BUSINESS ENVIRONMENT

UNIT 1

BUSINESS AS A SOCIAL SYSTEM

Business is an integral part of social system and it is influenced by other

elements of society which, in term, is affected by the business. Today the whole
society is a business environment.

Davis and Blomstorm point out that in taking an ecological view of

business in a systems relationship with society; three ideas are significant in
addition to the systems idea.

The three ideas are:

1. Values
2. Viability
3. Public visibility

1. VALUES:
Business like other social institutions, develops certain belief systems and
values for which they stand, and there beliefs and values are a source of
institutional drive. These values drive from a multitude source, such as the mission
of business as a social institution, the nation in which business is located, the type
of industry in which it is active and the nature of employees. These values become
guides for employees decisions in the interface of business. Second, they become
strong motivators for people in a business.

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2. VIABILITY
Davis and Blomstorms define viability as the drive to line and grow, to
accomplish the potential not yet reached, and to achieve all that a living system is
capable of becoming. If a business is to be a viable, vigorous, institution in society,
it must initiate its share of forces in its own environment rather than merely adjust
to outside forces. Every business needs a drive and spirit all its own to make it as a
positive actor on the social stage rather than reactor or a reflector.

3. PUBLIC VISIBILITY
The term public visibility refers to the extent that organizations activities
are known to person outside the organization. Public visibility is different from
idea of public image. The term public image refers to what people think about an
organizations act, while are known. The importance of public visibility is that it
subjects business activities to public examination, discussion and judgment.

These are became business is integral part of social system. It is a social

organ to help accomplish the social goals.

INTERNAL AND EXTERNAL ENVIRONMENT OF BUSINESS [TYPES

OF ENVIRONEMTN]
I. INTERNAL ENVIRONMENT FACTORS

1. Value system: The value systems of the founders and those at the helm of
affairs have important bearing on the choice of business, the mission and
objectives of the organization, business policies and practices. It is a widely
acknowledged fact that the extent to which the value system is shared by all in
organization is an important factor contributing to success.

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2. Mission and Objectives: The business domain of the company, priorities,
direction of the development, business philosophy business policy etc are
guided by the mission and objective of the company.
Example: Ranbaxys thrust in to the foreign markets and developments have been
driven by its mission to become a researcher based international pharmaceutical
company.

3. MANAGEMENT STRUCTURE AND NATURE

The organizational structure, the composition of board of directors, extent
of professionalization of management etc, are important factors influencing
business decisions. Some management structures and styles delay decision making
while some other facilitate quick decision making.

The Board of Directors being the highest decision making body which sets
the direction for the development of the organization and which oversees the
performance of organization, the quality of the Board is a very critical factor for
the development and performance of company.

4. INTERNAL POWER RELATION

Factors like the amount of support the top management enjoys from the
different levels of employees, share holders, and Board of Directors have
important influence on the decision and their implementation. The relationship
between the members of the board and between chief executive and the Board are
also critical factors.

5. HUMAN RESOURCES
The characteristics of the human resources like skill, quality, morale,
commitment, attitude etc., could contribute to the strength and weakness of the
organization.

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6. COMPANY IMAGE AND BRAND EQUITY
The image of the company matters while raising finance, forming joint
ventures or other alliances, soliciting marketing intermediaries, entering purchase
on sale contracts, launching new products etc. Brand equity is also relevant in
several of these cases.

7. OTHER FACTORS
A) Research and development determine a companys ability to innovate and
compete.
B) Marketing quality of marketing men, brand equity, distribution network
have direct effect on marketing.
C) FINANCE 0 financial policies; financial position and capital structure are
also affecting business performances.
D) Physical Assets production capacity, technology, distribution logistics

EXTERNAL ENVIRONMENT FACTORS

It consists of 2 types.
1. Micro environment
2. Macro environment

I. Micro Environment
The micro environment is also known as the task environment and
operating environment became the micro environment forces have a direct bearing
on the operations of the firm.
These include the factors like

1. SUPPLIERS
An important force in the micro environment of a company is the suppliers,
i.e. those who supply the inputs like raw materials and components to the

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company. The importance of reliable source of supply is for the smooth
functioning of business.

It is very risky to depend on a single supplier became of skills, lock out or

any other production problem with that supplier may seriously affect the company.
Hence multisource of supply often helps reduce risks.

2. CUSTOMERS
A business exist only became and its customers. A company may have
different categories of customers like individuals, households, industries and other
commercial establishment and govt. and other institution.

3. COMPETITORS
A firms competitors include not only other firms which market the same
products but also all those who compete for the discretionary income of the
consumers.

4. MARKETING INTERMEDIARIES
The immediate environment of the company may consist of number of
marketing intermediaries which are firms that aid the company in promoting,
selling and distributing its goods to final buyers.

The marketing intermediaries includes middlemen such as agents and

merchants who help the company find customers or close sales with them.

5. FINANCIERS
Another important micro environmental factor is the financier of the
company. Besides the financing capabilities, their policies and strategies, attitudes,
ability to provide non financial assistance etc are very important.

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6. PUBLICS
A public is any group that has an actual or potential interest in an impact
on an organizations ability to achieve its interests. Media publics, citizen action
publics and local publics are some examples.

MACRO ENVIRONMENT
It is also called as general environment and remote environment. The macro
environment is generally uncontrollable than micro environment, the success of
the company depends on its adaptability to the environment.

The important macro environment factors as follows:

I. TECHNOLOGICAL ENVIRONMENT
Technology is one of the important determinants of success of a firm as
well as economic and social development of nation. It includes both hardware and
software to solve problems and promote progress.

1. Innovative drive of company

The term innovation means introduction of new product, the use of new
method of production. The technical, industrial and commercial steps which leads
to marketing of new products and to commercial use of new technical process and
equipment.

2. Customers Needs / Expectation

Technological orientation and R&D effects of a company may also be
influenced by the customer needs and expectation. In several cases the customer
and the supplier have a collaborative relationship to develop the product or
solutions. If the customers are highly demanding, companies would be compelled
to be innovative.

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3. Demand conditions
The size of demand influences the choice of the technology . The size of
demand influences the choice of the technological scale. Fast growing trend of
demand would encourage development of technology of large scale.

4. Suppliers offering
Many times technological changes are encouraged by the suppliers of a
company, like a capital goods supplier etc.

5. Competitive dynamics
Competition compels the adoption of the best technology and constant
endeavor to innovate.

6. Substitutes
Emergence of new substitutes or technological improvements or substitutes
which alter technological change.

7. Social forces
Certain social forces like pretext against environment pollution or other
ecological problems demand for eco-friendly products.

8. Research organization
The technological environment of business is enriched by researched
organizations which develops new technologies and provide other technical inputs.

9. Govt. policy
The govt. contributes to the development to the technology by its own
direct involvement by establishing research organization and funding R & D. The
govt. may encourage private R & D by various incentives.

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II. DEMOGRAPHIC ENVIRONMENT

The importance of demographic factors to business is clear from the facts

that Management is men & Market is people. i.e., Management in Men,
Material, Machinery and Money, and market is people in the sense that the
demand depends on the people and their characteristics the number, income
levels, tastes and preferences, beliefs, attitudes and sentiments.

Important demographic bases of market segmentation include the

following:
1. Age structure
2. Gender
3. Income distribution
4. Family size
5. Occupation
6. Education
7. Social class
8. Religion
9. Race
10. Nationality

Demographic factors such as size of population, growth rate, age

composition, ethnic, density of population, rural urban distribution, nature of
family have very significant implication for business.

III. ECONOMIC ENVIRONMENT

Business partners and strategies are influenced by the economic
characteristics. The economic environment includes the structure and nature of the

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economy, the stage of development of economy, economic resources, level of
income, global economic linkages, economic policies etc.

1. Nature of the Economy

The general level of development of the economy has lot of implication for
business it has significant bearing on the nature and size demand, govt. policies
affecting business. The widely used method of classification of the economies is
on the basis of per capita income. Accordingly the low income, middle and high
income economies.

Low income economies are economies with very low per capita income.
High income economies are economies with very rich income per capita. Middle
income economies are sub divided into lower middle and upper middle income
where income per capita is neither very high nor low.

2. Structure of the economy

Factors such as contribution of different structure like primary
(agricultural), secondary (industrial) & tertiary (secondary) sectors, large,
medicine, small sectors to economy. These factors and the nature of each sector
have business implication. For example, India is one of the largest producers of
agricultural products, because of the small and fragmented nature of land holdings,
efficient collection and processing of products become difficult. The land holding
pattern also makes productivity improvements difficult.

3. Economic policies
There are several economic policies which can have very great impact on
business. Important economic policies are

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a) Industrial policy
It defines the scope and role of different sectors like private, public, joint
and cooperative. It may influence the location of industrial undertakings. Choice
of technology, state of operation, product mixes etc.

b) Trade policy
It can affect the fortunes of firms. For example a policy of protecting the
home industry may greatly help the import competing industries, while liberation
of the impart policy may create difficulties for such industries. This mean the firm
should come up with quality, cost, and marketing and after sales service etc.

c) Foreign exchange policy

Exchange rate policy and policy in respect of cross border movement of
capita are important for business.

d) Foreign investment and technology policy

Foreign investment and technology policy will increase domestic
competition at the same time it would benefit many domestic firms by
permitting global sourcing of capital and technology, by increasing the quantity
and quality of domestic supply of many goods and services.

e) Fiscal policy
Govt. strategy in respect of public expenditure and revenue can have
significant impact on business. The pattern of public expenditure may affect the
develop of industries. Such as govt. often use tax incentives or disincentives to
encourage or discourage certain activities. For ex: when industry suffers from
recession, a reduction of taxes like excise duty or sales tax may help improve the
demand.

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f) Monetary policy
The central bank, by its policy towards the cost and availability of credit,
can significantly influence savings, investments and consumer spending in
economy. For example 1% reduction in cash reserve ratio will significantly
increase loan able funds with commercial banking systems.

IV. NATURAL ENVIRONMENT

The natural environment ultimately is the source and support of everything
used by business every raw material, energy resource, life sustaining factor etc.

The natural environment determines what can be got done in a society and
how institution can function. Resource availability is the fundamental factor is the
development of business in the society.

Thus geographical and ecological factors, such as natural endowments,

weather and climatic conditions, topographic factors, vocational aspects in the
global context etc., are all relevant to business.

1. Geographical factors: differences in geographical condition between

markets may sometimes call for changes in the market mix. It influences
the location of some industries.
E.g. Industries with material index tend to be located near the raw material
sources.
2. Climatic and weather conditions: It affects the location of certain
industries like cotton textile industry. Topographic factors may affect the demand
pattern in some cases. E.g. in hilly areas Jeeps are greater demand than cars.

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 Weather and climatic factors affect the demand of certain types of products.
E.g. in region where temperature is very high in summer, there is good demand for
desert coolers.

Weather and climatic factors can affect the demand pattern of clothing,
building materials, food, medicines etc. further, weather and climatic conditions
may call for modification to the products, packaging storage conditions etc.

3. Ecological factors: It assumes great importance, the depletion of natural

resources, environmental pollution another disturbance of the ecological balance
have carried great concern, govt. policies aimed as preservation of environment
purity and ecological balance, conservation of non-replenish able resources have
resulted additional responsibilities and problems for business.

CORPORATE SOCIAL RESPONSIBILITY

The important generally accepted responsibilities of the business to
different sections of the society are described below.

1. Responsibility to shareholders
The responsibility of a company to its shareholders, who are owners is a
primary one. The fact that the investments in the business should be recognized.
To protect the interests of the shareholders and to provide a reasonable dividend,
the company has to strengthen and consolidate its position.

2. Responsibility to employees
The success of an organization depends to a very large extent on the morale
of the employees and their whole hearted co-operation.

The responsibility of the organization to the workers include

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 1. The payment of fair wages
2. The provision of best possible working condition
3. Establishment of fair working standards and norms
4. The provision of labor welfare facilities to the extent possible and desirable
5. Arrangements for proper training and education of the workers
6. Reasonable chances and proper system for accomplishment and promotion
7. Proper recognition, appreciation and encouragement of special skills and
capabilities of workers.
8. The installation for efficient grievance handling system
9. An opportunity for participating in managerial decisions to the extent
desirable.

3. Responsibility to consumers
The customer is the foundation of business and keeps it in existence. It has
been widely recognized that customer satisfaction shall be the key to satisfying the
organizational goals. Some important responsibilities of business to customers are

1. To improve the efficiency of the functioning of business so as to increase

productivity and reduce prizes, improve quality, smoothen the distribution
system to make goods easily available.
2. To do research and development, to improve quality and introduce better of
new products.
3. To take the steps to remove the imperfection in the distribution system
including black marketing or anti-social elements.
4. To supply goods at reasonable prizes
5. To ensure that the product supplied has no adverse effect on the customer.

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6. To provide sufficient information about the product including adverse effects,
risks and care to be taken while using the products.
7. To avoid misleading the customers by improper advertisement.
8. To provide opportunity for being heard and to redress genuine grievances.
9. To understand customer needs and to make necessary measures to satisfy these
needs.

