Business Government and Society

Content
Contents Chapter I Nature ucture Natur e and str uctur e of the economy ........................................................................ 1 1.1 Nature and Structure of the Economy .................................................................... 1 1.2 Functions of the State and the Economic Role of the Government ................... 3 1.3 The Legal and Constitutional Environment ........................................................... 5 1.3.1 Company Laws ................................................................................................... 6 1.3.2 Foreign Exchange Regulation Act .................................................................. 7 1.3.3 The Sick Industrial Companies (Special Provisions) Act, 1985 ............... 7 1.3.4 The Monopolies and Restrictive Trade Practices Act(MRTP),1969 ........ 8 1.3.5 The Consumer Protection Act, 1986 .............................................................. 8 1.3.6 The Environment Protection Act, 1986 .......................................................... 9 1.4 Demographic Facts ..................................................................................................... 10 Summing Up ....................................................................................................................... 10 Self-assessment ................................................................................................................ 11 Chapter II The social environment and its influences on business ...................................... 12 2.1 Parameters of Quality of Life .................................................................................... 12 2.1.1 The Physical Quality of Life Index ................................................................. 14 2.1.2 Introduction to the Human Development Index .......................................... 14 2.2 Socio Economic Protective Legislations .................................................................. 15 2.2.1 Prevention Of Food Adulteration Act (1954) ................................................ 15 2.2.2 The Drugs And Cosmetics Act (1940) .......................................................... 16 2.2.3 Standards of Weights And Measures Act (1956) ......................................... 16 2.2.4 Public Liability Insurance Act ......................................................................... 16 2.3 Consumer Protection Overview ............................................................................... 16 2.3.1 Shortcomings of the CP Act, 1986 .................................................................. 17 2.3.2 Other Dimensions of the CP Act, 1986 .......................................................... 17 Summing Up ....................................................................................................................... 17 Self-assessment .................................................................................................................. 18 Chapter III Industry ............................................................................................................................... 19 3.1 Privatisation .................................................................................................................. 19 3.1.1 Ownership Measures ........................................................................................ 20 3.1.2 Organisational Measures ................................................................................. 20 3.1.3 Operational Measures ...................................................................................... 21 3.2 Disinvestment .............................................................................................................. 21 3.2.1 The Rangarajan Committee on Disinvestment ............................................ 21 3.3 Privatisation in India and the World: ....................................................................... A comparison of Political dynamics ......................................................................... 22 3.3.1 Privatisation or Disinvestment? ...................................................................... 24 3.3.2 Privatisation in India: A Balance Sheet ......................................................... 24 3.4 Competition Policy and Law ...................................................................................... 26 3.4.1 The MRTP: A redundant Act? ......................................................................... 26 3.4.2 The New Competition Law: an advance over MRTP .................................. 27 3.5 Industrial Reforms ...................................................................................................... 27 Summing Up ....................................................................................................................... 29 Self-assessment ................................................................................................................ 29
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Business, Government, and Society
Chapter IV The Financial System ....................................................................................................... 30 4.1 Money Market ............................................................................................................. 30 4.1.1 Money Market in India .................................................................................... 31 4.1.2 Instruments traded in the Money Market .................................................... 31 4.2 Gilt Edged Market or Government Securities Market ........................................ 34 4.2.1 Zero Coupon Bonds ........................................................................................... 35 4.2.2 Floating Rate Bond ............................................................................................ 35 4.2.3 Tap Stock ............................................................................................................. 35 4.2.4 Partly Paid Stock ............................................................................................... 35 4.2.5 Capital Indexed Bonds ..................................................................................... 35 4.3 Capital Market Reforms .............................................................................................. 36 4.3.1 Primary Market Reforms ................................................................................. 36 4.3.2 Secondary Market Reforms ............................................................................ 36 4.4 Buy back Ordinance .................................................................................................. 37 4.4.1 Buy back and experience with MNCs ........................................................... 38 4.5 Banking Sector Reforms ............................................................................................ 38 4.6 An Introduction to Fiscal, Monetary and Credit Policy ....................................... 41 4.6.1 Fiscal Policy ........................................................................................................ 41 4.6.2 Monetary and Credit Policy ............................................................................ 44 Summing Up ....................................................................................................................... 46 Self-assessment ................................................................................................................ 46 Chapter V Political System ......................................................................................................... 30 Evolution and History of Democracy ...................................................................... 47 Parliamentary and Presidential Forms of Democracies ...................................... 48 Direct and Indirect Forms of Democracies ........................................................... 49 Direct Democracy: An Experience .......................................................................... 49 Constitutional Reforms ............................................................................................... 50 5.5.1 Controversy Regarding Constitutional Reforms .......................................... 50 5.6 Judicial Reforms in India ........................................................................................... 53 Summing Up ....................................................................................................................... 53 Self-assessment ................................................................................................................ 54 Chapter VI International Inter national Linkages ..................................................................................................... 55 6.1 GATT and WTO .......................................................................................................... 56 6.1.1 WTO: A negotiating Forum ............................................................................. 56 6.1.2 WTO: A system of rules ................................................................................... 56 6.1.3 WTO: A dispute settlement body .................................................................... 56 6.1.4 Principles of WTO ............................................................................................. 56 6.1.5 Agreements under WTO .................................................................................. 57 6.2 Agriculture and WTO ................................................................................................ 58 6.3 Agreement on Sanitary and Phytosanitary Measures ......................................... 59 6.4 Agreement on Technical Barriers to Trade .......................................................... 59 6.5 Agreement on Textiles and Clothing ....................................................................... 60 6.6 General Agreement on Trade in Services ............................................................. 60 6.7 General Agreement on Trade Related Aspects of Intellectual Property Rights .... 60 The 5.1 5.2 5.3 5.4 5.5
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Content
6.7.1 Enforcement of TRIPS ...................................................................................... 60 6.8 Agreement on Subsidies and Countervailing Measures ..................................... 61 6.9 Agreement on Safeguards from Imports ................................................................ 61 6.10 Agreement on Trade Related Investment Measures ............................................ 62 6.11 Agreement on Government Procurement .............................................................. 62 6.12 Settlement of Disputes ................................................................................................ 63 6.13 Imposition of Penalties ................................................................................................ 63 6.14 Foreign Exchange Management Act ....................................................................... 64 6.15 Global Competitive Index ........................................................................................... 67 6.16 Corruption Perception Index ..................................................................................... 70 6.17 Index of Economic Freedom ..................................................................................... 71 Summing Up ....................................................................................................................... 72 Self-assessment ................................................................................................................ 72 Chapter VII Corporate Responsibility ................................................................................................. 73 7.1 Need for Sound Corporate Governance ................................................................. 73 7.2 Trend in Corporate Governance .............................................................................. 74 7.3 Recommendations of the Committee on Corporate Governance ....................... 76 7.3.1 Key Constituents of Corporate Governance ................................................. 76 7.3.2 Key Aspects of Corporate Governance .......................................................... 76 7.3.3 Mandatory and Non Mandatory Recommendations .................................. 76 7.3.4 Schedule of Implementation ............................................................................ 77 7.3.5 Composition of Board of Directors ................................................................. 77 7.3.6 Chairman of the Board ..................................................................................... 78 7.3.7 Composition of the Audit Committee ............................................................. 78 7.3.8 Frequency of Meetings and Quorum Requirements of The Audit Committee ........................................................................................ 79 7.3.9 Powers of the Audit Committee ....................................................................... 79 7.3.10 Disclosure of Remuneration Package ......................................................... 79 7.3.11 Accounting Standards and Financial Reporting ....................................... 79 7.3.12 Disclosures Related to Management ........................................................... 80 7.3.13 Complaints of the Shareholders .................................................................... 80 7.3.14 Government's push to Corporate Governance ........................................... 80 7.4 Corporate Social Responsibility ................................................................................ 81 7.4.1 Evolution ............................................................................................................. 81 7.4.2 The Pyramid of Corporate Social Responsibility ......................................... 82 Summing Up ....................................................................................................................... 83 Self-assessment ................................................................................................................ 84
Chapter VIII Business ethics ......................................................................................................... 85 Overview of issues in business ethics ....................................................................... 86 8.1. General business ethics .................................................................................. 86 8.1.1 Ethics of accounting information ...................................................... 86 8.1.2 Ethics of human resource management .......................................... 86 8.1.3 Ethics of sales and marketing ........................................................... 87 8.1.4 Ethics of production ........................................................................... 87 8.1.5 Ethics of intellectual property, knowledge and skills ................... 88 8.2 International business ethics and ethics of economic systems .............. 88 8.2.1 International business ethics ............................................................ 88
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8.2.2 Ethics of economic systems .............................................................. 89 Theoretical issues in business ethics ........................................................................ 89 8.2.3 Conflicting interests ............................................................................. 89 8.2.4 Ethical issues and approaches .......................................................... 89 8.3 Business ethics in the field ............................................................................. 90 8.3.1 Corporate ethics policies .................................................................... 90 8.3.2 Ethics officers ....................................................................................... 95 Summing up ................................................................................................................. 96 Self Assessment ........................................................................................................ 96 ChapterIX Globalization .............................................................................................................. 97 9.1 Globalization Definition, History ............................................................... 97 9.2 Modern Globalization ...................................................................................... 99 9.3 Measuring globalization .................................................................................. 99 9.4 Effects of globalization .................................................................................... 100 9.5 Pro-globalization (globalism) ........................................................................ 104 9.6 Anti-globalization .............................................................................................. 105 Summing up ................................................................................................................. 105 Self Assessment ........................................................................................................ 106
Chapter X Industrial Growth and Environmental degradation ..................................... 107 10.1 Causes of pollution ........................................................................................... 108 10.2 Type of industries and type of pollution ...................................................... 108 10.2.1 Causes of industrial pollution waste ............................................... 109 10.2.1.1 Water Pollution Industries ................................................... 110 10.2.1.2 Oil .............................................................................................. 110 10.2.2 Causes of Air Pollution ...................................................................... 111 10.2.2.1 Industries ................................................................................. 111 10.2.2.2 Transport ................................................................................. 112 10.2.2.3 Dwelling ................................................................................... 112 10.3 Environmental law .......................................................................................... 114 10.3.1 Environmental governance and regulation .................................... 114 10.3.1.1 Environmental protection .................................................... 114 Environment and rehabilitation .................................................. 115 Environmental Governance and regulation in India................ 115 10.3.1.2. Legislative efforts ................................................................. 115 Role of the Judiciary ...................................................................... 116 Working of Environmental regulation ........................................ 116 Enforcement .................................................................................... 118 Monitoring ....................................................................................... 118 Summing up ................................................................................................................ 120 Self Assessment ........................................................................................................ 120
Answer to Self-assessment ......................................................................................... 121
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Nature and Structure of the Economy
Chapter I Nature ucture Natur e and Str uctur e of the Economy
Learning Lear ning Objectives Reading this chapter would enable you to understand Different kinds of economic structures Performance of an economy based on its nature The importance of population and its dynamics Understanding of law and constitution Different laws applicable under Indian conditions Contents 1.1 Nature and Structure of the Economy 1.2 Functions of the State and the Economic Role of the Government 1.3 The Legal and Constitutional Environment 1.3.1 Company Laws 1.3.2 Foreign Exchange Regulation Act 1.3.3 The Sick Industrial Companies (Special Provisions) Act, 1985 1.3.4 The Monopolies and Restrictive Trade Practices Act (MRTP), 1969 1.3.5 The Consumer Protection Act, 1986 1.3.6 The Environment Protection Act, 1986 1.4 Demographic Facts Summing Up Self-assessment
Nature ucture 1.1 Natur e and Str uctur e of the Economy The purpose of business is to create wealth for all the agents involved in the process of business. The method of creating wealth and the extent to which it can be created depends on the nature and structure of the economy in which business is being carried out. Economic policy dimensions influence business fortunes and strategies. The economic policy in turn is influenced by the nature of the economy and the nature of the economy is influenced by the dominant political and cultural thought. Over the last 100 years or so, the world has seen three kinds of politicoeconomic structures of the economy. Free Market Systems Command Systems Mixed Economy Systems
The three above-mentioned structures represent three different levels of governmental control. a) A free market system allocates resources according to the price system. This depends upon the forces of supply and demand. The motive to supply is the prospect of profit. The motive to demand is utility or satisfaction. Such market systems are sometimes called laissez-faire,
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c)
since there is no external interference, or capitalist, because in their most advanced state they tend to be dominated by the owners of capital. In these systems, efficiency means achieving the maximum satisfaction of effective demand with the limited resources, or, looked at another way, producing all output as cheaply as possible. Since effective demand means the capacity to pay, an efficient free market economy will be as large as possible when measured in money, that is to say, national income will be maximised. In Command Systems the determination of need priorities is usually undertaken by the state, and such economies are called centrally planned or command economies. In a centrally planned system there is no single criterion for efficiency, and political choices will be very influential in economic activity. Since market prices are fixed and supply regulated by the state, one cannot measure efficiency in terms of maximised national income. Indeed it becomes problematic to value the national output in any way that can be meaningfully compared with the national incomes of free market economies. By definition, efficiency still means maximising output from limited input, but now we do not consider the market value of that output, rather a more subjective evaluation of the needs satisfied. Mixed economies are intended to combine the best of both the extreme systems and to avoid the worst to some extent they succeed. For example social security is often provided as a command style safety net to avoid starvation of the poor, (a negative externality,) and free education and health care, (merit goods,) are provided because left to itself, the market would under produce these goods.
It is a general belief that the free market system creates the urge for hard work and innovation. However, it also has its attendant problems. Antagonists say that the ownership of resources determines the structure and the extent of freedom of the economy. In such an economy, ownership is concentrated in the hands of a few and state control is replaced by control by an oligopoly. Whereas, under the ownership of the state social goals are pursued, the nature of social goals may depend on the value system of the politburo but nevertheless society benefits at large. The experience, however of erstwhile communist countries having a command system of economy has been very dismal. There has only been equality of poverty and that too amongst the masses. The ruling elite became richer and richer in these systems. Looking at these experiences, the World Bank Report on Good Governance released in the year 1997 talked about the hazards of extremes of governance and too little governance. It argued that erstwhile European countries have seen too much governance, which has resulted in a market that lacks an entrepreneurial spirit. Whereas, countries like Somalia, Congo, etc. have seen too little governance resulting in the creation of anti market conditions. The World Bank Report therefore talked about the right dose of governance that acts as a facilitator for the smooth conduct of market functions. It is not government's business to be in business. The job of the government is to create conditions for enterprise rather than running the enterprises themselves.
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Government 1.2 Functions of the State and The Economic Role of the Gover nment The STATE, in its wider sense, refers to a set of institutions that possess the means for legitimate coercion, exercised over a defined territory and its population referred to as society. The STATE monopolises rule making within its territory through the medium of an organised government. As per the rulings of the Supreme Court of India, even semi autonomous bodies receiving grants from the government will be categorised as state. Government, on the other hand refers to the process of governing. The process of governing requires a set structure, which exercises power. Because of this, the terms state and government are used interchangeably. The STATE, primarily consists of three broad kinds of institutions, with three distinct sets of powers with their assigned roles. These are: Legislature Legislature, whose role is to make the law: This role is performed by the parliament in democracies while the King or the monarch does the same in autocracies. Executive which is responsible for implementing the law: They are Executive, also sometimes referred to as the government'. Judiciary, Judiciary which is responsible for interpreting and applying the law.
These three institutions are woven in different ways to give different forms of government. The different forms of government decide the way economic matters are conducted and handled by the state. In an autocratic state all the above institutions are combined into one and all the powers are vested in the monarch or the king. In a theocratic state, like the Vatican City, all the powers are vested in the Church or whatever the highest religious body of the land is. In a democracy these powers are distributed according to the form of democracy, which can be A Presidential form in which, the president is elected by the direct vote of the electorate and he, in turn, chooses his council of ministers, who owe allegiance to him. In this form, the Parliament exercises control through laws and enactments and by budgetary allocations for different limbs of the government after discussions on the floor of the house. In the Parliamentary cabinet form, the majority party in the parliament elects its leader as the Prime Minister who then forms a council of Ministers mostly from amongst the elected representatives of his party. In such a system a president, if existent, is largely a figurehead.
It will be seen that the Presidential form of government offers greater stability than the parliamentary cabinet form, particularly if the largest party does not have an absolute majority. Fiscal Decisions: (related to taxation, expenditure, etc.) are taken much faster in a presidential form than in a parliamentary form of government. However, the danger is that the presidential form can drift into a dictatorship
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in the absence of well conceived checks and controls. The argument regarding the role of the government has always been changing with times. Mercantilists argued for a strong economic role of the government whereas free trade protagonists wanted to limit the role of the government. The World Development Report on Good Governance talks about matching the role of the government to its capability and then in the course of time increasing that capability. As per this report, the State (read government) can travel in the spectrum from one of performing only basic functions to somewhat advanced functions and then on to activist functions. In somewhat more detail these would be: Basic functions include pure public goods such as the provision of property rights, macroeconomic stability, control of infectious diseases, safe water, roads and protection for destitutes. These are the essential functions of the state. Without the provision of these, the state is bound to wither as it would be entirely incapable of providing an environment in which markets could function. Somewhat advanced functions include things like management of externalities (pollution, for example), regulation of monopolies, and the provision of social insurance (pensions, unemployment benefits). The provision of these services would depend on the enhanced capability of the government to do so. However, they also contribute towards bettering the business and market environment. For example, by providing financial regulation and consumer protection, the state overcomes the problem of imperfect information. Activist Functions can be taken up by states with strong capabilities. They can help private activity in market research, information on macro level and on canalising activities (grouping non-economic individual efforts and making them an economic group effort.) Accordingly, the economic roles of the government can be under the following four heads: 1. Regulatory Role: The government may regulate the economy through direct and indirect controls. Indirect controls are exercised through various fiscal and monetary incentives and disincentives or penalties. Certain activities may be encouraged or discouraged through monetary and fiscal incentives and disincentives. For instance, a high import duty may discourage imports. Direct Controls on the other hand can be applied selectively from firm to firm and industry to industry, at the discretion of the State. Regulation may cover a wide spectrum from entry into business to the final results of the business and also exit from business. Regulation is very important for the proper functioning of the market economy. Entrepr epreneurial Entrepreneurial Role: Due to ideological reasons and dearth of private enterprise and capital, the direct participation of government was very common in the socialist and developing countries. However, since the 1980s a belief has gathered momentum that government has no business to be in business'. However, in underdeveloped countries, where the infrastructures for development are inadequate and entrepreneurial activities are scarce, this role of the government assumes special
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significance. Development of certain priority sectors and protecting infant industry are still desired roles of the government in these countries. 3. Planning Role: How to use the limited resources to the best advantage is a question that every underdeveloped country faces. The role of government as a planner becomes important here. However, some countries have argued for indicative planning (just giving signals to the economy through tools of taxation and government expenditure) rather than involving the government in production and allocation duties. Promotional Role: The State needs to assume direct responsibility to build up and strengthen the necessary development infrastructures, such as power, transport, finance, marketing, institutions for training and guidance, etc. The promotional role of the State also encompasses the provision of various fiscal, monetary and other incentives, including measures to cover certain risks, for the development of certain priority sectors and activities.
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1.3 The Legal and Constitutional Environment One major Reliance Oil project in Gujarat faced a legal hurdle and incurred tremendous amount of extra expenditure because the person in charge was not aware of certain ecological laws. Similarly, another company in Delhi faced the wrath of the executive because it wanted to put up the Indian flag on its premises all throughout the year without being aware that it is illegal to do so. Instances such as these impress upon us the importance of knowing the legal and constitutional environment. The constitution is a politico legal institution in itself. It is also the super law, a reference frame for other laws to be made. It is thus the most important part of the non-economic environment of business. It gives structure to the legislative, executive and judiciary. All these organs run through organisations and institutions. For example, the judiciary runs through the Supreme Court, the High Court and the Lower court. An understanding of these and the consequent direction of business it entails is critical. The constitution in itself is a voluminous document. Yet, all readers are advised to go through it at least once. To describe and analyse the legal environment of business in India, we present here briefly an overview of some specific socio-economic legislations. Some of these legislations will be taken up for a detailed discussion in subsequent chapters. In this chapter, you should be interested in a broad overview rather than details. We may list these legislations, which define the legal environment of business in India. Company Laws Laws relating to Capital Markets MRTP (Monopolies and Restrictive Trade Practices Act) FERA (Foreign Exchange Regulation Act) IDRA (Industrial Development and Regulation Act) Trade Unions Act
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Bonus Ordinance Factory Legislations Social Security Enactments Laws for Consumer Protection
1.3.1 Company Laws Company Laws represent the principal laws affecting the organisation and management of corporate business. Originally, this law used to be concerned only with joint stock companies, but today its scope has increased. It covers different types of companies - their incorporation, their constitution, their management and also the manner of their dissolution. Based on the recommendations of the Bhabha Committee (1950), the companies act was thoroughly amended in 1956. The main objectives of the Companies Act 1956 are listed as follows: Minimum standard of business integrity and conduct in the promotion and management of companies. Full and fair disclosure of all reasonable information relating to the affairs of the company. Effective participation and control by shareholders and the protection of their interests. Enforcement of proper performance of their duties by the company management. The state's power of intervention and investigation into the affairs of companies with regard to interests of the shareholders and the public.
A. Capital Market Every Stock Exchange must have rules approved by the Central Government or the SEBI. Securities and Exchange Board of India Act, (SEBI) 1992 Promulgated as an ordinance on January 30, 1992, the SEBI Bill was passed by both Houses of Parliament and became effective on April 4, 1992. The objects of the SEBI Act are to develop the securities market on healthy and orderly lines and to provide adequate protection to investors. To this end, it is necessary to promote a market, which ensures: 1. 2. 3. 4. Fairness - The market must promote integrity in dealings, a high standard of conduct and good business practices. Efficiency - The market should be professionalised and well informed, offering high standards of service at reasonable costs. Confidence - The markets must inspire confidence in both investors and issuers to actively participate in and rely more on the security market. Flexibility - The market should be resilient, innovative and continuously responsive to the needs of all market participants.
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The Capital Market in India has witnessed tremendous growth in the recent past. There is increasing participation by the investing public. It is, therefore, imperative to sustain the confidence of the investors by protecting their interests. The Government has vested SEBI with the necessary statutory powers to deal effectively with all matters relating to the capital market. SEBI has been established on the pattern of the Securities and Exchange Commission (SEC) of the USA. 1.3.2 Foreign Exchange Regulation Act (FERA) The FERA Act of 1973 reflected the requirements for a highly regulatory system. The main features of this act were: 1. If the activities of a foreign company account for not less than 75 percent of its total annual turnover, such a company will be allowed to continue its activities subject to the condition that it will increase Indian participation, within a specified period, to not less than 26 percent of the equity capital of the company. If the same accounts for not less than 60 percent of its total annual turnover, it will be required to increase the Indian participation to not less than 49 percent of the equity of the capital. In such cases, a condition will be stipulated that the company concerned should undertake to export a minimum of 10 percent of its total annual turnover within a period of two years commencing from the date of approval by the Reserve Bank of India. If the exports of a company account for more than 40 percent of the total annual turnover, such a company will be allowed to continue its activities subject to the condition that it will increase, within a specified period, Indian participation to not less than 49 percent of the equity of the company. Cases of companies coming with proposals for substantial exports could be considered on merits for a higher level of equity participation provided such participation is in the overall interest of the economy of the country. The limit of Rs. 5 crores for permissible trading activity by multi-activity companies will be applicable only in the case of trading activities. The ceiling of 25 percent of the ex-factory value of the annual production for permissible trading activity by multi-activity companies will be raised to 40 percent and 60 percent respectively in the types of cases mentioned in (2) and (3) above.
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1 . 3 . 3 The Sick Industrial Companies (Special Provisions) Act 1985 (SICA, 1985) This act was enacted to address the problem of Industrial sickness. The objectives of SICA are: 1. 2. Securing timely detection of sick and potentially sick industrial undertakings; Speedy determination, by a panel of experts, of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies; Expeditious enforcement of the measures so determined.
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Providing for matters connected with or incidental to the above mentioned objectives.
BIFR and its functions The Board for Industrial and Financial Reconstruction was constituted on January 12, 1987. It is a quasi judicial body vested with powers to institute the necessary enquiries to determine if or not the company is sick. If the BIFR comes to the conclusion that the company has become sick, it can either give reasonable time to the company concerned to make its net worth positive or it can devise suitable measures, including change of managements, reduction of share capital, sale or leasing out of a part or whole of the undertaking or its merger with a healthy unit. By way of warning to unscrupulous managements, the Act also contains a provision that if the BIFR is satisfied that a person has been responsible for the diversion of funds or for managing the affairs of the company in a manner detrimental to the interests of the company, then the BIFR can direct banks and financial institutions not to extend any financial assistance for a period of ten years to such a person or to a firm in which such a person is a partner or to a company in which such a person is a director. 1.3.4 The Monopolies and Restrictive T rade Practices (MR TP) Act Trade 1969 The Monopolies and Restrictive Trade Practices (MRTP) Act has its genesis in the Directive Principles of State Policy embodied in the Constitution of India. Article 39 (b) and (c) thereof lay down that the state shall direct its policy towards ensuring. i) ii) that the ownership and control of material resources of the community are so distributed as best to subserve the common good, and that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.
The objectives of the MRTP Act are: a) To prevent concentration of economic power to the common detriment and the control of monopolies; b) To prohibit monopolistic trade practices; and c) To prohibit restrictive trade practices and unfair trade practices. 1.3.5 The Consumer Protection Act, 1986
For the first time in the history of consumer legislation in India, the Consumer Protection Act, 1986, extends statutory recognition to the rights of consumers. The Act recognises the following six rights of consumers. 1. 2. Right to safety, i.e., the right to be protected against the marketing of goods and services which are hazardous to life and property. Right to be informed, i.e., the right to be informed about the quality, quantity, potency, purity, standard and price of goods or services, as the case may be, so as to protect the consumer against unfair trade practices. Right to choose, i.e., the right of access to a variety of goods and services
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at competitive prices. In case of monopolies, say, railways, telephones, etc., it means the right to be assured of satisfactory quality and service at a fair price. 4. Right to be heard, i.e., the consumers' interests will receive due consideration at appropriate forums. It also includes the right to be represented in various forums formed to consider consumers' welfare. Right to seek redressal i.e., the right to seek redressal against unfair practices or restrictive trade practices or unscrupulous exploitation of consumers. It also includes the right to a fair settlement of the genuine grievances of consumers. Right to consumer education, i.e., the right to acquire the knowledge and skills to be an informed consumer. The Environment Protection Act, 1986
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The Directive Principles of State Policy contained in the Constitution direct the state to endeavour to protect and improve the environment and to safeguard the forests and wild life of the country. The Environment Protection Act, 1986, came into effect in November 1986 and is in addition to the two allied acts, viz, Water (Prevention and Control of Pollution) Act, 1974, and Air (Prevention and Control of Pollution) Act, 1981. The objective of the Act is to provide for the protection and improvement of the environment and matters connected therewith. The law covers not only land and water or air but all aspects of the environment. 1.4 Demographic Factors Demographic factors such as size of the population, population growth rates, age composition, ethnic composition, density of population, r ural-urban distribution, family size, nature of the family, income levels, etc. have very significant implications for business. One of the important objectives of the formation of the European Union (EU) was to bring about a single market that compares, in terms of the number of consumers, to that of USA and Japan. A high population growth rate also implies an enormous increase in the labour supply. When western countries experienced industrial revolution, the population growth was comparatively slow resulting in labour shortage and rising wages. Thus, cheap labour and a growing market have encouraged many multinationals to invest in developing countries. The falling birth rate and rising longevity will significantly alter age distribution within the population. The proportion of the aged in the population would go up. By 2025, India will be the country with the highest population of young people. However, other developed countries will have a predominantly older population, in some cases more than one third of the population would be more than 65 years of age.
Implications of demography:
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India is the second largest market in terms of the number of consumers. In March 2001, the estimated Indian population was about 102 crores compared to about 130 crores for China. By 2045, the Indian population is expected to surpass that of China. Because of the diversity of the demographic environment, companies are sometimes compelled to adopt different strategies within the same market'. As population around the world ages, it is said that the centre of gravity in the older population shifts from manual workers to people who have never worked with their hands, and especially to knowledge workers, a shift that will begin in the United States around the year 2010 when the babies of the baby boom which began in 1948 reach traditional retirement age. With migration all around, a truly heterogeneous population would arise. A highly heterogeneous population with its varied tastes, preferences, beliefs, temperaments, etc. gives rise to differing demand patterns and calls for differing market strategies. In such a scenario, personnel management is likely to become a more complex task.
Summing Up Over the last 100 years or so, the world has seen three kinds of politicoeconomic structures. The free market economy, the commanding heights and the mixed kind of economy. The Fiscal role of the government is largely determined by the above politico-economic structures. Accordingly the role of the government expresses itself into either a regulatory one, or an entrepreneurial one or one of planning or still a combination of all three. The constitution of governance becomes the prime factor which directs the role of the government. Also the laws that are passed by the government affect the economic environment in their capacity to effect business decisions. Lastly, the demographic profile of an economy and the dynamism of the same affects the economic environment to a great extent. Self-assessment 1. A free market system works because of the forces of ___________and ___________. The three institutions of a STATE are ___________, ___________ and __________. ____________ argued for a strong economic role for the government while the free trade protagonists asked for a limited role. The four economic roles of the government are ___________ role, ____________ role, _____________ role and _____________role. The Companies Act, 1956 was based on the recommendations of the
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_________ committee, 1950. 6. Article 39(b) of the Indian constitution is a precursor to the ___________ ACT, 1969. The Environment Protection Act was passed in the year ___________. The BIFR is a _______ judicial body to look into the problems of sickness of companies. India is the ________ largest market in the world in terms of the number of consumers. By the year _______, Indian population is expected to surpass that of China.
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Chapter II The social environment and its influences on business
Learning Lear ning Objectives Reading this chapter would enable you to understand: The concept of quality of life as distinct from quantity The index measuring physical quality of life. The Mechanism for developing the Human Development Index Enumeration of different socio-economic protective legislations and their applicability in Indian conditions. Contents 2.1 Parameters of Quality of Life 2.1.1 The Physical Quality of Life Index 2.1.2 Introduction to the Human Development Index 2.2 Socio Economic Protective Legislations 2.2.1 Prevention of Food Adulteration Act (1954) 2.2.2 The Drugs and Cosmetics Act (1940) 2.2.3 Standards of Weights and Measures Act (1956) 2.2.4 Public Liability Insurance Act 2.3 Consumer Protection Overview 2.3.1 Shortcomings of the CP Act, 1986 2.3.2 Other Dimensions of the CP Act, 1986 Summing Up Self-assessment
2.1 Parameters of Quality of Life While the income of a nation is just capable of indicating obliquely the standard of living, the quality of life is indicated by a host of other parameters like health, safety of the citizens, access to drinking water and environment, etc. Nobel laureate Amartya Sen has urged the government to concentrate more on health and education of the people as a means of improving the quality of life. He emphasised the need for a major government role in education and health as a part of the programme to empower the underprivileged for a sustained and balanced growth of the country. The well-being or quality of life of a population is an important concern in economics and political science. There are many components to well-being. A large part is the standard of living, the amount of money and access to goods and services that a person has; these numbers are fairly easily measured. Others like freedom, happiness, art, environmental health, and innovation are far difficult to measure. This has created an inevitable imbalance as programmes and policies are created to fit the easily available economic numbers while ignoring the other measures, that are very difficult to plan for.
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The social environment and its influences on business
The debate over what best maximises the quality of life is millennia old with Aristotle giving it much thought and eventually settling on the notion of eudemonia as central. The term has often been used, since the 1980s, in connection with the presence or absence of so-called victimless crimes, its users in this sense citing the incidence of these to gauge the inherent level of disorder in a society at a particular time. Users of the term in this application who tend to be political and/or social conservatives often refer to victimless crimes by the alternate name of "quality-of-life crimes." In conjunction with this, American sociologist James Q. Wilson has articulated what he calls the Broken Window Theory, which asserts that relatively minor problems left unattended (such as public urination by homeless individuals) send a subliminal message that disorder in general is being tolerated, and as a result, more serious crimes as well end up being committed (the analogy being that a broken window left unrepaired exudes an image of generalised dilapidation). Wilson's observations have propelled the political agenda of many prominent American mayors, most notably Rudolph Giuliani in New York City and Gavin Newsom in San Francisco. Understanding the quality of life is today most important in health care, where monetary measures do not readily apply. Decisions on what research or treatments to invest the most in are closely related to their effect on a patient's quality of life. One method for measuring the quality of life is subtracting the standards of living. An example of this would be, people in rural areas and small towns are generally reluctant to move to cities, even if it would mean a substantial increase in their standard of living. One can thus see that the quality of life of living in a rural area is of enough value to offset a higher standard of living. Similarly people must be paid more to accept jobs that will lower their quality of life, night jobs, ones with extensive travel pay more and difference in salaries can also give a measure of the value of quality of life. One attempt to take quality of life more into account in government decisions is the notion of a seventh generation standard, which argues that the effect of any decision today should be judged by its effect in six generations. These measures are often associated in the United States with the proposed Seventh Generation Amendment proposal to the U.S. Constitution, and in Canada with the Canada Well-Being Measurement Act co-authored by Mike Nickerson of the Green Party of Ontario and Joe Jordan, a Liberal Party of Canada Member of Parliament. This strategy still would be very difficult to implement as predicting the future is never easy. Decision makers seven generations ago in the early mid-nineteenth century would have great difficulty comprehending today's realities. Several First Nations in both Canada and U.S. seem to have independently originated this standard, prior to European contact, which seems to represent the age ratio between the longest-lived elders and newborns expressed in terms of generations, i.e. humans live at most 100-115 years, and reproduce in most tribal cultures at about 15-17 years old, a ratio of about seven to one. So, according to the standard, any child born as a decision was being made would be able to assess its impact over its entire life as an elder.
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2.1.1 The Physical Quality of Life Index (PQLI) The physical quality of life index (PQLI) is an attempt to measure the quality of life or well-being of a country. The value is a single number derived from the basic literacy rate, infant mortality, and life expectancy at age one, all equally weighted on a 0 to 100 scale. It was developed for the Overseas Development Council in 1979 by Morris Davis Morris, as one of a number of measures created due to dissatisfaction with the use of GNP as an indicator of development. PQLI might be regarded as an improvement but shares the general problems of measuring the quality of life in a quantitative way. It has also been criticised because there is considerable overlap between infant mortality and life expectancy. 2.1.2 Introduction to the Human Development Index (HDI) The Human Development Index (HDI) is a summary composite index that measures a country's average achievements in three basic aspects of human development: longevity, knowledge, and a decent standard of living. Longevity is measured by life expectancy at birth; knowledge is measured by a combination of the adult literacy rate and the combined primary, secondary, and tertiary gross enrolment ratio; and standard of living by GDP per capita (Purchase Power Parity US$) Before the HDI itself is calculated, an index needs to be created for each of these dimensions. To calculate these dimension indices the life expectancy, education and GDP indices minimum and maximum values (goalposts) are chosen for each underlying indicator. Calculating the HDI This illustration of the calculation of the HDI uses data for Costa Rica. 1. Calculating the life expectancy index The life expectancy index measures the relative achievement of a country in life expectancy at birth. For Costa Rica, with a life expectancy of 78.0 years in 2002, the life expectancy index is 0.884. Life expectancy index = 78.0 25/85 25 = 0.884 2. Calculating the education index The education index measures a country's relative achievement in both adult literacy and combined primary, secondary and tertiary gross enrolment. First, an index for adult literacy and one for combined gross enrolment are calculated. Then these two indices are combined to create the education index, with twothird weight given to adult literacy and one-third weight to combined gross
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enrolment. For Costa Rica, with an adult literacy rate of 95.8 percent in 2002 and a combined gross enrolment ratio of 69 percent in the school year 2001/02, the education index is 0.870. Adult literacy index = 95.8 - 0/100 - 0 = 0.958 Gross enrolment index = 69 - 0/100 - 0 = 0.690 Education index = 2/3 (adult literacy index) + 1/3 (gross enrolment index) = 2/3 (0.958) + 1/3 (0.690) = 0.870 3. Calculating the GDP index The GDP index is calculated using adjusted GDP per capita (PPP US$). In the HDI income serves as a sur rogate for all the dimensions of human development not reflected in a long and healthy life and in knowledge. Income is adjusted because achieving a respectable level of human development does not require unlimited income. Accordingly, the logarithm of income is used. For Costa Rica, with a GDP per capita of $8,840 (PPP US$) in 2002, the GDP index is 0.748. GDP index = log (8,840) log (100)/ log (40,000) log (100) = 0.748 4. Calculating the HDI Once the dimension indices have been calculated, determining the HDI is straightforward. It is a simple average of the three dimension indices. HDI = 1/3 (life expectancy index) + 1/3 (education index) + 1/3 (GDP index) = 1/3 (0.884) + 1/3 (0.870) + 1/3 (0.748) = 0.834 2.2 Socio Economic Protective Legislations Numerous legislations have been passed in the interest of the consumer and the public. Some of the important ones are: a) b) c) d) Prevention of Food Adulteration Act, 1954 The Drugs and Cosmetics Act, 1940 Standards of Weights and Measures Act, 1956 Public Liability Insurance Act, 1990
