,
IMF and World Bank in Global Economic Development
6.3.1 World Trade Organization (WTO)
6.3.2 International Bank for Reconstruction and Development (World Bank)
6.3.3 The International Monetary Fund (IMF)
6.4 Summary
6.5 Answers to ‘Check Your Progress’
6.6 Questions and Exercises
6.7 Further Reading

6.0 INTRODUCTION

India has the ninth largest economy in the world in terms of the nominal Gross Domestic
Product. In today's age, in the presence of a more globalized business environment all
over the world, the economic policies adapted by a country act as the key determinant
for getting the real benefits of the same. Particularly for developing nation like India,
policies adopted by governments play a crucial role in the development of the economy.
The unit discusses the various policies adopted by the Indian government. Policies of
liberalization and globalization are elaborated. Indian economy was liberalized in 1991
and since then the country has opened its doors to foreign direct investment. Facets of
liberalization and its impact on Indian business have been analysed substantially. The
unit carefully explains the importance of privatization. International economic
organizations such as World Bank, International Monetary Fund and their functions
are also described.

6.1 UNIT OBJECTIVES

After going through this unit, you should be able to:
• Discuss the idea of liberalization and its various facts
• Discuss privatization and list its various aspects
• Describe globalization and its opportunities and threats
• Explain extended competition in input and output markets
• Identify the role of World Trade organization, International Monetary Fund and
World Bank in the global business environment
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New Economic Policy
Environment in India 6.2 LIBERALIZATION: FACETS OF LIBERALIZATION
AND IMPACT ON BUSINESS

NOTES The main aim of liberalization was to dismantle the excessive regulatory framework
which acted as a shackle on freedom of enterprise. Over the years, the country had
developed a system of licence-permit-control raj. The aim of the new economic
policy was to save the entrepreneur from unnecessary harassment of seeking permission
from the bureaucracy to start an undertaking.
Similarly, the big business houses were unable to start new enterprises because
the Monopolies and Restrictive Trade Practices (MRTP) Act had prescribed a ceiling
on the asset ownership to the extent of ` 100 crores. In case a business house had
assets of more than ` 100 crores, its application was rejected. It was believed that on
account of the rise in prices, this limit had become outdated and needed a review. The
second objection by the private sector lobby was that it prevented big business houses
from investing in heavy industry and infrastructure which required lumpsum investment.
The NDA in its election manifesto had suggested that the asset limit of MRTP companies
should be raised to ` 1000 crores. The government thought it wise to abolish the limit
altogether so that big business could establish big projects in the core sectors—heavy
industry, petrochemicals, electronics, etc. The Government was of the view, that in the
context of liberalization, the MRTP limit had become irrelevant and needed to be
scrapped.
The major purpose of liberalization was to free large private corporate sector
from bureaucratic controls. It therefore, started dismantling the regime of industrial
licensing and control. In pursuance of this policy, the industrial policy of 1991 abolished
industrial licensing for all projects except for a short set of eighteen industries.
The list of industries in which industrial licensing is compulsory:
1. Coal and lignite
2. Petroleum and its distillation products
3. Distillation and brewing of alcoholic drinks
4. Sugar
5. Animal fats and oils
6. Cigars and cigarettes
7. Asbestos and asbestos-based products
8. Plywood and other wood-based products
9. Raw hides and skins
10. Tanned furs
11. Paper and newsprint
12. Electronics, aerospace and defence equipment
13. Industrial explosives
14. Hazardous chemicals
15. Drugs and pharmaceuticals
234 Self-Instructional Material
6.2.1 Privatization: Aspects of Privatization and Impact New Economic Policy
Environment in India
Privatization is only a modern name assigned to the concept of laissez-faire advocated
by Adam Smith and other classical economists. But in the environment of mixed
economy, it has a new significance. The world economists have adopted it as a tool for NOTES
new economic prosperity. It is expected that the new liberal era of industrialization will
open a new chapter in the field of productivity, efficiency, cost consciousness,
competitiveness and management. The participation of the private sector in the
development process is not an option, it is an essential requirement of development. Laissez-faire:
Earlier, private enterprises which had financial difficulties were taken over by An environment in which
the government in most of the countries. Now, the policy has completely changed. transactions between
private entrepreneurs are
Public enterprises which had financial difficulties are transferred to a private agency. free from state interference
Government policy in India as in other countries is undergoing a sea change
both on account of shifts in ideology as well as basic economic considerations. Moreover,
international lending agencies have increasingly brought in the privatization of public
enterprises as a condition for their project lending in several countries. It is evident
from the World Bank report which has supported privatization of public sector steel
industry and World Bank experts have suggested that privatization is essential to attain
productivity and efficiency.
After four decades of experiments with nationalization in many countries of the
world, a new worldwide experiment was started during the 80s in the form of
privatization. Many countries are moving away from nationalization out of sheer
economic compulsions, viz., the widespread failure of the public sector enterprises,
higher pressure on government budgets, particularly due to the subsiding of the public
sector white elephants and various other macro-economic problems. The public sector
has lost its dynamism and according to some, it is now more a drag on development
than an engine of growth.
It can be said that if a failing private enterprise should go out of business or
close down the organization, the same principle should be followed in case of the
public sector. But this is not always the case as the sick PSUs are allowed to operate
with budgetary support.
Contradictory as it may seem, privatization is perfectly compatible with Marx’s
postulate of withering of the State. It actually promotes the shifting of ownership of the
means of production from the elite to the masses.
Objectives of Privatization
1. Improvement of the economic-performance of assets
2. Depoliticalization of economic decisions
3. Reduction in public outlays, taxes and borrowing requirements
4. Promotion of popular capitalism through wider ownership of assets
5. Promotion of equity
International Experience
Worldwide experience of privatization started during the 80s with a view to increasing
efficiency and competitiveness of industry, means of earning money for the government,
Self-Instructional Material 235
New Economic Policy reducing budgetary deficit, widening share of ownership of economic assets and
Environment in India
eliminating political interferences. Mrs. Thatcher in UK and Ronald Reagan in the US
had championed the cause of privatization.