4. Responsibility to community

A business has a lot of responsibility to the community around its location

and to society. The responsibilities include

1. Taking appropriate steps to prevent environmental pollution and preserve

ecological balance.
2. Rehabilitating the population displaced by operate of the business
3. Assisting in the overall development of locality
4. Taking steps to conserve scares resources and developing alternatives
5. Improving the efficiency of the business operation
6. Contributing to research and development
7. Develop of backward areas
8. Promotion of small scale industries
9. promotion of education and population control
10. Contribution to the national effort to build up a better society

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BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY

BUSINESS ETHICS

The term business ethics refers to the system of moral principles and rules
of conduct applied to business. This means that the business should be conducted
according to certain self-recognized moral standards. Business, being a social
organ, shall not conduct itself in a way detrimental to the interests of society and
the business sector itself. A profession is bound by certain ethical principles and
rules of conduct which reflect its responsibility, authority and dignity. The
professionalization of business management, should therefore, be reflected in the
increasing acceptance of business ethics.

NOTE: In the 1930s Rotary International developed the code of ethics that is still
used extensions. It uses 4 questions that are called the 4 way of ethical behavior
for any business forces

Is it truth?
Is the fair to all concerned?
Will it build goodwill and friendship?
Will it be beneficial to all concerned?

LIST OF IMPORTANT ETHICAL PRINCIPLES THAT A BUSINESS

SHOULD FOLLOW:
1. Do not deceive or cheat customers by selling substandard or defective products
by under measurements or by any other means.
2. Do not resort to hoarding, black marketing or profiteering.
3. Do not destroy or distort competition

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4. Ensure sincerity and accuracy in advertising, labeling and packaging.
5. Do not tarnish the image of competitors by unfair practices.
6. Make accurate business records available to all authorized persons.
7. Pay taxes and discharge other obligation promptly
8. Do not farm cartel agreements, even informal, to control production, price etc
to the common detriment.
9. Refrain from secret kickbacks on payoffs to customers, suppliers,
administrators, politicians etc.
10. Ensure payment of fair wages to and fair treatment of employees.

ISSUES IN CORPORATE GOVERNANCE

Corporate governance is defined as the process and structures by which

business and affairs of corporate sector is directed and managed. The concept of
corporate governance primarily hinges on complete transparency, integrity and
accountability of the management.

Corporate governance is concerned with the values, vision and visibility. It

is about the value orientation of organization, ethical norms its performances, the
direction of development and visibility of its performances and practices.

Objectives
1. To build up an environment of trust and confidence amongst those having
completing and conflicting interest.
2. To enhance shareholders value and protect the interest of other shareholders by
enhancing the corporate performances and accountability.
- Transparency
- Accountability
- Investor protection

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 - Societal needs
- Value creation for stakeholders

ECONOMIC ROLE OF GOVERNMENT

The government plays an important role in almost every national economy

of world. Business fortunes and strategies are influenced by the economic
characteristics and economic dimension. The government normally plays four
important roles in an economy. They are,

1. Regulatory Role
Government regulation of the business may cover a broad spectrum
extending form entry into business to the final results of business. The reservation
of industries to small scale, public and co-operative sectors, licensing system etc.,
regulate the entry. Regulations of product mix, promotional activities etc., amount
to regulation of conduct to business. The state also regulates relationship between
enterprises.

2. Promotional Role
The promotional role played by the government is very important is
developed as well as in duping countries. In developing countries, where the
infrastructural facilities for development are inadequate and entrepreneurial
activities are scarce, the promotional role of the govt. assumes significance. The
state will have to assume direct responsibility to build up and strengthen
infrastructure such as power, transport, finance, marketing, institutions for training
and other promotional activities.

The promotional role of the state also encompasses the provisions of fiscal,
monetary and other incentives and development of priority sectors and activities.

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3. Entrepreneurial Role
Entrepreneurial role includes establishing and operating business
enterprises and bearing risks. A number of factors such as socio-political
ideologies, dearth of private entrepreneurship, absence of inadequate competition
in certain segments and resultant exploitations of consumers have contributed for
the growth of state owned enterprises.

4. Planning role
State plays an important role as planner.

GLOBAL ENVIRONMENT
Globalization is an attitude of mind which views the entire world as a
single market so that the corporate strategy is based on the dynamics of the global
business environment.

Globalization encompasses the following:

1. Expanding business globally
2. Giving up distinction between domestic and foreign market and developing
global outlook of business.
3. To maximize profit
4. For growth

Essential conditions for globalization

1. Business freedom: There should not be necessary govt. restriction like import
restriction, foreign investments etc.

2. Facilities: Enterprise can develop globally from home country bare depends on
facilities available like the infrastructural facilities.

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3. Govt. support: Govt support can encourage globalization, like infrastructural
facilities, R & D support, financial market reforms.

4. Resources: It decides the ability of firm to globalize. Resourceful companies

may find it easier to thrust ahead in global market. Resources include finance,
R&D, company and grand image, HR etc.

5. Competitiveness: A firm may drive a competitive advantage from any one or

more of the factors such as low costs and price, product quality, product
differentiation, technology superiority, marketing strength etc.

How to go global?
Important foreign market entry strategies

1. Exporting: Exporting the most traditional mode of entering global market.

2. Licensing & franchising: It involves minimal commitment of resources and

effort on the part of international marketer, are easy way of entering foreign
markets. Finalizing is a form of licensing in which a parent company grants
another independent entity the right to do business.

3. Contract manufacturing; a company doing international marketing contracts

with firms in the foreign countries to manufacture the products while
retaining the responsibility of marketing the product.

4. Management contracting: In this supplier brings together a package of skills

that will provide an integrated service to clients without risk on owner.

5. Turnkey contracts A turnkey contracts is an agreement by seller to supply

a buyer with a facility fully equipped and ready to be operated.

6. Wholly owned manufacturing facilities: It provides the firm with complete

control over production and quality. It does not have risk in the
development.

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7. Assembly operations: Assembly facilities in foreign markets are very ideal
when there are economies of scale in the manufacture. When an assembly
operations are labour intensive and labour is cheap in foreign country.

8. Joint ventures: Joint venture is a very common strategy of entering foreign

market. Any form of association which implies collaboration for more than
a transitory period is a joint venture. A joint venture may brought about by a
foreign investor buying an interest in a local company.

9. Third country location: Third country location is also an entry strategy,

when there is no commercial transaction between two nations for some
reasons, a firm in one of their nations which wants to enter the other market
will have to operate third country base.

10. Mergers and acquisitions: It have very good market entry strategy as well
as expansion strategy. It provides instant access to markets and distribution
network.

11. Strategic alliances: It is also used as market entry strategy it is also known
as coalition, this strategy seeks to enhance the long term competitive
advantage of the firm by farming alliance with competitors.

12. Counter trade: It is a form of international trade in which certain export and
import transaction are directly linked with each other.

Types of Mergers
1. Horizontal Merger: Takes place where the two margin companies products
similar product in the some industry. E.g. in 1998 combination of
Chrysler cooperation and similar sense to create Dainles Chrysler.
2. Vertical Merger: Occur when two firms each working at different stages in
the production of the same good combine. E.g. General Motors acquisition
of fisher body company (an auto parts manufacturer).

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Conglomerate Mergers: takes place when two firms operate in different industries.
E.g. Acquisition of Montgomery Ward and Co., (a retailer) by Mobil Oil
Company)

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 UNIT 2

ECONOMIC STRUCTURE OF INDIA

Mixed economy of India consists of public and private sector. Policy on the
public sector has been guided by the Industrial Policy Resolutions 1956 and 1991
which gave a strategic role in the economy. India was based agrarian economy
with weak industrial base, low level savings and investments and near essence of
infrastructural facilities.

Public sector
The object of accelerating the pace of eco-development and the political
ideology, gave the public sector a dominant role in the industrial development of
the nation led to rapid growth of the State Owned Enterprises (SOEs) sector in
India.

These enterprises came to cover a wide spectrum of activities in basic

strategic industries like steel, coal, minerals and metals, petroleum, heavy
engineering, chemicals, fertilizers and pharmaceuticals etc., on one hand and
consumer goods, trading and marketing activities, transportation, services,
contracts and consultancy services, tourist service, financial services, development
of small industries etc., on the other.

Objectives:
It was promoted as an instrument for implementation of the govt.s socio-
eco policies.

1. To help in the rapid eco growth and development and industrialization of the
country and create the necessary infrastructure for economic development.
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2. To earn return on investment and thus generate resources for development.
3. To promote redistribution on income & wealth
4. To create employment opportunities
5. To promote balanced regional development
6. To assist the development of small scale and ancillary industries
7. To promote import substitution, save and earn foreign exchange for the
economy.

Growth & performance of public enterprise

The Industrial Policy Resolution of 1948 made it clear that the manufacture
of arms and ammunitions, the production & control of atomic energy and the
ownership and management of railway transport would be the exclusive monopoly
of the company. After 6 months industries were coal, iron and steel, aircraft
manufacture, ship building, manufacture of telephone, telegraph and wireless
apparatus, excluding radio receiving sets and mineral oils.

IP of 1956: All the industries of basic & strategic importance or in the

nature of public utility services should be in public sector.

At the beginning of the 1990, public sector was dominant in many

industries. Entire output in case of petroleum, lignite, copper & primary lead,
about 98% of zinc with 90% of coal, more than of steel and aluminium and 1/3 rd
of fertilizers.

PSEs as a whole have made huge profits mainly because of the enormous
profits made by several public sector monopolies. Many of the loss making PSE
have been either in non-priority sectors or in the sectors where the private sector
has proved to be more efficient.

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Why PSE fails?
Even though formulation of plan is good.

1. Huge cost, time over runs in project implementation

2. Land acquisition
3. Procurement of equipment
4. Civil work and other imponderable [not able to estimate]
5. Locational & investment decisions
6. Irrational product mix
7. Imposed marketing arrangements
8. Foreign financing
9. Technology upgradation, inadequate R & D, over manning.

Why PSE?
1. PSE not only for commercialization but to generate employment, promoting
balanced regional development etc.
2. Low return on investment on account of price constraints imposed on certain
infrastructural goods and services of PE.
3. Sick industries taken over by PU.
4. Promoted with long gestation period
5. Periodical wage revision.

New PS policy:
Policy announced on 24-7-1991 the priority areas of growth.
1. Essential infrastructure goods and services
2. Exploration & exploitation of oil and mineral resources
3. Technology development & building of manufacturing capabilities, long
term development of economy
4. Manufacture of goods where strategic considerations

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PSE-8
1. Arms & ammunition: defence equipment, aircraft
2. Atomic energy
3. Coal & Lignite
4. Mineral oils
5. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and
diamond.
6. Mining of copper, lead, zinc, tin, molybdenum, wolframite
7. Mineral specified in the schedule to the AE (control of production & use)
order 1958.
8. Railway transport

The new industrial policy also indicated that the public sector would
withdraw from the following cases:

1. Industries based on low technology

2. Small scale and non strategic areas
3. Inefficient and unproductive areas
4. Areas with low or zero social responsibility or public purpose
5. Areas where private sector has developed sufficient enterprise and
resources

Govt. policies:
1. Bring down govt. equity in all non-strategic PSU to 26% or lower, if
necessary.
2. Restructure & revive potentially viable PSUs
3. Close down PSUs which cannot be revived
4. Fully protect the interest of workers

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A disinvestment department was also set up.

Public Sector Ratnas

Govt. in 1997 July unfolded its strategy to grant autonomy to come PSUs
on an experimental basis was to select some vanguard PSUs to support them in
their drive to become global giants. After in-depth interministerial discussions.
Nine PSUs were selected. These are Navaratnas.

1. Bharath Heavy Electricals Ltd (BHEL)

2. Bharath Petroleum Corporation Ltd (BPCL)
3. Hindustan petroleum Corporation Ltd (HPCL)
4. Indian Oil Corporation Ltd (IOC)
5. Indian Petrochemicals Corporation Ltd (IPCL)
6. National Thermal Power Corporation Ltd (NTPCL)
7. Oil & Natural Gas Corporation Ltd (ONGC)
8. Steel Authority of India Ltd (SAIL)
9. Videsh Sanchar Nigam Ltd (VSNL)

GAIL & MTNL were given same status. All these were given freedom to incur.
1. Capital expenditure
2. Decide on joint venture
3. Set up subsidiaries/officers board
4. Enter into technology & strategic alliances
5. Raise funds from capital markets (international & domestic)
6. Enjoy substantial operations and managerial autonomy

7 other PSUs have been given the title ministers.

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Private Sector

The Industrial Policy Resolution of 1956 has made it very clear that as an
agency for planned national development, in the context of the countrys
expanding economy, the private sector will have the opportunity to develop &
expand. Outside the schedules of A&B would be undertaken ordinarily through the
initiative and enterprise of the private sector. It was the policy of the state to
encourage the development of these industries in the private sector, in accordance
with the programmed formulated in successive Five Year Plans, by ensuring the
development of transport, power and other services and by appropriate fiscal and
other measures.

The IPR of 1956 has clearly stated that the private sector have necessarily
to fit into the frame work of the social & economic policy of the state and will be
subject to control & regulation in terms of industries (Development & regulation)
Act and other relevant legislation. Private sector is dominant in the FMCG, Capital
Goods Industries.

New IP of July 24, 1991 Expands the role of PS due to privatization.

Economic Planning in India: From Mixed to a Market economy.

These are three types of economy. These are the free enterprises/market
economies or capitalist economy and at the other end are the centrally planned
economy or communist countries. In between these two are the mixed economy.