2 . 2 . 1 Prevention of Food Adulteration Act (1954) (amended in 1964 and 1971) Under this Act, manufacture and sale of adulterated or misbranded or substandard food is prohibited. It provides for food inspectors who can take samples of any article of food for analysis. The penalty for adulteration is imprisonment for up to six years and a fine of not less than Rs 1000. 2 . 2 . 2 The Dr ugs and Cosmetics Act (1940)
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This Act provides for the uniform control of manufacture, distribution and sale of drugs. It also covers the import of drugs and provides for the maintenance of uniformity in standards. This is essential in the light of continuous research and development and the use of various organic synthetics. Manufacture and sale of misbranded or spurious drugs attracts a maximum penalty of imprisonment for ten years and confiscation of all property, etc. used for such manufacture. Standards Weights Measures 2 . 2 . 3 Standar ds of Weights and Measur es Act (1956) (Amended in 1976) Uniform standards of weights and measures based on the metric system were established by this act. The central gover nment has set the specifications for any weight and measure in accordance with the recommendations made by the Inter national Organisation of Legal Metrology. 2 . 2 . 4 Public Liability Insurance Act The first Act of its kind in the world was passed in December 1990 to provide immediate cash to registered and non-registered companies, to meet unforeseen liabilities arising out of accidents. Protection 2.3 Consumer Pr otection Overview There has virtually been a tradition of exploitation of consumers in India due to shortages and a sellers' market. Consumers as buyers always had poor bargaining power. Manufacturers and traders often follow unfair and unethical practices. Though many legislations have been enacted, they have failed to provide any ef fective protection to consumers due to lack of ef fective implementation. It is common knowledge that a number of deaths take place every year due to food adulteration, spurious liquor, and contaminated / substandard medicines, etc. Many manufacturers and traders, including multinationals, indulge in unethical practices. They make tall claims for their products which turn out to be false. The service sector is no exception to unethical practices and allurements. To check the onslaught on consumers, a host of legislations have been enacted from time to time. These include Sale of Goods Act, 1930; Essential Commodities Act, 1955; the prevention of food adulteration act, 1954; Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act, 1980; Standards of Weights and Measures Act, 1956; Agricultural Products Grading and Marketing Act (AGMARK), 1937; Indian Standards Institution Certification Act, 1952; MRTP Act, 1969, etc. The MRTP Act acquired the elements of consumer protection legislation with amendments in 1984 when unfair trade practices were brought in its fold. However, in spite of these changes in the MRTP Act, need was felt for a more comprehensive consumer protection legislation. As a consequence, the Consumer Protection Act, 1986 was born. It is described as a unique legislation of its kind in India to offer protection to consumers. The Act was designed after an in-depth study of consumer protection laws and arrangements in the
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U.K., the U.S.A., Australia and New Zealand. The main objective of the Act is to promote better protection to consumers. Unlike other laws, which are punitive or preventive in nature, the provisions of this act are compensatory in nature. The Act intends to provide simple, speedy and inexpensive redressal to consumers' grievances. 2.3.1 Shortcomings of the CP Act, 1986 An important shortcoming is that penalty to a defaulter is limited to 20 times the value of the commodity, while the damage, his act or product could have caused may be much more. The Act needs an important change where negligence is proved on the part of the employees of public utilities and governmental organisations, and compensation given to the complainant. It is felt that the consumer forum should be authorised to specify that the amount should be paid from the salaries of defaulting employees.
2.3.2 Other Dimensions of the CP Act, 1986 Consumer protection by advertising bodies - The Advertising Standards Council of India (ASCI) set up by numerous advertising agencies has formulated a code to ensure the tr uthfulness and honesty of representations and claims made by advertisements to safeguard consumers against offensive and misleading advertisements. Pricing of Packaged Products - A notification of the Ministry of Food and Civil Supplies has indicated that the price on labels of all packaged products should be inclusive of all taxes. Consumer Education and Research Society - This body is doing some excellent work in educating various local consumer bodies as also taking up public interest litigation on various consumer issues. Doctors liable under the Consumer Protection Act - In the mid-nineties the Supreme Court decreed that medical practitioners like any other professionals, were liable under the CPA 1986. The ruling keeps government hospitals out of the purview of the CPA on the grounds that these hospitals provide free services.
Summing Up The debate on the economic welfare of people which always centred around the level of income gave rise to a lot of discontent amongst scholars because of its inadequacy to compare dif ferent economies. Quality of life was considered to be a better comparable parameter than income. Efforts were made to explain this parameter through PQLI and HDI. Preservation of quality of life resulted in many legal measures which aimed at giving higher and better consumption standards. Various socio-political legislations were passed towards this end. The Consumer Protection Act was one of the most
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important acts which looked at consumer protection in a holistic way.
Self -assessment 1. The Broken Window theory was articulated by the American sociologist ___________________. The Physical Quality of Life Index was developed by ______________. The parameters in the PQLI Index are _________ , ______________ and ________________. The Human Development Index is a composite summary index that measures a country's average achievements in three basic aspects: ___________, ____________ and __________________. In calculating the GDP Index, logarithm of Income is used because achieving a respectable level of human development does not require ______________ income. Prevention of Food Adulteration Act was amended twice in the years _________ and ____________. The Public Liability Insurance Act was passed in the year ___________. There has been a traditional environment of exploitation of consumers in India because of the prevalence of a _________ market. Under the CP Act, 1986, the penalty to a defaulter was limited to _________ times the value of the commodity. A Supreme Court ruling on the CP Act has kept government hospitals out of the purview of the CPA on the grounds that these hospitals provide ________ services.
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Chapter III Industry
Learning Lear ning Objectives Reading this chapter would enable you to understand: Concept of Privatisation Methods of Privatisation Privatisation as distinct from investments Privatisation experience of India as compared to experiences of the world A balance sheet of privatisation in India Concept of Competition Policy and Law Applicability of Competition Policy in India An introduction to Industrial reforms in India Contents 3.1 Privatisation 3.1.1 Ownership Measures 3.1.2 Organisational Measures 3.1.3 Operational Measures 3.2 Disinvestment 3.2.1 The Rangarajan Committee on Disinvestment 3.3 Privatisation in India and the World: a comparison of political dynamics 3.3.1 Privatisation or Disinvestment? 3.3.2 Privatisation in India: a balance sheet 3.4 Competition Policy and Law 3.4.1 The MRTP: a redundant Act? 3.4.2 The New Competition Law: an advance over MRTP 3.5 Industrial Reforms Summing Up Self-assessment
3.1 Privatisation Privatisation deals with the transfer of businesses from the state to the private sector. This commonly involves complex contractual structures to be put in place, and the industries concerned are usually closely regulated. Privatisation in a narrow sense indicates transfer of ownership of a public sector undertaking to private sector, either wholly or partially. But in another sense, it implies the opening up of the private sector to areas, which were hitherto reserved for the public sector. Such deliberate encouragement of investment in the private sector in the economy, will over a period of time increase the overall share of the private sector of the economy. This is the broader view in which privatisation of the economy can be effected. The basic purpose is to limit the areas of the public sector and to extend the areas of private sector operation including heavy industries and infrastructure.
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Privatisation is therefore, a process of involving the private sector in the ownership or operation of state owned or public sector undertakings. It can take three forms: 1. 2. 3. Ownership measures Organisational measures Operational measures
3 . 1 . 1 Ownership Measures The Degree of privatisation is judged by the extent of ownership transferred from public enterprises to the private sector. Ownership may be transferred to an individual, co-operative or corporate sector. This can have three forms: a) b) Total decentralisation: implies 100 percent transfer of ownership of a public enterprise to the private sector. Joint ventur e: implies partial transfer of a public enterprise to the venture: private sector. It can have several variants, 25 percent transfer to private sector in a joint venture implies that majority ownership and control remains with the public sector. 51 percent transfer of ownership to the private sector shifts the balance in favour of the private sector, though the public sector retains a substantial stake in the undertaking. 74 percent transfer of ownership to the private sector implies a dominant share being transferred to the private sector. In such a situation, the private sector is in a better position to change the character of an enterprise. Liquidation implies the sale of assets to a person who may use them for the same purpose or some other purpose. This solely depends on the preference of the buyer. Workers' co-operative is a special form of decentralisation. In this form, ownership of the enterprise is transferred to workers who may form a co-operative to run the enterprise. In such a situation, appropriate provision of bank loans is made to enable workers to buy the shares of the enterprise. The burden of running the enterprise rests on the workers in a workers' Co-operative. The workers become entitled to ownership dividend besides earning wages for their services.
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Measures 3.1.2 Organisational Measur es Include a variety of measures to a limited state control. They include: a) A holding company may be designed to take top-level major decisions with a sufficient degree of autonomy for the operating companies in its hold in their day to day operations. A big company like the Oil and Natural Gas Commission (ONGC), Steel Authority of India (SAIL) or Bharat Heavy Electricals Limited (BHEL) may acquire a holding status, thereby transferring a number of functions to its smaller units. In this way, a decentralised pattern of management emerges. Leasing In this arrangement, the government agrees to transfer the use of assets of a public enterprise to a private bidder for a specified period, say for 5 years. While entering into a lease, the bidder is required to give an assurance of the quantum of profits that would be made available to the state. This is a kind of tenure ownership. The government
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c) 1.
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reserves the right to review the lease to the same person or to grant the lease to another bidder depending upon the circumstances of the case. Restr ucturing is of two types: financial restructuring and basic restructuring. Financial Restr ucturing implies the writing off of accumulated losses Restructuring and rationalisation of capital composition in respect of debt-equity ratio. The main purpose of this restructuring is to improve the financial health of the enterprise. Basic Restr ucturing is said to occur when the public enterprise decides to shed some of its activities to be taken up by ancillaries or small-scale units.
3.1.3 Operational Measures The efficiency of public sector enterprises depends upon the organisational structure. Unless this structure grants a sufficient degree of autonomy to the operators of the enterprise or develops a system of incentives, it cannot raise its efficiency and productivity. These measures include: a. b. c. d. e. grant of autonomy to public enterprises in decision making, provision of incentives for workers and executives consistent with increase in efficiency and productivity, freedom to acquire certain inputs from the markets with a view to reducing costs, development of a proper criterion for investment planning, and permission to public enterprises to raise resources from the capital market to execute plans for diversification/expansion.
The basic purpose of operational measures is to infuse the spirit of private enterprise. 3.2 Disinvestment
Disinvestment is an important component of efforts towards privatisation. It simply implies privatisation of public sector units. Countries like the U.K. have shown as to how disinvestment could solve the fiscal crisis of the state and usher in a new industrial democracy. 3.2.1 The Rangarajan Committee on Disinvestment The Committee on disinvestment in Public Sector enterprises set up by the Government of India, under the chairmanship of C. Rangarajan, in 1993 has in its report made a number of recommendations. Important recommendations of the Committee include the following: 1. The best method for disinvestment is offering shares to the general public at fixed price through a general prospecting. However, since these shares have not been traded so far on the stock markets, it would be difficult to decide the fixed rate' at which they should be offered to the public. Once a reasonable time has elapsed and a normal trading atmosphere established in the market, this indeed would be the best
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method. Till then, the auction method with wide participation may be adopted. 2. The target level of disinvestment should be decided on the basis of the desirable level of public ownership in an activity or unit consistent with industrial policy. In all those units, which are reserved for the public sector, the percentage of equity disinvested should be 49 percent so that the government, by holding the majority of the shares, retains control over the management. In other cases, the percentage of equity to be divested should be 74 percent. Instead of yearwise targets for disinvestment, a clear action plan should be evolved. Disinvestment shall be in stages and sales shall be staggered so as to get the best possible price. A number of steps need to be undertaken for efficiently carrying out privatisation. These may include corporatisation of public enterprises, restructuring of finance with a proper debt-equity gearing and one Independent Regulatory Commission for the concerned sector, if necessary. A scheme of preferential offer of shares to workers and employees may be devised. Ten percent of the proceeds of privatisation may be set apart for lending to public enterprises on concessional terms for meeting their expansion and rationalisation needs.
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World: 3 . 3 Privatisation in India and the World: a comparison of political dynamics One dimension on which countries' privatisation programmes can be compared is the speed with which they are implemented. Some countries, like Argentina or the Czech Republic, implemented privatisation programmes rapidly, with large chunks divested within 3-5 years of launching the effort. But the vast majority of countries, including India, have implemented privatisation much more gradually, in fits and starts. Although many observers have complained about India's slow privatisation, in fact gradual privatisation is the international norm and rapid privatisation is the exception. To begin with, India was not a likely candidate for rapid privatisation, because it did not satisfy two necessary conditions for rapid privatisation: severe macroeconomic crisis, including high inflation, and a strong executive that could ram policies through. Many developing countries satisfied one of these criteria, e.g. Brazil and Turkey experienced several bouts of macroeconomic instability, yet these countries did not privatise rapidly. Even countries that satisfied both criteria, e.g. sub-Saharan Africa, privatised gradually or not at all. Only a handful of countries in Latin America and the transitional economies met both criteria and also privatised deeply and quickly (e.g. Argentina, Chile, Peru, Czech Republic, Estonia, etc.). To be sure, in 1991, when serious economic reform began in India, the country was in the midst of a balance of payments crisis and sought IMF assistance. But that crisis quickly gave way to a decade of good economic
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performance by Indian standards. From 1992-93 to 2000-2001, India's GDP grew at an average rate of 6.1 percent, inflation averaged 7.1 percent, and although imports exceeded exports every year, remittances and service exports grew to limit the current account deficit to average 1.1 percent of GDP . Rising capital inflows saw the country's foreign exchange reserves climb to $145 billion by September 2005. While these results were not spectacular compared to the high-growth Asian economies in their heyday, they were certainly better than India's previous record as well as the record of most other LDCs in the 1990s. Given that reality, politicians had little incentive to push through structural reforms like privatisation that would run into fierce resistance from powerful interest groups. Countries that privatised rapidly either did so under such severe macroeconomic conditions that included hyperinflation, shrinking GDP, and a severe balance of payments crisis or a sharp political discontinuity leading to a regime change (such as the ouster of a military dictatorship or the fall of communism). Under these circumstances, the hard economic medicine was acceptable. As part of that package of policies, privatisation was a way to rein in inflation by reducing the fiscal deficit (thereby limiting the monetisation of the deficit), and a convenient way to both raise foreign exchange, e.g. by selling state enterprises to foreign investors and increase FDI. The severe macroeconomic conditions were also the culmination of a long period of poor economic performance. In Argentina, for instance, the state was thoroughly discredited by the time President Menem came into office and pursued economic reforms, including deep privatisation. In countries like the Czech Republic, central planning and state ownership were so discredited that sweeping privatisation was politically very popular. The Indian economy, on the other hand, experienced mediocre economic performance for decades but never experienced very high inflation or prolonged periods of economic stagnation. At the same time, in India, the executive branch was weak throughout the 1990s. Through the 1990s, governments either had bare majorities or were coalition governments in which the leading party never had a majority on its own. In Argentina, Menem had much greater powers to push policies through, including relying on presidential decrees for some of the most important steps. In the Czech Republic too, President Havel and Prime Minister Klaus had a very broad mandate. Equally importantly they were ideologically committed to privatisation. On the other hand, in India's democratic setting with multiple institutional constraints, progress was understandably slow. Moreover, the liberalisation agenda was only grudgingly accepted across a wide swathe of the Indian political spectrum. The Congress Government headed by Narasimha Rao which initiated the radical changes, continued its ritualistic genuflection to
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the Nehruvian legacy of planning and SOEs. The Swadeshi Jagaran Manch and other elements of the BJP from the right and the CPM from the left had more in common with regard to economic policies on openness than differences. The caste-based parties the BSP, SP and RJD concerned that economic liberalisation would mean the unwinding of the hard won gains of reservations for their supporters in particular, were less than happy. Consequently, despite the many changes in policies and regulations, and a less adversarial relationship between business and government, there was a reluctance to overtly criticise earlier policies or explain with conviction and clarity why changes were needed. A lack of conviction translated into a lack of marketing reforms to the voter. Individual bureaucrats and ministers might have done so, but no Prime Minister has been willing to go to the people and say this is what we are going to do and these are the reasons why we need to do this. Thus, India's privatisation was of the gradual type. 3.3.1 Privatisation or Disinvestment? The government's privatisation programme began as a divestment programme, whose aim seemed to be merely to reduce the government's holdings by up to 20 percent, principally to raise resources to plug the budget deficit. Accordingly, the programme was labelled disinvestment and the term privatisation assiduously avoided. The next stage of escalation was raising the amount that would be divested to 49 percent. Since this would still leave the government with majority ownership, the fundamental character of the enterprise would be unchanged, while on the other hand even more resources could be mobilised to plug the budget deficit, which at the onset of the reforms exceeded 9 percent of GDP. In the next stage, the government decided that it would sell up to 74 percent of the equity, since that would leave it with 26 percent, a level high enough to give it a strong voice in the enterprise, though not a controlling voice. Finally, outright divestment became acceptable, initially for loss making enterprises and later even for profitable enterprises. Thus, the government escalated its commitment from merely privatising ownership to privatising control, and during the 2000-01 budget debate, Finance Minister Yashwant Sinha actually used the term privatisation to describe the government's programme for reforming SOEs(State Owned Enterprises). 3.3.2 Privatisation in India: a balance sheet 1. Whenever the Government tried to privatise any public sector undertaking, the opposition to the movement was so strong that the government did not succeed. The government under the provisions of Sick Industrial Companies Act (SICA) referred the cases of sick PSUs
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to the Bureau for Industrial and Financial Reconstruction. Upto 31st March 1995, 53 Central Public Sector Undertakings were registered with the BIFR. The BIFR has taken a decision for the revival of Indian Drugs and Pharmaceuticals Ltd., Orissa Drugs and Chemicals Ltd., Smith Stainstreet and Pharmaceuticals Ltd. Bharat Brakes and Valves Ltd., Biecco Lawrie Ltd., and Bengal Immunity Ltd. It has also decided to wind up some PSUs. They are: National Bicycles Corporation of India Ltd., Elgin Mills Co. Ltd., British Indian Corporation Limited., Cawnpore Textile Limited and Tannery and Footwear Corporation Ltd.. The cases of other registered Public Sector Enterprises are still under enquiry. But BIFR did not by and large result in any significant rehabilitation. The Government also decided to sign Memoranda of Understanding (MOU's) with various public sector enterprises. The main goal of the MOU policy is to reduce the quality of control' and increase the quality of accountability'. The MOU's grant greater operational autonomy of PSU's to pursue their objectives. Out of the 99 PSU's which signed the MOU with their administrative ministries, 46 were rated as Excellent' and 28 as very good'. The Disinvestment Commission was set up by the Government of India in August, 1996, to suggest the modalities for undertaking disinvestment of equities for select PSUs. The Commission has recommended disinvestment at varying levels for a number of PSU's like MFIL, GAIL, MTNL, CONCOR, PHL, ET&T, HVOC, HCIL, RICL, R-ASHOK AND UASHOK and NALCO. The Disinvestment Commission suggested strategic sales in various proportions for many enterprises like, BALCO, ITI, HTL, KIOCL, ITDC, BRPL, MFL,HCL, SCI, EPIL, HPL, IBP, NEPA, HZL, PPCL, FACT, IPCL, NFL and SAIL. The term strategic was frequently used to describe those state-owned enterprises (SOEs) that the government intended to retain control over the long term. But the definition of strategic became progressively tighter, so that the number of SOEs that could be divested expanded. Initially, for instance, the Ministry of Petroleum argued that oil companies were strategic, but by 2000 the cabinet committee on disinvestment had classified them as non-strategic. Eventually, only nuclear power, defence and railroads were left in the strategic category, and everything else was eligible for privatisation, and even in the last two, greater deregulation and outsourcing of activities is increasing the role of the private sector. To be sure, the debates on which sectors were strategic were contentious, but they ended with progressively narrower definitions, even though the party in power changed thrice. Although there has been a noticeable increase in the commitment to privatisation after the BJP-led governments came to power, there has been more continuity than discontinuity in the privatisation programme. Critics describe the disinvestments as deficit privatisation, because the proceeds of the disinvestments are being used to reduce the budget deficit. The Common Minimum Programme of the United Progressive Alliance Government stipulated that the proceeds of the disinvestments would be used in the two vital areas-health and education. A part of the proceeds of disinvestment will be earmarked to create an investment fund, which will be used to strengthen other public sector enterprises. The restrictions on the buyers also progressively declined. Initially the
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auction of shares was restricted to public financial institutions that over time were expected to offload them to private investors. By 1996 equity was being offered to foreign institutional investors. This followed three concomitant trends the willingness of the government to sell SOEs to strategic investors, that is, to private investors who would own a large block of shares (not necessarily 51 percent) and would enjoy management control, the liberalisation of rules governing foreign direct investment, and the opportunity to list Indian firms on foreign stock exchanges through ADRs and GDRs. Thus, potential buyers of Air India included Singapore Airlines in partnership with the Tatas, and Air France in partnership with a local Indian group, while foreigners owned portions of VSNL and MTNL through ADRs traded on the New York Stock Exchange. 3.4 Competition Policy and Law A high level committee on Competition Policy and Law recommended that a new Competition Act may be enacted on the lines recommended in the report of the committee and the MRTP Act, 1969, may be repealed and the MRTP Commission wound up. The provisions relating to the Unfair Trade Practices Act need not figure in the Indian Competition Act as they are presently covered by the Consumer Protection Act, 1986. A Competition Law Authority christened Competition Commission of India may be established to implement the Indian Competition Act. It will hear competition cases and also play the role of competition advocacy. The Competition Commission should be a multi-member body comprised of eminent and erudite persons of integrity and objectivity from the fields of Judiciary, Economics, Law, International Trade, Commerce, Industry, Accountancy, Public Af fairs and Administration. The investigative, prosecutorial and adjudicative functions will be separate. The Union Cabinet on 26th June 2001 cleared a diluted bill on competition law and policies named Trade Related Competition Commission of India (TRCCI) to replace the existing Monopolies and Restrictive Trade Practices Commission. (MRTPC). redundant 3.4.1 MR TP : a r edundant Act? The Primary objective of the MRTP Act was to control the concentration of economic power and control monopolies. With the initiation of the market economy and consequent liberalisation since 1991, this objective has been substantially diluted. The MR TP (Amendment) Act, 1991, has omitted provisions regarding the Central Government's permission for substantial expansion, establishment of new undertakings, mergers, takeovers, etc. Establishments, however big or small are now free to expand, or establish new undertakings, or effect mergers. Consequently, the strategic alliance between Godrej Soap and Proctor and Gamble could not be questioned. Likewise, the merger of Hindustan Lever and TOMCO, though objected to by certain quarters including the employees of TOMCO, was allowed by the Supreme Court.
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The MRTP Act was designed to prevent monopoly, however, it restricted competition. It in fact helped in protecting the market position of the large houses by restricting competition between the large houses. This has had many adverse effects, they have retarded competition, decelerated growth in the industrial and consequently in other sectors, and contributed to the foreign trade gap. For example, in the early seventies, having failed to make any headway within India, the only alternative left for the Birlas was to set up firms in other countries and it put up several successful companies in all the ASEAN countries. Thus, Birlas set up a viscose stable fibre plant in Thailand and exported fibre back to India. 3.4.2 The New Competition Law: an advance over MR TP Thus, the New Competition Law (NCL) is much an advance over the archaic MRTP Act. It takes into account the post reform realities of a liberalised economic environment. Whereas, the MRTP act was based on size as a factor, the NCL is based on structure as a factor. It defines competition offences clearly and explicitly, with the language being simple and easily comprehensible. Whereas, the MRTP Act discouraged dominance, the NCL only frowns upon the abuse of dominance. The TRCCI has much more autonomy and is selected by a collegium. 3.5 Industrial Refor ms
Industrial licensing was a major instrument of control under which the central government's permission was needed for both investment in new units (beyond a relatively low threshold) and for substantial expansion of capacity in existing units. Licensing was undoubtedly responsible for many of the inefficiencies plaguing Indian Industry. In a series of steps, licensing was abolished for all except seven industries viz., 1. 2. 3. 4. 5. 6. 7. alcoholic beverages, sugar, cigars and cigarettes, electronics, aerospace and defence products, hazardous chemicals and pharmaceuticals.
The special permission needed under the MRTP Act for any investment by the so called large houses which was an additional instrument of control over large houses, in addition to Industrial licensing was also abolished. Its stated objective was to prevent concentration of economic power but in practice it only served as another barrier to entry, reducing potential competition in the system. Abolition of these controls have given Indian Industry much greater freedom
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and flexibility to expand existing, or to set up new units in a location of their choice, thus increasing the pressure of competition as well as the ability to face competition. With the opening up of the Indian economy, the country's information technology Industry has been the biggest beneficiary. Between 1995 and 2000, the Indian IT Industry recorded a CAGR (Compounded Annual Growth Rate) of more than 42.4 percent. Software continues to contribute a major portion of the Indian IT Industry's revenues. India's exports of computer software beat global recession in 20012002 (April-March) to grow by a healthy 31.4 percent. In absolute terms, software and services exports went up to $ 7.875 billion in 2001-02 as against $5.978 billion in 2000-01. The steady growth in exports of software is a combined effect of software giants setting up bases in India to meet their global software requirements in the aftermath of 9/11, gradual market penetration that India is making in the non - traditional markets like the EU, Australia, Japan and China, and the increased receivables from IT enabled services like back office operations. India's exports of electronics hardware grew by 13.6 percent in 2001-02 to $ 1.183 billion from $ 1.041 billion in 2000-01. The IT manufacturing Industry has over 150 major hardware players supported by over 800 ancillary units and small time vendors engaged in sub - assemblies and equipment manufacturing. The combined export of software and services, and electronic hardware registered a growth of 28.7percent in 2001-02. In absolute terms, India's overall IT exports grew to $ 9.04 billion in 2001-02 from $ 7.019 billion in 2000-01. In 1999-00, more than 185 of the Fortune 500 companies outsourced their software requirements to Indian software houses. India's software industries show the clustering of the software companies in three distinct areas: Southern states, specifically Tamilnadu (Chennai, Madurai, Coimbatore and Trichy), Karnataka (essentially confined to Bangalore) and Andhra Pradesh (essentially confined to Hyderabad) In the west, Maharashtra (Mumbai and Pune), And in the North, Delhi, Noida and Gurgaon.
Software companies located in these regions account for almost the entire software and services exports of the country, highest number of firms and employment in the sector. Summing Up It is not the business of government to be in business. This has been the mantra around the world especially since the decade of 80s. India has tried its own brand of privatisation which gathered speed after 1991. MRTP laws in this context became archaic and a new legislation called competition law acquired its space. This gave more importance to competition than to control.
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Industry
We have also witnessed numerous debates for and against privatisation, the most important argument against privatisation is that it is a tool for deficit management. A lot has depended on the political ideologies of the time along with practical realities facing the world today. The liberalisation wave in particular has seen the software segment in India expanding to phenomenal proportions. Self -assessment 1. 2. The three forms privatisation can take are ____________ measures, ____________ measures and ______________ measures. As per the Rangarajan committee on disinvestment, those units which are reserved for the public sector, disinvestment should be to the tune of ____________ percent. India was not a likely candidate for rapid privatisation, because it did not satisfy two necessary conditions for rapid privatisation: severe _________ crisis, including high inflation, and a strong ___________ that could ram policies through. The government's privatisation programme began as a divestment programme, whose aim seemed to be merely to reduce the government's holdings by up to _________ percent, principally to raise resources to plug the _________ deficit. During the 2000-01 budget debate, Finance Minister Yashwant Sinha used the term ____________ to describe the government's programme for reforming SOEs. The term __________ was frequently used to describe those state-owned enterprises (SOEs) that the government intended to retain control over the long term. A Union Cabinet on 26th June 2001 cleared a diluted bill on competition law and policies named _________________ to replace the existing Monopolies and Restrictive Trade Practices Commission. (MRTPC). Whereas, the MRTP act was based on size as a factor, the NCL is based on ____________ as a factor. Between 1995- 2000, the Indian IT Industry recorded a CAGR of more than ________ percent. Critics describe the dis-investments as deficit privatisation, because the proceeds of the dis-investments are being used to reduce the _________ deficit.
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Chapter IV The Financial System
Learning Lear ning Objectives Reading this chapter would enable you to understand The concept of Money Market The development of the money market in India Instruments traded in the Indian Money Market Introduction to the Government Securities Market and instruments traded therein Reforms in the Indian capital markets Understanding of the Buy back law of India Reforms in the Banking sector Understanding of fiscal, monetary and credit policies Reforms of the fiscal environment in India Contents 4.1 Money Market 4.1.1 Money Market in India 4.1.2 Instruments Traded in the Money Market 4.2 Gilt Edged Market or Government Securities Market 4.2.1 Zero Coupon Bonds 4.2.2 Floating Rate Bond 4.2.3 Tap Stock 4.2.4 Partly Paid Stock 4.2.5 Capital Indexed Bonds 4.3 Capital Market Reforms 4.3.1 Primary Market Reforms 4.3.2 Secondary Market Reforms 4.4 Buy back Ordinance 4.4.1 Buy back and experience with MNCs 4.5 Banking Sector Reforms 4.6 An Introduction to Fiscal, Monetary and Credit Policy 4.6.1 Fiscal Policy 4.6.2 Monetary and Credit Policy Summing Up Self-assessment
The fundamental function of any monetary and financial system, no matter how simple or complex, is to promote efficiency in the process of exchange or trade in real goods and services, and thus to contribute to economic welfare. Around this objective is woven the entire gamut of financial institutions which interlinked, forms the financial system. 4.1 Money Market Money Market is the market for short term funds, as distinct from the Capital Market which deals in long term funds. The Reserve Bank of India defines the Money Market as a centre for dealings, mainly of a short term character, in
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The Financial System
monetary assets; it meets the short term requirements of the borrowers and provides liquidity or cash to lenders. It is the place where short term surplus investible funds at the disposal of the financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government. 4.1.1 Money Market in India The Money Market str ucture has undergone a change over the years, particularly under the impetus of economic reforms. Unlike in developed economies where Money Markets are promoted by financial intermediaries out of efficiency considerations, in India, as in many other developing countries, the evolution of the money market and its structure has been integrated into the overall deregulation process of the financial sector. The Reserve Bank has gradually developed the Money Market through a five pronged effort. 1. Interest rate ceilings on inter bank call/notice money, inter bank term money, rediscounting of commercial bills and inter bank participation without risk were withdrawn effective May 1, 1989. Several financial innovations in terms of money market instruments, such as, auctions of Treasury Bills, certificates of deposits, commercial paper and RBI repos were introduced. Barriers to entry were gradually eased by i) increasing the number of players (beginning with the Discount and Finance House of India in April 1988 followed by primary and satellite dealers and money market mutual funds), relaxing both issuance restrictions and subscription norms in respect of money market instruments and allowing determination of yields based on the demand and supply of such paper, and
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iii) enabling market evaluation of associated risks, by withdrawing regulatory restrictions, such as, bank guarantees in respect of CPs. 4. The development of markets for short term funds at market determined interest rates has been fostered by a gradual switch from a cash credit system to a loan based system, shifting the onus of cash management from banks to borrowers and phasing out the 4.6 percent 91-day tap Treasury Bills, which in the past provided an avenue for investing in short term funds. Institutional development has been carried out to facilitate inter linkages between the money market and the foreign exchange market, especially after a market based exchange rate system was put in place in March 1993.
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4.1.2 Instr uments T raded in the Money Market Call/Notice Money Market The most active segment of the monetary market segment has been the call money market where imbalances in the fund positions mostly of the banks
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are evened out. The Call/Notice money market has graduated into a broad and a vibrant market from a restricted and narrow one, consequent on the steps initiated with the onset of the process of liberalisation and deregulation. Presently Banks and PD (Primary Dealers) operate as both lenders and borrowers with a large number of financial institutions and mutual funds operating only as lenders. Corporate entities who have lendable surplus are permitted to lend through Primary Dealers. Since the withdrawal of the ceiling on the call rates, the call money rate has shown a tendency to fluctuate significantly on occasions. The sharp imbalances that arise in demand supply of money due to the combination of several factors have led to the volatile behaviour of call money rate. The most important of these has been the bunching of banks needs for short term funds in order to meet CRR compliance. Another factor has been the withdrawal of substantial liquidity from the system at one time to take care of Government needs. The volatility in the call money rates has also been the result of the asset liability mismatches of some large banks and their over reliance on call money market for liquidity management. There have been a variety of other reasons as well, like bunching of payment of tax at specific periods, slow off -take of credit, etc. With the deregulation of the interest rate and widening of the market through a large number of participants, the call money market has been playing an increasingly important role in equilibrating the banking system demand and supply of short term funds. However, despite widening of the call money market and DFHI's attempt to smoothen liquidity needs as mentioned earlier, there had been a relatively high degree of volatility in the call money market in the post 1991 period. In order to reduce the instability in the call money market, RBI has taken several steps in the past few years. Since December 1992, initially it had injected liquidity through DFHI and STCI. In the subsequent years, RBI has been moderating liquidity and volatilities in the call money market, through continuous use of repos and refinance operations and change in procedure for maintenance of CRR requirements. In pursuance of the recommendation of the Narasimhan Committee II, RBI has taken a decision to restrict the call, notice, term money market as purely an interbank market with additional access only to PDs. Steps have been taken to phase out non-bank participants from the call/notice/money market with the development of an active repo market and market for other money market instruments. erm T er m Money Inter bank market for deposits of maturity beyond 14 days and upto three months is referred to as term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend below 14 days .The market in this segment is presently not very deep. The declining spread in lending operations, the volatility in the call money market with accompanying risks in running asset/liability mismatches, the growing desire for fixed interest rate borrowing by corporates, the move towards fuller integration between forex and money markets, etc. are all the driving forces for the development
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of the term money market. These, coupled with the proposals for rationlisation of reserve requirements and stringent guidelines by regulators/managements of institutions, in the asset/liability and interest rate risk management, should stimulate the evolution of the term money market sooner than later. Forward Ready Forwar d Operations (Repo) Repo is a money market instrument, which enables collateralised short term borrowing and lending through sale purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor, with an agreement to repurchase at a predetermined date and rate. In the case of a repo, the forward clean price of the bonds is set in advance at a level which is different from the spot clean price by adjusting the difference between repo interest and coupon earned on the security. In the money market, this transaction is nothing but collateralised lending as the terms of the transaction are structured to compensate for the funds lent and the cost of the transaction is the repo rate'. In other words, the inflow of cash from the transaction can be used to meet temporary liquidity requirement in the short term money market at comparable cost. Repo rate is nothing but an annualised interest rate for the funds transferred by the lender to the borrower. Generally, the rate at which it is possible to borrow through a repo is lower than the same offered on unsecured (or clean) inter bank loan for the reason that it is a collateralised transaction and the credit worthiness of the issuer of the security is often higher than the seller. Other factors affecting the repo rate include, the credit worthiness of the borrower, liquidity of the collateral and comparable rates of other money market instruments. Commercial Paper (CP) The introduction of Commercial Paper (CP) in January 1990 as an additional money market instr ument was the first step towards securitisation of commercial bank's advance into marketable instruments. Commercial Papers are unsecured debts of corporates. They are issued in the form of promissory notes, redeemable at par to the holder at maturity. Only corporates who get an investment grade rating can issue CPs, as per RBI rules. Though CPs are issued by corporates, they could be good investments if proper caution is exercised. The market is generally segmented into the PSU CPs i.e., those issued by public sector and departmental undertakings and the private sector CPs. CPs issued by top rated corporates are considered sound investments. CPs are mostly issued to finance current transactions and seasonal needs for funds and are not tied to any specific transaction. The instrument provides banks and other institutions an opportunity to invest their short term surpluses in high earning securities. It is an unsecured and negotiable instrument, and is usually issued in a bearer form and on discount to face value basis. Market forces freely determine the discount rate. The CP yield is slightly lower than the prime lending rate and is higher than comparable
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bank deposit rates. Certificate of Deposits (CDs) A certificate of deposit (CD) is a document of title to a time deposit. Certificates of Deposits are unsecured promissory notes issued by banks with specific maturity similar in nature to the commonly available fixed deposits of the banks, with the difference between the two being that CDs are freely transferable from one party to another by endorsement and delivery. CDs are issued at a discount to the face value and the market determines the rate of discount. CDs are always traded at a spread over a T - Bill of the same maturity. This is because investors bank paper carry some credit risk, which treasuries do not and also the CDs are less liquid than treasury papers. Along with scheduled commercial banks, all India Financial Institutions like IDBI, ICICI, IFCI, IRBI, SIDBI and EXIM Bank have also been permitted to issue CDs. Commercial Bills Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) for the value of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial banks they are called commercial bills. If the seller wishes to give some period for payment, the bill would be payable at a future date (Usance bill). During the currency of the bill, if the seller is in need of funds, he may approach his bank for discounting his bill. One of the methods for providing credit to customers by bank is by discounting commercial bills at a prescribed discount rate. The bank will receive the maturity proceeds (face value) of the discounted bill from the drawee. In the meanwhile, if the bank is in need of funds, it can rediscount the bill already discounted by it in the commercial bill rediscount market at the market related discount rate. (The RBI introduced the Bill Market Scheme in 1952 and a new scheme called the Bill Rediscounting Scheme in November 1970.). 4.2 Gilt Edged Market or Gover nment Securities Market The Government resorts to the market for its borrowing programme. The government borrows from the market by issuing loan stock of various maturities. Banks, FIs, Mutual Funds, Provident Funds, Primary Dealers, NBFCs are the various categories of institutions who normally invest in government securities. Individuals also do invest in the government securities, but not in large quantum. In the case of government dated securities, coupon rates were declared and maturities shortened to bring these securities to market terms. The maximum maturity was reduced from 20 years to 10 years. Since April 1992, the entire central government borrowing programme in dated government security is conducted through auctions. But of late, the Government has resorted to private placement of government securities with RBI and later the same are
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sold through on tap'. Some other kinds of Gilt edged securities are: 4.2.1 Zero Coupon Bonds Bonds issued at discount and repaid at face value. The difference between the issue price and redemption price represents the return to the investor. No periodic interest payment is made. Zero coupon bonds bear no reinvestment risk but they are prone to interest rate risk making their prices highly volatile. The buyer of Zero coupon bonds receives one and only one payment, at maturity of the bond. In contrast coupon bonds make a series of periodic coupon payments to the buyer as well as paying face value at maturity. Zero Coupon bonds on auction basis were introduced by GOI in January 1994. 4.2.2 Floating Rate Bond
Floating Rate Bond is an instrument whose periodic interest or dividend rates are indexed to some reference index such as Treasury Bills etc. These instruments give a variable rate, a characteristic that allows both the issuer and investor to share the risk inherent in changing interest rates. The volatility of interest rates have led to the creation of these instr uments designed to of fer some protection to the players. Thus, floating rate bonds enable investors to take advantage of movements in interest rates. Floating rate bonds were introduced by the GOI on September 29, 1995 linking them to the 364 day treasury bills. 4.2.3 Tap Stock
A gilt edged security from an issue that has not been fully subscribed and is released into the market slowly when its market price reaches predetermined levels. Short taps are short dated securities and long taps are long dated stocks. These stocks were introduced by GOI on July 29, 1994. 4.2.4 Partly Paid Stock
An innovative instrument for which payment is made in instalments. It is designed for institutions with a regular flow of investable resources requiring investment outlets. The instrument has attracted good market response and is being traded actively. 4.2.5 Capital Indexed Bonds
These bonds were floated on December 29, 1997 on tap basis. The tap was kept open up to 28th January 1998 and an amount of Rs 704 crore was mobilised. These bonds are of four year maturity and carry a coupon rate of 6 percent. The objective of the capital indexed bonds was to provide a complete hedge against inflation for the principal amount of the investment.
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Reforms 4.3 Capital Market Refor ms Reforms 4.3.1 Primary Market Refor ms 1. The eligibility criterion for issuers has been strengthened. At the same time SEBI took several measures to provide issuers with more flexibility in the issue process. Stringent and detailed disclosure norms have been prescribed, and greater transparency in the draft prospectus is required. Further, separate criteria for finance companies have been prescribed. A criterion for accessing the securities market has been strengthened. Issuers proposing to make their first offer of equity to the public should have a track record of dividend payments in three years of the immediately preceding five years. This condition is relaxable under specific conditions. In October 1993, regulations for underwriters of capital issues and capital adequacy norms for stock brokers in the stock exchanges were announced. SEBI notified regulations for bankers to issues in July 1994. The regulations make registration of bankers to issues with SEBI compulsory. They stipulate the general obligation and responsibilities of the bankers to issues and contain a code of conduct. Under the regulations, inspection of bankers to an issue will be done by the Reserve Bank on request from the SEBI. Offer documents need no longer be vetted by SEBI. Merchant Bankers and Issuers, however, remain responsible for ensuring compliance with the norms on disclosure and investment protection prescribed by the SEBI. The government of India at the end of 1995 permitted IPO's through the Book Building' route. Book building is a process to ascertain the indicative subscription bids of interested investors to the public issue of securities. The advantages of this technique of obtaining advance feedback are that it helps in optimal pricing and removes uncertainties regarding mobilisation of funds. Reforms Secondary Market Refor ms The stock exchanges have been directed to broad base their governing boards and change the composition of their arbitration, default and disciplinary committee. The government has allowed foreign institutional investors (FIIS) such as pension funds, mutual funds, investment trusts, asset or portfolio management companies, etc. to invest in the Indian Capital market provided they register with SEBI. Trading modalities have been modernised. The National Stock Exchange introduced on-line electronic trading in 1994. The system allows brokers located in 140 cities and towns all over the country to trade in a single unified market, matching buy and sell orders with price priorities. It also ensures transparency for investors and assurance of best prices. Competition, thus led BSE also to introduce an on-line trading system in 1995, with linkages to brokers all over the country. Dematerialisation of stocks, introduced in 1996, eliminated delays and uncertainties in transfer of ownership. The process of demat and trading through depositories has helped to push the volume of business rapidly.
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The SEBI has made it compulsory for credit rating of debentures and bonds of more than 18 months' maturity. The maximum debt equity ratio of banks is 2:1 and the minimum debt service coverage ratio required is 1:2.
