MBA 105 -- Question-Answer Bank

Business Environment (MBA 105)

Questions from Unit I

Question 1. Define the term Business Environment? What are the features of Business Environment?

OR

Define the term Business Environment? Describe the changing role of Government in a developing economy like India?

Answer:The term Business Environment is composed of two words Business ‘and Environment‘. In simple terms, the state in which a person remains busy is known as Business. The word Business in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits.

Features of Business Environment:

·         Totality of external forces: Business environment is the sum total of allthings external to business firms and, as such, is aggregative in nature.

·         Specific and general forces: Business environment includes both specificand general forces. Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their day-to-day working. General forces (such as social, political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly.

·         Dynamic nature: Business environment is dynamic in that it keeps onchanging whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market.

·         Uncertainty: Business environment is largely uncertain as it is very difficultto predict future happenings, especially when environment changes are taking place too frequently as in the case of information technology or fashion industries.

·         Relativity: Business environment is a relative concept since it differs fromcountry to country and even region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.

Economic roles of the Government:

1.      Regulation

2.      Promotion

3.      Planning

4.      Production

As regulator: Government world over made a body of laws and policies to assure that competition is at least maintained if not enhanced. The antitrust laws passed in different countries commit the Government to preventing monopoly and maintaining competition. These laws are generally concerned with six specific areas: price discrimination, exclusive and tying contracts, interoperate stock holdings, interlocking directorates, mergers and trade practices that injure independent retailers and wholesalers.

As promoter: Promotional role of the Government in a capitalist economy is determined by the limitations of the business. Since business firms are profit maximizes, they have virtually no interest in making investments in sectors where return is either small, because of long gestation periods of projects, quite uncertain.

As planner: The government plays an important role as a planner, especially in developing countries. During the post-world war II period, many developing countries adopted economic planning for achieving higher growth rate and better standard of living.

As producer: In most capitalistic countries, the bulk of production is done in the private sector. Small scale manufacturing, commerce and agriculture are mostly in private hands, while large scale manufacturing mining and finance are under the control of transnational, domestically owned corporate and public sector enterprises. In developing countries, state-owned utilities provide electricity, gas and water. Public enterprises also play a significant role in transport and communications. In contrast, pattern of ownership differs substantially in different countries in mining and manufacturing.

Question 2. Explain Nature and Significance of Business Environment. What are the various elements of Business Environment?

Answer:The term ‘business environment’ connotes external forces, factors and institutions that arebeyond the control of the business and they affect the functioning of a business enterprise.These include customers, competitors, suppliers, government, and the social, political,legal and technological factors etc. While some of these factors or forces may have directinfluence over the business firm, others may operate indirectly. Thus, business environmentmay be defined as the total surroundings, which have a direct or indirect bearing on thefunctioning of business. It may also be defined as the set of external factors, such aseconomic factors, social factors, political and legal factors, demographic factors, technicalfactors etc., which are uncontrollable in nature and affects the business decisions of a firm.

NATURE OF BUSINESS ENVIRONMENT

On the basis of the above discussion the nature of business environment can besummarised as follows.

(a) Business environment is the sum total of all factors external to the business firm andthat greatly influence their functioning.

(b) It covers factors and forces like customers, competitors, suppliers, government, andthe social, cultural, political, technological and legal conditions.

(c) The business environment is dynamic in nature, which means, it keeps on changing.

(d) The changes in business environment are unpredictable. It is very difficult to predictthe exact nature of future happenings and the changes in economic and socialenvironment. .

(e) Business Environment differs from place to place, region to region and country tocountry. Political conditions in India differ from those in Pakistan. Taste and valuescherished by people in India and China vary considerably.

SIGNIFICANCE OF BUSINESS ENVIRONMENT

There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively.

As stated above, the business environment is multifaceted, complex, and dynamic in natureand has a far-reaching impact on the survival and growth of the business. To be morespecific, proper understanding of the social, political, legal and economic environmenthelps the business in the following ways:

(a) Determining Opportunities and Threats: The interaction between the businessand its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully.

(b) Giving Direction for Growth: The interaction with the environment leads to openingup new frontiers of growth for the business firms. It enables the business to identify theareas for growth and expansion of their activities.

(c) Continuous Learning: Environmental analysis makes the task of managers easier indealing with business challenges. The managers are motivated to continuously updatetheir knowledge, understanding and skills to meet the predicted changes in realm ofbusiness.

(d) Image Building: Environmental understanding helps the business organisations inimproving their image by showing their sensitivity to the environment within which theyare working. For example, in view of the shortage of power, many companies haveset up Captive Power Plants (CPP) in their factories to meet their own requirement ofpower.

(e) Meeting Competition: It helps the firms to analyse the competitors’ strategies andformulate their own strategies accordingly.

(f) Identifying Firm’s Strength and Weakness: Business environment helps to identifythe individual strengths and weaknesses in view of the technological and globaldevelopments.

COMPONENTS OF BUSINESS ENVIRONMENT

Business Environment has two components:

1.      Internal Environment

2.      External Environment

Internal Environment: It includes 5 Ms i.e. man, material, money, machine and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise.

External Environment: Those factors which are beyond the control ofbusiness enterprise are included in external environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two types:

1.      Micro/Operating Environment

2.      Macro/General Environment

Micro/Operating Environment:

The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public.

1.      Suppliers: They are the persons who supply raw material andrequired components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier.

2.      Customers: Customers are regarded as the king of the market.Success of every business depends upon the level of their customer‘ssatisfaction.

Types of Customers:

a.       Wholesalers

b.      Retailers

c.       Industries

d.      Government and Other Institutions

e.       Foreigners

3.      Market Intermediaries:They work as a link between business andfinal consumers. It consists of:

a.       Middleman

b.      Marketing Agencies

c.       Financial Intermediaries

d.      Physical Intermediaries

4.      Competitors: Every move of the competitors affects the business.Business has to adjust itself according to the strategies of the Competitors.

5.      Public: Any group who has actual interest in business enterprise istermed as public e.g. media and local public. They may be the users or non-users of the product.

Macro/General Environment: It includes factors that createopportunities and threats to business units. Following are the elements of Macro Environment:

Economic Environment: It is very complex and dynamic innature that keeps on changing with the change in policies or political situations. It has three elements:

a.       Economic Conditions of Public

b.      Economic Policies of the country

c.       Economic System

d.      Other Economic Factors: Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc.

Non-Economic Environment: Following are included innon-economic environment:-

1.      Political Environment: This includes the political system, the government policies and attitude towards the businesscommunity and the unionism. All these aspects have a bearing on the strategies adoptedby the business firms. The stability of the government also influences business and relatedactivities to a great extent. It sends a signal of strength, confidence to various interestgroups and investors. Further, ideology of the political party also influences the businessorganisation and its operations. You may be aware that Coca-Cola, a cold drink widelyused even now, had to wind up operations in India in late seventies. Again the trade unionactivities also influence the operation of business enterprises. Most of the labour unions inIndia are affiliated to various political parties. Strikes, lockouts and labour disputes etc.also adversely affect the business operations. However, with the competitive businessenvironment, trade unions are now showing great maturity and started contributing positivelyto the success of the business organisation and its operations through workers participationin management.

It affects different business unitsextensively. Components:

a.       Political Belief of Government

b.      Political Strength of the Country

c.       Relation with other countries

d.      Defence and Military Policies

e.       Centre State Relationship in the Country

f.       Thinking Opposition Parties towards Business Unit

2.      Socio-Cultural Environment: Influence exercised by socialand cultural factors, not within the control of business, is known as Socio-Cultural Environment. These factors include: attitude of people to work, family system, caste system, religion, education, marriage etc.

3.      Technological Environment: A systematic application ofscientific knowledge to practical task is known as technology. Every day there has been vast changes in products, services, lifestyles and living conditions, these changes must be analyzed by every business unit and should adapt these changes. Technological environment include the methods, techniques and approaches adopted forproduction of goods and services and its distribution. The varying technological environmentsof different countries affect the designing of products. For example, in USA and manyother countries electrical appliances are designed for 110 volts. But when these are madefor India, they have to be of 220 volts. In the modern competitive age, the pace oftechnological changes is very fast. Hence, in order to survive and grow in the market, abusiness has to adopt the technological changes from time to time. It may be noted thatscientific research for improvement and innovation in products and services is a regularactivity in most of the big industrial organisations. Now a days infact, no firm can afford topersist with the out-dated technologies.

4.    Natural Environment: It includes natural resources,weather, climatic conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business.

5.    Demographic Environment : It is a study of perspective ofpopulation i.e. its size, standard of living, growth rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc. Every business unit must see these features of population and recognize their various need and produce accordingly.

6.    International Environment: It is particularly important forindustries directly depending on import or exports. The factors that affect the business are: Globalization, Liberalization, foreign business policies, cultural exchange

7.    Legal Environment: This refers to set of laws, regulations, which influence the business organisations and their operations. Every business organisation has to obey, and work within the framework of the law. The important legislations that concern the business enterprises include:

·         Companies Act, 1956

·         Foreign Exchange Management Act, 1999

·         The Factories Act, 1948

·         Industrial Disputes Act, 1972

·         Payment of Gratuity Act, 1972

·         Industries (Development and Regulation) Act, 1951

·         Prevention of Food Adulteration Act, 1954

·         Essential Commodities Act, 2002

·         The Standards of Weights and Measures Act, 1956

·         Monopolies and Restrictive Trade Practices Act, 1969

·         Trade Marks Act, 1999

·         Bureau of Indian Standards Act, 1986

·         Consumer Protection Act, 1986

·         Environment Protection Act

Question3. Explain the concept and significance of environmental scanning. What are the factors affecting environment scanning?

Answer: Environmental scanning is an analysis and evaluation of internal conditions and external data and factors that affect the organization. It was originally a concept from the business management world by which businesses gathered information from the environment to give them a competitive advantage but now it is widely used by the public and private sectors as part of any planning or strategy. ‘Environmental scanning is monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation’. A corporation uses this tool to avoid surprises and to ensure its long term survival. Environmental scanning has positive relationship with the profits. Environmental scanning identifies changing trends and patterns which have impact on organization. The objective of environmental scanning is to alert decision makers to potentially significant external changes before they crystallize so that the decision makers have sufficient lead time to react to change. Environment scanning can be done on ad-hoc basis, periodic basis or continuous basis. It depends on nature of business and the nature of environmental factors. External environment scanning provides insights related to opportunities and threats while internal environment scanning provides insights related to strengths and weaknesses of any organization

Significance of environment scanning:

Business environment of a country is never constant or static. It is always in a dynamic state and is affected by a number of factors. The various factors that affect or constitute business environment keep interacting with one another. This dynamic nature and uncertainty of business environment result into a desperate need of various organizations to scan the business environment on continuous basis. The changes in the business environment are not sudden but gradual. Many business organizations are able to predict or forecast the changes on the basis of their experience and continuous monitoring of various factors which help them in manipulation of their decisions in comparison of their competitors. We may notice a few examples of environmental scanning as follows:

When it was found that the motorcycle was eating into the share of the scooter in the two-wheeler market, Bajaj which had been concentrating on the scooter realized the emerging threat and decided to introduce a motorcycle so that what its scooter would lose might be gained by its motorcycle. So Bajaj has noticed the changing trends in the two-wheeler segment and took appropriate decision and now Bajaj is the highest exporting company of two wheeler motorcycles in India. It could happen just because of business environment scanning.

We can quote another example to prove the need of environmental scanning. When Nirma launched the toilet soap with the strategy of low price and high promotion (penetration pricing), the HLL and Godrej realized the threat, and HLL launched Breeze and Godrej launched Vigil to counter the threat of Nirma. Scanning and monitoring of business environment is necessary to identify the emerging threats and to take measures to face them.

Apart from it, these are the other reasons which explain the need of business environment scanning:

1.      Environmental scanning helps the mangers to reduce uncertainties in the business environment by estimating future trends.

2.      Environmental scanning helps in narrowing down the alternatives which makes the managers more comfortable and accurate in taking business decisions.

3.      Environmental scanning helps in effective utilization of resources.

4.      Environmental scanning alerts the mangers for possible changes occurring in business environment and they can minimize the shocks.

5.      Environmental scanning helps in converting threats in to opportunities by letting the mangers know about the danger signals in time. Appropriate action can be taken to counter the threats and strengths can be developed to convert threats in to opportunities.

Factors Affecting environmental scanning

The external environment in which an organization operates business consists of a variety of factors. These factors are events, trends, issues and expectations of different interested groups. These factors are explained below:

• EVENTS are important and specific occurrences taking place in different environmental sectors.
• TRENDS are the general tendencies or the courses of action along which events take place.
• ISSUES are the current concerns that arise in response to events and trends.
• EXPECTATIONS are the demands made by interested group in the light of their concern for issues.

Take the example of the first public issue of shares of Reliance Industries in 1977. That was a specific event. The trend that started was the participation of public in equity investment in private sector companies. The issue that emerged was of the development of equity culture in India. The expectation by the general public that resulted was that the benefits would and profits would be received due to economic development in the corporate sector.

Environmental factors are a complex mix of the events, trends, issues and expectations that continually shape the business environment of the organization.

Question4. Explain the process of environment scanning.

Answer: The analysis consists of four sequential steps:  

Scanning 

It involves general surveillance of all environmental factors and their interactions in order to: 

1.      Identify early signals of possible environmental change.

2.      Detect environmental change already underway. 

Monitoring 

It involves tracking the environmental trends, sequences of events, or streams of activities. It frequently involves following signals or indicators unearthed during environmental scanning. 

Forecasting

Strategic decision-making requires a future orientation. Naturally, forecasting is an essential element in environmental analysis. Forecasting is concerned with developing plausible projections of the direction, scope, and intensity of environmental change.

Assessment  

In assessment, the frame of reference moves from understanding the environment- the focus of scanning, monitoring and forecasting – to identify what the understanding means for the organization. Assessment, tries to answer questions such as what are the key issues presented by the environment, and what are the implications of such issues for the organization.

Environmental Analysis

Collection of Information

Analysis is done by means of a search of verbal and written information, spying, forecasting and formal studies and information system. At first there is the gathering of verbal information, the sources of verbal information are:

1. Media such as radio and television

2. The firm's employees such as peers, subordinates and supervisors.

Other sources of verbal information outside the firm are:- Customers of the enterprise, persons in industry channel (such as wholesalers, brokers, distributors, etc.), suppliers doing business with the firm, competitors and their employees, financial executives such as bankers, stockholders, and stock analysts, consultants and the government.

Besides verbal sources, information can be gathered by reading. Information about the environment is readily available in newspapers, trade journals, industry newsletters, journals and publications, government reports, reports of various marketing research agencies such as Gallup, ORG, etc. It is said (is it not true?) that behind every business activity there is one government department and one association. This department or association publishes information related to business on regular intervals.

The second solution to environmental analysis is to design a Management Information System. A formal MIS gives quick relevant information to the decision-makers, which helps a lot in making timely decisions. Beside this, information regarding competitors can be gathered through Corporate Intelligence and Spying.

Corporate Intelligence: Corporate Intelligence (CI) can be described "as a technique of adopting industry/research expertise to analyse the information available on competition from public sources and to draw conclusion based on this data." A typical CI activity involves collection, organization, analysis and utilisation of business-related data of competitors to make informed decisions.

Spying: Corporate espionage can be defined as 'spying' on business competitors to acquire proprietary information such as product design, research projects, marketing plan, trade secret, source code for new software, intellectual property and research information and other business strategies. In 1996 the US government passed the Economic Espionage Act to restrict espionage. Similarly, in 1943, a P&G employee reportedly bribed an employee of Levers Brothers to steal a bar of soap that was under development.

Question5. Describe PESTLE and SLEPT analysis of environmental Scanning.

Answer: PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental factors, which are used to assess the market for a business or organizational unit strategic plan.

In business PESTLE analysis role is very important. PESTLE analysis is a useful tool for understanding the “big picture” of the environment, in which you are operating, and the opportunities and threats that lie within it. Originally it is designed as a business environmental scan; this analysis is an analysis of the external macro environment in which a business operates. By understanding the environment in which you operate (external to your company or department), you can take advantage of the opportunities and minimize the threats. These are factors which are beyond the control or influence of a business, however are important to be aware of when doing product development, business or strategy planning. A PESTLE analysis is a business measurement tool, looking at factors external to the organization. It is often used within a strategic SWOT analysis. The PESTLE analysis headings are a framework for reviewing a situation, and can also be used to review a strategy or position, direction of a company, a marketing proposition, or idea.

It is important to clearly identify the subject of a PESTLE analysis (that is a clear goal or output requirement), because an analysis of this type is multi-faceted in relation to a particular business unit or proposition – if you dilute the focus you will produce an unclear picture – so be clear about the situation and perspective that you use PESTLE to analyze.

PESTLE Analysis on an HR Department or other Internal Function

While the PEST or PESTLE analysis is primarily aimed at looking at the external environment of an organization, many HR courses ask students to use the PEST or PESTLE analysis model to look at their own function. In this context we need to imagine that the department (HR) is an organization in its own right and look outside. Factors to include in your analysis may include the following:

1. Political

(a) What is the culture of the organization?

(b) How is the HR function viewed by other functions?

(c) Who are the political champions of HR (or its adversaries)?

(d) Shareholder views

2. Economic

(a) What is the budgetary position of the department?

(b) Is more money available?

(c) Are our customers likely to spend more or less money on the services we offer?

(d) What is happening to the financial status of the organization?

(e) Interest rates

(f) Inflation

(g) Salary trends in the sector

3. Sociological

(a) Other departmental attitudes to HR

(b) Population shifts (age profile)

(c) Education

(d) Fads

(e) Diversity

(f) Immigration/emigration

(g) Health

(h) Living standards

(i) Housing trends

(j) Fashion & role models

(k) Age profile

(l) Attitudes to career

4. Technological

(a) What changes may be coming our way?

(b) What new technology/systems?

(c) How do we record attendance, performance?

(d) Use of and encourage home working?

(e) Communications technologies

(f) Changes of technology that will increase/reduce the need for recruitment

(g) Changes to HR software

5. Legal

(a) What is happening in our sector that will impact what we do?

(b) Minimum wage,

(c) Working time,

(d) Food stuffs,

(e) Under 18 working,

(f) Occupational/ industrial Training etc.

(g) What changes will impact the services of the organization?

6. Environmental

(a) Staff morale

(b) Staff engagement

(c) Need to reduce storage needs

(d) Management attitudes (inside department/ function)

(e) Organizational culture

Social, Legal, Economic, Political and Technological (SLEPT) Analysis

It is important to 'scan' the external environment before creating business plans or when evaluating existing ones. Doing this takes the form of a SLEPT analysis and thus there is a scanning or an investigation of the Social, Legal, Economic, Political, and Technological influences that can be or likely to be on a business. It is important that you should be aware of the actions of your competitors in business. Social factors relate to the pattern of behaviour, tastes, and lifestyles. A major component of this is a change in consumer behaviour resulting from changes in fashions and styles. The age structure of the population also alters over time (currently we have an ageing population). To give your business a better shape it is better to have a good knowledge of the social factors around you.

The legal factors i.e. laws especially the government policy relating to the businesses often undergoes a change with each budget session and the amendments and laws changed from time to time especially in a country like India. There are consumer protection legislation, environmental legislation, health & safety and employment law, etc., which are continually modified in a wide range of areas.

Economic factors are affected with every change in the social ones. There are multiple fluctuations associated with general booms and slumps in economy. In a boom nearly all businesses benefit and in a slump most lose out. Other economic changes that affect business include changes in the interest rate, wage rates, and the rate of inflation (i.e. general level of increase in prices). Businesses will be more encouraged to expand and take risks when economic conditions are right, e.g. low interest rates and rising demand.

Political changes relate to changes in government influence. In recent years these changes have been particularly significant because as members of the European Union we have to adopt directives and regulations created by the EU which then become part of UK law. Political changes are closely tied up with legal changes.

Changes in technology have also become particularly significant in the post-millennium world. This is particularly true in terms of modern communication technologies. The creation of databases and electronic communications have enabled vast quantities of information to be shared and quickly distributed in a modern company enabling vast cost reductions, and often improvements in service. Organisations need to be aware of the latest relevant technologies for their business and to surf the wave of change.

Question6. What are the various approaches of scanning the business environment? How will you scan the macro environment?

Answer: There are three approaches which could be adopted for sorting out information for environmental scanning. These are suggested by KUBR. We can discuss these as below:

• Systematic Approach: Under this approach, information for environmental scanning is collected systematically. Information related to markets and customers, changes in legislation and regulations that have a direct impact on an organization’s activities, government policy statements pertaining to the organization’s business and industry etc. could be collected continuously to monitor changes and take the relevant factors into account.
• Ad hoc Approach: Using this approach, an organization may conduct special surveys and studies to deal with specific environmental issues from time to time. Such studies may be conducted, for instance, when an organization has to undertake special projects, evaluate existing strategies or devise new strategies.
• Processed-form Approach: In this approach, the organization uses information in a processed form, available from different sources both inside and outside the organization.

Some management gurus believe that in today's turbulent business environment the best scanning method available is continuous scanning. This allows the firm to act quickly, take advantage of opportunities before competitors do, and respond to environmental threats before significant damage is done.

Scanning the Macro Environment

When we refer to environmental scanning, we usually refer just to the macro environment, but it can also include industry and competitor analysis, consumer analysis, product innovations, and the company's internal environment. Macro environmental scanning involves analyzing:

1. Economy

(a) GDP per capita

(b) Economic growth

(c) Unemployment rate

(d) Inflation rate

(e) Consumer and investor confidence

(f) Inventory levels

(g) Currency exchange rates

(h) Merchandise trade balance

(i) Financial and political health of trading partners

(j) Balance of payments

(k) Future trends

2. Government

(a) Political climate – amount of government activity

(b) Political stability and risk

(c) Government debt

(d) Budget deficit or surplus

(e) Corporate and personal tax rates

(f) Payroll taxes

(g) Import tariffs and quotas

(h) Export restrictions

(i) Restrictions on international financial flows

3. Legal

(a) Minimum wage laws

(b) Environmental protection laws

(c) Worker safety laws

(d) Union laws

(e) Copyright and patent laws

(f) Anti-monopoly laws

(g) Sunday closing laws

(h) Municipal licences

(i) Laws that favour business investment

4. Technology

(a) Efficiency of infrastructure, including: roads, ports, airports, rolling stock, hospitals, education, healthcare, communication, etc.

(b) Industrial productivity

(c) New manufacturing processes

(d) New products and services of competitors

(e) New products and services of supply chain partners

(f) Any new technology that could impact the company

(g) Cost and accessibility of electrical power

5. Ecology

(a) Ecological concerns that affect the firms production processes

(b) Ecological concerns that affect customers' buying habits

(c) Ecological concerns that affect customers' perception of the company or product

6. Socio-cultural

Demographic factors such as:

(a) Population size and distribution

(b) Age distribution

(c) Education levels

(d) Income levels

(e) Ethnic origins

(f) Religious affiliations

Attitudes towards:

(a) Materialism, capitalism, free enterprise

(b) Individualism, role of family, role of government, collectivism

(c) Role of church and religion

(d) Consumerism

(e) Environmentalism

(f) Importance of work, pride of accomplishment

Cultural structures including:

(a) Diet and nutrition

(b) Housing conditions

7. Potential Suppliers Labour Supply

(a) Quantity of labour available

(b) Quality of labour available

(c) Stability of labour supply

(d) Wage expectations

(e) Employee turn-over rate

(f) Strikes and labour relations

(g) Educational facilities

Material Suppliers

(a) Quality, quantity, price, and stability of material inputs

(b) Delivery delays

(c) Proximity of bulky or heavy material inputs

(d) Level of competition among suppliers

Service Providers

(a) Quantity, quality, price, and stability of service facilitators

(b) Special requirements

Stakeholders

(a) Lobbyists

(b) Shareholders

(c) Employees

(d) Partners

While scanning these macro environmental variables for threats and opportunities requires that each issue is rated on two dimensions. It must be rated on its potential impact on the company, and rated on its likeliness of occurrence. Multiplying the potential impact parameter by the likeliness of occurrence parameter gives us a good indication of its importance to the organisation.

Questions from Unit II

Question1. Define economic environment. Explain the factors which affect the economic environment.

Economic environment refers to the overall economic factors like economic system, economic structure, planning, economic policies, control and regulations etc. There is a close relationship between business and its economic environment. It obtains all inputs from economic environment and all its output is absorbed here with. The state of the economy is usually in flux. The current situation (specific to the industry) and any changes that may be forecast are important. The economy goes through a series of fluctuations associated with general booms and recessions in economic activity.   In a boom nearly all business are benefited whereas recession is a case vice versa. Business is influenced by economic aspects like interest rates, wage rates etc. The survival and success of each and every business enterprise depends fully on its economic environment. The GDP indicates the growth scenario of any country. Companies take this into consideration before expanding or diversifying their business. The main factors that affect the economic environment are:

Economic Conditions: The economic conditions of a country refer to a set of economic factors that have great influence on business organizations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.

Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are

• Industrial Policy: The Industrial policy of the government covers all those principles, policies, rules, regulations and procedures, which direct and control the industrial enterprises of the country and shape the pattern of industrial development.
• Fiscal Policy : It includes government policy in respect of public expenditure, taxation and public debt.
• Monetary Policy: It includes all those activities and interventions that aim at smooth supply of credit to the business and a boost to trade and industry.
• Foreign Investment Policy:  This policy aims at regulating the inflow of foreign investment in various sectors for speeding up industrial development and take advantage of the modern technology.
• Export –Import Policy (EXIM Policy): It aims at increasing exports and bridge the gap between expert and import. Through this policy, the government announces various duties/levies. The focus now-a-days lies on removing barriers and controls and lowering the custom duties.

The government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario, political expediency and the changing requirement. Every business organization has to function strictly within the policy framework and respond to the changes therein.

Economic System: The world economy is primarily governed by three types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. The type of economic system influences greatly the choice of business.

Question2. Define Economic System. What are the different types of economics systems?

The term economic system refers to the mode of production and the distribution of goods and services within which economic activity takes place. In a broader sense, it refers to the way different economic elements (individual workers and managers, productive organizations such as factories and firms and government agencies) are linked together to form an organic whole.

According to Landauer, "An economic system is the sum total of devices by which preferences among the alternative purposes of economic activity are determined and individual activities are coordinated for the achievement of those purposes."

The Economic system also refers to how the different economic elements will solve the central problem of an economy i.e. to answer three vital questions:

• What to produce?
• How to produce?
• For whom to produce?