1. The communist countries have a centrally planned economic system. Under

this rule, the state owns all the means of production, determines the goals of
production & controls the economy according to a central master plan. No

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 consumer sovereignty. Consumption plan in a centrally planned economy is
dictated by state. Ex: USSR, Chez Republic, Hungary, Poland and China.
2. In b/n capitalist and free market economic system is the mixed economy,
under which both public & private sector co-exist as in India. In many
mixed economies, the strategic & other nationally very important industries
are fully owned or dominated by the state.
3. The freedom of PS is the greatest in the market economy.
In market economy
a. The factors of production (labour, land, capital) are privately owned.
b. Income is in monetary form from sale & profits
c. Members have freedom of choice consumption, occupation,
savings and investment.
d. Not planned, controlled and regulated by govt.
This is far from real one. Ex: US, Japan, Australia and Canada

Structure of Economy
The contributions of sectors like primary (agri), secondary (industrial) and
tertiary sectors form structure of economy.

As economy develops share of primary sectors in development,

employment & GDP declines. Manufacturing also declines. The service sector is
largest & fast operating sector. They contribute upto 60% of world GDP and is less
in developed countries.
Developing Developed
1980 70 3.5 3
1990 98 3.7 3.3

The share of service sector increased from 1980 39% to 46% in 2000 in
India. Internationally it has increased 1990 12%.

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 This indicates decrease in price, increase in quality, increase in
competitiveness of downstream industries.

Economic Planning of India

The pattern of economic development in India is very significantly affected
by govt. planning.

The Planning commission

Planning Commission was set up in 1950 March functions: (i) make
resources available, (ii) Balanced and effective utilization of countrys resources.

National Development Council: It is presided over by PM and is composed of

UCM, CM of States and Union Territories and Members of the Planning
Commission. Union State Ministers are also invited to participate in deliberations.
Secretary of PC acts as secretary of NDC.

Functions; i) To prescribe guidelines,

ii) To consider national plan
iii) To consider important question of social & economic policy
iv) Review working of plans

Formulation of Plans: To prepare five year plan usually spread over a period of 2-3
years.

Review of the Plans

First Five year Plan April 1st 1951
Third Five year plan 1966

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Fourth got delayed due to disrupted the development process like the aggressions
of China & Pakistan and severe drought in the country.
1965-66 Fall income, increase in price, decrease in savings, devaluation of rupee
by 36.5% in June 1966.

4th Five Year Plan was put off by 3 years. This period had annual plans (66-67, 68-
69). This period is referred to as Plan Holiday.

Central Change: Premature end to five year plan, Janata Party in 1977 terminated
the 5th plan at the end of 4th year i.e. March 1978 instead of 1979 and formulated a
draft five year plan for 1978-83. It also introduced the concept of Rolling Plan.
Under this plan when one year elapses another year is added to the planning
horizon so that we will always have a Five year plan.

Formation of Congress Govt. in 1980 terminated 5 year plan formed by

Janata Govt. within 2 years and formulated a 5 year plan for 1980-85 (6 th Plan)

7th Plan April 1st 1985

8th plan 1992
9th 1997-2002

Objectives:
1. utilization of the natural resources
2. Ultimate removal of unemployment & poverty
3. Increased standard of living

Five year Plan (2002-07)

Should aim at an indicative target of 8% GDP Gross for 02-07.

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 Increase in GDP, increased human well being, consumption of food and
other consumer goods, but also education, health, availability of drinking water
and basic sanitation.

1. Decreased poverty 20% by 2007 and 10% by 2012

2. Increase in employment
3. Universal access to primary education by 200%
4. Decreased population 2001 2011 16.2%
5. Increase in literacy 72% by 2007 & 80% by 2012.
6. Decrease in Infant Mortality rate (IMR) 45%, per 1000 live births by 2007
and to 28% by 2012.
7. Decrease in Mattress Mortality Ratio (MMR) decrease 20% per 1000 live
births by 2007 and to 10% by 2012.
8. Increase in forest and tree lover to 25% by 2007 and 33% by 2012.
9. Villages access to drinking water (portable) by 2012.
10. Cleaning of all major polluted river by 2007 & notified stretches by 2012.

Performance
Although we have failed to achieve targets & 30% still under poverty line.
India is one of the largest industrial powers in the world and has the 3 rd largest
stock of scientific manpower.

Characteristics of Industries
Until 1991, the development of the private sector was under strict Govt.
control, was exercised through industrial licensing. Low like the Industries
(Development & Regulation) Act, the Companies Act gave enormous control over
the management and control of functioning of the industries. The M.R.T.P. Act
controlled merges, amalgamations and takeovers.

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Capital Goods Vs Consumer Goods
Basic and capital goods were considered as pride of place and the consumer
goods given low priority. In the process of capital accumulation, certain capital
intensive or large scale, sectors producing non-importable commodities, transport,
electricity are bound to grow. Imports cannot be expanded.

In case of consumer goods, the growth of consumer non-durables was more

than durables. Establishment of basic and heavy industries has been a reason for
self-reliance in respect of capital goods and modern technology build defence
strength.

The Development of Industries

1. Private Sector
2. Public Sector
3. Joint Sector has been promoted to facilitate the utilization of the resources
and talents of the private sector and function with social orientation of
public sector.
4. Co-op. sector: Made progress in industries like sugar, cotton textiles and
fertilizers. Growth of this sector promotes industrial democracy &
discourages concentration of economic power in few hands.
5. Village & small industries Not given the deserving importance. Some
units are reserved for them and the products too.

Import Substitution & Export Contribution

Import substitution assumed importance after the second plan. In early
decades of planning, considerable import substitution took place in many
important areas in capital goods, organic chemicals, pharmaceuticals, dyestuffs
etc. The Export Policy Resolution of 1970 emphasized the importance of
development and expansion of export oriented production. The Import

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Substitution Industrializaiton Strategy (ISI) followed in India has had adverse
effects. The high protection from foreign competition, resulted in high costs, poor
quality, indifference towards consumers and lack of innovativeness.

In mid 1950s Jute & cotton industries (textiles) were denied foreign
exchange and with liberalization non-essential industries were given import
substitution.

The import restrictions, high costs and poor quality also very severely
affected Indias export performance.

Capacity Utilization
Under utilization amounts to wastage of scarce resources, leads to cost-
push inflation. Creates demand supply imbalance, affect balance of trade,
employment, saving and investment. Under utilization of Industrial policy is due
to factors like as planned excess capacity calculated to meet the demand in the
foreseeable future, tech invisibilities which may create capacity in excess
[present demand]; and initial testing troubles of new industries which is
incapable in the developing economy.

Regional Disparities: Removal Third Plan

Large investments were made in backward areas. Incentive system was
introduced in 4th plan. The backward area development by industrialization is not
given importance.

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An Evaluation
Since 1951, large investments have been made in building up capacity over
a wide spectrum of industries. India is a major industrial power in world.
7th year revival states:
1. Substantial diversification
2. Produce large & broad range of industrial products
3. Self-reliance [achieved]
4. Capital & basic goods contribute 1 of total value added in manufacturing
5. Virtual sufficiency achieved
Between 1950 & 2000, IP increased 22 fold.
GDP increased by 13% in 1950-51 to 25%, 50 years of
industrialization
Technological, managerial, operational development
Development of skilled manpower was also achieved.

Agricultural Sector
Agriculture contributes over 1/4th of Indias GDP, provides 2/3rd of
population livelihood, supplies raw materials for number of industries and
contributes 1/5th of the export earnings. The rural market accounts for well over
55% of the demand of FMCGs.

Phases of Development: From 6th Plan

Phases
I 1900-1947 No growth, 0.3% annual growth, stagnation period
II. 1950-1980 Advance in modernization of agriculture, due to steps taken in
1. Technology based on scientific research
2. Wide range of services
3. Growth annually by 2.8%, 1967-68 to 1978-79.

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 4. Eighties Attention to markets & trading investments frame work to
minimize the handicaps of small & marginal farmers and maximize benefits
of agri.

Expansion & Development of Inputs & Services:

Central & state Govts. Role in development of agriculture sector.

1. Irrigation: Increases agri productivity & employment opportunities. Union
& State governments are developing the area under irrigation by executing
major, medium and minor irrigation projects and exploiting ground water
potential. Rural electrification programs (energisation of pumpsets) is also
being implement. This supports industries like cement, steel etc., Irrigation
electrification (aluminium cables, steels etc) will also increase demand for
pumpsets, PVC pipes, agri implements, insecticide and pesticides and
fertilizers, banks etc.

Private sectors like [farmers organization, voluntary bodies and general

public] are taking interest in irrigation. Ground water development is done through
own financing or institutional financing or both.

States like Maharashtra, Madhya Pradesh and Andrapradesh have initiated

the action for privatization of irrigation projects through projects like build own
operate (BOO) or build own operate transfer (BOOT) or Build own lease (BOL)
basis.

According to these projects the Irrigation department may use water in bulk
from the agency at mutually agreed price for distribution to the farmers. It also
been mobilized through issue of public bonds.

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 The most far reaching event was the introduction of high yielding varieties
(HYV) of a number of field crops and hybrids of millets in particular. This covers
wheat, rice, maize, jowar and bajra. Has revolutionalized agri and increased
production of foodgrains in country. The HYV increases demand for plant
nutrients and protectants like fertilizers, insecticides and pesticides.

1963 National Seeds Corporation (NSC)

1969 State Farms Corporation of India (SFCI) For quality seeds
After liberalization foreign firms were also set up.

Farm Research Institute is run by public and quasi public institutions.

1973 Indian Council for Agricultural Research set up for research, educating &
extensively educating the farmers, animal husbandry and fisheries. This council
helps in inter and intra collaboration with National & International Institutions.
Ex: International Atomic Energy.

Banks are also giving credit to agri projects (RRB), commercial banks and
primary co-operative are the major source.
For all related activities and finances relating to it. NABARD National
bank for Agricultural & Rural Development was established plays financial and
development roles of RBI and Agri Refinance and development Corporation
(ARDC).

1971 The Agro Service Centre Scheme Employment for trained entrepreneurs,
Inputs at door step of farmers.
1965 The Food Corporation of India

Rice Milling Storage Production of nutritions processed foods. The Central

/ State Warehousing Corporation.

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Agricultural Marketing:
6th Plan Three essential elements of marketing.
1. Support prices adjusted with cost of production to ensure fair returns to the
farmers.
2. Arrangements for procurement of agri produce at support prices, if prices
decrease.
The organization look after this is Food Corporation of India, The Cotton
Corporation of India, The Jute Corporation of India and the Co-operatives with the
National Agricultural Cooperative Federation of India (NAFED) as their Apex
Organization.

Directorate of Marketing & Inspection

Functions are to give advice to the Central & State Govts., Promote grading
and standardization, market practices, extension, research, cold storage.
Agmark for Cotton, vegetable oils, ghee, cream, butter, rice and wheat.

Regulated Markets:
The regulated market is a market where the activities are regulated by law
and is meant for dealing in a specific commodity or group of commodities.
The main objective of the regulated market is to save the farmers from the
exploitation of unscrupulous market intermediaries and to ensure a fair price for
their produce.

Co-op Marketing: It was started to help small farmers, grains & agri products are
graded and stored and sell at advantageous price. Marketing is the important
function of co-op. marketing.

Agri Price Policy:

Is decided by The Commission for Agri Costs and Prices (CACP).

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 Agri commodities like wheat and paddy have procurement prices fixed for
them.
Minimum Support Prices: for barley, gram, moong, urad, mustard, ground nut,
sunflower seed, soyabean and cotton (kapas).
Statutory Minimum Price: for sugarcane, jute and tobacco.

Trends in Service Sector:

As an economy develops the share of the primary sector in the GDP and
employment declines and those of other sectors increase. The service sector is the
largest and fastest growing sector. The service sector now contributes more than
60% of the world GDP.
1980 1990, the average annual growth rate of value added in the service
sector in the developing economics was 3.5% compared to the GDP growth rate of
3%.
1990-98 3.7% & 3.3%
The service sector of India grew at 6.9% and 7.9% during the above
periods, compared to the corresponding GDP growth rates of 5.8% and 5.9%. The
share of services in the GDP of India increased from 39% 1980 to 46% 2000.
The growing importance of services is reflected in the international trade
too. Between 1970 and 1990 international trade is services increases by an average
of 12% & 8% during 1990-97.
The growth rate of trade in services has been faster than that of goods.
Growth in services and in additions the electronic commerce has added to the new
trade pattern. Exports of commercial services have been borrowing on every
continent throughout the 1990s.
Services are used in production of goods and other services. Due to
competition in services there is reduction of prices and improvement in quality.

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Contribution of service to value added as % of GDP.
Region/country 1980 1990 1999
World 56 60 61
High Income Economics 59 64 64
Low and Middle Income economies 42 46 54
(developing countries)
India 39 42 46

Trends in GDP
Govt. expenditure as % of GDP
10% in 20th century
20% in 1960
50% in 1995
In developing countries, the central govt. expenditure was nearly 15% of
GDP.

1960 in 1990 it was double of 1960.

1997 1998 Economy growth
2001 4.4% total industrial stood at 2.7%
2002-03 4.0%

2002 03 5.7% increase

Consumer durables has a negative growth of 6.3%, 2003-04 8.5%

industrial production by 7.0%.

Unit III

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 Monetary and Fiscal Policy
Monetary and Fiscal policy are two powerful instruments of economic
management. Why? Necessary? In free enterprise economy.