4.4 Buy back Ordinance The buy back ordinance was introduced by the Government of India (GOI) on October 31, 1998. The major objective of the buy back ordinance was to revive the capital markets and protect companies from hostile takeover bids. The buyback of shares was governed by the Securities and Exchange Board of India's (SEBI) Buy Back of Securities Regulation, 1998, and Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and Takeover Regulations, 1997. The ordinance was issued along with a set of conditions intended to prevent its misuse by companies and protect the interests of investors. According to guidelines issued under SEBI's Buy Back of Securities Regulation, 1998, a company could buy back its shares from existing shareholders on a proportionate basis through tender offer. From the open market, through the book building process or the stock exchange. From odd lot holders.
The ordinance allowed companies to buy back shares to the extent of 25 per cent of their paid up capital and free reserves in a financial year. The buy back had to be financed only out of the company's free reserves, securities premium account, or proceeds of any earlier issue specifically made with the purpose of buying back shares. The ordinance also prevented a company that had defaulted in the repayment of deposits, redemption of debentures or preference shares, and repayment to financial institutions from buying back its shares. Moreover, a company was not allowed to buy back its shares from any person through a negotiated deal, whether through a stock exchange, spot transactions, or any private arrangement. It also allowed the promoters of a company to make an open offer (similar to acquisition of shares) to purchase the shares of its subsidiary. This allowed foreign promoters to utilise their surplus funds and make an open offer to acquire a 100% stake in their Indian subsidiaries. The buy back of shares was allowed only if the Articles of Association of the company permitted it to do so. The ordinance also required the company to pass a special resolution at a general meeting and obtain the shareholders' approval for the buy back. In addition, companies were not allowed to make a public or rights issue of equity shares within a period of 24 months from the day of completing the buy back, except by way of bonus issues and conversion of warrants, preference shares or debentures. 4.4.1 Buy back and experience with MNCs In October 2000, Royal Philips Electronics of Netherlands (Philips), the Dutch parent of Philips India Limited, announced its first offer to buy back the shares of its Indian subsidiary. The open offer was initially made for 23 percent of the
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outstanding shares held by institutional investors, private bodies and the general public. The offer was made at Rs.105, a premium of 46 percent over the then prevailing stock market price. With this, Philips became one of the first multinational (MNCs) companies in India to offer the buy back option to its shareholders. Soon after, the buy back option was offered by several multinational companies (MNCs) to increase their stake in their Indian ventures. Some of these companies were Cadbury India, Otis Elevators, Carrier Aircon, Reckitt Benkiser, etc. Fund managers who held these companies' stocks felt that allowing buy back of shares was one of most favourable developments in the Indian stock markets. It provided a much needed exit option for shareholders in depressed market conditions. Buy back by the company usually indicated that the management felt that its stock was undervalued. This resulted in an increase in the price, bringing it closer to the intrinsic value and providing investors with a higher price for their investment in the company. However, critics of the buy back option claimed that large multinationals had utilised the buy back option to repurchase the entire floating stock from the market with the objective of delisting from the stock exchange and eliminating an investment opportunity for investors. Moreover, most MNCs that offered the buy back option reported a steep decline in the trading volumes of the shares of their Indian ventures. The declining liquidity of these shares prompted critics to say that the Government of India's attempt to revive capital markets by allowing buy back of shares had failed. Reforms 4.5 Banking Sector Refor ms The Indian financial system in the pre-reform period (i.e., prior to the Gulf crisis of 1991), essentially catered to the needs of planned development in a mixed-economy framework where the public sector had a dominant role in economic activity. The strategy of planned economic development required huge development expenditure, which was met through the Government's dominance of ownership of banks, automatic monetisation of the fiscal deficit and subjecting the banking sector to large pre-emptions both in terms of the statutory holding of Government securities (statutory liquidity ratio, or SLR) and cash reserve ratio (CRR). Besides, there was a complex structure of administered interest rates guided by social concerns, resulting in crosssubsidisation. These not only distorted the interest rate mechanism but also adversely affected the viability and profitability of banks by the end of 1980s. There is perhaps an element of commonality of such a repressed' regime in the financial sector of many emerging market economies. It follows that the process of reform of the financial sector in most emerging economies also has significant commonalities while being specific to the circumstances of each country. A narration of the broad contours of reform in India would be helpful in appreciating both the commonalities and the differences in the paths of reform. 1. Reform measures were initiated and sequenced to create an enabling environment for banks to overcome external constraints. These were
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related to the administered structure of interest rates, high levels of pre-emption in the form of reserve requirements, and credit allocation to certain sectors. Sequencing of interest rate deregulation has been an important component of the reform process which has imparted greater efficiency to resource allocation. The process has been gradual and predicated upon the institution of prudential regulation for the banking system, market behaviour, financial opening and, above all, the underlying macroeconomic conditions. Interest rates in the banking system have been largely deregulated except for certain specific classes; these are: savings deposit accounts, non-resident Indian (NRI) deposits, small loans up to Rs.2 lakh and export credit. The need for continuance of these prescriptions as well as those relating to priority sector lending have been flagged for wider debate in the latest annual policy of the RBI. However, administered interest rates still prevail in the small saving schemes of the government. As regards the policy environment of public ownership, it must be recognised that the lion's share of financial intermediation was accounted for by the public sector during the pre-reform period. As part of the reforms programme, initially, there was infusion of capital by the Government in public sector banks, which was followed by expanding the capital base with equity participation by the private investors. The share of the public sector banks in the aggregate assets of the banking sector has come down from 90 percent in 1991 to around 75 percent in 2004. The share of wholly Government-owned public sector banks (i.e., where no diversification of ownership has taken place) sharply declined from about 90 percent to 10 percent of aggregate assets of all scheduled commercial banks during the same period. Diversification of ownership has led to greater market accountability and improved efficiency. Since the initiation of reforms, infusion of funds by the Government into the public sector banks for the purpose of recapitalisation amounted, on a cumulative basis, to less than one per cent of India's GDP, a figure much lower than that for many other countries. Even after accounting for the reduction in the Government's shareholding on account of losses set off, the current market value of the share capital of the Government in public sector banks has increased manifold and as such what was perceived to be a bail-out of public sector banks by the Government seems to be turning out to be a profitable investment for the Government. One of the major objectives of the banking sector reforms has been to enhance efficiency and productivity through competition. Guidelines have been laid down for the establishment of new banks in the private sector and foreign banks have been allowed more liberal entry. Since 1993, twelve new private sector banks have been set up. As already mentioned, an element of private shareholding in public sector banks has been injected by enabling a reduction in the Government shareholding in public sector banks to 51 percent. As a major step towards enhancing competition in the banking sector, foreign direct investment in private sector banks is now allowed up to 74 percent, subject to conformity with the guidelines issued from time to time. Consolidation in the banking sector has been another feature of the reform process. This also encompassed the Development Financial Institutions (DFIs), which have been providers of long-term finance while the distinction between short-term and long-term finance provider has increasingly become blurred over time. The complexities involved
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in harmonising the role and operations of the DFIs were examined and the RBI enabled the reverse-merger of a large DFI with its commercial banking subsidiary which is a major initiative towards universal banking. Recently, another large term-lending institution has been converted to a bank. While guidelines for mergers between non-banking financial companies and banks were issued some time ago, guidelines for mergers between private sector banks have been issued a few days ago. The principles underlying these guidelines would be applicable, as appropriate, to public sector banks also, subject to the provisions of the relevant legislation. Impressive institutional and legal reforms have been undertaken in relation to the banking sector. In 1994, a Board for Financial Supervision (BFS) was constituted comprising select members of the RBI Board with a variety of professional expertise to exercise undivided attention to supervision'. The BFS, which generally meets once a month, provides direction on a continuing basis on regulatory policies including governance issues and supervisory practices. It also provides direction on supervisory actions in specific cases. The BFS also ensures an integrated approach to supervision of commercial banks, development finance institutions, non-banking finance companies, urban co-operative banks and primary dealers. A Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) has also been recently constituted to prescribe policies relating to the regulation and supervision of all types of payment and settlement systems, set standards for existing and future systems, authorise the payment and settlement systems and determine criteria for membership to these systems. The Credit Information Companies (Regulation) Bill, 2004 has been passed by both the Houses of the Parliament while the Government Securities Bills, 2004 is under process. Certain amendments are being considered by the Parliament to enhance the Reserve Bank's regulatory and supervisory powers. Major amendments relate to the requirement of prior approval of the RBI for acquisition of five percent or more of shares of a banking company with a view to ensuring fit and proper' status of the significant shareholders, aligning the voting rights with the economic holding and empowering the RBI to supersede the Board of a banking company. There have been a number of measures for enhancing the transparency and disclosure standards. Illustratively, with a view to enhancing further transparency, all cases of penalty imposed by the RBI on banks as also directions issued on specific matters, including those arising out of inspection, are to be placed in the public domain. While the regulatory framework and supervisory practices have almost converged with the best practices elsewhere in the world, two points are noteworthy. First, the minimum capital to risk assets ratio (CRAR) has been kept at nine percent i.e., one percentage point above the international norm; and second, the banks are required to maintain a separate Investment Fluctuation Reserve (IFR) out of profits, towards interest rate risk, at five percent of their investment portfolio under the categories held for trading' and available for sale'. This was prescribed at a time when interest rates were falling and banks were realising large gains out of their treasury activities. Simultaneously, the conservative accounting norms did not allow banks to recognise the unrealised gains. Such unrealised gains coupled with the creation of IFR helped in
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cushioning the valuation losses required to be booked when interest rates in the longer tenors have moved up in the last one year or so. The regulatory framework in India, in addition to prescribing prudential guidelines and encouraging market discipline, is increasingly focusing on ensuring good governance through "fit and proper" owners, directors and senior managers of the banks. The transfer of a shareholding of five percent and above requires acknowledgment from the RBI and such significant shareholders are put through a fit and proper' test. Banks have also been asked to ensure that the nominated and elected directors are screened by a nomination committee to satisfy fit and proper' criteria. Directors are also required to sign a covenant indicating their roles and responsibilities. The RBI has recently issued detailed guidelines on ownership and governance in private sector banks emphasising diversified ownership.
Introduction Credit 4.6 An Intr oduction to Fiscal, Monetary and Cr edit Policy 4.6.1 Fiscal Policy
There are three major functions of a fiscal policy: i) The allocation function of budget policy, that is, the provision for social goods. It is a process by which the total resources are divided between private and social goods and by which the mix of social goods is chosen. The distribution function of budget policy, that is, distribution of income and wealth in accordance with what society considers as fair' or just' distribution. The stabilisation function of budget policy, that is maintaining high employment, a reasonable degree of price stability and an appropriate rate of economic growth, with due consideration of its effects on trade and the balance of payments.
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Fiscal Refor ms in India While the move towards fiscal adjustment was discer nible in the pronouncements made as a part of long term fiscal policy announced in the mid 1980s, a comprehensive fiscal reform programme at the Central Government level was initiated only at the beginning of the 1990s as part of the economic adjustment programme initiated in 1991-92. On the other hand, in the case of states, efforts towards fiscal adjustments began only in the late 1990s. Fiscal reforms in the States were, inter alia, necessitated by: Growing fiscal imbalances Sluggishness in central transfers resulting in falling tax to GDP ratio. Introduction of reform-linked assistance as a part of Medium term Fiscal reform programme on the basis of the recommendations of the Eleventh Finance Commission. Adjustment programme taken in some of the states, which was linked to borrowing from multilateral agencies.
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Fiscal reforms at the Centre covered tax reforms, expenditure pruning, restructuring of PSUs and better co-ordination between monetary and fiscal policies. 1. T ax Refor ms
The blueprint for tax reforms in India was provided by the Tax Reforms Committee (TRC)(1994) headed by R.J. Chelliah. The following goals were enunciated by the committee. i) ii) iii) iv) reduction of rates of all major taxes, viz, customs, income tax, and central excise; widening of bases of all taxes by removing or curtailing exemptions and concessions, drastic simplifications of the laws and procedures; Replacement of the existing taxes on domestic production and trade by a Value Added Tax (VAT); a thorough revamping and modernisation of the administration;
Progr ogress refor Pr ogr ess chart on tax r efor ms In 2002-03, the GOI had set up another committee to review fiscal reforms and suggest an appropriate framework under the chairmanship of Mr. Vijay Kelkar, Chief Economic Advisor. Regarding the revenue objective, the committee postulated that the reforms should be fully or at least, nearly revenue neutral in their totality; however, the system should become more income elastic. Several of the recommendations of the TRC have been implemented while action on some, especially on the administration front, is under way. Rationalisation attempted has widened the tax base and improved tax revenues substantially during the year 2003-04. The current thinking is of widening the Service Tax in the indirect tax portfolio to make a significant contribution to the revenue stream. While progress has been made in the area of tax reforms, the tax structure in India still remains very complicated with high rates of taxation with regard to both direct and indirect taxes. In the area of personal income tax, reforms have succeeded in establishing a regime of moderate tax rates, which compare well with other countries. The maximum rate of personal income tax has come down from 56 percent at the start of the reform to 30 percent. The rate of corporation tax on Indian companies, which varied from 51.75 percent to 57.5 percent in 1991-92, depending upon the nature of the company, has been unified and reduced to 35 percent. However, Corporate tax rates are still quite high in India despite the reductions announced in the Union budget for foreign companies. As per the GCR 200102, India ranked 50th out of a total of 75 countries ranked in the GCR on corporate income tax rates in 2001. Experience in other countries shows that a shift to VAT would help improve revenue generation but this is not possible in India due to federal pressures.
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2. Public Expenditure There are four broad categories of public expenditure in India. These are defence, education, health, employment and wages, and subsidies. In the four and a half decades of economic planning in India, the share of Government expenditure in GDP has increased from 10 percent to about 35 percent. The growth has been more or less uniform in all decades. In the eighties, in fact, there was no noticeable acceleration. Between development and non-development expenditure, the former has increased relatively faster than the latter. However the distinction between development and nondevelopment expenditure as used in of ficial publications has no special significance in economics, except in a broad sense. The share of Government expenditure in GDP in India is five percentage points above the average of the low income countries. i) Defence expenditure: Since Independence the defence budget of India has accounted between 1 to 4 percent of GDP and between 10 to 16 percent of total government expenditure. However, the total defence expenditure in India as a proportion of either GDP or total Government expenditure would be much lower than that of some of our principal adversaries like Pakistan and China. Education and Health expenditure: The government in India spends relatively more on education than on health. Expenditures on education and health vary widely between the states with southern states like Kerala spending relatively more on education. Subsidy: Unfortunately, the volume of subsidies given has been accelerating with time mainly because of vested political interests. Overprotection through subsidies has prevented the potential competitiveness of the system from being realised. Beyond a point, however, the fiscal system cannot absorb such subsidies. Internal public debt: Privatisation of public enterprises could raise significant funds as a percent of GDP, which could be used to buy down the public debt. Not only would the stock of debt itself be reduced, but also the interest costs of servicing the debt would surely decline as the debt stock itself was brought under control. Interest payments alone accounted for as high as 4.9 percent of GDP in 2001-02.
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Balance sheet of public expenditure i) While presenting the Budget for 1999-2000, the Hon'ble Minister for Finance had observed that the high rate of growth of non-developmental expenditure by the Government is a growing and critical source of concern. He had further observed that the most effective and lasting solution to this problem is to begin the process of downsizing the Government. While proposing certain initiatives in this regard, he had also indicated that in order to carry out the process of downsizing in a systematic way towards reducing the role and the administrative structure of the Government, an Expenditure Reforms Commission headed by an eminent and experienced person would be constituted.
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Accordingly, an ERC was constituted and by now it has given ten reports on rationalising government expenditure. While it will be necessary to reduce government expenditure by cutting non-essential expenditure, at the same time, it is important to increase government expenditure in important areas. The government needs to give greater attention to, and provide greater resources for, education and health. In the sphere of raising literacy levels and providing greater access to basic health services, the state governments are required to play a much more enlarged role.
Credit 4.6.2 Monetary and Cr edit Policy The major instruments of a country's monetary policy are: a) Bank Rate b) Liquidity Reserve Ratio, c) Open Market Operations By operating on these three parameters, the central Bank of a country controls the money supply and thereby stability of prices. Liquidity ratios in particular, Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) help in providing funds to the IDBI and its downstream development financial institutions (IFCI, ICICI, SFCs, etc.) at lower rates of interest for term lending. Outlook of the Monetary and Credit Policy for 2005 Projected Real GDP Growth Rate Of 6.5 To 7 Percent. The RBI has an optimistic outlook on the Indian economy and expects to achieve 6.5-7.0 percent real GDP growth during FY05 on account of sustained growth in the industrial sector, normal monsoon and good performance of exports. It has also revised the GDP growth for the FY04 at 8.1 percent as against 4 percent in FY03. The target seems achievable in the current scenario considering the growth rates that have been witnessed across various sectors and industries. With the global demand for commodities picking up, experts expect strong growth to continue in the industry and services sector. The targeted GDP growth seems to be achievable. Inflation The RBI plans to keep inflation stable at around 5 percent in FY05. The RBI foresees rising global crude oil prices and large liquidity in markets as major concerns. The global crude oil prices are at their historic highs. This will have a significant impact on inflation. The recent development on the political front indicates stable fuel prices in the country. But this is unlikely to continue for long because the subsidy provided by the Government of India will increase the fiscal deficit. It is believed that inflation will spur once fuel prices are hiked in the country. Interest Rates
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The RBI has indicated stable interest rates in the current scenario. Benchmark interest rate such as Bank Rate, Cash Reserve Ratio (CRR) and Repo Rate are kept unchanged at 6 percent, 4.5 percent and 4.5 percent respectively. Clearly, the policy expects to maintain the growth momentum, stability in prices and macroeconomic activities. The RBI's stance has changed from a soft bias to neutral in the current credit policy. This could be an indicator for higher interest rate going forward. Globally, interest rates are on a rising spree, which is likely to have a significant impact on Indian interest rates. Developing Asian countries like Philippines and Indonesia have a much higher interest rate vis-a-vis India. Even the chairman of the US Federal Reserve, Mr. Allan Greenspan has stressed strongly on hardening of the US interest rate. These global forces will also have a significant impact on Indian interest rates in the long-term. Forex For ex Reserves The RBI has maintained that, building a higher level of foreign exchange reserves taking into account anticipated current account deficit and liquidity at risk' arising from capital movement has been a top priority. The current account of balance of payments remained in surplus consecutively during FY03 and FY04 and expects a similar trend in FY05 as well. Emergence of the Left Parties as a strong group in the new government is expected to annoy overseas investors and may cap Foreign Direct Investment in India. However, the country is sitting comfortably on a huge foreign kitty that currently stands at a whopping US$145 bn. as on September 2005. The plight of foreign money going out of Indian shores will have a negative impact on rupee value. Credit Cr edit Of ftake The RBI has estimated a strong credit growth of 16-16.5 percent during FY05. Non-food credit accounts for 90 percent of bank credit. The current Monetary and Credit Policy has pegged non-food credit growth at 17.6 percent during FY04, piggybacking a strong 18.6 percent increase in housing and retail sector lending. The surge in retail growth was mainly on account of lower prices and availability of cheap money.
Summing Up The wave of financial reforms introduced many new kinds of instruments in the money and capital markets. This gave a lot of momentum to funds transfer and hence impacted the profitability of enterprises. Along with this, reforms were carried out in the primary and secondary markets. The buy back ordinance was one major step to give a boost and also the required security to primary and secondary markets. Banking sector reforms were carried out in order to improve the profitability of banks and also to tune them towards their new found role of competing in an atmosphere of competition.
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Fiscal reforms were carried out to remove impediments to business and improve the efficiency of governance. Taxation was sought to be revamped in a major way along with rationalisation of expenditure. Thus a two pronged strategy aiming at both fiscal and monetary policy tools sought to stabilise inflation, improve the accountability of public expenditure and increase growth was adopted. Self -assessment 1. The fundamental function of any monetary and financial system, no matter how simple or complex, is to promote efficiency in the process of ___________ in real goods and services. The volatility in the call money rates has also been the result of the _________ mismatches of some large banks and their over reliance on call money market for liquidity management. Under a repo transaction, a holder of securities sells them to an investor, with an agreement to _______ at a predetermined __________ and rate. The introduction of Commercial Paper (CP) in January 1990 as an additional money market instrument was the first step towards _____ of commercial banks advance into marketable instruments. ___ Bond is an instrument whose periodic interest /dividend rates are indexed to some reference index such as Treasury Bills etc. The major objective of the buyback ordinance was to _____the capital markets and protect companies from _____takeover bids. The blueprint for tax reforms in India was provided by the Tax Reforms Committee (1994) headed by __________. Since Independence the _____________ budget of India has accounted between 1 to 4 percent of GDP and between 10 to 16 percent of total government expenditure. The RBI has an optimistic outlook on the Indian economy and expects to achieve 6.5-7.0 percent real GDP growth during FY05 on account of sustained growth in the __________ sector, normal monsoon and good performance of exports. In the four and a half decades of economic planning in India, the share of Government expenditure in GDP has increased from ________ percent to about _______ percent.
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The Political System
Chapter V The Political System
Learning Lear ning Objectives Reading this chapter would enable you to understand The origin of democracy in the world Parliamentary and presidential forms of democracy Direct and Indirect forms of democracies A peep into the constitutional reforms of India A peep into judicial reforms in India Contents 5.1 Evolution and History of Democracy 5.2 Parliamentary and Presidential Forms of Democracies 5.3 Direct and Indirect Forms of Democracies 5.4 Direct Democracy: An Experience 5.5 Constitutional Reforms 5.5.1 Controversy Regarding Constitutional Reforms 5.6 Judicial Reforms in India Summing Up Self-assessment
5.1 Evolution and History of Democracy The word democracy was invented in Athens, to describe the revolutionary system of government. The Athenian democracy provides an example of the first democracy, and one of the most important in ancient times. By virtue of the fact that democracy has evolved over time (and is still continuing to in some respects), there are a few key differences between the Athenian democracy and democracies which exist today. First, the Athenian democracy's principle was selection by lot. An assembly of all male citizens in Athens participated in decision-making directly (compare direct democracy). Elected officials did not determine decisions, the ancients did not consider such a system a democracy but an oligarchy. Democracy had (and for some people still has) the meaning of equality in decisions and of elections in decisions, not the election of persons charged to decide (see representative democracy). One of the reasons why this system was feasible was because of the relatively small population of Athens-only 300,000 people. Additionally, there were severe restrictions that dictated who had the right to participate as a citizen, which excluded over half of the total population. Citizenship rights were limited strictly to male adult citizens of Athens. Therefore, women, children, slaves, foreigners, resident alien groups that together made up a majority of the city's population had no rights to participate in the assembly. On the other hand, modern democracy has its own limitations in comparison to the ancient model, as for most citizens, participation is limited to voting. Voting itself is usually
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limited to once every several years, and voters merely get to choose their representatives in the legislative or executive branches (with the exception of occasional referendums). After the fall of Athens, the Periclean democracy was restored in less than a year. However, even though Athens had previously encouraged democracy in her allies and dependent states; she was no longer in a position to do so. Democracy declined. In comparison, although the Roman republic elected its leaders, and passed its laws by popular assemblies, the system had been effectively gerrymandered in the interest of the rich and well-born. The Romans favoured similar systems in the states they controlled. Presidential Forms 5.2 Parliamentary and Pr esidential For ms of Democracies People do not exercise power directly in representative forms of democracy such as the parliamentary and presidential systems of government. Instead, power is transferred to state bodies, which, in turn, perform the acts of state in the name of the people. The British parliament in London is regarded as the home of the most common type of constitutional system - the parliamentary system of government. While most other western European countries have this form of political system, democracy in the United States is based on a presidential system. When making a comparison between the presidential and parliamentary systems of government, the following formal differences can be noted: The American president and the members of Congress are elected during separate elections. In a parliamentary system of government, however, the government and members of parliament are elected in a single election, even when the possibility of differing coalitions exists. Parliament elects the government in a parliamentary system; the parliament also has the power to vote the government out of office. Under normal circumstances the American Congress does not have the power to remove the president from office. The Congress cannot force the president out of office, for instance, because it holds a different opinion or because the ruling majority in Congress has changed. Only if the president commits a criminal of fence, can the House of Representatives and Congress force the president out of office following a vote on impeachment and a two-thirds-majority vote respectively. This means, however, that the president lacks an important means of keeping discipline in Congress. The president is unable - unlike the British prime minister - to dissolve parliament and order new elections. While the British prime minister - in the the classic parliamentary system of government - is also a member of parliament, the American constitution demands incompatibility between the government office and parliamentary mandate. The president and the members of his/ her government - with the exception of the vice-president, who is also the chairman of Congress - cannot be members of Congress.
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The job of the executive is split in a parliamentary system of government. Representative duties of state are performed by the state president or monarch. The real power of government is reserved for the head of government, that is, the prime minister, chancellor or premier. In the United States, in contrast, the president is both head of state and head of government. The president of the United States is formally - but not in constitutional reality - prevented from introducing legislative initiatives. The president is only permitted to veto legislative initiatives from the Congress. The president's veto, however, can be overruled with a two-thirds-majority vote in both houses of Congress. In a parliamentary system the government may introduce legislation and sometimes has an absolute right to veto expenditure laws.
Direct Indirect 5.3 Dir ect and Indir ect For ms of Democracies A Direct democracy is one which gives provisions for recall and plebiscite. It means that the elected representative can be recalled any time the electorate feels that he or she is not up to the mark. Also, all important issues are settled through the process of plebiscite or referendum. However, this is a costly approach and not possible in large economies or countries. Most of the countries have the Indirect kind of democracy. India, though has introduced the system of recall at its Panchayati raj level. 5.4 Direct Democracy: An Experience Switzerland is often seen as an example of direct democracy. On taking a closer look, however, this claim cannot be maintained; and this despite the fact that direct democracy does play a large role, especially in the form of the canton referendums. The constitution of the Swiss Confederation was written in 1848 (revised in 1874) and recognises the Federal Assembly as the highest-ranking state body. The Assembly is made up of the National Assembly (lower house) and the Council of States (representatives of the cantons). The Federal Council (Budesrat) - the government - is elected by the Federal Assembly for a four-year term. Its position vis--vis the Federal Assembly is not very strong. The Swiss constitution awards the greatest importance to parliament. In constitutional reality, however, and mirroring other democratic systems closely, the government has developed into the most important of the three state powers. Because the Federal Council has no powers to dissolve the Federal Assembly and the Federal Assembly cannot vote the government out of of fice, the Federal Council, whose members remain in of fice for an extended period, actually has a strong position in constitutional reality. Control over both parliament and the government is the job of those entitled to vote. The electorate not only chooses its representatives but also decides important issues by means of referenda, an integral part of the Swiss government. Constitutional amendments may be initiated by a petition of 50,000 voters and must be ratified by referenda. Federal legislation may also be made subject to referenda. If the representative elements of the Swiss constitution are strong, the plebiscite elements are only slightly weaker.
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Unlike Germany's experience with direct democracy between 1918 and 1933 during a period referred to as the Weimar Republic, elements of direct democracy in the Swiss constitution have proved sustainable. These direct elements in the Swiss constitution have become long-lasting rather than leading to revolution or chaos. The belief that all democratic power is derived from the people - "pouvoir constituant" - has been realised most sharply in Switzerland. The Swiss electorate has more direct political influence and more possibilities open to it for controlling government than any other democracy. Nonetheless, in order for the government and political system to work properly, representative bodies are essential. 5.5 Constitutional Reforms Refor ms
In Febr uary 2000, the Union government of India created a National Commission to review the working of its Constitution, which has seen seventysix amendments in five decades of its life compared to twenty-one amendments of the American Constitution since 1787. The objective was to review the Constitution in the light of the experience of the past 50 years and to develop recommendations for changes that can meet the requirements of an efficient, smooth and effective system of governance and socioeconomic development of a modern India. The commission was supposed to review the working of the constitution in the following areas: 1. 2. 3. 4. 5. 6. 7. Parliamentary democracy Electoral reforms Centre-state relations Enlargement of Fundamental rights Effectuation of fundamental duties of citizens Directive Principles of State Policy, and Socio-economic Development
Controversy Regarding Reforms 5.5.1 Contr oversy Regar ding Constitutional Refor ms For more than a decade, the BJP has been advocating radical changes in India's constitutional framework with Lal Krishna Advani, the then Union Home Minister, leading the campaign for a switch-over to a presidential system of governance. According to him, the American type of Presidency would be more efficient in India's political milieu than the Westminster model of parliamentary democracy, which the country has been following since it became independent in 1947. Advani points out that while free and fair elections are fundamental to democracy, the doctrine of basic structure of the Constitution does not bind India to the existing parliamentary scheme. Advani was vocal in demanding a fixed term of five years for Parliament to offset the legacy of rickety coalitions. He also wanted that Parliament should admit a motion of no confidence against an existing government only if the mover, as in Germany, can demonstrate the legislative strength to provide an alternative. The 1991 election manifesto of his party also promised to abrogate
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Article 370 of the Constitution that confers limited autonomy to Jammu and Kashmir, and to modify Article 30, which permits India's minority communities to run their own educational and cultural institutions. As is evident , the aforementioned reforms are reflections of the ideals of a particular political party. As such they have created a controversy of sorts. In fact, the need for reforms is felt only by a few political parties and the essence of this need is not all pervasive. The Congress is of the opinion that there is no need for reviewing the constitution as the process of amendment allows much flexibility to the executive and the legislature. Some of the other suggestions made for reforms are: Electoral reforms are urgent. India should switch over to at least a partial proportional representation in Parliament. That would ensure stability, also a more genuine political representation. At least 20 percent of the legislators should be elected indirectly from universities and other professional bodies to improve the quality of legislative work. The Constitution should be amended to permit the leader of the government to take Ministers on his Council from outside Parliament, as in Japan, without impairing the principle of collective responsibility to the legislature. The legislators, on nomination to the Council of Ministers, should resign from the houses to which they are elected, as in France, so that they do not waste their time and resources on politicking and pandering to local constituencies. Article 356 allows the President of India to assume all the powers of the State governments through the office of the Governor, and to place their legislatures under the authority of Parliament. This he can do on the satisfaction that a State government is unable to function in accordance with the provisions of the Constitution. In 1951, Punjab became the first victim. The Chief Minister Bhargava did not favour Nehru's policy to suppress the Sikh agitation for a linguistic reorganisation of Punjab. He was forced to resign. President's rule was proclaimed to keep the State Legislative Assembly in suspended animation, while the Union government groomed an alternative leader. President Rajinder Prasad was unhappy. He told Nehru that the situation in Punjab did not justify the use of Article 356 and the intervention set a very bad and a very wrong precedentNehru was not impressed. The next State to suffer the abuse was Kerala in 1959, when it came under the Communist Party's government with EMS Namboodaripad as the Chief Minister. The pretext was the deterioration of public order, a deterioration engineered by the Union government. From 1967 to 1969, seven State governments run by political parties inimical to the Congress government at the Centre were dismissed. Between 1970 and 1974, nineteen State governments were so subverted. During Indira Gandhi's experiment with dictatorship from June 1975 to March 1977, the State government of Tamil Nadu was toppled on the ground that it did not implement the Central directive to censure the press and to detain members of the opposition political parties. In all, the Union has used Article 356 more than 120 times to interfere in the affairs of the States. Because of such abuse of the aforementioned article, nearly all the states feel that Article 356 be scrapped.
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In Part XII of the Constitution, the Centre reserved for itself the power to impose the most remunerative and elastic of taxes by arguing that it needed finances to fulfil its responsibilities for defence, foreign relations, etc. Moribund resources, like land revenue, were left to the provinces. Inevitably, their tax base began to shrink rapidly. Of the combined aggregate resources during the period 1951-85, the Union government raised 71.5 per cent and the States only 28.5 percent. The Union's resources were squandered on defence, interest payments and discharging other non-productive liabilities. With all its talk about planning and the efficiency of central control, nearly all public sector enterprises continuously incurred staggering losses. Economic development in the States was further stunted by the Central monopoly of key industries although Entry 24 in the States' List of the Constitution placed industry as a State Subject. Through the Industrial Policy Resolution of 1948, the Union assumed monopoly over key defence industries. A revision in the Industrial Policy Resolution of 1955 transferred the remaining important sectors including oil, electricity, machine tools, fertilisers and dr ugs from the States to the Centre. The Industries Development and Regulation Act 1951 took further 37 items away. This meant that the Union alone could grant licences, regulate production and distribution of these items. The Act, amended ten times since then, places 171 items divided into 38 different categories, under Central control. All this has created much heartburn among federal units and therefore all of them feel that there is need for reforms in this area. Conclusion Today, India's economy seems to have moved irreversibly in the direction of globalisation and open market even as the vast masses of people remain trapped in abysmal levels of poverty, illiteracy, disparities of regional development, the regime of controls, and the absence of accountability. It is widely acknowledged that globalisation is a double-edged process. It has the potential to provide opportunities to the local democracy of citizenship, through decentralisation of information and technology, and by creating local units of human associations to link up with planetary processes. But for this to happen, the arrangements of governance have to harmonise with the heterogeneous and autonomous character of the initiatives. The structures of authority have to give way, vertically and horizontally, to the sovereignty of political engagement that alone can make the community of experts conscious of local needs. Decentralisation of political power downwards, consolidation of international networks for co-operation in the fields of knowledge and diffusion of responsibility to the civil society are the preconditions for the process of globalisation to be beneficial to all. International competitiveness that does not care for the strengthening of community infrastructure, local employment and environment will destroy what little meaning to democracy there remains in a country that has joined the race very late. 5.6 Judicial Refor ms in India The Indian Judicial system is badly in need of reforms. The statutes, laws and by- laws are archaic and based on ancient principles of law. It is common belief that law has not kept pace with the changes in society the last century.
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Urgent Judicial reforms are warranted in the following areas: 1. Judicial appointments and accountability mechanisms - the prevailing process for judicial appointments and regulations in India should be evaluated in the light of the experience over the past 50 years. Particular emphasis should be on countries such as UK, US, Germany, France and newly emerging democracies such as South Africa. Experiences in each of these countries and the pros and cons of their systems should be critically analysed. The Speedy Justice Mechanism and local justice models - The best practices in speedy justice models (such as the small claims courts in the US) in various countries should be studied, compared, critically analysed and documented. Based on the outcome of the study, a set of best practices suitable to Indian conditions should be recommended. Crime Investigation Mechanisms - mechanisms to reform the crime investigation machinery in India in order to insulate them from political control and restore public faith in the criminal justice system and rule of law. Justice Systems : In reviewing Justice systems, particular emphasis should be given to contrasting the two leading judicial schools of practice i.e. Adversorial vs. Inquisitorial systems of justice. The pros and cons of the various judicial systems should be critically analysed. Keeping in view global practices and the Indian experience of the past 50 years, the review should also come up with recommendations to make appropriate changes to the law in India.
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Summing Up Democracy is a form of government which belongs to the people, being elected by the people and for the people. USA is an example of the presidential form of democracy whereas UK is an example of the parliamentary form of democracy. Direct democracy is one which has a system of recall. Switzerland is an example of Direct Democracy. India is basically an indirect and parliamentary form of democracy. In India, what is supreme is the constitution. Unlike UK where parliament is the supreme or USA where Judiciary is the supreme, Indian constitution makers thought it was better to keep the constitution the supreme. This Indian constitution is in dire need of reforms. There have been controversies regarding different aspects of reforms. There has been an advocacy to move towards a presidential system of governance. Also, certain articles and provisions like article 356 have been sought to be changed. Concomitant to constitution reforms are the judicial reforms which are yet much warranted in India. Self-assessment 1. The word democracy was invented in _______, to describe the revolutionary system of government used. The Athenian democracy provides an example of the first democracy.
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The British parliament in London is regarded as the home of the most common type of constitutional system - the __________ system of government. A Direct democracy is one which gives provisions for _________ and _________. Article 356 allows the President of India to assume all the powers of the State governments through the office of the Governor, and to place their legislatures under the authority of __________. In all, the Union has used Article 356 more than _________ times to interfere in the affairs of the States. In Part ________ of the Constitution, the Centre reserved for itself the power to impose the most remunerative and elastic of taxes by arguing that it needed finances to fulfil its responsibilities for defence, foreign relations, etc.
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International Linkages
Chapter VI Inter national Linkages
Learning Lear ning Objectives Reading this chapter would enable you to understand Transformation of GATT into WTO Nature of WTO Principles of WTO Agreements under WTO Agriculture and WTO TRIPS TRIMS Subsidies Government Procurement Dispute settlement An understanding of the Foreign Exchange Management Act An understanding of the Global Competitive Index An understanding of the Corruption Perception Index An understanding of the Index of Economic Freedom Contents 6.1 GATT and WTO 6.1.1 WTO: A negotiating Forum 6.1.2 WTO: A system of rules 6.1.3 WTO: A dispute settlement body 6.1.4 Principles of WTO 6.1.5 Agreements under WTO 6.2 Agriculture and WTO 6.3 Agreement on Sanitary and Phytosanitary Measures 6.4 Agreement on Technical Barriers to Trade 6.5 Agreement on Textiles and Clothing 6.6 General Agreement on Trade in Services 6.7 General Agreement on Trade Related Aspects of Intellectual Property Rights 6.7.1 Enforcement of TRIPS 6.8 Agreement on Subsidies and Countervailing Measures 6.9 Agreement on Safeguards from Imports 6.10 Agreement on Trade Related Investment Measures 6.11 Agreement on Government Procurement 6.12 Settlement of Disputes 6.13 Imposition of Penalties 6.14 Foreign Exchange Management Act 6.15 Global Competitive Index 6.16 Corruption Perception Index 6.17 Index of Economic Freedom Summing Up Self-assessment
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6.1 GATT and WTO GATT(General Agreement on Tariffs and Trade) was an agreement on tariffs and its primary concern had been negotiations on matters related to trade policy and tariff restrictions. The Eighth Round, i.e., the Uruguay Round, was a break from the past with widening scope for negotiations. Four new areas were included; Intellectual Property rights, Foreign Investment Policies, Agriculture and Services. The latest Uruguay Round of Multilateral negotiations brought in some major trade reforms. The General Agreement on Trade and Tariff has culminated into the World Trade Organisation. The WTO (World Trade Organisation) came into being as a result of the Uruguay round of negotiations (1986-94) on 1st January 1995 and its head office is located at Geneva. As of 4th April, 2003, 146 countries were members. 6.1.1 WTO: A negotiating For um Essentially, the WTO is a place where member governments try to sort out the trade problems they face with each other. The first step is to talk. The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. 6.1.2 WTO: A system of r ules The system's overriding purpose is to help trade flow as freely as possible so long as there are no undesirable side-effects. That partly means removing obstacles. It also means ensuring that individuals, companies and governments know what the trade rules are around the world, and giving them the confidence that there will be no sudden changes of policy. In other words, the rules have to be transparent and predictable. 6.1.3 WTO: A dispute settlement body Trade relations often involve conflicting interests. Agreements, including those painstakingly negotiated in the WTO system, often need interpreting. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation. That is the purpose behind the dispute settlement process written in the WTO agreements. 6.1.4 Principles of WTO 1. Most-favoured-nation (MFN): treating other people equally - Under WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members. treatment: National treatment: Treating foreigners and locals equally- Imported and locally-produced goods should be treated equally at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. Freer Trade through Fr eer T rade thr ough negotiations: Lowering trade barriers is one
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of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. From time to time other issues such as red tape and exchange rate policies have also been discussed. 4. Predictability through commitment and transparency: Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition choice and lower prices. The multilateral trading system is an attempt by gover nments to make the business environment stable and predictable. refor Encouraging development and economic r efor m: Over three quarters of WTO members are developing countries and countries in transition to market economies. During the seven and a half years of the Uruguay Round, over 60 of these countries implemented trade liberalisation programmes autonomously. At the same time, developing countries and transition economies were much more active and influential in the Uruguay Round negotiations than in any previous round, and they are even more so in the current Doha Development Agenda.
5.
6.1.5 Agreements under WTO The table of contents of The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts is a daunting list of about 60 agreements, annexes, decisions and understandings. In fact, the agreements fall into a simple structure with six main parts: an umbrella agreement (the Agreement Establishing the WTO); agreements for each of the three broad areas of trade that the WTO covers (goods, services and intellectual property); dispute settlement; and reviews of governments' trade policies. broad They start with br oad principles: the General Agreement on Tariffs and Trade (GATT) (for goods), and the General Agreement on Trade in Services (GATS). (The third area, Trade-Related Aspects of Intellectual Property Rights (TRIPS), also falls into this category although at present it has no additional parts.) extra agreements and annexes dealing with the special requirements of specific sectors or issues. schedules (or lists) of commitments made by individual countries allowing specific foreign products or service-providers access to their markets. For GATT, these take the form of binding commitments on tariffs for goods in general, and combinations of tariffs and quotas for some agricultural goods. For GATT, the commitments state how much access foreign service providers are allowed for specific sectors, and they include lists of types of services where individual countries say they are not applying the most-favoured-nation principle of nondiscrimination.
6.2 Agriculture and WTO