NOTES It was Mrs. Thatcher who pioneered this new drive towards privatization with
an ideological seal by selling all or part of thirteen companies ranging from utilities like
British Telecom and British Gas to industrial companies. In the former Soviet Union,
Mikhail Gorbachev introduced Glasnost and Perestroika (restructuring) which included
a massive decentralization of economic management and decision making, setting up
of prices through competition, allowing private enterprise in selected areas, and so on.
In the US, privatization has dominated in the areas of ‘contracting out’ of public services,
infrastructure services, health services and public safety. France denationalized banking
and insurance sectors and some profit-making industries. Similar experiments with
privatization also started in Italy, Spain, Sweden, Germany, Netherlands, Ireland, Austria
and Japan.
In the less-developed countries, privatization has been pursued mainly because
of fiscal problems like budget deficit, through a variety of ways such as total or partial
denationalization, closure or liquidation of perpetually loss-making enterprises, transfer
of management, selling through auction, etc. Experiments with privatization process
had started in the 80s in Bangladesh, Pakistan, Thailand, Malaysia, Latin America and
African countries.
Signals of privatization process in India began with certain loosening of control
in the area of industrial licensing, liberalisation of import control policy, reduction in
income and corporate tax rates and the long-term fiscal policy since 1985.
India’s development strategy failed to exploit the advantages inherent in the
economy. Instead, through planning it created high-cost inefficient industries of less
than economic scale and sheltered them from foreign competition. Self-reliance was
perverted into self-sufficiency. The softness of the budget constraint of the bloated
public sector and bureaucracy is at the heart of the problem. The socio-political system
was unable to distribute assets. The instruments of industrial and import licensing policy
have not succeeded in reducing inequalities. Even though tax revenue as a share of
GDP has risen, the revenue has been increasingly squandered. The deficit reflects the
growth of subsidies of various kinds and the soft budget constraints of the public
sector.
The present trend indicates that public enterprises require a radical restructuring
and reorientation. This is likely to take any of the following routes:
(i) Divestiture, i.e., assets of a Government enterprise are sold or transferred
to a private owner.
(ii) De-nationalization/de-regulation.
(iii) Under the Industrial Policy, certain industries are exclusively reserved for
development in the state sector. Any relaxation in respect of such an
exclusive reservation.
(iv) Leasing of PE to a private sector party.
(v) Transfer of management and control of a PE to a private agency.
236 Self-Instructional Material
 Privatization has transformed itself from rhetoric to reality in both developed New Economic Policy
Environment in India
and developing countries. In the present day situation, it is an accomplished fact and
not a rigmarole. It is a reform that necessitates redistribution of income and usually a
change in employment patterns.
NOTES
Rationale for privatization
The rationale for privatization in various countries can generally be classified under
three heads: pragmatism, a commercial point of view, and ideological compulsions.
Pragmatism was born of hard facts: the mammoth public sector units had failed to
deliver on counts of efficiency and output both, thereby belying the faith in them to
establish the foundations of sound economic growth. While a few of them did manage
to produce good results, they generally showed a marked decline from the 1970s,
though a handful did well after the 80s. Fewer still managed to yield fairly decent
returns on investment, dividends that were disproportionate to the enormous amounts
of time and money invested in them. As such, they were not pulling their weight in the
economy, and needed to be overhauled drastically any which way.
Second, the organizational culture in PSUs militated against good management,
and it was felt that privatization would revitalize them by letting them be run on
commercial lines typified by the private sector approach to industrial activity, including
clipping the wings of powerful, much politicized trade unions that severely impeded
the progress of the PSU juggernauts.
Third, and as a corollary to the above, on account of historical reasons, the
government was accustomed to getting its work done the easy way, i.e., by official
diktat; its autocratic, ‘power distance’, impersonal style of functioning made it difficult
for it to ‘connect’ meaningfully with its key managerial personnel and motivate them to
effect commercial viability. This was unfortunate, given the fact that there were many
highly capable managers within the ranks of the PSUs.
In keeping with the socialistic pattern of functioning, private enterprise had long
laboured under the stigma of profiteering at public expense. If the private sector can at
all be accused of making money at public expense, it also cannot be denied that it was
merely responding in the only way it could, given the monopolistic and monolithic
structure installed by the very government that now clamoured for efficiency and
productivity in PSUs. In fact, by squandering the opportunities that had been handed
to it on a platter, the public sector – not its private sector cousin – was the main culprit
for the low productivity, poor return on investment and callous disregard for national
priorities such as poverty eradication (job reservation was never more than a mere
sop to appease political sentiments, barely scratching the surface of the problem) that
had brought the nation to a stage where it had to contend with a series of financial
crises, and which badly tarnished its image. On the other hand, the private sector had
flourished mightily despite – or perhaps because of – a system that gave it (on a quid
pro quo basis, let it be admitted) protection from competition through licensing and
other privileges.
It was left to the Government of PV Narasimha Rao and his Finance Minister
Dr Manmohan Singh to take the bull by the horns and introduce what is today known
as the liberalized regime. By beginning the long-overdue task of revamping the economy
in line with global trends, unshackling it from bureaucratic control, lowering trade
tariffs and allowing foreign conglomerates into the country, they served notice on a
complacent public sector to perform or perish. It was the start of a process whereby
Self-Instructional Material 237
New Economic Policy several unviable or redundant PSUs went under the hammer or were referred to BFIR,
Environment in India
while the more efficient ones were encouraged to adopt the MOU route that gave
them freedom to function on commercial lines, in return for full accountability. Several
PSUs that had been ailing under tight government controls, overstaffing and trade
NOTES union militancy such as NTPC, National Fertilisers and Hindustan Organic Chemical
Ltd., immediately took humane but firm measures to effect smart turnarounds that left
the critics dumbfounded. Going further, dilution of the policy of sectorwise reservations
generally gave both sectors the freedom to establish enterprises where earlier, entry
was mutually exclusive. In the final analysis, the long-term health of the economy would
depend heavily on how the better PSUs like Indian Oil Corporation (the lone Indian
corporate in the Fortune 500 list) and GAIL happen to fare. In weeding out the inefficient
PEs and reengineering the good ones, the government can at last concentrate on its
real function – governance, support, inspiration and guidance – leaving commercial
activity to those better equipped and empowered to undertake it.
6.2.2 Disinvestment
The use of a concerted economic boycott, with specific emphasis on liquidating stock,
to pressure a government, industry, or company towards a change in policy, or in the
case of governments, even regime change is termed as disinvestment. Disinvestment
has been a major strategy by which the Indian government has financed fiscal deficit.
Besides economic motivation, it aimed at improving efficiency of public sector units.
Disinvestment is the sale of a part of equity holdings held by the government in any
public sector enterprises to private investors. The major objectives of disinvestment
comprise the following:
1. To improve performance of the Public Sector Units in order to make them
globally competitive
2. To modernize public sector units through strengthening research and development
3. To retire public debt
4. To raise resources from within the public sector for meeting loss relating to
restructuring of those units which are sick but can be revived and retraining
displaced workers.
5. To put national resources and assets to optimal use
6. To mitigate fiscal deficit
7. To widen the capital market base
8. To fund the genuine need for expansion
Emergence of the disinvestment policy
The Industrial Policy of 1991 stated that the government would divest part of its
holdings in selected public sector enterprises. It aimed at providing further market
discipline in order to bolster the performance of public sector enterprises. In 1993, the
Report of the Rangarajan Committee was submitted which stated that the percentage
of equity could be divested up to 49 per cent for industries explicitly reserved for the
public sector. It also recommended that in exceptional cases, such an enterprise having
a dominant market share or a separate identity has to be maintained for strategic
reason, the target public ownership level could be kept at 26 per cent. That is,
disinvestment could take place to the extent of remaining 74 per cent. In 1999, the
238 Self-Instructional Material
government classified the public sector enterprises into strategic and non-strategic
areas for the purpose of disinvestment. The strategic Central public sector enterprises New Economic Policy
Environment in India
would be those functioning in the areas of arms and ammunition, atomic energy and
rail transport.
Methods of disinvestment NOTES
Main methods used to bring about disinvestment are as under
1. Initial public offering: This is the most important method used for privatization
in U.K. and OCED counties. Under this method, the shares of public sector
undertaking are sold to the retail investors and institutions. In some cases, the
government may sell shares of a public sector unit in international market also.
2. Strategic sale: In this method, the government sells its share in the public
sector units to a strategic partner. As a result the management passes over to
the buyer. Government offload is allowed above 51 per cent and the new cap is
fixed at 74 per cent. Between 1999–2000 and 2003–2004, the emphasis of
disinvestment changed in favour of strategic sale. At present, the policy is to list
large central public sector enterprises on domestic stock exchanges. Table 6.1
gives the details of the receipts through strategic sale with respect to nine public
sector undertakings.
3. Sale to foreigners: This is a variant of the sales method where the buyer is not
a domestic company but a foreign company. In small countries, the amount of
domestic capital is often limited. Therefore, the government sells its stakes to a
foreign company.
4. Equal-access voucher programmes: This form of privatization involves
distribution of vouchers across the population and attempts to allocate assets
approximately evenly among the voucher holders.
5. Management-Employee Buyouts: In this method of privatization,
managements and employees themselves buy major stakes in their firms.
Table 6.1 Details of the Receipts through Strategic Sale in Respect of Nine PSUs

Name of PSU Year Amount Realized

Modern Food Industries Ltd. 1999–2000 105.45
Bharat Aluminum Co. Ltd. 2000–2001 551.50

Hindustan Teleprinter Ltd. 2001–2002 55.00

Computer Maintenance Corporation 2001–2002 152.00
Indo Burma Petroleum Company Ltd. 2001–2002 1153.68
Videsh Sanchar Nigam Ltd. 2001–2002 1439.25
Paradeep Phosphates Ltd. 2001–2002 151.70
Hindustan Zinc Ltd. 2002–2003 445.00
Indian Petro Chemicals Corporation 2002–2003 1490.84
Ltd.
Total amount realized 5544.42

Disinvestment – Targets and Achievements

The government has adopted two methods of disinvestment- (1) Selling of shares in
select public sector units and (2) strategic sale of a public sector unit to Private Sector
Company. Table 6.2 gives a fair idea of the status of disinvestment of some PSUs. Self-Instructional Material 239
New Economic Policy Table 6.2 Details of Status of Disinvestment of Nine PSUs (in crore)
Environment in India

Name of Percentage Reserve Final bid Name of Strategic Partner

PSU of equity price price
divested accepted
NOTES
MFIL 74 Not 105.45 Hindustan Lever Limited
fixed
BALCO 51 514.4 551.50 Sterlite

HTL 74 38.80 55.00 Himachal Futuristics Limited

CMC 51 108.88 152 Tata Sons Limited

IBP 33.59 377 1153.68 Indian Oil Corporation

VSNL 25 1218.37 1439.25 Panatone Finvest Limited

PPL 74 176.09 151.70 Zuari Maroc Phosphates

Limited
IPCL 26 845 1490.84 Reliance Petroinvestment
Limited
HZL 26 353.17 445 Sterlite Opportunities and
Ventures Limited

The Table reveals the name of nine major public sector companies and percentage
of equity divested in these companies and final bid price accepted.
The first method was used over the period 1991–92 to 1998–1999. The
government experimented with various variants of this method. From 1999–2000 to
2003–2004 the government emphasis shifted to the second method, which involve
strategic sale of public sector units to a private sector company through a process of
competitive bidding. After 2004–05, disinvestment realizations have been through sale
of small portions of equity. India’s disinvestment programmes are shown in Table 6.3.
Table 6.3 Disinvestment – Target and Achievements

Years Disinvestment Target Disinvestment Achieved

1991–92 2500 3083

1992–93 2500 1912
1994–95 4000 4843
1998–99 5000 5371
1999–2000 10000 1829
2000–01 10000 1869
2001–02 12000 5632
2002–03 12000 3348
2003–04 14500 15547
2004–05 4000 2764
2005–06 No target fix 1569
2006–07 No target fix -
2007–08 No target fix 4181
2008–09 No target fix -
2009–10 No target fix 23552
2010–11 40000 22762

Source: Economic Survey

240 Self-Instructional Material
 Data presented in Table 6.3 shows the targets and achievement of India’s New Economic Policy
Environment in India
disinvestment programmes in different years. It shows that India has tried to improve
the pace of disinvestment targets, progressively moving upward from ` 2500 crore in
1991–92 to ` 40000 crore in 2020-21. But the achievement fell short of the target.
There has been a mixed response—in some years target of disinvestment was achieved NOTES
and in some years the target was not achieved. The data shows that the performance
on disinvestment front over the period 1991–1992 to 2004–05 has been dismal. Only
in four years 1991–92, 1994–95, 1998–99 and 2003–04 the target of disinvestment
was exceeded. The success of 1991–92 was due to the decision to accept extremely
low bids for share ‘bundles’ which included equity from public sector units which
would have otherwise commanded handsome premium. Moreover, the success in
2003–04 was primarily due to sale of 146.60 million share in ONGC which fetched
as much as ` 10,695 crore.
In all other years realisation from disinvestment were much less than the targets.
The main reasons for this poor performance were as follows:
1. The government did not adopt suitable methods to oversee the disinvestment
of public sector shareholding.
2. The department of Public Enterprise and the Finance Ministry adopted
techniques and methods, which resulted in far lower realization than justified.
3. The government launched the disinvestment programme without creating
the required conditions for its take-off. This is clear from the fact that it did
not try to list the shares of the public sector enterprises on the stock
exchanges. Thus, adequate efforts were not made to build-up the much-
needed linkage between the public enterprises on the one hand and the
capital market on the other hand.
4. The government carried out the whole exercise of disinvestment in a hasty,
unplanned and hesitant way. Hence, it failed to realize not only the best
value but also objectives of the disinvestment programme.
On account of all these reasons, there was considerable ‘under–pricing’ of public
enterprises shares resulting in considerable loss to the government.
6.2.3 Globalization and Enhanced Opportunities and Threats
The emergence of the global economy was the result of private initiative rather than Globalization:
carefully orchestrated national manoeuvres, yet today it determines the course of national Increasinghy global
economic policies. The globalized economy represents the following: relationships between
cultures, people and
1. Activity is taking place on an increasingly supranational scale economic activity