The first question ‘what to produce’ depends on what is wanted. But all wants cannot be satisfied. This is because a country may not be gifted with all the necessary resources to produce all the goods. Hence, depending upon the resources, a country would decide what it could produce. Then there is a problem of prioritizing the available resources among the goods to be produced. Resources should not be used for the production of unwarranted goods. The production of goods, which are harmful to human beings, like narcotic drugs, should be prevented. Hence, considering the availability of resources, the economic system should opt to produce only goods and services that would satisfy the wants of human beings and increase social welfare. In this context it becomes necessary to weigh the individual requirements and the national requirements for goods and services.

The second question ‘how to produce’ addresses issues relating to selection of right strategy, technology and investment. For example, a country like India, with very huge population cannot prefer capital intensive technology, as that would lead to more unemployment of human resources. Similarly, while selecting the technology, a country should weigh a number of considerations like relevance of technology, cost of technology, support in case of failures, consequences of the technology used etc. Another vital aspect is the investment that a country has to make while selecting the strategy and the technology and whatever the available funds, should be invested in sophisticated research and development or meeting the basic needs of the people.

‘For whom to produce’ implies to resource utilization. The country as a whole should be benefited not a few segments only. The aspect deals with equitable distribution of goods and services produced in the economy. The distribution of national products would differ from country to country depending upon the economic system in place.

The way in which the above three questions are answered depends on the economic system which function in a country. The role of government and private organization depends on the economic system being followed. There are three main economic systems, capitalism, socialism and mixed economy.

TYPES OF ECONOMIC SYSTEMS 

Free Enterprise Economy (Capitalism) 

This economic system works on the principle of Laissez Faire system, i.e., the least interference by the government or any external force. The primary role of the government, if any, is to ensure free working of the economy by removing obstacles to free competition. A free Enterprise Economy is characterized as follows: 

1.      Means of production are privately owned by the people who acquire and posses them.

2.      Private gains are the main motivating and guiding force for carrying out economic activities.

3.      Both consumers and firms enjoy the freedom of choice; consumers have the freedom to consume what they want to and firms have the choice to produce what they want to.

4.      The factor owners enjoy the freedom of occupational choice, i.e., they are free to use their resources in any legal business or occupation.

5.      There exists a high degree of competition in both commodity and factor markets.

6.      There is least interference by the government in the economic activities of the people; the government is in fact supposed to limit its traditional functions viz, to defence, police, justice, some financial organizations and public utility services.

Government Controlled Economy (Socialism)

The government-controlled economies are also called as Command, Centrally planned or Socialist economies. Such economies are, in contradistinction to the free enterprise economies, controlled, regulated and managed by the government agencies.  The other features of a pure socialist economy are:

1.      Means of production are owned by the society or by the state in the name of the community – private ownership of factors and property is abolished.

2.      Social welfare is the guiding factor for economic activities – private gains, motivations and initiatives are absent.

3.      Freedom of choice for the consumers is curbed to what society can afford for all.

4.      The role of market forces and competition is eliminated by law.

Mixed Economy 

A mixed economy is one in which there exist both government and private economic systems. It is supposed to combine good elements of both free enterprise and socialist economies. A mixed economy is widely known as one, which had both “public sector”  (the government economy) and “private sector” (the private economy). The private sector has features of a free enterprise economy and the public sector has features of socialist economy. It is important to note here that most economies in the world today are Mixed Economies. There are two different forms of the Mixed Economies.

Mixed Capitalist Economies 

A mixed Capitalist economy is a varient of the free enterprise economic system. To this category fall the highly developed nations like the United States, U.K., France, Japan etc. though these economies have a very large government sector, their private sectors work on the principles of the free enterprise system. The government plays a significant role in preserving capitalist mode of production, ensuring a workable competition in factor and product markets, providing infrastructure for promotion of private sector economic activities.

Mixed Socialist Economies 

To the category of the Mixed Socialist Economies belong the countries which have adopted “ socialist pattern of society: and economic planning as he means of growth and social justice (e.g. India) and the former communist countries (eg. Russia and china) which have of late carried out drastic economic reforms and liberalized their economies for private entrepreneurship. The government of these countries takes upon themselves to control and regulate the private sector activities in accordance

Question3. Describe Economic Planning in India. What are its rationale and objectives in India?

Answer: Economic Planning is the making of major economic decisions. What and how is to be produced and to whom it is to be allocated – by the conscious decision of a determinate authority, on the basis of a comprehensive survey of the economic system as a whole.

In an economy like India, the basis socioeconomic problems like poverty, unemployment, stagnation in agricultural and industrial production and inequality in the distribution of income and wealth can hardly be solved within the framework of an unplanned economy planning is required to remove these basic maladies.

We can identify the following characteristic features of economic planning:

·         Fixation of definite socio-economic targets;

·         Prudent efforts to achieve these targets within a given time period;

·         Existence of a central planning authority;

·         Complete knowledge about the economic resources of the country;

·         Efficient utilization of limited resources to get maximum output and welfare.

The Planning Commission of India is of the opinion that, “Planning is essentially a way of organizing and utilizing resources to get maximum advantage in terms of defined social ends. The two main-constituents of the concept of planning are: (a) a system of ends to be pursued, and (b) knowledge of available resources and their optimum allocation to achieve these ends. The availability of resources conditions the ends to be effectively achieved.”

Mixed economy and planning

Mixed economy is the outcome of the compromise between the two diametrically opposite schools of thought—the one which champions the ,cause of capitalism and the other which strongly pleads for the socialization of all the means of production and of the control of the entire economy by the state.

Thus, the concept of mixed economy accepts the possibility of the co-existence of private enterprise and public enterprise.

India is regarded as a good example of a mixed economy. Under the Directive Principles of the Indian Constitution, it has been laid down that the State should strive “to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of national life.”

In the economic sphere, the State is to direct its policy to secure a better distribution of ownership and control of the material resources of the community and to prevent concentration of wealth in the hands of a. few and the exploitation of labor. It would be impossible for the State to attain these ends implied in the directive principles unless the State itself enters the fields of production and distribution. This explains the rationale behind of economic planning. To protect the weaker sections, the State is also expected to control the distribution of essential commodities.

Similarly, by controlling the financial system, viz., insurance and banking, the State can endeavour to direct investment in socially desirable channels. Besides, in a poor and under-developed country like India, market forces based on profit motive cannot, by themselves, induce the private sector to move into infrastructural development (which involves heavy capital investment, long gestation period, low rate of return, etc.) Accordingly, the State has to promote infrastructural facilities like hydro-electric projects, irrigation; road and railway transport, and have to create conditions conducive to a higher level of investment so that national and per capita incomes of the people can be improved continuously.

Rationale of Planning in India

In India, comprehensive national planning is required to fulfil some broad social and economic objectives. The followings are some principal reasons for planning in India:

(a) Rapid Economic Development: Before Independence, the long period of British rule and exploitation had made India one of the poorest nations in the world. The main task before the national government was to undertake some positive development measures to initiate a process of development, which can be done .effectively only through the instrument of planning. The state planning mechanism has been proved to be much superior to private market operations in bringing about it a quick transition in the less-developed economics. The spectacular success of planning in some countries had inspired the national leaders to adopt the path of planning for an accelerated development of the shattered economy.

(b) Quick Improvement in the Standard of Living: The fundamental objective of planning is to bring about a quick improvement in the standard of living of the people in the less-developed countries. In an unplanned economy the country’s resources and materials cannot be employed for increasing the people’s welfare as the private capitalists in such an economy direct their activities in increasing their own profits. The path of planning has been chosen to promote a rapid rise in the standard of living of the people by efficient exploitation of resources, increasing production of most goods, and offering employment opportunities to the people.

(c) Removal of Poverty: Planning in India is necessary for the early removal of abject poverty of the people. This can be effectively done through –

·         Planned increase in the employment opportunities of the people,

·         Planned production of mass consumption goods and their planned distribution among the people,

·         Fulfilment of minimum needs programme by providing essential facilities (e.g., housing, roads, drinking water, public health, primary education, slum improvement, etc.), and,

·         Planned increase in the consumption of the poorest section of the people.

(d) Rational Allocation and Efficient Utilization of Resources: India is rich in natural resources, but these resources are not fully exploited to get maximum advantages. In the unplanned economy resources tend to be engaged in the production of these goods and services which yield maximum profits, as a result rational allocation of resources is not possible. An unplanned economy faces frequently the problem of either shortages in some sectors or surpluses in others. But such misallocation of resources can be rectified in a planned economy in which the planning authority determines the pattern of the investment of resources. In fact, the development plans in the country are now utilized for the rational allocation of investable resources.

(e) Increasing the Rate of Capital Formation: Planning can also raise the rate of capital formation in the less-developed countries like India. The surpluses of public enterprises as found in the planned economy can be utilized for investment and capital formation. In India, the governments have been increasing the rate of capital formation through the planned investment in the construction of roads, bridges, manufacturing of machineries and transport equipments etc.

(f) Reduction in Unequal Distribution of Income and Wealth: Income and wealth are not evenly distributed in India as in other less-developed countries. In the absence of planning such inequality tends to increase due to growing concentration of economic resources at the hands of a few capitalists. Besides, the capitalists in the unplanned society increase their own profits by paying less to the labourers and other suppliers of raw materials. Planning can reverse this trend through the proper guidance and control of production, distribution, consumption and investment. The development works can be so planned and so executed that the greater equality is established with the increase of income and employment.

(g) Reduction of Unemployment and Increase in Employment Opportunities: The backwardness of the different, sectors of the economy accounts for the presence of widespread unemployment, both open and disguised, in the country. The rate of economic growth usually becomes low in the unplanned society; as a result it becomes a difficult task to mitigate this serious problem without proper planning. The government can, however, increase the employment opportunities by undertaking development programs for the different sectors like agriculture, industries, social services, transport and communications, etc. Besides, labor-intensive development projects and job-oriented programs can also be undertaken to provide relief for the problem of unemployment.

The development plans in India have already given proper stress for increasing employment. The steps have been taken to create both short-term and long-term employment opportunities in various sectors like agriculture, industry, small and village industries, irrigation works, construction, etc.

(h) Reorganization of Foreign Trade: Economic planning in the less-developed countries can bring about fundamental Changes in the foreign trade structure of such countries like India. The foreign trade structure may be reoriented from primary producing economy to the industrialized economy. Through proper controls of import and effective promotion of export of industrial goods the development plans can reorganize the foreign trade structure. In India, the trade policy has been reoriented to realize some cardinal objectives such as import control and substitution, export promotion and growth of economy. Owing to such development the trade structure is no longer regarded as colonial as it was before Independence.

(i) Regional Balanced Development: Economic planning in India can correct the regional imbalances in development. Proper development programs may be taken for the all-round development of backward areas, so that all the regions are sufficiently developed. More and more industries are to be set up in the less-developed areas and the Plans should provide for dispersal of industries.

(j) Other Considerations: Indian economy requires planning for other purpose also such as the removal of the shortages of essential goods, attainment of self- sufficiency in essential goods such as food grains and key materials, economic self-reliance, establishment of social justice for increasing economic facilities for weaker and neglected sections of the people etc.

The aforesaid discussion points to the supreme necessity of economic planning in India. It is now fully realized that without planning the country would not be able to initiate a process of quick economic growth.

Objectives of Planning in India 

In India, the First Five year plan began in the year 1951-52. Although the objectives of these plans were different, we can identify some of the basic long-term and broad objectives of Indian planning. These are:

(i) Raising the growth rate: The economic planning in India was to bring about rapid economic growth through the growth in agriculture, industry, power, transport and communications and different other sectors in our economy. Further, the growth in real national income was considered to be the basis for an increase in per Capita real income and an improvement in the physical quality of life for, the maximum number of people. The growth, in national output must be higher than the growth rate in population for an increase in per capita output. Indian planners aimed at increasing national income and per capita income on the assumption that the continuous growth in national income and per capita income would remove the problem of poverty and raise the standard of living for the maximum people of the country.

(ii) Raising the investment-income ratio: Growth in investment as a proportion of national income was also one of the important long-term objectives of Indian five year plans.

(iii) Achieving self-reliance: This objective was considered to be an important objective for keeping the growth activity free from political pressures of dominant capitalist countries of the world. India had to import a huge quantity of food grains from abroad for a considerable period. Again, she had to depend on foreign countries for the import of heavy machinery, transport equipment, machine tools, electrical instruments, etc. This was required for the expansion of the industrial sector and for building, a strong infrastructural base in India after independence. Hence, it was quite natural that the developed capitalist countries, supplying food grains, machinery and capital to India, used to take full advantage of their strong bargaining power, by imposing different conditions while extending such help. In many cases, the domestic economic policies are also influenced by such conditions. Because of all these reasons, a self-reliant economic growth became a major objective of economic planning in India, particularly since the inception of the Third Five Year Plan.

(iv) Removing unemployment: Removal of unemployment and underemployment can be regarded as a precondition for the elimination of poverty. It was assumed by Planning Commission that an increase in investment would accompany not only an increase in national output but also a rise in employment opportunities. This argument was put forward by the Planning Commission quite explicitly during the Third Five Year Plan. The planning commission however, believed that the removal of unemployment would lead to increase in GDP, on the one hand and improve the standard of living of the people on the other.

(v) Reducing the incidence of poverty: Various plan documents have all along indicated that the policy of the Government of India is to reduce the incidence of poverty. The problem of poverty has been conceived as one of low productivity of a large section of the people. Hence, to remove these handicaps of the poor and to integrate them in the growth process, alleviation of poverty became one of the broad objectives of Indian planning. So, the long run objective was to free the economy from the vicious circle of poverty which encircles the economy, not only with poor purchasing power, low savings, low capital formation, low productivity and low level of national output, but also with a poor physical quality of life.

(vi) Reducing income inequalities: Indian planners visualized the creation of a socialistic pattern of society where each member of the society would get equal opportunities in the fields of education, health, nutrition, occupation, etc. Hence, they felt the need for reducing income and wealth inequalities in our society. These inequalities have their roots in the feudal system. Hence, reduction in income and wealth necessitated the abolition of semi-feudal relations of production in Indian villages. Thus; the objective was to abolish the ‘Zamindari’ system, impose ceilings on land-holdings and distribution of surplus land among the landless in rural areas.

Income and wealth inequalities arising out of industrialization and growth were far more complex. The Planning Commission felt the need for imposing some restrictive and fiscal measures e.g., by imposing higher rates of direct taxes on high incomes, to tackle this problem. Further, to reduce the disparity between urban and rural sectors, the Planning Commission suggested various measures to raise agricultural productivity, development of agro-based industries, a fair price to farmers for their products, etc. The Planning Commission stated its policy towards income inequalities in the Fourth Plan document. It emphasized economic growth with the hope that the poor will benefit from it and thus, income inequalities would be reduced.

A part from these long-term objectives the Sixth plan of India recognized one more objective of modernizing the production process. The implications of this modernization were to shift the sectoral comparison of national income, diversification of productive activities and advancement of technology. Modernization, as per the view of the Planning Commission, also implied introduction of modern technology, both in industrial and agricultural activities. It also implied an emergence of new types of banking, insurance and marketing institutions, which would facilitate the dynamics of growth process.

Question4. Explain the characteristics of Planning in India. Also explain the objectives of twelfth five year plan.

PLAN DETAILS

First Five Year Plan	1951-56	Focused on agriculture, irrigation, power projects and  land rehabilitation.
Second Five Year Plan	1957-61	Industrial Development and Employment generation.
Third Five Year Plan (Economy grappled recession)	1962-66	Agriculture and power generation for rapid growth of industrial sector.
Govt. then declared a “plan holiday” for three years due to failure of 3rd plan, as drought occurred in1966-67. Instead of 4th plan three annual plans were declared
Fourth Five Year Plan	1969-73	Providing necessary  consumption benefits to weaker section through employment and education.
Fifth Five Year Plan	1974-78	Achieving economic stability, fulfilling nutritional requirements, health and family planning
Sixth Five Year Plan	1979-84	Speedy industrialization, rise in employment, poverty reduction and technology self reliance.
Seventh Five Year Plan (Severe drought in the country)	1985-89	Rapid growth in food grain production, higher employment level, JRY was introduced.
Eighth Five Year Plan (BOP crisis due to gulf war of 1990)	1992-96	Devaluation of rupee, reducing trade barriers, reforms in financial sector, tax reforms and LPG policy.
Ninth Five Year Plan (Economy Performed well but benefits didn’t percolate to poor)	1997-2001	Improving living conditions of poor, raising agricultural and rural incomes, checking growth of population.
Tenth Five Year Plan (Country achieved 7% growth rate)	2002-2006	Aims to transform country into fastest growing countries, doubling per capita income and creating 100 million employment opportunities .
Eleventh  Five Year Plan	2007-2012	Aims at improving 1- Agriculture 2-Communication and information 3- Backward  Areas 4-Education 5- Environment and Forests 6- Financial Resources 7- Health and Family welfare 8- Housing and urban development 9-Industry and Minerals 10-Labour employment and manpower 11- Energy policy 12- Rural Development 13-Social justice and women empowerment 14-Science and technology 15-Transportation 16-Village and SSI 17-Water resources 18- Child development 19-International economics

Twelfth Five Year Plan

The Twelfth Plan (2012-17)commenced at a time when the global economy was going through a second financial crisis, precipitated by the sovereign debt problems of the Eurozone which erupted in the last year of the Eleventh Plan. The crisis affected all countries including India. Our growth slowed down to 6.2 percent in 2011-12 and the deceleration continued into the first year of the Twelfth Plan, when the economy is estimated to have grown by only 5 percent . The Twelfth Plan therefore emphasizes that our first priority must be to bring the economy back to rapid growth while ensuring that the growth is both inclusive and sustainable. The broad vision and aspirations which the Twelfth Plan seeks to fulfil are reflected in the subtitle: ‘Faster, Sustainable, and More Inclusive Growth’. Inclusiveness is to be achieved through poverty reduction, promoting group equality and regional balance, reducing inequality, empowering people etc whereas sustainability includes ensuring environmental sustainability ,development of human capital through improved health, education, skill development, nutrition, information technology etc and development of institutional capabilities , infrastructure like power telecommunication, roads, transport etc ,

Apart from the global slowdown, the domestic economy has also run up against several internal constraints. Macro-economic imbalances have surfaced following the fiscal expansion undertaken after 2008 to give a fiscal stimulus to the economy. Inflationary pressures have built up. Major investment projects in energy and transport have slowed down because of a variety of implementation problems. Some changes in tax treatment in the 2012–13 have caused uncertainty among investors. These developments have produced a reduction in the rate of investment, and a slowing down of economic growth.

The policy challenge in the Twelfth Plan is, therefore, two-fold. The immediate challenge is to reverse the observed deceleration in growth by reviving investment as quickly as possible. This calls for urgent action to tackle implementation constraints in infrastructure which are holding up large projects, combined with action to deal with tax related issues which have created uncertainty in the investment climate. From a longer term perspective, the Plan must put in place policies that can leverage the many strengths of the economy to bring it back to its real Growth potential.

Immediate priority is to revive the investor sentiment along with next short term action of removing the impediments to implementation of projects in infrastructure, especially in the area of energy which would require addressing the issue of fuel supply to power stations, financial problems of discoms and clarity in terms of New Exploration Licensing Policy (NELP)

Although planning should cover both the activities of the government and those of the private sector, a great deal of the public debate on planning in India takes place around the size of the public sector plan. The Twelfth Plan lays out an ambitious set of Government programmes, which will help to achieve the objective of rapid and inclusive growth. In view of the scarcity of resources, it is essential to take bold steps to improve the efficiency of public expenditure through plan programmes. Need for fiscal correction viz. tax reforms like GST , reduction of subsidies as per cent of GDP while still allowing for targeted subsidies that advance the cause of inclusiveness etc. and managing the current account deficit would be another chief concerns.

Achieving sustained growth would require long term increase in investment and savings rate . Bringing the economy back to 9 per cent growth by the end of the Twelfth Plan requires fixed investment rate to rise to 35 per cent of GDP by the end of the Plan period. This will require action to revive private investment, including private corporate investment, and also action to stimulate public investment, especially in key areas of infrastructure especially, energy, transport, water supply and water resource management. Reversal of the combined deterioration in government and corporate savings has to be a key element in the strategy.

Monitorable Targets of the Plan: Twenty Five core indicators listed below reflect the vision of rapid, sustainable & more inclusive growth of the twelfth Plan:

Economic Growth

1. Real GDP Growth Rate of 8.0 per cent.

2. Agriculture Growth Rate of 4.0 per cent.

3. Manufacturing Growth Rate of 10.0 per cent.

4. Every State must have an average growth rate in the Twelfth Plan preferably higher than that achieved in the Eleventh Plan. Poverty and Employment

5. Head-count ratio of consumption poverty to be reduced by 10 percentage points over the preceding estimates by the end of Twelfth FYP.

6. Generate 50 million new work opportunities in the non-farm sector and provide skill certification to equivalent numbers during the Twelfth FYP. Education

7. Mean Years of Schooling to increase to seven years by the end of Twelfth FYP.

8. Enhance access to higher education by creating two million additional seats for each age cohort aligned to the skill needs of the economy.

9. Eliminate gender and social gap in school enrolment (that is, between girls and boys, and between SCs, STs, Muslims and the rest of the population) by the end of Twelfth FYP. Health

10. Reduce IMR to 25 and MMR to 1 per 1,000 live births, and improve Child Sex Ratio (0–6 years) to 950 by the end of the Twelfth FYP.

11. Reduce Total Fertility Rate to 2.1 by the end of Twelfth FYP.

12. Reduce under-nutrition among children aged 0–3 years to half of the NFHS-3 levels by the end of Twelfth FYP. Infrastructure, Including Rural Infrastructure

13. Increase investment in infrastructure as a percentage of GDP to 9 per cent by the end of Twelfth FYP.

14. Increase the Gross Irrigated Area from 90 million hectare to 103 million hectare by the end of Twelfth FYP.

15. Provide electricity to all villages and reduce AT&C losses to 20 per cent by the end of Twelfth FYP.

16. Connect all villages with all-weather roads by the end of Twelfth FYP.

17. Upgrade national and state highways to the minimum two-lane standard by the end of Twelfth FYP.

18. Complete Eastern and Western Dedicated Freight Corridors by the end of Twelfth FYP. 19. Increase rural tele-density to 70 per cent by the end of Twelfth FYP.

20. Ensure 50 per cent of rural population has access to 40 lpcd piped drinking water supply, and 50 per cent gram panchayats achieve Nirmal Gram Status by the end of Twelfth FYP. Environment and Sustainability

21. Increase green cover (as measured by satellite imagery) by 1 million hectare every year during the Twelfth FYP.

22. Add 30,000 MW of renewable energy capacity in the Twelfth Plan  

23. Reduce emission intensity of GDP in line with the target of 20 per cent to 25 per cent reduction over 2005 levels by 2020. Service Delivery

24. Provide access to banking services to 90 per cent Indian households by the end of Twelfth FYP.

25. Major subsidies and welfare related beneficiary payments to be shifted to a direct cash transfer by the end of the Twelfth Plan, using the Aadhar platform with linked bank accounts.

Sectoral Pattern of Growth: The sectoral pattern of growth associated with the 8.0 per cent growth scenario is summarised in the table on following page.

The Agriculture Forestry and Fishing Sector is projected to grow at 4 per cent, an improvement over the 3.7 per cent rate achieved in the Eleventh Plan.

The Mining and Quarrying Sector grew by only 3.2 per cent in the Eleventh Plan, the growth rate being pushed down by negative growth of 0.6 per cent in 2011–12 reflecting problems in the iron ore sector, gas production and also coal.

The Twelfth Plan assumes a substantial improvement with the growth rate averaging 5.7 per cent. The manufacturing sector decelerated in the course of the Eleventh Plan with a growth rate of only 2.7 per cent in 2011–12.

The average growth rate in the Twelfth Plan period is projected at over 7 per cent which is a significant improvement over the situation in 2011–12 and 2012–13. City, gas and water supply are projected to grow at 7.3 per cent on an average compared with 6.1. per cent achieved in the Eleventh Plan.

Construction, which grew at 7.7 per cent in the Eleventh Plan, is projected to grow at an average rate of 9.1 per cent.

The other service sectors are projected to grow fairly robustly with Trade Hotels and Restaurants at 7.4 per cent; Transport, Storage and Communication at 11.8 per cent; Insurance and Business Service at 9.9 per cent, and, finally, Community and Personal Services at 7.2 per cent.

Public Sector Resources in the Twelfth Plan:

There have been several important developments during the Eleventh Plan that have implications for financing of the Twelfth Plan. The Indian Economy resiliently faced the global financial crisis of 2008. However, slower growth adversely impacts growth in Centre’s resources, particularly taxes.

The Sixth Central Pay Commission award has been implemented. The 13th FC award for 2011–15 is under implementation with some changes in the fiscal responsibility and budget management framework targets. Service tax has emerged as a very promising source of revenue. Efforts are being made to introduce unified Goods and Service Tax (GST) in consultation with States. This will be a major reform of the indirect tax system.

The projection of fiscal deficits based on Medium Term Fiscal Policy Statement 2012–13 indicates that debt resources for funding of GBS for the Twelfth Plan will be higher initially but is projected to decline gradually. The Centre’s net borrowing which was 5.9 per cent of GDP in 2011–12 (RE) is estimated to decline to 5.1 per cent of GDP in 2012–13 (BE). The fiscal deficit as percent of GDP is further projected to decline to 4.5 per cent in 2013–14, 3.9 per cent in 2014–15, 3.2 per cent in 2015–16 and 3.0 per cent of GDP in the last year of the Twelfth Plan.

13th Finance Commission increased the devolution to the states from 30.5 per cent to 32 per cent of divisible pool and it covers the period up to 2014-15, which includes the first three years of the twelfth Plan. The projections of resources for the Twelfth Plan have been made assuming 28.45 per cent of tax devolutions of the Gross Tax revenue.

This has been assumed by factoring in the surcharges being phased out and keeping the same ratio beyond 13th FC period till the terminal year of the Twelfth Plan. This might change later after the recommendations of 14th FC are available.

The Twelfth Plan assumptions on tax resources of the Centre and States envisage revenue neutrality of GST although there might be positive spin-off effects of GST mainly through better tax compliance. The projection of GBS of the Centre indicates that it will grow from 5.13 per cent of GDP in 2012–13 to 5.22 per cent of GDP in 2016–17.

The average GBS for the Central Plan in the Twelfth Plan period stands at 5.23 per cent of GDP as against 4.69 per cent of GDP realised in the Eleventh Plan. With the reforms being undertaken, the total subsidies, as a proportion of GDP, are projected to decline to 1.5 per cent by 2016–17.