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The original GATT did apply to agricultural trade, but it contained loopholes. For example, it allowed countries to use some non-tariff measures such as import quotas, and to subsidise. Agricultural trade became highly distorted, especially with the use of export subsidies which would not normally have been allowed for industrial products. The Uruguay Round produced the first multilateral agreement dedicated to the sector. These were launched in 2000, as required by the Agriculture Agreement. The new rules and commitments under the Agriculture Agreement are: Market Access - The new r ule for market access in agricultural products is tariffs only. Before the Uruguay Round, some agricultural imports were restricted by quotas and other non-tariff measures. These have been replaced by tariffs that provide more-or-less equivalent levels of protection if the previous policy meant domestic prices were 75 percent higher than world prices, then the new tariff could be around 75 percent. Domestic Support - Green, Amber and Blue Box categories i) Amber box - Domestic policies that do have a direct ef fect on production and trade have to be cut back. WTO members calculated how much support of this kind they were providing per year to the agricultural sector (using calculations known as total aggregate measurement of support or Total AMS) in the base years of 1986-88. Developed countries agreed to reduce these figures by 20 percent over six years starting in 1995. Developing countries agreed to make 13 percent cuts over 10 years. Least-developed countries do not need to make any cuts. This category of domestic support is sometimes called the amber box, a reference to the amber colour of traffic lights, which means slow down. ii) Green box - Measures with minimal impact on trade can be used freely they are in a green box. They include government services such as research, disease control, infrastructure and food security. They also include payments made directly to farmers that do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture, and direct payments under environmental and regional assistance programmes. iii) Blue box - Also permitted, are certain direct payments to farmers where the farmers are required to limit production (called blue box measures), certain government assistance programmes to encourage agricultural and rural development in developing countries, and other support on a small scale when compared with the total value of the product or products supported (5 percent or less in the case of developed countries and 10 percent or less for developing countries). Export Subsidies The Agriculture Agreement prohibits export subsidies on agricultural products unless the subsidies are specified in a member's lists of commitments. Where they are listed, the agreement requires WTO members to cut both the amount of money they spend on export subsidies and the quantities of exports that receive subsidies. Taking averages for 1986-90 as the base level, developed countries agreed to cut the value of export subsidies by 36 percent over the six years starting in 1995 (24 percent over 10 years for developing countries). Developed
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countries also agreed to reduce the quantities of subsidised exports by 21percent over six years (14 percent over 10 years for developing countries). Least-developed countries do not need to make any cuts. Least Developed Countries dependant on food imports Under the Agriculture Agreement, WTO members have to reduce their subsidised exports. But some importing countries depend on supplies of cheap, subsidised food from major industrialised nations. They include some of the poorest countries, and although their farming sectors might receive a boost from higher prices due to reduced export subsidies, they might need temporary assistance to make the necessary adjustments to deal with higher priced imports, and eventually to export. A special ministerial decision sets out objectives, and certain measures, for the provision of food aid and aid for agricultural development. It also refers to the possibility of assistance from the International Monetary Fund and the World Bank to finance commercial food imports.
Agreement Measures 6.3 Agr eement on Sanitary and Phytosanitary Measur es This is a separate agreement on food safety and animal and plant health standards. It allows countries to set their own standards. But it also says regulations must be based on science. They should be applied only to the extent necessary to protect human, animal or plant life or health, and they should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail. Member countries are encouraged to use international standards, guidelines and recommendations where they exist. However, members may use measures which result in higher standards if there is scientific justification. They can also set higher standards based on appropriate assessment of risks so long as the approach is consistent, not arbitrary. They can to some extent apply the precautionary principle, a kind of safety first approach to deal with scientific uncertainty. Article 5.7 of the SPS Agreement allows temporary precautionary measures. Agreement Technical Trade 6.4 Agr eement on T echnical Bar riers to T rade The Technical Barriers to Trade Agreement (TBT) tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles. The agreement recognises countries' rights to adopt the standards they consider appropriate, for example, for human, animal or plant life or health, for the protection of the environment or to meet other consumer interests. Moreover, members are not prevented from taking measures necessary to ensure their standards are met. In order to prevent too much diversity, the agreement encourages countries to use international standards where these are appropriate, but it does not require them to change their levels of protection as a result. 6.5 Agreement on Textiles and Clothing Since 1995, the WTO Agreement on Textiles and Clothing (ATC) has taken over from the Multifibre Arrangement. By 1 January 2005, the sector was to
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be fully integrated into normal GATT rules. In particular, the quotas would come to an end, and importing countries would no longer be able to discriminate between exporters. The Agreement on Textiles and Clothing would itself no longer exist: it's the only WTO agreement that has selfdestruction built in. 6.6 General Agr eement on T rade in Services Agreement The agreement covers all internationally-traded services, for example, banking, telecommunications, tourism, professional services, etc. It also defines four ways (or modes) of trading services: Cross Border Cross Border Supply or Mode 1 - services supplied from one country to another (e.g. international telephone calls) Consumption abroad or Mode 2 - consumers or firms making use of a service in another country (e.g. tourism) Commercial Presence or Mode 3 - a foreign company setting up subsidiaries or branches to provide services in another country (e.g. foreign banks setting up operations in a country) Presence of Natural Persons or Mode 4 - individuals travelling from their own country to supply services in another (e.g. fashion models or consultants) General Agreement on Trade Related Aspects of Intellectual Property Pr operty Rights
6.7
The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), negotiated in the 1986-94 Uruguay Round, introduced intellectual property rules into the multilateral trading system for the first time. The areas covered by the TRIPS Agreement are: Copyright and Related Rights Trade marks including service marks Geographical indicators Industrial Designs Patents Layout designs (topographies) of integrated circuits Undisclosed Information including trade secrets
6.7.1 Enforcement of TRIPS The agreement describes in some detail how enforcement should be handled, including rules for obtaining evidence, provisional measures, injunctions, damages and other penalties. It says courts should have the right, under certain conditions, to order the disposal or destruction of pirated or counterfeit goods. Wilful trademark counterfeiting or copyright piracy on a commercial scale should be criminal offences. Governments should make sure that intellectual property rights owners receive the assistance of customs authorities to prevent imports of counterfeit and pirated goods. 6.8 Agr eement on Subsidies and Countervailing Measur es Agreement Measures This agreement does two things: it disciplines the use of subsidies, and it
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regulates the actions countries can take to counter the effects of subsidies. It says a country can use the WTO's dispute settlement procedure to seek the withdrawal of subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty (known as countervailing duty) on subsidised imports that are found to be hurting domestic producers. The agreement defines two categories of subsidies: prohibited and actionable. It originally contained a third category: non-actionable subsidies. This category existed for five years, ending on 31 of December 1999, and was not extended. The agreement applies to agricultural goods as well as industrial products, except when the subsidies are exempt under the Agriculture Agreement's peace clause, which expired at the end of 2003. Prohibited Prohibited subsidies: subsidies that require recipients to meet certain export targets, or to use domestic goods instead of imported goods. They are prohibited because they are specifically designed to distort international trade, and are therefore likely to hurt other countries' trade. They can be challenged in the WTO dispute settlement procedure where they are handled under an accelerated timetable. If the dispute settlement procedure confirms that the subsidy is prohibited, it must be withdrawn immediately. Otherwise, the complaining country can take counter measures. If domestic producers are hurt by imports of subsidised products, a countervailing duty can be imposed. Actionable subsidies: in this category the complaining country has to show that the subsidy has an adverse effect on its interests. Otherwise the subsidy is permitted. The agreement defines three types of damage they can cause. One country's subsidies can hurt a domestic industry in an importing country. They can hurt rival exporters from another country when the two compete in third markets, and domestic subsidies in one country can hurt exporters trying to compete in the subsidising country's domestic market. If the Dispute Settlement Body rules that the subsidy does have an adverse effect, the subsidy must be withdrawn or its adverse effect must be removed. Again, if domestic producers are hurt by imports of subsidised products, a countervailing duty can be imposed.
Safeguards from 6.9 Agr eement on Safeguar ds fr om Imports A WTO member may restrict imports of a product temporarily (take safeguard actions) if its domestic industry is injured or threatened with injury caused by a surge in imports. Here, the injury has to be serious. An import surge justifying safeguard action can be a real increase in imports (an absolute increase); or it can be an increase in the importers' share of a shrinking market, even if the import quantity has not increased (relative increase). When a country restricts imports in order to safeguard its domestic producers, in principle it must give something in return. The agreement says the exporting country (or exporting countries) can seek compensation through consultations. If no agreement is reached the exporting country can retaliate
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by taking equivalent action, for instance, it can raise tariffs on exports from the country that is enforcing the safeguard measure. In some circumstances, the exporting country has to wait for three years after the safeguard measure is introduced before it can retaliate in this manner, i.e. if the measure conforms with the provisions of the agreement and if it is taken as a result of an increase in the quantity of imports from the exporting country. To some extent developing countries' exports are shielded from safeguard actions. An importing country can only apply a safeguard measure to a product from a developing country if the developing country is supplying more than 3 percent of the imports of that product, or if developing country members with less than 3 percent import share collectively account for more than 9 percent of total imports of the product concerned. 6.10 Agreement on Trade Related Investment Measures The Trade-Related Investment Measures (TRIMs) Agreement applies only to measures that affect trade in goods. It recognises that certain measures can restrict and distort trade, and states that no member shall apply any measure that discriminates against foreigners or foreign products (i.e. violates national treatment principles in GATT). It also outlaws investment measures that lead to restrictions in quantities (violating another principle in GATT). It includes measures which require particular levels of local procurement by an enterprise (local content requirements). It also discourages measures which limit a company's imports or set targets for the company to export (trade balancing requirements). Under the agreement, countries must inform fellow-members through the WTO of all investment measures that do not conform with the agreement. 6.11 Agreement Procur ocurement Agr eement on Gover nment Pr ocur ement
In most countries the government, and the agencies it controls, are together the biggest purchasers of goods of all kinds, ranging from basic commodities to high-technology equipment. At the same time, the political pressure to favour domestic suppliers over their foreign competitors can be very strong. An Agreement on Government Procurement was first negotiated during the Tokyo Round and entered into force on 1 January 1981. Its purpose is to open up as much of this business as possible to international competition. It is designed to make laws, regulations, procedures and practices regarding government procurement more transparent and to ensure they do not protect domestic products or suppliers or discriminate against foreign products or suppliers. The agreement applies to contracts worth more than the specified threshold values. For central government purchases of goods and services, the threshold is SDR (Special Drawing Rights ) 130,000 (some $185,000 in June 2003). For purchases of goods and services by sub-central government entities, the
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threshold varies but is generally in the region of SDR 200,000. For utilities, thresholds for goods and services are generally in the area of SDR 400,000 and for construction contracts, in general the threshold value is SDR 5,000,000. 6.12 Settlement of Disputes Settling disputes is the responsibility of the Dispute Settlement Body, which consists of all WTO members. The Dispute Settlement Body has the sole authority to establish panels of experts to consider the case, and to accept or reject the panels' findings or the results of an appeal. It monitors the implementation of the rulings and recommendations, and has the power to authorise retaliation when a country does not comply with a ruling. First stage: consultation (up to 60 days). Before taking any other actions, the countries in dispute have to talk to each other to see if they can settle their differences by themselves. If that fails, they can also ask the WTO director-general to mediate or try to help in any other way. Second stage: the panel (up to 45 days for a panel to be appointed, plus 6 months for the panel to conclude). If consultations fail, the complaining country can ask for a panel to be appointed. The country in the dock can block the creation of a panel once, but when the Dispute Settlement Body meets for a second time, the appointment can no longer be blocked (unless there is a consensus against appointing the panel).
6.13 Imposition of Penalties If the country that is the target of the complaint loses, it must follow the recommendations of the panel report or the appeals report. It must state its intention to do so at a Dispute Settlement Body meeting held within 30 days of the report's adoption. If complying with the recommendation immediately proves impractical, the member will be given a reasonable period of time to do so. If it fails to act within this period, it has to enter into negotiations with the complaining country (or countries) in order to determine the mutuallyacceptable compensation, for instance, tariff reductions in areas of particular interest to the complaining side. If after 20 days, no satisfactory compensation is agreed to, the complaining side may ask the Dispute Settlement Body for permission to impose limited trade sanctions (suspend concessions or obligations) against the other side. The Dispute Settlement Body must grant this authorisation within 30 days of the expiry of the reasonable period of time unless there is a consensus against the request. On 23 January 1995, Venezuela complained to the Dispute Settlement Body that the United States was applying rules that discriminated against gasoline imports, and formally requested consultations with the United States. Just over a year later (on 29 January 1996) the dispute panel completed its final report. (By then, Brazil had joined the case, lodging its own complaint in April 1996. The same panel considered both complaints.) The United States appealed. The Appellate Body completed its report, and the Dispute Settlement Body adopted the report on 20 May 1996, one year and four months after the complaint was first lodged. The United States and Venezuela then took six and a half months to agree on
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what the United States should do. The agreed period for implementing the solution was 15 months from the date the appeal was concluded (20 May 1996 to 20 August 1997). The case arose because the United States applied stricter rules on the chemical characteristics of imported gasoline than it did for domesticallyrefined gasoline. Venezuela (and later Brazil) said this was unfair because US gasoline did not have to meet the same standards, It violated the national treatment principle and could not be justified under exceptions to normal WTO rules for health and environmental conservation measures. The dispute panel agreed with Venezuela and Brazil. The appeal report upheld the panel's conclusions making some changes to the panel's legal interpretation. The United States agreed with Venezuela that it would amend its regulations within 15 months and on 26 August 1997 it reported to the Dispute Settlement Body that a new regulation had been signed on 19 August. 6.14 Foreign Exchange Management Act The Foreign Exchange Management Act (FEMA) is a law to replace the draconian Foreign Exchange Regulation Act, 1973. Any offence under FERA was a criminal offence liable to imprisonment, whereas FEMA seeks to make offences relating to foreign exchange, civil offences. Unlike other laws where everything is permitted unless specifically prohibited, under FERA nothing was permitted unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It provided for imprisonment of even a very minor offence. Under FERA, a person was presumed guilty unless he proved himself innocent whereas under other laws, a person is presumed innocent unless he is proven guilty. With liberalisation, a need was felt to remove the drastic measures of FERA and replace them by a set of liberal foreign exchange management regulations. Therefore FEMA was enacted to replace FERA. FEMA extends all over India. It applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom this Act applies. Regulation and management of foreign exchange Except with the general or special permission of the Reserve Bank, no person can :a. b. c. d. deal in or transfer any foreign exchange or foreign security to any person not being an authorised person; make any payment to or for the credit of any person resident outside India in any manner; receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner; Where any person in, or resident in India receives any payment by order or on behalf of any person resident outside India through any other
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e.
person (including an authorised person) without a corresponding inward remittance from any place outside India, then, such a person shall be deemed to have received such payment otherwise than through an authorised person. 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.
Financial transaction means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt. No person resident in India can acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India except with the general or special permission of the Reserve Bank. Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction. However, the 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. Any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify : any class or classes of capital account transactions which are permissible; the limit up to which foreign exchange shall be admissible for such transactions:
However, the Reserve Bank cannot impose any restrictions on the drawal of foreign exchange for payments due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business. The Reserve Bank can, by regulations, prohibit, restrict or regulate the following :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 foreign exchange 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;
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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. 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 resident outside India or inherited from a person who was resident outside India. A person resident 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 resident in India or inherited from a person who was resident in India. The Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. Every exporter of goods must :a. 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; furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realisation of the export proceeds by such exporter.
b.
The Reserve Bank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market-conditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit. Every exporter of services shall furnish to the Reserve Bank or to such other authorities a declaration in such form and in such manner as may be specified, containing the true and correct material particulars in relation to payment for such services. Where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.
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The Reserve Bank of India under the FEMA issues notifications on separate issues concerning foreign exchange from time to time. Till date it has issued 25 notifications related to the following areas: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22 23. 24. 25. Borrowing or Lending in Forex Borrowing or Lending in Rupees Branch or Office in India Capital account transactions Currency Deposits Derivative contracts Export - import in forex Export of goods and services Forex accounts by resident persons Guarantees Immovable property in India Immovable property Insurance Investment in firm or proprietorship in India Possession and retention of forex Postal order and money orders Realisation, repatriation or surrender of forex Receipt and payment Receipt from or payment to non-resident Remittance of assets Rupee transactions with Nepalese and Bhutanese Security Issue by person resident outside India Transfer or issue by non-resident Transfer or issue of foreign security
6.15 Global Competitive Index For well over two decades the World Economic Forum has been trying to shed light on the question of why some countries are able to grow on a sustained basis for prolonged periods of time, in the process pulling large segments of the population out of poverty, while others remain stagnant or, worse, actually see an erosion of living standards. Through its flagship publication, The Global Competitiveness Report, the World Economic Forum has led the way in assessing the competitiveness of nations. It brings key representatives from the private sector and the corporate world together with a broad spectrum of senior policymakers in government, creating opportunities for the thoughtful exchange of ideas and experiences on best practices. This exchange may be an important catalyst in identifying the most critical factors in the development process. The role of corruption in delaying the development process, the central importance of women's education for boosting per capita incomes, the interplay between political and civil rights and the willingness of the public to engage in economic activity, the role of a free press, and the type of safety net
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arrangements that governments put in place to enhance the ability of economic agents to participate in the life of the nation, are but some of the topics that have been at the centre of the agenda in many of the summits and other interactions organised by the World Economic Forum. The Forum has developed a vehicle, the Executive Opinion Survey (EOS), which annually conveys a wealth of information about the obstacles to growth in more than 100 countries, accounting for the lion's share of global GNP. Through the Survey, business executives in these countries assess the importance of a broad range of factors central to creating a healthy business environment in support of successful and productive economic activity. The tax and regulatory environment, labour market legislation, the overall macroeconomic environment, the prevalence of corruption and other irregular practices in the economy at large, the quality of the country's infrastructure and education are but a few of the areas covered by the EOS. Over the years, the Survey has continued to deliver a treasure trove of information about both country- specific strengths and weaknesses, and the challenges faced by the business community. On the basis of the information provided by the EOS, the Country Profiles prepared by the Forum offer extremely valuable information for policymakers, aid agencies and others, working to improve economic performance and the quality of people's lives. Composition of the Growth Competitive Index The Growth Competitiveness Index is composed of three component indexes: the technology index, the public institutions index, and the macroeconomic environment index.
These indexes are calculated on the basis of both hard data and Survey data. The responses to the Executive Opinion Survey are what is referred to as Survey data, with responses ranging from 1 to 7. The sample of countries is divided into two groups: the core innovators and the non-core innovators. Core innovators are countries with more than 15 US utility patents registered per million population in 2003; non-core innovators are all other countries. For the core innovators, extra emphasis is placed on the role of innovation and technology. The weightings for the core innovators are as follows: Growth Competitive Index for Core Innovators = Technology Index + + Public Institutions Index
Macroeconomic Environment Index For the non-core innovators, it calculates the Growth Competitiveness Index
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values as a simple average of the three component indexes: Growth Competitive Index for Non Core Innovators = 1/3 Technology Index + 1/3 Public Institutions Index + 1/3 Macroeconomic Environment Index Technology Index Technology Index comprehensively looks at the following questions. Country's position in technology relative to world leaders Companies in the Country not interested/aggressive in absorbing new technology. How much do companies in the country spend on R&D relative to other countries. Extent of business collaboration in R&D with local universities.
Public Institutions Index It looks comprehensively at the following questions: Is the judiciary in your country independent from political influences of members of government, citizens or firms? Property rights, including over financial assets, are clearly defined and well protected by law? Is the government neutral among bidders when deciding among public contracts? Does organised crime impose significant costs on business? How commonly are bribes paid in connection with import and export permits? How commonly are bribes paid when being connected with public utilities? How commonly are bribes paid in connection with annual tax payments?
Macroeconomic Environment Index It looks comprehensively at the following questions: Is the country's economy likely to be in a recession next year? Has obtaining credit for a company become easier or more difficult over the past year? Government surplus/deficit National savings rate Inflation Real effective exchange rate Lending borrowing interest rate spread Is the composition of public spending in the country wasteful, or does it provide necessary goods and services not provided by the market? GCI Rankings in 2004 Finland was ranked number 1 with a score of 5.95 and USA was ranked number 2 with a score of 5.82. India improved its ranking from 56 to 55 with a score of 4.07. While China slipped down from 44 to 46 with a score of 4.29. At the
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bottom was Chad with rank 104 and a score of 2.50. Bangladesh ranked 102 with a score of 2.84. Pakistan was ranked 91 with a score of 3.17. 6.16 Perception Cor r uption Per ception Index
The goal of the CPI is to provide data on extensive perceptions of corruption within countries. The CPI is a composite index, making use of surveys of business people and assessments by country analysts. It consists of credible sources using diverse sampling frames and different methodologies. These perceptions enhance our understanding of real levels of corruption from one country to another. Methodology: The CPI gathers data from sources that span the last three years (for the CPI 2004, this includes surveys from 2002, 2003 and 2004). 2. All sources provide a ranking of countries, i.e., include an assessment of multiple countries. 3. All sources measure the overall extent of corruption (frequency and/or amount of corruption) in the public and political sectors. 4. Evaluation of the extent of corruption in countries is done by nonresident experts (in the CPI 2004, this includes the following sources: CU (the State Capacity Survey by the Centre for International Earth Science Information Network (CIESIN) at Columbia University), EIU (The Economist Intelligence Unit) , MIG (Grey Area Dynamics Ratings by the Merchant International Group)and WMRC (The World Markets Research Centre); non-resident business leaders from developing countries (in the CPI 2004, this includes the following sources: TI/GI (Gallup International on behalf of Transparency Inter national, Bribe Payers Index Survey), II(Infor mation International, Beirut, Lebanon and MDB (a multilateral development bank) ; and resident business leaders evaluating their own country (in the CPI 2004, this includes the following sources: BEEPS The Business Environment and Enterprise Performance Survey), IMD (The International Institute for Management Development, Lausanne, PERC (The Political and Economic Risk Consultancy, Hong Kong) and WEF (World Economic Forum. Perception Cor r uption Per ception Index 2001 Finland ranks first with a score of 10. Singapore is ranked 5th, Hongkong is 16th while USA is 19th. India stands at 71 out of the 90 countries while Nigeria is at the bottom with the last ranking of 90. 6.17 Index of Economic Freedom Since 1995, the Index of Economic Freedom has offered the international community an annual in-depth examination of the factors that contribute most directly to economic freedom and prosperity. As the first comprehensive study of economic freedom ever published, the 1995 Index defined the method by which economic freedom can be measured in such vastly different places as Hong Kong and North Korea. Since then, other studies have joined the effort, analysing such issues as trade or government intervention in the economy. 1.
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There is overlapping coverage among these indices, but the Index of Economic Freedom includes the broadest array of institutional factors determining economic freedom: judiciary, Cor r uption in the judiciary, customs service, and government bureaucracy; barriers Non-tarif f bar riers to trade, such as import bans and quotas as well as strict labelling and licensing requirements; burden government, The fiscal bur den of gover nment, which encompasses income tax rates, corporate tax rates, and trends in government expenditures as a percent of output; law, judiciary, The r ule of law, ef ficiency within the judiciary, and the ability to enforce contracts; burdens Regulatory bur dens on business, including health, safety, and environmental regulation; regar egarding Restrictions on banks regar ding financial services, such as selling securities and insurance; Labour market regulations, such as established work weeks and mandatory separation pay; and Informal Infor mal market activities, including corruption, smuggling, piracy of intellectual property rights, and the underground provision of labour and other services.
Index of Economic Freedom 1996 rankings Hong Kong tops the list with Myanmar at the bottom ranked 123rd. India does poorly at rank 85 just a notch above China which is at 86. USA is ranked 8th while Pakistan is at rank 89. Summing Up The attempts at the Global level to integrate business around the world has seen the culmination of WTO in 1995. It has been a negotiating forum for all countries and has brought the bargaining strength of different country groups to prominence. It has succeeded in attending to a majority of issues through consensus and has set up a dispute settlement body in case any issue requires arbitration and judgment. No doubt it has largely succeeded in bringing about uniformity and greater opportunities for transparent business. There have been several indices to compare different economies on the basis of their accomplishments and present conditions. Index of freedom, corruption index, and global competitive index are a few of them. Also the flow of funds in and out of India have been set into a new legislation recognising the needs of a changed time. The RBI till date has issued 25 notifications regarding the FEMA act.
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Self -assessment 1. The WTO came into being as a result of _______ round of negotiations (1986-94) on 1st January _____ and its head office is located at ______. As of 4th April, 2003, ___ countries were members. Domestic policies that do have a direct effect on production and trade are put under the ________ box category. Taking averages for 1986-90 as the base level, developed countries agreed to cut the value of export subsidies by ______ percent over six years starting in 1995. Agreement on _________ and _________ measures is a separate agreement on food safety and animal and plant health standards. The ____________ Agreement (TBT) tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles. The agreement on Government procurement applies to contracts worth more than specified threshold values. For central government purchases of goods and services, the threshold is SDR ____________. The Foreign Exchange Management Act (FEMA) is a law to replace the draconian _____________ Act, 1973. The Growth Competitiveness Index is composed of three component indexes ________________, ______________ and __________. __________ ranks first with a score of 10 as per the Corruption perception index 2001. The 1995 Index defined the method by which ___________ freedom can be measured in such vastly different places as Hong Kong and North Korea.
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Corporate Responsibility
Chapter VII Corporate Responsibility
Learning Lear ning Objectives Reading this chapter would enable you to understand: Need and Trend of Corporate Governance Recommendations of the committee on corporate governance Understanding of the concept of corporate social responsibility Contents 7.1 Need for Sound Corporate Governance 7.2 Trend in Corporate Governance 7.3 Recommendations of the Committee on Corporate Governance 7.3.1 Key Constituents of Corporate Governance 7.3.2 Key Aspects of Corporate Governance 7.3.3 Mandatory and Non Mandatory Recommendations 7.3.4 Schedule of Implementation 7.3.5 Composition of Board of Directors 7.3.6 Chairman of the Board 7.3.7 Composition of the Audit Committee 7.3.8 Frequency of Meetings and Quorum Requirements of The Audit Committee 7.3.9 Powers of the Audit Committee 7.3.10 Disclosure of Remuneration Package 7.3.11 Accounting Standards and Financial Reporting 7.3.12 Disclosures Related to Management 7.3.13 Complaints of the Shareholders 7.3.14 Government's push to Corporate Governance 7.4 Corporate Social Responsibility 7.4.1 Evolution 7.4.2 The Pyramid of Corporate Social Responsibility Summing Up Self-assessment
7.1 Need for Sound Corporate Gover nance The concept of corporate governance has been attracting public attention for quite some time in India. The topic is no longer confined to the halls of academia and is increasingly finding acceptance for its relevance and underlying importance in the industry and capital markets. Progressive firms in India have voluntarily put in place systems of good corporate governance. Internationally too, while this topic has been accepted for a long time, the financial crisis in emerging markets has led to renewed discussions and inevitably focussed them on the lack of corporate as well as governmental oversight. In an age where capital flows worldwide, just as quickly as information, a company that does not promote a culture of strong, independent oversight, risks its very stability and future health. As a result, the link between a
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company's management, directors and its financial reporting system has never been more crucial. As the boards provide stewardship of companies, they play a significant role in their efficient functioning. Studies of firms in India and abroad have shown that markets and investors take notice of well-managed companies, respond positively to them, and reward such companies, with higher valuations. A common feature of such companies is that they have systems in place, which allow sufficient freedom to the boards and management to take decisions towards the progress of their companies and to innovate, while remaining within a framework of effective accountability. In other words they have a system of good corporate governance. Tr 7.2 T r end in Corporate Gover nance 1. It is important that insiders do not use their position of knowledge and acces to inside information about the company, and take unfair advantage of the resulting information asymmetry. To prevent this from happening, corporates are expected to disseminate the material price sensitive information in a timely and proper manner and also ensure that till such information is made public, insiders abstain from transacting in the securities of the company. The principle should be disclose or desist'. This therefore calls for companies to devise an internal procedure for adequate and timely disclosures, reporting requirements, confidentiality norms, code of conduct and specific rules for the conduct of its directors and employees and other insiders. The issue of corporate governance involves besides shareholders, all other stakeholders, and in particular the shareholders and investors. The control and reporting functions of boards, the roles of the various committees of the board, the role of management, all assume special significance when viewed from this perspective. The other way of looking at corporate gover nance is from the contribution that good corporate governance makes to the efficiency of a business enterprise, to the creation of wealth and to the country's economy. There are some Indian companies, which have voluntarily established high standards of corporate governance, but there are many more, whose practices are a matter of concern. There is also an increasing concern about standards of financial reporting and accountability, especially after losses suffered by investors and lenders in the recent past, which could have been avoided, with better and more transparent reporting practices. Investors have suf fered on account of unscr upulous management of companies, which have raised capital from the market at high valuations and have performed much worse than the past reported figures, leave alone the future projections at the time of raising money. Another example of bad governance has been the allotment of promoter's shares, on preferential basis at preferential prices, disproportionate to market valuation of shares, leading to further dilution of wealth of minority shareholders. This practice has however since been contained. There are also many companies, which are not paying adequate attention
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to the basic procedures for shareholders' service; for example, many of these companies do not pay adequate attention to redress investors' grievances such as delay in transfer of shares, delay in despatch of share certificates and dividend warrants and non-receipt of dividend warrants; companies also do not pay sufficient attention to timely dissemination of information to investors as also to the quality of such information. The SEBI has been regularly receiving a large number of investor complaints on these matters. While enough laws exist to take care of many of these investor grievances, the implementation and inadequacy of penal provisions have left a lot to be desired. 7. Corporate governance is considered an important instrument for investor protection, and it is therefore a priority on SEBI's agenda. To further improve the level of corporate governance, need was felt for a comprehensive approach at this stage of development of the capital market, to accelerate the adoption of globally acceptable practices of corporate governance. This would ensure that Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world. Securities market regulators in almost all developed and emerging markets have for some time been concerned about the importance of the subject and of the need to raise the standards of corporate governance. The financial crises in the Asian markets in the recent past have highlighted the need for an improved level of corporate governance and the lack of it in certain countries has been mentioned as one of the causes of the crises. Indeed corporate governance has been a widely discussed topic at recent meetings of the International Organisation of Securities Commissions (IOSCO). Besides in an environment in which emerging markets increasingly compete for global capital, it is evident that global capital will flow to markets which are better regulated and observe higher standards of transparency, efficiency and integrity. Raising standards of corporate governance is therefore also extremely relevant in this context.