2. Manufacturing is no longer confined to stand-alone factories within state

boundaries, but involves sourcing materials/components/sub-assemblies across
geographies wherever cost/quality parameters are met
3. Labour and processes are outsourced from wherever they are most economically
available at desired quality levels
4. Financial operations are conducted around the world as matters of routine
5. These events indicate the start of a new period of economic theory—a new
globalism distinct from the relatively recent post-war period which was dominated
by internationalism. Self-Instructional Material 241
New Economic Policy 6. Following on Nations taking the lead in initiating economic activity, after WW II
Environment in India
acting in concert through the creation of an international economic system for
trade and payments.
NOTES 7. Successive rounds of multilateral tariff reduction
8. A new era of globalization now sees corporates taking the lead, establishing
their hold in world markets for goods and services
9. Their activities are widening and deepening the economic interdependence of
nations to the extent of creating a borderless economy
10. This is quite unlike the earlier phase, which was characterized by exchange of
goods, services, capital and technology and where FDI was insignificant
11. Technological change and deregulation has seen transnationals integrate their
activities across a borderless world, to reduce costs, while consolidating home
markets and taking on global ones
12. Economic interdependence is increasingly production-based, and not trade-
based
13. Trade and technology transactions are taking place increasingly between
transnationals, not the market
Thus, globalization refers to
1. The multiplicity of linkages and interconnections between states and societies
which comprise the present world system
2. The description of the process by which events, decisions, and activities in
one part of the world come to have significant consequences for individuals
and societies in quite distant parts of the globe
3. Globalization has two quite distinct phenomena:
(i) Scope (or stretching), i.e., widening of the extent and form of cross-
border transactions, and
(ii) Intensity, i.e., deepening of the economic interdependence between
the actions of globalizing entities located in one country and those
located in other countries
4. The two most important causes of globalization are:
(i) The pressure on business enterprises by consumers and competitors
alike, to continually innovate and come up with new products while
improving existing ones. Escalating R&D costs coupled with shrinking
product lifecycles are compelling corporations both to downsize the
scope of their value-added activities and to venture further afield in
search of wider markets
(ii) The renaissance of market oriented policies pursued by national
governments and regional authorities. In the last five years alone,
while more than thirty countries have abandoned centralized planning
as the main mode of allocating search resources, over eighty countries
have liberalized their inward FDI policies, including China and India.
242 Self-Instructional Material
 Moreover, the undernoted factors have worked to stimulate cross-border New Economic Policy
Environment in India
corporate integration, both within TNCs and between independent firms:
1. The privatization of state-owned enterprises
2. Liberalization and deregulation of markets NOTES
3. Removal of a bevy of structural distortions
Globalization of Indian economy
Globalization of the Indian economy implies that:
1. Commodity as well as factory market is functioning under the influence of market
forces generated in the world economy
2. Gain in efficiency to compete in world markets
3. Exports increase; influx of foreign exchange and private foreign capital
4. Higher growth path with stability
5. Better balance of payments position relieves tension of default on IBRD loan
instalments
6. Enables movement towards ultimate full convertibility on capital and current
accounts
7. There is need to become globally competitive by creating stable micro- and
macro-economies without any vested interests
The argument in favour of integrating the Indian economy with the global economy
has long been put forward by the IMF and the World Bank as the answer to the failure
of hitherto followed economic policies. The slowdown of the world economy after 9/
11 and the meltdown of the south-Asian economies showed that the global economy
is unlikely to work very well unless there is globalization of both production and
consumption. Yet, complete globalization would also mean vulnerability to shocks that
are transmitted throughout the global economic system; India was insulated from the
fallout of the Baring’s Bank collapse and subsequent meltdown of the south-Asian
economies because it was not an active member of any trading blocs in the region.
Globalization is viewed as a two-way action plan, including:
1. Free competition
2. High productivity
3. Selling to one market—a global one where all are in open competition
4. This facilitates integration with the global mainstream
5. Promotes sourcing cheapest suppliers, in open global competition
6. Boosts industrial development and employment
7. Makes for better quality, export earnings and economic stability
Independent India inherited an inward-oriented policy and in the early years of
planning, an import substitution regime with anti-export bias was considered to be
quite appropriate. India’s trade regime remained basically inward-looking until export
incentives were introduced in the mid-1960s. In the 1970s, many more export incentives
were introduced but this did not help export promotion much. The 80s witnessed
attempts towards export promotion and trade liberalization under the Sixth and Seventh
Self-Instructional Material 243
New Economic Policy Plans. Despite the efforts towards liberalisation, India’s trade regime remained more
Environment in India
or less inward-looking.
Owing to greater reliance on the working of the closed economy, the Indian
NOTES economy has generated a high cost-inefficient industry which has prohibited the optimum
utilization of factors of production. Despite all potentialities, Indian industries are not
competing with the global industries with respect to cost and quality. Protection has
always given an avenue to develop a high cost industry. Under the shadow of FERA
and MRTP Acts, monopoly houses have developed. It is the closeness of the Indian
economy that prohibits introduction of the advanced technology of the developed
nations. So the globalization of the economy is essentially needed.
It will provide an opportunity for India to become an important production
centre of the world. It will also provide an opportunity to the Indian companies to
become multinational concerns. At the same time, it can attract foreign investors so as
to make India a centre of the world market. India can utilize these avenues very well
on account of its competitive edge over other countries due to its large skilled labour.
The strategy adopted since July 1991 for further integration of the Indian economy
with the world economy includes exchange rate adjustment to improve competitiveness
of exports, reduction in tariffs and a more open policy towards direct foreign investment
and technology.
The new economic policy aims at making the Indian economy competitive and
much better integrated with the world economy. We are now clearly in a new and
different world. India cannot expect a large inflow of external funds while there is an
irrational exchange rate policy. India has no other alternative but to integrate its economy
into the global mainstream to boost its economic growth. As most of the countries in
the world are steadily reorienting their economies to the market-friendly forces, it will
be suicidal on the part of India to remain in isolation. Competition from abroad would
lead to improvement in quality, productivity, efficiency and cost-effectiveness.
For integrating the Indian economy with the world economy not only faster
export growth but also free access to imports is necessary and accordingly import
duties have been brought down substantially. High tariffs have created a high cost
industrial structure and Indian competitiveness has been affected by this. When many
other countries had substantially reduced the tariffs, India’s tariff structure also needed
to be lowered.
Since globalization requires the creation of suitable environment for free flow of
direct foreign investment, the new industrial policy of 1991 permits approval for foreign
direct investment up to 51 per cent foreign equity in the case of high priority industries
and this obviously opens the door for multinationals in a big way. The foreign investment
will bring in new technology and marketing expertise from which the country will benefit.
The market-friendly approach of the new economic policy is expected to create a
suitable environment for the entry of foreign capital on a large scale.
An open policy towards technology transfer is also an important requirement
for globalization of the Indian economy. One obstacle to the much-needed inflow of
technology has been the cumbersome approval process involving delays and
uncertainties. To overcome this problem, the new industrial policy recommends that
244 Self-Instructional Material
automatic approval be given by the government for technology agreements related to New Economic Policy
Environment in India
high priority industries and similar facility be provided to non-priority industries also if
expenditure in foreign exchange is not involved.
The new economic policy which advocates a market-friendly approach and NOTES
removal of bureaucratic controls is expected to attract foreign capital and technology
and also facilitate easy movement of goods through substantial reduction in tariffs and
thus pave the way for further integrating the Indian economy with the global economy.
External environment is going to be more dynamic and complex. There will be
less social protection for inefficiency. There will be noticeable fights in the marketplace
for innovation and competitiveness. Unless we increase our productivity and efficiency,
we will not be able to go beyond ‘the Hindu rate of growth.’
India’s globalization efforts are hindered by the lack of a favourable international
environment. At a time when advanced countries, particularly the US, are adopting a
protectionist policy with Super 301 threat, it is very difficult to accomplish the objective
of globalisation of the Indian economy.
Second, openness of economy to world competition is an invitation to
multinationals. The role of multinationals is not salubrious for poor countries.
Third, globalization would imply certain consequences which may not be always
beneficial to the developing countries. One major implication of globalization is the
internationalization of prices. Globalization would also imply the equalization of domestic
prices with international prices. This would mean that the firms in the developing
economies should enhance their competitive strength. If some of the commodities
have relatively lower prices due to subsidization, the policy prescription would be that
subsidies should be withdrawn so that the prices would attain a parity with prices
prevailing in the international markets. In recent times the fertiliser prices in India had
been raised and the subsidies were withdrawn. The aftermath of the withdrawal of
subsidies would be a hefty increase in the prices of agricultural commodities. This
would mean that Indian prices must rise to US levels. So, as a result of globalization,
inflationary tendencies would persist as prices are expected to rise by 15 to
20 per cent.
6.2.4 Impact of Globalization on Different Sectors of Indian
Economy
Let us see how globalization has influenced almost all sectors of our economy.
1. Impact of globalization on industry
Globalization heavily influenced the existing industries in India such as iron and steel,
chemical, pharmaceutical, textiles and so on. Huge amounts of foreign direct investments
entered the Indian economy. Numerous foreign companies began investing in India
thereby boosting the country’s economy. This helped in reducing the level of
unemployment in India to a large extent. Another benefit of globalization was that,
India became more technologically advanced.
Despite such benefits, certain demerits of globalization on Indian economy cannot
be ruled out either. Competition in the Indian markets have increased manifold with
numerous foreign goods hitting the markets. Almost all the sectors were affected by
globalization. One such instance is that of decrease in the number of manual labour
Self-Instructional Material 245
New Economic Policy with the advent of latest technologies. Globalization has had a mixed impact on the
Environment in India
Indian economy.
2. Globalization and the external sector
NOTES The rising imports of oil, pearls and semi-precious stones have contributed significantly
to a large import bill. Rising crude oil prices, along with growth in quantity of oil
imports, has led to a higher imports bill. Despite a high export growth, the trade deficit
widened. with the global economic meltdown, net invisibles were in surplus. It is because
of two major components, software services and workers’ remittances. Table 6.4
highlights the indicators of the external sector as per Gross Domestic Product in 2010–
2011.
3. Impact of globalization on the pharmaceutical industry
The pharmaceutical industry of India is the third largest in the world in terms of volume.
The number of purely Indian pharmaceutical companies is low. The Indian
pharmaceutical industry is mainly operated as well as controlled by dominant foreign
companies having subsidiaries in India due to availability of cheap labour in India at
lowest cost. The Indian Drugs and Pharmaceutical Limited (IDPL) was established in
1961 with help from the Soviet Union. The establishment of these two public sector
units and the coming into force of the Drug Policy of 1978 had been mainly responsible
for the availability of drugs and medicines at relatively lower prices in India. The country
became almost self-sufficient in the production of drugs. Today, India is home to a
quite few major drug companies, viz., Cadila Healthcare, Piramal Healthcare, Dr.
Reddy’s and others. Globalization brought along new technologies, which helped in
bolstering the Indian drug industry. However, some Indian drug companies were
affected the other way through the process of merger and acquisitions.
Table 6.4 Indicators of the External Sector as per Gross Domestic Product