The balance from current revenue (BCR) as percent of GDP was projected at 2.31 per cent for the Eleventh Plan which turned negative by (–)0.61 per cent. However, with good buoyancy in tax revenue and a decline in non-plan expenditure, BCR is estimated to be 1.88 per cent of the GDP for the Twelfth Plan. The imposition of the fiscal deficit ceiling ensures that borrowings, including net miscellaneous capital receipts, decline from 5.06 per cent of GDP in Eleventh Plan to 3.35 per cent in the Twelfth Plan.

States Resources:

The fiscal deficit of the States as a whole remained below 3 per cent of GDP during the Eleventh Plan period. While prescribing different fiscal paths for individual States, the 13th FC has also set the fiscal deficits target of 3 per cent of GDP to be achieved by 2014–15 by all the States. Accordingly, the fiscal deficit limit of all States which has been a little over 3 per cent of the GDP in 2012–13 is projected to remain around 2.22 per cent during the Twelfth Plan period. This inevitably limits the scope for mobilising debt resources of the States, therefore, have to look at improving revenue realisation and controlling non-Plan expenditure.

The Aggregate Plan resources of the States and UTs including PSE resources have been projected to be Rs 37,16,385 crore at current prices .This comprises of Rs 28,58,599 crore of own resources (including borrowings) and Rs 8,57,786 crore of CA. UTs account for 3.88 per cent of the combined aggregate Plan resources of the States and UTs.

As a proportion of GDP, aggregate Plan resources of the States and UTs are projected at 5.45 per cent of GDP, registering an increase of 0.44 percentage points over the Eleventh Plan realisation .The BCR, which was Rs 2,74,400 crore at 2006–07 prices in the Eleventh Plan, is projected to increase to Rs 9,59,979 crore at current prices. This represents an increase of 0.39 percentage points of GDP over the Eleventh Plan. However, projections of resources of PSEs show a growth of 0.06 percentage points as compared with the Eleventh Plan. CA to the States remains almost at the same level as percentage of GDP.

Sectoral Allocation of Resources : Energy, Transport & Social Services account for about 70 % of the total outlay with the individual shares of 19% , 16 % & 35 % respectively and compared to 11th Plan their outlay increased by 110,96 and 112 % respectively.

Question5. Explain the constitution and different functions of NITI Aayog. Explain why planning commission was replaced by NITI Aayog?

Answer: The National Institution for Transforming India, also called NITI Aayog, was formed via a resolution of the Union Cabinet on January 1, 2015. NITI Aayog is the premier policy ‘Think Tank’ of the Government of India, providing both directional and policy inputs. While designing strategic and long term policies and programmes for the Government of India, NITI Aayog also provides relevant technical advice to the Centre and States. The first meeting of NITI Ayog was chaired by Prime Minister Narendra Modi on 08.02.2015.

The Government of India, in keeping with its reform agenda, constituted the NITI Aayog to replace the Planning Commission instituted in 1950. This was done in order to better serve the needs and aspirations of the people of India. An important evolutionary change from the past, NITI Aayog acts as the quintessential platform of the Government of India to bring States to act together in national interest, and thereby fosters Cooperative Federalism.

At the core of NITI Aayog’s creation are two hubs – Team India Hub and the Knowledge and Innovation Hub. The Team India Hub leads the engagement of states with the Central government, while the Knowledge and Innovation Hub builds NITI’s think-tank capabilities. These hubs reflect the two key tasks of the Aayog.

NITI Aayog is also developing itself as a State of the Art Resource Centre, with the necessary resources, knowledge and skills, that will enable it to act with speed, promote research and innovation, provide strategic policy vision for the government, and deal with contingent issues.

The new institution will be a catalyst to the developmental process; nurturing an overall enabling environment, through a holistic approach to development going beyond the limited sphere of the Public Sector and Government of India. This will be built on the foundations of:

·         An empowered role of States as equal partners in national development; operationalizing the principle of Cooperative Federalism.

·         A knowledge hub of internal as well as external resources; serving as a repository of good governance best practices, and a Think Tank offering domain knowledge as well as strategic expertise to all levels of government.

·         A collaborative platform facilitating Implementation; by monitoring progress, plugging gaps and bringing together the various Ministries at the Centre and in States, in the joint pursuit of developmental goals.

Constitution

Chairperson
ShriNarendraModi, Hon'ble Prime Minister

Vice Chairperson
Mr. Rajiv Kumar (The first VC was ShriArvind Panagariya who has resigned.

Full-Time Members
Shri Bibek Debroy
Shri V.K. Saraswat
Prof. Ramesh Chand

Ex-officio Members
Shri Rajnath Singh, Minister of Home Affairs
Shri ArunJaitley, Minister of Finance; Minister of Corporate Affairs; and Minister of Information and Broadcasting
Shri Suresh Prabhu, Minister of Railways
Shri Radha Mohan Singh, Minister of Agriculture

Special Invitees
Shri NitinGadkari, Minister of Road Transport and Highways; and Minister of Shipping
ShriThawar Chand Gehlot,Minister of Social Justice and Empowerment
Smt. SmritiZubinIrani, Minister of Human Resource Development.

Chief Executive Officer
Shri Amitabh Kant

Functions:

1.      To evolve a shared vision of national development priorities sectors and strategies with the active involvement of States in the light of national objectives

2.      To foster cooperative federalism through structured support initiatives and mechanisms with the States on a continuous basis, recognizing that strong States make a strong nation

3.      To develop mechanisms to formulate credible plans at the village level and aggregate these progressively at higher levels of government

4.      To ensure, on areas that are specifically referred to it, that the interests of national security are incorporated in economic strategy and policy

5.      To pay special attention to the sections of our society that may be at risk of not benefitting adequately from economic progress

6.      To design strategic and long term policy and programme frameworks and initiatives, and monitor their progress and their efficacy. The lessons learnt through monitoring and feedback will be used for making innovative improvements, including necessary mid-course corrections

7.      To provide advice and encourage partnerships between key stakeholders and national and international like-minded Think tanks, as well as educational and policy research institutions.

8.      To create a knowledge, innovation and entrepreneurial support system through a collaborative community of national and international experts, practitioners and other partners.

9.      To offer a platform for resolution of inter-sectoral and inter­ departmental issues in order to accelerate the implementation of the development agenda.

10.  To maintain a state-of-the-art Resource Centre, be a repository of research on good governance and best practices in sustainable and equitable development as well as help their dissemination to stake-holders

11.  To actively monitor and evaluate the implementation of programmes and initiatives, including the identification of the needed resources so as to strengthen the probability of success and scope of delivery

12.  To focus on technology upgradation and capacity building for implementation of programmes and initiatives

13.  To undertake other activities as may be necessary in order to further the execution of the national development agenda, and the objectives mentioned above.

NITI Aayog – How it is different from Planning Commission

In the Planning Commission, there was just one central figure that practically controlled every aspect of the commission: the Deputy Chairman. To do away with the central authority and to make the Aayog more useful in terms of policy, direction and implementation, the Deputy Chairman has been replaced by a CEO and a Vice Chairperson (with a caveat that they’ll be appointed by the PM).

The focus will be on being a catalyst and providing a platform for the States and the Centre to come together and discuss matters of economic policies and development plans. The planning will be orchestrated at the village level and an aggregation of these inputs shall be used to formulate national-level plans and policies. Even during the formation of the Aayog, Chief Ministers from all the States were invited to participate.

Apart from the CEO and the Vice-Chairman Niti Aayog will have a governing council comprising of Chief Ministers and Lieutenant Governors. They will also be for Union Ministers serving as ex-officio members. There will be full time members and part-time members. People will also be drawn from regional councils and experts and specialists from varied fields will also be a part of Niti Aayog, mostly as special invitees nominated by the Prime Minister. The Aayog will also have 2 part-time members from leading universities and research organizations.

Earlier the Commission was reporting to the National Development Council consisting of State Chief Ministers and Lieutenant Governors and this has been replaced by a governing council which, again, comprises of State Chief Ministers and Lieutenant Governors.

The big difference is, as mentioned above, the States will now have a greater say. Previously it was the Planning Commission that formulated plans and then asked the

States to implement them (provided they agreed), this time the States themselves will be able to actively participate in the planning so that there is no communication gap and the plans can be implemented effectively.

Special stress will be put on the benefit of those marginalised sections of the society that have been ignored so far.

Question6. Explain the Industrial Policy of India and its impact on economic reforms?

Answer:Industrial Policy of India: Industrial policy is a comprehensive package of policy measures which covers various issues connected with different industrial enterprises of the country. This policy is essential for devising various procedures, principles, rules and regulations for controlling such industrial enterprises of the country.

The pace, pattern and structure of industrialization in a country is highly influenced by its industrial policy. The industrial policy consists of a philosophy to determine the pattern of industrial development of country, procedures, principles, rules and regulations for the control of industries.

The policy also incorporates fiscal policy, monetary policy, the tariff policy, labour policy and the Government’s attitude towards the public and private sectors of the country. Before independence there was no proper policy for determining industrial development of the country. It is only after independence a beginning has been made in this direction.

Industrial Policy, 1948:

On April 6, 1948, the Government of India adopted the industrial policy resolutions for accelerating the industrial development of the country. The policy resolution contemplated a mixed economy which included both the public sector as well as private sector on the industrial front.

This policy divided the various Indian industries into four broad categories:

(a) In this first category of exclusive state monopoly, the manufacture of arms and ammunition, the production and control of atomic energy and ownership and management of railway transport were included.

(b) The second category included coal, iron and steel, aircraft manufacture, ship-building, manufacture of telephone, telegraphs and wireless sets and mineral oil industries. In this category all new factories would be owned and managed by the public sector although the existing units of such industries would continue to be run by the private industrial establishments. Thus, the State would have the exclusive right in setting up of new undertaking included in this category.

(c) The third category of industries included 20 important large scale and basic industries which were kept reserved for the time being to the private sector although the state reserves the right to plan, regulate and control as and when necessary. In this category various industries such as salt, automobiles, tractors, prime movers, heavy chemical, electric engineering, machine tools, fertilizers, electro-chemical industries, rubber manufactures, power and industrial alcohol, non-metals, cotton and woollen textiles, sugar, paper, cement, newsprint, air and sea transport, minerals and industries related to defence were included.

(d) The fourth category comprised of the ‘remainder of the industrial field’ which was kept open to private sector including both individual as well as co-operative.

In this industrial policy, special emphasis was laid on the development of cottage and small scale industries. Besides proper steps were taken to design a suitable tariff policy, taxation policy and also for maintaining sound industrial relation between management and labour.

Regarding foreign capital, the industrial policy recognized the need for security and participation of foreign capital and enterprise especially in respect of industrial technique and knowledge for enhancing the pace of industrialization in the country. But the policy was to lay down the foundation of mixed economy with the participation of both public and private sector for accelerating the pace of industrial development in the country.

Industrial Policy Resolution, 1956:

Alter the proclamation of industrial policy, 1948; Indian economy had to face a series of economic and political changes which necessitated the formulation of a fresh industrial policy for the country. In the meantime, the First Five Year Plan was completed and socialistic pattern of society was accepted as the major objective of the country’s social and economic policy. Thus, on April 30, 1956, a second Industrial Policy Resolution was adopted in India replacing the policy Resolution of 1948.

Following are some of the important provisions of the 1956 policy:

(i) New Classification of Industries:

In this new policy, industries were re-classified into three schedules.

These schedules were:

(a) Schedule A:

In the schedule A, seventeen industries were included and the future developments of these industries were to be the exclusive responsibility of the State. These industries include arms and ammunition, atomic energy, iron and steel, heavy castings and forgings of iron and steel, heavy machinery, heavy electrical industries, coal, mineral oil, mining; iron ore and other important minerals like, copper, lead and zinc; railway transport, aircraft, ship building, telephone, telegraph and wireless equipment, and generation and distribution of electricity.

(b) Schedule B:

In this schedule 12 industries were placed which will be progressively state- owned. In this schedule, the state would gradually set up new units and the private industries would also be expected to supplement the effort of the state in this regard.

These twelve industries include aluminium, other mining industries and other non-ferrous metals not included in the schedule A, machine tools, Ferro alloys and tool, steels, fertilizers, the chemical industry, antibiotics and other essential drugs, synthetic rubber, carbonization of coal, chemical pulp, road transport and sea transport.

(c) Schedule C:

In this schedule all the remaining industries were included and their future development would be left to the initiative and enterprise of the private sector. The state would facilitate and encourage the development of all these industries in the private sector as per the programmes finalized in the Five Year Plans of the country. These industries were controlled by the state in terms of the Industries (Development and Regulation) Act of 1951 and other relevant legislations.

(ii) No water-tight Classification:

It is important to note that the grouping of industries into three schedules was not placed in water-tight compartments. As these classifications remained open, thus the State may start any industry even in schedule C and similarly privately owned units may be permitted to establish industrial units even in schedule A in appropriate cases.

(iii) Fair and Non-discriminatory Treatment for the Private Sector:

The State would facilitate and encourage the private sector industries by ensuring infrastructural facilities like power, transport and other services and provide non-discriminatory treatment to both public and private owned units.

(iv) Encouraging Cottage and Small Scale Industries:

The State would continue to support cottage, village and small scale industries by restricting the volume of production in the large scale industrial units, by imposing differential taxation or by direct subsidies and would concentrate to improve their competitive strength by modernizing the techniques of production.

(v) Removal of Regional Disparities:

In order to secure a balanced development, the policy emphasized to remove regional disparities in respect of industrial development and tries to attain higher standard of living for the people of the country.

(vi) Amenities for Labour:

The Resolution recognized the importance of labour and recommended to associate the workers and technicians with management progressively. The policy stressed the need for improving the living and working conditions of workers and also to raise their standard of efficiency.

(vii) Attitude towards Foreign Capital:

Regarding the foreign capital the resolution maintained the same attitude as enunciated in our Industrial Policy, 1948. The policy recognized the importance of foreign capital and has given clear assurance for the safety and facilities for investment of the foreign investors.

Thus the Industrial Policy Resolution, 1956 has made a clear-cut provision for the expansion of both public sector and private sector enterprises in the country in co-ordinated manner with high degree of flexibility in its policies. Further, the policy resulted in the rapid expansion of the public sector in basic and heavy industries of the country.

Industrial Policy Statement, 1977:

In December 1977, the Janata Government announced its New Industrial Policy through a statement in the Parliament.

Following are the main elements of the new policy:

1. Development of Small Scale Industrial Sector:

The main thrust of the new policy was the effective promotion of cottage and small industries widely dispersed in rural areas and small towns. In this policy the small sector was classified into three groups—cottage and household sector, tiny sector and small scale industries.

This policy suggested following measures for the promotion of small scale and cottage industries of the country:

(a) Expanding the list of items from 180 to 807 items.

(b) Establishment of ‘District Industries Centre’ for the development of cottage and small scale industries.

(c) Revamping Khadi and Village Industries Commission.

(d) Special arrangement for widespread application of suitable technology for small scale and village industries.

2. Areas for Large Scale Sector:

The 1977 Industrial Policy prescribed the following areas for large scale industrial sector:

(a) Basic industries,

(b) Capital goods industries,

(c) High technology industries and

(d) Other industries outside the list of reserved items for the small scale sector.

3. Big Business Houses:

The 1977 Industrial Policy restricts the scope of large business houses so that no unit of the same business group acquired a dominant and monopolistic position in market.

4. Role of the Public Sector:

The new policy prescribed the expansion of the role of public sector especially in respect of strategic goods of basic nature. The public sector was also encouraged to develop ancillary industries and to transfer its expertise in technology and management to small scale and cottage industry sectors.

5. Promotion of Technological Self-reliance through the inflow of technology in sophisticated areas is another feature of the 1977 policy.

6. The policy recommended a consistent line of approach towards sick industrial units of the country.

7. Management-labour Relations:

The new policy of 1977 put emphasis on reducing the occurrence of labour unrest. The Government encouraged the worker’s participation in management from shop floor level to board level. But the industrial Policy 1977, is subjected to serious criticism as there was absence of effective measures to curb the dominant position of large scale units and the policy did not envisage any socio­economic transformation of the economy for curbing the role of big business houses and multinationals.

Industrial Policy of 1980:

On 3rd July, 1980 the Congress (I) Government announced its new industrial policy. This new policy seeks to promote the concept of economic federation, to raise the efficiency of public sector and to reverse trend of industrial production of the past three years and reaffirms its faith in the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA). While preparing this policy statement, the 1956 resolution was considered as its basis.

Socio-economic Objectives of the Policy:

The industrial policy statement, 1980 has laid down the following objectives:

(i) Optimum utilization of installed capacity;

(ii) Maximizing production and to achieve higher productivity and higher employment generation;

(iii) Correction of regional imbalance through a preferential development of industrially backward areas;

(iv) Strengthening of the agricultural base according to a preferential treatment to agro-based industries and promoting optimum inter-sectoral relationship;

(v) Faster promotion of export-oriented and import substitution industries;

(vi) Promoting economic federalism with an equitable spread of investment over small but growing unit in the rural as well as urban areas; and

(vii) Revival of the economy by removing the infrastructural gaps.

Policy Measures:

Besides in this industrial policy, 1980 the following policy measures were proposed to normalize the situation and to put the economy again on its feet:

1. Effective Operational System of Management of the Public Sector:

The new policy reaffirmed its faith in the public sector in-spite of having erosion of faith in it in recent years. Thus, the Government decided to launch a time bound programme in order to revive the efficiency of public sector undertakings.

2. Integrating Industrial Development in the Private Sector by Promoting the Concept of Economic Federalism:

The policy statements state that for integrated industrial development, it would promote the concept of economic federalism with setting up of a few nucleus plants in each district, identified as industrially backward district, to generate as many ancillaries and small and cottage units as possible.

3. Nucleus Plants:

The new policy has introduced the concept of nucleus plants which would concentrate on assembling the products of the ancillary units falling within its orbit, on producing the inputs needed by a large number of smaller units and making adequate marketing arrangements. The nucleus plant would also make provision for upgrading the technology of small units.

4. Redefining Small Units:

In view of the sufficient changes in the price level, price escalation and to develop the cottage and small scale industries, the Government decided:

(a) To raise the limit of investment in respect of tiny units from Rs. 1 lakh to Rs. 2 lakh;

(b) To raise the investment limits in case of small scale units from Rs. 10 lakh to Rs. 20 lakh; and

(c) To rise the investments limit in case of ancillary units from Rs. 15 lakh to Rs. 25 lakh.

Thus, the upward revision of investment limits would eliminate the tendency to circumvent the present limit by under-estimating the value of machinery and equipment, falsification of accounts or resort to ‘benami’ units. This would also help the qualified entrepreneurs in order to set up genuine small scale units and also facilitate the long overdue modernization of the existing small scale units.

Further, the new policy also provides other facilities like financial support to small units, buffer stocks of critical inputs for small units, marketing support and reservation of items for small scale industries as a whole.

5. Promotion of Industries in the Rural Areas:

The policy statement emphasized the necessity to promote suitable industries in the rural areas in order to generate bigger employment and for raising per capita income of the rural people without disturbing ecological balance in rural areas. In this respect the development of handloom, handicrafts and khadi and village industries would be given greater attention.

6. Removal of Regional Imbalance:

The policy encourages dispersal of industry and setting up of industrial units in industrially backward areas for making necessary correction in regional imbalances.

7. Liberalisation of Existing Capacities:

The policy statement gave recognition to the excess productive capacity as a result of replacement and modernization, and regularized these unauthorized excess capacities on selective basis.

8. Automatic Expansion:

The policy also gave concession to the large scale units about their extension and simplification for automatic expansion until now permitted to 15 industries.

9. Industrial Sickness and State Policy:

The policy statement also proposed to introduce “a checklist” to serve as ‘early warning system’ for identifying symptoms of sickness and also to take stern measures about deliberate mismanagement and financial improprieties leading to sickness. In exceptional cases only the management of sick units would be taken over on public interests.

Conclusion:

In conclusion it can be observed that the New Industrial Policy (1980) is guided mainly by the considerations of growth. The policy liberalized licensing for large and big business, wanted to promote large scale industries at the cost of small scale units. Thus the policy favours a more capital intensive path for development and paves the way for the expansion of large and big industrial houses.

Industrial Policy Development in Eighties—Liberalisation Wave:

During eighties, various steps were taken by the Government for liberalizing the industrial policy of the country.

These steps were as follows:

1. Exemption from Licensing:

In order to liberalise the industries, the exemption limit of licensing was continuously enhanced from non-MRTP and non-FERA companies. The exemption limit which was Rs. 3 crores in 1978, gradually enhanced to Rs. 5 crores in 1983 and then substantially to Rs. 55 crores for those projects to be located in non-backward areas and to Rs. 50 crores for those projects located in backward areas in 1988-89.

2. Relaxation to MRTP and FERA Companies:

The government made provision for various relaxations to those companies under MRTP Act (Monopolies and Restrictive Trade Practices Act) and FERA (Foreign Exchange Regulation Act) in order to expand industrial production and also to promote exports.

These relaxations include:

(a) Raising the limit of MRTP companies from Rs. 20 crores to Rs. 100 crores in March, 1985;

(b) Allowing the MRTP to set up new capacities in those industries of high national importance and with import substitution potential or using sophisticated technology without the approval to government in 1983 (May);

(c) Giving permission for unrestricted entry of large industrial houses and companies governed by FERA in 21 high technology items of manufacture in December, 1985. Accordingly, large industrial houses under the purview of MRTP Act and FERA companies were given permission to freely undertake the manufactures of 83 items.

(d) Specifying a list of 33 broad group of industries under Appendix I where MRTP and FERA companies were given permission to set up capacities provided these items are not in the reserved list of small scale sector or public sectors;

(e) Making provision for various other concessions such as regularisation of excess capacity and capacity re-endorsement, special facilities to set up industries in backward areas etc. to MRTP and FERA companies.

3. Delicensing:

In order to encourage industries, the government delicensed 28 broad categories of industries and 82 bulk drug and their formulations. These industries would now require any registration with the Secretariat for Industrial Approval and thus no licence had to be obtained by these industries under the Industries (Development and Regulation) Act if these industries do not fall within the purview of MRTP Act or FERA, do not produce articles reserved for small scale industries and the undertaking is not located in an urban area. In 1989-90, provision has been made for delicensing of some more industries.

4. Re-endorsement of Capacity:

In order to achieve maximum capacity utilisation, in April 1982, the scheme of capacity re-endorsement was announced. Again in 1986, this scheme was liberalised further to permit those undertakings in availing such facility which achieved 80 per cent capacity utilization (previously 94 per cent). The industries which were not permitted for automatic re-endorsement of capacity was reduced from 77 to 26.

5. Broad Banding Industries:

In 1984, the scheme of broad banding of industries was introduced in order to classify these industries into broad categories. This was done to enable the producers to change their product-mix rapidly in order to match the changing demand pattern.

6. Minimum Economic Scales of Operation:

In 1986 the government introduced the minimum economic scales of operation in order to encourage relations of economies of scale through the expansion of its installed capacities. Till 1989, minimum economic capacities (MECs) were specified gradually for 108 industries and in 1989-90 some more industries were specified under MECs.

7. Development of Backward Areas:

In order to develop backward areas, the government extended the scheme of delicensing in March 1986 to MRTP or FERA Companies engaged in 20 industries in Appendix I for their location in backward areas declared centrally. Later on the scheme was extended to 49 industries.

Again in 1988- 89, the government set up 100 grown centres throughout the country to provide infrastructural facilities to these backward areas. Moreover, in 1988 income tax reliefs were announced for promoting industrialisation of backward areas.

Accordingly, new industries established in notified backward areas were entitled to income tax relief under Section 80HH of I.T. Act by way of 20 per cent deduction from profits for a period of 10 years. Again under Section 80- I of Act, all new industrial undertakings were entitled to income tax relief by way of 25 per cent deduction of the profits for a period of 8 years.

8. Incentives for Export Production:

In order to promote exports, the government announced various concessions in its industrial policy and export (Exim) policy. Again, all 100 per cent export- oriented industries were exempted from Section 21 and 22 of the Act which were set in Free-Trade Zones. Some more industries were identified from export angle which were permitted 5 per cent automatic growth rate annually over and above their normal capacity.

9. Enhancement of Investment of Small Scale and Ancillary Units:

The investment limits for small scale units and ancillary units which was Rs. 20 lakhs and 25 lakhs respectively as per 1980 policy statement, gradually enhanced to Rs. 35 lakhs and Rs. 45 lakhs respectively in 1985 and Rs. 2 lakhs for tiny units.

In 1991, these limits were again raised to Rs. 60 lakhs and Rs. 75 lakhs for both the small scale and ancillary units respectively. Moreover about 200 times which were earlier reserved, were completely de-reserved and kept open for large and medium scale sector.

New Industrial Policy, 1991 and Economic Reforms:

The Congress (I) led by NarasimhaRao Government has announced its new industrial policy on July 24, 1991. In line with the liberalisation move introduced during the 1980s, the new policy radically liberalized the industrial policy itself and de-regulates the industrial sector substantially.

Objectives:

The prime objectives of the new industrial policy are to “unshakle the Indian industrial economy from the cobwebs of unnecessary bureaucratic controls”, and to build on the gains already experienced, to correct the distortions or weakness involved in the system, to introduce liberalisation measures in order to integrate Indian economy with world economy, to abolish restrictions on direct foreign investment, to liberate the indigenous enterprise from the restrictions of MRTP Act, to maintain a sustained growth in productivity and employment and also to achieve international competitiveness. Moreover, the policy also made provision for reducing the load of public sector enterprises showing either low rate of return or incurring losses over the year.

Thus to fulfil these objectives, the government introduced a series of initiatives in the new industrial policy in the following areas:

1. Abolition of Industrial Licensing:

In order to liberalise the economy and to bring transparency in the policy, the new industrial policy has abolished the system of industrial licensing for all industrial undertaking, irrespective of the level of investment, except for a short list of industries related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental concerns and items of elitist consumption. As per Annexure II of the policy there are only 18 industries for which licensing are compulsory.

These include:

(1) Coal and lignite;

(2) Petroleum (other than crude) and its distillation products;

(3) Distillation and brewing of alcoholic drinks;

(4) Sugar;

(5) Animal fat and oils;

(6) Cigars and Cigarettes of tobacco and manufactured tobacco substitutes;

(7) Asbestos and asbestos based products;

(8) Plywood and decorative veneers and other wood based products;

(9) Raw hides and skins, leather, chamois leather and patent leather,

(10) Tanned and dressed skins;

(11) Motor car;

(12) Paper and newsprint except bagasse based units;

(13) Electronic aerospace and defence equipment—all types;

(14) Industrial explosives;

(15) Hazardous chemicals;

(16) Drugs and Pharmaceuticals;

(17) Entertainment Electronics;

(18) White goods such as domestic refrigerators, washing machines, microwave ovens and air conditioners.

The compulsory licensing provision would not apply in respect of the small scale units taking up the manufacture of any of the above items reserved for exclusive manufacture in the small scale sector.

