INTERNAL RESEARCH ASSIGNMENT Name of the candidate: PANKAJ SHARMA Enrollment No.

: 10715903913 Course: MBA-I-B Batch: 2013-2015 Subject: Business and Legal Environment Subject code: MS-113 Topic of assignment: Industrial Policy and Political Environment Subject Teachers name: Dr. Divya Chowdhry

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Question 2
a) Review the economic reforms in foreign investment policies after the 1991 crisis. What has been the impact of these reforms on trade and foreign investment flows? b) Do you believe political stability leads to business development & vice-versa? Discuss.

ANSWER: A.)
ECONOMIC REFORMS IN FOREIGN INVESTMENT POLICIES AFTER 1991 CRISIS:
Foreign Investment Policy was the part of external trade reforms under industrial policy 1991, there were major changes in the foreign investment policy regarding the foreign investors. The changes are stated below: While freeing Indian industry from official controls, opportunities for promoting foreign investments in India should also be fully exploited. In view of the significant development of India's industrial economy in the last 40 years, the general resilience, size and level of sophistication achieved, and the significant changes that have also taken place in the world industrial economy, the relationship between domestic and foreign industry needs to be much more dynamic than it has been in the past in terms of both technology and investment. Foreign investment would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports. This is particularly necessary in the changing global scenario of industrial and economic cooperation marked by mobility of capital. The Government will

therefore, welcome foreign investment, which is in the interest of the country's industrial development. In order to invite foreign investment in high priority industries, requiring large investments and advanced technology, it has been decided to provide approval for direct foreign investment upto 51 per cent foreign equity in such industries. There shall be no bottlenecks of any kind in this process. This group of industries has generally been known as the "Appendix I industries" and are areas in which FERA companies have already been allowed to invest on a discretionary basis. This change will go a long way in making Indian policy on foreign investment transparent. Such a framework will make it attractive for companies abroad to invest in India.

MAJOR IMPACTS OF THE ECONOMIC REFORMS ON TRADE AND FOREIGN INVESTMENT FLOW
Foreign Investment allowed up to 51 % of Equity capital in FERA companies. Foreign Investment allowed up to 26 % of Equity capital in defence productions sector. Up to 100 % in certain sectors ( real estate ). Stock market opened for foreign investment. EXIM Policy liberalized , tariffs reduced , lifted import restrictions. Foreign exchange rate policy liberalized, Rupee was made fully convertible on current account and then recently partly on capital account. Dilution of protection to small scale industries and emphasis on competitiveness.

 The automatic approvals for technology agreement are allowed to industries within specified parameters. Indian companies are free to negotiate the terms of technology transfer with their foreign counterparts according to their commercial judgment. Companies can make remittances for technical services fees, know-how and royalty subject to the terms approved by RBI.

THE IMPACT OF THESE REFORMS ON TRADE AND FOREIGN INVESTMENT FLOW: Before economic reforms in foreign investment policy in 1991 crisis:
Restrictive policy towards foreign technology. Foreign investment allowed only in select industries that too subject to normally, a ceiling of 40% of total equity and prior permissions. There was a rigid framework regarding the foreign investors. The foreign investment limit in many sectors was very less. High import duties were their.

After economic reforms in foreign investment policy in 1991 crisis:

Very liberal policy towards foreign technology

Foreign investment allowed in a large number of industries, including up to 100% or equity in many of them. Automatic route available subject to specified conditions.

 After these reforms the foreign policy structure has become much flexible. The investment limit in many sector was increased in almost every sector and 100% in some sectors Drastic cut in import duties.

Positive Aspects:
Policy regarding Foreign capital: End of the rigid Bureaucratic controls and licensing. Import duties were brought down to very low. Many sectors were open for the foreign investors to invest and the limit of investment was also increased.

Negative Aspects:
Policy regarding Foreign Capital:
Assertions by critics assert that the welcome foreign capital may lead us to selling of our sovereignty to multinationals. Prudence demanded that utmost care to be taken to invite foreign capital in high priority industries only Monitoring of payment of dividends by RBI.

B.) yes, the statement is true that political stability leads to business development.
Political stability refers to the political environment of the country. The countrys legislature, judiciary and executive shapes the political environment of the country and reflects the political stability in the country. The practices exercised by the ruling political party in the context of business leads to the development in the business and can also leads to the fall in the development of the business. This concept is basically the political stability of the business.

The factors that constitute the political stability of a country are:

The constitution of a country Political Organisation Image of the country and its leaders Foreign Policy Laws governing business Flexibility and adaptability of laws The Judicial System

The above factors the factors that leads to development in the business and also they are the factors of political instability that may lead to the fall of the business growth. The positive and negative aspects of above factors are explained in detail below:

Factors of political stability that leads to business development and vice versa:
The constitution of a country:
If the constitutional framework of the country is in the concern of the development of the business sectors than it will lead to the better political stability and the functioning of the business firms will become more flexible and the business will feel more comfortable with the framework of the constitution. If the constitution of the business is not in the interest of the business and is not flexibly made than it may also lead to the fall in growth of business.

Political Organization:
Ever country has its own political organization. The organization reflects the structure of the political framework. It states that less will be the hierarchy more will be the flexibility in the operations, more complex hierarchy leads to more complexity in business operations which creates obstacles in the development of the business. So more smoother and understandable political organization leads to better development.

Image of the country and its leaders:

Better the image of the country is better will be the development of the business because the investors will feel more attractive to invest in the business of that country because they know that will get better return because of the good image of the business. The image of the country is created by its leaders, so, the leaders should be experienced and qualified enough to make business laws. If, the leaders of our country are not enough experienced than the policies made by them would not be optimum effective and it may lead to the fall in development of the business.

 Foreign Policy :
The foreign policy made by the ruling political party should be attractive to the foreign investors and should be stable for better development of the business in the country. A country having better foreign policy will have huge foreign investment with them and it will lead to the development of business. The foreign policy is one of the major factor or a major decision taken by the political parties regarding the foreign investors and if the decision regarding the foreign policy is not taken properly than it will give rise to lack of foreign investors that will lead to the fall in business development.

Laws governing business:

Stability in laws leads to better functioning in the businesses which leads to continuous development in the business sector. Laws of a country contains the following aspects: Rules Regulations Guidelines

These are the aspects contained in the laws that governs business, if these laws are as stable and are in the concern or the business the business will develop otherwise it will not.

Flexibility and adaptability of laws:

Laws and its flexibility are different from each other because laws are the written rules and regulation that govern business practices but its flexibility is in the practical sense of adaptability. The flexibility can only be judged when the laws governing business practices are applied. If the laws governing business are

flexible it will lead to business development and if the laws are not flexible than the business development will fall.

The Judicial System:

The judiciary also known as judicial system is a system that interprets law in the name of the state. The judicial system contains the law of settlement of disputes under the doctrine of state. The judicial system doesnt make laws or enforce laws but it interprets the laws in the name of the state. So, a judicial framework of the country should be properly established for the business development. If the judiciary is not properly established it may lead to the fall in the business development.