Key Indicators of
External Sector
(As per cent of
GDP)
1 2 3 4 5 6

1990–91 2003–04 2008–09 2009–10 2010–11

Exports 5.8 11.1 15.4 13.9 14.5
Imports 8.8 13.3 21.7 23.4 23.2
Trade Balance −3.0 −2.3 −8.6 −9.4 −8.8
Net Invisibles −0.1 4.6 5.8 7.2 5.1
Current Account −3.1 2.3 −2.8 −2.2 −3.7
Balance

Source: Economic Survey 2010–11.

Table 6.4 indicates that percentage share of exports and imports have increased
significantly over 1990–91 figures. The current account continues to be deficit.
4. Effects of globalization on poverty and inequality
Population is one of the main reasons for poverty and inequality in income. The most
popular maxim applicable to the country is that ‘India is a rich country inhabited by
246 Self-Instructional Material
poor people’. The rapid rise in the rural population, the slow rate of economic New Economic Policy
Environment in India
development, and negligible infusion of new technology into the agriculture sector
have all lead to poverty and inequality among Indians.
1. The Uniform Recall Period (URP) consumption distribution data of NSS 61st NOTES
round places the poverty ratio at 28.3 per cent in rural areas, 25.7 per cent in
urban areas and 27.5 per cent for the country as a whole in 2004–05.
2. The corresponding poverty ratios from the MRP consumption distribution data
are 41.8 per cent for rural areas, 25.7 per cent for urban areas and 37.2 per
cent for the country as a whole.
3. While the former consumption data uses a thirty-day recall period for all items
of consumption, the latter uses 365 day recall period for five infrequently
purchased non-food items, viz., clothing, footwear, consumer durable goods,
education and institutional medical expenses, and thirty day recall period for
remaining items.
4. Income inequality measured by the Gini coefficient (in rural areas) is highest in
Haryana followed by Kerala, Maharashtra, Punjab, Tamil Nadu, and West
Bengal. Though inequality is lowest in the rural areas of Bihar and Assam, this
may mean greater equality at low levels of income.
5. In rural areas, income inequality is highest in Madhya Pradesh followed by
West Bengal, Haryana, Karnataka, Kerala, Maharashtra and Chhatisgarh.
6. Economist TN Srinivasan argues that globalization may have a U-shaped effect
on poverty; while extensive integration reduces poverty, a small amount of
globalization may hurt the poor.
Table 6.5 Impact of Globalization on Poverty and Inequality

Poverty Ratios by URP and MRP (per cent)

Category Years
Planning Commission Estimates by URP 1993–94 2004–05
(uniform recall period)

Rural 37.3 28.3

Urban 32.4 25.7
All India 36.0 27.5
Tendulkar Estimates by MRP Method 1999–94 2004–05
(mixed recall period)

Rural 50.1 41.8

Urban 31.8 25.7

All India 45.3 37.2

Source: Government of India, Economic Survey, 2010–11.

5. Poverty alleviation programme and globalization
In the globalization era, anti-poverty programmes have been strengthened to generate
additional employment, create production assets, import technical and entrepreneurial
skills and raise the income level of the poor. They have broadly been of two kinds:
Self-Instructional Material 247
New Economic Policy assisting the poor to acquire assets and /or start a business enterprise to create self-
Environment in India
employment, and providing wage employment mostly in public works to supplement
incomes of the poor.

NOTES 6. Globalization and the textile industry

The initiation and development of globalization and the Indian textile industry took
place simultaneously in the 1990s. The Indian textile industry, until the economic
liberalization of the Indian economy, was predominantly an unorganized industry. The
Indian textile industry is one of the largest textile industries in the world and India earns
around 27 per cent of the foreign exchange from exports of textiles and its related
products. Further, globalization of the Indian textile industry has seen a paradigm increase
in the ‘total industrial production’ factor of this Industry, which presently stands at 14
per cent. Furthermore, the contribution of the Indian textile Industry towards the gross
domestic product (GDP) of India is around 3 per cent and the numbers are steadily
increasing. The process of globalization and Indian textile industry development was
the effect of rapid acceptance of ‘open market’ policy by the developing countries,
much in the lines of the developed countries of the world. The main aimof this policy
was to increase the foreign exchange earnings. It includes rational projections for the
overall development and promotion of all the sectors involved directly or indirectly
with the Indian textile industry.
7. Globalization and the Indian fiscal policy
Globalization has had a huge impact on the Indian Fiscal Policy. Table 6.6 indicates
how globalization has changed the fiscal pattern of the Indian government.
Table 6.6 Fiscal Pattern of the Indian Government

Some Fiscal Magnitudes

( as per cent of GDP)
Years Revenue Fiscal Deficit Primary Deficit
Deficit
2004–05 2.4 3.9 0.0
2005–06 2.5 4.0 0.4
2006–07 1.9 3.3 -0.2
2007–08 1.1 2.5 -0.9
2008–09 4.5 6.0 2.6
2009–10 5.1 6.3 3.1
2010–11 3.5 4.8 1.7

Source: Economic Survey 2010–11.

The macroeconomic impact of the global financial and economic crisis and the
expansionary fiscal stance was clearly visible in the demand side component of the
national income aggregates. As proportion of the GDP, the recent trends in deficit
indicators, post-crisis, have been affected by the swings in the levels of aggregate
demand.
8. Foreign direct investment and globalization
There has been increased inflow of Foreign Direct Investment (FDI) due to global
integration; India can absorb three times the FDI that it gets. The most welcome
248 Self-Instructional Material
feature was the rise in gross FDI inflows of US $ 23.0 billion in 2006–07, with FDI New Economic Policy
Environment in India
outflows also increasing steadily over the last five years. During 2005–06 to 2008–
09, FDI flows assumed greater significance. High inflows indicate India as an attractive
investment destination as a consequence of its liberalized investment climate, stable
and sound economic and political base, opportunities for economic growth, while NOTES
capital investment abroad reflects the growing global competitiveness of the Indian
Corporate Sector.
Sectoral growth rates
The Indian economy has grown at a robust rate during the last years and a striking
feature of this growth performance has been the strength of the services sector
Table 6.7.
Table 6.7 Sectoral Growth Rates during Globalization Period

(Per cent per annum)

Sector 1992–97 1997–02 2002–07 2007–08 2008–09 2009–10
Agriculture 4.8 2.5 2.5 4.9 1.6 0.2

Industry 7.3 4.3 9.2 8.1 3.9 9.3

Services 7.3 7.9 9.3 10.8 9.7 8.5

GDP at 6.6 5.5 7.8 9.0 6.7 7.3

factor cost

Notes: 1. Agriculture includes (i) agriculture (ii) forestry and logging (iii) fishing
2. Industry includes (i) mining and quarrying (ii) manufacturing (iii) electricity, gas and
water supply (iv) construction
3. Services includes (i) Trade, hotels & restaurants (ii) Transport, storage & communication
(iii) Financing, insurance, real estate &business services (iv) Community, social &
personal services
Source: (1) For columns (2), (3) and (4), Jim Gordon and Poonam Gupta, “Understanding India’s
Services Revolution”, International.

