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Economic and Social Environment

ASSIGNMENT SOLUTIONS GUIDE (2013-2014)
Disclaimer / Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the Assignments. These Sample Answers/Solutions are prepared by Tutor for the help of the student to get an idea of how he/she can answer the questions of the Assignments. Sample answers may be Seen as the Guide/Reference Book/Assignment Guide. Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/Solutions. Please consult you Teacher / Tutor before you prepare a Particular Answer.

Q. 1. All modern economies have certain economic problems to deal with. Examine and illustrate the statement. Ans. This statement states that including all the affluent societies, resources are scarce in each and every economy. Sometimes, choice concerning the use of resources have to be made by individuals, by business corporations, and by society together. The basic economic problems of every economy is the allocation of resources and optimum production. Problems are What to produce? How to produce? For whom to produce? When to produce? The nature of technology, technique of production, quality and quantity of goods and services must be decided by the economy. The timing of production, goods to produced should be decided also. The process of decision-making is different in every economy depending on the way of finding out the solutions to these problems. Some of the basic observations concerning the nature and functioning of modern economies are free market mechanism and centralised planning, secondly, welfare state like growth, efficiency and equity and thirdly, modern economies are not closed but open. National economic environment can be described in the terms of: (a) data environment and (b) system environment. Where, data environment contains the physical trends and structural co-efficients and system environment contains various policy statements, planning techniques, organisation and structure of capital market, role and responsibility of private and public sector i.e. the entire institutional framework of economy forms the system environment. India has a complex mixed economic system. Firstly, simple mixed economic system has the existence of private and public sectors like public, joint, co-operative, light sector, licensed sector, reserved sector etc. Secondly, there is a complementarity between central planning and pricing like five-year plans, annual plans, complex system of liberal rules, strict regulations, control mechanisms, planning etc. Thirdly it is expected to reach a target level of social welfare, and to complete this work, the profit policies are designed.

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In order to attain a higher rate of growth, heavy industrialization and large investments are undertaken. These kind of investments increase the flow of money faster than the flow of output, which generates inflationary forces. Hence, price stability comes in conflict with social justice. To reduce income inequalities progressive tax system is used and to overcome the balance of payment difficulties foreign exchange remittance help the country. Some of the landmark developments are Industrial Policy Resolution of 1948, Industries Development and Regulation Act 1951, Directive Principles of State Policy 1950, MRTP Act 1969, Industrial Licensing Policy 1970, FERA 1973, five-year plans, 20-point programme, controls and regulations on prices, output, production, various nationalisation schemes, antipoverty schemes. Some important provisions of 1980 were excess capacity regularisation, automatic expansion in rates of basic, critical and strategic importance industries from 5% per annum to 25% per annum in five years, promotion of 100% export oriented units, revival of sick units, development of nucleus plants and reorientation of public sector. Q. 2. Briefly examine the growth of SSI in the post-reforms period. Ans. Small Scale Industry has emerged into a prominant sector in Indian economy due to the wide network of institutions, policies and programmes and its own intrinsc merits. The growth was not only in the terms of unit but in terms of employment and production also. Some of the industries in the SSI sector contributing to export are readymade garments, leather products, gems and jewellery, handicrafts, chemicals and processed foods. In the post-reform period, small scale industry has been growing largely. Small scale industries registered a higher growth rate than the overall industrial sector in terms of number of units, production, employment and exports, despite the global and domestic recesion. Goods from the outside world are now marketed in India with the removal of quantitative restrictions. Several other factors contributed to the growth of small industry are: * A renewed realization in the 90s about the opportunities for food processing units both withing the country and abroad. * A emerging trend of Multi-National Corporations (MNCs). * Devaluation and depreciation of rupee. * A remarkable upsurge in the growth of durable consumer goods and capital goods industries. * The setting up of Small Industries Development Bank of India (SIDBI). The first and foremost problem is on the technology front faced by Small Scale Industry. Goods produced by SSIs are of poor quality and design. NACR and FNS has revealed that SSI used outmoded technology and its products are lack of quality. Due to the consistent high growth, requirements of SSI have been growing remarkably. Non-availability of finance at right time and quantity has remained a bottleneck for SSI growth. Small Scale entrepreneurs, in the visit of different kind of officials are said to be subject to harassment and disruption of work. Shortage of power, inadequate raw materials, marketing constraints etc., are some of the major problems faced by the small industry sector. All these have resulted in sickness in SSI.