1. Prices in free market fluctuate (govt. debits and credits)

2. Balance of payment is in disequilibrium
3. Involuntary unemployment
4. Inequality in distribution of income and wealth
5. Sluggish economic growth

I. The Monetary Policy

Def: Hary G. Johnson: Policy employing the central banks control of the supply of
money as an instrument for achieving the objective of general economic policy.
According to economists:
Monetary policy is the changes in the supply of money.
Credit policy is the changes in the supply of credit (different in broader sense)
Both policies
1. Central Bank administers both
2. Instruments of control are some at aggregate level
3. Determines the supply of money as well as the supply of bank credit

Main objectives are:

1. Maximum feasible output
2. High rate of economic growth
3. Fuller employment
4. Price stability
5. Greater equality in the distribution of income and wealth

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 6. Health balance of payments

These objectives are met under long-run price stability at maximum feasible o/p.
There are two theories.

1. Keynesian theory
It states that changes in the money supply work their way through the
system in a way that does not result in a close and stable linkage between changes
in the money supply and changes in the level of income.

2. Monetarist theory:
See the close and stable linkage. The monetary transmission mechanism is
the mechanism by which changes in the money supply produce effects that interact
with the real sector to create changes in income and in the price level. Two
primary mechanisms is applied,

Portfolio Mechanism: The way monetary policy affects the assets portfolio of
households and firms. This consists of two major schools of thought.

1. The Keynesian school: Treats changes in the market rate of interest that result
from changes in money supply as the significant aspect of the monetary policy. It
emphasizes on credit effect. To understand this, the households keep their
resources in the form of cost, financial assets (bonds, securities, shares and real
assets (plants and buildings, apartments and land etc.)

Assume that,
Central Bank of the country conducts an open market (exchange) purchase
and increase the money supply. With this cash balance is increased in individual
portfolio and securities with them are exchanged for the central bank notes. This

Page 41
creates temporary imbalance of excess cash. To correct this they buy financial
assets. This will continue until no further substitution can be made and is
profitable. By this substitution they increase the value of these assets and reduce
market rate of interest. The reduced rate of interest will inturn encourage the firms
to increase via the investment multiplier. The money supply increase demand
increase national income and product via changes in the market rates in interest.

2. The Monetarist School: The direct change in the money supply as the most
relevant aspect of monetary policy. They follow Keynesian school but do not hold
the changes in the interest rate as a pre-requisite for the changes in the demand for
goods and service.

An increase in money supply can lead directly to on increase in spending on

real assets. They regard money and real assets as close substitutes. The household
maintain a desired stock of money relative to their income. The monetary policy
changes cause the actual stock to differ from the desired stock and household
always want desired stock of income and money balance. This directly changes the
level of aggregate demand, income and prices.

According to this as a consequence of an increase in money supply, there

is a portfolio adjustment involving a movement out of money directly into goods.
The end result may need not be change in interest rate at all, it may be a change in
the general price level on its output.

II. The Wealth Mechanism: Its based on the manner in which changes in the
quantity of money affect non-human wealth and how this in turn affects aggregate
demand.

Where, WNH = H + PNK

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H = Quantity of nominal high powered money [is the sum of currency, required
reserves and excess reserves]
PVK = Market [on nominal present value of cash]

If price level falls, H

H will Net wealth of households and since consumption is a function of
wealth, consumption . The consumption if central bank quantity of money
and price levels remain constant.

H - WNH and consumption of current income Real balance effect is

one mechanism through which monetary policy can affect aggregate demand by
changing non-human wealth.

The second way is :

Changes in PVK
E.g. If Central Bank conducts an open market operation that increases demand for
government securities, thereby raising their prices and lowering their interest rate.
This inturn increases the desirabilitys of equities (common stocks) relative to
govt. bonds and prices will of equities, causing in PVK. Therefore equity
owners will consider themselves wealthiest and consumption expenditures will
rise.

Instruments
Targets of Monetary policy:
The instruments of monetary policy refer to the exo variable that the
Central Bank can change at its discretion with a view to controlling and regulating
the money supply and the availability of credit.
The measures of monetary policy are classified under two categories.

Page 43
 I. Quantitative measures of monetary control
II. Qualitative and selective credit controls

I. quantitative measures of monetary control:

1. Traditional measures are open market operations

Effectiveness of Open Market Operations

1. When commercial banks possess excess liquidity the open market operation
does not work effectively.
2. During the period of depression, open market, operations are not effective for
lack of demand for credit.
3. Open market has limited effectiveness due to under developed security and
capital market.
4. Govt. bonds & securities are not popular due to low rate of return.

II. Discount Rate (on Bank rate policy)

Is the rate at which the Central Bank rediscount the bills of exchange
presented by the commercial banks.
The RBI Act, 1935, defines Bank rate as the standard rate at which (the
bank) is prepared to buy or rediscount bills of exchange or other commercial
papers eligible for purchase under this act. It rediscounts only approved bills and
the first class bills of exchange.

Why Rediscount?
When commercial banks, faces a shortage of cash reserves, they approach
the Central Bank to get their bills of exchange rediscounted. . Of its functions
it is lender of lost Resort Central Bank. For rediscounting the bills of exchange,
the central bank changes the rate. This rate is traditionally called Bank rate or
discount rate.

Page 44
Bank Rate is the rate which the Central bank charges on the loans and advances to
the commercial banks.

The Central Bank can change this rate - or decrease depending on

whether it wants to expand or contract the flow of credit from commercial bank. It
credit creation capacity reduces discount rate and vice versa. This is called
Bank rate policy or discount rate policy. This was first adopted by Bank of
England in 1839. It was an effective bank of market was introduced in 1922.

Generally, the Central Bank rate is 1% point higher than the discount rate
charged by the commercial banks. E.g. Central banks want to control the flow of
bank credit, to achieve this objective, it will raise the discount rate. This action of
the Central Bank reduces the flow of the credit in three ways.

1. Discount rate (interest rate) decrease net worth of govt. bonds (treasury
bills and promissory notes), against which commercial banks borrow funds
from the Central Bank. Reduces the banks capacity to borrow.
2. When discount rate of Central Bank , Commercial Bank raises their
discount rate. DR, cost of credit, discourages business sector to get
their bills of exchange discounted. It also interest rate structure and
decrease demand for funds. This policy is called Dear Money Policy. A
reverse process is cheap money policy.
3. Bankers lending rate is adjusted to deposit rate. Bank rate, deposit rate.
This turns borrowers into depositors, savings in bank are in form of
deposits.
Limitations

Page 45
1. Effective only when commercial bank borrows from Central bank, because
they have their own financial resources.
2. With growth in credit institutions & financial intermediaries, the Capital
Market has widened. The share of banking credit has declined.
3. Variations in the discount rate become effective only where demand your credit
is interest elastic.

iii) The CSR & SRR: Cash reserve ratio, CRR is the percentage of total deposits
which commercial banks are required to maintain in the form of each cash reserve
with the Central Bank.

Objection: 1) Prevent shortage of cash (Depositors) CRR depends on govt. rules

and keep only small ratio in the form of reserves.
CRR is non-interest bearing often keep their cash reserves below the safe
limits. It might lead to financial crisis in banking sector. Central bank imposes
CRr, to control money supply. It controls legal powers to change. It is a legal
requirement. Therefore it is called statutory reserve ratio, SRR. When economic
conditions demand monetary contraction the Central bank cRr, when it demands
monetary expansion, Bank decrease CRR.
E.g. If deposit of commercial bank = Rs. 100 Million, & cRR = 20%

a) Banks can loan Rs. 80 million

b) Credit or deposit multiplier = 5
100 x 5 = 500 million or
80 x 5 = 400 million
If money supply decrease CRR increase by 25%, credit, multipliers
decrease = 4.
Loan = Rs. 75 M (100-25) = 75 M
Total Credit = 400 m

Page 46
 & Additional credit = 75 x 4 = 300 M

100 M decrease considerable impact on money market and if it is CRR = 20%

then situation changes.

SLR: Statutory Liquidity Ratio

The proportion of total deposits which commercial banks are required to
maintain with them in the form of liquid assets (cash reserve, gold & govt. bonds)
in addition to CRR.

II. Qualitative or Selective Credit Controls

The qualitative methods of monetary control affect (when effective), the
entire credit market in same direction. They lead either to expansion or to
contraction of the total credit. The impact is uniform. Authorities face problems
like,
i) Rationing the credit
ii) Diverting the flow of credit from non-priority sectors
iii) Curbing speculating tendency based on the availability of bank
credit.
These are not served well by quantitative measures, qualitative or selective credit
controls is used.

i) Credit Rationing: When there is shortage of institutional credit available for the
business sector, the large and financially strong sectors or industries tend to
capture the lions share, in the total instalments. Credit priority sectors and weak
industries are starved of necessary fund and bank credit goes to non-priority
sector.

Page 47
 a) Imposition of upper limits on the credit available to large industries and
firms.
b) Charging higher interest rate on bank beyond a certain limit.

ii) Change in lending margins:

Banks lends Jew % only on value of the mortgaged properly. The gap
between the value of the mortgaged property and amount advanced is called
lending margin. E.g. if value of stock = Rs. 10 M, amount advanced = Rs. 6 M,
Lending margin = 40% [can be increase in central bank with view to increase or
decrease credit].

This was used by RBI first time in 1949. objective is to control speculative
activity in the stock market.
By 1956, extensive use in scarce agricultural products like food grains,
cotton, oil seeds, vegetable oil, sugar, Khandsari and gur, cotton textile and yarns,
decrease price secures loans. This increases the buying, power and stocking and
future mortgaging and borrowing.

Therefore prices shoot up due to artificial scarcity. This is widely used in

India.

iii) Moral Suasion

Method by persuading and convincing the commercial banks to advance
credit in accordance with the directive of the central bank in the economic interest
of the country. But not effective in underdeveloped country. In this method, the
central bank writers letters to and holds meetings with the banks on moey and
credit matters, with clear directive to the banks to carry out their lending activity in
a specified manner.

Page 48
Limitations of Monetary Policy:
1. The time lag: the time taken in checking out the policy action, its
implementation and working time. Its divided into two parts:
i) Inside tag or preparatory lag:
a) Identifying nature of probability
b) Identifying sources of probability
c) Choice of appropriate policy action
d) Implementation of policy action
ii) Outside lag or response lag:
The time taken by households and the firms to react in response to the policy
action taken by the monetary authorities. This lag is long.

2. Problems in forecasting
Reliable assessment of magnitude of the problem recession or inflation as it
helps in determining the appropriate policy measures.

3. Non-Banking financial intermediaries:

Structural change reduces effectiveness of monetary policy. Although
financial intermediaries cannot create credit thro the process of credit multiplier,
their huge share in the financial operations reduces the effectiveness of monetary
policy.

4. Under development of money & capital market

Effectiveness of monetary policy is less developed countries is reduced
considerably because of the under developed character of their money and capital
markets.

Page 49
FISCAL POLICY
Def: As the govts programme of taxation expenditure and other financial
operations to achieve certain in national goals.

Objectives:
1. Eco growth
2. Promotion of employment
3. Economic stability & higher priority
4. Eco justice or equity

Two instruments used are taxation and public expenditure.

I. Indias taxation policy 1950-1990:

Was formulated to meet the financial needs of the country in the post-
independence period.

Role of RBI in Regulatory Banking Sector

The structure of Indian Banking System evolved during the pre-
independence period without any control and direction. The country had no
Central Bank prior to establishment of RBI.

The imperial Bank (SBI) of India though commercial bank, performed

certain central banking functions such as acting as bankers bank and banker to the
govt. the Central govt. had the sole authority to issue currency. But the result was
unsatisfactory for the development of the money market and commercial bank.

RBI was originally established as share holders bank in 1935 with the
nationalization in the west central government on January 1, 1949 acquired entire
capital and became a state owned institution.

Page 50
Functions of RBI
I. General Central Banking Functions:

The model for RBI is the Bank of England and its Central banking
functions are similar.

2. Issue of currency notes

Originally provision was for issuing currency notes according to
proportional reserve system but not elastic and did not suit the developmental
planning.

According to RBI (Amendment Act), Reserve system was introduced, a

minimum reserve system of Rs. 515 CR (Rs. 400 Cr in foreign securities, Rs. 115
Cr in gold coins) was to be kept. The provisions regarding maintenance of reserves
was again amended on October 31st 1957, which foreign exchange reserve to Rs.
200 G,. of this value of good was not to be at any time less than Rs. 115 Cr.

2. Bankers to Govt.
It is bankers agent & advisor. The RBI has obligations to transact the
banking business of the central and state govts. It accepts money and makes
payment on the govt. behalf and carry out exchanges and remittances, manages the
public debts and issues new loans.

RBI [Govt]
1. Advices Govt. on quantum and terms of new loans
2. Sells treasury bills
3. Makes wages and means of advance short term loans, repayable within 90
days from the date of advance.

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 4. RBI is the sole agent for transacting govt. receipts and payments.
5. Advices on banking policies, financial matters and planning & resource
mobilization.

3. Bankers Bank:
Controls commercial banking system under the RBI Act, 1934 and Banking
Regulation Act 1949. Assists scheduled commercial banks [Banks where affairs
are not conducted in a manner detrimental to depositors interest must maintain a
cash reserve (as decided by RBI). With RBI against their demand and time
liabilities RBI can also direct the bank to maintain 100% CR against all deposits
received after a specified date; these banks should submit weekly statement of
their transactions to the RBI] and state Co-op. Banks. RBI considers factors such
as the financial its tending policy and securities offered. While making advances to
it. It can deny residenting without any reason.