Share of services in GDP

Because of the relatively high growth rate of services in recent times, their share in
GDP has registered a marked increase. This is clear from Table 6.8.
Table 6.8 Sectoral Share of GDP in Per Cent

Sector 1990–91 2000/01 2004–05 2008–09 2009–10

At 1999-2000 At 2004–05
prices prices
Agriculture 31.4 23.9 18.9 15.7 14.6
Industry 5.9 25.8 28.0 28.0 28.1

Services 42.7 50.3 53.1 56.3 57.3

Source: Computed from (Reserve Bank of India, Handbook of Statistics on Indian Economy
2009-10, (Mumbai, 2010), table 3, pp. 11-13, and (2) CSO, National Accounts Statistics 2010 (Delhi
2010), statement 10, and New Series of National Accounts Statistics (Delhi 2010), statement 5p.94. Self-Instructional Material 249
New Economic Policy It is clear from this table that there has not been much change in the share of
Environment in India
industry in the GDP since 1980–81.The entire decline in the share of agriculture has
been due to a rapid increase in the share of services from 38.0 per cent of GDP in
1980–81 to 42.7 per cent in 1990–91 and further to a high of 57.3 per cent in 2009–
NOTES 10. What is significant is the fact that during the period of globalization, the share of
services has increased very rapidly.
9. Influence of globalization on education
While globalization process demanded better educated and skilled labour, the overall
level of education and skill-training continued to remain low. There was also a sharp
gender disparity in the mean years of schooling attained by male and female students.
It is clear from Table. In short, education efforts have overtaken the growth in population
and the absolute number of illiterates have started declining. The effective literacy rate
for the country by persons, males, females and the male-female gap since 1951 is
shown in Table 6.9.
Table 6.9 Literacy Rates in India

Census Year Persons Males Females Male-female

gap in
literacy rate
1 2 3 4 5
1951 18.33 27.16 8.86 18.30
1961 28.3 40.4 15.35 25.05
1971 34.45 45.96 21.97 23.98
1981 43.57 56.38 29.76 26.62
1991 52.21 64.13 39.29 24.84
2001 64.83 75.26 53.67 21.59
2011 74.04 82.14 65.46 16.68

The effective literacy rate for India in Census 2011, works out to 74.04 per
cent. The corresponding figures for males and females are 82.14 and 65.46 per cent
respectively. Thus, three-fourth of the population of ages 7 years and above is literate
in the country. Four out of every five males and two out of every three females in the
country are literate. The country has continued its march in improving literacy rate by
recording a jump of 9.21 percentage points during 2001–2011. The increase in literacy
rates in males and females is in the order of 6.88 and 11.79 percentage points
respectively. There have been sharp improvements in literacy overtime. While only 54
per cent of man and 19 per cent of women aged 60 and older are literate, among
children aged 10–14 years, literacy rates are 92 per cent for males and 88 per cent for
females. However, efforts are still required to achieve the target of 85 per cent set by
the Planning Commission to be achieved by the year 2011–12.
10. Impact of globalization on health
It was estimated that there were 2.31 million persons living with HIV/AIDS in India in
2007. The National AIDS Control Programme Phase III (NACP-III) is being
implemented for the period 2007–12 with an investment of ` 11,585 crore. In addition
to strengthening the health delivery system several other programmes have also been
strengthen like:
250 Self-Instructional Material
 1. Universal Immunization Programme New Economic Policy
Environment in India
2. National Vector Born Disease Control Programme, etc
Overall, there has been improvement in the quality of healthcare over the year.
11. Impact of globalization on unemployment NOTES
An estimate of unemployment rates based on the 64th NSS round of survey is shown
in Table 6.10. A comparative study of different estimates of unemployment during
2007–08 indicates that the CDS estimate of unemployment rate being the broadest is
the highest. The higher unemployment rates according to the CDS approach vis-a-vis
weekly and usual status approaches indicate a high degree of intermittent unemployment.
In the globalization era, many changes have taken place in the unemployment scene as
emerges from the 64th round, 2007-2008.
Table 6.10 Globalization and Urban Employment Rates

All India Rural and Urban

Unemployment Rates * from the NSS
64th Round 2007–08: Different Estimates
Estimate Rural Urban
UPS 2.2 4.5
US (adj.) 1.6 4.1
CWS 3.9 5.0
DCS 8.4 7.4

Notes: *As per cent of labour force.

UPS – usual principal status; US (a d j.) – usually unemployed excluding subsidiary status
workers;
CWS–current weekly status.
Source: NSS Report No. 531(64/10.2/1).
The CDS captures the unemployed days of the chronically unemployed, the
unemployed days of the usually employed who become intermittently unemployed
during the reference week, and unemployed days of those classified as employed
according to the current weekly status criterion.
12. Impact of globalization on public, private and organized sectors
Employment growth in the organized sector, public and private combined, increased
during the period 1994–2008. This has primarily been due to employment growth in
the private sector. Employment in establishments covered by the Employment Market
Information System of the Ministry of Labour and Employment grew at 1.20 per cent
per annum during 1983–94 but the growth decelerated to 0.05 per cent per annum
during 1994–2008. This decline was mainly due to a decrease in employment growth
in public-sector establishments from 1.53 per cent per annum in the earlier period to
(-) 0.65 per cent per annum in the later period. The private sector, on the other hand,
showed accelerated growth from 0.44 per cent to 1.75 per cent per annum
Table 6.11.

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New Economic Policy Table 6.11 Employment Growth in the Organized Sector
Environment in India
Rate of Growth of Employment in the
organized Sector
NOTES (per cent per annum)
Sector 1983–94 1994–2008
Public Sector 1.53 -0.65
Private Sector 0.44 1.75
Total organized 1.20 0.05

Source: Planning Commission and Directorate General of Employment and Training (DGET),
Ministry of Labour and Employment.
This table shows that in the era of globalization, many changes have taken place
in the employment in 1994–98.
1. There has been a decline in the rate of growth of public sector.
2. There has been an increase in the growth of private sector.
13. Globalization and Indian agriculture
Globalization has increased the use of comparative advantage, which allows nations to
specialize in certain crops they are best at because global trade makes it easy to
acquire other crops, which they are not good at from other nations. Experts believed
that globalization would help to balanced development of agricultural sector, changes
would occur in the economical conditions of the farmers, agricultural products would
get proper prices, employment would be available in agriculture, rural industries, cottage
industries, small industries would start and farmers would be happy but this belief is
going to be false. According to the policy of WTO, India had to reduce import duty by
50 per cent for agricultural goods till 2008. Also, India had to import 5 per cent of the
domestic market. Out of the Indian population 25 per cent people are still below
poverty line and 60 per cent population depends upon agriculture. The share of
agricultural income in gross national income in India is 23.6 per cent. In India 62 per
cent of total agricultural land depends upon rain water.
Loan for agriculture is provided at the rate of 15 per cent to 16 per cent as
compared to the loan provided for vehicles or houses at the rate of 7 per cent to 8 per
cent.
It is difficult for India to keep its place in global competition because Indian
goods are low in quality and standard; they are high in prices; and supply of goods is
inadequate and unstable. However, in developed countries the field of agriculture is
supplied with economical help, quota and right of intellectual wealth.
According to the agreement of WTO it has been decided that the developed
countries should give 5 per cent and developing countries should give 10 per cent
grants of total value of their agricultural goods.
Benefits of globalization to Indian agriculture
1. Increase in national income
2. Increase in employment
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 3. Ehmination of need to reduce grants New Economic Policy
Environment in India
4. Increase in the share in trade
5. Increase in the export of agricultural goods
NOTES
The adverse effects of globalization on Indian agriculture
1. Grants distributed on a large scale by the developed countries –
2. Small production field
3. Intellectual property right
4. Increasing production expenditure and low cost of goods
Simply put, globalization has its benefits as well as disadvantages. But generally,
the free trade among nations - its existing policies - must be reviewed in order to
protect the developing countries from receiving low-class imports. These countries
are yet to adjust and compete globally, they are not ready to enter the fray and go
head-to-head with the titans. Therefore, it must be imperative that the governing rules
must be amended.
14. Small scale industries and globalization
The growth of small industry in the transitional period of the 1990s has come down not
only in terms of units and employment but also output. This could be an indication that
increasing competition in the globalization period does affect the growth of Indian
small industries adversely. The share of small industries in national income increased in
the protection period of the 1980s but declined considerably in the transitional period
of the 1990s. By 2000-01, small industry employment increased to two-thirds of the
organized sector employment. Though the growth rate of small industry employment
came down in the 1990s, it increased more than proportionately in the period of
globalization compared with the protection period, with respect to other sectors of the
Indian economy. On the whole, small industry performance does indicate that the
sector faces a tough challenge for its survival and growth in the period of globalization.
The vehicle of our economy, which was earlier on a village road, has been put
on a highway. In other words the ‘bullock cart economy’ has already converted to a
‘bike economy’ and is struggling fast to become a ‘car economy’. There is need for
avoiding the crises and accidents so as to reach the destination.