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To tackle sickness in SSI, the basic casual factors like technological obsolescence, lack of finance, material constraints, marketing problems, etc., have to be solved. RBI had set-up a committee and issued guidelines to banks for early detection of sickness and prompt remedial action. Some other measures to overcome the constraints faced by SSIs are: * Linkages between Council of Scientific and Industrial Research (CSIR) and small industries need to be developed. * To promote credit flow to SSI, SIDBI can set-up district-wise branches. * Exclusive investment banks for SSI must be permitted to come up. * The role of vast network of technical institutions need to be reoriented and assessed for SSI technology development. * SIDO and NSIC may study the means to promote international sub-contracting for SSI benfit. * Visit of inspectors should be monitored and curtailed to the minimum. Q. 3. Critically analyze the achievements and adverse effects of regulatory framework in the course of Indias industrialization. Ans. Impact of Regulatory Framework on Industrial Structure and Performance The regulatory policy framework had affected: (a) The structure of Industrial Production: The Manufacturing Value Added (MVA) of capital goods industries which was less than 10% in 1950 and 40% in 1960 accounted 57% in 1984 and share of consumer goods declined to one-fourth in 1984 from one-third in 1960. (b) Size Distribution of Firms: The entry, growth and exit for different size of firms had barred. (c) Production Scale: The production units are and production costs became higher. (d) Market Concentration: Only a few firms had dominant share in many industries but they were protected from competition and not allowed other firms to enter into highly concentrated industries. (e) Production Specialization: The industrial product specialisation was insufficient due to highly protective industrial and trade policies, production of intermediate inputs for inhouse consumption, high rate of excise duties, licensing regime was less restrictive in granting licenses for new product lines. (f) Growth and Efficiency of Industry: The restrictive. industrial Policies aimed at planned industrialization of the country resulted in below the potential growth of industry and slower change in economic structure. To industrialise the country by assigning a major role to the public sector, Government formuated regulatory industrial policies, keeping in view the basic goals of the nation: economic growth, self-reliance and social justice. Therefore, there are four main objectives of the regulatory policy framework. (a) With an emphasis on the public sector, the promotion of heavy industry. (b) Economic self-reliance, which translated into broad efforts at import substitution and restrictions on technology imports to promote indigenous innovation.

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(c) Protection to small industry sector. (d) Balanced regional development. A variety of policy instruments formed the regulatory policy framework to achieve these objectives. Reservation of vast areas of industrial activities for the public sector, Legislation to control large and dominant firms, Industrial Licensing to regulate and control investments in industry and locations, Legislation to control foreign investment and technology inflow, Comprehensive policies and incentives to protect small scale industry, Restrictions on location of industrial units and incentives to move into backward regions, Price administration of infrastructural inputs and taxation, on the whole, due to the emergence of regulatory industrial policy framework, industrial activities were subjected to a wide variety of controls and regulations. The Regulatory policy framework emerged out of IPR 1956 and pursued for more than three deades had affected: (1) The structure of industry comprising structure of industrial production, size distribution of firms within industry, scale of production, market concentration of firms and product specialisation and (2) The growth and efficiency of industry. The basic and capital goods industries which accounted for less than 10 percent of Manufacturiong Value Added (MVA) in 1950 and 40 percent in 1960, accounted for 57 percent in 1984. The share of consumer goods which accounted for more than one third of MVA in 1960 declined to about one-fourth in 1984. The regulatory policies created differential barriers to entry, exit and growth for different sizes of firms. Licensing constraints, protection to small industry units, and limited size of the domestic market together had led to the growth of plants with less than economic scales of production. Though many Indian plants are small by international standards, production was concentrated only in a few firms in many industries. Absence of product specialisation and horizontal diversification in many industries is another outcome of regulated policy framework. The regulatory industrial policies affected the overall growth and efficiency of industry as well. In the process of economic development, countries go through two stages of structural change. In the first stage, the share of agriculture in Gross Domestic Product (GDP) falls and that of manufacturing output increases. In the second stage, the share of agriculture continues to fall and that of manufacturing after reaching the level of 25 to 35 percent of GDP also starts declining combined with the increasing share of service sector. The slow growth of productivity and rising trend of capital intensity adversely affected the competitiveness of Indian industry in the international market and thereby affected the growth of Indian exports as well. Q. 4. Distinguish between free trade and protection. Discuss the merits and demerits of free trade vs. protection for a developing country like India. Ans. The policies adopted by a country with reference to exports and imports are called Trade Policy. Trade Policy can be a free trade policy or protective trade policy. A free trade policy is a policy which does not impose any restriction on the exchange of goods and services