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SEBI took many steps before the constitution of the Committee on corporate governance to raise the standards of corporate probity. Some of these steps were: strengthening of disclosure norms for Initial Public Offers following the recommendations of the Committee set up by SEBI under the Chairmanship of Shri Y H Malegam; providing information in directors' reports for utilisation of funds and variation between projected and actual use of funds according to the requirements of the Companies Act; inclusion of cash flow and funds flow statements in annual reports; declaration of quarterly results; mandatory appointment of a compliance officer for monitoring the share transfer process and ensuring compliance with various rules and regulations; timely disclosures of material and price sensitive information including details of all material events having a bearing on the performance of the
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company; despatch of one copy of the complete balance sheet to every household and abridged balance sheet to all shareholders; issue of guidelines for preferential allotment at market related prices; and issue of regulations providing for a fair and transparent framework for takeovers and substantial acquisitions.
7.3 Recommendations of the Committee on Corporate Gover nance The Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7, 1999 under the Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of Corporate Governance. It's terms of reference were the following: to suggest suitable amendments to the listing agreement executed by the stock exchanges with the companies and any other measures to improve the standards of corporate governance in the listed companies, in areas such as continuous disclosure of material information, both financial and non-financial, manner and frequency of such disclosures, responsibilities of independent and outside directors; to draft a code of corporate best practices; and to suggest safeguards to be instituted within the companies to deal with insider information and insider trading. 7.3.1 Key Constituents of Corporate Gover nance The Committee has identified the three key constituents of corporate governance as. the Shareholders, the Board of Directors and the Management 7.3.2 Key Aspects of Corporate Gover nance It has attempted to identify in respect of each of these constituents, their roles and responsibilities as also their rights in the context of good corporate governance. Fundamental to this examination and permeating throughout this exercise is the recognition of the three key aspects of corporate governance, namely; accountability, transparency and equality of treatment for all stakeholders. 7.3.3 Mandatory and Non-mandatory Recommendations
The Committee felt that some of the recommendations are absolutely essential for the framework of corporate governance and virtually form its core, while others could be considered desirable. Besides, some recommendations may also need change of statute, such as the Companies Act, for their enforcement. In the case of others, enforcement would be possible by amending the
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Securities Contracts (Regulation) Rules, 1957 and by amending the listing agreement of the stock exchanges under the direction of SEBI. The latter, would be less time consuming and would ensure speedier implementation of corporate governance. The Committee therefore felt that the recommendations should be divided into mandatory and non- mandatory categories Those recommendations which are absolutely essential for corporate governance, can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory. Others, which are either desirable or which may require change of laws, may, for the time being, be classified as non-mandatory.
7.3.4 Schedule of Implementation The Committee recommends that while the recommendations should be applicable to all the listed companies or entities, there is a need for phasing out the implementation as follows: By all entities seeking listing for the first time, at the time of listing. Within the financial year 2000-2001,but not later than March 31, 2001 by all entities, which are included either in Group A'of the BSE or in S&P CNX Nifty index as on January 1, 2000. However to comply with the recommendations, these companies may have to begin the process of implementation as early as possible. These companies would cover more than 80 percent of the market capitalisation. Within the financial year 2001-2002,but not later than March 31, 2002 by all the entities which are presently listed, with paid up share capital of Rs. 10 crore and above, or net worth of Rs 25 crore or more any time in the history of the company. Within the financial year 2002-2003,but not later than March 31, 2003 by all the entities which are presently listed, with paid up share capital of Rs 3 crore and above.
This is a mandatory recommendation. 7.3.5 Composition of Board of Directors The composition of the board is important in as much as it determines the ability of the board to collectively provide leadership and ensures that no one individual or group is able to dominate the board. The executive directors (like director-finance, director-personnel) are involved in the day to day management of the companies; the non-executive directors bring external and wider perspective and independence to the decision making.
Till recently, it has been the practice of most of the companies in India to fill the board with representatives of the promoters of the company, and independent directors if chosen were also handpicked thereby ceasing to be independent.
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This has undergone a change and increasingly the boards comprise of the following groups of directors promoter director, (promoters being defined by the erstwhile Malegam Committee), executive and non executive directors, a part of whom are independent. A conscious distinction has been made by the Committee between two classes of non-executive directors, namely, those who are independent and those who are not. The Committee recommended that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty percent of the board comprising the non-executive directors. The number of independent directors (directors who apart from receiving director's remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgement of the board may affect their independence of judgement) would depend on the nature of the chairman of the board. In case a company has a non-executive chairman, at least one-third of the board should comprise of independent directors and in case a company has an executive chairman, at least half of the board should be independent. This is a mandatory recommendation. Chairman 7.3.6 Chair man of the Boar d Given the importance of the Chairman's role, the Committee recommended that a non-executive Chairman should be entitled to maintain a Chairman's office at the company's expense and also allowed reimbursement of expenses incurred in the performance of his duties. This will enable him to discharge responsibilities effectively. This is a non-mandatory recommendation. 7.3.7 Composition of the Audit Committee the audit committee should have minimum three members, all being non executive directors, with the majority being independent, and with at least one director having financial and accounting knowledge; the chairman of the committee should be an independent director; the chairman should be present at the Annual General Meeting to answer shareholder queries; the audit committee should invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the Committee but on occasions it may also meet without the presence of any executives of the company. Finance director and head of internal audit and when required, a representative of the external auditor should be present as an invitee for the meetings of the audit committee; the Company Secretary should act as the secretary to the committee
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These are mandatory recommendations. Frequency Requirements 7.3.8 Fr equency of Meetings and Quor um Requir ements of the Audit Committee To begin with the audit committee should meet at least thrice a year. One meeting must be held before finalisation of annual accounts and one necessarily every six months. The quorum should be either two members or one-third of the members of the audit committee, whichever is higher and there should be a minimum of two independent directors. Both the above are mandatory recommendations. 7.3.9 Powers of the Audit Committee To investigate any activity within its terms of reference. To seek information from any employee. To obtain outside legal or other professional advice. To secure attendance of outsiders with relevant expertise, if it considers necessary.
These are mandatory recommendations. 7.3.10 Disclosure of Remuneration Package It is important for the shareholders to be informed of the remuneration of the directors of the company. The Committee therefore recommends that the following disclosures should be made in the section on corporate governance of the annual report: All elements of remuneration packages of all the directors i.e. salaries, benefits, bonuses, stock options, pensions, etc. Details of fixed component and performance linked incentives, along with performance criteria. Service contracts, notice period, severance fees. Stock option details, if any and whether issued at a discount as well as the period over which accrued and over which exercisable.
This is a mandatory recommendation. Standards 7.3.11 Accounting Standar ds and Financial Reporting Over time financial reporting and accounting standards in India have been upgraded. This however is an ongoing process and we have to move speedily towards the adoption of international standards. This is particularly important from the angle of corporate governance. The Committee took note of the discussions of the SEBI Committee on Accounting Standards referred to earlier and made recommendations regarding the following aspects of financial reporting. Consolidation of accounts of subsidiaries. Segmented reporting where a company has multiple lines of business.
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Disclosure and Treatment of related party transactions. Treatment of deferred taxation.
7.3.12 Disclosures Related to Management As a part of the disclosures related to Management, the Committee recommended that as part of the directors' report or as an addition thereto, a Management Discussion and Analysis report should form part of the annual report to the shareholders. This Management Discussion and Analysis should include discussion on the following matters within the limits set by the company's competitive position: Industry structure and developments. Opportunities and Threats Segment-wise or product-wise performance. Outlook. Risks and concerns Internal control systems and their adequacy. Discussion on financial per formance with respect to operational performance. Material developments in Human Resources /Industrial Relations front, including number of people employed.
This is a mandatory recommendation. 7.3.13 Complaints of the Shareholders The Committee recommended that a board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. The Committee believes that the formation of such a committee will help focus the attention of the company on shareholders' grievances and sensitise the management to redressal of their grievances. This is a mandatory recommendation 7.3.14 Gover nment's push to Corporate Gover nance While presenting the Union Budget for 1999-2000, the finance minister announced the institution of a national award for excellence in corporate governance. The award, instituted by the Union Finance ministry and sponsored by the Unit Trust of India (UTI), is aimed at strengthening investor confidence in the capital markets by encouraging Indian companies to follow internationally accepted practices of corporate governance. The first award was won by Infosys technology. Tata Steel won the award for 2000.
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7.4
Corporate Social Responsibility
This term indicates the doings of corporates over and above the statutory requirements for the benefit of the society. According to N R Narayanmoorthy, Chief Mentor of Infosys Technology, a corporate's foremost social responsibility is to create maximum share holder value working under the circumstances where it is fair to all its stake holders workers, consumers, the community, government and the environment. He points out that by living in harmony with the community and environment around us and not cheating our customers and workers, we might not gain anything in the short run, but in the long run it means greater profits and shareholder value. 7.4.1 Evolution
What does it mean for a corporation to be socially responsible? Academics and practitioners have been striving to establish an agreed-upon definition of this concept for 30 years. In 1960, Keith Davis suggested that social responsibility refers to businesses' "decisions and actions taken for reasons at least partially beyond the firm's direct economic or technical interest." At about the same time, Eells and Walton (1961) argued that CSR refers to the "problems that arise when corporate enterprise casts its shadow on the social scene, and the ethical principles that ought to govern the relationship between the corporation and society." In 1971 the Committee for Economic Development in USA used a "three concentric circles" approach to depicting CSR. The inner circle included basic economic functions - growth, products, jobs. The intermediate circle suggested that economic functions must be exercised with a sensitive awareness of changing social values and priorities. The outer circle outlined newly emerging and still amorphous responsibilities that business should assume to become more actively involved in improving the social environment.
From social responsibility to social responsiveness Attention was shifted from social responsibility to social responsiveness by several other writers. Their basic argument was that the emphasis on responsibility focused exclusively on the notion of business obligation and motivation and that action or performance were being overlooked. The social responsiveness movement, therefore, emphasised corporate action, pro-action, and implementation of a social role. This was indeed a necessary reorientation. The question still remained, however, of reconciling the firm's economic orientation with its social orientation. A step in this direction was taken when a comprehensive definition of CSR was set forth. in this view, a four-part conceptualisation of CSR included the idea that the corporation has not only economic and legal obligations, but ethical and discretionary (philanthropic) responsibilities as well (Carroll 1979). The point here was that CSR, to be
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accepted as legitimate, had to address the entire spectrum of obligations business has to society, including the most fundamental-economic. It is upon this four-part perspective that our pyramid is based. In recent years, the term corporate social performance (CSP) has emerged as an inclusive and global concept to embrace corporate social responsibility, responsiveness, and the entire spectrum of socially beneficial activities of businesses. The focus on social performance emphasises the concern for corporate action and accomplishment in the social sphere. With a performance perspective, it is clear that firms must formulate and implement social goals and programmes as well as integrate ethical sensitivity into all decision making, policies, and actions. With a results focus, CSP suggests an all-encompassing orientation towards normal criteria by which we assess business performance to include quantity, quality, effectiveness, and efficiency. 7.4.2 The Pyramid of Corporate Social Responsibility For CSR to be accepted by a conscientious business person, it should be framed in such a way that the entire range of business responsibilities are embraced. It is suggested here that four kinds of social responsibilities constitute total CSR: economic, legal, ethical, and philanthropic. Furthermore, these four categories or components of CSR might be depicted as a pyramid. To be sure, all of these kinds of responsibilities have always existed to some extent, but it has only been in recent years that ethical and philanthropic functions have taken a significant place. Each of these four categories deserves a closer consideration. Economic Responsibilities Historically, business organisations were created as economic entities designed to provide goods and services to societal members. The profit motive was established as the primary incentive for entrepreneurship. Before it was anything else, the business organisation was the basic economic unit in our society. As such, its principal role was to produce goods and services that consumers needed and wanted and to make an acceptable profit in the process. At some point the idea of the profit motive was transformed into a notion of maximum profits, and this has been an enduring value ever since. All other business responsibilities are predicated upon the economic responsibility of the firm, because without it the others become moot considerations. Legal Responsibilities Society has not only sanctioned business to operate according to the profit motive; at the same time business is expected to comply with the laws and regulations promulgated by federal, state, and local governments as the ground rules under which business must operate. As a partial fulfilment of the "social contract" between business and society, firms are expected to pursue their economic missions within the framework of the law. Legal responsibilities reflect a view of "codified ethics" in the sense that they embody basic notions of fair operations as established by our lawmakers. They are depicted as the next layer on the pyramid to portray their historical development, but they are appropriately seen as co-existing with
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economic responsibilities as fundamental precepts of the free enterprise system. Ethical Responsibilities Although economic and legal responsibilities embody ethical norms about fairness and justice, ethical responsibilities embrace those activities and practices that are expected or prohibited by societal members even though they are not codified into law. Ethical responsibilities embody those standards, nor ms, or expectations that reflect a concer n for what consumers, employees, shareholders, and the community regard as fair, just, or in keeping with the respect or protection of stakeholders' moral rights. Philanthropic Responsibilities Philanthropy encompasses those corporate actions that are in response to society's expectation that businesses be good corporate citizens. This includes actively engaging in acts or programmes to promote human welfare or goodwill. Examples of philanthropy include business contributions of financial resources or executive time, such as contributions to the arts, education, or the community. A loaned-executive programme that provides leadership for a community's United Way campaign is one illustration of philanthropy. The distinguishing feature between philanthropic and ethical responsibilities is that the former are not expected in an ethical or moral sense. Communities desire firms to contribute their money, facilities, and employee time to humanitarian programmes or purposes, but they do not regard the firms as unethical if they do not provide the desired level. Therefore, philanthropy is more discretionary or voluntary on the part of businesses even though there is always the societal expectation that businesses provide it.
Summing Up In an age where capital flows worldwide, just as quickly as information, a company that does not promote a culture of strong, independent outlook, risks its very stability and future health. As a result, the link between a company's management, directors and its financial reporting system has never been more crucial. As the boards provide stewardship of companies, they play a significant role in their efficient functioning. The Kumarmangalam Birla committee on corporate gover nance was appointed because of the aforementioned concern. It has given a comprehensive list of recommendations to improve the fabric of corporate governance in India. At the same time, corporates are also working towards their social responsibility. They are becoming increasingly aware of their role in this regard to sustain business on a long term basis. Self-assessment 1. The issue of corporate governance involves besides shareholders, all other stakeholders, and in particular shareholders and ____________.
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The Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7, 1999 under the Chairmanship of _____________. The Committee has identified the three key constituents of corporate governance as _________, ___________and ______________. The three key aspects of corporate governance as per this committee are __________, ___________ and _________. The Committee recommended that the board of a company have an optimum combination of executive and non-executive directors with not less than __________ percent of the board comprising the nonexecutive directors. The award, instituted by the Union Finance ministry and sponsored by the Unit Trust of India (UTI), is aimed at strengthening ___________ confidence in the capital markets by encouraging Indian companies to follow internationally accepted practices of corporate governance. In 1971 the Committee for Economic Development in USA used a "________ __________ _________" approach to depicting CSR. A four-part conceptualisation of CSR included the idea that the corporation has not only economic and legal obligations, but _____ and ____________ responsibilities as well (Carroll 1979). In recent years, the term ________ has emerged as an inclusive and global concept to embrace corporate social responsibility, responsiveness, and the entire spectrum of socially beneficial activities of businesses. Ethical responsibilities embody those standards, norms, or expectations that reflect a concern for what ________, _________, ____________, and the community regard as fair, just, or in keeping with the respect for the protection of stakeholders' moral rights.
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Business ethics
Chapter VIII Business ethics
Business ethics is a form of applied ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole. Applied ethics is a field of ethics that deals with ethical questions in many fields such as medical, technical, legal and business ethics. In the increasingly conscience-focused marketplaces of the 21st century, the demand for more ethical business processes and actions is increasing. Simultaneously, pressure is applied on industry to improve business ethics through new public initiatives and laws. Businesses can often attain shortterm gains by acting in an unethical fashion; however, such behaviours tend to undermine the economy over time. Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career specialization, the field is primarily normative. In academia descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings. Lear ning Objectives 1. To understand the emphasis which companies are giving on commitment to promoting non-economic social values? 2. To understand the benefits of being ethical greatly outweigh being nonethical in business. 3. To understand the ethical issues in business. 4. To understand that taking decisions which based on ethics helps businesses in surviving many ups and downs. Contents Overview of issues in business ethics 8.1. General business ethics 8.1.1Ethics of accounting information 8.1.2Ethics of human resource management 8.1.3 Ethics of sales and marketing 8.1.4 Ethics of production 8.1.5 Ethics of intellectual property, knowledge and skills 8.2 International business ethics and ethics of economic systems 8.2.1 International business ethics 8.2.2 Ethics of economic systems Theoretical issues in business ethics 8.2.3 Conflicting interests 8.2.4 Ethical issues and approaches
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Business ethics in the field 8.3.1 Corporate ethics policies 8.3.2 Ethics officers Summing up Self Assessment
8.3
Overview of issues in business ethics 8 .1 General business ethics This part of business ethics overlaps with the philosophy of business, one of the aims of which is to determine the fundamental purposes of a company. If a company's main purpose is to maximize the returns to its shareholders, then it should be seen as unethical for a company to consider the interests and rights of anyone else. Corporate social responsibility or CSR: an umbrella term under which the ethical rights and duties existing between companies and society is debated. Issues regarding the moral rights and duties between a company and its shareholders: fiduciary responsibility, stakeholder concept v. shareholder concept. Ethical issues concerning relations between different companies: e.g. hostile take-overs, industrial espionage. Leadership issues: corporate governance. Political contributions made by corporations. Law reform, such as the ethical debate over introducing a crime of corporate manslaughter. The misuse of corporate ethics policies as marketing instruments.
information 8 . 1 . 1 . Ethics of accounting infor mation 1. 2. 3. 4. Creative accounting, earnings management, misleading financial analysis. Insider trading, securities fraud, bucket shops, forex scams: concerns (criminal) manipulation of the financial markets. Executive compensation: concerns excessive payments made to corporate CEO's and top management. Bribery, kickbacks, and facilitation payments: while these may be in the (short-term) interests of the company and its shareholders, these practices may be anti-competitive or offend against the values of society.
8 . 1 . 2 Ethics of human resource management The ethics of human resource management (HRM) covers those ethical issues arising around the employer-employee relationship, such as the rights and duties owed between employer and employee. 1. Discrimination issues include discrimination on the bases of age (ageism), gender, race, religion, disabilities, weight and attractiveness. See also: affirmative action, sexual harassment.
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Business ethics
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Issues arising from the traditional view of relationships between employers and employees, also known as At-will employment. Issues sur rounding the representation of employees and the democratization of the workplace: union busting, strike breaking. Issues affecting the privacy of the employee: workplace surveillance, . See also: privacy. Issues affecting the privacy of the employer: whistle-blowing. Issues relating to the fairness of the employment contract and the balance of power between employer and employee: slavery, indentured servitude, employment law. Occupational safety and health.
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The entire above are also related to the hiring and firing of employees. An employee or future employee can not be hired or fired based on race, age, gender, religion, or any other discriminatory act. 8 . 1 . 3 Ethics of sales and marketing Marketing, which goes beyond the mere provision of information about (and access to) a product, may seek to manipulate our values and behavior. To some extent society regards this as acceptable, but where is the ethical line to be drawn? Marketing ethics overlaps strongly with media ethics, because marketing makes heavy use of media. However, media ethics is a much larger topic and extends outside business ethics. Pricing: price fixing, price discrimination, price skimming. Anti-competitive practices: these include but go beyond pricing tactics to cover issues such as manipulation of loyalty and supply chains. See: anti-competitive practices, antitrust law. Specific marketing strategies: green wash, bait and switch, shill, viral marketing, spam (electronic), pyramid scheme, planned obsolescence. Content of advertisements: attack ads, subliminal messages, sex in advertising, products regarded as immoral or harmful Children and marketing: marketing in schools. Black markets, grey markets.
8 . 1 . 4 Ethics of production This area of business ethics usually deals with the duties of a company to ensure that products and production processes do not cause harm. Some of the more acute dilemmas in this area arise out of the fact that there is usually a degree of danger in any product or production process and it is difficult to define a degree of permissibility, or the degree of permissibility may depend on the changing state of preventative technologies or changing social perceptions of acceptable risk. Defective, addictive and inherently dangerous products and services (e.g. tobacco, alcohol, weapons, motor vehicles, chemical manufacturing, bungee jumping). Ethical relations between the company and the environment: pollution, environmental ethics, carbon emissions trading Ethical problems arising out of new technologies: , mobile phone radiation and health.
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Product testing ethics: animal rights and animal testing, use of economically disadvantaged groups (such as students) as test objects.
property operty, 8 . 1 . 5 Ethics of intellectual pr operty, knowledge and skills Knowledge and skills are valuable but not easily "ownable" as objects. Nor is it obvious that has the greater rights to an idea: the company who trained the employee or the employee themselves? The country in which the plant grew or the company which discovered and developed the plant's medicinal potential? As a result, attempts to assert ownership and ethical disputes over ownership arise. Patent infringement, copyright infringement, trademark infringement. Misuse of the intellectual property systems to stifle competition: patent misuse, copyright misuse, patent troll, submarine patent. Even the notion of intellectual property itself has been criticized on ethical grounds: see intellectual property. Employee raiding: the practice of attracting key employees away from a competitor to take unfair advantage of the knowledge or skills they may possess. The practice of employing all the most talented people in a specific field, regardless of need, in order to prevent any competitors employing them. Business intelligence and industrial espionage.
Ethics and Technology The computer and the World Wide Web are two of the most significant inventions of the twentieth century. There are many ethical issues that arise from this technology. It is easy to gain access to information. This leads to data mining, workplace monitoring, and privacy invasion.[5] Medical technology has improved as well. Pharmaceutical companies have the technology to produce life saving drugs. These drugs are protected by patents and there are no generic drugs available. This raises many ethical questions. 8.2 Inter national business ethics and ethics of economic systems The issues here are grouped together because they involve a much wider, global view on business ethical matters. 8 . 2 . 1 Inter national business ethics While business ethics emerged as a field in the 1970s, international business ethics did not emerge until the late 1990s, looking back on the international developments of that decade.[6] Many new practical issues arose out of the international context of business. Theoretical issues such as cultural relativity of ethical values receive more emphasis in this field. Other, older issues can be grouped here as well. Issues and subfields include: The search for universal values as a basis for international commercial behaviour. Comparison of business ethical traditions in different countries. Also on the basis of their respective GDP and [Corruption rankings]. Comparison of business ethical traditions from various religious perspectives.
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Ethical issues arising out of international business transactions; e.g. bioprospecting and biopiracy in the pharmaceutical industry; the fair trade movement; transfer pricing. Issues such as globalization and cultural imperialism. Varying global standards - e.g. the use of child labor. The way in which multinationals take advantage of international differences, such as outsourcing production (e.g. clothes) and services (e.g. call centres) to low-wage countries. The permissibility of international commerce with pariah states.
Foreign countries often use dumping as a competitive threat, selling products at prices lower than their normal value. This can lead to problems in domestic markets. It becomes difficult for these markets to compete with the pricing set by foreign markets. In 2009, the International Trade Commission has been researching anti-dumping laws. Dumping is often seen as an ethical issue, as larger companies are taking advantage of other less economically advanced companies. 8 . 2 . 2 Ethics of economic systems Ethics is a matter of doing justice to the human without twisting the facts and ignoring the constraints. The study introduces seven criteria of human justice that fundamentally relate to the Christian revelation and, at the same time, establish a humanistic and universal approach. Subsequently it focuses on the concrete economic systems and their problems. It describes and analyses various models of market and centrally planned economies, and evaluates them in the light of middle-level principles, which are informed by both ethical criteria and economic knowledge. Theoretical issues in business ethics 8.2.3 Conflicting interests Business ethics can be examined from various new perspectives, including the perspective of the employee, the commercial enterprise, and society as a whole. Very often, situations arise in which there is conflict between one and more of the parties, such that serving the interest of one party is a detriment to the other(s). For example, a particular outcome might be good for the employee, whereas, it would be bad for the company, society, or vice versa. Some ethicists see the principal role of ethics as the harmonization and reconciliation of conflicting interests. 8 . 2 . 4 Ethical issues and approaches Philosophers and others disagree about the purpose of a business ethic in society. For example, some suggest that the principal purpose of a business is to maximize returns to its owners, or in the case of a publicly-traded concern, its shareholders. Thus, under this view, only those activities that increase profitability and shareholder value should be encouraged, because any others function as a tax on profits. Some believe that the only companies that are likely to survive in a competitive marketplace are those that place profit maximization above everything else. However, some point out that self89/MITSDE
interest would still require a business to obey the law and adhere to basic moral rules, because the consequences of failing to do so could be very costly in fines, loss of licensure, or company reputation. Some take the position that organizations are not capable of moral agency. Under this, ethical behavior is required of individual human beings, but not of the business or corporation. Other theorists contend that a business has moral duties that extend well beyond serving the interests of its owners or stockholders, and that these duties consist of more than simply obeying the law. They believe a business has moral responsibilities to so-called stakeholders, people who have an interest in the conduct of the business, which might include employees, customers, vendors, the local community, or even society as a whole. Stakeholders can also be broken down into primary and secondary stakeholders. Primary stakeholders are people that are affected directly such as stockholders, where secondary stakeholders are people who are not affected directly such as the government. They would say that stakeholders have certain rights with regard to how the business operates, and some would suggest that this includes even rights of governance. Ethical issues can arise when companies must comply with multiple and sometimes conflicting legal or cultural standards, as in the case of multinational companies that operate in countries with varying practices. The question arises, for example, ought a company to obey the laws of its home country, or should it follow the less stringent laws of the developing country in which it does business? It is claimed that in a competitive business environment, those companies that survive are the ones that recognize that their only role is to maximize profits. 8.3 Business ethics in the field 8.3.1 8. 3.1 Corporate Ethics Policy As part of more comprehensive compliance and ethics programs, many companies have formulated internal policies pertaining to the ethical conduct of employees. These policies can be simple exhortations in broad, highlygeneralized language (typically called a corporate ethics statement), or they can be more detailed policies, containing specific behavioral requirements (typically called corporate ethics codes). They are generally meant to identify the company's expectations of workers and to offer guidance on handling some of the more common ethical problems that might arise in the course of doing business. It is hoped that having such a policy will lead to greater ethical awareness, consistency in application, and the avoidance of ethical disasters. An increasing number of companies also require employees to attend seminars regarding business conduct, which often include discussion of the company's policies, specific case studies, and legal requirements. Some companies even require their employees to sign agreements stating that they will abide by the company's rules of conduct. Many companies are assessing the environmental factors that can lead employees to engage in unethical conduct. A competitive business environment may call for unethical behavior. Lying has become expected in fields such as trading.
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Not everyone supports corporate policies that govern ethical conduct. Some claim that ethical problems are better dealt with by depending upon employees to use their own judgment. Others believe that corporate ethics policies are primarily rooted in utilitarian concerns, and that they are mainly to limit the company's legal liability, or to curry public favor by giving the appearance of being a good corporate citizen. Ideally, the company will avoid a lawsuit because its employees will follow the rules. Should a lawsuit occur, the company can claim that the problem would not have arisen if the employee had only followed the code properly? Sometimes there is disconnection between the company's code of ethics and the company's actual practices. Thus, whether or not such conduct is explicitly sanctioned by management, at worst, this makes the policy duplicitous, and, at best, it is merely a marketing tool. To be successful, most ethicists would suggest that an ethics policy should be: Given the unequivocal support of top management, by both word and example. Explained in writing and orally, with periodic reinforcement. Doable....something employees can both understand and perform. Monitored by top management, with routine inspections for compliance and improvement. Backed up by clearly stated consequences in the case of disobedience. Remain neutral and nonsexist. Importance of Ethics in Business Ethics is important not only in business but in all aspects of life because it is the vital part and the foundation on which the society is build. A business/society that lacks ethical principles is bound to fail sooner or later. According to International Ethical Business Registry, "there has been a dramatic increase in the ethical expectation of businesses and professionals over the past 10 years. Increasingly, customers, clients and employees are deliberately seeking out those who define the basic ground, rules of their operations on a day today...." Ethics refers to a code of conduct that guides an individual in dealing with others. Business Ethics is a form of the art of applied ethics that examines ethical principles and moral or ethical problems that can arise in business environment. It deals with issues regarding the moral and ethical rights, duties and corporate governance between a company and its shareholders, employees, customers, media, government, suppliers and dealers. Henry Ford said, "Business that makes noting but money is a poor kind of business". Ethics is related to all disciplines of management like accounting information, human resource management, sales and marketing, production, intellectual property knowledge and skill, international business and economic system. In business world the organization's culture sets standards for determining the difference between good or bad, right or wrong, fair or unfair. "It is perfectly possible to make a decent living without compromising the integrity of the company or the individual, wrote business executive R. Holland, "Quite apart from the issues of rightness and wrongness, the fact is that ethical behavior in business serves the individual and the enterprise much better in long run.", he added.
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Some management guru stressed that ethical companies have an advantage over their competitors. Said Cohen and Greenfield, "Consumers are used to buying products despite how they feel about the company that sells them. But a valued company earned a kind of customer loyalty most corporations only dream of because it appeals to its customers more than a product". The ethical issues in business have become more complicated because of the global and diversified nature of many large corporation and because of the complexity of economic, social, global, natural, political, legal and government regulations and environment, hence the company must decide whether to adhere to constant ethical principles or to adjust to domestic standards and culture. Managers have to remember that leading by example is the first step in fostering a culture of ethical behavior in the companies as rightly said by Robert Noyce, "If ethics are poor at the top, that behavior is copied down through the organization", however the other methods can be creating a common interest by favorable corporate culture, setting high standards, norms, framing attitudes for acceptable behavior, making written code of ethics implacable at all levels from top to bottom, deciding the policies for recruiting, selecting, training, induction, promotion, monetary / non-monetary motivation, remuneration and retention of employees. "Price is what you pay. Value is what you get" Warren Buffet Thus, a manager should treat his employees, customers, shareholders, government, media and society in an honest and fair way by knowing the difference between right or wrong and choosing what is right, this is the foundation of ethical decision making. REMEMBER: GOOD ETHICS IS GOOD BUSINESS. "Non-corporation with the evil is as much a duty as is co-operation with good" - Mahatma Gandhi.