6.3 EXTENDED COMPETITION IN INPUT

AND OUTPUT MARKETS ROLE OF WTO,
IMF AND WORLD BANK IN GLOBAL Check Your Progress
ECONOMIC DEVELOPMENT 1. Define liberalization.
2. Name three industries where
industrial licensing is
An attempt to create an international organization to look after matters of trade and compulsory.
commercial policy were made as early as 1947. Although a charter for an International 3. Write any three objectives
Trade Organization was drafted at the Havana Conference it was never ratified due to of privatization.
differences between those who wanted a free multilateral trading system and those 4. Write any three features of a
globalized economy.
who placed emphasis on full employment policy on a national basis. However, the
Self-Instructional Material 253
New Economic Policy American proposal for a general agreement on tariffs and trade was agreed upon, and
Environment in India
many nations signed. So emerged the General Agreement on Tariffs and Trade (GATT)
with no formal organization and no elaborate secretariat. It is through increasing
liberalization of world trade and through GATT negotiations that the World Trade
NOTES
Organization emerged in 1995.
The two outstanding features of GATT will be the principle of non-discrimination
and the principle of reciprocity with the purpose of promoting fair and free international
trade among members. To ensure non-discrimination, the members of GATT agreed
GATT:
General Agreement on to apply the principle of MFN (Most Favoured Nation) to all import and export
Tariffs and Trade to duties. This means that each nation shall be treated as well as the most favoured
promoted which the nation. However, GATT did not prohibit economic integration such as the formation of
principle of non- free trade areas or customs unions, provided that the purpose of such integration was
discrimination and the
principle of reciprocity
to facilitate trade between constituent territories and not to raise barriers to the trade
of others parties.
Protection to domestic industries is given only through customs tariffs, thereby
prohibiting import quotas and other restrictive trade practices.
The GATT office periodically convened conferences of nations for Multilateral
Trade Negotiations called rounds. Several rounds of trade negotiations conducted
under the auspices of GATT, resulted in significant reductions in the average level of
world trade tariffs.
The last round of multilateral trade negotiations known as the Uruguay Round,
which was the eighth round, centred around three main issues:
(i) Trade Related Intellectual Property Rights (TRIPs)
(ii) Trade Related Investment Measures (TRIMs) and
(iii) Trade in Agricultural Commodities.
The Third World Countries have been dissatisfied with GATT negotiations.
Liberalization of trade-related intellectual property rights would mean that the less-
developed countries would have to compete with the advanced countries or multinational
companies. TRIPs covering copyrights, patents and trademarks is likely to harm the
indigenous technology and nascent industries—particularly pharmaceutical and drug
industry. GATT covers the service sectors as well under TRIMs. This is likely to affect
the employment conditions in the developing countries as they will be swamped by
professionals from the advanced industrial countries. Agriculture is another controversial
issue under GATT. While the US insisted on free trade in agriculture withdrawal of
state subsidies, EEC countries particularly France, which heavily subsidize their
agriculture objected. The US threatened to use a law called super 301, under which
punitive action is taken against countries which do not follow a free trade regime.
6.3.1 World Trade Organization (WTO)
The new World Trade Organization (WTO) which replaced the General Agreements
in Tariffs and Trade (GATT) came into effect from 1 January 1995, with the backing of
at least 85 founding members including India. The WTO now comes as the third
economic pillar of worldwide dimensions alongwith the World Bank and the IMF.
As many as 77 of the 125 countries which signed the Uruguay round trade
accord in April 1994 at a conference in Marrakesh have officially notified GATT that
they would join the WTO.
254 Self-Instructional Material
 The new trade body—WTO with power to settle trade disputes between nations New Economic Policy
Environment in India
and to widen the principle of free trade to sectors such as service and agriculture,
covers more areas than GATT, whose rules have been in operation for the last 50
years. The WTO envisages the reduction of tariffs by more than one-third and is
concerned with further opening of markets. It is expected that world trade would be NOTES
stimulated strongly in the long run as a result of the coming into being of the new trade
body—WTO.
Like GATT, the WTO agreement will regulate the commodities trade, but in
addition it will also deal with services across borders like insurance and tourism. The
new WTO conditions also protect intellectual property like patents, copyrights and
brands. Agriculture and textiles are completely covered by the WTO agreements. The
highest WTO body is a ministerial conference which will meet at least once in two
years.
The WTO has been entrusted with the following functions:
1. The WTO would facilitate proper implementation of multinational trade
agreements.
2. It will review trade policies undertaken by the member countries.
3. It will act as a forum for the negotiation of disputes among the member
countries over trade-related problems.
4. The WTO will work in cooperation with the IMF and the World Bank.
India's Commitments to WTO
1. Tariff Lines: As a member of the WTO, India has bound about 67 per
cent of its tariffs lines whereas prior to the Uruguay Round only 6 per cent of
the tariff lines were bound. For non-agricultural goods with a few exceptions,
ceiling bindings of 40% ad valorem on finished goods and 25 per cent on
intermediate goods, machinery and equipment have been undertaken. The
phased reduction to these bound levels is being undertaken over the period
March 1995 to the year 2005. In textiles where reduction will be achieved
over a period of ten years, India has reserved the right to revert to duty
levels prevailing in 1990, if the integration process, envisaged under the
Agreement on Textiles, does not materialize in full. Under the Agreement of
Agriculture, India’s bound rate ranges from 100 to 300%.
2. Quantitative Restrictions: Quantitative restrictions on imports maintained
on balance of payments grounds were notified to WTO in 1997 for 2714
tariff lines at the eight digit level. In view of the improvements in India’s
balance of payments, the Committee on Balance of Payments Restrictions
had asked India for a phase out for the quantitative restrictions. An agreement
between the US and India was reached which envisaged the phasing out of
all quantitative restrictions by India byApril 2001. In line with this agreement,
India removed quantitative restrictions on 714 items in the Exim Policy
announced on 31 March 2000 and on the remaining 715 items in the Exim
Policy announced in March, 2001.
3. TRIPs (Trade-related Intellectual Property Rights): The ruling of the
two WTO Dispute Settlement Pannels following the complaints made by
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New Economic Policy the US and the European Union that India had failed to meet its commitments
Environment in India
under Article 70.8 and Article 70.9 made it obligatory for the Government
of India to make appropriate amendments to the Patents Act, 1970 by April
1999. The Patents (Amendment) Act, 1999 was passed by the Parliament
NOTES
in March 1999 to provide for Exclusive Marketing Rights. In respect of
plant varieties, a decision has been taken to put in place a suigeneris system
as it is perceived to be in our national interest.
As far as copyrights and related rights are concerned, the Copyright Act,
1957, as amended in 1994 takes care of our interest and meets the
requirements of the TRIPs Agreement except in the case of terms of
protection of performers’ rights. A Bill to increase this term to 50 years was
passed by the Parliament in December 1999.
4. TRIMs (Agreement on Trade-related Investment Measures): Under
the TRIMs agreement, developing countries have a transition period of
5 years upto December 31, 1999 during which they can continue to maintain
measures consistent with the Agreement provided these are duly notified.
The Government of India notified two TRIMs viz., that related to local
content requirements in the production of certain pharmaceutical products
and dividend balancing requirement in the case of investment in 22 categories
of consumer items.
5. GATS: Under the General Agreement on Trade in Services (GATS), India
has commitments in 33 activities. Foreign service providers will enter these
activities. According to the Government of India, the choice of the activities
has been guided by considerations of national benefit.
6. Customs Valuation Rules: India’s legislation on Customs Valuation Rules,
1998, has been amended to bring it in conformity with the provisions of the
WTO Agreement on implementations of Article GATT of 1994 and the
Customs Valuation Agreement.
WTO negotiations and India
The Doha Round of trade negotiations in the WTO effectively made very little progress
after 2008. Throughout 2009 and 2010, discussions continued but no headway was
made on any substantive issue in the negotiations. (A summary of India’s stand on key
negotiabing issues is given in Box). However, the subject featured on the agenda of
almost every major international meeting and there were strong affirmations of political
support for an early conclusion of the Doha Round. Discussions continued in Geneva
during March and April 2011, in a variety of formats.
Reports on each area of the negotiations were issued on 21 April 2011. These
documents provided an overview of the status of negotiations in each area covered in
the Doha Development Agenda. While they indicated significant progress in many
areas, they also captured the wide gaps remaining on many issues.
The focus then shifted to the possibility of selecting some issues for finalization
as an ‘early harvest’ in time for the Eighth Ministerial Conference of the WTO in
December 2011. It began with an attempt to select issues of particular importance to
256 Self-Instructional Material
least developed countries (LDCs). However, these attempts did not meet with any New Economic Policy
Environment in India
success and proved not only unproductive but very divisive as well. Members could
not agree on the issues to be included and sought to selectively bring in various issues
of commercial interest to them. Gradually, as Members brought in non-LDC issues,
NOTES
the discussion veered away from the LDC issues. The LDC issues include (i) duty free
quota free (DFQF) market access; (ii) the rules of origin for DFQF market access;
(iii) LDC waiver in services; and (iv) issues relating to cotton (domestic and export
subsidies for cotton and tariffs). Some of the issues suggested in addition for an ‘LDC
plus’ package were trade facilitation and the export competition pillar of the agriculture
negotiations. There was however little progress in arriving at a consensus on the elements
of the early harvest package. The LDCs made it clear that if the LDC package was
not delivered at the December 2011 Ministerial Conference, they would be very
disappointed. The African Group, the African- Caribbean-Pacific Group, and other
groups of developing countries supported an effort to harvest an LDC package for the
Conference. India too, supported this stand.
In October-November 2011, concerted efforts were made by some of the
developed country members of the WTO to use the G20 Leaders Summit in November
2011 to advance an agenda for the Eighth WTO Ministerial Conference scheduled to
be held in Geneva in December 2011. Specifically, they wanted to set the stage for
plurilateral agreements on selected issues in the WTO negotiations (rather than
multilateral agreements); get WTO members to agree to a commitment abjuring the
use of export restrictions; and introduce new issues for negotiation, namely climate
change, energy security, and food security. The weeks preceding the Eighth WTO
Ministerial Conference saw hectic activity in the WTO as some members attempted
to put various issues on the agenda for ministerial decision. These proposals, however,
did not receive support amongst WTO members. At the Eighth Ministerial Conference
from 15 to 17 December, ministers adopted a number of decisions on intellectual
property (IP), electronic commerce, small economies, LDCs’ accession, a services
waiver for LDCs, and trade policy reviews. A number of members expressed strong
reservations about plurilateral approaches. Many members stressed that any different
approaches in the work ahead should conform to the Doha mandate, respect the
single undertaking, and be truly multilateral, transparent, and inclusive. In looking at
future work, a large number of ministers stressed the centrality of development. Many
underlined the need to give priority to issues of interest to LDCs, including cotton.
Many mentioned the importance of all three pillars in the agriculture negotiations. Many
also mentioned trade facilitation, special and differential (S&D) treatment, S&D
monitoring mechanism and NTMs.
In an unprecedented display of unity, a coalition of more than a hundred
developing countries, including India, Brazil, China, and South Africa, met on the
sidelines of the Conference and issued a declaration emphasizing the development
agenda. They roundly criticized suggestions for plurilateral agreements to replace
decision making by multilateral consensus.