The regulatory functions of RBI under Banks Regulatory Act 1949 are:
1. Licensing of Banks
2. Branch Expansion
3. Liquidity of assets of commercial bank
4. Management and methods of working
5. Amalgamation
6. Reconstruction and liquidation

According to RBI (Amendment) Act, Reserve system was introduced, a minimum

reserve system of Rs. 515 Cr (Rs. 400 cr in foreign securities Rs. 15 Cr in gold
coins) was to be kept. The provisions regarding maintenance of reserves were
again amended on October 31, 1957 which reduced. The amount of gold (coin and
billion) and foreign exchange reserve to Rs. 200 Cr, of this value of gold was not
take at any time less than Rs. 15 Cr.

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2. Banker to the Govt.
It is banker, agent and advisor. The RBI has the obligation to transact the
banking business of the central and state government. It accepts money and makes
payment on the govt. behalf and carry out exchange and remittance, manages
public debt and issues loans.

RBI Govt.
1. Advices govt. on quantum and term of new loans
2. Sells treasury bills
3. Makes ways and means of advance short term loans, repayable within 90
days from the date of advance.
4. SBI is the sole agent for transacting govt. receipts and payment
5. Advices on banking policies, financial matters.

Developmental activities
RBI established the deposit insurance corporation of India in 1962 with the
12% of period of security to deposits.

Established UTI in 1969 to mobilize savings. To small investors, UTI offers

the advantages of reduced risk, steady income, liquidity etc. Assisted development
of short term coop credit for agri and also participated in establishing the agri
refinance and development coop covers in 1963. Half of capital (Rs. 100 Cr) of
NABARD has been provided by the RBI.

Control of Credit by RBI

RBI Act of 1934 & BR Act of 1949
RBI like any central bank resort sto bank rate manipulations, open market
ops, reserve requirement changes, direct action, rationing of credit and moral

Page 53
suatium. It also influences commercial banks lending policy, rate of interest, form
of securities against loans and portfolio distribution.

Stabilises external value of Rupee and therefore its function is of an

custodian of nations foreign exchange reserves. Its obligatory for the RBI to
budget sell currencies of all IMF members.

5. Credit control
Has all authority to use qualitative and quantitative methods of credit
control, but are ineffective.

6. Agricultural Finance
Other integrated scheme of agriculture credit was implemented, RBI role
from lender of last resort changed to that of an active agency for promotion of
appropriate specialized agencies of agricultural, finance the setting up of
NABARD in 1982.

7. Collection and publication of data

The RBI has been entrusted which the task of collection of compilation of
statistical into related to banking and other financial sectors of economy. RBI
bulletin monthly presents was only above function but also provides results
important studies and investigations conducted by RBI. Report on currency and
finance is an annual publication which provides comprehensive review of various
development of economic and financial importance.

Page 54
Effectiveness depends on 3 factors
- Commercial banks in the country should not be oversee to availing
rediscounting facility from the central bank.
- Bank do not maintain any excess can be reserve agreement deposit and if
extra ordinary demands are made by the depositors, they should get bills
rediscounted from central bank.
- Banks must hold adequate quantity of such credit instruments which will be
rediscounted by the central bank as per the legislation.
- Last two conditions are not satisfied in India. Firstly commercial bank are
not much dependent on RBI for financial assistance.
- Sedcondly in the absence of a will organize bill market, they lack adequate
quantity of eligible bill which can be rediscounted from the RBI. Carries of
money market each pre requisite for the success of RBI bank rate policy.

Open Market operations

RBI can authorizes the RBI to conduct purchase and sale ops in the govt.
securities, treasury bills and other approved securities. The silver several little
purposes. RBI has been extensively undertaking Switch operations (purchasing
of one sale of another or vice versa).

Fiscal Policy
Def: Is the governments programme of taxation, expenditure and other financial
operations to achieve certain national goals. The objectives are derived from the
aspiration and goals of the society.

Objectives are:
i) Economic growth
ii) Promotion of employment
iii) Economic stability &

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 iv) Economic justice or equity

These objectives vary from country to country and from time to time. The
objectives are growth, employment and equality. The two basic instruments that
are used to achieve the social goals are taxation and public expenditure.

RBI attempted to raise resources by selling govt. securities for meeting

development as well as defence requirements. There is fiscal bias. RBIs sales of
govts securities has been kept up by imposing a statutory condition on various
financial institutions to invest a portion of chair income/deposits in the govt. and
other approved securities. Now RBI doesnt purchase securities against each
payment.

CRR RBI Act 1956 RBI acquired the power to change reserve requirement of
CBs between 5 & 20% in reserve respect of their demand liabilities between 2 &
8% in respect of their time liabilities. RBI direct scheduled bank to keep certain
reserves of their liabilities created after a specified date in cash.

RBI Act was again amends in 1962 which fixed CRR at 3% for all
liabilities. Range is 3-15%. This tech is been implied for last 2 decades for
controlling inflation.

SLR: BR Act 1949, enabled the CBs to liquidate their govt. security holdings
wherever RBI increase CRR. The logphole was what a minimum of 25% SLR
could be maintained. RBI can raise amounts 15%

System of different rates

In 1960 RBI introduced a system of lending rates on slab basis. It was
effective for 4 years till it was replaced by her liquidity ratio system.

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Formulation of Tax Policy
Tax policy existed due to recommendations of dozens of tax enquiry
committees and review panels and deliberations on the recommendations in the
parliament. It is formulated, reformulated to make it fair, equitable and efficient.
This started in early 1950s by appointment of a number of committees.

1. Taxation Enquiry Committee (TEC) 1953-54 to suggest suitable tax

measures for mobilizing additional tax revenue.
2. Nicholas Kaldor Committee 1956 under chairmanship of Prof. Nicholas
Kaldor, tax expert of Britain to suggest new tax measures to augment govt.
revenue.
3. Direct Taxes Administration Committee: (Tyagi Committee) 1958
i) A scheme of integration of direct taxes
ii) To prevent tax evasion
iii) To simplify the procedure of tax compliance
iv) The committee on rationalization & simplification of the tax
structure (Bhoothalingam committee) 1967 to suggest measures
to reform the tax system and to prevent tax evasion.
v) Direct taxes enquiry committee (Wanchoo committee) 1971 to
suggest tax reform measures to prevent tax evasion.
vi) Indirect taxation enquiry committee (Jha Committee) 1976
To find and examine the sources of anomalies on the indirect tax
system and to explore the possibility of implementing Value
Added Tax (VAT) system in place of excise duties.
vii) Direct tax laws committee (Chaksi committee) 1978 to suggest
measures to simplify and rationalize tax laws to improve the
implementation
viii) Basic Function of tax policy: Tax policy was designed to perform
two basic functions.

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 Indias Taxation Policy 1950-1990

Was formed primarily to meet the financial needs of the country in the post-
independence period. The problem faced was how to mobilize adequate financial
resources to finance the development programmes chalked out in 5 year plans.
Financial resources has to be increased 4 times, so that rate of capital formation
could be stepped up from 5% of national income to say 20%. The known source of
development finance taxation, domestic borrowing, external borrowing on foreign
aid had the potentials of yielding adequate development finance. Taxable potential
was very low as income was low and per capita borrowing was lower. The
repayment near slow. So taxation policy was formulated.

Revenue function
Revenue collection is the primary objective of Indias tax policy. The state
and central government levies taxing power extensively and intensively. The taxes
imposed are from 1950,

1. estate duty
2. Wealth tax
3. Gift tax New in 1950
4. Expenditure tax
5. Capital gains tax

A tax rates were imposed on direct indirect taxes. Central Excise duty is imposed
on all imaginable non-agriculture products. High import duty is imposed on almost
all items of exports.

Estate government imposes tax on

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 1) Agricultural income tax on large holding tax
2) Surcharge of cash crops
3) Profession tax
4) Tax on urban property
5) Sales tax on motor spirit
6) Motor vehicle tax
7) Tax on passengers and goods, entertainment

Industrial Finance
Sources of finance for small and medium scale industries
Both medium and small scale industries require capital for plant and
machinery, production and final disposal. The capital varies in rural areas they
have to borrow from money lenders or land owners and pay high interest rate. In
urban areas, capital is better mobilized. The banks charge rate of interest often
ranging between 24 to 36% and not be able to raise necessary capital.

a) Loans by Commercial Banks

For long time CBs did not bother small and medium scale industries. SBI
with RBI took the initiative of setting up a pilot scheme for the provision of credit
for small scale industries. The schemes was extended to all branches of SBI.
Others CBs were slow in lending by March 1966 they had made advances amount
to Rs. 90 crores to small units with nationalization more advance to S & M
industries.

b) Credit Guarantee Scheme for S & M I

Came into force in July 1980. this is a important phase, the objective of the
scheme was to provide a measure of protection to specified banks irrespective of
their loans to small borrowers in the priority sectors of S & MI. the administration
was with RBI, but was transferred to the Deposit Insurance & Credit Guarantee

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Co-op (DICGC). This operates 5 schemes 4 for small borrowers and one for S &
MI. The advances to small borrowers is Rs. 25,600 crores. 515 Credit institute are
participating in the 5th scheme.

c) National Small Industrial Co-op. (NSIC)

Was set up in February 1955, for the purpose of assisting, financing,
protecting and promoting the S / I in India.

Functions are
1. To secure govt. order for output of SI unit.
2. To provide financial, technical and other assistance to fulfil orders.
3. To secure coordination between large and small scale industries to enable
small scale. In order to manufacture ancillaries and component parts
required by the large-scale industries.
4. To underwrite and guarantee loans from banks and other credit institute.

It also introduced hire purchase of machineries on easy payments. It conducts

surveys and secures contracts from central government.

SIDBI
Set up by Govt. of India under a Special Act of the Parliament in April 1990
as wholly owned subsidiary of SIDBI. It has taken over the outstanding portfolio
of IDBI relating to the small scale sector worth over Rs. 4,000 crores. Authorised
capital of SIDBI is Rs. 250 crores which can be increased to Rs. 1,000 crores.

Role:
1. Principal interest for SBI
2. Coordinate functions of other banks and financial institutions
3. Administer small industries for fund and national equity fund.

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Functions:
1. Refinances loans and advance extended by primary lending institute and
provide resources support system.
2. Rediscount on discounts bills arising from sale of machinery.
3. Grants direct assistance as well as refinance loans extended by primary
lending institute for financing export of products manufactured by last for
industrial concerns in SSI.
4. Extends financial support to state small industries development corporation
for providing scarce raw materials to marketing the end products of
industrial units in the SSI.
5. Provided financial support to NSIC for providing leasing, hire purchase and
marketing support to IU.

SIDBI was set up to ensure larges flow of financial assistance to SSI.

Technical upgradation and modernization of existing units, expanding channel for
marketing.

Mission:
1. Stimulate the promotion of new industries
2. Assist the expansion and modernization
3. Furnish technical and managerial aid

1. Long term or medium term loans, both rupee loans and foreign currency
loans.
2. Participates in equity capital and in debenture and underwrites new issues
of shares and debenture.
3. Guarantees loans from other private investment sources.

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 4. Provides financial services such as deferred capital, leasing credit,
instalment sale, asset credit and venture capital.
5. The total financial assistance amounted to Rs. 12,480 crores in 1955 up to
March 1990. While its disbursement amounted to Rs. 8090 crores. This
consisted of foreign currency, loans, rupee loans, guarantee and
subscription of shares and debentures.

Commenced leasing operation in 1983. It provide leasing assistance for

computerization, modernization / replacement, equipment of energy conversation,
export orientation and pollution control etc.

In 1977, KICI promoted the housing development finance corporation

(HDFC). Apart from HDFC, other institute are

1. CRISIL Credit Rating Information Services of India Ltd set up ICICI in

association with UTI to provide credit rating services to corporate sector.
2. Technical Development and Information Company of India Ltd (TDICI)
promoted by ICICI to finance the transfer and upgradation of technical provide
technical information/
3. Programme for the Advancement of Commercial Tech (PACT) set up with a
grant of us $ 10 M provided by US AID to assist market oriented R & D
activity, jointly undertaken by Indian companies, ICICI has undertaken the
administration and management.
4. Programme for acceleration of commercial energy research (PACER), funded
by US AID with a grant of US 40 M to support selected research and technical
development proposal in Indian energy sector.

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UTI Unit Trust of India

UTI was formally established in February 1964, to extend facilities of

investment in equity capital of companies, by the large and growing number of
small investors in the middle income group of the community.

Initial capital was 5 Crores which was subscribed fully by RBI, the LIC, the
SBI and scheduled banks and other financial institutions. The management and
direction is entrusted in the hands of the trust and in hands of Board of Trustees.

Primary objective: [two fold]

1. Stimulate and pool the savings of the middle and low income group.
2. Enable them to share the benefits and prosperity of the reply granting
industrialiszation in the country.

It could be achieved in three fold:

1. By selling units of the trust among as many investors as possible in
different parts of the country.
2. By investing the sale proceeds of the unit and also the initial capital fund of
Rs. 5 crores in industrial and corporate securities.
3. By paying divides to those who have bought the units of the trust.

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Industrial Reconstruction Bank of India (IRBI)

Was set up in 1971 April an institution named IRCI Industrial

Reconstruction Corporation of India under Indian Companies Act to look after
sick industries and for speedy reconstructions and rehabilitation and developing
infrastructure facilities like transport and marketing etc.

On August 1984, the Govt. of India passed and act converting the IRCI into
Industrial Reconstruction Bank of India (IRBI). IRBI was established in March
1985, for revival, assisting and promoting industrial development and
rehabilitating industrial concern. IRBI extends credit to sick small scale units
emphasis on continuous modernization, improve productivity and upgrade
technology.

Export Import Bank of India

Commonly known as Exem Bank, was set up on January 1982 to take over
operations of the internal financial wing of the IDBI (to provide financial
assistance to exporters and importers). It provides refinance facilities to CBs and
FI against export import.