2. Policy regarding Public Sector:

In-spite of its huge investment, the public sector enterprises could yield a very low rate of return on capital invested. A good number of public sector enterprises are incurring huge amount of loss regularly. Thus, in order to face the situation, the Government should restructure the potentially viable units.

The priority areas for the growth of future public sector enterprises included—essential infrastructure, exploration and exploitation of minerals and oil, technology development and products with strategic consideration.

The new policy has now reduced the list of industries under public sector to 8 as against the 17 industries reserved earlier as per 1956 policy. The industries which are now removed from the list of reserved industries include—iron and steel, electricity, air transport, ship building, heavy machinery industries, telecommunication cables and instruments.

Those 8 industries which remained in the reserved list for the public sector are :

(1) Arms and ammunition and allied defence equipment, defence aircraft and warships;

(2) Atomic energy;

(3) Coal and lignite;

(4) Mineral oil;

(5) Mining of iron ore, manganese ore, chrome, gypsum, sulphur, gold and diamond;

(6) Mining of copper, lead, zinc, tin, molybdenum and wolfarm;

(7) Minerals specified in the schedule to the Atomic Energy (Control of Production and Use) Order, 1953; and

(8) Rail transport.

3.      The new industrial policy states that the government will raise the strength of those public sector units included in the list of reserved industries or in the priority group of those earning reasonable profits. The government will now make review of the existing public sector industries.

Industries earning higher profit will be provided with much higher degree of management autonomy through the system of MOU. Private sector participation would be invited to raise the competitive capacity of these industries. Sick units will now be referred to the Board of Industrial Finance and Reconstruction (BIFR) for getting advice about its rehabilitation and reconstruction.

The government has also taken a decision to disinvest the equity shares of selected public units for bringing market discipline in their performances. In 1991-92, Rs. 3,038 crore was raised and in 1992-93 Rs. 1,866 crore was raised through disinvestment of PSE shares. Accordingly, a part of the shares of PSEs is now being offered for sale to mutual funds, financial institutions, general public and workers.

3. MRTP Limit:

As per the MRTP Act any firm with assets over a certain size (Rs. 100 crore since 1985) was classified as MRTP firms and such firm was allowed to start only selected industries on a case by case approval. But the government now felt that this MRTP limit has become deleterious in its effects on the industrial growth of the country.

Thus, the new policy states that the pre-entry scrutiny of investment decisions by the so-called MRTP companies will no longer be required. Instead emphasis will be on controlling and regulation of monopolistic, restrictive and unfair trade practices rather than making it necessary for the monopoly houses to obtain approval of the centre for expansion, establishment of new undertaking, merger, amalgamation and take over and appointment of certain director. “The thrust of the policy will be more on controlling unfair or restrictive business practices”.

Simultaneously, provisions of the MRTP Act will be strengthened in order to enable the MRTP Commission to take appropriate action in respect of monopolistic, restrictive and unfair trade practices.

4. Foreign Investment and Foreign Technology:

From the very beginning, foreign investment in India was regulated by the government. Thus, for any foreign investment or foreign technology agreements, prior approval of the government was necessary. All these were resulting in unnecessary delays and thus hampered the decision making in business.

The new industrial policy thus prepared a specified list of high technology and high investment priority industries (Annexure III) in which automatic permission will be available for direct foreign investment up to 51 per cent foreign equity. The Annexure III included 34 priority industries. Such as metallurgy, boilers and steam generating plants, electrical equipment, telecommunication equipment’s, transportation, industrial and agricultural machinery, industrial investments, chemicals, food processing, hotel and tourism industry.

In respect of foreign technology agreements automatic permission will be provided in high- priority industry up to a sum of Rs. 1 crore, 5 per cent royalty for domestic sales and 8 per cent of the sale over a 10 year period from the date of agreement or seven years from commencement of production. No permission will be required for hiring foreign technicians or for testing of indigenously developed technology abroad.

5. Location Policy Liberalised:

The new policy mentioned that in location other than cities of more than 1 million population, no industrial approvals from the centre will be required except for industries subject to compulsory licensing. In cities with more than 1 million population, industries other than those of non-polluting in nature, will be located outside 25 kms of its periphery.

6. Abolition of Phased Manufacturing Programmes:

Phased manufacturing programme was enforced in order to increase the pace of indigenization. The new policy has totally abolished such programmes as the government feels due to substantial reforms of trade policy and devaluation of rupee there is no need to enforce such programmes.

7. Removal of Mandatory Convertibility Clause:

From the very beginning a large part of industrial investment was financed by loans from banks and financial institutions who have followed a mandatory convertibility clause in their lending operations for new industrial projects. This has provided an option to convert loans into equity if it was felt necessary by the management.

This was an unwarranted threat to private firm. The new industrial policy removed this system and henceforth, financial institutions will not impose this mandatory convertibility clause.

Appraisal of the Policy:

Merits:

It is quite logical to think that a country like India is trying to achieve a faster industrial growth. Thus, the new industrial policy (1991) paves the way for liberalisation which will again result in a faster industrial growth as the industrial sector is being relieved of unnecessary control and regulation. J.C. Sandesara argued that the new policy will accelerate industrial production as it reduces project time and project cost of production, attract capital, technology and managerial expertise from abroad and improve the level of efficiency of production; enhance the allocative efficiency of the public sector by opening up nine areas from public sector and improve its performance and finally greater powers of the MRTP Commission will curb the monopolistic and oligopolistic behaviour and thus promote their competition and efficiency.

Criticism:

But some economists have also criticised this new policy on various grounds. The new policy made the provision for too much opening up of economy to foreign influences. H.K. Paranjape agreed that those 34 high priority industries having provision for automatic permission for foreign investment “would make it possible for large trans-national to dominate certain growing areas of our country and push to the wall any Indian concerns which attempt to stand out of their own. Indigenous R&D will be doomed.”

Moreover, past record of the multinationals working in India suggests that these companies are in operation more as trading than as manufacturing and exporting concerns. Considering our huge manpower resources, we need a labour intensive and capital saving technologies but the multinationals coming from a reverse situation will find it very difficult to adopt with such technology.

Moreover, liberalisation of foreign investment up to 51 per cent foreign equity and even 100 per cent export oriented company will counter the Nehruvian Model where foreign capital was permitted only during transitional phase with the goal to become self-reliant.

Moreover, free entry of foreign capital will remove the distinction between high priority and low priority industries and accordingly foreign investment would enter into all different lines of production. But considering our huge external debt burden, entry of foreign capital should be restricted to only priority industries. Allowing foreign equity in trading companies was also not justified.

The main idea behind the free flow of foreign capital is backed by the arguments that firstly, it would provide much needed foreign exchange and then secondly, it would lead to huge volume of foreign direct investment in the high priority industries. But in this connection, there is a fear that while doing so we may sell our economic sovereignty to multinationals.

However, the government should be very much careful about the hidden financial implications of reverse outflow of foreign exchange in the form of remittance of profit, dividends and royalties of the foreign capitalists. Therefore, considering the existing huge foreign debt burden, the Government must take proper care to invite foreign capital only in high priority industries and the country should not suffer by following the path followed by Brazil or Mexico.

The new industrial policy also mentioned about loss incurring public sector enterprises which would be referred to BIFR. Thus, while passing this sick enterprises to private business houses or to close such sick enterprises adequate social security measures must be undertaken. But the new policy neglected this provision.

It would be better if the ownership of such sick enterprises be transferred to workers’ co-operative and the government should provide adequate financial and technical assistance in order to revive such industrial units.

Moreover, the MRTP commission’s capacity to control and regulate the monopolistic and unfair practices is doubtful as the past experience suggests that the commission has failed in this respect.

From the foregoing analysis we can conclude that the new industrial policy has introduced certain challenging issues in order to restructure and revive the industrial sector of the country. The policy will rationalise the industrial investments will pave the way for growing competitiveness and profitability outlook among the Indian industries in near future.

The policy will attract foreign investment, no doubt, but its capacity to generate employment is doubtful. The exit policy will render many workers unemployed. Lastly, giving excessive freedom to foreign capital may also affect our economic sovereignty and will push the country towards debt trap. Thus, considering all these appre­hensions sufficient care should be taken in near future to keep the industrial economy in right track.

Question7. Explain the concept of EXIM Policy. Highlight the important features of current EXIM Policy.

Answer: Indian Trade Policy is prepared and announced by the Central Government (Ministry of Commerce). India's Export Import Policy also know as Foreign Trade Policy, in general, aims at developing export potential, improving export performance, encouraging foreign trade and creating favorable balance of payments position.

History of Exim Policy of IndiaIn the year 1962, the Government of India appointed a special committee to review the government previous export import policies. The committee was later on approved by the Government of India. Mr. V. P. Singh, the then Commerce Minister and announced the Exim Policy on the 12th of April, 1985. Initially the EXIM Policy was introduced for the period of three years with main objective to boost the export business in India The major information in matters related to export and import is given in the document named "Exim Policy 2002-2007".

Objectives of The Exim Policy : - There are two aspects of Exim Policy; the import policy which is concerned with regulation and management of imports and the export policy which is concerned with exports not only promotion but also regulation. The main objective of the Government's EXIM Policy is to promote exports to the maximum extent. Exports should be promoted in such a manner that the economy of the country is not affected by unregulated exportable items specially needed within the country. Export control is, therefore, exercised in respect of a limited number of items whose supply position demands that their exports should be regulated in the larger interests of the country. In other words, the main objective of the Exim Policy is:

·     To accelerate the economy from low level of economic activities to high level of economic activities by making it a globally oriented vibrant economy and to derive maximum benefits from expanding global market opportunities.

·     To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components,' consumables and capital goods required for augmenting production.

·     To enhance the techno local strength and efficiency of Indian agriculture, industry and services, thereby, improving their competitiveness.

·     To generate new employment.

·     Opportunities and encourage the attainment of internationally accepted standards of quality.

·     To provide quality consumer products at reasonable prices.

Governing Body of Exim Policy

The Government of India notifies the Exim Policy for a period of five years under Section 5 of the Foreign Trade (Development and Regulation Act), 1992. All types of changes or modifications related to the EXIM Policy is normally announced by the Union Minister of Commerce and Industry who co-ordinates with the Ministry of Finance, the Directorate General of Foreign Trade and network of DGFT Regional offices

HIGHLIGHTS OF THE FOREIGN TRADE POLICY 2015-2020

A.                                         SIMPLIFICATION & MERGER OF REWARD SCHEMES Export from India Schemes:

1. Merchandise Exports from India Scheme (MEIS) (a) Earlier there were 5 different schemes (Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip, VKGUY) for rewarding merchandise exports with different kinds of duty scrips with varying conditions (sector specific or actual user only) attached to their use. Now all these schemes have been merged into a single scheme, namely Merchandise Export from India Scheme (MEIS) and there would be no conditionality attached to the scrips issued under the scheme. Rewards for export of notified goods to notified markets under ‘Merchandise Exports 2 from India Scheme (MEIS) shall be payable as percentage of realized FOB value (in free foreign exchange). The debits towards basic customs duty in the transferable reward duty credit scrips would also be allowed adjustment as duty drawback. At present, only the additional duty of customs / excise duty / service tax is allowed adjustment as CENVAT credit or drawback, as per Department of Revenue rules.

 2. Service Exports from India Scheme (SEIS) (a) Served From India Scheme (SFIS) has been replaced with Service Exports from India Scheme (SEIS). SEIS shall apply to ‘Service Providers located in India’ instead of ‘Indian Service Providers’. Thus SEIS provides for rewards to all Service providers of notified services, who are providing services from India, regardless of the constitution or profile of the service provider. The rate of reward under SEIS would be based on net foreign exchange earned. The reward issued as duty credit scrip, would no longer be with actual user condition and will no longer be restricted to usage for specified types of goods but be freely transferable and usable for all types of goods and service tax 3 debits on procurement of services / goods. Debits would be eligible for CENVAT credit or drawback

3 Incentives (MEIS & SEIS) to be available for SEZs It is now proposed to extend Chapter -3 Incentives (MEIS & SEIS) to units located in SEZs also. 4. Duty credit scrips to be freely transferable and usable for payment of custom duty, excise duty and service tax. (a) All scrips issued under MEIS and SEIS and the goods imported against these scrips would be fully transferable. (b) Scrips issued under Exports from India Schemes can be used for the following:- (i) Payment of customs duty for import of inputs / goods including capital goods. (ii) Payment of excise duty on domestic procurement of inputs or goods, including capital goods as per DoR notification.

 4 (iii) Payment of service tax on procurement of services as per DoRnotification. (c) Basic Customs Duty paid in cash or through debit under Duty Credit Scrip can be taken back as Duty Drawback as per DoR Rules, if inputs so imported are used for exports.

5. Status Holders (a) Business leaders who have excelled in international trade and have successfully contributed to country’s foreign trade are proposed to be recognized as Status Holders and given special treatment and privileges to facilitate their trade transactions, in order to reduce their transaction costs and time. (b) The nomenclature of Export House, Star Export House, Trading House, Star Trading House, Premier Trading House certificate has been changed to One, Two, Three, Four, Five Star Export House. (c) The criteria for export performance for recognition of status holder have been changed from Rupees to US dollar earnings. The new criteria is as under:- 5 Status category Export Performance FOB / FOR (as converted) Value (in US $ million) during current and previous two years One Star Export House 3 Two Star Export House 25 Three Star Export House 100 Four Star Export House 500 Five Star Export House 2000 (d) Approved Exporter Scheme - Self certification by Status Holders Manufacturers who are also Status Holders will be enabled to self-certify their manufactured goods as originating from India with a view to qualify for preferential treatment under different Preferential Trading Agreements [PTAs], Free Trade Agreements [FTAs], Comprehensive Economic Cooperation Agreements [CECAs] and Comprehensive Economic Partnerships Agreements [CEPAs] which are in operation. They shall be permitted to self-certify the goods as manufactured as per 6 their Industrial Entrepreneur Memorandum (IEM) / Industrial Licence (IL)/ Letter of Intent (LOI). B. BOOST TO "MAKE IN INDIA"

6. Reduced Export Obligation (EO) for domestic procurement under EPCG scheme: Specific Export Obligation under EPCG scheme, in case capital goods are procured from indigenous manufacturers, which is currently 90% of the normal export obligation (6 times at the duty saved amount) has been reduced to 75%, in order to promote domestic capital goods manufacturing industry.

7. Higher level of rewards under MEIS for export items with high domestic content and value addition. It is proposed to give higher level of rewards to products with high domestic content and value addition, as compared to products with high import content and less value addition. 7 C. TRADE FACILITATION & EASE OF DOING BUSINESS

8. Online filing of documents/ applications and Paperless trade in 24x7 environment: (a) DGFT already provides facility of Online filing of various applications under FTP by the exporters/importers. However, certain documents like Certificates issued by Chartered Accountants/ Company Secretary / Cost Accountant etc. have to be filed in physical forms only. In order to move further towards paperless processing of reward schemes, it has been decided to develop an online procedure to upload digitally signed documents by Chartered Accountant / Company Secretary / Cost Accountant. In the new system, it will be possible to upload online documents like annexure attached to ANF 3B, ANF 3C and ANF 3D, which are at present signed by these signatories and submitted physically. (b) Henceforth, hardcopies of applications and specified documents would not be required to be submitted to RA, saving paper as well as cost and time for the exporters. To start with, applications under Chapter 3 & 4 of FTP are being covered (which account for nearly 70% of total applications in DGFT). Applications 8 under Chapter-5 would be taken up in the next phase. (c) As a measure of ease of doing business, landing documents of export consignment as proofs for notified market can be digitally uploaded in the following manner:- (i) Any exporter may upload the scanned copy of Bill of Entry under his digital signature. (ii) Status holders falling in the category of Three Star, Four Star or Five Star Export House may upload scanned copies of documents.

9. Online inter-ministerial consultations: It is proposed to have Online inter-ministerial consultations for approval of export of SCOMET items, Norms fixation, Import Authorisations, Export Authorisation, in a phased manner, with the objective to reduce time for approval. As a result, there would not be any need to submit hard copies of documents for these purposes by the exporters. Simplification of procedures/processes, digitisation and e-governance (a) Under EPCG scheme, obtaining and submitting a certificate from an independent Chartered Engineer, confirming the use of spares, tools, refractory and catalysts imported for final redemption of EPCG authorizations has been dispensed with. (b) At present, the EPCG Authorisation holders are required to maintain records for 3 years after redemption of Authorisations. Now the EPCG Authorization Holders shall be required to maintain records for a period of two years only. Government’s endeavour is to gradually phase out this requirement as the relevant records such as Shipping Bills, e-BRC are likely to be available in electronic mode which can be archived and retrieved whenever required. (c) Exporter Importer Profile: Facility has been created to upload documents in Exporter/Importer Profile. There will be no need to submit copies of permanent records/ documents (e.g. IEC, Manufacturing licence, RCMC, PAN etc.) repeatedly with each application, once uploaded.

10 (d) Communication with Exporters/Importers: Certain information, like mobile number, e-mail address etc. has been added as mandatory fields, in IEC data base. This information once provided by exporters, would help in better communication with exporters. SMS/ email would be sent to exporters to inform them about issuance of authorisations or status of their applications. (e) Online message exchange with CBDT and MCA: It has been decided to have on line message exchange with CBDT for PAN data and with Ministry of Corporate Affairs for CIN and DIN data. This integration would obviate the need for seeking information from IEC holders for subsequent amendments/ updation of data in IEC data base. (e) Communication with Committees of DGFT: For faster and paperless communication with various committees of DGFT, dedicated email addresses have been provided to each Norms Committee, Import Committee and Pre-Shipment Inspection Agency for faster communication. (f) Online applications for refunds: Online filing of application for refund of TED is being 11 introduced for which a new ANF has been created.

11. Forthcoming e-Governance Initiatives (a) DGFT is currently working on the following EDI initiatives: (i) Message exchange for transmission of export reward scrips from DGFT to Customs. (ii) Message exchange for transmission of Bills of Entry (import details) from Customs to DGFT. (iii) Online issuance of Export Obligation Discharge Certificate (EODC). (iv) Message exchange with Ministry of Corporate Affairs for CIN & DIN. (v) Message exchange with CBDT for PAN. (vi) Facility to pay application fee using debit card / credit card. (vii) Open API for submission of IEC application. (viii) Mobile applications for FTP 12 D. Other new Initiatives

12. New initiatives for EOUs, EHTPs and STPs (a) EOUs, EHTPs, STPs have been allowed to share infrastructural facilities among themselves. This will enable units to utilize their infrastructural facilities in an optimum way and avoid duplication of efforts and cost to create separate infrastructural facilities in different units. (b) Inter unit transfer of goods and services have been allowed among EOUs, EHTPs, STPs, and BTPs. This will facilitate group of those units which source inputs centrally in order to obtain bulk discount. This will reduce cost of transportation, other logistic costs and result in maintaining effective supply chain. (c) EOUs have been allowed facility to set up Warehouses near the port of export. This will help in reducing lead time for delivery of goods and will also address the issue of unpredictability of supply orders. (d) STP units, EHTP units, software EOUs have been allowed the facility to use all duty free equipment/goods for training purposes. This will help these units in developing skills of their employees.

 13 (e) 100% EOU units have been allowed facility of supply of spares/ components up to 2% of the value of the manufactured articles to a buyer in domestic market for the purpose of after sale services. (f) At present, in a period of 5 years EOU units have to achieve Positive Net Foreign Exchange Earning (NEE) cumulatively. Because of adverse market condition or any ground of genuine hardship, then such period of 5 years for NFE completion can be extended by one year. (f) Time period for validity of Letter of Permission (LOP) for EOUs/EHTP/ STPI/BTP Units has been revised for faster implementation and monitoring of projects. Now, LOP will have an initial validity of 2 years to enable the unit to construct the plant and install the machinery. Further extension can be granted by the Development Commissioner up to one year. Extension beyond 3 years of the validity of LOP, can be granted, in case unit has completed 2/3rd of activities, including the construction activities. (g) At present, EOUs/EHTP/STPI units are permitted to transfer capital goods to other EOUs, EHTPs, STPs, SEZ units. Now a facility has been provided that if such 14 transferred capital goods are rejected by the recipient, then the same can be returned to the supplying unit, without payment of duty. (h) A simplified procedure will be provided to fast track the de-bonding / exit of the STP/ EHTP units. This will save time for these units and help in reduction of transaction cost. (i) EOUs having physical export turnover of Rs.10 crore and above, have been allowed the facility of fast track clearances of import and domestic procurement. They will be allowed fast tract clearances of goods, for export production, on the basis of preauthenticated procurement certificate, issued by customs / central excise authorities. They will not have to seek procurement permission for every import consignment. 13. Facilitating & Encouraging Export of dual use items (SCOMET). (a) Validity of SCOMET export authorisation has been extended from the present 12 months to 24 months. It will help industry to plan their activity in an orderly manner and obviate the need to seek revalidation or relaxation from DGFT. 15 (b) Authorisation for repeat orders will be considered on automatic basis subject to certain conditions. (c) Verification of End User Certificate (EUC) is being simplified if SCOMET item is being exported under Defence Export Offset Policy. (c) Outreach programmes will be conducted at different locations to raise awareness among various stakeholders.

14 Facilitating & Encouraging Export of Defence Exports (a) Normal export obligation period under advance authorization is 18 months. Export obligation period for export items falling in the category of defence, military store, aerospace and nuclear energy shall be 24 months from the date of issue of authorization or co-terminus with contracted duration of the export order, whichever is later. This provision will help export of defence items and other high technology items. (b) A list of military stores requiring NOC of Department of Defence Production has been notified by DGFT recently. A committee has been formed to create ITC (HS) codes 16 for defence and security items for which industrial licenses are issued by DIPP.

15. e-Commerce Exports (a) Goods falling in the category of handloom products, books / periodicals, leather footwear, toys and customized fashion garments, having FOB value up to Rs.25000 per consignment (finalized using eCommerce platform) shall be eligible for benefits under FTP. Such goods can be exported in manual mode through Foreign Post Offices at New Delhi, Mumbai and Chennai. (b) Export of such goods under Courier Regulations shall be allowed manually on pilot basis through Airports at Delhi, Mumbai and Chennai as per appropriate amendments in regulations to be made by Department of Revenue. Department of Revenue shall fast track the implementation of EDI mode at courier terminals.

 16. Duty Exemption (a) Imports against Advance Authorization shall also be eligible for exemption from Transitional Product Specific Safeguard Duty. 17 (b) In order to encourage manufacturing of capital goods in India, import under EPCG Authorisation Scheme shall not be eligible for exemption from payment of anti-dumping duty, safeguard duty and transitional product specific safeguard duty.

 17. Additional Ports allowed for Export and import Calicut Airport, Kerala and Arakonam ICD, Tamil Nadu have been notified as registered ports for import and export.

18. Duty Free Tariff Preference (DFTP) Scheme India has already extended duty free tariff preference to 33 Least Developed Countries (LDCs) across the globe. This is being notified under FTP.

19. Quality complaints and Trade Disputes (a) In an endeavour to resolve quality complaints and trade disputes, between exporters and importers, a new chapter, namely, Chapter on Quality Complaints and Trade Disputes has been incorporated in the Foreign Trade Policy. (b) For resolving such disputes at a faster pace, a Committee on Quality Complaints and 18 Trade Disputes (CQCTD) is being constituted in 22 offices and would have members from EPCs/FIEOs/APEDA/EICs.

20. Vishakhapatnam and Bhimavaram added as Towns of Export Excellence Government has already recognized 33 towns as export excellence towns. It has been decided to add Vishakhapatnam and Bhimavaram in Andhra Pradesh as towns of export excellence.

Question8. What are the objectives of Monetary Policy? What are the reasons for failure of Monetary Policy in India?

Answer: From its inception, the RBI has followed the policy of controlled expansion, i.e., adequate financing of economic growth while ensuring reasonable price stability. Expansion of money is required in developing country for the purpose of development and investment. But this expansion results in inflation. So the RBI has to be cautious in order to achieve a trade-off between expansion and inflation. Not only this, the RBI also manages the forex exchange rate through open market operations, as after liberalisation it is the market forces that decide the exchange rate. The keynote of monetary policy can be said to be controlled expansion of bank credit and money supply, with special attention to seasonal requirement for credit. The RBI regards money supply and the volume of bank credits as the two major intermediate variables, but it seeks to control the former through the latter. It is said that money supply doesn't change on its own; it changes because of certain underlying development with regard to bank credit.

RBI and Credit Control

For the sake of credit control, the RBI resorts to bank rate manipulations, open market operations, reserve requirement changes, direct action, and rationing of credit and moral suasion. Apart from employing these traditional methods of credit control, it directly influences commercial banks' lending policy, rate of interest, and form of securities against loans and portfolio distribution. The instrument of monetary policy (methods of credit control) may be broadly divided into the following parts:

1. Open Market Operations

2. Bank Rate

3. Direct Regulation of Interest Rates on Commercial Banks' Deposits and Loans

4. Cash Reserve Ratio (CRR)

5. Statutory Liquidity Ratio (SLR)

6. Direct Credit Allocation and Credit Rationing

7. Selective Credit Controls (SCC)

8. Credit Authorisation Scheme (CAS)

9. Fixation of Inventory and Credit Norms

10. Credit Planning

11. Moral Suasion

12. Liquidity Adjustment Facility (LAF)

1. Open Market Operations: Open market operations involve the sale and purchase of government securities by the RBI to influence the volume of cash reserve with commercial banks and thus influence the volume of loans and advances they can make to the industrial and commercial sectors. The environment for open market operations is quite favourable because the government securities market is fairly developed in the country. At present, the RBI is authorised to conduct purchase and sale operations in government securities, treasury bills and other approved securities. The RBI is also empowered to buy and sell short-term commercial bills. Through the sale of securities the RBI withdraws a part of the deposit resources of the banking sector, thereby reducing resources available with the banks for lending. This reduces the supply of money, which in turn reduces inflation. The opposite happens when the RBI purchases securities. The stock of securities with the seller banks is reduced and the cash with them expands. This augments the credit-creating capacity of banks, reducing the interest rates and increasing the level of investment. Some monetary economists and bankers assert that the bank rate policy and open market operations are complementary measures in the realm of monetary management. Open Market Operations have both monetary policy and fiscal policy goals. Their multiple objectives include:

(a) To control the amount of and changes in bank credit and monetary supply through controlling the reserve base of banks,

(b) To make bank rate policy more effective,

(c) To maintain stability in government securities market,

(d) To support government borrowing programme,

(e) To smoothen the seasonal flow of funds in the bank credit market.