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between different countries. It involves complete absence of tariffs quotas, exchange restrictions, taxes and subsidies on production, factor use and consumption. It offers several advantages but they were enjoyed by developed and developing countries and underdeveloped countries were at a disadvantage in such system of international trade, which results in the emergence of protective trade policies in the early 20th century. Whereas, a protective trade policy seeks to maintain a system of trade restrictions with the objective of protecting the domestic economy from the competition of foreign products. It constituted an important plank in the commercial policies of underdeveloped countries during the 50s, 60s 70s and 80s to some extent. Trade policy is a set of policies adopted by a country with reference to imports and exports. It can be a free trade policy or protective trade policy. A policy which does not impose any restriction on the exchange of goods and services between different countries is a free trade policy. It includes exchange restrictions, taxes and subsidies on production, absence of tariff quotas, factor use and consumption. The disadvantages of this policy results in the emergence of protective trade policies in the early 20th century. Whereas, a policy which seeks to maintain a system of trade restrictions with the objective of protecting the domestic economy from the competition of foreign products is a protective trade policy. Trade policies may be outward looking or inward looking. An outward looking trade policy encourages free trade as well as the free movement of capital, workers, enterprises and students, a welcome to the multinational enterprise and an open system of communications. Whereas an inward looking trade policy stresses the need for a country to evolve its own style of development and to be the master of its own fate, with restrictions on the movement of goods, services and people in and out of the country. It also encourages the development of indigenous technologies appropriate to a countrys resource endownment. Some of the commodity specific trade policies which can be adopted by developing countries like India are: (1) Primary Outward Looking Policies: They are aimed at encouraging agricultural and raw material exports. (2) Secondary Outward Looking Policies: They are aimed at promoting manufactured exports. (3) Primary Inward Looking Policies: Its objective is to achieve agricultural selfsufficiency. (4) Secondary Inward Looking Policies: Its objective is attaining manufactured commodity self-sufficiency through import substitution. Trade policy will strongly influence the direction, trade and growth of foreign trade of a country, which in turn, will have a bearing on the economic development process. Therefore, trade policy is an important economic instrument which can be used by a country, with suitable modifications from time to time, to achieve its long-terms objectives.

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Q. 5. Collect data on foreign technical and financial collaborations for the period 2005-2012 and write a note on the trends of these collaborations. Ans. Foreign Investment Policy: 1991 Onwards Indias foreign investment policy has come a long way since independence. To facilitate the Indian economy and industry. To facilitate the Indian economy and industry in particular to achieve international competitiveness, led to the implementation of radical changes in Indias foreign investment policy the new industrial policy was introduced in 1991. FERA 1993 was brought into force to provide a larger role for foreign investment and technology Foreign investment does not need a company of foreign technology. Foreign investment upto 51 percent would be approved automatically ion 35 groups of high priority industries. Foreign investors have to adhere to divided balancing for a period of seven years from the date of commencement of production in 22 groups of consumer goods industries. Foreign investors can set-up fully owned subsidiaries. To facilitate the investments, the Government has set-up the Foreign Investment Promotion Board (FIPS) and to formulate the guidelines for the foreign investment policy and to promote opportunities for foreign investment in the country a Foreign Investment Promotion Council (FIPC) is formed upto 24 percent equity participation is allowed in small sale enterprises. The perception, attitude and approach of Idian Policy makers towards foreign investment have undergone a remarkable change in the 90s. Foreign Investment and Collabotaions in the PostReform Period In the 90s the Government has gone for an overhaul of foreign investment policy. FERA 1973 has been diluted largely and foreign investment is welcomed in a wide range of sectors. Foreign investors have responded positively to Indias policy changes. There has been a gradual and steady increase in both foreign investment and technical collaborationsapprovals as well as actual inflow. Telecommunications and Fuels are the two major sectors which account for the bulk of foreign investment approved during 199196. The other major sectors attracting much of the foreign investment approved are transportation industry, food processing industreis, chemicals, electrical equipments, service sector. The diversified foreign investment and collaborations further strengthen the diversified Industrial structure of Indian economy. India has been experiencing a significant increase in the magnitude, wider dispersion in terms of origin and direction of foreign investment in the post-reform period. Even the actual inflow of foreign direct investment has steadily gone up in the post-reform period. Thus, the liberalization of Indias foreign investment policy has had a major impact on foreign investment and collaborations. Transportaion indutry, food processing industries, chemicals, electrical equipments, service sector are the other major sectors attracting much of the foreign investment approved. The recognition of the role of foreign investment in economic development by India and the recognition of India as an important investment destination by foreign investors will have a long lasting impact on the globalisation process of the Indian economy.

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In the 90s, there has been a remarkable ussurge in the magnitude of foreign collaboration. This was due to an increase in both technical and financial collaborations. The amount of approaved foreign investment has gone up as the total foreign collaborations has increased steadily. During 1991-96, the two major sectors i.e. Tele-communications and fuels account for the bulk of approved foreign investment. The flowing of foreign direct investment into diversified sectors of Indian economy is a great achievement. The other major sectors which attract much of the approved foreign investment are transportation industry, chemicals, food processing industries, electrical equipments and service sectors. The diversified industrial structure of Indian economy can be further strengthened by the diversified foreign investment and collaborations from as many as 80 countries across the world India is attracting foreign investments, which includes America, Europe, Middle East, Africa, Australia and different parts of Asia. The actual inflow of foreign direct investment has gone up and India has been experiencing a wider dispersion in terms of origin and direction of foreign investment and a significant increase in the magnitude in the postreform period.

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