Capital Resources
Authorized capital of Exim Bank is Rs. 200 crore and paid up capital is Rs.
100 Cr. Wholly subscribed by the Central Govt. can raise currency from govt. and
foreign currency from other countries.

Functions:
1. Financing for exports and imports of good and services
2. Financing for exports & imports of machinery
3. Financing of joint ventures in foreign countries

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Presently 9 lending operations are undertaken:
1. Loans to Indian companies
a) Direct financial assistance to exporters
b) Technical consultancy services
c) Oversees investment
d) Pre-shipment credit
2. Loans to foreign govt. companies & PI are provided under:
a) Overseas buyers credit scheme
b) Lifes of credit to foreign govts and relending facility to banks
overseas.
c) Overseas Investment
d) Pre-shipment credit
3. Loans to cities in India include
a) Export bills re discounting schemes of short bills
b) Refinance of export credit.

IDBI Industrial Development Bank of India

Set up 1947 to provide long term finance in industry. Till 1976 it was a
wholly owned subsidiary of the RBI. In 1976, IDBI was delinked from RBI and
was taken over the Govt. of India.

Functions of the IDBI

1. Direct Assistance: By way of projects loans, underwriting of a direct
subscription to industrial securities, soft loans, technical refund loans and
equipment finance loans. It subscribes to purchase and underwrite the issue
of stocks, shares and bonds or debentures.
2. Indirect Assistance:
1. Can refinance term loans to industrial concerns repayable within 3 to
25 years given by the IFCI and State finances.

Page 65
 2. Refinance term loans repayable between 3-10 years given by
scheduled banks or state cooperative banks.
It can refinance bank and state cooperative banks.

3. Special Assistance: IDBI Act 1964 has provided for the creation of a special
fund known as the development assistance fund.

It provides assistance to backward areas in relation to industrial

development with the financial institute gives advances to small scale sector for
regional development and soft loan scheme.

Industrial Finance
1. Short-term finance:
Refers to the funds required for a period of less than one year required to meet
variables seasonal or temporary working capital requirement. Banks are primary
sources.

2. Medium term finance

1-5 years may be regarded as medium term. Is required for permanent working
capital, small expansions, replacements and modifications etc.

Corporate Securities

Corporate securities are instruments by capital is raised by joint stock

companies. There are two classes:

1. Ownership securities
Are the shares by which the owned capital is raised.

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Kinds of shares:
1. Preference shares: are those which have preference that right to the
payment of dividend during the life time of the company and a preferential
sight to the return of capital when the company is wound up.

Characteristics
1. Dividends are fixed
2. Those who hold PS get their dividends before others
3. During wind up also they get the money first.

Kinds
1. Cumulative PS: Have fired dividends whether these are profits or no
profits. If profits are not sufficient then dividend are accumulated and paid
the next year.
2. Convertible cumulative PS: Introduced in 1955. the CCP share can be
converted to equity any time between the third and fifth years of the issue.
3. Non cumulative PS: They cannot claim arrears of dividends of any year out
of the profits of subsequent year.
4. Participating preference shares: Shareholders receive a fixed rate of
dividend in priority to ordinary share, have sight to participate in the
balance of profit in an agreed proportion together with ordinary
shareholders have voting rights.
5. Non-participating PS: Entitled to only fixed share of dividends and have no
claim in surplus profit, do not have voting right.
6. Redeemable PS: Shares which can be purchased back by the company at
any time.
7. Irredeemable PS: That cannot be purchased back

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Equity Shares
Shares that are not preference shares are equity shares. They dont have
fixed rate of dividend. Once the claims of dividend of PS are complete the FS get
them. They are irredeemable and holders handle normal voting rights.

Two types of equity shares:

According to companys act.
1. With voting rights
2. With differential rights as to the dividend, voting or otherwise in
accordance with such rates of subject to conditions as may be prescribed.
Included by the Act by companies (Amendment) Act 2000.
3. It may consolidate and divide all or any part of share capital into shares of a
large amount.
4. May correct all or any of its fully paid up shares into stock and vice versa.
5. Can sub divide the existing shares into shares of lower denominations.
6. Can also cancel shares which have not been take up and reduce its capital
7. Can be done by company and dont need court permission.

Creditorship Securities
Consists of Debentures and bonds and credit instruments that are used by
companies to raise funds. The complaint raised is known as Borrowed Capital or
Debt Capital.

Debentures: A document under the companys scale which provides for the
payment of a principal sum and interest thereon at regular intervals which is
agency secured by a fixed or floating charge on the company is property or
undertaking which acknowledges a loan to the company.

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Classes:
1. Redeemable and sure deemable (perpetual)
2. Mortgage and simple
3. By a charge on the assets or property of the company
4. Spread over in different cities
5. Estimates of deposit and annual turnover is not available
6. RBI has no control over the lending activities

Nidhi operate South India

Some kind of mutual funds
Restricted only to the member

Indigenous bankers are individual firms which receive deposits and give loans and
thereby operate as banks. The activities not regulated. They do not constitute a
homogeneous group.

Organized Sector
Commercial Banks, FI, Mutual Funds and Discount and Finance House of
India Limited. The principal constituents of the Indian Money Market is

1. The Call Money Market: Overnight and money at short notice for periods
upto 14 days. It is meant to balance the short term needs of banks, exist in
developed markets.
2. Market which deals with treasury bills is called treasury bills market. They
are short term liability of the Central Govt. Issue to meet revenue deficits.
The market is undeveloped. RBI is the captive holder of these bonds. It is
also auctioned.
3. The Repo Market: Is a money market which helps in collateralized short
term borrowing and lending through sale purchase operations of debt

Page 69
 instruments. It is sold by their holder to an investor with an agreement to
repurchase them at a predetermined rate and date.
4. The Commercial Bill market: Is sub market where commercial bills trade
bill are handled. The commercial bill is a bill drawn by one merchant firm
on the another. They arise only out of domestic transactions. Purpose is to
reimburse seller, but buyer delays payments.
5. The Certificate of Deposit Market: Issued by bank to depositors of funds
that remain on deposit at the bank for a specified period. They are similar to
term deposits but are negotiable and trade able in the short term money
market.
6. Commercial Paper: Is short term instrument of raising funds by corporates.
Its a sort of unsecured private placement: Is the sale of an entire issue of
securities by a company directly to one or few investors, usually financial
institutions.

The appeal made to sell and buy through brokers. E.g. Insurance
companies, investment companies, trust accounts, pension and provident funds
etc. the growth of institutional investors ha increased the scope of private placing.

Methods:
1. Standing Behind the issue:
Underwriter guarantees the sales of a specified number of shares within a specified
period. If it doesnt sell underwriter buys it.

Convertible and unconvertible

Convertible debentures the holders have the option to convert their
debenture holdings into equity share of the company at a specified rate after a
specified period.

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New Issues Marketing of Securities
The securities market may be divided into:
i) New Issue Market and ii) Stock Exchange

Limitations:
1. For a new company with new and unknown promoters, it is not advisable.
2. If company fails to generate sufficient response, this is a flop.

Money Market
Money market refers to a mechanism whereby on the one hand borrowers
manage to obtain short term loanable funds and on the other, tenders succeed in
getting credit worthy borrowers for their money.

The Indian Money Market:

Is not integral of two types

1. Organised and 2) Un organized

Unorganized sector
Confined to small towns and villages. The indigenous bankers are financial
intermediaries. Among these the most prominent are financial companies, chit
funds and Nidhis. They give loans to retail on wholesalers, artisans and other self-
employed persons. They charge from 36-48% of interests. The chit funds are
saving institutions.

Chit Funds Not in Kerala and Tamil Nadu

1. Have regular members who make subscription
2. Collection is given to member of the fund

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Outright Purchase
The underwriter purchase the issue outright and resell the securities to
investors. Purchase price may be negotiated or may be determined by competitive
bidding.

The Consortium Method: Syndicated Method

Underwriting is jointly done by a group of underwriters who form a
syndicate for this purpose. Adopted for new issues, risk is widespread.

Advantages
1. Relieves the issue of the risk.
2. To fulfil minimum requirements
3. Reduces specialized functions
4. Have expert knowledge of the capital market conditions
5. Assist in mobilization of funds in the capital market
6. Help stabilize capital markets

Participation Certificate
Like certificate of deposits PCs are also issued by banks normally for
periods ranging from three months to 6 months. Maximum period to one year. In
need of funds, it allows a bank to obtain from other banks and financial
institutions.

Money Market mutual Funds

Was introduced by RBI in April 1992, the objective was to provide an
addition short term avenue to the individual investors. Initial guideline were not
attractive, as didnt receive any positive response. To make is attractive Rs. 50
crore is been given as limitation to the banks and FI from November 1995.

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Characteristics
1. Lack of integration
No coordination between organized and unorganized sector. One doesnt
have effect on others. There is no coordination and cooperation between them. The
indigenous bankers have no connections with RBI.

2. Lack of Rational Interest Rate Structure

Due to lack of coordination between banks. Too many concession rates, no
fixed interest, inappropriate lending and borrowing.

Shortage of funds in the MM

The loanable funds far exceed its supply. Due to small savings, low per
capita income, poverty, population and wasteful consumption.

Seasonal stringency of funds and fluctuation in interest rates

India, basically farm regulated, and has bearing on funds demand and
supply. Oct June require additional finance a monetary stringency is crated.

Inadequate Banking facilities

Though we have opened CBs everywhere, but still lack in banking
facilities. Rural areas still to be covered.

Reform measures
1. Introduction of stamp duty
2. Deregulation of interest rates from May 1985 by RBI have activated MM
3. Many MM Instruments are realtered
4. The introduction of Repo in December 1992, its an agreement with CBs
and RBI.

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Capital Market
Capital Health used in the production of funds wealth. It is the money and
money value investors in business unit.

A business enterprise can raise capital from various sources. Long term
trends can be raised either through issue of securities by borrowing from certain
institutions.

Borrowers of Capital are:

Central & State Govts and Local Govts.
Public Corporations
Business units

Lenders are:
Individual investors
Institutional investors
Banks
Special Industrial financing institutions

The MM and CM are interdependent

1. Suppliers / refers to operate in both markets within their frame work of
investment.
2. User also opt for both markets.
3. Short term and long term rates are interdependent.
4. Some institution serve both money and capital market.

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Role of Capital Markets in Indias Industrial Growth

1. For financing Five Year Plans

2. Mobilization of savings and accusation of capita formation
Paucity of resources and increasing demand for investments by industrial
organization in India. Capital upto is important.

3. Promotion of Industrial Growth

Stock exchange is a central market through about resources are transferred
to the industrial sector of the economy. Encourage people to invest in productive
rates than non productive channel.

4. Raising long term capital

Permanent capital is raised for a permanent present born companies require
funds permanently. The exchange gives investors to buy on sell their securities
while permanent capital with the companies remain same.

5. Ready and continuous market:

Stock market is every element of marketability makes investment with
more liquid as compared to other assets.

6. Proper channelisation of funds

Not only creates liquidity through its pricing mechanism, but also functions
to allocate resources to the most efficient industries. To channalise their funds in a
particular company.

7. Provision of a variety of services

FI provide variety of services
i) Grant of long term and medium term loans in entrepreneurs.

Page 75
 ii) Provision of underwriting facilities
iii) Assistance in promotion of companies
iv) Participation in equity capital
v) Expect advice i\on management of investment in industrial
service

Function
Provides services to both corporate and investor class sectors useful
services.

1. Ready and continuous market

Provides a convenient place where shares can be bought and sold. Easy
marketability make investment in securities more liquid as compared to other
assets.

2. Protection to Investors
The functioning is regulated and conducted by well laid rules. Provides
safety to investors. After 1992 scare everything comes under (SEBI).

3. Provides information to assess the real worth of securities

Trading is continuous and prices are determined by their supply and
demand. The prices are openly communicated to the public known as Market
quotations.

4. Proper channelisation of funds

Flow of funds is into most efficient industries. The prevailing market price
of a security and relative yield are the guiding factor for the people in channel is
their funds in particular company.

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5. Promotion of Industrial Growth
The funds are invested in productive channels than unproductive sections
like real estate, building etc. this stimulates industrial growth.

6. Accelerates capital formation

The positive features of the stock market encourage peoples to save and
invest in corporate securities. The twin fee market of recoverable return and
liquidity are definite incentive to the people to invest in securities.

7. Raising long term capital

Stock exchange offers investors opportunity to investors to buy and sell
their securities while retaining the permanent capital.

8. Impact of company performance

9. Economic barometer
Stock exchange prices are important economic indicated of the
performance.

Advantages
1. Benefits to community:
a) Promotes industrial growth and eco. Development
Inculcates habits of saving and accelerates the process of capital for margin
Optimum utilization of saree resource
Give picture of the economic of state and country
Manages fund for public sector

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Management: It is managed by an Executive Committee Council of Management /
Governing body which is an elects body. The government is empowered to
nominate not more than three members on the government body.

Functions
1) Ensure Rules are observed by members
2) To protect the interests of the investing public
3) To approve the quotation of new shares.

Membership: It is registered and governed by various regulations. It ensures that

the person is of good moral conduct, component, possess enough experience and
are financially sound can become its members. They enjoy special privileges. Non
members are not allowed to enter the floor.

Remisieres act as agents for the members and receive commission on the business
procedure by them. Also known as they commission men.

Authorised clerk: Act on behalf of their members employer do not get

commission.