2. Bank Rate: The bank rate is also known as discount rate. It is the rate at which the central bank discounts, or more accurately rediscounts, eligible bills. In a broader sense it refers to the minimum rate at which the central bank provides financial accommodation to commercial banks in the discharge of its function as the lender of the last resort. The bank rate is the basic cost of refinance and rediscounting facilities. Section 49 of the RBI Act, 1934 defines it as the standard rate at which the Bank is prepared to buy or rediscount bills of exchange or other eligible commercial paper. The technique of bank rate and discretionary control of refinance are used to regulate the cost and availability of refinance, and to change the volume of lendable resources of banks and other financial institutions. If monetary policy is effective, then change in bank rate affects the prime-lending rate. Any increment in bank rate means that now the RBI will charge higher interest rate from banks against the advances, so it results in the increment in the interest rate charged by commercial banks. This results in low level of investment and low level of inflation. To control inflation, bank rate was increased to 12% from 10% in 1991. In 1953, bank rate was 3.5% and rose to 10% in 1981, to 11% in July 1991, and to 12% in October 1991. In India, bank rate policy is not effective because commercial banks in India are not much dependent on the RBI for financial assistance. Also, because of bill market that is not well-organised, they lack adequate quantity of eligible bills which can be rediscounted to the RBI. Proper organisation of the various components of the money market is a prerequisite.

3. Direct Regulation of Interest Rates: It is expected that change in bank rate will bring a change in all market rates of interest in the same direction. But when the bank rate loses its significance in regulating market rates, the RBI is compelled to directly regulate interest rates on bank deposits and credit. Since 1964 it has been fixing all deposits rates of commercial banks, and since 1960, their lending rates. Deposit rates of co-operative banks came under regulation in 1974 and their lending rates in 1980. The RBI and some other authorities in India have been directly fixing many other interest rates also. Deregulation in interest rate began in 1985 after the recommendation of the Chakravarty Committee Report. In the past 14 years important changes in the deregulation of interest rate are:

(a) The Bank Rate has been activated.

(b) Most of the money market rates have been deregulated.

(c) The ceiling on the call rate was withdrawn with effect from May 1, 1989.

(d) The interest rates on treasury bills, certificates of deposits, commercial paper, and inter-bank participations are allowed to be flexible, variable and market determined.

(e) The deposits and lending rates of commercial banks, RRBs, urban co-operative banks, and other co-operative banks have been freed.

(f) Interest on public deposits accepted by all non-banking companies (financial and non-financial) have been deregulated.

(g) The coupon rate on government dated securities has been made market-related.

(h) The interest rates on convertible, non-convertible and other types of debentures have been made free.

(i) The term lending institutions can now charge interest rates unhindered by State intervention.

4. Cash Reserve Ratio: The CRR refers to the cash which banks have to maintain with the RBI as a certain percentage of their demand and time liabilities. According to the RBI Act 1935, every commercial bank has to keep certain minimum cash reserve with the RBI. Initially, it was 5% against demand deposit and 2% against time deposits. Under the RBI (Amendment Act) 1962, the RBI is empowered to determine CRR for the commercial banks in the range of 3% to 15% for the aggregate demand and time liabilities. CRR has been quite often used to control inflation. An increase in CRR reduces the cash with commercial bank which results in low supply of currency in the market, higher interest rate and low inflation. In the late 1980s there was a rapid growth of liquidity which resulted in higher inflation and thus the CRR was raised to its maximum limit of 15%, which resulted in higher interest rate and liquidity crunch in early 1990s when Prime Lending Rate was raised to as high as 17%.The Narsimhan Committee that submitted its report in November 1991 recommended that high CRR adversely affected bank profitability. Because of this, they charge higher interest rates, eventually reducing the level of investment and increasing the cost of production. The government decided to reduce the CRR in a phased manner. Initially it was reduced by .5% to 14.5% and by April 22, 2000 it was reduced to 8%. As a result, lending rate of banks was reduced to 12% from 17% of 1991.

5. Statutory Liquidity Ratio: Under the Section 24 of the Banking Regulation Act, 1949, commercial banks have to maintain liquid assets in the form of cash, gold and unencumbered approved securities equal to not less than 25% of their total demand and time deposits liabilities. This is known as statutory liquidity reserve requirements. There are three objectives of the SLR:

(a) To restrict expansion of bank credit.

(b) To augment banks' investment in government securities.

(c) To ensure solvency of banks.

The Banking Regulation (Amendment Act, 1962) provides for maintaining a minimum statutory liquidity ratio of 25% by the bank against their net demand and time liabilities. It gradually reached as high as 38.5% in 1990 and remained there till 1992. The objective of such a high SLR is to counter inflationary pressure which touched double digits at that time. As an impact of SLR on inflation and interest rate is same as that of CRR, so it is the combined affect of CRR and SLR that during 1990-92, the economy faced severe liquidity crunch and commercial banks' interest rates were as high as 17% and even more. The RBI increased CRR and SLR for two reasons:

(a) Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources' illiquid form and thus reduces their capacity to grant loans and advances to business and industry. This it leads to an inflationary condition.

(b) A higher liquidity ratio diverts banks from loans and advances to investment in government and other approved securities. It diverts funds from banks to government expenditure.

 After accepting the Narsimhan Committee recommendations, the RBI reduced in 1993-94 to 25% in a phased manner.

6. Direct Credit Allocation and Credit Rationing: The RBI directs the distribution and allocation of credit among different sectors, borrowers, and users through the fixation of specific and direct quantitative credit ceilings or credit targets. The objective was to mobilise the money in the priority sector. This technique was first introduced in November 1973 when the RBI stipulated a ceiling of 10% on the increase in non-food credit by the banking system for the busy season of 1973-74 over the outstanding amount, as at the end of September 1973.

In order to achieve regional or geographical balances in respect of credit disbursal, the RBI has been asking banks to achieve a certain prescribed credit-deposits ratio in respect of their rural and semi-urban branches separately.

7. Selective Credit Control: Selective and qualitative credit control refers to regulations of credit for specific purposes or branches of economic activity. The aim of selective control is to discourage such forms of activity as are considered to be relatively inessential or less desirable. Selective control has been used in Western countries to prevent the demand for durable consumer goods outrunning the supply and generating inflationary pressure.

Under the Banking Regulation Act, 1949, Section 21 empowers the RBI to issue directives to banks regarding their advance. The RBI mainly relies on three techniques of selective credit controls:

(a) The determination of margin requirement for loans against certain securities,

(b) Determination of maximum amount of advances or other financial accommodation,

 (c) Charging of discriminatory interest rates on certain types of advances.

Besides this, the RBI may also give directions to banks in general or even some particular bank as to the purpose for which loans may or may not be given. These directions may relate to:

(a) The purpose for which advances may or may not be made.

(b) The margins to be maintained in respect of secured advances.

(c) The maximum amount of advances to any borrower.

(d) The maximum amount upto which guarantees may be given by the banking company on behalf of any firm, company, etc.

(e) The rate of interest and other terms and conditions for granting advances.

The Credit Authorization Scheme introduced in 1965 is also a kind of selective credit control. Under these schemes the RBI regulates not only the quantum but also the terms on which credit flows to the different large borrowers, so that credit is directed to genuinely productive purposes, that it is in accordance with the needs of the borrower, and there is no undue channelling of credit to any single borrower or group of borrowers.

8. Credit Authorization Scheme: This technique was introduced in November 1965 with a view to regulating the volume and terms of credit supplied to large borrowers. As per this scheme, if the fresh working capital limit (inclusive of bill finance) to be sanctioned to any single party by any one bank or the entire banking system exceeded a stipulated level, the bank would require prior authorisation of the RBI for sanctioning such a loan. This stipulated level or cut-off point was fixed at 1 crore at the beginning. It was subsequently increased to 2 crore in November 1975, 4 crore in 1983 and to  6 crore thereafter.

In the second half of 1988, the RBI withdrew the scheme, and in its place a Credit Monitory Arrangement was introduced. According to the new scheme, credit proposal for 5 crore and above in the case of working capital and 2 crore and above in the case of term loans, had to be submitted to the RBI for post-sanction scrutiny.

9. Fixation of Inventory Norm and Credit Norms: The banks were required to advance credit for working capital to different industries in the light of inventory norms laid down by the Committee of Direction (COD) and its sub-committees. These committees reviewed and revised the norms from time to time in case of different industries and banks had to implement the new norms as and when they were formulated.

10. Moral Suasion: Besides all these, the RBI also circulates letters to the banks regarding the policies and priorities of the RBI about credit control and money supply. It also regularly discusses its policies with the bank. The objective is that the banks should work in the same direction.

11. Liquidity Adjustment Facility (LAF): LAF is a new technique of monitory policy in India. It matches the new requirement which emerges because of newer economic policies. LAF was introduced on June 5, 2000.

LAF introduced variable REPO auctions with same-day settlement. The amount of REPO and reverse REPO are changed on a daily basis to manage liquidity. The maturity of REPOs is between one day to fourteen days. The funds under LAF are expected to be used by the banks for their day-to-day mismatches in liquidity. All transferable Government of India dated securities/TB (except fourteen days TBs) can be traded in REPO and reverse REPO markets.

Interest rates in the REPO market usually emerge out of bids (i.e. auctions are conducted on "uniform price" basis), and the RBI occasionally conducts fixed interest rate (multiple price) auctions to send signals to the market. Under LAF, the RBI, periodically, if necessary even daily, sets/resets its REPO and reverses the REPO rate. It uses 3-day or 4-day REPOs to siphon off liquidity from the market. The REPOs are used for absorbing liquidity at a given rate (floor), and not infusing liquidity through reverse REPOs at a given rate (ceiling).

REPOs: A REPO is purchase of one loan against the sale of another. They involve the sale of securities against cash with a future buy back agreement. Under such an agreement, the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. The transaction is called a REPO when viewed from the perspective of the seller of the securities, and a reverse REPO when viewed from the perspective of the buyer of the securities.

REPOs are part of open market operations undertaken to influence short-term liquidity.

There are two types of REPO auctions: discretionary price auctions and fixed rate auctions, or uniform price auctions. Under the former, bidders submit multiple price-quantity sealed bids. Under the fixed rate REPOs auction, the rates are pre-announced and the bidders are required to submit bids indicating the volume of REPOs.

(a) Monetary policy in India has been formulated in the context of economic planning, whose main objective has been to accelerate the growth process in the country. In a country like India that has followed an expansionary fiscal policy, which leads to inflationary conditions, to manage a monetary policy under these circumstances is like tightrope walk. During the planning period prior to liberalisation, the RBI used higher CRR and SLR rates to control inflation.

(b) After 1992, the demand of the day was development and investment and the development sector was expanding and was and in need of money.

(c) Indian corporations had to compete with companies, which were getting money at 4% to 5% interest rates. Then the RBI had to reduce CRR and SLR to reduce interest rates and to make available money for investment purposes.

Question9. Define the term Foreign Direct Investment (FDI). Describe the determinants and impact of FDI in a developing economy?

Answer: Foreign Direct Investment (FDI) is defined as an investment made by an investor of one country to acquire an asset in another country with the intent to manage that asset (IMF, 1993). The IMF definition of FDI includes as many as following elements: equity, capital, reinvested earning of foreign companies, inter-company debt transactions including short-term and long term loans, overseas commercial borrowings, non-cash acquisition of equity, investment made by foreign venture capital investors, earnings data of indirectly-held FDI enterprises, control premium, non-competition fee and so on. Foreign investment and technology play an important role in the economic development of a nation and have been exploited by a number of developing countries.

Even communist countries like China have welcomed foreign investment to improve their economies. Governments of developing nations are attracting FDI along with the technology and management skills that accompany it. To attract multinational companies, governments are offering tax holidays, import duty exemption, subsidised land and power and many other incentives. FDI are supposed to bring many benefits to the economy. They contribute to GDP, capital formation, balance of payment and generate employment.

Determinants of FDI

Liberalization is not the sole reason to attract FDI. There are many other determinant of FDI, India may lagging there. As at Kearney's FDI Confidence Audit: India, February 2001 said "India gain's in attractiveness because of its market size and its potential is diminished by negative assessment of its regulatory environment." Other important determinants are rule of law, competitive wages, labour skill, infrastructure and well developed financial institutions. Determinants of FDI can be better understood by the Porter's diamond model of international competitiveness, which has identified four major determinants:

1. Factor Conditions (i.e. factor of production)

2. Demand condition

3. Related and supporting industries

4. Firm strategy, structure a rivalry

Factor Condition

A nation may have comparative advantage over others because of certain factors of production. Organizations will shift their production base to those countries where the critical factors of production of there industry specific is economical. India's human resources are of proven quantity as well as more economical in comparison to the US and Europe leading many countries to establish their manufacturing units here. India has the largest pool of English speaking people in Asia causing MNCs to shift their BPO, to India. India has also proven its competitive edge in R&D and Software Development, it is the reason that almost all the major software companies of the world have invested in India in software development and more and more companies like GE, NOKIA are establishing there Research center in India. But India doesn't have proved its advantage in basic research. In basic research it is the USA who has established its reputation, hence most of companies established there basic research set up in USA.

Most of the Software companies established their Application software research center in USA and Customized Research Centre in India. Italy has established its comparative advantage in terms of Industrial Design the result is that job of industrial design goes to Italy from all over world.

Demand Condition

This is also a significant factor in deciding the level of FDI. Higher the demand higher will the FDI. China and India are hot destinations of FDI because of their aggregate demand. In terms of PPP they are in top five countries of the world. Even the companies like P&G who don't believe in the customization of product for low income group is investing in R&D for the sake of customization of product for low income group. Most of MNCs whether it is Electronics, FMCG, Automobiles, White Goods etc. are investing in India and China and are investing in R&D in developing product for the local people only because huge demand in these countries specially in the low income and middle income group.

Related and Supported Industry

MNCs prefer to go to the destination where there is well developed supported industry (ancillaries units) for the specific industry. Infrastructure plays a critical role in a selection of site. It is well said that take care of roads and electricity investment will take care of itself. Well-developed ancillaries units facilitate the FDI. As now organization don't have to invest in ancillaries. Not only ancillaries but other supported industry as the availability of well-developed financial market, distribution network etc. also plays role.

Rivalry and Firm Strategy

The Competitive environment in a nation also plays a critical role. Organizations like to invest in countries where there is no stiff competition. Level of rivalry also decides the FDI. If all the above mentioned reasons are favorable to attract FDI even after that ultimately it is the Firms strategy which decides that whether it will invest in a most attractive destination or not. Few organizations are very aggressive in grabbing overseas investment opportunity on the other hand few are reluctant and follow a policy of wait and watch.

Impact of FDI

FDI has a wide spread impact on a country not only economically but also socially. Foreign investment is always accompanied by superior technology and transfer of technical knows how. It has an impact on local industry as it provides them both opportunity and threat. It gives consumers a wide choice that too at reasonable price. FDI increases not only GDP but also exports and therefore results in higher per capita income and large forex reserves.

Impact on Local Industry

McKinsey studied the impact of FDI on local industry and it found that FDI unambiguously helped the receiving economy. It raised productivity and output in the sector involved thereby raising national income, while lowering prices and improving the quality and selection of services and products and consumers. FDI nearly always generated positive spill over for the rest of economy. It generated big opportunities for local manufacturers as they become OEM to them. Not only an opportunity for manufacturing, FDI also give technical know-how to OEM which increases the level of quality. Today's Coca-Cola' bottling plant are far better, infact of international quality then those of Parle which Coca-Cola acquired.

Simultaneously it gives impetus to service industry. FDI has a big role in the development of the BPO industry in India. The entire framework of BPO industry in India is an outcome of FDI. And today India is the most preferred nation for BPO in the world.

Impact on Employment

FDI in India has contributed in the creation of a more than $10–billion-a-year software and outsourcing industry which employees 5,00,000 people directly. Projections suggest that it will employ 2,000,000 people by 2008. These are the estimates of only one industry. FDI has created jobs in every field manufacturing, telecommunication, advertising, media, and above all services.

Impact on Consumer

Perhaps biggest beneficiary of the FDI is the Indian consumer. By the 1980 we were driving Ambassador or Premier Padmini and after the investment by Suzuki 8 new models were launched. Now we have access to many international brands. Prices have been steadily decreasing in all the segments because of FDI, like electronics, computers, ACs, automobiles, and even soft drinks, two wheelers, etc. Not only this, today consumer has wide choice as these organizations are launching new variants with improved performance every day.

Besides this there is a are macro economic impact as contribution to GDP, though it may be argued that there is not any significant growth after liberalization as compared to previous decade. But FDI has contributed a lot in transforming whole economy. Earlier we were producing substandard goods and driving cars of 1960s and today gradually we are becoming the exporting hub of telecommunication tools, software and automobile. It had not only improved Balance of Payment but also fetched Foreign Exchange for the nation because of this Forex reserve of the nation is very high. Opponents of FDI argue that it will cannibalize local industry, to a extent it is true also which may be true. But it is not the MNCs, which threaten them, in fact it is their inefficiency, which is their biggest threat.

Question10.What do you mean by the term Fiscal Policy? Describe its main objectives.

Answer: The fiscal policy is concerned with the raising of government revenue and incurring of government expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue.Fiscal policy has to decide on the size and pattern of flow of expenditure from the government to the economy and from the economy back to the government. In broad term fiscal policy refers to "that segment of national economic policy which is primarily concerned with the receipts and expenditure of central government." In other words, fiscal policy refers to the policy of the government with regard to taxation, public expenditure and public borrowings.

The importance of fiscal policy is high in underdeveloped countries. The state has to play active and important role. In a democratic society direct methods are not approved. So, the government has to depend on indirect methods of regulations. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development.

In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy.

Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:

• Aggregate demand and the level of economic activity;
• The pattern of resource allocation;
• The distribution of income.

Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary, and contractionary:

• A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

• An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending, a fall in taxation revenue, or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.

• A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue, reduced government spending, or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.

The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s, partly as a response to the Great Depression.

Methods of funding

Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits.

This expenditure can be funded in a number of different ways:

• Taxation
• Seigniorage, the benefit from printing money
• Borrowing money from the population, resulting in a fiscal deficit
• Consumption of fiscal reserves.
• Sale of fixed assets (e.g., land).

Funding the deficit

A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edged securities. These pay interest, either for a fixed period or indefinitely. If the interest and capital repayments are too large, a nation may default on its debts, usually to foreign creditors.

Consuming the surplus

A fiscal surplus is often saved for future use, and may be invested in local (same currency) financial instruments, until needed. When income from taxation or other sources falls, as during an economic slump, reserves allow spending to continue at the same rate, without incurring additional debt.

Economic effects of fiscal policy

Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that adjusting government spending and tax rates are the best ways to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working towards full employment. The government can implement these deficit-spending policies to stimulate trade due to its size and prestige. In theory, these deficits would be paid for by an expanded economy during the boom that would follow; this was the reasoning behind the New Deal.

Governments can use budget surplus to do two things: to slow the pace of strong economic growth, and to stabilize prices when inflation is too high. Keynesian theory posits that removing funds from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices.

Some classical and neoclassical economists argue that fiscal policy can have no stimulus effect; this is known as the Treasury View, which Keynesian economics rejects. The Treasury View refers to the theoretical positions of classical economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same general argument has been repeated by neoclassical economists up to the present. From their point of view, when government runs a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing, or the printing of new money. When governments fund a deficit with the release of government bonds, interest rates can increase across the market. This is because government borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand (AD), contrary to the objective of a budget deficit. This concept is called crowding out; it is a "sister" of monetary policy.

In the classical view, fiscal policy also decreases net exports, which has a mitigating effect on national output and income. When government borrowing increases interest rates it attracts foreign capital from foreign investors in the form of hot money. This is because, all other things being equal, the bonds issued from a country executing expansionary fiscal policy now offer a higher rate of return. In other words, companies wanting to finance projects must compete with their government for capital so they offer higher rates of return. To purchase bonds originating from a certain country, foreign investors must obtain that country's currency. Therefore, when foreign capital flows into the country undergoing fiscal expansion, demand for that country's currency increases. The increased demand causes that country's currency to appreciate. Once the currency appreciates, goods originating from that country now cost more to foreigners than they did before and foreign goods now cost less than they did before. Consequently, exports decrease and imports increase.

Other possible problems with fiscal stimulus include the time lag between the implementation of the policy and detectable effects in the economy, and inflationary effects driven by increased demand. In theory, fiscal stimulus does not cause inflation when it uses resources that would have otherwise been idle. For instance, if a fiscal stimulus employs a worker who otherwise would have been unemployed, there is no inflationary effect; however, if the stimulus employs a worker who otherwise would have had a job, the stimulus is increasing demand while labor supply remains fixed, leading to inflation.

The fiscal policy is designed to achieve certain objectives as follows:

1. Development by effective Mobilisation of Resources

The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources.

The financial resources can be mobilised by :

1. Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation.
2. Public Savings: The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises.
3. Private Savings: Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

2. Efficient allocation of Financial Resources

The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc.

But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable.

3. Reduction in inequalities of Income and Wealth

Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.

4. Price Stability and Control of Inflation

One of the main objectives of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc.

5. Employment Generation

The government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generate more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self-employment scheme is taken to provide employment to technically qualified persons in the urban areas.

6. Balanced Regional Development

Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc.

7. Reducing the Deficit in the Balance of Payment

Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc.

The foreign exchange is also conserved by providing fiscal benefits to import substitute industries, imposing customs duties on imports, etc.

The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export.

8. Capital Formation

The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending.

9. Increasing National Income

The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country.

10. Development of Infrastructure

Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost.

11. Foreign Exchange Earnings

Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.

Conclusion
The objectives of fiscal policy such as economic development, price stability, social justice, etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing are effectively used. Though there are gaps in India's fiscal policy, there is also an urgent need for making India's fiscal policy a rationalised and growth oriented one. The success of fiscal policy depends upon taking timely measures and their effective administration during implementation.

Questions from Unit III

Question1. Define the political environment. What are the aspects of political environment which affect business?

Answer: Political Environment affects different business units extensively, as the business decisions are based on government policies and they have to change their policies too as per the government decisions. Political environment refers to three political institutions viz. legislature, executive and the judiciary in shaping, directing, developing and controlling business activities. The political environment of a country is influenced by the political organizations such as philosophy of political parties, ideology of government or party in power, nature and extent of bureaucracy influence of primary groups. The political environment of the country influences the business to a great extent. The political environment includes the political system, the government policies and their attitude towards the business community. All these aspects have a bearing on the strategies adopted by the business firms. The stability of the government also influences business and related activities to a great extent. It sends a signal of strength, confidence to various interest groups and investors. While hung parliament means an unstable and coalition government which signals poor decision making. For instance, business is subject to political risks if a war erupts in any country where we do business. Likewise, changes in government policies may either affect us positively or negatively. The prevailing political environment in any country directly affects the economic environment or performance. Take for example; Tata had to shift its plant from West Bengal to Gujarat because of this political environment. Reliance could not operate its store named ‘Reliance Fresh’ in UP in BSP government due to policies of government which were not supporting it. Another example can be quoted here of approval of FDI in retailing by UPA- II government, although it is yet to be decided to implement it. Therefore a business owner need to keep himself aware of the political climate in which he operates. Political changes can also create great opportunities for us as a business person and such chances can come our way if we keep our self knowledgeable about the political climate in which we do business. For example, When Samajwadi Party won the elections in UP and when it formed the government, it announced free distribution of laptop and tablets to the students which is a good business opportunity for any manufacturer of laptops and tablets.  This awareness enables us to run our business from an informed point of view so that we are not subjected to political risks. Now Narendra Modi Government has initiated MAKE in India to attract the FDI and MNC to manufacture in our country, he also decided demonitisation, GST and many new policies like digitalisation, Ujjawala scheme, STARTUP INDIA, SKILLED INDIA, STANDUP INDIA and now Mr. Modi is emphasizing on NEW INDIA concept, this all will affect the business scenario of our nation in coming years.

Some of the aspects of the political environment which affect our business are described as below:

1.      Stability           of        Government:

It's important to know how stable the national government is and how stable it's likely to be in future depending on prevailing political circumstances. Political instability makes it very difficult to do business. An abrupt change in a political regime may make businessmen lose their property and hard earned money.  The present coalition government of UPA –II in our country could not take decisions independently as it’s not a stable government.

2.      International     relations:

How does government relate with other governments? Does home government maintain good relations with other foreign governments? For instance, for people who run online home businesses, there are countries where it's pretty difficult for one to set up an online payment system just because services provided by, say, PayPal or Click bank are not available in those countries. This makes it difficult to sell products or services online. A good political environment makes it possible to establish good relations with other foreign governments, which in turn creates directly or indirectly an attractive environment for new investors.

3.      Government    bureaucracy:

The political environment in which we do business may be slow to facilitate opening or conducting businesses in the country. Long processes may be required for investors or entrepreneurs, whereby they are subjected to fill in so many forms that actually discourage some of the potential entrepreneurs.

Question2. Discuss the three institutions or pillars of democracy.

Answer: Effective and efficient governance is the expectation of every civilized society. This role is performed by the government which is one of the four essential elements of the state. No state is possible without a government which not only provides security to the people. But also looks after their basic needs and ensures their socio-economic development. Thus, we can say that a government is a set of institutions that exercises control through legal devices and imposes penalties on those who break the law, for this purpose, social acceptance of the power of the government to control people must be accepted by the people voluntarily and recognized by them. A government normally functions by dividing its functions between its organs, with each organ performing some specific functions. It primarily performs three main functions i.e. making of laws, enforcing the laws and adjudicating disputes.

There are three institutions of a government, the legislature which makes the laws, the executive which implements the laws and the judiciary which interprets the laws and decides the disputes. These institutions of the government are so well structured that they can perform their functions adequately. This system of dividing the powers in the three organs of the government is known as ‘separation of the powers’. This tradition is very much familiar in the US. In our country we also have this system of separation of powers to enjoy the democracy. The three institutions of the government are independent of one other. The legislature should comprise of representative of people of India, since they perform most important function of making laws by which the people of our country are to be governed. Therefore wide representation of people should be ensured to get better results. The executive implement the laws, therefore it should be ensured that the executive should comprise of the efficient and competent people.  The third institution, the judiciary interprets the laws and decides the disputes and cases according to the laws made by the legislature and implemented by the executive.

1. Legislation:

Legislature in the field of comparative politics is technically known as the rule making department. Most commonly, legislature is known by the name of parliament.  A legislature is a kind of deliberative assembly with the power to pass, amend, and repeal laws. The law created by a legislature is called legislation or statutory law. In addition to enacting laws, legislatures usually have exclusive authority to raise or lower taxes and adopt the budget and other money bills. Legislatures are known by many names, the most common being parliament and congress, although these terms also have more specific meanings.