Business and Ethics As an entrepreneur, sometimes, you may be forced adopt austerity measures for managing the finances of the company or there may be so many allurements that you may be tempted to make compromises on the quality of the products you manufacture or to terminate the services of some of the existing employees so as to increase profits. The situation may demand your immediate decision and the easy and simple way out may be to make such compromises. But if you are steadfast in observing ethics in your business, you may be equipped with the far-sightedness to foresee such eventualities and may have taken the appropriate steps that may free you from such tricky situations. Some people may argue that business and ethics cannot go together. This is not true. If you respect values in life, you will definitely understand that ethical business will definitely give you the leverage of peace of mind in doing your business. To understand the situations in the right perspective and consider ethical decisions for implementation, you may have to know the approaches that are available to you. 1. You take a stand that would be beneficial to all, keeping in mind your success in the business, your goals in the business, and your responsibilities to your customers, your responsibilities to the
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society at large and also to your employees. This is otherwise called the Utilitarian approach. 2. You may opt to stick to ethics, come what may. You do not worry about the consequences of your decisions and you possess the courage of conviction and conventions to assert that ethical decisions are supreme in business. Even if it may entail closing down of your business, you stick to that stand. This approach may not appeal to all entrepreneurs and very rarely, we come across entrepreneurs of this kind. The third approach is based on the golden rule. You clearly and unambiguously opt for decisions you know to be right. If you do not feel good taking a decision, then it is wrong. But, if you have a good feeling, then you believe it is the right decision. In certain situations, you will be forced to weigh the cost of the decisions as against the benefits derived from them. If the consequences of the decisions are going to cost you more than the benefits that you may derive, then you may not opt for it and if the benefits outweigh the cost, you may go ahead with those decisions.
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Experience shows that taking decisions based on ethics helps businesses in surviving many ups and downs. Business history clearly shows that adopting unethical means to run a business always leads to reversal of fortunes. Hence while taking decisions during such situations, the overriding consideration should be "Commerce with ethics", to quote Mahatma Gandhi's words.
Can Ethics and a Healthy Bottom Line For Companies Co-Exist? There's a view that soaring profits and ethics are mutually exclusive concepts, however, the two can co-exist. The world of business is generally perceived as jungle where the bottom line takes precedence over all other matters. While it is certainly true that profits are the true measure of success, commercial ruthlessness doesn't necessarily lead to unethical practices. There sometimes arises an inevitable conflict in the company between their moral obligations and improving the bottom lines. But ultimately companies following the path of ethical value system succeed in long run as sooner or later consumers learn to separate fact from fiction. Nowadays Money and Ethics are seen to be diametrically opposed to each other but it turns out money and ethics do have much in common. Any corporation large or small ultimately lives by its reputation. Ethics must sit at the top of the mountain for any successful company that wants the trust of the consumers and investors. There are very few second acts once the public perceives the organization flawed by dishonesty or inferior quality. As is very rightly said by Henry Ford - A business that makes nothing but money is a poor kind of business. Ethical decision-making gets especially interesting when organizations must reconcile their core values and show a healthy bottom line which end up in conflict with one another. The company and its management might get diversified to malpractices. Enron, WorldCom, Satyam, Xerox and other scandals shook public confidence in ethical value system of organizations. But it must understood very clearly Relativity applies to physics, not ethics (Albert Einstein)
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Profits and ethics are in reality part of the same equation. A corporation that wishes to grow and increase its financial return to its owners must balance ethics and operations. This is a complex journey especially during tremendous economic pressures. The drive for success in the marketplace and to maximize return of capital can lead a company astray with disastrous results. Successful businesses fail, profitably running businesses suf fer from a downfall and some seemingly ef fective corporate receive a great fall in their profits and popularity all due to the lack of business ethics. There are companies that have crossed ethical lines in the pursuit of profit, and momentarily gained fame and fortune but what was the end result?? Many companies strive for and achieve ethical behavior. Looking at names like Tata group, Ford India, Rockwell Automation, Infosys Technologies, Hindustan Unilever, ITC, ONGC it is inferred that Ethics remain being important in business and strong ethical values takes the business a long way. Ethics are important not only in business but in all aspects of life because it is an essential part of the foundation on which civilized society is build. A business that lacks ethical principles is bound to fail sooner or later. "If you have integrity, nothing else matters. If you don't have integrity, nothing else matters." -- Alan K. Simpson
Are Why Ethics Ar e Important in Business When working in the business world, it is a necessity to encompass moral ethics. Ethics is also especially important when working with financial information. It is very difficult to trust someone handling lots of money. Companies in the past have distorted their financial statements in order to look better to stockholders, without thinking of the consequences that may follow if they get caught. If a company does not promote good ethical behavior within the organization, it is hard to trust the financial statements. Auditors, or "independent third parties", must be truthful and honest when auditing a company's financial information. If honesty is not involved in the auditing process, it will be very hard for a shareholder to trust the company. In other words, if a company is caught altering their financial information, it is tremendously hard to have confidence the business, therefore putting the company in a bad situation. No one will want to buy their stocks anymore and many people will lose their faith in the company. Most likely, the company will collapse and it will be that much harder for people to put their trust into another company similar to the one that has collapsed. In order to prevent fraud in companies, it is a great idea to let the accountants have vacation days lined up and have other accountants fill in for the job. This way, fraud will be detected before any of the financial statements are sent out to the shareholders, and the employee creating the financials can be fired. Similarly, separation of duties also comes into play when dealing with important financials. Just like allowing accountants to take time off, there should be separation of responsibility within each department. For example, one employee can balance the books, and another employee can "audit" the financials and make sure
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that everything is balanced and in the right place. This may become time consuming; however, it is essential that the financials are accurate and completed with ethical precision. Most companies would want to make sure that the financials are correct and save the hassle of having ruined financials. There are also personal reasons as to keep financials accurate, such as having an honest and truthful reputation. Accountants must have strong moral values, or else there would be more fraudulent financials. It is hard to prove honesty to new people, especially to co-workers and new bosses. However, it is possible. Sincerely wanting the company to do well and succeed is a key factor in helping to prove trustworthiness. Arriving to work on time, getting projects completed, and having a good relationship with associates within the company are ways to prove to be a trustworthy person as well. In addition to shareholders having confidence in the company, partners and suppliers need to be able to trust the company. Personal relationships are based upon trust, as are corporate relationships. Companies thrive on networking in order to be successful. Employee performance also improves while working in an ethical environment. If employee performance improves, the company will thrive, and as a result, everyone wins. By making ethics mandatory within a company, success will be established. There is a chain reaction when ethical behavior occurs and when non-ethical behavior occurs. Non-ethical behavior can scorn the company and create bad publicity. Shareholders and corporate partners will lose their confidence in the company and give their support, money, and business to a similar company. Being non-ethical can lead to failure and the fall of the business. By being honest with the financials, shareholders can see the true potential the company has and base their decisions off of honesty. Corporate partners can count on the company when making business decisions. This would prevent any bad publicity for the company and keep them out of negative spotlights. The benefits of being ethical greatly outweigh being non-ethical in business. There are plenty of reasons why being honest and truthful is the better decision to make when creating financials for other businesspeople to see and use to make conclusions. Although it can be said that ethics is a given when working for a business, companies should enforce being ethical and ultimately become more successful because of it.
8.3.2 Ethics of ficers Ethics officers (sometimes called "compliance" or "business conduct officers") have been appointed formally by organizations since the mid-1980s. The effectiveness of ethics officers in the marketplace is not clear. If the appointment is made primarily as a reaction to legislative requirements, one might expect the efficacy to be minimal, at least, over the short term. In part, this is because ethical business practices result from a corporate culture that consistently places value on ethical behavior, a culture and climate that usually emanates from the top of the organization. The mere establishment of a
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position to oversee ethics will most likely be insufficient to inculcate ethical behaviour: a more systemic programme with consistent support from general management will be necessary. The foundation for ethical behavior goes well beyond corporate culture and the policies of any given company, for it also depends greatly upon an individual's early moral training, the other institutions that affect an individual, the competitive business environment the company is in and, indeed, society as a whole.
Summing up A code of ethics or conduct is a statement of ethical practices or guidelines to which an enterprise adheres. There are many such codes, some related to industry at large and others related directly to corporate conduct. These codes cover a multitude of subjects, ranging from misuse of corporate assets, conflict of interest, and use of inside information, to equal employment practices, falsification of books and records, and antitrust violations. These codes of ethics can promote positive behavior among corporations in a variety of ways. Recognizing and trying to solve the problems involving equality, the environment, and consumerism represent the major part of the social responsibility of business. Business ethics are standards that govern business behavior. Many have found that they believed that a code of ethics was the most effective way to encourage ethical business behavior. Sometimes these codes are written down or a code of ethics is communicated orally or even through the overall climate or cultural values of the organization
Self Assessment 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Explain ethics of accounting information Explain ethics of human resource management Ethics of sales and marketing Ethics of production Ethics of intellectual property, knowledge and skills What are the suggestions about ethics policy? Who are Ethics officers? Why Ethics Are Important in Business What is the importance of Ethics in Business Explain few approaches of business and Ethics. Can Ethics and a Healthy Bottom Line For Companies Co-Exist?
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Globalization
Chapter IX Globalization
Globalization has had an impact on different cultures around the world. Globalization describes an ongoing process by which regional economies, societies, and cultures have become integrated through a globe-spanning network of communication and exchange. The term is sometimes used to refer specifically to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. However, globalization is usually recognized as being driven by a combination of economic, technological, socio-cultural, political, and biological factors. The term can also refer to the transnational circulation of ideas, languages, or popular culture. Lear ning Objectives 1. To define globalization and international business and show how they affect each other 2. To understand why companies engage in international business and why international business growth has accelerated 3. To discuss the major criticisms of globalization 4. To become familiar with dif ferent ways in which a company can accomplish its global objectives 5. To apply social science disciplines to understanding the differences between international and domestic business Contents 9.1 Globalization Definition, History 9.2 Modern Globalization 9.3 Measuring globalization 9.4 Effects of globalization 9.5 Pro-globalization (globalism) 9.6 Anti-globalization 9.1 Definition An early description of globalization was penned by the American entrepreneurturned-minister Charles Taze Russell who coined the term 'corporate giants' in 1897. However, it was not until the 1960s that the term began to be widely used by economists and other social scientists. It had achieved widespread use in the mainstream press by the later half of the 1980s. Since its inception, the concept of globalization has inspired numerous competing definitions and interpretations. The United Nations ESCWA has written that globalization "is a widely-used term that can be defined in a number of different ways. When used in an economic context, it refers to the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, and services and labour... although considerable barriers remain to the flow of labour...
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Globalization is not a new phenomenon. It began in the late nineteenth century, but its spread slowed during the period from the start of the First World War until the third quarter of the twentieth century. This slowdown can be attributed to the inward looking policies pursued by a number of countries in order to protect their respective industries. However, the pace of globalization picked up rapidly during the fourth quarter of the twentieth century. History The historical origins of globalization are the subject of on-going debate. Though some scholars situate the origins of globalization in the modern era, others regard it as a phenomenon with a long history. Great Britain grew rich in the 19th century as the first global economic superpower, because of its superior manufacturing technology and improved global communications such as steamships and railroads. The 19th century witnessed the advent of globalization approaching its modern form. Industrialization allowed cheap production of household items using economies of scale, while rapid population growth created sustained demand for commodities. Globalization in this period was decisively shaped by nineteenth-century imperialism. After the Opium Wars and the completion of British conquest of India, vast populations of these regions became ready consumers of European exports. It was in this period that areas of sub-Saharan Africa and the Pacific islands were incorporated into the world system. Meanwhile, the conquest of new parts of the globe, notably sub-Saharan Africa, by Europeans yielded valuable natural resources such as rubber, diamonds and coal and helped fuel trade and investment between the European imperial powers, their colonies, and the United States. Said John Maynard Keynes. The first phase of "modern globalization" began to break down at the beginning of the 20th century, with the first World War. The novelist VM Yeates criticized the financial forces of globalization as a factor in creating World War I. The final death knell for this phase came during the gold standard crisis and Great Depression in the late 1920s and early 1930s. In the middle decades of the twentieth century globalization was largely driven by the global expansion of multinational corporations based in the United States and Europe, and worldwide exchange of new developments in science, technology and products, with most significant inventions of this time having their origins in the Western world according to Encyclopedia Britannica. Worldwide export of western culture went through the new mass media: film, radio and television and recorded music. Development and growth of international transport and telecommunication played a decisive role in modern globalization. In late 2000s, much of the industrialized world entered into a deep . Some analysts say the world is going through a period of delocalization after years of increasing economic integration. Up to 45% of global wealth had been destroyed by the global financial crisis in little less than a year and a half. China has recently become the world's largest exporter surpassing Germany.
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9.2 Moder n Globalization Globalization, since World War II, is largely the result of planning by politicians to break down borders hampering trade to increase prosperity and interdependence thereby decreasing the chance of future war. Their work led to the Bretton Woods conference, an agreement by the world's leading politicians to lay down the framework for international commerce and finance, and the founding of several international institutions intended to oversee the processes of globalization. These institutions include the International Bank for Reconstruction and Development (the World Bank), and the International Monetary Fund. Globalization has been facilitated by advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of the General Agreement on Tariffs and Trade (GATT), which led to a series of agreements to remove restrictions on free trade. Since World War II, barriers to international trade have been considerably lowered through international agreements GATT. Particular initiatives carried out as a result of GATT and the (WTO), for which GATT is the foundation, has included: Promotion of free trade: elimination of tariffs; creation of free trade zones with small or no tariffs Reduced transportation costs, especially resulting from development of containerization for ocean shipping. Reduction or elimination of capital controls Reduction, elimination, or harmonization of subsidies for local businesses Creation of subsidies for global corporations Harmonization of intellectual property laws across the majority of states, with more restrictions Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)
Cultural globalization, driven by communication technology and the worldwide marketing of Western cultural industries, was understood at first as a process of homogenization, as the global domination of American culture at the expense of traditional diversity. However, a contrasting trend soon became evident in the emergence of movements protesting against globalization and giving new momentum to the defense of local uniqueness, individuality, and identity, but largely without success. 9.3 Measuring globalization Looking specifically at economic globalization, demonstrates that it can be measured in different ways. This center around the four main economic flows that characterize globalization: Goods and services, e.g., exports plus imports as a proportion of national income or per capita of population Labor/people, e.g., net migration rates; inward or outward migration flows, weighted by population Capital, e.g., inward or outward direct investment as a proportion of national income or per head of population
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Technology, e.g., inter national research & development flows; proportion of populations (and rates of change thereof) using particular inventions (especially 'factor-neutral' technological advances such as the telephone, motorcar, broadband)
As globalization is not only an economic phenomenon, a multivariate approach to measuring globalization is the recent index calculated by the Swiss think tank KOF. The KOF Index of Globalization measures the three main dimensions of globalization: economic social And political. In addition to three indices measuring these dimensions, we calculate an overall index of globalization and sub-indices referring to actual economic flows economic restrictions data on information flows data on personal contact And data on cultural proximity. The index measures the three main dimensions of globalization: economic, social, and political. In addition to three indices measuring these dimensions, an overall index of globalization and sub-indices referring to actual economic flows, economic restrictions, and data on personal contact, data on information flows, and data on cultural proximity is calculated. Data is available on a yearly basis for 122 countries, as detailed in Dreher, Gaston and Martens (2008). According to the index, the world's most globalized country is Belgium, followed by , Sweden, the United Kingdom and the Netherlands. The least globalized countries according to the KOF-index are Haiti, Myanmar, the Central African Republic and Burundi. 9.4 Ef fects of globalization Globalization has various aspects which affect the world in several different ways such as: Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries. International trade in manufactured goods increased more than 100 times in the 50 years since 1955. China's trade with Africa rose seven-fold during 200007 alone. Financial - emergence of worldwide financial markets and better access to external financing for borrowers. By the early part of the 21st century more than $1.5 trillion in national currencies were traded daily to support the expanded levels of trade and investment. As these worldwide structures grew more quickly than any transnational regulatory regime, the instability of the global financial infrastructure dramatically increased, as evidenced by the financial crisis of 20072009.
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As of 2005-2007, the Port of Shanghai holds the title as the World's busiest port. Economic - realization of a global common market, based on the freedom of exchange of goods and capital. The interconnectedness of these markets, however meant that an economic collapse in any one given country could not be contained. Political - some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. Politically, the United States has enjoyed a position of power among the world powers, in part because of its strong and wealthy economy. With the influence of globalization and with the help of The United States' own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power. Infor mational - increase in information flows between geographically remote Informational locations. Arguably this is a technological change with the advent of fiber optic communications, satellites, and increased availability of telephone and Internet. Language - the most popular language is Mandarin (845 million speakers) followed by Spanish (329 million speakers) and English (328 million speakers). About 35% of the world's mail, telexes, and cables are in English. Approximately 40% of the world's radio programs are in English. About 50% of all Internet traffic uses English. Competition - Survival in the new global business market calls for improved productivity and increased competition. Due to the market becoming worldwide, companies in various industries have to upgrade their products and use technology skillfully in order to face increased competition. Ecological - the advent of global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Since many factories are built in developing countries with less environmental regulation, globalism and free trade may increase pollution. On the other hand, economic development historically required a "dirty" industrial stage, and it is argued that developing countries should not, via regulation, be prohibited from increasing their standard of living. The construction of continental hotels is a major consequence of globalization process in affiliation with tourism and travel industry, Dariush Grand Hotel, Kish, Iran Cultural - growth of cross-cultural contacts; advent of new categories of consciousness and identities which embodies cultural diffusion, the desire to increase one's standard of living and enjoy foreign products and ideas, adopt new technology and practices, and participate in a "world culture". Some bemoan the resulting consumerism and loss of languages.
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Spreading of multiculturalism, and better individual access to cultural diversity (e.g. through the export of Hollywood and, to a lesser extent, Bollywood movies). Some consider such "imported" culture a danger, since it may supplant the local culture, causing reduction in diversity or even assimilation. Others consider multiculturalism to promote peace and understanding between peoples. Greater international travel and tourism. WHO estimates that up to 500,000 people are on planes at any one time? In 2008, there were over 922 million international tourist arrivals, with a growth of 1.9% as compared to 2007. Greater immigration, including illegal immigration. The IOM estimates there are more than 200 million migrants around the world today. Newly available data show that remittance flows to developing countries reached $328 billion in 2008. Spread of local consumer products (e.g., food) to other countries (often adapted to their culture). Worldwide fads and pop culture such as Pokmon, Sudoku, Numa Numa, Origami, Idol series, YouTube, Orkut, Facebook, and MySpace. Accessible to those who have Internet or Television, leaving out a substantial segment of the Earth's population. Worldwide sporting events such as FIFA World Cup and the Olympic Games. Incorporation of multinational corporations in to new media. As the sponsors of the All-Blacks rugby team, Adidas had created a parallel website with a downloadable interactive rugby game for its fans to play and compete. Social - development of the system of non-governmental organizations as main agents of global public policy, including humanitarian aid and developmental efforts. Technical Development of a Global Information System, global telecommunications infrastructure, data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones. Increase in the number of standards applied globally; e.g., copyright laws, patents and world trade agreements. Legal/Ethical The creation of the international criminal court and international justice movements. Crime importation and raising awareness of global crime-fighting efforts and cooperation. The emergence of Global administrative law. Religious The spread and increased interrelations of various religious groups, ideas, and practices and their ideas of the meanings and values of particular spaces. Cultural ef fects Japanese McDonald's fast food as an evidence of international integration.
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Globalization
Culture is defined as patterns of human activity and the symbols that give these activities significance. Culture is what people eat, how they dress, beliefs they hold, and activities they practice. Globalization has joined different cultures and made it into something different. As Erla Zwingle, from the National Geographic article titled Globalization states, When cultures receive outside influences, they ignore some and adopt others, and then almost immediately start to transform them. One classic culture aspect is food. Someone in America can be eating Japanese noodles for lunch while someone in Sydney, Australia is eating classic Italian meatballs. India is known for its curry and exotic spices. France is known for its cheeses. America is known for its burgers and fries. McDonalds is an American company which is now a global enterprise with 31,000 locations worldwide. Those locations include Kuwait, Egypt, and Malta. This company is just one example of food causing cultural influence on the global scale. Meditation has been a sacred practice for centuries in Indian culture. It calms the body and helps one connect to their inner being while shying away from their conditioned self. There are more Americans meditating and practicing yoga now. Some people are even traveling to India to get the full experience themselves. Another common practice brought about by globalization is Chinese symbol tattoos. These tattoos are popular with today's younger generation despite the fact that, in China, tattoos are not thought of as cool. Also, the Westerners who get these tattoos often don't know what they mean, making this an example of cultural appropriation. The internet breaks down cultural boundaries across the world by enabling easy, near-instantaneous communication between people anywhere in a variety of digital forms and media. The Internet is associated with the process of cultural globalization because it allows interaction and communication between people with very different lifestyles and from very different cultures. Photo sharing websites allow interaction even where language would otherwise be a barrier. Negative ef fects Globalization has been one of the most hotly debated topics in international economics over the past few years. Globalization has also generated significant international opposition over concerns that it has increased inequality and environmental degradation. In the Midwestern United States, globalization has eaten away at its competitive edge in industry and agriculture, lowering the quality of life in locations that have not adapted to the change. Globalization, the flow of information, goods, capital and people across political and geographic boundaries, has also helped to spread some of the deadliest infectious diseases known to humans. Modern modes of transportation allow more people and products to travel around the world at a faster pace; they also open the airways to the transcontinental movement of infectious disease vectors. One example of this occurring is AIDS/HIV.
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Opportunities in richer countries drive talent away, leading to brain drains. Brain drain has cost the African continent over $4 billion in the employment of 150,000 expatriate professionals annually. Indian students going abroad for their higher studies costs India a foreign exchange outflow of $10 billion annually. The head of the International Food Policy Research Institute stated in 2008 that the gradual change in diet among newly prosperous populations is the most important factor underpinning the rise in global food prices. From 1950 to 1984, as the Green Revolution transformed agriculture around the world, grain production increased by over 250%. The world population has grown by about 4 billion since the beginning of the Green Revolution and most believe that, without the Revolution, there would be greater famine and malnutrition than the UN presently documents (approximately 850 million people suffering from chronic malnutrition in 2005). It is becoming increasingly difficult to maintain food security in a world beset by a confluence of "peak" phenomena, namely peak oil, peak water, peak phosphorus, peak grain and peak fish. Growing populations, falling energy sources and food shortages will create the "perfect storm" by 2030, according to the UK government chief scientist. He said food reserves are at a 50-year low but the world requires 50% more energy, food and water by 2030. The world will have to produce 70% more food by 2050 to feed a projected extra 2.3 billion people and as incomes rise, the United Nations' Food and Agriculture Organization (FAO) warned. The United Nations Office on Drugs and Crime (UNODC) issued a report that the global drug trade generates more than $320 billion a year in revenues. Worldwide, the UN estimates there are more than 50 million regular users of heroin, cocaine and synthetic drugs. The international trade of endangered species is second only to drug trafficking. Traditional Chinese medicine often incorporates ingredients from all parts of plants, the leaf, stem, flower, root, and also ingredients from animals and minerals. 9.5 Pro-globalization (globalism) Supporters of free trade claim that it increases economic prosperity as well as opportunity, especially among developing nations, enhances civil liberties and leads to a more efficient allocation of resources. Economic theories of comparative advantage suggest that free trade leads to a more efficient allocation of resources, with all countries involved in the trade benefiting. In general, this leads to lower prices, more employment, higher output and a higher standard of living for those in developing countries. Dr. Francesco Stipo, Director of the USA Club of Rome suggests that the world government should reflect the political and economic balances of world nations. A world confederation would not supersede the authority of the State governments but rather complement it, as both the States and the world authority would have power within their sphere of competence". Proponents of laissez-faire capitalism, and some libertarians, say that higher degrees of political and economic freedom in the form of democracy and capitalism in the developed world are ends in themselves and also produce higher levels of material wealth. They see globalization as the beneficial spread of liberty and capitalism.
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Globalization
Supporters of democratic globalization are sometimes called pro-globalists. They believe that the first phase of globalization, which was market-oriented, should be followed by a phase of building global political institutions representing the will of world citizens. 9.6 Anti-globalization The "anti-globalization movement" is a term used to describe the political group who oppose the neoliberal version of globalization, while criticisms of globalization are some of the reasons used to justify this group's stance. "Anti-globalization" may also involve the process or actions taken by a state in order to demonstrate its sovereignty and practice democratic decisionmaking. Anti-globalization may occur in order to maintain barriers to the international transfer of people, goods and beliefs, particularly free market deregulation, encouraged by organizations such as the International Monetary Fund or the World Trade Organization. Joseph Stiglitz and Andrew Charlton write: The anti-globalization movement developed in opposition to the perceived negative aspects of globalization. The term 'anti-globalization' is in many ways a misnomer, since the group represents a wide range of interests and issues and many of the people involved in the anti-globalization movement do support closer ties between the various peoples and cultures of the world through, for example, aid, assistance for refugees, and global environmental issues.
Summing up The Impact of Globalization on Business: Expanding the geographic footprint of any business in the era of globalization is not at all a perilous and costly job as it has been in the past. To remain competitive in today's scenario aggressive measures should be implemented to expand business. Starting business internationally is as defensive as an offensive play. Going by the global demands and considering the total size of international economies would reveal that in comparison with the size of national market the potential buyers generally reside in international markets. In comparison, if a business does not aim international market and the international customers then the company will not only be lagging behind taking the first mover's benefit of preserving customer dependability, but would also lose on collaborations with key partners and distribution pacts. With increase in consumers' demands and flattening of global market the international business is expected to assist several markets in a faultless manner. Changing slowly to economic alterations in today's world could ultimately harm the business. Examining the alleviating factor that globalization had on the world business would reveal that trade shortage, petroleum costing, dip in equity markets, housing calamity, restricted influx of funds, and total cost of living is defying us than ever before. With so many negative traits in world economy, conservative economic theory recommends that the interest rate today hold similarity with that of 1980 than the low interest rates we are witnessing today.
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In comparison with the financial scenario of 1980, the contemporary market is the outcome of a worldwide economy which is performing the role of an alleviating factor. By considering the following, it is estimated that by 2015, the developing economies will account for 50% of world GDP. Growing economies Over the last few years China and India has witnessed 9% and 7% of annual growth respectively. Demographics Economies now characterize younger populations, increasing number of well-qualified population, growing middle class populations, elevating incomes and urbanization. Commercial need The financial growth, as well as the existence of worldwide firms that accompanies job opportunities focused around intellectual capital is generating need for marketable real estate infrastructure. Infrastructure development Communications, utilities, and well-organized transportation has steadily improved over the past few years as compared to what it was few decades ago. uctures Opening up of closed market str uctur es Most flourishing developing economies have been occupied in methodical reorganization of basic community norms ignored in the developed economies. The factors which trigger growth and monetary infusions incorporate property privileges, legal procedure, published guideline, privatization of state owned firms, removal of capital management, and liberalization of norms related foreign direct investment.
Self Assessment Definition of Globalization? What is KOF Index of Globalization What is GATT? What are the effects of Globalization? Explain four main economic flows that characterize globalization:
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Industrial Growth and Environmental degradation
Chapter X Industrial Growth and Environmental degradation
The rapid economic growth achieved after globalization by some of the developing countries, has adversely affected the quality of the environment, imposed considerable social costs and livelihood impacts and has become a major threat to sustainable development. Since environment regulation tends to be weak in developing countries some of these countries have begun to specialize in pollution intensive manufacturing, particularly in products which have good export potential. However it is also extremely important for developing countries to achieve a high level of economic growth to mitigate their socio-economic problems. But the major challenge here is: how to ensure development in a sustainable manner by a proper trade-of f between environment and development. Lear ning Objectives Students learn the causes of pollution like water, air, noise pollution, solid waste etc. with special reference to industries. Students learn about the environmental governance and regulation in terms of protection and rehabilitation Students learn to appreciate social and economic solutions for problems of water supply, sanitation and health Contents 10.1 Causes of pollution 10.2 Type of industries and type of pollution 10.2.1 Causes of industrial pollution waste 10.2.1.1 Water Pollution Industries 10.2.1.2 Oil 10.2.1.3 Soil 10.2.1.4 Air 10.2.2 Causes of Air Pollution 10.2.2.1 Industries 10.2.2.2 Transport 10.2.2.3 Dwelling 10.3 Environmental law 10.3.1 Environmental governance and regulation 10.3.1.1 Environmental protection Environment and rehabilitation Environmental Governance and regulation in India 10.3.1.2. Legislative efforts Role of the Judiciary Working of Environmental regulation Enforcement Monitoring Summing up Self Assessment
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10.1 Causes of Pollution The ultimate cause of pollution is human activity itself. Pollution is a human contribution to nature. Science has evolved technologies and technologies have helped the human welfare. In the process, the pollution has been a part of technology and therefore a part of human miseries. Human activities mainly include industries for various human needs directly and indirectly 10.2 Industries A vast array of industries can cause pollution contrary to popular perception that only a chemical industry can cause pollution. The nature and intensity of pollution may be different in different industry. In some industries, the pollution is out rightly visible and substantial. In others, it may be invisible, indirect or negligible. In such a broad sense, no industry is free of pollution. Classified list of industries causing different types of pollution is presented in table. Type of industries Manufacture of chemicals, pesticides, medicines Manufacture of gases Cement, steel and other mine based industries Textile industries and their ancillaries Transport vehicle manufacturing Petroleum based industries Forest dependent industries Food industries Paper industries Sugar industry Brick industry Aircraft industry Electrical appliances and electric goods industries IT based industries Telecom industries Type of pollution Water pollution, air pollution Air pollution Air pollution and solid wastes, noise pollution Water pollution, air pollution, noise pollution Solid wastes, noise pollution, air pollution Water pollution, air pollution Air pollution, solid wastes and sound pollution Water pollution, air pollution, food pollution Water pollution, air pollution, solid wastes, sound pollution Water pollution, air pollution, solid wastes Air pollution, water pollution Solid wastes, water pollution, air pollution Solid wastes, air pollution Air pollution Solid wastes and air pollution