Types of Dealings
1. Ready delivery contracts: These involves investment transactions care known
as cash trading. The settlement is done within a fixed time, noted seven days
from date of contract. When settled same day it is spo delivery contracts.
2. Forward Delivery contracts: Involves speculative transactions are known as
forward. Trading the speculators are interests in dealings. It is done on fixed
settlement days on the end of every fortnight through clearing house only.
3. Clearing house: An institution share accounts brokers are settled. All
transactions are taken into account.

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4. Speculation and speculators: Speculation Refers to making quick profits by
anticipating the changes in the prices of shares. Speculative transactions are
carried out in the stock exchange day in and day out.
5. Bulls: Speculators who are optimist and crytallise in prices and purchase
shares.
6. Bears: Speculators who sell in anticipation and fall of prices in future.
7. Stages: who buy large amount of a new issue of share enabling them to sell
these shares at a profit.

Growth of Indian Stock Markets

The first organized stock exchange was established in India at Mumbai in
1857 and was styled as the native share and stock brokers associations. Mumbai
was followed by Ahmebad share and store brokers association in 1894, Calcutta
Stock Exchange association in 1903 and the Madras Stock Exchange Association
(Private) Ltd in 1931. when the Securities (Contracts) Regulation Act 1956 was
passed only % stock exchanges viz., Mumbai, Ahmedabad, Kolkatta, Chennai,
Delhi, Hyderabad and Indore, received recognition. 23 stock exchanges are
recognized.

National Stock Exchange of India (NSE)

Was set up in November 1992 by IDBI, UTI and other finance institutions.
NSE commenced operations in the whole debt market (WDM) in June 1994 and
trading in equities was started in the Capital Market (CM) segment in November
1994. The WEM is concerned with trading in govt. securities, treasury bills, PSU
bonds, CDs and CPs and corporate debentures and the main participation in this
market are bank, financial institutions and large corporate.

All transactions in debt securities through brokers. This is aimed to ensure

transparency and facilitate regulation. The capital market segment of NSE

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provides facility for trading of equal instruments, warrants, debentures,
preferences shares etc. both the segments of the NSE have grown substantially
over the years.

The regime in which trading on NSE operates is characterized by 4 key

innovations:

1. The physical floor was replaced by anonymous computerized order

matching with strict price time priority
2. The limitations of being in Mumbai and the limitation of Indias public
telecom network, were avoided by using. Satellite communications NSE
has a net work of 2,000 satellite terminals all over the country.
3. NSE is not owned by brokers. It is a limited liability company and brokers
are franchises.
4. Traditional practices of unrealiable fortnightly settlement cycle with the
crepe clause of badly were replaced by a strict weekly settlement cycle
without badla.

Export Contribution
Export contribution can be divided in three phases.

Phase I a) 1952-66 First three year plan [passively

b) 1966-73 export insufficient expansion

1) FD loans because of Jute, tea, cotton, textile, oil seeds and vegetable oil,
raw cotton, hide a etc.
2) Export duties affected the export commodities
3) Growing strength of domestic demand was increased.

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Phase II started in 1973 and lasted for decrease. Exports were given high
priority. Effective nominal exchange rate of the rupee depreciate in the 1970.

Import Substitution
Objectives are:
1. To save scarce foreign exchange for the import of more important goods.
2. To achieve self reliance in the production of as many goods as possible.

Import Policy
1. I Phase Import substitution mostly took the form of domestic production
of consumer goods.
2. II Phase Emphasis shifted to the replacement of the import of capital
goods.
3. III Phase Emphasis was on reducing the dependency on imported
technology by developing and encouraging the use of indigenous
techniques.

The immediate aim of import substitution in this country was the conservation of
foreign exchange. It long fun objective was to initiate structural changes of far
reaching significance in the economy. The result is industrial sections as achieved
diversification and depth necessary for future growth.

Indian Society
Social system is a very broad concepts. It includes the people, the
government, political, educational and industrial economic environments imbibed
in it.

Indian Society basically a traditional society. Now in the recent times

changing towards modernity. The family values, traditions and culture is rich in

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India than any other country. The quality of life have improved due to employment
and high earning. The society stands for certain beliefs, values which are a source
of institutional drive.

The different languages keep people bonded together. Indian society is very
sensitive culture of Indian society has changed slowly, but will require much more
time to adapt to modernization. No. of prejudices exists in these environment.
Acceptance of new is not immediate.

The society is also turning into liberalization. Women in middle class

families enjoy greater freedom.

The change is gradually taking place, from ethical and tradition to modern
and silicon.

Culture
Refers to that part of the total repertoire of human action (15 product)
which is socially as opposed to genetically transmitted.

E. B. Taylor defines, culture of civilization is that complex whole which

includes knowledge, belief art, morals, law, custom and other capabilities and
habits acquired by man as a member of social.

Culture is
- There is human product of social interaction
- Provides pattern for meeting biological and socio needs.
- Handed down from generation to generation
- Symbolic quality
- Learned by each person

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 - A basic determinant of personality
- For continued functions of society

Elements of Culture
1. Knowledge and belief: Refers to a peoples prevailing motions of reality.
They include myths and metaphysical beliefs as well as scientific realities.
2. Ideals: Refers to societal norms which define what is expected; customary,
right or proper in a given situation. Follows norms of proper behavior.

References: Refers to societys definitions of those things in life which are

attractive or unattractive as objects of desire.

Organization of culture
Refers to the social structure and the integration of traits, complexes and
patterns that make up the cultural system.

Stratification i.e. differentiation based on criteria such as age, sex, caste,

occupation, education, income is an important aspect of social status and cultural
organization. Each stratum has its own role limitation and rank. The organism of
culture is determined to a large extent by major social institutions. The important
common institutions of modern cultures are the eco system, the political
administrative system, the educational system, religion, family, expressionistic,
aesthetic and recreational institutions. They are established to mice and common
societal needs. Cultural traits (unit as observation [like normal behavior, shaking
hands or saying namaste, or an articraft like wooden bowl). Cultural pattern
(specific and enduring system of trait complexes) [Refers to major segments of the
culture.]

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Cultural adaptation
Refers to the manner in which a social system or an individual fits into the
physical or social environment. Adaptation is essential for survival e.g. oil energy
crisis.

Culture Shock: Environment changes produces culture, shock a feeling of

confusion, in security and caused by strangers of new environment. E.g.
movement from urban to rural and vice versa.

Cultural Transmission
The important character is its transmissive quality. It is transmitted from
one generation to the next and to the new members admitted to the culture. Culture
accumulates more techniques, ideas, products and skills. Cultural transmission
takes place by means of symbolic communication. A symbol is any sign signal or
word that conveys a meaning. It also facilitates cultural diffusion is the spread of
cultural elements from one place to another. Can be done through high educational
change and communication.

Cultural conformity
Individuals in a community either conform or deviate from cultural norms.
Cultural conformity follows that the most important process in society is that
which ensures that people do indeed meet their role obligation.

By William F. Orgburn says that various parts of modern culture do not

change at the same rate; and that since there is a correlation and interdependence
of parts, a rapid change in one part of our culture requires read. Investments
through other changes in various co-related parts of that culture. The important
factors that contribute do cultural lag are ignorance, wrong nations, conservation,
sentiment factors, political factors and vested interests.

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Cultural Traits
1. Low context and high context cultures:
High context is one that places great value on the intangible aspects of a
negotiation or business deal. They look beyond facts and figures and take into
consideration factors like personal relationships, atmosphere and attitudes towards
respect, religion and trust.

Low context: Assumes a high degree of shared knowledge on the behalf of a

transaction partner and thus deals only with tangible aspects of the deals as facts,
figures and performance. Atmosphere and personal relationship means little.
Business can be done without meeting face to face.

2. Masculine and Famine culture:

Masculine: Appreciates aggressiveness and assertiveness while respecting the goal
of material acquisition. Achievements is more important than building long term
relationship. Success is the function of individual and society is made up of
leaders follows.

Feminine: Appreciates inter-personal relationship put quality of life before

material acquisition, appalled concern for individuals and less fortunate. Mitchell
observes Business tends to be more pedestrian in cultures with a majority of
feminine trail. Business hinges more on personal relationships friends doing
business with friends, rather than on pure efficiency and written contracts.

3. Monochromic and Poly chronic societies;

Monochronic: How a culture views time. It is used for ordering ones life,
prioritizing and for doing task in sequential order one thing at a time societies of
developed world.

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Polychronic: uses time to accomplish diverse goals simultaneously and to interact
with as more individuals as possible even at same time.

4. Universalism vs. particularism:

Fans Tompenaalis identified five cultural dimensions.
Universalism: ideas and beliefs can be applied
Particularism: holds that the environment dictates how ideas should be applied.

5. Neutral Vs. Emotional

Emotional are held in check E.g. Japan Emotions are openly and naturally
UR expressed. People smile a great deal,
talk loudly when exited, greet each
other enthusiastically E.g. India,
Mexico and Swiss

7. Specific Vs. Diffuse

Individuals have a large public space Both public and private space are
and they readily let others enter and similar in size & individuals guard their
share & a small private space they public space affords entry into private
guard closely and share with only close space as well. E.g. China, Spain
friend association. E.g. UK, US &
Swiss
Individuals are open & extra separation No open to public space
of work and private life open to public
space.

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8. Achievement Vs. Ascription

People are accorded status based on Status is attributed based on who or

how well they perform their functions. what a person is. Accords status based
Give high status to high achievers on age, gender, or social connections.

Politics
There are not radical differences in the philosophic of major political
parties in some countries, the situation is quite different in others. The government
system in a number countries, including several countries which are making rapid
eco progress and having liberal policies towards foreign capital and technical is
not very democratic.

Indian politics believes in nationalism, but now with the liberalization,

globalization, the countries are in a competition to woo foreign capital and
technology. As a result there has been an influx of foreign investment to the
countries like ours. The restrictions and regulations, trade policies, procedures,
incentive system as all very different in Indian political system.

Coalition governments of different political practices are becoming

common. The constituents of the coalition are parties with very different economic
ideologies, making the scenario complex or confusing / uncertain. Some political
leaders are so powerful that they wild enormous control over the party. E.g.
Mamta Banerjee, Jailalitha, Uma Bharathi, Advani, Chandrababu Naidu (CEO).

There is a universal trend towards political decentralization. Thisnindicates

some shifts in the power centres firms have to deal with. Universally, the desire of
ethnic groups to become independent of the supremacy of others is growing.

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Positive of modernization on business and society
1. Leads to innovations
2. Increases productivity
3. Produce technically superior goods
4. Cost reduction
5. Spread of competition outside the national boundary
6. Greater output
7. Short working hours
8. Skilled jobs
9. Safe working conditions
10. Efficient use of raw materials
11. On standards of living increase

Negatives
1. Displacement of labour [unemployment]
2. Lower wages
3. Aged immobility [idleness]
4. Gap between management workers
5. Old crafts and craftmenship declines
6. Loss of identity as man becomes machine
7. In fast changing society

Even after 58 years of independence, Indian economy is still under

developed. The per capital income is very low and 60% to 70% seek employment.
Widespread unemployment is a normal feature. The increase of life expectancy
has increased the population.

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 Poverty level is as high as 48.44% and the per capita income (2004) is as
low as $ 620 which is not even 1/6 th of the USAs income. In rural India 37.3% and
urban 32.4% are under poverty line.

Indian society is dependent on agricultural sector. Low productivity is a

cause of worry. In India life expectancy is 33 years compared to 70 years in
middle income economies. In 2001 Indias population was 1,027 million against
361 million in 1951. The feeding increases and usage of natural resources also
increases. This rapid growth in population has resulted in unemployment.

Another factor is low capital formation results in slow growth and it is also
due to technological backwardness.

Racisim, casteism is also a major social issue. This has led to harassment of
the workers. Child labour and corruption has creped into the society as a devil
which cannot be fought.

With increase in population the rise in the slum population has also caused
problems. Land acquisition, deforestation is also part of this evil. Water, air, noise,
pollution has increased.

A shift to urban cities have brought in urban culture and values, beliefs of
traditions are decreasing.

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Environmental Issues

Till recently the business had not cared for ecological effects of its
activities. Guided entirely by its profit maximization goals the industry caused
tremendous damage to exhaustible natural resources such as minerals and forests.
It also contaminated water and polluted air. Environmental degradation is in the
process. Expensive of industrial towns has caused for pollution to reach
population. The pollutants discharged by these industries damage the health and
reduce output from local agriculture and industry damage infrastructure and
buildings.

Excessive usage of non renewable resources have caused threat to the

extension of distinction.

Some of the wastes that are thrown are not disposable safely. The ability of
natural environment to absorb waste is not infinite. Parts of natural environment
may serve more than one function. E.g. ocean are important in delimining the life
support system of the global and micro climates; they are sources of many
minerals and other resources, they assimilate many different wastes; and they also
provide the space and opportunity for marine past times.

With increase in income, municipal wastes increases and carbon dioxide

emissions per capita increase
With increase in income some problems decrease.

1. Public sanitation system

2. Rural electricity

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World development Report 2003 categorizes cites into low income cities, low-
middle income, upper-middle income and high income cities.

The low and lower-middle are facing environment issues like

1. water supply service
2. Sanitation
3. Drainage
4. Water resources
5. Solid waste management
6. Air pollution
7. Land management

Environmental degradation causes soil erosion and productivity. The hazards

caused to environment will exhaust those resources that are basically needed for
survival.