In parliamentary systems of government, the legislature is formally supreme and appoints a member from its house as the prime minister which acts as the executive. In a presidential system, according to the separation of powers doctrine, the legislature is considered an independent and coequal branch of government along with both the judiciary and the executive.

The Constitution of India which came into force on 26 January 1950 provides for a bicameral Parliament consisting of the President and the two Houses known as the Council of States (Rajya Sabha) and the House of the People (Lok Sabha).

The President

The President of the Republic is elected by an electoral college consisting of the elected members of both Houses of Parliament and the elected members of the Legislative Assemblies (popular Houses) of the States.  Though the President of India is a constituent part of Parliament, he does not sit or participate in the discussions in either of the two Houses.  There are certain constitutional functions which he has to perform with respect to Parliament.  The President summons and prorogues the two Houses of Parliament from time to time.  While the Rajya Sabha is a continuing body, the power to dissolve the Lok Sabha vests in the President.  His assent is essential for a Bill passed by both Houses of Parliament.  When the Parliament is not in Session and he is satisfied that circumstances exist which render it necessary for him to take immediate action, the President can promulgate Ordinances having the same force and effect as laws passed by Parliament. Ram Nath Kovind is the current President of India.(Since 25.07.2017). Earlier to him, Mr. Pranab Mukherjee was the President of India.

The Two Houses of Parliament: 

Council of States (Rajya Sabha):

The Rajya Sabha is to consist of not more than 250 members.  Of these, 12 are nominated by the President for their special knowledge or practical experience in such matters as literature, science, art and social service.  The remaining seats are allocated to the various States and Union territories, roughly in proportion to their population; each State is, however, represented by at least one member. The total number of seats in the Rajya Sabha at present is 245, including 12 members nominated by the President.

The representatives of each State in Rajya Sabha are elected by the elected members of the Legislative Assembly of the State in accordance with the system of proportional representation by means of single transferable vote. The representatives of the Union territories are chosen in such manner as Parliament may by law prescribe.  The minimum age for membership of the House is 30 years. The Rajya Sabha is not subject to dissolution, but as nearly as possible, one-third of its members retire as soon as may be on the expiration of every second year in accordance with the provisions made in that behalf by Parliament by law.  The normal term of office of a member of Rajya Sabha is six years from the date of election or nomination. The Chairman of the Rajyasabha is Mr. Venkaiah Naidu who is also the Vice President of the India.

House of the People (Lok Sabha):

The Lok Sabha, as the name itself signifies, is composed of representatives of the people chosen by direct election on the basis of adult suffrage.  The maximum strength of the House envisaged by the Constitution is 552 – upto 530 members to represent the States, upto 20 members to represent the Union territories and not more than two members of the Anglo-Indian Community to be nominated by the President if, in his opinion, that community is not adequately represented in the House.  The total elective membership of the House is distributed among the States in such a way that the ratio between the number of seats allotted to each State and the population of the State is, so far as practicable, the same for all States.  The qualifying age for membership of the Lok Sabha is 25 years. The Lok Sabha at present consists of 545 members.  

 The Lok Sabha, unless sooner dissolved, continues for five years from the date appointed for its first meeting and the expiration of the period of five years operates as dissolution of the House. However, while a Proclamation of Emergency is in operation, this period may be extended by Parliament by law for a period not exceeding one year at a time and not exceeding in any case beyond a period of six months after the Proclamation has ceased to operate.

The Constitution of India came into force on January 26, 1950. The first general elections under the new Constitution were held during the year 1951-52 and the first elected Parliament came into existence in April, 1952, the Second Lok Sabha in April, 1957, the Third Lok Sabha in April, 1962, the Fourth Lok Sabha in March, 1967, the Fifth Lok Sabha in March, 1971, the Sixth Lok Sabha in March, 1977, the Seventh Lok Sabha in January, 1980, the Eighth Lok Sabha in December, 1984, the Ninth Lok Sabha in December, 1989, the Tenth Lok Sabha in June, 1991, the Eleventh Lok Sabha in May, 1996, the Twelfth Lok Sabha in March, 1998, Thirteenth Lok Sabha in October, 1999, Fourteenth Lok Sabha in May, 2004 and Fifteenth Lok Sabha in April, 2009. Sixteenth Lok Sabha in May 2014.

The Presiding Officers

 Each House of Parliament has its own Presiding Officers.  In the Lok Sabha, both the Presiding Officers, i.e. the Speaker and the Deputy Speaker are elected from amongst its members.  In the Rajya Sabha, the Vice-President of India is the ex officio Chairman.  He is elected by the members of an electoral college consisting of the members of both the Houses of Parliament in accordance with the system of proportional representation by means of a single transferable vote.  The Deputy Chairman of the Rajya Sabha is, however, elected by the members of the Rajya Sabha from amongst themselves. Sumitra mahajan is the Speaker of the Loksabha and M.Thambidurai is the Deputy Speaker of Loksabha at present. Mr. Venkaiah Naidu, the Vice President of India is the Chairman of Rajyasabha while P.J.Kurian is the Deputy Vice Chairman of the Rajyasabha at present.

Leader of the House

Each House of Parliament has a Leader.  The Prime Minister, who is the Leader of the majority party in the Lok Sabha, functions as the Leader of the House in the Lok Sabha except when he is not a member of the Lok Sabha. In the case, when the Prime Minister is not a member of the Lok Sabha, he appoints/nominates a Minister, who is a member of the Lok Sabha,  to be the leader of the House in the Lok Sabha. The senior-most Minister, who is a member of the Rajya Sabha, is appointed by the Prime Minister as the Leader of the House in the Rajya Sabha.

Leader of the Opposition

Each House of Parliament has a Leader of the Opposition.  The Salary and Allowances of Leaders of Opposition in Parliament Act, 1977 defines the term ‘Leader of the Opposition’ as that member of the Rajya Sabha or the Lok Sabha who, for the time being, is the Leader of that House of the Party in Opposition to the Government having the greatest numerical strength and recognized, as such, by the Chairman of the Rajya Sabha or the Speaker of the Lok Sabha.

Sessions:

The period during which the House meets to conduct its business is called a session. The Constitution empowers the President to summon each House at such intervals that there should not be more than 6 month's gap between the two sessions. Hence the Parliament must meet at least twice a year. In India, normally, three Sessions of Parliament are held in a year: (i) Budget Session (February-May); (ii) Monsoon Session (July-August); and (iii) Winter Session (November-December).

2. Execution:

The execution is the implementing arm of the government. The execution formulates and executes the various policies of the government. The dictionary meaning of the word ‘execution’ is the power to put important decisions into action i.e. to execute or to implement. According to J.W.Garner, the executive institution embraces all the functionaries and agencies of the state which have been formulated by the government as per its will and expressed in terms of laws, thus it comprehends entire governmental organization. Thus tax collectors, police, inspectors, supervisors, army officers, district and state officers are a part of the executive organization.

Though the term ‘executive’ is taken into broad as well as narrow terms but in the politics, its narrow sense is mostly applied. It is the executive head and his principal colleagues who run the machinery of the government, formulate national policies and check its proper implementation for the welfare of the people and the nation both.

The permanent executive i.e. the bureaucracy takes care of the decisions of cabinet. It ensures the implementation of these laws and cabinet decisions in the same spirit. They are involved at every stage of the decision-making process and maintain the continuity in administration. Generally the political executives depend upon the bureaucrats because of their technical expertise and knowledge.

As per the book titled, ‘The Function of the Executives’, written by Chester Barnard, the functions of executives can be narrated as determination of the objectives, the initiation of policy, the manipulation of means, controls over the instruments of action and stimulation of action, and stimulation of coordinated action. The role of the government is increasing these days. In traditional sense, the role of any government has been to maintain law and order, provide social security, exercise control over public activities and protect the national from external aggression. But, in course of time, emphasis on planned economic development and various other circumstances such as increasing gap between rich and poor, monopoly like situation created by private sector, rise in inflation and concentration of national wealth in the hands of few, prompted the government to play an active role in promoting and regulating the business activity consequently. Thus, government has assumed four important roles in an economy as explained under:

• Regulatory Role.
• Promotional Role.
• Entrepreneurial Role.
• Planning Role.

3.Judiciary:

Judiciary, also known as the rule-adjudication department of the government, in quite simple terms, may be defined as the third organ of government concerned with the job of doing justice. It interprets law and awards punishments for the violation of laws. The primary objective of any political system is to protect the rights of the individual, and this work is done by the judicial organ of the government.

The functions of the judiciary differ from one political system to another, but generally they are as follows:

• The first and the foremost function of the courts is the administration of justice. The courts hear and decide cases of all civil, criminal and constitutional nature. In countries having written constitutions, the courts are also entrusted with the power of interpreting the constitution. They act as the guardian of the constitution.
• Secondly, though legislation is the work of the legislatures, the courts also legislate in a different way. Where a law is silent, or ambiguous, the courts decide what a law is and how it should prevail.
• Thirdly, the courts in a federal system of government also play the role of an independent and impartial umpire between the central and regional governments.
• Fourthly, the courts are important agencies of legitimizing the outputs of government. It is expected that the courts should keep themselves aware of the growing urges and aspirations of the people and should interpret the meaning of law dynamically in the light of obtaining situation. They should see that any law or executive action does not infringe upon the various rights of the people.
• Fifthly, the courts should also stabilize and support the existing political system. The behaviour of the courts must not be obstructive or destructive so that the smooth running o f the political organization becomes a problem.
• The most controversial function of the courts lies in their power of judicial review under which they have the capacity to examine the validity of a legislative or administrative measure, and then declare it, either in part of full, 'intra vires or ultra vires of the constitution.' This power had its origin in the United States and also has its best form there. Its second best example can be found in India. Its weaker instances can be found in other countries also like Italy, Australia and South Africa.

Question3. Explain Competition Act. What are the salient features of Competition Act?

The Competition Act, 2002 was enacted by the Parliament of India and governs Indian competition law. It replaced the archaic The Monopolies and Restrictive Trade Practices Act, 1969. Under this legislation, the Competition Commission of India was established to prevent activities that have an adverse effect on competition in India. This act extends to whole of India except the State of Jammu and Kashmir.

It is a tool to implement and enforce competition policy and to prevent and punish anti-competitive business practices by firms and unnecessary Government interference in the market. Competition law is equally applicable on written as well as oral agreement, arrangements between the enterprises or persons.

The Competition Act, 2002 was amended by the Competition (Amendment) Act, 2007 and again by the Competition (Amendment) Act, 2009.

This is an act to establish a commission, protect the interest of the consumers and ensure freedom of trade in markets in India-

·         To prohibit the agreements or practices that restricts free trading and also the competition between two business entities,

·         To ban the abusive situation of the market monopoly,

·         To provide the opportunity to the entrepreneur for the competition in the market,

·         To have the international support and enforcement network across the world,

·         To prevent from anti-competition practices and to promote a fair and healthy competition in the market.

SALIENT FEATURES

Anti-Competitive Agreements

Enterprises, persons or associations of enterprises or persons, including cartels, shall not enter into agreements in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an "appreciable adverse impact" on competition in India. Such agreements would consequently be considered void. Agreements which would be considered to have an appreciable adverse impact would be those agreements which-

·         Directly or indirectly determine sale or purchase prices,

·         Limit or control production, supply, markets, technical development, investment or provision of services,

·         Share the market or source of production or provision of services by allocation of inter alia geographical area of market, nature of goods or number of customers or any other similar way,

·         Directly or indirectly result in bid rigging or collusive bidding.

Types of agreement

Competition law identifies two type of agreements. Horizontal agreements which are among the enterprises who are or may compete within same business. Second is the vertical agreement which are among independent enterprise. Horizontal agreement is presumed to be illegal agreement but rule of reasons would be applicable for vertical agreements.

Abuse of dominant position

There shall be an abuse of dominant position if an enterprise imposes directly or indirectly unfair or discriminatory conditions in purchase or sale of goods or services or restricts production or technical development or create hindrance in entry of new operators to the prejudice of consumers. The provisions relating to abuse of dominant position require determination of dominance in the relevant market.

Combinations

The Act is designed to regulate the operation and activities of combinations, a term, which contemplates acquisition, mergers or amalgamations. Combination that exceeds the threshold limits specified in the Act in terms of assets or turnover, which causes or is likely to cause adverse impact on competition within the relevant market in India, can be scrutinized by the Commission.

Competition Commission of India

Competition Commission of India is a body corporate and independent entity possessing a common seal with the power to enter into contracts and to sue in its name. It is to consist of a chairperson, who is to be assisted by a minimum of two, and a maximum of ten, other members.

It is the duty of the Commission to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade in the markets of India. The Commission is also required to give opinion on competition issues on a reference received from a statutory authority established under any law and to undertake competition advocacy, create public awareness and impart training on competition issues.

Commission has the power to inquire into unfair agreements or abuse of dominant position or combinations taking place outside India but having adverse effect on competition in India, if any of the circumstances exists:

·         An agreement has been executed outside India

·         Any contracting party resides outside India

·         Any enterprise abusing dominant position is outside India

·         A combination has been established outside India

·         A party to a combination is located abroad.

·         Any other matter or practice or action arising out of such agreement or dominant position or combination is outside India.

To deal with cross border issues, Commission is empowered to enter into any Memorandum of Understanding or arrangement with any foreign agency of any foreign country with the prior approval of Central Government.

Review of orders of Commission

Any person aggrieved by an order of the Commission can apply to the Commission for review of its order within thirty days from the date of the order. Commission may entertain a review application after the expiry of thirty days, if it is satisfied that the applicant was prevented by sufficient cause from preferring the application in time. No order shall be modified or set aside without giving an opportunity of being heard to the person in whose favour the order is given and the Director General where he was a party to the proceedings.

Appeal

Any person aggrieved by any decision or order of the Commission may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Commission. No appeal shall lie against any decision or order of the Commission made with the consent of the parties.

Penalty

If any person fails to comply with the orders or directions of the Commission shall be punishable with fine which may extend to ₹ 1 lakh for each day during which such non compliance occurs, subject to a maximum of ₹ 10 crore.

If any person does not comply with the orders or directions issued, or fails to pay the fine imposed under this section, he shall be punishable with imprisonment for a term which will extend to three years, or with fine which may extend to ₹ 25 crores or with both.

Section 44 provides that if any person, being a party to a combination makes a statement which is false in any material particular or knowing it to be false or omits to state any material particular knowing it to be material, such person shall be liable to a penalty which shall not be less than ₹ 50 lakhs but which may extend to ₹ 1 crore.

Question4. Writea note on FEMA Act and its main provisions.

Answer: A system of exchange control was first time introduced through a series of rules under the Defense of India Act, 1939 on temporary basis. The foreign crises persisted for a long time and finally it got enacted in the statute under the title “Foreign Exchange Regulation Act, 1947”.  Subsequently, this act was replaced by the Foreign Exchange Regulation Act, 1973(FERA) which was came into force with effect from January 1, 1974 and regulating foreign exchange for more than 26 years under this Act.

In 1991 Government of India initiated the policy of economic liberalization. After this foreign investment in many sectors were permitted in India. In 1997, Tarapore committee  on Capital Account Convertibility, constituted by the Reserve Bank of India, recommended change in the legislative framework governing foreign exchange transactions. Accordingly, the Foreign Exchange  Regulation Act, 1973 was repealed and replaced by the new Foreign Exchange Management Act, 1999 (FEMA) with effect from June 01, 2000. Under FEMA the emphasis was on management of foreign exchange. Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India. It has brought a new management regime of foreign exchange consistent with the emerging frame work of the World Trade Organisation (WTO).   

APPLICABILITY OF FEMA

The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA extends to the whole of India. The Act also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention committed there under outside India by any person to whom this Act is applies.

OVERALL STRUCTURE

The overall structure of Foreign Exchange Management Act, 1999 is covered by legislations, rules and regulations. These legislations, rules and regulations relating to Foreign Exchange Management Act, 1999, can be divided in to the followings:

1. FEMA contains 7 chapters divided into 49 sections (Supreme Legislation)

2. 5 sets of Rules made by Ministry under section 46 of FEMA. (Delegated legislations)

3. 23 sets of Regulations made by RBI under section 47 of FEMA. (Subordinate Legislations)

4. Master Circular issued by Reserve Bank of India every year.

5. Foreign Direct  Investment (FDI) policy issued by Department of Industrial Policy and Promotion (DIPP) time to time.

6. Notifications and Circulars issued by Reserve Bank of India.

7. Enforcement Directorate.

FEMA contains 7 Chapters divided into 49 sections of which 12 sections cover operational part and the rest 37 sections deal with contraventions, penalties, adjudication, appeals, enforcement directions, etc.  FEMA makes provisions for dealings in foreign exchanges. Broadly, all current account transactions are free. However, Central Government can impose reasonable restrictions by issuing rules. The capital account transactions will be regulated by RBI/Central Government for which necessary circulars/notifications will have to be issued under FEMA.

All chapters of FEMA divided into 49 sections. Besides the FEMA, there are 5 Rules and 23 regulations under the Act which help in implementation of the Act are classified here: 

Chapter I: Preliminary (Section 1 &2)

Chapter II: Regulation and Managements of Foreign Exchange (Section 3 -9)

Chapter III: Authorised Person (Section 10-12)

Chapter IV: Contraventions and Penalties (Section 13-15)

Chapter V: Adjudication and Appeal (Section 16-35)

Chapter VI: Directorate of Enforcement (Section 36-38)

Chapter VII: Miscellaneous (Section 39-49)

The Rules made by Central Government under section 46 of FEMA are:

1. Foreign Exchange Management (Encashment of Draft, Cheque, Instruments and   Payment of Interest) Rules, 2000

 2. Foreign Exchange Management (Authentication of Documents) Rules, 2000

 3. Foreign Exchange Management (Current Account Transaction) Rules, 2000

 4. Foreign Exchange Management (Adjudications Proceedings and Appeal) Rules, 2000

 5. Foreign Exchange Management (Compounding Proceedings) Rules, 2000

The Regulations made by Reserve Bank of India under section 47 of FEMA are: 

1. Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2000

 2. Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000

 3. Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000

 4. Foreign Exchange Management (Deposit) Regulations, 2000

 5. Foreign Exchange Management (Export and Import of Currency) Regulations, 2000

 6. Foreign Exchange Management (Guarantees) Regulations, 2000

 7. Foreign Exchange Management (Issue of Security in India by a Branch, Office or Agency of a Person Resident Outside India) Regulations, 2000

8. Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000

 9. Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000

 10. Foreign Exchange Management (Export of Goods and Service) Regulations, 2000

 11. Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000

 12. Foreign Exchange Management (Insurance) Regulations, 2000

 13. Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations, 2000

 14. Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2000

 15. Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000

 16. Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000

 17. Foreign Exchange Management (Realization, Repatriation and Surrender of Foreign Currency) Regulations, 2000

 18. Foreign Exchange Management (Remittance of Assets) Regulations, 2000

 19. Foreign Exchange Management (Transfer or Issue of Security by a Person resident Outside India) Regulations, 2000

 20. Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000

 21. Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004

 22. Foreign Exchange Management (Offshore Banking Unit) Regulations, 2002

 23. Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs) ) Regulations, 2003.

AUTHORITIES AND ENFORCEMENT MACHINARY 

FEMA in itself is not an independent and isolated law. The provisions of FEMA are spread at different place and so there are regulatory bodies. Reserve Bank of India makes Regulations for FEMA and the Rules are made by Central Government. Authorities governing the enforcement of FEMA are: 

1. Foreign Exchange Department of Reserve Bank of India.

2. Directorate of Enforcement, Department of Revenue, Ministry of Finance.

3. Capital Market Division, Department of Economic Affairs, Ministry of Finance.

4. Foreign Trade Division, Department of Economic Affairs, Ministry of Finance.

Machinery responsible for various aspect of FEMA is:

1. Enforcement Directorate: To investigate provisions of the Act, the Central Government, have established the Directorate of Enforcement with Directors and other officers as officers of the Enforcement.

2. Adjudicating Authorities: The Adjudicating Authorities will issue a notice to the person who has contravened the provisions of the Foreign Exchange Management Act, Rules, Regulations, Notifications or any directions issued by the RBI.

3. Special Director (Appeals): Any person aggrieved by an order made by the Adjudicating Authority, being an Assistant Director of Enforcement or a Deputy Director of Enforcement can prefer an appeal to the Special Director (Appeals.)

4. Appellate Tribunal: Any person aggrieved by an order made by the adjudicating Authority, or the Special Director (Appeals) can prefer an appeal to the Appellate Tribunal.

FEMA envisages that RBI shall have controlling role in management of foreign exchange. Since RBI cannot directly handle foreign exchange transactions, it authorizes “Authorised Persons” to deal in foreign exchange as per direction issued by RBI.RBI is empowered to issue direction to such “Authorised Persons”. These Directions are issued through AP (DIR) Circulars. (AP stands for Authorised Person and DIR stand for Directions).

 MAIN PROVISIONS OF THE ACT

• It permits only authorised person to deal in foreign exchange or foreign security. Such an authorised person, under the Act, means authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised by Reserve Bank. The Act thus prohibits any person who:- 
• Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;
• Make any payment to or for the credit of any person resident outside India in any manner;
• Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;
• Enter into any financial transaction in India as consideration for or in association with acquisition or creation
  or transfer of a right to acquire, any asset outside India by any person;
• is resident in India which acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India. 
• The Act regulates two types of foreign exchange transactions, namely 'Capital Account Transactions' and 'Current Account Transactions'. 

1. According to the Act, 'Capital account transaction' means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes the following transactions referred in the Act:-
• Transfer or issue of any foreign security by a person resident in India;
• Transfer or issue of any security by a person resident outside India;
• Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
• Any borrowing or lending in rupees in whatever form or by whatever name called;
• Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
• Deposits between persons resident in India and persons resident outside India;
• Export, import or holding of currency or currency notes;
• Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
• Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
• Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred-

(i)                 By a person resident in India and owed to a person resident outside India; or

(ii)               By a person resident outside India. 

2. It also defines the term 'current account transaction' as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes:- (i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business; (ii) payments due as interest on loans and as net income from investments; (iii) remittances for living expenses of parents, spouse and children residing abroad; and (iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children.
• The Act has empowered the Reserve Bank of India (RBI) to specify, in consultation with the Central Government, the permissible capital account transactions and the limits upto which foreign exchange may be drawn for such transactions. But it shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.
• Any person may sell or draw foreign exchange if such sale or drawal is a current account transaction. Under the Act, Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.
• Every exporter of goods shall:- (i) furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India; (ii) furnish to the Reserve Bank such other information as may be required by it for the purpose of ensuring the realisation of the export proceeds by such exporter.
• The Reserve Bank may, at any time, cause an inspection to be made, by any officer specially authorised in writing by it in this behalf, of the business of any authorised person as may appear to it to be necessary or expedient for the purpose of:- (i) verifying the correctness of any statement, information or particulars furnished to the Reserve Bank; (ii) obtaining any information or particulars which such authorised person has failed to furnish on being called upon to do so; (iii) securing compliance with the provisions of this Act or of any rules, regulations, directions or orders made there under.

Question5. What are Capital Account and Current Account Transactions? Discuss the role of FEMA in regulating Capital and Current Account Transactions.

Answer: Capital Account Transaction: Section 2(e) states that 'Capital Account Transaction' means:

1. A transaction that alters the assets or liabilities, including contingent liabilities outside India of a person residing in India.

2. A transaction that alters the assets or liabilities in India of persons residing outside India.

3. Transfer or issue of any foreign security by a person residing in India.

4. Transfer or issue of any security by a person residing outside India.

5. Transfer or issue of any security or foreign security by any branch, office or agency in India or a person residing outside India.

6. Any borrowing or lending in foreign exchanges in whatever form or by whatever name known.

7. Any borrowing or lending in rupees in whatever form or by whatever name known between a person residing in India and a person residing outside India.

8. Deposits between persons residing in India and person residing outside India.

9. Export, import or holding of currency or currency notes.

10. Transfer of immovable property outside India, other than lease not exceeding five years, by a person residing in India.

11. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India.

12. Giving of guarantee or surety in respect of any debt, obligation or other liability incurred, by a person residing in India and owed to a person residing outside India, by a person residing outside in India.

Regulation of Capital Account Transaction

Subject to the provision of sub-section (2), any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction.

The RBI may, in consultation with the Central government, specify:

1. Any class or classes of capital account transaction that are permissible;

2. The limit up to which foreign exchange shall be admissible for such transactions.

Provided that the RBI shall not impose any restrictions on the withdrawal of foreign exchange for payments due on account of amortisation of loans for depreciation of direct investment in the ordinary course of business.

Without prejudice to the generality of the provision of sub-section (2), the Reserve Bank may, by regulations prohibit, restrict or regulate the following:

1. Transfer or issue of any foreign security by a person residing in India.

2. Transfer or issue of any security by a person residing outside India.

3. Transfer of issue of any security of foreign security by any branch, office or agency in India of a person residing outside India.

4. Any borrowing or lending in foreign exchange in whatever form or by whatever name known.

5. Any borrowing or lending in rupees in whatever form or by whatever name known between a person residing in India and a person residing outside India.

6. Deposits between persons residing in India and persons residing outside India.

7. Export, import or holding of currency or currency notes.

8. Transfer of immovable property outside India, other than lease not exceeding five years, by a person residing in India.

9. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years by a person residing outside India.

10. Giving a guarantee or surety in respect of any debt, obligation or other liability incurred:

(a) By a person residing in India and owed to a person residing outside India; or

(b) By a person residing outside India.

A person residing in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such persons when he was residing, outside India or inherited from a person who was residing outside India.

A person residing outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was residing in India or inherited from a person who was residing in India.

Without prejudice to the provision of the section, the RBI may, by regulations prohibit, restrict or regulate establishment in India of a branch, office or other place of business by a person residing outside India, for carrying on any activity relating to such branch, office or other place of business.

Current Account Transactions

FEMA has eased the regulation over transactions in foreign exchange and security. Transactions in current account have been made restrictions-free:

1. No restriction on current account transaction unless specified: Any person can sell or draw foreign exchange to or from authorized persons if such sale or withdrawal is a current account transaction. Reasonable restrictions on current account transaction can be imposed by the Central Government in public interest, in consultation with the RBI.

2. Current Account Transaction: Section 2(j) states that current account transaction means a transaction other than a capital account transaction. It includes the following:

(a) Payment due in connection with foreign trade, other current businesses, services and short term banking, and credit facilities in the ordinary course of business.

(b) Payment due as interest on loans as net income from investment.

(c) Remittances for living expenses of parents, spouse and children residing abroad.

(d) Expense in connection with foreign travel, education and medical care of patents, spouse and children.

(e) The definition is 'inclusive', i.e., besides of aforesaid expenses, any expenditure that is not a 'capital account transaction' will be a current account transaction. For examples, expenditure incurred on oneself own expenses on foreign travel, education, and medical care are covered as 'current account transaction' not specified above.