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Although all these industries have potentiality to generate pollutants in the environment. Some of them cause serious pollution then others. They are Chemicals, pesticides, medicines manufacturing industries Cement, steel industries Textile manufacturing and processing industries Paper industries Sugar industries Food industries All industries other than above cause relatively lesser pollution and are less dangerous than above industries. Most of these industries are established as core industries for progress of human society. Hence, it is undisputable that they have to exist for human existence and development. The only disputable point is how they have to be managed to make them free of pollution. The cause of pollution - in many situations - is not the industry itself, but the technology adopted by such industry. As the scientific research progresses, new technologies for industries are added. New technologies to minimize the pollution are also generated in every industry. How far these technologies are adopted will decide the nature and extent of pollution. 10.2.1 Causes of industrial pollution waste Pollution from thermal power plants due to chemical fertilizers, food, pesticide and pharmaceutical industries due to cement, steel, paper, sugar industries due to textile and textile related industries due to petroleum and other.. Radioactive Waste -Waste products from nuclear power stations etc. are becoming a serious problem. They should be put where the radiation can do no harm. Unfortunately, there is no way of stopping a radioactive nucleus from emitting radiation. Nuclear energy has some advantages over fossil fuel such as coal... Accumulation of wastes due to its improper disposal is a major problem in our country. The recent Surat plague epidemic is an indication. Population in India has been growing at the rate of 1.7%. With this increase, there has also been an increase in the amount of wastes. Waste Management - The garbage should be segregated at the source - home, office, shops, etc. This should be followed by door to door collection. The recyclable material can automatically be sent to recycling plants. Many nonbiodegradable materials are recyclable. For example, plastic, polythene, glass, metallic. Classification of Wastes - The wastes include kitchen waste, papers, construction materials, old tyres, medical wastes, etc. In order to understand the severity of the problem and to work towards a solution, one must understand the types of wastes being generated. Toxic Elements Commonly Present in Municipal and Industrial Waste Waters Industrial wastes. Causes bone damage, mottled teeth. Lead Plumbing, mining coal, gasoline. Causes anemia, kidney malfunction and nervous disorder.
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Water 10.2.1.1 Water Pollution Sewage that includes organic matter, animal and human excreta-one of the major pollutants of water in the urban and rural areas is the sewage. The sewage most often contains the organic matter that encourages the growth of microorganisms. These organisms besides spreading diseases also consume the oxygen present in water. This is called oxygen depletion. The aquatic organisms like the fish cannot then survive in such waters. This creates an imbalance in the aquatic ecosystems. Industries The industries are mostly situated along the riverbanks for easy availability of water and also disposal of the wastes. But these wastes include various acids, alkalis, dyes and other chemicals. They change the pH of water. There are also detergents that create a mass of white foam in the river waters. All these chemicals are quite harmful or even fatally toxic to fish and other aquatic populations. The industrial wastes include toxic metals like lead, mercury, cadmium, etc, and other chemicals like the fluorides, ammonia, etc. Certain industries such as power plants, refineries, nuclear reactors release a lot of hot water from their cooling plants. This hot water is let into the water bodies without the temperature being reduced. This results in heating up of the water and thereby killing the aquatic life. The oxygen content of water also becomes less due to increase in the temperature. This is called thermal pollution. 10.2.1.2 Oil
Oil spill is a major problem in the oceans and seas. The oil tankers and offshore petroleum refineries cause oil leakage into the waters. This pollutes the waters. Oil floats on the water surface and prevents the atmospheric oxygen from mixing in the water. The oil enters the body of the organisms. It also coats the body of the aquatic animals and birds which may also kill them. Pollutant Source/Cause Effect Ef fect Oxygen depletion Spread of diseases/ epidemics
Sewage that includes Sewerage of rural domestic wastes, and urban areas. hospital wastes, excreta, etc. Metals-Mercury Industrial wastes
Minamata disease (resulted from the contaminated waters of the Minamata bay in Japan in 1953) causes numbness of limbs, lips and tongue, blurred vision, deafness and mental derangement. Absorbed into blood and affects PBCs, liver, kidney, bone, brain and the penpheral nervous Lead poisoning can even lead to coma.
Lead
Industrial wastes
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Cadmium
Cadmium Fertilizers
Deposited in organs like the kidney, pancreas, liver, intestinal mucosa, etc. Cadmium poisoning causes headache, vomiting, bronchial pneumonia, kidney necrosis, etc. Arsenic poisoning causes renal failure and death, It can cause nerve disorder, kidney and liver disorders, muscular atrophy, etc. Accumulates in the bodies of fishes, birds, mammals including man. Adversely affects the nervous system, fertility. Causes thinning of egg shells in birds.
Arsenic
Fertilizers
Agrochemicals like DDT
Pesticides
Ef fects and Causes of Soil Pollution Industrial Dangerous chemicals entering underground water Ecological imbalance Release of pollutant gases Release of radioactive rays causing health problems Increased salinity Reduced vegetation 10.2.2 Causes of Air Pollution 10.2.2.1 Industries Industries are responsible for large scale air pollution as compared to other causes because: the extent of gaseous pollution from industries is very high as compared to any other cause number of industries being established are regarded as yard stick of progress. Not all industries can lead to air pollution. Following type of industries are responsible for air pollution. Thermal power plants - CO2, CO Fertilizer industries - NH3, CH4, SO2, H2S, NO3 Food industries - Cl, NO3, CO2 Pesticide industries - HCN, CN2, NH3, CH4, SO2, H2S, NO3, Cl, CO2, CO Pharmaceutical industries - Cl2, H2S, SO2, CH4, NH3 Cement industries - Cl2, NH3, SO2, NO2, Steel industries - CO2, CO Paper industries - CO, Cl2, CO2, H2S, SO2, NH3 Sugar industries - CO2, CO, Cl2, SO2, NH3, NO2 Textile industries - CO2, Cl2, NO2, SO2, NH3, Petroleum industries - CO2, CO, SO2 Atomic energy units - radioactive gases
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These industries release the pollutant gases in their normal course of functioning as a part of manufacturing process. Although some industries have modified their manufacturing process and brought some structural changes to reduce the pollution - the total air pollution due to industries is increasing. Most of industrially active areas in our country are highly polluted changing the composition of air. The dominant gases and pollutants due to industrial activities are SO2, NO2, Cl, CH3, CO2, CO. Each one of them has dangerous ef fect on human health, animal health as well as ef fect on the whole ecosystem. 10.2.2.2 T ransport Burning the petroleum products to run automotive transport vehicles is the main cause of air pollution. The main pollutants like SO2, CO, CO2 are main gases being released into air due to transport vehicles. But, the extent of pollution due to transport vehicles is directly dependent upon the level of urbanization density of vehicles As the urban development increases, the necessity of transport vehicles becomes inevitable. As the dependence on vehicle increases, the density of vehicle increases. Cities with very high population have recorded high level of air pollution due to vehicles. Vehicular pollution in many agglomerates like Delhi, Bombay, Calcutta, Bangalore, Pune is so high that a natural air with its natural composition has become rare. Some socially relevant issues related to vehicular pollution have been recently raised in public debates: Although vehicular transport is inevitable in cities, is it possible that individual ownership of vehicle could be avoided and public transport system could be more efficiently used. Is it necessary that a single travelling person use a four wheeler? Can we not partially replace the transport needs by electrically operated public transport systems than present petroleum dependent vehicles? Is there any possibility using electricity operated vehicles? 10.2.2.3 Dwelling Air pollution due to dwelling of human population is caused by three reasons. Chlorofluorocarbon Refrigerators, air coolers, and some electronic equipments release a group of chlorinated chemicals called Chlorofluorocarbon. They are potential pollutants. Due to large number of such equipments in a smaller geographical area (like in city) large amount of Chlorofluorocarbon are released to atmosphere.
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High Density Population Density of population in many cities and urban centers is so high that their respiration has caused imbalance in air composition. Their constant intake of oxygen and release of carbon dioxide has the potentiality to change the composition of air. Environmental degradation is one of the ten threats officially cautioned by the High Level Threat Panel of the United Nations. WRI (the World Resources Institute), UNEP (the United Nations Environment Programme), UNDP (the United Nations Development Programme) and the World Bank have made public an important report on health and the environment worldwide on May 1, 1998. Environmental Change and Human Health, a special section of World Resources 1998-99 in this report describes how preventable illnesses and premature deaths are still occurring in very large numbers. If vast improvements are made in human health, millions of people will be living longer, healthier lives than ever before. In these poorest regions of the world an estimated one in five children will not live to see their fifth birthday, primarily because of environment-related diseases. Eleven million children die worldwide annually, equal to the combined populations of Norway and Switzerland, and mostly due to malaria, acute respiratory infections or diarrhea illnesses that are largely preventable. When the environment becomes less valuable or damaged, environmental degradation is said to occur. There are many forms of environmental degradation. When habitats are destroyed, biodiversity is lost, or natural resources are depleted, the environment is hurt. Environmental degradation can occur naturally, or through human processes. The largest areas of concern at present are the loss of rain forests, air pollution and smog, ozone depletion, and the destruction of the marine environment. Pollution is occurring all over the world and poisoning the planet's oceans. Even in remote areas, the effects of marine degradation are obvious. In some areas, the natural environment has been exposed to hazardous waste. In other places, major disasters such as oil spills have ruined the local environment. CFCs, or chlorofluorocarbons, are the primary cause of ozone depletion. When industrial processes release these chemicals, they rise into the stratosphere and degrade the ozone. Acid rain, smog and poor air quality have been the result of air pollution. Both industrial operations and automobiles have released gigantic amounts of emissions that have intensified these problems. Deforestation and the logging industry have destroyed many tropical rain forests around the world. This has destroyed many natural habitats, and the plants and animals native to the areas.
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Environmentalists are working hard to combat environmental degradation. There are countless organizations located all over the world that are dedicated to preventing the global destruction of the environment. 10.3 Environmental law Environmental law is a complex and interlocking body of statutes, common law, treaties, conventions, regulations and policies which, very broadly, operate to regulate the interaction of humanity and the rest of the biophysical or natural environment, toward the purpose of reducing or minimizing the impacts of human activity, both on the natural environment and on humanity itself. Environmental law draws from and is influenced by principles of environmentalism, including ecology, , stewardship, responsibility and sustainability. From an economic perspective it can be understood as concerned with the prevention of present and future externalities. Areas of concern in environmental law include air quality, water quality, global climate change, agriculture, biodiversity, species protection, pesticides and hazardous chemicals, waste management, remediation of contaminated land and brown fields, smart growth, sustainable development, impact review, and conservation, stewardship and management of public lands and natural resources. While many countries worldwide have accumulated impressive sets of environmental laws, their implementation has often been woeful. In recent years, environmental law has become seen as a critical means of promoting sustainable development (or "sustainability"). Policy concepts such as the precautionary principle, public participation, environmental justice, and the polluter pays principle have informed many environmental law reforms in this respect (see further Richardson and Wood, 2006). There has been considerable experimentation in the search for more effective methods of environmental control beyond traditional "command-and-control" style regulation. , emission trading, voluntary standards such as ISO 14000 and negotiated agreements are some of these innovations. 10.3.1 ENVIRONMENTAL GOVERNANCE AND REGULATION 10.3.1.1 ENVIRONMENT PROTECTION a) The State's responsibility with regard to environmental protection has been laid down under Article 48-A of our Constitution, which reads as follows: "The State shall Endeavour to protect and improve the environment and to safeguard the forests and wildlife of the country". Environmental protection is a fundamental duty of every citizen of this country under Article 51-A (g) of our Constitution which reads as follows: "It shall be the duty of every citizen of India to protect and improve the natural environment including forests, lakes, rivers and wildlife and to have compassion for living creatures." Article 21 of the Constitution is a fundamental right which reads as follows: "No person shall be deprived of his life or personal liberty except according to procedure established by law." Article 48-A of the Constitution comes under Directive Principles of State Policy and Article 51 A (g) of the Constitution comes under Fundamental Duties.
b)
c)
D)
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e)
The State's responsibility with regard to raising the level of nutrition and the standard of living and to improve public health has been laid down under Article 47 of the Constitution which reads as follows: "The State shall regard the raising of the level of nutrition and the standard of living of its people and the improvement of public health as among its primary duties and, in particular, the State shall Endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health." The 42nd amendment to the Constitution was brought about in the year 1974 makes it the responsibility of the State Government to protect and improve the environment and to safeguard the forests and wildlife of the country. The latter, under Fundamental Duties, makes it the fundamental duty of every citizen to protect and improve the natural environment including forests, lakes, rivers and wildlife and to have compassion for living creatures.
h)
ENVIRONMENTS AND REHABILITATION ENVIRONMENTAL GOVERNANCE AND REGULATION IN INDIA 10.3.1.2 LEGISLATIVE EFFOR TS Legislative efforts at pollution control in India date back to the mid-nineteenth century.1 many of these Acts dealt with environmental regulation in a piecemeal manner and proved ineffective at reducing the levels of pollution. Action against polluters had necessarily to be initiated in courts by those affected. Pollution and environmental degradation were addressed very generally in terms of nuisance, negligence, liability, and a few principles of tort law. The spate of legislations2 in the post-independence period also dealt only incidentally with pollution. Both air and water pollution continued to increase. Perhaps inspired by the Stockholm Declaration of 1972, the Water (Prevention and Control of Pollution) Act, 1974 (the Water Act), provided for the institutionalization of pollution control machinery by establishing Boards for prevention and control of pollution of water. These Boards were entitled to initiate proceedings against infringement of environmental law, without waiting for the affected people to launch legal action. The Water Cess Act, 1977, supplemented the Water Act by requiring specified industries to pay cess on their water consumption. With the passing of the Air (Prevention and Control of Pollution) Act, 1981 (the Air Act), the need was felt for an integrated approach to pollution control. The Water Pollution Control Boards were authorized to deal with air pollution as well, and became the Central Pollution Control Board (CPCB) and the State Pollution Control Boards (SPCBs). The Bhopal Gas leak disaster of December 1984 precipitated the tightening of environmental regulation. In 1985, the Department of Environment was changed to the Ministry of Environment and Forests (MoEF) and given greater powers. The Environment (Protection) Act, 1986 (EPA), was passed, to act as an umbrella legislation. The Act also vested powers with the central government to take all measures to control pollution and protect the environment.
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The Environment (Protection) Rules, 1986 were subsequently notified to facilitate exercise of the powers conferred on the Boards by the Act. The EPA identifies the MoEF as the apex policy making body in the field of environment protection. The MoEF acts through the CPCB and the SPCBs. The CPCB is a statutory organization and the nodal agency for pollution control. The EPA in 1986 and the amendments to the Air and Water Acts in 1987 and 1988 furthered the ambit of the Boards' functions. Constitutional Directives In terms of constitutional provisions, the 42nd Amendment of 1976 for the first time imposed an obligation on the part of the state (Article 48A) and the citizens (Article 51A (g)) to endeavour to protect and improve the environment and to safeguard the forests and wildlife of the country. The economic reforms of 1991, the Rio Conference of 1992, 1. The Shore Nuisance Act, 1853, the Indian Penal Act, 1860, the Indian Easement Act, 1882, the Bengal Smoke Nuisance Act, 1905, the Bombay Smoke Nuisance Act, 1912, and the Motor Vehicles Act, 1939 were some of the pioneering legislative attempts. 2. These included the Factories Act, 1948, the Industries (Development and Regulation) Act, 1951, the River Boards Act, 1956, the Atomic Energy Act, 1962, the Insecticides Act, 1968, the Merchant Shipping (Amendment) Act, 1970, and the Radiation Protection Rules, 1971. Environment and Rehabilitation 97 and growing environmental awareness all resulted in further amendments to the constitution. Role of the Judiciary The Supreme Court and High Courts have played an active role in the enforcement of constitutional provisions and legislations relating to environmental protection. The fundamental right to life and personal liberty enshrined in Article 21 of the Constitution has been interpreted by the courts to include the right to pollution-free air and water. 3 . Also, relaxing the enforcement of strict rules of proof and modification of the traditional rule of standing so as to facilitate public interest litigations has served, more or less, to remove the difficulty in individuals approaching courts for redressal. The backdrop of all this has been the growing environmental awareness among the public. This has been demonstrated by public demonstrations and protests throughout the 1970s and 1980s4, growth in environment and development oriented non-governmental organizations (NGOs), citizen groups, and pressure groups in India (today, roughly 20 times the size in 1985), and the increase in the frequency of public interest litigations. Environmental Working of Envir onmental Regulation An analysis of the principal pollution control legislations, the Air and Water Acts, reveals that these legislations are mostly punitive in nature. The Pollution Control Boards (PCBs) have thus restricted their approach to pollution control to 'Command and Control' (CAC). This implies That the state agencies are to function as watchdogs to keep an eye on the existing industries. All new industries, before they start to function, would in this approach require prior permission to do so. The agency responsible then permits them to carry out industrial activity, subject to certain terms and conditions.
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While the basic functions of the CPCB remain prevention, control, and abatement of air and water pollution, with the various SPCBs assuming these functions, the role of the CPCB is restricted to providing technical or scientific assistance. The CPCB has maintained the major role of prescribing the standard limits for various pollutants. While the SPCBs may prescribe stricter limits if they choose, they may not dilute the standards stipulated by the CPCB. The SPCBs employ three instruments, namely, consent to establish producing units, consent to operate, and standards for air and water pollution. Under the Water Act, consent is necessary for an industry to 'discharge effluent into a stream'. Under the Air Act, consent is necessary to 'Establish or operate an industrial plant in an air pollution control area'. The other functions of the SPCBs are advising the state governments, formulation of preventive methods, technology development, and regulation of location of industries, disposal of hazardous wastes, and collection and dissemination of information on the prevention and control of pollution. The PCBs also have the power to move court for 'restraining apprehended pollution' as a preventive measure (Section 33 of the Water Act and Section 22A of the Air Act). In an extreme case, a PCB can give 'directions to any person, officer or authority' in the interest of pollution control, which 'includes the power to direct closure, prohibition or regulation of any industry or process, or stoppage or regulation of supply of electricity, water or any other service' (Section 33A of the Water Act and Section 31A of the Air Act). Failure to obtain consent and violation of consent conditions makes the occupier of an industrial unit liable for punishment under both Acts. The punishment prescribed is imprisonment with unlimited fine. For minor violations of the Acts, such as failure to provide information, obstructing personnel of the Board from discharging their duties, and so forth, the penalty prescribed is imprisonment up to three months or fine of Rs 10,000 or both. More severe punishments are provided under both Acts for continued violation after the first conviction (Section 41 to 45A of the Water Act and Section 37 to 39 of the Air Act). Thus, the role of the Boards is mostly that of an enforcer, and the primary functional tool employed by them for controlling industrial pollution is inspection of polluting units. The Water Act prohibits the discharge of pollutants into water bodies beyond established standards (Section 24), and requires that generators of all new and existing sources of discharge into water bodies get the prior consent of the PCBs (Section 25 and 26 respectively). It also lays down penalties, such as fines and imprisonment, for not complying with these (and other) regulations of the Act. Prior to 1988, enforcement was through criminal prosecution initiated by State Boards and by seeking injunctions to restrain polluters. After amendments to the Act in 1988, the Boards were given more teeththey can now close errant factories or cut off their water or electricity by an administrative order. The 'command' therefore is the stipulation of certain upper limits of parameters, while the 'control' is the power to withdraw the power supply, water supply, and the imposition of the penalty (fines, imprisonment).
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Pollution control laws have neither kept pace with constitutional directives, nor have they operationalized the space that exists for popular participation if these directives are truly understood. Environmental legislations, such as the Air and Water Acts, on the contrary, have a strong centralizing tendency, with the state and Central government as the exclusive decision makers. Further, none of these laws provide for co-ordinated functioning of the various enforcement agencies with the third tier of governance panchayats and municipalities. There is nothing at all to involve local communities. Enforcement The primary functional tool employed by the PCBs for controlling industrial pollution is inspection of polluting units. Given the penalties in force for noncompliance in India and keeping in mind the extent of the SPCBs' powers, the impact of inspections on compliance is only as strong as the threat of enforcement and punishment faced by the industrial units. Studies conducted reveal that there appears to be no impact of inspections on emissions. The reality is that environmental management often degenerates into crisis management. Inspections are undertaken at the time that operating consent is granted and thereafter usually only in response to complaints, accidents, or other emergencies. Enforcement by the PCBs, as a result, is woefully inadequate. Further, a study conducted by the Planning Commission found that they do not have a complete inventory of polluting and potentially polluting industries. Small industries (capable of high levels of pollution) have been left out of the purview, further undermining efforts at pollution control. Small industries are known to contribute as much as 40 per cent of air and water pollution. Monitoring Monitoring conducted by the PCBs is also far from effective. Polluting industries may make a one-time investment and set up Effluent Treatment Plants (ETPs). Around 25 per cent of its capital investment may be so spent on pollution control. The costs of operating these facilities are anywhere between 1530 per cent of the investment made, annually.13 As operating costs are high, industries are often reluctant to run these plants. Poor monitoring almost always allows units to get away without operating these plants properly. The PCBs claim that inadequate manpower limits their monitoring. Poorly Staf fed The Planning Commission study revealed that the PCBs are very poorly staffed. The study highlighted the predominance of non-technical members in most of the Boards, the lack of professionals in the composition of the Boards, and also the tendency to not fill vacancies of members representing local bodies. Thus, both motivationally and in ability, the PCBs are ill-structured. Lack Technical Skills One of the reasons for ineffective monitoring is the lack of technical skills of the PCBs. For instance, the Biomedical Waste (Management and Handling) Rules, 1998 specify the working of incinerators so as to reduce emissions of toxins like furans and dioxins. However, neither the CPCB nor the SPCBs have the capacity to even collect samples, let alone analyze these toxins.
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Inadequate Funding The principal sources of funding for PCBs are government grants and revenue collected under the Water Cess Act. In actual fact, PCBs are starved for funds. The result is inadequate infrastructure in terms of laboratories, monitoring equipment, and regional of fices, inadequate staf f, both technical and administrative, and an inability to discharge their primary functions. For example, the Bihar Pollution Control Board (BPCB), which administers pollution laws in the second most populous state of the country, has continuously been deprived of funds. For several years, the state government withheld funding, restricting BPCB expenditure to less than a third of its modest requisition. Even ten years after the enactment of the Water Act, the BPCB did not have a single laboratory or analyst to test effluent samples.14 A subset of the issue of inadequate funding is the manner in which the SPCBs have made expenses. An analysis of the expenditure incurred by the SPCBs during the Eighth Five Year Plan shows that the primary expenditure was on administration amounting to 57 per cent. The ratio of capital expenditure to total expenditure was about 14 per cent. Maintenance, depreciation, and other expenses constituted the major chunk of the remaining part. It follows that expenditure on pollution prevention activities, training, and research and development was for all practical purposes negligible. ference Political Inter fer ence However, the argument is made that PCBs are, sometimes, not able to exercise powers to force compliance because of interference from powerful interest and pressure groups. Such interference is sometimes based on the argument that strict compliance with standards will lead to closure of industrial units, which in turn may result in unemployment and protests. This interference is hardly surprising given that often the Boards are represented by vested interests responsible for pollution. With the position of the Chairman of the Boards invariably being a political appointee, political interference is rampant, and internal sabotage of most cases is then almost inevitable. Enforcement Variations in Enfor cement The high degree of political interference may be one of the factors responsible for wide variations in enforcement across states. It has been argued that although states cannot compete by lowering environmental standards in order to attract new investment, they can get around this by lax enforcement.16 This could be the outcome of a so-called 'race to the bottom' for environmental quality in which states invariably sacrifice the environment in the competition for jobs and economic growth. For example, there exists no uniform procedure for the grant of consents under the Air and Water Acts. Some SPCBs grant consents for a fixed period, usually between 1 and 3 years while the others may issue open-ended consents. The consent fee structure and industry classifications also differ widely across States, suggesting inequitable horizontal treatment of industrial units. For instance, if an industrial unit falling in the investment limit between Rs 50
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lakhs and Rs 100 lakhs applies for consent from the Madhya Pradesh Pollution Control Board, it is bound to pay Rs 7500 as fees whereas if the same unit applied for consent from the Kerala Pollution Control Board, the fee would be Rs 2000. Nonfilling of the sanctioned strength is one of the factors behind widely varying per unit staff ratios across SPCBs. In Andhra Pradesh, one technical person has to monitor 100 units whereas Kerala and Himachal Pradesh have 14 and 12 persons respectively for the same task. The norms for determining the staffing pattern of the boards have not been prescribed, leading to wide differences in the per polluting unit availability of staff for monitoring.
Summing up No industry is out of pollution. Most of these industries are established as core industries for progress of human society. Hence, it is undisputable that they have to exist for human existence and development. The only disputable point is how they have to be managed to make them free of pollution. The cause of pollution - in many situations - is not the industry itself, but the technology adopted by such industry. New technologies to minimize the pollution are also generated in every industry. How far these technologies are adopted will decide the nature and extent of pollution. It is also extremely important for developing countries to achieve a high level of economic growth to mitigate their socio-economic problems. Major challenge is: how to ensure development in a sustainable manner by a proper trade-of f between environment and development. Self assessment 1. 2. 3. 4. The ultimate cause of pollution is ___________________human activity itself. The oxygen content of water also becomes less due to increase in the temperature. This is called ______________________thermal pollution. ____________Oil spill is a major pollution problem in the oceans and seas. Areas of concer n in environmental law include ________________________________________________________________________________________________ ________________________________________________________________________________________________ _______________________________________________________________________________________________ _____________air quality, water quality, global climate change, agriculture, biodiversity, species protection, pesticides and hazardous chemicals, waste management, remediation of contaminated land and brown fields, smart growth, impact review, and conservation, stewardship and management of public lands and natural resources. "It shall be the duty of every citizen of India to protect and improve the natural environment including
5.
forests, lakes, rivers and wildlife and to have compassion for living creatures."
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Answers Chapter I: Nature and Structure of the Economy 1. Supply, demand 2. Legislature, executive, judiciary 3. Mercantilists 4. Regulatory, entrepreurial, planning, promotional 5. Bhabha 6. Monopolies & Restrictive Trade Practices 7. 1986 8. quasi 9. second 10. 2045 Chapter II: The Social Environment and its influences on business 1. James Q Wilson 2. Morris Davis Morris 3. basic literacy, infant mortality, life expectancy 4. longevity, knowledge, decent standard of living 5. unlimited 6. 1964, 1971 7. 1990 8. sellers' 9. twenty 10. free Chapter III: Industry 1. ownership, organisational, operational 2. 49 3. macroeconomic, executive 4. 20, budget 5. privatisation 6. strategic 7. Trade Related Competition Commission of India (TRCCI) 8. Structure 9. 42.4 10. budget
Chapter VI: The Financial System 1. Exchange or trade 2. asset-liability 3. repurchase, date 4. securitisation 5. floating rate 6. revive, hostile 7. R.J. Chellieh 8. defence 9. industrial 10. 10, 35 Chapter V: The Political System 1. 2. 3. 4. 5. 6. Athens parliamentary recall, plebiscite parliament 120 XII
Chapter VI: International Linkages 1. The Uruguay, 1995, Geneva, 146 2. amber 3. 36 4. sanitary, phytosanitary 5. technical barriers to trade 6. 130,000 7. Foreign Exchange Regulation Act 8. technology, public institutions, macroeconomic environment 9. Finland 10. economic
Chapter VII: Corporate Responsibility 1. investors 2. Kumarmangalam Birla 3. shareholders, Board of directors, The management 4. accountability, transparency, equality of treatment for all shareholders 5. fifty 6. investor 7. Three Concentric Circles 8. ethical, discretionary 9. corporate social performance 10. consumers, employees, shareholders Chapter VIII: Business ethics 1. The ethics of accounting information are as under: a. Creative accounting, earnings management, misleading financial analysis. b. Insider trading, securities fraud, bucket shops, forex scams: concerns (criminal) manipulation of the financial markets. c. Executive compensation: concerns excessive payments made to corporate CEO's and top management. d. Bribery, kickbacks, and facilitation payments: while these may be in the (short-term) interests of the company and its shareholders, these practices may be anti-competitive or offend against the values of society. 2. The ethics of human resource management are as under: a. Discrimination issues include discrimination on the bases of age (ageism), gender, race, religion, disabilities, weight and attractiveness. b. Issues arising from the traditional view of relationships between employers and employees, also known as At-will employment. c. Issues surrounding the representation of employees and the democratization of the workplace: union busting, strike breaking. d. Issues affecting the privacy of the employee: workplace surveillance e. Issues affecting the privacy of the employer: whistle-blowing. f. Issues relating to the fairness of the employment contract and the balance of power between employer and employee: slavery, indentured servitude, employment law. g. Occupational safety and health.
3. Ethics of sales and marketing are as under: Pricing Anti-competitive practices Specific marketing strategies Content of advertisements Children and marketing Black markets and grey markets 4. Ethics of production are: Defective, addictive and inherently dangerous products and services Ethical relations between the company and the environment Ethical problems arising out of new technologies Product testing ethics 5. Ethics of intellectual property, knowledge and skills are as under: Patent infringement, copyright infringement, trademark infringement. Misuse of the intellectual property systems to stifle competition. Even the notion of intellectual property itself has been criticized on ethical grounds. Employee raiding The practice of employing all the most talented people in a specific field, regardless of need, in order to prevent any competitors employing them. Business intelligence and industrial espionage. 6. Suggestions about the ethic policy are: Given the unequivocal support of top management, by both word and example. Explained in writing and orally, with periodic reinforcement. Doable: something employees can both understand and perform. Monitored by top management, with routine inspections for compliance and improvement. Backed up by clearly stated consequences in the case of disobedience. Remain neutral and nonsexist. 7. Ethics officers (sometimes called "compliance" or "business conduct officers") have been appointed formally by organizations since the mid-1980s. It is this person's responsibly to handle communication breakdowns and unethical conduct. When an employee gives notice that they are intending to quit their job, it would be up to the ethics office to investigate why they are quitting and take measures to attempt to resolve any issues surrounding that decision.
8. Ethics are important in business because of the following reasons: When working in the business world, it is a necessity to encompass moral ethics. Ethics is also especially important when working with financial information. Auditors, or "independent third parties", must be truthful and honest when auditing a company's financial information. Most companies would want to make sure that the financials are correct and save the hassle of having ruined financials. In addition to shareholders having confidence in the company, partners and suppliers need to be able to trust the company. By making ethics mandatory within a company, success will be established. The benefits of being ethical greatly outweigh being non-ethical in business. 9. Importance of ethics in business: Ethics is important not only in business but in all aspects of life because it is the vital part and the foundation on which the society is build. Ethics refers to a code of conduct that guides an individual in dealing with others. Ethics is related to all disciplines of management like accounting information, human resource management, sales and marketing, production, intellectual property knowledge and skill, international business and economic system. The ethical issues in business have become more complicated because of the global and diversified nature of many large corporation
10. Approaches of business and Ethics are: Philosophers and others disagree about the purpose of a business ethic in society. Thus, under this view, only those activities that increase profitability and shareholder value should be encouraged, because any others function as a tax on profits. Some believe that the only companies that are likely to survive in a competitive marketplace are those that place profit maximization above everything else. However, some point out that selfinterest would still require a business to obey the law and adhere to basic moral rules, because the consequences of failing to do so could be very costly in fines, loss of licensure, or company reputation. Some take the position that organizations are not capable of moral agency. Under this, ethical behavior is required of individual human beings, but not of the business or corporation. Other theorists contend that a business has moral duties that extend well beyond serving the interests of its owners or stockholders, and that these duties consist of more than simply obeying the law. They believe a business has moral responsibilities to so-called stakeholders, people who have an interest in the conduct of the business, which might include employees, customers, vendors, the local community, or even society as a whole. 11. Ethics and healthy bottom line for companies co-exist because of the following reasons: Companies following the path of ethical value system succeed in long run as sooner or later consumers learn to separate fact from fiction. Nowadays Money and Ethics are seen to be diametrically opposed to each other but it turns out money and ethics do have much in common. Ethical decision-making gets especially interesting when organizations must reconcile their core values and show a healthy bottom line which end up in conflict with one another. Profits and ethics are in reality part of the same equation. Ethics are important not only in business but in all aspects of life because it is an essential part of the foundation on which civilized society is build. A business that lacks ethical principles is bound to fail sooner or later.
Chapter IX: Globalization 1. Globalization is process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world.
2. The KOF Index of Globalization measures the three main dimensions of globalization: economic social political
3. GATT(General Agreement on Tariffs and Trade) is an agreement on tariffs and its primary concern has been negotiations on matters related to trade policy and tariff restrictions. 4. Globalization has various aspects which affect the world in several different ways such as: Industrial Financial Economic Political Informational Ecological Cultural Social Technical Legal/ethical Regional 5. The four main economic flows that characterize globalization are: Goods and services: (e.g., exports plus imports as a proportion of national income or per capita of population) Labor/people: (e.g., net migration rates; inward or outward migration flows, weighted by population) Capital: (e.g., inward or outward direct investment as a proportion of national income or per head of population) Technology: (e.g., international research & development flows; proportion of populations using particular inventions)
Chapter X: Industrial Growth and Environmental degradation 1. 2. 3. 4. human activity Thermal pollution. Oil spill air quality, water quality, global climate change, agriculture, biodiversity, species protection, pesticides and hazardous chemicals, waste management, remediation of contaminated land and brown fields, smart growth, sustainable development, impact review, and conservation, stewardship and management of public lands and natural resources. 5. Forests, lakes, rivers and wildlife and to have compassion for living creatures."