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New Economic Policy
Environment in India
India’s stand on key negotiating issues: A summary

Agriculture
NOTES
• Substantial and effective reductions in overall trade-distorting domestic support
(OTDS) of the US and EU;
• Self-designation of an appropriate number of special products (SPs);
• An operational and effective Special Safeguard Mechanism (SSM);
• Simplification and capping of developed country tariffs.
Non-Agricultural Market Access (NAMA)

• Adequate and appropriate flexibilities for protecting economically vulnerable

industries;
• Participation in sectoral initiatives only on a non-mandatory and good faith
basis without prejudgment of the final
• outcome, with substantial special and differential treatment provisions for
developing countries;
• Serious consideration of non-tariff barrier (NTB) textual proposals with wide
support such as the horizontal mechanism.
Services

• Need for qualitative improvement in the revised offers especially on Modes

1(cross-border supply) and 4 (movement of natural persons);
• Appropriate disciplining of domestic regulations by developed countries.
Rules

• Tightening of discipline on anti-dumping (deletion of zeroing clause and

reiteration of the lesser duty rule)
• Effective special and differential treatment for developing countries on fisheries
subsidies.
Trade-related Aspects of Intellectual Property Rights (TRIPS)

• Establishing a clear linkage between the TRIPS Agreement and the Convention
on Bio-diversity (CBD) by incorporating specific disclosure norms for patent
applications;
• Enhanced protection for geographical indications (GIs) other than wines and
spirits.
Source: Economic Survey 2011-12.

Benefits to India
1. The World Bank and the GATT secretariat have estimated that the income
effects of the implementation of the Uruguay Round package will add between
213 and 274 billion US dollars annually to world income. According to the
Government of India, since our country’s existing and potential export
competitiveness lies in clothing, agriculture, fishery products and processed food,
it is logical to believe that India will obtain large gains in these sectors.
258 Self-Instructional Material
 2. The phasing out of the MFA (Multi-Fibre Arrangement) by 2005 will benefit New Economic Policy
Environment in India
India as the exports of textiles and clothings will increase.
3. The third benefit that India expects relates to the improved prospects for
agricultural exports as a result of a likely increase in the world prices of agricultural NOTES
products due to reduction in domestic subsidies and barriers to trade. While on
the one hand earnings from agricultural exports are likely to increase, on the
other hand India has ensured that all major programmes for the development of
agriculture will be exempted from the disciplines in the Agricultural Agreement.
Thus, the operation of the public distribution system will not be affected by the
provisions of the Agreement; agricultural subsidies granted by developing
countries need not be withdrawn till such time they remain within the prescribed
limits specified in the Agreement; and protection necessary for developing the
agricultural sector in the under-developed countries might by continued. In fact,
India hopes that the reduction of subsidies in the US and the European Community
will enable it to increase its earnings from agricultural exports.
4. The Uruguay Round Agreement has strengthened multilateral rules and
disciplines. The most important of these relate to antidumping, subsidies and
countervailing measures, safeguards and disputes settlement. This is likely to
ensure greater security and predictability of the international trading system and
thus create a more favourable environment for India in the new world economic
order.
Disadvantages to India
The most important advantage of the new world economic order claimed by its
supporters is that it will increase the volume of trade substantially and as a result,
India’s export earnings will expand considerably. However, the estimates of quantitative
gains by India may prove wrong. The gains expected by the Government of India on
account of tariff reductions on goods may also not materialize as the number of goods
of export increase to India is very small.
The most serious disadvantages to India are likely to flow from the Agreements
pertaining to the TRIPs, TRIMs and services.
Protection of intellectual property rights—patents, copyrights, trademarks, etc.
has been made more stringent in the Uruguay Round. This has been done to protect
the interests of multinational corporations and developed countries as the Agreement
on TRIPs is highly weighted in favour of patent-holders. As correctly pointed out by
Muchkund Dubey, intellectual property rights protection is anti-competition and anti-
liberalization and goes against the spirit of opening up the world economy and global
integration. It is to be noted that the TRIPs Agreement goes against the Patent Act of
India 1970 in almost all important areas. Under the Indian Patents Act, only process
patents can be granted in food chemicals and medicines. The TRIPs Agreement
provides for granting product patents also in all these areas. TRIPs Agreement provides
that the general term of a patent shall be 20 years. The Indian Patents Act provides for
a general term of the 14 years for both product as well as process patents.