(f) Any person may sell or withdraw foreign exchange to or from an authorised person if such sale or drawl is a current account transaction.

Foreign Currency/Security/Property by Resident

A person resident in India may hold, own transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned by such person when he was residing outside India or inherited from a person who was residing outside India [section 6 (4)].

Indian Currency/Security/Property by Non-resident

A person residing outside India may hold, own transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was residing in India or inherited from a person who was residing in India. [section 6 (4)].

Restrictions on Branches, Offices of Non-residents

The RBI may prohibit, restrict or regulate establishment of branch, office or other place of business by a person residing outside India; for carrying on any activity relating to such branch, office or other place of business. [Section 6 (6)]

Question 6: Explain the scope and main provisions of Industrial (Development and regulation) Act 1951. Answer: Industrial (Development and regulation) Act 1951

Growth of the industrial sector at a higher rate and on a sustained basis is a major determinant of a country's overall economic development. In this regard, the Government of India has issued industrial policies, from time to time, to facilitate and foster the growth of Indian industry and maintain its productivity and competitiveness in the world market. In order to provide the Central Government with the means to implement its industrial policies, several legislations have been enacted and amended in response to the changing environment. The most important being the Industries (Development and Regulation) Act, 1951 (IDRA) which was enacted in pursuance of the Industrial Policy Resolution, 1948. The Act was formulated for the purpose of development and regulation of industries in India by the Central Government. Scope of the Act: This Act applies to the whole of India including the State of Jammu & Kashmir, The provision of the Act apply to industrial undertaking, manufacturing any of the articles mentioned in the first schedule. An industrial undertaking (also called a factory) for the purpose of the Act is the one where manufacturing process is being carried on: With the aid of power provided that fifty or more workers are working or were working on any day of the preceding twelve months; or (b) Without the aid of power provided that one hundred or more workers are working or were working on any day of the preceding twelve months. (c) The Act applies only on industrial undertakings. Trading houses and financial institutions are outside the purview of the Act. Exemption from the Act: The Act empowers the Central Government to grant exemption from this Act in certain cases section 29B of the Act provides that if the Central Government is of opinion that it would not be in public interest to apply all or any provision of this Act to any industrial undertaking, then the Central Government, by notification in the Official Gazette, may exempt any industrial undertaking or class of industrial undertakings from the operation of all or any of the provision of this Act. For grant exemptions, the Central Government will take into consideration the small of the number of workers employed or the amount invested in any industrial undertaking or to the desirability of encouraging small undertakings generally or to the stage of development of any scheduled industry. This section further provides that any notification as aforesaid can be cancelled by the Central Government and on such cancellation, no industrial undertaking, which was earlier exempted, shall carry on the business of the undertaking, after the expiry of such period as may be specified in the notification cancelling the exemption by the Central Government. Under the provisions of Sec. 29B, the Central Government has been issuing notifications from time to time granting exemptions. The main objectives of the Act is to empower the Government:- (i)                 to take necessary steps for the development of industries; (ii)               to regulate the pattern and direction of industrial development; (iii)              to control the activities, performance and results of industrial undertakings in the public interest. The Act applies to the 'Scheduled Industries' listed in the First Schedule of the Act. However, small scale industrial undertakings and ancillary units are exempted from the provisions of this Act. The Act is administered by the Ministry of Industries & Commerce through its Department of Industrial Policy & Promotion (DIPP). The DIPP is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector. It monitors the industrial growth and production, in general, and selected industrial sectors, such as cement, paper and pulp, leather, tyre and rubber, light electrical industries, consumer goods, consumer durables, light machine tools, light industrial machinery, light engineering industries etc., in particular. It is also responsible for facilitating and increasing the foreign direct investment (FDI) inflow into the country as well as for encouraging acquisition of technological capability in various sectors of the industry. Provisions of the Act: The Act has 31 sections. All of them can be classified into three broad categories depending upon the purposes they seek to serve: A. Preventive Provisions: Preventive provision provide for: (i) Registration and Licensing; (ii) Investigation; and (iii) Revocation of Licence. (i) Registration of an existing undertaking: Sec. 10 provides that the owner of every industrial undertaking other than the Central Government shall get his undertaking registered within a specified period. The industrial undertaking of which the Central Government is the owner. On registration, the owner shall be issued a certificate of registration containing the production capacity of the industrial undertaking and other particulars. In specifying the production capacity in the certificate of registration the Central Government takes into consideration the following factors: (i) The productive or installed capacity as specified in the application. (ii) The level of production immediately before the date on which the application for registration was made; (iii) The level of the biggest annual production during the three years immediately preceding the introduction of an Amendment Bill to this Act in 1973; (iv) The extent to which production during the said period was used for export; and (v) Such other factors as may be considered relevant, including the extent of underutilisation of capacity, if any. Registration Abolished: As a consequence to the new industrial policy, existing schemes of registration have been abolished. Licensing of Undertakings: Licence is required for establishing a new undertaking, for manufacturing a new article by an existing undertaking, for effecting substantial expansion by an existing unit, for changing location of an existing undertaking and for carrying on issues by an existing undertaking. (a) Licensing of New Undertaking: Sec. 11 of the Act provides that no person or authority, other than the Central Government, shall establish, after the commencement of this Act, a new undertaking without a licence issued by Central government. A State Government also needs a license to set-up a new unit. (b) Production of New Article: See. 11A provides that no owner of an industrial undertaking other than the Central Government, which is registered under sec. 10 of this Act or licensed or permitted under Sec. 11. of the Act, shall produce or manufacture a new article without obtaining a licence to do so. (c) Licence of effecting Substantial Expansion: Sec. 13 lays down that no owner of an industrial undertaking other than Central Government, shall effect a substantial expansion of an undertaking which has been registered or licensed, without a licence issued to that effect by the Central Government. What is substantial expansion in not made clear in this Act. However from the various notifications issued by the Central Government from time to time, it has been made clear the expansion up to percent will be regularised. In other words, expansion upto 25 per cent will not be considered as substantial. (d) Licence for Shifting Location: Sec. 13 lays down that without obtaining licence to the effect, no owner can change the location of the whole or any part of industrial undertaking which has been registered. (е) Licence to carry on Business: Licence is also necessary to carryon business (COB) by an existing undertaking to which licensing provision of the Act did not originally apply on account of exemption order issued by the government and subsequently became applicable as a result of cancellation of the exemption order under certain other circumstance as provided in the Act. Licensing Abolished: As per Government Notification No. 477(E), dated July .5, 1991, Sec. 1, 11A and 13 have been made in operative. (ii) Investigation: Sec. 15 empowers the Central Government to cause an investigation into an industrial undertaking on the happening of: (a) A substantial fall or likely fall, in the volume of production in respect of any article or class of articles relating to particular undertaking or an industry; or (b) A deterioration or likely deterioration in the quality of the product which could have been or can be avoided; or (c) A rise or likely rise (unjustifiable) in price of any article or class of articles; or (d) When it becomes necessary to take action of the conservation of any resources of national importance which are utilised by any undertakings or (e) Where any industrial undertaking, scheduled or otherwise, is being managed in a manner highly deter-mental to the scheduled industry concerned or to public interest. The purpose of investigation proves that action is desirable; the Central Government will take necessary action under Sec. 16 of the Act. Sec. 16 of the Act provides that the Central Government may issue such directions to the industrial undertaking concerned as may be appropriate in the circumstances for all or any of the following purposes: (a) Regulating the production of any article or class of articles by the industrial undertaking and fixing the standard of production. (b) Controlling the price or regulating the distribution of any article of class of articles being the subject matter of investigation. (iii) Revocation of Registration of Licence: Sec. 10A of the Act empowers the Central Government to revoke the registration when: (a) Registration was obtained by misrepresentation of an essential fact; or (b) Undertaking has ceased to be registrable by reason of any exemption granted under the Act, or (c) Registration has become useless or ineffective. Sec. 12 of the Act empowers the Central Government to revoke or amend any licence granted for establishing a new undertaking, or license granted for manufacturing a new article, on finding that the licence has, without reasonable cause failed to establish or to take effective steps to implement the licence within the time allowed. B. Curative Provisions: Curative provision includes the following: (i) Taking over management or control; and (ii) Control of supply, price and distribution of certain commodities. Power to take over management or control: Sec. 18A of the Act provides that the Central Government may by a notified order authorise any person or body a person’s to take over the management or to exercise control over a specified industrial undertaking if the Central Governmental is of the opinion that: (i) The concerned industrial undertaking has failed to comply with directions issued under Sec. 16 of the Act, (ii) The affairs of an undertaking in respect of which an investigating has been ordered under sec. 15 of the Act, are being managed in a manner highly deter-mental to the scheduled industry concerned or public interest. The period of takeover was five years, to be extended further for a period of two years subject to a maximum of twelve years. Power of Take over without investigation: Sec. 18A provides for the takeover after investigation. The Act, under Sec,. 18AA, also provides for the takeover without investigation, provided that the Central Government, is satisfied, on the basis of any documentary or other evidence in its possession, that in relation to an industrial undertaking the person in-charge of such industrial undertaking have, by reek-less investment or creation of encumbrances on the assets of the industrial undertaking or by diversion of funds, brought about a situation which is likely to affect the production of articles manufactured or produced in the industrial undertaking and that immediate action is necessary to prevent such situation, or industrial undertaking has been closed for a period of not less than three months and such closure is prejudicial to the concerned scheduled industry, and that the financial condition of the company owning the industrial undertaking and the condition of its plant and machinery makes it possible to restart the undertaking in the interest of the general public. The period to takeover is to be five years, to be extended by a further period of two years, subject to the maximum of 12 years. Takeover of management or control of industrial undertaking owned by companies in liquidation: Sec. 18FA empowers the Central Government to authorise any person or body of person with permission of the High Court concerned to take over the management or control of industrial undertakings owned by the companies in liquidation provided that the Central Government is of opinion that there are possibilities of running or restarting such undertakings for maintaining or increasing the production, supply or distribution of articles or class of articles in the public interest. The period of such takeover is to be 5 years, to be extended 6 times of two years each. No state government or local authority can take over the management or control of a scheduled undertaking. Power of Control supply and price of certain articles: In order to secure equitable distribution and availability at fair price of any article or class of articles relating to any scheduled industry, the Central Government may, so by a notified order. The notified order may provide for: (a) Controlling by prices at which any such article or class thereof may be bought or sold. (b) Regulating by licence, permits, or otherwise the distribution, transport, disposal, acquisition, use or consumption of any such article or class; (c) Prohibiting the withholding from sale of any such article or class thereof, ordinarily kept for sale; (d) Requiring any person manufacturing, producing or holding any stock in such article 01 class thereof to sell the whole or part, of the articles so manufactured or produced during a specified period or to sell the whole or a part of the articles so held in stock, to such pet son or class of person as may be specified in the order. (e) Regulating persons engaged in the distribution and trade and commerce in any such article or class thereof to mark the article expose are detrimental to the public interest. (f) Regulating or prohibiting any class of commercial or financial transaction relating to such article or class thereof, which in the opinion of the authority making order, are detrimental to the public interest. (g) Collecting any information or statistics with a view to regulating or prohibiting any of the a pre-said matters; and (h) Any incidental or supplementary matter including the grant of issue of licences, permits for their document and the charging fees thereof. C. Creative Provisions: The Creative provisions are positive in nature and involve co-operation between the Central Government, industry, workers and consumers of goods produced by scheduled industries. Following are the specific creative measures: Constituting Development Councils: Central Government may by a notified order establish in respect of any scheduled industry or group of scheduled industries, a Development Council which shall consist of members who in the opinion of the Central Government are; (a) Person capable of representing the interest of the owners of industrial undertaking in the scheduled industry or group of scheduled industries; (b) Person capable of representing the interest of persons employed in the industrial undertaking in the scheduled industry and group of scheduled industries; (c) Person having special knowledge of matters relating to the technical or other aspects of the scheduled industry or group of scheduled industries; (d) Persons not belonging to any of the aforesaid categories who are capable of representing the interest of consumers of good manufactured or produced by the scheduled industry of group of scheduled industries. Functions of the Council: The Development Council shall perform the following functions as laid down in the second schedule of the Act: 1. Commanding targets of production, coordinating production programmes and reviewing progress from time to time; 2. Promoting arrangements for better marketing and helping in the division of a system of distribution and sale of the produce of the industry which would be satisfactory to the consumers; 3. Promoting standardisation of products; 4. Suggesting norms of efficiency with a view to eliminating waste, obtaining maximum production, improving quality and reducing costs; 5. Recommending measures of securing the full utilisation of the installed capacity and for improving the working of the industry particularly of the less efficient units; 6. Assisting in the distribution of controlled materials promoting arrangement for obtaining materials for industry; 7. Promoting the training of persons engaged or proposing engagement in the industry and their education in technical or artistic subjects relevant thereto; 8. Promoting or undertaking inquiry as to materials and equipment and as to methods of productions, management and labour utilisation, including the discovery and development in new materials, equipment and methods of improvement in those already in use; 9. Promoting the retraining in alternative occupations of personal engaged in or retrenched from the industry; 10. Promoting or undertaking scientific and industrial research into matters affecting industrial psychology and research into matter relating to production and consumption or use of goods and service supplied by the industry; 11. Promoting or undertaking the collection and formulation of statistics; 12. Promoting improvements and standardization of accounting and costing methods and practice; 13. Investigation possibilities of decentralising stages and processes of production with a view to encouraging the growth of allied, small-scale and cottage industries; 14. Undertaking arrangement for making available to the industry information obtained and for advising on matters with which the Development Councils are concerned in the exercise of any of their functions; 15. Promoting the adoption of measures for increasing the productivity of labour including measures of securing safer and better working conditions; 16. Advising on any matter relating to the industry (other than remuneration and conditions of employment) as to which the Central Government may request the Development Council to advise and undertaking inquiries for the purpose of enabling the Development Council so to advice. Levy and Collection of Cess: Section 9 of the Act provides that the Central Government may by a notified order, levy and collect a cess for the purposes of this Act on all goods manufactured or produced in any scheduled industry as may be specified in this behalf by the Central Government, a duty of excise at such rate as may be notified by the Central Government and different rates may be specified for different classes of goods, provided that no such rate shall in any case exceed two percent of the value of the goods. The cess may be recovered in the same manner as an arrear of land revenue. The Central Government may, after collecting the proceeds of the cess, hand over the same to the Development Council which shall utilise the said proceeds for the following purposes; (a) To promote improvements in design and quality with reference to the products of such industry or group of industries. (b) To provide for the training of the technicians and labour in such industry or group of industries. (c) To meet such expenses as may be necessary in the exercise of its functions and its administrative expenses. (d) To promote scientific and industrial research with reference to the scheduled industry or group of scheduled industries in respect of which the Development Council is established. Central Advisory Council: Section 5 of the Act provides the establishment and functions of the Central Advisory Council. It is established for the purpose of advising the Central Government on matters concerning the development and regulation of scheduled industries. The Central Advisory Council shall be composed of a chairman and such other members not exceeding 13 members as may be appointed by the Central Government from among the persons who are in the opinion of the Central Government capable of representing the interests of the owners of industrial undertakings covered by scheduled industries, persons employed in industrial undertakings in scheduled industries, consumers of goods manufactured or produced by scheduled industries and such other class of persons including primary producers as in the opinion of the Central Government ought to be represented on the Advisory Council. It is made obligatory for the Central Government to consult the Central Advisory Council in regard to the making of any rules other than the first rules to be framed by the Central Government. Other provisions: Other provisions of the Act are as follows: 1. Power of the Central Government to provide relief to Certain Undertakings: With an objective to maintain the proper production in any scheduled industry the Central Government is empowered to take certain actions under Sec. 18FB of the Act under this section the Central Government may examine the undertaking whose management and control have been taken over from the Industrial Disputes Act 1947, the Minimum Wages Act 1948 and the Industrial Employment (standing orders) Act 1946. Similarly, the Central Government may suspend assurance, contracts, settlements, awards, standing orders or other instruments in force against the said undertaking. Sec 18FB is invoked to prevent fall in the volume of production of any of the said undertaking. 2. Delegation of power by Central Government: Under the provisions of Sec. 25 the Central Government is empowered to delegate its powers under the Act by a notified order to such office or authority as may be specified by the Central Government in its notification. The Act also provides full protection to the officer or authority acting under the provisions of the Act. No suit, prosecution or other legal proceedings can be initiated against the officer or authority. 3. Power to Make Rules: Sec. 30 of the Act empowers the Central Government to make rules for carrying out the provisions of the Act subject to the condition of the previous publication of the rules framed by the Central Government. The rule making authority of the Central Government under sec 30 of the Act will relate to the following matters: (a) The constitution of the Advisory Council and the Development Councils and incidental matters relating to the appointment of members and conduct of affairs of the Advisory council and the Development Council. (b) The matters which may be taken into account in granting or issuing of licences and permission and the matters which require previous consultations by the Central Government. (c) The facilities to be provided by any industrial undertaking for the training of technicians and labour. (d) The collection of any information or statistics in respect of any scheduled industry. (e) The manner in which the industrial undertaking may be registered and the levy of a fee therefore. (f) The procedure to be followed in making any investigation under this Act. (g) The creditors which may be included in any licence or permission including the conditions on which the licences and permission may be valid or amended. (h) The maintenance of books, accounts and records relating to an industrial undertaking. D. Penalties: The Act contains penalties for contravention of the provisions of the Act and for making false statement by any person under the provisions of the Act. The penalty for contravention is imprisonment upto six months, or a fine upto Rs. 5,000 or both. In case of continuing contravention the person may be punished with an additional fine which may extend to Rs. 500 for everyday during which the contravention continues after the conviction for first contravention. Penalty for making false statement is imprisonment upto three months or a fine which may extend to Rs. 2,000 or both.  The various provisions of the Act can be summarized as below:- Establishment of a 'Central Advisory Council' for the purpose of advising the Central Government on matters concerning the development of the industries, making of any rules and any other matter connected with the administration of the Act. Its members shall consist of representatives of the owners of industrial undertaking, employees, consumers, primary suppliers, etc. Establishment of a 'Development Council' for the purpose of development of any scheduled industry or group of scheduled industries. This council shall consist of the members representing the interests of the owners, employees, consumers, etc. and persons having special knowledge of matters relating to the technical or other aspects of the industries. The development council shall perform the following functions assigned to it by the Central Government:- (i) recommending targets for production, co-ordinating production programmes and reviewing progress from time to time. (ii) suggesting norms of efficiency with a view to eliminating waste, obtaining maximum production, improving quality and reducing costs. (iii) recommending measures for securing the fuller utilisation of the installed capacity and for improving the working of the industry, particularly of the less efficient units. (iv) promoting arrangements for better marketing and helping in the devising of a system of distribution and sale of the produce of the industry which would be satisfactory to the consumer. (v) promoting the training of persons engaged or proposing engagement in the industry and their education in technical or artistic subjects relevant thereto, etc. The development council shall prepare and transmit to the Central Government and the advisory council a report (annually) setting out what has been done in the discharge of its functions during the financial year last completed. The report shall include a statement of the accounts of the development council for that year, together with a copy of any report made by the auditors on the accounts. The IDRA empowers the Central Government to regulate the development of industries by means of licensing with suitable exemptions as decided by the Government. Accordingly, the entry into a business or the expansion of an existing business may be regulated by licensing. A licence is a written permission from the Government to an industrial undertaking to manufacture specified articles included in the Schedule to the Act. It contains particulars of the industrial undertaking, its location, the articles to be manufactured, its capacity on the basis of the maximum utilisation of plant and machinery, and other appropriate conditions which are enforceable under the Act. If an application for licence is approved and further clearance ( such as that of foreign collaboration and capital goods import) are not involved and no other prior conditions have to be fulfilled, an industrial licence is issued to the applicant. In other cases, a letter of intent is issued, which conveys the intention of the Government to grant a licence subject to the fulfilment of certain conditions such as approval of foreign investment proposal, import of capital goods, etc. The Government may order for investigation before the grant of licence to an industrial undertaking. It can make a full and complete investigation if it is of the opinion that in the respect of any schedule industry or undertaking, there has been or is likely to be:- (i) a substantial fall in the volume of output; or (ii) a marked deterioration in the quality of output or an unjustifiable rise in the price of the output. Also, if it is of the opinion that any industrial undertaking is being managed in a manner highly detrimental to the scheduled industry concerned or to the public interest, it orders investigation. As a result of such investigations, the Government is empowered to issue directions to the industrial undertaking for all or any of the following purposes:-  Regulating the production of output by the industrial undertaking and fixing the standards of production; Requiring the industrial undertaking to take such steps as the Central Government may consider necessary to stimulate the development of the industry to which the undertaking relate. Prohibiting the industrial undertaking from resorting to any act or practice which might reduce its production, capacity or economic value; Controlling the prices, or regulating the distribution, of an output for securing its equitable distribution and availability at fair prices. The Act also provides that any such directions may be issued by the Central Government at any time when a case relating to any industrial undertaking is under investigation. These directions shall have effect until they are varied or revoked by the Central Government. The power of control entrusted to the Central Government under the Act extends to that of the take over of the management of the whole or any part of an industrial undertaking which fails to comply with any of the directions mentioned above. The Government can also take over the management of an undertaking which is being managed in a manner highly detrimental to the scheduled industry concerned or to the public interest. Further, the Central government can take over the management of industrial undertaking owned by a company under liquidation, with the permission of the High Court, if the Government is of the opinion that the running or restarting the operations of such an undertaking is necessary for the maintaining or increasing the production, supply or distribution in the public interest. Until liberalisation, the industrial licence was required for the establishment of a new industrial undertaking, manufacturing of a new item by an existing undertaking, change of location of an industry, substantial expansion of existing capacity and for all other purposes. But the new industrial policy s liberalised this and exempted many industries from obtaining industrial licence. In today's scenario, only 6 categories of industries require industrial licensing under the Industries (Development and Regulation) Act, 1951 (IDRA). Such industries file an Industrial Entrepreneur Memoranda (IEM) with the Secretariat of Industrial Assistance (SIA), Department of Industrial Policy and Promotion to obtain an acknowledgement.

Questions from Unit IV

Question1. Explore previous and current status of information technology in India and analyzes various strategies to overcome its bottlenecks for its future growth and impact on various sectors of the Indian economy.

Answer: The stature of being one of the largest global IT capitals at this information age, India's information and technology services date back in 1967 with the establishment of TCS of Tata Groups in Mumbai and its influence and applications now has reached no doubt beyond the perceptions. In hindsight, the Indian IT sector by the end of 2020 poising to a huge US$ 225 billion industry has been instrumental in transformation of India's image on the global map from a decelerating economy to an innovative global catalyst in rendering hotshot technology solutions and services, acclaimed by the National Association of Software and Service Companies (NASSCOM) report. The industry of information technology comprising of IT and IT-enabled services has been fueling Indian economic growth and influencing the livelihood of the Indians with its contribution to different multifaceted parameters suchlike diversity, standard of life, employment and profession directly or indirectly.

Science of information technology or IT

Information technology is said to be a science or technology with a combination of hardware and software involving data storage and processing information or it may be a science of computer and telecommunication that incurs information capturing, storing and transmittance world over and the study includes the structural design, development, application, support and management of computer-based data systems, especially software development, applications and hardware computing. The science of information technology administers using computers and its software to store, process, transmit, preserve, and recuperate information safely. At this information epoch, the science of IT integrates other sorts of inventional technologies like usage of cell phones, iPods, and Apple TV in addition to the conventional PC and networking/internet technologies.

The services of IT industry in India

The industry of information technology in India includes the following services namely IT and software services, IT enabled services, hardware (engineering) services, and e-businesses/e-governance associated with government services.

·         IT services are outsourcing of software support/installation, processing services, systems integration, exports of products and services, and training/education of the information technology science.

·         IT enabled services include those that have been transformed through telecom and networking associated with remote maintenance, back office operations, data processing, medical record transcription, BPO, KPO, LPO, etc.

·         Engineering/hardware services consist of industrial design, mechanical design (CAD/CAM), electronic system design (chip/board and embedded software design), design validation testing services, industrialization and prototyping.

·         Business executed through internet is electronic business or e-business, i.e., purchase and sale of products and services, customer service, and business collaborations related to any kind of business undertaking and e-governance in the public sector.

With a new mantra popular as IT, India has been a pioneer in the software development, application and networking remained to be a preferred destination for software/ITES services. It strategical success of software export industry has played a significant role in the transformation from IT sector a decade ago to a current booming IT industry enabling a paradigm transition that Indian IT industry has emerged as a hub to competitive value-added services in the global market. This rapid growth in the IT industry is an effect of the following strength of the industry.

• Highly skilled technical resource.
• Minimum wage structure.
• Service quality and operational efficiency.
• Favorable government policies and initiatives by the government such as setting up of tech-parks and implementation of e-governance projects.
• Global giants like Microsoft, Oracle, IBM, etc., holding operations in India.
• Adopting quality standards such as ISO 9000, SEI CMM etc.
• Cost competitiveness.
• Effective English-speaking professionals.
• Development of significant telecommunication infrastructure systems reducing internet and telecommunication cost to larger extent.
• Country's geographical location, ability to offer 24x7 service and reduced turn-around times taking advantage of time difference.

Major government initiatives augmenting growth of the IT industry

The department of information technology (DIT) controlled by the Ministry of Communications and Information Technology in India has been accountable for formulation, execution and reassessment of national policies related to IT such as hardware and software, standardization of procedures, internet, e-commerce, e-business, e-medicine, education of IT and computer science, development of electronics and administration of IT related and Cyber laws. Along with the DIT, Electronics Export and Computer Software Promotion Council (ESC) and National Informatics Centre (NIC) functions for hardware/software industry development that comprises of knowledge-based enterprises, various measures to promote IT exports and industrial competitiveness of the industry as well.

National Association of Software and Services Company (NASSCOM)

As a non-profit organization, NASSCOM was established in 1988 to facilitate software and IT-enabled services industry and to promote research and development in software and allied industries. As a coordinating structure for the information technology and its enabled services in India, NASSCOM has a significant part supporting the Indian government to framework industry-friendly policies of the IT sector and to ensure Indian Information Security environment standardization at its best across the world proactively. Data Security Council of India (DSCI) as a self-governing body was set up by the NASSCOM as an initiative with the framework consisting of best practices for Indian IT and ITES industry and enforcement of the established security standards since these BPO/KPO companies deal with the international organizations that they need to be aware of and to be compliant with regulative measures in respect to each country.

Various schemes launched by the Government of India in the previous decades

Aiming to promote the export of software products and services to the global market, to push up domestic and foreign investment, technology/process know-how transfer, technical collaboration, etc. in the Indian IT industry, several schemes had been implemented by the Indian Government and State governments through which policy packages consisting of tax holidays, import duty concessions, liberalization of regulations in trade and commerce, etc. were offered during the past decades as follows:

·         Export Oriented Units (EOU) Scheme to encourage exports with the increase in productivity.