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Business, Government, and Society

Business, Government, and Society

Nature and Structure of the Economy

Chapter I Nature ucture Natur e and Str uctur e of the Economy

Business, Government, and Society

Nature and Structure of the Economy

Business, Government, and Society

Nature and Structure of the Economy

Business, Government, and Society

Nature and Structure of the Economy

Business, Government, and Society

Nature and Structure of the Economy

Business, Government, and Society

Nature and Structure of the Economy

Business, Government, and Society

Chapter II The social environment and its influences on business

The social environment and its influences on business

Business, Government, and Society

The social environment and its influences on business

Business, Government, and Society

The social environment and its influences on business

Business, Government, and Society

important acts which looked at consumer protection in a holistic way.

Chapter III Industry

Business, Government, and Society

Business, Government, and Society

Business, Government, and Society

Business, Government, and Society

Business, Government, and Society

Business, Government, and Society

Chapter IV The Financial System

The Financial System

Business, Government, and Society

The Financial System

Business, Government, and Society

The Financial System

Business, Government, and Society

The Financial System

Business, Government, and Society

The Financial System

Business, Government, and Society

The Financial System

Business, Government, and Society

The Financial System

Business, Government, and Society

The Financial System

Business, Government, and Society

The Political System

Chapter V The Political System

Business, Government, and Society

The Political System

Business, Government, and Society

The Political System

Business, Government, and Society

The Political System

Business, Government, and Society

Chapter VI Inter national Linkages

Business, Government, and Society

6.2 Agriculture and WTO

Business, Government, and Society

Business, Government, and Society

Business, Government, and Society