Self-Instructional Material 259

New Economic Policy 6.3.2 International Bank for Reconstruction and Development
Environment in India
(World Bank)
The World Bank was set up at the same time as the IMF in July 1944. The World
NOTES Bank is concerned with assisting its member countries to achieve sustained economic
growth. It functions as an intermediary for the transfer of financial resources from the
more developed to the less-developed countries.
Objectives: The World Bank was created with the following objectives:
The World Bank: 1. To help in the reconstruction and development of territories of members by
Concerned with assisting its
facilitating the investment of capital for productive purposes, including:
member countries to achieve
sustained economic growth (a) The restoration of economies destroyed or disrupted by war,
(b) The reconversion of productive resources to peace-time needs, and
(c) The encouragement of the development of productive facilities to
peace-time needs, and
(d) Encouragement of development of productive facilities and resources
in less-developed countries.
2. To promote private foreign investment by means of:
(a) Guarantees or participations in loans and other investments made by
private investors and
(b) To supplement private investment when private capital is not available
on reasonable terms.
3. To promote the long range balanced growth of international trade and the
maintenance of equilibrium in balance of payments by encouraging long term
international investment thereby assisting in raising productivity, the standard
of living and conditions of labour in their territories.
4. To encourage loans made or guaranteed so that the more useful and urgent
projects will be dealt with first, and
5. To conduct its operation so as to bring about a smooth transference from a
war-time to peace-time economy.
The World Bank's capital is too small to provide for the development need of
the entire world. It has therefore set up a number of subsidiary organizations for further
finance.
Thus, the Bank was intended to serve as an essential adjunct to the IMF and in
particular to ensure a high and stable level of international investment with a view to
promoting the maintenance of a high level of international trade and thus of production
and employment.
Membership and Organization: Every member of the lMF is also a member
of the World Bank. Any country acquiring the membership of the lMF, automatically
becomes member of the World Bank.
Each member of the World Bank has capital subscription that is similar to its
quota in the Fund. The member’s subscriptions also measures roughly its voting power.
In June 1991, 155 countries were members of the Bank. The World Bank is managed
in the same way as the IMF, except the head officer of the Bank is called the President.
The Governors and Executive Directors of the two organizations are frequently the
260 Self-Instructional Material same men.
 Resources: The World Bank started in 1946 with an authorized capital of $ New Economic Policy
Environment in India
10 billion, divided into 100,000 shares of $ 100,000 each. The member countries
subscribed to it in accordance with their economic position and the size of their quotas
in the IMP. A member’s total subscription in the capital of the Bank was originally
divided into three parts: NOTES
(i) 2 per cent of the subscription to be paid in gold or US dollars,
(ii) 18 per cent of the subscription to be paid in member’s own currency and
the remaining 80% subject to call as and when required to meet the Bank’s
obligations.
Functions: The functions of the World Bank are as follows:
1. It grants long-term and medium-term loans: One of the early objectives
of the World Bank was to aid reconstruction of war-torn nations, the job is
not a matter of history. After an initial period of two years in which the Bank
concentrated its loans on Europe's reconstruction needs, the Bank turned
its attention to developing countries. Loans are of two types-Reconstruction
Loans and Development Loans.
2. The Bank gives loans to member governments or to private enterprises. In
the latter case, the Bank demands a guarantee from the Government, the
Central Bank and similar organizations of the region in which the project is
to be undertaken. Loans are granted on a basis of sound financial and
economic analysis; the project must produce an acceptable rate of return.
3. The Bank gives technical advice to the borrowers and for this purpose engages
experts.
4. Economic and Social Research: In the field of economic and social research,
the World Bank conducts research projects and undertakes smaller research
studies. The World Bank Staff working papers are of great interest among
professional economists. The bank undertakes annually a comprehensive
analysis of economical and social situation in the developing countries with a
view to assessing the situation and making the decisions relating to
development. The World Development Report (Annual) deals with
fundamental problems currently facing the developing countries.
5. The Bank promotes foreign investments by guaranteeing loans made by
other organizations. The Bank’s duty is to supplement and not to supersede
the flow of private risk capital.
6. The World Bank's capital is too small to provide for the development needs
of the entire world. It has therefore set up a number of subsidiary organizations
for further finance.
Evaluations: The Bank's loan policy has been criticised on several grounds:
It is alleged that the cost of World Bank loans is high for the developing countries.
In addition to the high rates of interest on loans, the borrowing countries have to pay
fixed rate commitment charges on undisbursed loan balances. This criticism is true
particularly when we know that the World Bank loans are guaranteed by the
governments of the borrowing countries and are granted by the project appraisals.
Self-Instructional Material 261
New Economic Policy Second, the Bank provides loans mostly for specific projects rather than for
Environment in India
general development purposes. Critics argue that loans should be given for general
development also and thus the quantum of non-project loans be raised.
NOTES Third, as the World Bank is a non-political and non-partisan institution, it is not
supposed to discriminate against some countries in favour of certain others. In actual
practice, however, the bank has given loans not purely on economic considerations.
The countries of Asia and Africa taken together have the largest population area and
unexploited economic resources in the world. Their people suffer from immense poverty.
The help given to them by the World Bank has been too inadequate. On the contrary,
the countries in Latin America and the Caribbean have smaller population and area,
but they have received substantial amounts of loans.
Lastly, it is said that the Bank exercises too much control over the execution of
projects for which loans are given. It usually results on unnecessary interference in the
internal economic matters of the borrowing countries.
6.3.3 The International Monetary Fund (IMF)
The creation of the International Monetary Fund, briefly called IMF, in the post-
Second World War period constitutes an important landmark in the history of
international monetary cooperation.
All members of the United Nations Organization excepting the former USSR
are members of the IMF.
Objectives: The objectives of the IMF are as follows:
1. To promote international monetary cooperation though a permanent institution
which provides the machinery for consultation and collaboration on
international monetary problems.
2. To facilitate the expansion and balanced growth of international trade and to
contribute thereby to the promotion and maintenance of high levels of
employment and real income and to the development of productive resources
of all members as primary objectives of economic policy.
3. To promote exchange stability, to maintain orderly exchange arrangements
among members and to avoid competitive exchange depreciation.
4. To assist in the establishment of a multilateral system of payments in respect
of current transaction between members and in the elimination of foreign
exchange restrictions which hamper the growth of world trade.
5. To give confidence to members by making the Fund's resources available to
them under adequate safeguards, thus providing them with opportunity to
correct maladjustments in their balance of payments without resorting to
measures destructive to national or internationals prosperity.
6. In accordance with the above, to shorten the duration and lessen the degree
of disequilibrium in the international balance of payments of members.
The fundamental objective of the IMF is to facilitate the expansion and balanced
growth of international trade by promoting exchange stability and establishing a
multilateral system of payments. It is also required to make provision of means to
correct short-term maladjustments in member’s balance of payments.
262 Self-Instructional Material
 In essence, the main purpose of establishing the Fund was to achieve external New Economic Policy
Environment in India
advantages of gold standard without subjecting nations to its internal disadvantages
and at the same time maintain the internal advantages of paper standard while by-
passing the external disadvantages of paper standard.
Management: The IMF is an autonomous organization affiliated with the United NOTES
Nations. The head-office of the Fund is located in the US at Washington D.C.
Thirty, of the 44 countries that attended the Bretton Woods Conference are the
original members of the Fund. Membership is open to applicant countries on the terms
and conditions of the Fund. At the end of July 1994, 179 countries were members of
the Fund.
All the powers of the Fund are vested in the Board of Governors. Each member
country appoints a governor but the voting powers of Governors vary. The Board
consists of 24 Executive Directors of whom 6 are appointed and the others are elected
by member countries. The Board meets twice or thrice each week to consider day-
to-day problems.
The Chairman of the Board of Executive Directors is the Managing Director,
who is the executive head and head of the staff of the Fund. He holds office for a term
of five years.
Resources of the Fund: The IMF is financed by the participating countries,
each country’s contribution is fixed in terms of its quota. A member’s total subscription
is equal to its quota, which also determines the borrowing rights and the voting strength
of a member country.
The quota of each member is payable in the following manner: 15% of the
quota or 10% of its gold and dollar holdings is payable in gold or dollars; the rest in the
member's own currency.
It is important to note that until 1971, the IMF quota and all transactions were
expressed in terms of the US dollar which had a fixed parity with gold. Since December
1977, Special Drawing Rights (or SDR) has been used as the principal denominator
of all IMF transactions and accounts. The currency value of SDR is determined by a
standard basket of five specified currencies.
Functions: The fund performs five major functions.
(i) It serves as a short-term credit institution: If any country faces a
temporary balance of payments difficulty, the Fund will come to its aid. It
does not however, undertake to supply all the foreign exchange that a
country may need. All countries are supposed to have their separate
monetary and foreign exchange reserves to meet their normal requirements.
The Fund is not intended to supplant them but to provide only a second
line of defence in case of emergency. The borrowing country has to pay
interest and maintain its quota intact.
(ii) The Fund provides a mechanism for improving short-term balance
of payments position: To achieve this purpose, its rules provide for
oderly adjustment of exchange. No member country can indulge in
competitive exchange depreciation thus introducing the law of the indulge
in international monetary relations. Whenever a country feels that its rate
of exchange is out of line with its economy, the rate can be altered but only
Self-Instructional Material 263
New Economic Policy after due deliberation between the country and the authorities of the fund.
Environment in India
Thus there is provision for the careful determination of the initial rate and
its orderly adjustment subsequently.
(iii) The Fund provides machinery for international consultations: It
NOTES
brings together representatives of the principal countries of the world and
affords an excellent opportunity for reconciling their conflicting claims.
This constructive approach and measure of international cooperation have
had not only a stabilising influence on world economy but they have also
led to the expansion and balanced development of world trade and world
production. The Fund has thus contributed to the promotion and
maintenance of high levels of employment and real income and to the
development of the productive resources of the member countries.
(iv) It provides a reservoir of the currencies of the member countries and
enables members to borrow one another’s currency.
(v) It promotes orderly adjustment of exchange rates to promote exchange
stability.

6.4 SUMMARY

Some of the important concepts discussed in this unit are:

• Liberalization refers to a relaxation of previous government restrictions, usually
in areas of social or economic policy. The main aim of liberalization was to
dismantle the excessive regulatory framework that acted as a shackle on the
freedom of enterprise.
• The concept of laissez-faire as propounded by Adam Smith is known as
privatization in modern-day. In a mixed economy like India, privatization has a
new significance and the private sector in the development process is no longer
an option but essential.
• Privatization across the world started in the mid 80s with a view to increasing
efficiency and competitiveness of industry, means of earning money for the
government and so on.
• Privatization in India began with certain loosening of controls in the area of
Check Your Progress industrial licensing, liberalization of import control policy and long-term fiscal
5. WTO replaced _________ policy since 1985.
and came into effect from
January 1, 1995. • The rationale for privatization in various countries can be classified in to three
6. WTO works independently heads, first pragmatism and ideological compulsions; second the organizational
from the IMF and the World culture in public sector undertakings. It was felt that privatization would revitalize
Bank. (True/False)
the way of working. The third one is a corollary of the above, termed as diktat.
7. Every member of IMF is
also a member of the World The autocratic power of the same made it difficult to manage personnel and
Bank. (True/False) motivate them to perform.
8. The types of loans provided
by World Bank are _______ • Initiative of privatization resulted in the globalization of the economy. Globalization
loans and _______ loans. envisaged free competition, high productivity, promoting cheap suppliers and
boosting industrial development and employment.
264 Self-Instructional Material
 • The American proposal for a general agreement on tariff and trade resulted in New Economic Policy
Environment in India
the emergence of General Agreement on Tariff and Trade. Two main features of
the GATT were the principle of non-discrimination and the reciprocity with the
purpose of free international trade among members.
NOTES
• The World Trade Organization came into effect form 1995 with the backing of
at least 85 member countries including India. The organization now rated as the
third economic pillar of worldwide dimensions alongwith World Bank and the
International Monetary Fund.
• An international economic organization, the International Monetary Fund was
established with a goal to stabilize exchange rates and assist the reconstruction
of the world’s international payment system.

6.5 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. Liberalization refers to a relaxation of previous government restrictions, usually

in areas of social or economic policy. The main aim of liberalization was to
dismantle the excessive regulatory framework that acted as a shackle on the
freedom of enterprise.
2. Three industries where industrial licensing is compulsory are coal and ignite,
petroleum and distillation and brewing of alcoholic drinks.
3. Three objectives of privatization are improvement of the economic-performance
of assets, depoliticalization of economic decisions and promotion of equity.
4. Few features of the globalized economy comprise conducting financial operations
around the world as matters of routine; outsourcing labour and processes from
wherever they are most economically available and conducting activities on an
increasingly supranational scale.
5. GATT
6. False
7. True
8. Reconstruction, development

6.6 QUESTIONS AND EXERCISES

Short-Answer Questions
1. Explain the idea of liberalization.
2. Discuss the objectives and impact of privatization.
3. What are the main causes of globalization?
Long-Answer Questions
1. Write a note on the globalization of Indian economy.
2. How has India benefited from the World Bank and GATT? Explain.
3. Identify and discuss India’s stand on key negotiating issues at the WTO.
4. What are the objectives of the IMF. Discuss its structure and functions. Self-Instructional Material 265
New Economic Policy
Environment in India 6.7 FURTHER READING

1. Worthington, Ian and Britton, Chris Business Environment, Pearson Education.

NOTES 2. Jain TR, Trehan, Mukesh and Trehan, ranju Business Environment, FK
Publications.
3. Paul, Justin Business Environment, TataMcGrawHillEducation Pvt. Ltd.
4. Goyal, Alok and Goyal, Mridula, Business Environment, FK Publications.

266 Self-Instructional Material

 12 MM

VENKATESHWARA
OPEN UNIVERSITY
BUSINESS ENVIRONMENT www.vou.ac.in

BUSINESS ENVIRONMENT

BUSINESS ENVIRONMENT
[MBA]

VENKATESHWARA
OPEN UNIVERSITY
www.vou.ac.in