·         Electronics Hardware Technology Park (EHTP) complexes to be established by the central government, state government, public or private sector undertakings with the consent of the Inter-Ministerial Standing Committee (IMSC) under the ministry of communication and information technology.

·         The Software Technology Parks of India (STPI) to be installed by the ministry of information technology, Government of India and international technology park by the state governments in affiliation.

·         Special Economic Zones (SEZs) to be initiated to empower reliable manufacture and trade in terms of export promotions.

·         Sales from Domestic Tariff Area (DTA) to SEZs have been facilitated by providing drawback/DEPB benefits, CST exemption and service tax exemption to the domestic providers.

·         Units under the specified special economic zones to be availed income tax exemption for export profits for five years, 50% for the following two years and 50% of plow-back profits for three years thenceforth.

·         Export Promotion Capital Goods (EPCG) Scheme to permit capital goods importation required for pre-production, production and post-production with customs duty levied at 5% liable to export obligations.

·         Export Oriented Unit (EOU) scheme, Electronic Hardware Technology Park (EHTP) scheme or Software Technology Park (STP) scheme to be established through which IT units can make export of their whole goods and services.

·         Electronic City, an IT park in Bangalore in 1991 was set up in which major IT/electronic industries are functioning to empower knowledge-based industries.

Current status of Indian IT services

The vision to propel India as a global superpower in the field of IT, a cutting-edge competitor in the innovative sphere and to bring forth the advantages of IT in each and every aspect of manhood by the Department of Information Technology has been a major catalyst with the adoption and implementation of the National e-Governance Action Plan and the Unique Identification Development Authority of India (UIDAI) program. The different policy packages involve growth of electronics and hardware production, increased PC penetration in every nook and corner of the country, more utilization of internet throughout the country, progression of domestic software market, facilitating local languages through IT, increasing productivity in other sectors and exploring IT in creating more employment opportunities. In this regard, following are the measures adopted by the Indian government.

·         The Technical Advisory Group for Unique Projects (TAGUP) has been set up and Mr.NandanNilekani, one of the founders of the outsourcing jumbo, Infosys has been appointed as a chairman of this project to develop IT infrastructure in major areas inclusive of the issuance of unique ID to Indian citizens, new pension system and goods and services tax.

·         Constitution of National Task Force on Information Technology and Software Development to make a framework of long-term IT policy nationally.

·         Legislation of the Information Technology Act to furnish a legal patronage facilitating electronics business and trade.

·         Establishment of Software Technology Parks of India to augment software exports of the country and 51 STPI centres have been set up at present with certain exemptions and benefits.

·         Projects to develop Information Technology Investment Regions invested with good infrastructure to derive maximum benefits of networking and greater efficiency.

Growth history of IT and IT enabled services from statistical standpoint

·         On the basis of the NASSCOM report, clocking revenue growth of about US$ 76 billion, contributing 19% in the fiscal year 2011 has been estimated and recorded more than the anticipated growth in the IT sector, as hailed by the NASSCOM.

·         Estimation of revenues from exports in the financial year 2011 summing up to US$ 59 billion that brings about 26% of its contribution to total Indian exports including products and services by a research report.

·         Internal revenues from IT-BPO exclusive of hardware have been estimated at a growth rate of nearly 16% touching US$ 17.35 billion in the year 2011.

·         According to the IDC India report, the nation's data centre services market has been expected to reach almost US$ 2.2 billion at the end of the year 2011 that was aggregated at US$ 1.39 billion in 2009.

·         Domestic BPO industry is targeted at US$ 1.4 billion in 2011 that was US$ 1.1 billion in 2010 whereas it has been forecasted to touch US$ 1.69 billion and 2.47 billion by 2012 and 2014 respectively.

Investments in the domestic IT industry

·         As per the report of the Department of Industrial Policy and Promotion, worth of US$ 10,705 million as a cumulative foreign direct investment has been invested in the computer software and hardware sector during the period of April 2000 and February 2011.

·         Indian IT giants such as Infosys, TCS, HCL Technologies, Accenture, and Wipro have been making plans to acquire a major share of the US market by 2012 that has been the largest in the world backing up discretionary projects, robust clientele volumes and better pricing of the services.

·         By the year 2014, investments made by the EMC Corporation, eminent global tech leader in India will be around US$ 2 billion.

·         Kaspersky Lab, the Russian Internet security and antivirus software company plans to invest US$ 2 million through its retail launching at Hyderabad in 2011.

·         Aiming to pursue additional software development and training facilities in various special economic zones in some of the major cities designating 55,000 employees, Cognizant Technologies will capitalize over US$ 500 million by the end of 2014 as an expansion project.

·         Polaris Software Lab, Chennai-based financial technology company has planned to acquire 85.3% stake of San Francisco-based Iden-Trust, worldwide tech provider of digital trusted identity solutions valuing about US$ 20 million thus making a threshold into the cloud computing space for financial technology services.

·         Capgemini, the biggest consulting and computer servicing company in Europe has stepped in to provide internal support services to India.

·         Wal-Mart has been planning to elaborate its existing executions given Indian IT dominance and its capability of tracking more businesses.

·         In terms of manufacturing lightweight PC, the worldwide notable chip maker, Intel is looking forward to invest above US$ 1 billion in India in the coming years.

·         Cisco for its SME business and Oracle for its CRM services in India looking for 100% growth in view of emerging technology know-how and requiring cost-efficient clientele servicing.

·         Dell India gaining 80% sales during last year with US$ 700 million revenues.

·         ARM, the British chip designer, dominating in the mobile market initiates to develop the biggest design centre in India out of Britain.

·         Yahoo Inc and CRL (Computational Research Laboratories), a subsidiary of Tata Sons have jointly agreed in propelling Tata's EKA, (supercomputer that has been ranked as fourth fastest in the world) and for research in cloud computing in India.

Diversified impact of IT in various spheres

Overall in a nutshell, we need to get acquainted with the proliferation of this newer information systems and technology since its applications in our daily needs have been numerous, though we should be aware of the negative implications in relation to the emergent technology. Convergence of digital and multimedia, mobile, satellite, embedded systems, wireless communications, and diffused computation among different sectors, etc., have been the evidence of the state-of-the-art information systems and technology. Current information era visualizes technology applications in each and every aspect of our life and impact of IT on other sectors including agriculture, health care, legal systems, entertainment, biomedical sciences, and so on.

Agriculture and information systems

Information technology catalyzes all spheres of the economic development of a nation and agriculture too has never been exception. Since India is predominantly agriculture-based country it is necessary to have expert agriculture/irrigation methodologies and trading/business strategies of agriculture produces supporting integrated crop management of various kinds of crops, field-level intelligent decision-making system, and optimal machinery management practices in order to have potential maximum yields. Numerous organizations and institutions have been inculcating technology to provide solutions in the agriculture sector cost-effectively and Media Lab Asia, Ministry of Communications and IT (Government of India), Development Gateway Foundation (Government of India and World Bank) and Pan Asia Networking have been funding several research projects comprising design and evaluation of computer devices and interfaces, handheld and mobile users in lingual-related information, retrieval, translation, education, and e-learning. Agricultural universities have been facilitated to make use of IT in agriculture with the launching of technology courses in Agriculture Information Technology that involves developing expert systems of agri portals for weather, market information, etc., mobile knowledge dissemination, deploying GPS for agriculture, robotic systems for green house, irrigation and so many.

Medical sciences and Information technology

One of the major fields in which computer and technology has been a necessity is unquestionably the medical sciences. Computer technology has its application in the diagnosis, treatment, and prognosis of life-threatening diseases such as cancer, AIDS, and neural disorders. With the help of digital computerized sonography, diseases can be diagnosed and interpretations can be attained with the support of artificial intelligence providing greater degree of accuracy. Complex surgeries are carried out with the surgical robots. Implementing advanced wireless devices, processors, memory chips, and relevant operating systems is common nowadays in the health care discipline. Bluetooth and smart phone technologiesassist in remote patient monitoring, wireless biometric data, and medicine dispenser. For instance, a smart phone with its advanced capacities and greater functionality as of laptops provides support in remote monitoring of patients with chronic diseases in their home environment irrespective of their locations.

Computer technology and social media

No doubt a computer minus software or its relevant applications may be as such a brain-death patient at its vegetative value. Also educational cum social networking setups such as India Study Channel, Facebook, Twitter, Orkut, blogs, wikis and web-based e-mail clients like Gmail, Yahoo or MSN have been instrumental in galvanizing social environment and political issues as well. As due to the outgrowth of this information technology, globe has become a small village in fact. This is the high-tech world we live in indeed. Can we imagine technology would maintain world peace and security? Yes! It can do. In a recent session organized by the United Nations Security Council entitled as, "Voices of a New Generation," seeking perception of the global youth between 13 and 21 years of age on international peace and security, it has been mentioned by the speaker of the session, that thousands of submissions by the young people worldwide extending their support for world peace and security by sending e-mail, videos through YouTube, Facebook, and hand-written mails as well and this definitely exhibits the power of social media and it is evident that to what extent technology can be fueling and energizing such kind of marvelous initiatives. However, technology can also be instrumental to negative provoking like terrorist organizations since most of terror attacks have been executed through these applications.

Information technology in trade and business

Through implementation of the data integration, network storage, and database systems, technology has an immense drive for E-business and E-commerce because of the proliferation of the Internet and Web. Nowadays, shoppers can make online shopping for books, music, videos, toys, electronic devices, and games. The aviation and transportation sectors have come a long way with the Blue tooth technology increasing revenue, efficiency, customer base, and productivity being cost-effective.

Growth of Indian economy and IT industry

Needless to say, information technology plays a significant part in Indian economic development and has great potential of longstanding economic progression through greater productivity in different aspects of the economy. IT can shape the national economy decisively by various means of creating more workforce deployment, raising literacy rates, rendering maximum health services, and providing effective administration through e-governance. In addition to the major sectors such as biotechnology, pharmaceutical research, nanotechnology and so on, information systems has been crucial in the field of defense and intelligence, space exploration, weather forecasting, and transportation. In India, almost all public sector organizations have initiated IT-based systems in payrolls, stock market, rail and air ticketing reservation so that ensuring transparency, accountability and hence efficiency of the government administration and paving the way for economic growth to some extent.

Would Indian IT sector need to be reshaped in the future?

With high expectation of the IT industry to be revolutionized by 2015 at the global settings, the Indian IT sector needs to be information-smart with modernized information idealogy and sorting out new leads as how to organize broad-spectrum information management strategies not only in terms of IT sphere but for entire economy. It is evident that the country has immense potential for progression of the industry through its consolidation, maximization and cost transparency projects. However, possessing the potentiality and accomplishing have been distinct with the challenge lying in between. Challenged with the dearth of technically skilled man power, educational excellence, data growth and a host of internal political issues in addition to the need for focused efforts to info-infrastructure, streamlining IT hardware development that has been neglected to certain degree, and reduced cost base, under-mentioned strategies need to be highlighted.

·         Strong base for PSTN network at the Indian end to facilitate international call centers and software companies in India in order to propel telecommuting and enabling internet leased circuits to get linked into PSTN connectivity.

·         Although there has been income tax exemption for certain IT enabled servicing units, it is imperative to provide exemption to the entire ITES units.

·         Immediate requirement for the provision of affordable and on-demand network connectivity with 100% up-to-date and reliability.

·         Tariff rates for high-speed data communication need to be lessened to promote value addition from India since bandwidth tariffs in India have not been reduced with more volume as compared to that of international standards.

·         As the Indian IT business operations go round the clock especially in the ITES services 7x24 support of DoT links should be necessary.

·         Instant provision of international bandwidth is a must and it is advisable to allow the ITES firms to set up their own international gateways or they may utilize substitute satellite networks.

·         Domestic markets need to be augmented rather than sole reliability on international demands since serving more primary and secondary industries in IT would be a driveway for speedy growth of the information services sector.

·         Indian education system and its course contents need to be revamped to have knowledge-based human resources and launching of vocational courses especially for ITES that require specialized training, practical-oriented methodologies, language proficiency, accent training, and basic technical skills would be of highly importance.

·         To propagate IT into the rural areas and small towns, cost-effective data processing centers in small towns and nearby villages may be established to facilitate employment opportunities in those areas since more educated youth have been populated over there.

·         A framework of policies pertinent to information technology promoting women entrepreneurship thereby creating more employment among women is the prerequisite to have ideal information-smart business.

·         Improved info-infrastructure with adequate transportation and power supply and ensuring good governance would promote the IT industry further by leaps and bounds in India.

Conclusion

Thus analyzing our strength and weakness, it seems the Indian IT industry has to confront some challenges but with implementation of strategic plans, Indian techies could move ahead in the competitive international zone to retain its leadership with more focus necessitated in IT engineering (hardware) services along with its software counterpart. Concurrently, information services industry should be instrumental in raising the standard of living in all walks of life and enhancing their sustenance. Otherwise, India will not be able to derive maximum benefits of its success in the information services.

Question2. What are the various stages in the process of globalization? Explain the factors favouring Globalization in India. Also explain the obstacles of globalization in India.

Answer: India’s economic integration with the rest of the world was very limited because of the restrictive economic policies followed until 1991. Indian firms confined themselves, by and large, to the home market.  Foreign investment by Indian firms was very insignificant. With the new economic policy ushered in 1991, there has, however, been change. Globalization has in fact become a buzzword with Indian firms now and many are expanding their overseas business by different strategies. 

Globalization may be defined as “ the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology”.  Globalization may be considered at two levels .Viz, at the macro level (i.e., globalization of the world economy) and at the micro level (i.e., globalization of the business and the firm).  Globalization of the world economy is achieved, quite obviously, by globalising the national economies. Globalization of the economies and globalization of business are very much interdependent. 

REASONS FOR GLOBALISATION

1.      The rapid shrinking of time and distance across the globe thanks to faster communication, speedier transportation, growing financial flows and rapid technological changes.

2.      The domestic markets are no longer adequate rich. It is necessary to search of international markets and to set up overseas production facilities.

3.      Companies may choose for going international to find political stability, which is relatively good in other countries.

4.      To get technology and managerial know-how.

5.      Companies often set up overseas plants to reduce high transportation costs.

6.      Some companies set up plants overseas so as to be close to their raw materials supply and to the markets for their finished products. Other developments also contribute to the increasing international of business.

7.      The US, Canada and Mexico have signed the North American Free Trade agreement (NAFTA), which will remove all barriers to trade among these countries.

8.      The creation of the World Trade Organization (WTO) is stimulating increased cross-border trade.

FEATURES

The following are the features of the current phase of globalization:

New Markets

1.      Growing global markets in services – banking, insurance, and transport.

2.      New financial markets - deregulated, globally linked, working around the clock, with action at a distance in real time, with new instruments such as derivatives.

3.      Deregulation of anti - trust laws and proliferation of mergers and acquisitions.

4.      Global consumer markets with global brands.

New Actors

1.      Multinational corporations integrating their production and marketing, dominating food production.

2.      The World Trade Organization - the first multilateral organization with authority to enforce national governments compliance with rule.

3.      An international criminal court system in the making.

4.      A booming international network of NGOs.

5.      Regional blocs proliferating and gaining importance – European Union, Association of South- East Asian Nations, Mercosur, North American Free Trade Association, Southern African Development Community, among many others.

6.      More policy coordination groups – G-7, G40, G22, G77, and OECD etc.

New Rules and Norms

1.      Market economic policies spreading around the world, with greater privatization and liberalization than in earlier decades.

2.      Widespread adoption of democracy as the choice of political regime.

3.      Human rights conventions and instruments building up in both coverage and number of signatories – and growing awareness among people around the world.

4.      Consensus goals and action agenda for development.

5.      Conventions and agreements on the global environment – biodiversity, ozone layer, disposal of hazardous wastes, desertification, climate change.

6.      Multilateral agreements in trade, taking on such new agendas as environmental and social conditions.

7.      New multilateral agreements- for services, intellectual property, communications – more binding on national governments than any previous agreements.

8.      The multilateral agreements on investment under debate.

New Tools of Communication

1.      Internet and electronic communications linking many people simultaneously.

2.      Cellular phones.

3.      Fax machines.

4.      Faster and cheaper transport by air, rail and road.

5.      Computer-aided design.

STAGES OF GLOBALISATION

There are five different stages in the development of a firm into global corporations.

First Stage

The first stage is the arm’s length service activity of essentially domestic company, which moves into new markets overseas by linking up with local dealers and distributors.

Second Stage

In the stage two, the company takes over these activities on its own.

Third Stage 

In the next stage, the domestic based company begins to carry out its own manufacturing, marketing and sales in the key foreign markets.

Fourth Stage

In the stage four, the company moves to a full insider position in these markets, supported by a complete business system including R & D and engineering. This stage calls on the managers to replicate in a new environment the hardware, systems and operational approaches that have worked so well at home.

Fifth Stage

In the fifth stage, the company moves toward a genuinely global mode of operation.

FACTORS FAVOURING GLOBALISATION IN INDIA

n  Human resources.

n  Wide base.

n  Growing Entrepreneurship.

n  Growing domestic market.

n  Niche market.

n  Expanding market.

n  Transnationalisation of world economy.

n  Economic liberalisation.

n  Competition.

GLOBALISTION IN INDIA-OBSTACLES

n  Government policy and procedures.

n   High cost.

n   Poor infrastructure.

n   Obsolescence.

n   Resistance to change.

n   Poor quality image.

n   Supply problem.

n   Small size.

n   Lack of experience.

n  Limited R&D and marketing research.

n  Growing competition

n  Trade barriers

 The intent of globalisation is efficiency improvement and market optimisation taking advantage of the opportunities of the global environment. Therefore, in many cases, Indian companies have to globalise to survive and grow in the emerging competitive environment.

The limitations of national market, the diversity and unevenness of resource endowment of different nations, complexity of technological development, differences in the level of development and demand pattern, production efficiencies, cost etc are few factors that enforces the need for globalised operations. This is the reason because of which not only India but also a number of developing nations which, in the past, were against globalisation have now opened their doors for globalisation.

IMPACT OF GLOBALISATION ON INDIAN ECONOMY 

In India, the process of dismantling trade barriers was started in 1991 and subsequently, every year the Government has been announcing reduction in custom duties and removing quantitative restrictions. It is argued that this shall enable free flow of goods, capital and technology and thus globalization becomes a motivating force for nations to develop themselves at a faster rate. For a developing country like India, it opens access to new markets and new technology. Thus, the import-substitution strategy has been replaced by export led growth during the last decade in India. The recent developments in information and communications technology have further facilitated and accelerated the pace of globalization. International financial markets, trans border production networks and acceleration in capital flows across national frontiers have been the driving forces leading to greater global integration of the economies.

Question3. Define the term Liberalization, Privatization and Globalization? What is the Impact of Government Policy Changes on Business andIndustry?

Answer: The economic reforms that were introduced were aimed at liberalizing the Indian business and industry from all unnecessary controls and restrictions.They indicate the end of the licence-permit-quota raj.Liberalization of the Indian industry has taken place with respect to:

1.      Abolishing licensing requirement in most of the industries except a short list,

2.      Freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities,

3.      Removal of restrictions on the movement of goods and services,

4.      Freedom in fixing the prices of goods services,

5.      Reduction in tax rates and lifting of unnecessary controls over the economy,

6.      Simplifying procedures for imports and experts, and

7.      Making it easier to attract foreign capital and technology to India.

The new set of economic reforms aimed at giving greater role to the private sector in the nation building process and a reduced role to the public sector. To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991.The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernization. It was also observe that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions.

Globalization is defined as follow:

Globalizations are the outcome of the policies of liberalization and privatization.Globalization is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries.Globalization involves an increased level of interaction and interdependence among the various nations of the global economy.Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve a customer in a distant geographical market.

The Impact of Government Policy Changes on Business and Industry are as follows:

1.      Increasing competition: As a result of changes in the rules of industrial licensingand entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector.

2.      More demanding customers: Customers today have become more demandingbecause they are well- informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services.

3.      Rapidly changing technological environment: Increased competition forces thefirms to develop new ways to survive and grow in the market. New technologies make it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challenges before smaller firms.

4.  Necessity for change: In a regulated environment of pre-1991 era, the firms couldhave relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.

5.  Threat from MNC: Massive entry of multi nationals in Indian marker constitutes newchallenge. The Indian subsidiaries of multi- nationals gained strategic advantage. Many of these companies could get limited support in technology from their foreign partners due to restrictions in ownerships. Once these restrictions have been limited to reasonable levels, there is increased technology transfer from the foreign partners.

Question4: Define Multi National Corporation. Explain its need, advantages and disadvantages.

Multi National Corporations (MNC)

MNC`s are huge business organizations which extend their business operations beyond the country of its origin. They are multi-product and multi process enterprises who extend their business activities in various countries through a large network of industries and marketing operations. A MNC can be simply defined as a company which owns or controls production facilities in more than one country which has been acquired through foreign direct investment

Characteristics of Multinational Corporations (MNC)

·         It has production facilities in a foreign country

·         It should realize at least 25% of its total sales from its overseas operations

·         It has a geocentric and integrative approach in conducting its business operations

·          It has an efficient system of communication between headquarters and subsidiaries

Need for Multinational Corporations (MNC) 

Companies expand their business operations overseas due to the following reasons –

·         To Avoid Tariff and Non-Tariff barriers

·         To minimize transportation and distribution costs

·         To exploit opportunities present in the host country

·         To secure scarce raw materials and resources

·         To help in economic growth and development of the host country

Concepts related to Multinational Corporations (MNC)

Transnational Corporation – It is an enterprise which consists of a parent company and its foreign affiliates where the parent company acquires control over assets of its affiliates through major equity holdings.

Foreign Affiliates – It is a company in which an investor who belongs to another country holds more than 10% equity shares of the company.

Subsidiary – It is a company in the host country in which another company directly owns more than 50% of its equity and has full control over management.

 Associate – It is a company in the host country in which a foreign investor holds more than 10% but less than 50% equity shares.

Branch – A company is said to be a branch of another company –

·         When it is not a permanent office or Headquarters of the mother company

·          When its land, equipment and machinery is directly owned by the mother company

·          When its management control and decision making lies in the hand of the parent company

Advantages/Benefits of Multinational Corporations (MNC)

·         It results in Economic growth and development of the host country

·         It raises the standard of living of the people by offering high quality and huge variety of products

·         MNC`s bring advance technology and modern technical, research and managerial skills to the host country which aids in its development

·         It accelerates industrial growth and increases the rate of investment in the host country It promotes exports and reduces imports

·         MNC`s facilitate efficient utilization of resources in the host country

·         MNC`s raise competition in the domestic market thereby breaking monopolies and support the development of the domestic industries directly or indirectly

·         It promotes Bilateral Trade relations and cooperation among different countries  

Disadvantages/Demerits of Multi-National Corporations (MNC)

·         A MNC may develop monopoly in the host country

·          MNC may work against national interest

·         They may provide out-dated technology

·         May influence and manipulate domestic policies according to their selfish interests

·         May have an adverse effect on culture and lifestyle of the people of the country

·         May have adverse effects on domestic markets

Question 5: Explain the structure, objectives and role of WTO in settling disputes and coordinating trade among its members.

World Trade Organization

Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)  
Membership: 164 countries on29 July 2016
Budget: 197 million Swiss francs for 2013
Secretariat staff: 640
Head: Roberto Azevêdo (Director-General)

The Uruguay round of General Agreements on Tariffs and Trade (GATT) (1968-93) gave birth to World Trade Organization (WTO). The members of GATT signed on an agreement of Uruguay round in April 1994 in Morocco for establishing a new organization named WTO.( signed by 123 nations on 15 April 1994)

It was officially constituted on January 1, 1995 which took the place of GATT as an effective formal, organization. GATT was an informal organization which regulated world trade since 1948. World Trade Organization was formed as a replacement for General Agreements on Tariffs and Trade in 1995 with the purpose of supervising and liberalizing international trade.

Unlike GATT, World Trade Organization is a permanent organisation which has been established on the basis of an international treaty approved by participating countries. WTO has a total of 164 member countries accounting for over 97% of the world trade.

Objectives of World Trade Organization

1. To accept the concept of sustainable development

2. To protect the environment

3. To ensure optimum utilization of world resources

4. To enlarge production and trade of goods

5. To ensure full employment and increase in effective demand

6. To improve the standard of living of people of member countries

WTO Ministerial Conference:

Conferences	Date and year	Host City/Country
1st	9–13 December 1996	Singapore
2nd	18–20 May 1998	Geneva, Switzerland
3rd	30 November – 3 December 1999	Seattle, United States
4th	9–14 November 2001	Doha, Qatar
5th	10–14 September 2003	Cancún, Mexico
6th	13–18 December 2005	Hong Kong
7th	30 November – 2 December 2009	Geneva, Switzerland
8th	15–17 December 2011	Geneva, Switzerland
9th	3–6 December 2013	Bali, Indonesia
10th	15–18 December 2015	Nairobi, Kenya
11th	11–14 December 2017 (Proposed)	Buenos Aires, Argentina

Functions of World Trade Organization

1. To deal with regulation of trade between participating countries

2. To provide a framework for negotiations and formalization of trade agreements

3. It is responsible for enforcing trade laws and agreements

4. It monitors trade services and trade related aspects at intellectual property rights

5. To assist international organisations such as IMF and IBRD

6. To provide a framework for dispute settlement

Structure of World Trade Organization

World Trade Organization is supervised by a highest authority called Ministerial Conference which consists of representatives of all WTO members. It meets at least once in two years to take decisions on all matters of multilateral trade.

WTO consists of a general body called general council which directly reports to the ministerial conference. It delegates responsibilities to 3 bodies –

·         Council for Trade in Goods

·         Council for Trade in Services

·         Council for Trade-related aspects of intellectual property rights

Benefits of World Trade Organization 

·         The system helps promote peace

·         Disputes are handles constructively

·         Free trade cuts the cost of living

·         Provides more choice of products and quality

·         Trade raises incomes and stimulates economic growth

·         Governments are shielded from lobbying

·         The system encourages good governance

·         Trade liberalization has helped in economic growth

·         It provides a platform for multilateral discussions

·         It has helped in reducing various tariff and non-tariff barriers

·         It reviews economic policies and formulate new ones through trade reviews

Drawbacks of World Trade Organization

·         Industrialization and decision making are dominated by developed countries.

·         Developing nations do not have financial resources to participate in WTO discussions on negotiations

·         Very less attention is given to the development of under developed countries

·         Rules and regulations cannot be strictly enforced on developed countries who are members of WTO