Modernization has brought in change in the Indian society. This includes

significant alterations in social structure, cultural definitions and in the products of
socio-economic-cultural action. Social structures change in size, degree of
formality and informality and in the types of social relationships and in the
systems of statutes and roles. Materialism has creeped in his modernization.
Modernization has resulted in changes in size of society, social institutions,
occupational patterns; positions, status and roles, values, beliefs and attitudes,
social interactions, social mobility. The development of new techniques,
inventions, modes of production, new standards of living has resulted in
modernization.

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 Modernisation has brought women from home to office differentiated their
tasks and distinguished their earnings. New techniques of cooking ranges have
reduced the time spent in kitchens.

Role of communication in educating common man, has bought a social

change. It has reduced the social distance between the urban and rural areas; dams
are built to control floods and generate power, to irrigate land. Production of
artificial rains have shown positive signs of success. Modernization have made
material progress rapid and widespread, though unequal.

Modernization has number of adverse effects on society. Films has immoral

effect on society. There is concentration of economic power in few hands.
Developments in the field of nuclear science, though they offer great scope for
advancement, pose a serious threat to the very survival of human race.

Modernisation has also and is also saving lifes, makes desert bloom and
brings music in our living rooms.

Demographic Environment and Gender

The demographic environment includes age structure, gender, income
distribution, family size, FLC, occupation, education, social class, religion, race,
and nationality. There is an explosive growth of the global population.
Modernization has led to fall in birth rates even though the population is growing
over one percent annually.

Due to the gender bias there is tremendous fall in the birth rate. There is a
steady raise in income. Machines have taken over man. The technologies,
automation and even rationalization are hinderance to labour.

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 Heterogeneous culture is being adopted. The immigration problem gets
reduce due to political friendline between the countries. But this will increase
multi cultural complexities and adds new challenges and opportunities.

The marketers have to involve in diverse roles to satisfy each and every
member of the society.

Space of modernization of Indian society

Modernization has brought in change in the Indian society. This includes
significant alterations in social structure, cultural definitions and in the products of
socio-economic-cultural action, social structure change in size, degree of formality
and informality and in the types of social relationships in the systems of statutes
and roles. Materials has creeped in win modernization. Modernization ahs resulted
in changes in size of society, social institutions, occupational patterns; positions,
status and roles, various, beliefs and attitudes, social interactions, social mobile.
The development of new techniques, inventions, modes of production, new
standards of living has result in modernization.

Modernisation has brought women from home to office, differentiated their

tasks and distinguished their earnings. New techniques of cooking ranges have
reduced the time spent in kitchens.

Role of communication in educating common man, has bought a social

change. It has reduced the social distance between the urban & rural areas. Dams
are built to control flood, generate power, to irrigate land. Production of artificial
rains have shown positive signs of species. Modernization have made material
progress rapid and widespread though unequal.

Page 93
 Modernisation has number of adverse effects your society. Films have
immoral effect on society. There is concentration of economic power in few hands.

Govt. policy till 1991

India was following a very restrictive policy town foreign capital and
technical. Important of technical was consider on merits it substantial exports were
guaranteed over a period of 5 to 10 years and reasonable proposals for exports.
Govt. was issued lists where lists of industries were,

a) i) Foreign investment may be permitted

b) Only foreign tech collaboration (but no foreign investment) may be
permitted.

Tech collaborations were to be considered on the basis of annual royalty

payments which were linked with the value of actual production, % of royalty
depended on production and limit to 5 years (payment).

The Foreign Exchange Regulation Act (FERA) 1973 served as a tool for
implementing the national policy on foreign private investment in India. FERA
empowered RBI to regulate or exercise direct control over the activities of foreign
companies and foreign nationals in India. RBI has given general permission to
hold title of immovable properties.

New Policy
The industrial policy statement of July 24, 1991, which observes that while
freeing the Indian economy from official controls, opportunity for promoting
foreign investment in India shall also be fully exploited has liberalized the Indian
policy towards foreign investment and tech.

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 The new policy has also made the import of capital goods automatic
provided the foreign exchange requirement for such import is ensured through
foreign equity.

Silent Feature
1. FDI is eligible for automatic approval.
Unit Dec. 1996, only 36 industries were eligible for automatic approval of FDI
upto to 5!% of the total equity.

Now there are different types industries depending on the ceiling of foreign
equity participation.

1. Industries in which FDI does not exceed

Statistic:
1. Definition, scope and application, classification and tabulation, histogram,
standard deviation, strawness, correlation, Regression.
2. Probability multiple and partial correlation pass on distribution
3. Hypothesis or anova

Segmenting Consumer Market

1. Geographic
a) Region
b) Urban, suburban, rural
c) Climate
d) Cety size
e) Population Density

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2. Demographic
Income I Stage single or mallied head, under increase no
children
Age II stage married head, under 40 young children with
or without older children
Education III Stage married head, under 40, older children
Stage in life cycle IV stage married head, 40 or older, no children under
20
Social class V Stage head living along over 40, no children
Sex
Occupation
Religion
Race

3. Psychographic Bases: How people act

Different to measure
a) Personality
b) Life style
c) Readiness to buy

Segmenting Industrial market:

1. Kind of business activity
2. Users geographical location
3. Usual purchasing procedure
4. Six of user: Give lower prices to those buyers who buy in large quantities.

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Segmentation Need
1900s markets were segmented automatically each product was tailored to
the needs of the buyer who had ordered it.

When main industries shifted to mass production, to standardize, achieve

greater production efficiency, lower product cost, segmentation was need. They
took single market notion with them.

With the changing preferences of the customers the producers, produced

differentiated products to serve different market segments. Market segmentation
requires a balancing of production and marketing cost and price.

Why?
Concept of market segmentation is based on the fact that market is not
homogeneous, but heterogeneous in the potential buyers are homogeneous. But a
group of potential buyers do share contain characteristics of distinctive
significance to marketing and each group is a market segment. To apply market
segmentation successfully a particular segment must be measurable accessible of
sufficient size to make it, worthwhile cultivating.

Segmentation
Industrial Consumer
Industrial users Ultimate consumers
Large quantities industries Buy in smaller quantities
Employ professional to buy For consumption over short period
Specialised buying No systematic in buying
Use little time to buy
Buys broad spectrum goods

INTERNATIONAL BUSINESS ENVIRONMENT

UNIT 5

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 ISSUES IN INTELLECTUAL PROPERTY RIGHTS

Protection of intellectual property rights has become an issue of wide and

serious discussions. Intellectual property rights may be defined as information
with commercial value.

The Uruguay Round (UR) agreement on trade related aspects of Intellectual

Property Rights (TRIPS) covers seven intellectual properties

1. Patents
2. Copyright and related rights
3. Trademarks
4. Industrial designs
5. Layout designs of integrated circuits
6. Undisclosed information (trade search)
7. Geographical indication

1. PATENTS
Patent is a legal protection granted for an invention that is new, non-
obvious and useful. The patent grants the patent holder the exclusive right to make
use or sell the patented products. The main purpose of the patent system is to
benefit the society. Patent, by providing an opportunity to recoup the cost of
inventions and to make profit out of inventions, encourage research and dup and
thereby contribute to society.

According to Indian patents Act 1970, inventions mean any new and useful
(i) process of manufacture, (ii) machine, apparatus, article, (iii) substance produce
by manufacturer and any new and useful improvements in them.

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 While the patents grant the exclusive right to the inventor to exploit his
inventions for commercial gain for a specific period of time, it also imposes on
him the duty of fully disclosing the inventions. Under the 1970 Act, patent expiry
period is 5-7 years for some and 14 years to other products or 20 years.

Not patented: Atomic energy, traditional knowledge, scientific principles, abstract

theory, discovery of natural substances, new form of known substances, and
mixture of known compounds.

Disadvantages: charging higher rate

2. COPYRIGHT
Exclusive privileges to authors to reproduce, distribute, perform or display
their creative works.
Criteria: Life of authors & 70 years from creation of work
Copy right act 1957

3. TRADEMARKS
Brands and trade marks used very extensively in modern marketing to
maintain product identity and to help product promotion, have become very
popular terms.

Trademark is a brand a part of a brand that is given legal protection because

it is capable of exclusive appropriation. A trade marks protects the sellers
exclusive rights to use brand name or brand mark.
According to Trade Mark Act 1999, trade mark means a mark capable of
being represented graphically and which is capable of distinguishing the goods or
services of one person for those of others and may include shape of goods their
packaging and combination of colors.

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 It includes words, symbol, logo used by manufacturer to identify goods
which are distinctive and non-descriptive in nature.

Subject matter:
1. Reputation, 2. Goodwill and 3. To avoid duplication

Term of Protection
10 years from the date of registration.

4. DESIGN ACT 2000

A registered design is a monopoly right for the appearance of the whole or a
part of a product resulting from the subject matter lines, contours, colors, shape,
texture, configuration, patterns, materials which is new or original which has eye
appeal of the product or its ornamentation.

MULTINATIONAL COMPANY
Why to go global?

1. To achieve higher rate of profit

2. Expanding the production capacities beyond the demand of domestic
country
3. Secure competition in the home country
4. Limited home market
5. political stability and instability
6. Availability of Technology and managerial competition

Multinational companies are that companies:

1. Which produce in abroad as well as in headquarter

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 2. Which operate in certain minimum number of nations
3. Which drive some minimum percentage of its income from foreign
operations.
4. Which have certain minimum number of ratio of foreign to total number of
employees.
5. Possesses a management team with geometric orientation

Favorable impact of MNCs

1. It helps increase the investment level and thereby the income and employment
in host country.
2. The transnational corporations have become vehicle for the transfer of
technology.
3. The work to equalize the cost factors of production around the world.
4. MNCs provide an efficient means of integrating national economies.
5. It also helps increase competition and break domestic monopolies.
6. MNCs enable the host countries to increase their exports and decrease their
imports.
7. Help to improve standard of living
8. Employment of highly sophisticated management techniques
9. They kindle management revolution in the host countries
10. MNCs stimulate domestic enterprise
11. The reasons resources of MNCs enable them to have very efficient research
and development systems.

Harmful effects of MNCs

1. The MNCs main objective is profit maximization, not the development needs
of the countries.

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2. MNCs may destroy competition and acquire monopoly powers
3. MNCs retard growth of employment in the home country
4. Interference in the other affairs of the country
5. Faulty technology transfer
6. Depletion of non-renewable resources
7. They undermine the local culture and traditions, change the consumption habits
for their benefits against interest of local community.

FOREIGN INVESTMENT IN INDIA [FDI]

Foreign investment is playing an increasing role in economic development.
Economic reforms and the far reading political changes have resulted in very
substantial changes in international capital flows. FDI now contributes to a
significant share of the domestic investment, employment, exports etc. the India
began to experience a surplus on the balance of payment and very remarkable
improvement in the reserves positions.

Foreign investment has assisted and is assisting the economic growth of

country.

1. FDI shifts the burden of risks of investment from domestic to foreign

investors.
2. FDI is only capital inflow that has been strongly associated with higher
GDP since 1970.
3. FDI generated large employment opportunity.

The flow of direct foreign investments to India has been comparatively limited
because of the type industrial development strategy and the very cautious foreign
investment policy followed by nation.

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 Direct foreign investment in India is adversely affected by the following
factors

1. The public sector was assigned as monopoly or dominant position in most

important industries, and therefore, the scope of private investment, both
domestic and foreign was limited.
2. When the public sector needed foreign investment, there was a marked
preference for the foreign govt. sources.
3. Foreign investment was normally permitted only in high technology industries.
4. Foreign equity participation was normally subject to 40%.
5. Payment of dividends abroad, repatriation of capital etc., as well as inward
remittances was subject to stringent laws like Foreign Exchange Registration
Act (FERA) 1973. These discourage foreign investments.
6. Corporate taxation was high and tax laws and procedures were complex.

These factors either limited the scope of foreign investment in India.

INDIAN INVESTMENT IN FOREIGN COUNTRIES

Until 1991, India companies made very little investments abroad. Although
Govt. of Indias policy had been one of the encouraging foreign investments by
Indian companies, subject to certain conditions, several factors like domestic
economic policy and domestic economic situation were deterrent to foreign
investments by Indian companies.

By restricting the areas of operations and growth, the govt. policies

seriously constrained the potential of Indian companies to make a foray into the
foreign countries through investment. Added to this was the attraction of protected

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domestic market which was, in many cases, a sellers market and this made Indian
companies to ignore foreign markets.

Indian companies have established subsidiaries and joint ventures in a

number of countries in different manufacturing and service sectors.

The new economic policy of India is expected to encourage foreign

investments by Indian companies. The curbs on growth, even by mergers and
acquisition, have been removed, financing restriction has been based, areas of
business opened to private companies have been substantially enlarged and foreign
tie up policies have been liberalized.

Further, the domestic market is becoming increasingly competitive. All

these factors should encourage the Indian companies to invest in other countries
and to take advantage of the economic liberalization in many countries.

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GATT
General Agreement on Trade and Tariffs

The predecessor of WTO was born in 1948, as a result of the international

desire to liberalize trade.

Objectives
The primary objective of GATT was to expand international trade by
liberalizing trade so as to bring about all round economic prosperity. And the other
important objectives are

1. Raising the standard of living

2. Ensuring full employment
3. Developing full use of resource of the world
4. Expansion of production and international trade

Rules of GATT
1. Any proposed change in tariff, or other type of commercial policy of a
member country should not be undertaken without consultation of other
parties to the agreement.
2. The countries that adhere to GATT should work towards the reduction of
tariffs and other barriers to international trade, which should be negotiated
within the framework of GATT.

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